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APPRAISAL OF TRADE FINANCE CREDIT

Summer Project Report

Submitted in partial fulfillment of the requirements For Master of Management Studies (2011-13)
SUBMITTED BY

Vinisha Deepak Panchwani Roll No. (PG-11-036)

IES Management College and Research Centre Bandra, Mumbai

At Bank of Baroda (Opera House)Mumbai

IES Management College and Research Centre Bandra, Mumbai


MAY JUNE 2012

Students Declaration
I hereby declare that this report, submitted in partial fulfillment of the requirement for the award for the Post Graduate Diploma in Management, to IES Management College and Research Centre is my original work and not used anywhere for award of any degree or diploma or fellowship or for similar titles or prizes.

I further certify that without any objection or condition subject to the permission of the company where I did my summer project, I grant the rights to IES Management College and Research Centre to publish any part of the project if they deem fit in journals/Magazines and newspapers etc without my permission.

Place

: Mumbai

Date

: ____________
Signature

---------------------------Name Class : Vinisha Deepak Panchwani : PGDM 2011-13

Roll No : PG-11-036

ACKNOWLEDGEMENT
This project report is guidance and knowledge imparted to me by various mentors at Bank of Baroda, Opera House Branch Mumbai during my summer internship. It was very valuable learning experience for me.

I would like to thank

Mr. Chaudhuri

Asst. General Manager

Mr. Atul Kumar Trivedi Asst. General Manager (New) Mr. Manohar Jadhav Mr. Vikas Pathak Mr. Rahul Gamre Ms. Noorja Mam Mr. Mayur Gadpade Ms. Aarti Kabre Senior Manager Credit Senior Manager Credit Officer

I was able to gain insights of credit department in Bank of Baroda within a short period of two months. Last but not the least I would like to thank each and every staff member and entire non-staff members of Bank of Baroda family for their support and help as and when required.

My special thanks and gratitude to CA. Pooja Gupta who was instrumental in granting this project to me.

Table of Contents
Chapter I: Executive Summary ........................................................................................................................... 1 1.1 Introduction to Banking Sector ..................................................................................................................... 2 1.2 Introduction to Bank of Baroda ..................................................................................................................... 4 1.3 Introduction to Trade Finance ....................................................................................................................... 8 Need for Trade Finance ................................................................................................................................... 8 a) Pre Shipment Finance ............................................................................................................................. 9 b) Post Shipment Finance ............................................................................................................................... 10 Chapter II: Objective of the Study .................................................................................................................... 12 2.1 Methodology ............................................................................................................................................... 13 2.2 Limitations of the study ............................................................................................................................... 14 Chapter III :Analysis and Findings ................................................................................................................... 15 3.1 Overview of Loans ...................................................................................................................................... 16 a) b) Fund based Credit Facility ................................................................................................................... 16 Non Fund Based Credit Facility .......................................................................................................... 20

3.2 UCP 600 ...................................................................................................................................................... 34 3.3 FEDAI Guidelines ....................................................................................................................................... 36 3.4 Credit Rating ............................................................................................................................................... 38 3.4 Proposals ..................................................................................................................................................... 44 3.5 Export Credit Guarantee Corporation (ECGC) ........................................................................................... 50 3.6 CREDIT MONITORING ............................................................................................................................ 51 a) b) c) Monthly Monitoring Report (MMR) ................................................................................................... 51 Consortium Banking ............................................................................................................................ 52 Multiple Banking Arrangement ........................................................................................................... 53

3.6 CASE STUDY ANALYSIS ........................................................................................................................ 55 Recommendations ............................................................................................................................................. 68 References Bibliography ..................................................................................................................................... 69

List of Abbreviations
AFS ABS BPLR BG BP BD CMA CRISIL CARE CIBIL CA CC CGFTMSE CAG DER DP DSCR EMI ECBs ECGC FD FB FBP FBD ICRA LOC LC MEA MSEs MSMEs MBPF NPA NSC NFB OD PC PAT TEV TNW QMR QIS Annual Financial Statement Asset Backed Security Benchmark Prime Lending Rate Bank Guarantee Bills Purchase Bills Discounting Credit Monitoring Arrangement Credit Rating Information Services of India Limited Credit Analysis and Research Credit Information Bureau (India) Ltd Current Account Cash Credit Credit Guarantee Fund Trust for Micro and Small Enterprises Comptroller and Auditor General of India Debt to Equity Ratio Demand Promissory Debt service Coverage Ratio Equated Monthly Installment External Commercial Borrowings Export Credit and Guarantee Corporation Fixed Deposits Fund Based Foreign Bill Purchase Foreign Bill Discounting International Credit Rating Agency Letter of Comfort Letter of Credit Ministry of External Affairs Micro and Small Enterprises Micro, Small and Medium Enterprises Maximum Permissible Bank Finance Non Performing Assets National Savings Certificate Non Fund Based Over Draft Packing Credit Profit After Tax Techno Economic Viability Study Tangible Net worth Quarterly Monitoring Reports Quarterly Income Statement
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Chapter I: Executive Summary


Bank of Baroda has seen a phenomenal increase in their deposits and advances over the years. The report highlights various norms and policies followed by the bank before granting bank finance and monitoring of the account and also a study of banks credit Loan policy, Risk management, Credit Appraisal and Monitoring of the same.

The project has been focused Appraisal of Trade Finance Credit which shows the overall concept and mechanism of Trade Finance. It also includes the Fundamental Principles of Credit Appraisal of Proposals. The Method of study was based on secondary data and various information was provided by the staff members in Bank of Baroda.

Credit appraisal is done to evaluate the credit worthiness of a borrower. The credit appraisals for any organization basically follow these steps: Assessment of credit need, financial statement analysis, financial ratios of the company, credit rating, working capital requirement, term loan analysis, submission of documents, NPA classification and recovery.

Banks provide various services to the importer and exporter for carrying out International Trade. Offering Credit is an operation fraught with risk. Before offering credit to an organization, its financial health must be analyzed. Based on the financial health of an organization, banks assign Credit ratings. These credit ratings are used to fix the interest rate and quantum of installment.

This study aims to analyze the credit health of organizations that approach Bank of Baroda for credit facilities. After analyzing the credit health, the credit rating is determined. On the basis of credit rating, the interest rate guidelines circular is consulted to fix a price of credit facilities i.e. determine interest rate.

1.1 Introduction to Banking Sector A snapshot of the banking industry:


Section 6 of the Banking Regulation Act 1949 defines Bank as accepting for the purpose of lending or investment of deposits of money from public repayable on demand or otherwise and withdrawable by cheque, drafts order or otherwise.

The Reserve Bank of India (RBI), as the central bank of the country, closely monitors developments in the whole financial sector. Recently, the RBI took a few important steps to make the Indian Banking industry more robust and healthy. This includes de-regulation of savings rate, guidelines for new banking licenses and implementation of Basel Norm III. Since March 2002, Bankex (Index tracking the performance of leading banking sector stocks) has grown at a compounded annual rate of about 31%. After a very successful decade, a new era seems to have started for the Indian Banking Industry. According to a Mckinsey report, the Indian banking sector is heading towards being a high-performing sector. If we look at 5 years historical performance of different types of players in the banking industry, public sector bank has grown its deposits, advances and business per employee by the highest rate 21.7%, 23% and 21.1% respectively. As far as net interest income is concerned, private banks are ahead in the race by reporting 24.2% growth, followed by pubic banks (21.4%) and then by foreign banks (14.8%). Though the growth in the business per employee and profit per employee has been the highest for public sector banks, in absolute terms, foreign banks have the highest business per employee as well as profit per employee. In the last 5 years, foreign and private sector banks have earned significantly higher return on total assets as compared to their pubic peers. If we look at its trend, foreign banks show an overall decreasing trend, private banks an increasing trend and Public banks have been more or less stagnant. The net NPA of public sector bank was also significantly higher than that of private and foreign banks at the end of FY11, which indicates the asset quality of public banks is comparatively poor. The Capital Adequacy ratio was also very high for private and foreign bank as compared to public banks.

After looking at industry performance, lets see how the different players in the Banking Industry have performed in the last five years

1.2 Introduction to Bank of Baroda

Brief History:
Bank of Baroda is having a long, eventful and glorious history of more than 103 years. HH Sir. Maharaj Sayajirao-III founded the Bank. The Bank made a humble beginning in 1908 in a small building in Baroda. On 20th July 1908 Bank of Baroda Limited was registered under the Baroda Companies Act of 1897, with a paid up capital of Rs. 10 lacs. Soon after establishment, the Bank extended its operations to three other commercial centers of Gujarat namely, Surat, Mehsana and Navsari. In 1919, the Bank crossed the state frontiers by setting up Mumbai Main Office.

In the year 1935 Bank became a scheduled Bank. RBI included the Bank in the second schedule of RBI and brought under direct control of RBI. The first safe deposit lockers were provided at Baroda in 1939. At the time of independence in 1947, Bank of Baroda was a regional bank with 48 branches. However, it found a place in Indias Fortune Five list of Banks.

Board of Directors
1. 2. Shri M.D. Mallya I) Shri Rajiv Kumar Bakshi II) Shri N S Srinath : : : Chairman & Managing Director Executive Director Executive Director

Mission Statement:
To be a top ranking National Bank of International Standards committed to augmenting stake holders' value through concern, care and competence.
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Subsidiaries (Domestic):
Nainital Bank Ltd., BOBCARDS Ltd., BOB Capital Market Ltd.

Associates (Domestic):
Baroda Pioneer Asset Management Company Ltd India First Life Insurance Company Limited Baroda Uttar Pradesh Gramin Bank Baroda Rajasthan Gramin Bank Baroda Gujarat Gramin Bank Nanital -Almora Kshetriya Gramin Bank Jhabua-Dhar Kshetriya Gramin Bank

Subsidiaries (Overseas):
Bank of Baroda (Botswana) Ltd. Bank of Baroda (Kenya) Ltd. Bank of Baroda (Uganda) Ltd. Bank of Baroda (Guyana) Ltd. Bank of Baroda (UK) Ltd. Bank of Baroda (Tanzania) Ltd Bank of Baroda (Trinidad & Tobago) Ltd.

