You are on page 1of 75

P a g e | 1

Sr.No. Particulars Pg.No.
1 Acknowledgement 2
2 Declaration 3
3 Executive Summary 4
4 General Information 5

Loan Industry Profile, Objective, Scope and
Limitations of the study

Snapshot of the Banking Industry

About Bank Of India
5 Introduction to Automobile Sector 22

Supply Chain

Market Characteristics

Life Cycle

Key Statistics

Major Players

Major Developments and Investments

Government Initiatives

Key Success factors for an automobile company

Challenges Faced

Road Ahead
6 Appraisal of SME Loan Proposals 42

Definition of SME

Introduction to SRTO Loans and CGTMSE

BOI Scheme for Financing Commercial Vehicles

Case Study
7 Appraisal of Retail Loan Proposals 57

Introduction to Retail Credit

BOI Scheme for Auto Loans

Case Study
8 Bibliography 75

P a g e | 2


It is pride & privilege to express my deepest sense of gratitude to all those who have contributed
in the completion of my project.

I am grateful to my project guide Mr. Ganesh Shetty (branch manager) for his guidance,
co-operation and encouragement towards the project. I also thank all the employees of
Bank Of India, Sanpada branch for making me feel a part of the team. Their experience and
feedback kept me on track and helped me produce much better results.

Also I would like to give special thanks to my faculty guide Prof. V. Sivakumar for his
continued guidance and invaluable encouragement.

Last but not the least, I am thankful to my parents and all my friends for helping me
directly or indirectly in project.

P a g e | 3

I, Annie Nadar studying in the 2
year of Masters of Management Studies (M.M.S) at S.I.E.S
college of Management Studies, Nerul, Navi Mumbai hereby declare that I have completed the
summer internship project titled Study of Automobile Sector and Appraisal of SME and Retail
loans as part of the course requirement for M.M.S.
I further declare that the information presented in this project is authentic to the best of my

Annie Nadar
M.M.S (Finance)

P a g e | 4

This report is on the topic understanding of automobile sector and appraisal of SME and
retail loan proposals. The project was carried out at Bank Of India under the guidance of Mr.
Ganesh Shetty.
In the present world, every person wants to own the luxuries of life, but due to non
availability of finance everyone is not able to do so. Hence some apply for loans and thus comes the
need for financial institutions to lend various services to the people.
The entire process of sanctioning or rejecting a loan involves a number of processes. This
study involves the various process involved during the sanctioning or rejection of SME and retail
loans focusing on SRTO and auto loans.
A brief study of automobile sector helped me to understand the various market
characteristics and the parameters which affect the demand and supply of the industry.

P a g e | 5

Loan industry profile
A loan is an arrangement between a lender and a borrower. The lender gives money,
property or other asset the borrower and the borrower agrees to repay the money with interest, at
some future point in time. There is usually a predetermined time for repaying the loan and generally
the lender bears the risk that the borrower might not repay the loan. There are various types and
classes of loans, each with their own set of rules and terms.
A loan is based on a simple idea that someone gives you money and you promise to pay it
back. Since one must pay back the lender whether the business is a fabulous success or a miserable
failure, the entire risk of the new enterprise is placed squarely on ones shoulders. But if you are
confident about the prospects of a business and one has the opportunity to borrow money, a loan
may be more attractive source of money than getting it from an equity investor, who will own a
piece of the business and receive a share of the profits. If the business succeeds as one hope and the
person pays back the lender as promised, one will reap all future profits, there is no need to share
them with investors.
To study the automobile sector and understand the various market characteristics that
affects it.
To study in detail the steps involved in appraising auto loans
To study in detail the process of SRTO loans.

To be competitive in the modern banking/ corporate world, constant capital flow is essential.
Whether to expand business or to relocate production unit to some other place for cost
effectiveness or for any personal use, you require finance. Its not possible to fund them through
internal sources always. In an hour of need, we look for various options to raise money. Many
new ways have evolved to raise money but generally we tend to rely on the most favored
options, bank loan being one of them. This study will help in understanding the appraisal system
P a g e | 6

at BOI for SRTO and auto loans & also to understand how to reduce various risk parameters
associated in providing any loans or advances or project finance.

As the credit appraisal is one of the crucial areas for any bank, some of the
Technicalities are not revealed.
Credit appraisal system includes various types of detail studies for different areas of
analysis, but due to time constraint, our analysis was of limited areas only.

P a g e | 7

In recent time, we has witnessed that the World Economy is passing through some intricate
circumstances as bankruptcy of banking & financial institutions, debt crisis in major economies
of the world and euro zone crisis. The scenario has become very uncertain causing recession in
major economies like US and Europe. This poses some serious questions about the survival,
growth and maintaining the sustainable development.
However, amidst all this turmoil Indias Banking Industry has been amongst the few to
maintain resilience. The tempo of development for the Indian banking industry has been
remarkable over the past decade. It is evident from the higher pace of credit expansion,
expanding profitability and productivity similar to banks in developed markets, lower
incidence of non- performing assets and focus on financial inclusion have contributed to
making Indian banking vibrant and strong. Indian banks have begun to revise their growth
approach and re-evaluate the prospects on hand to keep the economy roling.
Unlike in the past, the banks today are market driven and market responsive. The top
concern in the mind of every bank's CEO is increasing or at least maintaining the market share in
every line of business against the backdrop of heightened competition. With the entry of new
players and multiple channels, customers (both corporate and retail) have become more
discerning and less "loyal" to banks. This makes it imperative that banks provide best possible
products and services to ensure customer satisfaction. To address the challenge of retention of
customers, there have been active efforts in the banking circles to switch over to customer-centric
business model. The success of such a model depends upon the approach adopted by banks with
respect to customer data management and customer relationship management.
Over the years, Indian banks have expanded to cover a large geographic & functional area
to meet the developmental needs. They have been managing a world of information about
customers - their profiles, location, etc. They have a close relationship with their customers and a
good knowledge of their needs, requirements and cash positions. Though this offers them a
unique advantage, they face a fundamental problem.
During the period of planned economic development, the bank products were bought in India and
not sold. What our banks, especially those in the public sector lack are the marketing attitude.
Marketing is a customer-oriented operation. What is needed is the effort on their part to improve
their service image and exploit their large customer information base effectively to communicate
product availability. Achieving customer focus requires leveraging existing customer information
P a g e | 8

to gain a deeper insight into the relationship a customer has with the institution, and improving
customer service-related processes so that the services are quick, error free and convenient for the
Furthermore, banks need to have very strong in-house research and market intelligence
units in order to face the future challenges of competition, especially customer retention.
Marketing is a question of demand (customers) and supply (financial products & services,
customer services through various delivery channels). Both demand and supply have to be
understood in the context of geographic locations and competitor analysis to undertake focused
marketing (advertising) efforts. Focusing on region-specific campaigns rather than national media
campaigns would be a better strategy for a diverse country like India.
Customer-centricity also implies increasing investment in technology. Throughout much of
the last decade, banks world-over have re-engineered their organizations to improve efficiency
and move customers to lower cost, automated channels, such as ATMs and online banking.
As is proved by the experience, banks are now realizing that one of their best assets for
building profitable customer relationships especially in a developing country like India is the
branch-branches are in fact a key channel for customer retention and profit growth in rural and
semi-urban set up. However, to maximize the value of this resource, our banks need to transform
their branches from transaction processing centers into customer-centric service centers. This
transformation would help them achieve bottom line business benefits by retaining the most
profitable customers. Branches could also be used to inform and educate customers about other,
more efficient channels, to advise on and sell new financial instruments like consumer loans,
insurance products, mutual fund products etc. There is a growing realization among Indian banks
that it no longer pays to have a "transaction-based" operating model. There are active efforts to
develop a relationship-oriented model of operations focusing on customer-centric services. The
biggest challenge our banks face today is to establish customer intimacy without which all other
efforts towards operational excellence are meaningless. The banks need to ensure through their
services that the customers come back to them. This is because a major chunk of income for most
of the banks comes from existing customers, rather than from new customers.
Customer relationship management (CRM) solutions, if implemented and integrated
correctly, can help significantly in improving customer satisfaction levels. Data warehousing can
help in providing better transaction experiences for customers over different transaction channels.
This is because data warehousing helps bring all the transactions coming from different channels
under the same roof. Data mining helps banks analyse and measure customer transaction patterns
P a g e | 9

and behaviour. This can help a lot in improving service levels.
It must be noted, however, that customer-centric banking also involves many risks. The
banking industry world over is being thrust into a wild new world of privacy controversy. The
banks need to set up serious governance systems for privacy risk management. It must be
remembered that customer privacy issues threaten to compromise the use of information
technology which is at the very center of e-commerce and customer relationship management -
two areas which are crucial for banks' future.
The critical issue for banks is that they will not be able to safeguard customer privacy
completely without undermining the most exciting innovations in banking. These innovations
promise huge benefits, both for customers and providers. But to capture them, financial services
companies and their customers will have to make some critical tradeoffs. When the stakes are so
high, nothing can be left to chance, which is why banks must immediately begin developing
comprehensive approaches to the privacy issue.
The customer centric business models based on the applications of information technology
are sustainable only if the banks protect client confidentiality in the process - which is the basic
foundation of banking business.

