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AN ANALYSIS OF THE CREDIT METHODOLOGY ADOPTED IN A PUBLIC SECTOR BANK

SIP project report submitted in partial fulfilment of the requirements for the PGDM Programme

BY LOVISH GUPTA 2011104 Supervisors: 1. C.P.SHARMA 2. HANISH RAJPAL

Institute of Management Technology, Nagpur. 2011-2013

Analysis of Credit Methodology, Bank of India

ACKNOWLEDGEMENT
Summer internship has long been an indispensable part of our curriculum of PGDM programme. Between the first and second year, this is an ideal way to get exposure to the real business world and learn about an industry. I have done my summer internship project in the Commercial and Institutional Credit Department(C&IC) at New Delhi Zonal Office, Bank of India, for 2 months from 11th April to 9th June, 2012.

My sincerest thanks and respect goes H.S.Anand and Ravi Kant Chaudhary, Chief Manager and their team C&IC Department for the immense help and guidance. I am indeed very thankful to them for their unending support right from the inspection of this project. They continuously shared their precious time and provided me right guidance at every stage.

I am grateful to Prof. Hanish Rajpal, Assistant Professor at Institute of Management Technology, Nagpur for helping me the queries and difficulties related to my internship project. His support and encouragement has a lot to do with the completion of this Project.

I am indebted to all employees of Bank of India, who directly or indirectly helped me in making my project a success. I greatly acknowledge the contribution of all.

Lovish Gupta

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Analysis of Credit Methodology, Bank of India

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Analysis of Credit Methodology, Bank of India

TABLE OF CONTENTS
1. Executive Summary. 2. Introduction. 3. Objectives... 4. About Bank of India... 5. Description of the concepts/ models introduced in the study 5.1 Lending Money to the Public...... 5.2 Importance of Lending 5.3 Modes of Delivery of Credit facilities. 5.4 Principles of Lending.. 5.5 How Lending Function works 6. Facts and Figures.... 6.1 Total Priority Sector Advances... 6.2 Total Non-Priority Sector Advances... 6.3 Cash Credit, Overdrafts and Loan repayable on Demand.. 6.4 Advances Portfolio... 6.5 Interest Income on Advances.. 6.6 Yield on Advances... 7. Methodology followed... 8. Findings.. 9. Interpretation and Conclusions..... 10. Recommendations.. 11. Limitations. 12. Future improvements. 13. Appendices.... 14. Bibliography.. 12 13 14 15 17 20 22 23 25 26 39 42 44 45 46 47 48 49 50 60 4 5 9 10

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Analysis of Credit Methodology, Bank of India

1. EXECUTIVE SUMMARY
This project ANALYSIS OF THE CREDIT METHODOLOGY has been prepared with facts and figures pertaining to Bank of India, New Delhi Zonal Office and undertaken to understand the credit exposure and appraisal of the borrower of Bank of India. Indian Banking Industry is growing faster than ever before and shows great opportunities with in rural as well as semi-urban India. Bank of India with its age old name has a place in peoples mind. But with the globalization, private banks that came just 10-15 years back are giving tough competition to Bank of India. Bank of India is one of the largest nationalized banks in India while its direct competitors are Bank of Baroda, Punjab National Bank, Central Bank etc. Whereas it is also competing with other private banks like ICICI Bank, HDFC Bank, Standard Chartered Bank etc. In the Banking Sector, deposits and advances plays a vital role on which income of the bank depends because on deposits banks gives the interest and on advance bank charges interest which is more than the deposit interest and the difference between the lending and the deposit interest is the profit of the bank. In this project various kinds of loans and advances and their bifurcation is discussed over a few years. The report also includes the brief description of the mechanism of giving credit to the customers.

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Analysis of Credit Methodology, Bank of India

2. INTRODUCTION History of Banking Sector:


The name Bank derives from the Italian word banco which means desk/bench, used by the Florentine Bankers, who used to make their transaction above the desk covered by a green table cloth. However, there are traces of banking activity even in ancient times. Banking in India originated in the last decades of the 18th century. The first banks were the General Bank of India which started in 1786 and the Bank of Hindustan both of which are now defunct. Bank of Bengal, Bank of Bombay and Bank of Madras was established as Presidency Banks. The three banks merged in 1921 to form the Imperial Bank of India, which is known by State Bank of India after Indias independence. Indian Bank in Calcutta established the Union Bank in 1839, but failed in 1848 as a consequence of the economic crises of 1848-49. The Allahabad Bank, established in 1865 and still functioning today, is the oldest Joint Stock Bank in India. The first entirely Indian joint stock bank was the Oudh Commercial Bank established in 1881 in Faizabad. It failed in 1958. The next step was the Punjab National Bank established in Lahore in 1895 which has survived to the present and is now one of the largest banks in India. Around the turn of the 20th Century, the Indian economy was passing through a relative period of stability. Indians had established small banks, most of which served particular ethnic and religious communities. The period between 1906 and 1911, Swadeshi movement inspired local businessmen and political figures to find banks for the Indian community. A number of Banks established then, one of them was Bank of India Others were Corporation Bank, Indian Bank, Bank of Baroda, Canara Bank and Central Bank of India.

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Analysis of Credit Methodology, Bank of India

Indias independence marked the end of a regime of the Laissez-Faire for the Indian Banking. The Government of India initiated measures to play an active role in the economic life of the nation and the Industrial Resolution Policy adopted by the government in 1948 envisaged a mixed economy. The major steps to regulate Banking included:

In 1948, the Reserve Bank of India, Indias central banking authority was nationalized and it became an institution owned by the government of India. In 1949, the Banking Regulation Act was enacted which empowered the RBI to regulate, control and inspect the banks in India. Banking means the accepting, for the purpose of lending or investment, of the deposits of money from the public, repayable on demand or otherwise, and withdrawal by cheque, draft, order or otherwise.

Nationalization
GOI issued an ordinance and nationalized the 14banks with effect from the midnight of July 19, 1969. A second dose of nationalization of 6 more commercial banks followed in 1980. The stated reason for the nationalization was to give the government more control of credit delivery. With the second dose of nationalization, the GOI controlled around 91% of the Banking business of India. Later on in the year 1993, the government merged New Bank of India with Punjab National Bank. It was the only merger between nationalized banks and resulted in the reduction of the nationalized banks from 20 to 19. After this till 1990s, the nationalized banks grew at a pace of around 4%, closer to the average growth rate of Indian economy.

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Analysis of Credit Methodology, Bank of India

Liberalization
In the early 1990s, the Narsimha Roa government embarked on a policy of liberalization, licencing a small number of private banks. These came to be known as New Generation Tech-savvy Banks and include Global Trust Bank, Axis Bank (earlier as UTI Bank), ICICI Bank and HDFC Bank. The move along with the rapid growth rate in the economy of India revitalized the Banking sector in India, which has seen rapid growth with strong contribution from all the three sectors of banks namely: Government Banks, Private Banks and Foreign banks. The next stage for the Indian Banking has been setup with the proposed relaxation in the norms for Foreign Direct Investment, where all foreign investors in banks may be given voting rights which could exceed the present cap of 10%, at present it has gone up to 49% with some restrictions. The new policy shook the banking sector in India completely. Bankers till this time, were used to the 4-6-4 method (Borrow at 4%; Lend at 6%; Go Home at 4%) of functioning. The new wave ushered in a modern outlook and tech-savvy methods of working for traditional banks. All this leads to the retail boom in India. People not just demanded more from their banks but also received more. Today, rural India still remains a challenge for the private sector and foreign banks. In terms of quality of assets, Indian Banks are considered to have clean, strong and transparent Balance Sheets related to other Banks in comparable economies in its region. The Banking Industry is highly competitive industry in India where so many banks compete with each other. There are around 500 commercial, regional and co-operative banks in India which makes it difficult for the players to survive. As per the current scenario, the banking industry is suffering from the stage of recession, but as far as the global banking is concerned, the Indian banking system is very much protected from the global recession due its traditional phase and rigid rules. The public sector banks are the basic foundation of the Indian banking sector.

