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Summer Internship Report On A Study of Credit Appraisal Process adopted by the banks for the Working Capital Finance

At My Money Mantra Ltd. In partial fulfillment of Post-Graduate Diploma in Management FMG XXI At FORE School of Management Submitted to: Prof. Neeta Gupta Faculty, FORE School of Management Submitted by: Anunay Srivastava FMG - 21, Roll no. 211025

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STATEMENT OF AUTHENTICATION
I , Anunay Srivastava certify that this report is my own work, based on my personal study and/or research and that I have acknowledged all material and sources used in its preparation, whether they be books, articles, reports, lecture notes and any other kind of document, electronic or personal communication. I also certify that this report has not previously been submitted for assessment in any other unit, except where specific permission has been granted from all unit coordinators involved, or at any other time in this unit, and that I have not copied in part or whole or otherwise plagiarized the work of other students and/or persons. Date: Place: Delhi Anunay Srivastava Roll No. 211025

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CERTIFICATE
This is to certify that Mr. Anunay Srivastava, Roll No. 211025, has completed his summer internship at My Money Mantra and has submitted this project report entitled A detailed study of Credit Appraisal Process for Working Capital Limit adopted by banks and recommending ways for their betterment towards partial fulfillment of the requirements for the award of the Post Graduate Diploma in Management (FMG- 21) 2012-2014. This Report is the result of his own work and to the best of my knowledge no part of it has earlier comprised any other report, monograph, dissertation or book. This project was carried out under my overall supervision. Date: Place: Faculty Guide

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ACKNOWLEDGEMENT
In pursuit of an MBA degree, summer internship plays a pivotal role in the overall grooming by providing real time industry experience. I have tried to apply the learning I have received from the various experienced professionals, who helped and guided me throughout the internship project tenure. I wish to express my true regards to individuals who have been a great support and motivated me to perform better. My Sincere thanks to Mr. Ritesh Mohan, Sr. Vice President, My Money Mantra, for giving me an opportunity to work with his team and to learn from the practical challenges that a manager faces while on the job. I would also like to thank Mrs. Neeta Gupta, Faculty FORE School of Management, for being my faculty mentor and guiding me at each and every step. My Sincere thanks to Mr. Anand Jha, Vice President, My Money Mantra & Mr. Abhishek Jain, Area Manager, My Money Mantra, for their support in solving my doubts related to the project. They have always encouraged me and appreciated my work by positively analyzing my findings and suggestions. They directed me how to make the data collected more valuable for me as well as the organization. I wish to place on record my gratitude to My Money Mantra Ltd. for providing me an opportunity to work on a project of such importance. My stay in the organization has been a great learning experience. This exposure has enriched me with knowledge and has also introduced me to the attributes of a successful professional. Anunay Srivastava (211025) FORE School of Management, New Delhi
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EXECUTIVE SUMMARY
Objectives The objective of this project is to gain an insight of the Credit Appraisal Process adopted by the banks in order to provide the Working Capital Loans to the SME Sector. This study is conducted in following three parts: 1) Detailed study of the credit facilities and products provided by the banks for working capital finance. 2) Detailed study of the credit appraisal process and techniques adopted by the banks to provide working capital loans. 3) A survey was conducted to understand the customer satisfaction with the credit facilities and credit appraisal process of the banks for working capital finance. For first two objectives, both primary and secondary research is conducted. Under primary research, first hand information is collected from the mortgage and credit departments of My Money Mantra and various partner banks which include ICICI Bank, HDFC Bank, Axis Bank, Citibank, HSBC, YES Bank and ING Vaisya. Direct interview with bank employees as well as My Money Mantra employees is also conducted for this purpose. Secondary research is conducted through internet, various journals and books. For the third objective, a detailed questionnaire is prepared for customer satisfaction analysis. More than 100 firms were interviewed and were requested to fill the questionnaire. These firms are SMEs located in the Delhi NCR region and most of the
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firms are the clients of the Chartered Accountants with whom we have established channel partnership during the project. Finally 100 completely filled questionnaires were selected for the analysis of Customer Satisfaction with credit facilities provided by the banks. Findings and Conclusions 1) It has been found that almost all the banks provide two types of credit facilities for working capital finance. These are Fund Based Credit- Term Loan, Cash Credit Limit, Bill Discounting and Non Fund Based Credit- Letter of Credit, Bank Guarantee. 2) The Credit Appraisal Process consists of following five steps: i. ii. iii. iv. v. Login of the Case Feasibility Study Preparation of Notes Appraisal by Risk Department Sanction

Following Ratios and elements are considered by the banks credit department while performing feasibility study: i. ii. iii. iv. v. Leverage Current Ratio Maximum Permissible Bank Finance (MPBF) Drawing Power (DP) Debt Service Coverage Ratio (DSCR)

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vi.

