Beruflich Dokumente
Kultur Dokumente
OF INDIA
EXECUTIVE SUMMARY
This project was undertaken at the Union Bank of India (INDUSTRIAL FINANCE
BRANCH) Office Delhi, at the Credit Department. Financial requirements for Project
Finance and Working Capital purposes are taken care of at the Credit Department.
Companies that intend to seek credit facilities approach the bank. Primarily, credit is
required for following purposes:
a.
knowledge-base is required
CHAPTER 1
INTRODUCTION
Introduction
contains
the
background,
achievements,
objectives,
developments & financial profile, and SWOT analysis of the Union Bank of India.
Chapter 2- Theoretical framework of the study contains concepts of Working Capital
and criteria for credit rating.
Chapter 3- Research methodology and design contains type of the data collected,
design adopted, scope, objectives and limitations of the study.
Chapter 4- Data analysis & Interpretation contains the analysis and interpretation of
the financial balance sheets and its financial indicators to evaluate credit rating.
Chapter 5- Major findings & Discussions contains examination of the working capital
and ratios interpreted.
In March 2006, the Reserve Bank of India allowed Warburg Pincus to increase its
stake in Kotak Mahindra Bank (a private sector bank) to 10%. This is the first time an
investor has been allowed to hold more than 5% in a private sector bank since the RBI
announced norms in 2005 that any stake exceeding 5% in the private sector banks
would need
to
be
vetted by
them.
Currently, India has 88 scheduled commercial banks (SCBs) - 28 public sector banks
(that is with the Government of India holding a stake), 29 private banks (these do not
have government stake; they may be publicly listed and traded on stock exchanges)
and 31 foreign banks. They have a combined network of over 53,000 branches and
17,000 ATMs. According to a report by ICRA Limited, a rating agency, the public
sector banks hold over 75 percent of total assets of the banking industry, with the
private and foreign banks holding 18.2% and 6.5% respectively.
The policy makers, which comprise the Reserve Bank of India (RBI), Ministry of
Finance and related government and financial sector regulatory entities, have made
several notable efforts to improve regulation in the sector. The sector now compares
favorably with banking sectors in the region on metrics like growth, profitability and
non-performing assets (NPAs). Indian banks have compared favorably on growth,
asset quality and profitability with other regional banks over the last few years.
The banking index has grown at a compounded annual rate of over 51 per cent since
April 2001 as compared to a 27 per cent growth in the market index for the same
period. The interplay between policy and regulatory interventions and management
strategies will determine the performance of Indian banking over the next few years.
Management success will be determined on three fronts:
i.
ii.
iii.
ii.
Banks will no longer enjoy windfall treasury gains that the decade-long
secular decline in interest rates provided
iii.
With increased interest in India, competition from foreign banks will only
intensify
iv.
Given the demographic shifts resulting from changes in age profile and
household income, consumers will increasingly demand enhanced institutional
capabilities and service levels from banks
COMPANY PROFILE
Union Bank of India, a public sector bank was incorporated in 1919.After the
inauguration by father of the nation Mahatma Gandhi bank has travelled a long
successful journey of 88 yrs of banking. Union Bank of India is committed to
maintain its identity as a leading innovative commercial Bank, alive to the changing
needs of the society. Union Bank has offered vast and varied services to its clientele
taking care of their needs. Today, with its efficient customer service, consistent
profitability & growth, adoption of new technologies and value added services, Union
Bank truly lives up to the image of, GOOD PEOPLE TO BANK WITH.
The key business areas of the bank are retail banking, international banking, corporate
banking & treasury. As Retail banking is growing very fast in Indian banking industry
union bank of India is also showing strong growth in this sector. The bank provide
housing, retailing trade, automobile, consumer, education and other personal loans
and deposits services such as fixed, saving and demand deposits for the valuable
clients. The bank has increased foreign exchange turnover from 361.02 bn in 2004-05
to408.94 bn in 2006-07 with annual growth rate of 13.27%. The corporate banking
sector offers various loan and free based products and services to its small and
medium enterprises, agriculture sector.
To boost SME Segment the bank has set up separate SME cells .the total employee
strength of bank are 25,421.Union bank of India is targeting a 25% growth in its SME
portfolio. The bank SME portfolio in 2005-06 was 6,839 crore and its target in 200607 is 8,540 crore. Union bank of India has made an agreement with SIDBI to provide
loan to SMEs. The bank is converting 32 small scale industry branches to SME
branches. Union bank of India and SIDBI are also in the process of putting up
marketing teams in 15 centers for identifying and appraising SMEs units and lending
them. Union bank of India has a network of more than 2200 branches all over India.
The Bank came out with its Initial Public Offer (IPO) in August 20, 2002 and
government of India holds 55.4% of the bank followed by FII 19.9% & Indian public
hold14.8% of the bank.
At the end of September 2011 the Bank achieved total business level of Rs.3,42,856
crore (Rupees Three Lakh Forty two thousand Eight hundred fifty six crore)
The Bank has over the years earned the reputation of being a techno-savvy Bank and
is one of the front runners amongst public sector bank in the field of technology. It is
one of the pioneer public sector banks, which launched Core Banking Solution in
2002. Online Tele banking facility is available to all its Core Banking customers. The
multi facility versatile Internet Banking Solution provides extensive information in
addition to the on line transaction facility to both individuals and corporate banking
with the Core Banking branches of the Bank. In addition to regular banking facilities,
today customer can also avail variety of value added services like cash management
service, insurance, mutual funds, Demat from the Bank.
The Vision Statement
To become the bank of first choice in our chosen area by building beneficial and
lasting relationship with the customers through a process of continuous process.
The Mission Statement
A logical extension of the Vision Statement is the Mission of the Bank, which is to
gain market recognition in the chosen areas.
To build a sizeable market shares in each of the chosen areas of business through
effective strategies in terms of pricing, product packaging and promoting the
product in the market.
CHAPTER 2
THEORITICAL FRAMEWORK
ASSESSMENT OF FUNDS
I.
