PROJECT REPORT ON CREDIT APPRAISAL PRACTISES AT CORPORATION BANK

(Carried out at Corporation Bank, Zonal Office, Bangalore)

Submitted in partial fulfillment of the requirements of MBA Program Of ICFAI Business School, Hyderabad

Submitted By

Srikanth.K.G.
Enrolment no.-09BSHYD0857

Name of the organization CORPORATION BANK

Zonal Office, Bangalore

Under the guidance of

EXTERNAL GUIDE: MR.N.V.SRIPATHI, SENIOR MANAGER CORPORATION BANK, ZONAL OFFICE BANGALORE INTERNAL GUIDE: MR.S.MURALI, ASSOCIATE DEAN ICFAI BUSINESS SCHOOL BANGALORE

ICFAI BUSINESS SCHOOL HYDERABAD

1

PROJECT REPORT ON CREDIT APPRAISAL PRACTISES AT CORPORATION BANK

(Carried out at Corporation Bank, Zonal Office, Bangalore)

Submitted in partial fulfillment of the requirements of MBA Program Of ICFAI Business School, Hyderabad

Submitted By

Srikanth.K.G.
Enrolment no.-09BSHYD0857

Name of the organization CORPORATION BANK

Zonal Office, Bangalore

Under the guidance of

EXTERNAL GUIDE: MR.N.V.SRIPATHI, SENIOR MANAGER CORPORATION BANK, ZONAL OFFICE BANGALORE INTERNAL GUIDE: MR.S.MURALI, ASSOCIATE DEAN ICFAI BUSINESS SCHOOL BANGALORE

ICFAI BUSINESS SCHOOL HYDERABAD

2

Authorization

ICFAI BUSINESS SCHOOL HYDERABAD

PROJECT CERTIFICATE

This is to certify that project entitled CREDIT APPRAISAL PRACTISES AT CORPORATION BANK is a bonafide work carried out by SRIKANTH.K.G. in partial fulfillment of the requirements of MBA program of ICFAI Business School, Hyderabad. It is certified that all corrections/suggestions indicated for assessment have been incorporated in the report. The project report has been approved as it satisfies the academic requirement of Summer Internship Program.

Signature of External Guide

Signature of Internal Guide

MR.N.V.SRIPATHI

MR.S.MURALI
3

Acknowledgement
Success is not a destination, but a journey-it is often said, I realized it even better during my Summer Internship Program. When I completed this journey, I may not have come this far without help, guidance and support of certain people who acted as guides, friends and torch bearers along the way There are many persons who may have helped you during the course of your project. I would like to thank Management of Corporation Bank ,for providing me this opportunity to undergo a project at Corporation Bank ,my Company Guide Mr.N.V.Sripathi who helped in successfully doing this project and guiding me continuously throughout the project. It may be noted that this report is purely for purposes of my MBA education and is not intended to be transacted in any other way .Iam also thankful to my Faculty guide Prof.S.Murali who was constant source of inspiration, and providing me an opportunity to learn and grow under his guidance and also IBS-Hyderabad, IBS-Bangalore which has extended all the facilities in completing the project. This pleasure would not have been mine without the firm support extended by Mr. Dominic, Chief Manager, Corporation Bank and Prof.Madtha, IBS Bangalore. Their appreciation mixed with constructive advice not only made my work interesting but also laid a strong foundation for the project. I take this opportunity to thank all senior executives and every associate of Corporation Bank, Zonal Office, Bangalore for providing me with all the necessary inputs and also the conducive environment to work in. I express my deep sense of gratitude to Mr.S.Murali, my faculty guide, for providing the valuable help and guidance at every step during the project. I shall always remain indebted to him, for his spirit of cooperation. Finally, I acknowledge the help of various persons in the office as well as in the college and my friends for the suggestions rendered from time to time towards the preparation of this report.

TABLE OF CONTENTS
Authorization .................................................................................................................................................... 3 Acknowledgement ........................................................................................................................................... 4 Abstract ............................................................................................................................................................ 7 Industry Profile ................................................................................................................................................ 9 Company Profile ............................................................................................................................................ 13 1. Introduction ............................................................................................................................................... 24 1.1 Purpose, Scope and Limitations ........................................................................................................ 25 1.2 Sources and Methods......................................................................................................................... 26 1.3 Report Organization............................................................................................................................ 26 2. Objective of the Project: ........................................................................................................................ 26 3. Research Methodology......................................................................................................................... 27 4. Literature Review ..................................................................................................................................... 27 5. Working Capital ......................................................................................................................................... 30 5.1 New Units ............................................................................................................................................ 31 5.2 Existing Units....................................................................................................................................... 31 5.3 Factors which determine working capital .......................................................................................... 32 5.4 Working Capital lending methods ...................................................................................................... 32 5.4.1. Projected Turnover Method (PTM) ............................................................................................ 32 5.4.2. Permissible Bank Finance (PBF)............................................................................................... 34 5.4.3. Cash Budget Method .................................................................................................................. 38 5.4.4 Net Owned fund Method ............................................................................................................. 40 5.5 Matrix based on Working Capital Lending Methods ........................................................................ 42 6. Term Loan ................................................................................................................................................. 44 6.1 Aspects covered in Term Loan Appraisal ......................................................................................... 44 6.1.1 Technical ...................................................................................................................................... 44 6.1.2. Managerial ................................................................................................................................... 44 6.1.3 Economical ................................................................................................................................... 45 6.1.4 Financial ....................................................................................................................................... 46 7. Non Fund Based Limits ........................................................................................................................... 50 7.1 Assessment of Non Fund Based Limit .............................................................................................. 50 8. Credit Appraisal Process .......................................................................................................................... 51 5

8.1 .Steps in Credit Appraisal................................................................................................................... 51 9. Credit Risk Assessment (CRA) ............................................................................................................... 53 9.1 Credit rating linked to loan pricing ..................................................................................................... 54 10. Analysis and Interpretation .................................................................................................................... 55 10.1. Corporation Banks Loan Policy ..................................................................................................... 55 10.2. Financial Ratios used for Credit Risk Assessment ....................................................................... 57 10.3 Illustrations ............................................................................................................................................ 59 10.3.1 Illustration 1-KPG LTD .................................................................................................................. 59 10.3.1.1 Assessment of FB WC requirements: ...................................................................................... 65 10.3.1.2 Management ............................................................................................................................... 66 10.3.1.3 Industry Analysis ........................................................................................................................ 66 10.3.1.4 Risk Analysis .............................................................................................................................. 67 Risk Analysis ............................................................................................................................................. 67 10.3.1.5 Ratio Analysis ............................................................................................................................. 68 10.3.2 Illustration 2-SSS LTD................................................................................................................... 70 10.3.2.1 Assessment of FB WC requirement: ........................................................................................ 77 10.3.2.2 Assessment of Letter of Credit requirements: ......................................................................... 79 10.3.3. Illustration 3-ABC Limited ................................................................................................................ 80 10.3.3.1 Assessment of the Term Loan: ................................................................................................. 84 10.3.3.2. Assessment of FB WC requirements: ..................................................................................... 87 10.3.3.3 Management ............................................................................................................................... 88 10.3.3.4 Industry Analysis ........................................................................................................................ 88 10.3.3.5 Business Analysis ...................................................................................................................... 89 10.3.3.6 Risk Analysis .............................................................................................................................. 90 10.3.3.7 Ratio Analysis ......................................................................................................................... 91

10.3.3.8 Rating Summary Information:.................................................................................................... 94 11. Findings ................................................................................................................................................... 95 12. Recommendations and Suggestions .................................................................................................. 101 13. Conclusion ............................................................................................................................................. 103 14. Appendices............................................................................................................................................ 105 15. Bibliography........................................................................................................................................... 115

Abstract

This project helps to understand one of the most important processes in the growing economy. In todays competitive world providing credit is both a rewarding and a challenging job. So when a Company approaches a bank based on the type of sector (Promising/Preferred, Export oriented, Case to Case) and also the credit portfolio of the bank, prevailing macroeconomic scenario, exposure norms, bank will decide on whether to consider the Company approached for granting Credit. Quantitative and Quantitative information about the Company is gathered by credit investigation (Internal as well as external due diligence agency). Now the Credit Appraisal is carried out for the Company based on the information provided. Techniques like financial statement analysis are used during appraisal and by adopting various methods of lending. A SWOT analysis of the Company is carried out and the bank arrives at a risk rating and based on the rating bank grants Credit to the applicant Company and pricing is fixed based on the rating.

INDUSTRY PROFILE

Industry Profile
After the recessionary period Indian economy has recovered and growing at a encouraging rate, consumption levels soaring and investment riding high, the Indian banking sector is on an upswing again. According to the Annual Statement on Monetary Policy for the year 2009-10 released by the Reserve Bank of India (RBI), the Indian economy has witnessed robust growth during 200607 for the fourth year in succession. The Central Statistical Organization (CSO) estimates that the real Gross Domestic Product (GDP) growth can accelerate from 6.7 per cent in 2008-09 to 7.2 per cent in 2009-10 though RBI and Prime Minister Manmohan Singh has forecasted 7.5% for 2009-10. According to the Annual Statement on Monetary Policy for the year 201011 GDP could end up between 7.2 and 7.5. India could become the third largest banking hub in the world by 2040, according to a PricewaterhouseCoopers (PwC) report. The potential banking market waiting to be tapped in India is fairly huge. Out of the 203 million Indian households, three-fourths, or 147 million, are in rural areas and 89 million are farmer households. In this segment, 51.4 per cent have no access to formal or informal sources of credit, while 73 per cent have no access to formal sources of credit. Similar data is not available for non-farm and urban households. Given the huge potential, corporate houses like the Tatas and Reliance - Anil Dhirubhai Ambani Group, besides several others, are interested in exploring this opportunity. A less penetrated market and the opportunity to service a large, young, working age population, which will create and therefore need help to manage wealth, emerging Indian multinationals with global horizons, entrepreneurs with surplus wealth and limited investment options makes India an extremely attractive market. India's per capita income is $1124 and is the 11th largest economy in the world and 4 th largest by purchasing power parity. Per capita income stood at $797 in 2006/07, according to data from the central bank's web site, nearly double from US$ 460 in 2000-01 thanks to robust economic growth and now to more than $1000 in spite of slower growth observed throughout the world. Consumption, which today accounts for 60 per cent of India's gross domestic product, is set to quadruple to US$1.5 trillion by 2025, overtaking Germany as the fifth-largest consumer market, according to a forecast made by McKinsey.

Retail banking Following the trend in other emerging economies, India is experiencing a boom in retail banking. Drawn by the promise of huge returns in this sector, a number of foreign banks are falling over each other to acquire a slice of the banking pie. A year and a half ago, Deutsche Bank launched its retail operations in India. Earlier, another German company BHW Holding AG positioned itself in this space by taking over Birla Home Finance Ltd. Now there are 29 foreign banks have a presence in India through their 268 branches. In May 2007, the 300year old Barclays Plc followed suit. Besides credit cards, its retail foray will be in the personal loan segment. These late entrants join the ranks of Citibank India, HSBC, ICICI Bank and HDFC Bank Ltd that have aggressively begun tapping this business. In May 2007, the retail portfolio of the Indian banking sector was US$ 111.7 billion or around 11 per cent of Indias gross domestic product of US$ 1 trillion. Such loans accounted for 26 per cent of total non-food gross bank credit in the country as on May 25, 2007 and increased
9

by 23.9 per cent on a year-on-year basis over May 26, 2006 after growing at 30 per cent for three years in a row. Mortgages or housing loans account for more than half of the retail portfolio and grew at a sizzling pace of 40 per cent plus during the last three years. Rural banking In October 2007, ABN Amro Bank announced its micro finance division has succeeded in providing basic financial support to some 500,000 underprivileged households in India. The Dutch banks micro finance portfolio is now US$ 50.8 million and the bank plans to double the coverage to more than a million households by 2010. Its a profitable business that achieved break-even in the first year itself. Bank of Baroda is working on similar lines and has adopted Durgapur district in Rajasthan. Durgapur, consisting of 800 villages, has a population of more than 1.1 million. The bank plans to set up more than 400 farmers clubs for expert advice on agricultural and financial issues and form 300 new self-help groups, organize health camps and train more than 4,000 rural youth for employment generation. Last year, the Chennaibased Indian Bank adopted Pondicherry for extending banking services. State Bank of India Ltd, the countrys largest commercial bank, is now drawing up plans to reach out to 100,000 villages. Mergers and acquisitions According to a PricewaterhouseCoopers (PwC) report, the banking sector in developing economies led by China and India are likely to overtake banks in the currently richest countries of the world by 2050. China and India show the greatest growth potential through organized growth and merger and acquisition (M&A) activities, PWC said. M&As volume in India's banking space increased to US$ 10.5 billion between January and September 2007 with 38 deals. In comparison, the sector had witnessed 23 deals worth US$ 707 million last year, according to a report by global data provider. Investment banking Investment banks operating in India have earned nearly as much in the first half of 2007 as they made throughout fiscal 2006-07 from underwriting stock offerings and advising on takeovers. Private equity and venture investments in India almost doubled to US$ 5.55 billion in the first half of this year, according to Chennai-based Venture Intelligence, which tracks such deals. It expects investments to cross US$ 10 billion by the end of the year.

Indian banks in loan markets abroad With the best of India Inc. flocking to overseas loan markets for funds, Indian banks have started following their top customers. For the first time, two Indian lenders -- ICICI Bank and SBI -- figure among the top five in the league tables for loan syndication. Loan books of Indian banks with significant international operations grew sizably in the first six months of 2007-08. In the aftermath of the US sub-prime mortgage losses, global banks had turned risk-averse causing a global credit squeeze. This forced Indian companies to turn to State Bank of India (SBI), ICICI Bank, Bank of India (BoI) and Bank of Baroda (BoB) to meet their credit requirements, particularly to fund overseas acquisitions. The loan books of
10

the four banks grew at over 25 per cent at the end of September over the previous year, much higher than the 21.9 per cent growth for the industry despite the fact that the cost of raising funds overseas has increased by 150-200 basis points in the aftermath of the subprime crisis. Overseas foray As many as nine Indian banks, led by HDFC Bank and ICICI Bank, have made it to the list of top 50 Asian Banks. Bank of Baroda, the fifth largest bank in India, has opened a representative office in the heart of Sydney's central business district, adding to the 19 Indian banks that have 188 branches abroad. Managed assets to rise 6-fold by 2015 The total assets managed by all funds in the country -- mutual funds, international funds, private banking, including portfolio management services, unit-linked insurance and pension funds is likely to grow more than six-fold to US$ 1,300 billion by 2015, from US$ 170 billion, says the Boston Consulting Group. The potential of the Indian market is attracting many new entrants and this is likely to continue over the next five years. The opportunity for various fund categories to invest in India will grow exponentially; managed assets, excluding pension, are expected to grow at least 10 times over the next 10 years.

11

COMPANY PROFILE

12

Company Profile
Corporation Bank is one of the oldest Banking Institutions in the Dakshina Kannada District of Karnataka and one of the oldest banks in India. As the saying goes on A thousand mile journey starts with small step. A step was taken by Shri Khan Bahadur Haji Abdullah Haji Kasim Saheb Bahadur; a businessman of Udupi way back on the 12th of March 1906 with a group of philanthropist founded the Canara Banking Corporation of Udupi Limited. A handful of people representing the various interests decided to promote the Canara Banking Corporation of Udupi Limited. Eleven persons who included 4 pleaders, 2 educationists, 1 insurance agent and 1 retired sub magistrate where the first signatories of the Articles of Association and Memorandum of Association of the bank who had in all 111 shares. The need to start this bank was felt because there was no such facility at Udupi, an important trading centre next to Mangalore in Dakshin Kannada district. The indigenous banking was largely in the hands of few rich private individuals and some thing had to be done to provide relief to the common man from the clutches of the money lenders who held the money. What inspired the founding fathers was the fervor of swadeshism, for promoting the bank, the founder president made an appeal saying, the primary object in forming the Corporation Bank is not only to cultivate habit of thrifts amongst all classes of people, without distinction of the cast or creed, but also habit of co-operation amongst all classes. This is swadeshism, pure and simple and every lover of the country is expected to come forward and co-operate in achieving the end in view. It was called through co-operation of all, shorn of distinction of caste and creed The Canara Banking Corporation Limited as the institution was called then, started functioning as a Nidhi with a humble beginning. The initial capital was Rs 5000. Corporation Bank which was founded in 1906 and today it is a 100 year young bank. The bank had its origin in the temple town, Udupi which was then a part of Dakshin Kannada district. The credit of introducing the bank goes to the Canara Banking Corporation of Udupi Limited. Corporation Bank is a public sector bank which has been silently creating waves among the domestic banks in India. It is one of the Nationalized Banks in India. The bank withstood the challenges of the financial sector reforms and has emerged as the one of the financially and fundamentally strong, well capitalized, technological sophisticated, efficient, effective and one of the most profitable bank in India. In the year 1952, Corporation Bank became the third bank in the country to receive license from the Reserve Bank of India as Scheduled Bank. In the year 1961, the bank of citizens was merged with the Corporation Bank. It was nationalized in April 1980, which triggered the growth of the bank in terms of geographical reach and business volumes. The name of the bank was changed from Canara Banking Corporation of Udupi Limited to Corporation Bank in the year 1973 and the corporate office of the bank was shifted to Mangalore.

13

Corporate Vision To evolve into a strong, sound and globally competitive financial system, providing integrated services to customers from all segments, leveraging on technology and human resources, adopting the best accounting and ethical practices and fulfilling corporate and social responsibilities towards all stake holders. Corporate Mission To become a provider of World-Class financial services. To meet customer expectations through innovation and technological initiatives. To emerge as a role model with distinct culture identity, ethical values and good Corporate governance. To enhance share holders wealth by sustained, profitable and financially sound growth with prudent risk management systems. To fulfill national and social obligation as responsible corporate citizen. To create environment, intellectually satisfying and professionally rewarding to the employees.

Service Profile The Corporation Bank will provide the different services with CARE approach to the Customers. The service profile of the Corporation Bank is as follows: Personal Products a. Deposit Products i. Corp Pragathi Account: The account can be opened with an initial deposit of Rs 10/- and will provide the account holder the basic banking facilities. No penalty will be levied even if the balance in the account drops below Rs 10. ii. Centenary Year Gold coin: It is 8 gm Centenary Year Gold coin of 999.9 purity, 24 carat. This gold coin is available at Corp Bank branches in select cities across India to individuals or retailers at a competitive price. iii. Saving Bank: Corp Bank SB account holder will get the facilities like any Branch banking. Corp power cheque, Corp convenience card, Corp junior account, Corp senior account. iv. Kshemanidhi Cash Certificates: KCC is a money multiplier deposit. It is a reinvestment Term Deposit scheme that can be opened for a period ranging from 6 months to 10 years. The rate of interest depends on the period of deposit.

v. Money Flex: The flexible term deposit- it allows the customer to withdraw money whenever he/she wants. The deposit can be made for a period ranging from 6 to 120 months. The minimum deposit is Rs 5000.
14

vi. Fixed Deposit: The deposit can be made for period ranging from 15 days to 10 years. The rate of interest depends on the period of deposit. vii. Corp classic: It is an innovative technology-based account that combines the hi-liquidity of a savings bank account and the high-returns of a Terms deposit. The account works simply by fixing by fixing your savings from a savings bank account to a term deposit and vice versa. viii. Recurring Deposit: Best suite to the salaried class, the customer can save a fixed sum every month for a period ranging from 12 months to 120 months. ix. Janatha Deposit: This deposit is for a period from 1 to 5. Our collection agent will call at customers place to collect your savings at regular intervals even daily. b. Personal Loans Products i. Corp plus: It is a loan facility to meet the short term financial requirement. This loan can be availed by professionals having gross income of Rs 80000 p.a. The loan amount will be limited to the extent of 25% of borrowers net annual income. ii. Corp Rental: The loan may be availed for any productive purpose such as taking up new projects, business or to meet domestic/personal/any other commitments. The minimum loan amount is Rs 5 lakh. iii. Education Loan: Under this scheme the bank finances the financial requirements of the student for higher studies. iv. Consumer Loan: This is a financial arrangement to finance the purchase of consumer durables. This loan can be availed to any person having an income of Rs 50000 p.a. v. Home Loan + Insurance: Corp bank in association with the life insurance corporation of India gives life insurance cover to the housing loan taken by the customers. Maximum term assure under the scheme will be 3 years. vi. Vehicle Loan: Corp Mobile offers the customer easiest motor cycle/car loans with absolutely no hassles. vii. Corp Mortgage: Under this scheme an individual can avail a loan minimum of Rs 1 lakh and maximum of Rs 25 lakh by mortgaging an asset as security. viii. Other Personal loan Products: Corporation bank also offers few more personal loan products such as Corp Mitra, Loan against shares and Corp Home etc.

