Master Circular

on

MANAGEMENT OF ADVANCES

(Updated upto 30 June, 2005)

(The Master Circular is also available at RBI

Website www.rbi.org.in and may be
down loaded from there)

RESERVE BANK OF INDIA

Urban Banks Department,
Central Office,
Mumbai.
RBI/2005-06/112

UBD.BPD (PCB) MC. No. 5 /13.05.00/2005-06

August 11 , 2005

Chief Executive Officers of

All Primary (Urban) Co-operative Banks

Dear Sir/Madam,

Master Circular

Management of Advances

Please refer to our Master Circular UBD.BPD.(PCB).MC.No.5 /13.05.00/2004-05

dated August 4, 2004 on the captioned subject (Available at RBI website
www.rbi.org.in). The enclosed Master Circular consolidates and updates all the
instructions/guidelines on the subject upto June 30, 2005.

2. Please acknowledge receipt of this Master Circular to the concerned Regional

Office of this Department.

Yours faithfully,

(N.S.Vishwanathan)

Chief General Manager-in-Charge

Encl: As above.
 Management of Advances

Contents

1. Background

2. Working Capital Requirements upto Rs.1 crore

3. Working Capital Requirements above Rs. 1 crore

4. Credit Administration

5. Other Guidelines
6 Monitoring of Wilful Defaultors
7. Rehabilitation of Sick SSI units ..

8. Specific Lending Activities

9. Discounting/Rediscounting of Bills by Banks

Annexure I Classification/reporting of data in regard to Assessment of

working capital limits Rs.1 crore

Annexure II Guidelines for Relief Measures

Annexure III Format for reporting of borrowal accounts classified as doubtful,loss or

suit filed with outstanding of Rs.1crore and above to be submitted to RBI.
Annexure IV Format for reporting of data on wilful Defaulters to RBI

Annexure V Guidelines for Rehabilitation of Sick SSi Units

Appendix List of circulars consolidated in the Master Circular

 MANAGEMENT OF LOANS AND ADVANCES

1. BACKGROUND
1.1 In the context of rapid growth of primary (urban) co-op. banks (PCBs),
qualitative aspects of lending, such as adequacy of lending to meet credit
requirements of their borrowers and effective supervision and monitoring of
advances have assumed considerable importance. Previously working capital
finance provided by the banks to trade and industry was regulated by the
Reserve Bank of India through a series of guidelines/instructions issued. There
were various quantitative and qualitative restrictions on bank’s lending. The
banks were also expected to ensure conformity with the basic financial
disciplines prescribed by the RBI from time to time under Credit Authorisation
Scheme (CAS).
1.2 However, consistent with the policy of liberalisation and financial sector
reforms, several indirect measures to regulate bank credit such as exposure
norms for lending to individual/group borrowers, prudential norms for income
recognition, asset classification and provisioning for advances, capital
adequacy ratios, etc. were introduced by RBI and greater operational freedom
has been provided to banks in dispensation of credit.

1.3 Banks are now are expected to lay down, through their boards, transparent
policies and guidelines for credit dispensation, in respect of each broad
category of economic activity, keeping in view the credit exposure norms and
various other guidelines issued by the Reserve Bank of India from time to time.
Some of the currently applicable guidelines are detailed in the following
paragraphs.

2. WORKING CAPITAL REQUIREMENTS UPTO RS. 1 CRORE

2.1 The assessment of working capital requirement of borrowers, other than SSI
units, requiring fund based working capital limits upto Rs.1.00 crore and SSI
units requiring fund based working capital limits upto to Rs.5.00 crore from the
banking system may be made on the basis of their projected annual turn over.

2.2 In accordance with these guidelines, the working capital requirement is to be

assessed at 25% of the projected turnover to be shared between the borrower
and the bank, viz. borrower contributing 5% of the turnover as net working
capital (NWC) and bank providing finance at a minimum of 20% of the turnover.

2.3 The banks may, at their discretion, carryout the assessment based on
projected turnover basis or the traditional method. If the credit requirement
based on traditional production/processing cycle is higher than the one
assessed on projected turnover basis, the same may be sanctioned, as
borrower must be financed upto the extent of minimum 20 per cent of their
projected annual turnover.
2.4 The banks may satisfy themselves about the reasonableness of the projected
annual turnover of the applicants, both for new as well as existing units, on the
basis of annual statements of accounts or any other documents such as returns
filed with sales-tax/revenue authorities and also ensure that the estimated
growth during the year is realistic.

2.5 The borrowers would be required to bring in 5 per cent of their annual turnover
as margin money. In other words, 25 per cent of the output value should be
computed as working capital requirement, of which at least four-fifth should be
provided by the banking sector, the balance one-fifth representing the
borrower's contribution towards margin for the working capital. In cases, where
output exceeds the projections or where the initial assessment of working
capital is found inadequate, suitable enhancement in the working capital limits
should be considered by the competent authority as and when deemed
necessary. For example, in case, annual turnover of a borrower is projected at
Rs. 60.00 lakh, the working capital requirement will be computed at Rs. 15.00
lakh (i.e. 25%) of which Rs. 12 lakh (i.e. 20%) may be provided by the banking
system, while Rs. 3.00 lakh (i.e. 5 %) should be borrower's contribution towards
margin money.

2.6 Drawals against the limits should, however, be allowed against the usual
safeguards so as to ensure that the same are used for the purpose intended.
Banks will have to ensure regular and timely submission of monthly statements
of stocks, receivables, etc., by the borrowers and also periodical verification of
such statements vis-à-vis physical stocks by their officials.

2.7 In regard to the above, few clarifications to some of the issues raised by banks
are given in Annexure I.

3. WORKING CAPITAL REQUIREMENTS ABOVE RS. 1 CRORE

3.1 Method of Assessment
3.1.1 The revised guidelines in respect of borrowers other than SSI units, requiring
working capital limits above Rs.1 crore and for SSI units requiring fund based
working capital limits above Rs.5 crore, from the banking system bestow
greater level of flexibility to the primary (urban) co-operative banks in their day-
to-day operations without diluting the prudential norms for lending as
prescribed by Reserve Bank of India.
3.1.2 The earlier prescription regarding Maximum Permissible Bank Finance (MPBF),
based on a minimum current ratio of 1.33:1, recommended by Tandon Working
Group has been withdrawn. Banks are now free to decide on the minimum
current ratio and determine the working capital requirements according to their
perception of the borrowers and their credit needs.
3.1.3 Banks may evolve an appropriate system for assessing the working capital
credit needs of borrowers whose requirement are above Rs.1 crore. Banks
may adopt any of the under-noted methods for arriving at the working capital
requirement of such borrowers.
 a) The turnover method, as prevalent for small borrowers may be used as a
tool of assessment for this segment as well,
b) Since major corporates have adopted cash budgeting as a tool of funds
management, banks may follow cash budget system for assessing the
working capital finance in respect of large borrowers.
c) The banks may even retain the concept of the MPBF with necessary
modifications.

3.2 Norms for Inventory/Receivables

3.2.1 In order to provide flexibility in the assessment of credit requirements of
borrowers based on a total study of borrowers' business operations, i.e., taking
into account the production/processing cycle of the industry as well as the
financial and other relevant parameters of the borrower, the banks have also
been permitted to decide the levels of holding of each item of inventory as also
of receivables, which in their view would represent a reasonable build-up of
current assets for being supported by bank finance.
3.2.2 Reserve Bank of India no longer prescribes detailed norms for each item of
inventory as also of receivables.

3.3 Classification of Current Assets and Current Liabilities

3.3.1 With the withdrawal of MPBF, inventory norms and minimum current ratio, the
classification of current assets and current liabilities ceases to be mandatory.
The banks may decide on their own as to which items should be included for
consideration as current assets or current liabilities.
3.3.2 Banks may also consider evolving suitable internal guidelines for accepting the
projections made by their borrowers relating to the item "Sundry Creditors
(Goods)" appearing as an item under "Other Current Liabilities" in the balance
sheet.

3.4 Bills Discipline

In respect of borrowers enjoying fund-based working capital credit limits of Rs.
5 crore and more from the banking system, the banks are required to ensure
that the book-debt finance does not exceed 75 per cent of the limits sanctioned
to borrowers for financing inland credit sales. The remaining 25 per cent of the
credit sales may be financed through bills to ensure greater use of bills for
financing sales.

3.5 Grant of Ad hoc Limits

To meet the contingencies, banks may decide on the quantum and period for
granting ad hoc limits to the borrowers based on their commercial judgement
and merits of individual cases. While granting the ad hoc limits the banks must
ensure that the aggregate credit limits (inclusive of ad hoc limits) do not exceed
the prescribed exposure ceiling.

3.6 Commitment Charge

 The levy of commitment charge is not mandatory and it is left to the discretion
of the financing banks/ consortium/syndicate. Accordingly, banks are free to
evolve their own guidelines in regard to commitment charge for ensuring credit
discipline.

3.7 Consortium Arrangement

The mandatory requirement of formation of consortium for extending working
capital finance under multiple banking arrangements has been withdrawn.

3.8 Syndication of Credit

The syndication of loans is an internationally practised model for financing
credit requirements. The banks are free to adopt syndication route, irrespective
of the quantum of credit involved, if the arrangement suits the borrower and the
financing banks.

3.9 Loan System for Delivery of Bank Credit

3.9.1 Background
In order to bring about an element of discipline in the utilisation of bank credit
by large borrowers, instill efficiency in funds management, loan system for
delivery of bank credit was been introduced for borrowers enjoying working
capital credit limits of Rs.10 crore and above from the banking system and the
minimum level of loan component for such borrowers was fixed at 80 per cent.
These guidelines have been revised by RBI, in the light of current environment
of short-term investment opportunities available to both the corporate and the
banks. In case any primary (urban) co-operative bank is having borrowers with
MPBF of Rs. 10 crore and above where it has participated under
consortium/syndication, it should ensure strict compliance with the under-noted
guidelines.
3.9.2 Loan Component and Cash Credit Component
(i) Banks may change the composition of working capital by increasing the
cash credit component beyond 20 per cent or to increase the loan
component beyond 80 per cent, as the case may be, if they so desire.
(ii) Banks are expected to appropriately price each of the two components
of working capital finance, taking into account the impact of such
decisions on their cash and liquidity management.
(iii) If a borrower so desires, higher loan component can be granted by the
bank; this would entail corresponding pro-rata reduction in the cash
credit component of the limit.
(iv) In the case of borrowers with working capital (fund based) credit limit of
less than Rs. 10 crore, banks may persuade them to go in for the Loan
System by offering an incentive in the form of lower rate of interest on
the 'loan component' as compared to the 'cash credit component' The
 actual percentage of 'loan component' in these cases may be settled by
the bank with its borrower clients.
(v) In respect of certain business activities which are cyclical and seasonal
in nature or have inherent volatility, the strict application of loan system
may create difficulties for the borrowers. Banks, may with the approval of
their respective Boards, identify such business activities which may be
exempt from the loan system of credit delivery.

