Report On Credit Appraisal of Industrial Finance

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A REPORT
ON
CREDIT APPRAISAL OF
INDUSTRIAL FINANCE FOR SME’s
SUBMITTED BY:
Kulbir Singh
Class roll no-2026, Examination roll no-581
Session 2006-2008
A report submitted in partial fulfillment of
the requirements of
MBA Program of Institute of Management Studies
Under the guidance of:

Dr. Parmod Sharma
Senior Lecturer
INSTITUTE OF MANAGEMENT STUDIES
HIMACHAL PRADESH UNIVERSITY

SHIMLA
1
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This is to certify that Mr. Kulbir Singh of MBA, Institute of Management Studies
has undertaken a project on “CREDIT APPRAISAL OF INDUSTRIAL
FINANCE FOR SME’s.” under my guidance. To the best of my knowledge that
project is neither submitted nor published elsewhere.
I recommend and forward the project for evaluation for the award of “Masters in
Business Administration.”
Project Guide
Dr.Parmod Sharma
ACKNOWLEDGMENT
2
I sincerely feel the credit of the project work
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could not be
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narrowed to only one individual. This work is an integrated effort of all
those concerned with it, it would have been quite difficult without their
direct & indirect co-operation. I wish to express my appreciation and
gratitude to all the concerned people.
First and the foremost my intellectual debt is to Dr.Parmod
Sharma(Senior Lecturer Institute of Management Studies) and Mr.A.K
Sharma (Chief Manager Loan Department Union Bank of India, Shimla)
who have contributed significantly towards the completion of the project.
They have provided the guidelines on which this project was made.
I am thankful to all the people who have given their precious
time and provided me with requisite data without which this project would
not have completed .I also thank them for giving their valuable
suggestions during the entire period of research.
However, I accept the sole responsibility for any errors of
omission and commission.
Kulbir Singh
Roll no-2026/581
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Table of Contents
CONTENTPAGE NO. 1 Introduction 1.1 Objectives of the Study 5 1.2
Purpose of the Study5 1.3 Limitation of the Study6 1.4 Proposed Methodology6 1.5
Abstract7,8 2. Main Text 2.1 Overview of Indian banking industry 9,10,11 2.2 union bank of
India 12,13,14 2.3 small scale industry15,16,17,18,19,20 3 credit appraisal procedure and
process21 3.1 assessment of credit need 22 3.2 financial statement
analysis23,24,25,26,27 3.3 risks in bank lending 27,28 3.4 financial ratio
analysis32,33,34 3.5 credit rating 35,36,37,38 4 loan facility 4.1 working capital loan
39,40,41,42,43 4.2 term loan 44,45,46,47,48,49,50
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Table of Contents
CONTENT PAGE NO.5 Documentation and formalities
515.1 NPA classification and recovery52,53,54,55AnnexureAnnexure-
I56,57,58,59,60,61,62,63,64Glossary65,66References67
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OBJECTIVES OF THE STUDY
The objective of research is to study the Corporate Banking

in Union Bank of India. The area of study in Corporate Banking in Union
Bank of India would include-
Working Capital Financing and Term loan financing- To support

extended both as Fund based and Non-Fund based facilities to
Corporate, Partnership firms, Proprietary concerns. Working Capital
finance extended to all segments of industries. The project research
focuses on determining the various factors considered in analyzing the
financial needs (working capital) of their clients and determining the
limit of finance. The objective of the project is also to study the well-
documented loan policy.
The study would involve following-
• Assessment of the advances.

• Processing of the advances.
PURPOSE OF THE STUDY FOR THE ORGANISATION
• This study would involve working out and interpreting the

financial ratios in case of working capital financing and term
loans.
• The study also involves the study of procedural formalities
included in sanctioning the finance to its clients.
• This study would involve analyzing the balance sheets of their
clients in determining their financial needs.
6
LIMITATIONS OF THE STUDY
Every study or research is conducted under some limits and there are
some restrictions which have some impact on the project.
Limitations of this project are–
• Coverage: The study aims at covering the corporate banking of

Union Bank of India only.
• The study aims at gaining the practical knowledge by taking
help of bank personals. So there might have been tendencies
among the personals to amplify or filter their responses due to
time limitation.
• Credit appraisal for working capital finance is study that
needed specialized knowledge of the area, so there is chance
for interpretational error on my par
PROPOSED METHODOLGY
Since the research carried out for this project is descriptive in nature,
the various documents and official files would require for understanding
the methodology used by the banks. The data collection can be done by
personal interview or direct observations. At the same time, related
articles, newspapers, magazines, in-house journals of banks, etc were
referred. The information on the project under consideration can be
obtained by the bank employees and officials. Also I went through
various files and the official correspondence of the bank for better
understanding the topic under the study. The methodology also include
finding out the financial ratio, understanding the credit rating and
assessment of working capital and term loan of the companies by making
the fresh proposal for working capital and term
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ABSTRACT
The project undertaken is credit appraisal of industrial finance for
SMEs. The project emphasis on understanding the procedure and process
used by union bank of India to assess the credit worthiness of the
borrower. Small scale industry in India is booming and contributing to 40%
of GDP, many banks are focusing their attraction towards this sector.
The credit appraisal process is the scientific way
of giving the credit to corporate client by analyzing the credit worthiness of
the company through different parameters. The first step in credit
appraisal project is to understand the Indian banking industry and the
performance of the few Indian banks in the previous financial years since
project undertaken is in banking industry a glance on union bank of India
and small scale industry in India is given and the steps taken by the banks
to development and welfare of SSI.
The credit appraisal for SME starts with
Understanding the need of loan to the borrower i.e. for which purpose the
loan is required. After this next step is to analyse the financial statement of
the company to whom the loan is to be sanctioned. The main things which
are taken into consideration while analyzing the financial statement are
type of statement, nature of activity ,accounting policy, qualities of assets
and liabilities , unit wise performance result of the company & director’s
report.
After analyzing the financial statement the second
step is to study the principle given by Basel committee on banking
supervision which basically Indian banks have to be follow as per the order
by Reserve Bank of India.The third step is to analyse the key financial
ratios of the company such as :
Leverage ratio, liquidity ratio, profitability ratio, turnover ratio, inventory
norms.
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The next step is to understand the methodology used to
determine the
credit rating. Since the credit rating methodology differ from bank to bank
in term of the weight age given to the parameters but the parameter used
by the banks to assess credit worthiness are almost same to all company.
The banks mainly provide two types of credit facility known as term loan
and working capital loan. The working capital loan is given by three
methods namely- projected balance sheet method, MFBF method and cash
budget method.
Term loan is the loan given by the company for a
long term gernally more than one year and less than 10 years to company.
The term loan is assessed by the break even analysis, cost benefit ratio,
payback period. While appraising the term loan technical, managerial,
financial feasibility is checked. The debt service coverage ratio is used for
assessing the company capacity to pay back installment of loan and int. on
term loan.
The sensitivity analysis is used to check the
company ability to pay back the loan by changing the independent
variables and consequently monitoring the effect on dependent variables.
The last step is to understand the classifications of NON PERFORMING
ASSET and the provision to recovery of NPA. The research report contains
the whole procedure & process which is used by the bank to give credit to
SMEs.
9
OVERVIEW O
R
MAIN TEXT
The banking system in India was established in 18th century. The first
Indian bank which came into existence in1786 was THE GENERAL BANK
OF INDIA which is followed by BANK OF HINDUSTAN. Although both
COMMERCIAL BANKS
these banks do not exist today but these banks made the foundation of
banking system in India. The oldest bank in existence in India is the state
bank of India being established as "The Bank of Bengal" in Calcutta in June
1806.The first fully Indian owned bank was the Allahabad bank, which was
established in 1865.
By the 1990s the market expanded with the
establishment of banks such as Punjab National bank in 1895 in Lahore
and Bank of India in 1906, in Mumbai - both of which were founded
under private ownership. The Reserve bank of India formally took on
the responsibility of regulating the Indian banking
REGIONA
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FOREIGN BANK
Sector from 1935 After India's independence in 1947, the Reserve Bank
was nationalized and given broader powers.
Nationalization
The nationalization of banks added a new chapter in the
Indian banking system in 1969 when the Indra Gandhi Government
nationalized the 14 largest commercial banks. A second phase of
nationalization of banks took place in 1980 by the nationalization of 6 more
commercial banks. The stated reason for the nationalisation was to give
the government more control of credit delivery.
Liberalizations
In the early 1990s the Narasimha Rao government embarked
on a policy of liberlisation and gave license to a small number of private
banks, which came to be known as NEW GENERATION TECH-SAVVY BANK
which included banks such as UTI Bank, ICICI Bank and HDFC Bank. This
move, along with the rapid growth in the economy of India, kick started the
banking sector in India, which has seen rapid growth with strong contribution
from all the three sectors of banks, namely, government banks, private banks
and foreign banks.
NO. OF COMMERCIAL BANKS IN INDIA
FINANCIAL YEAR MAR.-02 MAR.-03 MAR.-04 MAR.-05 MAR.-06
NO. OF COMMERCIAL BANKS (A+b) 297 292 290 289 222
{A} SCHEDULE COMMERCIAL BANKS 293 288 286 285 218
(-)OF WHICH: REGIONAL RURAL BANKS 196 196 196 196 133
{B} NON SCHEDULE COMMERCIAL BANKS 4 4 4 4 4
SOURCE: RESERVE BANK OF INDIA
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Since Indian banking sector is experience exponential growth, the profit

made by public sector and private sector banks are given below.
NET PROFIT OF COMMERCIAL BANKS IN INDIA (MN) Rs.

