A

Summer Training Report

On
CREDIT RISK MANAGEMENT
(Credit Appraisal & NPA)
at

Submitted in partial fulfillment of the requirements of

Master of Business Administration (MBA in Banking & Finance)
Amity University, Gurgaon (Manesar)
Under the Guidance of:- Dr. Sunil Kumar

Submitted By:-

Name:- Mr. A.K. Rastogi

Nikhil Satija

Designation:- Senior Manager

MBA: 3rd Semester

Roll. No. A50050213001

Amity Business School

Amity University
Gurgaon
SESSION 2013 2015

ACKNOWLEDGEMENT

I would like to express my profound gratitude to all those who have been instrumental
in the preparation of my project report. To start with, I would like to thank the
organization Punjab National Bank (Chairman- K.R. KAMATH) for providing me
the chance to undertake this internship study and allowing me to explore the area of
finance which would prove out to be very beneficial to me in my future assignments,
my studies and my career ahead.
I wish to place on records, my deep sense of gratitude and sincere appreciation to my
company guide and mentor, Mr. A.K. RASTOGI (Senior Manager), who suggested
and prepared the frame work of the project. I would also like to thank him for his
continuous support, advice and encouragement, without which this report could never
have been completed.
I am deeply grateful, to my f aculty guide Dr. Sunil Kumar for his invaluable
suggestions, comments, feedback and support throughout the internship.
A heartfelt thanks is also deserved to the staff of Punjab National Bank. Lastly, I wish to
thank my family and friends for their valuable help and support.

Nikhil Satija
Roll. No. A50050213001
MBA in Banking & Finance
Amity Business School

TABLE OF CONTENTS
S.No
Chapter 1

Chapter 2

Chapter 3

Contents
INTRODUCTION TO BANKING IN INDIA

Page No.

1.

History of Banking in India

1
1.

Scheduled Commercial Banks in India

2
1.

Banking Services in India

3
1.

Future Banking in India

4
1.

Company Profile

11

5
Companys Profile
2.

Introduction

14

1
2.

History of the Bank

14

2
2.

Achievements

17

3
2.

Vision & Mission

17

4
2.

Values and Ethics

18

5
2.

Products and Services

18

6
2.

Awards and Distinctions

19

7
2.

Organizational Structure

20

8
2.

SWOT Analysis

21

9
RESEARCH & METHODOLOGY
3. Objectives

24

Chapter 4

1
3.

Scope of the Study

25

2
3.

Limitation of Study

26

3
3.

Methodology

27

4
Review of Literature
4. Types of Credit Facilities

29

1
4.

34

Credit Appraisal Procedure

2
S.No
Chapter 4

Chapter 5

Contents

Page No.

Review of Literature
4.

Relevant Data for Appraisal Study

37

3
4.

Post Sanction Process

43

4
4.

Assessment of Credit Need

46

5
Data Analysis and Interpretations
5.

Case Study on Term Loan

62

1
Chapter 6
Chapter 7

NPA norms under Punjab National Bank

Review of Literature
7. Conclusions

93
96

1
7.

Recommendations

97

2
7.

References

99

Chapter 1:- INTRODUCTION TO BANKING IN INDIA:The banking section will navigate through all the aspects of the Banking System in India. It
will discuss upon the matters with the birth of the banking concept in the country to new
players adding their names in the industry in coming few years.
The banker of all banks, Reserve Bank of India (RBI), the Indian Banks Association (IBA)
and top 20 banks like IDBI, HSBC, ICICI, ABN AMRO, etc. has been well defined under
three separate heads with one page dedicated to each bank.
However, in the introduction part of the entire banking cosmos, the past has been well
explained under three different heads namely:

History of Banking in India

Nationalization of Banks in India

Scheduled Commercial Banks in India

The first deals with the history part since the dawn of banking system in India. Government
took major step in the 1969 to put the banking sector into systems and it nationalized 14
private banks in the mentioned year. This has been elaborated in Nationalization Banks in
India. The last but not the least explains about the scheduled and unscheduled banks in India.
Section 42 (6) (a) of RBI Act 1934 lays down the condition of scheduled commercial banks.
The description along with a list of scheduled commercial banks are given on this page

1.1 HISTORY OF BANKING IN INDIA:Without a sound and effective banking system in India it cannot have a healthy economy. The
banking system of India should not only be hassle free but it should be able to meet new
challenges posed by the technology and any other external and internal factors.
For the past three decades India's banking system has several outstanding achievements to its
credit. The most striking is its extensive reach.
PAGE:- 1

It is no longer confined to only metropolitans or cosmopolitans in India. In fact, Indian

banking system has reached even to the remote corners of the country. This is one of the main
reasons of India's growth process. The government's regular policy for Indian bank since
1969 has paid rich dividends with the nationalization of 14 major private banks of India.
Not long ago, an account holder had to wait for hours at the bank counters for getting a draft
or for withdrawing his own money. Today, he has a choice. Gone are days when the most
efficient bank transferred money from one branch to other in two days. Now it is simple as
instant messaging or dials a pizza. Money has become the order of the day.
The first bank in India, though conservative, was established in 1786. From 1786 till today,
the journey of Indian Banking System can be segregated into three distinct phases. They are
as mentioned below:

Early phase from 1786 to 1969 of Indian Banks

Nationalization of Indian Banks and up to 1991 prior to Indian banking sector

Reforms.

New phase of Indian Banking System with the advent of Indian Financial

&

Banking Sector Reforms after 1991.

To make this write-up more explanatory, I prefix the scenario as Phase I, Phase II and Phase
III.
Phase I:The General Bank of India was set up in the year 1786. Next came Bank of Hindustan and
Bengal Bank. The East India Company established Bank of Bengal (1809), Bank of Bombay
(1840) and Bank of Madras (1843) as independent units and called it Presidency Banks.
These three banks were amalgamated in 1920 and Imperial Bank of India was established
which started as private shareholders banks, mostly Europeans shareholders.

PAGE:- 2
In 1865 Allahabad Bank was established and first time exclusively by Indians, Punjab
National Bank Ltd. was set up in 1894 with headquarters at Lahore. Between 1906 and 1913,
Bank of India, Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank, and Bank
of Mysore were set up. Reserve Bank of India came in 1935.
During the first phase the growth was very slow and banks also experienced periodic failures
between 1913 and 1948. There were approximately 1100 banks, mostly small. To streamline
the functioning and activities of commercial banks, the Government of India came up with
The Banking Companies Act, 1949 which was later changed to Banking Regulation Act 1949
as per amending Act of 1965 (Act No. 23 of 1965). Reserve Bank of India was vested with
extensive powers for the supervision of banking in India as the Central Banking Authority.
During those days public has lesser confidence in the banks. As an aftermath deposit
mobilisation was slow. Abreast of it the savings bank facility provided by the Postal
department was comparatively safer. Moreover, funds were largely given to traders.
Phase II:Government took major steps in this Indian Banking Sector Reform after independence. In
1955, it nationalized Imperial Bank of India with extensive banking facilities on a large scale
especially in rural and semi-urban areas. It formed State Bank of India to act as the principal
agent of RBI and to handle banking transactions of the Union and State Governments all over
the

country.

Seven banks forming subsidiary of State Bank of India was nationalized in 1960 on 19th July,
1969, major process of nationalization was carried out. It was the effort of the then Prime
Minister of India, Mrs. Indira Gandhi. 14 major commercial banks in the country were
nationalized.
Second phase of nationalization Indian Banking Sector Reform was carried out in 1980 with
seven more banks. This step brought 80% of the banking segment in India under Government
ownership.
PAGE:- 3

The following are the steps taken by the Government of India to Regulate Banking
Institutions in the Country:

1949: Enactment of Banking Regulation Act.

1955: Nationalization of State Bank of India.

1959: Nationalization of SBI subsidiaries.

1961: Insurance cover extended to deposits.

1969: Nationalization of 14 major banks.

1971: Creation of credit guarantee corporation.

1975: Creation of regional rural banks.

1980: Nationalization of seven banks with deposits over 200 crore.

After the nationalization of banks, the branches of the public sector bank India rose to
approximately 800% in deposits and advances took a huge jump by 11,000%.
Banking in the sunshine of Government ownership gave the public implicit faith and
immense confidence about the sustainability of these institutions.
Phase III:This phase has introduced many more products and facilities in the banking sector in its
reforms measure. In 1991, under the chairmanship of M Narasimham, a committee was set
up by his name which worked for the liberalization of banking practices.
The country is flooded with foreign banks and their ATM stations. Efforts are being put to
give a satisfactory service to customers. Phone banking and net banking is introduced. The
entire system became more convenient and swift. Time is given more importance than
money.
The financial system of India has shown a great deal of resilience. It is sheltered from any

crisis triggered by any external macroeconomics shock as other East Asian Countries
suffered.
PAGE:- 4
This is all due to a flexible exchange rate regime, the foreign reserves are high, the capital
account is not yet fully convertible, and banks and their customers have limited foreign
exchange exposure.

1.2 SCHEDULED COMMERCIAL BANKS IN INDIA:The commercial banking structure in India consists of:

Scheduled Commercial Banks in India

Unscheduled Banks in India

Scheduled Banks in India constitute those banks which have been included in the Second
Schedule of Reserve Bank of India (RBI) Act, 1934. RBI in turn includes only those banks in
this schedule which satisfy the criteria laid down vide section 42 (6) (a) of the Act.
As on 30th June, 1999, there were 300 scheduled banks in India having a total network of
64,918 branches. The scheduled commercial banks in India comprise of State bank of India
and its associates (8), nationalized banks (19), foreign banks (45), private sector banks (32),
co-operative banks and regional rural banks.
"Scheduled banks in India" means the State Bank of India constituted under the State Bank of
India Act, 1955 (23 of 1955), a subsidiary bank as defined in the State Bank of India
(Subsidiary Banks) Act, 1959 (38 of 1959), a corresponding new bank constituted under
section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5
of 1970), or under section 3 of the Banking Companies (Acquisition and Transfer of
Undertakings) Act, 1980 (40 of 1980), or any other bank being a bank included in the Second
Schedule to the Reserve Bank of India Act, 1934 (2 of 1934), but does not include a co
operative

bank".

"Non-scheduled bank in India" means a banking company as defined in clause (c) of section
5 of the Banking Regulation Act, 1949 (10 of 1949), which is not a scheduled bank".

PAGE:- 5
The following are the Scheduled Banks in India (Public Sector):

State Bank of India

State Bank of Bikaner and Jaipur

State Bank of Hyderabad

State Bank of Indore

State Bank of Mysore

State Bank of Saurashtra

State Bank of Travancore

Andhra Bank

Allahabad Bank

Bank of Baroda

Bank of India

Bank of Maharashtra

Canara Bank

Central Bank of India

Corporation Bank

Dena Bank

Indian Overseas Bank

Indian Bank

Oriental Bank of Commerce

Punjab National Bank

Punjab and Sind Bank

Syndicate Bank

Union Bank of India

United Bank of India

UCO Bank

Vijaya Bank

PAGE:- 6
The following are the Scheduled Banks in India (Private Sector):

ING Vysya Bank Ltd

Axis Bank Ltd

Indusind Bank Ltd

ICICI Bank Ltd

South Indian Bank

HDFC Bank Ltd

Centurion Bank Ltd

Bank of Punjab Ltd

IDBI Bank Ltd

The following are the Scheduled Foreign Banks in India:

American Express Bank Ltd.

ANZ Gridlays Bank Plc.

Bank of America NT & SA

Bank of Tokyo Ltd.

Banquc Nationale de Paris

Barclays Bank Plc

Citi Bank N.C.

Deutsche Bank A.G.

Hongkong and Shanghai Banking Corporation

Standard Chartered Bank.

The Chase Manhattan Bank Ltd.

Dresdner Bank AG.

PAGE:- 7

1.3 BANKING SERVICES IN INDIA:With years, banks are also adding services to their customers. The Indian banking industry is
passing through a phase of customers market. The customers have more choices in choosing
their banks. A competition has been established within the banks operating in India.
With stiff competition and advancement of technology, the services provided by banks have
become more easy and convenient. The past days are witness to an hour wait before
withdrawing cash from accounts or a cheque from north of the country being cleared in one
month in the south.This section of banking deals with the latest discovery in the banking
instruments along with the polished version of their old systems.

BANK ACCOUNT:The most common and first service of the banking sector. There are different types of bank
account in Indian banking sector. The bank accounts are as follows:

Bank Savings Account - Bank Savings Account can be opened for eligible person /
persons and certain organizations / agencies (as advised by Reserve Bank of India
(RBI) from time to time)

Bank Current Account - Bank Current Account can be opened by individuals /

partnership firms / Private and Public Limited Companies / HUFs / Specified
Associates / Societies / Trusts, etc.

Bank Term Deposits Account - Bank Term Deposits Account can be opened by
individuals / partnership firms / Private and Public Limited Companies / HUFs/
Specified Associates / Societies / Trusts, etc.

Bank Account Online - With the advancement of technology, the major banks in the
public and private sector has faciliated their customer to open bank account online.
Bank account online is registered through a PC with an internet connection.

PAGE:- 8

The advent of bank account online has saved both the cost of operation for banks as
well as the time taken in opening an account.

PLASTIC MONEY:Credit cards in India are gaining ground. A number of banks in India are encouraging people
to use credit card. The concept of credit card was used in 1950 with the launch of charge
cards in USA by Diners Club and American Express. Credit card however became more
popular with use of magnetic strip in 1970 Credit card in India became popular with the
introduction of foreign banks in the country.
Credit cards are financial instruments, which can be used more than once to borrow money or
buy products and services on credit. Basically banks, retail stores and other businesses issue
these.

LOANS:Banks in India with the way of development have become easy to apply in loan market. The
following loans are given by almost all the banks in the country:

Personal Loan

Car Loan or Auto Loan

Loan against Shares

Home Loan

Education Loan or Student Loan

In Personal Loan, one can get a sanctioned loan amount between Rs 25,000 to 10, 00,000
depending upon the profile of person applying for the loan. SBI, ICICI, HDFC, HSBC are
some of the leading banks which deals in Personal Loan.

PAGE:- 9
Almost all the banks have jumped into the market of car loan which is also sometimes termed
as auto loan. It is one of the fast moving financial products of banks. Car loan / auto loan are
sanctioned to the extent of 85% upon the ex-showroom price of the car with some simple
paper works and a small amount of processing fee.
Loan against shares is very easy to get because liquid guarantee is involved in it.
Home loan is the latest craze in the banking sector with the development of the infrastructure.
Now people are moving to township outside the city. More number of townships is coming
up to meet the demand of 'house for all'. The RBI has also liberalised the interest rates of
home loan in order to match the repayment capability of even middle class people. Almost all
banks are dealing in home loan. Again SBI, ICICI, HDFC, HSBC are leading.
The educational loan, rather to be termed as student loan, is a good banking product for the
mass. Students with certain academic brilliance, studying at recognised colleges/universities
in India and abroad are generally given education loan / student loan so as to meet the
expenses on tuition fee/ maintenance cost/books and other equipment.

MONEY TRANSFER:Beside lending and depositing money, banks also carry money from one corner of the globe
to another. This act of banks is known as transfer of money. This activity is termed as
remittance business. Banks generally issue Demand Drafts, Banker's Cheques, Money Orders
or other such instruments for transferring the money. This is a type of Telegraphic Transfer or
Tele Cash Orders.

