Credit Appraisal
Content
Introduction
The project undertaken is “Analysis of Credit Appraisal at Bank of India”. The credit
appraisal process is the scientific way of giving the credit to corporate client by analysing the
credit worthiness of the company through different parameters. This project will give an
insight to the procedure followed at Bank of India to assess the credit worthiness of the
borrower.
I did my internship with Bank of India which is located in Noida Sec -9. The major reason for
choosing the Banking industry was to understand the working in the banks and also to gain
knowledge about banking industry and how it is helping the economy.
Due to recent surge in industrialization, the Indian economy is booming. To provide more
impetus to the industries, the government is encouraging their foray into various industries. In
order to fund the projects, the corporate depend on the credit and trade services provided by
the banks.
In the changing trade scenario, India has come up as an emerging player. There are great
potentials and opportunities in the trading sector on the domestic and international sector. The
economic growth of any country is dependent on its Import and Export. Thus providing need
based Credit is one of the most important factor helps exporter to make export orders and
importers to make purchases.
As finance has a risk attached, thus we need to appraise the proponent before lending any
credit this process is called Credit Appraisal which checks the need of finance for the
business. It involves appraisal of the background of the proponent, commercial, technical and
financial appraisal. Then the Term Loan / Working Capital Assessment is done to find the
limit of finance required.
The project describes about the process of credit appraisal for two different industries from
the information required to the processes involved. The project also details about the credit
policy and the credit rating process. A practical formulation of the credit proposal has been
done to provide a better understanding of the subject.
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Objectives
To work with an eminent Bank and to get a taste of corporate life.
To understand the working in the banks.
To bridge a gap between practical life and the theory that we have learnt in our
courses.
To understand the business and competitive environment in which Bank of India
operates.
To analyze and understand the financial position of Bank of India viz-a-viz its
competitors.
To study the policies and procedure for the Credit Appraisal for the Trade Credit.
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Financial Overview
Business Mix reaches
569710crores,growth of
10.62%
Chapter 1
Net Profit shoots up by
8% from Rs.2488.7 crores
to Rs.2677.52 crores.
COMPANY PROFILE
Operating Profit up by
24.33% (Rs.
6693.95Crore) supported
by growth in net interest
income as well as other
income.
Advances grew by
16.77% to
248833.34crores
Net Interest Income rises
by 6.43% to Rs. 8313.5Cr
from Rs. 7810.7Cr,
despite challenging
conditions.
Net Interest Margin
reported 4.43%
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BANK OF INDIA : COMPANY PROFILE
Bank of India (BoI) is a state-owned commercial bank with headquarters in Mumbai.
Government-owned since nationalization in 1969, It is India's 4th largest PSU bank,
after State Bank of India,Punjab National Bank and Bank of Baroda. Bank of India was
founded on September 7, 1906 by a group of eminent businessmen from Mumbai. In July
1969 Bank of India was nationalized along with 13 other banks.
It has 4157 branches including 29 branches outside India, and about 1679 ATMs. BoI is a
founder member of SWIFT (Society for Worldwide Inter Bank Financial
Telecommunications), which facilitates provision of cost-effective financial processing and
communication services. The Bank completed its first one hundred years of operations on 7
September 2006.
The Bank's association with the capital market goes back to 1921 when it entered into an
agreement with the Bombay Stock Exchange (BSE) to manage the BSE Clearing House. It is
an association that has blossomed into a joint venture with BSE, called the BOI Shareholding
Ltd. to extend depository services to the stock broking community.
Beginning with a paid-up capital of Rs.50 lakh and 50 employees, the Bank has made a rapid
growth over the years. It has evolved into a mighty institution with a strong national presence
and sizable international operations. In business volume, Bank of India occupies a premier
position
among
the
nationalized
banks.
Bank of India has several firsts to its credit. The Bank has been the first among the
nationalised banks to establish a fully computerised branch and ATM facility at the
Mahalaxmi Branch at Mumbai way back in 1989. It pioneered the introduction of the Health
Code System in 1982, for evaluating/ rating its credit portfolio. Bank of India was the first
Indian Bank to open a branch outside the country, at London, in 1946, and also the first to
open a branch in Europe, Paris in 1974. The Bank has sizable presence abroad, with a
network of 29 branches (including three representative office ) at key banking and financial
centres viz. London, New York, Paris, Tokyo, Hong-Kong, and Singapore.
4
HISTORY OF BANK OF INDIA
1906: BoI founded with Head Office in Bombay.
1921: BoI entered into an agreement with the Bombay Stock Exchange to manage its
clearing house.
1946: BoI opened a branch in London, the first Indian bank to do so. This was also
the first post-WWII overseas branch of any Indian bank.
1950: BoI opened branches in Tokyo and Osaka.
1951: BoI opened a branch in Singapore.
1953: BoI opened a branch in Kenya and another in Uganda.
1953 or 54: BoI opened a branch in Aden.
1955: BoI opened a branch in Tanganyika.
1960: BoI opened a branch in Hong Kong.
1962: BoI opened a branch in Nigeria.
1967: The Government of Tanzania nationalized BoI's operations in Tanzania and
folded them into the government-owned National Commercial Bank, together with those
of Bank of Baroda and several other foreign banks.
1969: The Government of India nationalized the 14 top banks, including Bank of
India. In the same year, the People's Democratic Republic of Yemen nationalized BoI's
branch in Aden, and the Nigerian and Ugandan governments forced BoI to incorporate its
branches in those countries.
1970: National Bank of Southern Yemen incorporated BoI's branch in Yemen,
together with those of all the other banks in the country; this is now National Bank of
Yemen. BoI was the only Indian bank in the country.
1972: BoI sold its Uganda operation to Bank of Baroda.
1973: BoI opened a rep in Jakarta.
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1974: BoI opened a branch in Paris. This was the first branch of an Indian bank in
Europe.
1976: The Nigerian government acquired 60% of the shares in Bank of India
(Nigeria).
1978: BoI opened a branch in New York.
1970s: BoI opened an agency in San Francisco.
1980: Bank of India (Nigeria) Ltd, changed its name to Allied Bank of Nigeria.
1986: BoI acquired Paravur Central Bank (Karur Central Bank or Parur Central Bank)
in Kerala in a rescue.
1987: BoI took over the three UK branches of Central Bank of India (CBI). CBI had
been caught up in the Sethia fraud and default and the Reserve Bank of Indiarequired it to
transfer its branches.
2003: BoI opened a representative office in Shenzhen.
2005: BoI opened a representative office in Vietnam.
2006: BoI plans to upgrade the Shenzen and Vietnam representative offices to
branches, and to open representative offices in Beijing, Doha, and Johannesburg. In
addition, BoI plans to establish a branch in Antwerp and a subsidiary in Dar-es-Salaam,
marking its return to Tanzania after 37 years.
2007: BoI acquired 76 percent of Indonesia-based PT Bank Swadesi.
2011: BoI opened a fully owened Subsidairay in Auckland, New Zealand on 6th
October,2011 (Bank of India (New Zealand) Ltd.)
The Bank’s Mission
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"To provide superior, proactive banking services to niche markets
globally, while providing cost-effective, responsive services to
others in our role as a development bank, and in so doing, meet the
requirements of our stakeholders".
The Bank’s Vision
"To become the bank of choice for corporates, medium
businesses and upmarket retail customers and to provide cost
effective developmental banking for small business, mass
market and rural markets"
Loan Product
PRODUCT AND SERVICES
Deposit Product
Cash credit
Overdraft
Loan against Bank Deposit
Loan against NSC, KVP, LIC
policies etc.
Agricultural Loan
SSI Finance
Star SSI Supreme Scheme,
Priyadarshini Scheme etc.
Star Home Loan
Star Personal Loan
Star Mortgage Loan
Star IPO
Star Autofin
Star Education Loan
Medimobile Loan
Gold Loan
Commercial loans
Bullion Banking
Export Finance
Investment &
Insurance
Savings Bank Account
BOI Savings Plus
Current Deposit Account
Double Benefit Deposit
Fixed Deposit
Quarterly
Certificate
Income
Monthly
Certificate
Income
Recurring Deposit
Foreign Currency Deposit
7
Mutual
Funds
Bonds
Insurance
Equity And
Derivatives
Star gold
coin
Channel Credit
Discount Future Cash Flows
Foreign Currency Swing limits
Exporter’s Gold Card
Dual Currency Swing Limit
Trade Finance
Bill Finance
Bank Guarantee
NRI Loan
Scheme
FCNR Deposit
Floating
Scheme
Rate
Deposit
Deposit Scheme for Senior
Citizens
Special Deposit Product
for High Value Deposit
Customer
Cards
Credit Card
Debit Card
-------------------------------Forex services
------------------------------- Product And Services
Trade Services
Forex Service Branch Locater
Online Services
Star Connect Internet
Banking Services
BOI STAR ePay
Star e-Remit Service
Star Shar(e) trade
e-Payment of Central
Excise & Service Tax
DGFT Online e Payment
Online Booking of Indian
Airlines & RailwaysTicket
e-Payment of Direct Taxes
Online Interbank Fund
Transfer
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Access To Bank
Internet
Banking
Mobile
Banking
ATM
Phone
Banking
Email
Statements
Chapter 2
INDUSTRY ANALYSIS
BANKING INDUSTRY ANALYSIS
The Banking industry comprises of segments that provide financial assistance and advisory
services to its customers by means of varied functions such as commercial banking,
wholesale banking, personal banking, internet banking, mobile banking, credit unions,
investment banking and the like.
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With years, banks are also adding services to their customers. The Indian banking industry is
passing through a phase of customers market. The customers have more choices in choosing
their banks. A competition has been established within the banks operating in India.
With stiff competition and advancement of technology, the services provided by banks have
become more easy and convenient. The past days are witness to an hour wait before
withdrawing cash from accounts or a cheque from north of the country being cleared in one
month in the south.
Banks are among the main participants of the financial system in India. Banking offers
several facilities & Opportunities. This section provides comprehensive and updated
information, guidance and assistance in all areas of banking in India.
Bank of Hindustan, set up in 1870, was the earliest Indian Bank . Banking in India on modern
lines started with the establishment of three presidency banks under Presidency Bank's act
1876 i.e. Bank of Calcutta, Bank of Bombay and Bank of Madras.
The commercial banking structure in India consists of: Scheduled Commercial Banks &
Unscheduled Banks. Banking Regulation Act of India, 1949 defines Banking as "accepting,
for the purpose of lending or investment of deposits of money from the public, repayable on
demand or otherwise and withdrawable by cheques, draft, order or otherwise."
The arrival of foreign and private banks with their superior state-of-the-art technology-based
services pushed Indian Banks also to follow suit by going in for the latest technologies so as
to meet the threat of competition and retain customer base.
The evolution of IT services outsourcing in the Indian banks has presently moved on to the
level of Facilities Management (FM). Banks now looking at business process management
(BPM) to increase returns on investment, improve customer relationship management (CRM)
and employee productivity.
For, these entities sustaining long-term customer relationship management (CRM) has
become a challenge with almost everyone in the market with similar products.
Historical Background
The first bank in India, though conservative, was established in 1786. From 1786 till today,
the journey of Indian Banking System can be segregated into three distinct phases. They are
as mentioned below:
· PHASE I - Early phase from 1786 to 1969 of Indian Banks
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· PHASE II - Nationalization of Indian Banks and up to 1991
· PHASE III - Indian Financial & Banking Sector Reforms after 1991.
PHASE I:
The General Bank of India was set up in the year 1786. Next came Bank of Hindustan and
Bengal Bank. The East India Company established Bank of Bengal (1809), Bank of Bombay
(1840) and Bank of Madras (1843) as independent units and called it Presidency Banks.
These three banks were amalgamated in 1920 and Imperial Bank of India was established
which started as private shareholders banks, mostly Europeans shareholders. During the first
phase the growth was very slow and banks also experienced periodic failures between 1913
and 1948. There were approximately 1100 banks, mostly small. To streamline the functioning
and activities of commercial banks, the Government of India came up with The Banking
Companies Act, 1949 which was later changed to Banking Regulation Act 1949 as per
amending Act of 1965 (Act No. 23 of 1965). Reserve Bank of India was vested with
extensive powers for the supervision of banking in India as the Central Banking Authority.
During those day’s public has lesser confidence in the banks. As an aftermath deposit
mobilization was slow. Abreast of it the savings bank facility provided by the Postal
department was comparatively safer. Moreover, funds were largely given to the traders.
PHASE II:
Government took major steps in this Indian Banking Sector Reform after independence. In
1955, it nationalized Imperial Bank of India with extensive banking facilities on a large scale
especially in rural and semi-urban areas. Second phase of nationalization Indian Banking
Sector Reform was carried out in 1980 with seven more banks. This step brought 80% of the
banking segment in India under Government ownership.
The following are the steps taken by the Government of India to Regulate Banking
Institutions in the Country:
· 1949: Enactment of Banking Regulation Act.
· 1955: Nationalization of State Bank of India.
· 1959: Nationalization of SBI subsidiaries.
· 1961: Insurance cover extended to deposits.
· 1969: Nationalization of 14 major banks.
· 1971: Creation of credit guarantee corporation.
· 1975: Creation of regional rural banks.
· 1980: Nationalization of seven banks with deposits over 200 crore.
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After the nationalization of banks, the branches of the public sector bank India raised to
approximately 800% in deposits and advances took a huge jump by 11,000%.Banking in the
sunshine of Government ownership gave the public implicit faith and immense confidence
about the sustainability of these institutions.
PHASE III
This phase has introduced many more products and facilities in the banking sector in its
reforms measure. In 1991, under the chairmanship of M Narasimham, a committee was set up
by his name which worked for the liberalisation of banking practices.
The country is flooded with foreign banks and their ATM stations. Efforts are being put to
give a satisfactory service to customers. Phone banking and net banking is introduced. The
entire system became more convenient and swift. The financial system of India has shown a
great deal of resilience. It is sheltered from any crisis triggered by any external
macroeconomics shock as other East Asian Countries suffered. This is all due to a flexible
exchange rate regime, the foreign reserves are high, the capital account is not yet fully
convertible, and banks and their customers have limited foreign exchange exposure
Banking industry is the back bone for growth of any economy. The journey of Indian
Banking Industry has faced many waves of economic crisis. Recently, we have seen the
economic crisis of US in 2008-09 and now the European crisis. The general scenario of the
world economy is very critical. It is the banking rules and regulation framework of India
which has prevented it from the world economic crisis
STRUCTURE OF INDIAN BANKING INDUSTRY
Banking Industry in India functions under the sunshade of Reserve Bank of India - the
regulatory, central bank.In India the banks are being segregated in different groups. Each
group has their own benefits and limitations in operating in India. Each has their own
dedicated target market. Few of them only work in rural sector while others in both rural as
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well as urban. Many even are only catering in cities. Some are of Indian origin and some are
foreign players.
Banking System in India
Reserve bank of India (Controlling Authority)
Development Financial institutions
IFCI IDBI ICICI NABARD NHB
Commercial
Banks
Banks
IRBI
SIDBI
Regional Rural
Land Development
Banks
Banks
Public Sector Banks
SBI Groups
EXIM Bank
Cooperative
Banks
Private Sector Banks
Nationalized Banks
Indian Banks
Foreign Banks
Banking Industry mainly consists of:
• Commercial Banks
• Co-operative Banks
SCHEDULED BANKS IN INDIA
(1) Scheduled Commercial Banks
Public Sector Banks
Private Sector
Foreign Banks In
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Regional Rural
Banks
(26)
India
(25)
Nationalized
Bank
Other
Public
Sector
Banks
(IDBI)
SBI And Its
Associates
Banks
(29)
(95)
Old Private
Banks
New Private
Banks
(2) Scheduled Cooperative Banks
Scheduled Urban Cooperative Banks
Scheduled State Cooperative Banks
Public Sector Banks
Public sector banks are those banks which are owned by the Government. The Govt. runs
these Banks. In India 14 banks were nationalized in 1969 & in 1980 another 6 banks were
also nationalized. Therefore in 1980 the number of nationalized bank 20. At present there are
total 26 Public Sector Banks in India (As on 26-09-2009). Of these 19 are nationalised banks,
14
6(STATE BANK OF INDORE ALSO MERGED RECENTLY) belong to SBI & associates
group and 1 bank (IDBI Bank) is classified as other public sector bank. Welfare is their
primary objective.
Almost 80% of the business are still controlled by Public Sector Banks (PSBs). PSBs are still
dominating the commercial banking system. Shares of the leading PSBs are already listed on
the stock exchanges
Nationalised banks
Allahabad Bank
Andhra Bank
Bank Of Baroda
Bank Of India
Bank Of Maharastra
Canara Bank
Central Bank Of India
Corporation Bank
Dena Bank
Indian Bank
Indian Overseas Bank
Oriental Bank Of
Commerce
Punjab & Sind Bank
Punjab National Bank
Syndicate Bank
UCO Bank
Union Bank Of India
United Bank Of India
Vijaya Bank
Other
Public
Sector
Banks
SBI & its Associates
IDBI
(Industrial
Developmen
t Bank Of
India)Ltd.
State Bank of India
State Bank of Hyderabad
State Bank of Mysore
State Bank of Patiala
State Bank of Travancore
State Bank of Bikaner And
Jaipur
(State Bank of Saurastra merged with
SBI in the year 2008 and State Bank of
Indore In 2010)
Private Sector Banks
The RBI has given licenses to new private sector banks as part of the liberalisation process.
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These banks are owned and run by the private sector. Various banks in the country such as
ICICI Bank, HDFC Bank etc. An individual has control over there banks in preparation to the
share of the banks held by him.
Private banking in India was practiced since the beginning of banking system in India. The
first private bank in India to be set up in Private Sector Banks in India was IndusInd Bank. It
is one of the fastest growing Bank Private Sector Banks in India. IDBI ranks the tenth largest
development bank in the world as Private Banks in India and has promoted world class
institutions in India.
The first Private Bank in India to receive an in principle approval from the Reserve Bank of
India was Housing Development Finance Corporation Limited, to set up a bank in the private
sector banks in India as part of the RBI's liberalization of the Indian Banking Industry. It was
incorporated in August 1994 as HDFC Bank Limited with registered office in Mumbai and
commenced operations as Scheduled Commercial Bank in January 1995. ING Vysya, yet
another Private Bank of India was incorporated in the year 1930
Private sector banks have been subdivided into following 2 categories:Old
Private Sector Banks
Bank of Rajasthan Ltd.
Catholic Syrian Bank Ltd.
City Union Bank Ltd.
Dhanalakshmi Bank Ltd.
Federal Bank Ltd.
ING Vysya Bank Ltd.
Jammu and Kashmir Bank
Ltd.
Karnataka Bank Ltd.
Karur Vysya Bank Ltd.
Lakshmi Vilas Bank Ltd.
Nainital Bank Ltd.
Ratnakar Bank Ltd.
SBI Commercial and
International Bank Ltd.
South Indian Bank Ltd.
Tamilnad Mercantile Bank
Ltd.
United Western Bank Ltd.
New Private Sector Banks
Foreign Banks In India
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Bank of Punjab Ltd. (since merged
with Centurian Bank)
Centurian Bank of Punjab (since
merged with HDFC Bank)
Development Credit Bank Ltd.
HDFC Bank Ltd.
ICICI Bank Ltd.
IndusInd Bank Ltd.
Kotak Mahindra Bank Ltd.
Axis Bank (earlier UTI Bank)
Yes Bank Ltd.
Foreign banks have been operating in India for decades with a few of them having operations
in India for over a century. The number of foreign bank branches in India has increased
significantly in recent years since RBI issued a number of licenses - well beyond the
commitments made to the World Trade Organisation. The presence of foreign banks in India
has benefited the financial system by enhancing competition, resulting in higher efficiency.
There has also been transfer of technology and specialised skills which has had some
"demonstration effect" as Indian banks too have upgraded their skills, improved their scale of
operations and diversified into other activities. At a time when access to foreign currency
funds was a constraint for the Indian companies, the presence of foreign banks in India
enabled large Indian companies to access foreign currency resources from the overseas
branches of these banks. Also with the presence of foreign banks, as borrowers in the money
market and their operation in the foreign exchange market has resulted in the creation and
deepening of the inter-bank money market. Now, it is the challenge for the supervisors to
maximize the advantages and minimize the disadvantages of the foreign banks' local presence
ABN AMRO Bank N.V.
HSBC (Hongkong &
Shanghai Banking
Corporation)
Abu Dhabi Commercial
Bank Ltd
JPMorgan Chase Bank
American Express Bank
Krung Thai Bank
Antwerp Diamond Bank
Mashreq Bank
Arab Bangladesh Bank
Mizuho Corporate Bank
Bank International
Indonesia
Oman International Bank
Bank of America
Shinhan Bank
Bank of Bahrain & Kuwait
Société Générale
Bank of Ceylon
Sonali Bank
Bank of Nova Scotia
Standard Chartered Bank
Bank of Tokyo Mitsubishi
UFJ
State Bank of Mauritius
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Barclays Bank
BNP Paribas
Calyon Bank
ChinaTrust Commercial
Bank
Citibank
DBS Bank
Deutsche Bank
Cooperative banks in India
The Cooperative bank is an important constituent of the Indian Financial System, judging by
the role assigned to co operative, the expectations the co operative is supposed to fulfil, their
number, and the number of offices the cooperative bank operate. Though the co operative
movement originated in the West, but the importance of such banks have assumed in India is
rarely paralleled anywhere else in the world. The cooperative banks in India plays an
important role even today in rural financing. The businessess of cooperative bank in the urban
areas also has increased phenomenally in recent years due to the sharp increase in the number
of primary co-operative banks.
Co operative Banks in India are registered under the Co-operative Societies Act. The
cooperative bank is also regulated by the RBI. They are governed by the Banking Regulations
Act 1949 and Banking Laws (Co-operative Societies) Act, 1965.
Rural banks in India
Rural banking in India started since the establishment of banking sector in India. Rural
Banks in those days mainly focussed upon the agro sector. Regional rural banks in India
penetrated every corner of the country and extended a helping hand in the growth process of
the country.
SBI has 30 Regional Rural Banks in India known as RRBs. The rural banks of SBI is spread
in 13 states extending from Kashmir to Karnataka and Himachal Pradesh to North East. The
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total number of SBIs Regional Rural Banks in India branches is 2349 (16%). Till date in rural
banking in India, there are 14,475 rural banks in the country of which 2126 (91%) are located
in remote rural areas.
Apart from SBI, there are other few banks which functions for the development of the rural
areas in India. Few of them are as follows.
Haryana State Cooperative Apex Bank Limited
The Haryana State Cooperative Apex Bank Ltd. commonly called as HARCOBANK plays a
vital role in rural banking in the economy of Haryana State and has been providing aids and
financing farmers, rural artisans, agricultural labourers, entrepreneurs, etc. in the state and
giving service to its depositors.
NABARD
National Bank for Agriculture and Rural Development (NABARD) is a development bank in
the sector of Regional Rural Banks in India. It provides and regulates credit and gives service
for the promotion and development of rural sectors mainly agriculture, small scale industries,
cottage and village industries, handicrafts. It also finance rural crafts and other allied rural
economic activities to promote integrated rural development. It helps in securing rural
prosperity and its connected matters.
Sindhanur Urban Souharda Co-operative Bank
Sindhanur Urban Souharda Co-operative Bank, popularly known as SUCO BANK is the first
of its kind in rural banks of India. The impressive story of its inception is interesting and
inspiring for all the youth of this country.
United Bank of India
United Bank of India (UBI) also plays an important role in regional rural banks. It has
expanded its branch network in a big way to actively participate in the developmental of the
rural and semi-urban areas in conformity with the objectives of nationalisation.
Syndicate Bank
Syndicate Bank was firmly rooted in rural India as rural banking and have a clear vision of
future India by understanding the grassroot realities. Its progress has been abreast of the
phase of progressive banking in India especially in rural banks.
Industry Segments
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•
Industrial
Finance
Commercial
Banking
Investment
Banking
• Micro
Finance
Rural Banking
Wholesale
Banking
•
Internet
Banking
•
Mobile
Banking
Current trend in banking
Currently banking in India is generally fairly mature in terms of supply, product
range and reach-even though reach in rural India still remains a challenge for the private
sector and foreign banks. In terms of quality of assets and capital adequacy, Indian banks
are considered to have clean, strong and transparent balance sheets relative to other banks
in comparable economies in its region. The Reserve Bank of India is an autonomous body,
with minimal pressure from the government. The stated policy of the Bank on the Indian
Rupee is to manage volatility but without any fixed exchange rate-and this has mostly been
true.
With the growth in the Indian economy expected to be strong for quite some time especially
in its services sector-the demand for banking services, especially retail banking,
mortgages and investment services are expected to be strong. One may also expect M&As,
takeovers, and asset sales.
Currently, India has 88 scheduled commercial banks (SCBs) - 28 public sector banks (that is
with the Government of India holding a stake), 29 private banks (these do not have
government stake; they may be publicly listed and traded on stock exchanges) and 31
foreign banks. They have a combined network of over 53,000 branches and 17,000 ATMs.
According to a report by ICRA Limited, a rating agency, the public sector banks hold over 75
percent of total assets of the banking industry, with the private and foreign banks holding
18.2% and 6.5% respectively.
Growth trends
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The growth of banking in the coming years is likely to be more qualitative than quantitative,
according to the report. Based on the projections made in the "India Vision 2020" prepared by
the Planning Commission and the Draft 10th Plan, the report forecasts that the pace of
expansion in the balance-sheets of banks is likely to decelerate
The Indian banking market is growing at an astonishing rate, with assets expected to reach
US$1.5 trillion by 2014. An expanding economy, middle class, and technological innovations
are all contributing to this growth. The country’s middle class accounts for over 352 million
people. In correlation with the growth of the economy, rising income levels, increased
standard of living, and affordability of banking products are promising factors for continued
expansion. The Indian banking Industry is in the middle of an IT revolution, focusing on the
expansion of retail and rural banking. Players are becoming increasingly customer-centric in
their approach, which has resulted in innovative methods of offering new banking products
and services. Banks are now realizing the importance of being a big player and are beginning
to focus their attention on mergers and acquisitions to take advantage of economies of scale
and/or comply with Basel II regulation. Indian banking industry assets are expected to reach
US$1.5 trillion by 2014 and are poised to receive a greater infusion of foreign capital. The
banking industry should focus on having a small number of large players that can compete
globally rather than having a large number of fragmented players.
Technology In Banking
In the six decades of independence banking has evolved in four different phases. During the
fourth phase important initiatives were taken with regard to improve the banking system. The
entry of foreign banks resulted in a paradigm shift in the way banking was done in India. The
arrival of foreign banks and private banks with there superior state of the art technology
pushed the Indian banks to adopt latest technology in market, so that they could retain there
customer base.
Information technology has been used under two different avenues in banking. One is
communication and connectivity and other is Business process reengineering. Information
technology enables sophisticated product development, better market infrastructure,
implementation of reliable techniques for control of risks and help the financial
intermediaries reach geographically distant and different market.
In India banks as well as other financial entities entered the world of information technology
and with Indian financial network(INFINET). INFINET, a wide area satellite network (WAN)
using VSAT(very small aperture technology) was jointly set up by Reserve Bank of India and
Institute for Development and research for banking in1999. INFINET which was initially
comprised only public sector banks was opened for participation by other categories of
members. The information technology act 2000 has given legal recognition for creation,
transmission, and retention of electronic data to be treated as a valid proof in the court of law
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The Reserve Bank of India has assigned priority to the up gradation of technology in the
banks. Substantial progress has been made for developing a modern, efficient, integrated and
secure payment and settlement system for the financial service sectors. Modernization of
clearing and settlement system through MICR based cheque clearing, popularizing electronic
clearing services (ECS) and integration of RBI-EFT scheme with funds transfer schemes of
bank, introduction of centralized fund management system (CFMS) are significant milestones
in this regard.
The coverage of electronic clearing services has been significantly effective to encourage non
paper based fund and develop a centralized facility for effective payment. The scheme for
electronic fund transfer operated by the reserve bank has been augmented and now it is
present in 13 cities. The centralized fund management system (CFMS) which would enable
banks to obtain account wise and centre wise position of their balances has been implemented
in a phased manner from November 2001.
Membership of INFINET has been opened to all the banks in addition to those in the public
sector banks. At the base of all the interbank message transfers using the INFINET is the
structured financial messaging system (SFMS). It would serve as a secure communication
carrier with templates for intra and interbank messages in a strict message format that will
facilitate straight through messaging. All the interbank messages will be stored and switched
to central hub at Hyderabad while the intra bank messages will stored in the bank gateway.
Security standards of SFMS will match the international standards.
Information technology has immense untapped potential in banking. Strengthening the
information technology in banks could improve the effectiveness of asset liability of banks.
Building up of a related data base would strengthen and enhance the forecasting of liquidity
of banks at the branch level. This could enhance the risk management capabilities of banks.
Legal/ Regulatory Issues Related To Banking
Banks works under various legal frameworks most important of them are, the Banking
regulation act 1949, Basel II norms, RBI act, Negotiable Instruments act.
Banking Regulation Act 1949
The banking regulation act was passed as banking companies act and it came into force in
16/3/49. Subsequently it was changed to Banking regulation act on 1/3/66.
22
BASEL II Norms
Basel II is the second of the Basel accords which are recommendation on the banking laws
and regulations issued by banking committee on banking supervision. The purpose of Basel II
norms is to create international standards that banking regulators can use when creating
regulations about how much capital does banks needs to put aside to guard against the types
of financial and operational risks banks face. Advocates of Basel II believe that such an
international system can help protect the international financial system from many types of
problem that arise should a bank or a series of banks collapse. In practice Basel II attempts to
accomplish this by setting up rigorous risks and capital management requirement designed to
ensure that the banks hold capital reserves appropriate to the risks the banks exposes itself to
through its investment and lending practices. Generally speaking this rules says that the
greater the risk the bank exposes itself, the greater the capital bank requires to safeguard its
solvency and overall economic stability.
Opportunities and Challenges for Players
The bar for what it means to be a successful player in the sector has been raised. Four
challenges must be addressed before success can be achieved. First, the market is seeing
discontinuous growth driven by new products and services that include opportunities in
credit cards, consumer finance and wealth management on the retail side, and in fee-based
income and investment banking on the wholesale banking side.
These require new skills in sales & marketing, credit and operations. Second, banks will no
longer enjoy windfall treasury gains that the decade-long secular decline in interest rates
provided. This will expose the weaker banks. Third, with increased interest in India,
competition from foreign banks will only intensify. Fourth, given the demographic shifts
resulting from changes in age profile and household income, consumers will increasingly
demand enhanced institutional capabilities and service levels from banks.
23
Competition Analysis
Name
Market Cap.(Rs.
Crores)
Net Interest
Income
Net
Profit
1,44,291.42
1,06,521.45
11,707.2
9
Bank of Baroda
28,623.80
29,673.72
5,006.96
PNB
26,098.10
36,428.03
4,884.20
Bank of India
19,999.04
28,480.67
2,677.52
Canara Bank
18,280.40
30,850.62
3,282.72
IDBI Bank
11,563.20
23,369.93
2,031.61
SBI
24
Union Bank
11,451.42
21,144.28
1,787.13
Indian Bank
7,518.83
12,231.32
1,746.97
Oriental Bank
7,044.57
15,814.88
1,141.56
IOB
6,969.75
17,897.08
1,050.13
Allahabad Bank
6,852.86
15,523.28
1,866.79
Corporation Ban
6,496.95
13,017.78
1,506.04
Andhra Bank
6,345.64
11,338.73
1,344.67
Syndicate Bank
6,097.75
15,268.35
1,313.39
Central Bank
5,922.05
19,149.50
533.04
UCO Bank
5,191.40
14,632.37
1,108.67
Dena Bank
3,372.81
6,794.13
803.14
Bank of Mah
3,012.82
7,213.96
430.83
Vijaya Bank
2,874.13
7,988.12
580.99
State B Bikaner
2,576.35
6,291.36
652.03
State Bnk Tr
2,469.50
6,828.76
510.46
United Bank
2,303.17
7,961.09
632.53
State Bnk My
2,244.99
5,078.44
369.15
Punjab & Sind
1,621.89
6,474.50
451.28
UTI – Gold
391.38 -
The above table reveals the data for market capitalization, Net Profit, and Net Income of the
PSU banks. This clearly shows that Bank of India ranks 4th among all other PSU banks in
terms of profitability, market cap. and Net Interest Income.
25
Market share
27%
SBI
Bank of Baroda
43%
PNB
Bank of India
Canara Bank
IDBI Bank
4%
Others
5%
6%
8%
8%
The above pie chart depicts the market share for PSU banks. It clearly indicates that SBI is
the leader among all the PSU banks holding 42.5% market share,while Bank of Baroda stood
2nd in number holding 8% market share. Hence from the above chart we can say that the
market share of Bank of India is 6%.
Competitive Forces Model
(Porter’s Five Force Model)
26
(3)
The threat of substitute
product is
very high like credit unions and investment
houses. There are other substitutes as well
banks like mutual funds, stocks, government
securities, debentures, gold, real estate etc.
Potential Entrants is high as
development financial institutions as well as
private and Foreign Banks have entered in a big
way
(2)
(1)
Rivalry among existing firms
has increased with liberalization. New
products and improved customer services is
the focus.
(5)
Bargaining power of the supplier
is
high as corporate can raise funds easily due
to high Competition.
is high. With the new financial instruments they
are asking higher return on the investments.
(4)
Bargaining power of buyers
1. Rivalry among existing firms
With the process of liberalization, competition among the existing banks has increased.
Each bank is coming up with new products to attract the customers and tailor made Loans
27
are provided. The quality of services provided by banks has improved drastically.
2. Potential Entrants
Previously the Development Financial Institutions mainly provided project finance
and development activities. But they now entered into retail banking which has resulted
into stiff competition among the exiting players.
3. Threats from Substitutes
Competition from the non-banking financial sector is increasing rapidly. The threat of
substitute product is very high like credit unions and in investment houses. There are other
substitutes as well banks like mutual funds, stocks, government securities, debentures,
gold, real estate etc.
4. Bargaining Power of Buyers
Corporate can raise their funds through primary market or by issue of GDRs, FCCBs. As a
result they have a higher bargaining power. Even in the case of personal finance, the
buyers have a high bargaining power. This is mainly because of competition.
5. Bargaining Power of Suppliers
With the advent of new financial instruments providing a higher rate of returns to
the investors, the investments in deposits is not growing in a phased manner. The
suppliers demand a higher return for the investments.
6. Overall Analysis
The key issue is how banks can leverage their strengths to have a better future. Since the
availability of funds is more and deployment of funds is less, banks should evolve new
products and services to the customers. There should be a rational thinking in sanctioning
Loans, which will bring down the NPAs. As there is a expected revival in the Indian
economy Banks have a major role to play. Funding corporate at a low cost of capital is a
special requisite.
Market Analysis
28
The Product Mix:
The banks primarily deal in services and therefore, the formulation of product mix is required
to be in the face of changing business environmental conditions. The changing psychology,
the increasing expectations, the rising income, the changing lifestyles, the increasing
domination of foreign banks and the changing needs and requirements of customers at large
make it essential that they innovate their service mix and make them of world class. Against
this background, we find it significant that the banking organizations minify, magnify
combine and modify their service mix.
Product Portfolio:
The bank professionals while formulating the product mix need to assign due weight-age to
the product portfolio. By the concept product portfolio, emphasis is on including the different
types of services/ schemes found at the different stages of the product life cycle. The portfolio
denotes a combination or an assortment of different types of products generating more or less
in proportion to their demand. The quality of product portfolio determines the magnitude of
success. It is excellence of bank professionals that help them in having a sound product
portfolio.
We find the composition of a family sound, if members of all the age groups are given due
place. Like this, the composition or blending of a service mix is considered to be sound, if
well established and likely to be profitable schemes are included in the mix. The bank
professionals are supposed to perform the responsibility of composing the same. An
organization with a sound product portfolio gets a conducive environment and successes in
increasing the sensitivity of marketing decisions.
If the banks rely solely on their established services and schemes, the multidimensional
problems would crop up in the long run because when the well established services/schemes
would start saturating or generating losses, the commercial viability of banks would of
course, be questioned. It is in this context, that we find designing of a sound product portfolio
essential to an organisation. We can’t deny that the product portfolio of the foreign banks is
found sound since they keep their eyes moving. The innovation, diffusion, adoption and
elimination processes are taken due care. The public sector commercial banks need to
innovate their service and this makes a strong advocacy in favour of analyzing the product
portfolio.
The Price Mix
In the formulation of product mix, the pricing decisions occupy a place of outstanding
significance. The pricing decisions or the decisions related to interest and fee or commission
29
charged by banks are found instrumental in motivating or influencing the target market. The
Reserve Bank of India and the Indian Banking Association are concerned with the
regulations. The rate of interest is regulated by the RBI and other charges are controlled by
the Indian Banking Association. To be more specific in the Indian setting, we find this
component of the marketing mix significant because the banking organizations are also
supposed to sub serve the interests of weaker sections and the backward regions. The public
sector commercial banks in particular are supposed to play developmental role with societal
approach. It is natural that this specific role of the public sector commercial banks
complicates the problem of pricing.
Promotion Mix
In the formulation of marketing mix the bank professionals are also supposed to blend the
promotion mix in which different components of promotion such as advertising, publicity,
sales promotion, word-of-mouth promotion, personal selling and telemarketing are given due
weight age. The different components of promotion help bank professionals in promotion the
banking business.