3.9.3 Ad hoc Credit Limit

The ad hoc/additional credit for meeting temporary requirements may be
considered by the financing bank only after the borrower has fully
utilised/exhausted the existing limit.
3.9.4 Sharing of Working Capital Finance
(i) The ground rules for sharing of cash credit and loan components
may be laid down by the consortium, wherever formed, subject to
the stipulations contained in Para. 3.9.2 above.
(ii) The level of individual bank's share shall be governed by the
norm for single / group borrowers credit exposure.
3.9.5 Rate of Interest
Banks are allowed to fix separate lending rates for 'loan component' and
'cash credit component'.
3.9.6 Period of Loan
The minimum period of the loan for working capital purposes may be
fixed by banks in consultation with borrowers. Banks may decide to split
the loan component according to the need of the borrower with different
maturity bases for each segment and allow roll over.
3.9.7 Security
In regard to security, sharing of charge, documentation, etc., banks may
themselves decide on the requirements, if necessary, in consultation
with the other participant banks.
3.9.8 Export Credit
Export credit limit would be allowed in the form hitherto granted. The
bifurcation of the working capital limit into loan and cash credit
components, as stated in paragraph 3.9.2 (i) above, would be effected
after excluding the export credit limits (pre-shipment and post-shipment).
3.9.9 Bills Limit
Bills limit for inland sales may be fully carved out of the 'loan
component'. Bills limit also includes limits for purchase of third party
 (outstation) cheques/bank drafts. Banks must satisfy themselves that the
bills limit is not mis-utilised.
3.9.10 Renewal/Roll-over of Loan Component
The loan component , may be renewed/rolled over at the request of the
borrower. However, banks may lay down policy guidelines for periodical
review of the working capital limit and the same may be scrupulously
adhered to.
3.9.11 Provision for Investing Short Term Surplus Funds of Borrowers
The banks, at their discretion, may permit the borrowers to invest their
short term/temporary surpluses in short-term money market instruments
like Commercial Paper (CP), Certificates of Deposit (CDs) and in Term
Deposit with banks, etc.
3.9.12 Applicability
The loan system would be applicable to borrowal accounts classified as
'standard' or 'sub-standard'.

4. CREDIT ADMINISTRATION
4.1 No Objection Certificate
The primary (urban) co-operative banks should not finance a borrower already
availing credit facility from another bank without obtaining a 'No Objection
Certificate' from the existing financing bank.

4.2 Opening of Current Accounts

Before permitting the parties to open current accounts/sanctioning post-sale
limits, the banks should invariably obtain the concurrence of the banks which
have sanctioned main limits.

4.3 Certification of Accounts of Non-Corporate Borrowers by Chartered

Accountants
As per the Income Tax Act, 1961, filing of audited balance sheet and profit &
loss account is mandatory for certain types of non-corporate entities. Therefore,
the banks must insist on the audited financial statements from the borrowers
enjoying large limits; since such borrowers would, in any case, be submitting
audit certificate to the income-tax authorities, based on audit of their books of
accounts by a Chartered Accountant.

4.4 Defaults in Payment of Statutory Dues by Borrowers

4.4.1 It has been observed that many of the borrowers enjoying credit facilities from
primary (urban) co-operative banks default in payment of Provident Fund,
Employees State Insurance and other statutory dues. Despite this, such
borrowers continue to carry on operations with the assistance of bank finance
without meeting their statutory, obligations.
4.4.2 In the case of insolvency/winding up of a borrowing employer, under the law,
there are certain priorities in regard to the recovery of statutory dues e.g.,
employees contribution towards provident fund deducted from wages of the
employee members for a period of more than six months and not paid to the
Commissioner, are a first charge on the assets of borrowers.
4.4.3 In the circumstances, the banks should safeguard their interest vis-à-vis such
statutory dues and, therefore, it would be desirable for the banks to ensure that
provident funds and similar other dues are paid by the borrowers promptly. For
the purpose, the banks should incorporate an appropriate declaration in their
application forms for grant/renewal/ enhancement of credit facilities so as to
ensure that the position regarding the statutory dues is disclosed therein.
4.4.4 Where warranted, banks should satisfy themselves about genuineness of the
party's declaration in this regard. Thus, the sanction/renewal/ enhancement of
credit facilities can be utilised by banks as a leverage for enforcing necessary
discipline on the part of their borrowers.
4.4.5 In respect of the corporate borrowers and non-corporate borrowers, the amount
of statutory dues should normally be reflected in their annual accounts which
should be duly certified by the auditors, and hence, the banks should have no
difficulty in ascertaining the position of their statutory dues. Nonetheless, in
addition to duly audited annual accounts, banks should also obtain a specific
certificate from the Chartered Accountant as regards the position of statutory
dues, if the audited accounts do not clearly indicate the position.
4.4.6 After ascertaining the quantum of statutory dues, the banks should ensure that
these are cleared by the borrowers within a reasonable period and that too
through internal generation of funds. The non-payment of statutory dues is one
of the symptoms of incipient sickness of an industrial unit. Therefore, it is in the
interest of both the lender and borrower to give high priority to the clearance of
these dues. Apart from insisting the borrowers to indicate a definite
programme for clearance of arrears, banks may consider suitable restrictions
on the outflow of funds by way of dividends, repayment of loans from promoters
or their friends, relatives or inter-corporate borrowings etc., till the overdue
statutory liabilities are cleared.

4.5 Sanction of Advances

4.5.1 Irregularities/ Deficiencies in Credit Sanction
Banks should, take suitable precautions to avoid irregular practices such as
sanctioning of advances beyond discretionary powers and/or without proper
credit appraisal in order to minimise chances of frauds.
4.5.2 Delegation of Powers
(i) The Board of Directors should delegate specific powers to the Branch
Managers and other functionaries at the Head Office level as also to the
Chairman in the matter of sanction of advances and expenditure. A
system should also be introduced to ensure that powers are exercised
within the limits prescribed and any transgressions are immediately
reported to Head Office.
 (ii) The internal inspectors should examine during the course of inspection of
branches whether powers have been exercised properly and any
unauthorised exercise of powers should immediately be brought to the
notice of Head Office. Similarly, sanctions beyond discretionary powers
by the Chairman, Chief Executive Officer and other executives at the
Head Office should also be reported to the Board of Directors.
4.5.3 Oral Sanction
The higher authorities at various level should desist from the unhealthy
practice of conveying sanction of advances orally or on telephone.
4.5.4 Proper Record of Deviations
(i) Only in exigencies, where sanctions are made on telephone/oral
instructions of higher functionaries or sanctions beyond discretionary
powers have to be resorted to, the following steps should be taken:
(a) Record of such instructions/sanctions should be maintained by the
sanctioning/disbursing authorities explaining the circumstances
under which sanctions were made.
(b) Written confirmation of the competent sanctioning authority should
be obtained by the disbursing authority / official within a
week/fortnight.
(c) Sanctions within discretionary powers should also be reported to
Head Office within a stipulated time and Head Office should
meticulously follow up receipt of such returns.
(d) Head Office should diligently scrutinise the statements/ returns
and should initiate stringent action against erring functionary(ies) if
he/they is/are found to have indulged in unauthorised sanctioning.
(ii) Officials should exercise powers delegated to them judiciously and
should not exceed their discretionary powers for granting loans and
advances. Violation, if any, in this regard should be viewed seriously and
the guilty should be punished suitably.

4.6 Monitoring Operations in Loan Accounts

4.6.1 Diversion of Funds
Some of the bank clients are known to be making large cash withdrawals. It is
quite possible that such cash withdrawals may be used by the account holders
for undesirable or illegal activities. While cash withdrawals cannot be refused,
banks should keep a proper vigil over requests of their clients for cash
withdrawals from their accounts for large amounts.
4.6.2 Post-Sanction Monitoring
(i) It is the primary responsibility of banks to be vigilant and ensure proper
end use of bank funds /monitor the funds flow. It is, therefore, necessary
for banks to evolve such arrangements as may be considered necessary
to ensure that drawals from cash credit/overdraft accounts are strictly for
the purpose for which the credit limits are sanctioned by them. There
 should be no diversion of working capital finance for acquisition of fixed
assets, investments in associate companies/subsidiaries, and
acquisition of shares, debentures, units of Unit Trust of India and other
mutual funds, and other investments in the capital market. This has to be
so, even if there is sufficient drawing power/undrawn limit for the
purpose of effecting drawals from the cash credit account.
(ii) Post sanction follow-up of loans and advances should be effective so as
to ensure that the security obtained from borrowers by way of
hypothecation, pledge, etc. are not tampered with in any manner and are
adequate.
(iii) Drawals against clearing cheques should be sanctioned only in respect
of first class customers and even in such cases the extent of limits and
the need therefor should be subjected to thorough scrutiny and
periodical review. Banks should not issue banker’s cheques/pay
orders/demand drafts against instruments presented for clearing, unless
the proceeds thereof are collected and credited to the account of the
party. Further, banker’s cheques /pay orders/ demand drafts, should not
be issued by debit to cash credit /over draft accounts which are already
overdrawn or likely to be overdrawn with the issue of such instruments.
(iv) Drawals against clearing instruments should be normally confined to
bank drafts and government cheques and only to a limited extent against
third party cheques.
(v) Cheques against which drawals are allowed should represent genuine
trade transactions and strict vigilance should be observed against
assisting kite-flying operations.
(vi) Drawals against cheques of allied /sister concerns should not be
permitted and the facility of drawal against clearing cheques should
normally be of temporary nature and should not be allowed on a regular
basis without proper scrutiny and appraisal.
(vii) Bills of accommodation nature should never be purchased and the
officials responsible for purchase of such bills should be punished
suitably.
(viii) In case a borrower is found to have diverted finance for the purposes,
other than for which it was granted, banks must recall the amounts so
diverted. In addition, banks may charge penal interest on the amount
diverted.
(ix) Where borrowers fail to repay the amounts diverted from cash credit
accounts for uses other than for which the limit was sanctioned, banks
should reduce the limits to the extent of amount diverted. The above
aspects relating to safe guards are only illustrative in nature and not
exhaustive.

4.6.3 Responsibility
(i) The primary responsibility for preventing misuse of funds rests with the
management of banks. For the purpose, highest standards of integrity
 and efficiency are imperative in urban banks which are the trustees of
public money. The banks should, therefore, take appropriate steps to
review and tighten their internal administration and control measures so
as to eliminate the scope for misuse/diversion of funds and malpractices.
(ii) Banks should take serious view of instances of misuse of power,
corruption and other malpractices indulged by the members of staff and
erring staff members should be given punishments befitting the
seriousness of the irregularity. Light punishments such as issue of
warning, stoppage of increments, transfer, etc. may not prove a
deterrent in all cases. Quick disposal of enquiries by the banks and
award of deterrent punishment would be necessary in all such cases,
The Board should take more active interest in these matters.

4.7 Annual Review of Advances

For an effective monitoring of the advances, it is imperative for the banks to
undertake an exercise for review of the advances on a regular basis. Apart
from the usual objective of such a review of assessing the quality of operation,
safety of funds, etc. the review should specifically attempt to make an
assessment of the working capital requirements of the borrower based on the
latest data available, whether limits continue to be within the need-based
requirements and according to the bank's prescribed lending norms.

5. OTHER GUIDELINES
5.1 Relief Measures to Persons Affected by Natural Calamities
5.1.1 The primary (urban) co-operative banks are expected to provide relief and
rehabilitation assistance, in their area of operation to people affected by natural
calamities such as droughts, floods, cyclones, etc.
5.1.2 The Government of India has evolved, in consultation with the RBI and the IBA,
a set of broad guidelines (Standing Guidelines) indicating the steps to be taken
by the banks in calamity affected areas. The Standing Guidelines, duly
modified, are given in Annexure II.
5.1.3 In order to avoid delay in taking relief measures on the occurrence of natural
calamity, banks should evolve a suitable policy framework with the approval of
the Board of Directors. An element of flexibility may be provided in the
measures so as to synchronise the same with the measures which could be
appropriate in a given situation in a particular State or District and parameters,
in this regard, may be decided in consultation with SLBC/DCC, as the case
may be.
5.1.4 Banks should get the documentation settled as per revised guidelines in
consultation with their legal departments, taking into account the relevant
provisions of the Contract Act and the Limitations Act and may issue
appropriate instructions to their offices in respect of documentation in relation to
cases covered by these guidelines.
5.1.5 Whenever required, RBI advises the banks to follow these guidelines in respect
of persons affected by riots and disturbances.

