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A Project on Assessment of working capital finance

By Ritika singh

Guides Mr. N.S. Mohan (AGM) Mr. Shailesh Rao(Head credit) Mr. Suraj Bhalerao (Financial Executive)

Project Work undertaken at:

Report Submitted in partial fulfilment of the requirements For the award of Post-Graduate Diploma in Banking and Finance (2012-2014) By National Institute of Bank Management, Pune


INTRODUCTION The Topic of my project is Assessment of Working capital Finance for SMEs in BANK OF INDIA. Today the base of the country Economic development and trade is depending upon Banking and credit structure of the economy. The financial structure is the foundation of credit and capital market of the economy, which solely depends upon the banking business in the country. Introduction and Importance of Small and Medium Enterprises (SMEs): Small and Medium Enterprises (SMEs) have played a significant role world over in the economic development of various countries. Over a period of time, it has been proved that SMEs are dynamic, innovative and most importantly, the employer of first resort to millions of people in the country. The sector is a breeding ground for entrepreneurship. The importance of SME sector is well-recognized world over owing to its significant contribution in achieving various socio-economic objectives, such as employment generation, contribution to national output and exports, fostering new entrepreneurship and to provide depth to the industrial base of the economy. SMEs are the backbone of all economies and are a key source of economic growth, dynamism and flexibility in advanced industrialized countries, as well as in emerging and developing economies. They are responsible for between 60-70% net job creations in Developing countries. Small businesses are particularly important for bringing innovative products or techniques to the market. Microsoft may be a software giant today, but it started off in typical SME fashion, as a dream developed by a young student with the help of family and friends. Only when Bill Gates and his colleagues had a saleable product were they able to take it to the marketplace and look for investment from more traditional sources. SMEs are vital for economic growth and development in both industrialized and developing countries, by playing a key role in creating new jobs. Financing is necessary to help them set up and expand their operations, develop new products, and invest in new staff or production facilities. SME sector in India is the key driver of the nation's economic growth with a contribution of over 40 per cent to the country's industrial output and around 35 per cent to direct exports. It accounts for over 90 per cent of the industrial units in the country. In terms of employment, this sector plays a very crucial role, being the second largest employer after agriculture. The impressive performance has been in spite of the inadequacies in capital, technology and

marketing. In the current economic slowdown, SME sector has been hit very hard due to rising interest rates and financial crunch. If India has to have a growth rate of 8-10% for next couple of decades, it needs a strong SME sector, without which it cannot be achieved. There are approximately 3 crores MSMEs in the country. The SMEs have shown an average growth of 18% over the last five years. Around 98% of the production units are in SME sector. As a result of this economic slowdown and global markets collapsing there is a decline in the cash reserve and the working capital becomes more difficult and has resulted in cut down on orders and piling up of pending payments. Although SMES can be defined in a number of ways but in accordance with the provision of Micro, Small & Medium Enterprises Development (MSMED) Act, 2006 the Micro, Small and Medium Enterprises (MSME) are classified as Manufacturing and Service Enterprises:

(a) Manufacturing Enterprises- The enterprises engaged in the manufacture or production of goods pertaining to any industry specified in the first schedule to the industries. The Manufacturing Enterprise is defined in terms of investment in Plant & Machinery. MANUFACTURING SECTOR Enterprises Micro Enterprises Small Enterprises Medium Enterprises Investment in plant & machinery Does not exceed twenty five lakh rupees More than twenty five lakh rupees but does not exceed five crore rupees More than five crore rupees but does not exceed ten crore rupees

In case of the above enterprises, investment in plant and machinery is the original cost excluding land and building and the items specified by the Ministry of Small Scale Industries

(b) Service Enterprises: The enterprises engaged in providing or rendering of services and are defined in terms of investment in equipment. SERVICE SECTOR Enterprises
Micro Enterprises

Investment in equipments Does not exceed ten lakh rupees:

Small Enterprises Medium Enterprises

More than ten lakh rupees but does not exceed two crore rupees More than two crore rupees but does not exceed five core rupees

Banks lending to medium enterprises will not be included for the purpose of reckoning of advances under the priority sector. However, advances to Small & Medium Enterprises shall be under thrust area for lending.

Problems of Financing SMEs: The main problem faced by SMEs when trying to obtain funding is that of uncertainty: SMEs rarely have a long history or successful track record that potential investors can rely on in making an investment; Larger companies (particularly those quoted on a stock exchange) are required to prepare and publish much more detailed financial information which can actually assist the financeraising process; Banks are particularly nervous of smaller businesses due to a perception that they represent a greater credit risk. Because the information is not available in other ways, SMEs will have to provide it when they seek finance. They will need to give a business plan, list of the company assets, details of the experience of directors and managers and demonstrate how they can give providers of finance some security for amounts provided. Prospective lenders usually banks will then make a decision based on the information provided. The terms of the loan (interest rate, term, security, and repayment details) will depend on the risk involved and the lender will also want to monitor their investment. A common problem is often that the banks will be unwilling to increase loan funding without an increase in the security given (which the SME owners may be unable or unwilling to provide).A particular problem of uncertainty relates to businesses with a low asset base. These are companies without substantial tangible assets which can be use to provide security for lenders. When an SME is not growing significantly, financing may not be a major problem. However, the financing problem becomes very important when a company is growing rapidly, for example when contemplating investment in capital equipment or an acquisition. Few growing companies are able to finance their expansion plans from cash flow alone. They will therefore need to consider raising finance from other external sources. Various Credit Schemes available to SMEs:

Credit Guarantee Fund Scheme for Small and Medium Industries:- There are an estimated 128.44 lakh registered and unregistered micro and small enterprises (MSEs) in the country at the end of March 2007, providing employment to an estimated 309.11 lakh persons. The MSE sector contributes about 39% of the manufacturing sector output and 33% of the nations exports. Of all the problems faced by the MSEs, non-availability of timely and adequate credit at reasonable interest rate is one of the most important. One of the major causes for low availability of bank finance to this sector is the high risk perception of the banks in lending to MSEs and consequent insistence on collaterals which are not easily available with these enterprises. The problem is more serious for micro enterprises requiring small loans and the first generation entrepreneurs. The Credit Guarantee Fund Scheme for Micro and Small Enterprises (CGMSE) was launched by the Government of India to make available collateral-free credit to the micro and small enterprise sector. Both the existing and the new enterprises are eligible to be covered under the scheme. The Ministry of Micro, Small and Medium Enterprises and Small Industries Development Bank of India (SIDBI), established a Trust named Credit.

Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) to implement the Credit Guarantee Fund Scheme for Micro and Small Enterprises. The scheme was formally launched on August 30, 2000 and is operational with effect from 1st January 2000. The corpus of CGTMSE is being contributed by the Government and SIDBI in the ratio of 4:1 respectively and has contributed Rs.1346.54 crore to the corpus of the Trust up to September 30, 2007. Based on the future requirement, the corpus is likely to be raised to Rs.2500 crore.

PURPOSE AND OBJECTICE OF THE STUDY: The main purpose of this project to access the financial viability of the loan proposal to access the actual worth of the borrower. This study would also involve working out and interpreting the financial ratios in case of working capital financing. The study also involves the study of procedural formalities included in sanctioning the finance to its clients. This study would involve analyzing the balance sheets of their clients in determining their financial needs. This study will also involve the Analysis of the borrower, its net worth, and all the security provided by the borrower.

Another purpose of the study is to identify the weakness and problems in credit functions. To study the various loan facilities provided by the bank such as Cash credit, packing credit, letter of credit and so on. To understand the loan appraisal process starting from receiving of the application till Post disbursement and monitoring of the borrower.