The Place Mix
This component of the marketing mix is related to the offering of services. The two important
decision making areas are making available the promised services to the ultimate users and
selecting a suitable place for bank branches.
The selection of a suitable place for the establishment of a branch is significant with the
viewpoint of making the place accessible and in addition, the safety and security provisions
are also found important. The banking organizations are not free to open a branch since the
Reserve Bank of India regulates the subject of branch expansion but so far as the
management of branch is concerned, the branch managers have option to select a place which
is convenient to both the parties, such as the users and the bankers. In the Indian perspective,
the protection to the bank’s assets and safety to the users and bankers need due weight age.
The vulnerable area or regions need adequate provisions to make the branch safe. The
management of office is also found significant with the viewpoint of making the services
attractive. The furnishing, civic amenities and parking facilities can’t be overlooked.
Thus, the place mix is found to be an important decision making area which requires due
attention, both at macro and micro levels.
The People
30
Sophisticated technologies, no doubt, inject life and strength to our efficiency but the
instrumentality of sophisticated technologies start turning sour if the human resources are not
managed in a right fashion. Generation of efficiency is substantially influenced by the quality
of human resources..
While fixing criteria for selection, banks assign due weight age to the ethical values. The
education and training facilities have been innovated.
The foreign banks and the private sector commercial banks reward for efficiency and at the
same time also demotivate the inefficient bankers. This helps them in improving the
efficiency of even the inefficient people. The development of human resources makes the
ways for the formation of human capital. Incentives, of course, inject efficiency and the
organizations offering more incentives succeed in motivating the people.
MACRO vs MICRO ECONOMIC ANALYSIS
31
PROBLEMS FACED BY INDIAN ECONOMY
I.
FALL IN SAVINGS RATIO
The savings ratio is the % of income that is saved not spent. A fall in the savings ratio implies
that consumer spending is increasing; often this is financed through increased borrowing.
Effects Of Fall In Savings Ratio
Higher Level Of Consumption
This results in increase in Aggregate Demand. The increase in AD will cause an increase in
economic growth and lower unemployment. However, rising Aggregate Demand may cause
inflation. Inflation will occur when growth is faster than the long run trend rate. This is now a
potential problem in the India. Inflation has recently gone above 7.50%
Boom And Bus
A fall in the savings ratio is usually accompanied by a rise in confidence. It is the rise in
confidence which encourages borrowing and consumers to run down savings. Therefore,
there is always a danger that a falling savings ratio can be a precursor to a boom and bust
situation.
Economy More Sensitive To Interest Rates
With a fall in the savings ratio interest rate changes will have a bigger effect in reducing
spending. This is because levels of borrowing are higher and therefore a rise in interest rates
has a significant impact on increasing interest repayments. Also, higher rates will not be
increasing incomes from savings as much.
Balance Of Payment
32
With higher levels of consumer spending, there will be an increase in imports. Therefore this
will lead to deterioration in the current account. The current account deficit could put
downward pressure on the exchange rate in the long term. However, some people argue a fall
in the savings ratio is not a problem, but, it is just a reflection of strong economy and
booming housing market, which increases scope for equity withdrawal.
II.
INFLATION
Inflation is posing a serious challenge to the economic growth of India. The WPI inflation
rate flared up during the period driven by significant increase in the prices of commodities,
primary articles and manufactured products, even though very small part of global crude
price increase has been passed on to the Indian consumers.
III.
GLOBAL RECESSION
It appears that Europe, Japan and the US are entering into recession. Falling house prices,
crisis in the financial system, and lower confidence could lead to a sharp downturn, with the
worst still to come. Many argue that India’s growth is not so dependent on growth in the
West. However, the Indian stock markets have been hit by the global crisis. India’s growing
service sector and manufacturing sector would be adversely impacted by a global downturn.
IV. RISE IN CRUDE PRICES
How global crude prices would behave probably has no easy answers; however we believe
that the current challenging and uncertain macro-economic conditions does not lead Indian
financials into a state of crisis. But continued rise in crude prices and its resultant impact on
inflation, interest rates and government finances has the potential to do so. Hence, crude price
remains the key risk to our positive stance on the Indian financials.
In the last couple of months oil prices have surged by 45% from US$ 100 to US$ 145 (and
now back to US$ 115). India currently imports 70% of its crude requirement, resulting in
pressure on government coffers on back of rising crude prices.
V. DEPRECIATING INR
Surge in crude prices has severely impacted current account deficit of the country. This
coupled with the outflow of FII investments has resulted in INR to depreciate sharply against
dollar further fueling inflation.
33
IMPACT OF ECONOMIC PROBLEMS ON INDIAN FINANCIALS
The current macro-economic conditions are expected to result in
SLOWDOWN IN CREDIT GROWTH
IMPACT ON MARGINS OF BANKS
PREASURE ON CREDIT QUALITY
SLOWDOWN IN CREDIT GROWTH
While the rise in interest rates should lead to a moderation in demand for credit, Indian banks
too are exercising caution while lending.. Risks and uncertainties in the system have
increased given the higher crude and commodity prices and its inflationary impact. This
would curtail consumption, which would impact economic growth adversely. Further higher
rates will not only impact the profitability of Indian corporate but also impact IRRs of various
proposed capex projects. This coupled with elections next year could lead to some
postponement of capex plans of corporate, leading to negative impact on demand for credit.
Higher rates have particularly impacted retail loan growth.
•
IMPACT ON MARGINS OF BANKS
During the past 18 months, CRR has increased by 400 bps to 9.0% currently and RBI has
also discontinued with interest payment on CRR balances. Every 50 bps hike in CRR
generally negatively impacts margins by ~5 bps.
In fact in an environment, where liquidity is tight, interest rates are at elevated levels and risk
premiums have increased, the banks tend to regain the pricing power. This would not only
help the banks to adequately price in risks but also help protect their margins. Apart from
hiking PLRs, banks are also resorting to reprising (in fact right-pricing) the loans that were
sanctioned well below PLRs. Significant portion of fixed rate loans would also get re-priced
over the period of 12-18 months.
•
PRESSURE ON CREDIT QUALITY
34
Higher lending rates are expected to impact credit quality for the banking system. The extent
of the impact on credit quality would also be bank specific given the loan mix (retail vs.
corporate), proportion of unsecured lending, credit profile of corporate loan book and
industry wise exposure. Indian banks’ fundamentals are relatively resilient with better risk
management systems, dramatically improved asset quality, stronger recovery mechanisms
(legal provisions) and with adequate capitalization and provisioning.
Even Certain sectors (like real estate, airlines industry) might feel the stress due to the
changing macro environment and rise in interest rates. Many companies where crude forms a
key raw material component are expected to get hit more severely. Similarly, sectors like real
estate and SMEs, which are interest rate sensitive, would face higher delinquencies if interest
rates strengthen further by 100-200 bps.
NECESSARY INITIATIVES TAKEN BY RBI & MINISTRY OF FINANCE TO
TACKLE ECONOMIC PROBLEMS
As most of economists feel that the most horrible problem which India is facing
currently is inflation which has crossed 7.50%. To come out of these problems RBI and
ministry of finance and other relevant government and regulatory entities are taking various
initiatives which are as follows...
•
RBI MONITORY POLICY
With the introduction of the Five year plans, the need for appropriate adjustment in monetary
and fiscal policies to suit the pace and pattern of planned development became imperative.
The monitory policy since 1952 emphasized the twin aims of the economic policy of the
government:
Spread up economic development in the country to raise national income and standard
of living, and
To control and reduce inflationary pressure in the economy.
This policy of RBI since the First plan period was termed broadly as one of controlled
expansion, i.e.; a policy of “adequate financing of economic growth and at the same time the
time ensuring reasonable price stability”. Expansion of currency and credit was essential to
meet the increased demand for investment funds in an economy like India which had
embarked on rapid economic development. Accordingly, RBI helped the economy to expand
via expansion of money and credit and attempted to check in rise in prices by the use of
selective controls.
OBJECTIVES OF MONITORY POLICY
35
Price Stability
Monitory Targetting
Interest Rate Policy
Restructuring Of Money Market
Regulation Of Foreign Exchange Market
WEAPONS OF MONITORY POLICY
Central banks generally use the three quantitative measures to control the volume of credit in
an economy, namely:
Raising bank rates
Open market operations and
Variable reserve ratio
However, there are various limitations on the effective working of the quantitative measures
of credit control adapted by the central banks and, to that extent, monetary measures to
control inflation are weakened. In fact, in controlling inflation moderate monetary measures,
by themselves, are relatively ineffective. On the other hand, drastic monetary measures are
not good for the economic system because they may easily send the economy into a decline.
In a developing economy there is always an increasing need for credit. Growth requires credit
expansion but to check inflation, there is need to contract credit. In such a encounter, the best
course is to resort to credit control, restricting the flow of credit into the unproductive,
inflation-infected sectors and speculative activities, and diversifying the flow of credit
towards the most desirable needs of productive and growth-inducing sector. It should be
noted that the impression that the rate of spending can be controlled rigorously by the
contraction of credit or money supply is wrong in the context of modern economic societies.
In modern community, tangible, wealth is typically represented by claims in the form of
securities, bonds, etc., or near moneys, as they are called. Such near moneys are highly liquid
assets, and they are very close to being money. They increase the general liquidity of the
economy. In these circumstances, it is not so simple to control the rate of spending or total
outlays merely by controlling the quantity of money. Thus, there is no immediate and direct
relationship between money supply and the price level, as is normally conceived by the
traditional quantity theories. When there is inflation in an economy, monetary restraints can,
in conjunction with other measures, play a useful role in controlling inflation.
36
•
FISCAL POLICY
Fiscal policy is another type of budgetary policy in relation to taxation, public borrowing, and
public expenditure. To curve the effects of inflation and changes in the total expenditure,
fiscal measures would have to be implemented which involves an increase in taxation and
decrease in government spending. During inflationary periods the government is supposed to
counteract an increase in private spending. It can be cleared noted that during a period of full
employment inflation, the aggregate demand in relation to the limited supply of goods and
services is reduced to the extent that government expenditures are shortened.
Along with public expenditure, governments must simultaneously increase taxes that would
effectively reduce private expenditure, in an effect to minimise inflationary pressures. It is
known that when more taxes are imposed, the size of the disposable income diminishes, also
the magnitude of the inflationary gap in regards to the availability of the supply of goods and
services. In some instances, tax policy has been directed towards restricting demand without
restricting level of production. For example, excise duties or sales tax on various
commodities may take away the buying power from the consumer goods market without
discouraging the level of production. However, some economists point out that this is not a
correct way of combating inflation because it may lead to a regressive status within the
economy.
As a result, this may lead to a further rise in prices of goods and services, and inflation can
spread from one sector of the economy to another and from one type of goods and services to
another. Therefore, a reduction in public expenditure, and an increase in taxes produces a
cash surplus in the budget. Keynes, however, suggested a programme of compulsory savings,
such as deferred pay as an anti-inflationary measure. Deferred pay indicates that the
consumer defers a part of his or her wages by buying savings bonds (which, of course, is a
sort of public borrowing), which are redeemable after a particular period of time, this is
sometimes called forced savings. Additionally, private savings have a strong disinflationary
effect on the economy and an increase in these is an important measure for controlling
inflation. Government policy should therefore, include devices for increasing savings. A
strong savings drive reduces the spendable income of the consumers, without any harmful
effects of any kind that are associated with higher taxation. Furthermore, the effects of a large
deficit budget, which is mainly responsible for inflation, can be partially offset by covering
the deficit through public borrowings. It should be noted that it is only government borrowing
from non-bank lenders that has a disinflationary effect. In addition, public debt may be
managed in such a way that the supply of money in the country may be controlled. The
government should avoid paying back any of its past loans during inflationary periods, in
order to prevent an increase in the circulation of money. Anti-inflationary debt management
also includes cancellation of public debt held by the central bank out of a budgetary surplus.
Fiscal policy by itself may not be very effective in combating inflation; therefore a
combination of fiscal and monetary tools can work together in achieving the desired outcome.
37
•
DIRECT MEASURES
Direct controls refer to the regulatory measures undertaken to convert an open inflation into a
repressed one. Such regulatory measures involve the use of direct control on prices and
rationing of scarce goods. The function of price control is a fix a legal ceiling, beyond which
prices of particular goods may not increase. When ceiling prices are fixed and enforced, it
means prices are not allowed to rise further and so, inflation is suppressed. Under price
control, producers cannot raise the price beyond a specified level, even though there may be a
pressure of excessive demand forcing it up.
In times of the severe scarcity of certain goods, particularly, food grains, government may
have to enforce rationing, along with price control. The main function of rationing is to divert
consumption from those commodities whose supply needs to be restricted for some special
reasons; such as, to make the commodity more available to a larger number of households.
Therefore, rationing becomes essential when necessities, such as food grains, are relatively
scarce. Rationing has the effect of limiting the variety of quantity of goods available for the
good cause of price stability and distributive impartiality.
Another control measure that was suggested is the control of wages as it often becomes
necessary in order to stop a wage-price spiral. During galloping inflation, it may be necessary
to apply a wage-profit freeze. Ceilings on wages and profits keep down disposable income
and, therefore the total effective demand for goods and services. On the other hand,
restrictions on imports may also help to increase supplies of essential commodities and ease
the inflationary pressure. However, this is possible only to a limited extent, depending upon
the balance of payments situation. Similarly, exports may also be reduced in an effort to
increase the availability of the domestic supply of essential commodities so that inflation is
eased.
In general, monetary and fiscal controls may be used to repress excess demand but direct
controls can be more useful when they are applied to specific scarcity areas. As a result, antiinflationary policies should involve varied programmes and cannot exclusively depend on a
particular type of measure only.
38
Chapter 3
FINANCIAL ANALYSIS
39
FINANCIAL ANALYSIS
This section will show, how Bank Of India has done financially over the last three
years(2010-2012). I have calculate all the financial ratios including the banking ratios also, to
show how Bank Of India fair up against its competitors. To do that I have used the last three
years balance sheet, profit and loss account, and cash flow statement of Bank Of India.
LIQUIDITY RATIOS
A class of financial metrics that is used to determine a company's ability to pay off its shortterms debts obligations. Generally, the higher the value of the ratio, the larger the margin of
safety that the company possesses to cover short-term debts.
1.
CURRENT RATIO
This ratio is a rough indication of a firm's ability to service its current obligations. Generally, the
higher the current ratio, the greater the "cushion" between current obligations and your Company's
ability to pay them. The composition and quality of current assets is a critical factor in the analysis
of your Company's liquidity. It is calculated as Total current assets divided by total current
liabilities.
Current Ratio = Current Assets
Current Liabilities
Current Ratio
5
4.32
4
3.83
3.49
Current Ratio
3
2
1
0
2010
Year
2011
2012
Current Assets
Current Liabilities
(Rs. In crores)
(Rs. In crores)
2010
37043.75
8574.63
4.32
2011
49723.21
12974.69
3.83
2012
46176.95
13243.43
3.49
40
Current Ratio
Interpretation:- From the above table it can be observed that the current ratio of Bank of
India stood at 4.32 ,3.83,3.49 in the year 2010,2011,2012 respectively. This shows that bank
has enough current assets available to pay off its short term obligations. The current ratio has
declined marginally to 3.83 in 2011 and has further declined to 3.49 in 2012 because of
increase in short term investments,borrowings and other current liabilities. So it can be
inferred that bank is effectively utilising the available funds.
2. LIQUID RATIO
It is also known as the ‘‘Quick Ratio’’ or "Acid Test" ratio; it is a refinement of the current
ratio and is a more conservative measure of liquidity. The ratio expresses the degree to which
your current Company's current liabilities are covered by the most liquid current assets.
Generally, any value of less than 1 to 1 implies a "dependency" on inventory or other current
assets to liquidate short-term debt. It is calculated as Cash plus trade receivables divided by
total current liabilities.
Liquid Ratio = Cash + Trade Receivables
Total Current Liabilities
Liquid Ratio
3.64
4
2.88
2.62
R 3
a
t 2
i 1
o
0
Liquid Ratio
2010
2011
2012
Years
Years
Liquid
Assets
Current
Liabilities
Liquid Ratio
(Rs. In
crores)
(Rs. In crores)
2010
31230.13
8574.63
3.64
2011
37309.99
12974.69
2.88
2012
34711.26
13243.43
2.62
41
Interpretation: - A quick ratio of 1:1 is considered favourable because for every rupee of
current liability,there is atleast one rupee of liquid assets. A higher value of ratio is considered
favourable. Here this ratio stood higher than one during the study period i.e 3.64 in 2010,2.88
in 2011 and 2.62in 2012.although the ratio shows a declining trend but it is still above the
benchmark level.This shows that bank has enough liquidity to service its short term debt and
is utilising its funds in a rational manner.
3. CREDIT DEPOSIT RATIO
This ratio indicates how much of the advances lent by banks is done through deposits. It is
the proportion of loan-assets created by banks from the deposits received. The higher the
ratio, the higher the loan-assets created from deposits. Deposits would be in the form of
current and saving account as well as term deposits. The outcome of this ratio reflects the
ability of the bank to make optimal use of the available resources
CREDIT DEPOSIT RATIO = Loans and advances(net of provisions)
TOTAL Deposits
X 100
Credit Deposit Ratio
76.93
78
76
R
a
t
i
o
74
72.04
Credit Deposit Ratio
70.33
72
70
68
66
2010
2011
2012
Years
Year
Total Deposits
(Rs. In crores)
Credit Deposit Ratio
2010
Loans & Advances
(Net Of Provisions)
(Rs. In crores)
165527
229761.94
72.04
2011
210200.7
298886
70.33
2012
244816.9
318216
76.93
Interpretation :- An ideal credit deposit ratio should range between 65- 75 %.
42
.the above table exhibits the credit deposit ratio of the bank during 3 years. This ratio stood at
72.04% ,70.33% and 76.93% in the year 2010,2011,2012 respectively. It shows that Bank of
India is performing well. It can also be observed that in the year 2012 the credit deposit ratio
has slightly crossed 75%(stipulated level as per RBI guidelines).This shows that in this year
bank has borrowed some fund from outside. Nevertheless, the overall credit performance of
the bank is satisfactory.
PROFITABILITY RATIOS
A class of financial metrics that are used to assess a business's ability to generate earnings as
compared to its expenses and other relevant costs incurred during a specific period of time.
For most of these ratios, having a higher value relative to a competitor's ratio or the same
ratio from a previous period is indicative that the company is doing well.
1. Operating Profit Ratio
A ratio used to measure a company's pricing strategy and operating efficiency. Operating
margin is a measurement of what proportion of a company's revenue is left over after paying
for variable costs of production such as wages, raw materials, etc. A healthy operating margin
is required for a company to be able to pay for its fixed costs, such as interest on debt. It Is
Also known as "operating profit margin."
Calculated as:-
Operating Profit Ratio = Operating Profit X 100
Net sales
Operating Profit Ratio
27.00%
R
a
t
i
o
26.32%
26.00%
24.75%
25.00%
23.50%
24.00%
23.00%
22.00%
2010
2011
2012
Years
43
Operating Profit Ratio
Year
Operating Profit
Sales
Operating Profit
Ratio (in %)
(Rs. In crores)
(Rs. In crores)
2010
4704.78
17877.99
26.32
2011
5384.22
21751.72
24.75
2012
6693.95
28480.67
23.50
Interpretation :- From the data in the above table, it can be observed that the operating
profit ratio of the bank is showing a declining trend. Although the operating profits have
increased but not exactly with same proportion as compared to increase in sales. This may be
due to increase in the interest expenses and other operating expenses particularly the staff
expenses in the year 2011 and 2012. Therefore the bank should check on unnecessary
operating expenses to correct this situation and to provide a sufficient return.
2. NET PROFIT RATIO
This ratio indicates the Net margin on a sale of Rs.100. It is calculated as follows:
Net Profit Ratio = Net Profit X 100
Sales
This ratio helps in determining the efficiency with which affairs of the business are being
managed. An increase in the ratio over the previous period indicates improvement in the
operational efficiency of the business. The ratio is thus on effective measure to check the
profitability of business. A low profit margin indicates a low margin of safety: higher risk that
a decline in sales will erase profits and result in a net loss.
Net Profit Ratio
14.00%
12.00%
R 10.00%
8.00%
a
t
6.00%
i
4.00%
o
2.00%
0.00%
11.44%
9.74%
9.40%
Net Profit Ratio
2010
2011
2012
Years
44
Year
Net Profit
Sales
Net Profit Ratio
(Rs. In crores)
(Rs. In crores)
(in %)
2010
1741.07
17877.99
9.74
2011
2488.7
21751.72
11.44
2012
2677.52
28480.67
9.40
Interpretation :- The net profit ratio of the bank stood at 9.74% & 9.40% in the year 2010 &
2012 respectively. This is due to higher provisions and interest expense in these years. But in
the year 2011 the bank has performed well with net profit reaching the double digit mark at
11.44% as the bank had maintained a tighter control at interest and other indirect expenses.
Although the net profit ratio shows a fluctuating trend but the overall profitability of the bank
is satisfactory as per industry trend.
3. RETURN ON ASSETS
Returns on assets ratio is the net income (profits) generated by the bank on its total assets
(including fixed assets). The higher the proportion of average earnings assets, the better
would be the resulting returns on total assets.
Return On Assets = Operating profit(net of provisions n contingencies)
Average or Total assets
Return on Assets
0.75%
R
a
t
i
o
0.71%
0.70%
0.70%
0.63%
0.65%
Return on Assets
0.60%
0.55%
2010
2011
2012
Years
Year
Net profit
Average or Total
45
Return On Assets (in
(Rs. In crores)
assets
(Rs. In crores)
%)
2010
1741.07
274966.46
0.63%
2011
2488.7
351172.56
0.71%
2012
2677.52
384535.47
0.70%
Interpretation:- The Return On Assets ratio of Bank of India are 0.63%,0.71% and 0.70% in
the year 2010,2011,2012 respectively. The return on assets increased in 2011 due to huge
increase in total assets and net profits in this year as compared to 2012 wherein return on
assets fell to 0.70% as net profit couldn’t increase with the same proportion as of total
assets.thus it lead to the conclusion that overall efficiency or profitability of the bank is
improving.
4. INTEREST SPREAD
Interest spread is the difference between the average lending rate and the average borrowing
rate for a bank or other financial institution. This is very similar to interest margin. If a bank's
lending was exactly equal to its borrowings (i.e. deposits plus other borrowing) the two
numbers would be identical. In reality, bank also has its shareholder's funds available to lend,
but at the same time its lending is constrained by reserve requirements.
Changes in the spread are an indicator of profitability as the spread is where a bank makes its
money
Interest Spread = (Interest income ÷ Interest earning assets) - (Interest expense ÷interest
bearing liabilities
Interest spread
5.50%
R
a
t
i
o
5.00%
5.06%
4.57%
4.43%
Interest spread
4.50%
4.00%
2010
2011
2012
Years
46
Year
Interest spread (in %)
2010
4.57
2011
5.06
2012
4.43
Interpretation :-From the figures exhibited in the above table,it can be observed that interest
spread of the bank stood at 4.57% in 2010,increased to 5.06% in 2011due to greater
proportionate increase in interest earned as compared to interest expended and in 2012 it fell
from 5.06% to 4.43% as interest earned had not increased in the same proportion as interest
expended. Thus it can be inferred that interest spread of the bank is fluctuating.
47
ACTIVITY RATIOS
Activity ratios are calculated to measure the efficiency with which the resource of a firm have
been employed. These ratios are also called turnover ratios because they indicate the speed
with which assets are being turned over into sales
1. FIXED ASSETS TURNOVER RATIO
Measure of the productivity of a firm, it indicates the amount of sales generated by each
Rupee spent on fixed assets, and the amount of fixed assets required to generate a
specific level of revenue. Changes in the ratio over time reflect whether or not the firm is
becoming more efficient in the use of its fixed assets.
Fixed assets turnover ratio =
Sales Revenue
Net Fixed Assets
Fixed Assets Turnover ratio
12
10.28
9.19
10
R
a
t
i
o
8
7.82
6
Fixed Assets Turnover ratio
4
2
0
2010
2011
2012
Years
Year
Sales Revenue
(Rs. In crores)
Net Fixed Assets
(Rs. In crores)
Fixed Assets Turnover
Ratio
2010
17877.99
2286.75
7.82
2011
21751.72
2365.95
9.19
2012
28480.67
2771.59
10.28
Interpretation :- The fixed assets turnover ratio of the bank stood at 7.82 in 2010, it
increased to 9.19 in 2011 and has further increased to 10.28 in 2012. Therefore it can can be
inferred that fixed assets ratio of the bank is consistently increasing and It indicates that
during the period of study fixed assets have been effectively used in the bank without much
additional investment and also the capital is not blocked in fixed assets.
48
2. TOTAL ASSETS TURNOVER RATIO
Total assets turnover ratio = Sales Revenue
Total Assets
Total Assets Turnover Ratio
7.41
7.5
7
R
a
t
i
o
6.5
6.5
Total Assets Turnover
Ratio
6.19
6
5.5
2010
2011
2012
Years
Year
Sales Revenue
(Rs. In crores)
Total Assets
(Rs. In crores)
Total Assets Turnover
Ratio
2010
17877.99
274966.46 6.50
2011
21751.72
351173 6.19
2012
28480.67
384535.5 7.41
Interpretation :- The above table exhibits Total Assets Turnover Ratio. It stood at 6.50 in
2010.In 2011 it has decreased marginally to 6.19 and after that it has increased to 7.41 in
2012. It shows a fluctuating trend. But overall efficiency of bank is satisfactory and is
utilising its Total Assets effectively.
LEVERAGE RATIO
49
Any ratio used to calculate the financial leverage of a company to get an idea of the
company's methods of financing or to measure its ability to meet financial obligations. There
are several different ratios, but the main factors looked at include debt, equity, assets and
interest expenses. A ratio used to measure a company's mix of operating costs, giving an idea
of how changes in output will affect operating income.
1. DEBT- EQUITY RATIO
A measure of a company's financial leverage calculated by dividing its total liabilities by
stockholders' equity.
A high debt/equity ratio generally means that a company has been aggressive in financing its
growth with debt. This can result in volatile earnings as a result of the additional interest
expense. If a lot of debt is used to finance increased operations (high debt to equity), the
company could potentially generate more earnings than it would have without this outside
financing. If this were to increase earnings by a greater amount than the debt cost (interest),
then the shareholders benefit as more earnings are being spread among the same amount of
shareholders. However, the cost of this debt financing may outweigh the return that the
company generates on the debt through investment and business activities and become too
much for the company to handle. This can lead to bankruptcy, which would leave
shareholders with nothing.
The debt/equity ratio also depends on the industry in which the company operates. For
example, capital-intensive industries such as auto manufacturing tend to have a debt/equity
ratio above 2, while personal computer companies have a debt/equity of under 0.5.
Debt Equity Ratio =
Long Term Debt
Shareholder’s Equity
Debt- Equity Ratio
19
18.5
18
18.56
17.72
17.5
Debt- Equity Ratio
17
16.71
16.5
16
15.5
2010
Year
2011
Long Term Debt
(Rs. In crores)
2012
Shareholder’s Equity
(Rs. In crores)
50
Debt Equity Ratio
2010
252161.84
14229.99
17.72
2011
320907.19
17290.68
18.56
2012
350330.25
20961.79
16.71
Interpretation:- The ratio shows the extent to which funds have been provided by long-term
creditors as compared to the funds provided by the owners. Here the Debt-Equity ratio for the
above period is always high. This shows that the bank is more relying on outside funds as
compared to internal sources of capital in its capital structure. From the long-term lenders
point of view this ratio is not satisfactory
CAPITAL ADEQUACY RATIO
A bank's capital ratio is the ratio of qualifying capital to risk adjusted (or weighted) assets.
National regulators tracks banks CAR to ensure that it can absorb reasonable amount of loss
51
and are complying with the banking statutory capital requirements. In the simplest
formulation, a bank's capital is the "cushion" for potential losses, which protect the bank's
depositors or other lenders. The RBI has set the minimum capital adequacy ratio at 10%for
all banks. A ratio below the minimum indicates that the bank is not adequately capitalized to
expand its operations. The ratio ensures that the bank do not expand their business without
having adequate capital.
Capital Adequacy Ratio = (Tier I + Tier I )Capital
Risk Weighted Assets(Including Off Balance Sheet Items)
Capital Adequacy Ratio
13.50%
12.94%
13.00%
R
a 12.50%
t 12.00%
i
o 11.50%
11.00%
12.17%
Capital Adequacy Ratio
2010
2011
11.95%
2012
Years
Year
Capital Adequacy
Ratio
2010
12.94
2011
12.17
2012
11.95
Interpretation :- The capital adequacy ratio of Bank of India stood at 12.94%,12.17% and
11.95% in the year 2010,2011,2012 respectively.It indicates that during the study period bank
has maintained a healthy capital adequacy ratio which is above 10% as prescribed by RBI
(under Basel II ).
INTEREST COVERAGE RATIO
This Ratio indicates the interest paying capability of firm .The interest coverage ratio is a
measure of the number of times a company could make the interest payments on its debt with
52
its earnings before interest and taxes, also known as EBIT. The lower the interest coverage
ratio, the higher the company's debt burden and the greater the possibility of bankruptcy or
default
Interest coverage ratio = Net profit before interest & tax
Fixed interest charge
Interest Coverage Ratio
R
a
t
i
o
1.26
1.24
1.22
1.2
1.18
1.16
1.14
1.25
1.21
1.18
2010
2011
Interest Coverage Ratio
2012
Years
Year
Net profit before
interest & tax
(Rs. In crores)
Fixed interest charge
Interest coverage ratio
(Rs. In crores)
2010
14615.89
12122.04 1.21
2011
17436.41
13941.03 1.25
2012
23744.75
20167.23 1.18
Interpretation :- The interest coverage ratio of Bank of India stood at 1.21,1.25,1.18 in the
years 2010,2011,2012 respectively. Since this Ratio indicates the interest paying capability of
firm and ideal Ratio is 1.5 times. So interest paying capacity of the bank is moderate.
CASH FLOW ANALYSIS OF BANK OF INDIA FOR THE YEAR ENDED
2010,2011,2012
53
CASH FLOW STATEMENT OF BANK OF INDIA
2010
2011
2012
Net Profit before tax
2493.83
3495.38
3577.52
Net Cash Flow from Operating Activities
8439.81
6133.09
-1702.55
Net cash flow from Investing Activities
-224.72
-720.22
-616.67
Net cash flow from Financing Activities
1253.78
771.3
28.71
Net Increase/decrease in Cash & Cash Equivalents
9468.87
6184.17
-2290.51
Opening Cash & Cash Equivalents
21761.3
31230.1
37414.3
Closing Cash & Cash Equivalents
31230.1
37414.3
35123.8
CASH FLOW FROM OPERATING ACTIVITIES
Interpretation :- The above cash flow statement of Bank of India reveals that the net cash
flow from operating activities stood at 8439.81 in the year 2010.It has declined to 6133.09 in
2011. This may be due to greater proportionate increase in advances as compared to interest
earned this year. Also operating expenses were at higher side during this year. In 2012 the net
cash from operating activities has further declined and has become negative. Here it may be
noted that despite a great increase in interest earned, cash flow from operating activities have
declined. This is due to greater increase in borrowings this year which has lead to more
interest expense. Also deposits has not been increased in the same proportion as compared to
advances this year.
CASH FROM INVESTING ACTIVITIES:Interpretation :- The net cash flow from investing activities has been in negative figures in
all the 3 years of the study period. It stood at -224.72 in 2010,which is followed by a great
decline in 2011 and has reduced to -720.22 . Although its has increased to tune of 103.55
crores in 2012 but the net cash flow from investing activities is still in negative figures and it
stood at -616.67. the huge outflow of cah from investing activities in the year 2011 is due to a
huge investment in subsidiaries and fixed assets.
CASH FROM FINANCING ACTIVITIES:-
54
Interpretation :- The net cash flow from financing activities during the period of study has
been showing a declining trend. It stood at 1253.78 crores in 2010, which has reduced to
771.3 in 2011 and in is followed by a huge decline of 742.59 in 2012 and has reduced to
28.71 crores in this year. This is due to greater dividend payments and interest payment on
IPDI and subordinate bonds and upper tier II bonds during the year 2011 and 2012.
COMPARATIVE ANALYSIS OF BANK OF INDIA WITH CANARA BANK
RATIO ANALYSIS
The above table exhibits various financial ratios of Bank of India and the ratios of Canara Bank.
Below is the comparative analysis of these ratios:1.
CURRENT RATIO :- From the above table it can be observed that current ratio of Bank of
India stood at 4.32, 3.83, 3.49 and that of Canara bank stood at 3.28, 4.75, 4.13 for the years
2010,2011,2012 respectively .Although both are having enough liquidity but going by increasing
55
trend of current ratio for Canara bank it shows that it is not utilising its funds efficiently as
compared to Bank of India.
Current Ratio
5
4.5
4.32
3.5
4.13
3.83
4
3.49
3.28
Bank Of India
3
Canara bank
2.5
2
1.5
1
0.5
0
2010
4.75
2011
2012
2.
LIQUID RATIO :- The liquid ratio for both the banks shows fluctuating trend. Both have
been maintaining a healthy liquid ratio but as compared to Bank of India, Canara Bank has
excess short term liquidity available which may not be so good as the opportunity cost of holding
excess liquidity might be more that may affect its profitability.
3.
CREDIT DEPOSIT RATIO (CDR) :- The credit deposit ratio plays an important role in
determining the profitability of the banks. By comparing the CDR for both the banks it can be
observed that CDR of Bank of India is quite fluctuating during the study period while that of
Canara bank is more or less stable. But overall the credit performance of both the banks is quite
good.
56
Credit Deposit Ratio (CDR)
78.00%
76.93%
76.00%
74.00%
71.30%
72.04%
72.00%
Bank Of India
71.57%
70.33%
Canara bank
70.27%
70.00%
68.00%
66.00%
2010
2011
2012
4.
OPERATING PROFIT RATIO :- The Operating Profit Ratio of Bank Of India stood at
6.84%, 1.87%, 4.70% and that of Canara Bank stood 26.99% ,26.48%, 19.26% at for the
years 2010,2011,2012 respectively.It indicates that the operational efficiency of Canara Bank is
much better than that of Bank of India and it has a better control on its expenses.
5.
NET PROFIT RATIO :- It can be observed from the above table that the Net profit ratio of
Bank of India stood at 23.42%, 15.18%, 18.80% and that of Canara Bank stood at
16.11%,17.46,%10.64% for the years 2010,2011,2012 respectively. Although the Net Profit of
Canara Bank is much higher than that of Bank of India during the period of study but the Net
Profit ratio of Bank of India is much better than that of Canara Bank. This indicates that overall
profitability of Bank of India is much sound than Canara Bank.
57
Net Profit Ratio
25.00%
20.00%
16.11%
15.00%
17.46%
15.18%
Bank Of India
10.64%
Canara bank
10.00%
5.00%
0.00%
23.42%
2010
18.80%
2012
2011
6.
RETURN ON ASSETS :-The return on assets for both the banks shows fluctuating trend.It
stood at 0.63%, 0.71%, 0.70% for Bank of India and 1.14%, 1.20%, 0.88% for Canara Bank
for the year 2010,2011,2012 respectively. It shows that Canara Bank has a better return on
investment as compared to Bank of India.
7.
FIXED ASSETS TURNOVER RATIO :- The fixed Assets Turnover ratio of Bank of India
stood at 7.82, 9.19, 10.28 and that of Canara Bank stood at 6.56, 8.11, 10.80. It shows similar
trend for both the banks. Thus it can be inferred that both the banks are utilising its fixed asstes
efficiently.
8.
TOTAL ASSETS TURNOVER RATIO :- The total assets turnover ratio is also showing
similar trend for both the banks. But if looking at the figures for both the banks for total assets
turnover ratio during the study period it stood at 6.50, 6.19, 7.41 for Bank of India and at 7.08,
6.86, 8.25 for Canara Bank it can be inferred that Canara bank is utilising its total assets in a
better way as compared to Bank of India.
9.
DEBT –EQUITY RATIO :- The Debt-Equity ratio of Bank of India stood at 17.72, 18.56,
16.71 and that of Canara Bank stood at 16.57, 15.38, 15.10 for the year 2010,2011,2012
respectively. Both the banks This indicates that both the banks are more relying on outside funds
as compared to internal sources of capital in its capital structure have a very high debt- equity
ratio. But as compared to Bank of India, Canara Bank has a lesser reliance on the debt.
10.
CAPITAL ADEQUACY RATIO :- This ratio determines the capacity of a bank in terms of
meeting with the liability and other risks such as credit risk, operational risk. The above table
reveals that capital adequacy ratio stood at 12.94%, 12.17%, 11.95% for Bank of India and that
of Canara Bank it stood at 13.43%, 15.38% ,13.76% for the year 2010,2011,2012 respectively.
As this ratio measure of how much capital is used to support the banks' risk assets.
58
The analysis reveals that both the banks have maintained a healthy ratio beyond the minimum
limit of 10% prescribed by RBI (under Basel II).but it is higher for canara bank as compared to
Bank of India.this indicates that Canara bank is the more efficient in terms of meeting with the
liability and other risks such as credit risk, operational risk as compared to Bank of India.
