CHAPTER 1

INTRODUCTION TO THE PROJECT

1
1.1 Concept and Significance of the Study

The purpose of the project was to prepare loan proposals, both new and review, in order
to assess a firms or individuals capability to be able to repay those loans within the said
duration and adhere to the terms of the agreement.

The project consisted of two parts.

1. Preparation of loan proposal statements for SME clients.

2. Preparation of loan review proposal statements for the Bank’s Retail

customers(availing housing loan facilities only)

1.1.1 SME Clients.

SME clients require 2 types of loans: Fund Based and Non Fund Based.

Fund based loans include: Term loan (working capital) as well as Cash Credit
facilities.

Non Fund based loans include : Issuing Bank Guarantees and Letters of Credit.

2
 Loan processing for SME customers is undertaken in a detailed manner
wherein detailed annual reports, balance sheet statements, MSOD statements,
utilization of funds, the securities as well as their CRISIL rating if any, asset codes etc
are carefully scrutinized before accepting the firms proposal to sanction limits.

1.1.2 Retail Customers (Housing Loan)

The accounts of customers who have availed housing loans from Bank of India are
reviewed on an annual basis. During this review their current outstanding amount, no. of
EMIs due and their present drawing limit is calculated in order to check whether the account
is overdue or not. Also when any LIC policy has been provided as a collateral security, the
account is checked for proper payment of annual premiums to keep the policy from lapsing
and accordingly recorded in the review statement.

Proper documentation of security statements as well as original sanction limits as well

as progress of the housing project is tracked and recorded in the review proposal. Also an
annual review of the mortgaged property kept as security with the bank is undertaken by one
of the authorized officials of the bank and the inspection date along with relevant findings is
also recorded.

1.2 Scope & Limitations of the Study.

3
 1.2.1 Scope

This study was undertaken at a branch in Pune. The scope of the project is as follows.

1. The study was undertaken in the credit department of the branch.

2. Preparation of new and review proposals for SME customers was the main focus
of the project.

3. A small part of the retail segment was also covered by way of preparation of
housing loan review proposals.

1.2.2 Limitations

1. As the study was undertaken in a branch, some operations in credit rating

procedures which are only undertaken at Zonal level were not handled by me.

2. In the retail segment, only housing loan proposals were handled without delving
into other types of loans within that segment.

3. Only the financial credit rating was carried out under this project as management
and business risk rating is carried out by higher authorities.

1.3 Objectives of the study

The study was undertaken in order to fulfil the following objectives.

1. To prepare loan proposals in order to determine the repayment capacity of a SME or retail
client.

2. To carry out financial credit rating of SME firms to analyse past and future trends.

3. To prepare review proposals for customers availing housing loans.

4
 At the outset of the project, various loan proposals that had been sanctioned under the
existing credit appraisal procedure were studied in order to determine the basis for approval
and sanctioning of these loans. Nearly 5 proposals of various industries ranging from Auto
parts retailers and distributors to pharmaceutical distributers to food products manufacturers
were studied. These industries differed in their working capital and non fund based needs
depending on the growth of the business and the export orientation of the company
respectively.

5
 CHAPTER 2

IINTRODUCTION TO THE INDUSTRY

2.1 Banking revisited

The first bank in India, though conservative, was established in 1786. From 1786 till
today, the journey of Indian Banking System can be segregated into three distinct phases. They
are as mentioned below:

• Early phase from 1786 to 1969 of Indian Banks.

• Nationalisation of Indian Banks and up to 1991 prior to Indian banking sector Reforms.
• New phase of Indian Banking System with the advent of Indian Financial & Banking Sector
Reforms after 1991.

Phase I

The General Bank of India was set up in the year 1786. Next came Bank of Hindustan
and Bengal Bank. The East India Company established Bank of Bengal (1809), Bank of
Bombay (1840) and Bank of Madras (1843) as independent units and called it Presidency
Banks. These three banks were amalgamated in 1920 and Imperial Bank of India was

6
established which started as private shareholders banks, mostly Europeans shareholders.

In 1865 Allahabad Bank was established and first time exclusively by Indians, Punjab
National Bank Ltd. was set up in 1894 with headquarters at Lahore. Between 1906 and 1913,
Bank of India, Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank, and Bank
of Mysore were set up. Reserve Bank of India came in 1935.

During the first phase the growth was very slow and banks also experienced periodic
failures between 1913 and 1948. There were approximately 1100 banks, mostly small. To
streamline the functioning and activities of commercial banks, the Government of India came
up with The Banking Companies Act, 1949 which was later changed to Banking Regulation
Act 1949 as per amending Act of 1965 (Act No. 23 of 1965). Reserve Bank of India was
vested with extensive powers for the supervision of banking in India as the
Central Banking Authority. During those days public has lesser confidence in the banks. As
an aftermath deposit mobilisation was slow. Abreast of it the savings bank facility provided
by the Postal department was comparatively safer. Moreover, funds were largely given to
traders.

