Vijaya Bank Credit Appraisal Executive Summary

VIJAYA BANK EXECUTIVE SUMMARY
My Project is about the Credit Appraisal System in Banking Sector. The banking sector is one of the most rapidly growing areas in the financial sector. As an economy grows over the years, banking sector intensifies and broadens its reach. The banking sector is scalping new heights it is expanding enormously. A bank with an efficient credit appraisal and loan recovery system will grow stronger over the years. Such banks have good management control and also inherent strengths in terms of a highly motivated staff, good checks and balances, which are further enhanced by a regulatory and supervisory system.
As the growth in advances is largely determined by the economic and business environment, such banks will be able to push their credit portfolio aggressively, especially when the economy is booming. Also, as such banks have a diversified credit portfolio; it would act as a cushion during economic downturns.
Although creditors usually consider a number of factors in deciding whether to grand credit, most creditors rely heavily on credit history. Building a good credit history is important. If you have no reported credit history, it may take time to establish your first credit account. This problem affects young people just beginning career as well as older people who have never used credit.
Credit Appraisal has become a very sensitive issue nowadays, so it is very important to study the credit appraisal system in banking sector. This study will help in improving the credit appraisal system in banks & to reduce various risk parameters, which are broadly categorized into financial risk, business risk, industrial risk & management risk associated in providing any loans or advances or project finance. This report will help in improving knowledge about credit appraisal system & to have practical exposure of the credit appraisal scenario in banking sector.
Dayananda Sagar business school
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INTRODUCTION
The Reserve Bank of India (RBI), as the central bank of the country, closely monitors developments in the whole financial sector.
The banking sector is dominated by Scheduled Commercial Banks (SBCs). As at end March 2002, there were 296 Commercial banks operating in India. This included 27 Public Sector Banks (PSBs), 31 Private, 42 Foreign and 196 Regional Rural Banks. Also, there were 67 scheduled co-operative banks consisting of 51 scheduled urban cooperative banks and 16 scheduled state co-operative banks.
Scheduled commercial banks touched, on the deposit front, a growth of 14% as against 18% registered in the previous year. And on advances, the growth was 14.5% against 17.3% of the earlier year.
State Bank of India is still the largest bank in India with the market share of 20% ICICI and its two subsidiaries merged with ICICI Bank, leading creating the second largest bank in India with a balance sheet size of Rs. 1040bn.
Higher provisioning norms, tighter asset classification norms, dispensing with the concept of past due for recognition of NPAs, lowering of ceiling on exposure to a single borrower and group exposure etc., are among the measures in order to improve the banking sector. A minimum stipulated Capital Adequacy Ratio (CAR) was introduced to strengthen the ability of banks to absorb losses and the ratio has subsequently been raised from 8% to 9%. It is proposed to hike the CAR to 12% by 2004 based on the Basle Committee recommendations.
Retail Banking is the new mantra in the banking sector. The home Loans alone account for nearly two-third of the total retail portfolio of the bank. According to one estimate, the retail segment is expected to grow at 30-40% in the coming years.
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Net banking, phone banking, mobile banking, ATMs and bill payments are the new buzz words that banks are using to lure customers. With a view to provide an institutional mechanism for sharing of information on borrowers / potential borrowers by banks and Financial Institutions, the Credit Information Bureau (India) Ltd. (CIBIL) was set up in August 2000. The Bureau provides a framework for collecting, processing and sharing credit information on borrowers of credit institutions. SBI and HDFC are the promoters of the CIBIL.
The RBI is now planning to transfer of its stakes in the SBI, NHB and National bank for Agricultural and Rural Development to the private players. Also, the Government has sought to lower its holding in PSBs to a minimum of 33% of total capital by allowing them to raise capital from the market. Banks are free to acquire shares, convertible debentures of corporate and units of equity oriented mutual funds, subject to a ceiling of 5% of the total outstanding advances (including commercial paper) as on March 31 of the previous year.
The finance ministry spelt out structure of the government-sponsored ARC called the Asset Reconstruction Company (India) Limited (ARCIL), this pilot project of the ministry would pave way for smoother functioning of the credit market in the country. The government will hold 49% stake and private players will hold the rest 51%- the majority being held by ICICI Bank (24.5%).
Reforms in the Banking sector

The first phase of financial reforms resulted in the nationalization of 14 major banks in 1969 and resulted in a shift from Class banking to Mass banking. This in turn resulted in a significant growth in the geographical coverage of banks. Every bank has to earmark a minimum percentage of their Loan portfolio to sectors identified as priority sectors. The manufacturing sector also grew during the 1970s in protected environs and the banking sector was a critical source. The next wave of reforms saw the nationalization of 6 more commercial banks in 1980. Since then the number scheduled commercial banks increased four-fold and the number of banks branches increased eight-fold.
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After the second phase of financial sector reforms and liberalization of the sector in the early nineties, the Public Sector Banks (PSB) s found it extremely difficult to complete with the new private sector banks and the foreign banks. The new private sector banks first made their appearance after the guidelines permitting them were issued in January 1993. Eight new private sector banks are presently in operation. These banks due to their late start have access to state-of-the-art technology, which in turn helps them to save on manpower costs and provide better services.
During the year 2000, the State Bank of India (SBI) and its 7 associates accounted for a 25% share in deposits and 28.1% share in credit. The 20 nationalized banks accounted for 53.5% of the deposits and 47.5% of credit during the same period. The share of foreign banks ( numbering 42 ), regional rural banks and other scheduled commercial banks accounted for 5.7%, 3.9% and 12.2% respectively in deposits and 8.41%, 3.14% and 12.85% respectively in credit during the year 2000
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 (the old / new domestic and foreign). These banks have over 67,000 branches spread across the country. The Indian banking industry is a mix of the public sector, private sector and foreign banks. The private sector banks are again spilt into old banks and new banks.
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Banking System in India
Reserve bank of India (Controlling Authority)
Development Financial institutions
Banks
IFCI IDBI ICICI
NABARD NHB
IRBI
EXIM Bank
SIDBI
Commercial Banks
Regional Rural Land Development Banks Banks
Cooperative Banks
Public Sector Banks
Private Sector Banks
SBI Groups
Nationalized Banks Foreign Banks
Indian Banks
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INDIAN BANKING SYSTEM-THE CURRENT STATE AND THE ROAD AHEAD INTRODUCTION
Recent time has witnessed the world economy develop serious difficulties in terms of lapse of banking & financial institutions and plunging demand. Prospects became very uncertain causing recession in major economies. However, amidst all this chaos Indias banking sector has been amongst the few to maintain resilience.
A progressively growing balance sheet, higher pace of credit expansion, expanding profitability and productivity akin to banks in developed markets, lower incidence of nonperforming as
GLOBAL AND LOCAL SCENARIO OF BANKING sets and focus on financial inclusion have contributed to making Indian banking vibrant and strong. Indian banks have begun to revise their growth approach and re-evaluate the prospects on hand to keep the economy rolling. The way forward for the Indian banks is to innovate to take advantage of the new business opportunities and at the same time ensure continuous assessment of risks.
A rigorous evaluation of the health of commercial banks, recently undertaken by the Committee on Financial Sector Assessment (CFSA) also shows that the commercial banks are robust and versatile. The single-factor stress tests undertaken by the CFSA divulge that the banking system can endure considerable shocks arising from large possible changes in credit quality, interest rate and liquidity conditions. These stress tests for credit, market and liquidity risk show that Indian banks are by and large resilient.
Thus, it has become far more imperative to contemplate the role of the Banking Industry in fostering the long term growth of the economy. With the purview of economic stability and growth, greater attention is required on both political and regulatory commitment to long term development programme. FICCI conducted a survey on the Indian Banking Industry to
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assess the competitive advantage offered by the banking sector, as well as the policies and structures that are required to further the pace of growth. The results of our survey are given in the following sections.
General Banking Scenario

The pace of development for the Indian banking industry has been tremendous over the past decade. As the world reels from the global financial meltdown, Indias banking sector has been one of the very few to actually maintain resilience while continuing to provide growth opportunities, a feat unlikely to be matched by other developed markets around the world. FICCI conducted a survey on the Indian Banking Industry to assess the competitive advantage offered by the banking sector, as well as the policies and structures required to further stimulate the pace of growth.
The predicament of the banks in the developed countries owing to excessive leverage and lax regulatory system has time and again been compared with somewhat unscathed Indian Banking Sector. An attempt has been made to understand the general sentiment with regards to the performance, the challenges and the opportunities ahead for the Indian Banking Sector.
A majority of the respondents, almost 69% of them, felt that the Indian banking Industry was in a very good to excellent shape, with a further 25% feeling it was in good shape and only 6% of the respondents feeling that the performance of the industry was just average. In fact, an overwhelming majority (93.33%) of the respondents felt that the banking industry compared with the best of the sectors of the economy, including pharmaceuticals, infrastructure, etc.
Most of the respondents were positive with regard to the growth rate attainable by the Indian banking industry for the year 2009-10 and 2014-15, with 53.33% of the view that growth would be between 15-20% for the year 2009-10 and greater than 20% for 2014-15.
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On being asked what is the major strength of the Indian banking industry, which makes it resilient in the current economic climate; 93.75% respondents feel the regulatory system to be the major strength, 75% economic growth, 68.75% relative insulation from external market, 56.25% credit quality, 25% technological advancement and 43.75% our risk assessment systems.
Change is the only constant feature in this dynamic world and banking is not an exception. The changes staring in the face of bankers relates to the fundamental way of banking-which is going through rapid transformation in the world of today. Adjust, adapt and change should be the key mantra. The major challenge faced by banks today is the ever rising customer expectation as well as risk management and maintaining growth rate. Following are the results of the biggest challenge faced by the banking industry as declared by our respondents (on a mode scale of 1 to 7 with 1 being the biggest challenge):
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They also asked their respondents to rate India on certain essential banking parameters (Regulatory Systems, Risk Assessment Systems, Technological System and Credit Quality) in comparison with other countries i.e. China, Japan, Brazil, Russia, Hong Kong, Singapore, UK and USA.
The recent financial crisis has drawn attention to under-regulation of banks (mainly investment banks) in the US. Though, the Indian story is quite different. Regulatory systems of Indian banks were rated better than China, Brazil, Russia, and UK; at par with Japan, Singapore and Hong Kong where as all our respondents feel that we are above par or at par with USA. On comparing the results with their previous survey where the respondents had rated Indian Regulatory system below par the US and UK system, they see that post the financial crisis Indian Banks are more confident on the Indian Regulatory Framework.
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The global meltdown started as a banking crisis triggered by the credit quality. Indian banks seem to have paced up in terms of Credit Quality. Credit quality of banks has been rated above par than China, Brazil, Russia, UK and USA but at par with Hong Kong and Singapore and 85.72% of the respondents feel that we are at least at par with Japan. Thus, they see that the resilience the Indian Banks showed at the time of financial crisis has led to an attitudinal shift of our respondents with the past survey indicating Credit quality of Indian banks being below par than that of US and UK.
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As technology ingrains itself in all aspects of a banks functioning, the challenge lies in exploiting the potential for profiting from investments made in technology. A lot needs to be done on the technological front to keep in pace with the global economies, as is evident from the survey results. Technology systems of Indian banks have been rated more advanced than Brazil and Russia but below par with China, Japan, Hong Kong, Singapore, UK and USA. They find no change on introspection of their past surveys which also highlighted the need for Indian banks to pace up in adoption of advanced technology.
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Global Expansion of Indian Banking

