MSME Lending-

Process flow and Credit Appraisal

In Punjab National Bank

By:

Bandana Mohapatra
(11DM036)
Birla Institute of Management Technology

Under the guidance of:

Faculty Guide: Industry Guide:

Prof. Brajendra Kumar Das Mr. Suraj Dutta

Professor and Advisor Financial Analyst
Birla Institute of Management Technology Punjab National Bank

15th April – 15th June, 2012

 Date: 15-06-2012

TRAINING CERTIFICATE
We hereby certify that Ms. Bandana Mohapatra, a Full Time Student of Post Graduate Diploma
in Management Course, 2011-2013, of Birla Institute of Management Technology (BIMTECH)
has undergone her Summer Internship as mandated for the completion of his above course from
BIMTECH, for a period of 8 weeks starting from 15th April, 2012.

The title and scope of his project was “MSME Lending- Process flow and Credit Appraisal in
Punjab National Bank”. The project was carried out under the guidance of Mr. Suraj Dutta,
Financial Analyst.

We found her to be a dedicated and diligent student. We take this opportunity to wish her every
success in her future endeavors.

Sincerely,

Mr. Suraj Dutta

Designation -Financial Analyst
Location- Bhubaneswar

2
 SUMMER PROJECT CERTIFICATE

This is to certify that Ms. Bandana Mohapatra Roll No. 11DM036 a student of PGDM has

worked on a summer project titled “MSME Banking-Process flow and Credit Appraisal” at

Punjab National Bank-CO, Bhubaneswar after Trimester-III in partial fulfillment of the

requirement for the Post Graduate Diploma in Management programme.

This is his/her original work to the best of my knowledge.

Date: 15-06-2012

(Prof. B.K. Das)

3
 ACKNOWLEDGEMENT

I would like to gratefully acknowledge the contribution of all the people who took active part and
provided valuable support to me during the course of the project. To begin with, I would like to
offer my sincere thanks to “Mr. Suraj Dutta, Financial analyst” for giving me the opportunity to
do my summer training at “Punjab National Bank”. Without his guidance, support and valuable
suggestions during the research, the project would not have been accomplished.

My heartfelt gratitude also goes to the entire “Credit and Rehabilitation” department at Punjab
National Bank-CO, Bhubaneswar, for their co-operation and willingness to answer all my
queries, and provide valuable assistance.

I also sincerely thank my faculty guide Prof. B.K. Das, Professor and Advisor, Birla Institute of
Management Technology (BIMTECH), Greater NOIDA, who provided valuable suggestions,
shared his rich corporate experience, and helped me script the exact requisites.

Finally, my heartfelt thanks to all the people and staff at Punjab National Bank, faculty members
at BIMTECH and all my beloved friends who have directly or indirectly appreciated, criticized
and supported my work during the course of the project.

(Bandana Mohapatra)

4
 LETTER OF AUTHORIZATION

I, Bandana Mohapatra, a student of Birla Institute of Management Technology (BIMTECH),

hereby declare that I have worked on a project titled “MSME Banking-Process flow and
Credit Appraisal” during summer internship at Punjab National Bank-CO, Bhubaneswar for
the partial fulfillment of the requirement for the Post Graduate Diploma in Management
program.

I guarantee my research work to be authentic and original to the best of my knowledge in all
respects of the process carried out during the project tenure.

My learning experience at Punjab National Bank-CO, Bhubaneswar under the guidance of Mr.
Suraj Dutta, Financial analyst, PNB-CO, Bhubaneswar and Prof. B.K. Das, Professor and
Advisor, BIMTECH, has been truly enriching.

Date: 15-06-2012 _________________

(Bandana Mohapatra)

5
 LETTER OF TRANSMITTAL
Birla Institute of Management Technology,
Plot no. 5, Knowledge Park-II,
Institutional Area,
Greater NOIDA,
Uttar Pradesh – 201306

Date: 13-06-2012

Mr. Suraj Dutta,

Financial Analyst,
CO: Bhubaneswar,
4th Floor, Deendayal Bhawan
Ashok Nagar, Janpath
Bhubaneshwar - 751009

Dear Sir,

SUB: Summer Project Report

Attached herewith is a copy of my summer-project report entitled “MSME Banking-Process

flow and Credit Appraisal” which I am submitting in order to mark the completion of 8-week
summer project at your organization. This report was prepared by me using the best of practices
and summarizes the work performed on the project and is being submitted in partial fulfillment
of the requirements for award of diploma.

I would like to mention that the overall experience with the organization was very good, which
helped me to know how is the work carried out in real practice with the help of your esteemed
organization. I feel honored that I got an opportunity to work with Punjab National Bank, an
organization of great repute.

I hope I did justice to the project and added some value to your organization.
Suggestions/comments would be appreciated.

Yours truly,

Bandana Mohapatra
bandana.mohapatra13@bimtech.ac.in

6
 CONTENTS

i. Certificates…………………………………………..……………........................ 02
ii. Acknowledgement…………………………………………………………………….
04
iii. Letter of Authorization ……………………………………........................................
05
iv. Letter of transmittal…………………………………………………………………….
06
v. List of Tables……………………………………………………………..................
08
vi. List of Figures…………………………………………………………................ 08
vii. List of Exhibits………………………………………………………………………
08
viii. Executive Summary…………………………………………………………………
09
1. Brief overview of Punjab National Bank…………………………………………...
10
2. Literature Review…………………………………………………………………..
12
3. Micro, Small and Medium Enterprises
3.1 Overview of MSME sector………………………………………………………..13
17
3.2 MSME Banking in PNB………………………………….............................................
4. Types of Loans
4.1 Working Capital…………………………………………………………………. 21
4.2 Term Loan…………………………………………………………………………….
23
5. Project Appraisal
5.1Procedure for project appraisal…………………………………………………………
25
5.2Pre-Sanction Appraisal………………………………………………………………….. 26
5.3Post-Sanction Appraisal ………………………………………………………… 30
5.4 Review/Renewal of sanction……………………………………………………………….,
32
6. Case Study of M/s ABC Pvt. Ltd.………………………………………………………
33
7. Case Study of M/s XYZ Pvt. Ltd.………………………………………………………
47
8. Exhibits……………………………………………………………………… 57
9. References…………………………………………………………………… 60
10. Appendix……………………………………………………………………. 61
11. Glossary of Abbreviations………………………………………………….. 68

7
 LIST OF TABLES
Table 1 Performance highlights of the bank 11
Table 2 Limit for investment in MSME 14
Table 3 Share of SMEs Output to India’s GDP 15
Table 4 Time norms for application processing 18
Table 5 MSME Advances including Trading Advances covered under MSME Act 19
Table 6 Credit risk assessment taking character, capacity and capital as criteria 28
Table 7 Borrower’s Profile M/s ABC Pvt. Limited 35
Table 8 Requirement of M/s ABC Pvt. Limited 36
Table 9 Credit risk rating of M/s ABC Pvt. Limited 37
Table 10 Cost structure of M/s ABC Pvt. Limited 39
Table 11 Staff and labor requirement of M/s ABC Pvt. Limited 40
Table 12 Cost of Project of M/s ABC Pvt. Limited 41
Table 13 Status of investment of M/s ABC Pvt. Limited 41
Table 14 Current ratio analysis of M/s ABC Pvt. Limited 42
Table 15 Debt-equity ratio analysis of M/s ABC Pvt. Limited 43
Table 16 Profit sales ratio analysis of M/s ABC Pvt. Limited 43
Table 17 TOL/TWN ratio analysis of M/s ABC Pvt. Limited 44
Table 18 Sensitivity analysis of M/s ABC Pvt. Limited 45
Table 19 Borrower’s profile of M/s XYZ Pvt. Limited 48
Table 20 Requirement of M/s XYZ Pvt. Limited 49
Table 21 Credit Risk assessment of M/s XYZ Pvt. Limited 50
Table 22 Raw material requirement of M/s XYZ Pvt. Limited 52
Table 23 Installed capacity of M/s XYZ Pvt. Limited 52
Table 24 Approvals obtained by M/s XYZ Pvt. Limited 54
Table 25 Cost of project of M/s XYZ Pvt. Limited 55

LIST OF FIGURES

Figure 1 Types of loans 22

Figure 2 Working Capital cycle 22
Figure 3 Appraisal system 26
Figure 4 Loan disbursement process 26
Figure 5 Current ratio analysis of M/s ABC Pvt. Limited 42
Figure 6 Debt-equity ratio analysis of M/s ABC Pvt. Limited 43
Figure 7 Profit sales ratio analysis of M/s ABC Pvt. Limited 44
Figure 8 TOL/TWN ratio analysis of M/s ABC Pvt. Limited 45

LIST OF FIGURES
Exhibit 1 Profile of the Borrower Form 57
Exhibit 2 Checklist for SSI Proposal 58

8
 EXECUTIVE SUMMARY

Banks in India now envisage a global flavor by casting aside their rudimentary policies to make a
significant move towards servicing the Small and Medium Enterprises. They have fine-tuned
their product offerings, services and technology to match-up the global standards and contribute
significantly to our country’s growth.