Phase II

Government took major steps in this Indian Banking Sector Reform after
independence. In 1955, it nationalised Imperial Bank of India with extensive banking
facilities on a large scale especially in rural and semi-urban areas. It formed State Bank of
India to act as the principal agent of RBI and to handle banking transactions of the Union and
State Governments all over the country.

Seven banks forming subsidiary of State Bank of India were nationalised in 1960 on
19th July, 1969, major process of nationalisation was carried out. It was the effort of the then
Prime Minister of India, Mrs. Indira Gandhi. 14 major commercial banks in the country were
nationalised.

Second phase of nationalisation Indian Banking Sector Reform was carried out in 1980
with seven more banks. This step brought 80% of the banking segment in India under

7
 Government ownership. The following are the steps taken by the Government of India to
Regulate Banking Institutions in the Country:

• 1949 : Enactment of Banking Regulation Act.

• 1955 : Nationalisation of State Bank of India.
• 1959 : Nationalisation of SBI subsidiaries.
• 1961 : Insurance cover extended to deposits.
• 1969 : Nationalisation of 14 major banks.
• 1971 : Creation of credit guarantee corporation.
• 1975 : Creation of regional rural banks.
• 1980 : Nationalisation of seven banks with deposits over 200 crore.

After the nationalisation of banks, the branches of the public sector bank India rose to
approximately 800% in deposits and advances took a huge jump by 11,000%. Banking in the
sunshine of Government ownership gave the public implicit faith and immense confidence
about the sustainability of these institutions.

Phase III

This phase has introduced many more products and facilities in the banking sector in
its reforms measure. In 1991, under the chairmanship of M Narasimham, a committee was set
up by his name which worked for the liberalisation of banking practices.

The country is flooded with foreign banks and their ATM stations. Efforts are being
put to give a satisfactory service to customers. Phone banking and net banking is introduced.
The entire system became more convenient and swift. Time is given more importance than
money. The financial system of India has shown a great deal of resilience. It is sheltered from
any crisis triggered by any external macroeconomics shock as other East Asian Countries
suffered. This is all due to a flexible exchange rate regime, the foreign reserves are high, the
capital account is not yet fully convertible, and banks and their customers have
limited foreign exchange exposure.

8
 The nationalisation of banks in India took place in 1969 by Mrs. Indira Gandhi the
then prime minister. It nationalised 14 banks then. These banks were mostly owned by
businessmen and even managed by them.

• Central Bank of India

• Bank of Maharashtra
• Dena Bank
• Punjab National Bank
• Syndicate Bank
• Canara Bank
• Indian Bank
• Indian Overseas Bank
• Bank of Baroda
• Union Bank
• Allahabad Bank
• United Bank of India
• UCO Bank
• Bank of India

Before the steps of nationalisation of Indian banks, only State Bank of India (SBI) was
nationalised. It took place in July 1955 under the SBI Act of 1955. Nationalisation of Seven State
Banks of India (formed subsidiary) took place on 19th July, 1960. The State Bank of India is
India's largest commercial bank and is ranked one of the top five banks worldwide. It serves 90
million customers through a network of 9,000 branches and it offers -- either directly or through
subsidiaries -- a wide range of banking services.

The second phase of nationalisation of Indian banks took place in the year 1980. Seven
more banks were nationalised with deposits over 200 crores. Till this year, approximately 80% of
the banking segment in India were under Government ownership. After the nationalisation of
banks in India, the branches of the public sector banks rose to approximately 800% in deposits
and advances took a huge jump by 11,000%.

9
 1955 : Nationalisation of State Bank of India.

1959 : Nationalisation of SBI subsidiaries.

1969 : Nationalisation of 14 major banks.

1980 : Nationalisation of seven banks with deposits over 200 crores

2.2 About Bank of India

A group of eminent businessmen from Mumbai started the Bank of India (also known as
BoI) on 7th September, 1906. Initially the bank was owned privately till it was nationalized in
July 1969. Bank of India began its operations with just Rs. 50 lakh and 50 employees. Over the
years, the bank has made rapid progress and has become a one of the leading financial
institutions in the country with presence both in and outside the country. The bank has over
3000 branches spread all over the country consisting of 136 specialized branches. Among the
nationalized banks in the country, the business volume of the Bank of India occupies a premier
position.

10
 Beginning with one office in Mumbai, with a paid-up capital of Rs.50 lakh and 50
employees, the Bank has made a rapid growth over the years and blossomed into a mighty
institution with a strong national presence and sizable international operations. In business
volume, the Bank occupies a premier position among the nationalised banks. The Bank has
3101 branches in India spread over all states/ union territories including 141 specialised
branches. These branches are controlled through 48 Zonal Offices . There are 29 branches/
offices (including three representative offices) abroad.

