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CHAPTER-1 INTRODUCTION TO BANKING SECTOR & SBI
HISTORY OF BANKING INDUSTRY:
The Reserve Bank of India (RBI), as the central bank of the country, closely monitors developments in the whole financial sector.
The banking sector is dominated by Scheduled Commercial Banks (SBCs). As at end-March 2002, there were 296 Commercial banks operating in India. This included 27 Public Sector Banks (PSBs), 31 Private, 42 Foreign and 196 Regional Rural Banks. Also, there were 67 scheduled co-operative banks consisting of 51 scheduled urban co-operative banks and 16 scheduled state co-operative banks.
Scheduled commercial banks touched, on the deposit front, a growth of 14% as against 18% registered in the previous year. And on advances, the growth was 14.5% against 17.3% of the earlier year.
State Bank of India is still the largest bank in India with the market share of 20% ICICI and its two subsidiaries merged with ICICI Bank, leading creating the second largest bank in India with a balance sheet size of Rs. 1040bn.
Higher provisioning norms, tighter asset classification norms, dispensing with the concept of ‘past due’ for recognition of NPAs, lowering of ceiling on exposure to a single borrower and group exposure etc., are among the measures in order to improve the banking sector.
CREDIT APPRAISAL IN BANKING SECTOR
A minimum stipulated Capital Adequacy Ratio (CAR) was introduced to strengthen the ability of banks to absorb losses and the ratio has subsequently been raised from 8% to 9%. It is proposed to hike the CAR to 12% by 2004 based on the Basle Committee recommendations.
Retail Banking is the new mantra in the banking sector. The home loans alone account for nearly two-third of the total retail portfolio of the bank. According to one estimate, the retail segment is expected to grow at 30-40% in the coming years.
Net banking, phone banking, mobile banking, ATMs and bill payments are the new buzz words that banks are using to lure customers.
With a view to provide an institutional mechanism for sharing of information on borrowers / potential borrowers by banks and Financial Institutions, the Credit Information Bureau (India) Ltd. (CIBIL) was set up in August 2000. The Bureau provides a framework for collecting, processing and sharing credit information on borrowers of credit institutions. SBI and HDFC are the promoters of the CIBIL. The RBI is now planning to transfer of its stakes in the SBI, NHB and National bank for Agricultural and Rural Development to the private players. Also, the Government has sought to lower its holding in PSBs to a minimum of 33% of total capital by allowing them to raise capital from the market.
Banks are free to acquire shares, convertible debentures of corporate and units of equity-oriented mutual funds, subject to a ceiling of 5% of the total outstanding advances (including commercial paper) as on March 31 of the previous year.
The finance ministry spelt out structure of the government-sponsored ARC called the Asset Reconstruction Company (India) Limited (ARCIL), this pilot project of the ministry would pave way for smoother functioning of the credit market in the country. The government will hold 49% stake and private players will hold the rest 51%- the majority being held by ICICI Bank (24.5%).
CREDIT APPRAISAL IN BANKING SECTOR
REFORMS IN THE BANKING SECTOR:
The first phase of financial reforms resulted in the nationalization of 14 major banks in 1969 and resulted in a shift from Class banking to Mass banking. This in turn resulted in a significant growth in the geographical coverage of banks. Every bank has to earmark a minimum percentage of their loan portfolio to sectors identified as “priority sectors”. The manufacturing sector also grew during the 1970s in protected environs and the banking sector was a critical source. The next wave of reforms saw the nationalization of 6 more commercial banks in 1980. Since then the number scheduled commercial banks increased four-fold and the number of banks branches increased eight-fold.
After the second phase of financial sector reforms and liberalization of the sector in the early nineties, the Public Sector Banks (PSB) s found it extremely difficult to complete with the new private sector banks and the foreign banks. The new private sector banks first made their appearance after the guidelines permitting them were issued in January 1993. Eight new private sector banks are presently in operation. These banks due to their late start have access to state-ofthe-art technology, which in turn helps them to save on manpower costs and provide better services.
During the year 2000, the State Bank of India (SBI) and its 7 associates accounted for a 25% share in deposits and 28.1% share in credit. The 20 nationalized banks accounted for 53.5% of the deposits and 47.5% of credit during the same period. The share of foreign banks ( numbering 42 ), regional rural banks and other scheduled commercial banks accounted for 5.7%, 3.9% and 12.2% respectively in deposits and 8.41%, 3.14% and 12.85% respectively in credit during the year 2000.
CLASSIFICATION OF BANKS:
regional rural banks and private sector banks (the old / new domestic and foreign).000 branches spread across the country. the State Bank of India and its group banks. commercial banks can be further grouped into nationalized banks. Scheduled banks comprise commercial banks and the co-operative banks. In terms of ownership. The Indian banking industry is a mix of the public sector. The private sector banks are again spilt into old banks and new banks. which is governed by the Banking Regulation Act of India.CREDIT APPRAISAL IN BANKING SECTOR The Indian banking industry. private sector and foreign banks. Banking System in India Reserve bank of India (Controlling Authority) Development Financial institutions Banks IFCI IDBI ICICI Commercial Banks NABARD NHB IRBI EXIM Bank ISIDBI Co-operative Banks Regional Rural Banks Land Development Banks Private Sector Banks Public Sector Banks SBI Groups Nationalized Banks Indian Banks Foreign Banks ABOUT SBI: Page 4 . These banks have over 67. 1949 can be broadly classified into two major categories. non-scheduled banks and scheduled banks.
looking at the vast untapped potential in the hinterland and proposes to cover 100. and other electronic channels such as Internet banking. It is also focusing at the top end of the market. on whole sale banking capabilities to provide India’s growing mid / large Corporate with a complete array of products and services. Custodial Services. to expand its Rural Banking base. mobile banking. Page 5 . It is consolidating its global treasury operations and entering into structured products and derivative instruments. the country’s oldest Bank and a premier in terms of balance sheet size. number of branches. the Bank is the largest provider of infrastructure debt and the largest arranger of external commercial borrowings in the country. market capitalization and profits is today going through a momentous phase of Change and Transformation – the two hundred year old Public sector behemoth is today stirring out of its Public Sector legacy and moving with an agility to give the Private and Foreign Banks a run for their money. The bank is entering into many new businesses with strategic tie ups – Pension Funds. The Bank is changing outdated front and back end processes to modern customer friendly processes to help improve the total customer experience. structured products etc – each one of these initiatives having a huge potential for growth. Today. The Bank is also in the process of providing complete payment solution to its clientele with its over 8500 ATMs. General Insurance. Advisory Services. It is the only Indian bank to feature in the Fortune 500 list. Private Equity. debit cards. The Bank is forging ahead with cutting edge technology and innovative new banking models.CREDIT APPRAISAL IN BANKING SECTOR The State Bank of India. Point of Sale Merchant Acquisition.000 villages in the next two years. etc. With about 8500 of its own 10000 branches and another 5100 branches of its Associate Banks already networked. Mobile Banking. today it offers the largest banking network to the Indian customer.
market capitalization and profits is today going through a momentous phase of Change and Transformation – the two hundred year old Public sector behemoth is today Page 6 . to drive home the message of Change and inclusiveness. The bank is also looking at opportunities to grow in size in India as well as internationally. SBI Life and SBI Cards . Their commitment to nation-building is complete & comprehensive. number of branches.000 employees in a period of 100 days using about 400 Trainers. It presently has 82 foreign offices in 32 countries across the globe. All their branches and administrative offices throughout the country sponsor and participate in large number of welfare activities and social causes.forming a formidable group in the Indian Banking scenario.CREDIT APPRAISAL IN BANKING SECTOR With four national level Apex Training Colleges and 54 learning Centres spread all over the country the Bank is continuously engaged in skill enhancement of its employees. In a recently concluded mass internal communication programme termed ‘Parivartan’ the Bank rolled out over 3300 two day workshops across the country and covered over 130. Their business is more than banking because they touch the lives of people anywhere in many ways. SBI DFHI. attitudes and take all employees together on this exciting road to Transformation. SBI Factors. Throughout all this change. the Bank is also attempting to change old mindsets.The Bank is actively involved since 1973 in non-profit activity called Community Services Banking. It has also 7 Subsidiaries in India – SBI Capital Markets. The workshops fired the imagination of the employees with some other banks in India as well as other Public Sector Organizations seeking to emulate the programme. Some of the training programes are attended by bankers from banks in other countries. TRANSFORMATION JOURNEY IN STATE BANK OF INDIA: The State Bank of India. It is in the process of raising capital for its growth and also consolidating its various holdings. SBICAP Securities. the country’s oldest Bank and a premier in terms of balance sheet size.
SBI Life and SBI Cards . SBICAP Securities. etc. mobile banking. Some of the training programmes are attended by bankers from banks in other countries. With about 8500 of its own 10000 branches and another 5100 branches of its Associate Banks already networked.forming a formidable group in the Indian Banking scenario. Page 7 .CREDIT APPRAISAL IN BANKING SECTOR stirring out of its Public Sector legacy and moving with an agility to give the Private and Foreign Banks a run for their money. General Insurance. It has also 7 Subsidiaries in India – SBI Capital Markets. Mobile Banking. SBI Factors. The Bank is also in the process of providing complete payment solution to its clientele with its over 8500 ATMs. It is consolidating its global treasury operations and entering into structured products and derivative instruments. It is the only Indian bank to feature in the Fortune 500 list. With four national level Apex Training Colleges and 54 learning Centers spread all over the country the Bank is continuously engaged in skill enhancement of its employees. debit cards. It is also focusing at the top end of the market. It presently has 82 foreign offices in 32 countries across the globe. Today. the Bank is the largest provider of infrastructure debt and the largest arranger of external commercial borrowings in the country. SBI DFHI. structured products etc – each one of these initiatives having a huge potential for growth. on whole sale banking capabilities to provide India’s growing mid / large Corporate with a complete array of products and services. The bank is entering into many new businesses with strategic tie ups – Pension Funds. It is in the process of raising capital for its growth and also consolidating its various holdings. Private Equity. Custodial Services. and other electronic channels such as Internet banking. Point of Sale Merchant Acquisition. The Bank is changing outdated front and back end processes to modern customer friendly processes to help improve the total customer experience. today it offers the largest banking network to the Indian customer. Advisory Services. The bank is also looking at opportunities to grow in size in India as well as internationally.
P. commercial and retail banking services in India. and has awarded the prestigious Indian of the Year – Business.CREDIT APPRAISAL IN BANKING SECTOR Throughout all this change. • The central bank.7% stake followed by overseas investors including GDRs with 19. In a recently concluded mass internal communication programme termed ‘Parivartan’ the Bank rolled out over 3300 two day workshops across the country and covered over 130. The CNN IBN. the Bank is also attempting to change old mindsets. As on September 06. The workshops fired the imagination of the employees with some other banks in India as well as other Public Sector Organizations seeking to emulate the programme. The bank provides a full range of corporate. State Bank of India (SBI) has history of more than 200 years of existence.624 ATMs. Mr. SBI is the largest commercial bank in India and accounts for approximately 18% of the total Indian banking business and the group account for 25% of the total Indian banking business. the bank has 14. to drive home the message of Change and inclusiveness. to its Chairman.755 branches of its associated banks. Background: State Bank of India is the largest and one of the oldest commercial bank in India. RBI’s stake in the bank is likely to be transferred to the Governmentof India (GOI). attitudes and take all employees together on this exciting road to Transformation.000 employees in a period of 100 days using about 400 Trainers. the State Bank of India is undertaking.78% shareholdingas on September 06. Network 18 recognized this momentous transformation journey. Indian central bank namely Reserve Bank of India (RBI) is the major share Page 8 . Reserve Bank of India (RBI) is the largest shareholder in the bank with59. The bank also has the largest network of 5. O. Bhatt in January 2008. in existence for more than 200 years.061 branches which include 4. • SBI has the largest distribution network in India spread across every nook and corner of India.
SBI group accounts for around 25% of the total business of the banking industry while itaccounts for 35% of the total foreign exchange in India.CREDIT APPRAISAL IN BANKING SECTOR holder of the bank with 59.19% clerical staff and the remaining 25. The bank is listed on the Bombay Stock Exchange. it was the first joint-stock bank of British India sponsored by the Government of Page 9 . net interest margin (NIM) of the bank has gone up from as low as 2. Apart fromIndian network it also has a network of 73 overseas offices in 30 countries in all time zones. SBI has displayed a continued performance in the last few years in scaling up its efficiency levels.9% in FY02 to 3. A unique institution.3%. correspondent relationship with 520 International banks in 123 countries. Net Interest Income of the bank has witnessed a CAGR of 13. Thebank has a branch network of over 14. 2006. The bank had total staff strength of 198.40% in FY06 and currently is at 3. 45. During the same period.32%. EVOLUTION OF SBI: The origin of the State Bank of India goes back to the first decade of the nineteenth century with the establishment of the Bank of Calcutta in Calcutta on 2 June 1806. With this type of strong base. SBI has the largest branch and ATM network spread across every corner of India.51% are officers.646bn with the public holding (other than promoters) at 40. Chennai Stock Exchange and Ahmedabad Stock Exchange while its GDRs are listed on the London Stock Exchange. Kolkata Stock Exchange. SBI has acquired banks in Mauritius.7% stake.774 as on 31st March. In recent past. Three years later the bank received its charter and was re-designed as the Bank of Bengal (2 January 1809). National Stock Exchange. Of this. 29.000 branches (including subsidiaries). The bank is capitalized to the extent of Rs.3% during the last five years.30% were sub-staff. Kenya and Indonesia.
275. But the lofty traditions of banking which the Imperial Bank consistently maintained and the high standard of integrity it observed in its operations inspired confidence in its depositors that no other bank in India could perhaps then equal.11. reserves. When India attained freedom.94 crores respectively and a network of 172 branches and more than 200 sub offices extending all over the country. Imperial Bank The Imperial Bank during the three and a half decades of its existence recorded an impressive growth in terms of offices.72. investments and advances. the Imperial Bank had a capital base (including reserves) of Rs. Corporate Banking. International Banking. deposits. The Bank of Bombay (15 April 1840) and the Bank of Madras (1 July 1843) followed the Bank of Bengal.14 crores and Rs. Key Areas of Operations: The business operations of SBI can be broadly classified into the key income generating areas such as National Banking. The functioning of some of the key divisions is enumerated below: Page 10 . The financial status and security inherited from its forerunners no doubt provided a firm and durable platform. All these enabled the Imperial Bank to acquire a pre-eminent position in the Indian banking industry and also secure a vital place in the country's economic life. deposits and advances of Rs. & Treasury operations.CREDIT APPRAISAL IN BANKING SECTOR Bengal.85 crores. These three banks remained at the apex of modern banking in India till their amalgamation as the Imperial Bank of India on 27 January 1921. the increases in some cases amounting to more than six-fold.
Page 11 .705. As at the end March 2006.05% of thebank’s commercial and institutional non-food credit and 12. offering payments in addition to collections.747. had a turnover of Rs.4. This product is now comprehensive cash management solution.1. • The foreign exchange business grew by around 55% y-o-y and reached Rs.85% of the total domestic credit portfolio as on 31st March 2006. the disbursements and capitalization were zero and profit amounted to Rs.75bn as of 31st March 2006. These SBUs are as follows: 1) Corporate Accounts This SBU is important for the bank as its loan portfolio constituted about 27.245. • Vendor financing activity is being integrated with core banking through the internet platform. SBI has created various Strategic Business Units (SBU) in order to streamline its operations.193bn. This SBU now handles nearly 12% of the country’s visible trade and about 43% of bank’s forex business. 2) Leasing This SBU is not writing any leases since the past few years as unfavorable business climate and availability of alternative funding options at cheaper cost. This is identified as a focus area to capture the credit portfolio of vendors.70bn as of 31st March 2006. which is the cash management product offered by this SBU.CREDIT APPRAISAL IN BANKING SECTOR a) CORPORATE BANKING The corporate banking segment of the bank has total business of around Rs1.9mn. Some of the products under corporate accounts SBU are as follows: • SBI-FAST.