Banking in India has its origin as early as the Vedic period. It is believed that the transition
from money lending to banking must have occurred even before Manu, the great Hindu Jurist,
who has devoted a section of his work to deposits and advances and laid down rules relating to
rates of interest. During the Mogul period, the indigenous bankers played a very important role in
lending money and financing foreign trade and commerce. During the days of the East India
Company, it was the turn of the agency houses to carry on the banking business.
The General Bank of India was the first Joint Stock Bank to be established in the year 1786.
The others which followed were the Bank of Hindustan and the Bengal Bank. The Bank of
Hindustan is reported to have continued till 1906 while the other two failed in the meantime. In
the first half of the 19
century the East India Company established three banks; the Bank of
Bengal in 1809, the Bank of Bombay in 1840 and the Bank of Madras in 1843. These three banks
also known as Presidency Banks were independent units and functioned well. These three banks
were amalgamated in 1920 and a new bank, the Imperial Bank of India was established on 27

January 1921. With the passing of the State Bank of India Act in 1955 the undertaking of the
Imperial Bank of India was taken over by the newly constituted State Bank of India.
P a g e | 10

The Reserve Bank which is the Central Bank was created in 1935 by passing Reserve Bank
of India Act 1934. In the wake of the Swadeshi Movement, a number of banks with Indian
management were established in the country namely, Punjab National Bank Ltd, Bank of India
Ltd, Canara Bank Ltd, Indian Bank Ltd, the Bank of Baroda Ltd, the Central Bank of India Ltd.
On July 19, 1969, 14 major banks of the country were nationalized and in 15
April 1980 six
more commercial private sector banks were also taken over by the government.
The Indian banking can be broadly categorized into nationalized (government owned),
private banks and specialized banking institutions. The Reserve Bank of India acts a centralized
body monitoring any discrepancies and shortcoming in the system. Since the nationalization of
banks in 1969, the public sector banks or the nationalized banks have acquired a place of
prominence and has since then seen tremendous progress. The need to become highly customer
focused has forced the slow-moving public sector banks to adopt a fast track approach. The
unleashing of products and services through the net has galvanized players at all levels of the
banking and financial institutions market grid to look anew at their existing portfolio offering.
Conservative banking practices allowed Indian banks to be insulated partially from the
Asian currency crisis. Indian banks are now quoting a higher valuation when compared to banks
in other Asian countries (viz. Hong Kong, Singapore, Philippines etc.) that have major problems
linked to huge Non Performing Assets (NPAs) and payment defaults. Co-operative banks are
nimble footed in approach and armed with efficient branch networks focus primarily on the high
revenue niche retail segments.
The Indian banking has finally worked up to the competitive dynamics of the new Indian
market and is addressing the relevant issues to take on the multifarious challenges of
globalization. It has come a long way from being a sleepy business institution to a highly
proactive and dynamic entity. Banks that employ IT solutions are perceived to be futuristic and
proactive players capable of meeting the multifarious requirements of the large customers base.
Private banks have been fast on the uptake and are reorienting their strategies using the internet as
a medium The Internet has emerged as the new and challenging frontier of marketing with the
conventional physical world tenets being just as applicable like in any other marketing medium.
This transformation has been largely brought about by the large dose of liberalization and
economic reforms that allowed banks to explore new business opportunities rather than
generating revenues from conventional streams (i.e. borrowing and lending).
The banking in India is highly fragmented with 30 banking units contributing to almost
50% of deposits and 60% of advances. Indian nationalized banks (banks owned by the
P a g e | 11

government) continue to be the major lenders in the economy due to their sheer size and
penetrative networks which assures them high deposit mobilization. The Indian banking can be
broadly categorized into nationalized, private banks and specialized banking institutions.
The Reserve Bank of India acts as a centralized body monitoring any discrepancies and
shortcoming in the system. It is the foremost monitoring body in the Indian financial sector. The
nationalized banks (i.e. government-owned banks) continue to dominate the Indian banking arena.
Industry estimates indicate that out of 274 commercial banks operating in India, 223 banks are in
the public sector and 51 are in the private sector. The private sector bank grid also includes 24
foreign banks that have started their operations here. Under the ambit of the nationalized banks
come the specialized banking institutions. These co-operatives, rural banks focus on areas of
agriculture, rural development etc., unlike commercial banks these co-operative banks do not lend
on the basis of a prime lending rate. They also have various tax sops because of their holding
pattern and lending structure and hence have lower overheads. This enables them to give a
marginally higher percentage on savings deposits. Many of these cooperative banks diversified
into specialized areas (catering to the vast retail audience) like car finance, housing loans, truck
finance etc. in order to keep pace with their public sector and private counterparts, the co-
operative banks too have invested heavily in information technology to offer high-end
computerized banking services to its clients.
Complementing the roles of the nationalized and private banks are the specialized financial
institutions or Non Banking Financial Institutions (NBFCs). With their focused portfolio of
products and services, these Non Banking Financial Institutions act as an important catalyst in
contributing to the overall growth of the financial services sector. NBFCs offer loans for working
capital requirements, facilitate mergers and acquisitions, IPO finance, etc. apart from financial
consultancy services. Trends are now changing as banks (both public and private) have now
started focusing on NBFC domains like long and medium-term finance, working cap
requirements, IPO financing etc. to meet the multifarious needs of the business community.

Banking Industry in India functions under the sunshade of Reserve Bank of India - the regulatory,
central bank. Banking Industry mainly consists of:
Commercial Banks
Co-operative Banks
P a g e | 12

The commercial banking structure in India consists of: Scheduled Commercial
Banks Unscheduled Bank. Scheduled commercial Banks constitute those banks which have been
included in the Second Schedule of Reserve Bank of India (RBI) Act, 1934.
RBI in turn includes only those banks in this schedule which satisfy the criteria laid
down vide section 42 (60) of the Act. Some co-operative banks are scheduled commercial banks
although not all co-operative banks are. Being a part of the second schedule confers some benefits
to the bank in terms of access to accommodation by RBI during the times of liquidity constraints.
At the same time, however, this status also subjects the bank certain conditions and obligation
towards the reserve regulations of RBI.
For the purpose of assessment of performance of banks, the Reserve Bank of India
categorise them as public sector banks, old private sector banks, new private sector banks
and foreign banks.

Reserve Bank of India

Bank Financial Institution

All India
State Level

Public Sector
Sector banks
Rural Banks
Rural Cooperative
Credit Instituti
P a g e | 13


Nationalized Banks
Old Private Sector
New Private Sector

Foreign Banks


Allahabad Bank Ltd.
Catholic Syrian Bank

Axis Bank Ltd.
Abu Dhabi
Commercial Bank


Andhra Bank Ltd.

City Union Bank Ltd.
Development Credit
Bank Ltd.
American Express


Bank of Baroda Ltd.
Dhanalakshmi Bank

HDFC Bank Ltd.
Bank Internasional
4 Bank of India Ltd.
Federal Bank Ltd ICICI Bank Ltd. Bank of America NA

Bank of Maharashtra

ING Vysya Bank Ltd.

IndusInd Bank Ltd.

Bank of Ceylon


Canara Bank Ltd.
Jammu and Kashmir
Bank Ltd.
Kotak Mahindra Bank
Bank of Nova Scotia
(Scotia Bank)

Central Bank of India

Karnataka Bank Ltd.

Yes Bank Ltd.
Bank of Tokyo
Mitsubishi UFJ

Corporation Bank

Karur Vysya Bank Ltd.

Barclays Bank PLC
9 Dena Bank Ltd.
Lakshmi Vilas Bank Ltd.

BNP Paribas
10 IDBI Bank Ltd.
Nainital Bank Ltd.

Calyon Bank


Indian Bank Ltd.

Ratnakar Bank Ltd.

Chinatrust Commercial

Indian Overseas
Bank Ltd.
SBI Commercial and
International Bank Ltd.

Citibank N.A.

Oriental Bank of
Commerce Ltd.

South Indian Bank Ltd.

DBS Bank

Punjab and Sind
Bank Ltd.
Tamilnad Mercantile
Bank Ltd.

Deutsche Bank AG

Punjab National Bank



Syndicate Bank Ltd.

JPMorgan Chase
17 UCO Bank Ltd.
Krung Thai Bank

Union Bank of India

Mashreq Bank psc

United Bank of India

Mizuho Corporate


Vijaya Bank Ltd.

Royal Bank of

State Bank of Bikaner
and Jaipur Ltd.

Shinhan Bank

State Bank of
Hyderabad Ltd.

Socit Gnrale

State Bank of India

Sonali Bank

State Bank of Mysore

Standard Chartered

State Bank of
Patiyala Ltd.

State Bank of

State Bank of


P a g e | 14


Strength Weakness

Aggression towards development
the existing standards by banks.
Strong regulatory impact by central
Bank to all the banks.
Presence of intellectual capital to face
the change in implementation with good

Poor Technology infrastructure.
Ineffective risk measures.
Presence of more number of smaller
banks that would likely to be
Impacted adversely.
Opportunities Threats

Increasing Risk management Expertise.
Need significant Connection among, business
Credit & risk management and Information
Advancement of technologies. Strong Asset
Base would help in bigger growth.

Inability to meet the additional Capital
Loss of Capital to the entire banking system
due to merger and acquisitions.
Huge investment in technology.

P a g e | 15


-Low supplier bargaining
-Few alternatives available
-Subject to RBI Rules and
-Not concentrated
-Forward integration
-Nature of suppliers

Intense competition
Many private, public,
Co-operative, foreign banks
High threat from
Mutual funds,
Government securities
-Low barriers to entry
-Government policies
are supportive
-Globalization and
liberalization policy
-High exit barriers
-High bargaining power
-Low switching cost
-Large no. of alternatives
-Homogeneous service by
-Full information available
with customers
P a g e | 16

Key Points:
Liquidity is controlled by the Reserve Bank of India (RBI).
India is a growing economy and demand for credit is high though it could be cyclical.
Barriers to entry
Licensing requirement, investment in technology and branch network.
Bargaining power of suppliers
High during periods of tight liquidity. Trade unions in public sector banks can be anti
reforms. Depositors may invest elsewhere if interest rates fall.
Bargaining power of customers
For good creditworthy borrowers bargaining power is high due to the availability of large
number of banks
Competition - High
There are public sector banks, private sector and foreign banks along with non banking
finance companies competing in similar business lines.

