INTERNSHIP AT

FEDERAL BANK, THIRUVANANTHAPURAM

A report submitted in partial fulfillment of the requirements for the award of degree in
MASTER OF BUSINESS ADMINISTRATION
of
UNIVERSITY OF KERALA

Submitted By
VISAL S

Reg. No: 59517810112

2 ND Semester 2018

Under the guidance of

Mrs. Gayathri Ganesh Dr. Manoj Krishnan C G

Senior Manager (CA) Associate Professor-HRM

Federal Bank, Trivandrum TKM Institute of Management

TKM INSTITUTE OF MANAGEMENT, KOLLAM

SEPTEMBER, 2018
CERTIFICATE FROM THE COMPANY

2
CERTIFICATE FROM THE INSTITUTE

3
 DECLARATION

I, VISAL S, doing (Semester-II) Master of Business Administration at TKM

Institute of Management, do hereby declare that this internship study at FEDERAL BANK,
THIRUVANANTHAPURAM, submitted to the University of Kerala in partial fulfillment
of the requirement for the award of degree in Master of Business Administration is the record
of original study conducted by me under the guidance of Mrs. GAYATHRI GANESH,
Senior Manager (CA), Federal Bank-RCH, Thiruvananthapuram and
Dr. MANOJKRISHNAN.C.G, Associate Professor-HRM, TKM Institute Of Management,
Kollam.
I further declare that this study has not previously formed the basis for the
award of any degree, diploma, associate ship, fellowship, or other similar title of recognition.

VISAL S

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 ACKNOWLEDGEMENT

The internship opportunity I had with FEDERAL BANK was a great chance for learning
and professional development. Therefore, I consider myself as a very lucky individual as I was
provided with an opportunity to be a part of it. I am also grateful for having a chance to meet so
many wonderful people and professionals who led me through this internship period.

First of all, I would like to thank God the almighty for his blessings. I extend my
sincere thanks to Mrs. Geetha V, Deputy Vice President & RCH-Head, Federal Bank,
Thiruvananthapuram for allowing me to do internship in the RCH and providing valuable
suggestions during the internship. I am using this opportunity to express my sincere gratitude and
special thanks to Mrs. Gayathri Ganesh, Senior Manager (CA), RCH- Federal Bank,
Thiruvananthapuram who in spite of busy with her duties, took out time to hear, guide and
keep me on the correct path and allowing me to carry out my project at their esteemed
organization. I thank Dr. Jayaram Nayar, Director, TKM Institute of Management for
providing us with this Internship opportunity to get a good exposure of the corporate world
before stepping into our professional career. It is my utmost privilege to express my sincere
thanks to Dr. Manojkrishnan C G, Associate Professor- HRM, TKM Institute of
Management for providing me with valuable guidance throughout my internship.

I perceive this opportunity as a big milestone in my career development. I will strive to use
gained skills and knowledge in the best possible way, and I will continue to work on their
improvement, in order to attain desired career objectives.

VISAL S

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 TABLE OF CONTENTS

Chapter No Title Page No.

I INTRODUCTION 7
II INTERNSHIP ENVIRONMENT 8
III INTERNSHIP DETAILS- PERSONAL 15
ENGAGEMENT
 CREDIT ASSESSMENT 19
 MSME 24
 ASSESSMENT OF LOANS FOR 26
MSME’S

 CREDIT RATING 28
 CASE ASSESSMENT 30
IV INTERNSHIP OVERVIEW- 50
CONCLUSION
BIBLIOGRAPHY
APPENDIX

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 LIST OF TABLES

Table No Particulars Page No.

1 ASSESSMENT OF WORKING 53
CAPITAL
2 FRSL ASSESSMENT 56
3 DETEREMINATION OF TERM LOANS 57
FOR DIARY AND FARMING SECTOR
4 WORKING CAPITAL ASSESSMENT- 57
DAIRY & FARMING SECTOR

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EXECUTIVE SUMMARY
Micro, Small and Medium Enterprises (MSME) sector is one of the still untapped
high growth segments in India and an essential partner for achieving socio-economic growth.
MSMEs, which are spread across both urban and rural areas of the country, mostly form part
of the unorganized sector. As per present estimates, the MSME sector including Khadi,
Village and Coir industries, consist of 51 million units and provides employment to over 117
million persons. The sector contributes 7% to India’s GDP while accounting for 45% of the
total manufacturing output and 40% of the exports from India.

Federal Bank Limited is a major Indian commercial bank in the private sector
headquartered at Aluva, Kerala having more than thousand branches and ATMs spread across
different States in India. The MSME business for Federal bank constitutes about 45-50
percent of its book. They aim at boosting the small-scale business by providing sufficient
credit facilities to businessmen without any delay so that more and more business grow which
can lead to more employment opportunities and growth of the country.

During my internship at FEDERAL BANK, I was posted to the Regional Credit Hub
(RCH) of Federal Bank at Thiruvananthapuram. The topic assigned for the project was
‘CREDIT ASSESSMENT OF MSME’S’. The RCH at Thiruvananthapuram deals with the
Credit Assessment of MSME’s in Thiruvananthapuram, Kollam and Alappuzha districts of
Kerala. Loan proposals are analysed for the risk to know the Loss Given Default (LGD) by
the borrower. Credit facilities are provided as per the financial strength, viability of the
business and the credibility of the borrower.

During the internship I went through the various Credit facilities provided to
MSME’s, Credit Analysis, Credit Rating, Legal Scrutiny Report (LSR) and various schemes
of MSME loans like Export Finance, Federal Rent Securitization Loan (FRSL), Contractor
Plus Scheme and Agri based loans. Nine case analysis of various proposals received by the
bank were done and the report on the same was generated. The credit requirements of the
borrower may be in the form of funded or non- funded finance. The most commonly used
credit facilities are for Working Capital requirements, Term Loans and Bank Guarantees. A
study on the internal rating was done to understand how interest rates are charged on based
on the financial performance of the company. Also, Legal Scrutiny Report was studied to
understand how legality of the collateral is checked for any issues. I was given a target for
introducing Federal Bank Digital products to 10 customers which was achieved.

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I.INTRODUCTION

Federal Bank Limited is a leading major Indian commercial bank in the private sector
headquartered at Aluva, Kerala having more than thousand branches and ATMs spread across
different States in India. As of now, the Bank has 1252 branches, 1687 ATMs and 231 cash
recyclers across the country. I was posted as the Finance and Marketing Intern at the
Regional Credit Hub (RCH), Thiruvananthapuram. The period of internship was from 23
July 2018 to 7 September 2018 (45 Days).

Banking Industry is the backbone of our economy and it has wide untapped potential.
The government encouragement for opening bank accounts for everyone, Digital banking and
promoting domestic small and medium enterprises is an opportunity for developing my career
in the banking sector.

I got the opportunity with Federal Bank Limited for my internship as it is one of the
leading commercial bank in our country so that I could get real world exposure to the banking
industry and learn as much as possible which would help me in developing my career.

During my internship, my guide assigned me with Credit Assessment of MSME’s.

For this, first I was required to study the Federal Bank Loan Policy and then basics of credit
were understood. Then credit assessment of around nine proposals were done and reports
were generated. Along with this various loan schemes, credit rating and legal scrutiny report
were studied to get a complete picture of how the process of loans sanctioning takes place for
any business entity. As part of the internship I was required to introduce Federal Bank Digital
Products to any 10 customers which was done.

As a Finance and Marketing Intern at Federal Bank, I was looking primarily to

understand how the banking industry works and what are the essential qualities one should
have in order to excel in the finance sector. For this strong basics of accountancy and
numerical skill were required. During my internship my company guide helped me through
all the things which was not familiar to me and helped me understand things with practical
examples through various cases. It was interesting to understand how the theory learnt so far
is applied in the industry for assessing credit proposals.

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II. INTERNSHIP ENVIRONMENT- COMPANY AND INDUSTRY
ANALYSIS

INDUSTRY PROFILE: BANKING

The Indian banking system consists of 27 public sector banks, 21 private sector banks,
49 foreign banks, 56 regional rural banks, 1,562urban cooperative banks and 94,384rural
cooperative banks, in addition to cooperative credit institutions.