BANK MAR.-05 MAR.-06 % CHANGE
PRIVATE SECTOR BANK
ICICI BANK 20,052.00 25,400.70 26.67
HDFFC BANK 6,655.60 8,707.80 30.83
UTI BANK 3,345.80 4,850.80 44.98
J& K BANK 1,150.70 1,768.40 53.68
KARUR VYSYA BANK 1,053.40 1,353.50 28.49
FEDRERAL BANK 900.90 2,252.10 149.98
KOTAK BANK 848.90 1,182.31 39.28
YES BANK NA 2,700.00 NA
INDUSIND BANK 2,101.50 368.20 -82.48
ING VYSYA BANK -381.30 90.60 NA
PUBLIC SECTOR BANK

STATE BANK OF INDIA 43,045.20 44,066.70 2.37
BANK OF BARODA 6,768.40 8,269.60 22.18
BANK OF INDIA 3,400.50 7,014.40 106.28
CORPORATION BANK 4,021.60 4,444.60 10.52
IDBI LTD. 3,072.60 5,608.90 82.55
DENA BANK 610.00 729.90 19.66
CANARA BANK 11,095.00 13,432.20 21.07
ALLAHABAD BANK 5,417.90 7,061.30 30.33
PUNJAB NATIONAL BANK 14,101.20 14,393.10 2.07
VIJAYA BANK 3,805.70 1,268.80 -66.66
BANK OF MAHARSHATRA 1,771.20 507.90 -71.32
UNION BANK OF INDIA 3,015 3,610.00 19.7
Source: reserve bank of India
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Corporate Mission:
• A logical extension of the Vision Statement is the Mission of the

Bank, which is to gain market recognition in the chosen areas.
• To build a sizeable market share in each of the chosen areas of

business through effective strategies in terms of pricing,
product packaging and promoting the product in the market.
• To facilitate a process of restructuring of branches to support a

greater efficiency in the retail banking field.
• To sustain the mission objective through harnessing technology

driven banking and delivery channels.
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• To promote confidence and commitment among the staff

members, to address the expectations of the customers
efficiently and handle technology banking with ease.
ABOUT UNION BANK OF INDIA

“We should have the ability to carry on
a big bank, to manage efficiently Crores of rupees in the course of our
national activities. Though we have not many banks amongst us, it does
not follow that we are not capable of efficiently managing Crores and tens
of Crores of rupees."
MAHATMA GANDHI
Union Bank of India, a public sector bank was

incorporated in 1919.After the inauguration by father of nation “mahatma
Gandhi” bank has travelled a long successful journey of 88 yrs of banking.
Union Bank of India is committed to maintain its identity as a leading
innovative commercial Bank, alive to the changing needs of the society.
Union Bank has offered vast and varied services to its clientele taking care
of their needs. Today, with its efficient customer service, consistent
profitability & growth, adoption of new technologies and value added
services, Union Bank truly lives up to the image of, “GOOD PEOPLE TO
BANK WITH”.
The key business areas of the bank are retail banking,

international banking, corporate banking & treasury. As Retail banking is
growing very fast in Indian banking industry union bank of India is also
showing strong growth in this sector. The bank provide housing, retailing
trade, automobile, consumer, education and other personal loans and
deposits services such as fixed , saving and demand deposits for the
valuable clients. The bank has increased forgeion exchange turnover from
361.02 bn in 2004-05 to408.94 bn in 2006-07 with annual growth rate of
14
13.27%. The corporate banking sector offers various loan and free based
products and services to its small and medium enterprises, agriculture
sector.
To boost SME Segment the bank has set up separate SME
cells .the total employee strength of bank are 25,421.
Union bank of India is targeting a 25% growth in its SME portfolio. The
bank SME portfolio in 2005-06 was 6,839 crore and its target in 2006-07
is 8,540 crore. Union bank of India has made an agreement with SIDBI
to provide loan to SMEs. The bank is converting 32 small scale industry
branches to SME branches. Union bank of India and SIDBI are also in
the process of putting up marketing teams in 15 centers for identifying
and appraising SMEs units and lending them.
Union bank of India has a network of more than 2100
branches all over India. The Bank came out with its Initial Public Offer
(IPO) in August 20, 2002 and govt.of India holds 55.4% of the bank
followed by FII 19.9% & Indian public hold14.8% of the bank. The Bank
has over the years earned the reputation of being a techno-savvy Bank
and is one of the front runners amongst public sector bank in the field of
technology. It is one of the pioneer public sector banks, which launched
Core Banking Solution in 2002. Online Tele banking facility is available
to all its Core Banking customers. The multi facility versatile Internet
Banking Solution provides extensive information in addition to the on
line transaction facility to both individuals and corporate banking with
the Core Banking branches of the Bank. In addition to regular banking
facilities, today customer can also avail variety of value added services
like cash management service, insurance, mutual funds, Demat from the
Bank.
15
SMALL SCALE INDUSTRY:

With the advent of planned economy from 1951 and the subsequent industrial policy
followed by Government of India, both planners and Government earmarked a special
role for small-scale industries and medium scale industries in the Indian economy.
Due protection was accorded to both sectors, and particularly for smallscale industries
from 1951 to 1991, till the nation adopted a policy of liberalization and globalization.
Certain products were reserved for small-scale units for a long time, though this list of
products is decreasing due to change in industrial policies and climate.
SMEs always represented the model of socio-economic policies of Government of
India which emphasized judicious use of foreign exchange for import of capital goods
and inputs; labour intensive mode of production; employment generation;
nonconcentration of diffusion of economic power in the hands of few (as in the case of
big houses); discouraging monopolistic practices of production and marketing; and
finally effective contribution to foreign exchange earning of the nation with low import-
intensive operations. It was also coupled with the policy of de-concentration of
industrial activities in few geographical centers. It can be observed that by and large,
SMEs in India met the expectations of the Government in this respect. SMEs
developed in a manner, which made it possible for them to achieve the following
objectives:
• High contribution to domestic production
• Significant export earnings
• Low investment requirements
• Operational flexibility
• Location wise mobility
• Low intensive imports
• Capacities to develop appropriate indigenous technology
• Import substitution
• Contribution towards defense production
• Technology – oriented industries
• Competitiveness in domestic and export markets
16
At the same time one has to understand the limitations of SMEs, which are:
• Low Capital base
• Concentration of functions in one / two persons
• Inadequate exposure to international environment
• Inability to face impact of WTO regime
• Inadequate contribution towards R & D
• Lack of professionalism
In spite of these limitations, the SMEs have made significant contribution towards
technological development and exports.
SMEs have been established in almost all-major sectors in the Indian industry
such
as:
• Food Processing
• Agricultural Inputs
• Chemicals & Pharmaceuticals
• Engineering; Electricals; Electronics
• Electro-medical equipment
• Textiles and Garments
• Leather and leather goods
• Meat products
• Bio-engineering
• Sports goods
• Plastics products
• Computer Software, etc.
An industrial undertaking in which the investment in fixed assets in plant

and machinery whether held on owner ship term on lease or on hire
purchase does not exceed rs. 10 million.It is estimated that in terms of
value, the sector accounts for about 39% of the manufacturing output and
17
around 33% of the total exports of the country.As per available
statistics,
this sector employs an estimated 31 million persons spread over 12.8
million enterprises and the labour intensity in the MSE sector is estimated
to be almost 4 times higher than the large enterprises.
In India 2.30 lakhs units are only registered in Gujarat
providing employments to 39 lakhs people in Gujarat, which contributes to
24% of total employment provided by SSI in India.
Small Scale and ancillary units (i.e. undertaking with investment
in plant and machinery of less than Rs. 10 million) should seek registration
with the Director of Industries of the concerned State Government. The
govt. of India established ministry of small-scale industry in 2001.the role
of ministry of small scale industry is to mainly assist the state in their
effort to promote the growth of SSI, increase the competition and
gernation of employments.
Performance of Micro & Small Enterprises

Employ- Exports
No of units(in lakh) Production ment
(at 2001-02 (Rs in
Unregd prices)crore (in crore
Year Regd . Total s lakhs) )
306 86.01
2002-03 16.03 93.46 109.49 771(8.7) 263.68 3
336 9764
2003-04 17.12 96.83 113.95 344(9.6) 275.3 4
100.3 3729 287.5 1244
2004-05 18.24 5 118.59 38(10.9) 5 17
104.1 4188 299.8 1502
2005-06 19.3 2 123.42 84(12.3) 5 42
108.1 4716
2006-07 20.32 2 128.44 63(12.6) 312.52 N.A.
Sources:Office of the Development Commissioner(MSME)

* Estimates based on definitions prior to anactment of MSMED Act 2006
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Recently.major initiatives have been taken by the Govt. to

revitalize the MSME sector. They include:
 Implementation of the Micro, Small and Medium Enterprises