The Bank came out with its maiden public issue in 1997 and follow on Qualified
Institutions Placement in February 2008. . Total number of shareholders as on 30/09/2009 is
2,15,790. While firmly adhering to a policy of prudence and caution, the Bank has been in the
forefront of introducing various innovative services and systems. Business has been
conducted with the successful blend of traditional values and ethics and the most modern
infrastructure. The Bank has been the first among the nationalised banks to establish a fully
computerised branch and ATM facility at the Mahalaxmi Branch at Mumbai way back in
1989. The Bank is also a Founder Member of SWIFT in India. It pioneered the introduction
of the Health Code System in 1982, for evaluating/ rating its credit portfolio.

The Bank's association with the capital market goes back to 1921 when it entered into
an agreement with the Bombay Stock Exchange (BSE) to manage the BSE Clearing House. It
is an association that has blossomed into a joint venture with BSE, called the BOI
Shareholding Ltd. to extend depository services to the stock broking community. Bank of
India was the first Indian Bank to open a branch outside the country, at London, in 1946, and
also the first to open a branch in Europe, Paris in 1974. The Bank has sizable presence
abroad, with a network of 29 branches (including five representative office) at key banking
and financial centres viz. London, Newyork, Paris, Tokyo, Hong-Kong and Singapore. The
international business accounts for around 17.82% of Bank's total business.

2.2.1 Mission and Vision

11
 Mission

“to provide superior proactive banking services to niche markets globally, while
providing cost effective, responsive services to others in our role as a development bank, and
in so doing, meet the requirements of our stakeholders.”

Vision

“to become the bank of choice for corporate, medium businesses and upmarket retail
customers and to provide cost effective developmental banking for small business, mass
market and rural market.”

Shri Alok Kumar Mishra has taken over as Chairman and Managing Director of Bank
of India with effect from 5gh August, 2009. Shri Mishra was the Chairman & Managing
Director of Oriental Bank of Commerce prior to the present assignment.Shri Misra held the
post of the Executive Director of Canara Bank from 24th March 2006 to 3rd June 2007 and
the Chairman & Managing Director of Oriental Bank of Commerce from 4th June 2007.

2.3 SME Sector in India.

The small and medium enterprises (SME) sector in India plays a vital role in the
growth of the country. The SME sector in India accounts for around 95% of the industrial
units, almost 40% of the gross industrial value-added in the Indian economy, 34% of exports
and provides direct employment to 20 million persons in around 3.6 million registered SME
units. The SME sector in India contributes to about 7% of India's gross domestic product
(GDP).

2.3.1 Impact of Liberalization

12
 Owing to liberalization and opening up of the economy, the SMEs are facing stiff
competition from imports and need technological upgrading to produce cheaper and better
quality products. Globalization can also act as a tool for development of the SME sector.
SMEs engaged in the manufacturing of engineering and automobile products have shown
excellent growth in the past years due to their expertise in supplying original equipment
manufacturer (OEM) assemblies and subassemblies, components, etc.

As a result of policy reforms, the Indian SME sector is in a better position to take on
competition from the globalised world than ever before. This can be attributed to not only
policy changes, but also a new found confidence amongst entrepreneurs who are taking a
more global view of their businesses just like SMEs from many other countries including
Italy, South Korea, Taiwan and China to name a few.

2.3.2 Exports performance of SMEs

SME Sector plays a major role in India's present export performance. 45%-50% of the
Indian Exports is contributed by SSI Sector. Direct exports from the SSI Sector account for
nearly 35% of total exports. Besides direct exports, it is estimated that small-scale industrial
units contribute around 15% to exports indirectly. This takes place through merchant
exporters, trading houses and export houses. They may also be in the form of export orders
from large units or the production of parts and components for use for finished exportable
goods. It would surprise many to know that non-traditional products account for more than
95% of the SSI exports.

13
 The exports from SSI sector have been clocking excellent growth rates in this decade.
It has been mostly fuelled by the performance of garments, leather and gems and jewellery
units from this sector. The product groups where the SSI sector dominates in exports, are
sports goods, readymade garments, woollen garments and knitwear, plastic products,
processed food and leather products.

2.3.3 Micro, Small & Medium Enterprises Development Act (MSMED act 2006)

The MSMED act 2009 is superior to the provisions for SSI under the IRDA in many
ways. However only the capital structure segregation has been mentioned here.

Enterprises classified broadly into:

i) Enterprises engaged in the manufacture/production of goods pertaining to any industry &

ii) Enterprises engaged in providing/rendering of services.

Manufacturing Enterprises:

Defined in terms of investment in plant and machinery (excluding land & buildings) and
further classified into:
• Micro Enterprises - investment up to Rs.25 lakh.
• Small Enterprises - investment above Rs.25 lakh & up to Rs.5 crore.
• Medium Enterprises - investment above Rs.5 crore & up to Rs.10 crore.

