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RESEARCH METHODOLOGY

 INTRODUCTION: Credit appraisal means investigation/assessment done by the bank before providing any loans and advances/project finance and also checks the commercial, financial &industrial viability of the project proposed its funding pattern and further checks the primary & collateral security cover available for recovery of such funds.
 PROBLEM STATEMENT:

To study the credit appraisal system in SME sector, at AXIS Bank Ahmadabad.  OBJECTIVES: • • To study the credit appraisal methods. To understand the commercial, financial & technical viability of the proposal proposed and it’s finding pattern.

 RESEARCH DESIGN: Analytical in nature.

 DATA COLLECTION:

Primary data: Informal interview with manager and other staff members at Axis Bank.

Secondary data:

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 Books  websites  database at Axis Bank  library research

 BENEFICIARIES:

Researchers:

This report will help researchers improving knowledge about the credit appraisal system and to have practical exposure of the credit appraisal system at AXIS Bank.

Management Students:

The project will help the management student to know the patterns of credit appraisal in Axis bank.  LIMITATION OF THE STUDY:

As the credit appraisal is one of the crucial areas for any bank, some of the Technicalities are not revealed.

Credit appraisal system includes various types of detail studies for different areas of analysis, but due to time constraint, our analysis was of limited areas only.

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CHAPTER 1 INTRODUCTION TO BANKING SECTOR A snapshot of the 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 cooperative 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. 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.

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SBI and HDFC are the promoters of the CIBIL. The government will hold 49% stake and private players will hold the rest 51%. convertible debentures of corporate and units of equity oriented mutual funds.the majority being held by ICICI Bank (24. The RBI is now planning to transfer of its stakes in the SBI. The next wave of reforms saw the nationalization of 6 more commercial banks in 1980. 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. ATMs and bill payments are the new buzz words that banks are using to lure customers. This in turn resulted in a significant growth in the geographical coverage of banks. processing and sharing credit information on borrowers of credit institutions. NHB and National bank for Agricultural and Rural Development to the private players.5%). phone banking. mobile banking. Since then the number scheduled commercial banks increased four-fold and the number of banks branches increased eight-fold. The finance ministry spelt out structure of the government-sponsored ARC called the Asset Reconstruction Company (India) Limited (ARCIL). subject to a ceiling of 5% of the total outstanding advances (including commercial paper) as on March 31 of the previous year. 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. (CIBIL) was set up in August 2000. 4 . The Bureau provides a framework for collecting. this pilot project of the ministry would pave way for smoother functioning of the credit market in the country. Every bank has to earmark a minimum percentage of their Loan portfolio to sectors identified as “priority sectors”. 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. The manufacturing sector also grew during the 1970s in protected environs and the banking sector was a critical source.Net banking. Banks are free to acquire shares. Also.

the Public Sector Banks (PSB) s found it extremely difficult to complete with the new private sector banks and the foreign banks.After the second phase of financial sector reforms and liberalization of the sector in the early nineties.9% and 12. The new private sector banks first made their appearance after the guidelines permitting them were issued in January 1993. This banks due to their late start have access to state-of-the-art technology. The share of foreign banks ( numbering 42 ). The 20 nationalized banks accounted for 53. regional rural banks and other scheduled commercial banks accounted for 5.1% share in credit. 3.2% respectively in deposits and 8.7%.41%.5% of credit during the same period.14% and 12. Eight new private sector banks are presently in operation.5% of the deposits and 47.85% respectively in credit during the year 2000 5 . the State Bank of India (SBI) and its 7 associates accounted for a 25% share in deposits and 28. During the year 2000. which in turn helps them to save on manpower costs and provide better services. 3.

commercial banks can be further grouped into nationalized banks. These banks have over 67. In Terms of ownership. non-scheduled banks and scheduled banks.000 branches spread across the country. Scheduled banks comprise commercial banks and the co-operative banks.Classification of Banks: The Indian banking industry. regional rural banks and private sector banks (the old / new domestic and foreign). Banking System in India Reserve bank of India (Controlling Authority) Development Financial institutions Banks IFCI IDBI ICICI NABARD NHB Commercial Banks Public Sector Banks SBI Groups Nationalized Banks Regional Rural Banks IRBI EXIM Bank SIDBI Cooperative Banks Land Development Banks Private Sector Banks Indian Banks Foreign Banks 6 . private sector and foreign banks. the State Bank of India and its group banks. which is governed by the Banking Regulation Act of India 1949 can be broadly classified into two major categories. The private sector banks are again spilt into old banks and new banks. The Indian banking industry is a mix of the public sector.

With the purview of economic stability and growth. greater attention is required on both political and regulatory commitment to long 7 . higher pace of credit expansion. Prospects became very uncertain causing recession in major economies. Thus. market and liquidity risk show that Indian banks are by and large resilient. expanding profitability and productivity akin to banks in developed markets. it has become far more imperative to contemplate the role of the Banking Industry in fostering the long term growth of the economy. Indian banks have begun to revise their growth approach and reevaluate the prospects on hand to keep the economy rolling. The single-factor stress tests undertaken by the CFSA divulge that the banking system can endure considerable shocks arising from large possible changes in credit quality. The way forward for the Indian banks is to innovate to take advantage of the new business opportunities and at the same time ensure continuous assessment of risks. However. These stress tests for credit. interest rate and liquidity conditions. A rigorous evaluation of the health of commercial banks. A progressively growing balance sheet. lower incidence of nonperforming assets and focus on financial inclusion have contributed to making Indian banking vibrant and strong. recently undertaken by the Committee on Financial Sector Assessment (CFSA) also shows that the commercial banks are robust and versatile. amidst all this chaos India’s banking sector has been amongst the few to maintain resilience.CHAPTER 2 GLOBAL AND LOCAL SCENARIO OF BANKING SECTOR Indian Banking System: The Current State & Road Ahead Introduction Recent time has witnessed the world economy develop serious difficulties in terms of lapse of banking & financial institutions and plunging demand.

the challenges and the opportunities ahead for the Indian Banking Sector. with a further 25% feeling it was in good shape and only 6% of the respondents feeling that the performance of the industry was just average. felt that the Indian banking Industry was in a very good to excellent shape. almost 69% of them. A majority of the respondents. As the world reels from the global financial meltdown. 8 . as well as the policies and structures required to further stimulate the pace of growth.33%) of the respondents felt that the banking industry compared with the best of the sectors of the economy. India’s banking sector has been one of the very few to actually maintain resilience while continuing to provide growth opportunities. An attempt has been made to understand the general sentiment with regards to the performance.33% of the view that growth would be between 15-20% for the year 2009-10 and greater than 20% for 2014-15. including pharmaceuticals. General Banking Scenario The pace of development for the Indian banking industry has been tremendous over the past decade. Most of the respondents were positive with regard to the growth rate attainable by the Indian banking industry for the year 2009-10 and 2014-15. In fact. The results of our survey are given in the following sections. The predicament of the banks in the developed countries owing to excessive leverage and lax regulatory system has time and again been compared with somewhat unscathed Indian Banking Sector. a feat unlikely to be matched by other developed markets around the world. infrastructure. an overwhelming majority (93. FICCI conducted a survey on the Indian Banking Industry to assess the competitive advantage offered by the banking sector. FICCI conducted a survey on the Indian Banking Industry to assess the competitive advantage offered by the banking sector. as well as the policies and structures that are required to further the pace of growth.term development programme. etc. with 53.

75% respondents feel the regulatory system to be the major strength. 75% economic growth. 93.On being asked what is the major strength of the Indian banking industry. 68.25% credit quality. which makes it resilient in the current economic climate. 25% technological advancement and 43. adapt and change should be the key mantra. Change is the only constant feature in this dynamic world and banking is not an exception. The major challenge faced by banks today is the ever rising customer expectation as well as risk management and maintaining growth rate. 56. The changes staring in the face of bankers relates to the fundamental way of banking-which is going through rapid transformation in the world of today.75% our risk assessment systems. Adjust.75% relative insulation from external market. Following are the results of the biggest challenge faced by the banking industry as declared by our respondents (on a mode scale of 1 to 7 with 1 being the biggest challenge): 9 .

Brazil. and UK. Brazil. Russia.They also asked their respondents to rate India on certain essential banking parameters (Regulatory Systems. Though. On comparing the results with their previous survey where the respondents had rated Indian Regulatory system below par the US and UK system. at par with Japan. Technological System and Credit Quality) in comparison with other countries i. UK and USA. Risk Assessment Systems. Japan. Singapore. Regulatory systems of Indian banks were rated better than China. the Indian story is quite different. The recent financial crisis has drawn attention to under-regulation of banks (mainly investment banks) in the US. they see that post the financial crisis Indian Banks are more confident on the Indian Regulatory Framework. Russia. China.e. 10 . Singapore and Hong Kong where as all our respondents feel that we are above par or at par with USA. Hong Kong.

Thus. they see that the resilience the Indian Banks showed at the time of financial crisis has led to an attitudinal shift of our respondents with the past survey indicating Credit quality of Indian banks being below par than that of US and UK. UK and USA but at par with Hong Kong and Singapore and 85. Indian banks seem to have paced up in terms of Credit Quality. Credit quality of banks has been rated above par than China.72% of the respondents feel that we are at least at par with Japan. Brazil. 11 .The global meltdown started as a banking crisis triggered by the credit quality. Russia.

the challenge lies in exploiting the potential for profiting from investments made in technology. A lot needs to be done on the technological front to keep in pace with the global economies. Technology systems of Indian banks have been rated more advanced than Brazil and Russia but below par with China. Japan. 12 . UK and USA.As technology ingrains itself in all aspects of a bank’s functioning. Singapore. They find no change on introspection of their past surveys which also highlighted the need for Indian banks to pace up in adoption of advanced technology. Hong Kong. as is evident from the survey results.

They divide them into organic means of growth that comes out of an increase in the bank’s own business activity. They further asked participants on the methods that they consider suitable to meet their expansion needs. In this light. 13 . 93. The lack of global scale for Indian banks came into sharp focus during the recent financial crisis which saw several international banks reneging on their funding commitments to Indian companies. but local banks could not step into the breach because of balance sheet limitations. and inorganic means that includes mergers or takeovers.75% of all respondents to their survey are considering expanding their operations in the future.Global Expansion of Indian Banking The idea of creating bigger banks to take on competition sounds attractive but one must realize even the biggest among Indian banks are small by global standards.

branch expansion finds favor with banks while strategic alliances is the most popular inorganic method for 14 .We see from the above graph that amongst organic means of expansion.

new ventures and buyout portfolios are the least popular methods for bank expansion.banks considering scaling up their operations. The business profile of banks has transformed dramatically to include non-traditional activities like merchant banking.86% were against them being established as banks. there has been a remarkable increase in the size. and the Indian banking industry unsaturated with CAGR of well above 20%. participants in their survey felt that the market definitely has scope to accommodate new players. Banking Activities Over the last three decades. a tiered license that enables new entrants to enter into specific areas of the business only after satisfactorily achieving set milestones for the prior stages. Banks felt that limitations regarding track record. they questioned banks on NBFCs and Industrial houses being established as banking institutions and find opinion to be marginally against the notion. However. Scope for New Entrants 81.25% also felt that there was further scope for new entrants in the market. with 35.new financial services and products and the human resource development. 57. On the other hand. cap on promoter's holdings and wider public holding in addition to a common banking regulator on a level playing field are essential before they may set themselves up as banks. ensuring adequate capitalization levels. spread and scope of activities of banks in India. While there has been prior debate. on further questioning. in spite of capital management and human resource constraints.14% of respondents feel that the above may be allowed but only if it is along with specific regulatory limitations. With only 30-35% of the population financially included. 15 . as there continue to remain opportunities in unbanked areas.71% in favour while 42. mutual funds.

based income. There is. banks rate product development and differentiation. and barely 13% have 20-30% of their total income constituted by fee-based income. if the industry is to become a global force to reckon with. innovation and customization. which has globally remained one of the key drivers of growth and profitability.71%) and FOREX Management (71. and further grow and expand their fee.Their survey finds that within retail operations. we see that Banc assurance (85. In fact. an urgent need for Indian banks to move beyond retail banking. cost reduction. Derivatives. Indian banks are fast realizing that fee-based sources of income have to be actively looked at as a basis for future growth. at the same time. remains the least profitable business opportunity for banks as the market for derivatives is still in its nascent stage in India.43%) remain most profitable for banks. understandably. credit discipline and income growth of individuals and customer orientation to be significant factors for their retail growth. There is nevertheless a visibly increased focus on fee based sources of income. cross selling and technological up gradation as equally important to the growth of their retail operations. Out of avenues for non-interest income. over 80% of banks in their survey have only up to 15% of their total incomes constituted by fee. 16 . 71% of banks in their survey saw an increase in their fee based income as a percentage of their total income for the FY 2008-09 as compared to FY 2007-08.based operations. Additionally a few respondents also find pro-active financial inclusion.

reflective of immense potential for the banking system This is mirrored in the fact that while our survey finds no discernible shift in the lending pattern of banks across Tier 1.Financial Inclusion and Expansion of Banking Services Transition from class banking to mass banking and increased customer focus is drastically changing the landscape of Indian banking. 93% Indian Banking System: The Current State & Road Ahead Page | 20 participants still find rural markets to be to be a profitable avenue. While 60% of our population has access to banks. Tier 2 and Tier 3 cities over the last two years. demographic knowledge and strong local relations (62. more so as compared to internet kiosks.25% of our respondents have a strategy in place to tap rural markets. Tie ups with micro finance institutions (MFIs)/SHG and introduction of innovative and customized products are considered most important to approaching rural markets according to respondents. In fact. This was followed by factors such as identifying needs and developing relevant financial products (75%). post offices and supply chain management techniques 17 .75%) in decreasing levels of importance. India has an expanding middle class of 250 to 300 million people in need of varied banking services. with the remainder as yet undecided on their plan of action. only 15% of them have loan accounts and an overwhelming 70% of farmers have no access to formal sources of credit. Expansion of retail banking has a lot of potential as retail assets are just 22% of the total banking assets and contribution of retail loans to GDP stands merely at 6% in India vis-à-vis 15% in China and 24% in Thailand.5%) and ensuring productive use and adequate returns on credit employed (43. more than 81. All banks in their survey weigh Cost effective credit delivery mechanisms (100%) as most important to the promotion of financial inclusion. Cost of accessing markets has been the only sour note in the overall experience of our respondents in rural markets At the same time. with 53% of respondents finding it lucrative in spite of it being a difficult market.

equally popular amongst banks. there is also a need for innovative instruments to deepen the market further. 18 . We asked the banks what they felt were major factors responsible for rigid prime lending rates. Credit Flow and Industry India Inc is completely dependent on the Banking System for meeting its funding requirement. Cash deposit machines. interest rate futures and credit default swaps as a means to further the financial inclusion and expansionary process. derivatives. warehouse receipts. As Indian financial markets mature over time. biometric and handheld devices. to prepaid cash cards. Some respondents also found the Business Correspondents model to be an untapped model for financial inclusion.25% of respondents found branchless banking to be an effective and secure way of reaching out to rural markets.Additionally. with mobile. One of the major complaints from the industry has in fact been high lending rates in spite of massive cuts in policy rates by the RBI. Suggestions ranged from micro saving and micro insurance initiatives. 81.

there are other factors which have led to the stickiness of lending rates such as wariness of corporate credit risk (33. February 2010) (FEDERATION OF INDIAN CHAMBERS OF COMMERCE & INDUSTRY) 19 . the trend seems to be changing.67%). followed by retail loans (73. 12). The great Indian industrial engine has nevertheless continued to hum its way through most of the year long crisis. However. We asked banks about the sectors that they consider to be most profitable in the coming years (Fig. All respondents were confident in the infrastructure sector leading the profitability for the industry.33%).00%) on the other hand. competition from government small savings schemes (26. Due to long-term maturity.None of the banks in their survey considered the cap on bank deposit rates to be one of the causes of inflexible lending rates. do not seem to have as significant an influence over lending rates according to banks. Benchmarking of SME and export loans against PLR (20.33%) and others (Source: Annual survey.

(3) The threat of substitute product is very high like credit unions and investment houses. real estate etc. With the new financial instruments they are asking higher return on the investments (1) Rivalry among existing firms has increased with liberalization. 20 . stocks. (4) Bargaining power of buyers is high as corporate can raise funds easily due to high Competition.CHAPTER 3 INDUSTRY ANALYSIS Competitive Forces Model (Porter’s Five Force Model) (2) Potential Entrants is high as development financial institutions as well as private and Foreign Banks have entered in a big way (5) Organizing power of the supplier is high. There are other substitutes as well banks like mutual funds. New products and improved customer services is the focus. gold. government securities. debentures.

5. The threat of substitute product is very high like credit unions and in investment houses. 21 . As there is a expected revival in the Indian economy Banks have a major role to play. Even in the case of personal finance. Bargaining Power of Buyers Corporate can raise their funds through primary market or by issue of GDRs.1. 4. The suppliers demand a higher return for the investments. 2. Since the availability of funds is more and deployment of funds is less. debentures. banks should evolve new products and services to the customers. the buyers have a high bargaining power. competition among the existing banks has increased. Each bank is coming up with new products to attract the customers and tailor made Loans are provided. which will bring down the NPAs. Overall Analysis The key issue is how banks can leverage their strengths to have a better future. There should be a rational thinking in sanctioning Loans. 3. Rivalry among existing firms With the process of liberalization. stocks. But they now entered into retail banking which has resulted into stiff competition among the exiting players. 6. This is mainly because of competition. There are other substitutes as well banks like mutual funds. real estate etc. As a result they have a higher bargaining power. The quality of services provided by banks has improved drastically. FCCBs. government securities. Bargaining Power of Suppliers With the advent of new financial instruments providing a higher rate of returns to the investors. Potential Entrants Previously the Development Financial Institutions mainly provided project finance and development activities. the investments in deposits is not growing in a phased manner. gold. Threats from Substitutes Competition from the non-banking financial sector is increasing rapidly.

reflect “Trends in the Indian Economy”. The performance of bank should therefore. 2. Greater securities of Funds Compared to other investment options banks since its inception has been a better avenue in terms of securities. 4. Consumer credit forms the major source of financing by banks. banking industry has changed drastically with the opportunities to the work with. Low Cost of Capital Corporate prefers borrowing money from banks because of low cost of capital. Large Customer Base This is mainly attributed to the large network of the banking sector. Due to satisfactory implementation of RBI’s prudential norms banks have won public confidence over several years. Due to the reforms in the financial sector. a) STRENGTHS 1. which has helped banks build large networks in the rural and urban areas. It mainly helps to know the strengths and Weakness of the industry and to improve will be known through converting the opportunities into strengths. Depositors in rural areas prefer banks because of the failure of the NBFCs. participation of banks in project financing has changed in the environment of banks. Banking network After nationalization.SWOT Analysis The banking sector is also taken as a proxy for the economy as a whole. The deregulation of the interest rate. Private banks allowed to operate but they mainly concentrate in metropolis. 22 . Middle income people who want money for personal financing can look to banks as they offer at very low rates of interests. new accounting standards new entrants and information technology. 3. It also helps for the competitive environment among the banks. The performance of banking industry is done through SWOT Analysis. banks have expanded their branches in the country.

