Professional Documents
Culture Documents
1
20 ONICRA 32
21 NSIC 33
22 FUTURE SCENARIO 33
23 GUIDELINES FOR LENDING TO SMEs
RBI GUIDELINES 34-35
BANK INSTRUCTIONS
24 CREDIT APPRAISAL PROCEDURE 36-53
25 DETAILS OF WORK DONE 53
26 MAJOR LEARNING 53
27 CONSTRAINTS FACED 53
28 CREDIT APPRAISAL OF XYZ PVT. LTD. FOR
54-58
WORKING CAPITAL LOAN
29 SUGGESTIONS AND RECOMMENDATIONS 58
30 ANNEXURE I 59
31 ANNEXURE II 67
32 BIBLIOGRAPHY 77
2
EXECUTIVE SUMMARY
SME branch, Union Bank of India deals with micro, small and medium enterprises.
Small And Medium Enterprises (SMEs) play a catalytic role in the development of
any country. They are the engines of growth in developing and transition economies.
SMEs always represented the model of socio-economic policies of Government of
India which emphasized judicious use of foreign exchange for import of capital
goods and inputs; labor intensive mode of production; employment generation; no
concentration of diffusion of economic power in the hands of few (as in the case of
big houses); discouraging monopolistic practices of production and marketing; and
finally effective contribution to foreign exchange earning of the nation with low
import intensive operations.
If SMEs cannot find the financing they need; there will be a loss in potential growth
for the economy. Hence credit appraisal of the firms has to be done.
Credit appraisal is done to evaluate the credit worthiness of a borrower. The credit
appraisals for any organization basically follow these steps: Assessment of credit
need, financial statement analysis, financial ratios of the company, credit rating,
working capital requirement, term loan analysis, submission of documents, NPA
classification and recovery.
3
LITERATURE REVIEW
CORPORATE MISSION
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 share in each of the chosen areas of business
through effective strategies in terms of pricing, product packaging and
promoting the product in the market.
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.
4
The dawn of twentieth century witnesses the birth of a banking enterprise par
excellence- UNION BANK OF INDIA- that was flagged off by none other than the
Father of the Nation, Mahatma Gandhi. Since that the golden moment, Union Bank
of India has this far unflinchingly traveled the arduous road to successful banking.
Union Bank of India, a public sector bank was incorporated in 1919.
Union Bank of India, which has the vision to become one of the top three
Nationalized Banks in India by 2012, has identified funding MSME business as one
of its thrust areas. The bank has taken several initiatives to ensure credit growth in
this segment.
5
SMALL SCALE INDUSTRIES:
Small and medium-sized enterprises (SMEs) are the backbone of all
economies and are a key source of economic growth, dynamism and flexibility
in advanced industrialized countries, as well as in emerging and developing
economies.
Small & Medium Enterprises (SMEs) play a predominant role in most
developed and developing economies not only because of their number and
variety but also due to their involvement in all segments of the economy. Their
contribution to regional development, their complementary role to support the
large sector, and as a basis for technological innovations and adaptations are
widely acknowledged. SMEs, in most countries, make up the majority of
businesses and account for the highest proportion of employment. They
produce about 25% of OECD exports and 35% of Asia’s exports. SMEs
account for a considerable share of industrial enterprises, employment and
production and therefore, occupy a place of strategic importance in Indian
economy as well. The contribution of SME firms to our national economy in
terms of creating a vibrant manufacturing sector, winning the global market
through increased exports, employment generation etc has been highlighted on
many occasions.
Microsoft may be a software giant today, but it started off in typical SME
fashion, as a dream developed by a young student with the help of family and
friends. Only when Bill Gates and his colleagues had a saleable product were
they able to take it to the marketplace and look for investment from more
traditional sources. While not every small business turns into a multinational,
they all face the same issue in their early days – finding the money to enable
them to start and build up the business and test their product or service.
6
With the advent of planned economy from 1951 and the subsequent industrial
policy followed by Government of India, both planners and Government
earmarked a special role for small-scale industries and medium scale industries
in the Indian economy. Due protection was accorded to both sectors, and
particularly for small scale industries from 1951 to 1991, till the nation adopted
a policy of liberalization and globalization. Certain products were reserved for
small-scale units for a long time, though this list of products is decreasing due
to change in industrial policies and climate.
SME growth was also coupled with the policy of de-concentration of industrial
activities in few geographical centers. It can be observed that by and large,
SMEs in India met the expectations of the Government in this respect. SMEs
developed in a manner, which made it possible for them to achieve the
following objectives:
7
The MSME segment in India has been receiving focused attention. With the
introduction of Micro Small & Medium Enterprises Development (MSMED) Act
2006, this sector is being increasingly viewed as an agent of economic growth by
Government institutions, corporate bodies and banks. The policy focus and the
Government's thrust towards promoting the MSME segment, along with
globalization and India's robust economic growth, have paved the way to several
latent business opportunities for this segment.
Manufacturing Sector
Enterprises Investment in plant & machinery
Investment in plant and machinery less
Micro
than Rs 25 lac
Investment in plant and machinery over
Small
Rs 25 lac but not exceeding Rs 5 Cr
Investment in plant and machinery over
Medium
Rs 5 Crores but less than Rs 10 Cr
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Service Sector
Enterprises Investment in equipments
Micro Does not exceed ten lakh rupees:
More than ten lakh rupees but does not
Small
exceed two crore rupees
More than two crore rupees but does not
Medium
exceed five core rupees
At the same time one has to understand the limitations of SMEs, which are:
Low Capital base
Limited access to technology
Lack of awareness of global best practices
Concentration of functions in one / two persons
Inadequate exposure to international environment
Inadequate contribution towards R & D
Lack of professionalism
Managerial inadequacies
Delayed Payments
Poor Quality
Incidence of Sickness
Lack of Appropriate Infrastructure and
Lack of Marketing Network.
