Credit Appraisal Final Project PDF Vinay

Introduction
1.1 Rationale of Study

A bank is a financial intermediary that accepts deposits and channels those depo
sits into lending
activities, either directly or through capital markets. A bank connects customer
s with capital
deficits to customers with capital surpluses.
Without a sound and effective banking system in India it cannot have a healthy e
conomy. The
banking system of India should not only be hassle free but it should be able to
meet new
challenges posed by the technology and any other external and internal factors.
For the past three decades India's banking system has several outstanding achiev
ements to its
credit. The most striking is its extensive reach. It is no longer confined to on
ly metropolitans or
cosmopolitans in India. In fact, Indian banking system has reached even to the r
emote corners of
the country. This is one of the main reasons of India's growth process.
The government's regular policy for Indian bank since 1969 has paid rich dividen
ds with the
nationalization of 14 major private banks of India.
Not long ago, an account holder had to wait for hours at the bank counters for g
etting a draft or
for withdrawing his own money. Today, he has a choice. Gone are days when the mo
st efficient
bank transferred money from one branch to other in two days. Now it is simple as
instant
messaging or dials a pizza. Money has become the order of the day.
The first bank in India, though conservative, was established in 1786. From 1786
till today, the
journey of Indian Banking System can be segregated into three distinct phases
1.1.1 Functions of Bank (Source Elementary Banking by, John Franklin Ebersole)
The most important functions of banking may be classified as follows:
(1) To, assemble capital and make it effective;
(2) To, receive deposits and make collections;
(3) To, check out and transfer funds;
(4) To, discount or lend;
(5) To, exercise fiduciary or trust powers;
(6) To, issue circulating notes.
Every bank which expects to succeed must first of all prove its value to the co
mmunity. The
services which a bank performs are so generally taken for granted that the publi
c is unaware of
the real extent of the facilities offered. Banks are equipped to utilize funds,
for either a short or
long period of time, safely, and with some profit. Depositors individually do no
t enjoy the same
ability. An individual's unused funds are perhaps small in amount, cannot be loa
ned
to advantage with the assurance of immediate return when desired, and the care o
f
the money involves worry and risk. The bank, on the other hand, possesses the ne
cessary men,
machinery and experience. By obtaining deposits, each perhaps small in itself, f
rom many
people, it acquires a large reservoir of funds. From this supply, which is const
antly being
increased by additional deposits and decreased by withdrawals according to the n
eeds and
circumstances of the depositors, the bank can now make loans and other investmen
ts from time
to time. It is known as a place where loans may be sought, and it is protected i
n making
these loans of funds which it has had left with it on deposit by the law of aver
ages which usually
operates in such a way that withdrawal and deposits about balance each other, th
e normal
tendency being in favor of a net increase. By receiving deposits and making coll
ections the bank
saves the depositor much personal effort. To receive or deposit in one city a ch
eck made payable
in another, hundreds or thousands of miles away, to convert that check in a rela
tively short time
into cash available for the depositor's use, and all this with no direct assista
nce from the customer
and at a very slight expense to him or none at all, is indeed service.
Currently, Indian banks have compared favorably on growth, asset quality and pro
fitability with
other regional banks over the last few years. The banking index has grown at a c
ompounded
annual rate of over 51 per cent since April 2001 as compared to a 27 per cent gr
owth in the
market index for the same period. Policy makers have made some notable changes i
n policy and
regulation to help strengthen the sector. These changes include strengthening pr
udential norms,
enhancing the payments system and integrating regulations between commercial and
co-
operative banks.
BANKING SECTOR PROFILE
2.1 Introduction
Banking is derived from the Italian word BANCOS, which means DESK. The Italians
had a
unique way of making monetary transactions. They used to do it over a desk with
a green top.
The history of banking is closely related to the history of money. As monetary p
ayments became
important, people looked for ways to safely store their money. As trade grew, me
rchants looked
for ways of borrowing money to fund expeditions.
Banking defined as per Indian Banking Regulation ACT 1949:
Accepting for the purpose of lending or investment of deposits of money from the
public,
repayable on demand or otherwise, and withdrawal by cheque, draft, and order or
otherwise.
Functions of Indian banks:
1. Accepting deposits.
2. Making deposits available on demand.
3. Investing the deposits of customers.
Without a sound and effective banking system in India it cannot have a healthy e
conomy. The
banking system of India should not only be hassle free but it should be able to
meet new
challenges posed by the technology and any other external and internal factors.
For the past three
decades India's banking system has several outstanding achievements to its credi
t. The most
striking is its extensive reach. It is no longer confined to only metropolitans
or cosmopolitans in
India. In fact, Indian banking system has reached even to the remote corners of
the country. This
is one of the main reasons of India's growth process. The government's regular p
olicy for Indian
bank since 1969 has paid rich dividends with the nationalization of 14 major pri
vate banks of
India.
Not long ago, an account holder had to wait for hours at the bank counters for g
etting a draft or
for withdrawing his own money. Today, he has a choice. Gone are days when the mo
st efficient
bank transferred money from one branch to other in two days. Now it is simple as
instant
messaging or dials a pizza. Money has become the order of the day.
The first bank in India, though conservative, was established in 1786. From 1786
till today, the
journey of Indian Banking System can be segregated into three distinct phases. T
hey are as
mentioned below:
. Early phase from 1786 to 1969 of Indian banks.
. Nationalization of Indian banks and up to 1991 prior to Indian banking sector
Reforms.
. New phase of Indian Banking System with the advent of Indian Financial & Banki
ng
Sector Reforms after 1991
2.2 Present Scenario of Banking Sector in India

The banking scenario in India has already gained all the momentum, with the dome
stic and
international banks gathering pace. The focus of all banks in India has shifted
their approach to
'cost', determined by revenue minus profit. This means that all the resources sh
ould be used
efficiently to better the productivity and ensure a win-win situation. To surviv
e in the long run, it
is essential to focus on cost saving. Previously, banks focused on the 'revenue'
model which is
equal to cost plus profit. Post the banking reforms, banks shifted their approac
h to the 'profit'
model, which meant that banks aimed at higher profit maximization.
2.2.1 Focus of Bank in India
The banking industry is slated for growth in future with a more qualitative rath
er than
quantitative approach. The total assets of all scheduled commercial banks by end
-March 2010 is
projected to touch Rs 40, 90,000 crore. This is going to comprise around 65% of
GDP at current
market prices as compared to 67% in 2002-03. The bank's assets are estimated to
grow at an
annual composite rate of growth of 13.4% during the rest of the decade as agains
t 16.7%
between 1994-95 and 2002-03.
Barring the asset side, on the liability perspective, there will be huge additio
ns to the capital base
and reserves. People will rely more on borrowed funds, pace of deposit growth sl
owing down
side by side. However, advances and investments would not see a healthy growth r
ate.
2.3 Banking Structure in India
2.3.1 Scheduled and Non Scheduled Banks
Banks can be categorized according to their ownership patterns, functions, and o
peration
coverage. The Indian Banking system regulated by the Reserve Bank of India compr
ises
scheduled and non scheduled banks, and these are classified in various sub categ
ories as
follows:
a) Scheduled Banks
These are banks, which are listed in the second schedule of the RBI act 1934. Th
ese
banks have paid up capital and reserves of not less than Rs. 5 lakhs and they ar
e
successful in convincing the RBI that there affairs are not conducted in a manne
r
detrimental to their depositors. These banks have required maintaining certain a
mount of
reserves (CRR) with RBI against which these banks enjoy the facilities of financ
ial
accommodation and remittance facilities at concessionary rates. Scheduled banks
are
classified as:
1.1Co-Operative Banks
1.2Commercial Banks
1.2.1Foreign Scheduled Banks (38),

1.2.2Indian Scheduled Banks
(a) Private Sector Scheduled Banks : Old and New (31)
(b) Public Sector Scheduled Banks,
a. State Banks and its 7 banking subsidiaries (8)
b. Nationalized Banks (19)
c. Regional Rural Banks (196)
b) Non Scheduled Banks
These are those, not included in the 2nd schedule of RBI act. Their number has
progressively declined over the years.
2.3.2 Public Sector Banks
a) State Bank Group and Nationalized Banks

This group of 27 banks has the largest no. of branches in urban and rural areas
throughout
the country. The group contributes about 75% of the total deposits and 70% of to
tal
advances of all commercial banks in India.
The erstwhile Imperial Bank of India was nationalized in 1955 to create State Ba
nk of
India, in accordance with SBI act 1955. SBI is the largest bank in the India in
terms of
branch networks, asset size, capital and profits. SBI.s 7 subsidiaries were crea
ted in 1959
by nationalizing the regional banks as per the SBI subsidiaries banks act 1959.
The
remaining 19 banks in public sector were nationalized by the banking company act
1970.
After 1994, most of these banks have made public issues of their shares, thus di
luting the
govt. share holding much below 100%, but above 51%.
b) Regional Rural Banks

These are small localized banks operating in rural areas limited to specified di
stricts.
They provide banking facilities to small farmers, agricultural labors and small
entrepreneurs. Their ownership capital is provided jointly by central govt. (50%
), the
concerned state govt. (15%), and the sponsor public sector banks (35%).
2.3.3 Private Sector Banks
These are incorporated in India and there shares/ ownership is held by business
houses
and individuals. These banks have small balance sheet size, limited regional ope
rations
and traditional style of management. New generation private sector banks, incorp
orated
post 1994, are technology driven and have a modern style of functioning, and thu
s
achieving a level of parity with that of foreign banks.
2.3.4. Foreign Banks
These are the banks incorporated abroad but granted license by RBI to conduct ba
nking
business in India through their Indian braches. These banks have limited branch
network
confined mostly to the metropolis/ big commercial centers. Their operations are
technology driven.
2.3.5. Co-Operative Banks

These are registered under the registrar of co-operatives and their main regulat
ors are
state govt. or central govt. in case the bank is operating in more than one stat
e. These
banks are operated on No Profit- No Loss principle of co- operation. The size of
assets/
liabilities of the co- operative banks are much smaller in comparison to commerc
ial
banks.
2.4 Major Players in Banking Sector
(2009)
Ranking
Name of Bank
Deposits (Rs
in Crore)
Advances (Rs
in Crores)
1
State Bank of India
742073
542503
2
HDFC Bank
142812
98883
3
Axis Bank
117374
81557
4
Bank of India
189708
142909
5
Punjab National Bank
209760
154703
6
Bank of Baroda
192397
143986
7
ICICI Bank Limited
218348
218311
8
Union bank of India
138703
96534
9
Citibank
51677
39920
10
Canara Bank
186893
138219
(Table 2) (Source: www.businessmapofindia.com)