Development Act,2006.
 A ‘Package for Promotion of Micro and Small Enterprises’was
announced in feb 2007.This includes measures addressing concerns of
credit ,fiscal support,cluster based
development.infrastructure,technology and marketing.
 To make the Credit Guarantee Scheme more attractive, the
following modifications have been made:
a. Enhancing eligible loan limit from Rs.25 lakh to Rs.50 lakh.
b. Raising the extent of guarantee cover from 75% to 80% for micro
enterprises for loans upto Rs.5 lakh.
c. The phased deletion of products from the list of items reserved
exclusive for small sector is being continued.On March 13,2007,125
items were dereserved reducing the number of reserved items to 114.
 Further for inducing participation of foreign players and big
corporate in Small Scale Industries the government has formally
announced doing away with the 24% investment ceiling in the
sector.
Credit is one of the major inputs for the promotion and

development of SSI. Credit to SSI is the part of credit sector lending. For
the public sector bank 40% of net bank credit should given to priority
sector. However for the foreign banks 32% of net bank credit should be
given to priority sector, out of which 10% is required for SSI.SIDBI (small
industry development bank of India), is the premier financial institution in
India which is only dedicated for the promotion and development of SSI.
19
Credit given to SSI sector from the public sector bank in India
Source annual report of SSI
Credit to tiny sector (having investment up to 25 lakhs rs.)
Source annual report of SSI
The process of economic liberalization and market reforms has opened up the
Indian Small scale sector to global competition. In order to enhance the
competitive strength of the small scale sector, the Government introduced an
incentive scheme for their quality improvement and environment management.
The scheme provides incentive (of up to Rs. 75,000 per unit) to SSI units which
acquire ISO 9000/ISO 14001 certifications. The scheme, in operation since
March 1994, was enlarged to include reimbursement of expenses for acquiring
ISO 14001 certification also w.e.f. 28th October 2002.
The SSI sector in India is booming but still some financial institute hesitate
to give credit to some specific sector due to the fear of non performing
assets (NPA). But by applying good credit policy and timely inspection of
20
SMEs banks can avoid these situations. The following table shows
decreasing trend in NPAs of union bank of India
21
CREDIT APPRAISAL PROCEDURE AND PROCESS:

Credit appraisal is done to evaluate the credit worthiness of a borrower.
The credit proposal is prepared to indicate the need based requirement and
the rationale for its recommendation. Bank has in place a well-defined
framework for approving credit limits of different segments. Requests for
credit facilities from the prospective borrowers shall be on the prescribed
format and the full-fledged proposal should be prepared for submission to
the appropriate sanctioning authority for approval. These proposals
analyze various risks associated with bank lending i.e. business risks,
financial risks, management risks, etc. and clarify the process by which
such risks will be managed on an on going basis The credit appraisals for
any organization basically follow the following process
• Assessment of credit need

• Financial statement analysis
• Financial ratios of the company
• Credit rating
• Working capital requirement
• Term loan and sensitivity analysis
• NPA classification and recovery
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 ASSESSMENT OF CREDIT NEED
The first step in the process of credit appraisal is to assess the need for
loan to the borrower. In the first step the need of financial requirement is
under stand i.e. for which purpose the loan is required .The banks basically
provide two types of credit facilities to their clients.
 Fund based facility
Fund based facilities provided by the banks are basically term loan &
working capital loan.
 Non fund based facility
Non fund based facilities provided by the banks are letter of credit, letter of
guarantee, packing credit.
The banks basically follow three method prescribed by TANDON COMITEE

REPORT to RBI {central bank in India}
1 FIRST METHOD: borrower will contribute 25% of working capital gap

75% would be financed by bank borrowing. Minimum current ratio would
be 1:1
2 SECOND METHOD: borrower will contribute 25% of total current asset

and the remaining working capital gap is filled by bank borrowing {WC gap
–borrower contribution}.the current ratio given by this method would
be1.3:1.
3 THIRD METHOD: borrower will contribute 100% of core asset and 25%
of balance of current asset. The remaining working capital gap will be
bridged by the borrowing.
The first two method are accepted by RBI for the
implementation .This is applied to the entire borrower having the credit
limit in excess of 20 lacs from the banking system
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 FINANCIAL STATEMENT ANALYSIS
Key points to be checked in financial statement:
 Type of statement: Examine weather financial statement is audited

or unaudited. If the report is audited study the auditor certificate.
 Nature of activity: Engaged in trading or manufacturing activity or

services, what kind of the products the company dealt in. if it is a
software industry does it have a technical component and skilled
manpower.
 Series of statement: examine the financial statements important

factor to note the trend has taken place from one year to another
year. for the last 2 or 3 years to know about the trend in the
performance of the firm. The
 Accounting policy which accounting policy the organization is

following. Weather depreciation is charged on WDV {written down
value} method or using SLM {straight line method}.
To understand this let us consider

Average annual profit =3, 00,000
Original cost of fixed asset =10, 00,000
Deprecation under WDV method =25%
Deprecation under SLM method =8%
Tax rate = 50%
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DEPRECEATION METHOD
YEAR Written down value method{25%} Straight line method {8%}
Net Profit after Profit after Net Profit after Profit after
fixed deprecation Deprecatio fixed deprecation Deprecation
asset n asset And tax
And tax
0 10,00,000 10,00,000
1 -2,50,000 50,000 25,000 -80,000 2,20,000 1,10,000

7,50,000 9,20,000
2 -1,87,500 1,12,500 56,250 -80,000 2,20,000 1,10,000

5,62,500 8,40,000
3 -1,40,625 1,59,375 79,687.5 -80,000 2,20,000 1,10,000

4,21,875 7,60,000
4 -1,05,468 1,94,532 97,266 -80,000 2,20,000 1,10,000
3,16,40 6,80,000
7
5 -79,102 2,20,898 1,10,449 -80,000 2,20,000 1,10,000
2,37,305 6,00,000
TOTAL 3,68,652 5,50,000
NOTE: Wdv rates are approximately 3 times SLM
CHANGE IN NET WORTH
Year Net Worth WDV method Net Worth SL Method
0 5,00,000 5,00,000
1 5,25,000 6,10,000
2 5,81,250 7,20,000
3 6,60,500 8,30,000
4 7,58,203 9,40,000
5 8,68,652 10,50,000
25
This is clear from the above illustration that by adopting different method
of deprecation the value of profit after tax and net worth are different. So
there is every possibility of using SL method of deprecation to fixed asset
and value of fixed asset would be more which in turn greater solvency and
liquidity of the firm on paper which is not same in WDV method
The stock of the firm is based on FIFO and LIFO method.
PURCHASE AND CONSUMPTIONS OF ITEM (XYZ)
PURCHASE PRICE TOTAL CONSUMPTION

MONTH DATE (IN UNITS) (PER UNITS) PURCHASE (UNITS)
JANUARY 14 5000 15 75,000

20 - - - 3,000
28 7500 16 1,20,000
FEBRUARY 7 11,000 16 1,76,000

15 - - - 12,000
25 7,000 17 1,19,000
MARCH 5 9,000 18 1,62,000

12 - - - 15,500
TOTAL 39,500 6,52,000 30,500
FIRST IN FIRST- OUT (FIFO) METHOD

COST
CONSUMPTIONS (PER
MONTH DATE (IN UNITS) UNITS) COST TOTAL COST
JANUARY 20 3,000 15 45,000 45,000
FEBRUARY 15 2,000 15 30,000

7,500 16 1,20,000 1,90,000
2,500 16 40,000
MARCH 12 8,500 16 1,36,000

7,000 17 1,19,000 4,90,000
CLOSING
STOCK 31 9,000 18 1,62,000
PURCHASES 6,52,000
26
LAST IN FIRST –OUT (LIFO) METHOD
CONSUMPTIONS COST
MONTH DATE (IN UNITS) (PER UNITS) COST TOTAL COST
JANUARY 20 3,000 15 45,000 45,000
FEBRUARY 15 11,000 16 176,000 1,92,000

1,000 16 16,000
MARCH 12 9,000 18 1,62,000

6,500 17 1,10,500 2,72,500
CLOSING
STOCK 31 500 17 8,500
6,500 16 10,400
2,000 15 30,000
TOTAL 1,42,500
PURCHASES 6,52,000
From the above example it is clear that by adopting different method of

stock valuation the closing stock of the company differ widely irrespective
of any point of time holding the same quantity in units. FIFO method of
inventory valuation inflates the inventory costs and which in turn shows
the higher book profit than justified. LIFO method on the other hand
depresses inventory cost and is considered to be more realistic estimate
for the profit for a period. Since price is increasing trend so FIFO method
giving high value of closing stock if the price would be in decreasing trend
than LIFO method give high value of closing stock. ICAI now allows
inventory to be valued either on the basis of the FIFO method or net
realizable method.
 Qualities of assets/ liabilities: a financial statement, which is

