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WITH REFERENCE TO
A PROJECT REPORT SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENT FOR THE AWARD OF THE DEGREE OF
GAYATRI VIDYA PARISHAD COLLEGE FOR DEGREE & PG COURSES (Autonomous) ACCREDITED by NAAC with B++ Institution Approved by AICTE, Affiliated to Andhra University RISHI KONDA, Visakhapatnam- 530 045 Batch: 2011-13
DECLARATION
I hereby declare that the project work entitled Financing to MSMEs in the perspective of Banks as well as Borrowers with reference to Andhra Bank, Zonal Office, Visakhapatnam is a bonafide work submitted by me in partial fulfillment for the award of Master of Business Administration, Andhra University, Visakhapatnam.
I also declare that this project is a result of my own effort and that it has not been submitted to any other university for the award of any Degree or Diploma. The empirical findings in the project report are based on the data collected by me.
CERTIFICATE
This is to certify that the project entitled a study on FINANCING TO MSMEs IN THE PERSPECTIVE OF BANKS AS WELL AS BORROWERS is the bonafide record for work done by Mr. RAVI KUMAR CH during the period 2011-2013 in partial fulfillment of the requirement for the award of the degree of MASTER OF BUSINESS ADMINISTRATION in GAYATRI VIDYA PARISHAD COLLEGE FOR DEGREE AND P.G COURSES, VISAKHAPATNAM, under my guidance and supervision.
Visakhapatnam Date:
Mrs. P.HIMAJAGATHI Asst. Professor School of Management Studies GVP College for Degree and PG Courses
ACKNOWLEDGEMENTS
I express my sincere gratitude to Prof.S.RAJANI, the Director; School of Management studies Gayatri Vidya Parishad College for Degree and P.G courses for giving me opportunity to work on this Project. I am grateful to Dr.K.V.V.MURALI SOMESWARA RAO Head of Department; School of Management studies Gayatri Vidya Parishad College for Degree and P.G courses for giving me opportunity to work on this Project and for valuable advices. I wish to take great Pleasure in recording my profound gratitude and sincere thanks to Mrs.P.HIMAJAGATHI Assistant Professor in School of Management studies Gayatri Vidya Parishad College for Degree and P.G courses for her inspiring guidance and keen interest and critical evaluation of the work for the successful completion of the project work. Its immense pleasure to thank Ms.K.VIMALA, Financial Analyst; Andhra Bank, Zonal Office at Visakhapatnam, and her team for their co-operation in providing the required information at each stage to complete my project successfully.
RAVI KUMAR CH
CONTENTS
CH NO. I. II. III. IV. V. VI. VII. VIII. IX. INTRODUCTION INDUSTRY PROFILE
CHAPTERS
PROFILE OF ANDHRA BANK CONCEPTUAL FRAME WORK ANALYSIS AND INTERPRETATION FINDINGS AND SUGGESTIONS CONCLUSION BIBLIOGRAPHY ANNEXURES
INTRODUCTION
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Introduction:
Micro, Small and Medium Enterprises (MSMEs) have played a significant role world over in the economic development of various countries. India, certainly, is no exception. Keeping in view its importance, the promotion and development of MSMEs has been an important plank in our policy for industrial development and a well- structured programme of support has been pursued in successive five-year plans for the promotion and development of MSMEs in the country. There exists a well-developed network of financial institutions at national and state level to channelize credit to MSMEs. SIDBI is the national level principal financial institution for promotion, financing and development of MSMEs. It provides direct assistance to the SSI sector through several schemes like direct discounting, project finance, assistance for technological up gradation and modernization, marketing, finance, resource support to institutions engaged in developing SSIs, venture capital, factoring services, etc. It also provides indirect assistance comprising refinance, bills rediscounting (equipment) and against inland supply of bills through an organized network of 910 Primary Lending Institutions (PLIs) including banks and SFCs with more than 65,000 outlets throughout the country.
Lending norms of the banks has been changing from time to time. So it is necessary to know the basis for the banks to provide credit to different sectors. In India most of the business entities are in MSME sector. They need adequate funds to run and expand their businesses. For getting loans from banks, they need to fulfill some eligibility criteria and norms. So the main purpose of this study is to study the availability of credit for Micro, Small and Medium scale enterprises.
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In
To know the knowledge of the borrowers and their responses on different criteria.
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Research methodology:
The study is mainly relying up on both Primary and as well as Secondary Data. A sample of limited number of customers (Borrowers) has been taken for the study. It includes various websites and articles.
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Industrial profile
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INDUSTRY PROFILE:
Banking Industry:
The Websters dictionary defines Bank as an establishment for the custody, loan, exchange, or issue of money, for the extension of credit, and for facilitating the transmission of funds: the table, counters, or place of business of a money changer. A Bank can also be defined as a financial institution that accepts deposits and channels the money into lending activities.
History of Banking:
The first banks were probably the religious temples of the ancient world, and were probably established sometime during the 3rd millennium B.C. Banks probably predated the invention of money. Deposits initially consisted of grain and later other goods including cattle, agricultural implements, and eventually precious metals such as gold, in the form of easy-to-carry compressed plates. Temples and palaces were the safest places to store gold as they were constantly attended and well built. As sacred places, temples presented an extra deterrent to would-be thieves. There are extant records of loans from the 18th century BC in Babylon that were made by temple priests to merchants. Modern western economic and financial history is usually traced back to the coffee houses of London. The London Royal Exchange was established in 1565. At that time moneychangers were already called bankers, though the term "bank" usually referred to their offices, and did not carry the meaning it does today. There was also a hierarchical order among professionals; at the top were the bankers who did business with heads of state, next were the city exchanges, and at the bottom were the pawn shops or Lombards. Global banking and capital market services proliferated during the 1980s and 1990s as a result of a great increase in demand from companies, governments, and financial institutions, but also because financial market conditions were buoyant and, on the whole, bullish.
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Growing internationalization and opportunity in financial services entirely changed the competitive landscape, and now many banks prefer the universal banking model. Today universal banks are free to engage in all forms of financial services, make investments in client companies, and function as much as possible as a one-stop supplier of both retail and wholesale financial services.
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The Reserve Bank of India acts a centralized body monitoring any discrepancies and shortcoming in the system. Since the nationalization of banks in 1969, the nationalized banks have acquired a place of prominence and has since then seen tremendous progress. The need to become highly customer focused has forced the slow-moving public sector banks to adopt a fast track approach. In India the banks are being segregated in different groups. Each group has their own benefits and limitations in operating in India. Each has their own dedicated target market. Few of them only work in rural sector while others in both rural as well as urban and many even only catering in cities.
The banks are of several types. Types of banks in India are (a) Public sector banks (b) Private sector banks (c) Cooperative banks (d) Regional Rural banks and (e) Foreign banks.
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Classification of Banks:
The Indian banking industry, which is governed by the Banking Regulation Act of India 1949 can be broadly classified into two major categories, non-scheduled banks and scheduled banks. Scheduled banks comprise commercial banks and the co-operative banks. In Terms of ownership, commercial banks can be further grouped into nationalized banks, the State Bank of India and its group banks, regional rural banks and private sector banks (domestic and foreign). These banks have over 67,000 branches spread across the county. The Indian banking industry is a mix of the public sector, private sector and foreign banks. The private sector banks are again spilt into Indian banks and foreign banks.
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(2)
Potential Entrants is high as development financial institutions as well as private and foreign banks have entered in a big way.
(5) (1) (4)
Organizing power of the supplier is high. With the new financial instruments they are asking higher return on the investments.
Rivalry among existing firms has increased with liberalization. New products and improved customer services is the focus.
Bargaining power of buyers is high as corporate can raise funds easily due to high competition.
(3)
Threat from substitute is high due to competition from NBFCs and insurance companies as they offer a high rate of interest than banks.
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1.
