36225415 Credit Appraisal Report

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TABLE OF CONTENTS
S NO. 1 CONTENTS EXECUTIVE SUMMARY ABOUT UNION BANK OF INDIA  VISION  MISSION  VARIOUS POLICIES OFFERED BY BANK SMALL SCALE INDUSTRIES IMPORTANCE OF SMALL AND MEDIUM ENTERPRISES ISSUES IN LENDING AND THEIR SOLUTIONS INITIATIVES TAKEN BY BANKS FOR SMEs PERFORMANCE AND ACHIEVEMENTS PRIORITY SECTOR DISTRIBUTION RECENT STEPS UNDERTAKEN BY BANK RBI DIRECTIVES QUICK ESTIMATES OF 4TH CENSUS (2006-07) EXPORT TRENDS OF SMEs IN LAST 60 YEARS AND EXPORT PERFORMANCE 13 RECOMMENDATIONS IN 11TH FINANCIAL PLAN 14 PROVISIONS FOR SMEs IN ANNUAL BUDGET 2009-10 15 16 MSMED ACT SOME POLICY REFORMS FOR THE SME SECTOR 17 18 19 SIDBI SMERA CGTMSE 25-26 27-28 28-31 32 1 24 25 23 21-22 PAGE NO. 3

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4-5

3 4 5 6 7 8 9 10 11 12

6-10 11-12 12-14 15-16 17 18 19 20 21

20 21 22 23

ONICRA NSIC FUTURE SCENARIO GUIDELINES FOR LENDING TO SMEs  RBI GUIDELINES  BANK INSTRUCTIONS

32 33 33

34-35

24 25 26 27 28

CREDIT APPRAISAL PROCEDURE DETAILS OF WORK DONE MAJOR LEARNING CONSTRAINTS FACED CREDIT APPRAISAL OF XYZ PVT. LTD. FOR WORKING CAPITAL LOAN

36-53 53 53 53 54-58 58 59 67 77

29 30 31 32

SUGGESTIONS AND RECOMMENDATIONS ANNEXURE I ANNEXURE II BIBLIOGRAPHY

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EXECUTIVE SUMMARY
SME branch, Union Bank of India deals with micro, small and medium enterprises. The objective of project is credit appraisal of SMEs. Small And Medium Enterprises (SMEs) play a catalytic role in the development of any country. They are the engines of growth in developing and transition economies. SMEs always represented the model of socio-economic policies of Government of India which emphasized judicious use of foreign exchange for import of capital goods and inputs; labor intensive mode of production; employment generation; no concentration of diffusion of economic power in the hands of few (as in the case of big houses); discouraging monopolistic practices of production and marketing; and finally effective contribution to foreign exchange earning of the nation with low import intensive operations. Despite their economic significance, SMEs face a number of bottlenecks that prevent them from achieving their full potential. A major obstacle in SME development is its inability to access timely and adequate finance. If SMEs cannot find the financing they need; there will be a loss in potential growth for the economy. Hence credit appraisal of the firms has to be done. Credit appraisal is done to evaluate the credit worthiness of a borrower. The credit appraisals for any organization basically follow these steps: Assessment of credit need, financial statement analysis, financial ratios of the company, credit rating, working capital requirement, term loan analysis, submission of documents, NPA classification and recovery.

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LITERATURE REVIEW
ABOUT UNION BANK OF INDIA
VISION
To become the bank of first choice in our chosen areas by building beneficial and lasting relationship with customers through a process of continuous improvement.

CORPORATE MISSION
 A logical extension of the Vision Statement is the Mission of the Bank, which is to gain market recognition in the chosen areas.  To build a sizeable market share in each of the chosen areas of business through effective strategies in terms of pricing, product packaging and promoting the product in the market.  To facilitate a process of restructuring of branches to support a greater efficiency in the retail banking field.  To sustain the mission objective through harnessing technology driven banking and delivery channels.  To promote confidence and commitment among the staff members, to address the expectations of the customers efficiently and handle technology banking with ease.

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The dawn of twentieth century witnesses the birth of a banking enterprise par excellence- UNION BANK OF INDIA- that was flagged off by none other than the Father of the Nation, Mahatma Gandhi. Since that the golden moment, Union Bank of India has this far unflinchingly traveled the arduous road to successful banking. Union Bank of India, a public sector bank was incorporated in 1919. Union Bank of India, which has the vision to become one of the top three Nationalized Banks in India by 2012, has identified funding MSME business as one of its thrust areas. The bank has taken several initiatives to ensure credit growth in this segment.

VARIOUS POLICIES OFFERED BY BANK FOR SMEs
 Union high pride  Union procure: Financing of receivables through bills discounting relating only to the products supplied by vendor to the concerned Corporate.  Union supply: Financing purchases of dealers through buyers‟ bills discounting relating only to products supplied by the concerned corporate  Union cyber: Term loan for PCO and cyber cafe  SME plus: Temporary short term working requirements of MSMEs  Union transport: To finance transport operators upto 10 vehicles of all make, Utility Vehicles, Light Commercial, Medium Commercial, Luxury, and Heavy Commercial Vehicles  Scheme for financing purchase of generator sets etc.

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SMALL SCALE INDUSTRIES:
Small and medium-sized enterprises (SMEs) are the backbone of all economies and are a key source of economic growth, dynamism and flexibility in advanced industrialized countries, as well as in emerging and developing economies. Small & Medium Enterprises (SMEs) play a predominant role in most developed and developing economies not only because of their number and variety but also due to their involvement in all segments of the economy. Their contribution to regional development, their complementary role to support the large sector, and as a basis for technological innovations and adaptations are widely acknowledged. SMEs, in most countries, make up the majority of businesses and account for the highest proportion of employment. They produce about 25% of OECD exports and 35% of Asia‟s exports. SMEs account for a considerable share of industrial enterprises, employment and production and therefore, occupy a place of strategic importance in Indian economy as well. The contribution of SME firms to our national economy in terms of creating a vibrant manufacturing sector, winning the global market through increased exports, employment generation etc has been highlighted on many occasions.

Microsoft may be a software giant today, but it started off in typical SME fashion, as a dream developed by a young student with the help of family and friends. Only when Bill Gates and his colleagues had a saleable product were they able to take it to the marketplace and look for investment from more traditional sources. While not every small business turns into a multinational, they all face the same issue in their early days – finding the money to enable them to start and build up the business and test their product or service. 6

With the advent of planned economy from 1951 and the subsequent industrial policy followed by Government of India, both planners and Government earmarked a special role for small-scale industries and medium scale industries in the Indian economy. Due protection was accorded to both sectors, and particularly for small scale industries from 1951 to 1991, till the nation adopted a policy of liberalization and globalization. Certain products were reserved for small-scale units for a long time, though this list of products is decreasing due to change in industrial policies and climate. SME growth was also coupled with the policy of de-concentration of industrial activities in few geographical centers. It can be observed that by and large, SMEs in India met the expectations of the Government in this respect. SMEs developed in a manner, which made it possible for them to achieve the following objectives:  High contribution to domestic production  Significant export earnings  Low investment requirements  Operational flexibility  Location wise mobility  Low intensive imports  Capacities to develop appropriate indigenous technology  Import substitution  Contribution towards defense production  Technology – oriented industries  Competitiveness in domestic and export markets

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The MSME segment in India has been receiving focused attention. With the introduction of Micro Small & Medium Enterprises Development (MSMED) Act 2006, this sector is being increasingly viewed as an agent of economic growth by Government institutions, corporate bodies and banks. The policy focus and the Government's thrust towards promoting the MSME segment, along with globalization and India's robust economic growth, have paved the way to several latent business opportunities for this segment.

In accordance with the provision of Micro, Small & Medium Enterprises Development (MSMED) Act, 2006 the Micro, Small and Medium Enterprises (MSME) are classified in two Classes:

(a) Manufacturing Enterprises: The enterprises engaged in the manufacture or production of goods pertaining to any industry specified in the first schedule to the industries (Development and regulation) Act, 1951). The Manufacturing Enterprises are defined in terms of investment in Plant & Machinery. (b) Service Enterprises: The enterprises engaged in providing or rendering of services and are defined in terms of investment in equipment. Manufacturing Sector Enterprises Micro Investment in plant & machinery Investment in plant and machinery less than Rs 25 lac Investment in plant and machinery over Rs 25 lac but not exceeding Rs 5 Cr Investment in plant and machinery over Rs 5 Crores but less than Rs 10 Cr 8

Small

Medium

Service Sector Enterprises Micro Small Investment in equipments Does not exceed ten lakh rupees: More than ten lakh rupees but does not exceed two crore rupees More than two crore rupees but does not exceed five core rupees

Medium

At the same time one has to understand the limitations of SMEs, which are:  Low Capital base  Limited access to technology  Lack of awareness of global best practices  Concentration of functions in one / two persons  Inadequate exposure to international environment  Inadequate contribution towards R & D  Lack of professionalism  Managerial inadequacies  Delayed Payments  Poor Quality  Incidence of Sickness  Lack of Appropriate Infrastructure and  Lack of Marketing Network.