based on accounting standard, however not shows the quality of
assets and liability. The banker should therefore to check on
periodical checking, quality control certification like ISO certification.
27
 Unit wise result: the company which has diversified
business
should ask to produce activity wise financial statement for the better
understanding.
 Director’s report: finally a director report of the company should
study which shows the company future plans, new initiative taken by
the company etc.
Risk associated with bank lending:
Banks mainly faces three kind of risk which has impact on profitability of
the bank. These risks are
 Credit risk
 Market risk
 Operational risk
Credit risks basically is the major risk which is faced by the bank on
account of their business activity, which including the lending to
corporate world, individual bank, another bank or financial institution.
Credit risk is of two types
 borrower risk
 portfolio risk
Borrower risk may be the possibility of that a borrower will fail to
meet his financial obligations in accordance with agreed term.
Portfolio risk arises due to credit concentration/ investment
concentration.i.e most of the credit is given to only one type of group and
the possibility of default.
Market risk is the variability in the profitability of the firm due to
change in market variables. This is manly of three types.
 interest rate risk
 exchange rate risk
Interest rate risk: the risk in the erosion of earning due to variation in
the interest rate with in the time period is referred as interest rate risk.
28
Exchange rate risk: this risk is of two type
 Transaction risk
 Translation risk
Transaction risk: is the risk basically arises due to the fluctuation in the
price of a currency, upward or down ward; result in a loss on a particular
transaction.
Translation risk: in a situation of a translation the balance sheet of a
bank effected adversely due to exchange rate movement and change in
the level investment or borrowing in foreign currency even without having
translation at a particular time.
Liquidity risk: liquidity risk arises out of the possibility that would not be
able to meet its financial obligation as they become due for the payment.
the risk basically arise due to mismatch between the cash inflow or out
flow of the funds or funding the long term asset term asset by short term
liabilty.surplus liquidity also is the loss to the banks as the money is not
used to raise the income to the bank.
There are many indicators of Credit Risk Problems which show the risk in
bank lending.Gernally high level of non-performing assets of the bank or
Heavy Provisions show the greater risks. This can be also assessed through
the balance sheet and p/l account of the company. It is red indicator to the
bank which shows that bank has one of the problems with the credit policy.
I. Generally an indicator of poor quality of a credit portfolio.
II. Implies poor risk selection and/or poor credit monitoring.
III. Very rapid expansion of credit portfolio size.
It is not necessary that an above indicator of problems always be
true but it often reflect future problem.
29
The seventeen basic principles for bank lending are
given below to
avoid the risks associated with bank lending.
ESTABLISHING AN APPROPRIATE CREDIT RISK ENVIRONMENT
Principle 1: The board of directors should have responsibility for

approving and periodically reviewing the credit risk strategy and significant
credit risk policies of the bank. The strategy should reflect the bank’s
tolerance for risk and the level of profitability the bank expects to achieve
for incurring various credit risks.
Principle 2: Senior management should have responsibility for
implementing the credit risk strategy approved by the board of directors
and for developing policies and procedures for identifying, measuring,
monitoring and controlling credit risk. Such policies and procedures should
address credit risk in all of the bank’s activities and at both the individual
credit and portfolio levels.
Principle 3: Banks should identify and manage credit risk inherent in all
products and activities. Banks should ensure that the risks of products and
activities new to them are subject to adequate procedures and controls
before being introduced or undertaken, and approved in advance by the
board of directors or its appropriate committee.
A. OPERATING UNDER A SOUND CREDIT GRANTING PROCESS
Principle 4: Banks must operate under sound, well-defined credit-granting
criteria. These criteria should include a thorough understanding of the
borrower or counterparty, as well as the purpose and structure of the
credit, and its source of repayment.
Principle 5: Banks should establish overall credit limits at the level of
individual borrowers and counterparties, and groups of connected
counterparties that aggregate in comparable and meaningful manner
different types of exposures, both in the banking and trading book and on
and off the balance sheet.
30
Principle 6: Banks should have a clearly established process
in place for
approving new credits as well as the extension of existing credits.

Principle 7: All extensions of credit must be made on an arm’s-length
basis. In particular, credits to related companies and individuals must be
monitored with particular care and other appropriate steps taken to control
or mitigate the risks of connected lending.
B. MAINTAINING AN APPROPRIATE CREDIT ADMINISTRATION,

MEASUREMENT AND MONITORING PROCESS
Principle 8: Banks should have in place a system for the ongoing

administration of their various credit risk-bearing portfolios
Principle 9: Banks must have in place a system for monitoring the
condition of individual credits, including determining the adequacy of
provisions and reserves.
Principle 10: Banks should develop and utilize internal risk rating systems
in managing credit risk. The rating system should be consistent with the
nature, size and complexity of a bank’s activities.
Principle 11: Banks must have information systems and analytical
techniques that enable management to measure the credit risk inherent in
all on- and off-balance sheet activities. The management information
system should provide adequate information on the composition of the
credit portfolio, including identification of any concentrations of risk.
Principle 12: Banks must have in place a system for monitoring the
overall composition and quality of the credit portfolio.
Principle 13: Banks should take into consideration potential future
changes in economic conditions when assessing individual credits and their
credit portfolios, and should assess their credit risk exposures under
stressful conditions.
31
C. ENSURING ADEQUATE CONTROLS OVER CREDIT RISK
Principle 14: Banks should establish a system of independent, ongoing

credit review and the results of such reviews should be communicated
directly to the board of directors and senior management.
Principle 15: Banks must ensure that the credit-granting function is being
properly managed and that credit exposures are within levels consistent
with prudential standards and internal limits. Banks should establish and
enforce internal controls and other practices to ensure that exceptions to
policies, procedures and limits are reported in a timely manner to the
appropriate level of management.
Principle 16: Banks must have a system in place for managing problem
credits and various other workout situations.
D. ROLE OF SUPERVISORS
Principle 17: Supervisors should require that banks have an effective

system in place to identify measure, monitor and control credit risk as part
of an overall approach to risk management. Supervisors should conduct an
independent evaluation of a bank’s strategies, policies, practices and procedures
related to the granting of credit and the ongoing management of the portfolio.
Supervisors should consider setting prudential limits to restrict bank exposures to
single borrowers or groups of connected counterparties.
Source: Reserve Bank of India
32
www.final-yearprojects.co.cc KEY FINANCIAL RATIO: www.troubleshoot4free.com/fyp/
LEVERAGE Ratios:
a) Debt-equity ratio: Long term liabilities

Tangible Net worth
Ratio indicates term lender’s stake vis-à-vis stake of the owner. It should
be between 1.5 and 2.
Long term liabilities may include term loans, debentures deferred payment
guarantees, fixed deposit.
Tangible net worth = Equity share capital + Preference share capital
redeemable after 3 years + reserves and surplus + Subsidy - Intangible
assets - accumulated losses, if any.
b) Fixed assets coverage ratio:

Fixed assets + Other non-current assets * 100
Tangible net worth + Long term liabilities
It indicates coverage of long-term uses by long term sources. Lower
percentage indicates extent of net working capital available.
PROFITABILITY RATIOS:
a) Profit margin on sales: Net Profit * 100

Sales
It indicates profitability of the firm after accounting for all the expenses
and taxes. To be compared with similar size units belonging to the same
33
industry. It is to be compared with the similar size units belonging to the

same industry.
b) Cost of sales to sale: Net profit * 100

Sales
It indicates cost efficiency. It is to be compared with the similar size units
belonging to the same industry.
c) Return on investment: PBIT * 100

Capital employed (Net fixed assets + Total CA)
It indicates the rate of return on total funds employed. It should be more
than average cost of capital.
d) Return on net worth: Net profit after preference dividend * 100

Equity capital +reserves and surplus
It is the ratio of return on owners’ fund.
d) Debt service coverage ratio:

Profit after tax + depreciation + interest * 100
Interest + Installments of term liabilities Payable during the year
The ratio indicates the extent to which the amount of interest and
installments payable during the year are covered by the funds generated
during the year. The minimum 1.5 is expected.
TURNOVER RATIOS
a) Total asset turnover ratio: Sales

Net fixed assets + current assets
34
It indicates how well the assets are used. It is to be compared with similar
size units belonging to the same industry.
b) Working capital turnover ratio: Sales

Total current assets
It indicates how well the current assets are used. It is to be compared with
similar size units belonging to the same industry. Location of the unit also
needs to be taken into consideration.
c) Inventory turnover ratio: Cost of goods sold

Average inventory
It indicates the extent of excess inventory. Trend over a period of line
compared with similar size units belonging to same industry.
35
OBJECTIVES OF CREDIT RATING
R.B.I. has given considerable emphasis on having a proper risk rating in

place as a credit rating system is considered as an instrument that helps
the bank in
• Measuring the Credit Risk at the transaction level.
• Pricing the Credit Risk
• Providing triggers for action on Portfolio Management
• Frequency of inspection
The following three credit rating models are used at UBI for evaluating the
credit worthiness of a borrower in the SME sector.
Rating Model 1 – For Small Borrowers with Credit Limit between 2 Lacs to
100 Lacks.
Rating Model 2 – For borrowers with Credit Limit between 10 Lacs to 5
Crores.
Rating Model 3 – For borrowers with Credit Limit between 1 Crore to 10
Crores.
The credit rating technique used by the banks differs from bank to bank.
As stated in the Basel committee reports the top management is
responsible for framing the policy of bank. The common parameters, which
are taken into consideration before preparing the credit rating module, are
below.
• Operational performance of unit

• Sales trend during last 3 years.
• Profit trend during last 3 years.
• Achievement of sales projections
• Achievement of profit projections
• Net worth
36
historical risks associated with unit www.troubleshoot4free.com/fyp/
• Geographical location
• Threat of obsolescence
• Industry type (sunrise, old, sunset)
• Industrial relation
• Regulatory risks and transaction/ compliance risk
• Repayment records
• Relationships of clients with the banks a/c
• Sector specific threat (external macro economic factors)

• Tax and duty barriers
• Conduct of fund and non-fund based accounts with banks /financial
institutions- whether these are regular or irregular.
• Compliance of terms and conditions stipulated by banks while
sanctioning of loan.
• Position of annual renewal/ review of loan facilities.
• Nature and value of securities (primary/ collateral) offered to cover
loan facility.
• Validity of creation of charge on the securities.
• Position of contingent liabilities, if any.
• Transparency and disclosures in audited annual accounts.
• Position with regard to submission of balance sheet and P&L account,
monitoring data and inventory statement etc.
• Auditor’s comments on quality and valuation of all types assets.
• Financial risk
• Return on equity ratios
• Debt service coverage ratio
• Total debt to net worth
• Operating profit to net sale
• Returns on assets
• Current ratio
37
• Nwc/ current asset
• Net profit to net sales

• Return on capital employed
capacity utilization and management

• Ownership pattern of the unit
• Qualification, experience and knowledge of industry/ business.
• Market reputation and credibility.
• Track record of debt repayment.
• Pending statutory dues and litigations, if any
• Succession planning
• Labour relation
• Total capacity utilization
• No. of NPA units of same sector
• Strategic risk
• Investment in technology for up gradation & R&D
• Competitive threat (global, industry, new entrant)
• Threat of substitute product ( if any)
• Future potential
• Market demand and growth potential of products.