Capital Adequacy Ratio (CAR)
13.43%
20.00%
15.00%
12.94%
Bank Of India
15.38%
13.76%
12.17%
10.00%
Canara bank
11.95%
5.00%
0.00%
2010
11.
2011
2012
INTEREST SPREAD :- Interest spread is the difference between the average lending rate
and the average borrowing rate for a bank or other financial institution. Changes in the spread are
an indicator of profitability as the spread is where a bank makes its money. The interest spread of
Bank of India stood at 4.57% , 5.06% ,4.43% and that of Canara Bank stood at 3.32%, 3.47%,
3.80% during the study period. Clearly it reveals that Bank of India has greater interest spread as
compared to Canara bank.
Interest Spread
5.06%
4.43%
6.00% 4.57%
3.32%3.47%3.80%
4.00%
2.00%
Bank Of
India
Canara
bank
0.00%
2010 2011 2012
12.
INTEREST COVERAGE RATIO :- This Ratio indicates the interest paying capability of
firm. The interest coverage ratio of both the banks shows similar trend. It stood at 1.21, 1.25, 1.18
for Bank of India and that of Canara Bank it stood at 1.29, 1.33 ,1.18 for the year 2010,2011,2012
respectively. Although it is slightly less than the ideal ratio of 1.5 for both the banks but on an
average we can say that this ratio is satisfactory for both the banks as it is above 1.
59
COMPARATIVE CASH FLOW STATEMENT ANALYSIS
NET CASH FLOW FROM OPERATING ACTIVITIES:Interpretation :- The net cash flow from operating activities of Bank of India shows a
declining trend as it stood at 8439.81crores in 2010 and has further reduced to 6133.09 crores
in 2011 and reached to negative in 2012 at -1702.55crores. whereas in canara bank the net
cash flow from operating activities shows as fluctuating trend as it stood at 4694.39 crores in
2010 which has increased to 8527.34crores in 2011 and then in 2012 it shows a huge fall in
the cash flow and consequently has reached to negative figures at -832.22 crores .This may
be due to increase in interest and operating expenses.
NET CASH FLOW FROM INVESTING ACTIVITIES :60
Interpretation :- The Net cash flow from investing activities for both the banks during the
study period has been showing a declining trend and is in negative figures. But the reduction
over the years in cash flow from investing activities in Canara bank is much lower than in
Bank of India. This shows that Canara bank is enjoying a better return on its investments and
is investing rationally.
NET CASH FLOW FROM FINANCING ACTIVITIES:Interpretation :- The Net cash flow from financing activities for Bank of India is showing a
decreasing trend during the study period but has never turned negative. Whereas in case of
Canara bank it shows a fluctuating trend. In the year 2010 it is negative and stood at -1628.
75 crores whereas it has improved to 2600.78 crores in 2011 but it has further declined to
-1554.94 crores. This is due to higher dividend payment and interest payment on Tier I and
Tier II bonds and there has been no inflow during this period. Therefore in can be inferred
that Bank of India is doing good in financial activities as compared to Canara Bank.
61
Chapter 4
RESEARCH PROJECT
62
PROJECT DETAILS
The project assigned to me at Bank Of India was “Analysis Of Credit Appraisal”. Credit
Appraisal is the process of calculating the creditworthiness of a business or an organization
before providing any Loans & advances/project finance.
I was placed in credit department under senior manager Mr. K.K Garg
During the first week I was assigned random tasks like updating data updation, entering dates
into excel sheet regarding last review done and due date for next review working capital/cc
limits,term loan and stock audit report; updating occupational codes for various customers of
the bank,preparing cover letters for bank guarantee etc. I was also shown various
files,documents,reports,memos,forms and applications used in the bank for various
operations in different departments. The major purpose for this entire exercise was to make
me familiar with the bank ,its operations,esp. in the credit deptt. and to familiarize with the
banking terms and abbreviations. This was an interesting experience for me.
In the second week I was given various files containing documents regarding proposals for
working capital limit enhancement/review,proposals for review of term loans advanced to
various customers of the bank. I went through all these files in details and cleared all my
63
queries regarding it from my mentor. Also I went through various other reports and
documents,financials that makes a part of credit appraisal process.
Later, in the third week I was assigned the task of making proposals for working capital
enhancement/review with existing limits for its customers on their request and for the
customers whose reviews for credit facilities were pending. During my entire training period
I made a total of 5 proposals and the entire exercise was a great learning experience and for
which I was appreciated by the chief manager,senior manager and other staff.
In the meantime I was exposed to forex deptt. wherein I use to sit with Mr. Vijay kumar
(incharge of forex deptt) and observe their working. He also made me learn to work on the
FINACLE (ERP software used in Bank Of India). There I learnt how forex transactions are
done,how the payments are made and received on behalf of customers,how the forward
contracts are booked and how the inter communication between the banks of parties
concerned with bank’s customers. For the few days I was also made to call the treasury and
take the forex transaction rates except the card rates (card rates are the basic rates for forex
transactions which the treasury issues daily) on the request of the customers who have to
export goods or book forward contracts.
In the last week I was sent to administration deptt. to learn how fresh accounts for customers
are opened,what are the various documents required for that,how the cheque books ,ATM
pin/password are issued. I also took various queries from the customers and successfully
solved them by giving various explanations and clarifications.
Overall it was a great experience to work in a public sector bank and a good learning for me.
The details of the project are as under:-
Advances (Credit Appraisal)
Credit Appraisal is the process of calculating the creditworthiness of a business or an
organization.
Credit Appraisal involves a wide variety of financial analysis techniques, including ratio and
trend analysis as well as the creation of projections and a detailed analysis of cash flows.
Credit appraisal also includes an examination of collateral and other sources of repayment as
well as credit history and management ability.
Before approving a commercial loan, a bank will look at all of these factors with the primary
emphasis being the cash flow of the borrower. A typical measurement of repayment ability is
the debt service coverage ratio. The debt service coverage ratio divides this cash flow amount
by the debt service (both principal and interest payments on all loans) that will be required to
be met.
64
Another criteria involved in the process of credit appraisal is determination of credit rating
which means assessing the credit worthiness of an individual, corporation, or even a country.
Credit ratings are calculated from financial history and current assets and liabilities.
Typically, a credit rating tells a lender or investor the probability of the subject being able to
pay back a loan. A poor credit rating indicates a high risk of defaulting on a loan, and thus
leads to high interest rates or the refusal of a loan by the creditor.
The ratings are of two types- external ratings and internal ratings. As the name implies
external ratings are given by external rating agencies like Moody’s, Standards and Poors etc.
Internal ratings are designed by the institution which requires it. Immaterial of the source of
rating whether internal or external it should be robust to be accepted as a reliable tool. For
corporate borrowers, the criteria for assessing risk are well known: profitability, growth,
industry outlook, competitive advantages, management and shareholders, in addition to the
standard set of financial and operational performance ratios.
A rating system can also serve as a tool for credit policy. For instance, some minimum rating
might be required to grant a loan.
It is this process which tries to evaluate the credentials and needs of the evaluator; the
business opportunity is made available to the bank in the form of Client Description. Bank on
submission of the Client description do a feasibility study of the project and check the
viability and the needs of the Customer.
• Client Description of the Project
• Proposal for the Trade Credit is
created.
• The Operation department takes
care of the proper documents and
sanctions the limit
Client
Descripti
on
Proposal
Creation
Operatio
ns
• Analysis/Review of the CMA Data
Review
65
The Advances thus made are done based on their requirement-
Advances
Term
Loans
Working
Capital
Limit
The project takes a practical approach in analyzing the procedure of the Credit Appraisal, two
proposals one based on Term Loan and the other on Working Capital has been detailed to
look into the intricate details of the process followed at Bank of India.
CREDIT APRAISAL PROCESS
Process Flow
Submission of Project Report along with the Request Letter
Carrying out due diligence
If not approved
if approved
Preparation of proposal
Submission of Proposal to Head Office
If No queries raised
If queries raised
Sanction of proposal
on various Terms &
Condition 66
Project Rejected
Solve the queries
Communication of
Sanction
Acknowledgement of
Sanction
Review of Sanction
Application to comply
with Sanction Terms
& Condition &
execution of Loan
Documents
Disbursement
Credit Policy at Bank of India
The bank has been working on its credit priorities which have been changed with the
changing times to cope up with the changes. The credit priorities for the bank stand as:
Maintenance of asset quality
Maintaining growth and reasonable risk adjusted returns on credit exposures
Retaining/Improving the Market share
Thrust on priority sector lending
Bank is conscious of the risk-return spread, thus bank has to judiciously set priorities in terms
of asset quality and return maximization. With the changing needs, Bank has kept an open
policy towards unfocussed assets. Asset quality priority calls for value driven culture with
conservative risk strategy, whereas market share priority calls for volume driven and
aggressive credit strategy. At the present situation, bank has to have a mix of both.
67
The purpose for the credit needs to be ascertained, with adherence to the guidelines and
directives.
Credit Delivery
The credit requirements may be dispensed in any of the following modes –
Sole Banking Arrangements – In account, where we remain to be sole lenders, the
account with ratings “AAA” (LC1 to LC2) and “AA” (LC3 to LC4).
Multiple Banking – In an arrangement where borrower desires to avail credit from
other banks, without a formal consortium arrangement. The borrower has to furnish
details from time to time. The credit from other banks should not exceed 10% of the
working capital limits. Also, exposure for working capital needs should not exceed
75% of the total working capital requirements of the borrower.
Consortium Lending – It’s a framework where banks have the freedom to frame the
ground for lending.
Syndication – It is an arrangement between two or more lending institutions to
provide a credit facility using common loan documentation.
Credit Thrust
The Bank of India has been proactively involved in lending to the priority sector to make sure
it meets the target prescribed by GOI/RBI which presently are –
Priority sector target of 40% of net Banks credit.
Exposure to agriculture not less than 18% of net Bank credit, and direct finance to
agriculture should not be less than 13.5% of net bank credit.
Exposure to weaker sections not less than 10% of net bank credit.
Export credit target of 12% of net Banks credit and etc.
Bank of India has well laid policies, which are reviewed periodically some of which are as
follows –
Increasing finance for production as well as investment for agriculture finance.
Priority is given to Infrastructure under priority sector financing.
Focus is on Low risk short duration exposures
Bank gives certain concessions to have better customer relations.
68
Bank has made efforts to make the process faster, by encouraging issuance of Kisan
Credit Cards.
Bank has been experimenting with innovative/area based schemes to improve lending
Bank has made many tie-ups with corporate, NGOs, NBFCs in order to focus on
different areas of finances.
The Changing Market Realities
Bank of India reviews the policies to be able to revise them as per the changing market
scenario. With the changing times, the bank has shifted their focus on to major corporate
clients with less risk. The corporate financing opens up ample opportunities in terms of
financing mergers, acquisitions, IPO financing etc. The thrust also lies on the post sale
finance services both for supplier and buyer.
The need to have exposures of the bank linked with products such as factoring and forfeiting
to ensure risk free recovery.
Bank of India does not encourage funding in areas of harmful/depleting substances. Also, the
bank tries not to finance areas which are affected by government policies.
Analysis of Credit Appraisal
Credit Appraisal is the process which is required for appraisal of the proponent to assess his
credit needs. The process of Credit Appraisal at Bank of India is no different. It involves
appraising the background of the Management, doing a technical and financial feasibility
study. Appraisal thus compromises two distinct segments –
Appraising the acceptability of the customer
Assessment of Customer Credit needs.
Main components of Credit Appraisal
Background of the Management
It involves knowing the borrower by either obtaining status reports from previous bankers or
by scrutinizing the management in case of corporate. The check is made to make sure that
borrower/ promoters name does not appear in the ECGC list of defaulters.
69
Commercial Appraisal
It involves detailed study about the product and its market, to understand the demand-supply
situation, the competition in the segment, effect of government policies on the industry etc.
Technical Appraisal
In case of project involving manufacturing or production, technical appraisal is carried out.
The TEV study is not done in case of service or for industries where he good does not go
through a state change. Also, there are exceptions where the TEV study is not required by the
sanctioning authority.
The traditional industries which are running over generations and whose viability cannot be
questioned can be exempted from TEV study. But it would be required for some new venture
with not much information on its know-how, its demand-supply pattern. Thus in all new and
Greenfield projects TEV study is carried out, even then if the company is reputed and the
Term Loan requirement is less than Rs. 20 Cr, TEV study can be waived off.
Its validity is for one year provided the scope of the project does not change.
Financial Appraisal
The second segment of Credit Appraisal i.e. Assessment of Customer Credit needs, requires
the financial performance of the proponents. The financial study gives us the clear idea about
the ability of the proponent to absorb unanticipated financial cost. Along with the cost of the
project, the financial projections are scrutinized to ascertain the financial need for the project.
The Performance Indicators are –
Profitability Ratios
Debt-Equity Ratios
Debt Service Coverage Ratio
Break-Even Point
Profit / Volume Ratio
Pay Back Period
Benefit Cost Ratio
Internal Rate of Return
70
Sensitivity Analysis
In case of higher limits, few other ratios are calculated –
Current Ratio
Total outside Liabilities (TOL) / Equity Ratio
EBITDA / Interest Ratio
PBT / Net Sales Ratio
(Inventory + Receivables) / Sales Ratio
DSCR ( Debt Servicing Coverage Ratio)
In financial appraisal, the projections are scrutinized so as to have an achievable Sales,
creditors, and holding level.
The Ratios are properly analyzed in order to have them within limits else an explanation for
the same is taken from the proponent. To make them more meaningful, the ratios are put
against the industry average. The positive and the negative factors which could affect the
financial need of the customer are considered.
Some important aspects to be analyzed –
Investment in subsidiaries should not be more than 10% of the Tangible Net Worth;
else the excess amount is deducted from the Net worth for computing various ratios.
Financial figures are reworked in order to avoid any misinterpretations.
The position of contingent liabilities, disputed tax liabilities and their impact on the
performance.
Types of facilities of Credit Delivery
Generally bank gives the following types of facilities to the customer:
The types of facilities would comprise of term loans , demand loans, O/Ds, cash credit,
WCDL, advances against bills, channel credit, invoice discounting/financing, discounting of
future cash flows/rent receivables and lines of credit, L/Cs, guarantees , acceptance
facilities ,cash management etc
These credit facilities can be broadly divided into two types:
Funded credit facilities
71
Non- funded credit facilities
Funded credit facilities
These facilities mainly consist of:
1. Working capital ( fund based)
The working capital includes the following :
Cash credit hypothecation of stocks
EPC-sublimit of CC
Cash credit hypothecation of book debts
FBP/FBD/ODF OBC
FBN-DP/DA 90 days
2. Term loans
Non- funded credit facilities
These facilities mainly consist of –
Guarantee
LC-inland/ foreign DP/DA 180 days
Analysis of assessment of Working Capital Limits
In Bank of India, the working capital requirement of the borrower is assessed using different
methods, based on the limits.
Turnover Method
Borrowers with a credit limit of less than Rs. 5 Cr, the working capital requirement is
computed as 25% of the projected annual turnover, of which bank provides 4/5th (i.e. 20% of
the projected annual turnover) and the remaining 1/5th is contributed by the borrower as
margin.
On an average the average business cycle assumed by the bank is 3 months; the bank is
flexible to consider the working capital limits in case of longer business cycle.
Level of Holding / MPBF
72
In this method of working capital assessment, bank determines the level of holding of
inventories by looking into the past levels of holding for inventory and receivables. In case of
A rated accounts with fund-based limits exceeding Rs 5 crores, cash flow statements would
be obtained and scrutinized. Cash DSCR and cash interest coverage ratios may also be
worked out and commented in the proposal.
Cash Budget System
The assessment of working capital requirement may be done on the basis of the projected
cash budget statement (annual) comprising of the projected receipts and payments for the
next 12 months on account of: Business operations, Non- business operations, Cash flow
from capital accounts, Sundry items
Analysis of Credit Proposal of Working Capital and Term loan
A.
1.
BORROWER PROFILE:
Name of Account
M/S Agni Engineers Pvt Ltd.
Factory
A-68, Prayag Apartment, Vasundhra Enclave, Delhi-110096
Regd. Office
B-59, Sector-83, Phase-II, NOIDA-201306..
2.
Constitution
Private Limited Company
3.
Business/Activity:
Manufacturing of sheet metal & press metal tools /plastic and rubber
moulding products.
BSR Occupation Code:
4.
Established in
36909
1992 as firm
5.
Advance since:
1995
1996 incorporated to
Private Limited Co.
6.
7.
If the account is new, name of the earlier Banker : N.A
a) Risk Rating
Present
Proposed
SBS4
SBS4
73
8.
Asset Code:
11/Standard
b) Pricing Rating
SBS4
SBS4
c) External Credit
N.A.
N.A.
Rating
9.
Group
No specific Group
10.
Chief Executive/
Mr. Rajeev Tiwari, Director
Promoter Directors
Ms Rupam Tiwari, Director
11
a
Consortium
N.A
b
Multiple *
Banking
No
Arrangements
N.A
Leader/
Share
Our
Share
N.A.
Main
Banker/
Our
Share
NA
Other
Banks/
Share
N.A.
N.A.
Other
Banks/
Share
N.A.
Share
B. ISSUE/S FOR CONSIDERATION:
12.
13.
Last Sanction / Review: Zonal Manager dated 07.03.2011
Present Request: Review/Additional Terms
1. Working Capital on same limit
2. Term Loan on run down /outstanding level
C.
14.
FACILITIES & SECURITY COVER AND MAJOR TERMS OF SANCTION:
(Rs. in lakhs)
Limits (with
purpose)
WC-Fund Based
i)CC- Stocks
Existing
100.00
Propo
sed
Inc.(+)/
100.00
--
74
Dec.(-)
in
limits
Pricing*
ROI/Commission
@4% over base
rate13.00% p.a.
with monthly
rests
Present
O/s as
31.03.11
19.25
Overdues @
Nil
ii)CC-B/Debts
50.00
50.00
--
--do--
50.00
Nil
100.00
100.00
--
--
69.25
Nil
3.22
0.95
3.22
Nil
134.36
107.36
144.09
--
Nil
-
--
--
274.00
248.61
217.86
--
(upto 90 days)
Max (i+ii)
Term Loan-I
(-)2.27
As per scheme
Autofin Loan
Term Loan-II
(-)27
@4.50% over
base rate13.50%
p.a. with monthly
rests
Land & Building
Non Fund Based
Total
Major Terms of
sanction
Repayment of TLs
-
--
--
a. Drawing to be allowed against paid stock only
b. Drawings against book debts of 90 days only
TL I (original limit Rs. 10.53 lac) repayable in 60 EMI of Rs. 23292.00
already commenced from Aug 2007.
TL II (original limit Rs. 160.00 lac ) repayable in 72 monthly installments
of Rs. 2.25 lac each already commenced from March 2010.
15. Security
Principal
Particulars
Date of
valuation
report
Value
(Rs. in crores)
Hyp. Of Stocks
31.12.2010
Value
Share
74.18
Hyp of Book Debts
31.12.2010
133.16
187.40
Hyp of Vehicle
31.03.2010
14.64
12.44
221.98
315.07
75
Our
115.23
D. COLLATERAL SECURITY
(Rs in lacs)
Nature of
Owned by
Security
EQM land Company
&
buildings /
Shed
Location
Valuation
i)B-59, Sector-83, Phase-II, NOIDA-
Date
Value
26-08-09
176.87
23-08-09
218.32#
201306
ii)Plot No 96 Sector- Ecotech Extn-I
Greater Noida
Total
395.19
#value is inclusive of land & building proposed
(Rs. in lacs)
16 Directors’ name
Assets
Liabilities
Sh. Rajeev Tiwari
67.74
Net worth
16.82
50.92
Mrs. Rupam Tiwari
47.07
20.29
26.78
114.81
37.11
77.70
Basis
CBD-23 dt 12-01-11
Guarantors’ Name
All the directors are guarantors
in the account
Total
E. CONDUCT/VALUE OF ACCOUNT :
17.
Conduct of the account:
Satisfactory
a)
Cheques Returned during the year under review for financial reasons: --
b)
LC Devolved and BG-Invoked during the year under Review: - N.A
F.
Financial Position:
76
-do-
(Rs in lacs)
18
.
PARTICULARS
Audite
d
Aud
Prov
Estim
Proj
Estim
31.03.1
0
31.03.1
1
31.03.1
1
31.03.1
2
31.03.1
2
31.03.1
3
31.03.1
4
17.13
17.13
19.13
19.13
19.13
19.13
19.13
255.83
287.19
382.10
420.31
420.31
471.41
530.71
Proj
1
Paid up Capital:
2
Tangible
Networth
3
Investment in cos
0.00
0.00
0.00
0.00
0.00
0.00
0.00
4
(Of which in
group cos)
0.00
0.00
0.00
0.00
0.00
0.00
0.00
5
Adjusted TNW
255.83
287.19
382.10
420.31
420.31
471.41
530.71
6
Capital Employed
369.53
437.71
503.67
573.93
573.93
598.03
630.33
7
Net Block
434.09
399.87
506.63
457.02
457.02
486.67
476.32
8
Net sales :
Domestic
655.70
900
910.8
1050
1050
1200
1500
1
1
Other Income
6.46
7
4.68
5.04
5.04
5.46
5.88
1
2
EBIDTA
47.56
85.14
76.71
88.95
88.95
104.43
118.39
1
3
Interest
7.11
35.15
25.26
28.92
28.92
24.65
25.78
1
4
Gross Profit/
(Loss)
40.45
49.99
51.45
60.03
60.03
79.78
92.61
1
5
Taxes
9.74
6.74
12.06
11.48
11.48
18.33
12.96
1
6
Cash Accruals
30.71
43.25
39.39
48.55
48.55
61.45
69.65
1
7
Depreciation
10.71
11.89
13.12
10.34
10.34
10.35
10.35
1
8
Net Profit/(Loss)
20.00
31.36
26.27
38.21
38.21
51.1
59.30
77
1
9
Net Profit/Capital
Employed (%)
2
0
2
1
5.41
7.16
4.93
6.35
6.35
8.18
9.02
Current Assets
284.89
269.93
330.55
359.62
359.62
419.71
510.73
Current Liabilities
379.39
235.53
308.84
218.65
218.65
285.24
333.61
.75
1.15
1.07
1.64
1.64
1.47
1.53
RATIOS :
2
2
Current ratio
2
3
Debt/Equity :
2
4
Term liab./
Adjusted TNW
.44
.52
.39
.43
.43
.33
.24
2
5
TOL/ Adjusted
TNW
1.93
1.34
1.20
.95
.95
.93
.87
2
7
Profitability%:
PAT/Net Sales
3.05
3.48
2.88
3.64
3.64
4.26
3.95
2
8
DSCR
2
9
Interest Coverage
3
0
Inventory +
Receivables/
Sales (%)
19.
Average DSCR is 1.80
5.32
2.23
2.56
2.68
2.68
3.49
3.70
.33
.27
.30
.29
.29
.29
.29
Comments in brief on financial position:
The financial indicators of the company have been derived on the basis of audited
financial accounts for the period ended 31.03.11, Provisional for FY 11-12, estimates
for the current year and projections for next years. Our comments based on the
financials indicators are as under:
19.1 PAID-UP CAPITAL/TNW:
Paid up capital of the company is Rs.19.13 lacs as per audited financials as on
31.03.2011.the Tangible Net Worth of the company stood at 382.10 lacs as at 31.03.2011
as per audited balance sheet in comparison to 255.83 lacs as per audited balance sheet of
31.03.2010. It is further estimated / projected to improve to Rs. 420.31 by 31.03.12 and
78
Rs.471.41 lacs by 31.03.13. Thus the capital /TNW base / position is adequate to cover the
proposed exposure as per norms.
The reconciliation of the TNW of the company is as under:
TNW as on beginning of the year 31.03.10
Add: Increase in capital
Increase in share premium
Net Profit & Surplus
Less:
TNW as at the end of 31.03.11
(Rs. In lacs)
255.83
2.00
98.00
26.27
382.10
19.2 SALES: Sales of the company are mainly in domestic market. The company had
achieved sales of Rs.655.7 lacs during the year 2009-10 the sales achieved by the
company during the year 2010-11 is Rs.910.8 lacs as per audited balance sheet in
comparison to Rs. 900.00 lacs as per estimated financials submitted by the company.
The Company has projected the same to the level of Rs 1050 lacs by 31-03-2012 and
Rs. 1200 by 2012-13.Looking to the past trend and market reputation, adequate orders
in hand, we feel the estimated/projected sales turn over is would be achievable by the
Company.
19.3 OTHER INCOME: The company had earned other income of Rs. 4.68 lac during the
year 2010-11.other income mainly comprises of job works, sale of scraps and other
Misc. receipts.
19.4 PROFITABILITY: Profitability of the company from operations was at 2.88%
during 2010-11. The profitability increased to 3.64% as on 31.03.2012 (Provisional)
and is comparable with other such units engaged in this line of activity. Profitability at
this level is considered reasonable / good.
19.5 NET BLOCK : The net block of the company stood at Rs.506.63 as at
31.03.2011,which mainly comprises of land and building of Rs.342.55 Lac ,plant and
machinery of Rs.135.77 Lac and Misc .Rs.28.31 lac
19.6 CURRENT RATIO: During the year ended 31.03.11, CR was 1.07, which is within
Bank’s acceptable norms. It has increased to 1.64 as at 31.03.12 (provisional) due to
reduced borrowing during the year.
19.7 DEBT EQUITY RATIO: The debt equity ratio of the company as on 31.03.2010 is
0.37 and the same is 0.32 as per audited balance sheet as on 31.03.2011.Branch has
accepted the same.
19.8 DSCR/ISCR: In view of good profitability of the unit / cash accruals, DSCR for the
existing term loan obligation has been well above the accepted level. DSCR for the year
2010-11 is 1.24. The position is considered satisfactory. The repayment of existing term
loan has been in time. No difficulty is envisaged in timely servicing of term loan
installment and interest in future as well.
79
Further the present and estimated ISCR of the Company are at satisfactory level. ISCR
stood at 2.56 as at 31.03.11. As per provisional financials as at 31.03.12, the same has
marginally increased to 2.68 due to increase in profit during the year viz a viz last
financial year and increase in interest due to additional Term loan availed/sanctioned
by us during the year. Company has projected ISCR to improve to 3.49 as at 31.03.13
due to better estimated profits during the year.
19.9 CONTINGENT LIABILITIES: There are no such liabilities reported in the audited
balance sheet of the company as on 31.03.11
19.10 AUDITOR’S QUALIFICATIONS if ANY: As per the Auditor’s report as at
31.03.11, no qualification has been observed.
In view of the above the financials of the company can be considered satisfactory.
20. Inter Company Comparison N.A
Name of Co.
Year
Sales
PBT/Sales
TOL/T
NW
CR
21. Favourable Factors (in brief): the branch has adviced as under:
1. The company has been dealing with our noida branch for 16 years.conduct of the
account has been reported satisfactory.
2. There has been steady growth of business of the company in the past.
3. Company’s products have wide end use applications. Market share of products is
increasing year after year. Company’s clients are big/reputed corporate. The
improvement in the economy which has started shall add to the further growth of
the company
4. Mr. Rajeev Tiwari the principal promoter director behind the acrivity of the unit has
experience of over 15 years in this line of activity. His contribution has been
valuable in further growth of the business.
22. Risk Factors and Mitigants:
Risk factors:
1. There has been substantial fluctuation in the prices of metal and metal products in
the past. This affects the turnover and profitability.
2. There is tough competition in the market.
3. Usual market risks associated with the trade.
80
Mitigating factors:
1. By virtue of their vast experience in the line they have gained expertise to control the
price fluctuation factor suitably to avoid adverse effect on the margins.
2. They have sustained the market competition over the years and have earned good
reputation in the market.
3. Their dealings with the retail customers are very limited.
23. Borrower’s Exposure: (Existing) – with us
(Rs. in lakhs)
Amount
Facility
O/S as on
Asset Status
31.032011
With Us
i) CC –Stock
100.00
ii) CC-Book Debts
19.25
50.00
Max (i+ii)
50.00 Standard
100.00
69.25
Term Loan- I
(Autofin loan)
Term Loan- II (Land &
Building
With Other Banks
Nil
6.50
3.81 Standard
134.36
107.36 Standard
NA
Total
274.00
24. Group Exposure (including this proposal):
Name of
company/
firm
NA NA
Zone/
Branch
AC/
CR
F.B.
N.F.B.
81
217.86
(Rs. in lakhs)
Total/
Max.
Outstanding
Out of
As on 13.01.11
Order,
FB
If any
NFB
M/S Agrahan Ghaziaba
d
Engineers
Noida Br
Pvt Ltd
11/ AA
248.61
Nil
248.61 217.86
Nil
Nil
(Rs. in lakhs)
Maximum exposure based on capital funds as on
04.12.2010
Borrower
Cap.
M/S Agrahan Engineers Pvt Ltd
Total
Group
Cap.
Actual
248.61
248.61
Actual
248.61
248.61
25. Exposure to Industry (including present exposure) - Not Available
(Wherever applicable)
(Rs. in lakhs)
a) Sectoral Cap for Industry
:
N.A.
248.61
b)
Bank’s Exposure
:
c)
Zone’s Exposure
:
d)
NPA Bank
:
e)
NPA Zone
:
26.Utilization of Account
(Rs. in crores)
Utilization of :
2010-11
Amount
a) Fund Based Limits
82
2011-12
%
Amount
%
i.
Term Loan
0.12
100.00
0.08
100.00
1.29
64.50
1.71
71.25
0.26
52.00
0.61
40.67
-2010-11
--
ii. Working Capital
b) Non Fund Based Limits
27.
28.
Export Turnover (Rs. in lakhs)
Earning (Rs. in lakhs)
Interest
-2011-12 (Estimates)
0.14
Other Income
No.
0.19
Amt.
Earnings
0.01
Bills Purchased/ collected
-
-
LCs opened
-
-
Guarantees issued
-
-
--
No.
Amt.
Earnings
0.01
Any other Income
0.02
0.02
Total
0.17
0.22
Yield
12.06
12.29
29. Details of Float Available:
(Rs in lacs)
Current Year Position
No of A/Cs
Position during last year
Amount
Average
Outstanding as on
Balance
31.03.11
Savings bank
--
--
--
--
Current Deposit
1
0.85
0.58
0.76
Term Deposit
4
0.67
0.47
0.50
Total
5
1.52
1.05
1.26
30. Concessionary facilities : None
31. AUDIT/ INSPECTION/ MEETINGS:
83
Last Date
Remarks/observations
N.A.
Not Applicable
Stock inspection
Stock audit
Consortium meeting
32 a
Any adverse comments of Statutory/ No major irregularities persisting in the account.
Internal/Concurrent/RBI Auditors and
Borrower's Auditors (as extracted from
the Balance sheet)
32 b
Closure of CPA (Authority & Date)
33.FLOW CHART
Date application received at branch
Date of Branch Proposal
Date proposal received at Zonal Office
Date clarifications received at Zonal Office
Date of ZO Proposal
04.05.12
09.05.12
ASSESSMENT/JUSTIFICATION FOR PROPOSED LIMITS :
34. Project Finance/Term Loan Assessment:
The Co. was sanctioned Term Loans for land & building and the other term loan was sanctioned for
purchase of delivery /transportation vehicles. The details of the same are as under :
34.1 Term Loan –I (Land & Building) :
The company was sanctioned a Term Loan of Rs.160.00 lacs for Land & Building for acquiring
Industrial Plot No. 96 at Ecotech, Extension –I, Greater Noida and for construction of building
there on .Total cost of project of land & building was Rs 218.32 lacs and the margin money Rs
58.32 lacs @ 26.75% contributed by the Co.
84
Repayment
The loan is repayable in 72 monthly instalments of Rs 2.25 lacs each commencing from March
2010 . The interest is serviceable as and when applied to the account .The project has been
completed and the repayment in the term loan account is as per the stipulated terms and the account
is in order . The conduct of the account is satisfactory. We recommend to review the same at its
drawing limit /outstanding level
34.2 Term Loan –II (Autofin Loan) :
The Co. has been sanctioned a term loan of Rs 10.53 lacs for purchase of Honda Civic
vehicle under the Bank`s Autofin Loan Scheme . Total cost of vehicle was Rs 12.49 lacs
and the margin money of Rs 1.97 lacs @ 15.74 % contributed by the Company .
Repayment
The loan is rapyable in 60 EMI of Rs . 23,291 /- from Aug 2007 . The account is regular
and the conducted satisfactorily . We recommend to review the same at its drawing
limit/outstanding level .
34.4
SECURITY:
The said term loans are secured by way of EQM of land & building and
hypothecation of vehicles under the Bank`s hypothecation clause with concerned
RTOs as per the RC available with us .
As discussed in the Para 19.4 profitability of the company has been accepted at the
estimated level. Accordingly based on the same DSCR of the company for the entire
tenure of all the term loans for the company as a whole are as under:
2010-11
2011-12
2012-13
2013-14
2014-15
2015-16
PAT
26.27
38.21
51.10
59.30
48.40
50.62
Depreciation
13.12
10.34
10.35
10.35
10.35
10.35
Cash profit
39.39
48.55
61.45
69.65
58.75
60.97
Interest on TL
25.26
28.92
13.37
9.32
5.27
1.30
Sub total
64.65
77.47
74.82
78.97
64.02
62.27
Interest on TL
25.26
28.92
13.37
9.32
5.27
1.30
Installment of TL
27
27
27
27
27
27
85
Sub total
52.26
55.92
40.37
36.32
32.27
28.30
DSCR
1.24
1.38
1.85
2.17
1.98
2.20
Average DSCR
1.80
The DSCR is satisfactory and average DSCR comes to 1.80
35. Working Capital Assessment:
At present the company is enjoying Fund Based credit facilities by way of Term Loan of
Rs.1,40,86,000 and WCL of Rs.1 crores from our branch . The working capital limit was
assessed for the year 2010-11 based on the estimated sales turn over. Now the Co. has
requested us to review the WCL based on the estimated sales turn over for the F Y 2011-12
and we have taken the estimated sales turnover of Rs. 1050 lacs for assessing the working
capital requirement of the company. Based on the said level of sales ,the working capital
requirement of the company as per turnover method has been assessed by the branch as
under:
31.03.11
31.03.12
a
Gross Turnover
910.80
1050.00
b
25% of Gross Sales
227.70
262.50
c
5% of Gross Sales
45.54
52.50
d
Actual/projected NWC
21.71
140.97
e
b-c
182.16
210.00
f
b-d
205.99
121.53
g
Cash Credit
of stocks
Permissible Bank 1Finance (lower
of e &Hyp.
182.16
f)
2
Cash Credit Hyp of Book Debts
S.no.
h
Limits Requested
i
Limits Recommended
Facility
Max of Stocks100
& Book Debts
100
36. Non Fund Based Limits Assessment: N.A
86
121.53
100
100
(Rs.
In
lac)
Limit
Margin
100.00
25%
50.00
40%
100.00
--
37.
38.
CONFIRMATION:
a.
Compliance of last sanctioned terms
:
Yes
b.
Security Documents are valid/in force
:
Yes
c.
Proper charge on securities created in Bank's favour
:
Yes
d.
Exposure is within Bank’s prudential Norms/RBI guidelines
:
Yes
e. Company/directors are not under Bank’s/RBI/ ECGC defaulter’s :
list
No
f.
Any deviation from usual norms
:
g.
Whether directors are disqualified under Section 274 of :
Companies Act
NA
h.
Any arrears in payment of statutory liabilities by the Co.
:
No
i.
Whether status report/D&B report, if applicable, obtained
:
N.A
j.
Auditor’s comments on Corporate Governance Practices followed :
in case of Limited Companies
N.A.
k.
Pending litigation against / by the company (if yes, details)
Nil
:
No
Industry Perception: Business Scenario Perception / SWOT Analysis / Risks and
Mitigation
Strengths:
1. The Company has been in the market for over 20 years. Market share is
steadily increasing. Margins are improving.
2. The promoters are in the existing line of activity for the last over 20 years.
3. There regular demand of the products in the market and outlook for growth in
the domestic sector appears positive.
87
4. The company has increased the product range which enables to sell various
types of products from one place.
5. Promoters / family members are very well known to the bank. Their dealings
have been for more than 16 years. Conduct of the account has been
satisfactory.
6. The clients of the company are big corporates like Hero Motors, SAMSUNG
and Moser Baer etc. The company enjoys good reputation in the market in
Delhi.
Weakness:
1. Government policies on metal prices, regulatory aspects may cause fluctuation
in the prices and down the general sentiments in the market.
2. Volatility in the prices may also occur due to international market position.
Opportunity:
1. The sheet metal & moulding components have wide applications in FMCG,
automobiles, electronic items, telecommunication industry and various other
sectors and thus it is estimated that consumption / demand shall continue to
grow.
Threats:
1.
Competition in the market has bearing on sales.