P a g e | 17

Political/ Legal
Influences which have an impact on banking services and consumer confidence include
the following:
State provision of pensions
Government encouragement of savings and investment (for e.g. via tax benefits)
Regulatory control and protection (to prevent the collapse of financial institutions and
protect investors money)
Economic factors are key variables which have an impact on the activity in the
banking services sector. The level of consumer activity is governed by income levels and
personal wealth. As income levels grow, more discretionary income is available to spend
on banking services. Consumer confidence in the economy and in job security also has a
major impact; if lean times are foreseen ahead, savings will take priority over loans and
other forms of expenditure. Consumers may also seek easy access savings and be willing
to tie up their money for longer periods with potentially more attractive investments.
The main economic factors that should be monitored with regard to banking services
marketing are as follows:
Personal and household disposable income
Discretionary income levels
Employment levels
The rate of inflation
Income tax levels and taxation structures
Savings and investment levels and trends
Stock market performance
P a g e | 18

Consumer spending & Consumer credit
Many demographic factors have an important bearing on banking services markets.
Changing employment patterns
Numbers of working women
The ageing population
Marriage/divorce/birth rates
Consumption trends
Technology has a major impact on many industries including financial
services and banking in particular. ATM services which not only provide cash but
also allow for bill payments, deposits and instant statements are widely used. From
the customers viewpoint, technology has played a major role in the development of
the process whereby the service is delivered. Automated queuing systems have made
visits to the bank easier and more convenient. Telephone Banking and insurance
services are now being used in place of the traditional branch-based service process.
Technology has also played a major role within organizations, bringing about far
greater efficiency through computerized records and transaction systems and also in
business development, through the setting up of detailed customer databases for
effective segmentation and targeting. The main technological developments fall
within these categories;
Process developments
Information storage and handling
Database system

P a g e | 19


Bank of India was founded on 7th September, 1906 by a group of eminent
businessmen from Mumbai. The Bank was under private ownership and control till July
1969 when it was nationalized along with 13 other banks.
Beginning with one office in Mumbai, with a paid-up capital of Rs.50 lakh and 50
employees, the Bank has made a rapid growth over the years and blossomed into a mighty
institution with a strong national presence and sizable international operations. In
business volume, the Bank occupies a premier position among the nationalized banks.
The Bank has 3101 branches in India spread over all states union territories
including 141 specialized branches. These branches are controlled through 48
Zonal Offices. There are 29 branches/ offices (including three representative
offices) abroad.
The Bank came out with its maiden public issue in 1997 and follow on Qualified
Institutions Placement in February 2008. Total number of shareholders as on 30/09/2009 is
2, 15,790.
While firmly adhering to a policy of prudence and caution, the Bank has been in
the forefront of introducing various innovative services and systems. Business has been
conducted with the successful blend of traditional values and ethics and the most modern
infrastructure. The Bank has been the first among the nationalized banks to establish a
fully computerized branch and ATM facility at the Mahalaxmi Branch at Mumbai way
back in 1989. The Bank is also a Founder Member of SWIFT in India. It pioneered the
introduction of the Health Code System in 1982, for evaluating/ rating its credit portfolio
P a g e | 20

The Bank's association with the capital market goes back to 1921 when it entered
into an agreement with the Bombay Stock Exchange (BSE) to manage the BSE Clearing
House. It is an association that has blossomed into a joint venture with BSE, called the
BOI Shareholding Ltd. to extend depository services to the stock broking community.
Bank of India was the first Indian Bank to open a branch outside the country, at London,
in 1946, and also the first to open a branch in Europe, Paris in 1974. The Bank has sizable
presence abroad, with a network of 29 branches (including five representative offices) at
key banking and financial centers viz. London, New York, Paris, Tokyo, Hong-Kong and
Singapore. The international business accounts for around 17.82% of Bank's total

Mission of the Bank:

To provide superior, proactive banking services to niche markets globally, while providing
cost - effective, responsive services to others in our role as a development bank, and in so
doing, meet the requirements of our stakeholders.

Vision of the Bank:

To become the bank of choice for corporate, medium businesses and up market retail
customers and to provide cost effective developmental banking for small business, mass
market and rural market.

P a g e | 21

Rs. In crores
Branches Staff
Capital &
Advances Net Profit
1906 1 52 0.52 0.18 0.59 0.0025
1916 1 104 0.57 3.44 2.84 0.07
1926 3 305 1.78 9.89 7.10 0.13
1936 15 703 2.04 17.00 9.08 0.21
1946 32 1534 3.51 64.40 27.09 0.72
1956 46 2386 6.02 69.55 57.21 0.92
1966 201 8167 9.83 307.42 222.48 1.50
1969 325 11020 10.85 435.88 295.68 1.61
1976 1053 23280 16.40 1412.20 995.35 3.24
1986 1927 49162 114.82 8917.00 5248.00 14.30
1996 2454 54046 1260.52 27523.00 15596.00 276.48
2006 2645 42635 4984.88 93932.03 65173.74 701.43
2007 2845 41511 5895.37 119881.74 86791.00 1123.17
2008 2974 40616 10589.39 150011.98 113476.33 2009.40
2009 3091 40151 13494.92 189708.48 142909.37 3007.35
2010 3264 39676 14230.00 229761.94 168490.71 1741.07

P a g e | 22

We have come a long way since the Automotive Industry in India was
delicensed. Today, this sector is one of the shining examples of what can be achieved in a
relatively short span of time with the right kind of support of the Government, combined with
the entrepreneurial skills and managerial talent that the Industry has to offer. The automobile
sector of any country reflects the health of its economy. By this virtue, the Indian economy is
very much in a good shape as the country's automobile industry has marked impressive
growth in the last fiscal, majorly driven by demand for two-wheelers and light trucks
One area of concern is the ever increasing trade deficit in auto components, which
meant that imported components constituted 1/3rd of the total auto component turnover of the
country. In 2010-11, India was a net importer of auto components and this deficit has been
on the increase since the past 4-5 years. Some of the reasons for the continued sharp increase
in imports include capacity constraints of domestic manufacturers, price competitiveness of
the imported products, lack of design capabilities with domestic industry etc. This is not a
desirable situation as a significantly large portion of value addition and job creation is
captured in auto component manufacturing.

In an attempt to end the blues that prevails in the auto sector, the following provisions
have been made by the Finance Ministry Pranab Mukherjee in the Budget 2012-13:
Increase in the excise duty in large cars from the current 22 percent to 24 percent
Specified parts required hybrid vehicles enjoy full exemption from basic customs duty
and special CVD with concessional excise duty of 6 percent.
Completely Built Units of MUVs/SUVs whose value exceeds USD 40,000 per vehicle
are permitted for import without type approval.
Basic customs duty on MUVs/SUVs basic customs duty on such vehicles is being
enhanced from 60 percent to 75 percent ad valorem.
Making of commercial vehicle bodies is currently exempted from excise duty.
Allocated Rs 1,000 crore to National Skill Development Fund (NSDF).

P a g e | 23

Supply Chain
Supply Chain of Automobile Industry:
Source: ImaginMor, Inderscience Enterprises Ltd and United Nations Industrial Development
The supply chain of automotive industry in India is very similar to the supply chain of
the automotive industry in Europe and America. The order of the industry arises from the
bottom of the supply chain i. e., from the consumers and goes through the automakers and
climbs up until the third tier suppliers. However the products, as channelled in every
traditional automotive industry, flow from the top of the supply chain to reach the
consumers. Automakers in India are the key to the supply chain and are responsible for the
products and innovation in the industry.
P a g e | 24

The description and the role of each of the contributors to the supply chain are discussed
Third Tier Suppliers: These companies provide basic products like rubber,
glass, steel, plastic and aluminium to the second tier suppliers.
Second Tier Suppliers: These companies design vehicle systems or bodies
for First Tier Suppliers and OEMs. They work on designs provided by the first tier
suppliers or OEMs. They also provide engineering resources for detailed designs.
Some of their services may include welding, fabrication, shearing, bending etc.
First Tier Suppliers: These companies provide major systems directly to
assemblers. These companies have global coverage, in order to follow their customers
to various locations around the world. They design and innovate in order to provide
black-box solutions for the requirements of their customers. Black-box solutions are
solutions created by suppliers using their own technology to meet the performance
and interface requirements set by assemblers.
First tier suppliers are responsible not only for the assembly of parts into
complete units like dashboard, breaks-axel-suspension, seats, or cockpit but also for
the management of second-tier suppliers.
Automakers/Vehicle Manufacturers/Original Equipment
Manufacturers (OEMs): After researching consumers wants and needs,
automakers begin designing models which are tailored to consumers demands. The
design process normally takes five years. These companies have manufacturing units
where engines are manufactured and parts supplied by first tier suppliers and second
tier suppliers are assembled. Automakers are the key to the supply chain of the
automotive industry. Examples of these companies are Tata Motors, Maruti Suzuki,
Toyota, and Honda. Innovation, design capability and branding are the main focus of
these companies.
Dealers: Once the vehicles are ready they are shipped to the regional branch and
from there, to the authorised dealers of the companies. The dealers then sell the
vehicles to the end customers.
P a g e | 25

Parts and Accessory: These companies provide products like tires,
windshields, and air bags etc. to automakers and dealers or directly to customers.
Service Providers: Some of the services to the customers include servicing of
vehicles, repairing parts, or financing of vehicles. Many dealers provide these services
but, customers can also choose to go to independent service providers.

P a g e | 26

Market characteristics
Demand Determinants: Determinants of demand for this industry include
vehicle prices (which are determined largely by wage, material and equipment costs)
and exchange rates, preferences, the running cost of a vehicle (mainly determined by
the price of petrol), income, interest rates, scrapping rates, and product innovation.
Exchange Rate: Movement in the value of Rupee determines the attractiveness
of Indian products overseas and the price of import for domestic consumption.
Affordability: Movement in income and interest rates determine the
affordability of new motor vehicles. Allowing unrestricted Foreign Direct Investment
(FDI) led to increase in competition in the domestic market hence, making better
vehicles available at affordable prices. Product Innovation is an important determinant
as it allows better models to be available each year and also encourages
manufacturing of environmental friendly cars.
Demographics: It is evident that high population of India has been one of the
major reasons for large size of automobile industry in India. Factors that may be
augment demand include rising population and an increasing proportion of young
persons in the population that will be more inclined to use and replace cars. Also,
increase in people with lesser dependency on traditional single family income
structure is likely to add value to vehicle demand.
Infrastructure: Longer-term determinants of demand include development in
Indians infrastructure. Indias banking giant State Bank of India and Australias
Macquarie Group has launched an infrastructure fund to rise up to USD 3 billion for
infrastructure improvements. India needs about $500 billion to repair its
infrastructure such as ports, roads, and power units. These investments are been made
with an aim to generate long-term cash flow from automobile, power, and telecom
industries. (Source: Silicon India)
Price of Petrol: Movement in oil prices also have an impact on demand for
large cars in India. During periods of high fuel cost as experienced in 2007 and first
half of 2008, demand for large cars declined in favour of smaller, more fuel efficient
vehicles. The changing patterns in customer preferences for smaller more fuel
P a g e | 27

efficient vehicles led to the launch of Tata Motors Nano one of worlds smallest
and cheapest cars
Basis of Competition: Competition in this industry is high and increasing.
Automotive industry is a volume driven industry and certain critical mass is a pre-
requisite for attracting the much needed investment in research and development and
new product design and development. Research and development investment is
needed for innovations which is the lifeline for achieving and retaining
competitiveness in the industry. This competitiveness in turn depends on the capacity
and the speed of the industry to innovate and upgrade. The most important indices of
competitiveness are productivity of both labour and capital.
The concept of attaining competitiveness on the basis of low cost and
abundant labour, favourable exchange rates, low interest rates and concessional duty
structure is becoming inadequate and therefore, not sustainable. A greater emphasis is
required on the development of the factors like innovation which can ensure
competitiveness on a long-term basis. India with a rapidly growing middle class,
market oriented stable economy, availability of trained manpower at competitive cost,
fairly well-developed credit and financing facilities and local availability of almost all
the raw materials at a competitive cost has emerged as one of the favourite investment
destinations for the automotive manufacturers. These advantages need to be leveraged
in a manner to attain the twin objective of ensuring availability of best quality product
at lower cost to the consumers on the one hand and developing and assimilating the
latest technology in the industry on the other hand.