15

c. Corporate Products Corporation Bank offers several corporate banking services. The bank offers unique services tailor- made for the requirement of Corporate and large business houses as well as small and medium enterprises. i. Corp Fast: Corp fast is an innovative solution which facilities speedy realization of outstation cheques and instruments using latest communication technology. ii. Project Finance: Corp Bank also finances the financial requirements for certain projects on the basis of economic a technical feasibility of the project. iii. Corp Rental: This facility helps the customer to encash the rent receivable from the commercial properties. iv. Forex: Corp Bank also offers Forex services to its customers. v. Working capital: Corp Bank also provides the short term financial facility to finance the working capital requirements. vi. Term Finance: The bank extends term loans for capital investment being made by the clients on account of expansion of existing enterprises for establishment of a new enterprise. d. NRI Schemes i. Corp Express Money: The bank has entered into a tie up with UAE Exchange Center LLC for facilitating global money transfers into India from Gulf region. With a view to facilitating the NRIs in the Gulf and Middle East to transfer their earnings back home swiftly. ii. NRI Loans: Corp bank is granting loans in rupees to NRIs against security of shares, immovable property in India corp. It also provides housing loans to NRIs. iii. Forex Facility for Residents: Indian residents can get foreign exchange assistance from Corporation bank for study in abroad, foreign travel, purchase of air tickets and investments. e. Internet Banking i. Corp-E-cheque: It is an innovative product developed by Corp bank by combining the power of Corp net the banks Internet Banking Services with EFT scheme. ii. Corp Net: In the niche area of collection and payment services Corp bank has a leadership presence in the country and caters exclusively to the cash management requirements of the corporate.

16

f. Other Services i. Online Railway Reservation: The Bank has entered into a tie up with the Indian railway catering and tourism corporation for online booking of railway tickets. ii. Corp Medi-claim: This is a group medical claim insurance offered by the Corp Bank to its account holders. This product has been devised to meet the medical insurance needs of banks customer. iii. Corp Junior: It enables parents whose children are studying away from them to remit money at periodic intervals in a hassle free manner. iv. Corp Mobile Recharge: Electronic Recharge of pre-pad mobile phones is a facility which customers having prepaid mobile phones to electronically recharge their mobile phones cards by debiting their account through Corp bank ATMs or through SMS from their mobile phones. v. Corp Bullet RTGS Facility: It is a remittance facility, which enables customer to transfer funds to anybody anywhere within India. The facility works on the Real Time Gross Settlement (RTGS) platform developed by the RBI. vi. Corp Power cheque Multi city cheque Facility: Multi city cheque is a facility wherein the customer can issue cheques drawn at the base branch and payable at selected remote centers. This cheques will thus, be treated as local cheques in the remote center selected by the customer.

Financial Results of the Bank

Table No 1 : Profit loss account (Rs in Crore) Mar ' 09 Mar ' 08 Mar ' 07 Mar ' 06 Mar ' 05 Income Operating income Expenses Material consumed Manufacturing expenses Personnel expenses Selling expenses Administrative expenses Expenses capitalized Cost of sales 6,704.97 4,933.79 3,675.10 2,824.09 2,372.75

467.97 16.48 632.17 1,116.62

427.87 13.97 513.58 955.42

375.08 10.78 541.38 927.24

360.30 14.18 499.78 874.26

279.68 14.32 386.70 680.71

17

Mar ' 09 Mar ' 08 Mar ' 07 Mar ' 06 Mar ' 05 Operating profit 1,211.97 905.13 695.49 550.17 571.63 Other recurring income 224.54 166.03 151.04 158.24 82.67 Adjusted PBDIT 1,436.52 1,071.16 846.53 708.41 654.29 Financial expenses 4,376.37 3,073.24 2,052.37 1,399.66 1,120.42 Depreciation 54.96 59.54 59.38 56.27 68.99 Other write offs Adjusted PBT 1,381.56 1,011.63 787.15 652.15 585.30 Tax charges 493.48 330.42 280.45 230.04 202.43 Adjusted PAT 802.19 605.24 424.15 374.31 338.55 Non recurring items -0.82 -0.33 -3.20 -3.27 -2.64 Other non cash adjustments 91.40 130.07 115.19 73.42 66.26 Reported net profit 892.77 734.99 536.14 444.46 402.17 Earnings before appropriation 892.77 734.99 536.14 444.46 402.17 Equity dividend 179.30 150.61 129.10 100.41 93.24 Preference dividend Dividend tax 30.47 25.60 20.24 14.08 12.66 Retained earnings 683.00 558.78 386.80 329.97 296.27

Table No 2 : Cash flow (Rs in Crore) Mar ' 09 4,146.10 -87.22 -176.21 3,882.68 8,915.85 12,798.53 Mar ' 08 2,406.97 -50.58 -159.43 2,196.97 6,718.89 8,915.85 Mar ' 07 2,821.65 -84.54 -106.91 2,630.20 4,088.69 6,718.89 Mar ' 06 677.00 -54.46 -114.49 508.06 3,580.63 4,088.69 Mar ' 05 905.33 -63.70 -97.19 744.44 2,836.20 3,580.63

Profit before tax Net cash flow-operating activity Net cash used in investing activity Net cash used in fin. activity Net inc/ dec in cash and equivalent Cash and equivalent begin of year Cash and equivalent end of year

18

Table No 3 : Balancesheet
(Rs in Crore)

Mar ' 09 Sources of funds Owner's fund Equity share capital Share application money Preference share capital Reserves & surplus Loan funds Secured loans Unsecured loans Total Uses of funds

Mar ' 08

Mar ' 07

Mar ' 06

Mar ' 05

143.44 4,753.07

143.44 4,085.07

143.44 3,622.02

143.44 3,231.45

143.44 2,911.48

73,983.91 55,424.42 78,880.42 59,652.93

42,356.89 32,876.53 27,233.16 46,122.35 36,251.42 30,288.08

Fixed assets Gross block 775.86 Less : revaluation reserve Less : accumulated 476.94 depreciation Net block 298.92 Capital work-in-progress Investments 24,937.77 Net current assets Current assets, loans & 2,617.26 advances Less : current liabilities & 5,952.99 provisions Total net current assets -3,335.73 Miscellaneous expenses not written Total

723.40 451.65 271.75 16,512.38

692.44 411.40

619.75 363.90

571.47 315.27

281.04 255.85 256.20 14,417.49 10,652.00 10,261.11

1,712.12 4,807.14 -3,095.02 -

1,353.58 3,577.29 -2,223.71 -

1,547.66 2,595.14 -1,047.48 -

1,279.53 2,337.88 -1,058.35 9,458.96

21,900.96 13,689.11

12,474.82 9,860.38

19

Notes: Book value of unquoted investments Market value of quoted investments Contingent liabilities 43,640.00 Number of equity shares 1434.40 outstanding (Lacs) 29,303.39 1434.40 -

26,691.26 18,082.63 14,352.44 1434.40 1434.40 1434.40

20

Table No 4 : Annual results in brief Mar ' 10 7,294.61 5,560.23 5,084.35 2,136.73 81.59 Mar ' 09 6,067.35 4,679.91 4,376.37 1,796.61 62.24 Mar ' 08 4,516.55 3,438.87 3,073.24 1,251.14 51.24 Mar ' 07 3,430.16 2,303.11 2,052.37 1,140.04 37.38 Mar ' 06 2,626.47 1,502.70 1,399.66 1,051.52 30.99

Sales Operating profit Interest Gross profit EPS (Rs)

Table No 5 : Annual results in details Mar ' 10 Mar ' 09 Mar ' 08 1,186.42 1,107.21 699.78 631.70 467.97 427.87 464.08 185.73 330.42 734.99 143.44 614.40 42.83 76.14 23.99 14.09 Mar ' 07 565.84 378.31 425.28 323.46 280.44 536.14 143.44 614.40 42.83 67.14 28.53 13.42 Mar ' 06 571.46 363.53 383.22 377.02 230.04 444.46 143.44 614.40 42.83 57.21 32.88 13.90

Other income Stock adjustment Raw material Power and fuel Employee expenses Excise Admin and selling expenses Research and development expenses Expenses capitalized Other expenses 628.25 533.60 Provisions made 474.43 385.86 Depreciation Taxation 492.05 517.98 Net profit / loss 1,170.25 892.77 Extra ordinary item Prior year adjustments Equity capital 143.44 143.44 Equity dividend rate Agg. of non-prom. shares (Lacs) 614.40 614.40 Agg. of non promoter Holding (%) 42.83 42.83 OPM (%) 76.22 77.13 GPM (%) 25.19 25.04 NPM (%) 13.80 12.44 Key Ratios Table No 6 : Ratio analysis of Bank

21

Mar ' 09 Mar ' 08 Mar ' 07 Mar ' 06 Mar ' 05 Per share ratios Adjusted EPS (Rs) 55.93 Adjusted cash EPS (Rs) 59.76 Reported EPS (Rs) 62.24 Reported cash EPS (Rs) 66.07 Dividend per share 12.50 Operating profit per share (Rs) 84.49 Book value (excl rev res) per share 341.36 (Rs) Book value (incl rev res) per share 341.36 (Rs.) Net operating income per share 467.44 (Rs) Free reserves per share (Rs) 183.72 Profitability ratios Operating margin (%) Gross profit margin (%) Net profit margin (%) Adjusted cash margin (%) Adjusted return on net worth (%) Reported return on net worth (%) Return on long term funds (%) Leverage ratios Long term debt / Equity Total debt/equity Owners fund as % of total source Fixed assets turnover ratio Liquidity ratios Current ratio Current ratio (inc. st loans) Quick ratio Inventory turnover ratio Payout ratios Dividend payout ratio (net profit) Dividend payout ratio (cash profit) 18.07 17.25 12.88 12.36 16.38 18.23 115.83 42.19 46.35 51.24 55.39 10.50 63.10 294.79 294.79 343.96 183.69 29.57 33.71 37.38 41.52 9.00 48.49 262.51 262.51 256.21 170.55 26.09 30.02 30.99 34.91 7.00 38.36 235.28 235.28 196.88 162.24 23.60 28.41 28.04 32.85 6.50 39.85 212.98 212.98 165.42 117.34

18.34 17.13 14.41 13.03 14.31 17.38 94.80

18.92 17.30 14.01 12.63 11.26 14.23 73.21

19.48 17.48 14.90 14.43 11.09 13.16 59.37

24.09 21.18 16.37 16.59 11.08 13.16 54.38

15.11 6.20 8.64

13.11 7.08 6.82

11.25 8.16 5.31

9.74 9.30 4.56

8.91 10.08 4.15

0.43 0.03 9.53 -

0.35 0.02 9.99 -

0.37 0.02 9.58 -

0.59 0.04 10.46 -

0.54 0.04 9.30 -

23.49 22.13

23.97 22.17

27.85 25.07

25.75 22.86

26.33 22.47
22

Earning retention ratio Cash earnings retention ratio Coverage ratios Adjusted cash flow time total debt Financial charges coverage ratio Fin. charges cov.ratio (post tax) Component ratios

Mar ' 09 Mar ' 08 Mar ' 07 Mar ' 06 Mar ' 05 73.86 70.89 64.80 69.42 68.72 75.53 73.50 69.12 73.41 74.02

86.31 1.33 1.22

83.37 1.35 1.26

87.60 1.41 1.29

76.36 1.51 1.36

66.82 1.58 1.42

Material cost component (% earnings) Selling cost Component 0.24 Exports as percent of total sales Import comp. in raw mat. consumed Long term assets / total Assets 0.90 Bonus component in equity capital (%)

0.28 0.90 -

0.29 0.91 -

0.50 0.87 -

0.60 0.89 -

23

IBS

1. Introduction
CREDIT APPRAISAL This project is based on Credit Appraisal process followed in Corporation Bank for the Clients. Credit appraisal is a process which involves gathering of the required data from the borrower and thereafter evaluating various parameters viz constitution ,background, net worth of the investors, purpose of credit, working results, financial position, requirement of credit, repayment capacity, security guarantee, industry prospects, operations under the account, other ancillary business passed on to bank and also the risks involved. Credit appraisal involves detailed and in-depth analysis of the projected/estimated/audited results of the project. In this process the technical, the marketing the organizational, the financial, the economic and the social aspects of the projects are examined one by one to ensure technical feasibility, market necessity, financial viability, economic strength and social desirability for term loans. It is a process where by a lending financial institution makes an independent and objective assessment of the various aspects of investment proposition for arriving at a financial decision. Appraisal exercises are aimed at determining the viability of a project and some times helps in reshaping the project to upgrade its viability. It is most crucial stage of project cycle at which the bank makes a critical evaluation of all the parameter to determine the feasibility of the project and to make a decision whether to finance or not. Types of Finance considered for Credit Appraisal 1. Term Loan- Investopedia explains Term Loan as a loan from a bank for a specific amount that has a specified repayment schedule and a floating interest rate. For example -Businesses may use the cash from a term loan to purchase fixed assets such as equipment used in its production 2. Working Capital- Working capital is the money required for day to day operations .Working Capital requirements refer to the funds required for financing the minimum total current assets. Liquid surplus or net working capital surplus of long term sources over long term uses This is the short-term capital or finance that a business keeps. Working capital is the money used to pay for the everyday trading activities carried out by the business - stationery needs, staff salaries and wages, rent, energy bills, payments for supplies and so on. 3. 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'. These facilities are divided in three broad categories as under:
24

IBS

a. Letters of credit b. Guarantees c. Co-acceptance of bills/deferred payment guarantees. Industrial classification All the companies can be broadly divided into 3 types. 1. Manufacturing companies/firms 2. Trading companies 3. Construction company/firms.

1.1 Purpose, Scope and Limitations

Purpose To study the analytical framework used in credit appraisal in Corporation Bank and different methods used for credit appraisal based on the credit limits.

Scope of study The scope of the study is limited to Corporation Bank Zonal Office, Bangalore; it will give an in-depth theoretical and practical knowledge about the credit appraisal. This study also covers ratio analysis, cash flow from proposed project, risk involved in the project, analysis of the financial statement and the data found in the appraisal statement.

Limitations The study is limited to the Credit appraisal department of Corporation Bank Zonal Office, Bangalore. Interbank comparison providing the same service will not be done. Time Constraint

25

IBS

1.2 Sources and Methods

Methodology of data Collection As regards methodology, normally both quantitative and qualitative approaches are adopted. In order to collect the data, this study brings a live analysis based on the live data collected from secondary type of data. The techniques of ratio analysis have been made use for the analysis of the financial statement of the bank. Interacting with executives, functional in charge of various areas and Departments discussing informally. Referring to the secondary that is, various project reports prepared by the Bank and desk guides available with the bank. Visiting official website of the bank and other related websites. Referring to news papers and various business magazines.

1.3 Report Organization

This report starts with explanation of different finances considered in credit appraisal. Credit Appraisal Process in detail and the methodologies used .Analysis and Interpretation of different methodologies, Findings, Suggestions and Recommendations based on the analysis carried out

2. Objective of the Project:

To have practical knowledge and experience towards project financing. Compare and contrast different credit appraisal methods used in Corporation bank. To examine interrelationship among various aspects of working capital finance and evolve a relationship matrix among various factors. To examine credit appraisal practices in banking industry (from secondary sources) and recommendations for improvement if any.

26

IBS

3. Research Methodology
The first part of the project deals with credit appraisal process for working capital finance followed in Corporation Bank. Relevant data was obtained from primary source i.e. Corporation Bank and other secondary sources such as books, internet etc.The working capital gap is calculated and the assessment is done before the assessment all the ratios related to working capital are calculated and also all other quantitative and qualitative analysis is done to ensure the proper channeling of the money considered for disbursal.

The second part of the project dealt with all the methods in working capital finance which are used at Corporation Bank, Zonal Office and the factor on which each method is adopted and also dealt with other kinds of finance i.e. Term Loan and Letter Credit.

4. Literature Review
Now due to the growing demand and competition credit appraisal is becoming both a challenging and rewarding process. Funding is done for SME (Small medium industries), Large industries. Initially medium scale was categorized under a different heading. SME Sector: We must now acquaint ourselves with two definitions. SSI & SME. Historically our commercial banks started financing Small Scale Industrial Units way back in the year 1960 with a credit guarantee scheme by the Central Government administered by the Reserve Bank as the Agent. (Presently this scheme is not available). The SSI is defined as an industrial unit whose original investment in plant and machinery should not exceed Rs.7.50 lakhs (raised to Rs.10 lakhs on 10.9.75 and now it is Rs.1 Crore and in the case of Ancillary Unit investment in fixed assets should not exceed Rs.3 crores) And the unit should engage itself, in manufacturing, processing and preservation of goods. Mining and quarrying, servicing and repairing and custom service units are also treated as SSI units. There is a Tiny Sector where the investment in plant and machinery should be less than Rs.25 lakhs and in the case of Village and & Cottage Industries the credit requirement should not be above Rs.50,000/- While determining the scale of industry in our country we have gone by the investment in plant and machinery but in some countries they base on the number of employees, say up to 200 for the SSI. Beyond SSI limit the industry would fall under the category of Medium Scale or Large Scale. We have now integrated Small Scale and Medium Scale under a single category SME.

27

IBS

Official Definition: At this juncture it is worth mentioning that Reserve Bank has come out with guidelines to the banks in respect of SME sector. They are reproduced in their monthly publication, Monetary & Credit Information Review (MCIR) issues for Aug & September 2005 which are very relevant both to the bankers and the borrowers. August issue gives guidelines for lending to the sector and September relates to the restructuring of overdue and irregular debts besides one time settlement of the dues of SME. We shall first acquaint ourselves with the definition given on page 2 of Sept 2005 issue: At present, a small scale industrial (SSI) unit is an undertaking in which investment in plant and machinery, does not exceed Rs.1 Crore, except in respect of certain specified items under hosiery, hand tools, drugs and pharmaceuticals, stationery items and sports goods, where this investment limit has been enhanced to Rs.5 Crore. A comprehensive legislation which would enable the paradigm shift form small-scale industry to small and medium enterprises is under consideration of the Parliament. Pending enactment of the legislation, current SSI/Tiny Industries definition may continue. Units with investment in plant and machinery in excess of SSI limit and up to Rs.10 Crore may be treated as medium enterprises (ME).

Credit Flow to SME Sector: From the issue of MCIR for August 2005 we can note the anxiety and concern of the Monetary Authorities to step up the flow of credit with a substantial increase from the present levels. Among other things banks are asked to a) Formulate policies for extending credit to this sector b) Have a cluster approach to reduce the cost of finance c) Each and every Urban and Semi-urban branch of a bank should finance at least 5 new units per year. Similarly from the issue for September 05, we can note the guidelines for Debt Restructuring and Relief besides One Time Settlement (OTS) of NPAs below Rs.10 Crore classified as Doubtful or Loss Assets as on 31.3.2004 and so also for the debts classified as Sub-standard on 31.3.04 but subsequently become Doubtful or Loss Assets. The OTS is also applicable to all debts under litigation subject to obtaining a consent decree. SMEs Abroad: Going back to the SMEs abroad, in some countries, they are encouraging the SMEs to grow international (transnational is the term used) and spread their wings by strategic alliance, joint ventures, having affiliates or making direct investment in capital. In some quarters loans are granted for this purpose at nominal rate of interest. Developed countries prefer developing countries in view of the latter having cheaper manpower and also natural resources. They also transfer technical know-how, impart training and hold conferences and seminars to pass on the knowledge. Indian Context: In the Indian context, financing SMEs is not something new or unknown. All that we have done recently is the renewal of our pledge to serve the SME Sector with a greater vigor. The Finance Minister during his Budget Speech on 28th February 2005 set the ball rolling. The relevant portion of his speech is as follows: SMALL & MEDIUM ENTERPRISES. In recent years our approach to small scale industry has evolved and now we are inclined to treat the sector as the small and

28

IBS

medium enterprises sectorSmall Industries Development Bank of India (SIDBI) has established this year a SME Growth Fund with a corpus of Rs.500 Crores. Small and medium units in knowledge based industries such as Pharma, Biotech and IT will be provided equity support through this Fund. There is a need for a new legislation that will provide a supportive environment for small and medium enterprises He concludes that the Minister of Small Scale Industries will introduce the Small and Medium Enterprises Development Bill. Three things are distinctly clear here. From the Small Scale Industries we have moved to a broader SME sector. And this integrated sector is going to get a good legal and legal support from the authorities. In fact these words have given a good fillip to move in the right direction. Performance: On page 15 of the Economic Times of Tuesday the 11th Oct 2005 there is an advertisement from the ICICI Bank that gives us the following figures: 95% of Industrial Units 40% of Manufactured Output 60% of Exported Goods More than 3 Million Companies 17+ Million Employees SMEs are the backbone of the countrys economy ICICI Bank periodically carries a special feature of one page in the Economic Times under the caption: ICICI BANK PRESENTS SME DIALOGUE which helps us to know the importance of this sector. Large Enterprises-Since the sector has a better credit history and repayment capabilities obtaining finance for this sector is easier compared to SME so in my literature survey I have devoted attention to SME.

