loan policy fy 2011-12 - kerala financial corporation · loan policy fy 2011-12 3 1. preamble 1.1...

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LOAN POLICY FY 2011-12

KERALA FINANCIAL CORPORATION

Loan Policy FY 2011-12

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I N D E X

Chapter No

Title Page Nos

1. Preamble 3-5 2. Framework of the Loan Policy 5-6 3. Objectives 7 4. Validity 7-8 5. Eligible activities for financial assistance 08/12/11 6. Policy in the lines of activity 12-26 7 Credit Management Policy 26-47 8 Credit Monitoring 47-56 9 Conclusion 56 10 Indicative list of Early Warning Signals

(Annexure-I) 57

11 Monitoring of Standard Assets – Trigger Points (Annexure-II)

58-59

12 Scheme of Term Loan for Industrial Activities (Annexure-III)

60-63

13 Parameters for different Schemes 64-65


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1. PREAMBLE

1.1 The basic business objective of the Corporation is term lending to industries, to

support sustained industrial growth in the State with special attention to the

MSME sector.

1.2 In the light of the fast changing economic scenario, it is necessary to fine tune

the operational policies every year. Recognising this need, the Corporation has

formulated a Comprehensive Loan Policy Document. This policy document

helps credit dispensing functions to create good loan portfolio. The policy also

provides explicit guidelines to the concerned in the areas of project acceptance,

appraisals and loan sanctioning. It is required that the policy be revie wed

annually.

1.3 A brief stock of the economic scenario of the Country and the State is taken

before going into the Loan Policy of the Corporation applicable for the financial

year 2011-12. This will help understanding the challenges before financial

institution in catering to the needs of the industrial sector.

1.4 With the opening up of the Indian economy, the financial environment in the

country is undergoing a major change. The Indian banking environment has

become fiercely competitive with increasing customer demands and reduced

spreads. The competition has also resulted in availability of innovative financial

products / instruments in the market. Thus, flexibility, responsiveness and

operational efficiencies are becoming key distinguishing factors for garnering

desired business. The product offerings of the Corporation are continuously

being widened to meet the diverse demands of the customers.

1.5 The significant role played by the micro, small and medium enterprises in the

Indian Economy is well known. This is further re-emphasised in the 11th Five

Year Plan Approach Document, which states that, ”the micro, small and

medium enterprises (MSMEs), and the corporate sector, has a critical role to

play in achieving the objective of faster and more inclusive growth”.

1.6 The Government of Kerala has brought-out a comprehensive Industrial and

Commercial Policy in 2007 with the main objective of achieving high and

sustainable economic growth. This is specific thrust to social objectives through


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rapid industrialization and big leap in commercial activities without affecting

ecology and environment. The policy aims at creating large-scale employment

opportunities for the people of Kerala. It also seeks to convert Kerala into an

investment friendly destination. The objectives of the Government policy are

to:

Convert Kerala into a favoured destination for Manufacturing, Agro

Processing, Health Services and Knowledge based Industries and Services.

Strengthen the State Level Public Enterprises (SLPEs) by technological

upgradation, diversification, efficient management system and synergizing

with Central Public Sector Undertakings.

Make Traditional Industries competitive by modernization, value addition

and skill development.

Promote and support MSMEs as ancillary units to large scale industries as

well as a self sustaining entities considering its role as a largest

employment provider in the State.

Make use of the abundant and highly rich mineral resources of the State to

the fullest extent while protecting environment and ecology and restricting

the mining activity in the Public Sector.

Equip the State to harness the industrial and commercial potentials to be

opened up with the commissioning of Vallarpadam International Container

Terminal, Vizhinjam Deep Sea Port and the Petronet L.N.G. Terminal.

Generate massive employment in industrial, commercial and service

sectors.

Attract huge capital investment on mutually beneficial terms.

Tap the rich industrial potential of bio-technology.

Accelerate growth in Service Sector and to make Kerala a major

Commercial Hub.

Develop Kerala as a global centre of excellence with state-of-the-art

education and skill sets, and prepare a pool of multi skilled, technically

competent individuals and organizations.


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1.7 The Director of Industries and commerce provide the following fiscal incentives.

(a) State Investment Subsidy

(b) Margin Money Loan to MSMEs

(c) Margin Money Loan to Non-resident Keralites (NRKs)

(d) Women Industries Programmes

(e) Earnest Money Deposit and Security Exemption.

(f) Margin Money Loan for Cluster Development.

1.8 The Corporation will continue its efforts in providing valuable interventions in

the target segment and keep adopting a multi-faceted approach to source and

manage its business with a view to augment the flow of credit to the sector and

also align itself with the risk management systems.

2 FRAMEWORK OF THE LOAN POLICY 2.1 The Loan Policy takes into account the fact that extending credit is a basic

function of the Corporation which involves a number of risks. The Corporation

has adopted the following Risk Philosophy in line with the business objectives

and required positioning in the market:

The Corporation places total commitment to State‟s industrial

development, focused on healthy and sustained growth of

entrepreneurship, with special care for the Micro, Small and Medium

enterprises. It will evolve, on a continuing basis, excellent internal

competencies for credit assessment and monitoring to protect funds lent

and their healthy utilization by its clients through adoption of effective

contemporary processes relating to risk management, personnel skills and

strong and intelligent monitoring systems.

The Corporation will, concomitantly ensure, through efficient funds and

credit management, profit and capital growth.

The Corporation is sensitized to the fact that confidence and competence to

build business, is directly proportionate to its basic operational, physical,

financial, accounting and compliance strengths and controls – each, in a

way, intertwined with the other. It will, therefore, build in appropriate core

organizational values and processes.


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In addition to lending, the Corporation will also provide escort services,

counseling and consultancy to strengthen entrepreneurial capabilities and

to promote planned and healthy entrepreneurial growth as also the health

of its assets.

2.2 The major business lines of the Corporation comprise project finance,

equipment finance, corporate loans, marketing finance, infrastructure finance,

finance to construction activities, acquisition of existing assets / enterprises,

Line of Credit (LoC) for raw-material purchase by MSMEs, State Govt.

sponsored schemes, working capital loans, privileged customer loans, etc.

The thrust area of business identified for the FY 2011-12 are as follows:

(a) Manufacturing sector

(b) Support to service sector

(c) Cluster based initiation

(d) Funding of Energy Efficiency/Conservation projects

(e) Assistance to Non-Resident Keralites (NRKs)

(f) Lending to Micro-enterprises

(g) Support to traditional industries.

(h) Funding of Micro-Finance Institutions

(i) IT Sector

(j) Working Capital Assistance.

(k) Fee based activities.

2.3 The focus of the Loan Policy for FY 2011 is on asset growth with quality coupled

with growth in income in each segment of business. Accordingly, due emphasis

is accorded to credit assessment, risk management, credit monitoring & review,

exposure management, enhancing skill sets of employees, etc., while

maintaining the focus on customer needs. Looking into the increasing

competition and the resultant margin pressures, the Corporation would also

put in place a suitable strategy to rapidly develop and increase the size and

scope of its portfolio for generating fee based income.


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3 OBJECTIVES OF THE LOAN POLICY

The broad objectives of the Loan Policy of the Corporation for FY 2011-12 are

to:

establish a comprehensive credit strategy to fulfill the corporate mandate as

per the SFCs Act, 1951, amended from time to time, and undertake all such

activities directly or indirectly, that are beneficial to the MSME sector.

ensure efficient delivery of credit with focus on asset growth and quality

coupled with growth in income.

encourage functionaries at different levels to assume reasonable credit risks

to maximise returns from lendings.

encourage various functionaries to innovate and evolve competitive

products based on market requirements.

provide indicative guidelines to various policy & functional level officers of

the Corporation for measures to be taken for improving the credit delivery

and customer satisfaction.

encourage expansion and diversification of credit portfolio, especially

through coverage of thrust areas/ industries / sectors/ newer areas of

business and profitable deployment of the Corporation‟s funds.

strengthen the risk management systems for appropriate pricing of credit

risks and ensure close monitoring of the credit portfolio so as to prevent

fresh slippages into NPAs.

build strong alliances with intermediaries for tapping new business.

explore new channels of credit delivery for the benefit of MSMEs.

4 VALIDITY/ AUTHORITY OF LOAN POLICY

The Loan Policy is the principal document for the credit operations of the

Corporation, duly approved by the Board of Directors and is expected to serve

as the guiding document for the Corporation.

This Loan Policy shall remain in force till the next revision is carried out and

disseminated. This policy shall supersede the previous guidelines on the

subject provided that such supercession shall not invalidate or affect any action

or decision taken, before the commencement of this policy.


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All officers are authorized to act upon this policy on its issuance by Head Office.

Clarification of further guidelines if needed would be issued by HO.

5. ELIGIBLE ACTIVITIES FOR FINANCIAL ASSISTANCE 5.1 The business strategy of the Corporation revolves around identification of

thrust areas for direct lending, charting out a focused business development

strategy, encouraging product innovation, improving credit delivery and having

in place a pricing policy which supports business growth and links it to risk.

5.2 The SFCs Act, 1951 prescribes broadly the types of activities, which are eligible

for financial assistance from the Corporation. The Act also provides for KFC to

include newer areas of activities for financial assistance from time to time. This

apart, the Corporation has also evolved its own schemes under broad guidelines

of SFCs Act, 1951 depending upon market potential. The activities which are

eligible for financial assistance from the Corporation, are grouped into two

categories :

(i) Activities as listed out in the SFCs Act, 1951

(ii) Schemes formulated by the Corporation

5.3 Activities as listed out in the SFCs Act, 1951

The State Financial Corporations Act, provides the list of activities which can be

covered under the list of industrial concerns engaged or to be engaged in :

i) Manufacture, preservation or processing of goods;

ii) Mining or development of mines;

iii) Hotel industry;

iv) Transport of passengers or goods by road or by water or by air (or by rope

way or by lift);

v) Generation or distribution of electricity or any other form of power;

vi) Maintenance, repair, testing or servicing of machinery of any description

or vehicles or vessels or motor boats or trailers or tractors;

vii) Assembling, repairing or packing any article with the aid of machinery or

Power;

viii) Setting up or development of an industrial area or industrial estate;

ix) Fishing or providing shore facilities for fishing or maintenance thereof:

x) Providing weigh bridge facilities;


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xi) Providing engineering, technical, financial management, marketing of

other services or facilities for industry;

xii) Providing medical, health or other allied services;

xiii) Providing software or hardware services relating to information

technology, telecommunications or electronics including satellite linkage

and audio or visual cable communication;

xiv) Setting up or development of tourism related facilities including

amusement parks, convention centers, restaurants, travel and transport

(including those at airports), tourist service agencies and guidance and

counseling services to the tourists;

xv) Construction;

xvi) Development, construction and maintenance of roads;

xvii) Providing commercial complex facilities and community centers

including conference halls;

xviii) Floriculture;

xix) Tissue culture, fish culture, poultry farming, breeding and hatcheries;

xx) Service industry, such as altering, ornamenting, polishing, finishing,

oiling, washing, cleaning or otherwise treating or adapting any article or

substance with a view to its use, sale transport, delivery or disposal;

xxi) Research and development of any concept technology, design, process or

product whether in relation to any of the matter aforesaid, including any

activities approved by the Small Industries Bank; or

xxii) Such other activity as may be approved by the SIDBI;

5.4 Schemes formulated by the Corporation

Based on the activities permitted under the SFCs Act, the Corporation has

formulated various schemes for extending financial assistance. The various

schemes being operated are given below.


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Sl. No.

Scheme Code

Name of Scheme

1. TL Scheme for Term Loan for industrial Activities 2. TL Single Window Scheme

(Term Loan + Working Capital Loan) 3. SPL Working Capital Term Loan 4. SPL Working Capital Revolving Fund Scheme 5. TL Scheme for Construction activities and housing projects 6. TL Takeover of Bank Loan 7. TL Micro Finance Scheme 8. SPL Short Term Loan 9. SPL Special working Capital Assistance to Hotels 10. SPL Scheme for Financial Assistance to Civil Contractors. 11. SPL Scheme for Financial Assistance for producing Feature Film and TV

serials.

The basic scheme for term loan for industrial activities is given in Annexure-III

and the broad parameters of all the schemes are given at Annexure-IV. The other

schemes will be reviewed by the Managing Director and modified in line with the new

Loan Policy.

