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DOCUMENT B 2011 The South Indian Bank Limited DOCUMENT -B 2011
Credit Risk Management Policy, 2011 DOCUMENT B Credit Risk Management Policy The South Indian Bank Limited 1. Introduction................................................................. ..............................................................4 2. Objectives .................................................................. ...............................................................5 3. Definition of Credit Risk ................................................... ........................................................5 4. Elements of Credit Risk Management........................................... ............................................6 4.1 Credit risk identification and assessment .................................. ......................................11 4.1.1 Managing the Country Risk................................................. .....................................11 4.1.2 Credit Risk Rating Frameworks ............................................ ...................................12 4.1.3 Credit Risk Rating Symbols ............................................... ......................................15 4.1.4 Credit Risk Rating Process. .............................................. ........................................17 4.1.5 Credit Risk Rating Procedure ............................................. ......................................17 4.1.6 Credit Risk Rating Structured Obligations ................................ ...............................18 4.1.7 Credit Risk Rating Communication.......................................... ................................18 4.1.8 Credit Risk Rating Review ................................................ .......................................19
4.1.9 Guarantees and Co-acceptances ............................................ ...................................19 4.2 Credit Risk Mitigation (CRM) and Controls .................................. .................................20 4.2.1 Credit Risk Mitigation Procedures ........................................ ...................................20 4.2.2 Credit Risk Control Credit Pricing ................................................................. .......22 4.2.3 Rating Exemptions......................................................... ...........................................22 4.2.4 Margin on Loans and Modifications to Margin Policy ....................... .....................23 4.3 Credit Risk Measurement .................................................... ............................................23 4.3.1 Credit Risk Measurement Individual Exposure.....................................................23 4.3.2 Credit Risk Measurement Portfolio Exposure.......................................................24 4.4 Credit Risk Monitoring...................................................... ..............................................27 4.4.1 Loan Review Mechanism .................................................... .....................................27 4.4.2 Credit Audit ............................................................. .................................................29 5. Credit Risk Governance Structure ............................................ ...............................................31 6. Interest Rate Risk Management................................................ ...............................................31 7. Rating and Credit Administration............................................. ...............................................32
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Credit Risk Management Policy, 2011 Annexures 1. Rating score sheet for mercantile credit accounts 34 2. Credit risk rating frame work housing loans sector 38 3. Credit risk rating framework for micro & small enterprises (MSE) 41 4. Credit risk rating framework for SSI & tiny sector (Below Rs.200.00 lacs) 46 5. Price rating score sheet for limits of Rs.10 Lacs and above upto Rs.50 Lacs 51 6. Rating Score Sheet for accounts where the funded limit is less than Rs.100 La cs . 53 7. Rating model for trading concern with total limits Rs.100 Lacs and above 58 8. Rating score sheet for manufacturing / Industires 63 9. Credit Risk Rating model for Contractors 68 10. Rating for Educational Institutions 72 .. . / .. / .. .. .. /
11. Rating model for Green Field Model.......................................... .................................................... 76 12. Credit Rating Model for Real Estate Sector Existing................................................................... 83 13. Rating Model for Real Estate (New Projects)................................. ............................................... 86 14. Rating Model for Banks...................................................... ............................................................. 90 15. Rating Model for Housing Finance Companies.................................. ............................................ 97 16. Rating Model for Non Banking Finance Companies.............................. ......................................... 99
17. Rating Model for term loan borrowers........................................ .................................................. 102 18. Rating for Non Fund Based Advances.......................................... .................................................. 105 19. Model for rating new projects having exposures of not more than Rs. 5 Crore 109 20. Infrastructure Lending and List of the Items included under Infrastructure S ector / 111 21. RBI Guidelines on Exposure Ceiling.......................................... ...................................................... 112 22. BROAD GUIDELINES ISSUED BY RBI FOR GUARANTEES AND CO-ACCEPTANCE 114 23. Country Risk Classification & List of Approved Foreign Banks 116 24. Risk Weights as defined in guidelines on prudential exposure 128 25. Guidelines of Reserve Bank of India for classification of accounts as Commer cial Real estate.. 135 26. RBI Norms on mapping of exposure............................................ .................................................. 139 South Indian Bank Page 3 / .. .. .
Credit Risk Management Policy, 2011 DOCUMENT -B Credit Risk Management Policy 1. Introduction 1. In the wake of globalization and liberalization, the Banking environment in India has undergone and continues to undergo major changes. The opening of the economy has resulted in the entry of multinationals in the corporate sector and of foreign and private sector Banks. The Indian Banking scenario has witnessed progressive deregulation (such as in entry norms, lending rates, deposit rates, mergers & acquisitions, products and services offered), introduction of prudential norms a nd adoption of international supervisory best practices such as Basel II. Hence, in the present scenario of acute and increasing competition and of thinning spreads, it is imperative for Banks to manage the risks, particularly credit ris k arising from their activities. 2. The Indian Banks regulator, Reserve Bank of India (RBI) has been issuing risk management guidelines and other guidelines aimed at improving the efficiency of the banking sector. In 1992, RBI introduced a system to risk weigh t on balance sheet and off balance sheet assets and calculate the adequacy of a bank s capital vis--vis the aggregated risk weighted assets. In 2002, the Reserve Bank o f India (RBI) issued a guidance note on credit risk management to enable Banks to enhance and fine tune their existing risk management systems. In the same year, the Government of India passed the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act or SARFAESI Act , which paved the way for securitization transactions and establishment of asset reconst ruction companies. In 2005, RBI issued draft Prudential Guidelines on Capital Adequacy Implementation of the New Capital Adequacy Framework , which was modeled after the Basel II Standardized Approach guidelines for credit risk. The finalized draft guidelines in respect of capital adequacy were issued in April 2 007 and were revised subsequently on 1st July 2011. In 2006, RBI issued Guidelines on Securitization of Standard Assets, as applicable to Banks, financial institution s and non-Banking financial companies, covering such aspects as true sale , provision of credit enhancement facilities, prudential norms on investment in securities issu ed by SPV etc. 3. Given this background, SIB has developed a comprehensive credit risk management policy, which seeks to provide broad direction to all activities associated with credit risk management and in doing so attempts to preserve the Bank s
existing credit risk management practices to the extent possible. This credit risk management policy super cedes the credit risk management policy of the bank South Indian Bank Page 4
Credit Risk Management Policy, 2011 formulated in 1999 and all updates made to the 1999 policy from time to time. 4. The policy has to be reviewed by the Board of Directors or the Risk Management Committee every year. The policy was last reviewed vide agenda RMC/IRM/013/1011. 5. All the modifications/ changes made by the Board of Directors or Risk Management Committee and the change in guidelines issued by Reserve Bank subsequent to the last review are incorporated in this review. 6. This policy document is intended to provide broad guidelines for credit risk management. Detailed process guidelines/ instructions shall be laid down through a Manual of Instructions or periodically issued in circulars. 2.Objectives 7. The SIB credit risk management policy is intended to support the following objec tives: . Adhere to the guidelines / policies concerning credit risk management specified by the Reserve Bank of India, Government of India and other binding regulatory authorities. . Adhere to International good practice in respect of credit risk management.
. To use of credit risk management in business decision making (sanctioning/ inves ting, risk-based pricing) and business strategy formulation (capital allocation to dif ferent business units). . Pro-active management through risk mitigation, monitoring and reporting. . Enable credit portfolio risk management through means such as targeted lending, securitization and the use of asset reconstruction companies. . Promoted economic capital calculation in respect of credit risk and its use in establishing risk-based limits credit risk capital calculation. . Facilitate fruitful business relationship with corporate and retail clients by s ervicing their needs promptly and efficiently. 3.Definition of Credit Risk 8. Credit risk associated with a credit exposure should be defined as the risk of l osses arising from a credit exposure turning adverse i.e. defaulting or moving towards
distress, due to inability or unwillingness of the borrower to repay. Credit risk could be associated with credit exposures in the Held-to-Maturity (HTM), Available-for-Sa le South Indian Bank Page 5
Credit Risk Management Policy, 2011 (AFS) or Held-for-Trading (HFT) portfolios in Non SLR Bonds. For the purpose of this policy, we consider credit risk as associated with the HTM and hence it can be d efined as the risk of an obligor defaulting on his obligation towards the bank. A defau lt is considered to have occurred with regard to a particular obligor when either or b oth of the two following events have taken place: The bank considers that the obligor is unlikely to pay its credit obligations to the banking group in full, without recourse by the bank to actions such as realizing security (if held). The obligor is past due more than 90 days (or internal threshold in terms of num ber of days past due, as defined by the bank) on any material credit obligation to t he banking group. Overdrafts will be considered to be past due once the customer ha s breached an advised limit or been advised of a limit smaller than current outsta nding. 9. The elements to be taken as indicators of unlikelihood to pay include: The bank puts the credit obligation on non-accrued status. The bank makes a charge-off or account-specific provision resulting from a significant perceived decline in credit quality subsequent to the bank taking on the exposure. The bank sells the credit obligation at a material credit-related economic loss. The bank consents to a distressed restructuring of the credit obligation where t his is likely to result in a diminished financial obligation caused by the material forgiveness, or postponement of principal, interest or (where relevant) fees. The bank has filed for the obligor s bankruptcy or a similar order in respect of the obligor s credit obligation to the banking group. The obligor has sought or has been placed in bankruptcy or similar protection where this would avoid or delay repayment of the credit obligation to the bankin g group. 4.Elements of Credit Risk Management 10. Credit risk management function covers the sub-functions of credit risk identifi cation and assessment, risk measurement, risk controls and risk monitoring. The nature of credit risk management function as carried out or proposed to be carried out by the different departments in the bank, is as follows: CPPI (Credit Policy Planning and Intelligence) develops the loan policy
Credit Risk Management Policy, 2011 (including specification of minimum acceptable credit quality for sanction and renewal purposes and including specification of credit administration functions covering documentation, disbursements and post-sanction monitoring), NPA management policy, credit risk mitigant management procedures and other credit related policies and procedures, which are approved by CPC (Credit Policy Committee) and the board. CPPI shall take inputs relating to risk parameters fro m IRMD in preparing these policies. IRMD develops the credit risk management policy, develops and acts upon credit risk management procedures in respect of: (i) Risk Identification and Assessment by developing the credit risk assessment framework for exposures originated by the corporate banking group and retail banking group (which gets approved by Board) and using the approved risk rating framework to appraise corporate banking proposals and by contributing to the cre dit risk mitigant management procedures development. (ii) Risk Measurement at the individual exposure level and portfolio level such as estimating risk components of probability of default, loss given default and exposure at default and calculating capital required in respect of unexpected cr edit risk losses. (iii)Risk Controls such as procedures for setting risk-based exposure limits in the portfolio (the exposure limits are suggested by IRMD and approved by appropriate authority), minimum cut-off scores for granting retail credit (cut-off scores ar e suggested by IRMD and approved by product development and marketing committee of retail banking), minimum acceptable rating grades for sanctioning o r renewing corporate credit threshold rating is part of loan policy, which is approved by appropriate authority, collateral margin or haircut thresholds recommended (suggested by IRMD and approved by appropriate authority). (iv)Risk monitoring such as reviewing risk ratings at defined periodicity (by IRMD), validating the predictive powers of the commercial & institutional risk r ating models and other credit risk assessment models (by IRMD), validating estimates o f risk components (by IRMD), re-estimating risk components during changed economic conditions or changing trends (by IRMD), conducting risk assessment of dummy or a sample of retail exposures and reviewing the minimum cut-off scores recommended for retail credit approval (by IRMD), monitoring adherence to portfolio exposure limits along borrower or facility dimensions such as borrower rating category or collateral type (by relevant business unit), monitoring adher ence to cut-off scores prescribed for approving retail credit and minimum acceptable rating thresholds for sanctioning/renewing corporate credit (by relevant busines s units), monitoring adherence to delegation of powers in respect of sanctioning authorities (by business units), monitoring feasibility of collateral margin or
haircut thresholds recommended (which gets approved by appropriate authority) South Indian Bank Page 7
Credit Risk Management Policy, 2011 on a periodic basis (by IRMD). Business units such as corporate banking, retail banking, and recovery departmen t, in respect of (i) Risk Identification and Assessment by ensuring that all relevant information and material is made available to IRMD to carry out the credit risk assessment including interaction with other bankers and market information, and by appraising credit risk in case of corporate proposals appraised by business units, SME proposals, agriculture proposals and personal banking proposals. (ii) Risk Measurement by recording missed payments as per the schedule of repayment, credit risk mitigant type and their values which should be recorded at regular periods, recovery amounts and timing of recovery, other details corresponding to the borrower and facility which are relevant to estimating PD, LGD and EAD. (iii) Risk Controls by ensuring adherence to the delegation of powers in respect of sanctioning/approving credit, ensuring adherence to cut-off scores for approving retail exposure and minimum threshold rating for approving corporate credit, calculating the bearing of credit risk on pricing, ensuring adherence to constraints on maturity of advances, ensuring adherence to risk-based exposure limits and other portfolio exposure limits approved by appropriate authority, carrying out relevant credit administration functions such as those pertaining to legal follow-up including documentation requirements (such as documentation for borrower identification, security identification, evidence of transaction, security charge creation, to enable ban k to enforce its right/ security(ies) in a court of law or administrative authority for recovery of dues) and follow-up of DRT/SARFAESI recovery cases, post-sanctioning monitoring, disbursement. (iv) Risk Monitoring by use of physical follow-up covering on-site monitoring such as plant visits to validate the security cover and appraise their value and financial follow-up covering off-site monitoring such as scrutinizing the submitted stock statements, quarterly progress reports, periodic scrutiny of borrower s book of accounts and no lien accounts maintained with other banks, checking adherence to financial covenants specified such as margins or financial ratios etc., incorporating any update regarding the borrower or industry or economy obtained from the industry, consortium partners or market news etc. and passing it on to IRMD for reassessing the credit risk and if required take pro-active steps to minimize losses, ensuring adherence to risk based and other portfolio exposure limits approved by appropriate authority, identification and reporting of NPAs as per NPA management policy, ensuring prompt follow-up action in cases of persisting irregular accounts/ potential NPAs, conduct follow-up for recovery. South Indian Bank Page 8
Credit Risk Management Policy, 2011 Inspection and Vigilance department carries out an audit of adherence by CPPI, IRMD and business units to their respective risk management functions mentioned above and in doing so provides assurance about the competence and use of credit risk policies and practices. Inspection and Vigilance department reviews the risk pol icies and procedures to ensure that they comply with applicable regulations. It reviews the status of adherence to the risk management policies and procedures. Inspection and Vigilance department is also involved in the bank s loan review mechanism which amongst other objectives provides an independent review of credi t risk assessment and assesses the adequacy of and adherence to loan policies & procedures and evaluates compliance with relevant laws and regulations. Similarly Inspection and Vigilance department reviews the results of IRMD s estimates of risk components and expected and unexpected losses. It reviews the commercial & institutional credit risk rating model and retail scoring models developed by IRMD and the working results produced by these risk assessment models. 11. To reinforce the indispensable role played by IRMD in credit risk management, a structured break-up of its functions is provided below. These functions are benchmarked to RBI regulations, Basel II guidelines and international good pract ices. Risk Identification and Assessment 12. This involves, Developing and refining the credit risk assessment models used by the corporate Banking and retail Banking groups Conducting industry research, which is integral to assessing the risk associated with any corporate proposal Appraising and assessing the risk involved in new corporate credit proposals and proposals put up for renewal. All credit ratings for corporate proposals to be confirmed by IRMD and any deviation in sanctioning loans despite IRMD s risk rating to be allowed as per the Bank s policy of overrides authorization. Risk Measurement 13. This involves, Estimating and validating risk components for the corporate and retail exposures i.e. PD, LGD, EAD for corporate exposure and EL, PD/LGD and EAD for the retail exposures. Estimating regulatory and economic capital associated with the aggregate credit portfolio and sub-portfolios. Risk Controls 14. This involves, South Indian Bank Page 9
Credit Risk Management Policy, 2011 Setting risk-based exposure limits in the portfolio (the exposure limits are app roved by appropriate authority) through optimization of the credit portfolio compositi on, after taking into account return estimates and risk appetite defined by the Board. The exposure limits are set along dimensions such as industry, rating category, collateral type etc. Suggesting minimum cut-off scores for granting retail credit (cut-off scores are approved by product development and marketing committee of retail banking) and minimum acceptable ratings for sanctioning/renewing corporate credit (approval b y appropriate authority). Recommending collateral margin or haircut thresholds recommended (which gets approved by appropriate authority). Risk Monitoring 15. This involves, Reviewing the existing credit exposures as per a defined periodicity (this periodicity could be sensitive to the risk the exposure; for instance higher ris k exposures with rating of B and below could be reviewed quarterly, while others could be reviewed semi-annually or annually). Reporting any adverse development in credit risk of existing credit exposures to the concerned relationship manager of the business unit, so that pre-emptive act ion can be taken to mitigate or cut down the potential losses for the Bank. Validating the predictive powers of the commercial & institutional credit risk rating models and other credit assessment models. Validating estimates of risk components and re-estimating risk components during changed economic conditions or changing trends. Conducting risk assessment of dummy or a sample of retail exposures and reviewin g the adequacy of the minimum cut-off scores recommended for retail credit approva l. Monitoring validity of the portfolio exposure limits along borrower or facility dimensions such as borrower rating category or industry type, on a periodic basis and hence ensuring a well diversified credit portfolio. Monitoring feasibility of collateral margin or haircut thresholds recommended (which approved by appropriate authority) on a periodic basis. Enabling compliance with RBI regulations, Basel II requirements, and SIB internal guidelines concerning IRMD s role such as in respect of risk reporting and South Indian Bank Page 10
Credit Risk Management Policy, 2011 international good practices including wherever these regulations and guidelines have a bearing on the above-mentioned functions. 16. Credit risk management activity shall be more successful if the credit portfolio can be proactively managed. In order to achieve this objective, the sell down of assets and acquisition of selected assets from the market to rebalance the portf olio would need to be actively considered. In order to aid effective portfolio manage ment, credit risk models and appropriate performance measurement systems such as RAROC etc. would be actively developed. 17. These elements of credit risk management as well as the implications on risk governance structure have been elaborated upon in the ensuing sections. 4.1 Credit risk identification and assessment 18. This credit risk management activity comprises development and use of credit risk rating or scoring models for the bank s fund-based and non-fund based credit exposures to retail, commercial & institutional and international borrowers. The details about the bank s framework for managing country risk, credit risk rating frameworks, rating symbols, rating processes and procedures, rating of structure d obligations, ratings communications, ratings review, and transitional rating adj ustments have been mentioned below. 4.1.1 Managing the Country Risk 19. The bank shall follow the following guidelines for managing the country risk s: . RBI guidelines also suggest various limits, which would require fixing and monitoring, aggregate bank wide exposures. These limits could be fixed after the networking of the domestic treasury and IBD with core banking solution. . Country risk should be monitored at least on a weekly basis & all exposures on problem countries to be evaluated on a real time basis. Bank shall move over to real time monitoring of country exposures (all categories). To begin with Bank will adopt the sovereign ratings of international rating agencies. However bank shall put in place appropriate systems to move over to internal assessment of country risk. . The Banks originated from countries included in the Restricted Cover list of ECG C will not be included in the approved list of Foreign Banks maintained by the Ban k. . In case exporter requires export finance under LC of a Bank originated from the Restricted Cover list of ECGC, it will be ensured that the Exporter has take
n specific policy of ECGC before approving the Bank, on a case-to-case basis. . In the case of export finance under non-LC bills, it will be ensured that the ex porter has taken specific policy of ECGC for exports to Restricted Cover countries. South Indian Bank Page 11
Credit Risk Management Policy, 2011 . Country risk guidelines would be applicable in respect of those countries where a bank has net funded exposure of 1% or more of its total funded assets. The total assets for this purpose shall be the position as per the balance sheet for the p revious quarter. . Exposure limit for any country shall not exceed its regulatory capital except in the case of insignificant category. . The exposure limits are as follows: Risk profile Exposure as % to capital fund Existing LOW RISK 60% to capital fund MEDIUM RISK 15% to capital fund HIGH RISK 5% to capital fund . Capital fund includes both tier I capital and II. The position as per CRAR computation of the previous quarter shall be reckoned for computing exposure lim its. . The above exposures shall be classified currency wise and limits shall be fixed on the basis of fixing limits for overnight exposures in consultation with IBD. The y shall be monitored once the software is implemented. . An internal Matrix that reckons counter party and country risk shall be develope d in consultation with IT Department. . Branches shall follow rigorous application of KYC principle in internal activiti es and scan watch lists once AML package is implemented. . ECGC is publishing the list of Countries placed under Restricted Cover categorie s being part of our Whole Turnover Post Shipment Guarantee. (Ref: CCD/87/2001-02 dated10.01.2002). The list being dynamic will be revised by ECGC from time to time. The latest list of countries is attached as Annexure 23 for the immediate reference by the branches. . To ensure the genuineness of the country risk data, the country code entered in the finacle shall be verified by the authorizer at branch level and shall be subject