Profitability Ratios

3) Customer Satisfaction analysis has been done through the questionnaire filled by the firms. Following factors are considered for this analysis: i. ii. iii. iv. v. vi. vii. Type of the Firm Relationship with the bank Credit Facility Availed Criteria set by the banks for credit sanctioning Documentation Required Interest Rate and Processing Fees charged Processing Speed of the loan application

It has been found that majority of the bank client ( 41%) are private limited companies. Most of the firms are enjoying relationship with their banks for more than 20 years, i.e, they are enjoying a healthy relationship with their banks. It has been observed that majority of firm (34 %) availed the cash credit limit followed by term loan (23 %). Hence we can say that cash credit limit and term loans are the major facilities in demand. Only 7 % of the firms feels that the criteria set for credit appraisal by the banks is very stringent while majority of the firms (41%) feels that the criteria is normal and appropriate. Hence, we can say that majority of the customers are satisfied by the criteria set by the firms for credit sanctioning. It has been observed that majority of the firms (48%) feel that documentation process involved is very heavy and are not satisfied with it. Hence, it is recommend that bank should try to ease down the documentation required for the loan approval or try to obtain the documents in soft copies via emails as

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much as possible. A majority of firms (67%) believe that interest rate and processing fees charged is normal and seems to be satisfied with it. Majority of customer feels that processing speed for the loan application is normal to high and are very satisfied with it. 46% of the firms find the products provided by their banks good. 26 % find it average and 23 % find it excellent. Only 5 % find their products poor. This is another factor highlighting customer satisfaction.

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TABLE OF CONTENTS
CHAPTER 1 INTRODUCTION. 10 1.1 Background 10 1.2 Literature Review.. 10 1.3 Working Capital Finance. 13 1.4 Company Profile... 20 1.5 Objectives of the study.25

CHAPTER 2 METHODOLOGY 26 2.1 Research Design...26 2.2 Data Collection methods..26 2.3 Sampling and Fieldwork 27 2.4 Analysis and Results.27 CHAPTER 3 CONCLUSION AND RECOMMENDATIONS.43 ANNEXURES 1) Questionnaire..44 2) References..47

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CHAPTER 1 INTRODUCTION
1.1 Background Financial Crisis is the main cause of recession around the globe.. World economy and stock markets are highly affected by this crisis. One of the root causes for financial crisis is Credit Defaults by various individuals and firms. Credit Appraisal is the process of analyzing the credit worthiness of an individual or a firm in order to prevent the possible Credit Defaults. Lending is the primary function of banks and currently banks are offering wide range of products for this purpose. One of the major portion of banks lending belongs to the working capital loan to SME Sector. This project is done in order to gain an insight in the Credit Appraisal Process adopted by various banks for working capital loan. It includes the study of various credit facilities provided by the bank to its customers and various credit appraisal techniques adopted by the banks for these facilities. It also includes the study of how loan proposal is made and various formalities required for the sanctioning of the loan. 1.2 Literature Review According to Treacy and Carey (2000), a bank should consider various factors while designing a Credit Appraisal System. These factors include cost,information gathering, rating consisitency, staff incentives etc. They noticed that a rating system with more rating categories is better than the system with less categories, however it leads to greater operating cost.
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Study conducted by Crouhy et al ( 2001) recommends that bank should analyse three different categories of variables- quantitative, qualitative and legal while assigning grade to a particular loan application. The quantitative analysis includes financial analysis and is based on the firms financial reports. The four major quantitative variable used in this model are net income, total operating income, total equity capital and total asset value. These variables are used to calculate various ratios like Return on Equity( ROE), Return on Assets (ROA), Assets Utillization (AU) etc. For loans like overseas loans or export/import loans, country risk is also taken into account. Main concern of qualitative analysis is the quality of the borrowers competitiveness and the growth potential of the industry in which borrower is operating. Legal analysis ensures that the borrower has the power to sign the credit agreement and that it gets the first claim on the collateral. Banks also need to ensure that the borrower is legally liable to borrow the loan amount. According to Jay T. Fitts, Executive Vice President, LaSalle Bank, FSB, credit appraisal for working capital is a process in the course of shifting, both in how we approach it and what we need to have done. He states that lenders are driving this business to a low cost commodity activity. Peterson and Rajan (1997) discovered that under the conditions of certainity, firms have little reason to hold more working capital than a minimum level. Larger amounts would increase the level of operating assets, increase the need for external funding, resulting in lower return on assets and a lower return in equity, without any increase in profit. Brigham and Houston (2000) focused on understanding how IPO companies manage their working capital and other balance sheet items. They examined the the effect of

