My Final Report

A REPORT ON
A STUDY AND ANALYSIS OF TRADE FINANCE PRACTICES

OF METAL AND PLASTIC INDUSTRIES IN AHMEDABAD
AND TRADE FINANCE FACILITIES OF KOTAK
MAHINDRA BANK
By:
VAIBHAV MITTAL (09BSHYD0952)

IBS HYDERABAD
KOTAK MAHINDRA BANK

A REPORT ON
A STUDY AND ANALYSIS OF TRADE FINANCE PRACTICES

OF METAL AND PLASTIC INDUSTRIES IN AHMEDABAD
AND TRADE FINANCE FACILITIES OF KOTAK
MAHINDRA BANK
By
VAIBHAV MITTAL (09BSHYD0952)
Project undertaken in
KOTAK MAHINDRA BANK
A report submitted in partial fulfillment of the requirements of MBA Program
Company guide: Faculty guide:
Mr.Bhavik Pandya (Kotak Mahindra Bank) Prof. Ruchi Tewari

Authorization
The making of this Report has been authorized by Mr. Kiran Vanjole and Mr. Bhavik Pandya,
Kotak Mahindra Bank. The report is submitted as partial fulfillment of the requirement of MBA
Program of IBS.
Acknowledgement
It’s a pleasure to acknowledge all those whose inspiration and wisdom helped me in my summer
internship project.
First and foremost I would like to thank my company guide Mr. Bhavik Pandya for giving me
such a wonderful opportunity to work for Kotak Mahindra bank, Ahmedabad am deeply indebted
to him also for his help, stimulating suggestions and encouragements which helped me in my
research and completion of the project. I would like to thank him for giving me his precious time
whenever I needed their guidance.
I would like to thank my faculty guide, Prof. Ruchi Tewari for her valuable time and support.
Her timely suggestions and feedback helped me shape the project in the desired manner. Without
her encouragement and guidance, I would not have finished this project on time.
Lastly I would like to thank the wonderful Institutional Sales Team for their affection and help
offered to me. The experience gained from interactions with them was valuable. I would like to
thank Mr. Kiran Vanjole for his insights and suggestions. I thank him for being so kind and
patient with me and for providing all his invaluable advice which has helped me the most.
Discussions with Mr. Amit Kewlani are also gratefully acknowledged.
Vaibhav Mittal
ICFAI (HYD), 09BSHYD0952
About Kotak Mahindra bank
Kotak Mahindra is one of India's leading financial institutions, offering complete financial
solutions that encompass every sphere of life. From commercial banking, to stock broking, to
mutual funds, to life insurance, to investment banking, the group caters to the financial needs of
individuals and corporates.
The group has a net worth of over Rs. 7,100 crore, employs around 8,800 people in its various
businesses and has a distribution network of branches, franchisees, representative offices and
satellite offices across 282 cities and towns in India and offices in New York, London, Dubai and
Mauritius. The Group services around 6 million customer accounts.
Value addition to Kotak Mahindra Bank
“A study and analysis of the trade finance practices of metal and plastic industries in
Ahmedabad and trade finance facilities of Kotak Mahindra Bank” will be helpful in following
ways:-
1) The project will create a customer base which will include industries that are not dealing with
Kotak Mahindra Bank hence help in getting business.
2) The customer database will enlist the problems which these customers are facing with their
existing banks, hence will help the bank in pitching in with their products to the new
customers according to their needs.
3) The project will suggest some marketing strategies which might help the bank in positioning
themselves in that region as that industrial area is already mostly covered by PSUs.
The project chosen by me is a live project on which Kotak Mahindra Bank is currently working
on. Kotak Mahindra Bank is in expansion mode; therefore, they are opening new branches across
Ahmedabad. In April 2010 Kotak opened new branch in Bodakdev, Ahmedabad and in July
2010 they are planning to open the same in industrial area of Ahmedabad. The project includes a
thorough analysis of the customer database collected through a survey done in the same
industrial area.
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Contents

1. Authorization………………………………………………………………………………….……………………………………………………3
2. Acknowledgement…………………………………………………………………………………….…………………………………………4
3. About Kotak Mahindra Bank………………………………………………………………………………………………………..………5
4. Value addition to Kotak Mahindra Bank…………………………………………………………………………………………..….6
5. Abstract………………………………………………………………………………………………………………………………………..……10
6. Introduction to trade finance………………………………………………………………………………………………………...….11
7. Trade finance facilities at Kotak Mahindra Bank………………………………………………………………….…………….18
8. Study and analysis of trade finance practices of metal and plastic industries in Ahmedabad…………...24
9. Financial analysis……………………………………………………………………………………………………………………………….25
10. CIBIL report……………………………………………………………………………………………………………………………………..36
11. Point of difference in credit appraisal process…………………………….……………………………………………………38
12. Marketing…………………………………….……………………………………………………………………………………………….…39
13. Present state of small and medium enterprise sector………………………………………………………………………40
14. Market information………………………………..……………………………………………………………………………………….43
12. Findings and analysis……………………………………………………………………………………………………………………….47
15. SWOT Analysis……………………………………..………………………………………………………………………………………….64
16. Marketing strategies………………………………………………………………………………………………..………………………65
17. Bank Marketing techniques……………………………………………………………………………………………………………..71
18. Conclusion……………………………………………………………………………………………………………………………………….73
19. References…………………………………………………………………………………………………………………………….…………74
20. Annexure I: Sample Cibil report....................................................................................................…...75
21. Annexure II: How to read Cibil report………………………………………………………………………………………………77
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List of figures

1. Method of payment……………………………………………………………………..……………………………………………………11
2. Copy of CIBIL report……………………………………………………………………………………………………….………………….37
3. Clusters Division…………………………………………………………………………………………………………………………………58
4. Industries division……………………………………………………………………………………………………………………….…….59
5. Mode of business………………………………………………………………………………………………………………………………59
6. Existing banker……………………………………………………………………………………………….………………………………….60
7. Preferred banker……………………………………………………………………………………………………………………………….61
8. Services satisfaction…………………………………………………………………………………………………………………………..61
9. No. of credit users……………………………………………………………………………………………………………………………..62
10. Type of credit facility……………………………………………………………………………………………………………………….62
11. Porter five forces……………………………………………………………………………………………………………………………..65
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List of tables

1. District wise SSI positions…………………………………………………………………………………………..………………………41
2. Wilk’s Lambda…………………………………………………………………………………………………………….……………………..48
3. Eigen value…………………………………………………………………………………………………………………………………………49
4. Structure matrix…………………………………………………………………………………………………………………………………49
5. Discriminant function coefficients……………………………………………………………………………………………………..50
6. Group centroid…………………………………………………………………………………………………………………………………..51
7. Cluster centre………………………………………………………………………………….…………………………………………………53
8. Cluster membership…………………………………………………………………………………………………………………………..56
9. Final cluster centers…………………………………………………………..………………………………………………………………56
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Abstract
“A study and analysis of the trade finance practices of metal and plastic industries in Ahmedabad
and trade finance facilities of Kotak Mahindra Bank” is a research cum financial analysis report
which covers the over view of the trade finance practices both from borrower side and from the
lender side. The borrower is the organized metal and plastic small and medium enterprises in
Ahmedabad and the lender is the Kotak Mahindra bank. The project includes the understanding
of the above mentioned industries financial position, trade practices and requirements in
Ahmedabad. The report covers marketing research and financial analysis. The conclusions of the
market research will suggest some marketing strategies for the new branch of Kotak Mahindra
bank which they will be opening in a industrial estate in July 2010. The strategies will help bank
in targeting new customers and positioning the bank’s branch with respect to other PSU’s and
private banks. Financial analysis includes the appraisal process by which trade finance products
are sanctioned to the industries.
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Introduction to Trade finance
To succeed in today’s global marketplace, exporters must offer their customers attractive sales
terms supported by the appropriate payment method to win sales against foreign competitors. As
getting paid in full and on time is the primary goal for each export sale, an appropriate payment
method must be chosen carefully to minimize the payment risk while also accommodating the
needs of the buyer. As shown below, there are four primary methods of payment for international
transactions:-
Figure 1 Methods of payment
Highlights1
• International trade presents a spectrum of risk, causing uncertainty over the timing of
payments between the exporter (seller) and importer (foreign buyer).
• To exporters, any sale is a gift until payment is received.
• Therefore, the exporter wants payment as soon as possible, preferably as soon as an order
is placed or before the goods are sent to the importer.

