DISCLAIMER:
This document is prepared by Mr. Kedar Kulkarni, Chief Manager & Learning Head of
Baroda Academy, Ahmedabad.
Every attempt is made to summarize the Global Credit Exposure Management Policy
2020 and further modifications in the same.
I have also incorporated two small, simple caselets; for working capital assessment;
at the end of the document.
Enough care has been taken to make the document, as error-free.
However, please note that human errors of commission/ omission are always possible.
Hence, this document should only be used as a support, in the preparation of
promotion examination.
Please further note that, for any query/ guidance/ support/ guidelines, the staff
members should always refer to the Bank’s circulars, policies, Book of Instructions,
etc. only and not this summarized document.
Regards
KEDAR KULKARNI
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BARODA ACADEMY AHMEDABAD
Global Credit Exposure Mgt. Policy 2020
1) Prepared by Risk Management Department, BCC.
2) It aims to measure and mitigate credit risk.
3) Valid upto 31st December 2021 *
(* MD & CEO is authorized to continue, for maximum -6- months, beyond due
date of the policy)
4) Policy covers both fund-based as well as non-fund-based exposures
5) Policy covers both domestic as well as international exposure
6) The policy is divided into a number of sections viz.
a) Roles & Responsibilities
b) Credit Administration
c) Credit Strategy
d) Credit Process
e) Monitoring & Control
f) Other policy matters
g) Exit Policy
h) Training & Development
i) Etc.
7) Roles & Responsibilities –
Defines functions and responsibilities of different committees like RMCB,
CPC,PPAC.
It also discusses the CREP function and role of
CRO.
CREP –
a) Fresh Exposure – Rs. 5.00 crores and above to the counterparty.
b) In case of RWI, if exposure to the counterparty, reaches Rs. 5.00
crores andabove.
c) Plain Review, for accounts having exposure above Rs. 5.00 crores,
wherein the BOBICON rating has declined by 2 notches in case of
BOB-1 rated a/cs and by 1 notch; in case of BOB-2 and below rated
accounts.
d) ln case of Modification proposals, wherein modification pertains to
any security dilution and/or timelines for security creation/perfection.
e) ln case of Review/ Review with decrease proposals, the deviations in
financial covenants only consisting of key ratios*, beyond
acceptable level.
KEY RATIOS* GENERAL Min/ MICRO & MEDIUM ACCEPTABLE
BENCHMARK Max SMALL ENTERPRISE LEVEL
ENTERPRISES
CURRENT 1.33 Min 1.17 1.20 1.00
RATIO
D:E (TTL/ 3.00 Max 3.00 3.00 4.50
ATNW)
D:E (TOL/ 4.50 Max 4.50 4.50 5.00
ATNW)
FACR 1.25 Min 1.25 1.25 1.25
AVERAGE 1.75 Min 1.75 1.75 1.20
DSCR
Per Year 1.25 Min 1.00 1.25 1.00
DSCR
I.C.R. 2.60 Min 2.25 2.50 2.00
(TOTAL 5.00 Max 6.00 5.50 6.00
DEBT)/
EBIDTA
8) Credit Administration –
It discusses Bank’s internal classification of borrowers as below –
a) C&I Credit Borrowers – Corporate entities having gross annual
turnover of above Rs. 250.00 crores, as per last audited Balance
Sheet. In case of project finance, if project cost is Rs. 50.00 crores
and above.
b) MSME Borrowers - Corporate entities having gross annual turnover of
upto Rs. 250.00 crores, as per last audited Balance Sheet. In case of
project finance, if project cost is upto Rs. 50.00 crores. (Irrespective of
whetherthey confirm to regulatory definition of MSME or not)
c) Rural & Agriculture Borrowers - All agriculture and allied activities;
irrespective of their priority sector status.
d) Retail Lending – Lending for the personal consumption/ meeting
personal financial life cycle needs, excluding the loans covered under
above 3 types.
It also discusses HR capacity of Credit Risk Management, as below –
Proposals with exposure above Rs. 50 crores, will be processed by the
officers having qualifications of CA/CFA/CMA/MBA(F) etc. or experience
of -3- years, with Moody’s Analytics certification.
9) Credit Strategy –
a) Target Sectors & Markets-
- Positive Outlook Sectors
- Moderate Exposure in Neutral outlook Sectors
- For Negative Outlook Sectors, exposure limited to external
rating “A”and above.
b) Credit Rating Matrix
BOBICON Rating Target Share in External Rating Target Share in
Increm. Business Increm. Business
BOB-1, BOB-2 10% AAA/ CMR-1 10%
BOB-3 15% AA/ CMR-2 15%
BOB-4 20% A/ CMR-3 25%
BOB-5 35% BBB/ CMR-4 & 30%
below
BOB-6 & below 20% BB/ CMR-5 & 20%
below
c) Credit Risk Matrix
CIBIL Score Range Target Share in Increm. Business
771 & above 30%
726-770 20%
701-725 10%
Below 701 10%
No/ limited credit history 30%
d) RAROC Guidelines – (Risk Adjusted Return on Capital)
- Credit Proposals above Rs. 5.00 crores
- Hurdle Rate – 15% (WACC/ COE)
- Exceptions
e) Restricted Exposures -
Viz. Wilful defaulters, fraud accounts, loans against bank’s own
shares,against FDRs of other Banks, ODS, etc.
f) Activity Clearance –
Some of the activities like manufacturing of liquor, plantation,
vegetable oilsetc.