Banking in India, in the modern sense, originated in the last decade of the 18th century.
Among the first banks were the Bank of Hindustan, which was established in 1770 and
liquidated in 1829–32; and the General Bank of India, established in 1786 but failed in 1791.
The largest bank, and the oldest still in existence, is the State Bank of India (S.B.I). It
originated and started working as the Bank of Calcutta in mid-June 1806. In 1809, it was
renamed as the Bank of Bengal. This was one of the three banks founded by a presidency
government, the other two were the Bank of Bombay in 1840 and the Bank of Madras in
1843. The three banks were merged in 1921 to form the Imperial Bank of India, which upon
India's independence, became the State Bank of India in 1955. For many years the presidency
banks had acted as quasi-central banks, as did their successors, until the Reserve Bank of
India was established in 1935, under the Reserve Bank of India Act, 1934. In 1960, the State
Banks of India was given control of eight state-associated banks under the State Bank of
India (Subsidiary Banks) Act, 1959. These are now called its associate banks. In 1969 the
Indian government nationalised 14 major private banks, one of the big bank was Bank of
India. In 1980, 6 more private banks were nationalised. These nationalised banks are the
majority of lenders in the Indian economy. They dominate the banking sector because of their
large size and widespread networks. The Indian banking sector is broadly classified into
scheduled and non-scheduled banks. The scheduled banks are those included under the 2nd
Schedule of the Reserve Bank of India Act, 1934. The scheduled banks are further classified
into: nationalised banks; State Bank of India and its associates; Regional Rural Banks
(RRBs); foreign banks; and other Indian private sector banks. The term commercial banks
refer to both scheduled and non-scheduled commercial banks regulated under the Banking
Regulation Act, 1949. Generally, the supply, product range and reach of banking in India is
fairly mature-even though reach in rural India and to the poor still remains a challenge.

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PORTER’S SECTORAL ANALYSIS- BANKING SECTOR

 Power of buyers: Customer’s bargaining power is high because bank provide

homogenous kind of services and customers can get all the information very easily.
So, the switching cost is low for the customer.
 Power of suppliers: In the banking industry, supplier’s bargaining power is low
because banks have to meet regulatory criteria, made by RBI.
Competitive Rivalry: competition in the banking industry is very high because of
large number of public, private, foreign and co-operative banks.
 Availability of substitutes: There is a high from substitutes such as mutual funds, T-
bills, Govt. securities and NBFC’s.
Threat of new entrants: banking regulations require the approval of the regulator
RBI before setting up a new bank. So, the threat of new entrants is low in the banking
sector.

COMPANY PROFILE:

Federal Bank Limited is a major Indian commercial bank in the private sector
headquartered at Aluva, Kerala having more than thousand branches and ATMs spread across
different States in India. As of now, the Bank has 1252 branches, 1687 ATMs and 231 cash
recyclers across the country. The Bank is a pioneer among traditional banks in India in the
area of using technology to leverage its operations and was among the first banks in India to
computerize all its branches. The Bank offer its customers, a variety of services such as
Internet banking, Mobile banking, on-line bill payment, online fee collection, depository
services, Cash Management Services, merchant banking services, insurance, mutual fund
products and many more as part of its strategy to position itself as a financial super market
and to enhance customer convenience.

HISTORY:
The history of Federal Bank dates back to the pre-independence era. The founders
included Pattamukkil Varattisseril Oommen Geevarghese, and his brothers Oommen Chacko,
Oommen Kurian, and Oommen George. Oommen Geevarghese was the founder chairman
and Oommen Chacko was the managing director. The Bank was incorporated on April 23,
1931 as the Travancore Federal Bank Limited, Nedumpuram under the Travancore
Companies Regulation, 1916. Late K.P. Hormis, the visionary banker and founder took up
the reigns in 1945 and built the bank a nationwide institution. The bank was named

11
Federal Bank Limited on 2 December 1949, after completing the formalities of Banking
Regulation Act, 1949.
The Bank was licensed under the Banking Regulation Act, 1949, on July 11, 1959 and
became a scheduled commercial bank under the Second Schedule of Reserve Bank of India
Act, 1934 on July 20, 1970. Between 1963 and 1970, Federal Bank took over Chalakudy
Public Bank (est.20 July 1929 in Chalakudy), Cochin Union Bank (est.1963) in Trichur,
Alleppey Bank (est.1964; Alappuzha), St. George Union Bank (est.1965) in Puthenpally, and
Marthandam Commercial Bank (est. 1968) in Thiruvananthapuram. In 1970, Federal Bank
became a scheduled commercial bank and came out with its initial public offering in 1994.
In January 2008, Federal Bank opened its first overseas representative office in Abu Dhabi.
In April 2015, Federal Bank posted its highest ever net profit at Rs 1005.75 crore for the
fiscal 2014-15. The net profit grew 20% during the year which saw the deposits and advances
of the bank outgrow that of the industry by 40%. In November 2016, Federal Bank opened its
second UAE representative office in Dubai as part of a strategy to expand footprints in
the Persian Gulf region to serve its fast growing overseas clients. Today the bank is present in
25 States, Delhi NCT and 4 Union Territories and the bank is listed in BSE, NSE and London
Stock Exchange.

VISION:
To be the ‘Most Admired Bank' which is Digitally enabled with a sharp focus on Micro,
Medium and Middle market enterprises.

MISSION:

Devote balanced attention to the interests and expectations of stakeholders, and in particular:

Shareholders: Achieve a consistent annual post-tax return of 18% on net worth.

Employees: Develop in every employee a high degree of pride and loyalty in serving
the Bank.
Customers: Meet and even exceed expectations of target customers by delivering
appropriate products and services, employing as far as feasible, single window and
24-hour-seven-day-week concepts, leveraging a strengthened branch infrastructure,
ATMs, other alternative distribution channels, cross-selling a range of products and
services to meet customer needs varying over time, and ensuring the highest standards

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 of service at all time, guided by our principle of being 'Digital at the fore, human at
the core'.

KEY PERSONS:

Mr. K. M. Chandrasekhar - Part Time Chairman

Mr. Shyam Srinivasan - Managing Director & CEO

PRODUCTS AND SERVICES OFFERED:

Credit cards
ATM facilities
On-line bill payment
Online fee collection
Depository services
Cash Management Services
Merchant banking services
Mutual fund products
Internet Banking
Mobile Banking
Private banking
Consumer banking
Wealth management
Corporate banking
Investment banking
Insurance
Mortgage loans

FEDERAL BANK DIGITAL PRODUCTS:

FedMobile
Fednet- Internet banking
FedBook Selfie- m-passbook and Selfie account
BHIM LOTZA UPI payments app
FedCorp
Federal Calendar
Fed NR Connect

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DIGITAL BANKING:

In August 2013, Federal Bank introduced FedBook, the first electronic passbook launched by
any bank in India. FedBook is a mobile app through which customers can view their
passbook details.

In May 2015, Federal Bank and SBI Card launched Federal Bank-SBI two co-branded Visa
credit cards, namely Platinum and Gold ‘N More.

In July 2015, Federal Bank introduced automated chat facility, a first of its kind by an Indian
bank. Customer wanting to check the bank’s products and services can now visit its website
and chat with its Virtual Relationship Officer/Agent. The virtual agent generates personalised
responses to customer queries.

In August 2015, creating history, Federal Bank launched India’s first Mobile App for Bank
Account Opening. Bank has introduced this unique facility of Mobile based Bank Account
Opening as an upgrade to FedBook, its e-Passbook App. With the new avatar of FedBook,
anyone having an Aadhaar Card and PAN Card, can open a Savings Bank Account and get
their Account Number instantly using a mobile from anywhere. Further, the account can also
be funded with an initial remittance through online fund transfer up to a maximum amount of
Rs. 10000.

In August 2016, Federal Bank launched Lotza, the Unified Payment Interface app.

SYSTEM AND SOFTWARES USED:

FINACLE
CLAPS
RAM
CRESS

FINACLE is the main software of Federal Bank which contains facilities for Retail banking,
corporate banking etc... Financials are analysed using a Web based software known as
CLAPS which is integrated with other software’s like CRESS and RAM which are used for
internal credit rating purposes. CLAPS is used by the processing officers throughout the

14
assessment of credit facilities. All the financials are fed into the software which helps in
calculating the required ratios for the analysis.

SWOT ANALYSIS:

STRENGTH WEAKNESS
1. 1252 branches spread across 24
1. Less customer market in urban
states in India and 1693 ATMs
areas outside Kerala.
around India
2. Innovative but simple products and
service offerings
3. Strong hold in semi-urban market.
4. State of Art Digital support for
customers and employees

THREAT OPPURTUNITIES

1. Increasing market of retail loan in

1. Highly competitive environment
the economy.
2. Stringent Banking Norms
2. Make in India scheme helps in
3. Threat from Small Payments Bank
developing domestic market.
from different new players.
3. Deeper penetration to North Indian
states.
4. Govt. encouragement for opening
new bank accounts

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DEPARTMENT PROFILE:

The Regional Credit Hub (RCH) of federal Bank deals with the Credit Assessment of
MSME’s. Working Capital Credit facilities up to Rs. 10 Cr for manufacturing sector, service
sector and Term loans up to Rs. 5Cr are assessed at RCH and anything above Rs. 10cr is dealt
by National Credit Hub (NCH). The customers approach the bank for Credit facilities for
their business activities. Credit facilities are provided as funded as well as non-funded
finance.