Reference: Trade finance guide: quick reference for exports by International trade administration
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• To importers, any payment is a donation until the goods are received.
• Therefore, the importer wants to receive the goods as soon as possible, but to delay
payment as long as possible, preferably until after the goods are resold to generate enough
income to make payment to the exporter.
The four primary methods of payments are as follows:-
Cash-in-Advance
With this payment method, the exporter can avoid credit risk, since payment is received prior to
the transfer of ownership of the goods. Wire transfers and credit cards are the most commonly
used cash-in-advance options available to exporters. However, requiring payment in advance is
the least attractive option for the buyer, as this method creates cash flow problems. Foreign
buyers are also concerned that the goods may not be sent if payment is made in advance. Thus,
exporters that insist on this method of payment as their sole method of doing business may find
themselves losing out to competitors who may be willing to offer more attractive payment terms.
Key points
• Full or significant partial payment is required, usually via credit card or bank/wire transfer,
prior to the transfer of ownership of the goods.
• Cash-in-advance, especially a wire transfer, is the most secure and favorable method of
international trading for exporters and, consequently, the least secure and attractive option for
importers. However, both the credit risk and the competitive landscape must be considered.
• Cash-in-advance, especially a wire transfer, is the most secure and favorable method of
international trading for exporters and, consequently, the least secure and attractive option for
importers. However, both the credit risk and the competitive landscape must be considered.
• Creditworthy foreign buyers, who prefer greater security and better cash utilization, may find
cash-in-advance terms unacceptable and may simply walk away from the deal.
Characteristics of cash in advance payment method:
1. Applicability
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It is recommended for use in high-risk trade relationships or export markets, and ideal for
Internet-based businesses.
2. Risk
Exporter is exposed to virtually no risk as the burden of risk is placed nearly completely on the
importer.
3. Pros
• Payment before shipment

• Eliminates risk of non payment
4. Cons
• May lose customers to competitors over payment terms

• No additional earnings through financing operations
Letters of Credit
Letters of credit (LCs) are among the most secure instruments available to international traders.
An LC is a commitment by a bank on behalf of the buyer that payment will be made to the
exporter provided that the terms and conditions have been met, as verified through the
presentation of all required documents. The buyer pays its bank to render this service. An LC is
useful when reliable credit information about a foreign buyer is difficult to obtain, but you are
satisfied with the creditworthiness of your buyer’s foreign bank. An LC also protects the buyer
since no payment obligation arises until the goods have been shipped or delivered as promised.
Key points
• An LC, also referred to as a documentary credit, is a contractual agreement whereby a bank in

the buyer’s country, known as the issuing bank, acting on behalf of its customer (the buyer or
importer), authorizes a bank in the seller’s country, known as the advising bank, to make
payment to the beneficiary (the seller or exporter) against the receipt of stipulated documents.
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• The LC is a separate contract from the sales contract on which it is based and, therefore, the
bank is not concerned whether each party fulfills the terms of the sales contract.
• The bank’s obligation to pay is solely conditional upon the seller’s compliance with the terms
and conditions of the LC. In LC transactions, banks deal in documents only, not goods.
Characteristics of letter of credit
1. Applicability
It is recommended for use in new or less-established trade relationships when you are satisfied
with the creditworthiness of the buyer’s bank.
2. Risk
Risk is evenly spread between seller and buyer provided all terms and conditions are adhered to.
3. Pros
• Payment after shipment

• A variety of payment, financing and risk mitigation
4. Cons
• Process is complicated and labor intensive
• Relatively expensive in terms of payment transaction
Documentary Collections
A documentary collection is a transaction whereby the exporter entrusts the collection of a

payment to the remitting bank (exporter’s bank), which sends documents to a collectingbank
(importer’s bank), along with instructions for payment. Funds are received from the importer and
remitted to the exporter through the banks involved in the collection in exchange for those
documents. Documentary collections involve the use of a draft that requires the importer to pay
the face amount either on sight (document against payment—D/P) or on a specified date in the
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future (document against acceptance—D/A). The draft lists instructions that specify the
documents required for the transfer of title to the goods. Although banks do act as facilitators for
their clients under collections, documentary collections offer no verification process and limited
recourse in the event of nonpayment. Drafts are generally less expensive than letters of credit.
Key Points
• D/Cs are less complicated and less expensive than LCs.

• Under a D/C transaction, the importer is not obligated to pay for goods prior to shipment.
• The exporter retains title to the goods until the importer either pays the face amount on sight
or accepts the draft to incur a legal obligation to pay at a specified later date.
• Banks that play essential roles in transactions utilizing D/Cs are the remitting bank
(exporter’s bank) and the collecting bank (importer’s bank).
• While the banks control the flow of documents, they do not verify the documents nor take
any risks, but can influence the mutually satisfactory settlement of a D/C transaction.
Characteristics of documentary collection
1. Applicability
It is recommended for use in established trade relationships and in stable export markets.
2. Risk
Exporter is exposed to more risk as D/C terms are more convenient and cheaper than an LC to
the importer.
3. Pros
• Bank assistance in obtaining payment

• The process is simple, fast, and less costly than LCs
4. Cons
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• Banks’ role is limited and they do not guarantee payment
• Banks do not verify the accuracy of the documents
Open Account
An open account transaction means that the goods are shipped and delivered before payment is
due, usually in 30 to 90 days. Obviously, this is the most advantageous option to the importer in
cash flow and cost terms, but it is consequently the highest risk option for an exporter. Due to the
intense competition for export markets, foreign buyers often press exporters for open account
terms since the extension of credit by the seller to the buyer is more common abroad. Therefore,
exporters who are reluctant to extend credit may face the possibility of the loss of the sale to their
competitors. However, with the use of one or more of the appropriate trade finance techniques,
such as export credit insurance, the exporter can offer open competitive account terms in the
global market while substantially mitigating the risk of nonpayment by the foreign buyer.
Key Points
• The goods, along with all the necessary documents, are shipped directly to the importer
who agrees to pay the exporter’s invoice at a future date, usually in 30 to 90 days.
• Exporter should be absolutely confident that the importer will accept shipment and pay at
agreed time and that the importing country is commercially and politically secure.
• Open account terms may help win customers in competitive
markets, if used with one or more of the appropriate trade finance techniques that mitigate
the risk of non payment.
Characteristics of open account
1. Applicability
It is recommended for use (1) in secure trading relationships or markets or (2) in competitive
markets to win customers with the use of one or more appropriate trade finance techniques.
2. Risk
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Exporter faces significant risk as the buyer could default on payment obligation after shipment of
the goods.
3. Pros
• Boost competitiveness in the global market

• Establish and maintain a successful trade relationship
4. Cons
• Exposed significantly to the risk of nonpayment

• Additional costs associated with risk mitigation measures
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Trade finance facilities at Kotak Mahindra
Bank
Kotak Mahindra Bank provides a wide range of export related services, assisting the growth of
an organization into the overseas market. In the context of SMEs, the bank has designed its trade
finance products to cater their hunger for expansion.
Kotak Mahindra Bank has divided its trade finance facilities into following categories:
1. International -exports
2. International-imports
3. Bank guarantee
4. Domestic
1. International-exports
Kotak Mahindra Bank provides a wide range of export related services, assisting the growth of a
particular organization.
a) Pre-shipment credit
Kotak Mahindra offers pre-shipment credit to exporters by way of packing credit, for the specific
purpose of procuring raw materials / purchasing / manufacturing / processing / transporting /
warehousing / packing and shipping the goods meant for export.
Exporters can avail of this pre-shipment credit either in rupees or foreign currency.
A pre requisite to avail of pre-shipment financing is that the Exporter should have a credit
facility in place with a bank. Each bank has a credit process that determines the amount of
funding the bank can give the company.
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This is ‘need based financing’2, - which means that banks will lend an amount to organizing after
factoring in a particular margin (this margin is calculated as a percentage of the value of the
order). The margin differs from bank to bank. Margins are stipulated for the following reasons:
• to ensure that the exporter has some stake in the transaction

• to cover any erosion in the value of goods, and
• to ensure that there is no lending against the exporter's profit margin
The banking practice is that the exporter can obtain 90% of the FOB (free on board charges)
value of the order or 75% of the CIF (cost, insurance and freight) value of the order.
b) Post- shipment finance
Post-shipment finance is a loan or advance granted by a bank to an exporter of goods from India.
This facility is available to an exporter subsequent to the date of shipment of goods upto the date
of realization of export proceeds.
Some key features of post-shipment finance are as follows:
• Finance is extended to either the exporter (seller's credit) or the overseas buyer of the goods
(buyer's credit).
• Finance is extended against evidence of shipping documents.
• Concessive rate of interest is available for a maximum period of 180 days, starting from the
date of submission of documents. Normally, the documents are to be submitted within
21days from the date of shipment.
Post-shipment finance can be further classified as under:
a. Negotiation of export documents under Letter of Credit (LC).
b. Purchase / Discount of export document under confirmed orders / export contracts, etc.

