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STUDY ON CORPORATE LOANS IN UNION BANK

OF INDIA

EXECUTIVE SUMMARY
This project was undertaken at the Union Bank of India (INDUSTRIAL FINANCE
BRANCH) Office Delhi, at the Credit Department. 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

b. Term loans for corporate projects


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. A

knowledge-base is required

regarding the design of contractual arrangements to support project financing; issues


for the host government legislative provisions, public/private infrastructure
partnerships, public/private financing structures; credit requirements of lenders, and
how to determine the project's borrowing capacity; how to analyze cash flow
projections and use them to measure expected rates of return; tax and accounting
considerations; and analytical techniques to validate the project's feasibility
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 concept of Credit Management is undergoing radical
changes. Credit Risk in all exposures calls for precise measuring and monitoring for
taking considered credit decisions with suitable risk factor, risk premium, etc. Credit
portfolio should be well diversified in various promising sectors with a cautious
approach to be adopted in risky segments.

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STUDY ON CORPORATE LOANS IN UNION BANK


OF INDIA

CHAPTER 1

INTRODUCTION

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INTRODUCTION TO THE PROJECT


The project undertaken is credit appraisal of industrial finance for corporate loans..
The credit appraisal for corporate projects starts with understanding the need of loan
to the borrower i.e. for which purpose the loan is required. After this next step is to
analyse the financial statement of the company to whom the loan is to be sanctioned.
The main things which are taken into consideration while analyzing the financial
statement are type of statement, nature of activity ,accounting policy, qualities of
assets and liabilities , unit wise performance result of the company & directors report.
After analyzing the financial statement the second step is to study the principle given
by Basel committee on banking supervision which basically Indian banks have to be
followed as per the order by Reserve Bank of India. The third step is to analyse the
key financial ratios of the company such as: Leverage ratio, liquidity ratio,
profitability ratio, turnover ratio, inventory norms., credit rating methodology differ
from bank to bank in term of the weight age given to the parameters but the parameter
used by the banks to assess credit worthiness are almost same to all company.
The report is divided into different parts that includesChapter1-

Introduction

contains

the

background,

achievements,

objectives,

developments & financial profile, and SWOT analysis of the Union Bank of India.
Chapter 2- Theoretical framework of the study contains concepts of Working Capital
and criteria for credit rating.
Chapter 3- Research methodology and design contains type of the data collected,
design adopted, scope, objectives and limitations of the study.
Chapter 4- Data analysis & Interpretation contains the analysis and interpretation of
the financial balance sheets and its financial indicators to evaluate credit rating.
Chapter 5- Major findings & Discussions contains examination of the working capital
and ratios interpreted.

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Chapter 6- Recommendations and Conclusions contains the suggestions for the


companys improvements in the fields where needed.
INDUSTRY PROFILE
The last decade has seen many positive developments in the Indian banking sector.
The growth in the Indian Banking Industry has been more qualitative than quantitative
and it is expected to remain the same in the coming years. Based on the projections
made in the "India Vision 2020" prepared by the Planning Commission, the report
forecasts that the pace of expansion in the balance-sheets of banks is likely to
decelerate. The total assets of all scheduled commercial banks by end-March 2010 is
estimated at Rs 40,90,000 crores. That will comprise about 65 per cent of GDP at
current market prices as compared to 67 per cent in 2002-03. Bank assets are expected
to grow at an annual composite rate of 13.4 per cent during the rest of the decade as
against the growth rate of 16.7 per cent that existed between 1994-95 and 2002-03. It
is expected that there will be large additions to the capital base and reserves on the
liability side.
The Indian Banking Industry can be categorized into non-scheduled banks and
scheduled banks. Scheduled banks constitute of commercial banks and co-operative
banks. There are about 67,000 branches of Scheduled banks spread across India. As
far as the present scenario is concerned the Banking Industry in India is going through
a transitional phase.
The Public Sector Banks (PSBs), which are the base of the Banking sector in India
account for more than 78 per cent of the total banking industry assets. Unfortunately
they are burdened with excessive Non Performing assets (NPAs), massive manpower
and lack of modern technology. On the other hand the Private Sector Banks are
making tremendous progress. They are leaders in Internet banking, mobile banking,
phone banking, ATMs. As far as foreign banks are concerned they are likely to
succeed in the Indian Banking Industry.

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Currently, banking in India is generally fairly mature in terms of supply, product


range and reach-even though reaching rural India still remains a challenge for the
private sector and foreign banks. In terms of quality of assets and capital adequacy,
Indian banks are considered to have clean, strong and transparent balance sheets
relative to other banks in comparable economies in its region. The Reserve Bank of
India is an autonomous body, with minimal pressure from the government. The stated
policy of the Bank on the Indian Rupee is to manage volatility but without any fixed
exchange rate-and this has mostly been true.
With the growth in the Indian economy expected to be strong for quite some timeespecially in its services sector-the demand for banking services, especially retail
banking, mortgages and investment services are expected to be strong. One may also
expect Mergers &Acquisitions, takeovers, and asset sales.

In March 2006, the Reserve Bank of India allowed Warburg Pincus to increase its
stake in Kotak Mahindra Bank (a private sector bank) to 10%. This is the first time an
investor has been allowed to hold more than 5% in a private sector bank since the RBI
announced norms in 2005 that any stake exceeding 5% in the private sector banks
would need

to

be

vetted by

them.

Currently, India has 88 scheduled commercial banks (SCBs) - 28 public sector banks
(that is with the Government of India holding a stake), 29 private banks (these do not
have government stake; they may be publicly listed and traded on stock exchanges)
and 31 foreign banks. They have a combined network of over 53,000 branches and
17,000 ATMs. According to a report by ICRA Limited, a rating agency, the public
sector banks hold over 75 percent of total assets of the banking industry, with the
private and foreign banks holding 18.2% and 6.5% respectively.
The policy makers, which comprise the Reserve Bank of India (RBI), Ministry of
Finance and related government and financial sector regulatory entities, have made

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several notable efforts to improve regulation in the sector. The sector now compares
favorably with banking sectors in the region on metrics like growth, profitability and
non-performing assets (NPAs). Indian banks have compared favorably on growth,
asset quality and profitability with other regional banks over the last few years.
The banking index has grown at a compounded annual rate of over 51 per cent since
April 2001 as compared to a 27 per cent growth in the market index for the same
period. The interplay between policy and regulatory interventions and management
strategies will determine the performance of Indian banking over the next few years.
Management success will be determined on three fronts:
i.

Fundamentally upgrading organizational capability to stay in tune with the


changing market

ii.

Adopting value-creating M&A as an avenue for growth

iii.

Continually innovating to develop new business models to access untapped


opportunities

Opportunities and Challenges for the Players


The bar for what it means to be a successful player in the sector has been raised. Four
challenges must be addressed before success can be achieved.
i.

The market is seeing discontinuous growth driven by new products and


services that include opportunities in credit cards, consumer finance and
wealth management on the retail side, and in fee-based income and investment
banking on the wholesale banking side. These require new skills in sales &
marketing, credit and operations

ii.

Banks will no longer enjoy windfall treasury gains that the decade-long
secular decline in interest rates provided

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iii.

With increased interest in India, competition from foreign banks will only
intensify

iv.

Given the demographic shifts resulting from changes in age profile and
household income, consumers will increasingly demand enhanced institutional
capabilities and service levels from banks
COMPANY PROFILE

Union Bank of India, a public sector bank was incorporated in 1919.After the
inauguration by father of the nation Mahatma Gandhi bank has travelled a long
successful journey of 88 yrs of banking. Union Bank of India is committed to
maintain its identity as a leading innovative commercial Bank, alive to the changing
needs of the society. Union Bank has offered vast and varied services to its clientele
taking care of their needs. Today, with its efficient customer service, consistent
profitability & growth, adoption of new technologies and value added services, Union
Bank truly lives up to the image of, GOOD PEOPLE TO BANK WITH.
The key business areas of the bank are retail banking, international banking, corporate
banking & treasury. As Retail banking is growing very fast in Indian banking industry
union bank of India is also showing strong growth in this sector. The bank provide
housing, retailing trade, automobile, consumer, education and other personal loans
and deposits services such as fixed, saving and demand deposits for the valuable
clients. The bank has increased foreign exchange turnover from 361.02 bn in 2004-05
to408.94 bn in 2006-07 with annual growth rate of 13.27%. The corporate banking
sector offers various loan and free based products and services to its small and
medium enterprises, agriculture sector.
To boost SME Segment the bank has set up separate SME cells .the total employee
strength of bank are 25,421.Union bank of India is targeting a 25% growth in its SME
portfolio. The bank SME portfolio in 2005-06 was 6,839 crore and its target in 200607 is 8,540 crore. Union bank of India has made an agreement with SIDBI to provide
loan to SMEs. The bank is converting 32 small scale industry branches to SME

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branches. Union bank of India and SIDBI are also in the process of putting up
marketing teams in 15 centers for identifying and appraising SMEs units and lending
them. Union bank of India has a network of more than 2200 branches all over India.
The Bank came out with its Initial Public Offer (IPO) in August 20, 2002 and
government of India holds 55.4% of the bank followed by FII 19.9% & Indian public
hold14.8% of the bank.
At the end of September 2011 the Bank achieved total business level of Rs.3,42,856
crore (Rupees Three Lakh Forty two thousand Eight hundred fifty six crore)
The Bank has over the years earned the reputation of being a techno-savvy Bank and
is one of the front runners amongst public sector bank in the field of technology. It is
one of the pioneer public sector banks, which launched Core Banking Solution in
2002. Online Tele banking facility is available to all its Core Banking customers. The
multi facility versatile Internet Banking Solution provides extensive information in
addition to the on line transaction facility to both individuals and corporate banking
with the Core Banking branches of the Bank. In addition to regular banking facilities,
today customer can also avail variety of value added services like cash management
service, insurance, mutual funds, Demat from the Bank.
The Vision Statement
To become the bank of first choice in our chosen area by building beneficial and
lasting relationship with the customers through a process of continuous process.
The Mission Statement
A logical extension of the Vision Statement is the Mission of the Bank, which is to
gain market recognition in the chosen areas.
To build a sizeable market shares in each of the chosen areas of business through
effective strategies in terms of pricing, product packaging and promoting the
product in the market.

