Beruflich Dokumente
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1 DECLARATION BY LEARNER 1
3 CHAPTER 1- INTRODUCTION 3
4 CHAPTER 2- MSME 10
5 CHAPTER 3- BASIC PRINCIPLE OF LENDING 15
CHAPTER 4- FINANCIAL INSTRUMENTS PROVIDED BY
6 17
BANK
7 CHAPTER 5- TYPES OF LENDING 20
Place: KOTA
Date: 20-06-2015
DECLARATION BY THE LEARNER
This is to declare that I have carried out this project work myself in part fulfillment of
the
POST GRADUATE DIPLOMA IN BANKING AND FINANCE Program of SCDL.
The work is original, has not been copied from anywhere else and has not been
submitted
to any other University/Institute for an award of any degree/diploma.
Certified that the work incorporated in this Project Report submitted CREDIT
APPRAISAL PROCESS OF A BANK (WORKING CAPITAL ASSESSMENT) by
HIMANSHU SHARMA is his original work and completed under my supervision.
Material obtained from other sources has been duly acknowledged in the Project
Report.
INTRODUCTION
WORKING CAPITAL
“The most common definition of working capital is the difference of the firm’s current
assets and current liabilities.”
Apart from financing for investing in fixed assets, every business also requires funds on
a continual basis for carrying on its operations. These include expenses incurred for
purchase of raw material, manufacturing, selling, and administration; until such goods
are sold and the sales realized. Business transactions are generally carried on credit with
a number of days elapsing subsequent to the sale being affected for realization of
proceeds. While part of the raw material may be purchased by credit, the business
would still need to pay its employees, meet manufacturing & selling expenses (wages,
power, supplies, transportation and communication) and the balance of its raw material
purchases. Working capital refers to the source of financing required to by businesses
on a continual basis for meeting these needs.
1. Cash Discount:
If a proper cash balance is maintained, the business can avail the advantage of
cash discount by paying cash for the purchase of raw materials and merchandise.
It will result in reducing the cost of production.
6. Distribution of Dividend:
If company is short of working capital, it cannot distribute a good dividend to its
shareholders in spite of sufficient profits. Profits are to be retained in the
business to make up the deficiency of working capital. On the other contrary, if
working capital is sufficient, ample dividend can be declared and distributed. It
increases the market value of shares.
9. High Morale:
The provision of adequate working capital improves the morale of the executive
because they have an environment of certainty, security and confidence, which
is a great psychological, factor in improving the overall efficiency of the
business and of the person who is at the helm of fairs in the company.
1. Nature of Business:
Working capital requirement of a firm basically influenced by the nature of its
business trading and financial firms have a very small investment in fixed assets,
but require a large sum of money to be invested in working capital. Retails
stores, for example must carry large stock of a verity of good to satisfy varied
and continuous demand of their customer.
2. Seasonality of operations:
Firms which have marked seasonality in their operations usually have highly
fluctuating working capital requirements. Consider a firm selling air
conditioners, its sale reaches a peak during the summer months and drops
sharply during the winter period. The working capital requirements of such a
firm are likely to increase considerably in summer months and decrease
significantly during the winter period. On the other hand, a firm manufacturing
product like lamps, which have fairly even sales round the year, tends to have
stable working capital requirements.
3. Production policy:
If the production is evenly spread over the entire year, working capital
requirements are greater, because the inventories will be unnecessarily
accumulated during off season period. But if the production schedule favours a
varying production plan as per the seasonal requirements, working capital is
required to a greater extent during a specified season only. The production
policies are affected by so many factors availability of raw materials, labour,
stocking facility etc & therefore, whatever the productions policies are, the firm
has to arrange its working capital requirements accordingly.
5. Market Situation:
If the market is strong and competition weak a, firm can manage with a smaller
inventory of finished goods because customers can be served with some delay.
Further, in such a situation the firm can insist on cash payment and avoid lock
up of funds in accounts receivable- it can ask for advance payment, partial or
total.
6. Conditions of supply:
The inventory of raw materials, spares, and stores depends on the condition of
supply. If the supply is prompt and adequate, the firm can manage with small
inventory. However, if supply is unpredictable and scant, the firm, to ensure
continuity of production, would have to acquire stocks as and when they are
available and carry larger inventory, on an average. A similar policy may have
to be followed when the raw material is available only seasonally and production
operations are carried out round the year.
9. Business cycles:
Requirement of working capital also varies with the business. When the price
level is up due to boom conditions, the inflationary conditions create demand for
more working capital. During depression also a heavy amount of working capital
is needed due to the inventories being locked unsold and book debts uncollected.