5.5 The sectors eligible for Corporation‟s support will include broadly the following

manufacturing sector

all manufacturing activities including processing and preservation.

service sector

transport, marketing, IT Parks, hospitals, pathological laboratories medical

equipment, professionals like doctors and architects, etc.

hospitality sector

like hotels, lodges, restaurants, convention centre / seminar halls, tourist resorts,

amusement parks, etc., as the need for this sector is being increasingly felt as a

promotional support for state industrial / business growth.

marketing

like commercial complexes, construction of Godown, input suppliers / vendors,

stockists : as they provide important backward and forward linkage.

micro-finance institutions

well run MFIs: as funding them is an indirect mode of assisting self-help groups

and promoting financial inclusion.


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Infrastructure

basic requirements that form the engines of economic growth (inspire the setting

up or development of industrial area, industrial estate, I.T. parks, roads, etc.),

training institutions, etc.

power sector

power generation / distribution including alternate sources of power like

windmills and solar energy - as they provide pollution-free additional power as

also help tax – saving plans.

funding of micro enterprises

funding of micro enterprises mainly to help first generation entrepreneurs who

need finance to start their business enterprise.

Others

as may be determined by business environmental needs and the Board; new

products will be evolved as aligned to market changes / demand, as this is vital to

both industrial and the Corporations growth.

5.6 Eligible Borrowers

As a prudent practice and a step towards risk mitigation, customers would be

encouraged to adopt a corporate culture by establishing limited companies of

public/private/partnership nature. They can also be allowed time even after

sanction/disbursement to convert a firm/concern/societies/Trusts into such

entity, which will give them better growth prospects and market acceptability.

However, no worth-while proposal would be denied assistance for want of such

conversion. The corporation would continue to provide financial assistance to

customers having following constitutional framework.

(a) Proprietory firms

(b) Partnership firms

(c) Private and Public Limited Companies

(d) Limited Liability Partnerships

(e) Registered trusts

(f) Government owned companies

(g) Registered/Co-operative societies.

6. POLICY IN THE LINES OF ACTIVITY


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6.1 It is a known fact that saturation, obsolescence, un-viability, economy of scales,

geographical factors, environmental issues, infrastructure, global economy /

markets etc. do have a bearing on lines of industrial / business activity to be

encouraged for financing. Some of these parameters keep changing from time

to time depending upon the external environment within the industry. It is

therefore essential to make a periodical review of the performance of these

activities in order to determine the policy on supporting any activity in a

particular period of time and at a particular geographical location.

The Corporation will identify and support activities in any given geographical

area or sector as determined by opportunities of good, viable and sustained

business and their genuine needs.

6.2 Keeping these issues in mind, the activities of the Corporation are grouped into

the following four categories :

(a)Thrust Sector and Focus areas

(b)Normal Sector

(c) Restricted Sector

(d)Prohibited Sector

The „Thrust Sector‟ represents high priority areas chosen for lending by the

Corporation. Under the thrust sector, specific areas are identified to be given

special focus during the current financial year. The Corporation will take up

special publicity, awareness and training drives to give more thrust to these

areas of activities.

The „Normal Sector‟ represents the activities which may be the traditional ones,

but still doing alright by virtue of good demand.

The „Restricted Sector‟ represents areas which require more careful scrutiny

than usual and certain amount of restraint.

The „Prohibited Sector‟ represents the activities where the new units are to be

discouraged. However, proposals for expansion and modernization from the

existing units and classified as standard assets with a good track record can be

considered on a case to case basis.


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The details of the activities under thrust sector are given in para 2.2 and that

under restricted sector are given in para 6.14. The activities to be included

under Prohibited sector will be communicated from time to time.

6.3 Micro, Small and Medium Enterprises Development (MSMED) Act,

2006

The Micro, Small and Medium Enterprises Development Act (MSMED), 2006

has shifted the focus from “industry” to “enterprise”. The definitions adopted

for manufacturing and service sector activities under MSMED Act are as under:

Enterprise Category

Manufacturing (Original Investment

in P&M)

Services (Original Investment

in Equipment)

Micro Up to Rs.25 lakh Up to Rs.10 lakh

Small Upto Rs.500 lakh Upto Rs.200 lakh

Medium Upto Rs.1000 lakh Upto Rs.500 lakh

6.4 While the Corporation would consider support to all eligible activities, the

following areas would be accorded due emphasis for faster asset growth during

the year:

6.5 Assistance to existing MSME units

The Corporation has been able to increase its retail customer base over the

years. Assistance to existing well performing MSME customers for their varied

business needs would continue to be the thrust area of the Corporation.

Simplified processes, quick credit decision and timely credit delivery would help

in building up sizable „quality assets‟ from existing customers. Corporation

would continue to look into requirements of existing customers and devise

suitable products / processes to serve them better.

6.6 MSME Manufacturing Sector

Assistance to MSME projects in the manufacturing sector for their varied

business needs would be the thrust area of business for KFC. Emphasis will be

on traditional industries of Kerala like coir, spices, hand-looms, rubber, food-


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processing, light engineering, cashew, furniture, tourism, bricks, diaring

activities, sea food, Rice Mill, plywood, crusher etc. in clusters or individually.

The MSME manufacturing sector witnessed revival in many sectors after

second half of FY 2010 though some sectors may have still not come out of the

impact as the developed economies are not yet fully out of the recessionary

trend. The Corporation would, however, endeavour to enhanced flow of credit

to the MSME manufacturing sector particularly in the micro-enterprise

segment. In the manufacturing sector, the Corporation would also encourage

projects of MSMEs involving improvement in energy efficiency and cleaner

production.

6.7 Service Sector

The share of the service sector in the Indian economy is continuously

increasing and the sector contributes significantly in employment generation

and export earnings. Segments such as healthcare, telecommunication, IT and

IT enabled services continue to witness healthy growth. Towards meeting the

growing financial requirements of the sector, the Corporation would target the

service sector projects, an indicative list of which is given below:

Hospitality & tourism related activities (including health tourism)

IT, IT enabled services and communication services.

Advertisement and promotion services

Infrastructure support services including activities relating to telecom.

Transport Services.

Logistic services

Some of the projects in the service sector, even though do not create tangible

assets and may not meet security related norms, are found to generate

comfortable cash flows. These include IT and other knowledge based industries,

retailing, franchising, assisting channel partners of leading manufacturers,

lease rental discounting, etc. As there is good potential for considering

assistance to these sectors, proposals of such kind with borrowers having sound

financial position, past performance as reflected in previous balance

sheets/cash flows and management track record could be considered for KFC‟s


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financial support based on factors like order book position, projected cash flow,

etc.

Significant investments are also being made in the state for setting up of

infrastructure for Business Process Outsourcing (BPO), Knowledge Process

Outsourcing (KPO) and other knowledge based activities like call centres,

technical help desks, medical transcriptions, IT/ IT enabled services, bio-

informatics, contract research, etc. Some of these services/activities are

outsourced to India which have large potential for employment generation.

Moreover many big companies/PSUs in the state itself are outsourcing their

requirements through ancillary units/vendors in the MSME/transport sectors,

etc. which offers business potential for the Corporation. Considerable

opportunities are opening up for MSMEs with regard to sub-contracting of

various work to them by the larger corporates undertaking such activities,

provided the MSMEs are in a position to consistently deliver high quality and

timely output. The telecommunication sector (wire & wireless services, value

added services, internet, etc.) is also providing opportunities for growth in

entrepreneurship, employment and income generation. The MSMEs

undertaking various telecom services like setting up of mobile/radio frequency

transmission/receiver towers, cabling, network installation, systems

integration, service centres, dealerships, etc. require credit based on innovative

financial structures. Since these are, as yet, largely untapped areas, the

Corporation would consider extending assistance to this high growth segment

of borrowers covering their receivables/ other credit needs, in association/

linkage with large corporates sub-contracting work to them.

Besides, business opportunities in new areas such as setting up of service

stations (petrol and gas filling stations, auto workshops, etc.), events

management, and establishment of design houses/studios could also be

considered for financing by the Corporation.

In respect of stand-alone IT/telecom services projects, the credit risk aspects

should be properly addressed and in this regard safeguards like tie up with

established corporates/ contractors, participating under consortium financing,

adequate promoters contribution being brought in, etc. would be ensured.

6.8 Credit delivery in Cluster


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The MSME sector in Kerala is highly diversified in terms of industry segments

and geographical terrain. A large segment of MSMEs operate in clusters which

have developed at certain different geographical locations due to various factors

like historical availability of certain skill craftsmanship in the location,

proximity to raw material or customer, etc. MSMEs located in clusters have

similar characteristics and face similar challenges. Corporation‟s credit linked

interventions involve providing financial assistance to MSME units in clusters

through special dispensations using customised products and processes keeping

in view their needs and requirements. Customisation is considered a key

requirement as the normal schemes & bench mark norms, which are designed

for stand alone customers, are sometimes not exactly suited for such cluster

interventions.

As part of its business strategy, the Corporation would continue to accord

greater focus on MSME clusters as the hubs of potential business centres with

growth outlook and relatively lower risk, through its branch network. For this

the Corporation would involve other intermediaries/ institutions for developing

customised cluster based lending strategy.

6.9 Fee based activities

The Corporation would encourage non-fund based business by way of offering

appraisal/management/escort/consultancy services, loan syndication,

skill/EDP trainings, etc. The aim is to help first generation entrepreneurs as

well as to increase fee-based income and thereby improving the Corporation‟s

bottom line subject to norms and guidelines in this regard. KFC would

continue to take-up agency services for mutual fund, insurance, credit rating

etc. through SBI Mutual Fund, LIC Mutual Fund, New India Assurance

Company Ltd, CRISIL etc. to enhance fee based income. The Corporation will

actively explore the vast opportunities available in such fee-based business

which, on the other hand, will also help bringing more direct business through

entrepreneurial confidence and image building and the Corporation would

ultimately be able to emerge as a one-stop-shop for entrepreneurs.

6.10 Assistance to Women Entrepreneurs and SC/ST entrepreneurs


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In order to encourage Women Entrepreneurs and SC/ST entrepreneurs, the

Corporation has decided to give women entrepreneurs and SC/ST

entrepreneurs an interest reduction of 1% on all schemes in addition to the

existing rebate based on prompt repayment and also based on credit rating. The

interest reduction of 1% will be available to only enterprises owned and

administered/managed by woman entrepreneurs or SC/ST entrepreneurs.

Ceiling of financial assistance under this scheme will be Rs. 50 lakhs.

6.11 Lending to Micro Finance Institutions

With a view to finance self help groups and encourage financial inclusion, the

Corporation has formulated a scheme for financing Micro Finance institutions

(MFIs). Assistance under the scheme will be extended to MFIs having sufficient

experience and exposure in micro-credit lending through tie-up with the

banking network. The loan assistance to MFIs will be subject to a minimum of

Rs. 10 lakh and maximum of Rs. 500 lakh. The assistance will be subject to

satisfactory Capacity Assessment Rating of the MFI by an accredited rating

agencies like CRISIL, M-CRIL, SMERA etc. prior to each assistance.

6.12 Special package to Non-Resident Keralites (NRKs)

Government of Kerala vide Order No. 16529/Pu-A1/09/Fin. dt. 13-3-2009

directed to formulate a special package of 100 crores for supporting Non

resident Keralites returning back due to economic recession and those who

intend to invest in industrial and commercial ventures.

The NRKs can choose projects based on their area of expertise, interest and

present industrial potential of the State. They will be offered a special rate of

interest of 9% and only 50% of the processing fee will be charged for loan

processing. This package will be applicable to those NRKs who return to Kerala

for permanent settlement on or after 1-7-2007. The scheme would stand

extended for a further period of 1 year and loan applications received from

NRKs up to March 31, 2012 will be entertained.

Maximum ceiling of financial assistance under this scheme shall be normally Rs.

100 lakhs. However, proposals for loans above Rs. 100 lakhs in deserving cases,


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on a selective basis can be considered with prior approval from the Managing

Director.

A fast track system for clearing the loan proposals submitted by the overseas

returnees will be made at all branches and monitoring of these cases will be done

at the zonal level. The Consultancy Wing of the Corporation through its HO

Team, Zonal Officers and District Managers/Customer Relation Managers in

branches will provide all necessary help and guidance to Non-Resident

Keralites, which may include legal scrutiny of documents, project report

preparation, obtaining NOC from Government Departments for starting the

project, identifying machinery suppliers, etc.