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To facilitate a process of restructuring of branches to support a greater efficiency


in the retail banking field.
To sustain the mission objective through harnessing technology driven banking
and delivery channels.
To promote confidence and commitment among the staff members, to address the

expectations of the customers efficiently and handle technology banking with


ease.

ORGANISATIONAL STRUCTURE OF UBI

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Union Bank of India

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CHAPTER 2

THEORITICAL FRAMEWORK
ASSESSMENT OF FUNDS

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I.

WORKING CAPITAL AND ITS 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,
equipments, vehicles etc and also to run the business i.e. its day to day operations.
Working capital is defined, as the funds required for carrying the required levels of
current assets to enable the unit to carry on its operations at the expected levels
uninterruptedly. Thus working capital required (WCR) is dependent on
i.

The volume of activity (viz. level of operations i.e. Production and Sales)

ii.

The activity carried on viz. manufacturing process, product, production


programmed, and the materials and marketing mix.

The purpose of assessing the WC requirement of the industry is to determine how the
total requirements of funds will be met. The two sources for meeting these
requirements are the units long-term sources (like capital and long term borrowings)
and the short-term borrowings from banks. The long-term resources available to the
unit are called the liquid surplus or Net Working Capital (NWC).
It can be explained by visualizing the process of setting up of industry. The units
starts with a certain amount of capital, which will not normally be sufficient, even to
meet the cost of fixed assets. The unit, therefore, arranges for a long-term loan from a
financial institution or a bank towards a part of the cost of fixed assets. From these
two sources after meeting the cost of fixed assets some funds remain to be used for
working capital. This amount is the Net Working Capital or Liquid Surplus and will
be one of the sources of meeting the working capital requirements.
The remaining funds for working capital have to be raised from banks; banks
normally provide working capital finance by way of advantage against stocks and
sundry debtors. Banks, however, do not finance the full amount of funds required for
carrying inventories and receivables: and normally insist on the stake of the enterprise
at every stage, by way of margins.

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Bank finance is normally restricted to the amount of funds locked up less a certain
percentage of margins. Margins are imposed with a view to have adequate stake of the
promoter in the business both to ensure his adequate interest in the business and to act
as a protection against any shocks that the business may sustain. The margins
stipulated will depend on various factors like salability, quality, durability, price
fluctuations in the market for the commodity etc. taking into account the total working
capital requirements as assessed earlier, the permissible limit, up to which the bank
finance cab be granted is arrived. While granting working capital advances to a unit, it
will be necessary to ensure that a reasonable proportion of the working capital is met
from the long-term sources viz. liquid surplus. Normally, liquid surplus or net
working capital be at least 25% of the working capital requirement (corresponding to
the benchmark current ratio of 1.33), though this may vary depending on the nature of
industry/ trade and business conditions.
Various methods for assessment of Working Capital are discussed in detail:
1. Operating cycle method:
Any manufacturing activity is characterized by a cycle of operations consisting of
purchase of raw materials for cash, converting them into finished goods and realizing
cash by sale of these finished goods. The time that lapses between cash outlay and
cash realization by sale of finished goods and realization of sundry debtors is known
as length of operating cycle. That is, the operating cycle consists of:
i.

Time taken to acquire raw materials and average period for which they
are in store.

ii.

Conversion process time

iii.

Average period for which finished goods are in store and

iv.

Average collection period of receivables (sundry debtors).

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Operating Cycle is also called cash-to-cash and indicates how cash is converted into
raw materials, stocks in process, finished goods, bills (receivables) and finally backs
to cash. Working capital is the total cash that is circulating in this cycle. Therefore,
working capital can be turned over or deployed after completing the cycle. Factors,
which influence working capital requirement, are Level of operating expenses and
Length of operating cycle.
Any reduction in either of the both will mean reduction in working capital
requirement or indicate an efficient working capital management.
It can thus be concluded that by improving that by improving the working capital
turnover ratio (i.e. by reducing the length of operating cycle) a better management
(utilization) of working capital results. It is obvious that any reduction in the length of
the operating cycle can be achieved only by better management only by better
management of one or more of the individual phases of the operating cycle period for
which raw materials are in store, conversion process time, period for which finished
goods are in store and collection period of receivables. Looking at whole problem
from another angle, we find that we can set up extremely clear guidelines for working
capital management viz. examining the length of each of the phases of the operating
cycle to assess the scope for reduction in one or more of these phases.
The length of the operating cycle is different from industry to industry and from one
firm to another within the same industry. For instance, the operating cycle of a
pharmaceutical unit would be quite different from one engaged in the manufacture of
machine tools. The operating cycle concept enables to assess working capital need of
each enterprise keeping in view the peculiarities of the industry it is engaged in and its
scale of operations. Operating cycle is an important management tool in decision
making.

FUND

RM

SIP

RECEIVABLES

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2. Traditional method of assessment of working capital requirement


The operating cycle concept serves to identify the areas requiring improvement for the
purpose of control and performance review. But, as bankers, we require a more
detailed analysis to assess the various components of working capital requirement
viz., finance for stocks, bills etc.
Bankers provide working capital finance for holding an acceptable level of current
assets viz. raw materials, stock-in-process, finished goods and sundry debtors for
achieving a predetermined level of production and sales. Quantification of these funds
required to be blocked in each of these items of current assets at any time will,
therefore provide a measure of the working capital requirement of an industry.

Raw material: Any industrial unit has to necessarily stock a minimum quantum of
materials used in its production to ensure uninterrupted production. Factors, which
affect or influence the funds requirement for holding raw material, are:
i.

Average consumption of raw materials.

ii.

Their availability locally or form places outside, easy availability /


scarcity, number of sources of supply

iii.

Time taken to procure raw materials (procurement time or lead time)

iv.

Imported or indigenous.

v.

Minimum quantity supplied by the market (Minimum Order Quantity


(MOQ)).

vi.

Cost of holding stocks (e.g. insurance, storage, interest)

vii.

Criticality of the item.

viii.

Transport and other charges (Economic Order Quantity (EOQ)).

ix.

Availability on credit or against advance payment in cash.

x.

Seasonality of the materials.

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Stock in process: Barring a few exceptional types of industries, when the raw
material get converted into finished products within few hours, there is normally a
time lag or delay or period of processing only after which the raw materials get
converted into finished product. During this period of processing, the raw materials
get converted into finished goods and expenses are being incurred.
The period of processing may vary from a few hours to a number of months and unit
will be blocked working funds in the stock-in-process during this period. Such funds
blocked in SIP depend on:
i. The processing time
ii. Number of products handled at a time in the process
iii. Average quantities of each product, processed at each time (batch
quantity)
iv. The process technology
v. Number of shifts.

Finished goods: All products manufactured by an industry are not sold immediately.
It will be necessary to stock certain amount of goods pending sale. This stock depends
on:
i.

Whether the manufacture is against firm order or against anticipated


order

ii.

Supply terms

iii.

Minimum quantity that can be dispatched

iv.

Transport availability and transport cost

v.

Pre-dispatch inspection

vi.

Seasonality of goods

vii.

Variation in demand

viii.

Peak level/ low level of operations

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ix.

Marketing arrangement- e.g. direct sale to consumers or through


dealers/ wholesalers.

Sundry debtors (receivables): Sales may be affected under three different methods:
i.Against advance payment
ii.Against cash
iii.On credit
iv.
A unit grants trade credit because it expects this investment to be profitable. It would
be in the form of sales expansion and fresh customers or it could be in the form of
retention of existing customers. The extent of credit given by the industry normally
depends upon:
i.

Trade practices

ii.

Market conditions

iii.

Whether it is bulky by the buyer

iv.

Seasonality

v.

Price advantage
Even in cases where no credit is extended to buyers, the transit time for the goods to
reach the buyer may take some time and till the cash is received back, the unit will
have to be cut out of funds. The period from the time of sale to receipt of funds will
have to be reckoned for the purpose of quantifying the funds blocked in sundry
debtors. Even though the amount of sundry debtors according to the units books will
be on the basis of Sale Price, the actual amount blocked will be only the cost of
production of the materials against which credit has been extended- the difference
being the units profit margin- (which the unit does not obviously have to spend). The
working capital requirement against Sundry Debtors will therefore be computed on
the basis of cost of production (whereas the permissible bank finance will be
computed on basis of sale value since profit margin varies from product to product

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and buyer to buyer and cannot be uniformly segregated from the sale value).The
working capital requirement is expressed as so many months cost of production.

Expenses: It is customary in assessing the working capital requirement of industries,


to provide for 1 months expenses also. A question might be raised as to why expenses
should be taken separately, whereas at every stage the funds required to be blocked
had been taken into account. This amount is provided merely as a cushion, to take
care of temporary bottlenecks and to enable the unit to meet expenses when they fall
due. Normally 1-month total expenses, direct and indirect, salaries etc. are taken into
account. While computing the working capital requirements of a unit, it will be
necessary to take into account 2 other factors,
i.

Is the credit received on purchases- trade credit is a normal


practice in trading circles. The period of such credit received varies
from place to place, material to material and person to person. The
amount of credit received on purchases reduces the working capital
funds required by the unit.

ii.

Industries often receive advance against orders placed for their


products. The buyers, in certain cases, have to necessarily give advance
to producers e.g. custom made machinery. Such funds are used for the
working capital of an industry. It can be thus summarized as follows:

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Raw materials

Months requirement

Rs. A

Stock-in-process

Months (cost of Production)

Rs. B

Finished Goods

Months cost of Production required to


be stocked

Rs. C

Sundry Debtors

Months cost of Production (o/s


credits)

Rs. D

Expenses

One month(normally)

Rs. E

Total Current Assets

A+B+C+D+E

Credit received on
Purchases (months
Purchase value)

Rs. F

Advance payment
on order received

Rs. G

WORKING CAPITAL REQUIRED (H) = (A+B+C+D+E)- (F+G)

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3. Projected Annual Turnover Method for SME units (Nayak Committee)


For SME units, which enjoy fund based working capital limits up to Rs.5 crore, the
minimum working capital limit should be fixed on the basis of projected annual
turnover. 25% of the output or annual turnover value should be computed as the
quantum of working capital required by such unit.
The unit should be required to bring in 5% of their annual turnover as margin money
and the Bank shall provide 20% of the turnover as working capital finance. Nayak
committee guidelines correspond to working capital limits as per the operating cycle
method where the average production/ processing cycle is taken to be 3 months.
Example:
Anticipated Annual Output (A)

120

Working Capital Requirement: 25% of A (B)

30

Margin : 5% of A (C)

Maximum Permissible Bank Finance (B-C)

24
In Rs lacs

Important clarifications:

i.

