report summer internship

7/27/2019 Report Summer Internship

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Credit Appraisal in Textile Sector

SUMMER INTERNSHIP

PROJECT

In Partial Fulfilment of the

Post Graduate Program in Management

at the

University Business School, Chandigarh

Submitted By:

Gunpreet Singh

(MBA Finance)


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Acknowledgement

A journey to the world outside text books and class rooms has remained the best teacher for

ages. My project at UCO Bank was an expedition to learn, in a different way.

I avail this opportunity to express my profound sense of sincere and deep gratitude to many

people who are responsible for the knowledge and experience I have gained during the

project work.

I would like to express heartfelt gratitude to my project mentor Mr. Rajiv Gupta UCO Bank,

Sector 17, Chandigarh. It was due to his vast experience that I got a chance to learn many

things.

UCO Bank gave me an opportunity to study and understand the different facets of credit

management and their importance. This practical insight into the functioning of the credit

management was an enriching experience and I am sure it would stand me in good stead in

my professional life.

Last but certainly not the least, I would also like to thank my institute University Business

School, Panjab University, Chandigarh for inculcating in me the management knowledge and

skills and then providing me with the best opportunity to apply and update my knowledge

and skills through summer internship in such an esteemed organization.

Gunpreet Singh

University Business School


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DECLARATION FORM

I hereby declare that the Project work entitled, Credit Appraisal in Textile Sector submitted

by me to UBS, PANJAB UNIVERSITY for the Summer Internship during the Post

Graduate Program in Management is my own original work and has not been submitted

earlier either to UBS or to any other Institution for the fulfilment of the requirement for any

course of study. I also declare that no chapter of this manuscript in whole or in part is lifted

and incorporated in this report from any earlier / other work done by me or others.

Signature of Student: Signature of Company Mentor:


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Table of Contents

Chapter -1 Objectives & Background ................................................................................... 1

1.1 Project Overview .............................................................................................................. 1

1.2 Objectives of the Project .................................................................................................. 2

1.3 UCO Bank ........................................................................................................................ 2

1.3.1 Introduction ............................................................................................................... 3

1.3.2 Vision Statement........................................................................................................ 4

1.3.3 Mission Statement ..................................................................................................... 4

1.3.4 Strengths .................................................................................................................... 4

1.3.5 Organisation Structure ............................................................................................... 4

1.3.6 Key Highlights ........................................................................................................... 4

1.3.7 Key Risks ................................................................................................................... 5

1.3.8 Financial Position ...................................................................................................... 5

1.3.9 Annual Results ........................................................................................................... 7

Chapter -2 UCO Bank Loan Policy Overview ...................................................................... 9

2.1 Section 1 ........................................................................................................................... 9

2.2 Section 2 ........................................................................................................................... 9

2.3 Section 3 ......................................................................................................................... 12

2.4 Section 4 ......................................................................................................................... 21

2.5 Section 5 ......................................................................................................................... 35

2.6 Section 6 ......................................................................................................................... 42

2.7 Section 7 ......................................................................................................................... 43

2.8 Section 8 ......................................................................................................................... 46

2.8 Section 9 ......................................................................................................................... 54

Chapter -3 Credit Appraisal & Credit Rating .................................................................... 553.1 Credit Monitoring ........................................................................................................... 55

3.1.1Monitoring Objectives: ............................................................................................. 55

3.1.2 Monitoring Tools: .................................................................................................... 55

3.1.3 Stages of Monitoring: .............................................................................................. 56

3.1.4 Monitoring Process: ................................................................................................. 56

3.2 Credit Rating .................................................................................................................. 58

3.2.1 UCO BANK Credit Rating ...................................................................................... 58

3.2.2 ICRA Rating ............................................................................................................ 64


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3.2.3 CIBIL Rating ........................................................................................................... 66

3.3 Management of NPAs: .................................................................................................. 69

Chapter -4 Industry Overview & Analysis of Proposal ..................................................... 71

4.1 Overview of the Textile Industry ................................................................................... 71

4.1.1 Introduction ............................................................................................................. 71

4.1.2 SWOT of the Textile Industry: ................................................................................ 72

4.1.3 Textile Sectors in India: ........................................................................................... 73

4.1.4 Policy and Regulatory Framework .......................................................................... 75

4.1.5 EXIM scenario ......................................................................................................... 79

4.1.6 SMEs in the Textile Industry ................................................................................. 81

4.1.7 Future Outlook ......................................................................................................... 84

4.1.8 UCO Bank Outlook on Textile ................................................................................ 84

4.2 Genus Texspin: Company and Financial Data .............................................................. 86

4.2.1 Company Overview ................................................................................................. 86

4.2.2 Account Profile: ....................................................................................................... 86

4.2.3 Shareholding Pattern: .............................................................................................. 87

4.2.4 Financial Overview .................................................................................................. 88

4.2.5 Proposal: .................................................................................................................. 94

4.2.6 Exposure of Other Banks ....................................................................................... 108

4.2.7 Group Credit .......................................................................................................... 108

4.2.8 Assessment of Proposal ......................................................................................... 110

4.2.9 Banks Comments on the Account: ....................................................................... 111

Chapter 5 Conclusion & Recommendations ..................................................................... 114

5.1 Conclusion .................................................................................................................... 114

5.2 Recommendations ........................................................................................................ 114

Glossary of Terms .................................................................................................................. 117

Bibliography .......................................................................................................................... 118


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Chapter -1 Objectives & Background

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1.1 Project Overview

Credit Appraisal Credit Appraisal is the process by which a lender appraises the technical

feasibility, economic viability and bankability including creditworthiness of the prospective

borrower. Each bank has its own methodology to determine if a borrower is creditworthy or

not. It is determined in terms of the norms and standards set by the bank.

Acredit appraisal is an important part of determining the eligibility for a loan, and the

quantum of the loan. A prospective borrower has to go through the various stages of the

credit appraisal process of the bank. Each bank has its own criteria to satisfy itself on the

credit worthiness of the borrower.

The eligibility for the loan that a person can get depends on his credit worthiness, determined

in terms of the norms and standards of the bank. Being a crucial step in the loan process, a

borrower needs to be careful in planning his financing modes. The credit worthiness assures

the repayment capacity of the borrower - whether the borrower is capable of repaying the

loan and dues on time.

The process of Credit Appraisal is multidimensional and includes-

Management Appraisal Technical Appraisal Commercial Appraisal Financial Appraisal Economic Appraisal.

Credit Management- It is a collection of processes involves qualifying the extension of credit

to a customer monitors the reception and logging of payments on outstanding invoices, the

initiation of collection procedures, and the resolution of disputes.

The process of credit management begins with accurately assessing the credit-worthiness ofthe customer base. This is very important because the bank chooses to extend different lines

of credit at different rates to different customers. Proper credit management calls for setting

specific criteria that a customer must meet before receiving credit As part of the evaluation

process, credit management also calls for determining the total credit line that will be

extended to a given customer.

Several factors are used as part of the credit management process to evaluate and qualify a

customer for the receipt of credit. This includes gathering data on the potential customers

current financial condition, including the current credit score. The current ratio between

income and outstanding financial obligations will also be taken into consideration.


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After establishing the credit limit for a customer, credit management focuses on ensuring

timely repayment of loans, reviewing and renewing the credit limits extended to the clients.

1.2 Objectives of the Project

Credit Appraisal is one of the most significant and important task that any lender faces. Its

importance lies in the fact that the survival of the lending institution will depend on how well

the exposures are managed. Each exposure undertaken by the Bank will have different set of

opportunities and challenges, and the ability of the customer to repay will depend on these

conditions.

UCO Bank has established detailed guidelines regarding the facilities to be offered to various

types of customers, the amount of exposure to be undertaken, the conditions for the

exposures, the Rate of Interest to be charged under different cases.

Keeping the importance of Credit Rating in cognisance, the primary objectives of my

Summer Internship with UCO Bank were:

To study & understand the credit policy of the bank and the credit appraisal process asa whole.