P a g e | 28

Life Cycle
The automobile sector is now in a growth stage.
The market for manufacturing motor vehicles is consistently increasing.
The products manufactured by this industry are profitable.
Companies have been consistently opening new plants over the past five years.
Japanese and European manufacturers of motor vehicles have entered the market.
Industry value added has been rising, along with the rise in GDP.
The auto industry has grown in the clusters of interconnected companies which are
linked by commonalities and complementarities. The major clusters are in and around
Manesar in North, Pune in West, Chennai in South, Jamshedpur-Kolkata in East and Indore
in Central India. The Government is planning to create a National Level Specialises
Education and Training Institute for Automotive Sector and to enhance the transportation,
communication and export infrastructure facilities. The contribution of automotive sector in
the GDP of India is expected to double by 2016 through major spotlight on export of small
cars, Multi-Utility Vehicles, Two and Three wheelers.

P a g e | 29

Key Statistics

Source: Society of Indian Automotive Manufacturing (SIAM)


1. Light
2. Medium and

1. Mopeds

2. Scooters

3. Motorcycles

4. Electric two

1. Passenger
2. Goods carriers
1. Passenger cars
2. Utility vehicles
3. Multipurpose
P a g e | 30

The automotive industry of India is categorised into passenger cars, two wheelers,
commercial vehicles and three wheelers, with two wheelers dominating the market. This 76%
of the two wheelers comprises of motorcycles, scoters, mopeds and electric two wheelers
which are yet to penetrate. The passenger vehicles are further categorised into passenger cars,
utility vehicles and multi-purpose vehicles. All sedan, hatchback, station wagon and sports
cars fall under passenger cars. Tata Nano, is the worlds cheapest passenger car,
manufactured by Tata Motors - a leading automaker of India. Multi-purpose vehicles or
people-carriers are similar in shape to a van and are taller than a sedan, hatchback or a station
wagon, and are designed for maximum interior room. Utility vehicles are designed for
specific tasks. Commercial vehicles are categorised into heavy, medium and light. While
three wheelers are categorised into passenger carriers and goods carriers.

Automobile Production Trends
(Number of Vehicles)
Category 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11
1,209,876 1,309,300 1,545,223 1,777,583 1,838,593 2,357,411 2,987,296
353,703 391,083 519,982 549,006 416,870 567,556 752,735
374,445 434,423 556,126 500,660 497,020 619,194 799,553
6,529,829 7,608,697 8,466,666 8,026,681 8,419,792 10,512,903 13,376,451
Grand Total 8,467,853 9,743,503 11,087,997 10,853,930 11,172,275 14,057,064 17,916,035

Source: Society of Indian Automotive Manufacturing (SIAM)
The cumulative production for April-March 2012 registered a growth of 13.83 per
cent over April-March 2011, manufacturing 20,366,432 vehicles during the period. While
P a g e | 31

Passenger vehicle segment grew at 4.66 per cent during April-March 2012, overall
commercial vehicle segment registered an expansion of 18.20 per cent year-on-year (y-o-y)
By volume, two wheelers account for three-fourths of the entire market. India is the
worlds 2nd largest two wheeler producer and 4th largest commercial vehicle producer.

Automobile Domestic Sales Trends
(Number of Vehicles)
Category 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11
1,061,572 1,143,076 1,379,979 1,549,882 1,552,703 1,951,333 2,520,421
318,430 351,041 467,765 490,494 384,194 532,721 676,408
307,862 359,920 403,910 364,781 349,727 440,392 526,022
6,209,765 7,052,391 7,872,334 7,249,278 7,437,619 9,370,951 11,790,305
Grand Total 7,897,629 8,906,428 10,123,988 9,654,435 9,724,243 12,295,397 15,513,156

Source: Society of Indian Automotive Manufacturing (SIAM)

Two Wheelers sales registered a growth of 14.16 per cent during April-March 2012
wherein Mopeds, Motorcycles and Scooters grew by 11.39 per cent, 12.01 per cent and 24.55
per cent, respectively

P a g e | 32

Automobile Exports Trends
(Number of
Category 2004-05 2005-
2006-07 2007-08 2008-09 2009-10 2010-11
166,402 175,572 198,452 218,401 335,729 446,145 453,479
29,940 40,600 49,537 58,994 42,625 45,009 76,297
Three Wheelers 66,795 76,881 143,896 141,225 148,066 173,214 269,967
Two Wheelers 366,407 513,169 619,644 819,713 1,004,174 1,140,058 1,539,590
Grand Total 629,544 806,222 1,011,529 1,238,333 1,530,594 1,804,426 2,339,333

The industry exported 2,910,055 units registering a growth of 25.44 per cent in April-
March 2012. Automobile exports registered a growth of 17.81 per cent in March 2012 as
against March 2011
Two wheelers accounted for the largest share in exports (by volume) at 66 per cent in
FY11. Passenger vehicles account for a sizeable 19 per cent of overall exports.
The entry of MNCs/ foreign collaboration, has also given rise to increased level of
automobile exports. India has slowly emerged as a hot favorite location for Auto Makers. Its
central proximity along with cheap trained manpower makes it much lucrative. The local
volumes itself speaks of the glory and currently it is just a tip of the iceberg. The volumes are
bound to grow multiple folds in coming few years. This has made OEM's take the Indian
ground seriously as part of their strategy.
India has become important to the whole world and this is becoming like an export
hub especially for small cars and components globally. Never before, Auto majors have
launched cars specifically for Indian consumers but now they appear to be giving immense
importance to Indian market. The export volumes for the last four years, too, suggest a strong
P a g e | 33

correlation with domestic demand. In years, when the domestic market has been sluggish,
auto makers have been aggressive on exports and vice versa.
A look on the export scenario for March 2012
112724 13228 125952 10.5
95047 5367 100414 5.3
HYUNDAI 39122 20107 59229 33.9
MAHINDRA 44342 2659 47001 5.7
FORD 9026 3122 12148 25.7

The export volume of Hyundai & Ford speaks for itself - around 34% and 26% of overall
volumes of Hyundai & Ford were exports. While it is clear that the Indian-origin OEMs were
busy satisfying the domestic demand.
This is a major reason why Chennai is home to major Auto Makers. Its proximity to
Ennore port makes it extremely viable to set up base there. To emphasize on the scale of
exports currently happening through Chennai -
Toyota started the export of its Etios & Liva from April'12 with the first batch of 247
units shipped on April 4 from Ennore. Toyota aims to export 20000 cars this year.
Nissan India has exported 85,000 cars till date, manufactured at its Oragadam facility
and posted a record export of 14,403 units in January 2012. The company is planning
to increase the volume of exports in 2012 and targets car exports worth Rs. 500 crore
P a g e | 34

Exports volume was led by the local arms of global car makers such as Hyundai,
Nissan Motor Co. Ltd and Ford Motor Co., all of which have identified India as an
export hub for small cars and have constantly shipped models from their factories in
Export is now being looked as a strategic advantage for OEMs citing the volatility in the
domestic demand. In the coming years the percentage of exports is bound to equal domestic

2006-07 2007-08 2008-09 2009-10 2010-11
30,476 36,612 33,250 43,296 58,583
(USD Conversion Rate) 45 40 46 47 46

Source: Society of Indian Automotive Manufacturing (SIAM)

P a g e | 35

Major Players
There is presence of a clear market leader in each segment of the market. The
automotives industry is concentrated with market leaders in each segment commanding a
share of over 40 percent.

Market Leader Others
45% 16% 15% 7%
MCVs and
63% 23% 7%

59% 30% 4%
40% 10%

24% 7% 6%
51% 21%

P a g e | 36

The size and high growth potential of the Indian car market has attracted several
foreign players, such as Mercedes Benz, BMW, Volkswagen, Toyota, Honda, Ford, Hyundai
and General Motors, among others. Several of these players have expanded operations in
For instance, Hyundai Motor India Limited (HMIL) is a dominant passenger car
manufacturer in India, controlling 16% market share in the passenger vehicles segment. It is
the largest passenger car exporter and the second-largest car manufacturer in India. The
company sold a total of 616,039 vehicles in the year 201011. It has a fully integrated, state-
of-the-art manufacturing plant near Chennai and has also set up a modern multi-million dollar
R&D facility at Hyderabad. HMIL currently exports cars to more than 115 countries across
the EU, Africa, the Middle East, Latin America and Asia Pacific.
Another success story is Honda Siel Cars India Limited (HSCIL). The company was
incorporated in December 1995 as a joint venture between Honda Motors of Japan and Siel
Limited, an Indian company. The total investment made by the company in India until now is
INR 1,620 crore in a plant at Greater Noida in Uttar Pradesh and INR 784 crore in its
Tapukara plant, in the state of Rajasthan. HSCILs first state-of-the-art manufacturing unit at
Greater Noida was a greenfield project spread across 150 acres (over 600,000 sq. m.). The
annual capacity of this facility is 100,000 units. The companys second manufacturing facility
at Tapukara is spread over 600 acres and will has an initial production capacity of 60,000
units per annum.
Similarly, the high-end luxury car maker Mercedes Benz is also growing at a healthy
pace in India, being driven by demand for its C-Class and E-Class vehicles. It sold 7,430
units during the period January 2011 to December 2011. The strong sales, in 2011, of SLS
AMG at INR 2.5 crore; G 55 AMG at INR 1.1 crore and the new SLK 350 and E-Class
Cabriolets, reaffirms the high demand for sports cars from the Mercedes-Benz portfolio and
also the growing preference for the brand among Indian consumers.
Major Indian companies present in the automobiles market include Tata Motors,
Maruti Suzuki India, Mahindra & Mahindra, Ashok Leyland, Hero Honda Motors and Bajaj
Auto. Tata Motors is Indias largest automobile company, making commercial and passenger
vehicles. It is world's fourth-largest truck manufacturer and the world's second-largest bus
manufacturer. Maruti Suzuki is India's largest passenger car company, accounting for 45%
share of the Indian car market. Hero Honda is worlds largest two-wheeler manufacturing
P a g e | 37

company in the world. Its market share in the Indian two-wheeler segment is 41%. Bajaj
Auto is the worlds fourth-largest two-wheeler and three-wheeler manufacturer.