The assessment of WC limits should be done both as per Projected Turnover


Method and Traditional Method; the higher of the two is to be sanctioned as
credit limit. If the operating cycle is more than 3 months, there is no restriction
on extending finance at more than 20% of the turnover provided that the
borrower should bring n proportionally higher stake in relation to his
requirements of bank finance.

ii.

While the approach of extending need based credit will be kept in mind, the
financial strengths of the unit is also important, the later aspect assumes
greater significance so as to take care of quality of banks assets. The margin
requirement, as a general rule, should not be diluted.

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4. MPBF Method (Tandon and Chore Committee Recommendations)

The Tandon Committee was appointed to suggest a method for assessing the working
capital requirements and the quantum of bank finance. Since at that time, there was
scarcity of banks resources, the Committee was also asked to suggest norms for
carrying current assets in different industries so that bank finance was not drawn more
than the minimum required level. The Committee was also asked to devise an
information system that would provide, periodically, operational data, business
forecasts, production plan and resultant credit needs of units. Chore Committee,
which was appointed later, further refined the approach to working capital assessment.
The MPBF method is the fall out of the recommendations made by Tandon and Chore
Committee. Regarding approach to lending: the committee suggested three methods
for assessment of working capital requirements.

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i.

First Method of lending: According to this method, Banks would finance up to a


max. of 75% of the working capital gap (WCG= the total current assets - current
liabilities other than bank borrowing) and the balance 25 % of the WCG considered
as margin is to come out of long term source i.e. owned funds and term borrowings.
This will give rise to a minimum current ratio of 1.17:1. The difference of (1.17-1)
represents the borrowers margin which is popularly known as Net Working Capital
(NWC) of the unit
Second Method of lending: As per the 2nd method Bank will finance maximum up to

ii.

75% of total current assets (TCA) & Borrowers has to provide a minimum of 25% of
total current assets as the margin out of long term sources. This will give a minimum
current ratio of 1.33:1
iii.

Third Method of lending: Same as 2nd method, but excluding core current assets
from total assets and the core current assets is financed out of long term funds. The
term core current assets refers to the absolute minimum level of investment in
current assets, which is required at all times to carry out minimum level of business
activity. The current ratio is further improved i.e. 1.79: 1

Example:
Current Liabilities

Current assets

Creditors for purchase


100 Raw material
First method of
Second method of
Third method of
lending
Other currentlending
liability
50 lending
Stock in process
Total CA

370 Total CA
Bank borrowings

Less: CL
Bank
Borrowing

Less: 25% of
150
CA
Total Current Liabilities

Working
Capital Gap
25% of WCG
from long
term sources
MPBF

Less: CL 220 Bank


Borrowing

90

Receivables
Less: core
92
95
CA
from
LT assets
Other
current

50

350 Total Current Assets


275

370

1.17: 1

Current ratio

10

(In Rs lacs)

Calculating
Less:
NWC
25%
150
from LTS

69

Less: CL
Bank
Borrowing

150

128 MPBF

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Current ratio

20

370
CA goods 370
200 Total
Finished

55
165 MPBF

200

1.33: 1

Current ratio

56
1.79: 1

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The above example shows that the contribution of margin by the borrower increases
when financing is shifted from First method to Second method which is known to be
stringent from borrower point of view (Third method was not accepted by RBI).
5. Projected Balance Sheet Method (PBS)
The PBS method of assessment will be applicable to all borrowers who are engaged in
manufacturing, services and trading activities who require fund based working capital
finance of Rs. 25 lacs and above. In case of SSI borrowers, who require working
capital credit limit up to Rs. 5 cr, the limit shall be computed on the basis of Nayak
Committee formula as well as that based on production and operating cycle of the unit
and the higher of the two may be sanctioned.. The assessment will be based on the
borrowers projected balance sheet, the funds flow planned for current/ next year and
examination of the profitability, financial parameters etc. unlike the MPBF method, it
will not be necessary in this method to fix or compute the working capital finance on
the basis of a stipulated minimum level of liquidity (Current Ratio). The working
capital requirement worked out is based on the following:
i.

CMA assessment method is continued with certain modifications.

ii.

Analysis of the Profit and Loss account, Balance Sheet, Funds flow etc.
for the past periods is done to examine the profitability, financial position,
and financial management etc of the business.

iii.

Scrutiny and validation of the projected income and expenses in the


business and projected changes in the financial position (sources and uses
of funds). This is carried out to examine whether these parameters are
acceptable from the angle of liquidity, overall gearing, efficiency of
operations etc. In the PBS method, the borrowers total business
operations, financial position, management capabilities etc. are analysed
in detail to assess the working capital finance required and to evaluate the
overall risk. The assessment procedure is as follows:

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i.

Collection of financial information from the borrower

ii.

Classification of current assets / current liabilities

iii.

Verification of projected levels of inventory/ receivables/ sundry creditors

iv.

Evaluation of liquidity in the business operation

v.

Validation of bank finance sought

II. ASSESSMENT OF TERM LOANS

Term Loans are generally granted to finance capital expenditure, i.e. for acquisition of
land, building and plant and machinery, required for setting up a new industrial
undertaking or expansion/diversification of an existing one and also for acquisition of
movable fixed assets. Term Loans are also given for modernization, renovation, etc.
to improve the product quality or increase the productivity and profitability.
The basic difference between short-term facilities and term loans is that short-term
facilities are granted to meet the gap in the working capital and are intended to be
liquidated by realization of assets, whereas term loans are given for acquisition of
fixed assets and have to be liquidated from the surplus cash generated out of earnings.
They are not intended to be paid out of the sale of the fixed assets given as security
for the loan. This makes it necessary to adopt a different approach in examining the
application of the borrowers for term credits.For the assessment to Term Loan Techno
Economic Feasibility Study is done. The success of a feasibility study is based on the
careful identification and assessment of all of the important issues for business
success. A detailed Project Report is submitted by an entrepreneur, prepared by a
approved agency or a consultancy organization. Such report provides in-depth details
of the project requesting finance. It includes the technical aspects, Managerial Aspect,
the Market Condition and Projected performance of the company. It is necessary for
the appraising officer to cross check the information provided in the report for

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determining the worthiness of the project. The feasibility study is a part of Credit
Appraisal process and the same is discussed in the later chapter.

BASEL ACCORD & RISK MANAGEMENT


The Basel accord/accords refer to the banking supervision accords namely Basel I and
Basel II issued by the Basel Committee on Banking Supervision (BCBS).

BASEL I ACCORD

The 1988 Basel Accord primarily addressed banking in the sense of deposit taking
and lending. The main focus was Credit Risk. It described the strength of the Bank as
measured by the Capital employed. Accordingly it put a minimum level of capital
adequacy (Capital to Credit Risk Weighted Assets ratio) at 8%. Basel I allocated 4 risk
weights i.e. 0%, 20, 50% and 100% to different exposure types, based on the risk
perceived on the exposure types under the credit portfolio. Basel I provided a set
norm for capital allocation which helped many banks to allocate capital to counter the
risks faced by them.

CRAR

Capital

Risk Weighted Assets (Credit Risk+ Market Risk +Operational Risk)

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Paid Up Equity Capital + Statutory Reserves + Other disclosed

Tier I
Capital

free reserves + Capital Reserves representing surplus arising out


of sale proceeds of Assets + Innovative Perpetual Debt
instruments

CAPITAL

Tier II
Capital

Revaluation Reserves (at a discount of 55%) + General Provisions


and Loss Reserves + Subordinated Debt +

Hybrid Debt Capital

Instruments

Risk Weighted Assets

Basel I introduced the concept of Risk Weighted Assets (RWA). All the assets of a
bank (advances, investments, fixed assets etc.) carry certain amount of risk. In
proportion to the quantum of this risk, bank must maintain capital. Quantification of
risk is done in percentage (0%, 20%, 50% etc.). Exposure when multiplied with these
percentages gives risk based value of assets. These assets are also called Risk
Weighted Assets (RWA).

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BASEL II ACCORD

Banking has changed dramatically since the Basel I document of 1988. Advances in
risk management and the increasing complexity of financial activities / instruments
prompted international supervisors to review the appropriateness of regulatory capital
standards under Basel I. To meet this requirement, the Basel I accord was amended
and refined which came out as the Basel II document. The Basel II document is
structured into three parts. Each part is called as a pillar. Thus these three parts
constitute three pillars of Basel II.

PILLA
RI

This pillar is compatible with the credit risk, market risk and
operational risk. The regulatory capital will be focused on these
three risks
This pillar gives the bank responsibility to exercise the best ways

PILLA

to manage the risk specific to that bank. It also casts

R II

responsibility on the supervisors to review and validate banks


risk measurement models.