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working capital management on these companies. They discovered that maintaining control over level of cash, securities, inventory, fixed assets and accounts payables is associated with higher operating performance. According to Payle (1997), banks have various credit policies which guide them in the process of credit appraisal. These policies guide the banks on who should access credit, when and why one should obtain the credit including repayment arrangements and necessary collaterals. The method of assessment and evaluation of risk of each prospective applicant are part of a credit control policy. Bonin and Huang (2001) discovered that a firms credit policy may be lenient or stringent. In the case of a lenient policy, the firm lends liberally even to those whose credit worthiness is questionable. This minimizes costs and losses from bad debts but might reduce revenue earning from loans, profitability and cash flow. Chen and Shimerda (1981) classified 100 financial indicators out of which 65 are financial ratios.Their final model,however, includes only seven financial indicators while identifying the bankrupt firms. These indicators are return on investment, debt ratio, current ratio, cash position, net working capital turnover, inventory turnover and accounts receivable turnover. The bankruptcy model for industrial companies developed by Gombola and Ketz (1983) adds to these factors a cash flow measure.

Sun and Li (2006) have developed a model to predict companies fin ancial distress, testing 35 financial ratios for 135 pairs of listed companies. Their final distress prediction model includes net profit growth rate, liabilities to tangible net assets, accounts

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receivable turnover, liabilities to cash flow, liabilities to equity market value, total asset turnover and gross profit margin.

Giacomino and Mielke (1993) propose nine cash flow ratios to evaluate a company's performance and use than to evaluate US companies in the chemical, food and electronic industries, calculating three-year averages per industry. The industries were chosen had the largest number of companies among the Fortune 500

1.3 Working Capital Finance Working capital is the cash required by the business for carrying out its operating activities or day to day activities. Items of working capital include account receivables, levels of inventory, account payable etc. Analysis of these items signifies the financial strength of the company.

Gross Working Capital (GWC): It is the investment in Current Assets. These are the assets which can be converted into cash within an operating cycle. Examples of Current Assets are cash-in-hand, account receivables, short term securities, inventories, short term securities etc.

Net Working Capital (NWC): It is the difference Current Assets and Current Liabilities whose maturity date is within one operating cycle.

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Having adequate working capital is necessary but having excessive working capital is not a healthy indicator. It means that idle funds are lying in the business which are not being utilized efficiently. It is like a burden on the firm. This affects the share price in the capital market and also is the sign of bad debt and wastage.

Many committees were formed to develop the peocess of working capital requirement calculation. Some of these committees are as follow:

a) Tandon Committee b) Kannan committee

a) Tandon Committee Report In 1974, a study group headed by Mr. P. L. Tandon, ex chairman of PNB, was formed for framing guidelines for commercial banks for follow-up & supervision of bank credit for ensuring proper end-use of funds. It was a landmark in the history of bank lending in India. With acceptance of major recommendations by Reserve Bank of India, a new era of lending began in India. Tandon committees recommendations The committee pointed out that the best security of bank loan is a well functioning business enterprise, not the collateral.