42. FIs and non-banking finance companies (NBFCs). both interest and fee based.86bn (fund based and non fund based) including syndication amount of Rs. As a whole.11. roads. Corporate Banking. International Banking.08bn in the previous year. As of March 2006. It also handles non-infrastructure projects with certain ceilings on minimum project costs.25. 5) Stressed Assets Management During FY06. 4) Mid Corporate Group The Mid Corporate Group (MCG) created in June 2004 has 7 MCG Regional Officescontrolling 28 large branches with high concentration of Mid Corporate (MC) business.9bn against security receipts and Rs. Multi-City cheque facility and Core Power have been introduced in all these branches.8.11bn were in place as against 13 projects involving Rs. this SBU achieved total sanctions of Rs. CINB.CREDIT APPRAISAL IN BANKING SECTOR 3) Project Finance This SBU focuses on funding core projects like power.55.80bn were in place as against 27 projects involving Rs. These technology products coupled with quick Turn Around Time (TAT) have enabled Mid-Corporate Group to increase its business substantially and generate higher income. New technology products like RTGS.The entire Off-Site MC business of all branches at 31 identified centres has been broughtunder the fold of MCG. During FY06. During FY06. ports.63bn in the previous year.51.140. telecom. airports. this SBU entered into financing of aviation sector actively by sanctioning loans for modernization of airports and acquisition of aircrafts. The average processing time of credit proposals is about 15 daysand quicker decision making on credit proposals of the Mid Corporate units has resulted in greater customer satisfaction.41bn on cash basis to Asset Reconstruction Company (ARCIL). the banking industry witnessed a major policy initiative by Reserve Bank of India with the opening up of sale / purchase of non performing assets to banks. special economic zones and others. During FY06 sanctions for 29 projects involving a total amount of Rs.95bn during the period ended March 2006. the bank sold NPAs to the tune of Rs. total sanctions for 18 projects involving a total State Bank of India. During FY06. 21 MCG branches have been migrated to core banking platform. National Banking. Treasury Operations Associates & Subsidiaries amount of Rs. The progress in enforcing the security interest has somewhat slowed down due to the requirement of Page 12 .238.
but against alternate securities.67bn. earn on savings. During FY06. to reach out to customers.464. such as SBIMaxgain (minimize interest burden.CREDIT APPRAISAL IN BANKING SECTOR withdrawing suits pending before the tribunal prior to action being initiated against the defaulting borrowers under the SARFAESI Act. The auto loans portfolio has shown a growth of Rs. On the home loan front. mainly due to implementation of well planned strategies. personal banking advances increased from Rs. 104 satellite offices and 679 extension counters.74bn in absolute terms and 65% which is considerably higher than last year’s growth. 12 exchange bureaus. b) NATIONAL BANKING The national banking group has 14 administrative circles encompassing a vast network of 9.47 % against a growth rate of 40.51bn to Rs. revamped business processes and with its focus on market dynamics and customer preferences. 4 sub-offices.177 branches.610. Page 13 . Debt restructuring mechanism for units in SME sector has been devised to ensure restructuring of debt of all eligible Small and Medium Enterprises (SMEs) on favorable terms. 809 are specialized branches. SBI Freedom Home Loans (Loans given without mortgage of property. and concentrating on various players in the value chain. instead).146. even in the remotest corners of the country. several new products were introduced. This group consists of four business group which are enumerated below: 1) Personal Banking SBU This SBU is mainly responsible for retail business. SBI Tribal Plus Home Loans. at no extra cost).12% in the previous year. tailored to fit the needs of specific customer segments. 2) Small & Medium Enterprises The SME Business Unit implemented comprehensive strategies. Out of the total branches.17. showing a growth of Rs. achieved commendable business growth.16bn at the rate of 31. The initiative was implemented by focusing on specific industry segments. SBI NRI-Home Loans.
recording a growth of 39. agriculture loans contribute 11% of the total loan book. 4) Government Banking With the establishment of the government business unit and the consequent focus on marketing.06 %.456.CREDIT APPRAISAL IN BANKING SECTOR Focused on the SME sector. c) INTERNATIONAL BANKING Page 14 . 3) Agricultural Banking This SBU is accountable for agricultural credit both traditional and new thrust areas like contract farming.90bn during FY06. The turnover increased by 10. farmers financed through Agri Export Zones (AEZs) and value chain financing. of India target of 30%. sago and starch and horticulture activities like Apple Orchards and grape farming under the scheme.1.08% during the year.16bn as at the end of March 06. projects under Uptech are taken up in location specific and activity specific industry clusters. So far the bank has taken 28 projects for modernization under the Project Uptech covering industries like foundry.773.26bn in FY05 to Rs. etc. Bank’s business turnover from the government business segment during 2004-05 was Rs.205.52 % to Rs. pumps. Agricultural advances grew from a level of Rs.9. auto components. business turnover of this segment has grown substantially over the years.60bn of previous year recording a growth of 17.30bn of previous year. The bank has also covered agro based industries like rice mills.843. Increase in disbursements during FY06 was 83% against the Govt. and knitwear. SME advances increased to Rs. The deposits of the SME SBU increased to Rs. glass.890.328. The criteria laid down by the Government of India for growth in SME advances is 20%. As on November 2006.70bn as at the end of March 2006 from Rs.305.81bn.042.8.53bn from Rs.
Factoring. Security trading and primary dealership in the Money Market. In recent years. SBI acquired 76% shareholding in Giro Commercial Bank Limited in Kenya and PT Indomonex Bank Ltd. 25 foreign offices were successfully switched over to Finacle software.755 branches of its seven Associate Banks dominates the banking industry in India. Merchant Banking.CREDIT APPRAISAL IN BANKING SECTOR SBI has a network of 73 overseas offices in 30 countries in all time zones and correspondent relationship with 520 international banks in 123 countries.061 branches including 4. The bank diversified its operations more actively into alternative assets classes with a view to diversify the portfolio and build alternative revenue streams in order to offset the losses in fixed income portfolio. The bank is keen to implement core banking solution to its international branches also. in Indonesia. SBI has installed ATMs at Male. Mutual Funds. Muscat and Colombo Offices. the Group. Page 15 . through its various subsidiaries. provides a whole range of financial services which includes Life Insurance. The reorganization seeks to enhance the efficiencies in use of manpower resources and increase maneuverability of banks operations in the markets both domestic as well as international e) ASSOCIATES & SUBSIDIARIES The State Bank Group with a network of 14. robust credit growth and liquidity constraints. Credit Card. d) TREASURY The bank manages an integrated treasury covering both domestic and foreign exchange markets. The bank incorporated a company SBI Botswana Ltd. During FY06. the treasury operation of the bank has become more active amidst rising interest rate scenario. In recent years. In addition to banking. Reorganization of the treasury processes at domestic and global levels is also being undertaken to leverage on the operational synergy between business units and network. at Gaborone.
ii) SBI Capital Markets Limited (SBICAP) Page 16 . SBI’s seven associate banks are the first amongst the public sector banks in India to get fully networked through CBS. of lives insured and policies is 25mn).21% among the private players and number one in terms of number of lives insured amongst private players (no.CREDIT APPRAISAL IN BANKING SECTOR 1) Associates Banks: SBI has seven associate banks namely • State Bank of Indore • State Bank of Travancore • State Bank of Bikaner and Jaipur • State Bank of Mysore • State Bank of Patiala • State Bank of Hyderabad • State Bank of Saurashtra All associate banks have migrated to Core Banking (CBS) platform.7. providing anytimeanywhere banking to its customers to facilitate a bouquet of innovative customer offerings.68bn. Single window delivery system has been introduced in all associate banks. In H1FY07 gross premium was Rs. 2) Non-Banking Subsidiaries/Joint Ventures i) SBI Life: SBI Life is the third largest private insure with the market share of 10.
906. All India financial institutions and private sector banks hold 5. for carrying on the Financial Services Authority (FSA) regulated activities.69% as on March 31. iv) SBI Cards & Payments Services Pvt.1. project advisory and structured finance. Total secondary market turnover of the company was Rs. the aggregate revenue generated by the SBICSPL was Rs. SBI Caps has promoted four wholly owned subsidiaries viz.5.27bn while pre-tax profit was Rs.186. The total assets under management are Rs. the company has earned a PAT of Rs. SBICAP Securities Ltd.67bn in the various schemes during the year. 2006. v) SBI Funds Management (P) Ltd. On the international front. while PAT of the company was at Rs.46%.01% of the company’s paid up capital. Ltd. SBI Caps booked gross income amounting to Rs. Page 17 .481. 2006.75bn in the previous year.285.84% and the Asian Development Bank holds 4.39bn which amounted to a market share of 12. To capitalize on the emerging opportunities. (SBIFMPL) SBI Mutual Fund is the mutual funds arm of the bank. and one of the projects handled by the company has been selected as the Asia Pacific Infrastructure deal of the year for FY06..24. SBIFMPL reported a total inflow of Rs. SBICAP Trustee Company Limited for undertaking venture capital business and SBI CAP (UK) LTD. the company has been placed 11th globally in the Mandated Project Advisor league tables by Thompson’s. while other nationalized banks hold 22.89% among all primary dealers.6mn. for undertaking stock broking activities.CREDIT APPRAISAL IN BANKING SECTOR SBI Caps forged ahead in issue management. For the year ended 31st March.79bn in FY06 as against Rs.1.2mn in FY06 as against Rs.2mn in the last year. sales and distribution. the expertise of SBI Caps in the infrastructure and project advisory has received international acclaim.4mn. (SBICSPL) SBICSPL is ranked 2nd in industry with cards in force over 3mn as on September 06. The company reported a net profit of Rs. SBICAPS Ventures Limited. During FY06. In addition.4mn as at the end of March.49bn.881.558.132. iii) SBI DFHI LTD SBI group holds 67. 2006.
Of this.19% clerical staff and the remaining 25. welcomes you to its ‘Investors Relations’ Section. conference call. website. It is our endeavor to walk on the path of transparency and allow complete access to all the stakeholders enabling total awareness about the Bank. SBI had launched VRS scheme for its employees in FY01 in which it has reduced it staff by approximately 5. such as through e-mail. the country’s largest commercial Bank in terms of profits. branches and employees.30% were sub-staff.CREDIT APPRAISAL IN BANKING SECTOR f) Human Resources The bank had total staff strength of 198. 2006. 45.774 on the 31st March. deposits. with its heritage dating back to the year 1806.000 employees in next 4-5 year. NON BANKING SUBSIDIARIES: The Bank has the following Non-Banking Subsidiaries in India : SBI Capital Markets Ltd SBI Funds Management Pvt Ltd SBI Factors & Commercial Services Pvt Ltd SBI DFHI Ltd State Bank of Travancore (SBT) INVESTOR RELATIONS: State Bank of India. Page 18 . The Bank communicates with the stakeholders through a variety of channels. 29.51% are officers. assets. analysts’ meet and attendance at Investor Conference throughout the world. one-on-one meeting. strives to continuously provide latest and upto date information on its financial performance.000 and estimates natural retirement of another 5. SBI.
The Corporate Centre has several other establishments in and outside Mumbai. State Bank of India has 52 foreign offices in 34 countries across the globe. State Bank of India has an extensive administrative structure to oversee the large network of branches in India and abroad. SBI has always been fundamentally strong in its core business which is mirrored in its results – year after year. The Corporate Accounts Group is a Strategic Business Unit of the Bank set up exclusively to fulfil the specialised banking needs of top corporates in the country. State Bank of India invites you to take a journey to understand the potential of not just a large but truly global organisation.CREDIT APPRAISAL IN BANKING SECTOR Please find below Bank’s financial results. Fund Managers and Analysts. financial & technical viability of the project proposed its funding pattern & further checks the primary & collateral security cover available for recovery of such funds. designated to cater to various functions. The Corporate Centre is in Mumbai and 14 Local Head Offices and 57 Zonal Offices are located at important cities spread throughout the country. Page 19 . analysis of performance and other highlights which will be of interest to Investors. Our Colleges/Institutes/Training Centres are the seats of learning and research and development to spread the wings of knowledge not only to our employees but also other banks/establishments in India and abroad. CHAPTER-2 BRIEF OVERVIEW OF CREDIT APPRAISAL Credit appraisal means an investigation/assessment done by the bank prior before providing any loans & advances/project finance & also checks the commercial.
Generally the credit facilities are extended against the security know as collateral. banks are normally interested in the actual loan amount to be repaid along with the interest. Every bank or lending institution has its own panel of officials for this purpose. Thus. • • • Character Capacity Collateral If any one of these are missing in the equation then the lending officer must question the viability of credit. It is generally carried by the financial institutions which are involved in providing financial funding to its customers. are taken into account while appraising the credit worthiness of a person. Thus it is necessary to appraise the credibility of the customer in order to mitigate the credit risk. credit cards. nature of employment. etc.CREDIT APPRAISAL IN BANKING SECTOR Brief overview of credit: Credit Appraisal is a process to ascertain the risks associated with the extension of the credit facility. previous loans. income. which should be the objective of every lending officer. But even though the loans are backed by the collateral. number of dependents. repayment capacity. continuity of employment. However the 3 ‘C’ of credit are crucial & relevant to all borrowers/ lending which must be kept in mind at all times. Proper evaluation of the customer is performed which measures the financial condition and the ability of the customer to repay back the loan in future. Page 20 . the customer's cash flows are ascertained to ensure the timely payment of principal and the interest. Factors like age. however if proper credit evaluation techniques and monitoring are implemented then naturally the loan loss probability / problems will be minimized. There is no guarantee to ensure a loan does not run into problems. It is the process of appraising the credit worthiness of a loan applicant. Credit risk is a risk related to non repayment of the credit obtained by the customer of a bank.
Credit allows you to buy goods or commodities now. Loans can be for small or large amounts and for a few days or several years. you will be able to get the most for your money and avoid paying unnecessary charges. student loans. Loans can be secured or unsecured. You often have to pay a deposit. BASIC TYPES OF CREDIT There are four basic types of credit. major appliances. Installment credit may be described as buying on time. a debt is formed. The most common way to avail credit is by the use of credit cards. make a down payment. and water. In simple terms. financing through the store or the easy payment plan. Loans let you borrow cash. also known as a borrower. electricity. With the issuance of a credit. Money can be repaid in one lump sum or in several regular payments until the amount you borrowed and the finance charges are paid in full. and furniture are often purchased this way. A credit is a legal contract where one party receives resource or wealth from another party and promises to repay him on a future date along with interest. also known as a lender. We use credit to buy things with an agreement to repay the loans over a period of time. and agree to pay the balance with a specified number of equal payments called Page 21 . The borrower takes the goods home in exchange for a promise to pay later. Other credit plans include personal loans. You usually sign a contract. vehicle loans. By understanding how each works. Service credit is monthly payments for utilities such as telephone. and instead arranges either to repay or return those resources (or material(s) of equal value) at a later date. The first party is called a creditor. and pay for them later. and you may pay a late charge if your payment is not on time.CREDIT APPRAISAL IN BANKING SECTOR Credit is the provision of resources (such as granting a loan) by one party to another party where that second party does not reimburse the first party immediately. small business loans. a credit is an agreement of postponed payments of goods bought or loan. trade. home loans. Cars. thereby generating a debt. gas. while the second party is called a debtor.
Using a credit card can be the equivalent of an interest-free loan--if you pay for the use of it in full at the end of each month. The finance charges are included in the payments. The item you purchase may be used as security for the loan. or businesses.CREDIT APPRAISAL IN BANKING SECTOR installments. banks. BRIEF OVERVIEW OF LOANS Credit can be of two types fund base & non-fund base: FUND BASED includes: • • Working Capital Term Loan NON-FUND BASED includes: • • Letter of Credit Bank Guarantee FUND BASED:WORKING CAPITAL:Page 22 . Credit cards are issued by individual retail stores.
GENERAL The objective of running any industry is earning profits. the materials & marketing mix. machinery. METHODS & APPLICATION SEGMENT SSI SBF C&I Trade Services LIMITS Upto Rs 5 cr Above Rs 5 cr All loans & Upto Rs 1 cr METHOD Traditional Method & Nayak Committee method Projected Balance Sheet Method Traditional / Turnover Method Traditional Method for Trade & Projected Turnover Method Page 23 .. The excess of current assets over current liabilities is treated as net working capital or liquid surplus & represents that portion of the working capital which has been provided from the long term source. For production. for storing finishing goods till they are sold out & for financing the sales by way of sundry debtors/ receivables. Capital or funds required for an industry can therefore be bifurcated as fixed capital & working capital.e. Thus Working Capital Required is dependent on (a) The volume of activity (viz. equipments. Working capital in this context is the excess of current assets over current liabilities. level of operations i. mfg process. & also to run the business i. building. 2. plant. for employment of labour. 3..CREDIT APPRAISAL IN BANKING SECTOR 1. production programme. Funds required for day to-day working will be to finance production & sales. Production & sales) (b) The activity carried on viz. funds are needed for purchase of raw materials/ stores/ fuel. product. tools etc. its day to day operations. for power charges etc. vehicles. An industry will require funds to acquire “Fixed assets” like land.e. Definition Working capital is defined as the funds required to carry the required levels of current assets to enable the unit to carry on its operations at the expected levels uninterruptedly.
OPERATING CYCLE METHOD a) Any manufacturing activity is characterized by a cycle of operations consisting of purchase of purchase of raw materials for cash. converting these into finished goods & realizing cash by sale of these finished goods. b) Diagrammatically. the OPERATING CYCLE is represented as under Page 24 .CREDIT APPRAISAL IN BANKING SECTOR Above Rs 1 cr & upto Rs 5 cr Above Rs 5 cr C&I Industrial Below Units Rs 25 lacs Rs 25 lacs & Over but upto Rs 5 cr Above Rs 5 cr Projected Balance Sheet Method & Projected Turnover Method Projected Balance Sheet Method Traditional Method Projected Balance Sheet Method & Projected Turnover Method Projected Balance Sheet Method 4.
CREDIT APPRAISAL IN BANKING SECTOR Raw Materials Stock in Process Cash Finished Goods Bills c) The time that lapses between cash outlay & cash realization by sale of finished goods & realization of sundry debtors is known as the length of the operating cycle. the operating cycle consists of: • Time taken to acquire raw materials & average period for which they are in store. d) That is. Page 25 .
of cycles per annum = Rs.000/3 WCR is therefore not Rs. bills (receivables) & finally back to cash.= Rs.000/- Assessment of Working Capital Requirement & Permissible Bank Finance using Operating Cycle Concept Let us consider a case of a unit where: Sales = Rs. Therefore. as you know. In these cases. (This is also known as working capital turnover ratio). (A) Page 26 . there are 3 operating cycles in a year. Sales Operating expenses = = Rs.000. 72. Therefore WCR = Operating Expenses No. 1. This means there are 365/120 = 3 cycles of operations in a year. 20. 72.000 per annum But the working capital requirement. e) The length of the operating cycle = a+b+c+d (as in 4.4) If a = 60 days b = 10 days c = 20 days d = 30 days The operating cycle is 120 days (nearly 4 months). 72. 72. is not Rs.000/. finished goods. 24.00.000/. That means each rupee of working deployed in the unit is turned over 3 times in a year.000 p. 24.but only Rs.CREDIT APPRAISAL IN BANKING SECTOR • • • Conversion process time Average period for which finished goods are in store & Average collection period of receivables (Sundry Debtors) Operating cycle is also called the cash-to-cash cycle & indicates how cash is converted into raw material. working capital can be turned over or redeployed after completing the cycle. stocks in process. Working capital is the total cash that is circulating in this cycle.m.000 per annum Rs.