Representative Offices (Overseas)


Bank of Baroda (Thailand) Bank of Baroda (Australia)

Associate (Overseas)
Indo-Zambia Bank Ltd. (Lusaka)

Awards for the Bank


Best Public Sector Bank (PSB) by CNBC-TV18 & MCX Golden Peacock Award for Excellence in Corporate Governance by Institute of Directors & World Forum for Corporate Governance received in London Dainik Bhaskar India Pride Award for 2011 Most Efficient Bank in Kenya Best Initiatives in Inclusive Banking FIBC Banking Award Dun & Bradstreets Leading PSB in Global Business Development Category National Award for Performance under SME Business Award for Best Utilisation of Intellectual Resources Best Growing Large Bank by Business World-PWC Business Leadership Award by NDTV- Best PSB in 2011 Award for Excellence in Financial Reporting by ICAI in PSB category

Strategies and Action Points


Resource Mobilization Resource Deployment Financial Inclusion Non-interest Income Wealth Management Alternate Delivery Channels Asset Quality Management Organizational Restructuring & BPR HR & Support Services To Be Most Admired Bank

PROGRESS AT A GLANCE OF BANKS PERFORMANCE


Particulars Liabilities Share Capital Reserves & Surplus Net Worth Secured Loans Unsecured Loans TOTAL LIABILITIES Assets Gross Block (-) Acc. Depreciation Net Block Capital Work in Progress. Investments. Inventories Sundry Debtors Cash And Bank Loans And Advances Total Current Assets Current Liabilities Provisions Total Current Liabilities NET CURRENT ASSETS Misc. Expenses TOTAL (A+B+C+D+E) ASSETS 4,921.59 2,580.09 2,341.50 0.00 83,209.40 0.00 0.00 64,168.54 297,602.02 361,770.56 11,400.46 0.00 11,400.46 350,370.11 0.00 435,921.01 4,548.16 2,248.44 2,299.72 0.00 71,260.63 0.00 0.00 49,934.07 4,266.60 1,981.84 2,284.76 0.00 61,182.38 0.00 0.00 35,467.06 3,954.13 1,644.41 2,309.72 0.00 52,445.88 0.00 0.00 24,087.12 148,564.01 172,651.13 16,538.15 0.00 16,538.15 156,112.98 0.00 210,868.58 3,787.14 1,360.14 2,427.01 0.00 43,870.07 0.00 0.00 22,299.29 111,003.15 133,302.44 12,594.41 0.00 12,594.41 120,708.03 0.00 167,005.10 Mar'12 12 Months 412.38 27,064.47 27,476.85 23,573.05 384,871.11 435,921.01 Mar'11 12 Months 392.81 20,600.30 20,993.11 22,307.85 Mar'10 12 Months 365.53 14,740.86 15,106.38 13,350.08 Mar'09 12 Months 365.53 12,470.01 12,835.54 5,636.09 192,396.95 210,868.58 Mar'08 12 Months 365.53 10,678.40 11,043.93 3,927.05 152,034.13 167,005.10

305,439.48 241,044.26 348,740.45 269,500.73

234,902.76 179,382.50 284,836.83 214,849.56 9,656.73 0.00 9,656.73 8,815.97 0.00 8,815.97

275,180.10 206,033.59 0.00 0.00

348,740.45 269,500.73

1.3 Introduction to Trade Finance Credit and Finance is the life blood of any business whether domestic or international. It is more important in the case of Export transactions due to the prevalence of novel non- price competitive techniques encountered by exporters in various nations to enlarge their share of world markets. The selling techniques are no longer confined to mere, quality, price or delivery schedules of the products but are extended to payment terms offered by exporters. Liberal payment terms usually score over the competitors not only of capital equipment but also of consumer goods. The payment terms however depends upon the availability of finance to exporters in relation to its quantum, cost and the period at pre- shipment and post- shipment stage.

Need for Trade Finance To cover commercial & Non-commercial or political risks attendant on granting credit to a buyer. To cover natural risks like an earthquake, floods etc.

An exporter may avail financial assistance from any bank which considers the ensuing factors: Availability of funds at the required time to the exporter. Affordability of the cost of funds. Guidelines for Banks dealing in Trade Finance When a commercial bank deals in export finance it is bound by the ensuing guidelines: a. Exchange control regulations. b. Trade control regulations. c. Reserve Banks Directives. d. Export Credit Guarantee Corporation Guidelines. e. Guidelines of Foreign Exchange Dealers Association of India.

Bank now have a look at the different types of export finance. Basically the point separating the two types of finances is related to whether the financial assistance is granted to an

exporter prior to or after the shipment of the goods. Thus, as indicated above the two types of export finances are as follows: Pre- Shipment Finance Post- Shipment Finance

a) Pre Shipment Finance Financial assistance extended to the exporter from the date of receipt of the export order till the date of shipment is known as Pre-Shipment credit. Such finance is extended to an exporter for the purpose of procuring raw materials, processing, packing, transporting, warehousing of goods meant for exports. Pre- Shipment Finance is available in the form of packing credit and advances against receivables from the government like duty drawback, etc. Pre Shipment Finance is essentially a working capital advance made available for specific purpose of procuring or processing or manufacturing of goods meant for export.

Two essential features of packing credit advances are:a. There should be an export order or a letter of credit. b. The advances to be liquidated from the relative export proceeds.

Importance of Finance at Pre-Shipment Stage:


To purchase raw material and other other inputs to manufacture goods. To assemble the goods in the case of merchant bankers. To store the goods in suitable warehouses till the goods are shipped. To pay for packing, marking and labeling of goods. To pay for pre-shipment inspection charges. To import or purchase from the domestic market heavy machinery and other capital goods to produce export goods. To pay for consultancy services. To pay for export documentation expenses.

b) Post Shipment Finance It is the loan or credit given by an institution to the exporter from the date of extending the credit (after the shipment of goods) to the date of realization of export proceeds.

Post- Shipment finance is available in the form of: Duty export bills purchased/ negotiated/ discounted. Advances against bills sent on collection basis. Advances against export on consignments basis. Advances against drawback. Advances against undrawn balances.

It is essentially an advance against receivables which will be in the form of shipping documents.

Credit facility extended to an exporter from the date of shipment of goods till the realization of the export proceeds is called Post-Shipment Credit.

Importance of Finance at Post-Shipment Stage:


To pay to agents/ distributors and others for their services. To pay for publicity and advertising in the overseas market. To pay for port authorities, custom and shipping agents charges. To pay towards export duty or tax, if any. To pay towards ECGC premium. To pay for freight and other shipping expenses. To pay towards marine insurance premium, under CIF contracts. To meet expenses in respect of after sale services. To pay towards such expenses regarding participation in exhibitions and trade fairs in India and abroad. To pay for representatives abroad in connection with their stay board.

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The following are the Salient Features of Post-Shipment Finance: 1) In the case of bills purchased, discounted or negotiated, interest for transit period up to notional due date would be charged at the time of negotiation, purchase or discount. 2) If in the above case, proceeds are credited to the Nastro accounts of banks before the expiry of normal transit period, in the case of demand or usance bills, interest is recovered for actual number of working days for which finance is outstanding. 3) Interest is charged up to the date of reversal of rupee liability for advances against bills on collection basis. 4) Where export bills are not realized within 180 days from transit period, they would not be eligible for concessional interest and would attract overdue interest. 5) If the packing credit advances were not liquidated from the export proceeds they would not be eligible for concessional interest but would attract commercial interest from the date of availment of preshipment advances. 6) Post shipment advances not realized, but recovered by debit of exporter accounts would also attract commercial rate of interest from the date of availment of post shipment advance.

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Chapter II: Objective of the Study


1. To find out the role of Trade finance and credit appraisal of Bank of Baroda. 2. To study procedure adopted in evaluating credit proposal by using case analysis. 3. To understand the rules laid down by bank for lending of money.

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2.1 Methodology
Since the research carried out for this project is descriptive in nature, the various documents and official files would require for understanding the methodology used by the banks. The data collection can be done by personal interview or direct observations. At the same time, related articles, newspapers, magazines, in-house journals of banks, etc were referred. The information on the project under consideration can be obtained by the bank employees and officials. Also I went through various files and the official correspondence of the bank for better understanding the topic under the study. The methodology also include finding out the financial ratio, understanding the credit rating and assessment of working capital and term loan of the companies by making the fresh proposal for working capital and term

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2.2 Limitations of the study


As the credit rating is one of the crucial areas for any bank, some of the technicalities are not revealed which may have cause destruction to the information and our exploration of the problem. As some of the information is not revealed, whatever suggestions generated, are based on certain assumptions. Credit appraisal system includes various types of detail studies for different areas of analysis, but due to time constraint, our analysis was of limited areas only.

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Chapter III :Analysis and Findings


Process for Credit appraisal Receipt of application from applicant | Receipt of documents (Balance sheet, KYC papers, Different govt. registration no., MOA, AOA, and Properties documents) | Pre-sanction visit by bank officers | Check for RBI defaulters list, willful defaulters list, CIBIL data, ECGC caution list, etc. | Title clearance reports of the properties to be obtained from empanelled advocates | Valuation reports of the properties to be obtained from empanelled valuer/engineers | Preparation of financial data | Proposal preparation | Assessment of proposal | Sanction/approval of proposal by appropriate sanctioning authority | Documentations, agreements, mortgages | Disbursement of loan | Post sanction activities such as receiving stock statements, review of accounts, renew of accounts, etc
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3.1 Overview of Loans Banks Credit Facilities

Fund Based Credit Facilities

Non-Fund Based Credit Facilities

a) Fund based Credit Facility: Fund based functions of a bank are those in which banks make deployment of their funds either by granting advances or by making investments for meeting gaps in funds requirements of their customers/ borrowers. Fund-based functions of a bank may be classified as follows:

Fund Based Credit Facilities

Cash Credit

Overdraft

Packing Credit

Bills Purchasing/Bills Discounting

Working Capital Facility: Working Capital is the blood of business. No business can survive without adequate working capital. Working Capital is that part of the capital required to purchase raw materials, meet the salaries and wages of employees meet movement expenses of goods and similar recurring expenses. It takes into account trade credit to customers and from suppliers. The timing mismatch and the transfer to title of the product and settlement of dues along with routine expenses (salaries, communication expenses, etc) give
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rise to the demand for short term funds, generally known as working capital funding requirement.