The objective of running any industry is earning profits. An industry will require
funds to acquire fixed assets like land and building, plant and machinery,
equipments, vehicles etc and also to run the business i.e. its day to day operations.
Working capital is defined, as the funds required for carrying the required levels of
current assets to enable the unit to carry on its operations at the expected levels
uninterruptedly. Thus working capital required (WCR) is dependent on
i.
The volume of activity (viz. level of operations i.e. Production and Sales)
ii.
The purpose of assessing the WC requirement of the industry is to determine how the
total requirements of funds will be met. The two sources for meeting these
requirements are the units long-term sources (like capital and long term borrowings)
and the short-term borrowings from banks. The long-term resources available to the
unit are called the liquid surplus or Net Working Capital (NWC).
It can be explained by visualizing the process of setting up of industry. The units
starts with a certain amount of capital, which will not normally be sufficient, even to
meet the cost of fixed assets. The unit, therefore, arranges for a long-term loan from a
financial institution or a bank towards a part of the cost of fixed assets. From these
two sources after meeting the cost of fixed assets some funds remain to be used for
working capital. This amount is the Net Working Capital or Liquid Surplus and will
be one of the sources of meeting the working capital requirements.
The remaining funds for working capital have to be raised from banks; banks
normally provide working capital finance by way of advantage against stocks and
sundry debtors. Banks, however, do not finance the full amount of funds required for
carrying inventories and receivables: and normally insist on the stake of the enterprise
at every stage, by way of margins.
Bank finance is normally restricted to the amount of funds locked up less a certain
percentage of margins. Margins are imposed with a view to have adequate stake of the
promoter in the business both to ensure his adequate interest in the business and to act
as a protection against any shocks that the business may sustain. The margins
stipulated will depend on various factors like salability, quality, durability, price
fluctuations in the market for the commodity etc. taking into account the total working
capital requirements as assessed earlier, the permissible limit, up to which the bank
finance cab be granted is arrived. While granting working capital advances to a unit, it
will be necessary to ensure that a reasonable proportion of the working capital is met
from the long-term sources viz. liquid surplus. Normally, liquid surplus or net
working capital be at least 25% of the working capital requirement (corresponding to
the benchmark current ratio of 1.33), though this may vary depending on the nature of
industry/ trade and business conditions.
Various methods for assessment of Working Capital are discussed in detail:
1. Operating cycle method:
Any manufacturing activity is characterized by a cycle of operations consisting of
purchase of raw materials for cash, converting them into finished goods and realizing
cash by sale of these finished goods. The time that lapses between cash outlay and
cash realization by sale of finished goods and realization of sundry debtors is known
as length of operating cycle. That is, the operating cycle consists of:
i.
Time taken to acquire raw materials and average period for which they
are in store.
ii.
iii.
iv.
Operating Cycle is also called cash-to-cash and indicates how cash is converted into
raw materials, stocks in process, finished goods, bills (receivables) and finally backs
to cash. Working capital is the total cash that is circulating in this cycle. Therefore,
working capital can be turned over or deployed after completing the cycle. Factors,
which influence working capital requirement, are Level of operating expenses and
Length of operating cycle.
Any reduction in either of the both will mean reduction in working capital
requirement or indicate an efficient working capital management.
It can thus be concluded that by improving that by improving the working capital
turnover ratio (i.e. by reducing the length of operating cycle) a better management
(utilization) of working capital results. It is obvious that any reduction in the length of
the operating cycle can be achieved only by better management only by better
management of one or more of the individual phases of the operating cycle period for
which raw materials are in store, conversion process time, period for which finished
goods are in store and collection period of receivables. Looking at whole problem
from another angle, we find that we can set up extremely clear guidelines for working
capital management viz. examining the length of each of the phases of the operating
cycle to assess the scope for reduction in one or more of these phases.
The length of the operating cycle is different from industry to industry and from one
firm to another within the same industry. For instance, the operating cycle of a
pharmaceutical unit would be quite different from one engaged in the manufacture of
machine tools. The operating cycle concept enables to assess working capital need of
each enterprise keeping in view the peculiarities of the industry it is engaged in and its
scale of operations. Operating cycle is an important management tool in decision
making.
FUND
RM
SIP
RECEIVABLES
FUND
Raw material: Any industrial unit has to necessarily stock a minimum quantum of
materials used in its production to ensure uninterrupted production. Factors, which
affect or influence the funds requirement for holding raw material, are:
i.
ii.
iii.
iv.
Imported or indigenous.
v.
vi.
vii.
viii.
ix.
x.
Stock in process: Barring a few exceptional types of industries, when the raw
material get converted into finished products within few hours, there is normally a
time lag or delay or period of processing only after which the raw materials get
converted into finished product. During this period of processing, the raw materials
get converted into finished goods and expenses are being incurred.
The period of processing may vary from a few hours to a number of months and unit
will be blocked working funds in the stock-in-process during this period. Such funds
blocked in SIP depend on:
i. The processing time
ii. Number of products handled at a time in the process
iii. Average quantities of each product, processed at each time (batch
quantity)
iv. The process technology
v. Number of shifts.
Finished goods: All products manufactured by an industry are not sold immediately.
It will be necessary to stock certain amount of goods pending sale. This stock depends
on:
i.
ii.
Supply terms
iii.
iv.
v.
Pre-dispatch inspection
vi.
Seasonality of goods
vii.
Variation in demand
viii.
ix.
Sundry debtors (receivables): Sales may be affected under three different methods:
i.Against advance payment
ii.Against cash
iii.On credit
iv.
A unit grants trade credit because it expects this investment to be profitable. It would
be in the form of sales expansion and fresh customers or it could be in the form of
retention of existing customers. The extent of credit given by the industry normally
depends upon:
i.
Trade practices
ii.
Market conditions
iii.
iv.
Seasonality
v.