ed to audit by internal inspectors. 4.1.2 Credit Risk Rating Frameworks 20. The credit risk rating framework forms the basic module for identifying and assessing credit risk for the bank. The credit risk rating frameworks are meant to communi cate the South Indian Bank Page 12
Credit Risk Management Policy, 2011 judgment on the credit risks and are not meant to be a substitute for the vast l ending expertise and experience of our officers. 21. Broadly, the rating frameworks would assess the credit risk of the borrower under broad parameters such as financial risk, business risk, management risk and faci lity risk. The financial risk includes an assessment of the company s financial performance, financial strengths and its financial flexibility. Business risk assessment shal l cover the business fundamentals of the company, the characteristics of the industry and it s operational efficiencies. Management risk shall evaluate the company, its qualit y of the management, their risk appetite, track record etc. Facility risk would assess th e strengths of the collateral and matters specific to the loan facility. 22. The bank has developed the following Credit Risk rating models for different categories of borrowers and loan portfolio approved by board. Credit Risk rating models Sl. No Model Application Annexure no. 1 Mercantile Credit Accounts All accounts eligible for classification under Mercantile credit. Annexure 1 2 Rating for Housing loans All types of Housing loans from Rs.10.00 lacs and above. Annexure 2 3 Credit Risk rating framework for micro & small enterprises Micro & Small Enterprises (MSE) with exposure Rs 10 lakh and above upto and including Rs 50 lakh, including for new projects in MSE sector. Annexure 3 4 Rating for SSI loans All types of loans to SSI sector from Rs.10.00 lacs to Rs.200.00 lacs. Annexure 4 5 Price Rating For loans 10.00 lacs 50.00 lacs All accounts from Rs.10.00 lacs to Rs.50.00 lacs Annexure 5 6 Funded limit is Rs
50 lakh to Rs 100 lakh All trading concerns with total limits Rs.50 lacs to 100.00 lacs Annexure 6 7 Trading concerns All trading concerns with total limits Rs.100.00 lacs and above. Annexure 7 8 Industries All Manufacturing units having total limits Rs.100.00 lacs and above. Annexure 8 9 Rating for Contractors All Contractors advances Annexure 9 South Indian Bank Page 13
Credit Risk Management Policy, 2011 10 Rating for Educational Institutions All t yp e s of loans to educational institutions for Rs.100.00 lacs and above. Annexure 10 11 Rating model for Greenfield projects All firms/ new projects where no operation as per audited balance sheets, except those falling under MSE as in 3. (Green field model should be applied in all cases where the proposed term loan is to be utilized for creation of additional capacity and proposed capacity addition is 50% or more of the existing.) Annexure 11 12 Real Estate SectorExisting All existing real estate advances for Rs.100.00 lacs and above. Annexure 12 13 Real Estate Sector New All real estate proposals for advances Rs.100.00 lacs and above. Annexure 13 14 Rating model for banks All banks Annexure 14 15 Housing Finance Companies All intermediary housing finance companies / borrowers having total limits Rs.100.00 lacs and above. Annexure 15 16 Non Banking Finance Companies All intermediary finance companies / borrowers having total limits Rs.100.00 lacs and above. Annexure 16 17 Rating for term loans All types of term loans which will not cover under any of the above sectors, above Rs.10.00 lacs Annexure 17 Rating for All types of Non und based advances Annexure 18 18 Non Fund Based
advances. which will not cover under any of the above sectors and Ratio of funded to total is less than 25%. 19 Rating of accounts new projects having exposures of not more than `5 Crore with at least 50% collateral coverage and which cannot be rated using the other existing models. The model can be used for any concern (fresh trading concerns / service providers/manufacturing) without financial history. (The model can be used only where at least 50% collateral security is available). Annexure 19 South Indian Bank Page 14
Credit Risk Management Policy, 2011 23. Rating models for the remaining categories where we have substantial exposur e will form part of this policy as and when developed and approved by the board. 24. In case of a borrower whose activities relate to more than one category, the applicable framework shall be the one to which the major portion of the turnover of the borrower relate to. In case any parameter in the framework is not directly relat ed to the credit proposal/ exposure being rated, then such parameter shall be ignored in t he rating process and the corresponding total marks shall be deducted from the total befor e computing the overall score. 25. If the security offered is third party property, a score of 2 or to the exte nt of score awarded on account of this property, whichever is lower, to be deducted from the score f or collateral, uniformly for all models. 26. In order to ensure that the risk rating is consistent across various functio naries each framework is supported by a Guidance Sheet, which shall be referred to by t he concerned functionaries. 4.1.3 Credit Risk Rating Symbols 27. A rating symbol is shorthand to quantify credit risk. The different rating not ches, which represent the credit risks associated with the exposure, shall be as under: 1. Above 80% SIB: AAA Highest safety 2. Above 70% & up to 80 % SIB: AA High Safety 3. Above 60% & up to 70 % SIB: A Adequate Safety 4. Above 55% & up to 60 % SIB: BBB Moderate Safety 5. Above 50% & up to 55% SIB: BB Inadequate Safety 6. Above 45 & up to 50% SIB: B High Risk 7. 40% and above & up to 45 % SIB: C Substantial Risk 8. Below 40% SIB: D Default 28. Accounts that are exempted from rating are as explained in 4.2.3 (Rating Exemptions) below. 29. While the intention of the bank is to aim at a portfolio of AAA rated accoun ts, in actual situation this may be rather difficult to achieve. As a general norm, ratings of BBB of above are considered as pass grade and those below BBB as non pass grade. The acceptable minimum rating for entry level / enhancements, continuance etc shall be as follows: South Indian Bank Page 15
Credit Risk Management Policy, 2011 No. Sector Entry / Enhancements Criteria Continuance 1 SSI/Regulatory retail */Agriculture SIB BBB SIB BB 2 Corporate * SIB A SIB BBB 3 Commercial Real Estates SIB AA SIB BBB 4 Others SIB A SIB BBB *classification as corporate / retail sector is as per the relevant RBI guidelin es on NCAF. Note: (i) Relaxation in rating by one notch can be considered by functionaries not below t he rank of Executive Director depending on merits for entry / enhancements. (ii) All accounts which are specifically given unrated status by IRMD / Regional head s can be sanctioned by respective sanctioning authorities not below the rank of AG M in a branch / regional office up to a limit of Rs.250 Lakhs. If the limit is abo ve Rs.250 Lakhs, proposal has to be put up to the head office. Note: Unrated status can be given by Regional heads only for fresh limits to new ly set up units wherein audited financials / project report are not available. All other terms and conditions regarding delegation of powers should be complied with. (iii) Discretionary powers to allow entry / enhancements in rating categories below th e minimum criteria and exemptions as the above shall be vested with MCB / Board. (iv) As a general rule, bank should try to exit for accounts which are in the sub investment grade (i.e. SIB BB and below). However the continuance of such limits can be sanctioned as follows: Sl No Rating Rating Sanctioning authority Discretionary powers 1 SSI/Regulatory Retail/SME /Agriculture Below B Continuance ED and above 50% of delegated powers 2 Corporate
B and below Continuance ED and above 50% of delegated powers 3 Real Estates B and below Continuance ED and above 50% of delegated powers 4 Others B and below Continuance ED and above 50% of delegated powers 5 Unrated accounts Continuance ED and above 75% of delegated powers (GM(O) and above only to exercise these powers ) South Indian Bank Page 16
Credit Risk Management Policy, 2011 4.1.4 Credit Risk Rating Process. 30. For each proposal the credit officer would assign a rating based on the appropriate framework to the sanctioning authority. The risk rating would have to be confirm ed by the sanctioning authority/IRMD at the time of the credit sanction depending upon the limits including non-fund based limits as may be decided by the board from time to time . 31. In case of rating of accounts coming within RO powers, the rating officer at RO should rate the account and should get it approved by the regional head and approved rating sheet shall form part of the credit proposal. 32. In case of accounts falling within RO powers, and the exposure exceeds cut o ff limit fixed for credit rating, by the Board, the credit proposal shall be forwarded to IRMD directly by the RO along with copy of their appraisal note and financial analysis, RO rating and audited financial statement with all schedules and annexure. Rating approving authority 33. The rating beyond the cut off stipulated shall be approved by IRMD independe ntly. The initial rating appraisal shall be done by the dealing officers at IRMD and shall be approved by Chief Manager/ Assistant General Manager. The approving authority shall be th e Chief Risk Officer, presently Deputy General Manager. In case of leave / absence of Ch ief Risk Officer, the lower functionary can approve the rating, and shall be got ratified by CRO on his return to office. 4.1.5 Credit Risk Rating Procedure 34. The ratings shall be assigned based on the audited financial statements of t he previous year (for all accounts with exposure below `15 Lacs (If the existing exposure is belo w `15 Lacs and for those accounts with proposed exposure is more than `15 Lacs) and th ose accounts that are not required to be audited under any other law, audited financ ials for rating of the accounts need not be insisted.) in respect of financial risk and a ccording to the current conditions prevailing in respect of the other risks unless otherwise spe cified in the framework. In assessing the current conditions prevailing in respect of Business risk, Management Risk matters etc inferred from provisional / unaudited financial stat ements, reviews on conduct of account or any other relevant sources shall be relied upon . 35. ECGC insurance with Whole Turnover Packing Credit (WTPCG) / Whole Turnover P ost
Shipment Guarantee (WTPSG) and buyer wise policy will be treated as collateral c over to extent of coverage available. South Indian Bank Page 17
Credit Risk Management Policy, 2011 4.1.6 Credit Risk Rating Structured Obligations 36. Rating based on Structured Obligation assumes that a third party will step i n, in the event of default. 37. The borrower has to be rated on its stand-alone performance and financial po sition as per our relevant rating models and shall be upgraded with SO rating, wherever such c redit enhancement is available. 38. The symbol (SO) after the rating indicates "structured obligation". 39. The rating parameters for SO rating shall be as follows: Un conditional guarantee from Government of India SIB: AAA (SO) Virtually Zero Risk Un conditional guarantee from state Governments SIB: AAA (SO) Virtually Zero Risk Un conditional guarantee of corporates rated by approved external agency. SIB: A (SO) or rating of guarantor by external agency whichever is lower Adequate Safety Security coverage of 100% by way of our own deposits, NSC, KVP, and other transferable GOI Bonds SIB: AAA (SO) Virtually Zero Risk Un conditional guarantee/LC from Scheduled Banks SIB: AA (SO) Higher Safety Counter guarantee / Comfort letter from Scheduled Bank /Coacceptance. SIB: AA (SO) Higher Safety UBP / DBD facilities backed by LC s of other banks. SIB: AAA (SO) Inter Bank Exposure with 20% risk Weight. 4.1.7 Credit Risk Rating Communication 40. The ratings as confirmed by IRMD shall be communicated to the sanctioning au thority. Branches shall be informed of any downgrading in rating. However the ratings bei ng
proprietary information of the bank the branch shall not disclose the rating fra mework or the analysis thereof to the borrower. South Indian Bank Page 18
Credit Risk Management Policy, 2011 41. The confirmed ratings by the appropriate authority alone shall be put up to the sanctioning authority. 42. In case of all sanctions with limit exceeding the ceiling fixed for IRMD vet ting by Board, any reference to the credit rating in all Sanction Notes / Memorandum shall be t he confirmed IRMD rating 43. In case of all sanctions coming under RO powers, any reference to the credit rating in all sanction notes shall be the RO rating unless limits come under the purview of IR MD. Rating at RO level should be done by the risk officer and risk officer should no t be the dealing officer. 44. Any change in any of the parameters, which will affect the rating, such as release of security, enhancement of limits, reduction in margin etc to be informed to Ratin g Authority for review of rating. 4.1.8 Credit Risk Rating Review 45. All ratings shall be reviewed annually or at the time of each enhancement (e ither in fund based or non fund based limits) whichever is earlier. 46. In case there is any reliable source of information on the deterioration/ im provement of strength, or financial status, the rating of the account shall be reviewed with or without disclosing the source of information. 47. If the guarantee against which Rating (SO) granted is expired, revoked or de faulted, the rating has to be reviewed. 4.1.9 Issuance of Guarantees and Co-acceptances to other Banks 48. As per extant guidelines in vogue issued by RBI, banks were precluded from issuing guarantees favoring financial institutions, other banks and other lending a g e n c i e s . In tune with liberalization and deregulation of the banking se ctor and in view of the adoption of risk management systems in banks, RBI has now allowed banks to issue guarantees favoring other banks/FIs/ other lending agencies for t he loans extended by the latter. A broad guideline issued by RBI in the matter is appende d as Annexure 22. South Indian Bank Page 19
Credit Risk Management Policy, 2011 49. Our Board has issued the following guidelines for acting as guaranteeing ban k / lending bank, as part of Credit Policy (Document A). As a guaranteeing bank, our exposur e is capped at the level of bank s prudential exposure limit. Issue of such guarantees as mentioned above is subject to conditions laid down in our Policy Document A which states that the Bank will entertain credit proposals for non-fund based requirem ents of only those clients who are already having banking relationship with us and enjoy ing fund based limits and have necessary means to meet contingent liabilities when due / devolved. Delegation of powers 50. As guaranteeing bank, the delegated powers for issue of guarantees for Executives are restricted to their powers to sanction non-funded limits. Reporting System 51. In the case of guarantees issued to other Bank/FI s, RO s should also give a wri te up on the status of account maintained with lending bank. Towards this, branches shall be advised to call for periodical reports from lending Bank on conduct of the borro wable account. 4.2 Credit Risk Mitigation (CRM) and Controls 4.2.1 Credit Risk Mitigation Procedures 52. Credit Policy and Planning Intelligence or CPPI should develop credit risk mitigant procedures, which address (i) classification of credit risk mitigant, (ii) acceptable credit risk mitigant and their associated terms, (iii) documentation and legal process requirements for credit risk mitigant, (iv) custody of collateral, (v) insurance, (vi) on-site and off-site monitoring requirements in respect of collateral (here there is no distinction between primary and collateral security, which is in keeping with the spirit of Basel II guidelines), such as plant visits, scrutiny of stock statements etc. IRMD shall contribute to the credit risk management procedures by addressing (i) collateral valuation aspects such as valuation norms to be followed, age of collateral appraisals, valuation frequency, South Indian Bank Page 20
Credit Risk Management Policy, 2011 (ii) margin or haircut requirements, (iii) examining correlation between the value of different credit risk mitigant and hence concentration risk in respect of collateral and guarantees, resulting in portfolio-wide limits being defined for dimensions of credit risk mitigant such as type, industry, geography incorporated in the facility rating, (iv) examining correlations between default occurrence and recovery from credit risk mitigant, resulting in portfolio-wide limits along dimensions of industry, geography and credit risk mitigant type, (v) Monitoring requirements such as with respect to collateral to loan ratio (CTL) adherence and portfolio-wide limits along dimensions of industry, geography and credit risk mitigant. RBI guidelines, Basel II guidelines and international good practices should be considered while developing the credit risk management procedures. Acceptances of Guarantees and Co-acceptances from other Banks 53. As a lending bank, Board has adopted the following ceilings for inter-bank exposure for extending credit facilities on the strength of guarantees issued by scheduled commercial Bank. Institution-wise limits fixed by the Board for inter-bank expos ure for extending credit facilities on the strength of guarantees issued by them. 54. The ceiling fixed by investment policy as explained in 4.3.2. (Credit Risk Measurement Portfolio Exposure, Prudential limits) below will hold good in this case also. 55. Whenever credit facilities are extended to borrowers on the strength of guar antees issued by schedule commercial Bank as mentioned above, the same will be informed to IRMD and Treasury Department by CD CS on an ongoing basis on receiving the reports from branch / RO for monitoring purpose. 56. As per RBI guidelines, the exposure against LC/BG of a commercial bank should be treated as exposure on that bank. Accordingly the exposure will bear risk weight based on CRAR of the bank. Bank will not extend finance against LC / BG of banks which will not have minimum CRAR as prescribed by RBI. LC/BG opened by Non-Scheduled Banks shall not be accepted. Delegation of powers 57. As lending bank, functionaries in the rank of Executive Director and above shall exercise the full powers up to the ceiling for extending various credit faciliti es on the strength of guarantees issued by scheduled commercial Bank, considering the low risk involved.
Credit Risk Management Policy, 2011 Reporting System 58. Regional Offices should send a regular report on availment of BG/ loans agai nst BG of th other banks on a quarterly basis to HO CD by 15th of the succeeding month, i.e., 15 of January, April, July and October, every year. In the case of lending on the s ecurity of guarantee of other Bank, branches / Regional Offices should immediately send a r eport to CD-CM to monitor the inter-bank exposure on an on-going basis. 4.2.2 Credit Risk Control Credit Pricing 59. Though rating has a bearing on pricing of loans, the expected probability of default is not reckoned objectively. Flexibility should also be made for revising the price due to changes in rating / value of collateral over time. Banks are expected to move ov er to Risk Adjusted Return on Capital (RAROC) framework for pricing of loans subsequently. It is banks endeavor to develop appropriate pricing model based on risk sensitiveness of the counter party. 60. There are definite operational constraints for mid sized private sector banks in the present competitive environment to introduce such measures immediately. Further the RAROC framework could be adopted only after the system of assessing the expected losses and unexpected losses is put in place. 61. Bank reserves the right to modify the concessional rate of interest, if any, offered to the customer if their rating is deteriorated. This has to be informed to the cus tomer. 4.2.3 Rating Exemptions 62. Accounts belonging to following categories will be exempted from rating. . Accounts with limits below ` 10 Lacs. . Accounts where there is no specific model and IRMD/Regional head confirms that the account can be treated un-rated. (Conditions on unrated status are mentioned in 4.1.3). . Exposure against pledge of gold. . Exposure against 100% deposit margin of our own bank. . Exposure against LC / BG of other banks would be SIB AAA (SO).
Credit Risk Management Policy, 2011 4.2.4 Margin on Loans and Modifications to Margin Policy 63. Document A, Credit policy along with amendments thereto specifies the minimum required margin on each type of loans and securities. These margin stipulations generally satisfy the Basel II requirements and any further amendment to the margin stipul ations shall be after considering its effect on Capital Adequacy. 4.3 Credit Risk Measurement Rating Database 64. The historic data of rating will be maintained at all levels. Any deterioration in rating from that of previous rating shall be with a special note on the reason thereof. 65. The IRB approach in the Basel II Capital Adequacy Framework requires extensive historical data on rating spanning over the past 5 years. Efforts shall be initi ated to start building a database of rating history. 66. Rating migration study shall be conducted once in a year and the same shall be approved by the Credit Risk Management Committee. The frequency shall be increased to hal f yearly in due course when the rating coverage is increased substantially. 4.3.1 Credit Risk Measurement Individual Exposure 67. The credit risk management cell should develop and operationalize procedures for measuring credit risk. These procedures should be concerned with estimation and validation of the following credit risk measures in case of corporate exposures: 1. Probability of default or PD for different borrower rating grades. 2. Probability of ratings transition or ratings transition matrix for different bor rower rating grades. 3. Loss given default or LGD for different facility rating grades. 4. Exposure at default or EAD for different facility rating grades. 68. These procedures should be concerned with estimation and validation of the following loss characteristics in case of retail exposures: 1. Expected loss or EL for different pools and sub-pools within the retail portfoli o. 2. Probability of default or PD for different pools and sub-pools within the retail portfolio. 3. LGD for different pools and sub-pools within the retail portfolio (can be derive d once PD and EL is available) or LGD for different facility pools (where risk South Indian Bank
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Credit Risk Management Policy, 2011 drivers having a bearing on LGD and EAD are used to create facility pools). 4. EAD for different facility pools. 69. IRMD shall develop procedures for estimating the above-mentioned risk components by referring to RBI guidelines, Basel II guidelines and international good practices. IRMD shall have dedicated resources for the above-mentioned task and at an appropriate stage, acquire suitable software technology (including statistical m odels for PD, LGD, EAD estimation for corporate exposure and EL, PD/LGD, EAD estimation for retail exposure) and supporting risk warehouse. IRMD shall monitor its estim ates of risk components in the context of actual risk occurrences and the aggregate busi ness conditions, and accordingly revise the estimates, if required. 4.3.2 Credit Risk Measurement Portfolio Exposure 70. IRMD shall develop procedures for measuring and managing credit portfolio risk in accordance with RBI guidelines, Basel II guidelines and international good pract ice. Hence, credit portfolio risk measurement and management should take into account default correlations between obligors, correlations between the values of differ ent credit risk mitigant and correlations between default occurrences and recovery values. The procedures should also incorporate the result of adverse aggregate business condi tions or stress scenarios such as negative GDP growth rate for 2 consecutive quarters or spurt in oil prices above USD 125 / barrel in risk and hence capital estimates. This would require the use of a credit portfolio risk management template . Till such time tha t data is a constraint, IRMD could approximate portfolio risk measures using the B asel II IRB Advanced calculation or arithmetic sum of the individual exposure risks in t he portfolio. With data availability, IRMD shall estimate default correlations, cre dit risk mitigant value correlation (to begin with between different credit risk mitigant types and with greater data availability between different credit risk mitigant type belon ging to different industries in different geographies) and correlations between default occurrences and recovery experience. These default correlations should enable IR MD to arrive at economic capital calculation for the credit risk of the portfolio. The main objective of credit portfolio risk management including setting up prudential ex posure
limits is to achieve a well-diversified portfolio across dimensions such as comp anies, group companies, industries, collateral type, geography, rating etc. Hence, CRMD can propose risk based exposure limits along the above-mentioned dimensions (such as rating category, industry, geography, collateral type) after taking into account the return associated with the rating categories and the risk appetite specified by the Board (i.e. acceptable unacceptable loss as a percentage of portfolio size). In settin g exposure limits, CRM Cell should also ensure adherence to the prudential exposure norms prescribed by RBI. 71. Bank exposures are to be maintained within the RBI s guidelines and internal substantial exposure guidelines in respect of individual companies, group compan ies, South Indian Bank Page 24
Credit Risk Management Policy, 2011 Banks, sensitive sectors such as capital market, real estate and sensitive commodities etc. The exposure includes aggregate credit exposure i.e. credit (funded and non-funded credit limits) and investments, where the sanctioned limi ts or outstanding, whichever is higher, is reckoned (even non-fund based exposures are reckoned at 100% of limit or outstanding). For the purpose of determining busine ss groups to which borrowing units belong, the guiding principle used by the Bank w ould be commonality of management and effective control. In the case of a split in the g roup, if the split is formalized, the splinter groups will be regarded as separate groups . If the Bank has any doubt about the bonafides of the split, a reference will be made to RBI for a final view in the matter to preclude the possibility of a split being engineered in order to prevent coverage under the group approach. Exposure limits are linked to SIB s capital funds. Capital funds for the purpose o f exposure would be as per the published accounts as on March 31 of the previous y ear and would comprise Tier I + Tier II capital. However, at times the Bank can stip ulate absolute exposure thresholds (in INR crores) and exposure limits as a percentage of the Bank s total advances, the Bank s demand and time liabilities in India and the Bank s total fund based exposure. Prudential Limits 72. RBI guidelines regarding prudential exposure limits are attached as Annexure 21. The following prudential limits are fixed in addition to the limits fixed in the ban k s loan policy: . Total Non Fund based limits to any single borrower from the Banking System shall not exceed 5 times TNW of the borrower. . Total Non Fund plus Fund Based limits together to any single borrower from the Bank shall not exceed 10 times TNW of the borrower. All small loans up to Rs.10. 00 lacs including government sponsored schemes are exempted from this rule. . For intermediary housing finance companies, borrowings are restricted to 20 time s net owned funds. We shall therefore exempt, Housing Finance Companies Approved by National Housing Bank, which is governed by separate rules on borrowing powers, from above rule.