1. Cash Credit: Cash Credit makes a provision by bank for loan by depositing the sanctioned amount of the loan into new account from which borrower can withdraw as per requirement within permissible amount fixed by bank for specific time or period.

Cash credit theory based on Pay on Demand. It is provided for a period of less than 12 months i.e. 1 year. Cash credit facilities fulfill the requirement of working capital which is needed to run daily operation in a business concern. It is needed against local purchase of Raw material, Book debts, Receivables, stocks etc. It is similar to loan but different from conventional loan. In this system, Bank maintains a Cash Credit Account for their borrower. Cash credit makes a provision for credit by transferring the sanctioned amount into Cash Credit Account from which borrower can withdraw as per their requirement. Borrower can withdraw money within sanctioned limit & daily limit. Cash Credit Account almost similar to Current Account but its not Current Account. In cash credit system, interest charged on amount actually withdrawn in daily basic. Borrower cant withdraw total sanctioned amount of loan at a time.

Bank or holds Stock or Book Debt (as security) against advance sanctioned. The security or guarantee remains accessible by Bank until Cash Credit repaid in full. Depending on the security holds, Cash Credit facility is two types i.e. Pledge (where Bank holds physical control of stock & book debt.) & Hypothecation (borrower holds total control of stock and submits periodical statement of stock to the lender). Cash Credit-Hypothecation system is broadly used.

Cash credit amount is pre-approved and the repayment of loan is the same whether borrower is using cash credit or not. If cash credit amount is paid off before term of loan is complete, borrower is liable to pay penalty fee of 2 % based on of loan amount.

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This is the process followed under Cash Credit Facility Application form is accepted and acknowledged. Personal interview /discussions are held with the customers by the banks officials. Bank's Field Investigation team visits the business place/work place of the applicant. (All the documents submitted are verified by the bank with the originals so as to ensure the authenticity of the same.) Bank verifies the track record of the applicant with the common information sharing bureau (CIBIL). In case of fresh projects the bank analyses the back ground of the applicant/firm/company and the Technical feasibility/financial viability of the project based on various parameters and also the existing market conditions. Depending on the size of the project the file is put up for sanction to the appropriate level of authority.

2. Overdraft: It can avail Loan against NSC/KVP/Relief bonds of RBI/LIC policies to meet any expenses. All properly introduced individual customers, who have capacity to service the loan and interest, are eligible for this facility. This facility provided for a period of less than 12 months i.e. 1 Year which means that it is reviewed every year. The security to be provided is Charge on securities of Govt. /PSUs, Pledge of NSCs/IVP/ KVP/LICs etc or any other such security transferable/assignable to the Bank. The Documents to be submitted are Salary Certificate / IT Return copy for assessing the capacity to service the interest / installment and Original NSC / KVP/ RBI Relief Bond / LIC Policy.

This is the process followed in overdraft facility: Application form is accepted and acknowledged. Personal interview /discussions are held with the customers by the banks officials.

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Bank's Field Investigation team visits the business place/work place of the applicant. (All the documents submitted are verified by the bank with the originals so as to ensure the authenticity of the same.)

Bank verifies the track record of the applicant with the common information sharing bureau (CIBIL).

In case of fresh projects the bank analyses the back ground of the applicant/firm/company and the Technical feasibility/financial viability of the project based on various parameters and also the existing market conditions.

Depending on the size of the project the file is put up for sanction to the appropriate level of authority.

3. Packing Credit: Packing credit is a loan/ cash credit facility sanctioned to an exporter in the Pre-Shipment stage. This loan facilitates the exporter to purchase raw materials at competitive rates and manufacture or produce goods according to the requirement of the buyer and organize to have it packed for onward export. The lending institutions seek a Letter of Credit opened in favour of the exporter from the overseas buyer along with the irrevocable (cannot be canceled once drawn) Purchase Order favoring the exporter. Packing Credit facility will cover all the working capital needs of the exporter including raw materials, wages, packing costs and all pre-shipment costs.

Packing credit is available for generally a period of 90 days and the exporter has to pay lower rate of interest compared to traditional Overdraft or Cash Credit facility. Exporters use this facility so they can bid the most competitive price for export thus gaining more business opportunities for export. The process followed for packing credit facility is as follows: Discussions and Meetings are held with the customers by the banks officials. Bank's Field Investigation team visits the business place/work place of the applicant. This investigation is to be carried out by professionals or Experts wherever necessary.

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(All the documents submitted are verified by the bank with the originals so as to ensure the authenticity of the same.) Bank verifies the track record of the applicant with the common information sharing bureau (CIBIL) and RBI Caution list. In case of fresh projects the bank analyses the back ground of the applicant/firm/company and the Technical feasibility/financial viability of the project based on various parameters and also the existing market conditions through TEV (Techno Economic Viability) Study. Depending on the size of the project the file is put up for sanction to the appropriate level of authority.

4. Bills Purchasing (BP) / Foreign Bills Purchasing (FBP): Bill purchase facility is extended against clean demand bills like Cheques/ drafts/ bills of exchange/ hundies and demand documentary bills. The following points to be considered while purchasing clean bills/ Cheques: Bills/ cheques should be purchased from account holders. Cheques drawn on scheduled and other first class banks should only be purchased. Stale cheques and post dated cheques should not be purchased. Cheques drawn by the borrowers on themselves, on their branches and associate concerns and/or on their close relatives should not be purchased. Where clean bills are drawn in respect of goods already supplied, it should satisfy about the bonafides of the transaction.

b) Non Fund Based Credit Facility: Credit facilities, which do not involve actual deployment
of funds by banks but help the obligations to obtain certain facilities from third parties, are termed as non-fund based facilities. These facilities include issuance of letter of credit, issuance of guarantees, which can be performance guarantee/financial guarantee/ deferred payment guarantee and Letter of Comfort. For its export financing purposes as well as for supplying and erection of transmission it mainly uses non fund based working capital.

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Non Fund Based

Bank Guarantee

Letter of credit

Letter of comfort

Bank Guarantee A contract of guarantee is defined as a contract to perform the promise or discharge the liability of the third person in case of the default. There are three parties to the contract of guarantees: a) Principal debtor : person at whose request the guarantee is executed b) Beneficiary: Person to whom the guarantee is given & who can enforce it in case of default. c) Surety: The person who undertakes to discharge the obligations of the applicant in case of his default. Thus, guarantee is a collateral contract, consequential to a main contract between the Principal Debtor & the beneficiary. For every issue of guarantee postage charges is charged in all the cases irrespective of bank guarantee amount.

Guidelines on conduct of Bank Guarantee business Branches, as a general rule, should limit themselves to the provision of financial guarantees & exercise due caution with regards to performance guarantee business. The subtle difference between the two types of guarantees is that under a financial guarantee, a bank guarantees a customer financial worth, creditworthiness & his capacity to take up financial risks. In a performance guarantee, the banks guarantee obligations relate to the performance related obligations of the applicant (customer). While issuing financial guarantees, it should be ensured that customers should be in a position to reimburse the Bank in case the Bank is required to make the payment under the guarantee. In case of performance guarantee, branches should exercise due caution & have sufficient experience with the customer to satisfy themselves that the customer has the necessary
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experience, capacity, expertise, & means to perform the obligations under the contract & any default is not likely to occur. Branches should not issue guarantees for a period more than 18 months without prior reference to the controlling authority. Extant instructions stipulate an Administrative Clearance for issue of Bank Guarantees for a period in excess of 18 months. However, in cases where requests are received for extension of the period of BGs as long as the fresh period of extension is within 18 months. No bank guarantee should normally have a maturity of more than 10 years. Bank guarantee beyond maturity of 10 years may be considered against 100% cash margin with prior approval of the controlling authority. More than ordinary care is required to be executed while issuing guarantees on behalf of customers who enjoy credit facilities with other banks. Unsecured guarantees, where furnished by exception, should be for a short period & for relatively small amounts. All deferred payment guarantee should ordinarily be secured.

Appraisal of Bank Guarantee Limit Proposals for guarantees shall be appraised with the same diligence as in the case of fund-base limits. Branches may obtain adequate cover by way of margin & security so as to prevent default on payments when guarantees are invoked. Whenever an application for the issue of bank guarantee is received, branches should examine & satisfy themselves about the following aspects: a) The need of the bank guarantee & whether it is related to the applicants normal trade/business. b) Whether the requirement is one time or on the regular basis c) The nature of bank guarantee i.e., financial or performance d) Applicants financial strength/ capacity to meet the liability/ obligation under the bank guarantee in case of invocation. e) Past record of the applicant in respect of bank guarantees issued earlier; e.g., instances of invocation of bank guarantees, the reasons thereof, the customers response to the invocation, etc. f) Present o/s on account of bank guarantees already issued

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g) Margin h) Collateral security offered

Extension of Bank Guarantee Once the validity period of guarantee gets over it can be extended further. There are some charges for extension of guarantee so along with the processing charges this extension charges which includes some amount which is to be added and with that service tax of 12.36% on the clubbed amount.