Price advantage
Even in cases where no credit is extended to buyers, the transit time for the goods to
reach the buyer may take some time and till the cash is received back, the unit will
have to be cut out of funds. The period from the time of sale to receipt of funds will
have to be reckoned for the purpose of quantifying the funds blocked in sundry
debtors. Even though the amount of sundry debtors according to the units books will
be on the basis of Sale Price, the actual amount blocked will be only the cost of
production of the materials against which credit has been extended- the difference
being the units profit margin- (which the unit does not obviously have to spend). The
working capital requirement against Sundry Debtors will therefore be computed on
the basis of cost of production (whereas the permissible bank finance will be
computed on basis of sale value since profit margin varies from product to product
and buyer to buyer and cannot be uniformly segregated from the sale value).The
working capital requirement is expressed as so many months cost of production.
ii.
Raw materials
Months requirement
Rs. A
Stock-in-process
Rs. B
Finished Goods
Rs. C
Sundry Debtors
Rs. D
Expenses
One month(normally)
Rs. E
A+B+C+D+E
Credit received on
Purchases (months
Purchase value)
Rs. F
Advance payment
on order received
Rs. G
120
30
Margin : 5% of A (C)
24
In Rs lacs
Important clarifications:
i.
ii.
While the approach of extending need based credit will be kept in mind, the
financial strengths of the unit is also important, the later aspect assumes
greater significance so as to take care of quality of banks assets. The margin
requirement, as a general rule, should not be diluted.
The Tandon Committee was appointed to suggest a method for assessing the working
capital requirements and the quantum of bank finance. Since at that time, there was
scarcity of banks resources, the Committee was also asked to suggest norms for
carrying current assets in different industries so that bank finance was not drawn more
than the minimum required level. The Committee was also asked to devise an
information system that would provide, periodically, operational data, business
forecasts, production plan and resultant credit needs of units. Chore Committee,
which was appointed later, further refined the approach to working capital assessment.
The MPBF method is the fall out of the recommendations made by Tandon and Chore
Committee. Regarding approach to lending: the committee suggested three methods
for assessment of working capital requirements.
ii.
75% of total current assets (TCA) & Borrowers has to provide a minimum of 25% of
total current assets as the margin out of long term sources. This will give a minimum
current ratio of 1.33:1
iii.
Third Method of lending: Same as 2nd method, but excluding core current assets
from total assets and the core current assets is financed out of long term funds. The
term core current assets refers to the absolute minimum level of investment in
current assets, which is required at all times to carry out minimum level of business
activity. The current ratio is further improved i.e. 1.79: 1
Example:
Current Liabilities
Current assets
370 Total CA
Bank borrowings
Less: CL
Bank
Borrowing
Less: 25% of
150
CA
Total Current Liabilities
Working
Capital Gap
25% of WCG
from long
term sources
MPBF
90
Receivables
Less: core
92
95
CA
from
LT assets
Other
current
50
370
1.17: 1
Current ratio
10
(In Rs lacs)
Calculating
Less:
NWC
25%
150
from LTS
69
Less: CL
Bank
Borrowing
150
128 MPBF
Current ratio
20
370
CA goods 370
200 Total
Finished
55
165 MPBF
200
1.33: 1
Current ratio
56
1.79: 1
The above example shows that the contribution of margin by the borrower increases
when financing is shifted from First method to Second method which is known to be
stringent from borrower point of view (Third method was not accepted by RBI).
5. Projected Balance Sheet Method (PBS)
The PBS method of assessment will be applicable to all borrowers who are engaged in
manufacturing, services and trading activities who require fund based working capital
finance of Rs. 25 lacs and above. In case of SSI borrowers, who require working
capital credit limit up to Rs. 5 cr, the limit shall be computed on the basis of Nayak
Committee formula as well as that based on production and operating cycle of the unit
and the higher of the two may be sanctioned.. The assessment will be based on the
borrowers projected balance sheet, the funds flow planned for current/ next year and
examination of the profitability, financial parameters etc. unlike the MPBF method, it
will not be necessary in this method to fix or compute the working capital finance on
the basis of a stipulated minimum level of liquidity (Current Ratio). The working
capital requirement worked out is based on the following:
i.
ii.
Analysis of the Profit and Loss account, Balance Sheet, Funds flow etc.
for the past periods is done to examine the profitability, financial position,
and financial management etc of the business.
iii.
i.
ii.
iii.
iv.
v.
Term Loans are generally granted to finance capital expenditure, i.e. for acquisition of
land, building and plant and machinery, required for setting up a new industrial
undertaking or expansion/diversification of an existing one and also for acquisition of
movable fixed assets. Term Loans are also given for modernization, renovation, etc.
to improve the product quality or increase the productivity and profitability.
The basic difference between short-term facilities and term loans is that short-term
facilities are granted to meet the gap in the working capital and are intended to be
liquidated by realization of assets, whereas term loans are given for acquisition of
fixed assets and have to be liquidated from the surplus cash generated out of earnings.
They are not intended to be paid out of the sale of the fixed assets given as security
for the loan. This makes it necessary to adopt a different approach in examining the
application of the borrowers for term credits.For the assessment to Term Loan Techno
Economic Feasibility Study is done. The success of a feasibility study is based on the
careful identification and assessment of all of the important issues for business
success. A detailed Project Report is submitted by an entrepreneur, prepared by a
approved agency or a consultancy organization. Such report provides in-depth details
of the project requesting finance. It includes the technical aspects, Managerial Aspect,
the Market Condition and Projected performance of the company. It is necessary for
the appraising officer to cross check the information provided in the report for
determining the worthiness of the project. The feasibility study is a part of Credit
Appraisal process and the same is discussed in the later chapter.
BASEL I ACCORD
The 1988 Basel Accord primarily addressed banking in the sense of deposit taking
and lending. The main focus was Credit Risk. It described the strength of the Bank as
measured by the Capital employed. Accordingly it put a minimum level of capital
adequacy (Capital to Credit Risk Weighted Assets ratio) at 8%. Basel I allocated 4 risk
weights i.e. 0%, 20, 50% and 100% to different exposure types, based on the risk
perceived on the exposure types under the credit portfolio. Basel I provided a set
norm for capital allocation which helped many banks to allocate capital to counter the
risks faced by them.