. In case, where the criterion of tangible net worth is not met, continuance can b e permitted by next higher authority. For enhancement and fresh limits sanctioning powers ar e vested with MCB/Board. . Total Non Fund based limits (Off Balance Sheet exposure) at any point of time sh all not exceed 5 times Banks Total Capital (Including Tier I and Tier II). . Forward contracts in Forex business executed and outstanding to any single borrower from the Banking system at any point of time shall not exceed 10 times of the TNW of borrower. . Inter-bank Exposure limits including Placements, UBP (LC) / advances against South Indian Bank Page 25
Credit Risk Management Policy, 2011 bank guarantee or LC of any particular bank shall be as prescribed in the invest ment Policy. . Bank s credit exposure to any of the Industrial segment shall not exceed 10% of it s total credit of previous quarter. The percentage shall be maintained separately for funded limits and Non-funded limits/ commitments. For the purpose of calculating exposu re, the norms shall be (i) full limit sanctioned for WC limits (ii) outstanding balance for the term loans and (iii) 100% of Non-funded limits and other commitments. The segment-wise exposure limits shall be as follows, or as per the Credit Polic y of the bank, if revised: Category Exposure 1 Advance to Capital Market Sector 20% of net worth of previous year 2 Advance to Cotton Textiles and Spinning Industry 10% of domestic credit of previous quarter end. 3 Advance to NBFC s 10% of domestic credit of previous quarter end. (Refer Note) 4 UBP s to Tyre Companies 5% of domestic credit of previous quarter end. 5 Housing Loans 12% of domestic credit of previous quarter end. 6 Housing Finance Companies 5% of domestic credit of previous quarter end. 7 Commercial Real Estate 5% of domestic credit of previous quarter end. 8 Investment in Mortgage Backed Securities 1% of domestic credit of previous qua rter end. 9 Trust / Educational / Charitable Institutions. 8% of domestic credit of previo us quarter end. 10 Exposure to Microfinance Institutions ` 300 Crores. 11 Unsecured Advances 20% of Total Advances. 12 Unsecured advances plus unsecured BG 30% of Total Advances. 13 Gold Loans 30% of domestic credit of previous quarter end. Note: A sublimit of 5% of the domestic credit as at the end of the previous quar ter is fixed in aggregate to exposure to such NBFCs having gold loans to the extent of 50 percen t or more of their financial assets. South Indian Bank Page 26
Credit Risk Management Policy, 2011 73. The exposure under Housing Finance Companies can be exceeded by 5%, without exceeding over all ceiling of 5, 6, 7 and 8 together to 20%. Substantial Exposure Ceiling 74. Aggregate advances above ` 100 crore (excluding food credit) should not exce ed 800% of the capital funds of the bank. 75. CRMC will monitor the exposure ceiling on a monthly basis. The exposure is to be monitored on the last Friday of the month and it shall be reviewed by the Management Committee of the Board. However if the gap in exposure (Limit Actual exposure) falls below 1%, such exposures should be monitored by CRMC on a weekly basis. Rating-wise Exposure Ceiling 76. Even though our aim is to bring entire credit portfolio AAA grade, it may no t be practical in all cases. We shall therefore fix maximum exposure norms based on rating as f ollows. % of A and above to total rated exposure = 100% % of BBB, BB and B to total rated exposure = 15% % of C rated account to total rated accounts = 5% Rating wise Distribution of accounts: 77. It is the outlook of the bank that all accounts should be brought under mini mum rating A. As a first step, we shall prescribe following maximum limit for all rated loan a ccounts: Sl. No Rating 1000 lacs and above 100 to 1000lacs Below 100 Overall ceiling 1 Accounts Rated AA and above 100% 100% 100% 100% 2 Accounts Rated A 60% 60% 60 60% 3 Accounts Rated B to BBB 10% 15% 15 15% 4 Accounts Rated C 5% 5% 5 5% 4.4 Credit Risk Monitoring 4.4.1 Loan Review Mechanism 78. Loan review mechanism is an independent assessment, which evaluates the effectiveness of the loan administration, maintains the integrity of the credit rating process, and assesses the loan loss provisions, portfolio quality etc. It examin es compliance with extant sanction and post sanction processes / procedures laid do
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Credit Risk Management Policy, 2011 by the bank from time to time. Such a mechanism provides appropriate checks and balances to ensure that loan portfolio is managed in accordance with the bank s po licy. Effective credit review helps to detect weakness in credit assessment since the overall credit assessment process tends to be more diligent when subjected to review. 79. RBI guidelines on Risk Management Systems in Bank require Bank to put in pla ce an effective Loan review mechanism for constantly evaluating the quality of the loa n book and to bring about qualitative improvements in credit administration. 80. As mentioned in the paper issued by the Basel Committee, Principles for the Management of Credit Risk many Banks that experience asset quality problems lack an effective credit review process, which provides appropriate checks and balances to ensure that loans are in accordance with the bank s policy, and makes an independe nt judgment of asset quality. 81. The Bank has a largely decentralized lending set up with delegation of powers to functionaries. Intense competition in the market makes it imperative that the prescribed policies and procedures are adhered to so as to enable the bank to po sition itself strongly in the market without diluting credit standards in any way. Thus , credit review becomes relevant in a decentralized lending environment. 82. The complexity and scope of loan review mechanism will vary based on Bank size, type of operations and management practices. In respect of our bank the Inspecti on & Vigilance Department, Credit Monitoring Department, and Regional Offices already attend to aspects related to the post sanction review and follow up. Taking into accoun t the nature and size of our operations we shall adopt the Loan Review Policy as below . 83. Loan Review Officers should have sound knowledge in credit appraisal, lending practices and loan policies of the bank, relevant laws/ regulations that affect lending activities. Objective of Loan Review Mechanism: 84. To assess the adequacy of and adherence to loan policies and procedures and to monitor compliance with relevant laws and regulations. 85. To provide an independent review of credit risk assessment. 86. To provide the management with information on credit administration including credit sanction process, risk evaluation. 87. To recommend corrective action to improve credit quality, credit administration and
credit skills of staff. South Indian Bank Page 28
Credit Risk Management Policy, 2011 88. To undertake portfolio reviews, evaluate portfolio quality and isolate poten tial problems. 89. To initiate steps to preserve desired portfolio quality. 90. To provide information for determining adequacy of loan loss provision. Organizational Framework for Loan Review Mechanism 91. Loan Review Mechanism shall be implemented by the IRMD and Inspection & Vigilance department in the manner detailed in this Policy and will be reported to Credit Risk Management Committee. Scope of Reviews under Loan Review Mechanism 92. Advance accounts rating confirmation of which comes under the purview of IRMD shall come under the purview of loan review mechanism. 93. Review of all advances as per the prevalent system of monitoring till a revi ew mechanism is introduced. 94. Spot studies and reporting will be undertaken by Inspection & Vigilance Depa rtment and copy of such reports will be placed to CRMC. Frequency of Reviews under Loan Review Mechanism 95. Loan Reviews shall be undertaken normally within three months of loan disbur sement / renewal or whenever a fresh audited financials are available or when the existin g collateral coverage has undergone a change or when there is any change in any other risk pa rameters. 96. RO s and HO Credit Department shall submit copy of all sanction/ renewal beyond the cut off limits to IRMD after every sanction / renewal. 4.4.2 Credit Audit 97. Separate policy on credit audit has been approved by board as per DBR/INS/S171/1011 dated 01/12/2010 and accordingly the Inspection and vigilance department will conduct Credit audit of review sanction process / procedures of all accounts, wh ich includes (i) All advances sanctioned with individual exposure exceeding `1000 lacs, irrespective of the sanctioning authority, who has sanctioned the loan. (ii) All advance to associates/ group accounts with individual exposure above `.500 Lacs, where the group exposure is above `1000 Lacs. Temporary / adhoc limits may not come under the purview of credit audit. And for ascertaining the exposure for Term Loans, balance outstanding / drawing power which is higher to be considered. Credit audit is to be conducted within 3 months of first disbursement of all eli gible advance accounts. South Indian Bank
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Credit Risk Management Policy, 2011 4.5 Credit Risk Reporting 98. IRMD shall share the performance of its estimates for risk components with actual experience associated with default occurrences by reporting the same to the seni or management and board of the bank. 99. IRMD shall develop risk reporting for business unit-wise credit portfolios (such as corporate, retail, agriculture etc.) and rating category-wise business unit cred it portfolios. These risk reports should illustrate the estimates of PD, LGD, EAD, EL, and UL. This would assist senior management and board to assess the performance of e xisting business strategy and formulate future business strategy. 100. Relevant business units should report any deviations from the board approved portfolio exposure limits or from the rating threshold limits or from the delega tion of sanctioning powers authority, to senior management. Business units should als o report the status of NPAs, action taken in respect of significant NPAs and results aris ing from these actions to senior management and board. 101. Inspection and Vigilance department should report deviations in adherence t o laid down credit risk management policy and procedures by business units, to audit committ ee of the board and board. They should also provide independent assurance on IRMD s functions to the board and senior management, by reporting about the performance of IRMD developed rating models and risk component estimates. Other Issues 102. Defaulted (Categorized as NPA) accounts are treated as D without considering other parameters. 103. If defaulted accounts are upgraded, fresh rating can be done at any time based on latest available data. 104. In case of BBB and below, further rating can be done based on any change in situation, supported by evidences. 105. Cases under CDR packages also to be rated. 106. All the four credit agencies viz CRISIL, CARE, ICRA and FITCH are approved for the purpose of rating under standardized approach. South Indian Bank Page 30
Credit Risk Management Policy, 2011 5.Credit Risk Governance Structure 107. A Credit Risk Management Committee is constituted with following members. 108. Consequent to changes in Administrative setup we reconstitute CRMC with fol lowing members: (i) Managing Director & CEO (ii) Executive Directors (iii) General Manager (Credit) (iv) General Manager ( IRMD / CFM) (v) Deputy General Manager (IRMD / CFM) (If Any) 109. The quorum shall be four with compulsory presence of one Executive Director . 110. The Credit Risk Management Committee shall deal with issues relating to cre dit risk policy and procedures and analyse, manage and control credit risk on a bank wide basis. Aspects like the rating quality of the assets on a bank wide basis, impact of a general down turn in the economy on the credit portfolio, rating migration; scen ario analysis etc. will be reviewed by CRMC. Credit rating of all advance accounts at IRMD, if debated by concerned business units, shall be approved by CRMC. The CRMC shal l meet at least once in a quarter, and suggestions for improvement will be put up to appropriate authority. 6.Interest Rate Risk Management 111. It is the endeavour of the bank to manage the credit portfolio in such a wa y that bank will get reasonable spread on the funds employed. 112. In the case of fixed rate loans the interest rate will be reviewed in two y ears and will be reset suitably. 113. Bank prefers to bring all the loans under floating rate. Hence it is necess ary to put a cap on fixed rate loans. 114. The limit of IRMD rating shall be fixed by the Risk Management Committee. A nd presently all accounts having exposures above `250 Lacs (excluding UBD / DBD bac ked by LC s of other banks) are to be rated by IRMD. Presently for all UBD / DBD expos ures South Indian Bank Page 31
Credit Risk Management Policy, 2011 above `1000 Lacs backed by LC s of other banks, are to be rated by IRMD. For forwa rd cover exposures, only 2% of the forward cover would be treated as exposure for t he purpose of rating. 115. IRMD shall rollout new models, withdraw the existing models or even have th e right to purchase new models from vendors and may implement the same with the approval of Credit Risk Management Committee (CRMC). Interest Margin for various loans 116. Though the functionaries are vested with powers to reduce rate of interest based on certain stipulations, the minimum rate of interest for any particular exposure s hall be as prescribed by ALCO from time to time. Exceptions 117. Functionaries in the rank of ED and above are vested with powers to reduce ROI below minimum rates in deserving cases based on market conditions. 7.Rating and Credit Administration 118. Credit Monitoring department has been monitoring de-rated accounts on quarterly basis. The definition of de-rated accounts is given here for effective monitorin g. Definition of de-rated accounts Credit Department (Monitoring) is quarterly following up all de-rated accounts o f ` 250 lakh and above (which are rated by IRMD). The department currently follows the definition of de-rated accounts as those accounts with exposure ` 250 lakh and a bove, the rating of which have been downgraded during the quarter under review. The department has now referred to IRMD to consider a revised definition of de-r ated accounts so that monitoring of those accounts can be made more effective by focusing on default-prone accounts, rather than those that have merely been down graded. Based on various categories of rating and considering the best industry practice s and experiences, we are revising the definition of de-rated accounts, which are classified as three categories according to the closeness to default. a) De-rated accounts, category A Those accounts in which rating has been downgraded from investment grade (rating of SIB BBB and above) to sub-investment grade (rating of SIB BB and below). b) De-rated accounts, category B South Indian Bank
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Credit Risk Management Policy, 2011 Those investment grade (rating of SIB BBB and above) accounts in which rating has been downgraded by two notches or more. c) De-rated accounts, category C Those sub-investment grade (rating of SIB BB and below) accounts in which rating has been downgraded. South Indian Bank Page 33
Credit Risk Management Policy, 2011 Rating score sheet for mercantile credit accounts I. BUSINESS RISKS 1.Items traded 1.Easily available, non-seasonal, steady, Price Others from 'availability uncertain, fluctuating price, perishable' in different range 2.Infrastructure 1.Own 2.Rented where the remaining agreement period is more than 10 years 2.Rented where the remaining agreement period is more than 5 years 3. Else 3. Location 1. Prime 2. Other locations in varying importance II. MANAGEMENT RISKS 1. More than 8 years 2. >8 years but more than 6 years 3. >6 years but more than 4 years 3. >4 years but more than 2 years 4. >2 years but more than 1 year 5.Else III. OPERATIONAL RISK 1.Limit Management 1.Conduct excellent fluctuating balances 2. Reasonable 3.Exceeding more than one month South Indian Bank with limit never overdrawn and 6 conduct with varying exceeding, but no exceeding more than 1 month 2-5 0 5 0 -4 5 4 3
0 5 1-4 5 4 3 2 1 0 Annexure 1 Maximum Marks 5 15 5 5 5 6 14 Page 34
Credit Risk Management Policy, 2011 2.Compliance of sanction stipulations 2 1. 100% compliance 2 2. Major compliance 1 3. else 0 "Note: Irregularity means LC devolvement, BG invocation, non-payment of installm ent and interest within a reasonable time, Discounted cheque returns more than 5% etc." South Indian Bank Page 35 3. No.Of TOD s granted in the account for the last one year 6 1. No TOD 6 2. TOD upto 6 times 3-5 3. More than 6 times 0 IV. Collateral Security Collateral Cover Residential house in the name of partners/ proprietor, NSC, LIC, FD, KVP, Gold, etc. >150 % 20 >150 % 20 >=125% 12 50% to 150% 6-20 >=75% 8 Less than 50% 0 <75% 6 Commercial Property / Third party Property Commercial Property / other property >150 % 10 >150 % 10 >=125% 7 75% to 150% 5-10 >=75% 5 Less than 75% 0 V. Financials A. Liquidity 4 1.Current Ratio 1. CR >1.1 4 2. CR <1.1>1.05 3 3. CR <1.05>1 2 4. CR<1 0 B. Profitability 1.Gross profit (Excl. Int.) 1.Op. Profit =1 + ( increased =1, reduced=0) 2 20 46
Credit Risk Management Policy, 2011 2.Net profit ( before partners remuneration , interest to partners ) 1. Net profit increases by more than 20% 10 2. Net profit increases by more than 15% 9 3. Net profit increases by more than 10% 8 4. Net profit increases by more than 5% 7 5. Net profit increases 6 6. Net profit maintained 5 7. Net profit more than 90% of last year 4 8. Net profit more than 75% of last year 3 9. Made net profit 2 10.Loss 0 C. Interest Coverage 1. PBDIT/Interest 1.PBDIT/Int. >= 1.25 3 2.PBDIT/Int. <1.25>1.10 2 3.PBDIT/Int. <1.1>1.00 1 4.PBDIT/Int. <1.00 0 D. Solvency 1.Overall Indebtness 1.TOL/TNW<=3 3 2.TOL/TNW >3<=3.5 2 2.TOL/TNW >3.5<=4 1 3. TOL/TNW>4.0 0 E. Efficiency in utilization of Current Assets 1.Stock Velocity 1.Stock Velocity >=6 3 2.SV <6>=4 2 3.SV<4>3 1 4.SV <3 =0 0 2. Debtors Velocity 1.Debtors velocity >=6 3 2. DV <6 >=4 , 2 3. DV <4 , >=3 1 4. DV<3 0 F.Peformance 10 3 3 3 3 South Indian Bank Page 36
Credit Risk Management Policy, 2011 1.SALES = Average growth for the last three years 8 More than 25% 8 More than 20% 6 More than 15% 4 More than 5% 2 Negative 0 2.SALES / BANK BORROWINGS 10 More than 7 10 More than 6 8 More than 5 6 More than 4 4 Less than 4 0 Total 100 South Indian Bank Page 37
Credit Risk Management Policy, 2011 Annexure 2 Credit risk rating frame work housing loans sector A/c Branch: Max Marks Awarded MANAGEMENT RISK 30 0 1 Profile, Loan to net worth High Income High net worth NW>5times loan & loan less than 30 times monthly income, (2.5 times annual income) Medium income & Net worth NW>3 times loan & loan 10 less than 36 times monthly income, (3 times annual income) 8 Average income & Net worth NW>1.5 times loan & 10 loan less than 42 times monthly income, (3.5 times annual income) Average income & Net worth NW>1.5 times loan & 6 loan less than 48 times monthly income, (4 times annual income) 3 Else, Low income & Low net worth. 0 2 Age of applicant Below 25 yrs 4 Above 25 years but below 30 yrs 8 Above 30 years but below 40 yrs 6 8 Above 40 years but below 50 yrs 4 Above 50 years but below 60 yrs 2 Above 60 years 3 Source of Income 0 Professional / Salaried Reputed cos or govt service 6 Salaried in private sector service 5 Trader /Contractors/ other business of established 4 nature 6 Agriculture 2 Broker / Capital market (wide fluctuation in income anticipated) 0 South Indian Bank Page 38
Credit Risk Management Policy, 2011 4 Past dealings with our bank. 1. More than 8 years, SB/CD a/c 6 2. < 8 years but more than 6 years 5 3. < 6years but more than 2 years 4 6 4. < 2years but more than 1 year 2 5. Newly introduced customer 0 OPERATIONAL RISK 40 0 1 Ratio of income to repayment commitment >4.0 8 >3.0<4.0 6 >2.0<3.0 4 8 >1.5<2.0 2 <1.5 2 Supply of information to the Bank. 0 Regular 4 Delayed 2 4 Blocked 3 Record of irregularity 0 Prompt repayment 4 Occassional irregularity 2 4 Irregular 4 Compliance of sanction stipulations 0 100% compliance 4 Majority complied 2 4 Poor compliance 5 Security Cover 0 >= 250% 12 Prorata for all coverages 125-250% 12 125% 6 <125% 6 Additional Liquid security, like deposits/ NSC/ KVP etc 0 Available 2 2 Nil 7 Right over the property 0 Free hold Ancestoral / new purchase with clear title & Patta 6 Lease hold (99 years) / without Patta 3 6 Disputed / Minor interest 0 South Indian Bank Page 39
Credit Risk Management Policy, 2011 MARKET RISK 30 0 1 Variation in Income level of Borrower Up by 15% or more 8 Up by 10% to 15% 6 Up but less than 10% 4 8 Remained at Same or reduced less than 5% 2 Reduced more than 5% 2 Appreciation / depreciation of the value of asset 0 Appreciated 8 Remained at same level 4 8 Depreciated 3 Use of the House 0 For self occupation / self occupied 6 6 For letting out / let out 4 Location of the house 2 Urban area with good demand 8 Urban area moderate demand 6 Rural area with good demand 4 8 Rural area with moderate demand 2 Rural developing area 1 Total 100 Adjusted total 100 Rating Awarded South Indian Bank Page 40
Credit Risk Management Policy, 2011 Annexure 3 Credit risk rating framework for micro & small enterprises (MSE) Marks Max mark 1 Industry Risks (Production Stage Risk) 15 1 Business facilities (material, infrastructure etc.) Very comfortable 5 5 Comfortable 4 Moderately comfortable 2 Not comfortable 1 2 Factory / main business premises Building own or lease more than 10 years 4 4 Rented where the remaining agreement period is more than 5 years 2 Rented building with short duration, satisfactory 1 Other cases 0 3 Location Prime / Industrial area 2 2 Non Industrial area / by lanes 1 Else 0 4 Subsidy/ other concessions from Government available Capital subsidy and other subsidies available 4 4 Subsidy/ concession other than capital nature 2 No subsidy available 0 South Indian Bank Page 41
Credit Risk Management Policy, 2011 2 Management Risks Experience of the promoter/s At least one of the promoters is a technocrat or experienced in the same line 6 Promoters experienced in different line 2-4 New in the field 1 Net worth of promoters More than 3 times our exposure 4 More than our exposure 2 Less than our exposure 0 Operational Risks Supply of information to the Bank Prompt supply of information 3 Delayed supply of information 1-2 Defaults in supply of information 0 Record of Irregularity No irregularity 4 Rare instances of irregularity 1-3 No instance of irregularity 0 10 5 6 6 4 3 20 7 3 8 4 [Irregularity means LC devolvement, BG invocation, non-payment of installment and interest within a reasonable time, discounted cheque return more than 5% etc.]