RATIONALE BEHIND THE STUDY: Offering credit is an operation fraught with risk. Before offering credit to an organization, its financial health must be analyzed. Credit should be disbursed only after ascertaining satisfactory financial performance. Based on the financial health of an organization, banks assign credit ratings. These credit ratings are used to fix the interest rate and quantum of instalments. This study aims to analyze the credit health of organizations and method of finding out MPBF in BANK OF INDIA for working capital facilities. After analyzing credit health, the credit rating is determined. On the basis of credit rating, the bank will determine the interest rate and access whether to sanction the loan to the borrower or not.


REVIEW OF LITERATURE: For Literature Part, I have the following: Master Circular by RBI Manual of Instruction on working capital Finance. Various speeches and circulars at Website of RBI. Various circulars and Articles on BOI Website.

WORKING CAPITAL: Any industrial establishment requires broadly two kinds of funds. The first one is long-term funds which are required for the purchase of fixed assets such as land, building, machineries, electrical installations, start up expenses, development expenses, purchase of goodwill, purchase of furniture, purchase of vehicles and other items to bring the establishment into operation. The second kind is short-term funds. These are required to meet the needs of dayto-day expenses such as raw-materials, stores, power and fuel, salaries, wages, administrative expenses, interest, sales and distribution expenses and other expenses to produce the saleable goods, upto the realization of the sale proceeds. Till the sale proceeds are realized, the inventory is built up to facilitate smooth production and outstanding bills i.e. debtors are also financed by the short-term funds. In due course the establishment also gets some credit from their supplier which is indirect financing of the short-term funds. Funds employed in current assets constitute working capital. It is in fact the life-blood and controlling-nerve of the unit. The concept used for working capital may be gross working capital or net working capital. Gross working capital constitutes current assets, whereas net working capital means current asset minus current liabilities. Working capital, also known as net working capital, is a financial metric which represents operating liquidity available to a business. Along with fixed assets such as plant and equipment, working capital is considered a part of operating capital. It is calculated as current assets minus current liabilities. If current assets are less than current liabilities, an entity has a working capital deficiency, also called a working capital deficit. A company can be endowed with assets and profitability but short of liquidity if its assets cannot readily be converted into cash. Positive working capital is required to ensure that a firm is able to continue its operations and that it has sufficient funds to satisfy both maturing short-term debt and upcoming operational expenses. The management of working capital involves managing inventories, accounts receivable and payable and cash. How much working capital will be required by a particular industrial undertaking will depend upon the production cycle i.e. from the time raw material is

purchased to the time goods are sold and cash is realized (operating cycle). Therefore, the working capital for a unit would mean the total current assets it has to hold. Many newly started units become sick or run into fatal problems due to defective financial plan. The plan adopted may fail to provide adequate capital to meet the needs of both fixed and working capital, particularly the later. There are instances where units have been able to obtain sufficient funds to buy a plant but failed to equip the same and conduct production operations successfully because of faulty assessment of working capital needs. As far as the requirement of purchase of fixed assets is concerned, it is almost certain what items are to be purchased and how much amount will be involved and usually the decision for this expenditure is taken in the very beginning. If a borrower approaches for funds for this purpose, bankers examine the technical feasibility, economic validity and managerial competency before deciding to sanction the loan. There is not much problem to sanction it, provided the banker is satisfied about the earning capacity and the repayment schedule. Both the bankers as well as borrower have to decide about it only once.
On the other hand, amount of working capital required by the concerned unit may vary from time

to time, depending upon various factors such as cost of raw material, utilization capacity, marketing arrangements etc. It is on account of this fact that entrepreneurs usually spend most of their time to manage working capital requirements. Prior to nationalization, banks largely financed medium and large-scale industries and traders. There was inequitable distribution of credit amongst different sector and geographical areas. The security oriented-approach of banks resulted in credit being available only to the well-to-do, thus leading to concentration of economic power in their hands. Even upto 1973, industries did not have to plan their credits since it was easily available against collaterals. Banks on their part did not think of credit planning because banks were flush with funds. As per the Operating cycle concept, a firms operating cycle typically consists of three primary activities: purchasing resources, producing products and distributing (selling) the products. Here, the firms activities create fund flow that is being both unsynchronized and uncertain. This is unsynchronized because, cash disbursements (payments for purchases) usually take place before cash receipts (Collection of receivables). Further, they are also uncertain because, future sales and costs, which generate the respective receipts and disbursements, cannot be forecasted with complete accuracy. Hence, assessment of working capital is not merely an arithmetic exercise but also involves judgement of the bank. WORKING CAPITAL MANAGEMENT Decisions relating to working capital and short term financing are referred to as working capital management. These involve managing the relationship between a firm's short-term assets and its short-term liabilities. The goal of working capital management is to ensure that the firm is able to continue its operations and that it has sufficient cash flow to satisfy both maturing short-term debt and upcoming operational expenses.

Current assets are also referred as circulating assets due to conversion of one component of these assets into another. This conversion is known as working/operating capital cycle. A firm has to maintain cash balance to pay the bills as they become due. In addition, the firm must keep inventories to fulfil the customer orders promptly. Further, it invests in accounts receivable to extend credit to customers. Operating cycle is equal to the length of inventory and receivable conversion periods. The operating cycle starts from purchase of raw materials by cash (out of LTS and short-term loan/credit from banks for working capital) stock in process finished goods receivables and ends with cash. This operating cycle is expected to rotate throughout the year. The time involved in completing one cycle depends upon many factors such as availability of raw materials, workers and services of public utilities on one hand and supply of timely and adequate bank finance in the form of cash credit, overdraft, bills discounting or short-term loan and credit from suppliers of raw materials, on the other. A manufacturer of capital goods firm will have a longer operating cycle than a consumer goods manufacturer. The shorter the period involved in completing a cycle, the lesser would be the requirements of WC and vice-versa. Efficient firms always ensure that the operating cycle keeps on rotating without any interruptions. Banks should get all necessary details of Operating Cycle from a borrower for assessment of WC.

ASSESMENT OF WORKING CAPITAL FINANCE: Various methods used for assessment of Working Capital Finance are as under: Turnover Method (Up to Rs. 5.00Crore):

The working capital limits of the borrowers with working capital limits up to Rs.5.00 Crores in case of SME units/other units is computed on the basis of 20% of their realistic projected turnover subject to the condition that a minimum margin of 5% of turnover shall be brought in by the promoters/borrowers as their own contribution. The projected turnover submitted by the borrower is accepted subject to realistic attainment of the turnover, past track record, confirmed orders in hand and all other relevant factors. In order to ensure proper assessment of limits high projections should be critically analyzed. Where the margin contribution of the borrower is less than the minimum 5% prescribed, the working capital limits shall be assessed correspondingly lower in proportion to (1:4) the ratio of the margin being brought in by the borrower. In case, the margin available is higher than the minimum required margin, the same shall be accordingly taken into consideration (deducted) for arriving at MPBF. Wherever the nature of business activity so warrants, the branches may apply traditional method of lending (based on holding levels of Inventory, receivables and Creditors) and sanction need-based limits, including activities of fast moving consumer goods, where the turnover is very fast and limits assessed on turnover method may be very large in relation to actual requirement. In such cases the limits be fixed on the basis of average stock, receivables and creditors held by the borrower. This system may also be applied in case of Software & Technology units for limits upto Rs. 2.00 crore. However, in no case the concept of chargeable security laid down for calculation of Drawing Power (DP) on monthly basis be diluted. Computation of limit as per Turnover Method:

(Rs. in ____) 1 2 1 2 3 4 5 6 7 8 Annual Turnover as projected by the Borrower Turnover as accepted by the Bank Working Capital Requirement (25% of 2 above) Minimum Margin Required (5% of 2 above) Actual Margin Available (Item 3 item 4) (Item 3 item 5) MPBF(Lower of 6 and 7)

MPBF System (Above Rs.5.00 Crore):

The MPBF system shall continue to be followed for all borrowers with working capital limit above Rs.5.00 Crores. This will be valid where the bank is a sole banker as well as under multiple banking arrangements. In cases where the working capital limits ar e under consortium arrangement, the lead banks practice for assessment of the same shall be followed. In cases where our Bank is the Lead Bank, the MPBF system or the system agreed to by all the Member Banks on the basis of consensus shall be applicable. Calculation of MPBF: Calculation of MPBF: Year ended (a) Total Current Assets (b) Less: Export receivables (c)Net Current Assets Total Current Liabilities Working Capital Gap (1a 2) Less: 25% margin on Current Assets (Excl. Export Receivables i.e.25% of 1c) Actual/Projected Net Working Capital Item No. 3 4 Item No. 3 5 Maximum Permissible Bank Finance (Item 6 or 7, whichever is lower) 31.3._____ 31.3.____ 31.3._____


2. 3. 4. 5. 6. 7. 8.