CRAR
Capital
Tier I
Capital
CAPITAL
Tier II
Capital
Instruments
Basel I introduced the concept of Risk Weighted Assets (RWA). All the assets of a
bank (advances, investments, fixed assets etc.) carry certain amount of risk. In
proportion to the quantum of this risk, bank must maintain capital. Quantification of
risk is done in percentage (0%, 20%, 50% etc.). Exposure when multiplied with these
percentages gives risk based value of assets. These assets are also called Risk
Weighted Assets (RWA).
BASEL II ACCORD
Banking has changed dramatically since the Basel I document of 1988. Advances in
risk management and the increasing complexity of financial activities / instruments
prompted international supervisors to review the appropriateness of regulatory capital
standards under Basel I. To meet this requirement, the Basel I accord was amended
and refined which came out as the Basel II document. The Basel II document is
structured into three parts. Each part is called as a pillar. Thus these three parts
constitute three pillars of Basel II.
PILLA
RI
This pillar is compatible with the credit risk, market risk and
operational risk. The regulatory capital will be focused on these
three risks
This pillar gives the bank responsibility to exercise the best ways
PILLA
R II
PILLA
R III
DIFFERENCE BETWEEN
BASEL I
BASEL II
CREDIT APPRAISAL
Effectiveness of Credit Management in the bank is highlighted by the quality of its
loan portfolio. Every Bank is striving hard to ensure that its credit portfolio is healthy
and that Non Performing Assets are kept at lowest possible level, as both of these
factors have direct impact on its profitability. In the present scenario efficient project
appraisal has assumed a great importance as it can check and prevent induction of
weak accounts to our loan portfolio. All possible steps need to be taken to strengthen
pre sanction appraisal as always Prevention is better than Cure. With the opening up
of the economy rapid changes are taking place in the technology and financial sector
exposing banks to greater risks, which can be broadly classified as under:
Industry
Risks
Business
Risks
Managemen
t Risks
Financial
Risks
In light of the foregoing risks, the banks appraisal methodology should keep pace with
ever changing economic environment. The appraisal system aims to determine the
credit needs/requirements of the borrower taking into account the financial resources
of the client. The end objective of the appraisal system is to ensure that there is no
under - financing or over - financing. Following are the aspects, which need to be
scrutinized and analyzed while appraising:
MARKET ANALYSIS
(Demand & Potential)
The market demand and potential is to be examined for each product item and its
variants/substitutes by taking into account the selling price of the products to be
marketed vis-a-vis prices of the competing products/substitutes, discount structure,
arrangement made for after sale service, competitors' status and their level of
operation with regard to production and products and distribution channels being used
etc. Critical analysis is required regarding size of the market for the product(s) both
local and export, based on the present and expected future demand in relation to
supply position of similar products and availability of the other substitutes as also
consumer preferences, practices, attitudes, requirements etc. Further, the buy-back
arrangements under the foreign collaboration, if any, and influence of Government
policies also needs to be considered for projecting the demand. Competition from
imported goods, Government Import Policy and Import duty structure also need to be
evaluated.
TECHNICAL ANALYSIS
In a dynamic market, the product, its variants and the product-mix proposed to be
manufactured in terms of its quality, quantity, value, application and current
taste/trend requires thorough investigation.
FINANCIAL ANALYSIS
The aspects which need to be analyzed under this head should include cost of project,
means of financing, cost of production, break-even analysis, financial statements as
also profitability/funds flow projections, financial ratios, sensitivity analysis which
are discussed as under:
Cost of Project & Means of Financing
a. The major cost components of any project are 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. It also involves consultancy and
know-how expenses which are payable to foreign collaborators or consultants
who are imparting the technical know-how. Recurring annual royalty payment is
not reflected under this head but is accounted for under the profitability
statements. Further, preliminary expenses, such as, cost of incorporation of the
Company, its registration, preparation of feasibility report, market surveys, preoperative expenses like salary, travelling, start up expenses, mortgage expenses
incurred before commencement of commercial production also form part of cost
of project. Also included in it are capital issue expenses which can be in the form
of brokerage, commission, advertisement, printing, stationery etc.
Finally,
provisions for contingencies to meet any unforeseen expenses, such as, price
escalation or any other expense which have been inadvertently omitted like
margin for working capital requirements required to complete the production
cycle, interest during construction period, etc. are also part of capital cost of
project. It is to be ensured while appraising the project that cost and various
estimates given are realistic and there is no under/over estimation.
b. Besides Banks loan, the project cost is normally financed by bringing capital by
the promoters and shareholders in the form of equity, debentures, unsecured long
term loans and deposits raised from friends and relatives which are not repayable
till repayment of Bank's loan. Resources are raised for financing project by
raising term loans from Institutions/Banks which are repayable over a period of
time, deferred term credits secured from suppliers of machinery which are
repayable in installments over a period of time. The above is an illustrative list,
as the promoters have now started raising funds through Euro-issues, Foreign
Currency loans, premium on capital issues, etc. which are sometimes
comparatively cheap means of finance.
promoter to contribute the same. It should be ensured that at any point of time,
the promoters contribution should not be less than the proportionate share.
Profitability Statement
The profitability statement which is also known as `Income and Expenditure
Statement' 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. Thereafter, all
other expenses like salaries, office expenses, packing, selling/distribution, interest,
depreciation and any other overhead expenses and taxes are taken into account to
arrive at the figure of net profit. The projections of profit/loss are prepared for a
period covering the repayment of term loans.
scrutinizing all the items of cost, and examining the assumptions, if any, to ensure that
these are realistic and achievable. There should not be any optimism or pessimism in
working out profitability projections since even a little change in the product-mix
from non-remunerative to remunerative or vice-versa can distort the picture. While
preparing profitability projections, the past trends of performance in an industry and
other environmental factors influencing the cost and revenue items should also be
considered objectively.
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.
Break-Even Analysis
Analysis of break-even point of a business enterprise would help in knowing the level
of output and sales at which the business enterprise just breaks even i.e. there is
neither profit nor loss. A business earns profit if it operates at a level higher than the
break-even level or break-even point.
level, the business would incur loss. The break-even point in an algebraic equation
can be put as under:
Break-even point
(Volume or Units)
Break-even point
Total Fixed Cost / (Sales price per unit - Variable Cost per
unit)
(Sales in rupees)
The fixed costs include all those costs which tend to remain the same up to a certain
level of production while variable costs are those costs which tend to change in
proportion with the volume of production. As regards unit sales price, it is generally
the same for all levels of output.