6.13 Assistance to Energy Saving Projects

The Hon'ble Minister for Finance in his Budget speech for 2010-11 has indicated

that KFC would be providing loan at 5% for energy conservation projects. In

view of the growing need for energy saving and importance of energy

conservation, the Corporation has formulated a special scheme to promote

energy saving measures in SMEs by providing financial assistance for the

implementation of Energy Saving Devices/projects. As per the scheme Energy

Management Centre (EMC) has to recommend the proposals for consideration.

The proposals received at Branch Offices after initial processing will be

forwarded Consultancy Division for onward transmission to EMC. The effective

interest rate under the scheme is kept at 5% p.a. and no processing fee will be

charged. An upper loan limit of Rs. 200 lakh has been fixed for such support.

6.14 Commercial Real Estate (Restricted sector)

The Corporation would adopt a cautious approach in lending to the commercial

real estate (CRE) sector which is witnessing a downward trend through out the

country. Further, while considering support to apartment projects, etc. the cost

of land would normally be avoided from the project cost. The guidelines issued

by RBI / SIDBI from time to time would be followed in this regard, with proper

exposure cap.

6.15.1 Industry Exposure


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Exposure limit would be applicable for various industrial sectors. The exposure

would be restricted to the percentage as indicated below based on the loan

outstanding of the Corporation as per balance sheet figures for the financial

year 2010-11.

Sl. No.

Activity/Industry Existing

Exposure restriction out of total Loan

outstanding as on 31-03-2011

1 Manufacturing sector 25%

2 Micro Enterprises 5%

3 IT sector 3%

4 Micro-finance Institutions 2%

5 Hotel & Tourism related activities 45%

6 Hospital & Health Care 10%

7 CRE projects 10%

Total 100%

Wherever there are higher exposure to a particular sector/segment at present, it

shall be brought down to the desired level at the earliest. The Corporation's

exposure in activities at items 5 to 7 are to be brought down gradually. In such

activities where Corporation's lending has already exceeded the above exposure

limit or will exceed with a particular assistance proposed, the branch offices

would refer such fresh cases to the Credit Department, HO to take a view on

lending beyond the limit.

6.15.2 Group Exposure

Maximum financial assistance that can be extended per unit (individual

exposure) by the Corporation has been fixed as under, in terms of the norms

prescribed by SIDBI based on Section 26 of SFCs Act, 1951. For group

exposure the ceiling of financial assistance would be 1.5 times the ceiling for

individual exposure as under:

Particulars Cap (Rs.in crores)

For a Unit For Group


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Private/ Public Limited Companies / Corporations / Co-operative Societies

20 30

Partnership firms/Proprietary concerns and Trusts 8 12

Section 28(d) of the SFCs Act prohibits Corporation from granting any form of

assistance to any industrial concern in respect of which the aggregate of the

paid-up share capital and free reserves exceeds ten crores of rupees or such

higher amount not exceeding thirty crores of rupees as the State Government,

on the recommendation of the Small Industries Bank, may, by notification in

the Official Gazette, specify. Government of Kerala, vide Gazette notification

dated 5th June 2009 have permitted Kerala Financial Corporation to grant any

form of assistance to any industrial concern in respect of which the aggregate of

the paid up share capital and free reserves does not exceed Rs. 30 crores.

6.16 BO Jurisdiction

Regular visits/interaction with promoters is very crucial for maintenance of

asset quality. Hence, for better monitoring and operational convenience,

proposals from borrowers for projects being established within the concerned

district or the jurisdiction of a branch would only be normally considered by the

respective branch. However, proposals from existing/local customers for setting

up another project in a different district could be considered by a branch subject

to relaxations granted by Head of the Credit Department in very deserving cases

with convincing reasons thereof.

6.17 Loan disbursement

Branch offices are given the power to disburse all loans subject to the

compliance of sanction conditions, norms and eligibility criteria. Loan

disbursals will be made on complying with all pre-disbursement conditions (key

conditions) and creation of specified security in favour of the Corporation. In

the normal course, it should be insisted that the promoters'

contribution/margin for the project is raised and utilised in the project before

seeking disbursement from KFC, to ensure lesser interest burden and better

viability of a project which also enhances the promoter's credibility. However,

there can also arise occasions when a promoter is not able to bring in the entire


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contribution in advance. In such a situation, the matter would be well explained

in the appraisal note with proper justification which would also be incorporated

as a condition of sanction, so that disbursement can be made on pro-rata basis,

in proportion to the contribution brought-in and in instalments commensurate

with physical progress of the project.

Certain conditions of sanction may not be compliable before disbursement of

loan or implementation of a project. These issues which would appear as “other

conditions” of sanction, can be complied with during or after implementation of

the project. Normally, the promoters would have undertaken as prescribed in

the Loan Agreement to comply with such conditions. Branch Offices will ensure

that these conditions are compiled with during the course of implementation of

the project, after first disbursement or any stage of disbursement including the

last instalment.

The promoters will be free to seek disbursement in advance based on the drawal

schedule furnished at the time of appraisal for meeting the project expenditure,

say for a maximum period of three months, which would be released subject to

their bringing in full or part (50% or more) of promoters contribution as

prescribed, satisfying all terms and pre-disbursement conditions, and creating

full security as specified in the sanction letter. There would be no practice of

disbursement on reimbursement basis which is considered a major contributor

to project over-run and project failures for want of money at the hands of

promoters when it is needed the most to implement a project. Initial payment

would be normally restricted to civil works wherever applicable. Release of

payment for plant and machinery would be normally effected after ensuring

completion of civil works, availability of power etc. Before release of payment, it

would be ensured that the projected demand for funds is genuine and there is

sufficient progress in the project as envisaged in the appraisal note. A certificate

from an approved Chartered Accountant on the expenses already incurred may

be obtained. Officers should examine the Chartered Accountant certificates and

verify the position and progress at site during visits. Wherever false CA

certificate are detected, the same should be intimated to the Credit Department

at Head Office for initiating steps to bring it to the notice of Institute of

Chartered Accountants of India for black listing.


22

Need based changes in the original drawal schedule can be accepted by the

Branch Head at the time of each disbursement and a revised drawal schedule

can be obtained for the purpose. As far as possible, the disbursements should be

made through a no-lien account opened with the clients existing bankers (except

those to supply of machinery/materials, architects, contractors etc.). A copy of

no-lien account statement duly certified by the bank should be obtained and

verified to see that the funds are utilised for the purposes only for which they

were approved in the project.

6.18 Role of Customer Relations Manager (CRM)

The very first step of loan operations is the handling of loan enquiries and

business development. This task is assigned to the Customer Relations Manager

attached to Branch Offices, Zonal Offices and Head Office. Customer Relations

Manager (CRM) is responsible for extending a warm welcome with pleasant and

prompt services to all existing and prospective customers. CRM would also be in

regular contact with existing customers not only to understand their problems,

if any, for quick resolution, but also to explore the possibility of further business

opportunities and relationship building. If it is a new loan enquiry, relevant

scheme details with all its conditions and pre-requisites would be explained to

the customer. The CRM should be conversant with all loan related procedures

and formalities of the Corporation including technical and legal matters. The

Branch Manager, however, have the overall responsibility in this regard and

would continue to play the key role in regular interaction and relationship

building with the customers.

The present practice of the customer having to meet various staff members

including Legal/Technical personnel prior to registration would be discontinued

forth-with. The title scrutiny of documents need not be done at the enquiry

stage and can be undertaken once the application is registered before

sanctioning the loan. In case necessary, the customers can be advised to bring

title clearance report and other documents from any advocate who is on the

panel of the Corporation or nationalised banks or SIDBI. Such title scrutiny

report would be vetted by the Legal Officer of the Corporation for title clearance.


23

The CRM would register the application if all required documents as per check

list is furnished. If certain documents/information are not required for

immediate processing, then time can be given to produce the same during the

course of appraisal, but that should not come in the way of registering a loan

application. At the time of registration a letter of acknowledgment would be

given to the party showing the details of further documents/information

required and the date of site inspection, if any required. CRM would be the

single point contact for the customer, and the Branch Manager would ensure the

going smooth.

6.19 Prior in-principle clearance from SIDBI

SIDBI vide Circular dated 1-3-2011 has informed the Corporation that

henceforth prior approval of SIDBI is required under section 26(i) & (ii) of SFCs

Act where the loan proposed to be sanctioned exceeds Rs. 1000 lakhs in the case

of a Corporation established by law, a Company as defined in Companies Act

1956 or a Co-operative Society registered under Co-operative Societies Act, 1912

and Rs. 400 lakhs in respect of proprietary concern/partnership firm/trust etc.

Wherever possible prior clearance before sanction would be obtained from

SIDBI.

However, to avoid delay in sanction of assistance such approval can be sought

after sanction of the loan. Sanction communication in such situation can be

issued by branches in anticipation of getting permission from SIDBI, to avoid

delay. Immediately after sanction of loan above Rs. 1000 lakhs in case of

Corporate entities etc. and loans above Rs. 400 lakhs in other cases, the Branch

Offices would complete the specified format based on the appraisal note and

forwarded it to the SIDBI Co-ordination Cell in Accounts Department at H.O for

seeking permission from SIDBI under Section 26(i) & (ii) of SFCs Act.

6.20 Project Report

All loan applications would normally be submitted along with a project report

prepared by a Chartered/Cost Accountant or a professionally capable agency

and incorporating all essential aspects of a project including market study.

However, in case of smaller loans, say up to Rs. 25 lakh, the requirement of


24

formal project report from a chartered/cost Accountant, etc. can be dispensed

with, provided all relevant information in the form of a business plan is

submitted along with the application which should also be filled up fully and

properly. In case project reports/business plans are not available with the

promoters, the applicants can be directed to contact our Consultancy Division

for preparing the same.

6.21 Role of Zonal Offices/Branch Offices

Zonal/Branch Level Committees are delegated powers to take decisions on

sanction, disbursement, revival, restructuring and rehabilitation within the

approved delegation of powers .

Branch Offices would disburse all loan assistance and would conduct proper

monitoring/follow-up of the assisted units, based on the sanction accorded

by appropriate authority and the guidelines and instructions issued from

time to time.

While disbursing the loan amount and subsequently need based relaxations

of the conditions of sanction and various aspects of a project as specified in

the detailed appraisal note relating to the project, can be considered by the

sanctioning authority or by an authority higher than the sanctioning

authority, depending on the critically of the subject matter classified as major

changes or minor changes.

(a) Major changes that would be decided by next higher sanctioning authority

are as follows:

Change in Management (involving change in promoters/promoter

groups/ directors).

Inclusion/exclusion of investors/share holders, change in share holding

pattern, change in composition of means of finance, change of co-

obligants, etc.

Change in constitution, location of project, etc.

Delay in completion of the project beyond originally envisaged date of

commencement of business (COB).


25

Variation in norms/parameters, Promoter's Contribution, stipulated

security, and subsequent change of these norms/parameters during

credit rating, re-appraisal etc.

Change in key conditions critical to the project.

Decision regarding revaluation of landed property in case existing

valuation is less than 3 years old.

Reschedulement of standard accounts with increase in terminal date

originally fixed as per appraisal (to be done after analysing current cash

flow/repayment capacity, and before slippage to sub-substandard).

Relaxation required in approvals relating to site plan, building plan,

KSEB, PCB and other statutory bodies.

Granting of approvals arising out of the Loan Agreement, General

Conditions, Undertaking, etc.

Release of part security and ceding of charge with dilution of security

margin/asset coverage.

Approval for alteration in Memorandum and Articles of Association,

Partnership/Trust deeds, etc. of borrower.

All other matters which are not specified as minor.

(b) Decision regarding following minor changes would be taken by sanctioning

authority:

Change in project cost including change in individual project cost heads,

change in machinery suppliers, change in product/service profile or

technical scope of project, etc.

Partial release of mortgaged assets without diluting original security

position as per appraisal, in comparison with balance outstanding.

All decisions regarding land valuation except that specified as major

change.

Acceptability of assets as security.

Recall of loan cancellation/sanctioned due to mis-utilization, upto

sanctioned limit.

Relaxation of benchmark norms at the time of sanction, as specified in

para 7.2.2 and 7.2.3.


26

Reschedulement of standard accounts within terminal date originally

fixed as per appraisal (to be done after analysing current cash

flow/repayment capacity, and before slippage to sub-substandard).

Release of part security and ceding of charge without dilution of security

margin/asset coverage.

(c) Decisions which can be taken by Branch Head.

Recommendation of Margin Money/Loan subsidy and release of margin

money/ subsidy.

Ceding of 2nd charge over mortgaged assets to other banks/FIs.

Disbursement on satisfying the sanction conditions and execution of

security documents.