CREDIT APPRAISAL IN BANKING SECTOR
Raw Materials Wages Other manufacturing Expenses Total expenses Profit The operating cycle is Raw Materials Stock in Process FG Sundry Debtors The total length of Operating cycle = 15 days = 2 days = 3 days = 15 days = 35 days (D) = Rs. 3,000 p.m. = Rs. 19,000 p.m. (B) = Rs. 1,000 P.m. (C) = Rs. 14,000 p.m. = Rs. 2,000 p.m.
WCR = B * D = 19,000 * 35 = Rs. 22,167/- (approx.) 30 30 Where B = Operating Expenses; & D = Length of Operating cycle
1. A term loan is granted for a fixed term of not less than 3 years intended normally for
financing fixed assets acquired with a repayment schedule normally not exceeding 8 years.
2. A term loan is a loan granted for the purpose of capital assets, such as purchase of land,
construction of, buildings, purchase of machinery, modernization, renovation or
CREDIT APPRAISAL IN BANKING SECTOR
rationalization of plant, & repayable from out of the future earning of the enterprise, in installments, as per a prearranged schedule. From the above definition, the following differences between a term loan & the working capital credit afforded by the Bank are apparent:
• The purpose of the term loan is for acquisition of capital assets.
The term loan is an advance not repayable on demand but only in installments ranging over a period of years. The repayment of term loan is not out of sale proceeds of the goods & commodities per se, whether given as security or not. The repayment should come out of the future cash accruals from the activity of the unit. The security is not the readily saleable goods & commodities but the fixed assets of the units.
3. It may thus be observed that the scope & operation of the term loans are entirely different from those of the conventional working capital advances. The Bank’s commitment is for a long period & the risk involved is greater. An element of risk is inherent in any type of loan because of the uncertainty of the repayment. Longer the duration of the credit, greater is the attendant uncertainty of repayment & consequently the risk involved also becomes greater. 4. However, it may be observed that term loans are not so lacking in liquidity as they appear to be. These loans are subject to a definite repayment programme unlike short term loans for working capital (especially the cash credits) which are being renewed year after year. Term loans would be repaid in a regular way from the anticipated income of the industry/ trade.
5. These distinctive characteristics of term loans distinguish them from the short term credit granted by the banks & it becomes necessary therefore, to adopt a different approach in examining the applications of borrowers for such credit & for appraising such proposals. 6. The repayment of a term loan depends on the future income of the borrowing unit. Hence, the primary task of the bank before granting term loans is to assure itself that the anticipated income from the unit would provide the necessary amount for the repayment of the loan. This will involve a detailed scrutiny of the scheme, its financial aspects, economic aspects, technical aspects, a projection of future trends of outputs & sales & estimates of cost, returns, flow of funds & profits.
CREDIT APPRAISAL IN BANKING SECTOR
7. Appraisal of Term Loans Appraisal of term loan for, say, an industrial unit is a process comprising several steps. There are four broad aspects of appraisal, namely •
Technical Feasibility - To determine the suitability of the technology selected & the adequacy of the technical investigation & design; Economic Feasibility - To ascertain the extent of profitability of the project & its sufficiency in relation to the repayment obligations pertaining to term assistance; Financial Feasibility - To determine the accuracy of cost estimates, suitability of the envisaged pattern of financing & general soundness of the capital structure; & Managerial Competency – To ascertain that competent men are behind the project to ensure its successful implementation & efficient management after commencement of commercial production.
7.1 Technical Feasibility The examination of this item consists of an assessment of the various requirement of the actual production process. It is in short a study of the availability, costs, quality & accessibility of all the goods & services needed.
a) The location of the project is highly relevant to its technical feasibility & hence
special attention will have to be paid to this feature. Projects whose technical requirements could have been taken care of in one location sometimes fail because they are established in another place where conditions are less favorable. One project was located near a river to facilitate easy transportation by barge but lower water level in certain seasons made essential transportation almost impossible. Too many projects have become uneconomical because sufficient care has not been taken in the location of the project, e.g. a woolen scouring & spinning mill needed large quantities of good water but was located in a place which lacked ordinary supply of water & the limited water supply available also required efficient softening treatment. The accessibility to the various resources has meaning only with reference to location. Inadequate transport facilities or lack of sufficient power or water for instance, can adversely affect an otherwise sound industrial project.
It is equally important to avoid adopting equipment or processes which are absolute or likely to become outdated soon.. The size of the plant will be such that it will give an economic product which will be competitive when compared to the alternative product available in the market.. marketability of the products etc.CREDIT APPRAISAL IN BANKING SECTOR b) Size of the plant – One of the most important considerations affecting the feasibility of a new industrial enterprise is the right size of the plant. should be obtained with specific comments on the feasibility of scheme. Since earnings depend on the volume of sales. d) Labour – The labour requirements of a project. A smaller plant than the optimum size may result in increased production costs & may not be able to sell its products at competitive prices. there is shortage of trained personnel. whether machinery proposed to be acquired by the unit under the scheme will be sufficient for all stages of production. This involves getting answers to three questions. it is necessary to determine how much output or the additional production from an established unit the market is likely to absorb at given prices. c) Type of technology – An important feature of the feasibility relates to the type of technology to be adopted for a project. A new technology will have to be fully examined & tired before it is adopted. The quality of labour required & the training facilities made available to the unit will have to be taken into account e) Technical Report – A technical report using the Bank’s Consultancy Cell. the extent of competition prevailing. etc. a) A thorough market analysis is one of the most essential parts of project investigation. a) How big is the market? Page 30 . Though labour in terms of unemployed persons is abundant in the country. wherever necessary. The principle underlying the technological selection is that “a developing country cannot afford to be the first to adopt the new nor yet the last to cast the old aside”. need to be assessed with special care.2 Economic Feasibility An economic feasibility appraisal has reference to the earning capacity of the project. its profitability. 7. external consultants.
Break-even point: Page 31 . technological advances could bring substitutes into market while changes in tastes & consumer preference might cause sizable shifts in demand. parts for machines.g. paper for printing. start-up time etc.g. Care should be taken to see that there is no idle capacity in the existing industries. It is complicated because a variety of factors affect the demand for product e. taking account of the total output of the product concerned & the existing demand for it with a view to establishing whether there is unsatisfied demand for the product.CREDIT APPRAISAL IN BANKING SECTOR b) How much it is likely to grow? c) How much of it can the project capture? The first step in this direction is to consider the current situation. jute bags. ii) Future – possible future changes in the volume & patterns of supply & demand will have to be estimated in order to assess the long term prospects of the industry. The market analysis in this case should cover the market for the ultimate product.3 Financial Feasibility The basis data required for the financial feasibility appraisal can be broadly grouped under the following heads i) Cost of the project including working capital ii) Cost of production & estimates of profitability iii) Cash flow estimates & sources of finance. 7. The profitability estimates will also give the estimate of the Debt Service Coverage which is the most important single factor in all the term credit analysis. iii) Intermediate product – The demand for “Intermediate product” will depend upon the demand & supply of the ultimate product (e. The estimate of profitability & the breakeven point will enable the banker to draw up the repayment programme. The cash flow estimates will help to decide the disbursal of the term loan. Forecasting of demand is a complicated matter but one of the vital importance. A study of the projected balance sheet of the concern is essential as it is necessary for the appraisal of a term loan to ensure that the implementation of the proposed scheme. tyres for automobiles).
Page 32 . The cash accruals for this purpose should comprise net profit after taxes with interest. in that it serves as a measure of the repayment capacity of the project/ unit & is. depreciation provision & other non cash expenses added back to it. therefore. The repayment programme should be so stipulated that the ratio is comfortable. this point of no profit/ no loss is known as the break-even point. an appraisal of management is the touchstone of term credit analysis. Break-even point is expressed as a percentage of full capacity. In high cost schemes. The integrity & credit worthiness of the personnel in charge of the management of the industry as well as their experience in management of industrial concerns should be examined. Debt Service = Cash accruals Coverage Ratio Maturing annual obligations This ratio is valuable. on the relative strength of its management. the success of the project may be put to test. Hence. Debt/ Service Coverage: The debt service coverage ratio serves as a guide to determining the period of repayment of a loan. This is calculated by dividing cash accruals in a year by amount of annual obligations towards term debt. The ratio may vary from industry to industry but one has to view it with circumspection when it is lower than the benchmark of 1. the capacity of an enterprise to forge ahead of its competitors depends to a large extent. If there is a change in the administration & managerial set up.CREDIT APPRAISAL IN BANKING SECTOR In a manufacturing unit. A good project will have reasonably low break-even point which not be encountered in the projections of future profitability of the unit. the total manufacturing cost equals the sales revenue.75. if at a particular level of production. an idea of the unit’s key personnel may also be necessary. 7. appropriately included in the cash flow statements.4 Managerial Competence In a dynamic environment.
Here arises the need of Letter of Credit (LCs). Bankers and all concerned deal only in documents & not in goods. The seller desires to have an assurance for payment by the purchaser. it is therefore necessary that the evidence of movement of goods is present.CREDIT APPRAISAL IN BANKING SECTOR NON-FUND BASED:LETTER OF CREDIT Introduction The expectation of the seller of any goods or services is that he should get the payment immediately on delivery of the same. At the same time the purchaser desires that the amount should be paid only when the goods are actually received. The objective of LC is to provide a means of payment to the seller & the delivery of goods & services to the buyer at the same time. provided that the terms & conditions of the credit are complied with. If documents are in order issuing bank will pay irrespective of whether the goods are of expected quality or not. Banks are also not responsible for the genuineness of the documents & quantity/quality of goods. Clean bills which do not have document of title to goods are not normally established by banks. This may not materialize if the seller & the buyer are at different places (either within the same country or in different countries). or authorizes another bank to effect such payment. Parties to the LC Page 33 . i. is to make a payment to or to the order of a third party (the beneficiary). Basic Principle: The basic principle behind an LC is to facilitate orderly movement of trade. or authorizes another bank to negotiate against stipulated document(s). the bank has to advice him to convert all his requirements in the form of documents to ensure quantity & quality of goods. or to accept & pay such bills of exchanges (drafts). or is to accept & pay bills of exchange (drafts drawn by the beneficiary). Definition A Letter of Credit (LC) is an arrangement whereby a bank (the issuing bank) acting at the request & on the instructions of the customer (the applicant) or on its own behalf. Hence documentary LCs is those which contains documents of title to goods as part of the LC documents. iii. ii. If importer is your borrower.
Irrevocable LCs cannot be revoked/ cancelled/ amended without the prior concern of all the parties to the LC. Reimbursing bank is used in an LC transaction by an opening bank when the bank does not have a direct correspondent/branch through whom the negotiating bank can be reimbursed. Here. the opening bank will direct the reimbursing bank to reimburse the negotiating bank with the payment made to the beneficiary. Types of Letter of Credit:a) Revocable & Irrevocable: As the name suggests. c) Sight/ Usance LCs: Page 34 . A bank will confirm an LC for his beneficiary if opening bank requests this as part of LC terms. revocable LCs are those that can be revoked by the issuing bank & hence are not in commercial use. the LC may be transferred to the second beneficiary & if provided in the LC it can be transferred even more than once. In the case of transferable LC. b) Confirmed LC: The seller may ask for the confirmation of the LC by a bank in his own country if he is not satisfied about the issuing bank’s credentials.CREDIT APPRAISAL IN BANKING SECTOR 1) Applicant – The buyer who applies for opening LC 2) Beneficiary – The seller who supplies goods 3) Issuing Bank – The Bank which opens the LC 4) Advising Bank – The Bank which advises the LC after confirming authenticity 5) Negotiating Bank – The Bank which negotiates the documents 6) Confirming Bank – The Bank which adds its confirmation to the LC 7) Reimbursing Bank – The Bank which reimburses the LC amount to negotiating bank 8) Second beneficiary – The additional beneficiary in case of transferable LCs Confirming bank may not be there in a transaction unless the beneficiary demand confirmation by his own bankers & such a request is made part of LC terms.
all LC are not transferable. If A receives an LC for USD 100000 for shipment of marine products & he approaches the Bank for opening LCs in favour of his suppliers of marine products within the original value & in keeping with the terms of the original LC these new LCs are opened against the backing of the original LC. Sight LCs have to be paid by the drawee (buyer) immediately whereas he gets credit as per LC terms under Usance LCs. As per UCPDC stipulated in the LC. However. The seller gives the receipt & an undertaking to present the documents before the LC expires. who exports marine products by buying them from a number of suppliers. it may be noted that this arrangement is not under the provisions of UCPDC though the individual LCs are governed by it. Page 35 .CREDIT APPRAISAL IN BANKING SECTOR In case of the sight LCs beneficiary gets immediate payment upon presentation of the documents while in the case of usance. g) Back to back LCs: When the bank opens new LCs against the backing of an LC received by a beneficiary having the first LC as security for the new LCs opened. f) Transferable LCs: Transferable LC are transferable in whole or in part to one or more beneficiaries depending on the terms of LC. Advance amount would be adjusted from the proceeds of the export documents. For example let us assume a customer A. Number of such utilization & the period of time by which this should take place are stipulated in the LC. the issuing bank undertakes to restore the credit to the original amount after it has been utilized. d) LC with advance payment to the seller: The LC which authorizes the advising bank to advance a part of LC amount to the seller to meet pre-shipment expenses is known as Red Clause Letter of Credit. The goods are stored in the name of the issuing bank. the transaction is referred to as Back to Back. This is the back to back transaction. On receipt of bill payment advise the LC amount gets reinstated. When the Red Clause LC provides for the cost of shortage facilities at the port of shipment in addition to the pre-shipment advance to the beneficiary it is called Green Clause LC. the risk is assumed by the buyer. e) Revolving LC: Under this. However. the payment is made after a certain period as per the LC terms.
CREDIT APPRAISAL IN BANKING SECTOR Illustration for computation of LC limit M/S XYZ Co Ltd Letter of credit limit of Rs.12 Page 36 .64 69. 20 crore (Rs.2 months’ consumption) Average usance period Lead time & transit period Total of (B) & (C) The requirement of LC limit (A) * (D) (A) (B) (C) (D) 172.30 3 months 1 month 4 months 23. in crores) Total purchase of raw material Purchase of raw materials under LC Average monthly purchase of raw material under LC Average holding of imported raw materials (2.78 11.41 5.
c) Guarantee: The person who undertakes to discharge the obligations of the applicant in case of his default. The parties to the contract of guarantees are: a) Applicant: The principal debtor – person at whose request the guarantee is executed b) Beneficiary: Person to whom the guarantee is given & who can enforce it in case of default. Purpose of Bank Guarantees Page 37 . guarantee is a collateral contract. a) Raw material consumption (Amount in rupees) b) Add: Closing stock of raw material c) Less: Opening stock of raw material d) Total Purchases during the period e) Purchases on LC basis as % of total purchases f) Purchases on LC basis in rupees g) Import duty payable. the following 23. Thus.CREDIT APPRAISAL IN BANKING SECTOR Limit recommended say Explanatory notes: 1) While calculating the amount of raw materials purchases on LC basis. consequential to a main contract between the applicant & the beneficiary. BANK GUARANTEES A contract of guarantee is defined as ‘a contract to perform the promise or discharge the liability of the third person in case of the default’.00 points need to be noted. if any h) Purchases on LC basis net on import duty (CIF value) (f-g) 2) Transit time should be treated as ‘nil’ if usance period starts from shipment date.
. security. In a performance guarantee. Branches may issue guarantees generally for the following purposes: a) In lieu of security deposit/earnest money deposit for participating in tenders. Branches should not issue guarantees for a period more than 18 months without prior reference to the controlling authority. e) Performance guarantee for warranty period on completion of contract which would enable the suppliers to realize the proceeds without waiting for warranty period to be over. creditworthiness & his capacity to take up financial risks. c) In respect of raw materials supplies or for advances by the buyers. expertise. d) In respect of due performance of specific contracts by the borrowers & for obtaining full payment of the bills. Extant instructions stipulate an Administrative Clearance for issue of Page 38 . Guidelines on conduct of Bank Guarantee business Branches. The guarantees executed by banks comprises both performance guarantees & financial guarantees. a bank guarantee’s a customer financial worth.CREDIT APPRAISAL IN BANKING SECTOR Bank Guarantees are used to for both both preventive & remedial purposes. The subtle difference between the two types of guarantees is that under a financial guarantee. branches should exercise due caution & have sufficient experience with the customer to satisfy themselves that the customer has the necessary experience. b) Mobilization advance or advance money before commencement of the project by the contractor & for money to be received in various stages like plant layout. In case of performance guarantee. maturity & purpose. capacity. the bank’s guarantee obligations relate to the performance related obligations of the applicant (customer). etc. & means to perform the obligations under the contract & any default is not likely to occur. The guarantees are structured according to the terms of agreement. should limit themselves to the provision of financial guarantees & exercise due caution with regards to performance guarantee business. design/drawings in project finance. g) Bid bonds on behalf of exporters h) Export performance guarantees on behalf of exporters favouring the Customs Department under EPCG scheme. as a general rule. it should be ensured that customers should be in a position to reimburse the Bank in case the Bank is required to make the payment under the guarantee. While issuing financial guarantees. viz. f) To allow units to draw funds from time to time from the concerned indenters against part execution of contracts.