The idea of creating bigger banks to take on competition sounds attractive but one must realize even the biggest among Indian banks are small by global standards. The lack of global scale for Indian banks came into sharp focus during the recent financial crisis which saw several international banks reneging on their funding commitments to Indian companies, but local banks could not step into the breach because of balance sheet limitations.
In this light, 93.75% of all respondents to their survey are considering expanding their operations in the future. They further asked participants on the methods that they consider suitable to meet their expansion needs. They divide them into organic means of growth that comes out of an increase in the banks own business activity, and inorganic means that includes mergers or takeovers.
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We see from the above graph that amongst organic means of expansion, branch expansion finds favor with banks while strategic alliances is the most popular inorganic method for banks considering scaling up their operations. On the other hand, new ventures and buyout portfolios are the least popular methods for bank expansion.
Scope for New Entrants

81.25% also felt that there was further scope for new entrants in the market, in spite of capital management and human resource constraints, as there continue to remain opportunities in unbanked areas. With only 30-35% of the population financially included, and the Indian banking industry unsaturated with CAGR of well above 20%, participants in their survey felt that the market definitely has scope to accommodate new players.
While there has been prior debate, they questioned banks on NBFCs and Industrial houses being established as banking institutions and find opinion to be marginally against the notion, with 35.71% in favour while 42.86% were against them being established as banks.
However, on further questioning, 57.14% of respondents feel that the above may be allowed but only if it is along with specific regulatory limitations. Banks felt that limitations regarding track record, ensuring adequate capitalization levels, a tiered license that enables new entrants to enter into specific areas of the business only after satisfactorily achieving set milestones for the prior stages, cap on promoter's holdings and wider public holding in addition to a common banking regulator on a level playing field are essential before they may set themselves up as banks.
Banking Activities
Over the last three decades, there has been a remarkable increase in the size, spread and scope of activities of banks in India. The business profile of banks has transformed dramatically to include non-traditional activities like merchant banking, mutual funds,new financial services and products and the human resource development. Their survey finds that within retail operations, banks rate product development and differentiation; innovation and customization; cost reduction; cross selling and technological up gradation as equally important to the growth of their retail operations. Additionally a few
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respondents also find pro-active financial inclusion, credit discipline and income growth of individuals and customer orientation to be significant factors for their retail growth.
There is, at the same time, an urgent need for Indian banks to move beyond retail banking, and further grow and expand their fee- based operations, which has globally remained one of the key drivers of growth and profitability. In fact, over 80% of banks in their survey have only up to 15% of their total incomes constituted by fee- based income; and barely 13% have 20-30% of their total income constituted by fee-based income.
Out of avenues for non-interest income, we see that Banc assurance (85.71%) and FOREX Management (71.43%) remain most profitable for banks. Derivatives, understandably, remains the least profitable business opportunity for banks as the market for derivatives is still in its nascent stage in India.
There is nevertheless a visibly increased focus on fee based sources of income. 71% of banks in their survey saw an increase in their fee based income as a percentage of their total income for the FY 2008-09 as compared to FY 2007-08. Indian banks are fast realizing that fee-based sources of income have to be actively looked at as a basis for future growth, if the industry is to become a global force to reckon with.
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Financial Inclusion and Expansion of Banking Services
Transition from class banking to mass banking and increased customer focus is drastically changing the landscape of Indian banking. Expansion of retail banking has a lot of potential as retail assets are just 22% of the total banking assets and contribution of retail loans to GDP stands merely at 6% in India vis--vis 15% in China and 24% in Thailand. All banks in their survey weigh Cost effective credit delivery mechanisms (100%) as most important to the promotion of financial inclusion. This was followed by factors such as identifying needs and developing relevant financial products (75%), demographic knowledge and strong local relations (62.5%) and ensuring productive use and adequate returns on credit employed (43.75%) in decreasing levels of importance. In fact, India has an expanding middle class of 250 to 300 million people in need of varied banking services. While 60% of our population has access to banks, only 15% of them have loan accounts and an overwhelming 70% of farmers have no access to formal sources of credit, reflective of immense potential for the banking system This is mirrored in the fact that while our survey finds no discernible shift in the lending pattern of banks across Tier 1, Tier 2 and Tier 3 cities over the last two years, 93% Indian Banking System: The Current State & Road Ahead Page | 20 participants still find rural markets to be to be a profitable avenue, with 53% of respondents finding it lucrative in spite of it being a difficult market. Cost of accessing markets has been the only sour note in the overall experience of our respondents in rural markets At the same time, more than 81.25% of our respondents have a strategy in place to tap rural markets, with the remainder as yet undecided on their plan of action. Tie ups with micro finance institutions (MFIs)/SHG and introduction of innovative and customized products are considered most important to approaching rural markets according to respondents, more so as compared to internet kiosks, post offices and supply chain management techniques
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Additionally, 81.25% of respondents found branchless banking to be an effective and secure way of reaching out to rural markets, with mobile, biometric and handheld devices, equally popular amongst banks. Some respondents also found the Business Correspondents model to be an untapped model for financial inclusion. As Indian financial markets mature over time, there is also a need for innovative instruments to deepen the market further. Suggestions ranged from micro saving and micro insurance initiatives, Cash deposit machines, warehouse receipts, to prepaid cash cards, derivatives, interest rate futures and credit default swaps as a means to further the financial inclusion and expansionary process.
Credit Flow and Industry

India Inc is completely dependent on the Banking System for meeting its funding requirement. One of the major complaints from the industry has in fact been high lending rates in spite of massive cuts in policy rates by the RBI. We asked the banks what they felt were major factors responsible for rigid prime lending rates. None of the banks in their survey considered the cap on bank deposit rates to be one of the causes of inflexible lending rates. Due to long-term maturity, the trend seems to be changing. However, there are other factors which have led to the stickiness of lending rates such as
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wariness of corporate credit risk (33.33%), competition from government small savings schemes (26.67%). Benchmarking of SME and export loans against PLR (20.00%) on the other hand, do not seem to have as significant an influence over lending rates according to banks. The great Indian industrial engine has nevertheless continued to hum its way through most of the year long crisis. We asked banks about the sectors that they consider being most profitable in the coming years (Fig. 12). All respondents were confident in the infrastructure sector leading the profitability for the industry, followed by retail loans (73.33%) and others
(Source: Annual survey, February 2010) (FEDERATION OF INDIAN CHAMBERS OF COMMERCE & INDUSTRY) Lets study the credit appraisal system in SME sector at Vijaya bank.
BRIEF OVERVIEW OF CREDIT APPRAISAL

Credit appraisal means an investigation/assessment done by the bank prior before providing any loans & advances/project finance & also checks the commercial, financial & technical
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viability of the project proposed its funding pattern & further checks the primary & collateral security cover available for recovery of such funds.
Brief overview of credit