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Analysis of Credit Methodology, Bank of India

HIGHLIGHTS OF THE BANK


Following are some highlights of the Bank of India as on 31st March, 2011 and on 31st March, 2012. Operating profit of Rs. 5384 crore and Net Profit of Rs. 2542 crore in March 2011 and Operating profit of Rs. 6694 crore and Net Profit of Rs. 2678 in March 2012. Capital Adequacy Ratio at 12.71% as against 10% prescribed by RBI (Basel II) Book value per share is Rs. 283.24 and 326.52 and Earnings per Share is Rs. 47.35 and 43.28 in March, 2011 and 2012 respectively. Gross NPA ratio decreased from 2.74% to 2.34% in March, 2012. Net NPA ratio decreased from 1.78% to 1.47% in March, 2012. Total business reached at Rs. 515040 crore recording a growth rate of 28% in March, 2011 and Rs. 569710 crore at a growth rate of 11% in March, 2012. Total deposits increased by 30% and reached the level of Rs. 298886 crore in March, 2011 and increased by 7% and reached Rs. 318216 in March, 2012. Gross credit touched Rs. 216154crore increasing by 26% in March, 2011 and increased by 17% up to Rs. 251494 crore in March, 2012. Agriculture Loan reached Rs. 23469 crore in March, 2012 with a growth rate of 33% while SME loan reached up to Rs. 32270crore. Retail Loan reached Rs. 19116 crore in March, 2012 with a growth rate of 15 % where as Corporate Loan reached Rs. 103095 crore.

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Analysis of Credit Methodology, Bank of India

3. OBJECTIVES OF THE STUDY


In India, many banks compete with each other making Banking Industry one of the most competitive industries in India. In India, there are more than 500 banks which make it difficult for other banks to survive. In order to survive, they have to overtake each other. The Banking Industry is divided into Public sector banks, Private sector banks and Cooperative banks. Public sector banks are the banks which have government undertaking of more than 51%. Public sector banks constitute most of the Indian Banking Industry assets. On the other hand, Private sector banks in India are also witnessing immense progress. Objectives of the study: Through complimentary case studies and hands on analyses, to learn about various kinds of loans and advances and the guidelines related to them. To study the credit appraisal system. To study the impact of loans and advances on the profitability of the Bank. To promote and bring new business to the office by stressing on key factors.

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Analysis of Credit Methodology, Bank of India

4. ABOUT BANK OF INDIA


Bank of India was founded on 7th September, 1906 by a group of eminent businessmen from Mumbai. The Bank was under private ownership and control till July 1969 when it was nationalised along with 13 other banks. Beginning with one office in Mumbai, with a paid-up capital of Rs.50 lakh and 50 employees, the Bank has made a rapid growth over the years and blossomed into a mighty institution with a strong national presence and sizable international operations. In business volume, the Bank occupies a premier position among the nationalised banks. The Bank has 4001 branches in India spread over all states/ union territories including specialized branches. These branches are controlled through 51 Zonal Offices. There are 29 branches/ offices (including five representative offices) and 3 Subsidiaries and 1 joint venture abroad. The Bank came out with its maiden public issue in 1997 and follow on Qualified Institutions Placement in February 2008. While firmly adhering to a policy of prudence and caution, the Bank has been in the forefront of introducing various innovative services and systems. Business has been conducted with the successful blend of traditional values and ethics and the most modern infrastructure. The Bank has been the first among the nationalised banks to establish a fully computerised branch and ATM facility at the Mahalaxmi Branch at Mumbai way back in 1989. The Bank is also a Founder Member of SWIFT in India. It pioneered the introduction of the Health Code System in 1982, for evaluating/ rating its credit portfolio. The Bank's association with the capital market goes back to 1921 when it entered into an agreement with the Bombay Stock Exchange (BSE) to manage the BSE Clearing House. It is an association that has blossomed into a joint venture with BSE, called the BOI Shareholding Ltd. to extend depository services to the stock broking community. Bank of India was the first Indian Bank to open a branch outside the country, at London, in 1946, and also the first to open a branch in Europe, Paris in 1974.
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Analysis of Credit Methodology, Bank of India

The Bank has sizable presence abroad, with a network of 29 branches (including five representative offices) at key banking and financial centres viz. London, New York, Paris, Tokyo, Hong-Kong and Singapore. The international business accounts for around 17.82% of Bank's total business. Our Mission "to provide superior, proactive banking services to niche markets globally, while providing cost-effective, responsive services to others in our role as a development bank, and in so doing, meet the requirements of our stakeholders". Our Vision "to become the bank of choice for corporates, medium businesses and upmarket retail customers and to provide cost effective developmental banking for small business, mass market and rural markets"

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Analysis of Credit Methodology, Bank of India

5. DESCRIPTION OF THE PROJECT 5.1 Lending Money to Public


Lending money is one of the two major activities of a bank. Banks accept deposit from public for safe-keeping and pay interest to them. They then lend this money to earn interest on this. In a way, the banks act as intermediaries between the people who have the money to lend and those who have the need for money to carry out business transactions. The difference between the rates at which the interest is paid in deposits and is charged on loans, is called the spread. Banks lend money in various forms and they lend for practically every activity. From the point of view of security, loans are given against or in exchange of the ownership (physical or constructive) of various types of tangible items. Some of the securities against which the banks lend are: Commodities Debts Financial Instruments Real Estate Automobiles Consumer Durable Goods Documents of title Apart from above categories, the Banks also lend to people on their net worth. Such loans are called clean and the banks are understandably cagey about extending such loans. The credit card arms of the various banks fill up this void. Cash credit (CC) Account: This account is the primary method in which Banks lend money against the security of commodities and debt. It runs like a current account except that the money that can be withdrawn from this account is not restricted to the amount deposited in the account. Instead, the account holder is permitted to withdraw a certain sum called a limit or credit facility in excess of the amount deposited in the account. Cash credits are payable on demand. These are, therefore, counter part of demand deposits of the Bank.

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Analysis of Credit Methodology, Bank of India

Overdraft: The word overdraft means the act of overdrawing from a Bank Account. In other words, the account holder withdraws more money from a Bank than has been deposited in it. Bill discounting: Bill discounting is a major activity with some of the smaller Banks. Under this type of lending, Bank takes the bill drawn by the borrower on his (borrowers) customer and pays him immediately deducting some amount as discount/ commission. The bank then presents the bill to the borrowers customer on the due date of the bill and collects the total amount. If the bill is delayed, the borrower or a customer pays the bank a pre-determined interest depending on the terms of transaction. Term Loan: Term Loans are counter parts of Fixed Deposits in the Bank. Banks lend money in this mode when the repayment is sought to be made in fixed, pre-determined instalments. This type of loan is normally given to the borrowers for acquiring long term assets i.e. assets which will benefit the borrower over a long period (exceeding at least one year) like purchases of Plant & Machinery, constructing building for factory, setting up new projects fall in this category. Financing for purchase of automobiles, consumer durables, real estate and creation of infrastructure also falls in this category. The asset for which loan is given is held as principle security and other collateral securities may be taken for security reasons as per the requirements. Future profitability is considered as primary importance so the person is able to pay and not a defaulter. So, profitability ratio and Debt Service Coverage Ratios are considered to the most important. Non Fund Credit: This type of credit is not given in real but bank provides Guarantee and Letter of Credit (L/C) to avail this credit. 5.2 IMPORTANCE OF LENDING: Lending is a core function of a Bank, which contributes significantly to its profits. Funds mobilized from deposits are deployed by Banks in making loans and advances to various business, trade and commerce. The main purpose of loans and advances is to earn profit by way of interest spread i.e. the differential between the average interest rates receivables of loans and payables on deposits.