Decision on legal scrutiny by external advocate.

Decision on revaluation of assets by an external valuer.

7. CREDIT MANAGEMENT POLICY

The business development strategy would be supported by a prudent Credit

Management Policy. The market demand to improve products & processes

would be balanced with exercise of sufficient control on the credit delivery

processes so that exercise of prudence is not sacrificed. The key areas of credit

management shall be as under:

(1) Product management (2) Process management

Delegation of Powers Appraisal Process Monitoring Process

(3) Management Information Systems (MIS)

7.1 PRODUCT MANAGEMENT

7.1.1 Product Rationalisation

The Corporation has rationalised its various products based on the experience

gained in operating them and the feedback received from the operating level.

7.2 Process Management

Various internal business processes would be monitored to achieve the dual aim

of operational flexibility & simplicity and adequate control over business

operations.


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7.2.1 Delegation of Powers

The key tool for managing the internal processes of the Corporation is the

Delegation of Powers (DoP) which has been formulated keeping in view the

requirements of quick decision making in the Corporation and the level of

experience and expertise obtaining among officers at various grades.

The DoP, apart from indicating the financial and other powers of the Credit /

Sanctioning Committees and the individual functionaries of the Corporation,

also puts in place suitable system of checks and balances in the credit related

decision processes. The Corporation operates at 3 tiers viz., Branch, Zone, and

Head Office through various Committees. The authorities at the Head Office

comprise of HO Sanction Committees, Executive Committee and the Board.

Suitable delegation is extended to each of the Committees so as to ensure

proper control mechanism and risk sharing.

SANCTION COMMITTEES

Loan amount upto Rs. 250 lakhs @ - Branch Level Sanction &

Settlement Committee

Above Rs. 250 lakh upto Rs. 500 lakh @ - Zonal Level Sanction &

Settlement Committee

Above Rs. 500 lakh and upto Rs. 750 lakh @ - Sanction Committee

headed by GM

Above Rs. 750 lakh and upto Rs. 1000 lakh @- Sanction Committee

headed by MD

Loans above Rs. 1000 lakh @ - Executive Committee

Sanction of assistance under special dispensations and those involving variations

from approved guidelines - Board

@ including existing loan outstanding, if any.

The proposals to all the above Committees shall emanate from the concerned

branches and shall be recommended by the branch in charge after being cleared

by the Branch Level Committee. Proposals for Head Office Committees/EC/

Board shall be routed through the Zonal Manager to the Credit Department in


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Head Office who, with their comments and recommendations, shall place it

before the concerned Committee/EC/Board, for consideration as per the

Delegation of Powers.

7.2.2 Benchmark Financial Norms

Sr. No.

Parameters Benchmark norms wherever

applicable

Extent of relaxation

permissible

A B C D

1 DER (For the company as a whole, including proposed assistance)

(a) Micro and small enterprises 2:1 3:1

(b) Medium enterprises/Service Sector Enterprise

2:1 2.5:1

2 Projected DSCR 2.1 1.5:1

3 Promoter's contribution

New Entity 33% 25%

Existing Entity 25% 20%

4 Overall asset coverage

i. Micro, Small and Medium enterprises

(a) New Entity (other than i(c), (ii) & (iii) below)

1.4 1.2

(b) Existing Entity (other than i(c), (ii) & (iii) below)

1.3 1.2

(c) Existing Entity with CGTMSE cover 1.2 1.2

ii. Service sector projects/borrowers (other than micro enterprises and CRE)

1.75 1.5

iii. Commercial Real Estate Projects 2 2

A “New entity” is an entity newly set up/proposed to be set up. This would also include entities established in the past but with nil or insignificant commercial production. An “Existing entity” is one which has already been established and is engaged in commercial production (with or without Corporation's financial assistance).

Out of the four parameters above, relaxations in norms in not more than two

shall be considered for the same project. Further, relaxations under D(4) shall

be considered only when the projected DER is not more than 2:1. Similarly, the

relaxations under D(1) shall be considered only when the overall asset coverage

is not less than 1.4 times new entities and 1.3 times for existing entities.


29

As regards benchmark norm of minimum promoters contribution, exceptions

are permitted under special schemes.

Relaxations can be granted in financing MSME clusters. A flexible approach

could be followed with regard to issues like promoters contribution, DER,

DSCR, security margin/asset coverage etc. in such cases.

The above benchmark financial norms are not applicable for assistance to

project under joint financing arrangements. The norms for such proposals

would be in line with the norms of the consortium partners.

7.2.3 Relaxation of Benchmark Financial Norms:

As hitherto, it would be endeavoured that no deserving and bankable proposal

is denied financial assistance for the mere fact that it falls short of the

benchmark norms/ parameters for a scheme. Accordingly, the Sanctioning

Authority would take a holistic view of the proposal and may permit relaxation

in one or more benchmark norms after considering aspects like risk perception,

risk mitigants available and linkages and benefits accruing to the MSME sector

arising out of the Corporation's assistance, to the extent permitted as given at

Para 7.2.2. The rationale for grant of such relaxations may be suitably brought

out in the proposals and also reported to the Post Sanctioning Reporting (PSR)

Authority. Relaxations, if any, beyond the caps for sanctioning a loan would be

considered by Board.

7.2.4 Appraisal process

The Corporation will follow industry practices in analyzing and appraisal of

loan applications and will endeavour, constantly, to improve them. The project

appraisal will be a comprehensive data-based assessment of project viability,

the loan required, evaluation of the security available, the risks involved, the

quantum of loan and its repayment, etc. Viability assessment will be done

covering the key areas.

The MSME sector has characteristic traits like high degree of dependence on

the promoters‟ capabilities, infrastructural bottlenecks, marketing challenges,

non-availability of reliable data, etc. Nevertheless, the Corporation would


30

introduce comprehensive appraisal mechanism, which will now be linked to

'Core Financial Solution' since introduced.

The broad operational guidelines on Project Appraisal has already been

circulated vide Circular KFC/CIR49/CR2/10-11 dated 31-1-2011. These

guidelines shall be complied with by the field level offices to ensure maintaining

expected appraisal standards, effective project monitoring and efficient risk

management.

7.2.5 The main aspects of appraisal process are as follows: (a) Use of data bases, ratings The Corporation will use the following data base and ratings to gather data to

support assessment and risk management.

Data-base developed internally from the appraisals, risk-analysis, failure cause analysis, etc.

Business Intelligence report from the field about the promoters and market information.

data bases like the CMIE data base

Reports of accredited rating agencies like CRISIL, ICRA, CARE, SMERA, DUNN & BRADSTREET, etc.

In the case of existing clients, their track record in repayment, and relationship experience become important.

Capital line, RBI Bulletin.

(b) Security

The main criteria for supporting a project would be its viability and bankability,

rather than security. However, in order to comply with the prudential norms

prescribed by RBI, it would be necessary to have adequate security coverage for

every loan account. Wherever primary security is not adequate enough to meet

the security requirements, collateral security would be insisted upon.

Primary security for the loan shall be existing assets of the borrowing unit and

assets proposed to be created with loan assistance. All other additional assets

offered as security would form part of collateral security. The calculation of

security for a loan would be based on the concept of overall security coverage

and margin on security as given below:


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Overall Asset Coverage = Total tangible security including collateral security

loan amount

Margin on primary security = (Total value of tangible security – loan amount)

Security value x 100

The minimum asset/coverage for a loan would be as per the norms given in

para 7.2.2.

The following forms of assets would be considered as security for a loan:

Mortgage/hypothecation of immoveable and movable assets.

Bank guarantee

Government guarantee

Charge over receivables/charge on bank debts

Fixed Deposits of scheduled commercial banks

Power of Attorney for collection of contract amount.

Any other security acceptable to KFC.

Certain items of assets which are fast depreciating and that may not have much

market value would not be taken at its original value for the purpose of

security. Such assets of the following nature would be included as security after

providing due weightage to the depreciation, etc. as under:

Item

Depreciation/ Margin (%)

Value to be taken as security (%)

a) Land including land development/land scaping / Gardening

NIL 100

b) Building / Building Renovation 15 85 c) Plant & machinery and equipments

including erection, electrification

15

85 d) Moulds / Dies / Tools/ Accessories/

Fittings

75

25 e) Furniture /Fixtures / shelf 75 25 f) Technical know how 100 NIL g) Computer & accessories

including erection,electrification

50

50 h) Software 100 NIL i) Interior decoration 75 25 j) Office equipments and furniture 75 25


32

k) Diagnostic and testing equipments / Lab equipments.

75 25

l) Furnishing/ curtains/ and decorative items 100 NIL m) Crockery, cutlery and vessels 100 NIL n) Vehicles including extra fittings cost of

body, essential tools and excluding insurance, Road tax etc.

20 80

o) DG set, Lift, Fire fighting equipments, Airconditioners etc.

25 75

p) Cost of optical fibrelines 100 NIL q) Gymnasium equipments 75 25 r) Reference books 100 NIL s) Kitchen equipments including erection and

electrification

25

75 While calculating security value, preliminary expenses, other intangible expenses, deposits with Electricity Board, Margin Money for Working Capital etc. are not to be taken.

The security requirements are minimum needed and there is no restriction on

obtaining higher security wherever available. Further, for certain activities like

working capital, short term loan, vehicles, educational institutions, commercial

complexes, housing/flats, contractor loan, film/TV serial production, units

located in industrial areas/parks/estates where charge can not be created in

favour of Corporation, and units located in rented premises or in premises

which cannot be mortgaged to the Corporation, etc. need based additional

collateral security above the benchmark norm subject to a maximum of overall

asset coverage of 2:1 can be insisted by the sanctioning authority depending on

the risk perception and availability.

(c) Technical feasibility

The project's technical content - essentially products, product-mix, technology

adopted, plant and machinery, availability of utilities like power, water, anti-

pollution and effluent disposal processes, labour, managerial staff; proximity

to source of inputs and market etc.

(d) Commercial viability :

Market, demand – supply position for the products, marketing and selling

strategies, pricing, competition and the strategy to meet it, export potential,

product life cycle, break even level of production / sales and the applicant's

capability to reach the market.


33

(e) Financial appraisal :

the applicant's present and projected financial position (balance sheet,

statements of profit and loss; cash flow) expected cash generation ;

requirements of working capital, LC's etc. and arrangements made for

them; hedging Foreign Currency risks, etc..

analysis will be on audited financials of the latest financial year.

7.2.6 Credit Appraisal & Rating Tool (CART) :

Credit Appraisal and Rating Tool (CART) is a comprehensive business tool for

enabling quick appraisal and rating of SME credit proposals in an automated

work flow environment. The software developed by SIDBI, has been in

operation for past few years in SIDBI, commercial banks and select SFCs for

appraising projects. It has contributed to significant reduction in credit

dispensation time.

CART has two modules such as Appraisal and Rating. The appraisal module

covers analysis of all the relevant aspects of a credit proposal viz., Promoters,

Financials, Industry, Market, KYC norms etc. CART essentially aim at helping

in prudent decision making on support-worthiness of credit proposals. CART

also aims at serving as an effective tool for quick appraisal and quantitative

rating of credit proposals and it offers an efficient credit delivery to SME

customers. The software also has the facility for undertaking re-rating of

proposals.

Presently CART system is having Appraisal and Rating modules for Loan

types of “up to Rs 10 lakhs and above Rs 10 lakhs”, assistance types of “Term

loan/ Working capital/Term loan & Working capital”. The present ceiling for

appraisal by CART is fixed at Rs. 100 lakhs.

It is expected to bring standardization of credit decisions and reduce turn

around time for credit dispensation. As already agreed under the MoU with

SIDBI, KFC has already implemented the CART model of appraisal. Currently

this facility is accessable by all the Branch Offices. Appraisal for all loan

proposals upto Rs. 1 crore should be done only through CART from FY 2011-12.


34

7.2.7 Guarantee cover of CGTMSE :

Availability of bank credit without the hassles of collaterals / third party

guarantees would be a major source of support to the first generation

entrepreneurs especially from the economically and socially disadvantaged

sectors to realise their dream of setting up a micro or small industrial unit of

their own Micro and Small Enterprise (MSE). Keeping this objective in view,

Ministry of Micro, Small & Medium Enterprises (MSME), Government of India,

has launched the Credit Guarantee Scheme so as to strengthen credit delivery

system and facilitate flow of credit to the MSE sector. To operationalise the

scheme, MSME Ministry and SIDBI have jointly set up the Credit Guarantee

Fund Trust for Micro and Small Enterprises (CGTMSE).