3. Company Profile
Introduction
Citi is today.s pre-eminent financial services company, with some 200 million cu
stomer
accounts in more than 100 countries. Our history dates back to the founding of C
itibank in 1812,
Bank Handlowy in 1870, Smith Barney in 1873, and Banamex in 1884, and Salomon Br
others in
1910. Committed to India for over 106 years, Citi prides itself in being a premi
er locally-
embedded financial institution backed by its global network across 100 countries
. With over
10,000 employees and US$3.1 billion capital invested, Citi is the single largest
foreign direct
investor in the financial services industry in India. Citi is a dominant provide
r of banking and
financial services in India and offers a comprehensive suite of products and ser
vices to over
1,500 large corporate and multinationals, over 2,500 small and medium enterprise
s and over 7
million retail customers. Citi India's operations encompass corporate and invest
ment banking,
consumer banking, private banking, and banking services to the international Ind
ian community.
The breadth of Citi.s activities in India includes:
3.1.1 Institutional Clients Group
. A leading corporate bank with a 106-year history of serving Indian corporate s
ector and
financial institutions
. Enjoys a dominant market share in key products like cash management, FX and Cu
stodial
Services
. Has a fast growing SME franchise with a dominant share of market in many key v
erticals
3.1.2 Investment Banking & Capital Markets - Citi

. Dominant Investment Bank across both fund raising and advisory services
. Leading advisor on Equity and Equity-linked transactions
. Top-notch local currency debt house
. Pioneers in Securitization
. Leading issuer of G3 bonds
. A top-notch Research team providing top quality research & international exper
tise to
trading oriented investors through comprehensive coverage of the Indian markets
across
sectors
. Leading equity trading house
3.1.3 Alternate Investments - Citi Venture Capital International

. A leading private equity player over the last decade
. Investments in multiple sectors in the country in sectors including auto compo
nents,
financial services, ITES and real estate.
3.1.4 Consumer Banking & Global Cards

Citibank
. Pioneered consumer banking and was the first to introduce credit cards and con
sumer
finance. Significant investments in technology have enabled Citi to maintain its
edge
through alternative distribution channels ATM, online banking, phone banking, mo
bile
banking
. Retail network includes 40 branches in 28 cities and over 450 ATMs
CitiFinancial
. Consumer finance services for Personal Loans, Home Loans, and third-party insu
rance
. Over 350 branches across 180 geographic locations
Citi Wealth Advisors

. Financial planning and investment advisory based on a retail brokerage platfor
m to serve
wealth management needs of retail investors
3.1.5 Global Wealth Management

Citi Private Bank
. A holistic approach to wealth management for both individuals and businesses
throughout the wealth creation cycle
. Provides the full range of finance, banking, investment, trust and advisory se
rvices for
wealth creators
. Trusted advisors for designing insightful solutions customized to individual c
lient needs,
with an emphasis on personalized, confidential service
3.1.6 Outsourcing
India is a key outsourcing hub for Citi:
. Provides software development for over 50 countries
. Offers knowledge outsourcing services to Citi's Investment Bank and Research t
eams
across the globe
( Source: www.citigroup.com)
3.2 Citibank India Branches
The wide reach of the Citibank India can be gauged in terms of its presence in a
round 28
locations. The branches are operational at Mumbai, Delhi, Noida, Gurgaon, Chandi
garh,
Jalandhar, Ludhiana, Nashik, Surat, Bhopal, Indore, Vadodara, Ahmedabad, Auranga
bad, Vapi,
Pune, Kolkata, Faridabad, Lucknow, Bhubaneshwar, Jaipur, Akola, Chennai, Bangalo
re,
Hyderabad, Coimbatore, Cochin (Kochi), and Pondicherry.
3.3 Products of CitiBank
Products
CASH
MANAGEMENT
INVESTMENT
BANKING
SECURITIES AND
FUND SERVICES
MARKET
LOANS
TRADE
SOLUTION
3.3.1 Cash Management
. Account Services and Liquidity Management
Liquidity management is quintessential for effective working capital

management. At Citi, we understand that liquidity management requires visibility
control and optimization of balances across your accounts. A wide range of
Corporate, Financial Institutions and Small / Medium Enterprises choose Citi as
the preferred partner for meeting their account management requirements.
Corporate can hold the following types of accounts
. Current Account
It is a plain vanilla, non-interest bearing account and the withdrawals to the
account are permissible only up to the amount of deposits in the account.
. EEFC Account
Exchange Earner's Foreign Currency Account (EEFC) is an account maintained in
foreign currency with an Authorized Dealer. This account is for Exporters to hol
d
their Foreign Currency Inward Remittance in foreign currency.
. Cash Credit Account
Cash Credit account is a form of current account with overdraft facility with fi
xed
limit. This account is also non-interest bearing account.
. Escrow
As an Escrow Agent, Citibank provides customized solutions by receiving,
safekeeping, investing and disposing of escrowed assets.
. Payment
. Collection
3.3.2 Trade Solution

. Trade Services
. Trade Finance
. Structured Trade
. Export and Agency Finance
3.3.3 Loan
At Citi, you can get all the financial products and services your growing compan
y needs. As the
leading bank for business, we have the right financial solution for each step of
your growth, so
when you want to upgrade your facilities or pursue an attractive growth opportun
ity, availability
of finances will be the least of your concerns.
Citi provides you comprehensive lending facilities encompassing:
. Rupee Loans
. Foreign Currency Loans
. External Commercial Borrowings
Citi led the financing facility in Tata Steel's $8 billion acquisition of Corus
- the largest-ever
cross-border acquisition by an Indian firm. When you partner with Citi, you can
expect best-in-
class financing solutions.
3.3.4 Market
. Managing Financial Risk
. Foreign Exchange
. Derivatives
. Commodity
. Fixed Income Interest Market
. Special Situation Group
3.3.5 Securities and Fund Services

. Custody Services
. Fund Services
. Derivatives Clearing
3.4 Board of Directors
Alain J.P. Belda

Managing Director, Warburg Pincus
Timothy C. Collins
Chief Executive Officer and Senior Managing Director, Ripplewood Holdings LLC
Jerry A. Grundhofer
Chairman Emeritus, U.S. Bancorp
Robert L. Joss, Ph.D.
Professor of Finance and Former Dean, Stanford University Graduate School of
Business
Andrew N. Liveris
Chairman and Chief Executive Officer, The Dow Chemical Company
Michael E. O'Neill
Former Chairman and CEO, Bank of Hawaii Corporation
Vikram Pandit
Chief Executive Officer, Citi
Richard D. Parsons
Chairman, Citi and Special Advisor, Providence Equity Partners Inc.
Lawrence R. Ricciardi
Senior Advisor, IBM Corporation, Jones Day and Lazard Freres & Co.
Judith Rodin
President, Rockefeller Foundation
Robert L. Ryan
Chief Financial Officer, Retired, Medtronic Inc.
Anthony M. Santomero
Former President, Federal Reserve Bank of Philadelphia
Diana L. Taylor
Managing Director, Wolfensohn Fund Management, L.P.
William S. Thompson, Jr.
Chief Executive Officer, Retired, Pacific Investment Management Company
(PIMCO)
Ernesto Zedillo
Director, Center for the Study of Globalization and Professor in the
Field of International Economics and Politics, Yale University
Literature Survey
4.1 Credit Appraisal
Appraisals are typically used either for taxation purposes or to determine a pos
sible selling price
for the property in question. The appraiser can use any number of valuation meth
ods in order to
determine the appropriate value to assign, including the current market value of
similar
properties, quality of property and valuation models.
Credit Appraisal is the process by which a lender appraises the technical feasib
ility, economic
viability and bankability including creditworthiness of the prospective borrower
. Credit appraisal
process of a customer lies in assessing if that customer is liable to repay the
loan amount in the
stipulated time, or not. Here bank has their own methodology to determine if a b
orrower is
creditworthy or not. It is determined in terms of the norms and standards set by
the banks. Being
a very crucial step in the sanctioning of a loan, the borrower needs to be very
careful in planning
his financing modes. However, the borrower alone doesn.t have to do all the hard
work. The
banks need to be cautious, lest they end up increasing their risk exposure. All
banks employ their
own unique objective, subjective, financial and non-financial techniques to eval
uate the
creditworthiness of their customers.
4.1 Components of Credit Appraisal Process
While assessing a customer, the bank needs to know the following information: In
comes of
applicants and co-applicants, age of applicants, educational qualifications, pro
fession,
experience, additional sources of income, past loan record, family history, empl
oyer/business,
security of tenure, tax history, assets of applicants and their financing patter
n, recurring
liabilities, other present and future liabilities and investments (if any). Out
of these, the incomes
of applicants are the most important criteria to understand and calculate the cr
edit worthiness of
the applicants. As stated earlier, the actual norms decided by banks differ grea
tly. Each has
certain norms within which the customer needs to fit in to be eligible for a loa
n. Based on these
parameters, the maximum amount of loan that the bank can sanction and the custom
er is eligible
for is worked out. The broad tools to determine eligibility remain the same for
all banks. We can
tabulate all the conditions under three parameters.
Parameter
DOCUMENTS
Technical feasibility
Field Investigation, Market value
of asset
Economic viability
LTV(Loan to Value), IIR
Bankability
Past month bank statements, Asset
and liabilities of the applicant
(Table 1) (Source www.iba.com)

Besides the above said process, profile of the customer is studied properly. The
ir CIBIL (Credit
Information Bureau (India) Limited) score is checked.
Parameter components & How bank asses your creditworthiness through it:
Serial
No
Technical
Feasibility
What is Bank Looking for
1
Living
standard
Decent living standard with some tangibles like T.V. & fridge will
provide assurance to bank regarding their residential status.
2
Locality
Presence of some undesirable elements like local goons or
controversial areas adversely affects your loan appraisal process.
3
Telephonic
Verification
At least one response is needed from person to establish the identity of
the person from contact point of view.
4
Educational
Qualification
Not an essential barrier but essential to understand the complex terms
& conditions of bank loan.
5
Political
Influence
An interesting reference point in the sense that they are one of major
category of loan defaulters
6
Reference
To establish residential identity of person from human contact point of
view & cross check of their loans.
(Table 2) (Source www.iba.com)