Service Enterprises:

Defined in terms of their investment in equipment and further classified into:

14
• Micro Enterprises - investment up to Rs.10 lakh.
• Small Enterprises - investment above Rs.10 lakh & up to Rs.2 crore.
• Medium Enterprises - investment above Rs.2 crore & up to Rs.5 crore.

15
 CHAPTER 3

LITERATURE REVIEW

3.1 Types of Loan facilities for SMEs

SME customers require 2 types of loan facilities.

1. Fund based

2. Non Fund based

3.1.1 Fund based facilities/limits.

In fund based facilities there is an actual outlay of cash by a bank to the company/firm
requesting for these limits.

16
Fund based limits can be broadly categorized as:

1. Cash credit is a short-term cash loan to a company. A bank provides this type of

funding, but only after the required security is given to secure the loan. Once a security
for repayment has been given, the business that receives the loan can continuously draw
from the bank up to a certain specified amount. This type of financing is similar to a line
of credit.

2. Overdraft

The word overdraft means the act of overdrawing from a Bank account. In other
words, the account holder withdraws more money from a Bank Account than has
been deposited in it. In the case of Cash Credit, a proper limit is sanctioned which
normally is a certain percentage of the value of the commodities/debts pledged by
the account holder with the Bank. Overdraft, on the other hand, is allowed against
a host of other securities including financial instruments like shares, units of
mutual funds, surrender value of LIC policy and debentures etc. Some overdrafts
are even granted against the perceived worth of an individual. Such overdrafts are
called clean overdrafts.

3. Bill Discounting

Bill discounting is a major activity with some of the smaller Banks. Under this
type of lending, Bank takes the bill drawn by borrower on his (borrower's)
customer and pays him immediately deducting some amount as
discount/commission. The Bank then presents the Bill to the borrower's customer
on the due date of the Bill and collects the total amount. If the bill is delayed, the
borrower or his customer pays the Bank a pre-determined interest depending upon
the terms of transaction.

4. Term Loan

17
Term Loans are the counter parts of Fixed Deposits in the Bank. Banks lend money in
this mode when the repayment is sought to be made in fixed, pre-determined instalments.
This type of loan is normally given to the borrowers for acquiring long term assets i.e.
assets which will benefit the borrower over a long period (exceeding at least one year).
Purchases of plant and machinery, constructing building for factory, setting up new
projects fall in this category. Financing for purchase of automobiles, consumer durables,
real estate and creation of infra structure also falls in this category.

3.1.2 Non Fund Based limits

The credit facilities given by the banks where actual bank funds are not involved are
termed as 'non-fund based facilities'. They are mainly credit security instruments.

They are again broadly classified as

1. Deferred payment guarantees

These are required for acquisition of Capital goods (Plant & Machinery
including Generators) where there is provision for Suppliers Credit by the
Manufacturer/Supplier. A deferred payment guarantee is a contract under which a
bank promises to pay the supplier the price of machinery supplied by him on deferred
terms, in agreed instalments with stipulated interest in the respective due dates, in case
of default in payment thereof by the buyer.

As far as the buyer of the plant and machinery is concerned, it serves the same
purpose as term loan. The Primary security is 1st charge on fixed assets financed.
Collateral security and Third party guarantee as per Bank policy.

2. Letter of Credit

A letter of credit is an obligation taken on by a bank to make a payment once

certain criteria are met. Once these terms are completed and confirmed, the bank will

18
 transfer the funds. This ensures the payment will be made as long as the services are
performed. A letter of credit could be used in the delivery of goods or the completion
of a service. The seller may request that the buyer obtain a letter of credit before the
transaction occurs. The buyer would purchase this letter of credit from a bank and
forward it to the seller's bank. This letter would substitute the bank's credit for that of
its client, ensuring correct and timely payment.

A letter of credit is a bank’s DIRECT undertaking to the supplier (called the

beneficiary) to pay. When a letter of credit is in use, the issuing bank does not wait for
the buyer to default, and for the seller to invoke the undertaking.

3. Bank Guarantee

A bank guarantee guarantees a sum of money to a beneficiary. The sum is only

paid if the opposing party does not fulfil the stipulated obligations under the contract.
This can be used to essentially insure a buyer or seller from loss or damage due to non
performance by the other party in a contract. A bank guarantee might be used when a
buyer obtains goods from a seller then runs into cash flow difficulties and can't pay
the seller. The bank guarantee would pay an agreed-upon sum to the seller. Similarly,
if the supplier was unable to provide the goods, the bank would then pay the
purchaser the agreed-upon sum. Essentially, the bank guarantee acts as a safety
measure for the opposing party in the transaction.