In case of the any of the method used, there is a concept of DRAWING POWER. The borrower has to submit monthly stock statement according to which the Drawing power will be calculated and based on that the borrower will be able to withdraw money from the account. In case the sanctioned limit is, for say, 5 crores but the drawing power comes to be 3 crores then, in that particular month the borrower cannot withdraw more than 3 crores otherwise a penal interest will be charged extra on the overdue amount. D.P. (Drawing power) shall not be allowed against the following: Obsolete Stocks

Receivables beyond 90 days; in case of Government Departments receivables beyond 180 days Stocks released to the borrower against trust receipt in case of Letter of Credit established on DA basis till the bills are retired by the borrower.

Computation of Drawing Power: The following shall be the methodology for computing the drawing limit in respect of our finance against: i) Inventories: Total inventory (excluding non usable, non moving , slow moving stocks A ) (period to be specified) LESS : Unpaid stocks ( on account of sundry creditors for purchases, B DALC, advance payment guarantees / suppliers credit etc., ) and stock hypothecated to any other facilities Value of paid stock (A - B ) C LESS : Stipulated margin on stocks as per sanction DP / DL on stocks (C - D ) ii) Book Debts: Total amount of inland credit sales (debtors) not exceeding the period F permitted by the sanctioning authority LESS: Value of bills (Supply Bill, SDB, BE) discounted by the Bank / G Factors duly adding back the margin (on the date of stock statement) & advance received against supplies. Net bills receivables / debtors unfinanced by the Bank / Factors (F - G ) H LESS : Stipulated margin on book debts as per sanction I D E

DP / DL on Book debts ( H - I ) or stipulated sub limit under Book Debt J whichever is lower The total drawing power / drawing limit against stocks and Book debts shall be E + J or sanctioned limit whichever is lower.

BENCHMARK FINANCIAL RATIOS: The financial strength of the borrower client should be adequate in relation to the project size/volume of operations proposed to be undertaken and risks involved therein.

Industry-wise bench marks for financial ratios such as Current and Debt Equity Ratio, Profitability Ratios, interest service coverage ratio and Debt Service Coverage Ratio can be arrived at after detailed study of each industry based on size, location, etc. The benchmark Current Ratio in case o The benchmark Debt Equity Ratio (DER) shall be up to 2:1. However, in respect of SME, the same may be considered up to 4:1 on case to case basis.

TERM LOAN: Firms engaged in industrial and service related activities require funds for various purposes. To commence business, they are expected to invest in fixed assets comprising land and building, plant and machinery, furniture & fixtures etc. Initially, each firm requires minimum fixed assets. Subsequently, additional plant capacity may be created for expansion or for purchase of new plant and machinery for the purposes of modernization and diversification. Besides, the firms require funds to finance other fixed assets also, which include goodwill, trade mark and other non-current assets. To finance all these fixed assets, each firm raises funds in the form of capital, subsidies and grants from the Government, retained earnings in the case of existing firms, term loan from banks and financial institutions and loans received from non-institutional sources such as friends and relatives etc. Grants and subsidy received from the government are expected to supplement the capital of an entrepreneur and the same are considered as part of long-term funds. Capital and reserves & surplus constitute owned funds (equity or net worth). In general, term loan from banks and financial institutions is the main source of funds for financing of fixed assets. Relatively speaking, for banks, risk in term loan is high since repayment is expected to take place during the next 5-7 years during which there could be many uncertainties in respect of performance of the firm, value of money, erosion in the value of securities, integrity of the borrower etc. Hence, it calls for a detailed appraisal of term loan not only to keep the entrepreneur happy but also to ensure a professional approach in financial analysis and decision making and also to observe due diligence of lending norms, policy guidelines and global best practices. This paper deals with various aspects of term loan to fill up knowledge and skill gaps on the part of credit officers and branch managers in banks and financial institutions. In case of term loans and deferred payment guarantees, the project report should be obtained from the customer, which may have been compiled either in-house or by a firm of consultants/merchant bankers. Term Loan exposure to a borrower/group shall be within the prudential norm s of capital adequacy and per borrower/group exposure stipulated by bank. The Bank shall take steps to strengthen in-house term loan appraisal or get the term loan proposals appraised by any reputed appraisal agency wherever required, keeping in view the exposure of the bank. The technical feasibility, economic viability and bankability of projects with particular reference to risk analysis and sensitivity

analysis should be critically appraised by the Bank and wherever the Branch / R.O does not have the requisite expertise, necessary assistance of the Syndication cell, which has been set up at Head Office, may be taken which shall be involved for conducting technoeconomic viability studies / appraisals. However, techno-economic viability study will be obtained only in selected cases from reputed consultants, viz. IDBI, SBICAP or PNB Gilts wherever considered necessary. For infrastructural development projects it must be ensured that these are being implemented without the support of budgetary allocation i.e. projects funded out of budgetary resources, or where a firm commitment for budgetary support has been made and is in operation, such projects shall not be entertained.

Calculation of DSCR (for the period covering repayment period of TL):

DSCR = Profit after tax + Interest on T/L + Depreciation Interest on T/L + Instalment payable on T/L

Usually, the maturity of term loan is ranging from 3-7 years. But in respect of capital intensive project, it is still longer. The repayment period is fixed taking into the Projected Cash Flow Statement, DSCR and IRR. If cash surplus is substantially larger, the repayment period may be reduced. Moratorium period or initial repayment holiday (from the date of disbursement till the due date of commencement of commercial production) may be granted based on cash losses (cash payments less receipts) that the firm may incur in the beginning. However, the repayment holiday should not be too long (reasonable repayment holiday ranges from 6 -12 months). But interest on term should be fixed on quarterly basis from the date of disbursement of term loan. The payment of interest and loan installment starts after the repayment holiday. The rate of interest on term loan should be as per the loan policy of the bank. The main purpose of appraisal of term loan is to confirm whether funds are safe in the hands of a potential borrower and whether the project would generate sufficient cash surplus from operations to service the debt and repay the principal amount. For this purpose, a scrutiny of the projected statements by using analytical tools is a must. Further, judgment has to be exercised by the credit officer by taking a view on assumptions made in preparing the projected statements and overall integrity and reputation of the borrower based on available information. Thus, appraisal of term loan involves two major criterions to decide on the borrowers request: (A) Borrowers Appraisal and (B) Project Appraisal



Cash Credit Bank overdraft Inland bills Packing Credit FDBP/FUDBP


Bank Guarantee Letter of Credit Buyers credit( Letter of comfort)

Fund based: Overdraft:

When a customer maintaining a current account is allowed by the bank to draw more than the Credit balance in the account, such facility is called an overdraft facility. At the request and Requirement of customer temporary overdraft are allowed. However, against certain securities, regular overdraft limits are sanctioned. Salient features of this type of account are as under i) Overdraft accounts are maintained in current account ledgers. Depending upon business Requirements, for regular overdraft limits either some folio in current account ledger are reserved or separate ledger is maintained. Current account cheque book is issued to the constituents. ii) All rules applicable to current account are applicable to overdraft account. Overdraft is a running account and hence debits and credits are freely allowed. Cash credit:

A cash-credit is an arrangement to extend short term working capital facility under which the bank establishes a credit limit and allows the customers to borrow money up to a certain limit. Under the system, bank sanctions a limit called the cash-credit limit to each borrower up to which he is allowed to borrow against the security of stipulated tangible assets i.e. stocks, books debts etc. the customer need not draw at once the whole of the credit limit sanctioned but can Withdraw from his cash-credit account as and when he needs the funds and deposit the surplus cash/funds proceeds of safe etc. into the account. Inland Bills:

In this case, the bank sanctioned a limit to the Customer and the client can Discount those bills and will pay the money to the Borrower and the bank will take the money from the Debtor of the borrower on due date of the Bill. Packing Credit:

In case of Packing credit, the borrower wants the money to purchase the Raw material when the borrower has to export the goods, but the borrower dont have money to purchase raw material and then manufacture and then export the goods, in that case the borrower approaches to the bank for getting the credit for Pre-Shipment purpose then bank will provide the credit after confirming that the borrower has actually to export and goods and after getting the guarantee from the Buyer that he will pay the money on getting the goods. FDBP/FUDBP:

In case of FDBP facility, the bank will discount the bill purchased at Sight and in case of FUDBP, the bank will discount the bill purchase with usance period. Normally in case of Import and export, it usually takes a month or so in documentation task, so in case of FDBP facility, bank will discount the bill today and the bank will get the money from the buyer after the whole documentation will done, usually after 30 days and in case of FUDBP, the bank will discount the bill today and the bank will get the money from the buyer after whole documentation will be done plus the usance period. Non Fund Based: Buyers Credit( Letter of comfort):

In case of buyers credit, the Bank arranges fund from some other bank which bank had to pay on behalf of the borrower, the Bank issues Letter of comfort to that Bank which shows an assurance that bank will pay the money as and when due. This is most polular in case of Consortium. Letter of Credit:

A binding document that a buyer can request from his bank in order to guarantee that the payment for goods will be transferred to the seller. Basically, a letter of credit gives the seller reassurance that he will receive the payment for the goods. Modern banks facilitate trade and commerce by rendering valuable services to the business community. Apart from providing appropriate mechanism for making payments arising out of trade transactions, the banks gear the machinery of commerce, specially in useful like between the buyer and the seller who are often too far away from and too unfamiliar with cash other. Opening or issuing letter of credit is one of the important services provided by the banks for these purpose. The foundation of the banking business is the confidence reposed in the banking institutions by the people in general and the mercantile community in particular. The

standing, reputation and goodwill earned by a banking institution enables it to issue instruments, known as letter of credit, in favors of traders and banks to meet the needs of their customer ASSESSMENT OF LETTER OF CREDIT LIMIT (DP / DA): The assessment of the limit is as under:
Values a. Total purchases of the raw material b. Out of which under LC c. Transit period d. Average period from date of opening LC to date of meeting liability under LC including usance period e. Total period(c+d) f. LC requirement (b*e/365)

Bank Guarantee:

Contract of guarantee have special significance in the business of banking as a means to ensure safety of funds lent to the customers. The safety of such funds is primarily ensured by securing a charge over the tangible assets owned by the borrower and by the personal security of the letter, but in case the borrower is unable to provide the security to tangible assets or the value of the latter falls below the amount of the loan and the borrowers personal security is not considered sufficient an additional security is sought by the banker in the from of a guarantee given by a third person. A guarantee is, in fact the personal security of the third person, who must command the confidence of the banker. Contract to perform the promise or discharge the liability of a third person in case of his default. ASSESSMENT OF BANK GUARANTEE LIMIT:The guarantee limit is assessed as under:
(Rs, in crores) Items total contracts already in hand likely quantum of contracts to mature quantum of guarantees likely to arise out of the above(A) total bids applied likely quantum of contracts to mature Financial guarantee performance guarantee

quantum of guarantees likely to arise out of the above(B) bids in pipeline likely quantum of contracts to mature quantum of guarantees likely to arise out of the above(C) outstanding BG's (D) total A+B+C+D less: quantum likely to expire during the year max. Quantum of guarantee needed limit proposed

Ways in which Bank is involved in Financing: Loan Syndication:

In case of Loan Syndication the borrower approaches one bank and that bank will arranges fund for the borrower from other banks. In this case the Bank to which borrower has approached may be a part of the financing bank or May not by, it is on own discretion of the bank. In this type of financing, it is very easy for the borrower since borrower need not to approach each and every bank individually; the bank will approach to different banks. For syndication of loan, Bank will be free to decide its own terms and conditions and rate of interest / other charges etc. The Bank will go for loan syndication in project financing depending on its Asset-Liability position and risk profile of the portfolio. Bank will prefer such proposals for loan syndication, which will facilitate earning of substantial revenue in the form of Handling Charge/Syndication Fees. The Bank shall avoid taking undue large share in such syndication. Multiple Banking:

In this case the borrower will approach to each and every bank individually and ask for working capital limit. There is no lead bank in case of multiple banking arrangements and each bank uses its own method of accessing Working capital limits. Consortium:

In case of Consortium also the borrower will approach to different banks individually, the only difference between consortium and Multiple banking arrangement is that there is Lead Bank in case of Consortium and all the other banks to follow the terms and condition laid down by Lead Bank. The RBI guidelines for mandatory formation

of consortium in respect of working capital limits of Rs.50.00 Crore and above from the Banking system stand withdrawn. However, considering the risk involved in large exposures, it will be Banks endeavor to ensure that wherever possible, large advances are made in consortium or on syndication basis. Bank will prefer to have, subject to prudential norm, at least 5% share as a member of consortium for a meaningful participation in the consortium. However, it will be the sole discretion of the Bank to take up enhanced share on pro rata basis irrespective of its status in the consortium. Bank will take its own credit decision on the borrower. Bank may consider opting out of the consortium in case it is not satisfied with the performance / financial operations of the borrower. Bank's own appraisal method of lending as mentioned above will be followed in case of consortium arrangement where Bank is leader of the consortium. However, in cases where Bank is not the consortium leader, the appraisal done by Consortium Leader will be given due importance, but the Bank will also have to carry out its own assessment and if it shows major variation from that assessed by the leader, necessary clarification should be obtained from the leader and a need based limit will be sanctioned.

SECURITY: Assets of tangible nature when offered as a security for any bank finance by the borrower could be either a primary security or collateral security A primary security is an asset which is offered by the borrower against which bank grants finance or an asset which is acquired out of the bank finance and is given as security to the bank for the said finance. Security obtained from the borrower to additionally secure the loan sanctioned to him which may be a clean loan or loan secured by primary security, could be called collateral security. MODES OF CHARGING SECURITY: PLEDGE Section 172 of the Indian Contract Act, 1872 defines the term pledge as under: The bailment of goods as security or payment of debts or performance of a promise is called pledge. The bailor is, in this case, called the pleger and the bailee is called pledgee. Pledge means bailment of goods Its purpose is to secure payment of a debt or To sure performance of a promise. Any movable property can be pledge. Delivery (actual or constructive) is necessary to complete a pledge.

HYPOTHECATION In hypothecation, the possession of the property in the goods and other movable offered as security remains with the borrower and an equitable charge is created in favor of the lender. Charge against property for an amount of debt where neither ownership nor possession is passed on to the creditor. Hypothecation is defined in none of the acts.





MORTGAGE Mortgage is the transfer of an interest is specific immovable property for the purpose of securing the payment of money advanced or to be advanced by way of loan, an existing or future debts or the performance of the agreement Which way lead to a pecuniary liability. The borrower is called the mortgagor and the lender the mortgagee ASSIGNMENT Assignment means transfer of a right of an actionable claim, existing or future. Actionable claim means a claim to any debt other than a debt secured by mortgage of immovable property, by hypothecation or pledge of movable property, either actual or constructive of the claimant, which the civil courts recognize as affording grounds for relief, whether such debt or beneficial interest be existent, accruing, conditional or contingent.