No bank guarantee should normally have a maturity of more than 10 years. Branches may obtain adequate cover by way of margin & security so as to prevent default on payments when guarantees are invoked. in cases where requests are received for extension of the period of BGs as long as the fresh period of extension is within 18 months. branches should examine & satisfy themselves about the following aspects: a) The need of the bank guarantee & whether it is related to the applicant’s normal trade/business.e. e.. Whenever an application for the issue of bank guarantee is received. However. the customer’s response to the invocation. the reasons thereof. instances of invocation of bank guarantees. b) Whether the requirement is one time or on the regular basis c) The nature of bank guarantee i.g. where furnished by exception. Unsecured guarantees. etc. financial or performance d) Applicant’s financial strength/ capacity to meet the liability/ obligation under the bank guarantee in case of invocation. Page 39 . should be for a short period & for relatively small amounts. Bank guarantee beyond maturity of 10 years may be considered against 100% cash margin with prior approval of the controlling authority.CREDIT APPRAISAL IN BANKING SECTOR BGs for a period in excess of 18 months.. More than ordinary care is required to be executed while issuing guarantees on behalf of customers who enjoy credit facilities with other banks. e) Past record of the applicant in respect of bank guarantees issued earlier. Appraisal of Bank Guarantee Limit Proposals for guarantees shall be appraised with the same diligence as in the case of fund-base limits. All deferred payment guarantee should ordinarily be secured.
Amount of Guarantee Rs………………. …………………………… ……………………………. ………. c) for a specific amount d) in respect of bona fide trade/ commercial transactions. When it is required to be issued on a format different from the IBA format. ……………………………. 1955 having its Central Office at Nariman Point.Branch Form No. Guarantee No. Mumbai & amongst other places.CREDIT APPRAISAL IN BANKING SECTOR f) Present o/s on account of bank guarantees already issued g) Margin h) Collateral security offered Format of Bank Guarantees Bank guarantees should normally be issued on the format standardized by Indian Banks Association (IBA).1. Dear Sir. as may be demanded by some of the beneficiary Government departments. b) for a definite objective enforceable on the happening of a definite event.3. it should be ensured that the bank guarantee is a) for a definite period. ……………………………. Guarantee cover from 1. e) contains the Bank’s standard limitation clause f) not stipulating any onerous clause. a (Stamp) Page 40 .3.20*1 This Deed of guarantee executed by the State Bank Of India constituted under the State Bank of India Act. & g) not containing any clause for automatic renewal of the bank guarantee on its expiry Specimen of the First Page of Bank Guarantee (To be stamped as an agreement in accordance with the Stamp Act in force) STATE BANK OF INDIA …………………….20*0 to 31.20*1 Last date for lodgement of claim – 31.
CIBIL data. ECGC caution list.. This guarantee is issued subject to the condition that the liability of the bank under this Guarantee is limited to a maximum of Rs. MOA. willful defaulters list. SUBJECT TO AS AFORESAID (Main Guarantee matter may be typed hereafter) CREDIT APPRAISAL PROCESS Receipt of application from applicant | Receipt of documents (Balance sheet.(hereinafter referred to as ‘the Contractor/(s)). registration no.only) & the Guarantee shall remain in full force up to 31..3. Different govt.(Rupees …………………………………………………….(hereinafter referred to as ‘the Bank’) in favour of…………………………(hereinafter referred to as ‘the Beneficiary’) for an amount not exceeding Rs……………. etc...CREDIT APPRAISAL IN BANKING SECTOR branch at……………………………….only) at the request of……………………. last date of claim).3. | Title clearance reports of the properties to be obtained from empanelled advocates | Valuation reports of the properties to be obtained from empanelled valuer/engineers | Preparation of financial data Page 41 . KYC papers. …………… (Rupees………………………. and Properties documents) | Pre-sanction visit by bank officers | Check for RBI defaulters list. AOA.20*1.20*1 (date of expiry) & cannot be invoked otherwise than by a written demand or claim under this Guarantee served on the Bank on or before the 31.
CREDIT APPRAISAL IN BANKING SECTOR | Proposal preparation | Assessment of proposal | Sanction/approval of proposal by appropriate sanctioning authority | Documentations. review of accounts. Page 42 . etc (on regular basis) CHAPTER-3 RESEARCH METHODOLOGY INTRODUCTION TO CREDIT APPRAISAL: Credit appraisal means an investigation/assessment done by the bank prior before providing any loans & advances/project finance & also checks the commercial. agreements. financial & technical viability of the project proposed its funding pattern & further checks the primary & collateral security cover available for recovery of such funds. Ahmedabad. PROBLEM STATEMENT: To study the Credit Appraisal System in SME sector. renew of accounts. at State Bank of India (SBI). mortgages | Disbursement of loan | Post sanction activities such as receiving stock statements.
RESEARCH DESIGN - Analytical in nature COVERAGE Study of credit appraisal in banking sector at State Bank of India. business risk. To observe the movements to reduce various risk parameters which are broadly categorized into financial risk. To check the primary & collateral security cover available for recovery of such funds. To check the commercial.CREDIT APPRAISAL IN BANKING SECTOR OBJECTIVES • • • • To study the Credit Risk Assessment Models. Ahmedabad DATA COLLECTION Secondary Data • • • • • Books & magazines Database at SBI Library research Websites E-circulars of SBI Page 43 . financial & technical viability of the project proposed & its funding pattern. industrial risk & management risk.
industrial risk & management risk associated in providing any loans or advances or project finance. CHAPTER-4 INTRODUCTION OF SME SME Page 44 . which are broadly categorized into financial risk. business risk.CREDIT APPRAISAL IN BANKING SECTOR LIMITATION OF STUDY • • Due to the constraint limited study on the project has been done Access to data ( Credit Appraisal data in detail is not available) EXPECTED CONTRIBUTION OF THE STUDY: This study will help in understanding the credit appraisal system in banks & to reduce various risk parameters.
presents an opportunity to the nation to harness local competitive advantages for achieving global dominance. therefore. 4.2 From SSI to SME: Page 45 . The sector. contribute 40% of the industrial output and offer the largest employment after agriculture.CREDIT APPRAISAL IN BANKING SECTOR 4.1 Concept: The small-scale industries (SSI) produce about 8000 products.
The definition may be reviewed after enactment of the Small and Medium Enterprises Development Bill. Small and Medium Enterprises Development (MSMED) Act 2006 which was notified on October 2.3 Definition of SMEs“ At present.10 crore under multiple/ consortium banking arrangement. A comprehensive legislation. 10 crore may be treated as Medium Enterprises (ME). The lowering of trade barriers across the globe has increased the minimum viable scale of enterprises. 4. Units with investment in plant and machinery in excess of SSI limit and up to Rs. drugs and pharmaceuticals. c) All corporate SMEs.4 Eligibility criteria (i) These guidelines would be applicable to the following entities. b) All corporate SMEs.1 Government policy as well as credit policy has so far concentrated on manufacturing units in the small-scale sector. 4. irrespective of the level of dues to the bank. except in respect of certain specified items under hosiery. stationery items and sports goods. which are viable or potentially viable: a) All non-corporate SMEs irrespective of the level of dues to banks. which are enjoying banking facilities from a single bank. there is also a need to broaden the current concept of the sector and include the medium enterprises in a composite sector of Small and Medium Enterprises (SMEs). which would enable the paradigm shift from small-scale industry to small and medium enterprises under consideration of Parliament. The size of the unit and technology employed for firms to be globally competitive is now of a higher order. 2006. In keeping with global practice. The definition of the small and medium enterprises as provided in the Act (Annex VII) will have immediate effect. Units with investment in plant and machinery in excess of SSI limit and up to Rs. which have funded and non-funded outstanding up to Rs. The definition of small-scale sector needs to be revisited and the policy should consider inclusion of services and trade sectors within its ambit.10 crore may be treated as Medium Enterprises (ME). where this investment limit has been enhanced to Rs 5 crore. a small scale industrial unit is an undertaking in which investment in plant and machinery.1 crore.CREDIT APPRAISAL IN BANKING SECTOR Defining the New Paradigm2. “ The Government of India has enacted the Micro. The Reserve Bank of India had meanwhile set up an Internal Group which has recommended:” Current SSI/tiny industries definition may continue. does not exceed Rs. Page 46 . hand tools.
(iv) In respect of BIFR cases banks should ensure completion of all formalities in seeking approval from BIFR before implementing the package. SME: At present. small and medium enterprises. 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. A comprehensive legislation which would enable the paradigm shift from small scale industry to small and medium enterprises is under consideration of Parliament.CREDIT APPRAISAL IN BANKING SECTOR (ii) Accounts involving willful default.10 crore may be treated as Medium Enterprises (ME). Page 47 . Banks may arrange to compile data on outstanding credit to SME sector as on March 31. (iii) Accounts classified by banks as “Loss Assets” will not be eligible for restructuring. Only SSI financing will be included in Priority Sector. All banks may fix self-targets for financing to SME sector so as to reflect a higher disbursement over the immediately preceding year.5 crore. drugs and pharmaceuticals. does not exceed Rs. current SSI/tiny industries definition may continue. hand tools. stationery items and sports goods where this investment limit has been enhanced to Rs.1 crore except in respect of certain specified items under hosiery. Units with investment in plant and machinery in excess of SSI limit and up to Rs. a small scale industrial unit is an industrial undertaking in which investment in plant and machinery. all banks. including Regional Rural Banks may make concerted efforts to provide credit cover on an average to at least 5 new small/medium enterprises at each of their semi urban/urban branches per year. Banks may initiate necessary steps to rationalize the cost of loans to SME sector by adopting a transparent rating system with cost of credit being linked to the credit rating of enterprise. while the sub-targets for financing tiny units and smaller units to the extent of 40% and 20% respectively may continue. 2005 as per new definition and also showing the break up separately for tiny. Pending enactment of the above legislation. fraud and malfeasance will not be eligible for restructuring under these guidelines. In order to increase the outreach of formal credit to the SME sector.
efficient recovery processes and available security. SMEs also lack access to private equity and venture capital and have a very limited access to secondary market instruments. With the deregulation of the financial sector. particularly the tiny segment of the small enterprises have inadequate access to finance due to lack of financial information and non-formal business practices. d) The access of SMEs to technology and product innovations is also limited. c) SMEs lack easy access to inter-state and international markets.CREDIT APPRAISAL IN BANKING SECTOR A debt restructuring mechanism for nursing of sick units in SME sector and a One Time Settlement (OTS) Scheme for small scale NPA accounts in the books of the banks as on March 31. 2004 are being introduced. the ability of the banks to service the credit requirements of the SME sector depends on the underlying transaction costs. e) SMEs face considerable delays in the settlement of dues/payment of bills by the large scale buyers. There is lack of awareness of global best practices. 4. WHAT IS RISK? • Risk is inability or unwillingness of borrower-customer or counter-party to meet their repayment obligations/ honor their commitments. b) SMEs face fragmented markets in respect of their inputs as well as products and are vulnerable to market fluctuations. as per the stipulated terms. There is an immediate need for the banking sector to focus on credit and SMEs.5 CHALLENGES FACED BY SME: The challenges being faced by the small and medium sector may be briefly set out as followsa) Small and Medium Enterprises (SME). LENDER’ TASK Page 48 . CHAPTER-5 CREDIT RISK ASSESSMENT FOR A BANK.
to measure & to monitor the credit risk of an individual proposal.CREDIT APPRAISAL IN BANKING SECTOR • • Identify the risk factors. Page 49 . The eventual CRA rating awarded to a unit (based on a score of 100) is a single-point risk indicator of an individual credit exposure. CREDIT & RISK • • Go hand in hand. At the corporate level. & is used to indentify. and Mitigate the risk HOW DOES RISK ARISE IN CREDIT? In the business world. these are the broad risk categories or risk factors built into our CRA models. They are like twin brothers. CRA takes into account the above types of risks associated with the borrowal unit. CRA is also used to track the quality of Bank’s credit portfolio. success factors behind a business are: • • • • Managerial ability Favorable business environment Favorable industrial environment Adequate financial strength As such. Risk arises out of • • • • Deficiencies / lapses on the part of the management (Internal factor) Uncertainties in the business environment (External factor) Uncertainties in the industrial environment (External factor) Weakness in the financial position (Internal factor) To put in another way.
proper risk assessment right at the beginning. that is. The banker has to take a calculated risk. But it’s always prudent to have some idea about the degree of risk associated with any credit proposal. salaries to employees & dividend to shareholders In credit. it is not enough that we have sizable growth in quantity/ volume. risk should not deter a Banker from lending. LENDING DESPITE RISKS: • • • • So. which go to pay interest to depositors. based on risk-absorption/ risk-hedging capacity & risk-mitigation techniques of the Bank. excepting the almost negligible volume of lending against liquid collaterals with adequate margin.CREDIT APPRAISAL IN BANKING SECTOR • • They can be compared to two sides of the same coin. All credit proposals have some inherent risks. IMPORTANCE OF CREDIT RISK ASSESSMENT Credit is a core activity of banks & an important source of their earnings. at the time of taking an exposure. is extremely important. To ensure asset quality. Page 50 . A banker’s task is to identify/ assess the risk factors/ parameters & manage / mitigate them on a continuous basis. it is also necessary to ensure that we have only good quality growth.
to become Basle-II compliant. like in many other fields. As of now. with the implementation of Basle-II accord4. Health Code System (1985) / IRAC norms (1993) are Asset (loan) classification systems. That is why Credit Risk Assessment (CRA) system is an essential ingredient of the Credit Appraisal exercise. Thereafter. The CRA models adopted by the Bank take into account all possible factors which go into appraising the risks associated with a loan. capital has to be allocated for loan assets depending on the risk perception/ rating of respective assets. in SBI. our Bank played a proactive & pioneering role. industrial & management risks and are rated separately. We had our Credit Rating System (CRA) in 1988. INDIAN SCENARIO: • • In Indian banks. not CRA systems. separate models for SSI & AGL segments were introduced in 1998.CREDIT APPRAISAL IN BANKING SECTOR Moreover. therefore. 2002. RBI came out with its guidelines on Risk Management Systems in Banks in 1999 & Guidance Note on Management of Credit in October. These have been categorized broadly into financial. The first CRA model was rolled out in 1996 to take care of exposures to the C & I (Manufacturing) segment. in the field of Credit Risk Assessment too. CREDIT RISK ASSESSMENT (CRA) – MINIMUM SCORES / HURDLE RATES 1. To arrive at the overall risk rating. • SBI SCENARIO: However. the factors duly weighted are aggregated & calibrated to arrive at a single point indicator of risk associated with the credit decision. extremely important for every bank to have a clear assessment of risks of the loan assets it creates. Then. It is. business. Page 51 . there was no systematic method of Credit Risk Assessment till late 1980’s/ early 1990’s. the CRA system was introduced in the Bank in 1996. CRA is the most important component of the Credit Appraisal exercise for all exposures > 25 lacs & a very important tool in decision-making (a Decision Support System) as well as in pricing. when the C&I (Mfg) CRA model was developed for Non Banking Finance Companies (NBFCs). The review of the existing CRA Model for NBFCs is under process.
future prospects & risk mitigation (collateral security / financial standing). • • 4. Management parameters: The management of an enterprise / group is rated on the following parameters: • • Integrity (corporate governance) Track record Managerial competence / commitment Expertise Structure & systems Experience in the industry Credibility : ability to meet sales projections Credibility : ability to meet profit (PAT) projections Payment record Strategic initiatives Length of relationship with the Bank • • • • • • • • • Page 52 . 3.CREDIT APPRAISAL IN BANKING SECTOR 2. The overall financial risk is assessed in terms of static ratios. Financial parameters: The assessment of financial risk involves appraisal of the financial strength of the borrower based on performance & financial indicators. Industry parameters: The following characteristics of an industry which pose varying degrees of risk are built into Bank’s CRA model: • • Competition Industry outlook Regulatory risk Contemporary issues like WTO etc.
No.00 crore Rs 0. No. of 100) is rated on a 8 point scale from SB1/SBTL1 to SB 8 /SBTL8.CREDIT APPRAISAL IN BANKING SECTOR 5. (i) (ii) Exposure Level (FB + NFB Limits ) Over Rs. The overall score thus obtained (out of a max. AGL) Regular Model Simplified Model Trading Sector ( Trade & Services) Regular Model Simplified Model (b) Type of Ratings S. No.25 crore to Rs. For example S. 5. 5. SALIENT FEATURES OF CRA MODELS: (a) Type of Models S. SSI . The risk parameters as mentioned above are individually scored to arrive at an aggregate score of 100 (subject to qualitative factors – negative parameters).00 crore Non – Trading Sector (C&I . (i) (ii) Model Regular Model Simplified Model Type of Rating Borrower Rating Facility Rating Borrower Rating New Rating Scales – Borrower Rating: 16 Rating Grades There are different rating given to the different banks. 1 2 3 4 5 6 Borrower Rating SB1 SB2 SB3 SB4 SB5 SB6 Range of scores 94-100 90-93 86-89 81-85 76-80 70-75 Risk level Virtually Zero risk Lowest Risk Lower Risk Low Risk Moderate Risk with Adequate Cushion Moderate Risk Comfort Level Virtually Absolute safety Highest safety Higher safety High safety Adequate safety Moderate Safety Page 53 .
New Rating Scales .CREDIT APPRAISAL IN BANKING SECTOR 7 8 9 10 11 12 13 14 15 16 SB7 SB8 SB9 SB10 SB11 SB12 SB13 SB14 SB15 SB16 64-69 57-63 50-56 45-49 40-44 35-39 30-34 25-29 <24 - Average risk Acceptable Risk (Risk Tolerance Threshold) Borderline risk High Risk Higher risk Substantial risk Pre-Default Risk (extremely Vulnerable to default) Default Grade Above Safety Threshold Safety Threshold Inadequate safety Low safety Lower safety Lowest safety Nil Bank has introduced New Rating Scales for borrower for giving loans. Bank gives loans to the borrower as per their rating like SBI gives loans to the borrower up to SB8 rating as it has average risk till SB8 rating. Rating is given on the basis of scores out of 100. So banks does not give loans after SB8 rating. From SB9 rating the risk increases.Facility Rating : 16 Rating Grades Page 54 .
