IndusInd Bank Ltd

Risk Management Department

Credit Risk Policy

1. Introduction

“Credit Risk” is defined as the probability / potential that the borrower or counter-
party may fail to meet its obligations in accordance with agreed terms. It involves
inability or unwillingness of a borrower or counter-party to meet commitments in
relation to lending, trading, hedging, settlement and other financial transactions.

Credit Risk is made up of two components

(i) Transaction Risk (or Default Risk), which represents the risk arising from
individual credit exposures and
(ii) Portfolio Risk, which represents the risk inherent in the portfolio of credit
assets (concentration of assets, correlation among portfolios, etc).

Credit Risk faced by a bank depends on both external factors and internal factors.
External factors arise from situations, which are beyond the control of the bank but
the consequences of which need to be managed in order to mitigate their impact on
the bank. On the other hand, internal factors are unique to the bank, which are
within the control of the bank.

2. Sources of Credit Risk

Credit Risk can arise out of direct lending risk, contingent lending risk, issuer risk,
pre-settlement risk and settlement risk, to name a few.
Direct lending risk lies in products like loans and advances, overdrafts, bills
discounted, etc. It is the risk that the dues may not be repaid on time.

Contingent lending risk lies in products like letters of credit, guarantees, etc. It is
the risk that contingent exposures get converted into actual obligations and that
these obligations may not be repaid on time.

Issuer risk is the risk of financial loss due to change in the credit rating of the issuer
of a debt instrument. It is also the risk that the bank may not be able to sell the
instrument within a predetermined holding period.

Pre-settlement risk is the risk that a counter-party with whom the bank has a
reciprocal agreement may fail before settlement of the contract e.g. in forwards,
futures and options. As a result, the bank faces the risk of default on the
settlement date and hence may have to undertake fresh transactions for covering
the failed transactions, leading to replacement cost. The level of exposure varies
throughout the life of the contract and the extent of losses will only be known at
the time of default.

Settlement risk (also known as Herstatt risk) is the risk that the bank delivers
its part of the contract but the other bank does not fulfil its obligation. This risk
arises out of time lags in settlement of one currency in one centre and the
settlement of another currency in another time zone.

The bank will identify all sources of credit risk and monitor aggregated exposures to a
borrower/counter-party on a bank-wide basis.

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3. Coverage

The Credit Risk Policy is discussed under the following headings.

Para No Objectives
4 Objectives of Credit Risk Policy
5 Organizational structure for Credit Risk Management
6 Lending Polices
7 Portfolio Management
8 Credit Risk Monitoring
9 Models / Analytics
10 Exceptions / Deviations to the Policy
11 Review of Policy

4. Objectives of Credit Risk Policy

The broad objectives of evolving the Bank’s credit risk policy are:

To build a high quality portfolio in line with the Bank’s risk appetite and strategy.
To identify, measure, monitor, manage and control risk effectively and to ensure that
the Bank gets compensated for the risk assumed
To maximize Bank’s Risk-Adjusted Return by maintaining credit risk exposure within
acceptable parameters.
To develop a greater ability to recognize and avoid potential problems.
To support sustainable business growth within the overall Risk appetite of the Bank.
Diversifying the risk profile among different segments of Products, Geographies,
Group etc in order to minimise the concentration risk and maximise returns.

5. Organization Structure

The Board of Directors has the overall responsibility for managing risks within the
Bank. It is aided by the Risk Management Committee of the Board (RMC) in policy
formulation and overseeing the risk management functions performed by the official-
level committees of the Bank entrusted with the responsibility of managing risks on a
day-to-day basis.

5.1 Credit Risk Management Committee (CRMC)

The Credit Risk Management Committee (CRMC) is responsible for managing credit
risk in the Bank at the apex level.

5.1.1 Constitution of CRMC

The constitution of the Committee will be as follows.

1 Managing Director and CEO - Chairman

2 Chief Risk Officer
3 Head – Corporate & Commercial Banking
4 SVP (Credit)
5 SVP (Risk Management)
6 SVP (FRR)

All other Business Unit Heads shall be invited on a need basis. SVP (Risk
Management) will function as Convener of Credit Risk Management Committee
(CRMC). CRMC is authorised to invite any such official to its meetings, on a regular or
adhoc basis, as its members consider necessary to assist them in making CRMC
decision.
MD shall be empowered to identify individuals within the Bank and nominate them as
members to the committee.
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The minimum quorum for the committee is four members.

The committee shall meet at least once in quarter.

5.1.2 Roles & responsibilities of CRMC

- Management of credit risk on a Bank-wide basis

− Vetting and recommending to the Board through RMC policies relating to Credit
Risk Management such as Credit Risk Policy, Credit Policy, NPA Management
Policy, Loan Review Policy etc.
− Reviewing compliance of prudential limits set out in the Credit Risk Policy and
monitoring diversification of the asset portfolio.
− Periodically reviewing the portfolio objectives by assessing the bank’s current
portfolio in terms of asset quality, portfolio composition and concentration risk.
− Examining industry reports from the industry analysis cell (in Risk Management
Department).
− Reviewing industry classification (Thrust, Negative or Acceptable) and the policies
relating to lending to various industries, including stipulation of industry-wise
exposure limits.
− Reviewing the Credit Risk rating framework whenever required.
− Recommending the policy for pricing credit risk and policies on Risk adjusted
return on capital (RAROC).
− Recommending the methodology to be followed for allocation of capital for credit
risk (Model, assumptions, confidence level, horizon, data to be used etc.)
− Monitoring progress of the bank’s compliance to RBI guidelines and Basel
recommendations in respect of credit risk management
− Approving all new credit-related products proposed for launch.
− Reviewing the risks involved in lending to new segments.
− Reviewing / recommending appropriate credit software support systems
− Any other matters relating to Credit Risk Management function.

5.2 Credit Risk Management Cell

Credit Risk Management Cell (CRM Cell), which is a part of integrated Risk
Management Dept, will be responsible for undertaking Credit Risk Management
functions, independent of Credit Dept.

The following are the major functions of CRM Cell.

Design and periodically review policies relating to Credit risk, including policy on Loan
Review Mechanism and submission to CRMC/RMC/BOD for approval.
Periodical review of risk assessment systems and providing support to users of Rating
and Appraisal Model (RAM) at branches.
Vetting credit proposals for individual exposures from macro risk perspective before
sanction by Corporate Office.
Maintain Industry Analysis desk, with active interaction with Credit Dept. Provide
inputs to the Credit team on the prospects of various industries and bankable
relationships in these industries
Develop credit-related MIS, automated to the extent possible
Monitoring Portfolio Management to ensure portfolio quality
Monitor concentration risk through prudential limits
Manage balanced portfolio composition (distribution of assets)
Apprising the Top Management on a monthly basis and the Board every quarter the
above details by way of detailed portfolio analysis reports
Explore use of Credit Derivatives towards Portfolio Risk Management.
Enable measurement of Credit Risk, Allocation of capital to individual exposures and
provide a framework for RAROC (Risk Adjusted Return on Capital)

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 Responsible for the pricing framework for Credit assets and enable adoption of Risk
Based Pricing
Implementation of Basel II – New Capital Adequacy Framework as desired by RBI to
risk sensitise the Capital of the Bank.

6. Lending Policies

6.1 Target Credit Grades

6.1.1 RAM & Rating grade structure

The Bank has acquired from Crisil and operationalised Rating and Appraisal Models
(RAM). Currently, it is mandatory that all the proposals be rated in RAM. There are 8
models for different segments of borrowers viz. Large Corporates, SME borrowers,
Traders, NBFCs, Capital market brokers and Business Banking (eNon-schematic Retail
credit - applicable to all “Retail accounts with turnover upto Rs. 25 crores and
exposure limit upto Rs. 2 crores). Besides, the Bank has developed internal rating
models for rating (a) domestic banks / domestic entities of international banks and
(b) Financial institutions / Primary Dealers.

In each of the models, ratings are done on a scale of 1 (most superior) to 8 (most
inferior). The rating grades are uniquely named for each model. For instance, rating
grades of LCM are named as L1 to L8, whereas those of SME model are named as S1
to S10. Moving forward, the SME model specific ratings shall be on a scale of 1 to 8

However, all these model-specific rating grades are mapped to a common scale rating
grades IB-1 (most superior) to IB-8 (most inferior). These are the rating grades for
performing advances. Going forward, the model specific rating and common scale
rating within the each risk grade shall have modifiers which will discriminate the risk
more precisely.

6.1.2 Minimum Acceptable Rating Grades

(1) Preferred Obligor Credit Rating shall be IB-1 to IB-4.