3. This is good for the economy but banks have failed to manage the asset quality and their intensions were more towards fulfilling government norms. they will have greater flexibility to fix their own interest rates which depends on the profitability of the banks. Powerful Unions Nationalization of banks had a positive outcome in helping the Indian Economy as a whole. Priority Sector Lending To uplift the society. Capital Markets.b) WEAKNESS 1. Bonds etc. Basel Committee The banks need to comply with the norms of Basel committee but before that it is challenge for banks to implement the Basel committee standard. They are against automation. High Non-Performing Assets Non-Performing Assets (NPAs) have become a matter of concern in the banking industry. c) OPPORTUNITIES 1. priority sector lending was brought in during nationalization. which has to be reduced to meet the international standards. 2. which are of international standard. Universal Banking Banks have moved along the value chain to provide their customers more products and services. which have a major influence in decision-making. As a result lending was done for nonproductive purposes. This is because reduced to meet the international standardsof change in the total outstanding advances. 2. Differential Interest Rates As RBI control over bank reduces. which provides every financial service under one roof. Every Indian bank has an opportunity to become universal bank. 23 . High Household Savings Household savings has been increasing drastically. 3. Banks should use this opportunity for raising funds. 4. But this had also proved detrimental in the form of strong unions. Investment in financial assets has also increased. like home finance.

4. Normally these instruments offer better return to investors. 2. Untapped Foreign Markets Many Indian banks have not sufficiently penetrated in foreign markets to generate satisfactory business therefore. Business can Effectively carried out through internet banking. They can introduce the new products and develop the existing services. 5. The spread in the banking sector is very narrow. Due to some major changes in policies related to deposits mobilization credit deployment. 3. Interest Banking The advance in information technology has made banking easier. Inflation The interest rates go down with a fall in inflation. Changes in the Government Policy The change in the government policy has proved to be a threat to the banking sector. 24 . d) THREATS 1. The market oriented economy and globalization has resulted into competition for market share. Capital Market Instruments and Mutual Funds are increasing. the investors will shift his investments to the other profitable sectors. it can be concluded clear opportunity exists in such markets. Thus.the whole scenario of banking industry may change. NBFCs. The investments in NBFCs deposits. 4. Recession Due to the recession in the business cycle the economy functions poorly and this has proved to be a threat to the banking sector. interest rates. Capital Markets and Mutual funds There is a huge investment of household savings. To meet the competition the banks has to grow at a faster rates and reduce the overheads.

 Progressive globalization and achieving international standards.63 crores with the public holding (other than promoters and GDRs) at 53.. The Oriental Insurance Company Ltd. The Bank today is capitalized to the extent of Rs.I). 25 . after the Government of India allowed new private banks to be established. The Bank was promoted jointly by the Administrator of the specified undertaking of the Unit Trust of India (UTI .CHAPTER 4 INTRODUCTION TO AXIS BANK Axis Bank was the first of the new private banks to have begun operations in 1994. and United India Insurance Company Ltd. i. 403.e.72%. Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC) and other four PSU insurance companies. The Bank has a network of over 4055 ATMs (as on 31st December 2009) providing 24 hrs a day banking convenience to its customers. The Bank's Registered Office is at Ahmedabad and its Central Office is located at Mumbai. National Insurance Company Ltd. Mission  Customer service and product innovation tuned to diverse needs of individual and corporate clientele. The New India Assurance Company Ltd. The Bank has strengths in both retail and corporate banking and is committed to adopting the best industry practices internationally in order to achieve excellence. This is one of the largest ATM networks in the country.  Continuous technology up gradation while maintaining human values.. The Bank has a very wide network of more than 896 branches and Extension Counters (as on 31st December 2009).

Core values
 Customer satisfaction through • • • • Providing quality service effectively and efficiently “smile, it enhances your face value” a service quality stressed on Periodic customers service audits Maximization of stakeholder value

Business divisions
 Treasury management Treasury is responsible for the maintenance of the statutory requirements such as the cash reserve ratio (CRR), statutory liquidity ratio (SLR) and the investment of such funds. It also manages the assets and liabilities of the bank. Primary dealing activities can be classified into • • • Money market operations Foreign exchange operations Derivatives

 Merchant Banking and capital markets Axis Bank is a registered merchant Banker. The services offered are: • • Private placement/syndication Issue management

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• • •

Debenture trustees Depository services Project advisory services, capital market services, advisory on Mergers & Acquisition

 Retail financial services All branches have a dedicated financial advisory desk, wherein the mutual fund schemes are marketed. The objective is to provide customers with a larger portfolio of investment avenues thereby enhancing customer relationship. Other products handled by the department include sale of Gold Coins as well as marketing of Depository services.

 Corporate and institutional banking

• • • •

Cash management Services Business current Accounts Correspondent Banking Government Business

 Retail Banking

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Retail banking is one of the key departments in the bank. It has the largest variety in its portfolio which consists of retail asset and retail liability products. Retail Banking by definition implies banking services which are offered to individual customers as opposed to corporate banking which is meant for companies.

 International banking Major functions include • Handling regulatory issues which include compliance with regulations of various authorities such as RBI regulatios, FEMA etc • Keeping a track of the business volumes being generated by the branches and controlling the margins • Maintaining relationship with correspondent Banks outside India

 Advances The function involves extending fund and non-fund based credit facilities to different clients in the country, the department aims to maximize the interest spread earned on funds available with the bank while keeping the risk on the credit portfolio at acceptable limits. The department also tries to maximize fee-based income from both fund based and non-fund based activities.

Board of Directors:
Shri N.C. Singhal Shri J.R. Varma Dr. R.H. Patil Smt. Rama Bijapurkar
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N. Subbiah Shri Ramesh Ramanathan Shri K. Prithviraj 29 .Shri R.B. L. Vaish Shri M.V.

the small and medium enterprises (SME) sector is broadly a Term used for small scale industrial (SSI) units and medium-scale industrial units. Small and Medium enterprises Development (MSMED) Act. An SSI unit should neither be a subsidiary of any other industrial unit nor be owned or controlled by any other industrial unit. can be considered as an SSI unit and any investment of upto Rs 100 million can be Termed as a medium unit. a standard definition surfaced only in October 2. Small and Medium Enterprises. Government of India. For instance. this sector was defined as an enterprise with investment in plant and machinery of up to Rs 1 lakh and situated in towns and villages with strength of 30 . however was changed according to the changing economic scenario and thus has separate definitions to it. History Small and Medium Enterprises or SMEs are vital for the growth and well being of the country. An SME is known by different ways across the world. imposed the Micro. Any industrial unit with a total investment in its fixed assets or leased assets or hire-purchase asset of upto Rs 10 million. it gradually gained significance. In India. This sector was recognized and given importance right from independence and is being encouraged ever since then.2006. it commenced on a small scale. When it started gaining momentum. an SME definition for manufacturing enterprises is different from what an SME definition for service enterprises has to say. when the Ministry of Micro. This definition.CHAPTER 5 INTRODUCTION TO SME In the Indian context. 2006. Though. because it employed a considerable number of people.

In fact. quality control and marketing surveys in order to assist the SSIs in enabling them to market their products in an underdeveloped market. the SME segment saw a lot more development and support from the government. known as the Abid Hussain Committee. in 1995-96. Description of SME in the manufacturing sector 31 . which.1 percent. for the first time in India’s development history spoke of liberalization. In 1991. Exportoriented enterprises could be wholly foreign owned and foreign equity participation was selectively allowed. Indian companies were no longer insulated from the global economy. more competitive and resilient. the growth rate of SSIs exceeded that of the total industrial sector. however it increased again in 1996 and continued to be higher than the total industrial growth rate till 1999. Industries could import capital goods with much fewer restrictions. the government started providing special services akin to product standardization. especially SMEs. till 2006. The scenario for the small-scale sector changed with the Industrial Policy of July 1991. With liberalization. Yet. What this meant was that medium and large enterprises would no longer need licenses to run. The policy statement put in place special legislation to recognize and protect self employed people in cottage and home industries. District industries canters (DICs) were set up and made the focal point of SSI development. From 1991 to 1995.less than 50. bypassing large cities and state capitals. Also. there was an urgent need to make them. 1996 saw the government involved in the setting up of a higher level committee. the growth rate of SSIs was almost three times that of the total industrial sector at 3.000 people. rapid changes were seen in the Indian economy. to review policies for small industries and recommend measures to help formulate a strong and innovative policy package for the rapid development of SMEs. the growth rate of SSIs was slightly lower than the total industrial sector.

 Small business. The following points will explain how. processing or preservation of goods for the list of eligible industries in the First Schedule to the Industries (Development and Regulation Act). whose borrowing limits do not exceed Rs 10 lakh of which not more than Rs 2 lakh should be for working capital requirements  Professionally qualified medical practitioners setting up a practice in semi urban and rural areas. For the Manufacturing Sector. whose original cost price of equipment used for business. 1951. 32 . the MSMED Act 2006 defines micro. small and medium enterprises (MSMEs) as mentioned below:  A micro enterprise is an enterprise where investment in plant and machinery does not exceed Rs 25 lakh. SME definition for Service Enterprises A service sector enterprise is defined as one involved in providing services. does not exceed Rs 20 lakh. building and the items specified by the Ministry of Small Scale Industries with its notification No SO 1722 (E) dated October 5.  The investment in plant and machinery in a small enterprise is more than Rs 25 lakh.  Small road and water transport operators that can now own a fleet of vehicles not exceeding ten in number. 2006.  A medium enterprise is one where the investment in plant and machinery is more than Rs 5 crore. the cost excludes that of land. In all these.The Term enterprise in the manufacturing context stands for an industrial undertaking or a business concern involved in the production. whose borrowing limits should not be less than Rs 15 lakh with a subceiling of Rs 3 lakh for working capital requirements. but does not exceed Rs 5 crore. but does not exceed Rs 10 crore.  Professional and self-employed persons.

SMEs also lack access to private equity and venture capital and have a very limited access to secondary market instruments.  SMEs face considerable delays in the settlement of dues/payment of bills by the large scale buyers.  SMEs face fragmented markets in respect of their inputs as well as products and are vulnerable to market fluctuations. There is lack of awareness of global best practices.Challenges faced by SME The challenges being faced by the small and medium sector may be briefly set out as Follows Small and Medium Enterprises (SME). With the deregulation of the financial sector. efficient recovery processes and available security. particularly the tiny segment of the small enterprises have inadequate access to finance due to lack of financial information and non-formal business practices. There is an immediate need for the banking sector to focus on credit and SMEs 33 .  SMEs lack easy access to inter-state and international markets.  The access of SMEs to technology and product innovations is also limited. the ability of the banks to service the credit requirements of the SME sector depends on the underlying transaction costs.

34 . etc. income. repayment capacity. But even though the Loans are backed by the collateral. the customer's cash flows are ascertained to ensure the timely payment of principal and the interest. number of dependents. at all times. continuity of employment. banks are normally interested in the actual Loan amount to be repaid along with the interest. It is generally carried by the financial institutions. However the 3 ‘C’ of credit are crucial & relevant to all borrowers/ lending. previous Loans. Factors like age. Brief overview of Credit Credit Appraisal is a process to ascertain the risks associated with the extension of the credit facility. Generally the credits facilities are extended against the security know as collateral. which must be kept in mind. Thus it is necessary to appraise the credibility of the customer in order to mitigate the credit risk. credit cards. its funding pattern & further checks the primary & collateral security cover available for recovery of such funds. It is the process of appraising the credit worthiness of a Loan applicant. are taken into account while appraising the credit worthiness of a person. nature of employment.CHAPTER 6 OVERVIEW OF CREDIT APPRAISAL Credit appraisal means an investigation/assessment done by the banks before providing any Loans & advances/project finance & also checks the commercial. financial & technical viability of the project proposed. Proper evaluation of the customer is performed this measures the financial condition and the ability of the customer to repay back the Loan in future. Credit risk is a risk related to non-repayment of the credit obtained by the customer of a bank. which are involved in providing financial funding to its customers. Thus. Every bank or lending institution has its own panel of officials for this purpose.

you will be able to get the most for your money and avoid paying unnecessary charges. home Loans. which should be the objective of every lending Officer. thereby generating a debt. Character  Capacity  Collateral If any one of these are missing in the equation then the lending officer must question the viability of credit. Service credit is monthly payments for utilities such as telephone. 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. and pay for them later. In simple Terms. The most common way to avail credit is by the use of credit cards. also known as a lender. and instead arranges either to repay or return those resources (or material(s) of equal value) at a later date. Basic types of credit There are four basic types of credit. vehicle Loans. and water. student Loans. There is no guarantee to ensure a Loan does not run into problems. We use credit to buy things with an agreement to repay the Loans over a period of time. and you may pay a late charge if your payment is not on time. electricity. however if proper credit evaluation techniques and monitoring are implemented then naturally the Loan loss probability / problems will be minimized. You often have to pay a deposit. while the second party is called a debtor. also known as a borrower. gas. The first party is called a creditor. Other credit plans include personal Loans. Credit allows you to buy goods or commodities now. With the issuance of a credit. trade. 35 . By understanding how each works. a debt is formed. 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. small business Loans. a credit is an agreement of postponed payments of goods bought or Loan.

The borrower takes the goods home in exchange for a promise to pay later. or businesses. banks. Installment credit may be described as buying on time. and furniture are often purchased this way. Cars.end of each month. The item you purchase may be used as security for the Loan. and agree to pay the balance with a specified number of equal payments called installments.Loans let you borrow cash. Loans can be for small or large amounts and for a few days or several years. Credit cards are issued by individual retail stores. Loans can be secured or unsecured. make a down payment. 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.-if you pay for the use of it in full at the Brief overview of Loans Loans can be of two types fund base & non-fund base:  Fund Base includes: • • Working Capital Term Loan  Non-fund Base includes: • • • Letter of Credit Bank Guarantee Bill Discounting 36 . Using a credit card can be the equivalent of an interest-free Loan. You usually sign a contract. The finance charges are included in the payments. major appliances. financing through the store or the easy payment plan.

Working capital in this context is the excess of current assets over current liabilities. For production. tools etc. From the above definition. the following differences between a Term Loan & the working capital credit afforded by the Bank are apparent: o The purpose of the Term Loan is for acquisition of capital assets. Fund Base: • Working capital The objective of running any industry is earning profits. which has been provided from the long-Term source. & also to run the business i. plant. such as purchase of land. building. financing the sales by way of sundry debtors/ receivables. as per a prearranged schedule. A Term Loan is a Loan granted for the purpose of capital assets.. 37 . vehicles. & repayable from out of the future earning of the enterprise.e. for storing finishing goods till they are sold out & for working capital or liquid surplus & represents that portion of the working capital. Capital or funds required for an industry can therefore be bifurcated as fixed capital & working capital. • Term Loan 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. equipments. purchase of machinery. its day-to-day operations. construction of. funds are needed for purchase of raw materials/ stores/ fuel. modernization. in installments. The excess of current assets over current liabilities is treated as net. machinery. for employment of labor. for power charges etc. renovation or rationalization of plant. buildings. Funds required for day to-day working will be to finance production & sales. An industry will require funds to acquire “fixed assets” like land.

its capital assets. greater is the attendant uncertainty of repayment & consequently the risk involved also becomes greater. whether given as security or not. o The repayment of Term Loan is not out of sale proceeds of the goods & commodities per se. An element of risk is inherent in any type of Loan because of the uncertainty of the repayment. Longer the duration of the credit. However. to adopt a different approach in examining the applications of borrowers for such credit & for appraising such proposals. The repayment should come out of the future cash accruals from the activity of the unit. 38 . it may be observed that Term Loans are not so lacking in liquidity as they appear to be. flow of funds & profits. The Bank’s commitment is for a long period & the risk involved is greater.o The Term Loan is an advance not repayable on demand but only in installments ranging over a period of years. 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. economic aspects. 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. returns. The repayment of a Term Loan depends on the future income of the borrowing unit. Financial aspects. It may thus be observed that the scope & operation of the Term Loans are entirely different from those of the conventional working capital advances. technical aspects. a projection of future trends of outputs & sales & estimates of cost. This will involve a detailed scrutiny of the scheme. Term Loans would be repaid in a regular way from the anticipated income of the industry/ trade. o The security is not the readily saleable goods & commodities but the fixed assets of the units. These distinctive characteristics of Term Loans distinguish them from the short Term credit granted by the banks & it becomes necessary therefore.

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. o Is to make a payment to or to the order of a third party (the beneficiary). or to accept & pay such bills of exchanges (drafts). Non-fund Base: • Letter of credit The expectation of the seller of any goods or services is that he should get the payment immediately on delivery of the same. The seller desires to have an assurance for payment by the purchaser. c) Guarantee: The person who undertakes to discharge the obligations of the applicant in case of his default. 39 . or o Authorizes another bank to effect such payment. or is to accept & pay bills of exchange (drafts drawn by the beneficiary). Here arises the need of Letter of Credit (LCs). provided that • 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’. This may not materialize if the seller & the buyer are at different places (either within the same country or in different countries). 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. 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. or o Authorizes another bank to negotiate the Terms & conditions of the credit are complied with. against stipulated document(s).

realize the proceeds without waiting for warranty) To allow units to draw funds from time to time from the concerned indenters against part execution of contracts. f) Bid bonds on behalf of exporters g) Export performance guarantees on behalf of exporters favoring the Customs Department under EPCG scheme. c) In respect of raw materials supplies or for advances by the buyers. signed by the maker. guarantee is a collateral contract. or to the bearer of that instrument. e) Performance guarantee for warranty period on completion of contract which would enable the suppliers to period to be over. consequential to a main co applicant & the beneficiary. design/drawings in project finance. a certain person. 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. or to the order of. Branches may issue guarantees generally for the following purposes: a) In lieu of security deposit/earnest money deposit for participating in tenders. directing a certain person to pay a certain sum of money only to. • Bill discounting: Definition: As per Negotiable Instrument Act..Thus. “The bill of exchange is an instrument in writing containing an unconditional order. d) In respect of due performance of specific contracts by the borrowers & for obtaining full payment of the bills. The guarantees are structured according to the Terms of agreement. The guarantees executed by banks comprise both performance guarantees & financial guarantees. viz. maturity & purpose. etc.” 40 . security. Purpose of Bank Guarantees Bank Guarantees are used to for both both preventive & remedial purposes.

Documentary Bills a. Profitability 41 . Flexibility o To Banks 1. Usance Bill 3. 120 days. may handover the B/E to the Bank.Discounting of bill of exchange: A seller (Drawer) if need cash. a company or a high Net worth Individual and obtain ready cash this is known as discounting of bill. 60. Demand Bill 2. NBFC. Short Term source of finance 2.normal maturity periods are 30. For discounting the bill. Documents against payment (D/P) bills 4. Safety of funds 2. the practice in India is that. the financing organization holds the original B/E till the drawee pays on maturity. Clean Bills Advantages o To Investors 1. 90. Certainty of payment 3. financiers charge an interest on the bill amount for the duration of the bill which is called discount charges. Documents against acceptance (D/A) bills b. Types of Bills 1. No tax deducted at source 4. Outside the purview of Section 370 of Indian Companies Act 1956 3.

registration no.Credit Appraisal Process Receipt of application from applicant Receipt of documents (Balance sheet. ECGC. CIBIL data. willful defaulters list. MOA. KYC papers. Different govt. and properties documents Pre-sanction visit by bank officers Check for RBI defaulters list. AOA.. Caution list etc 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 Proposal preparation Assessment of proposal Sanction/approval of proposal by appropriate sanctioning authority 42 .