CREDIT APPRAISAL IN BANKING SECTOR S NO 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 FACILITY GRADES FR1 FR2 FR3 FR4 FR5 FR6 FR7 FR8 FR9 FR10 FR11 FR12 FR13 FR14 FR15 FR16 RANGE OF SCORES 94-100 87-93 80-86 73-79 66-72 59-65 52-58 45-51 38-44 31-37 24-30 17-23 11-16 5-10 1-4 0 RISK LEVEL Virtually Zero Risk Lowest Risk Lower Risk Low Risk Moderate Risk with Adequate Cushion Moderate Risk Average Risk Acceptable Risk (Risk Tolerance Threshold) High Risk Higher Risk Substantial Risk Highest Risk COMFORT LEVEL Virtually Absolute Safety Highest Safety Higher Safety High Safety Adequate Safety Moderate Safety Above Safety Threshold Safety Threshold Low Safety Lower Safety Lowest Safety NIL CHAPTER-6 Page 55 .
The objective is to maintain Bank’s undisputed leadership in the Indian Banking scene. The formal policy is well documented in the form of circular instructions. where procedural aspects are highlighted. 1. 1.2 The Loan Policy of the any bank has successfully withstood the test of time and with in- built flexibilities. has been able to meet the challenges in the market place. shareholder & employee satisfaction & to play a leading role in the expanding & diversifying financial services sector. The policy exits & operates at both formal & informal levels. apart from the Book of Instructions. with World class standards & significant global business. at the holistic level.1 State Bank of India’s (SBI) Loan Policy is aimed at accomplishing its mission of retaining the bank’s position as a Premier Financial Services Group.CREDIT APPRAISAL IN BANKING SECTOR SBI NORMS FOR CREDIT APPRAISAL Credit appraisal means an investigation/assessment done by the bank prior before providing any loans & advances/project finance & also checks the commercial.4 The Loan Policy also aims at striking a balance between underwriting assets of high quality. is an embodiment of the Bank’s approach to sanctioning. financial & technical viability of the project proposed its funding pattern & further checks the primary & collateral security cover available for recovery of such funds. committed to excellence in customer.3 The policy. managing & monitoring credit risk & aims at making the systems & controls effective. LOAN POLICY – AN INTRODUCTION 1. periodic guidelines & codified instructions. while continuing emphasis on its Development Banking role. 1. and customer oriented selling. Page 56 .
Partnerships. Based on the present indications. JHF. The Board has permitted setting up of the Credit Policy & Procedures Committee (CPPC) at the Corporate Centre of the Bank of which the Top Management are members. as a matter of policy the Bank does not take over any Non-Performing Asset (NPA) from other banks. 1. 20 crores ( Fund based & non-fund based ) Maximum aggregate credit facilities of Rs.g. sets parameters for credit portfolio in terms of exposure limits.CREDIT APPRAISAL IN BANKING SECTOR 1. etc. reviews credit appraisal systems. & general management of NPAs besides dealing with the issues relating to Delegation of Powers. To this end. following exposure levels are prescribed: Individuals as borrowers Maximum aggregate credit facilities of Rs.5 The Policy aims at continued growth of assets while endeavoring to ensure that these remain performing & standard. 80 crores ( Fund based & non-fund based ) Non-corporates ( e. approves policies for compromises. to deal with issues relating to credit policy & procedures on a Bank-wide basis. The CPPC sets broad policies for managing credit risk including industrial rehabilitation. Associations ) Corporates Maximum aggregate credit facilities as per prudential norms of RBI on exposures CREDIT APPRAISAL STANDARDS 1 (A) Qualitative: Page 57 . write offs.6 The Central Board of the Bank is the apex authority in formulating all matters of policy in the bank.
) DSCR Net (min. CR of 1. the proposition is examined from the angle of viability & also from the Bank’s prudential levels of exposure to the borrower.) 1.) Promoters’ contribution (min. 1 (B) Quantitative: (a) Working capital: The basis quantitative parameters underpinning the Bank’s credit appraisal are as follows:- Sector/ Parameters Liquidity Current Ratio (min. Group & Industry.33 3. opinion reports from existing bankers & published data if available are carefully pursued.75:1 2:1 2:1 30% of equity 20% of equity (i) Liquidity: Current Ratio (CR) of 1.)) 5.33 will generally be considered as a benchmark level of liquidity.33 is only indicative & may not be deemed Page 58 .CREDIT APPRAISAL IN BANKING SECTOR At the outset.00 2:1 1. In case of a maiden venture. Thereafter. 5 cr.) Mfg 1.) Financial Soundness TOL/TNW (max. However the approach has to be flexible.75:1 Others 1. a view is taken about our past experience with the promoters. 5 cr.20 (For FBWC limits above Rs.) Gearing D/E (max. if there is a track record to go by. an element of subjectively has to be perforce introduced as scant historical data weightage to be placed on impressions gained out of the serious dialogues with the promoter & his business contacts. in addition to the drill mentioned heretofore.00 2:1 1.00 (For FBWC limits upto Rs. Where it is a new connection for the bank but the entrepreneurs are already in business.) Gros (min.
. In specific cases where warranted. What is more important to establish a steady output if not a rising trend in quantitative terms because sales realization may be varying on account of price fluctuations. In such cases. it alone will not be a reason for rejection for the loan proposal or for the sanction of the loan at a lower level. (v) Profits: While net profit is ultimate yardstick.CREDIT APPRAISAL IN BANKING SECTOR mandatory. cash accruals. (iii) Financial Soundness: This will be dependent upon the owner’s stake or the leverage. i. hire-purchase & leasing concerns.e. trading. In cases where projected CR is found acceptable. For industrial ventures a Total Outside Liability/ Tangible Net worth ratio of 3. suitable written commitment should be obtained from the borrower to the effect that he would be bringing in required amounts within a mutually agreed time frame (ii) Net Working Capital: Although this is a corollary of current ratio. which have taken place in the intervening years. the movements in NWC are watched to ascertain whether there is a mismatch of long term sources vis-à-vis long term uses for purposes which may not be readily acceptable to the Bank so that corrective measures can be suggested. In cases where the CR is projected at a lower than the benchmark or a slippage in the CR is proposed. profit before depreciation & taxation conveys the more comparable picture in view of changes in rate of depreciation & taxation. the Page 59 . However. (iv) Turn-Over: The trend in turnover is carefully gone into both in terms of quantity & valve as also market share wherever such data are available. Here again the benchmark will be different for manufacturing. Where it is felt that the projected CR is not acceptable but the borrower deserves assistance subject to certain conditions. working capital finance as requested may be sanctioned. such sanction can be with the condition that the borrower should bring in additional long-term funds to a specific extent by a given future date. for the sake of proper assessment. the reason for low CR or slippage should be carefully examined & in deserving cases the CR as projected may be accepted.0 is reasonable but deviations in selective cases for understandable reasons may be accepted by the sanctioning authority.
as these are usually one time or extraordinary income. (ii) Promoter’s contribution of at least 20% in the total equity is what we normally expect. But promoters’ contribution may vary largely in mega projects. the project report is obtained from the customer. which may be compiled either in-house or by a firm of consultants/ merchant bankers. The sanctioning authority will have the necessary discretion to permit deviations. (vi) Credit Rating: Wherever the company has been rated by a Credit Rating Agency for any instrument such as CP / FD this will be taken into account while arriving at the final decision. we would not normally insist on this and only use this tool if such an agency had already looked into the company finances. the Credit Officer would seek the benefit of a second opinion either from the Bank’s Technical Consultancy cell or from the consultants of the Bank/ SBI Capital Markets Ltd. (iii) The other basic parameter would be the net debt service coverage ratio i. However as the credit rating involves additional expenditure. exclusive of interest payable. (b) Term Loan (i) In case of term loan & deferred payment guarantees. this will depend on Debt: Equity gearing for the project..CREDIT APPRAISAL IN BANKING SECTOR non-operating income is excluded.5: 1 & should not in any case be above 2:1. (iv)As regards margin on security. which should preferably be near about 1. The technical feasibility & economic viability is vetted by the bank & wherever it is felt necessary.75. Debt should not be more than 2 times the Equity contribution. On a gross basis DSCR should not be below 1. The sanctioning authority in exceptional cases may permit deviations from the norm very selectively. exit options explored. Therefore there cannot be a definite benchmark. their accounts closely monitored. These ratios are indicative & the sanctioning authority may permit deviations selectively. Companies incurring net losses consistently over 2 or more years will be given special attention.e. Page 60 . which should normally not go below 2.e. i. and if necessary.
CREDIT APPRAISAL IN BANKING SECTOR (v) Other parameters governing working capital facilities would also govern Term Credit facilities to the extent applicable. Application for requirement of loan 2. (C) Lending to Non-Banking Financial Companies (NBFCs) (D) Financing of infrastructure projects (E) Lease Finance (F) Letter of Credit. Guarantees & bills discounting (G) Fair Practices for lenders REQUIREMENT OF DOCUMENTS FOR PROCESS OF LOAN 1. Copy of Memorandum & Article of Association Page 61 .
Copy of Excise number 12. Copy of PAN/TAN number of company 9. i. of all the directors 13. he Bank announces from time to time its single Benchmark Prime Lending Rate (BPLR)..e. Copy of GST/CST number 11. reference / Page 62 . Copy of incorporation of business 4. orders in hand.CREDIT APPRAISAL IN BANKING SECTOR 3. Allotment letter. previous track records. Copies related to the property such as 7/12 & 8A utara. Financial statements of last 3 years including the provisional financial statement for the year 2007-08 8. Pricing in the Bank can be divided into interest pricing and non-interest pricing. Copy of last Electricity bill of company 10. In line with RBI guidelines.2 lacs will be as prescribed by RBI. Address proof of all the directors 14. Also provide some information about the directors of the company 7. lease/ sales deed. Copy of commencement of business 5. Possession 15. RATES & OTHER CHARGES) 1. Brief history of company. Financial statements of associate concern for the last 3 years PRICING (FACTORS DECIDING INT. 2R permission.D. its customers & supplies. Pricing of loans up to Rs. Photo I. Copy of resolution regarding the requirement of credit facilities 6. Bio-data form of all the directors duly filled & notarized 16.
The system enables evaluation of the fundamental strength of the borrower so as to charge a graded rate of interest based on different ratings. housing term loans to individuals. 3. In case of corporate relationship where the value of connections and overall potential for profitability from a particular account are more important than a particular transaction. The maximum spread over SBAR which could be charged by the Bank will be decided by the Bank from time to time.CREDIT APPRAISAL IN BANKING SECTOR indicative rates at which the Bank would lend to its best customers. Pricing of Bank's funds and services while being basically market driven is also determined by two important considerations. An internal Credit Risk Rating system covering all advances of Rs. However..) in a transparent manner as per Board approved policies. e. 4.25 lacs and above in C&I. Within such ceiling. products. the applicable price for a particular advance or service is fixed taking into account the marginal cost of Bank's funds and desired rate of return as calculated from indices like profitability levels and return on capital employed.g. Market related charges and a discretionary structure that enables branches to effectively face competition are in place. the Bank has also adopted an appropriate authority structure to facilitate competitive pricing of loan products linked both to risk rating and overall business considerations. Interest rates below SBAR could be offered to exporters or other credit worthy borrowers including public enterprises on the lines of a transparent and objective policy approved by the Bank's Board. credit related services etc. i. All other loans are to be priced on the basis of Bank's SBAR with the pricing being linked to grade of the risk in the exposure. taking into consideration the trends in movement of interest rates and market competition. as considered appropriate. G-Sec rates. the pricing for various credit facilities. including sub-SBAR pricing would be determined by ALCO or COCC. At the corporate level. Fixed interest rates are also extended for commercial loans. Interest rate without reference to SBAR could be charged in respect of certain categories of loan / credit like discounting of bills. minimum desired profitability and risk inherent in the transaction. lending to intermediary agencies etc. Bank has introduced fixed interest rates in respect of certain categories of loans in personal segment. schemes. the price is fine tuned even to Page 63 . MIBOR etc. 5.g. albeit highly selectively..e. SSI and AGL segments has been put in place to facilitate structured assessment of credit risks. Bank may also price floating rate products by using market benchmarks (e. These would be reviewed periodically based on feedback from operating units and the market. 2. The BPLR would be referred to as State Bank Advance Rate (SBAR) in our Bank.
the period of exposure.. to the CGM (Circle) / CGM (CAG-Cen. REVIEW / RENEWAL OF ADVANCES 1. A separate authority structure. conduct of the account etc. Term loans which are irregular will be reviewed once in six months. sanction for the continuance of the limits is obtained in each case by reviewing the facilities. 2.CREDIT APPRAISAL IN BANKING SECTOR level of no-loss-no-profit in the transaction. i.) in respect of COCC-I&II sanctions and to the GM (Network) in all other cases. as given below. fresh sanction is accorded for the limits. however.e. the factors that weigh are the rate charged by the financial institutions. renewal is not possible for some reason. Working capital facilities are granted by the Bank for a period of 1 year and thereafter they are required to be renewed each year. In the case of all listed companies with credit rating of SB4/SBTL4 and below. has been prescribed for above noted half-yearly review of term loans: 3. a brief review is to be put up on the basis of half-yearly working results published by them duly incorporating comments such as extent of exposure. the pattern of volatility in the interest rates and the expected movement of the rates in the long term perspective. Such review is to be submitted to the respective GE in respect of ECCB sanctions. For long term exposures. Page 64 . Where.
There will be no CRA rating review for term loans. (ii) The unit should score the minimum scores as prescribed. Advances under SSI / C&I Segments (i) The advance to be taken over should be rated SB3/SBTL3 or above. Page 65 . TAKE OVER OF ADVANCES 1. in respect of term loans.CREDIT APPRAISAL IN BANKING SECTOR 4. Bank needs to aggressively market for good quality advances. the following set of financial covenants is to be stipulated: (i) Current Ratio (ii) TOL/TNW (iii) Interest Coverage Ratio (iv) Default in payment of interest / installment (v) Cross Default (default in payment of instalment/ interest to other institutions/ banks) Default of these covenants would attract penal interest of 1% as under: (a) Any adverse deviation by more than 20% from the stipulated levels in respect of any two of the items (i) to (iii) above .penal interest to be levied for the period of non-adherence subject to a minimum period of 1 year. a common set of norms / guidelines for C&I. A. SSI and AGL segments has been laid down for take over of advances. One of the strategies for increasing good quality assets in the Bank's loan portfolio. under the various risk segments. would be to take over advances from other banks/FIs. (b) Default in payment of interest/installments to the Bank or to other FI/Banks-penal interest to be levied for the period of such defaults. in the Credit Risk Assessment. However. Keeping this in view and with the prime objective of adding only good quality assets.
as it has been in existence for a shorter duration. (v) The Term Loan proposed to be taken-over should not have been rephased. However. if necessary. if a unit is not having a track record for 3 years. For takeover of existing TLs. it should have earned net profit (post tax) in the preceding year of operation. generally. (vi) and (vii) above are not applicable for take-over of working capital advances] Note 1 : In the case of take-over proposals involving advances up to Rs. Other factors that may be kept in view are: - • • • Continued viability Track record Standing in the market of the unit/ promoter. Page 66 . may be permitted to extend up to 8 years. However. (If this information is not forthcoming from the bank/FI. such proposals may also be considered for sanction on a case to case basis. if a rephasement was necessitated due to external factors and viability of the unit is not in doubt.CREDIT APPRAISAL IN BANKING SECTOR (iii) The account should have been a standard asset in the books of the other bank/FI during the preceding 3 years. However. when only TLs are taken over. which should be at least one year. Chapter 34. Volume III of Manual on Loans & Advances). Part III. The services of statutory auditors of our Bank may also be sought for this purpose). (iv) The unit should have earned net profits (post tax) in each of the immediately preceding 3 years. by the existing FI/Bank after commencement of commercial production. the ratingshould be carried out. if the unit has been in existence for a lesser period. while the original time frame for repayment will be generally adhered to. the schedule of repayment for the existing term loans. [The norms at (v). (vi)The remaining period of scheduled repayment of the term loan should be at least 2 years. a certificate should be obtained from the borrower’s Auditor that the loan has been a standard asset during the preceding 3 years in the books of the bank/FI in terms of the asset classification norms of RBI. takeover can be considered based on the track record for the available period. If sanction of fresh term loan is proposed along with the takeover. flexibility may be allowed in the quantum of periodical repayments.25 lacs. as per the scoring model prescribed under SME Smart Score (Refer page 170.
Advances under Trade and Services Sector: i) The current ratio and TOL/TNW ratio should be at acceptable levels. it is necessary not to alert the bank concerned.33 will be indicative. as per audited balance sheet not older than 12 months. For FBWC limits of above Rs. the report may be obtained after the sanction of facilities but before release of the facilities. Where.5 cr. The experience of the present banker (item 13 of the format) should show satisfactory dealings with the unit.CREDIT APPRAISAL IN BANKING SECTOR Note 2: Take-over of units from our Associate Banks is not permitted. However. from the point of competition. C. and joining a consortium (or when a member bank exits consortium and we join the consortium in its place). are not reckoned as take-over of advances from other banks. It may be considered acceptable up to 1. Page 67 . depending on the activity.20. Other Guidelines: (i) In all cases of take-over of advances from other banks. if the unit has been in existence for a lesser period. the credit information report in the format prescribed by IBA should be obtained. B. ii) The unit should have earned post-tax profits in each of the immediately preceding 3 years. the current ratio of 1.5 Cr. increasing our share. it should have earned net profit (post-tax) in the preceding year of operation. Note 3 : In the cases of working capital finance through consortium or multiple banking. TOL/TNW ratio higher than 3 would be permissible depending on the type of activity. Current ratio of not below 1 is acceptable up to FBWC limit of Rs.