Working Capital
4.2 Working Capital:
Net working capital of a business is its Current Assets less its Current Liabili
ty
Positive working capital means that the company is able to pay off its short-ter
m
liabilities. Negative working capital means that a company currently is unable t
o meet its short-
term liabilities with its current assets (cash, accounts receivable and inventor
y).
It is also known as "net working capital", or the "working capital ratio".
Every business needs adequate liquid resources in order to maintain day-to-day c
ash flow. It
needs enough cash to pay wages and salaries as they fall due and to pay creditor
s if it is to keep
its workforce and ensure its supplies.
Maintaining adequate working capital is not just important in the short-term. Su
fficient liquidity
must be maintained in order to ensure the survival of the business in the long-t
erm as well. Even
a profitable business may fail if it does not have adequate cash flow to meet it
s liabilities as they
fall due. Therefore, when businesses make investment decisions they must not onl
y consider the
financial outlay involved with acquiring the new machine or the new building, et
c, but must also
take account of the additional current assets that are usually involved with any
expansion of
activity. Increased production tends to engender a need to hold additional stock
s of raw materials
and work in progress. An increased sale usually means that the level of debtors
will increase. A
general increase in the firm.s scale of operations tends to imply a need for gre
ater levels of cash.
4.2.1 Need for Working Capital
Different industries have different optimum working capital profiles, reflecting
their methods of
doing business and what they are selling.
Businesses with a lot of cash sales and few credit sales should have minimal tra
de debtors.
Supermarkets are good examples of such businesses;
Businesses that exist to trade in completed products will only have finished goo
ds in stock.
Compare this with manufacturers who will also have to maintain stocks of raw mat
erials and
work-in-progress.
Some finished goods, notably foodstuffs, have to be sold within a limited period
because of
their perishable nature.
Larger companies may be able to use their bargaining strength as customers to ob
tain more
favorable, extended credit terms from suppliers. By contrast, smaller companies,
particularly
those that have recently started trading (and do not have a track record of cred
it worthiness) may
be required to pay their suppliers immediately.
Some businesses will receive their monies at certain times of the year, although
they may incur
expenses throughout the year at a fairly consistent level. This is often known a
s seasonality of
cash flow. For example, travel agents have peak sales in the weeks immediately f
ollowing
Christmas.
4.2.2 Working capital needs also fluctuate during the year
The amount of funds tied up in working capital would not typically be a constant
figure
throughout the year. Only in the most unusual of businesses would there be a con
stant need for
working capital funding. For most businesses there would be weekly fluctuations.
Many
businesses operate in industries that have seasonal changes in demand. This mean
s that sales,
stocks, debtors, etc. would be at higher levels at some predictable times of the
year than at
others. In principle, the working capital need can be separated into two parts:
A fixed part, and
A fluctuating part
The fixed part is probably defined in amount as the minimum working capital requ
irement for
the year. It is widely advocated that the firm should be funded in the way shown
in the diagram
http://tutor2u.net/business/images/workingcapital_fluctuations.gif
(Chart 1) (Source: Bank Financial Management by Saxena and Vashist)
The more permanent needs (fixed assets and the fixed element of working capital)
should be
financed from fairly permanent sources (e.g. equity and loan stocks); the fluctu
ating element
should be financed from a short-term source (e.g. a bank overdraft), which can b
e drawn on and
repaid easily and at short notice.
4.3 Tondon Commitee
The study group headed by Shri Prakash Tandon, the then Chairman of Punjab Natio
nal Bank,
was constituted by the RBI in July 1974 with eminent personalities drawn from le
ading banks,
financial institutions and a wide cross-section of the Industry with a view to s
tudy the entire
gamut of Bank's finance for working capital and suggest ways for optimum utilisa
tion of Bank
credit. This was the first elaborate attempt by the central bank to organise the
Bank credit. The
report of this group is widely known as Tandon Committee report.
Most banks in India even today continue to look at the needs of the corporates i
n the light
of methodology recommended by the Group.
As per the recommendations of Tandon Committee, the corporates should be discour
aged from
accumulating too much of stocks of current assets and should move towards very l
ean
inventories and receivable levels. The committee even suggested the maximum leve
ls of Raw
Material, Stock-in-process and Finished Goods which a corporate operating in an
industry should
be allowed to accumulate these levels were termed as inventory and receivable no
rms.
Depending on the size of credit required, the funding of these current assets (w
orking capital
needs) of the corporates could be met by one of the following methods:
. First Method of Lending:
Banks can work out the working capital gap, i.e. total current assets less curre
nt liabilities
other than bank borrowings (called Maximum Permissible Bank Finance or MPBF) and
finance a maximum of 75 per cent of the gap; the balance to come out of long-ter
m funds,
i.e., owned funds and term borrowings. This approach was considered suitable onl
y for
very small borrowers i.e. where the requirements of credit were less than Rs.10
lacs
. Second Method of Lending:
Under this method, it was thought that the borrower should provide for a minimum
of
25% of total current assets out of long-term funds i.e., owned funds plus term
borrowings. A certain level of credit for purchases and other current liabilitie
s will be
available to fund the buildup of current assets and the bank will provide the ba
lance
(MPBF). Consequently, total current liabilities inclusive of bank borrowings cou
ld not
exceed 75% of current assets. RBI stipulated that the working capital needs of a
ll
borrowers enjoying fund based credit facilities of more than Rs. 10 lacs should
be
appraised (calculated) under this method.
. Third Method of Lending: Under this method, the borrower's contribution from l
ong
term funds will be to the extent of the entire CORE CURRENT ASSETS, which has be
en
defined by the Study Group as representing the absolute minimum level of raw mat
erials,
process stock, finished goods and stores which are in the pipeline to ensure con
tinuity of
production and a minimum of 25% of the balance current assets should be financed
out of
the long term funds plus term borrowings.
(Source: banknetindia.com)
4.4 Basel II
The Basel Committee consists of representatives from central banks and regulator
y authorities of
the Group of Ten countries, plus others (specifically Luxembourg and Spain). The
committee
does not have the authority to enforce recommendations, although most member cou
ntries (and
others) tend to implement the Committee's policies. This means that recommendati
ons are
enforced through national (or EU-wide) laws and regulations, rather than as a re
sult of the
committee's recommendations - thus some time may pass between recommendations an
d
implementation as law at the national level. On 4 July 2006, the Committee issue
d a
comprehensive version of the Basel II Framework. the elements of the 1988 Accord
that were
not revised during the Basel II process, the 1996 Amendment to the Capital Accor
d to
Incorporate Market Risks, and the 2005 paper on the Application of Basel II to T
rading
Activities and the Treatment of Double Default Effects. No new elements have bee
n introduced
in this compilation.
The Basel Accord(s) or Basle Accord(s) banking supervision Accords Basel I and B
asel II
issued by the Basel Committee on Banking Supervision (BCBS). They are called the
Basel
Accords as the BCBS maintains its secretariat at the Bank of International Settl
ements in Basel,
Switzerland and the committee normally there.
4.4.1 Basel I is the round of deliberations by central bankers from around the w
orld, and in
1988, the Basel Committee (BCBS) in Basel, Switzerland, published a set of minim
al capital
requirements for banks, enforced by law in the Group of Ten (G-10) countries in
1992. Basel I is
now widely viewed as outmoded, by more comprehensive set of guidelines, Basel II
and these
are in the process of implementation by several countries. Since 1988, this fram
ework has been
progressively introduced in member countries of G-10, currently comprising 13 co
untries,
namely, Belgium, Canada, France, Germany, Italy, Japan, Luxemburg, Netherlands,
Spain,
Sweden, Switzerland, United Kingdom and the United States of America. The Basel
I accord
dealt with only parts of each of these pillars of Basel-II. For example: with re
spect to the first
Basel II pillar, only one risk, credit risk, was dealt with in a simple manner w
hile market risk was
an afterthought; operational risk was not dealt with at all. Basel I, that is, t
he 1988 Basel Accord,
primarily focused on credit risk. Assets of banks were classified and grouped in
five categories
according to credit risk, carrying risk weights of zero (for example home countr
y sovereign
debt), ten, twenty, fifty, and up to one hundred percent (this category has, as
an example, most
corporate debt). Banks with international presence are required to hold capital
equal to 8 % of
the risk-weighted assets.
4.4.2 Basel II is the second of the Basel Accords, which are recommendations on
banking
laws and regulations issued by the Basel Committee on Banking Supervision. The p
urpose of
Basel II, which was initially published in June 2004, is to create an internatio
nal standard that
banking regulators can use when creating regulations about how much capital bank
s need to put
aside to guard against the types of financial and operational risks banks face.
Advocates of Basel
II believe that such an international standard can help protect the internationa
l financial system
from the types of problems that might arise should a major bank or a series of b
anks collapse. In
practice, Basel II attempts to accomplish this by setting up rigorous risk and c
apital management
requirements designed to ensure that a bank holds capital reserves, through its
lending and
investment practices. Generally speaking, these rules mean that the greater risk
to which the bank
is exposed, the greater the amount of capital the bank needs to hold to safeguar
d its solvency.
Basel II uses a "three pillars" concept
. Minimum capital requirements (addressing risk).
. Supervisory review and
. Market discipline to promote greater stability in the financial system.
4.4.2.1 First pillar

The first pillar deals with maintenance of regulatory capital calculated for thr
ee major
components of risk that a bank faces:
. The credit risk component can be calculated in three different ways of varying
degree of
sophistication, namely
. Standardized approach, Foundation IRB and Advanced IRB. IRB stands for
"Internal Rating-Based Approach".
. For operational risk, there are three different approaches
. Basic indicator approach or BIA, standardized approach or TSA, and advanced
measurement approach or AMA, the internal measurement approaches an
advanced form.
. For market risk the preferred approach is VaR (value at risk).
4.4.2.2 Second Pillar

The second pillar deals with the regulatory response to the first pillar, giving
regulators much
improved 'tools' over those available to them under Basel I. It also provides a
framework for
dealing with all the other risks a bank may face, such as systemic risk, pension
risk,
concentration risk, strategic risk, reputation risk, liquidity risk and legal ri
sk, which the accord
combines under the title of residual risk. It gives banks a power to review thei
r risk management
system. There are four Principals of Second Pillar
Principle 1: Bank should have a process for accessing their overall capital adeq
uacy in relation
to their risk profile and strategy for maintaining their capital levels.
Principle 2: Supervisors should review and evaluate banks Internal Capital Adequ
acy
Assessment Strategy and their ability to monitor ensures compliance, and takes a
ppropriate
supervisory Action if not satisfied.
Principle 3: Supervisors should expect banks to operate about the minimum Regula
tory Capital
Ratio. Banks should hold capital in access of minimum requirements
Principle 4: Supervisors should seek to intervene at early stage to prevent capi
tal from falling
below the minimum levels. Rapid Remedial Actions is required to restore smooth f
unctioning.
4.4.2.3 Third Pillar
Committee believes that it is rationale for pillar three is sufficiently strong
warrant the
introduction of disclosure requirement for the banks using the Basel II framewor
k. The purpose
of Pillar three is guiding principles of market discipline is to complement the
minimum capital
requirement and the supervisory review process. The committee aims to encourage
market
discipline by developing a set of disclosure requirement which will allow market
participants to
access key information on scope of Application, Capital Risk Exposure, Risk Acce
ptance
Processes and hence Capital Adequacy of the institution.
(Source: www.bis.org)
Objective of the Project
1. To study the various products available for working capital finance in