To study the credit rating methods followed by the Bank for different credit ranges. To study the method used by bank to calculate the interest rates to be charged. To understand the method of detailed analysis of financial statements and make a sound

credit decision.

To understand the causes of problem loans, be able to identify early warning signals andtake remedial actions.

1.3 UCO Bank

UCO Bank is a commercial bank established in 1943. The idea to establish the bank was first

conceived by G.D. Birla, the famous industrialist, after the historic 'Quit India Movement' in

1942. The idea was culminated on the 6th of January 1943, when The United Commercial

Bank Ltd. was born with its Registered and Head Office at Kolkata.

A commercial bank and a Government of India Undertaking, it comprises of government

representatives as well as renowned professionals, management experts, economists,


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businessmen, and so on, in its Board of Directors. United Commercial Bank has stretched out

to of all segments of the economy - be it agriculture, industry, trade and commerce.

Along with 13 other major commercial banks of India, United Commercial Bank was

nationalized on 19th July, 1969, by the Government of India. Thereafter the Bank expandedrapidly. To keep pace with the developing scenario and expansion of business, the Bank

undertook an exercise in organizational restructuring in the year 1972. Under the act of

Indian Parliament, in 1985, its name changed from United Commercial Bank to the present

name, UCO Bank. As of 2005, the bank has 2000 Service Units spread all over India. A

distinctive feature of UCO bank is its introduction of 'NO HOLIDAY' branches. These bank

branches work on all the 365 days of a year. With the age of global banking, UCO bank has

also changed to be adept with the newest technology, boasting of specialized computerized

branches in both India and overseas.

Banks loan products include housing loan, education loan, personal loan, car loan, trade

loan, cash rental loan, working capital financing and term loans for agriculture and other loan

schemes. In addition the bank offers various international banking services, which comprise

foreign currency loans, finance/services to exporters and importers, remittances, forex and

treasury services, resident foreign currency deposits, correspondent banking services, and

various general banking services. It provides international banking services for customers

including corporate, nonresident Indians, overseas corporate bodies and foreign

companiesindividuals.

1.3.1 Introduction

Heritage

Having traversed periods of expansion and consolidation, the Bank was nationalized by the

Government of India on the July 1969 whereupon 100 per cent ownership was taken over by

the government in UNITED COMMERCIAL BANK. This historic event brought about a

sea-change in the entire fabric of the bank's thinking and activities, commensurate with the

government's socio-political approach of mass banking as against class banking hitherto

practiced. Branch expansion started at a fast pace, particularly in rural areas, and the bank

achieved several unique distinctions in Priority Sector lending and other social upliftment

activities. To keep pace with the developing scenario and expansion of business, the Bank

undertook an exercise in organizational restructuring in the year 1972. This resulted into

more functional specialization, decentralization of administration and emphasis on

development of personnel skill and attitude. Side by side, whole hearted commitment into the

government's poverty alleviation programmes continued and the convenorship of State Level

Bankers' Committee (SLBC) was entrusted on the Bank for Orissa and Himachal Pradesh in

1983.


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The year 1985 opened a new chapter for the Bank as the name of the Bank changed to UCO

BANK by an Act of Parliament. The customer friendly and socially committed character,

however, remained even with this change in name which has, over the years, been regarded

as one of the well known and vibrant banks in the country. Today, with all its inner strengths,

UCO Bank has come a long way to symbolize friendliness for customers and efficiency in itsbanking business. Truly, UCO BankHONOURS YOUR TRUST.

Organisation Structure

Headquartered in Kolkata, the Bank has 35 Regional Offices spread all over India. Branches

located in a geographical area report to the Regional Office having jurisdiction over that area.

These Regional Offices are headed by Senior Executives ranging upto the rank of General

Manager, depending on size of business and importance of location. The Regional Offices

report to General Managers functioning at Head Office in Kolkata.

1.3.2 Vision Statement

To emerge as the most trusted, admired and sought-after world class financial institution and

to be the most preferred destination for every customer and investor and a place of pride for

its employees.

1.3.3 Mission Statement

To be a Top-class Bank to achieve sustained growth of business and profitability, fulfilling

socio-economic obligations, excellence in customer service; through up gradation of skills of

staff and their effective participation making use of state-of-the-art technology.

Global banking has changed rapidly and UCO Bank has worked hard to adapt to these

changes. The bank looks forward to the future with excitement and a commitment to bring

greater benefits to you.

UCO Bank, with years of dedicated service to the Nation through active financial

participation in all segments of the economy - Agriculture, Industry, Trade & Commerce,

Service Sector, Infrastructure Sector etc., is keeping pace with the changing environment.

With a countrywide network of more than 2000 service units which includes specialised andcomputerised branches in India and overseas, UCO Bank has marched into the 21st Century

matched with dynamism and growth!

1.3.4 Strengths

Country-wide presence Overseas Presence with Profitable Overseas Operations Strong Capital Base High Proportion of Long Term Liabilities A Well Diversified Asset Portfolio


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A Large and Diversified Client Base Fully Computerised Branches at Major Centres Branch representation in Top 100 Centres (as per deposits) in the country

1.3.5 Organisation Structure

Headquartered in Kolkata, the Bank has 35 Regional Offices spread all over India. Branches

located in a geographical area report to the Regional Office having jurisdiction over that area.

These Regional Offices are headed by Senior Executives ranging upto the rank of General

Manager, depending on size of business and importance of location. The Regional Offices

report to General Managers functioning at Head Office in Kolkata.

1.3.6 Key Highlights

Broad scale of operations

UCO bank had an asset base of Rs.1373.5 bn as on March 31, 2010 which accounted for

2.7% and 2.4% of total deposits and advances respectively in India. The banks deposits and

advances registered a CAGR of 23.6% and 20.6% respectively over the past three years. As

on March 31, 2010 it had deposits of Rs.1224 bn and advances of Rs.825 bn. The bank has a

panIndia presence with a healthy network of 2202 domestic and 4 overseas branches with

608 ATMs facilitating 1.33 mn card holders as on March 31, 2011.The banks entire branch

network has now been covered under core banking solutions (CBS) which puts the bank in a

position to compete with other larger banks.

Moderate capitalization with modest resource profile

UCO bank has moderate capitalization supported by capital infusion aggregating to Rs.15.73

bn by Government of India (GoI) through perpetual non cumulative preference shares in the

past twoandhalf years. The banks TierI Capital Adequecy Ratio (CAR) under BaselII

stood at 7.5% as on December 31, 2010. The banks modest resource profile is marked by

lowerthanindustry average share of current account and savings account (CASA) deposits

in its total deposits. The bank continues to face challenges in improving the proportion of

retail deposits (savings account and term deposits) in total deposits and is therefore highly

dependent on bulk deposits and certificates of deposits (CDs) for its growth. The banks

CASA deposits, at 24.8% as on December 31, 2010 was lower than the industry average of35% on the same date. The bulk deposits and CDs constituted 45% of the total deposits.

Government ownership provides stability

GoI is the majority shareholder in UCO bank with shareholding of 63.59% as on December

31, 2010. This gives stability to the bank both on an ongoing basis and in the event of

distress. In 201011, GoI has committed infusion of Rs.201.57 bn in PSBs as additional

capital to help the banks maintain Tier I CAR of 8% and to increase its stake in a few PSBs to

at least 58%. The government has stated it will maintain overall CAR of PSBs at ~12%, so

that the banks can grow their balance sheets and remain competitive.


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1.3.7 Key Risks

Risk of non payment by customers Average asset quality Credit risk on account of slowdown in economy

1.3.8 Financial Position

UCO bank witnessed a significant growth of 41.3% in its NII for FY10 and it stood at

Rs.23.2 bn as against Rs.16.4 bn in FY09 backed by strong yoy growth in deposits and

advances by ~ 22.1% and 19.6% respectively. The bank recorded a strong growth of ~27% in

agriculture landing and 35% in MSME loans.

