RESEARCH METHODOLOGY

CORPORATE BANKING

STATEMENT OF PROBLEM:
To study the emergence and evolution of the corporate banking as an important division of
the commercial banking and also to study the credit appraisal models supporting the
increased activities of corporate lending by banks.

In today’s global Banking arena, Corporate Bankers are facing a string of unprecedented and
sweeping challenges in the areas like Treasury Management, Trade Finance, Risk
Management, Compliance Management, Electronic Trading and Derivatives Markets.
Compounding this are the mounting complexities from ongoing regulatory changes,
decreasing margins and fierce competition

NEED FOR STUDY:

Over the period of time, with the tremendous increase in the growth pattern of industrial
development, the need for the corporate loans have increased more than ever. So, the
increasing trend urges the banks and financial institutions to focus on corporate banking as a
separate division. So, the researchers have preferred to study the concept of corporate
banking and all the operational aspects attached to it in the entire process.

OBJECTIVE OF THE STUDY:

• To study the banking industry, as a whole with the help of various analysis including
SWOT analysis, PEST analysis and Porter’s Five Force analysis.

• To acquire basic knowledge about the corporate lending in India and its relevance
with respect to banks.

• To analyze the credit risk models of both public bank and private bank and bring out
its comparative picture on the basis of various parameters.
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 • To study credit risk management strategies of bank.

RESEARCH DESIGN:
A research design is the arrangement of the condition for collection and analysis of data.
Actually it is the blueprint of the research project. The research type is descriptive research.
The main objective of this design is search primary and secondary data.

The research primarily focuses on the secondary sources and first hand information through
focus group interviews.

DATA COLLECTION:
As the research type is descriptive, the method of data collection was informal.

SOURCES:
The relevant information were collected from both primary and secondary sources like follow
up with bank managers web search, newspaper articles

TOOLS:
Focus group interviews with the managers of banks.

BENEFICIARIES:

For the banks:

It will give them the in depth review of the various aspects involved in the corporate banking
with emphasis on the credit risk management.

For the corporates:

The report shows the comparative study of the credit appraisal and sanctioning procedure
involved in the credit lending by banks as well as financial institutions. Secondly, they will
also get the relevance of the corporate lending by the banks and its various relevant aspects.

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For the management students:
The report studies the entire banking industry from various aspects using different analytical
tools. Secondly, it introduces into the world of credit lending and its trend in India. Moreover,
it also shows the operational procedures involved in the corporate lending with emphasis on
risk modeling and credit risk management.

LIMITATIONS OF THE STUDY:

The scope of the report is mainly depends on the information extracted from secondary
sources and the information given by the managers of banks. So, lack of the availability of
the first hand information may act as a limitation to the project report.

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 CHAPTER: 1

AN OVERVIEW ON BANKING INDUSTRY

In recent years, the banking industry around the world has been undergoing a rapid
transformation. In India also, the wave of deregulation of early 1990s has created heightened
competition and greater risk for banks and other financial intermediaries. The cross-border
flows and entry of new players and products have forced banks to adjust the product-mix and
undertake rapid changes in their processes and operations to remain competitive. The
deepening of technology has facilitated better tracking and fulfillment of commitments,
multiple delivery channels for customers and faster resolution of miscoordinations.

Unlike in the past, the banks today are market driven and market responsive. The top concern
in the mind of every bank's CEO is increasing or at least maintaining the market share in
every line of business against the backdrop of heightened competition. With the entry of new
players and multiple channels, customers (both corporate and retail) have become more
discerning and less "loyal" to banks. This makes it imperative that banks provide best
possible products and services to ensure customer satisfaction. To address the challenge of
retention of customers, there have been active efforts in the banking circles to switch over to
customer-centric business model. The success of such a model depends upon the approach
adopted by banks with respect to customer data management and customer relationship
management.

Over the years, Indian banks have expanded to cover a large geographic & functional area to
meet the developmental needs. They have been managing a world of information about
customers - their profiles, location, etc. They have a close relationship with their customers
and a good knowledge of their needs, requirements and cash positions. Though this offers
them a unique advantage, they face a fundamental problem.

During the period of planned economic development, the bank products were bought in India
and not sold. What our banks, especially those in the public sector lack are the marketing
attitude. Marketing is a customer-oriented operation. What is needed is the effort on their part
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to improve their service image and exploit their large customer information base effectively
to communicate product availability. Achieving customer focus requires leveraging existing
customer information to gain a deeper insight into the relationship a customer has with the
institution, and improving customer service-related processes so that the services are quick,
error free and convenient for the customers.

Furthermore, banks need to have very strong in-house research and market intelligence units
in order to face the future challenges of competition, especially customer retention.
Marketing is a question of demand (customers) and supply (financial products & services,
customer services through various delivery channels). Both demand and supply have to be
understood in the context of geographic locations and competitor analysis to undertake
focused marketing (advertising) efforts. Focusing on region-specific campaigns rather than
national media campaigns would be a better strategy for a diverse country like India.

Customer-centricity also implies increasing investment in technology. Throughout much of

the last decade, banks world-over have re-engineered their organizations to improve
efficiency and move customers to lower cost, automated channels, such as ATMs and online
banking.
As is proved by the experience, banks are now realizing that one of their best assets for
building profitable customer relationships especially in a developing country like India is the
branch-branches are in fact a key channel for customer retention and profit growth in rural
and semi-urban set up. However, to maximize the value of this resource, our banks need to
transform their branches from transaction processing centers into customer-centric service
centers. This transformation would help them achieve bottom line business benefits by
retaining the most profitable customers. Branches could also be used to inform and educate
customers about other, more efficient channels, to advise on and sell new financial
instruments like consumer loans, insurance products, mutual fund products, etc.
There is a growing realization among Indian banks that it no longer pays to have a
"transaction-based" operating model. There are active efforts to develop a relationship-
oriented model of operations focusing on customer-centric services. The biggest challenge
our banks face today is to establish customer intimacy without which all other efforts towards
operational excellence are meaningless. The banks need to ensure through their services that
the customers come back to them. This is because a major chunk of income for most of the
banks comes from existing customers, rather than from new customers.

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Customer relationship management (CRM) solutions, if implemented and integrated
correctly, can help significantly in improving customer satisfaction levels. Data warehousing
can help in providing better transaction experiences for customers over different transaction
channels. This is because data warehousing helps bring all the transactions coming from
different channels under the same roof. Data mining helps banks analyse and measure
customer transaction patterns and behaviour. This can help a lot in improving service levels.
It must be noted, however, that customer-centric banking also involves many risks. The
banking industry world over is being thrust into a wild new world of privacy controversy.
The banks need to set up serious governance systems for privacy risk management. It must be
remembered that customer privacy issues threaten to compromise the use of information
technology which is at the very center of e-commerce and customer relationship management
- two areas which are crucial for banks' future.

The critical issue for banks is that they will not be able to safeguard customer privacy
completely without undermining the most exciting innovations in banking. These innovations
promise huge benefits, both for customers and providers. But to capture them, financial
services companies and their customers will have to make some critical tradeoffs. When the
stakes are so high, nothing can be left to chance, which is why banks must immediately begin
developing comprehensive approaches to the privacy issue.

The customer centric business models based on the applications of information technology
are sustainable only if the banks protect client confidentiality in the process - which is the
basic foundation of banking business.

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1.1 EVOLUTION OF BANKING IN INDIA

Banking in India has its origin as early as the Vedic period. It is believed that the transition
from money lending to banking must have occurred even before Manu, the great Hindu
Jurist, who has devoted a section of his work to deposits and advances and laid down rules
relating to rates of interest. During the Mogul period, the indigenous bankers played a very
important role in lending money and financing foreign trade and commerce. During the days
of the East India Company, it was the turn of the agency houses to carry on the banking
business.

The General Bank of India was the first Joint Stock Bank to be established in the year 1786.
The others which followed were the Bank of Hindustan and the Bengal Bank. The Bank of
Hindustan is reported to have continued till 1906 while the other two failed in the meantime.
In the first half of the 19th century the East India Company established three banks; the Bank
of Bengal in 1809, the Bank of Bombay in 1840 and the Bank of Madras in 1843. These three
banks also known as Presidency Banks were independent units and functioned well. These
three banks were amalgamated in 1920 and a new bank, the Imperial Bank of India was
established on 27th January 1921. With the passing of the State Bank of India Act in 1955 the
undertaking of the Imperial Bank of India was taken over by the newly constituted State Bank
of India.

The Reserve Bank which is the Central Bank was created in 1935 by passing Reserve Bank
of India Act 1934. In the wake of the Swadeshi Movement, a number of banks with Indian
management were established in the country namely, Punjab National Bank Ltd, Bank of
India Ltd, Canara Bank Ltd, Indian Bank Ltd, the Bank of Baroda Ltd, the Central Bank of
India Ltd. On July 19, 1969, 14 major banks of the country were nationalized and in 15th
April 1980 six more commercial private sector banks were also taken over by the
government.

The Indian banking can be broadly categorized into nationalized (government owned),
private banks and specialized banking institutions. The Reserve Bank of India acts a
centralized body monitoring any discrepancies and shortcoming in the system. Since the
nationalization of banks in 1969, the public sector banks or the nationalized banks have
7
acquired a place of prominence and has since then seen tremendous progress. The need to
become highly customer focused has forced the slow-moving public sector banks to adopt a
fast track approach. The unleashing of products and services through the net has galvanized
players at all levels of the banking and financial institutions market grid to look anew at their
existing portfolio offering.

Conservative banking practices allowed Indian banks to be insulated partially from the Asian
currency crisis. Indian banks are now quoting a higher valuation when compared to banks in
other Asian countries (viz. Hong Kong, Singapore, Philippines etc.) that have major problems
linked to huge Non Performing Assets (NPAs) and payment defaults. Co-operative banks are
nimble footed in approach and armed with efficient branch networks focus primarily on the
‘high revenue’ niche retail segments.

The Indian banking has finally worked up to the competitive dynamics of the ‘new’ Indian
market and is addressing the relevant issues to take on the multifarious challenges of
globalization. It has come a long way from being a sleepy business institution to a highly
proactive and dynamic entity. Banks that employ IT solutions are perceived to be ‘futuristic’
and proactive players capable of meeting the multifarious requirements of the large customers
base. Private banks have been fast on the uptake and are reorienting their strategies using the
internet as a medium The Internet has emerged as the new and challenging frontier of
marketing with the conventional physical world tenets being just as applicable like in any
other marketing medium.

This transformation has been largely brought about by the large dose of liberalization and
economic reforms that allowed banks to explore new business opportunities rather than
generating revenues from conventional streams (i.e. borrowing and lending).

The banking in India is highly fragmented with 30 banking units contributing to almost 50%
of deposits and 60% of advances. Indian nationalized banks (banks owned by the
government) continue to be the major lenders in the economy due to their sheer size and
penetrative networks which assures them high deposit mobilization. The Indian banking can
be broadly categorized into nationalized, private banks and specialized banking institutions.

8
The Reserve Bank of India acts as a centralized body monitoring any discrepancies and
shortcoming in the system. It is the foremost monitoring body in the Indian financial sector.
The nationalized banks (i.e. government-owned banks) continue to dominate the Indian
banking arena. Industry estimates indicate that out of 274 commercial banks operating in
India, 223 banks are in the public sector and 51 are in the private sector. The private sector
bank grid also includes 24 foreign banks that have started their operations here. Under the
ambit of the nationalized banks come the specialized banking institutions. These co-
operatives, rural banks focus on areas of agriculture, rural development etc., unlike
commercial banks these co-operative banks do not lend on the basis of a prime lending rate.
They also have various tax sops because of their holding pattern and lending structure and
hence have lower overheads. This enables them to give a marginally higher percentage on
savings deposits. Many of these cooperative banks diversified into specialized areas (catering
to the vast retail audience) like car finance, housing loans, truck finance etc. in order to keep
pace with their public sector and private counterparts, the co-operative banks too have
invested heavily in information technology to offer high-end computerized banking services
to its clients.

Complementing the roles of the nationalized and private banks are the specialized financial
institutions or Non Banking Financial Institutions (NBFCs). With their focused portfolio of
products and services, these Non Banking Financial Institutions act as an important catalyst
in contributing to the overall growth of the financial services sector. NBFCs offer loans for
working capital requirements, facilitate mergers and acquisitions, IPO finance, etc. apart from
financial consultancy services. Trends are now changing as banks (both public and private)
have now started focusing on NBFC domains like long and medium-term finance, working
cap requirements, IPO financing etc. to meet the multifarious needs of the business
community.

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1.2 STRUCTURE OF BANKING INDUSTRY:

Banking system plays an important role in a country’s economy. It promotes growth and
development of the country. Indian money market comprises organized and the unorganized
institutions. The organized and unorganized institutions in the Indian banking system serve a
source of short term credit to agriculture, industry, trade and commerce.

In the Indian banking structure the Reserve Bank of India is the central bank. It regulates,
direct and controls the banking and financial institutions in the country. There are three high
banking institutions, namely, RBI, NABARD and EXIM Bank. There are separate financial
institutions catering to the needs of different sectors of the economy. Development Banks,
Investment Banks, Co-operative Banks, Land Development Banks, Commercial Banks in
public and private sectors, NABARD, RRBs, EXIM Bank, etc. The indigenous bankers and
moneylenders dominate unorganized sector.

The Indian banking structure can be seen from the chart shown under:

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 Apex Banking Institution

RBI IDBI NABARD EXIM Bank SIDBI NHB

IRBI

Banking Institutions

Commercial Regional Rural Co- operative Land Development

Development
Banks Banks Banks Banks
Bank

Public Private Foreign PAC’s CCB’s SCB’s PLD’s SLDB

Sector Sector exchange
Banks Bank Banks

All India
State
Level
Level

SBI and Nationalised

Subsidiaries Banks
IDBI ICICI SIDBI

SFC’s
SIDC

Foreign Indian Non – Schedule

Bank Scheduled Bank Bank

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The chart reveals that there are several apex banking institutions working at the national
level. RBI is the highest banking authority regulating, directing and controlling all the
banking and financial institutions in the country. There are development banks, namely IDBI,
SIDBI, ICICI at the national level and State Financial Corporations and State Industrial
Development Corporations which have been set-up.

There are 29 public sector banks. Co-operative banks have three tier system. At the village
level there is Primary Agriculture Co-operative Society(PACs), at the district level there is
Central Co-operative Bank and at the state level there is State Co-operative Bank. Co-
operative banks provide short term and medium loans to the agriculture sector. Land
Development Banks provide long term agriculture credit. It comprises Primary Land
Development Bank(PLDB) at ht district level and State Land Development Bank(SLDB) at
the state level. RRBs provide loans and advances to the rural poor and NABARD is an apex
body regulating, directing and controlling the financial and banking institutions providing
finance for the agriculture and rural development.

TYPES OF BANKS

Modern age is the age of specialization with the changing situation worldwide, bank
functions have also undergone a major change. Economic conditions and financial needs of a
country are different than those of other countries throughout the world. Some financial
institutions deal in accepting deposits and making loans and advances to different sectors of
the economy. Some institution makes loans and advances for medium and short term, while
others are meant for long term advances. Some are financing industrial sector and foreign
trade while others are advancing loans to agriculture sector.

In broader sense of the term banks may be classified into following categories:

• Central Bank
• Commercial Banks
• Development Banks

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• Investment Banks
• Co-operative Banks
• Foreign Exchange Banks
• Savings Banks
• Export-Import Bank
• Specialized National Banks
• Indigenous Bankers
• International Financial Institutions

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1.3 GROWTH OF BANKING SECTOR
(DECADE WISE)

Pre-Liberalization: The growth of the Banking Sector in the pre liberalization period can be
analyzed as under.

1971-80:
This was the decade immediately following the Nationalization of 14 commercial banks. Also
the banking sector grew at the fastest pace in this decade.

1. Assets:
The assets of the sector grew at 21.58 % CAGR1. They increased from RS.82.52bn to
Rs.582.33bn. This kind of growth was achieved due to massive increase in the number of
branches resulting in a spurt in deposit mobilization.

2. Deposits:
The deposits grew from Rs.64.79bn to Rs.439.87bn. at a CAGR 21.11 %. The growth was
higher in later part of the decade. This growth rate would have been higher had the current
accounts grown at a rate higher than 18 %. This indicates people’s preference for using bank
as place to keep their savings. The bank was not used as a place to keep money to be used for
transaction motive. This is further clarified by the poor ratio of average current deposits to
total deposits at 23.45 %.

3. Advances:
The advances grew at 19.26 % CAGR from Rs.46.85bn to Rs.272.67bn. Also the growth was
higher in the later part of the decade. Thus the advances grew at a pace slower than the
deposits due to decreasing credit deposit ratio, which reduced from 72.30 % in 1970 to 61.99
% in 1980.