PAGE:- 10
1.4 FUTURE OF BANKING IN INDIA:A healthy banking system is essential for any economy striving to achieve good growth and
yet remain stable in an increasingly global business environment. The Indian banking system
has witnessed a series of reforms in the past, like deregulation of interest rates, dilution of
government stake in PSBs, and increased participation of private sector banks.
It has also undergone rapid changes, reflecting a number of underlying developments. This
trend has created new competitive threats as well as new opportunities. This paper aims to
foresee major future banking trends, based on these past and current movements in the
market.
Given the competitive market, banking will become a process of choice and convenience.
The future of banking would be in terms of integration. This is already becoming a reality
with new-age banks such as YES Bank, and others too adopting a single-PIN. Geography will
no longer be an inhibitor. Technology will prove to be the differentiator in the short-term but
the dynamic environment will soon lead to its saturation and what will ultimately be the key
to success will be a better relationship management.

OVERVIEW:If one were to say that the future of banking in India is bright, it would be a gross
understatement. With the growing competition and convergence of services, the customers
(you and I) stand only to benefit more to say the least. At the same time, emergence of a
multitude of complex financial instruments is foreseen in the near future (the trend is visible
in the current scenario too) which is bound to confuse the customer more than ever unless she
spends hours (maybe days) to understand the same. Hence, I see a growing trend towards the
importance of relationship managers. The success (or failure) of any bank would depend not
only on tapping the untapped customer base (from other departments of the same bank,

customers of related similar institutions or those of the competitors) but also on the
effectiveness in retaining the existing base.

PAGE:- 11
India has witness to a sea change in the way banking is done in the past more than two
decades. Since 1991, the Reserve Bank of India (RBI) took steps to reform the Indian
banking system at a measured pace so that growth could be achieved without exposure to any
macro-environment and systemic risks. Some of these initiatives were deregulation of interest
rates, dilution of the government stake in public sector banks (PSBs), guidelines being issued
for risk management, asset classification, and provisioning. Technology has made
tremendous impact in banking. Anywhere banking and Anytime banking have become a
reality. The financial sector now operates in a more competitive environment than before and
intermediates relatively large volume of international financial flows. In the wake of greater
financial deregulation and global financial integration, the biggest challenge before the
regulators is of avoiding instability in the financial system.

RISK MANAGEMENT:The future of banking will undoubtedly rest on risk management dynamics. Only those banks
that have efficient risk management system will survive in the market in the long run. The
effective management of credit risk is a critical component of comprehensive risk
management essential for long-term success of a banking institution.
Although capital serves the purpose of meeting unexpected losses, capital is not a substitute
for inadequate decontrol or risk management systems. Coming years will witness banks
striving to create sound internal control or risk management processes. With the focus on
regulation and risk management in the Basel II framework gaining prominence, the postBasel II era will belong to the banks that manage their risks effectively. The banks with
proper risk management systems would not only gain competitive advantage by way of lower
regulatory capital charge, but would also add value to the shareholders and other stakeholders
by properly pricing their services, adequate provisioning and maintaining a robust financial
structure.

The future belongs to bigger banks alone, as well as to those which have minimized their
risks considerably.

PAGE:- 12

Application of advanced technology:Technology is a key driver in the banking industry, which creates new business modules and
process, and also revolutionizes distribution channels. Banks which have made in adequate
investment in technology have consequently faced and erosion of there market shares. The
beneficiaries are those banks which have invested in technology. Adoption of technology also
enhanced the quality of risk management systems in banks. Recognizing the benefits of
modernizing their technology infrastructure banks is taking the right initiatives. While doing
so, banks have four options to choose from: they can build a new system those selves, or buy
best of he modules, or buy a comprehensive solution, or outsource. In this context banks need
to clearly define their core competencies to be sure that they are investing in the areas that
will distinguish them from other market players, and give them a competitive advantage.
The global challenges which banks face or not confined only to the global banks. These
aspects are also highly relevant for banks which are part of a globalized banking system.
Further, overcoming these challenges by the other banks is excepted to not only stand them in
good stead during difficult times but also augurs well for the banking.

PAGE:- 13

Chapter 2:- Company Profile

2.1 INTRODUCTION:Punjab National Bank of India, the first Indian bank started only with Indian capital, was
nationalized in July 1969 and currently the bank has become a front-line banking institution
in India with 4525 Offices including 432 Extension Counters. The corporate office of the
bank is at New Delhi. Punjab National Bank of India has set up representative offices at
Almaty (Kazakhistan), Shanghai (China) and in London and a full fledged Branch in Kabul
(Afghanistan).
Punjab National Bank with 4497 offices and the largest nationalized bank is serving its 3.5
crore customers with the following wide variety of banking services:

Corporate banking

Personal banking

Industrial finance

Agricultural finance

Financing of trade

International banking

Punjab National Bank has been ranked 38th amongst top 500 companies by The Economic
Times. PNB has earned 9th position among top 50 trusted brands in India. Punjab National
Bank India maintains relationship with more than 200 leading international banks world

wide. PNB India has Rupee Drawing Arrangements with 15 exchange companies in UAE and
1 in Singapore.

2.2 HISTORY OF THE BANK:Punjab National Bank (PNB) was registered on May 19, 1894 under the Indian Companies
Act with its office in Anarkali Bazaar Lahore. The Bank is the second largest governmentowned commercial bank in India with about 4,500 branches across 764 cities. It serves over
37 million customers.
PAGE:- 14
The bank has been ranked 248th biggest bank in the world by Bankers Almanac, London.
The bank's total assets for financial year 2007 were about US$60 billion. PNB has a banking
subsidiary in the UK, as well as branches in Hong Kong and Kabul, and representative
offices in Almaty, Dubai, Oslo, and Shanghai.

1895: PNB commenced its operations in Lahore. PNB has the distinction of being the
first Indian bank to have been started solely with Indian capital that has survived to
the present. (The first entirely Indian bank, the Ouch Commercial Bank, was
established in 1881 in Faizabad, but failed in 1958.) PNB's founders included several
leaders of the Swadeshi movement such as Dyal Singh Majithia and Lala HarKishen
Lal,[1] Lala Lalchand, Shri Kali Prosanna Roy, Shri E.C. Jessawala, Shri Prabhu
Dayal, Bakshi Jaishi Ram, and Lala Dholan Dass. Lala Lajpat Rai was actively
associated with the management of the Bank in its early years.

1904: PNB established branches in Karachi and Peshawar.

1940: PNB absorbed Bhagwan Dass Bank, a scheduled bank located in Delhi circle.

1947: Partition of India and Pakistan at Independence. PNB lost its premises in
Lahore, but continued to operate in Pakistan.

1951: PNB acquired the 39 branches of Bharat Bank (est. 1942); Bharat Bank became
Bharat Nidhi Ltd.

1961: PNB acquired Universal Bank of India.

1963: The Government of Burma nationalized PNB's branch in Rangoon (Yangon).

September 1965: After the Indo-Pak war the government of Pakistan seized all the
offices in Pakistan of Indian banks, including PNB's head office, which may have
moved to Karachi. PNB also had one or more branches in East Pakistan (Bangladesh).

1960s: PNB amalgamated Indo Commercial Bank (est. 1933) in a rescue.

1969: The Government of India (GOI) nationalized PNB and 13 other major
commercial banks, on July 19, 1969.

1976 or 1978: PNB opened a branch in London.

1986 The Reserve Bank of India required PNB to transfer its London branch to State
Bank of India after the branch was involved in a fraud scandal.

PAGE:- 15

1986: PNB acquired Hindustan Commercial Bank (est. 1943) in a rescue. The
acquisition added Hindustan's 142 branches to PNB's network.

1993: PNB acquired New Bank of India, which the GOI had nationalized in 1980.

1998: PNB set up a representative office in Almaty, Kazakhstan.

2003: PNB took over Nedungadi Bank, the oldest private sector bank in Kerala. Rao
Bahadur T.M. Appu Nedungadi, author of Kundalatha, one of the earliest novels in
Malayalam, had established the bank in 1899. It was incorporated in 1913, and in
1965 had acquired selected assets and deposits of the Coimbatore National Bank. At
the time of the merger with PNB, Nedungadi Bank's shares had zero value, with the
result that its shareholders received no payment for their shares. PNB also opened a
representative office in London.

2004: PNB established a branch in Kabul, Afghanistan. PNB also opened a

representative office in Shanghai. PNB established an alliance with Everest Bank in

Nepal that permits migrants to transfer funds easily between India and Everest Bank's
12 branches in Nepal.

2005: PNB opened a representative office in Dubai.

2007: PNB established PNBIL - Punjab National Bank (International) - in the UK,
with two offices, one in London, and one in South Hall. Since then it has opened a
third branch in Leicester, and is planning a fourth in Birmingham. Gatin Gupta
became Chairmen of Punjab National Bank.

2008: PNB opened a branch in Hong Kong.

2009: PNB opened a representative office in Oslo, Norway.

PAGE:- 16
2.3 ACHIEVEMENTS: Punjab National Bank announced its Q1FY 2010 results on 29 July 2009, delivering
62% y-o-y growth in net profits to Rs832 crore (Rs512cr), substantially ahead of
expectations on account of large treasury gains, apart from healthy operating
performance.

While the banks deposit growth was reasonably robust at 4.4% sequentially and
26.5% y-o-y, unlike the peers its growth in advances also remained strong at 38% y-oy.

In spite of being at the forefront of PLR cuts, the bank posted a healthy growth in Net
Interest Income (NII) of 29% y-o-y.

Other Income surged 113% y-o-y, driven by strong treasury gains of Rs355 crore
during the quarter in line with industry trends, even as Fee income was also robust at
45% y-o-y, on the back of strong balance sheet growth.

Operating expenses were higher than expected on account of Rs150 crore of

provisions for imminent wage hikes.

Gross and Net NPA ratios remained stable sequentially at 1.8% and 0.2%, with the
bank not adopting the guidelines of treating floating provisions as part of tier 2 capital
instead of adjusting against NPAs on express permission from the RBI.

2.4 VISION AND MISSION:Vision

To evolve and position the bank as a world class, progressive, cost effective and
customer friendly institution providing comprehensive financial and related
services.

PAGE:- 17

Integrating frontiers of technology and serving various segments of society

especially weaker section.

Commited to excellence in serving the public and also excelling in corporate

values

Mission

To provide excellent professional services and improve its position as a leader in

financial and related services.

Build and maintain a team of motivated workforce with high work ethos.

Use latest technology aimed at customer satisfaction and act as an effective

catalyst for socio economic development.

2.5 VALUES AND ETHICS:

Bonding and Integrity

Ethical conduct

Periodic disclosure

Confidentiality and fair dealing

Compliance with rules and regulations

2.6 PRODUCTS AND SERVICES:Savings Fund Account - Total Freedom Salary Account, PNB Prudent Sweep, PNB
Vidyarthi SF Account, PNB Mitra SF.

PAGE:- 18
Account Current Account - PNB Vaibhav, PNB Gaurav, PNB Smart Roamer
Fixed Deposit Schemes - Spectrum Fixed Deposit Scheme, Anupam Account, Mahabachat
Schemes, Multi Benefit Deposit.

Scheme Credit Schemes - Flexible Housing Loan, Car Finance, Personal Loan, Credit Cards
Social Banking - Mahila Udyam Nidhi Scheme, Krishi Card, PNB Farmers Welfare Trust
Corporate Banking - Gold Card scheme for exporters, EXIM finance.
Business Sector - PNB Karigar credit card, PNB Kushal Udhami, PNB Pragati Udhami,
PNB Vikas Udhami. Apart from these, and the PNB also offers locker facilities, senior
citizens schemes, PPF schemes and various E-services.

2.7 AWARDS AND DISTINCTIONS:

Ranked among top 50 companies by the leading financial daily, Economic Times.

Ranked as 323rd biggest bank in the world by Bankers Almanac (January 2006),
London.

Earned 9th place among India's Most Trusted top 50 service brands in Economic
Times- A.C Nielson Survey.

Included in the top 1000 banks in the world according to The Banker, London.

Golden Peacock Award for Excellence in Corporate Governance - 2005 by Institute of

Directors.

FICCI's Rural Development Award for Excellence in Rural Development 2005

PAGE:- 19

2.8 ORGANIZATIONAL STRUCTURE:-

H
E
A
DD

Z
O
N

AA

O O
F
F
F F
I C
C
E
E
S

(
2
5
)

PAGE:- 20

2.9 S W O T ANALYSIS:Strength
Weakness
Opportunities
Threats
Lets analyze SWOT in order to know as to where the company stands

SWOT ANALYSIS:STRENGTH: Wide network

Large number of customers
Fast adaptability to technology
Brand image

PAGE:- 21

WEAKNESS: Casual behaviour

Corruption and red tapism
Slow decision making due to large hierarchy
High gross NPA

OPPORTUNITIES: Home to home banking services

Diversification towards other fields
Globalization

THREATS: Stiff competition from SBI and other private players.

PAGE:- 22

Chapter 3:- Research and Methodology

3.1 OBJECTIVES:

To study broad contours of management of credit, the loan policy, credit appraisal for
business units i.e. for working capital loan or Term Loan.

To understand the basis of credit risk rating and its significance.

To utilize the above learning and appraise the creditworthiness organizations those
approach PUNJAB NATIONAL BANK for credit. This would entail undertaking of
the following procedures:
i.

Management Evaluation

ii.

Business / Industry Evaluation

iii.

Technical Evaluation

iv.

Legal Evaluation

v.

Financial Evaluation

vi.

Credit Risk Rating

To carry out the Financial Analysis/Appraisal of the borrower/Project. .

Understanding the Credit monitoring arrangement (CMA) data
Checking the viability of the project through ratio analysis.
Assessment of working capital limits and term loans.

Finding permissible banking finance ( PBF)

To assess the credit rating of borrower company.

To analyze the Non Performing Assets in Bank and various reasons that leads an
account to become an NPA.

PAGE:- 24

3.2 SCOPE of the Study:Primary:

The main scope of the study is the in depth study of the sanctioning and analysis of the term
loan and its appraisal by PUNJAB NATIONAL BANK for Corporate. This includes the
following:

Judge whether the project is viable or not, i.e. whether it can generate adequate
surplus for servicing its debts within a reasonable period of time and still is left with
some funds for future development. This involves taking an over-all view of the
strengths and weaknesses of the project.

To see whether the management and organization can prove effective for successful
implementation of the project.

Secondary:

To prepare CMA data for WC assessment in order to ensure optimum investment in

current assets so that the normal operations are not affected adversely.

To track & evaluate the health of borrower accounts on a continuous basis through
PMS report that is to detect unsatisfactory/adverse signals/indicators at an early stage
in a comprehensive manner and to propose speedy corrective/remedial actions/steps
to prevent the account from becoming Non Performing Asset as well as to minimize
the loan losses.

To study the treatment of sick units either by their restructuring or by bifurcating the
units.

PAGE:- 25

3.3 Limitation of Study:The data availability is proprietary, not readily shared for dissemination and is highly
confidential. Assumptions and projections are based on current market conditions and have
not taken into account the price volatility. Financial statements of the proposed project are
subject to risks and uncertainties that could cause actual results to differ materially from
those mentioned in the report. The risks and uncertainties include, but are not limited to, the
following:
(i)

Changes in Indian laws

(ii)

Changes in Indian in global economic conditions

(iii)

Changes in government regulations

(iv)

Introduction of new technologies

The staff although are very helpful but are not able to give much of their
time due to their own work constraints.