9 3 Limit Within DP with fluctuating balances 3 Management Occasional over drawings, but within permissible level 2 South Indian Bank Page 42
Credit Risk Management Policy, 2011 10 Limit rarely used and within DP 1 Overdrwan frequently and watch category 0 Dealing with us (including deposit connections as well) More than 10 years 5 Less than 10 years but more than 8 years 4 Less than 8 years but more than 6 years 3 2Less than 6 years but more than 3 years Less than 3 years 1 New account 0 Limit Utilization Credit turnover more than 4 times of limit and more than 80% of the sales are routed through a/c 3 Credit turnover more than 3 times of limit and more than 60% of the sales are routed through a/c 2 Credit turn over more than 2 times of limit and more than 40% of the sales are routed through a/c 1 Other cases 0 Compliance of sanction stipulations 100% compliance 2 Majority complied 1 Poor compliance 0 Market Risks Product reservation Reserved for the MSE sector 3 Not reserved 0 Product nature Item with high demand 4 Ancillary units or captive consumption 3 5 11
3 12 2 4 10 13 3 14 4 South Indian Bank Page 43
Credit Risk Management Policy, 2011 15 3 5 15 16 10 17 5 6 30 18 5 19 3 Normal products with moderate demand 2 Luxury products with limited market 0 Marketing Arrangements Proper marketing tie-up is done or captive consumption 3 Other marketing methods 1 Open marketing 0 Facility Risks Property security coverage (primary and collateral) >= 125% 10 Pro-rata for all coverage 25%125% 25% 2 <25% 0 ( If 2nd Charge, only 50% marks) Nature of collateral Liquid security (eligible financial collateral as NSC, LIC, FD) upto 50% available 5
ECGC/ guarantees from other Governmental agencies available 3 Mortgage of prime property 2 Other mortgages 1 Other cases 0 Financial Risks Current Ratio CR >= 1.33 5 CR < 1.33 > 1.20 4 CR < 1.20 > 1.10 3 CR < 1.10 > 1.00 2 CR<1 0 Operating Profit margin(Operat Increased 3 Maintained 2 Reduced 1 South Indian Bank Page 44
Credit Risk Management Policy, 2011 Total Adjusted Total Rating Awarded ing profit / sales) Loss 0 Cash Profitability Increased 5 Maintained 4 Reduced 2 Loss 0 Interest Coverage Ratio If >=2 5 If <2>1.5 3 If <1.5>1.25 2 If <1.25 0 TOL/TNW <=3 3 >3<=4 2 >4.0 <=5 1 >5 0 Growth in Sales Turn over compared to previous year Above 25% 3 Above 10% 2 Less than 10% 1 Reduced 0 Stock Turn over Ratio >=6 3 <6>=4 2 <4>=3 1 <3 =0 0 Debtors Turnover Ratio (Including Debtors> 6 months) >=6 3 <6>=4 2 <4>=3 1 <3 =0 0 5 3 3
3 3 South Indian Bank Page 45
Credit Risk Management Policy, 2011 Annexure 4 A/c: Branch: Marks Rating Summary based on AFS as on 31.03.2011 Marks Max Award ed 2011 5. INDUSTRY RISKS (Production Stage Risk) 16 Raw Materials Indigenous, easily available, nonseasonal, steady price 3 3Seasonal / Almost steady price 2 Perishable /Imported 1 Availability uncertain, fluctuating price 0 Infrastructure (Building, Power, fuel, labour, transportation etc) Building own or lease more than 10 years, others excellent 3 3 Rented where the remaining agreement period is more than 5 years 2 Rented building with short duration, satisfactory 1 Else 0 Location Prime / Industrial area 3 3Non Industrial area / by lanes 2 Else 0 Technology State-of-the-art 3 3Current technology 2 Obsolete technology 0 Industrial climate & relationships Trouble free environment and coordial relationships 3 3Medium type relation ship and environment 2 Strained relations and Prone to threat of Strike 0 Credit risk rating framework for SSI & tiny sector (Below Rs.200.00 lacs) South Indian Bank Page 46
Credit Risk Management Policy, 2011 R & D Arrangement R&D Available / Not required 1 1 Required but not available 0 II. MANAGEMENT RISKS 10 Experience group Reputed Business group 3 3Moderate 2 New Venture 0 Experience of the promoter/s At least one of the promoters are technocrat or experienced 3 3 New in the field 0 Employed executives Skilled /Qualified person in all key areas 4 4Skilled /Qualified person in few key areas 1-3 No Skilled /Qualified person are employed 0 III. OPERATIONAL RISK 16 Supply of informations to the Bank Prompt supply of informations 2 2Delayed supply of informations 1 Defaults in supply of informations 0 Record of Irregularity * No irregularity 2 2 Any instance of irregularity 0 *Irregularity means LC devolvement, BG invocation, non-payment of installment and interest within a reasonable time , Discounted cheque return more than 5% etc. Limit Management Within DP with fluctuating balances 3 3 Occassional over drawings, but within permissible level 2 Limit rarely used and within DP 1 Overdrwan frequently and watch category 0 Dealing with us More than 10 years 4 4Less than 10 years but more than 6 years 3 Less than 6 years but more than 3 2 South Indian Bank Page 47
Credit Risk Management Policy, 2011 years Less than 3 years 1 New account 0 Limit Utilization Credit turn over More than 4 times of limit and more than 80% of the sales are routed through a/c 3 3 Credit turn over More than 3 times of limit and more than 60% of the sales are routed through a/c 2 Credit turn over More than 2 times of limitand more than 40% of the sales are routed through a/c 1 Credit turn over less than 2 times of limit and less than 40% of the sales are routed through a/c 0 Compliance of sanction stipulations 100% compliance 2 2Majority complied 1 Poor compliance 0 IV MARKET RISK 8 Product Product is regular consumable/ Industrial item with demand 5 5 Product is short shelf life but with demand 4 Fashionable goods but with demand 3 Short life goods with competition from Indian counter part 2 Short life goods with competition from overseas producers= 0 Marketing arrangements Fully tied up through organized marketing net work 3 3Through marketing agents 2 Own arrangements with good marketing strategy 1 Open Marketing 0 V. Collateral Security 10 Collateral >= 125% 10 102. Prorata for all coverages 25-125% 25% 2 South Indian Bank Page 48
Credit Risk Management Policy, 2011 <25% 0 If 2nd Charge, only 50% marks VI FINANCIAL RISKS 40 A Liquidity CURRENT RATIO CR >= 1.33 5 5 CR < 1.33 > 1.25 4 CR < 1.25 > 1.10 3 CR < 1.10 > 1.00 2 CR<1 0 QUICK RATIO (Ratio of Current assets excl stock/ Current Liability) QR >= 1.00 4 4QR < 1.00 > 0.90 3 QR < 0.90 > 0.75 2 QR < 0.75 0 B Profitability Operating Profit margin (Operating profit / sales) Increased 3 3 Maintained 2 Reduced 1 Loss 0 Return on capital employed Increased 3 3Maintained 2 Reduced 0 Cash Profitability (Computed leaving stock variation) Increased 5 5 Maintained 4 Reduced 2 Loss 0 C Interest Coverage (PBDIT/Interest) 5 Interest Coverage Ratio If >=2 5 5 If <2>1.5 3 If <1.5>1.25 2 If <1.25 0 D Leverage 9 TOL/TNW <=3 3 3 >3<=4 2 >4.0 <=5 1 >5 0 South Indian Bank Page 49
Credit Risk Management Policy, 2011 Working Capital Borrowing / Sales <=20% 3 3 >20%<=30% 2 >30%<40% 1 > 40% 0 Growth in Sales Turn over compared to previous year Above 25% 3 3 Above 10% 2 Less than 10% 1 Reduced 0 E Solvency 6 Stock Turn over Ratio >=6 3 3 <6>=4 2 <4>=3 1 <3 =0 0 Debtors Turn over Ratio (Including Debtors> 6 months) >=6 3 3 <6>=4 2 <4>=3 1 <3 =0 0 Total 100 Adjusted total 100 Rating Awarded South Indian Bank Page 50
Credit Risk Management Policy, 2011 Annexure 5 Price rating score sheet for limits of Rs.10 Lacs and above upto Rs.50 Lacs. Sl. No. Description Criteria Marks 1 Current Ratio CR>1.33 5 CR<1.32>1.17 3 CR <1.17>1 2 CR< 1 0 2 Indebtness Ratio IR< 4 5 IR >4<5 3 IR >5<6 2 IR > 6 0 3 Repayment obligations Prompt payment 5 Payment within 15 days 3 Payment between 15 days to 30 days 2 Payment beyond 30 days 0 4 Conduct/operations in the account No over drawings/regular in every respect 5 Irregular for not more than 2 occasions 3 Irregular for 2 to 4 occasions 2 Irregular for more than 4 occasions 0 5 Submission of important data/statement Prompt submission 5 Late submission with delay of 1 month to 3 month 3 More Than 3 Months 0 6 Rectification status of irrugularities 100% rectifications 5 75 to 99% rectifications 3 50 to 74% rectifications 2 less than 50% rectifications 0 7 Compliance obligations Prompt compliance 5 Compliance with delay of 15 days 3 Compliance with delay of 15 to 30 days 2 South Indian Bank Page 51
Credit Risk Management Policy, 2011 Compliance with delay of above 30 days 0 8 Performance/achievements in relation to projections viz. profit, sales current ratio etc. 100% achievements 5 90 to 99% achievements 3 75% to 89% achievements 2 less than 75% achievements 0 9 Business value of the borrower to bank Depending upon banking relationship, ancillary business etc. 1 to 5 10 Support of Collateral Security 100% collateral coverage 5 75 to 99% coverage 3 50% to 74% coverage 2 less than 50% collateral 0 Total Total Percentage South Indian Bank Page 52
Credit Risk Management Policy, 2011 Annexure 6 Rating Score Sheet for accounts where the funded limit is less than Rs.100 Lacs Max. Marks I. BUSINESS RISKS 15 1.Materials 5 1.Easily available, nonseasonal, steady price 5 2. Others from availability uncertain, fluctuating price, perishable in different range 0 4 2.Infrastructure 5 1.Own 5 2.Rented where the remaining agreement period is more than 10 years 4 2.Rented where the remaining agreement period is more than 5 years 3 3. Else 0 3. Location 5 1. Prime 5 2. Other locations in varying importance 1 4 II. MANAGEMENT RISKS 10 1.Experience of the Group 5 1.Reputed Business Group 5 2.Moderate 1 4 3.New Venture 0 South Indian Bank Page 53
Credit Risk Management Policy, 2011 1. More than 8 years 5 2. >8 years but more than 6 years 4 3. >6 years but more than 4 years 3 4. >4 years but more than 2 years 2 5. >2 years but more than 1 year 1 6.Else 0 1.Promt supply of informations 2 2. Delayed supply of informations 1 3. Defaults in supply of informations 0 1.No irregularity 4 2.Any instance of irregularity 0 1.Within DP with fluctuating balances 2 2.Occassional over drawings 1 3.Overdrwan balance 0 4.Complian1. 100% compliance ce of sanction stipulations 2 2. Major compliance 1 2. Else 0 5 10 2 4 2 2 2.Dealing with us for III. OPERATIONAL RISK 1.Supply of informations to the Bank 2.Record of Irregularity. 3.Limit Management South Indian Bank Page 54
Credit Risk Management Policy, 2011 ( Note: Irregularity means LC devolvement, BG invocation, non-payment of installme nt and interest within a reasonable time , Discounted cheque return more than 5% etc. ) IV. Collateral Security 15 V. Financials >= 125% = 15 } >= 50% = 6 } From 50% to 125% proportionate For second charge, 50%. 1. CR >1.1 8 2. CR <1.1>1.05 7 2. CR <1.05>1. 6 3. CR<1.>0.95 5 3. CR<.95>0.90 4 3. CR<.90>0.85 3 3. CR<.85>0.80 2 3. CR<.80>0.75 1 1. >100 % of req. NWC & improved from Pr.Yr. 5 2. >100 % of req. NWC & reduced from Pr.Yr. 4 3. > 75 % of req. NWC & improved from Pr.Yr. 3 4. > 75 % of req. NWC & reduced from Pr.Yr. 2 Increased from previous year and positive 1 Others 0 50 A. Liquidity 1.Current Ratio 8 2.Net Working Capital 5 B. Profitability 1.Op. profit (Excl. Int.) 4 Op. Profit =2 + ( increased =2, maintained =1 South Indian Bank Page 55
Credit Risk Management Policy, 2011 2.Op. profit margin (Excl. Int.) 1. If Op.Pr. & increased 3 2. If Op.Pr & maintained 2 3. If Op. profit, though reduced 1 3. If Op.loss 0 1. If increased 4 2.If maintained 2 3. If reduced 1 4. If negative 0 3 3.Return on Capital Employed 4 4.Net Profit 4 Profit =2 + (increase=2, maintained =1 reduced=0) C. Interest Coverage 1.PBDIT/Interest 5 D. Solvency 1.Overall Indebtedness 6 1.PBDIT/Int. >= 2 5 2.PBDIT/Int. <2>1.75 4 2.PBDIT/Int. <1.75>1.5 3 3.PBDIT/Int. <1.5>1.35 2 3.PBDIT/Int. <1.35>1.25 1 4.PBDIT/Int. <1.25 0 1.TOL/TNW <=2.5 6 2.TOL/TNW>2.5<=2.67 5 3.TOL/TNW>2.67<=2.85 4 4.TOL/TNW>2.85<=3.0 3 5.TOL/TNW>3.00<=3.25 2 6.TOL/TNW>3.25<=3.5 1 7.TOL/TNW>3.5 0 E. Efficiency in utilization of Current Assets South Indian Bank Page 56
Credit Risk Management Policy, 2011 1.Stock Velocity 1.Stock Velocity >=6 2.SV <6>=5 3.SV <5>=4 4. SV<4>3=2 5. SV<3>2=2 6.SV <3 5 4 3 2 1 0 5 2.Debtors Velocity 1. DV >=6 2. DV <6 >=5 , 3. DV <5 , >=4 3. DV <4 , >=3 3. DV <3 , >=2 4. DV<2 6 5 4 3 2 0 6 Total 100 South Indian Bank Page 57
Credit Risk Management Policy, 2011 Annexure 7 Rating model for trading concern with total limits Rs.100 Lacs and above A/c: Branch Max Marks Marks Awarded A. FINANCIAL RISKS 2011 I Profitability 40 0 a Net Profit / Sales >=10% <10%>=5% <5%>=2% <2% Loss 4 3 2 1 0 4 b Operating Profit / Sales 1) >=20% 2) <20%>=10% 3) <10%>=5% 4) <5%>=0% 5) Operating loss 4 3 2 1 0 4 c. PBDIT/Interest 1. If >=2 2. If <2>1.5 3. If <1.5>1.25 4. If <1.25 3 2 1 0 3 d Any huge contingent liability exceeding TNW 1. Does exist 2. Does not exist 0 2 2 II Liquidity a Current Ratio 1. CR>=1.33 2 CR<1.33>=1.25 3 CR<1.25>=1.1 4 CR<1.1>1.