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 4. Net worth:
The Net worth increased from Rs.1.16bn to Rs.5.33bn at a CAGR of 16.48 %.
The Capital of the banks remained flat throughout the decade growing at just 8.54 % and also
the growth came in the later part of the decade. The capital increased form Rs.470.2mn to
Rs.1.07bn.
However, the Reserves grew at a healthy pace of 20 % CAGR from Rs.690mn to Rs.4.27bn.
Thus the banks in this decade did not raise capital and funded their growth from internal
accruals. This resulted in a wide gap between Reserves and Capital indicating the banks’
hunger for Capital.

1981-90:

1. Assets:
The growth of the sector was significantly subdued since the last decade. The assets grew at
just 16.30 % CAGR compared to 21.58 % in the previous decade. The total assets increased
from Rs.582.33bn to Rs.2636.93bn.

2. Deposits:
Deposits increased from Rs.439.86bn to Rs.1820.46bn at a CAGR of 15.26 %. The current
accounts remained the usual laggards in terms of growth growing at just 12.67 % CAGR. The
term and saving deposits grew at a slightly faster pace of 16.17 % and 15.5 % CAGR.

3. Advances:
Advances grew at a CAGR of 16.79 % from Rs.272.67bn to Rs.1287.85bn. This is due to the
fact that the banks have stepped up their credit-deposit ratio from 62 % to 70.74 %. This
indicates higher investment than saving in the economy.

4. Net worth:
The Net worth increased from Rs.5.33bn to Rs.47.1bn. Thus the net worth grew at a
whopping 24.33 % CAGR.

15
The capital hungry banks went on capital raising spree in the latter half of the decade. Thus
the capital grew at a CAGR of 34.53 %. In absolute terms, the capital soared from Rs.1.06bn
at the beginning of the decade to Rs.20.73bn at the end of the decade.
The Reserves however grew at more or less constant pace of 19.97 % CAGR throughout the
decade.
At the end of the decade the Capital had kept pace with the Reserves and the gap between
them had significantly narrowed down.

Post-Liberalization: The growth of this sector after 1991 can be represented as under.
1991-2000:

1. Assets:
The rate of the sector further slowed down during this decade. The assets grew at a CAGR of
15.24 % from Rs.2636.93bn to Rs.11103.68bn. The growth rate however, was greater in the
later part of the decade indicating future prospects of increase in growth.

2. Deposits:
The deposits grew from Rs.1820.47bn to Rs.9003.06bn at a CAGR of 16.69 %. There was a
spurt in the last 3-4 years of the decade indicating improving trend. In this decade however,
the savings accounts were the laggards in terms of growth at 13.34 % CAGR. The term
deposits grew at 18.38 % and current deposits grew at 15.23 %. This reversal of trend in
growth rates shows that the people are increasingly using banks to deposit money to be used
for transaction motive.

3. Advances:
The advances increased from Rs.1287.85bn to Rs.4434.69bn at a CAGR of 12.46 %. The
lower growth in advances is due to the decline in credit-deposit ratio from 70.74 % in 1990 to
49.26 %. This shows there was a marked decline in investment in this decade with savings
exceeding investment.

4. Net worth:
The Net worth grew at a feverish pace of 36.60 % CAGR, the highest in last three decades.
This was mainly because the RBI opened the Banking sector to Private sector. As many as 9
New Private Sector Banks started their operations in this period. They brought a lot of capital
16
in the period 1993-95. However in the later half of the decade, capital growth was virtually
nil.
The Reserves grew at 37.54 % CAGR from Rs.26.36bn Rs.438.34bn. However, contrary to
Capital the Reserves recorded exceptional growth in the later half of the decade due to
improving profits of private as well as public sector banks. However the gap between
reserves and capital is once again widening.

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1.4 FUTURE LANDSCAPE OF INDIAN BANKING

Liberalization and de-regulation process started in 1991-92 has made a sea change in the
banking system. From a totally regulated environment, we have gradually moved into a
market driven competitive system. Our move towards global benchmarks has been, by and
large, calibrated and regulator driven. The pace of changes gained momentum in the last few
years. Globalization would gain greater speed in the coming years particularly on account of
expected opening up of financial services under WTO. Four trends change the banking
industry world over, viz. 1) Consolidation of players through mergers and acquisitions, 2)
Globalisation of operations, 3) Development of new technology and 4) Universalisation of
banking. With technology acting as a catalyst, we expect to see great changes in the banking
scene in the coming years. The Committee has attempted to visualize the financial world 5-10
years from now. The picture that emerged is somewhat as discussed below. It entails
emergence of an integrated and diversified financial system. The move towards universal
banking has already begun. This will gather further momentum bringing non-banking
financial institutions also, into an integrated financial system.

The traditional banking functions would give way to a system geared to meet all the financial
needs of the customer. We could see emergence of highly varied financial products, which
are tailored to meet specific needs of the customers in the retail as well as corporate
segments. The advent of new technologies could see the emergence of new financial players
doing financial intermediation. For example, we could see utility service providers offering
say, bill payment services or supermarkets or retailers doing basic lending operations. The
conventional definition of banking might undergo changes.

The competitive environment in the banking sector is likely to result in individual players
working out differentiated strategies based on their strengths and market niches. For example,
some players might emerge as specialists in mortgage products, credit cards etc. whereas
some could choose to concentrate on particular segments of business system, while
outsourcing all other functions. Some other banks may concentrate on SME segments or high
net worth individuals by providing specially tailored services beyond traditional banking

18
offerings to satisfy the needs of customers they understand better than a more generalist
competitor.

International trade is an area where India’s presence is expected to show appreciable increase.
With the growth in IT sector and other IT Enabled Services, there is tremendous potential for
business opportunities. Keeping in view the GDP growth forecast under India Vision 2020,
Indian exports can be expected to grow at a sustainable rate of 15% per annum in the period
ending with 2010. This again will offer enormous scope to Banks in India to increase their
forex business and international presence. Globalization would provide opportunities for
Indian corporate entities to expand their business in other countries. Banks in India wanting
to increase their international presence could naturally be expected to follow these corporates
and other trade flows in and out of India.

Retail lending will receive greater focus. Banks would compete with one another to provide
full range of financial services to this segment. Banks would use multiple delivery channels
to suit the requirements and tastes of customers. While some customers might value
relationship banking (conventional branch banking), others might prefer convenience banking
(e-banking).

One of the concerns is quality of bank lending. Most significant challenge before banks is the
maintenance of rigorous credit standards, especially in an environment of increased
competition for new and existing clients. Experience has shown us that the worst loans are
often made in the best of times. Compensation through trading gains is not going to support
the banks forever. Large-scale efforts are needed to upgrade skills in credit risk measuring,
controlling and monitoring as also revamp operating procedures. Credit evaluation may have
to shift from cash flow based analysis to “borrower account behaviour”, so that the state of
readiness of Indian banks for Basle II regime improves. Corporate lending is already
undergoing changes. The emphasis in future would be towards more of fee based services
rather than lending operations. Banks will compete with each other to provide value added
services to their customers.

Structure and ownership pattern would undergo changes. There would be greater presence of
international players in the Indian financial system. Similarly, some of the Indian banks
19
would become global players. Government is taking steps to reduce its holdings in Public
sector banks to 33%. However the indications are that their PSB character may still be
retained.

Mergers and acquisitions would gather momentum as managements will strive to meet the
expectations of stakeholders. This could see the emergence of 4-5 world class Indian Banks.
As Banks seek niche areas, we could see emergence of some national banks of global scale
and a number of regional players.

Corporate governance in banks and financial institutions would assume greater importance in
the coming years and this will be reflected in the composition of the Boards of Banks.

Concept of social lending would undergo a change. Rather than being seen as directed
lending such lending would be business driven. With SME sector expected to play a greater
role in the economy, Banks will give greater overall focus in this area. Changes could be
expected in the delivery channels used for lending to small borrowers and agriculturalists and
unorganized sectors (micro credit). Use of intermediaries or franchise agents could emerge as
means to reduce transaction costs.

Technology as an enabler is separately discussed in the report. It would not be out of place,
however, to state that most of the changes in the landscape of financial sector discussed
above would be technology driven. In the ultimate analysis, successful institutions will be
those which continue to leverage the advancements in technology in re-engineering processes
and delivery modes and offering state-of-the-art products and services providing complete
financial solutions for different types of customers.

Human Resources Development would be another key factor defining the characteristics of a
successful banking institution. Employing and retaining skilled workers and specialists, re-
training the existing workforce and promoting a culture of continuous learning would be a
challenge for the banking institutions.

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1.5 BANKING INDUSTRY REFORMS AND VISION 2010

“A vision is not a project report or a plan target. It is an articulation of the desired end
results in broader terms” - A.P.J.Abdul Kalam

Vision is of an integrated banking and finance system catering to all financial intermediation
requirements of customers. Strong market players will strive to uncover markets and
provide all services, combining innovation, quality, personal touch and flexibility in
delivery. The growing expectations of the customers are the catalyst for our vision.
The customer would continue to be the centre-point of our business strategy. In short,
you lose touch with the customer, and you lose everything.

It is expected that the Indian banking and finance system will be globally competitive. For
this the market players will have to be financially strong and operationally efficient.
Capital would be a key factor in building a successful institution. The banking and
finance system will improve competitiveness through a process of consolidation,
either through mergers and acquisitions through strategic alliances.

Technology would be the key to the competitiveness of banking and finance system. Indian
players will keep pace with global leaders in the use of banking technology. In such a
scenario, on-line accessibility will be available to the customers from any part of the
globe; ‘Anywhere’ and ‘Anytime’ banking will be realized truly and fully. At the
same time ‘brick and mortar’ banking will co-exist with ‘on-line’ banking to cater to
the specific needs of different customers.

Indian Banking system has played a crucial role in the socio-economic development of the
country. The system is expected to continue to be sensitive to the growth and development
needs of all the segments of the society. The banking system that will evolve will be
transparent in its dealings and adopt global best practices in accounting and disclosures
driven by the motto of value enhancement for all stakeholders.

Financial Sector Reforms set in motion in 1991 have greatly changed the face of Indian
Banking. The banking industry has moved gradually from a regulated environment to a
21
deregulated market economy. The market developments kindled by liberalization and
globalization have resulted in changes in the intermediation role of banks. The pace of
transformation has been more significant in recent times with technology acting as a catalyst.
While the banking system has done fairly well in adjusting to the new market dynamics,
greater challenges lie ahead. Financial sector would be opened up for greater international
competition under WTO. Banks will have to gear up to meet stringent prudential capital
adequacy norms under Basel II. In addition to WTO and Basel II, the Free Trade Agreements
(FTAs) such as with Singapore, may have an impact on the shape of the banking industry.
Banks will also have to cope with challenges posed by technological innovations in banking.
Banks need to prepare for the changes. In this context the need for drawing up a Road Map to
the future assumes relevance. The idea of setting up a Committee to prepare a Vision for the
Indian Banking industry came up in IBA, in this background.

Managing Committee of Indian Banks’ Association constituted a Committee under the

Chairmanship of Shri S C Gupta, Chairman & Managing Director, Indian Overseas Bank to
prepare a Vision Report for the Indian Banking Industry. The composition of the Committee
is given at the end of the report.

The Committee held its first meeting on 23rd June 2003 at Mumbai. Prior to the meeting the
members were requested to give their thoughts on the future landscape of the banking
industry. A discussion paper based on the responses received from members was circulated
along with a questionnaire eliciting views of members on some of the specific issues
concerning anticipated changes in the banking environment. In the meeting, which served as
a brainstorming session, members gave their Vision of the future. A second meeting of the
Committee was held at Chennai on 7th August 2003 to have further discussions on the
common views, which emerged in the first meeting, and also to examine fresh areas to be
covered in the study.

22
The Vision Statement prepared by the Committee is based on common thinking that
crystallized at the meetings. In the Chennai meeting it was decided to form a smaller
group from among the members to draft the report of the Committee. The group met
thrice to finalize the draft report. The report was adopted in the final meeting of the
Committee held at Mumbai.

When we talk about the future, it is necessary to have a time horizon in mind. The
Committee felt, it would be rather difficult to visualize the landscape of banking industry
say, 20 years hence due to the dynamic environment. While Government of India
brought out India Vision 2020, the Committee is of the view that the pace of changes
taking place in the banking industry and in the field of Information Technology would
render any attempt to visualize the banking scenario in 2020, inconceivable. The entire
financial services sector may undergo a dramatic transformation. It was, therefore, felt
that we should set our goals for the near future say, for 5-10 years hence and
appropriately call this exercise “Banking Industry – Vision 2010”. The three main
aspects focused in the banking vision includes product innovation, process re-engineering
and technology.

PRODUCT INNOVATION AND PROCESS RE-ENGINEERING

With increased competition in the banking Industry, the net interest margin of banks has
come down over the last one decade. Liberalization with Globalization will see the
spreads narrowing further to 1-1.5% as in the case of banks operating in developed
countries. Banks will look for fee-based income to fill the gap in interest income. Product
innovations and process re-engineering will be the order of the day. The changes will be
motivated by the desire to meet the customer requirements and to reduce the cost and
improve the efficiency of service. All banks will therefore go for rejuvenating their
costing and pricing to segregate profitable and non-profitable business. Service charges
will be decided taking into account the costing and what the traffic can bear. From the

23
earlier revenue = cost + profit equation i.e., customers are charged to cover the costs
incurred and the profits expected, most banks have already moved into the profit
=revenue - cost equation. This has been reflected in the fact that with cost of services
staying nearly equal across banks, the banks with better cost control are able to achieve
higher profits whereas the banks with high overheads due to under-utilisation of
resources, un-remunerative branch network etc., either incurred losses or made profits not
commensurate with the capital employed. The new paradigm in the coming years will be
cost = revenue - profit.

As banks strive to provide value added services to customers, the market will see the
emergence of strong investment and merchant banking entities. Product innovation and
creating brand equity for specialized products will decide the market share and volumes.
New products on the liabilities side such as forex linked deposits, investment-linked
deposits, etc. are likely to be introduced, as investors with varied risk profiles will look
for better yields. There will be more and more of tie-ups between banks, corporate
clients and their retail outlets to share a common platform to shore up revenue through
increased volumes.

24
Banks will increasingly act as risk managers to corporate and other entities by offering a
variety of risk management products like options, swaps and other aspects of financial
management in a multi currency scenario. Banks will play an active role in the
development of derivative products and will offer a variety of hedge products to the
corporate sector and other investors. For example, Derivatives in emerging futures
market for commodities would be an area offering opportunities for banks. As the
integration of markets takes place internationally, sophistication in trading and
specialized exchanges for commodities will expand. As these changes take place, banking
will play a major role in providing financial support to such exchanges, facilitating
settlement systems and enabling wider participation.

Bancassurance is catching up and Banks / Financial Institutions have started entering

insurance business. From mere offering of insurance products through network of bank
branches, the business is likely to expand through self-designed insurance products after
necessary legislative changes. This could lead to a spurt in fee-based income of the
banks.

Similarly, Banks will look analytically into various processes and practices as these exist
today and may make appropriate changes therein to cut costs and delays. Outsourcing
and adoption of BPOs will become more and more relevant, especially when Banks go in
for larger volumes of retail business. However, by increasing outsourcing of operations
through service providers, banks are making themselves vulnerable to problems faced by
these providers. Banks should therefore outsource only those functions that are not
strategic to banks’ business. For instance, in the wake of implementation of 90 days’
delinquency norms for classification of assets, some banks may think of engaging
external agencies for recovery of their dues and in NPA management.

25
Banks will take on competition in the front end and seek co-operation in the back end, as
in the case of networking of ATMs. This type of co-opetition will become the order of
the day as Banks seek to enlarge their customer base and at the same time to realize cost
reduction and greater efficiency.

TECHNOLOGY IN BANKING

Technology will bring fundamental shift in the functioning of banks. It would not only
help them bring improvements in their internal functioning but also enable them to
provide better customer service. Technology will break all boundaries and encourage
cross border banking business. Banks would have to undertake extensive Business
Process Re-Engineering and tackle issues like a) how best to deliver products and
services to customers b) designing an appropriate organizational model to fully capture
the benefits of technology and business process changes brought about. c) how to exploit
technology for deriving economies of scale and how to create cost efficiencies, and d)
how to create a customer - centric operation model.

Entry of ATMs has changed the profile of front offices in bank branches. Customers no
longer need to visit branches for their day to day banking transactions like cash deposits,
withdrawals, cheque collection, balance enquiry etc. E-banking and Internet banking have
opened new avenues in “convenience banking”. Internet banking has also led to
reduction in transaction costs for banks to about a tenth of branch banking.

Technology solutions would make flow of information much faster, more accurate and
enable quicker analysis of data received. This would make the decision making process
faster and more efficient. For the Banks, this would also enable development of appraisal
and monitoring tools which would make credit management much more effective. The
result would be a definite reduction in transaction costs, the benefits of which would be
shared between banks and customers.