Documentations. etc (On regular basis) 43 . renew of accounts. mortgages Disbursement of Loan Post sanction activities such as receiving stock statements. agreements. review of accounts.

Industry related risk factors. Government regulations/legislation impacting on the industry. Credit risk rating.. List of defaulters. e. Profile of the promoters/senior management personnel of the project. if applicable. Appraisal A. ban on financing of industries producing/ consuming Ozone depleting substances.g. Group Exposure restrictions. Acceptability of the promoters. Compliance regarding transfer of borrower accounts from one bank to another. Prudential Exposure norms. Industry Exposure restrictions. Preliminary appraisal  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 when they fall Towards this end the preliminary appraisal will examine the following aspects of a proposal. 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. Assessment and Sanction functions 1. Caution lists. Applicant’s status vis-à-vis other units in the industry.Loan administration pre.sanction process Appraisal. (ii) no limitations have 44  . • • • • • • • • • • • • • • Bank’s lending policy and other relevant guidelines/RBI guidelines.

if the proposal is to finance a project. Also provide some information about the directors of the company g) Financial statements of last 3 years including the provisional financial statement for the year 2007-08 h) Copy of PAN/TAN number of company i) Copy of last Electricity bill of company j) Copy of GST/CST number k) Copy of Excise number l) Photo I. 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 .D.demand. of all the directors m) Address proof of all the directors n) Copies related to the property such as 7/12 & 8A utara. Possession o) Bio-data form of all the directors duly filled & notarized p) Financial statements of associate concern for the last 3 years 45 . lease/ sales deed. previous track records. cost of production. 2R Permission. etc.been placed on the Company’s borrowing powers and operations and (iii) the scope of activity of the company.  Further. are prima facie in order  Required Documents for Process of Loan a) Application for requirement of loan b) Copy of Memorandum & Article of Association c) Copy of incorporation of business d) Copy of commencement of business e) Copy of resolution regarding the requirement of credit facilities f) Brief history of company. its customers & supplies. Allotment letter. orders In hand. profitability.

should include: • Organizational set up with a list of Board of Directors and indicating the qualifications. production. the competitors’ share. The information. b) ‘No Objection Certificate’ from Term lenders if already financed by them and c) Report from Merchant bankers in case the company plans to access capital market. competitive advantage of the applicant. in other words a brief on the managerial resources and whether these are compatible with the size and scope of the proposed activity. • • • • • Current practices for the particular product/service especially relating to Terms of credit sales. etc. along with a copy of the proposal/project report. wherever necessary. covering specific credit requirement of the company and other essential data/ information. If the branch (a reference to the branch includes a reference to SECC/CPC etc. purchase. the branch will arrive at a decision whether to support the request or not. proposed marketing arrangement.g. among other things. as the case may be) finds the proposal acceptable. • 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. Estimates of sales cost of production and profitability. probability of bad debts. Projected profit and loss account and balance sheet for the operating years during the Currency of the Bank assistance. a comprehensive application in the prescribed proforma. demand and supply gap. a) Appraisal report from any other bank/financial institution in case appraisal has been 46 . The report may comment on the geographic spread of the market where the unit proposes to operate. marketing and finance. it will call for from the applicant(s).. After undertaking the above preliminary examination of the proposal. branch should obtain additionally done by them. If request includes financing of project(s). etc.

irrespective of market segment. interfirm and inter-industry comparisons should be made to establish their veracity. 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. B. In respect of existing concerns. a pro-forma balance sheet as on a recent date should be obtained and analysed). and d) Financial statements and borrowing relationship of Associate firms/Group Companies. enjoying credit limits of Rs. Detailed Appraisal  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. b) Details of existing borrowing arrangements. c) Credit information reports from the existing bankers on the applicant Company. particulars regarding the history of the concern. all the data/information furnished by the borrower should be counter checked and. present financial position. its past performance. etc. in addition to the above.10 lacs and above from the banking system.  In addition to the financials. the reason therefore. if any.  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. For non-corporate borrowers. audited balance sheet in the IBA approved formats should be submitted by the borrowers. 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. wherever possible. should also be called for. While appraising a project or a Loan proposal. if so. 47 .

made by the statutory auditors on the company’s accounts. The nature and purpose of the contingent liabilities.whether the provisions made in the balance sheets are adequate to take care of the company’s tax liabilities. economic and Financial viability and other aspects are to be examined as indicated below: • • • • • Statutory clearances from various Government Depts. fuel etc. Pollution control clearance Cost of project and source of finance 48 . the commercial. Qualifications/adverse remarks. and Compliance with lending norms and other mandatory guidelines as applicable  Project financing: If the proposal involves financing a new project. / Agencies Licenses/permits/approvals/clearances/NOCs/Collaboration agreements. if any. The position regarding the company’s tax assessment . past deviations in sales and profit projections. • • Projected levels: whether acceptable. if any created for the purpose. Trends in sales and profitability. and estimates/projections of sales values. Pending suits by or against the company and their financial implications (e. together with comments thereon.• • • • • • • • • • • Whether the company has revalued any of its fixed assets any time in the past and the present status of the revaluation reserve. Record of major defaults. Production capacity & use: past and projected. if any. o Estimated requirement of working capital finance with reference to acceptable build up of inventory/ receivables/ other current assets. power.). If any. cases relating to customs and excise. as applicable Details of sourcing of energy requirements. sales tax. etc. in repayment in the past and history of past sickness. other ratios relevant to the project.g. Apart from financial ratios. Dividend policy.

Term Loans.) • • • Arrangements proposed for raising debt and equity Capital structure (position of Authorized.• Build-up of fixed assets (requirement of funds for investments in fixed assets to be critically examined with regard to production factors. etc..) Debt component i. 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.e. Issued/ Paid-up Capital. • • • • • • • • • • • • Feasibility of arrangements to access capital market Feasibility of the projections/ estimates of sales. economies of scale etc. 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. if available Management quality. Where central or state sales tax Loan or developmental Loan is taken as source of financing the project. the manner of repayment. furnish details of the Terms and conditions governing the Loan like the rate of interest (if applicable). track record Company’s structure & systems Applicant’s strength on inter-firm comparisons 49 . improvement in quality of products. etc. debentures. competence. unsecured Loans/ deposits. deferred payment facilities. Redeemable Preference Shares. 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 amortization schedule Whether profitability is adequate to meet stipulated repayments with reference to Debt Service Coverage Ratio.

the portion of the equity / Loans which is proposed to be brought in by the promoters. where necessary.half yearly and yearly Also examine and comment on the status of approvals from other Term lenders. with emphasis on following aspects: o Market share of the units under comparison o Unique features o Profitability factors o Financing pattern of the business o Inventory/Receivable levels o Capacity utilization o Production efficiency and costs o Bank borrowings patterns o Financial ratios & other relevant ratios o Capital Market Perceptions o Current price o 52week high and low of the share price o P/E ratio or P/E Multiple o Yield (%). market view (if anything adverse). A pre-sanction inspection of the project site or the factory should be carried out in the case of existing units. the promoter should furnish a definite plan indicating clearly the sources for meeting his contribution.. debentures. professional entities like CRIS-INFAC. source data from Stock Exchange Directory. their family members. Present relationship with Bank: 50 . viz. public equity etc. should also be fully tied up. However. financial journals/ publications. friends and relatives will have to be brought upfront. CMIE. Under such circumstances.For the purpose of inter-firm comparison and other information. C.. relaxation in this regard may be considered on a case to case basis for genuine and acceptable reasons. To ensure a higher degree of commitment from the promoters. The balance amount proposed to be raised from other sources. and project implementation schedule. etc.

Structure of facilities and Terms of Sanction: Fix Terms and conditions for exposures proposed . Opinion Reports: Compile opinion reports on the company. Credit risk rating: Draw up rating for (i) Working Capital and (ii) Term Finance.FB & NFB Occurrence of irregularities. etc. F. profile of present exposures: Credit facilities now granted Conduct of the existing account Utilization of limits . Stock turnover. Guarantee Margins .. partners/ promoters and The proposed guarantors. renewal data. E.facility wise and overall: • • • • Limit for each facility – sub-limits Security . realization 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 D. Existing charges on assets of the unit: If a company. 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. if any Frequency of irregularity i. G.• • • • • • • • • • • • • • • Compile for existing customers.Primary & Collateral. report on search of charges with ROC. Financial Follow-up Reports.For each facility as applicable Rate of interest 51 .e.

provide additional inputs arising from the assessment. Carry out pre-sanction visit to the applicant company and their project/factory site. 52 . Assessment: Indicative List of Activities Involved in Assessment Function is given below: • Review the draft proposal together with the back-up details/notes. and the borrower’s application. • • • • Interact with the borrower and the appraiser. if any.) to see if this is prima facie in order. J.• • • • • Rate of commission/exchange/other fees Concessional facilities and value thereof Repayment Terms. 2. Proposal for sanction: Prepare a draft proposal in prescribed format with required backup details and with recommendations for sanction. 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 (ii) Deviations. 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. financial statements and other reports/documents examined by the appraiser. proposed from usual norms of the Bank and the reasons therefore I. where applicable ECGC cover where applicable Other standard covenants H. incorporate these and required modifications in the draft proposal and generate an integrated final proposal for sanction. Assistance to Assessment: Interact with the assessor. etc.

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. the proposal is a fair banking risk. Recount briefly the value of the company’s (and the Group’s) connections. all considered. if any. give recommendations for grant of the requisite fundbased and non-fund based credit facilities. o Adequacy/ correctness of limits/ sub limits. arrange for additional inputs/ modifications to be incorporated in the proposal. Finally. Recommendation for sanction: Recapitulate briefly the conclusions of the appraisal and state whether the proposal is economically viable. 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. 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 therefor • To the extent the inputs/comments are inadequate or require modification. • Examine critically the following aspects of the proposed exposure. margins. 53 . State whether. arrange with the appraiser for the analysis on the correct lines. o Proposed structure of facilities. moratorium and repayment schedule o Adequacy of proposed security cover o Credit risk rating o Pricing and other charges and concessions.

54 .3.Post sanction Credit process . charges and concessions proposed for the exposure and covenants o Stipulated vis-à-vis the risk perception. If any critical information is not provided in the proposal. 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. Value of the existing connection with the borrower Loan administration . remit it back to the Assessor for supply of the required data/clarifications. pricing. setting out the reasons. if it is not acceptable.  Examine critically the following aspects of the proposed exposure in the light of corresponding instructions in force: • • • • • • • • • • • Bank’s lending policy and other relevant guidelines RBI guidelines Borrower’s status in the industry Industry prospects Experience of the Bank with other units in similar industry Overall strength of the borrower Projected level of operations Risk factors critical to the exposure and adequacy of safeguards proposed There against Credit risk rating Security.  Accord sanction of the proposal on the Terms proposed or by stipulating modified or additional conditions/ safeguards. or Defer decision on the proposal and return it for additional data/clarifications. or Reject the proposal.

A banker cannot take solace in sufficiency of security for his loans. supervision and monitoring. follow-up. 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. Types of Lending Arrangements 55 . The objectives of the three stages of post sanction process are detailed below. e) Ultimately ensure safety of funds lent.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. Stages of post sanction process The post-sanction credit process can be broadly classified into three stages viz. Credit assessment is made based on promises and projections.. It is for this reason that proper follow up and supervision is essential. which together facilitate efficient and effective credit management and maintaining high level of standard assets. A loan granted on the basis of sound appraisal may go bad because the borrower did not carry out his promises regarding performance.

In the case of borrowing business entity. In consortium lending. this leads to a consortium lending arrangements. documentation & supervision & control. The various arrangements under borrowings from more than one bank will differ on account of terms & conditions.Introduction Business entities can have various types of borrowing arrangements. 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)  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. Sometimes. consortium arrangement enables participating banks to save manpower & resources through common appraisal & inspection & sharing credit information. The borrower enjoys the advantage similar to single window availing of credit 56 . several banks pool banking recourses & expertise in credit management together & finance a single borrower with a common appraisal.  Consortium Lending When one borrower avails loans from several banks under an arrangement among all the lending bankers. 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. it is able to meet its funds requirement without being constrained by the limited resource of its own banker. The bank is also able to spread its portfolio. method of appraisal. common documentation & joint supervision & follow up. 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. Besides this. coordination.

 Multiple Banking Arrangement Multiple Banking Arrangement is one where the rules of consortium do not apply & no inter se agreement among banks exists. Additionally. The bank taking the highest share of the credit will usually be the leader of consortium. If one bank wanted to call up the advance & protect the security. another bank was interested in continuing the facility on account of group considerations. consensus was rarely prevalent among the consortium members. There is no such arrangement called ‘Multiple Banking Arrangement’ & the term is used only to denote the existence of banking arrangement with more than one bank. Points to be noted in case of multiple banking arrangements • • • Though no formal arrangement exists among the financing banks. The arrangement continues until any one of the bank moves out of the consortium.facilities from several banks. There is no ceiling on the number of banks in a consortium. Consortium arrangement occasioned delays in credit decisions & the borrower has found his way around this difficulty by the multiple banking arrangement. when units were not doing well. 57 . It is a convenient mode of raising long-term funds. 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 outstanding with the other banks should be obtained on the periodical basis & also verified from the Balance sheet of the unit to avoid excess financing  Credit Syndication A syndicated credit is an agreement between two or more lending institutions to provide a borrower a credit facility using common loan documentation. 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. The borrower avails credit facility from various banks providing separate securities on different terms & conditions.

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.The borrower mandates a lead manager of his choice to arrange a loan for him. cost of credit etc. On the basis of the memorandum & on their own independent economic & financial evolution the leading banks take a view on the proposal. communication & control within the syndication process & finalizes deal timing. 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 58 . The mandated banker – the lead manger – prepares an information memorandum & Circulates among prospective lender banks soliciting their participation in the loan. The mandated bank convenes the meeting to discuss the syndication strategy relating to coordination. management fees. 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. thus easy & hassle fee Large loans can be raised through syndication by accessing global markets For the borrower. The mandate spells out the terms of the loan & the mandated bank’s rights & responsibilities. The loan agreement is signed by all the participating banks. 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.

2. The maximum Loan amount under the product is Rs. The facility is in the form of a Cash Credit (for Working Capital requirements) and Term Loan (Financing Capital expenditure). It includes various products like: • • • • • • • • Mpower OD and Mpower Term Loan Business Loan for Property Power Rent Power Trade Zero Collateral Loans (ZCL) to MSE under CGS Card Power Enterprise Power Business Power • Mpower OD and Mpower Term Loan: The product aims at to provide both Working capital and Term finance requirements of a trade enterprise. • Business Loan for Property: 59 .50 Crs.CHAPTER 7 CREDIT APPRAISAL MODEL AT AXIS BANK Credit to SME Sector AXIS bank provides credit to SME sector under following Schemes  SME – Schematic (Fast Track) It includes structured products basically to provide fast services to clients. Non-Fund based facilities can also be granted under the product. The facility is secured by hypothecation of Working Capital assets and further collateralized by charge over an immovable property/ financial asset.

The maximum Loan amount under the product is Rs. The facility is secured by guarantee cover of credit guarantee fund trust for micro and small enterprises (CGTMSE) and there is no collateral security to be taken in such cases. Maximum loan amount under the product is Rs. The lease rentals are hypothecated in bank’s favor and the Loan is further collateralized by charge over the property. • Power Trade: The product aims to provide both working capital and Term finance requirements of a trade enterprise. Non. The facility is in the form of a Term Loan repayable by EMIs.00 crore.The product is aimed at providing finance to business enterprises for acquition of an immovable property. The Loan amount is assessed on the basis of the net present value of the rental receivables over the lease period (after deducting margin and taxes).5 crores. 1.fund based facilities can also be granted under the product. The maximum Loan amount under the product is Rs. 2. Maximum Loan amount under the product is Rs. 20 crores. • Power Rent: The product generally known in market parlance as “Lease Rental Discounting” is aimed at providing a Term Loan to owners of properties against their lease rental receivables.5 times. The product specifies a minimumsecurity coverage of 1. 5 crores. The facility is in the form of a cash credit (for working capital requirements) and Term Loan (financing capital expenditure). The facility is secured by hypothecation of working capital assets and further collateralized by charge over an immovable property/ financial asset. Both demand loan & term loan facilities are offered to the 60 . • Card Power: This is a scheme for financing credit/debit card receivables of units installing pour EDC machines. • Zero Collateral Loans (ZCL) to MSE under CGS: This product facilitates the MSEs and software/IT related services to avail both working capital and term finance from bank.

pre & post shipment credit & non-fund based facilities like LC & BG.00 Crore. Their services ranging from Funded to Non-Funded.borrowers. seasonal business etc.  SME. from Short Term to Long Term and from Credit to Trade Services ensures to get finance the way it is best suited for business. All trading/ retailing activities (with a few exceptions like liquor. timely availability of credit is an integral ingredient needed to scale new heights. The facilities offered include CC Rupee export credit. 1. • Busness Power: Business Power is an unsecured Term Loan (Maximum loan amount under the product is Rs. subject to a maximum of Rs. • Enterprise Power: This product has been developed to meet the credit needs of the Micro and small enterprises covering both manufacturing and the service sectors. 35 lacs) to be repaid by way of EMI’s over a maximum period of 4 years. 2.5 crores. so that focus on business needs becomes possible whereas Bank cater to meet financing needs. Axis Bank understands this and endeavor to be not just a bank but also financing partner.). tobacco. Services: • • • • • • • • Cash Credit Working Capital Demand Loan Export Finance Short Term Loan Term Loan Clean Bill Discounting LC Backed Bill Discounting Co-Acceptance of Bills 61 .Non Schematic (Standard) For a business on the growth phase with a wide range of opportunities to explore. where credit/ debit cards are used are eligible for the loans. The maximum limit is restricted to Rs.

personal or corporate guarantee. and/or collateral security of movable fixed assets. The primary or collateral security will be as mentioned in cash credit facility. • Short Term Loan: Bank provides Working Capital facilities to meet day-to-day working capital needs and Term Loan for capex. immovable property. processing and packaging the goods and shipping the goods. • Export Finance: Bank provides finance for export activities in the form of Pre-Shipment Credit against firm order and or Letter of Credit and Post shipment credit.. Here also interest is levied on the amount drawn rather than on the amount utilized. etc. Finance is provided in Indian or foreign currency depending upon the need of the borrower.• • • • Credit Facilities against Guarantee or Stand By Letter of Credit issued by Foreign Banks Letter of Credit Bank Guarantee Solvency Certificates • Cash Credit: Bank offer Cash Credit facilities to meet day-to-day working capital needs. Interest is charged not on the sanctioned amount but on the utilized amount • Working Capital Demand Loan: Bank also provides working capital facilities in the form of Working Capital Demand Loan instead of cash credit facility. Cash Credit is provided against the primary security of stock. etc. Credit is available for procuring raw materials. meeting temporary mismatches in working capital or for meeting contingent expenses. manufacturing the goods. debtors. In such situations it provides Short Term Loans for tenure up to a year to ensure that 62 . other current assets. However there may be occasions where there is need of ad hoc or short-Term finance for general corporate purposes.

