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A SUMMER TRAINING PROJECT REPORT

ON

CREDIT APPRAISAL FOR TERM LOAN AND


WORKING CAPITAL FINANCING
SUBMITTED UNDER THE PARTIAL FULFILLMENT FOR THE AWARD
OF DEGREE OF MASTER IN BUSINESS ADMINISTRATION (2013-2015)

SUBMITTED BY:
SAURABH JAIN
ENROLLMENT NO: 04896403913
BATCH NO: 2013-2015

MAHARAJA AGRASEN INSTITUTE OF TECHNOLOGY


An ISO 9001:2008 Certified institute
NAAC Accredited Grade A
(Approved by AICTE, HRD Ministry, Govt. of India)
Affiliated to Guru Gobind Singh Indraprastha University, Delhi
SEC -22 ROHINI, NEW DELHI
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STUDENT DECLARATION

This is to certify that I have completed the project titled Credit Appraisal For Term Loan
& Working Capital Financing under the guidance of Mr Prashant Jain (Senior Branch
Manager) BMIET Raipur, Punjab National Bank, in the partial fulfillment for the award of
the degree of Master in Business Administration from Maharaja Agrasen Institute Of
Technology, New Delhi. This is an original work and I have not submitted it earlier
elsewhere.

Name: Saurabh Jain


Enrollment No: 04896403913

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CERTIFICATE (From Guide)

This is to certify that the project titled Credit Appraisal For Term Loan & Working Capital
Financing is an academic work done by Saurabh Jain submitted in the partial fulfillment of
the requirement for the award of the degree of Master of Business Administration in Finance
from MAHARAJA AGRASEN INSTITUTE OF TECHNOLOGY, New Delhi under my
guidance and direction. To the best of my knowledge and belief the data and information
presented by him in the project has not been submitted earlier elsewhere.

(Project Guide)
MAIT

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ACKNOWLEDGEMENT
First and foremost I am grateful to the Punjab National Bank for giving me an opportunity to
be a part of their esteemed organization and enhance my knowledge by granting permission
to complete my project under their guidance. I express my sincere gratitude to my company
guide Mr Prashant Jain (Senior Branch Manager) BMIET Raipur for rendering me his
continuous support, encouragement and guidance and also for lending a patient ear when it
came to solving my problems related to the project. The project would not have been possible
without his valuable time and support.
I am deeply indebted to all the faculty members of my institute for their valuable contribution
during the academic session. Also I want to acknowledge the support of the staff of the
Central Library of the bank for providing with various books and study material relevant in
the preparation of the project report.
Last but not the least, I would like to thank everyone I was associated with, whose names
have remained unmentioned here, but who have contributed by giving me a sharp and
gratifying imminent approach and insight during the course of my project.

Regards,
SAURABH JAIN
MAIT, New Delhi

EXECUTIVE SUMMARY
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This project reflects the role of a financial analyst.


This project studies the credit appraisal methodology at Punjab National Bank for a proposal
received either for term loan or working capital financing or both or more and where the
borrower wants to avail the facility from a consortium of banks. This project explains various
credit facilities and processes followed by one of the most reputed bank in the country, Punjab
National Bank. Each bank has its own set of policies that must be followed while sanctioning a
loan and care must be taken that the money provided by the bank is being used up for the
intended purpose only. The task ranging from acceptance of loan proposal to sanctioning of loan
is carried out at Credit Division of the bank. Moreover, each loan proposals fall under powers of
different levels depending on the size of the proposal.
The study is undertaken to understand the process of project appraisal for term loans and
assessment for working capital requirements being followed at PNB. With a developing economy
and many multinational companies coming up, new projects are being undertaken. These projects
require huge amount of capital and thus banks come forward to finance these projects depending
on the feasibility of the project. PNB carries out an extensive study of the project and checks for
it feasibility and if the project seems to be feasible, a decision is taken. This process of carrying
out the feasibility test of the project based on the financial position of the company is called
Project Appraisal.
Credit appraisal is the process of evaluating a proposals worthiness of being provided with the
type of credit facility the borrower has asked for. This includes the evaluation of current financial
status, appraisal of projected cash flows, fund flows, P&L and Balance sheets, purpose for which
the facility is availed, technical and financial feasibility of the project, credit history, managerial
competence and past experience, etc. in case for a term loan. As part of the appraisal process,
credit rating is done for the proposal and is conducted either by the bank itself or is get done by
approves external agencies. Financial requirements for Project Finance and Working Capital
purposes are taken care of at the Credit Department. Companies that intend to seek credit
facilities approach the bank. Primarily, credit is required for following purposes:
a. Working capital finance
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b. Term loan for mega projects


c. Non Fund Based Limits like Letter of Guarantee, Letter of Credit etc.

The project covers the most important aspect of a company, Working Capital. Different firms
have different approaches to finance their working capital needs to carry out their day to day
operations. After receiving proposals for working capital loans, as a precaution banks need to
assess the amount of working capital loan which can be granted and also to determine the interest
rate at which the loan can be provided. The RBI and its committees have introduced new methods
for the calculation of credit eligibility for the working capital financing of firms. The newer
methods are firmer on risk management front and also the stability of economy in case of any
excessive default rate.
Project Financing discipline includes understanding the rationale for project financing, how to
prepare the financial plan, assess the risks, design the financing mix, and raise the funds. In
addition, one must understand some project financing plans have succeeded while others have
failed. Project finance is different from traditional forms of finance because the credit risk
associated with the borrower is not as important as in an ordinary loan transaction; the most
important is the identification, analysis, allocation and management of every risk associated with
the project.
The purpose of this project is to explain, in a brief and general way, the manner in which risks are
approached by financiers in a project finance transaction. Such risk minimization lies at the heart
of project finance. Efficient management of credit portfolio is of utmost importance as it has a
tremendous impact on the Banks assets quality & profitability. The ongoing financial reforms
have no doubt provided unparalleled opportunities to banks for growth, but have simultaneously
exposed them to various risks, which need to be effectively managed.
Also, lending continues to be a primary function in banking. In the liberalized Indian economy,
clientele have a wide choice. External Commercial Borrowings and the domestic capital markets
compete with banks. In another dimension, retail lending- both personal advances and SME
advances- competes with corporate lending for funds and for human resources. But lending by
nature cannot be an aggressive selling activity, disregarding the risks involved. Bank has to be
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competitive without compromising on the basic integrity of lending. The quality of the Banks
credit portfolio has a direct and deep impact on the Banks profitability.
The study has been conducted with the purpose of getting in-depth knowledge about the credit
appraisal and credit risk management procedure in the organization for the above said first two
purposes. To understand the process completely and clearly, I appraised a project by a company
in plywood industry for the term loan. After appraisal, I compared my findings, analysis and
recommendations with those of PNB appraising officers and found out the reasons for
discrepancies. Depending on the type of project, a suitable model is chosen and based on
financials of the company and the track record of the management, rating is done. This rating also
helps in determining the rate of interest at which the loan should be given. Generally, a company
with good ratings is given loan at a lower ROI as the risk involved is lower.
Case study shows how the policies and procedures are implemented during the actual appraisal of
a loan proposal. Report ends with the conclusion and recommendations for further refining and
strengthening of the credit appraisal process. Various components of appraisal process viz.
financial evaluation, techno-economic evaluation, risk analysis etc. have been explained in detail.

List of abbreviations:
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AGM Assistant General Manager


BG

Bank Guarantee

CC

Cash Credit

CMD Chairman and Managing Director


CO

Circle Office

CRMDCircle Risk Management Department


CAD Credit Administration Department
CD

Credit Division

CARD Credit Audit Review Division


CASA Current Account/Savings Account
CRMC Credit Risk Management Committee
DSCR Debt Service Coverage Ratio
DER

Debt-Equity Ratio

DTL

Deferred Tax Liability

DPG

Deferred Payment Guarantee

DTA Deferred Tax Liability


BD

Discount of Bills

ED

Executive Director

FACR Fixed Asset Coverage Ratio


FB

Fund Based

GM

General Manager

HO

Head Office

IRMD Integrated Risk Management Division


LCB

Large Corporate Branch

LC

Letter of Credit.

LOC

Letter of Credit
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MC

Management Committee

MPBF Maximum permissible Bank Finance


MCB mid Corporate Branch
NWC Net Working Capital
NFB

Non Fund Based

PMS

Preventive Monitoring System

PF

Provident Fund

PNB

Punjab National Bank

RBI

Reserve Bank of India

RMC Risk Management Committee


RMD Risk Management Division
TL

Term Loan

WC

Working Capital

ZO

Zonal Office

Table of Content
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Chapter
no.

Contents

Pg. no

Student declaration
Certificate from guide
Acknowledgement
Executive summary
List of abbreviation

1.

Introduction

2
3
4
5
8
11
12
15
25
25

1.1 Banking Industry at Glance


1.2 Company Profile
1.3 Competition Information
1.4 SWOT Analysis of PNB

2.

Literature Review & Conceptual Discussion

26

2.1 Review of Literature


2.2 Working Capital loan
2.2.1 Working Capital Assessment
2.2.1.1 Fund Based
2.2.1.2 Non Fund Based
2.2.1.3 Key Working Capital Ratios
2.3 Term loan
2.3.1 Key Financial Ratios
2.4 Security
2.5 Fund Flow Statement
2.6 Balance Sheet Projections
2.7 Credit Risk Rating

3.

Research Methodology

27
30
35
36
40
42
45
48
50
52
53
57
58
58
58
59
59
59

3.1 Objective
3.2 Scope
3.3 Managerial Usefulness
3.4 Type of Research
3.5 Data Collection Method
3.6 Limitation of the Study

4.

Data Analysis

60
61
74
87
87

Case Study (A)


Case Study (B)
Strength
Weakness

5.

Conclusion and Suggestions


5.1 Suggestions
5.2Conclussion Case (A)
5.3Conclussion Case (B)

88
89
89
90
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Bibliography

91

Chapter -1
Introduction

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1.1 Banking industry at a glance


Bank is the main confluence that maintains and controls the flow of money. Government
uses it to control the flow of money by managing Cash Reserve Ratio (CRR) and thereby
influencing the inflation level. The function of the bank include accepting the deposit from the
public and other institutions and then to direct as loans and advance to parties for growth and
development of industries. It extends loans for the purpose of education, housing etc and as a part
of social duty, some percentage of agricultural sectors as decided by the RBI. The bank takes the
deposit at the lower rate of interest and gives loan at the higher rate of interest. The difference in
the transaction constitutes the main source of the income for the bank. This is known as Net
Interest Margin.
Banking in India has undergone starling changes in terms of growth and structure. Organized
banking was active in India since the establishment of the General Bank of India in 1786. The
Reserve Bank of India (RBI) was established as a central bank in 1995. The imperial bank of
India, the biggest Bank at that time, was taken over by the Government to form State owned
STATE BANK OF INDIA (SBI). RBI under took an exercise to reduce the fragmentation in the
Indian Banking Industry post independence by merging weaker banks with stronger banks. The
total number of banks reduced from 566 in 1951 to 85 in 1969.
With the objective of reaching out to the masses and servicing credit needs of all sections of
people, the government nationalized 14 large banks in 1969. This period saw the enormous
growth in the number of branches and Banks branch network become wide enough to reach the
weaker section of the society in a vast country like INDIA.

Major Banking Operations


The main operations of a bank can be segregated into three main areas:
(i)

Balancing Profitability with Liquidity Management

(ii)

Management of Reserves

(iii)

Creation of Credit.
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Main Operations of a Bank

Operations of
Bank

Balancing
Profitability with
Liquidity
Management

Management of
Reserves

Creation of
Credit

Balancing Profitability with Liquidity Management


Banks are commercial concerns which provide various financial services to customers in return
for payments in one form or another, such as interest, discount fees, commission etc. Their
objective is to make profits. However, what distinguishes them from other business concerns is
the degree to which they have to balance the principle of profit maximization with certain other
principles.

Banks in general have to pay much more attention in balancing the profitability with liquidity.
Therefore, they have to devote considerable attention to liquidity management. Banks deal in
other peoples money, a substantial part of which is repayable on demand. That is why, for banks
unlike other business concerns liquidity management is as important as profitability management.

Management of Reserves
Banks are expected to hold voluntarily a part of their deposits in the form of ready cash which is
known as cash reserves and the ratio of cash reserves to deposits is known as Cash Reserve Ratio
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(CRR). The Central Bank in every country is empowered to prescribe the reserve ratio that all
banks must maintain. The Central Bank also undertakes as the lender of last resort, to supply
reserves to banks in times of genuine difficulties. Since the banks are required to maintain a
fraction of their deposit liabilities as reserves, the modern banking system is also known as the
fractional reserve banking.

Creation of Credit
Unlike other financial institutions, banks are not merely financial intermediaries but they can
create as well as transfer money. Banks are set to create deposits or credit or money or it can be
said that every loan given by bank creates a deposit. This has given rose to the concept of deposit
multiplier or credit multiplier. The importance of this is that banks add to the money supply in the
economy and hence, banks become responsible in a major way for changes in the economic
activities.