PILLA

This pillar is on market discipline is used to leverage the

R III

influence that other market players can bring

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DIFFERENCE BETWEEN
BASEL I

BASEL II

Limited role of collateral as risk


1
mitigant

Recognizes wide range of


1 Collateral & Guarantees as
risk mitigant

2 Not recognizing Operational Risk

Recognizes Operational Risk


2 and prescribes explicit
capital charge for

Risk weights assignment on


transaction basis

Not recognizing tenure or


4 remaining time to maturity of
exposures in risk assessment

Risk weight assignment on


risk rating basis

Recognizes the tenure or


remaining time to maturity
4
of exposures in risk
assessment

Provisions are through Asset


Classification.
5

Provisions are through


Expected Loss Estimation

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CREDIT APPRAISAL
Effectiveness of Credit Management in the bank is highlighted by the quality of its
loan portfolio. Every Bank is striving hard to ensure that its credit portfolio is healthy
and that Non Performing Assets are kept at lowest possible level, as both of these
factors have direct impact on its profitability. In the present scenario efficient project
appraisal has assumed a great importance as it can check and prevent induction of
weak accounts to our loan portfolio. All possible steps need to be taken to strengthen
pre sanction appraisal as always Prevention is better than Cure. With the opening up
of the economy rapid changes are taking place in the technology and financial sector
exposing banks to greater risks, which can be broadly classified as under:

Industry
Risks

Government regulations and policies, availability of


infrastructure facilities, Industry Rating, Industry Scenario &
Outlook, Technology Up gradation, availability of inputs,
product obsolescence, etc.

Business
Risks

Operating efficiency, competition faced from the units engaged


in similar products, demand and supply position, cost of labor,
cost of raw material and other inputs, pricing of product, surplus
available, marketing, etc.

Managemen
t Risks

Background, integrity and market standing/ reputation of


promoters, organizational set up and management hierarchy,
expertise/competence of persons holding key position in the
organization, delegation and decentralization of authority,
achievement of targets, track record in execution of project, debt
repayment, industry relations etc.

Financial
Risks

Financial strength/standing of the promoters, reliability and


reasonableness of projections, past financial performance,
reliability of operational data and financial ratios, adequacy of
provisioning for bad debts, qualifying
remarks of
auditors/inspectors etc.

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In light of the foregoing risks, the banks appraisal methodology should keep pace with
ever changing economic environment. The appraisal system aims to determine the
credit needs/requirements of the borrower taking into account the financial resources
of the client. The end objective of the appraisal system is to ensure that there is no
under - financing or over - financing. Following are the aspects, which need to be
scrutinized and analyzed while appraising:
MARKET ANALYSIS
(Demand & Potential)

The market demand and potential is to be examined for each product item and its
variants/substitutes by taking into account the selling price of the products to be
marketed vis-a-vis prices of the competing products/substitutes, discount structure,
arrangement made for after sale service, competitors' status and their level of
operation with regard to production and products and distribution channels being used
etc. Critical analysis is required regarding size of the market for the product(s) both
local and export, based on the present and expected future demand in relation to
supply position of similar products and availability of the other substitutes as also
consumer preferences, practices, attitudes, requirements etc. Further, the buy-back
arrangements under the foreign collaboration, if any, and influence of Government
policies also needs to be considered for projecting the demand. Competition from
imported goods, Government Import Policy and Import duty structure also need to be
evaluated.
TECHNICAL ANALYSIS

In a dynamic market, the product, its variants and the product-mix proposed to be
manufactured in terms of its quality, quantity, value, application and current
taste/trend requires thorough investigation.

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Location and Site


Based on the assessment of factors of production, markets, Govt. policies and other
factors, Location (which means the broad area) and Site (which signifies specific plot
of land) selected for the Unit with its advantages and disadvantages, if any, should be
such that overall cost is minimized. It is to be seen that site selected has adequate
availability of infrastructure facilities viz. Power, Water, Transport, Communication,
state of information technology etc. and is in agreement with the Govt. policies.
The adequacy of size of land and building for carrying out its present/proposed
activity with enough scope for accommodating future expansion needs to be judged.
Raw Material
The cost of essential/major raw materials and consumables required their past and
future price trends, quality/properties, their availability on a regular basis,
transportation charges, Govt. policies regarding regulation of supplies and prices
require to be examined in detail. Further, cost of indigenous and imported raw
material, firm arrangements for procurement of the same etc. need to be assessed.
Plant & Machinery, Plant Capacity and Manufacturing Process
The selection of Plant and Machinery proposed to be acquired whether indigenous or
imported has to be in agreement with required plant capacity, principal inputs,
investment outlay and production cost as also with the machinery and equipment
already installed in an existing unit, while for the new unit it is to be examined
whether these are of proven technology as to its performance. The technology used
should be latest and cost effective enabling the unit to compete in the market.
Purchase of reconditioned/old machinery is to be dealt in terms of laid down
guidelines. Compatibility of plant and machinery, particularly, in respect of imported
technology with quality of raw material is to be kept in view. Also plant and
machinery and other equipments needed for various utility services, their supply
position, specification, price and performance as also suppliers' credentials, and in

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case of collaboration, collaborators' present and future support requires critical


analysis. Plant capacity and the concept of economic size has a major bearing on the
present and future plans of the entrepreneur(s) and should be related to the availability
of raw material, product demand, product price and technology.
The selected process of manufacturing indicating the adequacy, availability and
suitability of technology to be used along with plant capacity, manufacturing process
needs to studied in detail with capacities at various stages of production being such
that it facilitates optimum utilization and ensures future expansion/ debottlenecking,
as and when required. It is also to be ensured that arrangements are made for
inspection at intermediate/final stages of production for ensuring quality of goods on
successful commencement of production and completion, wherever required.

FINANCIAL ANALYSIS
The aspects which need to be analyzed under this head should include cost of project,
means of financing, cost of production, break-even analysis, financial statements as
also profitability/funds flow projections, financial ratios, sensitivity analysis which
are discussed as under:
Cost of Project & Means of Financing
a. The major cost components of any project are 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. It also involves consultancy and
know-how expenses which are payable to foreign collaborators or consultants
who are imparting the technical know-how. Recurring annual royalty payment is
not reflected under this head but is accounted for under the profitability
statements. Further, preliminary expenses, such as, cost of incorporation of the
Company, its registration, preparation of feasibility report, market surveys, preoperative expenses like salary, travelling, start up expenses, mortgage expenses
incurred before commencement of commercial production also form part of cost

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of project. Also included in it are capital issue expenses which can be in the form
of brokerage, commission, advertisement, printing, stationery etc.

Finally,

provisions for contingencies to meet any unforeseen expenses, such as, price
escalation or any other expense which have been inadvertently omitted like
margin for working capital requirements required to complete the production
cycle, interest during construction period, etc. are also part of capital cost of
project. It is to be ensured while appraising the project that cost and various
estimates given are realistic and there is no under/over estimation.
b. Besides Banks loan, the project cost is normally financed by bringing capital by
the promoters and shareholders in the form of equity, debentures, unsecured long
term loans and deposits raised from friends and relatives which are not repayable
till repayment of Bank's loan. Resources are raised for financing project by
raising term loans from Institutions/Banks which are repayable over a period of
time, deferred term credits secured from suppliers of machinery which are
repayable in installments over a period of time. The above is an illustrative list,
as the promoters have now started raising funds through Euro-issues, Foreign
Currency loans, premium on capital issues, etc. which are sometimes
comparatively cheap means of finance.

Subsidies and development loans

provided by the Central/State Government in notified backward districts to attract


entrepreneurs are also means of financing a project. It is to be ascertained that
requirement of finance has been properly tied-up for unhindered implementation
of a project. The financing structure accepted must be in consonance with
generally accepted levels along with adequate Promoters' stake. The
resourcefulness, willingness and capacity of promoter to contribute the same have
also to be investigated. In case of project finance, the promoter/borrower may
bring in upfront his contribution (other than funds to be provided through internal
generation) and the branches should commence its disbursement after the
stipulated funds are brought in by the promoter/borrower. A condition to this
effect should be stipulated by the sanctioning authority in case of project finance,
on case to case basis depending upon the resourcefulness and capacity of the

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promoter to contribute the same. It should be ensured that at any point of time,
the promoters contribution should not be less than the proportionate share.
Profitability Statement
The profitability statement which is also known as `Income and Expenditure
Statement' is prepared after considering the net sales figure and details of direct
costs/expenses relating to raw material, wages, power, fuel, consumable stores/spares
and other manufacturing expenses to arrive at a figure of gross profit. Thereafter, all
other expenses like salaries, office expenses, packing, selling/distribution, interest,
depreciation and any other overhead expenses and taxes are taken into account to
arrive at the figure of net profit. The projections of profit/loss are prepared for a
period covering the repayment of term loans.

The economic appraisal includes

scrutinizing all the items of cost, and examining the assumptions, if any, to ensure that
these are realistic and achievable. There should not be any optimism or pessimism in
working out profitability projections since even a little change in the product-mix
from non-remunerative to remunerative or vice-versa can distort the picture. While
preparing profitability projections, the past trends of performance in an industry and
other environmental factors influencing the cost and revenue items should also be
considered objectively.
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.
Break-Even Analysis
Analysis of break-even point of a business enterprise would help in knowing the level
of output and sales at which the business enterprise just breaks even i.e. there is
neither profit nor loss. A business earns profit if it operates at a level higher than the
break-even level or break-even point.

If, on the other hand, production is below this

level, the business would incur loss. The break-even point in an algebraic equation
can be put as under:

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Break-even point
(Volume or Units)

Break-even point

Total Fixed Cost / (Sales price per unit - Variable Cost per
unit)

(Total Fixed Cost x Sales) / (Sales - Variable Costs)

(Sales in rupees)

The fixed costs include all those costs which tend to remain the same up to a certain
level of production while variable costs are those costs which tend to change in
proportion with the volume of production. As regards unit sales price, it is generally
the same for all levels of output.
The break-even analysis can help in making vital decisions relating to fixation of
selling price make or buy decision, maximizing production of the item giving higher
contribution etc. Further, the break-even analysis can help in understanding the impact
of important cost factors, such as, power, raw material, labor, etc. and optimizing
product-mix to improve project profitability.
Fund-Flow Statement
A fund-flow statement is often described as a Statement of Movement of Funds or
where got: where gone statement. It is derived by comparing the successive balance
sheets on two specified dates and finding out the net changes in the various items
appearing in the balance sheets.

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A critical analysis of the statement shows the various changes in sources and
applications (uses) of funds to ultimately give the position of net funds available with
the business for repayment of the loans. A projected Fund Flow Statement helps in
answering the under mentioned points.

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 problems?

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 analyze 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.