Rivalry among existing firms With the process of liberalization, competition among the existing banks has
increased. Each bank is coming up with new products to attract the customers and tailor made loans are provided. The quality of services provided by banks has improved drastically. 2. Potential Entrants Previously the Development Financial Institutions mainly provided project finance and development activities. But they now entered into retail banking which has resulted into stiff competition among the exiting players. 3. Threats from Substitutes Banks face threats from Non-Banking Financial Companies. NBFCs offer a higher rate of interest. 4. Bargaining Power of Buyers Corporate can raise their funds through primary market or by issue of GDRs, FCCBs. As a result they have a higher bargaining power. Even in the case of personal finance, the buyers have a high bargaining power. This is mainly because of competition. 5. Bargaining Power of Suppliers With the advent of new financial instruments providing a higher rate of returns to the investors, the investments in deposits is not growing in a phased manner. The suppliers demand a higher return for the investments. 6. Overall Analysis The key issue is how banks can leverage their strengths to have a better future. Since the availability of funds is more and deployment of funds is less, banks should evolve new products and services to the customers. There should be a rational thinking in sanctioning loans, which will bring down the NPAs. As there is a expected revival in the Indian economy Banks have a major role to play. Funding corporate at a low cost of capital is a special requisite.
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INTRODUCTION TO MSMEs:
Micro, Small and Medium Enterprises (MSMEs) have played a significant role world over in the economic development of various countries. Over a period of time, it has been proved that MSMEs are dynamic, innovative and most importantly, the employer of first resort to millions of people in the country. The sector is a breeding ground for entrepreneurship. The importance of MSME sector is well-recognized world over owing to its significant contribution in achieving various socio-economic objectives, such as employment generation, contribution to national output and exports, fostering new entrepreneurship and to provide depth to the industrial base of the economy. Micro, Small and medium-sized enterprises (MSMEs) are the backbone of all economies and are a key source of economic growth, dynamism and flexibility in advanced industrialized countries, as well as in emerging and developing economies. MSMEs constitute the dominant form of business organization, accounting for over 95% and up to 99% of enterprises depending on the country. They are responsible for between 6070% net job creations in Developing countries. Small businesses are particularly important for bringing innovative products or techniques to the market. Microsoft may be a software giant today, but it started off in typical MSME fashion, as a dream developed by a young student with the help of family and friends. Only when Bill Gates and his colleagues had a saleable product were they able to take it to the marketplace and look for investment from more traditional sources. MSMEs are vital for economic growth and development in both industrialized and developing countries, by playing a key role in creating new jobs. Financing is necessary to help them set up and expand their operations, develop new products, and invest in new staff or production facilities.
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Many small businesses start out as an idea from one or two people, who invest their own money and probably turn to family and friends for financial help in return for a share in the business. But if they are successful, there comes a time for all developing MSMEs when they need new investment to expand or innovate further. That is where they often run into problems, because they find it much harder than larger businesses to obtain financing from banks, capital markets or other suppliers of credit.
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(f) High employment orientation: MSMEs are usually the prime drives of jobs, in some cases creating up to 80%. Jobs MSMEs tend to be labour intensive per se and are able to generate more jobs for every unit of investment, compared to their bigger counterparts. (g) Reduction of regional imbalances Unlike large industries where divisibility of operations is more difficult, MSMEs enjoy the flexibility of location. Thus, any country, MSMEs can be found spread virtually right across, even through some specific location s emerge as clusters.
MSMEs in India:
India has a vibrant MSME sector that plays an important role in sustaining economic growth, increasing trade, generating employment and creating new entrepreneurship in India. In keeping in view its importance, the promotion and development of MSMEs has been an important plank in our policy for industrial development and a well-structured programme of support has been pursued in successive five-year plans for. MSMEs in India have recorded a sustained growth during last five decades. The number of MSMEs in India is estimated to be around 13 million while the estimated employment provided by this sector is over 31 million. The MSME sector accounts for about 45 per cent of the manufacturing output and over 40 per cent of the national exports of the country. India embarked on the path of opening up its economy and integrating it with the global economy in 1991. The liberalization of economy, while offering tremendous opportunities for the growth and development of Indian industry including MSMEs, has also thrown up new challenges in terms of fierce competition. The very rules which provide increased access for our products in the global markets also put domestic industry under increased competition from other countries. In todays world, access on a global basis to modern technology, capital resources and markets have become the most critical determinants of international competitiveness.
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Defining MSMEs:
In India, the enterprises have been classified broadly into two categories: (i) Manufacturing; and (ii) Those engaged in providing/rendering of services. Both categories of enterprises have been further classified into micro, small and medium enterprises based on their investment in plant and machinery (for manufacturing enterprises) or on equipments (in case of enterprises providing or rendering services). The classification on basis of investment is as under: For the Manufacturing Sector, the MSMED Act 2010 defines micro, small and medium enterprises (MSMEs) as mentioned below: A micro enterprise is an enterprise where investment in plant and machinery does not exceed Rs 25 lakh. The investment in plant and machinery in a small enterprise is more than Rs 25 lakh, but does not exceed Rs 5 crore. A medium enterprise is one where the investment in plant and machinery is more than Rs 5 crore, but does not exceed Rs 10 crore. Enterprises engaged in providing or rendering of services and whose investment in equipment under MSMED Act, 2010 are specified below: A micro enterprise is an enterprise where the investment in equipment doesnt exceed 10 lakh. A small enterprise is an enterprise where the investment in equipment is more than Rs.10 lakh but not exceed Rs.2crore. A medium enterprise is an enterprise where the investment in equipment is more than Rs.2crore but not exceed Rs.5crore.
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While calculating the investment in plant and machinery/equipment referred to above, the original price thereof shall be taken into account, irrespective of whether the plant and machinery/equipment are new or second hand. In case of imported machinery/equipment, the following duty/charges/costs shall be included in calculating their value: Import Duty (not to include miscellaneous expenses such as transportation from the port to the site of the factory, demurrage paid at the port); Shipping Charges; Customs Clearance charges; and Sales Tax or Value-added Tax. Cost of the following plant & machinery/equipments etc would be excluded:; Equipments such as tools, jigs, dies, moulds, and spare parts for maintenance and the cost of consumable stores; Installation of plant &machinery; Research and development and pollution control equipments; Power generation set and extra transformer installed by the enterprises as per the Regulations of the State Electricity Board; Bank charges and Service Charges paid to the National Small Industries Corporation or the State Small Industries Corporation; Procurement or Installation of cables, wiring bus bars, electrical control panels (not mounted on individual machines) Oil circuit breakers or miniature circuit breakers which are necessarily to be used for providing electrical power to the plant and machinery or for safety measures; Gas producer plants; Transportation charges (other than sales tax or value-added tax and excise duty) for indigenous machinery from the place of their manufacture to the site of the enterprise); Charges paid for technical know-how for erection of plant machinery;
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Such storage tanks which store raw materials and finished products only and are not linked with the manufacturing process; Fire-fighting equipment; and Such other items as may be specified, by notification from time to time. In case of Service Enterprises, the original cost to exclude furniture, fittings and other items not directly related to the services rendered. Land and Building would also not be included while computing the machinery/equipments cost. MSME would be meant to include Micro Small and Medium Enterprises (MSMEs). The above definitions of Micro, Small and Medium Enterprises would be in place of the existing definitions of Small & Medium Industries and SSSBEs/Tiny Enterprises. Micro Enterprises would include Tiny Industries also. Small Enterprises (Manufacturing) would mean Small Scale Industries (SSIs). Medium Enterprises (Manufacturing) would mean Medium Industries (MIs). Small Enterprises (Services) and Medium Enterprises (Services) would mean other Small & Medium Enterprises. Thus, MSME Advances would be categorized as under: All advances to segments viz. Micro, Small and Medium Enterprises in the Manufacturing sector irrespective of sanctioned limits, (including advances against TDRs/Govt. Securities etc for business purposes to these categories of Borrowers), and Advances to Services Sectors such as Professional & Self-Employed, Small Business Enterprises, and Small Road/Water Transport Operators and other enterprises, engaged in providing/rendering of services, conforming to the above investment criteria and enjoying borrowing/non-borrowing facilities with the Bank (including advances against TDRs/Govt. Securities etc for business purposes to these categories of Borrowers). Those enterprises exceeding the investment ceilings would be categorized as Large Enterprises and be outside the purview of MSME.