The main objective of CGTMSE is that the lender should give importance to

project viability and secure the credit facility purely on the primary security of

the assets financed. Further, the lender availing guarantee facility should

endeavor to give composite credit to the borrowers so that the borrowers obtain

both term loan and working capital facilities from a single agency. The Credit

Guarantee Scheme seeks to reassure the lender that, in the event of a MSE unit

which availed collateral free credit facilities, fails to discharge its liabilities to

the lender, the Guarantee Trust would make good the loss incurred by the

lender up to 75 / 80/ 85 per cent of the credit facility.

KFC in line with RBI/SIDBI instructions, would encourage collateral-free

lending to the SME units wherever feasible for loan size upto Rs. 50 lakh with

guarantee cover under CGTMSE scheme.

7.2.8 Credit Rating :

An internal credit rating/risk assessment has been implemented in KFC for

various segments of borrower‟s and made it a part of the detailed appraisal

note. Annual re-rating for all existing borrowers would be necessarily

undertaken on the basis of current data obtained from the customers. This

would enable monitoring of rating migration of borrowers and portfolio levels

and would be used to judge the level of rebate to be allowed to borrowers.


35

The internal rating models are envisaged to cover three broad categories of risk

– business risk, management risks and financial risks. Appraisal notes should

clearly identify the risks associated with the projects and should contain

remedies for mitigation of risks identified.

A minimum internal credit rating of 50% is necessary for sanctioning loans

for a project. The rating models will help to take timely decision on approval /

rejection of proposals. In case, the rating of the borrower / facility / overall

assessment is found to be not within the stipulated investment grade, the

proposal will be rejected at the branch level itself.

Sanction of loans upto Rs.5.00 crores is permitted through internal credit

rating mechanism. External credit rating is applicable for bigger loans above

Rs.5.00 crores.

7.2.9 Service of External Rating Agencies

A scheme for Performance and Credit Rating Mechanism for SSIs has been

formulated by the Govt. of India in consultation with Indian Banks‟

Association (IBA) and various Rating Agencies. The National Small Industries

Corporation (NSIC) has been appointed the nodal agency for implementation of

this scheme. Under the scheme, the NSIC provides subsidy in the rating fees to

the units obtaining credit ratings from agencies, which are empanelled by them.

The clients have the liberty to choose among the accredited Rating Agencies.

The rating services of CRISIL & SMERA shall be availed in respect of units in

manufacturing / services sector. The Corporation has entered into a MoU with

CRISIL & SMERA to provide rating service at reduced rates.

The rating scale of CRISIL and SMERA are as follows:

a) SME Rating:

CRISIL SMERA

Rating Rating scale Rating Rating Scale

SME1 Highest 1 Highest

SME2 High 2 High

SME 3 above average 3 Above Average

SME4 Average 4 Average


36

SME5 Below average 5 Below Average

SME6 Inadequate 6 Inadequate

SME7 Poor 7 Low

SME8 Default 8 Lowest

b) CRISIL/SMERA rating for SSI (Small enterprises)

Performance

Capability

Financial strength

High Moderate Low

Highest SE1A SE1B SE1C

High SE2A SE2B SE2C

Moderate SE3A SE3B SE3C

Weak SE4A SE4B SE4C

Poor SE5A SE5B SE5C

All loans above Rs. 5.00 crores are to be compulsorily rated by an accredited

Credit Rating Agency. The services of CRISIL or SMERA can be utilised by KFC

customers for the purpose. Rating scale of 1 to 5 will only be considered for

financing SME projects. In the case of SSI (Small enterprises) rating scale of

SE1A to SE3C will only be considered for financing. However in the case of

additional loans to existing clients for modification / expansion etc. external

credit rating is not compulsory for sanction of loans. Relaxation for waiver of

external credit rating for loans above Rs. 5 crore for new entities will be

considered by the Credit Department, HO.

7.2.10 Know your customer (KYC) & Anti Money Laundering(AML) Norms:

With the aim to develop and evolve a robust system to prevent abuse of a

financial institution as conduit for money laundering and combating financing

of terrorism, RBI has advised banks and FIs to prepare comprehensive policy

on KYC Guidelines and AML Standards with the approval of Board of Directors.

Comprehensive guidelines on the same have been put in place and made

available to the operating offices. A system of categorisation of the customers

into low, medium and high risk categories in terms of the nature of business

activity, constitution, location of customer and his clients, mode of payments,

etc., at the time of appraisal is required.


37

7.2.11 RBI’s caution list / wilful defaulters’ list :

At the time of appraisal, the name of the company or its promoters, directors /

partners or any of the group / associate concerns, would need to be checked in

the lists issued from time to time, as under :

RBI list of non-suit filed accounts of wilful defaulters of Rs.25 lakh & above.

RBI list of non-suit filed defaulters of Rs.1 crore & above.

CIBIL list of suitfiled accounts of wilful defaulters of Rs.25 lakh & above.

CIBIL list of suit filed accounts of Rs.1 crore & above.

AML standards - List of Terrorist Individuals/Organisations

As regards willful defaulters, RBI/SIDBI have stipulated that no additional

facilities should be granted to such 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, DFIs, Government owned NBFCs, 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.

However, in line with RBI‟s instructions, while dealing with wilful default of a

single borrowing company/unit in a group, the Corporation would consider the

track record of the individual company/unit, with reference to its repayment

performance to its lenders. Such proposals would need to be submitted to the

Managing Director for consideration and justification for grant of assistance to

such borrower should be properly brought out in the loan proposal. Further,

Government officials and representatives of banks/FIs, including retired

officials associated with such companies/units as „nominee directors‟ whose

names have been reported along with a defaulting borrower may not be taken

into consideration for the purpose of being categorised as wilful defaulters.

Likewise, professional directors like Chartered / Cost Accountants and

Management Consultants who neither have commercial interest or financial

stake in the company/unit, nor are involved in the day-to-day management of

the company/unit, need not be equated with the promoter directors or directors


38

who are promoters‟ family members / relatives and who are involved with the

day t0 day management of the company/unit.

In case it is observed that name of borrower, its directors/ partner(s)/

proprietor appear on the RBI‟s Caution / Wilful Defaulters list subsequent to

extension of assistance by the Corporation, further enhancement in exposure

would generally not be considered. However, in case enhancement in exposure

becomes necessary from the consideration of maintaining asset quality or in

cases of wilful default by any other single borrowing company/unit in a group,

etc., the same could be considered. In such cases, the reasons for need to

enhance exposure would be highlighted in the appraisal memorandum.

Care may be exercised while considering assistance to any company or its

promoters, directors / partners or any of group / associate concerns whose

name appears in any of the lists mentioned above.

7.2.12 CIBIL data base

The Branch Offices should make use of the CIBIL data base, including

Commercial Credit Information Reports and Consumer Credit Information

Reports on the borrowers/customers and promoters/guarantors and associate

concern/group companies and its promoters for ascertaining credit history of

the applicants, wherever available. The defaults shown in the credit rating by

CIBIL has to be analysed by the Appraising Officers and in case of defaults or

serious irregularities the loan application would be rejected forthwith.

7.2.13 Guidelines to borrowers:

The Corporation has come-out with a checklist/guidelines for the use of

borrowers. Branch Offices would continue to make use of the same and would

formally forward a copy to the borrower during the enquiry/registration stage.

7.2.14 Guidelines on Connected lending:

While considering the proposal for assistance, in terms of RBI guidelines to all

India FIs on connected lending, operating offices have been advised not to

consider loans and advances and non-fund based facilities to, or on behalf of,


39

any of the Directors or to any of the firms in which any of the Directors is

interested as partner, manager, employee or guarantor. The RBI guidelines in

respect of loans and advances to relatives of the Corporation‟s Directors,

Directors of other FIs/banks and their relatives, and officers of FIs or their

relatives are required to be adhered to.

7.2.15 NOC from existing lenders :

In the normal course NOC should be obtained from the existing lender before

considering assistance to a unit. However, in order to avoid delay in credit

delivery on account of delays in obtaining NOC from existing lenders for

creation of charge in favour of the Corporation on the assets being created out

of Corporation‟s assistance, NOC need not be insisted from the existing lenders

having charge on the existing assets of the unit, in case any difficulty is

encountered. Instead, they shall be informed about creation of exclusive first

charge in favour of the Corporation on the assets being created out of the

Corporation‟s assistance. In case charge on the assets to be created out of the

Corporation‟s assistance is to be shared with the existing lenders and whenever

assistance is granted on the security of current assets [subject to compliance of

Corporation‟s guidelines], NOC from the working capital banker must be

obtained prior to disbursement of the Corporation‟s assistance.

7.2.16 Due diligence of machinery suppliers:

With a view to ensure proper end use of funds, due examination of credentials

of the machinery suppliers should be undertaken in all cases of financing

projects/ equipments. Further, as far as new borrowers are concerned, the

payment cheque or the demand draft should not be handed over to the

borrower or their representative. These are necessarily to be handed over to the

machinery supplier or his authorised representative with due acknowledgement

or sent directly to the machinery supplier by courier etc., and proper

acknowledgement by way of PoD etc. may be kept on record. In all such cases

due authorisation from the borrower for direct payment to the supplier should

be obtained. For existing customers with successful implementation track

record, cheque/ draft in the name of the machinery supplier could be handed


40

over to the borrower or his authorised representative if so demanded, for

delivering it to the machinery supplier.

As far as possible, a commitment letter may be issued to the machinery supplier

for supply of machinery along with promoters margin money. Payment may be

made after verification of machinery at the customer‟s factory site.

7.2.17 Time schedule for disposal of loan proposals:

For ensuring an efficient credit delivery mechanism, attempt would be made to

dispense assistance normally within a period of 15 working days from the date

of registering an enquiry, for proposals falling within the purview of BOs and

further period of 15 working days for proposals to be referred to ZO/HO,

subject to satisfactory submission of complete information by the applicant.

The time limit from enquiry to registration of application should not exceed one

week. Further, where proposals are to be declined without detailed appraisal

on account of not being found support-worthy as per the policy framework

and/or risk perception of the Corporation, a decision thereon should normally

be communicated to the applicant within 10 working days of receipt of relevant

information. Similarly, in case appraisal of a loan proposal can not be

proceeded with for want of vital information even after waiting for a period up

to 10 days of submission of application, such proposals would be closed

temporarily till the information is received from the promoters. In such a

situation, the promoters will be advised of the fact with a detailed list of

information still required. The case can be re-opened on receipt of the

information with the same customer code.

7.2.18 Fair Practices Code for lenders :

SIDBI issued a Circular (No.10/2007-08 dated 6.7.2007) in line with the guide

lines issued by Reserve Bank of India that SFCs should adopt the subject

guidelines and frame a fair practices code duly approved by the respective

Board of Directors.

The Fair Practices Code for Lenders, as per RBI guidelines, are required to be

followed by the Corporation. The Code sets out the guidelines for processing of

loan applications, appraisal, disbursement, post-disbursement supervision, etc.


41

All information relating to charges/ fees for processing would be disclosed in

the loan application forms. Further, the customer would be informed of all

costs to be borne in sourcing finance from the Corporation and the procedure,

method and requirements for disbursement of the loan. A copy of signed Loan

Agreement would be given to the borrower. The guidelines issued on fair

practices Code for lenders would be adhered to while processing loan proposals.

A Grievance Redressal Mechanism is also required to be in place to resolve the

disputes arising out of the Fair Practices Code.

The matter regarding grievance redressal was placed before the Board Meeting

at its meeting held on 30.07.2007 and necessary guidelines in this regard has

been issued. Keeping view the multiplicity of complaints, a revised guidelines

on complaints and grievances management and redressal system for employees,

customers and public, is being introduced to systematically handle this matter.

These guidelines will be strictly followed at various operational levels.

7.2.19 Loan processing fee: 0.5 % of the loan sanctioned in all cases. 25% of

probable processing fee should be remitted as advance at the time of registering

the loan application. The balance-processing fee should be remitted at the time

of issue of sanction communication. The maximum processing fee to be

remitted is limited to Rs.5.00 lakhs. Service charge at appropriate rate would

apply.

Normally processing fee once remitted will not be refunded. However it can be

refunded in such cases where the applicant has complied with all norms for

processing of loan applications, but loan is not sanctioned due to some other

reasons, subject to approval of MD.

In the case of loans which are renewed, a service charge @ 0.25% of the

renewed loan amount would be charged. No processing fee for substitution of

security property will be charged henceforth.

