Final Sip Report

A REPORT ON
TO UNDERSTAND AND ANALYZE THE SYSTEM OF CREDIT APPRAISAL AND RISK ASSESSMENT AT STATE BANK OF INDIA
By Neelam S. Mandowara 10BSPHH010444 IBS Hyderabad
IBS Hyderabad 2010-2011
A REPORT ON
TO UNDERSTAND AND ANALYZE THE SYSTEM OF CREDIT APPRAISAL AND RISK ASSESSMENT AT STATE BANK OF INDIA
By Neelam S. Mandowara 10BSPHH010444
A report submitted in the partial fulfillment of The requirement of MBA Program of IBS Hyderabad
Beneficiary: STATE BANK OF INDIA MID-Corporate Group Regional Office, Ahmedabad

Date of submission 13 May 2011
AUTHORIZATION
This project was undertaken at State Bank of India, MID-Corporate Group, Regional Office (MCGRO), and Ahmedabad from February 14th to May 21th, 2011 as a Special Assignment for summer internship project in management for the partial fulfillment of the MBA Program at ICFAI Business School, Hyderabad Date: 13 May 2011
Beneficiary: 1. Mr. J. Karthikeyan , DGM(Sales Hub),SBI MID-Corporate Group, Regional Office, Ahmedabad 2. Mr. Anand Singh, chief manager (CPC), SBI MID-Corporate Group, Regional Office, Ahmedabad 3. SBI MID-Corporate Group, Regional Office, Ahmedabad
STATEMENT OF PRIVACY
This report is prepared as a part of the academic curriculum of MBA course offered by ICFAI Business School, Hyderabad and is solely intended for the purpose of serving as a reference to the officials of SBI- MCG Regional office, Ahmedabad. The same should not be used by anyone for any other technical/legal/commercial purpose. No part of the report should be either made accessible to or used by any official out side the SBI-MCG Regional Office, Ahmedabad, without prior authorization by the person in-charge of the report.
ACKNOWLEDGEMENT
I take this opportunity to humbly express my sincere thanks to all those concerned with my project titled To Understand and Analyze the System of Credit Appraisal and Risk Assessment at State Bank of India. I express my deep sense of gratitude to Mr. Kaushik Bagchi, General Manager, MCGRO and Mr. J. Karthikeyan, DGM (SH), SBI MID-Corporate Group, Regional Office, Ahmedabad for providing me the opportunity to work at State Bank of India- MID-Corporate Group for my Summer Internship Program. I am obliged to Mr. Anand Singh, Chief Manager (CPC), and my company guide, without his help I may well have not completed the project satisfactorily. His invaluable guidance has proved to be a key to my success in overcoming difficulties faced during the course of project work. I am also indebted to Miss. Nidhi Lakahni, Credit Analyst (CPC), who has always encouraged me to carry out innovative tasks, to critically analyze the cases and gave her valuable inputs as and when required. I would also like to show my appreciation to whole staff of State Bank of India, MID-Corporate Group, Ahmedabad for this their help and support. I express my deep feelings of gratitude to Prof. D.S. Chary, ICFAI Business School, Hyderabad and my faculty guide for motivating me at every step of the project and guiding me the right direction.
With Regards Neelam S. Mandowara 10BSPHH010444
EXECUTIVE SUMMARY
I Neelam S. Mandowara pursuing my MBA at ICFAI Business School, Hyderabad and as a part of academic curriculum, I have done my 14-week summer internship at State Bank of India MID-Corporate Group, Ahmedabad Region. The project instructed was to Understand and Analyze the System of Credit Appraisal and Risk Assessment at State Bank of India; the task was accomplished by practical exposure of the process followed by the Bank.
Objective of the Project 1. To understand the process of Credit Appraisal followed at State Bank of India. 2. The project report can be used by State Bank of India MID-Corporate Group as guide for novice. 3. Evaluation of the Credit Appraisal Process and thereby giving Recommendations to the bank for improving it. Background India being a country with wide array of resources has great business opportunities owing to that business flourished in India somewhere in 17th century with the growth in industries fund requirements of enterprises were increasing and hence lead to the invention of a proper banking system in year 1786 since than banks are backbone to the growth and expansion of industries. State Bank of India came to existence in year 1955 and since than it is the largest bank of the country with present asset base of $352 billion and $285 billion in deposits, it is a regional banking behemoth and is one of the largest financial institutions in the world. It has a market share of about 20% among Indian commercial banks in deposits and loans. The MID-Corporate Group of SBI was formed as a part of business process reengineering , bank provides both fund based and non fund based credit to its customers by effectively scrutinizing the borrower and hence, deciding upon the limits to be sanctioned

Facilities given by bank to its customers includes working capital loans, term loans, letter of credit, bank guarantee, export packing credit , foreign bill discounting etc. hence covering both inland and export finance requirements of the enterprise. Hence the whole project report is concentrating mainly on domestic finance owing to the short span of internship. Methodology 1. Understanding and Evaluation of the Credit Appraisal Process is done by working on live projects and hence based on the analysis and daily observations the whole project report is drafted. 2. The credit requirements of the company are assessed using the Balance Sheet & Income Statement, Ratio analysis (Leverage, Liquidity & Profitability ratios). Apart from this, various articles from journals, magazines, newspapers, etc have been referred to understand the prospects of the Industry in which the company is operating. 3. A number of research articles by various scholars have been studied to understand and get more knowledge about the topic. Limitations of the Study 1. The project is dependent upon primary data provided by the bank. Since most of it is confidential in nature, trainees are not allowed to use it for the report. Hence, hypothecated values are mentioned in the project. 2. The use of secondary research is less since the project is based more on the primary research and the observations made on day to day activities of the Bank (Mid Corporate Group). 3. Wide ranges of products are provided to customers at MCGRO but owing to the tenor of internship export finance is not discussed and analyzed in detail.
Table of contents
Cover Page.. I Title Page.. II Authorization. III Statement of Privacy IV Acknowledgements..... V Executive Summary.. VI 1. Introduction. 01 1.1 Objectives 01 1.2 Limitations.. 02 1.3 Methodology. 02 2. Banking Industry in India 03 3. Company Profile.. 06 About State Bank of India. 06 SBI MID-Corporate Group. 07 4. Theoretical background of credit appraisal 10 Credit.. 10 Why Credit from Banks.. 10 Cardinal Principles of Lending 10 Credit Appraisal .. 11 Loan Policy of State Bank of India 12 Steps of Credit Appraisal Followed State Bank of India 13 5. Types of Facilities. 14 Working Capital Loan 15
IBS Hyderabad 2010-2011 Term Loan Financing. 18 Letter of Credit. 21 Bank Guarantee.. 26 Stand By Line of Credit 28 6. Credit Monitoring Arrangement 29 7. Credit Risk Assessment 35 What is Risk. 35 Types of Risk and Risk Management 35
Credit Risk Assessment Model at State Bank of India.. 38 8. Pricing.. 49 9. Proposal Writing.. 51 AS Format. 10.Sanctioning Authorities . 51 66
11.Findings & Conclusion.. 68 Findings 68 Conclusion. 69 12.Recommendation 70 13.References 71
INTRODUCTION
The project is all about the process of credit appraisal that is right from the time when enterprises come for the request of loan to final disbursement of loan. The process of Credit Appraisal passes through various stages which includes analysis of financial statements, preparation of Credit Monitoring Arrangement (CMA followed by ratio analysis and then risk rating is done known as Credit Risk Assessment (CRA) at SBI, after scrutinizing the credibility of the borrower and success of the project proposed a loan sanctioning report known as Proposal is drafted and passed on to the appropriate authorities for sanction and approval. At MID-Corporate group of State Bank of India, projects having fund based requirement of above 10 crores or the turnover of the enterprise is above 50crores, any of the two parameters should be satisfied in order to qualify the loan sanctioning process under the governing powers of MID-Corporate group. The main focus of the project is to study about the system adopted by State Bank of India, Being the largest bank of India the method and structure adopted by the bank is unique and credible, as many private and public sector banks have adopted this model for appraisal especially the risk assessment model of bank is very efficient and effective such a system has protected bank from major defaulting and financial crisis.
Objectives of the Project

1. To understand the process of Credit Appraisal followed at State Bank of India. 2. Assessing the Short Term and Long Term finance requirements (both fund based and nonfund based) of enterprises. 3. The project report can be used by State Bank of India MID-Corporate Group as guide for novice. 4. To understand the rationale behind various guidelines and policies of State Bank of India. 5. To understand the organization culture and get familiar with the corporate world. 6. Evaluation of the Credit Appraisal Process and thereby giving Recommendations to the bank for improving it.
IBS Hyderabad 2010-2011 Limitations of the Study

1. The project is dependent upon primary data provided by the bank. Since most of it is confidential in nature, trainees are not allowed to use it for the report. Hence, hypothecated values are mentioned in the project. 2. The use of secondary research is less since the project is based more on the primary research and the observations made on day to day activities of the Bank (Mid Corporate Group). 3. While preparing CMA various assumptions are made for the estimations and projections which depend upon the person doing the calculations and hence can lead to slight variations in results. 4. In Credit Risk Assessment there are various subjective criterias so it depends upon the person doing the analysis how he rates these subjective parameters so it can lead to some discrepancy in the ratings. 5. The process of appraisal slightly defers from the type of loans hence it will be difficult to standardize the whole process. 6. Industry analysis is done by individuals hence the way an individual perceives a particular sector the other one may not perceive in the same way hence it is also a kind of limitation. 7. Wide ranges of products are provided to customers at MCGRO but owing to the tenor of internship export finance is not discussed and analyzed in detail.
Methodology
1. Understanding and Evaluation of the Credit Appraisal Process is done by working on live projects and hence based on the analysis and daily observations the whole project report is drafted. 2. The credit requirements of the company are assessed using the Balance Sheet & Income Statement, Ratio analysis (Leverage, Liquidity & Profitability ratios). Apart from this, various articles from journals, magazines, newspapers, etc have been referred to understand the prospects of the Industry in which the company is operating. 3. A number of research articles by various scholars have been studied to understand and get more knowledge about the topic.
Banking Industry in India

Bank is a financial organization that has functions like to borrow money from the people
and pays interest to them on their deposit, to lend money to the enterprises for productive purposes and charge interest from them.
According to Indian Banking Regulation Act of 1949 the term function of a bank is defined
as Accepting for the purpose of lending all investment of deposits, of money from the public, repayable on demand or otherwise and withdrawal by cheque, draft or otherwise" and the term Banking Organization is defined as "Any company which transacts banking business in India."
Banking in India took its birth somewhere in the first decade of 18th century with the
establishment of The General Bank of India in 1786, which was followed by Bank of Hindustan. But due to some reasons both of them didnt flourished well and hence are no more in existence.
The oldest bank which still exists in India is The State Bank of India which was initially
established as "The Bank of Bengal" in Calcutta in June 1806. A couple of decades later, i.e.

