P. 1
54034165

54034165

|Views: 7|Likes:
Published by anand_lamani88

More info:

Published by: anand_lamani88 on Jul 04, 2012
Copyright:Attribution Non-commercial

Availability:

Read on Scribd mobile: iPhone, iPad and Android.
download as PDF, TXT or read online from Scribd
See more
See less

07/04/2012

pdf

text

original

A REPORT ON

³CREDIT APPRAISAL´
CANARA BANK

SUBMITTED BY:MBA(GENERAL) FINANCE

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

DECLARATION
To, The Chairman, UBS, Chandigarh.

Sir, I hereby declare that the project work entitled ³CREDIT APPRAISAL´ has been written and submitted, is my original work the empirical findings in the report are based on information collected by me and not copied from elsewere. I understand that detection of any such coping is liable to be punished in any way the school deems fit.

DATE:- 28/07/09

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

ACKNOWLEDGEMENT
I would like to express sincere thanks to my mentors ± Mr. Rajesh Kumar Redhu, Manager(Credit) at Canara Bank (Chandigarh Branch, Circle Office) and Mr. Sanjay Satija, Officer, Canara Bank (Chandigarh Branch, Circle Office) for their guidance that helped me in the completion of the project. Last but not the least, I express my profound gratitude to the staff of Canara Bank (Chandigarh Branch, Circle Office), for providing a congenial and competitive work environment, which made the Summer Internshipr a great learning experience.

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

ABSTRACT
The project is on credit appraisal process of CANARA BANK. Credit appraisal is an important activity carried out by the credit department of the bank to determine whether to accept or reject the proposal for finance. In beginning the project report talks about the banking industry in India and various changes that took place. These changes are divided into various phases i.e. 1. 2. 3. 4. 5. Early history From world war 1 to Independence Post independence Nationalization Liberalization

After that history of CANARA BANK is given which was founded by Late Sri Ammembal Subbarao Pai in 1906. This is followed by banks MISSION AND VISION. After that the project report talks about various concepts that we come across in banking such as BASEL II NORMS, RISK MANAGEMENT, ASSET QUALITY MANAGEMENT etc. Firstly an introduction of various risks that are involved in banking is given. This includes the following risk:1. 2. 3. 4. Credit risk Market risk Operational risk Environmental risk

It also includes an introduction of some risk rating models. This information has been gathered from an article ³ RISK MANAGEMENT IN BANKS´ by R.S. RAGHAVAN. This is followed by an introduction of BASEL II NORMS. Introduction of basel II norms explains the three main pillars of these norms which are:1. Minimum capital requirement 2. Supervisory review of capital adequacy 3. Public disclosure After that an overview of asset quality management is given. Asset quality refers to the degree of financial strength and risk in a bank's assets, typically loans and investments. A comprehensive evaluation of asset quality is one of the most important components in assessing the current condition and future viability of the bank. After providing an overview of all these concepts the project report talks about the credit appraisal process of CANARA BANK. The methods that are used by banks in order to calculate the loan limits i.e. y y y Turnover Method; MPBF method based on inventory and receivables holding levels; Cash Budget Method

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

Credit appraisal process is followed by a case study of a plywood firm. The personal information of the company is not disclosed as per the instructions of CANARA BANK

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

TABLE OF CONTENTS
S.NO Particulars 1 CHAPTER 1- Introduction 1.1 Objective 1.2 Methodology 1.3 Limitations 2 CHAPTER 2- Banking Industry In India 2.1 Early History 2.2 From World War I to Independence 2.3 Post-Independence 2.4 Nationalization 2.5 Liberalization 3 CHAPTER 3- Canara bank 3.1 History 3.2 Mission 3.3 Vision 4 CHAPTER 4 - Risk and their types 4.1 Credit risk 4.2 Market risk 4.3Operational risk 4.4 Regulatory risk 4.5 Environmental risk 5 CHAPTER 5 - An overview of Basel II norms 5.1 Key elements of new accord 5.1.1Minimum capital requirements 5.1.2 Supervisory review of capital adequacy Page No. 9 9 9 9 10 10 11 12 13 13 15 15 17 17 18 18 21 24 24 25 26 26 26 32

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

5.1.3 Public disclosure 6 CHAPTER 6 - An overview of asset quality management 4.1Definition 4.2Significance 4.3Assessment 4.3.1 Asset classifications 4.3.2 Examination ratios and rating guidelines 4.3.3 Loan review 4.3.4 Other sources of asset quality information 7 CHAPTER 7 ± Introduction to Credit Appraisal 7.1 Background of the proponent/ management 7.2 Commercial appraisal 7.3 Technical appraisal 7.4 Financial appraisal 7.5 Pre-sanction appraisal and post sanction supervision 7.5.1 Pre-sanction appraisal of projects 7.5.2 Post-Sanction Supervision And Follow-Up 8 9 CHAPTER 8 - Assessment of working capital requirement CHAPTER 9 - A case study of XYZ ltd.

32 34 34 34 35 35 36 37 37 38 39 39 39 40 45 45 50 51 68

ANNEXURE I ANNEXURE II ANNEXURE III ANNEXURE IV ANNEXURE V ANNEXURE VI

96 97 99 103 105 109

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

ANNEXURE VII ANNEXURE VIII 10 BIBLIOGRAPHY

111 114 115

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

CHAPTER- 1
1.1 Objective :

INTRODUCTION

The main objectives of the project are: y To study the credit policy of the bank and the credit appraisal process as a whole. y y y y To study the credit rating methods followed by the Bank for different credit ranges. To study the method used by bank to calculate the interest rates to be charged. To study and analyze the credit proposals of plywood industry. To study a credit appraisal report of a firm engaged in manufacturing of pre-laminated plywood boards. 1.2 Methodology: Sources of data: Secondary data source Secondary data: Secondary data are those, which have already been collected by some one else. Secondary Data Sources those helpful in research were:1. Balance sheet of the company 2. Credit policy book of the bank 3. Office note prepared by bank 4. Bank website 5. Various articles on banking 1.4 imitations of the study: Following could be the limitations of the study: 1. There is no information regarding the total amount of credit available to a particular industry thus the inclusion of industry analysis is limited. 2. All the proposals cannot be studied due to lack of time. 3. No involvement in the Bank¶s credit appraisal process was possible.

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

CHAPTER 2

BANKING INDUSTRY IN INDIA

Banking in India originated in the last decades of the 18th century. The oldest bank in existence in India is the State Bank of India, a government-owned bank that traces its origins back to June 1806 and that is the largest commercial bank in the country. Central banking is the responsibility of the Reserve Bank of India, which in 1935 formally took over these responsibilities from the then Imperial Bank of India, relegating it to commercial banking functions. After India's independence in 1947, the Reserve Bank was nationalized and given broader powers. In 1969 the government nationalized the 14 largest commercial banks; the government nationalized the six next largest in 1980. Currently, India has 88 scheduled commercial banks (SCBs) - 27 public sector banks (that is with the Government of India holding a stake), 31 private banks (these do not have government stake; they may be publicly listed and traded on stock exchanges) and 38 foreign banks. They have a combined network of over 53,000 branches and 17,000 ATMs. According to a report by ICRA Limited, a rating agency, the public sector banks hold over 75 percent of total assets of the banking industry, with the private and foreign banks holding 18.2% and 6.5% respectively

Early history
Banking in India originated in the last decades of the 18th century. The first banks were The General Bank of India, which started in 1786, and the Bank of Hindustan, both of which are now defunct. The oldest bank in existence in India is the State Bank of India, which originated in the Bank of Calcutta in June 1806, which almost immediately became the Bank of Bengal. This was one of the three presidency banks, the other two being the Bank of Bombay and the Bank of Madras, all three of which were established under charters from the British East India Company. For many years the Presidency banks acted as quasi-central banks, as did their successors. The three banks merged in 1925 to form the Imperial Bank of India, which, upon India's independence, became the State Bank of India. Indian merchants in Calcutta established the Union Bank in 1839, but it failed in 1848 as a consequence of the economic crisis of 1848-49. The Allahabad Bank, established in 1865 and still functioning today, is the oldest Joint Stock bank in India. It was not the first though. That honor belongs to the Bank of Upper India, which was established in 1863, and which survived until 1913, when it failed, with some of its assets and liabilities being transferred to the Alliance Bank of Simla. When the American Civil War stopped the supply of cotton to Lancashire from the Confederate States, promoters opened banks to finance trading in Indian cotton. With large exposure to speculative ventures, most of the banks opened in India during that period failed. The depositors lost money and lost interest in keeping deposits with banks. Subsequently, banking in India remained the exclusive domain of Europeans for next several decades until the beginning of the 20th century. Foreign banks too started to arrive, particularly in Calcutta, in the 1860s. The Comptoire d'Escompte de Paris opened a branch in Calcutta in 1860, and another in Bombay in 1862; branches in Madras and Pondichery, then a French colony, followed. HSBC established itself in Bengal in 1869. Calcutta was the most active trading port in India, mainly due to the trade of the British Empire, and so became a banking center.

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

The Bank of Bengal, which later became the State Bank of India. The first entirely Indian joint stock bank was the Oudh Commercial Bank, established in 1881 in Faizabad. It failed in 1958. The next was the Punjab National Bank, established in Lahore in 1895, which has survived to the present and is now one of the largest banks in India. Around the turn of the 20th Century, the Indian economy was passing through a relative period of stability. Around five decades had elapsed since the Indian Mutiny, and the social, industrial and other infrastructure had improved. Indians had established small banks, most of which served particular ethnic and religious communities. The presidency banks dominated banking in India but there were also some exchange banks and a number of Indian joint stock banks. All these banks operated in different segments of the economy. The exchange banks, mostly owned by Europeans, concentrated on financing foreign trade. Indian joint stock banks were generally under capitalized and lacked the experience and maturity to compete with the presidency and exchange banks. This segmentation let Lord Curzon to observe, "In respect of banking it seems we are behind the times. We are like some old fashioned sailing ship, divided by solid wooden bulkheads into separate and cumbersome compartments." The period between 1906 and 1911, saw the establishment of banks inspired by the Swadeshi movement. The Swadeshi movement inspired local businessmen and political figures to found banks of and for the Indian community. A number of banks established then have survived to the present such as Bank of India, Corporation Bank, Indian Bank, Bank of Baroda, Canara Bank and Central Bank of India. The fervour of Swadeshi movement lead to establishing of many private banks in Dakshina Kannada and Udupi district which were unified earlier and known by the name South Canara ( South Kanara ) district. Four nationalised banks started in this district and also a leading private sector bank. Hence undivided Dakshina Kannada district is known as "Cradle of Indian Banking".

From World War I to Independence
The period during the First World War (1914-1918) through the end of the Second World War (19391945), and two years thereafter until the independence of India were challenging for Indian banking. The years of the First World War were turbulent, and it took its toll with banks simply collapsing despite the Indian economy gaining indirect boost due to war-related economic activities. At least 94 banks in India failed between 1913 and 1918 as indicated in the following table:

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

Years

Number of banks Authorised capital Paid-up Capital that failed (Rs. Lakhs) (Rs. Lakhs)

1913 12

274

35

1914 42

710

109

1915 11

56

5

1916 13

231

4

1917 9

76

25

1918 7

209

1

Post-independence
The partition of India in 1947 adversely impacted the economies of Punjab and West Bengal, paralyzing banking activities for months. India's independence marked the end of a regime of the Laissez-faire for the Indian banking. The Government of India initiated measures to play an active role in the economic life of the nation, and the Industrial Policy Resolution adopted by the government in 1948 envisaged a mixed economy. This resulted into greater involvement of the state in different segments of the economy including banking and finance. The major steps to regulate banking included:
y y y

In 1948, the Reserve Bank of India, India's central banking authority, was nationalized, and it became an institution owned by the Government of India. In 1949, the Banking Regulation Act was enacted which empowered the Reserve Bank of India (RBI) "to regulate, control, and inspect the banks in India." The Banking Regulation Act also provided that no new bank or branch of an existing bank could be opened without a license from the RBI, and no two banks could have common directors.

However, despite these provisions, control and regulations, banks in India except the State Bank of India, continued to be owned and operated by private persons. This changed with the nationalisation of major banks in India on 19 July, 1969.

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

Nationalisation
By the 1960s, the Indian banking industry has become an important tool to facilitate the development of the Indian economy. At the same time, it has emerged as a large employer, and a debate has ensued about the possibility to nationalise the banking industry. Indira Gandhi, the-then Prime Minister of India expressed the intention of the GOI in the annual conference of the All India Congress Meeting in a paper entitled "Stray thoughts on Bank Nationalisation." The paper was received with positive enthusiasm. Thereafter, her move was swift and sudden, and the GOI issued an ordinance and nationalised the 14 largest commercial banks with effect from the midnight of July 19, 1969. Jayaprakash Narayan, a national leader of India, described the step as a "masterstroke of political sagacity." Within two weeks of the issue of the ordinance, the Parliament passed the Banking Companies (Acquisition and Transfer of Undertaking) Bill, and it received the presidential approval on 9 August, 1969. A second dose of nationalization of 6 more commercial banks followed in 1980. The stated reason for the nationalization was to give the government more control of credit delivery. With the second dose of nationalization, the GOI controlled around 91% of the banking business of India. Later on, in the year 1993, the government merged New Bank of India with Punjab National Bank. It was the only merger between nationalized banks and resulted in the reduction of the number of nationalised banks from 20 to 19. After this, until the 1990s, the nationalised banks grew at a pace of around 4%, closer to the average growth rate of the Indian economy. The nationalised banks were credited by some, including Home minister P. Chidambaram, to have helped the Indian economy withstand the global financial crisis of 2007-2009.[1][2]

Liberalisation
In the early 1990s, the then Narsimha Rao government embarked on a policy of liberalization, licensing a small number of private banks. These came to be known as New Generation tech-savvy banks, and included Global Trust Bank (the first of such new generation banks to be set up), which later amalgamated with Oriental Bank of Commerce, Axis Bank(earlier as UTI Bank), ICICI Bank and HDFC Bank. This move, along with the rapid growth in the economy of India, revitalized the banking sector in India, which has seen rapid growth with strong contribution from all the three sectors of banks, namely, government banks, private banks and foreign banks. The next stage for the Indian banking has been setup with the proposed relaxation in the norms for Foreign Direct Investment, where all Foreign Investors in banks may be given voting rights which could exceed the present cap of 10%,at present it has gone up to 49% with some restrictions. The new policy shook the Banking sector in India completely. Bankers, till this time, were used to the 46-4 method (Borrow at 4%;Lend at 6%;Go home at 4) of functioning. The new wave ushered in a modern outlook and tech-savvy methods of working for traditional banks.All this led to the retail boom in India. People not just demanded more from their banks but also received more. Currently (2007), banking in India is generally fairly mature in terms of supply, product range and reacheven though reach in rural India still remains a challenge for the private sector and foreign banks. In terms of quality of assets and capital adequacy, Indian banks are considered to have clean, strong and transparent balance sheets relative to other banks in comparable economies in its region. The Reserve Bank of India is an autonomous body, with minimal pressure from the government. The stated policy of

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

the Bank on the Indian Rupee is to manage volatility but without any fixed exchange rate-and this has mostly been true. With the growth in the Indian economy expected to be strong for quite some time-especially in its services sector-the demand for banking services, especially retail banking, mortgages and investment services are expected to be strong. One may also expect M&As, takeovers, and asset sales. In March 2006, the Reserve Bank of India allowed Warburg Pincus to increase its stake in Kotak Mahindra Bank (a private sector bank) to 10%. This is the first time an investor has been allowed to hold more than 5% in a private sector bank since the RBI announced norms in 2005 that any stake exceeding 5% in the private sector banks would need to be vetted by them. In recent years critics have charged that the non-government owned banks are too aggressive in their loan recovery efforts in connection with housing, vehicle and personal loans. There are press reports that the banks' loan recovery efforts have driven defaulting borrowers to suicide.

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

CHAPTER 3

CANARA BANK

1.HISTORY

OF CANARA BANK

Late Sri Ammembal Subbarao Pai Our Beloved Founder

Founded as 'Canara Bank Hindu Permanent Fund' in 1906, by late Sri. Ammembal Subba Rao Pai, a philanthropist, this small seed blossomed into a limited company as 'Canara Bank Ltd.' in 1910 and became Canara Bank in 1969 after nationalization.

"A good bank is not only the financial heart of the community, but also one with an obligation of helping in every possible manner to improve the economic conditions of the common people" - A. Subba Rao Pai.

Founding Principles
To remove Superstition and ignorance. To spread education among all to sub-serve the first principle. To inculcate the habit of thrift and savings. To transform the financial institution not only as the financial heart of the community but the social heart as well. 5. To assist the needy. 6. To work with sense of service and dedication. 7. To develop a concern for fellow human being and sensitivity to the surroundings with a view to make changes/remove hardships and sufferings. Sound founding principles, enlightened leadership, unique work culture and remarkable adaptability to changing banking environment have enabled Canara Bank to be a frontline banking institution of global standards. 1. 2. 3. 4.

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

Significant Milestones
Year 1st July 1906 1910 1969 1976 1983 1984 1985 1987 1989 198990 199293 199596 200102 200203 200304 200405 200506 200607 Canara Hindu Permanent Fund Ltd. formally registered with a capital of 2000 shares of Rs.50/- each, with 4 employees. Canara Hindu Permanent Fund renamed as Canara Bank Limited 14 major banks in the country, including Canara Bank, nationalized on July 19 1000th branch inaugurated Overseas branch at London inaugurated Cancard (the Bank¶s credit card) launched Merger with the Laksmi Commercial Bank Limited Commissioning of Indo Hong Kong International Finance Limited Canbank Mutual Fund & Canfin Homes launched Canbank Venture Capital Fund started Canbank Factors Limited, the factoring subsidiary launched Became the first Bank to articulate and adopt the directive principles of ³Good Banking´. Became the first Bank to be conferred with ISO 9002 certification for one of its branches in Bangalore Opened a 'Mahila Banking Branch', first of its kind at Bangalore, for catering exclusively to the financial requirements of women clientele. Maiden IPO of the Bank Launched Internet & Mobile Banking Services 100% Branch computerization Entered 100th Year in Banking Service Launched Core Banking Solution in select branches Number One Position in Aggregate Business among Nationalized Banks Retained Number One Position in Aggregate Business among Nationalized Banks. Signed MoUs for Commissioning Two JVs in Insurance and Asset Management with international majors viz., HSBC

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

(Asia Pacific) Holding and Robeco Groep N.V respectively Launching of New Brand Identity Incorporation of Insurance and Asset Management JVs Launching of 'Online Trading' portal Launching of a µCall Centre¶ Switchover to Basel II New Capital Adequacy Framework The Bank crossed the coveted Rs. 3 lakh crore in aggregate business The Bank¶s 3rd foreign branch at Shanghai commissioned

200708

200809

As at March 2009, the total business of the Bank stood at Rs. 3,25,112 crore.

2. MISSION

To provide quality banking services with enhanced customer orientation, higher value creation for stakeholders and to continue as a responsive corporate social citizen by effectively blending commercial pursuits with social banking.

3.VISION

To emerge as a µBest Practices Bank¶ by pursuing global benchmarks in profitability, operational efficiency, asset quality, risk management and expanding the global reach.

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

CHAPTER 4
1. CREDIT RISK

RISK AND THEIR TYPES

Credit Risk is the potential that a bank borrower/counter party fails to meet the obligations on agreed terms. There is always scope for the borrower to default from his commitments for one or the other reason resulting in crystalisation of credit risk to the bank. These losses could take the form outright default or alternatively, losses from changes in portfolio value arising from actual or perceived deterioration in credit quality that is short of default. Credit risk is inherent to the business of lending funds to the operations linked closely to market risk variables. The objective of credit risk management is to minimize the risk and maximize bank¶s risk adjusted rate of return by assuming and maintaining credit exposure within the acceptable parameters. Credit risk consists of primarily two components, viz Quantity of risk, which is nothing but the outstanding loan balance as on the date of default and the quality of risk, viz, the severity of loss defined by both Probability of Default as reduced by the recoveries that could be made in the event of default. Thus credit risk is a combined outcome of Default Risk and Exposure Risk. The elements of Credit Risk is Portfolio risk comprising Concentration Risk as well as Intrinsic Risk and Transaction Risk comprising migration/down gradation risk as well as Default Risk. At the transaction level, credit ratings are useful measures of evaluating credit risk that is prevalent across the entire organization where treasury and credit functions are handled. Portfolio analysis help in identifying concentration of credit risk, default/migration statistics, recovery data, etc. In general, Default is not an abrupt process to happen suddenly and past experience dictates that, more often than not, borrower¶s credit worthiness and asset quality declines gradually, which is otherwise known as migration. Default is an extreme event of credit migration. Off balance sheet exposures such as foreign exchange forward cantracks, swaps options etc are classified in to three broad categories such as full Risk, Medium Risk and Low risk and then translated into risk Neighted assets through a conversion factor and summed up. The management of credit risk includes a) measurement through credit rating/ scoring, b) quantification through estimate of expected loan losses, c) Pricing on a scientific basis and d) Controlling through effective Loan Review Mechanism and Portfolio Management. A) Tools of Credit Risk Management. The instruments and tools, through which credit risk management is carried out, are detailed below: a) Exposure Ceilings: Prudential Limit is linked to Capital Funds ± say 15% for individual borrower entity, 40% for a group with additional 10% for infrastructure projects undertaken by the group, Threshold limit is fixed at a level lower than Prudential Exposure; Substantial Exposure, which is the sum total of the exposures beyond threshold limit should not exceed 600% to 800% of the Capital Funds of the bank (i.e. six to eight times). b) Review/Renewal: Multi-tier Credit Approving Authority, constitution wise delegation of powers, Higher delegated powers for better-rated customers; discriminatory time schedule for review/renewal, Hurdle rates and Bench marks for fresh exposures and periodicity for renewal based on risk rating, etc are formulated. c) Risk Rating Model: Set up comprehensive risk scoring system on a six to nine point scale. Clearly define rating thresholds and review the ratings periodically preferably at half yearly intervals. Rating migration is to be mapped to estimate the expected loss. d) Risk based scientific pricing: Link loan pricing to expected loss. High-risk category borrowers are to be priced high. Build historical data on default losses. Allocate capital to absorb the unexpected loss. Adopt the RAROC framework. e) Portfolio Management The need for credit portfolio management emanates from the necessity to optimize the benefits associated with diversification and to reduce the potential adverse impact of concentration of exposures to a particular borrower, sector or industry. Stipulate quantitative ceiling on aggregate exposure on specific rating categories, distribution of borrowers in various industry, business

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

group and conduct rapid portfolio reviews. The existing framework of tracking the non-performing loans around the balance sheet date does not signal the quality of the entire loan book. There should be a proper & regular on-going system for identification of credit weaknesses well in advance. Initiate steps to preserve the desired portfolio quality and integrate portfolio reviews with credit decision-making process. f) Loan Review Mechanism This should be done independent of credit operations. It is also referred as Credit Audit covering review of sanction process, compliance status, review of risk rating, pick up of warning signals and recommendation of corrective action with the objective of improving credit quality. It should target all loans above certain cut-off limit ensuring that at least 30% to 40% of the portfolio is subjected to LRM in a year so as to ensure that all major credit risks embedded in the balance sheet have been tracked. This is done to bring about qualitative improvement in credit administration. Identify loans with credit weakness. Determine adequacy of loan loss provisions. Ensure adherence to lending policies and procedures. The focus of the credit audit needs to be broadened from account level to overall portfolio level. Regular, proper & prompt reporting to Top Management should be ensured. Credit Audit is conducted on site, i.e. at the branch that has appraised the advance and where the main operative limits are made available. However, it is not required to visit borrowers factory/office premises. B. Risk Rating Model Credit Audit is conduced on site, i.e. at the branch that has appraised the advance and where the main operative limits are made available. However, it is not required to risk borrowers¶ factory/office premises. As observed by RBI, Credit Risk is the major component of risk management system and this should receive special attention of the Top Management of the bank. The process of credit risk management needs analysis of uncertainty and analysis of the risks inherent in a credit proposal. The predictable risk should be contained through proper strategy and the unpredictable ones have to be faced and overcome. Therefore any lending decision should always be preceded by detailed analysis of risks and the outcome of analysis should be taken as a guide for the credit decision. As there is a significant co-relation between credit ratings and default frequencies, any derivation of probability from such historical data can be relied upon. The model may consist of minimum of six grades for performing and two grades for nonperforming assets. The distribution of rating of assets should be such that not more than 30% of the advances are grouped under one rating. The need for the adoption of the credit risk-rating model is on account of the following aspects. ² Disciplined way of looking at Credit Risk. ² Reasonable estimation of the overall health status of an account captured under Portfolio approach as contrasted to stand-alone or asset based credit management. ² Impact of a new loan asset on the portfolio can be assessed. Taking a fresh exposure to the sector in which there already exists sizable exposure may simply increase the portfolio risk although specific unit level risk is negligible/minimal. ² The co-relation or co-variance between different sectors of portfolio measures the inter relationship between assets. The benefits of diversification will be available so long as there is no perfect positive correlation between the assets, otherwise impact on one would affect the other. ² Concentration risks are measured in terms of additional portfolio risk arising on account of increased exposure to a borrower/group or co-related borrowers. ² Need for Relationship Manager to capture, monitor and control the over all exposure to high value customers on real time basis to focus attention on vital few so that trivial many do not take much of valuable time and efforts. ² Instead of passive approach of originating the loan and holding it till maturity, active approach of credit portfolio management is adopted through secuitisation/ credit derivatives. ² Pricing of credit risk on a scientific basis linking the loan price to the risk involved therein. ² Rating can be used for the anticipatory provisioning. Certain level of reasonable over-provisioning as best practice. Given the past experience and assumptions about the future, the credit risk model seeks to determine the present value of a given loan or fixed income security. It also seeks to determine the quantifiable risk that the promised cash flows will not be forthcoming. Thus, credit risk models are

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

intended to aid banks in quantifying, aggregating and managing risk across geographical and product lines. Credit models are used to flag potential problems in the portfolio to facilitate early corrective action. The risk-rating model should capture various types of risks such as Industry/Business Risk, Financial Risk and Management Risk, associated with credit. Industry/Business risk consists of both systematic and unsystematic risks which are market driven. The systematic risk emanates from General political environment, changes in economic policies, fiscal policies of the government, infrastructural changes etc. The unsystematic risk arises out of internal factors such as machinery breakdown, labour strike, new competitors who are quite specific to the activities in which the borrower is engaged. Assessment of financial risks involves appraisal of the financial strength of a unit based on its performance and finacial indicators like liquidity, profitability, gearing, leverage, coverage, turnover etc. It is necessary to study the movement of these indicators over a period of time as also its comparison with industry averages wherever possible. A study carried out in the western corporate world reveals that 45% of the projects failed to take off simply because the personnel entrusted with the test were found to be highly wanting in qualitatively managing the project. The key ingredient of credit risk is the risk of default that is measured by the probability that default occurs during a given period. Probabilities are estimates of future happenings that are uncertain. We can narrow the margin of uncertainty of a forecast if we have a fair understanding of the nature and level of uncertainty regarding the variable in question and availability of quality information at the time of assessment. The expected loss/unexpected loss methodology forces banks to adopt new Internal Ratings Based approach to credit risk management as proposed in the Capital Accord II. Some of the risk rating methodologies used widely is briefed below: a. Altman¶s Z score Model involves forecasting the probability of a company entering bankruptcy. It separates defaulting borrower from non-defaulting borrower on the basis of certain financial ratios converted into simple index. b. Credit Metrics focuses on estimating the volatility of asset values caused by variation in the quality of assets. The model tracks rating migration which is the probability that a borrower migrates from one risk rating to another risk rating. c. Credit Risk +, a statistical method based on the insurance industry, is for measuring credit risk. The model is based on acturial rates and unexpected losses from defaults. It is based on insurance industry model of event risk. d. KMV, through its Expected Default Frequency (EDF) methodology derives the actual probability of default for each obligor based on functions of capital structure, the volatility of asset returns and the current asset value. It calculates the asset value of a firm from the market value of its equity using an option pricing based approach that recognizes equity as a call option on the underlying asset of the firm. It tries to estimate the asset value path of the firm over a time horizon. The default risk is the probability of the estimated asset value falling below a pre-specified default point. e. Mckinsey¶s credit portfolio view is a multi factor model which is used to stimulate the distribution of default probabilities, as well as migration probabilities conditioned on the value of macro economic factors like the unemployment rate, GDP growth, forex rates, etc. In to-days parlance, default arises when a scheduled payment obligation is not met within 180 days from the due date and this cut-off period may undergo downward change. Exposure risk is the loss of amount outstanding at the time of default as reduced by the recoverable amount. The loss in case of default is D* X * (I-R) where D is Default percentage, X is the Exposure Value and R is the recovery rate. Credit Risk is measured through Probability of Default (POD) and Loss Given Default (LGD). Bank should estimate the probability of default associated with borrowers in each of the rating grades. How much the bank would lose once such event occurs is what is known as Loss Given Default. This loss is also dependent upon bank¶s exposure to the borrower at the time of default commonly known as Exposure at Default (EaD).