5.2 Disclosure of Information on Defaulting Borrowers of Banks and

Financial Institutions
5.2.1 The Reserve Bank of India has been collecting information regarding defaulting
borrowers and suit filed accounts of scheduled commercial banks and financial
institutions for circulation among banks and financial institutions to put them on
guard against such defaulters.
5.2.2 Similar information has also to be collected from scheduled primary (urban) co-
operative banks. These banks are, therefore, required to submit to the Reserve
Bank of India as at the end of September and March every year, the details of
the borrowal accounts which have been classified as doubtful, loss or suit filed
with outstanding (both under funded and non-funded limits) aggregating Rs. 1
crore and above as per the format given in Annexure III.
5.2.3 The Reserve Bank of India is circulating to the banks and financial institutions
the information on the defaulters (i.e., advances classified as doubtful and
loss). The banks and financial institutions may make use of the information
while considering the merits of the requests for new or additional credit limits by
existing and new constituents.
5.2.4 The Reserve Bank of India has also been publishing a list of borrowal accounts
against which Banks and Financial Institutions have filed suits for recovery of
advances (outstanding aggregating Rs.1.00 crore and above) based on
information furnished by scheduled commercial banks and financial institutions.
Such list published as on 31 March each year in Compact Disc (CD) form and
updated on quarterly basis is available with RBI, Publications Division at the
following address:
Sales Section
Division of Reports, Review and Publications
Reserve Bank of India
Amar Building, Ground Floor
P.B. Road, P.B. No. 1036
Fort, Mumbai 400 001.
The said list and its quarterly up dates are also placed on RBI's Website
(www.rbi.org.in)
5.2.5 It is likely that some of the borrowers named in the list of suit filed accounts
may approach the scheduled primary (urban) co-operative banks for their credit
requirements. The information available in the above mentioned CD will be of
immense use to scheduled primary (urban) co-operative banks, while
considering requests for fresh/additional credit limits. The banks can verify the
list to ensure that the defaulting borrowing units as also their
proprietors/partners/ directors etc. named in the published list of suit-filed
accounts, either in their own names or in the names of other units with which
they are associated, are not extended further credit facilities.
5.2.6 The banks may make enquiry, if any, about the defaulters from the reporting
bank/ financial institution.

6 MONITORING OF WILFUL DEFAULTERS

6.1 Collection and dissemination of information on cases of wilful default of

Rs. 25.00 lakh and above
6.1.1 Pursuant to the instructions of the Central Vigilance Commission for collection
of information on wilful defaulters by RBI and dissemination to the reporting
banks and financial institutions, a scheme has been framed under which the
banks and financial institutions will be required to submit the details of the wilful
defaulters. The scheduled primary (urban) co-operative banks have also been
brought within the ambit of the scheme.
6.1.2 The details of the scheme are given below:
(i) The scheme has come into force with effect from 1st April 1999.
Accordingly, scheduled primary (urban) co-operative banks are required
to report on a quarterly basis, all cases of wilful defaults which occurred,
or are detected after 31st March 1999 in the proforma given in Annexure
IV.
(ii) The scheme covers all non-performing borrowal accounts with
outstanding (funded facilities and such non-funded facilities which are
converted into funded facilities) aggregating to Rs. 25.00 lakh and
above.

6.2 Wilful Default

"A wilful default would be deemed to have occurred, if :

(a) The unit has defaulted in meeting its payment / repayment obligations to the
lender even when it has the capacity to honour the said obligations.

OR
(b) The unit has defaulted in meeting its payment / repayment obligations to the
lender and has not utilised the finance from the lender for the specific purposes
for which finance was availed of but has diverted the funds for other purposes.
OR
(c) The unit has defaulted in meeting its payment / repayment obligations to the
lender and has siphoned off the funds so that the funds have not been utilised
for the specific purpose for which finance was availed of, nor the funds are
available with the unit in the form of other assets.

6.3 Diversion and siphoning of funds

6.3.1 Diversion of funds would be construed to include any one of the under-noted
occurrences:
 (a) utilisation of short-term working capital funds for long-term purposes not
in conformity with the terms of sanctions;

(b) deploying borrowed funds for purposes / activities or creation of assets

other than those for which the loan was sanctioned;

(c) transferring funds to the subsidiaries / group companies or other

corporates by whatever modalities;

(d) routing of funds through any bank other than the lender bank or
members of consortium without prior permission of the lender;

(e) investment in other companies by way of acquiring equities / debt

instruments without approval of lenders;

(f) short fall in deployment of funds vis-à-vis the amounts disbursed / drawn
and the difference not being accounted for.
6.3.2 Siphoning of funds should be construed to have occur if any funds borrowed
are utilised for purposes unrelated to the operations of the borrower, to the
detriment of the financial health of the entity or of the lender. The decision as to
whether a particular instance amounts to siphoning of funds would have to be a
judgement of the lenders based on objective facts and circumstances of the
case.

6.4 Cut-off limits

While the penal measures normally be attracted by all the borrowers identified
as wilful defaulters or the promoters involved in diversion / siphoning of funds,
keeping in view the present limit of Rs.25 lakh fixed by the Central Vigilance
Commission for reporting of cases of wilful default by scheduled banks to RBI,
any wilful defaulter with an outstanding balance of Rs.25 lakh or more would
attract the penal measure stipulated at para 6.6 below. The limit of Rs.25 lakh
may also be applied for the purpose of taking congnisance of the instances of
`siphoning '/ `diversion' of funds.

6.5 End-use of Funds

In cases of project financing, banks should seek to ensure end use of funds by,
inter alia, obtaining certification from the Chartered Accountants for the
purpose. In case of short-term corporate / clean loans, such an approach ought
to be supplemented by `due diligence' on the part of lenders themselves, and to
the extent possible, such loans should be limited to only those borrowers
whose integrity and reliability were above board. Scheduled pcbs, therefore,
should not depend entirely on the certificates issued by the Chartered
Accountants but strengthen their internal controls and the credit risk
management system to enhance the quality of their loan portfolio. Needless to
 say, ensuring end-use of funds by banks should form a part of their loan policy
document for which appropriate measures should be put in place.

6.5.1 The following are the illustrative measures that could be taken by the lenders
for monitoring and ensuring end-use of funds :

(a) Meaningful scrutiny of quarterly progress reports / operating statements /

balance sheets of the borrowers ;
(b) Regular inspection of borrowers' assets charged to the lenders as
security;
(c) Periodical scrutiny of borrowers' books of accounts and the no-lien
accounts maintained with other banks;
(d) Periodical visits to the assisted units;
(e) System of periodical stock audit, in case of working capital finance;
(f) Periodical comprehensive management audit of the `Credit' function of
the lenders, so as to identify the systemic weaknesses in the credit-
administration.

6.6 Penal measures

In order to prevent the access to the capital markets by the wilful defaulters, a
copy of the list of wilful defaulters is forwarded by RBI to SEBI as well. It has
also been decided that the following measures should be initiated by schedule
pcbs against the wilful defaulters

(a) No additional facilities be granted to the listed wilful defaulters. In

addition, the entrepreneurs / promoters of companies where banks
have identified siphoning / diversion of funds, misrepresentation,
falsification of accounts and fraudulent transactions should be debarred
from institutional finance for floating new ventures for a period of 5
years from the date the name of the wilful defaulter is published in the
list of wilful defaulters by the RBI.

(b) The legal process, where warranted, against the borrowers/guarantors

and foreclosure of loans should be initiated expeditiously. The lenders
may also initiate criminal proceedings against wilful defaulters,
wherever necessary.

(c) Wherever possible, the banks should adopt a proactive approach for a
change of management of the wilfully defaulting borrower unit. It would
be imperative on the part of the banks to put in place a transparent
mechanism for the entire process so that the penal provisions are not
misused and the scope of such discretionary powers is kept to the
barest minimum. It should be ensured that a solitary or isolated
instance is not made the basis for imposing the penal action.

6.7 Treatment of Group

 While dealing with wilful default of a single borrowing company in a group, the
banks should consider the track record of the individual company, with
reference to its repayment performance to its lenders. However, in cases where
a letter of comfort and/or the guarantees furnished by the companies within the
group on behalf of the wilfully defaulting units are not honoured when invoked
by scheduled banks, such group companies should also be reckoned as wilful
defaulters.

6.8 Role of Auditors

6.8.1 In case any falsification of accounts on the part of the borrowers is observed by
banks, they should lodge a formal complaint against the auditors of the
borrowers, with Institute of Chartered Accountant of India (ICAI) if it is observed
that the auditors were negligent or deficient in conducting the audit to enable
the ICAI to examine and fix accountability of the auditors.

6.8.2 With a view to monitoring the end-use of funds, if the lenders desire a specific
certification from borrowers' auditors regarding diversion / siphoning of funds by
the borrower, the lender should award a separate mandate to the auditors for
the purpose. To facilitate such certification by the auditors scheduled pcbs will
also need to ensure that appropriate covenants in the loan agreements are
incorporated to enable award of such a mandate by the lenders to the
borrowers / auditors.

6.9 Filing of Suits to Recover Dues from Wilful Defaulters

6.9.1 There are few cases where the amount outstanding is substantial but the banks
have not initiated any legal action against the defaulting borrowers. It may be
noted that the cases of wilful defaults have an element of fraud and cheating
and therefore, should be viewed differently.
6.9.2 Scheduled pcbs should examine all cases of wilful defaults of Rs. 1.00 crore
and above and file suits in such cases, if not already done. Banks should also
examine whether in such cases of wilful defaults, there are instances of
cheating/fraud by the defaulting borrowers and if so, they should also file
criminal cases against those borrowers. In other cases involving amounts
below Rs. 1.00 crore, banks should take appropriate action, including legal
action, against the defaulting borrowers.

7. GUIDELINES FOR REHABILITATION OF SICK SMALL SCALE

INDUSTRIAL UNITS

(i) The Reserve Bank of India, had constituted a Working Group on

Rehabilitation of Sick SSI units, under the Chairmanship of Shri S. S. Kohli,
to review the existing guidelines in regard to rehabilitation of sick small
scale units and to recommend the revision of the guidelines for
rehabilitation of currently sick and potentially viable SSI units, making
them transparent and non-discretionary. The revised guidelines are
 detailed in Annexure V. Reserve Bank of India has accepted all the major
recommendations of the Group.

(ii) The emphasis of the rehabilitation effort in case of SSI units is on early
detection
of signs of incipient sickness, adequate and intensive relief measures and
their
speedy application rather than giving a long span of time to the units for
rehabilitation.

( iii) The banks should take a sympathetic attitude and strive for rehabilitation, in
respect
of units in the SSI sector, particularly wherever the sickness is on account
of
circumstances beyond the control of the entrepreneurs. Banks are also
advised to
take a pro-active stance in providing timely assistance for rehabilitation of
small
scale units, which are affected by the industrial down turn and delays in
payments
against supplies made by them to large scale and other units.

(iv) In the case of units which are not applicable of revival, banks should try for
a
settlement and \or resort to other recovery measures expeditiously.

(v) It may be noted that the enclosed guidelines are applicable to industrial
units which were being financed by the bank before they turned into sick
units. Primary (urban) co-operative banks are not expected to take over
financing of sick industrial units, particularly, those financed by
commercial banks earlier, in view of the risks involved.

8. SPECIFIC LENDING ACTIVITIES

8.1 Bridge Loans/Interim Finance

8.1.1 The grant of bridge loan/interim finance by pcbs to any company (including
finance companies) is totally prohibited.
8.1.2 The ban on sanction of bridge loans/interim finance is also applicable in
respect of Euro issues.
8.1.3 The banks should not circumvent these instructions by purport and/or intent
by sanction of credit under a different nomenclature like unsecured negotiable
notes, floating rate interest bonds, etc. as also short-term loans, the
repayment of which is proposed/expected to be made out of funds to be or
likely to be mobilised from external/other sources and not out of the surplus
generated by the use of the asset(s).
8.1.4 If any bank has sanctioned and disbursed any bridge loan/interim finance, it
should report the same to the concerned Regional Office of the Urban Banks
Department with full particulars and certifying that the loans are utilised strictly
for the purpose for which the public issue and/or market borrowing was
intended. Thereafter, the concerned banks should immediately take steps to
ensure timely repayment of such bridge loans/interim finance already
sanctioned and disbursed and under no circumstances, should the banks allow
extension of time for repayment of existing bridge loans/interim finance.
8.1.5 These instructions are issued by the Reserve Bank of India in exercise of
powers conferred by the Sections 21 and 35A read with section 56 of the
Banking Regulation Act, 1949.

