A PROJECT REPORT

ON

“CREDIT APPRAISAL & RISK ASSESSMENT MODEL FOR MSME’s”

At

SMALL INDUSTRIES DEVELOPMENT BANK OF INDIA

(Submitted in partial fulfillment of requirement for the PGDM Course

2012-14)

Under the guidance of:

Prof. Neeti Shikha

Internal Faculty guide

And

Mrs Ranjana Bhattacharjee

AGM, GSC Department, SIDBI

SUBMITTED BY:

ANKITA AGARWAL

ROLL NO.: 211020

PGDM 2012-14

FORE SCHOOL OF MANAGEMENT

B-18, QUTUB INSTITUTIONAL AREA, NEW DELHI

1
 CERTIFICATE

This is to certify that Ms. Ankita Agarwal, Roll No. 211020, has completed her summer

internship at Small Industries Development Bank Of India(SIDBI) , and has submitted

this project report entitled (Credit Appraisal and Risk Assessment Model for

MSME’s) towards part fulfillment of the requirements for the award of the Post Graduate

Diploma in Management (FMG-21) 2012-2014.

This Report is the result of her own work and to the best of my knowledge no part of it

has earlier comprised any other report, monograph, dissertation or book. This project

was carried out under my overall supervision.

Date:

Place:

————————————-
Company Project Guide

2
 CERTIFICATE

This is to certify that Ms. Ankita Agarwal, Roll No. 211020, has completed her summer

internship at Small Industries Development Bank Of India(SIDBI) , and has submitted

this project report entitled (Credit Appraisal and Risk Assessment Model for

MSME’s) towards part fulfillment of the requirements for the award of the Post Graduate

Diploma in Management (FMG-21) 2012-2014.

This Report is the result of her own work and to the best of my knowledge no part of it

has earlier comprised any other report, monograph, dissertation or book. This project

was carried out under my overall supervision.

Date:

Place:

————————————-
Internal Faculty Guide

3
 ACKNOWLEDGEMENT

Behind every fruitful endeavour lies the advice, guidance and inspiration of all the

people directly or indirectly involved with the report. I wish to express my gratitude to all

the people involved in the completion of this report. I am thankful to all of them for their

help and encouragement throughout the completion of the report. They have been a

constant source of support for me.

I would like to extend my sincere gratitude to the management of SIDBI for providing me

the enriching opportunity of working with the organization and its team for a period of 2

months. In particular, I would like to thank my Company Guide, Mrs. Ranjana

Bhattacharjee for sparing the time to provide me with necessary guidance and advice

from time to time, with utmost patience, in spite of their extremely busy schedule. I

would also like to express my sincere gratitude to Mr. Kaushlendra Kumar and Mr.

Mukesh Jaiswal of the Central Loan Processing Cell (CLPC) Department for providing

me with valuable inputs.

My heartfelt gratitude and warm salutations are also due to Prof .Neeti Shikha, the

faculty of our Institute, for inculcating in me the principles of dedication and hard work,

and proving her guidance and support throughout the Project.

Their constructive criticism of the approach to the problem and the result obtained

during the course of this work has helped me to a great extent in bringing work to its

present shape.

ANKITA AGARWAL

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 EXECUTIVE SUMMARY

The project titled ‘Credit Appraisal and Risk Assessment Model for MSME’s’ is

concerned with the analysis of the various aspects of project financing and the

importance of rating the various MSME’s which forms the basis for assessing the risk

and charging rate of interest on the loan proposal.

Since micro, small and medium enterprises are important drivers for the economy of the

country therefore it is important for nodal agencies like SIDBI to assist them with the

credit requirement at a cost effective and timely manner. So the aim of the study is to

study thoroughly the various aspects(technical, economic, financial and commercial

aspects) of credit appraisal and to study the various norms which are followed by SIDBI

towards disbursement of loans. Moreover SIDBI assists the MSME’s with various

subsidy schemes which cover various sectors like textile, leather, food etc where

technology upgradation is important for the growth of the sector. So an attempt has

been made to study the various subsidy schemes provided by SIDBI.

The most common teething problem faced by MSMEs is getting access to credit. One of

the best ways to ensure credit worthiness, as recommended by many organizations, is

to go for credit rating by a third party. This report also tries to delve deeper into the

rating model used by SIDBI to rate various proposals. Moreover an in depth comparison

has been made on the parameters used by the model for the manufacturing and service

sector. This has been done to see the effectiveness of the risk assessment model used

by the company.

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 TABLE OF CONTENTS

ACKNOWLEDGEMENT……………………………………………………………………….iv

EXECUTIVE SUMMARY………………………………………………………………………………………………………………… v

1.INTRODUCTION 1
1.1 INDUSTRY OVERVIEW 1
1.2 COMPANY PROFILE 4
1.3 RELEVANCE OF THE STUDY…………………………………………………………………………………………………………..11

1.4 OBJECTIVES OF THE PROJECT……………………………………………………………………………………………………….12

2.LITERATURE REVIEW 13
2.1 SCOPE OF THE STUDY…………………………………………………………………………………………………………………..13
2.2 INTRODUCTION TO PROJECT FINANCING 16
2.3 PROCEDURAL ASPECTS OF PROJECT FINANCING IN BANKS………………………………………………………….16

3.METHODOLOGY 19

3.1 UNIVERSE OF THE STUDY 19

3.2 LOCALE OF THE STUDY 19
3.3 SAMPLE SELECTION…………………………………………………………..………………………………………………………..19

3.4 DATA COLLECTION 19

3.5 ANALYSIS OF DATA 20
3.6 FIELD EXPERIENCE…………………………………………………………..………………………………………………………….20

4.TERM LOAN AND WORKING CAPITAL CASE STUDIES AT SIDBI………………………………………………………..21

4.1 CASE 1-TERM LOAN 21

4.1.1 TECHNICAL APPRAISAL 21
4.1.2 COMMERCIAL APPRAISAL………………………………………………………………………………………………..22

4.1.3 FINANCIAL APPRAISAL 22

4.1.4 MANAGEMENT APPRAISAL 31
4.1.5 COMPLIANCE ANALYSIS FOR SUBSIDY ASSISSTANCE…………………………………………………………31

4.2 CASE 2-WORKING CAPITAL LOAN………………………………………………………………………………………………37

5.RISK ASSESSMENT AT SIDBI……………………………………………………………………………………………………………39

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 5.1 IMPORTANCE OF CREDIT RATING FOR MSME’s 39
5.2 SCOPE OF CREDIT RATING 39
5.3 RATING REPORT FOR ‘ABC’ COMPANY…………………………………………………………..………………………….41

5.4 COMPARISON OF RAM MODEL OF MANUFACTURING AND SERVICE INDUSTRY 49

6. CONCLUSION AND SUGGESTIONS 56
ANNEXURE………………………………………………………………………………………………………………………………………………i

BIBLIOGRAPHY……………………………………………………………………………………………………………………………………..xii

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 LIST OF TABLES

Table 1: Past Financial Performance of ‘ABC’ company................................................23

Table 2: Desirable Norms and parameters for eligibility of assistance...........................25

Table 3: Breakeven point................................................................................................27

Table 4: Discounted Cash Flow Techniques..................................................................27

Table 5: Sensitivity Analysis...........................................................................................28

Table 6: Projected Profitability........................................................................................30

Table 7: Eligibility under JICA scheme...........................................................................31

Table 8: Financial Parameters for JICA scheme............................................................33

Table 9: Eligibility under CLCSS Subsidy.......................................................................35

Table 10: Nayak Committee Method..............................................................................37

Table 11: Second Method Of Lending............................................................................38

Table 12: Ratings and their significance.........................................................................40
Table 13: Rating Summary Table...................................................................................41
Table 14: Obligor Rating Table.......................................................................................42

LIST OF FIGURES

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Figure 1: Number of enterprises in the MSME sector......................................................1

Figure 2: Employment in MSME sector............................................................................2

Figure 3: Growth comparison : MSME vs IIP & GDP%....................................................3

Figure 4: Structure of Indian Banking...............................................................................4

Figure 5: Categorization of micro, small and medium enterprises...................................6

Figure 6: Trend in the growth of MSEs and employment generated..............................13

Figure 7: Graphical representation of BEP.....................................................................27

Figure 8: Graphical representation of ROCE,IRR and CoC...........................................28

CHAPTER-1

INTRODUCTION

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1.1 INDUSTRY OVERVIEW

The Micro, Small and Medium Enterprises (MSMEs) play a key role in the economic
and social development of the country. They also play a major role in the development
of the economy with their effective, efficient and flexible entrepreneurial spirit. The
MSME sector contributes to the country’s manufacturing output, exports and
employment and is credited with generating the highest employment growth.

The MSME sector in India is highly heterogeneous in terms of the size of the
enterprises, variety of products and services, and levels of technology. The sector not
only plays a critical role in providing employment opportunities at comparatively lower
capital cost than large industries but also helps in industrialization of rural and backward
areas, reducing regional imbalances and assuring more equitable distribution of national
income and wealth. MSMEs complement large industries as ancillary units and
contribute enormously to the socioeconomic development of the country. The
continuous increase in the MSME industries and the employment in the sector shows
the importance and credibility of this sector.

Fig 1. Number of Enterprises in the MSME sector(Source: Annual report 2012-

13,www.msme.gov.in)

Fig 2. Employment in MSME sector(Source: Annual report 2012-13-

www.msme.gov.in)

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Key highlights of the MSME Sector:

• MSMEs account for about 45% of India’s manufacturing output.

• MSMEs account for about 40% of India’s total exports.

• The sector is projected to employ about 73 mn people in more than 31 mn units

spread across the country.

• MSMEs manufacture more than 6,000 products ranging from traditional to high tech
items.

• For FY11, total production coming from the MSME sector was projected at Rs
10,957.6 bn, an increase of more than 11% over the previous year.

MSMEs have outperformed IIP and GDP growth rates in the past five years. The total
production of MSMEs for FY11 was Rs 10,957.6 bn (at 2001-02 prices). Between FY07
and FY11, the sector’s total production grew at a CAGR of 11.5% - a clear indication of
the substantial contribution of MSMEs to the Indian economy. During FY12, total
production of MSMEs was projected to grow at 11.48%, compared to industrial and
GDP growth of 8.2% and 8.4% respectively.

Fig 3. Growth Comparison: MSME vs IIP & GDP(%)

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A dynamic global economic scenario has thrown up various opportunities and
challenges to the MSME sector in India. On the one hand, numerous opportunities have
opened up for this sector to enhance productivity and look at new national and
international markets. On the other hand, these opportunities compel the MSMEs to
upgrade their competencies to contend with competition since obsolescence is rapid
with new products being launched at an incredible pace and are available worldwide in
a short time.