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

The extent of provisioning required could be estimated from the expected Loss Given Default (which is the product of Probability of Default, Loss Given Default & Exposure & Default). That is ELGD is equal to PODX LGD X EaD. Credit Metrics mechanism advocates that the amount of portfolio value should be viewed not just in terms of likelihood of default, but also in terms of credit quality over time of which default is just a specific case. Credit Metrics can be worked out at corporate level, at least on an annual basis to measure risk- migration and resultant deterioration in credit portfolio. The ideal credit risk management system should throw a single number as to how much a bank stands to lose on credit portfolio and therefore how much capital they ought to hold.

2. MARKET RISK
Market Risk may be defined as the possibility of loss to bank caused by the changes in the market variables. It is the risk that the value of on-/off-balance sheet positions will be adversely affected by movements in equity and interest rate markets, currency exchange rates and commodity prices. Market risk is the risk to the bank¶s earnings and capital due to changes in the market level of interest rates or prices of securities, foreign exchange and equities, as well as the volatilities, of those prices. Market Risk Management provides a comprehensive and dynamic frame work for measuring, monitoring and managing liquidity, interest rate, foreign exchange and equity as well as commodity price risk of a bank that needs to be closely integrated with the bank¶s business strategy. Scenario analysis and stress testing is yet another tool used to assess areas of potential problems in a given portfolio. Identification of future changes in economic conditions like ± economic/industry overturns, market risk events, liquidity conditions etc that could have unfavourable effect on bank¶s portfolio is a condition precedent for carrying out stress testing. As the underlying assumption keep changing from time to time, output of the test should be reviewed periodically as market risk management system should be responsive and sensitive to the happenings in the market. a) Liquidity Risk: Bank Deposits generally have a much shorter contractual maturity than loans and liquidity management needs to provide a cushion to cover anticipated deposit withdrawals. Liquidity is the ability to efficiently accommodate deposit as also reduction in liabilities and to fund the loan growth and possible funding of the off-balance sheet claims. The cash flows are placed in different time buckets based on future likely behaviour of assets, liabilities and off-balance sheet items. Liquidity risk consists of Funding Risk, Time Risk & Call Risk. Funding Risk : It is the need to replace net out flows due to unanticipated withdrawal/nonrenewal of deposit Time risk : It is the need to compensate for nonreceipt of expected inflows of funds, i.e. performing assets turning into nonperforming assets. Call risk : It happens on account of crystalisation of contingent liabilities and inability to undertake profitable business opportunities when desired. The Asset Liability Management (ALM) is a part of the overall risk management system in the banks. It implies examination of all the assets and liabilities simultaneously on a continuous basis with a view to ensuring a proper balance between funds mobilization and their deployment with respect to their a) maturity profiles, b) cost, c) yield, d) risk exposure, etc. It includes product pricing for deposits as well as advances, and the desired maturity profile of assets and liabilities. Tolerance levels on mismatches should be fixed for various maturities depending upon the asset liability profile, deposit mix, nature of cash flow etc. Bank should track the impact of pre-payment of loans & premature closure of deposits so as to realistically estimate the cash flow profile. b) Interest Rate Risk Interest Rate Risk is the potential negative impact on the Net Interest Income and it refers to the vulnerability of an institution¶s financial condition to the movement in interest rates. Changes in interest rate affect earnings, value of assets, liability off-balance sheet items and cash flow. Hence, the objective

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

of interest rate risk management is to maintain earnings, improve the capability, ability to absorb potential loss and to ensue the adequacy of the compensation received for the risk taken and effect risk return tradeoff. Management of interest rate risk aims at capturing the risks arising from the maturity and re-pricing mismatches and is measured both from the earnings and economic value perspective. Earnings perspective involves analyzing the impact of changes in interest rates on accrual or reported earnings in the near term. This is measured by measuring the changes in the Net Interest Income (NII) equivalent to the difference between total interest income and total interest expense. In order to manage interest rate risk, banks should begin evaluating the vulnerability of their portfolios to the risk of fluctuations in market interest rates. One such measure is Duration of market value of a bank asset or liabilities to a percentage change in the market interest rate. The difference between the average duration for bank assets and the average duration for bank liabilities is known as the duration gap which assess the bank¶s exposure to interest rate risk. The Asset Liability Committee (ALCO) of a bank uses the information contained in the duration gap analysis to guide and frame strategies. By reducing the size of the duration gap, banks can minimize the interest rate risk. Economic Value perspective involves analyzing the expected cash in flows on assets minus expected cash out flows on liabilities plus the net cash flows on off-balance sheet items. The economic value perspective identifies risk arising from long-term interest rate gaps. The various types of interest rate risks are detailed below: Gap/Mismatch risk: It arises from holding assets and liabilities and off balance sheet items with different principal amounts, maturity dates & re-pricing dates thereby creating exposure to unexpected changes in the level of market interest rates. Basis Risk: It is the risk that the Interest rat of different Assets/liabilities and off balance items may change in different magnitude. The degree of basis risk is fairly high in respect of banks that create composite assets out of composite liabilities. Embedded option Risk: Option of pre-payment of loan and Fore- closure of deposits before their stated maturities constitute embedded option risk Yield curve risk: Movement in yield curve and the impact of that on portfolio values and income. Reprice risk: When assets are sold before maturities. Reinvestment risk: Uncertainty with regard to interest rate at which the future cash flows could be reinvested. Net interest position risk: When banks have more earning assets than paying liabilities, net interest position risk arises in case market interest rates adjust downwards. There are different techniques such as a) the traditional Maturity Gap Analysis to measure the interest rate sensitivity, b) Duration Gap Analysis to measure interest rate sensitivity of capital, c) simulation and d) Value at Risk for measurement of interest rate risk. The approach towards measurement and hedging interest rate risk varies with segmentation of bank¶s balance sheet. Banks broadly bifurcate the asset into Trading Book and Banking Book. While trading book comprises of assets held primarily for generating profits on short term differences in prices/yields, the banking book consists of assets and liabilities contracted basically on account of relationship or for steady income and statutory obligations and are generally held till maturity/payment by counter party. Thus, while price risk is the prime concern of banks in trading book, the earnings or changes in the economic value are the main focus in banking book. Value at Risk (VaR) is a method of assessing the market risk using standard statistical techniques. It is a statistical measure of risk exposure and measures the worst expected loss over a given time interval under normal market conditions at a given confidence level of say 95% or 99%. Thus VaR is

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

simply a distribution of probable outcome of future losses that may occur on a portfolio. The actual result will not be known until the event takes place. Till then it is a random variable whose outcome has been estimated. As far as Trading Book is concerned, bank should be able to adopt standardized method or internal models for providing explicit capital charge for market risk. c) Forex Risk Foreign exchange risk is the risk that a bank may suffer loss as a result of adverse exchange rate movement during a period in which it has an open position, either spot or forward or both in same foreign currency. Even in case where spot or forward positions in individual currencies are balanced the maturity pattern of forward transactions may produce mismatches. There is also a settlement risk arising out of default of the counter party and out of time lag in settlement of one currency in one center and the settlement of another currency in another time zone. Banks are also exposed to interest rate risk, which arises from the maturity mismatch of foreign currency position. The Value at Risk (VaR) indicates the risk that the bank is exposed due to uncovered position of mismatch and these gap positions are to be valued on daily basis at the prevalent forward market rates announced by FEDAI for the remaining maturities. Currency Risk is the possibility that exchange rate changes will alter the expected amount of principal and return of the lending or investment. At times, banks may try to cope with this specific risk on the lending side by shifting the risk associated with exchange rate fluctuations to the borrowers. However the risk does not get extinguished, but only gets converted in to credit risk. By setting appropriates limits-open position and gaps, stop-loss limits, Day Light as well as overnight limits for each currency, Individual Gap Limits and Aggregate Gap Limits, clear cut and well defined division of responsibilities between front, middle and back office the risk element in foreign exchange risk can be managed/monitored. d) Country Risk This is the risk that arises due to cross border transactions that are growing dramatically in the recent years owing to economic liberalization and globalization. It is the ossibility that a country will be unable to service or repay debts to foreign lenders in time. It comprises of Transfer Risk arising on account of possibility of losses due to restrictions on external remittances; Sovereign Risk associated with lending to government of a sovereign nation or taking government guarantees; Political Risk when political environment or legislative process of country leads to government taking over the assets of the financial entity (like nationalization, etc) and preventing discharge of liabilities in a manner that had been agreed to earlier; Cross border risk arising on account of the borrower being a resident of a country other than the country where the cross border asset is booked; Currency Risk, a possibility that exchange rate change, will alter the expected amount of principal and return on the lending or investment. In the process there can be a situation in which seller (exporter) may deliver the goods, but may not be paid or the buyer (importer) might have paid the money in advance but was not delivered the goods for one or the other reasons. As per the RBI guidance note on Country Risk Management published recently, banks should reckon both fund and non-fund exposures from their domestic as well as foreign branches, if any, while identifying, measuring, monitoring and controlling country risk. It advocates that bank should also take into account indirect country risk exposure. For example, exposures to a domestic commercial borrower with large economic dependence on a certain country may be considered as subject to indirect country risk. The exposures should be computed on a net basis, i.e. gross exposure minus collaterals, guarantees etc. Netting may be considered for collaterals in/guarantees issued by countries in a lower risk category and may be permitted for bank¶s dues payable to the respective countries. RBI further suggests that banks should eventually put in place appropriate systems to move over to internal assessment of country risk within a prescribed period say by 31.3.2004, by which time the new capital accord would be implemented. The system should be able to identify the full dimensions of country risk as well as incorporate features that acknowledge the links between credit and market risks.

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

Banks should not rely solely on rating agencies or other external sources as their only country riskmonitoring tool. With regard to inter-bank exposures, the guidelines suggests that banks should use the country ratings of international rating agencies and broadly classify the country risk rating into six categories such as insignificant, low, moderate, high, very high & off-credit. However, banks may be allowed to adopt a more conservative categorization of the countries. Banks may set country exposure limits in relation to the bank¶s regulatory capital (Tier I & II) with suitable sub limits, if necessary, for products, branches, maturity etc. Banks were also advised to set country exposure limits and monitor such exposure on weekly basis before eventually switching over to real tie monitoring. Banks should use variety of internal and external sources as a means to measure country risk and should not rely solely on rating agencies or other external sources as their only tool for monitoring country risk. Banks are expected to disclose the ³Country Risk Management´ policies in their Annual Report by way of notes.

3. OPERATIONAL RISK
Always banks live with the risks arising out of human error, financial fraud and natural disasters. The recent happenings such as WTC tragedy, Barings debacle etc. has highlighted the potential losses on account of operational risk. Exponential growth in the use of technology and increase in global financial inter-linkages are the two primary changes that contributed to such risks. Operational risk, though defined as any risk that is not categorized as market or credit risk, is the risk of loss arising from inadequate or failed internal processes, people and systems or from external events. In order to mitigate this, internal control and internal audit systems are used as the primary means. Risk education for familiarizing the complex operations at all levels of staff can also reduce operational risk. Insurance cover is one of the important mitigators of operational risk. Operational risk events are associated with weak links in internal control procedures. The key to management of operational risk lies in the bank¶s ability to assess its process for vulnerability and establish controls as well as safeguards while providing for unanticipated worst-case scenarios. Operational risk involves breakdown in internal controls and corporate governance leading to error, fraud, performance failure, compromise on the interest of the bank resulting in financial loss. Putting in place proper corporate governance practices by itself would serve as an effective risk management tool. Bank should strive to promote a shared understanding of operational risk within the organization, especially since operational risk is often interwined with market or credit risk and it is difficult to isolate. Over a period of time, management of credit and market risks has evolved a more sophisticated fashion than operational risk, as the former can be more easily measured, monitored and analysed. And yet the root causes of all the financial scams and losses are the result of operational risk caused by breakdowns in internal control mechanism and staff lapses. So far, scientific measurement of operational risk has not been evolved. Hence 20% charge on the Capital Funds is earmarked for operational risk and based on subsequent data/feedback, it was reduced to 12%. While measurement of operational risk and computing capital charges as envisaged in the Basel proposals are to be the ultimate goals, what is to be done at present is start implementing the Basel proposal in a phased manner and carefully plan in that direction. The incentive for banks to move the measurement chain is not just to reduce regulatory capital but more importantly to provide assurance to the top management that the bank holds the required capital.

4. REGULATORY RISK
When owned funds alone are managed by an entity, it is natural that very few regulators operate and supervise them. However, as banks accept deposit from public obviously better governance is expected of them. This entails multiplicity of regulatory controls. Many Banks, having already gone for public issue, have a greater responsibility and accountability. As banks deal with public funds and money, they are subject to various regulations The very many regulators include Reserve Bank of India (RBI), Securities Exchange Board of India (SEBI), Department of Company Affairs (DCA), etc. More over,

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

banks should ensure compliance of the applicable provisions of The Banking Regulation Act, The Companies Act, etc. Thus all the banks run the risk of multiple regulatory-risk which inhibits free growth of business as focus on compliance of too many regulations leave little energy and time for developing new business. Banks should learn the art of playing their business activities within the regulatory controls.

5. ENVIRONMENTAL RISK
As the years roll by and technological advancement take place, expectation of the customers change and enlarge. With the economic liberalization and globalization, more national and international players are operating the financial markets, particularly in the banking field. This provides the platform for environmental change and exposes the bank to the environmental risk. Thus, unless the banks improve their delivery channels, reach customers, innovate their products that are service oriented, they are exposed to the environmental risk resulting in loss in business share with consequential profit.

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

CHAPTER 5

AN OVERVIEW OF BASEL II NORMS

Key Elements of the New Accord
The New Accord consists of three pillars: (1) minimum capital requirements, (2) supervisory review of capital adequacy, and (3) public disclosure. The proposals comprising each of the three pillars are summarised below.

Pillar 1: Minimum capital requirements
1.While the proposed New Accord differs from the current Accord along a number of dimensions, it is important to begin with a description of elements that have not changed. The current Accord is based on the concept of a capital ratio where the numerator represents the amount of capital a bank has available and the denominator is a measure of the risks faced by the bank and is referred to as risk-weighted assets. The resulting capital ratio may be no less than 8%. 2. Under the proposed New Accord, the regulations that define the numerator of the capital ratio (i.e. the definition of regulatory capital) remain unchanged. Similarly, the minimum required ratio of 8% is not changing. The modifications, therefore, are occurring in the definition of risk-weighted assets, that is in the methods used to measure the risks faced by banks. The new approaches for calculating risk-weighted assets are intended to provide improved bank assessments of risk and thus to make the resulting capital ratios more meaningful. 3.The current Accord explicitly covers only two types of risks in the definition of riskweighted assets: (1) credit risk and (2) market risk. Other risks are presumed to be covered implicitly through the treatments of these two major risks. The treatment of market risk arising from trading activities was the subject of the Basel Committee¶s 1996 Amendment to the Capital Accord. The proposed New Accord envisions this treatment remaining unchanged. 4. The pillar one proposals to modify the definition of risk-weighted assets in the New Accord have two primary elements: (1) substantive changes to the treatment of credit risk relative to the current Accord; and (2) the introduction of an explicit treatment of operational risk that will result in a measure of operational risk being included in the denominator of a bank¶s capital ratio. The discussions below will focus on these two elements in turn. 5. In both cases, a major innovation of the proposed New Accord is the introduction of three distinct options for the calculation of credit risk and three others for operational risk. The Committee believes that it is not feasible or desirable to insist upon a one-size-fits-all approach to the measurement of either risk. Instead, for both credit and operational risk, there are three approaches of increasing risk sensitivity to allow banks and supervisors to select the approach or approaches that they believe are most appropriate to the stage of development of banks¶ operations and of the financial market infrastructure. The following table identifies the three primary approaches available by risk type. Credit Risk Operational Risk CREDIT RISK OPERATIONAL RISK 1.Standardized Approach 1.Basic Indicator Approach 2.Foundation IRB Approach 2. Standardized Approach 3.Advanced IRB Approach 3.Advance Measurement Approach

Standardised approach to credit risk
The standardised approach is similar to the current Accord in that banks are required to slot their credit exposures into supervisory categories based on observable characteristics of the exposures (e.g. whether the exposure is a corporate loan or a residential mortgage loan). The standardised approach establishes fixed risk weights corresponding to each supervisory category and makes use of external credit assessments to enhance risk sensitivity compared to the current Accord. The risk weights for sovereign, interbank, and corporate exposures are differentiated based on external credit assessments. For

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

sovereign exposures, these credit assessments may include those developed by OECD export credit agencies, as well as those published by private rating agencies. The standardised approach contains guidance for use by national supervisors in determining whether a particular source of external ratings should be eligible for banks to use. The use of external ratings for the evaluation of corporate exposures, however, is considered to be an optional element of the framework. Where no external rating is applied to an exposure, the standardised approach mandates that in most cases a risk weighting of 100% be used, implying a capital requirement of 8% as in the current Accord. In such instances, supervisors are to ensure that the capital requirement is adequate given the default experience of the exposure type in question. An important innovation of the standardised approach is the requirement that loans considered past-due be risk weighted at 150%, unless a threshold amount of specific provisions has already been set aside by the bank against that loan. Another important development is the expanded range of collateral, guarantees, and credit derivatives that banks using the standardised approach may recognise. Collectively, Basel II refers to these instruments as credit risk mitigants. The standardised approach expands the range of eligible collateral beyond OECD sovereign issues to include most types of financial instruments, while setting out several approaches for assessing the degree of capital reduction based on the market risk of the collateral instrument. Similarly, the standardised approach expands the range of recognised guarantors to include all firms that meet a threshold external credit rating. The standardised approach also includes a specific treatment for retail exposures. The risk weights for residential mortgage exposures are being reduced relative to the current Accord, as are those for other retail exposures, which will now receive a lower risk weight than that for unrated corporate exposures. In addition, some loans to small- and mediumsized enterprises (SMEs) may be included within the retail treatment, subject to meeting various criteria. By design the standardised approach draws a number of distinctions between exposures and transactions in an effort to improve the risk sensitivity of the resulting capital ratios. The same can also be said of the IRB approaches to credit risk and those for assessing the capital requirement for operational risk where capital requirements are more closely linked to risk. In order to assist banks and national supervisors where circumstances may not warrant a broad range of options, the Committee has developed the µsimplified standardised approach¶ outlined in Annex 9 of CP3. The annex collects in one place the simplest options for calculating risk weighted assets. Banks intending to adopt the simplified standardised methods are also expected to comply with the corresponding supervisory review and market discipline requirements of the New Accord.

Internal ratings-based (IRB) approaches
One of the most innovative aspects of the New Accord is the IRB approach to credit risk, which includes two variants: a foundation version and an advanced version. The IRB approach differs substantially from the standardised approach in that banks¶ internal assessments of key risk drivers serve as primary inputs to the capital calculation. Because the approach is based on banks¶ internal assessments, the potential for more risk sensitive capital requirements is substantial. However, the IRB approach does not allow banks themselves to determine all of the elements needed to calculate their own capital requirements. Instead, the risk weights and thus capital charges are determined through the combination of quantitative inputs provided by banks and formulas specified by the Committee. The formulas, or risk weight functions, translate a bank¶s inputs into a specific capital requirement. They are based on modern risk management techniques that involve a statistical and thus quantitative assessment of risk. Ongoing dialogue with industry participants has confirmed that use of such methods represents an important step forward for developing a meaningful assessment of risk at the largest most complex banking organisations in today¶s market. The IRB approaches cover a wide range of portfolios with the mechanics of the capital calculation varying somewhat across exposure types. The remainder of this section highlights the differences between the foundation and advanced IRB approaches by portfolio, where applicable.

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

Corporate, bank and sovereign exposures The IRB calculation of risk-weighted assets for exposures to sovereigns, banks, or corporate entities uses the same basic approach. It relies on four quantitative inputs: (1) Probability of default (PD), which measures the likelihood that the borrower will default over a given time horizon; (2) Loss given default (LGD), which measures the proportion of the exposure that will be lost if a default occurs; (3) Exposure at default (EAD), which for loan commitments measures the amount of the facility that is likely to be drawn if a default occurs; and (4) Maturity (M), which measures the remaining economic maturity of the exposure. Given a value for each of these four inputs, the corporate IRB risk-weight function described in CP3 produces a specific capital requirement for each exposure. In addition, for exposures to SME borrowers defined as those with annual sales of less than 50 million of Euros, banks will be permitted to make use of a firm size adjustment to the corporate IRB risk weight formula. The foundation and advanced IRB approaches differ primarily in terms of the inputs that are provided by the bank based on its own estimates and those that have been specified by the supervisor. The following table summarises these differences.