The SME Sector includes Micro Enterprises, Small Enterprises, Artisans & Village
Industries, Medium Enterprises, Service Sector units & individual sub-sector units.
Micro Enterprises
Micro Enterprises are those engaged in manufacturing, processing, preservation of
goods, mining, quarrying, servicing & repairing of specified type of machinery &
equipment, agro service units whose investment in Plant and Machineries does not
exceed Rs. 25.00 lacs irrespective of location of the unit in respect of manufacturing
units and investment in equipments not exceeding Rs 10.00 lacs in respect of Service
Sector units.
Small Enterprises
A Small Enterprise industrial is one which is engaged in the manufacture, processing or
preservation of goods or is a servicing and repair workshop undertaking repairs of
machinery used for production, mining or quarrying or custom service unit (except
water service units), having investment in Plant and Machineries (original cost) above
Rs 25.00 lacs but not exceeding Rs. 5.00 Cr in respect of manufacturing unit and above
Ra 10.00 lacs but not exceeding Rs 2.00 Cr in respect of Service Sector unit.
Medium Enterprises
A Unit which is engaged in the manufacture, processing or preservation of goods or is a
servicing and repair workshop undertaking repairs of machinery used for production,
mining or quarrying or custom service unit (except water service units), with investment
in Plant & Machinery in excess of Rs 5.00 crores and upto Rs.10.00 crores in respect of
manufacturing units and investment in equipments in excess of Rs 2.00 crores and up to
Rs 5.00 crores in respect of Service Sector units may be treated as Medium Enterprises
(MEs).
The MSMED Act 2006
Micro Enterprise Not to Exceed Rs. 25 Lakhs in Plants & Not to Exceed Rs. 10 Lakhs in
Machinery. Equipments.
Small Enterprise More than Rs.25 Lakhs but does not exceed More than Rs.10 Lakhs but does not
Rs. 5 Crore Plants & Machinery. exceed Rs. 2 Crore in Equipments.
Medium Enterprise More than Rs.5 Crore Rupees but does not More than Rs. 2 Crore Rupees but
exceed Rs. 10 Crore Plants & Machinery. does not exceed Rs. 5 Crore
Equipments.
Taking a look at the role of SMEs in India’s economy and their future growth potential
and the problems they face especially with respect of finance, banks have a greater role
to play in addressing their needs.
Another variant of credit risk is counterparty risk. The counterparty risk arises from
non-performance of the trading partners. The non-performance may arise from
counterparty’s refusal/inability to perform due to adverse price movements or from
external constraints that were not anticipated by the principal. The counterparty risk is
generally viewed as a transient financial risk associated with trading rather than
standard credit risk.
It lies in products like letters of credit, guarantees, etc. It is the risk that contingent
exposures get converted into actual obligations and that these obligations may not be
repaid on time.
Issuer Risk:
It is the risk of financial loss due to the degradation in the credit rating of the issuer of
the debt instrument. It is also the risk that the bank may not be able to sell the
instrument within a predetermined holding period.
Pre-Settlement Risk:
It is the risk that the counter-party with whom the bank has a reciprocal agreement may
fail before settlement of the contract e.g. in forwards, futures and options. As a result
the bank faces the risk of default on the settlement date and hence may have to
undertake fresh transactions, leading to replacement cost.
Settlement Risk:
It is the risk where the bank delivers its part of the contract but the other bank does not
fulfill its obligation. This risk arises out of time lags in settlement of another currency in
another time zone.
The bank needs to identify all sources of credit risk and monitor aggregated exposures
to a borrower or counter-party on a bank-wide basis.
CHAPTER 3
BASIC PRINCIPLES OF
LENDING
BASIC PRINCIPLES OF LENDING
Banks are in business to maximize value for its shareholders. Consequently, when a
bank lends money, it attempts to lend money to those applicants that are deemed as the
best from the applicant pool. The process by which a lender appraises the
creditworthiness of the prospective borrower is called credit appraisal. This normally
involves appraising the borrower’s payment history and establishing the quality and
sustainability of his income. A bank assesses the credit risk of any borrower based on
the following 5 "C's" of Credit:
1. Capacity to repay is the most significant of the five factors. The lender will
have to determine the sources of income that the applicant possesses to repay the
loan. The main consideration will be cash flow generated from the business.
2. Capital is the money that has been invested by the business owner into his/her
business. The amount of invested capital by the owner is indicative of the
owner's stake and confidence in the viability of his/her business.