in 1805 foreign banks like Credit Lyonnais started their Calcutta operations. At that point of time, Calcutta was the most active trading port, chiefly due to the trade with the British Empire, and due to which banking activity took roots there and prospered well.
The first fully India owned bank was Allahabad Bank, which was established in 1865. By the
1900s, the market expanded with the establishment of banks such as Punjab National Bank in Lahore and Bank of India in Mumbai, both of these banks were founded by private owners.
The Reserve Bank of India formally took the responsibility of regulating the Indian banking
sector from 1935 and after India's independence in 1947; The Reserve Bank was nationalized and given broader powers.
The Reserve Bank of India is the supreme monetary and banking authority in the country
and has the responsibility to control the banking system in the country.
On July 19th 1969, 14 Major Banks of the Country were nationalized and on 15th April 1980
six more commercial private sector banks were also taken over by the government .
The Indian Banking industry is governed by the Banking Regulation Act of India 1949. The
industry can be classified into two major categories, non-scheduled banks and scheduled banks.
Schedule Banks are those, which are referred to Second Schedule of RBI Act, 1934. These
are the banks which have paid-up capital and reserves of an aggregate value not less than 5

lacks and Non-Schedule Banks are those, which are not mentioned in Second Schedule of RBI Act, 1934.
The figure below shows the structure of Scheduled Banks in India.
(6)
The pace of development for the Indian banking industry has been tremendous over the
past decade. As the world reels from the global financial meltdown, Indias banking sector has been one of the very few to actually maintain resilience while continuing to provide growth opportunities, a feat unlikely to be matched by other developed markets around the world.
Company Profile of State Bank of India
About State Bank of India The origin of State Bank of India set its roots in year 1806 when Bank of Calcutta (also
known as Bank of Bengal) was established. In 1921, the Bank of Bengal and two other presidency banks (Bank of madras and Bank of Bombay) were amalgamated to form the Imperial Bank of India.
In 1955, in controlling interest the Imperial Bank of India was acquired by the RBI and State
Bank of India came into existence by an act of parliament, as a successor to the Imperial Bank of India.
Today, State Bank of India (SBI) has spread its arms around the world and has a network of
branches spanning all time zones. SBIs International Banking Group delivers the full range of cross border finance solutions through it four wings: Domestic Division Foreign Offices Division Foreign Department International Services division
SBI provides a range of banking products through its vast network of branches in India and
overseas, including products aimed at non-resident Indians (NRIs). The State Bank Group, with over 16,000 branches, has the largest banking branch network in India. It also has around 130 branches overseas. With an asset base of $352 billion and $285 billion in deposits, it is a regional banking behemoth and is one of the largest financial institutions in the world. It has a market share of about 20% among Indian commercial banks in deposits and loans.
IBS Hyderabad 2010-2011 The Bank is also in the process of providing complete payment solution to its clientele with
its over 21000 ATMs, and other electronic channels such as Internet banking, debit cards, mobile banking, etc.
The State Bank of India Group includes a network of 5 baking subsidiaries and several nonbanking subsidiaries offering merchant banking services, fund management, factoring services, primary dealership in government securities, credit cards and insurance.
The Bank is forging ahead with cutting edge technology and innovative new banking
models, to expand its Rural Banking base, looking at the vast untapped potential in the hinterland and proposes to cover 100,000 villages in the next two years.
SBI is also focusing at the top end of the market, on whole sale banking capabilities to
provide Indias growing mid / large Corporate with a complete array of products and services. Bank is consolidating its global treasury operations and entering into structured products and derivative instruments.
Today, the Bank is the largest provider of infrastructure debt and the largest arranger of
external commercial borrowings in the country. It is the only Indian bank to feature in the Fortune 500 list.
SBI MID-Corporate Group Mid Corporate Group is a Strategic Business Unit (SBU), created as part of Business Process
Re-engineering (BPR) within the Bank to focus and aggressively market in the Mid Corporate sector.
Mid Corporate Group was incorporated in the year 2004 and has 8 Regional offices all over
India (known as MCGRO).
Following are the eligibility criteria for a customer to avail services for loan under the
governing power of SBI-MCG: Turnover of the enterprise should be between `50 crores and `350crores. The amount of fund based and non fund based exposure should be at least `10crore
IBS Hyderabad 2010-2011 The Banks Mid Corporate Group offers a wide array of client focused products and services
to take care of overall banking requirements of the Mid-Corporate clients.
The Mid Corporate Group is headed by Dy. Managing Director (DGM) and Group Executive
(MC). The Chief General Manager (MCG) is in charge of Mid Corporate Regional Offices (MCROs) which are all headed by General Managers under whom the Branches of the Group function.
Organizational Structure at SBI MID-Corporate Group
GM and DGM are at the top of pyramid and they are the main decision making authorities. DGM also administers the whole functioning of the credit processing cell. AGMs have administrative as well as credit appraisal tasks such as examination of proposals submitted by team leaders, CRA validation, handling restructuring issues etc. CMs are team leaders and there task is to facilitate the process of credit appraisal by guiding and motivating the credit analysts to accomplish the task effectively. Bottom of pyramid consists of the credit analyst, who carries out the whole process of credit appraisal.

The following are some of the major facilities provided by bank: 1) Working Capital loan (Cash Credit) 2) Term Loan (Project Finance) 3) Export Packing Credit/Pre shipment credit in Foreign Currency/Foreign Bill discount Limits 4) Bank Guarantee (Non-Fund Based) 5) LC (Non-Fund Based) 6) Stand by Limit of Credit (SLC)
At SBI MID-Corporate the Pre-Sanction Process involves following: Appraisal & Recommendations Assessment Sanction At SBI MID-Corporate the Post-Sanction Process involves following: Follow up Supervision Monitoring & Control
Theoretical Background of Credit Appraisal

CREDIT
The word credit comes from the Latin word credere, meaning trust. When lender transfers his wealth to a borrower who has agreed to pay later, there is a clear implication of trust that the payment will be made at the agreed date. The credit period and the amount of credit depend upon the degree of trust.
Why Credit From Banks

The most important variables of an economy are the consumption demands of the vast population and the supply of machinery to meet this demand and also the modern economy is driven by technology. Hence, in present scenario the total output by industrial and non-industrial sectors is very huge and the finance requirement of which cannot be met by an industrialist all alone so comes the role of commercial banks as credit provider to the industry. Augment of resources to set-up a manufacturing facility i.e. term credit repayable over a specified period of time and the working capital loan which is required to finance the working capital cycle
Cardinal Principles of Lending

1. Safety The borrower must repay the loan amount with interest as per the loan agreement; the ability to repay the loan depends upon the borrowers capacity and willingness repay. The lending banker ensures this by satisfying himself about the adequacy and quality of the asset charged, and also whether the business is viable enough to earn sufficient margins to pay the interest and generate profits to repay the debt.

2. Liquidity Commercial banks lend funds to the borrowers through long term and short term deposits made by the customers of the bank which are repayable on demand or over short to long periods. So, an unusual proportion of long-term loans in a banks books may lead to an assetliability mismatch and a liquidity crisis. Generally to avoid such situations banks are restricting long term lending to the extent of one third of their advances portfolio.
3. Profitability Banks lend funds to earn interest out of which they pay interest on deposits, incur staff cost, other operational expenses and distribute dividends to the shareholders. Hence, spread over borrowing rate and lending rate should be adequate. So, the rate of interest on lending varies according to the degree of risk involved in lending to various classes of borrowers. This is mainly based on internal rating factors derived from business and industry risk factors, financial risk and management risk etc. These three principles are pillars for success and smooth functioning for any bank and hence a balance between all these has to be maintained.
Credit Appraisal
It is the process through which banks decides on various issues before lending money to the corporate, it can be defined as the process in which the decision maker makes an attempt to find answers to some basic questions like: 1. Whether the need by the entrepreneur is justified 2. Whether the requirement of funds estimated will be serviced 3. Whether the product of the bank supports the requirement Lending bankers usually compute the credit requirements after undertaking a structural analysis of the business and nature of business by applying various tools like audited and

projected financials, ratio analysis, margin assessment etc. having decided on that the proposal, as a reasonable and acceptable business risk, is a bankable proposition. The next step involves assessing the nature and extent of the proposed exposure. The bank provides a range of debt instruments including all types of term and working capital facilities, which can be structured either as fund based or non-fund based or a combination of both.
Loan Policy of State Bank of India

SBIs Loan Policy is directed towards fulfilling the Banks vision Customer first and first in customer satisfaction. Loan Policy is aimed at accomplishing Banks mission to create products and services that help their customers to achieve their goals. Loan Policy applies to all domestic lending. SBIs Loan Policy is reviewed once in a year and is aligned with the chairmans Policy Guidelines. The Policy establishes a commonality of approach regarding credit basics, appraisal skills, documentation standards and awareness of institutional concerns and strategies, while at the same time leaving enough room for flexibility and innovation.
IBS Hyderabad 2010-2011 Steps of Credit Appraisal at State Bank of India

Receipt of application for loan from the client Submission of project report and required financial details Thorough study of the documents submitted by the client Collecting information about the company & the promoters Preparation of Credit Monitoring Arrangement (CMA) Ratio Analysis Credit Risk Assessment (CRA) Drafting of final project proposal Proposal is submitted to concerned authorities for sanction Conveying sanction of credit limits and acceptance of term and conditions of sanction. Suitable documentation Disbursement of loan
The above chart shows the whole process of credit delivery carried out at SBI; however, this flow varies from banks to banks. Different banks have their own formats and may differ marginally in credit delivery. SBI which is countrys largest lender, this is the normal flow which is followed. The process may vary marginally for the type of facilities involved, but more or less this is the standard set for credit delivery. In the above chart first and last two steps are carried out at branch level with the help of relationship manager while other than this all the steps are carried out by MCGRO.
TYPES OF FACILITIES
There are basically two heads under which a loan sanctioned to any corporate entity can be classified as shown below with the subdivisions: 1. Fund Based Working Capital loan Term Loan Stand By Line of Credit 2. Non-Fund Based Letter of Credit Bank Guarantee Stand By Line of Credit Fund based requirements supports the industry/corporate to meet their funding requirements for working capital finance or towards acquiring fixed assets etc. Hence, Funds deployed in a business enterprise can be broadly classified into two components viz. fixed capital and working capital. Fixed capital is invested in fixed assets (capital assets), through which enterprises engages for manufacturing of goods/ products for sale /acquire assets for providing services and generate profits. To meet such requirement banks offer the product called Term loans, which are available for a period not less than 3 years whereas the loans provided for a period of one to three years, are classified as Demand Loan. On the other hand, working capital is deployed in purchasing the items, which are transformed into saleable goods by the production process so to meet this day to day requirement banks offer working capital loan which is considered to be a short-term loan and has to be renewed every year. Hence, we can say that the assets representing working capital rapidly convert from one form to another in short period of time (max. one year)while this is not the case with the fixed capital, the cash conversion time in case of fixed assets is quite large.