The break-even analysis can help in making vital decisions relating to fixation of
selling price make or buy decision, maximizing production of the item giving higher
contribution etc. Further, the break-even analysis can help in understanding the impact
of important cost factors, such as, power, raw material, labor, etc. and optimizing
product-mix to improve project profitability.
Fund-Flow Statement
A fund-flow statement is often described as a Statement of Movement of Funds or
where got: where gone statement. It is derived by comparing the successive balance
sheets on two specified dates and finding out the net changes in the various items
appearing in the balance sheets.
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. A projected Fund Flow Statement helps in
answering the under mentioned points.
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. The financial ratios which are considered important are discussed as under:
Ratio
Formula
Remarks
Equity
capital
intensive
In financing
projects
like
Debt + Depreciation +
Service
Coverage
Taxes) + Annual
2 Debt-
Ratio
Intangible Assets)
Total outside
Liabilities (Total
versa
Operating Profit
Profit4 Sales
(Before Taxes
excluding Income
Ratio
5 Sales-
Tangible
Assets
Ratio
However,
Current Assets
Current
Ratio
Current Liabilities
Sales
Output
7 Investment
Ratio
taken into consideration for arriving at the profitability projections is the `MOST
LIKELY VALUE'.
Feasible
Determining of Interest Rate and Preparation
of Proposal
Preparing Credit
Report / Feasibility Report and Risk Rat
Not feasible
Submission of Proposal to designated Authority
(Circle office)
Submission
of Proposal to designated Authority
Queries
Re-verification and analysis of the Proposal
Meeting with the client to clarify the queries
No Queries
Sanctionby
ofthe
Proposal
Acknowledgement of Sanction Terms & Condition
client on various Terms & Conditions
Procedures at Branch
Office Level
All loan facilities considered only after obtaining loan application from the
borrower and compilation of Confidential Report on them and the guarantor. The
borrowers should have the desired background, experience/expertise to run their
business successfully
Project for which the finance is granted should be technically feasible and
economically/commercially viable i.e. it should be able to generate enough
surplus so as to service the debts within a reasonable period of time.
Cost of the project and means of financing the same should be properly assessed
and tied up. Both, under-financing and over- financing can have an adverse impact
on the successful implementation of the project.
Borrowers should be financially sound, enjoy good market reputation and must
have their stake in the business i.e. they should possess adequate liquid resources
to contribute to the margin requirements.
The policy lays down norms for takeover of advances from other banks/ financial
institutions
As a matter of policy the bank does not take over any Non-performing Asset
(NPA) from other banks
METHODS OF LENDING
For Working Capital
i. Simplified method linked with turnover
Simplified method based on turnover for assessing working capital finance up to
Rs.2 crore (upto Rs. 5 crore in case of SSI units)
ii. MPBF System
Existing MPBF system with flexible approach shall be followed for units
requiring working capital finance exceeding the above-mentioned amount
iii. Cash Budget System
Cash Budget System shall be followed in Sugar, Tea, Service Sector and Film
Production accounts. It will be our endeavor to introduce the same selectively in
other areas also
For Term Loan
banking )
One borrower several banks (loan syndication)
One Bank
The most familiar amongst the above for smaller loans is the one borrower one bank
arrangement. Here the borrower confines all his financial dealings with only one
bank. Sometimes, units would prefer to have banking arrangements with more than
one bank on account of the large financial requirement or the resource constraint of
his own banker or due to varying terms & conditions offered by different banks or for
sheer administrative/consortium arrangement are that exposure to an individual
customer is limited & risk is proportionate. The bank is also able to spread his
portfolio. In case of borrowing business entity, it is able to meet its fund requirement
without being constrained by the limited resource of its own banker. Besides this,
consortium arrangement enables participating banks to save manpower & resources
through common appraisal & inspection & sharing credit information.
Consortium lending
When borrowers avails loans from several banks under an arrangement among all the
lending bankers, this lends to a consortium banking lending arrangements. In
consortium lending, several banks pool banking resources & expertise in credit
management together & finance a single borrower with a common appraisal, common
documentation & joint supervision & follow up. The bank taking the highest share of
credits will usually be the leader of consortium. There is no ceiling of banks in a
consortium.
Multiple Banking Arrangement
Multiple banking arrangement is one where rules of consortium do not apply & no
inter agreement among banks exists. The borrower avails credit facility from various
banks providing separate securities on different terms & conditions. There is no such
arrangement called multiple banking arrangements& term is used only to donate the
existence of banking arrangement with more than one bank.
Credit Syndication
A syndicated loan or credit is the arrangement between two or more lending
institutions to provide a borrower a credit facility using common loan documentation.
It is a convenient mode of raising long term funds. The borrowers mandate a lead
manager of his choice to arrange a loan for him. The mandate spells out the terms of
the loan & the mandated banks rights & responsibilities. The mandated banker the
lead manager prepares an information memorandum & circulates among
prospective lender banks soliciting their participation in the loan. On the basis of the
memorandum & on their own independent evaluation the leading banks take a view
on the proposal. The mandated bank convenes the meeting to discuss the syndicated
strategy relating to coordination, communication & control within the syndication
process & finalizes deal timing, management fees, cost of credit etc. The loan
agreement is signed by all the participating banks. The borrower is required to give
prior notice to the lead manager about loan drawl to enable him to tie up
disbursements with other lending banks.
FEATURES OF SYNDICATED LOANS
Arrangements brings together group of banks
Borrower is not requires to have interface with participating banks, thus easy
& hassle free
In order to measure the credit risk in banks portfolio, the bank has developed the
following models:
Credit Risk Rating Model
Small 2 Loans
Small Loans
Mid Corporate
Large Corporate
The credit risk rating models have been developed with a view to provide a standard
system for assigning a credit risk rating to all the borrowers on the basis of the overall
credit risk involved in them. Inputs to the models are the financial, management,
business and conduct of account, industry information. The evaluation of a borrower
is done by assessment on various objective/subjective parameters. The model
evaluates the credit risk rating of a borrower on a scale of AAA to D with AAA
indicating minimum risk and D indicating maximum risk.