P a g e | 38

Major Developments & Investments
World's largest two-wheeler manufacturer Hero MotoCorp has inked a technology-
sharing deal with US motorcycle firm Erik Buell Racing (EBR) wherein Hero would
buy technology from EBR without sharing profits or ownership. EBR is already
working on some of Hero MotoCorp's products to customise them according to the
Indian markets. New models of bikes and scooters are likely to get launched by 2013
The Stuttgart-based luxury car maker Mercedes Benz intends to invest Rs 350 crore
(US$ 67.97 million) by 2014 in its facility near Pune and launch about five compact
premium cars in India by then. The company sees great growth prospects in India and
hence plans to strengthen its dealership network and ramp-up its production capacities
to harness the opportunity
Tata Motors, the country's largest automobile producer, has announced that it will
infuse Rs 800 crore - Rs 1000 crore (US$ 155.2 - 194 million) over 2012-2015 to
build a plant in Dharwar, Karnataka. The facility that would be exclusively dedicated
to manufacture the Tata Ace Zip and Magic Iris, will have an annual capacity of
90,000 units. It is anticipated that the plant would reach its full capacity by the end of
fiscal 2012-13
Nissan plans to bring its premium car brand Infiniti in the domestic market as it
intends to expand its luxury car basket in India. Infiniti's entry will intensify the
competition in Indian luxury car space as there are so many brands vying for
substantial market share. Nissan plans to assemble the car in India instead of
importing it a completely-built unit (CBU)
Escorts' agri-machinery arm won a one-year rate contract from the Ministry of
Commerce and Industry for supplying tractors to Central and State-level agencies.
The contract would enable the Faridabad-based firm to supply tractors on pre-
approved prices directly without entering any tendering process
Source: Department of Heavy Industry & Public Enterprises Government of India

P a g e | 39

Government Initiatives
The Government and the automotive industry had jointly set a road map, a vision, for
the future of the Indian auto industry in the shape of the Automotive Mission Plan (AMP)
2006-16. The main objective of this is setting up of a technology modernization fund focused
on SMEs. Automotives training institutes , auto design centers, special auto parks are also
established. As per this plan the Indian Government recognises its role as a catalyst and
facilitator to encourage the companies to move to higher level of competitive performance.
The Indian Government wants to create a policy environment to help companies gain
competitive advantage. The government aims that with its policies its encourage growth,
promote domestic competition and stimulate innovation.
General improvement in availability of trained manpower and good infrastructure is
required for sustainable growth of the industry. Keeping this in view, the Indian Government
has launched a unique initiative of National Automotive Testing and R&D Infrastructure
Project (NATRIP) to provide specialised facilities for Testing, Certification and
Homologation to the industry. A similar initiative is required for creating specialised
institutions in automotive sector for education, training and development.
In order to enforce compliance and the Energy Conservation Act, the Government has
recently given its nod to fuel mileage standards and labelling for new cars. Keeping consumer
interest in mind, these norms would mandate auto makers to put Government certified fuel
efficiency labels on each car they sell and improve efficiency of their products. While the
labels will become compulsory soon, the standards will be introduced by 2015, giving
manufacturers time to improve upon their technology.
SIAM is working on a voluntary recall policy that is in favour of auto manufacturers.
The soon-to-be-unveiled policy would make producers proactive rather than being reactive
for the recall activity.
On a similar note, the Indian Government is in the process of constituting a National
Automotive Board (NAB) which would become a formal set-up to look into the issue of
recall of vehicles and hence improve manufacturing standards. The prospective body, to
oversee technical and safety aspects of vehicles, will have representatives from all the nodal
ministries and automotive bodies such as the Automotive Research Association of India
P a g e | 40

Some of the factors, which contributes to the success of an automobile company are
enlisted below:
Diversified product mix and possession of a portfolio of products in different sub-
segments enables company to absorb a downturn in a particular sub-segment.
Improving cost competitiveness by pursuing various measures such as efficient
outsourcing, reduction in vendor base, efficient inventory management (like just in
time inventory system), higher level of localization, use of common components and
manufacturing various models on single platform and above all, rationalization of
Greater downstream participation of automotive manufacturers in the areas of
financing, services and product support. Tie-up with financial institutions for auto
financing will help push up sales in a competitive market. Similarly, having a wide
dealership network and after sales service/product support system helps promote
Strong brand image/promotion of brand, access to technology, research and
development support for upgrading technology and for launching new models. In this
area, the MNCs operating in India or, domestic automobile companies having alliance
with global players are better placed.
P a g e | 41

Challenges that Indian auto industry has to address
Scale up capacities and absorbing newer technologies.
Cost competitiveness.
Infrastructure development.
Improve productivity of both labour and capital.
Favourable and predictable business environment.
Availability of cost effective capital.
Availability of raw material commensurate with growth.
Availability of auto grade technically advanced material.

Road Ahead
Industry body SIAM expects overall automobile sales to grow by 10-12 per cent in
2012-13 on the back of supportive Government policies, launch of new models and
intensifying enthusiasm for cars among Indian consumers.
Furthermore, Rothschild, a UK-based global financial advisory firm, forecasts that
India would become the third largest auto industry by volumes by 2015. The growth is
anticipated to be driven by increase in investments by auto makers that would expand the
capacity from 4.8 million units in 2010 to 12 million in 2018. New launches, strengthening
dealership networks, strategic alliances and predicted mergers and acquisitions (M&As) are
expected to provide an impetus to the sector in the years to come.

P a g e | 42

Definition of Micro, Small and Medium Enterprises
A. Enterprises engaged in the manufacture or production, processing or preservation of
goods as specified below:
A micro enterprise is an enterprise where investment in plant and machinery
does not exceed Rs. 25 lakhs;
A small enterprise is an enterprise where the investment in plant and machinery
is more than Rs. 25 lakhs but does not exceed Rs. 5 crore; and
A medium enterprise is an enterprise where the investment in plant and
machinery is more than Rs.5 crore but does not exceed Rs.10 crore.
B. Enterprises engaged in providing or rendering of services and whose investment in
equipment (original cost excluding land and building and furniture, fittings and other
items not directly related to the service rendered or as may be notified under the
MSMED Act, 2006) are specified below. These will include small road & water
transport operators (owning a fleet of vehicles not exceeding ten vehicles), retail trade
(with credit limits not exceeding Rs.10 lakhs), small business (whose original cost
price of the equipment used for the purpose of business does not exceed Rs.20 lakhs)
and professional & self employed persons (whose borrowing limits do not exceed
Rs.10 lakhs of which not more than Rs.2 lakhs should be for working capital
requirements except in case of professionally qualified medical practitioners setting
up of practice in semi-urban and rural areas, the borrowing limits should not exceed
Rs.15 lakhs with a sub-ceiling of Rs.3 lakhs for working capital requirements).
A micro enterprise is an enterprise where the investment in equipment does not
exceed Rs. 10 lakhs;
A small enterprise is an enterprise where the investment in equipment is more
than Rs.10 lakhs but does not exceed Rs. 2 crore; and
A medium enterprise is an enterprise where the investment in equipment is more
than Rs. 2 crore but does not exceed Rs. 5 crore

P a g e | 43

Introduction to SRTO loans and CGTMSE
Many small and medium enterprises face challenges in mobilizing capital for their
business. This challenge is much more severe for start-up businesses. The challenge comes
from the fact that SMEs have limited owned capital available to start a business and sustain it
during initial tough years. Coupled with this is the fact that banks and financial institutions
ask for collateral before deciding to fund SME business. Funds are available to Small Road
Transport Operators (SRTOs) under the priority sector lending scheme of commercial banks
and public financial institutions. Under this scheme, transport operators can obtain finance,
generally for purchase of chassis, at reasonable rate of interest. But transport operators face a
variety of problems in bank financing. Banks are hesitant to lend because of the fear of
default in repayment of loan; no loans are given for meeting working capital requirement or
even for body-building. The repayment period is short, ranging from three to four years.
Margin money requirement ranges between 25 and 40 per cent. Such policies in bank
financing benefit the relatively richer transport operators, who are in a position to contribute
margin money from their own resources and are capable of meeting working capital
requirements. On the other hand, small operators depend on private financing with high rates
of interest, which in the long run, increases operational costs. Considering these bottlenecks,
CGTMSE (Credit Guarantee Fund Trust for Small and Medium Enterprises) is a scheme
available to small enterprises to raise capital without collateral.
CGTMSE was started in the year 2000 and came into force on August 1, 2000. The
key objective of the scheme was to provide collateral free loans to small businesses. Keeping
this objective in view, the Ministry of Micro, Small & Medium Enterprises (MSME) and the
Government of India, launched a credit guarantee scheme (CGS) so as to strengthen the
credit delivery system and facilitate flow of credit to the MSE sector.
The main objective is that the lender should give importance to project viability and
secure the credit facility purely on the primary security of the assets financed. The other
objective is that the lender availing guarantee facility should endeavor to give composite
credit to the borrowers so that the borrowers obtain both term loan and working capital
facilities from a single agency. The Credit Guarantee scheme (CGS) seeks to reassure the
lender that, in the event of a MSE unit, which availed collateral free credit facilities, fails to
discharge its liabilities to the lender, the Guarantee Trust would make good the loss incurred
by the lender up to 75 / 80/ 85 per cent of the credit facility.
P a g e | 44