1. Fund based Finance - Working Capital Finance-OD/CC

- Term Loans

2. Non-Fund based Finance- Bank Guarantees

-Letter of Credit

The proposals are received at the various branches located around the country. The
branch processes it and sends to the RCH/NCH based on the delegation. Processing Officers
at RCH analyses the proposals received through various methods. Internal Credit rating is
done and the financials of the company are analysed thoroughly. After the processing the
case is put forward for discussion in RCH committee which includes processing officers,
vice- presidents and the RCH head. They asses the risk and determine the extent of finance
that can be provided to the customer. This may vary from customer to customer due to
quality of financials and credibility of the customer. Finally, the sanction order is issued to
the bank who in turn informs the customer regarding the same.

The Regional Credit Hub (RCH) at Thiruvananthapuram consist:

RCH Head and Deputy Vice President

Assistant Vice- Presidents
Officers level- 1/2/3
Supporting staff

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III. INTERNSHIP DETAILS – PERSONAL ENGAGEMENT

The internship organization was Federal Bank limited, where I was in the position of
Finance and Marketing Intern at Regional Credit Hub (RCH), Thiruvananthapuram. My
objective as an Intern was to understand how the banking industry works and what are the
essential qualities one should have in order to excel in the finance sector. Also to understand
what are the various areas to be focused while joining a new organization as fresher and to
develop a professional attitude which could lead to value addition.

Credit Assessment of MSME’s was the key area of my internship since the RCH of Federal
Bank deals with same. This particular area requires good analytical skills along with good
numerical skills. Also strong basics of accountancy was required. The atmosphere of RCH
was very good. The officers always showed a friendly gesture and were ready to help me in
clearing my any queries. The normal work hours are from 9 am to 5pm.

During my internship my company guide was Mrs. Gayathri Ganesh, Senior Manager
(CA). She helped me through all the things which was not familiar to me and helped me
understand things with practical examples through various cases. Credit, Credit Rating,
Export Credit, Legal Scrutiny Report (LSR), Federal Rent Securitization Loan(FRSL),
Contractors Plus Scheme and Agri loans were explained to me by her. It was interesting to
understand how the theory learnt so far is applied in the industry for assessing credit
proposals.

DEPARTMENT LAYOUT:

The Regional Credit Hub (RCH) at Thiruvananthapuram consist:

RCH Head and Deputy Vice President
Assistant Vice- Presidents
Officers level- 1/2/3
Supporting staff

The total strength of RCH department is 25*.

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PROCESS:
Proposals are received at various branches around the country for credit facilities. The
corresponding branches process the proposals and sends it to RCH (Regional Credit Hub) for
evaluation. The proposals are processed by the processing officers level- 1/2/3 and it is then
put in the RCH committee for discussion of the case. The RCH Committee consists of RCH
Head, AVP’s and processing officers who discuss the case and evaluate the whether the
proposal could be sanctioned or not.

INTERNSHIP OVERVIEW:
During my internship, my guide assigned me with Credit Assessment of MSME’s.
For this, first I was required to study the Federal Bank Loan Policy and then basics of credit
were understood. Then credit assessment of around nine proposals were done and reports
were generated. Most of the credit requirements of the borrowers were in the form of
Working Capital Requirements, Term Loans or Bank Guarantees. It was interesting as well as
challenging to understand how the Credit Assessment was done.
Financial ratios need to be calculated to know the financial health of the
organizations. Strong basics of accounting was required and sharp numerical skills were
required. To face this challenge, I had to revise through the accounting for managers which
was learnt during the first semester. Also notes were provided to me by my guide which was
very useful. After facing the initial challenge, I got in to the process and slowly synced with
the organization. Understanding various cases in practical way was very interesting as I could
understand how various business organizations run their financials which was not known to
me before. Along with this various loan schemes, credit rating and legal scrutiny report were
studied to get a complete picture of how the process of loans sanctioning takes places for any
business entity.
As part of the internship I was required to introduce Federal Bank Digital Products to
any 10 customers which was done. Opening bank account with Fedbook Selfie Mobile App
was done for 4 customers. Another Federal Bank App – LOTZA was introduced to 6
customers which is a UPI based payment interface for Digital Payments.
What I found most interesting during my internship was that I could understood an
entire picture of how Banking and Credit facilities processes takes places in our country. To
know how every sector is linked to each other and how an impact in any one of the sector
affects the other.

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 The theory things which I learned from my classroom and the problems in
Accountancy and Finance management was very much required during my internship as it
was the fundamental basics of the accounting. During my internship I came across balance
sheet consolidating, financial ratios and generating report of the analysis. At Federal Bank
officers are using web based software CLAPS in which financials of the proposals are fed in
to the system which automatically generates the required ratios and other calculations.

INTERNSHIP TASKS UNDERTAKEN

Targets Assigned:
1. As part of the internship I was required to introduce Federal Bank Digital
Products to any 10 customers which was done. Opening bank account with
Fedbook Selfie Mobile App was done for 4 customers. Another Federal Bank
App – LOTZA was introduced to 6 customers which is a UPI based payment
interface for Digital Payments.
2. Case analysis of nine proposals were done on Working Capital Assessment, Term
Loans, Bank Guarantees etc.

 An Average Day:
An average day lasts from 10 am to 5pm in the organization. Meeting the company
guide and discussing for the tasks of the present day takes place at first. Files are
given by the guide for case analysis and in between if any doubts arise, it is cleared.
Report is generated and is presented before the guide which is examined by her. Any
corrections and new information obtained is noted down.

 An Average Week:
An average week includes the tasks undertaken during the current week. A weekly
revision of the Case Analysis done during the particular week are carried out so that
the new things learned are understood properly.

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 Meeting with (Name of the Person) Purpose of the Meeting & Outcome

WEEK-1
Mrs. Gayathri Ganesh, Senior Manager (CA) Briefing on Loan Policy and the nature of
work of the organization.

WEEK-2,3
Mrs. Gayathri Ganesh, Senior Manager (CA) Various loan schemes for MSME’s were
explained like FRSL, contractor Plus Scheme,
Export Finance, E-DFS Scheme.

WEEK-4,5
Mrs. Gayathri Ganesh, Senior Manager (CA) Explained Legal Scrutiny Report which is
reviewed in every proposals received to check
the quality of collateral.

WEEK-6
Mrs. Gayathri Ganesh, Senior Manager (CA) Discussion on the Report Making guidelines for
the bank.

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 CREDIT ASSESSMENT

CREDIT

The economic growth of any country is determined by the investments made by the various
entities resulting in increased production measured by the growth in GDP of such
economies. The credit provided by the banks is an important driver for such growth. In most
countries, bank loans are the main source of financing for small and medium-sized
enterprises.
In fact, banks are financial intermediaries that raise funds by way of deposits or otherwise
and lend or invest the same and make profits in the process.

In short lending is one of the core functions of the banks. It is the main source of income for
the banks. The difference between the interest they get on the loans and advances and the
interest they pay on the deposits is called the net interest income which is the major
contributor towards the profit of the banks.

TYPES OF CREDIT FACILITIES:

Banks extend both fund based and non-fund based facilities to its customers.

FUND BASED FACILITIES

Fund based facilities can be by way of working capital loans as well as term loans.

Working capital finance is extended for acquiring current assets like goods, receivables
etc.

Term loans are extended for acquiring fixed asset such a land, building, machineries etc.

 WORKING CAPITAL:

Working Capital facilities can be by way of running accounts like cash credit and
overdrafts, or payment by installments by way of demand loans or it can be by way of
purchasing/ discounting of bills.

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  Cash credit

In the case of cash credit remittances and withdrawals are permitted and hence it is called a
running account. Bank will fix a limit up to which the customer can borrow and the debit
balance in the account cannot exceed the same. Further withdrawals will also be regulated by
the value of the primary security such as goods and receivables held by the customer from
time to time and also the margin stipulated by banks. This concept is called by the name
drawing power.

 Overdraft

Banks also grant overdraft facilities against securities like fixed deposit etc. A certain limit is
fixed by the bank in such accounts taking into account the value of the deposit/other
securities and the customer can operate within this limit.

 Demand Loans
The bank advances a fixed amount for a shorter period, which has to be repaid in instalments
or in lump sum. Normally it will not be a running account

 Bills purchased / discounted

Bills of exchange are drawn by a seller on the purchaser of the goods as per the terms agreed
by them. It can be a demand bill or a nuisance bill. Banks purchases a demand bill and
discounts a usance bill.

 Demand bills
Demand bills are payable on demand and are also known by the name sight bills. Only when
the payment is made by the drawee of the bill, the banker will release the documents of title
to goods such as lorry receipt, railway receipt which are forwarded by the seller to the buyer
through the bank.
 Usance bills
Usance Bills are payable by the purchaser only after a certain period known as the credit
period allowed by the seller. So banker releases the documents like lorry receipt/ railway
receipt to the drawee without payment but on accepting the bill of exchange by him.

