Part 05 — The Lending Lifecycle

Sanction

Purpose

Sanction is the formal credit decision. It converts appraisal into an approved facility with amount, tenor, pricing, security, covenants, deviations, and conditions. In a well-run lender, sanction is not “credit said yes”; it is a controlled act by the right authority under a delegation of authority (DoA), with all deviations visible and with conditions that operations can actually test before documentation and security creation.

RBI does not publish a common DoA grid for banks and NBFCs. It does, however, expect credit policies, fair practices, transparent pricing, and board-approved controls. The 2025 UCB advances circular is explicit that boards should delegate specific sanctioning powers and that powers must not be exceeded; oral sanction is called out as an unhealthy practice (Master Circular - Management of Advances - UCBs, April 1, 2025). NBFCs similarly anchor this in board-approved credit policy under the scale-based framework (Master Direction - RBI (NBFC - Scale Based Regulation) Directions, 2023, October 19, 2023).

Actors

The relationship manager presents the business case but should not approve credit. The credit analyst prepares the credit appraisal memo (CAM), including financial analysis, bureau, bank-statement analysis, GST or income tax return (ITR) findings, deviations, and collateral note. The credit manager recommends. The sanctioning authority may be a branch credit head, regional credit manager, zonal credit manager, chief risk officer nominee, product credit committee, or board-level committee depending on exposure and deviation severity. Legal, valuation, fraud-control, and operations feed mandatory observations. Compliance reviews regulatory-sensitive cases such as related-party exposure, digital-lending partner cases, or co-lending products.

Inputs & Documents

The sanction pack usually contains application form, KYC and beneficial-owner confirmation, bureau reports, bank-statement analysis, GST returns or Account Aggregator data, financial statements/ITR, CAM, field investigation or personal discussion notes, collateral legal and valuation reports, deviation sheet, end-use details, pricing calculator, product policy checklist, and proposed repayment schedule.

For micro and small enterprises, ticket sizes vary widely. A digital unsecured business loan may be ₹1 lakh to ₹25 lakh with 12-36 month tenor and 16-30% annual reducing interest. A secured LAP may be ₹10 lakh to ₹5 crore at 10-18% depending on borrower profile and collateral. Working-capital limits may be ₹5 lakh to ₹10 crore, with cash credit reviewed annually and drawing power monitored monthly through stock and receivable statements. These are market practice ranges, not regulatory caps.

Step-By-Step Workflow

The CAM is frozen with recommendation, proposed limit, risk grade, borrower group exposure, product, collateral, pricing, and policy deviations.
The business user confirms commercial terms: processing fee, insurance, legal/valuation charges, annual renewal fee, prepayment clause, and whether disbursal is borrower, supplier, dealer, or escrow routed.
The system maps the case to DoA using exposure, product, internal rating, collateral type, vintage, unsecured portion, negative industry, deviations, and connected-borrower exposure.
Approvers receive the full digital file. A good credit committee records questions and decision rationale, not just “approved”.
The sanction decision is captured as approved, approved with modifications, deferred, rejected, or returned for rework. Modifications often reduce amount, increase margin, add guarantor, require property perfection, shorten tenor, or move from bullet to amortising repayment.
Conditions precedent (CPs) and conditions subsequent (CSs) are separated. CPs block disbursement; CSs allow disbursement but create dated post-disbursement tasks.
The sanction letter and Key Facts Statement (KFS), where applicable, are generated and accepted before documentation.

For retail and MSME term loans, RBI’s KFS circular requires a standardised KFS with annual percentage rate (APR), all charges, amortisation schedule, validity period, and inclusion as a summary box in the loan agreement; new retail and MSME term loans sanctioned from October 1, 2024 must comply (Key Facts Statement for Loans & Advances, April 15, 2024). This means sanction systems must not let fees appear later outside KFS without explicit borrower consent.

Exceptions & Edge Cases

Common sanction exceptions are policy deviation, documentation deviation, security deviation, exposure breach, related borrower, credit committee split decision, and conditional approval subject to third-party confirmation. A typical Indian SME nuance is “program lending”: a borrower may fail full financial appraisal but pass a GST-surrogate or banking-surrogate program if turnover, bank credits, bureau, and vintage fit predefined bands. The sanction note should say this clearly because monitoring metrics differ.

For working capital, sanction must define whether drawing power is monthly, quarterly, or system-calculated; stock statements older than a set number of days should block drawdown. For project or machinery loans, sanction should specify moratorium, installation proof, and direct-to-supplier disbursement. For LAP, it should define exact property owners, mortgage type, original document list, insurance, and release conditions.

Systems Touched

LOS, business rule engine (BRE), document management, credit workbench, pricing engine, deviation-management module, committee workflow, e-sign/e-stamp provider, customer notification service, and audit trail. The sanction object becomes the source for loan agreement generation and LMS boarding, so manual changes after sanction should require maker-checker approval.

TATs/SLAs Typical In Industry

For pre-approved merchant or GST-led unsecured loans, sanction may be same day after KYC. Branch-led unsecured SME cases typically take 2-5 working days after complete documents. Secured LAP or working-capital files often take 5-12 working days because legal and valuation have to close first. Credit committee cases above regional powers may run weekly or twice weekly; urgent exceptions should be logged as such, not approved by phone.

Stage Metrics

Track approval rate, sanction-to-disbursement conversion, average sanctioned amount versus requested amount, deviation frequency, approval TAT by authority, credit conditions per case, rejection reasons, pricing override rate, and early delinquency by sanctioning authority or program. A useful quality metric is “first EMI bounce or first stock-statement default within 90 days of sanction”.

Co-Lending/Partner-Origination Variant

Under the 2025 Co-Lending Directions, the co-lending agreement must define borrower selection, product lines, responsibilities, fees, information exchange, customer interface, and grievance handling. Each RE must retain at least 10% share, the final borrower rate must be a weighted blended rate, and KFS must disclose required CLA details (RBI Co-Lending Arrangements Directions, 2025). Practically, the originator may sanction first, but the partner bank’s auto-accept or reject rules must be encoded. The sanction letter should not hide the fact that two REs are funding the loan.