LIEN Lien is the right of a creditor to retain in his possession the goods and securities owned by the debtor unit the debts has been discharged, but has no right to sell the goods and securities so retained. In lien two types particular lien and general lien. SET-OFF Banker has right of set off between two or more accounts maintained by a customer, if one of them is in debit and their relationship in both the accounts is of debtor and creditor. For example A has taken an overdraft of Rs. 10000/- in his current a/c. He also has a saving bank account which shows a credit balance of Rs. 12000/- bank can combine this a/c and can set off dues of current account from customers saving bank account. PROCEDURE FOR SANCTIONING LOAN: In loan account the entire amount sanctioned is debited to the borrowers account Interest is also debited to the account. It is the credit repayment made on instalments basis. Following procedure is adopted for sanctioning of loans. PRE SANCTION SURVEY AND INSPECTION:

Loan facility is available on the basis of security offered or on the basis of period of which it is required. Security offered by the customers may be fixed asset, plant and machinery, equipment, house etc. Depending upon the purpose of loan, the banker conducts a pre-sanction survey and inspection. During this survey bankers inspect the security offered by seeing the location of factory, business premises, inspect documents and letter of goods etc. such survey helps the bank to know about the customers. PREPARATION OF LOAN APPLICATION:

The loan application has to be prepared and handed over to the banker by the borrower. In a loan application the following details are to be furnished 1. Name of the borrower 2. Occupation 3. Purpose of loan 4. Period of loan 5. How borrower proposes to repay the loan 6. Projection of cash generations over the loan period 7. P&L A/c, B/S, for the period of loan in the form of projection

8. Details of security offered. CREDIT APPRAISAL:

Loan applications have to evaluated and appraised to decide whether they can be sanctioned or rejected. The loan department in the bank does this work. During appraisal the loan department concerned applies various methods of scrutiny to find out the details given in the application are true and the projections hold good. Thus market information, sales forecast, etc. would be independently assessed. During Credit appraisal, the banker has to look at the Commercial viability, Management viability, Technical viability and financial viability. SANCTIONING:

The loan department scrutinizes the loan application and decides whether the loan is to be sanctioned or not. Norms for sanctioning the proposal are indicated by RBI PREPARATION OF SANCTION LETTER:

Sanction letter contains the following points1. Name of the borrower 2. Limits sanctioned 3. Period of loan 4. Security offered by the borrower 5. Terms of repayment 6. Margin to be maintained 7. Rate of interest 8. Stock statements to be submitted at periodical intervals The borrower is informed about these aspects and a copy of the letter is sent to be borrower. ACCEPTANCE OF TERMS AND CONDITIONS BY THE BORROWER:

Normally the borrower is in continuous touch with the bank though be has banded over the proposal to the bank. They accept terms lay down by the bank. They are not requested to inform the bank in writing of having accepted the terms. PREPARATION OF LOAN DOCUMENTS:

Demand promissory note

It is an important document and a common document for the bank. The borrower accepts his liability regarding the funds lend by the banker through this document. It contains data of execution, place of execution, name of the payee, the loan amount, rate of interest, address of the borrower etc. Loan agreement These are standard printed documents running into a No. of pages. They contain all legal aspects regarding the rights of both the parties and liabilities of the borrower. DISBURSEMENT OF LOAN:

When the loan is sanctioned at the time of disbursement of loan of loan a/c is opened in the name of the borrower. The loan a/c opened is debited and savings a/c is credited for equivalent sum. PERIODICAL INSPECTION AND SUPERVISION:

After the loan is disbursed borrower utilizes the loan amount to generate the funds and profits so that he can repay the loan. Therefore bank inspects the keep supervision whether the loan amount is been utilized in a productive way or not. For periodical inspection and supervision purpose, bank asks for QIS and Monthly stock statement from the borrower. Branches prepare BCC statement and MOR report and send it to Head office and regional office.


DATA COLLECTION AND ANALYSIS: The research carried out for this project was descriptive in nature, the various documents and official files were required for understanding the methodology used by the banks. Data Collection: Information has been collected from both Primary and Secondary sources of data collection. Primary Data: i. ii. iii. Discussion with the senior manager and Chief Manager at SME centre Discussion with AGM of the SME centre. Study of various Borrower files at SME CENTRE, in pimpri branch, pune.

Secondary Data: i. ii. iii. iv. Website of RBI AND BOI. Loan policy of BOI. Articles and Presentations from Internet. Various newspapers, periodicals and published articles on the industry that is being studied.

Tools of Analysis and Presentation: To analyze the data obtained from various sources, following tools were used: Tools of Analysis: Various ratios and techniques like MPBF, FACR, Current Ratio, Debt Equity Ratio, Leverage Ratio, ISCR and DSCR should be calculated and compared with the minimum benchmark provided in the loan policy to assess the credit appraisal. Tools of Presentation: -Tables: This tool was used to present the data in tabular form.

Techniques of analysis: Mainly the analysis was done taking financial statement and past record of the borrower in mind and the above mentioned ratios and calculations were used to reach the conclusion.


My Analysis is based on several loan proposals studied by me in the Bank. I studied many loan proposals relating to SMEs . But, I have kept my project report limited to Analysis of Term loan and working Capital requirements of SMEs. After reading so many loan proposals, I got an idea of how to make a loan process note in BOI. Then, I have done the analysis of the following loan proposal with the help of my Guide in BOI, SME centre. In case of SMEs one can avail Working capital loan or Term loan , and for calculating working capital limit, Two methods are used namely Turnover method and Method II Suggested by Tandon committee in which Borrower has to bring 25% of Current Assets. In BOI, Turnover method is used if the borrower has asked for a loan amount below 5 Crores and Method II of Tandon committee i.e. MPBF II is used if the Borrower requirement is more than 5 Crores.


Cash credit

Term loan

Turnover method

MPBF II method

Loan proposal for cash credit of Rs. 1.00 crore and enhancement of non fund based limit from Rs. 14.00 crores to Rs. 24.00 crores. ABC Private Limited deals in supply/erection/insallation and maintenance of flow meters focussing on providing turnkey solutions in water mangement. Internal rating of the borrower comes out to be MS 2 i.e. a good rating and an external credit rating of SME1 by CRISIL which shows highest level of creditworthiness, adjudged in relation to other SMEs. It has been assigned a risk weight of 50%.

(Amt. Rs. In crores) FACILITY EXISTING LIMITS PROPOSED LIMITS FUND BASED Cash credit 1.00 1.00 NON FUND BASED LC 3.00 10.00 BG 14.00 24.00 TOTAL 15.00 25.00 ** earlier the company was enjoying interchangeability between LC and BG to the extent of Rs. 3.00 crores and now it has requested for interchangeability to the extent of Rs. 10.00 crores MANAGEMENT: Mr XYZ is the CMD of the company, an engineering graudate (BE E&TC), by qualification. He has around 20 years of experience in this line of activity. He has developed good reputation in the industry for himself and for companys product in the market over the period of years. Mrs. ABC is the director of the company, an arts graduate. She has been associated with the company since its inception and looking after day to day operations. BUSINESS PROFILE: The company is in this line of activity since 1989. The company has near monopoly in manufacturing of water flow systems. There are very few players operating in this line of business. The client base of the company includes mostly government and semi government organisations. So the risk of default by the customer is less and receivables realisation is secured and doesnt pose any problems. The demand for the product is not going to be affected as water supply is a social activity conducted by the government. The client base of the company are municipal corporations, govt. organisations etc. So it is more or less secured business.