General Guidelines For all public sector Banks As regards the purpose of the guarantee, as a general rule, the banks should confine themselves to the provision of financial guarantees and exercise due caution with regard to performance guarantee business. As regards maturity, as a rule, banks should guarantee shorter maturities and leave longer maturities to be guaranteed by other institutions. No bank guarantee should normally have a maturity of more than 10 years. However, in view of the changed scenario of the banking industry where banks extend long term loans for periods longer than 10 years for various projects, it has been decided to allow banks to also issue guarantees for periods beyond 10 years. While issuing such guarantees, banks are advised to take into account the impact of very long duration guarantees on their Asset Liability Management. Further, banks may evolve a policy on issuance of guarantees beyond 10 years as considered appropriate with the approval of their Board of Directors. Types of bank Guarantees

1. Financial Bank Guarantee: Financial Bank Guarantee is a bond which is not cancelable and ensures the payment of the interest and repayment of the principal amount as per the schedule agreed upon by both the borrower and the lender. A guarantor to this debt security

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is liable to pay off the liability in case the first party or the issuer of the Financial Bank Guarantee fails to make the payment. In Bank of Baroda Financial Guarantees comes for Payment to Tax Authorities, Revenue Authorities, Payment of Excise Duties, Job Disputed claims (Claim on Property).In case of Financial Guarantees usually100% margin is taken. Comparatively the commission charges are higher in this particular guarantee. The Commission rate as on date is 0.28% per month.

For E.g.:- A bank guarantee for 116761/- was sanctioned for a period of 3 months i.e. from 12.06.2012 9.09.2012 against FD of 117000 from an XYZ company and beneficiary being Federation of Indian Chambers of Commerce & industry. So the Commission will be 116761*0.28%*3 (months).

2. Performance Bank Guarantee: The seller issues a Performance Bank Guarantee to ensure or give concrete commitment to the buyer through its bank. This method ensures the buyer the timely execution of an agreement to have the goods exported or delivered or services performed. In case the seller defaults on execution of the terms agreed upon the Performance Bank Guarantee ensures the buyer the payment of the guarantee amount by the issuing bank. Generally the performance Bank guarantee is 10 percent of the total assignment or project value.

In Bank of Baroda Performance Guarantees usually takes 15 25 % margin is taken. Comparatively the commission charges are lower in this particular guarantee. The Commission rate as on date is 0.23% per month.

For E.g.:- Banks Performance guarantee of Rs 14660/- margin being 25% requested by ABC Company and beneficiary being TATA Institute of Social Science. Performance based on the word done for Mini Modernization, DOL Control Panel, Landing Lock, Complete Harnessing, COP & LPB Complete.

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3. Deferred Bank Guarantee: It is type of Financial Guarantee. Usually this is not used Earlier this was used. The payment is to be made in terms of Installment. Every time Banks Liability will be reduced to the extent of payment made.

For E.g.: If XYZ takes Machinery worth 24 Cr and payment is to be made in 2 years than every month they need to pay 1 Cr with interest. If in case company defaults to pay in a particular month the bank is liable to pay in a particular month the bank is liable to pay for that particular month or else for all the remaining months depends on terms and conditions of the contract.

Letter of credit
Definition In simple terms, a letter of credit is a bank undertaking of payment separate from the sales or other contracts on which it is based. It is a way of reducing the payment risks associated with the movement of goods.

Expressed more fully, it is a written undertaking by a bank (issuing bank) given to the seller (beneficiary) at the request, and in accordance with the buyers (applicant) instructions to effect payment that is by making a payment, or by accepting or negotiating bills of exchange (drafts) up to a stated amount, against stipulated documents and within a prescribed time limit.

Why use a Letter of Credit?

The need for a letter of credit is a consideration in the course of negotiations between the buyer and seller when the important matter of method of payment is being discussed. Payment can be made in several different ways: by the buyer remitting cash with his order; by open account whereby the buyer remits payment at an agreed time after receiving the goods; or by documentary collection through a bank in which case the buyer pays the collecting bank for
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account of the seller in exchange for shipping documents which would include, in most cases, the document of title to the goods. In the aforementioned methods of payment, the seller relies entirely on the willingness and ability of the buyer to effect payment. When the seller has doubts about the credit-worthiness of the buyer and wishes to ensure prompt payment, the seller can insist that the sales contract provides for payment by irrevocable letter of credit. Furthermore, if the bank issuing the letter of credit (issuing bank) is unknown to the seller or if the seller is shipping to a foreign country and is uncertain of the issuing banks ability to honour its obligation, the seller can, with the approval of the issuing bank, request its own bank to assume the risk of the issuing bank by confirming the letter of credit.

Typical Documents required includes:

Transport Documents: Transport Document Covering at Least Two Different Modes of Transport (multimodal or combined transport document) Bill of Lading Non-Negotiable Sea Waybill Charter Party Bill of Lading Air Transport Document Road, Rail or Inland Waterway Transport Documents

Insurance Documents: Insurance Policy Insurance Certificate Open Cover

Financial Documents: Bill of exchange (Draft)

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Commercial Documents: Commercial Invoice Packing List; Weight List Inspection Certificate Certificate of Analysis

Official Documents: Certificate of Origin Health Certificate Consular Invoice, Legalized Invoice

Parties Involved in Letter Of Credit Applicant: The buyer or importer of goods. Issuing Bank: Importers bank who issue the L/C.

Beneficiary: The party to whom the L/C is addressed. The seller or supplier of goods. Advising Bank: Issuing Banks branch or correspondent bank in the exporters country to whom the L/C is send for onward transmission to the beneficiary.

Confirming Bank: The Bank in beneficiary country, which guarantees the credit on the request of the issuing bank.

Negotiating Bank: The bank to whom beneficiary presents his documents for payment of L/C.

Types of Letter of Credit


Revolving Letter of Credit

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A Letter of Credit issued for a specific amount within which series of BP or BN are purchased/ negotiated. The limit will be automatically reinstated on retirement of earlier bill purchased or negotiated, is called Revolving Letter of Credit. Bank should recover the commission on each reinstatement. In case of Revolving L/C's aggregate turnover of bills under the L/C within the validity period of L/C in addition to a suitable limit for single transaction should be specified. Red Clause and Green Clause Letter of Credit Red clause Letter of credit which authorize the bank to provides finance to exporter at the preshipment stage which is known as packing credit finance. The credit facility granted under such letter of credit is to be liquidated by purchase or negotiation of Bills under the L/C. Green Clause letter of Credit is one which authorized the bank to grant further finance to exporter for storage of goods in the name of bank, payment of dockyard, port and insurance charges etc. Before the shipment is taking place. Stand - By Letter of Credit In certain countries where issuance of guarantee is prohibited, banks are issuing stand by L/C. This L/C guaranteed the payment in the event of failure of the opener to perform the contractual obligations. Stand by credit is one which provides for tendering of documents relating to transactions between the buyer and seller at the counter of the issuing bank for settlement of transactions in case of failure of the buyer. The stand by L/C also provides for availing finance by the seller or exporter from the bank, before the transactions are settled. Back to Back Letter of Credit

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On many occasion, it may happen that the beneficiary of letter of credit has to procure raw materials or finished goods etc. from various suppliers. He will request his banker to issue letter of credit in favour of these suppliers on the basis of letter of credit he is having. The letter of credit issued in favour of the local or other suppliers as above is called back to back letter of credit. The terms and conditions of such back to back L/C should be in conformity with the original letter of credit. Transferable Credit When a letter of credit authorize to transfer the credit to the second beneficiary at the request of first beneficiary to the extent of amount and quantity of goods. This is called transferable credit. This credit can be transferred once only. This means that second beneficiary can not transfer the portion allotted to him to next supplier. However, the first beneficiary has a right to substitute the invoice etc.

Letter of Credit Process

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1. The exporter and importer sign a bill of sale contract. 2. The importer applies to his bank, the issuing bank, to open a letter of credit. 3. The issuing bank sends the advice of the credit to the advising bank. 4. The exporter is advised of the credit. 5. Following shipment of the goods, the exporter presents the documents to the advising bank. 6. After checking the documents and confirming that they agree with the letter of credit terms, payment is made to the exporter. At the same time, the advising bank sends the documents to the issuing bank and requests reimbursement for the letter of credit amount plus the advising bank's fees and expenses. 7. The issuing bank sends the documents to the importer and debits his account for the letter of credit amount plus the fees and expenses of the banks involved. Import and Export Letter of Credit

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Import Letter of Credit Import letter of credit means a commercial letter of credit established in favor of an exporter. It is usually issued by a domestic bank in favor of a foreign seller at an importers request. Import letter of credit has several benefits such as: a. It ensures control and security because payment is made only against the documents specified; b. It ensures the advantage of experience; c. It enhances the bargaining position; and d. It improves the competitive status particularly with suppliers who insist on payment by letter of credit. Import Process Involving a Letter of Credit 1. The importer first request a quote for the merchandise. This may or may not include transportation and insurance costs. 2. The importer prepares a purchase order based on the offer received from the exporter. 3. The exporter creates a pro forma invoice and sends it to the importer. 4. The importer opens a letter of credit with the opening bank in the country.

This involves advising the bank of the documents required from the exporter. As an importer, you not only need the documents required by customs, but also the documents that are required by any other agency regulating your commodity. These may include

Bills of lading Commercial invoice Export packing list Certificate of Origin Insurance certificates
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Licenses (when necessary)

Export Letter Of Credit It all depends on your point of view. From the seller's (beneficiary's) perspective, a To the buyer

commercial letter of credit from a foreign country is an export credit.

(applicant), the same letter of credit is an import credit. An export credit is a conditional payment mechanism whereby the issuing bank irrevocably promises to pay the seller, if presented documents comply with all of the L/C's terms and conditions. As the issuing bank's undertaking is conditional, a commercial letter of credit is not a guarantee of payment.