Data Input Probability of default (PD) Loss given default (LGD) Exposure at default (EAD) Maturity (M)

Foundation IRB Provided by bank based on own estimates Supervisory values set by the Committee Supervisory values set by the Committee Supervisory values set by the Committee or At national discretion, provided by bank based on own estimates (with an allowance to exclude certain exposures)

Advanced IRB Provided by bank based on own estimates Provided by bank based on own estimates Provided by bank based on own estimates Provided by bank based on own estimates (with an allowance to exclude certain exposures)

The table makes clear that for corporate, sovereign, and interbank exposures, all IRB banks must provide internal estimates of PD. In addition, advanced IRB banks must provide internal estimates of LGD and EAD, while foundation IRB banks will make use of supervisory values contained in CP3 that depend on the nature of the exposure. Advanced IRB banks will generally provide their own estimates of remaining maturity for these exposures, although there are some exceptions where supervisors can allow fixed maturity assumptions to be used instead. For foundation IRB banks, supervisors can choose on a national basis whether all such banks are to apply fixed maturity assumptions described in CP3 or to provide their own estimates of remaining maturity. Another major element of the IRB framework pertains to the treatment of credit risk mitigants, namely, collateral, guarantees and credit derivatives. The IRB framework itself, particularly the LGD parameter, provides a great deal of flexibility to assess the potential value of credit risk mitigation techniques. For foundation IRB banks, therefore, the different supervisory LGD values provided in CP3 reflect the presence of different types of collateral. Advanced IRB banks have even greater flexibility to assess the value of different types of collateral. With respect to transactions involving financial collateral,

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

the IRB approach seeks to ensure that banks are using a recognised approach to assessing the risk that such collateral could change in value, and thus a specific set of methods is provided, as in the standardised approach. Retail exposures For retail exposures, there is only a single, advanced IRB approach and no foundation IRB alternative. The key inputs to the IRB retail formulas are PD, LGD and EAD, all of which are to be provided by the bank based on its internal estimates. In contrast to the IRB approach for corporate exposures, these values would not be estimated for individual exposures, but instead for pools of similar exposures. In light of the fact that retail exposures address a broad range of products with each exhibiting different historical loss experiences, the framework divides retail exposures into three primary categories: (1) exposures secured by residential mortgages, (2) qualifying revolving retail exposures (QRRE), and (3) other non-mortgage exposures also known as µother retail.¶ Generally speaking, the QRRE category captures unsecured revolving credits that exhibit appropriate loss characteristics, which would include many credit card relationships. All other non-mortgage consumer lending including exposures to small businesses falls into the µother retail¶ category. A separate risk-weight formula for each of the three categories is provided in CP3. Specialised lending Basel II distinguishes several sub-categories of wholesale lending from other forms of corporate lending and refers to them as specialised lending. The term specialised lending is associated with the financing of individual projects where the repayment is highly dependent on the performance of the underlying pool or collateral. For all but one of the specialised lending sub-categories, if banks can meet the minimum criteria for the estimation of the relevant data inputs, they can simply use the corporate IRB framework to calculate the risk weights for these exposures. However, in recognition that the hurdles for meeting these criteria for this set of exposures may be more difficult in practice, CP3 also includes an additional option that only requires that a bank be able to classify such exposures into five distinct quality grades. CP3 provides a specific risk weight for each of these grades. For one sub-category of specialised lending, µhigh volatility commercial real estate¶ (HVCRE), IRB banks that can estimate the required data inputs will use a separate riskweight formula that is more conservative than the general corporate risk-weight formula in light of the risk characteristics of this type of lending. Banks that cannot estimate the required inputs will classify their HVCRE exposures into five grades, for which CP3 also provides specific risk weights. Equity exposures IRB banks will be required to separately treat their equity exposures. Two distinct approaches are described in CP3. One approach builds on the PD/LGD approach for corporate exposures and requires banks to provide own PD estimates for the associated equity exposures. This approach, however, mandates the use of a 90% LGD value and also imposes various other limitations, including a minimum risk weight of 100% in many circumstances. The other approach is intended to provide banks with the opportunity to model the potential decrease in the market value of their equity holdings over a quarterly holding period. A simplified version of this approach with fixed risk weights for public and private equities is also included. Implementation of IRB

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

By relying on internally generated inputs to the Basel II risk weight functions, there is bound to be some variation in the way in which the IRB approach is carried out. To ensure significant comparability across banks, the Committee has established minimum qualifying criteria for use of the IRB approaches that cover the comprehensiveness and integrity of banks¶ internal credit risk assessment capabilities. While banks using the advanced IRB approach will have greater flexibility relative to those relying on the foundation IRB approach, at the same time they must also satisfy a more stringent set of minimum standards. The Committee believes that banks¶ internal rating systems should accurately and consistently differentiate between different degrees of risk. The challenge is for banks to define clearly and objectively the criteria for their rating categories in order to provide meaningful assessments of both individual credit exposures and ultimately an overall risk profile. A strong control environment is another important factor for ensuring that banks¶ rating systems perform as intended and the resulting ratings are accurate. An independent ratings process, internal review and transparency are control concepts addressed in the minimum IRB standards. Clearly, an internal rating system is only as good as its inputs. Accordingly, banks using the IRB approach will need to be able to measure the key statistical drivers of credit risk. The minimum Basel II standards provide banks with the flexibility to rely on data derived from their own experience, or from external sources as long as the bank can demonstrate he relevance of such data to its own exposures. In practical terms, banks will be expected to have in place a process that enables them to collect, to store and to utilise loss statistics over time in a reliable manner. Securitisation Basel II provides a specific treatment for securitisation, a risk management technique that the current Accord does not fully contemplate. The Committee recognises that securitisation by its very nature relates to the transfer of ownership and/or risks associated with the credit exposures of a bank to other parties. In this respect, securitisation is important in helping to provide better risk diversification and to enhance financial stability. The Committee believes that it is essential for the New Accord to include a robust treatment of securitisation. Otherwise the new framework would remain vulnerable to capital arbitrage, as some securitisations have enabled banks under the current Accord to avoid maintaining capital commensurate with the risks to which they are exposed. To address this concern, Basel II requires banks to look to the economic substance of a securitization transaction when determining the appropriate capital requirement in both the standardized and IRB treatments. As elsewhere in the standardised approach to credit risk, banks must assign supervisory risk weights to securitisation exposures based on various criteria. One noteworthy point is the difference in treatment of lower quality and unrated securitizations vis-à-vis comparable corporate exposures. In a securitisation, such positions are generally designed to absorb all losses on the underlying pool of exposures up to a certain level. Accordingly, the Committee believes this concentration of risk warrants higher capital requirements. In particular, for banks using the standardised approach, unrated securitization positions must be deducted from capital. For IRB banks that originate securitisations, a key element of the framework is the calculation of the amount of capital that the bank would have been required to hold on the underlying pool had it not securitised the exposures. This amount of capital is referred to as KIRB. If an IRB bank retains a position in a securitisation that obligates it to absorb losses up to or less than KIRB before any other holders bear losses (i.e. a first loss position), then the bank must deduct this position from capital. The Committee believes that this requirement is warranted in order to provide strong incentives for originating banks to shed the risk associated with highly subordinated securitisation positions that inherently contain the greatest risks. For IRB banks that invest in highly rated securitisation exposures, a treatment based on the presence of an external rating, the granularity of the underlying pool, and the thickness of an exposure has been developed.

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

Because of their importance in ensuring the smooth functioning of commercial paper markets and their importance to corporate banking generally, the Basel II securitization framework includes an explicit treatment of liquidity facilities provided by banks. In the IRB framework, the capital requirement for a liquidity facility is dependent upon a number of factors including the asset quality of the underlying pool and the degree to which credit enhancements are available to absorb losses prior to use of the facility. Each is a critical input to the supervisory formula designed for use by originating banks to calculate capital requirements for unrated positions, such as liquidity facilities. A treatment of liquidity facilities in the standardised approach is also provided which sets out various criteria for ensuring that more preferential treatment is only provided to those liquidity facilities where the risks are lower. Many securitisations of revolving retail exposures contain provisions that call for the securitisation to be wound down if the quality of securitised assets begins to deteriorate. The Basel II proposals include a specific treatment of securitisations with these µearly amortisation¶ features, given that such mechanisms can in effect partly shield investors from fully sharing in the losses of the underlying accounts. The Committee¶s approach is based on a measure of the quality of the underlying assets in the pool. When this is high, the approach implies a zero capital requirement associated with the securitised exposures. As the quality deteriorates, however, the bank must increasingly hold capital as if future draws on existing credit card lines would remain on its balance sheet. Operational risk The Committee believes that operational risk is an important risk facing banks and that banks need to hold capital to protect against losses from it. Within the Basel II framework, operational risk is defined as the risk of losses resulting from inadequate or failed internal processes, people and systems, or external events. This is another area where the Committee has developed a new regulatory capital approach. As with credit risk, the Committee builds on banks¶ rapidly developing internal assessment techniques and seeks to provide incentives for banks to improve upon those techniques, and more broadly, their management of operational risk over time. This is particularly true of the Advanced Measurement Approaches (AMA) to operational risk described below. Approaches to operational risk are continuing to evolve rapidly, but are not likely in the near term to attain the precision with which market and credit risk can be quantified. This situation has posed obvious challenges to the incorporation of a measure of operational risk within pillar one of the New Accord. Nevertheless, the Committee believes that such inclusion is essential to ensure that there are strong incentives for banks to continue to develop approaches to operational risk measurement and to ensure that banks are holding sufficient capital buffers for this risk. It is clear that a failure to establish a minimum capital requirement for operational risk within the New Accord would reduce these incentives and result in a reduction of industry resources devoted to operational risk. The Committee is prepared to provide banks with an unprecedented amount of flexibility to develop an approach to calculate operational risk capital that they believe is consistent with their mix of activities and underlying risks. In the AMA, banks may use their own method for assessing their exposure to operational risk, so long as it is sufficiently comprehensive and systematic. The extent of detailed standards and criteria for use of the AMA are limited in order to accommodate the rapid evolution in operational risk management practices that the Committee expects to see over the coming years. The Committee intends to review progress in regard to operational risk approaches on an ongoing basis. It has been strongly encouraged by the advances made at those banks that have been developing operational risk frameworks consistent with the spirit of the AMA. Management at these banking organisations has concluded that it is possible to develop a flexible and comprehensive approach to operational risk measurement within their firms. Internationally active banks and banks with significant operational risk exposure (for example, specialised processing banks) are expected to adopt over time the more risk sensitive AMA. Basel II contains two simpler approaches to operational risk: the basic indicator and the standardised approach, which are targeted to banks with less significant operational risk exposures. In general terms, the basic

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

indicator and standardized approaches require banks to hold capital for operational risk equal to a fixed percentage of a specified risk measure. In the basic indicator approach, the measure is a bank¶s average annual gross income over the previous three years. This average, multiplied by a factor of 0.15 set by the Committee, produces the capital requirement. As a point of entry for the capital calculation, there are no specific criteria for use of the basic indicator approach. Nevertheless banks using this approach are encouraged to comply with the Committee¶s guidance on sound practices for the management and supervision of operational risk, which was released in February 2003. In the standardised approach, gross income again serves as a proxy for the scale of a bank¶s business operations and thus the likely scale of the related operational risk exposure for a given business line. However, rather than calculate capital at the firm level as under the basic indicator approach, banks must calculate a capital requirement for each business line. This is determined by multiplying gross income by specific supervisory factors determined by the Committee. The total operational risk capital requirement for a banking organisation is the summation of the regulatory capital requirements across all of its business lines. As a condition for use of the standardised approach, it is important for banks to have adequate operational risk systems that comply with the minimum criteria outlined in CP3. Banks using the basic indicator or standardised approaches to operational risk are not permitted to recognise the risk mitigating impact of insurance. As discussed in Part II of this overview paper, banks using the AMA are permitted to do so subject to certain conditions.

Pillar 2: Supervisory review & Pillar 3: Market discipline Supervisory review
The second pillar of the New Accord is based on a series of guiding principles, all of which point to the need for banks to assess their capital adequacy positions relative to their overall risks, and for supervisors to review and take appropriate actions in response to those assessments. These elements are increasingly seen as necessary for effective management of banking organisations and for effective banking supervision, respectively. Feedback received from the industry and the Committee¶s own work has emphasised the importance of the supervisory review process. Judgements of risk and capital adequacy must be based on more than an assessment of whether a bank complies with minimum capital requirements. The inclusion of a supervisory review element in the New Accord, therefore, provides benefits through its emphasis on the need for strong risk assessment capabilities by banks and supervisors alike. Further, it is inevitable that a capital adequacy framework, even the more forward looking New Accord, will lag to some extent behind the changing risk profiles of complex banking organisations, particularly as they take advantage of newly available business opportunities. Accordingly, this heightens the importance of, and attention supervisors must pay to pillar two. The Committee has been working to update the pillar two guidance as it finalises other aspects of the new capital adequacy framework. One update is in relation to stress testing. The Committee believes it is important for banks adopting the IRB approach to credit risk to hold adequate capital to protect against adverse or uncertain economic conditions. Such banks will be required to perform a meaningfully conservative stress test of their own design with the aim of estimating the extent to which their IRB capital requirements could increase during a stress scenario. Banks and supervisors are to use the results of such tests as a means of ensuring that banks hold a sufficient capital buffer. To the extent there is a capital shortfall, supervisors may, for example, require a bank to reduce its risks so that existing capital resources are available to cover its minimum capital requirements plus the results of a recalculated stress test. Other refinements focus on banks¶ review of concentration risks, and on the treatment of residual risks that arise from the use of collateral, guarantees and credit derivatives. Further to the pillar one

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

treatment of securitisation, a supervisory review component has been developed, which is intended to provide banks with some insight into supervisory expectations for specific securitisation exposures. Some of the concepts addressed include significant risk transfer and considerations related to the use of call provisions and early amortisation features. Further, possible supervisory responses are outlined to address instances when it is determined that a bank has provided implicit (noncontractual) support to a securitisation structure. Market discipline The purpose of pillar three is to complement the minimum capital requirements of pillar one and the supervisory review process addressed in pillar two. The Committee has sought to encourage market discipline by developing a set of disclosure requirements that allow market participants to assess key information about a bank¶s risk profile and level of capitalisation. The Committee believes that public disclosure is particularly important with respect to the New Accord where reliance on internal methodologies will provide banks with greater discretion in determining their capital needs. By bringing greater market discipline to bear through enhanced disclosures, pillar three of the new capital framework can produce significant benefits in helping banks and supervisors to manage risk and improve stability.

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

CHAPTER 6

AN OVERVIEW OF ASSET QUALITY MANAGEMENT

Asset quality refers to the degree of financial strength and risk in a bank's assets, typically loans and investments. A comprehensive evaluation of asset quality is one of the most important components in assessing the current condition and future viability of the bank. The quality of the bank¶s assets impacts, in varying degrees, all components of a bank¶s financial performance. High levels of classified assets can have a negative impact on earnings through lower interest income, higher provisions to the loan loss reserve and increased administrative costs for managing and collecting these assets. Asset quality problems can diminish the liquidity inherent in the loan portfolio and have a negative impact on the adequacy of bank capital. Poor asset quality also reflects upon management¶s competence. As a consequence, it is important for the board to put in place policies to limit the bank¶s credit risk and to monitor the bank for compliance with policies. SIGNIFICANCE Asset quality is an important aspect of bank condition assessed during an examination. When examiners evaluate asset quality, they primarily look at the level of credit risk in the bank¶s assets and try to determine if borrowers will repay when their obligations are due to the bank. A considerable amount of examiner time is spent on this determination. Why is so much time and effort spent evaluating asset quality and identifying credit risk? Simply put, poor asset quality can:
y y y y

Suggest problems for management, customers, shareholders and regulators. Be an indicator of future charge-offs. Tend to identify poor managers and problem banks. Significantly affect earnings, capital and liquidity.

Asset quality is just one of several measurement tools used to determine the extent of a bank's credit risk exposure. Credit risk can be found in the following assets:
y y y y y

y

Loans and leases Investments Due from banks Other Real Estate Owned (OREO). For example, real estate acquired through foreclosure. Other assets: Suspense accounts, repossessed collateral (other than real estate), prepaid expenses, accounts receivable, accruals (including accrued interest receivable) and CINIP (cash items not in process of collection). Off-Balance-Sheet Items: o Letters of Credit ± standby, commercial o Unfunded Loan Commitments (firm) o Unused Committed Lines of Credit (without MAC clause) o Assets Sold with Recourse

The terms most often used when analyzing asset quality are:

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

y

y

y y

Past-due - when payment was not made on the expected date. This is further defined by the number of days the payment is late. A loan becomes past-due when it is 30 days delinquent. A payment could be 29 days late, but the loan still considered current. Nonaccrual loans - those loans on which interest is no longer being accrued. These are seriously delinquent loans that are 90 days past-due, are not well secured since they are not backed by good collateral and are not yet in collection. A loan may also be placed on nonaccrual when the collection of principal and/or interest is in doubt. This may occur well in advance of the loan being past-due by 90 days. Also, it is important to note that a loan may be 90 days past-due and not be considered nonaccrual. Charge-offs - charged against the Allowance for Loan and Lease Losses (ALLL) which reduces the value of the asset to zero (0) on the bank¶s books. Classifications ± assets that have some well-defined weakness, whose collection is in doubt, or are of such little value that they should be charged-off.

ASSESSMENT Like every other aspect of a bank¶s operation, directors have responsibility for keeping abreast of their bank¶s asset quality. Bank examination reports, internal and external loan review data and ongoing loan reports are key information sources in assessing a bank¶s asset quality and credit risk.

Asset Classifications During their review, examiners assess the inherent credit risk in a sample of a bank¶s interest bearing assets²loans and securities. An asset will be assigned either a pass or classified rating. Pass assets are those where there is a reasonable prospect for the bank to receive principal and interest according to the asset¶s contractual terms. Those assets not rated pass are designated as classified assets. All the bank regulatory agencies use the same asset classification categories. There are three adverse classification categories, each representing a different degree of the risk of nonpayment:
y y y

Substandard Doubtful Loss

A point to remember is that the categories are progressive: each of the categories has all of the characteristics of the previous one, plus additional factors. For example, substandard assets have some well-defined weakness that could lead to loss if action is not taken. In comparison, doubtful assets, a more serious problem classification, have some loss in them that cannot be determined at the time the evaluation is made. Substandard - Substandard assets have a well-defined weakness that may jeopardize collection of principal and interest. These weaknesses include inadequate net worth, paying capacity and collateral. There is a distinct possibility that the bank will sustain some loss if the deficiencies are not corrected. This does not mean that every classified asset has loss exposure. The loss exposure occurs in the aggregate of all substandard assets. In many cases, the loss may not appear for some time.

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

Doubtful - Doubtful assets have all the weaknesses of substandard assets, plus the characteristic that collection in full is highly questionable and unlikely. There will be some loss in the asset, but the amount is unknown at the time the asset is being reviewed. Typically, an asset will not be classified as doubtful at more than one examination. As a result, bank management should make every effort to determine the value of any collateral or how much they can reasonably expect to receive. Any remainder would then be charged-off. Loss - Assets classified as loss are considered to be uncollectible and of so little value that maintaining them as a bank asset is not warranted. If any portion were eventually repaid, it would be considered a recovery. Loss assets should be charged-off at the time they are determined to be uncollectible. Examination Ratios and Rating Guidelines Asset review is used by examiners to construct summary ratios that serve as a starting point for an overall assessment of a bank¶s asset quality rating. Two useful ratios that show the ability of bank capital and the allowance for loan and lease losses to absorb problem loans are the total and weighted classification ratios. The total classification ratio is the ratio of a bank's classified assets to its Tier 1 Capital plus reserves.
y y y

The calculation is Total Adversely Classified Items divided by Tier 1 Capital and ALLL. This ratio measures the volume of classified assets relative to the ³cushion´ of capital that may be used to absorb inherent losses in classified assets. Values for this ratio above 40 to 50 percent often represent less than satisfactory asset quality.

The Weighted Classification Ratio Another useful ratio is the weighted classification ratio, an asset quality measure used only by the Federal Reserve System. Other agencies, such as the FDIC and Office of the Comptroller of the Currency, only use the total classification ratio.
y y

y y

The ratio is Weighted Classifications (the sum of each category total multiplied by its weighting factor) divided by Tier 1 Capital and ALLL. The numerator for this ratio is the bank's classified assets, weighted by the severity of their classification. The weights used are 20 percent for loans classified substandard, 50 percent for loans classified doubtful and 100 percent for loans classified loss. This ratio measures the severity of classifications relative to capital and the ALLL. Weighted classification ratio values above 15 percent often represent unsatisfactory asset quality.

A bank with a large amount of loans that are classified as substandard will have a higher total classification ratio, but a smaller weighted ratio than a bank with more loans in the doubtful and loss categories.

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

Classification (by volume) Total of Substandard Assets Total of Doubtful Assets Total of Value Impaired Assets Total of Loss Assets Total Adversely Classified Items Divided by Tier 1 + ALLL = Total Classification Ratio

Category Weighting Factors Total of Substandard Assets x 20% Total of Doubtful Assets x 50% Total of Value Impaired Assets x 100% Total of Loss Assets x 100% Total Weighted Classifications Divided by Tier 1 + ALLL = Total Weighted Classification Ratio

A total classification ratio less than 40 percent and a weighted classification ratio less than 15 percent are often thought of as cutoff values for satisfactory asset quality. However, keeping ratios below these values will not necessarily result in a satisfactory asset rating for a bank. Factors such as a trend in problem assets, ability to satisfactorily administer the loan portfolio and management¶s ability to successfully work through problem loans are also taken into account in assessing asset quality. Loan Review Loan review information is another data source used to judge bank asset quality. Loan review is a bank¶s assessment of the inherent risk in its loan portfolio. This review may be done by the bank itself or by someone hired by the bank. Loans that pose normal credit risk receive a pass. Those that pose a greaterthan-normal credit risk receive a classified grade. Bank loan grading systems often have more pass and criticized loan grades than the system used by bank examiners. For instance, one survey indicated that loan grading systems of community banks on average had three pass grades and three nonpass grades. Some banks who answered the survey had 10 pass and 10 nonpass grades. Regardless of the number of grades, the information included in a bank¶s loan grading system must be translatable into the grades used by banking supervisors. As a result, internal and external loan review information can be used to assess bank asset quality and calculate the asset quality ratios used by the banking agencies during the interim period between bank examinations. Other Sources of Asset Quality Information Beside examination and loan review data, a summary picture of asset quality can be obtained from other sources. One particularly good information source is the Uniform Bank Performance Report (UBPR). Bank asset quality ratios can be found on pages 1, 8 and 8A. The ratios presented on these pages provide a preliminary view of asset quality. Two useful ratios to check in the UBPR are the past-due ratio and net losses to average total assets ratio. 1. The past-due ratio reflects all loans over 30 days past due (loans that are 30 to 89 days past due, plus loans that are 90 days or more past due, plus nonaccrual loans) as a percentage of total loans. Values approaching 4 percent may need further investigation with management. 2. Net losses to average assets. Net losses are loan charge-offs for the current period less recoveries of prior period charge-offs (charge-offs ± recoveries). Since some losses are an inevitable part of the banking business, it can be expected that a bank will experience some loan losses. However, a loss ratio (net losses/average total assets) greater than 1 percent indicates that losses may be becoming excessive. Consequently, you may want to work with management to investigate the reasons behind the losses and determine if corrective action is needed.

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

CHAPTER- 7
4.1 INTRODUCTION

CREDIT APPRAISAL PROCESS

Credit appraisal is a holistic exercise which starts from the time a prospective borrower walks into the branch and culminates in credit delivery and monitoring with the objective of ensuring and maintaining the quality of lending and managing credit risk within acceptable limits. There are two types of proposals that are received by the Bank for funds. The first types of proposals are for starting a new project or for setting up a new company, also known as project financing and the other proposals are for additional funds requirements (working capital). Financial requirements for Project Finance and Working Capital purposes are taken care of at the Credit Department. Companies that intend to seek credit facilities approach the bank. Primarily, credit is required for following purposes:1. Working capital finance 2. Term loan for mega projects 3. non fund based Limits Like Letter of Guarantee, Letter of Credit Prior to nationalization the Bank had a security centric approach for sanctioning the proposals i.e. the Bank sanctioned the proposal for credit facility to the company when it had security against the amount given. There are two types of securities, primary and collateral. The primary security is the asset created out of the Bank¶s finance. Collateral security refers to other assets owned by the company or its directors. Previously there were no regulatory issues or capital adequacy issues. But it was observed that during boom period many people who did not even had the knowledge about a particular industry jumped in and were interested for finance. Eventually such companies resulted to be failures. RBI norms for NonPerforming Assets (NPA) are very strict. Thus to avoid many of the accounts becoming NPAs the Bank changed its security centric approach.

The process of credit appraisal would begin with the selection of the proponent. It would involve appraising the background of the proponent/management, commercial, technical and financial appraisal. Appraisal of credit facilities would comprise two distinct segments: a) Appraising the acceptability of the customer b) Assessment of the customer¶s credit needs. The appraisal would be different in respect of : a) Personal loans for consumer durables, houses etc; b) Loans to tiny business enterprises; c) Loans to agriculturalists; and,

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

d) Credit facilities to firms, corporate and others for business/trade/industry. 4.1.1 Background of the proponent/management The identification of the borrower is done properly through scrutiny of his antecedents, experience, competence, integrity, initiative etc. This may be done by obtaining status reports from previous bankers or meaningful assessment of his dealings with the bank, if banking with it. In case of corporate, the management structure, the background of top management, needs to be scrutinized. The names of prospective borrowers/promoters should not appear in the list of defaulters published by RBI/ECGC etc or in any other list of undesirable customers. If so, care should be taken. To strengthen the credit appraisal further details of the status report received from another bank may be ascertained by the appraising officer by personally visiting his counterpart in the other bank remitting the report for a personal discussion. The gist of such a discussion may be recorded in a file and brought out in the proposal. KYC guidelines as framed by RBI and adopted by Bank are to be followed by the branches. In case of borrowers/promoters who have been identified as willful defaulters by banks and advised by RBI, there are certain penal provisions applicable. These are required to be complied without fail by branches. 4.1.2 Commercial appraisal The nature of the product, demand for the same, the existing and perceived competition in the segment, ability of the proponents to withstand the same, government policies governing the industry, etc. need to be taken into consideration. The trade practices in respect of the product should be thoroughly understood 4.1.3 Technical appraisal Technical appraisal of the project needs to be carried out for industrial activity proposals beyond the cutoff limits prescribed from time to time. Such appraisal may be carried out in-house by technical officers working in Technical Appraisal Department/Technical Appraisal cells or officers having technical expertise for the same or by an outside agency as determined by the appropriate authority. Where technical appraisal is carried out by All India Financial Institutions. PSU Banks/other leading banks having expertise I the area and the same may be accepted for an appraisal purpose In case of service industry or preservation industry TEV study is not applicable unless the goods to be preserved require some change in their state through some industrial process. Exemptions from fresh techno- economic appraisal shall be available in the following categories:

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

a) Where appraisal has been carried out by all India financial institutions/ Banks and such FIs/Banks themselves would be taking up exposure. b) Where appraisal has been carried out by leader of WC consortium and the branch/sanctioning authority observing no serious differences with such appraisal. c) In case of AAA (LC1 to LC2 or equivalent) /AA (LC3 to 4 or equivalent) rated accounts with other banks, where our bank proposes to join the consortium and/or sanction limits under multiple banking arrangement for the existing activity of the company/firm, and the sanctioning authority decides not to insist for fresh TEV study. d) In case of well conducted existing accounts with credit rating of AAA (LC1 to LC2) and AA (LC3 to LC4) where only additional working capital limits are sought and diversification of the project is not proposed, and the sanctioning authority decides not to insist for fresh TEV study e) In case of well conducted existing accounts with credit rating of AAA (LC1 to LC2) and AA (LC3 to LC4)term loan requirements upto 25% of the working capital limits sanctioned, provided expansion is in the same product line and without change in technology, and the sanctioning authority decides not to insist for fresh TEV study f) Accounts involving re-structuring under CDR ± will be guided by super majority decision taken by CDR Empowered Group. A TEVS report shall remain valid for a period of one year from the date of the report, subject to there being no change in the scope of the project, beyond which it needs to be referred for re-appraisal. 4.1.4 Financial appraisal Apart from ascertaining the need based character of the limits requested for, the financial health of the proponents, ability to absorb unanticipated financial costs need to be looked into which would include scrutiny of the cost of the project, means of financing, financial projections etc. important performance indicators like profitability ratios, debt-equity ratio, debt service coverage ratio, break even point, profit/volume ratio, payback period, benefit cost ratio, internal rate of return, sensitivity analysis, etc. need to be within acceptable parameters for that industries/activities. Where higher limits are considered, detailed analysis of the financial health would be made and the following ratios computed:i. ii. iii. Current ratio Total outside liabilities/equity ratio Profit before interest and taxes/interest ratio

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

iv. v. vi.