9
SMEs have been established in almost all-major sectors in the Indian industry.
Such as:
Food Processing
Agricultural Inputs
Chemicals & Pharmaceuticals
Engineering; Electricals; Electronics
Electro-medical equipment
Textiles and Garments
Leather and leather goods
Meat products
Bio-engineering
Sports goods
Plastics products
Computer Software, etc.
High contribution to domestic production
Significant export earnings
Low investment requirements
Operational flexibility
Location wise mobility
Low intensive imports
Capacities to develop appropriate indigenous technology
Import substitution
Contribution towards defense production
Technology – oriented industries
Competitiveness in domestic and export markets
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IMPORTANCE OF SME SECTOR
In spite of limitations, the SMEs have made significant contribution towards
technological development and exports:
The SME sector plays a vital role in the growth of the country. It contributes
almost 40% of the gross industrial value added in the Indian economy. It has
been estimated that a million Rs. of investment in fixed assets in the small
scale sector produces 4.62 million worth of goods or services with an
approximate value addition of ten percentage points.
MSMEs are crucial to the economic growth process and play an important role
in the country’s overall production network. They are drivers behind a large
number of innovations and contribute through creation of employment,
investments and exports.
The MSMEs play a pivotal role in the overall industrial economy of the
country. India has nearly13 million MSMEs which produce a diverse range of
products (about 8000 odd items), including consumer items, capital and
intermediate goods. In terms of value, the sector accounts for about 45% of the
manufacturing output and around 40% of the total export of the country.
This sector is ideally suited to build on the strengths of our traditional skills
and knowledge, by infusion of technologies, capital and innovative marketing
practices.
11
The factors – strengths coupled with opportunities – that work in favor of
Indian MSMEs include their high contribution to domestic production,
significant export earnings, low investment requirements, operational
flexibility, location-wise mobility, low intensive imports, capacities to develop
appropriate indigenous technology, import substitution, contribution towards
defense production and competitiveness in domestic and export markets. The
sector, therefore, presents an opportunity to harness local competitive
advantage to achieve global dominance in industrial production and provide
even greater employment.
12
b) Granularity: This refers to a situation where the risk grading system at banks
did not have the requisite capability to discriminate between good and bad
risks. The consequence was tightening of credit terms, or an increase in prices,
or both. From the borrower’s perspective, this leaded to an outcome where the
bank was over-pricing good risks and under-pricing bad risks.
c) Pecking Order Theory: Pecking order theory flows from the above two
issues, which made SME lending highly difficult for banks. Under this
hypothesis, SMEs, which faced a cost of lending that is above the true risk-
adjusted cost, had incentives to seek out alternative sources of funding.
Evidence suggests that in such situations SMEs preferred to utilize retained
earnings instead of raising loans from banks.
d) Moral Hazard: Even when loans are made to SMEs, it may so happen that the
owners of these SMEs take higher risks than they otherwise would without
lending support from the banks. One reason for this situation is that the owner
of the firm benefits fully from any additional returns but does not suffer
disproportionately if the firm is liquidated. This is referred to as the moral
hazard problem, which can be viewed as creating a situation of over-
investment. The moral hazard problem may, thus, result in SME lending
turning bad in a short period of time, a situation that all banks would like to
avoid.
13
FOLLOWING STEPS HAVE BEEN TAKEN AS REMEDIAL MEASURES:
b) Relationships: The length of the relationship between a bank and its SME
customers is also an important factor in reducing information asymmetry, as an
established relationship helps to create economies of scale in information
production. A relationship between a SME and a bank of considerable duration
allows the bank to build up a good picture of the SME, the industry within
which it operates and the caliber of the people running the business. The closer
the relationship, the better are the signals received by the bank regarding
managerial attributes and business prospects.
14
Recognizing the importance of the MSME sector, Government has announced
several initiatives aimed at increasing the flow of credit to this sector. The
objective is to double the flow of credit to the sector from Rs 67,600 crore in
2004-05 to Rs 1,35,200 crore by 2009-10, i.e., within a period of 5 years. It also
suggested rationalizing the cost of loans to MSME sector by adopting a
transparent rating system with cost of credit linked to the rating of an enterprise.
• Bank has launched its ambitious “Project Navnirman” for transforming itself
from a ‘Banking Organization’ to a ‘Sales Oriented Financial Service
Organization’. With this strategic initiative in mind, a separate vertical named as
“MSME Vertical” has been carved out to oversee the growth of MSME finance
in the Bank across the country.
a. accelerate the credit flow to MSMEs through focused sales and marketing
b. enhance customer service through quick Turn Around Time
c. reduce NPAs in MSMEs through efficient supervision and monitoring
d. lower cost and build expertise
15
• Bank has entered into MoU with :
a. SIDBI: for joint processing of loan applications and WC limits
b. SMERA: for rating of MSME clients only
c. CGTMSE: for extending guarantee cover
d. NSIC: for financing around 250 training institutes
e. ONICRA agency specialized in credit rating of MSMEs
• The Bank also set up a research chair at the prestigious Indian Institute of
Management, Ahemdabad. The chair will fund research in MSME sector and
findings will be shared with the Bank.