This report gives an insight into the MSME sector in India and role of PNB in the financial
inclusion. The credit appraisal procedure undertaken in Punjab National Bank for disbursement
of loans to MSME is also studied in detail. It analyzes various aspects of financing the MSME
borrowers which lie within the ambit of the Circle Office of Punjab National Bank, and are
beyond the power of the branch office.

The process Punjab National Bank follows to assess the economic viability of its clients and
grant the credit is studied by understanding various types of facilities offered by the bank for
Project Finance, including both Fund based facilities like term loan and Cash credit and Non
Fund based facilities like Bank Guarantee and Letter of Credit. The calculation of the credit risk
before granting finance, which is used by the bank to evaluate the credit risk of the bank and
accordingly charge the rate of interest to the clients, is also studied with the help of a case study.

9
 BRIEF OVERVIEW OF PUNJAB NATIONAL BANK

Punjab National Bank (PNB) was set up in the year 1895 in Lahore. The bank was nationalized in
July 1969 along with 13 other banks. Since then, PNB has achieved growth at a galloping pace
and is a professionally managed bank with a successful track record of over 110 years. PNB is
ranked as the 2nd largest bank in the country after SBI in terms of branch network, business etc.
and continues to enjoy the leadership position among the nationalized banks. Besides being
ranked as one of India's top service brands, PNB has remained fully committed to its guiding
principles of sound and prudent banking. Apart from offering banking products, the bank has also
entered the credit card, debit card; bullion business; life and non-life insurance; Gold coins and
asset management business, etc.

Table 1: Performance highlights of the bank

(in crores)
Parameters Mar'08 Mar'09 Mar'10 Mar’11 CAGR %

Operating Profit 4006 5690 7326 9056 22.29

Net Profit 2049 3091 3905 4433 23.98

Deposit 166457 209760 249330 312899 14.42

Advance 119502 154703 186601 242107 16.01

Total Business 285959 364463 435931 555005 15.09

During the FY 2010-11, with 38.45% share of Current and Saving Account (CASA) deposits, the
Bank achieved a net profit of Rs 4433 crores. Bank has a strong capital base with capital
adequacy ratio of 12.52% as on Mar’11 as per Basel II with Tier I and Tier II capital ratio at
8.44% and 3.98% respectively. As on March’11, the Bank has the Gross and Net NPA ratio of

10
1.79% and 0.85% respectively. During the FY 2010-11, its ratio of Priority Sector Credit to
Adjusted Net Bank Credit at 40.5% and Agriculture Credit to Adjusted Net Bank Credit at
19.7% was also higher than the stipulated requirement of 40% and 18% respectively.

The Bank has been able to maintain its stakeholders’ interest by posting an improved NIM of
3.91% in Mar’11 (3.57% Mar’10) and a Return on Assets of 1.34%. The Earning per Share
improved to Rs 140.60 (Rs 123.98 Mar’10) while the Book value per share improved to Rs
661.20 (Rs 514.77 Mar’10). Punjab National Bank continues to maintain its frontline position in
the Indian Banking Industry.

The impressive operational and financial performance has been brought about by Bank’s focus
on customer based business with thrust on CASA deposits, Retail, MSME and Agri Advances
and with more inclusive approach to banking; better asset liability management; improved
margin management, thrust on recovery and increased efficiency in core operations of the Bank.

11
 LITERATURE REVIEW
Credit appraisal, risk analysis and decision making by D.D. Mukherjee, 5th edition, 2010

The publication is a handy tool to all practicing bankers while making decision on credit
proposals. Students of banking, credit officers in both commercial and co-operative banks as
also finance companies find the book highly rewarding. Detailed step by step guidelines to the
practitioners on every aspect of the credit appraisal are clearly stated. The book provides
guidelines on how to do analysis of financial statements, profit and loss and relevant balance
sheet items. Forecasting and cash budget applications are also illustrated. It is a reference book
to any banker right from bottom to the top executives upto CEO level.

It has been designed for easy understanding but it does not encompass modern day techniques
to calculate and analyze credit lending viability. Use of excel formulae has not been
demonstrated. The inherent problems in the credit appraisal mechanism, which cannot be
quantified, have not been explained in detail.
Book of instruction of loans for internal circulation (Risk management division, head
office, Jan 2010)
Faced with the challenge of providing credit facilities to the MSME sector, which is one of
the growing sectors in the country, Punjab National Bank provides credit facilities both fund
based and non-fund based credit to the MSME borrowers. The book of instruction provides a
set of guidelines for provision and assessment of the proposal. It provides a set of formats and
guiding principles for the bank officials to follow during disbursement of loans.
Prime Minister's Employment Generation Programme (PMEGP)
RBI/2008-09/211 RPCD.PLNFS.BC. No. 41 /09.04.01/2008-2009 October 10, 2008
This is a circular for all Indian Scheduled Commercial Banks (including RRBs). The
Government of India, have merged Rural Employment Generation Programme (REGP) with
Prime Minister Rozgar Yojana (PMRY) and introduced a new scheme called Prime Minister
Employment Generation Programme (PMEGP). Master Circular ‐ Lending to Micro,
Small & Medium Enterprises (MSME) Sector
RBI/2011‐12/83 RPCD. SME & NFS. BC. No. 09/06.02.31/ 2011‐12 July 1, 2011
This Master Circular is for all Scheduled Commercial Banks (excluding RRBs). It
consolidates the instructions issued by the RBI upto June 30, 2011, to the extent they deal
with the MSME sector lending by commercial banks. It lays down the do’s and don’ts for the
commercial banks while formulating their policies for lending to the MSME sector.

12
 MICRO, SMALL AND MEDIUM ENTERPRISES

3.1 OVERVIEW OF MSME SECTOR:-

Looking at the scale of their spread and contribution, the Micro, Small and Medium
enterprises are believed to play a catalytic role in the nation’s development and transition of
economies. During recession, MSMEs have acted as shock absorbers, as in India this sector
has significantly contributed to production, employment generation and export promotion. A
significant population of our country is engaged in this sector which has created an
opportunity for employment and, in turn, helped to eradicate rural poverty.
In accordance with the provision of Micro, Small and Medium Enterprises Development
(MSMED) Act, 2006 the Micro, Small and Medium Enterprises (MSME) are classified into:

(a) Manufacturing Enterprises:-

The enterprises engaged in the manufacture or production of goods pertaining to any industry
specified in the first schedule to the industries (Development and regulation) Act, 1951). The
Manufacturing Enterprises are defined in terms of investment in Plant and Machinery.
(b) Service Enterprises:-
The enterprises engaged in providing or rendering of services and are defined in terms of
investment in equipment.

The limit for investment in plant and machinery / equipment for manufacturing / service
enterprises, as notified, vide S.O. 1642(E) dtd.29-09-2006 are as under:

Table 2: Limit for investment in MSME

Manufacturing Sector
Enterprises Investment in plant and machinery
Micro Enterprises Does not exceed twenty five Lakh rupees
Small Enterprises More than twenty five Lakh rupees but does not exceed five crore rupees
Medium Enterprises More than five crore rupees but does not exceed ten crore rupees
Service Sector
Enterprises Investment in equipments
Micro Enterprises Does not exceed ten Lakh rupees:
Small Enterprises More than ten Lakh rupees but does not exceed two crore rupees
Medium Enterprises More than two crore rupees but does not exceed five core rupees

Source:Ministry of MSME

13
MSME Sector has registered steady performance over years, thereby registering high
contribution to the GDP, which is currently at 10 percent and is projected to go up by a
minimum of 7 percent and touch 17 percent share of India’s GDP by 2012. The tables below
give the glimpse of the contribution made by MSMEs in growth of the country:
Table 3: Share of SMEs Output to India’s GDP

D andB Research
Source: Ministry of MSME and Central Statistical Organization

CHALLENGES:
Despite its commendable contribution to the Nation's economy, MSME Sector does not get
the required support from the concerned Government Departments, Banks, Financial
Institutions and Corporate. It faces problems at every stage of its operation.
The major problems confronting this sector have been identified as:

1) Absence of adequate and timely banking finance:

Finance is one of the critical inputs for growth and development of any kind of business, as it
is used to meet both fixed as well as working capital requirements. They need credit support
not only for running the enterprise and operational requirements but also for diversification,
modernization/upgradation of facilities, capacity expansion, etc.
Generally, such enterprises operate through owner's contribution, loans from friends and
relatives and some bank credit. They are often unable to procure adequate financial resources
for the purchase of machinery, equipment and raw materials as well as for meeting day-to-
day expenses. Due to low goodwill and little fixed investment, they find it difficult to borrow
at reasonable interest rates. As a result, they have to depend largely on internal resources.

14
2) Non-availability of highly skilled labor at affordable cost:
There is lack of trained and experienced employees because small firms cannot pay high
salaries and cannot spend much on training their employees. Small scale firms find it difficult
to recruit and motivate skilled managerial and technical personnel as they look for better
opportunities in the large scale industries. Therefore, they get the second rate talent or have to
depend on family members who do not have diversified skills.

3) Ineffective marketing strategy:

Small scale units have to face several difficulties in the marketing and distribution of their
products. Most of them do not have their own marketing network. They find it difficult to sell
their output at remunerative prices due to higher cost of production and non-standardized
quality of products. They cannot afford to spend much on advertising, sales, promotion,
marketing research, etc. They have to sell their products at throwaway prices due to weak
bargaining power and immediate need for money. They also face stiff competition from large
firms.