22
  TERM LOANS are extended banks for purchasing machineries, vehicles and other
fixed assets. It is normally repaid by installments over a period by the borrower. The
installments can be equated monthly installment or graded installments etc. The
borrower will bring a certain percentage of the cost of the asset for which finance is
granted as margin and the rest will be given by the bank as loan.

NON FUND BASED FACILITIES

In the case of non-fund based facilities there is no immediate outlay of funds. Non fund
based facilities include bank guarantees and letter of credit

 Guarantees
Banks will be issuing guarantees on behalf of their customer undertaking to pay the
beneficiary of the guarantee a certain amount of money in case the customer fails to fulfil the
obligations it has entered with the beneficiary. The bank will pay the money to the
beneficiary as and when they demand the same within the validity period of the guarantee.
The banks will charge commission from the customer for issuing such guarantees.

The guarantees issued can be a financial guarantee, performance guarantee or a deferred

payment guarantee.

 In the case of financial guarantee banks undertake to pay the beneficiary a certain
sum in case of any default by the borrower in fulfilling the terms of the contract,
which the customer has entered with the beneficiary. Banks will make the payment
to the beneficiary on roper invocation and not concerned with any dispute between
the customer and the beneficiary in respect of the terms of contract entered between
them.

 In the case of performance guarantee the bank is guaranteeing performance by its

customer and in case of default bank will pay a certain sum of money to the
beneficiary.

 Deferred payment guarantee normally arises when the customer purchases

machineries/fixed assets on credit from its supplier. That is the payment has to be

23
 made to the supplier in installments over a period of time. The bank guarantees the
payment of installments on due dates stipulated.

 Letter of credit (LC)

It is an arrangement whereby the LC issuing bank at the request of its customer

(buyer/opener) undertakes to pay the beneficiary (seller) on submitting the documents
stipulated in the LC as per the terms mentioned in such LC. So the supplier is ensured
payment and the purchaser is ensured of the supply as evidenced by the documents submitted
by the seller under the LC. It can be an inland LC or an import LC depending whether the
transaction is within the country or across the border.

In the case of LCs banks deal with documents only and make payments if the documents are
in order. The banker is not concerned with any dispute between the buyer and the seller with
respect to the goods or with other terms of the contract.

EXPORT CREDIT

Banks grant Pre-shipment / Packing credit and post shipment credit to the exporters.

Pre-shipment / Packing credit

It mans any loan or advance granted or any other credit provided by a bank to an exporter for
financing the purchase, processing, manufacturing or packing of goods prior to shipment on
the basis of a letter of credit opened in his favour or on the basis of a confirmed order.

Post shipment credit

It means any loan or advance granted or any other credit provided by a bank to an exporter of
goods / services from India after the shipment of goods / rendering of services till the
realisation of the export proceeds and also includes loans / advances grated on the security of
any duty drawback allowed by the government from time to time.

24
Types of Pre shipment finance
Packing credit
Advances against receivable from the government like the duty drawback
Advances against cheques/ drafts representing advance payment

Types of Post shipment finance

Export bills purchased/negotiated/ discounted
Advances against bills sent on collection basis
Advance against exports on consignment basis
Advances against undrawn balances
Advances against duty drawback receivable from government

Deemed Exports
Deemed exports refers to those transactions in which the goods supplied do not leave the
country and the payment for such supplies are received either in Indian rupees or in free
foreign exchange. Example supply of goods to Export Oriented Units, export Processing
Zones, special economic zone etc.

Banks have to look into the following guidelines/regulations while dealing with export
finance

RBI Guidelines
Trade Control Regulations (Foreign Trade Policy)
International Chambers of Commerce (ICC) Guidelines
Export Credit Guarantee Corporation of India Ltd
FEDAI Guidelines

25
MSME

MSME is fast growing sector in the Indian Economy. Micro, Small & Medium Enterprises
sector constitute the growth engine of the country’s economy. The MSMEs lead to
entrepreneurial development and diversification of the industrial sector, and also provide
depth to industrial base of the economy. MSMEs play crucial role in providing large
employment opportunities at comparatively lower capital cost than large industries. MSMED
Act was notified in 2006 to address different issues affecting MSMEs and seeks to facilitate
the development of these enterprises by enhancing their competitiveness. Bank has given
highest importance to financing MSMEs in our strategical growth plan. With the Government
committed to give fillip to this sector through infrastructure development, skill set
development/entrepreneurship development, technology upgradation etc., the scope for
MSME finance has increased even further.

Definition of Micro, Small and Medium Enterprises

The Government of India has enacted the Micro, Small and Medium Enterprises
Development (MSMED) Act, 2006. With the enactment of this Act, the paradigm shift that
has taken place is the inclusion of the services sector in the definition of MSMEs, apart from
extending the scope to medium enterprises. The Act modified the definition of micro, small
and medium enterprises engaged in manufacturing or production and providing or rendering
of services. Enterprises are broadly classified into two categories - Manufacturing and those
engaged in providing/ rendering of services. Both categories of enterprises have been further
classified into micro, small and medium enterprises based on their investment in plant and
machinery (for manufacturing enterprises) or on equipment (in case of enterprises providing
or rendering services).

26
The present ceiling on investment to be classified as micro, small or medium enterprises is as
under:

Enterprises Manufacturing Sector Service Sector

Original cost of Investment in plant & machinery Investment in equipment’s

Micro Enterprises Does not exceed Rs. 25 lakhs Does not exceed Rs. 10 lakhs

Small More than Rs. 25 lakhs but does not More than Rs. 10 lakhs but does

Enterprises exceed Rs. 500 lakhs not exceed Rs. 200 lakhs

Medium More than Rs.500 lakhs but does not More than Rs.200 lakhs but does

Enterprises exceed Rs.1000 lakhs not exceed Rs.500 lakhs

27
 ASSESSMENT OF LOANS AND ADVANCES FOR MSME’S

ASSESSMENT OF WORKING CAPITAL LIMITS

Reserve bank of India has permitted banks to evolve their own lending methods. Following
methods are adopted by the bank for assessment of working capital requirement of various
categories of borrowers. Other methods may also be used by the Bank for working capital
assessment if found reasonable and appropriate.

a) Turnover Method
b) MPBF (Maximum Permissible Bank Finance) Method
c) Cash Budget method

a) Turnover method
Turnover method may be used for assessing working capital needs of borrowers other than
Micro and Small Enterprises (MSE) seeking credit limits up to and including Rs.2 crores. For
Micro and Small Enterprises, turnover method would be applied for credit limits up to and
including Rs.5 crores.
b) Maximum Permissible Bank Finance Method
The MPBF method may be used for assessment of limits of above Rs. 2 crores (above Rs.5
crores in case of Micro and Small Enterprises) excluding those borrowers engaged in
activities of seasonal nature, contract works and for NBFCs. Under this method, the fund
requirement is computed based on the working capital gap of the borrower. The key
determinants for the limit, inter alia, are the extent of financing support required by the
borrower and the acceptability of the borrower’s overall financial position including the
projected level of liquidity.

c) Cash Budget Method

Cash budget method may be used for assessing WC finance for seasonal industries like sugar,
tea, construction activity among others. The required finance is quantified from the projected
cash flows and not from the projected values of current assets and current liabilities. Other
aspects of assessment like examination of funds flow, profitability, financial parameters, etc.
are also carried out.

28
ASSESSMENT OF AD HOC LIMITS

Adequate regular limits shall be sanctioned to borrowers taking into account the working
capital cycle and other material facts so as to avoid request for ad hoc limits by the borrower
till next renewal of limits. Ad hoc requirement can arise on account of cash flow mismatches,
seasonal nature of business, change in external environment etc. The circumstances and the
reasons for considering ad hoc facility should be analysed carefully and mentioned in the
appraisal note.

ASSESSMENT OF TERM LOANS

(A). Term Loans can be extended for capital expenditure, long term working capital
requirements, on lending, etc. In respect of term loans for capital expenditure, it shall be
ensured that the total project cost arrived at is accurate, comprehensive, reasonable and
realistic. The proportion of debt and equity components i.e. the project debt / equity gearing,
envisaged in the tie up of the means of financing of the project is examined to ascertain
whether it is reasonable and acceptable. There is no standard project Debt / Equity (D/E)
ratio that can be prescribed for any project. The stipulation of this ratio for a project shall be
based on various factors such as nature and size of the project, location, capital intensity,
gestation period, promoters‟ capacity, state of the capital markets, importance to the national
economy, government policies, etc. There are no rigid norms for the project Debt/Equity
ratios. However, one of the deciding factors of the D/E ratio will be the debt servicing ability
of the project. After taking into consideration the above-mentioned factors and the suitability
of the various sources of finance with due regard to the financial leverage envisaged for the
project, the term finance arrived at shall be validated and accepted.