Major recommendations of the committee were as follows:

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1. Assessment of need based credit of the borrower on a rational basis on the basis of their business plans. 2. Bank credit would only be supplementary to the borrowers resources and not replace them, i.e. banks would not finance one hundred percent of borrowe rs working capital requirement. 3. Bank should ensure proper end use of bank credit by keeping a closer watch on the borrowers business, and impose financial discipline on them. 4. Working capital finance would be available to the borrowers on the basis of industry wise norms (prescribe first by the Tandon Committee and then by Reserve Bank of India) for holding different current assets. 5. Credit would be made available to the borrowers in different components like cash credit; bills purchased and discounted working capital, term loan, etc., depending upon nature of holding of various current assets. 6. In order to facilitate a close watch under operation of borrowers, bank would require them to submit at regular intervals, data regarding their business and financial operations, for both the past and the future periods. Methods of Lending The lending framework proposed by Tandon Committee dominated commercial bank lending in India for more than 20 years and its continues to do so despite withdrawal of mandatory provision of Reserve Bank of India in 1997. As indicated before, the essence of Tandon Committees recommendations was to finance only portion of borrowers working capital needs not the whole of it. It was thought that gradually, the borrower should depend less on banks to fund its working

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capital needs. Hence the committee recommended Maximum Permissible Bank Finance system or MPBF system.It suggested three methods of lending. Working Capital Gap = Total Current Assets Current Liabilities other than bank borrowings. First method of lending The contribution by the borrowing unit is fixed at a minimum of 25% working capital gap from long-term funds. In order to reduce the reliance of the borrowers on bank borrowings by bringing in more internal cash generation for the purpose, it would be necessary to raise the share of the contribution from 25% of the working capital gap to a higher level. The remaining 75% of the working capital gap would be financed by the bank. This method of lending gives a current ratio of only 1:1. This is obviously on the low side. Second method of lending In order to ensure that the borrowers do enhance their contributions to working capital and to improve their current ratio, it is necessary to place them under the second method of lending recommended by the Tandon committee which would give a minimum current ratio of 1.33:1. The borrower will have to provide a minimum of 25% of total current assets from long-term funds. However, total liabilities inclusive of bank finance would never exceed 75% of gross current assets. As many of the borrowers may not be immediately in a position to work under the second method of lending, the excess borrowing should be segregated and treated as a working capital term loan which should be made repayable in installments. To induce the borrowers to repay this loan, it should be charged a higher rate of interest. For the present, the group

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recommends that the additional interest may be fixed at 2% per annum over the rate applicable on the relative cash credit limits. This procedure should be made compulsory for all borrowers (except sick units) having aggregate working capital limits of rs.10 lakhs and over. Third method of lending Under the third method, permissible bank finance would be calculated in the same manner as the second method but only after deducting four current assets from the gross current assets. The borrowers contribution from long-term funds will be to the extent of the entire core current assets, as defined, and a minimum of 25% of the balance current assets, thus strengthening the current ratio further. This method will provide the largest multiplier of bank finance. Core portion current assets were presumed to be that permanent level which would generally vary with the level of the operation of the business. For example, in case of stocks of materials the core line goes horizontally below the ordering level so that when stocks are ordered materials are consumed down the ordering level during the lead time and touch the core level, but are not allowed to go down further. This core level provides a safety cushion against any sudden shortage of materials in the market or lengthening of delivery time. This core level is considered to be equivalent to fixed assets and hence, was recommended to be financed from long-term sources. b) Kannan committee This committee was headed by Sh. K. Kannan, Chairman and Managing Director of Bank of Baroda. The main recommendations of the committee are:

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1. Modality of working capital assessment of the borrowers will be left with each Bank who may devise a flexible system under the overall regulatory guidelines of RBI taking into account (a) Size of the Bank and whether it is a domestic private bank or a foreign bank or a public sector bank, (b) Bank's Prudential exposure limit and core resource base, (c) Bank's Credit (Loan) Policy guidelines, (d) Credit Skill Management in the Bank and development of specialised cadre of credit officer, (e) Bank's thrust for business priorities.

2. Borrowers with working capital requirements over Rs.20crores may be granted the facility 100% by way of loan. Borrowers with working capital requirements over Rs.10 crores but up to Rs.20 crores may have 75% of Loan component and borrowers with working capital requirements over Rs.5 crores but up to Rs.10 crores may have 60% of Loan component.

3. Margin and holding level of Stocks, Book Debts etc. as security for working capital facility may entirely be left to die discretion of financing bank. If any Bank so desires, it may continue to follow Tandon/Chore Committee guidelines.

4. Reasonableness of Current Ratio/Debt Equity ratio may be decided by individual Banks as per their Loan Policy. However, if any Bank desires to continue existing Bench mark, Current Ratio of 1.33 it may continue to do so.