Keeping these requirements in mind Bank provides Term Loans up to acceptable tenor with suitable moratorium. Bank provides funding to such companies against guarantees or SBLCs of acceptable foreign banks. Bank discount bills or receivables and provide credit against that. This facility is provided for a period of 3-6 months depending upon the tenor of the bill. Suitable collateral security is also taken whenever required. • Letter of Credit: Apart from fund based working capital facilities Bank provides a range of Non63 . and repayment options structured on the basis of customer’s estimated cash flows.business runs smoothly. This facility is provided for a period of 3-6 months depending upon the tenor of the bill or Letter of Credit. • Clean Bill Discounting: Bank provides clean bill discounting facilities to fund receivables. • Term Loan: When there is need of long-Term funds for capex or capacity expansions or plant modernization and so on. • Co-Acceptance of Bills: Bank also provides co-acceptance of trade bills depending upon the need of the borrower. These Loans are primarily secured by a first charge on the fixed assets acquired through the Loan amount. if required. • Credit Facilities against Guarantee or Stand By Letter of Credit issued by Foreign Banks: Various foreign companies set up subsidiary in India. • LC Backed Bill Discounting: Bank discount trade bills drawn under Letters of Credit issued by reputed banks to fund receivables.

Sanctioning powers for schematic Loans under MSME and Mid Corporate In order to have better control over the portfolio. Apart from this it provides Import Letter of Credit for importing machinery or capital goods. it provides a range of guarantee such as Performance guarantee. • Bank Guarantee: Bank provides Bank Guarantee on behalf of its client to various other entities such as Government. The Branch Heads of other stand-alone branches where budgets have not been allocated will not have any sanctioning powers. Accordingly. These are generally provided for 3-6 months depending upon Trade cycle. where the potential and manpower support exist for such business.Fund Based facilities such as Letter of credit. however. quasi govt bodies. Letter of Credit is provided to meet trade purchases. Such LCs are for tenure ranging from 1-3 years depending upon the need of the borrower. The Branch Heads of branches located at centers where Advances Cells have been set up will not have any sanctioning powers. corporate and so on. These branches would. Bank Guarantees. financial guarantee. Solvency certificates. to be decided by Advances Cells. Branch Heads of stand-alone branches where budgets have been allocated will have sanctioning powers as per delegation of powers given below. it is felt that the budget for schematic advances should be allotted only to select branches. EPCG etc. • Solvency Certificates: Bank also provides solvency certificate depending upon the need of the borrower. the budget for FY 08 has been restricted to select branches. continue to source business and such proposals would be processed / sanctioned at the respective 64 . etc. The tenure of Bank Guarantee range from 1 year to 10 years depending upon the purpose of the guarantee.

The proposals sanctioned at Advances Cells / Zonal Offices during a particular month are to be submitted for review by the next higher authority through a monthly control return. obtention of stock statements and periodical inspection of borrowal units. latest by the 5th of the succeeding month. Branches would continue to be responsible for all post sanction formalities. periodic updating of drawing power. The concessions in rates of interest / variations authorised by the VP (Advances) and SVP (Advances) during a particular month are to be submitted for review by the SVP(Advances)/ Zonal Head respectively through a monthly control return. in the prescribed format and not on a caseby-case basis. If a combination of schematic Loan products is to be offered. the proposals sanctioned by the Branch Heads /Advances Cells (headed by AVPs/Managers) during a particular month are to be submitted for review by the appropriate authority at Zonal Office or Advances Cells as the case may be through a monthly control return. to be exercised by various officials would be as under. in the prescribed format by the 5th of the succeeding month. Lacs) 50 250 1000 2000 Interest rates Concessions NIL NIL Upto 100 bps Upto 100 bps Reviewing Authority AVP / VP-Advances at the Advances Cell VP-Advances SVP – Advances Zonal Head All requests for interest rate concessions are to be forwarded to the Advances Cells. The sanctioning powers. Sanctioning Authority Manager AVP VP SVP (Advances) at ZO Exposure Limits (in Rs. latest by the 5th of the succeeding month. the combined exposure shoul be the criterion while sanctioning the limits 65 . Review / renewal of existing Loans at such branches would also be done at the Advances Cells. Similarly. in the prescribed format and not on a case-by-case basis.Advances Cells. maintaining quality of assets held in their books.

Introduction to Credit Risk Management
Definition Of all different types of risks that a bank is subject to, credit risk can be defined as the risk of failure on the part of the borrower to meet obligations towards the bank in accordance with the Terms and conditions that have been agreed upon. Inability and/or unwillingness of the borrower to repay debts may be the cause of such default. The bank aims at minimizing this risk that could arise from individual borrowers or the entire portfolio. The former can be addressed by having well-developed systems to appraise the borrowers; the latter, on the other hand, can be minimized by avoiding concentration of credit exposure with a few borrowers who have similar risk profiles. Credit risk management becomes even more relevant in the light of the changes that have been brought about in the economic environment, including increasing competition and thinning spreads on both the sides of Balance sheet

Determinants of Credit Risk Factors determining credit risk of a bank’s portfolio can be divided into external and internal factors. The banks do not have control on external factors. These include factors across a wide spectrum ranging from the state of the economy to the correlation among different segments of industry. The risk arising out of external factors can be mitigated via diversification of the credit portfolio across industries especially in light of any expectations of adverse developments in the existing portfolio. Given that the banks have very little control over such external factors, the bank can minimize the credit risk that it faces mainly by managing the internal factors. These include the internal policies and processes of the bank like Loan policies, appraisal processes, monitoring systems etc. These internal factors can be taken care of, partly, via effective rating and monitoring systems, entry level criteria etc. These processes would enable improvement in the quality of credit decisions.

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This would effectively improve the quality (and hence profitability) of the portfolio. While monitoring systems are useful tool at post-sanction stage, rating systems act as important aid at the pre-sanction stage.

Introduction to Credit Tools
The Bank has developed tools for better credit risk management. These focus on the areas of rating of corporate (pre-sanctioning of Loans) and monitoring of Loans (post-sanctioning). The focus of this manual is to familiarise the user with the credit rating tool.  Credit Rating: Definition Credit rating is the process of assigning a letter rating to borrowers indicating the creditworthiness of the borrower. Rating is assigned based on the ability of the borrower (company) to repay the debt and his willingness to do so. The higher the rating of a company, the lower the probability of its default. The companies assigned with the same credit rating have similar probability of default.  Use in decision-making Credit rating helps the bank in making several key decisions regarding credit including: • Whether to lend to a particular borrower or not; What price to charge • What are the products to be offered to the borrower and for what tenor • At what level should sanctioning be done • What should be the frequency of renewal and monitoring It should, however, be noted that credit rating is one of the inputs used in taking credit decisions. There are various other factors that need to be considered in taking the decision (e.g., adequacy of borrower’s cash flow, collateral provided, relationship with the borrower). The rating allows the bank to ascertain a probability of the borrower’s default based on past data.

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 Main features of the rating tool: i) Comprehensive coverage of parameters. ii) Extensive data requirement. iii) Mix of subjective and objective parameters. iv) Includes trend analysis. v) 13 parameters are benchmarked against other players in the segment. The tool contains the latest available audited data/ratios of other players in the segment. The data is updated at intervals. vi) Captures industry outlook. vii) Eight grade ratings broadly mapped with external credit rating agency’s ratings prevalent in India.  Special features of the web based credit rating tool i) Centralised data base. ii) Easy accessibility and faster computation of scores. iii) Selective access to users based on the area of operation. Branches have access to the data pertaining to their branch only, Zonal offices have access to the data pertaining to all the branches under their control and the Credit Department and Risk Department at Central Office have access to all accounts. iv) Adequate security system and provision of audit trails for confidentiality. v) Maintaining of past rating records in the system for collection of empirical data on rating migrations. This will enable the bank to arrive at PDs (Probability of Default) factor.

Rating Tool for Small and Medium Enterprises (SME)
The SME rating tool has been developed for the purpose of assigning a credit rating to the SME borrower of the Bank. The aim of the tool is to provide a standardised system for the bank to evaluate the credit risk of different borrowers. It should, however, be noted that this tool is not the standalone exercise for the purpose of sanctioning of Loan to a SME borrower. It should be supplemented with other inputs important in the sanctioning process.

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we shall discuss in greater detail the structure of the tool and the methodology of using it.The following broad areas have been considered for deTermining the rating of borrowers in the SME category: • • • • • Financial performance Business performance Industry outlook Quality of management Conduct of account (after roll out of the Monitoring tool) Within each of these broad areas. In the following sections.5 15 ii) Scenario (II) with monitoring tool: The weightages would be conveyed separately on roll out of the tool. various parameters have been used for obtaining an overall rating of the borrower.5 22.  Parameters used in credit rating of SME: The rating tool for SME borrowers assigns the following weightages to each one of the four main categories i) Scenario (I) without monitoring Parameter Financial performance Operating performance of business Quality of management Industry outlook Weightage (%) 40 22.  Parameters used in the SME tool 69 .

The risk assessment in industry sectors is done at the Central Office level and appropriate score for each industry has been allocated in the tool. Also. the tool will automatically reckon the allocated score. it would have a direct impact on the integrity of the borrower especially in Terms of its willingness to repay its debt. These various sub-parameters give us an idea of the different sources of risk being faced by a company in different areas. The parameters in this category assess the borrower’s competence in its primary activities. Borrowers. operating performance of business and quality of management may have different credit ratings due to the risks inherent in their industry. which are similarly ranked in Terms of financial performance.• Financial performance The tool in its current form uses various parameters for rating a borrower on its financial strength. it is important to assess the riskiness of the industry to which that borrower belongs.  Three types under SME tool i) Manufacturing ii) Services and iii) Trading 70 . • Operating performance of business Operational efficiency of a borrower is important in deTermining the generation of cash for repayment of its debt obligations. • Quality of management Quality of the management of a borrowal unit has a direct impact on the performance of the unit. On selection of the relevant industry sector. • Industry In order to undertake the credit rating of any borrower.

Various parameters under each of the above stated parameters for these three types of SME tool are as under: 1 i) Financial performance Sr. F1 F2 F3 F6 F7 F8 F9 F12*$ F13 Sub parameters Net Sales Growth Rate (%) PBDIT Growth Rate (%) PBDIT/Sales (%) TOL/TNW Current Ratio Operating Cash Flow DSCR Foreign exchange risk Expected values of D/E. B7 B8 B9 B10 B13 B14 B15 B20 B21 Sub parameters Credit period allowed Credit Period Availed Working Capital Cycle Tax incentives Production Related Risk Product Related Risks Price Related Risk Client Risk Fixed Asset Turnover TOTAL Weightage (%) 10 10 20 10 10 10 10 10 10 100 iii) Quality of management 71 . No. if 50% of NFB credit devolves (corrected for margin) F24 Realisability of Debtors F27* State of export country economy F28* Fund repatriation risk TOTAL * Applicable for export units $Applicable for units having imports and or exports Weightage (%) 10 7 10 10 10 8 8 10 5 12 5 5 100 Manufacturing ii) Operating performance of business Sr. No.

M1 M2 M3 M4 M6 M9 M8 Sub parameters HR policy/track record of industrial unrest Track Record in Default of Statutory Dues Market Report of Management reputation History of FERA violation/ED enquiry Too Optimistic Projections of Sales and Other Financials Technical & Managerial Expertise Capability to raise money TOTAL Weightage (%) 15 16 15 8 16 15 15 100 2 i) Financial performance Services Sr. if 50% of NFB credit devolves (corrected for margin) F24 Realisability of Debtors F27* State of export country economy F28* Fund repatriation risk TOTAL * Applicable for export units $Applicable for units having imports and or exports Weightage (%) 10 7 10 10 10 8 8 10 5 12 5 5 100 ii) Operating performance of business Sr.Sr. No. F1 F2 F3 F6 F7 F8 F9 F12*$ F13 Sub parameters Net Sales Growth Rate (%) PBDIT Growth Rate (%) PBDIT/Sales (%) TOL/TNW Current Ratio Operating Cash Flow DSCR Foreign exchange risk Expected values of D/E. No. No. M1 M3 M4 Sub parameters HR Policy/Track Record in Industrial Unrest Market Report of Management Reputation History of FERA violation/ED enquiry Weightage (%) 15 20 10 72 .

M1 M3 M4 M6 M8 M12 Sub parameters HR Policy/Track Record in Industrial Unrest Market Report of Management Reputation History of FERA violation/ED enquiry Too Optimistic Projections of Sales and Other Financials Capability to raise money Mix of Professional and Traditional Management TOTAL Weightage (%) 15 20 10 20 15 20 100 3 i) Financial performance Trading Sr. F1 F2 F3 F6 F7 F8 F9 F12*$ F13 F24 F27* Sub parameters Net Sales Growth Rate (%) PBDIT Growth Rate (%) PBDIT/Sales (%) TOL/TNW Current Ratio Operating Cash Flow DSCR Foreign exchange risk Expected values of D/E.M6 M8 M12 Too Optimistic Projections of Sales and Other Financials Capability to raise money Mix of Professional and Traditional Management TOTAL 20 15 20 100 iii) Quality of management Sr. No. if 50% of NFB credit devolves (corrected for margin) Realisability of Debtors State of export country economy Weightage (%) 10 7 10 10 10 8 8 10 5 12 5 73 . No.

No. M1 M2 M3 M4 M6 M8 M12 Sub parameters HR Policy/Track Record in Industrial Unrest Track Record in Default of Statutory Dues Market Report of Management Reputation History of FERA violation/ED enquiry Too Optimistic Projections of Sales and Other Financials Capability to raise money Mix of Professional and Traditional Management TOTAL Weightage (%) 15 16 15 8 16 15 15 100 74 . B3 B7 B8 B9 B10 B14 B15 B24 Sub parameters Inventory Turnover Credit period allowed Credit Period Availed Working Capital Cycle Tax incentives Product Related Risks Price Related Risk Sustainability of Sales TOTAL Weightage (%) 16 10 12 16 10 12 12 12 100 iii) Quality of management Sr. No.F28* Fund repatriation risk TOTAL * Applicable for export units $Applicable for units having imports and or exports 5 100 ii) Operating performance of business Sr.

A consistent growth in this ratio indicates an improved performance of the company. CAGR (Compounded average growth rate) for three years = 75 . expressed as percent. Formula The compounded annual growth rate over the past 3 years is calculated in percentage Terms. Notes • Net sales = Gross sales – Indirect taxes • For banks. NBFCs.Net Sales Growth Rate Importance of this indicator This ratio refers to the compounded annual growth rate of net sales over a period of three years. CAGR (Compounded annual growth rate) for three years = [{(Value of sales in current year)/(Value of sales in year –3)}(1/3) – 1}]*100 Thus it is the third root of sales in current year divided by sales three years ago. reflected in increasing profitability (compared to its sales growth). The company’s growth ratio vis-à-vis other companies in the industry will be a good tool to assess its performance. minus 1. and other financial institutions: o Net sales = net interest income + other income F2 . finance costs (interest) and tax over a period of three years. then it will enable us to analyse the problems unique to this company. Formula The compounded annual growth rate over the past 3 years is calculated in percentage Terms.Definition of Parameters used in SME tool F1 . If the growth rate is low compared to others in the industry.PBDIT Growth Rate Importance of this indicator This ratio refers to the compounded annual growth rate of profits before depreciation (non cash).

NBFCs. minus 1.PBDIT/Sales Importance of this ratio This ratio indicates the profit before depreciation. then it is a positive indication of the operating efficiency in Terms of raw material consumption. interest and tax • For banks. and other financial institutions. It reflects the capacity of the business unit to assure the creditors of the security they have for payment of both interest and instalment. expressed as percent. employee productivity and power consumption among other things. interest and tax as a percentage of net sales. If this ratio as a percentage of sales is high. Formula This ratio (in %) is computed by dividing the PBDIT with Net Sales.TOL/TNW Importance of this ratio This ratio gives a holistic representation of total outside liabilities in relation to tangible net worth of company. depreciation and tax is an indicator of the operational efficiency. This ratio shows how much outside borrowings are resorted to in comparison with owners’ funds 76 . Notes • PBDIT denotes profit before depreciation. The ratio is a measure of the margin available to a company from its operations.[{(Value of PBDIT in current year)/(Value of PBDIT 3 years back)}(1/3) – 1}]*100 Thus it is the third root of PBDIT in current year divided by PBDIT three years ago. The profit before interest. and other financial institutions: o Net sales = net interest income + other income o Use PBT instead of PBDIT F6 . A high value indicates greater profitability and hence betters capability to repay the debt. • For banks. interest and tax. (PBDIT/Net Sales) x 100 • PBDIT = Operating profit before depreciation. use PBT instead of PBDIT F3 . It indicates the extent to which the creditors are covered by asset. NBFCs.

NBFCs and other financial institutions.TNW • TNW as defined in Debt Equity ratio • Also calculate this ratio for banks. we should account for the vulnerability of a company to short Term insolvency. The current ratio could be high because of excess inventory or slow realisation of debtors. • Also calculate this ratio for banks. dies.Current Ratio Importance of this ratio Current assets of company are the assets that can be easily liquidated and converted into cash. Formula The ratio is worked out by dividing the Current Assets with Current Liabilities Current Assets Current liabilities (including instalments due during the year) • To get a meaningful current ratio. Therefore. The current ratio measures short-Term liquidity of the company and ability to meet its shortTerm financial obligations. Total Outside Liabilities Tangible Net Worth • TOL = Total liabilities . NBFCs and other financial institutions.Formula The total outside liabilities are divided with the tangible net worth of the company. as it will give an indication of the duration mismatch of the company’s balance sheet 77 . A high ratio is good from the point of view of the bank but a very high ratio may affect profitability through a high inventory carrying cost. receivables over 6 months. If such “excess assets” exist then please make necessary notes in the remarks column. spares required for more than 9 months of production and disputed receivables. In such cases please indicate your assessment of the value of current ratio. current assets must not include inventory which is older than the normal working cycle of company (say 6-8 month). as it will give an indication of the capital adequacy of the company F7 .

interest and dividends. It is different from funds flow of business.Increase / + decrease in non cash current assets + Increase / . The operating cash flow can indicate the company’s need for external financing. this indicator tries to capture the capability of the firm to be able to meet its business obligations . Calculation Operating cash flow ( for the last financial year) is computed in the following manner Head Net Sales Other income Total receipts Less: COGS Gross Profit Less: SGA/Operating expenses PBDIT .decrease in current liabilities Operating cash Less: Income tax paid Post tax operating cash Less: Interest paid on LT & ST Less: Dividend paid Cash from operations Repayment due of long Term debt Amount 78 .F8 .Operating Cash Flow Importance of this indicator This measure indicates the company’s cash inflows and outflows arising from its operations. It helps us to evaluate the company’s ability to generate cash inflows from operations to pay debt. and to explain the difference between net income and net cash flow for operating activities. While funds flow is good to match long Term and short Term use and source of funds.

repayment of principal and interest. The rating is done as explained in the table below. P B D I__________ Instalments for the year + interest 79 . This ratio is a good indicator of the long-Term solvency of a company. This ratio also helps to deTermine the time when repayment should commence and the pay-back period of the Loan. DSCR measures the number of times a company’s earnings cover its total longTerm debt-servicing requirement. including interest and principal repayments in Term Loans.e. over a period of one year.How to rate Compare “cash flow from operations” to “repayment due of long Term debt”. Description The company is likely to default on repayment of its Loans and Interest The company is not in a position to meet its repayment obligations from its own resources and it faces difficulties to arrange outside funds The company is in a position to meet its repayment obligation from its own resources and Term funds that are already applied for (and expected to be sanctioned shortly) The company is in a position to meet its repayment obligation from its own resources and Term funds The company is in a comfortable position to meet its repayment obligation from its own resources (no need for outside funds) 3 4 2 Score O 1 F9 . This ratio will help us to evaluate if an adequate cash flow will be available to meet debt obligation and also for providing margin of safety to lenders.DSCR (Debt Service Coverage Ratio) Importance of this ratio This ratio measures the capacity of the company to service its debt i. Formula The profit before depreciation and interest (PBDI) is divided by installments due during the year plus interest.