(B). The quantum of credit dispensation in the form of term loans should be in accordance
with the Bank’s policy to reduce the blocking of funds for longer period, to facilitate planning
and management of the maturity pattern of Bank’s assets and liabilities. Bank shall restrict
the maximum tenure for terms loans (except retail loans) to 15 years. Credit Committee/
Board may consider longer period on a case to case basis

29
 CREDIT RATING

CREDIT RISK ASSESSMENT

The Bank’s approach to credit facilities and assessment of credit risks encompasses both
funded and non-funded exposures. Before a credit facility is sanctioned to any borrower,
credit officers shall perform a comprehensive assessment of the risk profile of the borrower
and transaction characteristics based on broad categories of risk namely, financial risk,
business risk, industry risk & management risk and assign appropriate risk grade to the
borrower.

RATING METHODOLOGY

(A). The RAM models for rating Corporate and SME borrowers are developed on two-
dimensional rating methodology:

 OBLIGOR RISK RATING (ORR): It brings in the first dimension. Obligor risk
rating indicates the probability of default (PD) of the borrower.

 FACILITY RISK RATING (FRR): It brings in the second dimension. Facility

rating reflects the collateral and / or guarantees provided by the borrower to
strengthen the credit quality and which has bearing on recovery and Loss Given
Default (LGD).

 A combination of the Obligor Risk Rating (ORR) and Facility Risk Rating (FRR)
provides the combined rating of a borrower (FBR) in RAM, which indicates the
expected loss in case of default.

(B). The CRESS score cards are simple scoring models which will identify and assess the
risk in retail, agriculture and micro/small business borrowers at the time of granting the
facility, enabling the Bank to accept or reject a proposal.

30
GRADE DEFINITION OF RISK GRADES:

Obligor Risk Rating - ORR1 indicates the highest safety and ORR10 the default grade.

Facility Risk Rating - The FRR grade indicates the percentage of effective LGD.FRR1
indicates that the effective LGD is nil or the least and FRR8 indicates that the effective LGD
is the highest.

Combined Rating - The combined rating grade FBR1 indicates that the Expected Loss
(function of PD & LGD) is nil or least suggesting that at the event of default the loss to the
Bank is least or none and FBR10 indicates that the loss to the Bank is maximum.

Acceptable rating grades

(A). The combined rating FBR shall form the basis of lending decisions and FBR6 shall be
the threshold rating grade with FBR1 to FBR6 forming the acceptable rating grades. There
will be 6 investment grade ORR grades (ORR1 to ORR6) for Large Corporate, NBFC,
Contractor, Real Estate and LRD models, 5 investment grade ORR grades (ORR3 to ORR7)
for Large Trader, SME Manufacturer & SME Service Models and 4 investment grade ORR
grades (ORR4 to ORR7) for SME Trader model.

(B). For minimizing expected loss, all fresh advances to ORR7 rated borrowers will be
subject to availability of sufficient collateral/guarantee to improve the FBR rating to
minimum FBR6 grade.

31
 CREDIT ASSESSMENT

CASE ANALYSIS-1

PROPOSAL FOR EXTENSION OF WORKING CAPITAL LIMIT-OD

COMPANY PROFILE:

The proposal given here is for the extension of existing OD facility of a second hand
car dealer. Presently they are enjoying an OD of 2.5 CR. The borrower has been continuing
the business for the past few years and are well experienced.

The borrower is buying the used cars from the owners directly by full payment. There is no
transfer of ownership of the vehicles to the company’s name, instead only possession remains
with them. When the sale of a vehicle is done, the ownership is directly transferred to the new
owner from the previous owner.

The borrower has pointed out that there has been a decline in sales due to the impact of GST
and demonetisation. The second hand car trading got a hit due to high percentage of tax. Also
the cash transactions above 2 lakhs was not possible. The company is also facing stiff
competition from the owner local parties.

ANALYSIS:

 The used car is seen recovering from the impact of GST and Demonetisation. Hence the
CAGR of sales may decline in the coming years.
 The Tangible Net worth (TNW) is observed to be having positive growth rate.
 Current ratio is showing a positive trend. I.e.; They are having enough short term assets
to pay their short term liabilities.
 The TOL/TNW shows the company is having a moderate risk. Since the promoter’s
stake in the business is greater than 2 and less than 3.
 Return on capital employed(ROCE) shows a positive growth rate. i.e.; There is efficient
use of capital in the business.

32
 The operating profit went down in 2017 (demonetisation + GST) and now they are
slowly gaining back momentum.
 The interest cover is less than 2. i.e.; They can pay interest with debts moderately.
 The creditors payment period is less than 3 days. This shows that the borrower makes
purchase through full payment rather than credit.
 Debtors realization Period is around 70 days (2 months) on an average. i.e.; The
borrower can recover the amount within 70 days.
 The borrower is having around 36 days of inventory holding period. i.e.; It takes slightly
more than a month for the sale of a car.
 There is a good purchase to sales ratio of 92%, which shows stocks are not getting
accumulated.
 The operating Cycle i.e.; the conversion of cash back to cash takes around 3.5 months. It
can be noted that operating cycle is quite healthy for a second-hand car dealer.

INFERENCE:

From the analysis it can be inferred that the business is performing moderately. Also,
it has been noted that the Drawing Power (DP) has been lower than the OD limit for the past
2-3 years. So, it is suggested that current OD limit should be reduced to an amount on par
with their current drawing power of the past few years. Further it is advised to review the
borrower’s performance on a timely basis.

33
 CASE ANALYSIS-2

RENEWAL OF WORKING CAPITAL LIMIT-CC

COMPANY PROFILE:

The proposal given here is for the renewal of Cash Credit (cc) limit of Rs. 75 lacs for
working capital requirement of a gun manufacturing company. The borrower is in to the
manufacture, wholesale and retail sales of gun and other explosive products.

The company was established in 1996 and is banking with us since 2007. Presently,
there are having a Term Loan (TL) of Rs. 3.5 lacs.

The borrower deals with fire arms, air rifles, high explosives, ammunition, and
chemicals etc. which are distributed by Central Govt. Department. They used to settle the
suppliers account with cash in order to avoid any delay in payment. Hence, all the sales are
not routed through the bank account. Both the partners are High Net Worth individuals
having high value FD accounts in one of our branch.

FINANCIAL ANALYSIS:

 There is no sign of debtors which shows that the borrower gets the payment at the
very instance of sale. There is no delay in payment for them from the customers.
 Presently the current ratio of the company is very high is very high and in the
estimated and projected, the current ratio is closer to 2. This shows that the can pay
the short term obligations with its current assets.
 The ROCE values shows positive growth rate. i.e.; they are utilising there capital in a
moderately good manner.
 The operating profit shows positive growth rate i.e.; they are utilising there capital in
a moderately good manner.
 TOL/TNW is less than 1 in all the cases and hence the business reliance on debts is
very low and should be noted.
 The CAGR may decline in the company years and shows inconsistency.
 The DP of the borrower on an average is less than 30 lacs.
 The Inventory Holding Period is less than 20 days on an average.

34
  The purchase to sales ratio is around 80% which is quite good for a manufacturing
firm.
 The interest cover times is very high which is primarily due to the underutilisation of
the CC limits. It will only come down if the CC limits are properly utilised.

INFERENCE:

From the analysis it can be seen that the borrower is having very poor utilisation of CC limits.
On an average the company utilises only 30 lacs of the allotted limit. Since, the funds are not
properly utilised it is recommended to charge the commitment fee for the unutilised portion
of CC.

Further it is noted that the transactions are done through the bank which is not
acceptable. So, it is advised to route the transactions through the bank for better utilisation of
CC facilities.

Therefore, the CC limit can be renewed only to a limit of 30 lacs as per the present financial
conditions of the company.

35
 CASE ANALYSIS- 3

EXTENSION OF PEAK SEASON LIMIT FOR WORKING CAPITAL

LIMIT-CC

COMPANY PROFILE:

The borrower is a sole proprietorship. They are banking with us since 2014. The
proposal given here is for extending the peak season limit (Rs. 15 lacs) by one month for a
trading company which deals with wholesale distribution and stockiest of hill produce items
(pepper, medicinal honey, areca nut, rubber and cardamom. The CC limit of the company
was enhanced to Rs. 110 lacs (Rs. 95 lacs for non-peak season and Rs. 15 lacs in the peak
season) in March 2018. Due to the changes in the external environment the party has sought
for extension of the peak season limit till 31/08/2018 from the already extended 2 months
dated 02/06/2018.

The borrower is a well-known businessman of the locality and has made various
improvements in the company. The borrower is regular in its payment and the transactions
are routed through our account. The borrower is expanding their business and is into exports
also. The payment from exports comes only after inspection of products, therefore Operating
Cycle (OC) is greater than 1.5 months.