26
While application of technology would help banks reduce their operating costs in the long
run, the initial investments would be sizeable. With greater use of technology solutions,
we expect IT spending of Indian banking system to go up significantly.

One area where the banking system can reduce the investment costs in technology
applications is by sharing of facilities. We are already seeing banks coming together to
share ATM Networks. Similarly, in the coming years, we expect to see banks and FIs
coming together to share facilities in the area of payment and settlement, back office
processing, data warehousing, etc. While dealing with technology, banks will have to
deal with attendant operational risks. This would be a critical area the Bank management
will have to deal with in future.

Payment and Settlement system is the backbone of any financial market place.
The present Payment and Settlement systems such as Structured Financial Messaging
System (SFMS), Centralised Funds Management System (CFMS), Centralized Funds
Transfer System (CFTS) and Real Time Gross Settlement System (RTGS) will undergo
further fine-tuning to meet international standards. Needless to add, necessary security
checks and controls will have to be in place. In this regard, Institutions such as IDRBT
will have a greater role to play.

27
 CHAPTER: 2

STRATEGIC ANALYSIS OF BANKING INDUSTRY

2.1 PORTER’S FIVE FORCE ANALYSIS:

Prof. Michael Porter’s competitive forces Model applies to each and every company as
well as industry. This model with regards to the Banking Industry is presented below:

28
 (2)
Potential Entrants is
high as Development
Financial Institutions
as well as Private and
foreign banks have
entered in a big way.

(1)
(5)
Rivalry among (4)
Organizing Power of
Existing Firms has Bargaining Power of
the Supplier is high.
increased with Buyers is high as
With new financial
liberalization. New corporate can raise
instruments they are
products and improved funds easily due to
asking higher return
customer services is high competition.
on investment.
the focus.
(3)
Threat from
Substitute is high due
to competition from
NBFCs & Insurance
companies as they
offer a higher rate of
interest than banks.

• Rivalry among existing firms

29
With the process of liberalization, competition among the existing banks has increased.
Each bank is coming up with new products to attract the customers and tailor made loans
are provided. The quality of services provided by banks has improved drastically.

• Potential Entrants
Previously the Development Financial Institutions mainly provided project finance and
development activities. But they have now entered into retail banking which has resulted
into stiff competition among the existing players

• Threats from Substitutes

Banks face threats from Non-Banking Financial Companies. NBFCs offer a higher rate of
interest.

• Bargaining Power of Buyers

Corporates can raise their funds through primary market or by issue of GDRs, FCCBs. As
a result they have a higher bargaining power. Even in the case of personal finance, the
buyers have a higher bargaining power. This is mainly because of competition.

• Bargaining power of Suppliers

With the advent of new financial instruments providing a higher rate of returns to the
investors, the investments in deposits is not growing in a phased manner. The suppliers
demand a higher return for the investments.

• Overall Analysis
The key issue is that how can banks leverage their strengths to have a better future. Since
the availability of funds is more and deployment of funds is less, banks should evolve
new products and services to the customers. There should be rational thinking in
sanctioning loans, which will bring down the NPAs. As there is expected revival in the
Indian economy banks have a major role to play. Funding corporate at a low cost of
capital is a major requisite.

30
2.2 SWOT ANALYSIS:
The banking sector is often taken as a proxy for the economy as a whole. The
performance of bank should therefore, reflect “Trends in the Indian Economy”. Due to
the reforms in the financial sector, banking industry has changed drastically with the
opportunities to the work with, new accounting standards new entrants and information
technology. The deregulation of the interest rate, participation of banks in project
financing has changed in the environment of banks.

The performance of banking industry is done through SWOT Analysis. It mainly helps to
know the Strengths and Weakness of the industry and to improve will be known through
converting the opportunities into strengths. It also helps for the competitive environment
among the banks.

STRENGTHS

1. Greater securities of Funds

Compared to other investment options banks since its inception has been a better avenue
in terms of securities. Due to satisfactory implementation of RBI’s prudential norms
banks have won public confidence over several years.

2. Banking network
After nationalization, banks have expanded their branches in the country, which has
helped banks build large networks in the rural and urban areas. Private banks allowed to
operate but they mainly concentrate in metropolis.

3. Large Customer Base

31
This is mainly attributed to the large network of the banking system. Depositors in rural
areas prefer banks because of the failure of the NBFCs
.

4. Low Cost of Capital

Corporate prefers borrowing money from banks because of low cost of capital. Middle
income people who want money for personal financing can look to banks as they offer at
very low rates of interests. Consumer credit forms the major source of financing by banks

WEAKNESSES

1. Basel Committee

The banks need to comply with the norms of Basel committee but before that it is
challenge for banks to implement the Basel committee standard, which are of
international standard.

2. Powerful Unions
Nationalization of Banks had a positive outcome in helping the Indian Economy as a
whole. But this has also proved detrimental in the form of strong unions, which have a
major influence in decision making. They are against automation.

3. Priority Sector Lending

To uplift the society, priority sector lending was brought in during nationalization. This is
good for the economy but banks have failed to manage the asset quality and their
intensions were more towards fulfilling government norms. As a result lending was done
for non-productive purposes.

4. High Non-Performing Assets

Non-Performing Assets (NPAs) have become a matter of concern in the banking industry.
This is because of change in the Accounting Standards (Prudential Norms). Net NPAs

32
increased to large extent of the total advances, which has to be reduced to meet the
international standards.

OPPORTUNITIES

1. Universal Banking
Banks have moved along the value chain to provide their customers more products and
services. For example: - SBI is into SBI home finance, SBI Capital Markets, SBI Bonds
etc.

2. Differential Interest Rates

As RBI control over bank reduces, they will have greater flexibility to fix their own
interest rates which depends on the profitability of the banks.

3. High Household Savings

Household savings have been increasing drastically. Investment in financial assets has
also increased. Banks should use this opportunity for raising funds.

4. Overseas Markets
Banks should tap the overseas market, as the cost of capital is very low.

5. Internet Banking
The advances in information technology have made banking easier. Business transactions
can effectively carried out through internet banking.

33
THREATS

1. NBFCs, Capital Markets and Mutual funds

There is a huge investment of household savings. The investments in NBFCs deposits,
Capital Market Instruments and Mutual Funds are increasing. Normally these instruments
offer better returns to investors.

2. Change in the Government Policy

The change in the government policy has proved to be a threat to the banking sector.

3. Inflation
The interest rates go down with a fall in inflation. Thus, the investors will shift his
investments to other profitable sectors.

4. Recession
Due to the recession in the business cycle the economy functions poorly and this has
proved to be a threat to the banking sector. The market oriented economy and
globalization has resulted into competition for market share. The spread in the banking
sector is very narrow. To meet the competition the banks have to grow at a faster rate and
reduce the overheads. They can introduce new products and develop the existing services.

34
2.3. PEST ANALYSIS

POLITICAL/ LEGAL ENVIROMENT

Government and RBI policies affect the banking sector. Sometimes looking into the
political advantage of a particular party, the Government declares some measures to their
benefits like waiver of short-term agricultural loans, to attract the farmer’s votes. By
doing so the profits of the bank get affected. Various banks in the cooperative sector are
open and run by the politicians. They exploit these banks for their benefits. Sometimes
the government appoints various chairmen of the banks.
Various policies are framed by the RBI looking at the present situation of the country for
better control over the banks

ECONOMICAL ENVIROMENT

Banking is as old as authentic history and the modern commercial banking are
traceable to ancient times. In India, banking has existed in one form or the other from
time to time. The present era in banking may be taken to have commenced with
establishment of bank of Bengal in 1809 under the government charter and with
government participation in share capital. Allahabad bank was started in the year 1865
and Punjab national bank in 1895, and thus, others followed

Every year RBI declares its 6 monthly policy and accordingly the various
measures and rates are implemented which has an impact on the banking sector. Also the
Union budget affects the banking sector to boost the economy by giving certain
concessions or facilities. If in the Budget savings are encouraged, then more deposits will
be attracted towards the banks and in turn they can lend more money to the agricultural

35
sector and industrial sector, therefore, booming the economy. If the FDI limits are
relaxed, then more FDI are brought in India through banking channels.

SOCIAL ENVIROMENT

Before nationalization of the banks, their control was in the hands of the private
parties and only big business houses and the effluent sections of the society were getting
benefits of banking in India. In 1969 government nationalized 14 banks. To adopt the
social development in the banking sector it was necessary for speedy economic progress,
consistent with social justice, in democratic political system, which is free from
domination of law, and in which opportunities are open to all. Accordingly, keeping in
mind both the national and social objectives, bankers were given direction to help
economically weaker section of the society and also provide need-based finance to all the
sectors of the economy with flexible and liberal attitude. Now the banks provide various
types of loans to farmers, working women, professionals, and traders. They also provide
education loan to the students and housing loans, consumer loans, etc.

Banks having big clients or big companies have to provide services like
personalized banking to their clients because these customers do not believe in running
about and waiting in queues for getting their work done. The bankers also have to provide
these customers with special provisions and at times with benefits like food and parties.
But the banks do not mind incurring these costs because of the kind of business these
clients bring for the bank.

Banks have changed the culture of human life in India and have made life much
easier for the people.

TECHNOLOGICAL ENVIROMENT

36
 Technology plays a very important role in bank’s internal control mechanisms as
well as services offered by them. It has in fact given new dimensions to the banks as well
as services that they cater to and the banks are enthusiastically adopting new
technological innovations for devising new products and services.

The latest developments in terms of technology in computer and

telecommunication have encouraged the bankers to change the concept of branch banking
to anywhere banking. The use of ATM and Internet banking has allowed ‘anytime,
anywhere banking’ facilities. Automatic voice recorders now answer simple queries,
currency accounting machines makes the job easier and self-service counters are now
encouraged. Credit card facility has encouraged an era of cashless society. Today
MasterCard and Visa card are the two most popular cards used world over. The banks
have now started issuing smartcards or debit cards to be used for making payments.
These are also called as electronic purse. Some of the banks have also started home
banking through telecommunication facilities and computer technology by using
terminals installed at customers home and they can make the balance inquiry, get the
statement of accounts, give instructions for fund transfers, etc. Through ECS we can
receive the dividends and interest directly to our account avoiding the delay or chance of
loosing the post.

Today banks are also using SMS and Internet as major tool of promotions and
giving great utility to its customers. For example SMS functions through simple text
messages sent from your mobile. The messages are then recognized by the bank to
provide you with the required information.

All these technological changes have forced the bankers to adopt customer-based
approach instead of product-based approach.

37
 CHAPTER: 3

CORPORATE BANKING: AN OVERVIEW

3.1 INTRODUCTION:

According to American author and humorist Mark Twain: ”A banker is a fellow who
lends his umbrella when the sun is shining and wants it back the minute it begins to rain.”
Many troubled businesses seeding credit in recent years might agree with Mr. Twain.
Indeed securing the large amounts of credit that many businesses require can be a
complicated and challenging task loan requests. Moreover, business loans, often called
commercial and industrial loans, rank among the most important assets that commercial
banks and their closest competitors hold.

Corporate finance is an area of finance dealing with financial decisions business

enterprises make and the tools and analysis used to make these decisions. The primary
[1]
goal of corporate finance is to maximize corporate value while managing the firm's
financial risks. Although it is in principle different from managerial finance which studies
the financial decisions of all firms, rather than corporations alone, the main concepts in
the study of corporate finance are applicable to the financial problems of all kinds of
firms.
The discipline can be divided into long-term and short-term decisions and techniques.
Capital investment decisions are long-term choices about which projects receive
investment, whether to finance that investment with equity or debt, and when or whether
to pay dividends to shareholders. On the other hand, the short term decisions can be

38
grouped under the heading "Working capital management". This subject deals with the
short-term balance of current assets and current liabilities; the focus here is on managing
cash, inventories, and short-term borrowing and lending (such as the terms on credit
extended to customers).
The terms corporate finance and corporate financier are also associated with investment
banking. The typical role of an investment bank is to evaluate the company's financial
needs and raise the appropriate type of capital that best fits those needs.

Corporate banking is a part of commercial banking but the part that average depositor
with deposits account never sees. It is a division of commercial banking which extends
the financial support to the corporate for helping them achieve their organizational goals
and objectives. While banks hold money and mortgages, lend money, extend or open up a
line of credit for the average depositors, it is business that needs major financial services
to build plant, erect buildings, make structural improvements on old ones and start new
business ventures. This is one of the most competitive, risky and financially lucrative
areas of doing business in today’s world.

Commercial loans were the earliest form of lending banks did in their move than 2000
year old history. Later in the 20th century finance companies, insurance firms, and thrift
institutions entered the business lending field. Today loan officers skilled in evaluating
the credit of businesses are usually among the most experienced and highest paid people
in the financial services field, along with security underwriters.

As a part of commercial banking, corporate banking is focused on analyzing and

assessing the risk of the business, establishing the creditworthiness of the business and
trying to predict the likelihood of success or failure of business endeavour. These are the
professionals who help decide what business initiatives will be taken and when, whether
or not to expand the existing businesses, help develop new markets so that new clients
can be found and help develop new products for e-commerce, the internet and the
international markets.

39
Corporate Banking represents the wide range of banking and financial services provided
to domestic and international operations of large local corporate and local operations of
multinationals corporations. Services include access to commercial banking products,
including working capital facilities such as domestic and international trade operations
and funding, channel financing, and overdrafts, as well as domestic and international
payments, INR term loans (including external commercial borrowings in foreign
currency), letters of guarantee etc.

The Investment Banking and Markets division of various bank brings together the
advisory and financing, equity securities, asset management, treasury and capital markets,
and private equity activities to complete the CIBM structure and provide a complete
range of financial products to our clients. Increasingly, ECA financing is being
considered by customers and we work closely with our project export finance teams, both
onshore and offshore, to provide structured solutions.

The Corporate Bank in India was ranked 2nd overall in the 2004 Greenwich Survey.

This portfolio is largely spread within 9 sector teams divided as under :

• Consumer Brands
• Industrials
• Energy and Utilities
• Telecommunications
• Automotive
• Healthcare
• Transport and Logistics
• Metals and Mining
• Media

40
3.2 STRUCTURE OF CREDIT LENDING (CORPORATE)
IN INDIA:

Banks, finance companies, and competing business lenders grant many different types of
commercial loans. Among the most widely used forms of business credit are the
following:

SHORT-TERM BUSINESS LOANS:

 Self-liquidating inventory loans
 Working capital loans
 Interim construction financing
 Security dealer financing
 Retailer and equipment financing
 Asset-based loans (accounts receivable financing, factoring, and inventory
financing)
 Syndicated loans

LONG-TERM BUSINESS LOANS:

 Term loans to support the purchase of equipment, rolling stock, and structures
 Revolving credit financing
 Project loans
 Loans to support acquisitions of others business firms

41
SHORT-TERM LOANS TO BUSINESS FIRMS:

Self-Liquidating Inventory Loans

Historically, commercial banks have been the leaders in extending short term credit to
businesses. These loans were used to finance the purchase of inventory, raw materials or
finished goods to sell. In this case the term of the loan begins when cash in needed to
purchase inventory and ends when cash is available in the firm’s account to write the
lender a check for the balance of its loan.

Working Capital Loans

Working capital loans provide businesses with short run credit, lasting from few days to
about one year. Working capital loans are most often used to fund the purchase of
inventories in order to put goods on shelves or to purchase raw materials; thus, they come
closest to the traditional self-liquidating loan described previously.

Frequently, the working capital loan is designed to cover seasonal peaks in the business
customer’s production levels and credit needs. Normally, working capital loans are
secured by accounts receivable or by pledges of inventory and carry a floating interest
rate on the amounts actually borrowed against the approved credit line. A commitment
fee is charged on the unused portion of the credit line and sometimes on the entire
amount of funds made available.

Interim Construction Financing

42
A popular form of secured short term lending is the interim construction loan, used to
support the construction of homes, apartments, office buildings, shopping centers, and
other permanent structures. The finance is used while the construction is going on but
once the construction phase is over, this short term loan usually is paid off with a longer
term mortgage loan issued by another lender, such as insurance company of pension fund.
Recently, some commercial banks have issued ‘minipermanent’ loans, providing funding
for construction and the early operation of a project for as long as five to seven years.

Retailer and Equipment Financing

Banks support installment purchases of automobiles, appliances, furniture, business

equipment, and other durable goods by financing the receivables that dealers selling these
goods take on when they write installment contracts to cover customer purchases. In turn,
these contracts are reviewed by banks and other lending institutions with whom the
dealers have established credit relationships. If they meet acceptable credit standards, the
contracts are purchased by lenders at an interest rate that varies with the risk level of each
borrower, the quality of collateral pledged, and the term of each loan.

Asset-Based Financing

An increasing portion of short-term lending by banks and other lenders in recent years
has consisted of asset based loans, credit secured by the shorter term assets of a firm that
are expected to roll over into cash in the future. Key business assets used for many of
these loans are accounts receivables and inventories of raw materials or finished goods.
The lender commits funs against a specific percentage of the book value of outstanding
credit accounts or against inventory.