Strong growth in PPP coupled with bringing down the cost of funds substantially by shedding

high cost deposits and improvement in yield on advances boosted PAT by 81.5% to Rs.10.1

bn in FY10 from Rs.5.5 bn in FY09.

UCO banks yearly average cost of deposits dropped to ~5.9% in FY10 against 6.6% in FY09

because of reduction in high cost deposits partly because of decline in interest rates. This

helped to grow the net interest margin (NIM) by ~30 basis points to 1.9% in FY10 from 1.6%

in FY09.

The bank is well capitalized, with a capital adequacy ratio (CAR) of 13.2% at the end of

March 31, 2010 as per BaselII norms as, compared with 11.9% as on March 31, 2009. The

bank has raised subordinated debt of Rs. 13 bn by issue of unsecured redeemable bonds of

Rs.5 bn as Upper TierII capital and unsecured redeemable bonds of Rs.8 bn as subordinated

debt under Tier II capital. The bank has also redeemed Rs.1.5 bn of subordinated debt

instruments under TierII capital during the year.


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1.3.9 Annual Results


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Sources:

UCO Bank CRISIL Company Report

www.ucobank.com


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Chapter -2 Loan Policy Overview

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Chapter -2 UCO Bank Loan Policy Overview

2.1 Section 1

Scope of the Policy

The Loan Policy Document provides necessary directives covering all loans and advances to

borrowers/proposed borrowers but does not cover loans and advances to -

Bank's own staff Bank's Directors Relatives of Directors Directors and their relatives on reciprocal basis.

Loans and advances to Bank's own staff would be governed by schemes approved by the

Board of Directors in terms of guidelines on the matter received from Govt. of India. Loans

and advances to Bank's Directors, Relatives of Directors, Directors and their relatives onreciprocal basis would be based on specific approval of Board of Directors and should

conform to the statutory and Regulatory directives in force.

Objectives of Loan Policy

The Loan Policy Document-2010 seeks to respond to the present requirements in the light of

expected environment.

Its objectives are:

1. Incremental credit deployment as per the Bank's business plan.2.

Create requisite capacity in the Credit Administration structure for credit dispensationand monitoring.

3. A well diversified fully rated credit portfolio.4. Control credit quality such that default rate over the year is contained within5. 2% so as to achieve reduction in provision requirements.6. Optimize profit from the portfolio.

2.2 Section -2

Policy directives on strategies to achieve the target

The Bank would seek to achieve the target set for credit expansion through emphasis on

thrust areas as per Bank's business plan, distribution of targets across its branches based on

credit deployment/ absorption capacity of branches and their command areas and delegation

of discretionary powers across field functionaries.

Additionally, the Bank would provide marketing support, products aligned with market

demand, and competitive pricing. Effective client contact on a regular basis would be

encouraged. The Bank would also seek to standardize its products, as far as possible, for ease

of handling and to reduce operational costs.

Monitoring of credit accounts will receive priority at all levels. Bank will take effective steps

to constantly improve credit appraisal and account maintenance skills of its personnel. Thesesteps would help the Bank to achieve its objective of minimizing slippage.


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2.2.1 Segment- Wise Target Allocation Across Zones

The Bank has allocated segment wise targets to the Zones taking into account their capacity

for credit expansion. The Zones further have distributed these targets amongst the branchesunder their control, keeping in view the potential of the branches. Quarterly review of the

performance vis-a-vis targets allocated would be carried out and necessary follow up would

be carried out to achieve over all target set for credit expansion.

2.2.2 Delegation of Discretionary Powers

Suitable discretionary powers have been delegated to the field functionaries to enable them to

accord sanctions on credit proposals without delay. However, suitable flexibility in the

existing structure may be carried out to reflect the requirements specific to a scheme or

product. This may be based on lower risk perception associated with products/ schemes or

competitive requirements.

2.2.3 Alignment of Products and Pricing With Market Demand

The Bank has adopted a strategy to design and market standardised credit products for

various segments in the credit market. Additionally, Bank would also, based on its experience

and feed-back received on market and demand, modify its products with a view to improve

its market share. Bank would also recognize price competition and align its pricing, subject to

other relevant factors, with the market.

In case of credit proposals specific to a unit, the Bank would continue to take into account

their specific needs keeping in view Bank's profitability, Loan Policy and other directives/guidelines.

2.2.4 Product Development

Banking product is a package of deliverables/services, which is specifically designed by the

bank for a set of target customers with a purpose that customer and the bank are mutually

benefited from it, on an ongoing basis.

Bank from time to time develops various products relating to its different business

dimensions and can broadly be classified into the following categories:

1) Loan products which are designed as tailor made schemes targeting a particularsegment of clients/borrowers e. g. UCO Shelter, UCO Traders, UCO Car, UCO

Mahajan etc.

2) Deposit products which are designed in a manner to impart maximum value to thedepositors and to garner deposits for the Bank e.g. UCO Premium, UCO Star etc.

3) Technology based products rendered to supplement the existing products/services forthe customers like VISA Card, RTGS, Multicity Cheque Facility, E-Banking etc.

4) Hybrid Products: a single product carrying features of more than one product e.g.friend-in-need scheme etc.

5) Any OtherA product in its process of development undergoes various stages viz. conceptualization,

development of modalities, cost-benefit analysis, risk perception, approval, implementation,


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review and monitoring etc. therefore needs to go through a structured process of

development.

2.2.5 Marketing Support

The Bank will undertake product publicity through various modes available keeping in viewthe cost-benefit aspect, coverage and other relevant factors. This would be carried out to

popularize our products and to convey information content.

Bank has added officers with specialization in marketing to its resources. They would form

the nucleus around which client contact strategy would be developed. Client contact would

serve the objective of maintaining close liaison with existing and potential major customers

for the purpose of business and feedback.

2.2.6 Standardisation in Credit Dispensation

Retail / SE Departments at Head Office will take steps to standardize respective credit

products to the extent possible. Standardization of various schemes incorporating process

note, documentation, monitoring and follow up will be carried out to simplify credit

dispensation process. This will also help in handling volumes by field functionaries and

reducing costs.

Zonal Offices would also be encouraged to develop schemes suitable to various groups of

borrowers within their command area subject to approval by HO Retail/ SE Department as

the case may be.

2.2.7 Credit Appraisal & Account Maintenance Skills

As a long-term measure, the Bank would continue to recruit/identify officers forspecialization in credit dispensation. Identified officers would receive exposure in credit

processes at branches, controlling offices and Head office. They would also be imparted on-

the-job training and classroom trainings at Bank's Staff Training College, B.T.C., and NIBM

etc.

Short-term measures would include deputing officers from Head Office and controlling

offices to assist branch level functionaries in credit dispensation. Further, thrust branches

shall be identified based on business potential for maintaining large borrower accounts. These

branches would be provided with officers possessing required credit dispensation skills.

2.2.8 Marketing for High Value Corporate Accounts

Considering the fact that a fair share of Credit Expansion has to come from Corporate Sector,

marketing efforts in this segment will be intensified at all levels.

2.3 Section 3

Policy Directives on Portfolio Exposure

The Bank would adhere to the following guidelines in achieving its objective of portfolio

diversification. The guidelines restrict Bank's exposure on single borrower, group borrower,counter-parties (i.e. commercial banks, Regional rural banks (RRBs) etc.) and foreign


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countries. It also restricts overall unsecured exposure, exposure on capital market and

provides for monitoring aggregate exposure on high value individuals/groups. It seeks to

ovoid industry concentration and limits further exposure in specified industries.

DefinitionsExposure

Exposure shall include credit exposure (funded and non-funded credit limits), investment

exposure (including underwriting and similar commitments) as well as certain types of

investments in companies, in Indio or abroad and credit exposure of derivative products. The

sanctioned limit or outstanding, whichever is higher, shall be reckoned for arriving at

exposure limit. However, in case of fully drawn term loans, where there is no scope for

redrawal of any portion of the sanctioned limit, the outstanding would be reckoned as

exposure.