• To solicit the MSME clients, bank has launched a web based information
channel i.e., “SME Helpline” and all the Regional offices of the Bank have been
designated as the “MSME Care Centers” and the details of the same have been
placed on the banks website. The MSME entrepreneurs/clients can contact any
of the centers across the country and get their queries satisfied.
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PERFORMANCE: -
The MSME credit growth of the bank has been driven by focusing on assured Turn
Around Time (TAT), Credit Delivery at affordable prices, customized products, and
enhancing the base of MSME clients.
MSME portfolio of the Bank recorded a growth of 31.91% for the year ended March
2009.The outstanding under MSME segment as on March 31, 2009 was Rs.16,149
Crore as against Rs.12,242 Crore as on March 31, 2008 and Rs.8833 Crore as on Mar
31, 2007.
The share of the MSME lending constituted 16.60% of the total advances of the
Bank as on March 31 2009 as compared to 16.13% in the previous year.
Priority Sector Advances registered the growth of 21.02% and stood at Rs.36,341 Cr
as on March 31, 2009. Small Enterprises segment comprises of 26% of its total
priority sector advances
ACHIEVEMENTS:-
Union Bank was awarded a National Award for Excellence in Lending to Micro
Enterprises 2008-09 on 29th August, 2009. The Bank attained Second Rank based on
its excellent performance in lending to micro enterprises during the year 2008-09.
The Bank was awarded the Gold Trophy and a certificate in the Elite Class for
Excellence in Marketing & Brand Communication by Association of Business
Communicators of India (ABCI) in March 2010.
The Bank was awarded the prestigious “Skoch Challenger Award” 2009 for
excellence in capacity building through innovative concept of “Village Knowledge
Centre” as part of financial inclusion initiatives.
17
PRIORITY SECTOR DISTRIBUTION
MICRO ENTERPRISES
SMALL ENTERPRISES
18
RECENT STEPS UNDERTAKEN BY BANK
Granting of additional need based credit facilities
Conducting cluster surveys and issuing of instructions as a corrective measure.
Reduction in margin requirement
Reduction in interest rates of MSEs.
NBFCs (Non Banking Finance Companies), MFIs (Micro Finance
Institutions), NGOs (Non Government Organizations), SHPIs( Self Help
Promoting Institutions)are engaged in micro credit on lending activity.
All firms which are interrelated are considered as cluster. Their problems are
analyzed and solved. Bank offer concession in interest rates, collateral securities
etc.
Restructuring of debt of all small and medium enterprises at terms which are par
with that of corporate debt restructuring (CDR) mechanism.
For improving credit flow to MSEs Central Processing Centers are established
for marketing and minimum response time for sanction of MSE proposals. At
present SME SARALS are established at 7 centers attached to FGMOs.
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RBI DIRECTIVES
Public sector banks were advised to fix their own targets for funding MSEs in
order to achieve a minimum 20% year on year growth in credit to MSEs
The objective was to double the flow of credit from Rs 67600 crore in 2004-05
to rs 135200 crore to the MSE sector by 2009-10within a period of 5 years
Credit limit upto 5 lac will be collateral free and credit limit upto 25 lac and 1
crore will be free if covered under CGS (Credit Guarantee Scheme) of
CGTMSE (Credit Guarantee Fund Trust for Micro and Small Enterprise).
Also entered in MoU with SME Rating Agency (SMERA). Under this, bank is
offering concessional rate of interest to SMERA rated accounts.
MoU with NSIC has been entered for financing NSIC-TIC(NSIC Training
Cum Incubation Centre) for promoting entrepreneurship and skill development
20
QUICK ESTIMATES OF 4TH CENSUS (2006-07)
21
1992-93 53688 17785 33.1
1993-94 69547 25307 36.4
1994-95 82674 29068 35.1
1995-96 106353 36470 34.2
1996-97 118817 39249 33.4
1997-98 126286.00 44442.18 35.19
1998-99 141603.53 48979.23 34.59
1999-00 159561.00 54200.47 33.97
2000-01 202509.7 69796.5 34.47
2001-02 207745.56 71243.99 34.29
2002-03 252789.97 86012.52 34.03
22
RECOMMENDATIONS IN 11TH FINANCIAL
PLAN
Envisaging the critical role which the MSMEs play in Indian Economy,
following recommendations having been made in 11th Financial Plan (2007-
2012):
23
PROVISIONS FOR SMEs IN ANNUAL BUDGET
2009-10
Following provisions have been made in Annual Budget (2009-10) for Micro, Small
and Medium Enterprises:
A fund, worth Rs. 4,000 crore, will be formed out of the Rural Infrastructure
Development Fund (RIDF) and provided to the Small Industries Development
Bank of India (SIDBI). This fund is expected to incentivize banks and State
Finance Corporations (SFCs) to extend loans to MSMEs by refinancing 50% of
incremental lending to these players during 2009-10. This move will facilitate
credit flow at affordable rates for MSMEs and thereby provide them the much-
needed fiscal support.
Rs 144 crore for Credit Support Program to provide Guarantee cover to banks for
extending loans to Small/Tiny units without collateral.
24
MICRO, SMALL & MEDIUM ENTERPRISES
DEVELOPMENT ACT (MSMED)
A single comprehensive legislation for the promotion, development and enhancement
of the competitiveness of the MSME sector - Micro, Small and Medium Enterprises
Development (MSMED) Act, 2006 came into effect from October 2006.
25
• Promotion and financial support for Credit-cum-Performance Rating in MSME
sector in India, to facilitate greater and easier flow of credit from the banking sector
to SMEs.
• The National Commission for Enterprises in the Unorganized Sector (NCEUS) has
been set up as an advisory body and a watchdog for the informal sector to bring
about improvement in the productivity of these enterprises for generation of large
scale employment opportunities on a sustainable basis, particularly in the rural
areas.