• Do not fill in this ratio for banks. Prudent borrowers hedge their exposure to foreign exchange. How to rate The rater has to subjectively rate this indicator on a score of 0 to 4 based on his perception and knowledge of the foreign exchange risk.Foreign exchange risk Importance of this indicator Adverse movements in the foreign exchange rate can have a tremendous impact on the company’s financial strength. The rater needs to know how the likely fluctuation in exchange rate will affect the profits of the company. or sales being made and payment being received against these sales. Portfolio based risk is on account of foreign exchange Loans where the repayment is made on future dates in foreign currency. Only the un-hedged part of the foreign exchange exposure should be taken into account. A potential model to allocate score can be the following: Description The risk involved is > 10% of TNW The risk involved is between 8% and 10% of TNW The risk involved is between 5% and 8% of TNW The risk involved is less than 5% of TNW The entire portfolio is hedged Score 0 1 2 3 4 80 . Foreign exchange risk may be either transaction based or portfolio based. Transaction based risk is due to time lags between purchases being made and payment being made. Depending on composition of international trade. NBFCs and other financial institutions F12 . the adverse exchange rate movement could affect the profitability/cash flow.

Important notes • The foreign exchange risk can be quantified by using the forward exchange rates prevailing in the currency market.Expected values of Debt Equity ratio if 50% NFB credit devolves Importance of this indicator This indicator gives us an idea about the future expected debt equity structure in an extreme situation. Most companies have to put up a margin for their nonfund based credits. NBFCs and other financial institutions F13 . Natural hedge involved. The new D/E ratio will have to be corrected for this when the limits devolve. imports = 10.imports/exports) = 20 x (1. When this ratio is 1. since part of it will be covered by the margin Calculation The calculation is the same as for F5 – Debt/Equity ratio. This is quite a good comforting factor for the bank.imports divided by exports) (always divide the smaller number by the larger one). • The risk involved can be estimated by evaluating two measures: 1. with Debt = Long Term debt + 50% of the company’s non-fund based limits margin that the company put up for its non-fund based limits.10/20) = 10 = 5% of TNW • Also calculate this ratio for banks. In doing so. foreign exchange risk from exports and imports cancels each other out (provided it is to/from similar currency zones) Example: total sales = 100. NBFCs and other financial institutions 81 . with a proxy measure being (1. exports as % of TNW 2. TNW = 200 Risk involved = exports x (1. exports = 20. it gives a sense of the long-Term financial stability in an extreme situation. It recalculates the Debt/Equity ratio when 50% of non-fund based limits devolve. • Do not calculate this ratio for banks.

that is currently in a recession.F24 . The minimum score of 0 could be assigned to exporters who trade the bulk of their products/services with 1 single country. since importers will typically may have the reaction to cut costs by cutting relationships with overseas’ suppliers. A lot depends on how auditors have treated the receivables. There are many ways in which the auditors can play around with the receivables viz. which could affect the overall risk profile of the exporter 82 . Any delay in receipt of payment from debtors/non-receipt of amount can hamper the production cycle of a company as well as increase collection costs and the probability of default on the part of the debtor of the company. In that case. How to rate The rater has to subjectively rate this indicator on a score of 0 to 4 based on his perception and knowledge of the foreign exchange risk.Some of these currencies may be difficult to exchange or to wire back to India.Realisability of Debtors Importance of this indicator This indicator should indicate the quality of the debtors of the company and if money can be recovered from them quickly and easily. significant costs and risks are involved in the repatriation of funds. Hence the realisability of the debtors of a company is a critical input for assessing the financial risk of a borrower. F27 – State of the export country economy Importance of this indicator The economy of the country(ies) to which is being exported. The maximum score of 4 can be granted to parties who have a wide portfolio of export countries. Receivables may be unrelated to business activity of the company or there could be high amount of bad debts in the receivable portfolio of the company. the receivables may be disputed. A slowdown in the economic growth might even have a more than linear impact on the exporter’s turnover and profitability. with most (or all) of these countries showing strong economic growth. F28 – Fund repatriation risk Importance of this indicator Exporters are often paid in the currency of the country to which they export. will have a significant impact on the exporter’s business.

NBFCs and other financial institutions B7 . the higher the ratio. 83 . It is the average length of time that customers who buy on credit take to pay their dues.How to rate The rater has to subjectively rate this indicator on a score of 0 to 4 based on his perception and knowledge of the foreign exchange risk. B3 . A decrease in ratio could be a significant danger signal. A lower ratio results in high carrying cost and blocking of funds. Formula The ratio is worked out by dividing the net sales with average inventory maintained. A high ratio is good from the point of liquidity since inventory will be quickly converted into cash. Low ratio could indicate the presence of slow moving items in stock. This ratio also indicates the efficiency of the company in utilizing its inventory and maintaining it at an optimum level. Net sales Average inventories • Average inventory = (opening stock of inventory + closing stock of inventory)/2 • Inventory = raw materials + WIP + finished goods • Do not calculate this ratio for banks.Inventory Turnover(Trading) Importance of this ratio This ratio indicates the velocity (number of times) with which the inventory circulates in the business. Thus. The maximum score of 4 could be granted to exporters who only trade with countries.Credit period allowed Importance of this indicator This indicates the period of realisation of sales proceeds. The minimum score of 0 could be assigned to an exporter who trades the bulk of his products/services with a country that has very stringent foreign exchange and currency repatriation policies. It indicates the efficiency of management in debt collection. the higher the sales per unit of investment in inventories. during the relevant period. thus limiting the liquidity of the company. which have no restrictions on the flow or repatriation of funds.

A stronger company will avail a longer credit period from its suppliers than a weak company. Formula The credit period availed (in days) is computed by dividing the average (non financial) creditors outstanding during the year with average daily cost of sales. Average debtors Average daily sales Average debtors = (Sundry debtors in the beginning of the year + sundry debtors at the close of the year)/2 • Do not calculate this ratio for banks.Credit period availed Importance of this indicator It measures the average time taken by the company to pay its suppliers for purchases made on credit. Average creditors Average daily cost of sales Average creditors = (Sundry creditors in the beginning of the year + sundry creditors at 84 . since it also reflects the bargaining power enjoyed by the company in the market with respect to the buyers.A lower value of this ratio indicates a speedy realisation of sale proceeds. This indicator is a measure of the bargaining power that the company enjoys with its suppliers. Formula The period of collection (in days) is calculated by dividing the average debtors outstanding with average daily sales. A longer credit period offered by suppliers also indicates that the suppliers are confident of the ability of the company to pay them. The appraisal officer should be careful when assessing this ratio. A high ratio could be indicative of disputed receivables or a high amount of bad debts. This ratio relates credit availed to its total purchases. a very high ratio could indicate short-Term liquidity problems also. A word of caution. NBFCs and other financial institutions B8 . The industry’s practice should be given due consideration.

) Such tax holiday period is helpful for company to take advantage especially in a commodity market and thus improve profitability. since it represents an important invest Also. How to rate The rater has to subjectively rate this indicator on a score of 0 to 4 based on his perception and knowledge of the government policies and industry. NBFCs and other financial institutions B10 .the close of the year)/2 • Do not calculate this ratio for banks. A unit located in backward area or in some of the states (like Goa or union territory of Daman & Diu etc.Tax Incentives Importance of this indicator Tax incentives can be a major driver of profitability for many companies. the way a company go about their working capital. (Both states grant income tax and sales tax holidays for 3-5 yrs. Trading) Importance of this indicator Working capital represents an important part of the employed capital of many companies. Therefore.) enjoy special tax incentives. The rater should also be aware of the management strengths and their ability to make best use of the existing government 85 . NBFCs and other financial institutions B9 – Working capital cycle (Manufacturing. In a sense one could argue that good working capital management is an indicator of good management Factors to be considered Inventory turnover and credit period allowed How to calculate Net sales Working capital Working capital = Raw materials and spares+ Finished and semi finished goods+ Debtors • Do not calculate this ratio for banks. says a lot about the management of the company. a good performing company should carefully manage this part of its assets.

A potential model to allocate score can be the following: Score =2. State of technology used. stability and consistency of quality of the production activities are a critical deTerminant of performance.Production related risk (Manufacturing) Importance of this indicator This measures the risk of a company with respect to its production activities.1 if company is not upgrading and has old technology Score = 4. Patents and proprietary technology. Score of 0 means no or negative effect of taxes. How to rate The rater has to subjectively rate this indicator on a score of 0 to 4 based on his perception and knowledge of the production risk. if company is upgrading but has old technology Score = 0. if company is not upgrading but has new technology • Do not calculate this ratio for banks. Problems in production would lead to impact on overall performance of the company. The state of technology can be considered an overall driver of this risk Factors to be considered Capacity Utilisation. Score of 4 indicates a high probability of successfully getting tax incentives. other financial institutions or service Companies B14 – Product/service related risk Importance of this indicator This indicator measures the risk relating to the products manufactured / services provided by the company. R&D Number of manufacturing plants. Flexibility in product manufacturing.incentives. NBFCs. It evaluates the ability of company to sustain the production activity at a diversified level. if company is upgrading and technology is new Score = 3. Availability of raw material. B13 . A company having little production related uncertainties in production would be better placed in the industry. 86 . Thus the efficiency.

The shorter the expected life of the product. substitution. otherwise its market reputation will suffer. Highly customized product/service. decrease in demand etc. The company’s ability to standardize product quality. A potential model to allocate score can be the following: Description High variability in product/service quality (e. The price competitiveness of a company is an important indicator of the competitive position of a company. a 87 .g. The expected product life cycle will also contribute to the overall product risk. A product should be of a consistent high quality. getting ISI benchmarks or ISO certificates will add to its advantage. the riskier the company’s business performance .The risks associated with the product can be those related to obsolescence. Product/service quality. Factors to be considered Product range.Price Related Risk Importance of this indicator This indicator measures the ability of a company to dictate prices in the marketplace as well as to cut its prices in case of a price war. Brand value. frequent recalls) and short product life (<1 year) High variability in product/service quality and medium product life (1 to 3 years) Low variability in product/service quality and medium product life (1 to 3 years) No variability in product/service quality and long product life (> 3 years) No variability in product/service quality and very long product life (> 5 years) Score 0 1 2 3 4 B15 . Demand supply position/gap. A company that is in a position to charge a premium over its competitors is better placed in the industry. How to rate The rater has to subjectively rate this indicator on a score of 0 to 4 based on his perception and knowledge of the product risk. Similarly. Obsolescence.

A score of 4 means that the company has a well diversified portfolio of high quality clients. … Factors to be considered Number of clients. i. This might not only adversely impact their own reputation. This risk is twofold: number of clients and quality of clients. or have 1 predominant clients who makes or breaks the company. but also represent a barrier to recruiting and retaining of talent. B20 – Client risk(Services. innovation. Medium-sized companies sometimes depend on a very small portfolio of clients. can charge a sustainable price premium. Pricing Flexibility.e.company with lower costs is in a good position to withstand price competition in the market. A score of 0 indicates that the company has no control at all over its price. quality/reputation of clients How to rate The rater has to subjectively rate this indicator on a score of 0 to 4 based on his/her perception and knowledge of the client risk. Brand Equity. A score of 0 indicates that the company depends on a small set of clients. Factors to be considered Economies of scale/cost effective technology. medium sized companies are sometimes closely connected to clients with a shady or poor reputation. which can be perceived as 2nd or 3rd rank in their respective industry. Also. it can price the product to its advantage. Financing edge over competitors. Bargaining power of buyers How to rate The rater has to subjectively rate this indicator on a score of 0 to 4 based on his/her perception and knowledge of the price risk. Manufacturing) Importance of this indicator Smaller to midsized companies can face considerable risks at the client side. thus being subject to high price risks. A score of 4 means that the company is not at all subject to price risk. B21 – Fixed asset turnover (Manufacturing) Importance of this indicator 88 . If the company’s products enjoy a high reputation.

Therefore. B23 – Competence to innovate(Services) Importance of this indicator The success of a company can often be related to the overall performance of its service offering. machines. buildings. timeliness or response time. quality of internal training programs. It is therefore important to assess how these companies score on these dimensions.) B22 – Quality of internal processes & systems (Services) Importance of this indicator The business performance of service companies is often determined by the quality of their internal processes and systems. A score of 0 indicates that the company has a very poor service offering and resulting reputation. How to rate The rater has to subjectively rate this indicator on a score of 0 to 4 based on his/her perception and knowledge of the quality of internal processes and systems.. effectiveness …) will influence its competitive position and hence its success 89 .Fixed assets represent an important part of the capital employed at manufacturing companies. since they will be an important contributor to the potential success and / or risk of the company Factors to consider Consistency of delivered service. internal sharing of know-how. A score of 4 means that the company’s processes and systems are considered top class in the industry.. customization. a company’s capability to develop services which respond to its users’ needs (through efficiency. How to rate Net sales Fixed tangible assets With fixed tangible assets = replacement or acquisition value of fixed tangible assets (land. A well performing company should therefore make sure that it gets the maximum out of its machine park.

showing continuous growth as a result of a well laid out strategy. the rater should assign a score of 0 if he/she thinks that management will perform poorly on the ratio/indicator. The minimum score of 0 could be given to opportunistic trading companies. and without a clear-cut strategy.How to rate The rater has to subjectively rate this indicator. A score of 4 means that the rater feels that promoters and their management will perform very well on the ratio/indicator. How to rate The rater has to subjectively rate this indicator. A rating scale from 0 to 4 will be used. A company with sustainable sales will have a core portfolio of products. A rating scale from 0 to 4 will be used. which will not switch quickly. Opportunistic trading companies do run the risk of making the wrong “bet”. based on his understanding of the company’s innovation capabilities. Adversely. B24 – Sustainability of sales(Trading) Importance of this indicator An important driver of the success of a trading company. based on his understanding of the company’s sales sustainability. Therefore. A score of 1 or 0 indicates a weaker or poor (respectively) innovation skill compared to competitors. A score of 3 or 4 indicates a stronger or outstanding (respectively) innovational strength compared to its competitors. resulting in impressive declines in sales. A score of 2 means that the company can be seen as having “average” innovation skills. Subjective Assessment of Quality of Management How to rate: The rater should rate the ratios and indicators on the score of 0 to 4 depending on his understanding and comfort levels. The maximum score of 4 can be assigned to trading companies with a strong portfolio of core products. showing a very random path in performance. the risk associated with a trading company is very much linked to the sustainability of its sales. is the level of sales it is able to generate. 90 .

does the company provide a supportive environment. Factors to assess include: is the HR system fair and equitable.g.HR policy / Track record of industrial unrest Importance of this indicator This factor relates to labour unrest. This incidentally becomes one of the most important ratios and indicators. lock out. adhering to commitments. etc. this indicator reflects the quality of the company’s HR policy.Market report of management reputation Importance of this indicator This market report assesses the reputation or general perception about integrity and fair dealing of the promoters.Trading) Importance of this indicator This factor takes into account the seriousness of the company and its management towards contractual obligation. are promotions based on merits. as past behaviour is often a good proxy for their future behaviour. and do employees feel appreciated? M2 . M1 . M3 . and work slow down. PF dues. If management is not serious about the legal and statutory dues then there is a high probability of it not being committed to fulfil the Loans taken from the bank. fair dealings has important bearing on quality of management. Industrial harmony is a key factor for success of an industry/business. The reputation of promoters regarding their integrity. Electricity bills. strike and strained management – employee relation.Track record in default of statutory dues (e. 91 .The importance of each of the above ratios and indicators are now listed. Adverse performance of associate concerns controlled by the corporate should also be considered. In short.) (Manufacturing .

M6 – Too optimistic projections of sales and other financials Importance of this indicator There is sometimes a conscious attempt to over-estimate financial projections to secure excess borrowings. this should contribute to a reduced risk for the bank. If management is likely to find additional outside funding (from capital market.Tarding) Importance of this indicator This indicator tries to evaluate the professionalism of the company’s management. Companies also indulge in unhealthy practice of electricity thefts or evasion of ST. partners. Technical skills will contribute to a greater efficiency of operations and quality of products.M4 . Recurrent non-achievement of targets could be indicative of such practice. Such instances speak about poor integrity of company and indicate about company working against national interest. Careful scrutiny of past track records help develop an idea of reliability of projections. It is important that the management consists of people who know the business. M9 . family. However. IT or Excise or indulge in Hawala transactions.…) whenever this is necessary. Managerial know-how will enable management to avoid typical pitfalls and to put together a consistent and feasible strategy. a lot of companies are 92 . M8 – Capability to raise resources Importance of this indicator Management’s capability of raising additional resources is an important factor in assessing the creditworthiness of the company. M12 – Mix of professional and traditional management (Services.History of FERA violation /ED enquiry Importance of this indicator A company may have a track record of FERA violation or might have faced raids by the Enforcement Directorate. group company. under-invoicing or overinvoicing.Technical & Managerial expertise(Manufacturing) Importance of this indicator This indicator relates to the technical knowledge and experience of the promoters in the relevant area of operation. the industry and who have the necessary experience to make things work.

This would activate the Credit rating tool provided in the rating model and based on the data entered. Therefore. After the sanction and disbursement of the advance. the concerned client should be rated in the credit rating model under the Scenario I option. further modifications / re-ratings pertaining to that account will compulsorily have to be done using Scenario-II option only. This would activate both the Credit rating tool and the Monitoring tool in the model. This rating exercise should be done in the model under the Scenario II option. In other words. The model would re-compute the overall rating after reckoning the data both from rating tool and the monitoring tool. Once an account has been re-rated using the Scenario-II option. Monitoring Tool Introduction The web based credit rating model consists of the following two tools: 1) Credit rating tool 2) Monitoring tool The model has been provided with the following two options: 1) Scenario I 2) Scenario II At the time of sanctioning of a fresh advance.still family-owned. it is important to assess if the company maintains a good balance between traditional management (who often own the client relations) and professional management. the tool would compute a credit rating for the client. which is often reflected in the composition of the management team. the access to Scenario-I option will be blocked in such cases 93 . rating of the borrower should be reviewed at a frequency indicated by the rating wise schedule (as indicated in the Credit Policy of the Bank).