Capital Funds

Capital funds will comprise of Tier-I & Tier-II capital as defined under capital adequacy

standards and as per the published accounts as on March 31 of the previous year. The

infusion of Capital under Tier-I and Tier-II, either through domestic or overseas issue after

the published balance sheet date, will also be taken into account for determining the exposure

ceilings. Other accretions to Capital Funds by way of quarterly profits etc. would not be

eligible to be reckoned for determining the exposure ceiling. The Bank is prohibited from

taking exposure in excess of the ceilings in anticipation of infusion of Capital at a future date.

2.3.1 Prudential Exposure ceilingsThe Bank shall limit itsExposure on a single borrowerand borrowers belonging to a group

to the following limits.

1. Single Borrower

2. Group Borrower

Single Borrower

15% of Bank's Capital Funds

40% of Bank's Capital Funds

Single borrower would imply individual borrower that may be an individual, a HUF, a

proprietorship/partnership/private or public limited concern, trust etc., but should be a single

unit.

Borrowers belonging to a Group

a) Business entities, whether proprietorship or partnership or private limited company or

public limited companies having one or more common Partner /Director. However, in case of

Public Limited Companies, the group approach will be based on the concept of commonality

of management and effective control on the basis of relevant information available with the

Bank. In other words, if a professional (i.e. non-promoter) Director is common between two

Public Limited Companies, who does not have substantial share holding / management

control, such companies will not be treated as group companies merely on this ground,


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OR

b) A limited Company, which is subsidiary of another limited company or closely held

company with substantial interest

2.3.1.1 Prudential Exposure norms for NBFC: Single borrower NBFC 10% of Bank's Capital Funds

Single Borrower NBFC 15% of bank's Capital Funds

(In case additional 5% is on lent to Infrastructure)

2.3.1.2 Exemptions

Single/Group Exposure limit will not be applicable on the following types of exposures:

Limits allocated directly by the Reserve Bank of Indio for food credit. Existing/additional credit facilities (including funding of interest and irregularities)

granted to weak/sick industrial units under rehabilitation packages.

Exposures where principal and interest are fully guaranteed by Government of India. Loans and advances granted against security of Bank's own term deposits.

2.3.2 The indicative list of various forms of exposure:

All types of funded and non-funded credit limits. Facilities extended by way of equipment leasing, hire purchase finance and factoring

services.

Advances against shares, debentures, bonds, units of mutual funds etc. Bank loan for financing promoter's contributions. Bridge loans. Financing of Initial Public Offerings (IPOs) / Employee stock Options (ESOPs). Underwriting obligations. Buy bock Commitments. Investment in shares and debentures/bonds of companies acquired through direct

subscription, devolvement arising out of underwriting obligations or purchased from

secondary markets or on conversion of debt into equity.

Investment in PSU bonds through direct subscription, devolvements arising out ofunderwriting obligations or purchase mode in the secondary market.

Investment in Commercial Papers (CPs) issued by Corporate Bodies/PSUs. Investment in debentures /bonds /security receipts /pass through certificates (PTCs)

issued by a Securitization Company (SC)/ Reconstruction Company(RC).

Credit exposure equivalent of derivative products2.3.2.1 Measurement of Credit Exposure of Derivative Products

For the purpose of computing credit exposure of all derivative products Current Exposure

Method as given below should be followed.

Current Exposure Method:


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Under Current Exposure Method, credit exposure equivalent of off-balance sheet interest rate

and exchange rate instruments shall be the sum of:

1. The total of replacement cost (obtained by "marked to market") of all contracts with

positive value (i.e. when the Bank has to receive money from the counter party).

2. An amount for potential future changes in credit exposure calculated on the basis of thetotal notional principal amount of the contract multiplied by the following credit conversion

factors according to the residual maturity:

Residual Maturity

Interest Rate

Contract

Exchange Rate

Contract

Less than one year 0.50% 2.00%

One year and over to

less than 5 yrs 1.00% 10.00%

Conversion factor to be

The derivative products shall be marked to market at least on a monthly basis.

The Bank would follow the internal methods of determining the marked to market value of

the derivative products. The credit exposure for single currency floating / floating interest rate

swaps would be evaluated solely on the basis of their mark-to-market value.

2.3.3 Infrastructure Lending

According to RBI master circular on Exposure Norms Infrastructure lending would include

all credit facilities extended in any form to a borrower entity engaged in:

1. Developing.

2. Operating and maintaining.

3. Developing, operating and maintaining any infrastructure facility that is a project in any of

the following sectors, or any infrastructure facility of a similar nature.

A road, including toll road, a bridge or a rail system. A highway project including other activities being an integral part of the highway

project.

A port, airport, inland waterway or inland port. A water supply project, irrigation project, water treatment system, sanitation and

sewerage system or solid waste management system.

Telecommunication services, weather basic or cellular including radio paging,domestic satellite service (a satellite owned and operated by an Indian company for

providing telecommunication service), network of trunking, broadband network and

Internet services.

An industrial park or special economic zone. Generation or generation and distribution of power. Transmission or distribution of power by laying a network of new transmission or

distribution lines.

Construction relating to projects involving agro processing and supply of inputs toagriculture.


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Construction for preservation and storage of processed agro products, perishablegoods such as fruits, vegetables and flowers including testing facilities for quality.

Construction of educational institutions and hospitals. Laying down and/ or maintenance of gas, crude oil and petroleum pipelines.

Any other infrastructure facility of similar nature.

2.3.4 Substantial Exposure

Sum total of exposures assumed in respect of single borrowers enjoying credit facilities in

excess of a threshold (10% say) of Capital Funds was stipulated at 400% of Capital Funds in

the Loan Policy Document approved by the Board for the year 2001-2002. However, a report

on accounts, where the exposure has crossed threshold limit of 1 0%, shall continue to be

placed before the Board every six months for review.

2.3.5 Unsecured Exposure

Unsecured exposure is an exposure comprising all funded and non-funded exposures

(including underwriting and similar commitments) where the realizable value of security, as

assessed by the Bank/ approved valuers/ Reserve Bank's Inspecting Officers, is not more than

10 percent, ab-initio, of the outstanding exposure. But the classification of advances as

secured or unsecured would be revisited at the time of review of advances and also as part of

preparation of final statements.

Security will mean tangible security properly charged to the Bank and will not include

intangible securities like guarantees, comfort letters, charge on rights, licenses, authorizations

etc.

2.3.6 Capital Market Exposure

Following exposures shall qualify as Capital Market Exposure:

i) Direct investment in equity shares, convertible bonds, convertible debentures and units of

equity-oriented mutual funds the corpus of which is not exclusively invested in corporate

debt.

ii) Advances against shares/bonds/debentures or other securities or on clean basis to

individuals for investment in shares (including IPOs /ESOPs), convertible bonds, convertible

debentures or units of equity-oriented mutual funds etc.

iii) Advances for any other purposes where shares or convertible bonds or convertible

debentures or units of equity oriented mutual funds are taken as primary security.

iv) Advances for any other purposes to the extent secured by the collateral security of shares

or convertible bonds or convertible debentures or units of equity oriented mutual funds i.e.

where the primary security other than shares/convertible bonds/convertible debentures/units

of equity oriented mutual funds does not fully cover the advances.

v) Secured and unsecured advances to stockbrokers and guarantees issued on behalf of

stockbrokers and market makers.

vi) Loans sanctioned to corporates against security of shares /bonds/debentures or other

securities or on clean basis for meeting promoter's contribution to the equity of new

companies in anticipation of raising resources.

vii) Bridge loans to companies against expected equity flows/issues.


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viii) Underwriting commitments taken by the Bank in respect of primary issue of shares of

convertible bonds or convertible debentures or units of equity oriented mutual funds.

However, with effect from April 16, 2008, Bank may exclude its own underwriting

commitments, also the underwriting commitments of its subsidiaries, if any, through the book

running process for the purpose of arriving at the capital market exposure of the solo bank aswell as well the consolidated Bank.

ix) Financing to stockbrokers for margin trading.

x) All exposures to Venture Capital Funds (both registered and unregistered). This exposure

will be deemed to be at par with equity.