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5. Periodical statement of stock, book debts coupled with physical verification of securities, business site of the borrower should continue to be the basic credit monitoring tool of the banks. Along with periodical stocks, book debts statement, borrower must mention data relating to production, sales and other assumptions on which working capital assessment is made by the financing bank. If there is any variation more than 10%, justification thereof is to be submitted.

6. Periodical review of business performance data of the borrower should be made in conjunction with operations of the borrower's account, drawing power of securities, half yearly profitability statement etc. Modality of such periodical review may be decided by each bank.

7. Time schedule for disposal of loan application is left to be framed by each Bank in its Loan Policy.

8. Depending upon the size and area of operation each Bank may maintain data base of large borrower accounts including Group Accounts at Central/Zonal Office. Cut off limit for data base and coverage of information range may be decided by each bank.

9. Each bank may decide its policy guidelines about issue of Commercial Paper by the borrowers.

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10. Quarterly Information System (QIS) and Credit Monitoring Arrangement (CMA) may cease to be a Regulatory requirement. However, individual banks may continue to obtain QIS statement if they so desire as per their Loan Policy.

11. Identification of current assets for the purpose of computation of current ratio should be based on guidelines of Institute of Chartered Accountants of India. Also computation of Debt Equity ratio guidelines of the aforesaid Institute may be followed.

12. Credit Rating Policy should be entirely left to the discretion of banks. Involvement of external agencies may not be insisted. The banks should evolve appropriate Credit Rating Policy taking into account, their overall financial parameters and other allied matters having bearing on risk evaluation of such parties

1.4 Company Profile My Money Mantra is Indias leading financial services distributor, having more than two decades of experience and leverage its domain expertise to bring unmatched value to its clients. It offers a wide product menu and reputed partnerships to bring the best to its customers. They partnered with over 35 banks to provide these financial services. The company has a team of around 1500 dedicated professionals across several cities including Delhi NCR, Mumbai, Pune, Bangalore, Chennai, Kolkata and Chandigarh. Their products and services range includes loans, credit cards and insurance. Loans: Retail Loans:

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Home loan: A home loan is a type of loan where the consumer borrows money from a lender which would typically be a Bank, an NBFC or a housing finance company, to purchase a residential property and offers the same property to the lender as a security. Loan against property: Popularly known as LAP in the financial services circles, these loans are a convenient means to access funds at interest rates which are lower than personal loans or other forms of unsecured loans. Loans for NRIs: In case of NRIs who are salaried individuals, it is possible not only to purchase properties in India but also to avail loans for funding these purchases. Personal loans: Personal loans are no-questions-asked unsecured loans given to individuals on the basis of their profile only i.e. income, nature of employment, years of work experience etc. Such loans, unlike property based loans or car loans do not require the borrower to give any kind of security or collateral to the bank. Most banks do not question the purpose for which the loan is required, but you would still be required to state the purpose on the application form. Almost universally, banks do not allow these loans to be taken for speculative purposes e.g.: investing in stocks etc. This product is mostly for salaried individuals only. Unsecured business loan: Unsecured business loans have no requirement for a security or collateral to be submitted and are offered purely on the current financial strength and past credit record of the borrower. Corporate loans: Corporate loans are for running and meeting current needs in a business. They are offered in three types. They are Term loan, Cash credit (CC) and Over draft (OD).

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Take over and top up loans: the current loan of a customer is transferred to another bank at a lover ROI or with higher amount than the current amount or both. Credit Cards: There are different types of credit cards available like cash rewards, airline &travel rewards, fuel rewards, shopping rewards, business cards and life style cards. Depending on the usage of customer he needs to choose that type of card. For example if a person travels a lot then he/she can choose airline &travel rewards that earns airline miles or privileges that can makes traveling more comfortable. Insurance: Life Insurance: Life insurance is a legal agreement between the policy holder and the Insurance Company to secure his/her Familys future in case of untimely demise. It provides with a pre-determined amount to the beneficiary during the contract period. The primary purpose of Life Insurance is the protection of the entire family in case of death. Health Insurance: Health insurance is a contract (called a policy) between an insurance company and the policy holder whereby the insurance company promises to pay for medical expenses incurred by the insured. Basically, the client pays a sum of money called the Premium and in turn the Insurance firm would commit to pay a predetermined sum of money to meet the customer's claims. General Insurance: Auto/Car Insurance: Motor insurance protects the client and his/her vehicle - against losses caused due to fire, theft, explosion, burglary, riots, strikes, earthquakes, flood,