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Analysis of Credit Methodology, Bank of India

5.3 MODES OF DELIEVERY OF CREDIT FACILITIES: Sole Banking Arrangements Multiple Banking Consortium Lending Syndication

Sole Banking: Here all the credits needs of a borrowing unit are met by a single Bank. The accounts are rated like AAA for (LC1 to LC2) and AA for (LC3 to LC4) where Bank of India is Sole Banker. Borrowers shall normally obtain Banks prior approval in case they would like to switch over to Multiple Banking Arrangement or consortium lending. Whenever a customers credit requirements exceeds the exposer ceiling or Rs. 400 crore whichever is higher, the borrower would be encouraged to scout for another Bank/ Institution to share credit facilities under Multiple Banking, Consortium or Syndicate Arrangements. Multiple Banking: Here the credit needs of different divisions of a borrowing company are met independently by different banks without any formal agreement/ arrangement amongst them. Where Bank of India is the sole banker and the borrower desires to avail of credit limits from other Bank/s without formal consortium arrangements, the reasons for the borrower waiting to shift to another bank are ascertained and recorded. The Bank can permit the borrower to bank elsewhere provided the borrower agrees to furnish from time to time details of the various facilities availed from other bank/s. Again Banks exposure for working capital needs should not exceed 75% of the total working capital requirements of the borrower.

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Analysis of Credit Methodology, Bank of India

Consortium Lending: The entire credit needs of a borrowing unit are financed by a group of Banks by forming a consortium. It is a concept to promote collective applications of banking resources. Syndication: A syndicated credit is an arrangement between two or more lending institutions to provide a credit facility using common loan documentation. Advantages of Consortium: Notionally borrower to deal with one bank Entire fund requirement arranged by the syndication lender Unlike consortium default risk shared under syndication Borrower gets competitive price through bids Fixed price lending Bank of India encourages financing under such agreements. 5.4 PRINCIPLES OF LENDING: Banks follows the basic principles of prudence while lending, as the money banks are lending belongs to their depositors and has to be repaid on demand or on maturity as per the terms of the deposits. The Bank also follows certain other principles, as described below that help banks in honouring their commitments to the depositors and earing profit from their lending activities. 1. Safety and Security Principle: Safety principle means timely return of the funds, lent by the bank. While granting a loan, a bank carefully examines the economic, commercial and financial viability of the applicants business, quality of its management (integrity, honesty, willingness to repay loan, reputation in market, business acumen etc.) and the past track record. Assets acquired by bank loan are charged/ hypothecated to the bank by the way of its security in the form of mortgages of immovable property and pledge/ hypothecation of goods and receivables of the borrowers wherever necessary additional collateral security of tangible assets and/ or third party guarantees are also obtained by bank.

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Analysis of Credit Methodology, Bank of India

2. Risk Diversification Principle: Lending involves risk taking and banks always strive to minimize such a risk. The main risk in lending is, credit risk, arising from the business failure of the borrower or default in payment of the principle/ interest by the borrower due to other reasons. The credit risk is sought to be diversified by banks by avoiding concentration of loans to a few borrowers/ industries/ sectors, as per the prudential norms set internally and stipulated by the regulatory authorities.

3. Profitability principle: Profit-earning is necessary for any business to sustain and grow. Further, the logical corollary to risk taking, is profit making. Banks seek to earn profit by charging an interest higher than payable by them on their deposits. The difference between the average interest earned of loans/ investments (yield) and paid in deposits (cost of funds) is the gross interest spread. 4. Liquidity Principle: A bank has to manage its assets and liabilities in such a manner that it can meet all its deposits liabilities in time, out of money acquired as repayment of loans. It has to attune the maturities of its liabilities. No bank can afford a delay or default in meeting its deposits or other liabilities, as this would result in loss of trust and faith of the depositors/ customers, on which rest the edifice of banking business. 5. Loan Purpose Principle: Banks grants loans and advances for lawful purposes as per public policy and its own objectives. Unlawful activities include money laundering (for terrorists activities, illegal trafficking and drugs) or for activities banned or restricted by the RBI and other regulatory and statutory activities are not financed. While avoiding giving loans for unlawful or restrictive purposes, a bank may have special knowledge and expertise of certain industries and would therefore lend mainly to the units in these segments. Every banks portfolio is therefore different as per its objectives and credit policy. 6. Government Policies: There are certain government policies under which banks have to give loans to the priority sector.

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Analysis of Credit Methodology, Bank of India

5.5 How lending function works:


The loan application is received by the branch with the supporting documents(security papers, third party guarantee, consolidated balance sheets and income statements of last few years, loan purpose verification documents etc.) The application is processed by the branch manager and analyzed that the applicant is viable for the approval of loan or not. If he requires some more documents as per the needs, he can ask the applicant for the required documents. Proper verification is done of the security held by the bank and the verification charges are to be borne by the applicant. Branch manager finds certain key ratios like current ratio, profitability ratio, debt equity ratio, interest coverage ratio, debt service coverage ratio. These computed ratios are compared with the guidelines given by the bank. If the applicant is unable to stand by on these parameters then the application has been rejected. If branch manager finds applicant viable the rating is done, through this rating it us decided how much rate of interest is to be imposed. If the loan amount is within the limits of the branch manager, he approves the loan amount and if the loan amount is more than the limits of the branch then that application is sent to the zonal office. The application is processed again in the zonal office, key ratios are calculated, the processing authority gives its comments and the application is sent to the sanction authority. If the applicant is capable to fulfill the requirements as per the banking guidelines then the loan is approved, unless it is sent back to the branch for further enquiry and to fulfill the required documents.

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Analysis of Credit Methodology, Bank of India

Key Ratios

Current Ratio: Current ratio is a financial ratio that measures whether or not a firm has enough resources to pay its debts over the next 12 months. It compares a firm's current assets to its current liabilities. It is expressed as follows: Current Ratio = Current Assets Current Liabilities

The current ratio is an indication of a firm's market liquidity and ability to meet creditor's demands. Acceptable current ratios vary from industry to industry. If current liabilities exceed current assets (the current ratio is below 1), then the company may have problems meeting its short-term obligations. Debt equity Ratio: The debt-to-equity ratio is a financial ratio indicating the relative proportion

of shareholders equity and debt used to finance a company's assets. Closely related to leveraging, the ratio is also known as Risk, Gearing or Leverage. The two components are often taken from the firm's balance sheet or statement of financial position (socalled book value), but the ratio may also be calculated using market values for both, if the company's debt and equity are publicly traded, or using a combination of book value for debt and market value for equity financially. Interest Coverage Ratio: A ratio used to determine how easily a company can pay interest on outstanding debt. The lower the ratio, the more the company is burdened by debt expense. When a company's interest coverage ratio is 1.5 or lower, its ability to meet interest expenses may be questionable. An interest coverage ratio below 1 indicates the company is not generating sufficient revenues to satisfy interest expenses. Interest Coverage Ratio: Earnings before Interest & Tax Interest Expense

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Analysis of Credit Methodology, Bank of India

Debt Service Coverage Ratio: The debt service coverage ratio (DSCR), also known as "debt coverage ratio," (DCR) is the ratio of cash available for debt servicing to interest, principal and lease payments. It is a popular benchmark used in the measurement of an entity's (person or corporation) ability to produce enough cash to cover its debt (including lease) payments. The higher this ratio is, the easier it is to obtain a loan. The phrase is also used in commercial banking and may be expressed as a minimum ratio that is acceptable to a lender; it may be a loan condition or covenant. Breaching a DSCR covenant can, in some circumstances, be an act of default.

