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credit appraisal at uco bank

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credit appraisal at uco bank

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A REPORT
ON
CREDIT APPRAISAL
BY
ENROLLMENT NO.
IBS HYDERABAD
CREDIT APPRAISAL
Submitted by
1
ENROLL ID
MBA-2013-201
A Project Report submitted in partial fulflment of the
requirements of MBA program of IBS HY!RABA"
!CO BAN"
DATE O# S!BMISSION$ 1%TH MAY 2013.
A!THORI&ATION
This is to certify that this is a bonafide project report submitted in partial fulfilment of the
requirement of MBA program of ICFAI Business School.
This report of documented titled C'edit ())'(i*(+ P',-e** (t !CO B(./0.
This report has been formally submitted to Prof. Praveen Srivastava-Member of Faculty, IBS
Hyderabad.
2

-
AC"NO1LED2EMENT
At the completion of my Summer Internship !roject" I feel obliged to e#press my heartfelt
gratitude to$ards all those $ho ha%e made this possible. The three months of internship has been
an enriching e#perience in terms of learning and application of theory into practice. The real time
e#perience that I ha%e recei%ed is something $hich cannot be emulated in a class room scenario
and $ill be highly helpful for my professional gro$th. The e#perience has helped me to
understand and appreciate the dynamics e#isting in $or&ing capital and term loan financing " the
intricacies in%ol%ed in credit appraisals and also $hat are the parameters and approaches needed
to be follo$ed by a credit analyst in this regard. I con%ey my sincere gratitude to Mr. A.'.
3
Sharma" ()M Flagship corporate credit" *ead office" +C, Ban& for e#tending this opportunity
to me" for doing my summer internship during the three months duration from February -.th to
May -/
rd
at +C, Ban&. I $ould also li&e to e#press my sincere gratitude to Mr. S.!. Singh" Chief
Manager $ho $as my coordinator and guide at +C, Ban& for the timely suggestions and
directions $hich $ere %ery helpful during the course of my project. If not for his guidance and
support" this 0ndea%our $ould not ha%e been a success. 1e#t" I definitely $ould li&e to than& Mr
!ra%een Sri%asta%a" Asst. !rof ICFAI *2(03ABA(" my college guide for his &een and
dedicated approach in guiding and moti%ating me.
CHAPTER PLAN
TABLE O# CONTENTS
CHAPTER 1 040C+TI50 S+MMA32666666666666.. 3
CHAPTER 2 I1T3,(+CTI,1 T, C30(IT A!!3AISA76666666 10
CHAPTER 3 ,B80CTI50S6666666666666666... 12
CHAPTER 4 30S0A3C* M0T*,(,7,)266666666666. 13
CHAPTER I1(+ST32 !3,FI7066666666666666. 14
4
CHAPTER % C,M!A12 !3,FI7066666666666666. 15
CHAPTER 5 305I09 ,F 7IT03AT+30666666666666. 16
:.; 9or&ing Capital Assessment6666666666. ;<
:.- Assessment of Term 7oans66666666666 /=
:./ Basel Accord > 3is& Management66666666.. /;
CHAPTER 3 C30(IT A!!3AISA766666666666666 33
?.; Introduction666666666666666. //
?.- Mar&et Analysis66666666666666 /.
?./ Technical Analysis6666666666666. /@
?.. Financial Analysis6666666666666.. /?
?.A Management > ,rganiBational Analysis6666666 .A
[email protected] Credit Appraisal Chec&list66666666666 [email protected]
CHAPTER 6 C30(IT 3IS' MA1A)0M01T66666666666 46
<.; Credit 3is&666666666666666... .<
<.- Credit 3is& Management System in 666666... .<
CHAPTER 10 !,ST SA1CTI,1 F,77,9 +! ,F 7,A1S6666666..
CHAPTER 11 A1A72SIS > I1T03!30TATI,16666666666.. 5
;;.; +C, 7oan !olicy6666666666666. A:
;;.;.; ,bjecti%e6666666666666..... A:
;;.;.- Basic Tenets of the !olicy666666666... A:
;;.;./ Methods of 7ending66666666666. A?
;;.- Credit Appraisal !rocess at +C,666666666 @=
;;.-.; Flo$chart6666666666666... @=
;;.-.- Brief on the !rocess66666666666. @=
;;.-./ 3is& 3ating of the Borro$er666666666. @-
;;.-.. (etermination of the Applicable 3ate of Interest6666. @A
;;.-.A !ost Sanction Follo$ +p6666666666 @@
CHAPTER 12 CAS0 ST+(2 @?
;-.; Borro$ers !rofile66666666666.... @?
5
;-.- Credit Appraisal of ABC !A3TS !%t. 7td66666... :;
I. Management
0%aluation66666666
II. Business
0%aluation666666666
III. Technical
0%aluation66666666...
I5. 7egal
0%aluation666666666...
5. Financial
0%aluation66666666...
:;
:/
:A
::
:?
;-./ !resent !roposal666666666666. ?.
;-.. Security 66666666666666 ?<
;-.A Credit 3is& 3ating66666666666.. <=
;[email protected] 3ecommendations66666666666.. <.
CHAPTER 13 C,1C7+SI,1 > 30C,MM01(ATI,1S66...6666 6
Conclusion666666666666666.. <A
Findings6666666666666666. <:
3ecommendations666666666666...... <?
7imitations666666666666666... <<
Li*t ,7 Abb'e8i(ti,.*$-
+C, +nited Commercial Ban&
9C 9or&ing Capital
CMA Credit Monitoring Arrangement
9C(7 9or&ing Capital (emand 7oan
SSI Small Scale industries
M!BF Ma#imum !ermissible Ban& Finance
1FB 1on Fund Based
6
FB Fund Based
!AT !rofit After Ta#
!B(IT !rofit Before (epreciation Interest > Ta#
T,7 Total ,utside 7iabilities
T19 Total net 9orth
CA30 Credit Analysis > 3esearch
CC Cash Credit
3BI 3eser%e Ban& ,f India
C> I Commercial > Industrial
!BS !rojected Balance Sheet
7C 7etter ,f Credit
19C 1et 9or&ing Capital
9C) 9or&ing Capital )ap
CCA Core Current Assets
,C7 ,thers Current 7iability
(FI (e%elopment Financial Institutions
CA Current Assets
C7 Current 7iabilities
B,I Ban& ,f India
Chapter
E9EC!TI:E S!MMARY
This project $as underta&en at the +C, Ban&. Companies that intend to see& credit facilities
approach the ban&. !rimarily" credit is required for follo$ing purposesC
a. 9or&ing capital finance
b. Term loan for mega projects
c. 1on Fund Based 7imits li&e 7etter of )uarantee" 7etter of Credit etc.
7
!roject Financing discipline includes understanding the rationale for project financing" ho$ to
prepare the financial plan" assess the ris&s" design the financing mi#" and raise the funds. In
addition" one must understand some project financing plans ha%e succeeded $hile others ha%e
failed. A &no$ledgeDbase is required regarding the design of contractual arrangements to support
project financingE issues for the host go%ernment legislati%e pro%isions" publicFpri%ate
infrastructure partnerships" publicFpri%ate financing structuresE credit requirements of lenders" and
ho$ to determine the projectGs borro$ing capacityE ho$ to analyBe cash flo$ projections and use
them to measure e#pected rates of returnE ta# and accounting considerationsE and analytical
techniques to %alidate the projectGs feasibility
!roject finance is different from traditional forms of finance because the credit ris& associated
$ith the borro$er is not as important as in an ordinary loan transactionE $hat are most important
are the identification" analysis" allocation and management of e%ery ris& associated $ith the
project.
The purpose of this project is to e#plain" in a brief and general $ay" the manner in $hich ris&s are
approached by financiers in a project finance transaction. Such ris& minimiBation lies at the heart
of project finance. 0fficient management of credit portfolio is of utmost importance as it has a
tremendous impact on the Ban&sH assets quality > profitability. The ongoing financial reforms
ha%e no doubt pro%ided unparallel opportunities to ban&s for gro$th" but ha%e simultaneously
e#posed them to %arious ris&s" $hich need to be effecti%ely managed.
The concept of Credit Management is undergoing radical changes. Credit 3is& in all e#posures
calls for precise measuring and monitoring for ta&ing considered credit decisions $ith suitable
ris& mitigants" ris& premium" etc. Credit portfolio should be $ell di%ersified in %arious promising
sectors $ith a cautious approach to be adopted in ris&y segments.
Also" lending continues to be a primary function in ban&ing. In the liberaliBed Indian economy"
clientele ha%e a $ide choice. 0#ternal Commercial Borro$ings and the domestic capital mar&ets
compete $ith ban&s. In another dimension" retail lendingD both personal ad%ances and SM0
ad%ancesD competes $ith corporate lending for funds and for human resources. But lending by
nature cannot be an aggressi%e selling acti%ity" disregarding the ris&s in%ol%ed. Ban& has to be
8
competiti%e $ithout compromising on the basic integrity of lending. The quality of the Ban&Hs
credit portfolio has a direct and deep impact on the Ban&Hs profitability.
The study has been conducted $ith the purpose of getting inDdepth &no$ledge about the credit
appraisal and credit ris& management procedure in the organiBation for the abo%e said first t$o
purposes.
In this report I ha%e also co%ered the methods applicable to the ban&s in appraising $or&ing
capital and term loan and their analysis. The $hole process of appraisal starts $hen the borro$er
arri%es at the ban&. It is follo$ed by %erification and detailed analysis of balance sheets" credit
limits to be sanctioned after considering all parameters li&e 3BI guidelines and ban& internal
guidelines and lastly follo$Dup has to be done by monitoring the cashDcredit account and quarterly
information system reporting. After the analysis" the ban&Hs internal credit rating procedure is
done to rate the client before the final appro%al is gi%en to the proposal
Chapter !
CREDIT APPRAISAL ; AN INTROD!CTION
It is the process by $hich a lender appraises the credit$orthiness of the prospecti%e borro$er. This
normally in%ol%es appraising the borro$erHs payment history" establishing the quality >
sustainability of his income.
Factors li&e age" income" no of dependents" nature of employment" continuity of employment"
repayment capacity" pre%ious loans" etc. are ta&en into account $hile appraising the
credit$orthiness .0%ery ban& or lending institution has its o$n panel of officials for this purpose.
9
CREDIT1ORTHINESS O# BORRO1ERS$-
The business of sanctioning unsecured loans > Ad%ances is comparati%ely more ris&y > needs
special care > attention on the part of the ban&er.
The credit$orthiness of a personFfirm means that heFit deser%es a certain amount of credit" $hich
may safely be granted .Such credit$orthiness is judged by the ban&er on the basis of Character"
Capacity > Capital.
1< CHARACTER$-
In assessing the credit $orthiness of the firm" the first consideration is Character of the firm
concerned. The $ord character implies > includes a number of personal characteristics. 7i&e
honesty" integrity" regularity" > promptness in fulfilling its promises > repaying its dues" sense of
responsibility" good habits > reputation etc. If a firm possesses all these qualities $ithout any
doubt or super%ision in mind of others it possesses an e#cellent character > $ill be considered
credit$orthy by the ban&er.
2< CAPACITY$-
The success of an enterprise largely depends upon the ability" competence"> e#perience of the
entrepreneur . If the borro$er possesses necessary technical s&ill" managerial ability> e#perience
to run a particular industry or trade" success of such unit may be ta&en for granted > the ban&er
$ill consider it a deser%ing case for granting a loan. The significance of this factor is no$ gro$ing
as the ban&s are $illing to grant unsecured loans to personsFfirms on the basis of soundness of
their business projects" irrespecti%e of their o$n capital.
3< CAPITAL$-
The ban&er also gi%es importance to the adequacy of capital of the borro$er. Ban&s are the
repositories of the public money > lend the borro$ed money. The ban&er therefore does not lend
money to an entrepreneur $ho does not ha%e adequate funds of his o$n. In case of failure of the
business enterprise the ban&er $ill be able to realiBe if the borro$erHs o$n capital is sufficient.
A)('t 7',m t=e (b,8e me.ti,.ed C>S t=e'e ('e *,me m,'e -'ite'i( ?=i-= *=,u+d be
[email protected](mi.ed be7,'e *(.-ti,.i.A t=e +,(.. T=e -'ite'i( ('e (* 7,++,?*
10
1< CASH #LO1 I Cash flo$ is the %ital parameter that is used to identify $hether the borro$er
$ill ha%e enough cash to repay the loan or ad%ance. Cash &eeps the liquidity to ensure repayment.
The ban&er rise to identify the annual cash flo$ from the submitted statements.
2< CONDITIONS ; The business > economic conditions may change after the loan is
sanctioned. So these changes should be ta&en into consideration.
3< CARE#!LNESS ;(ocumentation" follo$ up > consistent monitoring are essential to high
quality loan portfolio.
Im),'t(.-e ,7 C'edit A))'(i*(+ Sy*tem$-
The function of commercial ban& is to collect deposit from the common people > to in%est
deposited money in different sectors for o%erall de%elopment of the economy of the country.
Commercial ban&s and financial institutions are intermediate bet$een lenders >borro$ers. If the
ban& manager fails to analyBe the clientHs %iability of repaying the loan" possibility of default may
arise due to the fact. So the importance of A!!3AISA7" in sanctioning the loan is the &ey to
identify the borro$erHs ability" e#pertise" efficiency" industrial analysis JmacroK >business
performance. In credit appraisal process the follo$ing parameters are ta&en into account.
 RECO:ERY O# CREDIT ;Appraisal is done to ensure the reco%ery of the credit along
$ith the good super%ision" monitoring" > the relationship. In other $ords the purpose of
the appraisal is to be sure that the proposal ad%ance $ill be safe" liquid> profitable> for
all acceptable purpose co%ered by adequate security.
 SA#ETY ;The most important measure of appraising the loan proposal is safety of the
project. Safety means the assurance of repayment of distributed loans .Ban& is in business
to ma&e money but safety should ne%er be sacrificed for profitability. To ensure the safety
of the loan" the borro$er should be chosen carefully.
 LIB!IDITY ;The ban&er must ensure that the borro$er is able to repay the loan on
demand or $ithin a short period. This depend upon the nature of assets o$ned by the
borro$er : pledged to the ban&er.eg. )oods> commodities easily mar&etable $hile fi#ed
assets li&e land > buildings can be liquidated after a time inter%al. Thus the ban&er regards
11
liquidity as important as safety of the funds > grants loans on the security of the assets
$hich are easily mar&etable $ithout much loss.
 PRO#IT ;!rofit is the blood for any commercial institution .Before appro%al of any loan
project" the ban& authority has to be sure that proposal project $ill be a profitable %enture.
 SEC!RITY ;Security ser%es as a safety %alue for an une#pected emergency. Since ris&
factors are in%ol%ed" security co%erage has to be ta&en before a lending.
 DI:ERSI#ICATION O# RIS" ;(uring sanctioning any loan ban& has to be attenti%e
about di%ersification of ris&. All money must not be disbursed amongst a small no of
people.
 NATIONAL INTEREST C 2RO1TH ;Ban&ing industry has significant role to play in
the economic de%elopment of a country. The ban& $ould lend if the purpose of the
ad%ances can contribute more to the o%erall economic de%elopment of the country
S,u'-e* ,7 C'edit I.7,'m(ti,.$
Pe'*,.(+ I.te'8ie?$
The Manager should arrange one or more inter%ie$s $ith the borro$er. A personal inter%ie$ $ith
the prospecti%e borro$er is one of the most important duties of the Manager and this
responsibility should" in no case" be delegated to an ine#perienced ,fficer. (uring the inter%ie$"
the Manager should probe into the past history" present performance and future prospects of the
borro$er. The inter%ie$ may co%er $hole range of his business such as"
JaK 9hat is the e#perience of the borro$er in the line in $hich he is engaged or $ants to engage
himselfL
JbK *o$ many years has this business been operatingL *as it produced a record of successful
operationsL (o the turno%er and profit sho$ rising trend or falling trendL
JcK 9hat line of the business is the company inMretail" $holesale" manufacturing or ser%iceL Are
the products manufactured or sold" or the ser%ices performed acceptable to the publicL
12
JdK Is it a proprietorship" partnership or limited companyL If it is proprietorship" $ho is ne#t to
handle the business if anything should happen to the proprietorL If the business is a partnership"
ho$ many partners are thereL 9hat is the relationship of partners to each otherL 9hether all of
them are loo&ing after the business or some of them are sleeping partnersL
JfK 9hat is the purpose of ad%anceL *o$ much money is requiredL *o$ this quantum of ad%ance
being as&ed for has been arri%ed atL
JgK 9hat are capital resources of borro$erL (oes he intend to bring more capitalL
JhK *o$ the Management proposes to repay the ad%anceL 9hat $ill be the duration of ad%anceL
JiK 9hat security $ill be offeredL 9hether guarantee of some third party $ill be a%ailableL *o$
the security $ill be chargedL
B(D(' Re),'t*$
Information regarding character and Integrity should be tactfully gathered from sources near to the
borro$er. 3eports should be obtained from businessmen carrying on in the same trade as the
borro$er" some of $hom may be his friends" others his ri%als or enemies.
Re),'t 7',m ,t=e' B(./*$-
In case of ne$ customers ha%ing dealings $ith other ban&s" confidential opinion of his ban&ers
should be obtained. In ascertaining the credit position from other ban&s" particularly $here an
ad%ance account is to be transferred from another ban& to our boo&s" care should be ta&en to see
that the credit information recei%ed from the partyHs ban&ers are thoroughly chec&ed up by
ma&ing independent baBar enquiries lest to get rid of a bad account" a fa%ourable report is supplied
by the other ban&.
Study ,7 A--,u.t$-
In case of customer already ha%ing an accountMcurrent or cash creditFo%erdraft accountM$ith
the branch" the ban&Hs o$n record should be loo&ed into. 9hat does it re%ealL
JaK The ban&Hs record $ill re%eal the manner in $hich the borro$er has handled his credit. This
information $ill indicate $hat can be e#pected of him in future.
13
JbK If the borro$er formerly $as not enjoying any credit limits" then the state of his current
account $ill indicate appro#imate turno%er of his business" if there ha%e been return of cheques
due to insufficiency of fundsE stop payment of cheques etc.
JcK 9hile the turno%er of the account $ould indicate le%el of business acti%ity" a scrutiny of the
pay in and payDout items $ould thro$ light about the concerns $ith $hom he is dealing $ith in
course of sales and purchases. If such concerns are repeated parties" it $ould add to the credibility
of the business.
#i.(.-i(+ St(teme.t*$
The financial statements i.e. !rofit and 7oss Account and Balance Sheet for last three years
audited should be called for and properly analysed. In case" they ha%e not been audited" unaudited
statements prepared for income ta# purposes should be obtained and analysed. This analysis $ill
help ans$er such questions asC
JaK 9hether the concern is financially sound and stableL
JbK 9hether its profitability or earning capacity is up to the required standardL
JcK 9hether its liquidity is satisfactoryL
JdK 9hether it is $ell managedL
Financial analysis determines the significant operating and financial characteristics of a firm form
accounting data and financial statements. Analysis can be done throughC
1. R(ti, A.(+y*i*
-. T'e.d (.(+y*i*$ Trend analysis can be throughC
i. Intra firm comparison that is re%ie$ of the trend of the ratios o%er the years
$ithin the firm and
ii. Inter firm comparison.
14
-. Re(di.A ,7 .,te* t, (--,u.t* (.d ,t=e' i.7,'m(ti,.$ Careful reading and analysis of the
notes on accounts" one can gauge the policies of the management" performance of the
company" and its future planning.
O8e't'(di.A i.di-(ti,.*$
,%er trading implies doing more business than can be con%eniently carried on by the finance
a%ailable. Some of the indications of o%er trading are mentioned belo$CM
JaK Current liabilities increased at a faster rate of current assets.
JbK Creditors far e#ceed debtors.
JcK Borro$ings tend to increase.
JdK Fi#ed assets tend to increase.
JeK More liquid current assets li&e cash and ban& balance decrease and less liquid assets li&e
in%entories" boo& debts increase.
JfK Allo$ing shorter credit than usual or customary.
JgK ,btaining longer credit than usual or customary.
JhK Total current liabilities are much in e#cess of tangible net $orth.
I.-,me T(@E 1e(+t= T(@ (.d S(+e* T(@ A**e**me.t O'de'$
Manager should call for the originals of Income Ta#" 9ealth Ta# and Sales Ta# Assessment
,rders for pre%ious years as $ell as that for the current year. 9here%er Income Ta#" 9ealth Ta#
Assessments are not completed" copies of such returns" as filed" should be obtained. Income Ta#
Assessment $ill gi%e an idea of the borro$erHs profits and comments" if any" in such orders on the
maintenance of accounts $ill be helpful in &no$ing the pitfalls in borro$erHs business records.