Profit before tax/ net sales ratio Inventory + receivables/Sales ratio DSCR if the borrower enjoys any term loan with any bank/ FI even if no TL is being considered by the bank

a) Current Ratio:-

This ratio indicates the solvency of the company to meet the liabilities, which are due for payment within the next 12 months from out of the current assets. But the ratio may not reflect the true picture about the solvency of the company as the realisable value of the current assets in the event of the forced sale cannot be determined as against the current liabilities which are clearly quantified. The ratio is calculated based on the current assets and current liabilities as on the last date of the accounting year and it is quite possible that this can be easily managed even on the last date of the Balance Sheet by any corporate. As the assessment of working capital requirement is done based on the projected Balance Sheet keeping the audited Balance Sheet as a base , it is desirable for the lending agencies to relate this ratio with other operating ratios which give qualitative analysis on the cash management efficiency of the corporate.

b) Debt Equity Ratio(Total Outside Liabilities to Tangible Net Worth):-

This ratio is calculated by dividing the total liabilities of the company with the tangible net worth of the company. This ratio reflects the financial soundness and the solvency of the corporate. Lower the ratio indicates the high degree of solvency and higher the ratio indicates the over extended financial position of the company. Normally, the Bankers feel comfortable as long as this ratio does not go beyond 3:1 for any corporate.

c) Funded Debt Ratio (Total Outside Term Liabilities to Tangible Net Worth):-

This ratio is calculated by dividing the long term loans with the tangible net worth of the company. The ratio signifies the financial soundness of the corporate. Lower the ratio indicates the high solvency and higher the ratio indicates high debt gearing of the corporate. Mostly, the term lending institutions use this ratio as a yardstick for the purpose of appraisal of the term loan requirements of the corporate. Normally, the term lending institutions insist on the corporate to maintain a ratio of 2:1 as a benchmark for any project finance. d) Debt Service Coverage Ratio (DSCR):-

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

This ratio is calculated by dividing the cash accruals with the term loan obligations, which falls due during the accounting period. This ratio will enable the term lending institutions to evaluate the viability of the proposal and determine the period of the term loan and also to fix up a suitable repayment schedule depending on the cash accruals during the tenor of the term loan. Normally, the minimum average DSCR of 1.5:1 is considered desirable while considering the term loans to any corporate. Normally, Current Ratio and the Debt Equity Ratio are relied for the 'Working Capital Assessment' and the Funded Debt Ratio and Debt Service Coverage Ratio are relied for the 'Project Appraisals'. While these ratios are quite useful in judging the financial soundness as well as the short term and medium term solvency of any corporate, it is equally expedient on the part of the lending agencies to rely more on certain other Balance Sheet and operating ratios which will reflect more transparency on the ability/efficiency of the corporate in the funds management. e) Capacity utilisation to installed capacity Ratio :This ratio will indicate the following:y y Extent of the capacity utilisation. Whether the growth in sales is on account of increase in the production or increase in the selling price per unit of production or increase in the production and decrease in the selling price per unit of production etc. It is possible that the company can always maintain the growth in sales not be increase in the volume of production but mere increase in the selling price per unit of production also. y Reason for decrease/stagnation in the production in terms of quantity can be ascertained like fall in demand, introduction of new substitutes in the market by its competitors, production bottlenecks, labour problems etc. y Future capacity expansion can always be subjected to a closer scrutiny in the event of increase in the fixed assets being reflected in the CMA. f) Net Block to Long Term Debt Ratio:In most of the Working Capital Advances, there is a practice of stipulating second charge on the fixed assets of the company where the same are charged to the term lending institutions. The above ratio will indicate the asset coverage ratio for the term lenders which in turn will indicate the cushion available for the working capital bankers also being the second charge holders. Further, this ratio will also highlight the any

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

investment made in the fixed assets for expansion/diversification and redemption/rescheduling of long term debts depending on the increase/decrease in the ratio on an ongoing basis. g) Inventory and Receivables to Total Current Assets Ratio:This ratio will indicate the extent of funds that are deployed in the form of production linked assets like inventory and receivables. Notwithstanding the fact that the corporate has brought in the required margin on the total current assets as per the assessment made in the CMA, the bankers always regulate the drawings in the cash credit account based on the fully paid stock declared in the stock statement less margin to arrive at the drawing power. Normally, the carry of inventory is influenced by the level of activity/availability of the raw material and the receivables depending on the trade practices/supply and demand. At the same time any unreasonable level of carry of inventory and receivables are not desirable, as it would unnecessarily block the working capital resulting into cash flow problems. In any given situation, it is always comfortable for the working capital bankers if the ratio indicates sufficient cushion for the drawings in the working capital limits as otherwise the working capital limits will throw irregularity for want of adequate level of inventory and receivables. Further, no yardstick can be fixed for carry of inventory and receivables and the other current assets which should be normally based on the past trend and depending on the various other factors like production cycle, availability of raw materials, transit time for the procurement of the raw materials, the trade practices with regard to availability of credit in the market and collection of receivables etc. However, any abnormal increase/decrease in the composition of current assets (whether inventory and receivables or other current assets) should attract closer scrutiny by the lenders. h) Closing stock of Raw Materials to Raw Materials Consumed Ratio:This ratio will compare the extent of raw materials holding as closing stock with reference to the raw materials consumed during the accounting year. The ratio will indicate how many times the raw materials have been turned over during the accounting period. By multiplying the ratio with 365 days, the holding period comes. If the holding period is less, it will contribute to lowering the net operating cycle. There cannot be any bench marking of the same. It varies from industry to industry and again within the industry, unit to unit depending upon the competence of the person responsible for the business.

i) Total Assets (net of intangibles) to Net Worth Ratio : This ratio will indicate the extent to which the owned funds are invested in building up the assets of the corporate. A low ratio indicates the lesser dependence on the outside borrowings and plough back of cash accruals into the system. A high ratio indicates the increased dependence on the outside borrowings to run

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

the business. This will indicate the prudence of the management in conserving the internal cash generation for building up the assets of the company.

j) Cost of Production to Net Sales Ratio:This ratio will indicate the operating efficiency of the corporate and the increasing ratio will indicate the inability of the corporate to pass on the rising cost of inputs to the end users of the product. This will indicate the falling/rising profit margin of a corporate, which will put the lenders on guard while making further financial commitments to the corporate.

k)Interest to Total Borrowings (including Sundry Creditors):This ratio will indicate the average cost of the funds borrowed by the company to run its business. This will enable the lender to determine the rate at which the corporate is borrowing from outside sources. High ratio indicates the desperate attempt of the borrower to manage its funds requirement by resorting to high cost borrowings, which will have direct impact on the bottom line of the corporate.

l) Net Sales to Total Current Assets Ratio :This ratio will indicate the number of times the company has been able to turnover the total working capital employed by the company. Normally, if the ratio settles between 4 and 8, it can be inferred that there is a healthy turnover in the working capital. If the ratio goes beyond 8, there is a possibility of the corporate indulging in over trading. m) Net Sales to Bank Borrowings Ratio :This ratio will indicate whether the increase in the Bank Borrowings is proportionate to the increase in the sales or not. If the corporate is not able to reach the level of activity as envisaged at the time of appraisal of the working capital limits and avails the limits assessed to the full extent or beyond the limits assessed, it should put the lenders on guard about the possible diversion of funds. This ratio can be used to ascertain the cause of such action and refrain the corporate from indulging in such diversions.

n) Interest Coverage Ratio (PBIT/Interest) :This ratio will indicate the ability of the corporate to service the interest on the loan taken from the lenders. If the ratio is increasing, it gives an indication that corporate is generating sufficient profit to service the interest on the loans borrowed. It will increase the comfort level of the lenders in taking higher exposure to the corporate.

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

o) Net Profit Margin ( Net Profit i.e. PBT/Net Sales) : This ratio will indicate the profitability of the corporate in relation to the volume of the sales achieved. Even though the profit of the corporate in absolute terms may be increasing but in terms of the percentage to sales it may be shrinking. This ratio will reflect whether the corporate is able to maintain the profitability in relation to the growth in the sales.

4.2 PRE-SANCTION APPRAISAL AND POST SANCTION SUPERVISION

Effectiveness of pre-sanction appraisal and post-sanction follow-up system in a bank can be gauged from the level of NPAs in its credit portfolio. Both the systems are of great significance particularly in the present scenario when the economy is globalizing and financial reforms are taking place, thereby exposing the bank to greater credit related risks. Such risks may include business industry outlook, financials, interest, quality of management, etc. a sound system helps banks to identify and sanction loan proposals that rae technically, financially, commercially and economically sound.

4.2.1 Pre-sanction appraisal of projects

A project report is a document which provides information about the proposed activity-product/service to be undertaken both in terms of quantity and value, process of manufacture, technology to be used, type of raw materials and machinery required and their supply position. The project report also provides information about the demand and supply position of the product, profitability projections, funds flow statements, schedule of repayment of the bank loan and important ratios. In addition to this it provides position of availability of licences, permissions if any required from the government agencies, local/international market conditions and environmental factors having influence on the project for successful implementation of any project the background, experience, qualification of

entrepreneurs/promoters also matter.

The various aspects which should be examined while appraising any project are discussed as under: 1. Economic and Financial Appraisal The aspects need to be analysed under this head should include cost of the project and means of financing, cost of production, break-even analysis, balance sheet and profitability projections, funds flow statements (i) Cost of project

The major cost components of any project can be grouped under the following heads:

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

y y

Land and building including transfer, registration, development and construction charges Plant and machinery, equipment for auxiliary services including sales tax, transportation, insurance, duty, foundation, power, etc.

y y

Office equipments, furniture/fixtures, lighting and other accessories etc. Consultancy and know-how fees payable to foreign collaborators or consultants who re imparting the know-how

y

Annual recurring royalty payment is not reflected under this head but is accounted for under profitability

y

Preliminary expanses that also include cost of incorporation of the company, its registration, preparation of feasibility report, market surveys etc.

y

Pre-operative expenses incurred, such as, salary, travelling, insurance, startup expenses, mortgage expenses etc. incurred before starting of commercial production

y

Capital issue expenses in case of companies which are raising funds by issue of capital to public. Such expenses may include brokerage and commission, advertisement, printing, stationary etc.

y (ii) y y

Provision for contingencies to meet any unforeseen expenses Means of finance

The cost of project can be financed through the following means/sources: Capital brought in by the promoters and shareholders in the form of equity/debentures Unsecured long-term loans and deposits raised from friends and relatives to remain in business till repayment of bank¶s loans y y Term loans from institutions/banks which are repayable over a period of time Deferred term credits by suppliers of plant/machinery, payable in installments over a period of time y Raising funds through Euro-issues, foreign currency loans, premium on capital issues, etc. which are sometimes comparatively cheaper means of finance y Subsidies and development loans provided by the central/state government in notified backward districts to attract entrepreneurs (iii) Profitability projections

The profitability projections should be prepared based on assumptions which are realistic ± neither optimistic nor pessimistic. Projections are worked out for a period covering the repayment of loans. The appraisal of the projections should cover scrutiny of various items of revenue and cost to ensure that these are achievable. While preparing profitability projections, the past trends

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

of performance in industry and other environmental factors influencing the cost and revenue items should also be considered objectively. (iv) Break-Even Analysis

Analysis of break-even point of a business enterprise would help in knowing the level of output or sales at which would break-even, i.e. there is neither profit nor loss. The break-even analysis can help in making vital decisions relating to fixation of selling price, make or buy decision, maximizing production of the item giving higher contribution etc. further, the break-even analysis can also help in understanding impact of important cost elements, such as, power, raw materials, labor etc. and optimizing product-mix to improve project profitability. (v) Fund-Flow Statement

A fund-flow statement is often described as a ³working capital flow´ statement. It is derived by comparing the balance sheets on two specified dates and finding out the net changes in the various items appearing in the balance sheets. A critical analysis of the statement shows the various changes in sources and applications of funds and to ultimately provide the position of net funds available with the business for repayment of the loans. (vi) Balance sheet projections

Study of projected balance sheet statements provides the position of assets and liabilities of a unit at a particular time. An appraisal of the projected balance sheet data would reveal whether the concern is healthy, growing, and has a promising future or is stagnating. (vii) Financial ratios

While analyzing the financial aspects of project, it would be advisable to analyse the important financial ratios over a period of time as it would tell us a lot about a unit¶s liquidity position, management¶s stake in the business capacity to service the debts, etc. the financial ratios which are considered important may include debt-service coverage ratio, debt-equity ratio, current ratio, net profit to sales ratio, etc. But financial analysis has certain limitations and it does not disclose some of the following critical factors: y y y y y y Managerial competence Technological competence Turnover of people Obsolescence of technology Competition Marketing

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

Thus the above aspects are also considered while appraising a project to make the appraisal activity more meaningful. 2. Appraisal of market demand and potential The market demand and potential need to be examined for each product item after taking into account the demand/supply position, availability of substitutes, selling price, discount structure, arrangement for after sales services, etc. the main aspects to be critically analysed under this head may include the following: y size of market for the product(s) both local and export based on present/expected demand and supply position y Position of competitors indicating the levels at which they are operating and as to how they are performing in terms of sales and profit. y Buy-back arrangement under the foreign collaborations, if any, and for what quantity, price and period y Selling price with complete break-up i.e. whole-sale, retail, discount structure, credit proposed to be offered etc. y Analysis of import and export and the government policies having influence on the project. y Future demand for the product(s) based on reports published in important journals, newspapers and views expressed by the government and trade association, etc. 3. Appraisal of Technical aspects The appraisal of technical aspects of a project should cover the technology to be used and how far it is successful. The important aspects requiring examination should cover the following: y Product(s) proposed to be manufactured or services rendered in terms of quantity, value and their application y Location of unit indicating advantages and disadvantages, availability of infrastructural facilities, concessions available from the government in the area, etc. y Size of the land and building and whether open and covered area is enough for present activity and for future expansion. y Availability of technology and process of manufacture and whether the same has been subjected to frequent changes in the past y Capacity of the plant/machinery, price, market report on the suppliers credentials and the on the performance of the machines.

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

y

Specifications for raw material needed, sources of supply, availability position, transportation costs, etc.

y

Arrangement made for inspection at intermediate and final stages of production, equipment needed for ensuring quality.

y

Availability of licenses and clearances, if any, required from the central/state governments and other agencies for setting up of such a unit.

It is generally seen that the new promoter(s) make heavy and disproportionate investments in fixed assets like land/building, plant/machinery, etc. which results in uneconomic working due to heavy interest burden on such investments if these remain under-utilized. At times adequate provision for funds is not made to take care of normal cost overruns which can even result in failure of the project. A proper technical appraisal can help in successful implementation of the project. 4. Appraisal of Management and Organisation of Project The identification of the borrower needs to be done properly through scrutiny of his antecedents, experience, competence, integrity, initiative etc. this may be done by obtaining status reports from previous bankers or meaningful assessment of his dealings with the bank, if banking with it. In case of corporate, the management structure, the background of top management, needs to be scrutinized. The names of prospective borrowers/promoters should not appear in the list of defaulters published by RBI/ECGC etc or in any other list of undesirable customers. If so, care should be taken. To strengthen the credit appraisal further details of the status report received from another bank may be ascertained by the appraising officer by personally visiting his counterpart in the other bank remitting the report for a personal discussion. The gist of such a discussion may be recorded in a file and brought out in the proposal. KYC guidelines as framed by RBI and adopted by Bank are to be followed by the branches. Willful defaulters In case of borrowers/promoters who have been identified as willful defaulters by banks and advised by RBI, there are certain penal provisions applicable. These are required to be complied without fail by branches. 4.2.2 Post-Sanction Supervision And Follow-Up Post sanction supervision and follow-up of loan accounts in banks has assumed a lot of significance as it helps in keeping a close watch on their performance and for initiating timely corrective action. Main objective of the post-sanction supervision is to ensure that the project financed is successfully implemented. Some of the important goals of monitoring are as under:

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

1. Periodical monitoring of the actual performance of assisted constituents vis-à-vis projections accepted at the time of appraisal of credit facilities viz. Sales, operating Profits, Inventory and Debtor levels, Cash Flow etc. 2. Identifying and evaluating temporary / critical aberrations coming in the way of smooth functioning of the assisted company (ies) for timely restructuring. 3. Interacting regularly with the borrowers (and guarantors) through timely inspection in order to ascertain. y y Borrower¶s (management) stake and interest in the day to day business operations The production level, inventory level, trend of manufacturing/ sales, labor problems, maintenance of production units and market reports and other related issues. y As to whether funds invested in business are adequately protected and whether day to day problems, if any, facing the business are resolved satisfactorily. y And understand the financial problems of the assisted companies without delay and to assist on regular or ad-hoc basis after evaluating the same on merits. y Whether there are any impediments in timely service of interest, repayment of installments due to Bank y y As to whether the Bank¶s funds are put to productive use As to whether there is any threat to the recovery of Bank¶s funds invested in the business and to initiate timely, appropriate recovery measures in potentially non-performing assets. The system adopted by the bank for follow-up of the loan accounts having working capital limits of Rs.50 lakhs and above is as advised by the Reserve Bank of India. The system is popularly known as Quarterly Information System (QIS) under which the following three formats have been prescribed for collecting information.

Form-1(quarterly)

Projected level of sales, production, current assets and current liabilities

Form-2(quarterly)

Comparison of projection of the previous quarter with the actual figures in respect of production, sales and position of current assets and current liabilities

Form-3(half-yearly)

Operational and financial information in respect of sales, cost of goods sold, profit/loss, position with regard to inflow and outflow of funds.

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

CHAPTER-8

ASSESSMENT OF WORKING CAPITAL REQUIREMENT

A unit needs working capital funds mainly to carry current assets required for its operations. Inadequate levels of working capital may result in under-utilisation of capacity and serious financial difficulties. Similarly, excessive levels may lead to unproductive use of credit and unnecessary interest burden on the unit. Consistent with the policy of liberalisation, greater operational freedom has been provided to banks in dispensation of credit. Reserve Bank has decided in April, 1997 to withdraw the prescription in regard to assessment of working capital needs based on the concept of MPBF enunciated by Tandon Study Group.Banks were given freedom to evolve appropriate system for assessing the working capital needs of borrowers within the existing prudential guidelines and exposure norms. Banks were also advised to lay down through their Boards, transparent policy and guidelines for credit dispensation in respect of each broad category of economic activity. Accordingly, our Bank came out with following operational guidelines in April 1998.

In case of accounts where we are either the leaders of consortium or the borrower is banking with us solely or under multiple Banking arrangements, we may adopt any one of the methods viz.
y y y

Turnover Method; MPBF method based on inventory and receivables holding levels; Cash Budget Method;

on the criteria detailed below. In case of accounts where we are members of the consortium, we shall have to fall in line with the decision of the leader/consortium.

The method of assessment to be adopted may be determined by the total working capital (fund based) requirements of the borrowers. They may be broadly bifurcated into borrowers having working capital limits (fund based) upto Rs.5.00 crores and those having more than Rs.5.00 crores from the banking system. D/A L/C limits should be treated as a part of fund based limits for the purpose of assessment.

5.1 TURNOVER METHOD:
This is applicable to all borrowers enjoying fund-based working capital credit limits upto and inclusive of Rs.5.00 crores with the banking system. Under this method, the working capital requirements of the borrower will be computed at 25% of the projected annual turnover of which atleast four-fifth i.e. 20% of the projected turnover should be provided by the bank as working capital finance and balance one-fifth i.e. 5% of the projected annual turnover should be contributed by the borrower, as his margin towards working capital. These guidelines have been formulated assuming average production/business cycle of 3 months. In reality, this cycle could be longer or shorter. It is,
www.final-yearprojects.co.cc www.troubleshoot4free.com/fyp/

therefore, necessary to assess the proponent's working capital requirements on the basis of traditional approach of production/business cycle and consider limits in excess of 20% of the projected annual turnover wherever warranted due to longer cycle, keeping a minimum margin of one fifth of the working capital requirements. On the other hand, in case of shorter production/business cycle, working capital limits at 20% of the projected annual turnover should be sanctioned and actual drawing should be allowed on the basis of drawing power after excluding unpaid stocks/stocks acquired under D/A L/C.

Loans and advances to Small Scale Industries
SSI units having working capital limits of up to Rs 5 crore from the banking system are to be provided working capital finance computed on the basis of 20 percent of their projected annual turnover. The banks should adopt the simplified procedure in respect of all SSI units (new as well as existing).

Export Credit
Export Credit is a priority area, where we have in place a system of assessment of the working capital requirements of exporters for 2 years i.e. for the current year and next year.

Trade Credit
At present the above methods of assessments are followed for assessment of the working capital requirements of Traders including Merchant Exporters. The turnover method of assessment presupposed a turnover cycle of 3 months. This may not be applicable to traders where the cycle is of a much shorter period. In such cases 20% of turnover need not be considered as the minimum to be sanctioned for working capital limits. The sanctioning authority may make a judicious estimate on the basis of CMA forms submitted by the borrower.

Checklist of Mandatory Information A)Working Capital facilities of less than Rs.10.00 lacs:y

Audited/Unaudited Financial statements for last 3 years. In their absence, data on performance during past 3 years like sales, gross profit, net profit etc. may be accepted.

y

Copies of sales tax returns/declarations/assessment orders, wherever applicable, in support of performance data;

y

Projections of sales gross profit and net profit for the current year.

B)Working Capital facilities of Rs.10.00 lacs and above upto and inclusive of Rs.1.00 crores:y y

Audited Financial statements ; Operating Statement in Form No.II (Annexure A-1 or E-1 of the CMA data);

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

y

Balance sheet Analysis in Form No.III (Annexure A-2 or E-2 of the CMA data).

C) Working capital facilities upto Rs.5.00 crore (SME)
y y y

Audited balance sheet Sales projection CMA data to be taken only in case of operating cycle beyond 90 days and incase of doubt.

D) Working capital facilities of Rs. 5.00 crore and above
y y y

Audited Profit & Loss Account and Balance Sheets Full set of CMA data forms Cash flow statement.

The projections of turnover should be critically examined on the basis of past performance and future plans for expansion/diversification, if any. Based on realistic projections of the turnover, working capital limits may be considered upto 20% thereof. The borrower should bring minimum 5% of the projected turnover so assessed as his own contribution towards margin money. Borrowers having working capital limits (fund based) above Rs.5.00 crores from the banking system may be given the option to choose between (a) the existing system of lending based on holding level of inventory / receivables and (b) the Cash Budget System of lending. The decision to allow the borrower to switch over to Cash Budget Systems of assessment would rest with the Bank.

5.2 MAXIMUM PERMISSIBLE BANK FINANCE METHOD :
The method of lending on the basis of level of inventory and receivables has been in existence for the past two decades. At present, Banks have the freedom to determine the level of holding for inventory and receivables for various industries. We should continue to accept those levels which are in conformity with the past levels of holding of the borrower (on the basis of actual for last 2 years) the industry level in general as may be advised by RBI from time to time and level of activity. Deviations in this regard may be permitted depending upon merits of each case by the sanctioning authority. The existing CMA data forms for assessment of limits and QIS returns for monitoring of the accounts for borrowers, who choose this method of assessment, are to be used.

5.3 CASH BUDGET SYSTEM
Customers enjoying working capital limits in excess of Rs.5.00 crores will be given option to adopt the Cash Budgeting Method at the discretion of the Bank. In case such borrowers choose the Cash Budget System of lending, they have to satisfy the Bank that they have necessary infrastructure in place to submit the required information periodically in time. The scope of internal MIS should be

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

satisfactory and commensurate with the level of operations. The borrower must have a finance professional and computerised environment. Under this method, the peak level cash deficit will be the level of total working capital finance to be extended to the borrower by the Banking System. The peak level cash deficit will be ascertained from the Projected Cash Budget Statement submitted by the borrower. The cash budget statement would comprise of projected receipts and payments for the next 12 months on account of: i. ii. iii. iv.

Business Operations; Non-business Operations; Cash flow from capital accounts; and Sundry items.

Checklist of mandatory information: i) Projected Cash Budget Statement(Annual); ii) Projected Cash flow for next quarter (at least a week in advance); iii) Quarterly summary of cash book pertaining to previous quarter(actuals) certified by a Chartered Accountant within 2 weeks of the close of the quarter; iv) Monthly Select Operational Data.