FINANCIAL ANALYSIS:

 The current ratio is below 1.18 which is low and therefore the company may find
difficulty in paying its liabilities with its assets.
 The TOL/TNW is in the margin. i.e.; Owner’s stake in business is quite low.
 PBIDT is having a strong positive growth.
 The growth in sales is very strong and the estimated and projected sales for coming
years is Rs. 1100 lacs and Rs. 1600 lacs respectively.
 The ROCE is having good return rate of around 45%.
 Interest coverage ratio is greater than 2. I.e. the company can make payment with
debts quite well.

36
  Debt/TNW is greater than 2.5 on an average which is quite risky for the creditors.
 It is noted that stock insurance is expiring soon.
 Currently the DP (Drawing Power) is around Rs. 26 lacs but its projected and
estimated figures is around Rs. 100 lacs.
 In 2017, it is observed that large portion of purchases were on credit.
 Creditors payment period is estimated to be less than a month, currently the company
lacs fund to pay the creditors.
 Debtor’s Realization Period is estimated to be around 45 days.
 The Inventory Holding Period is slightly more than a month.
 The Operating Cycle takes around 45 days.
 There is a very good purchases to sales ratio in the estimated but there is
inconsistency in the previous years.

INFERENCE:

From the analysis it can be observed that the borrower is in a booming stage and is rapidly
trying to expand its business. They are currently lacking funds for their payments. The
current ratio should be improved so as to minimise the risk. Since the TOL/TNW is very high
than the prescribed limit, the owner should increase the Net Worth of the company by
infusing additional capital. It is advised to renew the stock insurance as soon as possible.
Since the products are seasonal in nature and it is also a precondition for the disbursal of the
amount.

Therefore, taking into consideration the borrower’s good profile and timely payment of
interest and from the financials it is recommended to extend the seasonal peak limit by
additional one month (till 31/08/2018). The Drawing Power (DP) of the borrower is currently
very low which should be considered seriously, otherwise it can lead to cut in CC limit in
future.

37
 CASE ANALYSIS-4

PROPOSAL FOR TERM LOAN AND WORKING CAPITAL LIMIT

FOR A NEW FIRM

COMPANY PROFILE:

The borrower is a new concern which is dealing with Light Commercial Vehicle
(LCV) dealership of a reputed automobile company. They have obtained the license from the
Automobile Company for the sales and service of LCV’s. They have put a proposal for a CC
limit of Rs. 100 lacs and Rs. 25 lacs as Term Loan. The term loan is for the furnishing works
of the showroom which is being carried out at an estimate of Rs. 54.51 lacs. The working
capital is for funding of spares and stocks of vehicles. The borrower has also obtained license
for setting up another showroom in the next district.

The promoters are well qualified and are financially sound. One of the promoter is
already in to vehicle dealership. The working capital limit of Rs. 100 lacs (Rs. 90 lacs EDFS
Scheme and Rs. 10 lacs as cash credit).

Term loans:

Term loan is loan from a bank for a specific amount that has a specified repayment
schedule and a fixed or floating interest rate. It is used for purchase of equipment, real estate
or other fixed assets.

DSCR:

It stands for ‘Debt Service Coverage Ratio’. It is a measure of the level of cash flow
available to pay current debt obligations such as interest, principal and lease payments.

For e.g.: A DSCR of 0.89 indicates that the company’s net operating income is able to cover
89% of its annual debt payments.

𝑃𝑃𝑃+𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃+𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑃𝑃 𝑃𝑃𝑃𝑃 𝑃𝑃𝑃𝑃𝑃

DSCR=
𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑃𝑃 𝑃𝑃𝑃𝑃 𝑃𝑃𝑃𝑃𝑃𝑃+𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑃𝑃 𝑃𝑃𝑃𝑃 𝑃𝑃𝑃𝑃

E-D FS Scheme:

E-DFS stands for Electronic Dealer Financing Scheme. In this Scheme, the bank
directly pays the credit amount of the dealer to the company. The dealer gets a period of 60

38
days to sell the vehicle and repay the amount to the bank. If they fail to deliver within the
time, the account will be freezes for further OD/CC transactions.

PROPOSAL FOR TERM LOAN:

The borrower has put a proposal for Rs. 25 lacs for the furnishing works of the newly
opening showroom which is under construction of 54.50 lacs. The showroom is a leased one
with monthly rent of Rs. 0.55lacs.

OBSERVATIONS FROM UNIT INSPECTION:

 The borrowers are in the field for more than 15 years and are well experienced.
 It is observed that the first floor works were almost complete and the furnishing was
going on.
 They are planning the official commencement in July 2018, so that they can capture
the Onam sales.
 One of the borrower is already into vehicle dealership and are having CC limit of Rs.
70 lacs with another bank.
 While conducting unit visit it was observed that some of the assets to be financed are
already in place and hence, a portion of loan is as reimbursements.

ASSUMPTIONS:

 Since it is a new company there is projected and estimated balance sheet only with
some assumptions.
 The sales are assumed at 35 vehicles per month for the next 8 months in FY 2018-19
which comes to turnover of 1400 lacs. The increase in sales is assumed at 25%.

FINANCIAL ANALYSIS:

 The borrower is having a very good PBIDT projection for the coming years.
 TNW is having a good growth rate.
 The growth in sales is assumed at 25%. TOL/TNW is greater than 4 which is
projected to be coming down in the coming years as it is a new company.
 ROCE is having good return of around 20% on an average.

39
  The current ratio is projected around to be around 1.37 which should be improved
further.
 PBIDT/sales are mostly less than 2 and PAT (Profit after Tax) is projected to be
around 0.94.
 Interest cover times is greater than 2. I.e.; the company will be able to pay its interest
on debt easily.
 The DSCR is calculated to be around 4.20, which is acceptable to the bank as per the
loan policy.

INFERENCE:

Considering the financial projection and the experience of the borrower in the similar
field, the request for proposal is viable to the bank. The borrower has brought own fund for
many of the asset purchases. Also, they are eligible for working capital of around Rs. 3cr but
they have only requested for 1 cr. The Rs. 10 lacs CC is for maintaining the spare parts of the
vehicle which is reasonable. The request for Rs. 25 lacs Term loan can also be considered.
They have already purchased 50% of the own fund for movable asset purchases. The OD
facility of Rs. 90 lacs can also be considered through E-DFS facility.

Therefore, the request for Rs. 1.25cr bank finance (Rs. 90 lacs OD + Rs. 10 lacs CC
+Rs. 25 lacs Term Loan) can be sanctioned. Please note that the post sanction conditions of
closing the account with the other bank should take place within 4 months and maintaining
active transactions through our account shall take place.

40
 CASE ANALYSIS-5

ENHANCEMENT OF WORKING CAPITAL LIMIT AND NEW TERM

LOAN

COMPANY PROFILE:

The borrower is a sole proprietorship. The family members of the borrower are good
customers of our bank and are from a reputed family. Currently they are under a takeover
threat by another bank who have offered 8.95% interest with Rs. 60lacs credit enhancement.
The borrower is growing well and they are in agreement with major building projects around
the state.

The proposal is by a pipe manufacturing and sales company who already have a working
capital limit of Rs. 100 lacs and a term loan of Rs. 100 lacs with our bank. Presently they
have requested to enhance the limit to Rs. 160 lacs for CC and a term loan of Rs. 10 lacs for
setting up additional units for increasing the production. They are also having an existing cc
limit of Rs. 10 lacs for their tile manufacturing company. They have also requested for the
waiver of margin by 25%.

Assumptions for term loan:

1. Tax is calculated at 20 and depreciation is at 15% of the fixed assets valued at 135
lacs.
2. PBIDT margin is 7%.
3. Existing 10L loan for the tile manufacturing company will be sealed off.

FINANCIAL ANALYSIS:

 The operating income declines in 2017, which may be due to impact of GST and
demonetisation and now it shows sign of recovery.
 PBIDT declines at first and then shows signs of recovery later.
 ROCE is around 10%.
 Current Ratio is greater than the required benchmark level and therefore it is
satisfactory.

41
  Debt/TNW is less than 1 which is good for the company’s creditors.
 TOL/TNW is around 1.7 which is good.
 Growth in sales shows negative figures in 2017 and in 2018 it shows 140% increase
in sales which is good. It is mainly due to setting up of additional units for production.
 Interest cover is more than 2 and is satisfactory.
 Currently the DP is around 115 lacs and in the projected they have shown DP of
167.11 lacs which is a huge increase on a yearly basis.
 The purchase to sales ratio is around 90%.
 Operating cycle is around 3 months, currently it is 4-5 months.
 DSCR is calculated to be around 3.08.

INFERENCE:

From the analysis it can be inferred that the borrower is expanding their business.
They are currently enhancing their production due to increased demand. The borrower is also
having a good relation with our branch. Considering the financials, it can be noted that
currently the DP of the company is around Rs. 115 lacs and will be higher when the
additional units start their production. Considering the takeover threat from other banks and
from satisfactory financials, we can allow them a CC limit of Rs. 150 lacs. Since the DSCR is
in the acceptable range, the term loan of Rs. 10 lacs can be sanctioned for a period of 5 years
with a cushioning period of 12 months. Also, it has been advised to procure all the bills of the
already purchased items.