(Industry average/benchmark (as extracted from CRIS INFAC/Capitaline
wherever available)
------Not Available-----
PBT/
Net Sales/
Bank Finance/
Net Sales
Total Tangible
Current Assets
88
Inventory +
Receivables/
Assets
Net Sales
39. BRANCH RECOMMENDATIONS
Mr. Rajiv Tiwari started the business of sheet metal & moulding components on very low
scale in the year 1992 in a proprietorship firm. The firm was converted to M/S Agrahan
Engineers Pvt. Ltd (AEPL) in the year 1996. The unit is engaged in the manufacturing of
same sheet metal & moulding products it started in 1992. It is a closely held private
limited company with Ms Rupam Tiwari W/O Mr Rajiv Tiwari as another director. The
Company’s manufacturing activity is located in own factory building situated at B-59,
Sector-83, NOIDA. The required infrastructure is available in the area . The company has
grown steadily over the years. Enthused with the growth and demand of the product, the
company has made the expansion by way of acquiring land & building at Greater Noida .
Mr. Rajiv Tiwari, promoter /director has experience for over 20 years in the line of
activity and the over all control of marketing and administration rests with him. For day
to day operations, manufacturing process, administrative work, the company has
employed other executives/ supervisors, trained staff and semi skilled workers. The
company employs about 60 staff for its activity. Looking to the steady growth,
satisfactory conduct of the account, the management of the company is considered
satisfactory.
The company has been banking with us since 1995. The conduct of accounts has been
satisfactory. The present request of the Company is as under :
Present Reference:
1)
Review of term loans at its drawing limit/outstanding level.
2)
At present the company is enjoying working capital limit of Rs.100 lacs from our
Bank as per last sanction. WC limit is proposed to be reviewed at same level of
Rs.100 lacs based on the turnover method .
Financial Position:
Financial position based on balance sheet as on 31.03.10, 31.03.11, estimated balance
sheet as on 31.03.12 and projections for the next year has been mentioned in detail in the
proposal. The sales of the company are showing increasing trend over the years. Liquidity
and other ratios are at acceptable levels. Capital/TNW is adequate for the exposure norms.
Profitability is at satisfactory level and is improving over the years. The parameters along
with the explanations have been considered and the position is satisfactory.
Security:
The credit facilities are secured by hypothecation of stocks & book debts, plant &
machinery, hypothecation of vehicle out of Bank finance and the same are collaterally
secured by extension of EQM of existing factory land & building situated at B-59, Sector83, Noida valued at Rs.176.87 lacs as per the Bank`s appoved valuer M/S Accurate
Valuer`s report dated 26-08-2009 and EQM on Industrial plot No.96 , Sector–Echotech
89
Extn-I, Greater Noida valued at Rs. 140 lacs as per the Bank`s approved valuer Mr.
Gurcharan Singh `s report dated 23-08-2009 (total value inclusive of proposed building is
Rs 218.32 lacs ).
Guarantor(s):
In addition to above ,the personal guarantee (Joint & Several guarantee) by Sh. Rajiv
Tiwari & Ms. Rupam Tiwari,both the directors of the company is proposed for the
existing as well as the for the additional advance .
Credit Rating and Pricing:
We have carried out the credit rating exercise in the account based on the audited Balance
Sheet of the Company as of 31.3.2011, the account qualifies for SBS-4 rating . Accordingly
we propose to charge the rate of interest applicable to MSME unit as per the present
guidelines .
Recovery of Applicable Charges:
All applicable charges shall be recovered as per the guidelines .
35. Recommended for
I.
SANCTION of:
Limits
a)CC Hypothecation of Stocks
Existing
Proposed
100.00
100.00
50.00
50.00
100.00
100.00
3.22
.95
d)Term Loan (Land & Building)
134.36
107.36
Total
274.00
90
248.61
b)CC Hypothecation of Book
Debts
Max. a+b
c)Term Loan-I
I.
36.
APPROVAL FOR:
a) Assigning SBS-4 rating to Company and Rate of interest as per Para 35.
Authority for Sanction
In terms of extant guidelines under delegation of powers the proposed limits falls
within the delegated authority of GM-NBG as per revised delegation of powers
circulated vide HOBC No. 104/134 dated 25.01.2011.
Submitted for sanction/approval, please.
RECOMMENDED
(------------------)
(-----------------)
Manager
Chief Manager
Analysis of assessment of Term Loan
The appraisal process of a term loan is a little different form the appraisal process of working
capital. A few more factors have to be considered for the term loan appraisal in addition to the
other details like borrower’s profile, credit rating etc.
For providing term loan facilities, a few more factors have to be considered. They are the
funded debt/equity ratio, the DSCR both for the project and the company, as a whole as also
the period of repayment should be given due weight-age. Also the cash-flow statements are to
be obtained and analyzed in all accounts with limits of Rs5 crores and above or wherever
needed
Risks associated with the borrowal accounts like critical inputs risk, operational risk,
production process risk, marketing and labour risks are to be analyzed and taken into account
in the assessment.
91
The following things are taken into consideration while appraising the term loan –
Project particulars
Cost of source of finance,
Amount of advance and purpose
Repayment schedule
Details of security/ value of security/margin: basis of valuation
Comments on the project
Project revenue, profitability and DSCR
Marketing viability
Project implementation schedule along with present status of reports
Availability of refinance
Analysis of Credit Proposal of Term Loan
Proposal of R&R Infra Private Limited
Question – Industry is Infrastructure under the heads “Roads and ports”
The company XYZ LTD. Limited has a fund based requirement of Rs. 10000 lacs. The
company is under PPL (Public Private Partnership).
Credit Requirement
Facility
Proposed
Term Loan
10000
Working Capital ( FB )
Non-Fund Based
Total
10000
The Memorandum of Sanction or Memorandum of Approval starts with the Proposal Number
for Reference along with date of application and date of creation for the proposal.
92
The Credit Proposal along with major sections from A to J, with all sections together
accounting for a total of 36 customized headings which contain data depending on the credit
proposal requirement for that project. Example – The Term loan requirement for this project
does not require Working Capital Assessment.
Borrower Profile
The first section named A is Borrower Profile, which contains the basic details about the
borrower i.e. Name of Account, Constitution(Private/Public), Business Activity(Example –
Construction of roads and highways), Business and Account establishment dates, Credit Risk
Grades, Group and Directors Information, Consortium (Yes/No), Multiple Banking
Arrangement (Yes/No).
The XYZ LTD. Public Limited (Unlisted) is into Construction of Roads and Highways. It
was established in 2004 and has been in business with the bank since 2006. The Risk Grades
assigned for Borrower Risk Grade is LC6 and for Borrower Pricing Grade is LC7. The Group
for the project is a Joint venture between public and private firms. Mr. K. Singh is the
Managing Director and it is a consortium lending with the market share as 9.09%.
Sharing Pattern of Term Loan
Name of Bank
Amount
Percentage (%)
Other Banks
100000
90.91
Bank of India
10000
9.09
Total
110000
100
Issue for Consideration
The second section named B is Issues for Consideration. It covers the Last Review, Any
additional request.
The XYZ LTD. Limited is submitting a new request for a fund based loan of Rs. 10000 lacs.
Facilities and Security Cover
93
The third section named C is Facilities and Security Cover. Under facilities it covers the
limits sanctioned, the pricing, the outstanding amount, and over dues if any. Also it covers the
Repayment of Term Loan.
Limits
Existing
Proposed
Inc/Dec
Pricing
O/s
Over dues
Term Loan
--
10000
--
9.5 %
9094
--
Working
Capital
--
--
--
--
--
--
Non-Fund
Based
--
--
--
--
--
--
Total
--
10000
(+)10000
--
9094
--
Repayment of 48 unequal quarterly installments commencing from June 2012. The door to
Term Loan
door period is 16.5 years. The tail period is 15.5 years. Total project period is
32 years.
Under Security Cover, the borrower is required to provide the principal and collateral
security. But in cases collateral can be exempted.
In principal security it usually covers the current assets of the company, whose value is
ascertained and acts as a security cover against the credit provided to the borrower. In case of
consortium, since there are many banks so each bank has to find out their share depending
upon the share of loan granted i.e. the total project cost is Rs.150000 lacs and the loan share
is 9.09%.
Thus the security value as per Bank of India loan share comes out to be 9.09% of Rs.150000
equal to Rs.13646 lacs.
Guarantor may be required to provide security against credit, but it is again not a mandate
and depends upon project.
Security
Particulars
Date of Evaluation
Principal
Hypothecation
of Eventual
assets,
Escrow
Account, Assignment
of Rights, Assignment
of Insurance, DSRA
13646
Collateral
--
--
-94
Value(Our share)
Exposure
The fourth section named D is Exposure, which provides details about the Borrower’s
Exposure, Group Exposure, Industry Exposure and Conduct/Value of Account.
In Borrower’s Exposure, we take into account all the existing exposure of the borrower with
Bank of India, with Other Banks, with FIs / LIC etc.
Facility
Amount
O/s
With Bank of India
TL
10000
9094
With Other Banks
TL
95000
86357
With FIs / LIC
TL
5000
4548
110000
99999
Total
In Group Exposure, the group which in our case is a Joint venture between a public and
private. Thus the group exposure with Bank of India needs to be calculated.
Both the Borrowers Exposure and Group Exposure needs to be within the limits sanctioned as
per the Credit Policy.
Borrower
Group
Cap
Actual
Cap
Actual
294000
10000
735000
170376
Industry Exposure marks the cap for that sector, the Bank and the Zone Exposure as well as
NPA for that sector.
Exposure to Industry
Sectoral Cap for Industry
506065
Bank’s Exposure
379966
Zone’s Exposure
151557
NPA Bank
242
95
NPA Zone
--
Conduct/Value of the Account is very important criteria in deciding the Rate of Interest. It
takes into account the conduct, utilization of limits as well as the earnings made.
Utilization
Last Year
Percentage
Amount
Term Loan
4675
Current Year
Percentage
Amount
46.75
9600
96
Earnings
Interest
444
912
Other Income
0.73
25
Total
444.73
937
Yield %
9.51
9.76
The Low Yield is on account of ROI being linked to the Government Securities, as it is a
Public Private Partnership, so the ROI charged is low.
Favorable factors
The project is a joint venture between XYZ LTD. and Government of Rajasthan, with
promoters having robust experience in project development and implementation.
The government of Rajasthan has accorded high priority for development and up
gradation of infrastructure and has thus created state road development funds to
provide balance investment.
Investment is expected to be recovered through the levy of toll fees.
Financial Position of XYZ Infra
The project is an effort to improve the road infrastructure. It is a joint venture of the public
and private institution.
Paid-up Capital
The paid up capital is constant at Rs. 5000 lacs at the end of FY 2008, and is estimated to
increase to Rs. 25800 lacs by FY 2009 and to Rs. 28300 lacs by FY 2010.
96
The company is planning to raise the amount by IPO/Private Placement for funding the
project cost. The timing for IPO would depend on market conditions. Thus in case of delay in
IPO/Private Placement process, the promoters will provide an undertaking for arranging the
equity requirement of the capital.
Net Sales
The year FY 2008 is the first year of operations. The revenues for the same will start coming
from the toll collected on the completed stretches. The revenues earned for the year 20072008 was Rs. 929 lacs and were estimated to Rs. 7500 lacs for the Year 2008-2009. The sales
were found to be in line to achieve the estimated sales.
Other Income of Rs 114 consisted of interest on Fixed Deposits.
Profits/Profitability
The company has suffered a net loss of Rs. 2781 lacs as the revenues were operational for
part of the year. Also, as interest of Rs. 15 Cr has been expensed due to prior completion of
the project.
The gaps had been met by the Financial Security Fund of the Government. The EBIDTA is
expected to be Rs. 7500 lacs at the end of FY 2010.
The company as a whole would be break even and start generating profits from their second
year of operations. The losses if any will be met by the FSF set up the government.
Investments
The company has projected investments at Rs. 12500 lacs, as it has planned to invest in land
adjacent to the toll roads. The investment in land banking would be financed with the
proceeds of the IPO/Private placement.
Total Net Worth
TNW at Beginning of the Year
29106
Add: Increase in paid up capital
Increase in share premium
Net profit for the year
Decrease in intangible assets
-
97
Less: Decrease in paid up capital
General Reserve used for Provision
Increase in Intangible Assets
Dividend payment including tax
Loss during the Year
TNW at end of Year
2781
26325
The TNW is estimated to be Rs. 52500 lacs at end of FY 2011, and to Rs. 52200 lacs at end
of FY 2012.
Particulars
FY 2011
FY 2012
TNW at Beginning of the Year
26325
52500
Add: Increase in paid up capital
Increase in share premium
Net profit for the year
Decrease in intangible assets
Sub-debt from XYZ LTD.
Additional funding from Public
Contribution from Government
State Fund
Less: Decrease in paid up capital
General Reserve used for Provision
Increase in Intangible Assets
Dividend payment including tax
Loss during the Year
TNW at end of Year
20800
9800
2000
8500
2500
2600
2200
12725
52500
5400
52200
Financial Position of XYZ Infra
Audited
09
Audited
2010
Estimated
2011
Projected 2012
Paid up Capital
Equity
Preference Share
Tangible Net Worth
Investment in Cos
Adjusted TNW
5000
5000
25800
28300
29106
26325
29106
26325
52500
-12500
45250
52200
-12500
44290
98
Capital Employed
Net Block
Net Sales
48951
50161
Domestic
Exports
Total
Other Income
EBITDA
Interest
Gross Profit
Taxes
Cash Accruals
Depreciation
Net Profit
Net Profit / Capital Employed %
Current Assets
Current Liabilities
Ratios
Current Ratio
Debt/Equity
Term Liab. / Adjusted TNW
TOL/Adjusted TNW
Profitability Percentage : PAT / Net
Sales
DSCR
Company as a Whole
For Specific TL
Interest Coverage
Inventory + Recievables / Sales (%)
114
105
105
41
64
64
0.05
1334
2545
0.524165
0.68
0.77
125623
120805
173500
160700
200000
184500
929
7500
15500
929
7500
458
1585
-1127
-2
-1129
1652
-2781
-100
12700
-12800
15500
1000
7500
12900
-5400
-7400
5400
-12800
-100
5400
-5500
12165
7348
200
2900
1.655552531 3.77
4.05
2.3
2.3
2.83
2.83
Average DSCR 2.34
Average DSCR 2.37
0.29
0.42
1
Important Ratios
Debt-Equity Ratio – There is an increase in project cost due to increase in the price of raw
material (i.e. Bitumen) from Rs 150000 lacs to Rs 161800 lacs. The increase in cost would be
met by the sponsors. Thus the DER ratio comes out to be 2.12.
Interest Service Coverage Ratio – The ISCR for the project is 0.29 for FY 2010 and at 0.42
for the FY 2011. The low ISCR ratio is acceptable as the company has made provision for
payment of interest in the form of Financial Security Fund and also Debt Service Reserve
Account (DSRA) has been factored in the project cost.
99
With operations going to full scale, the company should improve the ISCR Ratio.
Debt Service Coverage Ratio – The Average DSCR for the project is 1.67. With other projects
in line, the average DSCR is expected to go above 2, which is acceptable.
Analysis of Term Loan Assessment
The project is a joint venture between the government and private institution. It is a part of
the initiative taken by the Government for improving the roads and infrastructure to promote
tourism. The estimated cost of the project is 150000 lacs.
Project Cost (Rs. In lacs)
Equity
IPO
5000
Debt
Interest
free
Government
sub-debt 24000
Sub-Debt from Banks/FI’s
5000
Sub-Debt from XYZ LTD.
4000
Term Loans from Banks/FI’s
110000
The company has taken a Term loan of 110000 lacs by a consortium of 12 banks. With our
share at Rs. 10000 lacs(9.09%).
The project cost increased from Rs. 150000 lacs to Rs. 161800 lacs on account of increase in
the raw material. The increase will be offset by the saving initiated by the company of Rs.
9900, and the remaining Rs. 11800 lacs, part of which Rs 2000 lacs will be met by the
Government and remaining Rs. 9800 lacs will be met by the sub-debt from the sponsors.
As Security, the term loan has a first pari passu charge on the assets of the project. The value
of security under our share is Rs. 13646 lacs. The company is also required to maintain
insurance for the cost and expenses incurred for management of the risks.
The price charged is 9.5%, which is then linked to the Government Securities. This pricing is
sector specific and as infrastructure is priority sector for the Bank. The interest rates are kept
low by linking it to the Government Securities.
100
The project appraisal finds that the substantial stretches have been completed before time.
Toll collection has commenced. The Average DSCR for the project works out to be 2.34
The company is servicing interest in spite of losses, from the Financial Security Fund made
available by the government.
In the process, a complete viability study of the project as in this case the road viability is
studied in terms of its connecting ends and the purpose it serves in comparison to the existing
road links in terms of shorter route etc. The purpose for undertaking the project is studied indepth to calculate the amount of advance. Also the study of expenses as in this case:
Civil Work Cost – The civil cost with provision for contingencies and price escalation.
Land Acquisition and Rehabilitation expenses – Cost of acquiring the land and
implementing the rehabilitation program.
Preliminary and Pre-Operative Expenses – The expenses incurred for project
development and administrative expenses.
Interest during Construction – The amount is estimated and the company has to make
provisions for effecting the payment before the start of operations.
The current status, the proposed improvements and estimated benefits of the project are
studied.
Traffic Assessment
In order to assess the potential of the project, a traffic assessment study is done. This helps us
to understand the feasibility of the project. The traffic volume has been arrived by
multiplying with the seasonal variation factor to arrive at Annual Average Daily Traffic
(AADT). The growth rate is then identified based on the study done on the traffic pattern.
Project Appraisal, viability, profitability projections, DSCR
The average DSCR works out to be 2.37, with a minimum of 1.28 in the first year of
operation. With the traffic study the growth potential for traffic has been identified.
The project period provides a revenue tail of 17 years to mitigate any unforeseen risks. Thus
the project is economically viable and technically feasible.
101
Sensitivity Analysis
The project is subject to toll revenue and operating cost risks thus we do a sensitivity analysis
Scenario
Senior Debt without DSRA
Senior Debt with DSRA
Avg. DSCR
Min. DSCR
Avg. DSCR
Min. DSCR
2.35
1.28
2.37
1.58
Base Case Traffic 2.20
Reduced by 10 %
1.19
2.22
1.48
Increase in Project 2.18
cost by 10%
1.19
2.20
1.46
Increase in O&M 2.33
cost by 10%
1.26
2.35
1.56
Base Case
Security
The principal security is the charge on current assets i.e. movable, tangible, intangible assets,
receivables, cash and investment.
An Escrow account is maintained into which all the investment in the project, and all project
revenues and proceeds are deposited.
Debt Service Reserve Account
The company is also asked to maintain a DSRA from the commencement of operations to
meet the debt service requirements. An amount equal to the principal and interest for one
quarter is maintained. Amount in DSRA shall be utilized only in case of short fall in cash
flows for meeting the debt service requirements.
Industry Perception
102
An efficient transportation system is a pre-requisite for sustained economic development.
Transportation system includes roads, railways, waterways etc. Roads are considered the
primary means of transportation in the country due to easy accessibility. On an estimate
around 61% of the total freight and 86% of the total passenger traffic is carried by roads.
India has the second-largest road network in the world, aggregating 3.34 million km. In the
decreasing order of the volume of traffic movement, the road network can be divided into
National Highways, State Highways, Major district roads and Rural and other roads.
Roads are the preferred mode of transportation in India. Road Transport has emerged as the
dominant segment in India’s transportation sector. The sector has plays a major role in the
country GDP.
The State Highways are secondary system of road transportation, providing linkages to the
national highways, connecting important towns, tourist centers and ports. Major district roads
run within the district connecting areas of production with the markets and providing
interconnectivity between the rural areas and district headquarters.
The secondary system of roads carried 40% of the total road traffic, although they constitute
around 18% of the total road length. They contribute significantly to the rural economy and
thus to the industrial development of the country by enabling movement of raw materials and
products.
Branch Recommendations
The company is an initiative of the government to improve the infrastructure with the
objective of making the state a preferred destination for tourism.
The company is also responsible for improvement, rehabilitation, and maintenance of the
project roads and the sponsors has a proven track record in the infrastructure sector.
The PDA (Partnership and Development Agreement), authorizes the company to collect the
toll fees from the users of the Project Roads and transfer the project roads at the end of the
Project period.
Considering the viability of the project, acceptable DSCR, DSRA provision, experience and
track record of the promoters and tail period of 17 years, the Term Loan limit of Rs. 10000
lacs is given to the company.
103
Management of the Company
The Board of Director’s are from the Government bodies and XYZ LTD.. This is JV 50:50
between the public and private so the management does not stand as guarantors.
It is the Private body which needs to be studied i.e. XYZ LTD..
XYZ LTD. – It is a premier financial institution with the objective of developing projects in
the infrastructure sector. The key promoters are Central Bank of India, HDFC, and UTI. The
company undertakes projects in the following broad business segment –
Commercialization of Infrastructure projects
Financial Services ranging from project financing, investment banking etc.
The company is a premier in financing Infrastructure projects and has huge exposure and
experience for carrying out the implementation of the Project.
Credit Review
This is a very important activity to monitor the progress of the Client project and to make
sure that the funds are being used in the same area as mentioned. The default time period is
half-by yearly basis. Though the proposal is reworked on yearly basis to mark the progress of
the project and make changes in the limits / interest rates and other terms and conditions.
Credit Rating
The bank while evaluating the credit proposal derives the credit rating which has to be over
and above “LC5”, based on which the interest rates to be charged are decided. In special
cases bank may consider projects with LC6 and LC7. The Borrower Risk Grade and
Borrower Price Grade both are checked and the recommendations are made.
Risk factors and Mitigation
Risk Type
Mitigation
Time and Cost Overruns during construction
The company has undertaken improvement
works and completed substantial portion before
time
104
Adequate escalation provisions are provided.
Statutory Approvals and Clearances
The critical clearances are obligations of the
Government, which has a joint venture, thus no
delays
Commercial Risk
Geographical location adds to the positives, as
traffic has registered a growth of 61% for last
five years
The roads provide more efficient connectivity
to National Highways
Senior and Subordinated debts from Banks/FI
The entire debts flow from Banks/FI will be
managed by the XYZ LTD. Financial Services.
Equity
In case of unavailability of IPO, the entire
proceeds would be managed by the sponsors
Political Events
As per PDA, the government takes care of the
any cost incurred due to the any political event
Credit Pricing
The bank charges interest rates which are dependent on the nature of the project, the risk
associated with the project etc. Thus referencing to the article attached in the appendix we
can be clear on the components which account for the same.
Also, in the form of Pre-payment charges and commitment charges, the bank charges for
either prepayment of the interest component or either not using the loan to the limit as
mentioned in the terms and conditions of the memorandum.
Also, the bank charges processing fees, as mentioned in the terms and conditions of the
memorandum.
Last but not the least, in case of any defaults or non-fulfillment of any condition can cause for
a charge in the form of liquidated damages.
Bank’s Policy
The Bank of India policy varies for every industry, thus for the roads and highways projects
under Public Private Partnership (PPP) are as follows:
Financing to road projects may be considered on the basis of a viability study, taking
into account the traffic study and revenue generation capacity of the project.
In sanctioning proposals, the risk assessment and mitigation should be addressed.
105
Before any disbursement takes place, the bank makes sure that all the project
agreements and contracts have been undertaken by the promoter.
The following arrangements are also considered i.e. Escrow Account, Comprehensive
Insurance cover, maintenance of DSRA etc after the Commencement Operation Date
(COD).
Since Infrastructure projects are of generally longer durations hence the credit review
plays an important part to check whether the project is going as per the schedule, else
remedial action needs to be initiated.
The total sanctioned limit for roads and highways project is fixed at 5 % of the Gross
Domestic Advances of the Bank.
For any relaxation banks needs to get the approval from the Ministry of Commerce.
Financial parameters to be followed:
o Maximum D/E Ratio is 4:1
o Minimum Average DSCR should be 1.25
106
Chapter 5
CONCLUSION &
RECCOMENDATIONS
Observation & Findings
As per the observations made during the study of my project I found that the bank needs to
review its credit rating system and needs to be more stringent in norms. Thus bank needs to
make sure that it invests in sectors which promise better growth, which can be done by a
thorough study of the market forces. So banks need to maintain the opportunity risk balance,
to invest in corporate with higher operational efficiency.
Banks needs to focus on sectors such as Infrastructure, the bank guidelines for financing this
sector should be made liberal and thus bank should try to give various concession facilities.
Thus for risk rating bank takes external rating for the company carrying out the project and
107
not for the specific project. The concession should be given in the form of relaxation in
prepayment charges, maintenance of DSRA account, margins etc.
Conclusion
The association with Bank of India for project on “Analysis of Credit Appraisal” has been an
educational experience.
It has helped a lot to understand the practical aspects of Trade Finance and Credit Appraisal
and how the various methods/policy that we been studying theoretically are applied in
business.
With the globalization process, the role of Trade Finance and Credit has undergone a sea
change and it is a major profit center for better performing banks.
Credit operations have become more significant and complex today than what it was few
years back. The role played by the technology and the rapid changes in the financial sector
cannot be ascertained. The role of information technology is pivotal particularly because
unless informational expectations are clarified and met, Trade and Credit operations cannot
be made efficient in operations.
Credit provided by the banks is an important source of finance for the corporate. But the bank
has to check the acceptability of the corporate before they can sanction the loan to it. Along
with this, the assessment of the credit needs of the corporate also has to be done by the bank.
This entire process is called the credit appraisal process of the bank.
The bank then decides whether to sanction the loan to the corporate or not. If the loan is to be
sanctioned then what rate of interest is to be provided to the corporate is decided based on the
risk rating of the corporate and a host of other subjective factors.
This process of credit appraisal is to be carried out at the time of initial entry of a corporate to
the bank as also the consequent periodic reviews or renewals to make sure that the credit is
given to the business which is creditworthy and in limits as per the needs of the business.
Bank of India has steadily been growing over the last many years. The financial turmoil has
impacted the bank, the credit for which goes to the strict Credit Appraisal issuing procedure.
This helps the bank to keep its NPA value at a minimum. The NPA of the firm has been
declining over the years and this year it was just 1.47% of total advances. This is a very
healthy figure and shows how effective the bank is in its credit management.
108
5.00%
4.50% 4.50%
4.00%
3.50%
3.00%
2.50%
2.77%
Column3
2.00%
1.50%
1.49%
1.00%
0.74%
0.50%
0.00%
2004
2005
2006
1.47%
1.31%
2007
0.91%
0.52%
2008
0.44%
2009
2010
2011
2012
To sum up, the paradigm shift in the risk exposure levels of the financial institutions, has
definitely led to Credit Appraisal assuming a center stage. Undoubtedly all financial
institutions need to perform Credit Appraisal. But to have a proper Credit Appraisal operation
in place, requires a thorough understanding of the underlying factors. Such an understanding
will enable the financial institution to identify and unbundle the risks and further aid in
adopting and developing appropriate risk management models to manage risks and thereby
making the process of Credit Appraisal a success.
Thus we can say that the bank, given its resources, can occupy a better place in the near
future, all it needs is a broader perspective and the right attitude to make maximum use of its
resources.
Recommendations
Bank of India has been in the banking sector for years, thus the products and services offered
in Trade finance and Credit Appraisal Process have developed to a great extent: it is almost
flawless.
But some recommendations have been provided which are as follows –
109
Credit Appraisal
The new credit rating models that have recently come need to be developed further so
as to increase their accuracy. This will help the bank immensely in the future.
Usually, the review of the account for “AAA”, “AA” and “A” rated companies is once
in a year. The review and consequently the credit appraisal of the account for the “A”
rated companies should be done at a period less than a year, maybe once every 9
months. This is because the “A” rated accounts are at a relatively higher risk than the
“AAA” or the “AA” rated account
The manual process of Credit Appraisal should be automated to considerable effect.
The Credit Appraisal process should be more organized, the repetitive process should
be made to minimize and thus helping to make the process faster.
Bank of India should give more concession to infrastructure sector. Especially to
power, road and ports as it is need of the hour.
The bank needs to work in depth market study for projects with lower credit ratings to
be able to identify them as valuable customers.
Key Concerns for the Bank of India
Bank is increasing its international operations with some of its branches in high-risk
countries. Any adverse event in these countries could lead to negative impact on
bank's business and profitability.
Due to rising inflation, RBI has been following stringent credit norms leading to rise
in cost of funds and slower credit growth for banks. This will put additional pressure
on profitability of bank.
Banks are considered to be barometer of economy and have been major beneficiary of
current economic boom. Any significant downturn in economy could affect bank
adversely.
Bank of India needs to enhance their IT implementation in comparison with the
private players.
Practical aspect of Learning from Bank of India
The experience at the Bank of India, Noida Branch in one of the largest Public Sector bank
was a fulfilling one. During my time here I got to understand the intricacies involved in
Corporate Banking.
110
At Bank of India, Noida Branch I got the in depth study of the Corporate Banking
operations at the bank. I had the chance to get exposure to the various trade finance
products and services offered. The new trends and opportunities lying ahead for the
bank were also studied.
Also, I got a practical understanding of the Credit Appraisal process followed at Bank
of India by analyzing the real-time proposals being worked at Bank of India. The
Credit Policy helped to understand the various regulations followed at Bank of India.
The Credit Rating system gives an insight to the various risk factors considered by
Bank of India and also the risk management strategies followed at Bank of India.
I also got an exposure to forex exchange transactions. I have learned how forward
contacts are booked, how payments are received and made,how the communication is
made with overseas banks.
I found that summer training project provides a lot of learning opportunities. I gained
a lot of knowledge about the practical aspect of fieldwork.
Observing and learning how to deal with clients and how to solve their queries was an
amaing experience.
My exposure to the outer world through my training had given me a chance to relate
my theoretical knowledge with its practical applicability.
I have become more confident and I have also improved on my sense of appreciation.
In the end, the environment at the Bank was very helpful in intellectual development.
Annexure
BALANCE SHEET OF BANK OF INDIA (As on 31st march
2010,2011,2012)
31.03.10
31.03.11
31.03.12
CAPITAL AND
LIABILITIES:
Total Share Capital
525.91
547.22
574.52
Equity Share Capital
525.91
547.22
574.52
0
0
0
Share Application Money
111
Preference Share Capital
0
0
0
12275.46
15423.99
19153.57
1428.62
1319.47
1233.7
14229.99
17290.68
20961.79
229761.94
298885.81
318216.03
22399.9
22021.38
32114.22
252161.84
320907.19
350330.25
8574.63
12974.69
13243.43
274966.46
351172.56
384535.47
Cash And Balances With RBI
15602.62
21782.43
14986.71
Balances With Banks,Money
At Call
15627.51
15527.56
19724.55
168490.71
213096.18
248833.34
Investments
67080.18
85872.42
86753.59
Gross Block
3790.82
4020.14
4237.8
Accumulated Depreciation
1504.07
1654.19
1466.21
Net Fixed Assets
2286.75
2365.95
2771.59
65.07
114.8
48.63
Other Assets
5813.62
12413.22
11465.69
Total Assets
274966.46
351172.56
384535.47
Reserves
Revaluation Reserves
Net Worth
Deposits
Borrowings
Total Debt
Other Liabilities And
Provisions
Total Liabilities
ASSETS:
Advances
Capital Work In Progress
112
PROFIT AND LOSS A/C OF BANK OF INDIA(for the year ended 31st
march 2010,2011,2012)
31.03.10
31.03.11
31.03.12
INCOME:
Interest Earned
17878
21751.7
28480.7
Other Income
2616.64
2641.77
3321.17
Total Income
20494.6
24393.5
31801.8
12122
13941
20167.2
Operating Expenses
3667.81
5068.24
4940.66
Total Expenses
15789.9
19009.3
25107.9
Operating Profit
4704.78
5384.22
6693.95
Other Provision And
Contigencies
2210.93
1888.84
3116.43
752.78
1006.68
900
1741.07
2488.7
2677.52
Extraordinary Items
0
0
0
Profit B/F
0
0
0
1741.07
2488.7
2677.52
0
0
0
307.21
428.65
444.3
0
0
0
EXPENDITURE:
Interest Expended
Provision For Tax
Net Profit
Total
Preference Dividend
Equity Dividend
Corporate Dividend Tax
Pershare Data
113
Eps(Rs.)
33.11
45.48
46.6
70
70
70
243.75
292.26
450
625
669.4
Transfer To Other Reserve
862.42
1419.4
1542.12
Proposed Dividend/Transfer To
Govt
428.65
444.3
466
0
0
0
1741.07
2488.7
2677.52
Equity Dividend(%)
Book Value(Rs)
Appropriations
Transfer To Statutory Reserve
Balance C/F To Balance Sheet
Total
Client Application Form
Std. No. SSID -29
P.A 10,000 Forms – 2- 98
BANK OF INDIA
APPLICATION FORM FOR CREDIT FACILITIES
APPLICATION FORM FOR CREDIT FACILITIES OF OVER RS. 2 CRORE
114
Details about the Unit and its Management
Brief Description of the Industrial Activity
Funding Activities of the Unit
Repayment
Source of Funds (*)
Securit
y
Rate
Int.
of per month
Present O/s
Amount of Default
(in 000s of Rs.)
(if any)
(*) (Indicate sources of funds with name & address, e.g., banks/ financial institutions/others
(specify)
Arrears in Statutory Payments (if any)
Past Performance
Enclose certified copies of the
(a) Memorandum and articles of Association
(b) Audited Balance Sheet and Trading and Profit and Loss A/cs for the three years of
the promoter company.
(c) Copy of the agreement(s), if any. Entered into among the promoters.
115
Shareholding pattern
Employees Details
Details about associates firms
Technical feasibility (Please enclose the feasibility / project report)
Utilities (Give comments on requirement. availability/adequacy, qualitative aspects, etc.)
Details about the Effluent
Details about the quality control
Economic feasibility
Cost of Project
(Please furnish estimates of cost of project under the following heads.
Indicate the basis for arriving at the cost of project)
Means of Financing
(Please furnish details of sources of finance for meeting the cost under the following
heads)
Details about Promoter’s contribution to the project
Financial Assistance Required
116
Schedule of Implementation
(Please indicate the progress made so far in the implementation of the project and
furnish the schedule of implementation.
Future Projections
(To be given for the next five years)
Government Consents
Repayment Programme
Details of Securities to be offered: Primary and Secondary
(Working capital and term loan securities to be indicated separately)
Encl: Certified Xerox Copies of
a) Audited Balance Sheets with Trading And Profit & Loss account, for the last three
years.
b) Memorandum and Articles of Association, Certificate for Commencement of
Business in
case of limited companies…
c) Income Tax, Wealth Tax Returns and assessment orders for the last three years.
for the unit as well as proprietor/partners/promoters/directors.
117
d) Sales Tax Returns and assessment orders for the last three years.
BANK OF INDIA
Bio-data form
Details of existing fixed assets
Particulars of buildings proposed to be constructed
Particulars of machinery
Projections of performance, profitability and repayment
Cash flow statement
Projected balance sheet
Assessment of working capital requirements
Checklist for entrepreneurs
1.
BANK OF INDIA WELCOMES YOU TO apply for credit facilities to finance
your Small Scale Unit.
118
2.
We consider it as YOUR RIGHT to get loans from us for your viable and
creditworthy projects. Our simplified procedures will speed up the processing of your
application.
3.
Whilst we recognize your right, you have a corresponding RESPONSIBILITY to
earnestly
Implement your project and repay our dues as per terms agreed to at the time of sanction
Kindly follow the instruction given below :
i) Select appropriate application given bellow:
Form No. SSID 26 for loans upto Rs. 5 lakhs.
Form No. SSID 27 for loans upto Rs. 50 lakhs.
Form No. SSID 28 for loans upto Rs. 2 crores.
Form No. SSID 29 for loans above Rs. 2 crores.
ii) Please fill in all details sought in the form. If you wish to furnish any additional data
/information, it may be submitted as an annexure.
iii) Kindly ensure that all the documents enlisted in the application form are tendered
alongwith the form.
Generally, following documents are required for credit limits over Rs. 5 lakhs :
a) Balance sheets with Trading and Profits and Loss account, for the last three
years.
b) Memorandum and articles of Association, Certificate for Commencement
of Business.
c) Income Tax, Wealth Tax Returns and assessment orders for the last three
years.
d) Sales Tax Returns for the last three years.
e) Copy of sale/lease deed of land and building/factory shed/gala etc.
f) Copy of Government order converting the land into industrial land, if
applicable.
g) Copy of site plan of land and building, duly approved by local authority.
h) Copy of sanction of adequate water and power connection.
i) CMA data if ANNEXURE III and IV of the form not filled in.
j) Quotation/catalogues/invoice in respect of each machine to be purchased.
119
k) Assets & Liabilities Statement – (CBD23) duly filled in by all
partners/guaranters/
promoters – directors alongwith proof of ownership of assets listed therein.
l) Copy of Title deeds of Property proposed as a collateral security.
References
Bank of India, Branch Circulars, Ref: CBB, Sub: Credit Appraisal
Bank of India, Client Proposals, Ref: CBB, Sub: Advances Operations
Bank of India, Reference Manual for Corporate Banking Relationship Manager,
product Guide, Version – 4, Jan 2008
Bank of India, Branch Circular No. 101/84 dated 04.08.07, Sub: Exposure on Roads
and Highways under Public Private Partnership.
Bank of India, Credit Policy of the Bank for the Financial year 2007-2008
Mukherjee D. D., ed. 2006. Credit Appraisal, Risk Analysis and Decision Making,
Mumbai-SnowWhite.