Financial Ratios
While analyzing the financial aspects of project, it would be advisable to analyze the
important financial ratios over a period of time as it may tell us a lot about a unit's
liquidity position, managements' stake in the business, capacity to service the debts
etc. The financial ratios which are considered important are discussed as under:

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Ratio

Formula

Remarks

There cannot be a rigid rule to a satisfactory


debt-equity ratio, lower the ratio higher is the
degree of protection enjoyed by the creditors.
These days the debt equity ratio of 1.5:1 is

Debt (Term Liabilities) considered reasonable. It, however, is higher in


Debt1 Equity
Ratio

respect of capital intensive projects. But it is

Equity

always desirable that owners have a substantial


stake in the project. Other features like quality

(Where, Equity = Share


capital, free reserves, premium
on shares, , etc. after adjusting
loss balance)

of management should be kept in view while


agreeing to a less favorable ratio.
highly

capital

intensive

In financing

projects

like

infrastructure, cement, etc. the ratio could be


considered at a higher level.

Debt + Depreciation +

This ratio of 1.5 to 2 is considered reasonable. A

Service

Net Profit (After

very high ratio may indicate the need for lower

Coverage

Taxes) + Annual

2 Debt-

Ratio

interest on long term


debt

moratorium period/repayment of loan in a


shorter schedule. This ratio provides a measure
of the ability of an enterprise to service its debts
i.e. `interest' and `principal repayment' besides
indicating the margin of safety. The ratio may

Annual interest on long

vary from industry to industry but has to be

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term debt + Repayment of
debt

viewed with circumspection when it is less than


1.5.

Tangible Net Worth


(Paid up Capital +
Reserves and Surplus 3 TOL
TNW
Ratio

Intangible Assets)

This ratio gives a view of borrower's


capital structure. If the ratio shows a
decreasing trend, it indicates that the

Total outside

borrower is relying more on his own

Liabilities (Total

funds and less on outside funds and vice

Liability - Net Worth)

versa

Operating Profit

Profit4 Sales

(Before Taxes

This ratio gives the margin available

excluding Income

after meeting cost of manufacturing. It

from other Sources)

provides a yardstick to measure the

Ratio

efficiency of production and margin on


sales price i.e. the pricing structure
Sales

5 Sales-

This ratio is of a primary importance to

Tangible
Assets
Ratio

see how best the assets are used.


Sales
Total Assets Intangible Assets

rising trend of the ratio reveals that


borrower has been making efficient
utilization of his assets.

However,

caution needs to be exercised when


fixed assets are old and depreciated, as
in such cases the ratio tends to be high
because the value of the denominator of

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the ratio is very low.

Higher the ratio greater the short term liquidity. This


ratio is indicative of short term financial position of a
business enterprise. It provides margin as well as it is

Current Assets

Current

measure of the business enterprise to pay-off the


current liabilities as they mature and its capacity to

Ratio

Current Liabilities

withstand sudden reverses by the strength of its liquid


position. Ratio analysis gives indications; to be made
with reference to overall tendencies and parameters in
relation to the project.

Sales

Output
7 Investment
Ratio

Total capital employed (in


fixed & current assets)

This ratio is indicative of the efficiency with which


the total capital is turned over as compared to other
units in similar lines.

Internal Rate of Return


The discount rate often used in capital budgeting that makes the net present value of
all cash flows from a particular project equal to zero. Higher a project's IRR the more
desirable it is to undertake the project. IRR should be higher than the Cost of the
project (interest rate in case of project financing)
Sensitivity Analysis
While preparing and appraising projects certain assumptions are made in respect of
certain critical/sensitive variables like selling price/cost price per unit of production,
product-mix, plant capacity utilization, sales etc. which are assigned a `VALUE' after
estimating the range of variation of such variables. The `VALUE' so assumed and

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taken into consideration for arriving at the profitability projections is the `MOST
LIKELY VALUE'.

Sensitivity Analysis is a systematic approach to reduce the

uncertainties caused by such assumptions made.


The Sensitivity Analysis helps in arriving at profitability of the project wherein
critical or sensitive elements are identified which are assigned different values and the
values assigned are both optimistic and pessimistic such as increasing or reducing the
sale price/sale volume, increasing or reducing the cost of inputs etc. and then the
project viability is ascertained. The critical variables can then be thoroughly examined
by generally selecting the pessimistic options so as to make possible improvements in
the project and make it operational on viable lines even in the adverse circumstances.

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CREDIT APPRAISAL PROCESS

Submission of Project Report along with the Request


Letter
Carrying
out Due Diligence on the Client

Feasible
Determining of Interest Rate and Preparation
of Proposal
Preparing Credit
Report / Feasibility Report and Risk Rat
Not feasible
Submission of Proposal to designated Authority
(Circle office)
Submission
of Proposal to designated Authority

Queries
Re-verification and analysis of the Proposal
Meeting with the client to clarify the queries

No Queries

Vetting of Credit Approval


Risk Rating
Report made by the client like Reduction of Interes
of request

Sanctionby
ofthe
Proposal
Acknowledgement of Sanction Terms & Condition
client on various Terms & Conditions

Application to comply with Sanction T&C. Execution


of Loan
DocumentsAmount from the branch offi
Disbursement
of Sanctioned

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Procedures at Branch
Office Level

Procedures at Circle Office


Level

LOAN POLICY OF BANK


UBIs LOAN POLICY
The Credit Management & Risk Policy of the bank at the macro level is an
embodiment of the Banks approach to understand, measure and manage the credit
risk and aims at ensuring sustained growth of healthy loan portfolio while dispensing
the credit and managing the risk. This would entail reducing exposures in high risk
areas, emphasizing more on the promising industries / productive sectors/ segments of
the economy, optimizing the return by striking balance between the risk and the return
on assets and striving towards maintaining/improving market share.
BASIC OF THE POLICY

All loan facilities considered only after obtaining loan application from the
borrower and compilation of Confidential Report on them and the guarantor. The
borrowers should have the desired background, experience/expertise to run their
business successfully

Project for which the finance is granted should be technically feasible and
economically/commercially viable i.e. it should be able to generate enough
surplus so as to service the debts within a reasonable period of time.

Cost of the project and means of financing the same should be properly assessed
and tied up. Both, under-financing and over- financing can have an adverse impact
on the successful implementation of the project.

Borrowers should be financially sound, enjoy good market reputation and must
have their stake in the business i.e. they should possess adequate liquid resources
to contribute to the margin requirements.

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Loans should be sanctioned by the competent sanctioning authority as per the


delegated loaning powers and should be disbursed only after execution of all the
required documents.

Projects financed must be closely monitored during implementation stage to avoid


time and cost overruns and thereafter till the adjustment of the bank's loan.

The policy sets out minimum or benchmark lending rate, BPLR = 11 %

The policy lays down norms for takeover of advances from other banks/ financial
institutions

As a matter of policy the bank does not take over any Non-performing Asset
(NPA) from other banks

METHODS OF LENDING
For Working Capital
i. Simplified method linked with turnover
Simplified method based on turnover for assessing working capital finance up to
Rs.2 crore (upto Rs. 5 crore in case of SSI units)
ii. MPBF System
Existing MPBF system with flexible approach shall be followed for units
requiring working capital finance exceeding the above-mentioned amount
iii. Cash Budget System
Cash Budget System shall be followed in Sugar, Tea, Service Sector and Film
Production accounts. It will be our endeavor to introduce the same selectively in
other areas also
For Term Loan

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In case of infrastructure/mega projects, proper appraisal will be made by utilizing


the services of specialized / Technical officers.
The term loans with remaining maturity period of above 5 years shall not exceed
50% of the term deposits with remaining maturity period of above 5 years after
taking into account the renewal of term deposits as per the past trend.
TYPES OF LENDING ARRANGEMENTS
Business entities can have various types of borrowings arrangements. They are:

One borrower one bank


One borrower several banks
One borrower several banks (with consortium arrangements)
One borrower several banks ( without consortium arrangements- multiple

banking )
One borrower several banks (loan syndication)
One Bank
The most familiar amongst the above for smaller loans is the one borrower one bank
arrangement. Here the borrower confines all his financial dealings with only one
bank. Sometimes, units would prefer to have banking arrangements with more than
one bank on account of the large financial requirement or the resource constraint of
his own banker or due to varying terms & conditions offered by different banks or for
sheer administrative/consortium arrangement are that exposure to an individual
customer is limited & risk is proportionate. The bank is also able to spread his
portfolio. In case of borrowing business entity, it is able to meet its fund requirement
without being constrained by the limited resource of its own banker. Besides this,
consortium arrangement enables participating banks to save manpower & resources
through common appraisal & inspection & sharing credit information.
Consortium lending
When borrowers avails loans from several banks under an arrangement among all the
lending bankers, this lends to a consortium banking lending arrangements. In
consortium lending, several banks pool banking resources & expertise in credit

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management together & finance a single borrower with a common appraisal, common
documentation & joint supervision & follow up. The bank taking the highest share of
credits will usually be the leader of consortium. There is no ceiling of banks in a
consortium.
Multiple Banking Arrangement
Multiple banking arrangement is one where rules of consortium do not apply & no
inter agreement among banks exists. The borrower avails credit facility from various
banks providing separate securities on different terms & conditions. There is no such
arrangement called multiple banking arrangements& term is used only to donate the
existence of banking arrangement with more than one bank.
Credit Syndication
A syndicated loan or credit is the arrangement between two or more lending
institutions to provide a borrower a credit facility using common loan documentation.
It is a convenient mode of raising long term funds. The borrowers mandate a lead
manager of his choice to arrange a loan for him. The mandate spells out the terms of
the loan & the mandated banks rights & responsibilities. The mandated banker the
lead manager prepares an information memorandum & circulates among
prospective lender banks soliciting their participation in the loan. On the basis of the
memorandum & on their own independent evaluation the leading banks take a view
on the proposal. The mandated bank convenes the meeting to discuss the syndicated
strategy relating to coordination, communication & control within the syndication
process & finalizes deal timing, management fees, cost of credit etc. The loan
agreement is signed by all the participating banks. The borrower is required to give
prior notice to the lead manager about loan drawl to enable him to tie up
disbursements with other lending banks.
FEATURES OF SYNDICATED LOANS
Arrangements brings together group of banks
Borrower is not requires to have interface with participating banks, thus easy
& hassle free

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Large loans can be raised through syndication by accessing global markets


For the borrower, the competition among the lenders leads to finer terms
Small banks can also have access to large ticket loans & top class credit
appraisal & management
CREDIT RISK RATING
CREDIT RISK
Credit risk means the possibility of loss associated with diminution in the credit
quality of borrowers. In a banks portfolio, losses stem from outright default due to
inability or unwillingness of a customer or counter party to meet, commitments in
relation to lending, trading, settlement and other financial transactions.