9ealth Ta# Assessment $ill indicate the net $orth of the indi%idual. Sales Ta# assessment $ill
re%eal the turno%er in business.
P',)e'ty St(teme.t$
15
The property statement of a borro$er $ill gi%e an idea of his $orth" liabilities and his income
from real estate Jimmo%able propertyK. A complete list of property their situation" appro#imate
%aluation should be obtained.
Pe'*,.(+ :i*it$
The Manager should not straighta$ay accept the figures presented in the borro$erHs financial
statements or the information about business pro%ided by him. The Manager" either alone" or
accompanied by his credit in%estigatorFsome other ,fficer" should %isit the plant or place of
business of the borro$er.
!roject F Credit appraisal is done by ban&s or financial institutions by obtaining credit information
of the borro$ing company.
I.7,'m(ti,. 'eFui'ed t, be *ubmitted by t=e C,m)(.y GB,'',?e'< t, t=e
B(./$
The company should ma&e sure that the follo$ing information required for processing credit
requests are collected by the company for submitting it to the ban& or financial institution in order
to obtain the required credit facilityC
;. B(*i- b(-/A',u.d i.7,'m(ti,. ,. t=e -,m)(.yC
-. ReFui'ed 7(-i+ity
/. "ey i.du*t'y dy.(mi-*C
.. M(.(Aeme.tC
A. M(.(Aeme.t i.7,'m(ti,. *y*temC (etails of the planning" controlling and monitoring
systems $hich ha%e been put in place ha%e to gi%e.
@. #i.(.-i(+*
:. Det(i+* ,7 t=e Se-u'ity t, be )+edAedC
?. P'e*e.t b(./i.A 'e+(ti,.*=i)C The ban& requires full details of the present credit facilities
being enjoyed at the moment.
16
Chapter "
OBHECTI:ES
 To StudyF analyse meritsFdemerits of the methodologies > guidelines directed by 3BI
about financing $or&ing capital and term loan and its practical approach adopted by +C,
BA1' ..
 To understand the meaning > importance of Credit Appraisal System.
 To study the eligibility criteria for sanctioning loans and ad%ances.
17
 To analyse the procedure follo$ed by the ban& for sanctioning loans.
 To study the documentation required for credit appraisal. To &no$ the authorities >
committees in%ol%ed in Credit Appraisal System.
 To determine the efficiency of Credit Appraisal System of +C, BA1'
 To identify > suggest the scope for impro%ement in Credit Appraisal System of the ban&.
Chapter #
RESEARCH METHODOLO2Y
!roject MethodologyH is the procedure follo$ed by the students for collecting the required data for
project. The necessary information is collected by follo$ing t$o types of sourcesCD
PRIMARY SO!RCES O# DATA COLLECTION$-
!rimary (ata is the first hand data collected by follo$ing $aysCD
 Pe'*,.(+ I.te'8ie?C D
18
By inter%ie$ing the C*I0F MA1A)03 IM3 S.!. Singh JM2 C,M!A12 )+I(0K essentials
for loan sanctioning $ere understood.
 Ob*e'8(ti,.$ -
By obser%ing the $or&ing of manager as $ell as employees in the ban&" the actual procedure of
loan sanctioning $as understood.
SECONDARY SO!RCES O# DATA COLLECTIONCD
Secondary (ata is the readymade or readily a%ailable data obtained from follo$ing sourcesCD
 I.te'.et$ -
The use of internet $as beneficial for &no$ing the history > functioning of +C, BA1' as $ell
as theory of Credit Appraisal System. credit rating report of C3ISI7" CA30" internal rating report
prepared by ris& management dept" "BS0 "1S0 sites for getting data about share mar&et
perception of respecti%e firms for collecting > analysing data.
 M(.u(+$-
Manual contains the detail description of the process follo$ed by the +C, ban& for credit
appraisal before sanctioning loans and ad%ances and $hat can the manager do if he doesnHt find
the rele%ant information about the borro$er. 9hat are the %arious parameters on $hich the
borro$er should be e#amined and $hat are the documents required during appraisal process of the
borro$er.
Chapter $
BAN"IN2 IND!STRY
De7i.iti,. ,7 B(./$-
Ban& is a financial institution that borro$s money from the public > lends money to the public for
producti%e purpose. The Indian ban&ing regulation act of ;<.< defines the term ban&ing company
as Any company $hich transacts ban&ing business in IndiaN > the term ban&ing as Accepting
19
the purpose of lending all in%estment of deposits" of money from the public" repayable on demand
or other$ise > $ithdra$al by cheque" draft or other$iseN.
I.du*t'y O8e'8ie?$-
Hi*t,'y$-
Ban&ing in India has its origin as carry as the 5edic period. It is belie%ed that the transition from
money lending must ha%e occurred e%en before Manu" the great *indu jurist" $ho had de%oted a
section of his $or& to deposits > ad%ances" laid do$n rules relating to the interest. (uring the
Mughal period" the indigenous ban&ers played a %ery important role in lending money> financing
foreign trade > commerce. (uring the days of east India Company" it $as to turn of the agency
houses top carry on the ban&ing business. The general ban& of India $as the first joint stoc& ban&
to be established in the year ;:[email protected] other $hich follo$ed $as the Ban& of *industan> Bengal
ban&. The ban& of *industan is reported to ha%e continued till ;<[email protected]" $hile the other t$o failed in
the meantime. In the ;
st
half of ;<
th
century the east India company established three ban&s" The
ban& of Bengal in ;?=<"The ban& of Bombay in ;?.=" The ban& of madras in ;?./.The three
ban&s also &no$n as presidency ban&s > $ere independent units > functioned $ell. These three
ban&s $ere amalgamated in ;<-= > the imperial ban& of India $as established on 8an ;<-;" $ith
the passing of the SBI act in ;<AA" the underta&ing of the imperial ban& of India $as ta&en o%er
by the ne$ly constituted SBI. The reser%e $hich is the central ban& $as created in ;</A by
passing of 3BI act ;</.. In the $a&e of s$adeshi mo%ement" a number of ban&s $ith Indian
management $ere established in the country namely !unjab national ban&" canara ban& limited"
Indian ban& limited" The ban& of Baroda limited" The central ban& of India limited. ,n 8uly ;<
th
;<@<" ;. major ban&s of country $ere nationaliBed >in ;A
th
April ;<?= si# more commercial
pri%ate sector ban&s $ere also ta&en o%er by the go%ernment .The Indian ban&ing industry $hich
$as go%erned by the ban&ing regulation act of India ;<.<" can be broadly classified into t$o
major categories" nonDscheduled ban&s >scheduled ban&s .Scheduled ban&s comprise commercial
ban&s > coDoperati%e ban&s.
The first phase of financial reforms resulted in the nationaliBation of ;. major ban&s in ;<@<
>resulted in a shift from class ban&ing to mass ban&ing. This in turn resulted in the significant
gro$th in the geographical co%erage of ban&s. 0%ery ban& had to earmar& a min percentage of
20
their loan portfolio to sectors identified as priority sectorsN. The manufacturing sectors also gre$
during the ;<:=s in protected en%ironments > the ban&ing sector $as a critical source of capital.
The ne#t $a%e of reforms sa$ the nationaliBation of @ more commercial ban&s in ;<?=. Since then
the no of scheduled commercial ban&s increased fourfold and the no of ban& branches increased to
eight fold.
After the second phase of financial sector reforms > the liberaliBation of sector in the early
nineties the public sector ban&s found it difficult to compete $ith the ne$ pri%ate sector ban&s >
foreign ban&s. The ne$ pri%ate sector first made their appearance after the guidelines permitting
them issued in 8anuary ;<</.
I.di(. B(./i.A Sy*tem$-
Ban&ing in our country is already $itnessing the see changes as the ban&ing sector see&s ne$
technology >its application. The best part is that the benefits are beginning to reach masses.
0arlier this domain $as the preser%e of %ery fe$ organiBations. Foreign ban&s $ith hea%y
in%estments in technology started gi%ing some out of the $orldN customer ser%ices. But the
ser%ices $ere a%ailable only to selected fe$ %ery large account holders. Then came the
liberaliBation > $ith it a multitude of pri%ate ban&s" a large segment of urban population then
requires minimal time > space for its ban&ing needs. ,ne of the classical economic functions of
the ban&ing industry that has remained %irtually unchanged o%er the centuries is lending. ,n the
other hand competition has had considerable ad%erse impact on the margins" $hich lenders ha%e
enjoyed "but on the other hand technology has some e#tend reduced the cost of deli%ery of %arious
products > ser%ices.
The IT re%olution had a great impact in the Indian ban&ing system. The use of the computers had
led to introduction of online ban&ing in India. The use of modern inno%ation >computeriBation of
the ban&ing sector has increased many fold after the economic liberaliBation of ;<<; as the
countryHs ban&ing sector e#posed to the $orld mar&et. The Indian ban&s $ere finding it difficult
to compete $ith the international ban&s in terms of the customer ser%ice $ithout the use of the
information technology. Automated teller machine or popularly &no$n as ATM are the three
alphabets that ha%e changed the concept of ban&ing li&e nothing before. Instead of tellers handing
21
your o$n cash" today there are efficient machines that donHt tal& but just dispense cash. Total no
of ATMs installed in India by %arious ban&s as on end 8une -=;- is <<-;?.The ne$ pri%ate sector
ban&s in India is ha%ing the largest no of ATMs $hich is follo$ed by offsite ATMs belongs to SBI
and its subsidiaries and then it is follo$ed by ne$ pri%ate ban&s" nationaliBed ban&s" > foreign
ban&s.
Cu''e.t S-e.('i,$-
Currently o%erall ban&ing in India is considered as fairly mature in terms of supply" product range"
reach e%en though reach in rural India still remains a challenge for pri%ate sectors > foreign
ban&s. 0%en in terms of quality of assets > capital adequacy" Indian ban&s are considered to ha%e
clean" strong and transparent balance sheets as compared to other ban&s in comparable economies.
The 3BI is an autonomous body" $ith minimal pressure from the go%ernment. The stated policy
of the ban& on the Indian rupee is to manage %olatility I$ithout any stated e#change rate > this
has mostly been true.
9ith the gro$th of the Indian economy e#pected to be strong for quite some time especially in its
ser%ice sectors" the demand for ban&ing ser%ices Iespecially retail ban&ing" mortgages>
in%estment ser%ices are e#pected to be strong. Currently India has ?? scheduled commercial ban&s
JSCBsK D-? public sector ban&s" -< pri%ate ban&s and /; foreign ban&s. They ha%e a combined
net$or& of A/=== branches .According to a report by IC3A limited" the public sector ban&s hold
o%er :A percent of total assets of the ban&ing industry" $ith the pri%ate and foreign ban&s holding
;?.-O and @.AO respecti%ely.
Im),'t(.-e ,7 B(./i.A Se-t,' i. 2',?t= ,7 I.di(. e-,.,my$-
In the recent times $hen the ser%ice industry is attaining greater importance compare to
manufacturing industry ban&ing has e%ol%ed as prime sector pro%iding financial ser%ices to
gro$ing needs of the economy.
22
Ban&ing industry has undergone a paradigm shift from pro%iding ordinary ban&ing in the past to
such complicated > crucial ser%ices li&e merchant ban&ing" housing finance" bill discounting etc.
The sector has become more acti%e $ith entry of ne$ players li&e foreign > pri%ate ban&s. It has
also e%ol%ed as a prime builder of the economy by understanding the needs of same >
encouraging the de%elopment by $ay of gi%ing loans" pro%iding infrastructure facilities >
financing acti%ities for the promotion of entrepreneurs > other business establishments.
For a fast de%eloping country li&e India" presence of a sound financial system to mobiliBe >
allocate sa%ings of the public to$ards producti%e acti%ities is necessary. Commercial ban&s play a
crucial role in this regard.
The ban&ing sector in recent years has incorporated ne$ products in their business $hich is
helpful for gro$th. The ban&s ha%e started to pro%ide fee based ser%ices li&e" treasury operation"
managing deri%ati%es" options> futures" acting as ban&er to the industry during the public
offering" pro%iding consultancy ser%ices" acting as an intermediary bet$een t$o business entities
etc. At the same time ban&s are reaching out to the other end of the customer requirements li&e
insurance premium payment" ta# payment etc. It has changed itself from transaction type ban&
into relationship ban&ing" $here $e can find friendly >quic& ser%ices suited to our needs. This is
possible $ith understanding the customer needs their %alue to the ban& by $ellDorganiBed staff"
computer based net$or& for speedy transactions" plastic money facilities etc. The customer at
present as& for con%enience of ban&ing transactions" li&e -. hours ban&ing .The relationship
ban&ing plays a major > important role in gro$th.
Another major role played by ban&s in a transactional business" transactions> net$or&ing. Many
Indian leading ban&s ha%e spread out their net$or& to other countries" $hich helps in currency
transfer > earn e#change o%er it.
These ban&s play a major role in commercial import > e#port business. This foreign presence also
helps in bringing in the international standards of operations >ideas. The liberaliBation of ;<<;
has allo$ed many foreign ban&s to enter in the Indian mar&et > establish their business. This has
helped large amount of foreign capital inflo$ > increase our foreign e#change reser%es.
B(./* )+(y im),'t(.t ',+e i. e-,.,mi- de8e+,)me.t ,7 t=e -,u.t'y +i/e$-
23
 Ban&s mobiliBe the small sa%ings of the people > ma&e them an a%ailable for producti%e
purpose.
 !romotes the habits of sa%ings among the people thereby offering attracti%e 3,I on their
deposits.
 !ro%ides safety > security to the surplus money of the depositors and as $ell pro%ides a
con%enient > economical method of payment.
 Ban&s pro%ides con%enient means of transfer of fund from one place to another.
 *elps in mo%ement of capital from regions $here it is not %ery useful to regions $here it
can be more useful.
 Ban&s ad%ances e#posure in trade >commerce" industry> agriculture by &no$ing their
financing requirements > prospects.
 Ban&s act as an intermediary bet$een the depositors > the in%estors. Ban&s also act as
mediator bet$een e#porter >importer.
THE STR!CT!RE O# INDIAN BAN"IN2$-
The Indian ban&ing industry has reser%e ban& of India as its regulatory authority. This is a mi# of
public sector" pri%ate sector" coDoperati%e ban&s > foreign ban&s. The pri%ate sector ban&s are
again split into old ban&s > ne$ ban&s.
RESER:E BAN" O#
INDIA
G Ce.t'(+ b(./<
S-=edu+ed b(./*
24
Chapter %
COMPANY PRO#ILE
+C, ban& is commercial public sector ban&. It $as established in ;<./ by )hanshayam (as
Birla. 0arlier it $as &no$n as united commercial ban&" it $as started $ith 'ol&ata as its head
office $ith issued capital of - crores and paid up capital of ; crore. As per current mar&et position
go%ernment holding in +C, ban& is @A.;< per cent.
Ban& is managed around the nation by .; Bonal offices and ;= circle offices present in all the
crucial part of country. In terms of its a%ailability to the customers it has --== branches and [email protected]?
25
Ne? )'i8(te *e-t,'
b(./*
Public sector
ban#s
ATM all o%er the country. +C, ban& has %ital presence in financial mar&et outside India. It has
four o%erseas branches" t$o of $hich are in important financial centres of the $orld that is
Singapore and *ong 'ong. This ban& include many ser%ices to its customers $hich includes
International ban&ing ser%ices " ser%ices for 13I" eDban&ing solutions " loan scheme and deposit
schemes. It has many branches for direct ta# collections in India.
At present it has mar&et capital of A?:..-? crores and its 3,0 is ;<.. per cent. Being a
commercial ban& loan and ad%ances is among the primary acti%ity of the ban&. Apart from lending
credit for both term loan and $or&ing capital loan for the different sectors li&e Agriculture sector"
Trade and Ser%ice sector" 7arge" Medium and Small Scale Industries sector" Infrastructure sector
etc. including ta&ing care of their e#port import and nonDfund based needs li&e 7etter of Credit"
Ban& )uarantee etc. Ban& has large bas&et for the product for retail sector" some of these areC
!CO HOME$-
26
+C, *ome +C, Car +C, Trader
+C, 0ducation 7oan +C, Cash +C, 3ent
+C, Mortgage +C, Securities +C, 3eal 0state
+C, !ensioner +C, T$o 9heeler +C, !remier
0ducational 7oan
Scheme
+C, S$abhiman I 3e%erse
Mortgage 7oan Scheme for
Senior CitiBen
Interest Subsidy
Scheme for *ousing
the +rban !oor
JIS*+!K
+C, 0ducation 7oan
Scheme for
5ocational 0ducation
and Training
+C, )old 7oan 'isan Credit Card
J'CCK
+C, 'ISA1
B*,,MI 53I(*I
J+'B5 K
+C, 'ISA1 TAT'A7 SC*0M0 +C, 0STAT0
!+3C*AS0 7,A1
SC*0M0
+C, 'ISA1 A77
!+3!,S0 T03M
7,A1 SC*0M0
This scheme is for indi%iduals Jincluding 13I and !I,K ha%ing minimum -; years of age and
ma#imum @= years of age Jsalaried personK and @A years of age JnonDsalaried personK inclusi%e of
repayment period.
The purpose of this scheme isCD
 !urchase and construction of independent house or flat for residential purpose.
 0#tension" 3epair and 3eno%ation of e#isting house not more than A= years old.
 Ta&eo%er of home loans a%ailed from other ban&sFFIs.
 7oan is also a%ailable for furnishing of house property.
!CO REAL ESTATE$-
+nder the scheme ad%ances are pro%ided to the !romoter of real estate $ho must be $ell
established and e#perienced in their line of acti%ities at least for a period of three years.
Cooperati%e Societies are not eligible.
!CO S1ABHIMAN- RE:ERSE MORT2A2E LOAN MORT2A2E LOAN SCHEME
#OR SENIOR CITI&EN$-
under 3e%erse Mortgage a Senior CitiBen" o$ning a houseFflat" can enjoy a monthly Income
against the mortgage of his property $hile remaining the o$ner and occupying the house
throughout his lifetime" $ithout repayment or ser%icing of the loan.
"ISAN CREDIT CARD$-
!urpose of this scheme isCD
 To meet the short term credit requirements for culti%ation of crops
 SelfDconsumption requirement of farmer.
 9or&ing capital for agriculture" dairy animals" inland fishery etc.
 In%estment credit requirement for agriculture and acti%ities li&e pump sets" dairy animals
etc.
!CO "ISAN ALL P!RPOSE TERM LOAN SCHEME$-
27
This scheme $as madeCD To pro%ide single term loan limit to farmers for all term loan
requirements li&e Farm MechaniBation" 9ater Conser%ation" *orticulture" Allied Acti%ities and
,ther Agriculture related acti%ities etc.
HISTORY$-
The idea of an Indian supporting ban& $as concei%ed of by Mr. ).( Birla" the doyen of Indian
Industrial renaissance" after the historic PQuit IndiaP mo%ement in ;<.-. Soon this nascent idea
came into reality and" on the @th of 8anuary ;<./" The +nited Commercial Ban& 7td. $as
established $ith its 3egistered and *ead ,ffice at 'ol&ata. The %ery first Board of (irectors $as
represented by eminent personalities of India dra$n from many fields" and this allDIndia character
of the Ban& has been assiduously maintained till date not only in the composition of its Board but
also in the geographical spread of its -A== and more branches in the country as $ell as in its
o%erseas centers in Singapore and *ong 'ong.
*a%ing tra%ersed periods of e#pansion and consolidation" the Ban& $as nationaliBed by the
)o%ernment of India on ;< 8uly ;<@< $hereupon ;== per cent o$nership $as ta&en o%er by the
go%ernment in +1IT0( C,MM03CIA7 BA1'. This historic e%ent brought about a seaDchange
in the entire fabric of the ban&Gs thin&ing and acti%ities" commensurate $ith the go%ernmentGs
socioDpolitical approach of mass ban&ing as against class ban&ing hitherto practiced. The Ban&
had gone for 3s.-== crore of I!, during the year -==/D=. and is no$ a listed Company.
BRANCH PRO#ILE$-
This branch is located in )omtinagar area of 7uc&no$.
IFSC code of this branch isD +CBA===;@A.
Branch code is I ;@A.
MIC3 numberD [email protected]=-?==:
M(I,' C+ie.t* ,7 t=e #i'mCD
135S enterprises" Modern Communications" )unjan 0nterprises" 0%errite Machines 7imited.