5 <1 4 3 2 1 0 4 b Net Sales / Total Current Assets 1) Above 3 2) Between 2 and up to 3 3) Between 1 and up to 2 4) Below 1 3 2 1 0 3 South Indian Bank Page 58
Credit Risk Management Policy, 2011 III Leverage a TOL/TNW 1) <=3 2) >3<=3.50 3) >3.50 <=4 4) >4<=4.5 5) >4.5 4 3 2 1 0 4 b Working Capital Borrowing / Sales 1) <=20% 2) >20%<=30% 3) >30%<40% 4) > 40% 3 2 1 0 3 c Growth in sales / turn over compared to previous year 1) Above 50% 2) Above 25% 3) Above 10% 4) Less than 10% 5) Reduced 4 3 2 1 0 4 d Stock Turn over Ratio 1) >=6 2) <6>=4 3) <4>=3 4) <3 =0 3 2 1 0 3 e Debtors Turn over Ratio (Including Debtors> 6 months) 1) >=6 2) <6>4 3) <4>=3
4) <3 3 2 1 0 3 f Tangible net worth to sales 1) <=20% 2) >20%<=30% 3) >30%<40% 4) > 40% 3 2 1 0 3 B BUSINESS RISKS 15 0 a Item Traded 1. Consumable items/ Durable 2. Short life / Perishable / Fashionable goods 3. Luxury goods 4. Hazardous Items 4 3 2 0 4 South Indian Bank Page 59
Credit Risk Management Policy, 2011 b Demand for the traded item/s 1. High demand 2. Consistent Demand 3. Low demand 2 1 0 2 1) Trade of only a Whether multiplicity in single item 2) Trade of more 1 c 3 number of items traded than 2 items 3) Several items 2 traded 3 1. Own 2. Rented, where remaining 3 d Infrastructure agreement period 3 more than 5 years 2 3. Else 1 e Location advantage 1. Prime 2. High floors / bylanes 3. Others 3 2 1 3 C MANAGEMENT RISKS 15 0 1. Reputed Business group 3 a Experience of the trader/ group 2. Moderate 3. New Venture by 1st generation 1-2 3 Entrepreneurs 0 1 . Over 10 times loan amount 2. Over 5 times but 4 Total Networth of the less than 10 times 3. Over 2 times but 3
b proprietor/partners/directors 4 (If Personal Gtee) less than 5 times 3. More than loan 2 amount 4.Less than loan 1 amount 0 c Dealing with us 1. More than 10 5 5 South Indian Bank Page 60
Credit Risk Management Policy, 2011 years 2. Less than 10 years but more than 8 years 3. Less than 8 years but more than 5 4 years 4. Less than 5 years but more than 3 3 years 2 5. Less than 3 years 1 6. New Customer 0 Performance of group 1) All concerns are profit making and d concerns well managed 1 1 2) All other cases 0 e Any instance of attachment by Govt Dept. / Court 1. No instance 2. There are instance 2 0 2 D OPERATIONAL RISKS 15 0 a Supply of information to the Bank 1.Prompt supply 2.Delayed supply 3.Defaults in supply 2 1 0 2 1. No irregularity 3 b Record of irregularity 2. Single instance 3. More than once 1 3 instances of irregularity 0 1. 100% compliance 2 c Compliance of sanction terms 2. No major noncompliance 1 2
3. All others 0 d Whether any of the group concerns are highly irregular / NPA 1. Yes 2. No 0 2 2 South Indian Bank Page 61
Credit Risk Management Policy, 2011 e Any qualification by auditors affecting financials. 1) Does exist 2) Does not exist 0 2 2 f Turn over in the account More than 4 times of limit 3-4 times of limit 1-2 times limit Less than 1 time 4 3 1 0 4 E FACILITY RISK 15 0 a Security coverage 1. >= 150% Pro-rata Marks for 50% to 150% =50% < 50% 10 2 0 10 1. Liquid security as NSC, LIC , FD at least equal 2. Pro-rata for liquid security/ Prime urban property / 5 b Nature of collateral Residential Urban 5 property 3. Other urban / 3-4 village residential 2 4. Other mortgages 5. Only personal 1 guarantee 0 Total 100 0 Adjusted Total (For New A/c) 100 0 Rating awarded South Indian Bank Page 62
Credit Risk Management Policy, 2011 Annexure 8 Rating score sheet for manufacturing / Industires I. INDUSTRY RISKS Marks A. Production Stage Risk 10 1 Raw Materials 3 1. Indigenous, easily available, non-seasonal, steady price 3 2. Imported item 2 3. Controlled item, supply restricted 1 4. Availability uncertain, fluctuation price 0 2 Power & Fuel & Labour 2Easy availability, fixed cost 2 Controlled supply, fluctuating cost 1 else 0 3 Technology 2 State-of-the-art 2 Current technology 1 Obsolete technology 0 4 Infrastructure 2 Excellent 2 Satisfactory 1 Else 0 5 R & D Arrangement 1Available 1 Not available 0 B. Post-Production Risk 10 1 Demand 5 Demand much in excess of supply and other related factors are favourable 5 Demand more than supply, at different levels 3-4 Goods prone to obsolescence with good demand 1-2 Others 0 2 Competition 3
Credit Risk Management Policy, 2011 Low competition, high entry barrier 3 Competition varies, but still favourable 1-2 Severe competition 0 3 Marketing Arrangements 2 With orporate marketing agencies 2 Planned marketing strategy (own) 1 Else 0 II. MANAGEMENT RISKS 10 Promoters 1 Experience of the Group 3Reputed Business group 3 Moderate 1-2 New Venture 0 2 Management Proficiency 2Professional management 2 Traditional 1 Mixed 0 3 Experience of the Promoters 2 Sound 2 Moderate 1 No past experience 0 4 Employed Executives 3 Employed qualified persons in all key areas 3 Employed qualified persons in few key areas 1-2 No qualified persons employed 0 III. Operational Risks 10 1 Supply of information to the Bank 2Prompt supply of information 2 Delayed supply of information 1 Defaults in supply of information 0 2 Record of Irregularity 4No irregularity 4 Stray Cases of Irregularity 3 South Indian Bank Page 64
Credit Risk Management Policy, 2011 Varying Irregularity 1-2 Highly Irregular 0 3 Limit Management 2 Within DP with fluctuating balances 2 Occasional Overdrawing 1 Overdrawn balance 0 4 Compliance of sanction stipulations 2100% compliance 2 Compliance of major terms 1 Else 0 IV. Collateral Security 5 1 Collateral cover 5 >= 100% = 5 } >= 75% = 4 } >= 50% = 3 } >= 25% = 2 } < 25% = 0 IV. Financials 55 A. Liquidity 13 1 Current Ratio 8 >1.4 8 8 <1.4>1.35 7 <1.35>1.33 6 1.33 5 <1.33>=1.30 4 <1.30>=1.20 3 <1.20>=1.10 2 <1.10>=1.00 1 <1.00 0 2 Net Worth Capital 5 >100 % of req. NWC & improved from Pr.Yr. 5 5 >100 % of req. NWC & reduced from Pr.Yr. 4 3>75 % of req. NWC & improved from Pr.Yr. South Indian Bank Page 65
Credit Risk Management Policy, 2011 >75 % of req. NWC & reduced from Pr.Yr. 2 Increased from previous year and positive 1 Others 0 B. Profitability 15 1 Operating profit (Excl. Int.) Op. Profit =2 + (increase=2, maintained=1, reduced=0) 4 2 Operating profit margin (Excl. Int.) 3 Operating profit increased 3 Operating profit maintained 2 Operating profit decreased 1 Operating loss 0 3 Return on Capital Employed 4 If increased 4 If maintained 3 If decreased 1 Negative return 0 4 Net Profit Profit =2 +(increase=2, maintained=1, reduced=0) 4 C. Interest Coverage (PBDIT/Interest) 5 1 >=3 5 5 <3>2.5 4 <2.5>2 3 <2>1.75 2 <1.75>1.5 1 <1.5 0 D.Solvency 12 1 Term Indebtedness (DER) <=1.5 6 6 >1.5<=1.67 5 >1.67<=1.84 4 >1.84<=2 3 >2<=2.25 2 >2.25<=2.5 1 >2.5 0 2 Overall Indebtedness (TOL/TNW) <=2.5 6 6
Credit Risk Management Policy, 2011 >2.5<=3.0 5 >3.0<=3.50 4 >3.5 <=4.0 3 >4.0 <=4.25 2 >4.25 <=4.5 1 >4.5 0 E. Efficiency in utilization of CA 10 1 Stock Velocity >=6 5 5 <6>=5 4 <5>=4 3 <4>3 2 <3>2 1 <3 0 2 Debtors Velocity >=6 5 5 <6>=5 4 <5>=4 3 <4>3 2 <3>2 1 <3 0 Total 100 Adjusted Total 100 Rating awarded South Indian Bank Page 67
Credit Risk Management Policy, 2011 Annexure 9 Credit Risk Rating model for Contractors A/c Branch: I. BUSINESS RISK Max. Marks Marks Awarded 2011 1 Nature of Contracts. 15 0 1 Relating to Central Govt / PSUs Relating to State Govt / Local Bodies /Established 4 2 corporates 3 4 3 Relating to private firms / business concerns 2 4 Relating to indviduls 0 2 Infrastructure (Machinery / labour, transportation etc) 1 Machinery own, Permanent labours at disposal Machinery Rented & Labour contract permanent 4 4 2 arrangement. 3 3 Rented and temporary labour arranged temporarily 1 4 Else 0 3 Registration of contractor 1 AA class 4 2 A Class 3 4 3 B Class 1 4 Un registered 0 4 Industrial climate & relationships 1 Trouble free environment and co-ordial relationships 3 3 2 Medium type relation ship and environment 2 3 Strained relations and Prone to threat of Strike 0 II. MANAGEMENT RISKS 10 0 1 Experience group 1 Reputed Business group 3 2 Moderate 2 3 3 New Venture 0 2 Experience of the promoter/s At least one of the promoters is technocrat & 1 Experienced 3 3 2 At least one of the promoters well experienced 2 3 New in the field 0 South Indian Bank Page 68
Credit Risk Management Policy, 2011 3 Employed executives 1 Skilled /Qualified person in all key areas 4 4 2 Skilled /Qualified person in few key areas 1-3 3 No Skilled /Qualified person are employed 0 III. OPERATIONAL RISK 17 0 1 Supply of informations to the Bank 1 Promt supply of informations 2 2 2 Delayed supply of informations 1 3 Defaults in supply of informations 0 2 Record of Irregularity * 1 No irregularity 2 Any instance of irregularity * Irregularity means LC devolvement, BG invocation, non-payment of installment and interest within a reasonable time , Discounted cheque return more than 5%, Belated completion / non satisfactory work of contracts, non release of payments, etc 3 0 3 3 Limit Management 1 Within DP with fluctuating balances 3 3 2 Occassional over drawings, but within permissible level 2 3 Limit rarely used and within DP 1 4 Overdrwan frequently and watch category 0 4 Past satisfactory dealing with us * 1 8 years and above 4 4 2 5 years and above but less than 8 years 2 3 2 years and above but less than 5 years 1 4 Less than 2 years * Dealings with us marks are to be orporat only if the dealings are thoroughly satisfactory without any orporat of cheques for want of funds. 0 5 Limit to work ratio 1 25% or less of work on hand 3 3 2 25% to 40% of work on hand 2 3 40-50% of work on hand 1 4 More than 50% of work on hand 0 6 Compliance of sanction stipulations 1 100% compliance 2 2 2 Majority complied 1 3 Poor compliance 0 South Indian Bank Page 69
Credit Risk Management Policy, 2011 0 IV MARKET RISK 8 1 Probability of delay in payments delay upt 45 days and budgetary allocation already 1 available Payment date un certain / Budgetary allocation not 3 3 2 nmadeUndue delay / 0 2 Nature of work Highly skilled type of work, not affected by climatic 1 conditions Moderately skilled work, not affected by climatic 5 5 2 conditions Moderately skilled work, affected by climatic conditions 4 3 & seasonal 2 V. Collateral Security Coverage 20 >= 125% 2. Prorata for all coverages 25-125% 15 15 25% 3 <25% If 2nd Charge, only 50% marks 0 Liquid Security Coverage with risk mitigation facility Guarentee by AA/ AAA rated Corporates Gold/ NSC/ Deposits/ LIC Policy with Sv equal to loan 5 5 Incl margin deposit 2. Prorata for all coverages 0%-100% 5 No liquid security 0 VI FINANCIAL RISKS 30 A LIQUIDITY 1 CR >= 1.33 5 5 2 CR < 1.33 > 1.25 4 3 CR < 1.25 > 1.10 3 4 CR < 1.10 > 1.00 2 5 CR<1 0 2 QUICK RATIO (Ratio of Current assets excl stock/ Current Liability) 1 QR >= 1.00 3 3 2 QR < 1.00 > 0.90 2 3 QR < 0.90 > 0.75 1 4 QR < 0.75 0 B Profitability 1 Operating Profit margin (Operating profit / sales) 0 South Indian Bank Page 70
Credit Risk Management Policy, 2011 1 Increased 2 Maintained 3 Reduced 4 Loss 3 2 1 0 3 2 Return on capital employed 1 Increased 3 3 2 Maintained 2 3 Reduced 1 4 Loss 0 3 Cash Profitability 1 Increased 5 5 2 Maintained 4 3 Reduced 2 4 Loss 0 C Interest Coverage (PBDIT/Interest) 1 If >=2 5 5 2 If <2>1.5 3 3 If <1.5>1.25 2 4 If <1.25 0 D Leverage 1 TOL/TNW 1 <=4 3 3 2 >4<=6 2 3 >6 <=8 1 4 >8 0 E Debtors Turn over Ratio (Including Debtors> 6 months) 1 >=6 3 3 2 <6>=4 2 3 <4>=3 1 4 <3 =0 0 Total 100 Adjusted Total 100 Rating Awarded South Indian Bank Page 71
Credit Risk Management Policy, 2011 Annexure 10 Rating for Educational Institutions A/c Branch: A. FINANCIAL RISKS Max Marks 30 Awarded I Profitability Excess of income before depreciation to total a income. 1) > =10% 4 4 2) <10%>=5% 3 3) <5%>=0% 2 4) Defficit 0 b PBDIT/Interest 1. If >=4 4 4 2. If <4>=3 3 3. If <3>=2 2 4. If <2>=1 1 5. If <1.00 0 c DSCR (for TL with or without WCL) 1) Above 1.75 3 3 2) Between 1.60 to and upto 1.75 2 3) Between 1.50 to and upto 1.60 1 4) Below 1.50 0 II Liquidity a Current Ratio 1. CR >1.33 5 5 2. CR <=1.33>1 .2 4 3. CR <=1.2>1.1 3 4. CR<=1.1>=1.00 2 5. CR<1.00 0 b Gross Income / Total Fixed Assets 1) Above 25% 5 5 2) Between 20% and upto25% 3) Between 10% and upto 4 20% 3 4) Between 5% and upto 10% 1 South Indian Bank Page 72
Credit Risk Management Policy, 2011 5) Less Than 5% 0 III Leverage a TOL/TNW 1) <= 2.00 4 4 3) >2.0<=2.5 3 4) >2.5<=3.5 2 5) >3.5 <=5 1 6) >5 0 b Growth in gross income compared to previous year 1) Above 10% 5 5 2) Less than 10%> 5% 3 3) Less Than 5% > 0% 2 3) Reduced 0 B BUSINESS RISKS 22 1 Courses offered 1. Professional course, with Demand 4 4 2. Other courses , but with demand 3 3. Normal courses with demand 2 4. Normal courses but without much demand 0 2 Job opportunity for the courses 1. High demand and campus placements 5 5 2. Consistent Demand/ Elementary schools 3 3. Low demand 0 3 Restrictions on the couses offered 1. No restrictions as all orporate permanent licences obtained 2. Occasional restrictions (Annual renewal of 5 5 Licences) 3 3. Restricted courses 0 4 Whether orporate d in number courses offered 1) Only a single course 0 5 2) 2-3 Courses / School 3 3) Several courses offered 5 5 Infrastructure 1. Own 2. leased, where remaining agreement period more 3 3 than 30 years 2 3. Else 0 South Indian Bank Page 73
Credit Risk Management Policy, 2011 C 1 MANAGEMENT RISKS Experience of the group 1. Reputed group 2. Moderate 3. New Venture 5 3 0 5 12 2 Dealing with us 1. More than 10 years 2. Less than 10 years but more than 8 years 3. Less than 8 years but more than 5 years 4. Less than 5 years but more than 3 years 5. Less than 3 years 5 4 3 2 1 5 3 Performance of group concerns 1) All concerns are well managed 2) All other cases 2 0 2 D 1 OPERATIONAL RISKS Supply of informations to the Bank 1.Prompt supply 2.Delayed supply 3.Defaults in supply 5 2 0 5 22 2 Record of irregularity 1. No irregularity 2. Stray instance of irregularity 3. Instances of irregularity more than once 4 2 0 4 3 Compliance of sanction terms 1. 100% compliance 2. No major non-compliance 3. All others 4
2 0 4 4 Any instance of attachment by Govt Dept. / Court 1. No instance 2. One stray instance 3. More than one instance 3 2 0 3 5 Any contingent liability orporate TNWpending decision of court 1. Does not exist 2. Only Small Liability 3. Exist 2 1 0 2 South Indian Bank Page 74
Credit Risk Management Policy, 2011 6 Whether any of the group concerns are highly irregular / NPA 1. Yes 2. No 0 2 2 7 Any qualification affecting financials 1) Does exist 2) Does not exist 0 2 2 E FACILITY RISK Security coverage excluding additional 1 construction, if any 1. >= 200% } If II 14 nd 8 8 2. >= 150% } charge , 6 3. >= 125% } 50% of 4 4. >= 100% } marks. 2 5. < 100% -No marks 0 Nature of 2 security 1. Liquid security as NSC, LIC , FD at least equal 2. 50% liquid/ prime urban property / Residential 4 4 urban 3 3. Other urban / village Residential properties 2 4. Other mortuguages 1 5. Only personal orporate and hypothecation. 0 3 Whether the title deeds of any property defective (In many cases property valued for whatever it is worth) 1. Yes 2. Portion of property (worth negligible compared 0 2 to total property ) 1 3. No cases 2 Total 100 Adjusted Total 100 Rating South Indian Bank Page 75
Credit Risk Management Policy, 2011 Annexure 11 Rating model for Green Field Model A/c Branch 1 2 3 4 5 6 Categories Marks Max marks Marks A Industry Risk 5 A.1 Economic prospects Favourable Moderate Not favourable 2 1 0 2 A.2 Industry prospects Excellent prospects Good prospects Moderate prospects Other cases 3 2 1 0 3 B Project risk 25 B.1 Nature of project Experienced promoters, accepted product Experience in different line, accepted product Experienced promoters, new product First time entrepreneurs, accepted product First time entrepreneurs, new product 5 3 2 1 0 5 B.2 Period of project Less than 12 months 12 to 24 months 24 to 36 months Above 36 months 3 2 1 0 3
B.3 Contingency provision Adequately provided Not adequately provided Not provided 2 1 0 2 B.4 Loan drawdown condition 3 South Indian Bank Page 76
Credit Risk Management Policy, 2011 7 8 9 10 11 12 Our loan to be released only after the promoters put in entire amount Our loan will be in proportion to the assets acquired Our disbursal will be over before project completes 3 2 0 B.5 Position of funding Entire 100% funding is tied-up More than 75% tied up More than 50% tied up Less than 50% 3 2 1 0 3 B.6 Clearances/ approval for the project All approvals obtained Major approvals obtained and only a few approvals remaining to be obtained Only a few approvals obtained No clearance btained 3 2 1 0 3 B.7 Stature of machinery suppliers/ vendors Of national/ international repute Medium companies Other suppliers 2 1 0 2 B.8 Technology State-of-the-art Latest technology Others 2 1 0
2 B.9 Present status of project More than 25% complete 10 25% complete Other cases 2 1 0 2 C Business Risk 10 C.1 Demand for product Favourable demand-supply position Moderate position 3 1 2 3 South Indian Bank Page 77
Credit Risk Management Policy, 2011 13 14 15 16 17 18 19 Product either entirely new or obsolete 0 C.2 Nature of product Product for mass consumption Captive consumption/ ancillary unit with committed orders Luxury products or products with limited market 2 1 0 2 C.3 Competition for product Low competition Medium competition High competition 2 1 0 2 C.4 Raw Material Available easily Imported/ Restricted availability domestically Not available easily 2 1 0 2 C.5 Infrastructural facilities Available easily Not available easily 1 0 1 D Management Risk 10 D.1 Qualification of promoters Technocrats or professionals with experience Other qualified persons with experience Others with experience New generation entrepreneurs 3 2 1 0
3 D.2 Qualified persons in key management posts In all key management posts In a few key management posts No qualified persons 2 1 0 2 D.3 Net worth of promoters More than 5 times the promoters contribution & more than 3 times our exposure 5 5 South Indian Bank Page 78
Credit Risk Management Policy, 2011 20 21 22 23 24 More than 2 times promoters contribution & more than our exposure Equal to or more than promoters contribution Less than promoters contribution 3 1 0 E Operational Risk 5 E.1 Operation of promoters account/ related firms with our bank/ other banks More than 5 years with good track record More than 3 years with good track record More than a year with good track record Other cases 3 2 1 0 3 E.2 Standing of promoters/ related firms in the market, as per financial data etc. Excellent Good Other cases 2 1 0 2 F Financial Risk 24 F.1 Average cash profit for first three years/ invested own funds 10% or more 6% or more 3% or more Less than 3% 3 2 1 0
3 F.2 Project Debt-equity ratio Debt not more than 1.5 times equity Debt not more than 2 times equity Debt not more than 2.5 times equity Debt not more than 3 times equity Debt more than 3 times equity 6 5 3 1 0 6 F.3 Debt Service Coverage Ratio (average) More than 2.00 More than 1.75 4 3 4 South Indian Bank Page 79
Credit Risk Management Policy, 2011 25 26 27 28 29 30 More than 1.50 Less than 1.50 2 0 F.4 Break-even point for the first full year of operation (cash profit) Below 50% 50% to 65% Above 65% to 80% 80% or above 3 2 1 0 3 F.5 Acceptance of revenue projections Price of products in line with market rate and at reasonable capacity utilisation Other cases or comparison not done 2 0 2 F.6 Acceptance of major expenses projections Price of material etc. in line with market rate Other cases or comparison not done 2 0 2 F.7 Project cost/ unit of production In line with industry standards from authentic sources Not in line/ no comparison done 2 0 2 F.8 Net profit before tax as percentage of sales for the first full year of operation In orporate with the industry average Higher than the industry average 2 0 2
F.9 Sensitivity criteria 6 F.9.a If there is 5% fall in sales price, resultant DSCR would be Above 1.50 1.25 or above 1 or above Less than 1 3 2 1 0 3 F.9.b If there is 5% rise in material or any major expenses taken together, resultatnt DSCR would be 3 South Indian Bank Page 80
Credit Risk Management Policy, 2011 32 33 34 35 36 Above 1.50 1.25 or above 1 or above Less than 1 3 2 1 0 G Facility Risk 15 G.1 Security of machinery At least for 50% of loan amount is available Only less than 50% 1 0 1 G.2 Value of property (both primary and collateral) and other collateral 100% or more From 25% to 100%, proportionate marks to be given For 25% Less than 25% 6 1 0 6 G.3 Note: Nature of collateral Liquid security (eligible financial collateral as NSC, LIC, FD) Mortgage of prime property Other mortgages Other cases For collateral cover below 100%, pro-rata marks to be given 3 2 1 0 3 G.4 Period of term loan, excluding repayment holiday Less than 5 years 5 to 7 years More than 7 years
2 1 0 2 G.5 Constitution of the company Public limited company/ Government company Private limited company, Society, Trust or any registered enforceable entity Others 3 2 1 3 H Adverse impact for industry s default experience 0 South Indian Bank Page 81
Credit Risk Management Policy, 2011 37 H.1 (negative marks) Our experience in the sector Reasonable with default less than 1% Bad with default less than 10% Worse with default above 10% 0 -1 -2 Grand Total 100 Rating Awarded ** The rating awarded using Greenfield model should be continued during the peri od of construction of the project (irrespective of the period of construction) and als o during the gestation period (as mentioned in the project report) of the project or 12 month s from commencement of commercial operations whichever is earlier. After the above ment ioned period, these accounts should be rated based on latest Audited Financial Stateme nts and using appropriate rating models. During the computation of rating in the second year s ome marks / weightage to be given provided project implementation scheduled is adhered to. South Indian Bank Page 82
Credit Risk Management Policy, 2011 Annexure 12 Credit Rating Model for Real Estate Sector Existing A/c: Branch: Parameters Max. Marks Marks Awarded A Industry Risk 1. Availability of infrastructure 1 Availability of Pucca 2 lane Roads & W. S & Power 2 Availability of 7.5 m wide Road, Power & Water 3 Availability of >4.8 m <7.5 m Road, Power & Water 4 < 4.8 m >3.0 m Road, Power & Water 5 < 3.0 m wide Road, absence of power or water 2. Title of properties 1 Clear, Free hold 2 Perpectual Lease (99 Years) 3 Lease hold with right more than 25 yrs 4 Disputed / Minor right / Lease less than 25 yrs 3. Susceptibility to natural calamities 1 Sea / Mountain in hilly terrain / river nearby, likely to be flood/ sea erosion/ landslide 2 Sea / Mountain in hilly terrain / river near by, but chance for calamity is less 3 Chance for calamity is remote. 4. Schedule of implementation 1 No cost escalation 2 Slight cost escalation of less than 10% and met out of own funds 3 High cost escalation, additional loan availed. 10 8 6 2 0 5 4
2 0 0 3 5 5 3 1 10 5 5 5 2011 25 0 B Management Risk 1. Past Dealings of the account 1 Prompt supply of information to bank 5 2 Delayed supply of informations 2-4 5 3 Non supply of informations 2. Irregularity in account/ operation 0 South Indian Bank Page 83
Credit Risk Management Policy, 2011 1 No irregularity 2 Only sligt Irregularity but account has never fell watch 3 Watch category 4 Irregular 5 4 1 0 5 10 0 C Other Risk 1. Road and other infra structural development / Ecological & Pollution Standards. 1 No threat of any kind 2 Chances for threat, but not likely to affect as sufficient set back is given 3 Sufficient set back not given 2. Occupancy rate 1 100% or more than projected 2 80-100% of projection 3 Less than 75% of projection 3. Aesthetic appearance of building 1 Highly panoramic and state of art construction 2 Good appearance 3 Normal appearance 4. Location 1 Commercial / Important area 2 Moderately orporate area 3 Rural / un important area 4 Near Slums / Treanching ground/ burial ground 5. Environmental Balance 1 Constructed with sufficient open space & ecological balance 2 Constructed with moderate open space & ecological balance 3 Without open space & Airation/ ventilation 4 3 1 5 3 0 4 3 1
5 3 1 0 4 3 0 4 5 4 5 4 22 0 D Security Coverage 1 More than 200% 2 More than 150% but less than 200% 3 More than 100% but less than 150% 4 If 2nd charge (25% of above) 10 8 6 10 10 0 E Financial Risk. South Indian Bank Page 84
Credit Risk Management Policy, 2011 1. Tenants 1 Established Corporate Tenants / self occupied 2 Other Firms / established prop concerns 3 Other Tenants 2. Sudden Reduction in income / Increase in expenditure 1 Income of applicant increased than projected 2 Income of applicant is maintained as projected 3 Income of applicant reduced than projected 5 3 0 5 3 0 5 5 10 0 E1 Financial Position of Borrower 1. DER 1 <1.0 2 >1.0 <2.0 3 >2.0<2.5 4 >2.5 2. TOL/TNW 1 <1.5 2 >1.5 <2.0 3 >2.0<3.0 4 >3.0 3. DSCR 1 >2.5 2 >2.0<2.5 3 >1.5 <2.0 4. RETURN ON CAPITAL 1 Increased from previous year /projection 2 Maintained 3 Reduced 4 Became loss 6 4 2 0 6 4 2 0 6 4
1 5 4 2 0 6 6 6 5 23 Total 100 Adjusted Total 100 Rating Awarded South Indian Bank Page 85
Credit Risk Management Policy, 2011 Annexure 13 Rating Model for Real Estate (New Projects) A/c: Branch: Max. Marks Marks Awarded Industry A Risk 1. Availability of infrastructure Availability of Pucca 2 lane Roads & 23 1 W. S & Power 5 2 Availability of 7.5 m wide Road, Power & Water 4 3 Availability of >4.8 m <7.5 m Road, Power & Water 3 4 < 4.8 m >3.0 m Road, Power & Water 1 5 < 3.0 m wide Road, absence of power or water 0 2. Title of properties 5 1 Clear, Free hold 5 2 Perpectual Lease (99 Years) 4 3 Lease hold with right more than 25 yrs 3 4 Disputed / Minor right / Lease less than 25 yrs 0 3. Susceptibility to natural calamities Sea / Mountain in hilly terrain / river nearby, likely to be flood/ sea 5 1 erosion/ landslide 0 2 Sea / Mountain in hilly terrain / river near by, but chance for calamity is less 2 3 Chance for calamity is remote. 3 4. Schedule of implementation Expected to be implemented within 1 3 1 year without escalation 5 2 Expected to be implemented within 2 years 3 5
Credit Risk Management Policy, 2011 3 Expected to be implemented beyond 2 years 1 5. Licensing 1 No exemption 2 Only Zoning exemptions 3 Non-Converted land / Exemption Required 5 3 0 5 B Management Risk 1. Experience of Promoters 1 Established firm / corporate 2 Established proprietory concern 3 Entity without experience but with experienced executives New concern which doesn t come in 5 3 2 5 14 4 3. 0 2. Constructin Technology 1 State of the art with own Machinery 2 State of the art Through established contractors 5 4 5 3 Current Technology 4 Local technology 3 1 3. Planning 1 Well planned and spaced by established Engineers / architects 2 Planned with maximum space utility 3 Planned without maximum space utility 4 Un planned / locally planned 4 3 1 0 4 C Other Risk 18 1. Road and other infra structural development / Ecological & Pollution Standards.