Besides meeting the credit requirement of the borrowing enterprise by way of fund based credit facilities, banks also cater to the non-fund based requirements of their clients. The fund based facilities provided by banks require immediate outlay of funds which must be provided beforehand whereas the non-fund based facilities are essentially in the nature of promise made by banks in favour of a third party to provide funds on behalf of their clients if certain situations emerge or certain conditions are fulfilled. These non-fund based facilities may be in the nature of bank guarantee or letter of credit issued by banks.
Working Capital Loan

The term working capital refers to the current assets holding of an enterprise. For manufacturing enterprise therefore, the average levels of holding of raw materials, goods in process, finished goods, receivables, cash and other current assets together constitute the working capital.
Operating Cycle Concept of Working Capital The operating cycle concept of working capital envisages measurement of the average time taken by an enterprise in manufacturing the goods and selling them for cash so that the funds can be deployed for starting other batch of production.

The figure below shows the operating cycle or working capital cycle
RM
Cash Operating Cycle
SFG
Rec.
FG
Cash is required to purchase the raw materials, a manufacturing enterprise ensures that there should always be a minimum level of stock of raw material, which takes care of regular demand as well as any abrupt discontinuity in demand or supply; these raw materials are then pressed into production. The processing time depends on the nature and specification of the final product. In the course of processing, the enterprise may generate stock of semi-finished goods in the course of production now, when semi finished goods finally rolled out as finished goods these are stored till sale of goods as well as the process of delivery takes sometime, the enterprise may have to ensure that a minimum level of finished goods always remains available to meet the unforeseen demand. A portion of sale proceeds may remain locked for sometime in form of receivables and on expiry of credit period they are realized. Thus, every rupee invested in current assets at the beginning of the cycle comes back to the promoter with the profit element added after a lapse of specific time period and this length is known as working capital cycle.

Hence, as the funds are locked in the cycle the enterprise requires funding from banks for smooth functioning of their day to day activities.
Assessment of working capital loan
Fixed Assets Long-Term Liabilities
Current Assets Current Liabilities
The above figure is showing the block diagram of balance sheet where the left hand side represents the liabilities/sources of funds and right hand side represents Assets/Application of Funds. Long-term liabilities include equity capital, retained profits, term loans and unsecured loans while current liabilities include creditors, working capital bank finance and other current liabilities. All the short-term sources are used to fund the current assets and the difference between current assets and current liabilities known as net working capital is funded by long-term sources which can be through internal cash accruals etc. as depicted clearly from the figure above. It is believed that bank credit should be the last resort which should be tapped only after all internal and external sources of funding working capital requirements of the enterprise are exhausted, Hence, banks lend only a portion of working capital gap (WCG), which is the

value of the acceptable level of current assets after netting off the other sources of funding working capital requirements. Hence, method of computation Assessed Bank Finance (ABF) is adopted by the banks, there are various methods for the computation of the same as proposed by Tandom and Nayak committee out of which the method adopted by State Bank of India is given as ABF = WCG (actual/projected) NWC Where, ABF= Assessed Bank Finance WCG= Working Capital Gap = Current Assets - Other Current Liabilities NWC= Net Working Capital = Current Assets - Current Liabilities This is calculated in the CMA itself which will be discussed later. The financing of Working capital also depends upon some set benchmark for the ratios that is current ratio should at least be 1.2 for trading companies and 1.33 for rest and gearing ratio (TOL/TNW) should not exceed 5 for trading and 3 for others. In absence of the same deviation has to be approved by the appropriate authority
Term Loan Financing

A term loan is provided for acquisition of Long Term assets such fixed assets, Long Term Working Capital Margin as well as to acquire capital goods; which are required to be repaid out of cash generations from operations over a period of time. Repayment of term loans is, therefore, required as per schedule planned beforehand. The scope and approach in providing term credit by lending bankers are, thus different from working capital credit or other conventional form of advances. Term loan is a form of a participation loan as the lending institution has a stake in the unit covering a fairly long period of time and longer the period of repayment, the riskier is the proposition. Hence, any appraisal of term loan has an inbuilt method of assessment of the risk contained therein.

The basic purpose of appraisal of proposal for providing term credit requirements is to ensure that the borrower acquires the proposed fixed assets, puts them to use in producing merchandise which would have a market, and generate enough cash from operations to repay the term loan and service the interest commitments thereon over the stipulated period of repayment. The appraisal process, therefore, visualize a meticulous examination of all the relevant aspects of the economics of the project. Points to been seen while term loan appraisal Prima facie Acceptability The analyzer should inspect the MOA & AOA of the borrower organization, should check the RBI and SBI policy guidelines, government regulations, exposure norms, the credit history of the borrower is checked with the help of CIBIL, ECGC etc and finally the debt to equity ratio of the borrower organization, Once these all are under the satisfactory level the credit analyst will move further with the appraisal process. Technical Feasibility To check the viability of the project proposed which includes examination of suitability, adequacy, design, accessibility, production process, factors of production, and cost of production etc. of the project. This is analysis is done in order to see whether the loan taken from the bank will be deployed for a profitable purpose or not, for this there are various methods like Net Present Value (NPV), Project Evaluation and Review Technique (PERT) etc. Economic Viability Once the technical feasibility of the project is examined and if found to be satisfactory, the part of economic feasibility of the project where the market analysis is done to see whether the raw materials and all other requirements are easily available or not and whether the final product of this project will be successful or not in the market for which demand and supply gap is studied.

Financial Feasibility Data from the borrower should be analyzed to ensure that the project meets the minimum financial criteria. Thus the data can be broadly grouped as: Cost of the project including working capital margin A comprehensive and critical review of the project cost is necessary to ascertain, the reasonability and flexibility of estimates of cost, arrangement for raising funds for financing of the project, acceptability of the project and the modifications required. Cost of Production and Estimates of Profitability: A complete and vital assessment of the production cost is necessary to determine, the quality of product, the true production cost, demand gapreasonableness of price in competition, Break-Even analysis to ascertain profit margin. The estimate of profitability enables the banker to draw up the repayment programme, start-up time, etc. Break Even Point: In a manufacturing unit, if at a particular level of production, the total manufacturing cost equals the sales revenue, this point of no profit/no loss is known as the break-even point The Break-even point is worked out as under: BEP = Fixed Cost --------------------------Contribution
Where, contribution is give as unit selling price minus variable cost per unit. Break even point is expressed as a percentage of full capacity. A good project should have break-even point of at least 75% Commercial Viability Once all other aspects of project success has been analyzed, for a lending bank most important part is to check the implementation period of the project, moratorium required , check the projected profitability, breakeven analysis, Debt Service coverage Ratio (DSCR) etc. all this is done to examine in how many years the borrower would be able to pay back the debt.

Managerial Competence This is done to know and understand the proficiency of the management in making the project a success for this the experience, integrity, track record of the directors is studied. All the points covered so far are very core points and is not the core competency of a credit analyst and hence, for such kind of sensitive analysis for term loans especially for Greenfield projects bank has to employ experts from external agencies or technically reputed consultants who have a sound knowledge about the industry or products as discussed in this section and the report submitted by such consultants is known as TEV (Techno Economic Viability) report. For term loan appraisal some cut-off of ratios should be achieved i.e. Gross DSCR should be at least 1.75, gearing ratio(TOL/TNW) should not be more than 3 and repayment schedule should not be more than 8 years this will also include the moratorium. In absence of the same deviation has to be approved by the appropriate authority
Note: The calculation and study of ratios will be discussed later under the section of CMA
Letter Of Credit
Letter of credit is issued by banks to facilitate trade between two parties, whether domestic or international level. It is an undertaking issued by a bank, on behalf of the buyer to the seller, to pay for the goods and services as per agreed terms, provided that the seller presents documents which comply with the terms and conditions stipulated in the letter of credit.

Parties in an LC Transaction A transaction in a letter of credit may involve several parties at different stages. The various parties with different rights and responsibilities are the following:
Courtesy: www.googleimages.com
Applicant The buyer finalises the terms and conditions of a purchase transaction and on receipt of the confirmed offer from the Seller, submits a request to his bank for issuing a letter of credit in favour of the seller. Beneficiary The beneficiary of the letter of credit is the person in whose favour the credit has been issued. Generally, the credit is issued favouring the seller of goods and services. Issuing Bank On the receipt of request from its customer, the applicants (purchasers) bank examines the proposal and opens a letter of credit in favour of beneficiary with the stipulated terms and condition hence this bank is known as issuing bank.

Advising Bank In case the seller resides in a distant place or in a foreign country where the issuing bank do not have a branch, it may contact some other bank in the beneficiarys country. The identified bank in the beneficiarys country may agree to advice the credit to the beneficiary and thus play the role of advising bank. Negotiating Bank The issuing bank may nominate another bank in the ben eficiarys country to which the beneficiary presents its documents and from which it obtains payment of the sum against the letter of credit.
Types of Letter of Credit
Revocable A revocable credit issued by a bank could be amended or cancelled by the issuing bank at any point of time however; such type of credit has been withdrawn under the latest revisions. Irrevocable LOC which can neither be amended nor cancelled without an express agreement of all the parties concerned, the conformation of an irrevocable LC also helps the process of verification of the documents in a conclusive manner. This is also a measure to effectively counter the commercial or country risks emanating from the status of the issuing bank.

Sight Credit In such a credit the beneficiary gets the benefit of immediate payment upon presentation of the proper documents laid down as per the terms of LC at paying bank. Though the banks are allowed reasonable time to examine the documents. Such time does not exceed seven banking days following the day of receipt of the documents. Acceptance In such a credit the beneficiary decides to grant a period of credit to the importer after sight, the period of credit granted is known as Usance. Red Clause The issuing bank authorizes the advising bank to advance a part of the LC amount to the seller to meet pre-shipment expenses. The advising bank releases the advance payment against submission of receipt and an undertaking to present the documents by the beneficiary before the LC expires. The amount paid in advance is recovered with interest from the final payments to be made against submission of supply documents Green Clause It is an extension of red clause LC, in this the applicant also provides for storage facilities at the port of shipment in addition to the pre-shipment advance to the beneficiary. Revolving A buyer may need a specific type of merchandise on a regular basis and the supply may also be required to replenish regularly in such cases a revolving LC is issued in the favour of seller guaranteeing payment against individual consignments. Standby Such credits require a simple statement of claim or proof of delivery of goods or certificate of non-performance or an improper performance of the other party to the underlying contract.