In spite of these limitations, the SMEs have made significant contribution towards technological development and exports.

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SMEs have been established in almost all-major sectors in the Indian industry. Such as:  Food Processing  Agricultural Inputs  Chemicals & Pharmaceuticals  Engineering; Electricals; Electronics  Electro-medical equipment  Textiles and Garments  Leather and leather goods  Meat products  Bio-engineering  Sports goods  Plastics products  Computer Software, etc.  High contribution to domestic production  Significant export earnings  Low investment requirements  Operational flexibility  Location wise mobility  Low intensive imports  Capacities to develop appropriate indigenous technology  Import substitution  Contribution towards defense production  Technology – oriented industries  Competitiveness in domestic and export markets

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IMPORTANCE OF SME SECTOR
In spite of limitations, the SMEs have made significant contribution towards technological development and exports:  The SME sector plays a vital role in the growth of the country. It contributes almost 40% of the gross industrial value added in the Indian economy. It has been estimated that a million Rs. of investment in fixed assets in the small scale sector produces 4.62 million worth of goods or services with an approximate value addition of ten percentage points.
 MSMEs

are crucial to the economic growth process and play an important role

in the country‟s overall production network. They are drivers behind a large number of innovations and contribute through creation of employment, investments and exports.
 The

MSMEs play a pivotal role in the overall industrial economy of the

country. India has nearly13 million MSMEs which produce a diverse range of products (about 8000 odd items), including consumer items, capital and intermediate goods. In terms of value, the sector accounts for about 45% of the manufacturing output and around 40% of the total export of the country.
 In

India, MSME is the most important employment-generating sector and is

an effective tool for promotion of balanced regional development. This sector is the second largest manpower employer, after agriculture. This sector employs an estimated 60 million persons.  This sector is ideally suited to build on the strengths of our traditional skills and knowledge, by infusion of technologies, capital and innovative marketing practices.

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 The

factors – strengths coupled with opportunities – that work in favor of

Indian MSMEs include their high contribution to domestic production, significant export earnings, low investment requirements, operational flexibility, location-wise mobility, low intensive imports, capacities to develop appropriate indigenous technology, import substitution, contribution towards defense production and competitiveness in domestic and export markets. The sector, therefore, presents an opportunity to harness local competitive advantage to achieve global dominance in industrial production and provide even greater employment.

ISSUES IN LENDING AND THEIR SOLUTIONS
There were a number of issues in lending to the SME sector, which banks generally faced. The key issues among them are outlined below: a) Information Asymmetry: Accurate information about the borrower is a critical input for decision-making by banks in the lending process. Where information asymmetry (a situation where business owners or managers know more about the prospects for, and risks facing their business than their lenders) existed, lenders responded by increasing lending margins to levels in excess of that which the inherent risks required. However, the sheer ticket size of SME lending made it unviable for banks to invest in development of information systems about SME borrowers. In such situations, banks also curtailed the extent of lending even when SMEs were willing to pay a fair risk adjusted cost of capital. Implication of raising interest rates and/or curtailing lending was that banks would not have been able to finance as many projects as otherwise would have been the case.

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b) Granularity: This refers to a situation where the risk grading system at banks did not have the requisite capability to discriminate between good and bad risks. The consequence was tightening of credit terms, or an increase in prices, or both. From the borrower‟s perspective, this leaded to an outcome where the bank was over-pricing good risks and under-pricing bad risks.

c) Pecking Order Theory: Pecking order theory flows from the above two issues, which made SME lending highly difficult for banks. Under this hypothesis, SMEs, which faced a cost of lending that is above the true riskadjusted cost, had incentives to seek out alternative sources of funding. Evidence suggests that in such situations SMEs preferred to utilize retained earnings instead of raising loans from banks.

d) Moral Hazard: Even when loans are made to SMEs, it may so happen that the owners of these SMEs take higher risks than they otherwise would without lending support from the banks. One reason for this situation is that the owner of the firm benefits fully from any additional returns but does not suffer disproportionately if the firm is liquidated. This is referred to as the moral hazard problem, which can be viewed as creating a situation of overinvestment. The moral hazard problem may, thus, result in SME lending turning bad in a short period of time, a situation that all banks would like to avoid.

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FOLLOWING STEPS HAVE BEEN TAKEN AS REMEDIAL MEASURES: a) Collateral: Existence of collateral that can be offered to banks by SMEs could be one effective way of mitigating risk. Banks could, therefore, look at collateral when pursuing the question of SME lending. It can also be stated that a borrower‟s willingness to accept a collateralised loan contract offering lower interest (relative to unsecured loans) will be inversely related to its default risk. However, not all SMEs would be able to offer collateral to banks. Hence, Reserve Bank of India (RBI) allows banks, with a good track record and financial position on SSI units, to dispense with collateral requirements for loans.

b) Relationships: The length of the relationship between a bank and its SME customers is also an important factor in reducing information asymmetry, as an established relationship helps to create economies of scale in information production. A relationship between a SME and a bank of considerable duration allows the bank to build up a good picture of the SME, the industry within which it operates and the caliber of the people running the business. The closer the relationship, the better are the signals received by the bank regarding managerial attributes and business prospects.

c) Quality of Information: SMEs are required to provide accurate and qualitative information to the banks for them to undertake a reliable risk assessment. Accurate risk assessments obviously rely upon good information regarding the SME and its prospects. Hence, it is suggested that banks should make efforts to encourage SMEs to improve the quality of information provided.

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Recognizing the importance of the MSME sector, Government has announced several initiatives aimed at increasing the flow of credit to this sector. The objective is to double the flow of credit to the sector from Rs 67,600 crore in 2004-05 to Rs 1,35,200 crore by 2009-10, i.e., within a period of 5 years. It also suggested rationalizing the cost of loans to MSME sector by adopting a transparent rating system with cost of credit linked to the rating of an enterprise.

INITIATIVES TAKEN BY BANK FOR SME:• Bank has launched its ambitious “Project Navnirman” for transforming itself from a „Banking Organization‟ to a „Sales Oriented Financial Service Organization‟. With this strategic initiative in mind, a separate vertical named as “MSME Vertical” has been carved out to oversee the growth of MSME finance in the Bank across the country. • As part of the organizational restructuring exercise for improving credit flow to MSMEs, bank has streamlined its processes to increase efficiency. Central Processing Centers (CPCs) have been established at key locations to: a. accelerate the credit flow to MSMEs through focused sales and marketing b. enhance customer service through quick Turn Around Time c. reduce NPAs in MSMEs through efficient supervision and monitoring d. lower cost and build expertise

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• Bank has entered into MoU with : a. SIDBI: for joint processing of loan applications and WC limits b. SMERA: for rating of MSME clients only c. CGTMSE: for extending guarantee cover d. NSIC: for financing around 250 training institutes e. ONICRA agency specialized in credit rating of MSMEs • The Bank also set up a research chair at the prestigious Indian Institute of Management, Ahemdabad. The chair will fund research in MSME sector and findings will be shared with the Bank. • On an ongoing basis and as per RBI directives, meetings of Standing Committee on Customer Service were held with the active participation of customers of the Bank. The bank has broad based for the invitees to cover various segments of customers‟ viz., pensioners, women entrepreneurs, young generation etc. • To solicit the MSME clients, bank has launched a web based information channel i.e., “SME Helpline” and all the Regional offices of the Bank have been designated as the “MSME Care Centers” and the details of the same have been placed on the banks website. The MSME entrepreneurs/clients can contact any of the centers across the country and get their queries satisfied.

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PERFORMANCE: The MSME credit growth of the bank has been driven by focusing on assured Turn Around Time (TAT), Credit Delivery at affordable prices, customized products, and enhancing the base of MSME clients. MSME portfolio of the Bank recorded a growth of 31.91% for the year ended March 2009.The outstanding under MSME segment as on March 31, 2009 was Rs.16,149 Crore as against Rs.12,242 Crore as on March 31, 2008 and Rs.8833 Crore as on Mar 31, 2007. The share of the MSME lending constituted 16.60% of the total advances of the Bank as on March 31 2009 as compared to 16.13% in the previous year. Priority Sector Advances registered the growth of 21.02% and stood at Rs.36,341 Cr as on March 31, 2009. Small Enterprises segment comprises of 26% of its total priority sector advances

ACHIEVEMENTS:Union Bank was awarded a National Award for Excellence in Lending to Micro Enterprises 2008-09 on 29th August, 2009. The Bank attained Second Rank based on its excellent performance in lending to micro enterprises during the year 2008-09. The Bank was awarded the Gold Trophy and a certificate in the Elite Class for Excellence in Marketing & Brand Communication by Association of Business Communicators of India (ABCI) in March 2010. The Bank was awarded the prestigious “Skoch Challenger Award” 2009 for excellence in capacity building through innovative concept of “Village Knowledge Centre” as part of financial inclusion initiatives.