4) Non-availability of suitable technology:

Majority of the small scale units use old techniques of production and outdated machinery
and equipment. Upgradation of the technology and achieving economies of scale is one of the
major problems facing the sector. They cannot afford new machines and equipment and are
therefore not in a position to use the latest techniques of production. With liberalization of the
economy, the MSMEs are facing stiff competition from imports and need technological
upgradation in order to produce better quality products at cheap rates.

5) Shortage of raw materials:

Non-availability of quality raw materials on a timely basis in an adequate quantity is one of
the main problems faced by MSMEs. There is acute shortage of even the basic raw materials
required by small scale units. These units are handicap in obtaining raw materials of requisite
quality and quantity at reasonable prices. They do not get the benefits of bulk buying. For
instance, the handloom industry is facing shortage of yarn. Small scale industries also face
shortage of power due to which they are unable to make full utilization of plant capacity.
Majority of them cannot afford to install their own power generating plants to ensure
uninterrupted operations.
15
There can be many more similar issues hindering the orderly growth of the MSME sector
such as:
 Limited capital and knowledge

 Low production capacity

 Identification of new markets

 Constraints on modernization and expansions

 Follow-up with various government agencies to resolve problems

 Delayed Payments

 Lack of Appropriate Infrastructure

3.1.2 BANKING NEEDS OF MSME

 For MSME clients the requirement of credit is within a very short span of time.

 They need their banker to be understanding and supportive, as their cash flows are not
always smooth.

 Entrepreneurs may not be able to express their requirement clearly.

 They also need support in their transaction like receivables, remittance, cash collection
etc. (credit is not the sole requirement)

 MSME also needs convenience of technology for their banking needs.

16
 3.2 MSME BANKING IN PNB:-
Realizing the significance that, Micro and Small Sector contributes 40% of the gross turnover
in Manufacturing Sector, gives employment to 308 Lakh persons, produces 7500 products and
contributes more than 35% of the country's exports, PNB has formulated a number of
schemes to provide a impetus for the growth of the Micro and Small Enterprises Sector.

AMOUNT OF LOAN
 Term Loan (Need based).
 Working Capital Requirement Computed and Sanctioned at 20% of projected realistic
annual turnover basis.
 Composite Loan Limit has been raised to Rs. 100 Lakh (for Term Loan and Working
Capital).

APPLICATION
1. Simplified Loan Application Forms for convenience of borrowers.
2. Online Application.
3. Speedy Processing within specified time norms, i.e:-
Upto Rs.2 Lakh 2 weeks
Over Rs.2 Lakh and upto Rs.5 Lakh 4 weeks
Over Rs.5 Lakh 8 -9 weeks

Table 4: Time norms for application processing

COLLATERAL SECURITY

 Advances upto Rs.10.00 lakhs without collateral security.

 Advances over Rs.10 lakhs and upto Rs.25 lakhs, based on good track record and
financial position, no collateral insisted upon.
 Advances upto Rs.100 lakhs guaranteed under Credit Guarantee Fund Trust for Micro
and Small Enterprises (for manufacturing and service enterprises) without collateral
security / third party guarantee.

17
 LENDING RATES LINKED WITH BPLR AND BASE RATE

 BPLR - 14% (w.e.f from 01.05.2012)

 Base Rate - 10.50% (w.e.f from 01.05.2012)
 Tenor premium - 0.50% to be added for arriving at interest rate for loans
repayable in 3 years and above.

Table 5: MSME Advances including Trading Advances covered under MSME Act
BPLR System Base Rate System
a) Advances upto Rs. 50,000/-
i) Micro Enterprises BPLR -1.00% BR + 2.00%
ii) Small Enterprises BPLR -0.50% BR + 2.50%
b) Advances over Rs. 50,000/- but BPLR BR + 3.00%
upto Rs.2 lakhs
c) Advances over Rs.2 lakhs but BPLR BR + 3.00%
upto Rs.20 lakhs
d) Advances over Rs.20 lakhs As per credit risk rating As per credit risk rating
Credit BPLR System Base Rate System
Risk Above Rs. 20 Rs. 5.00 crore to Rs. 50.00 crore and
Rating lakhs to less less than Rs. 50.00 above
than Rs. 5.00 crore
crore
AAA BPLR BR + 3.00% BR + 3.00% BR + 2.25%
AA BPLR + 0.50% BR + 3.50% BR + 3.25% BR + 2.50%
A BPLR + 1.00% BR + 4.00% BR + 3.50% BR + 3.00%
BB BPLR + 1.50% BR + 4.50% BR + 4.25% BR + 3.75%
B BPLR + 2.00% BR + 5.00% BR + 5.00% BR + 4.50%
C BPLR + 2.00% BR + 5.00% BR + 5.00% BR + 5.00%
D BPLR + 2.00% BR + 5.00% BR + 5.00% BR + 5.00%

POLICIES OF PNB FOR MSME LENDING

1. The Bank shall continue to lay emphasis on financing Micro, Small and Medium
Enterprises and our existing MSME credit portfolio shall be enlarged. Policy Package of
Govt. of India 2006 shall be supported and popularized amongst our branches.

2. In line with GOI policy directives to achieve 20% YoY growth in credit to micro, small
and medium sector, the bank under vision 2013 documents envisages growth of more
than 25%.
3. Endeavour will be to achieve high growth in MSME advances and to increase the share of
the Micro Enterprises advances (i.e. manufacturing/ service enterprises having investment
in plant and machinery/equipment up to Rs. 25 lakhs/Rs. 10 lakhs) in the advances to
Small Enterprises to 60%.

18
4. The Reserve Bank of India guidelines on financing to MSMEs shall continue to be
followed and incorporated in various schemes for financing MSMEs. These guidelines on
timely sanctioning of MSME applications, margin, rate of interest, collateral security, etc
shall continue to be adhered to.
5. The Bank is financing Artisans, Craftsmen, Village and Cottage Industries, and Industries
falling under KVIC Schemes. The small non-farm sector units in rural areas and women,
minorities, SC/ST and other special groups are being financed in terms of Govt. of India /
RBI policy and shall continue to be given attention.
6. The bank has adopted cluster approach – a vehicle of growth for manufacturing sector by
leveraging Cluster Based Lending Approach. Under Cluster Based approach, bank has
adopted 41 MSME clusters and more are to be adopted in the years to come. Emphasis
will be made for customization of cluster specific schemes for boosting MSME advances.
7. Disposal of Loan Applications within the prescribed time limit is to be ensured. Up to Rs.
2.00 lakhs within 2 weeks (against RBI prescribed norms for loans up to Rs. 25000/-),
above Rs. 2 lakhs and up to Rs 5.00 lakhs within 4 weeks and above Rs. 5.00 lakhs within
8-9 weeks.
8. The Bank has specialized MSME branches to support finance to MSME units. The Bank
has plans / approvals to open more such branches during 2008-09. These branches shall
be developed as centers of excellence in MSME financing.
9. The various service sector enterprises shall be financed taking advantage of the new
investment limits in equipment under MSMED Act 2006.
10. The Bank is financing loans upto Rs 100 lakhs for Small Enterprises under the Credit
Guarantee Scheme of CGTMSE. The Bank proposes to continue the coverage under the
Scheme. The Bank is also charging concessional guarantee fee / annual service charges in
special category of advances / geographical areas as per the scheme.
11. The Bank has approved independent rating agencies like MSMERA, CRISIL, ICRA and
ONICRA etc. for rating of the MSME units.
12. With the revised policy guidelines on definition of Medium Enterprises under Micro,
Small and Medium Enterprises Development Act 2006, bank shall focus on these units
for financing and increasing our share.
13. The Bank shall continue to work with SIDBI, Ministry of Micro Small and Medium
Enterprises (MSME) to better serve the MSME Sector.”

19
SCHEMES OFFERED

1. SARTHAK UDYAMI - For setting up new units; expansion, modernization and

renovation of existing units; purchase of land, construction of building, machinery,
equipment etc; and working capital facilities.

2. PNB PRAGATI UDYAMI - Scheme for financing industry related services /

business enterprises.

3. PNB KUSHAL UDYAMI - Loans to craftsmen and technically qualified

entrepreneurs to set up micro and small units, for purchase of fixed assets and meeting
working capital needs.

4. LOANS FOR SETTING UP INDUSTRIAL ESTATES FINANCING

COOPERATIVE, PARTNERSHIP FIRMS AND JOINT STOCK
COMPANICES OF ENTREPRENEURS SOCIETIES FOR ESTABLISHING
INDUSTRIAL ESTATES - To purchase land and construction of factory sheds.

5. PNB VIKAS UDYAMI LOANS - For acquiring iso-9000 certification, expenses on

consultancy, documentation, audit certification fees, equipment and calibrating
instruments required would be taken into account for determining loan requirement.

6. PNB MSME SAHAYOG SCHEME - Financial assistance to meet unforeseen

expenditure of MSMEs having good track record.

7. PNB ARTISAN CREDIT CARD - To provide hassle free financial support to

artisans and make credit delivery simple and easy

8. SCHEME FOR ADVANCES TO OWNER-DRIVERS OF TAXI CARS, THREE

WHEELER ETC. - To provide self-employment opportunities to licensed drivers by
making cheaper and easier credit available for financing taxi cars, three wheelers
scooters, tempos or station wagons.