Citibank.
2. To study the existing Credit Appraisal System at Citibank.
3. To analyze the various parameters considered for evaluating the credibility
of the corporate clients for working capital financing.
4. To review the credit risk assessment methodology adopted at Citibank.
5. To analyze the loan disbursement procedure and the Remedial measure
adopted by banks for working capital loans.
RESEARCH METHODOLOGY
6.1 Introduction
Research methodology is a way to systematically solve the research problem. Rese
arch is an art
of scientific investigation and refers to a search for knowledge. It can be also
defined as
scientific search for pertinent information specific topic. It consists of sever
al steps that need to
be implemented in a sequential order for achieving objectives of research effect
ively.
6.2 Type of Research
The project is about analysis of the function of the bank & also how the Credit
appraisal is done
in the bank for working capital. So the project is of Analytical type of Researc
h which is a style
of qualitative inquiry, it is non-interactive document research which describes
and interprets the
past or recent past from selected sources.
6.3 Sampling Unit:
This is that element or set of elements considered for selection in some stage o
f sampling (same
as the elements, in a simple single-stage sample). In a multi-stage sample, the
sampling unit
could be blocks, households, and individuals within the households.
6.4 Sampling Technique:
Non Probability Purposive/Judgmental sampling is where the sample is selected on
the basis of
knowledge of the research problem to allow selection of "typical" persons for in
clusion in the
sample.
6.5 Data Collection
A research study may require primary data or secondary data. In simple words, th
e secondary
data already exists, which may be available within the organization or may be co
llected from
outside agencies. This type of data saves time & money of the researcher. Howeve
r, secondary
data should be properly evaluated because they are collected for a variety of pu
rposes.
6.5.1 Primary data
Primary data are those which are collected for the first time & they are origina
l in the character.
Primary data may pertain to demographic, socio-economic; characteristics of cons
umers, attitude
&opinion of people their awareness & knowledge & other similar aspects. Primary
data are
collected through survey & in survey method researcher doing a sample survey & i
n sample
survey researcher conducts a personal interview.
6.5.2 Secondary data
The process of secondary data collection & analysis is called desk research. Sec
ondary data are
those data which are collected from earlier work & are applicable or usable in t
he study of
research. Secondary data are collected through
1) Company.s Credit Manual
2) Annual report etc.
3) Books & article
But in this report only the secondary data are taken into consideration for data
analysis &
interpretation.
6.6 Data analysis:
Analysis of data is a process of inspecting, cleaning, transforming, and modelin
g data with the
goal of highlighting useful information, suggesting conclusions, and supporting
decision making.
Data analysis has been done using Graphs, Charts, Tables, and Financial Ratio.s
like DSCR,
Current Ratio etc.
Data Analysis
7.1 Products available at Citibank for Working Capital Finance
Funded
Facilities
Non Funded
Facilities
1. Sight Letter of Credit

2. Usance Letter of Credit
3. Bank Guarantee
4. Bill Discounting
7.1.1 Cash Credit: This account is the primary method in which Banks lend money
against the
security of commodities and debt. It runs like a current account except that the
money that can be
withdrawn from this account is not restricted to the amount deposited in the acc
ount. Instead, the
account holder is permitted to withdraw a certain sum called "limit" or "credit
facility" in excess
of the amount deposited in the account.
Cash Credits are, in theory, payable on demand. These are, therefore, counter pa
rt of demand
deposits of the Bank.
7.2.2 Working Capital Demand Loan: A short-term loan to finance day-to-day opera
tions of a
business. It is normally a loan for a comparably small amount, and is not used f
or long-
term investment purposes. Rather, it funds immediate needs, such as payroll and
accounts
payable.
1. Cash Credit
2. Working Capital Demand Loan
3. Export Finance
7.2.3 Export Finance: The exporter may require short term, medium term or long t
erm finance
depending upon the types of goods to be exported and the terms of statement offe
red to
overseas buyer. The short-term finance is required to meet working capital needs.
The working
capital is used to meet regular and recurring needs of a business firm. The regu
lar and recurring
needs of a business firm refer to purchase of raw material, payment of wages and
salaries,
expenses like payment of rent, advertising etc. Export finance is short-term wor
king capital
finance allowed to an exporter. Finance and credit are available not only to hel
p export
production but also to sell to overseas customers on credit.
7.2.4 Sight Letter of Credit: A is a document issued mostly by a financial insti
tution, used
primarily in trade finance, which usually provides an irrevocable payment undert
aking made
payable to a beneficiary upon presentation to the opener of conforming documents
.
7.2.4 Usance Letter of Credit: Letter of credit requiring payment a certain numb
er of days after
the appropriate documents are presented. It is also called a Usance letter of cr
edit.
7.2.4 Bank Guarantee: A type of guarantee in which a bank or other lending
organization promises to repay the liabilities of a debtor in the event of failu
re of the debtor to
make payment of the same.
7.2.5 Bills Discounting: A commercial bill discount is an act by which the legal
holder of a
commercial bill (including banker's acceptance draft and commercial acceptance d
raft) transfers
it to Bank to acquire cash before its maturity date for which banks charges a no
minal discounting
charge.
7.3.1 Credit Program Classification
Credit Program are classified into two parts
1. Classical Small Ticket Fast Track Program
2. Business Lending Program
7.3.1 Classical (STFT) Program

Small Ticket Fast Track targets smaller Obligors (mainly Tier 0) with approved f
acilities of
lower than INR 40MM and endeavors to facilitate bulk customer acquisition and as
set growth
by building a granular Portfolio. The Program primarily uses a template- based a
pproach to
customer selection, while keeping exception to a minimum.
1. Cash/ Liquid Asset Backed finance
2. Product Enables Loans (PEL)
3. Clean Door Opener (CDO)
4. Cash Management Services (CMS)
5. PSE Sub- Program
6. Downgraded /UN graded Existing
Customers
7. Temporary Overdraft (TOD.s)
/Line Excesses
Products of
Small Ticket
Fast Track
Program
7.3.1.1 Cash/ Liquid Asset Backed finance:

Customers providing cash/Liquid Assets approved elsewhere/ post shipment under c
lean or bank
accepted LC.s covering full facilities would be reported as Liquid Asset Backed an
d KYC,
CIBIL/Dedupe and SDN checks would be done as due diligence for the same for these
customer, only 1 year audited financials(less than 20 months old) would be requi
red. The
requirement of audited financials can be waived by a CO with covering limits and
will not be an
exception. These facilities could also be offered to start up companies.
7.3.1.2 Product Enables Loans (PEL):
PEL envisages self- Liquidating Post shipment loan against accepted invoices or
GRN linked
invoices of TTLC/GRB/MME buyers; the same being treated as clean. since without c
harge on
current assets or collateral. However, the TTLC/GRB/MME buyer has to undertake t
o credit
payments directly to account with Citibank. Therefore, the PEL offered will be c
apped at
Program Limits of INR 48MM; the same being treated as Clean.. TTLC/GRB/MME names
should be current customers and not classified names to qualify for the offering
.
7.3.1.3 Clean Door Opener (CDO):
Clean Door facilities will be offered selectively under the STFT Program. Based
on the
feedback on time taken and difficulty in convincing prospects to bank with Citib
ank, they will
offer clean door opener subject to the following additional conditions are met :
a) Tenor will be capped at 6 months extension for another 3 months will be subje
ct to approval
of Risk Manager.
b) Mandatory customer meeting by Credit VP.
c) CDO.s to be capped at 20% of incremental customers booked each month across l
ocation.
d) Security PDC for the CDO amount from main Working Capital Account.
7.3.1.4 Cash Management Services (CMS):
Citiclear, Citispeed, Citicheck are the approved CMS products. For Non- credit C
MS customer.s
Citicheck facility will extend only if Citispeed and/or Citiclear facility are a
lso offered.
All Credit customers are eligible for CMS facility. For Non- Credit customers- n
o credit visit/site
visit, call- back on customer and trade reference check will be required. The fo
llowing CSC will
be applicable for offering various CMS Products to non credit customers.
7.3.1.5 PSE Sub- Program:
This Sub- Program seeks to provide short tenor forward cover and option products
to customers
and prospects, up to a maximum PSE amount of Rs. 13.5MM which could be increased
to INR
48MM for larger obligors meeting more rigorous selection criteria. The PSE Propo
sition seeks to
assist customers in managing risks inherent within Loan/Fx transaction. Derivati
ve products
would be mainly Category A transactions. Category B deals are not anticipated to
be offered to
Asia Commercial Clients Exceptions require approval of HCRO with notification to
the GCG-
CRO, before entering into conversations with customer. The target market would b
e the liability
customers and prospects as well as customers not under negative TM of STFT Progr
am and
those covered under approved segments under the Classifiable Managed Program.
7.3.1.6 Downgraded /UN graded Existing Customers:
For existing customers, who do not meet Primary CSC grade or have scores below U
S, a result
of which the facilities provided are higher than the eligibility or the collater
al available is lower,
such facilities need to be approved by an approval level which is one level high
er than the
original approval level and renewed every 6 months thereafter.
7.3.1.7 Temporary Overdraft (TOD s) /Line Excesses:
Temporary overdraft/excess over approved lines can be approved as per the below
grid. The
SRM may approve changes to the limits mentioned below.
Limit
Approvals
<= INR 12MM
2 credit officers or 2 Business officer with
credit Initials approved by CBG Risk head.
> INR 12MM
Credit Officer (CO) / Business Officer and
STFT Risk Manager or SME Risk
Manager.s Designee.
(Table 3) (Source: Collected from the SME software manure of Citibank)

TOD/Excess up to a tenor of 14days would be approved as per the grid above. Subs
equently, the
TOD would be consolidated with the total facility and approved at the original l
evel by a credit
officer with the initials covering the aggregated exposure. The Risk Manager wil
l review TOD
reports on a monthly basis.
7.3.2 Business Lending Program
Business Lending Program focuses on small manufacturers, distributors, services
entities,
retailers and other small businesses worth turnover of less than Rs 500 MM, wher
e the lending
is Pre-dominantly amortizing in nature. Its Sub- Program SME light addresses the
Liquid Asset
backed requirement of customers up to Rs 40MM.
The customer will be categorized as follows:-
Tier 0:- Customers with sales of more than INR 5 MM and less than INR 90 MM.
Tier 1:- Customers with sales of more than INR 90MM and less than INR 450MM.
7.3.2.1 Customer Service Criteria:
Legal Entities
Customer Location
Min No. of
Years in
business
Sole Proprietorship where the proprietor
is a citizen of India
Only customer who are
located at the Branch
Location of Citibank
3 Years
Partnership firms where the partners are
Citizen of India,
Private Limited Companies under
Companies Act, 1956
Hindu United Families where all the Co-
Partners are Majors

New Entity: Where the Partners/ Promoters of a business have opened a new branch
/outlet, but
in a new firm/company and the new entity has completed at least 1 year of operat
ion and in
profitable on a net profit basis. The No. of operation and in Profitable (Net pr
ofit basis), the year
of existence of the parent business entity started by the partners/promoters man
y be considered.
However, a guarantee by the parent business entity would be mandatory.
7.3.2.2 Credit Program applicable to both Classical (STFT) and Business
Lending Program
Less than 3 years of Existence?
No
Cost of credit or ROA worse than 25% below plan
No
Current ARR rating of satisfactory, no unresolved MBI, and overall RCSA of
satisfactory
Yes
In a country with a Central Government ORR of 4- or worse
Yes
Portfolio Classification and rationale for classification: High Risk, Rationale
as above
Yes

7.3.2.3 Credit Risk Measurement Criteria
Serial
No.
Particulars
Tier-1
Tier-2
1.
Sales
Turnover
More than INR 90MM and less than
INR 450MM Profitable in each of the
last three years.
More than INR 5MM and
less than INR 90MM
2.
Cash Profit
Profitable in each of the last three years
Profitable in latest year
and at least two out of the
last three years.
3.
Net Worth
Min INR 4.4 MM
Min INR 2.2 MM
4.
Net Income
Min INR 2.20 MM
Min INR .90MM
5.
DSCR
Min 1.25 times
Min 1.25 times
6.
Debt Equity
Max of 3:1
Max 2:1
7.
Current Ratio
Minimum of 1 time for manufacturing
and 0.75 times for trading enterprise.
While these are minimum standards,
where as experience of lending suggests
that these vary from segment to
segment. Business shall identify and
Minimum of 1 time for
manufacturing and 0.75
times for trading
enterprises. While these
are minimum standards
our experiences of lending
obtain specific approvals from Risk
Manager for Current Ratio less than 1
times.
in various segments
suggest that these vary
from segment to segment.
Business shall identify and
obtain specific approvals
from Risk Manager for
Current Ratio less than 1
time.