2
Reference: A banker’s approach to SSI financing by Vinod Agrawal
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c. Advances against export bills sent on collection basis.
Post shipment finance is meant to finance export receivables.
In the case of routine exports, the maximum period allowed for realization of export proceeds is
6 months from the date of shipment. Banks can extend post shipment finance at a lower interest
rate up to the normal transit period or the notional due dates (this is calculated as the sum of the
Normal Transit Period + Usance Period, subject to a maximum of 180 days). Beyond that period,
banks lend at non-concessive rates or the normal commercial rates.
c) Inward remittance
The process of remitting foreign money to a country is said to be inward remittance. It is a

collective phrase used to mention the money transfer to a country from other countries.
Technically inward remittance is the process through which a foreign bank/company transfers
the fund to the domestic bank account in the home country. The process is initiated at the foreign
nation and takes place with the consent of the customer. E.g. Non resident Indians send money
back home primarily to support their families. In fact, stats show that 65% of remittances made
by NRIs are for supporting their family3. The transaction can be in any form such as travellers
cheques, drafts under travellers letters of credit, bills of exchange, currency notes and coin etc.
2. International-imports
Kotak Mahindra Bank provides a comprehensive range of import related services, helping
organizations cover their trading risks.
a) Letter of credit
Letters of credit accomplish their purpose by substituting the credit of the bank for that of the
customer, for the purpose of facilitating trade. Letter of credit is a contractual agreement between
a bank, known as the issuing bank, on behalf of one of its customers, authorizing another bank,
known as the advising or confirming bank, to make payment to the beneficiary. The issuing

3
Reference‐the Hindu business line date 23 may 2005
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bank, on the request of its customer, opens the letter of credit. The issuing bank makes a
commitment to honor drawings made under the credit. The beneficiary is normally the provider
of goods and/or services. Essentially, the issuing bank replaces the bank's customer as the payee.
b) Outward remittance
An Outward Remittance is a transfer of money in foreign exchange, by a resident in India to a

beneficiary situated outside the country (except for Nepal and Bhutan) for a purpose as approved
under FEMA (Foreign Exchange Management Act)4. Money can be sent abroad to a beneficiary
for various purposes including foreign travel, gifts, medical treatment, donations, etc. Money can
be sent abroad through the following modes:
• Wire Transfer
• Foreign Currency Demand Draft
Outward remittance includes:
• Payment of direct Import Bills: Processing and remittances for Import Bills directly
received by importers in India.
• Advance payment towards imports: Processing and remittances towards advance
payment for imports.
• Other outward remittances like dividend payouts, ECB payments, royalty, shipping,
etc.
3. Bank guarantee
A bank guarantee is a written unilateral undertaking of a bank (guarantor) to pay the beneficiary
the amount of money stated in the guarantee in the event that the principal (a bank customer
ordering the bank to issue a guarantee) should default under his obligations secured by the
guarantee.
A bank guarantee might be used when a buyer obtains goods from a seller then runs into cash
flow difficulties and can't pay the seller. The bank guarantee would pay an agreed-upon sum to

4
Reference‐Foreign management act 2000
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the seller. Similarly, if the supplier was unable to provide the goods, the bank would then pay the
purchaser the agreed-upon sum. Essentially, the bank guarantee acts as a safety measure for the
opposing party in the transaction.
These financial instruments are often used in trade financing when suppliers, or vendors, are
purchasing and selling goods to and from overseas customers with whom they don't have
established business relationships. The instruments are designed to reduce the risk taken by each
party.
Letters of credit ensure that a transaction proceeds as planned, while bank guarantees reduce the
loss if the transaction doesn't go as planned.
4. Domestic
Kotak also offers inland trade services that can help in ensuring your business transactions are
quickly and effectively executed. Whether company is working with suppliers to negotiate credit
terms, and it is looking for prompt collection solutions or competitive pricing rates, Kotak has
been providing them with competitative rates.
a) Bill discounting
Bill discounting is a major activity with some of the smaller Banks. Under this type of lending,
Bank takes the bill drawn by borrower on his(borrower's) customer and pay him immediately
deducting some amount as discount/commission. The Bank then presents the Bill to the
borrower's customer on the due date of the Bill and collects the total amount. If the bill is
delayed, the borrower or his customer pays the Bank a pre-determined interest depending upon
the terms of transaction.
Point of difference in Kotak’s bill discounting is the complete range of supply chain management
solutions. It aims at increasing the efficiency of the entire cycle, ensuring that transactions are
executed speedily and effectively.
b) Invoice discounting
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Invoice discounting is a form of short-term borrowing often used to improve a company's
working capital and cash flow position.
Invoice discounting allows a business to draw money against its sales invoices before the
customer has actually paid. To do this, the business borrows a percentage of the value of its sales
ledger from a finance company, effectively using the unpaid sales invoices as collateral for the
borrowing.
c) Purchase order financing
Purchase order financing is an innovative program where banks offer flexible finance to supply
chain partners of corporate. This involves "discounting" a contract/ purchase order to help
finance the manufacturing cycle for goods ordered by the corporate. This service is particularly
useful for vendors with seasonal increases in working capital requirements
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Study and analysis of trade finance
practices of metal and plastic industries
in Ahmedabad
This part of project has following tasks in relation to trade finance:
1. To understand bank’s perspective.
2. To understand customer’s perspective.
Bank perception will involve the credit appraisal process. The process will include hurdles which
a proposal crosses before it gets sanctioned either from branch office or by head office of bank. It
will include the financial analysis of a various proposals available with the bank using various
tools like financial statement analysis, financial analytical tool (software based tool) etc.
Customer’s perspective will include a thorough market research in industrial estate of
Ahmedabad which will help us in analyzing the factors which affects customer decision while
taking trade finance. Also it will include a market research whose objective is to segment the
market according to the response of the service improvement and also according to the factors
which customer thinks are important while taking credit facility. Therefore the analysis of trade
finance practices by metal and plastic industries in Ahmedabad is divided as
1. Financial analysis (bank’s perspective)
2. Market research (customer’s perspective)
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Financial analysis
The financial analysis will be an assessment of the viability, stability and profitability of
a business, sub-business or project. Lending is one of the primary functions in the banking
industry therefore in this part of project we will be looking at the process of credit appraisal of
working capital.
Targeting Small and medium enterprise (SME)
The importance of SME sector is well-recognized world over owing to its significant
contribution in achieving various socio-economic objectives, such as employment generation,
contribution to national output and exports, fostering new entrepreneurship and to provide depth
to the industrial base of the economy. In India, Gujarat has a vibrant SME sector that plays an
important role in sustaining economic growth, increasing trade, generating employment and
creating new entrepreneurship in India.
Indian SMEs require business advisory services to enhance their international competitiveness in
a highly competitive globalizing world.5 The SMEs find the services of reputed national and
international consultants as not cost effective and often, not adequately focused. Recognizing this
knowledge gap, Kotak Mahindra bank has been endeavoring to provide a suite of services to its
SME clients. These include providing business leads, handholding during the process of winning
an export contract and thus assisting the generation of export business on success fee basis,
countries/ sector information dissemination, capacity building in niche areas such as quality,
safety, export marketing, etc. and financial advisory services such as loan syndication, etc.
With a view to take a total view of SME sector covering the financial requirements in the life
span of a small scale unit from womb to the tomb its needs for raising of resources at various
stages are identified as under. An attempt is also made to identify the matching responses
required to be developed by the bank in catering to the various needs of the sector.

5

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Raising of resources needs
• Long term sources towards financing:
1) land/building
2) plant/machinery
3) misc. fixed assets
4) Technical knowhow
5) Preliminary /pre-operative expenses
6) Margin money for working capital
7) Cash losses up to the break even level
• Short term sources –towards working capital requirements
Responses
Guidance should be provided about the various agencies /institutions from whom long term
resources in the form of loans /subsidies could be raised:
1) Long term loans from SFCs-SIDCs

2) Term loans from banks
3) Equity fund assistance from banks
4) Deferred payment guarantees –bank
5) Bill discounting scheme
6) Subsidies by central and state government
7) Margin money loan
8) Deposits by public, friends and relatives
9) Shares
10) Leasing/ bought out deals
11) Promoters contribution
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The borrowing pattern to be decided keeping in view the maximum permissible debt/equity ratio
(presently 3:1)6.
Guidance on source for short term resources
1) Bank finance –against inventory/receivables

2) Drawee scheme
3) Sundry creditors/other current liabilities
4) Contingency facilities from the bank.
Kotak Mahindra bank’s response to the needs of the SMEs is in the following offerings:
1) Working capital
a) Cash Credit (CC)/Over Draft facility(OD)
b) Post-shipment finance
• Bill discounting
• Invoice discounting
c) Pre-shipment finance
• Purchase order financing
• Advance against future supplies
2) Term loan
3) Letter of credit
4) Bank guarantees
5) Export financing
a) Pre shipment
b) Post shipment
c) Bills on collection
6) Foreign remittances