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cyclones, accidents, malicious acts and terrorist activities , and damage caused by clients vehicle to another person or property (Third Party Liability). The companys customer matra:

Committed to getting you the best price


o

By working with several reputed partners, we aim to bring to you the best products and help you make significant savings

Going directly to the financial institution does not ensure better pricing, so you can rely on mymoneymantra with full confidence

It is our endeavor to bring you special deals and discounts from our partners

Dedicated to saving your time


o

We bring together a wide range of financial institutions under one roof so you dont have to search multiple websites or speak to various companies to find the right product

We will guide you every step of the way and our assigned counselor will assist in completion of all formalities till fulfillment & in resolution of subsequent queries

Helping you choose the product best suited to your need


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Our product guides are designed to help you understand the full variety of available options

Our counselors are trained to explain the product features, benefits and related costs

Respecting your privacy

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We will never sell your personal information to anyone or use it to make unwanted calls or send unwanted mails

You can opt out of receiving calls or emails at any time

BUSINESS MODEL OF THE COMPANY The company is a direct selling associate (DSA). As the name indicates, it collaborates with banks for selling their products and services. The bank shares some amount of profit for getting revenue for them. The company generates business by direct marketing/selling or by collaborating with channel partners. Direct marketing/selling: The Company gets a data base of potential clients for its products. The employees use this data to get clients and generate business leads. Satisfied clients refer more customers to this company and the pipe line keeps increasing. Channel partner collaborations: Generally the channel partners are chartered accountants, real estate agents, high profiled company officials etc. company collaborates with these channel partners to get more business while sharing some amount of its profit with them

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1.5 Objectives of the study a) To study the Credit Facilities for working capital provided by the banks to its customers b) To study the Credit Appraisal Process and Credit Appraisal techniques adopted by the banks c) To gain an insight of customer satisfaction for these credit facilities and process adopted by the banks.

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CHAPTER 2 METHODOLOGY
2.1 Research Design

The Study is divided into following three parts: a) Detailed study of the Credit Facilities provided by the banks for working capital loans. b) Detailed study of the Credit Appraisal Process and Credit Appraisal techniques adopted by the banks c) Customer Satisfaction analysis for these credit facilities and process adopted by the banks. 2.2 Data Collection Methods

1. Primary Data First hand information is collected from the mortgage and credit departments of my Money Mantra and various partner banks which include ICICI Bank, HDFC Bank, Axis Bank, Citibank, HSBC, YES Bank and ING Vaisya. Direct interview with bank employees as well as My Money Matra employees is also conducted for this purpose. A detailed questionnaire is prepared for customer satisfaction analysis.

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2. Secondary Data Secondary data is collected from internet, various journals, books and company records.

2.3 Sampling and Field Work

Sample Size: 100 Sampling Technique: Convenient Sampling Region: Delhi NCR More than 100 firms were interviewed and were requested to fill the questionnaire. These firms are SMEs located in the Delhi NCR region and most of the firms are the clients of the Chartered Accountants with whom we have established channel partnership during the project. Finally 100 completely filled questionnaires were selected for the analysis of Customer Satisfaction with credit facilities provided by the banks.

2.4 Analysis and Result

1) Findings of the study conducted to understand the Credit Facilities provided by the banks for working capital loans

As per my study, majorly following types of Working Capital Facilities are provided by the banks for working capital finance:

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Fund Based Credit


Term Loan

Non Fund based credit


Letter of Credit Bank Guarantee

Cash Credit Limit Bill discounting

Credit facilities are classified as fund based and non fund based.

(1) Fund Based Credit:

a) Term loan- In this facility, the repayment is to be made in fixed pre determined installments. This type of loan is normally given to the borrowers for acquiring long term assets. b) Cash Credit Limit- Cash credit limit is a loan offered against collateral security such as
residence, industrial or commercial property. This loan is mainly offered to the companies to meet working capital requirements. The lender examines a companys turn over, company financials and value of stock owned by the company to judge the eligibility criteria of the

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borrower. The borrower can withdraw money from his or her current account up to the limit sanctioned by the lender.

c) Bill Discounting- Under this facility, a borrower can obtain credit from the bank against bills. The bank purchase or discount the borrowers bills. The amount provided under this agreement is covered under the overall cash credit limit or overdraft limit.