Operations Department
Once the Credit Manager approves the loan, the application moves to the operations department. On being satisfied with the attached documentation, the operations department keep for safekeeping. It also handles other miscellaneous tasks such as sending a copy of loan payment history to the applicant if he so desires on receipt of the appropriate payment. Finally, after the loan has been fully paid by the applicant, it is also the duty of the Operations Department to grant the NOC to the applicant and thus close the case.

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Analysis of Credit Methodology, Bank of India

6. Facts and Figures


Table 1: Total Credit (New Delhi Zone)
2009 Total Credit Priority sector advances Housing below 25 lakhs Agriculture Education SC/ST Micro Small Medium Women employment credit Minority Weaker Sections Others Non Priority advances Loan Against FD(TDR) Housing above 25 lakhs Infrastructural Loan Retail Trading above 20 lakhs Commercial Estate Loan Personal Loan Capital Market Loan NBFC's Education loans above limit Others 11283 1760 185 320 50.32 24.32 11.27 36.32 134 243 198 48 509.77 9523 3162 13 4336 294 241 98 54 578 179 568 2010 14433 2206 203 276 56.08 33.14 12.95 41.11 197 305 254 85 742.72 12227 3685 34 4859 324 276 259 81 626 213 1870 2011 17015 3136 218 212 61.14 42.07 21.14 60.89 406.7 417 263 37.5 1396.56 13879 4034 22 5932 415 367 136 124 715 290 1846

(Rs. in Crore)
2012 16490 2314.6 197 200 57.29 40.39 519.5 200.36 210.5 424 296 40 129.56 14175.4 3268 27 6258 316 461 183 89 816 245 2512.4

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Analysis of Credit Methodology, Bank of India

Figure 1: Graphical Presentation of the Distribution of Credit


18000 16000 14000 12000 10000 8000 6000 Total Credit Priority sector advances Non Prority advances

4000
2000 0

2009

2010

2011

2012

Table 2: Distribution of Credit


2009 Total Credit Priority sector advances Non Priority advances 11283 1760 9523 2010 14433 2206 12227

(Rs. in Crore)
2011 17015 3136 13879 2012 16490 2314.6 14175.4

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Analysis of Credit Methodology, Bank of India

6.1 Total Priority Sector Advances


Figure 2: Trend of Priority Sector Advances
1000
900 800 700 600 500 400 300 200 100 0 Housing below 25 lacs Agriculture Education Micro, Small and Medium

2009

2010

2011

2012

Table 3: Priority Sector Advances


2009 Housing below 25 lakhs Agriculture Education Micro, Small and Medium 185 320 50.32 181.59 2010 203 276 56.08 251.06 2011 218 212 61.14 488.73

(Rs. in Crore)
2012 197 200 57.29 930.36

Here the major contribution in the priority sector is of Micro, Small and Medium enterprises. The main reason for high contribution of these industries is that the data is collected from the metropolitan city and here the major dealing is with enterprises. Due to the setting of new industries agricultural loan is decreasing year by year in this area. There is a drastically increase in micro enterprises loans because Bank of India is providing more loans to the very small business to grow them and these small business does not have sufficient funds to start the organization.

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Analysis of Credit Methodology, Bank of India

6.2 Total Non-Priority Sector Advances


Figure 3: Trend in Non-Priority Sector Advances
7000 6000 5000 4000 3000 2000 1000 0 2009 2010 2011 2012 Loan Against FD(TDR) Infrastructural Loan

NBFC's
Others

Table 4: Non-Priority Sector Advances


2009 Loan Against FD(TDR) Infrastructural Loan NBFC's Others 3162 4336 578 568 2010 3685 4859 626 1870 2011 4034 5932 715 1846

(Rs. in Crore)
2012 3268 6258 816 2512.4

There is decrease in advances in 2012 as an organization which had a loan against Fixed Deposit of Rs. 1000 crore premature the FD to cancel the loan so to avoid paying interest on the loan.

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Analysis of Credit Methodology, Bank of India

Loan against TDR (FD): This is the loan taken against the Fixed Deposit. So, risk while giving this kind of loan is negligible. If a person fails to repay the loan bank can take back the amount from the Fixed Deposit. Home Loan above 25 lakhs: Home loan if less than 25 lakhs then it is considered to be priority sector loan otherwise not. Infrastructural Loans: These loans are like making of roads, building of dams and power plants etc. Retail Trading: Retail trading if less than 20 lakhs then it is considered to be priority sector lending otherwise not. Commercial Estate Loan: It is related to the builders who make the colonies, flats and sells them on profit. Personal Loan: This loan is given to the person for his personal needs like marriage or for any other kind of need. Capital Market Loan: These loans are given for the purchase of stock and shares and these stock and shares held as the security to minimize the loss. NBFCs Loan: Non-Banking Financial Corporation Loans are given to the corporations who act as bankers and provide loans to the public. E.g. Indiabulls, Bajaj Capital etc. Education Loan: Education loan is considered to be priority sector advance if it is less than 10 lakhs in India and 20 lakhs in abroad and if it is more than this amount it is treated as nonpriority loan. There are more type of loans like loans given under Prime Minister Rojgar Yojna, Loans given to SC/ST, to women entrepreneurs, to minority and weaker section etc. The distinction between the Micro, Small and Medium is done on the basis of Fixed Plant and Machinery. If the value of is less than 25 lakhs it is considered to be micro, if it is greater than 25 lakhs but less than 5 crore it is small enterprise and greater than 5 crore and less than 10 crore is medium enterprise and beyond this large enterprises.

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Analysis of Credit Methodology, Bank of India

6.3
Table 5: Cash Credit, Overdrafts and Loan Repayable on Demand
2008 Pre-Shipment Credit PCFC (Pre-Shipment Credit in 2079 209.27 1193 813 1.94 1863 281.52 1321 1067 4.14 1985 698.41 1032 1281 8.07 2182 836.97 1678 914 22 2454 1024 3147 835 285.18 2009 261.79 2010 290.16

(Rs. in Crore)
2011 682 2012 795

Foreign Currency) NPA Packing Credit Demand Loans Foreign Currency Demand Loans Cash Credits Overdrafts Total cash credit, overdrafts and loans repayable on demand

4294.27

4532.52

4996.41

5610.97

7460

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Analysis of Credit Methodology, Bank of India

6.4Advances Portfolio: Pre-Shipment Credit Packing Credit


Pre-Shipment finance is the credit granted to the exporters by a financial institution. Pre-Shipment finance is part of working capital finance. There is no fixed formula to determine the quantum of finance that is granted to an exporter against a specific order. The only guiding principle is the concept of need based finance i.e. finance when there is a need for it and the exporter requires it. Banks describe the percentage of margin, depending on factors such as: The nature of order The nature of the commodity The capability of the exporter to bring in the requisite contribution in the shape of margin The main objective behind pre-shipment finance or pre export finance is to enable exporter to: Procure Raw Material Carry out manufacturing process Provide a secure warehouse for goods and raw material Process and pack the goods Ship the goods to the buyer

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Analysis of Credit Methodology, Bank of India

Figure 4: Pre-Shipment Credit


900 800 700 600 500 400 300 200 100 0 2008 2009 2010 2011 2012

Table 6: Pre-Shipment Credit


2008 Pre-Shipment Credit 285.18 2009 261.79 2010 290.16

(Rs. in Crore)
2011 682 2012 795

Packing Credit Loan is very low in the year 2008, but it can be seen that in the year 2012, there is drastic increase in the pre-shipment credit- packing credit. The reason for this increase is that the branch increased its number of customers in the year 2011 and this made the branch to get more exposure in packing credit loan to the big corporate. Also, the packing credit limit for the existing customer had increased in accordance with the sufficient pre requisite terms and conditions.