8.2 Advances to Builders/Contractors

8.2.1 The builders/contractors, who generally require, huge funds, take advance
payments from the prospective buyers or from those on whose behalf
construction is undertaken and, therefore, may not normally require bank
finance for the purpose. Any financial assistance extended to them by banks
may result in dual financing. The banks should, therefore, normally refrain
from sanctioning loans and advances to this category of borrowers.
8.2.2 However, where contractors undertake comparatively small construction work
on their own, (i.e. when no advance payments are received by them for the
purpose), the banks may consider extending financial assistance to them
against the hypothecation of construction materials, provided such loans and
advances are in accordance with the by-laws of the bank.
8.2.3 The banks should frame comprehensive prudential norms relating to the
ceiling on the total amount of real estate loans, single/aggregate exposure
limit for such loans, margins, security, repayment schedule and availability of
supplementary finance taking into account guidelines issued by RBI and the
policy should be approved by the bank's Board.
8.2.4 Banks should undertake a proper scrutiny of the relevant loan applications,
and satisfy themselves, among other things, about the genuineness of the
purpose, the quantum of financial assistance required, creditworthiness of the
borrower, his repayment capacity, etc. and also observe the usual safeguards,
such as, obtaining periodical stock statements, carrying out periodical
inspections, determining drawing power strictly on the basis of the stock held,
maintaining a margin of not less than 40 to 50 percent, etc. They should also
ensure that materials used up in the construction work are not included in the
stock statements for the purpose of determining the drawing power.
8.2.5 The banks may also take collateral security, wherever available. As the
construction work progresses the contractors will get paid and such payments
should be applied to reduce the balance in the borrowal accounts. If possible,
the banks, could perhaps enter into a tripartite agreement-with the borrower
and his clients, particularly when no collateral securities are available for such
advances. Thus, the banks should ensure that bank credit is used for
productive construction activity and not for activity connected with speculation
in real estate.
8.3 Financing of Leasing/Hire Purchase Companies
9.3.1 Enrolment of Financial Companies as Members
(i) Primary (urban) co-operative banks are normally not expected to enroll
non-banking financial institutions like investment and financial
companies as their members since it would be in contravention of the
State Co-operative Societies Act concerned and will also not be in
conformity with the provisions of model by-law No.9 recommended for
adoption, by all banks.
(ii) Therefore, the primary (urban) co-operative banks are not permitted to
finance such type of non-banking financial companies ( NBFCs).

8.3.2 Norms for financing Leasing/Hire Purchases Companies

(i) As in the case of finance and investment companies, admission of non-
banking financial companies which are not engaged exclusively in
leasing/hire purchase business as members may be contrary to the
provisions contained in the state co-operative societies act concerned
and model bye-law No.9 referred to above. It will, therefore, be
necessary for banks to obtain prior approval of the concerned Registrar
of Co-operative Societies before admitting them as members.
(ii) Even financing the leasing/hire purchase companies by primary (urban)
co-operative banks on a large scale is not favoured by the Reserve Bank
of India, since the banks are basically required to cater to the credit
needs of the people of small means.
(iii) Presently banks with working capital funds aggregating to Rs. 25 crore
and above, only are permitted take up the financing of leasing/hire
purchase companies that too only in consortium with other scheduled
commercial banks. The banks should observe the following norms, while
financing such companies :
(a) The level of finance to leasing/hire purchase companies depends
on the net owned funds of the companies, subject to the overall
ceiling on their borrowings upto ten times of their owned funds.
(b) Bank credit to companies exclusively engaged in equipment
leasing and hire purchases and such leasing/hire purchase
companies which are predominantly engaged in equipment
leasing/hire purchase business (i.e., at least 75 per cent of assets
are in equipment leasing/hire purchase and 75 per cent of their
gross income is derived from these two types of activities as per
their last audited balance sheet) may be extended within the
ceiling of three times of the net owned funds within the overall
ceiling of their borrowings upto ten times of net owned funds.
( c) In the case of other equipment leasing/hire purchases companies
(i.e. companies whose assets in equipment leasing/hire purchase
business are less than 75 per cent and whose gross income
derived from these two types of activities as per the last audited
 balance sheet is less than 75 per cent of its gross income), the
credit limit has to be within two times of their net owned funds
from the present level of four times.

8.4 Working Capital Finance to Information Technology (IT) and Software

Industry
8.4.1 Banks are permitted to decide on their own the loan policy and the manner of
estimating the working capital finance based on MPBF method or any other
method to be approved by their Board of Directors. The stance of Reserve
Bank policy towards operational freedom to banks remains unchanged. At the
same time, Reserve Bank recognises the fact that the banks are not
comfortable with extending aggressive credit support to a relatively new area of
software industry unlike other traditional industries, due to several factors which
make the assessment of credit needs and follow up thereof difficult, if not
insurmountable.
8.4.2 In order to bring about uniformity in approach, the Reserve Bank has
formulated guidelines for information of banks, on various aspects of lending to
information technology and software industry to facilitate free flow of credit. The
same were enclosed to our circular DS.SUB.No.4/13.05.00/98-99 dated 5
October 1998, addressed to scheduled PCBs. Banks are, however, free to
modify the guidelines based on their own experience without reference to
Reserve Bank to achieve the purpose of the guidelines in letter and spirit.
8.4.3 These guidelines have been framed based on the recommendations made by
the study group appointed by Reserve Bank to study the modalities of credit
extension to software industry as also taking into account the suggestions
made by the industry associations.
8.4.4 This being a relatively new area of credit deployment, primary (urban) co-
operative banks may take adequate steps to develop expertise in this area.
Besides other measures which banks might take, the need for training staff for
developing them in acquiring skills of project appraisal in this new area of
activity need not be over-emphasised. It has to be ensured that the concerned
staff is well aware of the requirements of the industry and remain in tune with
the latest developments so that the higher standards of project appraisal can
be maintained before extending the working capital finance to Information
Technology and software industries.

9. DISCOUNTING / REDISCOUNTING OF BILLS BY BANKS

Banks may adhere to the following guidelines while purchasing / discounting /

negotiating / rediscounting of genuine commercial / trade bills:

i. Since banks have already been given freedom to decide their own guidelines
for assessing / sanctioning working capital limits of borrowers, they may
sanction working capital limit as also bills limit to borrowers after proper
 appraisal of their credit needs and in accordance with the loan policy as
approved by their Board of Directors.

ii. Banks should clearly lay down a bills discounting policy approved by their
Board of Directors, which should be consistent with their policy of sanctioning
of working capital limits. In this case, the procedure for Board approval should
include banks’ core operating process from the time the bills are tendered till
these are realised. Banks may review their core operating processes and
simplify the procedure in respect of bills financing. In order to address the oft-
cited problem of delay in realisation of bills, banks may take advantage of
improved computer / communication network like Structured Financial
Messaging System (SFMS), wherever available, and adopt the system of ‘value
dating’ of their clients’ accounts.

iii. Banks should open letters of credit (LCs) and purchase / discount / negotiate
bills under LCs only in respect of genuine commercial and trade transactions of
their borrower constituents who have been sanctioned regular credit facilities
by the banks. Banks should not, therefore, extend fund based (including bills
financing) or non-fund based facilities like opening of LCs, providing
guarantees and acceptances to non-constituent borrower or / and non-
constituent member of a consortium / multiple banking arrangement.

iv. For the purpose of credit exposure, bills purchased / discounted / negotiated
under LCs or otherwise should be reckoned on the bank’s borrower constituent.
Accordingly, the exposure should attract a risk weight appropriate to the
borrower constituent (viz, 100% for firms, individuals, corporate etc.) for capital
adequacy purposes.

v. While purchasing / discounting / negotiating bills under LCs or otherwise, banks

should establish genuineness of underlying transactions / documents.

vi. Banks should ensure that blank LC forms are kept in safe custody as in case of
security items like blank cheques, demand drafts etc. and verified / balanced on
daily basis. LC forms should be issued to customers under joint signatures of
the bank’s authorised officials.
vii. The practice of drawing bills of exchange claused ‘without recourse’ and
issuing letters of credit bearing the legend ‘without recourse’ should be
discouraged because such notations deprive the negotiating bank of the right of
recourse it has against the drawer under the Negotiable Instruments Act. Banks
should not, therefore, open LCs and purchase / discount / negotiate bills
bearing the ‘without recourse’ clause.

viii. 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.

ix. Banks should be circumspect while discounting bills drawn by front finance
companies set up by large industrial groups on other group companies.

x. Bills rediscounts should be restricted to usance bills held by other banks. Banks
should not rediscount bills earlier discounted by non-bank financial companies
(NBFCs) except in respect of bills arising from sale of light commercial vehicles
and two / three wheelers.

xi. Banks may exercise their commercial judgment in discounting of bills of

services sector. However, while discounting such bills, banks should ensure
that actual services are rendered and accommodation bills are not discounted.
Services sector bills should not be eligible for rediscounting. Further,
providing finance against discounting of services sector bills may be treated as
unsecured advance and therefore, should be within the limits prescribed by
UBD for sanction of unsecured advances.

xii. In order to promote payment discipline which would to a certain extent

encourage acceptance of bills, all corporate and other constituent borrowers
having turnover above threshold level as fixed by the bank’s Board of Directors
should be mandated to disclose ‘aging schedule’ of their overdue payables in
their periodical returns submitted to banks.

xiii. Banks should not enter into Repo transactions using bills discounted /
rediscounted as collateral.

Any violation of these instructions will be viewed seriously and invite penal action from
RBI.

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 Annexure I

Master Circular

Management of Advances

Clarifications in regard to Assessment of

Working Capital Limits

[Ref. para 2.7]

Issues raised by banks Clarifications

(1) (2)
(i) Whether banks should The assessment of working capital credit limits
sanction working capital limits should be done both as per projected turnover
computed on the basis of a basis and traditional method. If the credit
minimum of 20 per cent of the requirement based on production/ processing
projected annual cycle is higher than the one assessed on
turnover/output value or projected turnover basis, the same may be
whether it is intended that sanctioned as RBI guidelines stipulate bank
banks should also arrive at the finance at minimum of 20 per cent of the
requirement based on the projected turnover. On the other hand if the
traditional approach of assessed credit requirement is lower than the
production/processing cycle one assessed on projected turnover basis,
and thereafter decide the while the credit limit can be sanctioned at 20
quantum of need-based per cent of the projected turnover, actual
finance. If the traditional drawals may be allowed on the basis of
approach is followed the drawing power to be determined by banks after
working capital finance arrived excluding unpaid stocks. In the case of
at could be either more than or Selective Credit Control commodities the
less than 20 per cent. In case drawing power should be determined as
it is less than 20 per cent, indicated in the RBI directive.
whether banks should still give
20 per cent ?
(ii) Whether projected turn The projected turnover/output value may be
over/output value basis 'gross interpreted as projected 'Gross Sales' which
sales' will include excise duty also.
 Issues raised by banks Clarifications
(1) (2)
(iii) Whether the 5 per cent In terms of extant guidelines the working
promoter's stake (Net Working capital requirement is to be assessed at 25 per
Capital) should be reckoned cent of the projected turnover to be shared
with reference to the projected between the borrower and bank viz. borrower
turnover or with reference to contributing 5% of the turnover as NWC and
the working capital arrived at bank providing finance at a minimum of 20 per
based on production/ cent of the turnover. The above guidelines
processing cycle. were framed assuming an average
production/processing cycle of 3 months (i.e.
working capital would be turned over four times
in a year). It is possible that certain industries
may have a production cycle shorter/longer 3
months. While in the case of a shorter cycle,
the same principle could be applied as it is the
intention to make available at least 20 per cent
of turnover by way of bank finance. In case the
cycle is longer, it is expected that the borrower
should bring in proportionately higher stake in
relation to his requirement of bank finance.
Going by the above principle, at least 1/5th of
working capital requirement should be brought
in by way of NWC.
(iv) Whether 5 per cent NWC Since the bank finance is only intended to
should be reckoned with support need-based requirement of a borrower
reference to turnover or with if the available NWC (net long term surplus
reference to available long funds) is more than 5 per cent of the turnover
term sources; in other words is the former should be reckoned for assessing
the prescribed NWC the the extent of the bank finance
minimum amount?
(v) Whether drawing power should It is left to the discretion of banks. However, in
continue to be regulated arriving at drawing power, unpaid stocks are
through stocks and whether not financed as it would result in double
unpaid stocks deducted for financing. The drawing power should conform
arriving at drawing power ? to Reserve Bank of India directives in the case
of Selective Credit Control commodities
(vi) Since the present instructions In the case of traders, while bank finance could
cover traders as well, and be assessed at 20 per cent of the projected
most trade is done at market turnover, the actual drawals should be allowed
credit, whether the credit limits on the basis of drawing powers to be
should be assessed as 20 per determined by banks after ensuring that unpaid
cent of the turnover per se and stocks are excluded. In the case of SCC
actual drawing regulated commodities the RBI directive should be
through stocks ? scrupulously followed.
 Annexure II