Despite the various challenges it has been facing, the MSME sector has shown
admirable innovativeness, adaptability and resilience to survive the recent economic
downturn and recession.

Fig 4. The Structure Of Indian Banking

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1.2 COMPANY PROFILE

Small Industries Development Bank of India (SIDBI), set up on April 2, 1990 under an
Act of Indian Parliament, is the Principal Financial Institution for the Promotion,
Financing and Development of the Micro, Small and Medium Enterprise (MSME) sector
and for Co-ordination of the functions of the institutions engaged in similar activities.

Business Domain of SIDBI

The business domain of SIDBI consists of Micro, Small and Medium Enterprises
(MSMEs), which contribute significantly to the national economy in terms of production,
employment and exports. MSME sector is an important pillar of Indian economy as it
contributes greatly to the growth of Indian economy with a vast network of around 3
crore units, creating employment of about 7 crore, manufacturing more than 6,000
products, contributing about 45% to manufacturing output and about 40% of exports,

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directly and indirectly. In addition, SIDBI's assistance also flows to the service sector
including transport, health care, tourism sectors etc.

Objectives of SIDBI

Four basic objectives are set out in the SIDBI Charter. They are:

 Financing

 Promotion

 Development

 Co-ordination

for orderly growth of industry in the small scale sector. The Charter has provided SIDBI
considerable flexibility in adopting appropriate operational strategies to meet these
objectives. The activities of SIDBI, as they have evolved over the period of time, now
meet almost all the requirements of small scale industries which fall into a wide
spectrum constituting modern and technologically superior units at one end and
traditional units at the other

Development Outlook

The major issues confronting MSMEs are identified to be:

 Technology obsolescence

 Managerial inadequacies

 Delayed Payments

 Poor Quality

 Incidence of Sickness

 Lack of Appropriate Infrastructure and

 Lack of Marketing Network

There can be many more similar issues hindering the orderly growth of MSMEs. Over
the years, SIDBI has put in place financing schemes either through its direct financing
mechanism or through indirect assistance mechanism and special focus programmes
under its P&D initiatives. In its approach, SIDBI has struck a good balance between
financing and providing other support services.

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SIDBI’s MISSION AND VISION

Mission
"To facilitate and strengthen credit flow to MSMEs and address both financial and
developmental gaps in the MSME eco-system"

Vision
“To emerge as a single window for meeting the financial and developmental needs
of the MSME sector to make it strong, vibrant and globally competitive, to position
SIDBI Brand as the preferred and customer - friendly institution and for
enhancement of share - holder wealth and highest corporate values through
modern technology platform.”

Fig 5. CATEGORIZATION OF MICRO,SMALL AND MEDIUM ENTERPRISES

SIDBI AS NODAL AGENCY FOR GOVERNMENT SCHEMES

SIDBI has been identified as a Nodal Agency for the releasing of assistance, monitoring,
interface and coordination with Financial Institutions, Banks and the Government. SIDBI
provides subsidies to the MSME’s under the following schemes:-

1) Technology Upgradation Fund Scheme-Textile Sector(TUFS)

The Scheme was launched by the Ministry of Textiles, GoI on April 1, 1999 and its
objective is to upgrade & modernize the Indian Textile Industry by encouraging it to
undertake & adopt modern technological process or undertake capacity expansion.

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SIDBI is the nodal agency for the SSI in the textile and cotton ginning and pressing
sector.

TUFS Objective & Incentives

i) A reimbursement of 5% on the interest charged by the lending agency on a

project of technology up gradation in conformity with the Scheme. However,
for spinning machinery the scheme will provide 4% for new stand alone /
replacement / modernization of spinning machinery; and 5% for spinning units
with matching capacity in weaving / knitting / processing / garmenting.

ii) Additional option to the powerlooms units and independent preparatory units
to avail 20% Margin Money subsidy under Restructured TUFS in lieu of 5%
interest reimbursement on investment in TUF compatible specified machinery
subject to a capital ceiling of Rs. 500 lakh and ceiling on margin money
subsidy of Rs.60 lakh. However, for brand new shuttleless looms the ceiling
on margin money subsidy will be Rs.1 crore. A minimum of 15% equity
contribution from beneficiaries will be ensured.

iii) An option to SSI textile and jute sector to avail of 15% Margin Money subsidy
in lieu of 5% interest reimbursement on investment in TUF compatible
specified machinery subject to a capital ceiling of Rs. 500 lakh and ceiling on
margin money subsidy of Rs.45 lakh. A minimum of 15% equity contribution
from beneficiaries will be ensured.

iv) 5% interest reimbursement plus 10% capital subsidy for specified processing,
garmenting and technical textile machinery..

v) 5% interest reimbursement plus 10% capital subsidy for brand new

shuttleless looms.

vi) 25% capital subsidy in lieu of 5% interest reimbursement on purchase of the

new machinery and equipments for the pre-loom & post-loom operations,
handlooms/up-gradation of handlooms and testing & Quality Control
equipments, for handloom production units.

vii) 25% capital subsidy in lieu of 5% interest reimbursement on benchmarked

machinery of silk sector as applicable for Handloom sector.

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2) Credit Linked Capital Subsidy Scheme

he objective of this subsidy is to facilitate technology up gradation of SSI units in the

specified products / sub-sectors by providing 15 % capital subsidy for induction of well
established and improved technologies.

Other than SIDBI and NABARD, following nine banks have been inducted as Nodal
Banks for the purpose of CLCSS:

• State Bank of India

• Canara Bank

• Bank of Baroda

• Punjab National Bank

• Bank of India

• Andhra Bank

• State Bank of Bikaner & Jaipur

• Tamil Nadu Industrial Investment Corporation

• The National Small Industries Corporation

The eligible borrowers for this subsidy include sole proprietorships, partnerships, Co-
operative Societies and Private and Public Limited Companies in SSI sector

Eligibility

 Units going for upgradation with state of the art technology with or without
expansion

 New units setting up facilities only with the appropriate and proven technology
approved by GTAB

 The units registered with State Directorate of Industries.

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Maximum Ceiling of loan eligible for support

 15% of the investment in eligible plant & machinery

 Ceiling on Loan- Rs.100 lakh

 Ceiling on subsidy-Rs. 15 lakh

3) Integrated Development of Leather Sector Scheme

In order to increase employment opportunities, productivity and competitiveness in the

global market, it is essential for the Leather Industry to have access to timely and
adequate capital for upgrading its technology level.

In light of the foregoing the present scheme is aimed at enabling existing tanneries,
footwear, footwear components and leather products units to upgrade leading to
productivity gains, right-sizing of capacity, cost cutting, design and development.

QUANTUM AND NATURE OF ASSISTANCE

Cases prior to August 29, 2008

The Scheme provides investment subsidy to the extent of 30% of cost of plant &
machinery for SSI and 20% of cost of plant & machinery for other units (i.e. non-SSI
units) subject to a ceiling of Rs. 50 lakh for technology up gradation / modernization
and/or expansion.

Cases subsequent to August 29, 2008

The Scheme provides investment subsidy to the extent of 30% of cost of plant &
machinery for SSI and 20% of cost of plant & machinery for other units (i.e. non-SSI
units), subject to a ceiling of Rs. 50 lakh for technology up gradation /modernization
and/or expansion and setting up a new unit. The subsidy amount would be @ 20% for
all units (both SSI and non-SSI) above Rs. 50 lakh, subject to a ceiling of Rs. 200 lakh.
Investment subsidy would also be available to units investing their own resources.

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SIDBI FINANCING SCHEME FOR ENERGY SAVING PROJECTS IN MSME SECTION

OBJECTIVE

The Japan International Cooperation Agency (JICA) has extended a Line of Credit to
Small Industries Development Bank of India (SIDBI) for financing Energy Saving
Projects in Micro, Small, and Medium Enterprises (MSMEs) Sector. The project is
expected to encourage MSME units to undertake energy saving investments in plant
& machinery / production process to reduce energy consumption, enhance energy
efficiency, reduce CO2 emissions and improve the profitability in the long run.
The financial assistance to MSMEs will be through SIDBI, as well as through refinance
to banks / State Finance Corporations (SFCs) and Non Banking Financial Companies
(NBFCs). Under the Line technical assistance is also provided to financial institutions
and MSME units for dissemination of information and successful implementation of
Energy Saving projects in MSME Sector.

FINANCIAL PARAMETERS

The financial parameters for assistance under the Scheme are:

PARAMETER NORM
Minimum Assistance Rs. 10 lakh
Minimum Promoters 25% for existing units
Contribution 33% for new units
Debt-Equity Ratio Maximum 2.5:1
Interest Rate The interest rate is based on internal risk rating within
the band given below:
 Fixed rate :9.5-10% p.a
 Floating rate:9.75-10.5% p.a
Security First Charge over assets acquired under the scheme;
first/second charge over existing assets and collateral
security
as may be deemed necessary.
Asset coverage Minimum Assets Coverage should be 1.4:1 for new
units and 1.3: 1 for existing units.
Repayment Need based. Normally, the repayment period doesn’t
Period extend
beyond 7 years. However, longer repayment period of
more
than 7 years can be considered under the Line if
considered
necessary.

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During the year 2011-12, capital subsidy claims of 638 eligible Micro and Small
Enterprises (MSEs) directly assisted by SIDBI and amounting to `43.86 crore were
settled under CLCSS. Further, subsidy claims of 909 MSEs amounting to `53.29 crore in
respect of co-opted Primary Lending Institutions were also settled. Since the launch of
the Scheme in October 2000, capital subsidy claims of 9,324 units aggregating `463
crore (cumulative) were settled. Similarly under TUFS, subsidy claims (both interest
incentive subsidy & capital/ margin money subsidy) of 305 eligible textile units for
SIDBI’s directly assisted cases amounting to `24 crore and subsidy claims aggregating
`14 crore were settled in respect of the co-opted PLIs for their assistance to MSEs.
Since the launch of the TUFS in April 1999, capital subsidy and interest incentive claims
for an amount of `636 crore (cumulative) have been settled. Under IDLSS, which was
launched in November 2005, cumulative claims of 1094 units aggregating `179 crore
were settled including 139 units amounting to `22 crore during FY 2011-12.

1.3 RELEVANCE OF THE STUDY

The MSME sector has shown impressive potential during the last few years but it faces
a number of challenges to its growth story. MSME’s suffer the high cost of credit which
does not reach them on time. There is inadequate capital infusion compounded by
insufficient data on credit requirement. In order to capture some of the major challenges
related to the credit requirement of the MSME’s this project is taken up to understand
how SIDBI has put up a robust procedure to the disbursement of term loan and working
capital loan in order to help MSME’s in technological upgradation as well as providing
them with timely financial assistance.