00 15.The allocated following Scenario 1 under the LCMC Scenario II Scenario 1 SME Scenario II weightages have been above stated respective scenarios: Parameters Financial Business Management Industry Monitoring Tool (Conduct) 40. In case of any clarifications the user may get in touch with the Risk Department at Central Office 94 .00 12.50 15.00 12.00 Not Applicable 35.00 55.00 Not Applicable 47.50 15. the erstwhile conduct rating parameters have been condensed and divided into two groups: 1) Hurdles: These are parameters which lack the discriminating power between a good and a bad account but they are nevertheless important as far as behavior of an obligor is concerned.50 22.50 10.00 15.00 17.00 15.00 (The above stated weightages are subject to change) Bases on an exercise conducted to examine the robustness of the monitoring tool.50 20.00 15. data input in the monitoring tool will be done by the branches only.00 22. Since inputs for the monitoring tool will be available with the branches.50 15. 2) Discriminants: These are parameters which have higher discriminating power between a good and a bad account and maybe used for predicting defaults.

strictures from regulators.Parameter Hurdles A1 A2 Creation of Charge on Primary Security Creation of charge on collateral and / or execution of personal / corporate guarantee A3 A4 A5 A6 A7 A8 A9 A10 B1 B2 Other Terms & conditions not complied with Receipt of periodical data / Stock & Book Debt statements Receipt of Balance Sheet / Renewal data Compliance of financial covenants Unit inspection reports observations Routing of proportionate turnover / business Utilisation of facilities (not applicable for Term Loan) Adequacy of insurance for the primary / collateral security Negative Deviation in Net Sales (actual vs. estimates) Financial Discipline Overdue discounted bills during the period under review Devolved bill under L/C outstanding during the period under review Invoked BGs issued outstanding during the period under review Frequency of RETURN of cheques per quarter deposited by borrower Frequency of issuing of cheques without sufficient balance per quarter Payment of INTEREST or INSTALMENT B3 B4 B5 Frequency of requests for Ad Hoc increase in limits Frequency of overdrawing in CC account Any other adverse features financial / non-financial. political risk and adverse trade environment not covered elsewhere 95 . including corporate governance issues such as adverse publicity.

The collateral security offers additional comfort to the bank partly mitigating the risk involved in the exposure. charge on the stipulated security is considered as not created for this exercise. Even if the delay in creation of security is allowed by the sanctioning authority. security is considered as not created. mortgage. When these assets are taken as security. they should be properly charged to the bank by way of hypothecation. etc. In case the primary security is not properly created or charged as required under the relevant law. such as inventory. Check whether the charge on primary security stipulated in the sanction has been created and registered with the RoC (where ever required) or any other authority. fixed assets. 96 . Hurdles A1: Creation of Charge on Primary Security Primary security refers to the asset/s taken as the main tangible security for the funding of which the bank grants finance. If any of the requirements of proper creation of charge on the primary security is not fulfilled.. The requirements stated in respect of the primary security (under A1) are applicable for the collateral security also. other current assets. A2: Creation of charge on collateral and / or execution of personal / corporate guarantee Collateral security is taken as an additional security over and above the primary security. pledge and assignment which should be legally enforceable. the bank’s advance may become unsecured thus increasing the risk in the exposure. receivables.

inventories. A4: Receipt of periodical data / Stock & Book Debt statements Timely receipt of various data from the borrower is of utmost importance in monitoring the health of an account. various other Terms and conditions are stipulated for enabling the bank to mitigate risk from the exposure. Apart from deTermining the drawing power (where ever applicable). A3: Other Terms & conditions not complied with Apart from the security. receivables. Non finalisation of audited balance sheet. sales. Scrutiny of the balance sheet can help notice salient and abnormal features in the areas of cash flow. FFR. diversion of funds. etc the parameter should be rated as ‘Not Complied’.A personal / corporate guarantee further enhances the degree of mitigation of risk. borrowings. Some of the stipulations assume greater importance to the safety of advance such as obtention of NOC from the existing lenders for creation of first / second / paripassu charge in favour of the bank. current ratio level. maintenance of minimum asset cover. Non receipt of such data (for any reason whatsoever) itself is considered as a risk factor. Even in case of frequent delays in submission of stock statements. capital base. raising of long Term 97 . and profitability. end use certification. etc. the data is considered as an indicator of conduct of the borrower’s business operation which have implication on the conduct / performance of the account. fund flow. infusion of funds by promoters. A6: Compliance of financial covenants Financial covenants are stipulated for mitigating risk in an exposure. non submission / delayed submission of audited balance sheet / renewal data reflects poorly on the corporate governance of the borrower and considered as one of the risk factors. It is important to ensure that these have been executed / obtained strictly as per the sanction Terms and legal requirements. A timely submitted balance sheet enables the Bank to assess potential adverse features and take appropriate action well in time. A5: Receipt of Balance Sheet / Renewal data The balance sheet is one of the sources of tangible information on the company’s operation which can be objectively analysed to assess the effectiveness of the business model. bringing in another bank for sharing / tying up the gap. Some of these stipulations relate to creation of Debt Service Reserve. TOL/TNW ratio. production.

funds. partly or fully. power. • Quality & value of inventory & finished product. etc. • Attendance of labour / staff and their working conditions. In case the stipulated financial covenants are not complied with. A8: Routing of proportionate turnover / business The user is required to select whether the borrower enjoys: Sole Banking Multiple / Consortium Banking And rate the borrower as per the options provided there under. Inspection should cover the following indicative areas: • Idle plant and machinery. the routing of turnover/business through the bank is considered as an added advantage to the bank. These risk mitigation measures provide extra comfort to the bank while sanctioning the advance. A7: Unit inspection reports observations Physical inspection of borrower’s unit enables the bank to verify the information supplied by the borrower. restrictions of investments/dividend etc. at least proportionate business should be routed. the exposure would carry a higher risk which needs to be captured in the monitoring tool. • Legal / statutory / lender’s notices pasted in the factory or on the Plant and Machineries. Apart from supplementing other income from the borrower the routing of entire / proportionate turnover / business enables the bank to capture the borrower’s cash flow which an important indicator of the borrower’s operations. the borrower’s godown / office / branches / outlets should be visited for ascertaining the overall conduct of business. liquidation of investments. In other cases. although it may not be one of the stipulations. the borrower is expected to route its entire turnover / business through the bank. • Adequate availability of utilities / infrastructure such as water. In case of borrowers engaged in activities other than manufacturing. 98 . In case of sole banking arrangement. Points to note: In case of Term Loan facility without working capital facility.

estimates) The amount of estimated/projected net sales is one of the major parameters of credit assessment. These implications are undesirable from a lender’s point of view. Devolved bill under L/C outstanding during the period under review 99 . The parameter intends to capture such risk. Discriminants B1: Negative Deviation in Net Sales (actual vs. Optimum utilisation of account apart from indicating soundness of borrower’s cash flow also ensures adequate earnings for the bank.A9: Utilisation of facilities (not applicable for Term Loan) Full utilisation of cash credit facilities without variations for a long period requires closer scrutiny to ensure that the liquidity of the borrower is not strained. Non-achievement of estimated/projected net sales by the company indicates setback in the borrower’s business performance. Non-achievement of sales could be one of the early indicators of the weakening of an account and we need to look for the reason/s for the set back. B2: Financial Discipline Overdue discounted bills during the period under review Non realisation of bills discounted by the bank reflects adversely on the borrower’s customer profile and hence considered as risk. The user needs to input the sales turnover as per the latest Audited Annual report as well as the sales turnover estimated / projected in the credit appraisal for the corresponding period. A10: Adequacy of insurance for the primary / collateral security Inadequacy of insurance indicates low value of assets or the possibility that the borrower has inadequate interest in the assets. Underinsurance would result in application of ‘average clause’ leading lower settlement of claim.

in most of the cases. Default / delay in payment of interest or instalment represent a strong warning signal about the health of the account. A borrower having adequate cash flows and efficient cash flow management system would not allow devolvement of contingent liability such as bills under LC. B4: Frequency of overdrawing in CC account 100 .Adequate cash flows are one of the important indicators of satisfactory health of a borrower. The signal adds to risk profile of the borrower. such features are the starting point of financial deficiency ultimately leading to default. Frequency of issuing of cheques without sufficient balance per quarter deposited by borrower Issuance of cheques by the borrower without maintaining sufficient balance in the account impacts his credit worthiness. Further. Payment of interest or instalment Failure to meet interest / instalment payment obligation indicates crystallization of credit risk. nonpayment of the invoked Bank Guarantee obligation within a reasonable period is considered risky. Frequency of return of cheques per quarter deposited by borrower Return of cheques deposited by the borrower indicates low credit worthiness of the borrower’s clients or the goods supplied by the borrowers do not conform to the Terms of sale qualitatively. Devolvement of bills under LC indicates inadequate cash flows of the borrower. Invoked BGs issued outstanding during the period under review Invocation of a guarantee indicates the borrower’s failure to perform the contract or meet the requirement for which the guarantee was issued and considered as a risk factor. This would have negative impact on the health of the borrower. This may ultimately affect the business of the borrower and hence considered as a risk factor. B3: Frequency of requests for Ad Hoc increase in limits Frequent requests for ad hoc increase in limits indicate lack of proper management of funds or inability of the borrower to raise funds from other sources or lack of cash flows to manage the working capital cycle. Historically.

strictures from regulators. Borrower Rating SME 1 SME 2 SME 3 SME 4 SME 5 SME 6 SME 7 SME 8 Range of Scores Above 85 76-85 66-75 56-65 46-55 36-45 26-35 Below 26 Risk Level Lowest risk Lower risk Low risk Moderate risk High risk High risk Higher risk Highest risk 101 . Hence. B5: Any other adverse features financial / non-financial. interest. Frequent overdraft of the CC account due to any reason (such as Term instalment. Rating Scales The rating tool for SME has an 8-point rating scale. the borrower should be able to manage his funds requirement within the sanctioned facilities. temporary liquidity mismatch etc. which ranges from SME 1 to SME 8. political risk and adverse trade environment not covered elsewhere No exposure is risk free nor can all risk factors in an exposure be objectively listed or foreseen at a given point of time. including corporate governance issues such as adverse publicity.The requirement of working capital finance is assessed on the basis of borrower’s estimated / projected level of operations.) indicates poor management of working capital finance and may be a potential risk of default. As this parameter is subjective the rater should select a suitable option based on his/her understanding of the borrower and the exposure. as well as other issues) may be considered while selecting the option. Factors including market forces like capital market perception (continuous fall in the stock price which are signals of deteriorating financial conditions.

New Gujarat High Court.301. S.00 ( 16 Jan' 09) Brief Background: The Company was incorporated on 14th June.(27. Rameshbhai Bhagwanbhai Patel (DIN : 00037568) Mr. 1990 as Private Limited Company. Gujarat.1 Details of case study Name Constitution Office Address Line of activity Sector Dealing with us Incorporation Name of Directors M/s Dynemic Products Limited (DPL) Public Limited Company B. Manufacturing of Food Colour Products Chemical and Chemical Products New Connection 14th June 1990 Mr. Bhagwandas Kalidas Patel (DIN : 00045845) Mr. As mentioned below Listed on the BSE Current Market Price – Rs. Shankarlal Baluram Mundra (DIN : 00388204) Not a recognized group External: Not done. The Company was 102 . The Name was subsequently changed to Dynemic Products Limited on 31/12/1992.14. Dixit Bhagwandas Patel (DIN : 00045883) Mr. Opp.03. 10.20 ( 22 Apr' 09) / Rs. Jagdishbhai Sevantilal Shah (DIN : 00037826) Mr. Hitendra Hargovinddas Sheth (DIN : 00037705) Mr.G. Vishnubhai Gangarambhai Patel (DIN : 00270413) Group Rating Associate Concern Share holding pattern Share Price movement Mr. Shashikant Purshottambhai Patel (DIN : 00045957) Mr. Harishbhai Keshavlal Shah (DIN : 00037932) Mr. 29. India.2009) Dynemic Overseas (India) Private Limited Dynemic USA Inc. Sola.Highway. Internal: SME 3 (ABS 31.55/.11.CHAPTER-8 CASE STUDY. Satyamev Complex-1. Dashrathbhai Prahladbhai Patel (DIN : 00008160) Mr.2009) 52 week high/low – Rs. Ahmedabad-380 060.

reactive & Raazole Dyes. The company has to its credit an award for Indirect Export of Self Manufactured Dyes for the year 2001-02 & 2002.P. Qualitative Factors:  The Company has a pro-active Management and Promoters who have hands on experience in manufacturing of Dyes InTermediaries and Food Colours. the raw material for Food Color. the Company has also received certificate of approval from Bureau Verities Quality International (BVQI) for achievement of 14001:1996 and 14001:2004 quality standards for both its units satiated at Ankleshwar. The Company gained goodwill in the short span of time due to its quality product. The company has well equipped state of art in house laboratory which conduct test of every parameter of food color & Dye intermediates laid down under national and international authorities. as its Unit I. The company has also obtained HAACP Code: 2003 certificate of registration from TQCS International (Group) Pty Ltd under food safety programme for both its units situated at Ankleshwar 103     . All these have led the company to acquire and retain a status of largest manufacturer and supplier of food colors and dye intermediates in India.Mtr. Both the units at Ankleshwar are Ultra modern and have eco friendly plants with in house testing facilities to control quality at every level of manufacturing. The company has obtained certificate of approval From Bureau Verities Quality International (BVQI) for achievement of ISO 9001: 2000 quality standards.03 received by Gujarat Dyestuffs Manufacturers’ Association. Profit making Company since last 13 years. The company commenced manufacturing of food colors namely Tratrazine in the year 2000-01. In the Year 2000 the company acquired the running business of M/s Safforn Dye Stuff Industries and started manufacturing wide range of food colors at the premises 3709/6. GIDC Estate. As the company aims to provide entire range qualitative and quantitative service to food industry.promoted with the objective of carrying on the business of manufacturing S.P. Ankleshwar having plot area of admeasuring 3700 Sq.C. The Company exports its product to around 41 countries worldwide.

Almost all export customers are dealing with company for many years. US and Europe. new market has opened for Indian manufacturer of Dyes and Intermediates. African countries. Both the Units of the company are exporting Oriented Units and have obtained the status of One Star Export House.  • • • • 104 . it has more opportunities to grab from growing International market. Company has its own presence in all most all countries. Globally many countries have discontinued production of Dyes. 6.00 Crore for Self Manufactured Indirect Export of Dyes & inTermediates in the year 2002-03 by Gujarat Dyestuffs Manufacturers’Association. Out of total exports turnover 60 to 70% percentage orders are repeated orders and rest of the orders are new orders. Far East. The company was awarded with trophy for export performance of more than Rs. Middle East. Company’s total turnover is divided into:   Exports Sales Local Sales Exports Sales: Company’s 70% turnover is generated by way of exports sales. The company is exporting Food colors in Latin America. Food colors and Intermediates.00 & 8. As Dynemic Products Ltd is already a well recognized name in the field globally. Due to the quality and timely delivery of the material the company have less competition from these countries.   Marketing Strategy/Marketing arrangement Strong and experience people are leading company’s marketing department. The Company has region wise Export Managers who can cater the need of customers individually.

00 lacs against norm of 1. g) h) Concession in processing fees at Rs.P in India which generating repeated order from the local customers. The company is the largest manufacturer of S. Company is also planning to arrange marketing arrangement with soft drink manufactures and pharmaceutical manufactures for food colors.500. f) Waiver of credit opinion report from existing bankers of M/s.00 lacs for working capital requirement ( take over of Rs. 300. c) Sanction of EPC/FBD/FBP/PCFC/PSCFC of Rs. company is planning to market the food colors in small packing through its dealers and distributors which cater the local needs. • • • Proposal for Proposal for fresh sanction of credit facilities by way of take over (with enhancement) from HDFC Bank a) Sanction of Cash Credit Limit of Rs. 500. DPL i.00 lacs for working capital requirement as a sub -limit of cash credit limit (take over of Rs. 500.00 lacs).00 lacs (equivalent to forward cover of Rs.00 lacs from HDFC Bank). Now.00%. Dynemic Overseas (India) Limited based on justifications given in the proposal.00 lacs (take over of Working Capital Term Loan of Rs.P. Permitting time of 30 days for completion of take over formalities with HDFC and creation of mortgage by CMC.e. Local Sales: • In Local Market Company is doing marketing its Dyes & Intermediates to the end customers.00 lacs from HDFC Bank). 300.00 lacs for working capital requirement as a sub-limit of cash credit limit (take over of Rs. 105 .00 lacs from HDFC Bank). M/s. d) Sanction of Corporate Loan of Rs. 25. e) Sanction of LER limit of Rs. DPL (HDFC Bank) and group concerns of M/s.00 lacs from HDFC Bank). 200. 1. 200. 500.C. 500. b) Sanction of Letter of Credit (Inland/Foreign) of Rs.

Existing & Proposed Facilities Type of Facility Cash Credit Limit – Stock cum Book Debt Corporate Loan EPC/FBD/FBP/PCFC/PSCFC – As a sub limit of Cash Credit Limit LC(Inland /Foreign) . G.00 200.I. Dist.Highway.00) Proposed + Inc / – Dec ----+25. Opp. Dynemic ii.C.308.mts.301. Sola. S. WC/LC/LER : 12 months.00 Purpose Tenor Repayment 700. 818000.  Security Hypothecation over Plant and Machinery (Pari Passu) (Both present & future).6416.55 lacs as Collateral per empanelled valuer of Citi Bank). (Value as on 31. 6401. Gujarat admeasuring 4272 square feets 106 . Primary  Hypothecation of entire current assets (Pari passu) of the company (Both present & future).D. WC/LC/LER : On Demand. 1529. Ahmedabad-380 060. 834000 each and last instalment of Rs.00) +25. Ankleshwar.00 +25. Pari – Passu charge being shared by Citi Bank Limited on following properties : i.00 725.310 Satyamev Complex-1.00 (Rs.00 (500. (Value is of Rs.G. 1326. Corporate Loan : 23 monthly instalments of Rs.42 lacs).00) (300. Repayment to commence from December 2009.03.2009 is of Rs.00 Total WC/LC/LER : To meet working capital requirements.00 (500. New Gujarat High Court.309.00) (300..Bharuch admeasuring 5664 sq.As a sub limit of Cash Credit Limit LER Limit (as a sub-limit of CC limit) Existing Limits (HDFC) 500. Plant and Machinery at Plot No. Corporate Loan : 24 months from the date of first disbursement. Office situated at B. in lacs) Proposed Limits (Axis Bank) 500.00) (15. Interest to be serviced as and when debited. Corporate Loan : For NWC built up.00 200.6415. standing in name of M/s. Factory Land and Building. Products Limited.

33 lacs (approx. Ramesh B. Multiple with Citi Bank (Proposed).Patel having net worth of Rs. Dixit B.SME) on 13th November 2009 and the overall operations of the unit were found to be satisfactory.2009. Mr. Credit enhancement Interest Rate LC Charges Processing fees Banking Arrangement Nil. Mr.88 lacs (approx. Kuntal Bhatt (Manager and RM .2009.Patel having net worth of Rs. Mr.e. Mr.2009.. 257.Bharuch admeasuring 12290.a. Factory Land and Building. Rs.57 lacs (approx.D.3710/3.75%). Bank’s standard schedule of charges. 36.03.Patel having net worth of Rs. 107 .K.3. Ankleshwar. 264.I. Unit visit The unit was visited Mr. Shashikant P.03. Dynemic Products Limited. 11. standing in name of M/s.25% p.standing in the name of M/s.C. with monthly rests (presently BPLR @ 14. Mr. Plant and Machinery at Plot No. G.2009.) as on 31. BPLR . mts.C. Dashrath P.Dash (AVP and SCO – SME) and Mr.80 sq.89 lacs (approx.) as on 31.Patel having net worth of Rs. Dist.03. P.03. iii. Personal Guarantee of :      Mr.2009.) as on 31.50% i.Patel having net worth of Rs. 148.3710/1.) as on 31.22 lacs (approx. 1 lacs for the sanctioned facilities plus applicable taxes.03. Asim Bhaduri (VP – SME and Center Head). Guarantee Dynemic Products Limited. 3709/6.) as on 31. B. 152.