Actual quarterly Cash Flow Statement duly certified by a Chartered Accountant should be compared with the Projected Cash Flow statement for the relevant quarter submitted by the borrower earlier. The borrower should properly explain any inconsistencies between the projected and actual cash flow. Where it is found that actual cash deficit is lower than projected cash deficit and yet the borrower has fully utilised the limits, it is likely that the borrower has not used the advance for approved purpose. Such cases should be handled with circumspection.

5.4 Working Capital Finance to Information Technology and software industry
Following the recommendations of the "National Task force on Information Technology and Software development" Reserve Bank has framed guidelines for extending working capital to the said industry. The banks are however free to modify the guidelines based on their own experience without reference to the Reserve Bank of India to achieve the purpose of the guidelines in letter and spirit. The salient features of these guidelines are set forth below:
y

The banks may consider sanction of working capital limits based on the track record of the promoters group affiliation, composition of the management team and their work experience as well as the infrastructure.

y

In the case of the borrowers with working capital limits of up to Rs 2 crore, assessment may be made at 20 percent of the projected turnover. However in other cases, the banks may consider assessment of MPBF on the basis of the monthly cash budget system. For the

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

borrowers enjoying working capital limits of Rs 10 crore and above from the banking system the guidelines regarding the loan system would be applicable.
y y

Banks can stipulate reasonable amount as promoters¶ contribution towards margin. Banks may obtain collateral security wherever available. First/ second charge on current assets if available may be obtained.

y

The rate of interest as prescribed for general category of borrowers may be levied. Concessional rate of interest as applicable to pre shipment/post shipment credit may be levied.

y

Banks may evolve tailor made follow up system for such advances. The banks could obtain quarterly statements of cash flows to monitor the operations. In case the sanction was not made on the basis of the cash budgets, they can devise a reporting system as they deem fit.

Exclusions: In case of seasonal industries viz. Sugar, Tea, Coffee etc. and Construction irrespective of the financial limits, the assessment is to be made on cash budget method. 5.5 Loan system for delivery of bank credit
In the case of borrowers with working capital limit of Rs 10 crore or above (fund based) from the banking system, the minimum level of loan component shall be 80 percent. If the borrower desires to avail of a higher percentage of loan component, this can be agreed to by the bank. In the case of borrowers with working capital limits of less than Rs 10 crore, banks may persuade them to go in for loan system by offering them an incentive in the form of a lower rat of interest on the loan e component as compared to the cash credit component. However the Board of the bank can decide on the method of lending to a particular industry and to exempt from the loan system of credit delivery.

5.6 Working Capital Demand Loan
Presently the actual 'Loan Component' is to be determined in consultation with the borrowers. The discretion to approve the proportion of the cash credit and Loan Component is left to the discretion of Zonal Manager and above. Any modification to the guidelines may be approved by the General Manager under advice of Credit Risk Monitoring Committee. Exemption of certain business activities from this requirement may be determined by the Board as directed by RBI. In order to in duce borrowers to avail of working capital facilities by way of WCDL we may offer lower rates of interest on WCDL as compared to the rate of interest applicable to the cash credit facilities. Further, at present , the minimum period permitted by the Bank is one month. In view of borrowers desiring to switch over to CP issue, FCL or short term rupee borrowings as cost saving measure, there could be demand for WCDL for minimum period of 7 days also. We may, therefore, consider WCDL for a minimum period of 7 days also.

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

5.6.1 Temporary/Adhoc/Additional limits/overlimits
In exceptional circumstances like natural calamities, fall in prices, change in government policies, cross border situation, other contingencies etc., the borrower may face liquidity crunch needing higher fund requirements than envisaged. Further, even in normal circumstances borrowers may face temporary liquidity constraints and require additional funds. In such cases we may consider requests from units for temporary over limits for periods not exceeding 30 days and ad hoc limits for periods not exceeding 90 days in excess of regular limits sanctioned to the borrower, as per the delegation in force. However, frequent requests for temporary/adhoc limits should be considered with circumspection . The necessity of ad hoc limits should not arise within 90 days of sanction of limits as this would reflect on our credit appraisal skills. Similary, temporary overdrafts should not be allowed within first six months of the opening of an account with us. However, in very emergent cases over limits not exceeding 30 days and ad hoc limits for not exceeding 90 days may be considered. It is to be understood that the ad hoc limit need not necessarily for the maximum period of 90 days and should be need based covering only the period during which there is a cash flow mismatch with the borrower. Even if the period of such overlimit or ad hoc limit is less than 90 days such instances should not exceed 6 times in a review year. If overlimits or ad hoc limits are to be considered against the above norms the same are required to be sanctioned by next higher authority not below the rank of a Zonal Manager under whose authority the regular limits along with the over/ad hoc limits would fall. In case of frequent request for over limits or ad hoc limits it is desirable to consider need based limits on a regular basis.

While considering a proposal for credit facilities, the borrower's financials are analysed to gauge his financial strength. For this purpose, the borrower's final accounts (both past and projected) are subjected to Ratio Analysis. Our Bank has put in place specific guidelines in respect of Debt Equity

Ratio and Current Ratio as under: Debt Equity Ratio : -At present, a Debt: Equity Ratio of 3:1 is treated as the acceptable norm.
Subordinated debts/funds with undertakings from the borrower to retain the same at the existing level during the currency of Bank,s finance may also be included as equity to arrive at debt equity ratio. Such subordinated funds, however, not to exceed borrower¶s 1st tier capital i.e. capital plus fress reserves less intangible assets.

Category

Debt-Equity Ratio

Tiny sector and SSI units with W/C limits upto Rs. 5 4:1 crores SSI units with W/C limits more than Rs. 5 crores/Trade 3:1

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

Medium Scale Large Scale

2:1 1:1

In case of infrastructure projects and capital goods manufacturer deviations may be permitted by the sanctioning authority taking into considerations the size of the project, total funds, outlay, gestation period, etc. The debt equity ratio may be calculated after bringing into the balance sheet such entries that sometimes shown as footnote like Bills Purchase/Bills Discounted. Any deviation from the bench mark accepted by the recommending/sanctioning authority be properly explained in the proposal. It is also to be noted here that the deviation is automatically factored in while deciding on the credit rating of the borrower.

Current Ratio: - At present the acceptable current ratio is treated as minimum 1.33:1 and sanctioning
authority approve of deviations having regard to other strengths of the proposal. We may continue with same for other than exports and companies availing Bills Discounting facility, etc. However, current ratio of 1.33:1 may be treated as a benchmark rather than minimum. The reasons for a ratio lower than or higher CR Ratio to this benchmark needs to be examined by the sanctioning authority. The financial management in general and liquidity management in particular needs to be examined if a lower CR is projected. The sanctioning authority may take a view regarding acceptability of the same or need for the borrower to infuse additional long term funds to improve the same. In case the current ratio is below the acceptable level as on the last date of financial year, the quarterly control statements may be scrutinised to arrive at the average current ratio of the firm. The borrowers may be advised to improve the ratio by injection of additional funds and/or ploughing back of profits. We may also insist that the borrower should not declare dividend without the prior permission of the Bank. The additional funds brought in/internal surpluses retained in the business should generall be y utilised for building up of assets that are current in nature. If the borrower does not improve the current ratio within the stipulated period, the sanctioning authority may consider obtaining additional tangible security/collateral security outside the business depending upon the merits of the case.

Cash Flow Analysis:
We need to examine the cash flow of the borrower to determine, whether the company generates enough cash from its own operations to cover all its expenses, including its interest and loan instalment payments. This will also enable detection of any aberrations in the cash flows of the unit.

Analysis of cash flow of the borrowers will also be a monitoring tool for detection of diversions/siphoning of funds by the borrower. Such diversion/siphoning of funds should be construed to occur if any funds borrowed from Banks are utilised for purposes unrelated to the operations of the

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

Borrower to the detriment of the financial health of the entity or of the Bank. The decision as to whether a particular instance amounts to siphoning of funds would have to be a judgment of the Bank based on objective facts and circumstances of the case. If such diversion/siphoning of funds is detected, the concerned authorities should immediately take steps as per the extant guidelines in force and as may be modified from time to time.

Investment in subsidiary and sister concerns:
Investment in subsidiary and sister concerns beyond a permissible level of 10% should be excluded from current assets to arrive at the current ratio Increase in such investment in case of borrowers having minimum current ratio of more than 1.33:1 may not be treated as diversion of funds. Investment in subsidiaries/sister concerns in excess of 60% of TNW shall generally require prior approval of the Bank. Such approvals may be granted by the sanctioning authority not below the rank of Zonal Manager. However, for proposals falling within the authority of M.Com./Board, such approval may be granted by the Chairman and Managing Director and in his absence by the Executive Director.

Further, investments in excess of 10% of the TNW of the borrower/proponent in associates and subsidiaries may be deducted from the TNW of the borrower/proponent for computing various ratios connected with net worth.

Commercial Paper:
The restoration of the working capital limits upon repayment of commercial paper may be done on the following lines:-

A. Issue of NOC
i) Banks have been given the freedom to determine the procedure to be adopted to provide for Commercial Paper (CP) issue by way of credit enhancement, stand-by facility etc. ii) Generally borrowers desirous of raising funds by way of CP route are required to obtain 'NOC' from their bankers from whom they are enjoying working capital credit facilities . 'NOC' for issue of CP may be given by the delegatee of the rank of Zonal Manager and above. In case of borrowers going in for issue of CP, their working capital limits may be proportionately reduced.

B. Restoration of limits

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

i)

In case of repayment of CPs with tenors of upto six months, we may allow automatic restoration of limits.

ii) Where the tenor of CP is more than 6 months but less than 12 months and the account is not due for review automatic restoration may be allowed provided,

a) account is otherwise in order; b) in consortium accounts other members of the consortium are also allowing such automatic restoration of limits and c) when the CP was issued, our limits were proportionately reduced. iii) Where the tenor of the CP is more than 6 months but less than 12 months and the account is due for review the borrowers may be advised that limits will be restored only if the account is reviewed before the maturity of the CP. Borrowers' cooperation may be sought to obtain all relevant information for the review and the account reviewed. Thereafter, limits may be restored upon repayment of CP.

With regard to placing funds in CP issue of a particular company, whether our borrower or not, this being an investment decision it may be done as per the investment policy of the Bank subject to credit exposure being in tune with policy norms and credit stipulations being strictly adhered to. Requests for purchase/negotiations of bills under LCs of Prime Banks if desired can be considered outside the MPBF of the borrowers and may also be considered for non borrowers also, subject to reporting to the regular bankers of the entity and observing the following: Beneficiary opens a current account with us  Regular bills facilities should be put in place and details advised to the principal banker of the customer.  In case of non-feasibility of this arrangement, the proceeds of IBN should be made payable to the account with the principal banker.  In case of new customers, the release of proceeds of DA bill should be done only after the bill in question is accepted by the LC opening bank.

5.7 RATES OF INTEREST ON ADVANCES
Bank¶s prime lending rate is 12% For advances exceeding Rs. 10 lakhs in large and corporate ± SBUs which will be effective from 01.01.2009 are as under: Rating Model Prime LC1 to LC2 Spread % over BPLR Nil Revised w.e.f. 01.01.2009 12.50%

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

AAA AA A B & others

LC1 to LC2 LC3 to LC4 LC5 & LC6 LC7 to LC10

1.00 2.00 3.25 3.50

13.50% 14.50% 15.75% 16.00%

Large/ Mid Corporate Credit Commercial Advances w.e.f. 01.01.2009

Limits upto Rs. 2 lakhs

Existing

Revised
12.50%

On working capital/ short term loans/ term loans ( 3 13.25% years and above) (At a rate not exceeding BPLR 12.50%)

II. Limits above Rs. 2 lakhs and upto Rs. 10 lakhs
In case of advances which are not covered under any other 1% over BPLR i.e. presently SBUs but falling under C &IC Sector, rate to be quoted is 13.50%

III. Limits above Rs. 10 lakhs (linked to Credit Rating of the borrower) :
Interest rates applicable to commercial advances for limits above Rs. 10 lakhs for (i) working capital including WCDL facilities and Short Term loans and (ii) Term loans of 3 years and above are given below:-

Rating Model

Spread

Rate of Interest (%) p.a.

Working Capital including WCDL & Short term loans (less than 3 years) Exist. Prime
LC1 to LC2 -13.25

Term loans of 3 yrs & above granted Prior to 1.10.2000 * On or after 1.10.2000

Rev.
12.50

Exist.
13.25

Rev.
12.50

Exist.
13.25

Rev.
12.50

AAA

LC1 to LC2

1.00

14.25

13.50

14.40

13.65

14.25

13.50

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

AA

LC3 to LC4

2.00

15.25

14.50

15.55

14.80

15.25

14.50

A

LC5 to LC6

3.25

16.50

15.75

16.75

16.00

16.50

15.75

B and Others

LC7 to LC10

3.50

16.75

16.00

16.75

16.00

16.75

16.00

*Term loans of 3 years and above granted prior to 1.10.2000 would attract the same spreads over BPLR as contracted i.e. 1.15%, 2.30% and 3.50%.

IV. Discounting of future cash flows/ Lease rentals : Existing
Landlords having lease agreements with MNCs/PSUs/Banks ± Public Sector, Private Sector, Foreign banks, Top rated Corporates Others ± BPLR + 1% 14.25% 13.50% BPLR i.e. 13.25%

Revised
BPLR i.e. 12.50%

V.Trade Finance (For select customers/transactions)
Card Rate i. Bills backed by LCs of Banks within the exposure limit given by Risk Mgmt Dept, HO

Existing

Revised

y y

Not exceeding 90 days 91 days to 180 days

14.00% 15.005

12.00%* 12.50%*

ii

Bills drawn by customers whose rating is ³AAA´
y y

Not exceeding 90 days 91 days to 180 days

14.50% --

12.25% 12.75%

iii

Customers with risk rating ³AA´ and above for bills

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

drawn on corporate and PSUs
y y

Not exceeding 90 days 91 days to 180 days

15.00% 15.50%

12.50% 13.00%

*effective from 22/12/2008

5.8 CMA DATA
In order to assess the requirements of working capital on the basis of production needs, it is necessary to get the data from the borrowers regarding their past/projected production, sales, cost of production, cost of sales, operating profit, etc. In order to ascertain the financial position of the borrowers and the amount of working capital needs to be financed by banks, it is necessary to call for the data from the borrowers regarding their net worth, long-term liabilities, current liabilities, fixed assets, current assets etc. A separate set of forms has been designed for traders and merchant exporters. The CMA data used for collecting various information/data from the borrowers cover following six forms:-

FORM - I.( Particulars of the existing/proposed limits from the banking system)
Particulars of the existing credit from the entire banking system as also the term loan facilities availed from the term lending institutions/banks are furnished in this form. Maximum and minimum utilisation of the limits during the last 12 months and outstanding balances as on a recent date are used for comparison with the limits now requested for.

FORM - II ( Operating Statement)
The data relating to gross sales, net sales, cost of raw materials, power and fuel, direct labour, depreciation, selling, general and administrative expenses, interest, etc., are furnished in this form. It also covers information on operating profit and net profit after deducting total expenditure from total sale proceeds.

FORM - III ( Analysis of Balance Sheet)
A complete analysis of various items of last two years¶ balance sheet, current year¶s estimates and following year¶s projections are given in this form. The details of current liabilities, term liabilities, net worth, current assets, fixed assets, other non-current assets, etc. are given in this form as per the classification accepted by the banks.

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

FORM - IV ( Comparative statement of current assets and current liabilities)
This form gives the details of various items of current assets and current liabilities as per the classification accepted by the banks. The figures given in this form should tally with the figures given in the Form II. In case of inventory (raw materials, consumable spares, stock-in-process and finished goods) receivables and sundry creditors, the holding/levels are given not only in absolute amounts but also in terms of months so that a comparative study may be done with the prescribed norms/past trends.

FORM - V ( Computation of Maximum Permissible Bank Finance )
On the basis of the details of the current assets and current liabilities given in Form-IV, MPBF is calculated in this form to find out the credit limits to be allowed to the borrowers.

FORM - VI ( Funds flow statement )
In this form, funds flow of long term sources and uses is given to indicate whether long-term funds are sufficient for meeting the long-term requirements. In addition to long-term sources and uses, increase/decrease in current assets is also indicated in this form.

CHECK LIST FOR VERIFICATION OF THE INFORMATION/DATA
The Bank verifies not only the arithmetical accuracy of the data furnished by the borrowers but also the logic behind various assumptions based on which the projections have been made. For this purpose, bank officials hold discussions with the borrowers on projected sales, level of operations, level of inventory, receivables etc. If necessary, a visit to the factory may also be made to have a clear idea of the products and processes. An illustrative check list is given below to indicate the various points to be examined by banks while finalising the credit requirements of the borrowers. I. UTILISATION OF EXISTING LIMITS i. It may be examined whether the limits have been adequately u tilised during the last 12 months. If not, the justification for further enhancement may be ascertained; ii. If the limits have been overdrawn, the reason may be ascertained. If the financial position of the unit is weak, steps for its improvement may be decided; iii. In the case of large borrowers enjoying aggregate fund based working capital limits of Rs.5.00 crores and above, it is necessary that limits sanctioned to borrowers against book debts should not be more than 75% of the aggregate limits sanctioned to them for financing their inland credit sales. Atleast 25% of the aggregate limits for financing inland credit sales should be provided by way of bills. If bill finance is lower than 25%, reasons for it may be

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

ascertained and necessary steps may be taken to develop bill culture in case of such borrowers. II. OPERATING STATEMENT i. It must be ensured that the annual projection of sales is reasonable in relation to the installed/licensed capacity, availability of inputs, environmental conditions, marketing prospects etc. ii. Projected sales should be in accordance with the past trend. In case it is over ambitious, the reasons should be ascertained to ensure that the projections are realistic and achievable. iii. If the unit is likely to implement a modernisation/expansion/diversification project, its impact on sales may be assessed. iv. If there is a declining trend in net sales, reasons thereof may be studied. In case an increase in limits is sought for, deeper study is required to be done. v. vi. The valuation of sales projections should be done on the current ruling prices. Valuation of various inputs constituting cost of sales in the projections should also be based on the current prices. vii. It should be ensured that the raw material consumption in relation to the cost of production is in keeping with the past trend. viii. It should be ensured that consumable stores and other items used in the process of manufacture are included in the raw materials. ix. It may be ascertained whether adequate depreciation has been provided. If the method of providing depreciation is changed, its impact on cost of production may be analysed. x. It may be ascertained whether selling, general and administrative expenses are in keeping with the past trend. If they show an abnormal increase in terms of the percentage to sales, the reasons therefore may be examined. xi. It may be examined whether the operating profit/profit before tax is increasing in line with the sales. If not, its reasons may be ascertained and analysed. xii. In the case of new units, the estimated production will be less than the installed capacity in the first year. The utilisation of the capacity may gradually increase in subsequent years. In the case of new units financed by term lending institutions, projections accepted by them regarding sales, raw materials, cost of production etc. may be taken as the basis for providing working capital. Banks and term lending institutions should have joint/simultaneous appraisal of the projects. III. ANALYSIS OF BALANCE SHEET i. The classification of current assets and current liabilities should be made as per the usual accepted approach of banks and the guidelines indicated in this regard by RBI.
www.final-yearprojects.co.cc www.troubleshoot4free.com/fyp/

ii.

It may be ascertained whether the levels of raw materials, stocks-in-process, finished goods and receivables are in conformity with the stipulated norms.

iii.

In case a unit which has been maintaining the inventory and receivables level lower than the norms, wants to raise the levels upto the norms, the reasons for the same may be examined.

iv.

The level of stock of spares may be estimated on the basis of the past experience. The projected stock of spares not exceeding 12 months consumption for imported items and 9 months consumption for indigenous items may be treated as current assets. In the case of fertilizer industry spares upto 12 months¶ consumption even for indigenous items may be treated as current assets. Spares held beyond these levels may be treated as non-current assets.

v.

Normally, the level of stock-in-process in terms of number of months related to the cost of production should not change. Its change may be justified only on account of change in production process/technology or as a result of production bottlenecks.

vi.

If the level of inventories is very high, the details of the age of inventory may be obtained to find out whether some of the items have become obsolete.

vii.

If the level of receivables is very high, the names of main buyers and the period of credit offered may be ascertained. It may be examined whether a portion of the receivables is likely to be irrevocable and if so, sufficient provision should be made for bad debts.

viii.

The details of inter-corporate investments and advances should be obtained and the reasons for not liquidating them may be examined.

ix.

Some of the borrowers may have a tendency to show the sundry creditors and other current liabilities in the projected figures at a reduced level. Although no norms have been fixed for sundry creditors, it is expected that the level of sundry creditors should be in accordance with the past trend and trade practices. Sundry creditors in terms of months¶ purchases may be verified with the past trend.

x.

If a sudden decline in the creditors for purchase is observed, month-wise data for the previous 12 months may be obtained and compared to check the reasonableness of the projection.

xi.

The borrowers should make adequate provision for taxes, dividends, statutory liabilities, etc., and if this has not been done, the extent of liabilities under these heads which have to be met within one year, should be classified as current liabilities.

xii. xiii.

It must be ensured that intangible assets over a period of time must be written off. It may be ascertained whether the net worth shows an increasing trend. If the trend shows a decline in net worth, its reasons may be ascertained.

xiv.

NWC should show an increasing trend from year to year. If not, reasons thereof should be ascertained.

xv.

In case date of Balance Sheet has been changed, the reasons for it should be ascertained to find out whether it has been done only for the purpose of showing a rosy picture.

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

xvi.

Information may be obtained about contingent liabilities to know their impact on the working of the unit.

IV.COMPUTATION OF MPBF i. Generally, MPBF should be calculated on the basis of Second Method of Lending. If the same has not been followed, reasons for it may be ascertained. ii. In the case of sick/weak units, MPBF may be calculated on the basis of the First Method of Lending. iii. If the Export bills limit is to be allowed over and above the permissible bank finance, the export bills should be excluded from the total sales and export receivables should also be excluded from the build-up of current assets. Separate limits may be given for export receivables even without keeping the 25% margin from the long term sources. iv. The third party outstation cheques/drafts purchase limits should be within the MPBF. However, at the request of the borrowers, such limits may be allowed to a small extent over and above the MPBF. v. It may be ascertained whether there is any co-relation between the projected increase in production /sales and increase in limits. If not, the reasons for it may be studied. V. FUND FLOW STATEMENT i. The long-term sources should be adequate to cover the long-term uses and leave a reasonable surplus for being employed as working capital. If long-term sources are less than the longterm uses, it may be inferred that short term funds are being diverted for purpose other than working capital needs. Such cases should be properly examined. ii. Increase in various items of inventory which is disproportionate to percentage rise in sales should be examined in detail. iii. The increase in short-term bank borrowings should be in line with the additional limits sought by the company over the previous years¶ level of availment. iv. The increase in short term bank borrowings should be matched suitably by the increase in current assets, particularly inventory and receivables. If it is not so, short term funds might be utilised for repayment of other current liabilities or be diverted for fixed assets or for intercorporate investments/advances. Such matters should be examined in detail. It may be noted that the above check list is not an end in itself. It only indicates the broad aspects to be examined by banks and helps in analysis and interpretation of the data furnished by the borrowers for taking judicious decisions.

5.9 Credit rating

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

Credit rating is a qualified assessment and formal evaluation of company¶s credit history and capability of repaying obligations. It measures the default probability of the borrower, and its ability to repay fully and timely its financial debt obligations. The main purpose of credit rating is to provide investors with comparable information on credit risk based on standard rating scale, regardless of specifics of companies, separate sector of the economy and country as a whole. Credit rating reflects financial, sectorial, operational, legal and organizational sides of companies, which characterize ability and willingness duly and in full amount to repay obligations. Credit rating models used by the Bank for assigning credit risk rating to various classes of borrowers which are as follows:

i.

Large Corporate Model (all credit exposures on domestic corporate including multiple banking, consortium advances ECBs and syndicated loans) (Fund/non-fund based limits Rs. 5 crores and above or turnover over Rs. 50 crores)

ii. iii. iv. v.

Mid-segment Model (Fund/non-fund based limits of Rs. 1 crore and above but not exceeding Rs. 5 crore and turnover below Rs. 50 crores) SBS (including SSI up to the limits specified) Model (Fund/non-fund based limits of Rs. 10 lacs and above but not exceeding Rs. 1 crore) Star Home Loan (Retail) including Star Mortgage Loan Star Personal Loan (Retail) including Star Holiday and Star Autofin.

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

CHAPTER 9

CASE STUDY :- XYZ PVT. LTD.

NOTE:- Personal Information of the company has not been disclosed as per the instructions of CANARA BANK. 1. Name of account 2. Constitution 3. Business/ Activity 4. Established in 5. Advance since
- XYZ Pvt Ltd. - Private Limited company - manufacturing of pre-laminated boards. - 03.11.2005 - 01.05.2008

EXISTING PROPOSED SOLE BANKING PRIORITY ± SME (Small Enterprise) BSR CODE-20201 Credit Risk Rating ± SME 4 (Moderate Risk)- ABS as on 31.03.2008 ASC CODE ASSET CLASSIFICATION (if Sub Std , Since when) S-2 STD
(As on 31.03.09)

S-2 STD

Whether appearing in SWL -Yes Rs. in Lacs PROPOSED FB NFB 918.70 391.00

EXPOSURE I.(a)BORROWER A) GENERALCR. B) INVESTMENT c) LEASING Total GROUP a) GENERAL CR b) INVESTMENT c) LEASING Total (c) GRAND TOTAL b) PROPOSAL RECEIVED AT I. Branch on II. CO on III. DT OF RECT OF CLARIFICATIONS IV. DT OF LAST SANCTION V. DT OF EXPIRY VI. EXTENSION UPTO VII. DT OF LAST REVIEW

EXISTING FB NFB 898.70 391.00

898.70 Nil

391.00 Nil

918.70 Nil

391.00 Nil

Nil 898.70 27.02.2009 06.03.2009 08.05.2009 18.05.2009 08.03.2008 07.03.2009 07.05.2009 04.12.2008

Nil Nil Nil 391.00 918.70 391.00 A RENEWAL OF LIMITS ˜ B RESTRUCTURING OF ˜ TL
˜

C PERMISSIONS D RATIFICATIONS

˜

E ALLOTMENT OF ASC F OTHERS

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

II. BORROWER'S PROFILE : 1.NAME OF THE BORROWER 2.NATURE OF ACTIVITY/ LINE OF THE BUSINESS 3.I) CONSTITUTION II) WHETHER LISTED Co 4.SECTOR 5.STANDING 6.BANKING WITH US SINCE 7.GROUP 8.IMPORTANT CHANGES IN THE MANAGEMENT IN THE RELEVANT PERIOD 9.LOCATION REGD. / ADMN. OFFICE WORKS

M/s. XYZ Pvt. Ltd. Mfg. of pre-laminated boards. Private Limited Company No Private 03.11.2005 01.05.2008 (Account takenover from PNB) Not a Recognized Group NIL

SCO 123, Industrial Area, Phase II, Chandigarh Mauja Rampur Jattan, Kala Amb, Nahan Road, Distt. Sirmour, Himachal Pradesh.

