Credit appraisal memorandum format: how to structure a CAM

Outcome

A credit appraisal memorandum (CAM) is the document a sanctioning authority reads to approve, change or decline a credit proposal. A usable credit appraisal memorandum format puts the ask and the recommendation first. The evidence follows in the order a sanctioner tests it: who is borrowing, what the record shows, whether cash flow repays the debt, what protects the lender, and on what conditions.

The Reserve Bank of India (Commercial Banks – Credit Risk Management) Directions, 2025, updated as on October 01, 2026, say what a bank’s appraisal must do. Chapter III, on credit risk evaluation, does not set a CAM template, so the layout below is working practice. Templates, section order and limits vary by institution.

Every regulatory reference here comes from those Directions. They apply to commercial banks: banking companies other than Small Finance Banks, Payments Banks and Local Area Banks, plus corresponding new banks and State Bank of India. At any other lender type, check the directions for your own type. Product-specific directions on MSME lending or loans against property (LAP) are outside this piece, as are Udyam registration rules and credit guarantee scheme terms. Points on those topics below are general working practice.

Prerequisites

• Your institution’s CAM template and credit policy. Paragraph 5 requires a bank to have a Board approved policy on credit risk management.
• The Guidance Note on Credit Risk Management, which paragraph 6 says a bank shall strictly follow.
• The borrower’s application, constitution documents and shareholding, for the promoters and any group entities.
• Audited financials, GST returns and bank statements, for the period your policy requires.
• Sanction letters and repayment schedules for every existing facility, from every lender.
• For MSME term loans, the Udyam registration (the government’s MSME registration), Credit Monitoring Arrangement (CMA) data if your bank uses it, and quotations or a project report that supports the cost of the asset. CMA data is a standard statement of past and projected financials.
• For LAP or property-backed term loans, title documents, a legal opinion, an independent valuation report and charge search results.

Steps

1. Write the decision summary. State the borrower, facility, amount, tenor, pricing, security, sanctioning authority and your recommendation. Write it last, place it first.

   What good looks like: a sanctioner can state the ask, the main risk and your view without turning the page.

2. Describe the borrower and run the restriction checks. Cover constitution, ownership, promoters, line of business and group links. For an MSME, record the Udyam registration and classification, and check that they match the applicant’s constitution and activity.

   State whether the borrower is a related party under the definitions in paragraph 4. Paragraphs 14 and 42H set out prohibitions, with exceptions and provisos. Permitted related-party loans above the materiality threshold in the bank’s policy go to the Board or the Committee on Lending to Related Parties (paragraph 42K).

   Record Legal Entity Identifier (LEI) status, a 20-digit code that identifies a party to a financial transaction. Under paragraph 64, non-individual borrowers with aggregate exposure of ₹5 crore and above from banks and financial institutions must obtain one. Under paragraph 65, a borrower who fails to do so gets no new exposure, renewal or enhancement, apart from the government departments and agencies it exempts.

   What good looks like: the related-party answer and the LEI position are stated explicitly, with the exposure figure used for the LEI test.

3. Report the credit information. Paragraph 11 requires a bank’s loan policies or appraisal processes to provide for Credit Information Reports (CIRs) from one or more Credit Information Companies (CICs), so that decisions rest on information in the system. Cover the borrower and, as your policy requires, promoters, guarantors and group entities.

   What good looks like: each report is dated, and every overdue, write-off or settlement carries an explanation you have tested rather than one you have only received.

4. Do your own financial analysis. Paragraph 7 requires an independent and objective appraisal in all cases. A bank must not depend on credit appraisal reports by outside consultants, especially the borrower’s in-house consultants. Spread the financials yourself, then reconcile sales to GST returns and bank credits. If the borrower supplies CMA data, rework the projections against past performance rather than carrying them across.

   Trace the promoter’s contribution. Paragraph 9 requires a bank to ascertain the source and quality of equity, and a lender to ensure at appraisal that parent company debt is not infused as equity of a subsidiary or Special Purpose Vehicle.

   What good looks like: variances between audited, GST and banking figures are quantified and explained, and the equity has a traced source.

5. Test repayment capacity. Show the debt service coverage ratio (DSCR), the cash available for debt service divided by the debt service due. Include existing lenders’ debt as well as the proposed loan. Paragraph 4 defines Earnings before Interest and Depreciation (EBID), by reference to the DSCR computation, as Profit After Tax + Depreciation + Interest on debt + Lease Rentals, if any. The denominator and acceptable levels vary by institution, so state yours.

   Paragraph 8 requires sensitivity tests or scenario analysis, especially for infrastructure projects, including project delays and cost overruns. Paragraph 12A requires credit assessments to suitably factor in the possible impact of calamities on borrowers who may be affected, so address it where location or sector makes it relevant.

   What good looks like: the base case assumptions are justified against past performance, each debt line ties to a sanction letter or the proposed terms, and the memo names the combination of stresses that breaks repayment.

6. Set out the structure and end use. Match tenor and repayment to the asset life and cash flow. Name the use of funds. Paragraph 23 bars a bank from lending to companies for buy-back of their shares or securities, and paragraph 12 points to the circular of January 14, 2011 on end-use monitoring. Paragraph 91O says term loans shall preferably go directly to the intended beneficiary’s account, where the beneficiary is identifiable, rather than through the borrower’s account.

   Check the account plan too. Paragraph 91C places no restriction on current or overdraft accounts where banking system exposure to the customer is below ₹10 crore. At ₹10 crore or more, paragraph 91D lets a bank maintain them if it holds at least a 10 per cent share of aggregate or fund-based exposure, subject to the provisos. A bank that does not qualify may maintain only collection accounts.