120
Financial Accounting ,a managerial perspective by Ashok Banerjee.
www.bankofindia.com
www.moneycontrol.com
www.rbi.org.in
www.scribd.com
www.slideshare.com
www.sirfpaisa.com
www.sulekhab2b.com
121
122
The project undertaken is “Analysis of Credit Appraisal at Bank of India”. The credit
appraisal process is the scientific way of giving the credit to corporate client by analysing the
credit worthiness of the company through different parameters. This project will give an
insight to the procedure followed at Bank of India to assess the credit worthiness of the
borrower.
I did my internship with Bank of India which is located in Noida Sec -9. The major reason for
choosing the Banking industry was to understand the working in the banks and also to gain
knowledge about banking industry and how it is helping the economy.
Due to recent surge in industrialization, the Indian economy is booming. To provide more
impetus to the industries, the government is encouraging their foray into various industries. In
order to fund the projects, the corporate depend on the credit and trade services provided by
the banks.
In the changing trade scenario, India has come up as an emerging player. There are great
potentials and opportunities in the trading sector on the domestic and international sector. The
economic growth of any country is dependent on its Import and Export. Thus providing need
based Credit is one of the most important factor helps exporter to make export orders and
importers to make purchases.
As finance has a risk attached, thus we need to appraise the proponent before lending any
credit this process is called Credit Appraisal which checks the need of finance for the
business. It involves appraisal of the background of the proponent, commercial, technical and
financial appraisal. Then the Term Loan / Working Capital Assessment is done to find the
limit of finance required.
The project describes about the process of credit appraisal for two different industries from
the information required to the processes involved. The project also details about the credit
policy and the credit rating process. A practical formulation of the credit proposal has been
done to provide a better understanding of the subject.
1
Objectives
To work with an eminent Bank and to get a taste of corporate life.
To understand the working in the banks.
To bridge a gap between practical life and the theory that we have learnt in our
courses.
To understand the business and competitive environment in which Bank of India
operates.
To analyze and understand the financial position of Bank of India viz-a-viz its
competitors.
To study the policies and procedure for the Credit Appraisal for the Trade Credit.
2
Financial Overview
Business Mix reaches
569710crores,growth of
10.62%
Chapter 1
Net Profit shoots up by
8% from Rs.2488.7 crores
to Rs.2677.52 crores.
COMPANY PROFILE
Operating Profit up by
24.33% (Rs.
6693.95Crore) supported
by growth in net interest
income as well as other
income.
Advances grew by
16.77% to
248833.34crores
Net Interest Income rises
by 6.43% to Rs. 8313.5Cr
from Rs. 7810.7Cr,
despite challenging
conditions.
Net Interest Margin
reported 4.43%
3
BANK OF INDIA : COMPANY PROFILE
Bank of India (BoI) is a state-owned commercial bank with headquarters in Mumbai.
Government-owned since nationalization in 1969, It is India's 4th largest PSU bank,
after State Bank of India,Punjab National Bank and Bank of Baroda. Bank of India was
founded on September 7, 1906 by a group of eminent businessmen from Mumbai. In July
1969 Bank of India was nationalized along with 13 other banks.
It has 4157 branches including 29 branches outside India, and about 1679 ATMs. BoI is a
founder member of SWIFT (Society for Worldwide Inter Bank Financial
Telecommunications), which facilitates provision of cost-effective financial processing and
communication services. The Bank completed its first one hundred years of operations on 7
September 2006.
The Bank's association with the capital market goes back to 1921 when it entered into an
agreement with the Bombay Stock Exchange (BSE) to manage the BSE Clearing House. It is
an association that has blossomed into a joint venture with BSE, called the BOI Shareholding
Ltd. to extend depository services to the stock broking community.
Beginning with a paid-up capital of Rs.50 lakh and 50 employees, the Bank has made a rapid
growth over the years. It has evolved into a mighty institution with a strong national presence
and sizable international operations. In business volume, Bank of India occupies a premier
position
among
the
nationalized
banks.
Bank of India has several firsts to its credit. The Bank has been the first among the
nationalised banks to establish a fully computerised branch and ATM facility at the
Mahalaxmi Branch at Mumbai way back in 1989. It pioneered the introduction of the Health
Code System in 1982, for evaluating/ rating its credit portfolio. Bank of India was the first
Indian Bank to open a branch outside the country, at London, in 1946, and also the first to
open a branch in Europe, Paris in 1974. The Bank has sizable presence abroad, with a
network of 29 branches (including three representative office ) at key banking and financial
centres viz. London, New York, Paris, Tokyo, Hong-Kong, and Singapore.
4
HISTORY OF BANK OF INDIA
1906: BoI founded with Head Office in Bombay.
1921: BoI entered into an agreement with the Bombay Stock Exchange to manage its
clearing house.
1946: BoI opened a branch in London, the first Indian bank to do so. This was also
the first post-WWII overseas branch of any Indian bank.
1950: BoI opened branches in Tokyo and Osaka.
1951: BoI opened a branch in Singapore.
1953: BoI opened a branch in Kenya and another in Uganda.
1953 or 54: BoI opened a branch in Aden.
1955: BoI opened a branch in Tanganyika.
1960: BoI opened a branch in Hong Kong.
1962: BoI opened a branch in Nigeria.
1967: The Government of Tanzania nationalized BoI's operations in Tanzania and
folded them into the government-owned National Commercial Bank, together with those
of Bank of Baroda and several other foreign banks.
1969: The Government of India nationalized the 14 top banks, including Bank of
India. In the same year, the People's Democratic Republic of Yemen nationalized BoI's
branch in Aden, and the Nigerian and Ugandan governments forced BoI to incorporate its
branches in those countries.
1970: National Bank of Southern Yemen incorporated BoI's branch in Yemen,
together with those of all the other banks in the country; this is now National Bank of
Yemen. BoI was the only Indian bank in the country.
1972: BoI sold its Uganda operation to Bank of Baroda.
1973: BoI opened a rep in Jakarta.
5
1974: BoI opened a branch in Paris. This was the first branch of an Indian bank in
Europe.
1976: The Nigerian government acquired 60% of the shares in Bank of India
(Nigeria).
1978: BoI opened a branch in New York.
1970s: BoI opened an agency in San Francisco.
1980: Bank of India (Nigeria) Ltd, changed its name to Allied Bank of Nigeria.
1986: BoI acquired Paravur Central Bank (Karur Central Bank or Parur Central Bank)
in Kerala in a rescue.
1987: BoI took over the three UK branches of Central Bank of India (CBI). CBI had
been caught up in the Sethia fraud and default and the Reserve Bank of Indiarequired it to
transfer its branches.
2003: BoI opened a representative office in Shenzhen.
2005: BoI opened a representative office in Vietnam.
2006: BoI plans to upgrade the Shenzen and Vietnam representative offices to
branches, and to open representative offices in Beijing, Doha, and Johannesburg. In
addition, BoI plans to establish a branch in Antwerp and a subsidiary in Dar-es-Salaam,
marking its return to Tanzania after 37 years.
2007: BoI acquired 76 percent of Indonesia-based PT Bank Swadesi.
2011: BoI opened a fully owened Subsidairay in Auckland, New Zealand on 6th
October,2011 (Bank of India (New Zealand) Ltd.)
The Bank’s Mission
6
"To provide superior, proactive banking services to niche markets
globally, while providing cost-effective, responsive services to
others in our role as a development bank, and in so doing, meet the
requirements of our stakeholders".
The Bank’s Vision
"To become the bank of choice for corporates, medium
businesses and upmarket retail customers and to provide cost
effective developmental banking for small business, mass
market and rural markets"
Loan Product
PRODUCT AND SERVICES
Deposit Product
Cash credit
Overdraft
Loan against Bank Deposit
Loan against NSC, KVP, LIC
policies etc.
Agricultural Loan
SSI Finance
Star SSI Supreme Scheme,
Priyadarshini Scheme etc.
Star Home Loan
Star Personal Loan
Star Mortgage Loan
Star IPO
Star Autofin
Star Education Loan
Medimobile Loan
Gold Loan
Commercial loans
Bullion Banking
Export Finance
Investment &
Insurance
Savings Bank Account
BOI Savings Plus
Current Deposit Account
Double Benefit Deposit
Fixed Deposit
Quarterly
Certificate
Income
Monthly
Certificate
Income
Recurring Deposit
Foreign Currency Deposit
7
Mutual
Funds
Bonds
Insurance
Equity And
Derivatives
Star gold
coin
Channel Credit
Discount Future Cash Flows
Foreign Currency Swing limits
Exporter’s Gold Card
Dual Currency Swing Limit
Trade Finance
Bill Finance
Bank Guarantee
NRI Loan
Scheme
FCNR Deposit
Floating
Scheme
Rate
Deposit
Deposit Scheme for Senior
Citizens
Special Deposit Product
for High Value Deposit
Customer
Cards
Credit Card
Debit Card
-------------------------------Forex services
------------------------------- Product And Services
Trade Services
Forex Service Branch Locater
Online Services
Star Connect Internet
Banking Services
BOI STAR ePay
Star e-Remit Service
Star Shar(e) trade
e-Payment of Central
Excise & Service Tax
DGFT Online e Payment
Online Booking of Indian
Airlines & RailwaysTicket
e-Payment of Direct Taxes
Online Interbank Fund
Transfer
8
Access To Bank
Internet
Banking
Mobile
Banking
ATM
Phone
Banking
Statements
Chapter 2
INDUSTRY ANALYSIS
BANKING INDUSTRY ANALYSIS
The Banking industry comprises of segments that provide financial assistance and advisory
services to its customers by means of varied functions such as commercial banking,
wholesale banking, personal banking, internet banking, mobile banking, credit unions,
investment banking and the like.
9
With years, banks are also adding services to their customers. The Indian banking industry is
passing through a phase of customers market. The customers have more choices in choosing
their banks. A competition has been established within the banks operating in India.
With stiff competition and advancement of technology, the services provided by banks have
become more easy and convenient. The past days are witness to an hour wait before
withdrawing cash from accounts or a cheque from north of the country being cleared in one
month in the south.
Banks are among the main participants of the financial system in India. Banking offers
several facilities & Opportunities. This section provides comprehensive and updated
information, guidance and assistance in all areas of banking in India.
Bank of Hindustan, set up in 1870, was the earliest Indian Bank . Banking in India on modern
lines started with the establishment of three presidency banks under Presidency Bank's act
1876 i.e. Bank of Calcutta, Bank of Bombay and Bank of Madras.
The commercial banking structure in India consists of: Scheduled Commercial Banks &
Unscheduled Banks. Banking Regulation Act of India, 1949 defines Banking as "accepting,
for the purpose of lending or investment of deposits of money from the public, repayable on
demand or otherwise and withdrawable by cheques, draft, order or otherwise."
The arrival of foreign and private banks with their superior state-of-the-art technology-based
services pushed Indian Banks also to follow suit by going in for the latest technologies so as
to meet the threat of competition and retain customer base.
The evolution of IT services outsourcing in the Indian banks has presently moved on to the
level of Facilities Management (FM). Banks now looking at business process management
(BPM) to increase returns on investment, improve customer relationship management (CRM)
and employee productivity.
For, these entities sustaining long-term customer relationship management (CRM) has
become a challenge with almost everyone in the market with similar products.
Historical Background
The first bank in India, though conservative, was established in 1786. From 1786 till today,
the journey of Indian Banking System can be segregated into three distinct phases. They are
as mentioned below:
· PHASE I - Early phase from 1786 to 1969 of Indian Banks
10
· PHASE II - Nationalization of Indian Banks and up to 1991
· PHASE III - Indian Financial & Banking Sector Reforms after 1991.
PHASE I:
The General Bank of India was set up in the year 1786. Next came Bank of Hindustan and
Bengal Bank. The East India Company established Bank of Bengal (1809), Bank of Bombay
(1840) and Bank of Madras (1843) as independent units and called it Presidency Banks.
These three banks were amalgamated in 1920 and Imperial Bank of India was established
which started as private shareholders banks, mostly Europeans shareholders. During the first
phase the growth was very slow and banks also experienced periodic failures between 1913
and 1948. There were approximately 1100 banks, mostly small. To streamline the functioning
and activities of commercial banks, the Government of India came up with The Banking
Companies Act, 1949 which was later changed to Banking Regulation Act 1949 as per
amending Act of 1965 (Act No. 23 of 1965). Reserve Bank of India was vested with
extensive powers for the supervision of banking in India as the Central Banking Authority.
During those day’s public has lesser confidence in the banks. As an aftermath deposit
mobilization was slow. Abreast of it the savings bank facility provided by the Postal
department was comparatively safer. Moreover, funds were largely given to the traders.
PHASE II:
Government took major steps in this Indian Banking Sector Reform after independence. In
1955, it nationalized Imperial Bank of India with extensive banking facilities on a large scale
especially in rural and semi-urban areas. Second phase of nationalization Indian Banking
Sector Reform was carried out in 1980 with seven more banks. This step brought 80% of the
banking segment in India under Government ownership.
The following are the steps taken by the Government of India to Regulate Banking
Institutions in the Country:
· 1949: Enactment of Banking Regulation Act.
· 1955: Nationalization of State Bank of India.
· 1959: Nationalization of SBI subsidiaries.
· 1961: Insurance cover extended to deposits.
· 1969: Nationalization of 14 major banks.
· 1971: Creation of credit guarantee corporation.
· 1975: Creation of regional rural banks.
· 1980: Nationalization of seven banks with deposits over 200 crore.
11
After the nationalization of banks, the branches of the public sector bank India raised to
approximately 800% in deposits and advances took a huge jump by 11,000%.Banking in the
sunshine of Government ownership gave the public implicit faith and immense confidence
about the sustainability of these institutions.
PHASE III
This phase has introduced many more products and facilities in the banking sector in its
reforms measure. In 1991, under the chairmanship of M Narasimham, a committee was set up
by his name which worked for the liberalisation of banking practices.
The country is flooded with foreign banks and their ATM stations. Efforts are being put to
give a satisfactory service to customers. Phone banking and net banking is introduced. The
entire system became more convenient and swift. The financial system of India has shown a
great deal of resilience. It is sheltered from any crisis triggered by any external
macroeconomics shock as other East Asian Countries suffered. This is all due to a flexible
exchange rate regime, the foreign reserves are high, the capital account is not yet fully
convertible, and banks and their customers have limited foreign exchange exposure
Banking industry is the back bone for growth of any economy. The journey of Indian
Banking Industry has faced many waves of economic crisis. Recently, we have seen the
economic crisis of US in 2008-09 and now the European crisis. The general scenario of the
world economy is very critical. It is the banking rules and regulation framework of India
which has prevented it from the world economic crisis
STRUCTURE OF INDIAN BANKING INDUSTRY
Banking Industry in India functions under the sunshade of Reserve Bank of India - the
regulatory, central bank.In India the banks are being segregated in different groups. Each
group has their own benefits and limitations in operating in India. Each has their own
dedicated target market. Few of them only work in rural sector while others in both rural as
12
well as urban. Many even are only catering in cities. Some are of Indian origin and some are
foreign players.
Banking System in India
Reserve bank of India (Controlling Authority)
Development Financial institutions
IFCI IDBI ICICI NABARD NHB
Commercial
Banks
Banks
IRBI
SIDBI
Regional Rural
Land Development
Banks
Banks
Public Sector Banks
SBI Groups
EXIM Bank
Cooperative
Banks
Private Sector Banks
Nationalized Banks
Indian Banks
Foreign Banks
Banking Industry mainly consists of:
• Commercial Banks
• Co-operative Banks
SCHEDULED BANKS IN INDIA
(1) Scheduled Commercial Banks
Public Sector Banks
Private Sector
Foreign Banks In
13
Regional Rural
Banks
(26)
India
(25)
Nationalized
Bank
Other
Public
Sector
Banks
(IDBI)
SBI And Its
Associates
Banks
(29)
(95)
Old Private
Banks
New Private
Banks
(2) Scheduled Cooperative Banks
Scheduled Urban Cooperative Banks
Scheduled State Cooperative Banks
Public Sector Banks
Public sector banks are those banks which are owned by the Government. The Govt. runs
these Banks. In India 14 banks were nationalized in 1969 & in 1980 another 6 banks were
also nationalized. Therefore in 1980 the number of nationalized bank 20. At present there are
total 26 Public Sector Banks in India (As on 26-09-2009). Of these 19 are nationalised banks,
14
6(STATE BANK OF INDORE ALSO MERGED RECENTLY) belong to SBI & associates
group and 1 bank (IDBI Bank) is classified as other public sector bank. Welfare is their
primary objective.
Almost 80% of the business are still controlled by Public Sector Banks (PSBs). PSBs are still
dominating the commercial banking system. Shares of the leading PSBs are already listed on
the stock exchanges
Nationalised banks
Allahabad Bank
Andhra Bank
Bank Of Baroda
Bank Of India
Bank Of Maharastra
Canara Bank
Central Bank Of India
Corporation Bank
Dena Bank
Indian Bank
Indian Overseas Bank
Oriental Bank Of
Commerce
Punjab & Sind Bank
Punjab National Bank
Syndicate Bank
UCO Bank
Union Bank Of India
United Bank Of India
Vijaya Bank
Other
Public
Sector
Banks
SBI & its Associates
IDBI
(Industrial
Developmen
t Bank Of
India)Ltd.
State Bank of India
State Bank of Hyderabad
State Bank of Mysore
State Bank of Patiala
State Bank of Travancore
State Bank of Bikaner And
Jaipur
(State Bank of Saurastra merged with
SBI in the year 2008 and State Bank of
Indore In 2010)
Private Sector Banks
The RBI has given licenses to new private sector banks as part of the liberalisation process.
15
These banks are owned and run by the private sector. Various banks in the country such as
ICICI Bank, HDFC Bank etc. An individual has control over there banks in preparation to the
share of the banks held by him.
Private banking in India was practiced since the beginning of banking system in India. The
first private bank in India to be set up in Private Sector Banks in India was IndusInd Bank. It
is one of the fastest growing Bank Private Sector Banks in India. IDBI ranks the tenth largest
development bank in the world as Private Banks in India and has promoted world class
institutions in India.
The first Private Bank in India to receive an in principle approval from the Reserve Bank of
India was Housing Development Finance Corporation Limited, to set up a bank in the private
sector banks in India as part of the RBI's liberalization of the Indian Banking Industry. It was
incorporated in August 1994 as HDFC Bank Limited with registered office in Mumbai and
commenced operations as Scheduled Commercial Bank in January 1995. ING Vysya, yet
another Private Bank of India was incorporated in the year 1930
Private sector banks have been subdivided into following 2 categories:Old
Private Sector Banks
Bank of Rajasthan Ltd.
Catholic Syrian Bank Ltd.
City Union Bank Ltd.
Dhanalakshmi Bank Ltd.
Federal Bank Ltd.
ING Vysya Bank Ltd.
Jammu and Kashmir Bank
Ltd.
Karnataka Bank Ltd.
Karur Vysya Bank Ltd.
Lakshmi Vilas Bank Ltd.
Nainital Bank Ltd.
Ratnakar Bank Ltd.
SBI Commercial and
International Bank Ltd.
South Indian Bank Ltd.
Tamilnad Mercantile Bank
Ltd.
United Western Bank Ltd.
New Private Sector Banks
Foreign Banks In India
16
Bank of Punjab Ltd. (since merged
with Centurian Bank)
Centurian Bank of Punjab (since
merged with HDFC Bank)
Development Credit Bank Ltd.
HDFC Bank Ltd.
ICICI Bank Ltd.
IndusInd Bank Ltd.
Kotak Mahindra Bank Ltd.
Axis Bank (earlier UTI Bank)
Yes Bank Ltd.
Foreign banks have been operating in India for decades with a few of them having operations
in India for over a century. The number of foreign bank branches in India has increased
significantly in recent years since RBI issued a number of licenses - well beyond the
commitments made to the World Trade Organisation. The presence of foreign banks in India
has benefited the financial system by enhancing competition, resulting in higher efficiency.
There has also been transfer of technology and specialised skills which has had some
"demonstration effect" as Indian banks too have upgraded their skills, improved their scale of
operations and diversified into other activities. At a time when access to foreign currency
funds was a constraint for the Indian companies, the presence of foreign banks in India
enabled large Indian companies to access foreign currency resources from the overseas
branches of these banks. Also with the presence of foreign banks, as borrowers in the money
market and their operation in the foreign exchange market has resulted in the creation and
deepening of the inter-bank money market. Now, it is the challenge for the supervisors to
maximize the advantages and minimize the disadvantages of the foreign banks' local presence
ABN AMRO Bank N.V.
HSBC (Hongkong &
Shanghai Banking
Corporation)
Abu Dhabi Commercial
Bank Ltd
JPMorgan Chase Bank
American Express Bank
Krung Thai Bank
Antwerp Diamond Bank
Mashreq Bank
Arab Bangladesh Bank
Mizuho Corporate Bank
Bank International
Indonesia
Oman International Bank
Bank of America
Shinhan Bank
Bank of Bahrain & Kuwait
Société Générale
Bank of Ceylon
Sonali Bank
Bank of Nova Scotia
Standard Chartered Bank
Bank of Tokyo Mitsubishi
UFJ
State Bank of Mauritius
17
Barclays Bank
BNP Paribas
Calyon Bank
ChinaTrust Commercial
Bank
Citibank
DBS Bank
Deutsche Bank
Cooperative banks in India
The Cooperative bank is an important constituent of the Indian Financial System, judging by
the role assigned to co operative, the expectations the co operative is supposed to fulfil, their
number, and the number of offices the cooperative bank operate. Though the co operative
movement originated in the West, but the importance of such banks have assumed in India is
rarely paralleled anywhere else in the world. The cooperative banks in India plays an
important role even today in rural financing. The businessess of cooperative bank in the urban
areas also has increased phenomenally in recent years due to the sharp increase in the number
of primary co-operative banks.
Co operative Banks in India are registered under the Co-operative Societies Act. The
cooperative bank is also regulated by the RBI. They are governed by the Banking Regulations
Act 1949 and Banking Laws (Co-operative Societies) Act, 1965.
Rural banks in India
Rural banking in India started since the establishment of banking sector in India. Rural
Banks in those days mainly focussed upon the agro sector. Regional rural banks in India
penetrated every corner of the country and extended a helping hand in the growth process of
the country.
SBI has 30 Regional Rural Banks in India known as RRBs. The rural banks of SBI is spread
in 13 states extending from Kashmir to Karnataka and Himachal Pradesh to North East. The
18
total number of SBIs Regional Rural Banks in India branches is 2349 (16%). Till date in rural
banking in India, there are 14,475 rural banks in the country of which 2126 (91%) are located
in remote rural areas.
Apart from SBI, there are other few banks which functions for the development of the rural
areas in India. Few of them are as follows.
Haryana State Cooperative Apex Bank Limited
The Haryana State Cooperative Apex Bank Ltd. commonly called as HARCOBANK plays a
vital role in rural banking in the economy of Haryana State and has been providing aids and
financing farmers, rural artisans, agricultural labourers, entrepreneurs, etc. in the state and
giving service to its depositors.
NABARD
National Bank for Agriculture and Rural Development (NABARD) is a development bank in
the sector of Regional Rural Banks in India. It provides and regulates credit and gives service
for the promotion and development of rural sectors mainly agriculture, small scale industries,
cottage and village industries, handicrafts. It also finance rural crafts and other allied rural
economic activities to promote integrated rural development. It helps in securing rural
prosperity and its connected matters.
Sindhanur Urban Souharda Co-operative Bank
Sindhanur Urban Souharda Co-operative Bank, popularly known as SUCO BANK is the first
of its kind in rural banks of India. The impressive story of its inception is interesting and
inspiring for all the youth of this country.
United Bank of India
United Bank of India (UBI) also plays an important role in regional rural banks. It has
expanded its branch network in a big way to actively participate in the developmental of the
rural and semi-urban areas in conformity with the objectives of nationalisation.
Syndicate Bank
Syndicate Bank was firmly rooted in rural India as rural banking and have a clear vision of
future India by understanding the grassroot realities. Its progress has been abreast of the
phase of progressive banking in India especially in rural banks.
Industry Segments
19
•
Industrial
Finance
Commercial
Banking
Investment
Banking
• Micro
Finance
Rural Banking
Wholesale
Banking
•
Internet
Banking
•
Mobile
Banking
Current trend in banking
Currently banking in India is generally fairly mature in terms of supply, product
range and reach-even though reach in rural India still remains a challenge for the private
sector and foreign banks. In terms of quality of assets and capital adequacy, Indian banks
are considered to have clean, strong and transparent balance sheets relative to other banks
in comparable economies in its region. The Reserve Bank of India is an autonomous body,
with minimal pressure from the government. The stated policy of the Bank on the Indian
Rupee is to manage volatility but without any fixed exchange rate-and this has mostly been
true.
With the growth in the Indian economy expected to be strong for quite some time especially
in its services sector-the demand for banking services, especially retail banking,
mortgages and investment services are expected to be strong. One may also expect M&As,
takeovers, and asset sales.
Currently, India has 88 scheduled commercial banks (SCBs) - 28 public sector banks (that is
with the Government of India holding a stake), 29 private banks (these do not have
government stake; they may be publicly listed and traded on stock exchanges) and 31
foreign banks. They have a combined network of over 53,000 branches and 17,000 ATMs.
According to a report by ICRA Limited, a rating agency, the public sector banks hold over 75
percent of total assets of the banking industry, with the private and foreign banks holding
18.2% and 6.5% respectively.
Growth trends
20
The growth of banking in the coming years is likely to be more qualitative than quantitative,
according to the report. Based on the projections made in the "India Vision 2020" prepared by
the Planning Commission and the Draft 10th Plan, the report forecasts that the pace of
expansion in the balance-sheets of banks is likely to decelerate
The Indian banking market is growing at an astonishing rate, with assets expected to reach
US$1.5 trillion by 2014. An expanding economy, middle class, and technological innovations
are all contributing to this growth. The country’s middle class accounts for over 352 million
people. In correlation with the growth of the economy, rising income levels, increased
standard of living, and affordability of banking products are promising factors for continued
expansion. The Indian banking Industry is in the middle of an IT revolution, focusing on the
expansion of retail and rural banking. Players are becoming increasingly customer-centric in
their approach, which has resulted in innovative methods of offering new banking products
and services. Banks are now realizing the importance of being a big player and are beginning
to focus their attention on mergers and acquisitions to take advantage of economies of scale
and/or comply with Basel II regulation. Indian banking industry assets are expected to reach
US$1.5 trillion by 2014 and are poised to receive a greater infusion of foreign capital. The
banking industry should focus on having a small number of large players that can compete
globally rather than having a large number of fragmented players.
Technology In Banking
In the six decades of independence banking has evolved in four different phases. During the
fourth phase important initiatives were taken with regard to improve the banking system. The
entry of foreign banks resulted in a paradigm shift in the way banking was done in India. The
arrival of foreign banks and private banks with there superior state of the art technology
pushed the Indian banks to adopt latest technology in market, so that they could retain there
customer base.
Information technology has been used under two different avenues in banking. One is
communication and connectivity and other is Business process reengineering. Information
technology enables sophisticated product development, better market infrastructure,
implementation of reliable techniques for control of risks and help the financial
intermediaries reach geographically distant and different market.
In India banks as well as other financial entities entered the world of information technology
and with Indian financial network(INFINET). INFINET, a wide area satellite network (WAN)
using VSAT(very small aperture technology) was jointly set up by Reserve Bank of India and
Institute for Development and research for banking in1999. INFINET which was initially
comprised only public sector banks was opened for participation by other categories of
members. The information technology act 2000 has given legal recognition for creation,
transmission, and retention of electronic data to be treated as a valid proof in the court of law
21
The Reserve Bank of India has assigned priority to the up gradation of technology in the
banks. Substantial progress has been made for developing a modern, efficient, integrated and
secure payment and settlement system for the financial service sectors. Modernization of
clearing and settlement system through MICR based cheque clearing, popularizing electronic
clearing services (ECS) and integration of RBI-EFT scheme with funds transfer schemes of
bank, introduction of centralized fund management system (CFMS) are significant milestones
in this regard.
The coverage of electronic clearing services has been significantly effective to encourage non
paper based fund and develop a centralized facility for effective payment. The scheme for
electronic fund transfer operated by the reserve bank has been augmented and now it is
present in 13 cities. The centralized fund management system (CFMS) which would enable
banks to obtain account wise and centre wise position of their balances has been implemented
in a phased manner from November 2001.
Membership of INFINET has been opened to all the banks in addition to those in the public
sector banks. At the base of all the interbank message transfers using the INFINET is the
structured financial messaging system (SFMS). It would serve as a secure communication
carrier with templates for intra and interbank messages in a strict message format that will
facilitate straight through messaging. All the interbank messages will be stored and switched
to central hub at Hyderabad while the intra bank messages will stored in the bank gateway.
Security standards of SFMS will match the international standards.
Information technology has immense untapped potential in banking. Strengthening the
information technology in banks could improve the effectiveness of asset liability of banks.
Building up of a related data base would strengthen and enhance the forecasting of liquidity
of banks at the branch level. This could enhance the risk management capabilities of banks.
Legal/ Regulatory Issues Related To Banking
Banks works under various legal frameworks most important of them are, the Banking
regulation act 1949, Basel II norms, RBI act, Negotiable Instruments act.
Banking Regulation Act 1949
The banking regulation act was passed as banking companies act and it came into force in
16/3/49. Subsequently it was changed to Banking regulation act on 1/3/66.
22
BASEL II Norms
Basel II is the second of the Basel accords which are recommendation on the banking laws
and regulations issued by banking committee on banking supervision. The purpose of Basel II
norms is to create international standards that banking regulators can use when creating
regulations about how much capital does banks needs to put aside to guard against the types
of financial and operational risks banks face. Advocates of Basel II believe that such an
international system can help protect the international financial system from many types of
problem that arise should a bank or a series of banks collapse. In practice Basel II attempts to
accomplish this by setting up rigorous risks and capital management requirement designed to
ensure that the banks hold capital reserves appropriate to the risks the banks exposes itself to
through its investment and lending practices. Generally speaking this rules says that the
greater the risk the bank exposes itself, the greater the capital bank requires to safeguard its
solvency and overall economic stability.
Opportunities and Challenges for Players
The bar for what it means to be a successful player in the sector has been raised. Four
challenges must be addressed before success can be achieved. First, the market is seeing
discontinuous growth driven by new products and services that include opportunities in
credit cards, consumer finance and wealth management on the retail side, and in fee-based
income and investment banking on the wholesale banking side.
These require new skills in sales & marketing, credit and operations. Second, banks will no
longer enjoy windfall treasury gains that the decade-long secular decline in interest rates
provided. This will expose the weaker banks. Third, with increased interest in India,
competition from foreign banks will only intensify. Fourth, given the demographic shifts
resulting from changes in age profile and household income, consumers will increasingly
demand enhanced institutional capabilities and service levels from banks.
23
Competition Analysis
Name
Market Cap.(Rs.
Crores)
Net Interest
Income
Net
Profit
1,44,291.42
1,06,521.45
11,707.2
9
Bank of Baroda
28,623.80
29,673.72
5,006.96
PNB
26,098.10
36,428.03
4,884.20
Bank of India
19,999.04
28,480.67
2,677.52
Canara Bank
18,280.40
30,850.62
3,282.72
IDBI Bank
11,563.20
23,369.93
2,031.61
SBI
24
Union Bank
11,451.42
21,144.28
1,787.13
Indian Bank
7,518.83
12,231.32
1,746.97
Oriental Bank
7,044.57
15,814.88
1,141.56
IOB
6,969.75
17,897.08
1,050.13
Allahabad Bank
6,852.86
15,523.28
1,866.79
Corporation Ban
6,496.95
13,017.78
1,506.04
Andhra Bank
6,345.64
11,338.73
1,344.67
Syndicate Bank
6,097.75
15,268.35
1,313.39
Central Bank
5,922.05
19,149.50
533.04
UCO Bank
5,191.40
14,632.37
1,108.67
Dena Bank
3,372.81
6,794.13
803.14
Bank of Mah
3,012.82
7,213.96
430.83
Vijaya Bank
2,874.13
7,988.12
580.99
State B Bikaner
2,576.35
6,291.36
652.03
State Bnk Tr
2,469.50
6,828.76
510.46
United Bank
2,303.17
7,961.09
632.53
State Bnk My
2,244.99
5,078.44
369.15
Punjab & Sind
1,621.89
6,474.50
451.28
UTI – Gold
391.38 -
The above table reveals the data for market capitalization, Net Profit, and Net Income of the
PSU banks. This clearly shows that Bank of India ranks 4th among all other PSU banks in
terms of profitability, market cap. and Net Interest Income.
25
Market share
27%
SBI
Bank of Baroda
43%
PNB
Bank of India
Canara Bank
IDBI Bank
4%
Others
5%
6%
8%
8%
The above pie chart depicts the market share for PSU banks. It clearly indicates that SBI is
the leader among all the PSU banks holding 42.5% market share,while Bank of Baroda stood
2nd in number holding 8% market share. Hence from the above chart we can say that the
market share of Bank of India is 6%.
Competitive Forces Model
(Porter’s Five Force Model)
26
(3)
The threat of substitute
product is
very high like credit unions and investment
houses. There are other substitutes as well
banks like mutual funds, stocks, government
securities, debentures, gold, real estate etc.
Potential Entrants is high as
development financial institutions as well as
private and Foreign Banks have entered in a big
way
(2)
(1)
Rivalry among existing firms
has increased with liberalization. New
products and improved customer services is
the focus.
(5)
Bargaining power of the supplier
is
high as corporate can raise funds easily due
to high Competition.
is high. With the new financial instruments they
are asking higher return on the investments.
(4)
Bargaining power of buyers
1. Rivalry among existing firms
With the process of liberalization, competition among the existing banks has increased.
Each bank is coming up with new products to attract the customers and tailor made Loans
27
are provided. The quality of services provided by banks has improved drastically.
2. Potential Entrants
Previously the Development Financial Institutions mainly provided project finance
and development activities. But they now entered into retail banking which has resulted
into stiff competition among the exiting players.
3. Threats from Substitutes
Competition from the non-banking financial sector is increasing rapidly. The threat of
substitute product is very high like credit unions and in investment houses. There are other
substitutes as well banks like mutual funds, stocks, government securities, debentures,
gold, real estate etc.
4. Bargaining Power of Buyers
Corporate can raise their funds through primary market or by issue of GDRs, FCCBs. As a
result they have a higher bargaining power. Even in the case of personal finance, the
buyers have a high bargaining power. This is mainly because of competition.
5. Bargaining Power of Suppliers
With the advent of new financial instruments providing a higher rate of returns to
the investors, the investments in deposits is not growing in a phased manner. The
suppliers demand a higher return for the investments.
6. Overall Analysis
The key issue is how banks can leverage their strengths to have a better future. Since the
availability of funds is more and deployment of funds is less, banks should evolve new
products and services to the customers. There should be a rational thinking in sanctioning
Loans, which will bring down the NPAs. As there is a expected revival in the Indian
economy Banks have a major role to play. Funding corporate at a low cost of capital is a
special requisite.
Market Analysis
28
The Product Mix:
The banks primarily deal in services and therefore, the formulation of product mix is required
to be in the face of changing business environmental conditions. The changing psychology,
the increasing expectations, the rising income, the changing lifestyles, the increasing
domination of foreign banks and the changing needs and requirements of customers at large
make it essential that they innovate their service mix and make them of world class. Against
this background, we find it significant that the banking organizations minify, magnify
combine and modify their service mix.
Product Portfolio:
The bank professionals while formulating the product mix need to assign due weight-age to
the product portfolio. By the concept product portfolio, emphasis is on including the different
types of services/ schemes found at the different stages of the product life cycle. The portfolio
denotes a combination or an assortment of different types of products generating more or less
in proportion to their demand. The quality of product portfolio determines the magnitude of
success. It is excellence of bank professionals that help them in having a sound product
portfolio.
We find the composition of a family sound, if members of all the age groups are given due
place. Like this, the composition or blending of a service mix is considered to be sound, if
well established and likely to be profitable schemes are included in the mix. The bank
professionals are supposed to perform the responsibility of composing the same. An
organization with a sound product portfolio gets a conducive environment and successes in
increasing the sensitivity of marketing decisions.
If the banks rely solely on their established services and schemes, the multidimensional
problems would crop up in the long run because when the well established services/schemes
would start saturating or generating losses, the commercial viability of banks would of
course, be questioned. It is in this context, that we find designing of a sound product portfolio
essential to an organisation. We can’t deny that the product portfolio of the foreign banks is
found sound since they keep their eyes moving. The innovation, diffusion, adoption and
elimination processes are taken due care. The public sector commercial banks need to
innovate their service and this makes a strong advocacy in favour of analyzing the product
portfolio.
The Price Mix
In the formulation of product mix, the pricing decisions occupy a place of outstanding
significance. The pricing decisions or the decisions related to interest and fee or commission
29
charged by banks are found instrumental in motivating or influencing the target market. The
Reserve Bank of India and the Indian Banking Association are concerned with the
regulations. The rate of interest is regulated by the RBI and other charges are controlled by
the Indian Banking Association. To be more specific in the Indian setting, we find this
component of the marketing mix significant because the banking organizations are also
supposed to sub serve the interests of weaker sections and the backward regions. The public
sector commercial banks in particular are supposed to play developmental role with societal
approach. It is natural that this specific role of the public sector commercial banks
complicates the problem of pricing.
Promotion Mix
In the formulation of marketing mix the bank professionals are also supposed to blend the
promotion mix in which different components of promotion such as advertising, publicity,
sales promotion, word-of-mouth promotion, personal selling and telemarketing are given due
weight age. The different components of promotion help bank professionals in promotion the
banking business.