FINANCIAL INDICATOR: (Rs. In crores) Audited 2010 Paid up capital: - Equity - Pref share Tangible networth Investment in cos Adjusted TNW Medium & long term loans Capital employed Current assets Current liabilities NWC( CA-CL) NET BLOCK Net Sales Other income EBIDTA Interest Gross profit/loss Taxes Cash accruals Depreciation net profit/loss Accumulated loss net profit/capital employed RATIOS: Current ratio Debt/equity: Term lia./adj TNW TOL/adj TNW TOL/quasi equity Profitability%: PAT/net sales DSCR Interest coverage Inventory+receivables/sales (%) 4.95 ----14.97 0.36 14.97 0.60 15.57 30.69 20.33 10.36 1.90 55.79 0.43 16.52 0.07 16.45 5.53 10.92 0.19 10.73 ------68.91% 1.51 0.04 1.40 -----19.23 -----153.90 32.32 Audited 2011 5.12 0.62 80.30 1.75 80.30 0.67 80.97 98.10 26.55 71.55 2.34 77.06 0.65 24.47 0.31 24.16 8.16 16.00 0.21 15.79 ------19.50% 3.69 0.01 0.34 -----20.49 ------51.87 25.79 Audited 2012 5.12 0.62 99.60 1.75 99.60 0.63 100.23 125.18 36.05 89.13 3.19 71.96 5.93 28.75 0.04 28.71 9.26 19.45 0.18 19.27 -------19.23% 3.47 0.01 0.37 ----26.78 ------462.97 66.52 Esmtd. 2013 5.12 0.62 123.74 1.75 123.74 0.62 124.36 145.16 25.81 119.35 3.26 100.00 6.00 36.64 0.32 36.32 12.00 24.32 0.18 24.14 ------19.41% 5.62 0.01 0.21 -----24.14 ------76.99 27.75 Proj. 2014 5.12 0.62 154.30 1.75 154.30 0.62 154.92 181.36 31.56 149.80 3.37 125.00 8.25 46.31 0.56 45.75 15.00 30.75 0.19 30.56 -----19.73% 5.75 0.004 0.21 ----24.45 ------55.91 88.91

Comments in brief on financial position: The comments on financial are based on the audited B/S of 31/3/2012 and projections of the subsequent years. Paid up capital/TNW: The authorised capital of the company is Rs.6.00 crores consisting of 518000 equity shares of Rs. 100 each. The issued subscribed and paid up capital of the company is Rs. 5.75 crores. The TNW of the company has increased form Rs.14.97 crores in FY 2009-10 to Rs. 80.30 crores in FY 2010-11 due to issue of equity shares on premium and plough back of the profits into business. The TNW of the company for FY 2011-12 is Rs. 99.60 crores which has increased over previous year due to the plough back of profits. The projected TNW of the company for FY 2012-13 and FY 2013-14 is Rs. 123.74 crores and Rs. 154.30 crores respectively. The rise in TNW in FY 2012-13 is due to plough back of the profits in the business. NET SALES: The sales of the company for the FY 2010-11 is Rs.77.06 crores which has risen from Rs. 55.79 crores in FY 2009-10. The rise in sales is on account of execution of new orders. The company has achieved sales of Rs.71.96 crores in the FY 2011-12 as per the ABS of FY 2011-12. The fall in sales is due to the general slow down in the industry which has bearing on govt. allocation of water utility sector. OTHER INCOME: As per the ABS of FY 2011-12, the other income of the company is Rs. 5.93 crores which include interest on FDR and interest on other investments. RPOFITS/PROFITABILITY: The net profit of the company is Rs. 19.27 crores in FY 2011-12. The net profit has risen on account of better operational efficiency and rise in other income. INVESTMENTS: As per the ABS of FY 2011-12 the company has investment of Rs.1.75 crores. The investment includes investment in other companies. the investment in the sister concern is not adjusted as it is not above 10% TNW.


The current ratio of the company for the FY 2010-11 is 3.69 against 1.59 in FY 2009-10. The ratio has risen due to the rise in cash and bank balances (FD) and rise in sundry debtors. The current ratio for 2011-12 is 3.47. the ratio has fallen marginally due to the rise in the sundry creditors and advance from the customers. The projected ratio for the FY 2012-13 and 201314 is 5.62 and 5.75 respectively. The ratio is above the acceptable level of 1 since FY 200910. DEBT EQUITY RATIO: The DER of the company improved to 0.34 in FY 2010-11 from 1.40 in FY 2009-10. The improvement in ratio is due to issue of equity shares on premium and plough back of profits into the business which strengthens equity base of the company. As per ABS of 201-12, the DER works out to 0.37 which is at acceptable level. The DER of the company for the FY 2012-13 and FY 2013-14 is 0.21 and 0.21 due to plough back of profits. DSCR/ISCR: The company does not have term liabilities as per the last audited balance sheets and in projected years, hence DSCR cannot be worked out. The ISCR of the company for the FY 2011-12 is 462.97. the ISCR of the company is high as it does not have any term liabilities whereas has healthy profits. The projected ISCR for the company for the FY 2012-13 and FY 2013-14 is 76.99 and 55.91 respectively. CONTINGENT LIABILITIES: As per the ABS of FY 2011-12 of the company, the company has contingent liabilities to the tune of Rs. 23.00 crores i.e. guarantees given by our bank and ICICI bank on the behalf of the company. In the past not a single BG is invoked and in case of any eventuality, the company has adequate resources to meet these contingent liabilities.

(Rs. In crores) Value Total principal cash credit hypothecation of stocks and book debts LC/BG pledge of TDR @ 15% collateral to cover all limits extension of EQM of flat no.5 at sanmancolony extension of EQM of plot 27.5 3.6 20.22 3.6 BOI share



0.87 3.52

0.87 3.37

hypothecation of stocks and book debts hypothecation of plant and machinery

27.5 0.11

20.22 0.11


ASSESSMENT/JUSTIFICATION FOR PROPOSED LIMITS: Project finance/term loan assessment: Not applicable as the company has not requested for term loan facility. Working capital assessment: Presently the company is enjoying working capital fund based limits of Rs. 1.00 crores from the bank. The bank has assessed WCFB limit at Rs. 1.00 crores for the FY 2012-13 based on estimated sales of Rs. 100 crores which is reasonable and achievable. Since the WC limit is more than Rs. 5.00 crores assessment is done under MPBF method: Assessment under MPBF method:
(in Rs. Crores) 2012-13 2013-14 145.16 181.36

Particulars a. Total current assets b. Other current liabilities (excluding bank CC and instalments on term loan due within 1 year) c. Working capital gap (a-b) d. Minimum stipulate net working capital (25% of a) e. Actual/projected net working capital gap (CA-CL including C/C) f. (c-d) g. (c-e) h. MPBF (lower of "f" and "g")

24.81 120.35 36.29 119.35 84.06 1 1

30.56 150.8 45.34 149.8 105.46 1 1

Assessment based on holding level:

(figures in days) actual as on 201112 raw material stock in process finished goods receivables: Export Domestic Creditors 2 1 estimated for 2012-13 projected for 2013-14 1 1 1 1

241 192

100 46

88 45

Actual level of raw material holding was 2days as at 31.03.12 and is estimated to be in the range of 1 in estimated and projected year. There are no major variations in the actual and estimated /projected level of holding for stocks in process. Level of domestic receivables was 241 days as at 31.03.12 which is high. However the company is taking concrete steps to bring down the level of debtors to 100 days by persistent follow up. Th actual level of creditors was 192 days as on 31.03.12 which is high. But now the company is planning to reduce creditors level, it is estimated at 46 days. The credit period available in this industry is generally low. Based on above computation, borrower is eligible for Rs. 1.00 crore for FY 2012-13. Justification of CC limit against stock: no limit available against stock.
Rs. In crores 2012-13 Stock less: creditors paid stock less: margin @ 25% permissible limit aganist stock 0.25 7.35 ========== =========== ===========

Thus at present there appears to be no justification for any limit against stock.