• The SME forum also expanded its network by entering into 2 domestic (the
National Small Industries Corporation – NSIC & Small and Medium Enterprises
Rating Agency (SMERA) & 2 overseas MoU’s with Japan, Finance Corporation for
Small & Medium Enterprises (JASME), Japan and German Association of Small
and Medium Enterprises (BVMW).
26
SIDBI (SMALL INDUSTRIAL DEVELOPMENT
BANK OF INDIA)
MISSION
To empower the Micro, Small and Medium Enterprises (MSME) sector with a view
to contributing to the process of economic growth, employment generation and
balanced regional development
VISION
To emerge as a single window for meeting the financial and developmental needs of
the MSME sector to make it strong, vibrant and globally competitive, to position
SIDBI Brand as the preferred and customer - friendly institution and for enhancement
of share - holder wealth and highest corporate values through modern technology
platform.
SIDBI was started with the motto of refinancing firms. SIDBI has also started tying
up with other nationalized and commercial banks in this regard that can help it gain
some more visibility and selling the products that need aggressive marketing. SIDBI
has a special corporate status because it has got an expertise since 1964 and has been
an agent in government schemes and finance is provided considering all expenses
related to the project from conceptualization of the project to the successful execution
of the project.
27
Four basic objectives are set out in the SIDBI Charter for orderly growth of industry.
They are:
Financing
Promotion
Development
Co-ordination
SMERA
SME Rating Agency of India Ltd (SMERA), the dedicated rating agency for SME
sector in India was formally launched at the hands of Union Finance Minister,
Shri P. Chidambaram, at a ceremony at Coimbatore. SMERA has been set up by
Small Industries Development Bank of India (SIDBI) in association with Dun &
28
Bradstreet (D&B), Credit Information Bureau (India) Limited and leading public
and private sector banks. SMERA''s primary objective is to provide ratings that
are comprehensive, transparent and reliable. This would facilitate greater and
easier flow of credit from the banking sector to SMEs.
There are several reasons for low SME credit penetration, key among them being
insufficient credit information on SMEs, low market credibility of SMEs (despite
their intrinsic strengths) and constraints in analysis. This leads to sub-optimal
delivery of credit and services to the sector. Rating Agencies can play an
important role in addressing some of these concerns. In this context, SMERA is
wholly committed to facilitating the overall growth and development of Indian
SMEs. The agency’s primary objective is to provide SME ratings that are
comprehensive, transparent and reliable. SMERA aims to be the country’s premier
agency that is focused primarily on providing ratings to SMEs so as to reflect their
intrinsic strength, with a view to facilitate faster and easier access to credit. The
SME policy recently announced by Government of India also lays emphasis on
using this as a tool for increasing credit to the sector.
SIDBI is the principal financial institution for the promotion, financing and
development of industry in the SME sector in the country. Over the last 20
years of its existence, it has developed a suite of products and services for the
SME sector. SMERA will be able to draw upon SIDBI’s longstanding
experience in dealing with Indian SMEs and its strong relationships with public
& private sector banks.
29
impressive track record in SME Risk Evaluation & Rating and has over 70
million SMEs in its global database.
SMERA is also supported by several leading public and private sector banks
that are active in the SME space. The recognition and acceptance of SMERA’s
ratings within the banking sector will help SMEs save time, effort and money
while approaching different banks for credit. It will also simplify and quicken
the process of lending to SMEs, while simultaneously reducing lending costs to
the sector as a whole.
CII has entered into a MoU with the SMERA. MoU will serve as a trusted third
party opinion on SME units’ capabilities and creditworthiness, as an
independent evaluation by an accredited third party will have good acceptance
from Banks, Financial Institutions, SME Customers and Buyers, enable SMEs
to secure adequate credit from Banks and Financial Institutions on time & at
competitive cost, benefit Banks and Financial Institutions by providing them an
independent evaluation of the strengths and weaknesses of the applicant
borrowing unit, which would help them in evaluating risk and taking credit
decision, and facilitate vendors/buyers in judging the capabilities and capacity
of the SME units for taking a decision on finalization of purchase contacts with
them.
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WHAT IS A SMERA RATING?
SMERA Rating is an independent third-party comprehensive assessment of
the overall condition of the SME, conducted by SME Rating Agency of India
Limited.
It takes into account the financial condition and several qualitative factors that
have bearing on credit worthiness of the SME.
An SME unit having a SMERA Rating would be able to enhance its market
standing amongst trading partners and prospective customer
Financial Strength
31
CGTMSE
Availability of bank credit without the hassles of collaterals / third party
guarantees would be a major source of support to the first generation
entrepreneurs to realize their dream of setting up a unit of their own Micro and
Small Enterprise (MSE). Keeping this objective in view, Ministry of Micro,
Small & Medium Enterprises (MSME), Government of India launched Credit
Guarantee Scheme (CGS) so as to strengthen credit delivery system and
facilitate flow of credit to the MSE sector. To operationalise the scheme,
Government of India and SIDBI set up the Credit Guarantee Fund Trust for
Micro and Small Enterprises (CGTMSE).
The other objective is that the lender availing guarantee facility should
endeavor to give composite credit to the borrowers so that the borrowers obtain
both term loan and working capital facilities from a single agency. The Credit
Guarantee scheme (CGS) seeks to reassure the lender that, in the event of a
MSE unit, which availed collateral free credit facilities, fails to discharge its
liabilities to the lender, the Guarantee Trust would make good the loss incurred
by the lender up to 75 / 80/ 85 per cent of the credit facility.