Master Circular

Management of Advances

Guidelines for Relief Measures by Banks

in Areas Affected by Natural Calamities

[Vide para 5.1.2]

1. Periodical but frequent occurrence of droughts, floods, cyclones, tidal waves and
other natural calamities cause heavy toll of human life and wide spread damage
to economic pursuits of human beings in one area or the other of the country.
The devastation caused by such natural calamities call for massive rehabilitation
efforts by all agencies. The State and local authorities draw programmes for
economic rehabilitation of the affected people. The developmental role assigned
to the commercial banks and co-operative banks, warrants their active support in
revival of the economic activities.

2. Since the area and time of occurrence and intensity of natural calamities cannot
be anticipated, it is imperative that the banks have a blue-print of action in such
eventualities so that the required relief and assistance is provided with the
utmost speed and without any loss of time. This presupposes that all the
branches of commercial banks and their Regional and Zonal Officers will have a
set of standing instructions spelling out the action that the branches will have to
initiate in the calamity affected areas immediately after the requisite declaration
by the district/State authorities. It is necessary that these instructions should also
be available with the State Government authorities and all the District Collectors
so that all concerned are clear as to the action that would be taken by the banks'
branches in the affected areas.

3. The precise details in regard to the provision of credit assistance by the

commercial banks, will depend on the requirements of the situation, their own
operational capabilities and the actual needs of the borrowers. This can be
decided by them in consultation with the district authorities.

4. Nevertheless, to enable banks to take uniform and concerted action

expeditiously, particularly to provide the financial assistance to agriculturist,
small scale industrial units, artisan, small business and trading establishments
affected by natural calamities, the following guidelines are commended.

5. To facilitate co-ordination and expeditious action by the financing institutions, the

convenors of the concerned District Consultative Committee (DCC) of the
affected districts should convene a meeting immediately after the occurrence of
natural calamities. In the event of the calamity covering a larger part of the State,
the convenors of the State Level Bankers' Committee (SLBC) will also convene a
meeting immediately to evolve a co-ordinated programme of action for
implementation of the programme in collaboration with the State/district
 authorities while determining the quantum of assistance required by a person
affected by the natural calamity, the banks may take into consideration the
assistance/subsidy received by him from the State Government and/or other
agencies.

6. Divisional/Zonal Managers of commercial banks should be vested with certain

discretionary powers so that they do not have to seek fresh approvals from their
Central Offices to the line of action agreed to by the District/State Level Bankers'
Committees. For example, such discretionary power would be necessary in
respect of adoption of scale of finance, extension of loan periods, sanction of
new loans, keeping in view the total liability of the borrower (i.e. arising out of the
old loan where the assets financed are damaged or lost on account of natural
calamity as well as the new loan for creation/repair of such assets, margin,
security, etc.).

7. Identification of the Beneficiaries

The bank branches should obtain from the concerned Govt. authorities list of
affected villages within their area of operation. From among the identified
persons, assessment of loss sustained by the existing constituents of the banks
would be easier. In the case of fresh borrowers, however, discreet enquiries
should be made in this regard and assistance of the Govt. authorities should be
sought wherever available for ascertaining genuineness of their requirements.
For providing conversion facilities in respect of crop loans, procedure for
identification of areas where such facilities have to be provided has been
indicated under crop loans in paragraph 12 below.

8. Coverage
(i) Each branch will provide credit assistance not only to its existing
borrowers but also to other eligible persons within its command area
provided they are not covered by any other financial agency.
(ii) Credit requirements of the borrowing members of the co-operatives will be
met by the Primary Agricultural Co-operative Societies
(PACs)/LAMPS/FSS etc. Branches of commercial banks may, however,
finance the non-borrowing members of the co-operative societies, for
which the latter will issue the usual 'No objection' certificates speedily.

9. Priorities
Immediate assistance including finances would be needed for protecting and
rejuvenating standing crops/orchards/plantations etc. Equally important will be
repair and protection of livestock sheds, grains and fodder storage/structures,
drainage, pumping, and other measures and operations to repair pump-sets,
motors, engines and other necessary implements. Subject to seasonal
requirements, next crop financing would be taken up.

10. Agricultural Loans

The bank assistance in relation to agriculture would be needed in the form of
short-term loans for the purpose of raising crops and term loans for purchase of
milch/draught animals, repairs of existing tube-wells and pump-sets, digging of
 new tube-wells and installation of new pump-sets, land reclamation, silt/sand
removal, protection and rejuvenation of standing crops/orchard/plantations, etc.,
repairs and protection of livestock sheds, grain and fodder storage structures,
etc.

11. Crop Loans

In the case of natural calamities, such as droughts, floods etc., Government
authorities would have declared annewari to indicate the extent to which the
crops are damaged. However, where such declaration has not been made
banks should not delay in providing conversion facilities, and the District
Collector's certificate that crop yield is below 50 percent of the normal yield
supported by the views of the DCC in the matter (for which a special meeting
may have to be convened) should be sufficient for invoking quick relief
arrangements. The certificate of the Collector should be issued crop -wise
covering all crops, including food-grains. Issuing of such certificates in respect
of cash crops, may, however, be left to the discretion of the Collector.

12 Guidelines for Providing Conversion Facilities

The following guidelines are suggested for providing conversion facilities:
(i) Banks may, of their own, decide the quantum of fresh loans to be
granted to the affected borrowers taking into consideration,
amongst others, the extent of the crop loss/scale of finance
and their repaying capacity.
(ii) Amount of principal as well as interest in respect of short-term loans due
in the year of occurrence of natural calamity may be converted into
term loans or the repayment period may be rescheduled suitably. The
period of conversion/re-schedulement to be granted may vary depending
on the intensity of calamity and the extent of crop loss and distress
caused to the farmers. Amounts not collected during the year of
occurrence of the calamity should be converted into term loans for a
period upto 3 years and for small and marginal farmers upto 5 years in
the normal circumstances. However, where the damage to crops arising
out of the calamity is very severe and has caused acute distress to the
farmers or if the calamity is for two successive years, banks may, at their
discretion and in consultation with Task Force/Steering Committee of
SLBC, grant extensions of the converted loans for longer periods ranging
upto 5 to 7 years. In extreme cases of hardships arising out of the very
severe loss to the crops or occurrence of three successive crop failures
and the debt burden being found to be beyond the immediate repaying
capacity of the borrower, conversion for longer period upto a maximum
period of 9 years may also be considered by banks, in consultation with
the Task Force/SLBC.
(iii) Pending conversion of short-term loans, banks may grant fresh crop
loans to the affected farmers.
(iv) Conversion of short-term production loans may be taken up by banks at
the time of sanction of fresh crop loans to the affected farmers without
 waiting for the due dates which are taken into account in normal course
of sanction of such loans.
(v) Similarly, instalments of principal/interest in respect of term loans may be
rescheduled for a period of 3 years which could be extended for longer
period in the circumstances mentioned at (ii) above.
(vi) Where relief in the form of conversion/re-schedulement of loans is
extended to the farmers, such converted/rescheduled dues should be
treated as current dues and banks should not compound interest in
respect of the loans so converted/ rescheduled.
(vii) Banks may not levy any penal interest and consider waiving penal
interest, if any, already charged in regard to the loans converted/
rescheduled.

13. (i) To be effective, the assistance to farmers will have to be disbursed with
utmost speed. For this purpose the lead bank and the district authorities
concerned should evolve a procedure whereby identification of
borrowers, issuance of certificates regarding Government/co-
operative/bank dues, title of the applicant to land etc. is secured
simultaneously.
(ii) Possibilities of organising credit camps, where Block Development and
Revenue officials, Co-operative Inspectors, Panchayat Pradhans etc.
could help finalise the applications on the spot, could be explored in
consultation with the district authorities where such credit camps are
being organised. The State Government will also arrange with the
Collectors to issue an executive order for the following officers or their
authorised representatives to assume respective duties and
responsibilities as envisaged under implementation of credit camps
programme:
• Block Development Officer
• Co-operative Inspector
• Revenue Authority/Village Revenue Assistant
• Bank official operating in the area
• PACS/LAMPS/FSS
• Gram Panchayat Pradhan
(iii) In order to avoid delay, the forms in which the State Government Officers
have to give certificates at the Credit Camps may be got printed in
sufficient numbers by the respective District Magistrates.

14. In considering loan applications for the ensuing crop season the current dues of
the applicants to the State Government may be ignored, provided the State
Government declare a moratorium for a sufficiently long period on all amounts
due to the government as on the date of occurrence of the natural calamity.

15. Scale of Finance

 Scale of finance in respect of different crops will be uniform in a district. The
scales will be fixed taking into account the prevailing conditions and norms
presently adopted by different lending agencies. In fixing the scales, minimum
consumption needs of borrowers will be taken into account. The concerned
District Magistrate and Managers of branches of banks operating in the district
would be advised to adopt the scales so laid down.
16. Development Loans - Investment Costs

(i) The existing term loan instalments will have to be rescheduled/postponed

keeping in view the repaying capacity of the borrowers and the nature of
natural calamity viz.,
(a) Droughts, floods or cyclones etc. where only crop for that year is
damaged and productive assets are not damaged.
(b) Floods or cyclones where the productive assets are partially or totally
damaged and borrowers are in need of a new loan.
(ii) In regard to natural calamity under category (a), the banks may postpone
the payment of instalment during the year of natural calamity and
extend the loan period by one year except (subject to the following
exceptions) -
(a) Those cultivators who had not effected the development or
investment for which the loan was obtained or had disposed of the
equipment or machinery purchased out of the loan.
(b) Those who are income tax payers.
(c) In the case of drought, those who are having perennial sources of
irrigation except where water supply was not released from canals or
irrigation facility was not available from other perennial sources.
(d) Tractor owners, except in genuine case where there is loss of income
and consequential impairment of their repaying capacity.
(iii) Under this arrangement the instalments defaulted wilfully in earlier years
will not be eligible for rescheduling. The banks may have to postpone
payment of interest by borrowers. While fixing extension of period the
commitment towards interest may also be taken into account.
(iv) In regard to category (i)(b) above, i.e., where the borrower's assets are
totally damaged, the rescheduling by way of extension of loan period may
be determined on the basis of overall repaying capacity of the borrower
including his repayment commitment on the old term loans and towards
the conversion loan (medium term loan) on account of postponing of
repayment of short-term loans and the fresh crop loan. In such cases, the
repayment period of total loan (including interest liability) less the
subsidies received from the Government agencies, compensation
available under the insurance schemes, etc. may be fixed having regard to
the repaying capacity of the borrower subject to a maximum of 15 years,
depending upon the type of investment as well as the economic (useful)
life of the new asset financed, except in cases where loans relate to land
shaping, silt removal, soil conservation etc. Thus in the case of loans for
agricultural machineries, viz. pump-sets and tractors, it should be ensured
 that the total loan period does not generally exceed 9 years from the date
of advance.