A bank guarantee, therefore, is more risky for the merchant and less risky for
the bank. But this is not the case with a letter of credit (LC). With a bank guarantee, if
a client defaults the bank assumes liability. With a letter of credit, liability rests solely
with the issuing bank (this being the key difference and the key advantage in an LC)
which then must collect the money from its client.

3.2 Credit Risk

19
 Credit risk is an investor's risk of loss arising from a borrower who does not
make payments as promised. Such an event is called a default. Another term for credit
risk is default risk. In other words, the risk of loss of principal or loss of a financial
reward stemming from a borrower's failure to repay a loan or otherwise meet a
contractual obligation. Credit risk arises whenever a borrower is expecting to use future
cash flows to pay a current debt. Investors are compensated for assuming credit risk by
way of interest payments from the borrower or issuer of a debt obligation.

Credit risk is closely tied to the potential return of an investment, the most notable
being that the yields on bonds correlate strongly to their perceived credit risk. The higher
the perceived credit risk, the higher the rate of interest that investors will demand for
lending their capital. Credit risks are calculated based on the borrowers' overall ability to
repay. This calculation includes the borrowers' collateral assets, revenue-generating
ability and taxing authority (such as for government and municipal bonds).

Credit risks are a vital component of fixed-income investing, which is why ratings
agencies such as CRISIL, SMERA, ONECRA, FITCH etc evaluate the credit risks of
thousands of corporate issuers and municipalities on an ongoing basis.

3.2.1 Why is Credit Risk Rating important?

A credit rating is an assessment of the creditworthiness of an issuer of financial

securities. It tells investors the likelihood of default, or non-payment, by the issuer of its
financial obligations. Credit analysis is the financial analysis used to determine the
creditworthiness of an issuer. It examines the capability of a borrower, or issuer of
financial obligations, to repay the amounts owing on schedule or at all.

20
 Rating systems measure credit risk and differentiate individual credits and groups
of credits by the risk they pose. This allows bank management and examiners to monitor
changes and trends in risk levels. The process also allows bank management to manage
risk to optimize returns.

The regulatory agencies use a common risk rating scale to identify problem
credits. The regulatory definitions are used for all credit relationships — commercial,
retail, and those that arise outside lending areas, such as from capital markets. The
regulatory ratings special mention, substandard, doubtful, and loss identify different
degrees of credit weakness. Credits that are not covered by these definitions are pass
credits, for which no formal regulatory definition exists.

1. Special mention (SM) — "A special mention asset has potential weaknesses
that deserve management’s close attention. If left uncorrected, these potential
weaknesses may result in deterioration of the repayment prospects for the asset or in
the institution’s credit position at some future date. Special mention assets are not
adversely classified and do not expose an institution to sufficient risk to warrant
adverse classification

2. Substandard C “A substandard asset is inadequately protected by the current

sound worth and paying capacity of the obligor or of the collateral pledged, if any.
Assets so classified must have a well-defined weakness, or weaknesses, that
jeopardize the liquidation of the debt. They are characterized by the distinct possibility
that the bank will sustain some loss if the deficiencies are not corrected.

3. Doubtful C “An asset classified doubtful has all the weaknesses inherent in
one classified substandard with the added characteristic that the weaknesses make
collection or liquidation in full, on the basis of currently existing facts, conditions, and
values, highly questionable and improbable.

4. Loss C “Assets classified loss are considered uncollectible and of such little
value that their continuance as bankable assets is not warranted. This classification
does not mean that the asset has absolutely no recovery or salvage value, but rather

21
that it is not practical or desirable to defer writing off this basically worthless asset
even though partial recovery may be affected in the future.”

22
 CHAPTER 4

FLOW OF THE PROJECT

4.1 Flowchart of Loan sanctioning for an SME customer.

The proposal put up for appraisal goes through a number of channels before it is finally
sanctioned.

Date of application
received at branch

Date of branch
proposal 23
 Date of proposal
received at Pune
Corporate Banking
Branch (PCCB)

Date of proposal
received at H.O

Date clarifications
received at Pune
CBB

Date of Pune CBB

proposal

Remarks

4.2 List of documents required

1. Company Annual Report along with Audited & estimated balanced sheet and P&L statements
with annexure to the same for 3 years.

24
2. CBD-23 statement – A statement of assets and liabilities for the main promoters of the
company or firm.

3. Hypothecation cum loan agreement

4. L444C – Statement of acknowledgement of debt and securities from the borrower to the
bank.

5. MSOD statements – Monthly select operational data.

6. Credit Rating of the SME by any credit rating agency like CRISIL, SMERA, ONECRA,
FITCH etc.

7. Details of float available.

8. Stock audit statements.

After obtaining the required documents, Bank of India (hereinafter referred to as the
Bank) carries out its credit rating procedure based on its unique credit rating model.