Export Process Involving a Letter of Credit The importer requests a quotation for goods. 1. The exporter sends the importer a quotation for the goods. 2. The importer sends the exporter a purchase order based on quotation. 3. The exporter creates a sales order based on the purchase order and sends it to the importer, together with the invoice. 4. Optional: Exporter notifies the importer of the exact delivery date and delivery quantity of the goods in an inbound delivery. 5. The importer opens a letter of credit at the opening bank in the country of destination (import country). 6. This letter of credit defines which documents are required by the customs authorities and other parties involved in handling your goods traffic, for example: 1. Bill of lading 2. Commercial invoice 3. Export packing list 4. Certificate of origin 5. Insurance certificates 6. Licenses (if needed)
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7. An Exporter can create and print all the above documents for customs processing, aside from the insurance certificates. The export documentary credit guarantees that payment will be made as long as exporter deliver the goods within the defined time frame and submit the documents defined in the letter of credit. This helps the exporter reduce payment risk. An Exporter can also demand immediate payment within the framework of the LC conditions (assuming the documents are correct), improving cash flow. 8. The opening bank sends the letter of credit to the advising bank in exporters country. 9. The advising bank notifies that a letter of credit has been opened in exporters favor. 10. Exporter dispatch the goods in accordance with the conditions defined in the letter of credit. 11. Exporter provides the advising bank in your country with the appropriate documents to document that the goods were dispatched in agreement with the letter of credit conditions. 12. The advising bank pays an exporter for the goods, based on the received documents. 13. The advising bank sends the documents to the opening bank and receives payment from the customer. 14. The importer receives the goods, submits a customs import declaration, and pays the customs duties to the responsible authorities. 15. An Exporter submits a customs declaration for the exported goods.

Letter of Comfort
A label given to a document sent by a parent company to encourage a lender to make a loan to its subsidiary. True comfort letter - not legally binding. Used in place of a guarantee, which places specic and certain legal obligations on the guarantor. The issue at stake is determining whether a document is a letter of comfort, which would be legally non-binding.

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3.2 UCP 600


UCP 600 is the latest version of the rules that govern letters of credit transactions worldwide. UCP 600 is prepared by International Chamber of Commerces (ICC) Commission on Banking Technique and Practice. Its full name is 2007 Revision of Uniform Customs and Practice for Documentary Credits, UCP 600, and (ICC Publication No. 600). The ICC Commission on Banking Technique and Practice approved UCP 600 on 25 October 2006. The rules have been effective since 1 July 2007. UCP 500 was the rules that had been in implementation before UCP 600. There are several significant differences exist between UCP 600 and UCP 500. Some of these differences are as follows;

The number of articles reduced from 49 to 39 in UCP 600; In order to reach a standard meaning of terms used in the rules and prevent unnecessary repetitions two new articles have been added to the UCP 600. These newly added articles are Article 2 Definitions and Article 3 Interpretations. These articles bring more clarity and precision in the rules;

A definitive description of negotiation as purchase of drafts of documents; New provisions, which allow for the discounting of deferred payment credits; The replacement of the phrase reasonable time for acceptance or refusal of documents by a maximum period of five banking days.

History of UCP First uniform rules published by ICC in 1933. Revised versions were issued in 1951, 1962, 1974, 1983 and 1993. 1933 Uniform Customs and Practice for Commercial Documentary Credits 1951 Revision - Uniform Customs and Practice for Commercial Documentary Credits 1962 Revision - Uniform Customs and Practice for Documentary Credits 1974 Revision Uniform Customs and Practice for Documentary Credits
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1983 Revision Uniform Customs and Practice for Documentary Credits 1993 Revision Uniform Customs and Practice for Documentary Credits Currently majority of letters of credit issued everyday is subject to latest version of the UCP. This widely acceptance is the key sign that shows the importance of the UCP, which are the most successful private rules for trade ever developed.

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3.3 FEDAI Guidelines


Foreign Exchange Dealer's Association of India (FEDAI) was established in 1958 under the Section 25 of the Companies Act (1956). It is an association of banks that deals in Indian foreign exchange and work in coordination with the Reserve Bank of India, other organizations like FIMMDA, the Forex Association of India and various market participants. FEDAI has issued rules for import LCs which is one of the important area of foreign currency exchanges. It has an advantage over that of the authorized dealers who are now allowed by the RBI to issue stand by letter of credits towards import of goods.

As the issuance of standby of letter of Credit including imports of goods is susceptible to some risk in the absence of evidence of shipment, therefore the importer should be advised that documentary credit under UCP 500/600 should be the preferred route for importers of goods.

Below mention are some of the necessary precaution that should be taken by authorized dealers While issuing a stands by letter of credits: 1. The facility of issuing Commercial Standby shall be extended on a selective basis and to the following category of importers i. Where such standby are required by applicant who are independent power producers/importers of crude oil and petroleum products ii. Special category of importers namely export houses, trading houses, star trading houses, super star trading houses or 100% Export Oriented Units. 2. Satisfactory credit report on the overseas supplier should be obtained by the issuing banks before issuing Stands by Letter of Credit. 3. Invocation of the Commercial standby by the beneficiary is to be supported by proper evidence. The beneficiary of the Credit should furnish a declaration to the effect that the claim is made on account of failure of the importers to abide by his contractual obligation along with the following documents. i. A copy of invoice.

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ii.

Nonnegotiable set of documents including a copy of non negotiable bill of lading/transport document.

iii.

A copy of Lloyds /SGS inspection certificate wherever provided for as per the underlying contract.

4. Incorporation of suitable clauses to the effect that in the event of such invoice /shipping documents has been paid by the authorized dealers earlier, Provisions to dishonor the claim quoting the date / manner of earlier payments of such documents may be considered. 5. The applicant of a commercial stand by letter of credit shall undertake to provide evidence of imports in respect of all payments made under standby. (Bill of Entry)

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3.4 Credit Rating


Rating provides an easy way to understand the credit risk and being extensively used. Credit Ratings are of two types- External and Internal ratings. While the former refer to the credit rating conducted by an External agency such as CARE, CRISIL, Moody, S & P, ICRA, and FITCH at the desire of the obligor to facilitate tapping of debt capital market, the internal ratings are assigned by Banks to appropriately reflect the credit risk involved. An internal Ratings system deployed by banks or other financial institutions varies across the board, but the ultimate goal remains the same i.e. credit risk management. External Ratings are given prominence in the standardized Approach; the Internal Ratings are the core of the advanced approaches. Now we will look over both the ratings in detail. Why is rating required? For assessing the risk of the party If the risk is more the rate of interest is also more Sanctioning power (As per Banks guidelines Bank can consider the sanction upto the rating of BOB6 in commercial proposal/ commercial activity in case of retail product upto B+ and if it is below BOB6 he can utilize 75% of his powers.)

External Credit Rating


A credit rating is an assessment by a third party of the creditworthiness of an issuer of financial securities. It tells investors the likelihood of default or nonpayment by the issuer, of its financial obligations. In fact external rating agencies, wherever they exist have a responsible role to play in the debt capital market of an economy. In Bank of Baroda CRISIL, CARE, ICRA and FITCH for accounts with 5 crore and above. Usually companies that desire to approach the public debt market should obtain ratings from at least two agencies. Only if the rating agencies assign a minimum investment grade, can they go ahead with the debt issue. The agencies are supposed to keep in touch with the development associated with the debt issuer and revise ratings in the event of significant credit events. The ratings by these firms are captured by alpha numeric letters, which are often stated to the shortest editorials that could ever be written. The example of Rating System is the Rating Definition shown below:
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Highest quality.AAA Very good qualityAA Good qualityA Medium qualityBBB Lower medium qualityBB Poor qualityB Speculative qualityC DefaultD

While AAA represents the highest quality of credit exposure, the D represents the high credit risk. Usually certain notions like + or - or numerals such as 1, 2, 3 are affixed to the alphabets mentioned above to highlight the distinctions in credit risk under each grade.

However often question arises of how reliable are this external credit ratings? Can a bank skip internal ratings and rely solely on external ratings? The answer to the question is no. The collapse of Enron, which enjoyed investment grade rating just months before its bankruptcy has eroded the faith in the three big credit rating agencies in the US. However, a comforting factor such kind of fiascos is rare, and the rating agencies improve their rating methodology with every such disaster. From a Banks point of view, unless it lacks resources, it ought to put in place an internal credit rating system to evaluate the credit. This is because of the certain inherent defects in external ratings, which are explained below:a. Most external ratings are done in times of debt issues by the obligors and to fulfill a statutory requirement. In such cases, the ratings represent the quality of the particular debt issue. External ratings need not always rate the issuer or the company in full. Accordingly these ratings will not be the real reflection of the issuer rating. For instance, if a debt issue enjoys sound collateral, the external rating of the debt issue would be better than that of the issuer rating. External rating is debt issue oriented rather than borrower specific. b. SEC, SEBI and similar regulatory bodies prescribe certain minimum condition to qualify for debt issues, which screens out almost the entire middle or medium market and smaller business segments. Ratings from external agencies exist only for large listed companies.
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There are no external ratings available for obligors belonging to entities not in a position to meet the eligibility criteria. c. Conflict of interest: The agencies earn a substantial part of their income, in some cases as high as 90%, from ratings assigned to the corporate sector and some point out this as a conflict of interest. It is not unusual to have two agencies come out with different ratings for the same obligor.

External Ratings to be held for accounts above 5 crore CARE PR1+ PR1 PR2 PR3 PR4 & 5 Unrated CRISIL P1+ P1 P2 P3 P4 & 5 Unrated FITCH F1+ F1 F2 F3 F4 & 5 Unrated ICRA A+ A1 A2 A3 A4 & 5 Unrated Risk Weight 20% 30% 50% 100% 150% 100%

Internal credit rating


Management of Credit Risk determines the asset quality of the Bank. An effective way to mitigate credit risk is to have robust credit rating system in place. Bank has introduced Basel II compliant credit risk rating models of M/s CRISIL. The new rating models are based on two-dimensional rating methodologies specified under Basel II requirements wherein 4 types of risks viz. industry risk, business risk, financial risk and management quality risk are assessed pertaining to characteristics on an obligor(borrower) while facilities proposed/sanctioned to a borrower are assessed separately under second dimension of rating i.e. Facility Rating The Credit rating can (i) Identify potential risk in a particular asset.(ii) Allow a bank to maintain healthy Asset Quality (iii) Impart flexibility in pricing assets to meet the required risk return parameters as per the banks strategy and credit policy.