3. Collateral is pledged assets to guarantee the security of a loan. Collateral is
deemed as a second source of income in the event that the borrower cannot
repay the loan. Assets that are typically accepted as collateral are fixed assets of
a business i.e., equipment, plant etc. Banks also consider working capital like
accounts receivable and inventory, to be feasible sources of collateral. But,
typically banks will usually discount the value of working capital (being that the
market value is neither fixed nor certain) at a certain percentage of estimated
market value.
4. Conditions focus on the intended purpose of the loan. How will the proceeds
from the loan be utilized i.e. to purchase equipment, working capital? Also
banks consider the local market and economic conditions both within your
industry and other industries that affect your business e.g., your suppliers and
customers.
5. Character is the personal impression that a prospective borrower makes to a
potential lender or investor. A person's educational background, industrial
experience and credit history with other creditors will be considered.
CHAPTER 4
FINANCIAL INSTRUMENTS
PROVIDED BY BANK
FINANCIAL INSTRUMENTS PROVIDED BY BANK
SME Finance is the funding of small and medium sized enterprises and represents a
major function of the general business finance market – in which capital for firms of
different types is supplied, acquired, and priced. Capital is supplied through the
business finance market in the form of bank loans and overdrafts; leasing and hire-
purchase arrangements; equity/corporate bond issues; venture capital or private equity;
and asset-based finance such as factoring and invoice discounting.
The Bank has provided wide range of financial facilities to this fast growing MSME
sector for fulfilling their credit requirement. The credit facilities that normally banks
offer to MSMEs can be divided into fund based and non-fund based is;
Fund Facilities:
1. Term Loan:
It is given for acquisition of capital goods (including second hand), fixed assets,
vehicles, plant & machinery, purchase of land, construction of buildings etc.
2. Cash Credit:
It is given for meeting working capital requirements
Purchase of raw material, components, stores, spares and maintenance of stock
of these items at minimum level and stock in process and finished goods.
Finance against receivables including receipted challans / invoices.
For meeting marketing expenses where the units have to incur large scale
expenditure towards marketing of their products.
3. Bills Purchase/Discounting:
It is another form of financing in which cash is given against bills of purchases
made by company or bills of sales to customer to whom credit is granted by
company.
Non-Funded Facilities:
1. Letter of Credit:
On sight/usance basis letter of credit is given to the companies for purchase of
raw material/capital goods. In this actual disbursement of cash does not take
place. This is just banks assurance that his customer will pay the specified
amount within specified date else bank will pay it. A Letter of Credit (LC) is a
document issued by the importer’s bank in favour of the exporter giving him the
authority to draw bills up to a particular amount (as per the contract price)
covering a specified shipment of goods and assuring him of payment against the
delivery of shipping documents as mentioned in LC.
2. Letter of Guarantee:
It is given for Performance, Advance Payment, Tender Money Security Deposit,
Guarantees for getting orders, for procurement of raw materials etc.
CHAPTER 5
TYPES OF LENDING
TYPES OF LENDING
Sole –Financing:
Where all the credit needs of borrowing unit are met by single bank. A single bank
carries disproportionate risk when it finances huge amount. Smaller banks cannot
finance huge sums. It may not have appraising skills. ‘AAA’ & ‘AA’ Borrowers’
accounts can be taken over subject to exposure ceiling; ‘A’ Rated borrower in normal
course.
Multiple Lending:
Where the credit needs of different divisions of a borrowing company are met
independently by different banks without any formal agreement/ arrangements amongst
them. This system has certain drawbacks. Their credit discipline is in jeopardy, good
accounts are snatched away, and recovery becomes difficult. While presently both the
arrangements are there in the market, multiple banking arrangements are beset with
many pitfalls as observed below.
Consortium Financing:
The entire credit need of a borrowing unit is financed by a group of banks by forming a
consortium. It is concept to promote collective application of banking resources.
Consortium helps to spread risk amongst bank consortium members. There is better
credit appraisal. Smaller banks can join consortium and finance to improve their
profitability. It also stops unhealthy practice of snatching accounts. Borrowers get their
credit requirements even if single bank has credit squeeze. Consortium would meet all
their genuine needs. Syndicate lending: A syndicated loan is an arrangement whereby a
number of banks, known as the syndicate, agree to make a loan to a borrower on
uniform terms and conditions, usually through the signature of one document or a set of
documents. This form of lending existed primarily to provide large sums of lending on
international level. Large projects, corporate acquisitions and debt to developing
countries are maintained at economical level purely because of this syndication
mechanism. Though similar to consortium, it provides freedom to borrower to choose
and at competitive pricing. In syndication, one bank, generally called lead manager/
syndicator, arranges a group of banks to form a syndicate and this syndicate provides
credit facilities to a borrower, using common loan documentation.