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PRIORITY SECTOR DISTRIBUTION
ENTERPRISE MICRO (MFG) MICRO (SERVICE) MICRO (MFG) MICRO (SERVICE) SMALL (MFG) SMALL (SERVICE) UPTO 5 CRORE UPTO 2 CRORE 40% 40% UPTO 5 CRORE UPTO 2 CRORE 40% 40% AMOUNT UPTO 25 LAKH UPTO 10 LAKH INVESTMENT 20% 20%

MICRO ENTERPRISES SMALL ENTERPRISES

 Micro and small enterprises are a part of priority sector.  Out of total finances, 60% to micro and 40 % to small industries  Medium enterprises are not a part of priority sector. 18

RECENT STEPS UNDERTAKEN BY BANK
 Granting of additional need based credit facilities  Conducting cluster surveys and issuing of instructions as a corrective measure.  Reduction in margin requirement  Reduction in interest rates of MSEs.  NBFCs (Non Banking Finance Companies), MFIs (Micro Finance Institutions), NGOs (Non Government Organizations), SHPIs( Self Help Promoting Institutions)are engaged in micro credit on lending activity.  CLUSTER BASED APPROACH All firms which are interrelated are considered as cluster. Their problems are analyzed and solved. Bank offer concession in interest rates, collateral securities etc.  NURSING SICK UNITS BACK TO HEALTH Restructuring of debt of all small and medium enterprises at terms which are par with that of corporate debt restructuring (CDR) mechanism.

 For improving credit flow to MSEs Central Processing Centers are established for marketing and minimum response time for sanction of MSE proposals. At present SME SARALS are established at 7 centers attached to FGMOs.

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RBI DIRECTIVES
 Public sector banks were advised to fix their own targets for funding MSEs in order to achieve a minimum 20% year on year growth in credit to MSEs  The objective was to double the flow of credit from Rs 67600 crore in 2004-05 to rs 135200 crore to the MSE sector by 2009-10within a period of 5 years  Commercial banks were advised to make efforts to provide credit cover on an average to atleast 5 new micro, small and medium enterprises at each of their semi-urban/ urban branches per year  Credit limit upto 5 lac will be collateral free and credit limit upto 25 lac and 1 crore will be free if covered under CGS (Credit Guarantee Scheme) of CGTMSE (Credit Guarantee Fund Trust for Micro and Small Enterprise).  Also entered in MoU with SME Rating Agency (SMERA). Under this, bank is offering concessional rate of interest to SMERA rated accounts.  MoU with NSIC has been entered for financing NSIC-TIC(NSIC Training Cum Incubation Centre) for promoting entrepreneurship and skill development

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QUICK ESTIMATES OF 4TH CENSUS (2006-07)
Number of MSMEs Number of Manufacturing Enterprises Number of Service Enterprises Number of Women Enterprises Number of Rural Enterprises Employment Per unit employment Per unit fixed investment Per unit original value of Plant & Machinery Per unit gross output 26.1 million 7.3 million 18.8 million 2.1 million (8%) 14.2 million (54.4%) 59.7 million 6.24 Rs.33.78 lakh Rs.9.66 lakh Rs.46.13 lakh

EXPORT TREND OF SMEs IN LAST 60 YEARS
Year Total exports (Rs. Crores) Exports from SSI sector (Rs. Crores) 1951-52 1961-62 1971-72 1976-77 1981-82 1986-87 1991-92 716 660 1608 5142 7809 12567 44040 Negligible Negligible 155 766 2071 3644 13883 9.6 14.9 26.5 29.0 31.5 Percentage share

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1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03

53688 69547 82674 106353 118817 126286.00 141603.53 159561.00 202509.7 207745.56 252789.97

17785 25307 29068 36470 39249 44442.18 48979.23 54200.47 69796.5 71243.99 86012.52

33.1 36.4 35.1 34.2 33.4 35.19 34.59 33.97 34.47 34.29 34.03

EXPORTS PERFORMANCE OF SME
SME Sector plays a major role in India's present export performance. 45%50% of the Indian Exports is contributed by SSI Sector. Direct exports from the SSI Sector account for nearly 35% of total exports. Besides direct exports, it is estimated that small-scale industrial units contribute around 15% to exports indirectly. This takes place through merchant exporters, trading houses and export houses. They may also be in the form of export orders from large units or the production of parts and components for use for finished exportable goods. Nontraditional products account for more than 95% of the SSI exports. The exports from SSI sector have been clocking excellent growth rates in this decade. It has been mostly fuelled by the performance of garments, leather and gems and jewellery units from this sector. The product groups where the SSI sector dominates in exports are sports goods, readymade garments, woolen garments and knitwear, plastic products, processed food and leather products.

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RECOMMENDATIONS IN 11TH FINANCIAL PLAN
Envisaging the critical role which the MSMEs play in Indian Economy, following recommendations having been made in 11th Financial Plan (20072012): • A total of 170 Technology Business Incubators and 50 Technology Innovation Centers should be set up with a total outlay of Rs. 1100Crores. • Enhancement in budget in all schemes promoting innovation and entrepreneurship. • Polytechnics and Industrial Training Institutes should be encouraged to organize short-term programs for vocational training of school dropouts in a variety of multi-skilled job positions that would be available in SMEs. • TIFAC (Technology Information, Forecasting and Assessment Council) will coordinate the activities of technology profiling of MSME clusters with active cooperation and involvement of CII, UNIDO and INAE. • Making available to MSMEs Special Purpose Machines (SPM), to meet our customers' specialized and highly complex requirements • Promoting Patenting and Quality Assurance • Comprehensive retraining programs for the workers & employees in MSMEs be introduced with incentives/ financial support for them • Taxation & Duty structures for MSMEs be kept such that they encourage innovation • Better amenities need to be provided around MSMEs or their clusters located in rural/ small town areas to check the concentration of population in urban areas

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PROVISIONS FOR SMEs IN ANNUAL BUDGET 2009-10
Following provisions have been made in Annual Budget (2009-10) for Micro, Small and Medium Enterprises:  A fund, worth Rs. 4,000 crore, will be formed out of the Rural Infrastructure Development Fund (RIDF) and provided to the Small Industries Development Bank of India (SIDBI). This fund is expected to incentivize banks and State Finance Corporations (SFCs) to extend loans to MSMEs by refinancing 50% of incremental lending to these players during 2009-10. This move will facilitate credit flow at affordable rates for MSMEs and thereby provide them the muchneeded fiscal support.  Rs 144 crore for Credit Support Program to provide Guarantee cover to banks for extending loans to Small/Tiny units without collateral.  Rs 823 crore for Prime Minister‟s Employment Generation Program to provide subsidy to beneficiaries‟ meeting cost of training and to meet residual/ committed liabilities under Prime Minister‟s Rozgar Yojana /Rural Employment Generation Program.

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MICRO, SMALL & MEDIUM ENTERPRISES DEVELOPMENT ACT (MSMED)
A single comprehensive legislation for the promotion, development and enhancement of the competitiveness of the MSME sector - Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 came into effect from October 2006.

BENEFITS OF THE MSMED ACT (2006)
The enactment of the Micro, Small & Medium Enterprises Development (MSMED) Act 2006 is sure enough a reflection of the Government of India‟s commitment for the growth and the development of SMEs in India. It addresses, and streamlines at the same time, key governance & operational issues being faced by the Micro, Small & Medium industry in India and at the same time aims to promote, encourage and synthesize the MSME sector within the context of the changing world trade environment.

SOME POLICY REFORMS FOR THE SME SECTOR
• National Manufacturing Competitiveness Council (NMCC) was set up to energize and sustain the growth of the manufacturing industry. New Promotional Package for MSMEs, and focus on accelerating development of clusters. • Revised strategy of lending and introduction of newer measures, such as the scheme to establish Small Enterprises Financial Centers (SEFC) for strategic alliance between branches of banks and SIDBI located in 388 clusters identified by ministry of SSI. 25

• Promotion and financial support for Credit-cum-Performance Rating in MSME sector in India, to facilitate greater and easier flow of credit from the banking sector to SMEs. • The National Commission for Enterprises in the Unorganized Sector (NCEUS) has been set up as an advisory body and a watchdog for the informal sector to bring about improvement in the productivity of these enterprises for generation of large scale employment opportunities on a sustainable basis, particularly in the rural areas. • Facilitation of technology transfer through the Technology Bureau for Small Enterprises (TBSE).