From all the types of LCs discussed above SBI issues sight and acceptance (Usance) credit, revolving LC is not preferred because it increases the liability of the bank and monitoring of the same is quite difficult but if insisted by the client, bank may consider such request on case to case basis.
Assessment of LC Limit at State Bank of India When customer approaches to SBI for LC, based on the nature of transactions and business, the requirement of LC limit is examined. LC Limit is given both for the domestic as well as Import purchase. Sometimes, based on the requirement of the customer, CAPEX LC (LC issued in favour of the supplier of capital goods/fixed assets) facility is also provided. The assessment of required of LC limit is based on various parameters like estimated annual purchase and out of which how much purchase will be made based on LC, credit availed from the suppliers, lead time etc. Following table shows how requirement of LC limit is assessed. The figures are taken hypothetically for the understanding of assessment of LC. (` in Crores) 276.39 27.64 2.30 3.00 months 0.30 month 7.60 7.00
Computation for Inland LC limits: Annual Purchase of Raw Material Estimated for 2011-12 Annual RM Purchase under LC (10%) Monthly Purchases Average Usance Period Lead time including Transit Period Max. LC Limit (2.30x3.30) Recommended LC Limit
IBS Hyderabad 2010-2011 Bank Guarantee

A guarantee is defined as a contract to perform the promise or discharge the liability of a third person in case of his default. Thus there are three parties involved in a contract of guarantee which are as follows: Applicant The client on whose behalf the guarantee is being issued. Beneficiary To whom the guarantee is issued. Guarantor It is the issuing bank who gives the guarantee on behalf of applicant. In case of bank guarantee, the liability of the issuing bank begins only after the default is committed by the principal debtor (applicant) and such default is brought to the notice of the issuing bank by the beneficiary with in the stipulated time, thereby demanding the compensation for the consequential loss suffered by the latter, the demand made in this manner by the beneficiary is called invocation in banking parlance. Types of Bank Guarantee
Financial Guarantee It may be seen as a certificate issued by the bank regarding the financial ability/worth of its client (applicant) to meet certain financial obligations, making payment and satisfying the dues as per contract terms etc. Generally, at State Bank of India does not issue BG more

than 18 months and if required to be issued it is being considered after due approval from the controllers. Performance Guarantee The issuing bank provides a guarantee to the beneficiary to make good the monetary loss in the event of non-performance or short-performance of a contract by the client (applicant), thus the issue of performance guarantee involves an assessment of the technical competency, managerial ability or vocational experience to execute a contract successfully, also the issue of such guarantees should be backed by adequate securities Both the types of guarantee is issued by SBI, it is the Credit Conversion Factor (CCF) which is different while calculating the limit, CCF for Financial BG is 100% and for Performance BG is 50% This is required for the purpose of capital charge in terms of BASEL norms. Assessment of Bank Guarantee at State Bank of India When customer approaches to SBI for BG, based on the nature of transactions and business, the requirement of BG limit is examined. The assessment of required of BG limit is based on various parameters like outstanding for last financial year, due during current year, additional requirement during the current year etc. Following table shows how requirement of BG limit is assessed. The figures are taken hypothetically for the understanding of assessment of BG. Computation of BG Limit Outstanding BGs for Last Financial Year Add: BGs Required During Current Year Due During Current Year Less: Estimated Maturity/Cancellation of BGs during the current year Required BG Limit Recommended BG Limit (` in Crore) 0.23 1.77 0.00 0.00 2.00 2.00
IBS Hyderabad 2010-2011 Stand By Line of Credit

A stand-by Line of Credit is issued to the clients in order to meet their emergent and unforeseen needs while carrying out their operations. The facility may be made available as Fund Based or Non-Fund Based limits ensuring that the aggregate exposure does not exceed the overall SLC limit. The SLC issued for emergent working capital requirements is termed as SLC (WC). The facility is available for a maximum period of 2 months at any one instance; however no restriction has been placed for number of times the facility can be used by the borrower. The quantum of finance under SLC is calculated as 15% of (FB+NFB) WC Limit and should not exceed `5Cr. The SLC issued for term loan requirements is termed as SLC (TL), this is given to facilitate the borrower for expeditious implementation of expansion/modernization plan and firming up capital expenditure to avoid time/cost overrun. The validity of sanction of SLC (TL) will be 12 months from the date of sanction. The quantum of finance under SLC (TL) is calculated as 2 times the residual cash accruals and should not exceed `5 Cr for corporate borrower and `2 Cr for non-Corporate. Assessment of SLC at State Bank of India Though both term and working capital SLC is permitted at SBI but generally working capital SLC is demanded by the clients. Following table shows how requirement of SLC (WC) limit is assessed. The figures are taken hypothetically for the understanding of assessment of SLC Computation of SLC Limit FB WC limit (Proposed) NFB WC limit (Proposed) Maximum SLC limit eligible (15% of FB WC and NFB WC) Recommended Limit (` in Crore) 21.00 7.40 4.26 3.00
CREDIT MONITORING ARRANGEMENT

Credit Monitoring Arrangement also known as CMA, its format is as prescribed by RBI. RBI decided to monitor each high value WC credit facility and advised the lending banks to report the details of such sanctioned credit facilities in prescribed format and hence, introduced Credit Monitoring Arrangement (CMA) after discontinuing Credit Authorisation Scheme (CAS) in 1988. The lending banks, while sending the details to RBI in this manner, observed that these forms served well the purpose of analysis as well as the financial appraisal of the WC credit. In CMA Financials of three year audited figures, current year estimates and next year projections for working capital and in case of term loans projections are made till the repayment of the long-term loan is done are examined in a CMA. The estimated and projected figures are calculated according to past trends and future expectations.
CMA Format and Analysis of CMA

Form I: Particulars of existing/proposed Limits from the banking system This form basically shows the limits from all banks and financial institutes, the limits include existing limits, shows the extent to which the limits has been utilized and the requested limits for the current year. Form II: Operating Statement The P&L statement prepared by a company may serve well the purpose of all shareholders, the government and the tax authorities, but a rearrangement of the various items of income and expenses is necessary for the purpose of undertaking a meaningful analysis and taking a credit decision. While analyzing the operating statements, various factors such as growth in sales over previous year as well as estimated growth as per industry trend is examined. Also the various operating and other costs like interest and depreciation etc. is compared with the past trends and based on the future expectation, cost estimates are made for the purpose of arriving at the profit of the enterprise. Any abnormal costs or losses are separately examined and analyzed accordingly.

Form III: Analysis of Balance Sheet It is necessary to restructure various items of financial statements submitted by an enterprise in a format meaningful for the purpose of credit analysis. The initial step in an exercise of restructuring the balance sheet is to classify the various assets into current, noncurrent, fixed and intangible assets. Similarly, the liabilities also need to be classified into various categories viz. current, deferred, net worth etc. Classification of items in this manner helps rearrange them in the order of priority from the point of view of a lending banker. Balance sheet shows the position of assets and liabilities of an entity as on the date of balance sheet. There are various types of assets like tangible, intangible, fixed, current etc and similarly various liabilities like short term loans, long term loans, current liabilities and provisions etc. Each of such assets and liabilities are examined and analyzed for source, purpose and application of the same. Moreover, the amount and duration of existence of such assets and liabilities are also taken into consideration to arrive at the regular funding position of the entity. Based on past trends, requirement of the entity and future funding pattern, positions of the assets and liabilities at the future dates are estimated and set accordingly for deciding the finance requirement of the organization. Form IV: Comparative Statement of Current Assets and Current Liabilities This form is used to understand the holding levels of the enterprise as it is the main source to study the actual working capital requirement of the enterprise; it also shows the cover period of receivables. Based on the holding period or say requirement of amount of fund to be invested in current assets, and availability of the credit to the company for paying the current liabilities, working capital requirement of the entity is assessed and further, after adjusting the long term surplus available for the same and internal accruals contributing to the same, the CC limit is arrived at. The extent of limit is also dependent upon the overall funding pattern of the entity and the fact is also to be assured that promoters also contribute towards the working capital requirement and contribution from bank finance is at acceptable level.

Generally all the corporate will wish to show high holding levels and fewer creditors hence it is the responsibility of the analyzer to understand the actual requirements and assess the same. Form V: Calculation for Assessed Bank Finance In this form the maximum working capital limit which is known assessed bank finance is calculated. Form VI: Fund Flow Statement The change in position of an item in the balance sheet is known as flow, the statement of changes is known as fund flow statement or as the statement of sources and application of funds. The inflow and outflow of funds is represented by a change in the assets and liability items of the balance sheet of an enterprise. While analyzing the inflow and outflow of the fund of an enterprise, separate analysis is made for long term sources and uses as well as short term sources and uses. Increase in long term liabilities and decrease in long term assets denotes long term source of the fund and decrease in long term liabilities and increase in long term assets denotes long term application/use of fund. The difference of the source and uses of long term fund is known as long term surplus or deficit as the case may be. When long term surplus is generated, it is used towards the short term application or say working capital finance. Whenever there is deficit in fund flow i.e. long term uses exceed long term sources, it is called diversion of fund from short term sources to long term usage. In general, diversion of fund is not desirable as it indicates that fund created/availed for the working capital are not used for the purpose for which they have been availed. The diversion may be accepted based on examining the genuineness in special cases with proper and satisfactory justification for the same.

Summary of Ratios Various ratios are calculated as a part of analysis; among them the most important ones are as discussed below: Current Ratio This is the most important ratio indicative of the liquidity position of an enterprise and is widely used by credit analyst in assessing the degree of liquidity enjoyed by an enterprise. The ratio is expressed as: Current Ratio = Current Assets Current Liabilities A current ratio of 2:1 thus implies that the value of current assets of the enterprise is double the amount of current liabilities, higher the current ratio better is the liquidity of the enterprise as it shows that enterprise has enough funds to meet its current liabilities. As a part of analysis this ratio should clear some cut-off value so that loan requirement of the enterprise can be made permissible that is for working capital loan this ratio should be 1.2 and 1.33 for trading and non-trading firms respectively, studying this ratio for the purpose of term loan does not have much significance. Gearing Ratio This ratio is expressed as given below: Gearing Ratio = TOL/TNW Where, TOL = Total Outside Liabilities TNW = Tangible Net Worth This ratio shows how much debt an enterprise has with respect to the tangible net worth it possess, smaller the value better it is its gearing. This ratio provides information on the position of owned funds compared to the total outside liabilities of the enterprise and is also termed as capitalization ratio. This ratio is

generally used in analyze the position of external funding position vis--vis the owned funds of an enterprise. As a part of analysis this ratio should clear some cut-off value so that loan requirement of the enterprise can be made permissible that is for working capital loan and term loan this ratio should be not more than 5 and 3 for trading and non-trading firms respectively Profitability Ratio This ratio is expressed as given below: Profitability Ratio = PBT/ Net Sales Where, PBT = Profit before Tax Net Sales = Gross Sales Excise Duty This ratio shows how much profit the enterprise is earning out of the annual sales; larger the value better is the operations of the enterprise. It measures the overall efficiency of production, administration, selling, financing, and pricing, value greater than 1 is appreciable. Interest Coverage Ratio This ratio is given as Interest Coverage Ratio = PBDIT/ Interest Where, PBDIT = Profit before depreciation and interest This ratio indicates the leverage enjoyed by the enterprise in paying the interest obligations. This ratio is calculated to check how credible is the enterprise to make its interest payments, higher the value it is better for the lending banker, this ratio is studied in case of loans in which only interest is received i.e. working capital loans.