1 No threat of any kind 3 3 2 Chances for threat, but not likely to affect as sufficient set back is given 3 Sufficient set back not given 2 1 2. Aesthetics of building 1 Highly panoramic and state of art construction 3 3 2 Good appearance 2 South Indian Bank Page 87
Credit Risk Management Policy, 2011 3 Normal appearance 1 3. Location 1 Commercial / Important area 2 Moderately orporate area 3 Rural / un important area 4 Near Slums / Treanching ground/ burial ground 4 3 1 0 4 4. Environmental Balance 1 Constructed with sufficient open space & ecological balance 2 Constructed with moderate open space & ecological balance 3 Without open space & Airation/ ventilation 3 2 0 3 5. Integrity of borrower / Builder 1 Well known to the bank 5 5 2 New Customer but with good reports from other banks 3 3 New Customer 1 D Security Coverage 9 1 More than 200% Excluding proposed construction if any 2 More than 150% Excluding proposed construction if any 3 More than 100% Excluding proposed construction if any 9 7 5 9 4 More than 200% including proposed construction if any 3 5 < 200% including proposed construction but > 150% 1 6 < 150% including proposed construction 0
E Financial Risk. 21 1. Price Appreciation / depreciation. 1 Area likely to be appreciated very High 2 Area likely to be appreciated moderately 3 Area likely to be appreciated low 4 Area likely to be depreciated 5 3 1 0 5 2. Demand South Indian Bank Page 88
Credit Risk Management Policy, 2011 1 Very High Demand 5 5 2 High Demand 3 3 low demand 3. Tenants 0 1 Corpotates 4 4 2 Other firms / Prop Concerns 3 3 Other Tenants 4. Estimates and costing Construction within Normal Market 0 1 Value Higher than Market value due to 3 3 2 posh appearance Higher than Market value at about 2 3 25% 1 4 Exhorbitant rate 5. Sudden variation in income 0 1 Regular income group with savings 4 4 2 Regular income group 3 3 Variable income Group Financial Position of 0-2 E1 Borrower 1. DER 15 1 <1.0 5 5 2 >1.0 <2.0 4 3 >2.0<2.5 2 4 >2.5 2. TOL/TNW 0 1 <1.5 5 5 2 >1.5 <2.0 4 3 >2.0<3.0 2 4 >3.0 3. DSCR 0 1 >2.5 5 5 2 >2.0<2.5 3 3 >1.5 <2.0 1 Total 100 Adjuisted Total 100 Rating Awarded South Indian Bank Page 89
Credit Risk Management Policy, 2011 Annexure 14 Rating Model for Banks Categories Industry position ** Standard set Marks Maximum marks Marks Awarded A Industry Risk 8 1 A.1 Prospects of the sector 4 Excellent 4 Good 2 Average 1 Unsatisfactory 0 2 A.2 Economic factors 4 Excellent 4 Good 2 Average 1 Unsatisfactory 0 B Manageme nt Risk 20 3 B.1 Nature of ownership/ regulatory control 5Govt. owned 5 Scheduled Commercial Bank 2 Others 0 4 B.2 Technology adaptation 2 Full adaptation 2 Partial adaptation 1 Others 0 South Indian Bank Page 90
Credit Risk Management Policy, 2011 5 B.3 Listing status of scrips 3 Listed in major exchanges 3 Listed, but not in major exchanges 2 Not listed 0 6 B.4 Professional ism in managemen t 3Excellent 3 Good 2 Medium 1 Others 0 7 B.5 Compliance of regulatory guidelines 3 Fully complied 3 Not complied 0 8 B.6 Branch network 4 Top Decile 3097 4 Top Quartile 1717 4 Second Quartile 937 3 Third Quartile 478 2 Above Bottom Decile 214 1 Others 0 C Financial parameters 72 South Indian Bank Page 91
Credit Risk Management Policy, 2011 C.1 Business position 14 9 C.1.I Growth in advance 2 Top Decile 44.05% 2 Top Quartile 27.13% 2 Second Quartile 19.88% 2 Third Quartile 6.22% 1 Above Bottom Decile -17.00% 0 Others 0 1 0 C.1.I I Growth in deposits 2 Top Decile 62.33% 2 Top Quartile 25.34% 2 Second Quartile 18.12% 2 Third Quartile 5.92% 1 Above Bottom Decile -6.51% 0 Others 0 1 1 C.1.I II Market share in business 6 Top Decile 3.51% 6 Top Quartile 1.34% 5 Second Quartile 0.46% 3 Third Quartile 0.03% 2 Above Bottom Decile 0.00% 1 Others 0 1 2 C.1.I V Non-interest income to total income
4 Top Decile 35.29% 4 South Indian Bank Page 92
Credit Risk Management Policy, 2011 Top Quartile 21.73% 4 Second Quartile 13.15% 3 Third Quartile 10.76% 2 Above Bottom Decile 8.73% 1 Others 0 C.2 Profitability position 19 1 3 C.2.I Return on assets 5 Top Decile 2.28 5 Top Quartile 1.53 5 Second Quartile 1.05 4 Third Quartile 0.53 3 Above Bottom Decile -0.25 2 Others 0 1 4 C.2.I I Return on owned funds 3 Top Decile 19.65% 3 Top Quartile 16.73% 3 Second Quartile 10.32% 2 Third Quartile 4.15% 1 Above Bottom Decile 0.00% 0 Others 0 1 5 C.2.I II Operating cost/ interest income 3Top Decile 17.27% 3 Top Quartile 19.09% 3 Second Quartile 22.80% 2 South Indian Bank Page 93
Credit Risk Management Policy, 2011 Third Quartile 38.78% 1 Above Bottom Decile 60.54% 0 Others 0 1 6 C.2.I V Interest spread 5 Top Decile 7.19 5 Top Quartile 5.42 5 Second Quartile 4.19 4 Third Quartile 3.63 3 Above Bottom Decile 3.08 2 Others 0 1 7 C.2. V Growth in net profit 3 Top Decile 60.73% 3 Top Quartile 27.49% 3 Second Quartile 7.10% 3 Third Quartile -46.68% 2 Above Bottom Decile -88.91% 1 Others 0 C.3 Stressed asset position 19 1 8 C.3.I Net NPA percentage 8 Top Decile 0.00 8 Top Quartile 0.23 8 Second Quartile 0.84 6 Third Quartile 1.59 4 Above Bottom Decile 2.88 2 South Indian Bank Page 94
Credit Risk Management Policy, 2011 Others 0 1 9 C.3.I I Gross NPA percentage 4 Below 1% 4 Below 2% 3 Below 4% 2 Others 0 2 0 C.3.I II Net NPA / net worth 4 Below 1.00% 4 Below 4.00% 3 Below 7.00% 2 Below 10.00% 1 Others 0 2 1 C.3.I V Net NPA/ gross NPA 3 Below 10% 3 Below 20% 2 Below 30% 1 Others 0 C.4 Capital position 20 2 2 C.4.I Capital adequacy ratio 10 Top Decile 18.35 13.50% 10 Top Quartile 15.37 11.25% 8 Second Quartile 13.62 9.00% 6 Third Quartile 12.78 6.00% 2 Above Bottom Decile 12.41 0.00% 0 Others 0 2 3 C.4.I
I Capacity to raise capital 5 Easy 5 Medium 2 South Indian Bank Page 95
Credit Risk Management Policy, 2011 Difficult 0 2 4 C.4.I II BV/ FV of shares 2 Top Decile 81.75 2 Top Quartile 40.22 2 Second Quartile 15.67 1 Third Quartile 8.28 0 Above Bottom Decile 2.92 0 Others 0 2 5 C.4.I V Market Capitalisatio n 3 Top Decile 127659.9 0 3 Top Quartile 23316.75 3 Second Quartile 6143.78 2 Third Quartile 925.54 1 Above Bottom Decile 0.00 0 Others 0 Grand Total 100 Rating Awarded ** Industry position is average of all the banks which will be based on working, so the industry position may vary on rating. South Indian Bank Page 96
Credit Risk Management Policy, 2011 Annexure 15 Rating Model for Housing Finance Companies A/c Branch : MANAGEMENT RISKS Marks Alloted Maximum 2011 30 0 1 Group Profile High Reputation 5 5Medium Reputation 2 Not known in the market 0 2 Experience of the Promoters. Above 10 years 5 5Above 5 years but below 10 yrs 2 New venture 0 3 Management Proficiency. Professional Management 5 5Family Concern 3 Mixed Management 4 4 Top Executives. Highly qualified 5 5Qualified 2 Not qualified. 0 5 Stock market awareness. Average quote above 2 times fv 7 7Average quote not less than fv. 4 Unquoted shares 0 6 Level of Industrial Relations. Satisfactory IR 3 3 Poor IR 0 OPERATIONAL RISKS 40 0 1 Infrastructure: Human Resources. Potential staff Normal 3 3 0 2 Branch Net work All India presence State Presence Single Office
3 32 0 3 Computer Support System for MIS Latest Product Normal automation Manual operations 3 32 0 4 Supply of information to the Bank. Regular Delayed Blocked 3 31 0 5 Record of irregularity No irregularity Occassional irregularity Irregular 5 52 0 South Indian Bank Page 97
Credit Risk Management Policy, 2011 6 Limit Management Fluctuating balances Stagnant. 3 3 1 7 Compliance of sanction stipulations 100% compliance Majority complied Poor compliance 4 42 0 8 Collateral Cover 100% cover 50% cover 25% cover Less than 25% 3 3 2 1 0 9 Recovery of loans by the company. Overdues less than 3% Overdue less than 5% Less than or equal to 10% More than 10%. 4 4 3 1 0 10 Loan to Net Worth . Less than permitted by RBI Up to the ceiling 3 3 1 11 Registration with RBI Registered Unregistered 3 3 0 12 Public Confidence. Permitted to accept Public Deposits Not permitted to accept 3 3 0 FINANCIAL RISKS 30 0
1 Current Ratio More than 1.33 More than 1.00 Less than 1.00 4 43 0 2 Net Working Capital in relation to Current Assets in excess of bench mark More than 25% More than 10% Less than 10% 6 63 0 3 Operating Profit Margin Increased from previous Same as previous Year Less than previous Year 5 52 0 4 Net Profit Increased from previous Same as previous Year Less than previous Year 4 42 0 5 Return on Capital employed Increased from previous Same as previous Year Less than previous Year 7 75 0 6 Retained profit. Increased from previous Same as previous Year Less than previous Year 4 43 0 TOTAL 100 0 ADJUSTED TOTAL 100 0 RATING AWARDED
year
year
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Credit Risk Management Policy, 2011 Annexure 16 Rating Model for Non Banking Finance Companies A/c: Branch: B. MANAGEMENT RISKS. A.Promoters: Max. Marks Marks Alloted 2011 1 Group Profile High Reputation Medium Reputation Not known in the market 5 1-4 0 5 Above 10 years 5 Above 8 years but below 10yrs 4 Experience of the Above 6 years but below 8 yrs 3 2 5 Promoters. Above 4 years but below 6 yrs 2 Above 2 years but below 4 yrs 1 Others 0 Management Professional Management 5 3 Proficiency. Mixed Management 4 5 Family Concern 3 4 Top Executives. Highlyqualified Moderate Qualification Not qualified. 5 1-4 0 5 Average quote above 2 times Stock market fv 7 5 Avg Quote above 1 to 2, in the 7 awareness. grade of 0.2 2-6 Unquoted shares 0 Level of Industrial Satisfactory IR 3 6 Relations. Moderate IR 1-2 3 Poor IR 0 30 0
B.Operational Risks: 1 Infrastructure: Human Resources. Qualified and experienced personnel Moderately qualified, experienced Others 3 1-2 0 3 2 Branch Net work All India presence State Presence District Presence Single Office 3 2 1 0 3 3 Computer Support Latest Product 3 3 South Indian Bank Page 99
Credit Risk Management Policy, 2011 System for MIS Normal automation Manual Operations 1-2 0 4 Supply of information to the Bank. Regular Average Delay Long Delay 3 1-2 0 3 Record of No irregularity 5 5 irregularity Occassional irregularity 1-4 5 Irregular 0 6 Limit Management Fluctuating balances Moderately Fluctuating Stagnant. 3 2 1 3 Compliance of 100% compliance Compliance in level of 4 7 sanction stipulations criticality 1-3 4 Poor compliance 0 100% cover 3 50% cover 2 8 Collateral Cover 3 25% Cover 1 Less Than 25% 0 Overdues less than 3% 4 Recovery of loans Overdue less than 5% 3 9 by the company. Less than 8% 2 4 Less than or equal to 10% 1 More than 10%. 0 Loan to Net Worth freedom to banks for Less than permitted by RBI 3 10 3 Registered companies Up to the ceiling
1 11 Registration with RBI Registered Unregistered 3 0 3 Permitted to accept Public 3 12 Public Confidence. Deposits 3 Not permitted to accept 0 40 0 C. Financials: 1 Current Ratio More than 1.33 More than 1.00 Less than 1.00 4 3 0 4 2 Net Working Capital More than 25% More than 20% More than 15% More than 10% 6 5 4 3 6 South Indian Bank Page 100
Credit Risk Management Policy, 2011 Less than 10% 0 Increased by more from previous year than 10% 5 Increased by more from previous year than 5% 4 3 Operating Margin Profit Same as previous Year or more Fell by 10% compared to last year 3 2 5 Fell my more than compared to last year 10% 1 Loss 0 Increased by previous year 10% from 4 4 Net Profit Increased from previous year Same as previous year 3 2 4 Less than previous Year 1 Loss 0 Increased by previous year 10% from 7 Increased less than 10% 6 Same as previous year 5 5 Return on employed Capital Fell by 5% from last year Fell by 10% compared to last year 4 3 7 Fell by 15% compared to last year 2 Fell by more last year
than 15% from 1 Negative Returns 0 Increased from previous Year 4 Same as previous Year 3 6 Retained profit. Fell by 10% compared to last year 2 4 Fell by more than compared to last year 10% 1 Loss 0 30.00 0.00 Total Score 100.00 0.00 Adjusted Total 100.00 0.00 Rating Awarded South Indian Bank Page 101
Credit Risk Management Policy, 2011 Annexure 17 Rating Model for term loan borrowers A. MANAGEMENT RISKS. Max. Marks Marks Awarded 1 Age of applicant/ Average age of applicants Below 25 years Above 25 years upto 50 yrs Above 50 years upto 75yrs Above 75 years 5 7 5 0 7 2 Source of Income Profit / Salaried Reputed Public/Pvt cos or govt service Trader /Contractor / other business of established nature Agriculture Broker / Capital market (wide fluctuation in income anticipated) 6 5 2 0 6 3 Past satisfactory dealings with our bank. 1. > 8 years SB/CD a/c 2. > 4 years upto 8 years 3. > 2 years upto 4 years 4. < 2 years 7 6 3 0 7 20 B.Operational Risks: 1 Supply of information to the Bank. Regular Delayed Blocked 5 2 0 5 2 Record of irregularity Prompt repayment Stray case of Minor Irregularity Occassional irregularity Irregular
5 4 2 0 5 3 Compliance of sanction stipulations 100% compliance Majority complied Poor compliance 5 3 0 5 4 Security Cover (Primary + Collateral) >= 200% Pro-Rata basis for 125 to 200% 125% <125% 6 4 0 6 5 Out of the above ,Liquid security, like >=50% 25% > 50% 4 3 4 South Indian Bank Page 102
Credit Risk Management Policy, 2011 deposits/ NSC/ KVP / Gold etc <10% > 25% Available Nil 2 1 0 6 Type of security Residential property along with or without commercial property Commercial / industrial property alone Agriculture/ vacant plot Movables only 5 3 2 0 5 15 C. Market Risks 1 Variation in Income level of Borrower (Gross Income/ Turn Over) Up by 10% or more Up but less than 10% Remained at Same Reduced 6 4 2 0 6 2 Appreciation / depreciation of the value of asset Highly Apreciated Appreciated Remained at same level Reduced / No asset acquired 6 5 2 0 6 3 Utilization of the asset For own business / occupation For letting out / let out Investment No asset acquired 6 4 2 0 6 4 Location of the Security Urban area with good demand
Urban area moderate demand Rural area with good demand Rural area with moderate demand Rural developing area 6 4 3 2 0 6 5 Purpose of the Asset/Loan 1. Consumption 2. Investment Capital maket 3. Investment Others 4. Productive-and Remunerative 0 2 4 6 6 30 D Financial Risks 1 Return on Capital employed More than 15% More than 10% 5 4 5 South Indian Bank Page 103
Credit Risk Management Policy, 2011 More than 5% More than 0 Negative 3 2 0 Ratio of cash surplus to >3.0 5 repayment commitment >2.5<3.0 3 2 (incase of entity with Balance sheet & P&L >2.00<2.5 2 5 account DSCR for the year to be taken) >1.50 <2 1 (1) High Income High net worth NW>5times loan & loan less than 30 times monthly income, (2.5 times annual income) 5 Profile, Loan to net worth of all borrowers together. (incase of entity with Balance (2) Medium income & Net worth NW>3 times loan & loan less than 36 times monthly income, (3 times annual income) 3 3 sheet & P&L account 5 TOL/TNW & Income to borrowings for the year to be taken) (3) Average income & Net worth NW>1.5 times loan & loan less than 42 times monthly income, (3.5 times annual income) 2 (4) Else, Low income & Low net worth. NW >= loan & Loan amount . 48 times MI 0 >3.5 times 5 Gross Income to Loan >3 times to 3.5 times 3 4 5 Borrowings >2.5 times to 3.5 times 2 Else 0 20 Total 100 Adjusted Total 100 Rating Awarded South Indian Bank Page 104
Credit Risk Management Policy, 2011 Annexure 18 Rating for Non Fund Based Advances A. I a FINANCIAL RISKS Profitability Net Profit /Net Sales 1) > =15% 2) <15%>=10% 3) <10%>=5% 4) <5% Loss Max Marks 30 5 5 4 2 1 0 Marks Awarded 2011 b Total Bank Borrowings Incl NFB / TNW <=4 >4<=5 >5<=6 >6 5 2 1 0 5 c. PBDIT/Interest 1. If >=2 2. If <2>1.5 3. If <1.5>1.25 4. If <1.25 5 4 2 0 5 d Return on Capital Employed 1. > 10% and increased from previous year 2. > 10% and Reduced from previous year 3 > 5% and increased from previous year 4. > 5% and Reduced from previous year 5. Else 5 4 3 2 0
5 II a Liquidity Current Ratio 1 CR >=1.25 2 CR<1.25>=1.10 3. CR<1.1>=1.0 4. <1 5 4 2 0 5 South Indian Bank Page 105
Credit Risk Management Policy, 2011 b Growth in Sales Turn Over compared to previous year 1) Above 50% 5 2) Above 25% 4 3) Above 10% 3 5 4) Less than 10% 2 50 Reduced 0 B 1 BUSINESS RISKS Purpose of the NFB limits 15 1. Performance orporate / Bid Bond guarentee 5 2. Import /purchase of raw materials 4 5 3. Against customs / tax department 2 4. Financial guarentee 0 2 Restrictions on the business 1. No trade restrictions 2. Occasional restrictions ( orporate credit contol, 5 5 essential commoditiesetc.) 3 3. Restricted trade 0 3 Beneficiary Govt companies / Reputed corporates 5 Trusts/ orporate / firms etc of reputation 3 5 Other business concerns 2 indviduals 0 C MANAGEMENT RISKS 15 1 Experience of the trader/ group 1. Reputed Business group 5 2. Moderate 3 5 3. New Venture 0 2 Total Networth of the proprietor/partners/Company 1 . Over 4 times loan amount 5 2. Over 2 times but less than 4 times 3 5 3. All others 0 3 Dealing with us 1. More than 10 years 5 5 South Indian Bank Page 106
Credit Risk Management Policy, 2011 2. Less than 10 years but more than 8 years 4 3. Less than 8 years but more than 5 years 3 4. Less than 5 years but more than 3 years 2 5. Less than 3 years 1 D 1 OPERATIONAL RISKS Supply of informations to the Bank 20 1.Prompt supply 4 2.Delayed supply 2 4 2 3.Defaults in supply Record of irregularity 0 1.No Default / devolvement in repayment commitments 5 2. Only stray instance of irregularity 3 5 3 3 More instances of irregularity Compliance of sanction terms 0 1. 100% compliance 4 2. No major non-compliance 2 4 4 3. All others Any instance of attachment by Govt Dept. / Court 0 1. No instance 3 2. One stray instance 2 3 5 3. More than one instance Any huge contingent liability pending decision of court 0 1. Does exist 0 2 6 2. Does not exist Whether any of the group concerns are irregular / NPA 2 1. Yes 0 2 2. No 2 E FACILITY RISK 1 Margin on NFB 20 1 >= 50% 5 5 2 >= 25% 4 South Indian Bank Page 107
Credit Risk Management Policy, 2011 2 3 3 >= 15% 4. >= 10% 5. < 10% Collateral coverage Excluding margin deposit. 1. >= 125% 2. Prorata for all coverages 50-125% 3. 50% 4. < 50% -No marks If 2nd Charge, only 50% marks Nature of collateral 1. Liquid security as NSC, LIC , FD at least equal 2. As NSC, LIC , at least 50% 3. Residential properties 4. Other mortuguages 5. Only personal guarentee 3 2 0 10 4 0 5 4 3 2 0 10 5 Total 100 Adjusted Total 100 Rating awarded South Indian Bank Page 108
Credit Risk Management Policy, 2011 Annexure 19 Model for rating new projects having exposures of not more than Rs. 5 Crore. Stage I ( Details are given below ) Risk Marks Project Risk 10 Management Risk 10 Financial Risk 20 Total 40 Details of Stage I Model for rating accounts with exposures above Rs.10 Lacs and not more than Rs.500 Lacs. A/c Branch Categories Marks Max marks A Project risk 10 1 A.1 Nature of project 5 1 Experienced promoters, accepted product 5 2 Experience in different line, accepted product 3 3 Experienced promoters, new product 2 4 First time entrepreneurs, accepted product 1 5 First time entrepreneurs, new product 0 2 A.2 Period of project 3 1 Less than 12 months 3 2 12 to 24 months 2 3 24 to 36 months 1 4 Above 36 months 0 3 A.3 Contingency provision 2 1 Adequately provided 2 2 Not adequately provided 1 3 Not provided 0 B Management Risk 10 4 B.1 Total Networth of the proprietor/partners/directors (If Personal Gtee) 5 1 >= 5 times loan amount 5 2 >= 4 times loan amount and < than 5 times 4 South Indian Bank Page 109
Credit Risk Management Policy, 2011 3 4 5 6 5 1 2 3 4 5 6 C 6 1 2 3 7 1 2 3 8 1 2 3 4 >=3 times loan amount and < than 4 times. 3 >= 2 times loan amount and < than 3 times. 2 >= 1 time the loan amount and < than 2 times. 1 Less than the loan amount 0 B.2 Dealing with us 5 More than 5 years 5 Less than 5 years but more than 4 years 4 Less than 4 years but more than 3 years 3 Less than 3 years but more than 2 years 2 Less than 2 years 1 New Customer 0 Financial Risk 20 C.1 Projected TOL/TNW 10 <=3 Times 10 Above 3 times and less than 4 times 5 More than 4 times 0 C.2 Project Debt-equity ratio (exclusively for the project) 5 Debt not more than 2 times equity 5 Debt not more than 3 times equity 2 Other Cases 0 C.3 DSCR 5 More than 2 5 More than 1.75 3 More than 1.50 2 Less than 1.50 0
Minimum required to be considered for stage II: 50% (including 50% marks in Financial Risk) Stage II : Collateral Coverage for assigning rating Collateral value as % of proposed exposure Rating 50% and above & < 75% BB 75% and above & < 90% BBB 90 % and above & < 110% A 110 % and above AA South Indian Bank Page 110