CREDIT RISK MANAGEMENT SYSTEM IN UBI


A comprehensive credit risk management system, which is in place in the bank,
encompasses the following processes:

Identification of Credit Risk

Measurement of Credit Risk

Grading of Credit Risk

Reporting and analysis of rating related data

Control of Credit Risk

CREDIT RISK IDENTIFICATION


In order to take informed credit decisions, it is necessary to identify the areas of credit
risk in each borrower as well as each industry. Risk Management Division HO, in
coordination with other HO divisions involved in disbursal of credit and also the risk
management departments of various zonal offices identifies these risks areas and
develops necessary tools and processes to measure and monitor the risk.
CREDIT RISK MEASUREMENT

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In order to measure the credit risk in banks portfolio, the bank has developed the
following models:
Credit Risk Rating Model

Total limits Applicable from the


Bank

Small 2 Loans

Above Rs. 20 lacs and up to Rs.


50lacs

Small Loans

Above Rs. 50 lacs and up to Rs.


5crores

Mid Corporate

Above Rs.5 crores and up to Rs.


15crores

Large Corporate

Above Rs. 15 crores

Non Banking Financial Corporation


Model

(irrespective of any limit)

New Business Model

Below Rs. 5 crores

New Project Model

Above Rs. 5 crores

The credit risk rating models have been developed with a view to provide a standard
system for assigning a credit risk rating to all the borrowers on the basis of the overall
credit risk involved in them. Inputs to the models are the financial, management,
business and conduct of account, industry information. The evaluation of a borrower
is done by assessment on various objective/subjective parameters. The model
evaluates the credit risk rating of a borrower on a scale of AAA to D with AAA
indicating minimum risk and D indicating maximum risk.
The credit risk-rating models incorporate therein all possible risk factors, which are
important for determining the credit quality/ rating of a borrower. These risks could
be:

Internal and specific to the company,

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Associated with the industry in which the company is operating or

Associated with the entire economy and can influence the repayment
capacity and/ or willingness of the company.

Evaluation methodology under rating models

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 pre-defined objective
criteria.

The scores 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, the better is its credit
rating. Weights have been assigned to different parameters based on their
importance. Weights assigned to different parameters have been loaded in the
software. After allocating/evaluating scores to all the parameters, the aggregate
score is calculated and displayed by the software.

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

Wherever a particular parameter is not applicable, no score should be given and


the parameter should be made Not Applicable.

For multi-divisional companies, which are involved in more than one industrial
activity, evaluation should be done separately for each business. However, the
management evaluation, conduct of account and financial evaluation will be done
on a common basis. In such cases, for the business section, each business should

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be evaluated and scored separately, taking into account the different industrial
activity involved.

GRADING OF BORROWERS UNDER THE RATING SYSTEM


In order to provide a standard definition and benchmarks under the credit risk rating
system, following matrix has been adopted in all the risk rating models.
Rating
category
UBI
AAA

Description

Grade within
the rating
Category

Minimum Risk

Above 80.00

UBIAAA

Marginal Risk

Above 77.50 up to 80.00

UBI- AA
+

Above 72.50 up to 77.50

UBI- AA

Above 70.00 up to 72.50

UBI- AA -

Above 67.50 up to 70.00

UBI- A +

Above 62.50 up to 67.50

UBI- A

Above 60.00 up to 62.50

UBI- A -

Above 57.50 up to 60.00

UBI- BB
+

Above 52.50 up to 57.50

UBI- BB

Above 50.00 up to 52.50

UBI- BB -

Above 47.50 up to 50.00

UBI- B +

UBI-AA

Modest Risk
UBI-A

Average Risk
UBI-BB

UBI-B

Score (%) obtained

Marginally
Acceptable Risk

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Rating
category

Description

Score (%) obtained

Grade within
the rating
Category

Above 42.50 up to 47.50

UBI- B

Above 40.00 up to 42.50

UBI- B -

UBI-C

High Risk

Above 30.00 up to 40.00

UBI- C

UBI-D

Caution Risk

30.00 and below

UBI D

CHAPTER 3

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STUDY ON CORPORATE LOANS IN UNION BANK


OF INDIA

RESEARCH METHODOLOGY &


DESIGN
RESEARCH METHODOLOGY
OBJECTIVES OF THE STUDY
To study the credit appraisal & risk rating methods applied for corporate loan
appraisal at UBI.
To understand the commercial, financial, technical viability of the project
proposed & its funding pattern
To understand the pattern for primary & collateral security cover available for
recovery of such funds.
RESEARCH DESIGN
The study is analytical in nature as it aims at analyzing the various sources & schemes
of funding. Two types of data are collected, one is primary data and another is
secondary data
PRIMARY DATA
Meetings and discussion with the Chief Manager and the Senior Manager of both
Credit and Credit Risk Management Department.
Meetings with the clients
SECONDARY DATA
Loan Policy and Internal Circulars of the bank
Research papers, power point presentations and PDF files prepared by the bank
and its related officials
Referring to information provided by CIBIL, Income Tax files, Registrar of
Companies (Ministry of Corporate Affairs), and Auditor reports

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Library research papers


Websites

LIMITATIONS OF THE STUDY

As the credit rating is one of the vital area for any bank, some of the technicalities
are not revealed which may cause destruction as they are confidential in nature.

As some of the information is not revealed, whatever suggestions generated, are


based on certain assumptions.

The credit appraisal decision are more of intuition and experience and since the
time period was limited, hence best efforts were made to grasp the process as
much as possible

The major limitation of this study shall be data availability as the data is
proprietary and not readily shared for dissemination

Due to ever changing environment, many risks are unexpected and the remedial
measures available are based on general experience from the past. Therefore risks
can only be minimized cannot be erased completely. Hence, out of the various
ways in which risks can be managed, none of the methods is perfect and may be
very diverse even for the work in a similar situation in the future

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STUDY ON CORPORATE LOANS IN UNION BANK


OF INDIA

CHAPTER 4

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DATA INTERPRETATION &


ANALYSIS
CASE STUDY
BORROWERS PROFILE
Group Name

XYZ Parts Private Limited

Address of Regd./Corporate
Office

41, Bhawana, Industrial Area, New Delhi110039

Constitution

Private Limited

Date of incorporation

18/08/1993

Dealing with UBI since

Maintaining current account with UBI, New


Delhi for the last 11 years.

Industry/Sector

Manufacturing of Auto & Tractor Parts


(Large Scale)

Business Activity (Product)

Engaged in Designing, Engineering and


Manufacturing of Auto and Tractor
components.

BACKGROUND
The Company ABC Parts Pvt. Ltd. was incorporated in 1993. The borrower has setup
manufacturing units at 4 locations for manufacturing of Automotive Parts. This
company is an ISO-9001 2000 Certified Company and working speedily on
achieving the TQ 14000. The Management of the company is experienced and
working in the line since long and the party is having the regular orders for marketing

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of products and as well as contracts with corporate manufacturing units of


Vehicles/Auto Mobiles. Because of their standing the company is getting repeated
orders. The Company is supplying its product to manufacture of Automobile/Vehicles
Manufacturer unit as Original Equipment Manufacturers. The company has set up inhouse R&D facility in their unit, sophisticated instrumentation laboratory, testing
laboratory etc., which reflects the broad vision of the company to withstand the
changing environment.
SHAREHOLDING
Amt. in Rs.
Lacs

%
Holding

100000

100.00

100%

FIs/ Mutual
Funds/UTI/Banks/FIIs

NIL

NIL

NIL

NRIs/OCBs

NIL

NIL

NIL

Public

NIL

NIL

NIL

Total

100000

100.00

100%

Major Share holders


Promoters Holding

No. of
shares

FACILITIES REQUIRED
Proposed

Secured/Unsecured (As

CC(H)

900.00

Secured

Fund Based Ceiling

900.00

Nature

per RBIs guidelines)

Fund Based

Non Fund Based


ILC/FLC

NIL

ILG/ FLG

NIL

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Non Fund Based


Ceiling

NIL

Term Loan

1600.00

Secured

TOTAL
COMMITMENT

2500.00

Secured
Rs. In Lacs

CREDIT APPRAISAL FOR ABC PARTS PVT. LTD

I. MANAGERIAL EVALUATION
1. Market reputation on the promoter / management of the company:
Satisfactory

2. Brief Profile of Directors

Shri Mahender Kumar Bhunsali, aged 80 years, promoted the business of auto
ancillaries after completing his education. He has been founder of the company
and is presently the chairman of the company. Looking at his rich experience
along with his forward looking capabilities, excellent work and ability to
progress as per the changing industry scenario, he was honored by Udyog Patra
Award

Shri Munish Kumar Bhunsali, aged 46 years, son of Shri Mahendra Kumar
Bhunsali joined his fathers business after completing his Graduation. He has
now been associated with this business for twenty-four years and is presently
Managing Director of the company

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Smt. Meenal Bhunsali W/o of Shri Munish Kumar Bhunsali aged 44 years, is
also a graduate. She has also been associated with the business for last eight
years and presently Director in the company

3. Quality of Management (Including Corporate Governance): Management


of the company is well experienced and have more than 20 year experience in
the auto parts line.