7.2.21 Financing of imported / indigenous second hand machinery: As

certain projects are being set up by some of the MSME units with the use of

second hand / refurbished machinery, purchase of such machinery could be

allowed very selectively as part of funding of a project, on case to case basis, by


42

the respective sanctioning authorities with proper justification for acquiring the

second hand / refurbished machinery. In this regard, a Chartered Engineer‟s

certificate certifying the functioning/ performance, residual life of at least 15

years, and value of machinery and value advantage, quality, as compared to

other similar models, etc. would be taken. In view of higher risks, where the

value of second hand machines/ equipment exceed 30 per cent of the project

cost prior clearance from HOD of Credit Department should be obtained. The

HO Sanction Committees would continue to consider proposals involving

second hand machinery/ equipment on merit. In case of financing under

Government subsidy schemes, the guidelines stipulated under the Government

schemes would be applicable (e.g., TUFS, CLCSS, etc.).

7.2.22 Revalidation of lapsed loan sanctions

The sanction letter conveying sanction of term loans, issued by the Corporation

generally stipulates a period of 3 months for execution of loan agreement and

other documents. Generally, within this time frame, the formalities are required

to be completed and disbursement of assistance made in an expeditious

manner. However, if some delay is experienced on account of certain genuine

reasons, then the competent authority can consider granting extension of time

to the borrower for completion of loan documentation formalities. In this

context, it should be ensured by all operating offices that the execution of loan

agreement is completed within a maximum period of 6 months from the date of

issue of sanction letter to the borrower.

In case the borrower fails to avail of any amount out of the loan sanctioned even

after lapse of a period of one year, the loan would stand automatically lapsed

and this would be communicated to the borrower by the Branch Manager at the

appropriate time. The lapsed sanction/undrawn sanction could be revalidated

by the sanctioning authority only after considering the validity of project

assumptions, fresh developments, cost over-run, if any, etc. The revalidation of

lapsed credit sanctions would be priced, as per then prevailing interest rate

structure.

7.2.23 Income Recognition


43

Interest income on loans and advances is accounted for on accrual basis.

However, except where interest and/or instalment of principal is due for more

than 90 days as on the date of balance sheet, interest in respect of such loan

accounts is taken credit on actual receipt basis as per RBI norms applicable for

term lending. Similarly, penal interest is being accounted for on actual receipt

basis in view of significant uncertainty about their realisability.

7.2.24 Insurance

All assets pledged to the Corporation including collaterals, should be invariably

insured by the loanee and it should be renewed by the loanee every year during

the tenure of the loan. This shall be scrupulously monitored by the Branch

Offices.

Transit insurance cover are available for project under implementation.

Construction upto lintel level for buildings may not be insured as in the case of

land. Machineries are required to be insured for its Reinstatement Value (RIV

clause) and in the joint names of KFC and the borrower (Bank clause).

Wherever possible the original of insurance cover meant for the lender would

be retained by KFC and kept in safe custody. However in cases where the

original is not available, a copy of insurance cover would be retained by KFC

and kept in safe custody along with other loan documents. Branches would

maintain an insurance register covering details of the insurance cover meant for

the lender available to assets financed and secured against KFC loan and ensure

that adequate insurance cover is available for all assets financed by KFC and

such insurance are renewed in time.

The borrowers are free to take insurance from any insurance company of their

choice approved by IRDA. In case the borrower does not renew the policy the

Corporation shall do the same under intimation to the customer and debit the

expenses to the loan account for which necessary conditions shall be stipulate

in the appraisal, agreement and loan sanction letter.

Corporation has entered into a MoU with the New India Assurance Company

Ltd to act as a corporate agent for insuring assets of assisted units. The

customers would be intimated about this arrangement so that they may insure


44

the assets without the usual hassles, if they so desire. The Branch offices may

ensure that the agency code of KFC is mentioned in the insurance policy in such

cases.

7.2.25 Statutory Dues

All statutory charges including sales tax, excise duties, provident fund

contribution, land tax, building tax, water and electricity payments, etc. due to

the Government or concerned authorities shall be paid and kept current by the

borrower/ co-obligants every year during the tenure of the loan and shall be

monitored by the Branch Offices, for which necessary conditions would be

incorporated in the detailed appraisal note, loan sanction letter and Loan

Agreement.

7.2.26 Prepayment/foreclosure of account

The facility of pre-payment of loan would be available to a borrower. The

borrower should pay interest on pre-payment/foreclosure @ 2% of the

principal outstanding as per original schedule as on date of closure depending

on financial background of the borrowing unit/promoter, future business

potential to KFC, status of the account and likely-hood of future default, etc.

Prepayment interest will not be charged in cases where 75% of the original loan

period is over. Where the Corporation has issued recall notice, prepayment of

principal will be taken as per original schedule and no pre-payment interest

will be applicable in such cases.

No pre-payment interest will be charged in respect of (a) short term loan,

(b) contractor loan, (c) WCTL/WCRFL, (d) Loan for market research,

(e) loans which are renewable, (f) loans for housing, and (g) loan for TV

Serial/Film production and where no bank take-over is involved. Similarly, the

Sanctioning Authority shall have powers to accept on merit pre-payment of two

future instalments of loan without any pre-payment interest, if it is found to be

advantageous to the Corporation in the long-run.

In genuine cases where the premature closure of the loan is made out of own

funds of the customer, without involving any takeover of the loan by a bank/FI,

foreclosure interest can be waived at the discretion of the Sanctioning


45

Authority. For cases where premature closure of the loan is due to bank

takeover, foreclosure interest as per norms would be charged. Service charge at

appropriate rate would also apply.

In case of any deviation from the above norms the approval of Managing

Director would to be obtained.

7. 2.27 Prime Lending Rate (PLR)

In the scenario of dynamic interest rates and competition, there is need for the

Corporation to enhance its portfolio with quality assets. An aggressive pricing

strategy is essential for the purpose. For all new loans, interest rate will be

linked to a Prime Lending Rate (PLR) of the Corporation and loans can be

extended on floating rates with fixed spread above or below the Prime Lending

Rate (PLR). The current PLR is 14%* p.a. The Corporation will review and

reset the interest rate from time to time, depending upon the market condition,

change in refinance rate by SIDBI and other financiers, etc. Such changes in

the rate of interest shall be applicable on the outstanding balance in the loan

accounts. Interest rate reset clauses would be incorporated in the loan

agreement. Borrowers will have the option to either accept the revised rates or

to prepay the outstanding amount without any foreclosure interest if they find

the revised rates unacceptable.

The Corporation was charging interest on quarterly basis in the past. However,

as KFC is now following 90 days NPA norms as per RBI guidelines, quarterly

rests for calculation of interest would mean that the status of a default would be

known only when it becomes NPA. In view of this the interest and principal

would be paid on monthly basis for all loans. However, a grace period of 8 days

would be permitted for payment of the principal / interest dues, which shall not

be reckoned as default. Penal interest @ 2% p.a. would be charged on the

defaulted amount for such defaulted period of delayed payment. It shall not be

compounded.

* Last updated on 26 -3-2011.

7.2.28 Rebate


46

Interest rebate is allowable for the following:

Prompt repayment of loan with interest thereon in all schemes. If any

interest due is defaulted and cleared along with the subsequent interest

payment, eligibility of rebate will be considered only for the subsequent

payment and not for the delayed payment. To be eligible for rebate,

borrower has to remit both interest and principal installments promptly and

there should not be any arrears in the loan account. A grace period of 8 days

(due date + 7 days) is given for remitting interest for availing rebate.

Relaxation can be done by Managing Director with the recommendation of

FC. The rebate will be available only for clients who have submitted/

renewed insurance policy with adequate cover. Similarly, no rebate is

envisaged for special loans given for Television Serial / Film production,

concessional loans to NRKs, special working capital loans to Hotels, and loan

to Micro-finance Institutions.

7.2.29 Reduction in Interest Rate:

Addition of new customers while retaining existing good customers is pivotal

for increasing business. It holds the key to healthy bottom line and coping with

the competition. Hence, in addition to the rebate given, interest reduction upto

1% would be considered in deserving cases relating to existing or new clients

who have excellent track record with KFC or their previous lender subject to the

following conditions.

(i) For existing clients, the loan account should be in standard category for the last

3 years and their credit rating continues to be in investible grade.

(ii) In the case of new clients, credit report from their bankers should be obtained

to satisfy the condition mentioned at (i) above. Verification of account

statements of working capital/term loan limits for at least immediately

preceding one year should be carried-out and recorded. It would be ensured

that there are no adverse features and repayments are prompt.

(iii) Credit rating should be carried-out on annual basis and for all loans in respect

of existing/new clients and they should obtain Credit Rating of not less than

70%.


47

This reduction is not applicable to Special Loan Schemes viz., loans for housing

projects and MFIs concessional loans to NRKs/Micro-enterprises, and energy

saving projects as well as special working capital limits to Hotels.

This reduction in interest rate is given over and above the rebate given at 7.2.4.

7.3 Management Information System 7.3.1 The Corporation is focusing on evolving a strong and automated Management

Information System (MIS) to facilitate easier monitoring of assistance extended

to its borrowers and to ensure proper feedback so as to effect improvements in

the credit delivery and monitoring mechanisms. The emphasis will be to move

from isolated application systems to integrated solutions with direct linkage to

the accounting functions. The data capturing will be linked to business

processes and its flow for MIS purposes would be kept automatic as far as

possible.

7.3.2 The periodicity of MIS reviews shall be specified by HO for critical and sub-

critical accounts. Review of all critical standard accounts along with NPAs will

be done at branch level by the newly constituted. Default Review Committee

(DRC) at least once in a month. Review of Nominee Directors wherever

applicable, shall also be undertaken annually. Pending applications and

undrawn sanctions shall be reviewed periodically at the frequency specified by

HO. The MIS for monitoring of NPAs and recovery performance shall be in line

with a separate Loan Recovery Policy framed for the purpose and modified from

time to time.

8. CREDIT MONITORING

Effective follow up and supervision of borrowal accounts would continue to be

the main pillars in the Corporation‟s credit administration and risk

management framework. Instructions have been issued, from time to time,

based on experience, feedback received from operating offices, internal and

concurrent audit observations, AG's audit, SIDBI‟s guidelines, etc. to ensure

effectiveness of credit monitoring mechanism in the Corporation. With an

aggressive business strategy intended to be pursued under the various schemes,

strengthening of credit monitoring mechanism is necessary. The Corporation


48

would, therefore, continue to give special emphasis on credit monitoring. The

broad guidelines on follow-up and monitoring has already been circulated vide

Circular KFC/CIR49/CR2/10-11 dated 31-1-2011. These guidelines would be

strictly adhered to so as to ensure that projects are implemented as per schedule

and are successfully operated.

8.1 Monitoring Objectives

The key objectives of credit monitoring include :

Monitoring of asset quality, rating migrations, critical accounts, etc.

Ensuring proper end use of funds;

Compliance with terms & conditions of sanction;

Adequate uninterrupted insurance cover;

Securities offered / charged / documentation being in order;

Monitoring financial & business performance of assisted units vis-à-vis the

projections;

Detection of diversion/syphoning of funds, wilful defaults and fraudulent

practices.

Detection of early warning signals, deterioration in credit quality / financial

performance of the account;

Monitoring changes in management structure, reconstitution, death or

resignation of a key person and other causes of concern leading to possible

deterioration in the quality of the assets;

Monitoring of stressed accounts and Preventive NPA management.

Payment of statutory liabilities, to avoid litigation and winding up.

Obtaining of approvals from Government authorities, and Regulatory

Bodies.

8.2 Monitoring Methodology

8.2.1 Monitoring compliance of key conditions

Sometimes in view of project exigencies, disbursements are made pending

compliance of certain key conditions like obtaining of statutory / regulatory


49

approvals for the project; non conversion of share application money into share

capital; submission of supporting documents in respect of security/ guarantee

created; etc. In such cases, a reasonable time is given to the borrower for

compliance of such conditions. These cases should be strictly monitored and

compliance should be ensured within the stipulated time. In the event of non-

compliance, the Corporation may charge additional interest of 1% p.a. till such

time the compliance is pending.

8.2.3 Post Sanction Reporting System

Having regard to the need for quick decision making and faster disposal of

proposals, powers have been decentralised. At the same time, in order to ensure

that powers are exercised in a judicious manner particularly at junior level, Post

Sanction Reporting (PSR) System and security of sanction before issue of

sanction letter, would be followed. All sanction by all committees have to be

reported to the Board.