4.3 Credit rating done for XYZ Distributers.

25
The following is the proposal format for exposures up to 100 lacs.

A) Borrowers Profile:

1. Name of the Account : XYZ Distributers

2. Business/Activity: Retailer in automobile spare parts.

3. Established in 1989 Advance since: 1999

4. If account is new, name of earlier banker: N.A.

5. External Credit rating: AA

6. Asset code(No./description): 11/standard

7. Details of promoters, Directors: Mr. S. K Chawla

8. Multiple Banking Arrangements: No.

B) Issues for Consideration:

9. Present Request: New WC limits of 7,00,000 and BG limits of 40 lacs.

10.Last sanction/ review: BG limits of 15 lacs.

C) Facilities and Security Cover

14.

Limits Existing Proposed Inc(+)/dec(-)

Term Loan N.A N.A -

26
 WC(FB) 0.00 7.00 7.00

BG(NFB) 15.00 40.00 25.00

15. Security

Security Particulars Date of valuation Present value(Bank’s

Share)

Principal Hypothecation of stocks

and book debts 31/05/2010 20.91
TDRs 25% of margin money

Collateral EQM of shop 31/05/2010 30.07

16. Guarantor’s profile.

Gives guarantor’s net worth as recorded in the CBD-23 statement.

D) Conduct/ value of account:

a) Cheques returned during the year under review for financial reasons: NIL

b) LC devolved and BG invoked: NIL

27
 17. Utilization of funds.

BG limits: 100%

E) Financial position

18.

Audited Audited Estimated Estimated

31.03.09 31.03.10 31.03.11 31.03.12

a) Paid up Capital 8.02

-equity
-preference share
b) TNW 9.71
c) Investment in co.s
which are -
associated co.s/
subsidiaries
d) Adjusted TNW 9.71
e) Capital employed 9.71
f) Net Block 0.41
g) Net Sales: 45.50
-Domestic
-Exports
Total
h) Other Income
i) Depreciation -
j) Gross profit/Loss 1.69
k) Net Profit/Loss 1.69

28
l) Cash 1.69
Accruals(i+k)
m) Net profit/ Capital 17.40
employed(%)
n) Current Assets 29.30
o) Current Liabilities 20.00

19. Ratios

p) Current Ratio: 1.46

q) Debt Equity ratio : 2.06

r) PAT/Net Sales(%) : 3.71

s) DSCR : NA as no term loan

t) ICR : NA as no interest payment towards long term debt.

u) Inventory + receivables / Sales : 0.64

H. Working Capital Assessment

a) Gross Sales 45.50

b 25% of Gross Sales 11.38
)
c) 5% of Gross Sales 2.28
d Actual Projected net working capital N.A.
)
e) (b-c) 9.10
f) (b-d) N.A.
g MBPF 9.10
)

21. We certify as under:

29
i) Method of assessment: Turnover method

ii) MSOD Submission: Regular

iii) Current assets/ liab. As per RBI norms: YES

iv) Conduct of Account: satisfactory

v) Position of accounts : In order

FLOW CHART

Date of application received at Branch: 17/06/2010

Date of Branch Proposal: 22/06/2010

Date Proposal received at Zonal Office: 23/06/2010

Remarks

22. Z.O Recommendations: Not made available till end of tenure of project.

30
 4.4 Learning from the process

1. Consortium Banking : In case of multiple banking arrangement, first pari passu charge has to
be stated on all assets. In case of liquidation of the firm, the liabilities will be in accordance
with amount of limits sanctioned by each bank.

2. Hypothecation on Stocks and Book Debts.

25% margin on closing stocks & 30% on sundry debtors is hypothecated under the
bank’s lien.

3. D/E ratio for an SME account should be 4:1

In case of a trading account it can be 3:1.

4. If investment in subsidiary co. by parent co. is more than 10% of the TNW, then it should be
adjusted in the Financial rating of the parent co.

5. DSCR

There is no depreciation in trading accounts. Hence DSCR cannot be calculated. Also

there is no DSCR for accounts which have not availed term loan as there is no repayment of long
term debt to be covered.

6. ISCR

31
 No ISCR calculated in accounts without term loan as there is no interest paymeny
towards long term debt.

7. Conversion of Demand Loan into Cash Credit facility

At the will and discretion of the bank, when there are increase in orders for the company
exceeding current demand loan limit, then the demand loan account may be converted into a cash
credit account.

8. Valuation of stocks.

Valuation of stocks is done at cost/ invoice/ market value whichever is lower.

9. NFBs

Non Fund Based limits are to be secured by 25% margin money in the form of Bank’s
TDRs, LCs. NFBs for 180 days are secured by stocks.

10. Drawing limits

Drawing power is calculated after deducting unpaid creditors and outstanding balance. No
drawings are allowed on sister concerns unless specifically agreed.

11. Bank’s Lien

It is a bank norm to display bank’s hypothecation plate/ board at the firm’s unit or
business premises. All assets to be charged to the bank are to be kept fully insured. A stock audit
is carried out on yearly basis.