CHAPTER 6
2. Non-Financial Details:
Copies of Memorandum of Association and Articles of Association (for limited
companies)
List of shareholders holding 5% or more in equity
Note on Company’s tax payment status
Copies of clearance from Government/Local Bodies a may be relevant to the
type of proponent e.g. NOC from Population Control authorities, approvals for
construction of factory/office building from Municipal Corporation/Local Body
etc.
Copies of letters of sanction from Banks/Financial Institutions participating in
financing the project and working capital requirements
Details on Associates and their nature of association if applicable
Photocopies of lease deeds /title deeds of all the properties being offered as
primary and collateral securities
3. Company’s Promoters and Management Details:
Bio-data of promoter/s and guarantor/s
Details of Managerial Personnel: Names of Directors /Partners, their addresses
and their PAN, Customer-IDs, if any. (Minimum of ten directors/partners)
Statement of Assets and Liabilities, certified by a Chartered Accountant, for past
3 years in respect of promoter/s and guarantor/s
4. Additional Details:
Constitution
Date of commencement of business / project
Size
B. PRE-SANCTION INSPECTION
1. Visits
Along with the collection of information and documents from the borrower, the bank
official conducts a pre-sanction inspection at the borrower’s factory and office site. The
purpose of this inspection is to view the operations and to verify the accuracy of the
details provided by the borrower. The observations during the visit may include the
following.
General working of factory / tempo of activity.
Power / fuel supply.
Idle machinery.
No. of shift worked.
Labour / Employee situation.
Pollution Control Certificate.
Details provided by the borrower during the discussion.
Other observations during the visit
2. CIBIL Report
Another Important thing in Pre-sanction Inspection is the CIBIL Report which is been
issued by the Credit Investigating Bureau. The aim of CIBIL's Commercial Credit
Bureau is to minimize instances of concurrent and serial defaults by providing credit
information pertaining to non-individual borrowers such as public limited companies,
private limited companies, partnership firms, proprietorships, etc. CIBIL will maintain a
central database of information as received from its Members. CIBIL will then collate
and disseminate this information on demand to Members, in the form of Commercial
Credit Information Reports (CIR) to assist them in their loan appraisal process.
CIBIL primarily gets information from its Members only and at a subsequent stage will
supplement it with public domain information in order to create a truly comprehensive
snapshot of an entity’s financial track record.
The CIBIL Report contains the following information-
Basic borrower information
Records of all the credit facilities availed by the borrower
Past payment history
Amount overdue
Number of inquiries made on that borrower, by different Members
Suit-filed status
3. Verification of Documents:
It Involves
Title clearance reports of the properties to be obtained from empanelled
advocates.
Valuation reports of the properties to be obtained from empanelled
valuer/engineers.
In this report all the documents are verified and thoroughly checked and authenticated.
It is important to see that all the necessary documents submitted are true. The Bank
officer checks with the respective authorities that the document submitted initially are
true and okay. Also the validity and dates of the document are to be noted.
C. APPRAISAL NOTE
The proposal is prepared by the bank officials on the basis of the data provided by the
client. Information gathered during meetings with the client and from other sources. The
sanctioning of credit facility is done on the basis of the proposal. The components of the
proposal as mentioned below explain the factors considered for sanction of credit.
1. Borrower Profile:
This comprises
Name of the Borrower
Date of establishment
Year since advance provided by the bank
Business activity
Name of the Group to which the company belongs
Chief Executive / Promoter
Banking Arrangement – sole banking, multiple banking or consortium.
Type of Facility
Types of Borrower: Individual, Joint Accounts, Partnership Firms, Limited
Companies
Industry Experience
CIBIL Score
Present Industry Scenario
2. Financial Analysis:
The assessment of financial risks is made on the basis of the analysis of the
performance of the borrowers as obtained from the last audited balance sheet / profit &
loss account. Additionally the trends for the past 2-3 years may be considered to give a
dynamic character to the variables selected.
Balance sheet analysis
P&L Statement Analysis
Fund Flow Analysis
All the above data can be easily obtained with the help of CMA data provided by the
company/borrower.