7.3.2.4 Mandatory Pre-Screening Criteria
Serial
No.
Parameters
Requirements
Source of Verification
1.
Selected Segment
To be a part of CRB
Target Market
CRB Target Segment
2.
RBI Negative
List/Defaulter List
Not on these List
RBI Negative list on
compliance Site.
3.
SDN Check
Not on SDN List
SDN list on Compliance
Site.
4.
CIBIL Check
To be Positive
CIBIL Website
5.
Location of
Customer
Customer to be located
at Citibank Branch
Location

7.4 Industry Specific Key Success Factors (All Points Below are Mandatory)
Serial No.
Particulars
Grade A
Grade B
Grade C
Grade D
A.
Pharmaceuticals:
1.
Established Sales
Network
Yes
Yes
Yes
Yes
B.
Paper & paper
packing:
1.
No. of Years in
Business
>12 years
>9 Years
>6 Years
>6 Years
2.
Profitability Run
during last 5
years
All 5 years
At least 4
Years
At least one
Block of 2
Years
At least one
Block of 2
Years
3.
Access to Raw
materials
Satisfactory
Satisfactory
Satisfactory
Satisfactory
C.
Pharmaceutical
Formalities
1.
No. of Years in
Business
>10 Years
>7 Years
>5 Years
> 5 Years
2.
Sales Turnover
MIN INR
90 MM
MIN INR
90 MM
MIN INR
90 MM
MIN INR
90 MM
3.
Revenue from
Branded
Products as a
Percentage of
total Revenue
> 50%
>50%
>50%
>50%
4.
Market Share
Rank of one
brand in the
therapeutic
Top 20
Top 20
Top 20
Top 20
category as per
ORG report
5.
Established Sales
7 distribution
network
Yes
Yes
Yes
Yes
D.
Branded
Consumers
1.
No. of Years in
business
>10 years
>7 years
>5 years
>5 years
2.
Sales Turnover
MIN INR
225MM
MIN INR
225 MM
MIN INR
225 MM
MIN INR
225 MM
3.
Revenues from
Branded
Products as a %
of total Revenue
>67%
>67%
>67%
>67%
4.
Years in
Business for
Brand
Minimum
10 Years
Minimum
Years
Minimum 5
years
Minimum 5
years
5.
Sales growth of
Major Brand
3 years
CAGR of
higher than
10%
3 Years
CAGR of
5%-10%
3 years
CAGR of
+5% up to -
5%
3 years
CAGR of
+5 up to -
5%
6.
Established Sales
& Distribution
Network
Yes
Yes
Yes
Yes
(Table 8)(Source: Collected from the SME software manure of Citibank)

7.4.1 Selection Criteria for Distributors
Serial
No.
Particulars
Grade A
Grade B
Grade C
Grade D
A.
Mandatory Criteria
1.
No. of Years in
Business
> 7 years
> 5 years
> 3 years
>3 years
2.
References- Trade
(Minimum 2)
Bank (At least 1)
No Adverse
Comment
No Adverse
Comment
No Adverse
Comment
No Adverse
Comment
3.
Tangible Net Worth
Positive
Positive
Positive
Positive
4.
DSCR
>2.0
>1.5
>1.2
>1.2
B.
Secondary
1.
Liquidity (Current
Ratio)
>1.25
>1.1
>1.0
>.8
2.
Stock Turnover Period
< 45 Days
< 75 Days
< 100 Days
< 120 Days
3.
Leverage (TOL/TNW)
Max 4
Max 5
Max 9
Max 14
4.
Sales Growth(CAGR)-
Existing Customer
Positive
-5% to 0%
-5% to 10%
---
5.
% of STO from
TTLC/GRB/TM
Linkage
> 50%
> 40%
> 20%
__
6.
Account Receivable
Aging
< 45 days
< 75 days
<100days
<120 days
7.
Principle
Concentration
<= 75%
__
__
__

7.4.2 Selection Criteria for New Distributors
Serial
No.
Customer Selection
Criteria
Grade A
Grade B
Grade C
Grade D
A.
Mandatory Criteria
1.
DSCR
>2.0
>1.5
>1.35
>1.2
B.
Secondary
1.
Leverage (TOL/TNW)
Max 4
Max 5
Max 7
Max 12
2.
Sales Growth(CAGR)
> 5%
0% to 5%
-5% to 0%
__
7.4.3 Selection Criteria for Service
Serial
No.
Customer Selection
Criteria
Grade A
Grade B
Grade C
Grade D
A.
Mandatory
1.
No. of Years in
Business
> 7 Years
> 5 Years
> 3 years
>3 years
2.
References- Trade
(Minimum 2)
Bank (At least 1
No Adverse
Comment
No Adverse
Comment
No Adverse
Comment
No Adverse
Comment
3.
Trade Net Worth
Positive
Positive
Positive
Positive
4.
DSCR
>2.0
>1.5
>1.2
>1.2
5.
Operating Margin
Positive
Positive
Positive
Positive
B.
Secondary
1.
Liquidity (Current
Ratio
>1.25
>1.1
>1.0
>.5
2.
Leverage
(TOL/TNW)
Max 3
Max 4
Max 5
Max 7
3.
External Debt
/EBITDA
<= 2.5x
<= 3.5x
<= 5x
<= 7x
4.
Sales
Growth(CAGR)-
Existing Customer
Positive
-5% to 0%
-5% to 0%
--
5.
Account Receivable
Aging
< 75 days
< 100 days
< 135 days
<135 days
6.
Buyers
Concentration
< 25%
Sales from
one buyer
< 30%
Sales from
one buyer
< 40%%
Sales from
one buyer
7.4.4 Selection Criteria for New Customer in Services
Serial
No.
Customer Selection
Criteria
Grade A
Grade B
Grade C
Grade D
A.
Mandatory
1.
DSCR
>= 8%
>= 8%
>= 8%
>= 8%
B.
Secondary
>= 8%
>= 8%
>= 8%
>= 8%
1.
PBIT margin
>= 8%
>= 8%
>= 8%
>= 8%
2.
Sales
Growth(CAGR)
>= 8%
>= 8%
>= 8%
>= 8%
For Customers with PBIT margin between 5% - 8% At least 50% of TFA should be cov
ered b
market value of commercial/ residential property For Retail services, Inventory
days should be <
104 days for Grade A.
7.4.5 Selection Criteria for Information Technology
Serial
No.
Customer Selection
Criteria
Grade A
Grade B
Grade C
Grade D
A.
Mandatory
1.
No. of Years in Business
> 7 Years
> 6 Years
> 5 years
>5 years
2.
References- Customer
(Minimum 2);
Bank (At least 1, if funded
by bank); Venture
Capitalist(1, if funded
through venture capital)
No
Adverse
Comment
No
Adverse
Comment
No
Adverse
Comment
No Adverse
Comment
3.
Trade Net Worth(INR)
Tier 2: >90
MM
Tier
3:>180MM
Tier 2:
>67 MM
Tier
3:>112MM
>45 MM
> 45 MM
4.
DSCR
>3.0
>2.5
>2.0
>2.0
B.
Secondary
1. Net
Margin
(excluding extra
ordinary
income/
expenses
Net Margin (excluding
extra ordinary
income/expenses
>10% for
the last
year,
positive for
last 3 years
>8% for
the last
year,
positive
for last 2
years
> 6%
> 3%
2.
Liquidity (Current Ratio
>2
>1.75
>1.5
>1.1
3.
Leverage (TOL/TNW)
Max 1.0
Max 1.5
Max 2
Max 4
4.
External Debt /EBITDA
<= 2.0x
<= 3.0x
<= 4x
<= 5x
5.
Sales Growth(CAGR)-
Existing Customer
-New Originations
15%
Positive
growth
over
previous
year
10%
Positive
growth
over
previous
year
5%
Positive
growth
over
previous
year
Increasing
Trend
6.
Export /Sales
>70%
>60%
.50%
>50%
7.
Account Receivable Aging

< 90 days
< 120
days
< 120
days
<180 days
and
receivables
<120
account for
at least
75% of
total
Receivables
8.
Buyers Quality
Minimum 50% of the buyers
should be approved
Minimum
30% of
buyers
should be
approved.
9.
Buyers Concentration
< 20%
Sales from
one buyer
< 30%
Sales
from one
buyer
< 40%
Sales
from one
buyer
< 50%
Sales from
one buyer
7.4.6 Credit Acceptance Criteria
Tenure Facility:
Particulars
Business Lending
ME Program
For Secured Facilities
(Property Collateral or
Pledge of Marketable
Securities or 100% cash
collateral)
Up to US $ 500M(INR
24MM)
Max 5 Years
Max 5 Years
Up to US $ 1MM(INR 48
MM)
Max 5 Years
Max 5 Years
Unsecured Facilities:
Tier 1 Customers
24/36 months
24 months
Tier 0 Customers
24/36 months
24 months
Unsecured ME Term loan
up to US$ 184M(INR
8.8MM)
--
36 months
New term loan term will be capped at 5 years irrespective of facility amount. Th
ey would
nevertheless need to grant further exposures where in the amortization periods h
ave already been
committed and are in excess of 5 years.
7.5 Obligor Exposure:
The maximum Obligor Exposure under the Program shall be the lower of either the
absolute
value cap or as 9% of Total sales of the borrower as given in the table below fo
r business lending
customers. Under the ME Program, the overall exposure shall restrict by the EMI/
Average Credit
card submissions (EMI to billing ratio). This serves as an overall cap for the o
bligor under the
program. However, lower limits have been prescribed for facilities, which are se
cured.
7.5.1 Secured Exposure:
These are Exposure collateralized by property/ Marketable Securities either inde
pendently or in
combination. For facilities, which are under the Market Establishment Program, H
ypothecation
of Credit Card receivables would be mandatory.
Obligor
Category
Max Exposure
% of Total Revenue
Business
Lending
Program
Tier 0
US $ 625M(INR 30MM)
50% of Total Revenue
Tier 1
US $ 1MM(INR 48MM)
50% of Total Revenue
Merchant
Establishment
Program
EMI to Billing Ratio of 67%. This is

defined as the monthly commitment
under the facility as a proportion of
the quarterly submission over the
previous quarter.
Tier 0
US $ 625M(INR 30MM)
Tier 1
US $ 1MM(INR 48MM)
Note: Where the obligor is a professional engaged in practice consulting in the
same line of
business as his professional qualification, we propose a relaxation to the rule
of exposure up to
50% of turnover.
(a) Where facilities are towards working capital/ annually renewable overdraft,
exposure shall be
limited to a maximum of 50% of revenues.
(b) Where facilities are towards capital expenditure, the rule of 50% of revenue
will not apply.
Maximum Obligor Limit for Unsecured facilities (including those secured by colla
teral other
than Property like receivables sticks etc.
Unsecured Facilities
Business Lending
ME Program
Tier 0
US $ 188M(INR 9.0MM)
US $ 188M(INR 9.0MM)
Tier 1
US $ 188M (US $ 415M)*(9MM
INR)
US $ 188M (9 MM)
Unsecured ME
Term Loan
--
US$ 100M(INR 4.8MM)
Leveraged Portion of Unsecured facilities subject to a maximum LTV of (100%)
Tier 1
US $415 M(INR 20MM)
US $ 415(INR 20MM)
Cap of 2 deal per month between US $ 188M US $415M