11.a. SHARE HOLDING PATTERN: (as on 20.02.09)
CATEGORY AMOUNT (Rs. In Lacs) % HOLDING i) Promoters & Associates 538.29 100 ii) FIs / Banks NIL NIL iii) Govt. NIL NIL iv) Corporate Bodies NIL NIL (Not referred above) v) Others NIL NIL TOTAL 538.29 100.00 * Including Share Application Money of Rs. 238.29 lacs.

11.b. TOP 10 SHARE HOLDERS WITH PERCENTAGE OF HOLDING
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. Name of Share Holder Mr. A Mr. B Mr. C Mr. D Mr. E Mr. F Mr. G Mr. H Mr. I Mr. J Mr. K TOTAL No. of shares Amount (as on 20.02.2009) % share holding

1912300 19123000 517500 5175000 149000 1490000 122500 1225000 95000 950000 95000 950000 65000 650000 24500 245000 9700 97000 7000 70000 2500 25000 30,00,000 3,00,00,000

63.74 17.25 4.97 4.08 3.17 3.17 2.17 0.82 0.32 0.23 0.08 100.00

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

11.c. PROFICIENCY OF DIRECTORS / MANAGEMENT :
Mr.A, M.D of the company, is a technocrat. He has past experience of working in Electronics Industry. In 1997, he entered into the field of trading of laminated board in the name of M/s. XYZ Sales Corporation with distributorship of ABC Products Ltd. At M/s XYZ Sales Corporation, the promoters were leading traders of laminated boards in Northern India. M/s XYZ Sales Corporation was distributors for :

MNO Industries Limited, Hyderabad PRQ Timber Products Limited, Orissa ASD Limited (Board Division)

Due to the above trading exposure XYZ Pvt Ltd has been able to build a good marketing network of dealers/distributors.

The Board of Directors is supported by well qualified and experienced production and marketing staff.

11.d. CORPORATE GOVERNANCE : Not a listed company. Hence, Not applicable.
11.e. LIST OF DIRECTORS AND THEIR NETWORTH NAME OF THE DIRECTORS
Mr. A Mr. B Mr. C Mr. D
(Rs. in Lacs)

Amount Date 63.74% 204.00 Undated 17.25% 180.00 01.12.2007 0.08% 135.00 Undated 0.82% 216.55 Undated Appointed as additional director w.e.f 01.04.09. Details called for.

SHARE HOLDING

NET WORTH

BASIS OF NET WORTH NF-589

.

12. IF ANY OF THE DIRECTORS OF THE COMPANY IS/ARE INTERESTED / ASSOCIATED WITH ANY DEFAULTING COMPANIES AS PER RBI DEFAULTERS LIST? IF SO: Name of the following Director is appearing in RBI's defaulter's list updated till March 2008 :
DIRECTOR COMPANY AMOUNT BANK

Mr. B

HARISH CHANDRA INDIA LTD113 A, KAMALANAGAR, DELHI-100 037

1062

KARNATAKA BANK LTD

None of the directors¶ name is appearing in Wilful defaulter list updated till June 2008.
www.final-yearprojects.co.cc www.troubleshoot4free.com/fyp/

The company, vide its letter dt. 04.03.08, has informed that Mr. B is not associated with any other firm / company as its promoter / Director. Besides, as per Affidavit dtd. 14.03.08, Mr. A has confirmed that he is not on the Board of any other company. 13. a) NAME OF THE GROUP ACCOUNTS, DEALING WITH US : NIL

b) NAME OF THE GROUP ACCOUNTS, NOT DEALING WITH US: Nil

III. PRESENT PROPOSAL : A. 1. TO PERMIT RENEWAL OF EXISTING LIMITS FOR A PERIOD OF ONE YEAR : (Rs. in Lacs)
NATURE OF LIMIT Fund Based OCC / ODBD Adhoc OCC/ODBD Total FB N F Based
ILC / FLC (DP) Sub-Limit ILC/FLC (DA) BG 450.00 (275.00) 41.00 36.26 25% 336.83 20%

EXISTING LIMITS AMOUNT Liability MARGIN 22.05.09
450.00 30.00 579.99* Stock ± 25% B. Db.40% 579.99

NATURE OF LIMIT Fund Based OCC / ODBD

PROPOSED LIMITS MARGIN

550.00

Stock - 25% B. Db ± 30%

480.00

Total FB N F Based
ILC / FLC (DP) # Sub-Limit ILC/FLC (DA) BG

550.00

350.00 (250.00) 41.00

20%

25%

Total NFB Grand Total

491.00 971.00

373.09 953.08

Total NFB Grand Total

491.00 941.00

* Convertibility of ILC/FLC limit of Rs. 100.00 lacs to OCC/ODBD limit permitt ed till tenability of limit * Adhoc OCC/ODBD of Rs. 30.00 lacs permitte d by the branch

# Inter-changeability of Rs. 100.00 lacs from ILC/FLC (DP/DA) to OCC/ODBD.

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

ii) DETAILS OF ST / ADHOC LIMITS GRANTED / OUTSTANDING. (Rs in lacs) Overdues PARTICULARS LIMIT PERMITTED PERIOD PRESENT SANCTIONED ON / BY PERMITTED LIABILITY * 22.05.09 TERM LOAN I 390.00 08/03/08 ± GM 4 x 2.50 318.70 Nil 4 x 8.00 4 x 22.00 4 x 30.00 4 x 29.08 A. 2. TO REVALIDATE SANCTION OF TERM LOAN OF RS. 50.00 LACS (permitted vide G.M. orders dtd. 08.03.08) ON FOLLOWING TERMS : Amount Purpose : Rs. 50.00 lacs (Fifty lacs only) Purchase & installation of 03 machineries valued Rs. 73.04 : lacs Disbursement During the year 2009-10 : Rs. 35.00 lacs During the year 2010-11 : Rs. 15.00 lacs : The payment to be made directly to suppliers / vendors against production of original invoices / bills. Margin : 31.54% (Rs. 73.04 lacs). Rate of Interest : BPLR + 1.50% = 13.50% p.a. (floating) Upfront Fee : As per extant guidelines. Repayment Entire loan (Existing & Proposed) to be recovered as per revised repayment schedule w.e.f. June¶ 2009, permitted : vide G.M. (Ag) orders dtd. 14.05.09. Interest to be paid as and when due. III b) PERMISSIONS/ OTHER PROPOSALS: 1. To permit one way interchangeability from ILC/FLC (DP/DA) limit to OCC/ODBD limit to the extent of Rs. 100.00 lacs, subject to availability of adequate DP. 2. To continue usance period for LC (DA) limit for 90 days (enhanced from 45 days, vide orders of G.M. dtd. 27.10.08 till tenability of limits), subject to 10% cut-back on all credits received in OCC/ODBD account and pooling the funds in an inoperative Current Account, to ensure LC commitments are met on due dates and there is no devolvement. 3. To permit reduction in book debt margin from exiting 40% to 30%. 4. To continue LC margin at 20% as against branch recommendation for reduction in margin upto 10%. 5. To confirm oral permission accorded by DGM on 17.04.09 for having permitted the branch to open ILC amounting to Rs. 60.00 lacs, subject to clearance of devolved LC liability till 22.04.09. (Devolved LC since cleared on 23.04.09).

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

6. To permit the branch to issue NOC in favour of DIC, HP for ceding pari-passu 1st charge on P & M of the company, for Rs. 30.00 lacs to enable the company to claim subsidy under Central Capital Investment Subsidy Scheme 2003. III c) SANCTION TERMS SOUGHT:
EXISTING
1. Stock statements/BD/MSOD statements 2. Periodicity 3. Due date for submission of: Stock statement / BD Statement 4. Periodicity of inspection of stocks i) Local / Outstation 5. LC period 6. Type of LC 7. Usance for LCs A) FLC B) ILC 8. Period of guarantee Detailed Monthly 7th of succeeding month Monthly 45 days Non revolving

PROPOSED
Detailed Monthly 7th of succeeding month Monthly 90 days Non revolving

9. Purpose of Guarantee

90 days 180 days 90 days 90 days Not to exceed 9 years (from the date of issue) including claim period For issuing guarantee in favour of DGFT or to be purchased and performance of export obligation as per DGFT guidelines.

9.

Others: 90 days 90 days

Age of Book Debts

III.d) RATIFICATION SOUGHT : NIL III.e) ALLOTMENT OF ASC : To continue ASC Code S ± 2 to the account. III.f) RATE OF INTEREST RECOMMENDED: For Working Capital Limits : i) Existing ROI ii) Applicable ROI as per H. O. 118/09 iii) Recommended ROI For Term Loan : (Existing & Proposed) i) Existing ROI BPLR ±1.25% = 10.75% p.a., floating. (Revised from BPLR ± 0.75% as per H. O. Cir. 347/08).

BPLR + 1.00% = 13.00% p.a., floating. (Revised from BPLR + 1.50% as per H. O. Cir. 347/08). BPLR + 1.25% = 13.25% p.a., floating. As per scoring pattern (Annexure VI) BPLR + 1.25% = 13.25% p.a., floating.

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

ii) Applicable ROI as per H. O. 118/09 iii) Recommended ROI IV. DETAILS OF SECURITIES:
DESCRIPTION

BPLR + 0.25% = 12.25% p.a., floating. As per scoring pattern (Annexure VII) BPLR + 0.25% = 12.25% p.a., floating. (Rs. in lacs)
VALUE (Basis of Valuation) Nature of Charge Held

For W/C Limits : 1.PRIME : Stocks Comprising Raw Stocks ± 537.35 Material, WIP, FG, Stores & Spares BD ± 537.79 and Book-debts
(As per S/S as on 31.03.09)

Hypothecation

For Term Loan : Factory Land & Building, P & M & w.d.v. ± 656.51 Misc. F.A. of the company (Present and Future)
(as per ABS as at 31.03.08) Factory L & B situated at Village Rampur Jattan, Tehsil Nahan, Distt. Land : Rs. 200.00 Sirmaur (H.P.), measuring 8 Bigha, standing in the name of the Company. Bld : Rs. 207.62 (As per valuation report dt. 03.03.08 of G. S. Chawla. (FSV±Rs. 326.10) EMT and Hypothecation

Pari-passu 1st charge on P &M with DIC, H.P. to the extent of Rs. 30.00 lacs for subsidy claim (Proposed)

2.COLLATERALS
a) Residential property situated at H. Rs. 101.26 No. 1, Sector 2 ± D, Chandigarh, owned by Mr. M (As per valuation report dt. 03.03.08 of G. S. Chawla, Panel Valuer (FSV ± Rs. 81.00) b) Residential property situated at H. Rs. 100.95 No. 5, Sector 6, Panchkula, owned by Mr. N. (As per valuation report dtd. EMT EMT

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

VALUE DESCRIPTION (Basis of Valuation)
31.03.08 of G. S. Chawla)

Nature of Charge Held

b) The prime security for WC are available as collateral security for Term Loan and vice versa.

3.a. PERSONAL GUARANTEE : NET WORTH NAME OF THE DIRECTORS Mr. A Mr. B Mr. C Mr. D Amount 204.00 180.00 135.00 216.55 Date Undated 01.12.2007 Undated Undated BASIS OF NET WORTH NF-589

4. CORPORATE GUARANTEE : NIL 5. SUBORDINATION OF UNSECURED LOANS : NIL 6. EXPOSURE Vs SECURITIES :
(Rs. in lacs)

EXPOSURE (Proposed) OCC / ODBD FLC / ILC (DP/DA)
BG TL (Existing) TL (Proposed) TOTAL

AMOUNT SECURITIES 550.00 EMT of House Properties 350.00 EMT of factory L & B (M.V. as per penal valuer report. 41.00 F.A. of the Co. (w.d.v. as on 31.03.08) 318.70 50.00 1309.70

AMOUNT
202.21 407.62 404.12

1013.95

* Available Collateral comfort is 77.42% of total exposure.

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

7. PENDING DOCUMENTATION: a) Whether EMT for all properties of land/building quoted as prime / collateral complete or not. If not details, reasons, and pending since when.... years. Completed b) If creation of paripassu I/II/III charge pending reasons .........years. --- N.A --and pending since when

c) Position regarding joint documentation. If pending since when and when likely to be completed. If completed date of execution of Joint documentation. --- N.A. --d) Whether documents obtained have been approved by R & L Section of Circle and all observations made on documents rectified/complied with. If not furnish reasons and action taken to comply with same. --- Complied with --e) Whether Charges have been filed. If not, furnish full particulars and probable date by which filing will be done. --- Yes --f) Confirm that subordination agreement wherever stipulated have obtained/completed. If not, reasons and when expected to be completed. --- N.A. --been

V. SELECT FINANCIAL INDICATORS WITH DETAILED COMMENTS. a) SELECT FINANCIAL INDICATORS: (Rs. in lacs)
ABS 31/03/07 Capital Reserves and Surplus Accumulated losses Tangible Net Worth Net Working Capital Current Ratio - Including TL instalment 256.03 28.01 0.00 283.02 44.71 1.11 ABS 31/03/08 404.71 59.86 0.00 463.80 124.08 1.13 PROV. 31/03/09 509.16 69.51 0.00 578.16 334.13 1.33 ESTI 31/03/10 509.16 102.13 0.00 611.03 347.54 1.32 PROJ. 31/03/11 509.16 168.48 0.00 677.64 350.06 1.30

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

- Excluding TL instalment Net Sales (of which Exports) Operating Profit Other Income Profit Before Tax Profit After Tax Depreciation Cash Accruals Operating Profit : Net Sales (%) Profit Before Tax: Net Sales (%) Bank Borrowings: Net Sales (%) Total Outside Liab.:Tangible NW Debt: Equity

1.31 332.45 0.00 31.91 0.81 32.72 28.01 6.88 34.89 9.60% 9.84% 84.79% 3.23 1.73

1.25 2037.42 0.00 34.41 2.28 36.69 31.85 26.96 58.81 1.69% 1.80% 24.46% 2.95 0.88

1.35 1973.86 0.00 14.42 0.48 14.64 9.64 26.16 35.80 0.73% 0.74% 28.15% 2.56 0.83

1.37 2582.31 0.00 37.88 0.00 37.62 32.62 28.68 61.30 1.47% 1.46% 30.98% 2.46 0.71

1.41 3086.60 0.00 75.01 0.00 74.75 66.35 29.63 95.98 2.43% 2.42% 25.92% 2.23 0.53

COMMENTS ON THE BALANCE SHEET AND FINANCIAL INDICATORS (ABS 2008 & PBS 09) :

i)

Comments on growth in sales, turnover, reason for shortfall:

The company has started commercial production w.e.f. 13.12.2006 and has made sales of Rs. 332.45 lacs during FY ¶07. As against estimated sales of Rs. 2880.76 lacs, the company achieved turnover of Rs. 2037.42 lacs during its 1 st year of full operations. The performance stood at 70.73%. During the FY ¶09, the company estimated turnover of Rs. 3880.00 lacs. Due to unavoidable factors, beyond the control of the promoters, the company could not achieve the projected turnover. Further, the industry is severely hit during the economic slowdown and the unit has suffered capacity bottlenecks, resulting the company achieved turnover of Rs. 1973.86 lacs.
iii) Networth & NWC :
In order to improve their cash-flow, the company committed to induct fresh long term funds to the tune of Rs. 200.00 lacs. During the FY 09, the company has inducted capital of Rs. 134.00 lacs by way of Share Application Money. Further, the company has retained their profit into the system, resulting in Networth has increased by Rs. 114.36 lacs during the FY 09.

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

As on 31.03.09, NWC stood at 334.13 lacs which is adequate to meet WC margin.

iv)

Current Ratio :
Current Ratio of the company has improved from 1.13 to 1.33 as on 31.03.09. On exclusion of term loan installments from current liabilities due within a year, Current Ratio further improve to 1.35.

v)

Comments on profit profitability, Reason for fall in if any
Though cost of sales has come down from 88% to 84% during the FY 09, Net profit (after tax) has declined from Rs. 31.85 lacs (M ¶08) to Rs. 9.64 lacs (M¶09) due to increase in General & Administrative Expanses.

Net profit (after tax) to sales ratio has come down from 1.56% to 0.49%.

Since the company¶s unit is located at Kala Amb, Distt. Sirmour, H.P., the company is exempted from Income Tax. However, provision of MAT has been made in books of account.

vi)

Comments on TOL/TNW:
TOL :TNW has improved from 2.95 to 2.56 during the FY 09. At the time of takeover, the company was sanctioned fresh TL of Rs. 50.00 lacs for their expansion plan. However, the company could not avail the same as the existing operations could not streamline.

vi.

Comments on investment portfolio:
The company has not made any investments in other companies/allied sister concerns.

vii) Comments on Auditors adverse/serious remarks:

As per ABS as on 31.03.2008, there is no adverse observation made by the auditor.

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

As per ABS as on 31.03.08, the company is yet to remit contribution to P.F & E.S.I.C. department.

V.c) FUNDS FLOW:
ABS 31/03/08 Long Term Sources Long Term Uses LT Surplus (+) / Deficit ( -) Short term Sources Short Term Uses ST Surplus (+) / Defict (-) 212.58 133.21 79.37 532.23 611.60 -79.37 ESTI 31/03/09 320.88 110.90 209.98 57.22 267.27 -210.05

(Rs. in lacs)
PROJ 31/03/10 66.56 53.15 13.41 244.40 257.81 -13.41 PROJ 31/03/11 104.63 102.11 2.52 80.22 82.74 -2.52

COMMENTS ON FUNDS FLOW: During the CFY 2007-08, the company has utilized long term surplus of Rs. 79.37 lacs towards short terms uses. V.d) CAPACITY UTILIZATION :
The unit is already having certain capacity bottlenecks, which are not being reflected due to low capacity utilization at present. However once the unit cross a monthly turnover of approx. Rs 1.75 crore or annual turnover of Rs 22.00 crore and above the same will start reflecting in operation. The status of capacity vis-à-vis the sales performance is explained in the following

Year

Capacity Utilization

Boards
(in number of unit)

Total (Rs Lacs)
2521.88 2909.86 3491.83

2008-09 2009-10 2010-11

32.50% 37.50% 45.00%

257,400 297,000 356,400

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

V.e) CURRENT TREND: ESTIMATES 2008-09 3841.00 (Rs. in lacs) ACTUALS PRORATA PERFORMANCE 31.03.09 1973.86 51.39%

Net Sales Comments :

During the FY ¶09, performance of the company is dismal. The company has attributed the following reasons to lower achievement : 1. Delay in shifting the Bank account caused production loss in April & May 08. 2. Delay in shipment in June 08 due of GUJJAR strike in Rajasthan. 3. During July 08, shipment plan went hey wire because of shipping lines. 4. Shortage of WC funds. 5. Slowdown in industry. The product of the company is well accepted in the market. With availability of adequate WC funds and competitive marketing, the company is hopeful to perform better during the CFY ¶10. VI. COMMENTS ON WC ASSESSMENT: i) FUND BASED :
ASSESSMENT UNDER MPBF METHOD :
(Rs. in Lacs)

2008-09
Total Current Assets 1335.52 445.79

2009-10
1420.20 272.66

Less: CL excl.Bank borrowings Working Capital Gap Less:
25% of CA OR Projected NWC [whichever is higher]

889.73
333.88 334.13

1147.54
335.05 347.54

MPBF Limits Sought

555.60 555.60

792.49 800.00

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

As shown in the above, the actual bank borrowing as on 31.03.09 is within assessed MPBF. The assessment of FBWC limit has been done based on projections for the FY 2009-10.

Presently, the company is enjoying OCC/ODBD limit of Rs. 450.00 lacs & ILC/FLC (DA) limit of Rs. 275.00 lacs and ILC/FLC (DP) limit of Rs. 175.00 lacs. Further, convertibility of ILC/FLC (DA) limit of Rs. 100.00 lacs permitted to OCC/ODBD limit.

The company informed that the raw material (i.e. plain board) is easily available in local market with trader importers as such they are required less LC limit and enhanced OCC/ODBD limits. Hence, the company has requested for enhancement in OCC/ODBD limit from Rs. 450.00 lacs to Rs. 800.00 lacs (sub-limit ILC/FLC ±DA limit of Rs. 350.00 lacs).

During the review period, irregularities i.e. overdues under TL account, devolvement under LCs & overdrawings in OCC/ODBD limit are observed. However, the company is making sincere efforts to overcome this juncture and the promoters brought in fresh funds of Rs. 134.00 lacs to improve their liquidity position. (C.A. certificate is submitted in this regard).

Though, the company achieved 50.88% of originally estimated sales, they have utilized the sanctioned limits to the full extent. The company has now requested for renewal of existing FB & NFB limits pleading that there is substantial increase in the level of inventories (raw material) and book debts. The company is not expecting major turnaround during the CFY and has estimated almost the same holding level during the CFY ¶10. However, the company is expecting a growth of 30% in sales volume during the CFY ¶10.
In order to ensure smooth functioning of the unit as well as to restrict our FB exposure, we recommend for sanctioning of OCC/ODBD limit of Rs. 550.00 lacs and inter-changeability to the extent of Rs. 100.00 lacs, out of sanctioned ILC/FLC (DA/DP) limit of Rs. 350.00 lacs to OCC/ODBD limit. As, LC (DA) limit is also a part of assessed MPBF, we are recommending for total FBWC limit of Rs. 650.00 lacs as against assessed MPBF of Rs. 800.00 lacs in order to restrict our FB exposure.

ii) ASSESSMENT OF NON FUND BASED LIMITS: A) : Presently, the company is enjoying ILC/FLC (DP) limit of Rs. 450.00 lacs (Sub-limit ILC/FLC (DA) limit of Rs. 275.00 lacs). The company has requested for renewal of existing NFB limits with restructuring of limits as the company intends to procure raw material locally through trader-importers and domestic manufacturers. Hence, the company has requested for higher OCC/ODBD limit with sub-limit ILC/FLC to meet any emergent need. The company would be able to save little costs and better plan its purchases for smooth and continuous production which have frequently been hampered due to sanctioned limits getting stuck in view of devolved LCs of small amounts.
www.final-yearprojects.co.cc www.troubleshoot4free.com/fyp/

The assessment for ILC/FLC limit of Rs. 350.00 lacs for the CFY ¶10 is carried out as under : (Rs. in lacs) Particulars ILC FLC Total 1 Total purchases during the year 1507.91 646.24 2154.15 2 Monthly RM requirement 125.66 53.85 179.51 3 Purchases proposed against LC 31.41 53.85 85.26 (ILC : 25%) (FLC : 100% - FOB/CIF value) 4 Usance period in months 3 6 5 Lead period in month 0.25 0.50 6 Total period in months 3.25 6.50 7 LC requirement (3x6) 102.08 350.02 452.10 8 LC recommended 350.00 The company informed that there is no technical binding or necessity to use only imported or indigenous material or mix of both, therefore, the decision whether to import or procure domestically depends entirely on the changing market scenario i.e. the prevailing prices, availability and quality of the material. Keeping in view the factor and the fact that the imported material gives higher yield and that at times suppliers insist for LCs, the company has proposed enhanced OCC/ODBD limit from Rs. 450.00 lacs to Rs. 800.00 lacs and one way inter-changeability of Rs. 350.00 lacs from OCC/ODBD limit to ILC/FLC (DA) limit and additional ILC/FLC limit of Rs. 100.00 lacs. The subject being an SME account, promoters being qualified, sufficient repeat orders from OEMs like Ashoka Ind., Chandigarh, Classic Furniture, Chandigarh, Nitin Furniture, Delhi & C. P. Lumber, Delhi and high demand for their products (i.e. pre laminated particle boards substitute to wood-based boards), it will be better for the company and the Bank to keep the account in operations. In case we do not extend helping hand to the company at this stage, the account may go bad. In the same time to safe guard bank¶s interest, we recommend to restrict our total FB & NFB exposure. Since, we are recommending for enhancement in OCC/ODBD limit to the extent of Rs. 100.00 lacs, we recommend for reduction in existing ILC/FLC (DP) limit from Rs. 450.00 lacs to Rs. 350.00 lacs (Sub-limit ILC/FLC ±DA limit of Rs. 250.00 lacs). In order to provide flexibility to the company for procurement of raw material locally as well as imported, we recommend for one way interchangebility of ILC/FLC (DP/DA) limit to the extent of Rs. 100.00 lacs to OCC/ODBD limit. Apart from the above, the company has sought for enhancement in usance LC period from 45 days to 90 days which may be permitted to ease liquidity, subject to cut -back to the tune of 10% of credit received in OCC/ODBD account. B) Presently, the company is sanctioned BG limit of Rs. 41.00 lacs (o/s Rs. 36.26 lacs) for issuance of Bank Guarantee in favour of DGFT, Custom & Excise Deptt. Etc. for a period of 9 years.