FICCIS ANNUAL SURVEY ON BANKING BANKING SECTOR FOR CONSOLIDATION

The following are the major highlights of the FICCI Survey: Some of the major strengths of the Indian banking industry, which have helped mark its place on the global banking scene as highlighted by our survey respondents were Regulatory Systems (84.21%), Economic Growth Rate (63.15%), Technological Advancement (52.63%), Risk Assessment Systems (47%) and Credit Quality (42.1%) Some of the areas that need to be geared up for future growth, identified by the survey respondents are Diversification of markets beyond big cities (84.2%), HR Systems (63.15%), Size of banks (52.63%) High Transaction Costs (47.3%), Banking Infrastructure (42%) and Labor Inflexibilities (42%). To a question on achieving global competitiveness, Consolidation in the financial sector has emerged to be the most significant measure required to create world class banking system followed by Strict Corporate Governance Norms, Regional Expansion, Higher FDI limits and FTAs.

29

IBS

Conclusion By adopting the Credit Appraisal and Rating beside Risk Assessment Tool development by SIDBI we can serve the SME sector better the sector should avail of the opportunities and scale new heights. With this the sector will be benefited and the society too. Regarding Large industries since they have a proven track record faster credit financing should be done for this sector too K.G.Mallya is a renowned author in Banking and Finance

5. Working Capital
Working Capital is an amount of money borrowed from a bank or other lender and used by a new business for money to keep operations going and pay business bills during the startup period, when income is usually less than expenses. For many new businesses, having enough working capital means the difference between the success and failure of the business. Working capital is a liquidity (cash) concept. A business might show a "profit," but if it cannot maintain a positive cash position (that is, having money in the bank to pay bills each month), the business cannot continue to operate.
(Jean Murray, About.com Guide)

Working capital is defined as: Working capital = current assets - current liabilities Where: Current assets are short term sources of finance such as stocks, debtors and cash - the amount of cash and cash equivalents - the business has at any one time. Cash is cash in hand and deposits payable on demand (e.g. current accounts). Cash equivalents are short term and highly liquid investments which are easily and immediately convertible into cash. Current liabilities are short term requirements for cash including trade creditors, expense creditors, tax owing, dividends owing - the amount of money the business owes to other people/groups/businesses at any one time that needs to be repaid within the next month or so. Current ratio i.e. Current assets to Current Liabilities should be greater than 1 which signifies greater liquidity and availability of greater working funds. If the net working capital is negative the difference is called net working capital deficit. Such a deficit indicates funds from current sources (current liabilities) have been
30

IBS

diverted for long term use and unless more funds are brought from long term source including cash generation, the enterprise may not survive for a long time Working capital Gap is the difference between current assets and current liabilities other than bank borrowings. The data or information needed for working capital assessment for new units and old units are as given below.

5.1 New Units

Bankers judgment and calculation will be based on the projections and estimates submitted to the bank by the parties. To check the hypothesis and assumptions interfirm comparisons involved in similar kind of activity can be done. The projections in case of new companies should have following information A. Projected Balance sheets (estimated/projected/audited) B. Projected Profit and loss account (estimated/projected/audited) C. Raw material quantity and value required to affect the sales D. Basis for projecting manufacturing and administrative expenses E. Period involved in various stages of operating cycle F. Proportion of Cash and Credit Sales G. Liquid surplus presently available H. Closing stock of raw materials, work in progress and finished goods and receivable estimates I. Manufacturing process details J. Detailed note on demand and supply and marketing arrangements. K. Competition analysis

5.2 Existing Units

For existing units judgment will be more accurate as the projections can be compared with past performance and estimates can be cross checked to data of past financial statements. The following information of the last year, current year and next year shall be required in order to judge accuracy of the need of the borrower A. Balance sheet (estimated/projected/audited) B. Profit and Loss account (estimated/projected/audited) C. Cash and Credit Sales D. Cash and Credit purchases of raw materials E. Basis for manufacturing costs and factory overheads F. Basis for administrative expenses G. Liquid surplus presently available H. Opening and Closing stock of raw materials ,work in progress and finished goods and receivables I. Manufacturing process details J. Detailed note on demand and supply and marketing arrangements. K. Competition analysis

31

IBS

5.3 Factors which determine working capital

a. Policies for production b. Manufacturing process c. Credit Policy of the unit d. Pace of turnover e. Seasonality The level of working capital is determined both by length of operating cycle and level of sales. The objective of running any industry is earning profits. An industry will require funds to acquire fixed assets like land and building, plant and machinery, equipments, vehicles etcand also to run the business i.e. its day to day operations. Working capital is defined, as the funds required carrying the required levels of current assets to enable the unit to carry on its operations at the expected levels uninterruptedly. Thus working capital required (WCR) is dependent on i. The volume of activity (viz. level of operations i.e. Production and Sales) ii. The activity carried on viz. manufacturing process, product, production programme, and the materials and marketing mix.

Though there are various methods used for assessing the quantum of working capital requirement for an industry, the following are commonly used. Various methods indicated are discussed in detail:

5.4 Working Capital lending methods

5.4.1. Projected Turnover Method (PTM)

Applicability: Applicable to borrowers who are engaged in manufacturing, services and trading activities with fund based working capital requirements up to and Inclusive of Rs 2 crore (5 crore for SSI) as per bank norms. Assessment of Working Capital finance Based on recommendations of Nayak Committee Steps involved in WC assessment are 1. Collection of Financial data 2. Analysis of Financial Data 3. Computation of WC finance 4. Fixing of sub limits
32

IBS

1. Collection of Financial Data CMA (Critical Monetary Analysis) forms (1, 2, 3, 4, 5 ) revised titled as CAF (Credit assessment forms) will be used for collection of financial data. CAF 1-Data on existing/proposed credit from the banking system, additional data Include: -Borrowing from NBFC -Borrowings from term lending institutions for working capital purpose -ICDs taken/Lease finance availed -ICDs given -Installment due and payable within next 12 months CAF 2-Operating statements for previous years (audited), current year (Estimated) and or next year (projected).

CAF 3-Analysis of the balance sheets for the previous years (audited) current Year (estimated) and next year projected. CAF 4-Comparative statements of current assets and current liabilities as per the Balance sheet. CAF 5-Fund flow statements for the previous year [actuals], current year [Estimates] and or next year [projections]

2. Analysis of financial statements The financial data collected as above should be analyzed to assess the working capital finance required by the borrower and evaluate the extent of credit risk. Scrutiny and verification of data to ascertain whether the turnover projected is realistic or achievable. Analysis of the fund flow, profit and loss and balance sheet etc for the previous years to examine profitability, financial position, financial management etc

3. Computation of working Capital finance Gross Working Capital requirements are assessed at a minimum 25% of the annual projected turnover. Of the Gross Working Capital at least 20% are to be brought by the

33

IBS

borrowers as margin by way of long term sources and remaining 80% will be provided by the bank by way of working capital finance.

Formula: [Rs in Lakhs] 1.Projected turnover for the year 2.Gross Working Capital[GWC] [25% of the projected turnover] Less: 3.Borrowers Margin [a minimum of 20% of GWC or projected NWC whichever is higher] 5.Permissable Bank Finance [(2)-(3)] : :

4. Fixing of Sub-limits The present system should be continued. In case where there is large buildup of any item of inventory or receivables is required sub limits will be fixed in a flexible manner.
5.4.2. Permissible Bank Finance (PBF)

This is the most commonly used method for lending working capital Applicability: Applicable to borrowers who are engaged in manufacturing, services and trading activities with fund based working capital requirements above Rs 2 crore (5 crore for SSI) as per bank norms. It is also applicable to civil contractors/builders/borrowers engaged in construction activities. Assessment of working capital finance The steps involved in assessment of working capital requirement are 1. Collection of Financial data 2. Analysis of Financial Data
34

IBS

3. Classification of Current Assets (CA)/Current Liability (CL) 4. Verification of Projected level of current assets/current liabilities with special emphasis on inventory/receivables/sundry creditors 5. Evaluation of liquidity in business operation 6. Validation of bank finance sought based on projected balance sheet 7. Fixing of sub limits

1. Collection of Financial Data CMA (Critical Monetary Analysis) forms (1, 2, 3, 4, 5) revised titled as CAF (Credit assessment forms) will be used for collection of financial data. CAF 1-Data on existing/proposed credit from the banking system, additional data Include: -Borrowing from NBFC -Borrowings from term lending institutions for working captial purpose -ICDs taken/Lease finance availed -ICDs given -Installment due and payable within next 12 months

CAF 2-Operating statements for previous years (audited), current year (Estimated) and or next year (projected).

CAF 3-Analysis of the balance sheets for the previous years (audited) current Year (estimated) and next year projected. CAF 4-Comparative statements of current assets and current liabilities as per the Balance sheet. CAF 5-Fund flow statements for the previous year [actuals], current year [Estimates] and or next year [projections]

2. Analysis of financial statements The financial data collected as above should be analyzed to assess the working capital finance required by the borrower and evaluate the extent of credit risk. Scrutiny and verification of data to ascertain whether the turnover projected is realistic or achievable.
35

IBS

Analysis of the fund flow, profit and loss and balance sheet etc for the previous years to examine profitability, financial position, financial management etc

3. Classification of Current Assets (CA)/Current liability(CL) The classification should be based on the extant instructions subjected to changes detailed below. a. Bills negotiated under LCs Bank Finance through LC should be shown as a contingent liability under additional items in CAF-3. b. Cash Margins for LCs and Guarantees. Margins deposited should be treated as current assets c. Investments FDs with banks and Govt/trustee securities are treated as investment under current assets. Temporary investments in mutual funds, units of UTI and money market are classified as current assets. All other investments like ICDs, investment in shares and debentures should be classified as non-current assets. d. ICDs taken It is a current liability shown separately as item D under additional information in Form 3 e. Book Debts All receivables up to 180 days should be treated as Current Assets. f. Export Receivables The export receivables may be included in total current assets for the purpose of arriving at PBF. g. Term Loan Installment Term Loan installment due in the next 12 months should be treated as current liability.
36

IBS

4. Verification of Projected level of current assets/current liabilities with special emphasis on inventory/receivables/sundry creditors The levels projected should be examined with reference to past trends, indicative levels, the borrower specific operating strength and weakness, their need to hold the current assets at the levels projected, and their ability to absorb cost of carrying inventory/receivables at the levels proposed. 5. Evaluation of Liquidity Under MPBF method a current ratio is 1.33:1 is acceptable and under PBF method a current ratio of 1.25:1 is considered as a benchmark level of liquidity. Any slippages in the current ratio are considered on a case to case basis. Before accepting the current ratio various aspects such as size of the operations, the period of working capital cycle and overall financial position of the borrower are to be examined. For export oriented units a current ration of 1.1:1 is considered satisfactory to encourage exports as per bank norms. 6. Validation of Bank Finances sought. In the MPBF method the amount of working capital is arrived as a residual source after netting off the working capital gap, the available net working capital or the required minimum of net working capital whichever is higher. Under PBF method the projected bank borrowing shown in CAF-3 (item 1 under current liabilities) which reflects the finance sought by the borrower should be validated for sanction subject to the condition that the operating cycle of the borrower, projected level of operations, reasonableness in the buildup of current assets/current liability, profitability, liquidity etc.furnished by the borrowers acceptable to the bank.

Particulars

Previous Year

Current Year

Next Year

1.Total current asset 2.Other current Liability 3. Working Capital Gap [(1)-(2)] 4. Net working Capital (Actual/Projected) 5.Permissible bank finance [(3)-(4)]
37

IBS

6.Net working capital to total current assets[%] 7.Bank finance to total current assets[%] 8.Sundry Creditors to Total Current Assets[%] 9.Other Current Liability to total Current assets[%] 10.Inventories to Net Sales(days) 11.Receivables to Gross Sales(days) 12.Sundry Creditors to Purchasers(days) 7. Fixing of Sub-limits The present system should be continued. In case where there is large buildup of any item of inventory or receivables is required sub limits will be fixed in a flexible manner
5.4.3. Cash Budget Method

Applicability: Applicable to borrowers who are engaged in manufacturing, services and trading activities with fund based working capital requirements above Rs 10 crore It is also applicable to civil contractors/builders/borrowers engaged in construction activities as per bank norms.(Not frequently used)

Assessment of Working Capital Finance The working capital finance should be projected from quantified from monthly/quarterly cash outflows/inflows projected and not from projected level of asset and liabilities The Cash budget method eliminates the anomaly of averages of production and sales parameters and takes into account the fluctuations in the requirement of funds within a time frame 1.Collection of Financial Data CMA (Critical Monetary Analysis) forms (1, 2, 3, 4, 5) revised titled as CAF (Credit assessment forms) will be used for collection of financial data.
38

IBS

CAF 1-Data on existing/proposed credit from the banking system, additional data Include: -Borrowing from NBFC -Borrowings from term lending institutions for working captial purpose -ICDs taken/Lease finance availed -ICDs given -Installment due and payable within next 12 months

CAF 2-Operating statements for previous years (audited), current year CAF 3-Analysis of the balance sheets for the previous years (audited) current Year (estimated) and next year projected. CAF 4-Comparative statements of current assets and current liabilities as per the Balance sheet. CAF 5-Fund flow statements for the previous year [actuals], current year [Estimates] and or next year [projections]

2. Analysis of financial statements The financial data collected as above should be analyzed to assess the working capital finance required by the borrower and evaluate the extent of credit risk. Scrutiny and validation of projected income and expenditure projected balance sheet and projected fund flow to examine whether these are acceptable from the angle of liquidity, overall gearing efficiency of operations. Analysis of the fund flow, profit and loss and balance sheet etc for the previous years to examine profitability, financial position, financial management etc

3. Assessment of bank finance for working capital Monthly/Quarterly projections of Cash receipts and Cash outflows should be furnished in the cash budget statement and the cash gap has to be arrived at which forms the basis for assessing working capital finance. On the scrutiny of data the following data should be extracted for the purpose of assessment of working capital requirements.

39

IBS

Sl no Particulars

Current Actual/Projections Q1 Q2 Q3

year Q4

1 2 3 4

Total cash outflows from business operations Total cash inflows to business operations Cash Gap in business operations LESS Amount brought/proposed to be brought in from other sources i.e. cash surplus under non business operations/capital accounts/sundry items Net Cash Gap for business operations [item 3-4]

7. Fixing of Sub-limits The present system should be continued. In case where there is large buildup of any item of inventory or receivables is required sub limits will be fixed in a flexible manner
5.4.4 Net Owned fund Method

For Working Capital requirement of NBFCs comprising of (a) Companies engaged in leasing and hire purchase activities (b) loans and investment companies (c) residuary non banking companies, are being assessed under the second method of lending requiring maintenance of current ratio of 1.33:1.The eligible bank finance linked to Net Owned Funds [NOF] of the borrowing unit Ceilings on Banks Lending to NBFCs NBFC Category Eligible Bank Finance Companies with not less than 75% of their 3 times the NOF of the company assets in equipment leasing and hire purchase and 75% of their gross income from these type of activities as per last audited balance sheet In respect of the equipment leasing, hire 2 times the NOF of the company purchase and investment companies [Companies with not less than 51% of their assets in equipment leasing and hire
40

IBS

purchase and 33% of their gross income from these type of activities as per last audited balance sheet] Loans and investment companies and 1 times the NOF residuary non banking Companies Ceilings on overall borrowings. NBFC CATEGORY Registered EL/HP companies complying with credit rating requirement and prudential norms Registered EL/HP companies complying with/without credit rating requirement or prudential norms Registered EL/HP companies complying with neither credit rating requirement nor prudential norms Unregistered EL/HP companies EL=Equipment Leasing HP=Hire Purchase OVERALL CEILING ON BORROWING No ceiling Up to 10 times the NOF

Up to 7 times the NOF

Up to 5 times the NOF

1. Computation Of Net Owned Fund: Owned fund shall consist of paid up equity capital, free reserves, balance in share premium account and capital reserves representing surplus arising out of sale proceeds of assets. Investments in shares of other banking financial companies and in shares, debentures of subsidiaries and group companies and loans and advances to and deposits with subsidiaries and companies in the same group, in excess of 10% of the owned fund should be deducted to arrive at the net owned fund. Net owned funds should be calculated as under: A] Paid-up equity capital B] General Reserves C] Share premium D] Capital Reserve E] Debenture redemption reserve. F] Capital redemption reserve G] Credit Balance in profit and loss account H] Any other free reserve I] Total [A to H] J] Accumulated losses K] Intangible assets
41

IBS

L] Total [J+K] M] Owned funds [I-L] N] Investment in shares of subsidiaries and companies in the same group and all non banking financial companies. O] Outstanding loans and advances to and deposits with subsidiaries and companies in the same group P] Total [N+O] Q] Amount of item no P in excess of 10% of item No M above. R] Net Owned Funds [M-Q] 2. Computation of Working Capital Finance

Working Capital requirement of NBFCs should be assessed based on the commercial judgment after taking into consideration the nature/type of activities, actual and projected cash flows, projections of current assets and current liabilities. Borrowers total business operations, financial position, management capabilities etc should be analyzed to evaluate the overall credit risk.

5.5 Matrix based on Working Capital Lending Methods

SEGMENT

SSI

LIMITS UPTO 5 CRORE UPTO 5 CRORE

METHOD

PROJECTED TURNOVER METHOD PERMISSABLE BANK FINANCE METHOD PROJECTED TURNOVER METHOD PERMISSABLE BANK FINANCE METHOD CASH BUDGET METHOD PROJECTED TURNOVER METHOD PERMISSABLE BANK FINANCE METHOD CASH BUDGET METHOD

TRADE AND SERVICES

UPTO 2 CRORE ABOVE 2 CRORE ABOVE 10 CRORE

INDUSTRIAL UNIT

UPTO 2 CRORE ABOVE 2 CRORE

ABOVE 10 CRORE NBFC(Non Banking Finance Corporation)

Net Owned Method

fund

42

IBS

Functions of credit Appraisal Group Undertake detailed techno-economic appraisal of large projects seeking Financial assistance from bank and preparation of appraisal report by evaluating technical, managerial, financial and commercial aspects of the project for term loan. Undertake regular evaluation of progress of implementation of large Projects assisted by the Bank. Peruse and furnish views/observations on project appraised by other Banks/reputed consultants, submitted by Cos/other groups of the wing. To undertake monitoring agency activity of companies going for IPO as per SEBI guidelines. Upgrade project evaluation skills. Undertake unit visits and hold discussions with the official of the Company. Undertake detailed techno-economic merchant appraisal of projects going for IPO as per SEBI guidelines.