Administrative Clearance (AC) In all the cases of take-over proposals. a brief proposal containing.CREDIT APPRAISAL IN BANKING SECTOR (ii) In all cases of take-over. AC is required to be obtained. branches should assess the requirements of the borrower and obtain sanction for the proposed limits before actually taking over the outstanding liability of the borrower to their existing bank/ FI. inter alia. branches should ensure proper documentation and other formalities to protect the interest of our Bank. • • • • Reasons for take-over Market perception including the existing bank’s/FI’s perception regarding the unit and its management. Unit should clear the stipulated hurdle rate in both the exercises. the appraising officials may record briefly on their enquiries with market sources/other bank/FI). Potential ancillary business accruing to the Bank. D. However if the audited balance sheet is more than 12 months old and the proposal has to be considered from the business angle. the comments on compliance with the norms and the other guidelines as above should be submitted to the appropriate authority as under: (i) For take-over of units complying with all the norms prescribed: Page 68 . additionally. No takeover of advances from any Public Sector Bank will be resorted to by quoting finer rates (v) The credit rating should be done based on the audited balance sheet which is not older than 12 months. (iv) The following aspects should invariably be examined in each case of take-over. For this purpose. (iii) In all cases of take-over. Terms and conditions stipulated by the existing bank and those proposed by our Bank. particularly to ensure against dilution of security cover. then a provisional balance sheet as on a recent date may be obtained from the unit and the CRA exercise done based on these figures. (For this.
CREDIT APPRAISAL IN BANKING SECTOR (ii) For take-over of units not complying with any one or more of the norms prescribed: E. take over of housing loans is considered selectively after due diligence and precautions. a general policy on the issues relating to sanction / continuation of credit facilities to such companies whose directors are in the RBI's defaulters' list needs to be put in place. CREDIT FACILITIES TO COMPANIES WHOSE DIRECTORS ARE IN THE DEFAULTERS' LIST OF RBI: 1. in consideration of larger business interests / valuable connections. While take over of 'P' segment advances is not generally encouraged. including names of directors of such companies. RBI has been collecting and circulating information on defaulting companies amongst banks / FIs. Page 69 . in cases where possession of the house / flat has been taken. Though RBI's defaulters' list is given due cognizance in the appraisal process. repayment of existing loan has already commenced and installments have been paid as per terms of sanction. The Directors of any company may be classified as promoter / elected / professional/ nominee / honorary directors.
Willful default & action there against .1 Cr.CREDIT APPRAISAL IN BANKING SECTOR Accordingly. When the list of such defaulters is circulated by CIBIL instead of RBI). and above. 2. it has been decided to adopt the following approach: The above policy on defaulters will be a broad framework for sanction / continuation of credit facilities to companies whose directors are in the RBI's list of defaulting borrowers of banks / FIs with dues of Rs.The penal measures would be made applicable to all borrowers identified as willful defaulters or the promoters involved in diversion / siphoning of Page 70 . the same Policy would continue to apply.
Where possible. mis-representation. The Bank may also initiate criminal action against willful defaulters. Similarly. 4. such Group companies also may be reckoned as willful defaulters. Bank would endeavour to ensure end-use of funds by.25 lacs or more without any exception. Bank will also retain the right to get investigative audit conducted whenever it is prima facie satisfied that there is a case for such investigative audit to detect siphoning/ diversion of funds or other malfeasance. CREDIT MONITORING & SUPERVISION 1. 6. It shall be the endeavor of the Bank to ensure that such loans are limited to borrowers whose integrity and reliability are above board. such an approach would be supplemented by due diligence on the part of the Bank. 3. against the borrowers / guarantors and foreclosure of recovery of dues should be initiated expeditiously. entrepreneurs / promoters of companies where the Bank has identified siphoning /diversion of funds. Broadly. obtaining certification from Chartered Accountants. In cases of project financing. where necessary.CREDIT APPRAISAL IN BANKING SECTOR funds with outstanding balance of Rs. 7. In case of short term corporate/clean loans. Bank shall adopt a proactive approach for a change of management of the willfully defaulting borrowing unit. wherever warranted. falsification of accounts and fraudulent transactions shall be debarred from Bank finance for floating new ventures for a period of 5 years from the date the name of the willful defaulter is published by RBI / CIBIL. Where a Letter of Comfort or guarantee furnished by the companies within a Group in favour of a willfully defaulting unit is not paid when invoked by the Bank. The legal process. Further. 5. No additional facilities shall be granted by the Bank to the listed willful defaulters.25 lacs will also be applied for the purpose of taking cognizance of instances of siphoning and diversion of funds. the limit of Rs. inter alia. the objectives of post-sanction follow up. supervision and monitoring are as under: (a) Follow up function: Page 71 .
(c) Monitoring function : • • • To ensure that effective supervision is maintained on loans / advances and appropriate responses are initiated wherever early warning signals are seen. activity level.CREDIT APPRAISAL IN BANKING SECTOR • • • • • • • To ensure the end-use of funds To relate the outstandings to the assets level on a continuous basis To correlate the activity level to the projections made at the time of the sanction / renewal of the credit facilities To detect deviation from terms of sanction. (b) Supervision function: • • To ensure that effective follow up of advances is in place and asset quality of good order is maintained. Detailed operative guidelines on the following aspects of effective credit monitoring are in place: • Post-sanction responsibilities of different functionaries Page 72 . 2. identify ‘incipient sickness’ and initiate proactive remedial measures. if any. and initiate remedial measures thereby averting the incidence of incipient sickness. To identify early warning signals. To monitor on an ongoing basis the asset portfolio by tracking changes from time to time. Chalking out and arranging for carrying out specific actions to ensure high percentage of ‘Standard Assets’. and management of the unit and ensure that the assets created are effectively utilized for productive purposes and are well maintained. To look for early warning signals. To ensure recovery of the installments of the principal in case of term loans as per the scheduled repayment programme and all interest. To make periodic assessment of the health of the advances by noting some of the key indicators of performance like profitability.
reporting. Bank’s lending policy and other relevant guidelines/RBI guidelines. Industry Exposure restrictions. Statement of stocks and book debts Computation of drawing power (DP) on eligible current assets and maintaining of DP register Verification of assets Inspection by branch functionaries – frequency. ASSESSMENT AND SANCTION FUNCTIONS 1. Group Exposure restrictions. LOAN ADMINISTRATION .PRE-SANCTION PROCESS APPRAISAL. Preliminary appraisal 1. APPRAISAL A. Towards this end the preliminary appraisal will examine the following aspects of a proposal. register etc. Stock Audit Follow up based on information systems Follow up during project implementation stage Follow up post-commercial production Monitoring and control Detection and prevention of diversion of working capital finance Monitoring of large withdrawals Allocation of limit Handling of NPA accounts etc. Page 73 .2. • • • Prudential Exposure norms.1 Sound credit appraisal involves analysis of the viability of operations of a business and the capacity of the promoters to run it profitably and repay the bank the dues as and then they fall 1.CREDIT APPRAISAL IN BANKING SECTOR • • • • • • • • • • • • • • Reporting for control Security documents.
e.3.g.4. along with a copy of the proposal/project report. The information.. are prima facie in order 1. the following aspects have to be examined: • Whether project cost is prima facie acceptable • Debt/equity gearing proposed and whether acceptable • Promoters’ ability to access capital market for debt/equity support • Whether critical aspects of project . Caution lists. Compliance regarding transfer of borrower accounts from one bank to another. Applicant’s status vis-à-vis other units in the industry. If the branch (a reference to the branch includes a reference to SECC/CPC etc. Acceptability of the promoters. cost of production. if applicable. profitability. a comprehensive application in the prescribed proforma. Profile of the promoters/senior management personnel of the project. 1. the branch will arrive at a decision whether to support the request or not. covering specific credit requirement of the company and other essential data/ information. if the proposal is to finance a project. Financial status in broad terms and whether it is acceptable The company’s Memorandum and Articles of Association should be scrutinized carefully to ensure (i) that there are no clauses prejudicial to the Bank’s interests. among other things.demand. etc. it will call for from the applicant(s).CREDIT APPRAISAL IN BANKING SECTOR • • • • • • • • • • Industry related risk factors. Credit risk rating. ban on financing of industries producing/ consuming Ozone depleting substances. After undertaking the above preliminary examination of the proposal. Further. as the case may be) finds the proposal acceptable. should include: Page 74 . List of defaulters. (ii) no limitations have been placed on the Company’s borrowing powers and operations and (iii) the scope of activity of the company. Government regulations/legislation impacting on the industry.
wherever necessary. • Current practices for the particular product/service especially relating to terms of credit sales. present financial position. in other words a brief on the managerial resources and whether these are compatible with the size and scope of the proposed activity. its past performance. should also be called for. 1. • If request includes financing of project(s). In respect of existing concerns. in addition to the above. The report may comment on the geographic spread of the market where the unit proposes to operate. This data/information should be supplemented by the supporting statements such as: a) Audited profit loss account and balance sheet for the past three years (if the latest audited balance sheet is more than 6 months old. • Estimates of sales.5. etc. a pro-forma balance sheet as on a recent date should be obtained and analysed). For non-corporate borrowers. • Projected profit and loss account and balance sheet for the operating years during the currency of the Bank assistance. (ii) ‘No Objection Certificate’ from term lenders if already financed by them and (iii) Report from Merchant bankers in case the company plans to access capital market.g. competitive advantage of the applicant.. the competitors’ share. demand and supply gap. branch should obtain additionally (i)appraisal report from any other bank/financial institution in case appraisal has been done by them. proposed marketing arrangement. production. etc. probability of bad debts. marketing and finance. irrespective of market segment. cost of production and profitability. particulars regarding the history of the concern. purchase. • Demand and supply projections based on the overall market prospects together with a copy of the market survey report. experience and competence of the key personnel in charge of the main functional areas e. enjoying Page 75 .CREDIT APPRAISAL IN BANKING SECTOR • Organizational set up with a list of Board of Directors and indicating the qualifications. etc.
if any. the following aspects should also be examined: • The method of depreciation followed by the company-whether the company is following straight line method or written down value method and whether the company has changed the method of depreciation in the past and.8 In addition to the financials. if so.10 lacs and above from the banking system. 1. the reason therefore. wherever possible. c) Credit information reports from the existing bankers on the applicant Company. 1.CREDIT APPRAISAL IN BANKING SECTOR credit limits of Rs. b) Details of existing borrowing arrangements. Page 76 . and d) Financial statements and borrowing relationship of Associate firms/Group Companies. all the data/information furnished by the borrower should be counter checked and. Detailed Appraisal 1. While appraising a project or a loan proposal.7 The financial analysis carried out on the basis of the company’s audited balance sheets and profit and loss accounts for the last three years should help to establish the current viability. B. inter-firm and inter-industry comparisons should be made to establish their veracity. audited balance sheet in the IBA approved formats should be submitted by the borrowers.6 The viability of a project is examined to ascertain that the company would have the ability to service its loan and interest obligations out of cash accruals from the business.
• The nature and purpose of the contingent liabilities. together with comments thereon. • Projected levels: whether acceptable. if any. the commercial.). Page 77 .whether the provisions made in the balance sheets are adequate to take care of the company’s tax liabilities. other ratios relevant to the project. cases relating to customs and excise. and • Compliance with lending norms and other mandatory guidelines as applicable 1.CREDIT APPRAISAL IN BANKING SECTOR • Whether the company has revalued any of its fixed assets any time in the past and the present status of the revaluation reserve. fuel etc. etc. and estimates/projections of sales values • Production capacity & use: past and projected. as applicable • Details of sourcing of energy requirements. • Estimated requirement of working capital finance with reference to acceptable build up of inventory/ receivables/ other current assets. • The position regarding the company’s tax assessment . in repayment in the past and history of past sickness. • Dividend policy. • Qualifications/adverse remarks. • Pending suits by or against the company and their financial implications (e. sales tax. if any.9. power. if any created for the purpose.g. made by the statutory auditors on the company’s accounts./ Agencies • Licenses/permits/approvals/clearances/NOCs/Collaboration agreements. • Apart from financial ratios. Project financing: If the proposal involves financing a new project. • Trends in sales and profitability. • Record of major defaults. economic and Financial viability and other aspects are to be examined as indicated below: • Statutory clearances from various Government Depts. if any. past deviations in sales and profit projections.
improvement in quality of products.e. economies of scale etc. Redeemable Preference Shares. etc.) • Arrangements proposed for raising debt and equity • Capital structure (position of Authorised. Where central or state sales tax loan or developmental loan is taken as source of financing the project. the manner of repayment.CREDIT APPRAISAL IN BANKING SECTOR • Pollution control clearance • Cost of project and source of finance • Build-up of fixed assets (requirement of funds for investments in fixed assets to be critically examined with regard to production factors. competence.) • Debt component i. if available • Management quality. • Feasibility of arrangements to access capital market • Feasibility of the projections/ estimates of sales. etc. furnish details of the terms and conditions governing the loan like the rate of interest (if applicable).. Issued/ Paid-up Capital. deferred payment facilities. Return on Investment • Industry profile & prospects • Critical factors of the industry and whether the assessment of these and management plans in this regard are acceptable • Technical feasibility with reference to report of technical consultants. All unsecured loans/ deposits raised by the company for financing a project should be subordinate to the term loans of the banks/ financial institutions and should be permitted to be repaid only with the prior approval of all the banks and the financial institutions concerned. unsecured loans/ deposits. track record • Company’s structure & systems Page 78 . cost of production and profits covering the period of repayment • Break Even Point in terms of sales value and percentage of installed capacity under a normal production year • Cash flows and fund flows • Proposed amortisation schedule • Whether profitability is adequate to meet stipulated repayments with reference to Debt Service Coverage Ratio. term Loans. debentures.
half yearly and yearly Also examine and comment on the status of approvals from other term lenders. should also be fully tied up. friends and relatives will have to be brought upfront. public equity etc. the portion of the equity / loans which is proposed to be brought in by the promoters. relaxation in this regard may be considered on a case to case basis for genuine and acceptable reasons. debentures. The balance amount proposed to be raised from other sources. To ensure a higher degree of commitment from the promoters. with emphasis on following aspects: • Market share of the units under comparison • Unique features • Profitability factors • Financing pattern of the business • Inventory/Receivable levels • Capacity utilisation • Production efficiency and costs • Bank borrowings patterns • Financial ratios & other relevant ratios • Capital Market Perceptions • Current price • 52week high and low of the share price • P/E ratio or P/E Multiple • Yield (%). financial journals/ publications. A pre-sanction inspection of the project site or the factory should be carried out in the case of existing units. viz. market view (if anything adverse). Under such circumstances. professional entities like CRISINFAC. CMIE. the promoter should furnish a definite plan indicating clearly the sources for meeting his contribution. source data from Stock Exchange Directory. where necessary. and project implementation schedule. their family members.CREDIT APPRAISAL IN BANKING SECTOR • Applicant’s strength on inter-firm comparisons For the purpose of inter-firm comparison and other information. Page 79 . However. etc...
Present relationship with Bank: Compile for existing customers. etc. number of times and total number of days the account was irregular during the last twelve months • Repayment of term commitments • Compliance with requirements regarding submission of stock statements.CREDIT APPRAISAL IN BANKING SECTOR C. Financial Follow-up Reports.. profile of present exposures: • Credit facilities now granted • Conduct of the existing account • Utilisation of limits .e. realisation of book debts • Value of account with break-up of income earned • Pro-rata share of non-fund and foreign exchange business • Concessions extended and value thereof • Compliance with other terms and conditions • Action taken on Comments/observations contained in RBI Inspection Reports: CO Inspection & Audit Reports Verification Audit Reports Concurrent Audit Reports Stock Audit Reports Spot Audit Reports Long Form Audit Report (statutory audit) Page 80 . • Stock turnover. if any • Frequency of irregularity i. renewal data.FB & NFB • Occurrence of irregularities.
Review of the proposal: Review of the proposal should be done covering (i) strengths and weaknesses of the exposure proposed (ii) risk factors and steps proposed to mitigate them (iii) deviations.CREDIT APPRAISAL IN BANKING SECTOR D. where applicable o ECGC cover where applicable o Other standard covenants H. report on search of charges with ROC. proposed from usual norms of the Bank and the reasons therefore. G. Existing charges on assets of the unit: If a company. if any. Page 81 . Opinion Reports: Compile opinion reports on the company.facility wise and overall: o Limit for each facility – sub-limits o Security . Guarantee o Margins . partners/ promoters and the proposed guarantors.For each facility as applicable o Rate of interest o Rate of commission/exchange/other fees o Concessional facilities and value thereof o Repayment terms.Primary & Collateral. F. Structure of facilities and Terms of Sanction: Fix terms and conditions for exposures proposed . Credit risk rating: Draw up rating for (i) Working Capital and (ii) Term Finance. E.