Since giving credit rating is one of the most important procedures taken by financial
institutes that offer credit to MSMEs to scrutinize their credit rating status in order to get
a clear picture of the creditworthiness of the enterprises therefore an attempt has been
made to study the Risk Assessment Model used by SIDBI to rate the MSME’s and thus
determine the risk and the interest rates for the project undertaken. An attempt is also
made to compare the different parameters taken into consideration for a manufacturing
sector proposal and a service sector proposal and then it is deduced why certain
parameters are taken into consideration and why some are not taken for the two
industries.

1.4 OBJECTIVES OF THE PROJECT

The objective of this project is:-

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1) To have an overview of the working and structure of SIDBI.

2) To understand Project Financing procedure with emphasis on Project Appraisal part

and the analytical techniques (DSCR, IRR, BEP, DE Ratio etc.) used in Small Industries
Development Bank Of India (SIDBI) for the disbursement of loans.

3) To study the credit risk scoring and rating model at SIDBI.

4) To gain in depth knowledge of project appraisal by taking up a case study of SIDBI

highlighting the technical, economical, financial and commercial aspects of project
appraisal.

5) To do a comparative study of the parameters of the Risk Assessment Model which

are considered in the manufacturing and the service sector proposals.

These objectives help in understanding how SIDBI has struck a good balance between
financing and providing other support services to the MSME’s.

CHAPTER-2

LITERATURE REVIEW

2.1 SCOPE OF THE STUDY

The contribution of micro, small and medium enterprises (MSME) sector to

manufacturing output, employment and exports of the country is quite significant.
According to estimates, in terms of value, the sector accounts for about 45 per cent of
the manufacturing output and 40 percent of the total exports of India. The MSME sector
employs about 42 million persons in over 13 million units throughout the country. There
are more than 6000 products, ranging from traditional to high-tech items, which are
being manufactured by the Indian MSMEs.

Fig 6. Trends in the growth of Micro and Small Enterprises (MSEs) and the

21
Employment Generated (in lakh)

Source: Annual Report, 2008-09. Ministry of Micro, Small and Medium Enterprises,
www.msme.gov.in

It can be deciphered from the graph that the number of MSEs has increased steadily in
India from 67.87 lakhs in 1990-91 to 133.68 lakhs in 2007-08. This could be possible
due to the conducive policy environment during the liberalization era (post 1991).
Similarly, number of persons employed in MSEs has risen from 158.34 lakhs in 1990-91
to 322.28 lakhs in 2007-08. The yawning gap between the two lines over the years
indicates that employment elasticity of the MSE sector has improved. However, much of
the labour absorption has taken place in the unorganized/ informal enterprises.
Inspite of being an important sector in the Indian economy MSME’s are facing some
issues.
According to The Challenge of Employment in India: An Informal Economy Perspective
(NCEUS,2009) shows that between August 2007 and 2008, credit for credit cards
increased by 86.3 per cent, all services sectors by 35.3 per cent, construction by 48.3
per cent, and real estate by 46.3 per cent. However, the increase to credit agriculture
and allied activities has been 18.5 percent and for small-scale industries (including
micro enterprises) just 9.7 per cent.

The overall availability of credit to small and micro enterprises as percentage of net
bank credit (NBC) of the Scheduled Commercial Banks (SCB) has declined from 15.5
per cent in 1996-97 to 6.6 per cent in 2007-08. Banks’ credit to micro enterprises

22
(investment up to Rs 25 lakh in plant and machinery) declined from 4.2 percent in 2002-
03 to 2.8 percent in 2007-08. The lower segment of micro enterprises (with investment
up to Rs 5 lakh in plant and machinery) has experienced a decline from 2.2 per cent to
1.6 percent in the same period. The proportion of net bank credit flows to the small
scale sector has been falling in recent years (from 16 per cent in early 1990s to 8
percent in 2006–2007)
Banks show their reluctance to extend credit to small enterprises because of the
following reasons:
• High administrative costs of small-scale lending
• Asymmetric information;
• High risk perception
• Lack of collateral.
Credit guarantee schemes diminishes the risk incurred by lenders and are mainly a
reaction to small firms’ lack of collateral. Such schemes do have the potential to reduce
the costs of small-scale lending and to improve the information available on borrowers.
They enable small firms to access formal credit and also improve the terms of a loan.
Such schemes assist small enterprises to obtain finance for working capital, investment
and/or leasing purposes at reasonable conditions. This enables SMEs to improve their
competitiveness and to extend their economic activity. Weaknesses of credit guarantee
schemes can be avoided through proper design and private sector involvement.

Some of the key constraints that are being faced by the Indian MSMEs are:

 Accessing adequate and timely financing on competitive terms, particularly

longer tenure loans.

 Accessing credit on easy terms has become difficult in the backdrop of current
global financial crisis and the resultant liquidity constraints in the Indian financial
sector, which has held back the growth of SMEs and impeded overall growth and
development.

 The financing constraints faced by Indian SMEs are attributable to a combination

of factors that include policy, legal/regulatory framework (in terms of recovery,
bankruptcy and contract enforcement), institutional weaknesses (absence of
good credit appraisal and risk management/ monitoring tools), and lack of
reliable credit information on SMEs.

 It has become difficult for lenders to be able to assess risk premiums properly,
creating differences in the perceived versus real risk profiles of SMEs.

 Access to skilled manpower, R&D facilities and marketing channels is limited.

 Availability of finance at cheaper rates, skills about decision-making and good

management and accounting practices, and access to modern technology.

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Looking at all the above constraints it is essential for organizations that are associated
with small-scale industry/ MSMEs like SIDBI to put in place an effective project
appraisal system so that MSME’s can get timely and effective disbursement of loans for
up gradation of technology in the various sectors.

The government of India has taken a large number of steps in the form of formation of
nodal bodies as well as providing a number of schemes like TUFS,CLCSS etc in order
to provide financial assistance to MSME’s. Some of the products and services offered
by SIDBI in this regard as follows:-

Institutional: Focuses on refinance schemes, like Mahila Udyam Nidhi, finance to small
transport operators, technology upgradation fund for textile units, loans for acquisition of
ISO certification, self-employment loan for ex-servicemen, single window finance for
short term credit, all of them operated through SFCs or SIDCs or primary lending
institutions or Banks or other microfinance institutions, depending upon the category of
loans.

Promotional: SIDBI acts as a nodal agency for several Government schemes such as
Technology Upgradation Fund Scheme for the textile sector, Integrated Development of
Leather Sector Scheme for the leather sector and Modernization/Upgradation of Food
Processing Industry.
SIDBI Venture Capital Fund Ltd (SVCL) manages two funds set up by SIDBI at the
national level.
The National Venture Capital Fund for Software and IT Industry (NFSIT) is worth 100
crore INR, established with the focus of supporting incubation projects of small-scale
units in the IT and related business.
The SME Growth Fund has a corpus of 500 crore INR which targets growth-oriented
businesses in the areas of life sciences, retailing, light engineering, food processing, IT,
infrastructure related services, healthcare, logistics and distribution, for making primary
equity and equity related investment.
Apart from these provisions more support is needed for MSMEs from the government in
the form of priority sector lending, government procurement programme, credit and
performance ratings and marketing support. Technology transfers (such as green
technology) and networking can revive the growth of MSMEs.

2.2 INTRODUCTION TO PROJECT FINANCING

Project Financing is the financing of long-term infrastructure and industrial projects

based upon a complex financial structure where project debt and equity are used to
finance the project. Risk identification and allocation are key components of project
finance.

Banks and other financial institutions have to ensure the viability of the project i.e the
project will generate sufficient returns on the resources invested in it.

24
Any surplus available from the project should be sufficient to pay interest on term loans
and repay the principal amount within a reasonable period depending on the nature of
the project.
The viability of a project depends on technical feasibility, marketability of products at a
profitable price, availability of financial resources in time and proper management of the
unit.

2.3 PROCEDURAL ASPECTS OF PROJECT FINANCING IN BANKS

Development operations financed by follow a procedure cycle, which is almost identical

for all kinds of projects whose technical, economic, and financial feasibility has been
established. These projects must have a reasonable economic rate of return and should
be intended to promote development in the beneficiary country. The procedure consists
of the following:-

 IDENTIFICATION OF THE PROJECT

The project’s idea is introduced to providers by various sources: a request from the
government concerned or financials identification missions may identify a proposal from
other financiers, or it. Applications for financing are then sorted out and classified:
projects to be financed are selected from amongst projects which have top priority in the
development plans of the beneficiary countries and which meet the requirements
established by the rules for financing set out by the providers and agreed upon by the
government concerned. In all cases, an official request from the government should be
submitted to financials before it decides to participate in the financing.

 DESK REVIEW AND DETERMINATION OF THE PROJECT’S SCOPE

Experts, each in his field of specialization, study all the documents available on the
project and examine its components, its estimated local and foreign costs, the
preliminary financing plan, the position of the other sources of financing, the current
economic situation and the development policy of the beneficiary country and, generally,
review all elements which may help in making the project a success.

 PRELIMINARY APPROVAL

The findings of the project’s review are set out in a report prepared by financials experts
and submitted to Board of Directors for preliminary approval for undertaking further
studies on the said project with the intention of considering the possibility of
organization’s participation in its financing.

 PROJECT APPRAISAL AND SUBMISSION TO THE BOARD

25
After the project has been granted preliminary approval, organizations usually
dispatches an appraisal mission to the project’s site. The appraisal stage is considered
to be one of the key stages of the procedure in this stage the project’s objectives,
components, cost, financing plan, justification and all its economic, technical and legal
aspects are determined. The project’s implementation schedule, the methods of
procurement of goods and services, the economic and financial analysis and the
implementing and operating agencies are also examined at this stage. Based on the
results of the appraisal mission, an appraisal report is prepared, as well as a Director
General’s report which is submitted to the Board of Directors for final approval.

 CONSULTATIONS WITH OTHER COFINANCERS

Consultations are considered to be one of the important stages in the procedure. It is

during this stage that agreement is reached regarding the financing plan, the type of
financing, and distribution of the components of the project so as to ensure the smooth
flow of disbursements during execution of the various components of the project. This
coordination should continue throughout the project implementation period to ensure the
fulfillment of its objectives.

 NEGOTIATIONS AND SIGNATURE OF THE LOAN AGREEMENT

After the beneficiary government is informed of the Board of Directors’ decision to

extend the loan according to the terms agreed upon during the appraisal of the project,
the loan agreement is prepared and negotiated, and eventually signed with the
government concerned.