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New CRISIL Rating Models for commercial advances are based on two dimensional rating methodology specified under Basel II Accord requirements. Eleven models for Credit Risk rating of all commercial advances i.e. existing as well as new with exposure of Rs.25 lacs and above (FB+NFB) for implementation have been introduced by our Bank. If the companys 3 years average turnover is above 50 crores than the company falls under large corporate.

Risk Assessment Models (BOBRAM)

Under this model 3 ratings are worked out. 1. Obligor Rating (Borrower rating): Rating for credit worthiness indicating the Probability of Default (PD). The obligor rating is indicative of creditworthiness of an obligor or the Probability of Default (PD) and it is based on the assessment of past; and projected cash flows of the company. 2. Facility Rating: It represents the loss given Default. 3. Composite Rating: It is a rating in which company is indicative of expected loss & it is worked out as the matrix of obligor Rating & Facility rating. For assessment of an obligor, the rating structure consists of evaluation by way of four models viz.:Industry Risk:- The assessment of this module which is external to borrower and is done by assessment of industry related macroeconomic parameters like demand supply gap/capacity utilization level/financial ratios like ROCE/OPM etc. applicable to the specific industry and having different risk weights. Parameters to be looked in Industry Risk: 1. Stage in life cycle of industry 2. Demand Supply Scenario 3. Competition 4. Impact of Government Policies
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5. Environmental Issues 6. Impact of change in technology 7. Length of operating cycle Business Risk: - The assessment of this module is based on internal working of the Borrower and relates to parameters such as after sales service, distribution set up, capacity utilization etc. Parameters to be looked in Business Risk: 1. Position of the Entity in its target market 2. Assessment of immediate buyers 3. Nature of economy of export country 4. Marketing and selling arrangement 5. Operating efficiency 6. Availability of skilled manpower 7. Environment Risk 8. Nature of technology employed 9. Availability of power and other utilities. Financial Risk: - The assessment of this module is based on internal working of the Borrower and relates to parameters; such as past and projected financials. Parameters to be looked in Financial Risk: 1. Financial Flexibility 2. Ability to raise debt from Banks/ Financial Institutions 3. Ability to raise equity from own sources 4. Ability to raise equity from cap markets 5. Past Financials 6. Accounting quality past 7. Future Financials

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Management Quality: - The assessment of this module is based on internal working of the Borrowers management and relates to parameters such as past repayment record, quality of information submitted, group support, etc. Parameters to be looked in Management Risk: 1. Credentials and Background of Promoters 2. Competence or technical skills of management 3. Management succession Plans 4. Constitution of borrower 5. Years of experience in same line of business 6. Payment Record. Obligor rating grades range from BOB 1 to BOB 10 Facility Rating:-It involves assessment of the security coverage for a given facility and indicates the Loss Given Default (LGD) for a particular facility. Facility Rating is dependent upon the type of facility and securities charged to the bank against the facility. Facility rating grade ranges from FR 1 to FR 8 Composite Rating (CR 1 to CR 10) It is matrix of PD and LGD and indicates the Expected Loss in case the facility is defaulted. The composite rating is worked out automatically by software based on the matrix of Obligor Grade and Facility Rating Grade Composite rating grade ranges from CR 1 to CR 10. Bank has accepted BOB 6 as the cut off point for the acceptance of an obligor based on obligor rating carried out as the applicable model Inspection of securities based on Credit rating Credit Rating for BOB1, 2, 3 Half Yearly Basis Credit Rating for BOB4,5- Quarterly Basis Credit Rating for BOB 6 & below- Bi monthly Basis

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3.4 Proposals Kinds of Proposal


1. Proposal for Fresh Limits: - For every facility to be sanctioned we need to make a proposal which shows the companies background and its operations. When a fresh limit comes in case of textiles, constructions or any other sector apart from those which require activity clearance we need to prepare proposal for fresh limit.

The fresh proposal includes: Basic data Issue for consideration Facilities demanded Background of the firm Security coverage Justification Recommendations Financial parameters and assessment Details of fund flow statement Comments on performance Calculation of MPBF Limit. It is to be calculated as under

Actuals ( 2010) 1 2 Total Current Assets Xxx

Actual ( 2011) Xxx Xxx

Estimated (2012) Xxx Xxx

Less: Current Liabilities (Other Xxx than Bank Borrowings)

3 4

Working Capital Gap (1-2) Actual/projected Bank Borrowings

Xxx Xxx

Xxx Xxx

Xxx Xxx

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5 6 7

Total Current Liabilities (2+4) Actual/projected NWC (1-5)

Xxx Xxx

Xxx Xxx Xxx

Xxx Xxx Xxx

Minimum stipulated margin 25% Xxx of C/A (Excl. Export receivables)

8 9 10

Item 3-6 Item 3-7 MPBF (8 or 9 whichever is low)

Xxx Xxx Xxx

Xxx Xxx Xxx

Xxx Xxx Xxx

2. Activity Clearance Proposal :- In the case of following activities/ industries in exposure, as Compiled by Risk Management Dept, BCC, Mumbai, would be subject to Activity Clearance from Corporate Centre even though proposals fall under the powers of Branch/ Regional/ Zonal Heads: Leasing, Hire-Purchase, Non-Banking Finance Companies (other than Central / State Govt. NBFCs), Capital Market (other than advances against shares to individuals), Financing of Film Making (Sanctioning authority rests with CMD / ED only within their delegated powers) Bridge Loan. Securitization / Through Deed of Assignment. Real Estate for Commercial Activities but excluding Retail Loans, Priority Sector Advances Fresh / incremental exposure to Diamond industry. Advances to Co-operative Banks.

In our Bank of Baroda Branch most of the Activity Clearance Proposals are due to major Exposure in Diamond Industry.

The Following are the information required for Activity Clearance Proposal: Issue for Consideration: - It includes the main purpose for approving the proposal.
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Basic Data Of Company:- It includes basic data like a. Name of the company

b. Constitutions and its partners or directors c. RBI Cautioned list d. Date of commencement of business and date since Banking with that particular bank e. Nature of Business f. Location of office g. Present credit request h. Security provided i. Credit rating (Internal & External) Structure of Proposed Borrowing Background of the firm Financials for the last 3 years and based on that projection and estimation of next 2 years. Profitability ratios and Comments on the same. SWOT Analysis of that particular sector Justification (Based on the reasons for providing them the above said loan) Recommendation

3. Concession/ Modification Proposal: In case of accounts who are in context from past many years and deal with us efficiently might grant for a discount and they pass an application for concession proposal. For those purpose we need to make concession proposal to make a note to our higher authority so that he/she can actually take a particular action on it so as to give concession or not. If an account needs a change in terms of payment i.e. interest or principle or change in pattern as such monthly or quarterly etc. than such changes can be made by passing a proposal which is approved by higher authority.

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4. Review Proposal: Credit facilities sanctioned to borrowers are subject to annual review as per the prevailing guidelines. However in case of borrowal accounts enjoying credit facilities of Rs 100 Crores and above where the credit rating is BOB-6 or below, the account should be reviewed on half- yearly basis. The accounts are required to be reviewed on or before the due date. The review makes a comprehensive study of borrowal account on various issues covering financial health, borrowers performance and prospects, quality of management, conduct of the account, compliance, etc. The review will also evaluate the impact of deficiencies observed during inspection/ Concurrent/ statutory/ credit audit/ RBI Inspection and rectification thereof. The review can also be done if in case there is an increment in credit facilities from the existing one which is known as review with enhance limit. The following are some of the important factors to look over while reviewing a companys account: a. Satisfactory conduct and turnover in the account. b. Fulfillment of repayment obligations (Interest & Installments) c. Adequacy of securities, drawing power, security coverage etc. d. Rectification of inspection irregularities (other than non submission of financial statements) e. Compliance of all terms and conditions of previous sanction. f. Satisfactory trend in production and sales as per projections g. Documentations and mortgages in the account being complete, valid and enforceable h. Prompt payment of bills under L/Cs, realization of BP/BDs, Guarantee Commission i. Submission of Income Tax/ Sales tax returns filed with Statutory Authority as per time schedule prescribed, wherever applicable (which will also indicate about the sales and profitability of the operations).

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While the objective of the above system/ procedure is to ensure timely review of advances accounts so that the slippage of the accounts to NPA category on technical grounds may be avoided. However Bank should nevertheless obtain latest Financial Statements within a reasonable time after the review is conducted and satisfy themselves as to the financial parameters emerging out of the Balance Sheet/ Profit & Loss a/c. In case any advances features are observed in the financials of the borrower, Bank should immediately initiate appropriate action as warranted.

Review is not applicable to: Irregular Account Account under restructuring / rephasement / rehabilitation Retail Loans NPA account Suit filed account Staff loans Loan against shares Loan against future rent receivables

5. Adhoc Proposal: This kind of proposal is for companies who are already enjoying credit facilities with banks. In Adhoc the company can further take loan for a short period of term say 2 to 3 months which means they take loan to fulfill their short term needs.

The following things are to be noted for sanctioning Adhoc facilities: which are mentioned in the annexure attached below Issue for Consideration Brief History of company Present Position of account which includes Present credit facility Financial Performance of the company
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Details of

Security Coverage Present Request Recommendation

6. Short Review: The bank has a practice of short review which is done when it is not possible to carry out a comprehensive Regular review of the account within the stipulated period pending receipt of certain particulars/ information or where the account is placed under special monitoring, etc. Bank continues to deal with the matter as under:Consecutive short reviews shall be restricted to two with a maximum period of six months for each short review. But in exceptional cases. The nest higher authority may do more consecutive Short reviews after satisfying himself about the need for the same and reasons duly recorded. Relaxation is also provided to restructure and accounts under reh abilitation where for a variety of reasons only, Short Reviews may have to be done till such time the unit/account becomes normal and healthy. Where there is impairment of borrowers quality indicated through various adverse features like default, diminution in value of security etc., suitable communication and if need be a Short Review should be placed before competent authority for perusal, direction and necessary action.