9. SCHEME FOR ADVANCES TO SMALL ROAD TRANSPORT OPERATORS

- To assist transport operators (existing as well as new entrants) and to create
employment opportunities for them.

20
 TYPES OF LOANS

Figure 2: Types of loans

5.1 WORKING CAPITAL:-
Working capital refers to the total amount of circulating funds required for meeting day to
day requirements. For continuous production, a manufacturing unit needs a specific level of
current assets such as raw material, stock in process, finished goods, receivables and other
current assets such as cash in hand/ bank and advances etc. The faster a business expands the
more working capital it will require.

5.1.1 WORKING CAPITAL CYCLE:

The working capital cycle or operating cycle of a manufacturing unit means the time taken
for converting cash into cash via raw material, stock in process, finished goods and
receivables. Cash flows in a cycle into, around and out of a business.

Figure 2: Working Capital cycle

21
GROSS WORKING CAPITAL AND NET WORKING CAPITAL:
Gross working capital means the total funds required for financing the total current assets.
Net Working capital means the difference of current assets and liabilities.

Gross Working Capital = Current Assets

Net Working Capital = Current Assets − Current Liabilities

In other words, net working capital denotes the portion of gross working capital contributed
from long term sources. As per practice of Indian banks, net working capital should normally
be 25% of total current assets which will give a current ratio of 1.33 to the unit. When net
working capital is negative, it implies that the short term funds have been diverted / used for
long term uses and the unit is facing a liquidity crunch. Such situation may also arise due to
losses. In such a situation, there is a requirement of raising long term sources to meet the
deficit.

Working Capital Finance is broadly categorized under two heads:

1. Fund Based. These are the facilities for which the bank provides funding and
assistance to actually purchase business assets or to meet business expenses in terms
of cash or cheque.

2. Non Fund Based. These are the facilities for which the bank can issue letters of credit
or can give a guarantee on behalf of the customer to the suppliers for the procurement
of goods and services on credit.

BANKER’S ROLE:
A unit must keep its working capital intact. Usually a portion of the working capital is
financed from long term sources called the net working capital (NWC). The remaining is
normally financed by the bank in the form of working capital limits. Excess of working
capital may result in idle resources and high interest cost whereas less amount of working
capital may mean disruption in the working process. So, an ideal amount of working capital
must be maintained. For financing of working capital, a banker should be able to estimate the
right amount of working capital needed by the unit. This would ensure the timely repayment
of the debt.

22
METHODS OF ASSESSMENT OF WORKING CAPITAL ADEQUACY:
1. Turnover method
2. Cash budget system
3. Committee recommendations

SIMPLIFIED TURNOVER METHOD: - This method was proposed by “The Nayak

Committee” and is used for assessment of working capital needs of small trading companies.
It is not appropriate for big manufacturing and trading companies and is normally used for
the financing of less than Rs. 25 lakhs.

 Working Capital Requirement = 25% of Turnover

 Promoter Contribution (Margin) = 5% of Turnover

 Bank Finance = 20% of Turnover

CASH BUDGET SYSTEM: - It is mainly used for service sector companies Like BPO,
KPO, Software companies etc. It eliminates traditional requirement of Stock and Debtors for
assessment.
Working Capital finance = Cash Inflow – Cash Outflow

COMMITTEE RECOMMENDATIONS: - “Tandon Committee” has recommended the

following methods:
 Method I - Borrowers to bring 25 % of the net working capital

 Method II - Borrowers to bring 25% of the Current Assets

 Method III - Borrowers to bring 100% of hard core assets + 25% of other current
assets.

CORE CURRENT ASSETS, which has been defined as representing the absolute minimum
level of raw materials, process stock, finished goods and stores which are in the pipeline to
ensure continuity of production.

5.2 TERM LOAN:-

Term loans are sanctioned for acquisition of fixed assets like land, building, plant/machinery,
office equipment, furniture-fixture, etc. It is not a demand loan and is repayable on demand.
These are normally granted for periods varying from 3 to 7 years and in exceptional cases,
such as, infrastructural projects, repayment period is extended beyond 7 years.

23
BANKER’S ROLE:
While extending term loans the bank must take care to conduct the total economic viability
study of the proposal. Term loans involve high amount of transactions. So, it is very important
to assess the recovery procedure, to avoid the conversion of the loan into a NPA.

METHODS OF ASSESSMENT OF TERM LOAN SANCTION:

The appraisal process involves an in-depth study of the following aspects of the proposal: -
 Financial
 Commercial
 Technical
 Managerial
Other than that the person’s paying capacity, income tax records, deposits, assets, etc. and the
company’s balance sheet and cash flow statement should also be checked.

24
 PROJECT APPRAISAL

6.1 PROCEDURE FOR PROJECT APPRAISAL:-

Credit Appraisal, Sanctions, Monitoring and Asset Recovery Management comprise the
entire gamut of activities in the lending process of a bank which are clearly shown as below:

Figure 3: Appraisal system

The whole process followed by Punjab National Bank from the application of loan to the
sanctioning of loan is described below with the help of flow chart:
Figure 4: Loan disbursement process

25
With a view to ensuring a healthy loan portfolio, PNB has taken various steps to bring its
policies and procedures in line with the changing scenario which also aims at effective
management and dispersal of credit risks, strengthening of pre-sanction appraisal and post
sanction monitoring systems.

There are two distinct phases of credit appraisal for a project:

A. Pre-sanction credit appraisal.
B. Post sanction supervision and follow up of loans.

6.2 PRE-SANCTION APPRAISAL:-

Before granting any advance under their own delegated powers or while forwarding
proposals for sanction to a higher authority, managers must satisfy themselves or provide the
following information as may be necessary to take a prudent credit decision and give their
own definite recommendations. The end objective of the appraisal system is to ensure that
there is no under-financing or over-financing.
Following are the aspects, which needs to be scrutinized and analyzed while appraising:

STUDING THE BORROWER’S PROFILE

The first and most important aspect to be evaluated while appraising a loan proposal is to
study the borrower’s integrity and honesty. Even if the bank has proper security, it is required
that the borrower is honest and tends to pay back the loan on time. The branch manager
should have confidence in the borrower before making an advance. The following points may
be noted in the appraisal of the borrower in order to make an assessment of his standing,
respectability and credit worthiness.

 CHARACTER: - It is essential that the borrower must have a very good character. The
assessment of an individual’s character is done on the following basis:

 Extent and nature of his education

 State of his health, capacity and energy for hard work

 General reputation among social and business circles, acquaintances,

associates, employees and creditors.

 Antecedent business records

26
  Behavior and dealing with bank and others.

 CAPACITY: - The Branch Manager must ascertain the borrower’s ability and experience to run
the business in a profitable manner. Other guiding factors are as follows:

 The ability and experience to run the business in a profitable manner.

 Past business results and income and expenses of the borrower.

 Technical expertise of the borrower should be ascertained.

 Paying pattern and defaults should be ascertained.

 CAPITAL: - The capital or financial strength of the borrower as measured by equity or

net worth of the business should be determined to assess the borrower’s credit worthiness
and ability to pay.

CHARACTER CAPACITY CAPITAL CREDIT RISK

   Safe

   Fair

   Fair

   Doubtful

   Limited Success

   High

   Inferior

   Distinctly poor

   Fraudulent
Table 6: Credit risk assessment taking character, capacity and capital as criteria

 EXPERIENCE: - The borrower should have adequate experience in the business or

should have employed competent personnel for management of the business.

 PURPOSE: - It should be ensured that the purpose of advance is acceptable to the bank
and the borrower can be trusted for not misusing the facilities and divert the funds
available in the business for other purpose.

27
 QUANTUM OF ADVANCE: - The amount of loan to be disbursed must be assessed
carefully by taking into account the following points:

 The amount of finance granted by the bank is need based and as per the actual
requirements of the business.

 Adequate cushion is provided to meet the unforeseen contingencies on account

of a possible escalation in the cost.

 The project should neither be underfinanced nor over financed.

 SECURITY: - It should be ensured by the bank that the security made available by the
borrower should be reasonable and its value should be sufficient to cover the advance.
The borrower’s title should be valid and transferable. Security is obtained as an insurance
against any unforeseen contingencies.

 REPAYMENT: - The repayment of the loan should be reasonable and acceptable by

both the parties. The repayment of advance can be made through the following 3 sources:

 Conversion of assets into cash

 Income, earning or fresh equity contribution
 Borrowings or other sources

STUDING THE BUSINESS ENVIRONMENT

The appraisal system aims at determining the credit needs/requirements of the borrower by
assessing his capacity and keeping track of the changing environment. The following points
may be noted in the appraisal of the borrower capacity with respect to its environment:-

 MARKET (DEMAND AND POTENTIAL): -

 Reasonable demand projection keeping in view the size of the market,

consumption level, supply position, export potential, import substitute etc.

 Competitor’s status and their level of operation with regard to production and
sales.

 Technology advancement/foreign collaborator’s status/buy-back arrangements etc.

28
  Marketing policies in practice, for promotion of product(s) and distribution
channels being used. Expenses on marketing are done so as to popularize the
product.

 Local/foreign consumer preferences, practice adapted, attitude, requirements etc.