Credit Appraisal is a process to ascertain the risks associated with the extension of the credit facility. It is generally carried by the financial institutions which are involved in providing financial funding to its customers. Credit risk is a risk related to non repayment of the credit obtained by the customer of a bank. Thus it is necessary to appraise the credibility of the customer in order to mitigate the credit risk. Proper evaluation of the customer is performed which measures the financial condition and the ability of the customer to repay back the loan in future. Generally the credit facilities are extended against the security know as collateral. But even though the loans are backed by the collateral, banks are normally interested in the actual loan amount to be repaid along with the interest. Thus, the customer's cash flows are ascertained to ensure the timely payment of principal and the interest.
It is the process of appraising the credit worthiness of a loan applicant. Factors like age, income, number of dependents, nature of employment, continuity of employment, repayment capacity, previous loans, credit cards, etc. are taken into account while appraising the credit worthiness of a person. Every bank or lending institution has its own panel of officials for this purpose. 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 is 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
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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.
BASIC TYPES OF CREDIT
There are four basic types of credit. By understanding how each works, you will be able to get the most for your money and avoid paying unnecessary charges. Service credit is monthly payments for utilities such as telephone, gas, electricity, and water. You often have to pay a deposit, and you may pay a late charge if your payment is not on time. Loans let you borrow cash. Loans can be for small or large amounts and for a few days or several years. Money can be repaid in one lump sum or in several regular payments until the amount you borrowed and the finance charges are paid in full. Loans can be secured or unsecured.
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Installment credit may be described as buying on time, financing through the store or the easy payment plan. The borrower takes the goods home in exchange for a promise to pay later. Cars, major appliances, and furniture are often purchased this way. You usually sign a contract, make a down payment, and agree to pay the balance with a specified number of equal payments called installments. The finance charges are included in the payments. The item you purchase may be used as security for the loan. Credit cards are issued by individual retail stores, banks, or businesses. Using a credit card can be the equivalent of an interest-free loan--if you pay for the use of it in full at the end of each month. BRIEF OVERVIEW OF LOANS
Credit can be of two types fund base & non-fund base:
FUND BASED includes:
Working Capital Term Loan NON-FUND BASED includes:
Letter of Credit Bank Guarantee FUND BASED:
WORKING CAPITAL:
1. GENERAL
The objective of running any industry is earning profits. An industry will require funds to acquire
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Fixed assets like land, building, plant, machinery, equipments, vehicles, tools etc., & also to run the business i.e. its day to day operations.
Funds required for day to-day working will be to finance production & sales. For production, funds are needed for purchase of raw materials/ stores/ fuel, for employment of labour, for power charges etc., for storing finishing goods till they are sold out & for financing the sales by way of sundry debtors/ receivables.
Capital or funds required for an industry can therefore be bifurcated as fixed capital & working capital. Working capital in this context is the excess of current assets over current liabilities. The excess of current assets over current liabilities is treated as net working capital or liquid surplus & represents that portion of the working capital which has been provided from the long term source.
2. Definition
Working capital is defined as the funds required to carry the required levels of current assets to enable the unit to carry on its operations at the expected levels uninterruptedly.
Thus Working Capital required is dependent on
(a) The volume of activity (viz. level of operations i.e. Production & sales)
(b) The activity carried on viz. mfg process, product, production programme, the materials & marketing mix 3. METHODS & APPLICATION SEGMENT LIMITS METHOD
SSI
Upto Rs 5 cr Above Rs 5 cr
Traditional Method & Nayak Committee method Projected Balance Sheet Method
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SBF All loans Traditional / Turnover Method
C&I Trade & Upto Rs 1 cr Services Above Rs 1 cr & upto Rs 5 cr Above Rs 5 cr C&I Units Industrial Below Rs 25 lacs Rs 25 lacs & Over but upto Rs 5 cr Above Rs 5 cr
Traditional Method for Trade & Projected Turnover Method Projected Balance Sheet Method & Projected Turnover Method Projected Balance Sheet Method Traditional Method
Projected Balance Sheet Method & Projected Turnover Method
Projected Balance Sheet Method
3. OPERATING CYCLE METHOD
a) Any manufacturing activity is characterized by a cycle of operations consisting of purchase of purchase of raw materials for cash, converting these into finished goods & realizing cash by sale of these finished goods. The time that lapses between cash outlay & cash realization by sale of finished goods & realization of sundry debtors is known as the length of the operating cycle.
b) That is, the operating cycle consists of:
Time taken to acquire raw materials & average period for which they are in store.
Conversion process time
Average period for which finished goods are in store &
Average collection period of receivables (Sundry Debtors)
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TERM LOAN 1. 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. 2. 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 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: The purpose of the term loan is for acquisition of capital assets. The term loan is an advance not repayable on demand but only in installments ranging over a period of years. 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. The security is not the readily saleable goods & commodities but the fixed assets of the units. 3. 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. 4. 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
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year after year. Term loans would be repaid in a regular way from the anticipated income of the industry/ trade.
5. 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.
6. 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 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 financial aspects, economic aspects, technical aspects, a projection of future trends of outputs & sales & estimates of cost, returns, flow of funds & profits.
7. Appraisal of Term Loans
Appraisal of term loan for, say, an industrial unit is a process comprising several steps. There are four broad aspects of appraisal, namely
Technical Feasibility - To determine the suitability of the technology selected & the adequacy of the technical investigation & design;
Economic Feasibility - To ascertain the extent of profitability of the project & its sufficiency in relation to the repayment obligations pertaining to term assistance;
Financial Feasibility - To determine the accuracy of cost estimates, suitability of the envisaged pattern of financing & general soundness of the capital structure; &
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Managerial Competency To ascertain that competent men are behind the project to ensure its successful implementation & efficient management after commencement of commercial production. 7.1 Technical Feasibility The examination of this item consists of an assessment of the various requirement of the actual production process. It is in short a study of the availability, costs, quality & accessibility of all the goods & services needed.
a) The location of the project is highly relevant to its technical feasibility & hence special attention will have to be paid to this feature. Projects whose technical requirements could have been taken care of in one location sometimes fail because they are established in another place where conditions are less favorable. One project was located near a river to facilitate easy transportation by barge but lower water level in certain seasons made essential transportation almost impossible. Too many projects have become uneconomical because sufficient care has not been taken in the location of the project, e.g. a woolen scouring & spinning mill needed large quantities of good water but was located in a place which lacked ordinary supply of water & the limited water supply available also required efficient softening treatment. The accessibility to the various resources has meaning only with reference to location. Inadequate transport facilities or lack of sufficient power or water for instance, can adversely affect an otherwise sound industrial project. b) Size of the plant One of the most important considerations affecting the feasibility of a new industrial enterprise is the right size of the plant. The size of the plant will be such that it will give an economic product which will be competitive when compared to the alternative product available in the market. A smaller plant than the optimum size may result in increased production costs & may not be able to sell its products at competitive prices.
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c) Type of technology An important feature of the feasibility relates to the type of technology to be adopted for a project. A new technology will have to be fully examined & tired before it is adopted. It is equally important to avoid adopting equipment or processes which are absolute or likely to become outdated soon. The principle underlying the technological selection is that a developing country cannot afford to be the first to adopt the new nor yet the last to cast the old aside. d) Labour The labour requirements of a project, need to be assessed with special care. Though labour in terms of unemployed persons is abundant in the country, there is shortage of trained personnel. The quality of labour required & the training facilities made available to the unit will have to be taken into account e) Technical Report A technical report using the Banks Consultancy Cell, external consultants, etc., should be obtained with specific comments on the feasibility of scheme, its profitability, whether machinery proposed to be acquired by the unit under the scheme will be sufficient for all stages of production, the extent of competition prevailing, marketability of the products etc., wherever necessary. 7.2 Economic Feasibility An economic feasibility appraisal has reference to the earning capacity of the project. Since earnings depend on the volume of sales, it is necessary to determine how much output or the additional production from an established unit the market is likely to absorb at given prices. a) A thorough market analysis is one of the most essential parts of project investigation. This involves getting answers to three questions. a) How big is the market? b) How much it is likely to grow? c) How much of it can the project capture? The first step in this direction is to consider the current situation, taking account of the total output of the product concerned & the existing demand for it with a view to establishing whether there is unsatisfied demand for the product. Care should be taken to see that there is no idle capacity in the existing industries.
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ii) Future possible future changes in the volume & patterns of supply & demand will have to be estimated in order to assess the long term prospects of the industry. Forecasting of demand is a complicated matter but one of the vital importance. It is complicated because a variety of factors affect the demand for product e.g. technological advances could bring substitutes into market while changes in tastes & consumer preference might cause sizable shifts in demand. iii) Intermediate product The demand for Intermediate product will depend upon the demand & supply of the ultimate product (e.g. jute bags, paper for printing, parts for machines, tyres for automobiles). The market analysis in this case should cover the market for the ultimate product.
7.3 Financial Feasibility The basis data required for the financial feasibility appraisal can be broadly grouped under the following heads i) ii) iii) Cost of the project including working capital Cost of production & estimates of profitability Cash flow estimates & sources of finance.
The cash flow estimates will help to decide the disbursal of the term loan. The estimate of profitability & the breakeven point will enable the banker to draw up the repayment programme, start-up time etc. The profitability estimates will also give the estimate of the Debt Service Coverage which is the most important single factor in all the term credit analysis. A study of the projected balance sheet of the concern is essential as it is necessary for the appraisal of a term loan to ensure that the implementation of the proposed scheme.
Break-even point: In a manufacturing unit, if at a particular level of production, the total manufacturing cost equals the sales revenue, this point of no profit/ no loss is known as the break-even point. Break-even point is expressed as a percentage of full capacity. A good project will have
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VIJAYA BANK
reasonably low break-even point which not be encountered in the projections of future profitability of the unit.
Debt/ Service Coverage: The debt service coverage ratio serves as a guide to determining the period of repayment of a loan. This is calculated by dividing cash accruals in a year by amount of annual obligations towards term debt. The cash accruals for this purpose should comprise net profit after taxes with interest, depreciation provision & other non cash expenses added back to it.
Debt Service Coverage Ratio
Cash accruals Maturing annual obligations
This ratio is valuable, in that it serves as a measure of the repayment capacity of the project/ unit & is, therefore, appropriately included in the cash flow statements. The ratio may vary from industry to industry but one has to view it with circumspection when it is lower than the benchmark of 1.75. The repayment programme should be so stipulated that the ratio is comfortable.
7.4 Managerial Competence In a dynamic environment, the capacity of an enterprise to forge ahead of its competitors depends to a large extent, on the relative strength of its management. Hence, an appraisal of management is the touchstone of term credit analysis. If there is a change in the administration & managerial set up, the success of the project may be put to test. The integrity & credit worthiness of the personnel in charge of the management of the industry as well as their experience in management of industrial concerns should be examined. In high cost schemes, an idea of the units key personnel may also be necessary. a) the bank guarantee on its expiry CREDIT APPRAISAL PROCESS
Receipt of application from applicant |
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VIJAYA BANK
Receipt of documents (Balance sheet, KYC papers, Different govt. registration no., MOA, AOA, and Properties documents) | Pre-sanction visit by bank officers | Check for RBI defaulters list, willful defaulters list, CIBIL data, ECGC caution list, etc. | Title clearance reports of the properties to be obtained from empanelled advocates | Valuation reports of the properties to be obtained from empanelled valuer/engineers | Preparation of financial data | Proposal preparation | Assessment of proposal | Sanction/approval of proposal by appropriate sanctioning authority | Documentations, agreements, mortgages | Disbursement of loan | Post sanction activities such as receiving stock statements, review of accounts, renew of accounts, etc (on regular basis) prior 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 fund.
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VIJAYA BANK
INTRODUCTION OF SME SME
4.1 Concept:
The small-scale industries (SSI) produce about 8000 products, contribute 40% of the industrial output and offer the largest employment after agriculture. The sector, therefore, presents an opportunity to the nation to harness local competitive advantages for achieving global dominance.
4.2 From SSI to SME:

Defining the New Paradigm2.1 Government policy as well as credit policy has so far concentrated on manufacturing units in the small-scale sector. The lowering of trade barriers across the globe has increased the minimum viable scale of enterprises. The size of the unit and technology employed for firms to be globally competitive is now of a higher order. The definition of small-scale sector needs to be revisited and the policy should consider inclusion of services and trade sectors within its ambit. In keeping with global practice, there is also a
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need to broaden the current concept of the sector and include the medium enterprises in a composite sector of Small and Medium Enterprises (SMEs). A comprehensive legislation, which would enable the paradigm shift from small-scale industry to small and medium enterprises under consideration of Parliament. The Reserve Bank of India had meanwhile set up an Internal Group which has recommended: Current SSI/tiny industries definition may continue. Units with investment in plant and machinery in excess of SSI limit and up to Rs.10 crore may be treated as Medium Enterprises (ME). The definition may be reviewed after enactment of the Small and Medium Enterprises Development Bill.
4.3 Definition of SMEs

At present, a small scale industrial unit is an undertaking in which investment in plant and machinery, does not exceed Rs.1 crore, except in respect of certain specified items under hosiery, hand tools, drugs and pharmaceuticals, stationery items and sports goods, where this investment limit has been enhanced to Rs 5 crore. Units with investment in plant and machinery in excess of SSI limit and up to Rs. 10 crore may be treated as Medium Enterprises (ME). The Government of India has enacted the Micro, Small and Medium Enterprises Development (MSMED) Act 2006 which was notified on October 2, 2006. The definition of the small and medium enterprises as provided in the Act (Annex VII) will have immediate effect.
4.4 Eligibility criteria

(i) These guidelines would be applicable to the following entities, which are viable or potentially viable: a) All non-corporate SMEs irrespective of the level of dues to banks. b) All corporate SMEs, which are enjoying banking facilities from a single bank, irrespective of the level of dues to the bank. c) All corporate SMEs, which have funded and non-funded outstanding up to Rs.10 crore under multiple/ consortium banking arrangement. (ii) Accounts involving willful default, fraud and malfeasance will not be eligible for restructuring under these guidelines. (iii) Accounts classified by banks as Loss Assets will not be eligible for restructuring.
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VIJAYA BANK
(iv) In respect of BIFR cases banks should ensure completion of all formalities in seeking approval from BIFR before implementing the package. SME: At present, a small scale industrial unit is an industrial undertaking in which investment in plant and machinery, does not exceed Rs.1 crore except in respect of certain specified items under hosiery, hand tools, drugs and pharmaceuticals, stationery items and sports goods where this investment limit has been enhanced to Rs.5 crore. A comprehensive legislation which would enable the paradigm shift from small scale industry to small and medium enterprises is under consideration of Parliament. Pending enactment of the above legislation, current SSI/tiny industries definition may continue. Units with investment in plant and machinery in excess of SSI limit and up to Rs.10 crore may be treated as Medium Enterprises (ME). Only SSI financing will be included in Priority Sector.
All banks may fix self-targets for financing to SME sector so as to reflect a higher disbursement over the immediately preceding year, while the sub-targets for financing tiny units and smaller units to the extent of 40% and 20% respectively may continue. Banks may arrange to compile data on outstanding credit to SME sector as on March 31, 2005 as per new definition and also showing the break up separately for tiny, small and medium enterprises Banks may initiate necessary steps to rationalize the cost of loans to SME sector by adopting a transparent rating system with cost of credit being linked to the credit rating of enterprise. SIDBI has developed a Credit Appraisal & Rating Tool (CART) as well as a Risk Assessment Model (RAM) and a comprehensive rating model for risk assessment of proposals for SMEs. The banks may consider taking advantage of these models as appropriate and reduce their transaction costs. In order to increase the outreach of formal credit to the SME sector, all banks, including Regional Rural Banks may make concerted efforts to provide credit cover on an average to at least 5 new small/medium enterprises at each of their semi urban/urban branches per year.
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VIJAYA BANK
A debt restructuring mechanism for nursing of sick units in SME sector and a One Time Settlement (OTS) Scheme for small scale NPA accounts in the books of the banks as on March 31, 2004 are being introduced. 4.5 CHALLENGES FACED BY SME: The challenges being faced by the small and medium sector may be briefly set out as followsa) Small and Medium Enterprises (SME), particularly the tiny segment of the small enterprises have inadequate access to finance due to lack of financial information and nonformal business practices. SMEs also lack access to private equity and venture capital and have a very limited access to secondary market instruments. b) SMEs face fragmented markets in respect of their inputs as well as products and are vulnerable to market fluctuations. c) SMEs lack easy access to inter-state and international markets. d) The access of SMEs to technology and product innovations is also limited. There is lack of awareness of global best practices. e) SMEs face considerable delays in the settlement of dues/payment of bills by the large scale buyers. With the deregulation of the financial sector, the ability of the banks to service the credit requirements of the SME sector depends on the underlying transaction costs, efficient recovery processes and available security. There is an immediate need for the banking sector to focus on credit and SMEs.
CREDIT RISK ASSESSMENT