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The sanctioned limits would no longer be the criteria determining the status as micro or small or medium enterprises in these cases.
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contributing 45% of the industrial output, 40% of exports, 42 million in employment, create one million jobs every year and produces more than 8000 quality products for the Indian and international markets. As a result, MSMEs are today exposed to greater opportunities for expansion and diversification across the sectors. The root cause for unemployment in India is the over growing population which has outpaced the development of industry and agriculture. For a country like ours, with limited financial resources and huge reservoir of human resources, Small and Medium industry is the only means for solving the unemployment problem. Small and Medium industry is providing employment at an increased rate. The Indian market is growing rapidly and Indian industry is making remarkable progress in various Industries like Manufacturing, Precision Engineering, Food Processing, Pharmaceuticals, Textile & Garments, Retail, IT, Agro and Service sectors. MSMEs are finding increasing opportunities to enhance their business activities in core sectors. The good performance of the small scale units is evident from their number, production, employment and foreign exchange earnings.
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Problems of MSMEs
Despite its commendable contribution to the Nation's economy, MSME Sector does not get the required support from the concerned Government Departments, Banking Sector, Financial Institutions and Corporate Sector, which is a handicap in becoming more competitive in the National and International Markets and which needs to be taken up for immediate and proper redressal. MSME sector faces a number of problems - absence of adequate and timely banking finance, limited knowledge and non-availability of suitable technology, low production capacity, follow up with various agencies in solving regular activities and lack of interaction with government agencies on various matters.
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Financial weakness stands in the way of securing raw materials in bulk in a competitive market. c) Production problem of MSMEs: MSME units suffer from inadequate work space, power, lighting and ventilation, and safety measures etc. These short comings have tended to endanger the health of workmen and have adversely affected the rate of production. Many units are following primitive methods of production. Adoption of modern techniques is either disliked by the entrepreneurs is not feasible. Wage rates and service conditions of small industries are not attractive to skilled labor. d) Technological problem of MSMEs: Today technology is changing at a very fast phase; it becomes difficult for MSMEs to cope up with changing technology. Technology up gradation and the frequent need to renew the equipment has emerged as a big problem. e) Marketing problem of MSMEs: As marketing is not properly organized, the helpless artisans are completely at the mercy of middle man. The potential demand for their goods remains under developed. The MSMEs have to face the competitions from large scale units in marketing their products. It causes damage to the growth and stability of MSMEs. MSMEs cannot afford to spend lavishly for advertisement to promote their sales. f) Managerial problem of MSMEs: Small scale industries in our country have suffered from the lack of entrepreneurial ability to develop initiative and undertake risks in the unexplored industrial fields. The in efficiency in management comes first among managerial problems. The entrepreneurial ability of promoters of cottage industries and MSMEs are handicapped by technical knowhow in the areas of production, finance, accounting and marketing management.
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g) Sickness of MSMEs: A serious problem which is hampering small and medium sector has been sickness. Many small units have fallen sick due to one problem or the other. Sickness is caused by two sets of factors, Internal and external factors. From among the various internal and external causes of sickness the important ones are bud management, high rate of capital gearing, inadequacy of finance, short of raw materials, outdated plant and machinery, low labor productivity etc.
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COMPANY PROFILE
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COMPANY PROFILE:
Andhra Bank is a medium-sized public sector bank (PSB), with a network of 1,712 branches, 15 extension counters, 38 satellite offices and 1056 automated teller machines (ATMs) as on march 31, 2012. Andhra Bank was founded by the eminent freedom fighter, Dr. Bhogaraju Pattabhi Sitaramayya. The Government of India owns 51.55% of its share capital and is going to increase it to 58% by infusing 1100 crore. The state owned Life Insurance Corporation of India holds 10% of the shares. The bank has done a total business of Rs. 1,90,535 crore as on 31.03.2012. The bank's operations are mostly concentrated in southern India, the region accounts for over 60% of the banks advances and deposits. Bank is migrating to "Centralized Core Banking Solution"118 Branches have already migrated to CBS. It is proposed to cover 550 branches by September 2009. This will benefit the customers, who will have access to banking and financial services anytime, anywhere through multiple delivery channels. Andhra Bank is a pioneer in introducing Credit Cards in the country in 1981. The Bank introduced Internet Banking Facility (AB INFI-net) to all customers of cluster linked branches. Rail Ticket Booking Facility is made available to all debit card holders through IRCTC Website through a separate gateway. Corporate Website is available in English, Hindi and Telugu Languages communicating Bank's image and information. Bank has been given 'BEST BANK AWARD' a banking technology award by IDRBT, Hyderabad for extensive use of IT in Semi Urban and Rural Areas on 02.09.2010. IBA Jointly with TFCI has conferred the Joint Runner-up Award to the Bank in the Bet Payments initiative in recognition of outstanding achievement of the
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Bank in promoting ATM Channel. Bank successfully conducted " Bancon 2010", a two day event at Hyderabad, deliberating on Inclusive Growth - A New Challenge. Kiddy Bank Scheme, with insurance benefits, was re-launched to inculcate savings habit among the children. Bank has mobilized nearly 90000 new accounts during 2011-08. As a part of "Financial Inclusion", Bank adopted two districts, namely, Srikakulam in Andhra Pradesh and Ganjam in Orissa and achieved 100% coverage. Bank has introduced Smart Card Scheme Pilot project in Warangal District and the same will be extended to other Lead Districts in due course. Bank has opened 2.11 lakh accounts under "No-frill accounts" category till 30.06.2008. Andhra Bank, along with A P State Government, NABARD, Canara Bank, Indian Bank, IOB and SBH sponsored the Andhra Pradesh Banker's Institute of Entrepreneurship Development, which will offer training to unemployed youth for improving their skills in Andhra Pradesh. Bank adopted Gundugolanu village, West Godavari District, Andhra Pradesh birth place of Dr. Bhogaraju Pattabhi Sitaramayya for all-round development. A comprehensive budget with an outlay of Rs.5.50 Crore is finalized for improving health, sanitation, education and social service facilities in the village.
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History:
Andhra Bank was founded by Dr. Bhogaraju Pattabhi Sitaramayya in 1923 in Machilipatnam, Andhra Pradesh. The founder Dr. Bhogaraju Pattabhi Sitaramayya was an eminent freedom fighter and a multifaceted genius. The Bank was registered on November 20, 1923 and commenced business on 28 November 1923 with a paid up capital of Rs 1.00 lakh and an authorised capital of Rs 10.00 lakhs. In 1956, linguistic division of States was promulgated and Hyderabad was made the capital of Andhra Pradesh. The registered office of the Bank was subsequently shifted to Andhra Bank Buildings, Sultan Bazaar, Hyderabad, and Andhra Pradesh. In the second phase of nationalization of commercial banks commenced in April 1980, the bank became a wholly owned Government bank. In 1964, the bank merged with Bharat Lakshmi Bank and further consolidated its position in Andhra Pradesh.
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Corporate Identity:
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Mission:
Beside the core activity of banking, Andhra Bank will venture into a spectrum of Financial Services. Utmost concern will be accorded to customer satisfaction by offering innovative and need-based financial products and services using state of the art technology.
Rural Development Trust (ABRDT) helps Rural Self Employment Training Institutes (RSETIs). Deposit Schemes o AB Savings Accounts o AB Current Accounts o AB Term Deposits o AB Arogyadaan Scheme o AB Bancassurance Life o AB Bancassurance (Non Life) Retail Loans Agricultural Loans Corporate Banking NRI Banking o NRI Products and Services o NOSTOR details for remittance o Western Union Money Transfer Technology Products o Multi City Cheque Facility o On-Line Tax Accounting System (OLTAS) o Real Time Gross Settlement (RTGS) o Instant Funds Transfer o ATM Services o Any Branch Banking o Electronic Clearing Service (ECS) o National Electronic Funds Transfer
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Bank has adopted the Gundugolanu village in the district of West Godavari in Andhra Pradesh tor improving health, sanitation, education and social service facilities in the village, with a comprehensive budget of Rs. 5.50 crore. In a move towards encouraging higher studies, Bank is setting up Andhra Bank School of Business in the campus of Andhra University, Visakhapatnam (Andhra Pradesh).