(2) Exposures to borrowers (other than Business Banking borrowers) with Obligor
credit rating of IB-5 and IB-6 could be considered, strictly subject to fulfilling both the
following conditions.

a) Such exposures are backed to the extent of at least (i) 25% to 50% on a
case to case basis (for IB-5) and (ii) 50% (for IB-6) of the exposure by (A)
our Bank deposit, (B) specified securities such as LIC, NSC, IVP, KVP, RBI
bonds, debentures/bonds issued by scheduled banks etc (C) approved
shares (D) immovable properties of residential / commercial nature
(agricultural and industrial properties excluded) after applying the
discounts as specified in the policy.

b) Interest return on Fund Based exposures from such accounts is higher than
the corresponding return available for IB-4 borrowers (indicatively by (i)
1.50% in respect of IB-5 rated borrowers and (ii) 3.00% in respect of IB-6
rated borrowers). The corresponding incremental return in respect of Non
Fund Based exposures may be indicatively 0.50% and 1.00% respectively
for IB-5 and IB-6 borrowers. As the rates vary considerably among various
exposures based on several factors, the spirit of this condition may be
ensured.

(3) Exposures to borrowers with Obligor credit rating of IB-5 and IB-6 (for Business
Banking borrowers) may be considered, strictly subject to fulfilling both the
following conditions.
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 a) Such exposures are backed to the extent of at least (ii) 50% (for IB-5) and
(ii) 75% (for IB-6) of the exposure by (A) our Bank deposit, (B) specified
securities such as LIC, NSC, IVP, KVP, RBI bonds, debentures/bonds issued by
scheduled banks etc (C) approved shares (D) immovable properties of
residential / commercial nature (agricultural and industrial properties
excluded) after applying the discounts as specified in the policy.

b) Interest return on Fund Based exposures from such accounts is higher than
the corresponding return available for IB-4 borrowers (indicatively by (i)
1.50% in respect of IB-5 rated borrowers and (ii) 3.00% in respect of IB-6
rated borrowers). The corresponding incremental return in respect of Non
Fund Based exposures may be indicatively 0.50% and 1.00% respectively for
IB-5 and IB-6 borrowers. As the rates vary considerably among various
exposures based on several factors, the spirit of this condition may be
ensured.

(4) In any case, exposures to borrowers with obligor credit rating of IB-5 or IB-6
borrowers needs to be sanctioned by an official / Committee who is otherwise
delegated to approve such exposures but not less than the level of COCC - II.

(5) In case of existing borrowers having a obligor credit rating of IB-5 or IB-6, efforts
shall be initiated to comply with the conditions under sl no. 2 or 3 above, read together
with sl no.4 above. If it is not possible to fulfil the above conditions, Bank will consider
gradual reduction in exposure or initiate efforts to exit.

(6) In case of existing borrowers having a obligor credit rating of IB-7 or IB-8
• No further exposures to such account
• Strengthen the collateral security and other comforts.
• Exit the account in a time-bound manner, in any way within a
maximum period of one year. Meanwhile, efforts will be made to
increase the interest rate in order to speed up the exit.
• If exit proves difficult, reduce the exposures in a phased manner

The exact strategy to be followed will depend on the nature of the

exposure. Any one or more of the above strategies may be adopted on
case-to-case basis.

(7) The collateral security to be obtained for the above exposures must be valued at
‘Distress sale Value’.

(8) Exposures to borrowers with obligor credit rating IB-5 and IB-6 shall be taken
keeping in view the overall Weighted Average Credit Rating of the credit portfolio,
which should be maintained at an optimal level.

6.1 Credit Approval Structure – Discriminatory Delegation of Powers

The Bank has, by way of a separate document, laid down the powers of various
committees and senior officials for approval of credit proposals. The delegation of
powers is based in terms of ‘Total indebtedness’ and ‘Tenor’. However, exercise of
delegated powers as a percentage to the overall sanctioning powers is linked to the
credit rating of the obligor. Thus, the delegated powers will be lower for accounts with
inferior ratings, when compared to the same for exposures with superior rating.

6.3 Risk-based Pricing

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As per RBI’s Guidance Note on Credit Risk Management, banks should evolve
scientific systems to price the credit risk, which should have a bearing on the
expected default. The pricing of loans normally should be linked to risk rating or any
other indicator of credit quality.

Pricing for a particular facility will have to take into account all the factors relating to
risk and return and be governed by overall earnings from the relationship/group.

Extant guidelines on pricing stated as approved by BOD as part of Credit Risk Policy
approved on 13.06.06 shall continue till revised pricing policy is approved.

6.4 Non-SLR Investments

As per the extant investment policy, Investment Committee is authorized to take

investment decisions in respect of Non-SLR securities.

RBI stipulates that all investment proposals should be subjected to the same degree
of credit risk analysis as any loan proposal. RBI further stipulates that banks should
not entirely rely on external ratings and should subject these investments to the
internal rating process.

Accordingly, new Non-SLR investments will be subjected to credit appraisal, rating

processes and periodic review, as applicable for the credit exposures. All the existing
Non-SLR investments will be subjected to an annual review. The minimum external
credit rating should be CRISIL BBB- or equivalent. However, irrespective of external
rating, appraisal as in case of normal credit shall be carried out by Credit Dept.

6.5 Compliance to regulatory restrictions on loans and advances

Our Bank will comply with the statutory/regulatory restrictions laid down by RBI in its
circular DBOD No. Dir. BC. 19/13.03.00/ 2008- 09 dated July 1, 2008. Salient
features of the guidelines in this regard are listed in Annexure A.

7. Portfolio Management – Prudential Exposure Limits

Concentration risk and control of portfolio composition are integral parts of portfolio
management.

The following prudential exposure limits are currently used for the purpose of portfolio
management and monitoring portfolio risk.

Single Borrower Exposure Limit

Group Exposure Limit
Substantial Exposure Limit
Industry Exposure Limit
Sensitive Sector Exposure Limit
Targeted WACR (Weighted Average Credit Rating)
Product-wise Exposure Limit
Unsecured Exposure Limit
Off Balance Sheet Exposure Limit
Bank Exposure Limit
Country Exposure Limit

7.1 Single Borrower Exposure Limit

7.1.1 RBI norm

 As per the existing RBI guidelines in respect of prudential exposure norms,

credit exposure to single borrower should not exceed 15% of the Capital Funds

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 of the Bank (Tier 1 + Tier 2) as at the end of the previous financial year. The
infusion of capital under Tier I and Tier II (other than accretion by way of
quarterly profits etc), either through domestic or overseas issue, after the
published balance sheet date shall also be taken into account for deeming the
exposure ceilings. The limit works out to Rs. 317.50 cr for our Bank (Capital
Funds was Rs. 2116.67 cr as on June 30, 2008). However, Single Borrower
exposure limit will be restricted to maximum Rs.300 crores. The exposure limit
shall be linked to rating of the borrower as mentioned under para 7.1.2 below

 As per RBI norm, credit exposure to single borrower may exceed 15% by an
additional 5% (i.e. up to 20% of capital funds) provided the additional credit
exposure is on account of infrastructure (As defined in Annexure B).
Additional 5% of capital funds work out to Rs 105.83 cr for our Bank as on
date.

 Further, credit exposure to single borrower may be considered upto a further

5% of capital funds, in exceptional circumstances, with the approval of the
Board.

 Single borrower exposure limits in respect of Oil Companies who have been
issued Oil Bonds (which do not have SLR status) by Government of India has
been fixed at 25% of capital funds. The limit works out to Rs. 529.17 cr for our
Bank (Capital Funds was Rs. 2116.67 cr as on June 30, 2008). Additional
exposure to the extent of further 5% of capital funds can be considered in
exceptional circumstances, with the approval of the Board.

 RBI further stipulates that 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.

 Bank shall follow the above RBI guidelines in respect of single borrower
exposure limit.

Exemptions from RBI norms

As per the RBI guidelines, the prudential limits on single borrower / group exposures
as stipulated by RBI would not be applicable to the following.

 Existing/additional credit facilities (including funding of interest and irregularities)

granted to weak/sick industrial units under rehabilitation packages.
 Food credit Borrowers to whom limits are allocated directly by RBI, for food credit.
 Advances where principal & interest are fully guaranteed by Government of India.
 Loans and advances granted against the security of bank’s own term deposits

7.1.2 Internal Norm – Linkage to risk factors

The internally stipulated single borrower exposure ceiling is linked to the Credit rating
of the borrower. In light of our experience in implementation of the policy guidelines
and increase in capital funds of our Bank, we propose to increase the single borrower
exposure limit link to rating of the accounts rated IB-4 & above. The structure of the
internal exposure norm is as tabled below.

Single Borrower Exposure Limit

RAM Rating Existing Limit Proposed Limit
Amount Amount
(Rs. in cr) (Rs. in cr)
IB 1 150.00 300.00
IB 2 100.00 250.00
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 IB 3 75.00 200.00
IB 4 50.00 150.00
IB 5 20.00 20.00
IB 6 10.00 10.00
IB 7 & IB 8 Exit from account / Exit from account /
Reduction in limits Reduction in limits

(a) In line with RBI guidelines, credit exposure to single borrower in excess of
prudential ceiling fixed by RBI may be considered to the extent of further 5% of the
Bank’s capital funds in exceptional circumstances, with the approval of COD/BOD

(b) Specially structured facilities such as escrow of receivables, Lease Rental

Discounting, s etc with assured and identified source of repayment shall not be
governed by exposure limit linked to internal rating and may be considered on a case
to case basis based on the strength of the proposal.

(c) In exceptional cases, on business considerations, the rating-linked limits specified

above could be exceeded with the specific sanction of COD/BOD. The maximum
exposure limit stipulated above should, however, not be exceeded.