All Such Exposures, as mentioned above, shall be governed in terms of Policy Guidelines on

Capital Market Exposure

2.3.7 Country Exposure

Bank's funded and non-funded exposure on different countries would form country exposure.

Such exposures shall be governed in terms of the Policy Guidelines on Country Risk

Management. The Bank takes both funded and non-funded exposure of different maturities

on different countries worldwide during the course of its operations. These exposures are

generally of the following types:

1) Funded Exposures2) Non-funded Exposures

While taking such exposures the bank is required to consider the risk associated with the

country where the underlying assets are created over and above the counter party risk.Country exposures for the domestic operations are taken by the designated branches in India.

The overseas centres, Singapore and Hong Kong also take country exposures.

RBI's guidelines on Country Risk Management are applicable to the bank as a whole.

However, for Singapore and Hong Kong the stricter of the provisions for country risk

management as prescribed hereunder or that prescribed by the respective monetary

authorities of those countries shall apply.

Country Risk Defined

Direct country risk:

Direct country risk will imply the risk associated with the country where the underlying

assets are created out of the exposure taken.

Indirect country risk:

Indirect country risk shall arise in cases where a domestic commercial borrower has large

economic dependence on a certain country. Large economic dependence for this purpose

shall mean economic dependence of more than 50% on a particular country.

Risk wise Classification of Countries:

The bank will use the seven-category classification followed by Export Credit Guarantee

Corporation of India Ltd (ECGC) for the purpose of classification of country risk exposures

as given hereunder:


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Risk

Category

ECGC

Classification

Insignificant A1

Low A2

Moderate B1

High B2

Very High C1

Restricted C2

Off-credit D

Such classification shall be updated with quarterly updates to be obtained from ECGC by

Head Office. Any sudden change in classification of a country in the interim period as

advised by ECGC shall also be reckoned.

Computation of Exposure

Exposures will be computed on a net basis i.e. gross exposure 'minus' collaterals, guarantee,

insurance etc. Netting may be permitted for cash collaterals, bank guarantees and credit

insurance available in/ issued by countries in a lower risk category than the country on

which exposure is assumed.

Indirect exposures shall be reckoned at 50% of the exposure for the purpose of these

guidelines. For the present, only in respect of the country, where a bank's net funded

exposure is 1 per cent or more of its total assets, indirect country risk shall be reckoned for

measuring, monitoring and controlling.

2.3.8 Counter Party Exposure

Bank's exposure on Clearing Corporation of Indio Limited (CCll), Scheduled Commercial

Banks, Regional Rural Banks, Co-operative Banks, Mutual funds and Primary Dealers shall

form counter party exposure.

2.3.9 Industry/Sectoral Exposure

The Bank has undertaken a study on industry/sector correlation and the policy for allocation

of credit exposure on various industries/sectors in the portfolio has been adopted with due

approval of Risk Management Committee of the Board (RMCB) as under:

I. Where industry specific exposure is less than 1 % of total credit exposure, the exposure

limit would be 1 % of the total projected credit exposure.

II. Where industry specific exposure is above 1 % but up to 2% of total credit exposure, the

exposure limit would be 2.5% of the total projected credit exposure.

III. Where industry specific exposure is above 2% but up to 4% of total credit exposure, the

exposure limit would be 5% of the total projected credit exposure.


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IV. Where industry specific exposure is above 4% but up to 6% of total credit exposure, the

exposure limit would be 7.5% of the total projected credit exposure.

V. Where industry specific exposure is above 6% of total credit exposure, the exposure limit

would be 10% of the total projected credit exposure.

2.3.10 Tenor Based Exposure

Asset Liability Management Committee (ALCO) shall decide, every year, the incremental

level of long-term exposure having tenor of 3 - 5 years and above 5 years considering

structural liquidity position of the Bank and shall allocate the same across various authorities

engaged in sanctioning credit proposals. Further, industries/sectors would be identified where

the Bank would take medium/long term exposure and such level of exposure would be

quantified. In doing so, the ALCO would take into account industry outlook provided by

reputed agencies.

This would be an annual exercise but may be reviewed from time to time. Further, the ALCO

would also crystallize critical success factors in such identified industries and borrower's

strength vis-a-vis crystallized critical success factors would be assessed in taking exposure on

borrowers.

Similarly Commercial Papers (CPs), because of their short-term nature and having impact on

Asset Liability Management (ALM), total exposure & tenure and its allocation across various

authorities engaged in sanctioning CPs would be determined by the ALCO from time to time.

2.3.11 Proposals Prohibited

This lending policy prohibits loans & advances (including non-fund based facilities) for the

following purposes or to the following categories of borrowers.1. Loans & advances for speculative purposes.

2. Proposals from defaulters of our Bank (excluding exempted categories).

3. Loans and advances to borrowers dealing in sensitive commodities as notified by RBI from

time to time, which directly or indirectly violate the spirit of the Selective Credit Control

directives (presently applies to buffer stock of sugar with Sugar Mills and unrealized stocks

of sugar with Sugar Mills representing levy sugar and free sale sugar).

4. Loans against commodities, possession/ production of which are prohibited by the law of

the land.

5. Sanction of fresh loans to clear the NPA accounts in the group/ associates.

6. Loans and advances against company shares to promoters of such companies (however,

promoters holding given as additional collateral for specific approved purposes may not come

under such prohibition).

7. Purchase and discount of bills, which are accommodative in nature.

8. Loans and advances to industries consuming/ producing ODS (Ozone Depleting

Substance).

9. Loans and advances to industries, whose application for clearance from Pollution Control

Board/s have been turned down or are under dispute/litigation.

10. Credit proposals from companies/borrowers whose name(s) appear in defaulters/ suit filed

accounts lists published by the Reserve Bank of India from time to time and whose names

appear in the ECGC caution list for exporters.


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11. Loans and advances on the security of UCO Bank's shares and for the purpose of

purchase/subscription to public issues of UCO Bank's shares.

2.3.12 STATUTORY AND REGULATORY RESTRICTIONS

Statutory restrictions, regulatory restrictions, restrictions on other loans & advances havebeen advised by RBI.

Statutory restrictions:

a) Advances against Bank's own shares.

b) Advances to Bank's Directors.

c) Restrictions on holding shares in Companies.

d) Restrictions on Credit to Companies for Buy-back of their securities.

Regulatory Restrictions:

a) Granting Loans and Advances to relatives of Directors.

b) Restrictions on Grant of Loans and Advances to the relatives of senior Officers of Banks.

c) Restrictions on grant of financial assistance to Industries producing/ Consuming Ozone

Depleting Substances (ODS).

d) Restrictions on Advances against Sensitive Commodities under Selective Credit Control

(SCC)

e) Restriction on payment of commission to staff members including officers.

Restrictions on other Loans and advances:

a) Loans and advances against Shares, Debentures & Bonds.b) Advances against Money Market Mutual Funds.

c) Advances against Fixed Deposit Receipts issued by other Banks.

d) Advances to Agents/ Intermediaries for Deposit Mobilisation.

e) Loans against Certificate of Deposits (CDs).

f) Bank Finance to Non-bank financial Companies (NBFCs).

g) Financing of Infrastructure/ Housing Projects.

h) Issue of Bank Guarantees in favour of financial institutions.

i) Discounting /rediscounting of Bills by banks.

j) Advances against bullion/primary gold.

k) Advances against Gold Ornaments & Jewellery

l) Gold (Metal) Loans

m) Loans and advances to Real Estate Sector

n) Loans and advances to small-scale industries.

o) Loan system for delivery of Bank Credit.

p) Lending under Consortium Arrangement/ Multiple Banking Arrangement

q) Working Capital Finance to Information technology & Software Industry.

r) Guidelines for Bank Finance for PSU Disinvestments of Govt. of Indio.

s) Grant of Loans for acquisition of Kisan Vikas Patras (KVPs)

t) 7% Savings Bonds 2002, 6.5% Savings Bonds 2003 (Non-taxable) & 8% Savings

(Taxable) Bonds 2003-Collateral facility


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u) Guidelines on Settlement of Non Performing Assets Obtaining Consent Decree from Court

v) Project Finance

w) Bridge Loans against receivables from Government

In addition, the following directives may be adhered to:1) Loans & advances to bank's directors/Relatives of directors/Lending to directors and their

relatives on reciprocal basis. Every borrower should furnish a declaration

where the borrower is an individual) he is not a director or specified near relation ofdirector of a banking company;

(where the borrower is a partnership firm) none of its partners is a director orspecified near relation of a director of a banking company; and

(where the borrower is a joint stock company) none of its directors is a director orspecified near relation of a director of a banking company.