• Peruse the financial analysis (Balance Sheet/ Operating Statement/ Ratio Analysis/ Fund Flow Statement/ Working Capital assessment/Project cost & sources/ Break Even analysis/Debt Service/Security Cover. and the borrower’s application. o Bank’s lending policy and other guidelines issued by the Bank from time to time o RBI guidelines o Background of promoters/ senior management o Inter-firm comparison o Technology in use in the company o Market conditions o Projected performance of the borrower vis-à-vis past estimates and performance o Viability of the project o Strengths and Weaknesses of the borrower entity. incorporate these and required modifications in the draft proposal and generate an integrated final proposal for sanction. J.CREDIT APPRAISAL IN BANKING SECTOR I. Assistance to Assessment: Interact with the assessor. 2. arrange with the appraiser for the analysis on the correct lines. etc. • Carry out pre-sanction visit to the applicant company and their project/factory site. provide additional inputs arising from the assessment. Proposal for sanction: Prepare a draft proposal in prescribed format with required backup details and with recommendations for sanction. • Interact with the borrower and the appraiser. • Examine critically the following aspects of the proposed exposure. financial statements and other reports/documents examined by the appraiser. Page 82 .) to see if this is prima facie in order. ASSESSMENT: Indicative List of Activities Involved in Assessment Function is given below: • Review the draft proposal together with the back-up details/notes. If any deficiencies are seen.
with any required modification to the initial recommendation by the Appraiser • Arrange with the Appraiser to draw up the proposal in the final form. If any critical information is not provided in the proposal. • Examine critically the following aspects of the proposed exposure in the light of corresponding instructions in force: o Bank’s lending policy and other relevant guidelines o RBI guidelines o Borrower’s status in the industry o Industry prospects o Experience of the Bank with other units in similar industry o Overall strength of the borrower Page 83 . remit it back to the Assessor for supply of the required data/clarifications. Recount briefly the value of the company’s (and the Group’s) connections. give recommendations for grant of the requisite fund-based and non-fund based credit facilities. all considered. moratorium and repayment schedule o Adequacy of proposed security cover o Credit risk rating o Pricing and other charges and concessions. proposed for the facilities o Risk factors of the proposal and steps proposed to mitigate the risk o Deviations proposed from the norms of the Bank and justifications therefore • To the extent the inputs/comments are inadequate or require modification. • Recommendation for sanction: Recapitulate briefly the conclusions of the appraisal and state whether the proposal is economically viable. Finally. if any. o Adequacy/ correctness of limits/ sub limits. 3. margins. the proposal is a fair banking risk. State whether. SANCTION: Indicative list of activities involved in the sanction function is given below: • Peruse the proposal to see if the report prima facie presents the proposal in a comprehensive manner as required. arrange for additional inputs/ modifications to be incorporated in the proposal.CREDIT APPRAISAL IN BANKING SECTOR o Proposed structure of facilities.
or Defer decision on the proposal and return it for additional data/clarifications. Credit assessment is made based on promises and projections. charges and concessions proposed for the exposure and covenants stipulated vis-à-vis the risk perception. A banker cannot take solace in sufficiency of security for his loans. setting out the reasons. Past record of satisfactory performance and integrity are no guarantee for future though they serve as a useful guide to project the trend in performance. It is for this reason that proper follow up and supervision is essential. pricing. if it is not acceptable. LOAN ADMINISTRATION . • Accord sanction of the proposal on the terms proposed or by stipulating modified or additional conditions/ safeguards. Stages of post sanction process Page 84 .POST SANCTION CREDIT PROCESS GENERAL 1. NEED Lending decisions are made on sound appraisal and assessment of credit worthiness. He has to a) make a proper selection of borrower b) Ensure compliance with terms and conditions c) Monitor performance to check continued viability of operations d) Ensure end use of funds. 2. or Reject the proposal. e) Ultimately ensure safety of funds lent. A loan granted on the basis of sound appraisal may go bad because the borrower did not carry out his promises regarding performance.CREDIT APPRAISAL IN BANKING SECTOR o Projected level of operations o Risk factors critical to the exposure and adequacy of safeguards proposed there against o Value of the existing connection with the borrower o Credit risk rating o Security.
CREDIT APPRAISAL IN BANKING SECTOR The post-sanction credit process can be broadly classified into three stages viz. The various arrangements under borrowings from more than one bank will differ on account of terms & conditions. supervision and monitoring. Besides this. The advantages to the bank in a multiple banking arrangement/ consortium arrangement are that the exposure to an individual customer is limited & risk is proportionate. TYPES OF LENDING ARRANEMENTS INTRODUCTION Business entities can have various types of borrowing arrangements. units would prefer to have banking arrangements with more than one bank on account of the large financial requirement or the resource constraint of his own banker or due to varying terms & conditions offered by different banks or for sheer administrative convenience. method of appraisal. coordination. follow-up. B. They are • • • • One Borrower – One Bank One Borrower – Several Banks (with consortium arrangement) One Borrower – Several Banks (without consortium arrangements – Multiple Banking One Borrower – Several Banks (Loan Syndication) A.. which together facilitate efficient and effective credit management and maintaining high level of standard assets. In the case of borrowing business entity. it is able to meet its funds requirement without being constrained by the limited resource of its own banker. CONSORTIUM LENDING Page 85 . ONE BANK The most familiar amongst the above for smaller loans is the One Borrower-One Bank arrangement where the borrower confines all his financial dealings with only one bank. The bank is also able to spread its portfolio. Sometimes. The objectives of the three stages of post sanction process are detailed below. consortium arrangement enables participating banks to save man power & resources through common appraisal & inspection & sharing credit information. documentation & supervision & control.
CREDIT SYNDICATION Page 86 . when units were not doing well. another bank was interested in continuing the facility on account of group considerations. The bank taking the highest share of the credit will usually be the leader of consortium. several banks pool banking resourses & expertise in credit management together & finance a single borrower with a common appraisal. Consortium arrangement occasioned delays in credit decisions & the borrower has found his way around this difficulty by the multiple banking arrangement. There is no ceiling on the number of banks in a consortium. Points to be noted in case of multiple banking arrangements • • • Though no formal arrangement exists among the financing banks. Additionally. consensus was rarely prevalent among the consortium members. The borrower enjoys the advantage similar to single window availing of credit facalities from several banks. it is preferable to have informal exchange of information to ensure financial discipline Charges on the security given to the bank should be created with utmost care to guard against dilution in our security offered & to avoid double financing Certificates on the outstandings with the other banks should be obtained on the periodical basis & also verified from the Balance sheet of the unit to avoid excess financing D.CREDIT APPRAISAL IN BANKING SECTOR When one borrower avails loans from several banks under an arrangement among all the lending bankers. common documentation & joint supervision & follow up. MULTIPLE BANKING ARRANGEMENT Multiple Banking Arrangement is one where the rules of consortium do not apply & no inter se agreement among banks exists. C. this leads to a consortium lending arrangements. The borrower avails credit facility from various banks providing separate securities on different terms & conditions. The arrangement continues until any one of the bank moves out of the consortium. There is no such arrangement called ‘Multiple Banking Arrangement’ & the term is used only to donote the existence of banking arrangement with more than one bank. If one bank wanted to call up the advance & protect the security. In consortium lending. Multiple Banking Arrangement has come to stay as it has some advantages for the borrower & the banks have the freedom to price their credit products & non-fund based facility according to their commercial judgment.
time-bound delivery schedule & drawals Streamlined process of documentation with clearly laid down roles & responsibilities Market driven pricing linked to the risk perception Competitive pricing but scope for fee-based income is also available Syndicated portions can be sold to another bank. It is a convenient mode of raising long-term funds. the competition among the lenders leads to finer terms Risk is shared Small banks can also have access to large ticket loans & top class credit appraisal & management • • • • • Advantages • Strict.CREDIT APPRAISAL IN BANKING SECTOR A syndicated credit is an agreement between two or more lending institutions to provide a borrower a credit facility using common loan documentation. On the basis of the memorandum & on their own independent economic & financial evolution the leading banks take a view on the proposal. The borrower is required to give prior notice to the lead manger about loan drawal to enable him to tie up disbursements with the other lending banks. The borrower mandates a lead manager of his choice to arrange a loan for him. cost of credit etc. thus easy & hassle fee Large loans can be raised through syndication by accessing global markets For the borrower. The mandated banker – the lead manger – prepares an information memorandum & circulates among prospective lender banks soliciting their participation in the loan. Features of syndicated loans • Arranger brings together group of banks Borrower is not required to have interface with participating banks. if required Fixed repayment schedule & strict monitoring of default by markets which punish indiscipline • • • • • Page 87 . The mandated bank convenes the meeting to discuss the syndication strategy relating to coordination. The mandate spells out the terms of the loan & the mandated bank’s rights & responsibilities. management fees. communication & control within the syndication process & finalises deal timing. The loan agreement is signed by all the participating banks.
* Shri Vinodkumar Lavjibhai Chaudhari.CREDIT APPRAISAL IN BANKING SECTOR CHAPTER-7 CASE STUDY OF SBI (1). * Shri Pratapbhai Lavjibhai Chaudhari.Partnership * Shri Harisinghbhai Lavjibhai Chaudhari.09. * Shri Jesangbhai Lavjibhai Chaudhari.& * Shri Janakkumar Jesangbhai Chaudhari Industry:.03. Details of case study Company:. Firm:.Transport Activity Segment:.C& I Date of Incorporation:.82 Page 88 .Janak Transport Co.
44 lacs. 295 lacs to finance the purchase of MahindraBolero. the ONGC outlook of the business is considered positive. Fixed hire charges/ taxi/ month: Rs.Multiple Banking Arrangement Regd. 363. 3. Office:.CREDIT APPRAISAL IN BANKING SECTOR Banking with SBI since:. Simandhar Flat. Mehsana. Pashabhai Petrol Pump.57 (3). 295 lacs Page 89 . Janak Transport Co. As the company is in this business since incorporation & the unit has good contracts with ONGC since last 26 years so it has a good repo with ONGC. & Admin. 29150 (with fixed 3000 Km run/ month & 12 hours duty/ day) (2). Brief of Contract: (1). The total project cost is estimated to be Rs. Duration of contract = 3 Years Proposed Credit Requirement: Fund Based = Rs.Opp. Nr. Additional/ km charges beyond 3000 km.16 years as a current A/C holder Banking arrangement:. Highway. Rs. As the company has a good repo with ONGC. is a partnership firm established in 1982 for carrying a transport business. The firm has approached for term loan of Rs.
2009 713.80 Proj.97 143.15 2.90 0.10 256.62 233. 2013 898.00 113.10 181.22 Proj.20 0.57 1.24 22.27 0.21 181.20 39.57 256.44 21.66 226.57 340.71 Proj. 31st March Net Sales Operating Profit (after interest) PBT PBT/Sales (%) PAT Cash Accruals PBDIT Paid up Capital TNW Adjusted TNW TOL/TNW TOL/Adjusted TNW Current Ratio 2007 501.48 3.90 40.51 212.32 125.80 12.96 200.64 1.56 12.04 0.65 425.51 15.04 21.08 340.74 266.47 Page 90 .04 21.04 12.65 326.48 5.96 16.48 129.27 6.99 113.06 151.65 404.36 203.82 234.25 150.22 12.08 427.01 2.96 125.24 1.78 149.80 1.15 2.48 113.56 22.41 22.CREDIT APPRAISAL IN BANKING SECTOR Performance Details a) PERFORMANCE AND FINANCIAL INDICATORS: (Rs.08 143.48 181. 2011 898.53 Proj.10 2.62 10.22 1.47 0.47 224. 2008 546.47 13.04 427.51 52.04 2.42 Esti.20 256.25 247.56 22.65 182.04 5.05 54.01 1. 2012 898.91 151.15 22.72 340.92 2.08 0. 2010 898. in lacs) Aud.01 91.57 Aud.65 374.47 3.69 92.53 2.31 92.
21 173.47 438.03.83 361.58 109.10 36. Expenditure (To the extent not written off or adjusted ) Total 31.53 52.34 100.40 31.87 39.04 2.03 134.23 173.74 1.22 2.57 113.29 6.66 100.66 78.25 b) Synopsis of Balance Sheet : Sources of funds Share Capital Reserves and Surplus Secured Loans : short term : long term Unsecured Loans Deferred Tax Liability Total Application of Funds Fixed Assets (Gross Block) Less Depreciation Net Block Capital Work in Progress Investments Inventories (Movable Assets) Sundry debtors Cash & bank balances Loans & advances to subsidiaries and group companies Loans & advances to others ( Less : Current liabilities ) (Less : Provisions ) Net Current Assets Misc.87 3.CREDIT APPRAISAL IN BANKING SECTOR Current Ratio (Excl.15 10.92 166.40 39.2008 22.49 349.61 11.57 102.70 48.92 166.93 10.3 134.2007 21.20 1.18 5.03.56 14.80 5.59 92.53 Page 91 .14 4.48 110.97 103.49 136. TL instalments) NWC 2.93 386.66 323.
62 2011 181.00 340.57 60.47 (Rs.00 256.44 2010 113.00 427.10 50.63 1.48 25.08 151.55 22.42 6.04 Page 92 .CREDIT APPRAISAL IN BANKING SECTOR c) Movement in TNW 2007 2008 21.90 10.04 2.51 2013 340.57 143./Subtract change in intangible assets Adjust prior year expenses Deduct Dividend Payment /Withdrawals Closing TNW 17.08 65.20 8.00 181.96 Opening TNW Add PAT Add.21 21.56 22.17 2009 22.56 113.04 11.48 68.48 92. in lacs) 2012 256.10 125. Increase in equity / premium Add.
34 19. 6. b) Project / Purpose: To purchase 59 new Mahindra Bolero under tie-up arrangement with ONGC.16 lacs as per details given below: Basic Price: Rs.CREDIT APPRAISAL IN BANKING SECTOR Appraisal Memorandum for term loan: Circle: Ahmedabad Branch: Mehsana Company: Janak Transport Company(JTC) Term Loan : a) Proposal: Term Loan of Rs. 0.295.44 Debt: Total 295. Mehsana.00 363. Page 93 .4 4 Means Equity : 68. 0. c) d) Appraised by: Inhouse examined by the Branch and found to be economically viable Cost of Project & Means of finance: Cost MAHINDRA Bolero DI-2WD Insurance RTO Tax WC Margin Total 328.47 363.57 lacs RTO : Rs.26 lacs The cost mentioned above is as per the quotation submitted by Shrijee Motors. 5.44 e) Remarks on Cost of project & Means of finance (in brief): Each vehicle shall cost Rs.33 lacs Insurance : Rs.6 3 15.00 lacs under the Transport Plus Scheme.
89 304.50 22.08 0.66 408.40 8.30 20.72 11.18 115.00 lacs and firm shall raise capital of Rs. Total cost of vehicle including the insurance and R.17 31.76 594.65 253.97 22.33 588.18 47.07 85.17 0. is Rs.69 109.CREDIT APPRAISAL IN BANKING SECTOR The firm is required to purchase 59 Mahindra Bolero for this purpose.56 18.65 253.O.66 175.97 37.54 69.08 0. The project is proposed to be financed by way of medium term loan of Rs.68 47.39 19.39 301.08 0.17 0.66 183.76 44.52 31/03/13 898.295.68 48.65 253.65 253.10 101.68 50.66 94.35 21.15 184.58 0.77 208. & General Expenses Interest Expenses Depreciation Total Fixed Cost ( C) Contribution (D=A-B) Contribution ratio (E=D/A) BE sales (F=C/E) BE sales as % of Net Sales Fixed cost with out depriciation G Contribution (H=A-B) Contribution ratio (I=D/A) Cash BE sales (J=G/I) CASHBE sales as % of Net Sales 31/03/09 713.89 268.36 48.44 lacs.57 87.66 239.66 445. 68.40 31/03/12 898.17 45.97 31/03/10 898.08 0.53 Page 94 .43 445.27 597.93 588.99 0.44 lacs as a margin.50 3.50 13.66 194.52 9.98 596.91 594.76 106. Total Variable Cost(B) Fixed Costs Direct Labour Selling.66 332.68 55.39 597.76 596.78 219.96 98.62 336.99 0.66 280.52 10. Admin.363.62 163.82 223.89 302.65 72.25 141.T.58 0.57 90.40 158.07 12.89 26.42 128. Break-even and sensitivity analysis and whether acceptable: Break even analysis Net Sales (A) Variable costs Power and Fuel Other operating Exp.50 33.12 269.50 20.66 166.05 120.98 309.63 31/03/11 898.
10 2.72 43.25 20.76 150.20 93.54 226.54 2.2.02 2.51 1.62 141.04 464.77 129.00 Min.47 98.33 Max.90 lacs for year 2007-08* Nil Page 95 .02 3.39 4.65 125.86% Actual profit Rs.13 448.12 233.92 33.40 200.15 212.21 94.61 1.87 1094.66 13.85 13.38 4.00 lacs with rising trend Nil Company's level as on 31/03/2008 1.80* 2. 2.87 541.42 12.22 1000.75 20. Rs.48 106.76 104.17 1.74 33.54 107.25 22.96 48.26 93.65 151.3.65 143.23 2010 100% 898.96 117.00 Min.96 247.99 Deviations in Loan Policy/ Scheme: Parameters Liquidity TOL/TNW Average gross DSCR (TL) Promoters contribution (under tieup) profits in the last two Others RATE OF INTEREST: Indicative Min/Max level as per Scheme Min.36 3.78 224.11 2.65 92. 1. 10 % Min.76 2011 100% 898.82 22.39 2.58 22.66 Total 536.01 83.CREDIT APPRAISAL IN BANKING SECTOR Commercial viability: Year ending 31st March Capacity utilisation % Sales Net Profit Depreciation Cash Accruals Interest TOTAL TL / DPG repayments Interest TOTAL Gross DSCR Net DSCR Average Gross DSCR Average Net DSCR 2009 100% 713.36 46.25 266.002 18.27 2013 100% 898.44 1.51 69. 1.54 2.36 203.12 93.37 2012 100% 898.25 166.99 132. 3.20 lacs for year 2006-07 and Rs.