4. Succession Planning: Is been taken care of


5. Confidential Reports: Satisfactory
6. Marketing: The endless pursuit for quality excellence for over four decades
has earned ABC the unswerving confidence of leading automotive and tractor
manufactures, that's why its components are used as Original Equipment in
vehicles manufactured. The company supplies its products to various
ORIGINAL VEHICLE MANUFACTURERS like:

Escorts Tractors Limited,

Tractors and Farm Equipment Limited (Massey Ferguson U.K)

Carraro India Ltd., (Carraro Spa, Italy)

Samey Deutz Fahr India Ltd.,(Samey, Italy)

Eicher Tractors (Valtra, Brazil)

Ford New Holland (CNH, Italy)

"Sonalika" International Tractors Ltd (Renault, France)

International Auto Ltd. etc.

On the other hand company has well experienced management, good


marketing team and vide market network of customers of its products.

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7. Borrowers' diversification, expansion, modernization program: The


company is setting up a new manufacturing facility, as a part of companys
overall expansion/integration plant for its production activities. For the above
purpose, a plot of land measuring about 11,190 sq. meters has been allotted to
the company by New Okhala Industrial Development Association, near NewDelhi. The Company Intend to set up new machinery there for setting up a
new plant to cater growing demands of its customers, who have already placed
orders to increase supply.

II. BUSINESS EVALUATION


Comments on industry scenario and industry outlook:
The past few years have witnessed a continuous influx of global auto majors in India.
Many auto majors have established facilities, which have also been aided by the
liberal government policy. India crossed million-mark last fiscal, which has set the
domestic auto ancillary industry on a roll. Auto MNCs are also launching their latest
models in India. The domestic auto industry has also come up with new and quality
models. Consequently, the importance for precision auto components has been
growing. The increase in demand for auto components in India has also resulted in an
increase in revenues and exports. Exports of auto components from India have
witnessed a CAGR of over 19% over the last six years.
The auto component sector is on a growth trajectory as is evident by the fact that an
auto component has been designated as a Thrust Sector by the Government of India
under the EXIM Policy.
Also, the problems of high rejection rates which plagued the domestic auto ancillary
industry has been overcome which is exhibited in number of overseas deals concluded
by the domestic industry amidst stiff competition from other Asian countries. The
Government has extended various fiscal incentives and policy measures which have

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helped the industry. Critically, outsourcing of automobile components that have


relatively high engineering and design content from suppliers in low cost countries
like India, is gaining momentum fast. It is estimated that in the next 10 years the auto
components industry will reach USD 33-40 billion. Going by the current trends in the
domestic automotive industry and as stated above, it is expected that the indigenous
demand for auto components will also reach USD 13-15 billion in the next 10 years
and about USD 20-25 billion would be exported. To meet the combined demand from
domestic and international customers the industry will have to make significant
incremental investment Hence, the Indian auto component industry (and by sequel the
forging industry) is poised to achieve a position in the top slot in the world and will be
in all probability a major driver of growth and employment in the domestic economy.
The fortunes of the auto ancillary sector are closely linked to those of the auto sector.
Demand swings in any of the segments (cars, two-wheelers, commercial vehicles)
have an impact on auto ancillary demand. Demand is derived from original equipment
manufacturers (OEM) as well as the replacement market. Replacement demand
accounts for close to 57% of total demand, while OEMs account for 27%, with
exports accounting for the balance 16%.The Indian auto component industry had an
estimated 480 companies operating in this area in FY05, employing more than
250,000 people and the industry exported goods worth estimated at US$ 1.4 bn. Share
of exports to output is estimated to have increased from 15% in FY04 to 16% in
FY05.One area where domestic units compare favorably with their international peers
is it terms of costs. Lower labour costs give Indian auto ancillary companies an
absolute cost advantage. India's strength in exports lies in forgings, castings and
plastics historically. But this is changing with more component manufactures
investing in upgradation of technology in recent years
III.

TECHNICAL EVALUATION

1. Land & Building - The Party has proposed to setup the designing , engineering
and manufacturing unit at Noida II having the area of 11,190 sq Mts The Party
has already constructed approx 45000 sq feet Industrial Shed. The building area is

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sufficient for the installation of the plant and machinery and for smooth working
of the unit.
2. Plant and Machinery: It is reported by the party that they are one of the largest
integrated plant of its kind for manufacturing Auto and Tractor Component in
North India spread over sprawling area of 57,340 sq feet at different locations in
Delhi, Faridabad and Noida. There are different types of shops i.e grinding shop,
turning centers, Machine Shops, ensuring high productivity and better quality to
keep pace with the ever rising quality standards. The party is also having HEAT
TREATMENT SHOP with hardening, annealing, carbonizing, tampering furnaces
which make the component to withstand strength in operating conditions of the
parts.
The party has submitted the quotations from the suppliers/manufacturers with the
term and conditions for supply. The credential of the suppliers is verified for the
supply of the machinery as per bank guidelines.

3. Raw Materials: The basic raw material required for the unit is forging of auto
parts, stainless steel, welding rods and store items etc. The material is available
through local suppliers/ units and most of the raw material is purchased from
Delhi & NCR.

4. Manufacturing Process: The auto parts being manufactured under strict quality
control by using latest CNC Machines of improved technology, modern process
control devices monitored by microprocessors and backed by a competent team of
technical personnel to ensure strict quality norms as laid down by the OEM units/
Manufacturer of Tractors and other Vehicles.

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5. Production Capacity: The stated projections are accepted by the bank as they
both match and are in sync the installed capacity and the market demand. The new
plant will become operational in the mid of the financial year 2010-11 and
production capacity of the company will increased.

6. Quality Control: The party has proposed to set up in- house R&D facility
comprising of pilot plant facility, sophisticated instrumentation laboratory, testing
laboratory etc. for Raw Material and finished goods etc. Quality control test are
being undertaken for raw material and other products at stages of production. The
product shall meet all the specification requirement of their client.

7. Staff and Labor: As the machines are semi automatic and the unit is located at
the Noida, which is the approved industrial area. So, there is no problem of skilled
and unskilled labor and it will be easily available as per the requirement of the
party as and when required for the proposed unit at Noida.

8. Power: The party has taken the temporary power load connection of 20KW for
completion of construction at Noida unit.

9. Other Infrastructure: The unit of the party is situated at Noida, it is a developed


industrial area and is connected to other parts of the country by roads and rails
routes. All types of facilities like postal, telecommunication, transportation etc. are
easily/already available.

IV.

LEGAL EVALUATION

Status of various statutory approvals and clearances:

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For the Noida Unit Company has already obtained the various approvals such as
sanction of building plan, Electricity/Power Load Connection, Water Connection,
Pollution Control Clearance. The other units of the Company are already working at
different locations in Faridabad and Delhi. The Director of the company has reported
that they have obtained the all approvals required for the units for manufacturing of
auto parts i.e, registration of the units with the concerned departments i.e. SSI
registration, Income tax, Sales Tax, authorization from Pollution control board.

V. FINANCIAL EVALUATION

Financial Statements of the company are as follows:

GITARATTAN INTERNATIONAL BUSINESS SCHOOL

PROFIT AND LOSS ACCOUNT: XYZ PARTS PVT. LTD


(In Rs. Lacs)

STUDY ON CORPORATE
LOANS
IN UNION BANK
31.03.2008
31.03.2009
31.03.2010
OF INDIA
Audited
Audited
Audited
Sales
Turnover
% rise or
fall in sales
Cost of sales
Operating
Profit
Other
Income
Profit
Before Tax
Provision
for taxes
Profit After
Tax
Depreciatio
n
Cash Profit

1995.39

31.03.2011
Provisional

31.03.2012
Projection

2047.12

2584.65

2379.88

4840.00

2.59

26.26

-7.92

103.37

1868.41

1954.42

2502.28

2270.66

4405.56

126.98

92.70

82.37

109.22

434.44

17.40

7.44

17.84

12.39

20.00

144.38

100.14

100.21

121.61

454.44

40.00

40.00

69.74

3.67

113.59

104.38

60.14

30.47

117.94

340.85

41.97

52.91

74.08

84.98

344.00

146.35

113.05

104.55

202.92

684.85

BALANCE SHEET: XYZ PARTS PVT. LTD


(In Rs. Lacs)

Share
capital
Reserves
and Surplus
Share App.
Money
Quasi
Capital
Def. Tax
liability/
Loss
Revaluation
Reserves
Net Worth
Secured
Loans
Unsecured
Loans
Term
Liabilities
Working
Capital

31.03.2008

31.03.2009

31.03.2010

31.03.2011

31.03.2012

Audited

Audited

Audited

Provisional

Projection

100.00

100.00

100.00

100.00

175.00

482.55

542.69

573.16

691.10

1064.68

0.00

0.00

0.00

75.00

0.00

17.45

32.79

45.84

60.88

75.00

0.00

0.00

32.81

32.81

0.00

0.00

0.00

0.00

0.00

0.00

600.00

675.48

751.81

959.79

1314.68

496.55

685.86

981.12

1119.01

1819.54

0.00

0.00

0.00

0.00

0.00

496.55

685.86

981.12

1119.01

1819.54

0.00

461.01

482.21

442.79

900.00

633.65

100.00

Advances
GITARATTAN
INTERNATIONAL BUSINESS SCHOOL
Sundry
496.60
400.67
694.94
Creditors

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FINANCIAL INDICATORS: ABC PARTS PVT. LTD


(In Rs. Lacs)

31.03.200

31.03.200

31.03.201

Audited
Intangible

Audited

Audited

31.03.2011
Provisiona
l

31.03.201
2
Projection

0.00

0.00

0.00

0.00

0.00

600.00

675.48

751.81

959.79

1314.68

0.00

0.00

0.00

0.00

0.00

600.00

675.48

751.81

959.79

1314.68

Current Ratio

1.21

1.35

1.21

1.42

1.46

Debt/Equity

0.83

1.02

1.31

1.17

1.38

248.45

369.55

273.36

486.28

526.91

2.84

2.57

3.01

2.38

2.25

2.84

2.57

3.01

2.38

2.25

6.36

4.53

3.19

4.59

8.98

PAT / Sales (%)

5.23

2.94

1.18

4.96

7.04

FACR

1.71

1.44

1.48

1.42

1.43

Assets
TNW
Investments in
allied co.
Adjusted TNW

NWC
TOL/TNW
TOL/ Adjusted
TNW
Operating Profit
/ Sales (%)

Brief discussion on Financial Indicators


1. Paid up capital / TNW
a. Authorized capital of the company is Rs.100 Lacs comprising of 1 Lac-equity
shares of Rs. 100/- each. Paid up capital are Rs. 100 Lacs comprising of 1 Lacequity shares of Rs 100/- each. It has been projected at the level of Rs 175.00
Lacs during current year. The company already inducted Rs. 75.00 Lacs as Share
application money, which will be converted in to Paid up share Capital before
disbursement of limits by the bank. The Company will increase the Authorized

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Capital Limit after the Sanction of the Proposal but before the disbursement of
the loan.
b. TNW of the company is steadily increasing with full retention of profits. It was
Rs. 582.55 Lacs as on 31.03.2007 and increased to Rs. 675.48 Lacs as on
31.03.2008 and further increased to Rs. 751.81 Lacs as on 31.03.2009. It has
been estimated / projected at Rs. 959.79 Lacs and Rs.1314.68 Lacs respectively
as at 31.03.2010 and 31.03.2011 due to retention of estimated/projected internal
accruals and proposed induction of capital in the business. Keeping in view of the
past trend of profitability, estimates/projections of TNW can be accepted.