Loans under CGTMSE are available to small and medium enterprises in both the
start-up as well as existent phases. The loans are given through Member Lending Institutions
(MLIs). All leading banks offer loans under the scheme. Loans given by MLIs under the
scheme are guaranteed by CGTMSE subject to limits. Following are the features of the
Eligible Borrowers:
Eligible borrower would be new or existing Micro and Small Enterprises (both
Manufacturing and Services) to which credit facility has been provided by the Bank
without any collateral security and/or third party guarantees. Collateral Security
would mean any asset other than business asset.
Under the Credit Guarantee Scheme, the CGTMSE encourages composite credit
being extended to a single borrower by a Member Lending Institution of the
CGTMSE. However credit facilities extended by a Bank for a unit already assisted by
State/National Level Institutions are eligible for Guarantee Cover under the scheme.
Joint financing by two commercial Banks to a single borrower shall not be eligible for
guarantee cover. Joint Financing with SIDBI would however be eligible for guarantee
All types of firms / companies or other legally constituted bodies, individual
borrowers, small businesses. Group lending through SHGs not eligible
Eligible Accounts:
Both Term Loan and Working Capital (both fund based and non-fund based) can be
Where the borrower is enjoying several distinct credit facilities, one or more out of
the same can be covered upto the Eligible Amount (presently Rs.100 lakhs) provided
collateral security and 3rd party guarantee are not obtained in such accounts.
In case an account which had been sanctioned earlier had been omitted to be covered
under the scheme, only working capital accounts of such borrower can be covered at
the time of renewal/review.
P a g e | 45

For credit facilities above Rs. 50 lacs and upto Rs. 100 lacs, internal rating should be
of the investment grade. Investment grade refers to the acceptable grade. In Bank of
India internal rating for extending credit facilities to micro and small enterprises for
fund based and non fund based limit between Rs. 10 lacs and Rs. 100 lacs, the SBS
model of credit rating shall be followed. The following risk grades are to be treated as
minimum grades for considering sanction of advance to a borrower.
Micro and Small Enterprises Manufacturing an entry grade of SBS 5.0 (total
score 180)
Micro and Small Enterprises Services an entry grade of SBS 5.5 (total score
of 196)
Credit Guarantee Cover:
The guarantee cover is subject to the overall ceiling of Rs. 65 lakhs to Women
Entrepreneurs and units located in North East Region and Rs 62.50 lakhs in respect of
other categories.
The extent of guarantee cover is up to 85% of the credit facility ( up to Rs 5 lakhs) in
respect of Micro Enterprises, 80% of the credit facility subject to a maximum of Rs 40
lakhs to Women Entrepreneurs /units located in North East Region(other than credit
to Micro Enterprises)
The Guarantee Cover will commence from the date of payment of guarantee fee.
The Guarantee Cover shall run through the entire tenure of the Term Credit /
Composite Credit.
Where working capital alone is financed, the tenure of guarantee cover is fixed
at 5 years. Guarantee Fee has to be paid afresh for renewed guarantee cover
thereafter for the next block of 5 years.
Term loan sanctioned or WC limit sanctioned / renewed in a particular
calendar quarter should be covered latest by the end of next calendar quarter.
Thus, maximum time of 6 months and minimum time of 3 months is available
for filing of application for Guarantee Cover.
P a g e | 46

Rehabilitation assistance:
For the unit covered under CGTMSE and becoming sick due to factors beyond the
control of management, assistance for rehabilitation extended by the Bank could also be
covered under the scheme provided the overall assistance is within the credit cap of Rs.100
Non eligibility:
Any facility given on the basis of collateral security or third party guarantee shall be
disqualified for coverage under the scheme. The CGTMSE also reserves the right to reject
any application for the guarantee cover, if it deems necessary.
Guarantee Fee and Annual Service Fee:
Upfront Guarantee Fee
Credit facility North East Region Others Annual Service Fee
Upto Rs. 5 lacs 0.75% 1% 0.50%
Above Rs. 5 lacs to
Rs. 50 lacs
0.75% 1.50% 0.75%
Above Rs. 50 lacs to
Rs. 100 lacs
1.50% 1.50% 0.75%

P a g e | 47

Target Group:
Individuals, Proprietorship or Partnership firms, Limited Companies, Trusts and
Societies are included in the scheme.
The purpose of this scheme is to finance commercial vehicles/ earthmoving
equipments/ excavators for commercial use and or captive use.
Eligibility or entry level norm:
For limits upto Rs. 100 lacs for SRTO borrowers, scoring sheet is applicable and entry
level is 20 marks. For SRTOs with limits above Rs. 100 lacs and Equipment hirers
irrespective of limit, appropriate rating model to be used and entry level as per extant
guidelines will be applicable.
Items to be financed:
Cost of the equipment or on the road cost of vehicle (to include cost of chassis, body,
tools, insurance for the loan tenure, registration cost, road tax, accessories and AMC ), these
items can be financed under the scheme.
Appraisal of loan:
The economic viability should be worked out as per prescribed proforma. Detailed
project report is not to be obtained for commercial use vehicles. In the case of captive use,
there should be adequate cash flow from the existing activity to service the term loan
instalments and interest. Minimum DSCR that is required is 1.25

P a g e | 48

A margin of 15% of the project cost as given under items to be financed. In
exceptional cases, like in case of large fleet owners with long standing in the industry, a
margin lower than 15% can be allowed.
Rate of Interest:
The rate of interest is linked to the base rate (floating) which is currently 10.5%
Limits upto Rs. 2 lacs 10.5%
Above Rs. 2 lacs upto Rs. 20 lacs 12%
Above Rs. 20 lacs upto Rs. 50 lacs 12.50%
Above Rs. 50 lacs upto Rs. 100 lacs 13.50%
Fleet owners Above Rs. 100 lacs 13%

The repayment period is 5 to 7 years including a moratorium of 3 months. Repayment
holiday of 3 months in a year during monsoon may be considered within the original tenor of
the term loan.
PPC and other charges:
0.20% is the PPC and other charges inclusive of PPC, Documentation, Inspection and
Mortgage charges. This is subject to minimum Rs. 2,000/-. Service tax is to be levied
Hypothecation of vehicle/ equipment
P a g e | 49

Registration of banks charge with the RTO and in the RC book in the case of vehicles.
If the account is covered by CGTMSE guarantee, no third party guarantee/ collateral
security should be obtained.
Where CGTMSE cover is not available, suitable third party guarantee and/or
collateral security may be obtained.

P a g e | 50

1 Area of Operation NERUL, SANPADA, TURBHE
2 Type of Vehicle Tata Winger School Van BS-III
3 Name of manufacturer TATA
4 Carrying Capacity of vehicle 13 seater + 1 Driver
5 Total cost of vehicle 750202
6 Margin Amount 150202
7 Loan Amount 600000
8 Monthly estimate of earnings
a Average no of days run per month (Max.25
b Average run per day in kms 60
c Total run per month 1500
d Freight rate per student per month 450
e Total no. of students 95
Total Earnings 42750
P a g e | 51

a Per Liter average run 12
b Total fuel consumption per month 125
c Monthly fuel consumption incl.oil @ Rs. 45
d Taxes (for one month) 1500
e Depreciation 15% 9378
f Int on Loan @ 12.0% 6000
g Salary to Driver & Cleaner 0
h Repairs & Maintenance 10% of cost + 4
i Living Expenses 6000
10 Net Surplus available p.m.
Net Profit 7329
Depreciation 9378
Total 16707
11 Monthly Installment of TL 8334
12 DSCR 1.58
Net profit + Depreciation + Int. on TL
Installment of TL + Int. on Term Loan
P a g e | 52

1 Average run per liter
a Truck 3.5 to 4 kms
b Tempo 10 to 11 kms
c Ambassador 9 to 10 kms
d Autorickshaw 25 kms
2 Depreciation
Taxi & Truck & Tempo 15%
Autorickshaw 20%
3 Repairs & Maintenance
Truck @ 10% of cost + cost of 6 tyres
Tempo @ 15% of cost + cost of 4 tyres
Car @ 10% of cost + cost of 4 tyres
Maxxi Truck one tyre & tube Rs. 3,500/-

P a g e | 53

Advance to SC/ST YES
Advance to Minority NO
Under Govt Spon.Scheme NO. Tie up with TATA MOTORS
If yes, Name of Scheme N.A.
Women Beneficiary NO
If yes, %of women holding N.A.
Whether covered under
Driving License No. MH43 20100009291
Whether registered with DIC NO
Whether member of any
Name of Account MR. XYZ
Established Since 1998
Nature of Business activity Public Transport
Constitution Individual
P a g e | 54

Address: Office NL-2/21, B-2, SECTOR-3, NERUL
Residence: NL-2/21, B-2, SECTOR-3, NERUL
Age in Years 38
Academic Qualification 12th
PAN Card Number ANUPK9727B
Experience in the activity 14 Years
Security in brief Hypothecation of Vehicle
Value of Security 750,202
Margin % 20%
Rate of Interest 1.5% over Base Rate (10.5%) presently 12.00% as per MOU
dt. 10.06 11 with TATA MOTORS
Total cost of project Rs. 7,50,202/-
1. Date of Inspection 23.06.2012
P a g e | 55

a) Name of Official Ganesh Shetty
b) Observations & brief
Borrower is residing at Nerul. The flat is in his father's
name.He is currently operating in the area of Nerul,
Seawoods, Sanpada and Vashi
2. Verification of
Business/Residential Address
done on
3. Verification of
Certificates/Income Tax &
other related documents
Not applicable for ITR filing due to low income
4. Reports from Existing
Banker obtained on
Reports are awaited
5. Asset & Liabilities
Statements verified
6. Market Enquiries done Yes
Findings on market enquiries Kamal Motors is an authorised dealer in Commercial
7. CIBIL/ECGC/RBI wilful
defaulters' list checked:
Findings: Satisfactory
8. D.S.C.R 1.58
Number of dependents 2 (Wife, 1 Child)
9. Present Liabilities if any: NIL
Marks as per Rating Sheet
Purpose of Loan Purchase of new Tata Winger BS-III School vehicle
P a g e | 56

Bank Of India has signed MOU on 10.06.2011 with TATA MOTORS for financing
commercial vehicles. The applicant is in the activity of transport of students since last 14
years. He is well settled in the activity. Presently he is doing the activity with his private
vehicle which he has to either dispose off or use for other purposes except for transport of
students, as per governments new regulations, therefore he has to purchase a new approved
vehicle for transport of students. The applicant is carrying students from KG to 10
and in all running 6 to 7 rounds in a day, to transport students as per schedules of various
schools. The activity is carried out with a mutual understanding between vehicle owners and
parents of the students. At present the applicant is earning around Rs. 35,000/- per month.
With the help of new approved vehicle, he expects increase in the number of students and
thereby monthly income to increase to Rs. 43,000/-. DSCR of the project has been calculated
and the same is above 1.50.
KYC norms and due diligence of the applicant has been carried out. The present
banking dealings with other banks or branch have been verified from the statement of account
and found satisfactory.
In view of the above, finance under SME sector, CGTMSE cover will be available
and the limit has to be repaid by the borrower in 72 equated monthly installments of Rs.
11,731/- commencing from immediate next month of the first disbursement.