M(I,' )',du-tCD
28
+C, home" +C, car" +C, trader" +C, cash" +C, s$abhiman" ,rganiBation is &no$n for
honouring the trust of its customers as it focus on satisfying its customers. ,rganiBation has highly
focused employee. Being the !S+ ban& it gets great support from go%ernment $hich helps it in
competing $ith other &ey players. This ban& has strong policy regarding e%aluation and appraisal
of credit. As ban& is focusing on financial inclusion" it has great chance of increasing its
Customer base in rural areas. There is increase in the income of middle class hence ban& can
launch different scheme to attract these customers .there is anticipation of impro%ement of
economic condition of country $hich can act as a great opportunity for ban&. By communicating
different scheme to potential customers" ban& can attract them.
7ending to priority sector may act as a hindrance in its gro$th. Increasing number of competitors
may decrease its customer base. Tactics of &eeping lo$ base rate by some pri%ate institution may
act as a great threat for ban&.
Cu''e.t M('/et P,*iti,.$-
As on /; March -=;-" )o%ernment ShareDholding of the Ban& $as @A.;< per cent. Branch
e#pansion started at a fast pace" particularly in rural areas" and the ban& achie%ed se%eral unique
distinctions in !riority Sector lending and other social uplift acti%ities. To &eep pace $ith the
de%eloping scenario and e#pansion of business" the Ban& undertoo& an e#ercise in organiBational
restructuring in the year ;<:-. This resulted into more functional specialiBation" decentraliBation
of administration and emphasis on de%elopment of personnel s&ill and attitude. Side by side"
$hole hearted commitment into the go%ernmentGs po%erty alle%iation programmes continued and
the con%enor ship of State 7e%el Ban&ersG Committee JS7BCK $as entrusted on the Ban& for
,disha and *imachal !radesh in ;<?/.
The year ;<?A" the name G+nited Commercial Ban&G $as changed into +C, BA1' by an Act of
!arliament. ,%er the years" +C, Ban& been regarded as one of the $ellD&no$n and %ibrant ban&s
in the country.
!CO BAN">* #i.(.-i(+ Re*u+t 7,' t=e #i.. Ye(' e.ded M('-= 31E 2013$-
29
In crores
P('(mete'* 31.03.2012
Audited
31.03.2013
(udited
C=(.Ae ,8e' #Y 12
GJ<
2+,b(+ bu*i.e** -:;A=? /=A=== ;-./.
2+,b(+ de),*it* ;A.==/ ;:/./; ;[email protected]
2+,b(+ (d8(.-e* ;;:A=. ;/;[email protected]< ;;.<:
O)e'(ti.A )',7it -?;; //A: ;<..;
Net )',7it ;;=< @;? D...-.
Net i.te'e*t i.-,me /<=- .A?- ;:..-
B,,/ 8(+ue )e' *=('e <..:- <:.<- /./?
T(b+e 1$ !CO BAN">* #i.(.-i(+ Re*u+t M('-= 31E 2013
"ey '(ti,*
P('(mete'* 31.03.12 31.0%.12 30.06.12 31.12.12 31.03.13
Retu'. ,. (**et =.A< =.?; =.-- =.-; =.;=
CAR ;-./A ;-.// ;-.-: ;/.;< ;..--
2',** NPA GJ< /..? /.?? ..?? A.A/ A..-
Net NPAGJ< ;.<@ -.-/ -.<. /./- /.;:
T(b+e 2$ !CO BAN">* "ey '(ti,* M('-= 31E 2013
"ey ,b*e'8(ti,.*$-
• Total business as at end MarH;/ stood at 3s. /=A=== crore as compared to 3s. -:;A=?
crore in MarH;-" e#hibiting a gro$th of ;-./. O on 2DoD2 basis.
• Business per 0mployee increased to 3s. ;[email protected]@ crore as at March -=;/ from 3s. ;;.:/
crore as at March -=;-.
• Business per Branch impro%ed to 3s. ;;@.<- crore as at March -=;/ compared to
3s. ;;/[email protected]= crore last year.
30
• Total income for the full year 3s. ;::=. crore compared to 3s. ;AA<? crore for F2;-.
• The Ban&Gs interest income for the $hole year $as at 3s. ;@:A- crore compared to 3s.
;[email protected]/- crore for F2;-.
• Total e#penses for the $hole year $as 3s. ;./.: crore compared to 3s. ;-:?: crore for
F2;-.
• ,perating e#penses reached 3s. -;:: crore compared to 3s. [email protected] crore for F2;-.
• The Ban& continues to maintain healthy capital base. As at March -=;/" Capital Adequacy
3atio as per BaselDII stood at ;..--O Jas against mandatory le%el of <OK.
I.te'.(ti,.(+ P'e*e.-e$-
Besides pro%iding inland ban&ing ser%ices through its %ast net$or& of branches in India" +C,
Ban& has a %ital presence in the financial mar&ets outside India. +C, Ban& presently has four
o%erseas branches in t$o important international financial centers in Singapore and *ong
'ong and representati%e office at 'uala 7umpur" Malaysia and )uangBhou" China.and is
considering proposals to open further branches in major financial centers across the globe. +C,
ban& has international presence for o%er @= years no$.
The Ban&Hs Singapore ,perations commenced from -;.=..;<A; $ith the opening of Singapore
Main branch and subsequently Sera goon branch $as opened in 7ittle IndiaN on =:.=/.;<A<.The
international lin&age from Singapore is supported by a large number of Indian branches net$or&
through Integrated Treasury Branch" Mumbai. ,ther branches in India also pro%ide international
ban&ing facilities through AuthoriBed Branches of the ban&.
This international net$or& is further augmented by correspondent arrangements $ith leading
Ban&s at all important $orld centers in %arious countries
MISSIONE :ISION C:AL!E$-
Mi**i,. St(teme.t$-
To be a TopDclass Ban& to achie%e sustained gro$th of business and profitability" fulfilling socioD
economic obligations" e#cellence in customer ser%iceE through up gradation of s&ills of staff" their
effecti%e participation and ma&ing use of stateDofDtheDart technology.
31
:i*i,. St(teme.t$-
To emerge as the most trusted" admired and soughtDafter $orld class financial institution and to be
the most preferred destination for e%ery customer and in%estor and a place of pride for its
employees.
O'A(.iD(ti,. St'u-tu'e$-
*eadquartered in 'ol&ata" the Ban& has /< Ronal ,ffices spread all o%er India. Branches located
in a geographical area report to the Ronal ,ffice ha%ing jurisdiction o%er that area. These Ronal
,ffices are headed by Senior 0#ecuti%es ranging upto the ran& of )eneral Manager" depending on
siBe of business and importance of location. The Ronal ,ffices report to at *ead ,ffice in
'ol&ata.
32
ABO!T THE LO2O$-
33
KHONORS YO!R TR!ST0
The logo of +C, ban& consists of a pair of clasped hands co%ered $ith an ,ctagonal Structure.
The logo is t$o hands encircling a point" or its the symbol of protecting ones trust $ith t$o hands
and the fists are also enclosed $ithin a bo# shaped formed by the same hand. ,%erall" itGs the
protection of trust and depict a sense of security in the customerGs mind.It has been coloured blue
since the organiBationGs inception" blue representing the Ban&Gs national responsibility. The
bac&ground has remained yello$ since the beginning as $ell.
The motto +C, Ban& has been D P*onors your TrustP.
34
Chapter &
RE:IE1 O# LITERAT!RE
:.; 1OR"IN2 CAPITAL AND ITS ASSESSMENT
The objecti%e of running any industry is earning profits. An industry $ill require funds to acquire
fi#ed assetsN li&e land and building" plant and machinery" equipments" %ehicles etc6 and also to
run the business i.e. its day to day operations.
9or&ing capital is defined" as the funds required for carrying the required le%els of current assets
to enable the unit to carry on its operations at the e#pected le%els uninterruptedly. Thus $or&ing
capital required J9C3K is dependent on
i. The %olume of acti%ity J%iB. le%el of operations i.e. !roduction and SalesK
ii. The acti%ity carried on %iB. manufacturing process" product" production programme" and
the materials and mar&eting mi#.
The purpose of assessing the 9C requirement of the industry is to determine ho$ the total
requirements of funds $ill be met. The t$o sources for meeting these requirements are the unitHs
longDterm sources Jli&e capital and long term borro$ingsK and the shortDterm borro$ings from
ban&s. The longDterm resources a%ailable to the unit are called the liquid surplus or 1et 9or&ing
Capital J19CK.
It can be e#plained by %isualiBing the process of setting up of industry. The unitHs starts $ith a
certain amount of capital" $hich $ill not normally be sufficient" e%en to meet the cost of fi#ed
assets. The unit" therefore" arranges for a longDterm loan from a financial institution or a ban&
to$ards a part of the cost of fi#ed assets. From these t$o sources after meeting the cost of fi#ed
assets some funds remain to be used for $or&ing capital. This amount is the 1et 9or&ing Capital
or 7iquid Surplus and $ill be one of the sources of meeting the $or&ing capital requirements.
The remaining funds for $or&ing capital ha%e to be raised from ban&sE ban&s normally pro%ide
$or&ing capital finance by $ay of ad%antage against stoc&s and sundry debtors. Ban&s" ho$e%er"
do not finance the full amount of funds required for carrying in%entories and recei%ablesC and
35
normally insist on the sta&e of the enterprise at e%ery stage" by $ay of margins. Ban& finance is
normally restricted to the amount of funds loc&ed up less a certain percentage of margins. Margins
are imposed $ith a %ie$ to ha%e adequate sta&e of the promoter in the business both to ensure his
adequate interest in the business and to act as a protection against any shoc&s that the business
may sustain. The margins stipulated $ill depend on %arious factors li&e salability" quality"
durability" price fluctuations in the mar&et for the commodity etc. ta&ing into account the total
$or&ing capital requirements as assessed earlier" the permissible limit" up to $hich the ban&
finance cab be granted is arri%ed.
9hile granting $or&ing capital ad%ances to a unit" it $ill be necessary to ensure that a reasonable
proportion of the $or&ing capital is met from the longDterm sources %iB. liquid surplus. 1ormally"
liquid surplus or net $or&ing capital be at least -AO of the $or&ing capital requirement
Jcorresponding to the benchmar& current ratio of ;.//K" though this may %ary depending on the
nature of industryF trade and business conditions.
:('i,u* met=,d* 7,' (**e**me.t ,7 1,'/i.A C()it(+ ('e di*-u**ed i. det(i+$-
;. O)e'(ti.A -y-+e met=,d$
Any manufacturing acti%ity is characteriBed by a cycle of operations consisting of purchase of
purchase of ra$ materials for cash" con%erting these into finished goods > realiBing cash by sale
of these finished goods. The time that lapses bet$een cash outlay > cash realiBation by sale of
finished goods > realiBation of sundry debtors is &no$n as the length of the operating cycle.
That is" the operating cycle consists ofC
• Time ta&en to acquire ra$ materials > a%erage period for $hich they are in store.
• Con%ersion process time
• A%erage period for $hich finished goods are in store >
• A%erage collection period of recei%ables JSundry (ebtorsK
36
The length of the operating cycle is different from industry to industry and from one firm to
another $ithin the same industry. For instance" the operating cycle of a pharmaceutical unit
$ould be quite different from one engaged in the manufacture of machine tools. The operating
cycle concept enables us to assess the $or&ing capital need of each enterprise &eeping in %ie$ the
peculiarities of the industry it is engaged in and its scale of operations. ,perating cycle is an
important management tool in decisionDma&ing. length of operating cycle S a T b T c T d.
0.g.CD a S @= days
b S ;= days
c S -= days
d S /= days"
The operating cycle is ;-= days Jnearly . monthsK. This means" there are
/@AF;-= S / cycles of operations in a year.
ASS0SSM01T ,F 9,3'I1) CA!ITA7 30Q+I30M01T >!03MISSIB70 BA1'
FI1A1C0 +SI1) ,!03ATI1) C2C70 C,1C0!TCD
7et us consider a case of a unit $here
Sales 3s.-="=== p.m. JAK
3a$ Material 3s.;."=== p.m.
9ages 3s.-"=== p.m.
,ther manufacturing e#penses 3s./"=== p.m.
Total 0#penditure 3s.;<"=== p.m. JBK
!rofit 3s ;=== p.m.
Table .C illustration JaK
37
The operating cycle isCD
3a$ material ;A days
Stoc& in process - days
Finished goods / days
Sundry debtors ;A days
Table AC illustration JbK
the total length of operating cycle S /A days J(K
9or&ing Capital 3equirement S B U ( F /=
S ;<=== U /A F /=
S 3s.--;@@ Jappro#.K
T'(diti,.(+ met=,d ,7 (**e**me.t ,7 ?,'/i.A -()it(+ 'eFui'eme.t$-
The operating cycle concept ser%es to identify the areas requiring impro%ement for the purpose of
control and performance re%ie$. But" ban&ers require a more detailed analysis to assess the
38
%arious components of $or&ing capital requirement %iB." finance for Stoc&s" bills etc. Ban&ers
pro%ide $or&ing capital finance for holding an acceptable le%el of current assets" %iB. ra$
materials" stoc&sDinDprocess" finished goods and sundry debtors for achie%ing a predetermined
le%el of production and sales. Quantification of these funds required to be bloc&ed in each of these
items of current assets at any time $ill" therefore pro%ide a measure of the $or&ing capital
requirement J9C3K of an industry
9hile computing the 9C3 of a unit" it is necessary to ta&e into account t$o other factorsCD
;K Credit recei%ed on purchases
-K Ad%ance recei%ed against orders placed for the products for industry.
3a$ Material Months
3equirement
3s.A
Stoc&DinD!rocess Jfor period
of processingK
Months cost of
!roduction
3s.B
Finished )oods Months cost of
!roduction required to be
stoc&ed
3s.C
Sundry (ebtors Months cost of
!roduction J,utstanding
CreditsK
3s.(
0#penses ,ne month JsayK 3s.0
Credit recei%ed on purchases 3s.F
Ad%ance !ayment on ,rder
3ecei%ed
3s.)
1,'/i.A C()it(+
ReFui'eme.t G1-'<
JATBTCT(T0K
D JFT)K
39
T(b+e %$ I++u*t'(ti,. G-<
The unit starts $ith a certain amount of capital $hich $ill not normally be sufficient e%en to meet
the cost of Fi#ed Assets. The unit thus arranges for a long term loan from a financial institution or
a ban& to$ards a part of the cost of fi#ed assets. From these t$o sources" after meeting the cost of
fi#ed assets" some funds remain to be used for $or&ing capital. This amount is V1et 9or&ing
CapitalH or V7iquid SurplusH > $ill be one of the sources of meeting $or&ing capital requirement.
The remaining funds for $or&ing capital ha%e to be raised from Ban&s. Ban&s normally pro%ide
$or&ing capital finance by $ay of ad%ances against stoc&s > sundry debtors. *o$e%er" ban&s do
not finance the full amount of funds required for carrying in%entories > recei%ables > normally
insist on the sta&e of the enterprise at e%ery stage" by $ay of margins. Margins are imposed $ith a
%ie$ to ha%e adequate sta&e of the promoter in the business both to ensure his adequate interest in
the business > to act as a bul$ar& against any stoc&s that the business may sustain. The margins
stipulated $ill depend on %arious factors li&e saleability" quality" durability" price fluctuations in
the mar&et for the commodity" etc. Ta&ing into account the total $or&ing capital requirement as
assessed earlier" the permissible limit" up to $hich the ban& finance can be granted is arri%ed at as
sho$n belo$CD
3a$ Material 3s . A
7ess C O margin 3s.B
3s.A I 3s.B S 3s.!
Stoc&DinDprocess 3s.C
7ess C O margin 3s.(
3s.C I 3s.( S 3s.Q
Finished )oods 3s.0
7ess C O margin 3s.F
3s.0 I 3s.F S 3s.3
40
Sundry (ebtors Jat sale %alueK 3s.)
7ess C O margin 3s.*
3s.) I 3s.* S 3s.S
T,t(+ Pe'mi**ib+e Limit ! T Q T 3 T S S T
T(b+e 5$ I++u*t'(ti,. Gd<
V! T Q T 3H $ill indicate the total limit against stoc& > VSH the limit against sundry debtors or
recei%ables in the form of bills. The difference bet$een the 9or&ing Capital 3equirement J9C3K
> the total permissible ban& borro$ing JTK should be met from the 7iquid Surplus or 1et
9or&ing Capital. 9hen the liquid surplus is not sufficient to meet the long term $or&ing capital
requirements" there $ill be a VdeficitH in meeting the unitHs $or&ing capital requirement.
A**e**me.t ,7 1C
1ame of the +nitC D MFs ABC 7td.
!articulars
J3s. in ===HsK
Anticipated monthly sales 3s.;==
Cost of production per month 3s.<=
of 3a$ Material 3s.?=
T(b+e 3$ I++u*t'(ti,. Ge<
Item St,-/i.A L
P(yme.t
Pe'i,d 1,'/i.A
-()it(+
ReFui'ed
M('Ai. J Am,u.t
Pe'mi**ib+e
+imit
3a$ material DDD DDD DDD DDD DDD
Indigenous ; month ?= -A -= @=
41
3a$
Material
9or& in
!rocess
- $ee&s .A -A ;; /.
Finished
goods
- $ee&s .A -A ;; /.
3ecei%ables
Jat
sales %alueK
; month <= // -/ @:
0#penses ; month ;= ;== ;= DDD
Total -:= :A ;<A
ad%ance payment recei%ed ;=
Credit on purchase .=
1,'/i.A C()it(+ ReFui'ed G1CR< -:=DJ;=T.=K S--=
T(b+e 6$ I++u*t'(ti,. G7<
The operating cycle concept ser%es to identify the areas requiring impro%ement for the purpose of
control and performance re%ie$. But" as ban&ers" $e require a more detailed analysis to assess the
%arious components of $or&ing capital requirement %iB." finance for stoc&s" bills etc.
Ban&ers pro%ide $or&ing capital finance for holding an acceptable le%el of current assets %iB. ra$
materials" stoc&DinDprocess" finished goods and sundry debtors for achie%ing a predetermined le%el
of production and sales. Quantification of these funds required to be bloc&ed in each of these
42
items of current assets at any time $ill" therefore pro%ide a measure of the $or&ing capital
requirement of an industry.
R(? m(te'i(+C Any industrial unit has to necessarily stoc& a minimum quantum of materials used
in its production to ensure uninterrupted production. Factors" $hich affect or influence the funds
requirement for holding ra$ material" areC
i. A%erage consumption of ra$ materials.
ii. Their a%ailability I locally or form places outside" easy a%ailability F scarcity"
number of sources of supply
iii. Time ta&en to procure ra$ materials Jprocurement time or lead timeK
i%. Imported or indigenous.
%. Minimum quantity supplied by the mar&et JMinimum ,rder Quantity JM,QKK.
%i. Cost of holding stoc&s Je.g. insurance" storage" interestK
%ii. Criticality of the item.
%iii. Transport and other charges J0conomic ,rder Quantity J0,QKK.
i#. A%ailability on credit or against ad%ance payment in cash.
#. Seasonality of the materials.
This ra$ material requirement is generally e#pressed as so many months requirement
JconsumptionK.
St,-/ i. )',-e**CD
Barring a fe$ e#ceptional types of industries" $hen the ra$ material get con%erted into finished
products $ithin fe$ hours" there is normally a time lag or delay or period of processing only after
$hich the ra$ materials get con%erted into finished product. (uring this period of processing" the
ra$ materials get con%erted into finished goods and e#penses are being incurred. The period of
processing may %ary from a fe$ hours to a number of months and unit $ill be bloc&ed $or&ing
funds in the stoc&DinDprocess during this period. Such funds bloc&ed in SI! depend onC
i.The processing time
ii.1umber of products handled at a time in the process
iii.A%erage quantities of each product" processed at each time Jbatch quantityK
i%.The process technology
43
%.1umber of shifts.
#i.i*=ed A,,d*C
All products manufactured by an industry are not sold immediately. It $ill be necessary to stoc&
certain amount of goods pending sale. This stoc& depends onC
i. 9hether the manufacture is against firm order or against anticipated order
ii. Supply terms
iii. Minimum quantity that can be dispatched
i%. Transport a%ailability and transport cost
%. !reDdispatch inspection
%i. Seasonality of goods
%ii. 5ariation in demand
%iii. !ea& le%elF lo$ le%el of operations
i#. Mar&eting arrangementD e.g. direct sale to consumers or through dealersF
$holesalers.
The requirement of funds against finished goods is e#pressed so many monthsH cost of production.