• The SME forum also expanded its network by entering into 2 domestic (the National Small Industries Corporation – NSIC & Small and Medium Enterprises Rating Agency (SMERA) & 2 overseas MoU‟s with Japan, Finance Corporation for Small & Medium Enterprises (JASME), Japan and German Association of Small and Medium Enterprises (BVMW). • With an objective to link small entrepreneurs, individual innovators with the academia, R&D institutions & businesses in UK & India, CII has also signed an MoU with the Centre for Entrepreneurial Learning (CfEL), Judge Business School, University of Cambridge. At the same time CII continuously work towards the process of tying up Small, Medium and Large industry partnerships, through Sourcing & Business Development meets.

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SIDBI (SMALL INDUSTRIAL DEVELOPMENT BANK OF INDIA)
MISSION To empower the Micro, Small and Medium Enterprises (MSME) sector with a view to contributing to the process of economic growth, employment generation and balanced regional development VISION To emerge as a single window for meeting the financial and developmental needs of the MSME sector to make it strong, vibrant and globally competitive, to position SIDBI Brand as the preferred and customer - friendly institution and for enhancement of share - holder wealth and highest corporate values through modern technology platform. SIDBI was started with the motto of refinancing firms. SIDBI has also started tying up with other nationalized and commercial banks in this regard that can help it gain some more visibility and selling the products that need aggressive marketing. SIDBI has a special corporate status because it has got an expertise since 1964 and has been an agent in government schemes and finance is provided considering all expenses related to the project from conceptualization of the project to the successful execution of the project.

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Four basic objectives are set out in the SIDBI Charter for orderly growth of industry. They are:
 Financing  Promotion  Development  Co-ordination

The Charter has provided SIDBI considerable flexibility in adopting appropriate operational strategies to meet these objectives. The activities of SIDBI, as they have evolved over the period of time, now meet almost all the requirements of small scale industries which fall into a wide spectrum constituting modern and technologically superior units at one end and traditional units at the other. MoU BETWEEN UBI and SIDBI  Joint identification of viable projects.  Co-financing of the projects  In case where term loan is considered by SIDBI, working capital facilities would be sanctioned by the bank and vice versa.

SMERA
SME Rating Agency of India Ltd (SMERA), the dedicated rating agency for SME sector in India was formally launched at the hands of Union Finance Minister, Shri P. Chidambaram, at a ceremony at Coimbatore. SMERA has been set up by Small Industries Development Bank of India (SIDBI) in association with Dun & 28

Bradstreet (D&B), Credit Information Bureau (India) Limited and leading public and private sector banks. SMERA''s primary objective is to provide ratings that are comprehensive, transparent and reliable. This would facilitate greater and easier flow of credit from the banking sector to SMEs.

There are several reasons for low SME credit penetration, key among them being insufficient credit information on SMEs, low market credibility of SMEs (despite their intrinsic strengths) and constraints in analysis. This leads to sub-optimal delivery of credit and services to the sector. Rating Agencies can play an important role in addressing some of these concerns. In this context, SMERA is wholly committed to facilitating the overall growth and development of Indian SMEs. The agency‟s primary objective is to provide SME ratings that are comprehensive, transparent and reliable. SMERA aims to be the country‟s premier agency that is focused primarily on providing ratings to SMEs so as to reflect their intrinsic strength, with a view to facilitate faster and easier access to credit. The SME policy recently announced by Government of India also lays emphasis on using this as a tool for increasing credit to the sector.


SIDBI is the principal financial institution for the promotion, financing and development of industry in the SME sector in the country. Over the last 20 years of its existence, it has developed a suite of products and services for the SME sector. SMERA will be able to draw upon SIDBI‟s longstanding experience in dealing with Indian SMEs and its strong relationships with public & private sector banks.



Dun & Bradstreet (D&B) is the world‟s leading provider of business information and Risk Management Solutions with a database covering over 95 million business entities. Over the past 164 years, D&B has built up an 29

impressive track record in SME Risk Evaluation & Rating and has over 70 million SMEs in its global database.


Credit Information Bureau (India) Ltd [CIBIL] is a composite credit bureau catering to both the commercial and consumer segments. It therefore serves as a repository of valuable payment information, which plays a major role in reducing information asymmetries and credit risk.



SMERA is also supported by several leading public and private sector banks that are active in the SME space. The recognition and acceptance of SMERA‟s ratings within the banking sector will help SMEs save time, effort and money while approaching different banks for credit. It will also simplify and quicken the process of lending to SMEs, while simultaneously reducing lending costs to the sector as a whole.



CII has entered into a MoU with the SMERA. MoU will serve as a trusted third party opinion on SME units‟ capabilities and creditworthiness, as an independent evaluation by an accredited third party will have good acceptance from Banks, Financial Institutions, SME Customers and Buyers, enable SMEs to secure adequate credit from Banks and Financial Institutions on time & at competitive cost, benefit Banks and Financial Institutions by providing them an independent evaluation of the strengths and weaknesses of the applicant borrowing unit, which would help them in evaluating risk and taking credit decision, and facilitate vendors/buyers in judging the capabilities and capacity of the SME units for taking a decision on finalization of purchase contacts with them.

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WHAT IS A SMERA RATING?
 SMERA

Rating is an independent third-party comprehensive assessment of

the overall condition of the SME, conducted by SME Rating Agency of India Limited.
 It

takes into account the financial condition and several qualitative factors that

have bearing on credit worthiness of the SME.
 SMERA

Rating consists of 2 parts, a Composite Appraisal/Condition

indicator and a Size indicator.
 An

SME unit having a SMERA Rating would be able to enhance its market

standing amongst trading partners and prospective customer
 SMERA

Rating categorizes SMEs based on size, so as to enable fair

evaluation of each SME amongst its peers.

Financial Strength

High

Moderate

Low

Performance Capability

Highest

SE1A

SE1B

SE1C

High

SE2A

SE2B

SE2C

Moderate

SE3A

SE3B

SE3C

Weak Poor

SE4A SE5A

SE4B SE5B

SE4C SE5C

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CGTMSE
Availability of bank credit without the hassles of collaterals / third party guarantees would be a major source of support to the first generation entrepreneurs to realize their dream of setting up a unit of their own Micro and Small Enterprise (MSE). Keeping this objective in view, Ministry of Micro, Small & Medium Enterprises (MSME), Government of India launched Credit Guarantee Scheme (CGS) so as to strengthen credit delivery system and facilitate flow of credit to the MSE sector. To operationalise the scheme, Government of India and SIDBI set up the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE). The other objective is that the lender availing guarantee facility should endeavor to give composite credit to the borrowers so that the borrowers obtain both term loan and working capital facilities from a single agency. The Credit Guarantee scheme (CGS) seeks to reassure the lender that, in the event of a MSE unit, which availed collateral free credit facilities, fails to discharge its liabilities to the lender, the Guarantee Trust would make good the loss incurred by the lender up to 75 / 80/ 85 per cent of the credit facility.

ONICRA
Onicra Credit Rating Agency is a path breaking innovative organization that analyzes data and provides rating solutions for Individuals and Small and Medium Enterprises(SMEs). This rating enables the lender or service provider to take a valued judgment on the Individual or SME based on its Financial, Background and Productivity analysis. 32

NATIONAL SMALL INDUSTRIES CORPORATION (NSIC)
National Small Industries Corporation Ltd. (NSIC), an ISO 9001 certified company, since its establishment in 1955, has been working to fulfill its mission of promoting, aiding and fostering the growth of small scale industries and industry related small scale services/business enterprises in the country. Over a period of five decades of transition, growth and development, NSIC has proved its strength within the country and abroad by promoting modernization, upgradation of technology, quality consciousness, strengthening linkages with large medium enterprises and enhancing exports - projects and products from small industries. NSIC carries forward its mission to assist small enterprises with a set of specially tailored schemes designed to put them in a competitive and advantageous position. The schemes comprise of facilitating marketing support, credit support, technology support and other support services.

FUTURE SCENARIO
While the Manufacturing sector would continue to be the flag bearer of the SME growth, however many of sunrise industries such as Information technology (IT), Biotechnology (BT), Pharmaceuticals and Nanotechnologies along with IT enabled services that are in the service sector will also play a significant role in the growth and development of SMEs.

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GUIDELINES FOR LENDING TO SMEs RBI GUIDELINES
 DISPOSAL OF APPLICATION: all loan application upto Rs. 250000 should be disposed off within 2 weeks and those upto 5 lac within 4 weeks provided the loan applications are complete in all respects and accompanied by check list.  COLLATERAL: the limit of all MSE borrowal account of collateral free loan is Rs 5 lac. Bank on the basis of good track record and financial position of MSE units may increase the limit of dispensation of collateral requirement for loan upto Rs. 25 lac (with approval of appropriate authority).

 COMPOSITE LOANS: a composite loan of Rs 1 crore can be sanctioned by banks to MSE entrepreneurs for their working capital and term loan requirement through single window.  DEBT RESTRUCTURING MECHANISM FOR MSEs: RBI has issued the detailed guidelines to ensure restructuring of debt of all eligible small and medium enterprises.  CREDIT LINKED CAPITAL SUBSIDY SCHEME (CLCSS) FOR TECHNOLOGICAL UPGRADATION OF MICRO AND SMALL ENTERPRISES: Government of India, Ministry of Micro, Small and medium Enterprises have conveyed there approval for continuation of CLCSS for

34

technology upgradation from X plan to XI plan(2007-12) subject to fulfillment of certain terms and conditions.