ONICRA
32
NATIONAL SMALL INDUSTRIES CORPORATION
(NSIC)
NSIC carries forward its mission to assist small enterprises with a set of
specially tailored schemes designed to put them in a competitive and
advantageous position. The schemes comprise of facilitating marketing support,
credit support, technology support and other support services.
FUTURE SCENARIO
While the Manufacturing sector would continue to be the flag bearer of the
SME growth, however many of sunrise industries such as Information
technology (IT), Biotechnology (BT), Pharmaceuticals and Nanotechnologies
along with IT enabled services that are in the service sector will also play a
significant role in the growth and development of SMEs.
33
GUIDELINES FOR LENDING TO SMEs
RBI GUIDELINES
DISPOSAL OF APPLICATION: all loan application upto Rs. 250000
should be disposed off within 2 weeks and those upto 5 lac within 4 weeks
provided the loan applications are complete in all respects and accompanied
by check list.
34
technology upgradation from X plan to XI plan(2007-12) subject to fulfillment
of certain terms and conditions.
BANK INSTRUCTIONS
The sanction of the proposals falling within the branch head delegation should
be disposed off within 7 days. The proposal with delegated authority of RO
should be disposed off within 5 days on receipt of the same at RO.
Branches should not insist for collateral for credit limit upto Rs 5 lac.
Branches should provide collateral free credit limit upto Rs 50 lac under
Credit Guarantee Scheme for MSEs subject to the satisfaction of borrower’s
track record and good and sound financial position
There is no such bar for the loan limit if the branch is satisfied about the track
record and financials of the borrower. It can sanction appropriate loan limit
irrespective of quantum.
Bank has also issued detailed guidelines regarding debt restructuring
mechanism for units in MSE sector.
35
INTRODUCTION TO THE PROJECT
Credit appraisal is done to evaluate the credit worthiness of a borrower. The credit
proposal is prepared to indicate the need based requirement and the rationale for its
recommendation. Bank has in place a well-defined framework for approving credit limits
of different segments. Requests for credit facilities from the prospective borrowers shall
be on the prescribed format and the full-fledged proposal should be prepared for
submission to the appropriate sanctioning authority for approval. These proposals analyze
various risks associated with bank lending i.e. business risks, financial risks, management
risks, etc. and clarify the process by which such risks will be managed on an ongoing
basis.
The credit appraisals for any organization basically follow the following process:
Assessment of credit need
Financial statement analysis
Financial ratios of the company
Credit rating
Working capital requirement
36
Term loan analysis
Submission of documents
NPA classification and recovery
CREDIT
37
FUND BASED FACILITY
Fund based facilities provided by the banks are basically term loan & working
capital loan.
LETTER OF CREDIT
Used for any transaction wherein one or more parties to the transaction requires
the comfort zone of guarantee of payment by a reputable bank. An LC is issued
by a bank on behalf of one of it's creditworthy customers, whose application for
the credit has been approved by that bank.
The parties to a Letter of Credit are
(1) The Buyer (the applicant)
(2) The Buyer's bank (the issuing)
(3) The Beneficiary (the seller/payee)
(4) The beneficiary's bank (the ADVISING BANK).
The LC outlines the conditions under which payment (credit) will be made to a
third party (the Beneficiary). The conditions are specified by the buyer.
It is the responsibility of the issuing bank to ensure, on behalf of its client (the
Buyer), that all documentary conditions have been met before the Letter of
Credit funds are released.
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LETTER OF GUARANTEE
Letter of guarantee or popularly known as Bank Guarantee is a form of
indemnity letter issued by bank on behalf of its client, whereby the bank
promises to indemnify the beneficiary in the event of default of its client.
A letter of guarantee often helps firms conduct business with parties they would
never normally get the chance to deal with. Many suppliers will often choose to
do business with customers that have a letter of guarantee because it eliminates
the risk that they will not receive the appropriate payment for the goods that they
are selling.
A bank guarantee, like a line of credit, guarantees a sum of money to a
beneficiary. Unlike a line of credit, the sum is only paid if the opposing party
does not fulfill the stipulated obligations under the contract. This can be used to
essentially insure a buyer or seller from loss or damage due to
nonperformance by the other party in a contract.
Debt
Tangible Net Worth (TNW)
The ratio gives the proportion in which financing of company is done. If it
works to 2:1, it means that the long term Creditors have provided Rs 2 of every
Re 1 of the owner’s contribution. If a company has more of debt and less of
capital, it may be problems with regard to repayment of installments and
payment of interest.
In the analysis of XYZ Pvt. Ltd. DER comes to be 3.08. Total debt of company
includes long term liabilities and current liabilities of Rs 168.33lacs and
68.52lacs respectively. Total net worth of company is Rs. 76.98lacs. TNW is
sum of paid up capital, reserves and surplus and intangible assets.
40
DEBT SERVICE COVERAGE RATIO (DSCR)
Given by:
If an enterprise has borrowed funds, it is required to repay the same and also
pay the interest. DSCR should not be less than 1.35 individually.
RATING MODEL
R.B.I. has given considerable emphasis on having a proper risk rating in place
as a credit rating system is considered as an instrument that helps the bank in
Measuring the Credit Risk at the transaction level
Frequency of inspection
Credit rating is done for calculating BPLR (Bank Prime Lending Rate) for
borrower
The credit rating technique used by the banks differs from bank to bank.