CMA DATA
Credit Monitoring Arrangement (CMA) data is a very important area to understand by a
person dealing with finance in an organization. It is a critical analysis of current &
projected financial statements of a loan applicant by the banker. CMA data is a
systematic analysis of working capital management of a borrower and objective of this
statement is to ensure the usage of long term and short term fund have been used for the
given purpose. In this article I want to discuss about the basic contents of the CMA
data. Basically CMA data contains the 7 statements which as follows.
Net Sales:
Gives a picture as to how have the business been performing, with over the years and
also based on the projections made will it be under or over performing.
TOL/TNW:
TOL = Current Liabilities + long term Liabilities
It indicates what proportion of equity and debt the company is using to finance its
assets.
DSCR :
The Debt Service Coverage Ratio is a financial ratio that measures a company's ability
to service its current debts by comparing its net operating income with its total debt
service obligations. In other words, this ratio compares a company's available cash with
its current interest, principle, and sinking fund obligations.
The debt service coverage ratio is important to both creditors and investors, but
creditors most often analyze it. Since this ratio measures a firm's ability to make its
current debt obligations, current and future creditors are particularly interest in it.
Debtors Turnover:
An accounting measure used to quantify a firm's effectiveness in extending credit as
well as collecting debts. The receivables turnover ratio is an activity ratio, measuring
how efficiently a firm uses its assets.
Inventory Turnover:
A ratio showing how many times a company's inventory is sold and replaced over a
period. The days in the period can then be divided by the inventory turnover formula to
calculate the days it takes to sell the inventory on hand or "inventory turnover days."
Asset Turnover:
The amount of sales or revenues generated per dollar of assets. The Asset Turnover
ratio is an indicator of the efficiency with which a company is deploying its assets.
Generally speaking, the higher the ratio, the better it is, since it implies the company is
generating more revenues per dollar of assets. But since this ratio varies widely from
one industry to the next, comparisons are only meaningful when they are made for
different companies in the same sector.
Creditors Turnover:
A short-term liquidity measure used to quantify the rate at which a company pays off its
suppliers. Accounts payable turnover ratio is calculated by taking the total purchases
made from suppliers and dividing it by the average accounts payable amount during the
same period.
The benchmark ratio for these differs from sector to sector and hence is dependent upon
the borrowers’ sector.
3. Assessment of Credit Requirement:
After the implementation of a phased liberation programme since 1991, the RBI
decided to allow full operational freedom to the banks in assessing the working capital
requirements of the borrowers. All the instructions relating to Maximum Permissible
Bank Finance (MPBF) have been withdrawn. The following two methods are employed
by Bank-
A. Turnover Method (Nayak Committee)
As per RBI guidelines credit requirement should be assessed by both the above methods
and higher of the PBF computed by these two methods should be sanctioned.
The following category of borrowers shall be considered on the basis of turnover
method
1. SSI borrowers shall be availing fund based facilities up to Rs. 5 Cr.
2. Other category of borrowers availing fund based facilities up to Rs. 2 Cr.
4. Cash Budget System:
An estimation of the cash inflows and outflows for a business or individual for a
specific period of time-
Cash budgets are used by banks to assess whether the entity has sufficient cash to fulfill
regular operations and/or whether too much cash is being left in unproductive
capacities.
For Seasonal industries such as sugar, tea etc; Software industry; Sick Units;
construction/Contractors/Developers cash budget method shall be used for assessment
of Working capital requirements. Separate Peak and Non-Peak level credit limits shall
be given consideration while working on the credit appraisal where the borrowers’
activities are of seasonal nature.
5. Operating Cycle:
The operating cycle is also useful for estimating the amount of working capital that a
company will need in order to maintain or grow its business. A company with an
extremely short operating cycle requires less cash to maintain its operations, and so can
still grow while selling at relatively small margins. Conversely, a business may have fat
margins and yet still require additional financing to grow at even a modest pace, if its
operating cycle is unusually long.
The operating cycle is the average period of time required for a business to make an
initial outlay of cash to produce goods, sell the goods, and receive cash
from customers in exchange for the goods. If a company is a reseller, then the operating
cycle does not include any time for production - it is simply the date from the initial
cash outlay to the date of cash receipt from the customer.
For example, let's say Company XYZ makes widgets, which typically sit in the
warehouse for 10 days. Let's also assume that it typically takes 15 days to collect on
the sale of each widget, and that it takes 14 days to pay invoices to Company
XYZ's vendors. Using the formula above, Company XYZ's net operating cycle is:
This means that Company XYZ generates cash from its assets within 11 days.