The study is being done keeping in mind the policies of the Head Office.

Due to the ongoing process of globalization and increasing competition, no single

model or method will suffice over a long period of time and constant up gradation
will be required.

PAGE:-26

3.4 Methodology:The methodology being used involves two basic sources of information secondary source.

Secondary sources of Information:

Loan Policy and Internal Circulars of the bank.

Research papers, power point presentations and PDF files prepared by the bank
and its related officials.

Referring to information provided by CIBIL, Income Tax files, Registrar of

Companies (Ministry of Corporate Affairs), and Auditor reports.

PAGE:- 27

Chapter 4:- Review of Literature

CREDIT APPRAISAL:The Credit Appraisal involves providing loan or credit and other facilities to a borrower, for
setting up new projects, expansion, diversification and modernization of existing industrial
units a starting a new Project called the Green Field project. While considering the project for
sanction of credit, we evaluate the technical feasibility, commercial and economic viability
and financial soundness of the entire project and also the credit worthiness of the sponsor.
The repayment of the loans and facilities is normally fixed on case to case basis depending on
projected cash flow of the project or the borrower.
Every banking organization has a credit policy for the entire sanction process, but the
fundamental framework is essentially the same everywhere. At the centre is the ability to
generate profits while also ensuring that an organization has adequate regulatory capital for
economic losses and shareholders requirement during the entire tenure of the project. The
credit appraisal process requires a hierarchical structure throughout the credit organization. It
can vary in procedures, size and functions as well as be designed along geographic, product,
industry, or international divisions.
Based on the communication received from Department of Financial Services, Ministry of
Finance, Govt. of India, Credit Approval Committee (CAC) of the Board for approving credit
proposals falling beyond the vested loaning powers of CMD, but upto ` 400 crore has been
formed. With the introduction of the said committee, the credit proposal falling under MC
powers but not exceeding ` 400 crore shall now be approved by the Credit Approval
Committee (CAC) as under:
The ceiling of ` 400 crore shall be for the aggregate commitment per borrower including
adhoc limits, if any. For group accounts, CAC shall take aggregate exposure upto ` 800
crore. Vide LA CIR NO. 32 dt. 18.05.2012 & LACL 03 dt. 08.01.2013 constitution of
committees at HO/CO level is as under

PAGE:- 28

CAC at HO level
HOCAC

Headed by

Level- CMD

III

Credit proposals
Above

Constitution

100 CMD, EDs, CGM / GMs of

crore & upto ` Credit / Finance / IRMD and

400 crore

HOCAC Level-II

Senior most ED

IBD

Above ` 50 crore EDs, GMs of Credit / Finance /

& upto ` 100 IRMD and Recovery Division
crore

HOCAC Level-I

Senior most GM Above `35 crore GMs

(Credit)

but upto `50 crore

(Credit),

DGMs

(Credit/Finance/IRMD/Recover
y

4.1. TYPES OF CREDIT FACILITIES BY PNB

1. Credit Facilities
Punjab National Bank provides different types of credit facilities according to the
banking norms and convenience of the clients. Different type of facilities provided can
be classified as:

PAGE:- 29

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4.1.1 Fund Based Facilities:Fund based facilities are those in that require immediate outlay of funds towards the
borrowing party. Punjab National Bank provides following fund based facilties:

Overdrafts:-

Overdraft accounts are treated as current accounts. Normally overdrafts are allowed
against the Banks own deposits, government securities approved shares and/or
debentures of companies, life insurance policies, government supply bills, cash
incentive and duty drawbacks, personal security etc. Overdraft accounts should be kept
in the ordinary current account head at branches.

Demand Loans:-

A demand loan account is an advance for a fixed amount and no debits to the account
are made subsequent to the initial advance except for interest, insurance premium and
other sundry charges.
PAGE:- 30

As an amount credited to a demand loan account has the effect of permanently reducing
the original advance, any further drawings permitted in the account will not be secured
by the demand promissory note taken to cover the original loan. A fresh loan account
must, therefore be opened for every new advance granted and a new demand
promissory note taken as security.
Demand loan would be a loan, which is payable on demand in one shot i.e. bullet
repayment. Normally, demand loans are allowed against the Banks own deposits,
government securities, approved shares and/or debentures of companies, life insurance
policies, pledge of gold/silver ornaments, mortgage of immovable property.
1. Cash credit Advances:Cash credit account is a drawing account against the credit granted by the bank and is
operated in exactly the same way as a current account on which an overdraft has been
sanctioned. The various types of securities against which cash credits are allowed are
pledge/hypothecation of goods or produce, pledge of documents of title to goods,
mortgage of immovable property, book debts. Trust securities etc. In cash credit
accounts the borrower is allowed to draw on account within the prescribed limit as and
when required.
2. Bill Finance:Bill finance are the advances against the inland bills are sanctioned in the form of limits
for purchase of bills (ODD) or discount of bills (BD) or bills sent for collection. Bills
are wither payable on demand or after usage period.

4.1.2 Non-fund Based Facilities:While fund based credit facilities require immediate outlay of funds from the bank,
non-fund based facilities basically include the promises made by banks in favor of third
party to provide monetary compensation on behalf of their clients if certain situations
emerge or certain conditions are fulfilled.
PAGE:- 31

The non-fund based business is one of the main sources of bank income. Income is in
the form of fees and commissions as compared to interest income in case of fund based
lending.
Non-fund based credit plays an important role in trade and commerce. The borrowing
clients of banks prefer to avail of the non fund based facilities mainly because:
a) The facility does not require immediate outlay of funds and therefore the cost of
such funds tend to be lower than the cost of fund based credit facilities.
b) A bank guarantee (BG) or letter of credit (LOC) issued by a bank on behalf of
its client is an off-balance sheet item in the books of clients, hence do not show
up as debt or liability.
Further, while assessing non-fund facilities, cash flow aspects should also be taken into
account.
1. Bank Guarantees:BGs may be financial or performance in nature. In a financial guarantee, the
issuing banks assumes an usual credit risk which is the domain of the banks.
However, issue of a performance guarantee involved technical competency and
managerial ability of a customer to ensure the performance of the contract for
which guarantee has been drawn.
Issuing banks responsibility against the BG is absolute. So proper appraisal
needs to be done before issuing BG as it is the responsibility of the issuing bank
to honor its guarantee when invoked.
2. Letter of Credit:A document issued by a bank that guarantees the payment of a customer's draft;
substitutes the bank's credit for the customer's credit. It is an undertaking issued
by bank on behalf of the buyer to the seller, to pay for the goods and services,
provided that the seller presents the documents which comply with the terms
and conditions stipulated in the LOC.
PAGE:- 32

All letters of credit are irrevocable, i.e., cannot be amended or canceled without
prior agreement of the beneficiary, the issuing bank and the confirming bank, if
any. It is different from BG in the sense that in case of LOC, the issuing bank
does not wait for the buyer to default, and for the seller to invoke the
undertaking. While in BG, comes into play only when the principal party (the
buyer) has failed to pay its supplier.
Types of Letter of Credit: Letter of credit may be divided in two broad
categories as
(i)

under:

Revocable letter of credit:- This may be amended or cancelled without

prior warning or notification to the beneficiary. Such letter of credit will not
offer any protection and should not be accepted as beneficiary of credit.

(ii)

Irrevocable letter of credit:- This cannot be amended or cancelled without

the 1agreement of all parties thereto. This type of letter of credit is mainly in
use and offers complete protection to the seller against subsequent
development against his interest.

Letter of credit may provide drawing of documents on following two bases:

Delivery against payment (DP) Sight:- In this case documents are delivered
against payment. The beneficiary is paid as soon as the paying bank or borrowers
bank has determined that all necessary documents are in order.

Delivery against acceptance (DA) Usance (time):- In this case documents are
delivered against acceptance. The borrower pays after certain due date of payment
specified.

PAGE:- 33

4.2 CREDIT APPRAISAL PROCEDURE:The financing gap is all the more important in a fast changing knowledge based economy
because of the speed of innovation. Innovative SMEs with high growth potential, many of
them in high technology sectors, have played a pivotal role in raising productivity and
maintaining competitiveness in recent years. But innovative products and services, however
great their potential, need investment to flourish. If SMEs cannot find the financing they
need, brilliant ideas may fall by the wayside and this represents a loss in potential growth for
the economy. Hence credit appraisal of the firms has to be done.
Credit appraisal is done to evaluate the credit worthiness of the borrower. The credit proposal
is prepared to indicate the need based requirement and the rationale for its recommendation.
Bank has in place a well defined framework for approving credit limits of different segments.
Requests for credit facilities from the prospective borrowers shall be on the prescribed format
and a full fledged proposal should be prepared for submission to the appropriate sanctioning
authority for approval. These proposals analyze various risks associated with bank lending
i.e. business risk, financial risk , management risk , etc and clarify the process by which such
risks will be managed on an on- going basis.
The credit appraisal for Punjab National Bank basically follows the following process :
1) Submission of documents
1.1)

Details of borrower

2) Borrower profile
3) Business Environment
4) Analysis of financial performance
4.1)
4.2)

Balance sheet analysis

Ratio analysis

5) Determination of limit
5.1)
5.2)
5.3)
5.4)

Working capital
Term loan
Letter of credit
Bank guarantees
PAGE:- 34

6) Compliance with RBI regulations

7) Risk assessment
8) Strength and weakness of proposal
9) Recommendations.

DOCUMENTS
Checklist Of Documents To Be Obtained For Working Capital Limits (Both Funded
And Non-Funded)

Basic loan applications in the specified format, photographs of the proprietors /

partners / directors / trustees.

Annexure to a basic loan application.

Copy of memorandum of association of the company / partnership deed / trust deed /

by laws.

Copy of MSME memorandum if registered under MSME Act.

List of trustees, Shareholders / partners / directors and their shareholding pattern.

Bio-data of key promoters / key persons managing the project.

Copies of selection notice , schedules , agreements etc in case of contractors.

Copy of license / dealership agreement etc duly verified by branch officials.

Copy of rent/lease agreement (in case of units functioning in rented / leased

premises).

Copies of LCs, orders and tie up arrangements on hand, in case of manufacturing /

export credit etc.

Details of major buyers / suppliers.

Copies of KYC Documents duly verified by branch officials.

I/E code in respect of importer and exporter.

Copies of audited balance sheets and P/L statements for last three financial years
along with schedules, auditors certificate, notes on accounts, provisional / estimated
balance sheet for the current year and projections for the next financial year.

Provisional balance sheet as of a recent date.

PAGE:- 35

Financial statements / assets & liabilities statements and income tax returns /
assessment orders of proprietor / partner / director / guarantors / co- obligants .

Income tax / sales tax returns / assessment orders of the company / firms.

Copy of sanction order of credit limits availed from existing bankers and balance
outstanding as on date.

CMA format incorporating the past two years audited , current year estimates and
future Details of sister concerns and their financial statements and details of facilities
enjoyed from financial institutions along with present balance outstanding.

Details of collateral securities proposed (in case of leasehold property, attach copy of
the lease deed).

Valuation report of the branch .

Pre-sanction inspection report .

Copy of the underlying contract if any.

In case Of Takeover of the Limit Is Proposed, the Following Additional Documents

Need to Be Submitted.

Statement of accounts for the past 3 to 12 months

Copy of sanction order of credit limit availed from existing bankers and balance
outstanding as on date.

Credit opinion from existing bankers, if available.

BOROWER PROFILE
It contains the following information:
1) Name and address of the borrower
2) Business activity
3) Credit rating and pricing
4) Banking arrangement
5) Management

Promoters

PAGE:- 36

Major shareholders

Name of the proprietor/partners/Directors/Trustees

BUSINESS ENVIRONMENT:It contains the following information:

1) Business description
2) Operating strategy
3) Borrower competitive position

4.3 Relevant Data for Appraisal Study:The data relevant for study of above aspects should be collected from the borrower. The main
data required for appraisal would be available in application. These data comprise the
following:

Cost of project and means of financing;

Profitability projections covering revenue, cost of production/expenditure etc.;

Fund flow and Cash flow statements;

Projected balance sheets.

1) Cost of Project & Means of Financing:The major cost components of the project is given including land and building
including transfer, registration and development charges as also plant and machinery,
equipment for auxiliary services, including transportation, insurance, duty, clearing,
loading and unloading charges etc. The means of financing the project cost may be one
or more of the following:

Equity capital from shareholders

Preference capital from preference shareholders

Capital subsidies from government

Debentures/ bonds issued by the company public issue or private

placement

Public deposits

PAGE:- 37

Unsecured loans from friends and relatives

Term loans (including deferred payment guarantees)

Lease finance

2) Profitability Statement:It is prepared after considering the net sales figure and details of direct costs/expenses
relating to raw material, wages, power, fuel, consumable stores/spares and other
manufacturing expenses to arrive at a figure of gross profit.
Generally speaking, a unit may be considered as financially viable, progressive and efficient
if it is able to earn enough profits not only to service its debts timely but also for future
development/growth.
3) Fund-Flow Statement:A critical analysis of the statement shows the various changes in sources and applications
(uses) of funds to ultimately give the position of net funds available with the business for
repayment of the loans.
4) Balance Sheet Projections:Commonly we understand the balance sheet is the statement of abstracts of various ledger
accounts pertaining to assets and liabilities of an entity, as on particular accounting date. As
regards contents of balance sheet, it reveals position of assets and liabilities of the firm on a
given date and so far as the nature is concerned, it leads to understand the status/ health of the
entity.
Balance sheet shows the various sources of funds available to the business (that is liabilities
and owners equity) and the types of property and property rights in which these funds are
currently looked up (assets).

PAGE:- 38
Main concern of banker is to find out

Whether firm/organization is financially sound and stable.

Whether its liquidity is satisfactory.

Whether profitability or earning capacity is up to the required standard.

Whether management of firm is competent and whether they can manage the
business.

5) Key Financial Ratios:While analyzing the financial aspects of project, it would be advisable to analyze the
important financial ratios over a period of time as it may tell us a lot about a unit's liquidity
position, managements' stake in the business, capacity to service the debts etc. : Study of the
ratios is also important to check the financial feasibility and for verifying the credit
worthiness of a prospective borrower. Ratio analysis is a quantitative technique for assessing
the financial health of a unit from a given accounting data. The financial ratios which are
considered important are discussed as under
SIGNIFICANCE

Liquidity Ratios

IMPORTANT RATIOS

Ability of the firm to meet Current Ratio

obligations in short term
Determining the solvency of Acid Test Ratio

Leverage ratios

Activity Ratios

the firm
Use of debit/finance
Debt/Equity ratio
Assessing the risk arising from Debt Service Coverage Ratio
the use of debt capital
(DSCR)
Measures how effectively the Inventory turnover ratio
assets are employed
To
know
turnover/Asset Debtor velocity ratio
management
Creditor velocity ratio

Profitability Ratios

PAGE:- 39
Debtor/Creditor Ratio
Indicator of effectiveness and Gross profit ratio
efficiency

(operating profit)
Net profit Ratio

LIQUIDITY RATIOS:Current Ratio: Current assets

Current liabilities
Acid test ratio: Current assts-Inventory
Current liabilities

LEVERAGE RATIOS:
Debt Equity ratio: Total outside liabilities
Equity
Funded Debt Equity Ratio: Long term Liabilities
Equity
Normally DER should be 3:1.Lower the ratio higher the protection to creditors. It indicates
the financial soundness of the concern.