7. Status Note: Accounts showing the signals of irregularity in repayment, deteriorations in value and condition of securities, status note may be submitted to the higher authority. This note shows the current position of the firm which is making the firm default in terms of its credit facility.

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3.5 Export Credit Guarantee Corporation (ECGC)


It is an organization, which assures the banks that, in the event of an exporter failing to discharge his liabilities to the bank, and thereby making the bank incur a loss, it would make good the major portion of the bank's loss. The bank is required to be co-insurer to the extent of remaining loss

To support and strengthen export promotion drive by providing range of credit risk insurance. In case of Pre-Shipment facilities the cover is 50% from ECGC and in case of Post-Shipment facilities the cover is 75% of the credit facility.

Ways in which ECGC helps:

Provides a range of credit risk insurance covers to exporters against loss in export of goods and services.

Offers guarantees to banks and financial institutions to enable exporters to obtain better facilities from them.

Provides Overseas Investment Insurance to Indian companies investing in joint ventures abroad in the form of equity or loan.

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3.6 CREDIT MONITORING


1. In - depth monthly analysis of your credit report. It means that you will be aware of how your credit score is influenced. 2. Email notification. If your credit report is modified in a manner that can influence your credit score, you will find this out at once through email. 3. Insurance against identity theft. You will be provided with financial protection that is needed in cases the identity is stolen.

Credit Monitoring is an important part of credit department as it includes:

Monthly Monitoring Report Consortium Banking Multiple Banking

a) Monthly Monitoring Report (MMR) For the purpose of monitoring of large borrowal accounts, to prevent asset quality slippage, to take timely corrective steps and to improve the quality of credit portfolio, bank has the system of monthly monitoring. Under the system, advance accounts with exposure (FB+NFB) are to be monitored at Regional/Zonal/Baroda Corporate Centre levels based on monthly monitoring reports submitted by branches within 5 days of reporting date (i.e. 15th of each month) of MMR to Regional Office, as under: Advance accounts with exposure (FB+NFB) of above Rs.10 crores, Monthly Monitoring Reports to be submitted to BCC through Zonal Office within 10 days of reporting date (i.e. by 25th of each month). Zonal Manager to monitor all advance accounts with exposure (FB+NFB) of above Rs.5 crore to Rs.10 crore based on the monthly monitoring reports in respect of these accounts received through Regional Office. The Zones will also submit copies of the MMRs of these accounts to BCC for further monitoring.

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Regional Manager to monitor all accounts with exposure (FB+NFB) of above Rs.1 crore to Rs.5 crores based on the monthly monitoring reports in respect of these accounts received from branches. The Regional Office will also submit copies of the MMRs of these accounts to Zonal Office for further monitoring. Branch Manager to monitor accounts of exposure (FB+NFB) of Rs.1 crore and below.

In addition to above at BCC level advance accounts of high risk borrowers (with credit rating BOB6 & below) with exposure (FB+NFB) of above Rs. 1 Crore up to Rs. 5 Crore, are to be monitored based on the Summary Reports of these accounts submitted by Regional Office on monthly basis. b) Consortium Banking When one borrower avails loans from several banks under an arrangement among all the lending bankers, this leads to a consortium lending arrangements. In consortium lending, several banks pool banking resources & expertise in credit management together & finance a single borrower with a common appraisal, common documentation & joint supervision & follow up. The borrower enjoys the advantage similar to single window availing of credit facilities from several banks. The arrangement continues until any one of the bank moves out of the consortium. The bank taking the highest share of the credit will usually be the leader of consortium. There is no ceiling on the number of banks in a consortium.

A term generally used in banking when a group of banks associating for the purpose of meeting the financial requirements of a borrower, such as Working Capital or a Term Loan. In business, the term applies to a group of companies, national or international, working together as a joint venture, sharing resources and having interlocking financial agreements. Bank finances under a Consortium arrangement is where one bank acts as a leader for the purpose of assessment of limits, documentation, creation of charge etc., on mutually acceptable terms and conditions. In case of consortium lending, the assets classification with all the member banks should be standard.

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When a company has availed credit facilities from more than one bank on the same security / ies with a condition that the charge on the security will be on equal footing (right basis) in proportion to the amount they have advanced. The charge is called paripasu charge. In case of consortium finance or multiple banking facilities, a charge on the same security is given to more than one lender this is called the pari-pasu charge.

In case of consortium account where we are leader and account falling under any of the above criteria, a joint decision is to be taken by the consortium banks. Where we are not leader, impress upon the lead bank and members to introduce the concurrent audit.

In the cases of working capital finance through consortium or multiple banking, increasing our share, and joining a consortium (or when a member bank exits consortium and we join the consortium in its place), are not reckoned as take-over of advances from other banks. c) Multiple Banking Arrangement Multiple Banking Arrangement is one where the rules of consortium do not apply & no inter se agreement among banks exists. The borrower avails credit facility from various banks providing separate securities on different terms & conditions. There is no such arrangement called Multiple Banking Arrangement & the term is used only to denote the existence of banking arrangement with more than one bank. Multiple Banking Arrangement has come to stay as it has some advantages for the borrower & the banks have the freedom to price their credit products & non-fund based facility according to their commercial judgment. Consortium arrangement occasioned delays in credit decisions & the borrower has found his way around this difficulty by the multiple banking arrangements. Additionally, when units were not doing well, consensus was rarely prevalent among the consortium members. If one bank wanted to call up the advance & protect the security, another bank was interested in continuing the facility on account of group considerations.

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Points to be noted in case of multiple banking arrangements Though no formal arrangement exists among the financing banks, it is preferable to have informal exchange of information to ensure financial discipline Charges on the security given to the bank should be created with utmost care to guard against dilution in our security offered & to avoid double financing

Certificates on the outstandings with the other banks should be obtained on the periodical basis & also verified from the Balance sheet of the unit to avoid excess financing

In case of sole banking or multiple banking, concurrent audit should be introduced immediately.

In the cases of working capital finance through consortium or multiple banking, increasing our share, and joining a consortium (or when a member bank exits consortium and we join the consortium in its place), are not reckoned as take-over of advances from other banks.

The advantages to the bank in a multiple banking arrangement/ consortium arrangement are that the exposure to an individual customer is limited & risk is proportionate. The bank is also able to spread its portfolio. In the case of borrowing business entity, it is able to meet its funds requirement without being constrained by the limited resource of its own banker. Besides this, consortium arrangement enables participating banks to save manpower & resources through common appraisal & inspection & sharing credit information.

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3.6 CASE STUDY ANALYSIS Credit Department as a whole is very vast so analysis of one segment or part is not sufficient to understand the entire department.

Therefore I have done the analysis of almost the entire credit department of how it works when a company asks us for loan.

To start with I would say that I was majorly exposed to companies in diamond industry which is involved in importing and exporting of diamonds. Here is the case when a diamond trading company comes for a credit facility of 6.00 crores. Firstly it would be understood from the above that for a fresh proposal in a diamond industry an Activity Clearance Proposal is to be made.

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Activity Clearance Proposal (For a fresh limit from a diamond industry)

Bank of Baroda OPERA HOUSE BRANCH MMSR, Mumbai

FORMAT FOR SEEKING PRINCIPLE APPROVALS FOR NEW BUSINESS

NOTE TO THE GENERAL MANAGER, MMSR, MUMBAI. Zone Greater Mumbai Zone Region Mumbai Region Name of the account: M/s Riya Exports Metro Branch South Opera House Branch

ISSUE FOR CONSIDERATION: 1. To accord activity clearance for Fresh Diamond Exposure of Rs. 6.00 Crores to M/s. Riya Exports.

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2. Basic Data Of The Company 1 2. 3. Name of the Entity Constitution Partners : Riya Exports Partnership Firm Ashwinbhai L Kanabar Dineshbhai M Kanabar Laxmanbhai M Kanabar General Information to understand the activity in which business is involved and the background of the particular company

Key Persons

Ashwinbhai L Kanabar Dineshbhai M Kanabar

4. 5.

RBI Caution Listed (Yes/No) No Date of commencement of 05/11/2000. business.

6 5. 6.

Banking with us since Nature of Business Registered Office:

New Account Manufacturing & Exports of cut and polished Diamonds Office : Panchratna Building, Opera House, Mumbai 400004

7.

Present Credit Request

Nature facility

Of Existing Limit

Proposed Limit (Rs. In lacs)


Bill Purchasing and Bill Discounting Sublimit is for Packing Credit in Foreign Currency

FBP/FCBD/ 0.00 PSDL (Sub-Limit for PC/PCFC) Forward Contract Limit


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600.00

0.00

(50.00)

0.00

600.00

8.

Security (Type and Value)


Underlying stock or the stock to be purchased from this loan amount is hypothecated.

Primary: Hypothecation of stock and Book -debts. Collateral:

1. Land at Katagam,, Surat Value at Rs. 2.65 crores which is expected to go up at around Rs. 475.00 lacs 2.Plant and Machinery Value at Rs. 78.30 lacs 3.Other Assets Value at Rs. 15.00 lacs

9.

Credit Rating (External )

Not Applicable.