Banks way of Appraisal The Branch should call for from the applicant an Application in the prescribed format covering full particulars. The application should contain the following essential data/information. a. Particulars of the project along with the copy of project report furnishing details of the Technology, Manufacturing Process, Availability of Raw Material, Construction, Production facilities etc. b. Estimate of costs of the project detailing assets acquired, to be acquired inclusive preliminary expenses and working capital. c. Details of the proposed means of financing, indicating the extent of promoters contribution, the share capital is to be raised from public and borrowings. d. Working capital requirement at the initial year e. Project implementation schedule f. Organization setup with list of Board of Directors, Qualification, Experience and Competencies. g. Demand projection based on the overall market prospectus together with copy of market survey report if any. h. Estimate of sales, cost of production, profitability. i. Projected profit and loss a/c, balance sheet for the operating years during Banks assistance. j. Proposed amortization schedule (repayment program) k. Projected fund flow statement l. Details of the nature and value of securities of fund.

43

IBS

Due diligence report shall be submitted in the prescribed format. Consent from the authorities of the Pollution Control Board and any other information will be sought. Credit appraisal begins once the bank has undertaken a thorough credit investigation on the constituents and is satisfied about his integrity, reputation and credit worthiness.

6. Term Loan
Term Loan as a loan from a bank for a specific amount that has a specified repayment schedule and a floating interest rate. For example -Businesses may use the cash from a term loan to purchase fixed assets such as equipment used in its production

A comprehensive appraisal of a project needs to cover the under noted aspects:

6.1 Aspects covered in Term Loan Appraisal

1. 2. 3. 4. Technical Managerial Economical Financial

6.1.1 Technical

Feasibility of Technical Process and its suitability Attainability of the scale of operation and adequacy of the machinery Whether the technology is up-to-date Arrangement for securing technical know-how Effluent disposal and pollution control Suitability of site location and availability of infrastructure After sales service/Reliability of suppliers

6.1.2. Managerial

Technical Experience, Financial & Marketing

Quality of Management Appraiser will briefly comment on the companys management setup, the
44

IBS

composition of the board and the chief executive in-charge of the day-to-day operations

Market and Demand Analysis This constitutes a crucial aspect of project appraisal as the basic viability of the project and consequently the repayment of the Banks loan depends on the marketability of its product. The bank will study this aspect under following heads. i. Sales Prospectus The bank will examine the company sales projections and the underlying assumption with reference to the demand forecast made in the publications and through market survey. It will examine also through past consumption from imported sources and likely future trend. The bank will examine the nature and extent of competition likely to be faced by the project from the principal competitors. Bank also examines the competitive ability of the company to penetrate the market and earn market share based on price, quality etc. ii. Selling price The bank will examine the industrys general price trend to see that the prices were stable in the past and will continue to be same in the future.

iii. Prospectus for export The bank has to comment on the prospectus for export. The bank should state how the company would meet the export commitments. The bank should state whether any subsidy/cash incentives will be available to company. iv. Marketing organization The appraiser has to give brief description of the companys marketing organization. If the company selling its products through distributors and selling agents bank has to examine the term of arrangement.

6.1.3 Economical

Whether in line with national policy/priority

45

IBS

Whether import substitution Whether foreign exchange earner Regulatory controls in regard to pricing, raw materials, production, etc.
6.1.4 Financial

Analysis of past years (for existing units) Financial/Profitability plan Capital/Debt Structure Availability of other resources Projection of Cash Flow during construction and also during operation Rate of Return Debt Equity Ratio Debt Service Ratio The factors above mentioned are explained below in detail Present financial position The bank will analyze the companys Audited Balance Sheet and Profit and Loss a/c for the last 3 years. A careful analyze and interpretation of the financial statement would provide a reasonable clear picture of the companys financial history, present position and future trend. The bank will look into Debt/Equity ratio and Current Ratio. The bank also collects the information regarding the following, The method of Depreciation Record of major defaults by the company The position regarding the companys tax assessment Pending suits by or against the company and their financial implication Qualification/adverse remarks if any, made by the statutory auditors on the companys accounts. Brief History In case of already existing company the bank will collect following information, Essential particulars about its promoters and background Its incorporation Its subsequent corporate growth to the date Major developments/changes in its management If the borrowing unit is new to the bank a credit report will be obtained by bank to ascertain the credit worthiness of the company. The banks will carefully scrutiny the MOA and AOA to ensure there is no limitations have been placed on the companies borrowing power and operations.

46

IBS

Past Performance A summery of companys past performance in terms of operating capacity, sales, operating profit and net profit for the past 3 year will be analyzed by the bank. The bank will analyze the sales and profitability for last 3 years. If the trend is in ascending order the performance can be consider satisfactory. Means of Financing The bank will examine the mean proportion of debt and equity components of means of financing of the project. The bank will comment on the project debt/equity ratio is satisfactory and acceptable. As per group credit policy the debt/equity ratio shall not exceed 2:1.

i. Share Capital The bank will ensure that the promoters of the company have invested atleast 25% of the total cost. The investment should be made in share capital. ii. Internal cash accruals The bank will examine whether the company will be able to meet its expenses and working capital requirements. It will ensure that the remaining part of the profit (cash accrual) will be possible to use it as part of financing for project. iii. Debenture The bank will examine the terms of proposed issue of debentures such as the nature of debenture, rate of interest, date of redemption and security offered. iv. Term Loans The power of public company to borrow by way of term loans is restricted to the amount of its paid-up capital and free reserves. The bank has to ensure that the loan taken by the company under those limits only. If the loan is provided by many lenders the information regarding that to be collected. v. Deferred payment facilities The bank has to get the details of the deferred payment guarantee. vi. Any other (Central/state sales tax loans, development loans) Bank has to specify whether it is central/state sales tax loan and will examine the term and conditions of granting the loan.
47

IBS

Project Implementation Schedule The bank will examine the project implementation schedule with reference to Bar chart or PERT/CPM chart by referring to actual implementation of similar projects. The bank has to ensure that the t5ime schedule for construction of building, installation of plant and machinery and commencement of commercial production is reasonable and acceptable. Capacity Utilization If the actual production is less than the rated capacity, the reason for the under utilization of the capacity should be examined. The bank will examine the steps taken by the company to improve the capacity utilization. The bank will examine the special important aspects relates to companys management labor relation. Whether there was any strike, lockouts or shut down during the past 3 years and how the labor disputes were settled.

Production Factors i. Manufacturing Process The bank has to examine the basis of selection of the process in relation to the other alternative process. If the technology is new to the country, the appraiser has to ensure about the suitability of the manufacturing process. ii. Raw Material The bank will list out the major raw materials required for the company production programme. The bank will examine the continuity of supply of the raw materials. The bank also examines the prices of the raw material to ascertain whether the fluctuations in the past years have taken into account while projecting the cost of production and profitability. iii. Utilities and Essentials The bank will examine the requirements of power, fuel, water, transport and the arrangement made by the company.

Fund Flow and Cash Flow Statement The statement which shows various sources of funds and their uses is called fund flow statement and its different from revenue statement of balance sheet.
48

IBS

The fund flow statement should be carefully examined and reasonableness of the various assumptions underlying the project should be ascertained. On the long term side, it should be ensure that fund outflow for essential expenditure on fixed asset, repayment obligation, taxes and dividends are fully provided for that the cash generation will be adequate. On the short term side, the projected increase in current liabilities/bank borrowings should be matched by projected increase in the inventories/receivables.

Cash flow estimates It is prepared to ensure that the unit will have necessary cash with it and it will not face liquidity problem. It is necessary for the construction period also to ensure availability of cash according to the requirement of the project. Commercial Viability and Profitability Appraising profitability is the most crucial exercise in project appraisal. The bank will examine estimated sales, cost of production and net profit furnished for the project. Inter firm comparison The reasonableness of the financial projection may be cross checked by the comparing the key financial parameters of the project with those of a similar project or with the industry average.

Debt Service Coverage Ratio The Debt Service Coverage Ratio is the core test ratio in project financing. This ratio indicates the degree of viability of project and influence in fixing the repayment period and the quantum of annual installments. Here Debt means installments payable during the year and Service means cash accruals comparing net profit plus depreciation and non cash write-off. It measures the extent of cash accruals (service) available to cover the maturing term obligation (debt) during each year. Interest due and chargeable can be fully paid even in a year where the project undergoes in loss. The bank will ensure that the profitability the project does not fall to that extent where the interest can not be paid by the company. The bank will ensure because of any genuine or valid reason the installment can be post-phoned, but the project should be able to pay the interest as and when falls due. The Bank Group Credit Policy is that the project shall give an average

49

IBS

Projected Balance Sheet In the case of cost of production and profitability estimates and fund flow projection, the projected balance sheet should be furnished by the company for the entire period. While appraising the following points will be checked by the bank. The cost of the project means of financing, the profitability estimates and the fund flow projection. While appraising a Term Loan proposal, Bank must see that the project must meet the following: Estimated Project cost is reasonable and complete and has fair chance of materializing The financial arrangements are complete and comprehensive Estimate of earnings and cost of production is realistic

7. 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'. These facilities are divided in three broad categories as under: Letters of credit Guarantees Co-acceptance of-bills/deferred payment guarantees.

Units for the above facilities are also simultaneously sanctioned by banks while sanctioning other fund based credit limits. Facilities for co-acceptance of bills/deferred payment guarantees are generally required for acquiring plant and machinery and may, technically be taken as a substitute for term loan which would require detailed appraisal of the borrower's needs and financial position in the same manner as in case of any other term loan proposal.

7.1 Assessment of Non Fund Based Limit

1. Non Fund Based Limits are normally to be sanctioned for existing customer only who already have fund based limits 2. If it is a new borrower then full processing has to be done as applicable to Fund Based Limits to be carried.
50

IBS

3. Borrowers background and experience of meeting commitments to be examined in detail. 4. L/C limit to be considered as per terms of Purchase or contract, lead period and minimum economical quantity of supply of stocks 5. Non Fund based Limits are to be supported by necessary fund based limits. 6. Past experience of payment of bills under L/C to be verified before considering new request. 7. While Assessing the b/g Limit contract or agreement which is the base for b/g, should be examined in details for any ambiguous clauses. 8. Any request for financial Guarantee to be critically examined before taking decision.

8. Credit Appraisal Process

8.1 .Steps in Credit Appraisal
Credit appraisal begins once the bank has undertaken a thorough credit investigation on the constituents and is satisfied about his integrity, reputation and credit worthiness.

The steps which are followed by the bank in appraisal of a project are as follows. a. Collection of Required data from the borrower. b. The bank verifies the legal status of the entity and the constitution of the entity to undertake business. c. The bank shall ensure that constituent has obtained all the relevant approvals from Government/Regulatory authorities. d. Background of the Promoters and their Net worth are checked thoroughly. e. Analysis of the financial statements is done. f. Details of Associate/Group companies if any are obtained. g. Security/Guarantee standards for repayment will be evaluated. h. Assessment of Credit Limits is done. i. j. Structuring of Credit Limits. Will check the Management and the organizational setup.

51

IBS

k. Production facilities, Market Prospects and Selling Arrangements of the constituent are analyzed. l. Will analyze the operational experience of the client.

m. Customer Profitability analysis is carried out. n. Exposure Norms are considered based on sector, industry and other factors. o. Based on the SWOT analysis carried out Rating and Pricing is done. p. A credit appraisal group goes to the client to carry a thorough analysis

Functions of credit Appraisal Group Undertake detailed techno-economic appraisal of large projects seeking Financial assistance from bank and preparation of appraisal report by evaluating technical, managerial, financial and commercial aspects of the project for term loan. Undertake regular evaluation of progress of implementation of large Projects assisted by the Bank. Peruse and furnish views/observations on project appraised by other Banks/reputed consultants, submitted by Cos/other groups of the wing. To undertake monitoring agency activity of companies going for IPO as per SEBI guidelines. Upgrade project evaluation skills. Undertake unit visits and hold discussions with the official of the Company. Undertake detailed techno-economic merchant appraisal of projects going for IPO as per SEBI guidelines.

Banks way of Appraisal: The Branch should call for from the applicant an Application in the prescribed format covering full particulars. The application should contain the following essential data/information. a. Particulars of the project along with the copy of project report furnishing details of the Technology, Manufacturing Process, Availability of Raw Material, Construction, Production facilities etc. b. Estimate of costs of the project detailing assets acquired, to be acquired inclusive preliminary expenses and working capital. c. Details of the proposed means of financing, indicating the extent of Promoters contribution, the share capital is to be raised from public and borrowings.
52

IBS

d. Working capital requirement at the initial year e. Project implementation schedule f. Organization setup with list of Board of Directors, Qualification, Experience and Competencies. g. Demand projection based on the overall market prospectus together with copy of market survey report if any. h. Estimate of sales, cost of production, profitability. i. Projected profit and loss a/c, balance sheet for the operating years during Banks assistance. j. Proposed amortization schedule (repayment program) k. Projected fund flow statement l. Details of the nature and value of securities of fund. Due diligence report shall be submitted in the prescribed format. Consent from the authorities of the Pollution Control Board and any other information will be sought.

9. Credit Risk Assessment (CRA)

The CRA model adopted by the bank takes into account the factors, which go into appraising the risks, associated with the loan. These have been categorized broadly into: 1. Financial risks 2. Business risks 3. Industrial risks 4. Management risks They are weighted separately. To arrive at the overall risk rating, the factors duly weighted are aggregated and calibrated to arrive at a single point indic ator of risk associated with the credit decision.

1. Financial parameters: the assessment of financial risk involves appraisal of the financial strength of the borrower based on performance and financial indicators. The overall financial risk is assessed in terms of static ratios, future prospects and risk mitigation (collateral security/ financial standing). 2. Business parameters: the following are the important parameters associated with Business risk: Technology Consistency in quality Consistency in cash flow Compliance of environmental regulations 3. Industry parameters: the following characteristics of an industry which pose varying degrees of risk are built into the Banks CRA model: Competition Industry outlook
53

IBS

Regulatory risk Contemporary issues like WTO etc.

4. Management parameters: the management of an enterprise/ group is rated on the following parameters: Integrity (corporate governance) Track record Managerial competence/commitment Expertise Structure and systems Experience in the industry Credibility: ability to meet profit(PAT) projections Credibility: ability to meet sales projections Payment record Strategic initiatives Length of relationship with the bank As such, these are broad based risk categories or risk factors built into CRA models. CRA takes into account the above types of risks associated with the borrowal unit. The eventual CRA rating awarded to a unit is (based on a score out of 100) is a single point risk indicator of an individual credit exposure and is used to identify, to measure and to monitor the credit risk of an individual proposal. At the corporate level CRA is also used to track the quality of banks portfolio. The risk parameters as mentioned above are individually scored to arrive at an aggregate score of 100 subject to qualitative factors- negative parameters. Type of rating awarded to loan proposal Under CRA, the rating is graded into 8 tiers, viz., CB1 to CB8 for Working Capital Limits in an ascending order of risk levels perceived in the borrowers accounts on the basis of aggregate score out of 100.

9.1 Credit rating linked to loan pricing

Pricing bands over Prime Lending Rate are linked to Credit Rating, with some flexibility for deviations delegated to different Sanctioning Authorities as per prescribed structure. CB1 getting the loan at PLR(prime lending rate) and for CB 8 interest can be charged up to 3.5% above the PLR

54

IBS

10. Analysis and Interpretation

10.1. Corporation Banks Loan Policy
The basic tenets of CORPORATION BANKS Loan Policy include the following: The policy applies to all domestic lending. Optimum exposure levels are set out in the Policy to different sectors in order to ensure growth of assets in an orderly manner. The policy sets out minimum scores/hurdle rates The policy lays down norms for take over of advances from other banks/ financial institutions As a matter of policy the bank does not take over any Non-performing Asset (NPA) from other banks. CREDIT APPRAISAL STANDARDS A. QUALITATIVE: At the outset, the proposition is examined from the angle of viability and also from the bank prudential levels of exposure to the borrower, group and industry. Thereafter, a view is taken about banks past experience with the promoters, if there is a track record to go by. Where it is a new connection for the bank but the entrepreneurs are already in business, opinion reports from existing bankers and published data if available are carefully perused. In case of a maiden venture, in addition to the drill mentioned heretofore, an element of subjectivity has to be perforce introduced as scant historical data would be available and weightage has to be placed on impressions gained out of the serious dialogues with the promoters and his business contacts. B. QUANTITATIVE 1. Working capital: the basic quantitative parameters underpinning the Banks credit appraisals are as follows: i. Liquidity: current ratio (CR) of 1.33 will generally be considered as a benchmark level of liquidity. However, the approach has to be flexible. Cr of 1.33 is only indicative and may not be deemed mandatory. In cases where the Cr is projected at a level lower than the benchmark or a slippage in the CR is proposed, it alone will not be a reason for rejection of the loan proposal or for sanction of loan. In such cases, the reasons for low CR should be carefully examined and in deserving cases the CR as projected may be accepted. In cases where projected CR is found acceptable, working capital finance as requested may be sanctioned.
55

IBS

ii. Net working capital: although this is a corollary of current ratio, the movements in Net working capital are watched to ascertain whether there is a mismatch of long term sources via-a-vis long term uses for purposes which may not be readily acceptable to the Bank so that corrective measures can be suggested. iii. Financial Soundness: this will be dependent upon the owners stake or the leverage. Here again the benchmark will be different for manufacturing, trading, hire purchase and leasing concerns. For industrial ventures Total Outside Liability/Tangible Net Worth ratio of 3.0 is reasonable but deviations in selective cases for understandable reasons may be accepted by the sanctioning authority. iv. Turn over: the trend in turn-over is carefully gone into both in terms of quantity and value as also market share wherever such data are available. What is more important is to establish a steady output if not a rising trend in quantitative terms because sales realization may be varying on account of price fluctuations. v. Profits: while net Profit is the ultimate yardstick, cash accruals, i.e. profit before depreciation and taxation conveys the more comparable picture in view of changes in rate of depreciation and taxation which may have taken place in the intervening years. However, for the sake of proper assessment, the non-operating incomes are excluded, as these are usually one time or extraordinary income. Companies incurring net losses consistently over 2 or more years will be given special attention, their accounts closely monitored, and if necessary, exit options explored. vi. Credit Rating: wherever a Credit Rating Agency for any instrument has rated the company, this will be taken into account while arriving at a final decision. However, as the credit rating involves additional expenditure, bank would not normally insist on this tool if such an agency had already looked into the company finances. vii. Capital Market: where the companys shares are listed in stock exchanges, the movements of the price of its share, the market value of shares like those of competitors in the same industry, response to public/right issues is also kept in view as these are reflective of the corporate image in the eyes of the investors community. 2. Term Loan / Deferred Payment Guarantees i. In case of term loans and deferred payment guarantees, the project report is obtained from the customer, which may have been compiled either in house
56

IBS

or by a firm or consultants/ merchant bankers. The technical feasibility and economic viability is vetted by the Bank and wherever it is felt necessary. ii. Promoters contribution of at least 20% in the total equity is what bank normally expects. But the promoter contribution may vary largely in mega projects. Therefore, there cannot be a definitive benchmark. The sanctioning authority will have the necessary discretion to permit deviations.

10.2. Financial Ratios used for Credit Risk Assessment

Under the CRA system, financial risks in a proposal are sought to be captured through some relevant ratios. Different ratios are used for assessing risks for extending working capital finance and term loans under CRA system. Also, the ratios used for assessing risk for financing NBFCs are different. Working capital finance (all segments except NBFCs) The following are the ratios used for working capital finance: 1. Current ratio: it is calculated by dividing current assets by current liabilities. It helps to measure liquidity and financial strength. 2. Care should be taken in interpreting this ratio as: a. It is applied at a single point in time, implying a liquidation approach, rather than a Judgment on the going concern, for it does not explicitly take into account the revolving nature of current assets and current liabilities. b. The seasonal character of the business resulting in fluctuating current ratio is a disturbing factor. 3. Liquidity could be severely affected if current liabilities exceed current assets. 4. The higher the ratio the better the liquidity position. 2. TOL/TNW: total outside liabilities divided by total net worth. i. It indicates size of stake, stability and degree of solvency. ii. Indicated how high the stake of the creditors is. iii. Indicated what proportion of the companys finance is represented by the tangible net worth iv. The lower the ratio the greater the solvency. v. The ratio is usually higher in case of SMES. Still anything over 3 or 4 should be viewed with concern. vi. The ratio should be studied at the peak level of operations. 3. PBDIT/interest (times): this is called interest coverage ratio. In the current context, the servicing capability of loan is very crucial. This ratio, which indicates the number of times the gross earnings cover the interest payable is an indicator of the measure of comfort that profitability provides. i. Higher ratio indicates comfortable debt servicing capability from the cash accrual of the company.
57

IBS

ii. A ratio of more than 3 is considered comfortable, where as a ratio of 2 and below is considered risky. 4. ROCE or ROA (%): profit before depreciation, interest and tax/ total capital employed multiplied by 100. i. High ratio indicates that the business is run on profitable lines. ii. It is a relationship between the profits made during the year and the finance employed to make profits i.e. it shows the earning power of the business. iii. It is a measure of the managements skill in profitably employing the funds in the Company. iv. It should not only compare favorably with the rate of interest on loanable funds in the market but also compensable for the risk involved in running the business. 5. Operating profits/Net sales (%): indicates operating efficiency. It should be comparable with similar industries. Trend for the company over a period should be encouraging. 6. Inventory / net sales + receivables / gross sales: expressed in days, this ratio captures the turnaround period f major items of the current asset i. Higher the figure, the slower is the turnaround of current asset and in general higher the risk. ii. This ratio will vary across industries. iii. For assessment of risk, a shorter working capital cycle can be regarded less risky. iv. Specific industry parameters should also be kept in mind while assessing the risk under this ratio. v. In general, it is expected that the working capital should be turned over at least twice.