In most loans collateralized by accounts receivable and inventory, the borrowing firm
retains title to the assets pledged, but sometimes title is passed to the lender, which then
assumes the risk that some of those assets will not pay out as expected. The most
common example of this arrangement is factoring, where the bank actually takes on the

43
responsibility of collecting the accounts receivable of one of its business customers. It
typically assesses a higher discount rate and lends a smaller fraction of the book value of
the customer’s accounts receivable because the lender incurs both additional expense and
additional risk with a factored loan.

Syndicated Loan

A type of large corporate loan that is increasingly used today is the syndicated loan. This
is typically a loan or loan package extended to a corporation by a group of banks and
other institutional lenders. These loans may be “drawn” by the borrowing company, with
the funds used to support business operations or commercial expansion, or “undrawn”,
serving as lines of credit to back a security issue or other venture. Banks engage in
syndicated loans both to spread the heavy risk exposures of these large loans, often
involving hundreds of lakhs or crore of rupees in credit for each loan, and to earn fee
income.

44
LONG-TERM LOANS TO BUSINESS FIRMS:

Term Business Loans

Term loans are designed to fund long and medium term business investments, such as the
purchase of equipment or the construction of physical facilities, covering a period longer
than one year. Usually the borrowing firm applies for a lump sum loan based on the
budgeted cost of its proposed project and then pledges to repay the loan in a series of
installments.

Term loans normally are secured by fixed assets e.g. Plant and Equipment owned by the
borrower and may carry either a fixed or a floating interest rate. That rate is normally
higher than on shorter term business loans due to the lender’s greater risk exposure from
such loans.

Revolving Credit Financing

A revolving credit line allows a business customer to borrow up to a pre specified limit,
repay all or a portion of the borrowing, and re borrows as necessary until the credit line
matures. One of the most flexible of all the forms of business loans, revolving credit is
often granted without specific collateral to secure the loan and may be short term or caver
a period as long as three, four, or five years. This form of business financing is
particularly popular when the customer is highly uncertain about the timing of future cash
flows or about the exact magnitude of the future borrowings needs.

Loan commitments are usually of two types namely,

1. Formal Loan Commitment, and

45
 2. Confirmed Credit Line.

Formal Loan Commitment is a contractual promise to lend to a customer up to a

maximum amount of money at a set interest rate or rate markup over the prevailing base
loan rate. Whereas, Confirmed Credit Line is a looser form of loan commitment where
the banks indicate its approval of customer’s request for credit in an emergency, though
the prices of such a credit line may not be set in advance and the customer may have little
intention to draw upon the credit line.

Long-Term Project Loans

The most risky of all business loans are project loans, credit to finance the construction of
fixed assets designed to generate a flow of revenue in future periods. Prominent examples
include oil refineries, pipelines, mines, power plants and harbor facilities. Project loans
are usually granted to several companies jointly sponsoring a large project.

Project loans may be granted on a recourse basis, in which the lender can recover funds
from the sponsoring companies if the project does not pay out as planned. At the other
end, loan may be extended on a non recourse basis, in which no sponsor guarantees; the
project stands or falls on its own merits. Many such loans require that the project‘s
sponsors pledge enough of their own capital to see the project through to completion.

46
 Term Loan / Deferred Payment Guarantees

• In case of term loans and deferred payment guarantees, the project report is
obtained from the customer, who may have been compiled in-house or by a
firm or consultants/ merchant bankers.

• Term loan is provided to support capital expenditures for setting up new

ventures as also for expansion, renovation etc.

• The technical feasibility and economic viability is vetted by the Bank and
wherever it is felt necessary.

• Banks normally expects at least 20% contribution of Promoter’s contribution.

But the promoter contribution may vary largely in mega projects. Therefore,
there cannot be a definitive benchmark.

• The sanctioning authority will have the necessary discretion to permit

deviations.

47
3.3 EMERGENCE OF CORPORATE BANKING IN INDIA

The bank lending has expanded in a number of emerging market economies, especially in
Asia and Latin America, in recent years. Bank credit to the private sector, in real terms,
was rising at a high rate. Several factors have contributed to the significant rise in bank
lending in emerging economies such as strong growth, excess liquidity in banking
systems reflecting easier global and domestic monetary conditions, and substantial bank
restructuring. The recent surge in bank lending has been associated with important
changes on the asset side of banksí balance sheet. First, credit to the business sector -
historically the most important component of banksí assets – has been weak, while the
share of the household sector has increased sharply in several countries. Second, banksí
investments in Government securities increased sharply until 2004-05. As a result,
commercial banks continue to hold a very large part of their domestic assets in the form
of Government securities - a process that seems to have begun in the mid-1990s.

There has been a sharp pick up in bank credit in India in recent years. The rate of growth
in bank credit which touched a low of 14.4 per cent in 2002-03, accelerated to more than
30.0 per cent in 2004-05, the rate which was maintained in 2005-06. The upturn in the
growth rate of bank credit can be attributed to several factors. One, macroeconomic
performance of the economy turned robust with GDP growth rates hovering between 7.5
per cent and 8.5 per cent during the last few years. Two, the hardening of sovereign
yields from the second half of 2003-04 forced banks to readjust their assets portfolio by
shifting from investments to advances. While the share of gross advances in total assets
of commercial banks grew from 45.0 per cent to 54.7 per cent that of investments
declined from 41.6 per cent to 32.1 per cent in the last few years.

48
However, the credit growth has been broad-based making banks less vulnerable to credit
concentration risk. The declining trend of priority sector loans in 2001-02 in the credit
book of banks was due to prudential write offs and compromise settlements of a large
number of small accounts which was reversed from 2002-03 on the strength of a spurt in
the housing loan portfolio of banks. Even though credit to industry and other sectors have
also picked up, their share in total loans has declined marginally. Retail loans, which
witnessed a growth of over 40.0 per cent in 2004-05 and again in 2005-06, have been the
prime driver of the credit growth in recent years. Retail loans as a percentage of gross
advances increased from 22.0 per cent in March 2004 to 25.5 per cent in March 2006.
The cyclical uptrend in the economy along with the concomitant recovery in the business
climate brings with it improved abilities of the debtors to service loans, thereby greatly
improving banks asset quality. Despite the sharp rise in credit growth in recent years, not
only the proportional levels of gross non-performing loans (NPLs) have declined, but the
absolute levels of gross NPLs declined significantly. Several factors have contributed to
the marked improvement in the Indian banksí asset quality. One, banks have gradually
improved their risk management practices and introduced more vigorous systems and
scoring models for identifying credit risks. Two, a favourable macroeconomic
environment in recent years has also meant that many entities and units of traditionally
problematic industries are now performing better. Three, diversification of credit base
with increased focus on retail loans, which generally have low delinquency rates, has also
contributed to the more favourable credit risk profile. Four, several institutional measures
have been put in place to recover the NPAs. These include Debt Recovery Tribunals
(DRTs), Lok Adalats (peopleís courts), Asset Reconstruction Companies (ARCs) and
corporate debt restructuring mechanism (CDRM). In particular, the Securitisation and
Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI)
Act, 2002 for enforcement of security interest without intervention of the courts has
provided more negotiating power to the banks for resolving bad debts.

49
50
Sectoral Deployment of Gross Bank Credit

During 2008-09 total deployment of gross bank credit increased to Rs.1.87,515 crores
from Rs.1,69.536 crores in 2008-07
Non-food bank credit increased sharply during 2005-06. The credit growth was broad
based. Credit to services (including personal loans and other services) increased by 52.8
per cent in 2005-06, accounting for 58.3 per cent of incremental non-food gross bank
credit (NFGBC). Personal loans increased sharply in recent years mainly on account of
housing loans. Real estate loans more than doubled. Other personal loans such as credit
card outstanding and education loans also recorded sharp increases of 59.3 per cent and
96.5 per cent, respectively.

Priority Sector Advances

Credit to the priority sector decreased to 34.1 per cent in the previous year against 39.5 in
2008. In terms of revised guidelines on lending to priority sector , broad category of
advances under priority sector include agriculture, micro and small enterprises, retail
trade, micro-credit, education and housing.

The agriculture and housing sectors were the major beneficiaries, which together
accounted for more than two-third of incremental priority sector lending. Credit to small
scale industries also accelerate. Several favourable policy initiatives undertaken by the
Central Government and the Reserve Bank including, inter alia, the policy package for
stepping up of credit to small and medium enterprises (SMEs) announced on August 10,
2005, have had a positive impact. At the individual bank-level, all the nationalised banks,
and all but two of the State Bank group (State Bank of India and State Bank of Patiala)
were able to meet the priority sector target of 40 per cent of NBC. However, only ten
PSBs (Allahabad Bank, Andhra Bank, Bank of India, Indian Bank, Indian Overseas
Bank, Punjab National Bank, Syndicate Bank, State Bank of Bikaner and Jaipur, State
Bank of Indore and State Bank of Saurashtra) were able to achieve the subtargets for
agriculture, while the sub-target for weaker sections was met by eight PSBs (Allahabad

51
Bank, Andhra Bank, Bank of India, Indian Bank, Indian Overseas Bank, Punjab National
Bank, Syndicate Bank and State Bank of Patiala).

Lending to the priority sector by foreign banks constituted 34.6 per cent of net bank
credit as on the last reporting Friday of March 2006, which was well above the stipulated
target of 32 per cent. The share of export credit in total netbank credit at 19.4 per cent
was significantly above the prescribed sub-target of 12.0 per cent. Foreign banks,
however, fell a little short of the sub-target of 10.0 per cent in respect of lending to SSIs.

Special Agricultural Credit Plans

The Reserve Bank had advised public sector banks to prepare Special Agricultural Credit
Plans (SACP) on an annual basis in 1994. The SACP mechanism for private sector banks
was made applicable from 2005-06, as recommended by the Advisory Committee on
Flow of Credit to Agriculture and Related Activities from the Banking System
(Chairman:Prof. V.S. Vyas) and announced in the Mid-term Review of Annual Policy for
2004-05. Public sector banks were advised to make efforts to increase their disbursements
to small and marginal farmers to 40.0 per cent of their direct advances under SACP by
March 2007. The disbursement to agriculture under SACP by public sector banks
aggregated Rs.94,278 crore during 2005-06, which was much above the target of
Rs.85,024 crore and the disbursement of Rs.65,218 crore during 2004-05. The
disbursement by private sector banks during 2005-06 at Rs.31,119 crore was above the
target of Rs.24,222 crore. 3.21 Public sector banks were advised to earmark 5.0 per cent
of their net bank credit to women. At end-March 2006, aggregate credit to women by
public sector banks stood at 5.37 per cent of their net bank credit with 22 banks achieving
the target. A consortium of select public sector banks was formed, with the State Bank of
India as the leader of the consortium, to provide credit to the Khadi and Village Industries
Commission (KVIC). These loans are provided at 1.5 per cent below the average prime
lending rates of five major banks in the consortium. An amount of Rs.322 crore was
outstanding at end-July 2006 out of Rs.738 crore disbursed by the consortium under the
scheme.

52
Micro-finance

The Reserve Bank has been making consistent efforts to strengthen credit delivery,
improve customer service and encourage banks to provide banking services to all
segments of the population. Despite considerable expansion of the banking system in
India, large segments of the country’s population do not have access to banking services.

Expanding the outreach of banking services has, therefore, been a major thrust area of the
policy of the Government of India and the Reserve Bank in recent years.

The self-help group (SHG)-bank linkage programme has emerged as the major micro-
finance programme in the country and is being implemented by commercial banks, RRBs
and co-operative banks. As on March 31, 2008 3.6 million SHGs had outstanding bank
loans of Rs.17,000 crore, an increase of 25 per cent over March 31, 2007 in respect of
number of SHGs credit linked. During 2007-08, banks financed 1.2 million SHGs for
Rs.8,849 crore. As at end-March 2008, SHGs had 5 million savings accounts with banks
for Rs.3,785 crore.

Retail Credit
Continuing the strong growth in recent years, retail advances increased by 40.9 per cent
to Rs.3,75,739 crore in 2007-08, which was significantly higher than the overall credit
growth of 31.0 per cent. As a result, their share in total loans and advances increased
during the year. Auto loans experienced the highest growth, followed by credit card
receivables, other personal loans (comprising loans mainly to professionals and for
educational purposes) and housing finance. Loans for consumer durables increased by
17.3 per cent as against the decline of 39.1 per cent in the previous year.

Major steps earlier taken by the Reserve Bank of India were somewhat more oriented
towards price stability and the related monitory instruments like the bank rate, reverse
repo rate, repo rate and CRR were adjusted to rein in the price instability. Naturally, the
priority was inflation control for overall growth of the economy and we must congratulate

53
the RBI for a wonderful job done. The inflation today is at a moderate level and in line
with a developed economy.With these steps taken by RBI, the latest scenario is that the
non-food credit growth got moderated, agricultural and service sector credit went up but
the retail credit growth actually took a beating due to northbound interest rates.
Such positive impact on inflation helped the economy for price stability and we feel what
is important for India now is to ensure that there is sufficient focus on growth of the
economy along with price stability.

Lending to the Sensitive Sectors

Lending by SCBs to the sensitive sectors (capital market, real estate and commodities)
increased sharply during 2005-06 mainly on account of a sharp increase in exposure to
the real estate market. Total exposure of SCBs to the sensitive sectors consituted 18.9 per
cent of aggregate bank loans and advances (comprising 17.2 per cent to real estate, 1.5
per cent to the capital market and 0.3 per cent to the commodities sector). During 2008-
2009 total lending to sensitive sector increased by 19.1 percent in capital market.

Among bank groups, new private sector banks had the highest exposure to the sensitive
sectors (measured as percentage to total loans and advances of banks) mainly due to the
increase in exposure to the real estate market, followed by foreign banks, old private
sector banks and public sector banks.

MEASURES BY SIDBI

54
SIDBI has developed a Credit Appraisal & Rating Tool (CART) as well as a Risk
Assessment Model (RAM) and a comprehensive rating model for risk assessment of
proposals for SMEs. The banks may consider to take advantage of these models as
appropriate and reduce their transaction costs.
.
Public Sector Banks are advised to follow a transparent rating system with cost of credit
being linked to the credit rating of the enterprise.

SIDBI in association with Credit Information Bureau (India) Ltd. (CIBIL) expedited
setting up a credit rating agency.

SIDBI in association with Indian Banks’ Association (IBA) would collect and pool
common data on risk in each identified cluster and develop an IT-enabled application,
appraisal and monitoring system for small (including tiny) enterprises. This would help
reduce transaction cost as well as improve credit flow to small (including tiny) enterprises
in the clusters.

The National Small Industries Corporation has introduced a Credit Rating Scheme for
encouraging SSI units to get themselves credit rated by reputed credit rating agencies.
Public Sector Banks will be advised to consider these ratings appropriately and as per
availability, and structure their rates suitably.

ROADMAP BY RBI

55
The Reserve Bank of India (RBI) has worked out the roadmap for the Indian banks to
graduate from the simpler approaches of the Basel II framework to more advanced ones.

Basel II is the second among Basel Accords, which are primarily, recommendations on
banking laws and regulations issued by the Basel committee on banking supervision.
It sets up rigorous risk and capital management requirements aimed at ensuring that a
bank holds capital reserves appropriate to the risk it exposes itself to through its lending
and investment practices.

Since March 2008, foreign banks operating in India and Indian banks having presence
outside the country have migrated to simpler approaches under Basel II framework. Other
commercial banks are required to migrate to these norms by March 31, 2009.
These include standardised approach for credit risk which arising from default by
borrowers, basic indicator approach for operational risk (arising from day to operations of
the banks such robbery or power failure) and standardised duration approach for market
risk (arising from fluctuations in interest rate and share prices) which affects the
investment and market portfolio of the banks.

In the framework, the RBI had earlier specified the date by which banks may file
application for approvals and the the likely date by which approvals can be obtained from
the central bank.

While banks have the discretion to adopt the advanced approaches, they need to seek
prior approval.

Under market risk, banks may apply to RBI for graduating to more advanced method of
internal models approach (IMA) by April 1, 2010 and then, RBI may approve it by March
31, 2011. IMA sets out a framework for applying capital charges to the market risks (both
on balance sheet and off-balance sheet) incurred by banks by an internal model. The
current standardised duration approach specifies a specific average duration of the banks

56
at large, which the banks follow and make it a basis for applying capital charges to only
open positions.

Similarly, for operational risk, banks may graduate to standardised approach by April 1,
2010 and RBI can approve the plan by September 30, 2010. After that, they can graduate
to advanced measurement approach for operational risk by April 1, 2011 and get RBI
approval by March 31, 2013.

While advanced measurement approach (AMA) sets the framework for banks to develop
their own empirical model to quantify required capital for operational risk, it can be used
after they get regulatory clearances.