Su.d'y debt,'* G'e-ei8(b+e*<C
Sales may be affected under three different methodsC
i. Against ad%ance payment
ii. Against cash
iii. ,n credit
A unit grants trade credit because it e#pects this in%estment to be profitable. It $ould be in the
form of sales e#pansion and fresh customers or it could be in the form of retention of e#isting
customers. The e#tent of credit gi%en by the industry normally depends uponC
i. Trade practices
ii. Mar&et conditions
iii. 9hether it is bul&y by the buyer
44
i%. Seasonality
%. !rice ad%antage
0%en in cases $here no credit is e#tended to buyers" the transit time for the goods to reach the
buyer may ta&e some time and till the cash is recei%ed bac&" the unit $ill ha%e to be cut out of
funds. The period from the time of sale to receipt of funds $ill ha%e to be rec&oned for the
purpose of quantifying the funds bloc&ed in sundry debtors. 0%en though the amount of sundry
debtors according to the unitHs boo&s $ill be on the basis of Sale !rice" the actual amount bloc&ed
$ill be only the cost of production of the materials against $hich credit has been e#tendedD the
difference being the unitHs profit marginD J$hich the unit does not ob%iously ha%e to spendK. The
$or&ing capital requirement against Sundry (ebtors $ill therefore be computed on the basis of
cost of production J$hereas the permissible ban& finance $ill be computed on basis of sale %alue
since profit margin %aries from product to product and buyer to buyer and cannot be uniformly
segregated from the sale %alueK.
The $or&ing capital requirement is e#pressed as so many monthsH cost of production.
[email protected])e.*e*$
It is customary in assessing the $or&ing capital requirement of industries" to pro%ide for ;
monthHs e#penses also. A question might be raised as to $hy e#penses should be ta&en separately"
$hereas at e%ery stage the funds required to be bloc&ed had been ta&en into account. This amount
is pro%ided merely as a cushion" to ta&e care of temporary bottlenec&s and to enable the unit to
meet e#penses $hen they fall due. 1ormally ;Dmonth total e#penses" direct and indirect" salaries
etc. are ta&en into account.
9hile computing the $or&ing capital requirements of a unit" it $ill be necessary to ta&e into
account - other factors"
i. Is the credit recei%ed on purchasesD trade credit is a normal practice in trading
circles. The period of such credit recei%ed %aries from place to place" material to
material and person to person. The amount of credit recei%ed on purchases reduces
the $or&ing capital funds required by the unit.
ii. Industries often recei%e ad%ance against orders placed for their products. The
buyers" in certain cases" ha%e to necessarily gi%e ad%ance to producers e.g. custom
45
made machinery. Such funds are used for the $or&ing capital of an industry. It can
be thus summariBed as follo$sC
3a$ materials Months requirement 3s. A
Stoc&DinDprocess Months Jcost of !roductionK 3s. B
Finished )oods Months cost of !roduction required to be stoc&ed 3s. C
Sundry (ebtors Months cost of !roduction JoFs creditsK 3s. (
0#penses ,ne monthJnormallyK 3s. 0
Total Current Assets ATBTCT(T0
Credit recei%ed on !urchases
JmonthsH !urchase %alueK
3s. F
Ad%ance payment on order
recei%ed
3s. )
1OR"IN2 CAPITAL REB!IRED GH< M GANBNCNDNE<- G#N2<
46
-. P',Ie-ted A..u(+ Tu'.,8e' Met=,d 7,' SME u.it* GN(y(/ C,mmittee<$-
For SM0 units" $hich enjoy fund based $or&ing capital limits up to 3s.A crore" the minimum
$or&ing capital limit should be fi#ed on the basis of projected annual turno%er. -AO of the output
or annual turno%er %alue should be computed as the quantum of $or&ing capital required by such
unit. The unit should be required to bring in AO of their annual turno%er as margin money and the
Ban& shall pro%ide -=O of the turno%er as $or&ing capital finance. 1aya& committee guidelines
correspond to $or&ing capital limits as per the operating cycle method $here the a%erage
productionF processing cycle is ta&en to be / months.
0#ampleC
Anticipated Annual ,utput JAK ;-=
9or&ing Capital 3equirementC -AO of A JBK /=
Margin C AO of A JCK @
Ma#imum !ermissible Ban& Finance JBDCK -.
In 3s lacs
Im),'t(.t -+('i7i-(ti,.*$
i. The assessment of 9C limits should be done both as per !rojected Turno%er Method and
Traditional MethodE the higher of the t$o is to be sanctioned as credit limit. If the
operating cycle is more than / months" there is no restriction on e#tending finance at more
than -=O of the turno%er pro%ided that the borro$er should bring n proportionally higher
sta&e in relation to his requirements of ban& finance.
ii. 9hile the approach of e#tending need based credit $ill be &ept in mind" the financial
strengths of the unit is also important" the later aspect assumes greater significance so as to
ta&e care of quality of ban&Hs assets. The margin requirement" as a general rule" should not
be diluted.
47
/. MPB# Met=,d GT(.d,. (.d C=,'e C,mmittee Re-,mme.d(ti,.*<$-
The Tandon Committee $as appointed to suggest a method for assessing the $or&ing capital
requirements and the quantum of ban& finance. Since at that time" there $as scarcity of ban&Hs
resources" the Committee $as also as&ed to suggest norms for carrying current assets in different
industries so that ban& finance $as not dra$n more than the minimum required le%el. The
Committee $as also as&ed to de%ise an information system that $ould pro%ide" periodically"
operational data" business forecasts" production plan and resultant credit needs of units. Chore
Committee" $hich $as appointed later" further refined the approach to $or&ing capital
assessment. The M!BF method is the fall out of the recommendations made by Tandon and Chore
Committee. 3egarding approach to lendingC the committee suggested three methods for
assessment of $or&ing capital requirements.
i. #i'*t Met=,d ,7 +e.di.AC According to this method" Ban&s $ould finance up to a ma#. of
:AO of the $or&ing capital gap J9C)S the total current assets D current liabilities other
than ban& borro$ingK and the balance -A O of the 9C) considered as margin is to come
out of long term source i.e. o$ned funds and term borro$ings. This $ill gi%e rise to a
minimum current ratio of ;.;:C;. The difference of J;.;:D;K represents the borro$erHs
margin $hich is popularly &no$n as 1et 9or&ing Capital J19CK of the unit
ii. Se-,.d Met=,d ,7 +e.di.A$ As per the -
nd
method Ban& $ill finance ma#imum up to :AO
of total current assets JTCAK > Borro$ers has to pro%ide a minimum of -AO of total
current assets as the margin out of long term sources. This $ill gi%e a minimum current
ratio of ;.//C;
iii. T=i'd Met=,d ,7 +e.di.A$ Same as -nd method" but e#cluding core current assets from
total assets and the core current assets is financed out of long term funds. The term Vcore
current assetsH refers to the absolute minimum le%el of in%estment in current assets" $hich
is required at all times to carry out minimum le%el of business acti%ity. The current ratio is
further impro%ed i.e. ;.:<C ;
48
[email protected](m)+e$
Cu''e.t Li(bi+itie* Cu''e.t (**et*
Creditors for purchase ;== 3a$ material -==
,ther current liability A= Stoc& in process -=
Ban& borro$ings -== Finished goods <=
3ecei%ables A=
,ther current assets ;=
Total Current 7iabilities /A= Total Current Assets /:=
JIn 3s lacsK
Calculating 19C
#i'*t met=,d ,7 +e.di.A Se-,.d met=,d ,7 +e.di.A T=i'd met=,d ,7 +e.di.A
Total CA /:= Total CA /:= Total CA /:=
7essC C7 I Ban&
Borro$ing
;A= 7essC -AO of CA <-
7essC core CA from
7T
<A
-:A
9or&ing Capital )ap --=
7essC C7 D Ban&
Borro$ing
;A= 7essC -AO from 7TS @<
-AO of 9C) from
long term sources
AA
7essC C7 I Ban&
Borro$ing
;A=
MPB# 1% MPB# 123 MPB# %
Current ratio ;.;:C ; Current ratio ;.//C ; Current ratio ;.:<C ;
49
The abo%e e#ample sho$s that the contribution of margin by the borro$er increases $hen
financing is shifted from First method to Second method $hich is &no$n to be stringent from
borro$er point of %ie$ JThird method $as not accepted by 3BIK.
.. P',Ie-ted B(+(.-e S=eet Met=,d GPBS<$-
The !BS method of assessment $ill be applicable to all borro$ers $ho are engaged in
manufacturing" ser%ices and trading acti%ities $ho require fund based $or&ing capital finance of
3s. -A lacs and abo%e. In case of SSI borro$ers" $ho require $or&ing capital credit limit up to 3s.
A cr" the limit shall be computed on the basis of 1aya& Committee formula as $ell as that based
on production and operating cycle of the unit and the higher of the t$o may be sanctioned.. The
assessment $ill be based on the borro$erHs projected balance sheet" the funds flo$ planned for
currentF ne#t year and e#amination of the profitability" financial parameters etc. unli&e the M!BF
method" it $ill not be necessary in this method to fi# or compute the $or&ing capital finance on
the basis of a stipulated minimum le%el of liquidity JCurrent 3atioK. The $or&ing capital
requirement $or&ed out is based on the follo$ingC
i. CMA assessment method is continued $ith certain modifications.
ii. Analysis of the !rofit and 7oss account" Balance Sheet" Funds flo$ etc. for the past
periods is done to e#amine the profitability" financial position" and financial
management etc of the business.
iii. Scrutiny and %alidation of the projected income and e#penses in the business and
projected changes in the financial position Jsources and uses of fundsK. This is carried
out to e#amine $hether these parameters are acceptable from the angle of liquidity"
o%erall gearing" efficiency of operations etc.
In the !BS method" the borro$erHs total business operations" financial position" management
capabilities etc. are analyBed in detail to assess the $or&ing capital finance required and to
e%aluate the o%erall ris&. The assessment procedure is as follo$sC
i. Collection of financial information from the borro$er
ii. Classification of current assets F current liabilities
50
iii. 5erification of projected le%els of in%entoryF recei%ablesF sundry creditors
i%. 0%aluation of liquidity in the business operation
%. 5alidation of ban& finance sought
$or#ing %apital &lo'chart()
Collection of financial data
Analysis of financial data
Classification of Current Assets JCAKF Current 7iabilities JC7K
5erification of projected le%els of current assetsF current liabilities $ith special
0mphasis on in%entoryF recei%ablesF sundry creditors
0%aluation of liquidity in the business operation
5alidation of ban& finance sought on the project balance sheet
Fi#ing of subDlimits
(isbursement of 9or&ing Capital 7oan
51
:.- ASSESSMENT O# TERM LOANS$-
Term 7oans are generally granted to finance capital e#penditure" i.e. for acquisition of land"
building and plant and machinery" required for setting up a ne$ industrial underta&ing or
e#pansionFdi%ersification of an e#isting one and also for acquisition of mo%able fi#ed assets.
Term 7oans are also gi%en for moderniBation" reno%ation" etc. to impro%e the product quality or
increase the producti%ity and profitability.
The basic difference bet$een shortDterm facilities and term loans is that shortDterm facilities are
granted to meet the gap in the $or&ing capital and are intended to be liquidated by realiBation of
assets" $hereas term loans are gi%en for acquisition of fi#ed assets and ha%e to be liquidated from
the surplus cash generated out of earnings. They are not intended to be paid out of the sale of the
fi#ed assets gi%en as security for the loan. This ma&es it necessary to adopt a different approach
in e#amining the application of the borro$ers for term credits.
For the assessment to Term 7oan Techno 0conomic Feasibility Study is done. The success of a
feasibility study is based on the careful identification and assessment of all of the important issues
for business success. A detailed !roject 3eport is submitted by an entrepreneur" prepared by a
appro%ed agency or a consultancy organiBation. Such report pro%ides inDdepth details of the
project requesting finance. It includes the technical aspects" Managerial Aspect" the Mar&et
Condition and !rojected performance of the company. It is necessary for the appraising officer to
cross chec& the information pro%ided in the report for determining the $orthiness of the project.
The feasibility study is a part of Credit Appraisal process and the same is discussed in the
follo$ing chapter.
52
Chapter '
CREDIT APPRAISAL
?.; INTROD!CTION
0ffecti%eness of Credit Management in the ban& is highlighted by the quality of its loan portfolio.
0%ery Ban& is stri%ing hard to ensure that its credit portfolio is healthy and that 1on !erforming
Assets are &ept at lo$est possible le%el" as both of these factors ha%e direct impact on its
profitability. In the present scenario efficient project appraisal has assumed a great importance as
it can chec& and pre%ent induction of $ea& accounts to our loan portfolio. All possible steps need
to be ta&en to strengthen pre sanction appraisal as al$ays !re%ention is better than CureN. 9ith
the opening up of the economy rapid changes are ta&ing place in the technology and financial
sector e#posing ban&s to greater ris&s" $hich can be broadly classified as underC
I.du*t'y Ri*/*
)o%ernment regulations and policies" a%ailability of infrastructure facilities"
Industry 3ating" Industry Scenario > ,utloo&" Technology +p gradation"
a%ailability of inputs" product obsolescence" etc.
Bu*i.e** Ri*/*
,perating efficiency" competition faced from the units engaged in similar
products" demand and supply position" cost of labor" cost of ra$ material
and other inputs" pricing of product" surplus a%ailable" mar&eting" etc.
M(.(Aeme.t Ri*/*
Bac&ground" integrity and mar&et standingF reputation of promoters"
organiBational set up and management hierarchy" e#pertiseFcompetence of
persons holding &ey position in the organiBation" delegation and
decentraliBation of authority" achie%ement of targets" trac& record in
e#ecution of project" debt repayment" industry relations etc.
#i.(.-i(+ Ri*/*
Financial strengthFstanding of the promoters" reliability and reasonableness
of projections" past financial performance" reliability of operational data and
financial ratios" adequacy of pro%isioning for bad debts" qualifying remar&s
of auditorsFinspectors etc.
53
In light of the foregoing ris&s" the ban&s appraisal methodology should &eep pace $ith e%er
changing economic en%ironment. The appraisal system aims to determine the credit
needsFrequirements of the borro$er ta&ing into account the financial resources of the client. The
end objecti%e of the appraisal system is to ensure that there is no under D financing or o%er D
financing. Follo$ing are the aspects" $hich need to be scrutiniBed and analyBed $hile appraisingC
?.- MAR"ET ANALYSIS $-
J(emand > !otentialK
The mar&et demand and potential is to be e#amined for each product item and its
%ariantsFsubstitutes by ta&ing into account the selling price of the products to be mar&eted %isDaD
%is prices of the competing productsFsubstitutes" discount structure" arrangement made for after
sale ser%ice" competitorsG status and their le%el of operation $ith regard to production and products
and distribution channels being used etc. Critical analysis is required regarding siBe of the mar&et
for the productJsK both local and e#port" based on the present and e#pected future demand in
relation to supply position of similar products and a%ailability of the other substitutes as also
consumer preferences" practices" attitudes" requirements etc. Further" the buyDbac& arrangements
under the foreign collaboration" if any" and influence of )o%ernment policies also needs to be
considered for projecting the demand. Competition from imported goods" )o%ernment Import
!olicy and Import duty structure also need to be e%aluated.
?./ TECHNICAL ANALYSIS
In a dynamic mar&et" the product" its %ariants and the productDmi# proposed to be manufactured in
terms of its quality" quantity" %alue" application and current tasteFtrend requires thorough
in%estigation.
L,-(ti,. (.d Site
Based on the assessment of factors of production" mar&ets" )o%t. policies and other factors"
7ocation J$hich means the broad areaK and Site J$hich signifies specific plot of landK selected for
54
the +nit $ith its ad%antages and disad%antages" if any" should be such that o%erall cost is
minimiBed. It is to be seen that site selected has adequate a%ailability of infrastructure facilities
%iB. !o$er" 9ater" Transport" Communication" state of information technology etc. and is in
agreement $ith the )o%t. policies. The adequacy of siBe of land and building for carrying out its
presentFproposed acti%ity $ith enough scope for accommodating future e#pansion needs to be
judged.
R(? M(te'i(+
The cost of essentialFmajor ra$ materials and consumables required their past and future price
trends" qualityFproperties" their a%ailability on a regular basis" transportation charges" )o%t.
policies regarding regulation of supplies and prices require to be e#amined in detail. Further" cost
of indigenous and imported ra$ material" firm arrangements for procurement of the same etc.
need to be assessed.
P+(.t C M(-=i.e'yE P+(.t C()(-ity (.d M(.u7(-tu'i.A P',-e**
The selection of !lant and Machinery proposed to be acquired $hether indigenous or imported
has to be in agreement $ith required plant capacity" principal inputs" in%estment outlay and
production cost as also $ith the machinery and equipment already installed in an e#isting unit"
$hile for the ne$ unit it is to be e#amined $hether these are of pro%en technology as to its
performance. The technology used should be latest and cost effecti%e enabling the unit to compete
in the mar&et. !urchase of reconditionedFold machinery is to be dealt in terms of laid do$n
guidelines. Compatibility of plant and machinery" particularly" in respect of imported technology
$ith quality of ra$ material is to be &ept in %ie$. Also plant and machinery and other equipments
needed for %arious utility ser%ices" their supply position" specification" price and performance as
also suppliersG credentials" and in case of collaboration" collaboratorsG present and future support
requires critical analysis. !lant capacity and the concept of economic siBe has a major bearing on
the present and future plans of the entrepreneurJsK and should be related to the a%ailability of ra$
material" product demand" product price and technology.
The selected process of manufacturing indicating the adequacy" a%ailability and suitability of
technology to be used along $ith plant capacity" manufacturing process needs to studied in detail
55
$ith capacities at %arious stages of production being such that it facilitates optimum utiliBation
and ensures future e#pansionF debottlenec&ing" as and $hen required. It is also to be ensured that
arrangements are made for inspection at intermediateFfinal stages of production for ensuring
quality of goods on successful commencement of production and completion" $here%er required.
?.. #INANCIAL ANALYSIS
The aspects $hich need to be analyBed under this head should include cost of project" means of
financing" cost of production" brea&De%en analysis" financial statements as also profitabilityFfunds
flo$ projections" financial ratios" sensiti%ity analysis $hich are discussed as underC
C,*t ,7 P',Ie-t C Me(.* ,7 #i.(.-i.A
a. The major cost components of any project are land and building including transfer"
registration and de%elopment charges as also plant and machinery" equipment for au#iliary
ser%ices" including transportation" insurance" duty" clearing" loading and unloading charges
etc. It also in%ol%es consultancy and &no$Dho$ e#penses $hich are payable to foreign
collaborators or consultants $ho are imparting the technical &no$Dho$. 3ecurring annual
royalty payment is not reflected under this head but is accounted for under the profitability
statements. Further" preliminary e#penses" such as" cost of incorporation of the Company" its
registration" preparation of feasibility report" mar&et sur%eys" preDoperati%e e#penses li&e
salary" tra%elling" start up e#penses" mortgage e#penses incurred before commencement of
commercial production also form part of cost of project. Also included in it are capital issue
e#penses $hich can be in the form of bro&erage" commission" ad%ertisement" printing"
stationery etc. Finally" pro%isions for contingencies to meet any unforeseen e#penses" such
as" price escalation or any other e#pense $hich ha%e been inad%ertently omitted li&e margin
for $or&ing capital requirements required to complete the production cycle" interest during
construction period" etc. are also part of capital cost of project. It is to be ensured $hile
appraising the project that cost and %arious estimates gi%en are realistic and there is no
underFo%er estimation. Further" these cost components should be supported by proper
quotations" specifications and justifications of land" machinery and &no$Dho$ e#penses etc.
56
ii. Besides Ban&Hs loan" the project cost is normally financed by bringing capital by the
promoters and shareholders in the form of equity" debentures" unsecured long term loans and
deposits raised from friends and relati%es $hich are not repayable till repayment of Ban&Gs
loan. 3esources are raised for financing project by raising term loans from InstitutionsFBan&s
$hich are repayable o%er a period of time" deferred term credits secured from suppliers of
machinery $hich are repayable in installments o%er a period of time. The abo%e is an
illustrati%e list" as the promoters ha%e no$ started raising funds through 0uroDissues" Foreign
Currency loans" premium on capital issues" etc. $hich are sometimes comparati%ely cheap
means of finance. Subsidies and de%elopment loans pro%ided by the CentralFState
)o%ernment in notified bac&$ard districts to attract entrepreneurs are also means of financing
a project. It is to be ascertained that requirement of finance has been properly tiedDup for
unhindered implementation of a project. The financing structure accepted must be in
consonance $ith generally accepted le%els along $ith adequate !romotersG sta&e. The
resourcefulness" $illingness and capacity of promoter to contribute the same ha%e also to be
in%estigated.