 DECLARATION OF EFFECTIVENESS OF THE LOAN AGREEMENT

A loan agreement is declared effective after continuous contacts with the government
concerned and the other co-financiers and after fulfillment of all conditions precedent to
effectiveness stipulated in the loan agreement.

 PROJECT IMPLEMENTATION AND DISBURSEMENT FROM THE LOAN

After the declaration of effectiveness of the loan agreement, the project’s

implementation and, consequently, the disbursements from the loan funds start
according to the plan agreed upon during the appraisal process and in line with the
rules and provisions of the loan agreement signed between the two parties.

 SUPERVISION AND FOLLOW UP

Financials undertakes the follow-up of the project’s implementation through its field
missions sent to the project’s site or through the periodic reports which it requires the
beneficiary country to provide on a quarterly basis. These reports enable them to advise
the government concerned on the best ways to implement the project.

26
  CURRENT STATUS REPORTS
Whenever necessary, experts prepare status reports which include the most recent
information and developments on the project’s implementation. These reports are
submitted to the Board of Directors for information and approval of any possible
amendments, which may be required for implementation. This is done in coordination
and agreement with the government concerned and the other co-financiers.

 PROJECT COMPLETION REPORT

This report is prepared at the project’s site and in the office as well, after completion of
the project. This report enables organizations to make use of the experience gained
from the completed project, when implementing similar projects in future. In addition, it
may help in identifying a new project in the same sector.

CHAPTER-3

METHODOLOGY

Methodology is description of the process, rules, methods employed in a study.

Research refers to a search for knowledge. One can also define research as a scientific
and systematic search for pertinent information on a specific topic. In fact, research is
an art of scientific investigation. This chapter deals with universe of the study, locale of
the study, method of data collection, tools used for data collection, types of sampling
used, sample sized used for study and analysis of the study.

3.1 UNIVERSE OF THE STUDY

The universe of the study consists of all the employees of the organization(SIDBI)
across the country. For this research the universe of the study considered is the India
Division of the Small Industries Development Bank Of India.

27
3.2 LOCALE OF THE STUDY

The locale of the study has been narrowed down to the Head Office, Lucknow office of
Small Industries Development Bank Of India. The study is categorized into many
departments of the SIDBI but it mainly deals with the Central Loan Processing Cell Of
SIDBI. A term loan proposal recently came to SIDBI for approval. So the researcher
decided to take up this proposal for appraisal purpose. A working capital loan proposal
also came for approval and its appraisal is also studied. The findings may or may not be
similar to the other branches of the company across the country.

3.3 SAMPLE SELECTION

The study has been done based on the detailed project report submitted by the project
developer and queries regarding the report were answered by the developer of SIDBI.

3.4 DATA COLLECTION

For the purpose of data collection, two different sources were adopted for the study:

 Primary Sources
 Secondary Sources

The primary data collection method has been used to complete the research activity.
But the researcher has done secondary research for major study.

Secondary - The researcher has gathered material from various research papers,
journals and magazines on the Indian MSME’s. Various books and articles were
referred to understand Project Financing/Project Appraisal. Moreover the project reports
of various working capital and term loan proposals were studied thoroughly to get an
insight into the actually procedure undertaken to disburse the loans.

3.5 ANALYSIS OF DATA

An actual term loan proposal and a working capital loan proposal was done to get a
hands on experience on the procedure of Project Appraisal. Excel statistical tools have
been used for analyzing the data.
Following steps were taken for analysis (appraising the project):

 Doing a management appraisal-checking the promoters contribution, credentials

and years of experience in the business.
 Doing a technical appraisal-visiting the locality of the project and checking
whether the machines and other utilities for the plant are sufficient to sustain the
project.
 Doing a financial appraisal-Doing a ratio analysis and checking whether the
ratios adhere to the prescribed norms. Calculating Debt Service Coverage Ratio,
IRR,NPV and doing a sensitivity analysis.

28
  Doing a commercial appraisal- Checking the demand and supply of the project.

Moreover for comparing the parameters of RAM model for manufacturing and service
sector the study was taken up on a micro level and the detailed analysis of the
parameters used in each sector was done. This was done by comparing the RAM
reports of proposals of manufacturing and service sector.

3.6 FIELD EXPERIENCE

The data analyzed was the result of interviews and questioning from the officials of two
departments of SIDBI. One department dealt with the project appraisal and
disbursement of loans called the Central Loan Processing Cell(CLPC) and the other
department dealt with the issue of subsidy schemes called the Government Schemes
Cell(GSC).As a part of the project a number of field visits were done to do the technical
appraisal of the proposals.

CHAPTER-4

TERM LOAN AND WORKING CAPITAL CASE STUDIES AT

SIDBI

4.1 CASE 1-TERM LOAN

The case analyzed is a proposal for sanction of term loan of Rs 57 lakh under Direct
Credit Scheme for expansion of project by way of purchase of additional machinery
covered under JICA(Japan International Cooperation Agency) Line of Credit with
CLCSS Subsidy of Rs 13,40,904 /-.The company is manufacturing plastic moulded
items which are used by retail consumers as well as institutional users.

29
DETAILED APPRAISAL FOR LOAN DISBURSEMENT
4.1.1 TECHNICAL APPRAISAL

Scope of the project: The project envisages expansion by way of purchase of

additional equipment viz. – Injection Moulding Machine, Injection unit assembly, High
Speed Mixture machine, moulds and electrical fittings.

Location of the project: The unit is not located in industrial Area, However the land is
converted for industrial use and it is connected with the road.

Technology & Manufacturing Process: The proposed expansion project is for

purchase of Injection Moulding machine, its accessories and electrical fittings. Presently
the unit is already having one machine from the same supplier, which is used for
manufacturing of plastic moulded household items– chairs and tables.

Raw materials/components:-
The main raw material required for the unit is plastic granules, and unit is using two
types of the granules – virgin and recycled. The virgin material is generally purchased
from Reliance Industries Ltd. However the cost of product out of virgin material is more
and the market generally does not accept the high value products. The unit mainly uses
the recycled granules which is available from traders across the states.

Utilities:
Power: The unit is having power connection of 250 KVA from Madhyanchal Vidyut
Vitran Nigam Ltd. (MVVNL) and the promoters have indicated that the same is
adequate for the existing as well as for proposed machinery. Presently, there is no
power back-up and the promoters would plan for purchase of DG set with increase in
the production.

Water: The water requirement of the unit is for drinking and sanitation purpose and unit
is having its bore-well to meet the day to day requirements of the unit.

Effluent disposal: The unit comes under non-hazardous small scale industry. The unit
does not have any effluent discharge during the production process and falls under the
green category.

Manpower: The unit is having the required manpower for running the facility. During the
visit the borrower indicated that the key person in the production line is having 14 years
experience in similar activity in firms/companies .The other manpower in the production
are mainly semi-skilled and unskilled and being an existing unit the manpower fulfillment
would not pose any problem.

30
Looking at all the above technical aspects it becomes evident that the above project
proposal ensures that necessary physical facilities required for production will be
available and the best possible alternative is selected to procure them.

4.1.2 COMMERCIAL APPRAISAL

Plastic in the recent times is most widely used product due to its durability and
malleability. Furniture is conventionally made out of wood but due to the availability and
environmental issues wood has become dearer. For furniture typical wood is continued
to be used. The requirement of the wood has been to great extent replaced by plastic
and plastic moulded furniture which is widely accepted. The demand for the plastic
moulded furniture has witnessed continuous increase and expected to continue.

4.1.3 FINANCIAL APPRAISAL

Capital cost of projects and sources of finance

For expansion the firm needs to purchase one “Injection Moulding Machine” of Rs.
89.39 lakh, one “Injection Unit Assembly” (DC Unit) of Rs 3.88 lakh, one “High Speed
Mixture Machine” of Rs 1.53 lakh, two number of moulds of Rs 25 lakh and other
charges of Rs 5 lakh viz. Insurance, Fright charges, loading & unloading charges and
electrical fitting, cables, bus bars etc.The total project cost comes out to be the borrower
Rs 125 lakh.Based on the merits, the total project cost has been worked out to Rs 93.27
lakh including cost of one “Injection Moulding Machine” of Rs 89.39 lakh and one
“Injection Unit Assembly” (DC Unit) of Rs 3.88 lakh. The borrower has agreed to
raise/bring funds from his own sources for the other remaining machinery/activity.Out of
the total project cost of Rs 93.27 lakh the contribution of the promoters is Rs 36.30 lakh
which comes out to be [36.30/93.27*100]=38.80%.

Financial analysis is done based on the balance sheet and P/L account sheet attached
in the annexure.

Table 1. PAST FINANCIAL PERFORMANCE OF THE APPLICANT UNIT

(in lakh)
Particulars FY2012 FY 2013 (Provisional, 1st &
2nd Quarter ) April to
September 2012

Net Sales 78.11 55.95

31
 Non operational Income 8.72 0.03
PBIT 13.76 17.29
Interest Paid 16.18 10.48
Depreciation 4.01 4.51
Operating Profit -2.42 6.81
PAT 4.35 4.61
Equity Share Capital 50.40 50.40
Reserve and Surplus 4.35 8.96
Tangible Net Worth 54.75 58.17
Interest free unsecured 0.00 190.42
loan
Interest bearing 132.92 0.00
unsecured loan
Current Liabilities 71.98 83.08
Total Long term 242.93 294.45
Liabilities
Total Outside 314.81 377.52
Liabilities(Current
liabilities +total long
term liabilities)
Net Block(Gross block- 257.24 261.76
depreciation)
Current Assets 90.58 129.66
Current 1.26 1.56
Ratio(Considering
installments of TL as
CL)
Current Ratio(Not 1.93 2.06
Considering
installments of TL as
CL)
Quick Ratio 0.63 0.62
Creditor Days 18 25
Debtor days 86 40
Finished goods holding 117 349
days
DER 4.88 5.38
DER(Considering 4.88 0.49
Interest free unsecured
Loan as quasi-equity)
TOL/TNW 5.75 6.49
NPM%(Net Profit/Total 5.57% 8.24%
Income)
Net Cash Accrual 8.36 9.29
Interest Coverage Ratio 1.64 2.07

32
 Net Working Capital 18.60 46.58
Contingent Liabilities Nil Nil

COMMENTS ON PAST FINANCIAL PERFORMANCE

 The company has been maintaining high cash and bank balance at the end of FY
2012 and FY 2013 (April to September 2012) [Rs 45 lakh and Rs 40.85 lakh
respectively]. Further, the outstanding in bank borrowing (WC account) is also Rs
38.15 lakh and Rs 49.95 lakh out of sanction amount of ` 53 lakh in FY 2012 and
FY 2013 (April to September 2012)].