Some industries like aviation, Infrastructure – Power, Roads, Telecom etc.
g) AIP –
All fresh proposals with ext. rating “A” and below and falling beyond
powersof ZOCC-GM
h) Margin Norms –
For C&IC, EC and MSME Loans
Facility Type of Security Minimum Margin
Term Loan Factory Land & 30%
Building
Plant & Machinery, 25%
equipment
Second Hand 40%
Machinery
Working Capital Stock & Receivables 25%
Export Credit 10% (Pre Shipment)
Nil (Post Shipment)
i) Project Loans –
- TEV study not to be insisted upon, upto project cost of Rs. 25.00
crores
- Waiver Authority (COCC-CGM, for Project Cost up to Rs. 50.00
crores and for COCC-ED, above Rs. 50.00 crores)
10) CREDIT PROCESS –
a) Guidelines are mentioned, regards to time frame of disposal of the
creditproposals.
For example,
MSME loans upto Rs. 5 lacs :– Within -1- week
MSME loans above Rs. 5 lacs & upto Rs. 25 lacs :– Within -10- working days
MSME loans above Rs. 25 lacs – Within -15- working days.
b) Periodicity of valuation of financial security –
Govt. Debt Gold LIC/NSC/KVP Units of
Securities Securities MF
Daily Daily Daily Annually Daily
c) PSR –
Branches in Area Sanction Threshold Retail
(other than retail)
Metro & Urban Above Rs. 25.00 lacs Above Rs. 5.00 lacs
Semi urban & Rural Above Rs. 10.00 lacs Above Rs. 5.00 lacs
d) WC Assessment :-
e) Benchmark Ratios – Discussed in detail, as above.
f) Asset Verification –
For Working INTERNAL RATING Frequency of Asset
Capital Finance Verification
*
BOB-1, BOB-2, BOB-3 Quarterly
BOB-4, BOB-5 Once in -2- months
BOB-6 and below Monthly
Fixed Assets Half Yearly
Under consortium Arrangement As fixed by the
consortium
* This frequency was applicable; due to covid-related restrictions. It was
applicable till 31.03.2021. However, since no recent guidelines were issued; we
may continue to be guided by the above guidelines.
g) Monitoring & Control
h) “Three Lines of Defence”
- Customer Relationship Dept.
- Risk Management
- Audit Dept.
i) Curing Policy
- Deferment of DCCO
- Cut-back Arrangement
- Extending need-based additional finance
- Etc.
j) Credit Systems in BOB
- CBS
- BOBICON
- CREMON
- INTRANET
- LLPS
- TABIT
- KTP, KGR,K+
- PSB59
- Etc.
11) Exit Policy
- For high risk borrowal accounts
- Systematically exit from these accounts, after EWS
12) Training & Development
- Minimum -1- week training annually to each of the officers
working inareas of credit, treasury and credit monitoring and risk
management.
- Baroda Apex Academy will design effective training programs in
creditrisk management and the same would be mandatory.
CASELET No. 1
A manufacturing unit has approached to a branch for sanction of working capital
limit. They have submitted the following projections. Answer the given below
questions based on the following projections.
(Rs.in lakhs)
Current Liabilities Amt Current Assets Amt
Creditors for purchases 100 Raw materials 200
Other current liabilities 50 Stock-in-process 20
Bank borrowings 200 Finished goods 90
Receivables 50
Other current assets 10
Total Current Liabilities 350 Total Current Assets 370
a) Gross Working Capital of the unit is Rs. ___ lakhs?
b) What is the Working capital gap?
c) Maximum Permissible Bank Finance as per 1st Method of Lending is Rs ___ lakhs?
Solution :-
a) Gross Working Capital = Total current assets = 370
b) Working capital gap = Gross Working Capital - Bank borrowings = 220
c) MPBF 1 = Working capital gap – Margin (25% of WCG) = 165
CASELET No. 2
Parameters Amount Parameters Parameters
Net Worth 12,00,000 Fixed Assets 10,00,000
Term Liabilities 10,00,000 Investment 15,00,000
Current Liabilities 15,00,000 Current Assets 8,00,000
Preoperative 4,00,000
Expenses
Total Liabilities 37,00,000 Total Assets 37,00,000
(a) Find the Net Working Capital of the Company
(b) Find the Tangible Net worth (TNW) of the company
(c) Find the Current Ratio
(d) Find the DE Ratio (Total outside liabilities/TNW)
(e) Find the DE Ratio (Total Term liabilities/TNW)
(f) What is Balance Sheet size of the above firm?
Solution:
(a) NWC = Current Assets – Current Liabilities
8-15= -7 lacs
(b) TNW = Net Worth – Pre-operative Expenses
12-4=8 lacs
(c) Current Ratio = Current Assets/ Current Liabilities
8/15=0.53
(d) TOL/ TNW = 25/8 =3.08
(e) TTL/ TNW = 10/8=1.25
(f) Balance Sheet Size = Rs. 37.00 lacs