The Bank along with Government of Andhra Pradesh, NABARD and other select banks sponsored the Andhra Pradesh Bankers / Institute of Rural & Entrepreneurship Development (APBIRED), which will offer training to unemployed youth for improving their skills. This is located at Hyderabad. The Bank is also making donations to charitable trusts and other institutions engaged in the upliftment of the society. As per Karmayog.org research work they ranked Andhra Bank as No. 3 organization out of top organizations with regard to corporate social responsibility.
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Theoretical Aspects:
Overview of Credit Appraisal
Credit appraisal means an investigation/assessment done by the banks before providing any Loans & advances/project finance & also checks the commercial, financial & technical viability of the project proposed, its funding pattern & further checks the primary & collateral security cover available for recovery of such funds.
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However the 3 C of credit are crucial & relevant to all borrowers/ lending, which must be kept in mind, at all times. Character Capacity Collateral If any one of these are missing in the equation then the lending officer must question the viability of credit. There is no guarantee to ensure a Loan does not run into problems; however if proper credit evaluation techniques and monitoring are implemented then naturally the Loan loss probability / problems will be minimized, which should be the objective of every lending Officer. Credit is the provision of resources (such as granting a Loan) by one party to another party where that second party does not reimburse the first party immediately, thereby generating a debt, and instead arranges either to repay or return those resources (or material(s) of equal value) at a later date. The first party is called a creditor, also known as a lender, while the second party is called a debtor, also known as a borrower. Credit allows you to buy goods or commodities now, and pay for them later. We use credit to buy things with an agreement to repay the Loans over a period of time. The most common way to avail credit is by the use of credit cards. Other credit plans include personal Loans, home Loans, vehicle Loans, student Loans, small business Loans, trade. A credit is a legal contract where one party receives resource or wealth from another party and promises to repay him on a future date along with interest. In simple Terms, a credit is an agreement of postponed payments of goods bought or Loan. With the issuance of a credit, a debt is formed.
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Term Loan
A Term Loan is granted for a fixed Term of not less than 3 years intended normally for financing fixed assets acquired with a repayment schedule normally not exceeding 8 years. A Term Loan is a Loan granted for the purpose of capital assets, such as purchase of land, construction of, buildings, purchase of machinery, modernization, renovation or
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rationalization of plant, & repayable from out of the future earning of the enterprise, in installments, as per a prearranged schedule. From the above definition, the following differences between a Term Loan & the working capital credit afforded by the Bank are apparent: o The purpose of the Term Loan is for acquisition of capital assets. o The Term Loan is an advance not repayable on demand but only in installments ranging over a period of years. o The repayment of Term Loan is not out of sale proceeds of the goods & commodities per se, whether given as security or not. The repayment should come out of the future cash accruals from the activity of the unit. o The security is not the readily saleable goods & commodities but the fixed assets of the units. It may thus be observed that the scope & operation of the Term Loans are entirely different from those of the conventional working capital advances. The Banks commitment is for a long period & the risk involved is greater. An element of risk is inherent in any type of Loan because of the uncertainty of the repayment. Longer the duration of the credit, greater is the attendant uncertainty of repayment & consequently the risk involved also becomes greater. However, it may be observed that Term Loans are not so lacking in liquidity as they appear to be. These Loans are subject to a definite repayment programme unlike short Term Loans for working capital (especially the cash credits) which are being renewed year after year. Term Loans would be repaid in a regular way from the anticipated income of the industry/ trade. These distinctive characteristics of Term Loans distinguish them from the short Term credit granted by the banks & it becomes necessary therefore, to adopt a different approach in examining the applications of borrowers for such credit & for appraising such proposals. The repayment of a Term Loan depends on the future income of the borrowing unit. Hence, the primary task of the bank before granting Term Loans is to assure itself that
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the anticipated income from the unit would provide the necessary amount for the repayment of the Loan. This will involve a detailed scrutiny of the scheme, its capital assets. Financial aspects, economic aspects, technical aspects, a projection of future trends of outputs & sales & estimates of cost, returns, flow of funds & profits.
Definition
A Letter of Credit (LC) is an arrangement whereby a bank (the issuing bank) acting at the request & on the instructions of the customer (the applicant) or on its own behalf, o Is to make a payment to or to the order of a third party (the beneficiary), or is to accept & pay bills of exchange (drafts drawn by the beneficiary); or o Authorizes another bank to effect such payment, or to accept & pay such bills of exchanges (drafts); or o Authorizes another bank to negotiate the Terms & conditions of the credit are complied with against stipulated document(s), provided.
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Bank Guarantees:
A contract of guarantee is defined as a contract to perform the promise or discharge the liability of the third person in case of the default. The parties to the contract of guarantees are: a) Applicant: The principal debtor person at whose request the guarantee is executed b) Beneficiary: Person to whom the guarantee is given & who can enforce it in case of default. c) Guarantee: The person who undertakes to discharge the obligations of the applicant in case of his default. Thus, guarantee is a collateral contract, consequential to a main co applicant & the beneficiary.
f) Bid bonds on behalf of exporters g) Export performance guarantees on behalf of exporters favoring the Customs Department under EPCG scheme.
Bill discounting:
Definition: As per Negotiable Instrument Act, The bill of exchange is an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of, a certain person, or to the bearer of that instrument. Discounting of bill of exchange: A seller (Drawer) if need cash, may handover the B/E to the Bank, NBFC, a company or a high Net worth Individual and obtain ready cash this is known as discounting of bill. the practice in India is that, the financing organization holds the original B/E till the drawee pays on maturity. For discounting the bill, financiers charge an interest on the bill amount for the duration of the bill which is called discount charges.normal maturity periods are 30, 60, 90, 120 days. Types of Bills 1. Demand Bill 2. Usance Bill 3. Documentary Bills a. Documents against acceptance (D/A) bills b. Documents against payment (D/P) bills 4. Clean Bills
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Advantages
To Investors 1. Short Term source of finance 2. Outside the purview of Section 370 of Indian Companies Act 1956 3. No tax deducted at source 4. Flexibility To Banks 1. Safety of funds 2. Certainty of payment 3. Profitability
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Receipt of documents (Balance sheet, KYC papers, Different govt. registration no., MOA, AOA, and properties documents
Check for RBI defaulters list, willful defaulters list, CIBIL data, ECGC, Caution list etc
Proposal preparation
Assessment of proposal
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Disbursement of Loan
Post sanction activities such as receiving stock statements, review of accounts, renew of accounts, etc (On regular basis)
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CREDIT PROCESS
Pre-Sanction Process Indicative list of Activities in the Appraisal Function A. Preliminary appraisal Obtain i. ii. iii. iv. v. Application for working capital Finance Audited financial for the previous three years Details of existing borrowing arrangements Reports from existing Banker on the application copy Financial statements, borrowings relationship of Associate firm/group companies vi. Profile of promoters /senior management personnel If request includes project financing, obtain additional: i. ii. Project report Appraisal report form Financial institutions in case Appraisal has been done by them iii. iv. NOC form term lenders if already financed by them Report form Merchant bankers in case capital market is being accessed Examine the following: i. ii. iii. iv. v. vi. vii. Banks lending policy/RBI guidelines, policies Prudential Exposure norms Industry Exposure restrictions Group Exposure restrictions Industry related risk factor List of defaulters Caution lists Compliances regarding transfer of borrowal accounts from one bank to another, it applicable viii. Gov. regulation/legislation impacting on the industry
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Acceptability of the promoters Applications status vis--vis other units in the industry Financial status in broad term and whether it is acceptable Examine also the following in case of request of project finance : Weather the project cost is prima facie acceptable Debt/equity gearing proposed and whether acceptable Promoters ability to access capital market for debt/equity support Whether critical aspect of project demand, product cost profitability etc. are prima facie in order
xvii.