 The holding period for the finished goods i.e. 117 days and 349 days in FY 2012
and FY 2013 (April to September 2012) respectively. The borrower has increased
its production in anticipation of good sales due to festive season in September
and hence reflected as high holding period.

 The borrower has stated that the company has been allotted power connection of
two machinery (250 KVA), but is presently using power for one machinery [due to
1st year of its operations]. Accordingly, the cost of electricity has been high in its
1st year of operations.

 The borrower has converted interest bearing unsecured loan of Rs. 132.92 lakh
to interest free unsecured loan aggregating to Rs.190.42 lakh [from FY 2012 to
FY 2013 (April to Sept 2012)]. As the DER is high, a suitable condition is being
stipulated for the borrower to maintain atleast an amount of Rs.50 lakh during the
currency of the loan. On account of this, it is felt that the DER (considering
interest free unsecured loan as quasi equity) shall be in the range of less than
2:1.

Table 2. DESIRABLE NORMS AND PARAMETERS FOR ELIGIBILITY OF

ASSISSTANCE

Desirable Norms and FY FY 2013 (Provisional, 1st & 2nd Remarks/

parameters 2012 Quarter ) [April to September Status
2012

(i) DER((SIDBI Generally 4.89 5.38

term loan+term not
loan from other exceeding
banks+int 2:1 for the
bearing firm as a
unsecured whole.
loans)/networth)

33
 DER Generally 4.89 0.49
(Considering not
Interest Free exceeding
Unsecured loan 2:1 for the
as quasi-equity) firm as a
whole.

DER for Generally 4.89 0.56

company as a not [(Long Term Debts as on
whole exceeding 30/09/2012 + Proposed TL) /
including 2:1 for the (Net worth as on 30/09/2012 +
current firm as a Existing Interest Free
assistance of whole. Unsecured loan+ Proposed
Rs 57 lakh Capital)] = [(102.47+57)/
(Considering (58.17+190.42+36.30)]=(159.4
Interest Free 7 / 284.89) = 0.56
Unsecured loan
as quasi-equity)

(ii) Projected Generally Average DSCR: 1.29 Not

DSCR not below complied
1.5:1 but it with so it
can be will be
relaxed up relaxed.
to 1.25:1.

iii)Minimum New [(93.27-57.00)/ 93.27]*100= Complied

promoter’s projects- 38.88% with
contribution 33%, lower
contribution
[upto 25%]
could be
accepted in
respect of
existing well
performing
companies /
firms.
Others –
25%
(minimum

(iv) Period of Minimum 6 60 months for installments of Complied

loan / limit months to TL and moratorium period of 6 with
maximum months
8-10 years
for term
loan
(including

34
 moratorium
of not
exceeding
18 months)

(v) Upfront fee Up-to 1% of 1% with applicable service tax. Complied

[non the term with
refundable] loan
sanctioned
at the time
of issue of
LOI
(vi) Overall Minimum 2.07 (118.27/57) Complied
Asset Coverage overall with
asset
coverage of
1.3 for
existing
companies
and 1.4 for
new
projects
should be
ensured.

(vii) Min Credit Not below CR3 / SME4/SIDBI5 Complied

Rating CR5 for with
Rupee
assistance
and Not
below CR4
for FC
assistance
Not Below
CR4 for
leather &
leather
products.

.
Table 3. BREAKEVEN POINT

Breakeven point in optimum year 2017(% of 31.92%

installed capacity)
Cash break even in optimim year 2017 18.43%

35
Table 4. DISCOUNTED CASH FLOW TECHNIQUES

IRR(Post tax) 12.66%

IRR(Pre-tax) 16.95%
NPV(Pre-tax) 102.70
NPV(Post tax) 3.51

Significance of NPV-Since the NPV post tax and pre-tax is positive therefore the
project is productive and proposal for term loan is accepted.
Significance of IRR-Since the IRR before tax and after tax is greater than the rate of
interest(cost of capital) which is calculated to be 10.33% therefore the proposal for term
loan is accepted.
(Calculation of DSCR, Breakeven point, IRR, NPV, Cost of Capital and ROCE is given
in the annexure)

Fig 7. GRAPHICAL REPRESENTATION OF BEP

Fig 8. GRAPHICAL REPRESENTATION OF ROCE,IRR AND COST OF CAPITAL

36
SENSTIVITY ANALYSIS

Sensitivity analysis has been attempted to observe impact on DSCR. The Unit is
operating on a margin of 5.57% (FY 2012) and based on the past trend, it is projected
that the margin will be in the range of 3% to 8%. As such it will be possible on the part of
the unit to sustain sensitivity up to +/- 5%.

Table 5.Senstivity Analysis

FINANCIAL PROJECTIONS/ECONOMIC VIABILITY

 The projections have been carried out based on the past

operations/performance, CMA data submitted by the borrower and future
business prospects of the firm.

 The borrower has proposed for expansion of existing business by installing of

one number of Injection Moulding Machine and the capacity of the plant will be

37
 doubled after installation of proposed machinery. Accordingly the production and
sales have been projected.

 The unit has submitted CMA data/projected sales of Rs 332.60 lakh, Rs 462.80
lakh, Rs 582.20 lakh, Rs 702.40 lakh, Rs 819.60 lakh, Rs 836.40 lakh, and Rs
841.40 lakh in FY 2013, FY 2014, FY 2015, FY 2016, FY 2017, FY 2018 and FY
2019 respectively.

 Based on the past trend the sales projections submitted by the unit have been
accepted though with a conservative approach. Accordingly Sales have been
projected of Rs 224.22 lakh, Rs 311.27 lakh, Rs 361.46 lakh Rs 382.20 lakh, Rs
406.16 lakh, Rs 430 lakh and Rs 430 lakh in FY 2013, FY 2014, FY 2015, FY
2016, FY 2017, FY 2018 and FY 2019 respectively.

 The firm has started commercial production since October 2011 and FY 2012 (6
months of operation only) is the first year of commercial operation.

 The company has achieved sales of Rs 78.11 lakh and of Rs 55.95 lakh in FY
2012 and FY 2013 (April to September 2012) respectively.

 The other non-operational income of the company is Rs. 8.72 lakh in FY 2012,
accordingly we have assumed of Rs. 10 lakh non-operational income in FY 2013
and onwards.

 The unit is using 40% of capacity utilization in FY 2012 based on that the
production capacity has been assumed at 45%, 55%, 65%, 75%, 80%, 80%, and
80% for FY2013, FY2014, FY2015, FY2016, FY2017, FY2018 and FY2019
respectively.

 The cost of production/net sales is 107.27 % in FY 2012 and accordingly

operating profit is negative in its 1st year of operation. However the unit has
made PAT on account of other income earned by it. The unit has been able to
improve its efficiency by reducing the raw material cost steadily over the year’s
i.e approx 82 to 89 % onwards FY 2013.

 Other costs are also considered at around/average actual cost of last FY i.e.
FY2012 and FY 2013 (April to September 30, 2012).

 The power consumption of Rs 13 lakh (16.66% of net sales) and Rs 17.78 lakh
(31.77% of net sales) against sales of Rs 78 lakh and Rs 55.95 lakh in FY 2012
and FY 2013 (April to September 2012) respectively due to 1st year of operation
of FY 2012 and sanction of power of proposed project, However we have
assumed the cost of power for FY 2013 and onwards as per the data given by
the borrower approx 5 to 7 % of net sales in FY 2013 and onwards.

 The depreciation and income tax have been calculated at the prevailing rates.

38
  The administrative and selling cost has been calculated at 1.22% of the sales in
FY 2012 accordingly we have assumed for FY 2013 and onwards.

 Annual increase of 10% has been assumed for salaries/wages and repairs and
maintenance activity.

 The retention of atleast Rs 50 lakh as interest free unsecured loan has been
assumed during the currency of the loan has resulted in the projected DER
[considering interest free unsecured loan as quasi equity] from 2013 onwards to
be maintained at level below 2:1.

Assumptions underlying profitability statement, projected profitability statement,

projected balance sheet and projected cash flow are given in Annexure.Based on the
above assumptions, the projected profitability and select ratios of the project are
presented below:

Table 6. Projected Profitability

39
4.1.4 APPRAISAL OF MANAGEMENT

It has been perceived by the Lucknow Branch Office that the promoters have
experience of 10-12 years in this line of business, and one of the promoters of the unit
is involved in 4 units and resourceful. Further a positive feedback about the promoters
has been received from one of the customers of SIDBI LKBO.

4.1.5 DETAILED COMPLIANCE ANALYSIS FOR SUBSIDY ASSISTANCE

Eligibility under JICA Energy Saving Line of Credit-The unit is already having one
such machine which is installed and under operations.Further the name of the
equipment supplier is also listed in the JICA list.

Table 7. Eligibility under JICA scheme

Sr. No Parameter - Particulars Actual under Compliance

Norm the project

1 Eligible units New / existing existing MSME Complied with

MSME units, as unit
per the definition

40
 of the MSMED
Act, shall be
eligible for
assistance under
the scheme.

2 Track record & Existing units Positive Complied with

Financial should have feedback about
position satisfactory track the promoter
record of past Credit Report
performance and from the existing
sound financial Banker has been
position and sought and yet
should not be in to be received. A
default to pre-LoI condition
institutions/banks is stipulated in
. this regard.

3 Eligible The projects Saving Complied with

machinery which will be Equipment List
eligible for (Release 7.2)
finance under the Sr.No.20.5, Page
Scheme will be No. 52 as per
energy saving JICA list*.
projects which
are to be
screened as per
the Energy
Saving
Equipment List /
activity List.

4 Minimum Credit Units should CR3 / SME4

rating have minimum
credit rating of
CR4 or its
equivalent.

5 Non eligible Sectors such as Not under non- Complied with

business the arms industry, eligible business
narcotics industry
or any unlawful
businesses are
categorized as
non eligible
business and
shall not be
eligible for
finance under this
Scheme.

41
 Similarly, such
projects which
may result in
larger negative
social and
environmental
impact would
also not be
eligible under the
Line of Credit.

Table 8. Financial Parameters for JICA scheme:

Sr. No Parameter Norm Compliance

1 Minimum Generally not less

assistance than Rs 10 lakh The assistance under the
current project is of Rs 57 lakh,
2 Maximum Generally not more Complied with
Assistance than Rs 15 crore per
project.