Under the standardised approach, a bank's activities are divided into eight business lines:
corporate finance, trading and sales, retail banking, commercial banking , payment and
settlement, agency services, asset management and retail brokerage. Within each business
line, gross income is a broad indicator for the scale of business operations and so, the
scale of operational risk exposure within each of these business lines. The capital charge
for each business line is calculated by multiplying gross income by a factor .

Currently, banks are using the basic indicator approach as per which they must hold
capital for operational risk equal to the average over the previous three years of a fixed
percentage of positive annual gross income.

For credit risk, banks can use internal ratings-based approach which allows them to
develop their own model to estimate the probability of default for individual clients or
groups of clients. Currently, banks use standardised approach where they are required to
use ratings from external credit rating agencies to quantify the required capital for credit
risk.

57
 CHAPTER: 4

CRM STRATEGIES FOR CORPORATE BANKING

4.1 RAROC

Risk-Adjusted Return on Capital –– RAROC–– is a measure of the expected return on

Economic Capital over the life of an investment. This prospective measure of risk-
adjusted profitability allows for apples-to-apples comparison of activities across risk
types of business.

RAROC helps senior management maximize shareholder value by addressing strategic

business questions such as:
• How much capital is needed to support the company’s enterprise-wide risks?
• Is the company over or under capitalized?
• Are individual business units creating or destroying shareholder value?
What opportunities for growth or diversification exist within the company?
• How should the economics of the business be managed within regulatory and
rating agency capital constraints?
• What is an optimal strategy for reinsurance?

RAROC allows for both relative comparisons between business units and absolute
comparisons to shareholders’ minimum required return on risk, or hurdle rate. A business
line is value-neutral if its RAROC is equal to the hurdle rate. It creates value if its
RAROC is higher than the hurdle rate and destroys value if it is lower.

58
COMPUTATION
RAROC is computed by dividing risk-adjusted net income by the total amount of
economic capital assigned based on the risk calculation. RAROC allocates a capital
charge to a transaction or a line of business at an amount equal to the maximum expected
loss (at a 99% confidence level) over one year on an after-tax basis. The higher the
volatility of the returns, the more capital is allocated. The higher capital allocation means
that the transaction has to generate cash flows large enough to offset the volatility of
returns, which results from the credit risk, market risk, and other risks taken. The
RAROC process estimates the asset value that may prevail in the worst-case scenario and
then equates the capital cushion to be provided for the potential loss.

RAROC is an improvement over the traditional approach in that it allows one to compare
two businesses with different risk (volatility of returns) profiles. A transaction may give a
higher return but at a higher risk. Using a hurdle rate (expected rate of return), a lender
can also use the RAROC principle to set the target pricing on a relationship or a
transaction. Although not all assets have market price distribution, RAROC is a first step
toward examining an institution's entire balance sheet on a mark-to-market basis - if only
to understand the risk-return trade-offs that have been made.

What is RAROC ?
Revenues
Expenses
Expected Losses
What is RAROC? + Return on
economic capital
Risk Adjusted + transfer values /
Return prices

RAROC
Risk Adjusted Capital required for
Capital or Economic Credit Risk
Capital Market Risk
Operational Risk

The concept of RAROC (Risk adjusted Return on Capital) is at the heart

of Integrated Risk Management.

59
4.2 RATING BASED METHODS:

Banks should have a comprehensive risk scoring / rating system that serves as a single point
indicator of diverse risk factors of a counterparty and for taking credit decisions in a
consistent manner. To facilitate this, a substantial degree of standardization is required in
ratings across borrowers. The risk rating system should be designed to reveal the overall risk
of lending, critical input for setting pricing and non-price terms of loans as also present
meaningful information for review and management of loan portfolio. The risk rating, in
short, should reflect the underlying credit risk of the loan book. The rating exercise should
also facilitate the credit granting authorities some comfort in its knowledge of loan quality at
any moment of time.

The risk rating system should be drawn up in a structured manner, incorporating, inter
alia, financial analysis, projections and sensitivity, industrial and management risks. The
banks may use any number of financial ratios and operational parameters and collaterals as
also qualitative aspects of management and industry characteristics that have bearings on the
creditworthiness of borrowers. Banks can also weigh the ratios on the basis of the years to
which they represent for giving importance to near term developments. Within the rating
framework, banks can also prescribe certain level of standards or critical parameters, beyond
which no proposals should be entertained. Banks may also consider separate rating
framework for large corporate / small borrowers, traders, etc. that exhibit varying nature and
degree of risk. Forex exposures assumed by corporates who have no natural hedges have
significantly altered the risk profile of banks. Banks should, therefore, factor the unhedged
market risk exposures of borrowers also in the rating framework. The overall score for risk is
to be placed on a numerical scale ranging between 1-6, 1-8, etc. on the basis of credit quality.
For each numerical category, a quantitative definition of the borrower, the loan’s underlying
quality, and an analytic representation of the underlying financials of the borrower should be
presented. Further, as a prudent risk management policy, each bank should prescribe the
minimum rating below which no exposures would be undertaken. Any flexibility in the
minimum standards and conditions for relaxation and authority therefore should be clearly
articulated in the Loan Policy.

60
The credit risk assessment exercise should be repeated biannually (or even at shorter
intervals for low quality customers) and should be delinked invariably from the regular
renewal exercise. The updating of the credit ratings should be undertaken normally at
quarterly intervals or at least at half-yearly intervals, in order to gauge the quality of the
portfolio at periodic intervals. Variations in the ratings of borrowers over time indicate
changes in credit quality and expected loan losses from the credit portfolio. Thus, if the rating
system is to be meaningful, the credit quality reports should signal changes in expected loan
losses. In order to ensure the consistency and accuracy of internal ratings, the responsibility
for setting or confirming such ratings should vest with the Loan Review function and
examined by an independent Loan Review Group. The banks should undertake
comprehensive study on migration (upward – lower to higher and downward – higher to
lower) of borrowers in the ratings to add accuracy in expected loan loss calculations.

Value At Risk
The VaR method is employed to assess potential loss that could crystalise on trading position
or portfolio due to variations in market interest rates and prices, using a given confidence
level, usually 95% to 99%, within a defined period of time. The VaR method should
incorporate the market factors against which the market value of the trading position is
exposed. The top management should put in place bank-wide VaR exposure limits to the
trading portfolio (including forex and gold positions, derivative products, etc.) which is then
disaggregated across different desks and departments. The loss making tolerance level should
also be stipulated to ensure that potential impact on earnings is managed within acceptable
limits. The potential loss in Present Value Basis Points should be matched by the Middle
Office on a daily basis vis-à-vis the prudential limits set by the Board. The advantage of
using VaR is that it is comparable across products, desks and Departments and it can be
validated through ‘back testing’. However, VaR models require the use of extensive
historical data to estimate future volatility. VaR model also may not give good results in
extreme volatile conditions or outlier events and stress test has to be employed to
complement VaR. The stress tests provide management a view on the potential impact of
large size market movements and also attempt to estimate the size of potential losses due to

61
stress events, which occur in the ’tails’ of the loss distribution. Banks may also undertake
scenario analysis with specific possible stress situations (recently experienced in some
countries) by linking hypothetical, simultaneous and related changes in multiple risk factors
present in the trading portfolio to determine the impact of moves on the rest of the portfolio.
VaR models could also be modified to reflect liquidity risk differences observed across assets
over time. International banks are now estimating Liquidity adjusted Value at Risk (LaVaR)
by assuming variable time horizons based on position size and relative turnover. In an
environment where VaR is difficult to estimate for lack of data, non-statistical concepts such
as stop loss and gross/net positions can be used.

62
63
4.3 INSPECTION METHODOLGY

The supervision of commercial banks and financial institutions is vested in the Reserve
Bank in terms of the provisions of the Banking Regulation Act, 1949 and the Reserve
Bank of India Act, 1934. This task is carried out by the Department of Banking
Supervision (DBS) under the guidance of the BFS. The basic objective of supervision of
banks is to assess the solvency, liquidity and operational health of banks. The onsite
inspection of banks referred to as Annual Financial Inspection (AFI) is conducted
annually (except in the case of State Bank of India in which case it is done once in two
years). For this purpose, the unit of inspection is the Head Office (HO) of the bank. A
team of Inspecting Officers from the Reserve Bank led by the Principal Inspecting
Officer (PIO) visits the bank and conducts the inspection based on the internationally
adopted CAMEL (Capital Adequacy, Asset Quality, Management, Earnings, Liquidity)
model, modified as CAMELS (S for Systems and Control) to suit the needs of the Indian
banking system. The focus of the AFI in recent years has been on supervisory issues
relating to securitisation, business continuity plan, disclosure requirements and
compliance with other existing guidelines. In order to have an overall perspective, units
of the bank throughout the country are also taken up for inspection either by the same
team inspecting the HO or by additional teams from the Regional Offices (RO) of the
Reserve Bank. These units could be treasury operations, specialised branches and
controlling offices in general, where there may be concerns relating mainly to frauds,
NPAs and exposure to sensitive sectors. Major findings of these other unit inspections are
incorporated in the Report. The timeframe for carrying out the inspection of the corporate
HO of the bank is two to three months. The inspection report is generally finalised
within four months. On completion of the inspection, the RO of the Reserve Bank,
under whose jurisdiction the HO of the bank is situated, issues the inspection report to the
bank for perusal, corrective action and compliance. Further, a detailed discussion on the
findings of the inspection and the road ahead is conducted by the Reserve Bank with the
CEO/CMD and other senior functionaries of the bank and a monitorable action plan is
decided and/or supervisory action is taken, wherever warranted. The findings recorded in
the inspection report along with the responses of the CEO/CMD of the bank are placed

64
before the BFS. Based on the findings of the inspection and other inputs, a supervisory
rating is assigned to the bank. Efforts are afoot to move to a risk based supervision (RBS)
approach, which envisages the monitoring of banks by allocating supervisory resources
and focusing supervisory attention depending on the risk profile of each institution.
The process involves continuous monitoring and evaluation of the appropriateness of the
risk management system in the supervised institution in relation to its business strategy
and exposures, with a view to assessing its riskiness.

65
4.4 RISK MANAGEMENT IN BANKS

Risk is inherent in any commercial activity and banking is no exception to this rule.
Rising global competition, increasing deregulation, introduction of innovative products
and delivery channels have pushed risk management to the forefront of today’s financial
landscape. Ability to gauge the risks and take appropriate position will be the key to
success. It can be said that risk takers will survive, effective risk managers will
prosper and risk averse are likely to perish. In the regulated banking environment,
banks had to primarily deal with credit or default risk. As we move into a perfect market
economy, we have to deal with a whole range of market related risks like exchange risks,
interest rate risk, etc. Operational risk, which had always existed in the system, would
become more pronounced in the coming days as we have technology as a new factor in
today’s banking. Traditional risk management techniques become obsolete with the
growth of derivatives and off-balance sheet operations, coupled with diversifications.
The expansion in E-banking will lead to continuous vigilance and revisions of
regulations.

Building up a proper risk management structure would be crucial for the banks in the
future. Banks would find the need to develop technology based risk management tools.
The complex mathematical models programmed into risk engines would provide the
foundation of limit management, risk analysis, computation of risk-adjusted return on
capital and active management of banks’ risk portfolio. Measurement of risk exposure is
essential for implementing hedging strategies.

Under Basel II accord, capital allocation will be based on the risk inherent in the asset.
The implementation of Basel II accord will also strengthen the regulatory review process
and, with passage of time, the review process will be more and more sophisticated.
Besides regulatory requirements, capital allocation would also be determined by the
market forces. External users of financial information will demand better inputs to
make investment decisions. More detailed and more frequent reporting of risk positions
to banks’ shareholders will be the order of the day. There will be an increase in the

66
growth of consulting services such as data providers, risk advisory bureaus and risk
reviewers. These reviews will be intended to provide comfort to the bank managements
and regulators as to the soundness of internal risk management systems.

Risk management functions will be fully centralized and independent from the business
profit centres. The risk management process will be fully integrated into the business
process. Risk return will be assessed for new business opportunities and incorporated
into the designs of the new products. All risks – credit, market and operational and so on
will be combined, reported and managed on an integrated basis. The demand for Risk
Adjusted Returns on Capital (RAROC) based performance measures will increase.
RAROC will be used to drive pricing, performance measurement, portfolio management
and capital management.

Risk management has to trickle down from the Corporate Office to branches or operating
units. As the audit and supervision shifts to a risk based approach rather than transaction
orientation, the risk awareness levels of line functionaries also will have to increase.
Technology related risks will be another area where the operating staff will have to be
more vigilant in the coming days.

Banks will also have to deal with issues relating to Reputational Risk as they will need to
maintain a high degree of public confidence for raising capital and other resources. Risks
to reputation could arise on account of operational lapses, opaqueness in operations and
shortcomings in services. Systems and internal controls would be crucial to ensure that
this risk is managed well.

The legal environment is likely to be more complex in the years to come. Innovative
financial products implemented on computers, new risk management software, user
interfaces etc., may become patentable. For some banks, this could offer the potential for
realizing commercial gains through licensing.

67
Advances in risk management (risk measurement) will lead to transformation in capital
and balance sheet management. Dynamic economic capital management will be a
powerful competitive weapon. The challenge will be to put all these capabilities together
to create, sustain and maximise shareholders’ wealth. The bank of the future has to be a
total-risk-enabled enterprise, which addresses the concerns of various stakeholders’
effectively.

Risk management is an area the banks can gain by cooperation and sharing of experience
among themselves. Common facilities could be considered for development of risk
measurement and mitigation tools and also for training of staff at various levels.
Needless to add, with the establishment of best risk management systems and
implementation of prudential norms of accounting and asset classification, the quality of
assets in commercial banks will improve on the one hand and at the same time, there will
be adequate cover through provisioning for impaired loans. As a result, the NPA levels
are expected to come down significantly.

68
 CHAPTER: 5

AN OVERVIEW OF PUNJAB NATIONAL BANK LTD

5.1 PNB PROFILE

With over 38 million satisfied customers and 4668 offices, PNB has continued to
retain its leadership position among the nationalized banks. The bank enjoys
strong fundamentals, large franchise value and good brand image. Besides being
ranked as one of India's top service brands, PNB has remained fully committed to
its guiding principles of sound and prudent banking. Apart from offering banking
products, the bank has also entered the credit card & debit card business; bullion
business; life and non-life insurance business; Gold coins & asset management
business, etc.

Since its humble beginning in 1895 with the distinction of being the first Indian
bank to have been started with Indian capital, PNB has achieved significant
growth in business which at the end of March 2009 amounted to Rs 3,64,463
crore. Today, with assets of more than Rs 2,46,900 crore, PNB is ranked as the
3rd largest bank in the country (after SBI and ICICI Bank) and has the 2nd largest
network of branches (4668 including 238 extension counters and 3 overseas
offices).During the FY 2008-09, with 39% share of low cost deposits, the bank
achieved a net profit of Rs 3,091 crore, maintaining its number ONE position
amongst nationalized banks. Bank has a strong capital base with capital adequacy
ratio as per Basel II at 14.03% with Tier I and Tier II capital ratio at 8.98% and
5.05% respectively as on March’09. As on March’09, the Bank has the Gross and
Net NPA ratio of only 1.77% and 0.17% respectively. During the FY 2008-09, its’
ratio of priority sector credit to adjusted net bank credit at 41.53% & agriculture
credit to adjusted net bank credit at 19.72% was also higher than the respective
national goals of 40% & 18%.

69
PNB has always looked at technology as a key facilitator to provide better
customer service and ensured that its ‘IT strategy’ follows the ‘Business strategy’
so as to arrive at “Best Fit”. The bank has made rapid strides in this direction.
Alongwith the achievement of 100% branch computerization, one of the major
achievements of the Bank is covering all the branches of the Bank under Core
Banking Solution (CBS), thus covering 100% of it’s business and providing
‘Anytime Anywhere’ banking facility to all customers including customers of
more than 2000 rural branches. The bank has also been offering Internet banking
services to the customers of CBS branches like booking of tickets, payment of
bills of utilities, purchase of airline tickets etc.Towards developing a cost effective
alternative channels of delivery, the bank with more than 2150 ATMs has the
largest ATM network amongst Nationalised Banks.

With the help of advanced technology, the Bank has been a frontrunner in the
industry so far as the initiatives for Financial Inclusion is concerned. With it’s
policy of inclusive growth in the Indo-Gangetic belt, the Bank’s mission is
“Banking for Unbanked”. The Bank has launched a drive for biometric smart card
based technology enabled Financial Inclusion with the help of Business
Correspondents/Business Facilitators (BC/BF) so as to reach out to the last mile
customer. The BC/BF will address the outreach issue while technology will
provide cost effective and transparent services. The Bank has started several
innovative initiatives for marginal groups like rickshaw pullers, vegetable
vendors, diary farmers, construction workers, etc. The Bank has already achieved
100% financial inclusion in 21,408 villages.