   What good looks like: a reader can follow the money from sanction to beneficiary, and the repayment schedule ties to the DSCR table.

7. Assess the security. Describe the property, title position, occupancy and charge type. Paragraph 70 requires valuation by professionally qualified independent valuers with no direct or indirect interest, and at least two independent reports for properties valued at ₹50 crore or above.

   List the charges already on the property. An MSME’s factory often secures an earlier loan, so name each lender, the amount secured and its ranking, and say how the new charge will rank. Where another lender’s consent is needed, make its no-objection certificate (NOC) a condition. Work out the loan-to-value ratio (LTV) on all debt ranking ahead of or equal to yours, not on the new loan alone.

   Cover the charge registry as well. Records of the Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI) can be searched by any lender, which helps prevent multiple lending against one property (paragraph 75). Paragraph 76 lists further filings, including mortgages other than by deposit of title deeds and hypothecation of plant and machinery. Paragraph 77 advises a bank to file charges on all current transactions on an ongoing basis. For a company borrower, a charge search at the Registrar of Companies is common practice too.

   If the structure relies on a credit guarantee, such as cover from the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), take eligibility, cover and cost from the current scheme document. If no guarantee is proposed, say so.

   What good looks like: the memo shows the LTV, the valuer’s independence, the legal opinion’s exceptions, the search results and every existing charge, and it does not treat collateral or a guarantee as a substitute for cash flow.

8. Name the risks and mitigants. Pick the risks specific to this borrower, such as customer concentration, input prices or succession. Where the borrower has foreign currency exposure, record the unhedged foreign currency exposure (UFCE) treatment under Chapter VII. While estimating UFCE, a bank considers only financial and natural hedges (paragraph 4).

   What good looks like: each risk has a size, a mitigant and a residual view. Departures from your credit policy are listed with reasons.

9. Close with terms and conditions. Separate pre-sanction requirements, pre-disbursement conditions, post-disbursement covenants and the review date. Paragraph 12 points to the circular of August 21, 2020 on ad hoc limits, short review and renewal. Paragraph 91E allows additional covenants as per the lender’s policies, by mutual agreement in the loan agreement.

   What good looks like: each condition has an owner and a date, and each one links to a risk named earlier.

Worked example, made-up numbers

The borrower is fictional: a private limited company in Pune that machines auto components, with its Udyam registration on file. It seeks a ₹2.5 crore term loan over 7 years to buy two CNC machines costing ₹3.1 crore. The promoters bring the other ₹60 lakh. The ₹5 crore, ₹10 crore and ₹50 crore thresholds come from the Directions. Everything else is invented, and the ratios are not benchmarks.

One other bank already lends to the company, and it has no NBFC debt. That bank holds a first mortgage on the factory for a term loan, with ₹1.5 crore sanctioned and ₹1.2 crore outstanding. It also provides a ₹1.7 crore cash credit limit against stock and receivables. The proposal asks for a mortgage on the factory ranking equally with that bank, plus hypothecation of the new machines.

All debt in year one, ₹ lakh, all at a floating 10%

Year-one repayment capacity, ₹ lakh

Base DSCR = 164.2 / 125.9 = 1.30x.

Sensitivity

The rate case holds EBID flat and ignores the tax effect, for simplicity. With rates up, DSCR reaches 1.00x if EBID falls ₹33.7 lakh, about 20.5%, to ₹130.5 lakh. The memo names that as the breaking point.

Checks recorded in the memo

Recommendation as written: Sanction ₹2.5 crore for 7 years once the LEI is in place. Before disbursement, require the promoters’ ₹60 lakh to be paid to the supplier, the other bank’s NOC, and creation of the mortgage ranking equally with that bank. Pay the loan directly to the supplier. DSCR stays above 1.0x in every scenario tested, though 1.07x in the combined case is thin, so a half-yearly covenant test on DSCR is proposed.

Common errors

• Burying the view. The recommendation appears only on the last page, so the sanctioner reads the facts without knowing what to test.
• Borrowing the analysis. Relying on a consultant’s credit appraisal report runs against paragraph 7. As a matter of practice, test any outside projections, including CMA data, against the borrower’s record.
• Taking equity at face value. Showing promoter contribution without its source misses the multiple leveraging that paragraph 9 warns can camouflage the Debt Equity ratio.
• Testing only the new loan. A DSCR that leaves out existing lenders’ debt overstates repayment capacity. Every debt line should tie to a sanction letter or the proposed terms.
• Missing charges on the factory. Taking an MSME’s factory as free security without a search can leave you ranking behind another lender, and an LTV on the new loan alone hides this.
• Testing LEI on your own exposure only. Paragraph 64 looks at aggregate exposure across banks and financial institutions, taking the higher of sanctioned limit and outstanding balance. Use your own data, the Central Repository of Information on Large Credits or a borrower declaration.
• Treating the two exposure tests as one. The account rules count sanctioned fund-based and non-fund-based facilities from the banking system, as defined in paragraph 91C. That differs from the LEI measure, so work out each separately.
• Treating a guarantee as repayment capacity. Guarantee cover is no answer to weak cash flow, and it needs checking against the current scheme document.
• Stressing one variable. A single revenue haircut can hide what a delay combined with a rate rise would do.
• Leaning on collateral. A comfortable LTV does not answer a weak DSCR.
• Citing the wrong rulebook. These Directions do not cover Small Finance Banks, Payments Banks or Local Area Banks, so a template carried across lender types can cite rules that do not apply.
• Writing generic risks. Risks that fit any borrower give the sanctioner nothing to decide on, and conditions that link to no risk are hard to justify later.