3 Minimum 25% for existing Promoters' contribution:

promoters units 33% for new [(93.27-57.00)/ 93.27]*100=
contribution units 38.88%

4 Debt equity ratio Maximum 2.5 :1 [57/(36.30)] = 1.57 (Rs. 36.30

(for Project) : lakh in the form of share
capital)

Debt equity ratio Maximum 2.5 :1 0.56 [(Long Term Debts as on

(for Firm as whole) 30/09/2012 + Proposed TL) /
: (Calculated (Net worth as on 30/09/2012 +
based on latest CA Existing Interest Free
certified provisional Unsecured loan+ Proposed
B/s) Capital)] = [(102.47+57)/
(58.17+190.42+36.30)]=(159.4
7 / 284.89) = 0.56

5 Interest rate Based on the rating 75 bps lower than the

of the customer and applicable rate under the
applicable interest scheme.
rate for Energy
Efficiency projects,
as per
extant RiMD

42
 Guidelines. Further Floating Interest Rate @
– BO should [PLR+0.50-0.75 % p.a.]
negotiate floating Since, the present effective
rate of interest. Bank PLR being is 12.75%, the
reserves the right to rate of interest is 12.50% p.a
charge normal [12.75 + 0.50 – 0.75 % p.a]
[DCS] interest rate if with monthly rests for TL of `
the account 57 lakh under JICA [Rating:
becomes NPA. Bank CR3]; Hence, complied with.
reserves the right to
charge normal
[DCS] rate of
interest if there is
irregularity in
implementation of
the project
[equipment is not of
the same
specification for
which approval was
taken, equipment
has been shifted to
another premises,
etc)

6 Upfront fee Non 1%, Complied with

refundable
upfront fee of
1% of
sanctioned
loan plus
applicable
service tax.

7 Security First charge over Complied with

assets acquired
under the scheme;
first/second charge
over existing assets
and collateral
security as may be
deemed necessary
as per extant
guidelines on asset
coverage.

8 Asset coverage Asset coverage Complied with

norms as per the
existing DCS norms.
Could be reduced to

43
 a minimum of 1.2:1
by sanctioning
authorities in case of
well run existing
units
9 Repayment period Need based. 5 years and moratorium period
Normally, the of 6 months. Complied with.
repayment period
shall not extend
beyond 7 years.
However, longer
repayment period of
more than 7 years
may be considered
under the Line if
considered
necessary.

ELIGIBILITY UNDER CLCSS SUBSIDY:

The project envisages expansion by way of purchase of additional equipment viz. – Injection
Moulding Machine, and Injection unit assembly. The only Injection Moulding Machine is eligible
for CLCSS.

Table 9. Eligibility under CLCSS Subsidy

Sr. No. Norm under the Actual under the Compliance Status /
scheme project Remarks

1 In terms of GSC As per Complied with

Circular No. 03/ 2006- Booklet/Revised
2007 dated June 01, Guidelines on Credit
2006, proposal is Link Capital Subsidy
covered under the Scheme (CLCSS) for
scheme. “First Technology Up
supplement of the gradation of Small
revised guidelines on Scale Industries (SSI)
the CLCSS for (As on April 20,
technology 2006,Fully automatic
upgradation of small Micro processor
scale industries (SSI) controlled Plastic
approved by the Injection Moulding
technical sub- machines is eligible
committee on the under Plastic
CLCSS (TSC) in its Moulded/ Extruded
6th meeting held on Products and Parts/
the 10th day of August, Components
2006” including reinforced

44
 plastic/composite
Material.

2 The Company/ Firm is Yes, Registered at Complied with.

registered with the DIC Lucknow as
State Directorate of Small Enterprise
Industries (Provisional (Manufacturing)
registration certificate
has been obtained by
the company.)

3 Management of the Keeping in view that Complied with.

Company/ Firm is the promoters are
competent to having experience in
implement the project. similar line of activity
and have recruited
competent personnel.
Hence, the overall
management may be
considered
competent.

4 The Company/ Firm A pre-disbursement Condition Stipulated

would not avail any condition for borrower
benefit including to furnish an
Interest/capital undertaking /
subsidy under any declaration in this
other scheme of the regard has been
Central Government / stipulated.
state Govt.

Details of eligible machinery:-

The total cost of machinery eligible under CLCSS is Rs. 89,39,362 /-. However, the
maximum amount of CLCSS subsidy is 15% of the actual cost of machinery eligible
under the scheme or Rs. 15.00 lakh whichever is lower. Hence, the company is eligible
for capital subsidy of ` 13,40,904 /- as per Booklet/Revised Guidelines on Credit Link
Capital Subsidy Scheme (CLCSS) for Technology Up gradation of Small Scale
Industries (SSI) (As on April 20, 2006).

45
4.2 CASE 2-WORKING CAPITAL LOAN
The case study for the renewal of working capital was of a ‘XYZ’ company which is in
the food processing sector/rice milling industry. The proposal for renewal of working
capital limit was of Rs 80 lakh. The promoters have an established marketing channel
and has prior experience in similar line of activity which shows a well established
business. The demand for the rice is also stable with U.P. Supply Department as the
major customer, which purchase 60% of the output under the levy scheme. The rest
40% of the output is sold in open market.
Looking at the financial ratios and other aspects it was found that the current ratio and
TOL/TNW of the unit was not satisfactory(Expected Norms-CR>=1.33 and
TOL/TNW<=4:1) and not as per the norms of the Banks guidelines and also beyond the
relaxable norms of TOL/TNW.In these conditions the borrower was notified to ensure
the minimum benchmarks by a suitable date failing which penal interest of 1% p.a will
be levied. As per loan policy FY 2012 the relaxation of TOL/TNW, Current Ratio, Interest
Coverage, Margin on stocks & Book Debts, Debtor days shall be considered only when
the overall asset coverage is not less than 1.5 times.Here the asset coverage ratio was
2.66 but as regards the existing accounts coming for renewals and/or need based
additional limits,a softer approach with regard to extent of relaxation could be taken,
based on the performance of the account, with a stipulation that those accounts should
at least meet the relaxed norms as proposed above, before the next renewal.If the
minimum norms in respect of overall asset coverage and internal rating are not met
possibilities of exit from the account(s) would be explored.
To assess the working capital limit we use two methods Nayak Committee method or
the second method of lending method.We use Nayak committee when the working
capital requirement is less than five crores.If it is more than five crores then we use the
second method of lending.So the calculations for assessing the working capital limit is
as follows:-

Table 10. As per Turnover Method (Nayak Committee)

S. Particulars For Estimated/ Projected
No Year ended as on
31/03/2013
1 Gross Sales 650.00

2 Working Capital Requirement (@ 25 % of Gross 162.50

Sales)
3 Minimum stipulated Margin Money for Working 32.50
Capital (@ 5 % of Gross Sales)
4 Projected net working capital 21.15

5 Net Working Capital (3 or 4 whichever is higher) 32.50

6 Permissible Bank Borrowing (2 - 5) – Based on 130.00

projected net working capital

46
Table 11. As per Second Method of Lending :
S. Particulars For Estimated/ Projected
No Year ended as on
31/03/2013
1 Working Capital Gap 101.15

2 Minimum stipulated Margin Money for Working 84.22

Capital
(25% of Total Current Assets)
3 Projected net working capital 21.15

4 Net Working Capital (2 or 3 whichever is higher) 84.22

5 Permissible Bank Borrowing (1-4) - Based on 16.93

projected net working capital

So as per Nayak Committee of lending, the renewal of working capital limit at existing
level of Rs 80.00 lakh was recommended. As the actual net working capital of Rs 19.29
lakh is less than the minimum stipulated margin money of Rs 32.50 lakh,a suitable
condition was stipulated that the borrower shall raise the deficit amount of Rs 13.21 lakh
by increasing the partners capital latest by a suitable date failing which penal interest of
1% p.a will be levied.

47
 CHAPTER-5
RISK ASSESSMENT AT SIDBI

One of the most important procedures taken by financial institutes that offer credit to
MSMEs is to scrutinize their credit rating status in order to get a clear picture of the
creditworthiness of the enterprises.
Credit rating is done on the basis of credit scores that are numerical values assigned to
the MSMEs based on a statistical analysis to notify their credit worthiness. The
government of India also operates a specialized rating agency known as the SME
Rating Agency of India Limited (SMERA), which is a third-party rating agency
exclusively set up for micro, small and medium enterprises in India for ratings on
creditworthiness. It provides ratings which enable only MSME units to raise bank loans
at competitive rates of interest.

Some of the important credit rating agencies working in India are CRISIL, CARE, ICRA,
FITCH RATING, NDIA and ONICRA.

5.1 IMPORTANCE OF CREDIT RATING FOR MSME’s

 Credit rating not only ensures the credibility of the SME, but also helps them to
get interest relaxation against credit from banks even in future credit applications.
 Credit rating assists the MSMEs in building their business credibility and hence,
reduces the perceived risk of default from the banks’ perspective.
 Credit rating also helps an MSME by getting more financial support as banks
may increase their credit limits due to higher comfort factor in transacting with a
well rated MSME.
 The rating also allows the MSMEs to expand their market base, get new
contracts from export markets.

5.2 SCOPE FOR CREDIT RATING

 Credit worthiness may be further improved by increasing the level of

transparency and process rigour in record keeping and financial reporting. Most
micro enterprises are weak in this aspect and this may be greatly improved
through rating. Rating involves analysis for which the starting point is the financial
statement of the firm.

 Financing institutes also apply qualitative parameters extensively in gauging the

credit worthiness of an MSME applicant since the financial statements furnished
may not reflect the correct business strength. Such parameters would include
typically organisation structure, background check of promoters (and family),
management strength, resilience of the firm, quality of product, supplier and

48
 client network, trade relationships, previous credit defaults (by any director or
kin), etc. Hence, maintaining transparency is of utmost importance in building
credit worthiness. The other aspect is of having well-defined processes and
adhering to them that would ensure quality of product, consistency of delivery,
etc.

The credit scoring model used in SIDBI is Risk Assessment Model developed by CRISIL
for measuring risks for both the servicing and manufacturing industry. The relevance of
the different ratings are given in the table below.

Table 12.Ratings and their significance

Rating Significance

CR 1 Highest
CR 2 High
CR 3 Above average
CR 4 Average
CR 5 Below average

Basically RAM does the company/project rating and facility rating. The company rating
is done taking into consideration the overall health and financial stability of the company
while facility rating is done in case of secured loans where we assess the value of the
securities(both primary and collateral) which are taken by the bank while giving the
loans.