Debt Service Coverage Ratio :

Net profit after tax + Interest on term loan

Annual installment of term loan + interest on term loan

Ideal ratio: 2:1, can be accepted up to 1.3:1. This ratio indicates the measures of safety in
payment of installments and interest-whether it can service the long tem debts.
PAGE:- 40
Decline in ratio means drop in profitability, over ambitious projections and inefficient
management .
The debt service coverage ratio serves as a guide to determining the period of repayment of a
loan.

This is calculated by dividing cash accruals in a year by amount of annual obligations

towards term debt. The cash accruals for this purpose should comprise net profit after taxes
with interest, depreciation provision & other non cash expenses added back to it.
This ratio is valuable, in that it serves as a measure of the repayment capacity of the project/
unit & is, therefore, appropriately included in the cash flow statements. The repayment
program should be so stipulated that the ratio is comfortable.

ACTIVITY RATIOS:
Inventory turnover ratios = Cost of sales
Average inventory
Cost of sales = Net sales - gross profit
Average inventory = opening stock+closing stock
2
It indicates number of times inventory has turned over in an accounting year. More number of
times indicates more sales.
Debtor velocity ratio = Sundry debtors*365or 52 or 12
Credit sales
Creditors velocity ratio = Sundry debtors*365or 52 or 12
Credit purchases
PAGE:- 41
6) Sensitivity Analysis:The sensitivity analysis is carried out by the bank in order to evaluate capacity of the project
to absorb shocks due to adverse movement in prices/ some other adverse developments and
sustain financial viability.

The viability of a project is dependent on various factors which include selling price, cost of
raw materials, cost of finance, availability of critical inputs and dependence on market like
buyer/seller market, other key technical parameters etc. In the absence of any defined factors
and its values for carrying out the sensitivity analysis, it has been decided that a common 5%
sensitivity factor on sale price/cost price of major raw materials should be applied in
appraisals of all the projects irrespective of the industry. However, 10% sensitivity factor may
be applied in highly volatile industries by assessing the expected volatility in sale price/ cost
price of major raw materials in future on case to case basis.

7) Management and Organization:Appraisal of project would not be complete till it throws enough light on the person(s) behind
the project i.e. management and organization of the unit. It is seen that some projects may
fail not because these are not viable but because of the ineffectiveness of the management
and the organization in controlling various functions like production, marketing, finance,
personnel, etc. The appraisal report should highlight the strengths and weaknesses of the
management by commenting on the background, qualifications, experience, and capability of
the promoter(s), key management personnel, effectiveness of the internal control systems,
relation with labour, working conditions, wage structure, and the other assigned essential
functions.
General Guidelines: Appraisal report should critically analyze and comment on
various important functional areas like technical, marketing, economic, financial,
management etc. and comment on their strengths and weaknesses, if any.
PAGE:- 42
The report should answer objectively various questions which may arise in the mind
like what, why, where, when, how & who relating to all the above functional areas &
should be conclusive as far as possible. The assumptions should be realistic. The report
should reflect three cardinal rules in its content: A.B.C which stands for Accuracy,
Brevity & Clarity; so that it proves useful and helpful in taking decisions as to whether
the project is technically feasible and economically viable and in this case it is viable.

4.4 Post-Sanction Processes:After the appraisal and sanctioning process, procedures for loan disbursal, legal
documentation and continuous monitoring of the loan implementation i.e. end-use, collateral
maintenance, financial health of the loaner etc. come into picture. Some of the important
processes are as described below:
Ensuring end-use of funds:One aspect of the credit risk management and control is to ascertain the end use of the funds.
This is because the risk profile of a loan is directly related to its prospected use. For example,
if a loan issued for purchase of machinery is diverted to real estate investment or say to
capital markets, then probability of its default increases considerably. Hence, it becomes
necessary for banks to monitor the usage of the loaned funds. Financial statements issued by
Chartered Accountants are analyzed to observe the spending of the funds. Moreover, PNB
has put in place guidelines and procedure to ascertain the use of funds through actual
inspection. Some of the illustrative measures that could be taken by the branches to ensure
end-use of funds are:
i) Meaningful scrutiny of quarterly progress reports/operating statements, balance
sheets of the borrowers.
ii) Regular inspection of borrowers assets charged to the Bank as security.
iii) Periodical scrutiny of borrowers books of accounts.
iv) Periodical visits to the assisted units.

PAGE:- 43
Preventive Monitoring System (PMS):Bank has introduced Preventive monitoring system for large borrowal accounts. The system
is applicable to all borrowal accounts having sanctioned limits (FB plus NFB) above Rs. 1
crore. The model for PMS has also been placed in central server environment. This system is
a dynamic system for tracking the health and conduct of borrowal accounts to capture the
signals of early warning. Timely decision should be taken on the future course of action in
the borrowal accounts depending upon PMS rank.PMS Reports consists eight parts:-

Part I is a brief profile of the account.

Part II has PMS index score and mentions the reasons for the irregularities.
Part III details about the financial/operational performance of the borrower.
Part IV consists of details of un-compiled important terms and conditions of

sanctions.
Part V mentions the status of outstanding serious inspection irregularities.
Part VI includes position of the account(s) as at the end of the quarter.
Part VII has details of security verification, insurance, stock audit, consortium

meeting.
Part VIII has comments and action plan.

There are 6 sections subdivided into 29 parameters on which the borrower is evaluated.
PMS scores are penalty points allotted for unsatisfactory features observed in the conduct of
an account. The scores awarded are negative in nature i.e. higher the score poorer is the
health. It is based on this score that PMS rank is determined. The ranking scale is a ten point
scale based on PMS index score, in which 1 is said to be the most satisfactory position and 10
to be the most unsatisfactory position.

PAGE:- 44
Given below is the ranking and the category to which an account belong with respect to its
rank:PMS SCORE

PMS RANK

CATEGORY

0-1000

HEALTHY

1001-2000

HEALTHY

2001-3000

EARLY WARNING

3001-4000

EARLY WARNING

4001-5000

EARLY WARNING

5001-6000

WARNING

6001-7000

WARNING

7001-8000

WARNING

8001-10000

LIKELY NPA / NPA

ABOVE 10000

10

LIKELY NPA / NPA

PMS also provide an action manual for the bank which mentions options as an early warning.
Some of these options are:

Careful vetting of loan documents.

Review of compliance with terms and conditions.

Meeting with party on reasons for business decline.

Influence borrower business plans.

Demand financial restructuring of borrowers balance sheet.

Increase interest rates.

PAGE:- 45

Re-inspection of primary security, stock audit by external auditors.

Valuation of collateral security.

Legal counsel on documentation and charge creation.

Insistence on higher collateral, guarantees.

Insistence on higher margins.

Change in the form of exposure - cash credit to short term loans.

Audit:Bank has a policy to conduct annual stock audit (including book debts) for all accounts with
fund based working capital limits of Rs.5 crore and above whether standard or NPAs. Annual
Stock Audit is compulsorily conducted in all accounts with risk rating B & below and
having fund based working capital limits of Rs. 1 crore and above.

Monitoring of Weak and Irregular Accounts:The bank has established systems for Inspection and control of its lending activity to ensure
that loan accounts are conducted in terms of sanction so as to have a sound credit portfolio.
Credit Division, HO monitors all weak and irregular loan accounts below standard category
having outstanding of above Rs.10 lac on monthly basis.

4.5 ASSESSMENT OF CREDIT NEED:The first step in the process of credit appraisal is to assess the need for loan to the borrower.
In the first step the need for financial requirement is understood i.e. for which purpose the
loan is required. The banks basically provide two types of credit facilities to their clients i.e.
Working capital and Term loan.

PAGE:- 46
4.5.1 WORKING CAPITAL:Working Capital for any manufacturing unit means the total amount of circulating funds
required for continuous operations of the unit on a going basis. Working capital is defined as
the funds required to carry the day to day operations of the business uninterruptedly.

The objective of running any industry is earning profits. An industry will require funds to
acquire fixed assets like land, building, plant, machinery, equipments, vehicles, tools etc.,
& also to run the business i.e. its day to day operations.
Funds required for day to-day working will be to finance production & sales. For production,
funds are needed for purchase of raw materials/ stores/ fuel, for employment of labor, for
power charges etc., for storing finishing goods till they are sold out & for financing the sales
by way of sundry debtors/ receivables. Capital or funds required for an industry can therefore
be bifurcated as fixed capital & working capital. Working capital in this context is the excess
of current assets over current liabilities. The excess of current assets over current liabilities is
treated as net working capital or liquid surplus & represents that portion of the working
capital, which has been provided from the long-term source.
Working Capital Comprises of:

Amount of raw materials of various kinds.

Amount for stock in process.

Amount for all finished goods in stores and in transit.

Amount for receivables or sundry debtors.

Other routine expenses.

Means to finance working capital are:

Credit available on purchases.

Short term bank borrowing.

Surplus of long term funds over long term uses(NWC).

PAGE:- 47

Thus Working Capital required is dependent on:

The volume of activity (viz. level of operations i.e. Production & sales)

The activity carried on viz. mfg process, product, production program, the materials
& marketing mix.

Operating cycle is illustrated as follows:

CASH
RECEIVABLES

RAW MATERIAL

FINISHED GOODS

GOOD IN PROCESS

The Operating Cycle Concept

This cycle continues and in order to keep the operating cycle going on, certain level of
current assets has to be maintained.

PAGE:- 48
Thus the total working capital can be obtained by assessing the level of various current assets
in terms of time and their value as shown:
Stage
Raw materials
Work in progress

Time
Value
Holding period
Value of RM consumed
Time taken in converting RM RM + Mfg. expenses (Cost of

Finished goods

to FG
production)
Holding period of FG before RM + Mfg. expenses + Adm.

Receivables

being sold
Credit allowed to buyer

Overhead (Cost of sales)

RM + Mfg. expenses + Adm.
Overhead + profit(sales)
Cash

Cash

RM holding time
holding time

RM purchased
F G sold

Processing time

FG

Rec. holding time

Processing starts

Processing ends

Rec. realized

DETERMINANTS OF WORKING CAPITAL:There are lot many factors that affect the quantum of working capital as desired by a business
entity. Following are the main factors common to most of the conglomerates:
1

Nature of business - Need for working capital is highly depends on what type of
business, the firm in. There are trading firms, which needs to invest a lot in stocks, ills
receivables, liquid cash etc. Public utilities like railways, electricity, etc., need much
less inventories and cash. Manufacturing concerns stands in between these two
extends. Working capital requirement for manufacturing concerns depends on various
factors like the products, technologies, marketing policies.
PAGE:- 49

Production policies - Production policies of the organization effects working capital

requirements very highly. Seasonal industries, which produces only in specific season
requires more working capital. Some industries which produces round the year but
sale mainly done in some special seasons are also need to keep more working capital.

Size of business - Size of business is another factor to determine the need for working
capital.

Length of operating cycle - Operating cycle of the firm also influences the working
capital. Longer the operating cycle, the higher will be the working capital requirement
of the organization.

Credit policy - Companies following liberal credit policies need to keep more
working capital with them. Efficiency of debt collecting machinery is also relevant in
this matter. Credit availability from suppliers also effects the companies working
capital requirements. A company that doesnt enjoy a liberal credit from its suppliers
will have to keep more working capital.

Business fluctuation - Cyclical changes in the economy also influence the level of
working capital. During boom period, to avail the advantage of rising prices, the
management intends to pile up inventories of raw materials and finished goods. This
creates demand for more capital. On contrary, during depression when the prices and
demand for manufactured goods constantly reduce, the industrial and trading
activities show a downward trend. Thus the demand for working capital is low.

Current asset policies - The quantum of working capital of a company is

significantly determined by its current assets policies. A company with conservative
assets policy may operate with relatively high level of working capital than its sales
volume. A company pursuing an aggressive amount assets policy operates with a
relatively lower level of working capital.
PAGE:- 50

Fluctuations of supply and seasonal variations - Some companies need to keep

large amount of working capital due to their irregular sales and intermittent supply.
Similarly companies using bulky materials also maintain large reserves of raw
material inventories. This increase the need of working capital. Some companies
manufacture and sell goods only during certain seasons. Working capital requirements
of such industries will be higher during certain season of such industries period.

Other factors Developed transportation and communication infrastructure help to

reduce the working capital requirement. Effective co-ordination between production
and distribution can further lower the need for working capital.

Data required for assessment of working capital requirement:For assessing the working capital needs of an organization, bank follows CMA (Credit
Monitoring Arrangement).

It is required by banks and other financial institutions, to

introspect or study the minutes of balance sheet and other financial statements of a body
corporate for financing their projects. In other words it is the detailed explanation of the
balance sheet and other financial ratios of the firm or any other corporate.
The CMA includes analysis of following five documents:

1. Existing and proposed banking arrangements:Particulars of the existing credit from the entire banking system as also the term loan
facilities availed of from the term lending institutions/banks are furnished in this form.
Maximum & minimum utilization of the limits during the last 12 months outstanding
balances as on a recent date are also given so that a comparison can be made with the limits
now requested & the limits actually utilized during the last 12 months.

PAGE:- 51
2. Operating statement:The data relating to last sales, net sales, cost of raw material, power & fuel, direct labour,
depreciation, selling, general expenses, interest, etc. are furnished in this form. It also covers
information on operating profit & net profit after deducting total expenditure from total sale
proceeds.

3. Analysis of Balance Sheet:A complete analysis of various items of last years balance sheet, current years estimate &
following years projections is given.

This form gives the details of various items of current assets and current liabilities as
per classification accepted by banks.. In case of inventory, receivables and sundry
creditors; the holding/levels are given not only in absolute amount but also in terms of
number of month so that a comparative study may be done with prescribed norms/past
trends. They are indicated in terms of numbers of months in bracket below their
amounts.

4. Calculation of MPBF (Maximum Permissible Bank Finance):On the basis of details of current assets & liabilities, Maximum Permissible Bank Finance is
calculated in a form to find out credit limits to be allowed to the borrowers.
5. Fund Flow Statement:In this form, fund flow of long term sources & uses is given to indicate whether long term
funds are sufficient for meeting the long term requirements. In addition to long term sources
and uses, increase/decrease in current assets is also indicated in this form.

PAGE:- 52
CMA DATA (Credit Monitoring Arrangement):Companies approaching bank for working capital financing need to assess their working
capital requirements. This assessment forms the most basic part of working capital and
companies must present a clear picture of this assessment to the banks for sanction of loan.
CMA data is one of the resources used to assess working capital for a company and it
involves preparation of number of forms. These forms have a prescribed format in which they
are presented and these forms clearly define financial position of the company. CMA data
distinguishes current assets and current liabilities and determines the net working capital for a
particular period. This net working capital is then used to determine one of the most
important variable i.e. Maximum Permissible Bank Finance. The bank adopts a suitable

method for the determination of MPBF using any of one method, Tandon or Chore
Committee.
In PNB, MPBF is assessed by using the method recommended by Chore Committee. Further
steps are taken based on it. CMA consists of six Forms and they are:

FORM I: Break up of facility: This form give details regarding the different forms
in which credit has been asked by company such as Cash Credit, Packing Credit,
Letter of Credit, Bank Guarantee, etc.

FORM II: Operating statement or Profit and Loss statement: This help banker
to know about the expenses and tells about the expenses and income generated during
the year.

FORM III: Analysis of Balance sheet: This helps bankers to assess the financial
health of an entity on date of documentation of the business entity

FORM IV: Comparative Statement of Current assets and current liabilities:

This form explains the operating cycle of the company.