8.2.4 Monitoring of rating of accounts and portfolio

The existing standard assets of the Corporation shall be rated under the

Internal Rating Model or the CART model, as the case may be and the overall

portfolio rating concentration and individual rating migrations would be

monitored closely. Credit Department would keep a watch on the rating

concentrations of new business and take necessary steps to ensure that the

rating profile of the new business is within acceptable grades.

8.2.5 IT- enabled internal monitoring

The monitoring of assistance would be made more efficient and effective by use

of IT enabled services and continuous improvements / developments. The

Systems Department of the Corporation would develop a program in the new

CFS by which alerts for overdues, stressed accounts, insurance policies, pending

applications, undisbursed commitments, cases where the final security is yet to

be created etc. are generated and automatically sent to the field offices

concerned for immediate remedial action.

8.2.6 Multi-tier monitoring


50

While the primary responsibility to monitor the individual accounts would

continue to rest with the Branch office concerned, for the overall monitoring

purpose, a multi-tier monitoring structure based on the criticality would be

followed for collective review of all standard assets.

i. Macro level monitoring at HO by Credit Department and by GM. ii. Asset Monitoring in respect of comparatively larger accounts at

Zonal Offices iii. Intensive monitoring at BO level.

For the purpose of assessing criticality level, the critical and sub-critical

accounts shall be defined as under :

Critical accounts:

Accounts having at least one of the following characteristics :

Suspected fraud

Stressed Assets

Projects under implementation (cases involving civil construction)

Cases where final security is yet to be created

Cases where Key Conditions are yet to be complied.

Slippage in implementation of the project

Time / cost overrun

Sub-critical accounts All accounts having features that are other than “critical”. The monitoring of

sub-critical accounts will be with regard to the following broad aspects, with

focus on criticality of the account :

Periodic visits and analysis of report

Interaction with other lenders to the unit

Submission of annual / periodic reports, especially the audited balance

sheet and profit & loss account, and analysis thereof

Validity of limitation period /receipt of BCC/AoDS

Availability of adequate insurance cover

Status of ECGC / CGTMSE cover, wherever applicable

Detection of early warning signals given at Annexure-I.

Debt servicing track record


51

Nominee Directors‟ reports, (wherever applicable)

Detection of Stressed Assets for early necessary action

Slippage in internal/external rating.

Frequency of monitoring of standard accounts would also depend on the

criticality level. The desirable action on the occurrence of identified trigger

points are summarised in Annexure II.

8.2.7 Periodic monitoring and review of loan accounts

Besides periodic visits to the assisted units, the borrowers are required to

submit periodic returns to the Corporation with regard to their performance.

These returns would be carefully scrutinised at the operating offices and

wherever corrective actions are to be initiated, these would be carried out

without delay. Further, the branch offices would be in regular contact with the

working capital bankers and other lenders of the unit so as to obtain early

feedback/ news on unit‟s performance and problems, etc. The operating offices

would also participate in State/District Level Bankers‟ Committee, Bankers‟

Club meetings and other meetings amongst bankers, CII, SSI/Management

Associations, etc. and use such interactions for getting information on

developments taking place in the local area, market, industry, client units, etc.

besides generating new business.

8.2.8 Field Officers

Field Officers at the Branch level are to be appointed for all accounts for being

in regular contact with the borrowers, not only to understand their problems, if

any, for quick resolution, but also to explore the possibility of further business

opportunities and relationship building. The contact details of relationship

manager may be communicated to the clients. The Branch in-charges, however,

would continue to play the key role in regular interaction and relationship

building with existing and prospective clients.

8.2.9 Visits

The importance of visits as a tool for monitoring is well recognised. Keeping in

view the human resources vis-à-vis the number of accounts being added every

year, frequency of visits to be undertaken would be rationalised. Critical


52

accounts will have to be given priority for visit. The frequency of visits to such

units would depend on the criticality level. Nevertheless, it may have to be

ensured that all cases classified as “critical” should be visited at least once in

three months. In respect of “sub-critical” accounts, top 75% customers by value,

(i.e. principal outstanding as on March 31) and rescheduled cases may be visited

once in two months. All other accounts should be visited once in six months.

8.2.10 Acknowledgement of Debt/Balance Confirmation

Annual re-rating for all existing borrowers should be undertaken on the basis of

current data to enable monitoring of credit migration at borrower and portfolio

levels.

Financial statements (P&L and Balance Sheet), IT returns, VAT returns, Tax

paid receipt and EC should be taken periodically. In all loan accounts

acknowledgment of Debt/Balance confirmation as on June 30 & March 31

should be collected.

8.2.11 Nominee Directors

The role of Nominee Directors as an effective mechanism for monitoring and

follow-up, the need for vigilant monitoring by the nominees appointed on the

Board of assisted units as also timely submission of report and action thereon

have been emphasised by SIDBI, RBI and GoI. The MSME sector, in particular

the smaller enterprises, is characterised by owner-manager type of structures

and most of these often lack good corporate governance practices. Due to this,

the units have generally not been found to be amenable to this tool of

monitoring. The Corporation would consider appointing Nominee Directors

wherever felt necessary, keeping in view the specific requirements and exposure

of the individual accounts.

8.2.12 Policy on exit from loans

Exits from the term loans take place in the normal course on final payment as

per the amortization schedule. The exit also takes place if a borrower insists on

pre-payment of loans/advances, which is accepted on receipt of applicable pre-

payment interest from the borrower. In case of financially weak borrowers, or

those want to quit the business, exits without levy of pre-payment interest could


53

also be considered wherever collection of prepayment interest is not possible.

Further, the Corporation would also consider exit from loans by way of

securitisation/ assignment/ sale to Asset Reconstruction Companies (ARCs) or

another bank/FI/NBFC on portfolio or individual loan basis if attractive

returns are expected. The Corporation can also off-load part of the loan in

favour of other FIs/Banks to reduce the exposure in case the risk perception on

the borrower is felt high. Takeover of loans by other banks would generally be

resisted, except in circumstances where the borrower is relatively weak and it

could be expected that banks would be in a better position to service their

needs. The borrowers could be identified as weak on the occurrence of following

triggers:

Repeated cost/ time over-run in the same project.

Frequent slippage to stressed assets category.

Slippage in internal rating.

Slippage of external rating

Any other signal indicating significant structural/ long term

weakness

On the occurrence of one or more of above, the operating office would in

consultation with its Zonal Office, identify the borrower as weak and help them

to come out of the difficulties by diagnosing their problems and providing them

need based support. The branch offices could also encourage the account to be

taken over by other banks, FIs, NBFC, etc.

8.2.13 Stressed Assets

Stressed Asset is defined as an account where principal and/or interest remains

overdue for more than 30 days. Such assets are required to be given special

attention as they may eventually turn into NPAs if not properly nursed.

Monitoring of such assets assumes added significance in the light of 90 days

NPA norm. As soon as an account is classified as a Stressed Asset, it should be

taken up for intensive monitoring. Specific and timely action as per guidelines

issued vide Circular No. KFC/CIR1/RECY1/11-12 dated 04-04-2011 should be

initiated by the BO concerned for preventing such accounts from turning into

an NPA.

8.2.14 Review/ restructuring of standard/stressed assets


54

The Corporation would initiate restructuring exercise in respect of all

potentially viable cases. While the restructuring of NPAs are explained in detail

in the Recovery Policy, as a measure of preventive NPA management, in respect

of stressed assets and standard assets, restructuring of dues would be

considered in deserving cases proactively. Such restructuring would be

undertaken with the objective of maintaining the asset quality.

Restructuring of individual proposals are considered on merits based on

detailed RBI/SIDBI/HO guidelines in this regard as mentioned above.

Deserving cases would be selectively considered by the competent authority for

granting need based reliefs /concessions /restructuring of dues on merits of

individual proposals.

In cases where projects including those classified as standard assets face

substantial time/ cost over-run, say over six months / 25% of the project cost,

the project should be reviewed/ reappraisal taken up during/ implementation

in order that the loan is suitably restructured/ repayment period rescheduled, if

necessary.

Based on the circumstances, reschedulement of standard assets, before it turns

into a toxic asset, could be considered in deserving cases. However, operating

offices should not make it a habit to provide reschedulement as a window-

dressing mechanism to present a rosy picture of the branch performance, and

such benefits should be extended after detailed analysis of the customers

genuine constraints and the cash flow situation of the assisted unit.

8.2.15 NPA management

Besides the credit monitoring mechanism which is in place for standard

accounts, a Loan Recovery Policy has been put in place to maximise recovery of

dues under the credit portfolio of the Corporation, especially out of Non-

Performing Assets (NPAs), by proper application of appropriate recovery tools

and to prevent fresh slippage of accounts to the NPA category.

8.2.16 Operational and Management Audit


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The Corporation has been carrying out Operational Audit of the operating

offices. The Corporation has well defined policy for conduct of such audits

which, inter alia, covers audit of loan / security documents. KFC would also be

introducing internal audit of administrative processes and Management Audit

of the offices as well as Head Office departments.

The Corporation also undertake concurrent Audit of the loan accounts on a

quarterly basis through accredited chartered accountants appointed for the

purpose with the approval of the Board.

8.2.17 Pre sanction scrutiny

Pre-sanction scrutiny of the loan proposals has been introduced to mitigate the

risk involved in lending. It will assess the shortcomings / deficiencies pertaining

to pre-disbursement stage formalities and assist in rectifying / minimizing the

same at the earliest. The credit scrutiny reviews the sanction process and

compliance thereof. It is an independent review of credit risk assessment. The

scope and coverage of the pre-sanction scrutiny shall be governed by guidelines

issued from time to time by H.O. to safeguard the interest of the Corporation.

A two-tier supervisory system would come into force with immediate effect, to

manage the process of pre-sanction scrutiny of loan proposals. Loan proposals

of Rs. 1 crore and upto Rs. 2.50 crore shall be undertaken by a team of two

officers deputed by the Zonal Manager from his zone within three days of

sanction by the BLSC. Loans proposals above Rs. 2.50 crore shall be scrutinized

by a 2-member team of officers familiar with project appraisal, deputed by the

Credit Department, HO. The loan sanction communication

will be issued to the party only after getting clearance from the ZM/HOD

(Credit) on satisfactory compliance of pre-sanction scrutiny.

Each sanctioning authority shall also report to the next higher authority details

regarding sanctions made on a monthly basis as Post Sanction Report (PSR).

8.3 STAFF ACCOUNTABILITY

The Corporation shall be introducing a staff accountability policy which,

inter alia, would cover the entire credit portfolio of the Corporation.


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9. CONCLUSION

Efficient credit delivery is the key to quality portfolio build up and customer

retention. The Loan Policy gives adequate flexibility to develop viable business

proposals. The Policy has also put in place a suitable structure for approval /

clearance of new products. Hence, any business proposition considered to be

viable and bankable should not be lost on account of non-availability of a

suitable scheme/product. It will also be the endeavour of the Corporation to

provide adequate and timely support to the industrial sector for the economic

development of the state. The corporation would give emphasis on the viability

of a project than a security oriented approach, as no amount of

security/collateral can replace the normal course of recovery of a loan out of

the income generated from the support, nor any lender can derive the

satisfaction of seeing through a successful project which serve many economic

and social objectives of the State.

The Corporation will continue its efforts to simplify and streamline

procedures/processes to expedite the credit delivery besides making efficient

use of IT for internal credit monitoring. Strategic alliance entered into with

commercial banks would also be utilised for giving better facilities and services

to the MSME customers. While the Corporation has been making efforts in

introducing risk management practices on an on-going basis, it would also

accord due emphasis in initiating a paradigm transition towards a completely

integrated risk management system in tune with the New Capital Adequacy

Framework and Basel II norms.