In case of project finance" the promoterFborro$er may bring in upfront his contribution Jother
than funds to be pro%ided through internal generationK and the branches should commence its
disbursement after the stipulated funds are brought in by the promoterFborro$er. A condition
to this effect should be stipulated by the sanctioning authority in case of project finance" on
case to case basis depending upon the resourcefulness and capacity of the promoter to
contribute the same. It should be ensured that at any point of time" the promoterHs
contribution should not be less than the proportionate share.
P',7it(bi+ity St(teme.t
The profitability statement $hich is also &no$n as WIncome and 0#penditure StatementG is
prepared after considering the net sales figure and details of direct costsFe#penses relating to ra$
material" $ages" po$er" fuel" consumable storesFspares and other manufacturing e#penses to arri%e
at a figure of gross profit. Thereafter" all other e#penses li&e salaries" office e#penses" pac&ing"
sellingFdistribution" interest" depreciation and any other o%erhead e#penses and ta#es are ta&en
into account to arri%e at the figure of net profit. The projections of profitFloss are prepared for a
57
period co%ering the repayment of term loans. The economic appraisal includes scrutiniBing all the
items of cost" and e#amining the assumptions" if any" to ensure that these are realistic and
achie%able. There should not be any optimism or pessimism in $or&ing out profitability
projections since e%en a little change in the productDmi# from nonDremunerati%e to remunerati%e
or %iceD%ersa can distort the picture. 9hile preparing profitability projections" the past trends of
performance in an industry and other en%ironmental factors influencing the cost and re%enue items
should also be considered objecti%ely.
)enerally spea&ing" a unit may be considered as financially %iable" progressi%e and efficient if it
is able to earn enough profits not only to ser%ice its debts timely but also for future
de%elopmentFgro$th.
B'e(/-E8e. A.(+y*i*
Analysis of brea&De%en point of a business enterprise $ould help in &no$ing the le%el of output
and sales at $hich the business enterprise just brea&s e%en i.e. there is neither profit nor loss. A
business earns profit if it operates at a le%el higher than the brea&De%en le%el or brea&De%en point.
If" on the other hand" production is belo$ this le%el" the business $ould incur loss. The brea&D
e%en point in an algebraic equation can be put as underC
The fi#ed costs include all those costs $hich tend to remain the same up to a certain le%el of
production $hile %ariable costs are those costs $hich tend to change in proportion $ith the
%olume of production. As regards unit sales price" it is generally the same for all le%els of output.
The brea&De%en analysis can help in ma&ing %ital decisions relating to fi#ation of selling price
ma&e or buy decision" ma#imiBing production of the item gi%ing higher contribution etc. Further"
the brea&De%en analysis can help in understanding the impact of important cost factors" such as"
po$er" ra$ material" labor" etc. and optimiBing productDmi# to impro%e project profitability.
58
Brea&De%en point
J5olume or +nitsK
Total Fi#ed Cost F JSales price per unit D 5ariable Cost per unitK
Brea&De%en point
JSales in rupeesK
JTotal Fi#ed Cost # SalesK F JSales D 5ariable CostsK
#u.d-#+,? St(teme.t
A fundDflo$ statement is often described as a VStatement of Mo%ement of FundsH or V$here gotC
$here gone statementH. It is deri%ed by comparing the successi%e balance sheets on t$o specified
dates and finding out the net changes in the %arious items appearing in the balance sheets.
A critical analysis of the statement sho$s the %arious changes in sources and applications JusesK of
funds to ultimately gi%e the position of net funds a%ailable $ith the business for repayment of the
loans. A projected Fund Flo$ Statement helps in ans$ering the under mentioned points.
• *o$ much funds $ill be generated by internal operationsFe#ternal sourcesL
• *o$ the funds during the period are proposed to be deployedL
• Is the business li&ely to face liquidity problemsL
B(+(.-e S=eet P',Ie-ti,.*
The financial appraisal also includes study of projected balance sheet $hich gi%es the position of
assets and liabilities of a unit at a particular future date. In other $ords" the statement helps to
analyBe as to $hat an enterprise o$ns and $hat it o$es at a particular point of time.
An appraisal of the projected balance sheet data of the unit $ould be concerned $ith $hether the
projections are realistic loo&ing to %arious aspects relating to the same industry.
#i.(.-i(+ R(ti,*
9hile analyBing the financial aspects of project" it $ould be ad%isable to analyBe the important
financial ratios o%er a period of time as it may tell us a lot about a unitGs liquidity position"
managementsG sta&e in the business" capacity to ser%ice the debts etc. The financial ratios $hich
are considered important are discussed as underC
59
R(ti, #,'mu+( Rem('/*
;
(ebtD0quity
3atio
(ebt JTerm 7iabilitiesK
0quity
(Where, Equity = Share capital,
free reserves, premium on
shares, , etc. after adjusting loss
balance)
There cannot be a rigid rule to a satisfactory debtD
equity ratio" lo$er the ratio higher is the degree of
protection enjoyed by the creditors. These days the
debt equity ratio of ;.AC; is considered reasonable.
It" ho$e%er" is higher in respect of capital intensi%e
projects. But it is al$ays desirable that o$ners
ha%e a substantial sta&e in the project. ,ther
features li&e quality of management should be &ept
in %ie$ $hile agreeing to a less fa%orable ratio.
In financing highly capital intensi%e projects li&e
infrastructure" cement" etc. the ratio could be
considered at a higher le%el.
-
(ebtD
Ser%ice
Co%erage
3atio
(ebt T (epreciation T
1et !rofit JAfter Ta#esK
T Annual interest on long
term debt
Annual interest on long
term debt T 3epayment
of debt
This ratio of ;.A to - is considered reasonable. A
%ery high ratio may indicate the need for lo$er
moratorium periodFrepayment of loan in a shorter
schedule. This ratio pro%ides a measure of the
ability of an enterprise to ser%ice its debts i.e.
WinterestG and Wprincipal repaymentG besides
indicating the margin of safety. The ratio may %ary
from industry to industry but has to be %ie$ed $ith
circumspection $hen it is less than ;.A.
/
T,7 F T19
3atio
Tangible 1et 9orth J!aid
up Capital T 3eser%es
and Surplus D
Intangible AssetsK
Total outside 7iabilities
JTotal 7iability D 1et
9orthK
This ratio gi%es a %ie$ of borro$erGs capital
structure. If the ratio sho$s a decreasing trend" it
indicates that the borro$er is relying more on his
o$n funds and less on outside funds and %ice %ersa
60
.
!rofitDSales
3atio
,perating !rofit JBefore
Ta#es e#cluding Income
from other SourcesK
Sales
This ratio gi%es the margin a%ailable after meeting
cost of manufacturing. It pro%ides a yardstic& to
measure the efficiency of production and margin on
sales price i.e. the pricing structure
A
SalesD
Tangible
Assets 3atio
Sales
Total Assets D Intangible
Assets
This ratio is of a primary importance to see ho$
best the assets are used. A rising trend of the ratio
re%eals that borro$er has been ma&ing efficient
utiliBation of his assets. *o$e%er" caution needs to
be e#ercised $hen fi#ed assets are old and
depreciated" as in such cases the ratio tends to be
high because the %alue of the denominator of the
ratio is %ery lo$.
@
Current
3atio Current Assets
Current 7iabilities
*igher the ratio greater the short term liquidity.
This ratio is indicati%e of short term financial
position of a business enterprise. It pro%ides margin
as $ell as it is measure of the business enterprise to
payDoff the current liabilities as they mature and its
capacity to $ithstand sudden re%erses by the
strength of its liquid position. 3atio analysis gi%es
indicationsE to be made $ith reference to o%erall
tendencies and parameters in relation to the project.
:
,utput
In%estment
3atio
Sales
Total capital employed
Jin fi#ed > current
assetsK
This ratio is indicati%e of the efficiency $ith $hich
the total capital is turned o%er as compared to other
units in similar lines.
61
I.te'.(+ R(te ,7 Retu'.
The discount rate often used in capital budgeting that ma&es the net present %alue of all cash flo$s
from a particular project equal to Bero. *igher a projectGs I33 the more desirable it is to underta&e
the project. I33 should be higher than the Cost of the project Jinterest rate in case of project
financingK
Se.*iti8ity A.(+y*i*
9hile preparing and appraising projects certain assumptions are made in respect of certain
criticalFsensiti%e %ariables li&e selling priceFcost price per unit of production" productDmi#" plant
capacity utiliBation" sales etc. $hich are assigned a W5A7+0G after estimating the range of
%ariation of such %ariables. The W5A7+0G so assumed and ta&en into consideration for arri%ing at
the profitability projections is the WM,ST 7I'072 5A7+0G. Sensiti%ity Analysis is a systematic
approach to reduce the uncertainties caused by such assumptions made. The Sensiti%ity Analysis
helps in arri%ing at profitability of the project $herein critical or sensiti%e elements are identified
$hich are assigned different %alues and the %alues assigned are both optimistic and pessimistic
such as increasing or reducing the sale priceFsale %olume" increasing or reducing the cost of inputs
etc. and then the project %iability is ascertained. The critical %ariables can then be thoroughly
e#amined by generally selecting the pessimistic options so as to ma&e possible impro%ements in
the project and ma&e it operational on %iable lines e%en in the ad%erse circumstances.
62
?.A MANA2EMENT C OR2ANI&ATION ANALYSIS
Appraisal of project $ould not be complete till it thro$s enough light on the personJsK behind the
project i.e. management and organiBation of the unit. It is seen that some projects may fail not
because these are not %iable but because of the ineffecti%eness of the management and the
organiBation in controlling %arious functions li&e production" mar&eting" finance" personnel" etc.
The appraisal report should highlight the strengths and $ea&nesses of the management by
commenting on the bac&ground" qualifications" e#perience" and capability of the promoter" &ey
management personnel" and effecti%eness of the internal control systems" relation $ith labor"
$or&ing conditions" $age structure" and the other assigned essential functions. In case the
promoterJsK ha%e interest" in other concerns as !roprietor or !artner or (irector" the appraisal
report should also comment on their performance in such concerns.
A business is more %ulnerable if decision ma&ing in all the functional areas rests $ith a particular
person" in other $ords" Wone man sho$G. Further" the management and the organiBation should be
conduci%e to the siBe and type of business. In case it is not so" it should be ensured that
professional managers are inducted to strengthen the organiBation.
[email protected] APPRAISAL O# PROHECT - A CHEC" LIST
An indicati%e list of issues $hich need to be loo&ed into $hile appraising a project is gi%en belo$C
63
MAR"ETIN2
;. 3easonable demand projections &eeping in %ie$ the siBe of the
mar&et" consumption le%el" supply position" e#port potential" import
substitute" etc.
-. CompetitorsG status and their le%el of operation $ith regard to
production and sales.
/. Technology ad%ancementFForeign CollaboratorGs StatusFBuyDbac&
arrangements etc.
.. Mar&eting policies in practice" for promotion of productJsK and
distribution channels being used. 0#penses on mar&eting are done
so as to populariBe the product.
A. 7ocalFforeign consumer preferences" practices adopted" attitudes"
requirements etc.
@. Influence of )o%t. policies" imports and e#ports in terms of quantity
and %alue.
:. Mar&eting professionals employed their competence" &no$ledge
and e#perience.
64
TECHNICAL
;. !roduct and its life cycle" productDmi# and their application.
-. 7ocation" its ad%antagesFdisad%antages" a%ailability of
infrastructural facilities" )o%t. concessions" if any" a%ailable there.
/. !lant and machinery $ith suppliersG credentials and capacity
attainable under normal $or&ing condition.
.. !rocess of manufacturing indicating the choice of technology"
position $ith regard to its commercialiBation and a%ailability.
A. !lant and machinery D its a%ailability" specification" price"
performance.
@. )o%t. clearanceF license" if any" required.
:. 7aborF Manpo$er" type of s&ills required and its a%ailability
position in the area.
#INANCIAL
;. Total project cost and ho$ it is being fundedFfinanced.
-. Contingencies and inflation duly factored in project cost.
/. !rofitability projections based on realistic capacity utiliBation and
sales forecast $ith proper justification. +nrealisticFambitious sales
projections $ithout reference to past performance and justification
to be a%oided.
.. Brea&De%en analysis" fund flo$ and cash flo$ projections.
A. Balance sheet projections should be realistic and based on latest
a%ailable data. The components of financial ratios should be
subjected to close scrutiny.
65
@. Aspect of support of parent company" $here%er applicable" may be
ta&en into account.
MANA2ERIAL
;. Financial standing and resourcefulness of the management.
-. Qualifications and e#perience of the promoters and &ey
management personnel.
/. +nderstanding of the project in all of its aspects D financing pattern"
technical &no$ledge and mar&eting programme etc.
.. Internal control systems" delegation of adequate po$ers and
entrusting responsibility at %arious le%els.
A. ,ther enterprises" if any" $herein the promoters ha%e the interest
and ho$ these are functioning.
ECONOMIC
;. Impact on increase in le%el of sa%ings and income distribution in
society and standard of li%ing.
-. !roject contribution to$ards creation and rate of increase of
employment opportunity" achie%ing self sufficiency etc.
/. !roject contribution to the de%elopment of the region" its impact on
en%ironment and pollution control
66
To judge $hether the project is %iable" i.e. it can generate adequate surplus for ser%icing its debts
$ithin a reasonable period of time and still left $ith some funds for future de%elopment. This
in%ol%es ta&ing an o%erDall %ie$ to analyse the strengths and $ea&nesses of the project. It should
also be analysed to see $hether the management and organisation can pro%e effecti%e for
successful implementation of the project.

Chapter (
CREDIT RATIN2
3ating has to be assigned to all the Credit accounts $ith the ban& in terms of the guidelines
prescribed for the purpose. In addition" credit portfolio of the branches" regions and the Ban& as a
$hole are also to be rated.
In rating indi%idual accounts" the e#tant guidelines pro%ide for rating of all indi%idual accounts
Je#cluding accounts under retail segmentK ha%ing e#posure abo%e 3s -A lacs. Accounts ha%ing
e#posure of 3s -A lacs and belo$ and those under retail segment are also to be rated" but rating
for these accounts are determined based on aggregate default performance of group of similar
accounts Jpooled assetsK. For e#ample" all accounts under V+C, ShelterH may ha%e one rating
assigned to it. All accounts under this category $ould be assigned the rating. Classification of all
accounts ha%ing e#posure of 3s -A lacs and belo$ in to %arious asset pools and their respecti%e
rating $ould be communicated by *ead ,ffice" 3is& Management (epartment o%er a period of
time. !ortfolio rating of the entire credit e#posure at branches" regions and the Ban& as a $hole is
67
determined based on $eighted a%erage rating Jbased on outstanding balance as $ell as limit
sanctionedK of all credit accounts at branches" regions and Ban& as a $hole respecti%ely.
'eeping in %ie$ $hat has been stated abo%e" this chapter is di%ided in to the follo$ing three
sections.
;. 3ating of Accounts $ith 0#posure of 3s -A 7acs or belo$ > Accounts under 3etail Segment.
-. 3ating of Accounts Je#cluding accounts under retail segmentK $ith 0#posure of more than 3s
-A 7acs.
/. !ortfolio 3ating
Se-ti,. 1$-
R(ti.A ,7 A--,u.t* ?it= [email protected]),*u'e ,7 R* 2 L(-* ,' be+,? C A--,u.t* u.de'
Ret(i+ SeAme.t$-
Credit rating of accounts ha%ing e#posure of 3s -A lacs or less and Ban&Hs midDmar&et products
i.e."
+C, Car
+C, Cash
+C, 0ducation
+C, Mega Cash
+C, 1ari Sha&ti
+C, !ension
+C, Shelter
+C, Shopper
68
are to be arri%ed at based on ban&Hs default e#perience at aggregate le%el. The rating of such
accounts $ould be ad%ised from time to time. Branches and controlling offices $ould be required
to assign credit rating on these accounts based on instructions issued by *ead ,ffice" 3is&
Management (epartment. All accounts falling under follo$ing categories are to be assigned
rating as indicated belo$
0#posure typeD classification 0#posure typeD sub
classification
3ating model to be usedFrating
to be assigned
3ating Based on
AggregateF!ool !erformance
7oans against ban&s o$n
deposits
ATT
Staff loans ATT
Accounts under +C,
Securities Scheme
ATT
)old loans ATT
Accounts $ith aggregate FB
and 1FB limit up to 3s.-A lacs
3ating to be assigned D 9ould
be ad%ised subsequently
$ith due appro%al of 3is&
Management Committee of
Board.
Accounts under MidDMar&et
SchemeU
+C, Car +C, Cash
+C, 0ducation Board.
+C, Mega Cash
+C, 1ari Sha&ti
+C, !ension
+C, Shelter
+C, Shopper
3ating to be assigned I
9ould be ad%ised
subsequently
$ith due appro%al of 3is&
Management Committee of
69
Se-ti,. 2.$-
R(ti.A ,7 A--,u.t* [email protected]+udi.A (--,u.t* u.de' 'et(i+ *eAme.t< ?it= [email protected]),*u'e ,7
m,'e t=(. R* 2 L(-*$-
3ating of Accounts $ith 0#posure of more than 3s -A 7acs Je#cluding accounts under retail
segmentK are to be carried out for each account using an appropriate rating model. The rating
process in%ol%esCD
AK Selection of Appropriate 3ating Model
BK ,perational instructions
CK A$arding score in terms of guidelines prescribed
(K Total 9eighted Score > 3ating
A. Se+e-ti,. ,7 A))',)'i(te R(ti.A M,de+$-
It is clarified that Credit rating of all the accounts cannot be carried out using a single rating
model. Ban& has de%eloped %arious rating models depending upon the siBe" type and our
e#perience $ith an account. Accordingly" appropriate rating model has to be selected depending
upon
 SiBe of e#posure"
 Type of e#posure and
 $hether the account is an e#isting account or a ne$ account or a green field Account or a
green field project.
0#isting AccountsCD
These are borro$al accounts of business units $hich are already in e#istence and are ha%ing
account $ith us. The business units $ould ha%e annual financial statements i.e." balance sheet and
70
profit > loss accounts and $ould also ha%e a trac& record $ith the Ban& that enables us to assess
them on conduct of accounts etc.
1e$ AccountsCD
These are borro$al accounts of business units $hich are already in e#istence but are not ha%ing
account $ith us. The business units $ould ha%e annual financial statements i.e." balance sheet and
profit > loss accounts but $ould not ha%e a trac& record $ith the Ban&. This ma&es it difficult to
assess them on conduct of accounts including that on nonDfund based facilities" performance in
relation $ith projections etc.
)reen Field AccountsCD
These are ne$ business accounts and therefore do not ha%e past financial statements i.e." balance
sheet and profit > loss accounts and also ha%e no trac& record to assess them on conduct of
accounts etc. This ma&es it difficult to assess them on conduct of accounts including that on nonD
fund based facilities" performance in relation $ith projections" performance on operational and
financial parameters.
)reen Field !rojectsCD
These are ne$ projects started by a ne$ company or projects of an e#isting company $here
in%estment in the asset of the ne$ project is more than A=O of the tangible net $orth of the
company.
1e$ly !romoted 1BFCsF Infrastructure (e%elopment Corporation" Industrial (e%elopment
Corporation and Financial > (e%elopment InstitutionsCD
These are ne$ accounts of 1BFCsF Infrastructure (e%elopment Corporation" Industrial
(e%elopment Corporation and Financial > (e%elopment Institutions and therefore do not ha%e
past financial statements i.e." balance sheet and profit > loss accounts and also ha%e no trac&
record to assess them on conduct of accounts etc. This ma&es it difficult to assess them on conduct
of accounts including that on nonDfund based facilities" performance in relation $ith projections"
performance on operational and financial parameters.
O)e'(ti,.(+ I.*t'u-ti,.*
71
2e.e'(+ I.*t'u-ti,.*
;. 3ating models enclosed pro%ide for rating of e#isting" ne$ and green field accounts. *o$e%er"
depending on the type of account" limit and tenure of the facility rele%ant rating model should be
used. The ma#imum mar&s $ill be different for e#isting" ne$ and green field accounts. Therefore"
total mar&s scored is to be con%erted out of ;== for uniformity for management rating as $ell as
rating of operational performanceFfinancial ratios.
-. 3ating is to be based on financial data as on immediate past financial year closing. This $ould
imply that if $e are rating a business unit on ;Ath September -==A" rating should be based on
audited Jor certified by o$nerFpromoter $here accounts are not auditedK financial statements as on
/;st March -==A" assuming that financial year of the business unit ends on March /;.
/. 9hile rating a business unit there is no need to ta&e into account proposed borro$ings etc. The
rating is to be carried out on the position as it e#ists on the immediate past financial year closing.
This is for the purpose of rating only.
.. It is clarified that 0ntry BarriersN may pro%ide for certain bench mar& ratios that may include
proposed borro$ings. Such ratios may be computed as has been pro%ided for in the 7oan !olicy.