FOR A BANK, WHAT IS RISK?
Risk is inability or unwillingness of borrower-customer or counter-party to meet their repayment obligations/ honor their commitments, as per the stipulated terms.
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LENDER TASK
Identify the risk factors, and
Mitigate the risk
HOW DOES RISK ARISE IN CREDIT?
In the business world, Risk arises out of
Deficiencies / lapses on the part of the management (Internal factor)
Uncertainties in the business environment (External factor)
Uncertainties in the industrial environment (External factor)
Weakness in the financial position (Internal factor)
To put in another way, success factors behind a business are:

Managerial ability
Favorable business environment
Favorable industrial environment
Adequate financial strength As such, these are the broad risk categories or risk factors built into our CRA models. CRA takes into account the above types of risks associated with the borrowable unit. The eventual CRA rating awarded to a unit (based on a score of 100) is a single-point risk indicator of an individual credit exposure, & is used to indentify, to measure & to monitor the credit risk of
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VIJAYA BANK
an individual proposal. At the corporate level, CRA is also used to track the quality of Banks credit portfolio CREDIT & RISK
Go hand in hand.
They are like twin brothers.
They can be compared to two sides of the same coin.
All credit proposals have some inherent risks, excepting the almost negligible volume of lending against liquid collaterals with adequate margin.
LENDING DESPITE RISKS:
So, risk should not deter a Banker from lending. A bankers task is to identify/ assess the risk factors/ parameters & manage / mitigate them on a continuous basis. But its always prudent to have some idea about the degree of risk associated with any credit proposal.
The banker has to take a calculated risk, based on risk-absorption/ risk-hedging capacity & risk-mitigation techniques of the Bank. IMPORTANCE OF CREDIT RISK ASSESSMENT Credit is a core activity of banks & an important source of their earnings, which go to pay interest to depositors, salaries to employees & dividend to shareholders
In credit, it is not enough that we have sizable growth in quantity/ volume, it is also necessary to ensure that we have only good quality growth.
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To ensure asset quality, proper risk assessment right at the beginning, that is, at the time of taking an exposure, is extremely important.
Moreover, with the implementation of Basle-II accord4, capital has to be allocated for loan assets depending on the risk perception/ rating of respective assets. It is, therefore, extremely important for every bank to have a clear assessment of risks of the loan assets it creates, to become Basle-II compliant.
That is why Credit Risk Assessment (CRA) system is an essential ingredient of the Credit Appraisal exercise
INDIAN SCENARIO:
In Indian banks, there was no systematic method of Credit Risk Assessment till late 1980s/ early 1990s.
Health Code System (1985) / IRAC norms (1993) are Asset (loan) classification systems, not CRA systems.
RBI came out with its guidelines on Risk Management Systems in Banks in 1999 & Guidance Note on Management of Credit in October, 2002. CREDIT RISK ASSESSMENT (CRA) MINIMUM SCORES / HURDLE RATES
1. The CRA models adopted by the Bank take into account all possible factors which go into appraising the risks associated with a loan. These have been categorized broadly into financial, business, industrial & management risks and are rated separately. To arrive at the overall risk rating, the factors duly weighted are aggregated & calibrated to arrive at a single point indicator of risk associated with the credit decision.
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2. Financial parameters: The assessment of financial risk involves appraisal of the financial strength of the borrower based on performance & financial indicators. The overall financial risk is assessed in terms of static ratios, future prospects & risk mitigation (collateral security / financial standing)
3. Industry parameters: The following characteristics of an industry which pose varying degrees of risk are built into Banks CRA model:
Competition
Industry outlook
Regulatory risk
Contemporary issues like WTO etc 4. Management parameters: The management of an enterprise / group is rated on the following parameters:
Integrity (corporate governance)
Track record
Managerial competence / commitment
Expertise
Structure & systems
Experience in the industry
Credibility : ability to meet sales projections
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Credibility : ability to meet profit (PAT) projections
Payment record
Strategic initiatives
Length of relationship with the Bank
SALIENT FEATURES OF CRA MODELS

(a) Type of Models Non Trading Sector (C&I , SSI , AGL) Regular Model Simplified Model
S. No. (i) (ii)
Exposure Level (FB + NFB Limits ) Over Rs. 5.00 crore Rs 0.25 crore to Rs. 5.00 crore
Trading Sector ( Trade & Services) Regular Model Simplified Model
(b) Type of Ratings
S. No. (i)
Model Regular Model
Type of Rating Borrower Rating Facility Rating
(ii)
Simplified Model
Borrower Rating
New Rating Scales Borrower Rating: 16 Rating Grades There are different ratings given to the different banks. For example S. No. Borrower Rating Range of scores Risk level Comfort Level
1 2 3 4
SB1 SB2 SB3 SB4
94-100 90-93 86-89 81-85
Virtually Zero risk Lowest Risk Lower Risk Low Risk
Virtually Absolute safety Highest safety Higher safety High safety
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5 SB5 76-80 Moderate Risk with Adequate Cushion 6 7 8 9 10 SB6 SB7 SB8 SB9 SB10 70-75 64-69 57-63 50-56 45-49 Acceptable Risk (Risk Tolerance Threshold) 11 12 13 14 15 SB11 SB12 SB13 SB14 SB15 40-44 35-39 30-34 25-29 <24 Borderline risk High Risk Higher risk Substantial risk Pre-Default Risk (extremely Vulnerable to default) 16 SB16 Default Grade Inadequate safety Low safety Lower safety Lowest safety Nil Safety Threshold Average risk Above Safety Threshold Moderate Risk Moderate Safety Adequate safety
Bank has introduced New Rating Scales for borrower for giving loans. Rating is given on the basis of scores out of 100. Bank gives loans to the borrower as per their rating. From SB9 rating the risk increases. So banks dont give loans after SB8 rating. New Rating Scales - Facility Rating: 16 Rating Grades
S NO
FACILITY GRADES
RANGE OF SCORES
RISK LEVEL
COMFORT LEVEL
1 2 3 4 5
FR1 FR2 FR3 FR4 FR5
94-100 87-93 80-86 73-79 66-72
Virtually Zero Risk Lowest Risk Lower Risk Low Risk Moderate Risk with Adequate Cushion
Virtually Absolute Safety Highest Safety Higher Safety High Safety Adequate Safety
FR6
59-65
Moderate
Moderate
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7 8 9 FR7 FR8 FR9 52-58 45-51 38-44 Acceptable Risk 10 11 12 FR10 FR11 FR12 31-37 24-30 17-23 (Risk Tolerance Threshold) High Risk Higher Risk Low Safety Lower Safety Risk Average Risk Safety Above Safety Threshold Safety Threshold
13 14 15 16
FR13 FR14 FR15 FR16
11-16 5-10 1-4 0
Substantial Risk
Lowest Safety
Highest Risk NIL
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VIJAYA BANK
RESEARCH METHODOLOGY
INTRODUCTION:
Credit appraisal means investigation/assessment done by the bank before providing any loans and advances/project finance and also checks the commercial, financial &industrial viability of the project proposed its funding pattern and further checks the primary & collateral security cover available for recovery of such funds.
PROBLEM STATEMENT: To study the credit appraisal system in SME sector, at Vijaya bank, Bangalore
OBJECTIVES:
To study the Credit Risk Assessment Models. To observe the movements to reduce various risk parameters which are broadly categorized into financial risk, business risk, industrial risk & management risk. To check the commercial, financial & technical viability of the project proposed & its funding pattern. To check the primary & collateral security cover available for recovery of such funds. To study the credit appraisal methods. RESEARCH DESIGN: Analytical in nature DATA COLLECTION: Primary data: Informal interview with the manager and other staff members at Vijaya Bank
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Secondary data: Books websites database at Vijaya Bank library research
BENEFICIARIES:
Researchers: This report will help researchers improving knowledge about the credit appraisal system and to have practical exposure of the credit appraisal system at Vijaya Bank. Management Students: The project will help the management students to know the patterns of credit appraisal at Vijaya Bank.
LIMITATIONS OF THE STUDY: As the credit appraisal is one of the crucial areas for any bank, some of the technicalities are not revealed. Credit appraisal system includes various types of detail studies for different areas of analysis, but due to time constraint, our analysis is of limited areas only. This study is only limited to VIJAYA BANK south end circle branch.
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VIJAYA BANK COMPANY PROFILE
VIJAYA BANK
BSE: 532401 | NSE: VIJAYABANK | ISIN: INE705A01016 Market Cap: [Rs.Cr.] 2,616 | Face Value: [Rs.] 10 Industry: Banks - Public Sector
BACKGROUND
Vijaya Bank (VB) came into existence in 15th April of the year 1980, as a consequence of the Government of India taking over the undertaking of Vijaya Bank Ltd. The Bank is engaged in transacts all types of banking business including foreign exchange. The bank has a strong presence in the fast-growing southern states. Its business activities are diversified and encompass merchant banking, credit cards, ATMs, housing finance, fast collection services etc. The Bank had sponsored its first Regional Rural Bank in the year 1985 under the name and style Visweswaraya Grameena Bank in March. This Regional Rural Bank caters the needs of the target group belonging to Mandya district of Karnataka State. VB introduced the novel scheme under the name of Vijaya Vichar Vihar' in the year 1989. During the year 1992, the bank had introduced automatic renewal facility upto four times in respect of short-term deposits accepted for periods from forty-six days to one year for the convenience of the customers.
TRANSFORMATION OF THE BANK

