DUE DILIGENCE BANKERS PERSPECTIVE Apte Joshi & Associates, Company Secretaries DUE DILIGENCE BANKERS PERSPECTIVE

COVERAGE OF THE PRESENTATION Apte Joshi & Associates, Company Secretaries COVERAGE OF THE PRESENTATION Objectives of Lending Polices Risks and its types Wilful Default Penal Measures Against Wilful Defaulters Diversion & Siphoning of Funds End use of Funds.

OBJECTIVES OF LENDING POLICY Apte Joshi & Associates, Company Secretaries OBJECTIVES OF LENDING POLICY The Lending Policy is framed with the purpose of enunciating the Thrust areas, Risk Perception, etc. The Lending Policy of the Bank aims at:- Providing Broad Guidelines for handling new Credit Proposals as well as existing Credit Portfolio. To evaluate the Risk Profile of the Credit Portfolio so as to mitigate the risk. Effective and Efficient Management of the Credit Portfolio of the Bank so as to ensure - reasonable Return on Advances with adequate safety of the funds

OBJECTIVES OF LENDING POLICY (Cont.) Apte Joshi & Associates, Company Secretaries OBJECTIVES OF LENDING POLICY (Cont.) To ensure planned lending and healthy growth of Loan Portfolio and achieve lending targets as per the Corporate Plan, an optimal CD ratio after meeting the statutory pre-emption and preventing asset-liability mismatches while keeping the NPA level to the minimum and improving the yield on advances, which is the main driver of profit. To ensure that aggregate risk in Loan Assets is not allowed to increase by stabilizing and percolating Credit Risk Management System.

RISK MANAGEMENT POLICY Apte Joshi & Associates, Company Secretaries RISK MANAGEMENT POLICY Credit Risk Rating Framework is developed by the Bank for Risk Rating of Borrowers. The Credit Risk Model shall be used for accurate determination of the overall characteristics of the Credit Portfolio i.e. Loan Concentration, Adequacy of Loan Provisions, and Measuring Probability of Default, Expected / Unexpected Loss. The pricing of borrowal accounts, w.e.f. 01.04.2008, shall be done in accordance with the Guidelines on Risk based Pricing (issued vide circular No. AX1/IRMD/CRR/Cir.no.1/2008-09 dated 30.04.2008)

CORPORATE RISKS IDENTIFIED IN THE PROCESS OF DUE DILIGENCE Industry and service Risks Management and Operation Risks Market Risks Political Risks Credit Risks Liquidity Risks Disaster Risks Systems Risks Legal Risks

INDUSTRY & SERVICES RISKS Economic Risks Services Risks Market Structures Business Dynamics Competition Risk Customer Relation Risks

MANAGEMENT AND OPERATION RISKS Risks to Property Clear and well defined Work Processes Changes in Technology Research and Development Risks Agency Network Risks Personal Risks Environmental and Pollution Control

Environmental and Pollution Control Regulatory Framework relating to Environment The Water (Prevention & Control of Pollution ) Act, 1974 National Green Tribunal Act, 2010 Rules made under these Laws The Environment (Protection) Act, 1986 The Air (Prevention & Control of Pollution ) Act, 1981 The Water (Prevention & Control of Pollution ) Cess Act, 1977

Quantity, Quality, Supplier Risks Forex Fluctuation Risks MARKET RISKS Raw Material Rates Quantity, Quality, Supplier Risks Forex Fluctuation Risks Interest Rate Risks

POLITICAL RISKS Elections War Risks Country/ Area Risk Insurance Risks Taxation Risks

Creditworthiness Risks Provisions for Bad and Doubtful Debts CREDIT RISKS LIQUIDITY RISKS Creditworthiness Risks Provisions for Bad and Doubtful Debts Risk in Settlement of Dues by Clients Financial Solvency Borrowing Limits, Delays Cash Reserve Management Risks Tax Risks

DISASTER RISK Natural Risks like Fire, Flood, Earthquakes etc. Man Made Risk Factor Risk of Failure of Effective Disaster Management Plans formulated by the Company

SYSTEM RISKS LEGAL RISKS System Capacities System Reliability Obsolescence Risks Data Integrity Risks Coordinating and Interface Risks Contracts Risks Contractual Liability. Frauds Judicial Risks Insurance Risks

Apte Joshi & Associates, Company Secretaries EXPOSURE CEILINGS The Exposure Ceiling for single borrower shall be 15% and the group exposure limit shall be 40% of capital funds as on 31st March of previous year. The single borrower exposure limit in respect of Oil Companies who have been issued Oil Bonds (which do not have SLR status) by Government of India shall be 25% of the Capital Funds. The Entry Level Exposure ceiling to a partnership firm shall not exceed 5% of Bank’s Net Worth and Ceiling to company (singly or in consortium/multiple financing) shall not exceed 10% of Bank’s Net Worth as on 31st March of the previous year.