 Influence of govt. policies, import and export in terms of quantity and values.

 Marketing professional employed their competences, knowledge and experiences.

 TECHNICAL: -

 Product and their life cycle, product mix and their application.

 Location, its advantage and disadvantages availability of infrastructure facilities,

government concessions, if any, available there.

 Plant and machinery with supplier’s credentials and capacity attainable under
normal working condition.

 Process of manufacturing indicating the choice of technology position with regard

to its commercialization and availability.

 Plant and machinery – its availability, specification price, performance.

 Government clearance/license, if any, required.

 Labor/manpower, type of skill required and its availability position in the area.

 FINANCIAL: -

 Total project cost and how it is being funded or financed.

 Contingences and inflation duly factored in project cost.

 Profitability projection based on the realistic capacity utilization and sales forecast
with proper justification. Unrealistic/ambitious sales projections to be avoided.

 Break-even analysis, fund flow and cash flow projections.

 Balance sheet projection should be realistic and based on latest available data.

 Components of financial ratios should be subjected to close scrutiny.

 Aspect of support of parent company, wherever applicable, may be taken into

account.

29
 MANAGERIAL: -

 Financial standing and resourcefulness of the management.

 Qualification and experience of the promoters and key management personnel.

 Understanding of the project in all of its aspects – financing pattern, technical

knowledge and marketing program etc.

 Internal control system, delegation of adequate power and entrusting responsibility

at various levels.

 Other enterprises, if any, wherein the promoters have the interest and how these
are functioning.

 ECONOMIC: -

 Impact on increase in the level of saving and income distribution in society and
standard of living.

 Project contribution toward creation and rate of increase of employment

opportunity, achieving self sufficiency etc.

 Project contribution to the development of the region, its impact on environment

and pollution control.

6.3 POST-SANCTION FOLLOW UP OF LOANS:-

If the proposal is considered viable and accepted by the bank then proper account in name of
the borrower is created. The account is reviewed from time to time in order to know whether
the company has met with all the terms & conditions or not, whether the interest is being paid
on time or not, whether there is overdraft in accounts or the funds are not utilized by the
company at all, whether the bank’s interest income is increasing or not. Two of the most used
methods for post sanction follow up are:

PREVENTIVE MONITORING SYSTEM (PMS)

Objectives of PMS:
The objective of PMS is to track & evaluate the health of borrower’s account on a continuous
basis and detect:

30
  Unsatisfactory/adverse signals/indicators at an early stage in a comprehensive
manner.

 Thorough probe into reasons behind observed signals and analysis thereof.

 Speedy corrective/remedial actions/steps to prevent the account from becoming NPA

as well as to minimize the loan losses.

Preventive Monitoring System consists of two parts:

i. PMS Index and Rank

PMS Index is a numerical index consisting of 29 indicators Parameters grouped into 6

sections. Penalty rates (weights) in the form of numerical values have been assigned
to each indicator (parameter) depending upon their degree of impact on health of an
account. The score assigned to any parameter is stored for last one year at any point of
time, which is known as Cumulative score. The section-wise maximum of cumulative
scores is to be summed up to arrive at PMS Index Score. Based on PMS Index Scores
a scale of 1 to 10 has been devised, which is known as PMS Ranking Scale. The PMS
Rank indicates the state of health of an account. The lower the PMS Rank, better the
health of account and vice-versa.

ii. PMS Report

PMS Report, which has eight parts, describes brief profile of the borrower, position of
accounts, details of signals contributing to PMS Index Score, reasons behind adverse
signals and proposes corrective/ remedial steps with time frame.

QUARTERLY MONITORING SYSTEM (QMS)

Bank has prescribed the QMS system for monitoring performance of big borrower accounts
enjoying working capital facilities of Rs. 1crore & above from the banking system. QMS
includes the submission of data on the prescribed formats depending upon the economic
activity of the borrower. Under this system financial and operational information/ data is
required to be submitted in two different sets of formats
i. QMS I

31
 This form is required to be submitted within six weeks from the close of the quarter
to which it relates. It gives information about the operations of the unit and its
performance for the quarter, also giving reasons for non-achievement of
sales/production targets.
ii. QMS II
This form is required to be submitted within two months from the close of the half-
year to which it relates. In addition to providing comparative position of the actuals
vis-a-vis the projections accepted at the time of sanction relating to the operations of
the unit, this form also indicates the `SOURCES' and `USES' of the funds generated
by the unit, during the half year. Critical analysis of this form can reveal the diversion
of short-term funds for long term uses.

6.4 REVIEW/RENEWAL OF SANCTION:-

All working capital facilities are to be reviewed/renewed at least once in a year or as per
terms of sanction. Timely review and renewal of sanction helps in knowing about borrowers’
performance and his financial position. In this context, the important guidelines are reiterated
for prompt compliance.

a) All working capital proposals to be reviewed/renewed at least once in a year.

b) All renewal cases should be diarized at least 4 month in advances and follow up by
the branch/zonal/regional office, as the cases may be, so that all the sanction are
renewed in time.

c) Where, for certain exception circumstances, a sanction cannot be renewed, a review

note is respect of H.O. sanction must submitted before the expiry date of the sanction.
Similarly in case of other sanctions if renewal is not possible at time, a review note
must be submitted to the sanctioning authority.

d) Risk rating of the account be got per the period

32
 CASE STUDY OF M/s ABC PVT. LTD.

PROBLEM DEFINITION

M/s ABC Pvt. Limited has been sanctioned the term loan and working capital loan. But in the
post sanction follow up some problems were found out, which resulted in the delay of the
scheduled date of Commencement of the business. The following are the problems:

 Raw Materials: During the Credit appraisal period, M/s ABC Pvt. Ltd informed the bank
that it has applied for raw materials to a particular dealer but later, after the disbursement
of the term loan it was found that M/s ABC Pvt. Ltd was not able to procure the raw
materials due to denial from the dealer. Later on it had applied for raw materials from the
Govt. Port Authority, Paradeep but the sanction again got delayed. Due to all these
problems there was delay in the start of the project.

 As the project was located in Paradeep which is a low lying area, filling up the site was
necessary prior to the start of the project. M/s ABC Pvt. Ltd projected the filling cost to
be 25 lakhs but it actually reached 35 lakhs. The increment in cost created problem in the
total finance.

 As the nature of the industry is such that it is dealing with hazardous product it is situated
far from the town. Due to this the cost of electrification was also high as the grid from
which they got the electrification was also high.

 The technical consultant’s assessment went wrong as the number of tanks for the storage
of product was increased due to increase in market demand. Due to this the company has
to increase the storage space accordingly to accommodate the increased production
capacity.

 There were no proper Govt. roads which connected the company with the town due to this
getting proper electricity was difficult because to ensure electrification the company has
to get the wire-line through the lands of public which was again a very tedious process
because all may not be convinced to give their land to the company for its own benefit.
Therefore convincing people and getting proper electrification was a very time taking
process.

 Machine delivery got delayed due to some problems in the machines.

33
 It got the Certificate of Establishment from the Pollution Control Board but the
Certificate to run the manufacturing unit was delayed, due to which the project got
delayed.

APPROACH TO THE PROBLEM

 Study the Techno-Economic Viability report to understand the financial, managerial,

technical, legal and economic aspects of the proposal
 Conduct Ratio analysis and sensitivity analysis to assess the present viability of the
project
 Study the branch and circle office reports to understand the depth of the problem.

RESEARCH METHODOLOGY

Primary sources of Information

 Meetings and discussion with the Industry mentor, Senior Manager and other
officials of the Credit and Rehabilitation Department in PNB-CO, Bhubaneswar.
 Meetings with field officers posted in Branch offices, who collect information from
clients for appraisal.
Secondary sources of Information
 Loan Policy and Internal Circulars of the bank.
 Research papers, power point presentations and PDF files prepared by the bank and
its related officials.
 Referring to information provided by CIBIL, Income Tax files, Registrar of
Companies (Ministry of Corporate Affairs), and Auditor reports.
 Referring to RBI guidelines for loan disbursement from its website.

DATA ANALYSIS
BORROWER’S PROFILE
Group Name M/s ABC Pvt. Ltd
Address of Regd./Corporate Office Atharbanki, Paradeep, Odisha
Constitution Private Limited
Date of incorporation 27.11.2006
Dealing with PNB since 2009
Business Activity (Product) Processing of used and waste oil
Table 7: Borrower’s Profile M/s ABC Pvt. Limited

34
BACKGROUND

M/s ABC Pvt. Limited, a company incorporated on 27.11.2006 and promoted by Shri P and
Shri Q has been set up for Re-cycling of Waste Oils as per guidelines laid down by Central
Pollution Control Board (CPCB) at Kalagarh, Orissa. The proposal is to install a vacuum-
distillation plant with a capacity of 5000 KL per annum. The cost of project estimated at Rs.
444.64 lakhs (including total working requirement of Rs. 131.13 lakhs) has been proposed to
be met through external financial assistance by way of fresh Term Loan of Rs. 200.00 lakhs
and Working Capital borrowing of Rs. 80.00 lakhs and the balance through promoters’
contribution of Rs. 164.64 lakhs. The company has approached BO: Y of PNB for sanction of
above mentioned financial facilities for meeting a part of the cost of project. As desired by
the authorities at Circle Office Orissa, the field officer visited the proposed project site on
13.01.2009 and held discussions with the promoter and Incumbent in Charge drafted the TEV
Report.