For NBFCs, the ratios are: 1. Current ratio 2. TOL/NOF: total outside liabilities/ net owned funds ratio represents the extent to which the company is leveraged. Net owned RBI uses funds as a reference for registration and acceptance of deposits from public. NOF represents total net worth, less investment in excess of 10% of owned funds as stipulated by RBI. i. Higher ratio indicates increased dependence on borrowings and other liabilities. ii. A ratio of 3 and below is considered very healthy, while a ratio above 7 is considered risky. 3. PBDT/ Total Assets: this ratio is a measure of gross profitability or gross return from the activity of the company. In the CPA models, for manufacturing company, the numerator is PBDIT but in NBFCs interest payment is a major component. So, it is more relevant to take PBDT for NBFCs.
58

IBS

i. A percentage of more than 10 is considered healthy whereas below 2 is considered risky.

4. PAT/ Total Income: total income= income minus other than non-recurring income. This ratio represents the profitability of operations. Total income from operations may be considered as equal to total sales of a manufacturing company. i. a percentage of 11% and above is considered healthy and below 3 is considered risky. 5. (Total income other non-recurring income)/interest expenses: the interest coverage ratio in respect of NBFCs is calculated by dividing total income less nonrecurring income with interest expenses. This ratio measures the cushion available for meeting interest liability. i. A ratio of 3 or more is considered healthy while less than 1 is considered highly risky. 6. Overdue/ demand raised ratio: this ratio measures collection efficiency. The term over dues represents claim amounts which have not been received till due date. i. A ratio of 1 and below is considered very healthy and more than 5 is considered very risky. 7. NPA/ total working assets ratio: NPAs in this context refer to lease rentals and hire purchase installments overdue for more than 12 months. Following are some examples of Balance Sheet Analysis and calculation of ratios which are important for analyzing the financial trend of the business.

10.3 Illustrations
(Name of the company and promoters has been masked due to confidentiality)

10.3.1 Illustration 1-KPG LTD

Background of the borrower KPG Ltd a proprietorship concern of S.The firm was established in 1984 .The turnover of the firm has improved from 290 lakhs in 2008-09 from 100 lakhs for the year ended 31-03-2008.Presently firm is having a CC limit of 50 lakhs. The firm has taken up the sale of mild steel ingots during last year which is used for making TMT Bars. The firm has estimated a sales turnover of 605 lakhs for the year 2009-10 and has sought renewal of the limit at the existing level

59

IBS

Present proposal
Table 7:-Nature of proposal: Renewal of credit limit as under Sl No 1. Nature of Facility Working capital Fund based 1.Cash credit Sub total Grand Total Existing Limits Proposed Limits

2.

50 50 50

50 50 50

Banking Arrangements
Type of Banking-Sole Banking Other Details Method of Lending-Projected Turnover Priority/Non Priority-Non Priority Whether post sanction reporting to RBI: No Applicable

Table 8 : Security Sl no Security Name Owner Total value Share of Basis Security avlue available to Bank 51.57 Balance sheet 83.98 Valuation Report Date of valuation

First charge on Company inventory cum book debts/current assets Residential Flat at S Yeshwanthapur,10/01 Brigade group, near Iskon

51.57

31-032009 03-122008

83.98

The security cover for the credit limit extended by the Bank works out to be 124% which is considered satisfactory.
60

IBS

Compliance with group credit policy guidelines

Parameters Entry Level per borrower exposure for FB facilities(Corporate) Maximum per borrower/Exposure Maximum group exposure Exposure to industry/sector Current Ratio Current Ratio for export oriented units Debt Equity Ratio DSCR TOL/TNW Promoters Contribution to project cost Minimum credit rating prescribed if any Whether industry falls under category where selective approach is to be adopted Summary of Financials a. Table 9:-Financials PARTICULARS 31-03-2007 AUDITED Net Sales (including 188.06 operating income) % rise/fall in net sales compared to previous year Operating Profit before 13.17 interest and depreciation Operating Profit before 7 interest and depreciation as % of net sales
61

Banks norm (Rs in Cr) 100

Actual (Rs in Cr) 75

15 1461 Electronics 10% of NBC 1.25:1 1.10:1 2:1 1.5:1 4:1 25% Minimum CB 6 No

50 50 0.14% of NBC 1.5:1 2.5:1 40% CB2

31-03-2008 AUDITED 104.93 -44.2

31-03-2009 AUDITED 292.25 178.52

31-03-2010 AUDITED 600 105.3

11.76

12

49.41

11.21

4.11

8.23

IBS

Operating Profit after interest and depreciation Operating Profit after interest and depreciation as % of net sales Net Profit after tax PAT as a % of net sales Cash Accruals Dividends (%) Dividend Retained Profit Paid up equity capital Tangible net worth TOL/TNW Debt Equity Ratio Net working capital Current Ratio

2.91

3.55

2.7

38.41

1.55

3.38

0.92

6.4

2.91 1.55 4.94 2.91 12.39 7.31 4.89 49.15 2.64

3.55 3.72 5.83 3.90 14.63 4.41 3.43 42.37 3.96

2.7 1.12 5.03 3.28 11.58 8.43 3.79 37.02 1.69

38.41 6.73 41.91 40.41 32.07 3.43 1.25 55.47 1.79

Financial Observations A. Sales Sales turnover The Sales turnover of the company is more than 290 lakhs as against Rs 100 lakhs of previous year. The borrower has stated that the turnover was low on account of the increase in raw material prices. For the current year the estimated sales is around 600 lakhs envisages a growth of 471%.In this year firm has taken up trading in mild steel ingots .It has done sales of 341 lakhs in the first 8 months ended November 2009 which on annualized amount to Rs 511 lakhs. Hence the firm is confident of achieving estimated sales. B. Profitability The Net profit earned by the firm is Rs 3.2 lakhs as against Rs 3.9 lakhs of previous year. The net profits earned as a % to the total sales achieved stood at 1.12% as against 3.72% of previous year. The cash accruals of the firm for the year 2008-09 stood at 5 lakhs.

62

IBS

C. Net Owned Funds vis--vis Total Funds Deployed: The net owned funds position of the Company is summarized as under:

Particular

Tangible Net Worth (+) Unsec loans promoters/relatives (-) Utlzn of funds for purpose not related to busn Net Owned Funds(NOF) Total funds Deployed(TFD) NOF as % of TFD

31-03-2008 Audited 14.63 from 49.29 63.92 79.1 80.81

31-03-2009 Audited 11.58 43.9 55.48 109.22 50.8

The NOF to TFD stood at 50.8% as against 80% of the previous year indicating satisfactory net owned funds position.

D. Long Term Funds and its deployment The sources of long term funds and its deployment is furnished here below: Table No 10 : Long term funds Particular 31-03-2008 Audited 14.63 from 49.29 0.88 64.8 20.22 20.22 2.21 42.37 64.8 31-03-2009 Audited 11.58 43.9 55.48 20.22 18.46 37.02 55.48

Tangible Net Worth (+) Unsec loans promoters/relatives Term Liabilities Total Sources Fixed Assets (Gross Block) Fixed Assets (Net Block) including Capital WIP Non Current Assets Net Working Capital Total Deployment

63

IBS

E. Fund Flow Statement: The position of movement of funds is furnished here below: Table No 11: Fund Flow Particular 31-03-2008 Audited Long Term sources 3.66 Long Term uses 10.44 Long Term surplus/deficit -6.78 Short Term Borrowings 22.42 other than bank borrowings Short term uses 7.65 Short term surplus/deficit 6.78 Net Surplus/deficit 7.99 Increase/Decrease in bank -7.99 borrowings F. Debt Equity Position The firm doesnt have any loans so there are no long term debt obligations. G. Liquidity Position Table No 12 : Liquidity Position Particulars 31-03-2007 Audited A. Total Current Assets 79.09 (excluding export receivables) B. Minimum required 15.82 NWC (20% of A) C. Actual NWC 49.15 D. Surplus (+)/Deficit (-) 33.33 in NWC E. Current Ratio 2.64 31-03-2009 Audited 3.97 9.32 -5.35 39.44 34.09 5.35 -

31-03-2008 Audited 56.67

31-03-2009 Audited 90.76

11.33 42.37 31.04 3.96

18.15 37.02 18.87 1.69

The Current Ratio of the firm as on 31-03-2009 is 1.69:1 as against 3.98:1 of the previous year and is found to be satisfactory

H. Contingent Liabilities : NIL

64

IBS

I. Audit Qualification:

No adverse remarks have been made in the auditors report attached to the balance sheet as on 31-03-2009

J. Comments on Overall Performance/financial position : Overall financial position appears to be satisfactory and turnover needs further improvement Justification of the limits proposed

10.3.1.1 Assessment of FB WC requirements:

Net sales for the current year projected by the year : Rs 600 (Rs in lakhs) Net Sales Projection accepted by us: Rs 766 (Rs in lakhs) Considering the demand for mild steel company has taken up trading in mild steel ingots.The firm had a sales turnover of 292 lakhs and has a estimated turnover of 600 lakhs for this year.The firm has furnished sales achieved upto June of the current year and as per that annualized sales amounts to 511 lakhs .Hence estimated sales is considered achievable Table 13 : Holding Levels Holding Levels 31-03-2007 Audited Stock un trade 42.57 (months cost of 3.11 sale) Receivables20.8 Domestic (months sales) 1.33 ReceivablesExports (months sales) Other Current 15.72 Assets Total Current 79.09 31-03-2008 Audited 36.13 5.27 5.49 0.63 15.05 56.67
65

31-03-2009 Audited 34.09 1.51 17.49 0.72 39.18 90.76

31-03-2010 Audited 50 1.11 50 1.00 25.47 125.47

IBS

Assets Creditors (months purchases) Other Current Liabilities Total CL other than bank borrowings

21.37 1.55 8.57 21.95

13.61 2.2 0.69 14.3

53.17 2.38 0.57 53.74

20 0.44 50 20

Table 14 : PTM (Projected Turnover Method) Assessment 31-03-2009 Estimated 1.Projected Turnover for 600 the year 2.GWC (25% of Projected 150 Turnover) 3.Borrowers margin-higher 55.47 of 20% of GWC or proj NWC 4.Permissable bank 94.53 Finance (2-3)

Table 15 : Rating Summary Information Internal Rating Latest Previous l Credit Based Financials of 2009 2008 on Specific grade T4 T5 model Single scale rating CB5 CB6

10.3.1.2 Management
The entire management is taken by proprietor and his son.

10.3.1.3 Industry Analysis

The firm was dealing in alloy steel which is a costly item and firm was not able to pass on the variation in the price to the ultimate buyer. Considering the demand for mild steel
66

IBS

ingots/billets the raw material for Rolling Mills which manufacture TMT bars which is used in construction activity the firm has taken trading in mild steel ingots/billets

SELLING AND MARKETING ARRANGEMENT: The firm has informed that they mainly supply their products to Rolling Mills and the demand for the product is so much that the goods purchased by the firm is directly dispatched to the ultimate seller.

Table 16 : RATING INFORMATION/KEY RISK ISSUES:

Total Level Risk Entity Grade Name OVERALL COMPANY T4 SCORE Score Type: Company INDUSTRY RISK BUSINESS RISK FINANCIAL RISK MANAGEMENT RISK IV V IV IV

Score 5.68

Max Score 10

6 5.48 5.61 5.9

10 10 10 10

Definition of Rating Grades-Trader Model Overall Weighted Risk Score Range 5.5-6.5 Risk Grade T4

10.3.1.4 Risk Analysis Risk Analysis

Risk Factor
Industry Risk Marketing Risk Employee Risk

Mitigation
The demand for mild steel is very high and it is used in manufacture of TMT bars Since the demand is very high the product is dispatched directly to the seller The company has almost a zero attrition rate with a highly experienced and efficient
67

IBS

employee base. Construction Risk Company has proposed to hire reputed engineering consultants and contractors for the execution of the project. More over it is also proposed to have a well chosen team of experienced persons and in house task force to co-ordinate the implementation of the project Availability and Transportation of Raw Company has made necessary Materials arrangements with back ups Management risk The management is very efficient with the backing of the family.

Funding Risk

Environmental risk Catastrophic Risk Competition Risk

Since there are no debts till date there will no issue in repaying the funds with the projected sales turnover The company has sought all the necessary related . All the necessary insurances are done. There is a wide gap in the demand and supply of the item now being traded by the firm .With the experience in the existing line of activity for more than 20 years, the firm is capable of withstanding the competition.

10.3.1.5 Ratio Analysis

a. Net Profit Ratio

This ratio shows the relationship between net profit and net sales which indicates efficiency of management. Year 2007 2008 2009 2010 PAT 2.91 3.9 3.28 40.41 Sales 188.06 104.93 292.25 600 NP Ratio % 1.5 3.71 1.12 6.7

68

IBS

b. Current Ratio

It measures the relationship between current asset and current liability. The ratio is an indicator of the firms commitment to meet its short term liabilities. Year 2007 2008 2009 2010 Current Liabilities Current Assets (CA) (CL) 29.94 79.09 14.3 56.67 53.74 90.76 70 125.47 Current Ratio=CA/CL 2.64 3.96 1.68 1.79

The current ratio as per bank norms is 1.25 and the current ratio for this company is well above the prescribed norms. This shows company has sufficient funds to pay its creditors and take care of all the current liabilities. The ratio is increasing year by year, it shows that the company has high capable of paying its creditors. But on the negative side there is a less efficient use of funds.
c. Debtor Turnover Ratio (DTR)

Debtors turnover ratio or accounts receivables turnover ratio indicates the velocity of debt collection. In simple words it indicates the number of times average debtors (receivables) are turned over during the year.

Year 2007 2008 2009 2010

Sales 188.06 104.93 292.25 600

Receivables/Average trade debtors 20.8 5.49 17.49 50

DTR 9.04 19.1 16.7 12

69

IBS

10.3.2 Illustration 2-SSS LTD

Background of the borrower The company was incorporated in 1998.The company is engaged in manufacture of auto components such as plastic rubber components, fly wheel magneto assembly etc. The Promoters R has vast experience in the industry. The company has set up plants at Aurangabad, Pune, Noida, and Patnagar. The product profile includes injection moulded components, engine valves, mirror assembly, air filter assembly, switches etc The products are used by 2/3/4 wheeler .All the major automobile companies are part of their client list. During the last year company has secured MEGA projects from government of Maharashtra. The company has acquired two running steel forging companies in Italy and Poland. They are dealing with our bank from January 2004 and is enjoying working capital credit limits and term loans under multiple banking arrangement basis.

Present proposal
Table 17 : Nature of proposal :Renewal/Extension of credit limit as under

Sl No

Nature Facility

of Existing Limits Banking system Corporation Banks share

Proposed Limits Banking System Corporation Banks share

1.

Working capital Fund based 1.Cash credit Sub total

43 43

22 22 59.75

59.75

3.5 3.5

Non Fund Based 1.BG 12 2.Inland/Import 96.5 LC-cum-Buyers Credit

12 80

12 96.5

12 80

70

IBS

Grand total

108.5

92

108.5

92

Banking Arrangements
Table 18 : Type of Banking-Multiple The following Banks financed for the project. Name of Bank Existing Limit % share 51.16 18.6 18.6 0 11.64 100 to availed Proposed limit 3.5 % share 5.86

Our share 22 Other Banks: a) Citibank 8 b) IDBI Bank Ltd 8 c) PNB d) HDFC Bank 5 Total 43 Non Fund Based Limits are proposed arrangement Table 19 :Non fund based limits Sl No 1. 2. 3. 4. Bank Corporation Bank Citibank NA HDFC Bank Ltd Saraswat Co-op Bank Ltd Total Other Details

5.5 9.21 17.35 29.04 33.4 55.89 0 0 59.75 100 under multiple banking

Letter of Credit Limit Share% 80 82.9 7.5 8 1 96.5 7.77 8.29 1.04 100

Bankers Gurantee Limit 12 12

Share% 100 100

1. Method of lending-Permissible bank finance 2. Priority/Non Priority-Non Priority 3. Whether post sanction reporting to RBI applicable-Yes 4. Borrower Gradation: Previous: CB2 Present: CB3 5. Sector-Private 6. Since dealing with the bank: January 2004

71

IBS

Table 20 : Security Sl no Security Name Owner Total value Share of Basis Date of Security valuation value available to Bank 29.02 Projections 31-032010

For working Company Capital First charge on inventory cum book debts/current assets

134.37

The security cover for the credit limit extended by the Bank works out to be 101% which is considered satisfactory.