The credit risk-rating models incorporate therein all possible risk factors, which are
important for determining the credit quality/ rating of a borrower. These risks could
be:
Associated with the entire economy and can influence the repayment
capacity and/ or willingness of the company.
The scores are assigned to each of the parameters on a scale of 0 to 4 with 0 being
very poor and 4 being excellent. The scoring of some of these parameters is
subjective while for some others it is done on the basis of pre-defined objective
criteria.
The scores given to the individual parameters multiplied by allocated weights are
then aggregated and a composite score for the company is arrived at, in
percentage terms. Higher the score obtained by a company, the better is its credit
rating. Weights have been assigned to different parameters based on their
importance. Weights assigned to different parameters have been loaded in the
software. After allocating/evaluating scores to all the parameters, the aggregate
score is calculated and displayed by the software.
The overall percentage score obtained is then translated into a rating on a scale
from AAA to D according to a pre-defined range of scores.
For multi-divisional companies, which are involved in more than one industrial
activity, evaluation should be done separately for each business. However, the
management evaluation, conduct of account and financial evaluation will be done
on a common basis. In such cases, for the business section, each business should
be evaluated and scored separately, taking into account the different industrial
activity involved.
Description
Grade within
the rating
Category
Minimum Risk
Above 80.00
UBIAAA
Marginal Risk
UBI- AA
+
UBI- AA
UBI- AA -
UBI- A +
UBI- A
UBI- A -
UBI- BB
+
UBI- BB
UBI- BB -
UBI- B +
UBI-AA
Modest Risk
UBI-A
Average Risk
UBI-BB
UBI-B
Marginally
Acceptable Risk
Rating
category
Description
Grade within
the rating
Category
UBI- B
UBI- B -
UBI-C
High Risk
UBI- C
UBI-D
Caution Risk
UBI D
CHAPTER 3
As the credit rating is one of the vital area for any bank, some of the technicalities
are not revealed which may cause destruction as they are confidential in nature.
The credit appraisal decision are more of intuition and experience and since the
time period was limited, hence best efforts were made to grasp the process as
much as possible
The major limitation of this study shall be data availability as the data is
proprietary and not readily shared for dissemination
Due to ever changing environment, many risks are unexpected and the remedial
measures available are based on general experience from the past. Therefore risks
can only be minimized cannot be erased completely. Hence, out of the various
ways in which risks can be managed, none of the methods is perfect and may be
very diverse even for the work in a similar situation in the future
CHAPTER 4
Address of Regd./Corporate
Office
Constitution
Private Limited
Date of incorporation
18/08/1993
Industry/Sector
BACKGROUND
The Company ABC Parts Pvt. Ltd. was incorporated in 1993. The borrower has setup
manufacturing units at 4 locations for manufacturing of Automotive Parts. This
company is an ISO-9001 2000 Certified Company and working speedily on
achieving the TQ 14000. The Management of the company is experienced and
working in the line since long and the party is having the regular orders for marketing
%
Holding
100000
100.00
100%
FIs/ Mutual
Funds/UTI/Banks/FIIs
NIL
NIL
NIL
NRIs/OCBs
NIL
NIL
NIL
Public
NIL
NIL
NIL
Total
100000
100.00
100%
No. of
shares
FACILITIES REQUIRED
Proposed
Secured/Unsecured (As
CC(H)
900.00
Secured
900.00
Nature
Fund Based
NIL
ILG/ FLG
NIL
NIL
Term Loan
1600.00
Secured
TOTAL
COMMITMENT
2500.00
Secured
Rs. In Lacs
I. MANAGERIAL EVALUATION
1. Market reputation on the promoter / management of the company:
Satisfactory
Shri Mahender Kumar Bhunsali, aged 80 years, promoted the business of auto
ancillaries after completing his education. He has been founder of the company
and is presently the chairman of the company. Looking at his rich experience
along with his forward looking capabilities, excellent work and ability to
progress as per the changing industry scenario, he was honored by Udyog Patra
Award
Shri Munish Kumar Bhunsali, aged 46 years, son of Shri Mahendra Kumar
Bhunsali joined his fathers business after completing his Graduation. He has
now been associated with this business for twenty-four years and is presently
Managing Director of the company
Smt. Meenal Bhunsali W/o of Shri Munish Kumar Bhunsali aged 44 years, is
also a graduate. She has also been associated with the business for last eight
years and presently Director in the company
TECHNICAL EVALUATION
1. Land & Building - The Party has proposed to setup the designing , engineering
and manufacturing unit at Noida II having the area of 11,190 sq Mts The Party
has already constructed approx 45000 sq feet Industrial Shed. The building area is
sufficient for the installation of the plant and machinery and for smooth working
of the unit.
2. Plant and Machinery: It is reported by the party that they are one of the largest
integrated plant of its kind for manufacturing Auto and Tractor Component in
North India spread over sprawling area of 57,340 sq feet at different locations in
Delhi, Faridabad and Noida. There are different types of shops i.e grinding shop,
turning centers, Machine Shops, ensuring high productivity and better quality to
keep pace with the ever rising quality standards. The party is also having HEAT
TREATMENT SHOP with hardening, annealing, carbonizing, tampering furnaces
which make the component to withstand strength in operating conditions of the
parts.
The party has submitted the quotations from the suppliers/manufacturers with the
term and conditions for supply. The credential of the suppliers is verified for the
supply of the machinery as per bank guidelines.
3. Raw Materials: The basic raw material required for the unit is forging of auto
parts, stainless steel, welding rods and store items etc. The material is available
through local suppliers/ units and most of the raw material is purchased from
Delhi & NCR.
4. Manufacturing Process: The auto parts being manufactured under strict quality
control by using latest CNC Machines of improved technology, modern process
control devices monitored by microprocessors and backed by a competent team of
technical personnel to ensure strict quality norms as laid down by the OEM units/
Manufacturer of Tractors and other Vehicles.