FACILITIES REQUIRED

NATURE PROPOSED SECURED/UNSECURED

(AS PER RBI’S
GUIDELINES)
Fund Based
Term Loan 200.00 Secured
CC 74.79
TOTAL COMMITMENT 274.79 Secured

Table 8: Requirement of M/s ABC Pvt. Limited Rs. In lakhs

SECURITY
1. PRIMARY

 For working capital limits: Hypothecation of Company’s present and future

raw material (used/waste oil), Stock in process (Oil-in-process), finished
goods (Processed oil), stores and spares and other current assets and Book
Debts/receivables.

 For Term Loan: Hypothecation of plant and machinery, vehicles, equipment,

furniture and fixtures and all other movable fixed assets.

35
 2. COLLATERAL

 Hypothecation/Mortgage of block assets immovable properties: Land and

building

CREDIT RISK RATING:-

The account was rated under the MSME Model. The following rating have been obtained by
both: branch office and zone office
TOTAL SCORE
Parameters Score obtained Weight Weighted Score
Financial 57.00 40.00% 22.80
Business 75.00 35.00% 26.25
Managerial 55.27 25.00% 13.82
AGGREGATE SCORE 62.87
Table 9: Credit risk rating of M/s ABC Pvt. Limited (The Aggregate Score of 62.87 refers to PNB-A)

THIS MEANS THE RATING OF THE BORROWER IS PNB A

DETERMINATION OF ROI

From the internal circular of the bank on ROI the corresponding ROI for auto ancillary firm
having a credit risk rating of A are:
• BPLR + 1.50% for Term loan, and
• BPLR + 1% for Working Capital limit
Imp: The rating as shown in the above section is not a replication of the original model in any form,
And the values and calculation of scores is for the purpose of understanding the process

CREDIT APPRAISAL:-

MANAGERIAL EVALUATION

 Market reputation on the promoter / management of the company: It is satisfactory

as promoters have about 10 years of experience in trading of petroleum products.

 Brief Profile of Promoters: Shri P and Shri Q are the promoters of the company. The
promoters are also involved in the activity recycling of Waste Oil on a very small scale.

36
  Shri P is involved in operating Oil Tankers for transporting of Petroleum Products for
the Public Sector Oil companies like Indian Oil etc.

 Shri Q is a Chartered Accountant.

 Quality of Management: The promoters are involved in the activity of recycling of

Waste Oil on a very small scale. Previously they used to trade in recycled waste oil but
now they plan to extend their business through manufacture of the same.

 Confidential Reports: Satisfactory

 Marketing: The promoters have not specified the detailed strategy for marketing the
products. However it has been informed that they have been involved the same activity in
the past and does not foresee any problem regarding the same. So, the market conditions
are satisfactory.

BUSINESS EVALUATION

Comments on industry scenario

The past few years have witnessed a continuous requirement of recycled products. Many
manufacturing units use fuel or oil as their raw materials. The Government of India’s
clean environment drive has forced the used oil manufacturing units to change over to
new technologies of manufacturing to keep the surroundings clean and free from water
and air pollution. So, the industry scenario for the proposal is viable and satisfactory for
granting credit, for establishing business.

TECHNICAL EVALUATION

 Land - The company has procured around 2 Acres of land at Kalagarh, Orissa for setting
up the unit. During the visit to the project site, it was observed that site development work
was in progress.

 Building - In the project report, a total amount of Rs. 35.50 lakhs has been provided in
the cost of project toward cost of construction of civil and factory building of the project.
The detailed estimate regarding the proposed area of construction from Govt. Approved
Architect has not been submitted by the company and as such the reasonableness of the
cost of construction cannot be commented upon. The approved plan for the proposed
construction has also not been submitted by the company.

37
  Plant and Machinery - The following items of plant and machinery has been proposed
to be installed section-wise:

(1) Process Plant

-Raw Oil Pump
-Dehydration Vessel
-Condenser
-Receiver
(2) Utilities
-Heating System
-Vacuum System
Cooling Tower System
Table 10: Cost structure of M/s ABC Pvt. Limited
The cost of plant and machinery has been estimated at Rs. 198.01 lakhs.

 Raw Materials: Raw Material for manufacture of Light Oils and Base Oils is
Transformer Oil, while the raw material required for manufacturing oil for fuel in
furnaces are mainly obtained Crude Oil Spills, Tank Bottom Sludge, Slope Oils generated
from Petroleum Refineries, Installation or Ships.

 Electrical Installations, Furniture & Fixture and Misc. Equipments - Since cost of
the individual items of the above are not backed by supporting documents like quotations
etc., the same has to be submitted before disbursement of term loan in the event that the
proposal for term loan is considered for sanction.

 Manufacturing Process - Vacuum Distillation method shall be adopted for refining of

used /waste lubricating oil. This process is replacing the traditional process of Acid
Treatment which results in serious environmental degradation and has been banned
throughout the world.

 Production & installation capacity - ABC Pvt. Ltd proposes to undertake manufacture
of Light Oils and Base Oils by refining of used Oil by vacuum distillation process and
Recycling of waste oils including Crude Oil Spills, Tank Bottom Sludge, Slope Oils
generated from Petroleum Refineries, Installation or Ships and is un-suitable for Re-
refining but can be used as fuel in furnaces.

38
 Staff and Labor - The following manpower has been proposed for the unit :

DESIGNATION NO SALARY TOTAL

Workshop Manager 1 20,000.00 20,000.00
Chemist 1 10,000.00 10,000.00
Supervisor 3 7,500.00 22,500.00
Plant Operator 3 7,500.00 22,500.00
Skilled Worker 10 4,000.00 40,000.00
Unskilled Worker 20 3,000.00 60,000.00
Accounts Clerk 2 5,000.00 10,000.00
Peon/Guard 4 2,500.00 10,000.00
Total Salary Per Month 195,000.00
Salary Per Annum 2,340,000.00
Fringe Benefit 351,000.00
Total Salary Per Annum 2,691,000.00
Say Rs. 26.91 lakhs

Table 11: Staff and labor requirement of M/s ABC Pvt. Limited
 Utilities

 Power - The power requirement is to the extent of 20 KW. The company has deposited
security money to the concerned authorities for obtaining the requisite power load.

 Fuel - Light Diesel Oil shall be used in the Thermic Heater. Average consumption of Light
Diesel Oil shall be 400 liters per day.

 Water - Water is mainly used for cooling the water circulation system. Make up water will be
needed to cover the evaporation of water in the cooling tower. The requirement of water has
been estimated at around 400 liters per day. Water shall be available from Tube-wells to be
sunk in the unit.

LEGAL EVALUATION

Status of various statutory approvals and clearances:

In consideration of the application of M/s ABC Pvt. Ltd, State Pollution Control Board of
Orissa dated 28.8.2008 conveyed their consent under Section 25 of Water (Prevention &
Control Pollution ) Act 1974 and Section 21 of Air (Prevention & Control of Pollution) Act
1981 for used oil reprocessing unit by adopting an environmental sound technology as per

39
 CPCB, Delhi guideline for manufacture / production of Base Oil -2520 KL / Month and Light
Fuel Oil -540 KL / Month.

FINANCIAL EVALUATION

COST OF PROJECT & MEANS OF FINANCE

Cost of Project (Rs. lakhs)
Land incl. land development 25.00
Building-Civil 13.00
Building Factory 22.50
Plant & Machinery 198.01
Electrical Installation 15.00
Furniture & Fixture 1.50
Misc. Equipments 5.00
Computer & Printer 1.50
Prelim. & Pre-op. Expenses 32.00
Margin for Working Capital 46.89
360.40
Means of Finance
Promoter’s Contribution 160.40
Term Loan from Bank 200.00
360.40

Table 12: Cost of Project of M/s ABC Pvt. Limited

STATUS OF INVESTMENT IN THE PROJECT
As per certificate given by Chartered Accountant, the details of investment made in the
project up to 31.1.2009 are as under:
Sl.No. Particulars Amount (Rs.)
1. Land & Sand filling, Sinking of tube well 1825450.00
2. Civil Construction (Foundation of Building, Outhouse etc.) 5106000.00
3. Building (Factory) Foundation (Piling) 984730.00
4. Power Supply Provision (Including Deposit with SESU) 915000.00
5. Advance for machinery (Fabrication work of Industrial components) 900000.00
6. Consultancy Fees 300000.00
Total 5435780.00

Table 13: Status of investment of M/s ABC Pvt. Limited

40
 FINANCIAL INDICATORS

RATIO CALCULATION & ANALYSIS

 CURRENT RATIO
Current ratio = Current assets/Current liabilities
YEAR 2011 2012 2013 2014 2015 2016
Current Assets 202.13 265.52 340.92 432.23 539.53 619.29
Current Liabilities 140.69 172.44 201.15 229.83 258.52 259.41
Current Ratio 1.44:1 1.54:1 1.69:1 1.88:1 2.09:1 2.34:1
Table 14: Current ratio analysis of M/s ABC Pvt. Limited