Structure of Banking Industry


Scheduled banks

Scheduled commercial
Banks

Public
sector
banks

SBI & its


subsidiari
es

Region
al rural
Banks

Nationaliz
ed Banks

Foreig
n
Banks

Scheduled cooperative
Banks

Privat
e
sector
Banks

Old
private
sector
Banks

Urban
Cooperativ
e Banks

State
cooperativ
e Banks

New
private
sector
Banks
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1.2 COMPANY PROFILE


Punjab National Bank (PNB)
VISION
"To be a Leading Global Bank with Pan India footprints and become a household brand in the
Indo-Gangetic Plains providing entire range of financial products and services under one roof"

MISSION
"Banking for the unbanked"

PUNJAB NATIONAL BANK


Established in 1895 at Lahore, Punjab National Bank (PNB) has the distinction of being the first
Indian bank to have been started solely with Indian capital. It was founded by Lala Lajpat Rai.
Now its headquarter is at Delhi. The bank was nationalized in July 1969 along with 13 other
banks. Today, PNB is a professionally managed bank with a successful track record over 111
years. The bank has the largest branch network In India, with 6001 branches across 764 cities and
serves over 72 million customers.
Parent company Government of India.
Category Banking Services.
Sector Banking and Finance.
Tag line The name you can bank upon.
USP Punjab national bank if one of big four banks of India.

Financial Performance (2013-2014)


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The Banks business crossed Rs.8 lakh crore as on March 31, 2014 registering a growth of
14.32%. This has positive impact on productivity indicators with business per employee
increasing to Rs.12.83 crore. Business per branch increased to Rs.126.10 crore. Total deposits
have touched Rs.4.51 lakh crore recording Growth of 15.27 % . Net advances are around Rs.3.49
lakh crore with growth 13.87 %. The Banks CASA deposits were showing an increase by 14.3%
over the FY14.
Capital & revenue are around 32677 which show the growth of 17.5%.
Business Parameters (Rs. Crore)

PARAMETERS
Total Business
Total Deposits
Net advances
Casa Deposit
Capital and Revenue
Source: Annual results 2014

Mar-13 Mar-14 Growth (%)


700285 800666
14.32
391560 451397
15.27
308725 349269
13.87
153344 164129
14.3
32677
35895
9.84

PARAMETER
Business per employee
Business per branch
Source: Annual result 2014

Mar-13 Mar-14
11.65
12.83
116.84 126.10

Bank has also done well in profitability parameters viz. Operating profit and Net Income in
absolute terms. Net Interest Income at over Rs.14875 crore during FY13 has been the highest
among all the Nationalized Banks. PNB is the first Nationalized Bank to cross Operating
Profit of Rs. 10,000 crore. Earnings per share also increased to Rs.139.52 during the FY13.
Profit Parameters (Rs. Crore)

PARAMETERS
Operating Profit
Net Profit
Net Intt Income
Source: Annual results 2014

Mar-13 Mar-12 Growth(%


)
10907
11384
2.8
4748
3343
-2.8
14857
13414
10.8

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Organization structure: PNB


The bank has its corporate office at New Delhi and supervises 69 circle offices under which
branches function. The delegation of powers is decentralized up to the branch level to facilitate

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quick decision making.

Board of
Director

CMD

ED

GM(Credit)

AGM

GM(NPA &
weak account)

GM(Retail &
lending)

GM(Treasury)

GM(Deposits)

GM(Audit)

DGM

DGM

DGM

DGM

.......

AGM

AGM

.......

FUNCTIONAL

HEAD

CMD Chief Managing Director ( KR kamath)


ED Executive Director ( Rakesh sethi )
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GM General Manager
AGM Assistant General Manager
DGM Deputy General Manager

Channels in PNB

PRODU

Corporate
Office (HO)

Branch
Office(BO)

Circle
Office(CO)

Circle
Office(CO)

Large
Corporate
Branches

Mid
Corporate
Branches

Circle
Office(CO)

Retail Hub

Specialized
Branches eg.
Agriculture

CT AND SERVICES
1. Savings Account
2. Current Account
3. Fixed Deposits Scheme
4. Credit Scheme
5. Social Banking
6. Corporate Banking

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VARIOUS TYPES OF LOAN PROVIDED BY PNB


1. Agriculture & Allied Activity
2. Industry
a. MSME Manufacturing
b. Large Industry

3. Retail Loans of which


a. Housing
b. Other Retail Loans car loan, housing loan, personal loan etc..
4. Comm. Real estate
5. Services and Others

AREAS OF CONCERN FOR PNB FOR CURRENT YEAR

Loss of Number One position in Deposits, Net Profit and Return on Equity.

Dependence on high cost deposits to shore up the deposits base.

Uncontrollable growth in NPAs.

Lead over the immediate competitor getting reduced to Rs. 1115 crore.

Lack of uniform growth in business of various Circles/Branches.

THE ACTION POINTS FOR THE CURRENT YEAR AREAS OF


CONCERN DISCUSSED ABOVE

Focus on CASA: Sustainable growth in savings Deposits by offering wealth management


services to the customers. Business value base current accounts be opened

Retail credit especially the housing loans be marketed aggressively to record high growth.

Wealth management products sales be maximized offering full range e.g. Gold coins to
Insurance.

Monitoring of Irregular Accounts be stepped up to prevent Slippages.


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NPA reduction by one on one meetings, immediately targeting freshly slipped accounts.

CREDIT ADMINISTRATION DIVISION (CAD)


Commercial lending organization structure in PNB consists of branches, Mid Corporate
Branches(MCB), Large Corporate Branches(LCB) and Head Office(HO). CAD looks after the
proposal for all type of loans which fall within the preview of GMs-HO/ED/CMD/MC/Board.
Credit proposal goes through different level of sanctioning to enforce internal control and other
practices to ensure that exception to policies, procedure and limits are reported in a timely
manner to the appropriate level of management for action. Authority to handle loan proposals is
distributed as detailed below:
1. Loan proposals less than 35cr are dealt by MCB and LCB at their level and all other
proposals are reffered to Circle Office which are finally handled at Head Office.
2. MCB handle proposals between Rs.5 crore and Rs.25 crore.
3. CAD at Head Office prepares finals proposals which are then placed before ED, CMD, or
MC as per the quantum of proposals.
4. ED has authority to approve loan proposals less than Rs.75 crore. CMD approve
proposals between Rs.75 crore and Rs.100 crore. Any proposal greater than Rs.100 Crore
need the approval of management committee.

RISK MANAGEMENT DEPARTMENT (RMD)


The credit administration division is assisted by RMD and industry desk for risk analysis and
technical feasibility of credit proposals.Credit risk is the possibility of loss associated with
changes in the credit quality of the borrowers or counter parties. In a banks portfolio, losses stem
from outright default due to inability or unwillingness of a borrower or counter party to honour
commitments in relation to lending, settlement and other financial transactions.
PNB has an elaborate risk management structure in place. Credit Risk management structure at
PNB involves

Integrated Risk Management Division (IRMD)


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IRMD frames policies related to credit risk and develops systems and models for
identifying, measuring and managing credit risks. It also monitors and manages industry
risks.

Circle Risk Management Departments (CRMDs)


Risk Management Departments at circle level are known as CRMD. Their responsibilities
include monitoring and initiating steps to improve the quality of the credit portfolio of the
Circle, tracking down the health of the borrowers accounts through regular risk rating,
besides assisting the respective Credit Committee in addressing the issues on risk.

Risk Management Committee (RMC)


It is a sub-committee of Board with responsibility of formulating policies/procedures and
managing all the risks.

Credit Risk Management Committee (CRMC)


It is a top level functional committee headed by CMD and comprises of EDs, CGMs/GMs
of Risk Management, Credit, Treasury etc. as per the directives of RBI.

Credit Audit Review Division (CARD)


It independently conducts Loan Reviews/Audits.

The risk management philosophy & policy of the bank focuses reducing exposure to high risk
areas, emphasizing more on the promising industries, optimizing the return by striking a balance
between the risk and the return on assets and striving towards improving market share to
maximize shareholders value.
The bank has robust credit risk framework and has already placed credit risk rating models on
central server based system PNB TRAC, which provides a scientific method for assessing
credit risk rating of a client. Taking a step further during the year, the bank has developed and
placed on central server score based rating models in respect of retail banking. These processes
have helped the bank to achieve fast & accurate delivery of credit, bring uniformity in the system
and facilitate storage ofdata & analysis thereof. The analysis also involves analysing the
projections for the future years.

RISK ANALYSIS
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PNB has elaborate risk management structure, processes and procedures in place. For the
appraisal of the loan proposals, RMD provides the risk ratings for the client and project based in
the patented internal models of the PNB that have been developed based on statistical analysis of
data. These models are placed on central server based system PNB TRAC, which provides
facility to assess credit risk rating of a client.
This credit risk rating captures risk factors under four areas:
1. Financial evaluation (40%)
2. Business or industry evaluation (30%)
3. Management evaluation (20%)
4. Conduct of account (10%)

Various External Credit Agencies in India:


1. CRISIL
2. CARE
3. ICRA
4. FITCH
5. BRICKWORK

Factors determining credit risk:

State of economy

Wide swing in commodity prices

Fluctuations in foreign exchange rates and interest rates

Trade restrictions

Economic sanctions

Government policies

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CREDIT FACILITIES
PNB provides different types of credit facilities according to the banking norms and convenience
of the clients. Different types of facilities provided are classified below:

1. FUND BASED FACILITIES


2. Fund based facilities are those that require immediate outlay of funds towards the borrowing
party.
a) Overdraft
Overdraft account is treated as current accounts. Normally overdrafts are allowed
against the Banks own deposit, government securities approved shares and/or
debentures of companies, life insurance policies, government supply bills, cash
incentive and duty drawbacks, personal security etc.
b) Demand loans
Demand loan would be a loan, which is payable on demand in one shot i.e. bullet
repayment. Normally, demand loans are allowed against the banks own deposits,
government securities, approved shares and/or debentures of companies, life insurance
policies, pledge of gold/silver ornaments, mortgage of immovable property.
c) Cash credit advances
Cash credit account is a drawing account against the credit granted by the bank and is
operated in exactly the same way as a current account on which an overdraft has been
sanctioned. In cash credit accounts the borrower is allowed to draw on account within
the prescribed limit as and when required.
d) Bill finance
Bill finance are the advances against the inland bills are sanctioned in the form of
limits for purchase of bills or discount of bills or bills sent for collection. Bills are
either payable on demand of after usage period.
3. NON FUND BASED FACILITIES
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While fund based credit facilities require immediate outlay of funds from the bank, non-fund
based facilities basically include the promises made by banks in favor of third party to provide
monetary compensation on behalf of their client if certain situations emerge or certain conditions
are fulfilled. The non-fund based business is one of the main sources of bank income. Income is
in the form of fees and commissions as compared to interest income in case of fund based
lending.Non fund based credit plays an important role in trade and commerce. The borrowing
clients of banks prefer to avail of the non-fund based facilities mainly because:
a) The facility does not require immediate outlay of funds and therefore the cost of such
funds tend to be lower than the cost of fund based credit facilities.
b) A bank guarantee(BG) or letter of credit(LOC) issued by a bank on behalf of its client
is an off-balance sheet item in the books of clients, hence do not show up as debt or
liability.
For the lending banks, cost of providing non-fund based facilities is significantly lower than the
cost of providing fund-based facilities.
(i) Bank Guarantees
BG may be financial of performance in nature. In a financial guarantee, the issuing bank
assumes an usual credit risk which is the domain of the banks. However, issue of a
performance guarantee involved technical competency and managerial ability of a
customer to ensure the performance of the contract for which guarantee has been drawn.
Issuing banks responsibility against the BG is absolute. So proper appraisal needs to be
done before issuing BG as it is the responsibility of the issuing bank to honor its
guarantee when invoked.
(ii) Letter of credit
A document issued by a bank that guarantees the payment of a customers draft;
substitutes the banks credit. It is an undertaking issued by bank on behalf of the buyer to
the seller, to pay for the goods and services. All letters of credit are irrevocable, i.e. cannot
be amended or cancelled without prior agreement of the beneficiary, the issuing bank and
the confirming bank, if any. It is different from BG in the sense that in case of LC, the
issuing bank does not wait for the buyer to default, and for the seller to invoke the
undertaking. While in BG, comes into play only when the principal party (the buyer) has
failed to pay its supplier.
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1.3 Competition Information


1. Indian bank
2. Andhra Bank
3. Canara bank
4. ICICI Bank
5. HDFC Bank
6. SBI

1.4 SWOT Analysis of PNB

Strengths

Weakness
Opportunities
Threats

1. Diversified operations with 5100 branches.


2. Strong I. T support with best fit approach.
3. Schemes for small and medium scale businesses.
4. It is the second largest state-owned commercial bank in India
with about 5000 branches across 764 cities.
5. Its 56,000+ workforce serves over 37 million customers.
1. Less penetration in the urban areas.
2. Inadequate advertising and branding as compared to other banks.
3. Legal issues regarding employees caused a bad name of PNB.
1. Small scale business banking across India.
2. Expansion in other countries for international banking.
3. Installation of more ATMs and better customers services.
1. Economic crisis and economic fluctuations.
2. Highly competitive environment.
3. Stringent Banking Norms by the RBI and the Governments.

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Chapter-2
Literature Review &
Conceptual Discussion

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2.1 REVIEW OF LITERATURE


1. WORKING CAPITAL
1.1. Sagan in his paper (1955), perhaps the first theoretical paper on the theory of working
capital management, emphasized the need for management of working capital accounts
and warned that it could vitally affect the health of the company. He realized the need to
build up a theory of working capital management. He discussed mainly the role and
functions of money manager inefficient working capital management. Sagan pointed out
the money managers operations were primarily in the area of cash flows generated in the
course of business transactions. However, money manager must be familiar with what is
being done with the control of inventories, receivables and payables because all these
accounts affect cash position. Thus, Sagan concentrated mainly on cash component of
working capital. He suggested that money manager should take his decisions on the basis
of cash budget and total current assets position rather than on the basis of traditional
working capital ratios. This is important because efficient money manager can avoid
borrowing from outside even when his net working capital position is low.
1.2. Walker (1964) made a pioneering effort to develop a theory of working capital
management by empirically testing, though partially, 3 management. Walkerstudied the
effect of the change in the level of working capital on the rate of return in nine industries
for the year 1961 and found the relationship between the level of working capital and the
rate of return to be negative. On the basis of this observation, Walker formulated three
following propositions:
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Proposition I If the amount of working capital is to fixed capital, the amount of


risk the firm assumes is also varied and the opportunities for gain or loss are
increased.