Exposure to Individual, Proprietor and Partnership firms

However, in respect of exposures to individuals, proprietors, the internal ceiling for

Single borrower exposure will be limited by the amounts shown in the above table or
Rs. 25 crores whichever is lower, in view of increased risk in proprietorship firms
relative to companies.

Similarly, in respect of exposures to partnership firms, the internal ceiling for Single
borrower exposure will be limited by the amounts shown in the above table or Rs.50
crores whichever is lower.

Exemptions to the above internal norm, subject to RBI ceiling

 The following exposures are exempted from the single borrower exposure limit,
subject to the ceiling stipulated by RBI.

 Bills discounted against LCs issued by banks, which are in the list approved
by Trade Finance & Remittances (SPOPS).
 Specially structured facilities such as escrow of receivables, Lease Rental
Discounting, etc with assured and identified source of repayment

 In respect of Discounting of usance bills duly accepted by drawee, such exposures

will be limited to “the amount of limit applicable to the credit rating of our
borrower (who is the drawer of the bill)” or “ the amount of limit applicable to the
credit rating of the drawee of the bill” whichever is higher. In case the drawee is
not rated, the exposure ceiling based on drawer’s credit rating will be taken.

The Bank will consider limits in excess of the internal prudential exposure limits
(within the RBI ceiling), subject to the provisions in Para.10 of this policy.

7.1.3 Exposure – Computation

7.1.3.1 Non Fund based exposures

All the fund-based exposures and all non-funded exposures except derivatives will
continue to be given 100% weightage for the purpose of computing exposure.

7.1.3.2 Derivatives

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RBI circular no. DBOD. No. BP.BC.86/21.04.15/2006-07 dated April 20, 2007 on
Derivatives stipulates that the Banks should establish both pre-settlement credit limits
and settlement credit limits. The former should be based on the credit-worthiness of
the counterparty in much the same way as for traditional credit lines. The size of the
limits should take into account the sophistication of the risk measurement system: if
notional amounts are used (which is not recommended), the limits should be
correspondingly more conservative. It is important that entities should establish
separate limits for settlement risk. The amount of exposure due to settlement risk
often exceeds the credit exposure arising from pre-settlement risk because settlement
of derivatives transactions may involve the exchange of the total value of the
instrument or principal cash flow. Settlement limits should have regard to the
efficiency and reliability of the relevant settlement systems, the period for which the
exposure will be outstanding, the credit quality of the counterparty and the entity’s
own capital adequacy. Entities should have efficient systems in place to aggregate its
exposure to counterparty across fund based and non fund based exposures, including
derivatives. These aggregate exposures should be within the single counterparty
exposure limits set by the management or regulator, whichever is less.

Credit equivalent exposure for all derivatives shall be computed by assigning risk
weights as prescribed by the RBI, as detailed below. The exposure is computed
based on the Original Maturity method and Current Exposure method. It is stipulated
that at the time of submission of proposal for sanction of Derivative exposures, the
threshold limit shall be computed as follows:

 Determining the Credit equivalent exposure as per Original Exposure method

specified by RBI
 A separate ‘Mark to Market (MTM)’ threshold, which may be higher or same
or even lower than the Original exposure, be recommended
 MTM threshold or Original exposure computed as per RBI guidelines,
whichever is higher shall be utilised for computing total indebtedness

Upon booking of Contracts, the Bank should use only Current Exposure method for
computing the exposure under Credit Risk on Derivative contract.

Foreign Exchange contacts

In order to arrive at the Credit equivalent amount under Original Exposure
method, the following Credit Conversion Factor (CCF) to the notional principal
amount shall be applied:

Original Maturity of the Instrument Risk weight

Less than one year 2%

For one year and less than two years 5% (2%+3%)
For each additional year or part 3%
thereof
b) In order to arrive at the Credit equivalent amount under Current method, the Bank
would sum:

a. Total replacement cost (obtained by ‘Marking to Market’) of all its contract

with the positive value (when the bank has to receive money from
counterparty) and
b. An amount of potential future change in credit exposure calculated on the
basis of total notional principal amount of the contract multiplied by the
following CCF:

Residual Maturity of the Instrument Risk weight

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 Less than one year 2%
Over One year to five years 10%
Over five years 15%

Bank will Mark to Market the derivative product on a monthly basis

While computing exposure, ‘Sold options’ shall be excluded, provided the

entire fee/ premium or any other form of income is received/ realised.

Note:
Foreign exchange contracts include the following:
• Cross currency interest rate swaps
• Forward foreign exchange contracts
• Currency futures
• Currency options purchased
• Other contracts which are similar in nature as the above instruments

∗ For the purpose of computing exposure, the margin available

specifically for the forward contract exposures will be netted from the
exposure, for all borrowers availing forward contract limits (stand-alone basis
or with other limits).

∗ Thus, the exposure would be equal to the equivalent credit exposure

less the deposit margin, if available. Consequently, where the margin is
equal to or more than the credit exposure, the exposure will be treated as
Nil.

∗ The net exposure to a particular borrower after off setting the margin,
will be computed on a aggregate level by summing up all the contracts with
‘In the money’ and ‘Out of money’

Forward Rate Agreement (FRA)/Interest Rate Swap (IRS)

The computation of risk weighted assets on account of FRAs / IRS under original
maturity shall be done by applying the risk weights mentioned below (as
prescribed by RBI).
Original Maturity Risk Weight

Less than one year 0.5 %

One year and less than two years 1.0 %
For each additional year 1.0 %

(b) The computation of risk weighted assets on account of FRAs / IRS under
residual maturity shall be done by applying the risk weights mentioned below
(as prescribed by RBI).

Residual Maturity Risk Weight

Less than one year 0.50%

Over one year to five years 1%
Over five years 3%

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 While computing exposure, ‘Sold options’ shall be excluded, provided the
entire fee/ premium or any other form of income is received/ realised.

Note: Interest Related Contracts include the following:

 Single currency interest rate swaps
 Basis swaps
 Forward rate agreements
 Interest rate futures
 Interest rate options purchased
 Other contracts that are similar in nature as above instruments

7.2 Group Exposure Limit

7.2.1 Group Exposure Limit – quantum

As per the existing RBI guidelines in respect of prudential exposure norms, limits to a
group should not exceed 40% of the Capital Funds of the Bank (Tier 1 + Tier 2) as at
the end of the previous financial year. The limit works out to Rs.846.68 cr for our
Bank (Capital Funds was Rs. 2116.67 cr as on June 30, 2008).

Credit exposure to borrowers belonging to a group may exceed 40% by an additional

10% (i.e. up to 50% of capital funds), provided the additional credit exposure is on
account of extension of credit to infrastructure projects. The enhanced limit works
out to Rs.1058.34 cr for our Bank.

In light of our experience in implementation of the policy guidelines and increase in

capital funds of our Bank, we propose to increase the prudential ceiling for Group
Exposure to Rs.500 cr (from existing Rs. 300 cr.). The enhanced limit of Rs.500 cr is
below the prudential limit prescribed by RBI, which is Rs. 846.68 crores for our Bank.

In line with RBI guidelines, credit exposure to group in excess of prudential ceiling
fixed by RBI may be considered to the extent of further 10% of the Bank’s capital
funds in exceptional circumstances, with the approval of COD/BOD

The Bank will consider limits in excess of the internal prudential exposure limits
(within the RBI ceiling), subject to the provisions in Para.10 of this policy.

Definition of Group
We define below ‘Group’. The borrowers will be treated as belonging to a group in any
of the following cases:

 There exists a Holding and Subsidiary relationship between the borrowing

company and the Group company
 The companies have common director(s) / partner(s) excluding professional
directors.
 If the promoter directors are either partners in a firm or directors in case of
private limited/public limited companies and have substantial interest of 50% or
above in the equity/share in the firm.
 The borrower/promoters have provided personal/corporate guarantee for the dues
of other individual/firm/company of the borrowers.
 If the majority of the directors are employees of another company with or without
any substantial interest held by them.
 If there exists significant equity interest with voice in management.
 If the borrowers are relatives (in case of individuals and partnerships only).
‘Relatives’ shall be as defined in Indian Companies Act (as reproduced in Annexure
C to this document).
 If it is otherwise so declared by the borrower in the credit application.

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Retail advances to directors / partners shall not be included with the exposure to the
company/ firm to which they belong to for the purpose of computing group exposure.
Further, group concept shall not be applicable to exposure to PSUs.

Besides the above, bank may choose to include any other company as a group
company if circumstances of the proposal so justify.

7.3. Exposures to NBFCs and Micro Finance Institution (MFIs)

RBI guidelines in relation to exposure on NBFC are as under:

The exposure (both lending and investment, including off balance sheet exposures) of
a bank to a single NBFC / NBFC-AFC (Asset Financing Companies) should not exceed
10% / 15% respectively, of the bank's capital funds as per its last audited balance
sheet. Banks may, however, assume exposures on a single NBFC / NBFC-AFC up to
15%/20% respectively, of their capital funds provided the exposure in excess of
10%/15% respectively, is on account of funds on-lent by the NBFC / NBFC-AFC to the
infrastructure sector.