12. Commission and interests

32
 Commission is charged on guarantees @ 0.77% and interest on CC and Demand loan
accounts depending upon credit rating and relationship with the Bank.

- Commission is charged for the claim period

- Concession for guarantees with cash margins

- Additional commission is charged for guarantees issued for government departments.

13. Watch and Substandard accounts

a. Watch accounts: accounts overdue over 30 days to 90 days.

b. Substandard accounts: accounts overdue 91 days onwards.

4.4.1 L444Cs – Acknowledgment of debt and security statements

L444Cs are statements acknowledged by the Promoter/ Guarantor to the Bank in

terms of the following:

a) Demand promissory note (Gives the balance in the account secured by it)

b) Letter of continuing security

c) Letter of guarantee

d) Agreement of pledge

e) Agreement of hypothecation

f) Equitable/ legal mortgage of immovable property.

33
 4.4.2 Types of Guarantees issues by the Bank.

a) In lieu of earnest money deposits.

b) In lieu of tender deposits.

c) In lieu of security deposit.

d) To obtain advance payments (generally exports).

e) To obtain mobilization advance (generally domestic).

f) Towards direct and indirect taxes to the government in respect of specific

transactions.

g) For direct/ indirect tax disputes with tax authorities.

h) For payment for suppliers/ services made/ rendered.

i) For bidding/ tendering for project contracts.

j) For performance in terms of any agreed contract.

k) For securing retention amount.

l) In favour of customs/ excise/ tax authorities towards tax/ duties payment etc.

m) Favouring courts for release of amounts.

n) For guaranteeing loan repayments.

4.5 Housing Loan review proposals.

34
 A small part of the project involved making of review proposals for housing loan
accounts i.e, assessing whether the account is in order, calculation of drawing limit and EMI
repayments dues etc. A total of 52 review proposals were made during the course of the
internship.

The format for the review proposals is given as under:

Review Proposal No. :.......................

Date:......................

STAR HOME LOAN: REVIEW OF ACCOUNT

A/c: Mr. ABC reddy

Review Limit : 1.43 lacs

Account Name Worth (in lacs)

Borrower Mr. ABC Reddy 3.16

Co Borrower Mrs. ABC Reddy 0.76

Guarantor

Guarantor XYZ 10.76

Purpose of loan Purchase of flat

Limit Amount sanctioned (Rs Lacs) Authority Date of sanction

Original 6.64 Z.M Pune 29/12/1997

35
Last review 1.65 S.M Cr. Branch 04/08/2009
Security Details Value in Rs lacs
Mortgage EQM of Flat at 101 Mayur Villa, Nigdi 30.00
Collateral
Guarantee XYZ 10.76
Position of Account
Sanction limit Amt Disb. Drawing Outstanding Prop Review Limit
Limit
6,64,000 6,64,000 1.43 1.51 1.43
Repayment No. of EMIs due No. of EMIs paid
EMI Rs 6780/- w.e.f
Mar 1998 131 130
Security Original security documents dated L444Cs Dated
8/1/1998
ROI 7.5% Margin 15%
Insurance Rs 8,00,000 Policy valid upto: 17/06/2011

4.5.1 Learning from this project.

1. The account is overdue by roughly Rs 8000 as the borrower had not repaid the
last EMI before the review.

36
2. Home loan sanctioning is done in accordance with the stages of completion of
the project.

i. The sanctioned amount is transferred to the borrower’s account or to the

builder’s account as the stages of the project complete according the
agreement between the bank and the borrower.

ii. Eg. If sanctioned limit is 20,00,000 and only 2,00,000 has been paid to the
developer in accordance with the stage of completion of the project then the
borrower has an option to either pay only the interest towards that disbursed
amount or the entire EMI of that month to the bank.

3. A Cushion or Moratorium period is provided to the borrower’s in case of semi

completion of the project wherein the borrower is subjected to pay only the amount
towards the interest of the disbursed amount.

4. In case of finished projects (flat ready for possession), the entire amount may
not be disbursed at the same time in case some of the required documents have not
been furnished to the bank.

5. Special schemes are available for members or ex members of the bank and
relatives to that person for housing loan schemes.

6. NPA – The Net NPA to a branch is calculated as

Net NPA = Total NPA net of provisions / Total Advances * 100

Rephasing or restructuring of NPA accounts is done by adjusting the EMI or

the tenure of the loan period. Accordingly either the tenure of the Loan repayment is
increased with a restructured EMI or the EMI is changed keeping the same repayment
period.