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

The BG liability was taken over from PNB and there is no instance of invocation of BG during the review period. Branch has recommended for renewal of existing BG limit. In order to meet emergent requirement of the company, we recommend for renewal of existing BG limit of Rs. 41.00 lacs. VII. ANALYSIS OF CREDIT RISK: Comments on Industrial scenario and standing of the party vis-a-vis Industry. 1. INDUSTRY POSITION AND PROSPECTS :
Mr. G and Mr. K is the pioneer in providing laminated technology. Research and development, has resulted in improvement in growth. Further, it is hoped that due to globalization of economy, this industry is come up fast.

As per Industry reports, there are more than a dozen units which are equipped with high pressure presses. Some of these units are being equipped further in order to manufacture sophisticated products. The European and other developed countries have already begun to use laminates. The Industry has to gear up in India to meet the stringent requirements of the transport industry for newer designs of rail coaches and luxury buses. Metro is fast developing in the country. The coaches for the Metro shall have to be manufactured in the country in the coming years, which would require densified wood laminates and other panel products having a length of 3 m and more. Deluxe buses for inter city travel also need long panel products to provide more comfort to the passengers, bus body builders in Goa, Punjab and Orissa are reported to be on the look out for such material.

Thrust on housing, furniture & fixture and malls in medium sizes cities likely to support the demand of laminated board. Substantial market of these products could be generated to cater not only the requirements of the transport sector, but requirements of other industries engaged in the manufacturing of other items, such as transformers, switch gears and wooden accessories for the textile looms. The markets in the Gulf region also has tremendous possibilities, which once tapped, could provide good dividends.

2.

UNIT'S POSITION : M/s. XYZ Pvt. Ltd. was incorporated on 3 rd Nov¶ 2005 with registered office at Chandigarh. The company has commenced commercial production on 13.12.2006. The main promoter, Sh. Ram Kumar, is technically qualified person and having good experience by trading of laminated boards. Other promoters are also having good business / technical experience. The location of the unit is in an industrial belt (Kal Amb ± Nalagarh) of the Himachal Pradesh. The unit, due to its location enjoys various tax benefits.

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

The company is marketing their products under the brand XYZLAM. The necessary action for registration of brand has already been taken by the company. The company has its dealer network. The promoters itself have been in trading activities for the last 8 years and have selected the dealers as per their study of the market. The demand of the product is nonseasonal and continuous one. Presently there are following 11 players in the market : S. No Competitors 1. GVK Industries - Hyderabad 2. ECO Board Industry - Kohlapur 3. Ballarshah Ply wood Chandrapur 4. Nepal Boards - Nepal 5. Bhutan Board - Bhutan 6. Kitply Industries-Rampur (UP) 7. Mysore Chips Boards - Mysore 8. Virgo Laminates - Derabassi 9. Loyal Laminates, Derabassi 10. Wintech Industries - Jalandhar 11. Singh Laminates - Yamunanagar Brands NOVAPAN ECOBOARD DECOBOARD NEPAL BOARDS BHUTAN BOARDS KITLAM ARCHIDLAM VIRGO LAM LOYAL LAM WINTUFF SINGHLAM

The company is facing competition from these manufacturers who are in the line of activity. Since, there is vast market for the product and each manufacturer has its own space to play, company is selling its product in routine and has established itself in the market especially in Northern belt of the Country. 3. COMMENTS ON PROPOSED EXPANSION / MODERNISATION, IF ANY. In absence of adequate and continued flow of WC funds, the company is not able to achieve optimal level of operations and had been able to operate at just the break-even level last year 2008-09. Nonetheless, there is good demand for the product of the company and company is hopeful of achieving estimated levels of operations for the CFY ¶10.

At the time of last sanction, the company was permitted fresh TL of Rs. 50.00 lacs for installation of 3 machineries costing Rs. 73.00 lacs. Since, the company could not streamline the existing operations, they postponed their expansion plan. However, the company has planned to install one out of the three machineries i.e. Paper Impregnator Machine costing Rs. 53.04 lacs during the CFY ¶10 against which the company has sought for disbursement of Rs. 35.00 lacs, out of sanctioned TL of Rs. 50.00 lacs. The company has planned to avail the balance TL during the next FY µ2011. 3. PAST TRACK RECORD OF DEALINGS :  During the review period, 9 LCs amounting to Rs. 290.07 lacs devolved due to mismatch between receipts & payments. However, the same were cleared with some delay and there is no devolved LC liability outstanding at present.

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/ 

The branch has returned 19 cheques amounting to Rs. 70.62 lacs for want of funds, till Dec¶ 08.  Persistent overdues under TL account & delay in servicing TL interest are observed.  Frequent overdrawings in OCC/ODBD limit. 4. FINANCIAL DISCIPLINE :  The company has inducted fresh funds to augment NWC and improve cash-flow system.  The company has ploughed back profit into the system.  Feedback statements are being submitted on time. 5. STATUTORY DUES, IF ANY, AND WHEN EXPECTED TO BE CLEARED: As per ABS as on 31.03.2008, no statutory dues are outstanding except P.F. & E.S.I.C dues. We may advise the branch to call for NIL statutory dues certificate as on 31.03.09 duly certified by C.A. 6. CAPITAL MARKET PERCEPTION (M.V.,EPS etc.- Share price High / Low.) Not a listed company, thus not applicable. 7. SPECIAL PRECAUTION TO BE TAKEN IF ANY IN THE LIGHT OF RISK PERCEPTION :
- There are already 11 players who have well established in the market in this line of activity. The company has to face competition with them. However, it depends upon promoters ability to compete with them. - The project is most sensitive to the sales price of the products and secondly to the price of raw materials. - XYZA Industries Ltd, Hyderabad has filed a case in Delhi High Court paying for direction to the company to change its name from XYZ Pvt Ltd. In the meantime, the company has already taken steps to change its name and has procured the availability of name ³Ram Plywood Ltd´ However, the change of name will not adversely affect the company since the trade mark ³Brown Board´ of the company will not get changed.

VIII. SHARING PATTERN : Sole Banking. Hence, not applicable. IX . VALUE OF THE ACCOUNT : (Rs. in lacs) 01.04.2008 to 31.01.09
www.final-yearprojects.co.cc www.troubleshoot4free.com/fyp/

Commission Interest earned ± WC TL Deposit - Encumbered

3.54 63.14 33.46 44.60

X. i. ADVERSE FEATURES/PENDING MATTERS/OTHER MISC MATTERS : (i) Major Adverse Features : NIL (ii) Pending Matters: a. H/Y book debt statement for Sept¶ 08 & March 09 duly certified by C.A. is yet to be submitted. b. Latest Search Report of company confirming having registered our charge with ROC.
(iii) Misc Matters: Not applicable.

a). Stock Audit :

Stock Audit of the company has been conducted by M/s. Nalin Kumar & Associates (C.A.) on 26.03.09. The observations are conveyed to the branch vide our letter No. 859 Dtd. 20.03.09. Branch is yet to confirm having rectified / complied with the observations.

b). Inspection Remarks : Not applicable

(iv) CREDIT REVIEW DEPARTMENT REMARKS ON MTR / LAST REVIEW

MTR of the account was carried out by R.M. Section during Dec¶ 2008. The account has been allotted ASC Code S -2.

The branch has confirmed having complied with / rectified R.M. Section¶s observations.

XII. OTHER INFORMATION: a) BILL CULTURE NORMS : Not applicable

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

b) SCC NORMS

: Not applicable

c) PRUDENTIAL EXPOSURE NORMS: Our proposed exposure falls within the prescribed prudential norms fixed for the FY ¶09 (i.e. Single Borrower exposure ceiling of Rs. 2300.00 Crores).
d) CREDIT EXPOSURE NORMS :

The proposed exposure comes under the exposure ceiling fixed for the industry as per LDGM 13/2008.

e) LOAN DELIVERY SYSTEM: NOT APPLICABLE f) i) CREDIT RATINGS :
Risk Management Section, Circle Office, Chandigarh has conducted the risk rating of the account based on ABS as on 31.03.08. The gist is as under:

Risk Parameters Industry Risk Business Risk Financial Risk Management Risk Overall Risk Score Rating Grade Grade Description Definition of the Grade

ABS 2007 7.20 6.61 3.60 6.84 5.67 SME 4 Moderate Risk
The degree of safety with respect to debt servicing capacity is just adequate and needs close monitoring.

ABS 2008 6.80 6.75 3.40 6.84 5.61 SME 4 Moderate Risk
The degree of safety with respect to debt servicing capacity is just adequate and needs close monitoring.

ii) CREDIT RATINGS BY IAD : Not applicable. g) CONCESSIONAL FACILITY IF ANY: NIL

XIII. NEED FOR EACH PROPOSAL CONTAINED IN PARA III: PROPOSAL III (1) : Renewal of OCC/ODBD limit : The subject account was takenover from PNB on 30.04.08 and the company was sanctioned enhanced FB & NFB limits to achieve turnover of Rs. 3880.00 lacs for the FY 09. However, the company could achieve 50.88% of estimated turnover due to the following reasons : 1. Delay in shifting the Bank account caused production loss in April & May 08. 2. Delay in shipment in June 08 due of GUJJAR strike in Rajasthan.

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

3. During July 08, shipment plan went hey wire because of shipping lines. 4. Shortage of WC funds. 5. Slowdown in industry. Affected by above factors, the experience in the account is not at satisfactorily level and irregularities i.e. Overdues in TL account, Devolvement under LCs & frequent overdrawings in OCC limit are the regular features of the account. However, the main promoter of the company, Mr. A, is a technocrat and has made sincere efforts to overcome this juncture. The promoters have inducted fresh funds to the extent of Rs. 134.00 lacs to improve their liquidity position. Though, the account is not fully in order but it is showing signs of improvement and there is no devolved LC liability outstanding at present. As, the company could not streamline the operations, the functioning of the unit further affected due to economic slowdown especially in Real Estate Sector. The company is facing liquidity crunch and has requested for restructuring of limits and term loan.
Presently, the company is enjoying OCC/ODBD limit of Rs. 450.00 lacs & ILC/FLC (DA) limit of Rs. 275.00 lacs and ILC/FLC (DP) limit of Rs. 175.00 lacs. Further, convertibility of ILC/FLC (DA) limit of Rs. 100.00 lacs permitted to OCC/ODBD limit.

The company informed that the raw material (i.e. plain board) is easily available in local market with trader importers as such they are required less LC limit and enhanced OCC/ODBD limits. Hence, the company has requested for enhancement in OCC/ODBD limit from Rs. 450.00 lacs to Rs. 800.00 lacs (sub-limit ILC/FLC ±DA limit of Rs. 350.00 lacs).

The company has submitted projections for the FY 2009-10 & & 2010-11 and has requested for enhanced OCC/ODBD limit of Rs. 800.00 lacs to achieve turnover of Rs. 2582.31 lacs during the CFY µ10 i.e. 30% increase over the FY ¶09. The product of the company is well accepted and is an environment friendly replacement of plywood. The company is also making best efforts to tide over the present juncture. The detail assessment for FBWC limit is carried out under Para VI (i). However, in order to restrict our FB exposure as well as to ensure smooth functioning of the unit, we recommend for enhancement in OCC/ODBD limit from Rs. 450.00 lacs to Rs. 550.00 lacs and interchangeability to the extent of Rs. 100.00 lacs, out of sanctioned ILC/FLC (DA/DP) limit of Rs. 350.00 lacs to OCC/ODBD limit. As, LC (DA) limit is also a part of assessed MPBF, we are recommending for total FBWC limit of Rs. 650.00 lacs as against assessed MPBF of Rs. 800.00 lacs.

Apart from the above, the company is also enjoying ILC/FLC (DP) limit of Rs. 450.00 lacs (Sub-limit ILC/FLC (DA) limit of Rs. 275.00 lacs). The company has requested for renewal of existing NFB limits with restructuring of limits as the company intends to procure raw material locally through trader-importers and domestic manufacturers. Hence, the company has requested for higher OCC/ODBD limit with sub-limit ILC/FLC to meet any emergent need. The company would be able to save little costs and better plan its purchases for smooth and continuous production which have frequently been hampered due to sanctioned limits getting stuck in view of devolved LCs of small amounts.
www.final-yearprojects.co.cc www.troubleshoot4free.com/fyp/

The assessment of NFB limits is carried out under Para VI. ii. of the Note. Keeping in view the volume of the raw material consumption, the requirement of ILC/FLC limit of Rs. 350.0 0 lacs is need based. The company informed that there is no technical binding or necessity to use only imported or indigenous material or mix of both, therefore, the decision whether to import or procure domestically depends entirely on the changing market scenario i.e. the prevailing prices, availability and quality of the material. Keeping in view the factor and the fact that the imported material gives higher yield and that at times suppliers insist for LCs, the company has proposed enhanced OCC/ODBD limit from Rs. 450.00 lacs to Rs. 800.00 lacs and one way inter-changeability of Rs. 350.00 lacs from OCC/ODBD limit to ILC/FLC (DA) limit and additional ILC/FLC limit of Rs. 100.00 lacs. Being an SME unit, the company is required bank¶s helps at this ju ncture. In the same time to safe guard bank¶s interest, we recommend to restrict our total FB & NFB exposure. Since, we are recommending for enhancement in OCC/ODBD limit to the extent of Rs. 100.00 lacs, we recommend for reduction in existing ILC/FLC (DP) limit from Rs. 450.00 lacs to Rs. 350.00 lacs (Sub-limit ILC/FLC ±DA limit of Rs. 250.00 lacs). In order to provide flexibility to the company for procurement of raw material locally as well as imported, we recommend for one way interchangebility of ILC/FLC (DP/DA) limit to the extent of Rs. 100.00 lacs to OCC/ODBD limit. PROPOSAL III (2) : To revalidate sanctioned TL of Rs. 50.00 lacs, permitted vide G.M. orders dtd. 08.03.08 : Vide orders of G.M. dtd. 08.03.08, the company was sanctioned TL of Rs. 50.00 lacs for purchase / installation of following P & M : Paper Impregnator machine Paper Printing Machine Board Packing Machine Total Rs. 53.04 lacs Rs. 14.00 lacs Rs. 6.00 lacs Rs. 73.04 lacs

The company could not avail the sanctioned term loan as they could not streamline existing operations so they did not go for further expansion. However, out of the above machineries, they highest priced machine ³Paper Impregnator´ was delivered in the month of Sept ¶07 but the same has been lying unpaid and un-installed. Since, these machineries are essential to increase the productivity and cut production time & cost, the company postponed installation of these machineries due to paucity of funds and insufficient accruals. The company has now planned to install these machineries in phase manner and has proposed to install ³Paper Impregnator Machine´ costing Rs. 53.04 lacs. For this purpose, the company has sought disbursement of Rs, 35.00 lacs, out of sanctioned TL of Rs. 50.00 lacs, during the CFY ¶10 & the balance of Rs. 15.00 lacs to be disbursed during the FY ¶11. The ³Paper Impregnator Machine´ will optimize the on-line production of glued paper which is affixed on plain boards and would thus reduce production time and in-process inventory. Therefore, the company has requested for release of Term Loan of Rs. 50.00 lacs in phase manner.
www.final-yearprojects.co.cc www.troubleshoot4free.com/fyp/

The viability of existing as well as proposed term loan is conducted by P.A. Cell, C.O. Chandigarh and is found financially viable. The average DSCR comes to 1.44. As per appraisal report, it is also emphasized to install additional machineries for line balancing of the unit. In view of the above, we may revalidate the sanctioned term loan of Rs. 50.00 lacs as per terms & conditions stipulated under Para III.A.2. PROPOSAL III (b). 1 : To permit one way inter-changeability from ILC/FLC (DP/DA) limit to OCC/ODBD limit to the extent of Rs. 100.00 lacs. The company has explained that procurement of raw material on LC basis is only credit enhancements instruments for their suppliers as these LCs create liquidity on their part and when these LCs get discounted for immediate payment, the cost of the discounted charges / interest is factored in the purchase prices. Therefore, the company has sought for higher OCC/ODBD limit to save little cost and better plan its purchases for smooth and continuous production which have frequently been hampered in the past due to the reasons mentioned elsewhere in the Note. In order to ensure smooth functioning of the unit without erratic production, we recommend for one way inter-changeability to the extent of Rs. 100.00 lacs, out of sanctioned ILC/FLC (DP/DA) limit of Rs. 350.00 lacs, to OCC/ODBD limit, subject to availability of adequate DP. PROPOSAL III (b). 2 : To continue usance LC (DA) period for 90 days as permitted by G.M. vide orders dtd. 27.10.08 : At the time of last sanction, the company was sanctioned LC (DA) limit on 45 days usance period. Subsequently, the usance period was enhanced to 90 days vide orders of G.M. dtd. 27.10.08, till tenability of sanction limits. The company has now requested for continuation of usance period for 90 days as they are getting credit from their supplier. This will improve cash flow system of the company, hence the same is recommended. However, the past track of the company in LC commitment is not satisfactory and number of times, LC got devolved. Hence, in order to ensure LC commitment to be met on due dates and to avoid further devolvement of LCs, we recommend for 10% cut-back on all credits received in OCC/ODBD account. The funds to be pooled in a separate inoperative Current Account and to be utilized towards meeting LC commitments. PROPOSAL III (b). 3 : To permit reduction in book debt margin from existing 40% to 30%. Sundry debtors of the company are realizing with some delay and receivable level is increased from 3.24 months (M ¶08) to 3.93 (M¶ 09). Further, the unit is situated in H.P. where they are enjoying exemption in excise duty for a period of 10 years. Therefore, the debtors of the firm are automatically less billed to the extent of the present excise duty rate of 8.24% in comparison to peers in other States. Hence, higher margin has been depriving the company of the available DP against its debtors.

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

In order to ensure availability of adequate DP, we recommend for reduction in book debt margin from existing 40% to 30%, as against company¶s request for book debt margin of 25%. PROPOSAL III (b). 4 : To continue LC margin at 20% as against branch recommendation for reduction in margin upto 10%. At the time of last sanction, the company was sanctioned LC limit with 10% margin. However the margin on LC was increased to 25% in wake of consistent devolvement, vide orders of G.M. dtd. 27.10.08. During Feb¶ 09, the company cleared the entire devolvement and has requested for reduction in LC margin to 10% against which the company was permitted reduction in LC margin from 25% to 20% vide orders of G.M. dtd. 21.02.09. Now, the company has once again requested for restoration of original LC margin at 10% and adjustment of excess margin already collected by the branch for opening fresh LCs. Since, we are recommending for need based enhancement in FBWC limits and have already permitted restructuring of term loan, we are not in favour of diluting LC margin. Hence, existing margin on LC limit may be permitted to continue. PROPOSAL III (b). 5 : To confirm oral permission accorded by DGM on 17.04.09 for having permitted the branch to open ILC amounting to Rs. 60.00 lacs, subject to clearance of devolved LC liability till 22.04.09. (Devolved LC cleared on 23.04.09). Due to devolved outstanding LC liability of Rs. 24.00 lacs, the branch has sought permission for opening fresh LCs amounting to Rs. 100.00 lacs for procurement of raw material. The promoter of the company called on us on 17.04.09 at C.O. and after getting assurance from the company to clear the devolved liability under LC upto 22.04.09, DGM (CO) permitted the branch to open ILC amounting to Rs. 60.00 lacs.

The branch has opened the LC on following dates : Date of opening LCs 18.04.09 20.04.09 Amount of ILC 20.89 38.98 (Rs. in lacs)

The branch has confirmed that devolved LC liability has since cleared on 23.04.09 and there is no devolved LC liability at present. The branch has sought for ratification of their action. In view of the above, we recommend for confirmation of permission accorded by DGM on 17.04.09.

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

PROPOSAL III (b). 6 : To permit the branch to issue NOC in favour of DIC, HP for ceding pari-passu 1 st charge on P & M of the company, for Rs. 30.00 lacs to enable the company to claim subsidy under Central Capital Investment Subsidy Scheme 2003.
The company has been sanctioned subsidy of Rs. 30.00 lacs from DIC, HP for setting up unit at H.P. In order to claim subsidy, the company requires to create pari-passu I charge in favour of DIC, HP on P & M to the extent of subsidy amount. The company is enjoying credit facilities under sole banking and the entire fixed assets of the company are hypothecated to us. Hence, the company has approached us to cede pari-passu 1st charge with DIC, HP on P & M to the extent of subsidy amount.

In order to enable the company to claim subsidy amount, we may accord the permission, subject to the following :

-

Subsidy amount to be disbursed through our Bank. Necessary modification in charge with ROC to be done.

PROPOSAL III (e): At the time of MTR of the account, conducted during Dec¶ 08, the account has been allotted ASC Code S-2. As per annexure VIII, the account complies with 06 parameters out of applicable 11 parameters. Due to Current Ratio below BML, higher TOL:TNW, persistent overdues & Non achievement of project turnover, we recommend for continuation of ASC Code S-2 to the account. PROPOSAL III (f): Rate of Interest for WC : Originally, the company was sanctioned limit @ BPLR + 1.50% = 13.50% p.a. (floating). Subsequently, the ROI slab has come down from BPLR + 1.50% to BPLR + 1.00% in terms of H. O. Cir. 347/08. As per scoring matrix (Annexure-VI), company is eligible for ROI @ BPLR + 1.25% = 13.25% p.a. (floating) for WC limits. Keeping in view the past track, we recommend for stipulation of applicable ROI. Rate of Interest for TL : The company has been sanctioned term loan @ BPLR ± 0.75% = 11.25% p.a. (floating). Subsequently, the ROI slab has come down from BPLR ± 0.75% to BPLR ± 1.25% as per H. O. Cir. 347/08.

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

Since, the company has revised their projections for the ensuing years, we have reviewed the term loan on existing as well as fresh term loan based on revised projections and TEV study conducted by P.A. Cell. As per scoring matrix (Annexure-VII), company is eligible for ROI @ BPLR + 0.25% = 12.25% p.a. (floating) for term loans. In view of above, we recommend for upward revision in ROI on term loan from existing BPLR ± 1.25% (10.75%) to BPLR + 0.25% (12.25%) on existing as well as fresh term loan. XIV. FOR INFORMATION
Based on TEV study conducted by P.A. Cell, C.O., General Manager (Ag) vide orders dtd. 14.05.09 permitted re-schedulement of outstanding TL liability of Rs. 316.28 lacs (as on 31.03.09) as under, in terms of H. O. Cir. 67/09 dtd. 28.02.09 :

Existing Repayment Schedule

Proposed Repayment Schedule of existing TL liability and additional Term Loan of Rs. 50.00 lacs

Takeover TL liability of Rs. 390.00 lacs + additional TL of Rs. 50.00 lacs to be recovered as under w.e.f. June 08 :

Existing TL liability of Rs. 316.29 lacs (as on 31.03.09) + proposed TL of Rs. 50.00 lacs to be recovered in ballooning manner, as under :

20 Quarters x Rs. 22.00 lacs.

Loan Principal (%) Quarters Quarterly Installment (Rs. in lacs)

FY 10 2.73% 04 2.50

FY 11 8.74% 04 8.00

FY 12 24.02% 04 22.00

FY 13 32.76% 04 30.00

FY 14 31.75% 04 29.08

Total 100% 20 366.32

Repayment holiday till May 08 was permitted. Interest to be recovered as and when due.

Interest to be recovered as and when due.

XV. SANCTIONING AUTHORITY : In terms of H. O. Cir. 232/08, the subject proposal falls under the delegated powers of G.M. (CO).

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

XVI. RECOMMENDATIONS: In view of the foregoing we recommend proposals as at Para III (a. b. e & f) subject to the terms and conditions as mentioned in the Note and other conditions as stipulated hereunder: 01) Branch to confirm having rectified / complied with Stock Audit Observations (Ref : our letter CHCCG:CR 559:859:09 Dtd. 20.03.09).

02) All NF 589s are undated and NF 589 of Sh. Ajay Gupta, Sh. M. P. Gupta & Smt. Nidhi Goyal to be submitted.

03) As per MCA portal, paid up capital of the company is furnished Rs. 242.00 lacs whereas as per ABS ¶08, the same is Rs. 300.00 lacs. Branch to direct the company to modify the same and obtain fresh status report from C.A. in this regard.

04) As per ABS ¶08, the company has not paid statutory dues i.e. P.F. & E.S.I.C. Branch to confirm that the company is not defaulted in payment of statutory dues. C.A. certificate to be obtained as on 31.03.09 for NIL statutory liability.

05) Branch to refer Credit Audit Report dtd. 14.05.09 of M/s. Goel Satish & Co. (C.A.) and confirm compliance / rectification of the observations.

06) Latest Search Report to be obtained and forwarded to us in terms of H. O. Cir. 24/08.

07) While issuing NOC in favour of DIC, H. P., branch to ensure that amount of subsidy to be routed through our Bank¶s account.

08) Branch to ensure that EMTs are perfect in all respects.

09) H/Y book debt statement for Sept¶ 08 & March 09 duly certified by C.A. to be submitted.

10) Resume of the account is not filed up properly. Branch to ensure that the company is routing the entire turnover through our Bank.

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

11) Branch to ensure that personal loan / vehicle loan of the company with other banks are regular and the company in not defaulted in repayment of these loans. Branch to call for pass sheet of these accounts. Further, branch to advise the company to confine their dealings with our Bank only.

12) End use of funds to be ensured and performance of the company to be monitored closely on monthly basis.

13) All other terms and conditions as applicable for such type of advances / loans shall be adhered to.