Banks may also consider fixing internal limits for their aggregate exposure to all
NBFCs put together.

7.3.1 Internal Norm – Linkage to risk factors

However, as a prudent measure, lower ceilings have been prescribed on exposure to

NBFCs as under:

Existing Exposure Limits - NBFCs

Category Single Borrower limit Aggregate
Exposure limit
NBFC (Exposure on account of Priority Rs. 50 crores Rs. 300 crores
Sector Advances)
NBFC (Exposure on account of other Rs. 30 crores Rs. 150 crores
than Priority Sector Advances)

During the last few years, NBFC’s credit profile has been relatively stable projecting
moderate growth in their business and improvement in asset quality. NBFCs play a
key role in the financial market and with their unique strength complements banks
because of their niche strengths, local knowledge and presence in remote
topographies.

NBFC segment offers opportunity to increase the share of Bank’s advances mainly
under Priority sector and considering the stable profile & increased business
opportunity, we propose to revise the aggregate exposure ceiling on NBFCs as under:

Proposed Exposure Limits - NBFCs

Category Single Borrower limit Aggregate
Exposure limit
NBFC (Exposure on account of Priority Rs. 150 crores Rs. 750 crores
Sector Advances)
NBFC (Exposure on account of other Rs. 100 crores Rs. 500 crores
than Priority Sector Advances)

The above borrower limits shall be subject to Single Borrower Exposure limit linked to
Rating as stated under para 7.1.2

7.3.2 Exposures to Micro Finance Institutions (MFIs)

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MFIs play a key role in disbursing credit in rural and semi urban areas. Their
experience and proximity to target group facilitates development of specialised
products to meet the requirements of the borrower. The business profile of MFI is
almost identical to NBFC. MFI offers opportunity in lending mainly under Priority
sector. We proposed that exposures to Micro Finance Institution shall be governed by
the exposure norms as mentioned hereunder:

Category Single Borrower limit Aggregate

Exposure limit
MFI (Exposure on account of Priority Rs. 150 crores Rs. 750 crores
Sector Advances)
MFI (Exposure on account of other Rs. 100 crores Rs. 500 crores
than Priority Sector Advances)

The above borrower limits shall be subject to Single Borrower Exposure limit linked to
Rating as stated under para 7.1.2

7.4 Substantial Exposure Limit

Substantial exposure limit is the sum total of exposures assumed in respect of those
single borrowers enjoying credit facilities in excess of a threshold limit. If few or
many such large exposures fail simultaneously, the Bank’s capital would be adversely
affected. Therefore, sum of such exposures needs to be capped by a prudential limit
linked to the Bank’s capital. We propose to define ‘substantial exposures’ as those
exposures, which are above Rs.50 cr.

However, Asset Backed Securities (ABS) and Mortgage Backed Securities (MBS)
exposures assumed under the Securitisation programs of other banks / FIs shall not
be considered within the purview of Substantial exposures.

The portfolio level ‘Substantial Exposure Limit’ shall be 300% of capital

funds.

7.5 Industry Exposure Limit

Industries are classified into three categories as follows.

Category Basis of classification

Thrust Industries Those industries in which the Bank decides to enhance exposure
Negative Those industries in which the Bank has decided to reduce / exit
Industries existing exposures and also avoid new exposures
(Exception would be those companies in these negative
industries, which are of superior risk profile on account of
company-specific advantages. Bank may consider
exposures against these companies).
Acceptable All others (Exposure in these industries will be governed by the
Industries attractiveness of individual proposals)

Accordingly, we recommend the following classification in the current policy. The

master list of industries is furnished in Annexure C.

Category Name of the industries

Thrust Computer - Software
Paints
Petroleum & Products
Pharmaceuticals - Bulk Drugs
Pharmaceuticals - Formulations
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 Category Name of the industries
Telecom - Cellular
Textiles - Ready made Garments
Chemicals - Organic
Negative Edible oil
Leather & Leather Products
Plastic & Plastic products
Power-Cables
Real Estate ( except Lease Rental Discounting, Contract
Construction, Mortgage backed securities (MBS), Housing
Finance Companies and Direct Home Loans)
Sponge iron
Stainless Steel
Sugar
Telecom - Equipment
Textile - Man Made Fibers/yarn
Textile - Synthetic fabrics
Textiles- Texturising
Acceptable All others not covered above

The Bank will review the above list periodically and obtain approval of CRMC / Top
Management.

Industry-wise Exposure Limits

The following exposure ceilings shall govern exposure to individual industries.

Category Ceiling for FB+NFB exposure

(% to total FB + NFB exposure)
Thrust Industries 10%
Negative Industries To be reduced from the present level
Others (Acceptable Industries) 5%

Ceiling for Trading and Services sector exposure, excluding the exposures
backed by deposits shall be as follows.
 Trading (Wholesale + Retail): 10% of total FB + NFB exposure.
 Services sector: 5% of total FB + NFB exposure
(However considering the specific nature of activity, IT- Software, IT
Enabled Services and Transport Services will be considered as industries
and will not be considered under service sector).

Progress in this respect will be reviewed periodically by CRMC & Top Management.

7.6 Sensitive Sector Exposure Limit

Sensitive sectors refer to sectors, which are subject to a high degree of asset price
volatility. RBI suggests that banks fix prudential limits for sensitive sector exposures
and monitor them closely. Exposures to sensitive sectors such as Capital Markets,
Commodities and Real Estate will be capped at predetermined levels and monitored
closely by our Bank.

7.6.1 Capital Market

• The total exposure ceiling on Capital Market sector shall be governed by the
following RBI stipulation:

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 (i) Total exposure to Capital Market sector shall not exceed 40% of the net
worth of the Bank on a solo and consolidated basis as on March 31 of the
previous year. The ceiling of 40% of net worth would apply to total exposure
including both fund-based and non-fund, to capital market in all forms.

7.6.1.1 In terms of RBI guidelines, capital market exposures will include the
following:

 Direct investment in equity shares, convertible bonds, convertible debentures

and units of equity oriented mutual funds the corpus of which is not
exclusively invested in corporate debt;

 Advances against shares/bonds/debentures or other securities or on clean

basis to individuals for investment in shares (including IPOs/ESOPs),
convertible bonds, convertible debentures, and units of equity-oriented
mutual funds;

 Advances for any other purposes where shares or convertible bonds or

convertible debentures or units of equity oriented mutual funds are taken as
primary security;

 Advances for any other purposes to the extent secured by the collateral
security of shares or convertible bonds or convertible debentures or units of
equity oriented mutual funds i.e. where the primary security other than
shares/convertible bonds/convertible debentures/units of equity oriented
mutual funds `does not fully cover the advances;

 Secured and unsecured advances to stockbrokers and guarantees issued on

behalf of stockbrokers and market makers;

 Loans sanctioned to corporates against the security of shares / bonds/

debentures or other securities or on clean basis for meeting promoter’s
contribution to the equity of new companies in anticipation of raising
resources;

 Bridge loans to companies against expected equity flows/issues;

 Underwriting commitments taken up by the banks in respect of primary issue

of shares or convertible bonds or convertible debentures or units of equity
oriented mutual funds; However, banks may exclude their own underwriting
commitments, as also the underwriting commitments of their subsidiaries,
through the book running process for the purpose of arriving at the capital
market exposure of the solo bank as well as the consolidated bank. The
position in this regard would be reviewed after an year.

 Financing to stockbrokers for margin trading;

 All exposures to Venture Capital Funds (both registered and unregistered).

7.6.1.2 Items excluded from Capital Market Exposure:

The following items would be excluded from the aggregate exposure ceiling of 40%
of networth and direct investment exposure ceiling of 20% of networth (wherever
applicable):

• Bank’s investments in own subsidiaries, joint ventures, sponsored Regional Rural

Banks (RRBs) and investments in shares and convertible debentures, convertible
bonds issued by institutions forming crucial financial infrastructure such as

Page | 15
 National Securities Depository Ltd. (NSDL), Central Depository Services (India)
Ltd. (CDSL), National Securities Clearing Corporation Ltd. (NSCCL), National
Stock Exchange (NSE), Clearing Corporation of India Ltd., (CCIL), Credit
Information Bureau of India Ltd. (CIBIL), Multi Commodity Exchange Ltd. (MCX),
National Commodity and Derivatives Exchange Ltd. (NCDEX), National Multi-
Commodity Exchange of India Ltd. (NMCEIL), National Collateral Management
Services Ltd. (NCMSL) and other All India Financial Institutions as listed out in
the Annexure to the circular issued by RBI. After listing, the exposures in excess
of the original investment (i.e. prior to listing) would form part of the Capital
Market Exposure.

• Tier I and Tier II debt instruments issued by other banks;

• Investment in Certificate of Deposits (CDs) of other banks;

• Preference Shares;

• Non-convertible debentures and non-convertible bonds;

• Units of Mutual Funds under schemes where the corpus is invested exclusively in
debt instruments;

• Shares acquired by banks as a result of conversion of debt/overdue interest into

equity under Corporate Debt Restructuring (CDR) mechanism;

• Term loans sanctioned to Indian promoters for acquisition of equity in overseas

joint ventures / wholly owned subsidiaries under the refinance scheme of Export
Import Bank of India (EXIM Bank).