BANK INSTRUCTIONS
 The sanction of the proposals falling within the branch head delegation should be disposed off within 7 days. The proposal with delegated authority of RO should be disposed off within 5 days on receipt of the same at RO.  Branches should not insist for collateral for credit limit upto Rs 5 lac. Branches should provide collateral free credit limit upto Rs 50 lac under Credit Guarantee Scheme for MSEs subject to the satisfaction of borrower‟s track record and good and sound financial position  There is no such bar for the loan limit if the branch is satisfied about the track record and financials of the borrower. It can sanction appropriate loan limit irrespective of quantum.  Bank has also issued detailed guidelines regarding debt restructuring mechanism for units in MSE sector.

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INTRODUCTION TO THE PROJECT
CREDIT APPRAISAL PROCEDURE
The “financing gap” is all the more important in a fast-changing knowledge-based economy because of the speed of innovation. Innovative SMEs with high growth potential, many of them in high-technology sectors, have played a pivotal role in raising productivity and maintaining competitiveness in recent years. But innovative products and services, however great their potential, need investment to flourish. If SMEs cannot find the financing they need, brilliant ideas may fall by the wayside and this represents a loss in potential growth for the economy. Hence credit appraisal of the firms has to be done.

Credit appraisal is done to evaluate the credit worthiness of a borrower. The credit proposal is prepared to indicate the need based requirement and the rationale for its recommendation. Bank has in place a well-defined framework for approving credit limits of different segments. Requests for credit facilities from the prospective borrowers shall be on the prescribed format and the full-fledged proposal should be prepared for submission to the appropriate sanctioning authority for approval. These proposals analyze various risks associated with bank lending i.e. business risks, financial risks, management risks, etc. and clarify the process by which such risks will be managed on an ongoing basis. The credit appraisals for any organization basically follow the following process:  Assessment of credit need  Financial statement analysis  Financial ratios of the company  Credit rating  Working capital requirement 36

 Term loan analysis  Submission of documents  NPA classification and recovery

ASSESSMENT OF CREDIT NEED
The first step in the process of credit appraisal is to assess the need for loan to the borrower. In the first step the need of financial requirement is understood i.e. for which purpose the loan is required .The banks basically provide two types of credit facilities to their clients.

CREDIT

FUND BASED

NON FUND BASED

TERM LOAN

WORKING CAPITAL

LETTER OF CREDIT

LETTER OF GUARANTEE

37

FUND BASED FACILITY Fund based facilities provided by the banks are basically term loan & working capital loan.

NON FUND BASED FACILITY Non fund based facilities provided by the banks are letter of credit and letter of guarantee.

LETTER OF CREDIT Used for any transaction wherein one or more parties to the transaction requires the comfort zone of guarantee of payment by a reputable bank. An LC is issued by a bank on behalf of one of it's creditworthy customers, whose application for the credit has been approved by that bank. The parties to a Letter of Credit are (1) The Buyer (the applicant) (2) The Buyer's bank (the issuing) (3) The Beneficiary (the seller/payee) (4) The beneficiary's bank (the ADVISING BANK).

The LC outlines the conditions under which payment (credit) will be made to a third party (the Beneficiary). The conditions are specified by the buyer. It is the responsibility of the issuing bank to ensure, on behalf of its client (the Buyer), that all documentary conditions have been met before the Letter of Credit funds are released.

38

LETTER OF GUARANTEE Letter of guarantee or popularly known as Bank Guarantee is a form of indemnity letter issued by bank on behalf of its client, whereby the bank promises to indemnify the beneficiary in the event of default of its client. A letter of guarantee often helps firms conduct business with parties they would never normally get the chance to deal with. Many suppliers will often choose to do business with customers that have a letter of guarantee because it eliminates the risk that they will not receive the appropriate payment for the goods that they are selling. A bank guarantee, like a line of credit, guarantees a sum of money to a beneficiary. Unlike a line of credit, the sum is only paid if the opposing party does not fulfill the stipulated obligations under the contract. This can be used to essentially insure a buyer or seller from loss or damage due to nonperformance by the other party in a contract.

FINANCIAL STATEMENT ANALYSIS
Key points to be checked in financial statement:  Type of statement: Examine weather financial statement is audited or unaudited. If the report is audited study the auditor certificate.  Nature of activity: Engaged in trading or manufacturing activity or services, what kind of the products the company dealt in.  Series of statement: Examine the financial statements. Examine balance sheets (audited, provisional and projected) and profit and loss account. Important factor to note the trend is to observe statements of the last 3 to 5 years to know about the trend in the performance of the firm. Prepare year wise break up of statements for observing trend. Compare between the projected and actual statements. Check the gap and reason for gap. 39

FINANCIAL RATIOS
On the basis of financial statements, financial ratios are calculated.

CURRENT RATIO
Formula for calculating current ratio is: Current Assets Current liabilities It is necessary that current assets should be sufficient to meet current liabilities. Current ratio should be atleast 1.33:1 according to bank norms. For example, according to break-up of balance sheet of XYZ Pvt. Ltd. as given in annexure I, total current assets are Rs. 107.71lacs and total current liabilities are Rs. 68.52lacs.Hence current ratio comes to be 1.57.

DEBT EQUITY RATIO (DER)
Formula for calculating current ratio is: Debt Tangible Net Worth (TNW) The ratio gives the proportion in which financing of company is done. If it works to 2:1, it means that the long term Creditors have provided Rs 2 of every Re 1 of the owner‟s contribution. If a company has more of debt and less of capital, it may be problems with regard to repayment of installments and payment of interest. In the analysis of XYZ Pvt. Ltd. DER comes to be 3.08. Total debt of company includes long term liabilities and current liabilities of Rs 168.33lacs and 68.52lacs respectively. Total net worth of company is Rs. 76.98lacs. TNW is sum of paid up capital, reserves and surplus and intangible assets.

40

DEBT SERVICE COVERAGE RATIO (DSCR)
Given by: Interest + PAT + depreciation + installment of term loan Interest + installment of term loan If an enterprise has borrowed funds, it is required to repay the same and also pay the interest. DSCR should not be less than 1.35 individually.

RATING MODEL
R.B.I. has given considerable emphasis on having a proper risk rating in place as a credit rating system is considered as an instrument that helps the bank in  Measuring the Credit Risk at the transaction level  Frequency of inspection  Credit rating is done for calculating BPLR (Bank Prime Lending Rate) for borrower The credit rating technique used by the banks differs from bank to bank. Following parameters are taken into consideration: 1.RATING OF BORROWER A. EVALUATION OF FINANCIAL RISK i. ii. iii. iv. v. Current ratio Debt Equity ratio Sales performance (actual V/S projected) Net profit margin (net profit to sales) Return on capital employed (Profit After Tax/ Capital Employed) vi. Debt Service Coverage Ratio (for term loans) 41

B. MANAGEMENT RISK i. ii. iii. iv. v. Experience of management and promoters Composition of management (qualification) Succession planning for key ratios Labor relations (w.r.t strikes, disputes etc) Honoring financial commitment( to banks/ financial institution ns/ creditors/ government etc)

C. EVALUATION OF MARKET OR INDUSTRY RISK i. ii. iii. iv. v. Market potential Competitive situation (no. of competitors, big competitors etc) Raw material availability and procurement Selling and distribution arrangement Technology advantage

2. RATING OF FACILITY i. ii. iii. iv. v. vi. submission of stock statement submission of audited balance sheet, P & L and financial data repayment schedule (only for term loans) margin given on term loan operation in account payment of loan and interest( timely or irregular)

3. RISK MITIGATORS i. ii. availability of collateral security and quality of collaterals available guarantee (director‟s/ third party) 42

4. BUSINESS ASPECTS i. ii. length of satisfactory relationship with UBI income value to the bank ( interest, commission, exchange etc)

Points are given for each field out of a maximum limit and these points are added. Credit rating is done on the basis of percentage, i.e., sum of points obtained to total points.