DSCR (Debt Service Coverage Ratio) This ratio is given as, DSCR = (PAT + Depreciation + interest on TL)/ (Annual Principal Installments + Interest on TL) This ratio indicates the capability of an enterprise for servicing both the interest and principal installments of a debt, this ratio is studied in case of term loans only as in term loan repayment of installment and interest both has to be received on time. As a part of analysis this ratio should clear some cut-off value so that loan requirement of the enterprise can be made permissible that is for term loan this ratio should not be less than 1.75 for trading firms. Debt to Equity Ratio This ratio is given as, Debt to Equity Ratio = Total Long Term Liabilities/Shareholders Equity This ratio is studied to measure the financial leverage of the enterprise, it indicates what proportion of equity and debt the enterprise is deploying to finance its assets. A high debt/equity ratio generally means that the enterprise has been aggressive in financing its growth with debt. This can result in volatile earnings as a result of the additional interest expense. Lending bankers always prefer some margin while financing the borrowers that are generally 65% is financed by bank and 35% should come from the promoters it may be through equity.
Credit Risk assessment

What is RISK
Risk is defined as any situation involving exposure to danger. In terms of finance, risk can be defined as: he that the expected or prospective advantage, gain, profit or return may not materialize;it means that the actual outcome of investment may be less than the expected outcome. Greater the variability or dispersion in the possible outcomes, or the broader the range of possible outcomes, the greater the risk. The measure of risk is Standard Deviation.
Types of Risk and Risk Management

As per the Reserve Bank of India guidelines issued in Oct. 1999, there are three major types of risks encountered by the banks and these are Credit Risk, Market Risk & Operational Risk. 1. Credit Risk Credit risk is defined as the possibility that a borrower or counterparty will fail to meet its obligations in accordance with agreed terms, the degree of credit risk is the probability that a loan lent to a borrower may not be repaid. The extent of repayment and the time taken in the process are the important factors in the computation of probability of default. 2. Market Risk

Market risk gives rise to the possibility of loss to a bank caused by changes in the market variables. The Bank for International Settlements defines market risk as the risk that value of on and off balance sheet positions will be adversely affected by movements in equity and interest rate in markets, currency exchange rates and commodity prices. Thus, Market Risk is the risk to the banks earnings and capital due to changes in the market level of the interest rates or prices of securities, foreign exchange and equities, as well as the volatilities of those changes. It is sub-classified as: Interest Rate Risk Interest Rate Risk is the potential negative impact on the Net Interest Income and it refers to the vulnerability of an institutions financial condition to the movement in interest rates. Changes in interest rate affect earnings, value of assets, liability offbalance sheet items and cash flow. Hence, the objective of interest rate risk management is to maintain earnings, improve the capability, ability to absorb potential loss and to ensure the adequacy of the compensation received for the risk taken. Liquidity Risk Bank Deposits generally have a much shorter contractual maturity than loans and liquidity management needs to provide a cushion to cover anticipated as well as sudden deposit withdrawals. Liquidity is the ability to efficiently accommodate deposit as also reduction in liabilities and to fund the loan growth and possible funding of the off-balance sheet claims. The cash flows are placed in different time buckets based on future likely behaviour of assets, liabilities and off-balance sheet items. Liquidity risk consists of Funding Risk, Time Risk & Call Risk. Funding Risk: It is the need to replace net out flows due to unanticipated withdrawal/nonrenewal of deposit. Time risk: It is the need to compensate for non-receipt of expected inflows of funds i.e. performing assets turning into nonperforming assets.

Call risk: It happens on account of crystallization of contingent liabilities and inability to undertake profitable business opportunities when desired. The Asset Liability Management (ALM) is a part of the overall liquidity risk management system in the banks. It implies examination of all the assets and liabilities simultaneously on a continuous basis with a view to ensuring a proper balance between funds mobilization and their deployment with respect to their maturity profiles, cost, yield, risk exposure, etc. It includes product pricing for deposits as well as advances, and the desired balanced maturity profile of assets and liabilities. Foreign Exchange Risk Forex risk is the risk that a bank may suffer as a result of adverse exchange rate movements during a period in which it has an open position, either spot or forward, or a combination of the two, in an individual foreign currency. The banks are also exposed to interest rate risk, which arises from the maturity mismatching of foreign currency positions. Even in cases where spot and forward positions in individual currencies are balanced, the maturity pattern of forward transactions may produce mismatches. As a result, banks may suffer losses as a result of changes in premia/discounts of the currencies concerned. In country like India which is pegged to single currency viz. USD, cross currency transaction also sometimes involves Forex risk. 3. Operational Risk According to Basel Committee operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people and system or from external events. The key to management of operational risk lies in the banks ability to assess its process for vulnerability and establish controls as well as safeguards while providing for unanticipated worst-case scenarios.
IBS Hyderabad 2010-2011 Credit Risk Assessment Model at State Bank of India
Credit risk management encompasses identification, assessment, measurement, monitoring and control of the credit exposure. The bank has well defined Credit Risk Management Policy and this has been in practice since 1996.
Over the years, banks policy and procedures in this regard have been enunciated, practiced and refined based on evolving concepts and banks actual experience. The risk assessment policy and procedure of SBI has been aligned to Standardized Approach under Basel II from 1.4.08 and the bank is gearing itself to adopt Foundation Internal Rating Based Approach The bank undertakes the following functions in the process of identifying and assessing the credit risk underlying a proposal: Developing and refining the credit risk assessment models used for taking Commercial Banking and Retail Banking exposures. Conducting industry research, which is integral to assessing the risk associated with any loan proposal of corporate.

CRA Process for Commercial Advances Before a credit facility is sanctioned to a client/obligor, the risk level is measured, as per the credit risk assessment framework developed by Credit Risk Management Department (CRMD). The credit risk rating is worked out by Credit Processing Cell on the audited balance sheets (projected financials in case of a new unit) and data collected by the credit analyst about the management, industry etc. of the enterprise.
The internal rating thus obtained is validated and approved by a separate committee, specially set up for this purpose. The process of validation and approval is made prior to sanction/renewal/enhancement of the credit facilities. The CRA model is divided in two sectors viz. trading (applicable for enterprises engaged in services and trading activities) and non-trading sectors (applicable for enterprise engaged in manufacturing activities) these two sectors are examined differently because trading and non-trading industries have different way of functioning and different requirements Therefore different parameters have been set for trading and non-trading business and accordingly scores are defined. For a credit proposal, a credit rating is based on audited financials as validated by CRA validation committee. The bank now has a unified Credit Risk Assessment System, which is used for assessing the credit risk of borrowers as well as facilities viz., working capital, term loan and non-fund based exposure etc., to commercial and institutional borrowers, MSMEs

(Micro, Small and Medium Enterprise) ), SSI (Small Scale Industries), SBF (Small Business Finance) and agriculture segment for exposure of 25lakhs and above. Their are two models for the each of the two sectors, the models are classified as shown below: Sr. No. Exposure Level (FB+NFB) 1 2 Over 5 Crore Rs 0.25 to 5 Crore Non-Trading Sector Regular Model Simplified Model Regular Model Simplified Model Trading Sector
The rating process reflects the risk involved in the facility/borrower and would be an evaluation of the borrowers intrinsic strength. The type of ratings is different depending upon the type of model this is as shown in table below: Sr. No. 1 Regular Model Type of Rating (i) Borrower Rating (ii) Facility Rating (i) Borrower Rating
Simplified
In the CRA model of SBI depending upon the extent of risk involved scores are given for each type of parameter on which risk has to be studied and depending upon the total score the final ratings are given and hence depending upon the risk score the pricing is decided.
Borrower Rating This rating is done to see the risk which may be faced because of the credibility of the borrower, the scale for borrowers rating is SB1 to SB16 depending upon the scores obtained by the enterprise under various heads as discussed hereinafter. In this rating process, various risks are studied with regard to the borrower mentioned below:

Financial Risk Various financial parameters are studied in this section this includes: Gearing Ratio (TOL/TNW) Current Ratio PBDIT/Total Assets Retained Profits/Total Assets PBDIT/Interest PAT/Operating Income Net Cash Accruals Growth in Net Sales Factors Influencing Financial Flexibility Group Risk Forex Risk Future Prospects Gross average DSCR, etc. For all these financial indicators based on the latest audited financials (projected in case of new unit) scores are assigned and each factor has weightage of its own in the risk assessment and depending upon that final score is calculated. For each indicator moving average of last three years and industry comparison (in case of manufacturing) is also carried out. Qualitative Factors If there are any qualitative remarks like Contingent Liabilities, Auditors Qualifying Remarks, and Accounting Policies etc. affecting the business, negative scoring is also defined based on the extent and effect of such qualitative factors on the overall functioning and credibility of the enterprise. Business and Industry Risk Some risk is always associated with the type of business the borrower enterprise is in, the parameters examined in this section are:

Competition and Market Risk Industry Outlook Industry Cyclicality Regulatory Risk Business Environment Technology and Vulnerability to Microeconomic Environment Access to Resources Product Profile R&D Distribution Network Restructuring Level of Integration, etc. These all parameters are very subjective hence study of all the factors to be considered is done by the credit analyst and then rating is done depending upon the analysis. Management Risk Risk is well associated with the way management is running the day to day functions of the borrower enterprise and hence it becomes a very important part of borrower ratings. This column covers points like: Integrity Corporate Governance Conduct of Account Managerial Competence Commitment Payment Record Experience in the Industry Length of Relationship with Bank Credibility Adherence to the Covenants of Sanction

Ability to meet changes, etc.
External Rating Solicited Rating by a recognized External Credit Rating Agency (ECRA) translates to additional Score. External Credit Rating Agencies assign Bank Loan Rating on long term and short term rating scales of various credit rating facilities. So with each the ECRA rating some risk weight is given and the scores are calculated. Following ECRAs recognized by RBI are considered for this purpose:
Sr. No.
Type
ECRA (a) Credit Analysis & Research Limited
Domestic
(b) CRISIL Limited (c) FITCH India (d) ICRA Limited (a) FITCH
International
(b) Moodys (c) Standard and Poors
Country Risk This is the risk that a borrower will not be able to service the obligation to pay because of cross-border restrictions on the convertibility or availability of a given currency. Applicable to Borrowers for whom 25% or more of their cash flow or assets are located outside India. Financial Statement Quality The credit analyst is to comment on the quality, adequacy and reliability of the financial statements/information irrespective of the risk rating. The quality is to be indicated as Excellent/good/satisfactory/poor.

Rating Transition Matrix In this section comparison of risk ratings done over a period of three years, Comments on the Movement of Rating /Risk Scores are furnished. Any major fluctuation in scores resulting in up-gradation or deterioration in rating by more than one stage, is commented upon, Up-gradation in rating only on account of higher score in parameters other than Financial Risk, is to be examined and commented upon. Maximum Score that is assigned to all these types of risks is as shown in table below Risk Type Regular Model Existing Company Financial Risk 65 New Company 25 (65 X 0.39) Qualitative Factor (-ve) Business & Industry Risk (-10) 20 (-10) 30 (20 X 1.5) Management Risk 15 45 (15 X 3) External Rating Total +5 100 +5 100 +5 100 10 (-10) 20 Simplified Model Existing Company 70 New Company 35 (70/2) (-10) 40 (20 X 2) 25 (10 X 2.5) +5 100

The scores obtained from all the parameters above has to clear the hurdle score to classify the enterprise acceptable for sanctioning of loan, the hurdle rates under Borrowers Rating is as shown in table below: Hurdle Score Risk Type Regular Model Existing Company Financial Risk Business & Industry Risk Management Risk Aggregate hurdle Score Overall Hurdle Score 25 12 8 15 SB10 New Company 10 16 22 48 SB10 Simplified Model Existing Company 30 10 5 45 SB10 New Company 15 20 13 48 SB10
Facility Rating A borrowing company may be availing either one or more of Fund Based Facilities such as Working Capital (WC)/Term Loan (TL) or Non-Fund Based Facilities like Letter of Credit (LC)/Bank Guarantee (BG), all the facilities are to be rated separately viz. if a borrowing company has both WC and TL and Bank Guarantee and LC, in total the company would have one Borrower Rating and four Facility Rating (i.e. 1+1+1+1 = 4) Loss Given Default (LGD) Facility Rating would reflects the degree of severity of loss in the event of default on the obligation. Facility Rating Grade thus translates on a LGD scale, indicating loss percentage, LGD is calculated on a sample basis in CRMD (Credit Risk Management Department) from the data available with them. Risk Drivers for LGD Current Ratio / Project Debt to Equity Current ratio is studied in case of working capital loan and project debt to equity is studied as a risk driver in case of term loan.