42
 CASE ANALYSIS -6

EXPORT FINANCE

COMPANY PROFILE

The borrower is a partnership firm which was incorporated in 2006. They are into the
processing and exporting of seafood items and are banking with us since 2006. They are
currently having the following credit facilities with us.

Funded exposure

PCL: Rs. 800 lacs

PCFC (Sublimit): $ 10 lacs

Post-shipment limit (L): Rs. 200 lacs

EBRD (FC): Rs. 135 lacs

Non- Funded Exposure

Bank Guarantee: Rs. 16.03 lacs

PROPOSAL:

The existing Pre-Shipment and Post- shipment limits are due for renewal and the
branch has submitted the renewal papers along with the request to renew the facility at the
same levels.

FINANCIALS:

 The sales growth is 25% in FY16, in FY17 it slowed down to 11% and in FY18 it
projected a 62% growth. In 2017, the projected sales of Rs. 5000 lacs sales fall short
off around Rs. 1200 lacs in sales. This was mainly due to the impact of Okhie
Cyclone. There is reported demand from other countries like china and middle-east
due which they have a much higher projection in the coming years.
 PBIDT shows a good positive growth rate.

43
  Current ratio is above the benchmark rate but the value is coming down to 1.23 in FY
-17 from 1.65.
 The Net worth is growing in good manner.
 The interest coverage ratio is high which is good for the firm.
 ROCE has a good growth rate of around 25%.
 TOL/TNW is within the prescribed limits.
 The Assessed Bank Finance (ABF) from the calculations come to around Rs. 950
lacs. The LC (FDBP/FUBP) of Rs. 200 lacs were considered outside ABF and Rs.
800 lacs were for PCL/PCFC.
 There was underutilisation of (FDBP/FUBP) LC in FY17, for which they have given
explanation that shipments were paid in advance. Also, they have assured of getting
few orders.

INFERENCE:

From the analysis it can be noted that the borrower is established one and is rapidly
trying to expand its market. There has been some fall in the sales due to the unfavourable
climatic conditions. The financials of the company are pretty strong and has been performing
consistently for the past years. The borrower and the parties are prominent and esteemed
customers if the branch. So it is recommended to renew the limit with following:

PC: Rs. 800 lacs

PCFC (sublimit of PC): $10 lacs

FDBP/FUBP (LC): Rs. 200 lacs

44
 CASE ANALYSIS-7

CONTRACTORS PLUS SCHEME

COMPANY PROFILE:

The borrower is a Govt. contractor of A- class who is banking with us since 2007. At
present he is having a Rs. 220 lacs CC limit and Rs. 50 lacs BG with us. He is having works
with Total PAC Rs. 756.25 lacs on which bills realised are Rs. 374.53 lacs. He is having new
fresh work PAC of Rs. 309.86 lacs.

The borrower has currently put forward a proposal for enhancing the CC limit to Rs.
250 lacs and BG limit to Rs. 100 lacs, since he has got fresh orders in hand.

It is noted that the party regularly falls into SMA. He is also having two other bank
accounts from which one is used for receiving the treasury payments.

FINANCIALS:

 Current Ratio is lower than the required benchmark level.

 ROCE is around 16% which is good.
 TOL/TNW is currently very high and it is seen to be coming down to benchmark
within the next year.
 The operating profit shows a steady positive growth rate.
 The turnover for 2017 was Rs. 274.38 lacs against the projected Rs. 1066 lacs. So, the
turnover through the account is very low which is to be noted.
 Interest Coverage Ratio is 1.65 which is very low.

INFERENCE:

As per the analysis the working capital limit enhancement seems to be viable since the
borrower is having orders in hand. Also he has mentioned that the low performance is due to
the delay in reception of bills from the government. Since, the ratios are low it is advised to
infuse additional capital of Rs. 20 lacs in the coming financial year.

45
 CASE ANALYSIS-8

FEDERAL RENT SECURITIAZATION LOAN SCHEME

COMPANY PROFILE

The borrower and her husband are HNI NRE clients of one of our branches. The
applicant is working as a banker in Kuwait and her husband is employed as an advocate there
itself. Both of them together have deposits of worth Rs. 148 lacs with our branch. They are
also having a housing loan limit of Rs. 25 lacs with balance outstanding of Rs. 0.54 lacs. The
current proposal is for a rent securitization loan of 50lacs from us. The borrower is having a
commercial property where a commercial building is under construction. Also, specifically
note that our branch is shifting to the ground floor of the ongoing project.
Corporate Planning Department (CPD) has given sanction for 1900 sq. feet for
shifting premises of our branch. As per the MOU, the lease period is for a period of 15 years
and lease rental rate is at Rs. 35 per square feet.

BANK SUGGESTIONS:

As per the bank policy, a short term demand loan can be sanctioned for construction
of building of Rs. 35lacs for 12 months. Once the building is completed and lease agreement
is executed, FRSL can be sanctioned and disbursed to close the short term loan.

COST OF PROJECT:

Construction of two storied commercial building with total plinth area 1772sqm.: Rs. 117.78
lacs.

Demand Loan: Rs. 35 lacs

Own Fund: Rs. 82.78 lacs

FRSL ASSESSMENT:

Total Net Present Value: Rs. 35 Lacs

46
The total monthly rent of the proposal premises as per MOU signed between the bank and the
lessor is Rs. 66500/- (1900 Sq. feet @ 35 per Sq. feet). We have considered a monthly rental
of Rs. 45952 after deductions of 30.90% TDS. The receivables are discounted @ 12.25%
applicable for FBR1 rated facility as the lessee is our bank itself.

INFERENCE:

From the FRSL assessment and understanding the profile of the borrower, Rs. 35 lacs
can be sanctioned at 12.25% for a period of 12 months. The collateral is more than sufficient
for the eligibility. Also, the parties are HNI NRE customers of our branch. It is also noted that
our branch is going to shift to the new premises of the so called project soon.

47
 CASE ANALYSIS-9

AGRCULTURAL AND ALLIED ACTIVITY (FARMING CATTLE AND

DAIRYING)

COMPANY PROFILE:

The borrower is running a high-tech dairy farm which was established in 2006. The
dairy farm is under sole proprietorship. The borrower is banking with us since 2013. In 2013,
they have installed a pasteurization unit under a brand name XYZ milk products which is
very popular around the locality. At present they are having more than 200 cows and their
calves. They are also procuring milk from his diary farm and from another dairy farm in
Tamil Nadu. The processing of milk products includes pasteurization, homogenization,
packing of milk of various brands (whole, standard, toned and double toned milk) and
supplying it to shops in the nearby towns.

PROPOSAL:

 Renewal of existing CC limit of Rs. 25 lacs to meet the working capital requirements.
 AMTL of Rs. 16.80 lacs for purchasing four brand new Mahindra Maximo Plus mini
truck under Federal Agri Mobile loan.
 AMTL of Rs. 7.60 lacs for purchasing a boiler unit for the dairy farm.

DETERMINATION OF TERM LOAN

1. Agri Mobile Loan: Rs. 16.60 lacs

Cost of purchase of 4 vehicles at 4.20 lacs per vehicle: Rs. 16.80 lacs

2. Assessment of Term Loan: Rs. 7.60 lacs

Eligible Loan Amount =75% of Rs. 33, 50,000/-

= Rs. 25, 12,500/-

Recommended Loan Amount =Rs. 25, 00,000/-

48
SECURITIES:

Collateral requirement as per margin norms (A): Rs. 355.50 lacs

Available collateral security (B) : Rs. 240 lacs

Shortage (A-B) : Rs. 115 lacs

Waiver (%) : Rs. 32.48%

FINANCIAL PERFORMANCE:

Net Sales shows a strong positive growth rate over the years.

OPBDIT shows positive growth rate.

TNW seems to be growing with a small dip during 2017.

DSCR is calculated to be around 4.52 which is good.

INFERENCE:

The high tech dairy farm is expanding its business and is planning for new value added
products. For the last few years they have been performing very well. Entire transactions are
routed through our account. An arrear of Rs. 2.93 lacs were seen which is associated with a
subsidy amount of Rs. 27.50 lacs from NABARD. They have assured that the loan will be
closed after the subsidy is credited to the loan account. All other financials of the dairy farm
is performing very well.

So, it is recommended that the following limits may be sanctioned:

 Rs. 16.80 lacs –Agri Mobile Loan @ 9.95 % for 7 years.

 Rs. 7.60 lacs- Term Loan @ 11.45% for 7 years
 Rs. 25 lacs- Extension of CC limit @ 11.45% for 12 months.