Proposition II The type of capital (debt or equity) used to finance working


capital directly affects the amount of risk that a firm assumes as well as the
opportunities for gain or loss.

Proposition III The greater the disparity between the maturities of a firms debt
instruments and its flow of internally generated funds, the greater the risk and
vice-versa.

1.3. Weston and Brigham (1972) further extended the second proposition suggested by
Walker by dividing debt into long-term debt and short-term debt. They suggested that
short-term debt should be used in place of long-term debt whenever their use would
lower the average cost of capital to the firm. They suggested that a business would hold
short-term marketable securities only if there were excess funds after meeting short-term
debt obligations. They further suggested that current assets holding should be expanded
to the point where marginal returns on increase in these assets would just equal the cost
of capital required to finance such increases.
1.4. Abramovitz (1950) and Modigliani (1957) highlighted the impact of capacity
utilization on inventory investment. Existing stock of inventories is expected to take
account of adjustment process to the desired levels. Thus the variable, existing stock of
inventories, is postulated to be negatively related with the desired stock. The ratio of
inventory to sales may affect inventory investment positively because a high ratio of
stocks to sales in the past suggests the maintenance of high levels of inventories in the
past and thus also calling for high investment in inventories in the current period.
1.5. Chakraborty (1973)approached working capital as a segment of capital employed rather
than a mere cover for creditors. He emphasized that working capital is the fund to pay all
the operating expenses of running a business. He pointed out that return on capital
employed, an aggregate measure of overall efficiency in running a business, would be
adversely affected by excessive working capital.

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Similarly, too little working capital might reduce the earning capacity of the fixed capital
employed over the succeeding periods. For knowing the appropriateness of working
capital amount, he applied Operating Cycle (OC) Concept. He calculated required cash
working capital by applying OC concept and compared it with cash from balance sheet
data to find out the adequacy of working capital in Union Carbide Ltd. and Madura Mills.
Co. Ltd. for the years 1970 and 1971. He extended the analysis to four companies over the
period 1965-69 in 1974 study. The study revealed that cash working capital requirement
were less than average working capital as per balance sheet for Hindustan Lever Ltd. and
Guest, Keen and Williams Ltd. 61indicating the need for effective management of current
assets. Cash working capital requirements of Dunlop and Madura Mills were more than
average balance sheet working capital for all years efficient employment of resources.
For Union Carrbide Ltd., cash working capital requirements were more in beginning years
and then started reducing in the later years as compared to conventional working capital
indicating the attempts to better manage the working capital.
Chakraborty emphasized the usefulness of OC concept in the determination of future cash
requirements on the basis of estimated sales and costs by internal staff of the firm. OC
concept can also be successfully employed by banks to assess the working capital needs
of the borrowers.

2. CREDIT RISK
2.1. According to the Saraiya Commission, "the grant of credit is a business which involves a
risk of increasing bad debts if proper care is not taken and banks therefore ascertain the
creditworthiness of borrowers from time to time and maintain credit reports on them. The
process of grant of credit by banks comprise in the filing in of applications by the
borrowers, scrutiny of the applications, assessment of creditworthiness and sanctions of
limits by the branch manager or higher authority as well as the follow-up actions on the
advances after they have been granted.
2.2. The modern rating system dates back to 1909 when John Moody started rating US
railroad bonds. In India in 1962, a Credit Information Division was established in RBI
with the view of collection of information from banks and other financial institutions
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regarding data relating to the prescribed limits sanctioned by RBI even the RBI Act was
amended into 1962 given powers to collect information in regard to credit facilities
granted by individual banks and notified financial institutions to their constituents and to
supply to these banks and institutions on application the relative information in a
consolidated form. Apart from all the above steps, banks constantly keep a check on the
customers by obtaining information from all the other sources pertaining to their
customers in any form. The Saraiya Commission also suggested the formation of credit
information bureaus on the lines of those prevalent in the US and the UK.

4. COMPLIANCE TO EXPOSURE NORMS


Exposure includes credit exposure (funded and non-funded credit limits) and investment
exposure (including underwriting and similar commitments) as well as certain types of
investments in companies. The sanctioned limits or outstanding, whichever are higher, shall
be reckoned for arriving at exposure limit. Further, non-fund based exposure is calculated at
100% of the limits or outstanding, whichever are higher.
Maximum industry exposure

The bank has developed a model for fixation of industry wise credit exposure ceilings. The
model captures external factors like rating of industry by external agency, nature of
industry and its importance in economy as well as internal factors like level and trend of
asset impairment, exposure level and quality of exposure in the industry. This model
provides scientific assessment and corresponding exposure ceiling level to an industry.
These limits shall be reviewed on the basis of data analysis regularly. As the ceilings
proposed are internal ceilings to achieve diversified growth of portfolio and reduce
portfolio concentration, it is provided that the monitoring against such limits would be
based on actual outstanding.

2.2 WORKING CAPITAL LOANS


Working capital refers to the current assets holdings of the firm. Net working capital is the
difference between current assets and current liabilities. Working capital requirements depend on
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various business specific internal factors like operating efficiency, technology employed and the
level of quality control.
A manufacturing enterprise has to maintain level of inventory at any point of time below which
production could get impacted. This minimum level of current asset is called Core Current Asset
level. This would be constantly tied up in the business with changes in sales and activity level.
Fluctuating component is the portion above this level that is continuously changing due to
changes in demand, seasonality of product etc.

Businesses finance permanent core component through long-term sources of fund like equity or
long term loans. Fluctuating component is financed mainly by availing the short term loans and
other credit facilities from the bank. Main focus here is to avoid overfunding or underfunding of
the operations. While overfunding will amount to locking up of assets unproductively as idling
cash or inventories, at the same time under funding would seriously hamper the day-to-day
operations and pose a threat to the survival of the business. Hence it is critical to correctly
determine the maximum bank finance that should be provided.

1. Types of Lending (Fund based and Non-Fund based limits)


After arriving at MPBF on the basis of current assets and current liabilities and appropriate
method of lending, various Fund based and Non Fund based Limits have to be decided. The
Fund based limits should not exceed MPBF in any case.
Working capital loan is of two types:
A. Fund Based Working Capital (FBWC) include those where actual funds are proposed to
be given. In FB earnings are in form of interest. Eg. Cash Credit (CC), Packing Credit
(PC) etc.
B. Non-Fund Based Working Capital (NFBWC) actual fund flow does not take place. In
NFB earnings are in form of commission. Eg. Letter of Credit (LC), Bank Guarantee
(BG) etc.

1.1 Fund Based Limits


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The inventory limits are set up in the shape of Cash Credit. The receivable limit either by way of
C/C against book debts or by way of bills limit.Cash credit is the most popular credit system
adopted in India and accounts for more than 70%of total bank credit. Under this system, banker
specifies a limit, called the cash credit limit, for each customer up to which the customer can
borrow money against the security of tangible assets or guarantees. The customer can withdraw
money when he needs funds and deposit any amount of money that he finds surplus with him.
The borrower is charged on the actual amount and tenure of the amount utilized. Under this
system, banks prescribe the cash credit limit for each of their customer on annual basis.

To avoid situations wherein customers seeking excessive cash credit limit, banks charge a
nominal fees on the unutilized amount of cash credit limit. These nominal charges are known as
commitment charges. Within the sanctioned limit, Drawing Power may be allowed on the basis
of value of security. The concept of Drawing Power is explained as under:
Take for an example, a company ABC Ltd. which does not use any Non fund based facilities.
This company takes cash credit advances from the bank. This cash credit limit is calculated using
the value of current assets and current liabilities of the company.

Financing Fund Based Requirements


An exporter may require credit facilities for completion of export contracts at two stages:
A. Pre Shipment (Packaging credit)
Pre Shipment credit means any loan/advance granted by a bank to an exporter for financing the
purchase, processing, manufacturing or packing of goods prior to shipment on the basis of letter
of credit opened in his favour by an overseas buyer.
Pre-shipment finance can be broadly classified into the following:
Packing Credit
Advance against Duty drawback entitlements
Packing Credit in foreign currency (PCFC)
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B. Post Shipment
Post Shipment credit means any loan/advance granted by a lending bank to an exporter of
goods from India from the date of extending credit after shipment of goods to the date of
realisation of exports proceeds. Post shipment credit facilities are as follows:

Export Bills purchased/discounted/negotiated

Advances against bills for collection

Advances against duty drawback receivables from government

Non fund based Limits


The credit facilities given by the banks where actual bank funds are not involved are termed as
'non fund based facilities'. These facilities are divided in three broad categories as under:

Guarantees
Sec 126 of Indian Contract Act defines guarantee as a contract to perform the promise of
discharge the liability of a third person in case of default.
Parties to a Guarantee:
(a)Surety (Guarantor): Person, who gives the guarantee
(b)Principal debtor: Person on whose behalf guarantee is given
(c)Creditor: the person to whom guarantee is given (Beneficiary of LG)

Types of Guarantees:

Financial Guarantee:

In financial guarantee , the guarantor is undertaking to pay

damages in monetary terms on the happening of some defaults. In these cases the LGs are
issued in Lieu of Financial transactions, e.g. (1) LG for payment of determined liabilities
towards tax, excise duties, custom duties octroi etc. (ii) LG issued towards disputed
liabilities.
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Performance Guarantee:

Under this head, the LGs are issued mostly to secure

performance of the contracts, the need to pay LG amount will arise only in the event of
non-performance of the contractual obligation. For example performance with regard to
construction of building installation of plant & machinery.
o Performance of plant and machinery up to agree level.
o Performance related to supply of goods/ materials.
o Securing Advance payment / in lieu of security money deposit, earnest money deposit/
tender deposit/ Bid bonds

Deferred Payment Guarantee (DPG): Like term loans, deferred payment guarantees are
also given for acquisition of fixed assets. Term loan involves payment in cash whereas in
the deferred payment guarantee, the Bank commits to pay the beneficiary in case of
default made by its customer (purchaser). Therefore, the issuance of deferred payment
guarantees should be treated at par with the grant of term loans and the proposals for the
two should be examined in the same manner.

The proposal for issuances of a deferred payment guarantee can be entertained in either of the
following two ways:
1) The Bank executes a guarantee deed on behalf of the customer (Purchaser) in favor of the
manufacturer/supplier/financial institution. OR
2) The Bank accepts/co-accepts usance bill on behalf of its customer (purchaser) drawn by
manufacturer/supplier.

Letter of Credit (LC)


Bank also provides companies with the facility of letter of credit, a type of non-fund based
facility which enables the companies to purchase raw materials or other components at credit and
paying them later. Letter of credit is issued by the bank at the request of the customer in favour of
a third party informing him that the bank undertakes to accept the bills drawn on its costumer up
to the amount stated in the LC subject to the fulfilment of conditions stipulated therein. In simple
language, LC is a letter issued by the bank on behalf of the customers. The bank charges a
particular fee from the customers for opening of an LC and at a suitable rate of interest.
Page | 35

Main parties to documentary credit:


a) The Buyer (Applicant for LC) issuing bank at his request and instructions opens the LC.
He has liability to pay the issuing bank for the drafts drawn under the LC.
b) Issuing or Opening Bank is the bank which opens/issues the LC at the request of applicant
(buyer) and undertakes to pay/ to accept bill drawn by the beneficiary.
c) The Seller (Beneficiary of LC) is in whose favour the LC is opened and to whom the LC is
addressed. Beneficiary is entitled to obtain payment under LC.
d) Advising Bank is the intermediary bank; advises the Letter of Credit to the beneficiary,
Advising Bank undertakes the responsibility of providing the authenticity of LC.
e) Confirming bank Confirming Bank is a bank that may be requested by the issuing bank to
add its confirmation. If agreed to, the bank becomes a party to LC and undertakes the
responsibility to honor the bills, i.e., to pay, to accept or to negotiate the same. Generally the
Advising Bank is asked to add confirmation to LC.
f) Negotiating Bank is a bank to whom the seller is supposed to submit the documents for
negotiation and get the payment as per the drawn bill.
g) Reimbursing Bank is a bank who is authorized by issuing bank (normally one of its
correspondent banks) to reimburse the paying or negotiating bank.

2.2.1 Working Capital Assessment


The objective of running any industry is earning profits. An industry will require funds to acquire
fixed assets like land and building, plant and machinery, equipment, vehicles etc. and also to
run the business i.e. its day to day operations. Working capital is defined, as the fund required
carrying the required levels of current assets to enable the unit to carry on its operations at the
expected levels uninterruptedly.
Each business unit has an operating cycle which can be illustrated below:

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This cycle continues and in order to keep the operating cycle going on, certain level of current
assets are requires, the total of which gives the amount of total working capital required. Thus,
working capital required (WCR) is dependent on:

1. The volume of activity (viz. level of operations i.e. Production and Sales).
2. The activity carried on viz. manufacturing process, product, production program, and the
materials and marketing mix.
Working capital loan is of two types:
1. Fund Based Working Capital (FBWC) include those where actual funds are proposed to
be given. In FB earnings are in form of interest. E.g. Cash Credit (CC), Packing Credit (PC)
etc.
2. Non-Fund Based Working Capital (NFBWC) actual fund flow does not take place. In
NFB earnings are in form of commission. E.g. Letter of Credit (LC), Bank Guarantee (BG)
etc.