P a g e | 57

In the current scenario, banks have been thriving on retail lending. The focus of banks
now, is to increase the probable profits while limiting possible losses. An increase in market
penetration brought about a change in the business environment and in the way banks
conducted their business. There was a change in terms of innovation in products as well as
processes to cater to the demands of the new age customer on one hand and to protect the
bank from multiple risks on the other. Retail exposure of banks includes various types
of retail credit, such as residential mortgages, consumer credit cards, automobile and
personal loans, loans against securities, and small business loans.
Retail loans include Home loans, auto loans and personal loans
The term EMI in a housing or vehicle loan is calculated on the basis of Principal and
interest on the loan
A Vehicle loan is granted against the security of Hypothecation of the vehicle
Retail loans are generally of Medium and small amounts
Retail loans are generally granted to Professionals, Salaried Employees, corporations
Home loans constitutes the largest percentage of retail loans in India
These are small size loans.
These loans meet the needs of a large number of customers with well diversified
The target customers are generally individuals or small organizations.
These loans offer standard products to customers. Very rarely a customer's
requirement is customized.
The operations of retail credit are centralized in most of the banks.
Bankers can make quick credit related decisions because of decentralization.
These loans are designed to cover varied segments of risks.
High volume business.
P a g e | 58

High number of transactions
Salient features
Types of facilities:
Loans are the finance facility of a fixed amount extended to meet a onetime
requirement of a customer, for a fixed tenure, to be repaid over a period in instalments. To
enable customers to meet their emergency requirements, bankers permit them an overdraft
[OD]. This means that bankers allow the customer to withdraw more than the credit balance
in the customer's current account or give a temporary loan in the current account itself
Secured/Unsecured facilities:
Secured loans are always secured by an underlying asset against which funding is
extended. This lending is also known as asset based lending. A specific charge is created
against such an asset. This gives the banker/lender the right to take possession of the asset
and sell it to recover the loan in case of default. Unsecured loans do not have any underlying
security and are purely extended based on the creditworthiness of the borrower. This is also
known as non-asset based lending.
On a loan given at a fixed rate, interest is charged throughout the tenure of the loan at
that rate which is fixed at the time of granting the loan. The customer has to pay interest at
the contracted rate irrespective of whether the interest rate in the market goes up or down. In
case of floating rate of interest, the rate at which the interest is charged on the loan varies
from time to time according to the movement of interest rate in the market.
The tenure for a loan depends upon the amount of the loan and repayment capacity of
the customer. However, the maximum tenure permitted depends upon the period over which
the asset financed could depreciate completely.

P a g e | 59

Out of the various types of retail credit, the focus of this project is on auto loans. This
report will talk about the scheme that Bank Of India offers for auto loans and the steps
involved in appraising an auto loan.

P a g e | 60

Salaried employees: 24 times of monthly gross salary
Professionals/businessman: 2 times of gross average annual income as per last three
years ITR.
Proprietor/Partnership firm/Company: 2 times of average annual cash accruals as per
last three years balance sheets.
Pensioners: 24 times of monthly pension
Farmers: Depending upon his income / repayment capacity
Staff(Retired employees): Both pension/CPF Optee as per income criteria
Advance can be granted jointly to two individuals combining their entitlement,
provided they are close relatives and vehicle is registered in the name of one of the co-
For purchase of two/four wheeler vehicles (not requiring heavy duty license).Also for
purchase of used/second hand 2 and 4 wheeler. (Age of the vehicle not to exceed 3 years)
In case of electronic/battery operated vehicles, these must be registered with RTO, if
registration with RTO is not required then with collateral security upto Rs. 50000/- for two
wheelers and upto Rs. 400000 for four wheelers.
Maximum limits for Finance:
Individuals (Resident in India):
Maximum limit in case of Indian make vehicles is Rs.25 lacs.
For imported vehicles the maximum limit is Rs.75 lacs.
For Companies and corporate entities a maximum of Rs.100 lacs can be sanctioned
(Can be a fleet of vehicles)
For non-resident Indians the maximum limit is Rs.25 lacs.

The limits are subject to:
P a g e | 61

24 times of gross monthly emoluments in case of salaried employees/pension/
or two times of gross average annual income as per last 3 yeas I.T. Returns
Two times average annual cash accrual (i.e. PAT + Dep.) as per firms/
companies last 3 years audited balance sheet, P&L A/c.
Net take home pay should be atleast 40% of income (net of proposed EMI).

Rate of Interest (on daily reducing balance):
a. New Vehicles
(Repayment upto 3 years)
@1.75% over Base Rate
b. New Vehicles
(Repayment over 3 years)
@2.25% over Base Rate
c. Second Hand Vehicles @2.25% over Base Rate

Interest concession in respect of loan to women beneficiary is 0.25% pa and in festival offer
no such concession is offered.
For individuals including NRIs: (For new vehicles)
Upto Rs.2 lacs 5%
Rs.2 lacs to Rs.10 Lacs 10%
Above Rs.10 lacs to Rs.25 lacs 15%
Above Rs.25 lacs 25%

For Corporate entities/firms, etc. a minimum margin of 25% has to be kept and for second
hand vehicles the minimum margin is 30%
P a g e | 62

Processing/ Handling Charges (One Time)
Upto Rs.25,000 1000
>Rs.25000 to Rs.25 lacs 1% of loan amount Min.Rs.2000 and Max.
Loan Over Rs.25 lacs Flat Rs.15,000
For Partnership firms/Corporates the processing charges will be double that of
For Rural areas the Processing charges will be 75% that of individuals in respect of
loans availed by borrowers from rural areas from the Rural Branches.
Processing charges are waived for senior citizens, staff members, retired staff and
pensioners drawing pension from bank.
For Individuals (new vehicles)
4 wheelers - Max. 7 years.
2 wheelers - Max. 5 years.
For Corporates/Firms, etc. - Max. 5 years.
For second hand vehicles - Max. 3 years.

Hypothecation of the vehicle to be purchased out of Bank finance.
Charge to be registered with RTO.
Third party guarantee required in the following cases:
P a g e | 63

Loans to NRIs Guarantee of Resident Indian is required.
Vehicles not registered with RTO and for loans to individuals for limits
exceeding Rs.25.00 lacs.

P a g e | 64

Steps to be followed during retail loan with the help of a
case of Mr. XYZ who has approached the bank for a bike
1. Interview.
Borrowers should be listened to attentively, intelligently, with understanding of the
problem, without pre-judgement or evaluation. After listening to the borrower, the
doubts may be put to him and questions asked to get relevant information to clear the
The manager should not pretend to have knowledge he does not have or about which
he is doubtful. He should ask him questions and make sure of the facts. The manager
should not commit himself without deliberating adequately or examining all the
aspects of the advance including legal aspects. Managers dealings with the borrower
should be straightforward and not liable to be misinterpreted.
Mr. XYZ had approached the bank for a bike loan for purchase of a 2 wheeler (Honda
CBR ABS). The cost of the bike was Rs. 1,97,456 out of which 35,456 was to be paid
by him. From the interview we came to know that Mr. XYZ works for voltas ltd and
has an average monthly salary of Rs.50,000. The customer seemed to be satisfactory
and the EMI for the proposed loan also fell under the permissible amount according to
the bank norms. Looking at all these criterias we further asked him to submit all the
documents that needed to be assessed and verified.

2. Pre Sanction inspection and due diligence.
a) Know Your Customer: A customer for this purpose is defined as
A person or an entity that maintains an account and or has a business
One on whose behalf the account is maintained.
Beneficiaries of transaction conducted by professional intermediateries.
Any person or entity connected with a financial transaction.

P a g e | 65

To prevent criminal elements from using the bank for money laundering
To enable the bank to know the customers and their financial dealings better.
To put in place appropriate control for detection and reporting of suspicious
To comply with applicable laws and regulatory guidelines.
To take necessary steps to ensure that the relevant staff are adequately trained
in KYC procedures
Customer identification is to be verified while establishing the business
relationship or when bank feels necessary to obtain additional information for existing
or new customers such as address, date of birth etc. If PAN card is available no
introduction is necessary. In case of Joint A/Cs, Current A/Cs, Company or trust A/C
photo ID of individual person should be obtained and verified.
In this case, Mr. XYZ had complied with the KYC norms, for address proof he
had provided electricity bill and for ID proof pan card and driving license was
The importance of ensuring KYC compliance can be seen from the press
reports detailed below:
Reserve Bank of India imposed a penalty of Rs. Five Lakhs on ICICI Bank for
violating banking regulations in respect of a single customer account, for opening of
which the bank had obtained a government issued identity card (driving license) and
introduction from an existing customer. RBI concluded that substitution of
introduction by an existing customer for address proof was in accordance with the
guidelines. The bank was issued warning letter and advisory note twice in the
previous two years for violating RBI guidelines. The bank was accused of violating
RBI guidelines/ directives in opening new deposit accounts.
Government imposed a penalty of more than Rs. 275 crore on major telecom
operators for not fully meeting the KYC norms. The CMDs and CEOs of these
telecom firms will face criminal action and will be treated as co-accused in cases
where the unverified SIMs are used in terror acts.
P a g e | 66

b) Past record: The bank has to gather the customers credit history. This
information is obtained with the help of CIBIL report. CIBIL is a depository, which
shares information only with those member banks who share their customer
information with the CIBIL. A CIBIL report can be availed by customers as well, by
making a pay order. The CIBIL report gives a score to the customer, a score above
700 is generally considered acceptable.
CIBIL report for the proponent was generated. We verified if there was any
overdue in any loan facilities that the proponent had availed. CIBIL report for Mr.
XYZ showed that there was no credit history for the borrower.
c) Income criteria: This amount is subjective and it differs from bank to bank.
3 months gross average salary 100
40% of gross average salary to be kept aside
for his daily consumption 40
Amount left 60
3 months average salary deductions 5
EMI for previous loan 5
Therefore the amount left with him 60

Now we have to check if the EMI for this loan fits within this range.
Mr. XYZ has average gross salary of Rs. 53785 and deductions of Rs. 9960 as
per his last three months salary sheets. He also has a car loan and a LIC policy, the
EMI for which comes to Rs. 8400 and 2500 respectively. Considering all this he can
comfortably pay an EMI of Rs. 5401 for this bike loan for 3 years.
d) Net worth: The net worth of a borrower can be calculated as assets less liabilities.
These details of the borrower are available in CBD 23 which has to be filled in by the
P a g e | 67

We ensured that the assets and liability declared by the proponent in the CBD
23 was verified and was true. The total asset of Mr. XYZ was Rs. 5.5 lacs, this
comprised of an owned car whose distress sales value could be Rs. 3Lacs and
insurance whose surrender value could be Rs. 2.5 Lacs. The total liability for the
borrower was Rs. 3.5Lacs, which was the amount outstanding in his auto loan.
3. Proposal preparation.
This is a manual proposal prepared for Mr. XYZ.