Following parameters are taken into consideration:
1.RATING OF BORROWER
A. EVALUATION OF FINANCIAL RISK
i. Current ratio
ii. Debt Equity ratio
iii. Sales performance (actual V/S projected)
iv. Net profit margin (net profit to sales)
v. Return on capital employed (Profit After Tax/ Capital
Employed)
vi. Debt Service Coverage Ratio (for term loans)
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B. MANAGEMENT RISK
i. Experience of management and promoters
ii. Composition of management (qualification)
iii. Succession planning for key ratios
iv. Labor relations (w.r.t strikes, disputes etc)
v. Honoring financial commitment( to banks/ financial institution
ns/ creditors/ government etc)
2. RATING OF FACILITY
i. submission of stock statement
ii. submission of audited balance sheet, P & L and financial data
iii. repayment schedule (only for term loans)
iv. margin given on term loan
v. operation in account
vi. payment of loan and interest( timely or irregular)
3. RISK MITIGATORS
i. availability of collateral security and quality of collaterals
ii. available guarantee (director’s/ third party)
42
4. BUSINESS ASPECTS
i. length of satisfactory relationship with UBI
ii. income value to the bank ( interest, commission, exchange etc)
Points are given for each field out of a maximum limit and these points are added.
Credit rating is done on the basis of percentage, i.e., sum of points obtained to total
points.
INVESTMENT GRADES:
43
NON INVESTMENT GRADES:
For example:
44
WORKING CAPITAL ASSESSMENT
Apart from financing for investing in fixed assets, every business also requires
funds on a continual basis for carrying on day to day operations. These include
amounts expenses incurred for purchase of raw material, manufacturing,
selling, and administration until such goods are sold and the money is received.
While part of the raw material may be purchased by credit, the business would
still need to pay its employees, meet manufacturing & selling expenses (wages,
power, supplies, transportation and communication) and the balance of its raw
material purchases. Working capital refers to the source of financing required
by businesses on a continual basis for meeting the short term needs. Working
capital purpose may be defined as the funds required in carrying the required
level of current assets to enable the unit to run its operation at the expected
levels without any liquidity constraint. Limits to the various borrowers are
assessed depending upon their requirements and their line of activity.
45
RAW
WIP
MATERIAL
FINISHED
CASH
GOODS
RECIEVABLES
Time taken for acquiring raw material and average storing period
Conversion processing time
Average storing period for finished goods
Average collection period for book depts.
Banks can check that how many days are consumed by this working cycle and
how much amount is stuck in the process and accordingly bank can finance the
companies.
46
OPERATING CYCLE
47
PURPOSE OF FUNDS
1. TURNOVER METHOD:
Under this method the bank finances maximum of 20% of the projected sales of
the borrower and the borrower has to contribute 5% as his margin. This method
is applicable for SSI borrowers up to Rs.5.00 crores.
EXAMPLE:
RS. IN LACS
A TOTAL SALES / TURNOVERPROJECTED 2,25
B 25% OFF TURNOVER [OF “A”] [WCG] 56.25
C MARGIN AT 5% OF TURNOVER [OF “A”] 11.25
D LIMIT PERMISIBLE 20% OF “A” [B –C] 45
48
EXAMPLE:
1. DP is the amount of loan sanctioned that the borrower is eligible to take every
month.
2. DP is calculated by stock statement. Companies are asked to submit their stock
statement every month.
3. Check and calculate total stock. Consider stock less than 90 days only (general
case).
4. Subtract all the creditors’ amount from stock amount since DP covers only the
paid up amount.
5. Calculate margin on stock. Generally margin is taken as 25% of total amount
obtained in earlier step.
6. Calculate the amount of debtors that is to be considered by bank in drawing
power. Generally this amount is 50% of total debtors’ amount.
7. Add amount to be paid by bank on stock and debtors. This amount is known as
DP of a particular account for a particular month.
49
8. DP should always be less than sanction limit. Sanction limit is predefined
For example, in case of XYZ Pvt. Ltd., working capital loan issued is Rs 50lacs.
Suppose value of stocks (less than 90 days) for a particular month is Rs. 1.5lacs,
creditors is Rs .5lac, debtors is Rs. 3lacs.
= 3.5 lacs
TERM LOAN:
Term loans are a lump-sum payment with payback over a specified period of time.
They may be used to finance equipment, a change in ownership, a new business
acquisition or other long-term needs of a company. The period of loan vary from 3
to 7 years.
There are many issues in providing a term loan. Some of the main issues are:
Check whether the purpose of loan is valid or not. The unit should
undertake detailed market study. The demand & supply gap of the product
should be assessed. For example if the loan is being taken for new machinery,
check whether there is any need for new machinery in the factory. Purpose of
loan can be:
o Land
o Building
o Plant and machinery
o Term loan for working capital etc.
50
Verify the cost of project. Check the estimated cost given for the project. It
should not be overstated. For example:
o If loan is taken for machinery then verify its price from market or other
similar firms.
o If loan is demanded for buying land then check if the area of land
should be optimum.
o If loan is demanded for building then verify that the width, length and
structure proposed should be optimum.
Check all means of finance. It is useful to check how a borrower can finance
its project since bank does not provide 100% finance. Means of finance can
be:
o Bank term loans
o Capital withdrawal
o Unsecured loan
o Internal accruals
DSCR: DSCR for each year should not be less than 1.35. Average DSCR for
all years should not be less than 1.50
51
DOCUMENTS AND FORMALITIES
Once the credit limit is sanctioned main documents are obtained from the client
concerned. The nature of documents varies depending upon the type of facility
sanctioned and terms of sanction. Some of the main documents are:
With a view to moving towards international best practices and to ensure greater
transparency, it has been decided to adopt the '90 days overdue' norm for
identification of NPAs, from the year ending March 31, 2004.