5. Production Capacity: The stated projections are accepted by the bank as they
both match and are in sync the installed capacity and the market demand. The new
plant will become operational in the mid of the financial year 2010-11 and
production capacity of the company will increased.
6. Quality Control: The party has proposed to set up in- house R&D facility
comprising of pilot plant facility, sophisticated instrumentation laboratory, testing
laboratory etc. for Raw Material and finished goods etc. Quality control test are
being undertaken for raw material and other products at stages of production. The
product shall meet all the specification requirement of their client.
7. Staff and Labor: As the machines are semi automatic and the unit is located at
the Noida, which is the approved industrial area. So, there is no problem of skilled
and unskilled labor and it will be easily available as per the requirement of the
party as and when required for the proposed unit at Noida.
8. Power: The party has taken the temporary power load connection of 20KW for
completion of construction at Noida unit.
IV.
LEGAL EVALUATION
For the Noida Unit Company has already obtained the various approvals such as
sanction of building plan, Electricity/Power Load Connection, Water Connection,
Pollution Control Clearance. The other units of the Company are already working at
different locations in Faridabad and Delhi. The Director of the company has reported
that they have obtained the all approvals required for the units for manufacturing of
auto parts i.e, registration of the units with the concerned departments i.e. SSI
registration, Income tax, Sales Tax, authorization from Pollution control board.
V. FINANCIAL EVALUATION
STUDY ON CORPORATE
LOANS
IN UNION BANK
31.03.2008
31.03.2009
31.03.2010
OF INDIA
Audited
Audited
Audited
Sales
Turnover
% rise or
fall in sales
Cost of sales
Operating
Profit
Other
Income
Profit
Before Tax
Provision
for taxes
Profit After
Tax
Depreciatio
n
Cash Profit
1995.39
31.03.2011
Provisional
31.03.2012
Projection
2047.12
2584.65
2379.88
4840.00
2.59
26.26
-7.92
103.37
1868.41
1954.42
2502.28
2270.66
4405.56
126.98
92.70
82.37
109.22
434.44
17.40
7.44
17.84
12.39
20.00
144.38
100.14
100.21
121.61
454.44
40.00
40.00
69.74
3.67
113.59
104.38
60.14
30.47
117.94
340.85
41.97
52.91
74.08
84.98
344.00
146.35
113.05
104.55
202.92
684.85
Share
capital
Reserves
and Surplus
Share App.
Money
Quasi
Capital
Def. Tax
liability/
Loss
Revaluation
Reserves
Net Worth
Secured
Loans
Unsecured
Loans
Term
Liabilities
Working
Capital
31.03.2008
31.03.2009
31.03.2010
31.03.2011
31.03.2012
Audited
Audited
Audited
Provisional
Projection
100.00
100.00
100.00
100.00
175.00
482.55
542.69
573.16
691.10
1064.68
0.00
0.00
0.00
75.00
0.00
17.45
32.79
45.84
60.88
75.00
0.00
0.00
32.81
32.81
0.00
0.00
0.00
0.00
0.00
0.00
600.00
675.48
751.81
959.79
1314.68
496.55
685.86
981.12
1119.01
1819.54
0.00
0.00
0.00
0.00
0.00
496.55
685.86
981.12
1119.01
1819.54
0.00
461.01
482.21
442.79
900.00
633.65
100.00
Advances
GITARATTAN
INTERNATIONAL BUSINESS SCHOOL
Sundry
496.60
400.67
694.94
Creditors
31.03.200
31.03.200
31.03.201
Audited
Intangible
Audited
Audited
31.03.2011
Provisiona
l
31.03.201
2
Projection
0.00
0.00
0.00
0.00
0.00
600.00
675.48
751.81
959.79
1314.68
0.00
0.00
0.00
0.00
0.00
600.00
675.48
751.81
959.79
1314.68
Current Ratio
1.21
1.35
1.21
1.42
1.46
Debt/Equity
0.83
1.02
1.31
1.17
1.38
248.45
369.55
273.36
486.28
526.91
2.84
2.57
3.01
2.38
2.25
2.84
2.57
3.01
2.38
2.25
6.36
4.53
3.19
4.59
8.98
5.23
2.94
1.18
4.96
7.04
FACR
1.71
1.44
1.48
1.42
1.43
Assets
TNW
Investments in
allied co.
Adjusted TNW
NWC
TOL/TNW
TOL/ Adjusted
TNW
Operating Profit
/ Sales (%)
Capital Limit after the Sanction of the Proposal but before the disbursement of
the loan.
b. TNW of the company is steadily increasing with full retention of profits. It was
Rs. 582.55 Lacs as on 31.03.2007 and increased to Rs. 675.48 Lacs as on
31.03.2008 and further increased to Rs. 751.81 Lacs as on 31.03.2009. It has
been estimated / projected at Rs. 959.79 Lacs and Rs.1314.68 Lacs respectively
as at 31.03.2010 and 31.03.2011 due to retention of estimated/projected internal
accruals and proposed induction of capital in the business. Keeping in view of the
past trend of profitability, estimates/projections of TNW can be accepted.
2. Sales: Gross Sales of the company is showing increasing trend. Sales have
increased from Rs. 20.47 crores in 2007-08 to Rs. 25.85 crores in 2008-2009.
Thus the company has registered a growth of more than 26% over the last year.
But sale during the financial year 2009-10 did not register any growth, due to
fluctuation in the foreign market export sale of the company decreased from the
last financial year. The company has achieved net sales of Rs 22.30 crore during
the financial year 2009-10. The company is estimating the sale on the basis of
order in hand. In view of the recovery of economy since Oct. 2009, Company is
expecting the good growth rate in sale in coming financial years, Another reason
of the healthy estimates are good government policies for export out of India and
recovery of overall global market from the financial crunch. The new plant of the
company will become function in the mid of the financial year 2010-11, which
will increase the production capacity of the company. The company has good
demand of its product in the market. Increase in the production capacity of the
company will increase the turnover of the company. Based on its existing clientele
and the demand in the market of the products of the company, the company is
estimating its Gross turnover for the financial year 2010-11 at Rs.48.40 Crore.