Where the declaration in respect of the above is in affirmative, the proposals along with

details of relationship should be sent to the Secretary to Board and Chairman & Managing

Director, for necessary clearance before taking up the proposal. Such proposals have a

reporting/clearance requirement either from Reserve Bank of India or from Board of

Directors.

2) Loans & Advances to Bank's Senior Officers and their relatives Every Borrower should

furnish a declaration

(where the borrower is an individual) he is not a specified near relation of any seniorofficer of the Bank;

(where the borrower is a partnership firm or HUF firm) none of partners or none ofthe members of HUF is a specified near relation of any senior officer of the Bank; and

(where the borrower is a joint stock company) none of its directors is a specified nearrelation of any senior officer of the Bank.

3. The Bank will not give any advance in respect of the Following Categories:

Advances against Bank's own shares. Credit to companies for buy bock of their securities. Finance for setting up new units consuming/producing ozone depleting substances

listed below.

4. The following categories of advances shall have special stipulations/Guidelines:

a. Advances against money market mutual funds. Banks are to be guided bySEBI Regulations in this regard. Guidelines issued by Reserve Bank of Indio

have since been withdrawn.

b. Advances against sensitive commodities under Selective Credit Control.c. Loans and advances against shares, debentures and bonds.d. Bank's finance to non-banking finance companies including Bank finance to

equipment leasing companies and Bank finance for purchased lease of existing

assets.


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e. Financing infrastructure/housing projects.f. Issue of Bank guarantee against financial institutions.g. Discounting/rediscounting of bills by banks.h. Advances against Fixed Deposit Receipts issued by other Banks

2.4 Section 4

Policy directives on credit rating

The Bank introduced, with approval of the Board, a rating Module developed by NIBM

effective from 01.04.2003 for rating of accounts with limits of Rs 2 crores and above.

However, the module has been criticized by the users as being complicated and conservative.

CRMC desired that a simplified model be developed for rating of accounts. Meanwhile, a

draft credit rating model was developed by a study-group of Institute of Chartered

Accountants of India that was appointed for the purpose. The rating module suggested by the

study group took into account the guidelines of Reserve Bank of India on the matter.

Corporate Risk Management Committee of the Bank and Risk Management Committee of

the Board (RMCB) suggested certain changes in this module. These changes had been

incorporated in the module and the Bank adopted the module with approval of the RMCB.

2.4.1 Rating of accounts

Rating has to be assigned to all the Credit accounts with the Bank in terms of the guidelines

prescribed for the purpose. In addition, credit portfolio of the branches, Zones and the Bank

as a whole are also to be rated.In rating individual accounts, the extant guidelines provide for rating of all individual

accounts (excluding accounts under retail segment) having exposure above Rs 25 lacs.

Accounts having exposure of Rs 25 lacs and below and those under retail segment are also to

be rated, but rating for these accounts are determined based on aggregate default performance

of group of similar accounts (pooled assets). For example, all accounts under 'UCO Shelter'

may have one rating assigned to it. All accounts under this category would be assigned the

rating. Classification of all accounts having exposure of Rs 25 lacs and below in to various

asset pools and their respective rating would be communicated by Head Office, Risk

Management Department over a period of time.Portfolio rating of the entire credit exposure at branches, Zones and the Bank as a whole is

determined based on weighted average rating (based on outstanding balance as well as limit

sanctioned) of all credit accounts at branches, Zones and Bank as a whole respectively.

2.4.1.1 Aggregate FB and NFB limit upto Rs 25 lac:

Accounts with aggregate FB &NFB limit upto Rs 25 lac would be rated on portfolio basis.

2.4.1.2 Aggregate FB and NFB limit over Rs 25 lac and up to Rs 5 crore:

Impact of expected industry performance on accounts with exposure up to Rs 5 crore would

be taken at aggregate level of exposure on a given industry. This is because, implications of


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industry rating are not significant enough in small accounts being usually local in nature and

therefore, depends upon the local economy. In case of such accounts, rating would be

determined on the basis of scores in Management rating (that includes conduct of account as

well) and Financial rating based on audited balance sheet/ financial statements as at the end

of the immediate preceding financial year. In arriving at final rating, management andfinancial rating shall have equal weights.

In rating new accounts or green field accounts in the first year of operation, assessment of

management rating would be based on available information and maximum score would

change accordingly. For financial rating, projections for the next year or average position in

case where term financing is involved, may be relied upon. The average position in case of

greenfield projects shall be arrived on the basis of overage figures of the first three years of

the projected financials. The first year to be considered shall be the year in which the loan is

sanctioned. The final score shall be brought down by 5 marks and rating may be given

accordingly.

2.4.1.3 Aggregate FB and N FB limit over Rs 5 crore without Term Facilities or with

term facilities of maturity not exceeding 5 years:

In rating accounts with total exposure in excess of Rs 5 crore under this category, apart from

management rating and financial rating, industry rating is also to be taken into account.

Industry rating would be made available by Risk Management Department to respective

sanctioning authority. This rating shall be updated from time to time and advised separately.

In arriving at final rating, management and financial rating shall have 45% weight each while

industry rating shall have 10% weight. Management and financial rating would be arrived at

in the same manner as in case of accounts with exposure up to Rs 5 crore.

2.4.1.4 Aggregate of FB and N FB limit over Rs 5 crore with term facilities of maturity

more than 5 years:

In rating accounts with total exposure in excess of Rs 5 crore under this category, apart from

management rating and financial rating, 'Project Rating Index' (PRI) is also to be taken into

account. Since all accounts having on exposure of above Rs 5 crore would fall under the

discretionary powers of D.G.M. and above, computation of PRI would be a Z.O./H.O. level

activity. Critical Success Factors, needed in computing PRI, would be made available by Risk

Management Department, H.O. In arriving at final rating, management and financial rating

and PRI shall have equal weight. Management and financial rating would be arrived at in the

some manner as in case of accounts with exposure up to Rs 5 crore.

2.4.1.5 Green Field Projects with aggregate FB and NFB limit over Rs 5 crore with

maturity of more than 5 years:

Green Field Project is defined as under:

A totally new project started by a new company.

An expansion project of on existing company where investment in the asset of the new

project is more than 50% of the tangible net worth of the company.

In rating these accounts in the first year of operation, assessment of management rating

would be based on available information.


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For financial rating the following factors have been adopted:

1. Project debt equity ratio: Lower the debt equity ratio less risky is the finance extended to

the project.

2. Timing of capital infusion by the promoter - earlier the better.3. Existence of additional cash flow, which can be used for repayment of interest and

principal in addition to availability of cash flow upon completion of the project.

This comfort would be available in case of existing project going in for expansion. In case of

stand-alone project, this comfort is not available and therefore stand-alone project would be

more risky compared to the expansion of existing projects.

The existing process of deducting 5 marks from the total weighted score for giving rating

would not be necessary in view of the fact that the financial rating is arrived at without basing

on projected financials.

2.4.1.6 Rating of NBFCs:

Separate rating module has been introduced for rating:

i) Equipment Leasing Companies

ii) Hire Purchase Companies

iii) Investment Companies

iv) Loan Companies

v) Residual Non-bonking Companies

vi) Housing Finance Companies

with aggregate FB & NFB limit of Rs 25 lac and above.