2) Non-Fund based Credit:

a) Letter of Credit- Suppliers, particularly the foreign suppliers, insist that his buyer should ensure that his bank will make payment if his fails to honour his obligation. This is ensured through a letter of credit arrangement.

b) Bank Guarantee- Under this facility, there will be a guarantee by the bank to the beneficiary to make payment if the customer on whosw e behalf the bank is guaranteeing defaults. Until then bank is not required to part with any money to the beneficiary.

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2) Findings of the study conducted to understand the Credit Appraisal Process and Credit Appraisal techniques adopted by the banks

Following steps are involved in credit appraisal process

Login of Credit File Feasibility Analysis Preparation of the note Appraisal By the Risk Department

Sanction Letter

Step 1: Login of credit File At this step, sales team of the bank gets the cases on the basis of their preferences and the data in their hand. After that it will handle over the case to the credit department along with the necessary documents for further process. Following is the list of necessary documents required to log in a case: Duly filled application form Audited Financials of last three years Provisional financials of last year ( if audited is not available)

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Bank Statement of last six months ITR Sanction Letter of prevailiong limit CIBIL Form Once all the documents are completed for log in, the case is shown in MIS as a log in by credit department.

Step 2: Feasibility Analysis At this step, initially a checkup of financials and other documents is done by the credit team. Following are the major elements and ratios on which credit team pays special attention while deciding whether the case is doable or not:

Leverage

For leverage, 3 to 5 is a good figure

Current Ratio

Current Ratio of 1.5 is an ideal figure

MPBF ( maximum Permissible Bank Finance)

Drawing Power

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Drawing Power is the amount of Working Capital funds the borrower is allowed to draw from the Working Capital limit allotted to him. Drawing Power is calculated as follows: ( )

DSCR ( Debt Security Coverage Ratio)

The debt service coverage ratio (DSCR), also known as "debt coverage ratio," (DCR) is the ratio of cash available for debt servicing to interest, principal and lease payments. It is a popular benchmark used to access the firms ability to produce enough cash to cover its debt payments. The higher this ratio is, the easier it is to obtain a loan

Profitability Ratio Major profitability ratios which are calculated are:

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Step 3: Note Preparation Once the case is approved by the credit team, it is sent for the note preparation. Note summarizes following details of the borrower:

Business Background Comment on financial statement of the company Future projections Bank Statement Analysis Promoters Background Industry Scenerio Details of the sanction Rate of interest and processing fee Other terms and conditions

Step 4: Appraisal by the risk department At this step, the risk department scrutinizes the whole proposal and sends a list of query to the credit department. The credit department works along with the sales team to solve out the queries. After all the queries are resolved, the case is uploaded for sanction to the appropriate authority as per the delegation of power by the bank.

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Step 5: Sanction At this stage, various observations are performed by the appropriate authority and the authority decides whether to sanction or not. Once the sanction is approved, Credit Agreement Letter (CAL) are prepared and issued to the customers.

3) Analysis of Customer Satisfaction with the credit facilities provided by the bank Q1) Type of firm Type of firm Proprietorship Partnership Limited Company Number of respondents 32 27 41 Percentsge 32 27 41

Inference: From the above table, we can see that 41% of the firms are Limited companies. Hence, we can infer that majority of the bank clients for working capital finance are Limited Companies.
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Q2) Have you ever availed working capital loan Response Yes No Number of Respondents 87 13 Percentage 87 13

Inference: From the above table, it can be inferred that majority of the firms have availed the working capital loans.

Q3) How long is your relationship with your bank Less than 5 years 5 to 10 Years 11 to 20 Years More than 20 Years Total 17 12 23 35 87 19.5 % 13.8 % 26.4 % 40.3 % 100 %

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Inference : From the above table, we can see that 40 % or majority of the firms are in the relationship with their banks for more than 20 years.

Q4) What type of credit facitlity you availed from the bank? Term loan Cash credit Bill Discount Letter of Credit Bank Guarantee 23 30 11 17 6 26 % 34 % 13 % 20% 7%

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It has been observed that majority of firm (34 %) availed the cash credit limit followed by term loan ( 23 %)

Q5) What do you feel about the Criteria set for Credit Sanctioning? Very stringent Stringent Normal and appropriate Easy Very easy 6 9 36 24 12 7% 10% 41% 28% 14%

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Only 7 % of the firms feels that the criteria set for credit appraisal by the banks is very stringent while majority of the firms (41%) feels that the criteria is normal and appropriate.