• Export potential of products.
• Position with regard to availability of raw material.
38
The following table shows classification of the Credit quality based on the
Credit rating score, calculated from the appropriate rating model.
INVESTMENT GRADE NON INVESTMENT GRADE

CREDIT RATING AGGREGATE CREDIT RATING AGGREGATE
QUALITY NUMERIC SCORE (of 100) QUALITY NUMERIC SCORE (of 100)
Lowest risk CR-1 >90 Watch list CR-7 51-60
CR-2 86-90 Risk prone CR-8 51 & below
Moderate risk CR-3 81-85 Sub- CR-9 -

standard
Satisfactory risk CR-4 76-80 Doubtful CR-10 -
Fair risk CR-5 71-75 Loss CR-11 -
Acceptable risk CR-6 61-70
Source: Union Bank of India
WORKING CAPITAL ASSESSMENT:

39
Apart from financing for investing in fixed
assets, every business also requires funds on a continual basis for carrying
on day to day operations. These include amounts expenses incurred for
purchase of raw material, manufacturing, selling, and administration until
such goods are sold and the monies. While part of the raw material maybe
purchased by credit, the business would still need to pay its employees,
meet manufacturing & selling expenses (wages, power, supplies,
transportation and communication) and the balance of its raw material
purchases. Working capital refers to the source of financing required to by
businesses on a continual basis for meeting the short term needs. Limits to
the various borrowers are assessed depending upon their requirements
and their line of activity.
OPERATING CYCLE OF THE COMPANY: The operating cycle is the

average time between purchasing or acquiring inventory and receiving
cash proceeds from its sale. From the operating cycle the bank can
understand about the future working capital requirement of the company.
CASH DRS.
F.G. R.M.
WIP
40
DURATION OF OC = R.M stock + WIP + FG stock holding
period +ACP –
APP
NO. Of OC’s in a year = 360/ 12
Duration of OC’s
WC requirement forecast = annual operating cost
No. of OCs in a year
Stock holding period = stock
Cost at which stock is valued
R.M. stock holding period = Average stock of raw material
Value of R.M. consumed per day
WIP period = Average stock of WIP
Cost of production/day
FG stock holding period = Average stock of finished
COGS per day
ACP = debtors * 360
Credit sale
APP = creditors *360
Cr. Purchase
41
1. Turnover Method: (Working Capital Requirements)
Under this method the bank finances maximum of 20% of the

projected sales of the borrower and the borrower has to contribute
5% as his margin. This method is applicable for the following
sectors:-
i. For SSI borrowers up to Rs.5.00 crores.

ii. For Non SSI borrowers up to Rs. 1.00 Crore.
Assessment of working capital by turnover method RS. IN LCS
A] TOTAL SALES / TURNOVERPROJECTED 2,25
B] 25% OFF TURNOVER [OF “A”] [WCG] 56.25
C] MARGIN AT 5% OF TURNOVER [OF “A”] 11.25
D] LIMIT 20% OF “A” [B –C] 45

E] LIMIT PERMISIBLE [B-C] 45
2. Maximum Permissible Bank Finance(MPBF) Method :

Under this method the borrowers requirements are assessed based on the
past practice/holding levels while the projections should be reasonably
conform with the past trends, deviations can be accepted subject to
satisfactory justification. This method is called as Tandon Committee
Method of lending. It is applicable for working capital requirement of the
borrowers coming under the following categories:
i) For SSI borrowers:

Rs.5 crores and above but less than Rs.50 crores
ii) For non SSI Borrowers:

Rs.1 crore and above but less than Rs.50 crores
42
Working Capital assessment on the formula prescribed by the

Tandon Committee.
Working Capital Requirement (WCR) = [Current assets – Current
Liabilities]
Permissible Bank Financing [PBF} = WCR – Promoter’s Margin Money i.e.
PMM (to be brought in by the promoter)
As per Formula 1: PMM = 25% of [CA – CL] and thereby PBF = 75% of [CA
– CL]
As per Formula 2: PMM = 25% of CA and thereby PBF = 75% [CA] – CL
As is apparent Formula 2 requires a higher level of PMM as compared to

Formula 1. Formula 2 is generally adopted in case of bank financing. In
cases of sick units where the promoter is unable to bring in PMM to the
extent required under Formula 2, the difference in PMM between Formulae
1 and 2 may be provided as a Working Capital Term Loan repayable in
installments over a period of time.
Rs in lakh
2007(act.) 2008(est.)
TOTAL CURRENT ASSETS 199.72 277.42

OTHER CURRENT LIABILTIES ( other than bank 95.69 90.03
borrowing )
WORKING CAPITAL GAP 104.03 187.39
Calculation of working capital requirement
Working Capital Requirement for the year 2007-08 is Rs. 199.72lakh
43
Formula 1
PMM (Promoter Margin Money) as per formula 1 = 25% of 104.03 lakh ~

Rs. 26 lakh
Hence, Permissible Bank Finance 1 = Rs. 78.3 lakh
Formula 2
PMM as per formula 2 = 25% of Rs. 199.72 lakh = Rs. 49.93 lakh
Permissible Bank Financing as per formula 2 = [75% of 199.72 lakh –
Rs.95.69 lakh] = Rs. 149.79-95.69 lakh = 54.1 lakh
The difference between the 2 methods is Rs. 24.2 lakh (which maybe
extended as a Working Capital Term Loan in case of sick units. Since by
the second method the contribution by the promoter is high so it would be
accepted for bank financing.
3 Cash Budget Method:
The borrower is required to submit the cash budget to the bank along with
actual as well as projected financial statements. The budget in the
prescribed format is to be prepared for a period of one year and then split
into forecasts for shorter periods say monthly or quarterly. The budget will
provide the following information.
i. The peak level of bank finance required during the course of the
year.
ii. The current level of bank finance required as forecasted by the split
budget (on monthly/quarterly) basis.
The following borrowers are assessed under this method :

a) Borrowers dealing in Cyclical industries like tea, sugar etc.
b) Borrowers availing Fund Based Working Capital limits of Rs.50 crores
and above from the banking industry. 36
44
Term loan:
Term loans are a lump-sum payment with payback over a specified period
of time. They may be used to finance equipment, a change in ownership, a
new business acquisition or other long-term needs of a company. The
period of loan vary from 3 to 10 years. Investment of these loans from
firms is in plant and machinery, vehicles and certain other equipments.
Repayment period for the term loan is calculated by DSCR and the
repayment should start immediately after the cash gernation. The formula
for calculating DSCR
(NPAT +int.on term loan + deprecation)
(Int. on term loan +installment of term loan)
The idle ratio is considered to be 2:1while in case of SSI 1.5:1 ratio is

considered to be good.
Appraisal for long term in case of an industry or a project is a long term

investment decision. So it should require a detailed study. The appraisal is
done on the basis of following steps:
1. Technical Feasibility:
The infrastructure required for the manufacturing process is studied
here. The location selected should be ideal with regard to
transportation, communication network, availability of water, climatic
conditions, and availability of manpower and disposal of waste. Size
of the plant & type of technology adopted is another important
aspect. The size of the plant or its capacity should be matching to
the requirements of the estimates of the project.
45
2. Economic Feasibility:
The unit should undertake detailed market study. The demand &
supply gap of the product should be assessed. The time of the unit
entering into the market is also important.
3. Financial Feasibility:
The cost of the project & the estimated time for execution is an
important factor. The promoter’s efficiency to complete the project
within the given period is most important. The source of finance,
without leaving any gap & availability of cash at the right time is to
be ensured. Possibility of cost escalation, cost overruns etc. to be
assessed. The financial feasibility is assessed by financial projection,
fund flow and cash flow statement, ratio analysis and by non
discounted and discounted cash flow statements.
Pay back period method: Payback period is calculated by
comparing cash out flow (investment) with cash inflow (cash profit)
and finding out that at what time they will be equal. Lower the
payback period better the project.
Average rate of return :
It is calculated as Average profit after tax
Average book value of investment
It is compared with the rate of return of other market investments.
Discounted cash flow technique
I. Net present value
It is calculated as =present value of cash inflow – present value of
cash outflow
The project is accepted if NPV is positive and rejected if NPV is
negative
2 Benefit cost ratio:
The entire cash inflow is discounted at the rate of interest to
arrive at present value rate.
46
BCR= present worth of the benefits (cash inflow)
Present worth of cost (investment)