FORM V: Maximum permissible bank finance: This forms will show how much
loan bank is eligible to give to company.

PAGE:- 53

FORM VI: Fund flow statement: Many companies do window dressing in their
financial statements and fudge with their accounting figures. A profitable firm may
have negative operative cash flows. Thus fund flow and cash flow analysis helps the
bankers to check the sources of inflow and points of outflow.

The CMA is prepared by both the company as well as the bank. The bank uses the CMA
prepared by the company to analyze the correctness of the working capital requirements and

understand its validity. However, the entire CMA data is prepared using the balance sheet of
the company and certain other documents submitted by the company to the banks.
Maximum Industry Exposure Limit:The bank has developed a model for fixation of industry wise credit exposure ceilings.
The model captures external factors like rating of industry by external agency, nature of
industry and its importance in economy as well as internal factors like level and trend of
asset impairment, exposure level and quality of exposure in the industry. This model
provides scientific assessment and corresponding exposure ceiling level to an industry.
These limits shall be reviewed on the basis of data analysis regularly. As the ceilings
proposed are internal ceilings to achieve diversified growth of portfolio and reduce
portfolio concentration, it is provided that the monitoring against such limits would be
based on actual outstanding. However, undisbursed term loan amounts in any industry
shall also be monitored closely. Further, the industry-wise exposures shall also be
monitored closely by Credit Division, CO to especially those industries which have
reached trigger level of 85% of exposure limit so that instances of breach of ceiling
could be averted.
Industry/Sector Ceiling in percentage
S.

Sector

Exposure

All Engineering
Chemicals, Dyes, Paints
Construction
Food Processing
Iron and Steel
Other Textiles
Paper and Paper Products
Petroleum
Sugar

6%
3%
5%
5%
10%
5%
3%
3%
5%

No
.
1.
2.
3.
4.
5.
6.
7.
8.
9.

4.5.2 TERM LOAN:Term loan is generally granted for acquisition of fixed assets i.e. land and building, plant and
machinery for new units and for expansion / modernization/ diversification of existing units.
Banks can sanction term finance for each project individually or in consortium / syndication
with other banks subject only to individual bank ceiling restricted prudential exposure norms

stipulated by RBI. The prudential exposure norms In respect of term finance for
infrastructure funding has however been raised to 60% for financing a group as against 50%
for other funding purposes.
Banks are free to decide the maximum periods of term finance, interest rate, appropriate debt
equity ratio for each project etc.
Appraisal of Term Loans:Assessment of earning potentials and generation of cash surpluses is the vital ingredient in
appraisal of term loans. The unit should make enough surplus earnings after meeting all the
expenses, taxes and other necessary provisions and the same should be adequate for servicing
the loan and interest thereon within a reasonable period of time. The appraisal of term loans
broadly involves an analytical assessment of the following:
i.

Purpose, cost of project and how it is to be tied up.

ii.

Future trends of production and sales.

iii.

Estimates of costs, expenses, earning and profitability.

iv.

Cash flow statements during the period of loan.

Other aspects to be considered in term loan proposal

1) Management and organizational aspects
2) Economic and financial aspects

PAGE:- 55
3) Technical aspects
4) Commercial aspects
5) Environmental aspects
6) Social aspects
Information required by banks for sanctioning Term loan

1. Project Report besides containing feasibility report , this will highlight cost of the
project , means of financing , cost of production and profitability , cash flow
estimates, fund flow trends and projected financial statements.
2. Loan application and details of constitution.
3. Particulars of land and building
a) Copy of land allotment letter and purchase deed, or lease deed or rent deed of the
building whichever is applicable.
b) A plan showing the allocation and measurement of land.
c) In case of lease deed, terms should be examined to know the right of the bank as
creditor and mortgagee and also the period of unexpired lease.
d) Cost structure of land and building.
4. Plant and machinery
a) A minimum of two or three quotations of plant and machinery from reputed
manufacturers and suppliers, giving detailed specifications , capacity ,prices have
to be obtained.
b) Technical feasibility of the project
c) Economic viability of the project
d) Financial viability of the project
e) Managerial competence
f) In case of imported machinery, arrangements made for imports should be
indicated.
5. preliminary and pre operative expenses.
6. provision of margin money.
7. Technical know-how and engineering consultancy fee.

8. Government licenses and permission.

PAGE:- 56
9. Other information besides above, the borrower has to submit all relevant financial
papers as desired by the bank based on the merit of each case.

Appraisal of term loan, say for an industrial unit is a process comprising several steps. While
appraising proposal for term loan, the following four fundamentals should be carefully
studied and analysed:
1. Technical Feasibility
2. Economic Feasibility
3. Financial Feasibility
4. Managerial Competence

TECHNICAL FEASIBILITY:This is an attempt to determine how well the technical requirements of the project can be
met. This comprises consideration of availability of infrastructural facilities, raw materials,
skilled and semi-skilled labour and other utilities on the one hand, and the technology
required for the manufacturing process on the other hand. This should also cover as to
whether the product mix of specified quantity and quality as projected can be manufactured
and whether the projections are realistic or achievable. Assessment should be made with an
eye on productivity which depends on the profitability of the unit. In technical appraisal,
following aspects are generally looked into:
a) Location and Site
b) Raw material
c) Plant & machinery, plant capacity and manufacturing process
d) Land
e) Building
f) Technology & process

g) Size of the plant

h) Power Supply
i) Water Supply
j) Labour supply

PAGE:- 57
k) Implementation Schedule
The examination of the technical feasibility requires assessment of the various requirements
of the actual production process. It is in short a study of the availability, costs, quality &
accessibility of all the goods & services needed.
The location of the project:This is highly relevant to technical feasibility & hence special attention will have to be paid
to this feature. Projects whose technical requirements could have been taken care of in one
location sometimes fail because they are established in another place where conditions are
less favorable. One project was located near a river to facilitate easy transportation by barge
but lower water level in certain seasons made essential transportation almost impossible. Too
many projects have become uneconomical because sufficient care has not been taken in the
location of the project, e.g. a woolen scouring & spinning mill needed large quantities of
good water but was located in a place which lacked ordinary supply of water & the limited
water supply available also required efficient softening treatment. The accessibility to the
various resources has meaning only with reference to location. Inadequate transport facilities
or lack of sufficient power or water for instance, can adversely affect an otherwise sound
industrial project.
Size of the plant: One of the most important considerations affecting the feasibility of a
new industrial enterprise is the right size of the plant. The size of the plant will be such that it
will give an economic product, which will be competitive when compared to the alternative

product available in the market. A smaller plant than the optimum size may result in
increased production costs & may not be able to sell its products at competitive prices.
Type of technology: An important feature of the feasibility relates to the type of technology
to be adopted for a project. A new technology will have to be fully examined & tired before it
is adopted. It is equally important to avoid adopting equipment or processes which are
absolute or likely to become outdated soon. The principle underlying the technological
selection is that a developing country cannot afford to be the first to adopt the new nor yet
the last to cast the old aside.
PAGE:- 58
Labor: The labor requirements of a project need to be assessed with special care. Though
labor in terms of unemployed persons is abundant in the country, there is shortage of trained
personnel. The quality of labor required & the training facilities made available to the unit
will have to be taken into account.
Technical Report: A technical report using the Banks Consultancy Cell, external
consultants, etc., should be obtained with specific comments on the feasibility of scheme, its
profitability, whether machinery proposed to be acquired by the unit under the scheme will be
sufficient for all stages of production, the extent of competition prevailing, marketability of
the products etc., wherever necessary.

ECONOMIC FEASIBILITY:An economic feasibility appraisal has reference to the earning capacity of the project. Since
earnings depend on the volume of sales, it is necessary to determine how much output or the
additional production from an established unit the market is likely to absorb at given prices.

A thorough market analysis is one of the most essential parts of project investigation.
This involves getting answers to three questions.

How big is the market?

How much it is likely to grow?

How much of it can the project capture?

Current situation:- The first step in this direction is to consider the Current situation, taking
account of the total output of the product concerned & the existing demand for it with a view
to establishing whether there is unsatisfied demand for the product. Care should be taken to
see that there is no idle capacity in the existing industries.
Future: possible future changes in the volume & patterns of supply & demand will have to
be estimated in order to assess the long term prospects of the industry. Forecasting of demand
is a complicated matter but one of the vital importance. It is complicated because a variety of
factors affect the demand for product e.g. technological advances could bring substitutes into
market while changes in tastes & consumer preference might cause sizable shifts in demand.
PAGE:- 59
Intermediate product: The demand for Intermediate product will depend upon the
demand & supply of the ultimate product (e.g. jute bags, paper for printing, parts for
machines, tyres for automobiles). The market analysis in this case should cover the market
for the ultimate product.

FINANCIAL FEASIBILITY:The basis data required for the financial feasibility appraisal can be broadly grouped under
the following heads:

Cost of the project including working capital.

Cost of production & estimates of profitability.

Cash flow estimates & sources of finance.

The cash flow estimates will help to decide the disbursal of the term loan. The estimate of
profitability & the breakeven point will enable the banker to draw up the repayment program
start-up time etc. The profitability estimates will also give the estimate of the Debt Service
Coverage which is the most important single factor in all the term credit analysis.
A study of the projected balance sheet of the concern is essential as it is necessary for the
appraisal of a term loan to ensure that the implementation of the proposed scheme.

MANAGERIAL COMPETENCE:-

The performance of an industrial concern, under competition, measures the quality of its
management. Therefore, for existing concerns, the past performance in terms of ROI should
help in relative assessment of its managerial competence. It should be ascertained that the
promoters had the desired background, experience and knowledge to successfully implement
the project. The various proponents in management appraisal are:
i) Financial Statement Analysis:The ratios about profits, liquidity etc. helps the banker in arriving at conclusion
about the managements ability and favorability.
PAGE:- 60
Another important type of data which should be secured is the dealings of the
proponent. Generally, good credit record indicates a proponents discipline in
servicing an account which may be a critical issue in establishing management
reliability.

ii) Proponents performance versus industry performance:More significance is given to the financial ratios if compared to various
companies or enterprises in the same industry as the proponent. Industry
average ratios should be secured and a judgment should be made on whether the
proponent is an industry leader or a tail-ender in the various aspects of
management.

iii) Other aspects

The proponents technical & marketing competence, financial management
competence, its philosophy and attitude, effectiveness of the proponents
management information system etc. are also taken into account.
Following is the list of documents required by bank for further processing:

a. KYC (Know Your Customer norms);

b. Financial data of borrowing company ( last 3 years or projections);
c. CMA ( Credit Monitoring Analysis ) data , Detailed Project report;
d. Sales tax, VAT, income tax and wealth tax assessment to check for any
statutory liabilities;
e. Registration document of company memorandum of association, article of
association, certificate of incorporation etc;
f. Assets and liabilities of promoters;
g. Collateral security, if any;
h. Loan application.

PAGE:- 61

CHAPTER 5:- Data Analysis and Interpretation

5.1 Case Study On Term Loan:The proposal falls under the powers of ED on account of total exposure of Rs. 55.00 crores
1. Name of the Borrower:
M/s. SANYA HOSPITALITY PRIVATE LIMITED ( SHPL)
BO & Controlling Office: NEHRU PLACE, NEW DELHI / CIRCLE OFFICE DELHI
Whether

fresh/renewal/ Fresh

enhancement
Asset
Classification NA-New Account
31.03.09
Credit Risk Rating by

Rating Date of Score ABS

Reasons for

Bank
Present
Previous
Large

Whether

Rating
degradation
BB
29.4.09 56.84 31.3.08 NA
NA-as the rating is being done for the first time

Agriculture/Retail/
SME/Large
a) Whether

Sensitive Yes

Sector
Real Estate/Capital Real Estate (Hotel)
Market
b)

Applicable

Risk 100%

weight
Consortium/Multiple
Banking
Lead Bank
PNBs Share %
Rs. In Crores

Consortium
Oriental Bank of Commerce
33.33%

PAGE:- 62
GIST OF THE PROPOSAL
Sanction of Term Loan of Rs. 55.00 crores
Purpose

Acquisition / Construction

Cost of Project
Total Debt
Promoters contribution
Proposed TL (our share)
DER
Repayment Period
Door to door tenor

of hotel
279.95
165.00
114.95
55.00
1.44:1
96 months
108 months

PART I
2. Borrowers Profile:a.

Group Name

No recognized group

Address of Regd. Office

D-13, Defence Colony, New Delhi 110024

b.
c.
d.

Works/Factory
Constitution
Date of incorporation/

Sushant Lok-I, Sector 27, Gurgaon

Private Limited company
11.1.2007

e.
f.
g.

Establishment
Dealing with PNB since
Industry/Sector
Business Activity (Product)/

New Account
Hotel / Hospitality
Acquisition and running of hotel

Installed Capacity.

PAGE:- 63
3. Directors (S/Shri)
Name

Designation

Whether Promoter/ Professional/

Shri Roop Madan

Mrs. Bela Madan

MD
Director

Nominee
Promoter
Promoter

4. Facilities Recommended:(Rs. in Crore)

Nature

Existing

Proposed

Secured/Unsecured along with

the basis thereof
(As per RBIs guidelines)

Fund Based
Term Loan

Nil

55.00

Secured

5.A Credit Rating by agencies {CRISIL/ICRA/CARE/FITCH INDIA} with purpose of such

rating:- Not yet done
5.B Details of proposed Working Capital Limits and term loan from the Consortium:(Rs. Crores)
Name of Bank

Amount-FB

Oriental Bank 4.53

Amount -TL

% Share in TL

Rate of Interest

60.00

36.36

(%)
13.00

of Commerce
Jammu
& -

50.00

30.31

13.00

Kashmir
PNB
TOTAL

55.00
165.00

33.33
100.00

13.00

31-Mar-07

31-Mar-08

31-Mar-09

Particulars (Rs in Lakhs)

Audited

Audited

Prov

Share Capital
Share Application
Current Liabilities & Provisions
Total Liabilities
Current Assets
Preliminary Expenses
Preoperative Expenses
Total Assets

1.00
0.06
1.06
0.65
0.35
0.06
1.06

1.00
0.12
1.12
0.65
0.35
012
1.12

1.00
10439..26
3.84
10444.20
10418.21
0.35
25.64
10444.20

4.53

PAGE:- 64
6 Financial Position of the Company (Rs. Lacs):-

The company has not started commercial operations and hence no Profit & Loss statement
has been prepared.
7.A Key Financials upto last quarter: NA
7.B Capital Market Perception: NA
7.C Comments on Financial Indicators (only major variation/trends to be explained NIL
7.D Details of investment in Shares, Debentures, Units or diversion of funds outside the
business etc. (Along with comments in case of increase:- NIL
7.E Details of Liabilities not accounted for/Contingent liabilities. Nil

7.F Status/details of adverse comments/ Qualification by Auditors of the borrowing unitNIL

7.G Position of assessment of income tax/sales tax/wealth tax of the

borrowing

concern/partners/proprietorPAGE:- 65
The company has filed ITR up to 31.03.2008 & Promoters/Guarantors have filed up to
31.03.2008
7.H Information on litigation initiated by other banks/FIs against the borrower as per latest
Audited Balance Sheet, if any- NIL
8. SECURITY
A. Primary:

For Term Loan

First pari-passu charge on block assets of the company by way of EM of land & building of
hotel & hypothecation of all other fixed assets with consortium banks having MV Rs. 316.24
crores as per valuation report dated 6.2.2009. The book value of proposed block assets is Rs.
271.75 crores as on 31.3.2010. However fresh valuation shall be got done before release of
loan
B. Collateral (Information in respect of mortgage of IP to be given only in the following
format:
i) Hypothecation/ Mortgage of Block Assets Immovable Properties: NIL
ii)

First/Second/Third charge/Pari passu charge

Second Pari passu charge on the entire current assets of SHPL since OBC has first
charge for FB limit of Rs. 4.53 Crores
iii) Personal /Corporate Guarantee

(Rs. Crores)
Name of Relationship

Net Worth

Immovable property

Guarantor with

Date of confidential
report

borrower
Prev.