Apte Joshi & Associates, Company Secretaries 3 C’s The objective of Lending Policy can be summarised into 3 C’s of lending on the basis of which a borrower will be / is evaluated:- 3 C’s

Apte Joshi & Associates, Company Secretaries 3 C’s CHARACTER CAPACITY CREDIT WORTHINESS.

Apte Joshi & Associates, Company Secretaries CHARACTER Openness: It is a basis for the confidence which needs to exist between business and all those who have a stake in its success. Integrity: Means both, i.e., straight forward dealing and completeness. Financial Reporting: Should be honest Should present a balanced picture The integrity of the reports depends on the integrity of those who prepare and present them Accountability and transparency: Accountability improves decision making and transparency helps to explain the rationale behind the decisions. Disclosure: It communicates trustworthiness. The ultimate purpose of the above principles is to create a self-driven, self-assessed, and self-regulated organization.

WILFUL DEFAULT A “wilful default” would be deemed to have occurred if any of the following events is noted:- The unit has defaulted in meeting its repayment obligations even when it has the capacity to do so. Has not utilised the finance for the specific purpose for which it was availed. The unit has siphoned off the funds borrowed for specific purpose and the funds are not available with the unit in the form of assets. Has disposed off the assets (movable/immovable) given by him for the purpose of security, without the knowledge of the banker/lender.

WILFUL DEFAULTS (Contd.) Deliberate non-payment of the dues despite adequate cash flow and good net worth. Siphoning off of funds to the detriment of the defaulting unit. Assets financed either not been purchased or been sold and proceeds have misutilised. Misrepresentation / Falsification of records. Disposal / Removal of securities without bank’s knowledge Fraudulent transactions by the borrower.

PENAL MEASURES AGAINST WILFUL DEFAULTERS No Additional facilities should be granted by a Bank / FI to the listed wilful defaulters. In addition, the Entrepreneurs / Promoters of Companies where Banks / FIs have identified siphoning / Diversion of Funds, Misrepresentation, Falsification of Accounts and Fraudulent Transactions should be debarred from institutional finance from Scheduled Commercial Banks, Development Financial Institutions, Investment Institutions etc. for floating new ventures for a period of 5 years from the date the name of the wilful defaulter is published in the list of wilful defaulters by RBI.

PENAL MEASURES AGAINST WILFUL DEFAULTERS (Contd.) The legal process, wherever warranted, against the Borrowers / Guarantors and foreclosure of recovery of dues should be initiated expeditiously. The lenders may initiate Criminal proceedings against wilful Defaulters, wherever necessary. Wherever possible, the Banks and FIs should adopt a proactive approach for a change of management of the wilfully defaulting borrower unit.

PENAL MEASURES AGAINST WILFUL DEFAULTERS (Cont.) A covenant in the loan agreements, with the companies in which the banks/FIs have significant stake, should be incorporated by the banks/FIs to the effect that the borrowing company should not induct a person who is a promoter or director on the Board of a Company which has been identified as a wilful defaulter as defined earlier and in case such a person is found to be on the Board of the borrower Company, it would take expeditious and effective steps for removal of the person from its Board.

DIVERSION & SIPHONING OF FUNDS Diversion of funds would include:- Utilisation of funds not in conformity with the terms of sanction. Deploying Borrowed Funds for purposes / activities / creation of assets other than those for which the loan was sanctioned. Transferring funds to subsidiaries or other corporates by whatever modalities. Routing of funds through any Banks, other than Lender Bank or members of consortium banks without its prior permission. Investment in other companies by way of acquiring Equities / Debt Instruments without prior approval of lenders. Shortfall in deployment of funds vis-à-vis the amounts disbursed, drawn and the difference not being accounted for.

END USE OF FUNDS In cases of Project Financing, the Banks / FI seek to ensure end use of funds by obtaining certification from the Chartered Accountants for the purpose. In case of short-term Corporate / Clean Loans, such an approach ought to be supplemented by “Due Diligence” on the part of lenders themselves. The Banks and FIs should not depend entirely on the certificates issued by the Chartered Accountant but strengthen their internal controls and the Credit Risk Management System to enhance the quality of their Loan Portfolio.

END USE OF FUNDS - Measures Following are some measures for monitoring end-use of funds: Meaningful Scrutiny of Balance Sheets / Progress Reports Periodical Scrutiny of Borrowers Books of Accounts Periodical visits to the Assisted Units Regular inspection of Borrowers Assets charged to the Lenders as Security

Thank You Presented by: Mr. Raghavendra J. Joshi email ID : rjjoshi@aptejoshi.com