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

2. 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.

3. 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

4. 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.

5. 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 , shall be done in accordance with the Guidelines on Risk based Pricing (issued vide circular No. AX1/IRMD/CRR/Cir.no.1/ dated )

6. 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

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

8. 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

9. 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

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

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

12. 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

13. 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

14. 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

15. 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.

16. 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

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

18. 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.

19. 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.

20. 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.

21. 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.

22. 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.

23. 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.

24. 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.

25. 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.

26. 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

27. Thank You Presented by: Mr. Raghavendra J. Joshi
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