Commercial Credit Appraisal, MPBF & Credit Card Underwriting Field Manual: Banking Mathematics, CMA Covenants & Underwriting Protocols

1. Nayak Committee Turnover Method (Fund-Based Limits Up to ₹5 Crore)

Under the Nayak Committee recommendations (1992), codified in RBI Master Directions for MSME financing, working capital assessment for credit requirements up to ₹5 Crore is simplified through the Turnover Method:

The Turnover Realism Audit: Credit officers examine historical audited revenue against projected turnover. Projections exceeding 25% to 30% year-on-year expansion require documented capital expenditure completion, new confirmed order books, or GST 3B monthly run-rate validations.

2. Tandon Committee Method 2 & CMA Balance Sheet Modeling (> ₹5 Crore)

For aggregate commercial exposures exceeding ₹5 Crore, banks discard the turnover shortcut and enforce full Credit Monitoring Arrangement (CMA) balance sheet analysis under the Tandon Committee Method 2 (1975):

Forensic Balance Sheet Sanitization: Credit appraisal teams aggressively prune current assets before computing TCA: receivables aged over 90–180 days are excised, non-moving inventory is written down, and inter-corporate advances to sister concerns are reclassified into non-current assets.

3. Chore Committee Loan Bifurcation & The Cash Budget Method

Under the Chore Committee guidelines (1979), large working capital sanctions are bifurcated to prevent liquidity diversion:

• Working Capital Demand Loan (WCDL - 75%): A fixed-tenor loan tranche (typically 7 to 90 days) carrying a defined rollover schedule and fixed interest rate. It funds the stable core current assets.
• Cash Credit (CC - 25%): A fluctuating, revolving overdraft facility utilized strictly for day-to-day transaction volatility, drawing power-backed against monthly stock statements.
• Cash Budget System: For cyclical and seasonal businesses (textiles, sugar, construction, fertilizers), banks mandate monthly projected cash flow budgets rather than balance sheet ratios. Bank finance is released against monthly peak deficit requirements.

4. Term Loan Debt Sizing & DSCR Modeling

While working capital funds operating velocity, capital expenditure (CAPEX) for plant, machinery, and facilities requires long-term debt sizing governed by Debt Service Coverage Ratio (DSCR):

5. Retail & Executive Credit Card Underwriting Scorecards

Retail credit card underwriting employs automated rule-engines evaluating debt sustainability through three primary mechanisms:

The Imputed 5% Burden Rule: When computing an applicant's FOIR for new loans, banks treat existing credit cards as an active debt burden imputed at 5% of the total sanctioned card limit (or 5% of peak revolving balance), whether the card is used or not.

6. RBI Master Directions & The November 2023 Risk-Weight Mandate

Credit underwriting operates strictly within Reserve Bank of India macroprudential directives:

• RBI Master Direction 2022 (Credit Cards): Mandates explicit consent for limit enhancement, transparent computation of Annualized Percentage Rates (APR), and standard 7-day default reporting grace periods.
• RBI November 2023 Risk-Weight Hike: To prevent overheating in unsecured consumer lending, the RBI increased regulatory risk weights on credit card receivables by 25 percentage points to 150% for scheduled commercial banks and 125% for NBFCs. This increased capital consumption has led banks to tighten bureau cut-offs (CIBIL 750+) and compress initial sanctioned limits.
• SMA Classification Framework: Borrowers are continuously monitored under Special Mention Account categorisation: SMA-0 (1–30 days past due), SMA-1 (31–60 days), and SMA-2 (61–90 days). Breaching SMA-1 results in immediate freeze of unutilized drawing power across working capital lines.