A. In fact" $ith e%ery ne$ acti%ity underta&en by a business unit or $ith e%ery additional dose of
financial facilities" rating may undergo a change. This $ould call for reDrating of the unit based on
re%ised data. But" for the time being this may not be carried out. Ban& shall issue necessary instru
instructions in the matter in due course.
R(ti.A C R(ti.A Re8ie?
3ating of all accounts" $hich are to be sanctioned at *ead ,ffice le%el" $ould be carried out by
3is& Management (epartment at *ead ,ffice. In addition" 3is& Management (epartment" *ead
,ffice shall re%ie$ the rating of accounts sanctioned by regional heads on random basis.
Similarly" rating of all accounts" $hich are to be sanctioned at 3egional ,ffices" $ould be carried
out by Credit Monitoring (epartment at regional offices. Further" in respect of accounts
sanctioned by regional heads" credit monitoring department of regional office shall for$ard
necessary details to *ead ,ffice" 3is& Management (epartment for re%ie$ of rating as and $hen
called for. 1ecessary details $ould include the follo$ing.
72
 !rocess 1ote
 Audited Financial Statements for the rele%ant 2ear
 MCM3 in respect of the account Jin respect of e#isting accountsK
 !roject 3eport Jin respect of green field accountsFprojectsK
In branches" rating $ould be carried out at appraisal le%el and confirmed by sanctioning authority.
Concerned regionHs Credit Monitoring (epartment shall re%ie$ the rating. The branch shall
for$ard necessary details Ji.e." !rocess 1ote" Audited Financial Statements for the rele%ant year"
MCM3 in respect of e#isting account and !roject 3eport in respect of green field
accountsFprojectsK to S!C *ead of concerned regional office.
 R(ti.A B(*ed A-ti,. P,i.t*
 3e%ie$F3ene$al of accounts
3e%ie$F3ene$al e#ercise in accounts rated B or belo$ should be carried out e%ery < months. In
other accounts annual re%ie$Frene$al e#ercise should be carried out.
 Stoc& Audit
Stoc& audit of accounts shall be carried out in accordance $ith the e#tant guidelines of Credit
Monitoring !olicy of the ban&.
 !ricing
As pricing is related to rating" on re%ie$ of rating by *, 3is& Management (epartmentF Credit
Monitoring (epartment of 3egional ,ffice the pricing may require re%ision. This $ould be
applicable to accounts sanctioned at branches and by regional heads. *o$e%er" re%ision in pricing"
if any" on account of re%ie$ of rating by 3is& Management (epartment at *ead ,ffice $ould be
decided by 0#ecuti%e (irector or Chairman > Managing (irector.
 Concessionary 3ate of Interest
73
In permitting concessionary rate of interest" the competent authority shall use the rating assigned
by 3is& Management (epartment" *ead ,ffice F Credit Monitoring (epartment of the concerned
3egional ,ffice
R(ti.A 2uide+i.e*$-
3ating guidelines are gi%en belo$ for %arious e#posure types as listed.
;K Accounts $ith aggregate FB and 1FB limit o%er 3s. -A lacs and up to 3s. A crores
-K Accounts $ith aggregate FB and 1FB limit o%er 3s.A crores $ithout term facilities or $ith
term facilities of maturity not e#ceeding A years
/K Accounts $ith aggregate FB and 1FB limit o%er 3s.A crores $ith term facilities $ith maturity
of more than A years
.K 0#posure on )reen Field projects $ith aggregate FB and 1FB limit o%er 3s.A crores $ith
maturity of more than A years
AK 0#posure on 1BFCs $ith aggregate FB and 1FB limit of 3s.-A lacs and abo%e
@K 0#posure on Accounts of infrastructure (e%elopment Corporation" Industrial (e%elopment
Corporation and Financial > (e%elopment Institutions $ith aggregate FB and 1FB limit of 3s.-A
lacs and abo%e
All rating models ha%e been designed to for e%aluating VManagementH" V,perational !erformance
> Financial 3atiosH and VIndustry ,utloo& or !roject ratingH. *o$e%er" depending upon type of
e#posure" the rele%ant factors differ. All the rele%ant factors applicable for rating ha%e been
detailed belo$.
1. A--,u.t* ?it= (AA'eA(te #B (.d N#B +imit ,8e' R*. 2 +(-* (.d u) t, R*. -','e*$-
The credit rating model adopted by the ban& for these accounts has ta&en into consideration the
follo$ing rele%ant factors grouped under three headsC
A. Management
 Integrity F Commitment
74
 Financial Strength
 Technical F Finance 'no$ledge
 ,rganiBational Structure F Succession !lan
 Selling and distribution net$or&
 0#perience of (irectors > !romoters
 !ending 7itigations
 Mar&et 3eputation > !ast Trac& 3ecord
 Conduct of Ban& Accounts
 Accounts running regularFIrregular
 Compliance of termsFconditions of sanction
 (iscipline in timely submission of dataFinformation
 In%entory > 3ecei%ables
 Management of In%entory > 3ecei%ables
 3ealisability of 3ecei%ables > 5aluation of In%entory
 Comments gi%en by Ban& InspectorsFStoc& Auditors
 Transparency in Accounting Statements
B. ,perational !erformance > Finance 3atios
 SalesF Brea& 0%en Sales
 Current 3atio
 3eturn on Capital 0mployed
75
 (ebt Ser%ice Co%erage 3atio J(SC3K
 7ong Term (ebtF 0quity
 Total ,ut side 7iabilitiesFTangible 1et 9orth
 Achie%ement of 1et Sales !rojections
 Achie%ement of 1et !rofit !rojections
 ,perations in 1on D Fund Based 7oan 7imits
 (i%ersion of Funds
 1et !rofit F 1et ,perating Cash Flo$
Assessment on rele%ant factors $ould be made as detailed belo$.
A. M(.(Aeme.t
In predicting performance of a business unit" assessment of management quality is a crucial factor.
Single most important reason for business failure has been attributed to inefficient management.
Management inefficiency can stem from lac& of integrity and commitment to lac& of necessary
e#pertise and inability to raise resources in time of need. Assessment of management is also
difficult" as quite a fe$ of the attributes of efficient management need qualitati%e assessment.
Management efficiency reflects in the $ay they maintain their accounts $ith ban&s" manage
business in%entory and the accounting practices they follo$. In predicting management success in
managing business these factors ha%e been found to be %ery rele%ant.
Integrity and CommitmentCD
This is a qualitati%e assessment of promoterJsK or proprietor or partners or top management in case
of professionally managed companies Ji.e." public limited companies $here majority of shares are
held by publicFFIsFMFs etc. li&e 7arsen > Toubro" ITC etc.K. Assessment on this aspect of
management should be based on mar&et and ban&ersH report" $illingness to offer securities to
secure Ban&Hs loan" commitment of the management to$ards the business" managementHs trac&
record in honoring its commitment in the past.A qualitati%e %ie$ on the management may be
76
ta&en based on the attributes mentioned abo%e and the management can be categoriBed as
e#cellent" good" a%erage or poor.
Financial StrengthCD
Financial Strength under management rating should be carried out in the follo$ing mannerC
;. M('/et 8(+ue ,7 t=e *=('e* G (* ,. t=e d(te ,7 '(ti.A< ,7 t=e -,m)(.y t, it* N,mi.(+ 8(+ue.
Mar&et 5alue of the shares is the price at $hich the shares are traded in the mar&et. 1ominal 5alue
is the face %alue of the shares.0#ampleC
The mar&et %alue of the ;= 3s.shares of a company is say 3s.;.- on the date of rating. In this
case" Mar&et Mar&et %alue of the sharesF1ominal %alue S ;.-F;=S;..-. The company $ill"
therefore" score / mar&s on this parameter.
In case of companies $here no share has been issued or in the case of companies
$here shares are not traded in the mar&et or regular quotes are not a%ailable in the mar&et" mar&s
a$arded should be =N. This is because of the reason that such companies $ould not be in a
position to raise additional funds from the mar&et.
-. C()(-ity ,7 i.te'.(+ Ae.e'(ti,. ,7 7u.d*.
3eturn on 0quity has been ta&en as an indicator for the Capacity of Internal generation of funds.
This is defined as underC
3eturn on 0quity J3,0K S !rofit after Ta#F Total 0quityJ paid up CapitalK
Allocation of mar&sC
0#ampleC
In case of a company" profit after ta# is say 3s.A= crores. The company has paid up equity capital
of 3s. -== crores.
3,0S A=F-==S;F.S.-A i.e. -AO. The company $ill" therefore" score =N on the Net 1,'t= ,7 t=e
)',m,te'* [email protected]+udi.A *t(/e i. t=e bu*i.e**$
77
This $ill indicate the e#tent to $hich the promoters $ould be able to inject additional funds from
their o$n sources $hene%er required.
TechnicalFFinance 'no$ledgeCD
This again is a qualitati%e assessment of promoterJsK or proprietor or partners or top management
in case of professionally managed companies Ji.e." public limited companies $here majority of
shares are held by publicFFIsFMFs etc. li&e 7arsen > Toubro" ITC etc.K.
This aspect of the Management is rated based on technical and financial qualification of the
promotersF&ey personnel" their &no$ledge of financial and ban&ing related aspects" their ability to
manage funds in an optimum manner" their ability to manage manufacturing processes in an
efficient manner etc. These attributes should be rele%ant to the line of business. A qualitati%e %ie$
on the management may be ta&en based on the attributes mentioned abo%e and the management
can be categoriBed as e#cellent" good" a%erage or poor.
,rganisation Structure F Succession planCD
This is a qualitati%e assessment of the companyHs organisation and its functioning. This aspect of
the management is assessed based on type of organiBation structure and hierarchy"
qualificationFquality of persons holding &ey positions" employee turno%er in the organiBation"
coordination among e#ecuti%es of different departments" delegation of responsibilities and
po$ers" succession plan for top management etc.
A qualitati%e %ie$ on the management may be ta&en based on the attributes mentioned abo%e and
the management can be categoriBed as e#cellent" good" a%erage or poor.
Selling and (istribution 1et$or&CD
This is a qualitati%e assessment of companyHs capability to sell $hat it produces. This aspect of
the company is assessed based on its strength to reach its customers and ho$ $ell it is placed to
meet the mar&et competition. CompanyHs sales net$or&" mar&eting plan including ad%ertisement
for its products and quality of sales are rele%ant factors here. Quality of sales here refers the
realiBation of cash $ithin reasonable period from credit sales and relati%e share of cash sales in
total sales.
78
A qualitati%e %ie$ on this aspect may be ta&en based on the attributes mentioned abo%e and can be
categoriBed as e#cellent" good" a%erage or poor.
0#perience of (irectors and !romotersCD
This is an assessment of e#perience in the line of business of promoterJsK or proprietor or partners
or top management in case of professionally managed companies Ji.e." public limited companies
$here majority of shares is held by publicF FIsFMFs etc. li&e 7arsen > Toubro" ITC etc.K.
This aspect is assessed based on number of years of effecti%e e#perience in handling similar line
of business and the le%el at $hich functional e#perience has been acquired. More the e#perience
better $ill be the a$areness about the finer points of the line of business. *igher the functional
le%el at $hich the e#perience has been acquired" better $ould be the o%erall &no$ledge in the line
of business.
1ormally fi%e years of e#perience in the line of business as promoterFtop le%el functionary should
be good enough for highest rating. 9here e#perience in the line of business is not there" minimum
rating should be assigned under this factor.
!ending 7itigationsCD
Assessment on this aspect is based on number of cases pending against the company andFor its
management. 9here litigations in%ol%e reputation of the company andFor its management andFor
ha%e financial implications" $here litigations relate to nonDcompliance $ith requirements of
regulatoryFstatutory nature such as ta# related issues or en%ironmental or license related issues" or
$here litigations in%ol%e patentsFtrademar&Fintellectual property rights related matter etc." such
litigations $ould ha%e impact on the companyHs financial position or operations. In such cases
lo$est rating should be a$arded under this category.Information on these matters are usually
a%ailable from mar&et" annual report of the company including 1otes to AccountsN attached to
annual reports and can be assessed from contingent liability schedule of annual report.
Mar&et 3eputation and !ast trac& recordCD
This is an o%erall assessment of promoterJsK or proprietor or partners or top management in case
of professionally managed companies Ji.e." public limited companies $here majority of shares are
79
held by publicFFIsFMFs etc. li&e 7arsen > Toubro" ITC etc.K in the eyes of parties dealing $ith it
including the Ban&. Mar&et is the major source of information. Trac& record $ith the Ban& is a
matter of record. ,ne should also loo& up the 3BI (efaulter 7ist and 0C)C list for assessing
companyHs trac& record $ith other ban&sFfinancial institutions.
A qualitati%e %ie$ on this aspect of management may be ta&en based on the information gathered
from mar&etFpast records etc. and can be assessed as e#cellent" good" a%erage or poor.
Conduct of Ban& AccountsCD
This is an objecti%e assessment of a companyHs beha%ior pattern to$ards his ban&er and reflects
managementHs attitude to$ards honouring their commitments to the Ban&. 9here a company
operates its account $ithin agreed limits and in accordance $ith terms of sanction" has complied
$ith terms of sanction and has the discipline in timely submission of dataFinformation etc. it may
be rated highest under this area. (e%iations from promised beha%ior are penaliBed that brings
do$n the rating.
Assessment under this area is based on records that e#ist $ith the ban& and therefore" %ery
transparent assessment can be made.
In%entory > 3ecei%ablesCD
This also is an objecti%e assessment of a companyHs ability to manage its in%entory. This is
assessed based on le%el of in%entory maintained in relation to its sales and an assessment of
realisability and %aluation of in%entories based on Comments gi%en by Ban&Hs inspectorsFStoc&
Auditors. Assessment under this area is also based on records that e#ist $ith the ban& and
a%ailable in companyHs accounts and therefore" %ery transparent assessment can be made in this
area as $ell.
Transparency in Accounting StatementsCD
Transparency and adherence to the standard accounting practices lend credibility to the financial
numbers reported in the balance sheet and profit and loss account. These numbers are critical in
assessment of credit $orthiness of a borro$er. Ban&ers $ould encourage its borro$ers to adhere
to proper practices in the matter.
80
A financial statement prepared as per standard accounting practice and that reflects true position
of the borro$er should be rated best.
B. O)e'(ti,.(+ Pe'7,'m(.-e C #i.(.-e R(ti,*$-
Apart from management e%aluation" operational performance and financial parameters can be
used to predict the performance of a business organisation or a business unit. The financial and
performance ratios that ha%e high predicti%e po$er and ha%e been ta&en into account in rating of
borro$ers are listed belo$. 3atios ha%e been defined so that e%ery borro$er is rated on the same
standard.
1et SalesF Brea& 0%en Sales
S J1et Sales I 5ariable 0#pensesKF Fi#ed 0#penses
*igher the sale to brea&De%en sales ratio" higher is our margin of safety. (epending on the %alue of
the ratio" this performance area may be assessed on a fi%e point scale and mar&s may be a$arded
as gi%en in the 3ating SheetN.
N,te$ :('i(b+e [email protected])e.*e* m(y be t(/e. (* C,*t ,7 S(+e* (.d [email protected] [email protected])e.*e* (*
T,t(+ [email protected])e.*e* +e** C,*t ,7 S(+e* (.d [email protected]'(,'di.('y [email protected])e.*e*E i7 (.y.
Current AssetsFCurrent 7iabilitiesCD
This ratio is popularly &no$n as Current ratio and indicates ability of a business unit to meet its
short term obligations. This indicates business unitHs ability to carry on its dayDtoDday business
acti%ities. A current ratio greater than ;.// is considered as highly satisfactory. (epending on the
%alue of the ratio" this performance area may be assessed on a fi%e point scale and mar&s may be
a$raded as gi%en in the 3ating SheetN.
3eturn on Capital 0mployed S J!rofit after Ta# T InterestK F JTangible 1et 9orth T 7ong
Term Borro$ings T Ban& Borro$ingsK
3eturn on capital employed J3,C0K is a measure of efficiency of capital employed in business as
also earning capacity of the business. 3,C0 should be higher than the cost of capital. 9here
81
interest rate on borro$ings is higher than 3,C0" it is loosing proposition for equity holder. In
other $ords" 3,C0 should be higher than the rate of interest chargeable adjusted for ta#es.
Assuming a ta# rate of /=O and interest rate of ;/O" the minimum 3,C0 a company should earn
is <O XJ;D =./K # ;/ OY. (epending on the %alue of the ratio" this performance area may be
assessed on a fi%e point scale and mar&s may be a$raded as gi%en in the 3ating SheetN.
(ebt Ser%ice Co%erage 3atioCD
M J1et !rofit T (epreciation T Interest on Term 7oanK F JAnnual 3epayment of Term
7oan T Interest on Term 7oanK
This ratio measures the capacity of a company to ser%ice its debts i.e. repay term loan installments
and interest on it in time. *igher the ratio" higher is our margin of safety.
(epending on the %alue of the ratio" this performance area may be assessed on a fi%e point scale
and mar&s may be a$arded as gi%en in the 3ating SheetN.
7ong Term (ebtF Tangible 1et 9orthCD
S Total long term debt F Tangible 1et 9orth JIncluding subordinated interest free borro$ings from
promotersK.
The ratio is an indicator of promotersFshareholders sta&e in business $hen compared to total long
term debts. 7o$ debt equity ratio means higher long term stability and in case the ratio is
generally coming do$n" represents plough bac& of profits. (epending on the %alue of the ratio"
this performance area may be assessed on a fi%e point scale and mar&s may be a$arded as gi%en
in the 3ating SheetN.
Total ,utside 7iabilitiesFTangible 1et 9orthCD
S Total ,ut side 7iabilitiesFTangible 1et 9orth JIncluding subordinated interest free borro$ings
from promotersK
This ratio is also an indicator of promotersFshareholders sta&e in business $hen compared to total
outside liabilities. 7o$er ratio means higher long term stability and in case the ratio is generally
coming do$n" represents plough bac& of profits. (epending on the %alue of the ratio"this
82
performance area may be assessed on a fi%e point scale and mar&s may be a$arded as gi%en in the
3ating SheetN.
,perations in 1on D Fund Based 7imitsCD
1on D Fund Based 7imits include letter of guarantee" 7etter of Credit Jboth Inland and foreignK"
(eferred !ayment )uarantee etc. 9here the 7FC > BF) limit ta&en together is less than AO of the
fund based limit" this may be ignored and need not be ta&en into account in rating a borro$er. 7FC
and BF) do not in%ol%e e#tending any fund or money but in%ol%e commitment by the ban&s on
behalf of their customers to pay in the e%ent of default by the customers. Many a time the nonD
fund limits get con%erted into fund based as the borro$ers some times delay and e%en default in
honouring their commitment. The borro$er is less ris&y if 7FCs and BF)s do not de%ol%e or
in%o&ed or if he arranges funds $hene%er any non fund based limit de%ol%esFis in%o&ed.
Associated ris&s are more if there is delay in arranging funds once any non fund based facilities
de%ol%e or is in%o&ed.
9e may assess this performance area on a four point scale and a$ard mar&s as is gi%en in the
3ating SheetN.
(i%ersion of FundsCD
Ban&s should critically appraise $hether the borro$er is di%erting funds to their allied and
associate concerns particularly $hen they are themsel%es not doing $ell. Fund di%ersion may
affect the companyHs liquidity position and operation. It also impacts debt equity ratios. A
company utiliBing short term fund for long term purposes could also become a matter of concern.
,%erall" it may affect financial stability of the firm.
This performance area may be assessed on a four point scale and mar&s may be a$arded as gi%en
in the 3ating SheetN.
1et !rofit F 1et ,perating Cash Flo$CD
This ratio determines quality of earnings. Besides" the importance of operating cash arises from
the fact that it is cash" $hich actually pays interest and installments. The prospecti%e borro$er is
e#pected to ha%e a net profit after ta# as $ell as a positi%e net operating cash flo$. +sually" it is
83
less than one indicating net profit at less than net operating cash flo$. If the ratio is more than one"
then it indicates sales achie%ed through more than usual recei%ables.This parameter may be
assessed on a four point
N,te $ Net O)e'(ti.A C(*= #+,? i* -,m)uted (* Ai8e. be+,?.
N L G-< O)e'(ti.A )',7it L GO)e'(ti.A L,**< be7,'e [email protected]'(,'di.('y item*
N De)'e-i(ti,.
- T(@e*
N L G-< I.-'e(*e L GDe-'e(*e< i. Net 1,'/i.A C()it(+
M Net O)e'(ti.A C(*= #+,?