Nature of Charge Scoring is done only for 1st charge, the quantum of Collateral vis--vis the total Exposure i.e., Exposure at Default (EAD) is the basis of scoring. EAD = for Fund Based Exposure: outstanding+ 75% of unutilized limits and for NonFund Based Exposure it is the total limit to be sanctioned Industry Recovery Rates /Default Rates vary from Industry to Industry, industry specific factors determine the current position of an industry in an Economic Cycle. Some of the factors which impacts recovery are the state of growth of that particular industry, the financial strength of the unit as well as the quality of the Asset. Units belonging to an industry under positive growth phase, and with better financial strength and asset quality stand a better chance of being sold as a going concern than the one under a recessionary phase having depressed financials /asset quality. In a highly favourable phase, the Default Point (DP) is far away while in a highly unfavorable position, the industrys susceptibility to be pushed into DP goes up substantially. The Scoring under the parameter is divided into the following two sub-heads: (a) Industry Characteristics & Distance to Default In this clause the scoring is done according to CRMD norms. (b) Industry Recovery Score The recovery score is calculated as given below: Score = {(100-LGD) X3}/100 in case if the industry of the enterprise is not listed than the industry score is taken as 0.72 on an average. Geography In this clause scoring is done depending upon the region, in which the enterprise is functioning, risk varies form place to place depending upon the availability of resources etc.

Unit Characteristics The Scoring under the parameter is divided in the following sub-heads: (a) Leverage/Enforcement of Collateral Leverage is a measure of the extent of claimants for an Asset in the event of default of a Borrowing Company i.e., it is inversely proportional to the enforcement of claim. Even for senior stake holders, higher leverage impacts the enforcement of collateral and recovery there from, as in many cases consent may have to be obtained from smaller claimants before disposal of Assets to affect recovery. The enforcement of Collateral for recovery therefore becomes a challenge. The assessment under the parameter is to be made in this section. (b) Safety, Value & Existence of assets Once a default occurs with no sign of reversing the process in sight (including restructuring of debt), the Bank needs to explore ways for disposal of assets for satisfaction of its dues. For such reasons, examination of the quality of Collateral & its useful life becomes important at the time of each successive review of the credit facility. This aspect is necessary to determine the quality of upkeep of the assets and their degree of deterioration (once default occurs), the likelihood of its disappearance, decline in its market value compared to Book Value. A borrowing concern under financial strain cuts back on maintenance of Collateral. The Risk assessment under the parameter needs to consider all such factors. Macroeconomic Conditions Economic downturn impacts LGD as all retarding economic variables impact the Demand-Supply Paradigm. It affects production/trade, recession sets in which in turn accelerate the loan default rate. Asset value deteriorates with few buyers, and distress sale at a depressed price becomes the only option to reduce the loss to some extent. Normally, assets need to be valued both in the up & down scenario of the economy. Accounting for this scenario is complex. BaselII Document has advocated a

conservative approach to be adopted Pillar I Capital calculations must reflect economic downturn condition, where necessary, to capture relevant risks. The other parameters under Macro-Economic Conditions are an offshoot of such a situation. The risk assessment under the parameter is to be done in this section. The scoring under the parameter is divided in the following sub-heads: (a) (b) (c) (d) GDP Growth Rate : Impact of Business Cycle Insolvency Legislation in the Jurisdiction Impact of Systemic/Legal Factors on Recovery Time Period for Recovery
Total Security (Primary + Collateral) The collaterals are an important ingredient of facility rating design; their quality and depth affects the severity of LGD for any facility. As an element of risk is involved, prudence is required in assessing the value of the collateral offered for obtaining credit facility. Scoring is done depending upon the type and amount of security to be given by the client on account of the loan taken. Risk Drivers for EAD Credit Quality of Borrowers The Score obtained by a unit under Borrower Rating reflects not only its financial strength but it is also an indicator as to how far it is away from Default stage/Point. In some cases, the deterioration in Rating may be a gradual affair while there would be isolated instances of a steep decline also in the event of any unexpected event resulting in Unexpected Losses. Measuring the position of a unit from the Default Point then assumes importance from the Default and the consequent Loss Severity angle. Tenor of Facility Risk is involved with the time period for which the loan is sanctioned because it cannot be assured that the performance of an enterprise will be the same or will be better over a longer span of time and hence risk weights are assigned depending upon the tenor of facility
Pricing
Pricing of loans in the bank cover interest income as well as fee income. Bank has quoted a single Base Rate (BR) which is the reference rate below which the bank will not undertake any lending activity except some permitted categories of advances like Staff Advances, Crop. Loans upto 3 lakhs, metal gold scheme etc.
Pricing of Banks funds and services while being basically market driven, is also determined by two important considerations: Minimum desired profitability Risk inherent in the transactions The Base Rate is reviewed by the Asset Liability Management Committee (ALCO) with periodicity of at least once in a quarter; the present base rate for the bank is fixed at 8.50% p.a. Credit Risk Premia (spreads) as per the existing Credit Risk Assessment (CRA) model of the bank is added to the base rate as per Credit Rating of the borrower. Since CRA rating takes into account the inherent risks in the business based on financial, industry, segment and management risks, the pricing for rated borrowers is uniform irrespective of segments (viz: C&I,SIB and AGRI)

For long term exposures, the factors that weigh are the rate charged by the financial institutions/ other banks, the period of exposure, the pattern of volatility in interest rates and the expected movement of rates in the long term perspective. Bank can price loans at fixed and floating rate basis linked to the base rate. However, the effective to be charged is equal to or above the Base Rate. The Bank has adopted an appropriate authority structure to facilitate competitive pricing of loan products. The authority concerned while exercising the discretion takes into consideration the risk rating of the loan assets, the trends in movement of interest rates, market competition and overall business consideration. for working capital and loans upto 3 years and limits between `25 Lakhs to `100 Crores the spread is as shown in table below:
Rating SB 1 to SB 2 SB 3 to SB 5 SB 6 to SB 7 SB 8 to SB 9 SB10 SB11 to SB15
Base Rate 9.25 9.25 9.25 9.25 9.25 9.25
Spread 4.75 6.00 6.50 6.75 7.25 7.50
Effective Rates 14.00 15.25 15.75 16.00 16.50 16.75
Appropriate tenor premium is built in the pricing for Term loans of various maturities beyond 3 years as shown in table below: Sr. No. 1 2 3 4 >3 yrs less than 5 yrs From 5 yrs to less than 7 yrs From 7 yrs to less than 10 yrs 10 yrs and above Term Term Premia (%) 0.50 0.75 1.00 1.25
Proposal writing
A project proposal is the final draft of the whole process of credit appraisal and is referred to team leader; it contains all the information regarding the enterprise, analysis done by the credit analyst at each stage of appraisal. The proposal is prepared as credentials to sanctioning authority for approval. There are two formats for drafting a project proposal that is as shown: S-Format: this format is prepared in case of sanction or renewal AS-Format: this format is prepared for continuation of limits, sanction of Ad-hoc facilities, and all sort non-business proposals.
S-Format
First page of proposal is Date Chart for Disposal of Credit Facilities 1. Name of Branch This clause has name of the branch from which the project has came to MCRO for appraisal. 2. Module Each region has various divisions and hence, that is mentioned in this section for example: Sales Hub, Ahmedabad. 3. Circle Regional office of MID-Corporate Group of SBI is defined as various circle depending upon the region it covers, hence the circle within which the branch which has brought the project falls in, has to be mentioned here for example: MID-Corporate, Ahmedabad region. 4. Name of Unit This clause has name of the enterprise which has applied for the loan from SBI E.g. XYZ Private Limited (XPL)

5. Nature of facilities applied for This clause is in form of a table showing the existing and proposed limits of fund based and non-fund based facilities, from SBI and other banks under consortium or multiple banking Arrangement (MBA), this table also shows the percentage exposure of SBI as compared to total outlay under consortium or MBA. 6. Date of receipt of the proposal at CPC The date on which the project came to MCRO for appraisal e.g. 12.03.2011 7. Proposal withdrawn by sanctioning authority If in case the proposal has been withdrawn by the sanctioning authority on demand of team leader or credit analyst based on various issues that date has to be mentioned in this clause. 8. Date of making reference to banks consultant Bank has its own consultancy cell, if in any case the appraisal of loan is referred to the consultancy cell that date is mentioned in this section. 9. Date of receipt of report from banks consultant If any report is received by the Banks consultancy cell that date is mentioned here. 10. Queries raised on The date on which some queries has been raised to the client or his consultant is mentioned here. 11. Date of receipt of complete information The date on which all the information required from the client is met, that date is mentioned in this section. 12. a. Date of submission to sanctioning authority This clause has dates that when the proposal was submitted to team leader and to next higher authority respectively. b. Authentication of the official submitting the proposal to the next higher authority This clause has the signature of credit analyst and the team leader.

Next page of the proposal is Executive Summary which contains table of contents which has detail about the name of section and page number of the same, the sections of proposal is as discussed in a chronological order. Section 1 : Memorandum for the MID-Corporate Credit Committee This section contains information regarding the borrower and the industry as shown below: A. Borrowers Profile This section contains details about the borrower i.e. name of the company, address of registered office, type of industry and activity of the enterprise, this section also has information about since how long the enterprise id banking with SBI. All this information is gathered by the credit analyst in order to understand and examine how has been the relationship of the entrepreneur with SBI and whether he is credible or not. In this section there is a clause of IRAC status i.e. Income Reorganization and Asset Classification; The IRAC norms serve two primary purposes i.e. to depict the true position of a bank's loan portfolio and to help arrest its deterioration. This clause is taken into consideration only when an existing client comes with new requirements. According to IRAC norms loan assets are classified in the following categories: Standard If the IRAC status is standard that means that the enterprise has paid all its debt on time i.e. both interest and installment in case of term loan and interest and loan repayment in case of working capital or any irregularity which falls within a period of 90days. Or we can say that these are the assets, which do not disclose any problem and do not carry more than the normal risk attached to the business. Sub-Standard Assets are classified sub-standard if they remain non-performing for less than or equal to 12 months. They have well defined credit weaknesses and are characterized

by the distinct possibility that the bank will sustain some loss if the deficiencies are not rectified. Doubtful Assets are classified doubtful if they remain non-performing for more than 12 months. They have all the weaknesses inherent in sub-standard assets with the added characteristic that collection or liquidation of the dues is highly improbable. Once an asset is classified doubtful than bank has to make some provisions, the percentage of provision to be made is as given below: For the first year of default provision made by bank is 20% of the total exposure For the second year of default provision made by bank is 30% of the total exposure For the third year of default provision made by bank is 50% of the total exposure Loss These are assets where loss has been identified by the bank or internal / external auditors or RBI inspection, but the amount has not been written off, wholly or in part. Such assets are considered uncollectible and of so little value that their continuance as bankable assets is not warranted, even though there may be some salvage or recovery value. Once an asset is classified loss than 100% provision has to be made by the bank and the account is categorized as a bad debt.
B. Brief Background( company/group/promoters/management including shareholding pattern) This section has brief history about the enterprise related to date of incorporation; products manufactured or traded, details about the background of the directors i.e. their qualification, experience in industry etc. , shareholding pattern is also mentioned in this part to see how much money is brought in by the promoters. This section is very useful in studying about the industry and promoters and hence their credit worthiness.