6
Reference: Financial Management by I.M Pandey
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The topics mentioned above have been discussed previously except working capital financing,
which will be discussed now.
Working capital and its assessment
The objective of running any industry is to earn profits. An industry will require funds to acquire
fixed assets like land, building, plant, machinery, equipment, vehicles etc, and also to run the
business viz day to day operations. Funds required for day to day working will be to finance
production and sales. For production, funds are needed for purchase of raw materials/stores/fuel
for payment of labor, power charges etc., for storing finished goods till they are sold out and for
financing the sales by way of sundry debtors/receivables. The more working capital, the less
financial strain a company experiences. By studying a company's position, one can clearly see if
it has the resources necessary to expand internally or if it will have to turn to a bank and take on
debt.
Working capital = current assets - current liabilities7
Where:
Current assets are short term sources of finance such as stocks, debtors and cash - the amount of
cash and cash equivalents - the business has at any one time. Cash is cash in hand and deposits
payable on demand (e.g. current accounts). Cash equivalents are short term and highly liquid
investments which are easily and immediately convertible into cash.
current liabilities are are short term requirements for cash including trade creditors, expense
creditors, tax owing, dividends owing - the amount of money the business owes to other
people/groups/businesses at any one time that needs to be repaid within the next month or so.
The Banks also lend to people on the basis of their perceived personal worth. Such loans are
called clean and the Banks are understandably cagey about extending such loans.
Cash credit Account

This account is the primary method in which Banks lend money against the security of

7
28 | P a g e

commodities and debt. It runs like a current account except that the money that can be withdrawn
from this account is not restricted to the amount deposited in the account. Instead, the account
holder is permitted to withdraw a certain sum called "limit" or "credit facility" in excess of the
amount deposited in the account.
Cash Credits are, in theory, payable on demand. These are, therefore, counter part of demand
deposits of the Bank.
Overdraft
The word overdraft means the act of overdrawing from a Bank account. In other words, the
account holder withdraws more money from a Bank Account than has been deposited in it.
Credit appraisal of CC/OD
Check list for appraisal of proposals is as follows
a) Background and history
• name of unit/date of establishment

• promoter’s background
• brief history of existing history
‐ Profit and loss account for last 3 years

‐ Balance sheet for last 3 years
‐ Explanations for abnormal variations
‐ Fund flow and financial policy followed
• Present borrowing arrangements
‐ Source security and purpose

‐ Present bank limits and out standings
‐ Position regarding tax dues
b) Project
29 | P a g e

• product –brief description of product
• location –state the location of the plant and examine the location advantages
etc; whether necessary permissions obtained or not
c) Raw materials
• list out all the major items of raw materials, the quantities required, their
prices and major suppliers.
• Examine the availability of raw materials
c) Managerial feasibility
• Names of proprietor/partners/directors, their qualifications, experience, its

relevance to the manufacturing activity proposed.
• Whether the unit is professionally managed, state the qualifications,
experience and terms of employment of the managerial staff.
d) Financial feasibility
• sales projections
• debt to equity ratio
• creditor cycle
• debtor cycle
• Gross profit ratio
• Net profit ratio
• Growth rate ( should be positive)
• Cash inflows
• Debt to service coverage ratio ( greater > 1)
e) Assessment of working capital
• total assets
• less than current liabilities
30 | P a g e

• net working capital gap (1-2)
• margin( vary bank to bank)
• eligible bank finance(1-2-3)
Term Loan
Term Loans are the counter parts of Fixed Deposits in the Bank. Banks lend money in this mode
when the repayment is sought to be made in fixed, pre-determined installments. This type of loan
is normally given to the borrowers for acquiring long term assets i.e. assets which will benefit the
borrower over a long period (exceeding at least one year). Purchases of plant and machinery,
constructing building for factory, setting up new projects fall in this category. Financing for
purchase of automobiles, consumer durables, real estate and creation of infra structure also falls
in this category.
A comprehensive appraisal of a project needs to cover the undernoted aspects:8
1) Technical 2) Economical 3) Managerial 4) Financial
1) Technical
• Feasibility of technical process and its suitability

• Adequacy of the scale of operation and adequacy of the machinery
• Whether the technology is up to date.
• suitability of site location and availability of infrastructure
• after sales service/reliability of suppliers
2) Economical
• whether in line with national policy

• Regulatory controls in regard to pricing, raw materials production etc.
3) Managerial

8
31 | P a g e

Marketing, financial, technical experience
4) Financial
• analysis of past years

• financial plan
• capital structure
• availability of other resources
• projection of cash flow during construction and also during operation
• projection of future profitability
• rate of return
• debt equity ratio
• debt service ratio
The basic data required for financial analysis:
• cost of the project (whether additional or new)

• cost of the production and profitability
• cash flow estimates (sources and uses of cash during the currency of the loan)
• balance sheet for the last three years
Cost of project
• A comprehensive and critical review is necessary to ascertain

• The reasonableness and flexibility of estimates
• Arrangement to raise funds to finance the project as a whole
Cost of production and profitability
• Break even analysis to ascertain profit margin( value and volume)

• General tendency is to show low production cost
• To ensure all important elements of cost is taken
• Demand gap- reasonableness of price in competition
32 | P a g e

• Quality of the product
Cash flow estimate
• To ensure when the cash is needed

• To find sources of cash
• To ensure repayment of loans and interest from cash accruals
For this debt service ratio to be commented upon. The emphasis here is that it is not enough to
show profit on paper but there should be accrual of cash itself. Debt service coverage ratio is
arrived at:
Cash Accruals / (Total interest + loan installment)9
Where
Cash accruals = net profit (after tax and providing interest on all long term
borrowings) + depreciation added back
This ratio and also cash flow estimate will provide information about:
• Margin of safety to lending institution

• The time when repayment should start
• Total period of repayment
Bank has to keep in mind return on investment or rate of return. The minimum rate of return on
investment should not less than long term investment of fund.
Balance sheet
• For expansion, last three with comparative profit and loss account
• For new units projected
• Balance sheet- comparison of figures to ascertain trade trends
• Comparison of return by similar industries

9
33 | P a g e

Steps
• Preparation of projected profit and loss account
• Preparation of cash flow for next 4/5 years
• Preparation of projected balance sheet for the next 4/5 years
The projected balance sheet will give

• Adequacy of debt: equity
• Adequacy of current ratio
Letter of credit
Steps regarding issue of L/C:
Process limit proposal
• Process importer’s application for regular/adhoc L/C limit

• Obtain credit report( CIBIL) on the party-analyze the financial statements and satisfy
about his integrity and creditworthiness and financial capacity
• Submit the proposal with relevant information / conditions to the appropriate sanctioning
authority.
• Margin < CC/EPC margin
• Sanction of L/C limit
• Documentation and safe custody of security documents
Issue of L/C
• Scrutnization of import license where applicable

• Sanction of specific L/C by appropriate authority
• Margin as per sanction terms
• L/C commission as per bank’s extent instructions
• L/C commitment charges
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Bank guarantee
Whenever an application for the issue of bank guarantee (or sanction of a B.G. limit) is received
bank examines it thoroughly about the following aspects
a) Purpose
b) Need for the B.G.
• is it related to applicant’s normal trade/business?
• is it on an adhoc basis or continuous basis?
c) Nature of B.G.
Financial guarantee or performance guarantee
d) Amount of B.G.
e) Applicant’s financial strength/capacity – (through an analysis of his financial statements and
opinion reports) to meet his liability under the B.G. on invocation.
f) Past record of the applicant with respect of B.G.’s issued earlier
g) Present outstanding on account of B.G.’s already issued.
h) Margin
i) Collateral security offered
Export finance
The lending norms are designed to enable the exporters to obtain financial assistance on
relatively liberalized terms through bank. An exporter may require financial assistance at pre-
shipment and/or post-shipment stage. The credit aspects are as follows
• Bank has adopted a flexible attitude with regard to debt/equity ratio, margin and security
but little compromise with respect of viability of the proposal and the integrity of the
borrower.
• Exporter should be able to satisfy their bankers about their capacity to execute the orders
within the stipulated time and to manage the export business.
• Projected growth and turnover of the export unit
• Inventory norms for exports unit under tendon committee/chore committee
• Relaxation for finished goods accumulation under tandon committee
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CIBIL report10
Kotak Mahindra bank also takes help of CIBIL - India's first credit information bureau. It is a
repository of information, which contains the credit history of commercial and consumer
borrowers. CIBIL provides this information to its Members in the form of credit information
reports. Kotak looks at the credit score during the financial analysis and has set 800+ CIBIL
credit score. 11Following is a sample CIBIL report.

10
Reference: credit information bureau of India limited
11
Reference: credit department of Kotak Mahindra bank
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Figure 2 Copy of cibil report
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Point of difference in credit appraisal in
different banks
Bank of finance is normally restricted to the amount of funds locked up less a certain percentage
of margins. Margins are imposed with a view to have adequate stake of the promoter in the
business both to ensure has adequate interest in the business and to act as a bulwark against any
shocks that the business may sustain. 12The margins stipulated will depend on various factors
like salability, whether imported or indigenous, quality, durability, price fluctuations in the
market for the commodity etc. Also certain banks see ratios differently. It is dependent on risk
appetite of the banks. For ex. In Kotak Mahindra bank creditors cycle in case of chemical
industry is 60-90 days, textile is 120 days and metal industries are greater than 90 days. The
same ratios can be different in public sector banks as they are government enterprise.
Banks have different exposure to the sector in which banks are about to finance .E.g. although
real estate may be booming at a certain point of time but banks can perceive it has a bubble.
Collateral security is also a point of differentiation.13 E.g. private banks generally don’t consider
primary security such as plant; machinery etc as security .Whereas public banks readily takes it.