The project is accepted if the BCR is more than one and rejected if BCR is
less than one.
Break even analysis:
Break even point is the point of sales at which a units makes no profit or
no loss. A unit can earn profit only if its level of sale is above the break
even point. Once the BEP is calculated, the sales projection made in the
profitability statement is compared with the break even point of sale. In
case the difference between projected sale and BEP sale is very low, it is
very risky to finance the project. On the other hand if projected sale is high
than BEP the profitability of earning some profit is still there are some
deviations in the project.
BEP can be classified in three ways
1 in terms of no. of units of sale
2 in terms of sale in rupees
3 in terms of capacity utilisation
1 BEP in units = fixed cost

Contribution/ unit
OR
fixed cost
Sales price/unit – variable cost/ unit
2 BEP in rupees = fixed cost * total sales in rupees

Total contribution
3 BEP in terms of capacity utilisation

BEP in capacity = No. of units at BEP * 100
Total capacity
To study the viability of the project the project having BEP above of 75%
of capacity utilisation should not be accepted for finance
Sensitivity analysis:
While giving credit to the company an exercise is done known as sensitivity analysis.
In this method we basically check the volatility in the profit of the company due to
47
change independent variable. The subsequent DSCR is calculated and the ability to
pay back term loan is calculated.
48
SCENARIO -1
PARTICUAR FY-08 FY-09 FY-10 FY-11 FY-12 FY-13 FY-14 FY-15
Particular FY 2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015
DSCR-1
(5% Increase in RMC)
Sales 2538.38 2951.45 3187.75 3410.89 3616.51 3757.63 3896.81 4004.34
Sales 2538.38 2951.45 3410.89 3616.51 3757.63 3896.81 4004.34
3187.75
RM CostR.M. 1401.99
1335.23 1472.09
1401.99 1589.86
1514.15 1669.34
1589.851729.06
1646.73 1793.12
1707.73 1835.22
1747.82 1786.11
1875.42
Consumption
Other Cost
& others 1438.41 1427.42 1380.61 1323.50 1293.87 1242.65 1203.36 1160.59
Total Cost 2840.40 2899.51 2970.47 2992.84 3022.93 3035.76 3038.58 3036.01
PBT -302.02 51.94 217.28 418.05 593.58 721.87 858.24 968.33
Excise 173.42 180.35 189.36 200.72 205.05 212.09 216.74 220.38
Tax 0.00 17.14 71.70 137.96 195.88 238.22 283.22 319.55
PAT -302.02 34.80 145.58 280.09 397.70 483.65 575.02 648.78
Salaries and 93.47 98.14 102.06 107.16 109.60 112.64 114.95 116.67
Depreciation
wages 397.53 380.00 352.40 303.78 297.40 275.25 230.55 205.81
Interest on 272.02 257.20 202.20 178.12 135.07 93.02 75.12 65.12
Power & 43.37 46.51 48.83 51.27 52.93 54.47 55.76 56.76
Term Loan
fuels
Total(A) 367.53 672.00 700.18 761.99 830.17 851.92 880.69 919.71
Stores and 13.75 14.71 15.02 15.77 16.12 16.47 16.82 17.03
Interest on
spares 272.02 257.20 202.20 178.12 135.07 93.02 75.12 65.12
Loan
Installment on 0.00 107.87 305.92 365.73 272.92 353.68 375.71 352.21
Term Loan
Repair and 17.87 19.45 20.42 21.44 22.23 22.86 23.44 23.88
Total (B)
maintenance 272.02 365.07 508.12 543.85 407.99 446.70 450.83 417.33
DSCR(A/B) 1.35 1.84 1.38 1.40 2.03 1.91 1.95 2.20
Administratio
n and other
expenses 157 135.37 138.07 114.97 111.94 104.10 105.98 93.01
Deprecation 397.53 380 352.4 303.78 297.40 275.25 230.55 205.81
Selling cost 142.43 151.94 162.57 175.57 181.20 189.28 194.87 199.23
Packaging
cost 82.32 84.78 90.71 94.33 97.02 100.14 102.02 103.92
Int.on
working
capital 45.23 58.97 58.97 60.37 65.32 62.32 67.12 58.78
Int. on term
loan 272.02 257.20 202.20 178.12 135.07 93.02 75.12 65.12
Total cost 2773.64 2829.41 2894.76 2913.35 2940.60 2950.38 2951.18 2946.70
PBT -235.26 122.04 292.99 497.54 675.92 807.26 945.63 1057.64
TAX 0.00 0 96.6867 164.1882 223.05 266.39 312.06 349.02
NPAT -235.26 122.04 196.30 333.35 452.86 540.86 633.57 708.62

49
40
SCENARIO-2
PARTICULAR 31.03.08 31.03.09 31.03.10 31.03.11 31.03.12 31.03.13 31.03.14 31.03.15

DSCR 2 ( 5% Decrease in
Sales)
Sales 2411.46 2803.88 3028.36 3240.35 3435.69 3569.75 3701.97 3804.12
Total Cost 2773.64 2829.41 2894.76 2913.35 2940.60 2950.38 2951.18 2946.70
PBT -362.18 -25.53 133.60 327.00 495.09 619.37 750.79 857.42
TAX 0.00 0.00 44.09 107.91 163.38 204.39 247.76 282.95
PAT -362.18 -25.53 89.51 219.09 331.71 414.98 503.03 574.47
Depreciation 397.53 380.00 352.40 303.78 297.40 275.25 230.55 205.81

Interest on Term
Loan 272.02 257.20 202.20 178.12 135.07 93.02 75.12 65.12
Total(A) 307.37 611.67 644.11 700.99 764.18 783.25 808.70 845.40
Interest on Term Loan 272.02 257.20 202.20 178.12 135.07 93.02 75.12 65.12
Installment on
Term Loan 0.00 107.87 305.92 365.73 272.92 353.68 375.71 352.21
Total (B) 272.02 365.07 508.12 543.85 407.99 446.70 450.83 417.33
DSCR(A/B) 1.13 1.68 1.27 1.29 1.87 1.75 1.79 2.03
SCENARIO -3
50
DSCR -3 ( 5% decrease in Sales and 5% increase in
RMC)
PARTICULAR FY-08 FY-09 FY-10 FY-11 FY-12 FY-13 FY-14 FY-15
Sales 2411.46 2803.88 3028.36 3240.35 3435.69 3569.75 3701.97 3804.12

RM Cost 1401.99 1472.09 1589.86 1669.34 1729.06 1793.12 1835.22 1875.42
Other
Cost 1438.41 1427.42 1380.61 1323.50 1293.87 1242.65 1203.36 1160.59
Total cost 2840.40 2899.51 2970.47 2992.84 3022.93 3035.76 3038.58 3036.01
PBT -428.94 -95.63 57.90 247.50 412.75 533.99 663.40 768.11
Tax 0.00 0.00 19.11 81.68 136.21 176.22 218.92 253.48
PAT -428.94 -95.63 38.79 165.83 276.55 357.77 444.47 514.64
Depreciation 397.53 380.00 352.40 303.78 297.40 275.25 230.55 205.81
Interest on Term
Loan 272.02 257.20 202.20 178.12 135.07 93.02 75.12 65.12
Total(A) 240.61 541.57 593.39 647.73 709.01 726.04 750.14 785.57
Interest on Term
Loan 272.02 257.20 202.20 178.12 135.07 93.02 75.12 65.12
Installment on
Term Loan 0.00 107.87 305.92 365.73 272.92 353.68 375.71 352.21
Total(B) 272.02 365.07 508.12 543.85 407.99 446.70 450.83 417.33
DSCR(A/B) 0.88 1.48 1.17 1.19 1.74 1.63 1.66 1.88
Since by changing the three variables the DSCR of the project is less than 1.55 is
only in two years, other wise it is more than 1.5. so the project should be accepted .
DOCUMENTATION FORMALITIES
51
Once the credit limits are sanctioned main documents are obtained from
the client concerned. The nature of documents varies depending upon the
type of facility sanctioned and terms of sanction. They may include one or
more of the following-
• Loan agreement conveying in terms and conditions of loan.