2.4.1.7 Rating of companies akin to NBFCs:

Separate rating module has been introduced for rating of:

i) Infrastructure Development Corporation

ii) Industrial Development Corporation

iii) Financial & Development Institutions with aggregate FB & NFB limit of Rs 25 lac &

above.

This module is basically identical to NBFCs module except that Total Outside Liability to

Net Owned Fund in the module for NBFCs has been replaced by Total Outside Liability to

Tangible Net Worth in this module.

2.4.1.8 Quarterly Monitoring Of Rating Of Accounts In The Private Sector Having

Short Term Unsecured Exposure Of Rs.100 Crore And Above

In order to have better control on unsecured exposure, the credit ratings of the accounts

pertaining to short term unsecured exposure of Rs.100 crore and above to private companies

in FC segment would be re-drawn on quarterly basis, on the strength of latest available

information on their financials and conduct.

2.4.1. 9 Rating Nomenclature and its meaning:


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Rating carried out by using the above models shall have the following meaning of the rating

nomenclature used.

Rating Meaning

A++ Indicates high position of (Negligible Risk) sustainable strength- absolute aswell as relative over short to medium term

A+ Indicates high position of strength (Very Low Risk) at relative level over short tomedium term

A Indicates moderate degree of (Low Risk) strength at relative level over short tomedium term

B+ Indicates moderate degree of (Medium Risk) strength with marginally uncertainstability over short to medium term

B Indicates low degree of strength (Medium Risk) strength with uncertain stabilityover short to medium term

B- Indicates low degree of strength (High Risk) with uncertain stability over short tomedium term

C Indicates fundamental weakness (High Risk) likely to affect performance in nearfuture

2.4.2 Rating and Rating Review:

Rating of all accounts, which are to be sanctioned at Head Office level, would be carried out

by Risk management Department, Head Office. In addition, Risk Management Department,

Head Office would review rating of all accounts above Rs. 15 crores sanctioned by the FGMs

and Zonal Heads. However, rating of accounts up to Rs.15 crores sanctioned by the FGMs

and Zonal Heads would be reviewed by Risk Management Department, H.O. on random

basis.

Credit Monitoring Department of Zonal Office shall forward the necessary details to Head

Office, Risk Management Department for review of rating. Necessary details would include

the following:

Process Note

Audited Financial statements for the relevant year

MCMR in respect of the account (in respect of existing accounts)

Project Report (in respect of green field accounts/projects)

2.4.3 Rating Based Action Points:

2.4.3.1 Review/Renewal of Accounts

Short review in accounts rated '8' or below should be carried out every 6 month with

emphasis on operations and primary securities. In other accounts annual review/renewal

exercise should be carried out.

2.4.3.2 Stock Audit:

Rating Amount of Exposure Frequency of stock audit


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A and above (Rs 20 crore and above) - Once a year B+ (Rs 10 crore and above) - Once a year B and below (Rs 5 crore and above) - Once in six months A and above (Below Rs 20 crore) - Sanctioning authority may authorize conduct of

stock B+ (Below Rs 10 crore) - audit depending upon the requirement B and below (Below Rs 5 crore) - development in the account

2.4.3.3 Pricing:

As pricing is related to rating, on review of rating by HO Risk Management

Department/Credit Monitoring Department of Zonal Office, the pricing may require revision.

This would be applicable to accounts sanctioned at branches and by Zonal Heads. However,

revision inpricing, ifany, on account of review of rating by Risk Management Department at

Head Office would be decided by either of the Executive Directors or Chairman & Managing

Director.

2.4.3.4 Concessionary Rate of Interest:

In permitting concessionary rate of interest, the competent authority shall use the rating

assigned/reviewed by Risk Management Department, Head Office/Credit Monitoring

Department at Zonal Office as the case may be.

2.4.3.5 Portfolio Rating:

Portfolio Rating (Exposure) is the weighted overage of rating-wise exposure (i.e., total limits,

fund based as well as non-fund based). Similarly, Portfolio rating (Outstanding) is the

weighted overage of rating-wise outstanding balances (i.e. total outstanding, both fund based

and non-fund based). Portfolio ratings are a major determinant of portfolio quality and it

needs to be monitored. Portfolio rating also provides on indication of available risk appetite

of the Bank and can be used to optimize return on the credit portfolio. Accordingly, it is

desirable that this is tracked on a regular basis.

2.4.4 RATING GUIDELINES

2.4.4.1 RATING OF ACCOUNTS WITH EXPOSURE OF RS 25 LACS OR BELOW &ACCOUNTS UNDER RETAIL SEGMENT

Credit rating of accounts having exposure of Rs 25 lacs or less and Bank's mid-market

products such as UCO Shelter, UCO Mortgage, UCO Trader, UCO Cash, UCO Education

etc. are to be arrived at based on Bank's default experience at aggregate level. The rating of

such accounts would be advised from time to time. Branches and controlling offices would be

required to assign credit rating on these accounts based on instructions issued by Head

Office, Risk Management Department.

2.4.4.2 RATING OF ACCOUNTS (EXCLUDING ACCOUNTS UNDER RETAIL

SEGMENT) WITH EXPOSURE OF MORE THAN RS 25 LACS


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Rating of Accounts with Exposure of more than Rs 25 Lacs (excluding accounts under retail

segment) are to be carried out for each account using an appropriate rating model. The rating

process involves:

a) Selection of Appropriate Rating Model- It is clarified that Credit rating of all the accounts

cannot be carried out using a single rating model. Bank has developed various rating modelsdepending upon the size, type and experience with an account. Accordingly, appropriate

rating model has to be selected depending upon

Size of exposure, Type of exposure and Whether the account is on:- Existing account- These are borrowal accounts of business units which are already in

existence and are having account with us. The business units would have annual

financial statements i.e., balance sheet and profit & loss accounts and would also have

a track record with the Bank that enables it to assess them on conduct of accounts etc.

New account - These are borrowal accounts of business units which are already inexistence but are not having account with us. The business units would have annual

financial statements i.e., balance sheet and profit & loss accounts but would not have

a track record with the Bank. This makes it difficult to assess them on conduct of

accounts including that on non-fund based facilities, performance in relation with

projections etc.

Green field account - These are new business accounts and therefore do not have pastfinancial statements i.e., balance sheet and profit & loss accounts and also have notrack record to assess them on conduct of accounts etc. This makes it difficult to

assess them on conduct of accounts including that on non-fund based facilities,

performance in relation with projections, performance on operational and financial

parameters.

Green field project - These are new project started by a new company or a project ofan existing company where investment in the asset of the new project is more than

50% of the tangible net worth of the company.

Newly Promoted NBFCs/lnfrastructure Development Corporation, IndustrialDevelopment Corporation and Financial & Development Institutions - These are new

accounts of NBFCs/ Infrastructure Development Corporation, Industrial

Development Corporation and Financial & Development Institutions and therefore

do not have past financial statements i.e., balance sheet and profit & loss accounts

and also have no track record to assess them on conduct of accounts etc. This makes

it difficult to assess them on conduct of accounts.

b) Operational instructions


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General lnstructions1. Rating models provide for rating of existing, new and green field accounts. However,

depending on the type of account, limit and tenure of the facility relevant rating model should

be used. The maximum marks will be different for existing, new and green field accounts.

Therefore, total marks scored is to be converted out of 100 for uniformity for managementrating as well as rating of operational performance/financial ratios.

2. Rating is to be based on financial data as on immediate past financial year closing.

3. While rating a business unit there is no need to take into account proposed borrowings etc.

4. It is clarified that "Entry Barriers" may provide for certain benchmark ratios that may

include proposed borrowings. Such ratios may be computed as has been provided for in the

Loan Policy.

5. In fact, with every new activity undertaken by a business unit or with every additional dose

of financial facilities, rating may undergo a change. This would call for re-rating of the unit

based on revised data.

Rating models have been designed to evaluate' Management', 'Operational Performance &

Financial Ratios' and 'Industry Outlook or Project rating'.

However, depending upon type of exposure, the relevant factors differ.