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Analysis of Credit Methodology, Bank of India

Figure 5: Growth Rate in Pre-Shipment Credit


160 140 120 100 80 60 40 20 0 2009 -20 2010 2011 2012

Table 7: Growth Rate in Pre-Shipment Credit


2009 Growth Rate (%) -0.08 2010 10.83

(Rs. in Crore)
2011 135.04 2012 16.57

The above figures show the growth in Pre-Shipment Credit. It can be seen that in the year 2009, there is negative growth in pre-shipment credit. But in the year 2011, there is a remarkable increase by growth rate of 135%. This made the interest income increased to such a higher rate in 2011.

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Analysis of Credit Methodology, Bank of India

PCFC (Pre-shipment Credit in Foreign Currency)


With the objective of making credit available at internally competitive rates, Ads have been permitted to the extend Pre-shipment Credit Loans in Foreign Currency to Exporters. Ads have been permitted to extend pre-shipment credit in foreign currency in order to facilitate the procurement of raw material/ components etc. required to fulfil the export order. The procurement of raw material or components may be made from the international markets or from domestic markets. Authorized dealers are permitted to extend pre-shipment credit in foreign currency (PCFC) with an objective of making the credit available to the exporters at internationally competitive price. This is considered as an added advantage under which credit is provided in foreign currency in order to facilitate the purchase of raw material after fulfilling the basic export orders. The rate of interest on PCFC is linked to London Interbank Offered Rate (LIBOR). Accordingly to guidelines, the final cost of exporter must not exceed 3.75% over 6 month LIBOR, excluding the tax. The exporter has freedom to avail PCFC in convertible currencies like USD, Pound, Sterling, Euro, Yen etc. However, the risk associated with the cross currency truncation is that of the exporter. The sources of funds for the banks for extending PCFC facility include the foreign currency balances available with the Bank in Exchange, 50% in Earner Foreign Currency Account (EFCA), Resident Foreign Currency Account RFC (D) and Foreign Currency (Non-resident) Accounts.

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Analysis of Credit Methodology, Bank of India

Banks are also permitted to utilize the foreign currency balances available under Escrow account and Exporters Foreign Currency accounts. It ensures that the requirement of the funds by the account holder for permissible transactions is met. But the limit prescribed for maintaining maximum balance in the account is not exceeded. In addition, banks may arrange for borrowings from abroad. Banks may negotiate terms of credit with overseas bank for the purpose of grant of PCFC to exporters, without the prior approval of RBI, provided the rate of interest on borrowings does not exceed 3.75% over 6 months LIBOR.

Analysis:
Before 2009, bank has not issued any PCFC but from 2009 it has started to issue this credit and this credit is increasing with the passage of time. Figure 6: PCFC (Pre-Shipment Credit in Foreign Currency)
25 20 15 10

5
0 2008 2009 2010 2011 2012

Table 8: PCFC (Pre-Shipment Credit in Foreign Currency)


2008 PCFC (Pre-Shipment Credit in Foreign Currency) 1.94 4.14 2009 2010

(Rs. in Crore)
2011 2012

8.07

22

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Analysis of Credit Methodology, Bank of India

Demand Loans
A loan which is repayable on demand (i.e. without prior notice), rather than on a specified date is known as demand loan. In other words, it is a loan (such as on overdraft) with or without a fixed maturity date, but which can be recalled anytime (often on 24- hour notice) by the lender and must be paid in full on the date of demand. Also, the borrower can pay off a demand loan at any time without incurring early payment penalties. It is also known as Call Loan or money at call. It is given for a maximum period of 3 years such as micro, small, medium loans etc. and if the loan is repayable in more than 3 years it becomes the term loan. Figure 7: Demand Loans

2500

2000

1500

1000

500

0 2008 2009 2010 2011 2012

Table 9: Demand Loans


2008 Demand Loans 2079 2009 1863 2010 1985

(Rs. in Crore)
2011 2182 2012 2454

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Analysis of Credit Methodology, Bank of India

Figure 8: Graphical Presentation of Growth Rate of Demand Loans (%)


15

10

0 2009 -5 2010 2011 2012

-10

-15

Table 10: Growth Rate of Demand Loans (%)


2009 Growth Rate of Demand Loans (%) -10.38 6.54 9.92 2010 2011

(Rs. in Crore)
2012

12.46

Analysis:
Demand loans shows downfall in the year 2009 by Rs. 216 crore and then slowly increased in the year 2011 and 2012. The reason for this was that the ratio of interest income was relatively less in demand loans than any other. So the exposure from demand loans was shifted to other which probably gave high rate of return in the interest rates. Also, this increased interest income. Therefore, the target for demand loan merely shut down and then increased a little in next consecutive years.

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Analysis of Credit Methodology, Bank of India

Foreign Currency Demand Loans


Demand loans which are borrowed other than in domestic currency are termed as Foreign Currency Demand Loans. Here, the interest rate is charged in home currency but is very volatile because of fluctuating exchange rates of different currencies which may lead to loss to the bank. Figure 9: Foreign Currency Demand Loans

1200 1000 800 600 400 200 0

2008

2009

2010

2011

2012

Table 11: Foreign Currency Demand Loans


2008 Foreign Currency Demand Loans 209.27 281.52 698.41 2009 2010

(Rs. in Crore)
2011 2012

836.97

1024

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Analysis of Credit Methodology, Bank of India

Figure 10: Growth rate of Foreign Currency Demand Loans (%)


160 140 120 100 80 60 40

20
0 2009 2010 2011 2012

Table 12: Growth rate of Foreign Currency Demand Loans (%)


2009 Growth rate of Foreign Currency Demand Loans (%) 34.52 148.08 2010

(Rs. in Crore)
2011 2012

19.84

22.35

Analysis
Foreign Currency Demand Loan is showing a decreasing trend and this is because of the same reason that the rate of interest income vis--vis demand loans was not feasible and viable enough to make bank to earn profits.

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Analysis of Credit Methodology, Bank of India

Cash Credit
It is usually a credit at a bank established by the negotiation of a loan from a bank. It is like a running current account facility to the corporate specifying the withdrawal limit and drawing power. The application for the cash credit loan is received by the branch, and the branch officer process the application, if the loan amount is within the sanctioning limit power of the branch then they can approves the loan otherwise they send the application to the Zonal office after analysing and giving their comments. When the application for the cash credit loan is received, the first step is to check the documents whether the required documents are attached with the file or not. Then the balance sheet of last two years and proceeding 4 years is analysed and the key ratios: Current ratio, Debt equity ratio, Interest service coverage ratio and profitability ratio are calculated and compared with the standard bank. Interest Service Coverage Ratio is considered to be the most important ratio for cash credit loan because it shows whether the applicant is able to pay off the interest amount of the loan or not. If the applicant is able to fulfil those standard format requirements then the further processing is done of his application otherwise the loan has been rejected and when the applicant fulfils the ratio requirements, then the maximum amount of loan for which the applicant is credible is calculated. While calculating CC limit, more stress is given on the primary assets mortgaged by the bank i.e. stock and debtors but secondary security of property and third party guarantees may be required to remain on the safer side. Credibility is calculated from the primary assets, 40% margin is there in case of debtors (Book Debts) and 25% margin in case of Stock. Then it is calculated whether the company or firm is Micro, Small or Medium which is done on the basis of Fixed Plant and Machinery. If the value of is less than 25 lakhs it is considered to be micro, if it is greater than 25 lakhs but less than 5 crore it is small enterprise and greater than 5 crore and less than 10 crore is medium enterprise and beyond this large enterprises.