Justification of CC limit against book debts:

Rs. In crores 2012-13 annual sales debtors (90 days) less: margin(40%) permissible limits against book debts 100 24.65 14.79 9.86

CC limit of Rs.1.00 crore against hypothecation of stocks and book debts is recommended. For cash credit, drawing limit shall be allowed on the basis of drawing power arrived at against paid stocks at 25% margin and book debts of not more than 40 days old at 40% margin after excluding unpaid stocks/stocks acquired under D/A L/C. NON FUND BASED LIMITS ASSESSMENT: Assessment of LC limit: The raw material required under the LC depends upon the sales purchase contract, therefore the bank assumes 70% raw material will be purchased under LC out of the total raw material requirement of Rs. 58.09 crores. The assessment of the limit is as under:
Rs. In crores 58.09 40 30 days

a. Total purchases of the raw material b. Out of which under LC c. Transit period d. Average period from date of opening LC to date of meeting liability under LC including usance period e. Total period(c+d) f. LC requirement (b*e/365)

90 days 120 days Rs. 13.15 crores

The company is enjoying LC limit of Rs.3.00 crores from the ICICI bank, thus eligible for LC limit of Rs. 10.15 crores from the bank. The company has requested for LC limit of Rs. 10.00 crores. So LC limit of Rs. 10.00 crores with margin of 15%. The LC/BG limit has been considered beyond the MPBF. The company has adequate sources on hand by way of term deposits and cash to the tune of Rs. 69.14 crores.

Assessment of BG limit: The company is required to furnish both inland and foreign bank guarantee. The company is required to furnish performance guarantee and BG for security deposit and advance payment. The advance payment guarantee is generally for 1-3 years and performance bank guarantee for 5-7 years. The company has to give performance guarantee to the tune of 5-10% order value. The guarantee limit is assessed as under:
(Rs, in crores) Items total contracts already in hand likely quantum of contracts to mature quantum of guarantees likely to arise out of the above(A) total bids applied likely quantum of contracts to mature quantum of guarantees likely to arise out of the above(B) bids in pipeline likely quantum of contracts to mature quantum of guarantees likely to arise out of the above(C) outstanding BG's (D) total A+B+C+D less: quantum likely to expire during the year max. Quantum of guarantee needed limit proposed Financial guarantee performance guarantee 120 80 8 250 170 17 100 50 5 10.85 40.85 5 35.85 24

The BG requirement of Rs. 38.85 crores will be partially financed from BG limits of Rs.9.00 crores from ICICI bank.



INTERPRETATION: Credit Appraisal Process: In the span of 8 weeks of my summer internship at BANK OF INDIA, I analyze that the people at BOI follows a very conservative approach, i.e. they follow a very strict loan appraisal process. The people at BOI are extremely qualified and experienced therefore they took each and every decision very carefully and each and every employee at BOI is committed and they think of Customers first before they think of themselves. They look at each and every aspect of the Borrower starting from Technical appraisal, Commercial appraisal, Management appraisal and Financial Viability.

BOI has a well defined Loan policy which tells us about each and every aspect of Bank lending. One thing I analyze is that it normally took more days for sanctioning of the loan proposal than Days defined in the loan policy of the Bank. The reason behind the delay is that most of the time is spent in getting reply of the queries from the branch sent by Regional Office. The Internal Rating scorer was very good as it takes into consideration all types of risk like financial risk, Management Risk, Industry Risk, Business Risk, basic borrower risk, project risk, conduct of account risk, final risk grade, pricing parameter risk The risk models used are as follow: FINANCIAL RISK MODELAverage sales (in Rs. lakh) Cash flow interest coverage ratio EBITDA/net sales Gearing Quick ratio ROCE (%) Sales growth(%) FINANCIAL RISK SCORE Value Contingent liabilities/networth Accounting quality Foreign currency exposure Financial restructuring history Quality of auditor firm == == == == Mark == == == == == == == === == == ==

Business risk: Value Customer quality and concentration Supplier reliability and concentration Order book position Competition impact on GP margin Industrial/employee relations Industry risk: Value Industry cyclicality Marks Mark

Industry seasonality Regulatory issues/fiscal policy dependence Technology dependence Environmental impact Demand supply situation Management risk: Value Integrity Business commitment Competence Experience Succession plan Financial strength Credit track record Ability to raise funds General reputation Internal control Intra company/group conflicts Project riskProject value Conduct of accountsValue Number of days interest/instalment overdue Submission of progress report Compliance with sanctioned/disbursement conditions Number of cheques/bills returned Comments on operations/assets during site visits Change in accounting period during the last 5 years No. Of times rescheduling/reliefs obtained from lending institutions Number of times overlimit/ad-hoc limit aalowed Cumulative number of days DP/limit overdrawn Variance in projected sales versus actual sales Pricing parametersValue General observations in conduct and ancillary business Length of satisfactory relationship Mark Mark Mark

Share in non fund based business Collateral coverage available for total limits(%) Threat of loss of business to competition Raters perception about long term benefit to the bank from the borrower/group Overall image/reputation of company/ group Most important part of any loan appraisal is financial Statements and CMA data given by the Borrower, but the conduct of the person also plays an important role. BOI follows proper pre-disbursement conditions like: At BOI, they use Turnover method if the loan proposal is below 5 crores and Method II of Tandon committee if the loan proposal is above 5 crores. A detailed study relating to financial viability is to be done, i.e. one should analyze the financial statements carefully. In case if Bank is not satisfied with the Projected Financial Statement, then Bank can ask for the proper reason from the Borrower. Employee Satisfaction is the key to success since every bank is providing the same service then why one will come to our Bank. Process note is prepared at each and every level like if the sanctioning authority of the Loan proposal is Head Office, then loan process note will be prepared at Branch level then Regional Office and then at the Head office, it sometimes shows Duplication of Work.


CONCLUSIONS: The study at BOI gave a vast learning experience to me and has helped to enhance my knowledge. During the study I learnt how the theoretical financial analysis aspects are used in practice during the working capital finance assessment. I have realized during my project that a credit analyst must own multi-disciplinary talents like financial, technical as well as legal know-how.

The credit appraisal for working capital finance system has been devised in a systematic way. There are clear guidelines on how the credit analyst or lending officer has to analyze a loan proposal. Credit Appraisal is a process of appraising the credit worthiness of loan applicants. The funds of depositors i.e. general public are mobilized by means of such advances. Thus it is extremely important for the lender bank to assess the risk associated with credit, thereby ensure the security for the funds deposited by the depositors. Therefore, we can say that Credit appraisal is very important for any loan proposal since encouraging SMEs is one of the most important tasks of the bank since it helps in GDP growth of the country and also helps in Employment generation to many people. Following things needs to be considered while doing Credit Appraisal of any loan proposal: First of all, the worthiness of the documents needs to be checked whether the information given in the Application is correct or not, and for that one can ask for supporting Documents also. Past conduct of the borrower with different banks can also be checked to know the conduct of account whether standard or Sub-standard. Then, feasibility study should be conducted on these four parameters: i. Technical Feasibility ii. Commercial Feasibility iii. Managerial Feasibility, and iv. Financial Feasibility Sales Projection needs to be checked carefully since if in case of Turnover method, sales is the most important factor to find the MPBF. Purpose of the loan needs to be checked, whether the purpose for which borrower is asking for loan is feasible or not. Internal rating needs to be done with care since it helps you to access the credit risk involved with the Borrower and helps you to decide the Interest rate to be charged from the borrower. Financial Ratios needs to be looked upon with great attention. The ratio should be more than the benchmark ratio given in the loan policy. Some of the ratios looked by the bank are: i. Current Ratio ii. Debt Equity ratio iii. Leverage ratio iv. Net profit to sales, and v. Return on TNW

Most important documents to be called from the borrower are: i. Audited and projected balance sheet. ii. CMA Data iii. Credit Report of Director and all the Guarantors. Current assets and Current Liabilities needs to be accessed properly since it helps in finding the Net working capital. A reasonable amount of Collateral security needs to be there, but loans should not be accepted/ rejected on the basis of Collateral only, it should only be considered as Cushion. In case of term loan, DSCR should be calculated properly and should match according to the minimum benchmark written in the loan policy. Property needs to be valued by a government approved valuer so as to know the realizable and market value of the collateral security.