The Place Mix
This component of the marketing mix is related to the offering of services. The two important
decision making areas are making available the promised services to the ultimate users and
selecting a suitable place for bank branches.
The selection of a suitable place for the establishment of a branch is significant with the
viewpoint of making the place accessible and in addition, the safety and security provisions
are also found important. The banking organizations are not free to open a branch since the
Reserve Bank of India regulates the subject of branch expansion but so far as the
management of branch is concerned, the branch managers have option to select a place which
is convenient to both the parties, such as the users and the bankers. In the Indian perspective,
the protection to the bank’s assets and safety to the users and bankers need due weight age.
The vulnerable area or regions need adequate provisions to make the branch safe. The
management of office is also found significant with the viewpoint of making the services
attractive. The furnishing, civic amenities and parking facilities can’t be overlooked.
Thus, the place mix is found to be an important decision making area which requires due
attention, both at macro and micro levels.
The People
30
Sophisticated technologies, no doubt, inject life and strength to our efficiency but the
instrumentality of sophisticated technologies start turning sour if the human resources are not
managed in a right fashion. Generation of efficiency is substantially influenced by the quality
of human resources..
While fixing criteria for selection, banks assign due weight age to the ethical values. The
education and training facilities have been innovated.
The foreign banks and the private sector commercial banks reward for efficiency and at the
same time also demotivate the inefficient bankers. This helps them in improving the
efficiency of even the inefficient people. The development of human resources makes the
ways for the formation of human capital. Incentives, of course, inject efficiency and the
organizations offering more incentives succeed in motivating the people.
MACRO vs MICRO ECONOMIC ANALYSIS
31
PROBLEMS FACED BY INDIAN ECONOMY
I.
FALL IN SAVINGS RATIO
The savings ratio is the % of income that is saved not spent. A fall in the savings ratio implies
that consumer spending is increasing; often this is financed through increased borrowing.
Effects Of Fall In Savings Ratio
Higher Level Of Consumption
This results in increase in Aggregate Demand. The increase in AD will cause an increase in
economic growth and lower unemployment. However, rising Aggregate Demand may cause
inflation. Inflation will occur when growth is faster than the long run trend rate. This is now a
potential problem in the India. Inflation has recently gone above 7.50%
Boom And Bus
A fall in the savings ratio is usually accompanied by a rise in confidence. It is the rise in
confidence which encourages borrowing and consumers to run down savings. Therefore,
there is always a danger that a falling savings ratio can be a precursor to a boom and bust
situation.
Economy More Sensitive To Interest Rates
With a fall in the savings ratio interest rate changes will have a bigger effect in reducing
spending. This is because levels of borrowing are higher and therefore a rise in interest rates
has a significant impact on increasing interest repayments. Also, higher rates will not be
increasing incomes from savings as much.
Balance Of Payment
32
With higher levels of consumer spending, there will be an increase in imports. Therefore this
will lead to deterioration in the current account. The current account deficit could put
downward pressure on the exchange rate in the long term. However, some people argue a fall
in the savings ratio is not a problem, but, it is just a reflection of strong economy and
booming housing market, which increases scope for equity withdrawal.
II.
INFLATION
Inflation is posing a serious challenge to the economic growth of India. The WPI inflation
rate flared up during the period driven by significant increase in the prices of commodities,
primary articles and manufactured products, even though very small part of global crude
price increase has been passed on to the Indian consumers.
III.
GLOBAL RECESSION
It appears that Europe, Japan and the US are entering into recession. Falling house prices,
crisis in the financial system, and lower confidence could lead to a sharp downturn, with the
worst still to come. Many argue that India’s growth is not so dependent on growth in the
West. However, the Indian stock markets have been hit by the global crisis. India’s growing
service sector and manufacturing sector would be adversely impacted by a global downturn.
IV. RISE IN CRUDE PRICES
How global crude prices would behave probably has no easy answers; however we believe
that the current challenging and uncertain macro-economic conditions does not lead Indian
financials into a state of crisis. But continued rise in crude prices and its resultant impact on
inflation, interest rates and government finances has the potential to do so. Hence, crude price
remains the key risk to our positive stance on the Indian financials.
In the last couple of months oil prices have surged by 45% from US$ 100 to US$ 145 (and
now back to US$ 115). India currently imports 70% of its crude requirement, resulting in
pressure on government coffers on back of rising crude prices.
V. DEPRECIATING INR
Surge in crude prices has severely impacted current account deficit of the country. This
coupled with the outflow of FII investments has resulted in INR to depreciate sharply against
dollar further fueling inflation.
33
IMPACT OF ECONOMIC PROBLEMS ON INDIAN FINANCIALS
The current macro-economic conditions are expected to result in
SLOWDOWN IN CREDIT GROWTH
IMPACT ON MARGINS OF BANKS
PREASURE ON CREDIT QUALITY
SLOWDOWN IN CREDIT GROWTH
While the rise in interest rates should lead to a moderation in demand for credit, Indian banks
too are exercising caution while lending.. Risks and uncertainties in the system have
increased given the higher crude and commodity prices and its inflationary impact. This
would curtail consumption, which would impact economic growth adversely. Further higher
rates will not only impact the profitability of Indian corporate but also impact IRRs of various
proposed capex projects. This coupled with elections next year could lead to some
postponement of capex plans of corporate, leading to negative impact on demand for credit.
Higher rates have particularly impacted retail loan growth.
•
IMPACT ON MARGINS OF BANKS
During the past 18 months, CRR has increased by 400 bps to 9.0% currently and RBI has
also discontinued with interest payment on CRR balances. Every 50 bps hike in CRR
generally negatively impacts margins by ~5 bps.
In fact in an environment, where liquidity is tight, interest rates are at elevated levels and risk
premiums have increased, the banks tend to regain the pricing power. This would not only
help the banks to adequately price in risks but also help protect their margins. Apart from
hiking PLRs, banks are also resorting to reprising (in fact right-pricing) the loans that were
sanctioned well below PLRs. Significant portion of fixed rate loans would also get re-priced
over the period of 12-18 months.
•
PRESSURE ON CREDIT QUALITY
34
Higher lending rates are expected to impact credit quality for the banking system. The extent
of the impact on credit quality would also be bank specific given the loan mix (retail vs.
corporate), proportion of unsecured lending, credit profile of corporate loan book and
industry wise exposure. Indian banks’ fundamentals are relatively resilient with better risk
management systems, dramatically improved asset quality, stronger recovery mechanisms
(legal provisions) and with adequate capitalization and provisioning.
Even Certain sectors (like real estate, airlines industry) might feel the stress due to the
changing macro environment and rise in interest rates. Many companies where crude forms a
key raw material component are expected to get hit more severely. Similarly, sectors like real
estate and SMEs, which are interest rate sensitive, would face higher delinquencies if interest
rates strengthen further by 100-200 bps.
NECESSARY INITIATIVES TAKEN BY RBI & MINISTRY OF FINANCE TO
TACKLE ECONOMIC PROBLEMS
As most of economists feel that the most horrible problem which India is facing
currently is inflation which has crossed 7.50%. To come out of these problems RBI and
ministry of finance and other relevant government and regulatory entities are taking various
initiatives which are as follows...
•
RBI MONITORY POLICY
With the introduction of the Five year plans, the need for appropriate adjustment in monetary
and fiscal policies to suit the pace and pattern of planned development became imperative.
The monitory policy since 1952 emphasized the twin aims of the economic policy of the
government:
Spread up economic development in the country to raise national income and standard
of living, and
To control and reduce inflationary pressure in the economy.
This policy of RBI since the First plan period was termed broadly as one of controlled
expansion, i.e.; a policy of “adequate financing of economic growth and at the same time the
time ensuring reasonable price stability”. Expansion of currency and credit was essential to
meet the increased demand for investment funds in an economy like India which had
embarked on rapid economic development. Accordingly, RBI helped the economy to expand
via expansion of money and credit and attempted to check in rise in prices by the use of
selective controls.
OBJECTIVES OF MONITORY POLICY
35
Price Stability
Monitory Targetting
Interest Rate Policy
Restructuring Of Money Market
Regulation Of Foreign Exchange Market
WEAPONS OF MONITORY POLICY
Central banks generally use the three quantitative measures to control the volume of credit in
an economy, namely:
Raising bank rates
Open market operations and
Variable reserve ratio
However, there are various limitations on the effective working of the quantitative measures
of credit control adapted by the central banks and, to that extent, monetary measures to
control inflation are weakened. In fact, in controlling inflation moderate monetary measures,
by themselves, are relatively ineffective. On the other hand, drastic monetary measures are
not good for the economic system because they may easily send the economy into a decline.
In a developing economy there is always an increasing need for credit. Growth requires credit
expansion but to check inflation, there is need to contract credit. In such a encounter, the best
course is to resort to credit control, restricting the flow of credit into the unproductive,
inflation-infected sectors and speculative activities, and diversifying the flow of credit
towards the most desirable needs of productive and growth-inducing sector. It should be
noted that the impression that the rate of spending can be controlled rigorously by the
contraction of credit or money supply is wrong in the context of modern economic societies.
In modern community, tangible, wealth is typically represented by claims in the form of
securities, bonds, etc., or near moneys, as they are called. Such near moneys are highly liquid
assets, and they are very close to being money. They increase the general liquidity of the
economy. In these circumstances, it is not so simple to control the rate of spending or total
outlays merely by controlling the quantity of money. Thus, there is no immediate and direct
relationship between money supply and the price level, as is normally conceived by the
traditional quantity theories. When there is inflation in an economy, monetary restraints can,
in conjunction with other measures, play a useful role in controlling inflation.
36
•
FISCAL POLICY
Fiscal policy is another type of budgetary policy in relation to taxation, public borrowing, and
public expenditure. To curve the effects of inflation and changes in the total expenditure,
fiscal measures would have to be implemented which involves an increase in taxation and
decrease in government spending. During inflationary periods the government is supposed to
counteract an increase in private spending. It can be cleared noted that during a period of full
employment inflation, the aggregate demand in relation to the limited supply of goods and
services is reduced to the extent that government expenditures are shortened.
Along with public expenditure, governments must simultaneously increase taxes that would
effectively reduce private expenditure, in an effect to minimise inflationary pressures. It is
known that when more taxes are imposed, the size of the disposable income diminishes, also
the magnitude of the inflationary gap in regards to the availability of the supply of goods and
services. In some instances, tax policy has been directed towards restricting demand without
restricting level of production. For example, excise duties or sales tax on various
commodities may take away the buying power from the consumer goods market without
discouraging the level of production. However, some economists point out that this is not a
correct way of combating inflation because it may lead to a regressive status within the
economy.
As a result, this may lead to a further rise in prices of goods and services, and inflation can
spread from one sector of the economy to another and from one type of goods and services to
another. Therefore, a reduction in public expenditure, and an increase in taxes produces a
cash surplus in the budget. Keynes, however, suggested a programme of compulsory savings,
such as deferred pay as an anti-inflationary measure. Deferred pay indicates that the
consumer defers a part of his or her wages by buying savings bonds (which, of course, is a
sort of public borrowing), which are redeemable after a particular period of time, this is
sometimes called forced savings. Additionally, private savings have a strong disinflationary
effect on the economy and an increase in these is an important measure for controlling
inflation. Government policy should therefore, include devices for increasing savings. A
strong savings drive reduces the spendable income of the consumers, without any harmful
effects of any kind that are associated with higher taxation. Furthermore, the effects of a large
deficit budget, which is mainly responsible for inflation, can be partially offset by covering
the deficit through public borrowings. It should be noted that it is only government borrowing
from non-bank lenders that has a disinflationary effect. In addition, public debt may be
managed in such a way that the supply of money in the country may be controlled. The
government should avoid paying back any of its past loans during inflationary periods, in
order to prevent an increase in the circulation of money. Anti-inflationary debt management
also includes cancellation of public debt held by the central bank out of a budgetary surplus.
Fiscal policy by itself may not be very effective in combating inflation; therefore a
combination of fiscal and monetary tools can work together in achieving the desired outcome.
37
•
DIRECT MEASURES
Direct controls refer to the regulatory measures undertaken to convert an open inflation into a
repressed one. Such regulatory measures involve the use of direct control on prices and
rationing of scarce goods. The function of price control is a fix a legal ceiling, beyond which
prices of particular goods may not increase. When ceiling prices are fixed and enforced, it
means prices are not allowed to rise further and so, inflation is suppressed. Under price
control, producers cannot raise the price beyond a specified level, even though there may be a
pressure of excessive demand forcing it up.
In times of the severe scarcity of certain goods, particularly, food grains, government may
have to enforce rationing, along with price control. The main function of rationing is to divert
consumption from those commodities whose supply needs to be restricted for some special
reasons; such as, to make the commodity more available to a larger number of households.
Therefore, rationing becomes essential when necessities, such as food grains, are relatively
scarce. Rationing has the effect of limiting the variety of quantity of goods available for the
good cause of price stability and distributive impartiality.
Another control measure that was suggested is the control of wages as it often becomes
necessary in order to stop a wage-price spiral. During galloping inflation, it may be necessary
to apply a wage-profit freeze. Ceilings on wages and profits keep down disposable income
and, therefore the total effective demand for goods and services. On the other hand,
restrictions on imports may also help to increase supplies of essential commodities and ease
the inflationary pressure. However, this is possible only to a limited extent, depending upon
the balance of payments situation. Similarly, exports may also be reduced in an effort to
increase the availability of the domestic supply of essential commodities so that inflation is
eased.
In general, monetary and fiscal controls may be used to repress excess demand but direct
controls can be more useful when they are applied to specific scarcity areas. As a result, antiinflationary policies should involve varied programmes and cannot exclusively depend on a
particular type of measure only.
38
Chapter 3
FINANCIAL ANALYSIS
39
FINANCIAL ANALYSIS
This section will show, how Bank Of India has done financially over the last three
years(2010-2012). I have calculate all the financial ratios including the banking ratios also, to
show how Bank Of India fair up against its competitors. To do that I have used the last three
years balance sheet, profit and loss account, and cash flow statement of Bank Of India.
LIQUIDITY RATIOS
A class of financial metrics that is used to determine a company's ability to pay off its shortterms debts obligations. Generally, the higher the value of the ratio, the larger the margin of
safety that the company possesses to cover short-term debts.
1.
CURRENT RATIO
This ratio is a rough indication of a firm's ability to service its current obligations. Generally, the
higher the current ratio, the greater the "cushion" between current obligations and your Company's
ability to pay them. The composition and quality of current assets is a critical factor in the analysis
of your Company's liquidity. It is calculated as Total current assets divided by total current
liabilities.
Current Ratio = Current Assets
Current Liabilities
Current Ratio
5
4.32
4
3.83
3.49
Current Ratio
3
2
1
0
2010
Year
2011
2012
Current Assets
Current Liabilities
(Rs. In crores)
(Rs. In crores)
2010
37043.75
8574.63
4.32
2011
49723.21
12974.69
3.83
2012
46176.95
13243.43
3.49
40
Current Ratio
Interpretation:- From the above table it can be observed that the current ratio of Bank of
India stood at 4.32 ,3.83,3.49 in the year 2010,2011,2012 respectively. This shows that bank
has enough current assets available to pay off its short term obligations. The current ratio has
declined marginally to 3.83 in 2011 and has further declined to 3.49 in 2012 because of
increase in short term investments,borrowings and other current liabilities. So it can be
inferred that bank is effectively utilising the available funds.
2. LIQUID RATIO
It is also known as the ‘‘Quick Ratio’’ or "Acid Test" ratio; it is a refinement of the current
ratio and is a more conservative measure of liquidity. The ratio expresses the degree to which
your current Company's current liabilities are covered by the most liquid current assets.
Generally, any value of less than 1 to 1 implies a "dependency" on inventory or other current
assets to liquidate short-term debt. It is calculated as Cash plus trade receivables divided by
total current liabilities.
Liquid Ratio = Cash + Trade Receivables
Total Current Liabilities
Liquid Ratio
3.64
4
2.88
2.62
R 3
a
t 2
i 1
o
0
Liquid Ratio
2010
2011
2012
Years
Years
Liquid
Assets
Current
Liabilities
Liquid Ratio
(Rs. In
crores)
(Rs. In crores)
2010
31230.13
8574.63
3.64
2011
37309.99
12974.69
2.88
2012
34711.26
13243.43
2.62
41
Interpretation: - A quick ratio of 1:1 is considered favourable because for every rupee of
current liability,there is atleast one rupee of liquid assets. A higher value of ratio is considered
favourable. Here this ratio stood higher than one during the study period i.e 3.64 in 2010,2.88
in 2011 and 2.62in 2012.although the ratio shows a declining trend but it is still above the
benchmark level.This shows that bank has enough liquidity to service its short term debt and
is utilising its funds in a rational manner.
3. CREDIT DEPOSIT RATIO
This ratio indicates how much of the advances lent by banks is done through deposits. It is
the proportion of loan-assets created by banks from the deposits received. The higher the
ratio, the higher the loan-assets created from deposits. Deposits would be in the form of
current and saving account as well as term deposits. The outcome of this ratio reflects the
ability of the bank to make optimal use of the available resources
CREDIT DEPOSIT RATIO = Loans and advances(net of provisions)
TOTAL Deposits
X 100
Credit Deposit Ratio
76.93
78
76
R
a
t
i
o
74
72.04
Credit Deposit Ratio
70.33
72
70
68
66
2010
2011
2012
Years
Year
Total Deposits
(Rs. In crores)
Credit Deposit Ratio
2010
Loans & Advances
(Net Of Provisions)
(Rs. In crores)
165527
229761.94
72.04
2011
210200.7
298886
70.33
2012
244816.9
318216
76.93
Interpretation :- An ideal credit deposit ratio should range between 65- 75 %.
42
.the above table exhibits the credit deposit ratio of the bank during 3 years. This ratio stood at
72.04% ,70.33% and 76.93% in the year 2010,2011,2012 respectively. It shows that Bank of
India is performing well. It can also be observed that in the year 2012 the credit deposit ratio
has slightly crossed 75%(stipulated level as per RBI guidelines).This shows that in this year
bank has borrowed some fund from outside. Nevertheless, the overall credit performance of
the bank is satisfactory.
PROFITABILITY RATIOS
A class of financial metrics that are used to assess a business's ability to generate earnings as
compared to its expenses and other relevant costs incurred during a specific period of time.
For most of these ratios, having a higher value relative to a competitor's ratio or the same
ratio from a previous period is indicative that the company is doing well.
1. Operating Profit Ratio
A ratio used to measure a company's pricing strategy and operating efficiency. Operating
margin is a measurement of what proportion of a company's revenue is left over after paying
for variable costs of production such as wages, raw materials, etc. A healthy operating margin
is required for a company to be able to pay for its fixed costs, such as interest on debt. It Is
Also known as "operating profit margin."
Calculated as:-
Operating Profit Ratio = Operating Profit X 100
Net sales
Operating Profit Ratio
27.00%
R
a
t
i
o
26.32%
26.00%
24.75%
25.00%
23.50%
24.00%
23.00%
22.00%
2010
2011
2012
Years
43
Operating Profit Ratio
Year
Operating Profit
Sales
Operating Profit
Ratio (in %)
(Rs. In crores)
(Rs. In crores)
2010
4704.78
17877.99
26.32
2011
5384.22
21751.72
24.75
2012
6693.95
28480.67
23.50
Interpretation :- From the data in the above table, it can be observed that the operating
profit ratio of the bank is showing a declining trend. Although the operating profits have
increased but not exactly with same proportion as compared to increase in sales. This may be
due to increase in the interest expenses and other operating expenses particularly the staff
expenses in the year 2011 and 2012. Therefore the bank should check on unnecessary
operating expenses to correct this situation and to provide a sufficient return.
2. NET PROFIT RATIO
This ratio indicates the Net margin on a sale of Rs.100. It is calculated as follows:
Net Profit Ratio = Net Profit X 100
Sales
This ratio helps in determining the efficiency with which affairs of the business are being
managed. An increase in the ratio over the previous period indicates improvement in the
operational efficiency of the business. The ratio is thus on effective measure to check the
profitability of business. A low profit margin indicates a low margin of safety: higher risk that
a decline in sales will erase profits and result in a net loss.
Net Profit Ratio
14.00%
12.00%
R 10.00%
8.00%
a
t
6.00%
i
4.00%
o
2.00%
0.00%
11.44%
9.74%
9.40%
Net Profit Ratio
2010
2011
2012
Years
44
Year
Net Profit
Sales
Net Profit Ratio
(Rs. In crores)
(Rs. In crores)
(in %)
2010
1741.07
17877.99
9.74
2011
2488.7
21751.72
11.44
2012
2677.52
28480.67
9.40
Interpretation :- The net profit ratio of the bank stood at 9.74% & 9.40% in the year 2010 &
2012 respectively. This is due to higher provisions and interest expense in these years. But in
the year 2011 the bank has performed well with net profit reaching the double digit mark at
11.44% as the bank had maintained a tighter control at interest and other indirect expenses.
Although the net profit ratio shows a fluctuating trend but the overall profitability of the bank
is satisfactory as per industry trend.
3. RETURN ON ASSETS
Returns on assets ratio is the net income (profits) generated by the bank on its total assets
(including fixed assets). The higher the proportion of average earnings assets, the better
would be the resulting returns on total assets.
Return On Assets = Operating profit(net of provisions n contingencies)
Average or Total assets
Return on Assets
0.75%
R
a
t
i
o
0.71%
0.70%
0.70%
0.63%
0.65%
Return on Assets
0.60%
0.55%
2010
2011
2012
Years
Year
Net profit
Average or Total
45
Return On Assets (in
(Rs. In crores)
assets
(Rs. In crores)
%)
2010
1741.07
274966.46
0.63%
2011
2488.7
351172.56
0.71%
2012
2677.52
384535.47
0.70%
Interpretation:- The Return On Assets ratio of Bank of India are 0.63%,0.71% and 0.70% in
the year 2010,2011,2012 respectively. The return on assets increased in 2011 due to huge
increase in total assets and net profits in this year as compared to 2012 wherein return on
assets fell to 0.70% as net profit couldn’t increase with the same proportion as of total
assets.thus it lead to the conclusion that overall efficiency or profitability of the bank is
improving.
4. INTEREST SPREAD
Interest spread is the difference between the average lending rate and the average borrowing
rate for a bank or other financial institution. This is very similar to interest margin. If a bank's
lending was exactly equal to its borrowings (i.e. deposits plus other borrowing) the two
numbers would be identical. In reality, bank also has its shareholder's funds available to lend,
but at the same time its lending is constrained by reserve requirements.
Changes in the spread are an indicator of profitability as the spread is where a bank makes its
money
Interest Spread = (Interest income ÷ Interest earning assets) - (Interest expense ÷interest
bearing liabilities
Interest spread
5.50%
R
a
t
i
o
5.00%
5.06%
4.57%
4.43%
Interest spread
4.50%
4.00%
2010
2011
2012
Years
46
Year
Interest spread (in %)
2010
4.57
2011
5.06
2012
4.43
Interpretation :-From the figures exhibited in the above table,it can be observed that interest
spread of the bank stood at 4.57% in 2010,increased to 5.06% in 2011due to greater
proportionate increase in interest earned as compared to interest expended and in 2012 it fell
from 5.06% to 4.43% as interest earned had not increased in the same proportion as interest
expended. Thus it can be inferred that interest spread of the bank is fluctuating.
47
ACTIVITY RATIOS
Activity ratios are calculated to measure the efficiency with which the resource of a firm have
been employed. These ratios are also called turnover ratios because they indicate the speed
with which assets are being turned over into sales
1. FIXED ASSETS TURNOVER RATIO
Measure of the productivity of a firm, it indicates the amount of sales generated by each
Rupee spent on fixed assets, and the amount of fixed assets required to generate a
specific level of revenue. Changes in the ratio over time reflect whether or not the firm is
becoming more efficient in the use of its fixed assets.
Fixed assets turnover ratio =
Sales Revenue
Net Fixed Assets
Fixed Assets Turnover ratio
12
10.28
9.19
10
R
a
t
i
o
8
7.82
6
Fixed Assets Turnover ratio
4
2
0
2010
2011
2012
Years
Year
Sales Revenue
(Rs. In crores)
Net Fixed Assets
(Rs. In crores)
Fixed Assets Turnover
Ratio
2010
17877.99
2286.75
7.82
2011
21751.72
2365.95
9.19
2012
28480.67
2771.59
10.28
Interpretation :- The fixed assets turnover ratio of the bank stood at 7.82 in 2010, it
increased to 9.19 in 2011 and has further increased to 10.28 in 2012. Therefore it can can be
inferred that fixed assets ratio of the bank is consistently increasing and It indicates that
during the period of study fixed assets have been effectively used in the bank without much
additional investment and also the capital is not blocked in fixed assets.
48
2. TOTAL ASSETS TURNOVER RATIO
Total assets turnover ratio = Sales Revenue
Total Assets
Total Assets Turnover Ratio
7.41
7.5
7
R
a
t
i
o
6.5
6.5
Total Assets Turnover
Ratio
6.19
6
5.5
2010
2011
2012
Years
Year
Sales Revenue
(Rs. In crores)
Total Assets
(Rs. In crores)
Total Assets Turnover
Ratio
2010
17877.99
274966.46 6.50
2011
21751.72
351173 6.19
2012
28480.67
384535.5 7.41
Interpretation :- The above table exhibits Total Assets Turnover Ratio. It stood at 6.50 in
2010.In 2011 it has decreased marginally to 6.19 and after that it has increased to 7.41 in
2012. It shows a fluctuating trend. But overall efficiency of bank is satisfactory and is
utilising its Total Assets effectively.
LEVERAGE RATIO
49
Any ratio used to calculate the financial leverage of a company to get an idea of the
company's methods of financing or to measure its ability to meet financial obligations. There
are several different ratios, but the main factors looked at include debt, equity, assets and
interest expenses. A ratio used to measure a company's mix of operating costs, giving an idea
of how changes in output will affect operating income.
1. DEBT- EQUITY RATIO
A measure of a company's financial leverage calculated by dividing its total liabilities by
stockholders' equity.
A high debt/equity ratio generally means that a company has been aggressive in financing its
growth with debt. This can result in volatile earnings as a result of the additional interest
expense. If a lot of debt is used to finance increased operations (high debt to equity), the
company could potentially generate more earnings than it would have without this outside
financing. If this were to increase earnings by a greater amount than the debt cost (interest),
then the shareholders benefit as more earnings are being spread among the same amount of
shareholders. However, the cost of this debt financing may outweigh the return that the
company generates on the debt through investment and business activities and become too
much for the company to handle. This can lead to bankruptcy, which would leave
shareholders with nothing.
The debt/equity ratio also depends on the industry in which the company operates. For
example, capital-intensive industries such as auto manufacturing tend to have a debt/equity
ratio above 2, while personal computer companies have a debt/equity of under 0.5.
Debt Equity Ratio =
Long Term Debt
Shareholder’s Equity
Debt- Equity Ratio
19
18.5
18
18.56
17.72
17.5
Debt- Equity Ratio
17
16.71
16.5
16
15.5
2010
Year
2011
Long Term Debt
(Rs. In crores)
2012
Shareholder’s Equity
(Rs. In crores)
50
Debt Equity Ratio
2010
252161.84
14229.99
17.72
2011
320907.19
17290.68
18.56
2012
350330.25
20961.79
16.71
Interpretation:- The ratio shows the extent to which funds have been provided by long-term
creditors as compared to the funds provided by the owners. Here the Debt-Equity ratio for the
above period is always high. This shows that the bank is more relying on outside funds as
compared to internal sources of capital in its capital structure. From the long-term lenders
point of view this ratio is not satisfactory
CAPITAL ADEQUACY RATIO
A bank's capital ratio is the ratio of qualifying capital to risk adjusted (or weighted) assets.
National regulators tracks banks CAR to ensure that it can absorb reasonable amount of loss
51
and are complying with the banking statutory capital requirements. In the simplest
formulation, a bank's capital is the "cushion" for potential losses, which protect the bank's
depositors or other lenders. The RBI has set the minimum capital adequacy ratio at 10%for
all banks. A ratio below the minimum indicates that the bank is not adequately capitalized to
expand its operations. The ratio ensures that the bank do not expand their business without
having adequate capital.
Capital Adequacy Ratio = (Tier I + Tier I )Capital
Risk Weighted Assets(Including Off Balance Sheet Items)
Capital Adequacy Ratio
13.50%
12.94%
13.00%
R
a 12.50%
t 12.00%
i
o 11.50%
11.00%
12.17%
Capital Adequacy Ratio
2010
2011
11.95%
2012
Years
Year
Capital Adequacy
Ratio
2010
12.94
2011
12.17
2012
11.95
Interpretation :- The capital adequacy ratio of Bank of India stood at 12.94%,12.17% and
11.95% in the year 2010,2011,2012 respectively.It indicates that during the study period bank
has maintained a healthy capital adequacy ratio which is above 10% as prescribed by RBI
(under Basel II ).
INTEREST COVERAGE RATIO
This Ratio indicates the interest paying capability of firm .The interest coverage ratio is a
measure of the number of times a company could make the interest payments on its debt with
52
its earnings before interest and taxes, also known as EBIT. The lower the interest coverage
ratio, the higher the company's debt burden and the greater the possibility of bankruptcy or
default
Interest coverage ratio = Net profit before interest & tax
Fixed interest charge
Interest Coverage Ratio
R
a
t
i
o
1.26
1.24
1.22
1.2
1.18
1.16
1.14
1.25
1.21
1.18
2010
2011
Interest Coverage Ratio
2012
Years
Year
Net profit before
interest & tax
(Rs. In crores)
Fixed interest charge
Interest coverage ratio
(Rs. In crores)
2010
14615.89
12122.04 1.21
2011
17436.41
13941.03 1.25
2012
23744.75
20167.23 1.18
Interpretation :- The interest coverage ratio of Bank of India stood at 1.21,1.25,1.18 in the
years 2010,2011,2012 respectively. Since this Ratio indicates the interest paying capability of
firm and ideal Ratio is 1.5 times. So interest paying capacity of the bank is moderate.
CASH FLOW ANALYSIS OF BANK OF INDIA FOR THE YEAR ENDED
2010,2011,2012
53
CASH FLOW STATEMENT OF BANK OF INDIA
2010
2011
2012
Net Profit before tax
2493.83
3495.38
3577.52
Net Cash Flow from Operating Activities
8439.81
6133.09
-1702.55
Net cash flow from Investing Activities
-224.72
-720.22
-616.67
Net cash flow from Financing Activities
1253.78
771.3
28.71
Net Increase/decrease in Cash & Cash Equivalents
9468.87
6184.17
-2290.51
Opening Cash & Cash Equivalents
21761.3
31230.1
37414.3
Closing Cash & Cash Equivalents
31230.1
37414.3
35123.8
CASH FLOW FROM OPERATING ACTIVITIES
Interpretation :- The above cash flow statement of Bank of India reveals that the net cash
flow from operating activities stood at 8439.81 in the year 2010.It has declined to 6133.09 in
2011. This may be due to greater proportionate increase in advances as compared to interest
earned this year. Also operating expenses were at higher side during this year. In 2012 the net
cash from operating activities has further declined and has become negative. Here it may be
noted that despite a great increase in interest earned, cash flow from operating activities have
declined. This is due to greater increase in borrowings this year which has lead to more
interest expense. Also deposits has not been increased in the same proportion as compared to
advances this year.
CASH FROM INVESTING ACTIVITIES:Interpretation :- The net cash flow from investing activities has been in negative figures in
all the 3 years of the study period. It stood at -224.72 in 2010,which is followed by a great
decline in 2011 and has reduced to -720.22 . Although its has increased to tune of 103.55
crores in 2012 but the net cash flow from investing activities is still in negative figures and it
stood at -616.67. the huge outflow of cah from investing activities in the year 2011 is due to a
huge investment in subsidiaries and fixed assets.
CASH FROM FINANCING ACTIVITIES:-
54
Interpretation :- The net cash flow from financing activities during the period of study has
been showing a declining trend. It stood at 1253.78 crores in 2010, which has reduced to
771.3 in 2011 and in is followed by a huge decline of 742.59 in 2012 and has reduced to
28.71 crores in this year. This is due to greater dividend payments and interest payment on
IPDI and subordinate bonds and upper tier II bonds during the year 2011 and 2012.
COMPARATIVE ANALYSIS OF BANK OF INDIA WITH CANARA BANK
RATIO ANALYSIS
The above table exhibits various financial ratios of Bank of India and the ratios of Canara Bank.
Below is the comparative analysis of these ratios:1.
CURRENT RATIO :- From the above table it can be observed that current ratio of Bank of
India stood at 4.32, 3.83, 3.49 and that of Canara bank stood at 3.28, 4.75, 4.13 for the years
2010,2011,2012 respectively .Although both are having enough liquidity but going by increasing
55
trend of current ratio for Canara bank it shows that it is not utilising its funds efficiently as
compared to Bank of India.
Current Ratio
5
4.5
4.32
3.5
4.13
3.83
4
3.49
3.28
Bank Of India
3
Canara bank
2.5
2
1.5
1
0.5
0
2010
4.75
2011
2012
2.
LIQUID RATIO :- The liquid ratio for both the banks shows fluctuating trend. Both have
been maintaining a healthy liquid ratio but as compared to Bank of India, Canara Bank has
excess short term liquidity available which may not be so good as the opportunity cost of holding
excess liquidity might be more that may affect its profitability.
3.
CREDIT DEPOSIT RATIO (CDR) :- The credit deposit ratio plays an important role in
determining the profitability of the banks. By comparing the CDR for both the banks it can be
observed that CDR of Bank of India is quite fluctuating during the study period while that of
Canara bank is more or less stable. But overall the credit performance of both the banks is quite
good.
56
Credit Deposit Ratio (CDR)
78.00%
76.93%
76.00%
74.00%
71.30%
72.04%
72.00%
Bank Of India
71.57%
70.33%
Canara bank
70.27%
70.00%
68.00%
66.00%
2010
2011
2012
4.
OPERATING PROFIT RATIO :- The Operating Profit Ratio of Bank Of India stood at
6.84%, 1.87%, 4.70% and that of Canara Bank stood 26.99% ,26.48%, 19.26% at for the
years 2010,2011,2012 respectively.It indicates that the operational efficiency of Canara Bank is
much better than that of Bank of India and it has a better control on its expenses.
5.
NET PROFIT RATIO :- It can be observed from the above table that the Net profit ratio of
Bank of India stood at 23.42%, 15.18%, 18.80% and that of Canara Bank stood at
16.11%,17.46,%10.64% for the years 2010,2011,2012 respectively. Although the Net Profit of
Canara Bank is much higher than that of Bank of India during the period of study but the Net
Profit ratio of Bank of India is much better than that of Canara Bank. This indicates that overall
profitability of Bank of India is much sound than Canara Bank.
57
Net Profit Ratio
25.00%
20.00%
16.11%
15.00%
17.46%
15.18%
Bank Of India
10.64%
Canara bank
10.00%
5.00%
0.00%
23.42%
2010
18.80%
2012
2011
6.
RETURN ON ASSETS :-The return on assets for both the banks shows fluctuating trend.It
stood at 0.63%, 0.71%, 0.70% for Bank of India and 1.14%, 1.20%, 0.88% for Canara Bank
for the year 2010,2011,2012 respectively. It shows that Canara Bank has a better return on
investment as compared to Bank of India.
7.
FIXED ASSETS TURNOVER RATIO :- The fixed Assets Turnover ratio of Bank of India
stood at 7.82, 9.19, 10.28 and that of Canara Bank stood at 6.56, 8.11, 10.80. It shows similar
trend for both the banks. Thus it can be inferred that both the banks are utilising its fixed asstes
efficiently.
8.
TOTAL ASSETS TURNOVER RATIO :- The total assets turnover ratio is also showing
similar trend for both the banks. But if looking at the figures for both the banks for total assets
turnover ratio during the study period it stood at 6.50, 6.19, 7.41 for Bank of India and at 7.08,
6.86, 8.25 for Canara Bank it can be inferred that Canara bank is utilising its total assets in a
better way as compared to Bank of India.
9.
DEBT –EQUITY RATIO :- The Debt-Equity ratio of Bank of India stood at 17.72, 18.56,
16.71 and that of Canara Bank stood at 16.57, 15.38, 15.10 for the year 2010,2011,2012
respectively. Both the banks This indicates that both the banks are more relying on outside funds
as compared to internal sources of capital in its capital structure have a very high debt- equity
ratio. But as compared to Bank of India, Canara Bank has a lesser reliance on the debt.
10.
CAPITAL ADEQUACY RATIO :- This ratio determines the capacity of a bank in terms of
meeting with the liability and other risks such as credit risk, operational risk. The above table
reveals that capital adequacy ratio stood at 12.94%, 12.17%, 11.95% for Bank of India and that
of Canara Bank it stood at 13.43%, 15.38% ,13.76% for the year 2010,2011,2012 respectively.
As this ratio measure of how much capital is used to support the banks' risk assets.
58
The analysis reveals that both the banks have maintained a healthy ratio beyond the minimum
limit of 10% prescribed by RBI (under Basel II).but it is higher for canara bank as compared to
Bank of India.this indicates that Canara bank is the more efficient in terms of meeting with the
liability and other risks such as credit risk, operational risk as compared to Bank of India.