17. Apart from rescheduling existing term loans, banks will provide to affected
farmers diverse type of term loans for developmental purposes, such as:

(i) Minor Irrigation

Term loans for repairs to wells, pump-sets, etc. which are to be quantified
after assessing the extent of damage and estimated cost of repairs.

(ii) Bullocks
Where the drought animals have been washed away, requests for fresh
loans for a new pair of bullocks/he-buffaloes may be considered. Where
loans are given for purchase of new cattle or where farmers have bought
milch cattle, reasonable credit may be given for purchase of fodder or feed.

(iii) Milch Cattle

Term loan for milch cattle will be considered depending upon breed, milk
yield, etc., the loan amount will include repairs to shelters, purchase of
equipment and feed.
(iv) Insurance
Considering the proneness of areas to cyclones and other natural
calamities, the cattle should be insured instead of Risk-cum-Mortality Fund
established for similar purpose in other safe areas. Milch animals/draught
cattle should be branded for identification as also to serve as safeguard
against their re-sale by the beneficiaries.
(v) Poultry and Piggery
For poultry piggery and goatery, loans will be considered as per norms of
different banks.
(vi) Fisheries
In the case of borrowers who have lost their boats, nets and other
equipment, re-phasing of payment of existing dues may be allowed on
merits. Fresh loans may be granted to them with loan maturity of 3/4 years.
Loans for repairs to boats of the existing borrowers may also be considered.
In cases where subsidy is available, the quantum of loan should be reduced
to that extent. In States where substantial subsidy towards the cost of boats,
nets. etc., is likely to be available, proper co-ordination with the concerned
State Government Department in this regard must be ensured. Apart from
complying with other norms and conditions for grant of advances,
assistance may be sought from the Department of Fisheries, which may be
expected to take measures which would enable banks to proceed with
financing for this purpose. The boats should be comprehensively insured
against all risks including natural calamities as far as possible.
18. Land Reclamation

(i) It is likely that financial assistance will be required for reclamation of lands
covered by sand casting. Normally, sand/silt deposits upto 3 inches will
either be ploughed back into the soil or removed by the farmers without any
need for financial assistance. Loan applications will, however, be
considered in cases where immediate cultivation is possible and
reclamation (removal of sand) is necessary. Wherever reclamation finance
for saline lands is warranted, the cost of reclamation not exceeding 25
percent of the scale allowed for crop loan may be advanced along with the
crop loan.

(ii) For other activates like Sericulture, Horticulture, Floriculture, Betelvine

growing etc., banks will advance loans for investment and working capital
under their existing schemes and follow usual procedures laid down by
them. The working capital finance may be provided until such period the
income from the plantation is adequate to take care of such expenditure.

(iii) However, additional need based crop loans, if necessary, would be given
for revitalisation/rejuvenation of standing crop/orchards based on individual
assessment.

(iv) The question relating to procurement and proper arrangement for supply of
adequate quantity of seeds and various types of fertilisers will have to be
discussed with the State Government and District Administration in each
district. Similarly, for the purpose of ensuring adequate irrigation facilities,
the State Government will undertake repairs to Government owned shallow
and deep tube-wells and River Lift Irrigation System damaged by floods and
other natural calamities. As for fisheries, the fisheries department of the
State Government will make arrangement to obtain fingerlings/and supply
them to those who wish to revive tank fishing with bank finance.

(v) The State Government will have to consider preparation of schemes which
would enable commercial banks to obtain refinance at NABARD rates for
amounts advanced by banks for the said purpose.

19. Consumption Loans

In view of the damage to crops and property, existing borrowers need

consumption loans for sustenance till the flow of income is resumed. For this
purpose, Rs. 75/- is admissible for ‘general consumption’. In view of the special
situation obtaining in the affected areas and the need for consumption loan for
general purposes, the banks may extend for 'general consumption' loan upto Rs.
250/- to be released in suitable instalments over the period upto the harvesting
of the current or the next crop depending on the devastation caused by the
natural calamity or proper assessment in individual cases. This limit may be
raised to Rs. 1,000/- in the States where the State Governments have
constituted risk funds for such lending by commercial banks.

20. Artisans and Self-Employed

 (i) For all categories of rural artisans and self employed persons including
handloom weavers, loans will be needed for repairs of sheds, replacement
of implements and purchase of raw materials and stores. In sanctioning the
loan, due allowance will be made for subsidy/assistance available from the
concerned State Government.

(ii) There may be many artisans, traders and self-employed who may not have
any banking arrangement or facility with any bank, but will now need
financial assistance for rehabilitation. Such categories will be eligible for
assistance from banks' branches in whose command areas they reside or
carry on their profession/business. Where such a person/party falls under
the command area of more than one bank, the banks concerned will meet
together and sort out his problem.

21. Small Scale and Tiny Units

(i) Rehabilitation of units under village and cottage industry sector, small
scale industrial units as also smaller of the medium industrial sector
damaged, will also need attention. Term loans for repairs to and
renovation of factory buildings/sheds and machinery as also for
replacement of damaged parts and working capital for purchase of raw
materials and stores will need to be provided urgently.

(ii) Where the raw materials or finished goods have been washed away or
ruined or damaged, banks security for working capital will naturally be
eroded and the working capital account (Cash Credit or Loan) will be out
of order. In such cases, banks will convert drawings in excess of the value
of security into a term loan and also provide further working capital to the
borrower.

(iii) Depending on the damage suffered and time needed for rehabilitation and
restarting production and sales, term loan instalments will have to be
suitably rescheduled keeping in view the income generating capacity of
the unit. Short-fall in margins will have to be condoned or even waived
and borrower should be allowed time to build up margin gradually from his
future cash generation. Wherever State Government or any agency has
formulated special scheme for providing grants/subsidy/seed money,
suitable margin may be stipulated to the extent of such
grants/subsidy/seed money.

(iv) The primary consideration before the banks in extending credit to a

small/tiny unit for its rehabilitation should be the viability of the venture
after the rehabilitation programme is implemented.

22. Terms and Conditions

The terms and conditions governing relief loans will be flexible as to security,
margin, etc. In the case of small loans covered by guarantee of Deposit
Insurance and Credit Guarantee Corporation, personal guarantees will not be
insisted upon. In any case, credit should not be denied for want of personal
guarantees.
23. Security

Where the bank's existing security has been eroded because of damage or
destruction by floods, assistance will not be denied merely for want of additional
fresh security. The fresh loan may be granted even if the value of security
(existing as well as the asset to be acquired from the new loan) is less than the
loan amount. For fresh loans sympathetic view will have to be taken:
(a) Where the crop loan (which has been converted into term loan) was
earlier given against personal security/hypothecation of crop which would
be the case for crop loans upto Rs. 5,000/- and the borrower is not able to
offer charge/mortgage of land as security for the converted loan, he
should not be denied conversion facility merely on the ground of his
inability to furnish land as security.
(b) If the borrower has already taken a term loan against mortgage/charge on
land, the bank should be content with a second charge for the converted
term loan.
(c) Banks should not insist on third party guarantees for providing conversion
facilities.
(d) In the case of term loans for replacement of equipment, repairs, etc. and
for working capital finance to artisans and self-employed persons or for
crop loans, usual security may be obtained. Where land is taken as
security in the absence of original Title Records, a Certificate issued by
the Revenue Department Officials may be accepted for financing farmers
who have lost proof of their titles i.e. in the form of deeds, as also the
registration certificates issued to registered share-croppers.
(e) As per the recommendations of the RBI report on customer service, banks
will finance the borrowers who require loans upto Rs. 500/- without
insisting either on collateral security or guarantee for any type of economic
activity.

24. Margin

Margin requirements be waived or the grants/subsidy given by the concerned

State Government may be considered as margin.

25. Interest

The rates of interest will be in accordance with the directives of the RBI. Within
the areas of their discretion, however, banks are expected to take a sympathetic
view of the difficulties of the borrowers and extend a concessional treatment to
calamity-affected people.
(i) Those meeting the eligibility criteria under the scheme of Differential Rate
of Interest should be provided credit in accordance with the provision of
the scheme.
(ii) In respect of current dues in default, no penal interest will be charged.
The banks should also suitably defer the compounding of interest
charges.
26. Applicability of the Guidelines in the case of Riots and Disturbances

Whenever, RBI advises the banks to extend rehabilitation assistance to the

riot/disturbance affected persons, the aforesaid guidelines may broadly be
followed by banks for the purpose. It should, however, be ensured that only
genuine persons, duly identified by the State Government agencies as having
been affected by the riots, etc., are extended rehabilitation/assistance.
(i) With a view to ensuring quick relief to the affected persons, the District
Collector, on occurrence of the riot/disturbances, may ask the Lead Bank
Officer to convene a meeting of the DCC, if necessary, and submit a report
to the DCC on the extent of damage caused to the life and property in the
area affected by riots/disturbances. If the DCC is satisfied that there has
been extensive loss to life and property, the relief, as per aforesaid
guidelines, may be extended to the people affected by riots/disturbances.
In certain centres where there are no DCCs, the District Collector may
request the Convenor SLBC of the State to convene a meeting of the
bankers to consider extension of relief to the affected persons. The report
submitted by the Collector and the decision thereon of DCC/SLBC may be
recorded and should form a part of the minutes of the meeting. A copy of
the proceedings of the meeting may be forwarded to the concerned
Regional Office of the RBI.
(ii) It should be ensured that only genuine persons duly identified by the
State Administration, as having been affected by the riots/disturbances
are provided the assistance.

-----------------------------
 Annexure III

Master Circular

Management of Advances

Details of the borrowal accounts which have been classified

as doubtful, loss or suit filed with outstanding (both under
funded and non-funded) aggregating Rs. 1.00 crore and above

[Vide para 5.2.2]

Name of the Bank :

1. Name of the Company/firm

2. Registered address of the company/firm

3. Names of the directors/partners of defaulting company/firm

4. Name of the branch

5. Type of facilities and limits sanctioned under each facility

6. Amount outstanding

7. Nature and value of securities held in each category

8. Asset classification of the defaulting account

(specify doubtful, loss or suit filed)

9. Date of classifying the account as doubtful / loss / suit filed

 Annexure IV

Master Circular

Management of Advances

Format for Reporting of Data on Wilful Default

[Vide para 6.1.2 (i)]

Information should be furnished to the Reserve Bank of India in floppy diskette in

format specified as below :

a) Input media : 3.5" floppy disk file

b) File Characteristics : ASCII or dbf file

The field - wise description of various items is as follows :

1) Serial Number : 9 (4) Unique number to be given to each of the records

2) Bank-branch name : x (14) As in the case of Basic Statistical return

3) Party 's name : x (45) The legal name

4) Registered address : x (96) Registered Office address

5) Amount outstanding : 9(6) Total amount outstanding in Rs. Lakhs

6) Name of directors : x(336) To be divided into 14 sub-fields of 24 bytes each

7) Status : Suit filed or non-suit filed

 ANNEXURE - V

GENERAL GUIDELINES FOR REHABILITATION OF

SICK SSI UNITS
[vide para 7(i)]

Incipient Sickness

1. It is of utmost importance to take measures to ensure that sickness is arrested at

the incipient stage itself. The branch/bank officials should keep a close watch on the
operations in the account and take adequate measures to achieve this objective. The
managements of the units financed should be advised about their primary
responsibility to inform the banks if they face problems which could lead to sickness
and to restore the units to normal health. The organizational arrangements at
branch level should also be fully geared for early detection of sickness and prompt
remedial action. Banks/Financial Institutions will have to identity the units showing
symptoms of sickness by effective monitoring and provide additional finance, if
warranted, so as to bring back the units to a healthy track.