2. Sales: Gross Sales of the company is showing increasing trend. Sales have
increased from Rs. 20.47 crores in 2007-08 to Rs. 25.85 crores in 2008-2009.
Thus the company has registered a growth of more than 26% over the last year.
But sale during the financial year 2009-10 did not register any growth, due to
fluctuation in the foreign market export sale of the company decreased from the
last financial year. The company has achieved net sales of Rs 22.30 crore during
the financial year 2009-10. The company is estimating the sale on the basis of
order in hand. In view of the recovery of economy since Oct. 2009, Company is
expecting the good growth rate in sale in coming financial years, Another reason
of the healthy estimates are good government policies for export out of India and
recovery of overall global market from the financial crunch. The new plant of the
company will become function in the mid of the financial year 2010-11, which
will increase the production capacity of the company. The company has good
demand of its product in the market. Increase in the production capacity of the
company will increase the turnover of the company. Based on its existing clientele
and the demand in the market of the products of the company, the company is
estimating its Gross turnover for the financial year 2010-11 at Rs.48.40 Crore.
Keeping in view the overall growth in the automobile and auto part manufacturing
market, the estimated turnover of the company can be accepted.

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3. Other income: The other income of the company includes interest on FDR,
Rebate and Discounts received, Foreign Exchange Benefit etc. The other incomes
for the year end 31.03.2008 were Rs. 7.44 Lacs and for the year ending
31.03.2009 were Rs. 17.84 Lacs. The other incomes of the company as per the
provisional balance sheet for the financial year 2009-10 have Rs. 12.39 Lacs. The
company is estimating other income at Rs. 20.00 for the financial year 201011.The Company estimated these income by taking care of interest receivable on
FDR and current discounts /rebate policies of the suppliers. Keeping in view the
past records of the company, Estimates/Projections of Other Incomes can be
accepted.

4. Profitability: PAT / Sale of the company for the financial year 2007-08 was 3%
and for the financial year 2008-09 was 1% . The PAT of the company for the
financial year 2008-09 was decreased because of increase in the depreciation and
Interest expenditure of the company. Due to expansion and installation of new
equipments during the financial year, depreciation and financial expenses of the
company increased disproportionately as compared to the increase in gross sale of
the company. These expenses were 10.68% of turnover for the financial year
2008-09 in comparison to 8.59% for the financial year 2007-08. As per the
provisional balance sheet for the financial year 2009-10 the company achieved
profitability @ 4.96% (PAT/Sale) upto 31.03.2010. The company is estimating the
profitability for the financial year 2010-11 at 7.04%. Increase in the production
capacity of the company will reduce the operation cost of the company and the
profitability of the company will increase. Keeping in view the industry scenario
and past trends of the company projections/estimates of the profitability of the
company can be accepted.
5. Investments: The Company has made investments in Fixed Deposits. The value
of Fixed Deposits at the end of the financial year 2008-09 is Rs. 6.48 Lacs.

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6. Current ratio: Current ratio of the company for the financial year ending
31.03.2007 & 31.03.2008 was 1.21:1 & 1.35:1 .But current ratio for the financial
year 2008-09 was 1.22:1 which is little lower than the bench mark of the bank i.e,
1.33:1 which was due to expansion plan of the company and formation of long
term assets of the company during the financial year 2008-09 to increase the
overall profitability of the company. The company used its internal accrual for
purchase of capital assets of the company. In spite of using its short term funds for
the purchase of the capital assets the NWC of the company is positive. The
expansion in the capital assets has increased the size of the plant and profitability
of the company which also improve the short term liquidity of the company. As
per the provisional balance sheet for the financial year 2009-10 the current ratio of
the company is 1.42, which is above the bench mark of the bank. Keeping in view
the past records/trends of the company estimated level current ratio can be
accepted.
7. Debt Equity Ratio: Debt Equity Ratio of the company for the financial year
2007-08 was 1.02:1 and for the financial year 2008-09 was 1.31:1. As per
provisional Balance sheet of the company the debt equity ratio for the financial
year 2009-10 is 1.17. The Company has estimated it debt equity ratio for current
financial year at 1.38:1. The debt equity ratio of the company is below the
acceptable bench mark of the bank i.e. 3:1 and proves the long term solvency of
the company. Hence keeping in view the past trends of the company estimates/
projections of Debt Equity ratio of the company can be accepted.

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CHAPTER 5

FINDINGS & DISCUSSIONS

FINDINGS & DISCUSSIONS

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At Union Bank Of India, Circle Office the priority to appraise a proposal was
given to new or fresh clients over the existing clients presenting proposals for
renewal

Ratings, as being performed at PNB, are done once a year. Therefore, the ratings
do not take into account short term drastic changes like price level changes (which
are an issue with any method based on accounting statements, since annual reports
are based on historical cost basis of accounting).

Some of the parameters in Business and industry evaluation are based on the
information provided by company, which in some cases may not be sufficient. No
specific guidelines are followed in such cases. Also, some of the parameters here
may be rendered redundant in some cases and may push up/ push down the rating
needlessly in these cases.

The present risk rating model does not have any mechanism to prioritize certain
sectors of the economy. There are certain sector in the economy where risk spread
is low and certain sectors where spread of risk is high like real estate. Also, there
are certain infrastructural projects which need to be prioritized. The risk rating
model is not flexible to incorporate all these issues.

The BPLR system will soon be replaced by Base Rate system. Banks may choose
any benchmark to arrive at the Base Rate for a specific tenor that may be
disclosed transparently.

With the deregulation of the financial sector, the ability of the banks to service the
credit requirements of the SME sector depends on the underlying transaction
costs, efficient recovery processes and available security. There is an immediate
need for the banking sector to focus on credit and finance requirements of SMEs.

GITARATTAN INTERNATIONAL BUSINESS SCHOOL

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OF INDIA

CHAPTER 6

CONCLUSION
&
RECOMMENDATIONS
CONCLUSION

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OF INDIA

The study at UBI gave a vast learning experience to me and has helped to enhance my
knowledge. During the study I learnt how the theoretical financial analysis aspects are
used in practice during the working capital finance and term loan assessment. I have
realized during my project that a credit analyst must own multi-disciplinary talents
like financial, technical as well as legal know-how.

Evaluation of Management: A detailed study about the promoters is carried out in


order to ensure promoters are experienced in the line of business and are capable
to implement and run the project

Technical Feasibility: A detailed study about the technical aspects is done to


determine the technical soundness of the project

Financial Viability: A detailed study relating to financial viability of the project is


done; thereby ensuring that project will generate sufficient surplus to repay the lan
installment and interest

Risk analysis: it determines the risk associated with the project this is done by
performing a Sensitivity analysis and Credit Rating. With Sensitivity Analysis the
projects capacity to service debts under worsened conditions is determined. Credit
rating, provides rating for various parameters like management, financial, market
and so, thereby determine the credit worthiness of the borrower

It is on the basis of the credit risk level, collateral securities to be given by the
borrower are determined.

UNION BANK adoptions of the Projected Balance Sheet method (CMA) of


assessment procedures are based on sound principles of lending. This method of
assessment has certain flexibility required to avoid any rigid approach to fixing
quantum of finance. The PBS method have been rationalized and simplified to
facilitate complete flexibility in decision-making. To ensure asset quality, proper risk
assessment right at the beginning, is extremely important.

GITARATTAN INTERNATIONAL BUSINESS SCHOOL

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RECOMMENDATIONS
The Credit Department at UBI (IFB BRANCH Office) Delhi, works at its full
potential and the staff is highly experienced and has a very strong intuitive sense. So,
there is no such recommendation on the entire process. However to make the process
more flexible and efficient, an electronic database should be designed carrying all the
available and important information related to the proposals accepted, and it should be
easily accessible to the Credit Department. This will help reduce paperwork and loss
of information.

Risk Management strategies of Union Bank of India must be revised.

Bank must try to reduce its Net and Gross NPA.

Bank must try to improve its Capital Adequacy Ratio..

Bank must do pre and post monitoring of Loans.

Bank must try to minimize systematic financial risk.

GITARATTAN INTERNATIONAL BUSINESS SCHOOL

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REFERENCES

REFERENCES
Books:

Sharma R.K & Gupta Shashi K;Management accounting-principles and


practice., eight edition, kalyani publishers New Delhi.

Bhalla V.Kfinancial management and policy, first edition, annual


publications, New Delhi.

Maheshwari S.N ;Management accounting and financial control, thirteen


edition, sultan chand & sons, New Delhi(2002).

GITARATTAN INTERNATIONAL BUSINESS SCHOOL

STUDY ON CORPORATE LOANS IN UNION BANK


OF INDIA

Kothari C.R;Research methodology-methods & techniques, second edition,


vishwa prakashan Delhi(1990).

Gupta Sunita, Management of Working Capital,First Edition,New Century


Publications,New Delhi(2003).

Websites:

www.unionbankofindia.com

www.wikipedia.com

www.crisil.com

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