B. Detailed appraisal Carry out a detailed appraisal alter a pre-sanction visit to applicant Company/their office/project site. Working capital facilities Examine/Analyze/Assess; i. ii. iii. iv. v. vi. vii. viii. Financials (in the prescribed form) Financial ratio and other ratios relevant to the project- Dividend policy Other aspects viz. Depreciation method and Revaluation method Record of defaults (tax duties etc.) Pending suits having financial implications (custom excise etc.) Qualification of balance sheets, Auditor remarks etc. Trends in sale and probability Past deviation in sale and profit projections Product capacity & use-past and projected Estimate/ projections of sales values Estimated working capital gap with reference to acceptable build up of inventory/receivable/other current asset. ix. Project levels whether acceptable
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By sourcing information where necessary from: Stock Exchange Directory financial journals/ publications, professional entities like INFAC, CMIE etc. with emphasis on following aspects: Market share of the units under comparison Unique features Profitability factors Financial pattern of the business Inventory receivable levels Capacity utilizations Production efficiency and costs Bank borrowing patterns Financial ratio & other relevant ratio
Opinion reports Compile opinion report on partners/promoters and the proposed guarantors Review of the proposal Strength and weakness of the exposure proposed Risk factor and steps proposed to mitigate them Deviations proposed from usual norms of the bank and the reasons
Proposal of sanction: Prepare a draft proposal in prescribed format with required back-up details and with recommendations for sanction
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Sanction Indicative list of Activities Involve in the sanction Function Peruse the proposal to see if the report prima facie presents the proposal; remit it back to the Assessor for the required data/clarifications. Examine critically the following aspect of the proposed exposure 1. Banks lending policy 2. Borrowers status in the industry 3. Industry aspect 4. Experience with units in similar industry 5. Overall strength of the borrower 6. Project level of operation 7. Risk Factors critical to the exposure and adequacy of safeguards there against proposed. 8. Value of existing connection with the borrower 9. Credit risk rating 10. Security pricing charges and concessions proposed for the exposure and covenants stipulated vis--vis the risk perception
POST SANCTION PROCESS 1. Follow up The follow-up functions will cover the following: (a) Ensuring on an ongoing basis compliance with terms and conditions of sanction through the system of control measures/feedback viz. Inspection visits, prescribed financial/ operation statements from the borrower interaction with borrower etc.
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(b) Tracking performance of the borrower, ensuring safety and recoverability of the advances (c) Ensuring compliance with all the internal and external reporting requirements covering the advances. Indicative list of the activities involved in the Follow-up function is as follows: Conveying sanction of advances to the borrower detailing the terms and conditions and obtaining acceptance thereof Preparation-submission of control returns for sanction CMA reporting of sanction where applicable Completion of applicable documentation; maintaining custody and validity of the documents. Creation of charge over security and completion of all relevant and applicable formalities, including: 1. Creation of Registered or Equitable mortgage 2. Creation of second charge 3. Registration of charge with ROC 4. Periodical search of charge with ROC Ongoing scrutiny of transaction in the various accounts by perusal of leaders, registers, vouchers etc. to watch for proper conduct of the accounts, healthy turnover therein and proper- end use of funds. Ongoing verification of assets charged as security, to ensure availability and safety of the assets. Maintaining ongoing contact with the borrower and co-leaders and keeping abreast of developments in the borrower entities and business environment. Preparation of reviews of IRAC, identification of deterioration assets and initiations of corrective action where warranted. Account wise follow up of NPAs for recovery /rehabilitation, preparation of related recommendations to appropriate authority for approval.
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Supervision i. Supervision function should primarily ensure that the effective fallow of advances is in the place of the asset quality of good order is maintained. Supervisor should look out for early warning signals, identity incipient sickness and initiate proactive remedial actions. ii. Indicative list of activities involved in supervision function is as follows Ensuring proper flow-up of advances and observations at the operating level of the system laid down by the bank. Periodic and random examination of statements received, control register and files/record covering the advance will assist this process. Ensuring the security documents are kept current and that all related documentation formalities are observed by the officials responsible. Ensure that the function at the follow-up level are performed diligently and as per extant instructions of the bank.
Monitoring and Controlling i. Monitoring and controlling function ensures that effective supervision is maintained on advance and appropriate responses are initiated whenever early warning signals are seen. The function also tracks customer satisfaction and provides responses where necessary. ii. Indicative list of activity involved in monitoring control function are as follows: Ensure that the effective supervision id maintained on advance by the lower level functionaries responsible for follow-up and supervision scrutiny of returns / reports received from these line functionaries, interaction with them, feedback from the customer, commentary in inspection/audit reports etc. will assess this process. Monitoring high value advances through specific focus on these in the return/report received on advance and by keeping watch on the developments in the borrower company/industry
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Ensuring non-recurrence at the operating level of the company noticed lapses/irregularities pointed out in various audit reports. Ongoing monitoring of asset portfolio by tracking changes from time to time; chalk out and arrange for carrying out specific action to ensure high standard asset content.
Extending guidelines to down the line functionaries on the follow-up and supervision of the exposures at risk.
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c) Operational risks:
i) Supply of information to banks ii) Record of irregularity iii) Limit management iv) Compliance of sanction stipulations
ii) Profitability
(1) Operational profit (2) Return of capital employed (3) Net profit
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Interpretation:
Above tables shows how Banks assess the risk, profitability and efficiency. In order to award loan to the business entity banks has to look in to the risk, return and efficiency by using the past and present information available about the company. Banks consider the following factors to assess the risk. Industry Risk Here the banks will look in to the all risk factors that related to an industry. Include the production stage risk and post production risk. Production stage risk assessed by considering the factors like raw materials, technology, Infrastructure etc and post production risk involves demand, competition and marketing challenges. Management Risk Promotes experience, management proficiency, employed executives are the factors which comes here. Operational risk Here banks look in to the past records of the customers transactions. Supply of information to the bank, record of the irregularities and compliance of sanctions and stipulations are considered here. Collateral security The collateral cover offered by the customer review comes here. Financial risk Liquidity, profitability and interest coverage ratios are assessed here to determine short term and long term solvency of the company.
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QUANTITATIVE:
1. Working capital: the basic quantitative parameters underpinning the Banks credit appraisal are as follows: i. Liquidity: current ratio (CR) of 1.33 will generally be considered as a benchmark level of liquidity. However, the approach has to be flexible. Cr of 1.33 is only indicative and may not be deemed mandatory. In cases where the Cr is projected at a level lower than the benchmark or a slippage in the CR is proposed, it alone will not be a reason for rejection of the loan proposal or for sanction of loan. In such cases, the reasons for low CR should be carefully examined and in deserving cases the CR as projected may be accepted. In cases where projected CR is found acceptable, working capital finance as requested may be sanctioned. ii. Net working capital: although this is a corollary of current ratio, the movements in Net working capital are watched to ascertain whether there is a mismatch of long term sources via-a-vis long term uses for purposes which may not be readily acceptable to the Bank so that corrective measures can be suggested.
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iii.
Financial Soundness: this will be dependent upon the owners stake or the leverage. Here again the benchmark will be different for manufacturing, trading, hire purchase and leasing concerns. For industrial ventures Total Outside Liability/Tangible Net Worth ratio of 6.0 is reasonable but deviations in selective cases for understandable reasons may be accepted by the sanctioning authority. Turn over: the trend in turn-over is carefully gone into both in terms of quantity and value as also market share wherever such data are available. What is more important is to establish a steady output if not a rising trend in quantitative terms because sales realization may be varying on account of price fluctuations.
iv.
v.