Sd/-

MANAGING DIRECTOR

ANNEXURE - I

INDICATIVE LIST OF EARLY WARNING SIGNALS

i. Non-cooperative attitude of promoters/directors of the assisted

company/unit ii. Not inviting nominee director for Board meetings iii. Absence of key personnel in Board meetings iv. Non-submission of project completion report / progress reports v. Non-submission of Balance Sheets


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vi. Inconsistencies in CA certificate / Sources & disposition of funds vii. Not taking timely/proper insurance cover viii. Not furnishing Balance Confirmation Certificates/Acknowledgement of

Debt and Securities ix. Avoidance of follow up visits by the borrowers / absence of promoters

during follow up visits x. Adverse market reports/banker‟s reports/opinion xi. Filing of suit/takeover of stocks/assets by banker/other lenders xii. Appearance in caution list / defaulter list / wilful defaulter list xiii. Takeover by other company / group without prior approval xiv. Raids on promoters/directors by government/statutory authorities xv. Reports of excise/tax violations, improper business practices,

mismanagement xvi. Failure to pay statutory liabilities xvii. Reports of siphoning/diversion of funds xviii. Reports of acquisition of disproportionate assets by promoters during

implementation of project xix. Reports of dissent among promoters xx. Complaints of non-payment /inadequate payment by suppliers xxi. Undue delay in shipment / non-shipment of stock / goods etc. xxii. Steady decline in production/sales and/or profits, increasing level of sundry

creditors, debtors exceeding 6 months, abnormal rise in inventory levels, downward trend in order book position, etc.

xxiii. Unit going for expansion before implementation of the assisted project. xxiv. Frequent dishonour of cheques xxv. Devolvement of LCs and nonpayment within a reasonable period. xxvi. Return / Nonpayment of bills discounted.


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ANNEXURE - II

Monitoring of standard assets - Trigger Points

S. No.

Trigger Points Desirable Action

(i) Detection of Warning Signals (Indicative list for term loan accounts given in Annexure I)

Take up with the promoters by way of letters, telephone calls and/or visits.

Corroborate the warning signals through other channels including informal discussions with bankers, suppliers, purchasers, similar units.

Ascertain the likely impact on the project / recovery prospects.

Consider offering need based relaxations, if necessary.

In case of lack of cooperation / inadequate response, consider issuing recall / takeover notice to bring pressure on the borrower.

(ii) Time / cost

overrun Collect details of such overrun. Examine the impact on the project / recovery prospects.

Suggest appropriate action on how to redress it in a time bound manner.

(iii) First default Bring the default to the notice of key personnel of the borrower unit / company and pursue for immediate payment. Ascertain the reasons and make a note of it, if significant. Promptly acknowledge the payment as soon as received. Initiate and maintain dialogue with the borrower unit / company.

(iv) Two consecutive defaults

Issue a formal default notice with a request for immediate payment.

Ascertain the nature and reasons for default and examine the seriousness thereof.

Suggest remedial action in consultation with the borrower unit / company.


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S. No.

Trigger Points Desirable Action

(v) Slippage to Stressed Asset category

RO/BO concerned should chalk out an action plan to prevent slippage to NPA category after a visit/discussion with the borrower unit/company.

Interact with the working capital banker to ascertain the status of default with them and to informally ascertain the developments in the borrower's working environment.

If considered necessary, offer reschedulement, restructuring etc., without depending too much on the working capital banker.

Review the position of security charged to the Bank, availability of security documents and enforceability of security.

Get the assets valued by the Bank's empanelled valuer, if felt necessary, to decide on application of an appropriate recovery tool.

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ANNEXURE III

Scheme of Term Loan for Industrial Activities

1. Objective Kerala Financial Corporation (KFC) as per its charter, has the mandate to finance and develop industrial activities in the State as a part of for revamping the State economy. KFC has been operating many schemes for various segments of industry covering wide spectrum of activities both in the manufacturing and service sectors especially to the Micro, Small and Medium Enterprises (MSME) sector. With a view to consolidate, rationalize and simply the existing scheme and to impart operational flexibility to suit the customer needs in the changing market scenario, an attempt is now made to introduce a comprehensive term loan assistance scheme for the core industrial activities. The objective is to meet the requirements of all the target groups by offering them need based financial assistance. It is also expected that no worthwhile, bankable proposal is turned down merely for want of a standard product or a scheme.

2. Eligible customers The customers should generally be limited companies in the partnership, private or public sector. Partnership firms, Sole- proprietory concerns, Societies and Trusts would also be considered; such customers would be, encouraged to convert into limited companies considering the growth prospects in adopting a corporate culture. As per, the SFCs Act 1951, the entities with capital and free reserves not exceeding Rs.30 crore only can be considered.

3. Eligible activities

All new and existing units taking up industrial/infrastructural activities are eligible. The following types of activities, inter alia, are covered:

MSMEs in the manufacturing/service sector. Bigger units also would be considered on selective basis.

IT/ICT enabled as well as logistic services

Qualified professionals for their offices/shops/transport, etc. needs.

Hotels, resorts, restaurants, catering services, amusement parks and other tourism related activities.

Hospitals, nursing homes, diagnostic centres, health clinics, veterinary clinics, etc.

Transport sector including agencies managing taxies/buses/trucks/boats and other contract carriers. Malls, showrooms, shopping/commercial complexes, display/ exhibition/convention centres, business/incubation centres/Auditorium, Internet café, multiplexes, video parlors, etc.

Warehouses/Godowns, container freight terminals, cold-storage facilities, etc.

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Acquisition of machineries/equipment, DG sets, computer sets, etc. for industrial purposes on standalone basis.

Petrol/diesel/gas filling stations, vehicle servicing centres, workshops, etc.

Infrastructure facilities such as industrial parks/estates (including modernization/refurbishing) power projects – both conventional and non-conventional, Common Effluent Treatment Plants, road construction benefitting industries, etc.

Skill training & educational activities directly linked to industrial activities.

Ancillary/vendor units of big corporates

Fisheries and aquaculture

Sericulture and horticulture

Any other activities as permitted under the SFCs Act, 1951.

4. Purpose To meet long term financial needs of industry and industry-related projects for the following purposes:

Setting up of new project

Modernization/Technology upgradation

Expansion/Diversification

Marketing and Market Research including publicity

Industrial Infrastructure development

Obtaining of Quality Standards like ISO seies/GMP/NABH Certification, etc.

Research & Development work/Lab including incubation facilities.

Acquisition of existing industry for carrying on same or different industrial activities, including units taken over/under disposal by KFC.

5. Loan Limit No minimum or maximum loan eligibility is kept. However, as permitted under SFCs Act 1951, partnership firms, proprietory concerns and trusts are eligible for a maximum amount of Rs.8.00 crore and limited companies/societies are eligible for loan upto Rs.20 crore.

The upper loan limits under Energy Saving Scheme will be Rs. 200 lakhs for Companies, Corporates and Co-operative Societies. Other cases including trust Rs. 100 lakhs.

For loans under Special Working Capital Assistance to Hotels the upper loan limits for Corporations/Companies and Co-operative Societies shall be Rs. 100 lakhs.

The upper limit for loan under Micro Enterprises shall be Rs. 25 lakhs.

6. Norms & Parameters a) Debt Equity Ratio

P.C. D.E.R.

New units - General 33.34% 2:1 - NRKs/Micro Enterprises (Mfg)/

Energy Saving projects 25.00% 3:1

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b) Not exceeding the specified rate and minimum promoters contribution.

Existing units going for expansion and Diversification - General 25.00% 3:1 (for project)

2:1 (for unit) - NRKs, Micro Enterprises(Mfg),

Energy Saving Projects 25.00% 3:1 (for project & Unit)

New& Existing units for - Modernization, Market

Research, Quality Standards, 10.00% 9:1 (for project) DG Sets, Lab, R&D, 2:1 (for unit) Incubation centres

Take- over of existing units 33.34 2:1

c) Loan Repayment Period

The loan will be repayable in monthly instalments for a period not less than 3 years and not more than 10 years, depending on the cash flow of the project. Repayment period for energy saving projects shall be three years.

The repayment period will be including a moratorium/initial gestation of 6 months to 2 years depending on the implementation schedule of the project.

Normally, the cash flow projections should provide for a Debt Service Coverage Ratio (DSCR) of not less than 2:1 for the project as well as the unit.

d)Rate of interest Effective rate and the document rates of interest for various segments are as under:

Effective Rate (%p.a.)

Document rate (Before Rebate/Concessions

(%p.a.)

Current PLR 14.00 14.00

Small/Medium Enterprises (Mfg.)

10.00 14.50

Micro-Enterprises (Mfg.) 7.00 12.50

NRKs 9.00 9.00

Energy Saving Projects 5.00

Women Enterprises/SC/ST* Additional 1% interest reduction on all schemes

*100% managed/owned by women or by SC/ST entrepreneurs.

For all loans floating interest rate is applicable based on Prime Lending Rate (PLR) from the date of first disbursement.

Rebate ranging from 1% to 9.5% is allowed for customers’ making prompt payment from insuring the assets properly, as also for special schemes for NRKs, Micro (Mfg.) Enterprises and Women enterprises

Interest will be calculated on daily diminishing balances on compound basis.

Penal interest @2% p.a. will be charged for defaulted amount for the

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defaulted period.

Rebate upto 1% is allowed for units obtaining internal credit rating in grades ranging from 70% to 100%.

e) Processing fee

f) Security The loan would be secured by minimum overall asset coverage of 1.30 times the loan amount for existing customers (including extension of residual charge on assets already secured), and 1.40 time for new customers. In case of CRE Projects and where landed property is not offered as primary security, the asset coverage required would be 2:1.

Personal guarantee of all promoters and all co-obligants would be normally obtained

Depending on risk perception additional comfort in any one or combination of the following forms would be obtained.

- Escrow Account - Brand Value - Corporate guarantee/guarantee from Banks/FIs - Key-man insurance - Life Insurance Policy - Traded shares of the assisted company or any other company - Fixed Deposits with Banks/FIs - Any other form of security/comfort to cover credit risk

7 All loans will be considered based on internal credit rating and subject to obtaining minimum qualified/investment grade of 50%.

Continuance of rebate on credit rating would depend on the unit obtaining minimum investible grade in annual credit rating exercise being carried out by KFC

Loans above Rs.5 crore would normally be sanctioned after furnishing Credit Rating from an accredited agency. KFC has an arrangement with CRISIL for rating its assisted units at concessional rates. Concessions from NSIC are also available to MSEs from NSIC.

gm2/ann/scheme for TL

64

ANNEXURE IV

PARAMETERS FOR DIFFERENT SCHEMES

Sl.

No.

Scheme

Code Name of Scheme

Promoters

contribution

Debt Equity Ratio

(DER) for the

project**

Interest rate

gross linked

to PLR++

Rebate for

prompt

payment

Interest

reduction

based on

credit rating

Effective rate

after rebate

and deduction

1 2 3 4 5 6 7 8 9

1 TL Scheme for Term Loan for

industrial activities

a) General 33.34% 2:1 14.5% 2 1 11.5

b) Small/Medium enterprises

in Manufacturing Sector

33.34% 2:1 14.5% 3.5 1 10

c) Small/Medium enterprises

in Service Sector

33.34% 2:1 14.5% 2.0 1 11.5

d) Micro enterprises in

Manufacturing Sector

25.00% 3:1 12.5% 4.5 1 7

e) Micro enterprises in

Service Sector

25.00% 3:1 14.5% 2 1 11.5

f) NRKs 9%(fixed)+

g) Women & SC/ST

Enterprises*

h) Energy Saving Projects 25% 3:1 13.5% 7.5 1 5

2 Single Window Scheme 33.34% of project

cost

25% of working

capital requirement

14.5% 2 1 11.5

3 Working Capital Term Loan 25% 3:1 14.5% 2 0 12.5

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4 Working Capital Revolving

Fund Loan

25% 3:1 14.5% 1 0 13.5

5 Construction Activities and

Housing Project

40% 1.5:1 15.5% 2 1 12.5

6 Takeover of loans from

Banks/FIs

33.34% 2:1 14.5% 2 1 11.5

7 Short Term Loan Scheme 10% 9:1 14.5% 1 - 13.5

8 Special Working Capital

Assistance to Hotels

0% for Bar licence

25% for working

capital

15.5% 1 - 14.5

9 Assistance to Micro Finance

Institutions

- 12.5% - - 12.5

10 Scheme for Financial

Assistance to Civil

Contractors

25% 3:1 15.5% 1 - 14.5

11 Scheme for Financial

Assistance for producing

Films and TV serials

50% 1:1 14.5% - - 14.5

* An additional interest reduction of 1% shall be given. All other parameters have to be complied with. + w.e.f. 01-04-2011

** In all cases of the DER for the unit as whole should be minimum 2:1. ++

PLR – 14% w.e.f. 26-03-2011.

Security will be as per the Benchmark security norms given at 7.2.2. Need based additional collateral security over the above the benchmark norm

subject to a maximum overall asset coverage ratio of 2:1 can be insisted by the sanctioning authority in addition to primary security depending on the risk

perception and availability.

gm2/scheme/parameters

loan policy fy 2011-12 - kerala financial corporation · loan policy fy 2011-12 3 1. preamble 1.1...

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