Capital Adequacy Ratio (CAR)
13.43%
20.00%
15.00%
12.94%
Bank Of India
15.38%
13.76%
12.17%
10.00%
Canara bank
11.95%
5.00%
0.00%
2010
11.
2011
2012
INTEREST SPREAD :- Interest spread is the difference between the average lending rate
and the average borrowing rate for a bank or other financial institution. Changes in the spread are
an indicator of profitability as the spread is where a bank makes its money. The interest spread of
Bank of India stood at 4.57% , 5.06% ,4.43% and that of Canara Bank stood at 3.32%, 3.47%,
3.80% during the study period. Clearly it reveals that Bank of India has greater interest spread as
compared to Canara bank.
Interest Spread
5.06%
4.43%
6.00% 4.57%
3.32%3.47%3.80%
4.00%
2.00%
Bank Of
India
Canara
bank
0.00%
2010 2011 2012
12.
INTEREST COVERAGE RATIO :- This Ratio indicates the interest paying capability of
firm. The interest coverage ratio of both the banks shows similar trend. It stood at 1.21, 1.25, 1.18
for Bank of India and that of Canara Bank it stood at 1.29, 1.33 ,1.18 for the year 2010,2011,2012
respectively. Although it is slightly less than the ideal ratio of 1.5 for both the banks but on an
average we can say that this ratio is satisfactory for both the banks as it is above 1.
59
COMPARATIVE CASH FLOW STATEMENT ANALYSIS
NET CASH FLOW FROM OPERATING ACTIVITIES:Interpretation :- The net cash flow from operating activities of Bank of India shows a
declining trend as it stood at 8439.81crores in 2010 and has further reduced to 6133.09 crores
in 2011 and reached to negative in 2012 at -1702.55crores. whereas in canara bank the net
cash flow from operating activities shows as fluctuating trend as it stood at 4694.39 crores in
2010 which has increased to 8527.34crores in 2011 and then in 2012 it shows a huge fall in
the cash flow and consequently has reached to negative figures at -832.22 crores .This may
be due to increase in interest and operating expenses.
NET CASH FLOW FROM INVESTING ACTIVITIES :60
Interpretation :- The Net cash flow from investing activities for both the banks during the
study period has been showing a declining trend and is in negative figures. But the reduction
over the years in cash flow from investing activities in Canara bank is much lower than in
Bank of India. This shows that Canara bank is enjoying a better return on its investments and
is investing rationally.
NET CASH FLOW FROM FINANCING ACTIVITIES:Interpretation :- The Net cash flow from financing activities for Bank of India is showing a
decreasing trend during the study period but has never turned negative. Whereas in case of
Canara bank it shows a fluctuating trend. In the year 2010 it is negative and stood at -1628.
75 crores whereas it has improved to 2600.78 crores in 2011 but it has further declined to
-1554.94 crores. This is due to higher dividend payment and interest payment on Tier I and
Tier II bonds and there has been no inflow during this period. Therefore in can be inferred
that Bank of India is doing good in financial activities as compared to Canara Bank.
61
Chapter 4
RESEARCH PROJECT
62
PROJECT DETAILS
The project assigned to me at Bank Of India was “Analysis Of Credit Appraisal”. Credit
Appraisal is the process of calculating the creditworthiness of a business or an organization
before providing any Loans & advances/project finance.
I was placed in credit department under senior manager Mr. K.K Garg
During the first week I was assigned random tasks like updating data updation, entering dates
into excel sheet regarding last review done and due date for next review working capital/cc
limits,term loan and stock audit report; updating occupational codes for various customers of
the bank,preparing cover letters for bank guarantee etc. I was also shown various
files,documents,reports,memos,forms and applications used in the bank for various
operations in different departments. The major purpose for this entire exercise was to make
me familiar with the bank ,its operations,esp. in the credit deptt. and to familiarize with the
banking terms and abbreviations. This was an interesting experience for me.
In the second week I was given various files containing documents regarding proposals for
working capital limit enhancement/review,proposals for review of term loans advanced to
various customers of the bank. I went through all these files in details and cleared all my
63
queries regarding it from my mentor. Also I went through various other reports and
documents,financials that makes a part of credit appraisal process.
Later, in the third week I was assigned the task of making proposals for working capital
enhancement/review with existing limits for its customers on their request and for the
customers whose reviews for credit facilities were pending. During my entire training period
I made a total of 5 proposals and the entire exercise was a great learning experience and for
which I was appreciated by the chief manager,senior manager and other staff.
In the meantime I was exposed to forex deptt. wherein I use to sit with Mr. Vijay kumar
(incharge of forex deptt) and observe their working. He also made me learn to work on the
FINACLE (ERP software used in Bank Of India). There I learnt how forex transactions are
done,how the payments are made and received on behalf of customers,how the forward
contracts are booked and how the inter communication between the banks of parties
concerned with bank’s customers. For the few days I was also made to call the treasury and
take the forex transaction rates except the card rates (card rates are the basic rates for forex
transactions which the treasury issues daily) on the request of the customers who have to
export goods or book forward contracts.
In the last week I was sent to administration deptt. to learn how fresh accounts for customers
are opened,what are the various documents required for that,how the cheque books ,ATM
pin/password are issued. I also took various queries from the customers and successfully
solved them by giving various explanations and clarifications.
Overall it was a great experience to work in a public sector bank and a good learning for me.
The details of the project are as under:-
Advances (Credit Appraisal)
Credit Appraisal is the process of calculating the creditworthiness of a business or an
organization.
Credit Appraisal involves a wide variety of financial analysis techniques, including ratio and
trend analysis as well as the creation of projections and a detailed analysis of cash flows.
Credit appraisal also includes an examination of collateral and other sources of repayment as
well as credit history and management ability.
Before approving a commercial loan, a bank will look at all of these factors with the primary
emphasis being the cash flow of the borrower. A typical measurement of repayment ability is
the debt service coverage ratio. The debt service coverage ratio divides this cash flow amount
by the debt service (both principal and interest payments on all loans) that will be required to
be met.
64
Another criteria involved in the process of credit appraisal is determination of credit rating
which means assessing the credit worthiness of an individual, corporation, or even a country.
Credit ratings are calculated from financial history and current assets and liabilities.
Typically, a credit rating tells a lender or investor the probability of the subject being able to
pay back a loan. A poor credit rating indicates a high risk of defaulting on a loan, and thus
leads to high interest rates or the refusal of a loan by the creditor.
The ratings are of two types- external ratings and internal ratings. As the name implies
external ratings are given by external rating agencies like Moody’s, Standards and Poors etc.
Internal ratings are designed by the institution which requires it. Immaterial of the source of
rating whether internal or external it should be robust to be accepted as a reliable tool. For
corporate borrowers, the criteria for assessing risk are well known: profitability, growth,
industry outlook, competitive advantages, management and shareholders, in addition to the
standard set of financial and operational performance ratios.
A rating system can also serve as a tool for credit policy. For instance, some minimum rating
might be required to grant a loan.
It is this process which tries to evaluate the credentials and needs of the evaluator; the
business opportunity is made available to the bank in the form of Client Description. Bank on
submission of the Client description do a feasibility study of the project and check the
viability and the needs of the Customer.
• Client Description of the Project
• Proposal for the Trade Credit is
created.
• The Operation department takes
care of the proper documents and
sanctions the limit
Client
Descripti
on
Proposal
Creation
Operatio
ns
• Analysis/Review of the CMA Data
Review
65
The Advances thus made are done based on their requirement-
Advances
Term
Loans
Working
Capital
Limit
The project takes a practical approach in analyzing the procedure of the Credit Appraisal, two
proposals one based on Term Loan and the other on Working Capital has been detailed to
look into the intricate details of the process followed at Bank of India.
CREDIT APRAISAL PROCESS
Process Flow
Submission of Project Report along with the Request Letter
Carrying out due diligence
If not approved
if approved
Preparation of proposal
Submission of Proposal to Head Office
If No queries raised
If queries raised
Sanction of proposal
on various Terms &
Condition 66
Project Rejected
Solve the queries
Communication of
Sanction
Acknowledgement of
Sanction
Review of Sanction
Application to comply
with Sanction Terms
& Condition &
execution of Loan
Documents
Disbursement
Credit Policy at Bank of India
The bank has been working on its credit priorities which have been changed with the
changing times to cope up with the changes. The credit priorities for the bank stand as:
Maintenance of asset quality
Maintaining growth and reasonable risk adjusted returns on credit exposures
Retaining/Improving the Market share
Thrust on priority sector lending
Bank is conscious of the risk-return spread, thus bank has to judiciously set priorities in terms
of asset quality and return maximization. With the changing needs, Bank has kept an open
policy towards unfocussed assets. Asset quality priority calls for value driven culture with
conservative risk strategy, whereas market share priority calls for volume driven and
aggressive credit strategy. At the present situation, bank has to have a mix of both.
67
The purpose for the credit needs to be ascertained, with adherence to the guidelines and
directives.
Credit Delivery
The credit requirements may be dispensed in any of the following modes –
Sole Banking Arrangements – In account, where we remain to be sole lenders, the
account with ratings “AAA” (LC1 to LC2) and “AA” (LC3 to LC4).
Multiple Banking – In an arrangement where borrower desires to avail credit from
other banks, without a formal consortium arrangement. The borrower has to furnish
details from time to time. The credit from other banks should not exceed 10% of the
working capital limits. Also, exposure for working capital needs should not exceed
75% of the total working capital requirements of the borrower.
Consortium Lending – It’s a framework where banks have the freedom to frame the
ground for lending.
Syndication – It is an arrangement between two or more lending institutions to
provide a credit facility using common loan documentation.
Credit Thrust
The Bank of India has been proactively involved in lending to the priority sector to make sure
it meets the target prescribed by GOI/RBI which presently are –
Priority sector target of 40% of net Banks credit.
Exposure to agriculture not less than 18% of net Bank credit, and direct finance to
agriculture should not be less than 13.5% of net bank credit.
Exposure to weaker sections not less than 10% of net bank credit.
Export credit target of 12% of net Banks credit and etc.
Bank of India has well laid policies, which are reviewed periodically some of which are as
follows –
Increasing finance for production as well as investment for agriculture finance.
Priority is given to Infrastructure under priority sector financing.
Focus is on Low risk short duration exposures
Bank gives certain concessions to have better customer relations.
68
Bank has made efforts to make the process faster, by encouraging issuance of Kisan
Credit Cards.
Bank has been experimenting with innovative/area based schemes to improve lending
Bank has made many tie-ups with corporate, NGOs, NBFCs in order to focus on
different areas of finances.
The Changing Market Realities
Bank of India reviews the policies to be able to revise them as per the changing market
scenario. With the changing times, the bank has shifted their focus on to major corporate
clients with less risk. The corporate financing opens up ample opportunities in terms of
financing mergers, acquisitions, IPO financing etc. The thrust also lies on the post sale
finance services both for supplier and buyer.
The need to have exposures of the bank linked with products such as factoring and forfeiting
to ensure risk free recovery.
Bank of India does not encourage funding in areas of harmful/depleting substances. Also, the
bank tries not to finance areas which are affected by government policies.
Analysis of Credit Appraisal
Credit Appraisal is the process which is required for appraisal of the proponent to assess his
credit needs. The process of Credit Appraisal at Bank of India is no different. It involves
appraising the background of the Management, doing a technical and financial feasibility
study. Appraisal thus compromises two distinct segments –
Appraising the acceptability of the customer
Assessment of Customer Credit needs.
Main components of Credit Appraisal
Background of the Management
It involves knowing the borrower by either obtaining status reports from previous bankers or
by scrutinizing the management in case of corporate. The check is made to make sure that
borrower/ promoters name does not appear in the ECGC list of defaulters.
69
Commercial Appraisal
It involves detailed study about the product and its market, to understand the demand-supply
situation, the competition in the segment, effect of government policies on the industry etc.
Technical Appraisal
In case of project involving manufacturing or production, technical appraisal is carried out.
The TEV study is not done in case of service or for industries where he good does not go
through a state change. Also, there are exceptions where the TEV study is not required by the
sanctioning authority.
The traditional industries which are running over generations and whose viability cannot be
questioned can be exempted from TEV study. But it would be required for some new venture
with not much information on its know-how, its demand-supply pattern. Thus in all new and
Greenfield projects TEV study is carried out, even then if the company is reputed and the
Term Loan requirement is less than Rs. 20 Cr, TEV study can be waived off.
Its validity is for one year provided the scope of the project does not change.
Financial Appraisal
The second segment of Credit Appraisal i.e. Assessment of Customer Credit needs, requires
the financial performance of the proponents. The financial study gives us the clear idea about
the ability of the proponent to absorb unanticipated financial cost. Along with the cost of the
project, the financial projections are scrutinized to ascertain the financial need for the project.
The Performance Indicators are –
Profitability Ratios
Debt-Equity Ratios
Debt Service Coverage Ratio
Break-Even Point
Profit / Volume Ratio
Pay Back Period
Benefit Cost Ratio
Internal Rate of Return
70
Sensitivity Analysis
In case of higher limits, few other ratios are calculated –
Current Ratio
Total outside Liabilities (TOL) / Equity Ratio
EBITDA / Interest Ratio
PBT / Net Sales Ratio
(Inventory + Receivables) / Sales Ratio
DSCR ( Debt Servicing Coverage Ratio)
In financial appraisal, the projections are scrutinized so as to have an achievable Sales,
creditors, and holding level.
The Ratios are properly analyzed in order to have them within limits else an explanation for
the same is taken from the proponent. To make them more meaningful, the ratios are put
against the industry average. The positive and the negative factors which could affect the
financial need of the customer are considered.
Some important aspects to be analyzed –
Investment in subsidiaries should not be more than 10% of the Tangible Net Worth;
else the excess amount is deducted from the Net worth for computing various ratios.
Financial figures are reworked in order to avoid any misinterpretations.
The position of contingent liabilities, disputed tax liabilities and their impact on the
performance.
Types of facilities of Credit Delivery
Generally bank gives the following types of facilities to the customer:
The types of facilities would comprise of term loans , demand loans, O/Ds, cash credit,
WCDL, advances against bills, channel credit, invoice discounting/financing, discounting of
future cash flows/rent receivables and lines of credit, L/Cs, guarantees , acceptance
facilities ,cash management etc
These credit facilities can be broadly divided into two types:
Funded credit facilities
71
Non- funded credit facilities
Funded credit facilities
These facilities mainly consist of:
1. Working capital ( fund based)
The working capital includes the following :
Cash credit hypothecation of stocks
EPC-sublimit of CC
Cash credit hypothecation of book debts
FBP/FBD/ODF OBC
FBN-DP/DA 90 days
2. Term loans
Non- funded credit facilities
These facilities mainly consist of –
Guarantee
LC-inland/ foreign DP/DA 180 days
Analysis of assessment of Working Capital Limits
In Bank of India, the working capital requirement of the borrower is assessed using different
methods, based on the limits.
Turnover Method
Borrowers with a credit limit of less than Rs. 5 Cr, the working capital requirement is
computed as 25% of the projected annual turnover, of which bank provides 4/5th (i.e. 20% of
the projected annual turnover) and the remaining 1/5th is contributed by the borrower as
margin.
On an average the average business cycle assumed by the bank is 3 months; the bank is
flexible to consider the working capital limits in case of longer business cycle.
Level of Holding / MPBF
72
In this method of working capital assessment, bank determines the level of holding of
inventories by looking into the past levels of holding for inventory and receivables. In case of
A rated accounts with fund-based limits exceeding Rs 5 crores, cash flow statements would
be obtained and scrutinized. Cash DSCR and cash interest coverage ratios may also be
worked out and commented in the proposal.
Cash Budget System
The assessment of working capital requirement may be done on the basis of the projected
cash budget statement (annual) comprising of the projected receipts and payments for the
next 12 months on account of: Business operations, Non- business operations, Cash flow
from capital accounts, Sundry items
Analysis of Credit Proposal of Working Capital and Term loan
A.
1.
BORROWER PROFILE:
Name of Account
M/S Agni Engineers Pvt Ltd.
Factory
A-68, Prayag Apartment, Vasundhra Enclave, Delhi-110096
Regd. Office
B-59, Sector-83, Phase-II, NOIDA-201306..
2.
Constitution
Private Limited Company
3.
Business/Activity:
Manufacturing of sheet metal & press metal tools /plastic and rubber
moulding products.
BSR Occupation Code:
4.
Established in
36909
1992 as firm
5.
Advance since:
1995
1996 incorporated to
Private Limited Co.
6.
7.
If the account is new, name of the earlier Banker : N.A
a) Risk Rating
Present
Proposed
SBS4
SBS4
73
8.
Asset Code:
11/Standard
b) Pricing Rating
SBS4
SBS4
c) External Credit
N.A.
N.A.
Rating
9.
Group
No specific Group
10.
Chief Executive/
Mr. Rajeev Tiwari, Director
Promoter Directors
Ms Rupam Tiwari, Director
11
a
Consortium
N.A
b
Multiple *
Banking
No
Arrangements
N.A
Leader/
Share
Our
Share
N.A.
Main
Banker/
Our
Share
NA
Other
Banks/
Share
N.A.
N.A.
Other
Banks/
Share
N.A.
Share
B. ISSUE/S FOR CONSIDERATION:
12.
13.
Last Sanction / Review: Zonal Manager dated 07.03.2011
Present Request: Review/Additional Terms
1. Working Capital on same limit
2. Term Loan on run down /outstanding level
C.
14.
FACILITIES & SECURITY COVER AND MAJOR TERMS OF SANCTION:
(Rs. in lakhs)
Limits (with
purpose)
WC-Fund Based
i)CC- Stocks
Existing
100.00
Propo
sed
Inc.(+)/
100.00
--
74
Dec.(-)
in
limits
Pricing*
ROI/Commission
@4% over base
rate13.00% p.a.
with monthly
rests
Present
O/s as
31.03.11
19.25
Overdues @
Nil
ii)CC-B/Debts
50.00
50.00
--
--do--
50.00
Nil
100.00
100.00
--
--
69.25
Nil
3.22
0.95
3.22
Nil
134.36
107.36
144.09
--
Nil
-
--
--
274.00
248.61
217.86
--
(upto 90 days)
Max (i+ii)
Term Loan-I
(-)2.27
As per scheme
Autofin Loan
Term Loan-II
(-)27
@4.50% over
base rate13.50%
p.a. with monthly
rests
Land & Building
Non Fund Based
Total
Major Terms of
sanction
Repayment of TLs
-
--
--
a. Drawing to be allowed against paid stock only
b. Drawings against book debts of 90 days only
TL I (original limit Rs. 10.53 lac) repayable in 60 EMI of Rs. 23292.00
already commenced from Aug 2007.
TL II (original limit Rs. 160.00 lac ) repayable in 72 monthly installments
of Rs. 2.25 lac each already commenced from March 2010.
15. Security
Principal
Particulars
Date of
valuation
report
Value
(Rs. in crores)
Hyp. Of Stocks
31.12.2010
Value
Share
74.18
Hyp of Book Debts
31.12.2010
133.16
187.40
Hyp of Vehicle
31.03.2010
14.64
12.44
221.98
315.07
75
Our
115.23
D. COLLATERAL SECURITY
(Rs in lacs)
Nature of
Owned by
Security
EQM land Company
&
buildings /
Shed
Location
Valuation
i)B-59, Sector-83, Phase-II, NOIDA-
Date
Value
26-08-09
176.87
23-08-09
218.32#
201306
ii)Plot No 96 Sector- Ecotech Extn-I
Greater Noida
Total
395.19
#value is inclusive of land & building proposed
(Rs. in lacs)
16 Directors’ name
Assets
Liabilities
Sh. Rajeev Tiwari
67.74
Net worth
16.82
50.92
Mrs. Rupam Tiwari
47.07
20.29
26.78
114.81
37.11
77.70
Basis
CBD-23 dt 12-01-11
Guarantors’ Name
All the directors are guarantors
in the account
Total
E. CONDUCT/VALUE OF ACCOUNT :
17.
Conduct of the account:
Satisfactory
a)
Cheques Returned during the year under review for financial reasons: --
b)
LC Devolved and BG-Invoked during the year under Review: - N.A
F.
Financial Position:
76
-do-
(Rs in lacs)
18
.
PARTICULARS
Audite
d
Aud
Prov
Estim
Proj
Estim
31.03.1
0
31.03.1
1
31.03.1
1
31.03.1
2
31.03.1
2
31.03.1
3
31.03.1
4
17.13
17.13
19.13
19.13
19.13
19.13
19.13
255.83
287.19
382.10
420.31
420.31
471.41
530.71
Proj
1
Paid up Capital:
2
Tangible
Networth
3
Investment in cos
0.00
0.00
0.00
0.00
0.00
0.00
0.00
4
(Of which in
group cos)
0.00
0.00
0.00
0.00
0.00
0.00
0.00
5
Adjusted TNW
255.83
287.19
382.10
420.31
420.31
471.41
530.71
6
Capital Employed
369.53
437.71
503.67
573.93
573.93
598.03
630.33
7
Net Block
434.09
399.87
506.63
457.02
457.02
486.67
476.32
8
Net sales :
Domestic
655.70
900
910.8
1050
1050
1200
1500
1
1
Other Income
6.46
7
4.68
5.04
5.04
5.46
5.88
1
2
EBIDTA
47.56
85.14
76.71
88.95
88.95
104.43
118.39
1
3
Interest
7.11
35.15
25.26
28.92
28.92
24.65
25.78
1
4
Gross Profit/
(Loss)
40.45
49.99
51.45
60.03
60.03
79.78
92.61
1
5
Taxes
9.74
6.74
12.06
11.48
11.48
18.33
12.96
1
6
Cash Accruals
30.71
43.25
39.39
48.55
48.55
61.45
69.65
1
7
Depreciation
10.71
11.89
13.12
10.34
10.34
10.35
10.35
1
8
Net Profit/(Loss)
20.00
31.36
26.27
38.21
38.21
51.1
59.30
77
1
9
Net Profit/Capital
Employed (%)
2
0
2
1
5.41
7.16
4.93
6.35
6.35
8.18
9.02
Current Assets
284.89
269.93
330.55
359.62
359.62
419.71
510.73
Current Liabilities
379.39
235.53
308.84
218.65
218.65
285.24
333.61
.75
1.15
1.07
1.64
1.64
1.47
1.53
RATIOS :
2
2
Current ratio
2
3
Debt/Equity :
2
4
Term liab./
Adjusted TNW
.44
.52
.39
.43
.43
.33
.24
2
5
TOL/ Adjusted
TNW
1.93
1.34
1.20
.95
.95
.93
.87
2
7
Profitability%:
PAT/Net Sales
3.05
3.48
2.88
3.64
3.64
4.26
3.95
2
8
DSCR
2
9
Interest Coverage
3
0
Inventory +
Receivables/
Sales (%)
19.
Average DSCR is 1.80
5.32
2.23
2.56
2.68
2.68
3.49
3.70
.33
.27
.30
.29
.29
.29
.29
Comments in brief on financial position:
The financial indicators of the company have been derived on the basis of audited
financial accounts for the period ended 31.03.11, Provisional for FY 11-12, estimates
for the current year and projections for next years. Our comments based on the
financials indicators are as under:
19.1 PAID-UP CAPITAL/TNW:
Paid up capital of the company is Rs.19.13 lacs as per audited financials as on
31.03.2011.the Tangible Net Worth of the company stood at 382.10 lacs as at 31.03.2011
as per audited balance sheet in comparison to 255.83 lacs as per audited balance sheet of
31.03.2010. It is further estimated / projected to improve to Rs. 420.31 by 31.03.12 and
78
Rs.471.41 lacs by 31.03.13. Thus the capital /TNW base / position is adequate to cover the
proposed exposure as per norms.
The reconciliation of the TNW of the company is as under:
TNW as on beginning of the year 31.03.10
Add: Increase in capital
Increase in share premium
Net Profit & Surplus
Less:
TNW as at the end of 31.03.11
(Rs. In lacs)
255.83
2.00
98.00
26.27
382.10
19.2 SALES: Sales of the company are mainly in domestic market. The company had
achieved sales of Rs.655.7 lacs during the year 2009-10 the sales achieved by the
company during the year 2010-11 is Rs.910.8 lacs as per audited balance sheet in
comparison to Rs. 900.00 lacs as per estimated financials submitted by the company.
The Company has projected the same to the level of Rs 1050 lacs by 31-03-2012 and
Rs. 1200 by 2012-13.Looking to the past trend and market reputation, adequate orders
in hand, we feel the estimated/projected sales turn over is would be achievable by the
Company.
19.3 OTHER INCOME: The company had earned other income of Rs. 4.68 lac during the
year 2010-11.other income mainly comprises of job works, sale of scraps and other
Misc. receipts.
19.4 PROFITABILITY: Profitability of the company from operations was at 2.88%
during 2010-11. The profitability increased to 3.64% as on 31.03.2012 (Provisional)
and is comparable with other such units engaged in this line of activity. Profitability at
this level is considered reasonable / good.
19.5 NET BLOCK : The net block of the company stood at Rs.506.63 as at
31.03.2011,which mainly comprises of land and building of Rs.342.55 Lac ,plant and
machinery of Rs.135.77 Lac and Misc .Rs.28.31 lac
19.6 CURRENT RATIO: During the year ended 31.03.11, CR was 1.07, which is within
Bank’s acceptable norms. It has increased to 1.64 as at 31.03.12 (provisional) due to
reduced borrowing during the year.
19.7 DEBT EQUITY RATIO: The debt equity ratio of the company as on 31.03.2010 is
0.37 and the same is 0.32 as per audited balance sheet as on 31.03.2011.Branch has
accepted the same.
19.8 DSCR/ISCR: In view of good profitability of the unit / cash accruals, DSCR for the
existing term loan obligation has been well above the accepted level. DSCR for the year
2010-11 is 1.24. The position is considered satisfactory. The repayment of existing term
loan has been in time. No difficulty is envisaged in timely servicing of term loan
installment and interest in future as well.
79
Further the present and estimated ISCR of the Company are at satisfactory level. ISCR
stood at 2.56 as at 31.03.11. As per provisional financials as at 31.03.12, the same has
marginally increased to 2.68 due to increase in profit during the year viz a viz last
financial year and increase in interest due to additional Term loan availed/sanctioned
by us during the year. Company has projected ISCR to improve to 3.49 as at 31.03.13
due to better estimated profits during the year.
19.9 CONTINGENT LIABILITIES: There are no such liabilities reported in the audited
balance sheet of the company as on 31.03.11
19.10 AUDITOR’S QUALIFICATIONS if ANY: As per the Auditor’s report as at
31.03.11, no qualification has been observed.
In view of the above the financials of the company can be considered satisfactory.
20. Inter Company Comparison N.A
Name of Co.
Year
Sales
PBT/Sales
TOL/T
NW
CR
21. Favourable Factors (in brief): the branch has adviced as under:
1. The company has been dealing with our noida branch for 16 years.conduct of the
account has been reported satisfactory.
2. There has been steady growth of business of the company in the past.
3. Company’s products have wide end use applications. Market share of products is
increasing year after year. Company’s clients are big/reputed corporate. The
improvement in the economy which has started shall add to the further growth of
the company
4. Mr. Rajeev Tiwari the principal promoter director behind the acrivity of the unit has
experience of over 15 years in this line of activity. His contribution has been
valuable in further growth of the business.
22. Risk Factors and Mitigants:
Risk factors:
1. There has been substantial fluctuation in the prices of metal and metal products in
the past. This affects the turnover and profitability.
2. There is tough competition in the market.
3. Usual market risks associated with the trade.
80
Mitigating factors:
1. By virtue of their vast experience in the line they have gained expertise to control the
price fluctuation factor suitably to avoid adverse effect on the margins.
2. They have sustained the market competition over the years and have earned good
reputation in the market.
3. Their dealings with the retail customers are very limited.
23. Borrower’s Exposure: (Existing) – with us
(Rs. in lakhs)
Amount
Facility
O/S as on
Asset Status
31.032011
With Us
i) CC –Stock
100.00
ii) CC-Book Debts
19.25
50.00
Max (i+ii)
50.00 Standard
100.00
69.25
Term Loan- I
(Autofin loan)
Term Loan- II (Land &
Building
With Other Banks
Nil
6.50
3.81 Standard
134.36
107.36 Standard
NA
Total
274.00
24. Group Exposure (including this proposal):
Name of
company/
firm
NA NA
Zone/
Branch
AC/
CR
F.B.
N.F.B.
81
217.86
(Rs. in lakhs)
Total/
Max.
Outstanding
Out of
As on 13.01.11
Order,
FB
If any
NFB
M/S Agrahan Ghaziaba
d
Engineers
Noida Br
Pvt Ltd
11/ AA
248.61
Nil
248.61 217.86
Nil
Nil
(Rs. in lakhs)
Maximum exposure based on capital funds as on
04.12.2010
Borrower
Cap.
M/S Agrahan Engineers Pvt Ltd
Total
Group
Cap.
Actual
248.61
248.61
Actual
248.61
248.61
25. Exposure to Industry (including present exposure) - Not Available
(Wherever applicable)
(Rs. in lakhs)
a) Sectoral Cap for Industry
:
N.A.
248.61
b)
Bank’s Exposure
:
c)
Zone’s Exposure
:
d)
NPA Bank
:
e)
NPA Zone
:
26.Utilization of Account
(Rs. in crores)
Utilization of :
2010-11
Amount
a) Fund Based Limits
82
2011-12
%
Amount
%
i.
Term Loan
0.12
100.00
0.08
100.00
1.29
64.50
1.71
71.25
0.26
52.00
0.61
40.67
-2010-11
--
ii. Working Capital
b) Non Fund Based Limits
27.
28.
Export Turnover (Rs. in lakhs)
Earning (Rs. in lakhs)
Interest
-2011-12 (Estimates)
0.14
Other Income
No.
0.19
Amt.
Earnings
0.01
Bills Purchased/ collected
-
-
LCs opened
-
-
Guarantees issued
-
-
--
No.
Amt.
Earnings
0.01
Any other Income
0.02
0.02
Total
0.17
0.22
Yield
12.06
12.29
29. Details of Float Available:
(Rs in lacs)
Current Year Position
No of A/Cs
Position during last year
Amount
Average
Outstanding as on
Balance
31.03.11
Savings bank
--
--
--
--
Current Deposit
1
0.85
0.58
0.76
Term Deposit
4
0.67
0.47
0.50
Total
5
1.52
1.05
1.26
30. Concessionary facilities : None
31. AUDIT/ INSPECTION/ MEETINGS:
83
Last Date
Remarks/observations
N.A.
Not Applicable
Stock inspection
Stock audit
Consortium meeting
32 a
Any adverse comments of Statutory/ No major irregularities persisting in the account.
Internal/Concurrent/RBI Auditors and
Borrower's Auditors (as extracted from
the Balance sheet)
32 b
Closure of CPA (Authority & Date)
33.FLOW CHART
Date application received at branch
Date of Branch Proposal
Date proposal received at Zonal Office
Date clarifications received at Zonal Office
Date of ZO Proposal
04.05.12
09.05.12
ASSESSMENT/JUSTIFICATION FOR PROPOSED LIMITS :
34. Project Finance/Term Loan Assessment:
The Co. was sanctioned Term Loans for land & building and the other term loan was sanctioned for
purchase of delivery /transportation vehicles. The details of the same are as under :
34.1 Term Loan –I (Land & Building) :
The company was sanctioned a Term Loan of Rs.160.00 lacs for Land & Building for acquiring
Industrial Plot No. 96 at Ecotech, Extension –I, Greater Noida and for construction of building
there on .Total cost of project of land & building was Rs 218.32 lacs and the margin money Rs
58.32 lacs @ 26.75% contributed by the Co.
84
Repayment
The loan is repayable in 72 monthly instalments of Rs 2.25 lacs each commencing from March
2010 . The interest is serviceable as and when applied to the account .The project has been
completed and the repayment in the term loan account is as per the stipulated terms and the account
is in order . The conduct of the account is satisfactory. We recommend to review the same at its
drawing limit /outstanding level
34.2 Term Loan –II (Autofin Loan) :
The Co. has been sanctioned a term loan of Rs 10.53 lacs for purchase of Honda Civic
vehicle under the Bank`s Autofin Loan Scheme . Total cost of vehicle was Rs 12.49 lacs
and the margin money of Rs 1.97 lacs @ 15.74 % contributed by the Company .
Repayment
The loan is rapyable in 60 EMI of Rs . 23,291 /- from Aug 2007 . The account is regular
and the conducted satisfactorily . We recommend to review the same at its drawing
limit/outstanding level .
34.4
SECURITY:
The said term loans are secured by way of EQM of land & building and
hypothecation of vehicles under the Bank`s hypothecation clause with concerned
RTOs as per the RC available with us .
As discussed in the Para 19.4 profitability of the company has been accepted at the
estimated level. Accordingly based on the same DSCR of the company for the entire
tenure of all the term loans for the company as a whole are as under:
2010-11
2011-12
2012-13
2013-14
2014-15
2015-16
PAT
26.27
38.21
51.10
59.30
48.40
50.62
Depreciation
13.12
10.34
10.35
10.35
10.35
10.35
Cash profit
39.39
48.55
61.45
69.65
58.75
60.97
Interest on TL
25.26
28.92
13.37
9.32
5.27
1.30
Sub total
64.65
77.47
74.82
78.97
64.02
62.27
Interest on TL
25.26
28.92
13.37
9.32
5.27
1.30
Installment of TL
27
27
27
27
27
27
85
Sub total
52.26
55.92
40.37
36.32
32.27
28.30
DSCR
1.24
1.38
1.85
2.17
1.98
2.20
Average DSCR
1.80
The DSCR is satisfactory and average DSCR comes to 1.80
35. Working Capital Assessment:
At present the company is enjoying Fund Based credit facilities by way of Term Loan of
Rs.1,40,86,000 and WCL of Rs.1 crores from our branch . The working capital limit was
assessed for the year 2010-11 based on the estimated sales turn over. Now the Co. has
requested us to review the WCL based on the estimated sales turn over for the F Y 2011-12
and we have taken the estimated sales turnover of Rs. 1050 lacs for assessing the working
capital requirement of the company. Based on the said level of sales ,the working capital
requirement of the company as per turnover method has been assessed by the branch as
under:
31.03.11
31.03.12
a
Gross Turnover
910.80
1050.00
b
25% of Gross Sales
227.70
262.50
c
5% of Gross Sales
45.54
52.50
d
Actual/projected NWC
21.71
140.97
e
b-c
182.16
210.00
f
b-d
205.99
121.53
g
Cash Credit
of stocks
Permissible Bank 1Finance (lower
of e &Hyp.
182.16
f)
2
Cash Credit Hyp of Book Debts
S.no.
h
Limits Requested
i
Limits Recommended
Facility
Max of Stocks100
& Book Debts
100
36. Non Fund Based Limits Assessment: N.A
86
121.53
100
100
(Rs.
In
lac)
Limit
Margin
100.00
25%
50.00
40%
100.00
--
37.
38.
CONFIRMATION:
a.
Compliance of last sanctioned terms
:
Yes
b.
Security Documents are valid/in force
:
Yes
c.
Proper charge on securities created in Bank's favour
:
Yes
d.
Exposure is within Bank’s prudential Norms/RBI guidelines
:
Yes
e. Company/directors are not under Bank’s/RBI/ ECGC defaulter’s :
list
No
f.
Any deviation from usual norms
:
g.
Whether directors are disqualified under Section 274 of :
Companies Act
NA
h.
Any arrears in payment of statutory liabilities by the Co.
:
No
i.
Whether status report/D&B report, if applicable, obtained
:
N.A
j.
Auditor’s comments on Corporate Governance Practices followed :
in case of Limited Companies
N.A.
k.
Pending litigation against / by the company (if yes, details)
Nil
:
No
Industry Perception: Business Scenario Perception / SWOT Analysis / Risks and
Mitigation
Strengths:
1. The Company has been in the market for over 20 years. Market share is
steadily increasing. Margins are improving.
2. The promoters are in the existing line of activity for the last over 20 years.
3. There regular demand of the products in the market and outlook for growth in
the domestic sector appears positive.
87
4. The company has increased the product range which enables to sell various
types of products from one place.
5. Promoters / family members are very well known to the bank. Their dealings
have been for more than 16 years. Conduct of the account has been
satisfactory.
6. The clients of the company are big corporates like Hero Motors, SAMSUNG
and Moser Baer etc. The company enjoys good reputation in the market in
Delhi.
Weakness:
1. Government policies on metal prices, regulatory aspects may cause fluctuation
in the prices and down the general sentiments in the market.
2. Volatility in the prices may also occur due to international market position.
Opportunity:
1. The sheet metal & moulding components have wide applications in FMCG,
automobiles, electronic items, telecommunication industry and various other
sectors and thus it is estimated that consumption / demand shall continue to
grow.
Threats:
1.
Competition in the market has bearing on sales.