Current Ratio

2.5
2
1.5
1
Current Ratio
0.5
0
1 2 3 4 5 6

Figure 5: Current ratio analysis of M/s ABC Pvt. Limited

INTERPRETATION

This ratio is indicative of short term financial position of a business enterprise. It provides
margin as well as it is measure of the business enterprise to pay-off the current liabilities as
they mature and its capacity to withstand sudden reverse by the strength of its liquidity
position. As per RBI stipulation, the minimum current ratio of a firm should not be less
than 1.33:1 so that current assets will be reasonably higher than current liabilities to
take care of the firm's short term liquidity. Current ratio represents margin of safety for
creditors.
It is seen that there is a gradual increase in current ratio from 1.44:1 to 2.39:1 over the
projected years. The projected current liability is growing but there is growth in projected
current assets at an increasing rate which leads to increase in current ratio. This shows the

41
 improvement in the liquidity position of the firm. The firm will be able to pay its current
liabilities in time without facing difficulties.
 DEBT-EQUITY RATIO
Debt-equity ratio = debt/equity
YEAR 2011 2012 2013 2014 2015 2016
Debt 166.67 133.33 100 66.67 33.33 0
Equity 195.41 247.51 314.67 397.67 496.84 596.17
Debt-Equity Ratio 0.85:1 0.54:1 0.32:1 0.17:1 0.07:1 0
Table 15: Debt-equity ratio analysis of M/s ABC Pvt. Limited

Debt-Equity Ratio

1
0.8
0.6
0.4 Debt-Equity
0.2 Ratio
0
1 2 3 4 5 6

Figure 6: Debt-equity ratio analysis of M/s ABC Pvt. Limited

INTREPRETATION
There cannot be a rigid to a satisfactory debt-equity ratio, lower the ratio higher is the degree
of protection enjoyed by the creditors. Normally banks/financial institutions do not accept the
debt equity ratio more than 2:1 barring certain exceptions.
The projected debt-equity ratio decreases from 0.85:1 in year 2011 to 0 in 2016 as a result of
projected debt becoming 0 in 2016.The decrease is a result of increase in tangible net worth
and decrease in term loan outstanding on account of repayment of loan.

 PROFIT SALES RATIO

Profit sales ratio= operating profit/sales
YEAR 2011 2012 2013 2014 2015 2016
Operating Profit 40.77 70.60 95.68 121.64 147.41 149.10
Sales 1034.66 1285.93 1501.73 1717.53 1933.33 1942.20
Profit Sales Ratio 3.94% 5.49% 6.37% 7.08% 7.62% 7.67%
Table 16: Profit sales ratio analysis of M/s ABC Pvt. Limited

42
 Profit sales Ratio

10.00%
8.00%
6.00%
4.00% Profit sales
2.00% Ratio
0.00%
1 2 3 4 5 6

Figure 7: Profit sales ratio analysis of M/s ABC Pvt. Limited

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

There is an increase in this ratio from 3.94% to 7.67% over the years. It is due to increase in
projected sales and due to increase in projected operating profit. This increasing trend speaks
of the good competitive operational strength of the firm.

 TOTAL OUTSIDER LIABILITIES / TANGIBLE NET WORTH RATIO

YEAR 2011 2012 2013 2014 2015 2016

TOL 307.36 305.77 301.15 296.5 292.16 259.41
TNW 195.41 247.51 314.67 397.96 496.84 596.17
TOL/TWN RATIO 1.57:1 1.24:1 0.96:1 0.74:1 0.59:1 0.44:1
Table 17: TOL/TWN ratio analysis of M/s ABC Pvt. Limited

TOL/TWN Ratio

1.5

1 TOL/TWN
Ratio
0.5

43
 Figure 8: TOL/TWN ratio analysis of M/s ABC Pvt. Limited

INTREPRETATION
This ratio gives a view of the borrower’s capital structure. A gradual decrease in the ratio is
seen from 1.57:1 in 2011 to 0.44:1 in 2016.It indicates that the projected TNW of the
company is growing over the years on account of plough back of profits and reduction in
projected TOL on account of regular repayment of loans.

SENSITIVITY ANALYSIS

The projections were subjected to sensitivity and the results are observed as under.

Impact on DSCR

Sensitive Factors
Av. DSCR
Base Case 2.11
Raw material price increased 1.26
by 5%.
Selling Price decrease by 5% 1.11

Impact on IRR (Post Tax)

Sensitive factor IRR (Post Tax)

Base Case 22.58%
Raw material price increased by 5% 11.81%
Selling Price decrease by 5% 9.85%
Table 18: Sensitivity analysis of M/s ABC Pvt. Limited

The table shows that if the projections are subjected to sensitivity analysis with adverse
changes made in crucial parameters like raw material cost and selling price by 5%, the
Average DSCR & IRR of the company falls to un- acceptable levels. The project is more
sensitive to adverse movements in the selling price as compared to that with respect to raw
material prices.

44
CONCLUSION

The proposal of M/s ABC Pvt. Limited is a profitable prospect to invest in but there are few
problems which the company faces that may lead to the conversion of the debt into a NPA for
the bank. It is obvious the company faces problems such as, raw material procurement and set
up cost escalation, as it is a medium enterprise. But there are few problems such as
establishment of electricity unit and getting clearance for commercial production from CPCB,
which should have been taken care of on time.

Since these problems have lead to delay of the commencement date, which would eventually
affect the repayment of the loan disbursed till date, these must be taken care of by the bank,
to avoid future defaults.

LIMITATIONS

The major limitations of the study are listed below:

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

 The geographical scope of the project was limited to PNB Circle Office. So, detail
study of appraisal done in branch offices could not be studied.

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

45
RECOMMENDATIONS

 The company should have permanent linkages with raw material dealers so as avoid
the problems which occurred due to delayed in raw material procurement.
 The application placed with the Govt. Port Authority, Paradeep must be renewed or
should be checked with the authorities for reconsideration.
 The company should hire qualified technicians so as to avoid the problems caused
during storage accommodation. Since, the promoters lack the expertise to handle a
manufacturing unit, more qualified managers also must be hired.
 The consultant firm agreement was missing. The company should go for a proper
agreement so that they can show it as a guarantee to the bank. An agreement gives the
company an advantage during disputes.

46
 CASE STUDY OF M/s XYZ PVT. LTD.

PROBLEM DEFINITION

The proposal is for sanction of a fresh Term Loan of Rs 330.00 lakhs for setting up a new
Chemical Manufacturing unit at Jhasuguda. Enhancement in existing CC(H) limit of Rs.
80.00 lakhs to Rs. 207.00 lakhs is also been proposed. Pre-sanction appraisal of the project is
to be done.

APPROACH TO THE PROBLEM

 Conduct Ratio analysis and sensitivity analysis to assess the present viability of the
project.
 Study the branch and circle office reports to understand the depth of the problem.

RESEARCH METHODOLOGY

Primary sources of Information

 Meetings and discussion with the industry mentor and other officials of the Credit
and Rehabilitation Department in PNB-CO, Bhubaneswar.
 Meeting the risk rater in PNB-CO, for understanding risk ratings.
Secondary sources of Information
 Loan Policy and Internal Circulars of the bank.
 Referring to information provided by CIBIL, Income Tax files, Registrar of
Companies (Ministry of Corporate Affairs), and Auditor reports.
 Referring to RBI guidelines for loan disbursement from its website.

DATA ANALYSIS

BORROWER’S PROFILE

Group Name M/s XYZ Pvt. Limited

Address of Regd./Corporate Office Ahmadabad, Gujarat
Works/ Factory Jharsuguda, Odisha
Constitution Private Limited Company
Dealing with PNB since 2008
Business Activity (Product) Chemical manufacturing
Table 19: Borrower’s profile of M/s XYZ Pvt. Limited

47
BACKGROUND

M/s XYZ Pvt. Limited, a company incorporated on 18.09.2005 at Ahmadabad, has its control
office at Jharsuguda. Presently the company’s directors are Shri A and Shri B. Shri A is a
Chartered Accountant by qualification and Shri B is a Masters in Chemical Engineering. The
main object of the company is to deal in all types of chemicals and chemical compounds in
all forms i.e. both organic and inorganic.
The company now proposes to set up its own unit to manufacture resin chemicals, Oleo
Chemicals and Dolowax. The company has acquired the required knowledge and expertise to
manufacture the above chemicals. Shri A is capable of looking after the financial and
managerial aspect of the unit being a Chartered Accountant and Shri B is capable of looking
after the production and quality standards being a Masters in Chemical Engineering. The
proposed plant will be situated at Jharsuguda.

FACILITIES REQUIRED

NATURE EXISTING PROPOSED TOTAL SECURED/UNSECURED

(AS PER RBI’S
GUIDELINES)
Fund Based
Term Loan NIL 330.00 330.00 Secured
CC 80.00 127.00 207.00 Secured
TOTAL 80.00 457.00 537.00 Secured
COMMITMENT
Table 20: Requirement of M/s XYZ Pvt. Limited Rs. In lakhs
SECURITY
3. PRIMARY

 For working capital limits: Hypothecation of Company’s present and future

raw material, Stock in process, finished goods, stores and spares and other
current assets and Book Debts/receivables.

 For Term Loan: Hypothecation of plant and machinery, vehicles, equipment,

furniture and fixtures and all other movable fixed assets.