7.5.2 Maximum Obligor Limits for Annually Renewal Overdraft (AROD s)
Unsecured Facilities
Business Lending
ME Program
Tier 0- Secured/ Leveraged
Portion of Secured
Exposure subject to an
overall LTV of 100%
US $300M(INR 14.40 MM)
US $200M (INR 9.6
MM)
Tier Zero Unsecured
US $ 150M (INR7.2MM)
US $100M (INR 4.8MM)
Tier 1 Secured **
US $ 1MM (INR 48MM)
US $ 750M (INR 36
MM)
Tier 1(LA Based)
US $ 1MM (INR 48 MM
NA
Tier 1 Unsecured
US $ 188m (INR 9MM)*
(INR 9MM)
US $ 188M (US $ 415
m)* (INR 9MM)
** Cap of 2 deals per month between US $ 188M US $415M

Note: Under the ME Program, AROD.s shall be restricted to 4 times the average mo
nthly Credit
card submissions.
7.6 Additional Credit Criteria
This section defines additional Criteria to be followed for specific customer se
gments /type of
transactions. They have defined additional criteria for Exporters as given below
. Additional /
amendments to this section can be done with the approval of a Risk Manager. Wher
e an
exception is required for a one off transaction, the deviation has to be approve
d by the country
Risk Head.
7.6.1 Exporters:
An Export Organization is a business where more than 50% of its sales revenue ar
ises from
export of goods and services. A merchant Exporter is an entity which exports man
ufactured
goods procured from other third party manufacturers. The export customer shall c
omply with all
Business- Lending Programs subject to following criteria.
1.
Sales Turnover
Minimum sales turnover of US $
1.05MM(INR 50 MM)
2.
Year of Existence
Minimum of 5 years
3.
Merchant Exporter special
condition
A merchant Exporter much have been
transacting on the same class of product for
a minimum of 5 years.
4.
Export Outstanding
Statement
Not more than 10% of the debtors of
customer much are over due in their
payments by more than 15 days. This is to
be certified at time of the CPA verifications
as at the last day of the month preceding
the CPA review
5.
High Risk
Countries/Continents
Where a customer exports to countries in
Africa, South America, China, Countries
under the denial and the IS sanctions, the
transaction would have to be approved by a
Risk Manager.
This approval is in addition to any
compliance approval that would be
required for facilities to exporters dealing
with countries under USA sanctions.
7.6.2 Credit Approval & Renewal
A credit Approval Document much be prepared for every facility under the Busines
s Lending
Program. The following approval grid must be followed.
Obligor Exposure <US $1MM
Two credit signor, one of whom must be a
CO from independent risk management
having covering limits for obligor
Exposure. SCM can be the second singer.
Cash Backed exposure under SME light
up to US $250M (INR 12MM)
In line with Section VI-3 of the commercial
policy such transaction can be approved by
a single credit signor having covering
initials.
A minimum of two credit signers must approve each credit transaction. One of the
two credit
signers must have credit limit equal to or greater than amount of the credit bei
ng approved. All
signers on each commercial lending transactions mush have a commercial risk cred
it initial. Risk
manager can delegate credit Initials for SCM.s up to a max amount of US $ 250 M.
Any extension of credit to a business, which poses an environment risk, has to b
e approved by a
senior Risk Manager.
In line with the Commercial Market Policy, where a request for incremental expos
ures is less
than 10% of the previous approved Obligor Exposure or US $ 2MM whichever is lowe
r, the
incremental exposure can be approved by two officers, at one level lower than wh
at is required
in the Credit Approval Grid.
8 CASE: Credit Appraisal Procedure for XYZ Industries Ltd.
8.1 Background:
XYZ Industries limited is a leading Interior Infrastructure Company in 1984 as X
YZ Timber
Industries Pvt. Ltd in Tizit, Nagaland by Mr. S.P. Mittal, and Chairman of the c
ompany. It
started commercial production of plywood with an installed capacity of 15 lakh s
q. mt, p.a. in
1987. In 1994, xyz Timber ltd. was converted into a public limited company and t
he name was
changed to XYZ Industries Limited (XYZIL) Later in 1996, Mittal Laminates Ltd, o
ne of its
group company engaged in production of laminates (set up in 1992 in behror, Raja
sthan, with an
installed capacity of 10 lakh sheets p.a. was merged into XYZIL. The installed c
apacity of
plywood.s gradually increased to 24 million sq. mts while annual capacity of the
laminates unit
increased to 5.34 million sheets by FY 2009.
8.2 Composition of Board and Shareholding Pattern
Mr. Shiv Prakash Mittal,
Executive Chairman
Mr. Rajesh Mittal,
Managing Director
Mr. Saurabh Mittal,
Joint Managing Director & CEO
Mr. Shobhan Mittal,
Executive Director
Mr. Moina Yometh Konyak
Mr. Gautam Dutta,
Nominee of IDBI Bank Limited
Mr. Susil Kumar Pal
Mr. Vinod Kumar Kothari
Mr. Anupam Kumar Mukerji
Ms. Sonali Bhagwati Dalal
(Table 20)
8.3 Location:
Its manufacturing sites are located in West Bengal, Rajasthan, Uttarakhand, Gujr
at, Himachal
Pradesh and Nagaland.
8.4 Shareholding Pattern
Particulars
% Holding
% Holding
Promoter Group
Individuals/HUF
19.54
Bodies Corporate
35.46
55.00
Public Shareholding
Mutual Funds
5.87
Foreign institutional Investors