• Banks’s own underwriting commitments, as also the underwriting commitments

of their subsidiaries, through the book running process.

7.6.1.3 Computation of exposure

For computing the exposure to the capital markets, loans/advances sanctioned and
guarantees issued for capital market operations would be reckoned with reference to
sanctioned limits or outstanding, whichever is higher. However, in the case of
fully drawn term loans, where there is no scope for redrawal of any portion of the
sanctioned limit, bank may reckon the outstanding as the exposure. Further, bank’s’
direct investment in shares, convertible bonds, convertible debentures and units of
equity oriented mutual funds would be calculated at their cost price.

7.6.1.4 Loans and advances against shares

In terms of RBI guidelines, Bank has prescribed the following ceiling on the capital
market related exposure:

a) Ceiling on loans/advances against shares & debentures etc. to

individuals

 Loans against security of shares, convertible bonds, convertible debentures and

units of equity oriented mutual funds to individuals from the banking system
should not exceed the limit of Rs.10 lakhs per individual if the securities are held
in physical form and Rs. 20 lakhs per individual if the securities are held in
demat form.

 Loans/advances to any individual from the banking system against security of

shares, convertible bonds, convertible debentures, units of equity oriented

Page | 16
 mutual funds and PSU bonds should not exceed the limit of Rs.10 lakhs for
subscribing to IPOs.

 Bank may extend finance to employees for purchasing shares of their own
companies under ESOP to the extent of 90% of the purchase price of the shares
or Rs. 20 lakhs, whichever is lower. Finance extended by banks for ESOPs/
employees' quota under IPO would be treated as an exposure to capital market
within the overall ceiling of 40 per cent of their net worth. These instructions,
however, will not be applicable to Bank’s extending financial assistance to their
(Bank’s) own employees for acquisition of shares under ESOPs/ IPOs. Bank
should, therefore, not extend advances including to their employees/ Employee
Trusts set up by them for the purpose of purchasing their (Bank’s) own shares
under ESOP/ IPO or from the secondary market. This prohibition will apply
irrespective of whether the advances are unsecured or secured.

Bank shall obtain a declaration from the borrower indicating the details of
the loans / advances availed against shares and other securities specified
above, from any other bank/s in order to ensure compliance with the
ceilings prescribed for the purpose.

b) Advances against Shares to Stockbrokers and Market Makers

In terms of RBI guidelines, Bank is free to provide credit facilities to stockbrokers

and market makers on the basis of its commercial judgment, within the policy
framework approved by the Board. However, in order to avoid any nexus emerging
between inter-connected stock broking entities and the Bank, it is prescribed that
within the overall ceiling of 40% of Bank’s net worth as on March 31 of the previous
year, a sub-ceiling for total advances to –

i. All the stock brokers and market makers (both fund based and non-fund based,
i.e. guarantees) shall be capped at 40% of the net worth of the Bank; and

ii. To any single stock broking entity, including its associates/ inter-connected
companies shall be capped as under:

Based on experience of dealing with segment, business proposition, changes in

market place and regulatory measures/ controls, we propose enhancement in the
Single Borrower exposure limit and Group Borrower exposure limit as mentioned
hereunder:

Single Borrower Exposure Limit:

RAM Rating Existing Maximum Proposed Maximum

Exposure Exposure
(Rs. cr.) (Rs. cr.)
IB1 Not Applicable 40
IB2 Not Applicable. 40
IB3 40 40
IB4 30 40
IB5 20 20
IB6 10 10
IB7 Nil Nil
IB8 Nil Nil

Page | 17
 The above Single Borrower exposure limit shall be applicable to facilities, other than
Loan against Demat Shares (LADS), sanctioned to Capital Market Broker

As regards LADS, maximum exposure of Rs. 40 crores shall be considered to a

Capital Market Broker, irrespective of the rating, on a case to case basis

Overall Single Borrower Exposure

Aggregate exposure to any single stock broking entity shall not exceed Rs. 60
crores.

Group Exposure Limit –quantum:

Aggregate Exposure to Stock Broking entities, Commodity Exchange Broking entities

and Currency Future Broking entities belonging to a Group is capped at Rs. 70
crores (enhanced from Rs. 40 crores)

Bank shall not extend credit facilities directly or indirectly to stockbrokers for
arbitrage operations in Stock Exchanges.

c) Bank financing to individuals against shares to joint holders or third

party beneficiaries

While granting advances against shares held in joint names to joint holders or third
party beneficiaries, Bank shall ensure that the objective of the regulation is not
defeated by granting advances to other joint holders or third party beneficiaries to
circumvent the above limits placed on loans/advances against shares and other
securities specified above.

d) Margins on advances against shares/issue of guarantees

In terms of RBI guidelines, a uniform margin of 50% shall be applied on all

advances/financing of IPOs/issue of guarantees for capital market operations. A
minimum cash margin of 25 per cent (within the margin of 50%) shall have to be
maintained in respect of guarantees issued by the Bank for capital market
operations.

e) Investments in Venture Capital Funds (VCFs)

In terms of RBI guidelines, Bank’s exposures to VCFs (both registered and

unregistered) will be deemed to be on par with equity and hence will be reckoned for
compliance with the capital market exposure ceilings (both direct and indirect).

No finance shall be extended for venture capital by any authority other than
the Board of Directors / Committee of Directors

f) Intra-day Exposures

In terms of RBI guidelines, Bank shall fix intra-day limits and put in place an
appropriate system to monitor such limits, on an ongoing basis.

g) Enhancement in limits

In terms of RBI guidelines, banks having sound internal controls and robust risk
management systems can approach the Reserve Bank for higher limits together with
details thereof.

7.6.2 Real Estate

Page | 18
7.6.2.1 Coverage of Real Estate

RBI, vide circular DBS.CO.PP.BC.21/11.01.005/2004-05 dated June 29, 2005 issued

revised guidelines relating to risk management, reporting requirements and balance
sheet disclosures in respect of Real Estate exposure. As per the revised guidelines,
Real estate exposure shall include the following.

o Lending secured by mortgages on Commercial property #

o Lending secured by mortgages on residential property
o Loans to Land and building developers
o Lease Rental Discounting
o Direct Housing Loans to individuals
o Investments in HUDCO/NHB bonds
o Loans to Housing Finance Companies

# (1) Commercial real estate exposure is defined by RBI as follows.

(a) Fund based and non-fund based exposures secured by mortgages on commercial real
estates (office buildings, retail space, multi-purpose commercial premises, multi-
family residential buildings, multi-tenanted commercial premises, industrial or
warehouse space, hotels, land acquisition, development and construction, etc.)
Exposure to entities for setting up Special Economic Zones (SEZ) or for acquiring
units in SEZs which includes real estate would also be treated as commercial real
estate exposure.
(b) Investments in Mortgage Backed Securities (MBS) and other securitised exposures
backed by exposures as at (a) above.
(2) Commercial real estate exposure will include Lease rental discounting exposures also.

The real estate exposure shall be governed by the following provisions.

7.6.2.2 Exposure ceiling

The existing ceiling on real estate exposure has been reviewed and considering the
business proposition and sensitivity attached to the sector, the overall prudential
ceiling has been proposed as under.

∗ Real estate exposure will include all the exposures as per the revised RBI
guidelines (as listed above) and will be subjected to a ceiling of 10% of
total FB exposures or Rs.1000 crores whichever is lower
∗ Within real estate sector, loans to land and building developers is
relatively riskier. Therefore, we propose that Loans to land and building
developers shall be subjected to a ceiling of 3% of total FB exposures or
Rs.300 crores whichever is less (enhanced from 1% of total FB+NFB
exposures or Rs.100 crores whichever is lower).
∗ Within real estate sector, we propose that Lease Rental Discounting
exposure shall be subjected to a ceiling of 5% of total FB exposures or
Rs.550 crores whichever is less
∗ There will be no interse flexibility for the above sub-limits.
∗ Individual exposure to Land & Building developers shall be subjected to a
ceiling of Rs.150 crores (enhanced from Rs. 50 crores)
∗ Individual lease rental discounting exposure shall be subjected to a ceiling of
Rs.100 crores (enhanced from Rs. 50 crores)
Within real estate exposure, our Bank will prefer to assume exposures to the following
segments.