12
13
Reference: Research paper on Innovation for reviving small scale industries by Anil K Gupta W.P. no 2009‐03‐03
March 2009
38 | P a g e

Marketing
Marketing is variedly defined, particularly Bank marketing. In simple terms bank
marketing is defined as the art of extending the right service to the right customers at
the right time on the right terms to satisfy the needs of the customers in the attempt to
attain banks overall objective. It is much more than mere selling of banks standardized
package services. We have to balance the needs and demands of the customers needs
and changes in the environment keeping in the mind the banks objective14. The overall
objectives of the bank are to sustain profitability with growth, to meet social objectives,
retain and increase its market share, develop new markets in new areas and to develop
new packages of services.15

14

15
Reference: Kotak Mahindra bank
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Present state of Small and medium
enterprises sector
“Small scale industries have great importance in the economy of India.
These must be developed in all respects.”
-Pt. Nehru16
Small scale industries have been defined in India in many ways from time to time. According to
latest definition a small scale industry is one having investment in plant and machinery up to Rs.
60 lakhs. For ancillary unit (the units which supply parts and equipments to large scale
industries) the limit of capital investment is Rs. 75 lakhs. 17Tiny industry is or having investment
in plant and machinery up to Rs. 2 lakhs. It is important to mention here that capital investment
for this purpose means the investment in plant and machinery and excludes the investment in
land and building.
The SSI Sector in India is the second largest manpower employer in the country next only to the
agriculture sector, which is stagnant and large industry sector is passing through ‘zero
employment growth’, it is SSS, besides the service sector, where employment, output export are
growing at substantial rates. Moreover, SSS helps in industrialization of rural and backward
areas and reduce regional imbalance. It can also facilitate effective mobilization of local
resources and skill which might otherwise remain untapped. The SSI sector has emerged over
five decades as a highly vibrant and dynamic sector of the Indian economy. By the end of March
2000, the SSI sector accounts for 95 per cent of the industrial units contributing about 40 per cent
of value addition in the manufacturing sector, nearly 80 per cent of manufacturing employment
and about 35 per cent of exports (both direct and indirect). More than 32 lakhs units (which
include both registered and unregistered units) are spread all over the country producing over
7500 items and providing employment to more than 178 lakhs persons.
According to latest census of SSI the state of Utter Pradesh tops the list with more than 17 lakhs
SSI units followed by Andhra Pradesh, Maharashtra, Madhya Pradesh and Tamil Nadu. Gujarat

16
17
Reference: Lending strategies to SMEs by Prof Vikas Srivastva ,NIBM Pune, July 2008
40 | P a g e

th
stands at 8 position. 18Sikkim has the lowest number of Small Scale units (368 units.). In 1980,
there were 43,712 small-scale industrial units and this number increased to 2, 56,388 at the end
of March, 2001.
A look at the district wise figures indicate that in 1980, the highest number of small-scale units
was in Ahmedabad (10,919), which increased to 65,763 in September 2006. The districts holding
the subsequent ranks in March, 2001 were Surat (47,404), Rajkot (32,461), Valsad-Dangs
(15,966), Vadodara (14,491), Mehsana (13,369) and Kheda (12,316). The lowest number was in
Gandhinagar district, where there were only 3060 small-scale units. Additional information on
district wise number of small-scale units can be obtained from following table:-
District wise Number of Registered Small-Scale Units in Gujarat: (1980-2001) 19
Name of the No. of SSI Units registered at the end of the year
District
2002 2003 2004 2005 Upto September-
2006(P)
Ahmedabad 60693 62137 63193 64916 65763
Amreli 4339 4627 4711 4811 4890
Banaskantha 5733 6093 6401 6665 6819
Bharuch 12004 12734 13384 13996 14328
Bhavnagar 11130 11335 11484 11671 11821
Gandhinagar 3648 4009 4371 4630 4808
Jamnagar 11518 12222 12591 13035 13236
Junagadh 6875 7231 7578 7830 7986
Kheda 11915 12388 12809 13201 13521
Kutch 5279 5470 5718 5962 6109
Mehsana 13137 13580 14043 14453 14602
Panchmahals 5772 6045 6363 6572 6704

18
Reference: Census of SSI 2001
19
Reference: Industries Commissionerate
41 | P a g e

Rajkot 29639 30611 31371 32030 32461
Sabarkantha 7214 7721 8114 8359 8601
Surat 41053 43015 44420 46316 47404
Surendranagar 7585 7872 8188 8402 8609
Vadodara 15653 16273 17219 17990 18498
Valsad 14662 14996 15318 15714 15966
Dang 24 53 53 53 53
Anand 1354 1715 1955 2184 2298
Dahod 710 817 914 1015 1092
Narmada 479 578 672 747 816
Navsari 2030 2451 2815 3200 3357
Patan 1450 1679 1982 2184 2274
Porbandar 419 533 639 710 766
Total 274315 286185 296306 306646 312782

Table 1district wise SSI positions
In Ahmedabad paper, textile, pharmaceutical, chemical, engineering, plastic, rubber are the
major small scale industries with an investment of around 70,000 lakhs INR.20 Metal industries
include-engineering tools manufacturer, scrap industries, pipes, castings and machines
manufacturing and machine tools manufacturing .Plastic industries include rubber products,
rubber gaskets, sheets(plastic rubber, pvc), household plastic goods manufactures. In the project
metal industries and plastic industries which are going to be considered will be from “organized
sector”
The share of the advances to SSI in Ahmedabad has been stagnant despite a revision in the
definition of an SSI unit to include fairly large units. The above census and the market potential
analysis implies that there is large untapped area in the form of SSI financing where Kotak
Mahindra bank, Ahmedabad needs to work.

20
Reference: Ahmedabad collectorate, Revenue Department of Gujarat government
42 | P a g e

Market information
At the macro level Bank need to know what the emerging scenario in SSI sector is so that Kotak
Mahindra bank can identify the growth centers and thrust areas and develop a suitable marketing
strategy.
The market research is used here to record, analyze and gather information related to trade
finance practices done by metal and plastic industries in Ahmedabad. To understand the
customer perspective of the trade finance facilities.
The research problem is undertaken by keeping in mind the requirements of Kotak Mahindra
bank. The bank is in expansion mode and looking forward to get new customers in the trade
finance department .The market research will not only help in choosing right customers but also
help in understanding customer expectations and requirements regarding trade finance facility.
The previously conducted researches on related topics also provided us with the guidelines for
the further course of action.
Data Collection from Primary Sources:
Primary data for the research is being collected through a structured questionnaire. The survey is
being conducted in the industrial estates in Ahmedabad such as G.I.D.C Odhav, G.I.D.C Vatva
and Rakhial industrial estate. The sample size is taken as 75.
Questionnaire Development and Pre testing:
The questionnaire used is a mixture of open and closed ended questions.
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Questionnaire on Trade Finance
1. Company's name: _______________________________________________
2. Type of business:
● Exports
● Imports
● Domestic
3. How long have you been in the business: ____________
4. Turnover: ________________
5. Existing banker(s):
a. private b. public c. cooperative
6. Are you availing any credit facility to finance your trade? Yes / No
7. If yes, what is the type and limit of the facility? ____________________________
8. Among following factors, to what extent each of them affects your decision for taking
credit facility? (5 – Highly affects)
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Factors Scale
1 2 3 4 5
Interest Rate
Documentation time
Limit
Repayment time
Collateral Security
Economic Scenario
Location of bank's
branch
Type of bank
Company's turnover
9. Which bank do you prefer?
Bank type Preference
Public
Co-operative
Private
10. Rate the following service improvement suggestions on scale of 5, 1 being least important
and 5 being most important
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Factors Scale
1 2 3 4 5
Improved customer to staff

ratio
Under skilled staff
service time improvement
Hidden costs
Processing fees
connectivity problems
The questionnaire was tested on 10 companies before editing it to suite bank requirements.
46 | P a g e

Findings and Analysis
Here the primary aim of market research market segmentation. It is process of dividing the market
according to similarities that exist among the various subgroups within the market. The
similarities may be common characteristics or common needs and desires. Market segmentation
comes about as a result of the observation that all potential users of a product are not alike, and
that the same general appeal will not interest all prospects. 21Therefore, it becomes essential to
develop different marketing tactics based on the differences among potential users in order to
effectively cover the entire market for a particular product. Here behavioral segmentation is used
as it divides buyers into groups based on their knowledge, attitudes, uses or responses to a
product.
Research problem:
To segment the customers in Vatva industrial region according to the factors they consider
essential for taking credit regarding trade activities.
Approach to the problem:

The above mentioned research is taken keeping in mind customer’s perspective while
approaching a bank for a particular credit facility. The research will not only help in choosing
right customers for Kotak Mahindra bank but also help in understanding customer expectations
and requirements regarding trade finance facility.
Variables
The variables here are indentified as dependent and independent variables. From the questionnaire
the variables are as follows:-
Dependent variable-Are you using any credit facility

21
Reference: marketing research by Naresh Malhotra
47 | P a g e

Independent variables - interest rate, documentation time, collateral security, repayment time,
location of the branch, type of the bank and company’s turnover.
Technique
Here we are using discriminant analysis. Discriminant analysis is a technique for analyzing data
when the criterion or dependent variable is categorical and the predictor or independent variables
are interval in nature.22 Here for example the dependent variable has two categories vis-à-vis yes
or no; either they used credit facility or they don’t use it. And the independent variables are the
ratings of the factors which customer consider before taking any credit facility.
Analysis results
Wilks' Lambda
Test
of
Functi Wilks'
on(s) Lambda Chi-square df Sig.
1 .667 9.793 2 .007

Table 2 Wilk's Lamda
Wilks’ Lambda is the ratio of within-groups sums of squares to the total sums of squares. This is
the proportion of the total variance in the discriminant scores not explained by differences among
groups. A lambda of 1.00 occurs when observed group means are equal.
From above table we infer that variability between group means is high and within group is small.
With wilk’s lambda 0.667 our model appears to have high explanatory power and explains 43%
of variance in the dependent variable.

22

48 | P a g e

Eigen values
% of Cumulative Canonical
Function Eigen value Variance % Correlation
1 1.044a 100.0 100.0 .754
Table 3 Eigen values
An Eigen value indicates the proportion of variance explained. (Between-groups sums of squares
divided by within-groups sums of squares). A large Eigen value is associated with a strong
23
function. Eigen value for the above function is greater than one which means that variance
explained by the independent variables taken together is higher than the variance explained by
independent variables individually. Also there is high correlation between dependent variable and
discriminant function score.
Structure Matrix
Function
repayment .0708
limit -.448
company turnover -.281
Economic scenario -.182
Collateral securitya .648
Interest ratea .732
Location of branch .750
documentation .627
typeofbank -.007
Table 4 Structure matrix

23

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Above table tells us the correlation between independent variables and discriminant scores. We
can infer that variables location of the branch, interest rate, documentation time and collateral
security have high correlation with our discriminant function.
Standardized Canonical Discriminant

Function Coefficients
Function
repayment 0.1515
limit 0.0288
company turnover 0.0023
economic scenario -0.0355
collateral security -0.2526
interest rate -0.2899
location of branch -0.3910
documentation 0.1404
typeofbank 0..0065
Table 5 Discriminant function coefficients
Because there are two categories of dependent variable therefore there is one discriminant
function. The above table gives the equation to the discriminant function.
The equation is
D=0.1515(repayment) - 0.0288(limit)+0.0023(company)-0.0355(economic)-0.2526(collateral)
-0.2899(interest)-0.3910(location)+0.1404(documentation)+0.0065(typeofbank)
50 | P a g e

Where
D = discriminant score of one data sample

Repayment = rating given in the questionnaire to the repayment time
Limit = rating given in the questionnaire to the limit
Company = rating given in the questionnaire to the company turnover
Economic = rating given in the questionnaire to the economic scenario
Collateral = rating given in the questionnaire to the collateral security
Interest = rating given in the questionnaire to the rate of interest
Location = rating given in the questionnaire to the location of the branch
Documentation = rating given in the questionnaire to the documentation time
Type of bank = rating given in the questionnaire to the type of the bank
Functions at Group Centroid
If credit Function
facility
used? 1
no .355
yes -.394
Table 6 group centroid
Functions at Group Centroide’ indicates the average discriminant score for subjects in the two
groups. More specifically, the discriminant score for each group when the variable means are
entered into the discriminant equation.
Cut off value=-0.039
Conclusion
It means that to take a first hand analysis or to find which company bank should approach first to
give credit; bank should make company fill up the questionnaire and run this software again to
check its discriminant score. If the score is less than -0.039, then the company falls in to a
51 | P a g e

category of “flexible” creditor and bank can approach to the company for the credit facility more
easily. And if the score is greater than -0.039, then the customer is “conservative” towards taking
credit and hence bank should approach the company with more attractive schemes.
Research problem
To segment the customers in the Vatva region according to the over all services which bank
should provide.
Approach to the problem
The above research is taken while keeping in mind the bank’s role as service provider. Many
people share common interests when it comes to services, so once the market is segmented it will
be easier for the bank to serve the customers according to their requirements.
Variables
The variables used here are the ranking given to the suggestions asked in the questionnaire which
are as follows improve customer to staff ratio, under skilled staff, service time improvement,
hidden costs processing fees, connectivity problems.
Technique
For the segmentation of market, the technique used is K- means cluster analysis. It seeks to
identify homogenous subgroups of cases in the population. Here value of the K i.e. the number of
clusters chosen is 3.K- means cluster analysis uses Euclidean distance.
Analysis results
The analysis results are as follows:
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Initial Cluster Centers
Cluster
1 2 3
staff 5.00 2.00 5.00
skill 4.00 2.00 5.00
service 3.00 4.00 4.00
cost 2.00 2.00 5.00
fees 2.00 2.00 4.00
connectivity 1.00 5.00 5.00
Table 7 cluster centre
First let’s analyze the initial cluster centers table which has been created with the SPSS. This table
initially on the arbitrary basis makes the specified numbers of the clusters and shows the quantum
of the variability.
To the extreme left of the table we have factors customer-to-staff ratio, connectivity, etc.
This table shows that initially 3 clusters have been formed by the software.
The customer-to-staff variable in cluster 1 has a value of 5 which means that the centroid value of
customer-to-staff in the cluster I is 5 similarly the centroid value in cluster 2 and 3 are 2 and 5
respectively.
Cluster Membership
Case
Number Cluster Distance
1 1 3.338
2 2 3.033
3 1 1.496
4 1 1.345
5 3 1.581
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6 2 1.376
7 3 .963
8 3 1.519
9 1 3.338
10 2 3.033
11 1 1.496
12 1 1.345
13 3 1.581
14 2 1.376
15 3 .963
16 3 1.519
17 3 1.871
18 3 1.581
19 2 1.376
20 3 .963
21 3 1.519
22 1 3.338
23 2 3.033
24 1 1.496
25 1 1.345
26 3 2.375
27 3 2.241
28 3 1.883
29 2 3.033
30 1 1.496
31 1 1.345
32 3 1.581
33 2 1.376
34 3 .963
35 3 1.519
36 3 1.871
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37 3 1.581
38 1 2.289
39 3 1.793
40 3 1.982
41 1 1.496
42 1 1.345
43 3 1.581
44 2 1.376
45 3 .963
46 3 1.519
47 3 1.871
48 3 1.581
49 1 2.289
50 3 1.793
51 3 1.982
52 1 1.496
53 1 1.345
54 3 1.581
55 2 1.376
56 3 .963
57 3 1.519
58 3 1.871
59 3 1.581
60 2 1.376
61 3 .963
62 3 1.519
63 1 3.338
64 2 2.159
65 3 .963
66 3 1.519
67 3 1.896
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68 3 2.143
69 3 3.027
70 3 1.766
71 1 2.160
72 1 1.480
73 1 1.345
74 3 1.581
75 2 2.159
Table 8 cluster membership
Now let’s analyze the cluster membership table which specifies the case on the left hand extreme
along with cluster and the distance value.
Let’s take an example for the analysis of the table
Case cluster Distance
1 1 3.338
This data specifies that the case 1(the first data sample) belongs to cluster 1 and the distance
between the case 1 and the centroid of cluster 1 is 3.338
Final Cluster Centers
Cluster
1 2 3
staff 4.10 2.00 2.45
skill 3.52 1.69 1.55
service 1.57 2.00 4.88
cost 2.71 4.92 1.57
fees 1.71 3.92 2.14
connectivity 2.48 3.31 4.55
Table 9 cluster centers
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Now let’s analyze the final cluster centers matrix as shown in the figure. Based on the number of
iterations as specified by the user (10 in our case) and the distance between the cases and the
clusters we have arrived at the final cluster center matrix.
First let’s analyze the rate of interest
Cluster 1 Cluster 2 Cluster 3
Customer-to- 4.10 2 2.45
staff ratio
Conclusion
We can see from the results that in cluster 1, firms give much preference to the Customer-to-staff
ratio of the banker while availing the credit facility. While the cluster 2 and 3 firms give very less
priority to the Customer-to-staff ratio factor.
The cluster 1 has a high values for customer to staff ratio and skilled staff; cluster 2 has given
more weightage to hidden costs and processing fees and cluster 3 has more score for service time
improvement and require more connectivity of bank branches.
The 3 clusters formed can be named as follows
1. Relationship centric
2. Cost centric
3. Time saving centric
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Figure 3 Clusters division
The results also suggests that more than 50 % people consider good connectivity and easy
accessibility a bank’s branch and minimum service time as their priority.
58 | P a g e