Keeping in view the overall growth in the automobile and auto part manufacturing
market, the estimated turnover of the company can be accepted.
3. Other income: The other income of the company includes interest on FDR,
Rebate and Discounts received, Foreign Exchange Benefit etc. The other incomes
for the year end 31.03.2008 were Rs. 7.44 Lacs and for the year ending
31.03.2009 were Rs. 17.84 Lacs. The other incomes of the company as per the
provisional balance sheet for the financial year 2009-10 have Rs. 12.39 Lacs. The
company is estimating other income at Rs. 20.00 for the financial year 201011.The Company estimated these income by taking care of interest receivable on
FDR and current discounts /rebate policies of the suppliers. Keeping in view the
past records of the company, Estimates/Projections of Other Incomes can be
accepted.
4. Profitability: PAT / Sale of the company for the financial year 2007-08 was 3%
and for the financial year 2008-09 was 1% . The PAT of the company for the
financial year 2008-09 was decreased because of increase in the depreciation and
Interest expenditure of the company. Due to expansion and installation of new
equipments during the financial year, depreciation and financial expenses of the
company increased disproportionately as compared to the increase in gross sale of
the company. These expenses were 10.68% of turnover for the financial year
2008-09 in comparison to 8.59% for the financial year 2007-08. As per the
provisional balance sheet for the financial year 2009-10 the company achieved
profitability @ 4.96% (PAT/Sale) upto 31.03.2010. The company is estimating the
profitability for the financial year 2010-11 at 7.04%. Increase in the production
capacity of the company will reduce the operation cost of the company and the
profitability of the company will increase. Keeping in view the industry scenario
and past trends of the company projections/estimates of the profitability of the
company can be accepted.
5. Investments: The Company has made investments in Fixed Deposits. The value
of Fixed Deposits at the end of the financial year 2008-09 is Rs. 6.48 Lacs.
6. Current ratio: Current ratio of the company for the financial year ending
31.03.2007 & 31.03.2008 was 1.21:1 & 1.35:1 .But current ratio for the financial
year 2008-09 was 1.22:1 which is little lower than the bench mark of the bank i.e,
1.33:1 which was due to expansion plan of the company and formation of long
term assets of the company during the financial year 2008-09 to increase the
overall profitability of the company. The company used its internal accrual for
purchase of capital assets of the company. In spite of using its short term funds for
the purchase of the capital assets the NWC of the company is positive. The
expansion in the capital assets has increased the size of the plant and profitability
of the company which also improve the short term liquidity of the company. As
per the provisional balance sheet for the financial year 2009-10 the current ratio of
the company is 1.42, which is above the bench mark of the bank. Keeping in view
the past records/trends of the company estimated level current ratio can be
accepted.
7. Debt Equity Ratio: Debt Equity Ratio of the company for the financial year
2007-08 was 1.02:1 and for the financial year 2008-09 was 1.31:1. As per
provisional Balance sheet of the company the debt equity ratio for the financial
year 2009-10 is 1.17. The Company has estimated it debt equity ratio for current
financial year at 1.38:1. The debt equity ratio of the company is below the
acceptable bench mark of the bank i.e. 3:1 and proves the long term solvency of
the company. Hence keeping in view the past trends of the company estimates/
projections of Debt Equity ratio of the company can be accepted.
CHAPTER 5
At Union Bank Of India, Circle Office the priority to appraise a proposal was
given to new or fresh clients over the existing clients presenting proposals for
renewal
Ratings, as being performed at PNB, are done once a year. Therefore, the ratings
do not take into account short term drastic changes like price level changes (which
are an issue with any method based on accounting statements, since annual reports
are based on historical cost basis of accounting).
Some of the parameters in Business and industry evaluation are based on the
information provided by company, which in some cases may not be sufficient. No
specific guidelines are followed in such cases. Also, some of the parameters here
may be rendered redundant in some cases and may push up/ push down the rating
needlessly in these cases.
The present risk rating model does not have any mechanism to prioritize certain
sectors of the economy. There are certain sector in the economy where risk spread
is low and certain sectors where spread of risk is high like real estate. Also, there
are certain infrastructural projects which need to be prioritized. The risk rating
model is not flexible to incorporate all these issues.
The BPLR system will soon be replaced by Base Rate system. Banks may choose
any benchmark to arrive at the Base Rate for a specific tenor that may be
disclosed transparently.
With the deregulation of the financial sector, the ability of the banks to service the
credit requirements of the SME sector depends on the underlying transaction
costs, efficient recovery processes and available security. There is an immediate
need for the banking sector to focus on credit and finance requirements of SMEs.
CHAPTER 6
CONCLUSION
&
RECOMMENDATIONS
CONCLUSION
The study at UBI gave a vast learning experience to me and has helped to enhance my
knowledge. During the study I learnt how the theoretical financial analysis aspects are
used in practice during the working capital finance and term loan assessment. I have
realized during my project that a credit analyst must own multi-disciplinary talents
like financial, technical as well as legal know-how.
Risk analysis: it determines the risk associated with the project this is done by
performing a Sensitivity analysis and Credit Rating. With Sensitivity Analysis the
projects capacity to service debts under worsened conditions is determined. Credit
rating, provides rating for various parameters like management, financial, market
and so, thereby determine the credit worthiness of the borrower
It is on the basis of the credit risk level, collateral securities to be given by the
borrower are determined.
RECOMMENDATIONS
The Credit Department at UBI (IFB BRANCH Office) Delhi, works at its full
potential and the staff is highly experienced and has a very strong intuitive sense. So,
there is no such recommendation on the entire process. However to make the process
more flexible and efficient, an electronic database should be designed carrying all the
available and important information related to the proposals accepted, and it should be
easily accessible to the Credit Department. This will help reduce paperwork and loss
of information.
REFERENCES
REFERENCES
Books:
Websites:
www.unionbankofindia.com
www.wikipedia.com
www.crisil.com