2.2.1.1 Assessment of Working Capital Limits (Fund based)


How much Working Capital loan should be given to the borrower is determined by evaluating the
Working Capital Requirement and the Assessed Bank Finance (ABF). This is done by 3 methods:
A. Simplified Turnover Method/Nayak Committee:
The Reserve Bank of India constituted on 9 December 1991, a Committee under the
Chairmanship of Shri P.R. Nayak, Deputy Governor to examine the difficulties confronting the
Page | 37

small scale industries (SSI) in the country in the matter of securing finance. The representative of
the SSI associations had earlier placed before the Governor, Reserve Bank of India, various
problems, issues and the difficulties which the SSI sector had been facing.
So for SSI with annual sales of less than Rs1000 Cr the working capital requirement was set to
25% of the annual sales out of which 20% would be financed by the Banks and the rest 5% would
be contributors margin.
B. Traditional Method/Tandon Committee/Chore Committee:
In PNB, MPBF is assessed by using the method recommended by Chore Committee. Preparation
of CMA data forms an integral part of CAD and it is based on this data that the further steps are
taken. CMA consists of six Forms and they are:

FORM I: Break up of facility: This form give details regarding the different forms in
which credit has been asked by company such as Cash Credit, Packing Credit, Letter of
Credit, Bank Guarantee, etc.

FORM II: Operating statement or Profit and Loss statement: This help banker to know
about the expenses and tells about the expenses and income generated during the year.

FORM III: Analysis of Balance sheet: This helps bankers to assess the financial health of
an entity on date of documentation of the business entity

FORM IV: Comparative Statement of Current assets and current liabilities: This form
explains the operating cycle of the company.

FORM V: Maximum permissible bank finance: This forms will show how much loan
bank is eligible to give to company.

FORM VI: Fund flow statement: Many companies do window dressing in their financial
statements and fudge with their accounting figures. A profitable firm may have negative
operative cash flows. Thus fund flow and cash flow analysis helps the bankers to check the
sources of inflow and points of outflow.
The CMA is prepared by both the company as well as the bank. The bank uses the CMA

prepared by the company to analyse the correctness of the working capital requirements and
understand its validity. However, it must be noted that the entire CMA data is prepared using the
balance sheet of the company and certain other documents submitted by the company to the
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banks. Here we explain the preparation of CMA data using a balance sheet of SAP TELECOM
Ltd.
The Study Group to frame guidelines for follow up of Bank Credit (commonly referred to as the
Tandon Committee) set up in July 1974, recommended radical changes in the system of bank
lending. Besides shifting the basis of bank lending from the erstwhile security-oriented system to
a production oriented one, it also recommended certain norms to facilitate meeting the genuine
credit needs of industry while, at the same time, preventing pre-emption of scarce bank resources
by the large industry.
The Tandon Committee suggested norms for 15 major industries (norms have since been
finalized for 45 industries) on the basis of various studies conducted earlier discussions with the
representatives of industry. These norms represent the maximum levels for holding inventory and
receivables in each industry for the purpose of sanctioning short-term credit limits to supplement
the borrowing units own resources to carry an acceptable level of current assets. It, however, a
borrowing unit has managed with lower levels of inventory and receivables in the past, banks are
to finance the level of current assets on the basis of such reduced levels of holding unless
warranted otherwise.
Hence for Working Capital limit of greater than Rs 5 Cr the Maximum Permissible Bank Finance
(MPBF) is calculated to assess the Assessed Bank Finance (ABF) and the contributors margin.
MA data is provided by the company in a prescribed format. This CMA data involves the analysis
of balance sheet in order to find out the working capital requirements of the company and the
maximum amount of permissible bank finance. This method is the most widely used method and
requires a great deal of understanding in order to prepare a CMA data of the company. The
Committee also suggested three ways to assess the maximum permissible level of bank finance
(MPBF). These are:

I.

1st Method of lending (Tandon Committee)

Total Current Assets (TCA)


Less: Other Current Liability (OCL)
Working Capital Gap (WCG)
Minimum stipulated NWC is 25% of the WCG

(1)
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Actual/Projected NWC

(2)

WCG (1)

(3)

WCG (2)

(4)

Maximum permissible Bank Finance is Minimum of (3) or (4)


Margin is (1) or (2) whichever is more
II.

2nd Method of lending (Chore Committee)

Total Current Assets (TCA)


Less: Other Current Liability (OCL)
Working Capital Gap (WCG)
Minimum stipulated NWC is 25% of the TCA

(1)

Actual/Projected NWC

(2)

WCG (1)

(3)

WCG (2)

(4)

Maximum permissible Bank Finance is Minimum of (3) or (4)


Margin is (1) or (2) whichever is more & CR will be =1.33 or more
III.

3rd method of lending

Chargeable Current Assets (CCA)


Add: Other Current Assets (OCA)
Total Current Assets (TCA)
Less: Other Current Liability (OCL)
Working Capital Gap (WCG)
Minimum stipulated NWC is 25% of CCA

(1)

Actual/Projected NWC

(2)

WCG (1)

(3)

WCG (2)

(4)

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Maximum permissible Bank Finance is Minimum of (3) or (4)


Margin is (1) or (2) whichever is more (However this method is not into use)

C. Cash Budget System:


Cash Budget method, which is used specially for industries where seasonality is involved like
availability of raw materials is seasonal such as sugar industry, cotton textiles and where sales is
seasonal like AC, Woolens etc. In this method, a cash budget is estimated for the next 12 months.
The cash requirements for each month are calculated and the highest value of cash required
during any month becomes the working capital of the company.

2.2.1.2 Assessment of Working Capital (Non-Fund Based)


The credit facilities given by the banks where actual bank funds are not involved are termed as
Non-Fund based facilities. These facilities are divided in three broad categories as under:
A. Letters of credit
Letter of credit (LC) is a method of settlement of payment of a trade transaction and is widely
used to finance purchase of machinery and raw material etc. It contains a written undertaking
given by the bank on behalf of the purchaser to the seller to make payment of a stated amount on
presentation of stipulated documents and fulfillment of all the terms and conditions incorporated
therein.
Letter of credit is of two types:
1) Delivery against payment (DP) SIGHT: The beneficiary is paid as soon as the paying bank
or borrowers bank has determined that all necessary documents are in order.
2) Delivery against acceptance (DA) USANCE: the borrower pays after certain due date of
payment specified.
LC involves three types of pricing = Basic Cost (C) + Insurance (I) + Freight (F)
Further LC is categorized in various type which are:
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Letter of Credit: - Inland Letter of Credit (ILC)


- Foreign Letter of Credit (FLC)
Letter of Credit: - Transferable LC
- Non-Transferable LC
Letter of Credit: - Revocable LC
- Irrevocable LC
Assessment of LC limit
Annual Raw Material Consumption

(a)

Annual Raw Material Procurement (through ILC/FLC)

(b)

Monthly Consumption

(c)

Usance

(d)

Lead Time

(e)

Total Time [(d) + (e)]

(f)

LC limit required [(f) x (c)] (LC limit recommended)

3) Guarantees
A contract of guarantee can be defined as a contract to perform the promise, or discharge the
liability of a third person in case of his default. Bank provides guarantee facilities to its customers
who may require these facilities for various purposes.

The guarantees may broadly be divided in two categories as under :


a. Financial guarantees Guarantees to discharge financial obligations to the customers.
b. Performance guarantees Guarantees for due performance of a contact by customers.
Assessment of BG limit
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Outstanding BG as per Audited Balance Sheet


Add: BGs required during the period
Less: Estimated maturity/cancellation of BGs during the period

Requirement of BGs (Recommended BG limit)

4) Bills Co acceptance
Bills co-acceptance is same as Letter of credit the difference is in Bills co-acceptance LC
is accepted by buyer as well as by co-accepting bank.

5) Deferred Payment Guarantees


DPG is a bank facility where the bank does not directly extend a loan. Instead, it extends a
guarantee to the seller on behalf of its client that the financing extended by the seller (by
himself or through its preferred financer) would be repaid as per the terms agreed upon.
The advantage to the buyer here is that he benefits to the extent of savings in interest
charges accruing on account of opting for equipment financing under installment payment
system less the guarantee charges paid to the bank.

2.2.1.3 Key Working Capital Ratios:


Current Ratio: A liquidity ratio that measures a company's ability to pay short-term
obligations.

Company has to maintain a current ratio of 1.33:1.The higher the current ratio, the more capable
the company is of paying its obligations. A ratio under 1 suggests that the company would be
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unable to pay off its obligations if they came due at that point. While this shows the company is
not in good financial health.

Quick Ratio: An indicator of a company's short-term liquidity. The quick ratio measures
a company's ability to meet its short-term obligations with its most liquid assets. Higher
the Quick ratio betters the position of the company. Quick ratio is effective in case stocks
are obsolete, non-saleable or waste.

Debt Equity Ratio: Represent the ratio between capital invested by the owners and the
funds provided by lenders.

Higher the ratio greater the risk to a present or future creditor. Debt Equity Ratio should be less
than 2:1. Too much debt can put your business at risk... but too little debt may mean you are not
realizing the full potential of your business and may actually hurt your overall profitability.

Gross Profit Margin: A financial metric used to assess a firm's financial health by
revealing the proportion of money left over from revenues after accounting for the cost of
goods sold. Gross profit margin serves as the source for paying additional expenses and
future savings.

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Operating Profit to Sales:This ratio gives the margin available after meeting cost of
manufacturing.

It provides a yardstick to measure the efficiency of production and

margin on sales price i.e. the pricing structure.

Return on Equity: The amount of net income returned as a percentage of shareholders


equity. Return on equity measures a corporation's profitability by revealing how much
profit a company generates with the money shareholders have invested.

TOL/TNW: This ratio gives a view of borrower's capital structure. If the ratio shows a
rising trend, it indicates that the borrower is relying more on his own funds and less on
outside funds and vice versa.

Where, Tangible Net Worth = Paid up Capital


Add: Reserves & Surplus
Add: Compulsory Convertible Debenture
Add/Less: Deferred Tax Liability/Assets
Add: Share Application Money
Less: Misc. exp. Not written off
Less: Accumulated Loss
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Inventory Turnover Ratio: A ratio showing how many times a company's inventory is
sold and replaced over a period.

2.3 TERM LOANS


Term loans are those loans that are lent for extended period of time majorly for the capital
expenditure by the firm. This is different from the short term loans which are mainly provided for
meeting working capital requirements and maintaining short term liquidity.
Term loans are provided for acquisition of fixed assets are to be repaid from the cash generated
from the operations. Credit delivery for term loans are broadly through two means:
i. Fund based
ii. Non- fund based
Term loans are sanctioned for acquisition of fixed assets like land, building, plant/machinery,
office equipment, furniture-fixture and other capital expenditure like purchase of transport
vehicles and other vehicles, agricultural equipment etc. The term loan is a loan which is not a
demand loan and is repayable in terms of instalments irrespective of the period or the security
cover.

Term loans are normally granted for the periods varying from 3-7 years and under exceptional
circumstances beyond 7 years. The term loan with remaining maturity period of above 5 years
shall not exceed 50% of the term deposits. Since term loans are provided for long tenure ensuring
the viability of the project and sufficient generation of cash over the long tenure of the loan
becomes critical.

TERM LOAN APPRAISAL


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Prior to the sanctioning of a loan it goes through a well-defined appraisal process where it is
evaluated on various parameters. Proper due diligence is followed to mitigate the risk of default
and fraud inherent in the lending process. The process followed is reviewed regularly to account
for new guidelines from the RBI and changes in banks credit policies. Various components of the
appraisal process are as detailed below:

Financial evaluation
It involves evaluation of financial statements of the borrower to ascertain the financial health of
the company. Financial statements are rearrangement as described in detail below and rearranged
financial statements are used to ascertain the capital requirements, liquidity, long term solvency,
debt-repayment capacity etc. of the business involved. Various components of financial
evaluation are as follows:

Reclassification and rearrangement of balance sheet items:


Financial statements contain the information about the financial health of enterprise. Since
different applicants use different formats and classification of some of the items present in the
balance sheet is subjective, it becomes necessary to re-arrange the balance sheet items to achieve
standardization. Components of the balance sheet are used in calculating ratio like Debt Equity
ratio(DER), Debt Service Coverage Ratio(DSCR), Current ratio, Fixed asset coverage
ratio(FACR), Maximum Permissible Bank Finance(MPBF) etc. There are guidelines from the
RBI and bank on the permissible values of these ratios. Therefore, proper rearrangement of
financial statements becomes critical in credit lending decision making.
Current Liabilities
o Short term borrowings including bills purchased and discounted excluding bank
finance.
o Unsecured loans.
o Public deposits maturing within the year.
o Sundry creditors.
o Interest and other charges accrued but not due for payment.
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o Advances/progress payments from customers.


o Deposits from dealers, selling agents etc.
o Installments of deferred payments, debentures, redeemable preference shares, long
term deposits payable within one year.
o Statutory liabilities like provision for PF dues, taxes etc.
o Miscellaneous current liabilities like proposed dividends, liabilities for expenses
etc.

Current Assets
o Cash and bank balances.
o Investments in government/trust securities, for short term and fixed deposits with
banks, investment in shares and debentures etc. should be excluded from current
assets.
o Raw material and consumable spares including that under transit. But slow
moving and obsolete items should be excluded from current assets and should be
grouped as non-current assets.
o Stock in progress and finished goods (including goods in transit).
o Advance payment for tax, prepaid expenses, advance for purchase of raw material
and consumables.