1.1 An illustrative list of warning signals of incipient sickness that are thrown up
during the scrutiny of borrowal accounts and other related records e.g. periodical
financial data, stock statements, reports on inspection of factory premises and
godowns, etc. is given in given below, which will serve as a useful guide to the
operating personnel.

i) Continuos irregularities in cash credit/overdraft accounts such as inability to

maintain stipulated margin on continuous basis or drawings frequently
exceeding sanctioned limits, periodical interest debited remaining unrealised;

ii) Outstanding balance in cash credit account remaining continuously at the

maximum;

iii) Failure to make timely payment of instalments of principal and interest on

term loans;

iv) Complaints from suppliers of raw materials, water, power, etc.about non-
payment of bills;
 v) Non-submission or undue delay in submission or submission of incorrect
stock statements and other control statements;

vi) Attempts to divert sale proceeds through accounts with other banks;

vii) Downward trend in credit summations;

viii) Frequent return of cheques or bills;

ix) Steep decline in production figures;

x) Downward trends in sales and fall in profits;

xi) Rising level of inventories, which may include large proportion of slow or non-
moving items;

xii) Larger and longer outstanding in bill accounts;

xiii) Longer period of credit allowed on sale documents negotiated through

the bank and frequent return by the customers of the same as also allowing
large discount on sales;

xiv) Failure to pay statutory liabilities;

xv) Utilization of funds for purposes other than running the units.

xvi) Not furnishing the required information/data on operations in time.

xvii) Unreasonable/wide variations in sales/receivables levels vis-à-vis level of co-

operation for stock inspections, etc.

xviii) Delay in meeting commitments towards payments of instalments due,

crystallized liabilities under LC/BGs, etc.

xix) Diverting/routing of receivables through non-lending banks.

1.2 Further, the system of asset classification introduced in banks will be useful for
detecting advances, with are deteriorating in quality, well in time. When an advance
slips into the sub-standard category, as per norms, the branch/bank should make full
enquiry into the financial health of the unit, its operations, etc. and take remedial
action. The bank/branch officials who are familiar with the day-to-day operations in the
borrowal accounts should be under obligation to identify the early warning signals and
initiate corrective steps promptly. Such steps may include providing timely financial
assistance depending on established need, if it is within the powers of the branch
manager, and an early reference to the controlling office where the relief required
are beyond his delegated powers. The branch/bank manager may also help the unit,
in sorting out difficulties which are non- financial in nature and require assistance
from outside agencies like Government departments/undertakings, Electricity
Boards, etc. He should also keep the term lending institutions informed about the
position of the units wherever they are also involved.

2. Definition of Sick SSI Unit :

An SSI unit be considered 'Sick' if

i) any of the borrowal accounts of the unit remains substandard for more than six
months i.e. principal or interest, in respect of any of its borrowal accounts has
remained overdue for a period exceeding one year. The requirement of overdue
period exceeding one year will remain unchanged even if the present period for
classification of an account as sub-standard, is reduced in due course;

or

ii) there is erosion in the net worth due to accumulated cash losses to the extent of
50 per cent of its net worth during the previous accounting year;

and

iii) the unit has been commercial production for at least two years.

This would enable banks to take action at an early stage for revival of the units. For
the purpose of formulating nursing programme, banks should go by the above
definition with immediate effect.

3. Viability of Sick SSI Units

A unit may be regarded as potentially viable if it would be in a position, after

implementing a relief package spread over a period not exceeding five years from the
commencement of the package from banks, financial institutions, Government
(Central/State) and other concerned agencies, as may be necessary, to continue to
service its repayment obligations as agreed upon including those forming part of
the package, without the help of the concessions after the aforesaid period. The
repayment period for restructured (past) debts should not exceed seven years from
the date of implementation of the package. In the case of tiny / decentralised sector
units, the period of reliefs /concessions and repayment period of restructured
debts which were hitherto, two years and three years respectively have been
revised, so as not to exceed five and seven years respectively, as in the case of
other SSI units. Based on the norms specified above, it will be for the banks/financial
institutions to decide whether a sick SSI unit is potentially viable or not. Viability of a
unit identified as sick, should be decided quickly and made known to the unit and
others concerned at the earliest. The rehabilitation package should be fully
implemented within six months from the date the unit is declared as 'potentially
viable'/'viable'. While identifying and implementing the rehabilitation package, banks/
FIs are advised to do 'holding operation' for a period of six months. This will allow
small-scale units to draw funds from the cash credit account at least to the extent of
their deposit of sale proceeds during of such 'holding operation'.

4.Reliefs and Concessions for Rehabilitation of Potentially Viable Units

4.1 It is emphasised that only those units which are considered to be potentially
viable should be taken up for rehabilitation. The reliefs and concessions specified are
not to be given in a routine manner and have to be decided by concerned
bank/financial institution based on the commercial judgement and merits of each case.
Banks have also the freedom to extent reliefs and concessions beyond the
parameters in deserving cases. Only in exceptional cases, concessions/ reliefs
beyond the parameters should be considered. In fact, the viability study itself should
contain a sensitivity analysis in respect of the risks involved that in turn will enable
firming up of the corrective action matrix.

The viability and the rehabilitation of a sick SSI unit would depend primarily on the
unit's ability to continue to service its repayment obligations including the past
restructured debts. It is, therefore, essential to ensure that ordinarily there is no write-
off of scaling down of debt such as by reduction in rate of interest with
retrospective effect except to the extent indicated in the guidelines. Norms for grant of
reliefs and concessions by banks/ financial institutions to potentially viable sick SSI
units for rehabilitation are furnished in below:

i) Interest Dues on Cash Credit and Term Loan

If penal rates of interest or damages have been charged, such charges should be
waived from the accounting year of the unit in which it started incurring cash losses
continuously. After this is done, the unpaid interest on term loans and cash credit
during this period should be segregated from the total liability and funded. No interest
may be charged on funded interest and repayment of such funded interest
should be made within a period not exceeding there years from the date of
commencement of implementation of the rehabilitation programme.

ii) Unadjusted Interest Dues

Unadjusted interest dues such as interest charged between the date up to which
rehabilitation package was prepared and the date from which actually implemented,
may also be funded on the same terms as at (i) above.

iii) Term Loans

The rate of interest on term loans may be reduced, where considered necessary, by
not more than three per cent in the case of tiny/ decentralised sector units and
by not more than two per cent for other SSI units, below the document rate.

iv) Working Capital Term Loan (WCTL)

After the unadjusted interest portion of the cash credit account is segregated as
indicated at (i) and (ii) above, the balance representing principal dues may be
treated as irregular to the extent it exceeds drawing power. This amount may be
funded as Working Capital Term Loan (WCTL) with a repayment schedule not
exceeding 5 years. The rate of interest applicable may be 1.5% to 3% points below
the prevailing fixed rate/minimum lending rate of the bank, wherever applicable, to
all sick SSI units including tiny and decentralized units.

v) Cash Losses
Cash losses are likely to be incurred in the initial stages of the rehabilitation
programme till the unit reaches the break-even level. Such cash losses excluding
interest as may be incurred during the nursing programme may also be financed by
the bank or the financial institution, if only one of them is the financier. But if both
are involved in the rehabilitation package, the financial institution concerned should
finance such cash losses. Interest may be charged on the funded at the rates
prescribed by SIDBI under its scheme for rehabilitation assistance.

Future cash losses in this context will refer to losses from the time of implementation
of the package up to the point of cash break-even as projected. Future cash losses
as above, should be worked out before interest (i.e., after excluding interest) on
working capital etc., due to the banks and should be financed by the financial
institutions if it is one of the financiers of the unit. In other words, the financial
institutions should not be asked to provide for interest due to the banks in the
computation of future cash losses and this should be taken care of by future cash
accruals. The interest due to the bank should be funded by it separately. Where,
however, a commercial bank alone is the financier, the future cash losses including
interest will be financed by it.

The interest on the funded amounts of cash losses/interest will be the rates prescribed
by Small Industries Development Bank of India under its scheme for rehabilitation
assistance.

vi) Working Capital

Interest on working capital may be charged at 1.5% below the prevailing fixed/
minimum lending rate charged by the bank wherever applicable. Additional working
capital limits may be extended at a rate not exceeding the minimum lending rate
chargeable by the bank.

vii) Contingency Loan Assistance

For meeting escalations in capital expenditure to be incurred under the rehabilitation

programme, banks/financial institutions may provide, where considered necessary,
appropriate additional financial assistance upto 15 per cent of the estimated cost of
rehabilitation by way of contingency loan assistance. Interest on this contingency
assistance may be charged at the concessional rate allowed for working capital
assistance.

viii) Funds for Start-up Expenses and Margin for Working Capital
There will be need to provide the unit under rehabilitation with funds for start-up
expenses (including payment of pressing creditors) or margin money for working
capital in the form of long-term loans. Where a financial institution is not involved,
banks may provide the loan for start-up expenses, while margin money assistance
may either come from SIDBI under its Refinance Scheme for Rehabilitation or should
be provided by State Government where it is operating a Margin Money Scheme.
Interest on fresh rehabilitation term loan may be charged at a rate 1.5% below the
prevailing fixed/minimum lending rate chargeable by the bank wherever applicable or
as prescribed by SIDBI/NABARD where refinance is obtained from it for the purpose.

All interest rate concessions would be subject to annual review depending on the
performance of the units.

ix) Promoters' Contribution

As per the extent RBI guidelines, promoter's contribution towards the rehabilitation
package is fixed at a minimum of 10 per cent of the additional long-term
requirements under the rehabilitation package in the case of tiny sector units and at
20 per cent of such requirements for other units. In the case of units in the
decentralized sector, promoters' contribution may not be insisted upon. A need is felt
for increasing the promoters' contribution towards rehabilitation from the present limits.
It is, therefore, open to banks and financial institutions to stipulate a higher
promoters' contribution where warranted. At least 50 per cent of the above
promoters' contribution should be brought in immediately and the balance within six
months.

For arriving at promoters' contribution, the monetary value of the sacrifices from
banks, financial institutions and Government may be taken into account, in addition
to the long-term requirement of funds under the rehabilitation package. While
evolving packages, it should be made a precondition that the promoters should bring
in their contribution within the stipulated time frame. Further, in regard to
concessions and relief made available to sick units, banks should incorporate a
'Right of Recompense' clause in the sanction letter and other documents to the effect
that when such units turn the corner and rehabilitation is successfully completed, the
sacrifices undertaken by the FIs and banks should be recouped from the units out
of their future profits/cash accruals.

4.2 Units becoming sick on account of wilful mismanagement, wilful default,

unauthorized diversion of funds, disputes among partners/promoters, etc. should not
be considered for rehabilitation and steps should be taken for recovery of bank's
dues. The definition of wilful default, will broadly cover the following :

i) Deliberate non-payment of the dues despite adequate cash flow and good
net-worth.

ii) Siphoning off of funds to the detriment of the defaulting unit.

iii) Assets financed have either not been purchased or have been sold and
proceeds have been mis-utilised.

iv) Misrepresentation /falsification of records.

v) Disposal/removal of securities without bank's knowledge; and.

vi) Fraudulent transactions by the borrower.

The views of the lending banks in regard to wilful mis-management of funds/defaults

will be treated as final.

5. Delegation of Powers

The delay in the implementation of agreed rehabilitation packages should be reduced.

One of the factors contributing to such delay was found to be the time taken by banks
having multiple branches for obtaining clearance from the Head Office for the relief
and concessions. As it is essential to accelerate the process of clearance, the banks
may delegate sufficient powers to senior officers at various levels to sanction the
bank's rehabilitation package drawn up in conformity with the prescribed guidelines.