INVESTMENT GRADES:

RISK
LOWEST RISK MINIMAL RISK MODERATE RISK SATISFACTORY RISK ACCEPTABLE RISK WATCH RISK

RATING
CR-1 CR-2 CR-3 CR-4 CR-5 CR-6

SCORE ( %)
> 90 81-90 76-80 71-75 66-70 61-65

43

NON INVESTMENT GRADES: RISK
RISK PRONE HIGH RISK SUB STANDARD DOUBTFUL LOSS

RATING
CR-7 CR-8 CR-9 CR-10 CR-11

SCORE ( %)
56-60 55 & BELOW DEFAULT- NPA -

For example: INTEREST RATES FOR SMALL INDUSTRIES CREDIT RATING CR1 CR2 CR3 CR4 CR5 CR6 CR7 CR8 CR9 WORKING CAPITAL BPLR - .25 BPLR BPLR + .25 BPLR + .75 BPLR + 1 BPLR + 1.5 BPLR + 2 BPLR + 2 BPLR + 2 TERM LOAN BPLR + .25 BPLR + .5 BPLR + .75 BPLR + 1.25 BPLR + 1.50 BPLR + 2 BPLR + 3 BPLR + 3 BPLR + 3

Current BPLR is11.75%

44

WORKING CAPITAL ASSESSMENT
Apart from financing for investing in fixed assets, every business also requires funds on a continual basis for carrying on day to day operations. These include amounts expenses incurred for purchase of raw material, manufacturing, selling, and administration until such goods are sold and the money is received. While part of the raw material may be purchased by credit, the business would still need to pay its employees, meet manufacturing & selling expenses (wages, power, supplies, transportation and communication) and the balance of its raw material purchases. Working capital refers to the source of financing required by businesses on a continual basis for meeting the short term needs. Working capital purpose may be defined as the funds required in carrying the required level of current assets to enable the unit to run its operation at the expected levels without any liquidity constraint. Limits to the various borrowers are assessed depending upon their requirements and their line of activity.

OPERATING CYCLE OF THE COMPANY: The operating cycle is the average time between purchasing or acquiring inventory and receiving cash proceeds from its sale. From the operating cycle the bank can understand about the future working capital requirement of the company. Any manufacturing activity entails a cycle of operation comprising of 5 stages from introduction of cash to realization of debts:

45

RAW MATERIAL

WIP

CASH

FINISHED GOODS

RECIEVABLES

COMPONENTS OF OPERATING CYCLE  Time taken for acquiring raw material and average storing period  Conversion processing time  Average storing period for finished goods  Average collection period for book depts.

Banks can check that how many days are consumed by this working cycle and how much amount is stuck in the process and accordingly bank can finance the companies.

46

OPERATING CYCLE

47

PURPOSE OF FUNDS
 Purchase of raw material  Payment of wages  Payment for consumption of power and fuel  Payment of manufacturing overheads  Payment of administrative overheads  Payment of selling and distribution overhead 1. TURNOVER METHOD: Under this method the bank finances maximum of 20% of the projected sales of the borrower and the borrower has to contribute 5% as his margin. This method is applicable for SSI borrowers up to Rs.5.00 crores.

EXAMPLE: RS. IN LACS A B C D TOTAL SALES / TURNOVERPROJECTED 25% OFF TURNOVER [OF “A”] [WCG] MARGIN AT 5% OF TURNOVER [OF “A”] LIMIT PERMISIBLE 20% OF “A” [B –C] 2,25 56.25 11.25 45

2. FLEXIBLE BANK FINANCE(FBF) METHOD : Under this method the borrowers requirements are assessed based on the past practice/holding levels while the projections should reasonably conform with the past trends, deviations can be accepted subject to satisfactory justification.

48

EXAMPLE: 31.3.08 (AUD.) 1 Total Current Assets Less : Current Liabilities 2 3 (Other than Bank Borrowing) Working Capital Gap Actual / Projected Net 4 5 Working Capital Flexible Bank Finance (3-4) 10.00 10.00 -24.24 34.23 40.09 30.01 230.00 20.00 321.01 9.99 204.54 70.10 250.00 31.3.09 (AUD.) 331.00 30.9.10 (Prov.) 274.64

DRAWING POWER (DP)
1. DP is the amount of loan sanctioned that the borrower is eligible to take every month. 2. DP is calculated by stock statement. Companies are asked to submit their stock statement every month. 3. Check and calculate total stock. Consider stock less than 90 days only (general case). 4. Subtract all the creditors‟ amount from stock amount since DP covers only the paid up amount. 5. Calculate margin on stock. Generally margin is taken as 25% of total amount obtained in earlier step. 6. Calculate the amount of debtors that is to be considered by bank in drawing power. Generally this amount is 50% of total debtors‟ amount. 7. Add amount to be paid by bank on stock and debtors. This amount is known as DP of a particular account for a particular month. 49

8. DP should always be less than sanction limit. Sanction limit is predefined

For example, in case of XYZ Pvt. Ltd., working capital loan issued is Rs 50lacs. Suppose value of stocks (less than 90 days) for a particular month is Rs. 1.5lacs, creditors is Rs .5lac, debtors is Rs. 3lacs. DP for the particular month will be DP = 1.5-.5+1.5 (50% of 3) lacs = 3.5 lacs

TERM LOAN:
Term loans are a lump-sum payment with payback over a specified period of time. They may be used to finance equipment, a change in ownership, a new business acquisition or other long-term needs of a company. The period of loan vary from 3 to 7 years.

There are many issues in providing a term loan. Some of the main issues are:  Check whether the purpose of loan is valid or not. The unit should undertake detailed market study. The demand & supply gap of the product should be assessed. For example if the loan is being taken for new machinery, check whether there is any need for new machinery in the factory. Purpose of loan can be: o Land o Building o Plant and machinery o Term loan for working capital etc.

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 Verify the cost of project. Check the estimated cost given for the project. It should not be overstated. For example: o If loan is taken for machinery then verify its price from market or other similar firms. o If loan is demanded for buying land then check if the area of land should be optimum. o If loan is demanded for building then verify that the width, length and structure proposed should be optimum.  Check all means of finance. It is useful to check how a borrower can finance its project since bank does not provide 100% finance. Means of finance can be: o Bank term loans o Capital withdrawal o Unsecured loan o Internal accruals  Calculations shall be based upon future projections and estimates given by party in their project reports. Examine balance sheets, profit sales and profit (audited, estimated and projected) to find out amount of loan, tenure, margin, interest rate etc.  DSCR: DSCR for each year should not be less than 1.35. Average DSCR for all years should not be less than 1.50

If all the conditions are favorable, loan is issued.

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DOCUMENTS AND FORMALITIES
Once the credit limit is sanctioned main documents are obtained from the client concerned. The nature of documents varies depending upon the type of facility sanctioned and terms of sanction. Some of the main documents are:  Loan agreement conveying in terms and conditions of loan.  A comprehensive credit agreement.  Agreement of hypothecation of book debts and stocks.  Pledge letters of agreement in respect of documents of title to goods covering credit limits.  Corporate and personal guarantee.  Documents conveying equitable mortgage on primary security i.e. fixed assets pertaining to the project and on the additional security (collateral)  Personal guarantee of the borrower and guarantor (if any)

NON PERFORMING ASSET:
Non Performing Asset means an asset or account of borrower, which has been classified by a bank or financial institution as sub-standard, doubtful or loss asset, in accordance with the directions or guidelines relating to asset classification issued by RBI. With a view to moving towards international best practices and to ensure greater transparency, it has been decided to adopt the '90 days overdue' norm for identification of NPAs, from the year ending March 31, 2004.

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A Non performing asset (NPA) shall be an advance where  Interest and /or installment of principal remain overdue for a period of more than 90 days in respect of a Term Loan,  The account remains 'out of order' for a period of more than 90 days, in respect of an overdraft/ cash Credit(OD/CC)

DETAILS OF WORK DONE
Major work assigned was renewing the working capital loan limit of various SMEs according to mentioned procedure. I also learnt method for calculation of drawing power and term loan assessment.

MAJOR LEARNING
 Breakup and analysis of balance sheet by calculating various financial ratios.  Finding the appropriate loan amount and rate applicable.

CONSTRAINTS FACED
No data of any company can be disclosed.

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FINDINGS AND CONCLUSION

CREDIT APPRAISAL OF XYZ PVT LTD FOR WORKING CAPITAL
 The management has been in this field for the last 12 years and dealing with bank from past 7 years.  There are charges of Rs.100.00lac in favor of SIDBI. Term Loan is availed for purchasing plant & machinery.  Balance sheet break up of last three years has been taken into consideration.  A copy of the contents of process note,made while issuing a loan, is shown in annexure II  Credit rating: CR 4  We observe that the capital has been static for the last several years but now the Company has increased the paid up capital to Rs.10.00 lac as of 31.03.09 and proposes to continue this level in the current & next fiscal.

Paid up capital
12.00 10.00 8.00 6.00 4.00 2.00 0.00 31.3.07 (Aud) 31.3.08(Aud) 31.3.09(Aud) Paid up capital

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 The general reserves are also increasing by retaining the net profit in the system. They have increased to 45 lacs as compared to 18 lacs previous year. General reserves have increased by 150%.

General Reserves
50.00 45.00 40.00 35.00 30.00 25.00 20.00 15.00 10.00 5.00 0.00 31.3.07 (Aud) 31.3.08(Aud) 31.3.09(Aud)

General Reserves

 The Company has informed that they have increased the unsecured loans from Rs.9.ac [31.3.08] to Rs.23lac [31.03.09], i.e., 155.55%.