7.26
Bodies Corporate
10.80
Individuals
21.07
45.00
Total
100.00
(Table 21)
8.5 Product Line:
Company is primarily engaged in manufacture of plywood and other value added pro
ducts such
as laminates and medium density fibre board (MDF). XYZIL operations are mainly d
ivided into
two divisions namely Plywood and Allied business and Laminate and Allied Busines
s division.
Within a very short span of time it has diversified its expertise in manufacturi
ng, marketing,
distribution and branding various types of plywood, flush doors, block boards, l
aminates,
decorative veneers and particle boards. The company enjoys the largest market sh
are in India.s
organized Plywood and laminates market (25% and 15% respectively). It currently
holds of
Laminates, Green Decowood & Green Lamieboard, Pre-Laminated Particleboard and MD
F.
8.5.1 Manufacturing Units
Product
Location
Installed Capacity
Plywood
Tizit, Nagaland
45 lac sq m
Plywood
Kriparampur, West Bengal
60 lac sq m
Plywood
Bamanbore, Gujrat
30 lac sq m
Plywood and decorative
Veneers
Pantnagar, Uttarakhand
105 lac sq m
Laminates
Behror, Rajasthan
63.40 lac Sheets
Decorative Veneers
Behror, Rajasthan
42 lac sq m
Laminates
Nalagarh, Himachal Pradesh*
33 lac Sheets
Total Capacity
378.4 lac sq m
(Table 22)
8.6 Buyers Detail
SI
no.
Name of the Customers
Division
Amount(Rs.
MM)
1.
Greenlam Asia Pacific PTE. Ltd
Decorative
133.65
2.
Greenlam America Inc
Decorative
107.45
3.
Ahuja & company
Decorative
107.38
4.
Green.s Marketing services- Hyderabad
Decorative
97.94
5.
Makor Haformaika Limited
Decorative
96.59
6.
Green.s Marketing services- Hyderabad
Plywood
68.78
7.
Ahuja Association
Plywood
63.38
8.
Om Prakash Fateh Chand & Co.
Plywood
62.09
9.
Plywood House
Plywood
61.59
10.
Prakash Ply Centre Pvt. Ltd.
Plywood
49.72
Total
848.87
(Table 23)
8.7 Suppliers Details
Si No.
Name of The Suppliers
Division
Amount(Rs
MM)
1.
Mayar (H.K) Limited
Plywood
221.05
2.
JB Daruka Papers Ltd.
Plywood
191.65
3.
Alkemal Singapore PTE Ltd
Plywood
144.88
4.
The Sirpur Paper Mills Limited
Plywood
117.15
5.
Wood Craft International PTE Ltd,
Singapore
Plywood
99.71
6.
Dragon Timber OPverseas PTE ltd,
Singapore
Plywood
91.76
7.
G.S.F. & C. Ltd, Vadodara
Plywood
89.23
8.
Natural Forest PTE Ltd, Singapore
Plywood
60.24
9.
Farlin Timbers PTE Ltd.
Plywood
59.51
10.
Dragon Timber Overseas PTE Ltd, Singapore
Plywood
39.74
Total
1114.92
(Table 24)
8.8 Qualitative Factors
Factors
Prior
KSF
Parameters
Conclusions
Qualitative
Current Industry State
NA
Hugh growth/Steady State/ Decline
Steady State
Current Market Position
NA
Monopoly/Dominant/Average/Low
Average
Management Depth
NA
Good/Average/Poor
Average
Is the Financial Statement
Reliable
NA
Yes/No
Yes
Factual
Auditors
NA
International/Local/Not Audited
Local
Length of Borrowing
NA
New Organisation
(Table 25)
8.8.1 Current Industry State: Steady State
Real Estate and Retail Sector are the important growth drivers of the Interior
Infrastructure and
Panel Industry. India is one of the largest consumers of wood in Southeast Asia
with sufficient
tropical wood of all varieties. However, in recent years, growing concerns about
the environment
and the need for forest conservation have led to reduction in wood supply, while
Reconstituted
wood products : plywood, hardboard, article board and medium density fiber board
have gained
popularity form the general consumer, Indian Railways, Defense, Furniture and La
minate
manufacturers as well as builders. The Plywood and laminates industry is predomi
nantly
dominated by the un-organized sector. However, with rationalization of excise du
ty on plywood
from 8% to 4% and laminates form 10% to 8% organized sector is consolidating and
expected to
grow rapidly and increase its share from 20% to 40% by FY2020. The total size of
the wood
panel market is around USD 2.5-3 Billion. Plywood controls 78% of the market, wh
ile the rest is
controlled by engineered panels like MDF and Particleboards. The Global Furnitur
e industry-
mostly dependent on lumber, natural wood, plywood and veneer/laminates- is proje
cted at USD
90 Billion, recording a CAGR of 7-8%. Though India.s present share in the intern
ational
furniture trade is insignificant at 0.25% due to predominance of unorganized pla
yers, the
industry is catching up fast with the booming reality business, spanning residen
tial and
commercial segments. Based on the same, the current industry state is considered
to be Average.
8.8.2 Current Market Position: Average
The industry is mainly divided into four segments: Low, Lower- mid, Upper-mid an
d Premium.
XYZ.s presence is mainly in the upper-mid and premium segments. Company has a 45
%
presence in the Upper-middle segment, and the remaining 55% in the premium segme
nt.
However there is an intense competition from unorganized segment and hence it ha
s been
considered the current market position as Average.
8.8.3 Management Depth: Average
The promoters of the company are established in the current line of business, ha
ving over 25
years of experience in the plywood and laminated industry. Company also has a te
am of
qualified technical/ finance professionals who manage the key business and strat
egic functions.
The key decisions are taken by the promoters and hence, the rate of management.s
depth of the
company is Average.
8.8.4 Financial Reliability: Reliable
Financial Statements of the company are audited by D.Dhandaria & company, a firm
which
adheres to the Accounting Standards set forth by the Institute of Chartered Acco
untants of India.
Hence their financial statements are considered to be Reliable.
8.8.5 Financial Positions and Liquidity
Turnover: In FY09, the total income (standalone) has increased by 31.44% to Rs 8
316 MM form
Rs 6327 Mm in FY08 and the growth on account of increased capacity utilization (
laminates and
plywood), improved product visibility realizations. XYZIL.s operations are divid
ed into two
divisions namely Plywood and allied Products and Laminates and allied products.
8.9 Financial Aspects:
8.9.1 Proposed requirement for financing Expansion
Company had undertaken two expansions one of them being setting up a new facilit
y for
manufacture of medium density fibre board(MDF) at a cost of Rs 2500 MM(million)
and another
being an unit for production of laminates at an approximately cost of Rs 1250 MM
. These
projects are funded by a debt: equity mix of 70:30 as a result of which the debt
/EBIDTA for
FY10 is high at 3.81x. All the 3 phases of the laminate project is on steam and
the MDF revenue
will start accruing from the current year. The incremental cash flows from the a
bove expansion
will mitigate this risk to an extent and it can be expected the projected Debt/E
BIDTA for FY 11
to come down to 2.64x.
8.9.2 Current and Future Prospect:
The future performance of the company to a large extent depends on the success o
f the MDF is a
new product in the Indian Context and scaling up revenues from not happen instan
tly. Currently
the market for MDF is relatively under developed in India and the segments reven
ues may not
scale- up as fast as the company have projected. The MDF demand in the country i
s estimated to
be around 500,000 cubic mt annually, whereas India produces only 200,000 cubic m
ts annually.
This indicates a shortfall and India currently dependent on imported MDF. The ge
neral Trend
worldwide is a presence shift from wood-based panel products to engineered panel
s like MDF
and particleboard. These is a change in consumer preference in terms of ready-ma
de furniture
and machine- made furniture, which requires engineered products like MDF and par
ticle boards,
thereby increasing. This trend is expected to catch up in India and increased us
e of MDF is
substitute the lower and mid- range plywood demand in the country, offering a mo
re attractive
price vs. quality trade-off. XYZIL is setting up the largest MDF plant in India
at Pantnagar,
Uttarakhand, which is equipped to manufacture 1, 80,000 cubic mt of MDF annually
. The
Company stated capacity and corresponding production are expected to result in a
20-25%
capture of the Indian market share.
8.9.3 Present and Proposed Banking Arrangement
XYZ Industries Limited is under a consortium banking arrangement with SBI being
the Lead
Banker. The consortium has been detailed below-
Name of Bank
Funded Limit
Non Funded
Limit
Total Limit
% Share
SBI
400
600
1000
40%
EXIM
112
0
112
4.48%
Standard
Chartered Bank
100
100
200
8%
ING Vysya
108
255
363
14.52%
IDBI Bank
50
50
100
4%
Axis Bank
Limited
150
375
525
21%
Citibank NA
200
-200
200
8%
Total Limits
1120
1380
2500
100.00%
(Table 26)
8.9.4 Working Capital Gap
Particulars
March 10
( Rs MM)
March 09
( Rs MM)
Proportionate Change
Debtors (upto 180 days)
1311.20
1277.52
2.6%
Inventory
2087.80
1694.43
23.22 %
Total
2288.00
2971.95
(23.01%)
Less: Creditors
1560.80
1708.49
(8.64 %)
Working Capital Gap
1838.20
1263.46
45%
Proposed Funded
Limits(All Banks)
1120
1070.00
(Table 27)
Operating Cycle of the company in FY09 is 25days and it is expected to increase
to 40 days in
FY10. This is mainly on account of reduction in payable days from 105 days in FY
09 to 80 days
in FY10. The working capital gap for the company will increase to Rs. 1838.20 MM
in march 10
compared to Rs 1263.46 MM in FY 09, on account of an inventory and reduction cre
ditors. The
Proposed Working Capital limits would be loaded subject to availability of adequ
ate working
capital gap.
8.10 PRE- SCREENING CRITERIA
SI
Parameter
Criteria
Details
Source of
Verification
1
Selected Segment
To be part of LCB target market
in the following sectors:
Manufacturing/Exporters/Services
Plywood
Industry
CASS/Customer
Site Visit
2
De-dupe/RBI Check
Not on RBI negative list
NA
Depude report;
RBI negative list
on compliance
site.
3
SDN check
Not on SDN list
Not on SDN
list
SDN list on
compliance with
Site
4
Sales Turnover FY
09(Audited)
Minimum of USD 50 MM(INR
2.25 MMM)
Rs 8732 MM
(US $181.92
MM)
Consolidated
Audited Annual
Report FY 09
Rs 10195.7
MM (US$
212.39 MM)
Projected
Financials for FY
10
5
DSCR
Minimum DSCR of 1.20x
1.26x
Consolidated
Audited Annual
Report FY 09
1.52x
Projected
Financials for FY
10
6
Profitability
Minimum profitability of 6% of
sales
5.50%
Consolidated
Audited Annual
Report FY 09
7.20%
Projected
Financials for FY
10
7
Net Profit Margins
for new
organizations
4%
3.55%(i.e.
310MM)
Consolidated
Audited Annual
Report FY 09
5% (i.e.
510MM)
Projected
Financials for FY
10
8
Working Capital
Cycle
Debtors +Inventory to be less
than 180 days sales.
124 days
Consolidated
Audited Annual
Report FY 09
120 days
Projected
Financials for FY
10
9
DEBT/EBIDTA
Maximum Debt/EBIDTA of 3.5x
3.36x
Consolidated
Audited Annual
Report FY 09
3.81x
Projected
Financials for FY
10
(Table 28)
8.11 Financial Position and Liquidity
8.11.1 Turnover:
In FY10, the total income (standalone) is expected to increased by 35.58% to Rs
8575 MM from
8315.68 MM in FY09 and the growth on account of increased capacity utilization (
laminates and
plywood), improved product visibility realizations. XYZIL.s operations are divid
ed into two
divisions namely Plywood and allied products and Laminates and allied products.
Particulars
FY10
Fy09
FY08
CHANGES
Plywood
4565
4432.00`
3063.7
49%
Particle Boards
114.5
111.1
189.9
-39.70%
Others
282
273.8
205.5
Plywood & Allied Products

4961.5
4816.9
3459
43.43%
Laminates
2761
2668.3
2166.9
27.41%
Decorative Veneers
798
778
689.6
15.71%
Others
54
52.4
8.6
Laminates & Allied Products

3613
3498.7
2865.1
26.20%
Gross Segmental Revenue
8574.5
8315.68
6324.1
35.58%
(Table 29)
. Plywood and allied products: The revenue of Rs. 4962 MM from this segment acco
unt
for around 58% of the total revenues and has grown by around 43% in quantity ter
ms as
compared to the previous year.
. Laminates and Allied Products: The revenue of Rs. 3613 MM from this segment
accounted for around 42% of the total revenues and has grown by around 26% in qu
antity
terms as compared to the previous year.
8.11.2 Cost Analysis: Raw material comprises of 65-67% of total sales on an aver
age. The total
raw material consumed has increased to Rs. 4500MM in FY09 from 3470MM in FY08. T
he
major raw material consumed by the company comprises of wood and chemicals used
for
plywood manufacture and paper and chemicals used for laminate manufacture. There
was a
marginal decline in the paper and wood cost as a proportion of total income howe
ver the
chemical consumption as proportion of total income, however the chemical consump
tion has
declined around 1.50% as proportion of total income primarily due to decline in
crude oil price.
8.11.3 Margins: Increase in overheads and forex loss of Rs. 160 MM has resulted
in a dip in
PBIT margin form 12% in FY08 to 9% in FY09. Net profit margin declined from 5.5%
to 3.5%
in FY09 due to decline in the operating margin and higher depreciation. Further,
the company
has also recognized unrealized income of Rs. 46 MM and Rs. 18.60 MM as export in
centives in
FY09 and FY08 however the same has been adjusted from margin of the company.
8.11.4 Liquidity Analysis: XYZIL has an operating cycle of around 26 days with i
nventory days
and receivable days of around 70 days and 54 days. Debtor >180 days was around R
s 34MM for
the FY09. The Inventory days might increase to around 80-90 days in case the com
pany
increased raw material imports. For FY09 imported raw materials have increased t
o around 36%
as compared to 31% in FY08. Payable days in FY09 have improved to 98 days from 1
08 days in
last year but are still on a higher side. Due to the same, current ratio for the
year stood at 1.09x.
8.12 Financial Statement of XYZ Industries Ltd.
XYZ industries Ltd Consolidated Financials

Particulars
31/03/2010
31/03/09
31/03/08
Unaudited
(Rs MM)
Audited
(Rs MM)
Audited (Rs
MM)
PROFIT AND LOSS ACCOUNT
%
DOMESTIC SALES
9383.2
92.03
7989.97
91.3
6341.71
93.4
EXPORT SALES
787.5
7.72
742.29
8.5
432.44
6.4
TOTAL SALES
10170.7
99.75
8732.26
99.8
6774.15
99.8
OTHER INCOME
25
0.25
21.63
0.2
15.29
0.2
TOTAL Revenue (A)
10195.7
100.00
8753.89
100
6789.44
100
RAW MATERIAL COST
6692.32
65.8
5748.64
65.7
4456.27
65.6
POWER, FUEL, OTHER DIRECT EXP
457.68
4.5
375.12
4.3
267.68
3.9
EMPLOYEE COST
803.48
7.9
635.55
7.3
418.51
6.2
GENERAL AND ADMIN EXPENSES
213.58
2.1
231.87
2.6
201.24
3
SELLING AND DIST. EXPENSE
905.19
8.9
805.9
9.2
629.76
9.3
OTHER EXPENSE
152.56
1.5
172.76
2
2.21
0
COST OF SALES (B)
9224.81
90.7
7969.84
91.1
5975.67
88
OPERATING PROFIT (A-B)
945.89
9.3
784.05
8.9
813.77
12
DEPRECIATION
203.41
2
172.92
2
132.96
2
FINANCIAL CHARGES
244
2.4
230.34
2.6
195.67
2.9
EXTRAORDINARY/PREV YR EXP.
0
0
0.04
0
0
0
PROFIT BEFORE TAX (PBT)
498.48
4.4
380.75
4.6
486.14
7.2
TAX PROVISION - CURRENT
88.5
67.61
0.8
49.68
0.7
TAX PROVISION - DEFERRED
3.06
0
64.97
1
PROFIT AFTER TAX (PAT)
409.98
310.08
3.5
371.49
5.5
DIVIDEND
0
0
0
0
0
DIVIDEND TAX
0
0
0
0
0
EXPORT PROFIT
380
310.08
371.49
PROFITABILITY
634
486.1
569.42
=========
=========
=========
BALANCE SHEET (LIABILITIES)
EQUITY CAPITAL
84.99
1.3
84.99
1.8
OTHER RESERVES(EXCLUD REVAL RESV)
1654.06
26.1
1369.61
28.3
CAPITAL NET WORTH
1739.05
27.4
1454.6
30.1
LESS: MISC EXPENDITURE
5
0.1
0.67
0
LESS: INTANGIBLE ASSETS
32.91
0.5
45.15
0.9
TANGIBLE NETWORTH
2742.6
1701.14
26.8
1408.78
30.1
LONG TERM DEBT
1273.32
20.1
860.62
17.8
SHORT TERM DEBT
860.61
13.6
672.05
13.9
UNSECURED LOAN FORM PROMOTERS
503.87
7.9
225.38
4.7
DEFERRED TAX LIABILITY
126.2302
123.13
2.5
TOTAL DEBT
4250.6
2764.03
43.6
1881.18
38.9
ACCOUNTS PAYABLE
1708.49
26.9
1424.78
29.5
OTHER CURRENT LIABILITIES/PROVISION
169.42
2.7
122.57
2.5
TOTAL CUREENT LIABILITY &
PROVISION
2382.7
1877.91
29.6
1547.35
32
-----
TOTAL EXTERNAL LIABILITIES