Pledge: The goods which are offered as security are transferred to the physical
possession of the lender. An essential prerequisite of pledge is that the goods are in the
custody of the bank. Pledge creates some kind of liability for the bank in the sense that
‘Reasonable care’ means care, which a prudent person would take to protect his
property. In case of non-payment by the borrower, the bank has the right to sell the
goods.
Lien: The term lien refers to the right of a party to retain goods belonging to other party
until a debt due to him is paid. Lien can be of two types viz. Particular lien i.e. A right
to retain goods until a claim pertaining to these goods are fully paid, and General lien,
Which is applied till all dues of the claimant are paid. Banks usually enjoyed general
lien.
In case of SSI units the bank does not demand any collateral security for accounts with
limits up to Rs 5 lakhs. In case of accounts with limits above Rs5 lakhs but not
exceeding Rs25 Lakhs , the bank may not insist on collateral security provided the
financial position is good and the unit’s track record is good. In case of certain
categories of advances such as the diamond exports, software etc. where the tangible
primary security is not available and the advance is granted more on trust and the track
record of the performance and conduct of the account .
When the bank is considering security cover, the following points are to be taken into
consideration:
Facility
Nature of security
Value of the security
Date of valuation
Date of creation of first/second charge
In case of pari-passu /second charge over
7. Deviation
Deviations from RBI guidelines or Bank policy regarding the proposal must be
mentioned and the justification/Mitigates for the same must be provided.
8. SWOT Analysis
A tool that identifies the Strengths, Weaknesses, Opportunities and Threats of an
organization. Specifically, SWOT is a basic, straightforward model that assesses what
an organization can and cannot do as well as its potential opportunities and threats. The
method of SWOT analysis is to take the information from an environmental analysis
and separate it into internal (strengths and weaknesses) and external issues
(opportunities and threats). Once this is completed, SWOT analysis determines what
may assist the firm in accomplishing its objectives, and what obstacles must be
overcome or minimized to achieve desired results.
It consists of various parameters; the broad categories are as follows
This assessment gives the credit analyst an insight into the macro environment and the
potential risk for the company. As the economic and business environment in which a
company is working is constantly changing it becomes all the more important for the
bank to assess the industry.
The industry is assessed in four parameters-
a. Demand – Supply Gap
b. Government policies
c. Input related risks
d. Extent of competition
Nature of the product, demand, existing and perceived competition in the segment,
ability of the proponents to withstand the same, government policies governing the
industry need to be taken into account.
9. Recommendations:
After considering the entire proposal the bank officer makes recommendations about
whether the proposal can be approved or not, any changes in terms or conditions is
required and should be notified to the Chief Manager and Borrower.
Also a small summary of the proposal is provided containing the details as follows-
Limit
Purpose
Security
Margin
ROI
Review
Collateral
Guarantees
D. SANCTION OF LOAN
1. Delegation of Authority
The bank officer prepares the documents and the Appraisal Proposal which is then
scrutinized by the senior manager or a higher authority which is then given for approval
to the Branch Manager for approval if limit is within 2cr and then to Zonal officer.
Also Deviations from the bank policy or Guidelines from RBI needs to be
communicated to the higher authorities.
Then, the bank should be within the knowledge of these matters and in case of
important decision affecting business banks concern should also be taken.
Disallowing large cash withdrawals - Large cash withdrawal will be allowed
only if the branch manager is satisfied with the purpose.
Bank will not allow operations in a NPA account and may seek legal remedies
to recover its dues.
On receiving the letter of sanction from the financial institution, the borrowing
unit convenes its board meeting at which the terms and conditions associated
with the letter of sanction are accepted and an appropriate resolution is passed to
that effect. The acceptance of terms and condition has to be conveyed to the
financial institution within a stipulated period.
The financial institution, after receiving the letter of acceptance from borrower,
sends the draft of the agreement to the borrower to be executed by the
authorized persons and properly stamped as per Indian Stamp Act, 1899. Once
the financial institution also signs the agreement, it becomes effective.
E. DISBURSEMENT
Working capital loan is disbursed to the borrower with help of a Cash Credit Account
and Issuing a Cheque book for the same, initial amount that can be accessed by the
borrower is as follows
1. Drawing Power
Sanction of the limits does not entitle the borrower to draw the limit to the fullest extent
disregarding the “drawing power” worked out in terms of security cover available to the
bank. Bank considers permissible bank finance (PBF) or DP, whichever is less. Thus, if
DP works out in the excess of sanction limit, the withdrawals is restricted to the extent
of sanctioned limit. And wherein the sanction limit is in excess of DP then withdrawal
is restricted to the extent of DP.