Backed by strong domestic performance, the bank is planning to realize its global
aspirations. In order to increase its international presence, the Bank continues its
selective foray in international markets with presence in Hongkong, Dubai,
Kazakhstan, UK, Shanghai, Singapore, Kabul and Norway. A second branch in

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Hongkong at Kowloon was opened in the first week of April’09. Bank is also in
the process of establishing its presence in China, Bhutan, DIFC Dubai, Canada
and Singapore. The bank also has a joint venture with Everest Bank Ltd. (EBL),
Nepal. Under the long term vision, Bank proposes to start its operation in Fiji
Island, Australia and Indonesia. Bank continues with its goal to become a
household brand with global expertise.

Amongst Top 1000 Banks in the World, ‘The Banker’ listed PNB at 250th place.
Further, PNB is at the 1166th position among 48 Indian firms making it to a list of
the world’s biggest companies compiled by the US magazine ‘Forbes’.

New Delhi, Jan 5: The Delhi-based Punjab National Bank (PNB) has received the
necessary approvals for patenting its rating model -- PNB Trac -- for its entire
category of lending. The loans with exposure of above Rs 20 lakh have been rated
individually, while loans with exposure under Rs 20 lakh have been rated
segment-wise on portfolio basis as per the terms of Basel II accord. This means
that the bank would be able to do credit ratings on its own for its lendings.

In terms of rating, PNB already has data for default rates for the last five years.
"The results of the exercise are extremely satisfactory," BM Mittal, chief general
manager, PNB, said, when contacted.

The default rates and migration matrix are comparable to that of leading credit
international rating agencies such as Standard & Poor's, Moody's, Fitch and with
international benchmarks. The default rates are also within the limits given in
Basel-II. Mittal added that the bank is fully equipped to implement the stringent
norms. "Though the deadline for the Basel II norms implementation has been
extended by Reserve Bank of India, PNB is ready to come up with the parallel
run," he added.

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Financial Performance:

Punjab National Bank continues to maintain its frontline position in the Indian banking
industry. In particular, the bank has retained its NUMBER ONE position among the
nationalized banks in terms of number of branches, Deposit, Advances, total Business,
operating and net profit in the year 2008-09. The impressive operational and financial
performance has been brought about by Bank’s focus on customer based business with
thrust on SME, Agriculture, more inclusive approach to banking; better asset liability
management; improved margin management, thrust on recovery and increased efficiency
in core operations of the Bank.
The performance highlights of the bank in terms of business and profit are shown below:
*Respective figure for the corresponding financial year

Parameters Mar'07 Mar'08 Mar'09 CAGR

Operating Profit* 3617 4006 5744 26.02
Net Profit* 1540 2049 3091 41.67
Deposit 139860 166457 209760 22.47
Advance 96597 119502 154703 26.55
Total Business 236456 285959 364463 24.15
(Rs.Crores)

ORGANIZATIONAL STRUCTURE OF

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 PUNJAB NATIONAL BANK

Head Office

Circle Offices
(58)

Branches (4267)

5.2 CORPORATE BANKING AT PNB

PNB has introduced a new scheme for property owners having their property situated in
Metro/Urban/ Semi Urban/rural centres and who have let out such properties.

73
Eligibility

Property Owners having their properties situated in metro, urban, semi-urban and rural
areas who have leased out such properties to the following:

(i) Public Sector Undertakings / Govt. / Semi / State Govt. & reputed
corporates, Banks, Financial Institutions, Insurance Companies and
Multinational Companies.

(ii) Reputed private schools/colleges (approved by/affiliated to State

Board/University/ AICTE/ any other govt. body).

(iii) Reputed private hospitals/ nursing homes.

Nature & Extent of loan

Remaining period of the lease Quantum of Loan

(Maximum upto following %age of the

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 future lease rentals receivable for
unexpired period of lease)

Upto 3 years 80
Beyond 3 years & upto 5 years 70
Beyond 5 years & Upto 7 years 65
Beyond 7 years & Upto 10 years 55

*Branches while financing under the scheme should ensure that the TDS, wherever
applicable have been taken into account.

Security

Assignment of lease rentals.

Equitable mortgage of the leased property or any other immovable property:-

• In case of loans having repayment period upto 5 years, the amount of loan should
not exceed the value of the property mortgaged.

• In case of loans having repayment period beyond 5 years, the amount of loan
should not exceed 75% of the value of the property mortgaged.

In case of Company - Personal Guarantee of promoter directors.

 Rate of interest

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  Repayment
Maximum 120 monthly installments or remaining period of lease whichever is
less.

 Processing Fee
0.70% of the loan amount + Service Tax & Education Cess

 Documentation Charges
Rs.270/- upto Rs.2 Lac + Service Tax & Education Cess
Rs.450/- over Rs.2 Lac + Service Tax & Education Cess

 Exim Finance

Services offered to Exporters

 Pre-shipment finance in foreign currency and Indian rupees

 Post-shipment finance in foreign currency and Indian rupees

 Handling export bills on collection basis

 Outward remittances for purposes as permitted under Exchange Control

guidelines

 Inward remittances including advance payments

 Quoting of competitive rates for transactions

 Maintenance of Exchange Earners Foreign Currency (EEFC) accounts

76
  Assistance in obtaining credit reports on overseas parties

 Forfeiting for medium term export receivables

Services offered to Importers

 Establishment of Import Letters of Credit covering import into India and handling
of bills under Letter of Credit

 Handling of import bills on collection basis

 Remittance of advance payment against imports

 Offering utilisation of PCFC ( pre-shipment credit in foreign currency) for

imports

 Credit reports on overseas suppliers

Exchange Earners Foreign Currency (EEFC) Deposits Scheme

The Exchange Earners Foreign Currency (EEFC) Deposits Scheme was started by RBI in
the year 1992 with the introduction of Liberalised Exchange Rate Management System.
Under this scheme, the recipient of inward remittances, exporters and other eligible
bodies are allowed to keep a portion of their inward remittances / export proceeds in
foreign currency with the banks in India which can later be utilised for permissible
purposes.

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PNB sets up connectivity with the Customs Deptt. for the benefit of exporters/importers:

To provide efficient service to our importer/exporter clients, PNB has set up connectivity
with the Customs Department to facilitate payment of custom duty and receipt of duty
draw back by the importer/exporter clients through the electronic media. Under this
system of Electronic Data Interchange (EDI), Custom Authorities process the shipping
bills and also effect on line payment of duty draw back for exporters. Further, they
undertake processing of Bill of Entry and deposit of custom duty for imports. This is a
pilot project in the country successfully implemented at Indira Gandhi International
Airport, Custom House branch of PNB. This has now been replicated at PNB's extension
counters at Inland Container Depot, Tughlakabad, Delhi and Patpar Ganj, Delhi.

LOANS TO MANUFACTURING INDUSTRIES

To set up SSI units, for purchase of fixed assets and meeting working
capital needs.

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PURPOSE
• For acquisition of fixed assets (plant, machinery, land, building,

tools, etc.).
• For working capital requirements within the ceiling limits of Rs 3
lakh / Rs 5 lakh as the case may be.

ELIGIBILITY FOR FINANCING SSI

Technically qualified entrepreneurs and / or those having adequate technical
practical experience in a particular field of technology.

MARGIN
For Term Loan
(i) Upto Rs 2 lakh Nil
(ii) Above Rs 2 lakh Upto Rs 3 lakh 10%
(iii) Above Rs 3 lakh Upto Rs 4 lakh 15%
(iv) Above Rs 4 lakh Upto Rs 5 lakh 20%

AMOUNT OF LOAN
Maximum Rs 3 lakh in case of individuals and Rs 5 lakh in case of
partnership firms or joint stock companies. (In case of ancillary unit or
industry with joint financing of SF / Bank higher assistance of Rs 5 lakh for
individual and Rs 10 lakh for groups).

REPAYMENT
5 to 7 years for term loan including moratorium period.

COLLATERAL SECURITY
No collateral security for loans upto Rs 5 lakh. For loans in excess of Rs 5
lakh and upto Rs 25 lakh no collateral security required, if the unit is having
good track record & financial position. In other cases collateral security or
third party guarantee is asked only in cases where primary security is
inadequate or for other valid reasons and not as a matter of routine.

LOCATION OF PROJECT
Preferably the unit should be set up in an industrial estate where there is
provision for suitable accommodation with the requisite facilities such as
water, power, transport and communication. Project set up in industrial
areas, zones or sites specifically declared as undeveloped by the State

79
 Government, concerned agencies / departments will be considered.

The required accommodation should, as far as possible, be acquired on

rental or hire-purchase basis. This will ensure that the investment in fixed
assets is made for purchase of the required machinery and equipment,
thereby enabling the entrepreneurs to make the best use of our financial
assistance.

CHAPTER: 6

AN OVERVIEW OF ICICI BANK LTD

6.1 ICICI PROFILE

ICICI Bank is India's second-largest bank with total assets of about Rs. 1 trillion and a
network of about 540 branches and offices and over 1,000 ATMs. ICICI Bank offers a
wide range of banking products and financial services to corporate and retail customers
through a variety of delivery channels and through its specialized subsidiaries and
affiliates in the areas of investment banking, life and non-Banking , venture capital, asset
management and information technology. ICICI Bank's equity shares are listed in India
on stock exchanges at Chennai, Muzaffarnagar, Kolkata and Vadodara, the Stock
Exchange, Mumbai and the National Stock Exchange of India Limited and its American
Depositary Receipts (ADRs) are listed on the New York Stock Exchange (NYSE).

80
ICICI Bank was originally promoted in 1994 by ICICI Limited, an Indian financial
institution, and was its wholly owned subsidiary. ICICI's shareholding in ICICI Bank was
reduced to 46% through a public offering of shares in India in fiscal 1998, an equity
offering in the form of ADRs listed on the NYSE in fiscal 2000, ICICI Bank's acquisition
of Bank of Madura Limited in an all-stock amalgamation in fiscal 2001, and secondary
market sales by ICICI to institutional investors in fiscal 2001 and fiscal 2002. ICICI was
formed in 1955 at the initiative of the World Bank, the Government of India and
representatives of Indian industry. The principal objective was to create a development
financial institution for providing medium-term and long-term project financing to Indian
businesses. In the 1990s, ICICI transformed its business from a development financial
institution offering only project finance to a diversified financial services group offering a
wide variety of products and services, both directly and through a number of subsidiaries
and affiliates like ICICI Bank. In 1999, ICICI become the first Indian company and the
first bank or financial institution from non-Japan Asia to be listed on the NYSE.

After consideration of various corporate structuring alternatives in the context of the

emerging competitive scenario in the Indian banking industry, and the move towards
universal banking, the managements of ICICI and ICICI Bank formed the view that the
merger of ICICI with ICICI Bank would be the optimal strategic alternative for both
entities, and would create the optimal legal structure for the ICICI group's universal
banking strategy. The merger would enhance value for ICICI shareholders through the
merged entity's access to low-cost deposits, greater opportunities for earning fee-based
income and the ability to participate in the payments system and provide transaction-
banking services. The merger would enhance value for ICICI Bank shareholders through
a large capital base and scale of operations, seamless access to ICICI's strong corporate
relationships built up over five decades, entry into new business segments, higher market
share in various business segments, particularly fee-based services, and access to the vast
talent pool of ICICI and its subsidiaries. In October 2001, the Boards of Directors of
ICICI and ICICI Bank approved the merger of ICICI and two of its wholly owned retail

81
finances subsidiaries, ICICI Personal Financial Services Limited and ICICI Capital
Services Limited, with ICICI Bank. The merger was approved by shareholders of ICICI
and ICICI Bank in January 2002, by the High Court of Gujarat at Ahmedabad in March
2002, and by the High Court of Judicature at Mumbai and the Reserve Bank of India in
April 2002. Consequent to the merger, the ICICI group's financing and banking
operations, both wholesale and retail, have been integrated in a single entity.

6.2 CORPORATE BANKING AT ICICI BANK

Escrow Account
At ICICI Bank, we extend the trust you have in us by providing you with escrow services
for safe custody of assets or for revenue streams. These services are customised to meet
your needs. Some of the escrow services offered are in relation to the following:
• Project financing
• Debt repayments
• Sale purchase transactions
• Mergers and acquisitions

Features
• Specialised and dedicated services
• Risk reduction in new relationships
• Security towards contingencies

82
 • Mandatory in certain transactions

Benefits
• Simplified documentation
• Customised transaction structure
• Online tracking of your escrow account

Fixed Deposit
Corporates can invest their surplus funds in fixed deposits for a wide range of tenures.
The minimum deposit amount is Rs.10,000. Other features of the account are:

Funding through a debit to the operative account/cheque for clearing

While interest is compounded quarterly, payment of interest is quarterly, monthly or on
maturity
Interest payouts can be through credit to your account or through banker's cheque

Benefits
• Wide range of tenures
• Choice of investment plans
• Partial withdrawal permitted
• Availability of auto-renewal facility

Structured Finance
In the Structured Finance space, our approach is totally client-centric. We believe that
every problem is unique and therefore we endeavour to develop and offer the widest
range of solutions tailored to address specific requirements of each client. Services
offered are:

• Structured finance for Corporate clients

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The Structured Finance Group aims to enable its corporate clients access funds through
cost efficient structures. The group's strength lies in its experience and expertise in
providing tailor-made solutions after understanding the client's requirements.

To deliver these customized structures, it leverages on ICICI Bank's global presence,

industry expertise, large underwriting capability and comprehensive product suite. Strong
capabilities in end-to-end solutions and timely execution have enabled ICICI Bank to
become one of the leading arrangers and underwriters of structured finance transactions.

The Structured Finance Group provides an array of services to its clients including:
• Acquisition finance
• Asset-backed finance
• Receivables purchase
• Subordinated debt
• Convertibles / Hybrid instruments
• Non-recourse structures

Investment opportunities in securitized debt instruments

We offer a plethora of investment opportunities in securitised debt instruments (SDIs)

involving both Pass-Through and Pay-Through structures which:
• offer a premium in yield to corporate debt instruments having similar risk profiles
• are customizable to meet both quantum and tenor requirements of the investors
• have well-diversified risk profiles
• could be customized (using different levels of credit protection) to meet the
specific risk appetites of the investors
• could be offered as collateral by the investors at a later date for additional
leveraging

84
For clients desirous of growth through the inorganic route, we can structure solutions
around sale of specific asset category(ies) as per the clients' needs.

Further, we could also structure solutions for clients desirous of getting involved in
market making or investing at specific points in time through structuring of appropriate
Put Options.

Securitization & structured finance advisory solutions

We help structure selling or buying of asset portfolios (in whole or in part) for clients
through securitisation or otherwise, thereby effectively limiting their exposures to future
risks arising out of such asset pools. We can even offer to buy such identified asset pools
from clients if the commercials suit the Bank's risk-return appetite.

Being involved in more than 100 securitisation transactions till date, we can provide
advice to clients for structuring securitisation transaction efficiently. We have the
distinction of structuring and placing some of the largest securitisation transactions in the
Indian market including the solitary transaction which exceeded USD 1.00 billion in
size.

Traditionally Corporate borrowing has been on the basis of strength or weakness of

balance sheet, with the credit quality of the borrower being the single most important
factor. But of late the borrowings are being closely linked to the value of the asset or the
revenue earning capability of the asset. This could be achieved by means of appropriate
structuring wherein customized borrowing propositions could be evolved for different
business.

85
A few examples of such structured financing could entail evolving solutions around
dealer financing, vendor financing, transporter financing, brand financing, Export &
Packing Credit (EPC) contract financing, investment monetisation, etc.

Leveraging on our rich experience and wide reach in the Indian debt markets, we can
provide arranging services for clients interested in securitising their assets.

Being a SEBI registered Category - I merchant banker, we can provide underwriting

services for securitisation transactions originated by clients.

We can also provide protection to the client from interest rate / currency risks for
their structured finance exposures through interest rate swaps, currency swaps and
associated derivatives.

We can also provide protection to the client from credit risks for their structured
finance exposures by tailoring suitable credit protection offerings.

We can also participate in market making or investing at specific points in time through
structuring of appropriate Put Options.

Dealer financing
Dealers of large corporates can be provided finance which can be either with a limited
recourse (on a first loss basis) to the corporate or based on the creditworthiness of the
dealer and its relationship with the manufacturer. Bill discounting / Web-based financing
with/without recourse, Cash credit / Demand loan facilities, Financing for auto dealers,
could be some of the examples in this space.

Vendor financing

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Vendor financing can be structured as a direct line of credit to the vendors specifically to
be used for supplies to the company or as a revolving line for discounting bills raised by
the vendors on the company. The former can be integrated into the Internet banking
model of ICICI Bank and a web-based vendor financing structure can be created. The
web-based structure would offer the company the convenience of operating the credit line
of the vendors for making payments through the net immediately after accepting goods.
Vendor financing programs can be set up for specific vendors recommended by the
company. Through the widespread branch network of ICICI Bank, the program can
include vendors at multiple locations.