Page | 19
 ∗ Exposures to Housing Finance Companies, which are eligible to be classified
as Priority exposure.
∗ Lease Rental Discounting exposures (structured lending – facilitates prompt
repayment)
7.6.2.3 Policies relating to management of risk
Management of risk in real estate exposures will be governed by the following policy
provisions.
∗ On all future sanctions, the property value will be taken at a discount of 20%
of the current market value. In respect of future lease rental discounting
exposures, the rental values, if the rental values shall be taken at a discount
of 10% of the agreed rental value.
∗ The discount may be increased by the sanctioning authority appropriately, if
the prices go up rapidly further. SVP (Credit) may be authorized to enhance
the discount from time to time.
∗ The discount may be reduced by the sanctioning authority in exceptional
cases, with appropriate justification, provided the sanctioning authority is
ECC or above.
∗ Whenever a property is re-valued in accordance with the policy on updating
property values periodically, branch should report to Credit Dept the revised
valuation. If the revised margin after revaluation is less than the margin
stipulated at the time of sanction, efforts should be made to replenish the
margin either by way of additional collateral or reduction of exposure or both.
∗ While sanctioning loans to builders and real estate developers, care shall be
taken by the sanctioning authority to ensure the following.
o The borrowers are reputed and financially sound and would be able
to successfully manage, if required, possible recession and
cancellation of bookings or non-booking of flats.
o Real estate exposures should be assumed for specific projects after
examining their viability and risks from various perspectives.
Sufficient margin not below 40% should be stipulated as cushion
against possible recession etc.
o Bank shall not assume exposures for investment in landed
property, without finalisation of any project.
o Personal guarantees of promoters / directors, credit ratings by
agencies, eligibility for NHB refinance, approval upfront for our
putting the premises to alternative use in case of foreclosure etc.
should be stipulated wherever appropriate.
o Bank will not extend FB or NFB facilities to private builders for
acquisition of land even as a part of housing project.
o Bank will ensure that prices charged from the ultimate beneficiaries
do not include any speculative elements, that is, prices should be
based only on the documented price of the land, the actual cost of
construction and a reasonable profit margin.
∗ While financing Housing Finance companies, it shall be ensured that the
borrower is reputed with healthy financials and is backed by financially sound
parent/group/promoters.
∗ Preference will be given to real estate exposures eligible for Priority credit,
while taking cognisance of the risks specific to real estate sector. The Bank
shall avoid financing the construction activities not eligible for bank credit as

Page | 20
 per RBI guidelines. The list of exposures (i) eligible for Priority Credit and (ii)
the construction activities not eligible for bank credit are listed in Annexure F.
7.6.3 Commodities
As per RBI’s Master Circular DBOD No DIR.BC.9/13.3.00/2002-03 dated 29.07.02, the
following commodities are generally treated as ‘sensitive’:

(a) Food grains viz. cereals and pulses

(b) Selected major oilseeds indigenously grown viz., groundnut,
rapeseed/mustard, cottonseed, linseed and castor seed, oils thereof, vanaspati
and all imported oils and vegetable oils
(c) Raw cotton and kappas
(d) Sugar / gur / khandsari
(e) Cotton textiles which include cotton yarn, man-made fibres and yarn
and fabrics made out of man-made fibres and partly out of cotton yarn and
partly out of man-made fibres

However, RBI has recommended that the Boards of the respective banks should
decide the commodities that would be treated as ‘sensitive’. We propose as follows.

Commodities become sensitive if the price volatility is very high, leading to higher
credit risk. We propose to continue to exclude from the purview of sensitive list,
those commodities in the above list, for which prices are quoted by Commodity
Exchanges. We also propose to continue that all food grains be excluded from the list
of sensitive commodities, since availability of food grains has improved and prices are
stable.

7.6.3.1 Exposure norms for Commodity Exchange Brokers

The exposure ceiling to any single commodity exchange broking entity; including
its associates/ inter-connected companies will remain unchanged as under:

Single Borrower Exposure Limit

Rating Existing Maximum Exposure Proposed Maximum
(Rs. cr.) Exposure
(Rs. cr.)
IB1 Not Applicable Not Applicable
IB2 Not Applicable Not Applicable
IB3 10 10
IB4 7.5 7.5
IB5 5 5
IB6 2 2
IB7 Nil Nil
IB8 Nil Nil

Group Exposure Limit –quantum:

Aggregate Exposure to Stock Broking entities, Commodity Exchange Broking entities

and Currency Future Broking entities belonging to a Group is capped at Rs. 70
crores (enhanced from Rs. 40 crores)

7.6.3.2 Commodity market – Margin requirements

In terms of RBI circular DBOD No. Dir. BC. 19/13.03.00/ 2008-09 dated July 1, 2008,
minimum margin of 50% out of which minimum cash margin requirement of 25% will
also apply to guarantees issued by the Bank on behalf of commodity brokers in favour
of the national level commodity exchanges, viz., National Commodity & Derivatives
Exchange (NCDEX), Multi Commodity Exchange of India Limited (MCX) and National
Multi- Commodity Exchange of India Limited (NMCEIL) and other commodity

Page | 21
exchanges, in lieu of margin requirements as per the commodity exchange
regulations.

7.6.4 Currency Future Broker

7.6.4.1 Margin requirements

Margin on Bank Guarantee favoring NSE/NSCCL to be issued on behalf of Brokers of

Currency Future segment shall be 50%, with minimum cash margin of 25% and the
remaining margin may be by way of stocks/ shares.

7.6.4.2 Single Borrower Exposure Limit

Currency Future Broker shall be rated on Capital Market Broker rating model and the
Single Borrower Exposure Limit shall be linked to rating as under:

RAM Rating Proposed Maximum

Exposure
(Rs. cr.)
IB1 Not Applicable
IB2 Not Applicable
IB3 10
IB4 7.5
IB5 5
IB6 2
IB7 Nil
IB8 Nil

7.6.4.3 Group Exposure

Aggregate Exposure to Stock Broking entities, Commodity Exchange Broking entities

and Currency Future Broking entities belonging to a Group is capped at Rs. 70 crores

7.6.5 Combined Limit for Sensitive Sector

The total exposure to sensitive sector shall be governed by the following provisions.

∗ The total sensitive sector exposure, covering exposure to Capital markets, Real
estate and Commodities should not exceed 20% of total FB+NFB
exposures of the Bank.
∗ While computing our exposure to the real estate and sensitive sectors, the
gross exposure shall be netted by the amount of cash / deposit margin for
CRAR purpose.
7.7 Credit rating-wise Exposure Limit

7.7.1 Inclusion of products under rating category

All the exposures that are rated shall be considered for this limit. Besides, the
following shall also be applicable.

1) Bills Discounted under LCs, Loans against Deposits and Staff Loans will
be treated equivalent to IB-1 advances.
2) ABS/MBS exposures that are externally rated AAA or equivalent shall be
treated as IB-1. ABS/MBS exposures that are externally rated AA or equivalent
shall be treated as IB-2.
3) NPAs will not be subjected to rating but assigned the rating of IB-10
after the account is identified as NPA

Page | 22
Rating of retail loans

We propose the following, in respect of rating of retail exposures.

Retail Loans (Schematic)

∗ Schematic Retail loans such as Personal loans, Housing loans and vehicle
loans need to be “scored” on objective models, which are backed by
empirical data [as opposed to rating model for corporates, which is a mix of
subjective and objective analysis based on both empirical data and analytical
understanding of risk factors].
∗ Vehicle loans in our bank (carrying on from erstwhile ALFIN) are rated on a
scoring model.
∗ For rating other retail loans such personal loans, housing loans etc, we need
to finalize a scoring model. We propose to look for external support to an
optimum extent in the form of vendors with proven models, besides our own
understanding of risk in such loans.

Retail Loans (Non-Schematic)

Rating of Business Banking (eNon-schematic Retail) exposures applicable to all

“Retail accounts with turnover upto Rs. 25 crores and exposure limit upto Rs. 5
crores

The Bank is in the process of moving exposures on account of Business Banking

segment into a templated structure based on Product Programme. Upon
implementation of the same, Business Banking shall be governed by the Product
Programme

7.7.2 Target in terms of Weighted Average Credit Rating (WACR) –Non-

Schematic Portfolio

We propose goals in terms of Weighted Average Credit Rating (WACR) for the rated
portfolio. Exposure under IB-1 is assigned a weight of 1, IB-2 a weight of 2 and so on,
till IB-8. NPA exposure is assigned a weight of 10. WACR indicates the portfolio
quality, including distribution in various ratings, in a nutshell.

We propose to continue with Target WACR of 3.25 as on March 31, 2009. Target for
WACR beyond March 31, 2009 shall be stipulated as part of Budgeting process.

Note: The numeral 1 for WACR represents IB-1 (lowest risk category), 2 represent IB-2 and so
on …… 8 represent IB- 8 (highest risk category).

Progress in achieving the targeted WACR shall be monitored on monthly basis.

7.8 Product-wise Exposure Limit

The Bank has been expanding its range of products for the past few years. There is a
need to monitor concentration of risk on a few products. Risk Management Dept has
been analysing portfolio composition and concentration every month. Such portfolio
analysis covers product-wise distribution and monitoring product concentration also.

Limit for Term loans exposure

Under the broad category of Term Loans, the following exposures shall be included.
o Term Loans to Corporates for periods above 12 months
o Asset Backed Securitisation exposures (ABS)
o Mortgage Backed Securitisation exposures (MBS)
o Retail Loans – Vehicle Loans, Personal Loans & Home Loans

Page | 23
 o Any other loan which is term in nature and for tenors above 12 months

Total exposure under Terms Loans category, as defined above, shall be

subjected to a ceiling of 65% of Total Fund Based advances. The Bank shall
pursue to reduce exposure towards Term loan progressively.