2. A--,u.t* ?it= (AA'eA(te #B (.d N#B +imit ,8e' R*. -','e* ?it=,ut te'm 7(-i+itie*
,' ?it= te'm 7(-i+itie* ,7 m(tu'ity .,t [email protected] ye('*$-
The credit rating model adopted by the ban& for these accounts ha%e ta&en into consideration all
the rele%ant factors applicable for accounts $ith aggregate FB and 1FB limit o%er 3s -A lacs and
up to 3s.A crores JItem ; abo%eK. The guidelines applicable for accounts $ith aggregate FB and
1FB limit o%er 3s -A lacs and up to 3s.A crores $ould apply to accounts under this category as
$ell. In addition the model ta&es into account the follo$ing factor.
 Industry ,utloo&
Industry ,utloo&CD
Impact of e#pected industry performance $ould be ta&en into account in such cases. For this
purpose" the latest industry scores as ad%ised by *ead ,ffice" 3is& Management (epartment from
time to time $ould be factored into the rating model.
3. A--,u.t* ?it= (AA'eA(te #B (.d N#B +imit ,8e' R*. -','e* ?it= te'm 7(-i+itie*
?it= m(tu'ity ,7 m,'e t=(. ye('*$-
84
The credit rating model adopted by the ban& for these accounts ha%e ta&en into consideration all
the rele%ant factors applicable for accounts $ith aggregate FB and 1FB limit o%er 3s -A lacs and
up to 3s.A crores JItem ; abo%eK. The guidelines applicable for accounts $ith aggregate FB and
1FB limit o%er 3s -A lacs and up to 3s.A crores $ould apply to accounts under this category as
$ell. In addition the model ta&es into account the follo$ing factor.
 !roject 3ating Inde#
Impact of e#pected industry performance is ta&en into account in such cases by estimating
V!roject 3ating Inde#H J!3IK. Method of computing !3I is indicated in the follo$ing paragraph.
Critical Success Factors" needed in computing !3I" in respect of %arious industries is enclosed. In
case industry Critical Success FactorsN
JCSFsK is desired on any industry that is not co%ered in the Anne#ure" it may be pro%ided
by *ead ,ffice on reference.
The !roject 3ating Inde#N J!3IK $ould be factored into the rating model.
P',Ie-t R(ti.A [email protected]$-
Business units may ha%e different strengths %isDZD%is the industry specific attributes. In %ie$ of
this" in case of projectsFterm finance that repays o%er a longer period" !roject 3ating Inde#N
J!3IK is estimated and factored into in lieu of simply incorporating industry rating.
Based on the en%ironment and industry analysis : to ;= factors may be identified that are most
li&ely to impact the success probability of the project under e#amination. These are called
VCritical success FactorsH or VIndicators for Industry Attracti%enessH. An illustrati%e list of such
factors is gi%en belo$.
 Mar&et siBe
 Mar&et gro$th rate
 Cyclicality
 Competiti%e structure
85
 Barriers to entry
 Industry profitability
 Technology
 Inflation
 3egulation
 9or&force a%ailability
 Social issues
 0n%ironmental issues
 !olitical issues
 7egal issues
Strategic )roupFBorro$er AnalysisCD
This $ould basically include an analysis of strengths and $ea&nesses and core competencies of
the borro$er group in relation to critical success factors identified for the productFser%iceFindustry.
The capacity of the borro$er group to respond to changes in the en%ironment and industry
characteristics $ould be a critical input !roject 3ating Inde#FIndustryDBusiness Attracti%eness
Inde#
This is a matri# de%eloped based on identified CSFs and its relati%e $eight as applicable to the
industry %isDZD%is groupHsFborro$erHs strength on each of the CSFs on a scale of say ;=. A
$eighted score indicates an objecti%e measurement on the project. The matri# along $ith a
hypothetical e#ample is $or&ed out belo$ by $ay of illustration
CS#* Ide.ti7ied Re+(ti8e 1eiA=t 2',u)>*
Pe'7,'m(.-e
1eiA=ted S-,'e
86
A ./= : -.;=
B .-A ? -.==
C .-= A ;.==
( .;- . =..?
0 .=? @ =..?
F .=A A .-A
T,TA7 ;.= @./;
The !3I in the subject case is @./; on a scale of ;=.
The !3I may change as the e#ternal factors change. It may also change as a groupHs strength or
$ea&nesses undergo changes due to proacti%e approaches adopted by them or due to lac& of it.
The abo%e analysis" it may be noted that is an approach to objecti%e measurement $hich is a&in to
S9,T analysis that are carried out. Strengths and $ea&nesses are internal to the organiBation and
are captured through strategic group analysis. Threats and opportunities are e#ternal to the
organiBations and are captured under en%ironment and industry analysis.
The !roject 3ating Inde#N J!3IK $ould be factored into the rating model.
4. [email protected]),*u'e ,. 2'ee. #ie+d )',Ie-t* ?it= (AA'eA(te #B (.d N#B +imit ,8e' R*. -','e* ?it=
m(tu'ity ,7 m,'e t=(. ye('*$-
The credit rating model adopted by the ban& for these accounts ha%e ta&en into consideration the
follo$ing rele%ant factors grouped under three headsC
A. Management
 Integrity F Commitment
 Financial Strength
 Technical F Finance 'no$ledge
87
 ,rganiBational Structure F Succession !lan
 Selling and distribution net$or&
 0#perience of (irectors > !romoters
 !ending 7itigations
 Mar&et 3eputation > !ast Trac& 3ecord
B. !roject Financial 0%aluation
 !roject (ebt 0quity 3atio
 Timing of Capital Infusion
 Cash Flo$ from other Sources
C. !roject 3ating Inde#
Assessment of VManagementH may be carried out as applicable for accounts $ith aggregate FB
and 1FB limit o%er 3s -A lacs and up to 3s.A crores JItem ; abo%eK. Similarly" assessment of
V!roject 3ating Inde#H may be carried out in accordance $ith the guidelines pro%ided in case of
accounts $ith aggregate FB and 1FB limit o%er 3s.A crores $ith term facilities $ith maturity of
more than A years Jitem / abo%eK.
Assessment of factors under V!roject Financial 0%aluationH is gi%en belo$.
!roject (ebt 0quity 3atioCD
7enders comfort in project finance comes from the o$nerHsFpromoterHs sta&e in the project. 9here
the sta&e of the o$nerFpromoter is higher" the comfort le%el is also higher. This is assessed
through !roject (ebt 0quity 3atio. *igher the ratio comfort le%el is more and ris& is lesser.
Timing of Capital InfusionCD
88
Timing of o$nerHs capital infusion also adds to the comfort of a lender. 9here o$ners bring in
their share in the project upfront" lenders comfort is more as compared to a situation $here
lenderFo$ner brings in funds in equitable proportion.
The comfort is least $here capital contribution of the o$ner is infused in the project at a later
date.
Cash Flo$ from other SourcesCD
In stand alone project financing ban&er depends primarily on the re%enue generated by a single
project as a source of repayment and on the collateral %alue of the projectHs assets for security.
!roject finance may ta&e the form of financing of the construction of a ne$ capital installation or
refinancing of an e#isting installation $ith or $ithout impro%ements. The e#amples are po$er
plants" infrastructure etc.
. [email protected]),*u'e ,. NB#C* ?it= (AA'eA(te #B (.d N#B +imit ,7 R*.2 +(-* (.d (b,8e$-
The credit rating model adopted by the ban& for these accounts ha%e ta&en into consideration the
follo$ing rele%ant factors grouped under three headsC
A. Management
B. ,perational !erformance > Finance 3atios
C. Industry ,utloo&
Assessment of VManagementH may be carried out as applicable for accounts $ith aggregate FB
and 1FB limit o%er 3s -A lacs and up to 3s.A crores JItem ; abo%eK. *o$e%er" assessment of
,perational !erformance > Finance 3atios differs as in e%aluating the same for 1BFCs the
follo$ing factors are ta&en in to account.
 ,perating !rofitFA%erage Assets
 In%estment as percentage of outstanding !ublic (eposit
 Current 3atio
 3eturn on Capital 0mployed
89
 Total ,utside 7iabilityF 1et ,$ned Funds
 Capital Adequacy 3atio
 ,%erdues to Total Cumulati%e (emands[ 1et 1!A as percent of Credit 0#posure
 Achie%ement of 1et sales !rojections
 Achie%ement of 1et !rofit !rojections
 (i%ersion of Funds
 1et !rofitF1et ,perating Cash Flo$
0%aluation of the follo$ing factors may be carried out as applicable for accounts $ith aggregate
FB and 1FB limit o%er 3s -A lacs and up to 3s.A crores JItem ; abo%eK.
 Current 3atio
 3eturn on Capital 0mployed
 Achie%ement of 1et sales !rojections
 Achie%ement of 1et !rofit !rojections
 (i%ersion of Funds
 1et !rofitF1et ,perating Cash Flo$
,perating !rofitFA%erage AssetsCD
,perating !rofitS Fund Based IncomeT 1onDfund based IncomeDFinancial 0#penditureD
,perating > other e#penditure.
This ratio is an indicator of profitable use of the assets of the business unit. An unit $ith large
asset base but $ith lo$ operating profit $ould indicate that either the assets are not income
generating or the use of the assets has not been proper.
In%estment as percentage of outstanding !ublic (epositCD
90
1BFCs accepting public deposits $ould be gi%en better mar&s based on the percentage of their
in%estment in unencumbered appro%ed securities to the outstanding public deposit. This is because
such in%estment gi%es a comfort to$ards ascertaining the strength of the 1BFCs in meeting public
deposit at maturity.
Total ,utside 7iabilities F 1et ,$ned FundsCD
JTotal outside liability $ould not include the proposed long term and short term borro$ingsK
This ratio is also an indicator of promotersHF shareholdersH sta&e in business $hen compared to
total outside liabilities. 7o$er ratio means higher long term stability and in case the ratio is
generally coming do$n" represents plough bac& of profits. (epending on the %alue of the ratio"
this performance area may be assessed on a fi%e point scale and mar&s may be a$arded as
indicated in the rating model.
Capital Adequacy 3atioCD
The balance sheets of 1BFCs get strengthened $ith compliance of prudential norms for Capital
Adequacy. This ratio being an indicator of as to $hat e#tent the ris& $eighted assets are co%ered
by the capital base" a higher ratio $ould indicate soundness of the business unit. (epending upon
the %alue of the ratio" this performance area may be assessed on a fi%eDpoint scale and mar&s may
be a$arded as indicated in the rating model.
,%er dues to Total Cumulati%e (emandsCD
The le%el of o%er dues to total cumulati%e demands is an indicator of the quality of the recei%ables
of the unit. ,%er dues abo%e a certain tolerable le%el $ould certainly indicate that the unit is not
doing $ell.
1et 1!A as percent of Credit 0#posureCD
This ratio $ill indicate the quality of the credit the unit has e#tended. *igh le%el of 1!As eats
a$ay the profits and ma&es the e#istence of the unit %ulnerable.
Industry ,utloo&CD
91
Future outloo& of 1BFCs is to be factored into based on industry rating ad%ised by *ead ,ffice"
3is& Management (epartment. The 1BFC industry outloo& has been gi%en a $eight of -=O.
%. [email protected]),*u'e ,. A--,u.t* ,7 i.7'(*t'u-tu'e De8e+,)me.t C,'),'(ti,.E I.du*t'i(+
De8e+,)me.t C,'),'(ti,. (.d #i.(.-i(+ C De8e+,)me.t I.*tituti,.* ?it= (AA'eA(te #B (.d
N#B +imit ,7 R*.2 +(-* (.d (b,8e$-
The credit rating model adopted by the ban& for these accounts are basically same e#cepting that
in e%aluating ,perational !erformance > Finance 3atios" Total ,utside 7iabilities F 1et ,$ned
Funds has been replaced $ith Total ,utside 7iabilities F Tangible 1et 9orth. 0%aluation of factors
rele%ant may be carried out as in case of 0#posure on 1BFCs $ith aggregate FB and 1FB limit of
3s.-A lacs and abo%e Jitem A abo%eK.
D. T,t(+ 1eiA=ted S-,'e C R(ti.A$-
Final rating of the accounts $ould be a$arded on the basis of total $eighted scores arri%ed at
using the abo%e rating modules" as applicable. This $ould be as underC
9eighted Score 0qui%alent 3ating
<=O and abo%e ATT J 1egligible ris&K
?=O to less than <=O AT J 5ery 7o$ 3is&K
:=O to less than ?=O A J 7o$ 3is&K
@=O to less than :=O BT J Medium 3is&K
A=O to less than @=O B J Medium 3is&
.=O to less than A=O BD J *igh 3is&K
Belo$ .=O C J *igh 3is&K
1oteC
i. The abo%e rating is subject to correlation $ith and structural changes in the economy.
92
ii. As the ris& rating efficiency of the model cannot be ascertained at this moment before it is put
to use o%er a period of time" the abo%e meaning attached to the rating nomenclature is only
pro%isional. The objecti%e meaning of the nomenclature $ould be finaliBed only after the ris&
rating efficiency of the model is established.
Se-ti,. 3
P,'t7,+i, R(ti.A$-
!ortfolio 3ating J0#posureK is the $eighted a%erage of ratingD$ise e#posure Ji.e." total limits" fund
based as $ell as nonDfund basedK. Similarly" !ortfolio rating J,utstandingK is the $eighted a%erage
of ratingD$ise outstanding balances Ji.e." total outstanding" fund based as $ell as nonDfund basedK.
!ortfolio ratings are a major determinant of portfolio quality and it needs to be monitored.
!ortfolio rating also pro%ides an indication of a%ailable ris& appetite of the ban& and can be used
to optimiBe return on the credit portfolio. Accordingly" it is desirable that this is trac&ed on a
regular basis.
Need 7,' -'edit R(ti.A*$-
9ith financial mar&et reforms" the traditional di%iding lines for ban&s" (e%elopment Financial
Institutions J(FIsK" 1BFCHs and other players in the financial system are gradually disappearing.
The commercial ban&s" $hose traditional forte has been $or&ing capital lending" are increasingly
mo%ing into long term financing" $hile the (FIs are mo%ing into short term $or&ing capital
lending. In this conte#t" 73 is aimed at pro%iding a %aluable input in assisting the decision ma&ing
process in BA1'. Ban&s and (FIs often use credit ratings on debt securities as an indicator of the
borro$erHs ability to honour its obligations on loans. Credit rating directly addresses their needs
by rating the loan itself and incorporating in the analysis" the specific characteristics of the loan.
Be.e7it* ,7 C'edit '(ti.A$-
CR ?i++ meet t=e 'eFui'eme.t* ,7 B(./* 7,' t=e 7,++,?i.A )u'),*e*$
a. Assessing the credit $orthiness of borro$ersE
b. Ser%ing as a simple objecti%e indicator for the internal credit ris& e#posure guidelinesE
93
c. (etermining the ris& premium to be chargedE
d. !ortfolio monitoringE
e. Ma&ing quic& credit decisions.
R(ti.A Met=,d,+,Ay$-
The analytical frame$or& for rating methodology $ould be di%ided into three Interdependent
segments. The first $ould deal $ith economy and industry characteristics" the second $ith
management aspects and the third $ith financial characteristics. In addition to quantitati%e and
objecti%e factors" qualitati%e aspects li&e assessment of management capabilities $ould be %ery
important factors in arri%ing at the rating for an instrument. 'ey areas considered in a rating
analysis $ould include the follo$ingC
A. E-,.,my (.d I.du*t'y Out+,,/ $-
The upcoming ris&s and opportunities in the borro$erHs industry $ould be $eighed to pro%ide a
frame$or& for understanding the future ability of borro$er to generate income. Factors
considered $ould includeC
• 0ffect of economic cycles on the industry.
• Business cycles in the industry and their se%erity.
• Tariff structure" threat from imports" price competiti%eness of the domestic industry" and
pace of technological change.
• Basis of competition and &ey success factors.
• Structure of the industry. 0ntry and e#it barriers.
• 5ulnerability of industry to ne$ technologies.
• 0n%ironmental factors.
B. M(.(Aeme.t A**e**me.t
94
• Bac&ground and history of borro$er.
• Corporate strategy
• Quality of management and management capabilities under stress.
• ,rganiBational structure" !ersonnel policies including succession planning.
• Corporate go%ernance.
• Mar&eting and distribution arrangements.
• Bargaining po$er of the borro$erHs suppliers and customers.
C. #i.(.-i(+ Ri*/
• Financial management philosophy and trac& record Jcapital structure" profitability"
liquidity position" financial fle#ibility and cash flo$ adequacyK.
• 9or&ing capital management.
• Asset co%er and liquidity profile of assets.
• Financial projections J$ith particular emphasis on achie%ability of sales targets" the
components of the cash flo$ and ability to meet debt obligations as and $hen they fall
dueK.
• Free cash flo$s and their sensiti%ity to %arious economic" industrial and business ris&s
o%er the term of the instrument.
• InterDfirm comparison of the financial structure and profitability margins.
• Accounting policies and practices.
• Trac& record of payments to the ban&s and financial institutions.
In addition" $hile conducting an analysis for short term loans" emphasis $ill be laid onC
95
• Sources of alternate liquidity
• Access to financial mar&ets.
• Quality of relationships $ith the lenders.
Most companies $ould be hard pressed to liquidate their short term $or&ing capital borro$ings
from current cash flo$s. Short term ratings $ill" therefore" e#amine the alternati%e sources of
liquidity a%ailable to a company" including its liquid in%estments.
D. Te'm* ,7 t=e L,(.
3ating may %ary according to loan co%enants such asC
• Maturity of loan.
• 1ature of loan D senior or subordinated" co%enants and other pro%isions that may reduce
the amount of reco%ery in case of default.
• 3epayment termsD moratorium period" repayment in installments or bullet repayment" etc
Chapter )
POST SANCTION #OLLO1 !P O# LOANS
Super%ision and Follo$Dup of ban& credit has assumed considerable significance particularly after
introduction of ne$ norms of assets classification" pro%isioning and derecognition of interest
income on 1!As" affecting profitability. System of super%ision and follo$ up can be defined as
the systematic e%aluation of the performance of a borro$al account to ensure that it operates at
%iable le%el and" if problems arise" to suggest practical solutions. It helps in &eeping a $atch on
the conduct and operationalFfinancial performance of the borro$al accounts. Further" it also helps
in detecting signalsFsymptoms of sic&ness and deteriorations" if any" ta&ing place in the conduct of
the account for initiating timely correcti%e actions to chec& slippage of accounts to 1!A category.
96
The goals and objecti%es of monitoring may be classified into fundamental and supplementary
goals. Fundamental goals help a ban& to ensure safety of funds lent to an enterprise $hile"
supplementary goals are directed to$ards &eeping abreast of problems arising out of changes in
both the internal and the e#ternal en%ironment for initiating timely correcti%e actions. Some of
the important goals of monitoring are listed as underC
i. To &eep a $atch on the project during implementation stage so that there are no time >
cost o%erruns.
ii. To ensure that the funds released are utiliBed for the purpose for $hich these ha%e been
pro%ided and there is no di%ersion of such funds.
iii. To e%aluate operational and financial results" such as production" sales" profitFloss" flo$
of funds" etc. and comparing these $ith the projectionsFestimates gi%en by the borro$er
at the time of sanction of credit facilities.
i%. To ensure that the terms and conditions as stipulated in the sanction ha%e been complied
$ith.
%. To monitor operations in the account particularly cash credit facilities $hich indicate
health of the account.
%i. To obtain mar&et report on the borro$er" to gather information li&e reputationFfinancial
standing etc.
%ii. To detect signals and symptoms of sic&ness or deterioration ta&ing place in
conductFperformance of the account.
%iii. To ensure that the unitGs management and organiBational setDup is effecti%e.
i#. To &eep a chec& on aspects li&e accumulation of statutory liabilities" creditors" debtors"
ra$Dmaterial" stoc&sDinDprocess" finished goods" etc.
#. To ensure charging of applicable rate of interestFpenal interestF commitment charges as
per ban&Gs guidelines.
97
System of super%ision > monitoring of credit as laid do$n by the Ban& needs to be meticulously
follo$ed by the branchesFcontrolling offices $hich" inter alia" co%ers the follo$ingC
i. Con%eying the sanction
ii. Maintenance of 7oan (ocument File
iii. Quarterly 3e%ie$ Sheet
i%. !re%enti%e Monitoring System
%. Quarterly Monitoring System
%i. Inspection and !hysical 5erification of stoc&s I Stoc& Audit
CREDIT APPRAISAL PROCESS AT !CO BAN"$-
#LO1CHART$-
98
1ot feasible
1o Queries
Queries
Feasible
Submission of !roject 3eport along
$ith the 3equest 7etter
Carrying out (ue (iligence on the
Client
Submission of !roposal to designated
Authority (ircle office)
3eD%erification and analysis of the
!roposal
Submission of !roposal to designated
Authority
!reparing Credit 3eport F Feasibility
3eport and 3is& 3ating
(etermining of Interest 3ate and
!reparation of !roposal
Meeting $ith the client to clarify the
queries
5etting of Credit 3is& 3ating 3eport Appro%al of request made by the client
li&e 3eduction of Interest 3ates etc
Sanction of !roposal on %arious Terms
> Conditions
Ac&no$ledgement of Sanction Terms
> Condition by the client
Application to comply $ith Sanction
T>C. 0#ecution of 7oan (ocuments
(isbursement of Sanctioned Amount
from the branch office
Chapter
CASE ST!DY
1. DATA SET O# REPORT$-
1.1.ABC MACHINES P:T. LTD.