Treatment of Export Receivables


For calculating MPBF, the amount of export receivables may be excluded from the current assets
as need based limits for export receivables could be sanctioned and in respect of such receivables
borrowers are not required to bring in 25% by way of Net Working Capital.
Treatment of Redeemable Preference Share
Preference share redeemable within one year should be considered as current liabilities. However,
preference share redeemable after one year should be considered as term liabilities.

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Treatment of Unsecured Loan


In case of Partnership, Proprietorship, and Private Ltd. Companies, the unsecured loans raised by
friends, relatives, and directors etc. that remain in the business for continuous basis may be
treated as quasi capital to the extent not exceeding 100% of tangible net worth of the party
subject to the condition that these loans shall not be withdrawn during the currency of the loan
and shall be subordinate to bank borrowings. Amount of unsecured loans over and above the net
worth of the party should be treated as term liability for calculating various financial ratios. For
Public Ltd. Companies, the unsecured loans should be treated as long term debts.
Cost of Project and means of Financing
Cost of project and sources of finance are ascertained to ensure the financial viability of the
project for which funding is sought. The major cost components of the project is given including
land and building including transfer, registration and development charges as also plant and
machinery, equipment for auxiliary services, including transportation, insurance, duty, clearing,
loading and unloading charges etc. the means of financing the project cost may be one or more of
the following:

Equity capital from shareholders

Preference capital from preference shareholders

Capital subsidies from government

Debentures/ bonds issued by the company public issue or private placements

Public deposits

Unsecured loans from friend and relatives

Term loans

Lease finance

Projections of Sales, Profit, Cash Flow and Balance Sheet


Revenues during the tenor of the loan are estimated for the project, base on the Techno-Economic
evaluation and past performance. Revenue projection, in addition to the estimates of sales and
other expenses are used to arrive at balance sheet projections. Generally, speaking, a unit may be
considered as financially viable, progressive and efficient if it is able to earn enough profits not
only to service its debts timely but also for future development/growth.
Page | 49

2.3.1 CALCULATING KEY FINANCIAL RATIOS


Current financials of existing operations, project funding information like sources of fund etc.
and future projections are used for calculating key financial ratios for a period of time. These
ratios tell us about a units liquidity position, managements stake in business, capacity to service
the debts etc. the financial ratios which are considered important are discussed as under:

Debt Equity Ratio(DER)

DER =

DEBT (Term Liabilities)


Equity shares capital, free reserves, premium on shares

etc. after adjusting profit and loss balance.


DER signifies how much the project is leveraged. For a project of private firm, equity capital is
brought in by promoter and hence lowers the DER. DER also varies from industry to industry. In
capital intensive industries involving large investments, DER is normally higher as compared to
the other industries.

Debt Service Coverage Ratio (DSCR)


DSCR = (Net Profit (after Taxes)+Annual interest on long debt+Depriciation)
Annual interest on long term Debt + Amount of Principle

This ratio provides a measure of the ability of an enterprise to service its debts i.e. interest and
principle repayment besides indicating the margin of safety. The ratio may vary from industry
to industry but has to be viewed with circumspection when it is less than 1.5, this ratio shows the
relationship between cash generating capacity of the unit and its repayment obligation and
indicates whether the cash flow would be adequate to meet the debt obligations and whether there
is sufficient margin for the lending banker.

Tangible Net Worth to Total Outside Liabilities (TNW/TOL)

Page | 50

TNW/TOL =

tangible net worth (paid up capital + reserve and surplus tangible assets)

total outside liabilities


This ratio gives a view of borrowers capital structure. If the ratio shows a rising trend, it
indicates that the borrower is relying more on his own funds and less on outside funds and vice
versa.

PROFIT SALES RATIO

PSR =

Operating profit before tax excluding other income


Sales

This ratio gives the margin available after meeting cost of manufacturing. It provides a yardstick
to measure the efficiency of production and margin on sales price i.e the pricing structure.

2.4 Security
Charging of a security means creating right of the creditor (bank) over the security so that in case
of default by the borrower, creditor (bank) cab realize the security to recover its advance. A
charge could be fixed charge or floating charge. Fixed charge is created on specific property like
land, building etc whereas floating charge is an equitable charge over the assets of the company.
A floating charge crystallizes when the company ceases to be a going concern or the charge
holder (bank) initiates action to enforce security for recovery of the amount loan.
1st, 2nd and paripassu charge: When charge is created in favor of more than one creditor, then the
creditor in whose favor the charge was created earlier will have the first charge and any
subsequent charge will be called as 2nd charge and so on. If a charge is created on several
creditors with the condition that all creditors will have equal priority in proportion to the amount
of their advance it is called paripassu charge. When consortium advance is granted this type of
charge is created by the borrower. In case of paripassu charge sale proceeds of the property are
shared among creditors in the proportion of their outstanding within sanctioned limits.
Two types of security:
A. Primary Security
Page | 51

A primary security is the security against which bank finance is made or the security
(asset) which is created out of bank.
B. Collateral Security
Security obtained in addition to prime security is known as collateral security. Properties
or assets that are offered to secure a loan or other credit. Collateral becomes subject to
seizure on default. Properties or assets that are offered to secure a loan or other credit.
Collateral becomes subject to seizure on default. Collateral is a form of security to the
lender in case the borrower fails to pay back the loan.

Charge on securities can be created by various methods depending on the type of security
charged.
Nature of charge (Security)
Nature of Charge
Pledge
Hypothecation
Lien
Mortgage
Assignment

Type of Security
Movable goods like stocks
Movable goods like stock, vehicles
Assignment, hypothecation
Immovable property
Book Debts, LIP, NSC, FDR

Lien: The right of a person to retain the possession of a property till dues are paid in full.
A lien may be general of particular.
TRANSFER OF OWNERSHIP OR PROPERTY: no
TRANSFER OF POSSESSION OF SECURITY: yes
POWER OF SALE: yes
Remarks: a particular lien confers right to retain the property in which a particular debt
arise. A general lien confers a right to retain all goods or any property (which is in
possession of holder) of another until all the claims of the holder are satisfied. Banker has
a general lien on all securities deposited by a customer.
Negative lien is an undertaking in writing form the borrower not to encumber or deposit
off his assets without banks permission as long as the banks advance is continued.
Page | 52

Pledge: Bailment of goods as security for payment of s debt or performance of a promise.


TRANSFER OF OWNERSHIP OR PROPERTY: no
TRANSFER OF POSSESSION OF SECURITY: yes
POWER OF SALE: yes, through intervention of court and after reasonable notice without
intervention of the court.
Remarks: the person delivering the goods as security is called pledger or pawer. The
person to whom the goods are delivered is called pledge or pawnee. A pledge may be in
respect of goods, stocks, shares or any other movable property.

Hypothecation: When possession of the property and other movable offered as a security
remains with the borrower and only constructive charge is created in favor of the lender,
the transaction is called hypothecation. It is created by an instrument in writing viz,
hypothecation agreement.
TRANSFER OF OWNERSHIP OR PROPERTY: no
TRANSFER OF POSSESSION OF SECURITY: no, but normally the creditor takes the
right to obtain possession in certain circumstances.
POWER OF SALE: yes, through intervention of court or after obtaining possession and
giving reasonable notice without intervention of court.
Remarks: in hypothecation advances, effectiveness supervision over the goods and
possession is absolutely necessary. For, this purpose, period stock statements are obtained
and the stocks are checked at regular intervals.

Mortgage: A mortgagees a transfer of interest in specific immovable property for the


purpose of securing the payment of money advance by the way of loan, an existing or
future debt or the performance of an engagement which may give rise to a pecuniary
liability.

2.5 FUND FLOW STATEMENT


Page | 53

A fund-flow statement is often describes as s Statement of Movement of Funds or where got:


where gone statement. It is derived by comparing the successive balance sheet specified dates
and finding out the net changes in the various items appearing in the balance sheets.
A critical analysis of the statement shows the various changes in sources and applications of
funds to ultimately give the position of net funds available with the business for the repayment of
the loans. A project Fund Flow Statements helps in answering the under mentioned point:

How much funds will be generated by internal operations/external sources?

How the funds during the period are proposed to be deployed?

Is the business likely to face liquidity problem?

2.6 BALANCE SHEET PROJECTIONS


The financial appraisal also includes study of projected balance sheet which gives the position of
assets and liabilities of a unit at a particular future date. In other words, the statement helps to
analyse as to what an enterprise owns and what it owes at a particular point of time. An appraisal
of the projected balance sheet data of the unit would be concerned with whether the projections
are realistic looking to various aspects relating to the same industry.
Analysis of balance sheet
Balance sheet analysis is the process of identifying the financial strength and weaknesses of the
firm by properly establishing relationship between the item of the balance sheet and profit and
loss account. It is concerned with the following parties:

Lender

Managements

Investors

Trade Credits

2.7 CREDIT RISK RATING


An overview:
Page | 54

An opinion offered by Rating Agency on the relative ability and willingness of an issuer of debt
instrument to make timely payments on specific debt or related obligations over the lift of
instrument. Relative ranking of credit quality of debt instrument. Not a recommendation to invest
since it does not evaluate reasonableness of issue price, possibility of capital gains, liquidity in
the secondary market, risk of pre-payment by issuer.
Various External Credit Agencies in India:

CISIL

CARE

FITCH

ICRA

Factors determining credit risk:

State of economy

Wide swing in commodity prices

Fluctuations in foreign exchange rates and interest rates

Trade restrictions

Economic sanctions

Government policies

Some company specific factors are:

Management expertise

Company policies

The internal factors within the bank, influencing credit risk for a bank is:

Deficiencies in loan policies/administration

Inadequate defined lending limits for loan officers/credit committees

Deficiencies in appraisal of borrowers financial position

Absence of loan review mechanism

Page | 55

Credit risk rating by PNB:


Credit risk rating assigned to the borrower, based on the detailed analysis for their ability and
willingness to repay the debt from the bank. Credit risk rating helps a bank in assigning as
probability of default.
Uses of credit risk rating: Whether to lend to a borrower or not: the credit risk rating of a
borrower determines the appetite of the bank in determining exposure level. A bank would be
willing to lend highly rated borrowers but would not like exposure to borrowers with very poor
credit risk rating.
The credit risk rating tool has been developed with a view to provide the standard system for
assigning a credit risk rating to the borrower of the bank according to their risk profile. The tool
evaluated the credit risk rating of a borrower on 7 scales from AAA to D indicating AAA as
minimum risk and D as maximum risk.
The credit risk rating tool incorporates and includes possible factors of risk for determining the
credit rating of borrower. This risk could be internal and specific to a company.The credit risk
rating tool has been developed to capture credit risk under four areas:
1. Financials
2. Business/Industry
3. Management
4. Conduct of Account
PNB also have a small weightage about the key risk factors. According to these head credit score
is determined based on the following weight age:
Factor affecting Credit Rating
S. No.
1
2
3
4
Total

Factors
Financial
Business/Industry
Management
Conduct of Account

Weight assigned
40
20
20
20
100

Usage of Credit Risk Rating Tool:


Page | 56

The scores are assigned to each of the parameters on a scale of 0 to 4 with 0 being very
poor and 4 being excellent. The scoring of some of these parameters is subjective while
for some others it is done on the basis of predefined objective criteria.

The score given to the individual parameters multiplied by allocated weights are then
aggregated and a composite score for the company is arrived at, in percentage terms.
Higher the score obtained by a company, better is its credit rating. Weights have been
assigned to different parameters based on their importance. After allocating/evaluating
scores to all the parameters, the aggregate score is calculated.

The overall percentage score obtained is then translated into a rating on a scale from AAA
to D according to the pre-defined range of credit scores.

The credit rating according to the credit scores are:

Rating with AAA, AA, A and BB grade signifies Investment Grade. B rating grade is known as
Marginally Acceptable Risk Grade and C and D rating grade are called High Risk Grade.
Page | 57

Chapter - 3
Research Methodology

Page | 58

3.1 Objectives of the Study


1. To gain insights into the Credit Administration processes of PNB.
2. To understand the different types of credit facilities and credit delivery mechanisms
provided to industrial customers viz. Overdraft, Cash Credit, Drawing Rights, Fund Based
Credit, Non Fund Based Credit etc.
3. To understand the appraisal process of Term Loan and Working Capital Financing
proposals of PNB.
4. To understand the factors affecting rate of interest levied viz. risk assessment, bank
guidelines, sectoral policies, business considerations etc.
5. To understand various norms like credit exposure limits etc., that influence credit disbursal
for various sectors, companies and business groups.

3.2 Scope of the Study


With the opening up of the economy, rapid changes are taking place in the technology and
financial sector, exposing banks to greater risks. Thus, in the present scenario efficient project
appraisal has assumed a great importance as it can check and prevent induction of weak accounts

Page | 59

to our loan portfolio. All possible steps need to be taken to strengthen pre sanction appraisal as
prevention is better than cure.

3.3 Managerial Usefulness of Study


This project will help to get insight into credit appraisal procedure of PNB. It is useful in
todays time. This project has usefulness for the people working with PNB and also for the people
who are in corporate world and need credit facilities either for expansion orfor working capital
requirements.

For the people working with PNB they come to know what are parameters to be
evaluated while studying an application for credit demanded by the companies.

For the people who belong to the corporate world and wants credit either for expansion
or working capital requirement comes to know about the procedure of the bank for
credit appraisal. So whenever the need credit they are familiar with the procedure.

3.4 Type of Research


In this project report Exploratory Research has been used which includes:

Search of secondary data.

Survey of knowledgeable persons.