VB had entered into the Memorandum of Understanding (MoU) with the Reserve Bank of India in the year of 1994 to fulfill definite performance commitments. Also in the same year of 1994, the bank introduced the new schemes viz. Vijaya Gift Bond Scheme and Vijaya Service Card for enlarging its services to its business clientele. The Bank opened its third exclusive NRI branch at Mapuca (Goa) and established special NRI Cells at the branches in Tiruvalla, Kottayam, Trivandrum and Kozhencherry (all in the Kerala State). During the
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VIJAYA BANK
year 1995, VB had opened 33 new branches and also the bank opened five Hi-tech Agricultural Finance branches at Bangalore, Coimbatore, Delhi, Hyderabad and Lucknow. In the identical year of 1995, the bank entered into an agreement with M/s. Oriental Exchange Co., WLL Manama, Bahrain providing for the Bank's participation in the said exchange company's day-to-day management. Vijaya Bank launched a fully operational Custodial Services Division at Mumbai. In the year 1996, VB had opened its first subsidiary, Vibank Housing Finance Limited to add impetus to housing finance. Vijaya Bank introduced three new loan schemes, namely, 'Vijaya Nivruthi', 'Vijaya Krishi Vikas' and 'Vijaya Mangala' to cater to the credit needs of pensioners, farmers and workingwomen respectively. The Bank had also entered into tie-up arrangements with ICICI, Banking Corporation Limited and Oman International Bank Ltd. VB had introduced innovative banking service called Any Branch Banking' in the same year of 1996. During the year 1997, Vijaya Bank had launched a special agriculture credit plan targeted specifically at agriculture and other, rural advances. The Bank also launched the special loan recovery motivation scheme', which helped reduce the level of NPAs from 11.6 per cent to 9.6 per cent. The Bank had entered into domestic correspondent Banking arrangements with various private sector banks and foreign banks during the year 1998. After a year, in 1999, Vijaya Bank had entered into Rs. 200-crore take-out financing agreement with the Housing and Urban Development Corporation (HUDCO) for funding infrastructure projects. In the year 2000, VB had introduced a new scheme named V-Star savings bank Account Scheme. Vijaya Bank taped the capital market with an initial public offering in the year 2000. The Bank had signed a pact with LIC in the year of 2003 to offer Life insurance cover to all its existing as well as its new deposit-holders. VB had unveiled a new electronic fund remittance facility called V-REMIT, under which the bank customers can electronically remit funds to the account holders in any bank. The MoU was signed with M/s National Insurance Company Limited in the year 2003 for marketing banc assurance products. Bank has decided to amalgamate its own subsidiary VIBANK Housing Finance Ltd. (VHFL) with the Vijaya Bank. Vijaya Bank had opened a Kiosk that is exclusively for retail lending at its Ashoknagar
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Branch in Mangalore and signed the MoU with Punjab National Bank and Principal Financial Group of USA for a joint venture participation in Asset Management Company. In the year 2004, the bank made tie-up with NIC to offer free insurance policy. Punjab National Bank (PNB) and VB had entered into a four-way partnership with Principal Financial of the US and Berger Paints to set up an insurance broking company. Vibank Housing Finance Ltd became a wholly owned subsidiary of the bank in the identical year of 2004. The Bank signed a pact with Nabard to co-finance agriculture, agro processing, hi-tech agriculture and rural development projects. Vijaya Bank launched the bank's second city specific credit card - the 'Hyderabad Card'. During the year 2005, the bank made tie-up with TAFE. In the year 2006-07, the bank implemented the Crore Banking Solution (CBS) in additional 152 branches. VB opened 43 new branches, upgraded 10 extension counters into full-fledged branches, converted 2 regional foreign exchanges into full-fledged overseas branches and also converted one capital market services branch into a general banking branch in the year 2006-07 The bank had helped 11061 Self Help Groups in the same year by the way of loan disbursement. In June of the year 2007, VB had inked a memorandum of understanding (MoU) with credit rating agency ICRA, under which ICRA will assign ratings to small scale industries (SSIs) and small and medium enterprises (SMEs) that are borrowers of the bank. As of April 2008, signed a memorandum of understanding with Fitch Ratings India to provide bank loan ratings to its corporate clients at a normal fee. Vijaya Bank plans to focus on farm and retail lending to push up business.
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VIJAYA BANK
Peer Comparison
Company
Market Cap (Rs. in Cr.) 124,290.03 26,863.65 25,292.65 18,561.70 18,226.12 11,761.10 11,313.80 7,720.82 7,400.44 6,499.54 6,380.79 6,000.75 5,858.80 5,723.33 5,468.72
P/E
P/BV
(TTM) (TTM) (x) 16.19 5.32 5.18 5.65 6.81 5.79 6.33 4.52 3.96 6.19 5.78 3.98 4.36 12.60 4.16 (x) 1.71 1.02 0.96 0.90 0.97 0.67 0.87 0.84 0.77 0.60 0.58 0.73 0.78 1.02 0.68
EV/EBIDTA (x) 17.07 16.64 16.07 14.95 17.62 13.51 16.03 13.61 15.44 16.83 12.18 16.07 14.08 15.94 16.64
ROE (%) 12.6 23.5 24.5 26.4 17.3 15.8 20.9 23.0 21.0 14.8 10.7 21.9 23.2 19.5 17.6
ROCE (%) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
D/E (x) 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
State bank of India Bank of Baroda Punjab Natl.Bank Canara Bank Bank of India IDBI Bank Union Bank (I) Indian Bank Allahabad Bank IOB Oriental Bank Corporation Bank Andhra Bank Central Bank Syndicate Bank
Key executives:
H S Upendra Kamath , Chairman & Managing Director Shubhalakshmi Panse , Executive Director K Gopalakrishnan Nair , Company Secretary Suma Varma , Nominee (RBI)
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VIJAYA BANK
Company Head Office / Quarters:
41/2 Trinity Circle, M G Road, Bangalore, Karnataka-560001 Phone : 91-80-25584066(20 lines)/25594737 Fax : 91-80-25598040/25594737 E-mail : vijayabank@vsnl.com sdigc@vijayabank.co.in ,Web : http://www.vijayabank.com
Registrars:
Link Intime India Pvt Ltd C-13 Pannalal Silk Mills Cmpd LBS Marg Bhandup West Mumbai - 400 078
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VIJAYA BANK
CASE STUDY -1
VIJAYA BANK ___________ BRANCH/REGION BANGALORE
FOR APPROVAL
FOR TERM LOANS

Sector Region Bangalore South Branch South Road MSME Small ( Mfg) Lending Style Consortium leader Our Share (%) Asset status Risk Rating SA/SSA/DA HC Present 31/3/11 Internal External : a. Name of the Agency b. Rating assigned Assignable Risk Weight Previous 31/3/_____ Sole/Consortium/Multiple - SOLE NA BSR Code CBS Code Date of Expiry Extended Upto Date of receipt at 12.01.2012 At full particulars At full particulars Group HO with RO with End
Priority Trading/Industry/Service sector/Infrastructure
Category
(Rs.in crore)
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VIJAYA BANK
NOTE FOR THE BOD/MCB/CMD/ED/GM
ACCOUNT: AAA PVT LTD
1. PRESENT PROPOSAL:
To approve the proposal for;
(a) Term Loan - For Rs.80.00 lakhs for setting up a factory for manufacture of polymer water storage tanks and crates in Kumbalagodu Industrial area, Mysore Road, Bangalore-74
Exposure FB Existing Proposed Total Total exposure 80.00 80.00 80.00 80.00 Borrower NFB Investment Others in the Group FB NFB Investment TOTAL
Cleared in RCC/CCC Agenda No.
2. BACKGROUND:
Name of the Borrower
AAA Pvt Ltd Regd. Office: No. 3KIADB Industrial Area, 1 st Phase, Kumbalagodu,
Mysore Road,Bangalore-560074 b c d Date of establishment Constitution Line of activity 12.01.2006 Private Limited Company Manufacturers and Dealers in plastic moulded articles , water storage tanks
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,crates and fittings e Our customer since Our borrower since f Name/s of proprietor, partners, Directors Fresh (1) ..- Mg.Director (2) Lakshmi P.N- Director
g
Sl No
Guarantor/
(Rs.in lakhs) Net worth
Name
Relationship if any with the Borrower
Age
1 2
Director - Director
39
306.00 18.00
Name of Directors/ Guarantors appearing in the RBI Defaulters List : Whether any of the party to the proposal (i.e., proprietor/partners/
promoters/Directors/Guarantors) are related to any of the directors of our bank and/or any other bank (both in public sector and private sector) or a financial Institution and if so nature of relationship :
None Litigations if any pending against the Company and/or its directors and if so details thereof:
None i Share holding pattern : Name of the Shareholder/s Satish No.of shares 5000 % 50 %
Lakshmi TOTAL
5000 10000
50%
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j. Existing Credit Facilities with our Bank:
Sanctioned by Nature of facility Amount
on Rate of interest & other charges Outstanding balance Over dues if any Plan for clearance
NIL
TOTAL
k. If a new applicant, whether the following due diligence criteria have been ensured/complied with:
Name of existing banker/s with address
Whether all KYC norms have been complied Identity of the proprietor/partner/directors properly established
Yes/No Yes/No
The statement of account with the existing bank/s for the last 6 months has been scrutinized and ensured absence of Return of cheques for want of funds NIL devolvement of Bills under LC NIL invocation of Bank Guarantees issued Arrears of interest payment Arrears of installment payment Yes/No Yes/No Yes/No Yes/No Yes/No
l. Compliance of sanction terms: - Not applicable
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Doc 54 Dated _____ Legal Audit report Dated _____ Stock Audit report Dated _____ Confirming compliance of all the sanction Y/N conditions held on RO records Confirming correctness and enforceability of the Y/N documents held on RO records. It is confirmed that all the irregularities pointed out Y/N therein, are rectified
If answer to any of the above columns is NO, then reasons for non compliance/nonsubmission along with details of irregularities not rectified and the date by which these will be rectified must be informed in respect of each item
m. Major Inspection/Audit/LRM/AFI comments (1) Internal (2) RBI (3) LFAR (4) Risk Management Dept NA NA NA NA
Action taken
Details of persisting inspection comments, reasons there for and the time frame by which these will be rectified should also be indicated.
NA
n. Key financial indicators:
(Rs.in lakhs)
Audited
Audited
Estimates for current
31/3/ (Projections for ensuing year) 31.03.13
PARTICULARS 31.03.09 Sales/receipts Operating profit PBT PAT 1.29 0.76 1.58 1.10 3.07 2.06 57.00 31.03.10 66.02 31.03.11 91.25
year 31.03.12 150.00
500.00
7.16 6.00
12.66 11.19
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VIJAYA BANK
Depreciation Cash accruals Paid up capital Reserves & surplus Intangible assets Tangible net worth Total Term liabilities Total outside liabilities Net Block of Fixed assets Non Current assets Current assets Current liabilities Net working capital Current ratio TOL/TNW 17.68 16.29 1.39 1.1 0.75 22.40 17.58 4.82 1.25 0.57 28.08 17.24 10.86 1.55 0.40 47.00 21.00 26.00 2.23 1.75 140.00 80.00 60.00 1.28 1.50 3.99 2.95 2.95 20.12 7.08 4.00 4.00 26.43 12.65* 5.30* 5.30 26.43 62.15 60.00 81.00 73.34 80.00 109.00 0.92 1.68 1.00 2.99 1.31 2.41 3.00 4.09 1.44 3.50 6.50 6.15 2.34 8.34 50.00 12.15 14.38 25.57 50.00 23.34
* Unsecured loans from directors not considered. Performance highlights (with specific comments on major variations from the past/present estimation) :
Capacity details: (In MT)

Production Capacity Installed Utilised % of Utilisation Existing Proposed 336 lacs ltrs
37-74%
Sales/receipts:
Performance vis vis projections : PARTICULARS
(Rs.in lakhs)
Audited for the previous
Audited/ Provisional For the
for the current year
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VIJAYA BANK
year _31.03.10 Projected net sales Actual net sales % of achievement -66.02 91.25 150.00 Last year 31.03.11 31.03.12
Profitability: Operating profit margin: PBT of Rs.3.06 lakhs for 2010-11 give an Operating profit margin at 3.7%. In absolute terms there is 163% growth in profitability over the previous year. The unit is progressively profitable.
Cash accruals margin: Cash accrual is at 5.5 % of gross sales and shows an increase of 155% over year 2009-10. There is ample liquidity in the system
Current ratio: 2.33: 1 indicates good amount of liquidity in the business. TOL/TNW: DER is very low at 0.5: 1 as there is hardly any outside liability for the company except a small amount of unsecured loan. There is adequate solvency for the company. Conclusions regarding overall financial position The financial position of the company is satisfactory. The unit is progressive and all vital ratios are well within the benchmark levels. It is proposed to bring in promoters contribution as additional capital (margin) for the project as projected in the Project report submitted. This should ensure maintenance of DER at the required level.
p. Sectoral exposure: (as on - to Industry)