ABC machines !%t. 7td had applied for $or&ing capital loan of -= lacs in the year -=;- at the
)omtinagar branch" 7uc&no$ branch of +C, ban&. Its details are as underCD
1AM0 ,F T*0 C,M!A12CD ABC MAC*I10S !5T. 7T(.
ACTI5IT2CDManufacturing of agricultural and farm equipmentFmachines etc.
MA1+FACT+3I1) !3,C0SS Jindicates to the e#tent possible" state $ise capacity data"
yieldFcon%ersion data" material flo$ etcKCD
Dcutting
Dgrinding
99
Dfabrication
Dassembly
Dtesting
Dfinal product
3A9 MAT03IA7 30Q+I30(
DIron steel
Delectrical component
Dsheet plats
Dmisc. items
!3,80CT C,ST
9or&ing capital requiredC -A lacs
FI1A1CI1)
D,$n fundsC A lacs
Dcash credit requiredC -= lacs
Three lac&s of machinery to be pro%ided by the promoters
3AT0 ,F I1T030ST C*A3)0(CD ;;.:AO Jsubject to changeK
(I30CT,3CD A35I1( BA1SA7
(AT0 ,F I1C,3!,3ATI,1CD -=;;D;-
T,TA7 CA!ITA7CD capital of the company is A 7acs di%ided by A=== equity share of rs.;== each.
BA1'I1) A33A1)0M01TCD S,70
!3IMA32 S0C+3IT2 F,3 T*0 T03M 7,A1CD
;K*ypothecation of ra$ material of 3s.;[email protected]===
-K*ypothecation of 9I! of 3s. /[email protected]==
/K*ypothecation of finished goods of 3s. :<:A=
C+3301T 3ATI,CD ;.=:C;
100
(,C+M01TS S0C+3ITI0S !3,5I(0( T, T*0 BA1' B2 T*0 B,33,903
DInsurance
Dstatement of stoc& in factoryFgodo$nsF$or&shops sales office of 0%errites machines !%t. 7td
hypothecated to +C, ban&.
Dhypothecation of goods to secure a demand cash credit
DForms of letter of guarantees
Ddeeds of hypothecations of mo%able plant and machinery to secure a term loan
DAc&no$ledgement of debt and securities
Ddraft of the letter of the title deeds obtained by mortgagers Jproperty plotsK
Dcopy of resolution passed by board of directors of the company.
DMemorandum of association
D3egistration of company under go%ernment of India" ministry of finance
Darticle of association.
1.2.9Y& BOTTLIN2 LTD.
42R B,TT7I1) 7T(. had applied for $or&ing capital loan as $ell as term loan" on the basis of
their past record and current securities that $as pro%ided their loan $as sanctioned on ;=
th
April
-=;/.
(0TAI7S ,F T*0 T03M 7,A1 ,F 42R B,TT7I1) 7T(.
3S./A.Alac including ta&e o%er of term loan of ;:.A lac from !1B )omtinagar" 7uc&no$.
!+3!,S0 CDFor the establishment of bottling plant.
MA3)I1CD //.//O
!3,80CT C,MM03CIA7 ,!03ATI,1 (AT0 CD; 8+10 -=;/.
T,TA7 T01,3 I1C7+(I1) M,3AT,3I+M !03I,(CD @ years and / months.
30!A2M01T SC*0(+70 CD !rincipal in :- equal monthly instalments of .<.-. lacs.
3AT0 ,F I1T030STCD base rate T/OJpresently ;/.-= K
!3IMA32 S0C+3IT2CD ;K plot of ;-<@.::lacs
101
-Khypothecation of property of /-== lacs
C,77AT03A7 S0C+3IT2 CD total collateral security of -<?.// had been pro%ided.
(0TAI7S ,F 9,3'I1) CA!ITA7 7,A1 ,F 42R B,TT7I1) 7T(.
AM,+1TCD .;? lacs
!3IMA32 S0C+3IT2CD :<-.:: lacs
C,77AT03A7 S0C+3IT2CD as in term loan
3AT0 ,F I1T030STCD base rateT-.A=O
,nline inspection of the record of 42R B,TT7I1) 7T(. $as conducted by A! > associates.
2.METHOD O# THESE DATA ANALYSIS
(ata analysis is done $ith the help of secondary data that are made a%ailable by credit see&ing
entity. Analysis of data is done by comparing different financial ratios and on the basis of that it is
%erified that project is financially %iable or not. ,ther than financial ratio" actual and estimated
balance sheet and profit and loss account analysis is done. In the case of retail lending salary of
loan see&er and his income ta# returns are analyBed and appraisal is done on the basis of analysis
of these data. 9hich type of data is required for the analysis depends on the information needs.
In the case ban& recei%e any application related to corporate lending. The information required by
the ban& $ill be actual and estimated profit and loss account " balance sheet of the entity. Industry
performance" mar&et demand" future prospects" economic scenario" go%ernment guidelines" effect
on en%ironment of that particular product" effect on the health of the users of that product. ,n the
basis of these data there are different type of appraisal that need to be done before appraisal of
credit. These includesCD
2.1.M('/et ())'(i*(+
;K In mar&et appraisal" analysis of demand for the product proposed to be manufactured
requires collection of data and preparation of estimates.
-K Mar&et appraisal requires a description of the product" its major uses"
/K It requires scope of the mar&et" possible competitions from substitutes" and special features
of the product.
.K That are proposed to be manufactured in regard to quality and price $hich $ould result in
consumer preference for the product in relation to competiti%e products.
102
AK 0stimates ha%e to be made about e#isting and future demand and supply of the product
proposed to be manufactured.
@K An assessment of li&ely competition in future and special features of the project $hich
may enable it to meet competition has to be made.
:K 0#port facilities ha%e to be identified and comparati%e data on manufacturing cost has to
be compiled.
2.2.Te-=.i-(+ ())'(i*(+
;KTechnical appraisal is primarily concerned $ith the project concept co%ering technology" design"
scope and content of the plant.
-K It also co%ers input and infrastructure facilities used for the project.
/K Basically the project should be able to deli%er mar&etable product from the resources deployed"
at a cost $hich $ould a lea%e a margin adequate to ser%ice the in%estment.
.K Technical appraisal has a bearing on the financial %iability of the project as reflected by its
ability to earn satisfactory return on the in%estment made and to ser%ice equity and debt.
2.3.#i.(.-i(+ ())'(i*(+.
;KFinancial appraisal is concerned $ith assessing the feasibility of a ne$ proposal for in%estment
for setting up a ne$ project or e#pansion of e#isting product facilities.
-K This in%ol%es an assessment of funds required to implement the project and sources of the
same.
/KThe other aspect of financial appraisal relates to estimation of operating cost and re%enue"
prospecti%e liquidity and and financial returns in the operating phase.
.K In appraising a project" the project direct benefits and cost are estimated at the pre%ailing
mar&et prices.
AK This analysis is used to appraise the %iability of the project as $ell as to ran& projects on the
basis of their profitability.

2.4.E-,.,mi- ())'(i*(+.
103
;K0conomic appraisal of a project deals $ith impact of the project on economic project on
economic aggregates.
-K 9e may classify these under t$o broad categories. The first deals $ith the effect of the project
on employment and foreign e#change.
/K And second deals $ith the impact of the project on net social benefits or $elfare.
5A3I,+S !*AS0 ,F T*0 !3,80CT A30CD
;K!roject identification
-K!roject selection and preparation of project report.
/K!roject appraisal
.KFinancing the project
AK!roject implementation
@K3eco%ery and ad%ances
(,C+M01TS T, B0 S+BMITT0( B2 B,33,903 T, T*0 BA1'
;K !roject report
-K !romoters details
/K Memorandum of association
.K Article of association
AK Copy of insurance document
@K Statement of stoc&s in factory" $or&shop or store if any.
:K Copies of hypothecation of goods
?K 7etter of guarantee
<K Copies of hypothecation of goods to secure a demand cash credit
;=K Ac&no$ledgement of debt and securities
;;K (raft of the letter of the title deeds obtained by mortgager.
;-K Copies of registration of company under )o%ernment of India" ministry of finance.
104
;/K Manufacturing process" if any.
;.K Ta# in%oice
;AK Agreement of tieDups.
If ban& recei%e any application of credit for retail lending li&e housing loan" car loan in that case
information need for the appraisal $ill be gross annual income of credit see&er from all source of
earning" income ta# return other credits ta&en by him and his record or past performances record.
,n the basis of all these information analysis of data is done and from all these it is analysed that
$hether potential borro$ers financial strength is good enough that he $ill return the amount
borro$ed $ith interest.

Chapter "
CONCL!SIONC
RECOMMENDATIONS
Before pro%iding any ad%ances to corporate sector for the purpose of $or&ing capital or the
purpose of term loan. Ban& should al$ays consider fe$ things" one of them is technology that is
being used. If ban& is pro%iding any ad%ances to any manufacturing unit" and technology that is
being used by that manufacturing unit is going to be obsolete in one or t$o years" then it $ill
become difficult for the company to return the borro$ed amount $ith interest as sell of product
$ill decrease and operating cost may increase.
For the type of sector $here technology becomes obsolete in smaller period of time" ban& may
suggest the borro$er to ta&e the technology on lease instead of buying it by in%esting hea%y
amount. If company ta&es the technology on lease $hich gets obsolete in smaller period of time" it
105
can replace it $ith the ne$ technology $hene%er required. And can sur%i%e in this competiti%e
mar&et.
Another thing that should be ta&en care is period of cash con%ersion cycle. 7esser the cash
con%ersion cycle suggests more quic&ly the in%entory is being con%erted into goods. More quic&ly
the recei%able is being con%erted into cash. 7esser cash con%ersion cycle suggest efficient
management of in%entory and ban& can ta&e it as a good sign before e#tending any credit" and it
increases the chance for ban& to get bac& its ad%ances $ith interest.
Ban& should carefully analyBe the sales pattern of the companyHs product as $ell as mar&et trend.
Because of trend It may happen that sales may increase for some time and then there is chance for
sudden falling. Ban& also need to analyBe the !AT and sales pattern because it gi%es the fair idea
of increasing or decreasing operating cost. And ban& may ta&e it as a source of future estimation
of company performance.
Ban& should timely %erify that $hether company is using the ad%ances properly for the specified
$or&" or there is any di%ersion of fund. Because if any company di%erse the borro$ed fund to
other place or in%ol%es it in other acti%ity then it may affect the proper running of business for the
purpose of $hich ad%ances had been ta&en and it may act hindrance for the ban& in getting bac&
it ad%ances $ith interest.
Ban& should also be concerned about ho$ much is the cash sale or credit sale of companyHs
product. *igher cash sales reflect that company is in better position in mar&et and more cash sales
increases liquidity of company. In similar $ay more credit sales may affect the performance of
company as sometime it may not get its recei%able on proper time $hich can affect its operational
acti%ity.
106
#INDIN2S
1."EY #INDIN2 #OR MSME AND CORPORATE LENDIN2 AND THEIR
IMPLICATION
;. corporate lending is one of the important function of the ban&. As it pro%ide an opportunity
for the gro$th of medium and small scale industry $hich helps in economic de%elopment
of country. It also acts as one the important source of income for the ban&s.
-. Ban& is al$ays concerned about the liquidity ratios of the company. As it gi%es an fair idea
that $hether company $ill able to return the amount along $ith interest or not. It is helpful
in estimating the company performance in repaying the loan at the time of any financial
crisis.
107
/. For $or&ing capital finance" normal current ratio required is ;.//C; " but it should not be
less than le%el of ;.::C;.
.. Total outside liabilities Jincluding the proposed borro$ingK to equity shall normally be /C;
as benchmar& but should not e#ceed /.AC;.
A. All ne$ proposals shall conforms to the satisfactory mar&et reports and at least bT credit
rating and minimum -F/ score under management rating as internal rating system of the
ban&.
@. In case of green field project $ith credit rating of B and management rating of A=O can be
considered for the finance at the ).M le%el.
:. For term loan F project finance" promoters contribution should normally be -AO or abo%e.
?. Term debt equity ratioJ including the proposed borro$ingK not to e#ceed -C;. *o$e%er in
case of project finance term debtJ including the proposed borro$ingK equity ratio should
not e#ceed /C;.
<. (ebt ser%ice co%erage ratio of minimum ;.AC; $ith benchmar& le%el of -C; should be
maintained.
;=. There are mainly three type of accounts that are maintained for the borro$erCD
aK 0#isting accountC these are the borro$al accounts of business units $hich are already
in e#istence and are ha%ing account $ith ban&.
bK )reen field accountC these are the ne$ business accounts and therefore do not ha%e
past financial statements.
cK 1e$ accountsC these are the borro$al account of business unit $hich are already in
e#istence but are not ha%ing account $ith ban&.
;;. Integrity and commitment of loan see&er is ta&en in consideration as it reflects his
$illingness to perform and return the amount $ith interest to the ban&.
108
;-. Financial strength of company is chec&ed by e%aluating mar&et %alue of share to the
nominal %alue.
;/. Capacity of internal generation of funds" that is" return on equity $hich is calculated by
di%iding profit after ta# $ith total equity Jpaid up capitalK. It is also a %ery good measure
of financial strength of a company $hich reflects the return company is getting on its
in%estment.
;.. Ban&s also measure financial strength before lending to any company by calculating the
net $orth of the promoters e#cluding stoc& in business.
;A. Before pro%iding any corporate ad%ances ban& al$ays consider the technical and financial
&no$ledge that the promoters of the company ha%e" because this &no$ledge helps sustain
in this competiti%e mar&et.
;@. ,rganiBational structure of a company and its succession plan is al$ays considered before
pro%iding any term loan as in long run organiBational structure of a company determines
its success or failure.
;:. If ad%ances is being ta&en for the production of a goods" then it become necessary for the
ban& to %erify its selling and distribution net$or&.
;?. Ban& also consider e#perience of director and promoters and their mar&et reputation $ith
past trac& record as it helps in &no$ing capability and $illingness of their performance.
;<. Account of company $ith ban& is regular or irregular determines its conduct hence it also
becomes one of the many important factors that are considered.
-=. (iscipline in timely submission of data information also determines conduct of the
company accounts.
-;. *o$ company is managing its in%entory and recei%able is also one of the important factors
to be considered for the ban&" it also %erifies companyHs realiBation of recei%able and
%aluation of in%entory.
109
--. To measure the performance of operation and for estimating that $hether company $ill
able to repay ban& consider many financial ratios" one of them is salesFbrea& e%en sales
ratio $hich is equal to net sales minus %ariable e#penses di%ided by fi#ed e#penses.
*igher the sales to brea& e%en sales ratio" higher is the margin of safety. 5ariable e#penses may
be ta&en as cost of sales and fi#ed e#penses as total e#penses less cost of sales e#traordinary
e#penses" if any.
-/. Current ratio is one of the important measure of the liquidity of a company it is calculated
by di%iding current asset of a company and its current liability. Current ratio greater than
;.// is considered as higher satisfactory.
-.. 3eturn on capital employed gi%es the fair idea about company performance it is calculated
by adding profit after ta# $ith interest and di%iding it $ith the sum of tangible net $orth
Tlong term borro$ing Tban& borro$ing.
3eturn on capital employed should be higher than rate of interest chargeable adjusted for ta#. If
it is lo$er than rate of interest charged company $ill not be able to repay its borro$ing.
-A. ,ne of important ratio that ban& al$ays consider before pro%iding any ad%ance is (ebt
ser%ice co%erage ratio it is calculated by adding net profit" depreciation and interest on
term loan and di%iding it $ith the sum of annual repayment of term loan and interest on
term loan.
*igher the debt ser%ice co%erage ratio" higher is the margin of safety.
[email protected] ,ne of the ratios that ban& al$ays considers is total long term debtF tangible net $orth. It
reflects $hether company $ill be able to all its debts at the time of some financial crisis.
-:. Ban& also calculate total outside liabilityFtangible net $orth. 7o$er ratio means higher
satisfaction for ban&s.
-?. Another important ratio that is calculated is effecti%e T,7Jtotal outside liabilityKF effecti%e
T19Jtotal net $orthK
110
0ffecti%e T,7S long term borro$ingT short term borro$ingT sundry creditorsT other liabilityT
credit equi%alent of nonD fund based outstanding.
0ffecti%e net $orthS paid up capital Treser%e e#cluding re%aluation reser%eT interest free
subordinate loans Iin%estment in sisterFassociate concernJunquoted shareK Iloans to sisterF
associate concernD intangible assets.
It also reflects company capability in repaying its liabilities at the time of any financial crisis.
-<. Another ratio $hich is not %ery important but ban&s consider it for &no$ing the
achie%ement of net sales projectionS actual net sales achie%edF net sales projected for the
year.
/=. Another ratio $hich is also not %ery important" but ban& may consider it for &no$ing the
achie%ement of net profit projectionS actual net profit achie%edF net profit projected for the
year.
/;. Ban& is al$ays attenti%e to$ard di%ersion of the funds as it may affects the company
liquidity position and operations. and it may also impact the debt equity ratio.
/-. Another ratio that is considered sometime is net profitF net operating cash flo$" usually it
is less than one indicating net profit at less than net operating cash flo$.
If the ratio is more than one" then it indicates sales achie%ed through more than usual recei%ables.
//. (ifferent charges that ban& puts before pro%iding any ad%ances areC
aK !rocessing charge.
bK (ocumentation charge.
cK Super%ision charge.
dK Inspection charge.
eK Mortgage charge.
fK !ayment charge.
111
/.. +C, ban& share in consortium $here ban& is the leader shall generally not e#ceed @=O of
the total fund based requirements and $here ban& is the member" minimum shall be AO
and ma#imum .=O.
/A. Ban& finance to high %alue project JA= crore and abo%eK must be accompanied by project
appraisal including the technical appraisal. 9hile project appraisal $ould be compulsory
in respect of project $ith debt component of A= crore and abo%e.
/@. Inland bill and e#port bill discounting up to ;?= days and demand loan repayable $ith a
period of less than three years comes under short term financing.
/:. Maturity range from / year and abo%e up to and inclusi%e of A years comes under medium
term loan.
/?. Terms loan in the maturity range of abo%e A years to ;= years comes under the long term
loan.
/<. 1o penal is charged for the loan up to -A===.
2."EY #INDIN2 AND THEIR IMPLICATION #OR RETAIL LOANS
;. Insurance paper is required.
-. Statements of stoc&s in factory Fgo$do$ns F $or&shops are required for any
manufacturing unit.
/. *ypothecation of goods to secure demand cash credit is required.
.. Form of letter of guarantee.
A. (eeds of hypothecation of mo%able plant and machinery to secure a term loan.
@. Ac&no$ledgement of debt and securities.
:. (raft of the letter of title deed obtained by mortgagers if any.
?. Copy of resolution passed by the board of directors.
112
<. Memorandum of association.
;=. 3egistration of company under go%ernment of India" ministry of finance.
;;. Article of association.
;-. '2C guidelines to be filled and submitted by the borro$er.
;/. Full information about the borro$er " partner and guarantor.
;.. Source of the fund that is being pro%ided as the margin by the borro$er.
;A. If construction is to ta&e place it must be done according to the building plan. And
borro$er $ill pay the charge of timely %erification by the ban&.
;@. Borro$er declaration ta&e it is not ta&ing any other credit under the same scheme $ith this
ban& or any other ban&.
LIMITATIONS
LIMITATION O# THE ST!DY AND #!T!RE DIRECTION$-
;K In this changing mar&et scenario and economic instability" it become tough to formulate
the policy and ma&e assumption that fullDfill e%ery needs" and reduces the ris& up to the
e#tent that is required before appraisal of any credit.
-K Changing political scenario of the nation also act as the hindrance in any prediction. As
$ith the change in go%ernment or the alliance $ith the help of $hich go%ernment is
running" rules changes there is also a chance of some change in economic scenario and
strategy to impro%e the economic condition of country.
113
/K (ata may not be accurate enough so that e#act prediction can be made.


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