• A comprehensive credit agreement.
• Agreement of hypothecation of book debts.
• Power of attorney to receive the business receivables.
• Pledge letters of agreement in respect of documents of title to goods
covering credit limits.
• Insurance / contingency insurance policy.
• Appropriate standard policy or specific policy.
• Corporate and personal guarantee.
• Documents conveying equitable mortgage on primary security i.e.
fixed assets pertaining to the project and on the additional security
(collateral)
• Personal guarantee of the borrower and guarantor (if any)
• Compliance of registration of charge formalities.
• Search report form an Advocate indicating a clear title for the last
fifteen years as per the land records; and
• Approved building plans incase of constructed property.
This would involve submission of the relevant documents by enterprise.
The legal department in the financial institution would scrutinize these
documents for their validity and completeness.
Non Performing Asset:

52
Non Performing Asset means an asset or account of borrower, which has

been classified by a bank or financial institution as sub-standard, doubtful
or loss asset, in accordance with the directions or guidelines relating to
asset classification issued by RBI.
With a view to moving towards international best practices and to ensure

greater transparency, it has been decided to adopt the '90 days overdue'
norm for identification of NPAs, form the year ending March 31, 2004.
Accordingly, with effect form March 31, 2004.
A Non performing asset (NPA) shell be an advance where
i. Interest and /or installment of principal remain overdue for a period

of more than 90 days in respect of a Term Loan,
ii. The account remains 'out of order' for a period of more than 90 days,
in respect of an overdraft/ cash Credit(OD/CC),
iii. The bill remains overdue for a period of more than 90 days in the
case of bills purchased and discounted,
iv. Interest and/ or installment of principal remains overdue for two

harvest seasons but for a period not exceeding two half years in the
case of an advance granted for agricultural purpose, and
v. Any amount to be received remains overdue for a period of more

than 90 days in respect of other accounts.
53
Reserve Bank of India (RBI) has issued guidelines www.troubleshoot4free.com/fyp/
on provisioning
requirement with respect to bank advances. They are classified mainly
into:
Standard Assets: Such an asset is not a non-performing asset. In other
words, it carries not more than normal risk attached to the business.
Sub-standard Assets: It is classified as non-performing asset for a period

not exceeding 12 months.
Doubtful Assets: Asset that has remained NPA for a period exceeding 12
months is a doubtful asset.
Loss Assets: Here loss is identified by the banks concerned or by internal

auditors or by external auditors or by Reserve Bank India (RBI) inspection.
It should be noted that the above classification is only for the purpose of
computing the amount of provision that should be made with respect to
bank advances and certainly not for the purpose of presentation of
advances in the banks balance sheet.
After the implementation of Securitization Act, 2002 banks issue notice to

the defaulter to either pay back the dues to the bank or give the ownership
of the secured assets mentioned in the notice. However, there is a
potential threat to recovery if there is substantial attrition in the value of
security given by the borrower or if borrower has committed fraud with the
concerned bank. Under such a situation it will be prudent to directly
classify the advance as a doubtful or loss asset, as appropriate.
DRT
The bank can file a suit against the clients in court to recover its due. It is
filed in court so that the dues can be recovered through the Debt Recovery
Tribunal. The DRT came into existence in 1993 for debts with outstanding
of Rs.10 lakhs and more.
54
The other courts will not have authority to hear cases falling under this
jurisdiction, once the case is referred to DRT. The DRT has the powers to
attach and sell, to arrest and detain in jail.
DEBT ASSET SWAP
It is the takeover of unproductive / non core assets by mutual agreement.
Absence of legal problems in taking over is a precondition. Minimum value of
asset should be Rs.5 Crores.
ONE TIME SETTLEMENT (OTS)
One time settlement is one the resource for the bank to recover its debts.
The settlement amount is arrived at by the bank and borrower in order to
settle the loan account. The doubtful or loss account as on 31.03.2000, the
settlement amount is minimum 100 % of O/s as on the date it became
NPA. Sub standard as on 31.03.2000, which later became Doubtful/loss,
the settlement amount is minimum 100% O/s on date it became Doubtful/
Loss + interest at PLR from 01.04.2000 to date of settlement. Amount is to
be paid in lump sum. And if it is payable in installments, the minimum no
of installments are 12. The minimum amount to be paid immediately is
25%, Interest at PLR from date of settlement to date of payment.
CORPORATE DEBT RESTRUCTURING

Corporate debt restructuring is a viable and transparent mechanism for
ailing but viable corporate outside the structure of BIFR/legal proceedings.
It is applicable for only sub standard assets. Only manufacturing
companies are covered under the scheme. In corporate restructuring
scheme only the accounts of Rs. 20 Crores and above are covered. It is a
three tier structure- CDR Forum, CDR Empowered Group, and CDR cell
CDR Forum frames policies and guidelines. CDR Empowered Group makes
sanctions, approvals, commitments, etc. CDR cell scrutinizes, assesses,
and monitors.
55
Features of the scheme are:
1. Revival plans is to be ready in 90 days

2. Lenders cannot exit from the agreement
3. Creditors with 20% or more exposure can approach the CDR

4. Restoration plan approved by 60% of value of creditors is binding
5. Amount of sacrifice is the amount of interest measured in P V terms,
which is provided fully or written off
Annexure -1
56
UNION BANK OF INDIA www.troubleshoot4free.com/fyp/
Credit department: central office
PROPSAL FOR ENHANCEMENT OF NON FUND BASED AND FUND BASED LIMIT
GROUP :
BANKING : LEAD BANK :
MONTH OF REVIEW : OUR SHARE :
ASSET CLASSIFICATION : FB
INTERNAL CREDIT RATING : NFB – 3.94%
STATUS OF ACCOUNT :
1 a) NAME OF THE ACCONT :

b) BRANCH/ ZONE :
c) DATE OF INCORPORATION :
2 CONSITUTION :
3 ADDRESS-
Registered office :
Corporate office
Unit/ works :
4 NAMES OF DIRECTORS AND :

THEIR MEANS
5 BACKGROUNDS OF THE PROMOTERS/ DIRECTORS:
57
6 CAPITAL
AS OF 31.03.2007 AMOUN AMOUNT www.troubleshoot4free.com/fyp/
(RS.)
STUCTURE
Authorized
capital
Paid up capital
Book value
Market value
6. (a) SHARE HOLDING

PATTERN
Particular No. of shares Face value % holding
Promoter
Institutional
Pvt.corp.bodies
NRIs and OCB
Clearing members
I Individuals
TOTAL
7 IN CASE OF PARTNER SHIP

FIRMS INDICATE CAPITAL : NA
CONTRIBUTED BY EACH
PARTNER SEPRATELY
8 LINE OF ACTIVITY :
9 SECTOR/ BSR CODE :
COMMENTS ON LATEST CREDIT:
10 WHETHER A/C IS TAKEN /TO

BE TAKEN OVER. IF SO NORMS
FOR TAKE OVER ARE FULLFILLED
11.
a) DEALING WITH BANK SINCE:
58
b) CREDIT FACILITIES SINCE:
12 TOTAL INDEBTNESS
NON –FUND BASED FUND BASED TOTAL
Existing Proposed Existing Proposed Existing Proposed
OUR BANK
Working
capital
Other banks
TOTAL
13 BRIEF BACKGROUND :
14. FINANCIAL INDICATOR:

Rs. In
FY- FY- FY- FY-
Paid up capital
RR Reserves and surplus
Intangible assets
Tangible net worth
Long term liabilities
Capital employed
Net block
Investments
Non current assets
Net working capital
Current assets
Current liabilities
Current ratio
DER
TOL/TNW
Net sales
Other income
Net profit after tax
Depreciation
Cash accruals
COMMENT ON FINANCIAL INDICATOR:

14.2 AUDIT NOTES IN BALANCE SHEET IF ANY , TO BE SPECIFIED:
14.3 COMMENT ON FINANCIAL INDICATOR ON CASH BASIS :--
31.03.2004 31.03.2005
Net cash flow from the operating activities
Net cash flow from investing activities
Net cash flow from financing activities
Increase in cash and cash equivalent
59
Cash andwww.final-yearprojects.co.cc
cash equivalent at the end of year www.troubleshoot4free.com/fyp/
14.4 COMMENT ON ESTIMATED BALANCE SHEET OF 31.03.2006
15 EVALUATION OF MANAGEMENT
16 EVALUATION OF INDUSTRY
17 EVALUATION OF BUSINESS RISK
18 CONDUCT OF THE ACCOUNT :
(1) A) regulatory in submission of

Stock / book debt statement
QPR / half yearly statement
Financial statement
CMA data
(2) name of the statement/ return
Stock statement /BD/MSOD
No. of Last statement
QPR/ half yearly
statement/ /return received
statement
return received
during the year
b) COMMENTS ON OPERATION / OVERDUES

(1) Turnover in the account is commensurate
With the limit
(2) Frequent excesses are given
(3) Cheques are returned frequently
19 COMLIANCE TO TERM OF SANCTION:

a) Completion of mortgage formalities :
b) Registration of charges with ROC
c) Whether document valid and in force
d) Compliance of RBI guidelines
e) Whether consortium meeting held
At a prescribed periodic intervals
Where the bank is the leader
20 a) DATE OF INSPECTON:
DURING THE FINANCIAL YEAR
60
20 b) NATURE AND VALUE OF COLLETERAL SECURITY:
Nature / description of Value Date of Insurance

collateral security indicating (rs. ) valuation Amount and date
area & location of property Along with of expiry
name of the
valuer
c) PERSONAL GUARNTEE/
CORPORATE GUARNTEE
21a) WHETHER THE NAME OF THE

COMPANY/ DIRECTORS
FIGURE IN RBI DEFAULTER
/ CAUTION LIST / ECGC. IF YES,
PLEASE FURNISH DETAIL
b) WHETHER DIRECTOR/
PARTNER / PROMOTERS
IS A DIRECTOR IN OUR / OTHER
BANK OR IS RELATED TO THEM
c) ANY LITIGATION IN FORCE

AGAINST THE FIRM/COMPANY
OR AGAINST THE PARTNER
/ DIRECTORS. IF SO MENTION
DETAILS & PRESENT POSITION
22 AUDIT OBSERVATIONS
a) Internal
b) Concurrent
c) Statuary
d) RBI inspection
e) Stock audit
23 ANY IRREGULAR FEATURE OBSERVED
IN THE MONITORING REPORT
61
24 EXPOUSRE DETAILS FROM OUR BANK
Limit Limit D.P. o/s as on Value of Irregularities

existing recommended security
date of
inspection
A} non fund based limit
Import/inland/L/C
Letter of guarantee
SUB LIMIT {a}