52
A Non performing asset (NPA) shall be an advance where
Interest and /or installment of principal remain overdue for a period of more
than 90 days in respect of a Term Loan,
The account remains 'out of order' for a period of more than 90 days, in
respect of an overdraft/ cash Credit(OD/CC)
MAJOR LEARNING
Breakup and analysis of balance sheet by calculating various financial ratios.
Finding the appropriate loan amount and rate applicable.
CONSTRAINTS FACED
No data of any company can be disclosed.
53
FINDINGS AND CONCLUSION
Paid up capital
12.00
10.00
8.00
6.00
Paid up capital
4.00
2.00
0.00
31.3.07 (Aud) 31.3.08(Aud) 31.3.09(Aud)
54
The general reserves are also increasing by retaining the net profit in the
system. They have increased to 45 lacs as compared to 18 lacs previous year.
General reserves have increased by 150%.
General Reserves
50.00
45.00
40.00
35.00
30.00
25.00
General Reserves
20.00
15.00
10.00
5.00
0.00
31.3.07 (Aud) 31.3.08(Aud) 31.3.09(Aud)
The Company has informed that they have increased the unsecured loans from
Rs.9.ac [31.3.08] to Rs.23lac [31.03.09], i.e., 155.55%.
20.00
15.00
Loans from Friends /
10.00 Relatives
5.00
0.00
31.3.07 (Aud) 31.3.08(Aud) 31.3.09(Aud)
55
Share application money has reduced from Rs.24.7lac [31.3.08] to Rs.22.5 lac
[31.03.09], i.e., 8.9%.
Share Application
30.00
25.00
20.00
15.00
Share Application
10.00
5.00
0.00
31.3.07 (Aud) 31.3.08(Aud) 31.3.09(Aud)
Long term liabilities have increased to Rs. 168.33lacs from 39.5lacS, i.e.,
326.15%.
56
Fixed assets have also increased tremendously to Rs.301.32 lacs as compared
to Rs. 76.68 lac last year, i.e., 292.95%.
300.00
250.00
200.00
100.00
50.00
0.00
31.3.07 (Aud) 31.3.08(Aud) 31.3.09(Aud)
DER is under the required limit (3.08) which is due to increase in Tangible
Net Worth of the company. TNW has increased around 2 times as compared
to last year.
We may say that financial position of the Company has been improving and it
must be maintained as projected by the Company.
Company has negative NWC (Net Working Capital) due to increase in total
fixed assets.
57
Method used for finding out the cash credit limit is turnover method:
Figs. In lacs
A TOTAL SALES 250
B 25% OFF TURNOVER [OF “A”] [WCG] 62.5
C MARGIN AT 5% OF TURNOVER [OF “A”] 12.5
D LIMIT PERMISIBLE 20% OF “A” [B –C] 50
58
ANNEXURES
ANNEXTURE I
59
b) Stores & Spares
- Indigenous
- Imported
c) Stock-in-Process
d) Finished Goods
e) Others (Scrap)
5
Deferred Receivables (due within one year)
6
Advances to Suppliers of Raw Materials / 11.00 45.00 30
Stores/ Spares
7
Advance Tax Payment
8
sundry debtors 39.17 59.73 76.51
9
Other Current Assets 0.00
10
Advance to staff 0.00
TOTAL CURRENT ASSETS 51.77 106.03 107.71
B)
CURRENT LIABILITIES
1
Short Term borrowings from bank 0.00
2
Unsecured Borrowings (include. ICDS etc.) 0
3
Sundry Creditors 32.00 63.00 40.00
4
Sundry Creditors for Expenses/Others
5
Advances / Progress payment from 5.50 0.00 11
Customers / Dep. from Dealers
6
Dividend papyable including D tax
7
Deposits maturing within 1 year
8
Instalments of TL/DPG/Deb./R.P.Share 1.3
/ECB/ADR/GDR due within one year
60
9
Int. & Other charges accrued but not due
for payment.
10
Provision for Taxation 2.16 1.74 1.22
11
Provision for Bonus
12
Other Statutory Liabilities
13
Other Current Liabilities / Provisions 26.90 38.20 15
TOTAL CURRENT LIABILITIES 66.56 102.94 68.52
C)
FIXED ASSETS (Net of Depreciation)
1
Land & Building 15.00 13.90 165.5
2
Plant & Machinery 48.50 52.96 119.56
3
Other Fixed Assets ( Inc.vehicle) 6.80 9.50 15.6
4
Furniture & Fixture 0.21 0.32 0.66
5
Capital Work in Progress
(-) Revaluation Reserve
TOTAL FIXED ASSETS 70.51 76.68 301.32
D)
LONG TERM LIABILITIES
1
Debentures
2
loan from ICICI bank 8.00 6.00 2
3
Term Deposits
4
Term Loans UBI Bank a/c no: 11.00 22.00 40
5
SIDBI 100
6
Car Loan 1.50 2.50 3.33
7
Loans from Friends / Relatives 6.00 9.00 23.00
61
8
Other Term Liabilities (include. ECB/
ADR/GDR/FCNR(B) Loans etc.)
TOTAL LONG TERM LIABILITIES 26.50 39.50 168.33
E)
MISCELLANEOUS ASSETS
1
Investments 0
2
Amounts due from Associates/ Subsidiaries
4
HousingLoan
5
FDR 5.00 5.00 5.00
6
EMD 1.10 2.30 2.5
7
Adv. to Suppliers of Capital Goods
8
Deferred receivables
9
Security Deposits 1.80 1.80 1.76
10
Book Debts Older than 6 Months 0
11
Other Miscellaneous Assets/ ICD etc.