Q6) What do you feel about the documentation required for processing loan application? Heavy Normal Less Very less 42 28 13 4 48 % 32 % 15 % 5%

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It has been observed that majority of the firms (48%) feel that documentation process involved is very heavy.

Q7) What do you feel about interest rate and processing fee charged? High Normal Low Very low 5 58 20 4 6% 67% 23% 5%

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As we can see, a majority of firms (67%) believe that interest rate and processing fees charged is normal.

Q8) What do you feel about Speed of processing loan application?

Fast Normal Slow Very slow

32 43 10 2

37% 49% 11% 2%

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Majority of customer feels that processing speed is normal to high

Q9) How do you feel about the credit product

Excellent Good Average poor

20 40 25 2

23% 46% 29% 2%

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2 25

20 exellent good average 40 poor

46% of the firms find the products provided by their banks good. 26 % find it average and 23 % find it excellent. Only 5 % find their products poor. This is another factor highlighting customer satisfaction.

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CHAPTER 3 CONCLUSION AND RECOMMENDATION


Both types of credit facilities for working capital finance, Fund Based Credit and Non Fund Based Credit have been studied. Mostly the Fund Based Credit facilities are availed by the customers. Among the fund based credit, cash credit limit and term loans are the products mostly in demand. Bank can provide some innovative modifications in other products in order to boost their demand. The five step Credit Appraisal Process is also studied and we can say that banks are following a structured credit appraisal process which is well managed by credit and risk departments of the banks. Customer Satisfaction analysis has been done through the questionnaire filled by the firms. Following factors are considered for this analysis: It has been found that majority of the bank client are private limited companies and most of them are satisfied with the sanction criteria, in factor with which clients seemed to be unsatisfied is the heavy documentation required by the banks. Hence, it is recommend that bank should try to ease down the documentation required for the loan approval or try to obtain the documents in soft copies via emails as much as possible.

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ANNEXURES
1) Questionnaire for customer survey

Name of the Firm:

Q 1) Type of the Firm a) Proprietorship b) Partnership c) Limited Company

Q 2) Have you ever availed Working Capital Loan? a) Yes b) No If answer of Q 2) is Yes then proceed to Q 3) otherwise terminate the Interview

Q 3) How long is your relationship with your bank? a) Less than 5 Years b) Between 5 to 10 Years c) Between 11 to 20 Years d) More than 20 Years

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Q 4) What type of Credit Facility you availed with the bank? a) Term Loan b) Cash Credit Limit/ Overdraft Limit c) Bill Discount c) Letter of Credit d) Bank Guarantee

Q 5) What do you feel about the Criteria set for Credit Sanctioning? a) Very Stringent b) Stringent c) Normal and Appropriate d) Easy e) Very Easy

Q6) What do you feel about the documentation required for processing loan application? a) Heavy b) Normal c) Less d) Very Less

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Q 7) What do you feel about interest rate and processing fee charged ? a) High b) Normal c) Low d) Very Low

Q 8) What do you feel about Speed of processing loan application? a) Fast b) Normal c) Slow d) Very Slow

Q 9) How do you feel about the credit product a) Excellent b) Good c) Average d) Poor

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2) REFERENCES Uwe Wehrspohn (2005) Credit Risk Evaluation: Modeling - Analysis Management, Center for Risk & Evaluation , Vol. 33 , pp 345-356, June 14, 2005 Simona Mihai Yiannaki (2008) Bank Risk Regulation and the Credit Crunch, Journal of elibrary no. G 34, June 17, 2008,Simone Westerfeld , Hans-Dieter Zimmermann (2008) Credit Risk Measurement under Basel II: An Overview and Implementation Issues for Developing Countries Swiss Institute of Banking and Finance, Vol.45, pp 347-76 Payle D.H. (1997), Bank Risk Management, Working Paper No.272, University of California., Berkeley Research Program in Finance Working Papers.No:RPF272. July. Tandon Prakash, "Tandon Committee Report on Working Capital Financing", RBI (1974) Nayak P. R., Nayak Committee on SSIs", RBI (1993)

WEBSITES http://www.rbi.org.in http://www.indianbankassociation.com http://www.bankersindia.com http://www.wikipedia.com

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