Case study.

3.5 Data Collection Method

Secondary Sources
o Study of various bank guidelines and circulars.
o Study of pre-approved proposals.
o Material provided by project guide.
o Study of proposal.
o Annual report of company.
o CMA of company.
Page | 60

3.6 Limitations of the Study

All the information cannot be included as most of the information is confidential and not
approachable.

The study is being done keeping in mind the policies of the head office.

The data availability is proprietary and not readily shared for dissemination.

The staff although are very helpful but are not able to give much of their time due to their
own job constraints.

The data is used in the study is secondary which can lead to some kind of discrepancy,
anomaly or biasness in the study

Due to the ongoing process of globalization and increasing competition, no one model or
method will suffice over a long period of time and constant up gradation will be required.

CHAPTER 4
Data Analysis &Interpretation
Page | 61

CASE STUDY (A)


ABC Expressway Ltd. is not an existing customer.
The details of the company are:

Name of the borrower

: M/s ABC Expressway Ltd.

BO

: Andhra Pradesh

Controlling Office

: Andhra Pradesh

Constitution

: Public Limited

Address of registered office

: Plot No.1129/A, Road No.36, Jubilee Hills,


Hyderabad - 500033, Andhra Pradesh

7. Date of incorporation

: November 28, 2011

9. Industry/ Sector

: Roads and Highways

10. Business Activity/Installed

: Four laning of NH-9 from Km. 0.000 to Km.


63.800 (approx. Length of 64.611 km) in the state
Of Andhra Pradesh under NHDP Phase III on
Design, Build, Finance, Operate, Transfer
(DBFOT) Toll basis.

Directors of the company:

Smt. A -

Promoter Director

Smt. B

Promoter Director

Page | 62

None of the directors is in the defaulter list of RBI.

Brief history:
ABC Ltd. is a SPV incorporated on November 28, 2011 to undertake the project for four-laning
of Rampur Shyampur Section of NH-9 from Km. 0.000 to Km. 63.800 (approximate length of
64.611 km) in the state of Andhra Pradesh on DBFOT basis.

The Sponsor:
The SPV is floated by 3 companies of XYZ Co. Group, viz XYZ Co. Infra Ltd, XYZ Co. Toll
Higways Ltd & XYZ Co. Projects Ltd (XYZ CO.). XYZ CO. is the listed and the flagship
company of XYZ Co. Group. The brief details of XYZ CO. are as under:
XYZ Co. Projects Ltd (XYZ CO.) was originally incorporated on March 15, 1990, XYZ CO. was
converted into a Public Limited Company in the 1995 and was renamed as XYZ Co. Projects
Limited.
XYZ CO. engaged in execution of infrastructure projects, such as construction of national
highways, fly-overs, hydel, dams, tunnels, aquaducts, bridges, railways and coal handling plants,
as well as work shop property development projects, including high rise structures, hospitality
and retail industrial structures.
XYZ CO. has also its presence in development of hotels, malls and office complexes through its
subsidiaries viz., Nama Hotels Private Limited .
The key financials of XYZ CO. is as under:
(Rs. in Cr)

Particulars
Gross Sales
Operating Profit/Loss

2008-09

2009-10

2010-11

2011-12

Audited

Audited

Audited

(Provisional)

1044.54

1393.86

1721.77

1819.82

27.81

40.17

23.54

19.15
Page | 63

Profit before tax

73.14

69.45

71.18

61.11

Profit after tax

46.91

45.77

32.41

36.50

Paid up capital

7.40

7.40

7.40

7.40

528.62

570.96

601.21

637.72

12.44

10.45

3.59

3.59

a) Tangible Net Worth

548.46

588.81

612.20

648.71

Net Working Capital

92.20

-50.69

215.72

94.14

1.15

0.94

1.18

1.04

Reserves and Surplus excluding


revaluation reserves
Deferred Tax Liability/Asset

Current Ratio*

GIST OF THE PROPOSAL

Page | 64

A. Sanction of Working Capital Limits: NIL

For Term Loan

Purpose

Part financing of Total debt component envisaged for four


laning of Rampur-Shyampur Section of NH-9 from Km.
0.000 to Km. 63.800 (approx. Length of 64.611 km) in the
state of Andhra Pradesh under NHDP Phase III on Design,
Build, Finance, Operate, Transfer (DBFOT) Toll basis for
a concession period of 20 years.

Cost of Project

738.61

Total Debt

387.00

Promoters contribution

Equity
92.00

Capital
Interest

free

142.61( revised )

50.61
unsecured loan
NHAI Grant

209.00

Proposed TL (our share)

150.00 (38.75%)

DER

1.10:1 (NHAI grant & interest free unsecured loans has


been considered as a part of equity for DE ratio).
DE ratio comes to 4.20:1 based on pure equity, i.e. if
NHAI grant & interest free unsecured loans are not taken
as part of equity.

Repayment Period

12 years 6 months

Door to door tenor

14.91 years (including construction period of 2 years +


moratorium period of 0.41 months + repayment period of
12 years)

Approval of ROI/ Service charges as under:-

Rate of Interest

Facility

Proposed

Applicable

Term
Loan

12.50% p. a fixed till COD BR+ 4.50%+TP, as


with first reset at COD/SCOD applicable to B rated
and annual reset thereafter as other category
Page | 65

approved by

Upfront Fee

borrowers

Term
Loan

0.20% of the loan amount +ST, 0.50% of the loan


as per NBG Approval
amount + ST, Minimum
Rs. 75.00 Lakh

Lead
Bank
Fee Term
(including
project Loan
management, Annual
TL review fee &
Escrow a/c fee)

Rs.7.5 Lac + ST on annual Rs.7.5 lacs for project


basis & Escrow A/c fee Rs1 lac management fee + Rs.1
per annum
lac for Escrow a/c fee

Documentation
Charges

Term
Loan

Rs. 25000 + ST

Rs. 25000 + ST

Approval of other Issues, if any :


To allow a time period of 6 months from the date of financial closure to obtain external rating
from an approved external rating agency.

Credit Rating by agencies {CRISIL/ICRA/CARE/FITCH INDIA} with purpose of such


rating:
Yet to be done, however WE has proposed a condition that the external rating is to be obtained
from external agency within a time period of 6 months from the date of financial closure,
otherwise 2% penal interest will be charged
The Share Holding pattern of RSEL as on March 31, 2012 is as under:
Amount
(Rs.)

% Holding

8,000

80,000

16.00

XYZ Co. Infra Ltd

10,000

1,00,000

20.00

XYZ Co. Toll Highways Ltd.

12,000

1,20,000

24.00

8,888

88,880

17.77

Name of the Subscriber


XYZ Co. Projects Ltd.(XYZ CO.)

Ram

No. of shares of
Rs.10/- each

Page | 66

Shyam

1,888

18,880

3.78

Ghanshyam

8,888

88,880

17.77

336

3,360

0.68

50,000

5,00,000

100.00

Radha
Total

Present physical & financial status of project, if any


Physical Status of the Project
Designs: 3G notification was already issued for major and minor bridges designs. The approval
of the designs is expected shortly from NHAI.
Plan & Profile: The EPC contractor i.e. XYZ Co. Projects Ltd. (XYZ CO.) has initiated step for
the approval of NHAI.
Survey of Works: Center line marking for 49.5 Km has been completed out of 64.6 Km road.
The balance work is under progress.
Land Acquisition by NHAI: Land acquisition for the road is under process. As regards the land
requirement for setting up batching plant, plant & machinery, stores, site office, etc, so far 8 acres
of land is acquired and the balance is under progress. The EPC contractor needs 17 acres of land
for this purpose.
Mobilization of men & machinery: Keeping in view the past experience of the EPC contractor
i.e. XYZ CO., no difficulty is envisaged for mobilization of men & machinery at sight. After
getting appointed date from NHAI, the required men and machinery will be easily mobilized by
XYZ CO..
Identification of Site: It is completed. Temporary site office is already in function and VAT
reiteration is also completed.
Financial Progress:
The Company has spent an amount of Rs.8.5 crore towards various preliminary and preparatory
works. The amount has been contributed from promoters equity.
Page | 67

Implementation schedule
The project shall be executed in a time period of 2 years as per the Concession Agreement. The
construction period shall begin from the date of financial closure. The Project expects to achieve
financial closure by October 2012.
The key dates are as under:
Date of receiving Letter of Acceptance for the Project

11.11.2011

Date of Signing of Concession Agreement

03.02.2012

Total Concession Period

20 years from
appointed date

Permissible Period for achievement of Appointed Date

200 days

Date of achieving financial closure / Appointed Date ( As per TEV report)

28.02.2013

Construction Period

730 days

Date of Completion of Construction

27.02.2015

SCOD

28.02.2015

The Term Loan of Rs.387 crores shall be repaid in 50 quarterly installments mentioned below
w.e.f. four (04) months from COD. The COD is 28.02.2015 hence repayment of term loan shall
commence from 30.09.2015 (date of repayment of first installment). The interest shall be paid on
monthly basis as & when levied.
As regards starting of construction works, the company has established sight office & also
deputed engineers. Road construction work yet to be started.

Proposed repayment schedule (in crores)


S.
No.

Year of Repayment

FY

First 03 installments

201516

1
Next 04 installments
2

201617

Opening
Balance

Installment
(%age of TL)

387.00

0.10%

386.61

Gross
Amount

Closing
Balance

0.39

386.61

0.39

386.23

0.10%
Page | 68

Next 04 installments
3
Next 04 installments
4
Next 04 installments
5
Next 04 installments
6
Next 04 installments
7
Next 04 installments
8
Next 04 installments
9
Next 04 installments
10
Next 04 installments
11
Next 04 installments
12
Last 03 installments
13

201718

386.23

201819

384.29

201920

373.07

202021

351.78

202122

318.89

202223

283.09

202324

236.65

202425

179.57

202526

127.32

202627

73.14

202728

17.03
--

1.94

384.29

11.22

373.07

21.29

351.78

32.90

318.89

35.80

283.09

46.44

236.65

57.08

179.57

52.25

127.32

54.18

73.14

56.12

17.03

4.40%

17.03

0.00

100.00

387.00

--

0.50%
2.90%
5.50%
8.50%
9.25%
12.00%
14.75%
13.50%
14.00%
14.50%

Total 50 Installments

Cost per kilometre for various phases:


(Rs. Crore)
Phases

2010-11 E

2011-12 P

2012-13 P

2013-14 P

2014-15 P

2015-16 P

5.3

5.5

5.8

6.1

6.4

6.7

II

8.7

9.2

9.6

10.1

10.6

11.1

III

10.5

11.0

11.6

12.2

12.8

13.4

IV

3.2

3.3

3.5

3.6

3.8

4.0

11.6

12.1

12.7

13.4

14.0

14.7
Page | 69

VI

15.8

16.5

17.4

18.2

19.1

20.1

VII

10.5

11.0

11.6

12.2

12.8

13.4

Growth parameters suggested by the Traffic Consultants:


Period

Car/Van/
Jeep

Bus/Mini Bus

LCV

Truck 2A

Truck 3A

MAV

2012-2015

9.0%

5.0%

7.8%

8.1%

8.0%

7.9%

2016-2020

9.9%

5.7%

8.3%

8.8%

8.7%

8.6%

2021-2025

8.4%

4.9%

7.4%

7.8%

7.7%

7.7%

2026-2030

7.9%

4.4%

7.0%

7.2%

7.1%

6.9%

2031-2035

6.7%

3.9%

5.9%

6.3%

6.2%

6.0%

2036-2040

5.5%

3.0%

5.0%

5.4%

5.4%

5.2%

Toll Rates
As per the Fee notification (Schedule R) of the signed Concession Agreement, the
Concessionaire can collect toll based on section 9 of National Highways Act, 1956, read with
Rule 3 of the National Highway Fee (Determination of Rates and Collection) Rules 2008, along
with its various amendments. The base rate of fee for use of a section of national highway of four
or more lanes for the base year 2007-08 is as given below:
Mode

Base Rate/Km (In Rs.)- Four Lane

Car, Jeep, Van, Light Motor Vehicle

0.65

Light commercial/light goods vehicle/Mini Bus

1.05

Truck/Bus (2 - axle)

2.20

3-Axle Commercial Vehicles

2.40

MAV(3 or 6 axles)

3.45

Oversized Vehicles (seven or more) axles)

4.20
Page | 70

Security

For working capital limits: NA

For Term Loan:

1) A first pari-passu charge on all the Companys properties and assets both present and future
save and except the Project assets.

A first pari-passu charge on all the companys tangible movable assets, including moveable
plant and machinery, machinery spares, tools and accessories, furniture, fixtures, vehicles and
all other movable assets, both present and future save and except the Project assets.

A first first pari-passu charge over all accounts of the Company including the MMRA (Major
Maintenance Reserve Account), Escrow account and the Sub-Accounts (or any account in
substitution thereof) that may be opened in accordance with the Concession Agreement and
the supplementary Escrow Agreement, or any of the other Project Documents and all funds
from time to time deposited therein, the receivables and all authorized investment or other
securities,

A first first pari-passu charge on all intangibles assets including but not limited to goodwill,
rights, undertaking and uncalled capital present and future excluding the Project Assets
(provided that all amounts received on account of any of these shall be deposited in the
Escrow Account.
First pari-passu charge on Assignment by way of Security in:

All the right, title, interest, benefits, claims and demands, whatsoever of the company in the
Project Documents,

The right, title and interest of the company in, to and under all the Government approvals,

All the right, title, interest benefits, claims and demands whatsoever of the Company in any
letter of credit, guarantee including contractor guarantees and liquidated damages and
performance bond provided by any party to the Project Documents.
Page | 71

All the right, title, interests, claims and demands whatsoever of the Company under all
insurance contents.