Credit Risk Management Policy, 2011 Annexure 20 The Definition of Infrastructure Lending and List of the Items included under Infrastructure Sector (Master Circular DBOD.No.Dir.BC.6/13.03.00/2011-12 dated 0 1072011) Any credit facility in whatever form extended by lenders (i.e. banks, FI s or NBFC s) to an infrastructure facility as specified below falls within the definition of infrast ructure lending . In other words, a credit facility provided to a borrower company engaged in: developing or operating and maintaining, or developing, operating and maintaining any infrastructure facility that is a proj ect in any of the following sectors, or any infrastructure facility of a similar nature : i. a road, including toll road, a bridge or a rail system; ii. a highway project including other activities being an integral part of the h ighway project; iii. a port, airport, inland waterway or inland port; iv. a water supply project, irrigation project, water treatment system, sanitati on and sewerage system or solid waste management system; v. telecommunication services whether basic or cellular, including radio paging, domestic satellite service (i.e., a satellite owned and operated by an Indian company for providing telecommunication service), Telecom Towers, network of trunking, broadband network and internet services; vi. an industrial park or special economic zone ; vii. generation or generation and distribution of power including power projects based on all the renewable energy sources such as wind, biomass, small hydro, solar, etc. viii. transmission or distribution of power by laying a network of new transmission or distribution lines. ix. projects involving agro-processing and supply of inputs to agriculture; x. projects for preservation and storage of processed agro-products, perishable goo ds such as fruits, vegetables and flowers including testing facilities for quality; xi. educational institutions and hospitals. xii. laying down and / or maintenance of pipelines for gas, crude oil, petroleum, minerals including city gas distribution networks. xiii. any other infrastructure facility of similar nature.
Credit Risk Management Policy, 2011 Annexure 21 RBI Guidelines on Exposure Ceiling 1. The exposure ceiling limits would be 15 percent of capital funds in case of a si ngle borrower and 40 percent of capital funds in the case of a borrower group. The ca pital funds for the purpose will comprise of Tier I and Tier II capital as defined und er capital adequacy standards 2. Credit exposure to a single borrower may exceed the exposure norm of 15 percent of the bank s capital funds by an additional 5 percent (i.e. up to 20 percent) provid ed the additional credit exposure is on account of extension of credit to infrastructur e projects. Credit exposure to borrowers belonging to a group may exceed the expos ure norm of 40 percent of the bank s capital funds by an additional 10 percent (i.e., up to 50 percent), provided the additional credit exposure is on account of extension of credit to infrastructure projects. The definition of infrastructure lending and the list of the items included under infrastructure sector are furnished in Annexure 20. 3. In addition to the exposure permitted above, bank may, in exceptional circumstan ces, with the approval of their Boards, consider enhancement of the exposure to a borrower (single as well as group) up to a further 5 percent of capital funds. 4. The bank should make appropriate disclosures in the Notes on account to the annual financial statements in respect of the exposures where the bank had exceeded the prudential exposure limits during the year. 5. The exposure limits will also be applicable to lending under consortium arrangements. 6. Bills purchased / discounted / negotiated under LC (where the payment to the beneficiary is not made under reserve ) will be treated as an exposure on the LC issuing bank and not on the borrower. In the case of negotiations under reserve th e exposure should be treated as on the borrower. Exemptions 7. The ceilings on single/group exposure limits are not applicable to existing/addi tional credit facilities (including funding of interest and irregularities) granted to weak/sick industrial units under rehabilitation packages. South Indian Bank
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Credit Risk Management Policy, 2011 8. Borrowers, to whom limits are allocated directly by the Reserve Bank for food cr edit, will be exempt from the ceiling. 9. The ceilings on single /group exposure limit would not be applicable where princ ipal and interest are fully guaranteed by the Government of India. 10. Loans and advances (both funded and non-funded facilities) granted against t he security of a bank s own term deposits may not be reckoned for computing the exposure to the extent that the bank has a specific lien on such deposits. 11. The ceiling on single/group borrower exposure limit will not be applicable to exposure assumed by banks on NABARD. The individual banks are free to determine the size of the exposure to NABARD as per the policy framed by their respective Board of Directors. However, banks may note that there is no exemption from the prohibitions relating to investments in unrated non-SLR securities prescribed in terms of the Master Circular on Prudential Norms for Classification, Valuation and Operations of Investment Portfolio by Banks, as amended from time to time. (Exposure shall include credit exposure (funded and non-funded credit limits) an d investment exposure (including underwriting and similar commitments). The sancti oned limits or out standings, whichever are higher, shall be reckoned for arriving at the exposure limit. However, in the case of fully drawn term loans, where there is n o scope for re-drawal of any portion of the sanctioned limit; banks may reckon the outst anding as the exposure.) South Indian Bank Page 113
Credit Risk Management Policy, 2011 Annexure 22 BROAD GUIDELINES ISSUED BY RBI FOR GUARANTEES AND COACCEPTANCE Guaranteeing banks The Board of Directors should reckon the integrity / robustness of the bank's risk management systems and accordingly put in place a well-laid out policy in this regard. The guarantee shall be extended only in respect of borrower constituents and to enable them to avail of additional credit facility from other banks/FIs/lending agencies. The guaranteeing bank shall assume a funded exposure of at least 10% of the exposure guaranteed. Bank should not extend guarantees or letters of comfort in favour of overseas lenders including those assignable to overseas lenders, except for the relaxatio ns permitted under FEMA. The guarantee issued by the bank will be an exposure on the borrowing entity on whosebehalf the guarantee has been issued and will attract appropriate risk weight as per the extant guidelines. Bank should ensure compliance with the recommendations of the Ghosh Committee and other internal requirements relating to issue of guarantees to obviate the possibility of frauds in this area. Lending Bank Bank extending credit facilities against the guarantees issued by other Bank/FIs should ensure strict compliance with the following conditions: The exposure assumed by the bank against the guarantee of another bank/FI will be deemed as an exposure on the guaranteeing bank/FI and will attract appropriate risk weight as per the extant guidelines. South Indian Bank Page 114
Credit Risk Management Policy, 2011 Exposures assumed by way of credit facilities extended against the guarantees issued by other banks should be reckoned within the inter bank exposure limits prescribed by the Board of Directors. Since the exposure assumed by the bank against the guarantee of another bank/FI will be for a fairly longer term than those assumed on account of inter bank dealings in the money market, foreign exchange market and securities market, Board of Directors shall fix an appropriate sub-limit for the longer term exposures since these exposures attrac t higher risk. Bank should monitor the exposure assumed on the guaranteeing bank/FI, on a continuous basis and ensure strict compliance with the prudential limits/sub lim its prescribed by the Board for Bank and the prudential single borrower limits prescribed by RBI for FI s. Bank should comply with the recommendations of the Ghosh Committee and other internal requirements relating to acceptance of guarantees of other Bank to obviate the possibility of frauds in this area. South Indian Bank Page 115
Credit Risk Management Policy, 2011 Annexure 23 Country Risk Classification & List of Approved Foreign Banks All banks (including foreign banks) with world ranking up to and including 1000 as per almanac have been approved by the Board for negotiating export bills drawn against LCs issued by these banks, provided they meet the following two conditio ns: 1. Country of origin of the bank should not be in the restricted cover country o f ECGC 2. Country risk classification by ECGC of the country of origin of the bank shou ld not be below B1 Moderate risk (3/7). Banks with world ranking up to and including 1000 and fulfilling the two conditi ons mentioned above will automatically come under the approved list and no separate sanction will be required for negotiating export bills against LCs drawn by thes e banks. Risk Management Systems in Banks Management. Criteria for 7-fold classification A1 (1/7): Politically stable, broad-based, strong and well-developed economy wit h a diversified export portfolio, strong external payments position with no possibility of transfer delay whatsoever. A2(2/7): Politically stable, relatively strong and well -developed economy. Comparatively w e l l -diversified export portfolio, moderately strong external payments situation that is unlikely to lead to transfer delays. B1 (3/7): No pronounced political instability, relatively strong economy but either structurally imbalanced or with poor growth rates, comparatively not well-diversified export portfolio, rather weak external payments position which is however unlikely to lead to transfer delays. B2 (4/7): Political instability (either present or imminent) and/or structurally imbalanced or with poor growth rates, and not well-diversified export portfolio which however is unlikely to lead to transfer delays. Should these occur they are resolved without refinancing or rescheduling? C1 (5/7): Political instability and/or unstable economy characterised by severe structural imbalances and poor or negative growth rates and characterised by narrow export base and pronounced weak external payments position which is likely to lead to transfer delays, Payment problems, including refinancing or rescheduling are likely. Full recovery on all debts is likely over the long term . South Indian Bank Page 116 Guidelines on Country Risk
Credit Risk Management Policy, 2011 C2 (6/7): Pronounced political instability and/or unstable economy characterized by very severe structural imbalances, poor or negative growth rates and weak and narrow export base and pronounced weak external payments position. Serious payment problems, including rescheduling and/or prolonged arrears are likely. Losses on some debts are likely over the short and medium term. Write-offs cannot be discounted. D (7/7): Acute and severe political instability, chronically unstable economy characterized by severe structural imbalances, very poor and/or negative growth rates, very weak and narrow export base, severe and chronical external payments problem including a record of repeated rescheduling and prolonged arrears are inevitable. Eventual forgiveness or effective repudiation likely. Severe losses on most debts are a possibility over the long term. COUNTRY RISK CLASSIFICATION BY ECGC AS ON 31st December 2011
ECGC has modified their previous model of risk rating. The new model includes th e following factors. 1. Economic Risk Rating 2. Political Risk Rating 3. ECGC experience 4. Economic and Political Relations with India 5. Experience of other Credit Insurers 6. Forecasting of these Parameters The list of countries has classified under three heads namely in open cover whic h includes 201 countries, Countries in Restricted Cover Group I which includes 24 Countries and Countries in Restricted Cover Group I which includes 12 Countries taking the total number of countries to 237. Country Risk Classification of Export Credit Guarantee Corporation of India Limited as at the end 31st December 2011. Countries in Open Cover Note: The country mentioned in the brackets represents the parent country (Order followed: Sl. No, Country, Group) Sr. Country Current No. Rating 31.12.2011 1 Albania B2 South Indian Bank Page 117
Credit Risk Management Policy, 2011 2 American Samoa A1 3 Andorra B2 4 Anguilla (UK) A1 5 Antigua and Barbuda B1 6 Argentina B1 7 Aruba (Netherlands) A1 8 Australia A1 9 Austria A2 10 Azerbaijan B1 11 Bahamas B2 12 Bangladesh B1 13 Barbados B2 14 Belarus B2 15 Belgium A1 16 Belize C1 17 Benin C1 18 Bermuda (UK) A1 19 Bhutan B2 20 Bolivia B1 21 Bosnia and Herzegovina B2 22 Botswana B1 23 Brazil A2 24 British Pacific (Pitcairn) Islands A1 25 British Virgin Islands A1 26 Brunei B1 27 Bulgaria B1 28 Burkina Faso C1 South Indian Bank Page 118
Credit Risk Management Policy, 2011 29 Burundi C2 30 Cambodia C1 31 Cameroon C1 32 Canada A1 33 Canary Islands (Spain) A2 34 Cayman Islands (UK) A1 35 Central African Republic D 36 Chad C2 37 Channel Isles (UK) A1 38 Chile A2 39 China A2 40 Christmas Island (Australia) A1 41 Cocos/Keeling Island (Australia) A1 42 Colombia A2 43 Comoros C2 44 Congo Republic B2 45 Cook Islands (New Zealand) A1 46 Costa Rica B1 47 Cote de Ivoire C1 48 Croatia B2 49 Cyprus B1 50 Czech Republic A2 51 Democratic Republic of Congo C2 52 Denmark A2 53 Djibouti C1 South Indian Bank Page 119
Credit Risk Management Policy, 2011 54 Dominica C1 55 Dominican Republic B2 56 Ecuador C1 57 El Salvador B2 58 Estonia B2 59 Ethiopia C1 60 Falkland Islands (UK) A1 61 Faroe Islands (Denmark) A2 62 Finland A2 63 France A1 64 French Guiana (France) A1 65 French Polynesia (France) A1 66 French South Atlantic Territories (France) A1 67 Gabon C1 68 Georgia C1 69 Germany A1 70 Ghana B2 71 Gibraltar (UK) A1 72 Greenland (Denmark) A2 73 Guadeloupe (France) A1 74 Guam (US) A1 75 Guatemala B2 76 Guinea C2 77 Guinea Bissau C2 78 Haiti C1 79 Heard Island and McDonald Island A1 South Indian Bank Page 120
Credit Risk Management Policy, 2011 (Australia) 80 Hong Kong (Sp. Ad. Region of China) A2 81 Hungary B1 82 India A1 83 Indonesia B1 84 Ireland A2 85 Israel A2 86 Italy A2 87 Jamaica B2 88 Japan A1 89 Kazakhstan B1 90 Kenya B1 91 Kiribati C2 92 Kuwait A2 93 Laos C1 94 Latvia B2 95 Lesotho B2 96 Liechtenstein A1 97 Lithuania B1 98 Luxembourg A2 99 Macao (China) A2 100 Madagascar C1 101 Malawi C1 102 Malaysia A2 103 Maldives C1 104 Mali B2 105 Malta B1 South Indian Bank Page 121
Credit Risk Management Policy, 2011 106 Marshall Islands C1 107 Martinique (France) A1 108 Mauritius A2 109 Mayotte (France) A1 110 Mexico A2 111 Micronesia B2 112 Moldova C1 113 Monaco A2 114 Mongolia C1 115 Montenegro C1 116 Montserrat (UK) A1 117 Morocco A2 118 Mozambique C1 119 Myanmar C2 120 Namibia B1 121 Nauru D 122 Nepal B1 123 Netherland Antilles (Netherlands) A1 124 Netherlands A1 125 New Caledonia (France) A1 126 New Zealand A1 127 Niger C1 128 Nigeria B1 129 Niue Island D 130 Norfolk Island (Australia) A1 131 Northern Mariana Islands (US) A1 South Indian Bank Page 122
Credit Risk Management Policy, 2011 132 133 134 135 136 137 138 139 140 141 142 143 144 145 146 147 148 149 150 151 152 153 154 155 156 157 158 159 Norway A1 Oman A2 Pakistan B2 Palau B2 Panama B1 Papua New Guinea B2 Paraguay B1 Peru A2 Philippines B1 Poland A2 Portugal A2 Puerto Rico (USA) A1 Qatar A2 Reunion Islands B1 Romania B1 Russia A2 Samoa C1 San Marino (Italy) A2 Sao Tome & Principie C2 Saudi Arabia A2 Senegal B2 Serbia C1 Singapore A1 Slovakia B1 Slovenia B1 Solomon Islands C1 South Africa A2 South Korea A1
Credit Risk Management Policy, 2011 160 Spain A2 161 Sri Lanka A2 162 St. Christopher and Nevis C1 163 St. Helena and Ascension (UK) A1 164 St. Lucia C1 165 St. Pierre and Miquelon (France) A1 166 St. Vincent and the Grenadines C1 167 Suriname C1 168 Swaziland C1 169 Sweden A1 170 Switzerland A1 171 Taiwan A2 172 Tanzania B1 173 Thailand B1 174 Togo C2 175 Tokealu (New Zealand) A1 176 Tonga B2 177 Trindiad and Tobago B1 178 Turkey B1 179 Turks and Caicos (UK) A1 180 Tuvalu C1 181 UAE A2 182 Uganda B2 183 Ukraine B2 184 United Kingdom A1 South Indian Bank Page 124
Credit Risk Management Policy, 2011 185 United States of America A1 186 Uruguay B1 187 US Pacific Islands (US) A1 188 US Virgin Islands A1 189 Vanuatu C1 190 Vatican City A1 191 Venezuela B2 192 Vietnam B1 193 Wallis and Futuna (France) A1 194 Western Sahara D 195 Zambia B2 196 Zimbabwe D Countries in Restricted Cover Group I for which revolving limits are approved
normally valid for 1 year. Sr. No. Country Current Rating 31.12.2011 1 Algeria B1 2 Angola C1 3 Armenia B2 4 Bahrain A2 5 Cape Verde C1 6 Cuba B2 7 Egypt A2 8 Equatorial Guinea C1 9 Eritrea C2 10 Gambia C1 South Indian Bank Page 125
Credit Risk Management Policy, 2011 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 Greece A2 Grenada C2 Guyana C2 Jordan B1 Kyrgyzstan C1 Liberia C2 Libya B1 Macedonia B2 Nicaragua C2 Palestine D Rwanda C1 Seychelles C1 Sierra Leone C2 Syria C1 Tajikistan C1 Tunisia A2 Turkmenistan C1 Uzbekistan B2 Yemen B2 Restricted Cover Group II for where Specific Approval will be given o
Countries in n a
case to case basis on merit. Sr. No. Country Current Rating 31.12.2011 1 Afghanistan C2 2 Fiji C1 3 Honduras C2 South Indian Bank Page 126
Credit Risk Management Policy, 2011 4 Iceland B2 5 Iran B1 6 Iraq C2 7 Lebanon C1 8 Mauritania C1 9 North Korea D 10 Somalia D 11 Sudan C1 12 Timor Leste D Risk Categories as mentioned by ECGC Risk category ECGC classification Insignificant A1 Low A2 Moderately low B1 Moderate B2 Moderately high C1 High C2 Very High D South Indian Bank Page 127
Credit Risk Management Policy, 2011 Annexure 24 Risk Weights as defined in guidelines on prudential exposure The risk weight of each of the following categories beyond Eligible Financial Co llateral will be as follows: Category Description Risk weight Loan to Central Government and Claims guaranteed by Government of India, Reserve Bank of India , DICGC and Credit Guarantee Fund Trust for Small Industries (CGTSI). Any loan Zero Loan guaranteed by State Governments Any loan 20% Loans to Regulatory Retail Portfolio. The exposure (both fund-based and non fund-based) takes the form of any of the following: revolving credits and lines of credit (including overdrafts), term loans and leases (e.g. installment loans and leases, student and educational loans) and small business facilities and commitments. Provided the exposure should not exceed the absolute threshold limit of `5 Crore and average annual business turn over ( the average of the last three years in the case of existing entities; projected turnover in the case of new entities; and both actual and projected turnover for entities which are yet to complete three years.)is less than `50 Crores irrespective of constitution (Exposure from Individual bank alone) Excluding (a) Exposures by way of investments in securities (b) Mortgage Loans to the extent that they qualify for treatment as claims 75% South Indian Bank Page 128
Credit Risk Management Policy, 2011 secured by residential property or claims secured by commercial real estate. (c) Loans and Advances to bank s own staff which are fully covered by superannuation benefits and / or mortgage of flat/ house. (d) Consumer credit, including personal loans and credit card receivables. (e) Capital market exposures. (f) Venture capital funds. Corporates (Exposure above ` 500.00 lacs or exposure with sales turn over above `.5000.00 lacs Exposure above 500.00 lacs and/or business turn over above than 5000.00 lacs irrespective of constitution (exposure from Individual bank alone) Risk weights depending upon the ratings, as instructed by RBI from time to time. The claims on ECGC ECIB available will be 65/75/90% depending on the exposure and type of guarantee. 20% The claims on banks incorporated in India and foreign bank branches in India, (scheduled banks), which comply with the minimum CRAR Excluding investment in equity shares and other instruments eligible for capital status. 20% All claims on non scheduled banks which meet the minimum CRAR. excluding investment inequity shares and other instruments eligible for capital status 100% All claims on other scheduled
and non scheduled banks (including investment in equity shares and other instruments CRAR (%) Schedule d Banks Other Bank s 6 to < 9 50% 150 % 3 to < 6 100% 250 South Indian Bank Page 129