B} fund based limits
Wcdl/Fcl
Cc/pc/Fdbp
SUB LIMIT {b}
C} TERM LOAN
TERM LOAN
SUB LIMIT {C}
GRAND TOTAL
{A+B+C}
b) DETAILS OF EXCESS ALLOWDED DURING THE YEAR:
c) OTHER EXPOUSRE, IF ANY, INCLUDING INVESTMENTS:
d) OTHER LIABILTIES OF DIRECTORS (IN THEIR INDIVIDUAL CAPACITY)
25a) EXPOUSRE DETAIL FROM BANKING SYSTEM

NAME OF THE NON FUND BASED
BANK %Share Amt. % share Amt.
b) CONDUCT OF THE ACCOUNT AND EXPOUSRE DETAIL FROM FINANCIAL

INSTITUTIONS:
c) VALUE OF ACCOUNT
62
d) DETAILS OF FOREIGN CURRENCY EXPOUSRE COMMITMENTS
AND
UNHEDGED POR
Amt. in USD
Name of the corporate Amount of exposure Unhedged Due dates for payment
portion (range)
External commercial
1. borrowing
2. Importance usance bills

received on collection
basis duly accepted and
outstanding
3. L/Cs & PAD for import

of goods capital
equipments.
4. Others exports
Receivables
5. Other import obligation
6. Foreign currency loan

availed from authorized
dealers in India
7. Any other exposure,
please specify
26 OPERATIONAL EXPERIENCES
a) WITH RESPECT TO
SISTER/ ALLIED CONCERN
b) COMMENTS ON OTHER BANKS
CREDIT REPORT ON SISTER
CONCERNS
27 OMMENT ON ASSESMENT OF LIMITS
INVENTORY AND RECEIVABLE NORM

Inventory Previously Actual on the Estimates Indicative
accepted assessment year Norms
level
Month value month value
RM-IMPORT
RM-INDIGENOUS
WIP/ FIG
RECIEVABLE-LOCAL
RECIEVABLE
63
EXPORTS
SUNDRY CREDITORS
OTHER CA
OTHER CL
raw material
stock in progress
Receivable ( domestic)
Receivable( exports)
Working capital assessment

2005(act.) 2006(est.)
Total current assets
Other current liabilities ( other than bank
borrowing )
Working capital gap
Actual/ projected NWC
FBF
ASSESSMENT OF NON – FUND LIMITS

A inland / import l/c
For purchase of raw material / stocks Imp. indigenous
Purposed purchase (% of total purchase)
Purchase
Purchase under l/c
A Average time taken from date of l/c till the date of
shipment (days)
B Average time taken from date of shipment to the
date of retirement of the bill under l/c (days)
Total A (a+b)
C Average rotation of letter of credit in one year
(365/a) times
D Level of l/c ( projected purchase/import during the
year )/c
Contingencies (IF ANY)
Limit required
Total l/c requirement =
Our share –
Limited recommended
64
Bank guarantee
29. Credit rating
30. a. Year FY- FY-

industry
Total score obtained
Grade
Parameter
Borrower rating
Borrower rating
Facility rating
Risk mitigators
Business aspects
Total marks with grade
31. industry scenario
32. out look
33. recommendation
Approved
65
GLOSSARY
A stern measure of a company's ability to pay its short term debts, in that
Acid test stock is excluded from asset value. (liquid assets/current liabilities) Also
referred to as the Quick Ratio.
Cost of goods sold The direct costs attributable to the production of the goods sold by a company.
(COGS) The directly attributable costs of products or services sold (usually materials,
labour, and direct production costs). COGS = net sale -gross profit.
The statement showing the movement of cash in and out of a business from
Cash flow statement day-to-day direct trading and other non-trading or indirect effects, such as
capital expenditure, tax and dividend payments.
Capital employed The value of all resources available to the company, typically comprising share
capital, retained profits and reserves, long-term loans and deferred taxation.
Cost of debt The rate that has to be received from an investment in order to achieve the
required rate of return from the creditors
A group of ratios that measures a firm’s ability to meet its recurring fixed
Coverage ratios
charge obligations, such as interest on long term debt, lease payments, and/or
proffered stock dividends
Average collection
This represents the no. of days’ worth credit sales that is locked in debtors.
period
Current liabilities
Liabilities that is normally payable within a year and are not for along term.
Current ratio
A liquidity measures defined as current assets divided by current liabilities.
The uncertainty of expected returns from a security attributable to possible
changes in the financial capacity of the security issuer to make future
Default risk
payments to the security owner. Treasury securities are considered to be
default free. Default risk is also referred to as “financial risk” in the context of
marketable securities management.
Inventory turnover
The ratio of net sales to inventory.
Letter of credit A letter from a bank mentioning that it has established a line of credit in favor
of a certain party
letters of guarantee are concerned with providing safeguards to buyers that

Letters of guarantee suppliers will meet their obligations or vice-versa, and are issued by the
supplier's or customer's bank depending on which party seeks the guarantee.
Net working capital Net working capital is the difference between total current assets total current
liabilities.
Operating cycle The operating cycle of a firm begins with the acquisition of raw materials and
ends with the collection of receivables.
66
A technique of risk analysis which studies the responsiveness of the criterion of
Sensitivity analysis merit like net present value or internal rate of return to variations in
underlying factors like selling price, quantity sold, etc.
Term loan A loan which is generally repayable in more than one year and less than ten
years.
Turn over ratios, also referred to as activity ratios or asset management ratios,
Turn over ratios measure how efficiently the firm employs the assets.
There are two measures of working capital- gross working capital and net
Working capital working capital. Gross working capital is the total of current assets. Net
working capital is the difference between the total current assets and the total
current liabilities.
67
BIBLIOGRAPHY
Websites:-
• www.marketresearch.com
• www.Investopedia.com
• www.cmia.com
• www.unionbankofindia.com
• www.google.com
• www.rbi.org.in
• www.sbi.com
BOOKS & PUBLICATIONS
• I. M. Pandey, Financial Management
• Union Bank manuals and circulars
• Credit management ( a practical approach)
• Pratiyogita Darpan
68
69

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www.final-yearprojects.co.cc www.troubleshoot4free.

Under the guidance of:

HIMACHAL PRADESH UNIVERSITY

narrowed to only one individual. This work is an integrated effort of all

direct & indirect co-operation. I wish to express my appreciation and

gratitude to all the concerned people.

First and the foremost my intellectual debt is to Dr.Parmod

Sharma(Senior Lecturer Institute of Management Studies) and Mr.A.K

Sharma (Chief Manager Loan Department Union Bank of India, Shimla)

who have contributed significantly towards the completion of the project.

I am thankful to all the people who have given their precious

suggestions during the entire period of research.

However, I accept the sole responsibility for any errors of

omission and commission.

OBJECTIVES OF THE STUDY

The objective of research is to study the Corporate Banking

Working Capital Financing and Term loan financing- To support

The study would involve following-

• Assessment of the advances.

PURPOSE OF THE STUDY FOR THE ORGANISATION

• This study would involve working out and interpreting the

LIMITATIONS OF THE STUDY

Limitations of this project are–

• Coverage: The study aims at covering the corporate banking of

NO. OF COMMERCIAL BANKS IN INDIA

FINANCIAL YEAR MAR.-02 MAR.-03 MAR.-04 MAR.-05 MAR.-06

NO. OF COMMERCIAL BANKS (A+b) 297 292 290 289 222

{A} SCHEDULE COMMERCIAL BANKS 293 288 286 285 218

{B} NON SCHEDULE COMMERCIAL BANKS 4 4 4 4 4

SOURCE: RESERVE BANK OF INDIA

Since Indian banking sector is experience exponential growth, the profit

NET PROFIT OF COMMERCIAL BANKS IN INDIA (MN) Rs.

PUBLIC SECTOR BANK

Source: reserve bank of India

• A logical extension of the Vision Statement is the Mission of the

• To build a sizeable market share in each of the chosen areas of

• To facilitate a process of restructuring of branches to support a

• To sustain the mission objective through harnessing technology

• To promote confidence and commitment among the staff

ABOUT UNION BANK OF INDIA

Union Bank of India, a public sector bank was

The key business areas of the bank are retail banking,

SMALL SCALE INDUSTRY:

An industrial undertaking in which the investment in fixed assets in plant

this sector employs an estimated 31 million persons spread over 12.8

Performance of Micro & Small Enterprises

Sources:Office of the Development Commissioner(MSME)

Recently.major initiatives have been taken by the Govt. to

 Implementation of the Micro, Small and Medium Enterprises

Credit is one of the major inputs for the promotion and

Source annual report of SSI

Credit to tiny sector (having investment up to 25 lakhs rs.)

Source annual report of SSI

CREDIT APPRAISAL PROCEDURE AND PROCESS:

• Assessment of credit need

The banks basically follow three method prescribed by TANDON COMITEE

1 FIRST METHOD: borrower will contribute 25% of working capital gap

2 SECOND METHOD: borrower will contribute 25% of total current asset

 FINANCIAL STATEMENT ANALYSIS

Key points to be checked in financial statement:

 Type of statement: Examine weather financial statement is audited

 Nature of activity: Engaged in trading or manufacturing activity or