84 0.60 31.26% 3.84 3078.58% 11.06% 1132.99) (1.84 1048.12 0.23 0.84 6.08) (0.34 1.69 190.73 0.42 2710.94 3237.48 0.03.35% 621.84 3471.33 1589.11 (Proj.00 181.87% 1132.57% 7.45) 31.76 499.12 317. in lacs) Particulars Gross Sales Net Sales Net Sales Growth Rate % Operating Profit Other Income PBDIT Depreciation Interest PBT PAT Cash Profit Operating Profit Margin % PBDIT Margin % PAT Margin % Paid up Capital .59 2725.13 2.03.20 4911.17 31.68 1570.80 4.34 2268.31 0.29 0.94 1.Equity Unadjusted TNW Unadjusted TOL Unadjusted TOL/ TNW Adjusted TNW Adjusted TOL Adjusted TOL/ TNW Interest Coverage Current Ratio DSCR NOCF Net Profit / NOCF NOCF / Interest NOCF / Financing Payments Total Debt / NOCF (No.06 3094.75 0.29 55.36) 412.82 1.89 3629.38 0.67 105.84 2649.89 50.76 7.56% 13.42 424.24 2.01 266.08 (Actuals) 3657.47 308.84 2764.42 0.20 34.03.82 0.52 322.97 524.00) Rating The rating of the company as per SME Rating Tool comes to SME .22 9.65) (1.80 0.26 0.04% 9.) 7500.39 9.24 3.91 0.69 2.62 5.21 654.) 6500.08 1.49 141.84 2890.20 149.52 0.74 110.35 7.99% 8.35 0.78 31.44 1.12 0.07 8.87 96.00 881.70 13.35 (269.12 794.38% 729.88 47.80 3.98 1.00 32.48 0.00 6500.44 0.84 2828.2009).33% 10.57% 6.45 369.04 (0.99 103.00% 1132.50 676.29 446.81) (0.29 4.62 48.81 5.12 146.20% 313.83 230.80 (5.09 107.87% 1132.70 2935.09 (Actuals) 4911.10 (Proj.00 7500. of years) 31.95 182.94 47.13 0.97 65.12 12.03 153.07 (Actuals) 3231.07 503.12 3231.53 2.26% 1132.79% 227.58 8.44 184.70 3657.94 149.27 1.27% 261.48 2731.00 15.03.96 2331. The segment wise scoring is as under: Particulars Overall Scoring Financial scoring Business scoring Rating SME-3 SME-4 SME-3 108 .00 1018.62 56.73 1109.73% 13.84 2707.83 9.03.03.29% 5.3 (ABS 31.Operational & Financial Analysis (Rs.

2009 Position No match found.Management scoring Industry scoring SME-3 SME-3 CIBIL/RBI/ECGC Defaulters’ List/CA Verification/ Auditor Verification Particulars RBI Defaulters list ECGC Specific Approval List CIBIL Defaulters List CA Verification (Auditor) Auditor’s Firm Verification As of Date 31. 3657. 109 . b) The proposed expansion of the company is having huge market potentials.2008 13. Verified. The sale of the company was increased from Rs.07. Reference Check Reference check was made through some of Bank’s clients in the same line of activity financed by Axis bank and the same was reported to be satisfactory.11. 4911.2009 13. Satisfactory. Verified. 3231.2008 31. e) The business is 19 years old. c) The Company is the leader in Manufacturing and export of food colours. Analysis a) The promoters of the company are having rich experience of more than 19 years in various Industries. f) The sale of the company has been showing an increasing trend throughout the years under consideration.12. No match found.12 lacs in FY06-07 (Aud) to Rs. d) The overall credit rating of company is SME –3.70 lacs (Aud) in FY07-08 and further to Rs.20 lacs in FY08-09 (Aud).11.

But. as per projected financials submitted by the company on account of increase in stock and receivables which is keeping in line with the increase in turnover and the holding levels are as per the industry practice. which is reasonably acceptable as regards to the liquidity position of the company.24 for FY09-10 and FY10-11.00% . 266. The net profit of the company was decreased from Rs.38 lacs.42 in FY06-07 (Aud) to 0.99 lacs. k) The overall conduct of the account. m) The company is a registered SSI unit.95 lacs in FY06-07 (Aud) showing margin of 8. at Citi Bank and HDFC is satisfactory.00%. The company has estimated TOL/TNW at 0. now the industry is on revival and boom path. which may be considered comfortable. Considering the same.06%. on account of capex expansion which will be completed in the current fiscal. h) The TOL/TNW of the company increased from 0.03 lacs in FY08-09 (Aud) showing margin of 3.9.94 in FY08-09 (Aud). repayment status etc.g) Since the company is into Manufacturing of Food Colours. 269.87% due to decrease in margins in the chemical industry on account of raw material price fluctuations worldwide. 190.84 in FY08-09 (Aud). i) The current ratio of the company was 1. j) The NOCF is positive during FY 2008-09 (Aud) by Rs. The same was an aberration. 654. 446. the company has estimated the profit of Rs.13 and 1.94 and 0. l) The main director is dynamic and has rich experience of more than 20 years in his line of activity. However. the net margin normally remains between 5.99 lacs in FY07-08 (Aud) showing margin of 5. which may be accepted.89 for FY09-10 and FY10-11 respectively on account of increased bank borrowings. 184.42 lacs for FY09-10 @ margin of 6.26% to Rs.34 in FY07-08 (Aud) and which further plummeted to 0.76 in FY06-07 (Aud) which decreased to 1.59 in FY07-08 (Aud) and to 0. The company has estimated its current ratio at 1.87%. NOCF is estimated negative in FY 2009 –10 at Rs. the same was maintained at Rs. 110 .

111 . o) The overall projected performance and financial of the unit are satisfactory.n) Market reference of the company is satisfactory .

India and there has been no looking back since then. It has been the culmination of inherent desire to give customer an innovative specialty brand that gave birth to Sankalp Restaurant. Goenka Mr. Kailash Goenka and Mr.02.CASE STUDY-2 Details of case study Name Constitution Group Date of Incorporation Name of Directors Sankalp Recreation Pvt. Survey # 948. The Founder of this chain Mr. (SRPL) Private Limited Company Sankalp 05. Ramavatar R.2002 Mr. Ramavatar Ranglal Goenka & his two sons Mr. Robin R. Ramavtar Goenka.2002. Road. Near AUDA Garden. Prahaladnagar. Goenka Registered Office Mr.: 079-27499200 (F) 079-27499300 FP # 4. G. Gurukul. Opp. Goenka “Sankalp Square”. Robin Goenka. Drive-in Road. With over forty highly profitable outlets and a large 112 . the group is having its presence into the Hospitality business for more than two decades and has their esteemed reputation in the market. SRPL has been incorporated on 05. Kailash R.2009) External: Not rated Brief Background The “SANKALP” group is a chain of specialty theme based retail restaurant outlets. 100 ft. ventured in to the business in 1981 with the opening of its flagship restaurant at Ashram Road. Off. he set up the theme-based restaurant in Ahmedabad and got an overwhelming response. Knowing the South Indian cuisine very well.03. Ahmedabad – 350051 Existing: Restaurant / Franchisee income from Restaurant Proposed: Hotel/Hospitality New Connection Internal: SME-2 (ABS 31.02. TPS # 45. The company has been floated by the promoters Mr. However. Near S. Ahmedabad. Highway. Ltd. Ahmedabad – 350052 Proposed Hotel Site Line of activity Dealing with us Rating Ph.

00 lacs each (April 2013 to March 2014) 12 monthly instalments of Rs.00 lacs for Hotel Project Sanction of one-time Foreign Letter of Credit (capex) facility of Rs.50) 1500. 1500. Proposal Details Proposal • • • • • Existing & Proposed Facilities Term Loan Foreign L/C capex (as a sub-limit of TL) Buyer’s Credit (as a sub-limit of TL) LER limit equivalent to forward cover of Rs.00 lacs (as a sub-limit of TL) Total For construction of 3-star Hotel Type of Facility Existing Limits Nil Nil Nil Nil Nil Proposed Limits 1500.00 + (150. in lacs) + Inc / – Dec +1500.00) + (150. 150.00) +(7.00 lacs) as a sub-limit of Term Loan Concession in Interest Rate and Processing Fees (Rs.50 lacs each (April 2016 to September 2016) Interest to be serviced separately as and when debited. 150. 7.50 lacs each (April 2011 to March 2012) ii) iii) iv) v) vi) 12 monthly instalments of Rs. 25.00 lacs in lieu of Foreign L/C (capex) as a sub-limit of Term Loan Sanction of LER limit of Rs. 113 Repayment . 22. 18.00 Purpose Tenor 82 months (including moratorium period of 16 months) Repayment to start from April 2011 i) 12 monthly instalments of Rs. 28.25 lacs each (April 2015 to March 2016) 6 monthly instalments of Rs. 150.00) (7. 31.00 lacs each (April 2014 to March 2015) 12 monthly instalments of Rs.00 Sanction of Term Loan of Rs.50 lacs (equivalent to forward cover exposure of Rs. the group is all set to launch into international market with its brands and food product exports merchandising too.50) +1500. 9.loyal customer base to boast off.00) (150. 150.00 lacs each (April 2012 to March 2013) 12 monthly instalments of Rs.00 (150.00 lacs (as a sub-limit of Term Loan) for import of machineries/equipments Sanction of Buyer’s Credit (capex) Limit of Rs.

tavern.82 Unit visit The proposed site of the hotel project of the company was visited by Mr. The net worth details are as under: (Rs. Dash (AVP/SCO . purchase. Kailash R. G. Near AUDA Garden. lodginghouse keepers etc. This area is the fastest developing area 114 . Near S. Goenka Total Net Worth 4. 15. Proposed Project SRPL has been incorporated as a Private Limited Company with main object of business of running hotel in all its aspects. in crores) Name of the Director Mr. hire the same including restaurant. Off. Ramavatar R.06 crores) Nil. Robin R. Ahmedabad .SME) and Mr.G. S.03 2. TPS # 45.Highway.61 3.380051. P. Road.SME).18 9. Ahmedabad – 51 (Projected Cost Rs.G. café. 7. own. Off 100 ft. Personal guarantee of the directors of the company. acquire. The company has proposed to set up a three star hotel with 96 rooms at S.Security & Guarantee Primary • EM of Land & Building at the Project Site located at FP # 4. This is situated at “Sankalp Hotel” Near AUDA Garden.07 crores) • Collateral Guarantee Hypothecation of entire movable fixed assets at the Project Site (Projected Cost Rs. Mr. Road. lodging and boarding and to run. 100 ft. control. Prahaladnagar. Survey # 948. Goenka Mr. C. Asim Bhaduri (Vice President . highway. refreshment-room. The project is located at one of the best locations and in the newly developed area of Ahmedabad City. manage. Highway. Prahaladnagar. Nishant Sharma (AVP/SSO SME) and the same was reported satisfactory. Goenka Mr.

49 12.84 476.00 1.00 54.11 31.00 crores.10 31. Operational & Financial Analysis Particulars Net Sales / Receipts Operating Profit Other Income PBDIT Depreciation & Amortisation Interest & Financial Charges Profit Before Tax (PBT) Profit After Tax (PAT) Cash Accruals Share Capital Reserves & Surplus 31.00 301.59 39. residential plots. A B C D E F COST OF PROJECT Land & Building Civil Construction and Civil Finishing Furniture & Fixtures Plant and Machinery Preliminary and Pre-operative Cost Contingencies TOTAL Rs.32 85.58 71.00 MEANS OF FINANCE A Equity Share Capital / Premium B Unsecured Loans C Term Loan TOTAL Against the total cost of project of Rs.51 0.64 123.00 1.80 0.45 76.84 476.00 916.00 crores.43 324.00 7.19 56.98 7.84 209.00 146.00 121.00 0.03.in the city and is surrounded by various business office premises.49 1.00 301.62 489. in Crores 9. Ahmedabad Railway Station is just 20 mins from the Hotel and International Airport is almost 30 mins from the location.12 86.00 2386. 15.03. the company has requested for Term Loan assistance of Rs.11 92.64 609. various restaurants and other commercial complexes. Hence the location of the project is ideal & the company wants to be a part of the growing popularity of this area.68 143.96 64.01 6.00 201.00 1333.57 2.00 916.03.63 48.00 0.12 (Aud) (Aud) (Est) (Proj) (Proj) 483.00 63.00 74. Company’s main purpose of the hotel is to encourage the corporate people who come for the business purposes.43 619.00 7.03.59 188.84 136.11 0.76 25.00 12.00 4.06 5.00 76.00 216. 25.08 31.00 295. the margin to be brought in by way of promoters’ contribution would be 40% of the total CAPEX for the proposed hotel project of the company by way of share capital/premium and unsecured Loans.00 3.84 257.00 453.00 46.00 63.00 247. Hence.09 31.00 15.19 143.00 511.00 25.56 7.03.43 115 .

99 0.78% 2.80 22.64 30.Misc. Interest Coverage Ratio Net Operating Cash Flow (NOCF) Net Profit / NOCF NOCF / Interest NOCF / Financing Payments Total Debt / NOCF (No.36 2.63 2192.36 1.86 2.65% 6.41 3.60 1.63 1846.63 0.42 1.04% 1.16 1.50 7.80 3.43 139.43 139.59 11.59 2.12.74 1.80 2497.30 1.26 300.59 0.00 920.00 0. Not W/off Tangible Net Worth (TNW) USL as Quasi Equity Adjusted TNW Total Term Liabilities (TTL) Total Outside Liabilities (TOL) Net Sales Growth % PBDIT Margin % PAT Margin % ROCE TOL / TNW Adj.80 118. TOL / TNW TTL / TNW Adj.00 124.45 2.87 0.00% 4.29 (49.00 75.07 2.60 15.84 1.95 0.00 389.31 0.00 169.80 2579.00 75. of years) Rating 0.61) 0.94 6.43 139.36% 24.00% 58.80 1848.87 1.00 124.12 1.38% 17.59 3.62% 10.64% 64.69 77.2009).03. Exp. The name of the company and its directors are not appearing in ECGC’s defaulter list as of 31.20% 12.20 156.60% 10.2008 (latest available).24 3.40 0.51 2.44 2.00 625.2008 (latest available) Rating SME-2 SME-3 SME-2 SME-2 SME-4 116 .52 11. TTL / TNW Current Ratio Current Ratio w/o TL inst.92) (0.20 528.26 4.83 0.44% 23.23 0.88% 35. The segment wise scoring is as under: Particulars Overall Scoring Financial scoring Business scoring Management scoring Industry scoring CIBIL/RBI/ECGC Defaulters’ List The name of the company and its directors are not appearing in CIBIL/RBI’s defaulter/willful defaulter list as of 31.74% 9.21 0.07 0.28) (0.39) (0.00 0.20 1059.37 3.99% 38.45 2.84 The rating of the company as per SME Rating Tool comes to SME-2 (ABS 31.73 2.39% 12.52 3.40 1.10 3.07.94) (9.71 650.08% 2.80 78.50 4.31% 15.36 0.64 0.09 0.20 764.57 0.35 3.05 0.63 1646.06% 5.71% 10.36 51.11 0.09 1.

c) The promoters are having sound entrepreneur skills to acquire business opportunities to scale new heights. e) The net profit of the existing business of the company was increased from Rs.96 lacs (NP margin of 10.60%) in FY08-09 f) The TOL/TNW of the company remained at 2.42 in FY08-09. 373. 489. 46.00 lacs taken for existing business and the proposed Term Loan disbursement of Rs. 86. The TOL/TNW of the company has been estimated at 5. 76. 483.00 lacs and Franchisee income of Rs.64%) in FY07-08 to Rs. b) The group is having its presence since 1981 and has emerged as a reputed name since inception.36 in FY08-09. 609.00 lacs during the current FY09-10.64 lacs in FY08-09.00 lac) for the year 2009-10. The same has been estimated at 1.74%) in FY07-08 to Rs.74 lacs (Restaurant income of Rs.00 lacs (Restaurant income of Rs. 48.49 lacs) upto 30.60 in FY07-08 and 1. d) The sales/receipts of the restaurant/franchisee business (existing) of the company were increased from Rs. 420. which indicates around 61% achievement of the estimated sales/receipts for the year 2009-10 and can be considered reasonable. While 117 . 73.09.25 lacs and Franchisee income of Rs.07 in FY07-08 and 1.51 for FY09-10 considering the existing business activity of the company during 2009-10. 300. The company has achieved the sale of Rs. The promoters of the company have rich experience in their line and belong to a resourceful family.19 lacs (PBDIT margin of 17.00%) in FY08-09. 1000.Analysis a) The company belongs a recognized group named SANKALP. who has created a niche in the hospitality sector.2009 against the estimated sale of Rs.63 lacs (NP margin of 9. The PBDIT of the existing activity of the company was increased from Rs. 484. 125.62 lacs in FY07-08 to Rs. g) The current ratio of the company remained above the benchmark level at 1.10 for FY09-10 considering the Loan Against Property of Rs.12 lacs (PBDIT margin of 15.

i) The company has shown a consistent growth since its inception and financials of the company are satisfactory.52 for FY11-12.44 for FY10-11 and 1. the current ratio has been projected at 1.considering the existing as well as proposed business activity of the company. h) The net operating and all ratios pertaining to NOCF were positive in FY08-09. The same have been estimated to be positive from FY09-10 onwards. 118 .

Bopal. Shah (ACPPS7169H) 2. Ltd. Mr.05. Dhara K. 24074300543. No. Dated 17. M: 9898052041 Tel.380015 F/101.07. Shah (ACYPS5908B) 3.CASE STUDY 3 Details of case study Applicant Details 1 Name of the Applicant Registered Office M/S. After Sola Over Bridge. Ahmedabad . 079-26747999 Mobile: 9898052001 (Ketan Shah) E-Mail: visheshd2000@gmail. (New Relationship) 401. Ahmedabad. Ahmedabad. dated 24. Judges bunglow cross road. M: 9898052616 Sola Timber Market. Kalasagar. Rudra Square. Mrs. Jodhpur Cross Road.com Private Limited Company Directors: 1. U51229GJ2001PTC39423.2007 Distributorship of Pepsi products. Mr. dated 01. Shah (AMFPS2018F) 4. Behind Ratnamani Complex. Satellite. Bopal Amli Road. Levi’s Struss Signature 2 Showroom (Fragrances) Showroom (Airtel) Godown (Beverage) Contact Details 3 Constitution 4 Date of Establishment 5 Nature of Business 119 . Ketan P. Shah (APAPS7788E) Company PAN No. Pankaj C.2002 • Import Export Code No.2001 • Gujarat Sales Tax Registration No. Pina P. Sola. 0807004081. Swagat Plaza I. Behind Mahindra Showroom. Mrs. Airtel. Ahmedabad. AABCV2348Q • Certificate of incorporation No. Bodakdev.04. M: 9898052002 19. Vishesh Distributors Pvt.