So, we can say that credit appraisal is very important for any loan proposal and BOI follows a sound and effective loan appraisal process. RECOMMENDATION: Based on my Interpretation and Analysis during summer Internship would like to recommend the following Suggestions to the Bank: Bank should try to minimise the duplication of work as it will help in avoiding wastage of the time of the employees. Bank should try to sanction the loan as early as possible since it will add to reputation in the eyes of the customers. Bank should focus on more advertising since sometimes you are better than your competitors but people are unaware about your schemes and offers due to less advertising, it will add to the business of the bank. Bank should focus on customer satisfaction and customer retention since it adds to the profit of the Bank. The Bank should try to provide latest information to the SMEs about the various SME financing schemes of the bank.

Product innovations in banks have set the rule of the game Innovate or perish. The same rule applies to SME segment. At present, there is a vast gap between requirements of the SME customer and availability of suitable/matching products and services in the public sector banks. Therefore, bank should try to minimise this Gap between requirement and availability of Finance. The process followed in sanctioning the loan and documentation required is cumbersome; hence it is suggested to make the process easier. Bank should develop flexible systems and procedures for dealing with SME customers and modify their role to be a facilitator. It may either provide software to these customers to prepare stock and financial statements or help and guide them in preparation of renewal proposal / statements. Bank should try that all the information should be reached to the SMEs so that they must be aware of all the policies and interest Rate regarding SMEs. Bank should encourage more and more people to start SMEs which help in our GDP growth and Creation of Employment. No position in Bank should be left vacant due to transfer of employees from one place to another. Terms and conditions should be explained properly to the customers to avoid misunderstandings between the customer and the Bank. The employees at Branch should remain updated about all the services and products offered by the Bank.


IMPLEMENTATION STRATEGY: The bank can use following Implementation strategies to implement the recommendations recommended by me: To minimize the duplication of work, Bank should prepare only one process note, which has to be prepared at the sanctioning authority level, since if the loan proposal is Head office level Loan proposal, then there is no need to make loan proposals at branch and Regional office level, only document has to be passed to Head office and a single process note should be prepare by the Head office. Generally the reason for the delay in sanctioning of loan proposal is the late reply of the queries asked by the sanctioning authority from the branch, one solution can be

that the Borrower should be directly called upon at the sanctioning authority office and no need to indulge branch in between it will reduce the loan sanctioning time and helps in avoiding the Delay in sanction of loan. Currently Bank is not focusing on Individual approach via Personal interaction, therefore Bank should recruit some professional marketing people who can approach directly to mid corporate and large corporate customers, and it will help the bank to increase the business. To increase chances of customer retention, bank should try to cross sell the products to the Bank customers since it will help the bank to gain customer satisfaction. To provide latest information about their Products, Bank can organize re-orientation program, workshops and seminars and latest information should be updated on the website and newspaper to make people more aware. To reduce the Gap between availability and requirement of Finance, New credit products may be developed to take care of the diverse, unexpected and short-term requirements of the SME customers in a hassle free manner and in a short time. To make the sanctioning process easier, A check list should be prepared by the bank and it should be given to the Borrower so that borrower will submit all the documents at one go only, it will be easy for Bank as well as Borrower and also avoid delay in sanctioning of the loan. To make the people aware about SME Financing, Bank should publish Monthly magazines, periodicals and publish them on their website and try to make them publish in newspapers also, it will help SMEs. To encourage people to start SMEs, Bank should go to Well established business schools and make students aware about easy financing to SMEs since most of the people dont want to start their business due to lack of Funds. To avoid vacant positions in bank due to transfer of employees, bank should ascertain that another employee is appointed at former employees place so as to avoid delay in work. To make the employees updated about the products and services of the Bank, the bank should organize frequent training programs for the employees to make them updated.


SUGGESTIONS FOR FUTURE RESEARCH: I have done the analysis of loan appraisal taking all the things into mind like financial viability and Technical Viability of the Borrower. In the analysis of any loan proposal, the most important thing is Financial Statement of the Borrower and CMA data given by the Borrower. In case the borrower is dealing with the Bank earlier also, then Conduct of Account plays a very important role. One can do the Future research on the Comparative Analysis of credit recovery Mechanism of Private sector and Public sector Banks which helps one to know about the Importance given by different Banks for Credit Recovery.

Another topic for Future Research can be Comparative Study of SME Financing Services Provided by Nationalised and Private Sector Banks which helps to know about the different financing schemes provide by different Banks for different Sectors. Another topic for Future Research can be Comparison of Interest Rate and service charges among different Banks which helps to know about the bank which offers loan at minimum Interest Rate and which offers at the highest. Another topic can be Time taken in sanctioning the loan proposal by different Banks, it helps the researcher as well as the banks to know how they are performing against their competitor Banks. All above are the possible topics for future research since my study was on SMEs, so I have suggested the future research topics related to SMEs only, if one will do any of the above analysis, it will be very helpful for the individual as well as for the organization also.


EXECUTIVE SUMMARY: SME plays a very important role in any countrys development. In a nations economy, its the small and micro enterprises which play a vital role. For, they not only give employment to a large number of unskilled and semi-skilled people but also support bigger industries by supplying raw material, basic goods, finished goods and components, etc. The critical role and place of the MSME sector in the Indian economy in employment generation, exports and economic empowerment of a vast section of the population is well known. The sector accounts for 45 percent of the manufactured output and 8 percent of the GDP. Advances extended to MSE sector are treated as priority sector advances and as per

RBI Guidelines; banks are required to extend at least 60% of their advances to the MSE sector to Micro Enterprises. During summer internship, the main task was to analyse and assessment of working capital finance to SMEs. The purpose of loan can be Working capital requirement, since in case of SMEs, the borrower starts the business with very less money and due to some credit period and non availability of the funds, and the borrower approach the bank for Working capital fund and Bank provide many types of Working capital funds including Fund based and Non Fund based funds. In case of Fund based, bank offers Cash credit limit, Bill discounting, Bank overdraft, Packing credit and so on and in case of Non fund based limit, bank provide Facilities like Bank Guarantee, letter of comfort and letter of credit etc. The main task in providing loan to SME borrowers is their credit appraisal, during credit appraisal; bank should look upon financial viability, Commercial viability, Management viability and Technical viability. The main task is to look at the audited and projected balance sheet. The bank should also look at the past record of the borrower with our bank as well as with other banks. The past record of the borrower should be good and the borrower should not be listed on the defaulters list. After doing the credit appraisal and doing detailed analysis of the financial statement of the borrower, the bank should also look at the Security offered by the borrower since it acts as a cushion for the bank, bank should not give loan on the basis of collateral but it should be taken into consideration. Bank also use internal rating to find out the risk associated with the borrower and with the help of the rating the bank will be able to find out the interest rate which has to be charged from the borrower. In case of Working capital loan, the bank follows Turnover method if the loan proposal is below 5 crores and if the Loan proposal is above 5 crore, then the bank follows Method II of Tandon committee. Then bank looks into some of the ration of the borrower financial and then look whether the Ratios such as Current Ratio, Debt equity ratio, Leverage ratio are more than the minimum required as per Loan policy or not. Then decision of whether to sanction the project or not will be taken and after sanction of the loan proposal, the bank does some post disbursement steps so as to avoid uncertainty in payment of interest like asking for Monthly Stock statement, Quarterly information system reports. After disbursement, the bank appoints some people for Post- Disbursement visit to the organization to check whether the funds are being utilised properly or not.

So, we can say that the credit appraisal system at BOI is very good and they follow all the steps before providing loan to any borrower.