A first pari-passu charge by way of pledge of 51% (Fifty one percent) of the issued paid up
equity share capital of the Borrower held by the promoter in the company till the final settlement
date.
Collateral (Information in respect of mortgage of IP to be given only in the following
format: NIL

Personal /Corporate Guarantee:


Corporate guarantee of XYZ Co. Projects Ltd having TNW of Rs. 648.71 cr as on 31.03.2012 &
IP NIL as per the following CR:
Name of
Guarantor

Relationship
with Borrower

(Rs. in Cr)
Net Worth

Prev.

Pres.

Immovable
property
Prev.

as at
31.03.12
XYZ Co.
Projects Ltd

Sponsor
company

NA

648.71

Present

Date of CR

Prev.

Pres.

as at
31.03.12
NA

NA

NA

06/10/2012

iv) Comments on changes, if any: N.A


v) Status of creation of charge:Security will be created within 6 months of documentation or
3 months from the 1st disbursement whichever is earlier. If security not created within the
stipulated time an additional interest of 1.00% is payable from the date of Documentation till
the date of creation of security.
Detailed Sensitivity Analysis:
The Sensitivity analysis has been carried out on the following three different scenarios and its results are
as under:
Particulars

Base
Case

Base Traffic
Reduced by 10%

Decrease in rate of
traffic growth by 50%

Increase in ROI by
1%
Page | 72

Average DSCR

1.58

1.46

1.23

1.52

Minimum DSCR

0.70

0.62

0.64

0.65

The average DSCR in base case is above generally acceptable level of 1.50 & is above 1.00 in all the
cases on which sensitivity is carried out but the minimum DSCR is below 1.00. The below par minimum
DSCR indicates that during that the company would not be in a smooth position to service its term debt
obligations. Hence, it is stipulated that the company/promoter to undertake to make good any shortfall in
cash accruals for timely servicing of Banks term loan.

It is proposed that company should induct additional fund during first 02 financial years in which annual
DSCR is less than generally acceptable level of 1.10, the year wise amount of additional funds are as
under. We have discussed the matter with the companys officials and the company has given an
undertaking to bring additional funds :
(Rs. in Crores)
Particulars
Additional
Fund
DSCR of 1.10

14-15

15-16

for
1.75

10.50

Growth Potential
An ambitious National Highway Development Programme (NHDP), involving a total investment
of Rs. 2, 20,000 crore (USD 45.276 billion) up to 2012, has been established with an extensive
road network of 3.3 million kilometres. In order to build world class highways in the country, the
Ministry of Road Transport and Highways has initiated a time-bound action plan to build NHs at a
pace of 20 km per day i.e. 7,300 km per year; bringing all the single/ intermediate lane NHs to the
minimum two lane level; and-take up a programme of 1,000 km expressways.
Foreign direct investment (FDI) received for construction activities (including roads and
highways) sector from April 2011 to July 2012 stood at US$ 616 million. The cumulative inflows
during April 2000 to July 2011 amounted to US$ 9,250 million, accounting for 6 per cent of the
total FDI equity inflows, according to data released by Department of Industrial Policy and
Promotion (DIPP).

Page | 73

Road development is recognised as essential to sustain Indias economic growth The Government
is planning to increase spends on road development substantially with funding already in place
based on a cess on fuel.

A large component of highways is to be developed through public-private partnerships


Several stretches already awarded to private companies on a BOT(Annuity) basis.

Investment opportunities exist in a range of projects being tendered by NHAI for


implementing the NHDP contracts are for construction or BOT basis depending on the
section being tendered

Economic Viability:
( i)

Demand Supply scenario :


CRISIL Research estimates investments of Rs 6.9 trillion over the period 2011-12 to 2015-16
driven by the government's focus and impetus towards the development of roads. National
highways are expected to comprise a major share of the total investments at 37 per cent
followed by state highways (41 per cent) and rural roads (22 per cent). Further, the public
sector will play a crucial role, funding around 65 per cent of the road projects, with the
remaining 35 per cent financed by the private sector.

(ii)

Supply scenario :- As above

(iii)

Industry scenario :
The road sector has been identified as one of the key infrastructural bottlenecks impeding
economic growth in India. The importance of road connectivity in linking demand and supply
and contributing to economic and social development of the country is well understood. In
India, roads carry around 85% of Passenger Traffic and 65% of Freight Traffic. They span
about 3.3 million km with road densities at 2.75 km per 1,000 people and 770 km per 1,000
square km compared to world average of 6.7 and 840 respectively. Further, about 15% of the
network carries 80% of the traffic.

About 14% of the National Highways and 1% of the State Highways are four-laned while 59%
and 22% respectively are two-laned. The network is divided into National Highways, State
Roads including State Highways and District Roads and Rural Roads. National Highways span
a length of 70,548 km, State Highways 1, 31,899 km, major district roads 4, 67,763 km and
rural roads 2,650,000 km. In order to address this issue, GOI initiated the comprehensive
Page | 74

National Highways Development Programme (NHDP) in 1999. NHAI has been given the
mandate to implement the NHDP. A region's industrial and employment base is closely tied to
the quality of the transportation system. Good, dependable transportation infrastructure allows
businesses to receive inputs to production facilities and to transport finished goods to market in
an efficient manner. An efficient transportation system allows companies to lower
transportation costs, which lowers production costs and enhances productivity and profits.
Highways generate direct employment due to manpower required for construction and
maintenance of roads. It generates indirect employment by aiding industrialization alongside
the highways.

The primary mandate of NHAI is time and cost bound implementation of the National
Highways Development Programme (NHDP) through a host of funding options including from
external multilateral agencies like World Bank, Asian Development Bank, JBIC etc.
(iv)

Marketing arrangement :
From the analysis done by the Traffic Consultant, it is unlikely that any traffic gets diverted
from the project stretch.

Also, the Concession Agreement provides for clauses that protects the Company from any
negative impact due to competing roads. Clause 30 provides for restricting on construction of
Additional Tollway before the 12th anniversary of the Appointed Date. In addition to this, the
Concession Agreement also stipulates that the fee charged for vehicles using such competing
facility shall not, at any time, be less than 25% higher than the fee levied and collected at the
Project Highway.

Case study (B)


Borrowers Profile
a

Group Name

XYZ Group of Industries

Address of Regd./Corporate Office

46C, Rafi Ahmed Kidwai Road, Kolkata

Works Address & Regd. Office

L.G Estate, Behind Garibsapir, Sihor


364240, Bhavnagar, Gujarat

Page | 75

c. Constitution and constitution code as Partnership Firm


per ladder
d. Date of incorporation/Establishment

21.11.1999

e. Dealing with PNB since

30.03.2011

f. Industry/Sector

Plywood Industry

g. Business Activity (Product)/

Plywood, Block Board & Veneer manufacturing

Installed Capacity.

1. Veneer 113987.36 sqm/Month


2. Plywood 1138.15 sqm / Month
3. Black Board 403.29 sqm/Month

Partners (S/Shri)
Name and
Designation

Shri Prakash More

Address/Mobile No./e-mail
address of Main
Directors/GuarantorDirecto
rs/Key persons
Flat No.30, Block-N, 571,
Diamond Harbour Road, Kol53 Phone 033-24005372/73

Whether Promoter/
Professional/Nominee

PAN

Partner

AINPM8081C

Partner

AABCT1308G

DOB-08.12.1969
M/s Mayur Ply
Industries Pvt. Ltd.

46C, Rafi Ahmed Kidwai,


Road, 2nd Floor, Kolkata,
West Bengal 700016
Phone-033-4001-7701

None of the partners is in the defaulter list of RBI .


Brief history
Profile of the firm
Diamond Timber Industries (DTI) is a partnership firm having its Registered Office at
L.G. Estate, behind Garibshapir, Sihor. District: Bhavnagar and corporate office at
Kolkata. It was established on 21.11.1999 with objective of manufacturing of different
types of Plywood, Veneer etc.

Page | 76

Diamond Timber was previously owned by Mr. Bijay Garodia, Mr. Amit Kumar Todi and
Mr. Pramod Kumar Ajitsaria. The owners were unable to run company efficiently and
Mayur Group of Industries acquired the firm in 2005. Post acquisition, the new promoters
created requisite infrastructure at the site and also created the market for itself.

The firm currently has two partners namely,


1. Shri Prakash Kumar Nauraglal More
2. M/s Mayur Ply Industries Pvt Ltd. (formerly known as M/S Timtech India Private
Limited)
DTI is engaged in manufacturing of plywood, block board, flush door, commercial
veneer, sawn timber and dealing in timber imported from Southeast Asian countries. The
new promoters have a very good network of marketing channels.

Ownership:
The firm is owned by MAYUR Group. Mayur Group of Industries is engaged in
manufacture of Plywood, Veneer and allied activities, Food Processing sector,
construction activity, trading of Timber & Food Products. The main promoters of the
group are Shri Naurang Lal More, Shri Deepak Kumar More & Shri Prakash Kumar More

GIST OF THE PROPOSAL


A. Renewal of Working Capital Limits

Limits

Existing

Proposed

FB Cash Credit

12.00

12.00

NFB Letter of Credit

25.00

25.00

Buyers Credit

NIL

(10.00)
Page | 77

T O TAL

37.00

37.00

B. For Term Loan : NA


C. Approval of ROI/ Service charges as under:Facility

Existing

Proposed

Applicable
rate

Income Earned
Last Year
2011-12

Rate of
interest

Processing
Fee

Processing
fee

Other
charges, if
any

Current year
upto Dec 12

Intt.

NonIntt.

Intt.

NonIntt.

CC

Base Rate
+ 4.00% i.e
14.25%
p.a. at
present

Base Rate +
4.00% i.e
14.25% p.a.
at present

Base Rate
+ 5.00% i.e
15.25%
p.a. at
present

0.58

---

1.27

LC

Schedule
charges

Schedule
charges

Schedule
charges

0.18

---

0.30

----

Rs. 225/per lac


+service
tax

Rs. 225/ per


lac +service
tax

Rs. 225/
per lac
+service
tax

Rs. 125.00/
per lac
+service
tax

Rs.
112.50/- per
lac +service
tax

---

---

0.06

---

Scheduled

Scheduled

FB

NFB

--

Rs.
112.50/per lac
+service
tax
Scheduled

Credit Risk Rating given by bank :Credit Risk Rating by Bank


is B+ indicating
marginally acceptable risk

Rating Date of
Rating

Score

ABS

Reasons for
degradation
Page | 78

Rating is yet to be vetted by


IRMD HO New Delhi

Present

17.12.12 44.39% 31.03.12 Due to non


achievement
of sales and
profit

Previous BB- 12.12.11 50.67% 31.03.11 NA

a) Share Holding Pattern as on 31.03.2012:


M/s Diamond Timber Industries is a partnership firm. The Profit & Loss sharing ratio of the firm
is given below:
Sl. No

Name of partners

Ratio (%)

a.

M/s Mayur Ply Industries Pvt Ltd.

90%

b.

Mr. Prakash More

10%

Facilities Recommended :
Nature

(Rs. in Crore)
Existing

Proposed

Fund Based

(As per RBIs guidelines)

CC(H)

12.00

12.00

WCDL

--

--

FOBP/FOUBP/FABC

--

--

Others

--

--

12.00

12.00

Fund Based Ceiling

Secured/Unsecured along with


the basis thereof

Secured

Non Fund Based


ILC/FLC

25.00

25.00

ILG/ FLG

--

--

--

(10.00)

25.00

25.00

Buyers Credit
ILC/FLC limit)

(within

Non Fund Based Ceiling

Secured

{Not Recommended}

Page | 79

Term Loan

--

ECB

--

--

37.00

37.00

TOTAL COMMITMENT

1. Short Term Loans sanctioned by PNB in last 12 months, if any: Nil


2. Details of facilities provided outside consortium including exposure on account of
derivatives, if any: Nil
3. Facilities

from

PNB

Subsidiaries/Exposure

by

way

of

investment

in

Equity/Debentures/Derivatives/Foreign Exchange etc. : Nil


4. Term Loans from other Banks/Financial Institutions/Other Institutions - (including
Lease, ICDs, Corporate Loans, Debentures etc.) Nil
5. Credit Rating by agencies {CRISIL/ICRA/CARE/FITCH INDIA} with purpose of
such rating:
The firm has not got external risk rating yet. The firm has assigned CARE for carrying out credit
risk rating.
6. Details of Working Capital Limits from the Consortium/Multiple Banking NILDetails of Group /Allied/Associate firms and the facilities sanctioned to them along with
conduct of these accounts with our Bank/ other Banks and comments on adverse indicators,
if any.

Financial Position of the Company as on close of financial year for last three years and
estimated for last year and projected for the next year
(Rs. in Crore)

Gross Sales

31.03.10

31.03.11

31.03.12

Estimated
for the
current
year (say
31.3.13)

Audited

Audited

Estimated

Audited

Estimated

31.29

44.00

65.00

64.25

82.00
Page | 80

- Domestic

31.29

44.00

65.00

64.25

82.00

% growth

40.62

47.73

46.02

27.63

Net sales (net of excise duty 31.29


etc.)