Godrej. Ketan P. Bopal. 2.00 lacs from Vijaya Bank. Ahmedabad. by takeover of existing LAP from HDFC Bank & also requested to allow the Cash credit limit of Rs. Is a private limited company.00 lacs.25% p. Estimated market value Rs. belongs to Mrs. Near Bopal Amli road. due to strong marketing channel. Now.41. Ahmedabad. Kalasagar Appartment. Jodhpur. The group was earlier distributor for companies like Himalaya. Swagat Plaza I.a. 120 . (Presently BPLR is at 14. TATA. Airtel. Shah (Director).a. The company wants to expand their existing business activity by enhancing working capital limit for smooth business operation. 1st floor. Ketan P. Parle. The company was established in year 2001. etc. 180. Levi’s Struss Signature.Rs.50% i. Near Bodakdev police chowki. Estimated market value Rs. Shop at 101. fragment shop.) 12 months only subject to review every year. The group has been engaged in distribution of branded company products like Pepsico beverage products. Shah (Director).00 lacs BPLR –2. belongs to Mr.00 lacs. . Shop at 19. 1st floor. with monthly rests. 80. Star India Bazaar.Brief Background M/S. Parker.75% p. Satellite. Purpose of loan Limits Proposed Rate of Interest Validity of Limits Security Details For General Business Purpose OVERDRAFT . Residential flat situated at 401. Adani & Lays. Ahmedabad. the company has requested for the OD limit of Rs. Wipro. Shah (Director). 180. Ltd. the company is also entered in agreement with Levi’s signature for distribution of garments to their outlets & franchises in all over the Gujarat. Dhara K. Amul. Primary Security: NIL Collateral Security: Equitable Mortgage of following properties: 1. belonging to Mr. 55.e. 12. Further the company is also having 14 commercial vehicles for distribution activities. Bodakdev. Rudra Square. Vishesh Distributors Pvt. Opp. 3.00 lacs. Present Proposal To meet the increasing business demand for the various distribution schemes. held by close family members.

Mr. The company is facing competition from the other distributors in the market. belongs to Mr. Ketan P. The company is frequently offering promotional schemes to its retail distributors 3. Mr. Shah (Director & property holder). Ms.00 lacs. are having 10 years of rich experience in the field of distributorship 2. Mr. The company is having diverse clientele base in the market. Ketan P. Shah (Director & property holder) 3. Ground floor. Directors of the company. Ahmedabad. 0. Total market value of above properties is Rs. Mrs. Disha Badani (Executive-SME). 4. Shop at 9-10. Mrs. The company has been visited by Mr. Pankaj C. Pina P. 5000/. 100.75% of the limit sanctioned plus applicable taxes (Non-refundable) As per bank’s extent guidelines. 2.02. N. Dhara K. The above risk factor is mitigated as below: 1.00 lacs.2010: Overall visit was found satisfactory. Guarantee: Personal guarantee of: 1. 301. Estimated market value Rs.plus applicable taxes (Non refundable) Processing Fees Documentation Risk Associated Risk mitigates Unit Visit Login Fees 121 .00 lacs (Approx). Sukriti Annexie. Shah (Director) 4. Nirav Ayer (Executive-SME). Near Prernatirth Bunglows-2. Rs. 80.Estimated market value Rs. Satellite. Shah (Director) PDC’s: Two PDC’s for the entire overdraft limit each dated 3 months and 9 months from the date of first disbursement. on 04. Shah (Director). Ramachandran (AVP-SME).

00 66.03. Shah: In CIBIL of Mr. Relevant documentary proofs available for CIBIL case. Ketan.09) 36. 0. we may consider the Credit Card written-off status as acceptable: 1. which as on date has become overdue of Rs. The borrower is having satisfactory repayment track record of CC. The director has also filed a case against SCB regarding the same. with overdue amount Rs. Ketan P.2009 . was observed written-off.03. Mr. LAP & term loan with HDFC Bank & Vijaya bank. He. but not the interest amount. ECGC defaulter List: No CIBIL: Credit card repayment record of Director Mr. However. Due to non receipt of bill on time. considering below facts.00 SME 3 (Acceptable) 122 . subsequently paid the actual amount.43 lacs.723/. 43. Ketan has submitted that it was a due of Rs.Defaulter List Whether the names of the borrower or any of the promoters/directors appear(s) in: RBI defaulters List: No (The firm name and directors are not featuring in RBI Defaulters’ List as of 31. it is observed that one credit card account from Standard Chartered Bank. 1100/-. there was interest charge levied on the actual amount. 2. The director has submitted the copy of the relevant documents to our bank. However.Latest Available).00 30. Credit Score Parameters (Enclosed Credit Scoring Sheet) Financial Non – Financial Overall Rating Present Score (ABS – 31.with interest charge. to the “Consumer Education & Research Society” and it is in process till date.

80 2.200731.25 70.30 56.37 350.10 153.29 Depreciation 3.66 0.91 14.00 38.03 2.68 2.59 13.72 78.15 117.00 30.16 14.91 13.46 123.38 6.88 45.72 914.37 95.60 0.64 2.70 160.2012 Audited Audited Audited Estimated Projected Projected Sales 1273.59 3.03.03.00 30.46 131.58 6.02 1.40 5.94 28.42 78.71 329.86 1155.200831.26 3.01 15.51 2.96 44.00 38.87 7.19 0.41 1.00 16.80 123 .25 PBT 1.00 1525.60 71.00 Other Income 23.00 256.46 8.00 PBDIT 23.33 94.00 38.58 45.44 14.33 328.52 116.63 30.92 17.97 0.00 1505.02 1.88 0.46 116.56 7.42 260.03.12 45.62 1.93 16.201031.42 250.61 30.75 3.91 205.00 8.80 1064.65 153.33 30.41 337.91 6.59 31.40 2.44 28.91 6.94 2.00 1555.00 18.67 2.Performance details Particulars 31.39 30.More than 6 months Debtors holding (in days) Current Ratio Current Asset Current Liabilities 38.13 222.15 0.41 127.91 Interest 12.97 64.22 1.99 222.00 29.54 52.27 50.26 185.91 TNW(Unadjusted) 13.85 0.41 8.79 339.94 52.25 6.42 259.61 0.16 78.96 52.95 37.21 0.49 32.98 11.03.00 1475.74 Cash Accruals 5.98 82.17 8.53 1125.55 18.96 Unsecured Loans from friends & relatives TNW (Adjusted) TOL(Adjusted) TOL(Unadjusted) TOL/TNW(Unadjusted) TOL/TNW(Adjusted) Debtors .39 0.26 148.50 PAT 1.61 187.00 PBT Margin % 0.38 183.03.02 1.19 117.46 111.14 71.201131.96 1.200931.71 255.33 884.00 10.98 158.65 0.00 11.Less than 6 months .85 158.10 246.43 367.31 1032.00 7.00 3.55 2.50 2.00 Total Income 1296.03.78 6.51 64.63 Interest & remuneration to Directors 4.

registering Y-o-Y growth of 16. 31. 2008-09. Further to this company was having TATA’s distributorship. Levi’s Struss Signature. Current year.50%. Shah.56 lacs. 2006-07. 28. Also. 1273. 1032. etc. through which it is expecting turnover of Rs. under which it was selling prepaid mobile cards also. which can be considered as satisfactory. This business was with high turnover and low margin basis. fragment shop. He is handling total business affairs with sound business and management policy. g) Despite of decrease in turnover of the company.26 lacs during FY 2007-08 as against Rs. 2007-08 and sales of Rs. 1. TATA. b) Key promoter and pioneer of the company is Mr.00 lacs every month.58 lacs for the FY 2008-09 & Rs. which was closed in the mid of the year 2009 & hence. During FY. 2008-09. PBDIT of the company is at quite higher level of Rs. Ketan P. c) He has gained good knowledge and skill especially in the field of marketing aspects. The company has closed that prepaid card section in year 2007. Rs. 50. there was decline in sales during past 3 years.. d) The company had registered sales of Rs.53 lacs in FY.33 lacs in FY.31 lacs in FY. Airtel. 2. 124 . company has entered into new agreement with Levi’s Signature. 3. 884. profitability is on increasing trend. e) The company is having Airtel distributorship.94 lacs of FY 2006-07. the net profit of the company increased to Rs. f) The company has booked net profit (PBT) of Rs. Amul.Analysis a) The group has been engaged in distribution of branded company products like Pepsico beverage products. engaged in the distribution activities since last more than 10 years.59 lacs for the FY 2007-08.

33 times. 2007-09. The TNW for the FY 2009-10 is estimated at higher side of Rs. 180. The current ratio estimated for FY 2009-10 is 1.26 for FY 2008-09. 13. 2006-07 to Rs. from Rs.96 lacs. mainly due to ploughing back of entire profit and infusion of fresh capital by directors with decrease in unsecured Loans from directors. mainly on account of proposed credit limit of Rs. 37.70 & at 2.h) The company has been marginally increasing its TNW (unadjusted) Y-o-Y basis i. i) The current ratio of the company for FY 2007-08 has been 1. .95 lacs in FY. 15.00 lacs from our bank and the same may be considered as satisfactory. 125 .e.44 lacs in FY.

0265-2645431. Vadodara-391243 Residence Address Contact Details Deep Jyoti-2. Rajendra st (SSI Registration No. dated bl 07. Por-Ramangamdi.C. Vallavhbhai. Vadodara. Dist. Gujarat Tractor. he decided to establish the business in the name of Suchi Wires.CASE STUDY 4 Details of case study Name of the Applicant Work Office Address Suchi Wires (New Relationship) 189.D. Patel a 240191100480. Opp. The proprietor was working with administrative department of school in his initial career before 20 years. Firm is mainly engaged in the business of manufacturing of iron wires.06. Rajendra Vallabhbhai Patel is a proprietor of the firm. E 24691601368) Proprietor: Mr.I.01. Estate. Proprietor then started trading in wires with friends at small level. 405. Block No. Mr.2007) PAN: ACSPP2512N is h m e nt Manufacturer of HB (Half hard bend) & MS (Mild stone) wires Date of Brief Background M/s Suchi Wires is a proprietorship firm established in year 1992. 404. 3098431 0265-2831649 (O) M: 9824034470 (Rajendrabhai) Proprietorship Firm Constitution Nature of Business 31. Vishwamitri.1992 (GST Registration No. 126 . G. on seeing the business potential. cutting & stretching it into different sizes according to customers’ requirements.

(Halol) Lalit Engineers (Vadodara) Almonard Pvt. The proprietor looks after the finance & overall management. He started business in year 1992 and having experience of around 17 years in the same line of business. are performed. as per the requirements/specifications of the clients.  Major Suppliers of the applicant are: National Small Industries Corporation Ltd. Mrs. u-pins. Mr. (Halol) Vijay jyot Seats Pvt. Ltd. (Vadodara) 127 . cutting. (Raipur) Roundwell Steel Corporation (Ahmedabad) Shree Vinayak Steels (Billimora)  Major Buyers of the applicant are: Gandhi Special Tubes Ltd. Ltd. (Ahmedabad) Shanti Fintrade Ltd. Kalpesh Patel (Brother-in-law of the proprietor) looks after the technical support. There are 16 workers in the firm. etc.The proprietor is Commerce Graduate & aged about 51 years. Applicant purchases wires of different diameters & then processes it through different machines to stretch them and prepare wires of particular diameter & size. bending etc. stapler pins. Niyati Patel (sister of the proprietor) manages administrative work related to the business. work processes like wire drawing. Iron wires are used in making grill of fridge back. To prepare the wires according to customers requirement. table fan cover. working in 2 shifts a day.

Present Proposal Purpose of Loan Limits Proposed Validity of Limits Security Details Working capital limit CC limit of Rs. 50.00 lacs.

Rate of Interest & BPLR-2.25% i.e. 12.50% (BPLR at present is 14.75%) 12 months only subject to review every year. Primary: Hypothecation of current assets of the firm. Collateral: A) Equitable mortgage of following properties:
1.

Factory premise of Suchi Wires situated at Plot No. 428, GIDC, Ramangamdi, Por, Vadodara. Property belongs to Mr. Rajendra V. Patel (proprietor) & approximate market value of the property is Rs. 45.00 lacs. Residential property situated at Deep Jyot-2, Block No. 404 & 405, Opp. Gujarat tractor, Vshwamitri, Vadodara. The property belongs to Mr. Rajendra V. Patel (proprietor) & approximate market value of the property is Rs. 15.00 lacs.

2.

B) Hypothecation of fixed assets of the firm. Guarantee: Personal guarantee of: 1. Mr. Rajendra Vallabhbhai Patel (Proprietor) Visit to the location of Firm 2. Mr. Kalpesh Patel (Brother-in-law of the proprietor) The unit of the firm was jointly visited by Mr. N Ramachandran (AVPSME), Mr. Sachin gupta (Deputy Manager-SME) & Mr. Sameep Buch (Manager-Axis Sales) on 12.10.2009. Overall conduct of the business was found regular. The visit was satisfactory. Processing Fees Login Fees Defaulter List 1.00% of sanctioned CC limit, plus applicable taxes (non-refundable). Rs. 5000/- plus applicable taxes, to be taken upfront (Non - refundable) Whether the names of the borrower or any of the promoters/directors appear(s) in:

128

RBI defaulters List: No (The firm name and proprietor’s name are not featuring in RBI defaulters list latest available of 31.12.2008) ECGC defaulter List: No CIBIL: Satisfactory

Credit Scoring Credit Score (Enclose Credit Scoring Sheet) Parameters Financial Business & Management Industry Overall Rating

Score (ABS 31/03/2009) 28.00 42.78 11.14 81.92

SME 2

129

Performance details Particulars Sales Other Income Total Income PBDIT Depreciation Interest PBT PAT PBT Margin % Cash Accruals TNW(Unadjusted) Unsecured Loans from friends & relatives TNW (Adjusted) TOL(Adjusted) TOL(Unadjusted) TOL/TNW(Unadjusted) TOL/TNW(Adjusted) Debtors - Less than 6 months - More than 6 months Debtors holding (in days) Current Ratio Current Asset Current Liabilities 31.03.2007 Audited 119.73 1.06 120.79 3.91 0.52 0.11 3.28 3.28 2.72 3.8 20.63 16.50 37.13 26.89 43.39 2.10 0.72 22.08 22.08 0.00 67.31 1.40 37.76 26.89 31.03.2008 31.03.2009 31.03.2010 31.03.2011 Audited Audited Estimated Projected 204.49 431.02 568.57 625.43 1.69 3.39 4.08 4.9 206.18 434.41 572.65 630.33 5.16 11.13 21.04 22.80 1.23 1.31 1.18 1.06 0.22 1.27 5.47 5.48 3.71 8.55 14.39 16.26 3.71 8.55 14.39 16.26 1.80 1.97 2.51 2.58 4.94 9.86 15.57 17.32 26.27 34.08 46.96 61.72 19.90 46.17 27.98 47.88 1.82 0.61 33.74 33.74 0.00 60.22 1.44 43.57 30.36 76.03 110.11 64.05 140.08 4.11 0.58 74.13 74.13 0.00 62.78 1.77 113.59 64.05 68.53 115.49 80.95 149.48 3.18 0.70 94.76 94.76 0.00 60.83 1.66 134.55 80.95 66.53 128.25 83.95 150.48 2.44 0.65 104.24 104.24 0.00 60.83 1.76 147.88 83.95

130

235.44 & for FY 2008-09 was at 1. Firm has achieved PBT of Rs. which is 41.66 for FY 2009-10. 131 . PBDIT of the firm is also on increasing trend.08 and Rs.77. c) Profitability of the firm is also showing increasing trend y-o-y bases. above the benchmark level of 1. the creditor base was on higher side.55 lacs in FY 2008-09. which can be considered as satisfactory. e) Debtor’s level of the firm is average 60 days for all the past 3 years. against which firm has achieved sales turnover of Rs. proprietor submitted that purchase of raw material was at better price & the suppliers also allowed credit period. 431. Debtors maintain regularity in payment. Profitability has also rose in line with increase in sales of previous financial year. Proprietor has submitted that average payment duration is 60 days maintained in the business. In March 2009. 204. Hence. Although. Unadjusted gearing of the firm is on higher side for FY 2008-09 mainly due to higher side of creditors at particular point in March 2009. it has been maintained above the benchmark level.71 lacs in FY 2007-08 & Rs. f) The Current Ratio of the firm has been on higher side. which can be considered as acceptable. with plough back of the profit in the business. 3.33 for all the past 3 years.02 lacs in FY. Estimated ratio is 1. which can be considered as acceptable. d) Net worth of the firm is increasing y-o-y bases. Current ratio for FY 2007-08 was 1. 2007.45 % of estimated sales. 568. b) Firm has achieved sales of Rs. 8.70 lacs till 31st October 2009.Analysis a) The market reputation of promoter is satisfactory. 2008-09. Firm has submitted estimated sales of Rs.57 lacs for FY 2009-10. this is more than double of the last year.49 lacs in FY.

salaries to employees & dividend to shareholders  Credit & risk go hand in hand  In the business world risk arises out of:• • • • Deficiencies / lapses on the part of the management Uncertainties in the business environment Uncertainties in the industrial environment Weakness in the financial position  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  The Credit Appraisal process 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. industrial.CHAPTER 9 FINDINGS  Credit appraisal is done to check the commercial. business. management risks & are rated separately 132 . 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  Credit is the core activity of the banks & important source of their earnings which go to pay interest to depositors.

i. The assessment of financial risk involves appraisal of the financial strength of the borrower based on performance & financial indicators  The norms of the bank for providing loans are not stringent.e. Axis bank tries to cater to the financial requirements of almost all the types of SME units. 133 .  By providing various schemes of loans. based on its past record and future growth perspective. the loan is provided. even if a particular client is not having the favorable estimated and financial performance.

But. long term plans also plays crucial role in increasing chances of getting project approved for loan. goals. Axis Bank norms for providing loans are flexible & it may differ from case to case. Other strong parameters also play an important role in analyzing credit worthiness of the firm/company. promoters. it is seen that credit appraisal is basically done on the basis of fundamental soundness. as well as type of business. our conclusion was such that credit appraisal system is not only looking for financial wealth. the same are applied at Axis Bank: • • • • • Financial performance Business performance Industry outlook Quality of management Conduct of account  Axis Bank loan policy contains various norms for sanction of different types of loans. These all norms do not apply to each & every case.  In all. industry. projected data and estimates. 134 .CHAPTER 10 CONCLUSION  Finance management is the backbone of any organizations and hence yields a number of job options ranging from strategic financial planning to sales.  From the study of Credit appraisal of SME. after different types of case studies. past records.  Usually. experience. it can be concluded that credit appraisal should therefore be based on the following factors. the viability of the project from every aspect is analyzed.

com www.rbi.com Books: “Credit and banking” By: K.indianbankassociation.org.in www.wikipedia.com www.BIBLIOGRAPHY Web Sites www.com www. C.bankersindia. Nanda 135 .Axis Bank.

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