The analysis done using the questionnaires is as follows:-
Figure 4 industries division
Metal related industries 85%
Plastic related industries 15%
Figure 5 Mode of business
59 | P a g e

Domestic 62%
Combination of export and domestic 30%
Export 8%
Figure 6 Existing banker
Public sector banks 72%
Private sector banks 18%
Cooperative banks 5 %
Combination (private-public, cooperative private etc.) 4%
60 | P a g e

Figure 7 Preferred banker
Public sector banks 56%
Private sector banks 28%
Cooperative banks 6%
Figure 8 Services satisfaction
Unsatisfied with services of current banker 65%
Satisfied with services of current banker 35%
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Figure 9 no. of credit user
Yes 48%
No 52 %
Figure 10 Type of credit facility
Cash credit limit 80%
Overdraft facility limit 14%
Export packing credit 4 %
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Summary
• The survey was conducted on plastic related industries (manufacturing, processing and
distribution) and metal related industries (metal scrap, fabrication of engineering tools and
equipments, cast iron powder etc.) in GIDC industrial estate, Vatva.
• The survey covered 75 industries in the industrial estate out of which 64 were metal related
industries and 11 were plastic related
• About 62% of industries were selling the products in domestic regions, 30% were doing
business with the help of exports and domestic and 8% of the industries were in the purely
export business.
• About 72% of the industries were dealing with public sector banks such as Bank of Baroda,
bank of India, Punjab national bank, State bank of India, oriental bank of commerce, Dena
bank etc.18 % were associated with private banks such as HDFC, Citibank, ICICI bank, etc.5
% of the industries were relying on cooperative banks such as Kalupur cooperative bank,
Nutan nagrik bank etc.
• When industries were asked about the preferred choice of banking 42 industries chose public
sector banks, 28 industries chose private sector banks and rest preferred cooperative banks.
• 65% of the industries were not satisfied with their current banking services.
• 48% of the industries were availing credit facility from the bank and rest were solely
dependent on their own capital.
• Those who were availing credit facility were using cash credit facility heavily (80%).
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SWOT Analysis
Before drawing up any marketing strategy, the branch should do a detailed SWOT analysis. A
SWOT analysis of the whole bank would not be of much use. The analysis should be specific to
the branch , its infrastructures, the environment covering the envisaged growth plans, the
competition and the range of services which the branch can extend vis-à-vis the competitors. In
the Vatva region there is good foothold of banks like HDFC, Kalupur cooperative bank, Bank of
India, Bank of Baroda and central bank. While a branch would derive in good measure the
strengths of the organization, there is a need to look closely at the Branch’s possible weaknesses
and threats and take suitable steps to overcome these.
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Marketing Strategies
Once the marketing information is collected, we must draw up specific marketing strategies to
achieve the objectives of the Bank. Our strategies should be related to customer services
marketing matrix which has already been postulated to the Bank’s overall objectives.
Competitive strategy
The first strategy is competitive strategy keeping in mind the competitors for Kotak Mahindra
bank in Vatva industrial estate. The main competitors are Bank of India, HDFC, and Kalupur
cooperative bank.
Figure 11 Porter five forces model
Marketing strategy is devised with the help of Michael porter 24five forces model for competitors.
Analysis of Porter’s five forces model with respect to Kotak Mahindra bank is as follows:-

24
Reference: Michael E. Porter's Competitive Strategy
65 | P a g e

1. Threat of New Entrants. The average person can't come along and start up a bank, but there
are services, such as internet bill payment, on which entrepreneurs can capitalize. Banks are
fearful of being squeezed out of the payments business, because it is a good source of fee-
based revenue. Also, when analyzing a regional bank, remember that the possibility of a mega
bank entering into the market poses a real threat. New entrants can be banks that have been
away from the idea of opening a branch in industrial estate like Vatva. Banks like ING Vyasa,
Karur Vyasa Bank, Cooperative banks like Nutan Nagrik bank, export oriented bank like
HSBC, Citibank, and Standard chartered Bank poses a threat to Kotak Mahindra Bank.
2. Power of Suppliers. The suppliers of capital might not pose a big threat, but the threat of
suppliers luring away human capital does. If a talented individual is working in a smaller
regional bank, there is the chance that person will be enticed away by bigger banks,
investment firms, etc.
3. Power of Buyers. The individual doesn't pose much of a threat to the banking industry, but
one major factor affecting the power of buyers is relatively high switching costs. If a person
has a mortgage, car loan, credit card, checking account and mutual funds with one particular
bank, it can be extremely tough for that person to switch to another bank. In an attempt to lure
in customers, banks try to lower the price of switching, but many people would still rather
stick with their current bank. On the other hand, large corporate clients have banks wrapped
around their little fingers. Financial institutions - by offering better exchange rates, more
services, and exposure to foreign capital markets - work extremely hard to get high-margin
corporate clients.
4. Availability of Substitutes. As you can probably imagine, there are plenty of substitutes in
the banking industry. Banks offer a suite of services over and above taking deposits and
lending money, but whether it is insurance, mutual funds or fixed income securities, chances
are there is a non-banking financial services company that can offer similar services. Now
many NBFCs like Bajaj Allianz, Reliance money, Tata capital etc have started offering
mortgage and loan services.
5. Competitive Rivalry. The banking industry is highly competitive. The financial services
industry has been around for hundreds of years and just about everyone who needs banking
services already has them. Because of this, banks must attempt to lure clients away from
competitor banks. They do this by offering lower financing, preferred rates and investment
66 | P a g e

services. The banking sector is in a race to see who can offer both the best and fastest services,
but this also causes banks to experience a lower ROA. They then have an incentive to take on
high-risk projects. In the long run, we're likely to see more consolidation in the banking
industry. Larger banks would prefer to take over or merge with another bank rather than spend
the money to market and advertise to people.
STRATEGY FOR RETENTION
Kotak’s objective of retaining its existing share of the market would need ensuring that all the
existing customers use in full measure all the services which bank offer presently. This calls for a
high degree of oneness with the customers, being ready to sense changes in preferences and being
ready to counter competitors making inroads into Kotak’s existing good business.
• Kotak must establish the culture of continuous contact with the customers by creating as many
as possible customer touch points.
• Inspection of units should not be treated as a substitute for customer calls.
• It should develop the culture of relaxed conversation with the manager of unit instead of
always planning purposeful customer calls.
• From the market analysis in Vatva region it was seen that existing banks in the region are
overlooking the problem of “speed of response”. The needs would cover timely extension of
credit, enhancement or renewal of limits, special facilities for special situations etc.
• From the market survey done in Vatva region shows that there is a dire need to cut down the
processing time of the documents and all the procedure which is associated to extension of
credit, enhancement or renewal of limits etc.
• The survey also stressed upon the fact that the banks should also consider plant and machinery
as part of collateral rather than commercial or residential premises. Few also suggested that
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banks should find a way where credit can be given by keeping least possible collateral
security.
• Another finding from the survey which could be helpful in retaining Kotak’s customers can be
negotiable and attractive rate of interest.
• Customers can be given services bundling or product bundling. A wide variety of industry
research shows those customers with multiple products are less likely to attrite. E.g. can be a
company using Kotak Mahindra banks’ unsecured overdraft facility, the same company can
avail bank guarantee or letter of credit without paying extra to the bank.
STRATEGY FOR MARKET DEVELOPMENT
Building up of new business (high value) could be done in two dimensions25.
Through interaction with the state level institutions and linkages with bank’s planning wings so
that actual thrust and potential areas can be identified. Bank must establish constant interaction
with the planning wing who would supply its branches with information on the plans of the State
for our bank. At state capitals and at district headquarters, it should develop and sustain its links
with the state financial corporation, state industrial development organizations, the director of
industries and commerce, the district industries centre and other organizations responsible for
development of entrepreneurs and industries in the small scale sector. Bank must also maintain its
links with large and medium scale industries for leads for growth of ancillary units in the G.I.D.C.
region. In an over communicated market, being these first before the others would reduce the
marketing efforts needed for getting business by 50%.
In second dimension bank’s attempt should be to carve out a share of the competitors (the rival
banks in Vatva region) good business by take over. For this a survey questions were designed in a