Profits: while net Profit is the ultimate yardstick, cash accruals, i.e. profit before depreciation and taxation conveys the more comparable picture in view of changes in rate of depreciation and taxation which may have taken place in the intervening years. However, for the sake of proper assessment, the nonoperating incomes are excluded, as these are usually one time or extraordinary income. Companies incurring net losses consistently over 2 or more years will be given special attention, their accounts closely monitored, and if necessary, exit options explored.
vi.
Credit Rating: wherever a Credit Rating Agency for any instrument has rated the company, this will be taken into account while arriving at a final decision. However, as the credit rating involves additional expenditure, bank would not normally insist on this tool if such an agency had already looked into the company finances. Capital Market: where the companys shares are listed in stock exchanges, the movement of the price of its share, the market value of shares like those of competitors in the same industry, response to public/right issues are also kept in view as these are reflective of the corporate image in the eyes of the investors community.
vii.
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* Applicable for export units $Applicable for units having imports and or exports
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Definition of Parameters used w.r.t financial performance: F1 - Net Sales Growth Rate
Importance of this indicator This ratio refers to the compounded annual growth rate of net sales over a period of three years. The companys growth ratio vis--vis other companies in the industry will be a good tool to assess its performance. If the growth rate is low compared to others in the industry, then it will enable us to analyse the problems unique to this company. Formula The compounded annual growth rate over the past 3 years is calculated in percentage Terms. CAGR (Compounded annual growth rate) for three years = [{(Value of sales in current year) / (Value of sales in year 3)}(1/3) 1}]*100 Notes Net sales = Gross sales Indirect taxes For banks, NBFCs, and other financial institutions: Net sales = net interest income + other income
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F3 - PBDIT/Sales
Importance of this ratio This ratio indicates the profit before depreciation, interest and tax as a percentage of net sales. The profit before interest, depreciation and tax is an indicator of the operational efficiency. If this ratio as a percentage of sales is high, then it is a positive indication of the operating efficiency in Terms of raw material consumption, employee productivity and power consumption among other things. A high value indicates greater profitability and hence betters capability to repay the debt. The ratio is a measure of the margin available to a company from its operations. Formula This ratio (in %) is computed by dividing the PBDIT with Net Sales. (PBDIT/Net Sales) x 100 PBDIT = Operating profit before depreciation, interest and tax For banks, NBFCs, and other financial institutions: Net sales = net interest income + other income Use PBT instead of PBDIT
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F6 - TOL/TNW
Importance of this ratio This ratio gives a holistic representation of total outside liabilities in relation to tangible net worth of company. It reflects the capacity of the business unit to assure the creditors of the security they have for payment of both interest and instalment. It indicates the extent to which the creditors are covered by asset. This ratio shows how much outside borrowings are resorted to in comparison with owners funds Formula The total outside liabilities are divided with the tangible net worth of the company. Total Outside Liabilities / Tangible Net Worth TOL = Total liabilities - TNW TNW as defined in Debt Equity ratio Also calculate this ratio for banks, NBFCs and other financial institutions, as it will give an indication of the capital adequacy of the company
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F7 - Current Ratio
Importance of this ratio Current assets of company are the assets that can be easily liquidated and converted into cash. The current ratio measures short-Term liquidity of the company and ability to meet its short-Term financial obligations. A high ratio is good from the point of view of the bank but a very high ratio may affect profitability through a high inventory carrying cost. Formula The ratio is worked out by dividing the Current Assets with Current Liabilities Current Assets__________________ Current liabilities (including installments due during the year) To get a meaningful current ratio, we should account for the vulnerability of a company to short Term insolvency. The current ratio could be high because of excess inventory or slow realisation of debtors. Therefore, current assets must not include inventory which is older than the normal working cycle of company (say 6-8 month), receivables over 6 months, dies, spares required for more than 9 months of production and disputed receivables. If such excess assets exist then please make necessary notes in the remarks column. In such cases please indicate your assessment of the value of current ratio. Also calculate this ratio for banks, NBFCs and other financial institutions, as it will give an indication of the duration mismatch of the companys balance sheet
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Calculation Operating cash flow ( for the last financial year) is computed in the following manner Head Net Sales Other income Total receipts Less: COGS Gross Profit Less: SGA/Operating expenses PBDIT - Increase / + decrease in non cash current assets + Increase / - decrease in current liabilities Operating cash Less: Income tax paid Post tax operating cash Less: Interest paid on LT & ST Less: Dividend paid Cash from operations Amount
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How to rate Compare cash flow from operations to repayment due of long Term debt. The rating is done as explained in the table below.
Description The company is likely to default on repayment of its Loans and Interest The company is not in a position to meet its repayment obligations from its own resources and it faces difficulties to arrange outside funds The company is in a position to meet its repayment obligation from its own resources and Term funds that are already applied for (and expected to be sanctioned shortly) The company is in a position to meet its repayment obligation from its own resources and Term funds The company is in a comfortable position to meet its repayment obligation from its own resources (no need for outside funds)
Score O
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Formula The profit before depreciation and interest (PBDI) is divided by installments due during the year plus interest. P B D I__________ Installments for the year + interest
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Important notes The foreign exchange risk can be quantified by using the forward exchange rates prevailing in the currency market. The risk involved can be estimated by evaluating two measures: 1. exports as % of TNW 2. Natural hedge involved, with a proxy measure being (1- imports divided by exports) (always divide the smaller number by the larger one). When this ratio is 1, foreign exchange risk from exports and imports cancels each other out (provided it is to/from similar currency zones) Example: total sales = 100, exports = 20, imports = 10, TNW = 200 Risk involved = exports x (1- imports/exports) = 20 x (1- 10/20) = 10 = 5% of TNW
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F13 - Expected values of Debt Equity ratio if 50% NFB credit devolves
Importance of this indicator This indicator gives us an idea about the future expected debt equity structure in an extreme situation. It recalculates the Debt/Equity ratio when 50% of non-fund based limits devolve. In doing so, it gives a sense of the long-Term financial stability in an extreme situation. This is quite a good comforting factor for the bank. Most companies have to put up a margin for their non-fund based credits. The new D/E ratio will have to be corrected for this when the limits devolve, since part of it will be covered by the margin
Calculation The calculation is the same as for F5 Debt/Equity ratio, with Debt = Long Term debt + 50% of the companys non-fund based limits margin that the company put up for its non-fund based limits.
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Analysis:
The analysis of the amount of money financed towards MSMEs and overall Advances including all other kinds of loans is as follows: For the end of Fiscal Years 2010, 2011, 2012 as on 31st march.
st st
31 Mar-2010 No: A/C Amount 450 3827 112 4562 3 1705 N.A 125638
31 Mar-2011 No: A/C Amount 559 5786 116 4830 3 2937 N.A 151073
In Lakhs 31 Mar-2012 No: A/C Amount 259 6191 100 9673 3 2986 N.A 125638
st
Source: Secondary data Inference: From the above table, Comparison between Micro, Small, Medium in successive 3 years:
6000
4000 2000 0 Micro Small Medium 2012 2011 2010
2012
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160000 140000 120000 100000 2010 80000 60000 40000 20000 0 MSME's Tot Advances
2011
2012
Inference: From the above 2 tables There is a consistent increase in the total value of amount financed to the MSMEs in the past 3 years. The total value of fund financed towards MSMEs is not upto the bank norms i.e., not up to 20% of the total advances. Though there are less number of borrowers regarding Medium enterprises, the financed amount towards them is very high compared to Micro and Small enterprises borrowers.
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Customers perspective:
1) To classify the respondents on percentage bases, as per the number of Years established in business. Number of years Less than 3 3-5 6-10 More than 10 Total Source: Primary data Tool used: Percentage Formula: Xi * 100 / N Number of Respondents 4 22 12 12 50 Percentage 8 44 24 24 100
% of Respondents
50 45 40 35 30 25 20 15 10 5 0 Less than 3 3 to 5 6 to 10 More than 10 % of Respondents
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Inference: From the above table, 8% of the respondents were established in the business for less than 3 years 44% of the respondents were established in the business for 3-5 years 24% of the respondents were established in the business for 6-10 years 24% of the respondents were established in the business for more than 21 years It can be inferred from the above data that the majority of the respondents have businesses established for a period of 3-6 years, followed by an equal number of respondents having businesses of more than 10 years and 6-10 years, and finally a meager portion being less than 3 years.