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Analysis of Credit Methodology, Bank of India

The SBS rating form is filled and the rate of interest is calculated on the basis of category of SBS rating in which applicant lies. Standard format is there for SBS rating to check how stronger the applicant has the credibility. More the credibility lesser will be the rate of interest. Proper inspection is done by the authorized person of the applicants property which is held as the secondary security. Then the market value, book value and the circle value of the property is calculated. The value of the property which is taken into consideration is the circle rate, it is the rate at which bank can sell the property at any point of time. Processing officer gives his comments on various ratios and findings after analysing the application. Working capital assessment is done and the processed application has been sent to the sanctioning authority. Sanctioning authority analysed the application according to their needs and if they found suitable then approves the loan unless gives their comments and sent back to the processing officer, if processing officer is able to fulfil such requirements then he can do otherwise asks for branch manager help. If the requirement is fulfilled by the branch manager, then the loan is approved, otherwise it has been rejected. The credibility of the applicant is reviewed every year with the same procedure.

Table 13: Cash Credits in Different Years


2008 Cash Credits 1193 2009 1321 2010 1032 2011 1678

(Rs. in Crore)
2012 3147

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Analysis of Credit Methodology, Bank of India

Overdrafts
An overdraft occurs when withdrawals from a bank account exceed the available balance. In this situation a person is said to be overdrafts. If there is a prior agreement with the account provider for an overdraft protection plan, and the amount withdrawn is within this authorized overdraft limit, then interest is normally charged at the agreed rate. If the balance exceeds the agreed limits, then fees may be charged and higher interest rate might apply. Figure 11: Overdrafts over last 5 Years

1400 1200 1000 800 600 400 200 0 2008 2009 2010 2011 2012

Table 14: Overdrafts


2008 Overdrafts 813 2009 1067 2010 1281

(Rs. in Crore)
2011 914 2012 835

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Analysis of Credit Methodology, Bank of India

Figure 12: Growth rate of Overdrafts (%)


40 30 20 10 0 2009 -10 -20 -30 -40 2010 2011 2012

Table 15: Growth rate of Overdrafts (%)


2009 Growth rate of Overdrafts (%) 31.24 2010 20.05

(Rs. in Crore)
2011 -28.65 2012 -8.64

It can be seen that in the year 2009, there was a drastically increase in the overdrafts with a growth rate of 31.24%. Also, in the year 2010, there has been an increase in the overdrafts but thereafter that it has shown a negative growth rate. The reason for this could be the customers are becoming more efficient to maintain their account and also there requirement is also within their limits.

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Analysis of Credit Methodology, Bank of India

6.5
Table 16: INTEREST INCOME ON ADVANCES
2008 1 Interest earned (a)+(b)+(c)+(d) (a) Interest/discount on advances/bills (b) Income on Investments (c) Interest on balances with RBI and other interbank funds (d) Others 2 3 4 Other Income TOTAL INCOME ( 1 + 2 ) Interest expended (a)On Deposits (b)On Borrowings (c)Subordinated Bonds (d)Others 5 Operating expenses (a)+(b) (a) Employees cost (b) Other operating expenses 6 7 TOTAL EXPENDITURE (4)+(5) OPERATING PROFIT (3-6) 52 2116 14471 8125 7058 562 505 ---2644 1657 987 10769 3702 65 3051 19398 10848 9776 533 539 ----3094 1937 1157 13942 5456 61.06 2616.63 20494.62 12122 10812 555 755 ----3667.82 2296.07 1371.75 15789.86 4704.76 294.35 2641.78 24393.50 13941 121786 8129 6350 3146 5068.24 3475.44 1592.80 19009.27 5384.23 264.31 3321.17 3801.84 20167 179570 11453 6658 3991 4940.66 3053.42 1887.24 25107.89 6693.95 12355 9276 2639 388 2009 16347 12539 3370 373 2010 17877.99 13103.23 4464.30 249.40

(Rs. in Crore)
2011 21751.72 15500.23 5171.71 785.43 2012 28480.67 20240.63 7141.76 833.97

This is the income earned by Bank of India by way of lending money. This contributes to the profit largely. Thus, it is treated very carefully as this lay down the true financial position of the bank i.e. profitability to much extent.

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Analysis of Credit Methodology, Bank of India

Figure 13: Interest on advances

25000

20000

15000

10000

5000

0 2008 2009 2010 2011 2012

Table 17: Interest on advances


2008 Interest on advances 9276 2009 12539 2010 13103.23

(Rs. in Crore)
2011 15500.23 2012 20240.63

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Analysis of Credit Methodology, Bank of India

Figure 14: Growth in Interest Income


40 35 30 25 20 15 10 5 0 2009 2010 2011 2012

Table 18: Growth in Interest Income


2009 2010

(Rs. in Crore)
2011 2012

Growth (%)

35

18

31

Analysis: Though interest income on advances is increasing but the actual increment is shown by the growth rate as shown. The branch growth is declining in interest income from 35% in 2009 to 31% in 2012.

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Analysis of Credit Methodology, Bank of India

6.6 Yield on Advances


This is the crux or core of any Commercial Bank. For a bank, yield on total advances gives the efficient allocation of resources by the bank. It is the net interest income earned from advances given to the corporate and all relative customers. Increasing trend vis--vis cost of deposits gives the true picture regarding efficiency of the bank. Figure 15: Graphical Presentation of Yield on Advances
16 14 12 10 8 6 4 2 0 2009 2010 2011 2012

Lending Rate (%)

Deposit Rate (%)


Net Yield (%)

Table 19: Yield on Advances


2009 Lending Rate (%) Deposit Rate (%) Net Yield (%) 12 8 4 2010 12.5 7 5.5 2011 14.75 9 5.75

(Rs. in Crore)
2012 14.75 9.25 5.5

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Analysis of Credit Methodology, Bank of India

Figure 16: Yield on Advances


35 30 25 20 15 Net Yield (%)

Deposit Rate (%)


Lending Rate (%)

10
5 0 2009 2010 2011 2012

Analysis
Thus it is showing an increasing trend and there is a sign of good or better performance. Bank should focus on minimizing cost of deposits and maximizing yield on advances. It also shows the sign of productivity of the bank because there is hardly any change in number of employees in the bank. Table 20: Net Profit of the Bank
2009 Net Profit 3073 2010 1787 2011 2542

(Rs. in Crore)
2012 2678

The main reason of large change in profit in 2009 is that more are more deposits in the bank and due to more deposits bank have to pay more amount of interest and the amount of the operating expenses also increases which causes a decline in the Net Profit. There are various government schemes under which bank has to lend the money to priority sectors at low rate of interest which restricts the bank to earn more on lending.

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Analysis of Credit Methodology, Bank of India

7. METHODOLOGY
The following is the methodology used in the project:

Design: This is an Analytical work on processing of loans and advances in Bank of India, one of the largest Nationalized Banks.

Data Collection: Both the primary and secondary data are used in the study. Primary data- Calculated the creditworthiness of certain companies by stressing on ratio analysis but for privacy of the bank the data is not available in the report.

Secondary data- Internet, Books, Banks Circulars, Educational Material and Bank
files etc.

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Analysis of Credit Methodology, Bank of India

8. Findings
Need for credible, independent judgments on the creditworthiness and solvency of depository institutions in the zonal office. Zonal office of Bank of India, credit analyses presents proven methodologies that will allow you to produce an informed evaluation of the impact of a banks credit risk on investment, lending and acquisition decisions. Bank of India credit analysis teaches the qualitative and quantitative factors and methodology used to evaluate banks credit policy. Through complimentary case studies and hands on analyses, participants leave with knowledge of technique and perspective necessary to access the creditworthiness and solvency of depository institutions so they can make independent decisions.