Present

Prev.

As at.

As

Shri Roop Promoter

NA

15.3.09
*477.22

N.A.

Madan
Director
Mrs. Bela -Do-

NA

*140.64

N.A.

at As at

Present

Prev.

Present

15.3.09
Nil

N.A.

25.00

N.A.

25.04.09
$

As

Madan
9.

at

25.04.09

Position of Account as on: NA (New Account)

10.A Conduct of the Account including details of terms & conditions not complied with- NA
10.B i) Value of the Account: NA
10.B ii) Deposits including Escrow/TRA account with details: NA
10.C

Review of the Account and Summary of serious irregularities pointed out by Banks

Inspectors, Concurrent Auditors, Credit Audit & Review Division (CA&RD), RBI Inspectors,
Statutory Auditors, observations of Stock Audit Report, Comment on Preventive Monitoring
Score Trends, (and status of rectification of these irregularities)
NA

PAGE:- 67
PART II
11 A. Brief History
SHPL was incorporated on 11th January 2007. SHPL has been promoted Mr. Roop Madan &
Mrs Bela Madan.
Mr. Roop Madan ,aged 39 years, is commerce postgraduate from Delhi University. He
started his carrier in year 1993 by joining his family business of merchant import exports.
He further in the year 1995 started his own business of merchant exporters importers by the
name and style of M/s. Roop International. In the year 2000, along with his family members
(father, brother & wife) he promoted a partnership firm by the name and style of M/s. Sanya
Motors to start the business of dealership in Passenger Cars, which was converted to M/s.
Sanya Automobiles Pvt. Ltd. (SAPL) in the year 2003. SAPL is the authorized dealers
for Tata Motors Limited. SAPL started its first showroom at D-13, Defence Colony, New
Delhi and workshop at Okhla, New Delhi, and subsequently two more show rooms were
added at Okhla and Mayapuri and one more workshop was added at Mayapuri in New Delhi
during the period 2001 to 2006. . Mr. Roop Madan has also considerable business interest
in Real Estate & Infrastructure
Ms. Bela Madan (wife of Mr. Roop Madan), aged 37 years, is an arts & education
postgraduate, added with masters in philosophy. She had been assisting Mr. Roop Madan in
his business activities since the year 2000.
Mr. Roop Madan and Mrs. Bela Madan have formed a company by the name of Sanya
Hospitality Private Limited (SHPL) which was incorporated on 11.1.2007 for the purpose of
acquiring 199 Rooms Four Star Hotel, known as Marriott Courtyard, at Shushant Lok
Integrated Township, Gurgaon, Haryana from Unitech Developers & Hotels Private Limited
(UDHPL).

PAGE:- 68
The promoters of the company wanted to enter the hospitality industry due to the up coming
Commonwealth Games in 2010 in New Delhi. They got the opportunity to buy a fully built
hotel along with a management contract with Marriott Courtyard. The hotel comes with a
management agreement with Marriott Courtyard for a period of 25 years. The hotel is
expected to be commercially operational by 1st October 2009.
The existing hotel has a debt outstanding of Rs. 33.00 crores with IDFC in the name of
existing promoters and the same is secured by way of first charge on the block assets. This
loan is proposed to be liquidated with the present financial tie up and charge shall be created
in favour of existing lenders within 30 days of disbursal.
SHPL has mandated SBI Capital Markets Limited to carry out the Financial Appraisal of their
proposed acquisition. The cost of acquisition has been estimated at Rs. 279.95 Crores, which
is proposed to be funded in Debt Equity Ratio of 1.44:1 with debt of Rs 165.00 crores and
equity of Rs 114.95 crores.
B. (i) Industry Rating as per RMD : Marginally Un-favourable

12.

Present Proposal- The Company has requested for sanction of term loan of Rs. 55.00

Crores for part fianc for purchase of Hotel at total cost of Rs. 279.95 cores
(i)

Purpose

Acquisition of Marriot Courtyard Hotel, Gurgaon from M/s. Unitech group at cost of Rs.
279.95 Crores
(ii) A. Appraising agency

The financial appraisal report for acquisition of the hotel project has been prepared by SBI
Capital Markets Limited. Who has find that the project is financial viable

PAGE:- 69
(iii) Summary of cost of project and means of finance
The total cost of the acquisition is Rs. 279.95 Crores. The different heads of acquisition cost
are given below;
Particulars

Rs in Crores

Acquisition of Gurgaon Hotel of UDHPL with Stamp Duty &

Registration Charges on Sale of Fixed Asset
Other expenses on Plant & Machinery for completion of Hotel
Other Expenses on Misc Fixed Assets for completion of Hotel
Contingency
Total Hard Cost
Preliminary Expenses
Preoperative Expenses
Margin Money for Working Capital
Interest During Construction
Total Soft Cost
Total Cost

Means of finance
Particulars
Equity
Debt
Total

Rs. in Crores
114.95
165.00
279.95

249.48
12.03
0.50
0.90
262.91
1.25
5.44
1.51
8.84
17.04
279.95

PAGE:- 70
(iv) Sources of Promoters Contribution and the time schedule as to when the funds will
be brought.
The equity requirement for the Acquisition estimated at Rs. 114.95 crores is proposed to be
funded through Promoters Contribution. The promoters propose to bring in their
contribution by way of equity. The promoters have already brought in Rs.108.00 Crores
by way of equity in the from of foreign direct investment from M/s. Kochi Marketing
(Middle East) Corporation, Dubai, UAE (20% shares at a premium) and will bring in the
remaining amount of Rs. 6.95 Crores from their own sources as the Net Worth of the
Promoter Directors, Mr. Roop Madan & Ms Bela Madan is Rs. 500.35 Crores, before release
of loan.

(v) Status of tie-up of loans:

The company has received in principle sanction from OBC and J&K Bank for the proposed
term loan of Rs. 60 crores and Rs. 50 crores respectively. The remaining amount of Rs. 55.00
crores is proposed to be availed from us. They have now obtained regular sanctions of both
the loans. However, copies of sanction letters are awaited.
(vi) Brief explanation for each major individual item of cost of Project
(viii) Summary of profitability, Break-Even, DSCR and IRR with comments thereon
including Assumptions underlying profitability projections:

(Rs. Crores)

Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18

FY
Sales
PBDIT
PAT
Ratios
PBDIT
PAT
DSCR

35.99 88.95
17.88
49.51
0.36
8.84

101.62 108.83 116.56 124.83

56.12 60.17 64.45 70.37
18.02 25.56 32.40 30.26

133.70
75.30
35.49

143.19
80.61
40.97

153.36
86.30
46.80

53%
1%
1.76

57%
18%
1.51

56%
27%
1.77

56%
29%
2.03

56%
31%
2.10

57%
10%
1.59

57%
23%
1.56

56%
28%
1.63

56%
24%
1.56

Minimum DSCR 1.51

Average DSCR
1.70
19.41%

IRR

SHPL would commence operations from October 2009.

Detailed projected profitability projections, balance-sheet, cash flow are as per Appendix VII
(VII) Status of various statutory approvals and clearances
Approval

Agency

Status

Land use clearance

Municipal Corporation (dated-13.12.06)

Received

Approval of building plans

Municipal Corporation (dated 25.03.06)

Received

Sanction for electrical load and State Electricity Board or electricity distribution Received
maximum demand
Sanction

for

water

company (dated 10.10.07)

supply Local Body / Water distribution company (dated- Received

requirement-Boring Tube well

19.01.07)

Environmental Clearance

State Pollution Control Board (dated 06.01.06)

4 star category hotel

Department of Tourism, Government of India Received

Received

(dated 16.10.07)

13. PricingInterest rate: The applicable rate as per credit risk rating BB is BPLT +4.00+0.50%
(TP)=16.00% whereas the company has requested for sanction of term loan at BPLR +1.00

+0.50%(TP)=13.00 % p.a. as the other two member banks under consortium have also
sanctioned the term loan at 13% p.a. We recommend for sanction of term loan at BPLR +1.00
+0.50%(TP)=13.00 % p. a
ROI/other charges stipulated by other participating banks, if applicable: The OBC and J& K
Bank rate of interest is 13.00%
PAGE:- 72
14. Other Issues
a. Time for creation of EM.
b. Time for getting the statutory approvals transferred in favour of SHPL
15. Strengths & Weakness with mitigants, if any
Strengths

Location of a hotel is of prime importance. As the proposed hotel of SHPL is located

very close to the IT Hub in Gurgaon, it can easily attract business tourists both
domestic and foreign.

As the proposed hotel is located very close to New Delhi Jaipur highway, it will attract
business travelers from New Delhi also.

New Delhi Jaipur Agra forms the Golden Triangle where the maximum
international tourists visit India. The proposed hotel will be located in the Golden
Triangle near the New Delhi Jaipur highway.

Creation of high-end facilities in the hotel like well-equipped rooms, specialty

restaurants, health club, modern business center facilities etc. will be an added
advantage.

The presence of the banquet and the hotel in the same complex can boost the occupancy
level of the hotel.

The hotel is located just 9 kms from the airport.

The hotel will be operated by well known Marriott Courtyard group

PAGE:- 73
Weaknesses: The promoters do not have any experience of running a hotel. The hotel will be operated
by Marriott Courtyard with which a management agreement has been signed.
A number of new hotels are being planned in Gurgaon. Since most of the hotels are being
planned in the 5 star category & SHPL plans to open a 4 star hotel which will be more
competitive price wise with almost equal service & facilities.
Opportunities:

Steady growth rate in international tourists arrivals in the National Capital Region is
expected to continue in the future thereby increasing demand for rooms.

Falling domestic airfares and introduction of low cost carriers will also increase tourist
arrivals in Gurgaon / New Delhi

Gurgaon is expected to strengthen its position in the IT and ITES sector. It is also
expected that the city will attract the sunrise industries such as automobile and biotech
industry.

The Commonwealth Games in 2010 will be attracting a number of foreign tourists in

the National Capital Region.

Threats:-

 Lack of appropriate long term infrastructure development plan can slow down the
commercial development in Gurgaon.
However, the state government as well as the central government has plans for
infrastructure development which includes extension of Delhi Metro to Gurgaon, Medicity
at Gurgaon etc.

PAGE:- 74
IT majors are planning accommodation facilities in its existing campus so as to overcome
the non availability of hotel rooms and reduce the travelling time of their business
travelers and such capacity creation can seriously affect the demand from eminent
corporate.
However, the development of in house facilities would be severely constrained by non
availability of adequate land and there would be strong demand from a number of IT
companies who do not have large campuses and need hotels for their clients and
employees.

16. Recommendations:
In view of the above we recommend for

Sanction of term loan of Rs. 55.00 Crores for part financing the purchase of the hotel
with aggregate cost of Rs. 279.95 crores. The loan will be under consortium with
OBC as leader with the total debt of Rs. 165.00 crores.

Detailed Industry Scenario

Hotel Industry in India
Indias hospitality industry has enjoyed robust growth over the past few years, buoyed by a
benign economic and political environment. Increase in domestic business and leisure travel
has benefited hotels in India. Rising incomes, frequent weekend trips and increased access to
travel related information over the internet have all propelled the growth in hospitality.
Premium segment hotels are more prominent in the major business destinations in India
coupled with popular tourist destinations like Goa that attract a lot of foreign clientele.

The market size of the hotel industry has more than doubled from Rs 77.13 billion in 200304 to Rs 186.71 billion in 2007-08 million, registering an impressive CAGR of 30 per cent.
During this period, the market size of 5-D/5-star hotels grew at a CAGR of 27 per cent.
PAGE:- 75
As of 2007-08, the 5-D/ 5-star hotels accounted for approximately 26 per cent of the total
hotel rooms but contributed a significant 60 per cent towards the total market size. This is
explained by the high ARRs commanded by hotels in the premium segment.
Hotel rooms in India grew at an overall CAGR of 4 per cent from 2001-02 to 2007-08, while
that in the premium segment clocked CAGR growth of 4.3 per cent over the corresponding
period.
Number of hotel rooms by category

Category

2001-022002-032003-042004-052005-062006-072007-08 E

Premium segment

24,334 24,719 26,457 27,951 29,097 31,018 31,408

Mid-market segment

29,001 28,506 28,788 33,094 32,209 34,971 35,885

Budget hotels

10,974 10,423 10,119 9,746

8,107

7,783

7,783

Heritage hotels

2,492

2,611

2,689

2,703

2,258

2,297

2,567

Others (unregistered etc) 30,440 29,816 30,854 31,712 37,368 40,357 45,200
Total rooms
Growth (y-o-y)

97,241 95,722 98,515 105,070 109,392 116,818 122,979

-2%

3%

7%

4%

7%

5%

According to the World Travel and Tourism Council (WTTC), the travel and tourism market
grew by an impressive CAGR of 17.33 per cent from Rs 797 billion in 2002 to Rs 1,773

billion in 2007, driven by growth in both personal and business tourism. As per WTTC
estimates, the direct and indirect contribution of travel and tourism to Indias GDP was 6.1
per cent (Rs 2,859.9 billion or $73.6 billion) in 2008. It is expected to remain at similar levels
6.1 per cent (Rs 9,141.1 billion or $171.5 billion) in 2018. The contribution of the industry
to employment is expected to rise from 30.5 million jobs in 2008 (6.4 per cent of total
employment, or 1 in every 15.6 jobs) to 39.6 million jobs (7.2 per cent of total employment
or 1 in every 13.8 jobs) by 2018.
The WTTC estimates the industry to register a CAGR of 14.5 per cent over the next 5 years
to reach Rs 3,491 billion by 2012. The recent slowdown in the global economy due to the
credit crisis is largely responsible for the moderation in growth rate.

PAGE:- 76
Lower business and leisure travel are likely to impact tourism in India. However, events such
as the Commonwealth Games (October 3-14, 2010, in New Delhi) and the Cricket World Cup
2011 (FebruaryMarch) would boost tourism, with increases in both foreign and domestic
tourists.
Personal travel and tourism accounted for 83.1 per cent of the overall travel and tourism
industry in 2007. In India, personal travel is expected to dominate the travel and tourism
industry given the importance of social visits such as marriages and visiting relatives and
friends.
Segmentation of Hotels
The hotel industry in India can broadly be classified into three major types:
Starred hotels: This includes hotels classified by the ministry of tourism into heritage
hotels, 5-D, 5-star, 4-star, 3-star, 2-star and 1 star hotels. Heritage hotels include old palaces
and havelis, which have been converted into hotels. The ministry of tourism also reclassifies
hotels every 3 years and is responsible for the classification of 5-D, 5-star and 4-star hotels.
The responsibility for the classification of 1-star, 2-star and 3-star hotels rests with state
governments. Heritage and Heritage Classic include residences, havelis, hunting lodges,
forts, palaces built prior to 1950 and 1935, respectively

Approved (Awaiting classification) hotels: This includes hotels that have acquired
approval from the ministry of tourism but have not been classified into any star category.
Licensed Units: This comprises hotels that have acquired a license from local municipal
authorities to conduct boarding and lodging facilities.