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No: of Respondents
Inference: From the above table, 68% of the total sample consisted of Private Limited Companies 32% of the total sample consisted of Sole Proprietorship Firms It can be inferred from the above table that a majority of the sample consisted of Private limited Firms and all the remaining are Sole Proprietorship Firms.
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3)
To do a sector wise classification of the businesses of the total sample. Sectors Manufacturing Service Trading Total Number of Respondents 39 6 5 50 Percentage 78 12 10 100
No: of Respondents
Manufacturing
Service Trading
Inference: From the above table, 78% of the total sample consisted of Manufacturing firms 12% of the total sample consisted of Trading firms 10% of the total sample consisted of Service firms It can be inferred from the above data that the sample comprises of respondents i.e., businesses from a variety of sectors, with majority being Manufacturing firms and service businesses form the smallest portion of the sample.
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4)
To classify the respondents based on the turnover per annum, in INR. Turnover per annum Less than 50 Lakhs 50Lakhs-1 crore 1-5 crores More than 5 crores Total Number of Respondents 10 20 12 8 50 Percentage 20 40 24 16 100
Number of Respondents
Inference: From the above table, 20% of the total sample consisted of companies having turnover less than 50 Lacs 40% of the total sample consisted of companies having a turnover 50L-1CR 24% of the total sample consisted of companies having a turnover 1CR 5CR 16% of the total sample consisted of companies having a turnover more than 5CR.
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5) To classify the respondents based on the purpose for which loan was taken.
Type of loan Term loan Working capital loan Source: Primary data Tool used: Percentage Formula: Xi * 100 / N Number of respondents 42 8 Percentage 84 16
No: of Respondents
45 40 35 30 25 20 15 10 5 0 Term Loan Working Capital No: of Respondents
Inference: It can be inferred from the obtained data that the sample comprises of respondents i.e., majority of Borrowers had taken the loan for Flooring of inventory and working capital, and for modernization and upgradation of technology form the smallest portion of the sample.
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6) To find out the criteria which are considered important by the respondents in
selecting their bank Rank Aspect Better service Single window dispensation Easy access Attractive financing conditions Low rates of interest Source: Primary data Formula: n WiXi i=1 Very Imp 9 21 6 14 Not Imp 2 10 Not at all Imp 3 14 Weighted mean average 3.54 3.58 2.52 3.92
Imp
Avg
17 14 2 18
19 15 18 18
22
16
12
4.20
Attractive financing conditions Not at all Imp Not Imp Easy access Avg Imp Very Imp Single window dispensation
Better service
10
15
20
25
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Inference: From the above data, the following can be inferred, Better service: This criterion is rated as 3.54 in a 5-point scale, which shows that the respondents consider this to be Important in selecting a bank.
Single window dispensation: This criterion is rated as 3.58 in a 5-point scale, which shows
shows that the respondents consider this to be Very Important in selecting a bank.
Low rates of interest: This criterion is rated as 4.20 in a 5-point scale, which shows that
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7) To classify the respondents based on the problems faced in raising finance from
public sector banks. Problem Insufficient collateral Poor Documentation Delay Cost Involved High Interest Total Source: Primary data Tool used: Percentage Formula: Xi * 100 / N Number of Respondents 14 2 27 1 6 50 Percentage 28 4 54 2 12 100
Number of Respondents
30 25
Number of Respondents
20 15 10 5
0
Insufficient collateral Poor Documentation Delay Cost Involved High Interest
Inference: From the above table, 54% of the total respondents feel that delay in sanction is the problem faced in raising finance from public sector banks. 28% of the total respondents feel that insufficient collateral is the problem faced in raising finance from public sector banks. 12% of the total respondents feel that high interest rate is the problem faced in raising finance from public sector banks. 4% and 2% of the total respondents feel that poor documentation and cost involved are the problems faced in raising finance from public sector banks respectively.
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Number of Respondents
25 20 15 10 5 0 Management Inexperience Application didnt meet criteria Not enough Guarantees provided Not a profitable venture Number of Respondents
Inference: From the above table, 46% of the total respondents feel that the reason for rejecting an application for loan is as it was not a Profitable Venture. 46% of the total respondents feel that the reason for rejecting an application for loan is as enough guarantees are not provided. 14% of the total respondents feel that the reason for rejecting an application for loan is as the management was very inexperience. 8% of the total respondents feel that the reason for rejecting an application for loan is as the application didnt meet the criteria.
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Demotivating Factors
30 25 20 15 Number of Respondents 10 5 0 Turned down before Complicated procedure Lengthy process Too much documentation
Inference: From the above table, 52% of the total respondents feel that the de-motivating factor in raising finance from the public sector bank as it is a lengthy process. 32% of the total respondents feel that the de-motivating factor in raising finance from the public sector bank as too much documentation is required. 16% of the total respondents feel that the de-motivating factor in raising finance from the public sector bank as it is a complicated procedure.
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10) To classify the respondents based on the better schemes provided by private
sector banks Vs public sector banks. Bank Type Public Private Total Source: Primary data Tool used: Percentage Formula: Xi * 100 / N Number of Respondents 50 50 Percentage 100 100
Bank Type
50 40
30
20 10 0 Public Private Bank Type
Inference: From the above table, It can be clearly seen that all the respondents are interested in raising finance from Public Sector banks only when compared to private sector banks.
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11)
To find out the criteria of level of satisfaction which are considered important
by the respondents for the loan sanctioned. Rank Aspect The amount granted relative to the amount requested The simplicity of the application form Interest rate Service fees Time to obtain approval Guarantees required by the institution Response of the bank staff Very High 10 Hig h 11 Les s 3 Very less 1 Weighted mean average 3.52
Avg
25
26
12
10
4.24
12 12 7 5
14 23 12 23
18 15 17 20
5 3 2
1 11 -
28
22
4.56
Source: Primary data Tool used: Weighted Average Formula: n WiXi i=1 ------------------------n Wi i=1
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Less
Avg High Very High
Interest rate
10
20
30
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Inference: From the above data, the following can be inferred, The amount granted relative to the amount requested: This criterion is rated as 3.52 in a 5-point scale, which shows that the respondents consider that in this factor their level of satisfaction is above average. The simplicity of the application form: This criterion is rated as 4.24 in a 5-point scale, which shows that the respondents consider that in this factor their level of satisfaction is very good. Interest rates: This criterion is rated as 3.62 in a 5-point scale, which shows that the respondents consider that in this factor their level of satisfaction is above average. Service fees: This criterion is rated as 3.94 in a 5-point scale, which shows that the respondents consider that in this factor their level of satisfaction is good. Time to obtain approval: This criterion is rated as 3.02 in a 5-point scale, which shows that the respondents consider that in this factor their level of satisfaction is just average. Guarantees required by the institution: This criterion is rated as 3.62 in a 5-point scale, which shows that the respondents consider that in this factor their level of satisfaction is above average. Response of the Bank Staff: This criterion is rated as 4.56 in a 5-point scale, which shows that the respondents consider that in this factor their level of satisfaction is very good.