TOTAL MISCELLANEOUS ASSETS 7.90 9.10 9.26
F)
NET WORTH
1
Paid up capital 1.00 1.00 10.00
2
General Reserves 14.00 18.00 45
3
Premium 0
4
Share Application 10.00 24.70 22.5
5
Revaluation reserves
6
Deferred tax liabilities
7
Other Reserves[Excl. Provisions]
8
Balance of Profit
62
TOTAL NET WORTH 25.00 43.70 77.50
G)
INTANGIBLE ASSETS
1
Goodwill
2
Premilinary expanses 1.23 1.67 0.52
3
Other Intangible Assets
TOTAL INTANGIBLE ASSETS 1.23 1.67 0.52
63
DER (TOL/TNW) 3.92 3.39 3.08
64
6 Net Sales 220.00 240.00 250.00
NWC to TCA
7 (%) -54.36 -4.01 -60.60
FBF to TCA
8 (%) 25.79 6.92 96.98
Sundry
Creditors to
9 TCA (%) 61.81 59.42 37.14
Sundry
Creditors to
10 TCL (%) 48.08 61.20 58.38
INVENTORY
&
RECEIVABLE
NORMS
RM 0.00 0.00
Consumption –
65
Imported
RM 0.00 0.00
Consumption -
Indigenous
Cost of 0.00 0.00
Production
Cost of Sales 0.00 0.00
66
ANNEXURE II
Group NA
Banking UNION BANK OF INDIA
Month of review
Assets
Classification
Internal credit
rating
Status of account Regula Early Alert Special Mention
[Please Tick r System Account
appropriate box]
2. Constitution :
3. Address-
Regd./Admn. Office :
Unit/Works :
4 Names of directors :
Names of directors Means as per CR dt.
67
5. Background of Promoters/Directors :
. Capital structure :
Name of share Holders Share capital Share Total
premium Amount
8. Line of activity :
9. Sector/BSR Code :
10. Comments on latest Credit/
Search report :
11. Whether a/c is taken over / to be
Takenover. If so norms for
Take over are fulfilled :.
12. a) Dealing with bank since :
b) Credit facilities since
13. Total indebtedness : [Rs. in lacs]
Fund Based Non-Fund Total
Based
Existin Propos Exist Pro Existin Propos
g ed ing pos g ed
ed
OUR BANK
Working
Capital
Car loan-I
Car Loan-
II
SOD Limit
Sub Total
68
Other Banks
Working
Capital
T.l.. / D.P.G.l..
Sub Total
Fin. Institutions
(SIDBI)
Working
Capital
T.l.. / D.P.G.l..
Term Loan -I
Term Loan -
II
Sub total
TOTAL
69
excise]
- Exports
Less: Excise Duty
Net Sales
Other Income
Net Profit After Tax
Depreciation
Cash Accruals
D.S.C.R.
%age of Net Profit to
Sales
Evaluation of Management :
Evaluation of Industry :
Financial statements :
CMA Data :
70
18. COMPLIANCE TO TERMS OF SANCTION:
A: Completion of mortgage formalities :
71
20[c]: Any litigation in force against the firm/Company or against Partners/
Directors. If so mention detail and present position:
22. [b] Conduct of account & Exposure Details from our bank:
[Rs. In lac]
OUR BANK
Limit Limits D.P. O/s as Value of Irregul
s Recomme on Security arities,
Existi nded [14.03.09 if any
ng By branch 14.03. ]
09
A] NON FUND
BASED
LIMITS
SUB LIMIT
[A]
B] FUND
BASED
LIMITS
CC(H)
SOD[Deposits]
SUB-LIMIT
[B]
C] TERM
LOAN
Car Loan-I
Car Loan-II
72
SUB-LIMIT
[C]
GRAND
TOTAL[A+B+
C]
24 [a] Conduct of Account and Exposure Details from Banking system[incl. our
Bank]
Fund Based Non Fund Based
% Sanction % Amou
Share ed Share nt
Amount
1 Union Bank of
India
73
31.3.0 31.3.1
6 31.3.07 31.3.08 31.3.09 0
Particulars (Aud.) (AUD) (Aud.) (Est) [Proj.]
Raw Materials –
Indigenous
(Months’ Consumption)
Raw Materials –
Imported
(Months’ Consumption)
Stock in process
(Months' cost of
production)
Finished goods
(Months' cost of sales)
Receivables
(Months’ Sales)
Other Current Assets
(Rupees In Lacs)
Sundry Creditors
(Months’ Purchases)
31.3.09
31.3.07 (Aud.) 31.3.08(AUD)
(AUD.)
Total Current
1
Assets
Less : Current
Liabilities
2
(Other than Bank
Borrowing)
Working Capital
3
Gap
Actual / Projected
4 Net Working
Capital
Flexible Bank
5
Finance (3-4)
6 Net Sales
74
7 NWC to TCA (%)
8 FBF to TCA (%)
Sundry Creditors to
9
TCA (%)
Sundry Creditors to
10
TCL (%)
.
[e] Assessment of Non-Fund-Based Limits :
[f] Consortium Arrangement :
[g]Any other matter :
[c] RECOMMENDATIONS
[Rs. in Lac]
AMOUNT Margi Interest Prime Security
Existi Propos n
ng ed
75
CC(Hyp)
W/w
CC(BD)
SOD
Terms & conditions:
Senior Manager
SANCTIONED / DECLINED
CHIEF MANAGER
76
BIBLIOGRAPHY
77