7.9 Unsecured Exposure Limit

RBI had earlier stipulated a ceiling of 15% of total advances for unsecured exposures,
which include 100% of unsecured loans and 20% of unsecured guarantees.
However, RBI has withdrawn all the guidelines in respect of unsecured exposures and
stipulated that banks’ Boards should formulate their own policies (RBI circular dated
June 17, 2004).

However, RBI has defined unsecured exposures as follows.

Unsecured exposure is defined as an exposure where the realizable value of security

is not more than 10% of the outstanding exposure. Exposures shall include all funded
and non-funded exposures. Security will mean tangible security properly charged to
the Bank and will not include intangible securities like guarantees, comfort letters etc.

All the credit worthy corporates with superior credit rating has been borrowing
unsecured and the trend has come to stay. Therefore, building a qualitative credit
portfolio includes granting liberal unsecured advances to low risk corporates.

In the light of the foregoing, we propose to continue of the following guidelines for
assuming new unsecured exposures.

• The minimum acceptable credit rating for unsecured exposure should be IB-4
• The total unsecured exposure should not exceed 25% of the total exposure
(FB+NFB).
• Unsecured exposures shall exclude the types of exposures listed out in
Annexure D. All these exposures listed out in Annexure D (except the one
under Sl no.22 which is added by us) had originally been excluded by RBI from
the purview of unsecured exposures when the relevant exposure norms were
in place.

7.10 Off-Balance Sheet Exposure Limit

RBI suggests that banks should evolve adequate framework for managing their
exposure in off-balance sheet products like LCs, Guarantees, Forex forward contracts,
swaps, options, etc. as a part of overall credit to individual customer relationship and
subject to the same credit appraisal, limits and monitoring procedures. Banks should
classify their off-balance sheet exposures into three broad categories – viz. Full risk,
Medium risk and Low risk. We propose the following classification:

 Full risk (Credit Substitutes)

o Stand-by letters of credit, usance Letters of Credit, financial guarantees,
DPG etc.
 Medium risk (Off-balance sheet exposures, which are not direct credit
substitutes, but carry default risk)
o Bid bonds, Sight Letters of Credit, performance guarantees, indemnities
and warranties and
 Low risk (Off balance sheet exposures which do not carry default risk but only
replacement cost risk)
o Forward contracts, reverse repos, currency swaps, options, futures, etc.

As per the extant policy on Bank Guarantees approved by the Board, a prudential
limit of 20% of our Bank’s Tier I capital has been stipulated for the exposures by way
Page | 24
of issuance of bank guarantees in favour of other banks / financial institutions / other
lending agencies. We propose to continue the same limit of 20% of Tier I capital of
our Bank.

Currently, our Off-Balance sheet exposures comprise mostly of Letters of Credit and
Bank guarantees (medium risk) and Forward Contracts (Low risk). The Bank is
initiating efforts to expand the range of Off-Balance sheet exposures.

The following measures are proposed as risk mitigants:

(i) Bank shall endeavour that the available security charge shall cover
fund based and non fund based exposure.
(ii) In case of Performance guarantee :
(a) The appraisal process shall cover evaluation of requisite skills/
technical expertise for execution of contract
(b) Bank shall obtain report on progress of the project periodically.
(c) The progress vis-à-vis physical and financial indicators should be
monitored regularly, and any slippages should be highlighted in
the credit review.
(iii) Bank shall monitor the exposure on a monthly basis

7.11 Exposure limits for banks, FIs/PDs, MFs

Bank risk arises when a bank fails to honour its commitments or defaults on its
payment to another bank. The bank risk exists in all lines of business, viz. trade
finance exposures, treasury exposures, balances with banks, banking book exposures,
etc.

A separate comprehensive Bank risk policy has been formulated in which we have
proposed limits to domestic as well as international banks and FIs/PDs. The policy has
already been approved by the Board and the limits approved are being monitored.

In respect of exposures on co-operative banks, separate policy has been approved by

the Board.

7.12 Country Exposure Limit

Country risk is the risk of loss that arises due to sovereign intermediation when the
counter-party is willing and able to honour commitments but is unable to do so, due
to the problems associated with the country in which he is residing. It is the
possibility that a country will be unable to service or repay its debts to foreign lenders
in a timely manner. A comprehensive Country risk policy has been approved by the
Board and the limits approved are being monitored.

7.13 Regular Portfolio Review

The Bank has been proactively monitoring the credit portfolio on a bank-wide basis for
ensuring a well-balanced portfolio.

For the purpose of Portfolio management, credit-related MIS has been automated and
Bank-wide data on credit exposures with different break-up figures are being
generated from the system with minimum manual intervention. For instance, the
industry-wise, rating-wise, size-wise, interest-rate-wise break-up of the credit
portfolio is being generated with minimum manual intervention.

Detailed Portfolio review report covering the above prudential exposure limits,
presenting the data as well as our inferences, is being submitted to Top Management
at monthly intervals and to the Board at quarterly intervals.
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8. Credit Risk Monitoring

The primary responsibility for monitoring individual credits will lie with the concerned
branches and the overall supervision vests with Credit Department. The Bank will
monitor the individual credits as under:

Day to day monitoring by the concerned branches. Illustrative (not comprehensive)

list will include
Monitoring of operations in the borrowal accounts with our Bank
Monitoring the developments in the business profile of the borrower
Monitoring the inter-firm investments within the group, especially those which are
affecting the health of our borrower entity
Receipt and scrutiny of periodical information from the borrower – for instance, stock
statement, quarterly / half-yearly / annual financials etc
Continuous assessment of Credit risk of the borrower (in terms of Industry risk,
Business risk, Management risk & Financial risk)
Loan Review Mechanism (LRM)
Interim / Periodic reviews
Identification of early warning signals (EWS) – The details of early warning signals,
the process of identification and follow up and strategies are detailed in the NPA
Management and Loan Recovery Policy, approved by the Board in its meeting held
on 17.09.2007.

8.1 Loan Review Mechanism (LRM) / Credit Audit

LRM involves independent assessment of the quality of an advance, effectiveness of

loan administration, compliance with internal policies of bank and regulatory
framework, adequacy of loan loss provisions (for NPAs) and portfolio quality. It also
helps in tracking weaknesses developing in the account for initiating corrective
measures in time. A separate policy containing the objectives, coverage and
frequency of LRM has been approved by the Board.

8.2 Periodic Reviews

We propose the following discriminatory schedule for interim/periodic reviews and
renewal depending on the credit quality of assets and size of the exposure. We will
however retain validity period for renewal at one year or as decided by the approving
authority at the time of sanction.
Rating Exposure size Frequency for Interim Reviews/ Renewal ##

All listed companies Brief Quarterly review based on published information and
irrespective of exposure Annual renewal
Unlisted companies
IB-1 Rs.25 cr & Half-yearly review – based on available information &
to above Annual renewal
IB-4 Below Rs.25 cr Annual renewal (i.e. no interim review)
IB-5 Rs. 2 cr and Half-yearly review – based on available information &
to above Annual renewal
IB-8 Below Rs.2 cr Annual renewal (i.e. no interim review)

## Half-yearly review and annual review shall be submitted to the sanctioning authority
as per the delegation of powers in force, while the quarterly review shall be submitted to
Credit Dept, Corporate Office

The above discriminatory schedule will cover all credit exposures. The interim review
shall be carried out based on a concise format designed by Credit Dept.

9. Models/ Analytics

9.1 Credit Risk Rating Model

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Risk-rating model is an important tool and is an integral part of the Credit Risk
Management. The benefits of a robust system based rating model are:
 Serves as a single point indicator of diverse risks of a borrower
 Enables the Bank to take informed credit decisions in a consistent manner.
 Facilitates adoption of risk-based pricing.
 Arriving at Facility Risk rating for the particular facility/product based on the
comforts of securities/guarantors.

The Bank has acquired from Crisil and operationalised Rating and Appraisal Models
(RAM). There are 6 models for different segments of borrowers viz. Large
Corporates, SME borrowers, Traders, NBFCs, Capital market brokers and Business
Banking. Besides, the Bank has developed internal rating models for rating (a)
domestic banks / domestic entities of international banks and (b) Financial institutions
/ Primary Dealers.
This will be an important building block for an effective and efficient Credit Risk
Management in the Bank.

Going forward when the Bank will adapt FIRB or AIRB approaches for Credit Risk
under Basel II, the PD data provided by the Rating model will facilitate in capturing
one of the important risk component viz. Probability of Default (PD) for computing
Risk Weighted Exposure.

9.2 Provisioning and Capital Allocation

9.2.1 Basel II Accord

Basel II accord stipulates three approaches for allocation of Capital for Credit Risk.
Gist of the three approaches is discussed below.

∗ Standardised Approach (SA)

Similar to Existing Approach (under Basel I). Only difference is Risk Weights are
discriminatory under the Standardised approach, depending on the rating of
individual borrower by recognised external rating agencies. Only issuer ratings
are relevant and not issue rating (unless we assume exposure on the issue rated).
Unrated exposures attract 150% RW in case of exposure above Rs 50 Cr, as
applicable now.

External Rating for borrowers availing facilities of Rs. 10 crores & above

Bank shall strive that all the borrowers with sanctioned limit Rs. 10 crores & above
shall obtain Bank Loan Rating from any of the External Rating agencies accredited
by RBI for the purpose.