++++++++++++++++++++++++++++++++++++++++++++++++++++++++
 Appendix

Master Circular

Management of Advances

A. List of Circulars consolidated in the Master Circular

No. Circular No. Date Subject

1. UBD.BPD.PCB.CIR.37/13.05.00/2003-04 16-03-2004 Discounting/Rediscounting of Bills By Banks
2. UBD.POT.PCB.No.1/09.09.0/2002-03 19-07-2002 Guidelines for Rehabilitation of Sick SSI Units
3. UBD.No.DS.PCB.Cir.34/13.05.00/2001-02 28.03.2002 Loan System for Delivery of Bank Credit
4. UBD.BSD.1.No.8/12.05.00/200-1-02 31-08-2001 Issue of banker’s cheques/pay
orders/demand drafts
5. UBD.NO.POT.No.33/09.17.03/2000-2001 20-02-2001 Relief measures for the persons/business
affected by the earthquake in Gujarat
6. UBD.DS.32/13.04.00/2000-01 12-02-2001 Reliefs/Concessions for Exporters Affected
by the Earthquake
7. UBD.No.POT.CIR.30/09.20.00/2000-01 01-02-2001 Branch Advisory Committees
8. UBD No.BR.11/16.74.00/98-99 30-06-1999 Collection and Dissemination of Information
on Cases of Wilful Default of Rs. 25.00 lakh
and above
9. UBD.No.DS.SUB.Cir.4/13.05.00/98-99 05-10-1998 Guidelines for Sanction of Working Capital
Finance to Information Technology (IT) and
Software Industry
10. UBD.No.DS.PCB.8/13.04.00/98-99 30-09-1998 Reliefs/Concessions for Exporters Affected
by Cyclone in Gujarat
11. UBD No.BR.3/16.74.00/98-99 29-07-1998 Disclosure of information regarding defaulting
borrowers of banks at-id financial institutions
12. UBD.No.DS.SUB.19/13.05.00/97-98 12-02-1998 Reporting of Credit Sanctions
13. UBD.No.DS.PCB.Cir.28/13.05.00/97-98 16-12-1997 Guidelines for lending by banks-Assessment
of working capital
14. UBD.No.DS.PCB.Cir.25/13.05.00/97-98 04-12-1997 'Bill' finance for settlement of dues of SSI
suppliers
15. UBD.No.DS.PCB.Cir15/13.05.00/97-98 21-10-1997 Loan system for delivery of bank credit
16. UBD.No.DS.PCB.Cir.47/13.05.00/96-97 23-04-1997 Guidelines for lending by banks-Assessment
of working capital-Concept of maximum
permissible bank Finance - Review of policy
17. UBD.No.DS.PCB.CIR.48/13.05.00/96-97 23-04-1997 Loan system for delivery of bank credit
18. UBD.No.DS.PCB.CIR.31/13.05.00/96-97 29-11-1996 Loan system for Delivery of Bank Credit
19. UBD.No.Plan.PCB.5/09.08.00/96-97 16-07-1996 Management of advances portfolio and
control over advances
20. UBD.No.DS.PCB.Cir.64/13.05.00/95/96 31-05-1996 Loan System for Delivery of Bank credit
21. UBD.No.DS.PCB.Cir.63/13.05.00/95-96 24-05-1996 Lending to non-banking financial companies
22. UBD.No.BR.6/16.74.00/95-96 06-05-1996 Disclosure of information regarding defaulting
borrowers of banks and financial institutions
23. UBD.No.Plan.PCB.60/09.78.00/95-96 08-04-1996 Equipment leasing and hire purchase
financing activities
No. Circular No. Date Subject
24. UBD.DS.PCB.CIR.54/13.05.00-95/96 23-03-1996 Realistic assessment of credit requirement
Measures to prevent diversion of funds
25. UBD.No.DC.23/13.05.00/95-96 19-10-1995 Credit Monitoring System-Introducing of
Health Code for borrowal accounts in banks
26. UBD.No.DS.PCB.CIR.22/13.05.00/95-96 13-10-1995 Loan System for Delivery of Bank Credit
27. UBD.No.DS.PCB.CIR.14/13.05.00/95-96 28-09-1995 Introduction of a loan system for delivery of
bank credits.
28. UBD No.DS.CIR.PCB.62/13.05.00/94-95 12-06-1995 Assessment of Working Capital limits of less
than Rs. 1 crore-Clarifications
29. UBD No.DS.PCB.CIR.59/13.06.00/94-95 31-05-1995 Norms for bank lending for working capital
purposes-Revised guidelines
30. UBD.No.DS.PCB.CIR.60/13.05.00/94-95 30-05-1995 Lending to Non-Banking Financial
Companies
31. UBD.No.DS.(PCB)CIR.58/13.05.00/94-95 17-05-1995 Bridge Loans/Interim Finance
32. UBD.No.DS.PCB.CIR.41/13.05.00/ 94-95 04-02-1995 Compliance with lending discipline-(a)
Charging of uniform rates of interest for
lending under consortium arrangement and
(b) penal interest for non-compliance with the
discipline
33. UBD No.DS.CIR.PCB.43/13.05.00/94-95 10-02-1995 Guidelines on lending under consortium
arrangements
34. UBD No.DS.CIR.PCB.39/13.05.00/94-95 14-01-1995 Levy of commitment charge on unutilised
portion of credit limit
35. UBD.No.DS.CIR.25/13.05.00/94-95 21-10-1994 Leading to non-Banking financial companies
36. UBD.No.DS.CIR.PCB.19/13.04.00/94-95 05-10-1994 Inventory/Receivables norms for various
industries
37. UBD.No.DS.CIR.PCB18/13.05.00/94-95 19-09-1994 Report of the in-House Group setup to review
the role of Reserve Bank of India in laying
down norms for bank lending for working
capital purposes - Revised guidelines.
38. UBD.No.DS.CIR.PCB-3/13.05.00/94-95 06-07-1994 Guidelines on lending under consortium
arrangements
39. UBD.No.(PCB).CIR.80/13.05.00/93-94 01-06-1994 Credit Authorisation Scheme - Co-ordination
between banks and Financial institutions in
ex-tending term loans
40. UBD.No.(PCB)50/13.05.00-93/94 14-01-1994 Restrictions on credit to certain sectors –
Real Estate Loans
41. UBD.No.POT.47/09.51.00/93-94 06-01-1994 Incidence of guarantee premium payable to
Deposit Insurance and Credit Guarantee
Corporation
42. UBD.No.(PCB)DC.40/13.05.00/93-94 13-12-1993 Credit Authorisation Scheme - Treatment of
term loan instalments for assessment of
working capital requirements
43. UBD.No.Plan.22/09.11.00/93-94 28-09-1993 Monitoring of flow of funds
44. UBD(PCB)5/13.06.00/93-94 14-08-1993 Credit Authorisation Scheme - Co-ordination
between banks and Financial institutions in
ex-tending term loans.
45. UBD.No.(PCB)1/13.06.00/93-94 12-07-1993 Review of inventory/receivable norms for
financing vegetable and hydrogenated oil
industry
No. Circular No. Date Subject
46. UBD.No.DC(PCB)99/13.06.00/92-93 30-06-1993 Review of inventory/receivables norms for
financing biscuits and bakery products
industry
47. UBD.No.(SUC)DC.124/13.06.00/92-93 30-06-1993 Inventory and Receivables Norms Basmati
Rice
48. UBD.No.(PCB)54/DC(R.1)-92/93 07-04-1993 Restriction on Credit to Certain Sectors
49. UBD.No.(PCB).DC45/R.1/92-93 25-02-1993 Credit Authorisation Scheme Treatment of
term loan instalments for assessment of
working capital requirements
50. UBD.No.41-UB.17(c)-92/93 10-02-1993 Guidelines for relief measures by urban
banks in areas affected by recent riots
51. UBD.No.I&L.40J.1.-92 /93 09-02-1993 Diversion of working capital funds
52. UBD.No.(PCB)29/1)C.(R.1)-92/93 26-12-1992 Bridge Loans/Interim Finance
53. UBD.(PCB)5/DC.R.1A/92-93 24-07-1992 Inventory and Receivables norms for power
Generation/Distribution Industry
54. UBD.(PCB)3/DC.R.1A.92/93 14-07-1992 Inventory and Receivables norms for certain
segments of Chemical Industry Essential Oil
based chemicals
55. UBD(PCB)38/DC.(R.1)-91/92 13-11-1991 Restriction on Credit to Certain Sectors
56. UBD.(SUC)36 /DC.R.1(A)-90/91 31-05-1991 Restrictions of Drawals Under Large Cash
Credit Limits
57. UBD(PCB)42/DC.HC.(Policy).90/91 11-02-1991 Credit Monitoring System Health Code for
Borrowal Accounts in Urban Co-operative
Banks
58. UBD.PCB.2/DC.(R-1)-90/91 20-07-1990 Financing of Leasing/Hire Purchase
Companies
59. UBD.(SUC)22/DC.R-1-90/91 07-07-1990 Credit Monitoring Arrangement Lending
Discipline - Quarterly Information System
(QIS)
60. UBD.No.DC.113/R.1A-89/89 24-04-1989 Assessment of Working Capital
Requirements - Inventory/Receivable Norms
for Paper Industry and for Consumable
Spares
61. UBD.No.DC.27/R.1.A-88/89 23-08-1988 Inventory/Receivables Norms for Engineering
Industry
62. UBD.No(DC)2/R.1-A-88/89 08-07-1988 Inventory/Receivable norms for Certain
Segments of Chemical Industry
63. UBD.No.(DC)123/R.1-87/88 31-05-1988 Credit Monitoring System - Introduction of
Health Code for Borrowal Accounts in Banks
64. UBD.No.(DC)101/R.1-A-87/88 15-02-1988 Inventory/Receivable Norms for Various
Industries
65. UBD.NO.I&L.67/J.1-87/88 21-11-1987 Advances to Builders/Contractors
66. UBD(DC)104/R.1-86/87 25-06-1987 Guidelines for Assessment of Working
Capital Requirements, Opening of Letters of
Credit and Issue of Guarantees
67. UBD.DC.84/R.1-86/87 03-06-1987 Credit Monitoring System - Introduction of
Health Code for Borrowal Accounts in Banks
68. UBD.(DC)57/R.1-86/87 19-02-1987 Defaults In Payment of Statutory Dues by
Borrowers
No. Circular No. Date Subject
69. UBD.No.DC.41/R.1-86/87 07-11-1986 Withholding of Credit Facilities to Borrowers
to Ensure Financial Discipline
70. UBD(DC)83/R.1-85/86 24-03-1986 Certification of Accounts of Non-Corporate
Borrowers by Chartered Accountants
71. UBD.NO.I&L.38 /J.1-85/86 11-10-1985 Advances Granted by Urban Co-operative
Banks - Diversion of Funds
72. UBD.P&O.1383/UB.17(C)-84/85 22-05-1985 Guidelines for relief measures by urban
banks in areas affected by natural calamities
73. UBD.POT.654/UB.17(C)-84/85 23-11-1984 Banks assistance to persons affected by
recent disturbances
74. ACD.OPR.1569/A.35-79/80 02-10-1979 Measures to restrict further credit expansion
75. ACD.OPR.2697/A.75/74-5 24-12-1974 Credit authorisation scheme for co-operative
banks
76. ACD.OPR.1222/A.75/74-5 07-09-1974 Credit authorisation scheme for co-operative
banks
77. ACD.Plan.3109/PR.414(9)/68-9 18-06-1969 Working group on industrial financing through
co-operative banks - recommendations
pertaining to the urban co-operative banks -
action required

B. List of Other Circulars from which instructions relating to Management of

Advances have also been consolidated in the Master Circular
No. Circular No. Date Subject
1. UBD.No.I&L/69/12.05.00/93-94 13-05-1994 Committee to enquire into
various aspects relating to
frauds and malpractices in
banks (Ghosh Committee)
2. UBD.21/12:15:00/93-94 21-09-1993 Committee to enquire into
various aspects relating to
frauds and malpractices in
banks primary (urban) co-
operative banks
3. UBD.No.2420-J.20-83/84 02-04-1984 Frauds, Mis-Appropriation,
Embezzlements And
Defalcation Of Funds In
Primary (Urban) Co-
operative Banks