Compliance with group credit policy guidelines

Parameters Entry Level per borrower exposure for FB facilities(Corporate) Maximum per borrower/Exposure Maximum group exposure Exposure to industry/sector Whether industry falls under category where selective approach is to be adopted Banks norm (Rs in Cr) 100 Actual (Rs in Cr) 75

547 1461 Auto Ancillary 10% of NBC No

141.21 214.71 1.15% of NBC

Table 21 : Key Indicators Particulars 31.03.07 (Audited) Net Sales/Operating 864.28 Income % of growth 35.98 31.03.08 (Audited) 631.85 72

31.03.09 (Projn.) 683.04 8.35

IBS

Operating Profit Operating Sales/Net Sales% EBIDTA Net Profit Net Profit/Net Sales% Cash Accruals Dividend % Share Capital Tangible Net Worth Net Owned Funds Debt Equity Ratio Current Ratio NOF/TFD(%)

57.10 6.62 113.93 46.77 5.42 9.14 200 2.8 152.27 33.26 1.62 0.99 26.45

55.04 8.73 84.17 45.51 7.22 17.46 200 2.93 146.53 21.34 1.50 0.72 35.63

`22.22 3.25 114.51 36.24 5.31 34.37 200 2.93 182.11 76.27 1.53 1.06 28.48

Summary of Financials Table 22 : Financials PARTICULARS 31-032006 AUDITED Sales 635.39 31-032007 AUDITED 864.28 31-032008 AUDITED 631.85 31-032009 AUDITED 683.04 31-032010 AUDITED 751.35

Net (including operating income) % rise/fall in net sales compared to previous year Raw materials consumed Raw materials consumed as a % of COP Cost of Sales Cost of sales as a % of net sales Operating Profit (after interest) Operating Profit Margin(%) Other Income

35.98

-26.89

8.35

10

430.94 83.74

601.8 82.77

407.86 86.35

451.72 81.31

497.32 81.91

516.51 81.45 49.92 7.87 4.55

725.67 84.16 57.10 6.62 10.09

73

472.70 74.98 55.04 8.73 13.82

555.37 81.31 22.22 3.25 32.70

606.89 80.77 35.84 4.77 57.72

IBS

Profit Before Tax PAT Net Profit Margin(%) Dividends(%) Dividend Retained Profit Paid up equity capital Tangible net worth TOL/TNW Debt Equity Ratio DSCR Net working capital Current Ratio Financial Observations Sales

54.41 35.01 5.52 100 0.33 34.64 0.33 106.29 2.47 0.98 9.5 45.72 1.29

67.19 46.77 5.42 200 0.66 46.02 0.33 152.27 3.32 1.62 7.92 -1.98 0.99

68.86 45.51 7.22 0.66 44.85 0.33 146.53 3.19 1.5 2.66 -69.52 0.72

54.92 36.24 5.31 0.66 35.58 0.33 182.11 2.42 1.53 3.77 9.27 1.06

93.56 61.76 8.22 0.66 61.10 0.33 243.21 1.56 1.00 5.01 36.22 1.26

The Sales turnover of the company is 696.45 Crore. The borrower has stated that the turnover was low on account of hiving off the polymer business. However with the other products there is higher turnover expected this year. In addition to this they have added a new product Crank Pin which recorded a turnover of 8 Cr during the year. Exports have touched a new high of 34.5 Cr . Hence the firm is confident of achieving estimated sales. Profitability The company has reported an operating profit of Rs 55 crore with a net profit of 45 crore. It has changed its method of charging depreciation from WDV to SLM. The depreciation has got reduced and profit has increased by Rs 37 crore Table 23 : Net Owned Funds vis--vis Total Funds Deployed: The net owned funds position of the Company is summarized as under: Particular Net Worth (-) Intangible Net worth 31-03-2007 Audited 152.27 74

31-03-2008 Audited 146.53 -

IBS

Tangible Net Worth (+) Unsec loans from promoters/relatives (-) Utlzn of funds for purpose not related to busn Net Owned Funds(NOF) Total funds Deployed(TFD) NOF as % of TFD

152.27 1.05 120.06 33.26 540.31 6.16

146.53 0.47 125.66 21.34 508.41 4.2

Table 24 : Long Term Funds and its deployment The sources of long term funds and its deployment is furnished here below:

Particular

Tangible Net Worth (+) Unsec loans promoters/relatives Term Liabilities Total Sources Fixed Assets (Gross Block) Fixed Assets (Net Block) including Capital WIP Non Current Assets Net Working Capital Total Deployment

31-03-2008 Audited 152.27 from 1.09 248.15 401.47 329.79 260.75 142.70 -1.98 401.47

31-03-2009 Audited 146.53 0.47 239.24 386.24 358.92 300.92 154.84 -69.52 386.24

Table 25 : Fund Flow Statement: The position of movement of funds is furnished here below: Particular 31-03-2007 Audited Long Term sources 187.95 Long Term uses 235.65 Long Term surplus/deficit -47.70 Short Term Borrowings 39.94 other than bank borrowings Short term uses 52.63 Short term surplus/deficit -12.69 Net Surplus/deficit -60.39 Increase/Decrease in bank 60.39 borrowings
75

31-03-2008 Audited 55.81 123.35 -67.54 100.22 100.22 32.68 -32.68

IBS

Debt Equity Position

The Debt equity ratio of the company stood at 1.50:1 which indicates comfortable solvency Table 26 : Liquidity Position Particulars F. 31-03-2006 Audited Total Current Assets 204.29 (excluding export receivables) Minimum required 40.86 NWC (20% of A) Actual NWC 45.72 Surplus (+)/Deficit (-) 4.86 in NWC Current Ratio 1.29 31-03-2007 Audited 256.92 31-03-2008 Audited 178.31

G. H. I. J.

51.38 -1.98 -53.36 0.99

35.66 -69.52 -105.18 0.72

Arising out of deficit in long term funds during the period covered the liquidity of the company was under strain. Table 27 : Contingent Liabilities Particulars Arrears of cumulative dividends Guarantees issued Guarantees issued to group of companies Gratuity liability not provided for Disputed Tax liabilities All other contingent liabilities Total Audit Qualification: 31-03-2007 27.19 27.78 2.3 0.12 57.39 31-03-2008 41.64 14.62 2.63 58.89

76

IBS

No adverse remarks have been made in the auditors report attached to the balance sheet as on 31-03-2008

Comments on Overall Performance/financial position : Overall financial position appears to be satisfactory . Justification for the limits proposed:

10.3.2.1 Assessment of FB WC requirement:

Net sales for the current year projected by the borrower: Rs 683.04 (in crore) Net Sales Projection by us: Rs 683.04 (in crore) The company has projected Gross sales of Rs 757.85 Cr with Net sales of Rs 683.04 Cr. The projections indicate a nominal growth of 8% over the previous year. During the last 11 months the company has achieved gross sales of Rs 693.89 Cr. For the next year the company has projected a sales turnover of Rs 751.34 Crore indicating moderate growth of 10% taking into account company has been able to achieve growth despite adverse conditions Table 28 :Holding Levels Holding Levels Stock un trade (months cost of sale) ReceivablesDomestic (months sales) ReceivablesExports (months sales) Other Current Assets Total Current Assets Creditors (months purchases) Other Current 31-03-2006 Audited 42.57 3.11 116.35 1.94 47.48 204.29 85.57 2.38 25 31-03-2007 Audited 36.13 5.27 141.11 1.72 67.06 256.92 103.09 2.06 47.42
77

31-03-2008 Audited 34.09 1.51 71.78 1.23 56.97 178.31 103.48 3.04 68.64

31-03-2009 Audited 50 1.11 63.35 1.06 52.65 170.8 91.32 2.43 23.46

31-032010 Audited

70.02 1.05 53.56 173.53 52.12 1.26 25.44

IBS

Liabilities Total CL other 110.57 than bank borrowings

150.51

172.12

114.78

77.56

The major raw materials include metal sheets, rounds, bars, electronic components, Plastic materials, cables, wiring harness, fasteners, lamps etc which are procured mainly locally and the company has association with suppliers. The company has a projected level of 0.75 months for the current year and 0.51 months for the next year. The stock in process and finished goods are also projected at the last year level while receivables are estimated on the basis of average collection period of 30-35 days. With regard to creditors the company has been able to negotiate with the suppliers for a longer credit period for which it is furnishing LC with a tenor of 90 days. the other current assets included cash and cash balances, advance tax and other prepaid expenses. The other current liabilities included a sum of Rs 43 crore. Table 29 :Permissible Bank Finance Method Assessment 31-032006 Audited Capital 93.72 40.86 31-032007 Audited 106.41 51.38 31-032008 Audited 6.19 35.66 31-032009 Audited 56.02 34.16 31-032010 Audited 95.97 34.71

A. Working Gap B. Min stipulated NWC(20% of A excl export receivables) C. Estimated Projected Net Working Capital D.PBF=(A-B) or (A-C) whichever is lower E.Net working capital to Total Current Assets (%) F.Bank Finance to Total Current Assets (%) G. Sundry Creditors to Total Current Assets (%) H. Other Current Liabilities to Total

45.72

-1.98

-69.52

9.27

36.22

48

55.03

-29.47

21.86

59.75

22.38

-0.77

-38.99

5.43

20.87

23.5

42.19

42.46

27.37

34.43

41.89

40.13

58.03

53.47

30.04

12.24

18.46

38.49

13.74

14.66

78

IBS

Current Assets (%) Based on the above parameters the PBF for the year 2009-10 works out to be Rs 59.75 Cr and corporation bank share is 3.5 Crore.

10.3.2.2 Assessment of Letter of Credit requirements:

The LC requirement is assessed as under: Table 30 : Usance L/Cs SL No 1 2 3 4 5 6 Particulars 31-03-2009 Estimated Annual Raw Material Consumption 518.71 Annual Raw Material Purchases 512.15 Raw Material to be procured under usance 256.08 (50%) Lead Time for shipment (days) 15 Usance Period (days) 90 L/C requirement (3)*(4+5)/365 73.67

Based on the business projections for the year 2009-10 the LC requirement for Raw Materials works out to be 73 Crore. The earlier sanctioned limits has been well utilized and the company has been prompt in payment of bills under LCs.

Assessment of Bankers Guarantee: The company is enjoying BG of 16 Crore. The limit is utilized for furnishing guarantees to the MEDA.The BG is satisfactorily utlised.Based on the business plam and requirements the company has requested for renewal of limit at Rs 12 Cr.It should be accounted as it is. Table 31 : Rating Summary Information Internal Rating Latest Previous Credit Based on Financial Specific of grade 2008 LCM 3 2006 LCM 2 model Single scale rating CB 3 CB 2

Table 32: Rate of Interest Facility Name Existing Rate Applicable Rate
79

Proposed Rate

IBS

Cash Credit

12.5% p.a.

13% p.a.

12.5% p.a.

10.3.3. Illustration 3-ABC Limited

Background of the borrower ABC limited was incorporated on 29th May 2007and is promoted by the XYZ Group with the main object of setting up facilities for manufacture of different consumer electronic products and home appliances. XYZ group has a market share of 25% in consumer electronics and household appliances. In line with the strategies of other multinational companies the group proposes to focus on distribution, brand building, new product development and OEM segments which have better margins. Strengths Proximity to Northern Indian markets which accounts for 25% of Total Indian Markets. Exemption from excise duties. All facilities under one roof thus saving administrative costs. Ultra modern facility Personal Guarantee of promoters and corporate guarantee of XYZ Weakness Larger working capital cycles, hence high working capital is required. As the company is planning to market its product through the group company viz XYZ Industries Ltd the success of the project is dependent on the performance of the XYZ Industries Ltd and its market penetration level.

80

IBS

Table 33 : Present proposal The credit sanctioned by the bank as under: Sl No Nature Facility of Existing Limits Banking system 1. Working capital Fund based 1.Cash credit cum WCDL Sub total Term Loan 1.Term Loan Sanction Sub Total Grand total(1+2) Corporation Banks share Proposed Limits Banking System Corporation Banks share

125 125

25 25 50 50 75

2.

225 225 350

3.

Banking Arrangements
Type of Banking-Multiple The following Banks financed for the project. Table 34 :Multiple Banking Arrangement Name of Bank Loan Amount(Cr) IDBI 75 Corporation Bank 25 Bank of Maharashtra/Bank of 25 Baroda Out of the 200 crore given by IDBI bank 100 crore-term loan ,75 crore-fund based working capital and 25 crore-non fund based limits.

Other Details 1. Method of lending-Permissible bank finance 2. Priority/Non Priority-Non Priority 3. Whether post sanction reporting to RBI applicable-Yes
81

IBS

Table 35 : SECURITY Sl no Security Name Owner Total value Share of Basis Date of Security valuation avlue available to Bank 53.06 Projections 2007/08

Paripassu Company first charge on inventory cum book debts/current assets Paripassu Company first charge on P&M and other moveable assets Paripassu Company first charge on factory land and building

318.34

216.5

58.1

As per project cost

38.5

8.55

As per project cost

Total

618.34

119.71 66.65

Total for coverage(excluding receivables)

security stocks and 300

The security covers for the credit limit extended by the Bank works out to be 88.87% which is considered satisfactory.

Shareholding Pattern
Paid up capital-1 crore Table 36 : Shareholding Pattern

82

IBS

Shareholder category BBB Inc CCC Ltd XYZ Industries Ltd XYZ Appliances Ltd Total

% Holding 49 26 19 6 100%

Compliance with group credit policy guidelines

Parameters Entry Level per borrower exposure for FB facilities(Corporate) Maximum per borrower/Exposure Maximum group exposure Exposure to industry/sector Current Ratio Current Ratio for export oriented units Debt Equity Ratio DSCR TOL/TNW Promoters Contribution to project cost Minimum credit rating prescribed if any Whether industry falls under category where selective approach is to be adopted Banks norm (Rs in Cr) 100 Actual (Rs in Cr) 75

547 1461 Electronics 10% of NBC 1.25:1 1.10:1 2:1 1.5:1 4:1 25% Minimum CB 6 No

75 231 0.14% of NBC 1.5:1 2.5:1 40% CB2

Summary of Financials a. Financials As the applicant company was incorporated on 29-05-2007 and as such it doesnt have any past financials. The authorized capital is 1 crore and it proposes to increase the capital to 101 crore.

JUSTIFICATION FOR THE LIMITS PROPOSED

83

IBS

10.3.3.1 Assessment of the Term Loan:

1. Technical Feasibility The company is supported by technical competence of XYZ group which has several tie-ups with major manufacturers like tyz for Consumer electronics and Panao for white goods. The XYZ Group has its own R&D centers in China and Japan for development of new products. So the applicant has not entered into any contract with the third party and will be using in-house expertise. The Plant and Machinery are secured by warranty of 12 months from the date of trial offered by High tech group and supported by XYZ Group. The group has carried out jobs in Oman, Italy and Mexico for the XYZ group and services have been found to be satisfactory. Hi-tech group has obtained back to back performance guarantees/commitment from most of the imported equipments/components from respective manufacturers. The company also proposes to enter into a Buy-back and Technical Support Agreement separately with XYZ Industries Ltd (VIL) to the satisfaction given by the Hi-tech group of lenders.VIL agrees to extend full technical support to the company for setting up, running and maintenance of the facilities based on the warranty/guarantee given by the Hi-tech group. VIL also confirms to ensure that the company attains the minimum capacity utilization of 40% for the first year, 70% in the second, 80% in the third,85% in the fourth and 90% thereafter.

2. Financial viability a. Project Cost Table 37 : Project Cost Name of each cost Estimated Cost component Land and Site 3.4 Development Building 35 Plant & Machinery 233.2 Utitlities & Misc. 17.3 Fixed assets Interest during 9 consortium Pre-Operative 2 Expenses Margin for working 75 capital

Cost incurred so far 3.5 11.78 34.42 0 0 0 0

Cost to be incurred in future 0 23.22 198.78 17.3 9 2 75

84

IBS

Total

375 b. Means of finance

49.7

325.3

Debt: Rs 225 (Rs in Cr) Equity: Rs150 (Rs in Cr) Table 38 :Means of Finance Source Term Loan Equity Share premium Amount 225 101 49 375 % to total 60 26.93 13.07 100

60(% of total) 40(% of total)

Amount tied Up till date 100 49.7 0 149.7

Amount yet to be tied up 125 51.3 49 225.3

Share premium will be contributed by promoter companies-Tusker Over Seas Inc (49%), Kitchen Appliances India Ltd (26%), XYZ Industries Ltd (19%) and XYZ Appliances Ltd (6%). The company has indicated 60% of term loan requirements will be in the form of Foreign Currency Loans. The project cost so far incurred by the company is from equity brought in by the promoters 3.Project Implementation Schedule : Table 39 : Project Implementation Schedule Activity Name Target Acquisition of Land Already acquired Development of Land Completed Construction of building August/September 2007 Plant and Machinery October 2007 Arrangement of Power October 2007 Arrangement of water Arranged Erection of Equipments September 2007 Trial Run October 2007 Commercial Production December 2007 The Company plans to complete TV line first followed by Refrigerator, washing machine and AC.The Company is confident of completing the project as per schedule. Table 40 : Business Projections and DSCR

Salient parameters of projected profitability statement:

Particulars Capacity 2008 40 2009 70 2010 80 2011 85
85

2012 90

2013 90

2014 90

IBS

Utilization Net Sales PAT Cash Profit Interest on Term Loans Total(A) Installments due-Existing term loans Installment dueProposed Term Loans Interest on term loans Total(B) DSCR(A/B) Average DSCR

765.72 33.78 49.16 18.56 67.72 -

1372.22 80.68 96.11 25.27 121.38 -

1583.12 94.14 109.76 20.67 130.43 -

1683.56 100.52 116.55 16.08 132.63 -

1787.01 107.08 123.65 11.48 135.13 -

1803.89 94.79 111.91 6.89 118.8 -

1807.24 90.47 108.14 2.3 110.44 -

37.5

37.5

37.5

37.5

37.5

37.5

18.56 18.56 3.65 2.5

25.27 62.77 1.93 -

20.67 58.17 2.24 -

16.08 53.58 2.48 -

11.48 48.98 2.76 -

6.89 44.39 2.68 -

2.3 39.8 2.78 -

The profit after tax to net sales for the company as whole is projected 4.41% at the first year and it is increasing and then there is decreasing observed which might be due to the expansion plans.. Detailed Balance Sheet and Cash Flow Statement for the projects on standalone basis and company as whole is furnished by way of Annexure. The business projection and profitability working furnished by the company may be Considered reasonable and achievable, as the same is based on the market study, capacity being created and the demand-supply gap.

Table 41 : Sensitivity analysis of DSCR Particulars 3% reduction in sales price 5% reduction in sales price 3% reduction in price of raw materials 5% reduction in price of raw materials MDSCR=Minimum DSCR ADSCR=Average DSCR If the projects sale decreased by 10% in that the average DSCR will be 1.05 which is found to be satisfactory. If the raw materials price decreased 5% by the DSCR is found
86

MDSCR 1.34 0.95 1.44 1.11

ADSCR 1.63 1.05 1.76 1.27

IBS

to be 1.27. Even though the standard ratio is 1.5 the company is able to pay its debt with the ratio 1. Even adverse situation also the company can pay its debts.

Justification of the limits proposed

10.3.3.2. Assessment of FB WC requirements:

Net sales for the current year projected by the year: Rs 766 (Rs in crore) Net Sales Projection accepted by us: Rs 766 (Rs in crore) As indicated the company has projected sales turnover of Rs 766 crore for first year. It is based on extensive market study undertaken. It is reported that Northern India accounts for nearly 30% of the Indian Market for consumer durables and its location will facilitate proximity to market. The location has other advantages like savings in transportation cost, tax soaps. Table 42 :Permissable Bank Finance Method Particulars Amount(Rs in crore) 1.Total Current Assets* 344 2.Current Liabilities *(other 95 than bank borrowings) 3.Working Capital Gap 249 (1-2) 4.Projected Net Working 124 Capital 5.Permissable bank 125 Finance (3-4) Current Assets * 1.Imported Raw Materials-45.35 crore 2.Indigenous Raw Materials98.27 Cr 3.Stock in Process-19.54Cr 4.Finished Goods-29 Cr 5.Recievables-125.77 Cr 6.Other current assets-23.07 Cr Current Liabilities* 1.Creditors-89.26 Cr 2.Tax provision-3.74 Cr 3.Others-3 Cr Out of this 75 Crore has already been given by IDBI having regard to the above bank has recommended for taking up of a share of Rs.25 Crore to be extended in the form of Cash-cum-Credit-WCDL providing for drawals against paid for stocks and book debts with a cover period of 90 days.

87

IBS

10.3.3.3 Management
The Management of the company vests with the Board of Directors comprising four Directors.Mr.ACE son of Mr.BDF is the managing director of the company. He is reported to have experience in the field of electronics, entertainment and gaming solutions and is instrumental in the growth and development of various home appliances brands. He is in the board of 9 other companies. He looks after the strategic and business related aspects and is also engaged in day to day business affairs of the company. The other promoter director Mr.CEG is associated with various companies of XYZ group and looks after international operations, sales and marketing of the entire group. The other two directors Mr. A and Mr.S are associated with the XYZ group. Mr. G, the former director of D Bank, is an advisor to the Board of Directors of XYZ group while Mr.H has served the group in various capacities and currently acts as a Finance Controller. Apart from the Board of Directors the company has appointed key managerial persons to look after the day to day affairs for different area of functioning, like production, marketing, finance.

10.3.3.4 Industry Analysis

Industry Name: Consumer Electronics Demand Supply Gap The industry is rated marginally favorable. The CTV is growing by an estimate 6.5% annually during last five years. Going ahead ,while the B/W TV segment share will continue to shrink at a fast pace the CTV segmented to grow by 9 % in the medium term.LCD TV may strain the growth rate of high-demand flat CRT-TV category. Government Policies The import duty has reduced from 65% (94-95) to 10.7 % (07-08), while imports from Thailand have zero duty. While the CTV imports have been negligible due to competitive domestic prices. While the prices of Chinese manufactured CTVs are lower, the threat from Chinese imports is limited due to perceived low quality of Chinese products among Indian consumers. Thus CTV industry has been rated neutral on this parameter.

Input Related Risk The main inputs required to manufacture CTVs are CPTs (27-30 % of raw materials cost) and printed circuit boards. Other inputs include tuners, cabinets, moulds, speakers and integrated circuits. Only a small number of electronic components need to be imported. The reduction in customs duty and FTA with Thailand are bringing down the
88

IBS

cost of components and forcing domestic CPT players to slash their prices. Hence easy availability and competitive pricing policy, the CTV industry has been rated marginally favorable on this parameter. Extent of Competition The CTV industry is intensely competitive in nature. With the entry of foreign players competition has shot up. Top 4 players control approx 60% of the market and remaining 40% is split among 18 regional players. The industry has experienced 6.43% increase in demand for consumer durable goods in FY 2007 and demand is expected to increase at a CAGR of 22% by FY2010.Increase in raw material prices and rise in power tariffs will be major challenges. Major players in the categories are L, S, XYZ, B., M electronics. L, S, XYZ share a major chunk of Television, washing machine and refrigerator sales.