49
 IV. INTERNSHIP LEARNING OUTCOME

CONCLUSION:

The Internship at Federal Bank Limited was very fruitful one. I got an overall view
and good exposure of the Banking Industry. Federal Bank is a leading commercial bank in
India with more than thousand branches around the country. The posting in Regional Credit
Hub was further more interesting as I am looking forward to develop my career as a financial
analyst in future. The Credit Assessment of various cases helped me to understand which are
the areas that I need to strengthen myself so that I can develop a good career. The main task
that is the processing of business loans for MSME’s also gave a good understanding of how
business entities obtain financial support from the bank for carrying out their business
operations. Working Capital requirements in the form of overdraft / cash credit, Term loans,
Bank Guarantees are the major forms of credit requirement for MSME’s.

A study on Internal Credit Rating which is an important factor in determining the

maximum permissible bank finance to the company. RAM and CRESS are the web based
software used in providing credit rating. Financial ratios need to be calculated from the
audited balance sheets and P&L A/C to know the financial health of the organizations. Strong
basics of accounting and sharp numerical skills were required for carrying out the assessment.
To face this challenge, I had to revise through the accounting for managers which was learnt
during the first semester. A study on the Legal Scrutiny Report (LSR) was done and exposure
to a case was done. LSR is used to check the quality of collateral provided by the borrower
against the credit facilities. Understanding various cases in practical way was very interesting
as I could understand how various business organizations run their financials which was not
known to me before.

Definitely the Internship at Federal Bank has added value to my career. Exposure to
one of the most reputed bank has given me an overall idea of how the banking industry
works.

50
 BIBILOGRAPHY

Textbooks:

1. The Fundamentals of Financial Management by Dr. Priya Singh

2. Management Accounting , Kalyani Publishers, New Delhi

Manuals and other documents:

1. Federal Bank Loan Policy

2. FRSL scheme
3. Contractors plus scheme

Websites:

 https://www.federalbank.co.in/
 https://en.wikipedia.org/wiki/Federal_Bank

51
 APPENDIX-I

LIST OF CUSTOMERS TO WHOM FEDERAL BANK DIGITAL PRODUCTS WERE

INTODUCED:

NAME ACCOUNT APPLICATION STATUS OF

NUMBER INSTALLED CUSTOMER

1 HARISANKAR 99980105605856 FEDBOOK NEW

BS SELFIE ACCOUNT

2 RAHUL PS 99980106315281 FEDBOOK NEW

SELFIE ACCOUNT

3 ARJUN 99980104209833 FEDBOOK NEW

PRASAD SELFIE ACCOUNT

4 PRANAV B 11420100173035 FEDBOOK NEW

SELFIE ACCOUNT

5 ARAVIND S.S 99980101716178 LOTZA UPI APP EXISTING

6 JINU VS 1634010008995 LOTZA UPI APP EXISTING

7 NIDHAL 11420100113742 LOTZA UPI APP EXISTING

8 REMYA 99980101893688 LOTZA UPI APP EXISTING

9 ANU 11290100393671 LOTZA UPI APP EXISTING

10 SHARAN 16340100073107 LOTZA UPI APP EXISTING

52
 APPENDIX-II
CALCULATIONS:

CASE1:

YEAR/ PERIOD 2016 2017 2018 2019 2020

ENDING
LIABILITIES AUDIT AUDIT PROVISON ESTIMAT PROJECT
ED ED AL ED ED
NET WORTH
Equity 131.87 132.97 149.67 135.74 143.25
Contingency Reserve
Other reserves 22.75 24.74
Less: Debit Bal in P&L 10.08 11.12 13.92 15.24 18.62
A/C
Sub Total 121.78 121.84 135.74 143.25 149.37
TERM LIABILITIES
Term Loans 35.84 31.65 30.54 35 35
Deferred Tax- Liability
Unsecured Loans
Sub Total 35.84 31.65 30.54 35 35
CURRENT
LIABILITIES
Short Term Bank 226.32 235.7 245.91 250 250
Borrowings
Sundry Creditors 5.96 8.35 7.56 7.25 7.5
Instalment of Term loans
Provisions
Other Current Liabilities 0.07 0.13
Sub Total 232.36 244.2 253.48 257.25 257.5
GRAND TOTAL 390 408.82 419.77 435.5 441.87

Assets

53
FIXED ASSETS
Gross Block incl. WIP 33.47 24.78 21.81 19.21 16.93
Less: Depreciation
Net Block 33.47 24.78 21.81 19.21 16.93
OTHER NON CURRENT
ASSETS
Investment in Associates
Investments in others
Security Deposits 5 5 5 5 5
Sundry debtors >6M
Loans & adv. to associates
Loans & adv.- others
Sub Total 5 5 5 5 5
CURRENT ASSETS
Cash and Bank incl. FD 15.21 12.81 7.61 10.5 7.5
FD with banks
Receivables 193.92 238.66 256.93 269.54 266.93
Inventory
Other current assets 142.38 128.19 128.15 131.25 145.5
Sub Total 351.52 379.04 392.7 411.29 419.93
GRAND TOTAL 390 408.82 419.77 435.5 441.87

Total Operating Income 1399.04 1265.41 1456.37 1607.5 1639

PBIDT 39.75 35.65 51.4 60.26 65.47
Interest 23.61 21.59 31.73 34.91 38.45
Depreciation 4.87 3.41 2.97 2.59 2.27
Operating Profit 11.26 11.18 16.7 22.75 24.74
Non-Operating Income
PBT
Tax
PAT 11.26 11.8 16.7 22.75 24.74
Cash Accruals 16.13 14.59 19.67 25.35 27.02

54
Dividend
Paid Up Capital
Tangible Net Worth 121.78 121.84 135.74 143.25 149.37
Exp in subsidiaries/ group
-Investments
-Loans and adv.
Adjusted TNW 121.78 121.84 135.74 143.25 149.37
Net Working Capital 103.94 122.66 131.86 154.04 162.43
Growth in Sales (%) -9.55 15 10.35 1.98
Growth in PAT (%) -0.7 49.37 26 8.75
PBIDT/Sales (%) 2.84 2.81 3.52 3.74 3.99
PAT/Sales (%) 0.8 0.88 1.14 1.41 1.5
Debt/TNW (times) 1.59 1.95 1.89 1.88 1.78
Debt/ ATNW (times) 1.59 1.95 1.89 1.88 1.78
Total Liabilities/ TNW 2.2 2.26 2.09 2.04 1.95
(times)
Total Liabilities/ ATNW 2.2 2.26 2.09 2.04 1.95
(times)
Total Debt/ Non Cur. 38.78 47.73 51.38 53.9 53.38
Assets
Current Ratio (times) 1.51 1.55 1.54 1.59 1.63
ROCE (%) 31.42 35.31 54.68 65 70.7
Interest Cover(times) 1.68 1.69 1.61 1.72 1.7

Purchases 1278.97 1147.65 1336.22 1471.25 1501.2

DP
Paid Stock 135.56 118.5 120.59 124 138

75% of the above 101.67 88.87 90.44 93 103.5

DP against book debts@ 116.35 143.2 154.15 161.72 160.16

55
40% margin

Total DP 218.02 232.07 244.6 254.72 263.66

Age of Creditors 0.055 0.087 0.067 0.0591 0.0559

Age of Debtors 1.66 2.26 2.11 2.01 1.95

Inventory upon sales 1.21 1.2 1.05 0.97 1.06

Operating Cycle 2.81 3.37 3.09 2.92 2.95

% of purchases to sales 91.41 90.69 91.75 91.54 91.59

CASE-8

Period of rent for assessment:10 years

Discounted at 12.25 %

Name of the Tenant Net Present Value (lacs)

Federal Bank Ltd. 35

Total (A) 35

-less deposits -

Total (B) 0

Net PV(A-B) 35

Less Margin@ Nil 0

Eligible Loan Amount Rs. 35

56
CASE-9

1. Boiler cost Rs. 10,00,000/-

2. GST @ 2% Rs. 20,000/-

TOTAL Rs. 10,20,000/-

1. Balance due after advance Rs. 7,70,000/-

payment Rs. 2,55,000/-
2. Margin @ 25%
Rs. 7,65,000/-
ELIGIBLE LOAN AMOUNT
LOAN AMOUNT RECOMMENDED Rs. 7,60,000/-

WORKING CAPITAL ASSESSEMENT:

Sl.NO ITEMS STOCKING AMOUNT

(months) REQUIRED (Rs.
)

1 Feeds 2 19,32,000/-

2 Direct wages 2 3,18,000/-

3 Insurance 1yr @ 5% 5,50,000/-

4 Medicine, vaccines, Food supplements etc. 2 1,50,000/-

5 Other direct expenses (transportation of feed, 2 4,00,000/-

animal, veterinary charges, electricity charges
etc.)

TOTAL COST FOR 2 MONTHS 33,50,000/-

57
58