Credit Risk Management Policy, 2011 eligible for capital status % 0 to < 3 150% 350 % Negative 625% 625 % Lending to Based on the loan to value ratio (LTV) Exposure upto `.30.00 lakh individuals for not more than 75%, based on banks =50% acquiring approved valuation policy. LTV Exposure from `. 30 lakh and residential ratio should be computed as a above but below `.75 lakh property which percentage with total outstanding in =75%. are fully secured the account (viz. principal+accrued by mortgages on interest+other charges pertaining to the LTV ratio more than 75% the residential loan without any netting) in the irrespective of amount property (ie numerator and the realizable value of the =100%. Housing Loans) residential property mortgaged to the bank in the denominator. Exposure of `.75 lakh and above, irrespective of the LTV ratio = 125% Restructured housing loans should be risk weighted with an additional risk weight of 25 per cent to the risk weights prescribed above. Commercial real Fund based and non-fund based 100% estate exposures to accounts that can be classified under Commercial Real Estate as defined in annexure 25. Non-performing For the purpose of computing the level The unsecured portion of assets (NPAs) of specific provisions in NPAs for deciding the risk-weighting, all funded NPA exposures of a single counterparty (without netting the value of the eligible collateral) should be reckoned in the denominator. For the purpose of defining the secured portion of the NPA, eligible collateral will be the same as recognized for credit risk mitigation purposes. Hence, other forms of collateral like land, buildings, plant, machinery, current assets, etc. will not be reckoned while computing the secured portion of NPAs for capital adequacy purposes. NPA, net of specific provisions (including partial write-offs), will be riskweighted as follows: (i) 150% risk weight when specific provisions are less than 20% of the outstanding amount of the NPA ;
(ii) 100% risk weight when specific provisions are at least 20% of the outstanding amount of the NPA ; (iii) 50% risk weight when specific provisions are at least 50% of the outstanding amount of the NPA. South Indian Bank Page 130
Credit Risk Management Policy, 2011 When NPA is fully secured by Fixed assets, along with other eligible collateral (i) Land and building which are valued by an expert valuer and where the valuation is not more than three years old, and (ii) Plant and machinery in good working condition at a value not higher than the depreciated value as reflected in the audited balance sheet of the borrower, which is not older than eighteen months. 100% risk weight will apply, net of specific provisions, when provisions reach 15% of the outstanding amount: Claims secured Risk weighted at 100% net of by residential specific provisions. property, as If the specific provisions in defined above, such loans are at least 20% but which are NPA. less than 50% of the outstanding amount, the risk weight applicable to the loan net of specific provisions will be 75%. If the specific provisions are 50% or more the applicable risk weight will be 50%. Specified categories Venture capital funds Fund based and non-fund based claims. Exposures will attract a higher risk weight of 150%: Consumer credit. Consumer loans including personal loans and credit card receivables but excluding educational loans. 125%. Capital market exposures 125% risk weight or risk weight warranted by external rating (or lack of it) of the counterparty, whichever is higher. Claims on Nondeposit taking systemically important nonbanking financial companies ,other than AFCs and NBFC-IFCs,
regardless of the amount of claim, Reserve Bank from time to time. 100% South Indian Bank Page 131
Credit Risk Management Policy, 2011 Loans and Which are fully covered by advances to superannuation benefits and/or bank s own staff mortgage of flat/ house= 20% Other loans and advances =75% Loan against Gold: Gold would include both Fully covered by gold as Pledge of Gold bullion and jewellery. However, the value of the collateralized jewellery should be arrived at after notionally converting these to 99.99 purity. per haircut = Zero. Un covered portion 125%. Rescheduled With a view to reflect a higher element The unrated standard / accounts of inherent risk which may be latent in entities whose obligations have been subjected to re-structuring / rescheduling either by banks on their own or along with other bankers / creditors, performing claims on these entities should be assigned a higher risk weight until satisfactory performance under the revised payment schedule has been established for one year from the date when the first payment of interest / principal falls due under the revised schedule. The applicable risk weights will be 125 per cent. Claims on NBFC Claims on rated as well as unrated NBFCs other than AFCs and NBFCIFCs 100% Any other facilities not mentioned above shall attract risk weight prescribed as per the Master Circular on Prudential Guidelines on Capital Adequacy or as per updated c irculars of RBI. South Indian Bank Page 132
Credit Risk Management Policy, 2011 Off Balance Sheet Exposures and Unavailed Exposures. Sr No Instruments Credit Conversion Factor (CCF) 1 Direct credit substitutes e.g. general guarantees of indebtedness (including standby L/Cs serving as financial guarantees for loans and securities, credit enhancements, liquidity facilities for securitisation transactions), and acceptances (including endorsements with the character of acceptance). (i.e., the risk of loss depends on the credit worthiness of the counterparty or the party against whom a potential claim is acquired) 100% 2 Certain transaction-related contingent items (e.g. performance bonds, bid bonds, warranties, indemnities and standby letters of credit related to particular transaction). 50% 3 Short-term self-liquidating trade letters of credit arising from the movement of goods (e.g. documentary credits collateralised by the underlying shipment) for both issuing bank and confirming bank. 20% 4 Sale and repurchase agreement and asset sales with recourse, where the credit risk remains with the bank. (These items are to be risk weighted according to the type of asset and not according to the type of counterparty with whom the transaction has been entered into.) 100% 5 Forward asset purchases, forward deposits and partly paid shares and securities, which represent commitments with certain drawdown. (These items are to be risk weighted according to the type of asset and not according to the type of counterparty with whom the transaction has been entered into.) 100% 6 Lending of banks securities or posting of securities as collateral by banks, including instances where these arise out of repo style transactions (i.e., repurchase / reverse repurchase and securities lending / securities borrowing transactions) 100% 7 Note issuance facilities and revolving / non-revolving underwriting facilities. 50% 8 Commitments with certain drawdown 100% 9 Other commitments (e.g., formal standby facilities and credit lines) with an original maturity of a) up to one year 20% b) over one year. 50% Similar commitments that are unconditionally cancellable at any time 0% South Indian Bank Page 133
Credit Risk Management Policy, 2011 by the bank without prior notice or that effectively provide for automatic cancellation due to deterioration in a borrower s credit worthiness 10 Take-out Finance in the books of taking-over institution (i) Unconditional take-out finance (ii) Conditional take-out finance 100% 50% Off Balance Sheet Exposure will be multiplied by the credit conversion factor an d the credit equalent so obtained will bear same risk weight as applicable to the counter par ty concerned. Eligible Financial Collaterals 1 Cash (as well as certificates of deposit or comparable instruments, including fixed deposit receipts, issued by the lending bank) on deposit with the bank which is incurring the counterparty exposure. 2 Gold: Gold would include both bullion and jewellery. However, the value of the collateralised jewellery should be arrived at after notionally converting these to 99.99 purity. 3 Securities issued by Central and State Governments 4 Kisan Vikas Patra and National Savings Certificates provided no lock-in period is operational and if they can be encashed within the holding period. 5 Life insurance policies with a declared surrender value of an insurance compan y which is regulated by an insurance sector regulator. 6 Debt securities rated by a chosen Credit Rating Agency in respect of which ban ks should be sufficiently confident about the market liquidity (satisfying the cond itions set by regulator) 7 Debt Securities not rated by a chosen Credit Rating Agency in respect of which banks should be sufficiently confident about the market liquidity (satisfying th e conditions set by regulator) 8 Units of Mutual Funds regulated by the securities regulator of the jurisdictio n of the bank s operation mutual funds (satisfying the conditions set by regulator) South Indian Bank Page 134
Credit Risk Management Policy, 2011 Annexure 25 Guidelines of Reserve Bank of India for classification of accounts as Commercial Real estate (CRE) Reserve Bank of India has revised its guidelines on classification of commercial real estate th (CRE), vide RBI/2009-10/151 DBOD.BP.BC.No. 42 / 08.12.015/ 2009-10 dated 9 September 2009. Relevant portions of the circular are given as follows. Reserve Bank defines Income-producing real estate (IPRE) as has been done in par a 226 of the Basel-II Framework, as below: "Income-producing real estate (IPRE) refers to a method of providing funding to real estate (such as, office buildings to let, retail space, multifamily residential buildings, industrial or warehouse space, and hotels) where the prospects for repayment and recovery on the exposure depend primarily on the cash flows generated by the asset. The primary source of these cash flows would generally be lease or rental payments or the sale of the asset. The borrower may be, but is not required to b e, an SPE (Special Purpose Entity), an operating company focused on real estate construction or holdings, or an operating company with sources of revenue other than real estate. The distinguishing characteristic of IPRE versus other corporate ex posures that are collateralised by real estate is the strong positive correlation betwee n the prospects for repayment of the exposure and the prospects for recovery in the event of default, with both depending primarily on the cash flows generated by a property. From the definition of IPRE given above it may be seen that for an exposure to b e classified as IPRE/CRE, the essential feature would be that the funding will res ult in the creation / acquisition of real estate (such as, office buildings to let, ret ail space, multifamily residential buildings, industrial or warehouse space, and hotels) wh ere the prospects for repayment would depend primarily on the cash flows generated by th e asset. Additionally, the prospect of recovery in the event of default would also depend primarily on the cash flows generated from such funded asset which is taken as security, as would generally be the case. The primary source of cash flow (i.e. more
than 50% of cash flows) for repayment would generally be lease or rental payment s or the sale of the assets as also for recovery in the event of default where such a sset is taken as security. These guidelines will also be applicable to certain cases where the exposure may not be directly linked to the creation or acquisition of CRE but the repayment would South Indian Bank Page 135
Credit Risk Management Policy, 2011 come from the cash flows generated by CRE. For example, exposures taken against existing commercial real estate whose prospects of repayments primarily depend o n rental/ sale proceeds of the real estate should be classified as CRE. Other such cases may include: extension of guarantees on behalf of companies engaged in commercial real estate activities, exposures on account of derivative transactions undertaken with real estate companies, corporate loans extended to real estate companies and investment made in the equity and debt instruments of real estate companies. Exposures which should be classified as CRE A) Loans extended to builders towards construction of any property which is inte nded to be sold or given on lease. However, construction for own use is exempted. Financing of acquisition / renovation of self-owned office / company premises is not to be classified as CRE. B) In the case of housing units otherwise classified as residential mortgage cat egory, if the total number of housing units is more than two, the exposure for the thir d unit onwards to be treated as CRE exposure as the borrower may be renting these housi ng units and the rental income would be the primary source of repayment. C) Loans for integrated township projects. D) Exposures towards development of SEZ, but following categories should be exem pted. i) In cases where there are arrangements to insulate the lease rentals from volatility in the real estate prices by way of lease agreements for periods not shorter than that of the loan and there is no clause which allows downward adjustment in the lease rentals, such cases need not be treated as CRE from the time such conditions get fulfilled. ii) In cases the repayment depends on the cash flows generated by the economic activities of the units in the SEZ and the general cash flow of the company rather than the level of real estate prices, such as when the development is done for own use or income is shared between company and the developer instead of merely on rent, such exposures should not then be classified as CRE. iii) If the repayment of co-developers in an SEZ undertaking a specific job such as provision of sewerage, electrical lines etc., is not dependent on the cash flows generated by the CRE asset, such exposures would not be classified as CRE. Same treatment would be applied if the co-developer is paid by the main developer based on progress in work.
E) In some cases exposure to real estate companies is not directly linked to the creation or acquisition of CRE, but the repayment would come from the cash flows generated b y Commercial Real Estate. Such exposures illustratively could be: South Indian Bank Page 136
Credit Risk Management Policy, 2011 i) Corporate loans extended to these companies, ii) Investments made in the equity/units/debt instruments of these companies, iii) Extension of guarantees on behalf of these companies, iv) Derivatives transactions entered into with these companies. F) Exposures to MFs/VCFs/PEFs investing primarily in the real estate companies. G) General purpose loans where repayment is dependent on real estate prices. Exemption A) If the loan extended to a company that is engaged in mixed activities includi ng real estate activity is for a specific purpose not linked to a real estate activity, such exposure need not be classified as CRE. B) Loans extended against the security of future rent receivables, if there are certain inbuilt safety conditions which have the effect of delinking the repayments from real estate price volatility like, the lease rental agreement between the lesser and lessee has a lock in period which is not shorter than the tenor of loan and there is no cla use which allows a downward revision in the rentals during the period covered by the loan banks can classify such exposures as non CRE. Banks may, however, record a reasoned note in all such cases. C) Credit facilities provided to construction companies which work as contractor s. D) Advances to Housing Finance Companies (HFCs). Other Guidelines A) In terms of Master Circular DBOD. No. DIR. (HSG). BC.08/08.12.01 /2009-10 dat ed July 1, 2009 on Housing Finance, finance may be extended to public agencies, and not to private builders, for acquisition and development of land, provided it is a part of the complete project including development of infrastructure such as water systems, drainage, roads, provision of electricity, etc. Where land is acquired and developed by State Hou sing Boards and other public agencies, finance may be extended to private builders on commer cial terms by way of loans linked to each specific project. However, fund based or non fund based facilities to private builders for acquisition of land even as part of a housing project cannot be granted. South Indian Bank Page 137
Credit Risk Management Policy, 2011 B) Bank finance can also be granted to individuals for purchase of a plot, provi ded a declaration is obtained from the borrower that he intends to construct a house on the said p lot, within such period as may be laid down by the banks themselves. C) It is possible for an exposure to get classified simultaneously into more tha n one category, as different classifications are driven by different considerations. In such cas es, the exposure would be reckoned for regulatory/ prudential exposure limit, if any, fixed by RB I or by the bank itself, for all the categories to which the exposure is assigned. For the p urpose of capital adequacy, the largest of the risk weights applicable among all the categories wo uld be applicable for the exposure. The exposure should also be reported to RBI under b oth the classifications with an appropriate foot note to avoid double counting. South Indian Bank Page 138
Credit Risk Management Policy, 2011 Annexure 26 RBI Norms on mapping of exposure The Revised Framework of Basel II recommends development of a mapping process to assign the ratings issued by eligible credit rating agencies (CRISIL, ICRA, CARE and Fitch) to the risk weights available under the Standardized risk weighting frame work. The mapping process is required to result in a risk weight assignment consistent with that of the level of credit risk. A mapping of the credit ratings awarded by the chos en domestic credit rating agencies has been furnished below. For Short Term Facilities For risk-weighting purposes, short-term ratings are deemed to be issue-specific. They can only be used to derive risk weights for claims arising from the rated facility. They cannot be generalized to other short-term claims. In no event can a short-term rating b e used to support a risk weight for an unrated long-term claim. Short-term assessments may only be used for short-term claims against banks and corporate. In respect of the issue specific short term ratings the following risk weight ma pping shall be adopted: CARE CRISIL Fitch ICRA (%) PR1+ P1+ F1+(ind) A1+ 20 PR1 P1 F1(ind) A1 30 PR2 P2 F2(ind) A2 50 PR3 P 3 F3 (ind) A3 100 PR4 & PR5 P 4 & P5 F4/F5 (ind) A4 / A5 150 Unrated Unrated Unrated Unrated 100 South Indian Bank Page 139
Credit Risk Management Policy, 2011 For Long Term Facilities Where a bank invests in a particular issue that has an issue specific rating by a chosen credit rating agency the risk weight of the claim will be as per the table shown below. Domestic rating agencies AAA AA A BBB BB & below Unrated Risk weight (%) 20 30 50 100 150 100 Where the bank s claim is not an investment in a specific assessed issue, the foll owing general principles will apply: (i) In situations where the borrower has been rated by an external agency and our ba nks claim is not included in the particular rating issued by the rating agency, the risk weight applicable to the specific debt (where the rating maps into a risk weight lower than that which applies to an unrated claim) may be applied to the bank s unassessed claim o nly if this claim ranks pari passu or senior to the specific rated debt in all respects . If rating is not mapped with the external rating agencies the rating applicable to the specif ic debt cannot be used and the unassessed claim will receive the risk weight for unrated claims. (ii) If there are two ratings accorded by chosen credit agencies that map into differ ent risk weights, the higher risk weight should be applied. South Indian Bank Page 140

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DOCUMENT B 2011 The South Indian Bank Limited DOCUMENT -B 2011

South Indian Bank Page 2

South Indian Bank Page 6

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wn South Indian Bank Page 27

credit skills of staff. South Indian Bank Page 28

0 5 1-4 5 4 3 2 1 0 Annexure 1 Maximum Marks 5 15 5 5 5 6 14 Page 34

3 12 2 4 10 13 3 14 4 South Indian Bank Page 43

3 3 South Indian Bank Page 45

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4 Top Decile 35.29% 4 South Indian Bank Page 92

I Capacity to raise capital 5 Easy 5 Medium 2 South Indian Bank Page 95

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