C. Brief write-up on industry/sector and companys standing in the industry This section has the write-up on industry as a whole, this done to see whether the exposure to be made in this sector by the bank is fruitful or not. In case of
manufacturing companies the whole manufacturing process is also discussed in this section. D. CRMD Exposure norms CRMD stands for Credit Risk Management Department of SBI, it undertakes reviews of industry/sector exposure for select industries at periodic intervals, and CRMD issues advisories on the general outlook in near terms for industry from time to time. The norms are classified as qualitative and quantitative approach as given below: Qualitative approach This approach measures that whether the industry outlook is positive, neutral or negative, this helps in deciding whether to finance this particular industry or not. Quantitative approach This approach measures the fund based exposure in this sector as a percentage of banks total fund based exposure. This gives a clear picture about the exposure in this sector and helps in decision making. E. Indebtedness/Exposure and capital charge Indebtedness This column shows the existing and proposed fund based and non-fund based outlay of SBI to the enterprise. Exposure Indebtedness plus the investment and leasing done by SBI in the enterprise and is nothing but the exposure of the bank in the enterprise. External Rating A table showing the details about the rating done by the External Credit Rating Agency i.e. name of the agency, rating and the outlook of the given rating.

Capital Charge The capital charge is the capital that will be blocked because of the exposure made in the enterprise, it is given by For Fund Based Facilities Capital Charge = Proposed Exposure X Risk Weight X 11% For Non-Fund Based Facilities Capital Charge = Proposed Exposure X Risk Weight X CCF X 11% Here risk weight of facilities depends upon the external rating of the company, the figure below shows the various risk rates associated with different external ratings: Long Term Rating AAA AA A BBB BB & Below CARE PR1+ PR1 PR2 PR3 PR4 & PR5 Short Term Rating CRISIL P1+ P1 P2 P3 P4 & P5 FITCH F1+ F1 F2 F3 B,C,D ICRA A1+ A1 A2 A3 A4 & A5 20% 30% 50% 100% 150% Risk Weight
CCF signifies the factor used to convert non fund based limit to funded limit, on which the bank provides applicable capital charge, it varies depending upon the type of facility i.e. for documentary LC it is 20%, for Financial BG it is 100%, performance BG it is 50% etc.

ROCE of bank is also calculated in this clause it is the amount that bank require each year in return for providing financing to a business. It is essentially a theoretical number which is supposed to reflect the return bank expects for the amount of risk in the business, it is given by:
ROCE (%) =
Section 2: Present Proposal A. Sanction and Approval for In this column the information about the limits that is to be sanctioned is mentioned and if some recommendations are to be approved by the committee is mentioned for example some changes in pricing, some concession in processing charges etc. B. Credit Limits(Existing and Proposed) This is the same table that is on the first page of the proposal showing all the existing and proposed limits of fund based and non-fund based facilities from SBI and total limits from MBA (Multiple Banking Arrangement) or Consortium, also showing the % share of SBI. C. Sharing Pattern In this column all the banks under MBA or consortium are mentioned with existing and proposed limits and percentage share of each of the banks. A separate table is made for both working capital limits (FB and NFB) and term loan (FB and NFB).
This whole section is concentrating on the limits required and how the financing is done for the same through MBA or Consortium and how much is the exposure of SBI. This section also has a brief description about why the loan or enhancement in existing limits is required by the enterprise.
Section 3: Performance and financial indicators This section is of great importance as it contains the analysis from CMA hence, all financial justification and description is given in this section. A. Financial indicators This section is taken from the CMA showing the two year audited, present year estimates and next years projections of the financial indicators. These financial indicators include Net Sales, Operating Profit, PBT, PBT/Net Sales, PAT, Cash Accruals ,PBDIT,PUC(Paid Up Capital),TNW(Tangible Net Worth), Adj. TNW,TOL/TNW,TOL/adj. TNW, Total CA, Current Ratio and NWC(Net Working Capital), any slump or spurt is these indicators is justified in this section. B. Movement in TNW (Tangible Net Worth) The following is the formula for calculating Net Worth of a company: TNW = Net Worth Intangible Assets Revaluation reserve Opening TNW Add: Profit / (-) Loss after tax Increase in Share Capital Decrease / (-) Increase in intangible assets Increase/ (-) Decrease in Reserves Adjust prior year expenses Increase in deferred tax liability Less: Dividend paid / Withdrawals Equals: Closing TNW The basic reason to study this is to get a clear image about the increase or decrease in net worth i.e. to understand among cash accrual, equity or application money which element is contributing to the change in overall TNW.
C. Synopsis of Balance Sheet Two year audited figures of balance sheet are mentioned in this section with analysis on the elements of balance sheet.
Section 4: Risk Assessment This section contains the gist of the whole Credit Risk Assessment done by the credit analyst; this is of great importance for the Bank as depending upon this pricing is decided. A. Credit Rating This section contains the table having synopsis of borrowers rating and facility rating obtained by the enterprise while CRA(Credit Risk Assessment) and also the rating obtained by ECRA(External Credit Rating Agency).In case of enhancement or renewal both existing and proposed ratings are shown so as to make the ground for comparison. B. Risks and Mitigation Factors This section shows threat and various risks which may be faced by the company and how capable are the company and its promoters to mitigate the same. C. Warning Signals/Major irregularities in Inspection report/Credit Audit/other reports In credit audit report, I/A report, statutory reports or qualification in Auditors Report if in any case some irregularity or any adverse feature which may affect the appraisal and assessment of credit or which may hinder the decision making are mentioned and justified in this section. D. Security This section has brief detail about the primary and collateral given by the enterprise as security against the loan taken is shown. This section also has the guarantee column which shows the personal guarantee of the directors. E. Changes if any, Justification

In case of renewal or enhancement if there are some changes made in the collaterals or personal guarantee is mentioned in this section with the justification of the same.
Section 5: Pricing This section concentrates on the pricing i.e. interest rate to be charged on the loan to be given taking in consideration all the required factors. A. Conduct of the Account If any irregularity is observed in WC or TL that is mentioned in this section with specific description of the same, also the utilization of fund based and non-fund based limits is mentioned. B. Income Analysis In this section actual, estimated and projected ROCE is studied in order to analyze the income expected to be earned by the bank due to this outlay. C. Other Banks /FI(Financial Institutions) Pricing This section shows the details about the pricing of other banks which are associated with the enterprise; this is checked in order to study the competitive pricing. D. Proposed Pricing Pricing that is interest rate to be charged to the enterprise on the outlay depends upon the CRA rating, the present base rate charged by SBI is 9.25% and depending upon risk rating spread above base rate is charged. Proposed pricing of an enterprise can be on card rate (i.e. the actual rate calculated according to the risk rating of the enterprise) or some other proposed rate(i.e. some concessional rate) depending upon various factors like competition and threat of loss of business, overall earnings from the enterprise, additional business potential, cross selling etc. Hence, this section contains the details about pricing for each type of facility availed by the client.

E. Justification for concessions already extended/proposed If loan is sanctioned on proposed rate (concessional rate) other than card rate the same has to be justified with valid and convincing reasons, showing both benefit and loss to the bank.
Section 6: Loan Policy and compliance A. Whether names of promoters, directors, company, group concerns figure in defaulter/willful defaulter list RBI Defaulters list, Willful defaulters list, ECGC caution list and CIBIL is checked to see whether any personal related to the enterprise has its name on it and if yes it has to be justified. In case if the name appears in the list of willful defaulters than loan is not sanctioned to such a party. B. Deviation in Loan Policy Some norms has been set by bank regarding the cut-off of ratios, contribution from promoters, prudential norms, fund based exposure to the industry etc. any deviation form the norms is mentioned and justified in this section. C. Deviation in Take Over norms and comments Any deviation from the take over norms is to be justified and approved by appropriate authority and detail about that is mentioned in this section. D. Directors of the borrower company are relatives of any of the Banks Board/Senior Officer of the Bank/Member of any other Banks Board This has to be mentioned explicitly as if such a thing happens or comes in notice will not be acceptable for sanctioning of loan. E. Compliance with section 20 of the Banking Regulation Act: whether any of the directors of the bank is director of the borrower company or is having any interest in the same This has to be mentioned explicitly as if such a thing happens or comes in notice will not be acceptable for sanctioning of loan.
Section 7: Future Plans and Business Potential A. Future Plans and Business Potential including cross selling/retail marketing based on Co/groups future plans This is studied to see the future growth plans of the company and how this could be beneficial to the bank and what other relationship or facility the client is utilizing from SBI from its vast product portfolio. B. Environmental and Sustainability Implications Some manufacturing firms are required to take environmental clearance, that is checked in this section i.e. whether the clearance is taken or not and if taken validity and expiry of the same. C. Earlier terms of Sanction: Compliance status Whatever stipulations and observation are made in last resolution is mentioned in this section with compliance status. D. Statutory dues/other contingent liabilities Any contingent liability has to be mentioned in this section and has to be seen whether they can affect the bank.
Section 8: Justification for the Proposal Justification of the whole proposal is summarized in a single page in this section.
Section C: Assessment of fund based and non-fund based limits This whole section shows the details of how the limits of fund based and non-fund based facilities is assessed and calculated, the calculation of each of them has been discussed earlier in the project report where all the facilities are discussed discretely. Below is the order in which the calculations are represented in this section. A. Assessment of Working Capital Limits Inventory and Receivable levels(months)

Assessed Bank Finance B. Assessment of LC Limit Requirement and calculation of recommended LC Limit is assessed in this section C. Assessment of BG Limit Requirement and calculation of recommended BG Limit is assessed in this section D. Calculation of SLC Limit Requirement and calculation of recommended SLC Limit is assessed in this section, terms and conditions governing SLC and compliance of the same is also mentioned in this section. E. Credit Exposure Limit (CEL) CEL is calculated only in cases where Forex risk is involved. Assessment of CEL is done as shown below: 1. Past Performance Method In this method average of past three year actual figures of export and import is taken, than it is compared with the latest figure and higher the value out of these two is considered. 2. Documentary Evidence Method Current estimations are compared with the values considered in step 1 and the value which is higher is considered. 3. Final CEL calculation (a) CEL = 2% of the value considered in step 2 above (b) CEL= 2% of total FB exposure in case of FCNRB F. Fund Flow Analysis In this section long term sources, uses and surplus/deficit for audited, estimated and projected financials is examined to see whether the overall fund flow pattern of the company is satisfactory or not.