10 Zones Experience to the Industry 11 Zones NPA in the Industry 12 Bank Credit Rating (Internal) New Account. (BOB1-BOB10)

The Structure of proposed Burrowing

Facility Purpose

Working Capital facility (Export Facility) Manufacturing & Exports of cut and polished Diamonds
This structure shows the overall gist of the facility they are demanding

Tenor Interest rate Upfront &other charges

12 Months subject to review As per extant guidelines of the bank As per extant guidelines of the bank

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BACKGROUND OF THE FIRM

M/S Riya Exports established in 2000 is in the business of manufacturing and Exports of cut and Polished Diamonds is promoted by Ashwinbhai L Kanabar and Dineshbhai M Kanabar. (Rs. In lacs) Nature of facility FBP/FCBD/PSDL (Sub-Limit for PC/PCFC) Forward contract Limit Existing limits 0.00 0.00 0.00 Proposed limit 600.00 (50.00) 600.00

Following are major suppliers of raw materials and clients of the firm.

Name of the suppliers Shine Gems Sakina Gems Janki Gems

Name of the clients Oval diamond Traders Rani Blue Star Diamond Traders

Names of Guarantees: N.A.

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Financial for last three years and projections for next year: (Rupees in Lacs)
PARTICULAR S a) Balance Sheet Data / Capital Structure a) Equity Share Capital Reserves & Surplus (Excl. Revaluation reserves and net of intangible assets) Tangible Net-worth Term Liabilities Capital Employed Net Block Current Assets Current Liabilities Net Current Assets Net Sales Adm. & Expenses Depreciation Interest Profit before Tax Less: Provision for Tax Profit After Tax c) Profitability Ratios NP / Sales - % Net Profit / Capital Employed PAT / TNW Current Ratio DE Ratio (TOL/TNW) 0.46 2.47 2.47 1.17 5.06 0.28 2.84 3.41 1.27 3.26 0.37 11.39 16.98 1.25 5.65 0.33 11.39 16.57 1.25 5.61 Audited 31.03.10 Audited 31.03.11 Estimated 31.03.12 Projected 31.03.13

91.43

95.93

163.00

198.00

91.43 -91.43 12.40 542.03 463.00 175.97 490.23

95.93 19.50 115.43 37.00 372.37 293.94 275.11 1155.48 35.17 4.01 12.36 3.35 0.07 3.28

163.00 80.00 243.00 33.20 1050.00 840.20 734.80 7500.00 65.00 3.80 26.00 28.68 1.00 27.68

198.00 90.00 288.00 29.60 1279.65 1021.25 1008.4 10000.00 75.00 3.60 50.00 34.30 1.50 32.80

Selling 11.52 -10.62 2.26 -2.26

Helps to record companys financial position

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Sales / Receipts: The Firm has achieved sales turn over of Rs. 490.23 lacs during FY 2009-10 and Rs.1155.48 Lacs in FY 2010-11.The company has estimated sales turnover of Rs. 7500 lacs for the year current FY 2011-12 and Projected sales of Rs.10000 Lacs for 2012-2013.

Net Profit: The firm has earned the profit of Rs2.26 lacs during the FY 2009-10 .The firm has earned net profit after tax of Rs.3.28 lacs during FY 2010-11 with increase of 45.13%. The firm has estimated PAT of Rs. 27.68 lacs for year 2011-12 and Rs. 32.80 lacs for FY 2012-13.

Tangible Net Worth: Net worth of the firm has improved from Rs.91.43 lacs as on 31-032010 to Rs. 95.93 lacs as on 31-03-2011 and further rise to Rs. 163 lacs as on 31-03-2012. In the same way the firm has estimated net worth of Rs.198 lacs as on 31-03-2013.

Current Ratio: The Current Ratio of the firm was 1.17 as on 31-03-2010, 1.27 as on 31-032011 and estimated at 1.25 as on 31-03-2012 and 1.25 as on 31-03-2013.

Debt Equity Ratio (Total Term Liabilities / Tangible Net Worth): Debt Equity Ratio of the firm 5.06 as on 31./03/2010 and 3.267 as on 31-03-2011. The firm has estimated it as 5.65 as on 31-03-2012 and projected 5.61 as on 31-03-2013.The firm needs to improve its equity.

SWOT Matrix: Strength The firm and its partners are well experienced. The Location ally in the heart of the diamond market of Mumbai. Enjoying good reputation for their specialized products of fancy diamonds.
Helps us understan d diamond industry as a whole

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Weakness

Low Diversity of products and customer base. Demand in fancy varies as per fashion and trend. Industry growing at reasonable pace. A Good festive season can change the whole scenario. Slow down in economy internationally particularly Diamond Industry in USA. Low technology barriers would result in the increased competition at local levels.

Opportunities

Threats

Justifications for the proposed Demand Loan/Term Loan/Non-Fund based limits: It is an Export oriented manufacturing firm. They are new accounts with satisfactorily conducted current account since 2001. The firm performance and financials is satisfactory Satisfactory Financials. This will improve our export finance portfolio and augment commission Income
This are the things which catched our attention to provide credit facility of 6 Crores to this Company and proposal with this justification is forwarded to AGM

Recommendations: In view of the above we recommend the firms request for fresh facilities and arrange to accord your approval.

Submitted for Consideration:

(S.Chaudhuri) Asst. Gen. Manager.


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Recommendations /comments of Zonal office (Please confirm that the proposal complies with applicable norms such as take over norm, real estate policy, prudential exposure cap. Etc.)

Date

Zonal Head

Recommendations /comments of Region (Please confirm that the proposal complies with applicable norms such as take over norm, real estate policy, prudential exposure cap. Etc.)

General Manager Greater Mumbai Zone.

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Analysis
The firm is into Manufacturing & Exports of cut and polished Diamonds. The promoters have sufficient experience in the line of activity. The promoters had already made negotiations of the some of the company and have deal into huge number of orders. Below is the list of the same: Parineeta Gems Star Diamond Traders Rani Blue Gokani Traders

The orders worth Rs.3.00 crores are expected to be finalized by end of October, 2012 and other orders to be finalized by March 2013. Projected financials are in line with the financials of the some of the unit in similar line of activity and production level. The promoters are having experience of more than 10 years in the line of the activity. The affairs of the firm are expected to be managed on professional lines based on their past experience. The conduct of accounts of associate with the existing bankers has been satisfactory. The short and medium term outlook for the industry is stable Availability of collateral security reflected in collateral coverage of 70.27%.

The company has adequate management skills and production/marketing infrastructure in place to achieve the projected trajectory. There is steady demand for the diamonds and gems even locally and globally.

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Findings
Credit appraisal is done to check the commercial, financial & technical viability of the project proposed its funding pattern & further checks the primary or collateral security cover available for the recovery of such funds Credit is core activity of the banks and important source of their earnings which go to pay interest to depositors, salaries to employees and dividend to shareholders Credit and risk go hand in hand In the business world risk arises out of:Deficiencies /lapses on the part of the management Uncertainties in the business environment Uncertainties in the industrial environment Weakness in the financial position Bank of Baroda loan policy contains various norms for sanction of different types of loans These all norms does not apply to each & every case Bank Of Baroda norms for providing loans are flexible & it may differ from case to case Banks main function is to lend funds/ provide finance but it appears that norms are taken as guidelines not as a decision making A bankers task is to identify/ assess the risk factors/ parameters and manage/ mitigate them on continuous basis The CRA models adopted by the bank take into account all possible factors which go into appraising the risk associated with a loan These have been categorized broadly into financial, business, industrial, management risks & are rated separately The assessment of financial risk involves appraisal of the financial strength of the borrower based on performance & financial indicators

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After case study, we found that in some cases, loan is sanctioned due to strong financial parameters From the case study analysis it was also found that in some cases, financial performance of the firm was poor, even though loan was sanctioned due to some other strong parameters such as the firm is dealing with bank since many years, the firm is assured with a confirm order etc.

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Chapter IV: Conclusions


Appraising of credit is a process of appraising the credit worthiness of loan applicants. The funds of depositors are mobilized by means of such advance. Thus, it is extremely important for the lender bank to assess the risk associated with credit; thereby ensure the security of the for the funds deposited by the depositors.

This project revolves around Trade Finance Credit and its appraisal.

In Bank of Baroda the study for a credit proposal is done by the following: a) Evaluation of Management: A thorough study about the promoters is carried out in order to ensure promoters are experienced in that particular Industry and are capable to run the business in an efficient manner.

b) Techno Economic Viability (TEV) Study: A detailed study about the Technical Aspects is done to determine the technical soundness of the company. c) Financial Viability: A detailed study relating to Financials of the company so that we could know whether the company is sustainable enough to stand in the market and the companys efficiency to pay installments and interest. d) Risk Analysis: It determines the risk associated with the company which is done by sensitivity analysis and Credit Rating. e) Securities offered: The collateral securities given by borrower should be determined.

Post the recent crisis, there has been an increased focus on credit appraisal with an emphasis on acquiring a thorough understanding of all aspects of the customer and his business. So the project gives an overall view legal and technical aspects of trade finance and relates economic and financial conditions in practical aspects. This document helps in analyzing different issues related to trade finance and applying the same in real life situations.

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Recommendations
After being a part of credit department there are some things which even we would like to make them work on. Below are certain things laid down for Bank to improve further: 1. Instead of working haphazardly it is better to minimize the number of documents needed and concentrate on the one which can actually help knowing the company better or proving the companys condition. 2. The customers may be benefited if the focus is on reducing the number of days required for the processing of loan. 3. Every bank should have one Financial Analyst who looks upon each and every companys Financials. 4. Interaction with the clients should be made more frequent.

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References Bibliography
(n.d.). Retrieved from RBI: www.rbi.org.in (2012, May 22). Retrieved May 22, 2012, from BankofBaroda: www.bankofbaroda.com (2012, June 20). Retrieved from http://lawcrux.org/data4T/it/itbank/itwrie_manage_finance_26.htm (2012, June). Retrieved from http://www.eximguru.com Economic Times. (2012, July 3). Retrieved July 3, 2012, from http://economictimes.indiatimes.com/bank-ofbaroda/balancesheet/companyid-12040.cms Macmillan. (n.d.). International Trade Finance. Menon, J. (2012). Trade Finance. Mumbai: Taxmann.

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