(Rs.in crore) Aggregate exposure to this sector No. of a/cs Amount Sanctioned NIL Ceiling Internal RBI -----Bal. o/s No. of accounts NPA status of our Exposure Bal. o/s % age of NPA
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VIJAYA BANK
3. TERMS OF THE PROPOSAL:
a Nature of facility Amount Proposed Existing Term Loan(ML) 80.00 -BR+. Repayable in 60 EMI after an initial RPH of 6 months (Rs. in crore)
Interest & charges Existing proposed
Terms
TOTAL b PRIMARY SECURITIES: Nature of security Description Margin propose d
80.00 Charge created on
Value of Securitypaneled valuer
Basis of Valuation Insurance Amount Valid till
L&B EMDTD
Industrial land & Factory building No.13E-, Khatha No.590/13E, ,Kumbalagodu I Indu. Area, Bangalore
25% on Bldg.& dev.
Land
70.00
Valuation dt
Building To be insured
Bldg
46+5 (51.00) (estimate d cost of land Dev & building.
25.12.11 by empanell ed valuer
P&M Hypothecat ion
Plant & Machinery and Electrical installation
25%
P&M
56.00
Invoice value & cost of installatio n
To be purchased & insured
COLLATERAL SECURITIES Nature of security Description Charge created on Value of security Basis of Valuation Insuranc e Amount Valid till
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VIJAYA BANK
EMDTD Continuing security
Continuing security of Res. L&B bearing No.4109,5 C Main Road,Tata Silk Farm, K.R.Road, Bangalore already secured to the HL of Mr.P.N.Satish & Brund devi
th
Existin g 277.00
Valuation by empanelled valuer dt 20.09.11
d) SECURITY COVERAGE
Particulars Fund based
Secured 80.00
Unsecured --
Total 80.00
Remarks With 25% margin on Bldg, civil work & P&M
a)L&B b)P&M c) TD d) Non Fund based A Not proposed b) c)
126.00 56.00
126.00 56.00
L&B on completion P&M to be installed
--
--
--
--
e) Purpose of the credit limit/s sought
Construction of Factory building and purchase and installation of Plant & Machinery and Electrical installation for the proposed factory for manufacture of polymer water tanks and crates for the proposed 2nd unit of the company at No.13,KIADB Industrial Area, 1 st Phase , Kumbalagod, Mysore Road, Bangalore-560074. The setting up of factory is being done as part of the company s expansion plan and it is situated adjascent to the existing unit.
f) Details of Concessions if any
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4. ADDITIONAL INFORMATION:
(a) Details of associate concerns:
(Rs.in lakhs)
Name : Brief data Year ending March 31.03.2011 M/s Satish Pipe lines Key indicators Not availed Sole Distributors of AVON brand agricultural and industrial pipelines having dealers all over Karnataka. Maintaining Current Account with the branch. Satisfactory dealings TNW Net Block Sales PBDIT PAT Cash accruals Current Ratio DE Ratio any credit March March
Details of the credit limit/s enjoyed by the associate concerns with our bank:-
Name the
of
Nature of Facility
Amount
Rate
of
Outstanding balance 09.02.12
Over dues if any
Plan
for
Asset Classification
Health Code
interest & other charges
clearance
Company
Satish Pipelines
LMV
5.26
5.26 Disbursed on09.02.12
--
24 months
--
-HC01
b) Account Review:
(Furnish here in brief comments based on the annexure. ) NA being fresh proposal. Current account is conducted well.
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c) Credit Assessment:
PROJECT PROFILE IN BRIEF:
(1) Project outlay:
(Rs.in crore/lakhs)
COST OF PROJECT
Amount
MEANS OF FINANCE Promoters contribution
Amount 87.00 80.00
Land & Development Build&Civil works P&Machinery Ele.Installations Contig, Misc.assets, KTPL Deposit etc Margin for W.C
40.00 46.00 30.00 15.00 11.00
Bank debt
Name of the Bank
Amount 80.00
% 48
Vijaya Bank, South End Rd 25.00 T O T A L 167.00
Toal
167.00
(2) Promoter's capability
( i) Promoter's background : The company is promoted by Mr. P.N.Satish and his mother, Smt.P.N.Vasanthalakshmi who are the 2 directors of the company. The objectives of the company is to carry on the business as manufacturers, dealers, importers and exporters of all kinds of plastic moulded equipments, water and other storage tanks , pipe fittings ,sanitary fixtures and irrigational fittings & fixtures.
Mr. P.N.Satish is already a Sole Distributor for the state of Karnataka for AVON branch of pipe fitting having a large chain of dealership. He is a Science Graduate with a Masters Degree in Business Management. Smt.Vasanthalkshmi is the mother of Mr.Satish and is a housewife.CIBIL report taken out in respect of Mr.Satish does not reveal any undesirable features or overdues.
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(ii) Management structure and competency : The promoters are well experienced in the line of activity .
(iii) Equity : It is proposed to increase the authorized capital to Rs.50.00 lakhs and bring in fresh contribution for the project.
(iv) Internal accruals: Internal accruals to the extent of Rs.10.00 lakhs is projected at the beginning.
(v) Unsecured loans :
Upto Rs.30.00 lakhs is projected. (vi) Tie up for all the above:
Arrangements have been made by the directors from own sources , Land is purchased and work commenced
(vii) Debt details: The original project cost of Rs.210.00 laksh has since been revised by the company in their Board meeting held on 11.01.2012. The revised cost is Rs.167.00 lakhs and the Loan component is estimated at Rs.80.00 lakhs .
(viii) Our Bank's share in the multiple/consortium lending The entire loan requirement (TL) is to be met by our branch and the company is not in need of any working capital loan at present.
(3) Technical viability: ( i) Land & its locational advantages : Land admeasuring 7022 sq.ft has been purchased in the name of the company at Kumbalagodu ind.area and it is proposed to build a factory in 3 floors totaling 10227 sq ft .
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The unit has all the locational advantage being in the Govt. Industrial area.
( ii) Plant & Machinery : Arrangements have been made by the company for procuring it indigenously from M/s Narota, Ahamedabad.
(iii) Utilities : Power : The unit will need 100K.V.power. The same would be applied for at the appropriate time .Also a DG set for 70 KV power would be installed.
Water : About 2000 litres of water is needed for cooling which can be recycled. KIADB has arrangement for regular supply of water.
Raw material : All consumable are available in Bangalore. LLDPE can be purchased from Reliance, Haldia and IOCL in Bangalore.
Manpower: Company has and existing manpower of 16 which will be increased to 29. The required personnel would be recruited locally.
(iv) Technical tie up : Being an existing unit , the required technical knowhow is available.
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(v) Other approvals required and status thereof: The unit is effluent free. Existing unit has pollution control clearance. The same would be obtained for the expansion unit also. The unit is in industrial area.
(vi) Project Architects and Engineers : Civil and industrial engineers are engaged for implementation of the project and installation of plant. D ZIGNS , Jayanagar, Bangalore are the architects.
(4) Economic viability:
( i)
Demand scenario : The company is operating since 2006 and marketing its products throughout Karnatqka. There is a growing demand for water tanks and the dealers are reportedly demanding more supplies. Hence the expansion plan.
(ii)
Supply scenario : The company is presently not able to meet the demand due to limited space and production facilities in the existing unit.
(iii)
Industry scenario :
There is growing demand for water storage tanks of capacity upto 1000 ltrs for domestic purposes and upto 5000 lts for industrial uses . There is also demand for crates used for floriculture and other agro based industries. (iv) Marketing arrangement : The company already has a large chain of dealers throughout Karnataka . As such supplying the products does not require any new marketing strategy or arrangements.
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(5) Financial viability:
( i) Profitability statement & ii) Cash flows
The project submitted by the company has envisaged a Project cost of Rs.210.00 lakhs with a TL component of Rs.120.00 lakhs. However due to design changes in the project, the revised project outlay submitted has put the Project cost at Rs.167.00 laksh and a TL component is kept at Rs.80.00 lakhs only. Detailed Projected B/s, profitability statement, Cash flows, Break even chart and TL repayment schedule covering 6 years from 2013 -2018 is submitted in the Project report. However in view of the downsizing of the project cost due to configuration changes and availability of own fund the borrower has now confined the TL requirement to Rs.80.00 lakhs repayable in 5 years . The Profitability and TL repayment and DSCR have been accordingly reworked.
Revised workings :
TL- Rs.80.00 lakhs TL Repayment - Rs.16.00 lakhs /annum ( Rs.1.33 per month) Int on TL @16% - repayment in 5 years
Debt Service Coverage Ratio I yr Profit 11.19 19.39 14.28 10.17 43.23 16 10.17 1.6 III
Rs in lacs IV 39.50 14.28 5.77 59.55 16 05.77 2.7 V 46.47 14.28 3.57 64.32 16 03.57 3.1
29.38 14.28 07.97 51.63 16 07.97 2.1
Depreciation 14.28 Int. TL Total Rep.of TL Int on TL DSCR Av DSCR 12.37 37.84 16 12.37 1.3 2.1 : 1
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(ii) Cash flows --- as above
Adequate liquidity is available
(iii)
Key Project ratios : Debt Equity ratio DER at 0.5: 1 is very well within benchmark. Promoters contribution is very high.
Asset coverage ratio
At 208% there is adequate coverage of exposure.
Debt Service coverage ratio
Average DSCR ar 2.1:1 indicates sufficient liquidity for servicing the debt.
Internal rate of return With project cost at Rs.167.00 lacs for 5 years IRR 29.82%
(6) Project implementation schedule:

Activity Expected date of Commencement Project Planning, preparation of project report, Prepared and fotationiling of loan application with Banks Order for site development & Civil Work, Structural Fabrication of SMS shed submitted to us Land purchased and development And civil work commenced Expected date of Completion March-2012
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Placing order for machinery Applying for power connection Delivery of Machinery Installation of machinery Training of Technical persons Commissioning Trial Production Commercial production By Feb-12. Quotation obtained. Jan-Feb -12 By Feb-12 Mar-12 Feb-Mar Mar-12 Mar-12 Apr-12
(7) Details of Techno economic viability Report:
Name of the agency which has conducte-12 d the Technical viability study
M.Balasundaram, Bangalore-8
Giri
nagar,
Name of the agency which has conducted the Do economic viability study
(8) Conclusion [Regarding viability of the Project]
The project is for expansion of existing capacity through setting up of a II unit. The project is technically feasible and economically viable.
(9) Allocation of share amongst Banks:

Name of Bank Existing Exposure
(Rs.in crore) Proposed Exposure
Fund based
Fund based
Sole Banking
100%
--
TOTAL
100%
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VIJAYA BANK
SCOT ANALYSIS:
STRENGTH
CONCERN
Existing profit making and progressive The business is run almost entirely by one company person,i.e Mr. Satish P.N.
OPPORTUNITY
THREAT
There is a growing demand for the product Any external factors affecting supply of raw and the company has a ready marketing materials or change in Govt.policies arrangement through its dealership network.
RISK ANALYSIS WITH MITIGATING FACTORS: RISK PERCEPTION Only normal business risk is perceived. MITIGATING FACTORS The business is well established, personnel with technical knowledge and skill are employed and loan exposure well secured by primary and collateral security.
d) Compliance with the RBI & Bank's Lending Policy Guidelines: Compliance with the Prudential exposure norms of RBI Compliance with the Prudential exposure norms of Bank Whether ALCO clearance is required Whether the exposure is within the Bank's sectoral exposure norms Compliance with the other lending policy guidelines of the Bank If not relaxations proposed thereof with justifications with recommendations Yes/No Yes/No Yes/No Yes/No Yes/No
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VIJAYA BANK
Compliance in case take over from banks is involved:
(Compliance with take over norms as per lending policy guidelines as per annexure should be confirmed here)
Not applicable
e) Risk Rating and pricing:
Risk rating based on Audited financials for existing entities and projected for new borrowers Internal risk rating The year before 31/3/ Risk rating Risk based pricing Name of the risk rating agency If there is a slippage in risk rating reasons thereof Previous year 31/3/ By an accredited Credit rating agency The year before 31/3/ Previous year 31/3/
f) Justifications for concessions (if any) proposed: Not proposed
Pricing stipulated as per HO circular ___________ Pricing as per risk rating Pricing proposed By RO By Dept Concession proposed Over stipulated rate of interest (HOC Over the risk based pricing Details of ancillary/other business support provided/ expected from the borrower )
Other information regarding concession/s proposed if any: (a) Whether the concessions proposed are based on the decision of consortium?
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(b) Whether all members of the consortium are proposing similar concessions?
If the pricing proposed is below the risk based pricing or pricing stipulated as per HO Circulars justifications with recommendations based on the Customer's Profitability analysis as under;
Rs.in lakhs 1 2 3 4 5 6 7 8 Average funds lent Cost of Funds (%) Interest cost of Funds lent Operating cost Capital Charge ( ( %): %) %) Provisioning Cost ( 9 10 11 12 13 14 15 16 17 18 19 20 Justification for the concession/s : NA Total Interest income from Borrower Total Commission earned on bills Income from Non fund based limits Total of processing, commitment, Penalties etc Income earned on SLR portion of deposit Total earnings from Borrower [9+10+11+12+13} Credit 50% of Operating cost for TL/NF Credit 50% of Provisioning cost for AA+ and AA ratings Effective Earnings from Borrower [14+15+16] Effective yield [17/1] Effective Cost to the Bank [3+4+5+6+8] Customer Profitability [17-19] Rs.in lakhs
Average Deposits maintained Average cost of above deposits
g) Relaxations if any proposed (from Banks Lending Policy Guidelines) along with justifications for the same:None proposed h) Additional terms and conditions: PREDISBURSEMENT 1. Pro-rata margin contribution is to be ensured while disbursing the loan 2. EMDTD of L&B to be created by registering Memorandum at SRO.
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3. Continuing security of HL property of Sri.P.N.Satish valued Rs.277.00 lakhs is to be obtained. POSTDISBURSEMENT 1. Required power to be applied for and obtained by the company. 2. Charge is to be created with ROC within 30 days . 3. Confirmation of infusion of additional capital is to be submitted. 4. Clearance from Pollution control Board to be obtained. 6. INTERPRETATIONS: The companys proposal for a Term loan of Rs.120.00 lakhs for the project has been provisionally sanctioned at the MSME Mela-2011 on 26.11.11. However the applicant has tuned down the loan requirement to Rs.80.00 lakh due to change in P&M configuration etc and submitted a revised proposal for Rs.80.00 lakhs . The company has informed that they do not require a working capital facilities at present.
The applicant is a Registered SME ( Mfg) unit in existence since 2006. The account is well conducted and the promoters are of high net worth and credit worthiness. The unit is coming up in a Govt industrial area and the projecrt is viable. Having regard to what is stated in the foregoing Note , the proposal is recommended for approval of the following facilities with the terms, conditions, concessions, relaxations, waivers as proposed therein. (Rs. crore)
Nature of facility Amount Proposed Existing Term Loan ( ML) -80.00 BR+ 4.35(15% )- floating as applicable to MSME Repayable in 60 EMI with initial RPH of 6 months Interest & charges Due date
TOTAL
80.00
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VIJAYA BANK
CASE STUDY -2
VIJAYA BANK SOUTH END BRANCH/ BANGALORE SOUTH REGION
FOR APPROVAL
FOR WORKING CAPITAL LIMITS

Sector Region Bangalore South Branch South Road Lending Style Consortium leader Our Share (%) Asset status Risk Rating SA HC 01 Present Previous Sole NA BSR Code CBS Code Date of Expiry Extended Up-to Internal External : a. Name of the Agency b. Rating assigned Assignable Risk Weight Group NA NA NA NA Date of receipt at At full Particulars At full HO with RO with 30.06.2012 31/03/2012 End
Priority Small Scale Industry
Category
Total exposure to Group-Present Cleared in RCC/ CCC Agenda No.
509.92
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VIJAYA BANK
NOTE FOR THE DGM, BANGALORE SOUTH
ACCOUNT: M/S. A BC PRIVATE LTD.
1. PRESENT PROPOSAL:
To approve the proposal for;
Renewal of CC (H) limit with enhancement from Rs:70.00 lakh to Rs:100.00 lakh
[Rs. in lakh] Exposure FB Borrower NFB Inves tmen t Existing-B/o in TLs W.C. Lt (existing) Proposed (Renewal of W/c Limit) Total 509.92 509.92 409.92 70.00 100.00 100.00 479.92 Others in the Group FB NFB Investme nt TOTAL
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2. BACKGROUND: A Name of the Borrower A B C PRIVATE LTD. No.76, I Main Road, .., Bangalore-27. B C D E Date of establishment Constitution Line of activity Our customer since Our borrower since F Name/s of Directors. 04/01/1996. Private Ltd Co. Manufacturers of Dies used by Litho Printers. 1996. 1996. 1. 2. 3. 4. . G
Sl No Guarantor/ (Rs.in lakhs) Net worth Name Relationship if any with the Borrower 1 Managing Director 69 As per assets & liability 2 3. 4. Director Director Director 59 38 33 -doAge
Name of Directors/ Guarantors appearing in the RBI Defaulters List :

Whether any of the party to the proposal (i.e., proprietor/partners/ promoters/Directors/Guarantors) are related to any of the directors of our bank and/or any other bank (both in public sector and private sector) or a financial Institution and if so nature of relationship :
NA NA
Litigations if any pending against the Company and/or its directors and if so details thereof:
Share holding pattern : Name of the Shareholder/s

A.
No.of shares
95023 29550 17550 18080
%
59.31 18.45 10.95 11.29
B C D
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j. Existing Credit Facilities with our Bank: (Rs: In lakh)
Sanctioned by:
Nature of facility CC(H) 70.00 Amount Rate of interest & other charges BR+ 6.00 % Outstandin g balance 58.96 Ovedue if any Nil Plan for clearance NA
SL-120209040250009 SL-120209041000019 SL-120209051000003 SL-120209051000002 SL-120209051000004 SL-120209051000005 SL-120209051000006 SL-120209051000007

TOTAL
245.00 136.00 032.00 192.00 016.45 024.00 089.00 030.00
BR+6.00=16.65 -do-do-do-do-do-do-do-
21.77 83.62 24.13 140.31 12.66 20.33 79.81 27.29