PAGE:- 77
Classification by segment

Segment

Location

Category

Target

Premium

Around 50 per cent of

5-star

Foreign businessHighest

these hotels are concentrated in

the four metros

Rates
ARRs

due

to

and

leisurehighest levels of service

travellers,

seniorquality.

business
executives and top
government
officials.

Mid market Located in major cities as

3-star,

Middle

levelOffer few facilities and

business
well as small cities
and tourist destinations

4-star

executives

charge

lower

than

andpremium segment.

leisure travelers

the

Segment

Location

Category

Target

Rates

Economy

Located in major cities

1-star,

Largely

Minimum

as well as small cities

2-star

Targeted

facilities.

Charges are lower than that

at

of the mid market segment.

domestic tourists
and tourist destinations
Heritage

Heritage hotels comprise old Heritage

Foreign

palaces, havelis, castles, forts andGrand,

travellers

residences, constructed prior toHeritage

1950,

converted

into

leisureARRs are lower than that

of hotels in the premium
segment

hotels Classic

largely located in leisure tourist

destinations like Jaipur.
Industry Characteristics
Cyclicality
Globally, the hospitality sector is cyclical in nature. During positive cycles, there are periods
of sustained growth in ARRs and occupancy rates (OR).
PAGE:- 78
This trend continues till the economy undergoes a downturn or there is excess supply.
Usually, occupancy rates begin to decline at the onset of a downturn, and this is followed by a
reduction in ARRs. In the recovery phase, occupancy rates start to move up, followed by an
increase in ARRs. In India, hotels have seen an ongoing improvement in ARRs and
occupancy rates from 2002-03.
Seasonality
The hotel industry enjoys higher occupancy rates from November to February. The
seasonality is far more pronounced in leisure destinations such as Goa, Jaipur and Agra. Also,
there is a spurt in foreign tourist arrivals during winter, benefiting tourist destinations.

Occupancy rates are relatively lacklustre from May to August owing to lesser travel during
summer and monsoon.
Capital-intensive
High cost of land and development makes the sector capital intensive. The cost of setting up a
hotel varies with location, size and category. Land costs vary significantly from one city to
another and have a fairly wide range within the city. The cost of construction per room
(excluding land) ranges between Rs 7-10 million for a premium segment hotel.
Manpower/Labour intensive
The sector is labourintensive, with an average employee to room ratio of around 1.8:1.
Smaller food and beverage operations help reduce this ratio for four and three star hotels vis a
vis premium hotels. Food and beverage is a more labourintensive segment. With massive
expansions underway, procuring trained manpower remains a challenge for hoteliers.
Marketing alliances
Hotel properties/chains are often associated with marketing alliances. These alliances provide
the hotel direct access to reservation network, promotion and internet coverage.

PAGE:- 79
Major marketing alliances include leading hotels of the world, leading small hotels of the
world and airline tie-ups. Other alliances include small luxury hotels of the world,
Recent Trends
Performance of premium segment hotels across cities

Occupancy rate (per cent)

ARR (Rs)

Jan-08 Jan-09 Apr-Jan Apr-Jan Jan-08 Jan- Apr-Jan Apr-Jan

2008

2009

09

2008

2009

Delhi

81

65

71

68

14110 11,392 11595

12,170

Goa

87

68

71

61

10,999 9,933 7,127

7,304

North Mumbai 79

59

75

65

12,625 9,965 10,693

11,210

Bengaluru

75

49

70

65

14,181 11,683 13,294

13,188

South Mumbai 84

48

70

58

12,999 11,710 10,419

11,301

Jaipur

80

65

60

58

9,301

7,577 6,559

6,359

Chennai

77

59

73

66

8,491

7,484 7,271

7,904

Kolkata

79

65

76

66

8,341

6,805 6,848

7,243

Hyderabad

73

55

64

59

8357

7,226 7593

7,333

Pune

84

43

76

62

9,674

7,310 8,358

8,287

National Capital Region - Gurgaon

A niche combination of luxury and sophistication has led the NCR to become one of the
prime destinations in the country for leisure and business tourism. The NCR, including the
national capital New Delhi and the satellite towns of Faridabad, Gurgaon, Noida and
Ghaziabad, form a substantial part of India's key economic zones. Factors such as its rich
history, excellent national and international connectivity and the access it provides to the

northern hill stations render the region one of the most favoured destinations for trade,
commerce and tourism.
PAGE:- 80
Rapidly improving infrastructure, widespread economic activity, availability of skilled
manpower and decentralisation of urban development policymaking have in recent times
triggered growth in the region. Further, the construction of the DND Expressway and
Gurgaon Express Highways, phased completion and rapid spread of the Delhi
Metro Project and growth of the IT/ITES, automobile and pharmaceuticals sectors have
strengthened the economic and business sector, resulting in increased business travel to this
region. Due to the NCR's booming industrial and trade activity and proximity to the northern
hills, the region not only witnesses a lot of transitional tourists, but also plays host to a large
number of foreign and domestic business and leisure travellers. Factors such as the NCR's
central location, state-of-the-art infrastructure and well established trade and commerce
sector differentiate it from India's other metro cities. A major proportion of hotel business
generated in the NCR comprises international travellers, and about 70% of the total foreign
travellers to the NCR are business travellers.
Over the last few years, tourism in the NCR has grown to include heritage tourism, adventure
tourism, medical tourism and ecotourism.

Various segments, including domestic and

international corporate travellers, bureaucrats, sportsmen and transitional tourists form the
main clientele for the hospitality sector. New Delhi, as the nation's capital, regularly hosts
various political meets that augment the demand for hotel rooms in the region. Healthy
industrial growth and better infrastructure, both of which are conducive for trade events, have
boosted business traffic and demand for business hotels.
The NCR has witnessed a considerable increase in the year-on-year number of foreign and
domestic travellers. The compounded annual growth rate for foreign and domestic travellers
to the NCR region has been 12.7% and 22% respectively since FY 2002-03. Demand
pressure in the region has been encouraging developers to venture into new hotel projects.

Currently, the total room inventory across the NCR is approximately 11,000 rooms. Out of
the existing inventory, 63% of the rooms are in the 5-star Deluxe and 5-star category, 15%
are in the 4-star category and 22% in the budget segment.
PAGE:- 81
The growth in the number of foreign and domestic business travellers to the region is
reflected in the growth in room supply in the 4-star category. Two hotels in this category,
namely The Ramada Plaza, with a room inventory of 445 rooms, and The IBIS Hotel, with a
room inventory of 217 rooms, became operational during 2008. During the early part of
2009, the Claridges Group is expected to introduce an additional supply of 240 rooms in the
4-star category in SurajKund.
Between FY 2004-05 and FY 2006-07, the average occupancy across the NCR hotels grew
from 70% to 79%. In FY 2007-08, the occupancy rate was approximately 77%, which is
expected to further decline by the end of FY 2008-09. This marginal decline in occupancy
levels can be attributed to the global economic slowdown, political unrest in Nepal & Tibet,
the Gujjar movement in the NCR and bomb blasts in various parts of the country.
ARR in the region has gradually increased from Rs. 5,000 in FY 2004-05 to Rs. 7,500 in FY
2006-07. As on the third quarter of 2008, the ARR was is approximately Rs. 0,500. Room
revenue contributes almost 60% of the total revenue generated in the hotels while the
Meetings, Incentives, Exhibitions and Conferences (MICE) segment accounts for
approximately 15% of total revenue.
The revenue share of the Food & Beverage (F&B) sector is limited due to competition from
local restaurants and food chains. Remunerations and salaries represent the major operational
cost for NCR hotels.
5-star Deluxe and 5-star Hotels
With an inventory of close to 7,000 rooms as of FY 2007-08, 5-star Deluxe and 5-star hotels
comprise the largest share of total room inventory in the NCR. The amalgamation of high
class luxury rooms and business conferencing facilities and services enables this segment to
cater to a mix of leisure and high-end business travellers to the region.

PAGE:- 82

The niche clientele of this segment has helped it achieve a steady ARR growth rate of
approximately 15-20% since FY 2005-06. The ARR value in FY 2007-08 for the segment
was approximately Rs.10,000. In the next few months, the growth in ARR values are
expected to witness a slowdown, primarily owing to the security threat in the country and the
global recession, which has forced several domestic and international companies to scale
down travel and outstation stay of employees. The occupancy across the segment for the year
FY 2007-08 was around 75%.
In 2010, the NCR will host the Commonwealth Games, which will attract a lot of sports
tourism from across the globe. Foreseeing increased demand for room nights, a number of
hoteliers are initiating new projects in the region. By the end of 2010, the NCR is expected to
witness an additional supply of close to 3,500 rooms in the 5-star Deluxe and 5-star category.
Brands like The Crowne Plaza, Radisson, Indus Group and the Taj Group will all contribute
towards the total supply. It remains to be seen whether this surge in supply is sustainable once
the Commonwealth Games are over.

4-star Hotels
The NCR being the centre for a lot of commercial business activities, political meets and
healthcare development, the number of business travellers to the region is high. With about
65-70% of corporate clientele, the 4-star segment witnessed an average occupancy of 85% in
FY 2007-08. The IT /ITES sector and the automobile and pharmaceutical industries have
been the major demand drivers in this segment. The ARR during the FY 2007-08 was Rs.
7,600.
The current room inventory for 4-star hotels in the NCR is 1,623 rooms. By the end of 2010,
the segment is expected to see an additional room supply of 1,800 rooms. Micro-markets in

NCR like Gurgaon, Noida and Greater Noida will contribute towards a major share of this
additional supply.

PAGE:- 83
Budget Hotels
Corporate travellers seeking accommodation for longer durations prefer budget
accommodation as compared to high-end 5 and 4-star properties. With basic accommodation
services like air-conditioned rooms, in-house restaurants, laundry facilities and gymnasiums,
budget hotels in the NCR market have achieved a high average occupancy of 82% during the
year FY 2007-08, while the ARR for budget hotels was Rs. 3,000.
However, the global economic slowdown is having an impact on the business of these budget
hotels as well. With corporate houses cutting costs and reducing business travel and travel
durations, occupancy during the year FY 2008-09 is expected to dip marginally.
Outlook
The hospitality industry in the NCR has been dented by the global economic recession and
security threat, highlighted by a number of terrorist attacks across the country this year.
This has led to a dip in the occupancy rates in the NCR hotels in the third quarter of FY 2008
- 09. Hotels across the NCR have witnessed cancellations of about 15-20% from the foreign
international travellers after the Mumbai blasts. The decline in occupancy is forecasted to
continue for about another month, especially as foreign government agencies have declared
India to be unsafe for travel. The revival of the industry post the Mumbai attacks is expected
to take up at the beginning of 2009. Hotel authorities in the NCR have taken up various
measures to maintain high occupancy levels during this time of distress. Hotel security is
being beefed up across the board, and certain hotels are tying up with travel authorities to
maintain continuity of business. Rooms are available at a discounted price, which is expected
to lower the ARR for the month of December 2008 by about 20%.
In the long run, adequate infrastructure development will be in place to ensure a healthy
hospitality industry within the NCR.

PAGE:- 84
Encouraging government policies such as the entitlement to duty-free imports of hospitality
products and services have facilitated considerable capital inflow from the global market.
Recent transactions of hotel plots at prices which are thrice the reserved level show the
growing interest of investors in the region.
As part of the 2008 Union Budget, the Finance Minister announced the extension of the fiveyear tax holiday for 2-star, 3-star and 4-star hotels and convention centres specifically
catering to the Commonwealth Games in Delhi, Gurgaon, Ghaziabad and Faridabad. Due to
this, the local and international developers have initiated more hotel projects in the region. To
benefit from this tax holiday, projects are required to be constructed and operational anytime
between 1st April, 2008 to 31st March, 2013.
Due to high land cost and with a view to mitigate risk, the concept of hotels in malls is also
flourishing. Budget hotels in malls which offer shopping experience with entertainment
facilities under one roof are eliciting attention from various hospitality players. 'The Leela'
Hotel in the Ambi Mall and 'Clarks Inn' in the Pacific Mall are examples of such projects.
Developers like Unitech and DLF are entering into joint ventures with international brands to
set up hotels in the region. The Hilton Garden Inn in Rohini and Saket is a DLF and Hilton
joint venture and The Regent Hotel in Greater Noida is an upcoming joint venture between
Unitech and Carlson Group.
The entry of international players is expected to strengthen the NCR market. In order to
promote tourism and hospitality infrastructure development in India, a number of PPP
initiatives are being undertaken as joint venture projects with leading developers like
Unitech, DLF and Parsvnath. Developments like high-speed express highways, information
technology platforms and energy and power projects are a few areas where PPP ties are being
explored. Such initiatives are expected to boost economic growth, and more specifically
hospitality sector growth, in the NCR over the coming years.

PAGE:- 85
Future Prospect of Proposed Hotel in Gurgaon
The proposed hotel of SHPL will be operational in FY 2009 and catch the Commonwealth
Games 2010 in New Delhi. By acquisition of Gurgaon Hotel of UDHPL, SHPL will get an
entry into the hospitality industry without the construction risk associated with it.

Future Prospect of Proposed Hotel in Gurgaon

The proposed hotel of SHPL will be operational in FY 2009 and catch the Commonwealth
Games 2010 in New Delhi. By acquisition of Gurgaon Hotel of UDHPL, SHPL will get an
entry into the hospitality industry without the construction risk associated with it.

Comments

on:

Management/Quality

of

Management

(Including

corporate

Governance)/Succession Planning/Production:
Marketing:
The Marriott Courtyard is an international hotel operator who will operate the hotel and will
be responsible for the day to day operations of the hotel.
They have an international and national clientele which will be tapped by SHPL to attract
guests for the Gurgaon Hotel
Comments on all major technical aspects like locational advantage, Technology/
manufacturing process, power, manpower, utilities, transportation, etc.

PAGE:- 86
SELLER COMPANY DETAILS
Background
Unitech Developers & Hotels Private Limited is developing the Courtyard Marriott at
Gurgaon, Haryana. SHPL proposes to acquire the hotel from UDHPL.
Promoters
UDHPL is promoted by M/s Unitech Limited (UL) a company listed on the Bombay Stock
Exchange & National Stock Exchange.
Location
The hotel is proposed to be set up on a commercial plot admeasuring 8053 sq. mt. (1.99
acres) at Sushant Lok-I, Sector-27, Gurgaon. The hotel site is located in one of the prime
commercial/residential areas of Gurgaon and has various infrastructure facilities. The site is
easily accessible from international and domestic airports of Delhi and main commercial
centres of NCR Delhi and is suitable for hotel development. The proposed hotel shall be
marketed and managed under Marriott Courtyard brand by Marriott International, a reputed
international hotel chain, for a period of 25 years.
The proposed hotel has the following location advantages:

The site is located in the Gurgaon just 3 KM from CBD, giving it an advantage of
IT and ITES clientele.

The site is well connected by the main road

All the advantages allocated to Gurgaon City.

The hotel is located at a distance of just 9 KM from Delhi Airport.