(Industry average/benchmark (as extracted from CRIS INFAC/Capitaline
wherever available)
------Not Available-----
PBT/
Net Sales/
Bank Finance/
Net Sales
Total Tangible
Current Assets
88
Inventory +
Receivables/
Assets
Net Sales
39. BRANCH RECOMMENDATIONS
Mr. Rajiv Tiwari started the business of sheet metal & moulding components on very low
scale in the year 1992 in a proprietorship firm. The firm was converted to M/S Agrahan
Engineers Pvt. Ltd (AEPL) in the year 1996. The unit is engaged in the manufacturing of
same sheet metal & moulding products it started in 1992. It is a closely held private
limited company with Ms Rupam Tiwari W/O Mr Rajiv Tiwari as another director. The
Company’s manufacturing activity is located in own factory building situated at B-59,
Sector-83, NOIDA. The required infrastructure is available in the area . The company has
grown steadily over the years. Enthused with the growth and demand of the product, the
company has made the expansion by way of acquiring land & building at Greater Noida .
Mr. Rajiv Tiwari, promoter /director has experience for over 20 years in the line of
activity and the over all control of marketing and administration rests with him. For day
to day operations, manufacturing process, administrative work, the company has
employed other executives/ supervisors, trained staff and semi skilled workers. The
company employs about 60 staff for its activity. Looking to the steady growth,
satisfactory conduct of the account, the management of the company is considered
satisfactory.
The company has been banking with us since 1995. The conduct of accounts has been
satisfactory. The present request of the Company is as under :
Present Reference:
1)
Review of term loans at its drawing limit/outstanding level.
2)
At present the company is enjoying working capital limit of Rs.100 lacs from our
Bank as per last sanction. WC limit is proposed to be reviewed at same level of
Rs.100 lacs based on the turnover method .
Financial Position:
Financial position based on balance sheet as on 31.03.10, 31.03.11, estimated balance
sheet as on 31.03.12 and projections for the next year has been mentioned in detail in the
proposal. The sales of the company are showing increasing trend over the years. Liquidity
and other ratios are at acceptable levels. Capital/TNW is adequate for the exposure norms.
Profitability is at satisfactory level and is improving over the years. The parameters along
with the explanations have been considered and the position is satisfactory.
Security:
The credit facilities are secured by hypothecation of stocks & book debts, plant &
machinery, hypothecation of vehicle out of Bank finance and the same are collaterally
secured by extension of EQM of existing factory land & building situated at B-59, Sector83, Noida valued at Rs.176.87 lacs as per the Bank`s appoved valuer M/S Accurate
Valuer`s report dated 26-08-2009 and EQM on Industrial plot No.96 , Sector–Echotech
89
Extn-I, Greater Noida valued at Rs. 140 lacs as per the Bank`s approved valuer Mr.
Gurcharan Singh `s report dated 23-08-2009 (total value inclusive of proposed building is
Rs 218.32 lacs ).
Guarantor(s):
In addition to above ,the personal guarantee (Joint & Several guarantee) by Sh. Rajiv
Tiwari & Ms. Rupam Tiwari,both the directors of the company is proposed for the
existing as well as the for the additional advance .
Credit Rating and Pricing:
We have carried out the credit rating exercise in the account based on the audited Balance
Sheet of the Company as of 31.3.2011, the account qualifies for SBS-4 rating . Accordingly
we propose to charge the rate of interest applicable to MSME unit as per the present
guidelines .
Recovery of Applicable Charges:
All applicable charges shall be recovered as per the guidelines .
35. Recommended for
I.
SANCTION of:
Limits
a)CC Hypothecation of Stocks
Existing
Proposed
100.00
100.00
50.00
50.00
100.00
100.00
3.22
.95
d)Term Loan (Land & Building)
134.36
107.36
Total
274.00
90
248.61
b)CC Hypothecation of Book
Debts
Max. a+b
c)Term Loan-I
I.
36.
APPROVAL FOR:
a) Assigning SBS-4 rating to Company and Rate of interest as per Para 35.
Authority for Sanction
In terms of extant guidelines under delegation of powers the proposed limits falls
within the delegated authority of GM-NBG as per revised delegation of powers
circulated vide HOBC No. 104/134 dated 25.01.2011.
Submitted for sanction/approval, please.
RECOMMENDED
(------------------)
(-----------------)
Manager
Chief Manager
Analysis of assessment of Term Loan
The appraisal process of a term loan is a little different form the appraisal process of working
capital. A few more factors have to be considered for the term loan appraisal in addition to the
other details like borrower’s profile, credit rating etc.
For providing term loan facilities, a few more factors have to be considered. They are the
funded debt/equity ratio, the DSCR both for the project and the company, as a whole as also
the period of repayment should be given due weight-age. Also the cash-flow statements are to
be obtained and analyzed in all accounts with limits of Rs5 crores and above or wherever
needed
Risks associated with the borrowal accounts like critical inputs risk, operational risk,
production process risk, marketing and labour risks are to be analyzed and taken into account
in the assessment.
91
The following things are taken into consideration while appraising the term loan –
Project particulars
Cost of source of finance,
Amount of advance and purpose
Repayment schedule
Details of security/ value of security/margin: basis of valuation
Comments on the project
Project revenue, profitability and DSCR
Marketing viability
Project implementation schedule along with present status of reports
Availability of refinance
Analysis of Credit Proposal of Term Loan
Proposal of R&R Infra Private Limited
Question – Industry is Infrastructure under the heads “Roads and ports”
The company XYZ LTD. Limited has a fund based requirement of Rs. 10000 lacs. The
company is under PPL (Public Private Partnership).
Credit Requirement
Facility
Proposed
Term Loan
10000
Working Capital ( FB )
Non-Fund Based
Total
10000
The Memorandum of Sanction or Memorandum of Approval starts with the Proposal Number
for Reference along with date of application and date of creation for the proposal.
92
The Credit Proposal along with major sections from A to J, with all sections together
accounting for a total of 36 customized headings which contain data depending on the credit
proposal requirement for that project. Example – The Term loan requirement for this project
does not require Working Capital Assessment.
Borrower Profile
The first section named A is Borrower Profile, which contains the basic details about the
borrower i.e. Name of Account, Constitution(Private/Public), Business Activity(Example –
Construction of roads and highways), Business and Account establishment dates, Credit Risk
Grades, Group and Directors Information, Consortium (Yes/No), Multiple Banking
Arrangement (Yes/No).
The XYZ LTD. Public Limited (Unlisted) is into Construction of Roads and Highways. It
was established in 2004 and has been in business with the bank since 2006. The Risk Grades
assigned for Borrower Risk Grade is LC6 and for Borrower Pricing Grade is LC7. The Group
for the project is a Joint venture between public and private firms. Mr. K. Singh is the
Managing Director and it is a consortium lending with the market share as 9.09%.
Sharing Pattern of Term Loan
Name of Bank
Amount
Percentage (%)
Other Banks
100000
90.91
Bank of India
10000
9.09
Total
110000
100
Issue for Consideration
The second section named B is Issues for Consideration. It covers the Last Review, Any
additional request.
The XYZ LTD. Limited is submitting a new request for a fund based loan of Rs. 10000 lacs.
Facilities and Security Cover
93
The third section named C is Facilities and Security Cover. Under facilities it covers the
limits sanctioned, the pricing, the outstanding amount, and over dues if any. Also it covers the
Repayment of Term Loan.
Limits
Existing
Proposed
Inc/Dec
Pricing
O/s
Over dues
Term Loan
--
10000
--
9.5 %
9094
--
Working
Capital
--
--
--
--
--
--
Non-Fund
Based
--
--
--
--
--
--
Total
--
10000
(+)10000
--
9094
--
Repayment of 48 unequal quarterly installments commencing from June 2012. The door to
Term Loan
door period is 16.5 years. The tail period is 15.5 years. Total project period is
32 years.
Under Security Cover, the borrower is required to provide the principal and collateral
security. But in cases collateral can be exempted.
In principal security it usually covers the current assets of the company, whose value is
ascertained and acts as a security cover against the credit provided to the borrower. In case of
consortium, since there are many banks so each bank has to find out their share depending
upon the share of loan granted i.e. the total project cost is Rs.150000 lacs and the loan share
is 9.09%.
Thus the security value as per Bank of India loan share comes out to be 9.09% of Rs.150000
equal to Rs.13646 lacs.
Guarantor may be required to provide security against credit, but it is again not a mandate
and depends upon project.
Security
Particulars
Date of Evaluation
Principal
Hypothecation
of Eventual
assets,
Escrow
Account, Assignment
of Rights, Assignment
of Insurance, DSRA
13646
Collateral
--
--
-94
Value(Our share)
Exposure
The fourth section named D is Exposure, which provides details about the Borrower’s
Exposure, Group Exposure, Industry Exposure and Conduct/Value of Account.
In Borrower’s Exposure, we take into account all the existing exposure of the borrower with
Bank of India, with Other Banks, with FIs / LIC etc.
Facility
Amount
O/s
With Bank of India
TL
10000
9094
With Other Banks
TL
95000
86357
With FIs / LIC
TL
5000
4548
110000
99999
Total
In Group Exposure, the group which in our case is a Joint venture between a public and
private. Thus the group exposure with Bank of India needs to be calculated.
Both the Borrowers Exposure and Group Exposure needs to be within the limits sanctioned as
per the Credit Policy.
Borrower
Group
Cap
Actual
Cap
Actual
294000
10000
735000
170376
Industry Exposure marks the cap for that sector, the Bank and the Zone Exposure as well as
NPA for that sector.
Exposure to Industry
Sectoral Cap for Industry
506065
Bank’s Exposure
379966
Zone’s Exposure
151557
NPA Bank
242
95
NPA Zone
--
Conduct/Value of the Account is very important criteria in deciding the Rate of Interest. It
takes into account the conduct, utilization of limits as well as the earnings made.
Utilization
Last Year
Percentage
Amount
Term Loan
4675
Current Year
Percentage
Amount
46.75
9600
96
Earnings
Interest
444
912
Other Income
0.73
25
Total
444.73
937
Yield %
9.51
9.76
The Low Yield is on account of ROI being linked to the Government Securities, as it is a
Public Private Partnership, so the ROI charged is low.
Favorable factors
The project is a joint venture between XYZ LTD. and Government of Rajasthan, with
promoters having robust experience in project development and implementation.
The government of Rajasthan has accorded high priority for development and up
gradation of infrastructure and has thus created state road development funds to
provide balance investment.
Investment is expected to be recovered through the levy of toll fees.
Financial Position of XYZ Infra
The project is an effort to improve the road infrastructure. It is a joint venture of the public
and private institution.
Paid-up Capital
The paid up capital is constant at Rs. 5000 lacs at the end of FY 2008, and is estimated to
increase to Rs. 25800 lacs by FY 2009 and to Rs. 28300 lacs by FY 2010.
96
The company is planning to raise the amount by IPO/Private Placement for funding the
project cost. The timing for IPO would depend on market conditions. Thus in case of delay in
IPO/Private Placement process, the promoters will provide an undertaking for arranging the
equity requirement of the capital.
Net Sales
The year FY 2008 is the first year of operations. The revenues for the same will start coming
from the toll collected on the completed stretches. The revenues earned for the year 20072008 was Rs. 929 lacs and were estimated to Rs. 7500 lacs for the Year 2008-2009. The sales
were found to be in line to achieve the estimated sales.
Other Income of Rs 114 consisted of interest on Fixed Deposits.
Profits/Profitability
The company has suffered a net loss of Rs. 2781 lacs as the revenues were operational for
part of the year. Also, as interest of Rs. 15 Cr has been expensed due to prior completion of
the project.
The gaps had been met by the Financial Security Fund of the Government. The EBIDTA is
expected to be Rs. 7500 lacs at the end of FY 2010.
The company as a whole would be break even and start generating profits from their second
year of operations. The losses if any will be met by the FSF set up the government.
Investments
The company has projected investments at Rs. 12500 lacs, as it has planned to invest in land
adjacent to the toll roads. The investment in land banking would be financed with the
proceeds of the IPO/Private placement.
Total Net Worth
TNW at Beginning of the Year
29106
Add: Increase in paid up capital
Increase in share premium
Net profit for the year
Decrease in intangible assets
-
97
Less: Decrease in paid up capital
General Reserve used for Provision
Increase in Intangible Assets
Dividend payment including tax
Loss during the Year
TNW at end of Year
2781
26325
The TNW is estimated to be Rs. 52500 lacs at end of FY 2011, and to Rs. 52200 lacs at end
of FY 2012.
Particulars
FY 2011
FY 2012
TNW at Beginning of the Year
26325
52500
Add: Increase in paid up capital
Increase in share premium
Net profit for the year
Decrease in intangible assets
Sub-debt from XYZ LTD.
Additional funding from Public
Contribution from Government
State Fund
Less: Decrease in paid up capital
General Reserve used for Provision
Increase in Intangible Assets
Dividend payment including tax
Loss during the Year
TNW at end of Year
20800
9800
2000
8500
2500
2600
2200
12725
52500
5400
52200
Financial Position of XYZ Infra
Audited
09
Audited
2010
Estimated
2011
Projected 2012
Paid up Capital
Equity
Preference Share
Tangible Net Worth
Investment in Cos
Adjusted TNW
5000
5000
25800
28300
29106
26325
29106
26325
52500
-12500
45250
52200
-12500
44290
98
Capital Employed
Net Block
Net Sales
48951
50161
Domestic
Exports
Total
Other Income
EBITDA
Interest
Gross Profit
Taxes
Cash Accruals
Depreciation
Net Profit
Net Profit / Capital Employed %
Current Assets
Current Liabilities
Ratios
Current Ratio
Debt/Equity
Term Liab. / Adjusted TNW
TOL/Adjusted TNW
Profitability Percentage : PAT / Net
Sales
DSCR
Company as a Whole
For Specific TL
Interest Coverage
Inventory + Recievables / Sales (%)
114
105
105
41
64
64
0.05
1334
2545
0.524165
0.68
0.77
125623
120805
173500
160700
200000
184500
929
7500
15500
929
7500
458
1585
-1127
-2
-1129
1652
-2781
-100
12700
-12800
15500
1000
7500
12900
-5400
-7400
5400
-12800
-100
5400
-5500
12165
7348
200
2900
1.655552531 3.77
4.05
2.3
2.3
2.83
2.83
Average DSCR 2.34
Average DSCR 2.37
0.29
0.42
1
Important Ratios
Debt-Equity Ratio – There is an increase in project cost due to increase in the price of raw
material (i.e. Bitumen) from Rs 150000 lacs to Rs 161800 lacs. The increase in cost would be
met by the sponsors. Thus the DER ratio comes out to be 2.12.
Interest Service Coverage Ratio – The ISCR for the project is 0.29 for FY 2010 and at 0.42
for the FY 2011. The low ISCR ratio is acceptable as the company has made provision for
payment of interest in the form of Financial Security Fund and also Debt Service Reserve
Account (DSRA) has been factored in the project cost.
99
With operations going to full scale, the company should improve the ISCR Ratio.
Debt Service Coverage Ratio – The Average DSCR for the project is 1.67. With other projects
in line, the average DSCR is expected to go above 2, which is acceptable.
Analysis of Term Loan Assessment
The project is a joint venture between the government and private institution. It is a part of
the initiative taken by the Government for improving the roads and infrastructure to promote
tourism. The estimated cost of the project is 150000 lacs.
Project Cost (Rs. In lacs)
Equity
IPO
5000
Debt
Interest
free
Government
sub-debt 24000
Sub-Debt from Banks/FI’s
5000
Sub-Debt from XYZ LTD.
4000
Term Loans from Banks/FI’s
110000
The company has taken a Term loan of 110000 lacs by a consortium of 12 banks. With our
share at Rs. 10000 lacs(9.09%).
The project cost increased from Rs. 150000 lacs to Rs. 161800 lacs on account of increase in
the raw material. The increase will be offset by the saving initiated by the company of Rs.
9900, and the remaining Rs. 11800 lacs, part of which Rs 2000 lacs will be met by the
Government and remaining Rs. 9800 lacs will be met by the sub-debt from the sponsors.
As Security, the term loan has a first pari passu charge on the assets of the project. The value
of security under our share is Rs. 13646 lacs. The company is also required to maintain
insurance for the cost and expenses incurred for management of the risks.
The price charged is 9.5%, which is then linked to the Government Securities. This pricing is
sector specific and as infrastructure is priority sector for the Bank. The interest rates are kept
low by linking it to the Government Securities.
100
The project appraisal finds that the substantial stretches have been completed before time.
Toll collection has commenced. The Average DSCR for the project works out to be 2.34
The company is servicing interest in spite of losses, from the Financial Security Fund made
available by the government.
In the process, a complete viability study of the project as in this case the road viability is
studied in terms of its connecting ends and the purpose it serves in comparison to the existing
road links in terms of shorter route etc. The purpose for undertaking the project is studied indepth to calculate the amount of advance. Also the study of expenses as in this case:
Civil Work Cost – The civil cost with provision for contingencies and price escalation.
Land Acquisition and Rehabilitation expenses – Cost of acquiring the land and
implementing the rehabilitation program.
Preliminary and Pre-Operative Expenses – The expenses incurred for project
development and administrative expenses.
Interest during Construction – The amount is estimated and the company has to make
provisions for effecting the payment before the start of operations.
The current status, the proposed improvements and estimated benefits of the project are
studied.
Traffic Assessment
In order to assess the potential of the project, a traffic assessment study is done. This helps us
to understand the feasibility of the project. The traffic volume has been arrived by
multiplying with the seasonal variation factor to arrive at Annual Average Daily Traffic
(AADT). The growth rate is then identified based on the study done on the traffic pattern.
Project Appraisal, viability, profitability projections, DSCR
The average DSCR works out to be 2.37, with a minimum of 1.28 in the first year of
operation. With the traffic study the growth potential for traffic has been identified.
The project period provides a revenue tail of 17 years to mitigate any unforeseen risks. Thus
the project is economically viable and technically feasible.
101
Sensitivity Analysis
The project is subject to toll revenue and operating cost risks thus we do a sensitivity analysis
Scenario
Senior Debt without DSRA
Senior Debt with DSRA
Avg. DSCR
Min. DSCR
Avg. DSCR
Min. DSCR
2.35
1.28
2.37
1.58
Base Case Traffic 2.20
Reduced by 10 %
1.19
2.22
1.48
Increase in Project 2.18
cost by 10%
1.19
2.20
1.46
Increase in O&M 2.33
cost by 10%
1.26
2.35
1.56
Base Case
Security
The principal security is the charge on current assets i.e. movable, tangible, intangible assets,
receivables, cash and investment.
An Escrow account is maintained into which all the investment in the project, and all project
revenues and proceeds are deposited.
Debt Service Reserve Account
The company is also asked to maintain a DSRA from the commencement of operations to
meet the debt service requirements. An amount equal to the principal and interest for one
quarter is maintained. Amount in DSRA shall be utilized only in case of short fall in cash
flows for meeting the debt service requirements.
Industry Perception
102
An efficient transportation system is a pre-requisite for sustained economic development.
Transportation system includes roads, railways, waterways etc. Roads are considered the
primary means of transportation in the country due to easy accessibility. On an estimate
around 61% of the total freight and 86% of the total passenger traffic is carried by roads.
India has the second-largest road network in the world, aggregating 3.34 million km. In the
decreasing order of the volume of traffic movement, the road network can be divided into
National Highways, State Highways, Major district roads and Rural and other roads.
Roads are the preferred mode of transportation in India. Road Transport has emerged as the
dominant segment in India’s transportation sector. The sector has plays a major role in the
country GDP.
The State Highways are secondary system of road transportation, providing linkages to the
national highways, connecting important towns, tourist centers and ports. Major district roads
run within the district connecting areas of production with the markets and providing
interconnectivity between the rural areas and district headquarters.
The secondary system of roads carried 40% of the total road traffic, although they constitute
around 18% of the total road length. They contribute significantly to the rural economy and
thus to the industrial development of the country by enabling movement of raw materials and
products.
Branch Recommendations
The company is an initiative of the government to improve the infrastructure with the
objective of making the state a preferred destination for tourism.
The company is also responsible for improvement, rehabilitation, and maintenance of the
project roads and the sponsors has a proven track record in the infrastructure sector.
The PDA (Partnership and Development Agreement), authorizes the company to collect the
toll fees from the users of the Project Roads and transfer the project roads at the end of the
Project period.
Considering the viability of the project, acceptable DSCR, DSRA provision, experience and
track record of the promoters and tail period of 17 years, the Term Loan limit of Rs. 10000
lacs is given to the company.
103
Management of the Company
The Board of Director’s are from the Government bodies and XYZ LTD.. This is JV 50:50
between the public and private so the management does not stand as guarantors.
It is the Private body which needs to be studied i.e. XYZ LTD..
XYZ LTD. – It is a premier financial institution with the objective of developing projects in
the infrastructure sector. The key promoters are Central Bank of India, HDFC, and UTI. The
company undertakes projects in the following broad business segment –
Commercialization of Infrastructure projects
Financial Services ranging from project financing, investment banking etc.
The company is a premier in financing Infrastructure projects and has huge exposure and
experience for carrying out the implementation of the Project.
Credit Review
This is a very important activity to monitor the progress of the Client project and to make
sure that the funds are being used in the same area as mentioned. The default time period is
half-by yearly basis. Though the proposal is reworked on yearly basis to mark the progress of
the project and make changes in the limits / interest rates and other terms and conditions.
Credit Rating
The bank while evaluating the credit proposal derives the credit rating which has to be over
and above “LC5”, based on which the interest rates to be charged are decided. In special
cases bank may consider projects with LC6 and LC7. The Borrower Risk Grade and
Borrower Price Grade both are checked and the recommendations are made.
Risk factors and Mitigation
Risk Type
Mitigation
Time and Cost Overruns during construction
The company has undertaken improvement
works and completed substantial portion before
time
104
Adequate escalation provisions are provided.
Statutory Approvals and Clearances
The critical clearances are obligations of the
Government, which has a joint venture, thus no
delays
Commercial Risk
Geographical location adds to the positives, as
traffic has registered a growth of 61% for last
five years
The roads provide more efficient connectivity
to National Highways
Senior and Subordinated debts from Banks/FI
The entire debts flow from Banks/FI will be
managed by the XYZ LTD. Financial Services.
Equity
In case of unavailability of IPO, the entire
proceeds would be managed by the sponsors
Political Events
As per PDA, the government takes care of the
any cost incurred due to the any political event
Credit Pricing
The bank charges interest rates which are dependent on the nature of the project, the risk
associated with the project etc. Thus referencing to the article attached in the appendix we
can be clear on the components which account for the same.
Also, in the form of Pre-payment charges and commitment charges, the bank charges for
either prepayment of the interest component or either not using the loan to the limit as
mentioned in the terms and conditions of the memorandum.
Also, the bank charges processing fees, as mentioned in the terms and conditions of the
memorandum.
Last but not the least, in case of any defaults or non-fulfillment of any condition can cause for
a charge in the form of liquidated damages.
Bank’s Policy
The Bank of India policy varies for every industry, thus for the roads and highways projects
under Public Private Partnership (PPP) are as follows:
Financing to road projects may be considered on the basis of a viability study, taking
into account the traffic study and revenue generation capacity of the project.
In sanctioning proposals, the risk assessment and mitigation should be addressed.
105
Before any disbursement takes place, the bank makes sure that all the project
agreements and contracts have been undertaken by the promoter.
The following arrangements are also considered i.e. Escrow Account, Comprehensive
Insurance cover, maintenance of DSRA etc after the Commencement Operation Date
(COD).
Since Infrastructure projects are of generally longer durations hence the credit review
plays an important part to check whether the project is going as per the schedule, else
remedial action needs to be initiated.
The total sanctioned limit for roads and highways project is fixed at 5 % of the Gross
Domestic Advances of the Bank.
For any relaxation banks needs to get the approval from the Ministry of Commerce.
Financial parameters to be followed:
o Maximum D/E Ratio is 4:1
o Minimum Average DSCR should be 1.25
106
Chapter 5
CONCLUSION &
RECCOMENDATIONS
Observation & Findings
As per the observations made during the study of my project I found that the bank needs to
review its credit rating system and needs to be more stringent in norms. Thus bank needs to
make sure that it invests in sectors which promise better growth, which can be done by a
thorough study of the market forces. So banks need to maintain the opportunity risk balance,
to invest in corporate with higher operational efficiency.
Banks needs to focus on sectors such as Infrastructure, the bank guidelines for financing this
sector should be made liberal and thus bank should try to give various concession facilities.
Thus for risk rating bank takes external rating for the company carrying out the project and
107
not for the specific project. The concession should be given in the form of relaxation in
prepayment charges, maintenance of DSRA account, margins etc.
Conclusion
The association with Bank of India for project on “Analysis of Credit Appraisal” has been an
educational experience.
It has helped a lot to understand the practical aspects of Trade Finance and Credit Appraisal
and how the various methods/policy that we been studying theoretically are applied in
business.
With the globalization process, the role of Trade Finance and Credit has undergone a sea
change and it is a major profit center for better performing banks.
Credit operations have become more significant and complex today than what it was few
years back. The role played by the technology and the rapid changes in the financial sector
cannot be ascertained. The role of information technology is pivotal particularly because
unless informational expectations are clarified and met, Trade and Credit operations cannot
be made efficient in operations.
Credit provided by the banks is an important source of finance for the corporate. But the bank
has to check the acceptability of the corporate before they can sanction the loan to it. Along
with this, the assessment of the credit needs of the corporate also has to be done by the bank.
This entire process is called the credit appraisal process of the bank.
The bank then decides whether to sanction the loan to the corporate or not. If the loan is to be
sanctioned then what rate of interest is to be provided to the corporate is decided based on the
risk rating of the corporate and a host of other subjective factors.
This process of credit appraisal is to be carried out at the time of initial entry of a corporate to
the bank as also the consequent periodic reviews or renewals to make sure that the credit is
given to the business which is creditworthy and in limits as per the needs of the business.
Bank of India has steadily been growing over the last many years. The financial turmoil has
impacted the bank, the credit for which goes to the strict Credit Appraisal issuing procedure.
This helps the bank to keep its NPA value at a minimum. The NPA of the firm has been
declining over the years and this year it was just 1.47% of total advances. This is a very
healthy figure and shows how effective the bank is in its credit management.
108
5.00%
4.50% 4.50%
4.00%
3.50%
3.00%
2.50%
2.77%
Column3
2.00%
1.50%
1.49%
1.00%
0.74%
0.50%
0.00%
2004
2005
2006
1.47%
1.31%
2007
0.91%
0.52%
2008
0.44%
2009
2010
2011
2012
To sum up, the paradigm shift in the risk exposure levels of the financial institutions, has
definitely led to Credit Appraisal assuming a center stage. Undoubtedly all financial
institutions need to perform Credit Appraisal. But to have a proper Credit Appraisal operation
in place, requires a thorough understanding of the underlying factors. Such an understanding
will enable the financial institution to identify and unbundle the risks and further aid in
adopting and developing appropriate risk management models to manage risks and thereby
making the process of Credit Appraisal a success.
Thus we can say that the bank, given its resources, can occupy a better place in the near
future, all it needs is a broader perspective and the right attitude to make maximum use of its
resources.
Recommendations
Bank of India has been in the banking sector for years, thus the products and services offered
in Trade finance and Credit Appraisal Process have developed to a great extent: it is almost
flawless.
But some recommendations have been provided which are as follows –
109
Credit Appraisal
The new credit rating models that have recently come need to be developed further so
as to increase their accuracy. This will help the bank immensely in the future.
Usually, the review of the account for “AAA”, “AA” and “A” rated companies is once
in a year. The review and consequently the credit appraisal of the account for the “A”
rated companies should be done at a period less than a year, maybe once every 9
months. This is because the “A” rated accounts are at a relatively higher risk than the
“AAA” or the “AA” rated account
The manual process of Credit Appraisal should be automated to considerable effect.
The Credit Appraisal process should be more organized, the repetitive process should
be made to minimize and thus helping to make the process faster.
Bank of India should give more concession to infrastructure sector. Especially to
power, road and ports as it is need of the hour.
The bank needs to work in depth market study for projects with lower credit ratings to
be able to identify them as valuable customers.
Key Concerns for the Bank of India
Bank is increasing its international operations with some of its branches in high-risk
countries. Any adverse event in these countries could lead to negative impact on
bank's business and profitability.
Due to rising inflation, RBI has been following stringent credit norms leading to rise
in cost of funds and slower credit growth for banks. This will put additional pressure
on profitability of bank.
Banks are considered to be barometer of economy and have been major beneficiary of
current economic boom. Any significant downturn in economy could affect bank
adversely.
Bank of India needs to enhance their IT implementation in comparison with the
private players.
Practical aspect of Learning from Bank of India
The experience at the Bank of India, Noida Branch in one of the largest Public Sector bank
was a fulfilling one. During my time here I got to understand the intricacies involved in
Corporate Banking.
110
At Bank of India, Noida Branch I got the in depth study of the Corporate Banking
operations at the bank. I had the chance to get exposure to the various trade finance
products and services offered. The new trends and opportunities lying ahead for the
bank were also studied.
Also, I got a practical understanding of the Credit Appraisal process followed at Bank
of India by analyzing the real-time proposals being worked at Bank of India. The
Credit Policy helped to understand the various regulations followed at Bank of India.
The Credit Rating system gives an insight to the various risk factors considered by
Bank of India and also the risk management strategies followed at Bank of India.
I also got an exposure to forex exchange transactions. I have learned how forward
contacts are booked, how payments are received and made,how the communication is
made with overseas banks.
I found that summer training project provides a lot of learning opportunities. I gained
a lot of knowledge about the practical aspect of fieldwork.
Observing and learning how to deal with clients and how to solve their queries was an
amaing experience.
My exposure to the outer world through my training had given me a chance to relate
my theoretical knowledge with its practical applicability.
I have become more confident and I have also improved on my sense of appreciation.
In the end, the environment at the Bank was very helpful in intellectual development.
Annexure
BALANCE SHEET OF BANK OF INDIA (As on 31st march
2010,2011,2012)
31.03.10
31.03.11
31.03.12
CAPITAL AND
LIABILITIES:
Total Share Capital
525.91
547.22
574.52
Equity Share Capital
525.91
547.22
574.52
0
0
0
Share Application Money
111
Preference Share Capital
0
0
0
12275.46
15423.99
19153.57
1428.62
1319.47
1233.7
14229.99
17290.68
20961.79
229761.94
298885.81
318216.03
22399.9
22021.38
32114.22
252161.84
320907.19
350330.25
8574.63
12974.69
13243.43
274966.46
351172.56
384535.47
Cash And Balances With RBI
15602.62
21782.43
14986.71
Balances With Banks,Money
At Call
15627.51
15527.56
19724.55
168490.71
213096.18
248833.34
Investments
67080.18
85872.42
86753.59
Gross Block
3790.82
4020.14
4237.8
Accumulated Depreciation
1504.07
1654.19
1466.21
Net Fixed Assets
2286.75
2365.95
2771.59
65.07
114.8
48.63
Other Assets
5813.62
12413.22
11465.69
Total Assets
274966.46
351172.56
384535.47
Reserves
Revaluation Reserves
Net Worth
Deposits
Borrowings
Total Debt
Other Liabilities And
Provisions
Total Liabilities
ASSETS:
Advances
Capital Work In Progress
112
PROFIT AND LOSS A/C OF BANK OF INDIA(for the year ended 31st
march 2010,2011,2012)
31.03.10
31.03.11
31.03.12
INCOME:
Interest Earned
17878
21751.7
28480.7
Other Income
2616.64
2641.77
3321.17
Total Income
20494.6
24393.5
31801.8
12122
13941
20167.2
Operating Expenses
3667.81
5068.24
4940.66
Total Expenses
15789.9
19009.3
25107.9
Operating Profit
4704.78
5384.22
6693.95
Other Provision And
Contigencies
2210.93
1888.84
3116.43
752.78
1006.68
900
1741.07
2488.7
2677.52
Extraordinary Items
0
0
0
Profit B/F
0
0
0
1741.07
2488.7
2677.52
0
0
0
307.21
428.65
444.3
0
0
0
EXPENDITURE:
Interest Expended
Provision For Tax
Net Profit
Total
Preference Dividend
Equity Dividend
Corporate Dividend Tax
Pershare Data
113
Eps(Rs.)
33.11
45.48
46.6
70
70
70
243.75
292.26
450
625
669.4
Transfer To Other Reserve
862.42
1419.4
1542.12
Proposed Dividend/Transfer To
Govt
428.65
444.3
466
0
0
0
1741.07
2488.7
2677.52
Equity Dividend(%)
Book Value(Rs)
Appropriations
Transfer To Statutory Reserve
Balance C/F To Balance Sheet
Total
Client Application Form
Std. No. SSID -29
P.A 10,000 Forms – 2- 98
BANK OF INDIA
APPLICATION FORM FOR CREDIT FACILITIES
APPLICATION FORM FOR CREDIT FACILITIES OF OVER RS. 2 CRORE
114
Details about the Unit and its Management
Brief Description of the Industrial Activity
Funding Activities of the Unit
Repayment
Source of Funds (*)
Securit
y
Rate
Int.
of per month
Present O/s
Amount of Default
(in 000s of Rs.)
(if any)
(*) (Indicate sources of funds with name & address, e.g., banks/ financial institutions/others
(specify)
Arrears in Statutory Payments (if any)
Past Performance
Enclose certified copies of the
(a) Memorandum and articles of Association
(b) Audited Balance Sheet and Trading and Profit and Loss A/cs for the three years of
the promoter company.
(c) Copy of the agreement(s), if any. Entered into among the promoters.
115
Shareholding pattern
Employees Details
Details about associates firms
Technical feasibility (Please enclose the feasibility / project report)
Utilities (Give comments on requirement. availability/adequacy, qualitative aspects, etc.)
Details about the Effluent
Details about the quality control
Economic feasibility
Cost of Project
(Please furnish estimates of cost of project under the following heads.
Indicate the basis for arriving at the cost of project)
Means of Financing
(Please furnish details of sources of finance for meeting the cost under the following
heads)
Details about Promoter’s contribution to the project
Financial Assistance Required
116
Schedule of Implementation
(Please indicate the progress made so far in the implementation of the project and
furnish the schedule of implementation.
Future Projections
(To be given for the next five years)
Government Consents
Repayment Programme
Details of Securities to be offered: Primary and Secondary
(Working capital and term loan securities to be indicated separately)
Encl: Certified Xerox Copies of
a) Audited Balance Sheets with Trading And Profit & Loss account, for the last three
years.
b) Memorandum and Articles of Association, Certificate for Commencement of
Business in
case of limited companies…
c) Income Tax, Wealth Tax Returns and assessment orders for the last three years.
for the unit as well as proprietor/partners/promoters/directors.
117
d) Sales Tax Returns and assessment orders for the last three years.
BANK OF INDIA
Bio-data form
Details of existing fixed assets
Particulars of buildings proposed to be constructed
Particulars of machinery
Projections of performance, profitability and repayment
Cash flow statement
Projected balance sheet
Assessment of working capital requirements
Checklist for entrepreneurs
1.
BANK OF INDIA WELCOMES YOU TO apply for credit facilities to finance
your Small Scale Unit.
118
2.
We consider it as YOUR RIGHT to get loans from us for your viable and
creditworthy projects. Our simplified procedures will speed up the processing of your
application.
3.
Whilst we recognize your right, you have a corresponding RESPONSIBILITY to
earnestly
Implement your project and repay our dues as per terms agreed to at the time of sanction
Kindly follow the instruction given below :
i) Select appropriate application given bellow:
Form No. SSID 26 for loans upto Rs. 5 lakhs.
Form No. SSID 27 for loans upto Rs. 50 lakhs.
Form No. SSID 28 for loans upto Rs. 2 crores.
Form No. SSID 29 for loans above Rs. 2 crores.
ii) Please fill in all details sought in the form. If you wish to furnish any additional data
/information, it may be submitted as an annexure.
iii) Kindly ensure that all the documents enlisted in the application form are tendered
alongwith the form.
Generally, following documents are required for credit limits over Rs. 5 lakhs :
a) Balance sheets with Trading and Profits and Loss account, for the last three
years.
b) Memorandum and articles of Association, Certificate for Commencement
of Business.
c) Income Tax, Wealth Tax Returns and assessment orders for the last three
years.
d) Sales Tax Returns for the last three years.
e) Copy of sale/lease deed of land and building/factory shed/gala etc.
f) Copy of Government order converting the land into industrial land, if
applicable.
g) Copy of site plan of land and building, duly approved by local authority.
h) Copy of sanction of adequate water and power connection.
i) CMA data if ANNEXURE III and IV of the form not filled in.
j) Quotation/catalogues/invoice in respect of each machine to be purchased.
119
k) Assets & Liabilities Statement – (CBD23) duly filled in by all
partners/guaranters/
promoters – directors alongwith proof of ownership of assets listed therein.
l) Copy of Title deeds of Property proposed as a collateral security.
References
Bank of India, Branch Circulars, Ref: CBB, Sub: Credit Appraisal
Bank of India, Client Proposals, Ref: CBB, Sub: Advances Operations
Bank of India, Reference Manual for Corporate Banking Relationship Manager,
product Guide, Version – 4, Jan 2008
Bank of India, Branch Circular No. 101/84 dated 04.08.07, Sub: Exposure on Roads
and Highways under Public Private Partnership.
Bank of India, Credit Policy of the Bank for the Financial year 2007-2008
Mukherjee D. D., ed. 2006. Credit Appraisal, Risk Analysis and Decision Making,
Mumbai-SnowWhite.
120
Financial Accounting ,a managerial perspective by Ashok Banerjee.
www.bankofindia.com
www.moneycontrol.com
www.rbi.org.in
www.scribd.com
www.slideshare.com
www.sirfpaisa.com
www.sulekhab2b.com
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