10.3.3.5 Business Analysis

1. Production and Infrastructural facilities and Selling and Marketing arrangements. a. Production and Infrastructural facilities
Plant and machinery will be procured from reputed suppliers and implemented under the guidance and support of Hi-tech Group and XYZ group. The company does not foresee any problem in sourcing required raw materials. The color picture tube will be purchased from S Color Ltd, B display Devices Ltd and JCTDF Electronics Ltd whereas speakers will be purchased from SVE Pvt Ltd and San International Ltd b. Selling and Marketing Arrangement XYZ has entered into an long term buy back agreement with the applicant company for assuring 100% off take. Presently group has more than 35000 dealers and distribution networks in India and abroad and has exports to various countries like Middle East, Africa and Europe. It has well distribution and marketing channels and strategies and pursuing aggressively for deepening and expansion of the same.

3. Market Position and Competitiveness XYZ is the market leader with a market share of 30% for Colour TVs, 25% in Refrigerators, 28% for washing machine, 21% in Acs.The group has decided to remain market leader and also to consolidate the business. It has decided to follow up the OEM for domestic as well as international markets. Group is marketing various brands such

89

IBS

as XYZ, DEF and is expected to add few more international brands to its existing multibrands strategy.

10.3.3.6 Risk Analysis

Risk Factor
Industry Risk

Mitigation

The industry is growing at an estimated rate of 6.5% and expected to grow at 9% in the medium term Marketing Risk XYZ group takes the responsibility of Buy Back of manufactured items and entire marketing activities Employee Risk The company plans to appoint 2285 staff for the proposed unit which includes 825 skilled labors, 1250 semi skilled and 210 officers and supporting staff. Necessary guidance will be provided by XYZ Construction Risk Company has proposed to hire reputed engineering consultants and contractors for the execution of the project. More over it is also proposed to have a well chosen team of experienced persons and in house task force to co-ordinate the implementation of the project Availability and Transportation of Raw Company has made necessary Materials arrangements with back ups Management risk The promoter are well experienced and have successfully implemented many projects in the past

Funding Risk

Environmental risk

Catastrophic Risk

Promoters contribution to the project is 40% upfront in the form of equity ,considering the group reputation it should be not be difficult to tie up debt funds for the project The company has applied for No objection certificates from the State Pollution Control Board and is awaiting for the approval. All the necessary insurances are done.
90

IBS

10.3.3.7 Ratio Analysis

a. Net Profit Ratio This ratio shows the relationship between net profit and net sales which indicates efficiency of management. This ratio is on a increasing trend, it shows the operational efficiency of the company. It shows that the company is earning enough money to meet its obligations. Year 2008 2009 2010 2011 2012 2013 2014 PAT 33.78 80.68 94.14 100.52 107.08 94.79 90.47 Sales 765.72 1372.22 1583.12 1683.56 1787.01 1803.89 1807.24 NP Ratio % 4.41 5.87 5.94 5.97 5.99 5.25 5.00

b. Current Ratio It measures the relationship between current asset and current liability. The ratio is an indicator of the firms commitment to meet its short term liabilities. Year 2008 2009 2010 2011 2012 Current assets 341.44 571.55 660.28 740.69 829.33 Current liabilities 216.79 390.29 411.75 423.14 435.63 Current Ratio 1.57 1.46 1.6 1.75 1.90

The current ratio as per bank norms is 1.25 and the current ratio for this company is well above the prescribed norms. This shows company has sufficient funds to pay its creditors and take care of all the current liabilities. The ratio is increasing year by year, it shows that the company has high capable of paying its creditors. But on the negative side there is a less efficient use of funds.

c. Quick Ratio or Acid Ratio The ratio measures the capacity of the organization to pay off liabilities of the urgent nature immediately.
91

IBS

Year 2008 2009 2010 2011 2012

Current assets 148.97 240.32 283.28 363.69 401.37

Current liabilities 216.79 390.29 411.75 423.14 435.63

Current Ratio 0.687 0.615 0.687 0.859 0.921

It will give a more realistic picture than current ratio since the inventory is left out

d. Stock Turnover Ratio/Inventory Turnover Ratio The ratio indicates the number of times the stock has been turned over during the period and evaluates the efficiency with which a firm is able to manage its inventory. Year 2008 2009 2010 2011 2012 Sales 765.72 1372.22 1583.12 1683.56 1787.01 Inventory 192.47 331.23 377 401.37 427.96 Current Ratio 3.97 4.14 4.19 4.19 4.17

e. Debtor Turnover Ratio (DTR)

Debtors turnover ratio or accounts receivables turnover ratio indicates the velocity of debt collection. In simple words it indicates the number of times average debtors (receivables) are turned over during the year.

Year 2008 2009 2010 2011 2012

Sales 765.72 1372.22 1583.12 1683.56 1787.01

Receivables/Average trade debtors 125.87 225.59 260.24 299.81 342.71

DTR 6.08 6.08 6.08 5.61 5.21

92

IBS

f. Debt Service Coverage Ratio The Debt Service Coverage Ratio is the core test ratio in project financing. This ratio indicates the degree of viability of project. Here Debt means installments payable during the year and Service means cash accruals comparing net profit plus depreciation and non cash write-off. It measures the extent of cash accruals (service) available to cover the maturing term obligation (debt) during each year.

Year 2008 2009 2010 2011 2012

Debt 79.13 151.78 168.45 171.33 174.59

Service 26.22 46.71 48.23 43.61 39.04

DSCR 3.01 3.24 3.49 3.92 4.47

The prescribed DSCR by the bank is 1.5 and the DSCR for ABC is well above the bank norm and found to be satisfactory and average DSCR is found to be 3.626

g. Interest Coverage Ratio: Year 2008 2009 2010 2011 2012 PBIT 63.75 136.35 152.83 155.3 158.02 Interest 26.22 46.71 48.23 43.61 39.04 ICR 2.43 2.91 3.16 3.56 4.04

The ratio is very important from the lenders point of view. It indicates whether the business would earn sufficient profits to pay periodically the interest charges. The projects projected profit before interest and tax to interest is only 2.43, it has increasing trend in the future period. It shows that the company is earning sufficient funds to pay the interest arising for the loan taken to put up project. In a year the PBIT is will be 4.04 times to its interest payment, it is because of the decrease in the interest and increase in the profits.

93

IBS

h. Debt/Equity Ratio The debt equity ratio is determined to ascertain the soundness of the long-term financial policies of the company. Year 2008 2009 2010 2011 2012 Debt 441.79 577.79 561.75 535.64 510.63 Equity 184.27 264.96 359.11 459.60 566.68 DE Ratio 2.39 2.18 1.56 1.16 0.90

Though the ratio is higher than 2 in first 2 years it has reduced in the later years. It was higher initially due to higher term loan which has reduced over years. The average Debt Equity ratio works out to be 1.63 which is within the norms prescribed

10.3.3.8 Rating Summary Information:

Rating is done using the software of risk assessment model provided by CRISIL Two types of rating is done 1. Facility Rating This is based on the type of Credit facility availed 2. Company Rating This is based on four factors 1. Business Risk 2.Financial Risk 3.Management Risk 4.Industry Risk Internal Credit Rating Latest Previous Based on Specific Financials Grade 2008 P1 Model Single Scale Rating CB2 -

94

IBS

11. Findings
Methods of lending Like many other activities of the banks, method and quantum of short-term finance that can be granted to a corporate was mandated by the Reserve Bank of India till 1994. This control was exercised on the lines suggested by the recommendations of a study group headed by Shri Prakash Tandon. The study group headed by Shri Prakash Tandon, the then Chairman of Punjab National Bank, was constituted by the RBI in July 1974 with eminent personalities drawn from leading banks, financial institutions and a wide cross-section of the Industry with a view to study the entire gamut of Bank's finance for working capital and suggest ways for optimum utilization of Bank credit. This was the first elaborate attempt by the central bank to organize the Bank credit. The report of this group is widely known as Tandon Committee report. Most banks in India even today continue to look at the needs of the corporate in the light of methodology recommended by the Group. As per the recommendations of Tandon Committee, the corporate should be discouraged from accumulating too much of stocks of current assets and should move towards very lean inventories and receivable levels. The committee even suggested the maximum levels of Raw Material, Stock-in-process and Finished Goods which a corporate operating in an industry should be allowed to accumulate. These levels were termed as inventory and receivable norms. Depending on the size of credit required, the funding of these current assets (working capital needs) of the corporate could be met by one of the following methods: First Method of Lending: Banks can work out the working capital gap, i.e. total current assets less current Liabilities other than bank borrowings (called Maximum Permissible Bank Finance or MPBF) and finance a maximum of 75 per cent of the gap; the balance to come out of long-term funds, i.e., owned funds and term borrowings. This approach was considered suitable only for very small borrowers i.e. where the requirements of credit were less than Rs.10 lacs
Second Method of Lending:

Under this method, it was thought that the borrower should provide for a minimum of 25% of total current assets out of long-term funds i.e., owned funds plus term borrowings. A certain level of credit for purchases and other current liabilities will be available to fund the build up of current assets and the bank will provide the balance. Consequently, total current liabilities inclusive of bank borrowings could not exceed 75% of current assets. RBI stipulated that the working capital needs of all borrowers enjoying fund based credit facilities of more than Rs. 10 lacs should be appraised (calculated) under this method.

95

IBS

Third Method of Lending: Under this method, the borrower's contribution from long term funds will be to the extent of the entire CORE CURRENT ASSETS, which has been defined by the Study Group as representing the absolute minimum level of raw materials, process stock, finished goods and stores which are in the pipeline to ensure continuity of production and a minimum of 25% of the balance current assets should be financed out of the long term funds plus term borrowings. (This method was not accepted for implementation and hence is of only academic interest). As can be seen above, the basic foundation of all banks' appraisal of the needs of creditors is the level of current assets. The classification of assets and balance sheet analysis, therefore, assumes a lot of importance. RBI has mandated a certain way of analyzing the balance sheets. The requirements of this break-up of assets and liabilities differs slightly from that mandated by the Company Law Board (CLB). The analysis of balance sheet in CMA data is said to give a more detailed and accurate picture of the affairs of a corporate. The corporates are required by all banks to analyze their balance sheet in this specific format called CMA data format and submit to banks. While most qualified accountants working with the firms are aware of the method of classification in this format, professional help is also available in the form of Chartered Accountants, Financial Analysts for this analysis Committees A study group headed by Shri Prakash Tandon, the then Chairman of Punjab National Bank, was constituted by the RBI in July 1974 with eminent personalities drawn from leading banks, financial institutions and a wide cross-section of the industry with a view to study the entire gamut of Bank's finance for working capital and suggest ways for optimum utilization of Bank credit. This was the first elaborate attempt by the central bank to organize the Bank credit. Most banks in India even today continue to look at the needs of the corporates in the light of methodology recommended by the Group. The report of this group is widely known as Tandon Committee report. The weaknesses in the Cash Credit system have persisted with the non-implementation of one of the crucial recommendations of the Committee. In the background of credit expansion seen in 1977-79 and its ill effects on the economy, RBI appointed a working group to study and suggest i) Modifications in the Cash Credit system to make it amenable to better management of funds by the Bankers and ii) alternate type of credit facilities to ensure better credit discipline and co relation between credit and production. The Group was headed by Shri. K.B. Chore of RBI and was named Chore Committee. Another group headed by Shri. P.R. Nayak (Nayak Committee) was entrusted the job of looking into the difficulties faced by Small Scale Industries due to the sophisticated nature of Tandon & Chore Committee recommendations.

96

IBS

The recommendations made by Tandon Committee and reinforced by Chore Committee were implemented in all Banks and Bank Credit became much more organized. However, the recommendations were perceived as too strict by the industry and there has been a continuous clamour from the Industry for movement from mandatory control to a voluntary market related restraint. With recent liberalization of economy and reforms in the financial sector, RBI has given the freedom to the Banks to work out their own norms for inventory and the earlier norms are now to be taken as guidelines and not a mandate. In fact, beginning with the slack season credit policy of 1997-98, RBI has also given full freedom to all the Banks to devise their own method of assessing the short term credit requirements of their clients and grant lines of credit accordingly. Most banks, however, continue to be guided by the principles enunciated in Tandon Committee report. Recent Position Corporation Bank is constantly using Permissible Bank finance where the residual of the working capital is considered for grant.For smaller lending Projected Turnover method is used . Otherwise, the corporate is requested to alter its business plans and funding pattern. In some cases where amount is more than 10 crore Corporation Bank has preferred Cash Flow method of assessment of corporate requirements and are shifting to this method. Under Cash Flow Method, the corporate is required to project its cash receipts and expenditure. Whenever, the expenditure overshoots the incomes, the Bank finance steps in to fill the gap. Many other banks, however,have continued with the method of Maximum Permissible Bank Finance (MPBF) While other bank loans have to be provided at rates of interest not less than Prime Lending Rate (PLR), discounting the bills of exchange has been permitted by the RBI at a rate less than PLR. RBI guidelines and measures taken for improving credit flow to the sector It is proposed to accept the recommendation with regard to the credit facilities being offered by the banking sector and accordingly request the Reserve Bank of India to advise the banks to frame a policy for enhancing the flow of credit to both small and medium enterprises, within the overall framework of credit policy of banks to small and medium enterprises. The challenges being faced by the small and medium scale sector may be briefly set out as follows a. Small and Medium Enterprises (SME), particularly the tiny segments of the small enterprises have inadequate access to finance due to lack of financial information and non-formal business practices. SMEs also lack access to private equity and venture capital and have a very limited access to secondary market instruments. b. SMEs face fragmented markets in respect of their inputs as well as products and are vulnerable to market fluctuations. c. SMEs lack easy access to inter-state and international markets.
97

IBS

d. The access of SMEs to technology and product innovations is also limited. There is lack of awareness of global best practices. e. SMEs face considerable delays in the settlement of dues/payment of bills by the large-scale buyers. With the deregulation of the financial sector, the ability of the banks to service the credit requirements of the SME sector depends on the underlying transaction costs, efficient recovery processes and available security. There is an immediate need for the banking sector to focus on credit and finance requirements of SMEs. Measures to increase the quantum of credit to SMEs at the right price 1. Public Sector Banks will be advised to fix their own targets for funding SMEs in order to achieve a minimum 20% year on year growth in credit to SMEs. The objective is to double the flow of credit from Rs.67,600 crore in 2004-05 to Rs.135,200 crore to the SME sector by 2009-10, i.e. within a period of 5 years. 2. Public Sector Banks will be advised to follow a transparent rating system with cost of credit being linked to the credit rating of the enterprise. 3. SIDBI in association with Credit Information Bureau(India) Ltd. (CIBIL)will expedite setting up a credit rating agency. 4. SIDBI in association with Indian Banks Association (IBA) would collect and pool common data on risk in each identified cluster and develop an IT-enabled application, appraisal and monitoring system for small (including tiny) enterprises. This would help reduce transaction cost as well as improve credit flow to small (including tiny) enterprises in the clusters. 5. The National Small Industries Corporation has recently introduced a Credit Rating Scheme for encouraging SSI units to get themselves credit rated by reputed credit rating agencies. Public Sector Banks will be advised to consider these ratings appropriately and as per availability, and structure their rates suitably. 6. SIDBI has developed a Credit Appraisal & Rating Tool (CART) as well as a Risk Assessment Model (RAM) and a comprehensive rating model for risk assessment of credit proposals for SMEs. Public sector banks will be advised to take advantage of these models as appropriate and reduce their transaction costs. 7. Outreach of Formal Credit: Opening of New Accounts The commercial banks (including regional rural banks) with over 67,000 branches, will make concerted efforts to provide credit cover on an average to at least 5 new tiny, small and medium enterprises at each of their semi urban/urban branches per year. The total credit flow of all banks was146780 crores in 05-06 to Rs184589 crores 06-07 and 25.81% growth . Project appraisal methods try to reduce the subjectivity involved in assessing the capacity of the borrowers with respect to repayment capacity. The availability of computerized software makes the technicalities of the assessment much simpler as compared to earlier. The project can be appraised by using some of the methods like healthy discussion can be held with the members of management of borrowings firms to get better idea about the business, its viability and the capacity of management to take decision in exceptional situation.

98

IBS

The study revealed that the different aspects of a project are not independent entities but are highly inter-related and a meaningful project appraisal depends upon the appreciation of these fundamental facts. The appraisal of a project is undertaken by t he bank with the objective of determining the market potential of a project, to determine repayment capacity of sanctioning unit and selecting an optimal strategy. The methods of analysis vary from project to project, but there are certain common aspects of study from the angle of technology and engineering. An analysis of a region economy provides a general framework within which the assessment of any project is made. This analysis indicates whether the project is in a potential environment, which enjoys priority for economic development of the region/state concerned. This exercise itself usually involves the investigation of six different aspects; Economic, Technical, Organizational, Managerial, Operational and Financial. The relative importance of these different aspects can vary considerably according to circumstances and type of project. The study also revealed that in a large majority of cases, it is possible to quantify project costs and benefits. Future costs and benefits are calculated, using either market are shadow prices and on the basis of past performance in case of expansion projects. Further both costs and benefits are put under subsidence to initiate the projects estimated rate of return. The latter is then compared with the minimum earning power. While the rate of return is an important test that all projects with quantifiable costs and benefits must pass, importance and significance is usually overestimated. The rate of return is a necessary confirming test of projects that have to be justified within a much wider frame of reference, in which basic project objectives and the nature of project benefits increased employment and improved income distribution play major roles. It was found that technical feasibility study is mainly done to consider the adequacy and suitability of the plant, the equipments and their significations, plant layout, balancing of different sections of the plant, proposed arrangements for procurement of the plant and equipments, reputation of the machinery suppliers etc. The feasibility study also considers the technology required for a particular project, evaluate technological alternatives and select the most appropriate technology in terms of optimum combination of project components. The study revealed that the market analysis gives a comprehensive account of the market opportunity, as well as of the marketing strategy appropriate for converting the opportunity into a reality. An intensive scanning and analysis of the proposed environment in which the industrial unit has to function should from the basis for analyzing market opportunities as well as for specifying the marketing strategy. This is because the ever changing environment, in which the industry sector functions, restricts or expands the opportunities available to and the threats to be faced by an industrial unit. The purpose of the appraisal of financial aspects of a project is generally to ensure its initiation of financial conditions for the sound implementation and efficient operation. The scope of this aspect of appraisal varies, of course, considerable with the nature of the project and whether it is revenue producing or not. For projects, which involve the marketing of a product or services by an entity, the appraisal includes in investigation of the availability and cost of raw material, power, labor and services needed for production and the prospects for marketing the product or services profitability.
99

IBS

In every case, it is necessary to ensure that satisfactory accounts are maintained for effective control over expenditure and revenue and to disclose the project and entity carrying it out also. Since the banks finance only a part of the investment cost of a project, it is necessary to ensure that funds from other sources are available on acceptable terms to meet the balance of the cost. This may be relatively simple where the government is able to provide the rest of the necessary funds from budgetary sources or it may be complicated, as in a project to expand or modernize a revenue earning concern where all the financial requirements of the concern during the construction of the project must be considered. Financial appraisal also evaluates capacity of revenue producing investments from the stand point of the entity. Industrial sponsor or other investors, who would make them in order to ascertain whether it is sufficiently attractive to warrant their participation establishing that the entity carrying out the project is in a position to manage its business in a cost-effective fashion is another important aspects. The efforts made by the Corporation Bank to constantly update its evaluation procedures indicate its high level professionalism and explains why it is in a leading position amongst all nationalized banks and incase of all the 3 illustrations whether fund based or non fund based ,term loan bank has done efficient appraisal. ABC LTD The current DER (Debt Equity Ratio) is 2.39 where the banks norm is 2, it is less than the bank norm. But in coming year the ratio will be improved. For the project the average DER is 1.65. Sensitivity analysis shows that the debt servicing capacity of ABC Ltd though it would be below the standard norms still company will be able to meet its debt obligations adverse scenario assumed. The promoter/management risk, project implementation risk, operational risk, market risk and finance risk are considered to be normal. The overall DSCR of the company and project are 2.5, which indicates viability and its above the Bank norms. Current Ratio and other liquidity ratios is found to be adequate so the company will be able to meet its current obligations also. KPG LTD In case of KPG liquidity ratios are found to be adequate so they will able to meet their current liabilities so based on their sales projections working capital granted is justified

SSS LTD In case of SSS liquidity ratios are found to be adequate so they will able to meet their current liabilities so based on all the financial statements working capital granted is justified and also LC has been untilised efficiently,So LC can be renewed based on credit record

100

IBS

12. Recommendations and Suggestions

The problems faced by the bank and the suggestions given are with regards to increase credit flow the industries not only with respect to working capital finance but also project finance and asset finance. Problems faced by the Bank for industries lending and suggestions to overcome some of these problems: Banks are now better equipped to handle the varied needs of the any sector due to better technology and risk management. As recommended by the Ganguly Committee, the Government has asked banks to adopt a full-service approach to cater to the diverse needs of the SME sector. This, it recommends, may be achieved by extending banking services to recognize SME clusters by adopting the 4-C approach: Customer focus, cost control, cross selling and containing risk. To enable the banks take more objective decisions, the Government plans to introduce a rating mechanism for designated industrial clusters; this may be designed jointly by Crisil, IBA, Sidbi and SSI Associations. This would enable institutional funding to be channelled through homogenous recognised clusters. There is a critical need to devote substantial resources to improving the skills and capabilities of banks' lending officers, especially with regard to the analysis of the industries ' financial statements. Understanding the nature of the borrower's business and the cash-flow required is paramount to preventing the creation of NPAs. Another way of extending loans to the SMEs is the relationship-lending rule, where the lending partly bases its decision on proprietary information about the firm and its owner through a variety of contacts over time. The information may be gathered from such stakeholders as suppliers and customers, who may give specific information about the owner of the firm or general information about the business environment in which it operates. Insufficient data on the certain industries, the lack of credible published information about their financial health, the high vulnerability of small players in a liberalizing market and the inadequacy of risk management systems in banks are factors leading to higher NPAs and lower profitability than potential in industries lending. This can be overcome by collection of authentic data on the industries segment, educating the enterprises on the need for reliable financial data, evolving suitable risk models and close monitoring of accounts by the bank.