409.92
Nil
NA
k. If a new applicant, whether the following due diligence criteria have been ensured/complied with: Name of existing banker/s with address
NOT APPLICABLE
Whether all KYC norms have been complied Identity of the proprietor/partner/directors properly established and ensured absence of NA Return of cheques for want of funds NIL devolvement of Bills under LC NIL invocation of Bank Guarantees issued Arrears of interest payment Arrears of instalment payment l. Compliance of sanction terms: -
Yes Yes
The statement of account with the existing bank/s for the last 6 months has been scrutinized
Yes/No Yes/No Yes/No Yes/No Yes/No
Doc 54
Dated _____
Confirming compliance of all the sanction Y conditions held on RO records
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VIJAYA BANK
Legal Audit report Dated _____ Stock Audit report Dated _____ Confirming correctness and enforceability of the Y documents held on RO records. It is confirmed that all the irregularities pointed out Y therein, are rectified
If answer to any of the above columns is NO, then reasons for non compliance/nonsubmission along with details of irregularities not rectified and the date by which these will be rectified must be informed in respect of each item
NA
m. Major Inspection/Audit/LRM/AFI comments (1) Internal (2) RBI (3) LFAR (4) Risk Management Dept No-persisting comments. Nil Nil
Action taken
Details of persisting inspection comments, reasons there for and the time frame by which these will be rectified should also be indicated.
n. Key financial indicators: PARTICULARS Audited Provisional
(Rs.in lakhs)
Est for Current yr.
(Projections)
31.03.11
31.03.12
31.03.13
31.03.14
Sales/receipts Operating profit PBT PAT Depreciation
1339.93 335.39 126.57 85.00 125.07
1400.00 357.96 132.41 87.39 132.23
1540.00 359.83 153.22 101.13 120.72
1694.00 351.75 186.33 122.98 103.26
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Cash accruals Paid up capital Reserves & surplus Intangible assets Tangible net worth Total Term liabilities Total outside liabilities Net Block of Fixed assets Non Current assets Current assets Current liabilities Net working capital Current ratio TOL/TNW 210.07 187.08 315.04 0 502.12 591.73 1179.73 1004.25 24.17 700.95 588.00 112.95 1.19 2.35 219.62 187.08 402.43 0 589.51 491.36 1016.21 907.02 30.00 716.22 524.85 191.37 1.36 1.72 221.85 187.08 503.55 0 690.63 351.85 689.98 786.29 50.00 583.30 338.13 245.17 1.73 1.00 226.24 187.08 626.53 0 813.61 214.62 513.81 683.03 55.00 628.37 299.19 329.18 2.10 0.63
Highlights (with specific comments on major variations from the past/present estimation): Sales: Growth in sales for 2010-11 was quite good, about 19%. However, growth was very dismal, just about 4%, in 2011-12 reportedly owing to slowdown in the growth of manufacturing sector in general. Party proposes minimum 10% hike over next two years, which seems to be quite reasonable and acceptab Sales/receipts: Performance vis vis projections : PARTICULARS Audited for the previous year 31.03.2011 Projected net sales Actual net sales % of achievement 1272.00 1340.00 1560.00 1540.00 1400.00 -(Rs.in lakhs)
Provisional for the Last Year 31.03.12
Est.for the current year 31.03.13
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VIJAYA BANK
CAPACITY DETAILS: (In MT)
Production Capacity Installed Utilised % of Utilisation Existing NA NA Proposed
Profitability: Operating profit margin: Operating profits both achieved/provisional and projected are at reasonable and consistent levels in the range of 21-25% of sales. Cash accruals: There are enough surplus cash accruals, after meeting all repayment commitments including interest, and is consistent around 13-15% over the years. Current Ratio: The CR has been consistently good and is expected to remain above the benchmark level of 1.33 over the ensuing years. However, the party is sound enough to meet any fund crunch on its own. TOL/TNW: The DER is in favorable position on account of considerable net worth held in the business and is likely to improve year on year as projected. Conclusions regarding overall financial position The overall financial position is quite satisfactory and is likely to improve further year on year. Party has been very prompt in repaying EMIs on TLs, and operation in the CCH account is also brisk. Business turnover and growth is good. The directors, all being family members, running the business under personal care and supervision. p. Sectoral exposure: (as on) - to Industry
(Rs.in crore) Aggregate exposure to this sector No. of a/cs Amount Sanctioned Bal. o/s No. of accounts NPA status of our Exposure Bal. o/s % age of NPA
Ceiling
NA
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VIJAYA BANK
Internal RBI
4. TERMS OF THE PROPOSAL
(Rs. in lakh)
Nature of facility Existing
Amount Proposed 70.00 100.00
Interest & charges Existing BR+ % 5.00 Proposed As applicable
Terms
CC(H)
Facility for 12months
TOTAL B Nature of security
70.00
100.00 Description Margin propose d Charge create d on Value of Security Basis of Valuatio n Insuranc e Amount Vali d till
PRIMARY SECURITIES:
RM, WIP, FG, Book Debts/Receivables.
Hyp. Of stock in trade RM consisting of Ply Wood, Litho Steel rules, WIP & FG; and Book Debts & Receivables
25% on Stock4 0% on Book Debts.
Hyp.
As -per stock / Book Debt statements.
Cost price.
outstanding for not more than 90 days.
COLLATERAL SECURITIES Nature of security Description Charge created Value of Security Basis of Valuation Insura nce Amou nt Valid till
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VIJAYA BANK
1. Land & Building
First charge by way of EMDT of land
Mortgage
Rs:162.9 5 lakh
Market value.
admeasuring 1912.50 Sft and Ground + three storied building constructed thereon having total built up area 6440 Sft situated at No.76, I Main, III Cross, Sudhamanagar, Bangalore owned by Sri. A. Vishwanatha Sanil, valued Rs:162.95 lakh as per valuation report of Sri. K. Udaya Kumar shetty, dated 12/07/2008.
Continuing security by way of EMDT of
2 Land & Building
land admeasuring 2400 Sft and Ground + four storied building constructed thereon having total built up area 8750Sft situated at No.10, I Main, III Cross, Sudhamanagar, Bangalore owned by the Company, with market value Rs:220.00.00 lakh as per
Rs:220.0 -do0 lakh -do-
valuation report adted:
SECURITY COVERAGE
Particulars Fund based a)CC(H) b) c) d) Non Fund based a) b) c)
Secured
Unsecured
Total
Remarks
100%
NA
Purpose of the credit limit/s sought
To augment working funds.
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VIJAYA BANK
Details of Concessions if any
Not Applicable.
5. ADDITIONAL INFORMATION:-
(a) Details of associate concerns: NA b) Account Review:-
(Rs.in lakhs)
(Furnish here in brief, comments based on the annexure-1.)
M/S. Zenith Die Makers Private Ltd, a family concern, is engaged in the activity of Mfg. of Dies of small Machine tools used mainly by Litho Printers since 1996. Turnovers in the last two previous years were reasonably good and with growth of over 19% in 2010-11.
The party has been dealing with us since 1996 and borrower since then. Conduct of existing limit/loans has been good and collaterally secured by prime land and building properties of adequate values.
The actual turnover in the account is commensurate with sales receipts. Interest being promptly serviced. Term liabilities with our/other banks/financial institutions are also being promptly serviced. Except in exceptional situations, party operates with in the limit. Overall conduct is very much satisfactory.
c) Credit Assessment:
(Rs.in lakh)
Fund based working capital limits:
(The method of assessment as applicable should be adopted)
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VIJAYA BANK
Under Projected Turnover Method for others up to WC limits of 2.00 crore : Accepted level of projected sales for the year 2012-13 of which maximum permissible working capital finance @ 25% of (A) less required minimum Promoter's contribution @ 5% of (A) Projected Net working capital Higher of (C) & (D) (B) (C) (D) (E) (A) 1540.00 385.00 077.00 245.00 245.00 140.00
Eligible Bank Finance (B) (E) -----------------------------------------------
Comments regarding acceptability and justifications for the level of holdings:
The growth projected for 2012-13 is only 10% over the actual/s of the previous year. Hence, given the favourable indications for growth, and considering the past performance of the unit, the projection is quite justified and acceptable. Taking overall financial position, vis-a vis vital ratios, branch recommends for renewal of the existing limit with enhancement as recommended below.
SCOT ANALYSIS:
STRENGTH
CONCERN
The unit is into the business for about 15- There is nothing to be concerned about the years now. Well established, well accepted unit as such. by the market. Promoters are good and well experienced besides being financially sound. Average growth in the last 3-4 years is really commendable. OPPORTUNITY THREAT
Opportunity is wide open in the growing The field involves technicality and use of economy and demand by large number of sophisticated machines. Company must take manufacturing units. Packaging is totally steps unavoidable for any product to be sold. to keep itself in updated the on the
developments
changing
technology/scenario. Market competition is another area of threat.
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VIJAYA BANK
RISK ANALYSIS WITH MITIGATING FACTORS: RISK PERCEPTION MITIGATING FACTORS
Branch does not anticipate any risk in the The promoters are well experienced with present scenario other than the normal widely spread reliable customer- base and are business risk as in the case of any other quite capable to manage contingency, if any. business.
d) Compliance with the RBI & Bank's Lending Policy Guidelines:
Compliance with the Prudential exposure norms of RBI Compliance with the Prudential exposure norms of Bank Whether ALCO clearance is required Whether the exposure is within the Bank's sectoral exposure norms Compliance with the other lending policy guidelines of the Bank If not relaxations proposed thereof with justifications with recommendations
Yes Yes No Yes Yes
NA
Compliance in case take over from banks is involved: -
(Compliance with take over norms as per lending policy guidelines as per annexure should be confirmed here)
NOT APPLICABLE
e) Risk Rating and pricing:
Risk rating based on Audited financials for existing entities and projected for new borrowers Internal risk rating The year before 31/3/11 Previous year 31/3/12 By an accredited Credit rating agency The year before 31/3/ Previous year 31/3/
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VIJAYA BANK
Risk rating Risk based pricing Name of the Risk rating agency -NA If there is a slippage in risk rating reasons thereof NOT GOT DONE
NA f) Justifications for concessions (if any) proposed: NA
Pricing stipulated as per HO circular ___________ Pricing as per risk rating Pricing proposed By RO By Dept Concession proposed Over stipulated rate of interest (HOC Over the risk based pricing Details of ancillary/other business support provided/ expected from the borrower )
Other information regarding concession/s proposed if any: (a) Whether the concessions proposed are based on the decision of consortium?
(b) Whether all members of the consortium are proposing similar concessions?
If the pricing proposed is below the risk based pricing or pricing stipulated as per HO Circulars justifications with recommendations based on the Customer's Profitability analysis as under;
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VIJAYA BANK
Rs.in lakhs 1 2 3 4 5 6 7 8 Average funds lent Cost of Funds (%) Interest cost of Funds lent Operating cost Capital Charge ( ( %): %) %) Provisioning Cost ( 9 10 11 12 13 14 15 16 17 18 19 20 Total Interest income from Borrower Total Commission earned on bills Income from Non fund based limits Total of processing, commitment, Penalties etc Income earned on SLR portion of deposit Total earnings from Borrower [9+10+11+12+13} Credit 50% of Operating cost for TL/NF Credit 50% of Provisioning cost for AA+ and AA ratings Effective Earnings from Borrower [14+15+16] Effective yield [17/1] Effective Cost to the Bank [3+4+5+6+8] Customer Profitability [17-19] Rs.in lakhs
Average Deposits maintained Average cost of above deposits
Justification for the concession/s :
NA
g) Relaxations if any proposed (from Banks Lending Policy Guidelines) along with justifications for the same: NA h) Additional terms and conditions:
PREDISBURSEMENT
Nil
POSTDISBURSEMENT
All existing terms and conditions hold good. 6. INTERPRETATIONS: Having regard to what has been stated in the foregoing, the proposal is recommended for approval of the following facilities with the terms, conditions, concessions, relaxations, waivers as proposed therein. All existing accounts are well conducted & secured by landed properties having sufficient market values.
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VIJAYA BANK
(Rs. crore)
Nature of facility Existing CC(H) 70.00 Amount Proposed (/FR/R&E/R&R) 100.00 (R ) BR+5.00% and PC applicable. as Facility subject to review after 12 months. Interest & charges Due date
TOTAL * F- fresh, R- renewal, R&E- renewal with enhancement, R&R- renewal with reduction
Page 83
VIJAYA BANK FINDINGS

Credit appraisal is done to check the commercial, financial & technical viability of the project proposed its funding pattern & further checks the primary or collateral security cover available for the recovery of such funds Credit is the core activity of the banks & important source of their earnings which go to pay interest to depositors, salaries to employees & dividend to shareholders. Credit & risk go hand in hand In the business world risk arises out of: Deficiencies / lapses on the part of the management Uncertainties in the business environment Uncertainties in the industrial environment Weakness in the financial position
Banks main function is to lend funds/ provide finance but it appears that norms are taken as guidelines not as a decision making A bankers task is to indentify/assess the risk factors/parameters & manage/mitigate them on continuous basis The Credit Appraisal process adopted by the bank take into account all possible factors which go into appraising the risk associated with a loan
These have been categorized broadly into financial, business, industrial, management risks & are rated separately The assessment of financial risk involves appraisal of the financial strength of the borrower based on performance & financial indicators.
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VIJAYA BANK
The norms of the bank for providing loans are not stringent, i.e. even if a particular client is not having the favorable estimated and financial performance, based on its past record and future growth perspective, the loan is provided. By providing various schemes of loans, Vijaya bank tries to cater to the financial requirements of almost all the types of SME units.
Page 85
VIJAYA BANK CONCLUSION

Finance management is the backbone of any organizations and hence yields a number of job options ranging from strategic financial planning to sales. From the study of Credit appraisal of SME, it can be concluded that credit appraisal should therefore be based on the following factors; the same are applied at Vijaya Bank: Financial performance Business performance Industry outlook Quality of management Conduct of account
Vijaya Bank loan policy contains various norms for sanction of different types of loans. These all norms do not apply to each & every case. Vijaya Bank norms for providing loans are flexible & it may differ from case to case. Usually, it is seen that credit appraisal is basically done on the basis of fundamental soundness. But, after two different types of case studies, my conclusion were such that credit appraisal system is not only looking for financial wealth other strong parameters are also playing an important role in analyzing credit worthiness of the firm/company. In all, the viability of the project from every aspect is analyzed, as well as type of business, industry, promoters, past records, experience, projected data and estimates, goals, long term plans also plays crucial role in increasing chances of getting project approved for loan.
Page 86

Vijaya Bank Credit Appraisal Executive Summary

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VIJAYA BANK EXECUTIVE SUMMARY

Dayananda Sagar business school

Dayananda Sagar business school

Reforms in the Banking sector

Dayananda Sagar business school

Dayananda Sagar business school

Development Financial institutions

IFCI IDBI ICICI

Regional Rural Land Development Banks Banks

Public Sector Banks

Private Sector Banks

Nationalized Banks Foreign Banks

Dayananda Sagar business school

Dayananda Sagar business school

General Banking Scenario

Dayananda Sagar business school

Dayananda Sagar business school

Dayananda Sagar business school

Dayananda Sagar business school

Dayananda Sagar business school

Global Expansion of Indian Banking

Dayananda Sagar business school

Scope for New Entrants

Dayananda Sagar business school

Dayananda Sagar business school

Dayananda Sagar business school

Credit Flow and Industry

Dayananda Sagar business school

BRIEF OVERVIEW OF CREDIT APPRAISAL

Dayananda Sagar business school

Brief overview of credit

Dayananda Sagar business school

BASIC TYPES OF CREDIT

Dayananda Sagar business school

Credit can be of two types fund base & non-fund base:

FUND BASED includes:

Working Capital Term Loan NON-FUND BASED includes:

Letter of Credit Bank Guarantee FUND BASED:

Dayananda Sagar business school

Thus Working Capital required is dependent on

Dayananda Sagar business school

Projected Balance Sheet Method & Projected Turnover Method

Projected Balance Sheet Method

3. OPERATING CYCLE METHOD

b) That is, the operating cycle consists of:

Conversion process time

Average period for which finished goods are in store &

Average collection period of receivables (Sundry Debtors)

Dayananda Sagar business school

Dayananda Sagar business school

7. Appraisal of Term Loans

Dayananda Sagar business school

Dayananda Sagar business school

Dayananda Sagar business school

Dayananda Sagar business school

Debt Service Coverage Ratio

Cash accruals Maturing annual obligations

Receipt of application from applicant |

Dayananda Sagar business school

Dayananda Sagar business school

4.2 From SSI to SME:

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4.3 Definition of SMEs