LIST OF ANNEXURES
1. 2. 3. 4. 5. 6. 7. LIMITS WITH OTHER BANKS/FI CONDUCT, RESUME AND OTHER DETAILS OF A/C ANALYSIS OF PROFIT & LOSS ACCOUNT ANALYSIS OF BALANCE SHEET COMMENTS ON W C ASSESSMENT & COMPUTATION OF MPBF PARAMETERS FOR ROI ± WC PARAMETERS FOR ROI - TL ANNEXURE ANNEXURE ANNEXURE ANNEXURE ANNEXURE ANNEXURE ANNEXURE I II III IV V VI VII

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

ANNEXURE I I. LIMITS WITH OTHER BANKS & FINANCIAL INSTITUTIONS. A. LIMITS WITH OTHER BANKS UNDER CONSORTIUM/MULTIPLE BANKING ARRANGEMENTS: (Rs. in lacs)
NAME OF THE NATURE OF LIAB. LIMIT OVERDUES BANK FACILITY 1 2 3 4 5 A.LIMITS WITH OTHER BANKS UNDER CONSORTIUM/MULTIPLE BANKING ARRANGEMENTS NIL B.LIMITS WITH OTHER BANKS: (Rs. in lacs) NAME OF THE NATURE OF BANK FACILITY 1 2 ASSET CLASSFN. 6

LIMIT

LIAB. 12.02.08 3 4 -- NIL --

OVERDUES 5

ASSET CLASSFN. 6

* N.A. = Not available.

C. LIMITS ON LEASE/HP (INCLUDING WITH OUR BANK) : 

The company is having 2 Car Loans with HDFC Bank having outstanding liability of Rs. 10.18 lacs as on 31.03.09.  The company is also having personal loan with Cholamandalam DBS having O/S liability of Rs. 1.12 lacs as on 31.03.09.

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

ANNEXURE - II I. COMMENTS ON THE CONDUCT OF ACCOUNTS & OTHER PARTICULARS: 1. MOVEMENT OF STOCKS 2. MEETING COMMITMENT UNDER LCS cleared. 3. INVOCATION OF GUARANTEES : NIL 4. RETURN OF BILLS DISCOUNTED 5. RETURN OF CHEQUES ISSUED 6. GUIDELINES FOR NPA REQUIREMENTS: a) WHETHER INTEREST RECOVERED : Yes UPTO DATE. b) WHETHER DP SUFFICIENT TO OUTSTANDING. : Yes 7. SUBMISSION OF FEED BACK STATEMENTS A. Stock Statement received up to 31/03/2009 B. MSOD received up to 31/03/2009 C. QOS received up to 30/06/2008 D. HOS received up to 30/09/2008 E. Credit Monitoring Sheets submitted 28/02/2009 F. Audited Balance Sheet submitted up to 31/03/2008 OTHER MATTERS: B. Penal Interest Collection (Stock Statements/Bill discounts /Bill culture): Company is prompt in submission of stock statements to the branch. Latest date of Inspection and confirmation for adherence to periodicity of stock inspection: 09.03.2009 Credit Monitoring Sheet submitted by branch till: Feb¶ 2008. : Satisfactory. : Devolvement under LC has since

: NIL : (19 ± Rs. 70.62 lacs, upto 31.12.08)

C.

D.

8. INWARD BILLS RECEIVED FOR COLLECTION OUTSTANDING FOR MORE THAN 2 MONTHS: No such instances reported 10. WHETHER INSURANCE COVER IS ADEQUATE FOR PRIME/COLLATERAL SECURITY: As per Stock statements for March 09, adequate insurance cover is available and the policy is in forece till 26.07.09.

11. IN RESPECT OF TERM LOANS WHERE PROJECT IS YET TO BE COMPLETED OR COMPLETED RECENTLY, CIRCLE TO INFORM WHETHER LATEST COPY OF PIPR/PROJECT COMPLETION REPORT (PCR) HAS BEEN OBTAINED/ FORWARDED TO APPROPRIATE AUTHORITIES: NOT APPLICABLE.

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

II. RESUME OF ACCOUNTS: Period from 01.04.2008 to 31.01.2009: a) FB Limits (Including Bills) (Rs in lacs)
Cheques / Bills Nature of A/c OCC/ODBD Max. Liab Min. Liab Turnover Interest Earned 63.14 Commission Earned Returned Amount 70.64 No. 19

B) NFB LIMITS: (01.04.08 to 31.01.09) NFB LIMITS: LCs BG Turnover 698.00 36.26 No. of Items 27 6 Commission 3.54 Number of devolvement 09 NIL Amount of devolvement 290.07 NIL

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

ANNEXURE III ANALYSIS OF P & L ACCOUNTS (Rs. in lacs)
ABS 31/03/07 Gross Sales a) Net Exports(net of return) b) Local Sales Less: Excise Duty NET SALES % rise (+) or fall ( -) in Net Sales Other Income: a) Exchange Profit, if any b) Commission & Brokerage c) Miscellaneous Sub total TOTAL INCOME 0.00 0.00 0.81 0.81 333.26 0.00 0.00 2.28 2.28 2039.70 0.00 0.00 0.48 0.48 1974.34 0.00 0.00 0.00 0.00 2582.31 0.00 0.00 0.00 0.00 3086.60 0.00 332.45 0.00 332.45 0.00% 0.00 2037.42 0.00 2037.42 512.85% 0.00 1973.86 0.00 1973.86 -3.12% 0.00 2582.31 0.00 2582.31 30.83% 0.00 3086.60 0.00 3086.60 19.53% ASB 31/03/08 PROV. 31/03/09 ESTI 31/03/10 PROJ 31/03/11

Raw Material consumed - Imported - Indigenous Stores & spares Power & fuel Labour charges Repairs and Maintenance Other Mfg. Expenses Depreciation SUB TOTAL Add: Opening Work in Process Less: Closing Work in Process COST OF PRODUCTION Add: Opening Finished goods 1.15 6.88 253.22 0.00 0.00 253.22 0.00 15.68 26.96 1824.98 0.00 0.00 1824.98 13.20 13.74 26.16 1670.63 0.00 0.00 1670.63 44.99 15.25 28.68 2326.13 0.00 0.00 2326.13 52.50 15.65 29.63 2650.03 0.00 0.00 2650.03 160.26 187.52 51.78 0.22 4.91 0.76 1692.93 0.00 2.56 64.90 21.95 0.00 1533.05 5.63 66.23 25.82 646.24 1507.91 7.89 94.08 26.08 615.47 1846.42 9.01 107.51 26.34

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

Less: Closing Finished goods SUB TOTAL (TOTAL COST OF SALES) Selling, General & Administrative overheads Interest Exchange loss, if any Miscellaneous Expenses TOTAL EXPENSES Profit Before Tax Income tax/Provision - Current - Deferred Tax Net Profit (a) Equity dividend paid Tax on Dividend (a) Dividend rate Retained profit Retained profit/NetProfit (%) Cash Accruals

13.20 240.02 32.44 28.08 0.00 0.00 300.54 32.72 4.71 0.00 28.01 0.00 0.00 0.00 28.01 100.00% 34.89

44.99 1793.19 79.51 130.31 0.00 0.00 2003.01 36.69 4.84 0.00 31.85 0.00 0.00 0.00 31.85 100.00% 58.81

52.50 1663.12 147.95 148.37 0.00 0.26 1959.70 14.64 5.00 0.00 9.64 0.00 0.00 0.00 9.64 100.00% 35.80

160.26 2218.37 180.76 145.30 0.00 0.26 2544.69 37.62 5.00 0.00 32.62 0.00 0.00 0.00 32.62 100.00% 61.30

160.26 2650.03 216.06 145.50 0.00 0.26 3011.85 74.75 8.40 0.00 66.35 0.00 0.00 0.00 66.35 100.00% 95.98

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

ANNEXURE-IV ANALYSIS OF BALANCE SHEET (Rs. in lacs)
LIABILITIES SHAREHOLDERS FUNDS Capital Share Application Money Debentures (Convertible) Share Premium Preference Shares (redeemable after 12 years) Reserves- General Reserves- Others Revaluation Reserves P & L Account(Profit) Sub total TERM LIABILITIES Term Loans - Banks Term Loans ± FI Deposits payable after 1 year Deferred Payment Credits Advances from Dealers Term Deposits Debentures Deferred Tax Liability Other Term Liabilities Sub Total CURRENT LIABILITIES Bank Borrowings Borrowings -Associate Cos. -Directors -Others 0.00 0.00 0.00 0.00 0.00 281.89 498.38 555.60 800.00 800.00 0.00 0.00 91.09 490.93 0.00 0.00 61.24 409.93 0.00 0.00 0.00 480.59 0.00 0.00 0.00 432.44 0.00 0.00 0.00 358.74 45.50 0.00 45.24 0.00 114.67 49.00 112.75 0.00 111.21 0.00 354.34 303.45 316.92 319.69 247.53 242.00 14.03 0.00 0.00 0.00 0.00 0.00 0.00 28.01 284.04 300.00 104.71 0.00 0.00 0.00 0.00 0.00 0.00 59.86 464.57 509.16 0.00 0.00 0.00 0.00 59.86 0.00 0.00 9.65 578.67 509.16 0.00 0.00 0.00 0.00 69.51 0.00 0.00 32.62 611.29 509.16 0.00 0.00 0.00 0.00 102.13 0.00 0.00 66.35 677.64 ABS 31/03/07 ASB 31/03/08 PROV. 31/03/09 ESTI 31/03/10 PROJ 31/03/11

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

Deposits from Dealers Advance Payment from Customers Creditors - for goods - Others Provisions - for Tax - for Dividend incl tax - Others Deposit/TL/instalment/DPG Other Current Liabilities Sub Total TOTAL LIABILITIES 4.11 0.00 6.49 67.50 6.56 423.88 1198.85 0.00 0.00 14.76 95.28 91.80 956.11 1830.61 5.00 0.00 20.00 12.44 40.28 1001.39 2060.65 5.00 0.00 20.00 34.15 42.28 1072.66 2116.39 8.40 0.00 20.00 88.70 40.88 1152.88 2189.26 0.00 57.33 16.45 239.44 0.00 368.07 0.00 171.23 0.00 194.90

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

ASSETS FIXED ASSETS Gross Block Less: Depreciation Net Block

ABS 31/03/07

ASB 31/03/08

PROV. 31/03/09

ESTI 31/03/10

PROJ 31/03/11

701.66 6.88 694.78

709.47 33.84 675.63

778.63 60.00 718.63

778.63 88.69 689.94

798.64 118.31 680.33

Capital Work in Process Advances for Capital goods Sub Total

29.92 0.00 724.70

69.04 0.00 744.67

0.00 0.00 718.63

0.00 0.00 689.94

0.00 0.00 680.33

Investment in Other Companies Deferred Receivables Goodwill/Misc.Expenses not written off P & L Account (Loss) Other Non Current Assets Sub Total

0.00 0.00 1.02 0.00 4.54 5.56

0.00 0.00 0.77 0.00 4.91 5.68

0.00 0.00 0.51 0.00 5.99 6.50

0.00 0.00 0.26 0.00 5.99 6.25

0.00 0.00 0.00 0.00 5.99 5.99

CURRENT ASSETS Raw Material -Imported -Indigenous Work in Process Finished Goods Stores & Spares Debtors(less than 6 months) - Exports - Others Debtors (more than 6 months) - Exports - Others 0.00 0.00 0.00 102.45 0.00 0.00 0.00 0.00 0.00 0.00 0.00 130.74 0.00 448.43 0.00 646.44 0.00 645.58 0.00 707.34 245.68 0.00 0.00 13.20 0.00 351.01 0.00 0.00 44.99 0.00 0.00 484.85 0.00 52.50 0.00 0.00 493.66 0.00 160.26 3.94 0.00 493.66 0.00 160.26 4.51

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

Loans and Advances -Associate Companies -Others Advances to Suppliers Deposits Cash & Bank balances Other Current Assets Sub Total GRAND TOTAL 42.13 0.00 31.49 5.35 468.59 1198.85 81.01 41.00 9.70 1.60 1080.19 1830.54 58.91 60.75 7.69 24.38 1335.52 2060.65 58.91 27.00 6.47 24.38 1420.20 2116.39 58.91 27.00 16.88 34.38 1502.94 2189.26

Difference Indicator

0.00

0.07

0.00

0.00

0.00

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

Annexure-V COMMENTS ON WC ASSESSMENT AND COMPUTATION OF MAXIMUM PERMISSIBLE
(In months)

A. HOLDING LEVELS:

ABS 31/03/07

ASB 31/03/08

PROV. 31/03/09

ESTI 31/03/10

PROJ 31/03/11

Raw Materials - Imported - Indegenious Semi-finished goods Finished Goods Stores and spares Receivables - Inland - Export Creditors

(15.72) (0.00) (0.00) (0.66)

(2.49) #DIV/0! (0.00) (0.30)

#DIV/0! (3.80) (0.00) (0.38)

(0.00) (3.93) (0.00) (0.87)

(0.00) (3.21) (0.00) (0.73)

(4.72) #DIV/0!

(3.24) #DIV/0! (1.57)

(3.93) #DIV/0! (2.63)

(3.00) #DIV/0! (0.90)

(2.75) #DIV/0! (0.95)

COMMENTS ON RM HOLDING:

The main raw material is Board, Paper, Glue and Packing Paper. Most of the Board and Paper is being imported against LC. In addition to this, indigenous raw material is available from Delhi, Chandigarh, Ahmedabad, Mumbai & Yamunanagar.

The company has started commercial production during Dec¶ 06, hence, holding of raw material as on 31.03.07 is not indicating the correct picture. Actual imported RM holding level stood at 2.49 month as on 31.03.08. Now, the company intends to procure RM locally. The RM holding level increased to 3.80 months as per PBS as on 31.03.09 as the company is facing capacity bottlenecks. The company has estimated / projected holding level at 3.93 months for the CFY 10 in tune with holding level as at 31.03.09. Though, the holding level is on higher side, we may accept the same keeping in view the smooth functioning of the unit.

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

COMMENTS ON WIP:

The level is included under raw material consumption.

COMMENTS ON FG:

The company is mainly selling its product at Northern Belt of the Country.

The company has estimated / projected FG holding level at 0.87 months which is increased from 0.38 months. Keeping in view of recessionary trend in the industry, we may accept the same as a special case.

COMMENTS ON RECEIVABLES:

Receivable holding level increased from 3.24 months (M¶ 08) to 3.93 months (M¶09). The company has estimated / projected the period of realization of debtors as 3.00 month which is reasonable and may be accepted.

COMMENTS ON SUNDRY CREDITORS:

The company is procuring raw material against LC for 45 days on DP / DA basis. The actual level stood at 2.63 months as on 31.03.09. The company has planned to purchase raw material locally and hence requested for higher OCC/ODBD limit. Hence, the company estimated the lower creditor level from 2.63 months to 0.90 months.

COMMENTS ON OTHER CURRENT ASSETS:

OCA mainly consist of cash & bank balance. The company has estimated / projected the level in tune with PBS as on 31.03.09.

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

B. COMPUTATION OF MPBF:
ABS 31/03/07 GROSS SALES NET SALES ± INLAND - EXPORT RAW MATERIALS CONSUMED - IMPORTED - INDIGENOUS STORES AND SPARES CONSUMED COST OF PRODUCTION COST OF SALES NET WORKING CAPITAL RAW MATERIALS ± IMPORTED -INDIGENOUS WORK IN PROCESS FINISHED GOODS STORES AND SPARES RECEIVABLES ± INLAND - EXPORT OTHER CURRENT ASSETS TOTAL CURRENT ASSETS SUNDRY CREDITORS OTHER CURRENT LIABILITIES TOTAL CURRENT LIABILITIES WORKING CAPITAL GAP 25% OF CURRENT ASSETS (OTHER THAN EXPORT RECEIVABLES) ACTUAL/PROJECTED NET WORKING CAPITAL M P B F ACTUAL/PROJECTED BANK BORROWINGS 332.45 332.45 0.00 187.52 51.78 0.22 253.22 240.02 44.71 245.68 0.00 0.00 13.20 0.00 130.74 0.00 78.97 468.59 57.33 84.66 141.99 326.60 117.15 ASB 31/03/08 2037.42 2037.42 0.00 1692.93 0.00 2.56 1824.98 1793.19 124.08 351.01 0.00 0.00 44.99 0.00 448.43 0.00 133.31 977.74 239.44 218.29 457.73 520.01 244.44

(Rs. In lacs)

PROV. 31/03/09 1973.86 1973.86 0.00 0.00 1533.05 5.63 1670.63 1663.12 334.13 0.00 484.85 0.00 52.50 0.00 646.44 0.00 151.73 1335.52 368.07 77.72 445.79 889.73 333.88

ESTI 31/03/10 2582.31 2582.31 0.00 646.24 1507.91 7.89 2326.13 2218.37 347.54 0.00 493.66 0.00 160.26 3.94 645.58 0.00 116.76 1420.20 171.23 101.43 272.66 1147.54 355.05

PROJ 31/03/11 3086.60 3086.60 0.00 615.47 1846.42 9.01 2650.03 2650.03 350.06 0.00 493.66 0.00 160.26 4.51 707.34 0.00 137.17 1502.94 194.90 157.98 352.88 1150.06 375.74

44.71 209.45 281.89

124.08 275.58 498.38

334.13 555.60 555.60

347.54 792.49 800.00

350.06 774.33 800.00

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

EXCESS FINANCE, IF ANY

72.44

222.81

0.00

7.51

25.68

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

ANNEXURE VI

INTEREST RATE STRUCTURE-WC (SME)

Parameter i)

ii)

iii)

iv)

v)

vi)

CURRENT RATIO: 1.33 AND ABOVE 1,28 TO 1.32 1.23 TO 1.27 1.18 to 1.22 1.14 to 1.17 Below 1.14 TOTAL OUTSIDE LIAB./EQUITY 2.50 and below 2.51 to 3.00 3.01 to 3.50 3.51 to 4.00 4.01 to 4.50 4.51 to 5.00 TIMELY RENEWALS: Delay not exceeding 3 months (Extn permitted) 10 Delay not exceeding 6 months (Extn permitted) 08 Delay beyond 6 months (Extn permitted) 04 Delay beyond 9 months (Discretion is vested with ED/MD to award full 00 marks) ACHIEVEMENT OF PROJECTED SALES 70.73% Above 90 % 10 81 to 90% 08 71 to 80% 06 50 to 70% 04 TIMELY REPAYMENTS (TL/DPG): Timely repayment 05 Up to 1 month's delay 04 Up to 3 month's delay 02 Beyond 3 months 00 PERPECTION OF SECURITIES INCLUDING CORPORATE AND CORPORATE GTEE Perfection of all securities 10 JD & Charge creation < 6 m 07 JD & Charge creation < 9 m 04 JD & Charge creation > 9 m 00 Value of Securities 150% or more of FB & NFB limits
65.10% 10

Based on ABS as at 31.03.08 Scoring Eligible Marks Marks 1.13 15 00 13 11 09 05 00 2.95 15 13 10 13 06 04 00

10

04

02

10

vii)

04

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

viii)

100% or more but < 150% of FB & NFB lts 50% or more but < 100% of Fb & NFB lts Less than 50% of FB & NFB limits IRREGULARITIES Consistently regular Irregular not more than 4 occasions not exceeding 15 days each. Irregular on more than 4 occasions in year BILLS DISHONOURED/CHEQUES RETURNED FOR WANT OF FUNDS. No returns 5% of total no of bills returned or bills representing 5% of the annual sales returned and no cheques dishonoured/ returned. Cheque dishonoured/returned Profit/ Loss for last 3 years Profit making for all the 3 years Loss for 1 year only as per latest Bal sheet Loss for 2 years only as per latest consecutive Balance sheets Loss for 3 years and above TOTAL MARKS Pro-rata

07 04 02 05 03 00

00

ix)

10 05 00 10 07 04 00 100

00

x)

10

53

As per H.O. Cir. 118/09 dtd. 31.03.09 EQUAL & ABOVE 90% EQUAL & ABOVE 85% BUT < 90% EQUAL & ABOVE 80% BUT < 85% EQUAL & ABOVE 75% BUT < 80% Less than 75%

ROI applicable for Small & Medium Enterprise 10.50% 11.25% 12.00% 12.50% 13.25%

As per scoring matrix, the applicable ROI is arrived to BPLR + 1.25% (i.e. 13.25% p.a. ± floating) as per Cir 118/2009 Dtd. 31.03.09.

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

ANNEXURE VII

FIXATION OF ROI ± TL

Scoring Matrix for Term Loan of Rs. 1 Crores and above in terms of HO Cir 103/07

Based on ABS ¶08 & PA cell report

Parameter
i) DEBT EQUITY RATIO Debt/TNW) Less than or equal to 1.5 Above 1.50 but < 1.60 Above 1.60 but < 1.70 Above 1.70 but < 1.80 Above 1.80 but < 2.00 Above ii)

Max Marks 0.88
10 08 06 04 02 00

Marks Obtained

(Long term

10

Overall Interest Coverage (Aggregate of PBDIT/Aggregate int on TL)
Equal to or above 4.00 Equal to or above 3.50 but < 4.00 Equal to or above 3.00 but < 3.50 Equal to or above 2.50 but < 3.00 Equal to or above 2.00 but < 2.50 Less than 2.00

10.03
10 09 07 05 03 00

10

iii)

Fixed Assets Coverage Ratio (726 / 440) 1.65
Capitalised project cost/Amt of TL Equal to or above 1.75 Equal to or above 1.65 but < 1.75 Equal to or above 1.50 but < 1.65 10 08 06

08

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

Parameter
Equal to or above 1.40 but < 1.50 Equal to or above 1.30 but < 1.40 Less than iv) Overall DSCR (PAT + Depreciation + Int on TL) (Inst of TL + Int on TL) Equal to or above 2.00 Equal to or above 1.80 but < 2.00 Equal to or above 1.60 but < 1.80 Equal to or above 1.40 but < 1.60 Equal to or above 1.20 but < 1.40 Less than 1.20 1.30

Max Marks
04 02 00

Marks Obtained

1.44

10 09 08 05 03 00

05

v) Track Record in service debt

NA

(for existing clients covering latest two years period)
Prompt and regular repayment Delay in payment of interest and or instalments up to 15 days Above 15 days and up to 1 month Above 1 month and up to 2 months Above 2 months 10 08

06 04 00

NA

In case of new clients, if track record is available, we may use this. If not, this parameter will not be considered) vi) Profitability of the project/ Return on capital employed

24.83%

10

PBDIT / Capital employed (i.e. Total liab ± Curr Liab) (1391.42/5603.95*100) Equal to or above 20% Equal to or above 16% but < 20% Equal to or above 12% but < 16% 10 08 06

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

Parameter
Equal to or above 8% but < 12% Equal to or above 4% but < 08% Less than vii) 04%

Max Marks
04 02 00

Marks Obtained

Value of account
Desirable group/potentially valuable connection/existing client rated/ existing client with substantial value. Others 1 to 10

05

0

Total Prorata

60 70

48 56 80%

Repayabl e in 3-5 years
EQUAL & ABOVE 90% EQUAL & ABOVE 85% BUT < 90% 10.75 11.50

Repayable in above 5 years
10.75 11.50

EQUAL & ABOVE 80% BUT < 85%
EQUAL & ABOVE 75% BUT < 80% Less than 75%

12.25
12.75 13.50

12.25
12.75 13.50

The company scored 48 marks out of applicable 60 marks i.e. 80%. The applicable ROI is arrived to @ BPLR + 0.25% (presently, 13.50% p.a. ± Floating) as per H.O. Cir. 118/09 dtd. 31.03.09.

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

ANNEXURE VIII

PARAMETERS FOR ALLOTTING ASC ±S1 CODE. 1. Conduct of the account satisfactory. 2. Current Ratio is 1.14 and above. 3. TOL:TNW is not more than 2.50 the permitted level or specific for industry. 4. There are no cheque returns and the dishonour of the bills discounted is less than 5% of the total bills discounted and have been recovered immediately within 15 days. 5. All important terms & conditions of the sanction like obtention of securities / collateral security, personal guarantee/s, creation of charge, proper completion of documentation, etc., are complied. 6. Overdues (including interest overdues, overdues on account of devolved LCs/guarantees liability), if any, in the account do not exceed 10% of the liability and are not outstanding for more than a month for reasons well explained and convincing and which do not indicate any possible deterioration in the quality of the asset. 7. Submission of feedback statements like Stock Statement, QOS, MSOD, ABS etc., are prompt. 8. All required renewal papers are submitted by the party promptly. 9. Achievement of projected turnover is 80% or more. 10.Profit making. 11.Safety of advance cannot be considered to be in doubt on the basis of feedback statements, operations in the account, QOS, CMS, ABS etc. The company comply with 06 out of 11 parameters. Yes No (1.13) No (2.95) No

Yes

No, Devolved LC is beyond the liability

Yes (QOS/HOS not submitted)

Yes No (70.30%) Yes Yes

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

BIBLIOGRAPHY
1. Article ³ Risk Management in banks´ by R.S.Raghavan 2. Article ³Credit as well as credit risk management in banks´ by R.S.Raghavan 3. Article ³RISK MANAGEMENT IN COMMERCIAL BANKS´(A CASE STUDY OF PUBLIC AND PRIVATE SECTOR BANKS) by prof. Rekha ArunKumar 4. Consultative document ³Overview of The New Basel Capital Accord´ 5. ³Banking on Basel- the future of financial regulation´ by Daniel K.Tarullo 6. ³Basel norms-challenges in India´ by Swapan Bakshi 7. www.canarabank.com 8. www.wikipedia.com 9. www.assetquality.com 10. www.rbi.org.in 11. www.fippi.org

www.final-yearprojects.co.cc

www.troubleshoot4free.com/fyp/

You're Reading a Free Preview

Download
scribd
/*********** DO NOT ALTER ANYTHING BELOW THIS LINE ! ************/ var s_code=s.t();if(s_code)document.write(s_code)//-->