Transporter financing
This is a product designed to finance the truck operators who are dedicated transport
service providers to a company. The truck operators are typically small players and hence
have limited sources for raising funds. It is likely that the vehicles used by them have
been financed at a high cost which they would indirectly be passed on to the company in
the form of increased freight rates. A financing facility could be set up for the truck
operators with some support from the corporates they serve, which could be used for
refinancing their existing vehicles or could be used for expansion of their fleet in line
with the company's growth requirements.

Brand financing
Borrowings could be structured against security of specific brand(s) or a sale and lease
back of the brand(s). Borrowers could even be financed to fund purchase of a brand. In
the first option, the brand would be mortgaged in the name of the lender and only in the
event of default of the loan would the brand be transferred to the lender. The lender could
alternatively purchase the brand from the borrowing company and lease / license it out to
the same entity. After expiry of the lease / license period the brand could either revert to
the company or be sold to someone else. In the second option, the loan could be given to
the company exclusively for purchasing the brand/s which would then be mortgaged in
the name of the lender.

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Investment monetization
This is a product designed to cater to the requirement of the business groups to streamline
the cross-holdings within their own group companies. A Trust could be set up to acquire
the intra-group cross holdings from the various companies in the group at current market
prices. To fund this, the Trust would issue Pass-through Certificates (PTCs) to the lender.
The take-out could be through a put option provided by the identified holding company
of the group wherein the lender could sell the PTCs to the put option provider at a pre-
determined price on a fixed date. The deal could be secured through a pledge of shares.

Project Finance Group

ICICI Bank Project Finance Group (PFG) has developed comprehensive domain
expertise and knowledge in the infrastructure & manufacturing sector, having ensured
timely financial closure of several big ticket projects. PFG has unmatched capabilities of
discovering, creating and structuring project finance transactions.

Group structure
PFG is the “One Stop Shop” fulfilling the funding requirements of Greenfield &
Brownfield projects in infrastructure & manufacturing sector. It comprises of three sub-
groups as follows:

• Infrastructure Finance Group (IFG): IFG caters to the funding requirement in the
infrastructure sector like Power, Telecom, Roads, Ports, Airports, Railways and
Urban infrastructure.
• Manufacturing Projects group (MPG): MPG caters to the funding requirement in
the manufacturing sector like Oil & Gas, Steel, Aluminium, Cement, Auto, and
Mining
• Infrastructure Equity Group (IEG): IEG is engaged in providing equity support to
projects in various established as well as upcoming sectors.

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The project finance team of ICICI Bank has developed substantial insight in the dynamics
and trends in the infrastructure sector, having assisted the Government of India in
formulating policies relating to various segments of the infrastructure sector. The unique
insight and understanding thus derived from the exercise has not only enabled ICICI
Bank to provide optimum solutions to its clients, but has also provided ICICI Bank with
an appropriate decision support for strategic measures, going forward.

Service offerings
PFG provide a wide range of services including the following:
• Rupee term loans
• Foreign currency term loans
• External Commercial Borrowings
• Subordinated debt and mezzanine financing
• Export Credit Agency backed funding
• Non fund based facilities like Letter of Credit, Bank Guarantee, Supplier’s Credit,
Buyer’s Credit etc.
• Equity funding

Technology Finance
The Technology Finance Group (TFG) of ICICI Bank implements various programmes
for international agencies such as World Bank and USAID. The programmes currently
running are designed to help the industry and institutions undertake collaborative R&D
and technology development projects. These programmes focus on the following sectors:

• Biotechnology/ Healthcare
• Electrical
• Electronics & communication
• Energy

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 • Environment
• Materials
• Manufacturing/ Control technologies
• Financial/ Security services

The core group handling these programmes assists projects, which introduce new
concepts, products, and processes that will have a positive impact on the industry and
help in improving competitiveness and operational efficiencies.
The programmes being implemented are:

Technology Development and Commercialization (TDC) programme

The objective of this programme is to facilitate technology development,

commercialisation and strengthen Indo-US technology collaboration. Till date, the
Technology Finance Group has assisted 29 projects. Private sector companies which
would like to commercialize innovative concepts, products and processes in the areas of
energy, environment & healthcare are eligible for concessional Rupee Term Loans up to
a maximum of 50% of the project cost. The repayment is structured as per project and
programme requirements.

Guidelines for Financial Assistance

The project is evaluated in terms of innovative content, likely impact on industry and
Indo-US linkages. The company is requested to submit a project profile covering the
following information:
• Brief particulars of the company
• Project title

90
 • Description of existing facilities
• Current development activities
• Proposed commercialisation project
• Innovative content of the project in terms of comparison with current methods and
aim of project in quantitative terms
• Major steps/ activities involved in proposed EE/ESCO/DSM project
• Brief on product / processes to be developed
• Brief particulars of the work already carried out
• Details on Indo-US technology collaboration (if any)
• Cost of project with breakup and proposed means of financing
• Schedule of implementation
• Business plan for commercialisation
• Details on market size, demand/supply drivers, etc.

The programme is currently under renewal

The objective of this programme is to stimulate technology development through private
investment in R&D and strengthen industry & technology institution (TI) collaboration.
The companies eligible for availing these facilities should be from the private sector
undertaking R&D in collaboration with TI.

Following are the eligible sectors

• Biotechnology/ Healthcare
• Electrical
• Electronics & communication
• Energy
• Environment
• Materials
• Manufacturing/ Control technologies
• Financial/ Security services
The facilities include concessional Rupee Term Loans of up to 50% of the eligible project
cost. The repayment is structured as per project and programme requirements. Till date
the SPREAD has assisted 120 projects.

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Guidelines for Financial Assistance: To avail the facilities, the companies are requested
to submit a project profile covering the following information:
• Project title
• Brief particulars of the company
• Description of existing facilities
• Current R&D activities
• Proposed R&D project
• Collaborating technology institution
• Brief on product / processes to be developed
• Innovative content of the project in terms of comparison with current practice and
aim of project in quantitative terms
• Major steps / activities involved in proposed R&D
• Break-up of activities to be taken up by the company and by the Technology
Institution
• Brief particulars of the work already carried out
• Cost of project with breakup and proposed means of financing
• Schedule of implementation
• Business plan for commercialisation
• Details on market size, demand/supply drivers, etc.

The project is evaluated in terms of

• Innovative content & likely impact

• Contribution from the technology institution
• Commercial potential.

DOCUMENTS

Please return the form along with the following documents

1. Firm/Company profile
2. List of 5 major suppliers and customers including contact person and contact no

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3. Constitution documents
4. Audited financial statements of last 3 years along with IT return and tax audit report
and schedules and notes to accounts
5. Bank statement of the last 6 months
6. IT PAN card of concern (entity) and all Promoters / Directors / Partners
7. Provisional Balance Sheet and P/L a/c of ...............-................... as certified by
proprietor / partner / director
Projected Balance Sheet and P/L a/c of ....,...........-................... as certified by proprietor /
partner / director
8. Proprietor's / Partner's/Directors personal ITR and Balance Sheet of last 1 year - CA
certified/signed by individual
9. Current performance ( P/L & Balance Sheet ) from April ........................,.... to till date
10. VAT assessment order or sales tax registration certificate or shop & establishment or
VAT return
For Limited Co.
11. Latest list of Directors
12. Form no: 32 and shareholding pattern or annual return
For Partnership
13. Registration certificate in case of partnership/application for registration
Property papers (for loan against collaterals)
14. Title deed
15. Completion certificate & occupancy certificate
16. Tax receipts & sanction plan
Additional documents for loan against credit card securitisation
17. CA certified last 12 months credit card sales of Master & Visa only (excluding
Dinners & Amex)
If applicable
18. Loan no of ICICI Bank loans (if any)
19. Latest 1 year audited financials of sister concern (If any)
20. Agreement with principal (if any) - Applicable to distributors/sole selling
agents/franchisee etc.

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21. Existing Banks sanctions letter (if applicable).
22. Any other document as required and deemed fit.

CHAPTER: 7

AN OVERVIEW OF BLISS PHARMA LTD

7.1 PHARMA INDUSTRY

The Indian pharmaceutical industry is a success story providing employment for millions
and ensuring that essential drugs at affordable prices are available to the vast
population of this sub-continent.”
Richard Gerster

The Indian Pharmaceutical Industry today is in the front rank of India’s science-based
industries with wide ranging capabilities in the complex field of drug manufacture and
technology. A highly organized sector, the Indian Pharma Industry is estimated to be
worth $ 4.5 billion, growing at about 8 to 9 percent annually. It ranks very high in the
third world, in terms of technology, quality and range of medicines manufactured. From
simple headache pills to sophisticated antibiotics and complex cardiac compounds,
almost every type of medicine is now made indigenously.

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Playing a key role in promoting and sustaining development in the vital field of
medicines, Indian Pharma Industry boasts of quality producers and many units
approved by regulatory authorities in USA and UK. International companies associated
with this sector have stimulated, assisted and spearheaded this dynamic development in
the past 53 years and helped to put India on the pharmaceutical map of the world.

The Indian Pharmaceutical sector is highly fragmented with more than 20,000 registered
units. It has expanded drastically in the last two decades. The leading 250 pharmaceutical
companies control 70% of the market with market leader holding nearly 7% of the market
share. It is an extremely fragmented market with severe price competition.
The pharmaceutical industry in India meets around 70% of the country's demand for bulk
drugs, drug intermediates, pharmaceutical formulations, chemicals, tablets, capsules,
orals and injectibles. There are about 250 large units and about 8000 Small Scale Units,
which form the core of the pharmaceutical industry in India (including 5 Central Public
Sector Units). These units produce the complete range of pharmaceutical formulations,
i.e., medicines ready for consumption by patients and about 350 bulk drugs, i.e.,
chemicals having therapeutic value and used for production of pharmaceutical
formulations.

Following the de-licensing of the pharmaceutical industry, industrial licensing for most of
the drugs and pharmaceutical products has been done away with. Manufacturers are free
to produce any drug duly approved by the Drug Control Authority. Technologically
strong and totally self-reliant, the pharmaceutical industry in India has low costs of
production, low R&D costs, innovative scientific manpower, strength of national
laboratories and an increasing balance of trade. The Pharmaceutical Industry, with its rich
scientific talents and research capabilities, supported by Intellectual Property Protection
regime is well set to take on the international market.

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7.2 CASE FACTS

7.2.1. COMPANY PROFILE

Bliss Gvs Pharma Limited was incorporated on 11th December, 1984 as Public Limited
Company. It is listed on Bombay and Delhi Stock Exchange. The Manufacturing Plant is
located at Palghar (approximately 90 kms from Bombay) in an industrial area which is
well developed with all infra-structural facilities. The plant is 1.5 kms. from Palghar
Railway Station on the Western Railway. The company's most unique product is 'Today'
Vaginal Contraceptive, a safe female contraceptive aimed at furthering planned
parenthood and is also an established method for preventing conception

Bliss Gvs Pharma Limited was incorporated on 11th December, 1984 as Public Limited
Company. It is listed on Bombay and Delhi Stock Exchange. The Manufacturing Plant is
located at Palghar (approximately 90 kms from Bombay) in an industrial area which is
well developed with all infra-structural facilities. The plant is 1.5 kms. from Palghar
Railway Station on the Western Railway. The company's most unique product is 'Today'

96
Vaginal Contraceptive, a safe female contraceptive aimed at furthering planned
parenthood and is also an established method for preventing conception.
Bliss Gvs Pharma Limited has the most modern plant to manufacture Female
Contraceptives, Soft Pessaries and Suppositories. Its most popular product is 'Today'
Vaginal Contraceptive pessaries containing Nonoxynol 9. Bliss also manufactures to U.S.
specification vaginal pessaries of Clotrimazole & Povidone Iodine in addition to Anal
Suppositories for treatment of Piles.
BLISS complies with all norms laid down by Food & Drug Administration for
manufacture of its products and maintains high International GMP standards.
BLISS also manufactures wide range of Pessary Formulations, Suppository Formulations,
Calcium Preparation, Protein Powders, Iron Preparation, Antibiotics, Analgesic &
Antipyretics, Respiratory, Anti-inflammatory, Dermatological Preparations, Anti-
Diarrhoeal products.
7.2.2. LOCATION

It is a sophisticated automatic plant situated at Palghar (approx. 90 kms away from

Mumbai City) in an Industrial area which is well-developed with all Infra-structural
facilities. This site is around 1.5 kms away from Palghar Railway Station on the Western
Railway and is well-connected by Road and Rail to most parts of the country, including
Mumbai.
The plant aims to be as the most modern and one of its kinds in Indian sub-continent, to
manufacture suppositories. Complete overhaul and annual maintenance has kept the plant
in excellent condition and fully operational with minimum down time. Spares and
consumables are maintained at proper levels to prevent unnecessary delays and the
company has made efforts to employ a qualified Maintenance Engineer since production
should not be hampered in any way.

7.2.3. AWARDS AND ACCOLADES

97
Bliss GVS Pharma receives award from Pharmexil
In recognition of commendable performance in exports of pharmaceuticals Bliss GVS
Pharma has announced that the company has received an Award from Pharmexcil,
Outstanding Export Performance Award in the recognition of commendable performance
in the exports of pharmaceuticals in the category of Small Scale Industries for the year
2008-2009.

7.2.4. PRODUCTS

Antimalarial
Alaxin Gvither P-Alaxin
Gsunate Lonart

Anal Suppositories
Rectol Poroxicam Parafen
Vomitin Slipizem Anomex
Prochloperazine Conlax Xtacy
Meloxicam Rectcin Glycerin

Vaginal Pessaries
Imazole Gvgyl Terconazole
Vagid Gvgyl - N Clindemycin
Povid / Gevid Blissfast / Gynanfort Klovinal
Micozole Blissnox / Wellgynax
Ecozole Vagikit

98
General
Lofnac Comit Zinvite
Funbact-A Aceclofenac Gudapet
Gvfluc Clamoxin Gbactin
40

7.3 FINANCIAL DATA

BALANCE SHEET AS AT 31ST MARCH 2009
(Rs. In crores)
Balance sheet
Mar ' 09 Mar ' 08
Sources of funds

Owner's fund
Equity share capital 10.31 6.45

Share application money - -

Preference share capital - -

Reserves & surplus 87.2 55.43

Loan funds

Secured loans 2.41 12.23

Unsecured loans - -

Total 99.93 74.1

Uses of funds

Fixed assets
Gross block 34.53 21.3
Less : revaluation reserve - -

Less : accumulated depreciation 10.17 6.6

99
Net block 24.36 14.7
Capital work-in-progress 0.13 0.04

Investments - -
Net current assets

Current assets, loans & advances 102.56 92.75

Less : current liabilities & provisions 27.12 33.39

Total net current assets 75.44 59.37

Miscellaneous expenses not written - -

Total 99.93 74.1

100
Profit loss account
Mar ' 09 Mar ' 08
Income

Operating income 132.96 102.4

Expenses

Material consumed 69.84 44.59

Manufacturing expenses 2.43 2.09

Personnel expenses 2.64 2

Selling expenses 6.71 4.58

Adminstrative expenses 12.03 7.35

Expenses capitalised - -

Cost of sales 93.65 60.62

Operating profit 39.31 41.77

Other recurring income 0.19 0.09

Adjusted PBDIT 39.49 41.86

Financial expenses 2.26 1.38

Depreciation 3.59 2.93

Other write offs - -
Adjusted PBT 33.64 37.55
Tax charges 2.77 1.27
Adjusted PAT 30.87 36.28
Non recurring items 6.71 -1.16

Other non cash adjustments -0.03 0.98

Reported net profit 37.55 36.09

Earnigs before appropriation 73.14 39.01

Equity dividend 1.55 0.65

Preference dividend - -

Dividend tax 0.26 0.11

Retained earnings 71.33 38.25

CHAPTER: 8

101
Case study analysis
8.1. ICICI RATING MODEL

ICICI Bank’s corporate banking strategy is based on providing customized financial

solutions to clients, tailored to meet their specific requirements. The corporate banking
strategy focuses on careful management of credit risk and adequate return on risk capital
through risk-based pricing and proactive portfolio management, rapid growth in fee-
based services and extensive use of technology to deliver high levels of customer
satisfaction in a cost effective manner.