101

IBS

Industries are increasingly using products such as derivatives to manage their forex flows. Bank needs to offer sophisticated products to the industries in a simplified manner. They need to innovate their delivery platforms by using Internet banking, mobile banking and card-based platforms for delivery of transaction-banking as well as credit products, and enhance the service element. SMEs look for convenience and simplicity in their banking requirements and banks should deliver these through an effective use of technology.

. All critical assumption could be valued in the light of actual parameters for similar understanding in the same industry and sensitivity analysis can be undertaken by varying these factors accordingly. Relative comparison with other players in the industry would provide a better estimation and analysis of the project. It also helps to assess the impact of adverse changes in the operating conditions of the project on its viability. In recent years, environmental concerns have assumed a greater deal of significance. The bank has to do Ecological analysis as the new project like drug and chemical industry impact the Environment. The Bank should also consider the capability of management and its analytical skills of the top management in the company. The Costs, Profits are predicted only on the basis of the past trends. But same trend may not continue in the future. They may vary depending upon the Economic conditions, Business cycles, Government policies etc. So there should be a provision for all these contingencies. This exercise is critical as it calls for a multi-dimensional analysis of the project that is, a complete scanning of the project.

102

IBS

13. Conclusion
Project Appraisal is a science as well as an art. While the basic principles of appraisal could be mastered in a short time span, the successful practice of the art of carrying out of appraisal requires keen observation, objectivity and decision making. It is also necessary to took ahead of the project. Project appraisal is a key to broad based, balanced industrial growth of the country. In a way, it calls for a judicious judgment and perspective outlook. The lending institutions examine the project to study its soundness on Technical, Economic, Commercial and Management grounds. If the appraisal report is found satisfactory, the loan application will be favorable considered. The manager then communicates his decision to the borrower and terms and conditions will be negotiated. The most important areas for the borrower and lender to negotiate are timing in relation to negotiation method of financing based on certificates of work done, repayment schedule, rate of interest, commitment fees, security options and monitoring and control requirements. Financial institutions also pay attention to political environment and labor conditions of the area where the project is to be located. Strikes, Lockouts, Industrial Peace and Communal Harmony in the area play a decisive role in examining success or failure of the project. As a lender and a development institution, the bank places particular stress on the need for an efficient organization and responsible management for the execution of the project. It is, therefore natural that financial institutions very carefully appraise the managerial aspects before sanctioning assistance for a project. If a proper appraise of the managerial aspects is made in the beginning itself, future problems in these areas can be avoided to a very large extent. It is therefore necessary that the overall background of the promoters, their academic qualification, business and industrial experience and their past performance are looked into in greater detail to assess their capabilities for implementing the projects for which financial assistance has been sought. The study at Corporation Bank Ltd gave a vast learning experience to me and has helped to enhance my knowledge. During the study I learnt how the theoretical financial analysis aspects are used in practice during the working capital, Term Loan and Non fund Based Limits assessment. I have realized during my project that a credit analyst must own multi-disciplinary talents like financial, technical as well as legal know-how. The credit appraisal for working capital finance system has been devised in a systematic way. There are clear guidelines on how the credit analyst or lending officer has to analyze a loan proposal. It includes phase-wise analysis which consists of 5 phases: 1. Financial statement analysis 2. Working capital and its assessment techniques 3. Credit risk assessment 4. Documentation
103

IBS

5. Loan administration Corporation Banks adoptions of the Permissible Bank Finance of assessment procedures are based on sound principles of lending. This method of assessment has certain flexibility required to avoid any rigid approach to fixing quantum of finance. It is superior and more rational compared to the Turnover Method, Cash Budget Method of assessment .It also facilitates the Bank to carry on follow up procedures. The PBS method have been rationalized and simplified to facilitate complete flexibility in decisionmaking. To ensure asset quality, proper risk assessment right at the beginning, is extremely important. That is why Credit Risk Assessment system is an essential ingredient of the Credit Appraisal exercise. The Corporation Bank Ltd was one of the first to formulate a Credit Risk Assessment model. It considers important parameters like profitability, repayment capacity, efficiency of the unit , historical /industry comparisons etc which were not factored in other models. It is equally efficient as the SIDBIs CART (Credit Assessment and Rating Tool) model. This shows Corporation Bank of India has sound system for credit appraisal.

104

IBS

14. Appendices
ABC Ltd Projected Profitability Project : Particulars Gross SalesDomestic Gross SalesExport Gross SalesTotal Less Excise Duty % age rise/fall in net sales Export incentives Others Other Operating Income-Total Total Operating Income Raw Material Consumed:Imported Raw Material Consumed:Indigenous Stores Consumed Power and Fuel Direct Labour and Wages Other Mfg expenses Depreciation Subtotal Inc/Dec in 2008 765.72 765.72 2009 1372.33 1372.33 79.22 2010 1583.12 1583.12 15.36 2011 1683.56 1683.56 6.34 6.15 (Rs in Crore) 2012 1787.01 1787.01

765.72

1372.33

1583.12

1683.56

1787.01

137.95

237.38

269.76

287.09

306.16

551.8 2.68 13 2.3 15.38 723.11 -19.54

949.5 4.8 16.9 4.12 15.43 1228.13 -14.10

1079.05 5.54 18.17 4.75 15.62 1392.89 -4.82 105

1148.37 5.89 19.44 5.05 16.03 1481.87 -2.53

1224.62 6.25 20.7 5.36 16.57 1579.66 -2.7

IBS WIP Inc/Dec in FG -29.31 -21.15 -7.23 Total Cost Of 674.26 1192.88 1380.84 Sales Selling, 28.71 44.6 51.45 General and Administrative Expenses Operating 62.75 134.85 150.83 Profit before interest Interest on 7.66 21.44 27.56 working capital Interest on 18.56 25.27 20.67 Term Loans Sub total 26.22 46.71 48.23 (Interest) Operating 36.53 88.14 102.6 Profit After Interest Non 1 1.5 2 Operating Income Non Operating Expenses Net of Non- 1 1.5 2 Operating Income and Expenses Profit Before 37.53 89.64 104.6 Tax Tax provision 3.75 8.96 10.46 Current* Tax Provision Deferred Sub Total 723.11 1228.13 1392.89 PAT 33.78 80.68 94.14 Dividend Cash Profit 49.16 96.11 109.76 Indicates Minimum Alternate Tax as applicable

-3.8 1475.54 54.72

-4.05 1572.91 58.08

153.3

156.02

27.53

27.56

16.08 43.61 109.69

11.48 39.04 116.98

111.69 11.17 1481.87 100.52 116.55

118.98 11.9 1579.66 107.08 123.65

106

IBS

Projected Balance Sheet Particulars Bank Borrowings Installment of Term Loans Creditors for Purchase Provision for Taxation Other Current Liabilities Sub total (A) Term Liabilities Debentures Preference Share Capital Term Loans from Banks/FI Unsecured Loans from friends and relatives Other term liabilities Sub-Total (B) Net Worth Equity Share Capital Partners Capital Revaluation Reserve Reserves and Surplus Profit and Loss Account Balance Total Net Worth (C) Total Capital+Liabilities (A+B+C) Cash and Bank Balance Investments 2008 125 85.04 3.75 3 216.79 225 2009 225 146.33 8.96 10 390.29 187.5 2010 225 166.29 10.46 10 411.25 150 2011 225 176.97 11.17 10 423.14 112.5 2012 225 188.73 11.9 10 435.63 75 -

225 101 49.49 33.78 33.78 184.27 626.06

187.5 101 49.49 114.47 114.47 264.96 842.75

150 101 49.49 208.62 208.62 359.11 920.86

112.5 101 49.49 309.11 309.11 459.6 995.24

75 101 49.49 416.19 416.19 566.68 1077.31

13.1 -

4.73 107

11.04 -

25.51 -

42.66 -

IBS Receivables Inventory Of Raw materials, WIP AND FG Consumes spares Advance Payment to Suppliers Advance payment of tax Other Current Assets Sub-Total (A) Fixed Assets Gross Block Less Depreciation Net Block Capital WIP Sub-total (B) Non Current Assets Investment in Group Concerns Other investments Receivables overdue for more than 6 months Deferred Tax Asset Other non current assets Sub Total (C) Intangible Assets (D) Total Assets (A+B+C+D) 125.87 192.47 225.59 331.23 260.24 377 299.81 401.37 342.71 427.96

2 3 341.44 300 15.38 284.62 284.62 -

2 3 571.55 302 30.8 217.2 217.2 -

4 3 660.28 307 46.42 260.58 260.58 -

6 3 740.69 317 62.45 254.55 254.55 --

8 3 829.33 327 79.02 247.98 247.98 -

626.06

842.75

920.86

995.24

1077.31

108

IBS

KPG Ltd Projected Profitability Project : Particulars Gross Sales-Domestic Gross Sales-Export Gross Sales-Total Less Excise Duty Commission/Brokerage received Export incentives Others Other Operating Income-Total Total Operating Income Purchases Other Trading expenses Subtotal Add: Opening Stock Less: Closing Stock Total Cost Of Sales Selling, General and Administrative Expenses Operating Profit before interest and Depreciation Depreciation Interest Operating Profit After Interest and Depreciation Non Operating Income Profit on Sale of Assets Interest from investments Other non operating income 2007 188.06 188.06 188.06 165.33 2.57 167.93 39.07 42.57 164.43 10.46 13.17 2008 104.93 104.93 104.93 74.27 1.59 75.86 42.57 36.13 82.3 10.87 11.76 2009 292.25 292.25 292.25 268.17 0.33 268.5 36.13 34.09 270.54 9.71 12 2010 600 600 600 550 6 556 34.09 50 540.09 10. (Rs in Crore) 2011 -

49.41

2.03 8.23 2.91

1.93 6.28 3.55

1.75 7.55 2.7

1.5 9.5 38.41

1 -

1.5 0.28 0.07

2 0.58

2 2

2 -

109

IBS

Total Non operating income Net of Non-Operating Income /Expenses Profit Before Tax Tax provision Current Tax Provision Deferred PAT Dividend Cash Accruals Projected Balance Sheet Particulars Bank Borrowings Installment of Loans Creditors for Purchase Statutory Liabilities due within one year Provision for Taxation Other Current Liabilities Total Current Liabilities Term Liabilities Debentures Preference Share Capital Term Loans from Banks/FI Unsecured Loans from friends and relatives Other term liabilities Total term liabilities Total Outside Liabilities Net Worth Equity Share Capital 2008 7.99 21.37 0.58 3 29.94 1.99 58.62

2.91 2.91 4.94

0.35 0.35 3.9 3.9 5.83

0.58 0.58 3.28 3.28 5.03

2 2 40.41 40.41 41.91

2009 13.61 0.51 0.18 10 14.3 0.88 49.29

2010 53.17 0.57 10 53.74 43.9

2011 50 20 10 70 40

2012 10 -

60.61 90.55 -

50.17 64.47 110

43.9 97.64 -

40 110 -

IBS Partners Capital General reserve Revaluation Reserve Profit and Loss Account Balance Total Net Worth Total Liabilities (A+B+C) Cash and Bank Balance Investments Receivables other than def and exports Export Receivables Stock in Trade Advance Payment to Suppliers Advance payment of tax Other Current Assets Total Current Assets Fixed Assets Gross Block Less Depreciation Net Block Capital WIP Non Current Assets Investment in Group Concerns Other investments Security Deposits Deferred Tax Asset Other non current assets 12.39 14.63 11.58 32.07 -

12.39 102.94 2.93 20.8 42.57 12.79 79.09 21.64 21.64 -

14.63 79.1 13.3 5.49 36.13 1.75 56.67 20.22 20.22 -

11.58 109.22 19.46 17.49 34.09 17.43 2.29 90.76 20.22 1.76 18.46 -

32.07 142.07 7 50 50 16 2.47 125.47 20.22 3.62 16.6 -

2.21 -

2.21 111

--

IBS Total Non Current Assets Intangible Assets (D) Total Assets Tangible Net Worth 2.21 102.94 12.39 2.21 79.10 14.63 109.22 11.58 142.07 32.07 -

RBI GUIDEUNES ON NON-FUND BASED FACILITIES Reserve Bank of India has also issued detailed guidelines to commercial banks in respect of non-fund based credit facilities. Some of the important points to be kept in view in this regard are discussed below: Letters of Credit Bank should normally open letters of credit for their own customers who enjoy credit facilities with them Customers maintaining current account only and not enjoying any credit limits should not be granted L/C facilities except in cases where no other credit facility is needed by the customer. The request of such customer for sanctioning and opening of letter of credit should be properly scrutinised to establish the genuine need of the customer. The customer may be, required to submit a complete loan proposal Including financial statements to satisfy the bank about his, needs and also his financial resources, to mire the bills drawn under Where a customer enjoys credit facilities with some other bank, the reasons for his approaching the bank for sanctioning L/C limits have to be clearly stated. The bank opening L/C on behalf of such customer should invariably make a reference to the, existing banker of the customer. In all cases of opening of letters of credit, the bank has to ensure that the customer is able to retire the bills drawn under L/C as per the financial arrangement already finalised.

Guarantees The conditions relating to obligant being a customer of the bank enjoying credit facilities as discussed in case of letters of credit are equally applicable for guarantees also. In fact, guarantee facilities also cannot be sanctioned in isolation. Financial guarantees will be issued by the banks only if they are satisfied that the customer will be in a position to reimburse the bank in case the guarantee is invoked and the bank is required to make the payment in terms of guarantee.
112

IBS

Performance guarantee will be issued by the banks only on behalf of those customers with whom the bank has sufficient experience and is satisfied that the customer has the necessary experience and means to perform the obligations under the contract and is not likely to commit any default. As a rule, banks will guarantee shorter maturities and leave longer maturities to be guaranteed by other institutions. Accordingly, no bank guarantee will normally have a maturity of more than 10 years. Banks should not normally issue guarantees on behalf of those customer's who enjoy credit facilities with other banks.

Co-acceptance of Bills 1. Limits for co-acceptance of bills will be sanctioned by the banks after detailed appraisal of customer's requirement is completed and the bank is fully satisfied about the genuineness of the need of the customer. Further customers who enjoy other limits with the bank should be extended such limits. Only genuine trade bills shall be co-accepted and the banks should ensure that the goods covered by bills co-accepted are actually received in the stock accounts of the borrowers. The valuation of goods as mentioned in the accompanying invoice should be verified to see that there is no overvaluation of stocks. The banks shall not extend their co-acceptance to house bills/ accommodation bills drawn by group concerns on one another. Before discounting/purchasing bills co-accepted by other banks for Rs.2 lakh and above from a single party, the bank should obtain written confirmation of the concerned controlling office of the accepting bank. When the value of total bills discounted/purchased (which have been co-accpeted by other banks) exceed Rs.20 lakh for a single borrower/ group of borrowers prior approval of the Head Office of the co-accepting bank shall be obtained by the discounting bank in writing. Banks are precluded from co-accepting bills drawn under Buyer's Line of Credit schemes of financial institutions like IDBI, SIDBI, PFC etc. Similarly banks should not co-accept bills drawn by NBFCs. Further, banks should not extend co-acceptance on behalf of their buyers/constituents under the SIDBI scheme. However, banks may co-accept bills drawn, under Seller's Line of Credit schemes for Bill Discounting operated by the financial institutions like IDBI, SIDBI, PFC etc. without any limit subject to buyer's capacity to pay and the compliance with exposure norms applicable to the borrower. Where banks open L/C and also co-accept bills drawn under such L/C, the discounting banks, before discounting such co-accepted bills, must ascertain the reason for co-acceptance of bills and satisfy themselves about the genuineness of the transaction.
113

2.

3. 4.

5.

6.

7.

8.

IBS

9.

Co-acceptance facilities will normally not be sanctioned to customers enjoying credit limit with other banks.

Reserve Bank Guidelines for SMEs Every Bank is required to set up its own policies for providing monetary assistance to the SME. Banks may start taking important steps for rationalizing the cost of loans granted to the SME sector. They should adopt a transparent rating system. SIDBI has its own Credit Appraisal & Rating Tool (CART) and Risk Assessment Model (RAM) along with a rating model. These have been developed for assessing risk involved in SMEs projects. The National Small Industries has their own Credit Rating Scheme, which in turns boost up the Small scale enterprises for getting themselves credit rated by the eminent credit rating agencies. For making formal credit possibilities accessible to the small and medium enterprises, all banks including of regional and rural banks are required to take up concrete steps for providing credit facilities to an average of at least 5 micro, small and medium enterprises (MSME's). Reserve Bank has issued a notification to all banks for detailing out their procedures of disposition of loan applications of MSME's including of the extent to which banks are permitted to grant collateral free loans etc. Reserve Bank has made special arrangements in institution for analyzing credit requirements of such units. Like the Standing Advisory Committee in Reserve Bank and cells at head office and regional centers of the bank, check and review the credit flow to SME.

114

IBS

15. Bibliography
Bank Finance for Industry and Trade-N.S.TOOR Lending Policy-Methods of Lending-Corporation Bank Group Credit Policy-Corporation Bank. Live Cases-Corporation Bank. http://www.investopedia.com/terms/t/termloan.asp\ http://www.bized.co.uk/learn/accounting/financial/sources/capital.htm http://wiki.answers.com/Q/What_are_Non_fund_based_limit http://www.accountingformanagement.com
http://www.rbi.org.in/scripts/NotificationUser.aspx?Id=5602&Mode=0 http://www.thehindubusinessline.com/2010/02/09/stories/2010020953180100.htm http://en.wikipedia.org/wiki/Economy_of_India http://www.ibef.org/Archives/ViewArticles.aspx?art_id=17181&cat_id=550 http://en.wikipedia.org/wiki/Corporation_Bank http://money.rediff.com/companies/corporation-bank/14030022/profit-and-loss http://www.corpbank.com/asp/0100text.asp?presentID=1198&headID=994

http://www.indianindustry.com/trade-information/guidelines-for-smes.html http://rushabhinfosoft.com/Webpages/BHTML/CH-36.htm

115