3148.1
4641.94
73.2
3428.53
7039
TOTAL NET WORTH & LIABILITIES
12524
6343.08
100
4837.31
100
=========
=========
=========
BALANCE SHEET (ASSETS)

TOTAL FIXED ASSETS
2473.01
39
1801.88
37.2
INVESTMENTS
367.77
5.8
119.54
2.5
TOTAL NON CURRENT ASSETS
8775.9
2840.78
44.8
1921.42
39.7
DEFERRED TAX ASSET
0
0
0
0
RECEIVABLES
1311.74
20.7
990.7
20.5
INVENTORY
1694.43
26.7
1494.53
30.9
CASH/BANK
172.94
2.7
102.78
2.1
LOANS & ADVANCES
323.19
5.1
327.89
6.8
OTHER CURRENT ASSETS
0
0
0
0
CURRENT ASSETS
3748.1
3502.3
55.2
2915.9
60.3
--------
TOTAL ASSETS
12524
6343.08
100
4837.31
100
=========
=========
=========
(Table 30)
8.12.1 Ratio Statement
Ratio Statement
Particulars
31/03/2010
31/03/09
31/03/08
PERFORMANCE RATIO
OPERATING PROFIT MARGIN

10%
9%
12%
NET PROFIT
5%
3.50%
5.50%
LIQUIDITY RATIO
CURRENT RATIO
1.63
1.28x
1.31x
DEBT/WORKING CAPITAL
NA
66.32
63.37
QUICK RATIO
NA
0.66
0.64
COLLECTION/RETENTION PERIOD(DAYS)
WORKING CAPTTAL OPERATING CYCLE
26
24
INVENTORY DAYS
74
70
79
RECEIVABLE DAYS
46
54
53
PAYABLE DAYS
NA
98
109
LEVERAGE RATIO
CAPITAL LEVERAGE
1.94
2.73
2.43
INTEREST COVERAGE
6.66
3.4
4.16
DEBT SERVICE COVERAGE RATIO
1.52
1.26
1.88
ACTIVITY RATIO
NET FIXED ASSET TURNOVER

NA
4.09
4.13
WORKING CAPITAL TURNOVER
NA
7.41
7.06
CAPITAL EMPLOYED TURNOVER
NA
2.25
2.29
(Table 31)
7.13 Remedial Management and Written down Standards
Remedial management for the portfolio would be in line with the Commercial Marke
ts Credit
Policies and procedures. All remedial accounts classified special mention will b
e managed by
Relationship Manager/Credit Officer/ SME Rehabilitation Officer. The Regional Sa
les Manager
in each region will be responsible for managing exit strategies and collection e
fforts on problem
names.
The remedial management Process for the STFT Program would be divided in two cat
egories
based on the TFA as follows:
A) Revolving Exposures greater up to INR 48MM and Term Amortizing Exposure > INR
24MM
up to INR 48 MM- for these customers the remedial management process would be mo
nitored
through classified loan management report (CLMR). The frequency of the reports w
ould be
monthly.
B) Term Amortizing exposures less than INR 24MM- for these customers, business m
anagers
and relationship manager would do a active follow up call for the delinquent acc
ounts would be
conducted by the Risk Manager and Remedial Manager and update on each account wo
uld be
documented. There would be no CLMR.s prepared for these accounts.
7.13.1 Remedial Management Process (Classifiable Managed)
Following are the indicative description for the various classification categori
es:
Serial
No.
Category
Description
1.
Pass
No Evident weakness
2.
Special Mention
Account shows potential weakness that deserves management
close attention. If left uncorrected, these potential weaknesses
may result in deterioration of repayment of the repayment
prospect or credit Position at some future date.
3.
Substandard
a) A substandard asset is inadequately protected by the current
sound worth and paying capacity if the obligor or of the collateral
pledge, if any, Assets so classified must have a well-defined
weakness, or weaknesses, that jeopardized the liquidation of the
debt. They are characterized by the distinct possibility that the
bank will sustain some loss if the deficiencies are not corrected.
b) Restructure due to borrower.s inability to meet original
repayment schedule.
4.
Doubtful
a) An asset is classified doubtful has all the weakness inherent in
one classified substandard with added characteristic that the
weakness make collection or liquidation in full, on the basis of
currently existing facts, conditions and values highly
questionable and improbable.
b) Account is delinquent more than 90 days.
5.
Loss
Assets classified as loss are considered uncollectible and of such
little value that their continuance as bankable assets is not
warranted. This classification doesn.t mean that the asset has
absolutely no recovery or salvage value, but rather that it is not
practical or desirable to defer writing off this basically worthless
asset even though partial recovery may be affected in the future.
7.14 Collection:
Collections for the business lending portfolio are managed by the relationship m
anager and the
area directors. Chapter VI of Commercial markets Policy mandates that each busin
ess must
document its collection procedures for Delinquency Managed Portfolio as part of
its Credit
Program. For the Business Lending Program we have not documented a separate coll
ections
Procedure as part of the credit Program based on the following rationale:
The business has a portfolio of approximately US $250 MM spread across approxima
tely 1800
customers. Delinquency management for the Portfolio is done on name basis and is
tracked
centrally by the risk team and on the ground, collections is managed by the Rela
tionship
Manager from the Sales team. Regular delinquency calls are held between Risk and
Sales teams
where the entire delinquent base is discussed on name basis and account strategy
formulated for
each account. All remedial decisions are taken by the risk team and on ground im
plementation
are managed by the sales team. The above strategy has worked well which reflects
in good
portfolio performance. Thus recommend continuation of the existing process till
the business
reaches a critical mass (around 4000 accounts) and the volumes warrant setting u
p of a separate
collections team. Also, out of the current 1800 customers approximately 800 cust
omers are
housed under the Fast Track Program that is discontinued and all existing exposu
res will run is
the 6-8 months.
8. Observation & Findings
. Banks are focusing on increasing the credit flow to SME.s with respect to work
ing
capital finance. Banks are now better equipped to handle the varied needs of the
SME
sector due to better Technology and risk management.
. Banks are moving ahead in providing solution to their clients, and delighting
their
customer by their service.
. Citibank restricts its services to the customers who are located at their bran
ch location.
. Citibank is profit oriented due to which it loses opportunity in serving a lar
ger segment of
customers.
. Banks are focusing on increasing their businesses to match competition which i
s leading
to increase in NPA.
. Information about the client is of immense importance as that would be reflect
ed in the
security of the amount given to them. Thus banks are involved in continuous anal
ysis of
the financials of the company so as to keep a track of the company.s performance
on
monthly basis.
9. Conclusion
Citibank was the first bank which has brought the service revolution in the bank
ing sector.
Currently they are focused in providing solution to the customers like cash mana
gement services
or developing software for their clients for maintaining their database. Citiban
k on a whole can
be said as a bank which is strictly profit oriented, rather than their share in
the market. Analysts
in the credit department do intense study of the client.s business from various
angles and then
decide the amount to be sanctioned to the client based on the earning capacity o
f the business.
Thus it can be said that Citibank is a bank which strictly abide by the credit a
ppraisal program
for deciding the loan amount for their client.
10. Recommendation & Suggestion
. There is a critical need to devote substantial resources to improving the skil

ls and
capabilities of banks' lending officers, especially with regard to the analysis
of the SMEs'
financial statements. Understanding the nature of the borrower's business and th
e cash-
flow required is paramount to preventing the creation of NPAs.
. Citibank should also try to increase the volumes of its business by developing
new
products for attracting more no. of customer and providing better service.

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Introduction

1.1 Rationale of Study

2.2 Present Scenario of Banking Sector in India

1.2.1Foreign Scheduled Banks (38),

a) State Bank Group and Nationalized Banks

b) Regional Rural Banks

2.3.5. Co-Operative Banks

(Table 2) (Source: www.businessmapofindia.com)

3.1.2 Investment Banking & Capital Markets - Citi

3.1.3 Alternate Investments - Citi Venture Capital International

3.1.4 Consumer Banking & Global Cards

Citi Wealth Advisors

3.1.5 Global Wealth Management

Liquidity management is quintessential for effective working capital

3.3.2 Trade Solution

3.3.5 Securities and Fund Services

Alain J.P. Belda

(Table 1) (Source www.iba.com)

(Table 2) (Source www.iba.com)

4.4.2.1 First pillar

. For market risk the preferred approach is VaR (value at risk).

4.4.2.2 Second Pillar

1. To study the various products available for working capital finance in

1. Sight Letter of Credit

7.3.1 Classical (STFT) Program

7.3.1.1 Cash/ Liquid Asset Backed finance:

(Table 3) (Source: Collected from the SME software manure of Citibank)

(Table 4) (Source: Collected from the SME software manure of Citibank)

(Table 5) (Source: Collected from the SME software manure of Citibank)

(Table 6) (Source: Collected from the SME software manure of Citibank)

(Table 7) (Source: Collected from the SME software manure of Citibank)

(Table 8)(Source: Collected from the SME software manure of Citibank)

(Table 9) (Source: Collected from the SME software manure of Citibank)

Account Receivable Aging

EMI to Billing Ratio of 67%. This is

Cap of 2 deal per month between US $ 188M US $415M

** Cap of 2 deals per month between US $ 188M US $415M

Foreign institutional Investors

Plywood & Allied Products

Laminates & Allied Products

XYZ industries Ltd Consolidated Financials

PROFIT AND LOSS ACCOUNT

BALANCE SHEET (LIABILITIES)

TOTAL EXTERNAL LIABILITIES

BALANCE SHEET (ASSETS)

OPERATING PROFIT MARGIN

WORKING CAPTTAL OPERATING CYCLE

NET FIXED ASSET TURNOVER

. There is a critical need to devote substantial resources to improving the skil

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