For the case study explained above the scores as determined by the RAM model is
given below. The models measure risk based on four major types of risks namely:-

1) INDUSTRY RISK

2) MANAGEMENT RISK

3) FINANCIAL RISK

4) BUSINESS RISK

5.3 RATING REPORT FOR ‘ABC’ COMPANY(CASE STUDY 1-MANUFACTURING

COMPANY)

49
 Model Name: SME Model
Company Name :ABC Company
Industry Name: PLASTIC MOULDED GOODS

Table 13.RATING SUMMARY TABLE

Borrower Rating - Model Specific SME4

Single Scale Borrower Rating SIDBI5
Score 6
Combined Rating CR3

Table 14. OBLIGOR RATING SUMMARY TABLE

CURRENT LEVEL
Top Level Risk Entity GRADE SCORE
Name
6
OVERALL RATING SME4
OVERALL PROJECT RISK
SME4 6
6.31
POST PROJECT IMPLEMENTATION
RISK
6.15
PROJECT IMPLEMENTATION RISK

OVERALL COMPANY RATING

SME4 5.88
Score Type: Company
III 6.57
INDUSTRY RISK
III 7.11
MANAGEMENT RISK
VI 3.15
FINANCIAL RISK
III 6.65
BUSINESS RISK
Score Type: Company
III 6.57
INDUSTRY RISK – PROJECT
P2 6
FUNDING RISK
P2 6.3
CONSTRUCTION RISK
V 4.86
FINANCIAL RISK – PROJECT
III 7.11
MANAGEMENT RISK – PROJECT
III 6.67
BUSINESS RISK – PROJECT

Overall Weighted Risk Grade Description Degree Of Safety

Risk Grade W.R.T Debt

50
Score Range Serving Capacity
Changes in
5.85 - 6.50 SME4 Investment Grade circumstances are
more likely to lead
to weakened debt
servicing capacity
than for higher
grades. Degree of
safety with respect
to Debt servicing
capacity is
moderate.

COMPARISON OF SCORES OF THE COMPANY AND THE PROJECT

INDUSTRY RISK

Industry Risk Overall Score Grade

Company 6.57 III
Project 6.57 III

8 8 8 8 8 8 8 8
8
7 6 6 6 6
6
5
4
3 2 2
2
1
0

Company Project

BUSINESS RISK

Business Risk Overall Score Grade

Company 6.65 III

51
Project 6.67 III

a) MARKET POSITION(50% WEIGHTAGE)

Market Position Overall Score Grade

Company 6.29 -
Project 6 -

8 8
8
7 6 6 6 6 6 6
6
5 4 4
4
3
2
1
0

Company Project

Note: The parameter ‘Assessment of immediate buyers’ will be judged for the
company as a whole and not for the project because the project is the addition of
an extra machine in the production line so the buyers for the company as a whole
is judged.

b) OPERATING EFFICIENCY(50% WEIGHTAGE)

Operating efficiency Overall Score Grade

Company 7 -
Project 7.33 -

52
 8 8 8 8
8
7 6 6 6 6
6
5
4
3
2
1
0

Company Project

FINANCIAL RISK

Financial Risk Overall Score Grade

Company 3.15 VI
Project 4.86 V

a) FINANCIAL FLEXIBILITY(20% WEIGHTAGE)-Company score-6

6 6
Company
6
5
4
2
3
1
2
1
0
Ability to raise debt Ability to raise equity

b) PAST FINANCIALS(70% WEIGHTAGE)-company score-2.1

53
 8
8
7 6
6
5 4
4
3 2 2
2
1
0
0 0 0

Capital

c) FUTURE FINANCIALS(10% WEIGHTAGE)-company score-4.8

10
10
9 8 8 8
8 7
7 6
6 5
5 4 4 4
4 3
3 2 2 2
2 1
1
0
0

Company

FINANCIAL RISK-PROJECT

54
 10 10
10

9
8
8
7
7
6 6
6
5
5
4 4
4
3
3
2 2
2
1
1

0
0) n o) ) ty j)
tax ve to i ze ui ro
t- ke ra rat s q p
os ea ge
i ty ct e s(
(p br ra u o je of a le
r n
sh ove eq p r ay s
etu Ca ec bt- of yw in
fr vi
c e % b op
o
er td as
n dr
rate s j ec n ( u to %
l bt ro o b 10
rn
a de stp b ut n tri to
te e o ri co R
In ag (P nt SC
ver ure c o er 's D
A ct s ot vg
tru o ter om o fa project
l S m pr ty
ta Pr
o of vi
a pi % s it
C n
se

MANAGEMENT RISK

Management Risk Overall Score Grade

Company 7.11 III
Project 7.11 III

55
 1010
10
9
8 8 8 8 8
8
7
6 6 6 6 6 6 6 6
6
5
4
3
2
1
0

Company Project

CONSTRUCTION RISK(PROJ)-6.3(P2)

56
 8
8 6 6 6 6
7
6
5
4
3
2
1
0
t d es s r
ec ri o nc te ie
oj e li pl
r P ar
a ci p
ep n le Fa yS
u
ut to al
ec sta yc ur er
ex Ge g Ke c t hin
o c
st ni
n tru a
ter ta
i
fra
s
n
M
o ai
rom Ob of
In
M
p f
of ty so
ty ili l
ili la
b
nta Project
Ab vai ed
e
A Cr

FUNDING RISK(PROJECT)-6(P2)

6 6

0 Project
Tie-up of Funds Financial flexibility

FACILITY RATING REPORT

In the case of the company ‘ABC’ the total term loan given is 57 lakh against the total
value of security of 118.27lakh which comprises of primary and collateral security.

Primary security-Hypothecation of the plant and machinery which are to be purchased

by the company from the term loan granted. The total value comes out to be Rs 93.27
lakh.

57
Collateral security- Mortgage of immovable property of the owners of the company
worth Rs 25 lakh.

5.4 COMPARISON OF RAM MODEL OF MANUFACTURING AND SERVICE

INDUSTRY

Here we will compare the RAM model of a manufacturing company( a company

manufacturing plastic moulded goods) and the RAM model of a company in the service
sector(healthcare company).

COMPANY RATING/PROJECT RATING

While assessing the company/project as a whole the weightages for the four types of
parameters namely industry, business, financial and management risk for both the
sectors is the same. The pie-chart below shows the weightages of the different
parameters.

RISK WEIGHTAGES

25.00% INDUSTRY RISK

15.00%
BUSINESS RISK
FINANCIAL RISK
MANAGEMENT RISK
35.00%
25.00%

INDUSTRY RISK

58
 20 20 20 20 20
20
18
16 14.29 14.29 14.29 14.29 14.29 14.29 14.29
14
12
10
8
6
4
2
0
0 0 0 0

Manufacturing Industry
Service Industry

COMMENTS

It is seen from the above bar graph that for the manufacturing sector the RAM model
considers seven important parameters in equal proportions to measure the industry risk.
However for the service sector the model considers five important parameters in equal
proportions. Though environment is affected by the wastes from healthcare units but
this impact is considerably less than the environmental issues linked with pollution from
manufacturing things therefore weightage is given to this parameter for the
manufacturing sector and not for the service sector. Length of the operating cycle is
mainly seen in the manufacturing sector.As far as input related risks are concerned the
manufacturing sector is predominated by the availability of raw materials so input
related risks are high in manufacturing industry.In the service sector availability of skilled
human resources is the main requirement so input related risks are considerably less in
the service sector.

BUSINESS RISK

a) MARKET POSITION(50% WEIGHTAGE)

59
 16 14.29 14.29 14.29
14 12.5 12.5 12.5 12.5 12.5 12.5 12.5 12.5
12

10

0
ty ke
t s 0 rs s t0 d0 s 0y 0ty
nt ar m
er ye m
er
m
en ure b le a lit tvi
E u ge t a u
f m sto b to ac iv ea
h
O
rge
t
cu i ate C us ran nuf ece c eQ /Cr
c to r r i on
a ta ed n a a
ds
/ rv
l Re i ts i ty m
m c eo i ng ntm n Se vat
ca in im i n l l e fu d no
p hi try rox t of nda d
se pon of e i ve Manufacturing
In Industry
a n P en e n m n t rc o r
r e p a o e Pe f
og Of ss
m De ng ec m
ta
l Service Industry
Ge n e nd et th a ge n
to As
s
sa ar
k f an te
o si m M i tyo M y /Po
P er l
ili
t
ngt i tca b
ll i Cr p a
Se Ca

COMMENTS-The hospital under consideration has a monopoly in its area so proximity

to customers and marketing and selling arrangements are not given any weightage
because it is having customers from the whole area. Since no component is
manufactured in the service sector the parameter ‘criticality of the component
manufactured’ is not considered. Moreover the quality of service is considered in the
service sector so the parameter ‘perceived service quality’ is not considered in the
manufacturing sector. The parameter ‘Capability/Potential for Innovation/Creativity’ is
predominant in the service sector because creative means of servicing in the healthcare
industry can lead to better treatments and can boost the profitability of the business.
However in the concerned manufacturing sector there is a predefined procedure of
production so this parameter is of less importance here.

OPERATING EFFICIENCY(50% WEIGHTAGE)

60
 20 20 20
20
18
16
14 12.5 12.5 12.5 12.5 12.5 12.5 12.5 12.5
12
10
8
6
4
2
0
0 0 0

Manufacturing Industry
Service Industry

COMMENTS-As discussed above the consideration of environmental risk in the

healthcare industry is negligible as compared to the manufacturing industry. Since the
raw materials used are not that significant as compared to the availability of skilled
manpower therefore the parameter ‘trend in the unit price of raw materials’ is not given
so much importance in the service sector as compared to the manufacturing sector. In
an industry manufacturing plastic moulded items the technology and the machinery
used to manufacture plays a key role. The turnover of unskilled workers is not so
significant as they can be easily replaced in the manufacturing sector. However in a
service industry where the skilled manpower plays a key role the turnover if high can
prove detrimental to the business therefore this parameter is given more importance in
the healthcare industry than in the industry manufacturing plastic moulded items.

The parameter ‘Availability of power and other utilities’ is given more importance in the
industry manufacturing plastic moulded items since power and fuel is the key ingredient
in the manufacture of plastic items.However in the healthcare industry predominated by
skilled manpower this parameter is of less importance.

61
FINANCIAL RISK

a) FINANCIAL FLEXIBILITY(20% WEIGHTAGE)

50 50 50 50 Manufacturing
Industry
50
45 Service Industry
40
35
30
25
20
15
10
5
0
Ability to raise debt Ability to raise equity

b) PAST FINANCIALS(70% WEIGHTAGE)

25
25
20 20
20 17.5

15
10 10
10 7.5
5 5 5 5 5 5 5
5

0
0

Manufacturing
Industry
Service Industry

COMMENTS-In the case of the concerned manufacturing unit there are no

export/import dealings therefore there are no issues of unhedged foreign exchange

62
 risk.But in the case of the the concerned service unit the unit deals with foreign
clients also so there can be a little risk pertaining to this parameter.

c) FUTURE FINANCIALS(10% WEIGHTAGE)

25
25
20 20 20
20

15
10 10 10
10
5 5 5 5 5 5
5

Manufacturing
Industry
Service Industry

63
MANAGEMENT RISK

16
14.29 14.29 14.29
14

12 11.11 11.11 11.11 11.11 11.11 11.11 11.11 11.11 11.11

10

0
0 0

Manufacturing Industry

Service Industry

COMMENTS

Since the concerned service unit is managed by only one person therefore the
parameters ‘Credentials, background and experience of the promoters’ and ‘Group
support’ is not taken into consideration.