Loans from Friends / Relatives
25.00 20.00 15.00 10.00 5.00 0.00 31.3.07 (Aud) 31.3.08(Aud) 31.3.09(Aud) Loans from Friends / Relatives

55

 Share application money has reduced from Rs.24.7lac [31.3.08] to Rs.22.5 lac [31.03.09], i.e., 8.9%.

Share Application
30.00 25.00 20.00 15.00 10.00 5.00 0.00 31.3.07 (Aud) 31.3.08(Aud) 31.3.09(Aud) Share Application

 Long term liabilities have increased to Rs. 168.33lacs from 39.5lacS, i.e., 326.15%.

TOTAL LONG TERM LIABILITIES
180.00 160.00 140.00 120.00 100.00 80.00 60.00 40.00 20.00 0.00 31.3.07 (Aud) 31.3.08(Aud) 31.3.09(Aud) TOTAL LONG TERM LIABILITIES

56

 Fixed assets have also increased tremendously to Rs.301.32 lacs as compared to Rs. 76.68 lac last year, i.e., 292.95%.

TOTAL FIXED ASSETS
350.00 300.00 250.00 200.00 150.00 100.00 50.00 0.00 31.3.07 (Aud) 31.3.08(Aud) 31.3.09(Aud) TOTAL FIXED ASSETS

 We observe that the sales are showing increasing trend.  Current ratio has been above the benchmark (1.57) against 1.03 of last fiscal year. This is due to decrease in current liabilities.  DER is under the required limit (3.08) which is due to increase in Tangible Net Worth of the company. TNW has increased around 2 times as compared to last year.  We may say that financial position of the Company has been improving and it must be maintained as projected by the Company.  Company has negative NWC (Net Working Capital) due to increase in total fixed assets. 57

 Method used for finding out the cash credit limit is turnover method:

Figs. In lacs A B C D TOTAL SALES 25% OFF TURNOVER [OF “A”] [WCG] MARGIN AT 5% OF TURNOVER [OF “A”] LIMIT PERMISIBLE 20% OF “A” [B –C] 250 62.5 12.5 50

Hence the amount of loan sanctioned is Rs 50lac.

SUGGESTIONS AND RECOMMENDATIONS
Perhaps key steps needed to be taken include:  Bank should launch more schemes for different sections in SME sector.  Promote measures to accelerate the opening–up of SME sector to the globalised (WTO) environment.  To integrate economic development of the Indian Small industry with the global economy in a truly multilateral trade regime.

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ANNEXURES
ANNEXTURE I
UNION BANK OF INDIA BREAK UP OF BALANCE SHEET

ACCOUNT : XYZ PVT. LTD. BRANCH : SSI, OKHLA, NEW DELHI (Rs. In Lacs) Year Ending A) 1 2 CURRENT ASSETS Cash & Bank Balance Investments a) Govt./Other Trustee Securities b) Fixed Deposits with banks/ MMMF/ CPS/CDS etc 3 Receivables a) Inland upto 6 months b) Exports 4 Inventory a) Raw Materials - Indigenous - Imported 59 0.20 0.20 0.30 0.30 0.00 0.50 0.5 0.00 0.00 0.00 0.00 0 0.00 1.40 1.00 0.70 31.3.07 (Aud) 31.3.08 (Aud) 31.3.09 (Aud)

b) Stores & Spares - Indigenous - Imported c) Stock-in-Process d) Finished Goods e) Others (Scrap) 5 6 Deferred Receivables (due within one year) Advances to Suppliers of Raw Materials / Stores/ Spares 7 8 9 10 Advance Tax Payment sundry debtors Other Current Assets Advance to staff TOTAL CURRENT ASSETS B) 1 2 3 4 5 51.77 106.03 39.17 59.73 76.51 0.00 0.00 107.71 11.00 45.00 30

CURRENT LIABILITIES Short Term borrowings from bank Unsecured Borrowings (include. ICDS etc.) Sundry Creditors Sundry Creditors for Expenses/Others Advances / Progress payment from Customers / Dep. from Dealers 6 7 8 Dividend papyable including D tax Deposits maturing within 1 year Instalments of TL/DPG/Deb./R.P.Share /ECB/ADR/GDR due within one year 60 1.3 5.50 0.00 11 32.00 63.00 0.00 0 40.00

9

Int. & Other charges accrued but not due for payment.

10 11 12 13

Provision for Taxation Provision for Bonus Other Statutory Liabilities Other Current Liabilities / Provisions TOTAL CURRENT LIABILITIES

2.16

1.74

1.22

26.90 66.56

38.20 102.94

15 68.52

C) 1

FIXED ASSETS (Net of Depreciation) Land & Building 2 3 4 5 Plant & Machinery Other Fixed Assets ( Inc.vehicle) Furniture & Fixture Capital Work in Progress (-) Revaluation Reserve TOTAL FIXED ASSETS 70.51 76.68 301.32 15.00 48.50 6.80 0.21 13.90 52.96 9.50 0.32 165.5 119.56 15.6 0.66

D) 1 2 3 4 5 6 7

LONG TERM LIABILITIES Debentures loan from ICICI bank Term Deposits Term Loans UBI Bank a/c no: SIDBI Car Loan Loans from Friends / Relatives 1.50 6.00 2.50 9.00 11.00 22.00 40 100 3.33 23.00 61 8.00 6.00 2

8

Other Term Liabilities (include. ECB/ ADR/GDR/FCNR(B) Loans etc.) TOTAL LONG TERM LIABILITIES 26.50 39.50 168.33

E) 1 2 4 5 6 7 8 9 10 11

MISCELLANEOUS ASSETS Investments Amounts due from Associates/ Subsidiaries HousingLoan FDR EMD Adv. to Suppliers of Capital Goods Deferred receivables Security Deposits Book Debts Older than 6 Months Other Miscellaneous Assets/ ICD etc. TOTAL MISCELLANEOUS ASSETS 7.90 9.10 9.26 1.80 1.80 1.76 0 5.00 1.10 5.00 2.30 5.00 2.5 0

F) 1 2 3 4 5 6 7 8

NET WORTH Paid up capital General Reserves Premium Share Application Revaluation reserves Deferred tax liabilities Other Reserves[Excl. Provisions] Balance of Profit 62 10.00 24.70 1.00 14.00 1.00 18.00 10.00 45 0 22.5

TOTAL NET WORTH G) 1 2 3

25.00

43.70

77.50

INTANGIBLE ASSETS Goodwill Premilinary expanses Other Intangible Assets TOTAL INTANGIBLE ASSETS 1.23 1.67 0.52 1.23 1.67 0.52

TOTAL ASSETS TOTAL LIABILITIES

131.41 118.06

193.48 186.14

418.81 314.35

Net working capital[CA-CL] Net working capital[LTL-LTA]

-14.79 -28.14

3.09 -4.25

39.19 -65.27

Year Ending Paid up Capital Reserves & Surpluses Intangible Assets Tangible Net Worth Long Term Liabilities Capital Employed Net Block Investments Other Non Current Assets Net Working Capital Current Assets Current Liabilities Current Ratio

31.3.07 (Aud.) 1.00 24.00 1.23 23.77 26.50 50.27 70.51 0.00 7.90 -28.14 51.77 66.56 0.78

31.3.08 (Aud) 1.00 42.70 1.67 42.03 39.50 81.53 76.68 0.00 9.10 -4.25 106.03 102.94 1.03

31.3.09 (Aud) 10.00 67.50 0.52 76.98 168.33 245.31 301.32 0.00 9.26 -65.27 107.71 68.52 1.57 63

DER (TOL/TNW) SALES & JOB WORK - Domestic[net of excise] - Exports Less: Excise Duty Net Sales Other Income Net Profit After Tax Depreciation Cash Accruals D.S.C.R. %age of Net Profit to Sales ROCE

3.92 220.00 220.00 0.00 220.00 4.00 10.00 14.00

3.39 240.00 240.00 0.00 240.00 4.60 12.00 16.60

3.08 250.00 250 0 0 250.00 0.00 7.7 24.00 31.70

1.82 7.96

1.92 5.64

3.08 3.14

FLEXIBLE BANK FINANCE XYZ PVT. LTD. Total Current Assets Less : Current Liabilities (Other than Bank Borrowing) Working Capital Gap Actual / Projected Net Working Capital Flexible Bank Finance (3-4) 31.3.07 (Aud.) 51.77 31.3.08 (Aud) 106.03 31.3.09 (Aud.) 107.71