The drawing power is calculated with the help of monthly stock statements submitted
by the borrower to the bank. It is as follows-
Stock Current
(+) Debtors
(-)Creditors O/S
Net Drawing Power
(-25%) Margin to the bank
Drawing Power (DP)
Registration under CERSAI is mandatory for all eligible cases.
2. Repayments Calculation
The interest rate is decided on the basis of circular provided by the bank taking into
account the Internal Credit Risk Rating of the borrower, base rate, coverage under
CGTMSE, percentage of Collateral security offered, whether the company falls under
priority sector lending or not and the limit of the loan sanctioned.
Supervision and follow-up of assisted project is during and after disbursement is indeed
a crucial exercise to be performed periodically with meticulous care, not only to
safeguard the interest of the term lending institution but also to ensure optimization of
returns on investments in the project. Follow-up is necessary as even a well convinced
project at appraisal stage could come to grief due to lack of adequate care, supervision
and control.
4. Tools Used
Monthly Stock Statements/6 months of Auditing done by the bank.
Analysing of annual financial statements.
Visits and Inspection.
Discussion with the management.
Executing of loan agreement and other necessary legal documents is not sufficient for
disbursing the loan. The term lending institution should ensure that the amount
disbursed would be utilized for the purpose for which it has been sanctioned.
CHAPTER 7
CASE STUDY
CASE STUDY
Consider the following proposal; to increase the cash credit limit from 1250 lacs INR
to Rs.2000 lacs INR. The increase in cash credit limit is needed to complete the existing
sales order and achieve the sales target.
Company Profile
The core competences of the company are thermal & mechanical design, fabrication,
machining & assembly and erection & commissioning of capital goods equipments. The
company product range covers all type of small capital goods equipments in power
generation and other process plant like refineries, fertilizer, chemical, smelting etc. Now
the company is equipped to fabricate large components and assemblies for all types of
power plants like Thermal, Hydro and Wind.
EXECUTIVE SUMMARY
Project Details The company has registered a steady growth in the business
operations in the current year. The company expects a
turnover of Rs. 4800 Lacs in the current year 2015-16 as
compared to the existing turnover for FY 2014-15 of Rs.
3300 Lacs. Due to this increased turnover the company has
asked for a Cash credit facility of Rs. 1700 Lacs and Bank
Guarantees of Rs. 150 Lacs and L/C of Rs. 150 Lacs.
(Existing CC Limit of ` 1000 Lacs and Bank Guarantee
limit of Rs. 150 Lacs and LC Limit of Rs. 100 Lacs with
existing Bank)
The core competences of the company are thermal & mechanical design, fabrication,
machining & assembly and erection & commissioning of capital goods equipments. The
company product range covers all type of small capital goods equipments in power
generation and other process plant like refineries, fertilizer, chemical, smelting etc. Now
the company is equipped to fabricate large components and assemblies for all types of
power plants like Thermal, Hydro and Wind.
Product Portfolio
XYZ Engineering Industries Pvt. Ltd. having its registered office in India and is a
private limited company incorporated under companies Act, 1956 in the year 2007. The
core competences of the company are thermal & mechanical design, fabrication,
machining & assembly and erection & commissioning of heat transfer equipments. The
company product range covers all types of heat transfer solutions in power generation
and other process plant like refineries, fertilizer, chemical, smelting etc. Now the
company is equipped to fabricate large components and assemblies for all types of
power plants like Thermal, Hydro and Wind.
1. Surface Condenser.
2. LP Heater.
3. HP Heater.
4. Exhaust Diffuser.
5. Other Heat Exchanger Equipment.
Shareholding Pattern
The share capital as on March 31, 2012 was Rs. 26624000 consisting 2662400 shares of
Rs 10 each. The shareholding pattern is as under-
Opportunities in the renewable sector, bio mass generation, waste heat recovery
and other sector.
A rise in the cogeneration power projects which is our niche market segment.
Threats
PROJECT DETAILS
XYZ Engineering Industries Pvt. Ltd. is currently having a Cash Credit Limits of Rs.
1000 Lacs and Bank Guarantee limit & LC of Rs. 250 Lacs with Bank.
The company has registered a steady growth in the business operations in the current
year. The company expects a turnover of Rs.4800 Lacs in the current year 2015-16 as
compared to the existing turnover for FY 2014-15 of Rs. 3300 Lacs. Due to this
increased turnover the company has asked for a Cash credit facility/WCDL of ` 1700
Lacs and Bank Guarantees of Rs. 150 Lacs and LC of Rs. 150 Lacs.