25
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manner so that customers present banking arrangements, customers needs, how the competitors
services are perceived by them and finally their suggestions to their banks can be analyzed.
From the market survey and analysis in Vatva industrial estate proximity of a bank’s branch was
one of the major factors which customers keep in mind before getting associated with a particular
bank. This need from the customer side itself suggests that Kotak Mahindra should not delay in
opening a well supported branch in Vatva. In April 2010 to serve the customers in retail segment
such as BPOs, furniture outlets, infrastructure and traders Kotak opened a branch in Bodakdev
region in Ahmedabad. The reason for delaying the decision of opening a branch in Vatva was that
the opportunities in Bodakdev region are changing at very rapid pace as compared to Vatva.
STRATEGY FOR PRODUCT DEVELOPMENT AND DIVERSIFICATION
While extending finance continues to be the prime function of a Banker, Kotak has come long
way from being mere lenders of money. From the marketing angle, Bank should take a holistic
view of the customer’s needs at various stages of his growth, from the time the project is
conceived. It should be able to extend the needed package of services throughout the life cycle of
a small scale unit.26
The government on its part has set up a number of specialized institutions both at the central level
and at the state level for example Development commissioner by ministry of micro, small and
medium enterprises. These institutions are constantly providing guidance to small scale industries
on production, marketing and finance. 27
A banker cannot afford to work in isolation relating his contribution solely to finance. Non
financial matters largely affect a unit’s future and the banker has to be a beneficiary of the effect
of such factors.
Bank should work on making up of consultancy cells to extend help in market surveys, and
solving production problems. It is a question of new technology; Kotak should be able to enlist

26
Reference: Marketing management by Philip Kotler
27

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the help of their SSI customers for guidance. If the unit is fairly large, needing merchant banking,
Bank should be in a position to procure a whole range of services, namely, management of issues,
project counseling, credit syndication, portfolio management etc.
In non favorable economic scenario bank should sympathize with their needs and help with
counsel and with financial and non-financial packages so that they can have an edge over others.
A full understanding of problems and needs of SSI unit be they in production, marketing or
financial, would enable Kotak to respond quickly giving them a competitive edge over other
banks.
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Bank Marketing techniques
The bank of the future has to be essentially a marketing organization that also sells banking
products. New distribution channels are being used; more & more banks are outsourcing services
like disbursement and servicing of consumer loans, Credit card business. Direct Selling Agents
(DSAs) of various Banks go out and sell their products. They make house calls to get the
application form filled in properly and also take your passport-sized photo. Home banking has
already become common, where you can order a draft or cash over phone/internet and have it
delivered home. ICICI bank was the first among the new private banks to launch its net banking
service, called Infinity. It allows the user to access account information over a secure line, request
cheque books and stop payment, and even transfer funds between ICICI Bank accounts. Citibank
has been offering net banking to its Suvidha program to customers. Public Sector Banks like SBI
have also started focusing on this area. SBI plans to open 100 new branches called Personal
Banking Branches (PBB) this year. Amidst of all these Kotak Mahindra Bank should position
itself successfully with help different techniques. I, with medium of report, want to suggest some
bank marketing techniques to Kotak.
1. More Aggressive Focus on 'Relationship banking': Even though trust in banks has waned
lately, banks are emphasizing the building of a stronger relationship through integrated
accounts and rewards programs like introducing Kotak Mahindra Bank's points.
2. Increased Promotion of new product programs: Kotak Mahindra bank’s should identify its
USP products. For example some of their products like “Active money” in current and savings
account, providing unsecured overdraft facility should be promoted heavily.
3. Continued Importance of Incentives: more incentives for opening new checking accounts can
be given. Also incentives to customers through refer-a-friend program can be helpful in
increasing customer base.
4. Mobile Banking is the 'New' Online Banking28: Mobile banking (also known as M-Banking,
mbaking, SMS Banking etc.) is a term used for performing balance checks, account

28
Reference: Hindu Business line December 31, 2009
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transactions, payments etc. via a mobile device such as a mobile phone. ICICI Bank is
providing mobile banking along with user friendly software.
5. Proliferation of Financial Literacy Programs: Bank should focus on new programs to help
customers better understand and manage their finances .Kotak Mahindra can also create a
buzz by organizing trade fair in industrial estate, organizing seminar on investments business
solutions and expert’s suggestions to renovate SSI industries.
6. Utilize Traditional Bank Marketing: Most banks still rely heavily on traditional marketing to
advertise their specials and rates. When a special promotion such as “Loan Mela” is
introduced, it is important to use newspaper, radio and other advertising already in place to
cross-promote the event. Every impression counts, so having the promotion mentioned at
every opportunity only increases the chances that a client will hear it, retain the information
and act on it.
7. Take the promotion on the Road: Participating in community events is a great way to gain
exposure and promote that "neighborhood bank" feeling. People like to feel as if they are
doing business with a bank that cares. During the duration of the promotion, check the local
calendar to see if there are any festivals or large community events in which the bank could
participate.
The opportunity to give gold coins at “Akshya Tritya” or special car loans schemes on eve of
“Dusherra” will achieve visibility, build brand recognition, and gain customers. That becomes
one more reason for people to come into the bank.
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Conclusion
In sum the profitability and growth of the bank depends on the quality of the credit portfolio of
the bank. Marketing in many ways may actually be the real key to credit quality. Some may argue
that aggressive marketing may be the source of problem accounts and that a person effective in
marketing may not be in position to make quality credit decisions. Marketing is a discipline.
When properly done it demand the highest level of professionalism. It involves thorough research
and analysis. It is the strategic response to the bank’s mission and objectives. On the other hand
lack of effective marketing approach in the Bank, and reliance on what business naturally flows in
or what business is left over by the competitors may enhance the level of problem accounts. To
quote Cass bettinger,” Marketing is the function of the organization charged with converting
corporate objectives into the bottom line reality through:-29
1. Determining, in a rational, informed and strategic manner, the desired customer base;
2. Identifying the specific current and future needs of the desired customer and customer market
segment;
3. Creating need satisfying benefits that respond profitably to the customer and prospect needs
and which positively differentiate the organization from its customers.
4. Communicating and delivering these benefits effectively in the market place
5. Converting the entire employee organization into a well informed, disciplined and professional
force committed to the organization values and objectives

29
Reference: High performance in the 90’s:Leading the strategic and cultural revolution in banking by Cass Bettinger

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References
Literature
• Market research by Naresh Malhotra

• SPSS help guide
• Credit appraisal, risk analysis and decision making by DD Mukherjee.
• A banker’s approach to SSI financing by Vinod Agrawal (FCS)
• I.M pandey
• ICFAI journals.
• Research papers
• Marketing management by Philip Kotler
Websites
• www.Kotak.com
• www.Cibil.com
• www.Rbi.org
• www.Vatvaassociation.com
• www.ahmedabadindustries.com
• www.gujarat.gov.in
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A REPORT ON

A STUDY AND ANALYSIS OF TRADE FINANCE PRACTICES

VAIBHAV MITTAL (09BSHYD0952)

KOTAK MAHINDRA BANK

A STUDY AND ANALYSIS OF TRADE FINANCE PRACTICES

VAIBHAV MITTAL (09BSHYD0952)

KOTAK MAHINDRA BANK

Company guide: Faculty guide:

Mr.Bhavik Pandya (Kotak Mahindra Bank) Prof. Ruchi Tewari

• To exporters, any sale is a gift until payment is received.

The four primary methods of payments are as follows:-

Characteristics of cash in advance payment method:

• Payment before shipment

• May lose customers to competitors over payment terms

• An LC, also referred to as a documentary credit, is a contractual agreement whereby a bank in

Characteristics of letter of credit

• Payment after shipment

A documentary collection is a transaction whereby the exporter entrusts the collection of a

• D/Cs are less complicated and less expensive than LCs.

Characteristics of documentary collection

• Bank assistance in obtaining payment

Characteristics of open account

• Boost competitiveness in the global market

• Exposed significantly to the risk of nonpayment

• to ensure that the exporter has some stake in the transaction

b) Post- shipment finance

Some key features of post-shipment finance are as follows:

• Finance is extended against evidence of shipping documents.

Post-shipment finance can be further classified as under:

a. Negotiation of export documents under Letter of Credit (LC).

Post shipment finance is meant to finance export receivables.

The process of remitting foreign money to a country is said to be inward remittance. It is a

An Outward Remittance is a transfer of money in foreign exchange, by a resident in India to a

Outward remittance includes:

c) Purchase order financing

1. To understand bank’s perspective.

2. To understand customer’s perspective.

1. Financial analysis (bank’s perspective)

2. Market research (customer’s perspective)

Targeting Small and medium enterprise (SME)

• Long term sources towards financing:

3) misc. fixed assets

5) Preliminary /pre-operative expenses

6) Margin money for working capital

7) Cash losses up to the break even level

• Short term sources –towards working capital requirements

1) Long term loans from SFCs-SIDCs

Guidance on source for short term resources

1) Bank finance –against inventory/receivables

Working capital and its assessment

Working capital = current assets - current liabilities7

Cash credit Account

Credit appraisal of CC/OD

Check list for appraisal of proposals is as follows

a) Background and history

• name of unit/date of establishment

‐ Profit and loss account for last 3 years

• Present borrowing arrangements

‐ Source security and purpose

• Names of proprietor/partners/directors, their qualifications, experience, its

e) Assessment of working capital

A comprehensive appraisal of a project needs to cover the undernoted aspects:8

1) Technical 2) Economical 3) Managerial 4) Financial