64
 CHAPTER-6

CONCLUSION AND SUGGESTIONS

This chapter deals with the findings, conclusions and suggestions of the report so that
relevant facts does not get lost in heap of information generated during the analysis and
the interviews.

6.1 MAJOR FINDINGS

 The study of project appraisal for MSME’s revealed that in many cases the balance
sheets and P/L accounts were not maintained properly and accurately. This
constraint made it difficult for SIDBI to conduct the financial appraisal correctly and
accurately and in most cases the loan was sanctioned based on the bank’s
perception of the management and the business.
 The projections made by the borrower as well as the bank was not based on any
clear trend analysis but it was mostly done based on perceptions. This constraint
therefore could not predict the profitability figures, DSCR and other important
parameters accurately.
 While rating the proposals for term loan, working capital and term loan-working
capital it was seen that the scoring for the different parameters was done on a 0-10
point scale. Therefore rating the qualitative parameters like industry, business and
management risks were purely subjective.
 In most cases it was found that SIDBI tried to assist maximum number of MSME’s so
it was seen that to improve the rating the qualitative parameters were manipulated to
increase the overall scoring.

 The general rule that if IRR(Post tax-12.66% and pre-tax-16.95%) > rate of interest
(cost of capital), then accept the project is applicable here as rate of interest in
10.33%.

 It was found that for riskier projects(new projects) the rating model used was RAM
which was a bit more detailed in terms of the number of parameters in each type of
risk. While for already existing projects the rating model used was CART. In many
cases it was found that this rule was not applied and some riskier projects were
rated by CART which could not assess the risk properly.

 In a particular case it was seen that a borrower had defaulted and was unable to pay
back the loan amount. Initially it was given a rating of CR3 and when it was rated
again the rating came to be CR4.In case of CR4 rating the rate of interest to be
charged would become higher. Since the borrower was already not in a position to
pay back therefore it was tried to manipulate the rating and keep it to its original

65
 rating CR3.Therefore it was seen that strict measures like taking the primary and
collateral security was not applied here.

6.2 SUGGESTIONS OF THE STUDY

 Proper trend analysis should be done to project the sales figures for the upcoming
years.
 Care should be taken while scoring the qualitative parameters as these can be
easily manipulated so that accurate risk can be assessed.
 Since risk assessment plays an important role in the disbursement of loans therefore
SIDBI can take help of an external agency to assess the risk properly rather than
doing it themselves so that the rating is not biased and preconceived.

6.3 LIMITATIONS OF THE STUDY

 The comparison of the parameters for the manufacturing and service sector was
based on 5-6 rating reports of each sector. Therefore an attempt is made to cover a
majority of the parameters taken into consideration for each sector but all the
parameters may not be covered.
 In most cases due to the time limitations of the SIDBI officials some of the
information obtained may not be complete. However an attempt is made to present a
majority of the information learned and analyzed.

6.4 FURTHER SCOPE OF THE STUDY

As it is known no study is an end in itself, scope exists for further exploration of the study.
So, more samples can be studied and an in-depth analysis can be carried out about the
parameters of the risk model and the project appraisal aspects.
The scope could be increased by taking projects of different industries, from different
countries and in different regions of India itself.

66
 ANNEXURE

BALANCE SHEET OF THE FIRM

(Rs.
lakh)
AS AS AS ON AS ON
ON ON
31- 31- 31- 9/30/20
Mar- Mar- Mar- 12
10 11 12
FIXED AND NON-CURRENT ASSETS AUDIT AUDIT AUDIT PROV.
ED ED ED
1 Gross Block
(a) Land 60.89 60.89
(b) Buildings 45.63 45.00
(c) Plant & Machinery 141.07 146.65
(d) Others 13.66 17.74
Gross Fixed Assets 0.00 0.00 261.25 270.28
2 Less: Depreciation to date 4.01 8.52
3 Less: Revaluation Reserves
4 Net Fixed Assets (1-2-3) 0.00 0.00 257.24 261.76
5 Capital Work-in-Progress (Incl. adv. for 4.16
capex)
6 Non Current Assets
(a) Sundry debtors over 6 months 18.32 1.65
(b) Investment/ Advances to Group
Cos./ Subsidiaries
(c) Other Investments
(d) Deferred Tax Assets 1.05
(e) Security Deposits 2.50 2.52
(f) Others 1.02 34.90
Sub-total 0.00 0.00 21.84 40.12
7 Total Fixed and Non-Current Assets 0.00 0.00 279.08 306.04
(4+5+6)

CURRENT ASSETS
8 Inventory
a) Raw Materials 22.40 2.40
b) Stock-in-Process (SIP)
c) Finished goods 20.40 72.20
d) Consumable Stores & Spares 2.43 3.64
Total Inventory 0.00 0.00 45.23 78.24
9 Sundry Debtors less than 6 months 10.57

1
 10 Advances to Suppliers of RM and
Stores/ Spares
11 Investments
12 Cash & Bank Balances 45.00 40.85
13 Loans and Other Advances 0.01
14 Other Current Assets 0.34
15 Total Current Assets (8 to 14) 0.00 0.00 90.58 129.66

CURRENT LIABILITIES
16 Sundry Creditors 4.22 8.56
17 Bank Borrowings for Working Capital 38.15 49.95
18 Instalments (Payable in one year)
(a) SIDBI Term Loan(s)
(b) Other Term Loan(s) 25.00 20.00
(c) Deferred Payment Credits
(d) Interest Bearing Unsecured
Loans
(e) Interest Free Unsecured Loans
Sub-total 0.00 0.00 25.00 20.00
19 Advances
20 Provisions 0.22 1.25
21 Other Current Liabilities 4.39 3.32
22 Total Current Liabilities (16 to 21) 0.00 0.00 71.98 83.08
23 Net Working Capital (Surplus of CA 0.00 0.00 18.60 46.58
over CL) (15-22)
24 Net Tangible Assets (7+23) 0.00 0.00 297.68 352.62
LONG TERM LIABILITIES
25 SIDBI Term Loan(s)
26 Other Term Loan(s) 109.26 102.47
27 Deferred Payment Credits
28 Interest Bearing Unsecured Loans 132.92
29 Interest Free Unsecured Loans 190.42
30 Other Long Term Liability
31 Deferred Tax Liabilities 0.75 1.56
32 Total Long Term Liabilities (25 to 31) 0.00 0.00 242.93 294.45
33 Net Worth (24-32) 0.00 0.00 54.75 58.17
Networth represented by
34 Equity Share Capital 50.40 50.40
35 Equity Share Capital- SIDBI / Others
36 Preference Share Capital
37 Reserves & Surplus 4.35
38 Subsidies
39 Profit & Loss Account (only credit 4.35 4.61

2
 balance)
40 Less: Intangibles/ Misc. / Prelim. / 1.19
Def.Rev.Exp. not written off
41 Less: Accumulated Losses
42 Net Worth (34+35+36+37+38+39-40- 0.00 0.00 54.75 58.17
41)

43 Contingent Liabilities (Rs. lakh)

44 Repayment of loan during the year 0.00 0.00 25.00
(Rs. lakh)

P/L ACCOUNT OF THE FIRM

3
PROJECTED BALANCE SHEET OF THE FIRM

4
PROJECTED P/L ACCOUNT OF THE FIRM

5
CALCULATION OF DSCR

6
CALCULATION OF BREAKEVEN POINT

7
The capacity utilizations are defined from beforehand.

The formulas for calculation of breakeven point are as follows:-

1)Breakeven Point(% of Installed Capacity)=Total Fixed Cost/Contribution*Production

capacity utilization

2)Cash Breakeven Point(% of Installed Capacity)=(Total Fixed Cost-

Depreciation)/Contribution*Production capacity utilization

(Contribution=Total Income-Total Variable Cost)

CALCULATION OF COST OF CAPITAL

8
 Amount Cost of Tax Rate Cost of Total
Funds Funds Cost
(%) (Post- (Post
Tax) Tax)
Equity Share Capital 36.30 15.00% 1.00 15.00% 5.45
Share Premium 0.00 15.00% 1.00 15.00% 0.00
Preference Share 0.00 15.00% 1.00 15.00% 0.00
Capital
SIDBI Equity 0.00 15.00% 1.00 15.00% 0.00
Contribution
Internal Accruals 0.00 15.00% 1.00 15.00% 0.00
Interest free Unsecured 0.00 15.00% 1.00 15.00% 0.00
Loans
Subsidy 0.00 15.00% 1.00 15.00% 0.00
Quasi-Equity Others (Pl 0.00 15.00% 1.00 15.00% 0.00
Specify)
SIDBI Term Loan 57.00 12.50% 0.65 8.15% 4.64
Term Loan from Other 0.00 0.00% 0.65 0.00% 0.00
Banks
Interest Bearing 0.00 0.00% 0.65 0.00% 0.00
Unsecured Loans
Internal Accruals 0.00 15.00% 1.00 15.00% 0.00
(Optimum Year)
Bank Borrowing for WC 81.23 15.00% 0.65 9.78% 7.94
(Optimum Year)

Total 174.53 18.03

Cost of Capital 10.33%

Cost of Funds(Post Tax)=Cost of funds(%)*Tax rate

Total Cost(Post Tax)=(Cost of Funds(Post Tax)*Amount)/100

Cost of Capital=(Total Cost(Post Tax)/Total Amount)*100

CALCULATION OF RETURN ON CAPITAL EMPLOYED

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CALCULATION OF INTERNAL RATE OF RETURN AND NPV

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 BIBLIOGRAPHY
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BOOKS REFERRED:

1. M.Y.Khan and P.K.Jain, Management Accounting (Third Edition), Tata McGrawHill.

2. 2.M.Y.Khan and P.K.Jain, Financial Management (Fourth Edition), Tata McGrawHill.
3. 3.D.M.Mittal, Money, Banking, International Trade and Public Finance
(EleventhEdition), Himalaya Publishing House.

WEB SITES

1.www.sidbi.com

2.www.icicidirect.com

3.www.rbi.org

4.www.indiainfoline.com

5.www.google.com

BANKS INTERNAL RECORDS:

1.Annual Reports of SIDBI.

2.SIDBI Manuals for subsidy schemes.

3.Appraisal reports of proposals.

4.Rating reports of proposals.

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