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12)
To find out the criteria of obstacles which are faced by the enterprises
(respondents) in its growth. Rank Aspect Technological barriers Instability of demand for product or service Obtaining adequate finance Low profitability of the sector Taxation policies of the Govt. Lack of experience & managerial skills Very High 26 23 Hig h 12 15 Les s 2 2 Very less 2 Weighted mean average 4.24 4.10
Avg
10 8
3 4 7 -
6 12 8
7 17 17 16
13 9 3 2
27 4 11 24
Source: Primary data Tool used: Weighted Average Formula: n WiXi i=1 ------------------------n Wi i=1
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Technological barriers
10
15
20
25
30
Inference: From the above data, the following can be inferred, Technological Barriers: This criterion is rated as 4.24 in a 5-point scale, which shows that the respondents consider that this factor as a major obstacle in their growth. Instability of Demand: This criterion is rated as 4.10 in a 5-point scale, which shows that the respondents consider that this factor as a major obstacle in their growth. Obtaining Adequate Finance: This criterion is rated as 1.78 in a 5-point scale, which shows that the respondents consider that this factor as a minor obstacle in their growth. Low profitability of Sector: This criterion is rated as 2.34 in a 5-point scale, which shows that the respondents consider that this factor as a normal obstacle in their growth. Taxation policies of Govt.: This criterion is rated as 3.02 in a 5-point scale, which shows that the respondents consider that this factor as a normal obstacle in their growth. Lack of experience and & Managerial Skills: This criterion is rated as 2.16 in a 5-point scale, which shows that the respondents consider that this factor as a minor obstacle in their growth.
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13) To classify the respondents based on preferring Andhra Bank when there is a
need for refinance. Number of Respondents 41 9 50
Preferred Yes No Total Source: Primary data Tool used: Percentage Formula: Xi * 100 / N
Percentage 82 18 100
Number of Respondents
Yes No
Inference: From the above table, 82% of the total respondents feel that they would like to prefer Andhra Bank when there is a need for Re-Finance. 18% of the total respondents feel that they would not like to prefer Andhra Bank when there is a need for Re-Finance.
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FINDINGS: The total value of the fund financed towards MSMEs is not upto the bank
norms i.e., not up to 20% of the Total Advances.
Though there are less number of borrowers regarding Medium enterprises, the
financed amount towards them is high compared to Micro and Small enterprises borrowers.
Respondents feel to prefer to deal only with Public Sector Banks, the reason is
they will be located in every nook and corner of the city.
Low rate of Interest is the criteria, which the borrowers most consider as
important by the respondents in selecting their bank.
Most of the respondents feel that the problem faced in raising finance from
public sector banks is Delay in Sanction and its Lengthy process.
The Respondents feel that the most common reason for rejecting an application
for loan is- It is not a profitable venture When we consider the level of satisfaction of respondents, they are unhappy with the amount granted to them compared with the requested amount and Time also. The respondents feel that the obstacles for their growth are most likely Electricity problems, Technological barriers and Instability of Demand.
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SUGGESTIONS:
The Credit department of Andhra Bank is at its full potential and the staff is highly experienced and has a very strong intuitive sense. So, there is no special recommendation on the entire process. However, the procedure starting from getting loan application to disbursement takes around 2-3 months and by the time disbursement is made, the market scenario changes. So, the process of loan sanctioning should be more speedy. In order to make the process more flexible and efficient, an electronic database should be designed carrying all the available and important information related to the proposals accepted, and it should be easily accessible to the credit department. This will help reduce paper work and loss of information.
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CONCLUSION
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CONCLUSION:
The study at Andhra Bank gave a vast learning experience and helped to enhance my knowledge. And the study helped to know how the theoretical financial aspects are used in practice during the loan assessment. And I have realized during my project work that a credit analyst must own multi-disciplinary talents like financial, technical as well as legal know-how. The credit appraisal for business loans has been devised in a systematic way. It is a process of appraising the credit worthiness of loan applications. Thus it extremely important for the lender bank to assess the risk associated with credit; there by ensure the security for the funds deposited by the depositors. There are clear guidelines on how the credit analyst or lending officer has to analyze a loan proposal. It includes phasewise analysis which consists of 6 phases. 1. 2. 3. 4. 5. 6. Financial statement analysis. Working capital and its assessment techniques. Techno economic feasibility analysis. Credit risk assessment. Documentation. Loan administration.
To ensure the asset quality, proper risk assessment right at the beginning is extremely important. That is why; credit risk management system is an essential one in the credit appraisal exercise. Andhra Bank has formulated a credit risk rating model, it consist important parameters like profitability, repayment capacity, efficiency of the unit, historical & industry comparisons, e.t.c., depending on the borrowers category. Micro, Small & Medium Enterprises play a vital role for the growth of Indian economy. MSMEs are finding increasing opportunities to enhance their business activities in core sectors. Though MSMEs spread all over the urban areas, proper infrastructure needs to be developed in the rural areas to establish these industries here. There is a need of high level research and development required to develop these sectors in both the urban and rural areas. The MSMEs sector is almost at its growth stage, with further advancements in technology, this sector is likely to grow further and contribute greatly to the economy of India. Therefore, it is vital to provide proper funds to these emerging industries and strengthen the economy.
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BIBLIOGRAPHY
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BIBLIOGRAPHY
Management by Vasant Desai - 6th edition. The Indian Financial system and Development by Vasant
Desai 2nd edition. Financial Management by I.M.Pandey 10th edition. Yearly manuals of Andhra Bank Guidelines books of Andhra Bank on Lending Norms
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ANNEXURES
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QUESTIONNAIRE ON MSM-ENTERPRENEURS PERSPECTIVE TOWARDS LOAN SANCTIONED Name Designation Name of the company Location Questions: _______________________ _______________________ _______________________ _______________________
1. How many years completed after the establishment of unit? Less than 3 years 3 - 5 years 6 -10 years More than 10 years 2. Nature of the Ownership? Private Limited Company Public Limited Company Partnership Firm Sole Proprietorship 3. To which sector your business is related to? Manufacturing sector Service sector Trading sector 4. Are there any branches to your business? Yes - _____ No
5. What is the total annual turnover of your business? Less than 50 lakhs 50 lakhs to 1 crore 1 crore to 5 crores More than 5 crores
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6. What are the sources of finance used by your enterprise? Owners financing Private financial institutions Equity finance Bank financing 7. Have you ever raised finance from public sector banks? Yes No 8. What type of loan is taken by you? Open term loan Working capital loan (OCC-Open Cash Credit) 9. What is the total duration for repaying the loan sanctioned? Less than 2 years 5 10 years
10. What is the actual mode of repayment period given by the bank? Monthly Quarterly Half-Yearly Yearly 11. How do you repay? Strictly follow the period Slightly extend the period Frequently delay in repayment Any others 12. For what purpose, your enterprise has taken loan? Real estate acquisition to house the business Increase the production Construction, renovation or leasehold improvements For flooring of inventory and working capital For modernization and upgradation of technology
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13. Rank the benefits of these schemes on the scale of 1-5; 1 being the most important: Rank 1 Aspect Better service Single window dispensation Easy access Attractive financing conditions Low rates of interest 2 3 4 5
14. What were the problems faced by your enterprise in raising finance from public sector banks? Insufficient collateral Poor documentation Delay in the sanction of loan Cost involved is high High rate of interest 15. Which of the following you feel is the most common reason for rejecting an application for Loan? The management team is too inexperienced The application did not meet the criteria The application was not correctly completed The enterprise could not provide enough guarantees Not a profitable venture 16. What factors demotivate you in applying for finance from the MSME financing schemes of the public sector banks? We were turned down before Procedure to obtain this type of financing is too complicated The process is lengthy Too much of documentation is required 17. Are these public sector bank schemes are better than private sector bank schemes? Yes No
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18. Please indicate your level of satisfaction with various aspects of obtaining finance from these public sector banks. Kindly rate them on 5-point scale basis; 1 being strongly satisfied and 5 being strongly dissatisfied: Rank 1 Aspect The amount granted relative to the amount requested The simplicity of the application form Interest rate Service fees Time to obtain approval Guarantees required by the institution Response of the bank staff 19. Apart from the existing schemes, what initiatives government can take for improving MSME business in India? _______________________________________________________________________________ _______________________________________________________________________________ 20. Rank the obstacles that are faced by your enterprise in its growth from 1 to 5; 1 being the biggest 2 3 4 5
RANK ASPECT Technological barriers Instability of demand for product or service Obtaining adequate financing Low profitability of the sector Taxation policies of the Govt. Lack of experience & managerial skills
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No
No
THANK YOU
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