The company is looking for a Cash credit Limits, Bank Guarantee and LC Limits.
Rs. In
Lacs
L/C 150.00
Total 2000.00
The MPBF Calculation for Cash Credit Limits is as under-
Rs. In
Lacs
Current Assets
Inventory
Less: Current
Liabilities
2. Consumables
The Company till last year was not holding consumables stock but due to the
increase in the number of orders and the configuration of orders increasing in
the nature of custom built orders it has decided to keep stock of consumables
also. Hence the stock of consumables has been assumed at reasonable 90 days (3
months).
3. WIP
The production cycle is long which is further aggravated by the requirement of
in-stage inspection in many of the orders and the processing of orders may take
upto 5 months. While there may be some variation in small jobs a minimum
period of three months is nevertheless required and it has been assumed an SIP
stocking of 131 days (3 months).(For FY 2014-15 the actual days were 131
days).
4. Finished Goods
Once the job is ready it is invariably subjected to ultimate customer’s inspection
in addition to the inspection by the purchaser who is normally an EPC contractor
or OEM manufacturer. It has been the company’s experience that generally
about a month is passed between the job’s readiness and its ultimate dispatch
from the factory. This fact does not reflect in the balance sheet since there is a
universal tendency to expediency towards the financial year end. So 18 days
(half month) of stocking of finished goods has therefore been assumed. (For FY
2014-15 the actual days were 6 days).
5. Receivables
The payment terms from the majority buyers is 45 to 85 days averaging about
60-65 days. Accordingly the receivables have been assumed at 70 days for FY
2015-16(2.30 months). (For FY 2014-15 the actual days were 69 days).
6. Creditors
The credit on major material is available only against the LC. It varies from 30
to 60 days. Consumables and other spares are available on 30 days credit. Any
longer credit is usually at a higher price. Our average creditors have been around
1.75 to 2 months which the company is desirous of reducing to 51 days (1.7
months) for better pricing and faster deliveries. While the credit is available
LCs are required for availing the credit. (For FY 2014-15 the creditors days
were 96 days, however the average creditors days during the FY 2014-2015
were 45 days)
7. Other Liabilities
The other liabilities have been assumed as per FY 2014-15 for FY 2015-16 also.
i.e 25 days(0.83 months).
Sales 4800.00
Say 150.00
9. Calculation of LC
LC required 186.41
Say 150.00
PAST & PROJECTED FINANCIALS
Rs. In Lacs
Rs. In
Lacs
Share Application
Money 66.01 31.40 0.00 0.00
Sales/Total Asset
(Times) 1.18 1.24 1.23 1.27
ROCE 6% 6% 9% 8%
Investor Ratios( In `)
Generally, while performing the credit appraisal process, the bank takes into
consideration the borrower’s profile , the facilities of credit delivery required by the
corporate, the security cover which the corporate can provide, the conduct/value of the
account of the corporate, the favorable conditions and the mitigants to the project for
which loan is required, the financial position of the corporate, the credit rating of the
corporate, the RBI and the bank’s norms relating to the exposure to the industry, region,
the margin norms etc.
Taking these factors into consideration, the bank decides whether to sanction the loan to
the corporate or not. If the loan is to be sanctioned then what rate of interest is to be
provided to the corporate is decided based on the risk rating of the corporate and a host
of other subjective factors.
SUMMARY
Banking sector plays a very crucial role in development of an economy. They provide
financial assistance to different kind of projects – to entrepreneurs for establishment of
new ventures, to existing firms – for expansion, diversification and modernization; thus
encouraging industrial development.
This project is undertaken to understand the procedure followed by a bank when it
extends working capital financing to a borrower. The detailed analysis is carried out by
the bank in the form of a proposal that is assessing the parties’ financial position and its
capacity to repay the debt which it has asked from the bank.
The banks need to appraise or evaluate the corporate before lending them any credit.
This process is called the credit appraisal of the corporate. The process of credit
appraisal would begin with the selection of the proponent. It would involve appraising
the background of the proponent/management, commercial, technical and financial
appraisal. Appraisal of credit facilities would comprise two distinct segments – (I)
Appraising the acceptability of the customer and (II) Assessment of the customer’s
credit needs.
It involves studying the different information, which the bank requires to appraise the
credit to the corporate. This project includes the study of the different types of facilities
of credit delivery that the bank gives to the corporate. It also includes the study of the
method of assessment of the working capital limits. This project will also consider the
study of the various parameters that the bank takes into consideration while deciding the
credit rating of the corporate.