1

2 3

66.56 -14.79

102.94 3.09

68.52 39.19

4 5

-28.14 13.35

-4.25 7.34

-65.27 104.46

64

Net Sales NWC to TCA 7 (%) FBF to TCA 8 (%) Sundry Creditors to 9 TCA (%) Sundry Creditors to 10 TCL (%) INVENTORY & RECEIVABLE NORMS Particulars Raw Materials Indigenous (Months‟ Consumption) Receivables Exports (Months‟ Sales) Other Current Assets (Rupees In Lacs) Sundry Creditors (Months‟ Purchases) RM Consumption –

6

220.00 -54.36 25.79

240.00 -4.01 6.92

250.00 -60.60 96.98

61.81

59.42

37.14

48.08

61.20

58.38

31.3.06 (Aud.) 0.00

31.3.07(AUD) 0.00

31.3.08 (Aud.) 0.00 0.00

0.00 51.57

0.00 105.73

0.00 0.00 0.00 0.00

32.00 0.00

63.00 0.00 0.00

0.00

0.00

65

Imported RM Consumption Indigenous Cost of Production Cost of Sales Sales Domestic Sales - Export Purchases 0.00 0.00

0.00 0.00 0.00 0.00 0.00

0.00 0.00 0.00 0.00 0.00

66

ANNEXURE II
UNION BANK OF INDIA SSI, OKHLA Branch/NRO Delhi /NZ EXECUTIVE SUMMARY TO THE COMPETENT AUTHORITY FOR APPROVAL PROPOSAL FOR: RENEWAL OF WORKING CAPITAL LIMIT Process Note No: Dated: TO: The Chief Manager, SSI okhla Branch, New Delhi Group Banking Month of review Assets Classification Internal credit rating Status of account [Please Tick appropriate box] 1. NA UNION BANK OF INDIA

Regula r

Early Alert System

Special Mention Account

a) Name of the Account : b) Branch / Zone : c) Date of incorporation : : : : Means as per CR dt.

2. Constitution 3. Address Regd./Admn. Office  Unit/Works 4 Names of directors : Names of directors

67

5. .

Background of Promoters/Directors :

. Capital structure Name of share Holders

: Share capital Share premium Total Amount

7. In case of partnership firms Indicate capital contributed By each partner separately

:

8. Line of activity : 9. Sector/BSR Code : 10. Comments on latest Credit/ Search report : 11. Whether a/c is taken over / to be Takenover. If so norms for Take over are fulfilled :. 12. a) Dealing with bank since : b) Credit facilities since 13. Total indebtedness : [Rs. in lacs] Fund Based Non-Fund Total Based Existin Propos Exist Pro Existin Propos g ed ing pos g ed ed OUR BANK Working Capital Car loan-I  Car LoanII SOD Limit Sub Total 68

Other Banks Working Capital T.l.. / D.P.G.l.. Sub Total Fin. Institutions (SIDBI) Working Capital T.l.. / D.P.G.l.. Term Loan -I Term Loan II Sub total TOTAL 14. Financial Indicators Year Ending Paid up Capital Reserves & Surpluses Intangible Assets Tangible Net Worth Long Term Liabilities Capital Employed Net Block Investments Other Non Current Assets Net Working Capital Current Assets Current Liabilities Current Ratio DER (TOL/TNW) SALES & JOB WORK - Domestic[net of 69 : 31.3.07 (Aud.) [Amount in Rs.lac] 31.3.08(Aud.) 31.3.09(Aud.)

excise] - Exports Less: Excise Duty Net Sales Other Income Net Profit After Tax Depreciation Cash Accruals D.S.C.R. %age of Net Profit to Sales

[i] COMMENTS FINANCIAL INDICATORS:

[ii] Audit notes in balance sheet if any, to be specified Evaluation of Management Evaluation of Industry 16. Evaluation of business risk: :

: :

17. [A] CONDUCT OF ACCOUNT [i] Regularity in submission of:  Stock /BD statements :  MSOD :  Financial statements  CMA Data : :

17.[B] Comments on Operations / Overdues:  Turnover in A/c is commensurate with the limits:  Frequent excesses are given: Cheques are returned frequently: 70

18. COMPLIANCE TO TERMS OF SANCTION: A: Completion of mortgage formalities : B: Registration of charges with RoC : :

C: Whether Documents valid and in force D: Compliance of RBI guidelines :

19[a] Dates of Inspection during the year Date of inspection Irregularity

Action taken

19[b](i) Nature and Value of collateral security Property Value in Dt. Of Insurance Remarks detail Rs.Lac valuation Amount & along with date of name of expiry valuer Second charge on the factory land & building at 203-204 DSIDC Shed, Okhla Industrial Area, Phase-I, New Delhi and plant & machinery installed there in with SIDBI. 19. [b](ii) Personal Guarantee: Names of guarantors (directors in their Means as per CR dt. personal capacity) 20.03.09

20[a] Whether the name of the Company/Directors figure in RBI Defaulters’/caution List/ Willful defaulters/ECGC. If yes please furnish data: 20[b] Whether Director/Partner/Proprietor is a Director in our /other bank or is related to them. If yes : 71

20[c]: Any litigation in force against the firm/Company or against Partners/ Directors. If so mention detail and present position:

21.

Audit Observation

:

22(a) Any other feature observed in the monitoring report : 22. [b] Conduct of account & Exposure Details from our bank: [Rs. In lac] Limit Limits s Recomme Existi nded ng By branch A] NON FUND BASED LIMITS SUB LIMIT [A] B] FUND BASED LIMITS CC(H) SOD[Deposits] SUB-LIMIT [B] C] TERM LOAN Car Loan-I Car Loan-II OUR BANK D.P. O/s as on Value of Irregul Security arities, [14.03.09 if any ] 14.03. 09

72

SUB-LIMIT [C] GRAND TOTAL[A+B+ C]

23[a] Details of excesses allowed during the year: No. Occassions excesses allowed Maximum excesses allowed 23[b] Other exposure, if any, including investments: 23[c] Other liabilities of partners/directors[in their individual capacity]:

24 [a] Conduct of Account and Exposure Details from Banking system[incl. our Bank] Fund Based Non Fund Based % Sanction % Amou Share ed Share nt Amount 1 Union Bank of India

25-a. Operational Experience with regard to Sister/Allied Concern: Name of Branc CoA Continge Worki Ter Inve Present the h nt ng m stme irregulari concern Capita Loa nts ty, l n If any 26. COMMENTS ON ASSESSMENT OF LIMITS [a] Projected level of sales : [b] Comments on inventory /receivables :

73

Particulars Raw Materials – Indigenous (Months‟ Consumption) Raw Materials – Imported (Months‟ Consumption) Stock in process (Months' cost of production) Finished goods (Months' cost of sales) Receivables (Months‟ Sales) Other Current Assets (Rupees In Lacs) Sundry Creditors (Months‟ Purchases)

31.3.0 31.3.1 6 31.3.07 31.3.08 31.3.09 0 (Aud.) (AUD) (Aud.) (Est) [Proj.]

[c] Working capital assessment

: 31.3.08(AUD) 31.3.09 (AUD.)

31.3.07 (Aud.) 1 Total Current Assets Less : Current Liabilities (Other than Bank Borrowing) Working Capital Gap Actual / Projected Net Working Capital Flexible Bank Finance (3-4) Net Sales

2

3 4 5 6

74

7 8 9 10

NWC to TCA (%) FBF to TCA (%) Sundry Creditors to TCA (%) Sundry Creditors to TCL (%)

. [e] Assessment of Non-Fund-Based Limits : [f] Consortium Arrangement : [g]Any other matter :

27. CREDIT RATING: Particulars Max. Marks Scored I Rating of borrower II Rating of facility III Risk mitigators IV Business aspects Sub total Equivalent marks= Indicate products / services proposed to be marketed to customer:

29. RECOMMENDATIONS:[covering risk factors & justification for sanction] [a] Justification: [b] Special limits to tide over the contingencies:  Whether the borrower was used to & justified in obtaining additional / temporary / adhoc sanction at Branch level for meeting mismatches in funds flow on sudden requirement.  Whether need for such special limit still continues, if yes, the amount and justification  If, such special limit is not found necessary-‘Nil’ should be reported: [c] RECOMMENDATIONS [Rs. in Lac] AMOUNT Existi Propos ng ed

Margi Interest n

Prime Security

75

CC(Hyp) W/w CC(BD) SOD Terms & conditions:

Senior Manager

SANCTIONED / DECLINED

CHIEF MANAGER

76

BIBLIOGRAPHY
 Union Bank Of India Manuals And Policies  I M Pandey, Financial Management, Working Capital Management, Pg: 577590  Ambrish Gupta, Financial Accounting for Management, Pg: 616-625  http://www.dcmsme.gov.in  http://www.and.nic.in/C_charter/indust/msmeact2006.pdf  http://msmehyd.ap.nic.in/MSME/SalientFeaturesMSMEDAct.pdf  http://msme.gov.in/AR-2008-09Englishindex.pdf?GXHC_gx_session_id_=a8ef968a8d1886d1&  http://www.icai.org/resource_file/9964243-249.pdf

77

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