Accounts with aggregate FB and NFB limit over Rs 25 lacs and up to Rs 5 crores

The credit rating model adopted by the bonk for these accounts have taken into consideration

the following relevant factors grouped under two heads:

A. Management - In predicting performance of a business unit, assessment of managementquality is a crucial factor. Single most important reason for business failures have been

attributed to inefficient management. Factors:

1. Integrity / Commitment - This is a qualitative assessment of promoter(s) or proprietor or

partners or top management in case of professionally managed companies (i.e., public limited

companies where majority of shares are held public/Fls/MFs etc. like Larsen &

Toubro, ITC etc.). Assessment on this aspect of management should be based on market and

bankers' report, willingness to offer securities to secure Bank's loan, commitment of the

management towards the business, management's track record in honoring its commitment in

the past.

A qualitative view on the management may be taken based on the attributes mentioned above

and the management can be categorized as excellent, good, average or poor.

2. Financial Strength - "Financial strength" under management rating should be carried out in

the following manner:

i. Market value of the shares (as on the date of rating) of the company to itsNominal value.

In case of companies where no share have been issued or in the case of companies where

shares are not traded in the market or regular quotes are not available in the market, marks


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awarded should be "0". This is because of the reason that such companies would not be in a

position to raise additional funds from the market.

ii. Capacity of internal generation of funds.Return on Equity has been taken as an indicator for the Capacity of Internal generation offunds. This is defined as under:

Return on Equity (ROE) = Profit after Tax/ Total Equity (paid-up Capital)

iii. Net Worth of the promoters excluding stake in the business:This will indicate the extent to which the promoters would be able to inject additional funds

from their own sources whenever required.

3. Technical/Finance Knowledge - This is a qualitative assessment.

This aspect of the Management is rated based on technical and financial qualification of the

promoters/key personnel, their knowledge of financial and banking related aspects, their

ability to manage funds in an optimum manner, their ability to manage manufacturing

processes in an efficient manner etc.

4. Organizational Structure / Succession Plan - This is a qualitative assessment of the

company's organization and its functioning. This aspect of the management is assessed based

on type of:

Organization structure and hierarchy, Qualification/quality of persons holding key positions, Employee turnover in the organization, Coordination among executives of different departments, Delegation of responsibilities and powers, Succession plan for top management etc.

5. Selling and distribution network - This is a qualitative assessment of company's capability

to sell what it produces.

This aspect of the company is assessed based on its strength to reach its customers and how

well it is placed to meet the market competition.

Company's sales network, marketing plan including advertisement for its products andquality of sales are relevant factors here. Quality of sales here refers the realization of cash

within reasonable period from credit sales and relative share of cash sales in total sales.

6. Experience of Directors & Promoters - This aspect is assessed based on number of years of

effective experience in handling similar line of business and the level at which functional

experience has been acquired. More the experience better will be the awareness about the

finer points of the line of business. Higher the functional level at which the experience has

been acquired, better would be the overall knowledge in the line of business.


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Normally five years of experience in the line of business as promoter/top level functionary

should be good enough for highest rating. Where experience in the line of business is not

there, minimum rating should be assigned under this factor.

7. Pending Litigations - Assessment on this aspect is based on number of cases pendingagainst the company and/or its management. Where litigations involve reputation of the

company and/or its management and/or have financial implications, where litigations relate to

non-compliance with requirements of regulatory/statutory nature such as tax related issues or

environmental or license related issues, or where litigations involve

patents/trademark/intellectual property rights related matter etc., such litigations would have

impact on the company's financial position or operations. In such cases lowest rating should

be awarded under this category.

Information on these matters are usually available from market, annual report of the company

including" Notes to Accounts" attached to annual reports and can be assessed from

contingent liability schedule of annual report.

8. Market Reputation & Past Track Record - Market is the major source of information.

Track record with the Bankis a matter of record. One should also look up the RBI Defaulter

List and ECGC list also for assessing company's track record with other bonks/financial

institutions.

B. Operational Performance & Finance Ratios - Apart from management evaluation,

operational performance and financial parameters can be used to predict the performance of a

business organisation or a business unit. The financial and performance ratios that have highpredictive power and have been taken into account in rating of borrowers are listed below.

Ratios have been defined so that every borrower is rated on the same standard.

For the purpose of credit rating "Tangible Net Worth" would be net of intercorporate

transfers.

Similarly, "Current Assets" would also be net of Loans & Advances to sister or associate

concerns or subsidiaries or group companies. Ratios:

1. Sales/ Break Even Sales - Net Sales/ Break Even Sales

= (Net Sales - Variable Expenses)/ Fixed Expenses

Higher the sale to break-even sales ratio, higher is our margin of safety.

Depending on the value of the ratio, this performance area may be assessed on a five point

scale.

Note:

Variable expenses may be taken as Cost of Sales and fixed expenses as Total Expenses less

Cost of Sales and Extraordinary Expenses, if any.

2. Current Ratio - Current Assets/Current Liabilities


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This ratio is popularly known as Current ratio and indicates ability of a business unit to meet

its short term obligations. This indicates business unit's ability to carry on its day-to-day

business activities. A current ratio greater than 1 .33 is considered as highly satisfactory.

3. Return on Capital Employed -= (Profit after Tax + Interest)/ (Tangible Net Worth + LongTerm Borrowings + Bank Borrowings)

Return on capital employed (ROCE) is a measure of efficiency of capital employed in

business as also earning capacity of the business. ROCE should be higher than the cost of

capital. Where interest rate on borrowings is higher than ROCE, it is loosing proposition for

equity holder. In other words, ROCE should be higher than the rate of interest chargeable

adjusted for taxes. Assuming a tax rate of 30% and interest rate of 13%, the minimum ROCE

a company should earn is 9% [(1- 0.3) x 13 %].

4. Debt Service Coverage Ratio (DSCR) = (Net Profit + Depreciation + Interest on Term

Loan) / (Annual Repayment of Term Loan + Interest on Term Loan)

This ratio measures the capacity of a company to service its debts i.e. repay term loan

instalments and interest on it in time. Higher the ratio, higher is our margin of safety

5. Long Term Debt/ Equity = Total long term debt / Tangible Net Worth (Including

subordinated interest free borrowings from promoters).

The ratio is on indicator of promoters/shareholders stake in business when compared to total

long term debts. low debt equity ratio means higher long term stability and in case the ratio is

generally coming down, represents plough bock of profits.

6. Total Outside Liabilities/Tangible Net Worth - = Total Outside Liabilities/Tangible Net

Worth (Including subordinated interest free borrowings from promoters)

This ratio is also on indicator of promoters/shareholders stake in business when compared to

total outside liabilities. lower ratio means higher long term stability and in case the ratio is

generally coming down, represents plough bock of

profits.

Effective TOL/ Effective TNW

This ratio is to incorporate the impact of non-fund based limits on credit risk in the borrowal

account.

In this ratio total outside Liabilities will include apart from the entire liabilities other than net

worth as per the balance sheet (Audited) the credit equivalents of existing non-fund based

limits. Credit equivalent of non-fund based limits would be determined based on credit

conversion factor as prescribed by RBI for capital adequacy computations.

Effective Total Outside Liabilities = long term borrowings + short term borrowings + sundry

creditors + other liabilities + credit equivalent of non-fund based outstandings.

Effective Net worth = Paid up capital + reserves excluding revaluation reserves + interest free

subordinate loans - investments in sister/associate concerns (unquoted shares) -loans to

sister/associate concerns - intangible assets).

Note:


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It is clarified that only subordinated interest free borrowings from promoters can be treated as

equity as no repayment obligation to promoter arises before outstanding debts are paid.

Further, like equity capital, there is no charge on the operating surplus on account of interest.

7. Achievement of Net Sales Projections = Actual Net Sales Achieved/Net Sales Projectedfor the Year

The level of net sales achieved as compared with what was projected indicates management's

foresightedness that is so important in keeping their commitments.

8. Achievement of Net Profit Projections = Actual Net Profit Achieved/Net Profit Projected

for the Year

9. Opera

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