Section D: Terms and Conditions A. Security: as mentioned in section 4 B. Change in security if any, Justification: as mentioned in section 4 C. ECGC (Export Credit Guarantee Corporation) Cover In case of EPC(Export Packing Credit) and FBD(Foreign Bill Discounting) ECGC Policy and ECGC Guarantee is to be taken by the client and bank respectively, and brief of same is mentioned in this section. D. Margins Margin for each facility is mentioned in this section, in case of working capital margin for various elements of working capital is calculated i.e. for raw material and finished goods is fixed to 25%, while in case of stock in process, receivables margin depends upon the period in which they will be realized as cash. While in case of LC and BG the margin depends upon various factors like Usance in case LC, amount of BG etc. E. Rate of Interest: interest rate charged for each facility is mentioned in this section in a tabular format. F. Insurance Stocks/properties/machinery charged/hypothecated to the Bank is to be insured for the full value or 10% over the sanctioned limit, whichever is higher in the joint names of the bank and the borrower with an insurance Co. approved by the Bank at the borrowers expenses and the policy to be lodged with the Bank. G. Processing Charges/Upfront Fee In case of working capital loan the fee charged by bank is known as processing charges which is `400 per lakh and in case of term loan the fee charged is known as upfront fee and that depends upon the period and amount of term loan. Though the charges are fixed but concession can be given subjected to the approval from higher authorities.

H. Inspection As per the extant information a regular post sanction inspection is to be carried out by Bank Official/Asset verification team or any other agency appointed by the bank. I. Repayment Schedule In case of term loan the whole repayment schedule is mentioned in this section
J. Validity of Sanction The period after the approval of limits within which the customer should respond back by way of documentation or by availing a part of limits and if not done revalidation is done. K. Validity of Pricing The period for which the pricing is valid, is mentioned here and if the limit is not utilized at least once in that duration than new pricing is to be done by the bank. L. Mortgage Charges Mortgage charges of SBI are `20,000 per Equitable Mortgage (EM) and these charges are fixed irrespective of the asset worth. M. Commitment Charges If the average utilization of limits sanctioned is equal to or less than 60% than bank charges some penalty to its customer and that is commitment charges. N. Commission on LC/BG Charges Commission charges on LC and BG depends upon various factors like Usance period, sanctioned amount etc. for example in case of domestic BG below 5 crores the commission charge is 2.75% of the total outlay. O. Financial Covenant According to bank norms TOL/TNW should not exceed a value of three; current ratio should be equal to or more than 1.33 etc. any adverse deviation by more than 20% from the stipulated levels would attract penal interest of 1% and 2% in case of default

payment of interest/installment. Hence, this section mentions such deviations and penal charges. P. Other Special Conditions Any other special conditions specific to the enterprise or industry is mentioned in this section.
Section E: Group/Associate profile Brief details about the group and associate firms are studied in this section.
Sanctioning Authorities
The two significant principles around which the scheme of delegation of financial powers revolve are: Powers are exercisable only in relation to duties and responsibilities specially entrusted to a functionary All sanctions are subject to report to the next higher authority The scheme of delegation of financial powers for advances and allied matters in the bank has a graded authority structure as depicted from the pyramid. Higher discretionary powers have been made available in case of top rated borrowers (usually SB1 to SB5) and functionaries across the hierarchy are vested with such dual powers depending on the rating of the borrower. The powers for sanctioning credit facilities by various authorities are vested with them of total indebtedness of the borrower. As seen in the following figure that higher the authority higher is the power.
ECCB CCCC WBCC-I WBCC-II MCCC
SMECC

The Executive Committee of Central Board(ECCB) has full powers for sanctioning credit facilities. The sacnctioning powers are delegated down the line to Committees of officials at various administrative offices and to individual line functionaries.following table shows the members of the various committees in hirearchy:
Name of the Committee ECCB: Executive Committee of Central Board CCCC: Corporate Centre Credit Committee WBCC-I: Wholesale Banking Credit
Members of the Committee Headed by Chairman BOD are committee members Two DMDs and One MD Two CGMs and One DMD
Committee I WBCC-II: Wholesale Banking Credit Two GMs and One CGM
Committee II MCCC: MID-Corporate Credit Committee SMECC: Small and Medium Enterprise Credit Committee Two DGMs and One GM Two AGMs and One DGM
Findings & Conclusion

Findings
I have gained practical knowledge for 3 months at SBI as a part of my summer internship and learnt the process of credit appraisal carried out at State Bank of India for sanctioning the credit facilities and in due course I came across following practical problems/issues regarding the appraisal, which are taken care accordingly by the credit analysts. Every loan request made by the clients were found to be unique by the nature of facility demanded, type of industry, volume of operations, funding pattern and experience of the businessmen hence, each and every loan request has some or the other issues which are distinctive. In my project tenure I worked for three companies viz. one textile and other two were hospitality industry and here is the critical findings out of the work done at the organization. When there is a request from the enterprise that additional bank finance is required, the overall funding pattern is examined. Moreover, sometimes the client demands an increase in bank borrowings by diverting the accruals of the business to the other businesses instead of investing in the same business as observed in the appraisal of enterprise carrying operations in textile industry such a demand is not acceptable. In such cases, genuineness of the requirement is assessed and accordingly bank finance is arrived at. Change in Industry scenario affects the profitability of the company. As observed in the enterprise dealing in textile industry, prices of raw material were rising and hence profitability was tumbling than the expected projections all because the burden of cost cant be immediately passed on to the customers. Moreover, in case of increasing prices of raw material, the client was interested in holding much stock and thereby demands for increase in working capital limit. In such case genuineness of the requirement is examined upon and finance is made available accordingly.

As explained earlier, benchmark current ratio for non trading unit is 1.33 and for trading unit is 1.20. But in certain industries like hospitality industries, current ratio was observed to be around at 1.00. In such type of industries, funding pattern and requirement of limits differ from other normal business operations as happened in the case of one hospitality company appraised. Such cases are analyzed accordingly and bank finance is decided based on such analysis. In one of the enterprise dealing in hospitality industry, short term funds were diverted towards long term application and thereby deficit was arising in the enterprise and in such case, reason for the diversion is examined and the same is accepted if genuineness is justified.
Conclusion
From the above project titled To Understand and Analyze the System of Credit Appraisal and Risk Assessment at State Bank of India, I conclude that the project has been completed successfully at State Bank of India MID-Corporate Group, Ahmedabad as a requisite of the MBA course at ICFAI Business School, Hyderabad. This project has helped me to understand the corporate world, and has given me a good exposure of Credit Appraisal. Learning form the project includes understanding the types of credit facilities and assessment of the same, financial statement analysis, preparation and analysis of Credit Monitoring Arrangement (CMA), carrying out ratio analysis and implication of each ratio depending upon the type of industry, carrying out Credit Risk Assessment and hence deciding the pricing i.e. interest rate to be charges to the enterprise and finally drafting the project proposal. Lastly the project has helped me to understand that every loan application is unique by the nature of facility demanded, type of industry, volume of operations, funding pattern and experience of the businessmen hence, each and every loan request has some or the other issues and have distinctive ways to find the solution.
RECOMMENDATION
In all the system of credit appraisal adopted by State Bank of India is robust and very well maintained but during the tenure of internship I found some minute pitfalls which if improved upon can build a more efficient system. A proper filing of the documents of all the previous appraisals should be maintained. Though binders are prepared but are not arranged in a proper manner hence tracing them becomes a tedious and time consuming task for the credit analyst. Hence, arrangement of all the binder should be done in alphabetical order or branch wise. Internet access should be made available to the credit analysts so as to keep them in touch with changes in industry, government reforms etc., also lot of things mentioned in the proposal are very subjective and varies from time to time hence an accesses to internet will help the credit analyst in carrying the process of credit appraisal effectively. Latest books and magazines should be made available at CPC as a reference material for credit appraisal. Feedback form submitted by Relationship Manager to CPC team should be drafted very carefully according to the banks instructions with all the information about the performance of the borrower account from the date of sanction to the due date of next renewal. This will help the team to take more informed decision for the sanction of credit facilities, keeping in view the conduct of the account in the past. Some basic documents are required from all the clients irrespective of the amount and type of loan requirement. Hence, a checklist of such documents should be made available at the branch. So that when clients request for loan is forwarded to CPC for appr aisal, it should have all the requisite documents to save time of the CPC cell. The team leaders should make a point that in any case whether existing or new connection pre-sanction visits should be done as it will give a clear picture of functioning of the enterprise and hence a better analysis can be carried out.
REFERENCES
Books
MUKHERJEE D.D., 2010, Credit Appraisal, Risk Analysis and Decision Making Mumbai: Snow White Publication Pvt. Ltd. Pandey I.M, 2007, Financial Management Khan M.Y. and Jain P.K., Fourth Edition, Financial Management, Tata McGraw Hill.
Circulars and other Print Material

Loan Policy of the State Bank of India Instruction Guides given by State Bank of India to the employees Internal resources especially available for the employees Circulars and guidelines published by State Bank of India on regular intervals Annual Reports of State bank Of India (2008-2010)
Websites
www.investopedia.com www.statebankofindia.com www.rbi.org.in www.scrib.com www.wikipedia.com www.bankersacademy.com www.riskglossary.com www.googleimages.com www.banknet.com

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A REPORT ON

By Neelam S. Mandowara 10BSPHH010444 IBS Hyderabad

IBS Hyderabad 2010-2011

By Neelam S. Mandowara 10BSPHH010444

Beneficiary: STATE BANK OF INDIA MID-Corporate Group Regional Office, Ahmedabad

IBS Hyderabad 2010-2011

IBS Hyderabad 2010-2011

IBS Hyderabad 2010-2011

With Regards Neelam S. Mandowara 10BSPHH010444

IBS Hyderabad 2010-2011

IBS Hyderabad 2010-2011

IBS Hyderabad 2010-2011

11.Findings & Conclusion.. 68 Findings 68 Conclusion. 69 12.Recommendation 70 13.References 71

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Objectives of the Project

IBS Hyderabad 2010-2011 Limitations of the Study

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Banking Industry in India

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The figure below shows the structure of Scheduled Banks in India.

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Company Profile of State Bank of India

Organizational Structure at SBI MID-Corporate Group

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Theoretical Background of Credit Appraisal

Why Credit From Banks

Cardinal Principles of Lending

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Loan Policy of State Bank of India

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Working Capital Loan

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Cash Operating Cycle

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Assessment of working capital loan

Fixed Assets Long-Term Liabilities

Current Assets Current Liabilities

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Term Loan Financing

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Types of Letter of Credit

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CREDIT MONITORING ARRANGEMENT

CMA Format and Analysis of CMA

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