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Analysis of Credit Methodology, Bank of India

9. Interpretation and Conclusions


It can be concluded that the overall performance of the bank is improving. Some documents in the file were folded or were missed out while checking the errors in the file. The main reason for increase in profit is the increase in the advances. The zonal office is able to control its cost and thus showing an overall performance in its functioning. Bank of India is trying to capture the foreign market because a lot of revenue of its coming from its foreign branches. So, it is stressing more on expanding business in the foreign to increase its revenue and profit. In May 2012, Bank of India started fully computerized system while lending loan and lot of paper work now have been reduced. Financial accounting information is affected by estimates and assumptions. Accounting standards allow different accounting policies, which impairs comparability and hence ratio analysis is less useful in such situations.

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Analysis of Credit Methodology, Bank of India

10. Recommendations
Executives/Co-ordinators shows that the presence of errors is mostly avoidable, only if a little time is spent in reviewing the file before logging it into Credit. Loans schemes of Bank of India are very good but aggressive marketing is required to compete with marketing strategies of private banks. Efforts should be made for direct marketing with clients/ corporates for entry into consortium arrangements. All the employees and customers should be more aware about the details of the internet banking. Focus should be made to increase fee based income besides high yielding advances.

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Analysis of Credit Methodology, Bank of India

11. Limitations
Due to the shorter period of time of 2 months, it is not possible to go in depth of each kind of particular loan, so more stress is given on Cash Credit loans, Term loans and Consortium lending during the training period. Bank of India has certain rules of privacy because of them I am not able to show the guidelines of the Bank set for the approval of loan, parameters of the key ratios and to show any processed application. Comparisons made for recommendations were with the past year data of Bank of India and the industry benchmarks but there is a possibility that some other banks are doing more well in some particular areas. As a trainee and not a permanent employee of the bank, bank managers hesitate to disclose the regulatory matters and some information and may be some guidelines of the bank. Even they disclose they cant permit to use the information in the report. Eg. Name of any party.

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Analysis of Credit Methodology, Bank of India

12. Future improvements


More careful study of the loan files is possible. Data compiled can be compared to other leading banks rather than comparing it only with the industry benchmarks. There must be some space of improvement in the proper division and delegation of work which increases the work speed and decreases the operating cost. Still old techniques are used while collecting the data from different branches and then the data is compiled which takes a lot of time, so some new technique or software should be used to collect the data to minimize the operating costs. Some leniency has been adopted in some cases while lending loans to people, so these leniencies should be avoided and strict rules have to be followed to avoid the default of repayments of loans. New marketing should be followed to attract more customers. Proper training should be providing to the new and existing staff to increase their efficiency.

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Analysis of Credit Methodology, Bank of India

13. Appendices

CMA (Credit Monetary Arrangement) Data Format


Table 22: Particulars for existing/ proposed limit for banking statement
Form I Particulars With us With other banks With FIs Under Lease Finance/ Investments Total Facility Limit Outstanding Asset Status

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Analysis of Credit Methodology, Bank of India

Table 23: Operating Statement


Form - II 31.03.2011 Audited 1. Gross sales (i) Domestic sales (ii) Export sales 2.Add other revenue income 3. Net sales 4. % age rise (+) or fall (-) in net sales 5. Cost of sales i) Raw materials(including stores & spares) ii)Power and fuel iii) Direct labour(Factory wages & salary) iv) Other mfg. expenses v) Depreciation vi) SUB-TOTAL (i to v) vii) Add: Opening stocks-in-process viii) Deduct: Closing stocks-in-process ix) Cost of Production x) Add : Opening stock of Finished goods xi) Deduct closing stock of finished goods Gross Profit 6. Selling, general & administrative exp. 7. SUB-TOTAL (5+6) 31.03.2012 Audited

(Rs. in lakhs)

31.03.2013 Estimated

31.03.2014 Projected

8. Operating profit before interest(3-7) 9. Interest 10.Operating profit after interest(8-9) 11. (i) Add other non-operating income (ii) Deduct other non-operating exp. 12. Profit before tax/loss {10+11(iii)} 13. Provision for taxes 14. Net profit/loss (12-13) 15. (a) Dividend & Dividend Tax (b) Rate 16. Retained profit (14-15) 17. Retained profit/Net profit (% age)

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Analysis of Credit Methodology, Bank of India

Table 24: ANALYSIS OF BALANCE SHEET


FORM III LIABILITIES 31.03.2011 Audited CURRENT LIABILITIES 1.Short-term borrowings from banks (i) From applicant bank (ii) From other banks (iii) (of which BP & BD) Subtotal (A) 2. Sundry creditors- Capital Goods and Spares 3. Sundry creditor 4. Advance payments from customers/dep. from dealers 5. Provision for taxation 6. Dividend payable 7. Other statutory liabilities (due within one year) 8. Deposits/Instalments of term loans/DPGs/Debentures 9. Other current liabilities & provisions (due in 1yr.) Other Current Liabilities [Sub-total (B)] 10. Total Current Liabilities(total of 1 to 9) TERM LIABILITIES 11. Debentures (not maturing within 1 yr.) 12. Preference shares (redeemable after1yr.) 13. Term loans (excluding instalments payable within 1 yr.) 14. Deferred Payment Credit excluding instalment due within 1 yr.) 15. Term deposits (repayable after 1 yr.) 16.Other term liabilities(unsecured loans) 17. TOTAL TERM LIABILITIES 18. Total Outside Liabilities(item 10 +17) NET WORTH 19.Share Capital 20.General reserve 21. Reserve for deferred tax liability 22.Other reserves(excluding provisions) 31.03.2012 Audited

(Rs. in lakhs)
31.03.2013 Estimated 31.03.2014 Projected

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Analysis of Credit Methodology, Bank of India

23.Surplus(+) or deficit(-) in P&L account 24. NET WORTH 25. TOTAL LIABILITIES CURRENT ASSETS 26.Cash and bank balances 27.Investments(other than long term investments) 28.(i) Receivables other than deferred & export (ii)Export receivables(including bills purchased & dis.) 29. Instalments of deferred receivables (due within 1 yr.) 30.Inventory: (i) Raw materials(including stores & other items) (ii) Works-in-process (iii)Finished goods (iv) Other consumable spares 31.Advances to suppliers of raw materials & stores/spares 32.Advance payment of taxes 33.Other current assets 34. TOTAL CURRENT ASSETS(total of 26 to 33) FIXED ASSETS 35.Gross Block(land & building, machinery, WIP) 36.Depreciation to date 37. NET BLOCK (35-36) OTHER NON-CURRENT ASSETS 38.Investments/book debts/adv./deposits (i)Investments in subsidiary companies/affiliates (ii)Advances to suppliers of capital goods & contractors 39.Non-consumables stores & spares 40.Other non-current assets including dues from directors 41. TOTAL OTHER NON-CURR.ASSETS 42. Intangible assets (patents, goodwill, prelim.) 43. TOTAL ASSETS (34+37+41+42) 44. TANGIBLE NET WORTH (24-42) 45. NET WORKING CAPITAL(17+24)-(37+41+42) 46. Current Ratio 47. Total Outside Liabilities/ Tangible Net Worth 48. Total Term Liabilities/Tangible Net Worth

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Analysis of Credit Methodology, Bank of India

Table 25: Comparative statement of Current assets & Current Liabilities


FORM - IV I. CURRENT ASSETS 31.03.2011 Audited 1.Raw materials including stores & other items 2. Other consumable spares 3. Stocks-in-process 4. Finished goods 5. Receivables other than export &deferred receivables 6. Export receivables 7. Advance to suppliers of materials & stores/spares 8. Other current assets including cash & bank balances 9. TOTAL CURRENT ASSETS II. CURRENT LIABILITIES 10. Creditors for purchase of raw materials & stores 11. Advance from customers 12. Statutory liabilities 13. Other current liabilities-specify major items 14. TOTAL 31.03.2012 Audited 31.03.2013 Estimated 31.03.2014 Projected