37
 CHAPTER 5

RESULTS AND CONCLUSIONS

38
5.1 Results

5.1.1 SME Proposal

1. The ratios for M/s XYZ distributors were as follows:

i. Current Ratio: 1.46

ii. Debt Equity ratio : 2.06

iii. PAT/Net Sales(%) : 3.71

2. The Maximum permissible bank finance was found out to be 9.10 lacs.

3. Utilization of funds (only BGs) for the previous year was 100%.

4. The increase from existing facility to proposed facility was 33 lacs.

5.1.2 Housing loan review proposal

1. The new review proposal was for a drawing limit of 1.43 lacs.

2. The account was outstanding by about Rs 8000/-.

3. No. of EMIs due was one less than no. of EMIs paid.

4. The LIC policy premium has been renewed for the next year.

39
5.2 Conclusions

5.2.1 SME proposal.

1. The current ratio is 1.46 which is within the RBI norms of 1.33. This ratio can fall up to
1:1 for the next 3 years so as to allow some relaxations and give a boost to this industry
according to RBI guidelines.

2. The Debt Equity ratio however was 2.06 which is considerably lower than the RBI norms
of 3:1. This account can be sanctioned the proposed limits by an authority higher to the
sanctioning authority which is the Senior Manager (Credit) in this case. This account may
be sanctioned at the discretion of the branch AGM.

3. The Maximum Permissible Bank Finance that can be provided to the enterprise for
working capital is 9.10 lacs whereas the required amount is only 7 lacs. Thus this limit
can be sanctioned.

4. The promoters are not under the RBI defaulter’s list.

5. The enterprise has requested for additional BG limits of 25 lacs on account of increased
business. The earlier limit of 15 lacs was utilized upto the extent of 100%.

6. The conduct of the account had been satisfactory for the tenure during which BG facility
was availed. Also no cheques have been returned which are under review due to financial
reasons. There has been no devolvement of LC and invocation of BGs. Thus the account
has satisfactory functioning.

7. There were no adverse comments during stock audit inspection meaning that
hypothecated goods have been kept in the facility according to norms.

40
5.2.2 Housing loan review proposal.

1. The account was overdrawn to the extent of Rs 8000/- which was promised to be paid
within the next 15 working days.

2. As a result, one EMI was due from the borrowers hence the account drawing limit
was reduced to 1.43 lacs with an outstanding of 1.51 lacs.

3. If the account remains unpaid for a period of 30 days it will fall into the watch
category. The longer the unpaid amount, greater is the risk of the account becoming
an NPA.

4. The LIC policy given to the bank as collateral security has been renewed by the new
year’s premium.

41
Annexure

Std. No. SSID -28

P.A 10,000 Forms/08-2002

BANK OF INDIA

SMALL SCALE INDUSTRIES

APPLICATION FORM FOR CREDIT FACILITIES

OF OVER RS. 50 LAKHS & UPTO RS.2 CRORE

1.1 Name of the Unit

(In block letters)

1.2 Constitution : Proprietary / Partnership Firm / Private

Limited /

(Please strike out which are not applicable) Public Limited Company / Co–
operative Society

1.3 Name of the Business

house/ group (if any)

2.1 Registration No.

(as given by the District Industries

42
 Centre / Directorate of Industries)

2.2 Date on Incorporation / Commencement of Business

3. Business Address with Telephone / Telex No.

3.1 Registered Office

3.2 Administrative Office

3.3 Factory

4. Background of the Proprietor / Partners / Promoters/ Directors

(please furnish information for each person as per the Annexure - I)

Hindi version of this form is available separately

43
 SMALL SCALE INDUSTRIES

APPLICATION FORM FOR CREDIT FACILITIES OF OVER RS. 50 LAKHS & UPTO RS.2
CRORE

5. Brief Description of the Industrial Activity

5.1 Existing

5.2 Proposed

6. How the Activity was financed so far

(to be filled up in case of existing unit only)

Repayment Present O/s Amount of Default

Source of Funds (*) Securit Rate of per month (in 000s of Rs.) (if any)
y Int.

(*) (Indicate sources of funds with name & address, e.g., banks/ financial
institutions/others (specify))

44
 7. Past Performance
(To be filed up in case of existing unit only)

(indicate in 000s of
Rs.)

Particulars Last Year Last but one Years Last but Two years

Turnover

Net Profit

Retained Profit

Monthly Turnover of last twelve months

8. Means of Financing

(Please furnish details of sources of finance for meeting the cost under the
following heads)

(in 000s of Rs.)

Sr. no. Particulars Amount Amount Total

Already Proposed to be
Raised Raised

A Capital

(specify resources
contributing capital)

B Reserves

45
C Term Loans

(give full particulars)

D Unsecured Loans, and

deposits

(indicate sources, rate of

interest, repayment period

etc.)

E Deferred Payment
Arrangements

Including Supplier’s Credit

F Subsidy

Central Govt.

State Govt.

G Seed capital

(indicate sources)

H Internal cash Accurals

I Other Sources (specify)

J Total

46
Bibliography

Bank of India Manual on loans and advances

http://bankofindia.com/

http://www.indianbank.in/

http://www.investopedia.com/

47