Financial performance

Manufacturing Max. Score Co.Score

Parameter Range Score Weight

Turnover/total >= 750 mn 5 4% 5 20 20
income 550 to 750 mn 4
400 to 550 mn 3
250 to 400 mn 2
100 to 250 mn 1
<100 mn 0
Turnover Growth >=15% 5 2% 5 10 10
12% to 15% 4
9% to 12% 3
6% to 9% 2
3% to 6% 1
<3% 0
Operating margin >=18% 5 5% 5 25 25
(PBDIT/TOI%) 16% to 18% 4
13% to 16% 3
10% to 13% 2
6% to 10% 1
<6% 0
Interest coverage >=5 times 5 2% 5 10 10
ratio 4 to 5 times 4

102
 3 to 4 times 3
2 to 3 times 2
1.5 to 2 times 1
<1.5 times 0
Total debt to net <=4 5 4% 5 20 20
cash accruals 4 to 6 4
6 to 7 3
7 to 8 2
8 to 10 1
>10 0
Debtors collection <=60 days 5 3% 2 15 6
period 60 to 90 4
90 to 120 3
120 to 150 2
150 to 180 1
>180 days 0
Networth >=200 mn 5 2% 5 10 10
150 to 200 mn 4
100 to 150 mn 3
50 to 100 mn 2
30 to 50 mn 1
<30 mn 0
TOL/TNW <=1 5 5% 1 25 5
1 to 1.25 4
1.25 to 1.5 3
1.5 to 1.75 2
1.75 to 2.5 1
>2.5 0
Current ratio >=1.75 times 5 4% 5 20 20
1.33 to 1.75 4
1.25 to 1.33 3
1.15 to 1.25 2
1 to 1.15 1
<1 0
Inventory to <=30 days 5 2% 0 10 0
turnover ratio 30 to 45 4
45 to 60 3
60 to 75 2
75 to 90 1
>90 days 0
No. of years More than 10 5 6% 3 30 18
Profitable years

103
 Minimum 10 4
years
Minimum 8 3
years
Minimum 5 2
years
Minimum 2 1
years
Less than 2 0
years
PAT (%) >=6% 5 2% 5 10 10
5% to 6% 4
4% to 5% 3
3% to 4% 2
2% to 3% 1
<2% 0
Total 41% 46 205 154

Business segment and market position

Parameter Range Score Weight Max. Co,'s

Score Score
Industry Positive 5 6%
(Classification given in Moderately 4
Annexure F) positive
Stable 3 3 (crisil 30 18
site)
Moderately 1
negative
Negative 0
Contracts in hand / >=40% of last 5 5% 3 25 15
confirmed orders/ year's turnover
30% to 40% of 4
assured off take
last year's
turnover

104
 20% to 30% of 3
last year's
turnover
10% to 20% of 2
last year's
turnover
0% to 10% of 1
last year's
turnover
No contracts / 0
confirmed
orders
Bargaining power High 5 5% 25 15
Moderate 3 3
Low 1
Nil 0
Product range Wide 5 4% 20 15
Niche 3 3
Limited 1
Single 0
No. of large customers 5 5 3% 3 15 9
contributing to >5% of
turnover) 4 4
3 3
2 2
1 1
0 0
Length of association >= 5 years 5 3% 5 15 15
with large customers 3 to 5 years 4
2 to 3 years 3
1 to 2 years 2
6 months to 1 1
year
< 6 months 0
% of turnover from 30% to 50% of 5 3%
large customers turnover
between 20% to 4 4 15 12
30% or 50% to
60%
between 15% to 3
20% or 60% to
70%

105
 between 10%to 2
15% or 70% to
80%
between 5%to 1
10% or 80% to
90%
<5% or >90% 0
Total 29% 24 145 99

106
 Promoters /management

Parameter Range 4Scor Weigh 5 Max

15 Cos.scor
15
e t score e
Business vintage (years) 0 – 10 3%

5 15 15
Personal networth of promoters 0 – 50 3%
(Rs. in mn)

Good 3
Constitution of the entity Public limited
(deposits/investments 5 3%
company
50.0 to 70.0 mn)
5 15 15
Private limited 4
company
Above average 2
Registered
(deposits/investments 3
partnership firm
20.0 to 50.0 mn)

Unregistered 2
partnership
Average 1
firm/HUF
(deposits/investments
Sole 1
10.0 to 20.0 mn)
proprietorship
concern
Trade reference/ Market Excellent 5 4% 20 12
Below average 0
feedback about promoters Very Good 4
(deposits/investments
Good 3 3
<10.0
Above mn)average 2

Promoter's payment record with other Average

Excellent 1
5 2% 5 10 10
Below average
Very Good 0
4
banks/FIs/NBFCs/creditors
Good 3
Promoter's financial flexibility Excellent 5 3%
Above average 2
(deposits/investm
ents >=100.0 mn)
Average 1
Below average 0

5 15 15
Total 18% 28 90 82

107
Collateral Security

Manufactur MAX
ing SCORE COs. SCORE
Parameter Range Score Weight
Collateral as % of >= 35% 5 6% 5 30 30
limits 30% to 4
35%
25% to 3
30%
20% to 2
25%
15% to 1
20%
<15% 0
Corporate AAA or AA+ 5 6% 4 30 24
Guarantee (Rating AA 4
of Guarantor) AA- 3.5
A+ 3
A 2.5
A- 2
BBB 1
Total 12% 9 60 54

OVERALL TOTAL 500 389

108
CREDIT RATING
Category Score Trading Manufactur
range and ing
services
A 85 and 80 100
above

B 65-85 60 80

C 55-65 40 50

COMPANY NAME SCORE CATEGORY EXPOSURE LIMIT

BLISS PHARMA 77.8 B 80 millions

109
 8.2. PNB CREDIT RATING MODEL

Bank has developed online comprehensive risk rating system that serves as a single point
indicator of diverse risk factors of counter-party and for taking credit decisions in a
consistent manner. The risk rating system is drawn up in a structured manner,
incorporating different factors such as borrower’s specific characteristics, industry
specific characteristics etc. Bank is also undertaking periodic validation exercise of its
rating models and also conducting migration and default rate analysis to test robustness of
its rating models.

Name of borrower : Bliss Pharma Ltd

Branch Office : Large Corporate Branch, Mumbai
Constitution

: Public Limited Company

S Ben
S Benc c cm
r mark o ark Benc Score
N Co's Bencmark Sco Valu r Val Bencma mark award
o. Parameters value Value re e e ue Score rk Value Score Value Score ed
1 Financials:
>2.
50
&
>4.0 upt
0 & o
>5.00 OR upto [2 4.0 1.00 &
I TOL:TNW 2.47 <0 [0] 5.00 ] 0 [4] upto 2.50 [6] <1.00 [8] 6.00
Ii Current Ratio 3.36 <1.00 [0] 1.00 [2 >1. [4] >1.50 & [6] >2.00 [8] 8.00
& ] 25 upto 2.00
upto &
1.25 upt
o

110
 1.5
0
8%
&
upt
4% & o
35.92 upto [2 12 12% &
Iii ROCE % <4% [0] 8% ] % [4] upto 16% [6] >16% [8] 8.00
>4.0 >3
0 & &
Inventory & Debtors upto [2 upt 2 & upto
Iv Holding (Months) 3.13 >5 [0] 5.00 ] o4 [4] 3 [6] <2.00 [8] 4.00
V Score under past financials 26.00

Subjective Assessment of Financials

85
%&
80% upt
& o
Reliability of Annual 80% & upto 90 90% &
vi Financial Statements below 85% % upto 95% >95%
(-) -
Vi Discounting Factor for (-) 20 30.00
i scre inder (vi) above. (-) 50% 30% % (-) 10% NIL %
Net score under
Vi Financial after
ii discounting (v-vii) 18.00
125
100 %&
Estimated cash profit of % & upt
current year to Net upto o
Ix
Repayment obligations 303.09 125 [2 175 [4
of current year % <100% [0] % ] % ] [0] [6] >250% [8] 8.00

NET SCORE OF
A FINANCIALS (viii+ix)

2 BUSINESS/INDUSTRY

111
 Positi
ve Pos
growt itive
h of gro
mini wth
mum of
5% mini
durin mu
g any m
one 5%
year for
out of any
past 2
3 yea
years rs,
and out
positi of Positive
ve past growth
growt 3 of
h of yea minimu
mini rs m 5% for
mum and consecut Positive
5% is exp ively 2 growth of
expe ecte years minimum
Growth of cted d to during 5% for last
less than to cont past 3rd 3 years
5% or conti inue year & continously
negative nue duri expecte and
growth durin ng d to expected to
during the g curr continue continue
last 3 years curre ent during during
consecutive nt [2 yea [4 current current
i Expected Sales Growth ly. [0] year. ] r. ] year. [6] year. 8.00
Positive growth of minimum 5% is expected to continue in the current year
High
depe
nden
ce on Eas
suppl y
iers/i avai Adequat
nstab labil e
ility ity availiblit
of of y at
Availability of Scarcity/low suppl [1 inpu [2 competiti Buyers'
Ii inputs availability [0] ies ] ts ] ve prices [3] market [4] 2.00

112
 Goo
d
Qua
lity/
Nor Standar
Quali ms d Quality
ty not mai & Post
Production/Prod Poor maint [1 ntai [2 Sales Market
Iii uct Strength Quality [0] ained ] ned ] Services [3] Leader [4] 2.00
Sati
sfac
tory
cust
om
Inade er
quate bas
custo e/
mer mar Good
Poor base/ keti Marketin
Customer mark ng g
base/ eting net Network/
Marketing marketing netw [1 wor [2 Growing Sellers'
Iv Strength network [0] ork ] k ] Market [3] market [4] 3.00
TOTAL SCORE
OF
BUSINESS/IND
B USTRY 15.00
3 MANAGEMENT:
% Achievement
of Sales vis-à-vis
i estimates 92.00%
Sales
75 & >80 & >90 &
Achievement 132.95
145(40% upto upto upto
Sales Target ) <75% [0] 80% 90% 95% >95% 3.00
Actual Profits
vis--vis
ii Estimated Profits 89.00%
Profit 75 & >80 & >90 &
Achievement 40.26 upto upto upto
Profit Target 45(20%) <75% [0] 80% 90% 95% >95% 2.00

113
 Propri
Propriet etorshi
Propri orship p >15
etorshi >10 years
p >5 years or
years but upto Partne
upto 15 years rship
10 or >2
years Partners Years
standi hip >5 and
ng or Years upto
Partne but upto 15 Partne
rship 10 years rship
upto 5 standing or >15
Years or Pvt Pvt.ltd. years
standi ltd. >5 or Pvt.
ng but Co.>2 years Ltd.
>2 years upto Co.
years upto 2 10 >10
or Pvt years years Years
ltd. standing or or
Co. or or any Public Public
Proprieto any other Ltd Ltd
rship other constitut Comp Comp
upto 5 constit ions any any >5
years utions such as upto 5 years
standing/ having Co-op. years in
Partners upto 2 Societie but>2 busine
hip upto years s etc. >2 years ss
Constitution/Esta 2 Years standi years standi operati
iii blishment standing ng standing ng on 4.00
Margin
Poor/willf ally Beyon
Integrity/Commit ul Accept Satifact Reliabl d
iv ment & Sincerity defaulter able ory e Doubt 3.00
v Track Record in Irregular Occasi No No No 3.00
Debt Repayment for over 3 onally irregular irregul irregul
and Statutory months/s Irregul ities arity arity
Dues tatutory ar due during during during
liabilities to past 1 past 3 past 3
overdue interes years/no years/ years
t/no statutory no &
statuto liabilities statuto capabl
ry overdue ry e of
liabiliti liabiliti repayi
es es ng on
overdu overdu deman

114
 d/no
statuto
ry
liabiliti
es
overdu
e e e
TOTAL SCORE
OF 15.0
C MANAGEMENT 0
4 CONDUCT OF ACCOUNT

Conduct of Un- [3 [6 Very

I Accounts satisfactory [0] Average ] Good ] Good [9] Excellent [12] 6.00
Delay in
submissio
n not Occasio
exceeding nally
Delay in 30 days of delayed
submission due date but Timely
beyond 30 but reliable submissi
days of due reliable data/ on/reliabl
Submission and date/ lack of data/rene renewal e
reliabilities of reliability of wal overdue data/rene Prompt
Feedback data/renew overdue >30 wal submission/rel
statements & al overdue >60 days days & overdue iable
Other beyond 90 & upto 90 upto 60 upto 30 data/renewal
ii Information days days days days not overdue 6.00
TOTAL SCORE
FOR CONDUCT 12.0
D OF ACCOUNT 0

TOTAL SCORE
(A+B+C+D)
E (E)
FOR TERM
5 LOAN:
Debt-Equity >1.50
Ratio of >3.00 >2.00 & & upto 1.00 &
i Company 0.02 or <0 [0] upto 3.00 [2] 2.00 [4] upto 1.50 [6] <1.00 [8] 8.00
DSCR/Repayme
ii nt Period:
a) In case of
existing
companies >1.75
already availing 1.25 & upto & upto 2.25 &
TL/DPG: OR N.A. <1.25 1.75 2.25 upto 2.50 >2.5 N.A.
b) In case of >6 >5 & upto 6 >4 & >3 & 3 years or 4
existing years years upto 5 upto 4 below

115
 companies
proposes to avail
fresh term
loan/DPG years years
12.0
F TOTAL FOR TL 0

GRAND
TOTAL SCORE
G (E+F) Out of total 120 80
Adjusted
Score Out of total 100 (G*100/120) 66.67

Score >80 >70 & upto >60 & upto >50 & upto >40 & upto >30 & upto 30 and
85 70 60 50 40 below

Grade AAA AA A BB B C D

CREDIT RISK RATING A

8.3. COMPARATIVE ANALYSIS

 ICICI model is divided into five parameters viz Promoters/ management, business
and market position, financial performance, transaction history and collateral and

116
 each parameter is divided in various sub parameters while PNB model is divided
in four parameters viz financials, business/industry, management, conduct of
account and each parameter is relatively divided in less number of sub parameters
compared to ICICI bank

 Collateral securities are not considered by PNB whereas these parameters are
included in ICICI model. PNB bank should consider collateral securities of a
company while evaluating and rating company as collateral securities are
important to judge company’s soundness.

 Transaction history of a company is considered by ICICI in detail as compared to

PNB model. ICICI bank considers various sub parameters under transaction
history like cheque bouncing, LC devolvement and utilization of fund based limits
that are lacking in PNB bank.

 ICICI bank focuses on company’s relationship with customer in detail as it is

important to measure stability of a company and demand of its products and
services in market whereas PNB does not consider company’s relations with
customer.

 Personal networth of promoters and their flexibility is considered by ICICI bank

whereas PNB bank does not consider.

 ICICI model gives weightage along with score whereas in PNB model only scores
are given to each parameter. In ICICI credit rating model separate score and
weightage is given to all sub parameters along with parameters

 Bliss pharma scores 77.8 and category - B as per ICICI model whereas it scores
66.67 and category - A as per PNB model

117
 In case if total exposure of an individual borrower exceeds maximum exposure
according to scorecard special approval is needed as per ICICI model whereas
there is no such limit in PNB model

118
 CHAPTER 9

9.1 RECOMMENDATIONS TO PNB

 PNB bank should consider personal net worth of promoters, promoters financial
flexibility and their payment records with other banks, financial institutions,
creditors and non financial institutions while rating a company to evaluate
efficiency of a company and its repayment abilities.

 PNB bank should conduct in depth study of a company viz it should consider
customers of a company and transaction history in detail to judge its stability in
market.

 As PNB bank ignores weightage of each parameters, scores loses its relevance.
Bank should consider weightage for each parameter along with each sub
parameter.

 PNB bank should include maximum exposure limit in its credit rating model to be
very specific and clear.

119
9.2 RECOMMENDATIONS TO COMPANY

 Bliss pharma should reduce its inventory turnover ratio for effective utilization of
resources.

 It should reduce debtor’s collection period for smooth running of business cycle
and working capital cycle.

 Company should increase its trade reference to increase its brand image.

 The company should increase its ratio between total outstanding liabilities and
total net worth to avail more credit from banks at easier terms. For this purpose it
has to increase its networth and reduce its outstanding liabilities.

120
 CHAPTER 10

CONCLUSION

 During my project I realized that a credit analyst must own multi-disciplinary

talents like financial, technical as well as legal know-how about corporate lending
and credit rating model for the purpose of lending loan

 A study of both private bank and public bank enhanced my knowledge and I
gained a great learning experience

 During the study I learnt how the theoretical financial analysis aspects are used in
practice during the term loan finance assessment

 The credit appraisal for term loan finance system has been devised in a systematic
way. There are clear guidelines on how the credit analyst or lending officer has to
analyze a loan proposal

 Credit Appraisal Model of both PNB and ICICI bank are based on sound
principles of lending

 Method of lending of both banks is different.

 Compared to PNB model, ICICI model is complicated as ICICI considers more

aspects and in detail compared to PNB.

 Both banks follow inventory and receivable norms as suggested by RBI.

121
BIBLIOGRAPHY
WEB LINKS:
www.rbi.com
www.icicibank.com
www.crisil.com
www.pnb.com
www.moneycontrol.com
www.icicidirect.com

LITERATURE SURVEY

• Economics times

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