44.00

65.00

64.25

82.00

Other Income

0.00

0.00

0.00

0.00

0.00

Operating Profit/Loss

0.85

1.26

1.95

1.70

2.40

Profit before tax

0.85

1.26

1.95

1.70

2.40

Profit after tax

0.59

0.89

1.37

1.09

1.68

Depreciation/

0.28

0.32

0.28

0.34

0.35

Cash profit/ (Loss)

0.87

1.21

1.65

1.43

2.03

EBIDTA/PBIDTA

0.87

1.24

3.11

3.86

6.93

Paid up capital

12.15

12.98

18.79

20.21

22.14

Reserves and Surplus


excluding revaluation
reserves

0.00

0.00

0.00

0.00

0.00

Deferred Tax Liability/Asset

0.39

0.50

0.39

0.61

0.61

a) Tangible Net Worth

12.54

13.48

19.18

20.82

22.75

b) Investment in allied
concerns and
amount of
cross holdings

0.00

0.00

0.00

0.00

0.00

c) Net owned funds/Adjusted


TNW

12.54

13.48

19.18

20.82

22.75

Share application money

0.00

0.00

0.00

0.00

0.00

Total Borrowings

0.00

0.00

12.00

11.97

12.51

Secured

0.00

0.00

12.00

11.46

12.00

Unsecured

0.00

0.00

0.00

0.51

0.51

- Export

Amortization of expenses

Page | 81

Other investments (excluding


investment in allied concerns
considered for arriving at Net
Owned Funds)

0.00

0.00

0.15

0.00

0.00

Total Assets

46.13

37.02

58.02

59.49

68.58

Current assets

39.92

30.18

52.23

51.96

61.40

Non current assets

6.21

6.84

5.79

7.53

7.18

Out of which net fixed assets

6.21

6.84

5.64

7.53

7.18

Net Working Capital

6.33

6.64

13.39

13.80

16.08

Current Ratio

1.19

1.28

1.34

1.36

1.35

Debt Equity Ratio

0.00

0.00

0.00

0.02

0.02

Term liability/ Adjusted


TNW

0.00

0.00

0.00

0.02

0.02

TOL/Adjusted TNW

2.68

1.75

2.03

1.86

2.01

Operating Profit/Sales

0.03

0.03

0.03

0.03

0.03

Long Term Sources

12.54

13.48

19.18

21.33

23.26

Long Term Uses

6.21

6.84

5.79

7.53

7.18

Surplus/ Deficit

6.33

6.64

13.39

13.80

16.08

Short Term Sources

33.59

23.54

38.84

38.16

45.32

Short Term Uses

39.92

30.18

52.23

51.96

61.40

Surplus/ Deficit

-6.33

-6.64

-13.39

-13.80

-16.08

SECURITY
Primary Exclusive charge on entire stocks and book debts and other current assets of the firm.
Collateral (Information in respect of mortgage of IP to be given only in the following
format: Continuation of EM of the factory land area measuring approx 24818 sqm. at L.G.
Estate, Behind Garibshapir, Sihor-364240, Bhavnagar, Gujrat. Land owned by the firm.
i) Hypothecation/ Mortgage of Block Assets Immovable Properties
Page | 82

(Rs. in Crore)
Security
Area in Owners
Descriptio Sq M or hip
n
Sq Ft

Land,
Building
and Plant
&
Machinery
located at
11 & 12 L
G Estate,
Behind
Garibshap
ir, Rajkot
Bhawnaga
r Highway
Road, P.O.
Sihor, Dist
Bhawnaga
r, Gujarat

ii)

Land
area
2481
8 Sq
Mtrs

Owned
by the
firm

Value
Last
sanction

Present
book
value

Realisa
ble
value

----

7.53

9.16

(WDV)

Basis
for
valuati
on

Dat
e

Whethe
r
existing
/ fresh

Valuation has
been done by
approved
valuer of the
Bank N.
Nayak &
Associates
vide its
valuation
report dtd.
09.07.12.

Existing

First/Second/Third charge/Paripassu charge : - NA -

iii) Personal /Corporate Guarantee


Personal Guarantee of Shri Prakash Kumar More and Corporate Guarantee of M/S Mayur Ply
Pvt Ltd
Rs. Crore
Name of
Guarantor

Relationship with
borrower

Net Worth

Prev As
at
31.03.10

Present
As at
31.03.11

Immovable
property
Prev.
As at

Date of
confidential
report

Present

Prev.

Present

As at

Page | 83

Shri Prakash Partner


Kumar
More

2.34

5.56

M/s Mayur
Ply Pvt Ltd

59.71

77.09*

Promoter

--

--

11.76

08.04
.11

10.12.20
12

08.04
.11

10.12.20
12

*TNW is as per ABS at 31.03.2012


Status of creation of charge: NA (However EM on the property has been created in favour of
our bank)
Security Margin (Fixed Asset Coverage Ratio for Term Loans):

NA

Position of Account as on:.20.03.2013


(Rs. in Crore)
Nature

Limit

VS

DP

Balance

Irregularity

Cash Credit

12.00

27.24

12.00

11.47

Nil

LC/LG

25.00

--

--

16.14

Nil

Due Date Default

Nil

Nil

Nil

NIL

NIL

AUDIT/INSPECTION/MEETINGS
Particulars

Last date

Remarks/Observations/Steps taken

a)

Annual inspection

30.09.2011

Closed

b)

Stock audit

----

Stock audit has been assigned by our bank

c)

Consortium meeting

NA

Sole banking

d)

Closure of IR

30.09.2011

Closed within stipulated time

i) Industry Rating as per RMD circular 85/2012


Plywood industry is not mentioned in the above circular , hence it is considered -NeutralPage | 84

Present Proposal
Present proposal is for renewal of FB working capital limit of Rs. 12.00 Cr, NFB limit of
Rs. 25.00 Cr.
DGM (Br) has stated the company has requested for enhancement of FBWC limit from Rs.12.00
Crore to Rs.21.00 Crore and NFBWC limit from Rs.25.00 Crore to Rs.35.00 Crore, vide its letter
dtd. 08.11.2012. Looking into couple of devolvement of LCs, DGM (Br) has proposed for
renewal of the limits.

Justification for working capital sanction


The firm has estimated turnover of Rs.82.00 Crore in FY2012-13, with a growth of 27.63% over
previous year. The existing WC limit shall continue.
Inventory and receivable holding levels:
Particulars

Raw Materials
Indigenous
(Period
months)

31.03.12

31.03.2012

31.03.2013

31.03.2013

Estimated

Actual

Projected

Accepted

17.00

5.27

6.50

6.50

(3.85)

(3.76)

(3.59)

(3.59)

10.47

12.25

12.25

(6.41)

(6.41)

(6.41)

12.00

12.05

15.50

15.50

(2.54)

(2.74)

(2.75)

(2.75)

0.20

0.22

0.22

(3.84)

(3.77)

(3.77)

18.82

21.80

21.80

in

Raw Materials
Imported
(Period
months)

in

Finished Goods
(Period
months)

in

Consumables
(Period
months)
Receivables

in
18.00

Page | 85

(Period
months)

in

Sundry Creditors

Other
assets

Current

(3.32)

(3.52)

(3.19)

(3.19)

5.46

24.92

31.00

31.00

(5.51)

(5.64)

(5.64)

4.95

5.13

5.13

2.73

DGM (Br) has further furnished the following details:Raw material:


Timber is the main raw material of the firm, which the firm imports from abroad and consumes
from domestic market as well.
During FY11-12, the firm has purchased approx. 48% of total purchase from domestic market
and rest 52% imported from other countries. Holding period of raw material (indigenous) was in
FY11-12 (3.76 months), which has been estimated to the level of be at the level of 3.59 months
for FY12-13, which is in line with the existing level.
Holding level of imported raw material was 6.41 months in FY11-12 and the same has been
estimated to the level of 6.39 months in FY12-13, which is almost in line with the existing trend
and hence acceptable.
Finished goods: Holding of finished goods has been estimated at 2.75 months for FY12-13,
which is in line with the previous level of 2.74 months in FY11-12 and hence acceptable.
Receivables: The level of receivables has been estimated at average 3.19 months for FY12-13
against 3.52 months for FY11-12. Estimated holding level is reasonable and acceptable.
Sundry Creditors: Sundry creditor level has been estimated at 5.64 months for FY12-13 against
5.51 months in FY11-12.
Other Current Assets: Other current assets of Rs 5.13 Crore are inclusive of cash in hand/ bank
and advance to the suppliers etc.
Page | 86

i)

Assessment of Fund Based Working Capital Limits:

Item

Current
Years Accepted
Estimates 2012-13 assessment year

for

2012-13
Chargeable current assets

56.27

56.27

Other current assets

5.13

5.13

Total current assets

61.40

61.40

Other current liabilities

33.32

33.32

Working capital gap

28.08

28.08

Net Working Capital at 25% of Total Current Assets


less Export Receivables

15.35

15.35

Projected net working capital

16.08

16.08

Permissible bank finance

12.73

12.73

Permissible bank finance

12.00

12.00

Justification for Non Fund based limits


The borrowing firm is now directly importing raw material from reputed suppliers in abroad
through LC, which will make costing of the goods cheaper, and the quality of the goods/raw
materials can be maintained better. Usance period of LC shall be 180 days.
LC requirement of the firm is computed as under:
[Rs. in crs]
Particulars

Unit

Details

Rs. Crore

44.75

%age

90%

Annual Purchase under LC

Rs. Crore

40.27

Monthly Purchase (A)

Rs. Crore

3.35

Lead Time

Months

1.25

Usance Period

Months

6.0

Annual Purchase of Raw materials


Purchase under LC

Page | 87

Total Time (B)

Months

7.25

LC required (A X B)

Rs. Crore

24.29

LC requested

Rs. Crore

25.00

No enhancement in the present limit has been recommended by DGM (Br). As such the existing
limit is being renewed.

The sales performance of the company and the projected sales are as follows:(Rs. in Crore)
31.03.10

31.03.11

Audited

Audited

Estimated

Audited

Estimated

Gross Sales

31.29

44.00

65.00

64.25

82.00

- Domestic

31.29

44.00

65.00

64.25

82.00

- Export

40.62

47.73

46.02

27.63

% growth *

31.03.12

Estimated
for the
current
year (say
31.3.13)

The company has registered sales growth of 46.02%. Against the estimated sales of 65.00 Cr, the
company has achieved sales of 64.25 Cr. The projected sales for the financial year ending
31.03.2013 is 82.00 cr. The company has achieved sales of 48.00 Cr up to December 2012
quarter. The proposed limit of 12.00 Cr for the projected sales is justified.

Strengths & Weakness


Strength
The promoters have considerable experience in manufacturing and trading of plywood
products for a period of 10 years and have total industry exposure of about 20 years.
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The unit is advantageously located with availability of power, water, labour etc.
Moreover units/Business houses/Distributors who are consuming the finished goods of
Diamond Timber Industries are located within comfortable distance.
The products of the firm already have a premium share in the market. Considering the
growth in real-estate, demand of plywood in domestic market will increase in the near
future. The company being already established will have no problems in increasing its
market share.

Weaknesses
Better quality of raw materials is not available in the domestic market.
Mitigating Factor: The firm imports quality raw materials from Malaysia, Dubai,
Singapore etc. and other foreign countries.

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Chapter 5
Conclusion & Suggestion

Suggestions
1. Bank should ask for Personal guarantee for credit enhancement as it creates a moral
binding on the borrower. Hence it mitigates the risk of default by failure on repayment
will lead to bad name of the promoter in the market and will have a spiral effect.

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2. Credit rating of the company is done on subjective parameters and every person has its own
point of view regarding these parameters and hence rating can differ. Therefore, there is a
need to standardize the norms to minimize human bias.
3. Utilization of Funds
Major portion of Bank finance consist of short term credit to meet working capital requirements. It is
therefore, necessary that it is utilized for acquiring inventories, to finance receivables etc. But it has
been observed from the balance sheet of various companies that fund raised (including bank
Finance) to meet short term needs are diverted towards other requirements.

Post loan sanction, monitoring should be done.


4. Land acquisition should be 100% before the actual starting of the project.
5. The EPC should be selected on competitive basis.
6. The EPC contractor should have a equity as it will help in maintain the quality of the work as well as
timely completion of it.

Conclusion
Case (A)
PNB has well researched and well defined credit appraisal systems which have been
experimented over its standing of 116 years in the industry, however in order to increase the
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efficiency and faster decision making on credit on credit matters, bank may conclude the
following action.
The upcoming port in the next three years to become functional will definitely increase the traffic
on the highway which will also increase the toll collection.
Based upon the financial background of the company and the positive output of TEV study we
recommend disbursing the following term loan to the company.
It might be possible that the company is able to repay the loan before its scheduled repayment
period.

Case (B)
Working capital can be sanctioned to the company. As the companys financial position seems
satisfactory.
Projected sales of the company justify the renewal of the present WC limit as the company
imports its raw material. The requirement for NFB limit of 25 crores is justified on the basis of
projection and calculation given in report.

BIBLIOGRAPHY

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WEBSITES

http://en.wikipedia.org/wiki/Punjab_National_Bank

rbi.org.in

http://www.dogpile.com/dogpile_other/ws/index?_IceUrl=trueDBOD/ RBI/ECGC/FEMA
notification/policies

http:// en.wikipedia.org/wiki/credit appraisal

http:// en.wikipedia.org/wiki/working capital

http://www.crisil.com/Ratings/RatingList/RatingDocs/megha-technicalengineers_02feb10.html

http://www.bankingindiaupdate.com/creditrisk.html

http://www.bizresearchpapers.com/Kesseven.pdf

http://www.investopedia.com

BOOKS, PUBLICATIONS & MAGAZINES

Book of Instruction on Loan Accounts PNB, Internal Circulation.

Project Appraisal by Prasanna Chandra.

PNB Annual Report 2012-13.

Internal Files of PNB.

PNB Monthly Review.

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