∗ Foundation Internal Rating-based (IRB) Approach

 Risk-sensitive Capital is computed using four risk components viz. Probability

of Default (PD), Exposure At Default (EAD), Loss Given Default (LGD) and
Maturity (M)
 Values of PD are to be provided by the Bank. Values of EAD, LGD & M are to
be provided by RBI.

∗ Advanced IRB Approach

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  Same as Foundation IRB, except that values of EAD, LGD & M will also be
internally provided by the Bank

9.2.2 RBI guidelines

RBI has issued guidelines on Implementation of New Capital Adequacy Framework in

April 2007 as per Basel II guidelines for banks in India. The following are the relevant
summary provisions relating to Credit risk capital.

 Foreign banks operating in India and Indian banks having presence outside India
are to migrate to the Standardised Approach (SA) for credit risk and the basic
indicator approach for operational risk with effect from March 31, 2008. All other
scheduled commercial banks are encouraged to migrate to these approaches in
alignment with them but in any case not later than March 31, 2009
 With a view to ensuring smooth transition to the revised Framework and with a
view to providing opportunity to banks to streamline their systems and strategies,
banks in India are required to commence a parallel run of the revised Framework.
The Boards of the banks should review the results of the parallel run on a
quarterly basis. Our Bank has been since doing parallel run under Basel II w.e.f
30.06.06.
 Banks that expect to meet the minimum requirements for entry and on-going use
of the Internal Rating Based Approaches (IRBA) are required to obtain prior
approval pf RBI. A separate communication in this regard will be issued to banks
by RBI at a later date.

9.2.3 Our approach

Our Bank is equipped to adopt Standardised Approach for credit risk. Bank has
acquired Reveleus – Basel II system from i-flex Solutions Ltd. and implementation of
the same is under way. The system is in Production stage and is expected to Go-Live
very shortly.

The process of Credit risk measurement under IRB approach requires introduction of a
system based ‘robust’ rating model and collection of ‘Data on Probability of Default
(PD)’ for a minimum period of 5 years and ‘Data on Loss Given Default (LGD)’ & ‘Data
on Exposure At Default (EAD)’ for minimum 7 years.

The data should be compiled internally by the Bank for the above number of years.
However, Basel II also permits mapping the Bank’s internal ratings (from RAM) to the
external ratings of Credit agencies like Crisil, for which PD data is available. However,
this approach needs to be approved by RBI. We propose to generate internal data
(which is essential for various purposes including Basel II) as well as map our ratings
to Crisil’s ratings (since such mapping does not require much effort on our part).

On collection of the requisite data in future and attaining capabilities for measurement
of Credit risk, the Bank will consider adoption of IRB approach.

10. Amendments, exceptions/ deviations to the Policy

RBI Guidelines
We shall comply with any mandatory changes or amendments, to RBI’s guidelines on
any of the matters discussed in this policy that will be affected by RBI.

Internal guidelines
The Bank will permit deviations to the Credit Risk Policy only under exceptional
circumstances. The deviations, which are within the RBI guidelines and RBI’s
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prudential exposure limits, may be permitted by the sanctioning authorities from the
level of Corporate Office Credit Committee – I (COCC-I) and above, after considering
in depth the justifications for such deviations. The recommending authority should
clearly state the reasons for considering the proposal with deviations.
11. Review of Policy

The Bank will review the credit risk policy at annual intervals or at shorter intervals if
necessitated by important internal/ external developments.

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 Annexure A to Credit Risk Policy

Compliance to regulatory restrictions on loans and advances

(Sec 6.5 of the Credit Risk Policy)
Salient features of the guidelines contained in RBI circular DBOD No.
Dir.BC.17/13.03.00/2008-09 dated July 1, 2008 is listed below.
6.5.1. Statutory Restrictions

6.5.1.1 Advances against bank's Own Shares

In terms of Section 20(1) of the Banking Regulation Act, 1949, a bank cannot
grant any loans and advances on the security of its own shares.

6.5.1.2 Advances to Bank's Directors & Restrictions on Power to remit debts

Section 20 (1) of the Banking Regulation Act, 1949 also lays down the
restrictions on loans and advances to the Directors and the firms in which they
hold substantial interest. These restrictions are listed out in sections 2.1.2.1 to
2.1.2.10 of RBI’s circular.

6.5.1.3 Restrictions on Holding Shares in Companies

In terms of Section 19(2) of the Banking Regulation Act, 1949, the banks should
not hold shares in any company except as provided in sub-section (1) whether as
pledgee, mortgagee or absolute owner, of an amount exceeding 30 percent of the
paid-up share capital of that company or 30 percent of its own paid-up share
capital and reserves, whichever is less.

Further, in terms of Section 19(3) of the Banking Regulation Act, 1949, the banks
should not hold shares whether as pledgee, mortgagee or absolute owner, in any
company in the management of which any managing director or manager of the
bank is in any manner concerned or interested.

Accordingly, while granting loans and advances against shares, statutory

provisions contained in Sections 19(2) and (3) of Banking Regulation Act should
be strictly observed.

6.5.1.4 Restrictions on Credit to Companies for Buy-back of their Securities

Banks should not provide loans to companies for buy-back of shares/securities.

6.5.2 Regulatory Restrictions

6.5.2.1 Granting loans and advances to relatives of Directors

Without prior approval of the Board or without the knowledge of the Board, no loans
and advances should be granted to relatives of bank's Chairman/Managing Director or
other Directors, Directors (including Chairman/Managing Director) of other banks and
their relatives, Directors of Scheduled Co-operative Banks and their relatives,
Directors of Subsidiaries/Trustees of Mutual Funds/Venture Capital Funds set up by
the financing banks or other banks as per details contained in Clauses 2.2.1.1 to
2.2.1.13 of RBI’s circular (reproduced in Annexure E).

6.5.2.2 Restrictions on Grant of Loans & Advances to Officers and the Relatives of
Senior Officers of Banks
All restrictions mentioned in Clauses 2.2.2.1 upto 2.2.2.5 of RBI’s circular (Annexure
B) will be complied with.

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6.5.2.3 Restrictions on Grant of Financial Assistance to Industries
Producing / Consuming Ozone Depleting Substances (ODS)

Government of India has advised that as per the Montreal Protocol, to which India is a
party, Ozone Depleting Substances (ODS) are required to be phased out as per
schedule prescribed therein. The Protocol has identified the main ODS and set time
limit on phasing out their production/consumption in future, leading to a complete
phase out eventually. Projects for phasing out ODS in India are eligible for grants
from the Multilateral Fund. The sectors covered in the phase out program are given
below:
Sector Type of substance
Foam products Chlorofluoro carbon - 11 (CFC - 11)
Refrigerators and Air-conditioners CFC – 12
Aerosol products Mixtures of CFC – 11 and CFC – 12
Solvents in cleaning applications CFC - 113 Carbon Tetrachloride, Methyl
Chloroform
Fire extinguishers Halons - 1211, 1301, 2402

The Bank should not extend finance for setting up of new units consuming/producing
above ODS. In this connection, IDBI has also advised banks that no refinance would
be extended to small/medium scale units engaged in the manufacture of aersol units
using CFC and any project assisted in this sector.
6.5.2.4 Loans and Advances against Shares, Debentures and Bonds
Banks are required to strictly observe regulatory restrictions on grant of loans and
advances against shares, debentures and bonds, which are detailed in the Master
Circular on 'Bank Finance Against Shares and Debentures'. The restrictions, interalia,
on loans and advances against shares and debentures, are: -
(a) No loans to be granted against partly paid shares.
(b) No loans to be granted to partnership/proprietorship concerns against the primary
security of shares and debentures.
6.5.2.5 Advances against Fixed Deposit Receipts (FDRs) Issued by Other Banks
There have been instances where fake term deposit receipts purported to have been
issued by some banks were used for obtaining advances from other banks. In the
light of these happenings, the banks should desist from sanctioning advances against
FDRs, or other term deposits of other banks.
6.5.2.6 Discounting/Rediscounting of Bills by Banks
This section details the guidelines to be adhered by banks while purchasing /
discounting / negotiating / rediscounting of genuine commercial / trade bills. One of
the guidelines deals with accommodation bills and reads: “Accommodation bills
should not be purchased / discounted / negotiated by banks. The underlying trade
transactions should be clearly identified and a proper record thereof maintained at the
branches conducting the bills business.”
6.5.2.7 Financing promoter's equity
In terms of our Circular DBOD. Dir. BC. 90/ 13.07.05/ 98 dated 28 August 1998,
banks were advised that the promoter's contribution towards the equity capital of a
company should come from their own resources and the bank should not normally
grant advances to take up shares of other companies. In view of the importance
attached to infrastructure sector, it has been decided that, under certain
circumstances, an exception may be made to this policy for financing the acquisition
of promoter's shares in an existing company, which is engaged in implementing or

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operating an infrastructure project in India. The conditions, subject to which an
exception may be made are listed out in the RBI circular.

Any changes or modifications effected by RBI in the above statutory and regulatory
restrictions will be complied with, by our Bank as required by RBI.

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