03. Rs. 4.02 which is considered satisfactory Despite that the bank has also done B.CREDIT APPRAISAL IN BANKING SECTOR As applicable to “Transport Plus Scheme”.10% of net sales for this current year • • • Page 96 . has done multiple banking arrangement it has o/s loans with other banks also but the co. 3 which is 12.00 % (0. the profit for the year ended 31. Also the contract awarded is backed by guarantee from ONGC regarding direct payment of monthly bills to SBI.86% which is above the margin requirement The current ratio is 1. 2. is regularly making the payment of loans of principal amount along with the interest so the loan is given.75% wef 12/08/2008) with monthly rests. analysis & found that the B. Hence. At present 14. surety of repayment is assured. 1.21 lacs • TOL/TNW should be max. The bank also checks commercial viability of the company & found that the DSCR for term loan is 2. sales was 47. 3 lacs with rising trend Actual profit Rs.81 lacs & Rs. This is subject to change as per Bank’s Instruction.80 here.08 is Rs.E.07 & 31. Analysis:• • • • • • • • Janak Transport Company is an existing profit making unit The main chunk behind giving loan is that Janak Transport Company is doing contract with ONGC since incorporation The promoters are having considerable experience as transport contractor with ONGC The unit has got confirm order/ tie-up with ONGC A letter of authority from ONGC was received.42 that is satisfactory Profits in the last two years:Min. 6.90 lacs for the 2007-08 If the partners remuneration & interest is included.E.03. as the co.25% above SBAR-presently 13.20 lacs for year 2006-07 & Rs. that if Janak Transport Company will not make the payment than ONGC will directly make the payment to the bank The promoters contribution to the project is 18.
RS No.26 crores for the year 2008-09 in the first six months of operations. Tal-Kadi. 2008.07 Banking arrangement:. Dist-Mehsana The unit will have installed capacity of 2520 MT. The unit is expected to start commercial production from first week of September.Manufacturing Activity:. The capacity utilization for the year 2008-09 has been projected at 70% of installed capacity in terms of the utilization of the machines.9.Sole Banking Regd. Accordingly the unit is projected to achieve a sale of Rs. & Admin.Akshat Polymers Firm:.11. Page 97 . Details of case study Company:. 840.Partnership Firm (M/S Umiya Polymers) * Shri Amrutbhai Laljibhai Desai * Shri Gunvantbhai Ambaramdas Patel * Shri Natvarlal Mohanlal Patel * Shri Dharamsinhbhai Lallubhai Desai * Shri Kanjibhai Maljibhai Desai Industry:.19. Office:.Maufacturing of HDPP woven sacks Segment:.SSI Date of Incorporation:. Kadi Thol Road.CREDIT APPRAISAL IN BANKING SECTOR • • The net sales & PAT of the company is increasing year after year so overall profitability is good The overall projected performance & financial of the unit are considered satisfactory (2).
50 crores is expected to be finalized by end of Agust.2. As per ICRA report. The unit has started negotiating for booking of the orders for the proposed plant and results are promising as advised. storage of the AGL commodities. etc. who purchases the HDPP woven sacks for grains through open tenders. HDPP woven sacks are widely used as packaging material in Cement. grading and research services (2006) Flexible packaging sector is expected to grow at the rate of 12. ii) iii) iv) The firm has also started marketing activity for their products by making personnel contacts & writing introductory letters to potential customers & as the promoters are in the same line of business activity for the last 15 years they are having very good market contacts for the sales of the Finished Goods. Rajasthan and sale to Central Govt. Fertiliser. The projections are considered acceptable in view of the following factors: i) The unit plans to initially market its product in Gujarat.19. the unit is projected to achieve capacity utilization of 80% during the year 2009-10 (the first full year of operations) and accordingly the sale for the year is projected at Rs. The orders worth Rs.77 crores. Maharastra. The promoters had already made negotiations of the some of the industries as detailed under for selling the HDPP woven sacks: • • • • • • v) Indian Farmers Fertilizers Company Limited Gujaco masol Birala cement Sanghi Cement Ambuja cement Various grain & Food Export units of Gujarat.40%. vi) Page 98 . All these segments are reported to have good demand for the HDPP/PE woven sacks in the Indian market.CREDIT APPRAISAL IN BANKING SECTOR Further. 2008 and before commissioning of the plant as advised. The promoters have sufficient experience in the line of activity.
18 5.38 Page 99 .53 0.51 2.2.53 0.73 0.31 1.01 (Rs.95 5.81 1.64 1.2.12 1.00 0.81 1.79 1.00 crores Approval for: i) CRA rating of SB.26 0.00 1.44 0.09 1.67 4. in Crores) 2011 2520 2091 20.66 1.95 1.25% Performance & Financial Indicators: Year Installed cap Qty.64 0.) Net Sales Qty.22 5.10 2.34 1. i) FBWC limits of Rs.50 3.27 1.49 2014 2520 2268 22.88 1.24 2.95 3.91 0.6 (71 marks) based on projected financials as on 31.92 0.19 4.73 4.62 2013 2520 2217 21. (approx) (MT) Net Sales (Value) (Export) Operating profit Profit before tax PBT/Net sales (%) Profit after tax Cash accruals PBDIT Paid up capital Tangible net worth Adjusted TNW TOL/TNW TOL/Adjusted TNW Current ratio 2. ii) Pricing for WC facilities @1.25 crores ii) Fresh Term Loan of Rs.43 4.03.30 1.00 1.88 0.32 5.82 1.52 1.88 5.75and for TL 1.92 1.96 0.17 5.50% above SBAR minimum @14.99 0.00 1.02 0.23 1.2010.23 2010 2520 2016 19.20 0.18 1.34 0.11 2.80 1.00% above SBAR as applicable for SB-5 minimum @13.96 0.05 0.32 2.95 2.09 0.95 4.29 0.58 0.30 5.57 0.66 2009 2520 1029 9.15 1.19 1.04 0.87 1.77 0.78 1.CREDIT APPRAISAL IN BANKING SECTOR Proposal: Sanction for.82 0.80 2012 2520 2142 21.33 1. (MT/pa.00 1.62 1.95 2.97 0.00 1.78 0.
60 0.01 0.50 5.03.71 2.CREDIT APPRAISAL IN BANKING SECTOR NWC 1.57 2.67 4.14 0.03.00 0.99 31.03.36 0.25 1.40 2.85 0.67 0. In crores) Sources of funds Share Capital Reserves and Surplus Secured Loans : short term CC : long term TL Unsecured Loans Deferred Tax Liability Total Application of Funds Fixed Assets (Gross Block) Less Depreciation Net Block Capital Work in Progress Investments Inventories Sundry debtors Cash & bank balances Loans & advances to suppliers of Raw material / spares Advance tax ( Less : Current liabilities ) (Less : Provisions ) Net Current Assets Misc.95 1.23 0.2010 1.37 Movement in TNW:Movement in TNW Opening TNW + PAT + Inc.15 0.2010 0.2011 2.25 2.73 1.23 0.98 2.74 3.28 Balance Sheet: (Rs.12 0.67 0.40 0.2009 0.37 2.79 Page 100 .01 1. of prior year exp. .37 2.03 6.66 0.Dividend payment Projected 31.07 2.69 1.29 2.30 1.31 3.Change in Int.2009 0.Adj.00 0.50 6.95 -0.10 0.03.15 0.95 0.78 31.29 0.01 31.13 2.03. Expenditure (To the extent not written off or adjusted ) Non-Current Assets/ Deposits Total 31. Assets +/.03 5.99 2. in Equity / Premium +/.
16 0.03. TL Int.01 0.54 1.75 2:1 Company's level as on 31.00 1. LC BG Bill Others loan processing Total Projection 31.01:1 1. directors.64:1 - Defaulters List:About unit and the promoters: Whether names of promoters.12. company.34 4.33 3.54 2.57 Deviations in Loan Policy: Parameters Liquidity TOL/TNW TOL/Adj.2007 No Wilful defaulters’ list dated 31.14 0. in crores) Projection 31.CREDIT APPRAISAL IN BANKING SECTOR Closing in TNW 1.2010 0.23 2.01 2.33 (Rs.64 2.80 2.2009 @ 1.52 2.03.2007 No ECGC caution list No Warning signals / Major irregularities in Credit audit: inspection report : Not applicable new unit Other audit reports : Adverse observations in Balance sheet Not applicable new unit Adverse observations in Auditors report Any NPAs among associate concerns Nil. None Page 101 .2009 0.03:1 0. group concerns figure in : RBI defaulters’ list dated 30.27 0. TNW Average gross DSCR (TL) Debt / equity Debt/Quasi equity Any others Indicative Min/Max level as per loan policy 1.03.03 0.15:1 Company's level as on 31.80 Bank Income Analysis From WC Int.03.09.50 1.29 0.11 2.2010 1.
in crores) 2013-14 Total Page 102 .CREDIT APPRAISAL IN BANKING SECTOR AKSHAT POLYMERS (AP) has been established as a partnership firm on 19th November. Sri Prahaladbhai is SSC and have 10 years of experience as Production Manager in Asia Woven Sacks Ltd.. He will be looking after general administration and accounts of the firm. He is also partner in M/s Shiv Shakti Steel. Kadi Sri Kanjibhai is a farmer by profession and sleeping partner. 2007 at Kadi. Kadi and has been inducted in the partnership as a investment partner. The brief background of the partners is as follows : Name M/s Umiya Polymers Age 46 Brief Background Sri Prahaladbhai Hargovandas Patel is the main partner in M/s Umiya Polymers with 30 share.Com. Shri Natvarlal Patel is a B. M/s Umiya Polymers are engaged in plastic waste recycling at Kadi. Sri Dharamsinhbhai is a partner in the local unit M/s Ajay Ginning Industries.. Sri Gunvantbhai also is a partner in M/s Ajay ginning Industires. Sri Amrutbhai Laljibhai Desai 43 Shri Dharamsingbhai Lallubhai Desai Shri Kanjibhai Malibhai Desai Shri Gunvantbhai Ambaramdas Patel 35 44 42 Shri Natvarlal Mohanlal Patel 48 The overall quality of the management is considered satisfactory. Sri Desai is SSC and have 15 years of experience as Production Manager in reputed Gopala Polyplast Ltd. Kadi who are engaged in similar activity. The partnership was constituted for manufacturing and selling of HDPP woven sacks to be manufactured from HDPP granules. The firm consists of total six partners. Kadi. Commercial viability : Year ending 2008-09 2009-10 2010-11 2011-12 2012-13 (Rs. He had good contacts in the market and will look after production department & raw material purchases. Santej. and has 10 years of experience in accounting.
CREDIT APPRAISAL IN BANKING SECTOR
31st March Net Sales Net Profit Cash Accruals Interest on TLs Sub Total (A) Total repayment Interest on TL Sub Total (B) DSCR (Gross) Net DSCR Average Gross DSCR Average Net DSCR
9.26 0.29 0.66 0.16 0.82 0.00 0.16 0.16 5.13 2.54 3.28
19.77 0.78 1.10 0.27 1.37 0.40 0.27 0.67 2.04 2.75
20.58 0.79 1.09 0.22 1.31 0.40 0.22 0.62 2.11 2.73
21.09 0.82 1.15 0.16 1.31 0.40 0.16 0.56 2.34 2.88
21.82 0.87 1.24 0.11 1.35 0.40 0.11 0.51 2.65 3.10
22.34 0.88 1.32 0.05 1.37 0.40 0.05 0.45 3.04 3.30
6.56 0.97 7.53 2.00 0.97 2.97
Break-even and sensitivity analysis and whether acceptable:(Rs. in crores)
Break even analysis 31/03/09 31-Mar-10 31-Mar-11 30-Mar-12 31-Mar-13 31-Mar-14 Capacity Utilization 70% 80% 83% 85% 88% 90% Net Sales (A) 9.26 19.77 20.58 21.09 21.82 22.34 Variable costs Raw material 8.74 17.13 17.77 18.20 18.84 19.27 Consumable spares 0.00 0.00 0.00 0.00 0.00 0.00 Power and Fuel 0.26 0.47 0.50 0.53 0.56 0.59 Other operating Exp. 0.09 0.13 0.15 0.16 0.17 0.18 Stock Changes 0.73 0.39 0.06 0.03 0.04 0.04 Total Variable Cost(B) 8.36 17.34 18.36 18.86 19.53 20.00 Fixed Costs Direct Labour 0.08 0.13 0.14 0.15 0.16 0.17 Selling, Admin. & General Expenses 0.06 0.10 0.11 0.12 0.13 0.14 Interest Expenses 0.40 0.55 0.48 0.42 0.35 0.29 Depreciation 0.37 0.32 0.30 0.33 0.37 0.44 Total Fixed Cost ( C) 0.91 1.10 1.03 1.02 1.01 1.04 Contribution (D=A-B) 0.90 2.43 2.22 2.23 2.29 2.34 Contribution ratio (E=D/A) 0.10 0.12 0.11 0.11 0.10 0.10 BE sales (F=C/E) 9.10 9.17 9.36 9.27 10.10 10.40 BE sales as % of Net Sales 98.27 46.38 45.48 43.95 46.29 46.55 Interfirm Comparison: (To be given only where data from comparable units is available.)
CREDIT APPRAISAL IN BANKING SECTOR
(Amt in Cr) Name of Company FBL NFBL Year Sales PBT / Sales % 2.16 6.52 4.53 5.92 TOL / TNW 1.47 2.90 3.14 2.50 CR
Ahmedabad Packaging Industries Ltd. Singhal Industries Pvt. Ltd Asia Woven Sacks Pvt. Ltd. Akshat Polymers
3.30 6.70 7.44 4.25
1.20 -1.00 --
2007 2010 2008 2010
23.11 15.19 22.98 19.77
1.90 1.08 1.52
Raw material – The major raw material for this plant is HDPP in the form of granules. This raw material is available locally by sales & distribution network of the major suppliers as under: • • • • • • Reliance Industries Limited Nand Agencies Labdhi International Hadlia petrochemicals Ltd. Sharada Polymers IPCL
The raw materials are purchased from the suppliers against the advance payment only and cash discounts are offered resulting in the increase n profitability. Any variation in the cost of raw material is proposed to be passed on to the finished products and will not affect the profitability.
Analysis:• The firm is into manufacturing of HDPP woven sacks which are widely used as packaging material in cement, fertilizer, etc.
CREDIT APPRAISAL IN BANKING SECTOR
• • As per ICRA report, grading and research services (2006) Flexible packaging sector is expected to grow at the rate of 12.40%. The promoters have sufficient experience in the line of activity. The promoters had already made negotiations of the some of the industries as detailed under for selling the HDPP woven sacks: • • • • • •
Indian Farmers Fertilizer Co. Ltd Birala cement Sanghi cement Ambuja cement Various grain & Food Export Unit of Gujarat
The orders worth Rs.2.50 crores is expected to be finalized by end of Agust, 2008 and before commissioning of the plant as advised. The company’s borrower rating is SB-6 based on projected financials as on 31.03.2010 (the first full year of operations). Projected financials are in line with the financials of the some of the unit in similar line of activity and production level. The promoters are having experience of more than 15 years in the line of the activity. The affairs of the firm are expected to be managed on professional lines based on their past experience. The conduct of accounts of associate with the existing bankers has been satisfactory. The short and medium term outlook for the industry is stable Availability of collateral security reflected in collateral coverage of 50.566%. Gross average DSCR of 2.54. Average security margin of 48%. The company has adequate management skills and production/marketing infrastructure in place to achieve the projected trajectory. There is steady demand for the product.
• • • • • • • • •
industrial. the unit was an existing profit making unit & letter of authority was received for direct payment to the bank from ONGC which is public sector Different appraisal scheme has been introduced by the bank to cater different industries such as:Doctor plus scheme for doctors Transport plus scheme for transport School. financial performance of the firm was poor. financial & technical viability of the project proposed its funding pattern & further checks the primary or collateral security cover available for the recovery of such funds SBI loan policy contains various norms for sanction of different types of loans These all norms does not apply to each & every case SBI norms for providing loans are flexible & it may differ from case to case The CRA models adopted by the bank take into account all possible factors which go into appraising the risk associated with a loan These have been categorized broadly into financial. collages & educational institutions Trader’s easy loan Warehouse receipt financing for commodity traders (agriculture related stock. loan is sanctioned due to strong financial parameters From the case study analysis it was also found that in some cases. management risks & are rated separately The assessment of financial risk involves appraisal of the financial strength of the borrower based on performance & financial indicators After case study we found that in some cases.) • • • • • • • • • • In the business world risk arises out of:Deficiencies / lapses on the part of the management Uncertainties in the business environment Page 106 . etc. cotton ginning. business. even though loan was sanctioned due to some other strong parameters such as the the unit has got confirm order.CREDIT APPRAISAL IN BANKING SECTOR • Credit appraisal is done to check the commercial.
CREDIT APPRAISAL IN BANKING SECTOR Uncertainties in the industrial environment Weakness in the financial position • • • • Credit is the core activity of the banks & important source of their earnings which go to pay interest to depositors. salaries to employees & dividend to shareholders Credit & risk go hand in hand Bank’s main function is to lend funds/ provide finance but it appears that norms are taken as guidelines not as a decision making A banker’s task is to indentify/assess the risk factors/parameters & manage/mitigate them on continuous basis BIBLIOGRAPHY BOOKS:- Page 107 .
R.in http://www. XXII No.bankersindia.org. “Banking Finance” A Leading Monthly of Banking & Finance Published by Sashi Publications.sbi.wikipedia..com http://www.12 December.in http://www.indianbankassociation.com Page 108 .S. Vol. State Bank Staff Collage Hyderabad JOURNALS:1) Agarwala. Vol..CREDIT APPRAISAL IN BANKING SECTOR 1) Vaidhyanathan. R..1 January.G.com http://www. 2008 ISSN-0971-4498 2) Agarwala.G. “Credit Management” Internal Circular of SBI. “Banking Finance” A Leading Monthly of Banking & Finance Published by Sushil Kumar Agarwala.rbi. XII No. T.co. 2008 ISSN-0971-4498 WEBSITES:http://www.
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