Table 26: ASSESSED BANK FINANCE - PROJECTED BALANCE SHEET METHOD


FORM V 31.03.2011 Audited 1. Total Current Assets 2. Other Current Liabilities 3. Working Capital Gap 4. Net Working Capital (Actual/Projected) 5. Assessed Bank Finance 5. NWC/TCA (%) 6. OCL/TCA (%) 7. Creditors/TCA (%) 8. ABF/TCA (%) 9. Inventory/Net Sales (Days) 10. Receivables/Gross Sales (Days) 11. Creditors/Purchases (Days) 31.03.2012 Audited 31.03.2013 Estimated 31.03.2014 Projected

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Analysis of Credit Methodology, Bank of India

Table 27: FUND FLOW STATEMENT


FORM VI 31.03.2011 Audited 1. SOURCES a) Net profit (after tax) b) Depreciation c) Increase in capital d) Increase in term liabilities, including public deposits e) Decrease in : i ) Fixed assets ii) Other non-current assets f) Others g) TOTAL 2. USES a) Net loss b) Decrease in term liabilities, including public deposits c) Increase in : i ) Fixed asset ii ) Depreciation adjustment iii) Other non-current assets d) Dividend payment e) Others f) TOTAL 3. Long term surplus / deficit 4. Increase / Decrease in current assets* 5. Increase / Decrease in current liabilities 6. Increase / Decrease in working capital gap 7. Net surplus(+) / deficit(-) 8. Increase / Decrease in Bank borrowings INCREASE / DECREASE IN NET SALES *Break-up of (4) i ) Increase / decrease in Raw materials ii ) Increase / decrease in Stock -in-process iii ) Increase / decrease in Finished goods iv) Increase / decrease in Receivables v ) Increase / decrease in Stores & spares vi) Increase / decrease in Other current assets Total 31.03.2012 Audited 31.03.2013 Estimated 31.03.2014 Projected

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Analysis of Credit Methodology, Bank of India

Rules for lending under Consortium Arrangements Number of Participating banks: Maximum 10 banks in case of fund based working capital limits up to Rs. 100 crore and maximum 15 banks in case of limits exceed Rs. 100 crore. Minimum share of each bank: 5% of fund based credit limits or Rs. 5 crore whichever is more. Entry into consortium: A new bank can be inducted into the consortium if the existing member banks/s is/ are not able to take up share in enhanced limits or when the existing bank/s is/ are unable to adhere to recommended time frame for disposal of proposal. Exit from the consortium: The member bank will not be permitted to leave the consortium before the expiry of at least 2 years from the disbursement of its share after the joining of the consortium. If a member bank is unable to take up its enhanced share, such enhanced share in full or in part can be reallocated among the other existing members. If the other existing members are also unable to take up such enhanced share of an existing member bank, a new bank willing to take up the enhanced share may be inducted into the consortium with the borrower. In cases where the other existing member banks or a new bank are unwilling to take over the entire outstanding of an existing member desirous of moving out of the consortium after the expiry of above mentioned period of 2 years, such bank may be permitted to leave the consortium by selling its debt at a discount and/or furnishing an unconditional undertaking that the repayment of its dues will be deferred till the dues of other members are repaid in full. Sanction of additional/ad hoc limit: Lead bank to have the freedom to sanction additional/ad hoc credit limits up to a predetermined percentage in emergent situations/contingencies. The other members to be advised immediately about such sanction together with their pro-rata share in the additional limits.

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Analysis of Credit Methodology, Bank of India

Lead Bank Fees: Where Bank of India is the lead Bank, it may charge service charges excluding Service Tax as follows: Limits up to Rs. 10 crore: Over Rs. 10 crore up to Rs. 50 crore: 0.25% p.a. Maximum Rs. 2.00 lakhs 0.15% p.a. Minimum Rs. 2.00 lakhs Maximum Rs. 7.00 lakhs Over Rs. 50 crore: 0.10% p.a. Minimum Rs. 7.00 lakhs Maximum Rs. 15.00 lakhs Grant of facility to the borrower by a non-member bank: The borrower should not obtain any additional banking facility or open current accounts or obtain bill limits, guarantees/acceptances, letter of credit etc. without the concurrence of the lead bank. As and when such permission is granted, other member banks should be advised. In case of borrowers availing of term loan finance from Bank of India, they need not necessarily avail working capital limits from it and vice versa. They should, however, ensure proper tie up for the same. Time frames for sanction of fresh/ enhanced credit limits: Proposal for sanction of fresh/enhanced credit limits Proposals for renewal of existing credit limits Proposal for sanction of ad hoc limits Proposed 45/25 days 10 days 5 days

Documentation: Single Window Concept Leading (SWCL) for documentation. Release of assets: In case, the borrower desires to have release of an asset which is charged to the consortium the borrowers request should be considered in a joint meeting of all the member banks after taking into consideration the existing value and nature of asset to be released and other assets available, the purpose for release of asset, the existing position of the accounts. However, in emergent situations, the leader and the member bank having the next largest share will be vested with the powers to take a decision in the matter. The decision will be communicated by the leader and it will be binding on all member banks in the consortium subject to provisions of the inter-se-agreement.

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Analysis of Credit Methodology, Bank of India

Commitment charges: These are stipulated on the utilized portion of the working capital/credit limits in relation to the quarterly operating limit/drawing limit at rates prescribed from time to time. Shares of limits fund based and non-fund based in the consortium: It is desirable that non-fund based limits should be shared in the same proportion as the fund based limits in the consortium. Rate of interest: Each member bank will have the discretion to decide Credit rating, and consequently, the rate of interest to be charged on the portion of credit limits extended by it to the borrower, in keeping with their risk perception and internal rules framed in this regard. Sharing of risk: This will be done in the same proportion as banks share in the fund based working capital limits. Periodic Meetings: Consortium meetings of all member banks will be held annually to access the credit requirements of the borrower. The lead bank and the bank having the next largest share in the credit facilities should meet at quarterly intervals to access the performance of the borrowers on the basis of statements under the Quarterly Information System (QIS) and fix the operating limits/individual banks share thereof for the next quarter. Submission of Information: Each of the member bank should submit to the lead bank on quarterly basis information on the following aspects so that a proper review of the performance of the company can be done during the quarterly/annual meeting held: 1) Extent of utilization of limit 2) Conduct of the account and status of the account 3) Any adverse audit observations in the account Inspection/Verification of securities: A joint inspection should be done by all member banks in rotation, the order of which may be decided in the joint consortium meeting. Apart from the joint inspection annually, stock audit/verification to be done by an audit/Chartered Accountant once in a year. All expenses in this regard will be borne by the borrower.

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Analysis of Credit Methodology, Bank of India

Classification of Accounts: As per recent RBI directives, each bank may classify the borrowers account according to its own record of recovery and other aspects having a bearing on the recoverability of the advance. In view of this, it will be responsibility of the bank classifying the account as NPA to advice the lead bank and other member bank of the consortium of such classification promptly. Once the account has been categorized as NPA by any of the member bank, a joint meeting of all the member banks should be called to determine future course of action. Bank reserves the right to amend, alter, add, modify or cancel any and all terms and conditions of the ground rules as and when required by the bank.

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Analysis of Credit Methodology, Bank of India

14. Bibliography
Study Materials from Bank of India: Credit Policy 2011, Bank of India Large Corporate Credit, Bank of India Credit Monitoring Policy by Bank of India Workshop Materials from Credit Officers

Websites: http://www.bankofindia.com/ http://www.rbi.org.in/home.aspx http://ww90.bankingupdate.com/ http://www.investopedia.com/

Reference Books: Financial Management, I.M. Pandey Indian Institute of banking and finance, Legal Aspects of Banking Operations, Macmillan India Ltd

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