DATE: 14.05.2012
DOB: 12/04/1980
Present Address: Flat-204, Ankur Apt,
sector-20, Airoli, Navi Mumbai.
Permanent Address: Flat 301, Ganesh
Bhuwan, Siddhi Vinayak Nagar, Phase- 1,
Diva East
Telephone No. 9821781555
Net worth:2 Lakhs(As per CBD23)
2. CONSTITUTION Individual
P a g e | 68

3.PRESENT OCCUPATION Area sales manager, Voltas Ltd.
5.PURPOSE OF LOAN For purchase of 2 wheeler (Honda CBR
ABS) vide Quotation no. 4009 dated
10.05.2012 from Siddhesh Automobiles

a. Cost of the Vehicle 1,82,500
b. ADD Comp. Insurance Premium for 1 year 2456
c. AD: Road Tax & Registration 12,500
d. Less Rebate, if any -
f. LESS: Margin@19% 35,456
g. Limit Proposed 1,62,000
h. Eligibility of Loan(24x Gross monthly emoluments for salaried
employees/pensioners) i.e. 24x Rs.53785 (as per salary slips of Jan 2012,
Feb 2012, Mar 2012)

i. Total percentage of deduction to Gross Salary/income after adding EMI
on proposed loan
j. Score assigned as per Rating Sheet 31/50
k. Amount being considered (least of g & h) 1,62,000

P a g e | 69

7. RATE OF INTEREST: 1.75% over Base Rate, presently 10.5% p.a. with monthly rest
i.e.12.25% for 3 years.
a. Principal Security: Hypothecation of 2 wheeler (Make) Honda (Model) CBR
(ABS) (2 wheeler)
b. Collateral Security: NIL
Disbursement is to be made by Demand Draft in favour of Siddhesh Automobiles
payable at Mumbai.
The loan is to be repaid in 36 EMIs of Rs 5,401 commencing from succeeding month
of disbursement.
a) Composite Hypothecation of agreement for charge on asset financed by the
b) DP Note and installment letter.
c) L515-Declaration, L516-Agreement.
d) Form 29&30, in duplicate.
e) Registration of charge with ROC incase of finance to Companies.
f) Letter to Insurance Company regarding charge to Bank by way of
hypothecation.(in duplicate, one copy to be sent to insurance Company)
g) Undertaking from the borrower that the insurance premium and any other
charges not stipulated herein during the currency of the Loan & beyond
sanctioned limit shall be paid by him and copy of insurance policy with
Banks hypothecation clause to be submitted to the branch for record.
h) Creation of charge on Collateral security if proposed/stipulated.
P a g e | 70

i) Banks charge to be registered with RTO and copy of RC Book with Banks
lien noted thereon to be kept on documents.
j) In other cases post-dated cheques towards EMIs.
a) Post dated cheques from the borrower.
b) Letter from Borrower, authorizing recovery of EMI from his S.B. Account and
Undertaking for non-shifting account from the Bank and inform the Bank in
case of his transfer or cessation of service.
Mr. XYZ is working for Voltas Ltd as the Area Sales Manager, since 2010. Mr. XYZ
wishes to buy a Honda CBR (ABS) and has applied for a loan of Rs 1,62,000 under our Star
Vehicle Loan Scheme for the same, vide invoice no 4009 dated 10.05.2012 from Siddhesh
Automobiles. The vehicle will be purchased in his personal name.
Mr. XYZ has opened a saving Account with our branch and has promised to maintain
a sizable amount. He presently has a savings a/c with ICICI bank. The statement of account is
obtained and kept on record.
As per CBD 23 of Mr.XYZ , He has a net worth of Rs. 2 Lakhs We obtained the
Credit Information Report of Mr. XYZ from CIBIL, vide control no. 536013129 on
10/05/2012. As per the report, he does not have any credit history, but we have come to know
that he has a car loan of Rs. 3,50,000 from Apna Sahkari Bank. The statement of account for
the same has been obtained and kept in record.
Mr. XYZ has a gross monthly salary of Rs. 53,785/- and his average monthly salary
deductions amount to Rs. 9,960 as per salary sheets of the months of Jan 2012, Feb 2012 and
Mar 2012. Rs. 8,400 and Rs.2,500 are being paid by Mr. Sawant as EMI for car loan and LIC
The EMI for this loan comes to Rs. 5,401/- considering this amount his net take
Home comes to Rs.27,524 which is 51.17% of the gross salary and falls within the stipulated
norms of the scheme.
P a g e | 71

KYC has been complied with. Pre sanction inspection has been carried out on
10/05/2012. Findings are satisfactory.
Having regards to:
1) Eligibility for loan under the scheme.
2) Repayment capacity of the borrower
3) Net worth of the borrower.
We hereby sanction a Vehicle Loan of Rs. 1,62,000 to Mr. XYZ

4. Execution of documents.
In case of all advances the lending bank protects its interest by obtaining appropriate
documents executed by borrowers and guarantors, if any, depending upon the type of
borrower, nature of security and charge and type of advances.
Document means any matter expressed or described upon any substance by means of
letter, figures or by more than one of these means intended to be used or which may be used
for the purpose of recording that matter. (Section 3 of Indian Evidence Act, 1872)
It would be seen that the emphasis is on the words matter and substance and
expression may be made in any manner for record.
In common usage the term documents is related to written record created for the
purpose of evidence while lending the bank funds.
The Indian Stamp Act while defining Instrument stated;
Instrument includes every document by which any right or liability is or purports to be
created, transferred, limited, extended, extinguished or recorded. (Section 2(14) of the
Indian Stamp Act).

P a g e | 72

The importance of documents may be enumerated as under:-
It serves as a written evidence of transaction and hence cannot be disputed by the
executant in future. A joint borrower cannot take plea in future that he had
understanding to act as a guarantor.
It is accepted as an evidence of fact in the Court of Law in any legal proceeding
against the defaulter.
It identifies the borrower, co-borrower and the guarantor.
It identifies the security charged to the Bank. Creation of charge cannot be
disputed during legal proceedings.
It identifies the nature of charge-hypothecation, pledge, mortgage, lien etc. and
also determines the banks right under such charge.
It helps the bank to safeguard its interest by incorporating protective clauses as
and when felt necessary.
The execution of a document will mean signing of a document, written out, read over,
understood. Document must exist before execution. A blank paper is not a document.
A document is deemed to have been executed, when parties who take benefits and
obligations under it have written their names on it. In order to prove execution of a document,
it must be shown that the executant signed the document after having known the contents of
The object of the Law of limitation is to prescribe the period within which existing
rights can be enforced in the Court of Law. It bars suits to be brought after lapse of the
limited time set by the law. It also relieves a person from the constant and continuous fears of
being dragged into the Court of Law.
P a g e | 73

The periods of limitation for filing a suit for the recovery of money in case of certain
common documents are as under
D.P.Note: 3 years from the date of execution
Term Loan agreement with repayment schedule : 3 years from the date when the
default is made unless the banker waives the benefit of the provision by rescheduling
the repayment terms
Letter of guarantee-3 years from the date of determination of guarantee
Documents should be filled in fully before execution.
All the alterations in the documents should be authenticated by the executant.
Execution of documents should always be done in presence of the officer responsible
for obtaining them. The officer concerned must be able to identify the borrower
As far as possible documents should be completed in the same hand writing using the
same ink and pen.
The borrower/guarantor must be asked to sign in full signature (not in initial) in the
same style throughout all documents. Where a documents runs into separate pages,
executant should sign on each page and at the end.
Where the borrower is an illiterate person or he does not understand language of the
documents, the contents of the document should be explained to him in the language
understood by him preferably in presence of a responsible person before execution of
the documents. A declaration to this effect duly countersigned by the said responsible
person should be obtained.
Unless there is specific requirement in the document it should not be attested.
Date and place of execution in each document should be mentioned invariably.
It should be ensured that date of execution of the documents coincides with the first
If power of attorney is executed in Banks favour, the same should be registered with
the concerned department.
In case of left hand signatures, a remark, alongwith signatures saying Left hand
signature should be given.
P a g e | 74

All the documents are to be entered in the Security Register properly under the initial
of the responsible official.

In this case Mr. XYZ executed the following documents in Banks favour:
Composite Hypothecation of agreement for charge on asset financed by the Bank-L-
DP Note and installment letter.
L515-Declaration, L516-Agreement
5. Disbursement.
Credit delivery in loan accounts is distinct from running accounts such as cash credit.
All disbursements whether in loan account or in running accounts, will be related to
actual/acceptable performance of the business unit and should never lose sight of basic
objective of safety of banks exposure in the credit assets. In case of retail loans the pay order
or DD should always be disbursed in the name of the vendor or dealer, this is done so as to
avoid misuse of fund by the borrower.
In this case the pay order/ DD was issued in the name of Siddhesh Automobiles the
dealer from whom the vehicle was being purchased.
6. Post sanction inspection.
This is done on a regular basis after the loan is given by obtaining receipts etc. This
helps us to check if the account is running properly.
In case of this vehicle loan, Mr. XYZ was asked to bring his bike for inspection once
it was delivered to him. We checked the engine number and chasis number of the vehicle
with the RC book and insurance documents. It was also ensured that the insurance and the
RC book showed that the vehicle was hypothecated in favour of the bank. The borrower has
to bring his vehicle to the branch every year for inspection, he also has to submit a copy of
his renewed insurance every year.

P a g e | 75


Department of Heavy Industry & Public Enterprises Government of India
Master Circulars of RBI
ImaginMor, Inderscience Enterprises Ltd and United Nations Industrial Development
Society of Indian Automotive Manufacturing (SIAM)
Bank of India website