PAGE:- 87
Technical Collaborator
The proposed hotel will be managed & operated by Marriott International with a
management Agreement for a period of 25 years. The following agreements are entered with
Marriott by UDHPL, which will be transferred to the company.
1. International Marketing Program Participation Agreement
2. License Royalty Agreement
3. Operating Agreement
4. Technical Services Agreement
5. Training Computer Systems Agreement
Brief Profile
Marriott International, Inc., is a leading lodging company . Its heritage can be traced to a
root beer stand opened in Washington, D.C., in 1927 by J. Willard and Alice S. Marriott.
Today, Marriott International has about 3,100 lodging properties located in the United
States and 67 other countries.

Agreements with Marriott

Technical Services Agreement
Technical Services Agreement between UDHPL & Marriott International Design &
Construction Services (MIDCS) dated as on December 2, 2005.
1. MIDCS shall provide technical advisory services and limited design services to
UDHPL. The project services shall be architectural and interior design, MEP systems,
trade equipment specifications and layouts, life safety requirements, audio / video
systems, telecommunication systems, security systems and project systems.

2. The services shall be provided by MIDCS at a lump sum fee of US$ 150,000/- +
taxes.
PAGE:- 88
Operating Agreement
Operating Agreement between UDHPL & Marriott Hotels India Private Limited (MHIPL)
dated as on December 2, 2005.
1. The term of the agreement is for 25 years. After that there is a provision for automatic
renewal for another 10 years.
2. The operating fee is 0.25% of Gross Revenue.
3. If MHIPL consents to the Sale of Hotel, then MHIPL may require that the purchaser
or tenant enter into new agreement with MHIPL.
License & Royalty Agreement
License & Royalty Agreement between UDHPL & Marriott International Licensing
Company (MILC) dated as on December 2, 2005.
1. MILC grants to UDHPL a non-exclusive and non-transferable right and license within
Gurgaon, Haryana, India to use the Courtyard Trademark for hotel services.
2. Base Royalty shall mean an amount payable to MILC as a deduction from Gross
Revenue equal to 1.75% of Gross Revenues.
3. Incentive Royalty shall mean an amount payable to MILC as follows 6% of the
operating profit for first 36 months & 8% thereafter

International Marketing Program Participation Agreement

International Marketing Program Participation Agreement between UDHPL & International
Hotel Licensing Company (IHLC) dated as on December 2, 2005.
1. IHLC shall provide to the hotel the international advertising, marketing promotion
and sales program.
2. UDHPL contribution to the costs and expenses associated with the program shall be
1.5% of the Gross Revenue.

PAGE:- 89
Training and Computer Systems Agreement
Training and Computer Systems Agreement between UDHPL & Renaissance Services BV
(RSBV) dated as on December 2, 2005.
1. RSBV shall provide certain core training programs for the benefit of management
level employees.

Utilities
Power
The maximum electrical load required at Marriott Courtyard is 1720 KVA. Installed
Transformer Capacity is 2 X1000 KVA (2000 KVA). 3 Gen Sets of 1000 KVA each will be
utilized in which one would be on standby.

Water
The Total water requirement is 390 KLPD for the hotel. 160 KLPD of water would be drawn
from a well. 80 KLPD of treated water would be obtained from the STP to be used for
Gardening and Cooling Towers. 150 KLPD of additional water would be supplied by the
Municipal Corporation

PAGE:- 90

ACQUISITION DETAILS
Acquisition Type
SHPL is an SPV to acquire the Gurgaon Hotel of UDHPL through an asset sale agreement.

ASSUMPTION OF THE FINANCIAL PROJECTIONS

Number of Rooms
The number of rooms has been assumed as follows -

Description

No.

Standard Rooms Single Occupancy

110

Standard Rooms Double Occupancy

80

Executive Suites

Deluxe Suites

Total No. of Rooms

199

Room Rent
The following room rent has been assumed in the hotel

Type of Room

Room Rent in FY 2009 - 10 (in Rs.)

Standard Rooms Single Occupancy

8,000.00

Standard Rooms Double Occupancy

9,000.00

Executive Suites

8,500.00

Deluxe Suites

10,000.00

Average Room Rent (ARR)

8,469.85

Revenue per Available Room (RevPAR)

5,505.40

PAGE:- 90
The room rates given above are assumed to be the applicable rates for the FY 2009 - 10.
Thereafter the rates have been increased by 7% every year. The current ARR in some of the
other 4 star hotels in NCR is Rs 8,000 9,000. The ARR can thus be considered reasonable.
Occupancy in %
The following occupancy rate has been assumed in the hotel

Type of Room
Standard

March 2010 March 2011 March 2012 March 2013 - 19

Rooms

Single 65%

75%

80%

80%

Rooms

Double 65%

75%

80%

80%

Executive Suites

65%

75%

80%

80%

Deluxe Suites

65%

75%

80%

80%

Average Occupancy

65%

75%

80%

80%

Occupancy
Standard
Occupancy

FY 2010 - 11 is the first year of full operations for the hotel. The occupancy rates have been
gradually increased and stabilized.

F&B & Banquet Revenue

The F & B Revenue includes revenue from the various restaurants, coffee shops, bar, lounge,
entertainment area and room service. Banquet Revenue includes revenue from banquet halls.
The F&B revenue has been assumed as 50% of Room Revenue & Banquet Revenue has been
assumed as 20% of Room Revenue.
Other Revenue
The other revenue (minor operations department) has been assumed as 10% of Room
Revenue.
PAGE:- 91
Expenses
The expenses in the hotel have been assumed as follows

Expenses
F&B Cost

32%

of F&B Revenue

Room Consumables

3%

of Room Revenue

Other Expenses

3%

of total Hotel Revenue

House Up Keep & services

3%

of total Hotel Revenue

Salaries & Wages

3.71

Rs. in Crs for first year (inc of 5% every

year)

Expenses
Power, Fuel & Water

9%

of Room Revenue

Repairs & Maintenance

1.50%

of Gross Fixed Assets

Advt & Sales Promotion Expenses

3%

of total Hotel Revenue

Admn. Overheads

4.00%

of total Hotel Income

Operating Fee

0.25%

of total Hotel Revenue

Management Fee

1.75%

of total Hotel Revenue

Incentive Fee

6%

of Gross Operating Profit in first 3 years

& 8% thereafter

International Marketing Fee

1.5%

of total Hotel Revenue

Interest Rate
For Term Loan agreed bank rate has been assumed as 13% & for working capital loan the
interest rate of 13.25% has been assumed.
Income Tax
The income tax rate for the Hotel located in National Capital Region has been taken as per
Section 80ID of the IT Act.

PAGE:- 92

Chapter 6:- NPA NORMS UNDER PNB

BACKGROUND:
Prudential norms for NPA were introduced by RBI wef 1/4/92,and norms for NPA
classification the delinquency period of were 4 quarters (non-recovery of interest / instalment
up to 4 quarters) and the same has been reduced to 3 quarters in 1994, 2 quarters in 1995 and
90 days w.e.f. 31.03.2004.

INCOME RECOGNITION:

Sr.
No.
1

Classification of account as non-performing asset is based on record of recovery.

Availability of security or net worth of borrower/guarantor is not to be taken into
account.
Interest on advances against term deposits, NSCs, IVPs, KVPs and Life policies may
be taken to income account on the due date, provided adequate margin is available in
the account.
Fees/Commission earned by banks as a result of reschedule of outstanding debts,
should be recognized on accrual basis over the period of time covered by re schedule.
On an account turning NPA, the interest already charged and not collected is to be
reversed by debiting Profit and Loss account, and further application of interest is to
be stopped. However, banks may continue to record such accrued interest in a
Memorandum account in their books
Category of account

Criteria for classification of account as NPA

Term Loan

if interest and/or instalment of principal remain overdue

for a period of more than 90 days .

Sr.
No.
2

3
4

5
6

7
8

Category of account
Cash
Credits
Overdrafts

Criteria for classification of account as NPA

and i) if the account remains out of order for a period of more

than 90 days
Conditions for treating the account as out of order:
(a) The outstanding balance remains continuously in excess
of the sanctioned limit/drawing power.
(b) Though the outstanding balance is less than the
sanctioned limit/drawing power but there are no credits
continuously for 90 days as on the date of balance sheet or
credits are not enough to cover the interest debited during
the same period
(ii) The outstanding in the account based on drawing power
calculated from stock statements older than three
months, would be deemed as irregular.
A working capital borrowable account will become NPA if
such irregular drawings are permitted in the account for a
continuous period of 90 days even though the unit may be
working or the borrowers financial position is satisfactory.
(iii) An account where the regular/ad-hoc credit limits have
not been reviewed/renewed within 180 days from the due
date/date of regular/ad-hoc sanction, will be treated as NPA.
Bills Purchased and if the bill remains overdue for a period of more than 90 days
Discounted
Direct
Agricultural the instalment of principal or interest thereon remains
Advances
overdue for two Crop seasons for short duration crops(or
one crop season for long duration crop).
The crop season for each crop, which means the period
up to harvesting of the crops raised, would be as
determined by the State Level Bankers Committee in each
State.
Securitization
amount of liquidity facility remains outstanding for more
transaction
than 90 days
Derivative transactions the overdue receivables representing positive mark-tomarket value of a derivative contract, if these remain unpaid
for a period of 90 days from the specified due date for
payment.
Other Accounts
if any amount to be received in respect of that facility
remains overdue for a period of more than 90 days
Accounts where a Where the account indicates inherent weakness on the basis
solitary or a few of the data available, the account should be deemed as a
credits are recorded NPA. In other genuine cases, the banks must furnish
before the balance satisfactory evidence to the Statutory Auditors/Inspecting
sheet date
Officers about the manner of regularisation of the account to
eliminate doubts on their performing status.
Overdue
Amount due to the bank under any credit facility is overdue,
if it is not paid on the due date fixed by the bank

PAGE:- 94

PROVISIONS FOR NPA ACCOUNTS

SR.
No.
1

Category
of CRITERIA
NPA
Sub- Standard if a/c is NPA for less
than or equal to 12
months
(wef
31/3/05).

Unsecured
exposure

Doubtful

Loss asset

RATE OF PROVISION

A general provision @ of 10% on total

outstanding be made without making any
allowance for DICGC/ECGC/CGTMSE
guarantee cover and securities available
for advances secured by way of tangible
Unsecured exposure assets.
is defined as an
exposure where the
realisable value of For unsecured advances provision will be
the security, as 20% of the outstanding.
assessed by the
bank/approved
valuers/Reserve
Banks inspecting
officers, is not more
than 10 percent, abinitio,
of
the
outstanding
exposure.
if a/c is NPA for a (i) Unsecured Portion: Provision @ 100%
period exceeding of unsecured portion,
12 months (wef (ii) Secured Portion: On tangible security31/3/05) or when
Up to one year doubtful-20 %
realizable value of
One to three year doubtful-30%
security is less than
More than 3 year doubtful- 100%
50%
of
value
assessed at the time
Provision is to be made on outstanding
of last inspection.
net of DI.
If so identified by
bank/auditor
or
realizable value of
security assessed by
bank/auditor is less
than 10 % of
outstanding in the
a/c.

100% of Net Outstanding.

PAGE:- 95

Chapter 7:- Conclusions and Recommendations:7.1 Conclusion:Credit appraisal is a process of appraising the credit worthiness of loan applicants. The fund
of depositors i.e. general public are mobilised by means of such advances / investments. Thus
it is extremely important for lender bank to assess the risk associated with credit, thereby
ensure the security for fund deposited by depositors. Therefore my analyses regarding credit
appraisal procedure of Punjab National Bank are as follows:

In case of retail lending bank strictly follow its circular and fulfils all requirement of
necessary documents required for different types of loan so that bank do not suffer
any types of loss.

Bank is very much particular about CIBIL report of borrowers in case of each type of
lending.

Bank lending process in case of retail loan is very much fast after compiling with all
the criteria of bank.

In case of project financing bank follow lengthy norms to check the feasibility of the
project such as:I. Firstly personal appraisal of promoter is done by the bank to ensure that
promoters are experienced in the line of business and capable to implement
and run the project efficiently.
AI. Secondly detail study about the technical aspect is done to find the
technical soundness of project such as proper scrutiny of financial report
is done, valuation of property by government approved valuer is done and
view regarding each and every area of project is done under technical
analysis.

PAGE:- 96
BI. A detail study relating financial viability of project is done by detail study
of cash flow, fund flow statements and by calculating import ratio which
is very much necessary for project appraisal such as DSCR, DER
etc. the main purpose of financial appraisal is insure that project will
ensure sufficient surplus to repay the instalment and interest.
IV. Risk analysis is done by bank to determine the risk associated with the
project. This is mainly done by sensitivity analysis and by PNB credit
rating or scoring. With sensitive analysis feasibility of project is
determined under worsened condition. Credit rating or PNB scoring is
done of various parameters such as personal, management, financial etc ,
thereby determine credit worthiness of customer.
V. It is on basis of credit risk level, a collateral security to be given by
borrower is determined.
This shows that Punjab National Bank has sound credit appraisal system.

7.2 Recommendations:

Hassel Free Paper Work

Borrowers generally get confused when they see bundles of papers in a simple
credit taking process and make them avoid the process. Bank should try to make
the credit payment as easier as possible and so that it is easier for the common
people to understand the terms and less of paper work for the borrower.

The loan processing time should be reduced.

The bank should completely eliminate the file system and go computerization at every
stage as this removes paper work and creates transparency in the system.

PAGE:- 97

Care must be taken to ensure that the judgment in appraisal process does not depend
on one single person and a single factor.

Revising the factors on which appraisal is done to face the ever increasing violability.
o Credit Payment Below BPLR
o The Bank makes the credit payment below BPLR (Basic Prime Lending Rate)
to some where it finds that the borrower is in urgent need and that he or she
has been loyal to the Bank in the past. The basic criteria of the Bank states that
the borrower should have to have a good past record and that the borrower
should fulfil all the criteria of the credit process.

The biggest loop hole in the bank is its recruitment process of its employees. The
Bank has large number of older age employees who are slower in their work speed.
This makes the work slower when it comes to services of the employees. The
employees are non-working lot and usually a lot of pending work is kept. This makes
the working of the bank cumbersome.

The bank has lost its large number of customers due to strict norms followed by the
bank in giving credit to its customers. The reason being borrowers try to escape such
stringent terms and conditions. This is the prime reason why the bank frequently loses
its customers as they find it appropriate to move to some other bank following
comparatively easier norms, for example private banks. The bank in this case should
make its policy a little easier for its customers to make them loyal customers of the
Bank.

PAGE:- 98

7.3 REFRENCES:I.

MUKHERJEE DD.,2006.Credit Appraisal Risk Analysis & Decision

Making,New Delhi: Kumariya Publishing House.

II.

Martin J. P. and Cendrowski H., 2008. Financial Statement Fraud and the
Lending,Vol -1.,New Delhi.

III.

Bidani S.N. and Sahay B. 1988, How Bank Credit is Administered:

Supervision and Follow-up,Delhi, Vision books Co. Ltd.

IV.

Earlier studies done on Credit Division and PNB Loan book

Websites:

www.google.co.in

The site of Punjab National Bank.

http://www.pnbindia.in/

http://www.rbi.org.in

Samuel, N.P.,2009.Survival Of An Org.[Online]NewYORK:Statesman

Available from: http://en.wikianswers.org/wiki/Project_appraisal.

http://en.wikipedia.org/wiki/Punjab_National_Bank

http://en.wikipedia.org/wiki/Working_capital

www.investopedia.com
PAGE:- 99

PNB journals (for internal circulation only):

Gist of operative circulars on loans and advances.
Documents and reference material of PNB.
Internal files of PNB.

PAGE:- 100