4. COLLATERAL

 Hypothecation/Mortgage of block assets immovable properties: Land

48
 CREDIT RISK RATING:-

The account was rated under the MSME Model. The following rating have been obtained by
both: branch office and zone office
TOTAL SCORE
Parameters Score obtained Weight Weighted Score
Financial 68.67 40.00% 27.46
Business 76.35 35.00% 26.72
Managerial 70 25.00% 17.50
AGGREGATE SCORE 71.69
Table 21: Credit Risk assessment of M/s XYZ Pvt. Limited (The Score of 71.69 refers to PNB AA-)

THIS MEANS THE RATING OF THE BORROWER IS PNB AA-

DETERMINATION OF ROI

From the internal circular of the bank on ROI the corresponding ROI for auto ancillary firm
having a credit risk rating of AA- are:
• BPLR + 1.50% for Working Capital limit, and
• BPLR + 1.50% + 0.50% for Term loan
Imp: The rating as shown in the above section is not a replication of the original model in any form,
And the values and calculation of scores is for the purpose of understanding the process

CREDIT APPRAISAL:-

MANAGERIAL EVALUATION

 Market reputation on the promoter / management of the company: It is satisfactory

as promoters have about 7 years of experience in chemical manufacturing.

 Brief Profile of Promoters: Shri A and Shri B are the directors of the company.

 Shri A has strong commercial and financial knowledge that makes him one of the
strong pillars of the business set up. He was in charge of the Refractory unit at
Ahmadabad. His rich knowledge and understanding of the requirement of the
refractory unit will be of great advantage to the chemical unit as the chemicals being
manufactured will be utilized by the various refractory units. Further his financial and
managerial capability will also help the unit to tide over any such crisis.

49
  Shri B has completed his Bachelor’s degree in Chemical Engineering.

 Quality of Management: The promoters are involved in the activity of chemical

manufacturing on a medium scale. The company is engaged in trading of Resin
chemicals. Oleo Chemicals and dolowax since incorporation. So, it has a strong
management.

 Confidential Reports: Satisfactory

 Marketing:

RESIN
Phenol Formaldehyde Resin is used as a binder in almost all the refractory manufacturing
unit. It has huge market in Orissa as well as nearing state due to concentration of big and
small steel plants in this area.

OLEO CHEMICALS
Oleo chemicals are used in all the refractory and steel plant in Orissa, Chattisgarh and
West Bengal. Being the hub of steel plant and refractory’s, there is huge market potential
for these oleo chemicals.

BUSINESS EVALUATION

Comments on industry scenario

The past few years have witnessed a continuous development in the manufacturing
sector. Many manufacturing units use resin chemicals, oleo chemicals and dolowax as
their raw materials. So, business opportunity for such units is very high.

TECHNICAL EVALUATION

 Land - The land where the proposed unit is to be establish has been purchased by Shri A
under M/s XYZ Pvt. Limited. Available area of 1.980 Acres ( 86249.14 sqft ) is adequate
for setting up proposed chemical factory. Company has submitted NOC from Gram
Panchayat, for establishment of proposed factory at the above mentioned site. Company is yet to
submit an approved map from Gram Panchayat of proposed civil construction at the site.

 Building - In the project report, a total amount of Rs. 273.99 lakhs has been provided in
the cost of project toward cost of construction of civil and factory building & structural

50
 steel work for both furnaces of the project. The detailed estimate regarding the proposed
area of construction from Govt. Approved Architect has been submitted by the company
and as such the reasonableness of the cost of construction cannot be commented upon.
The approved plan for the proposed construction has also been submitted by the
company.

 Plant and Machinery - The cost of plant and machinery has been estimated at Rs.
296.93 lakhs. Suppliers have been checked and found to be reliable.

 Raw Materials: Different types of raw materials are required for manufacturing proposed
chemicals i.e. Resin, Oleo Chemicals & Dolowax.

Details of % Raw Material required for manufacturing 1 MT of proposed chemical and

their Price Per MT is tabulated as follows:
Raw Material Consumption Rate per
Sl No. Finished Good
Required Norm in MT Kg./Ltr
Resin 1 MT Phenol 0.72 60000.00
1 Formalin 0.72 13000.00
Additives 0.02 100000.00
Oleo Chemical Petroleum Base Oil 0.525 60000.00
(Petrol & Vegetable Base Oil 0.525 50000.00
Veg. Oil Base) 1 MT Additives 0.003 300000.00
2 Oleo Chemical Inedible Veg. Oil 0.525 35000.00
(Bitumen & Bitumen & 0.525 30000.00
Inedible Oil Base) 1 Bituminous Products
MT Additives 0.003 300000.00
3 Dolowax 1 MT Cashew nut Oil & 1.00 30000.00
Additives 0.05 90000.00
Table 22: Raw material requirement of M/s XYZ Pvt. Limited
Proposed prices are as per the market trend & justified & hence accepted.
 Electrical Installations – Proposed investment of Rs. 25.12 lakhs in Electrical
Installation is justified & acceptable.

 Installed capacity

Sl No. Per Batch Batch/Day Production/Year

1 Resin Chemical 5.8 MT 1 1740.00 MT
2 Oleo Chemical
a. Petrol & Veg. Oil Base 6.10 MT 1 1098.00 MT
b. Bitumen & Inedible Oil Base 732.00 MT
3 Dolowax 360.00 MT
Total Capacity 11.90 MT 3930.00 MT
Table 23: Installed capacity of M/s XYZ Pvt. Limited

51
 Manufacturing Process –

 RESIN: - Phenol and formalin are taken in a SS Reactor and heated at 200 degrees
Centigrade for 12-15 hrs in presence of catalyst like caustic soda to achieve polymerization.
Other catalyst and additive like hexamine, defoamer & antisettling agent are also added. The
excess water in the reactor is condensed and collected in the distillate. The finished product
stays in the SS reactor and sent for packing.

The distillate water may be acidic and may contain traces of phenol and will be sent to
properly designed ETP Plant. ETP plant will contain lime dosing tank to convert
phenol into calcium phenolate. The water will be sent to evaporation pond and sludge
(Calcium phenolate) will be disposed in secured impermeable pit having a shed to
prevent from rain water.

 OLEO CHEMICALS:-

Bitumen Based specialty chemicals:

Bitumen is heated in a reaction vessel at 100 deg C for 3 hours and then solvent like
inedible oil and mineral oils are added to keep it liquid at room temperature. Various
additives like drier chemical, anti oxidants etc are added as per the specific
requirement of the customers.
Vegetable Oil based specialty chemicals:
Inedible vegetable oil is taken in a reactor and heated to 80 deg C for 5 hours and then
special chemicals are added to decrease the colour and odour of the oil. The final
product is blended with vegetable oil and base oils to get the desired property and
colour. Various additives like Viscosity Index modifier, lubricating agent etc are
added as per specific requirement of the customers.
CNSL based specialty chemicals:
CNSL is taken in reaction vessel and heated to 150 deg C till it attains a uniform
temperature. Other chemicals like sulphuric acid, hydrochloric acid, hexamine etc are
added to increase the viscosity of the product. The quantities of the chemicals added
depend upon the viscosity required by the customers. Its directly send to packing in
hot condition.

 DOLOWAX: - It is prepared by mixing Cashew nut Oil and certain additives.

52
  Utilities- The captioned unit is proposed to be established at Jharsuguda, Orissa. Good
transportation facility is available at the site. Company has applied for a contract load of 80 KW
Power Supply to Western Electricity Supply Company of Orissa Limited. WESCO has given its
consent letter for supply of required load after completion of all necessary required formalities.
Sanctioned load is sufficient for the proposed chemical plant of installed capacity. During the site
visit is has been observed that the transformer has been installed & charged at the site. Water
requirement for mixing of chemicals will be met by tapping ground water. Company has already
started using the same for construction purpose at the site. All required infrastructural facilities
which are necessary to run a unit smoothly & successfully like road, transport, power, water,
workers skilled/unskilled are available at the site.

LEGAL EVALUATION

Status of various statutory approvals and clearances:

Sl. No PARTICULARS STATUS

1 Obtained for Installed Capacity of 3000 MTPA

DIC Registration
dated 22.07.2010
2 NOC from Gram Panchayat Obtained dated 29.11.2010
As informed by director same is not required. BM to
3 Approval on map of
check up it is really so as per the local & state govt.
proposed construction
regulations.
4 Electricity Board’s NOC & Obtained dated 25.04.2011 for a contract demand of
Consent Letter for Power 80 KW.
Obtained dated 20.04.2011 for installed capacity of
3000 MTPA (Resin – 1440 MTPA, Oleo Chemical –
5 Pollution Control Boards
1560 MTPA) Company to obtain consent to operate
NOC to Establish
for actual installed capacity before commencing
production.
Obtained vide case no 1117/2009 and 1120/2009 u/s
6 Land Diversion 8-A (As per search report of Banks approved
advocate Shri K C Agrawalla)
NA. As informed license is not required for storage
7 License to store explosives below 45 KL. Company has proposed to have storage
of 30 KL only.

Table 24: Approvals obtained by M/s XYZ Pvt. Limited

53
 I. FINANCIAL EVALUATION

COST OF PROJECT & MEANS OF FINANCE

Sl. No. Cost of Project Existing Proposed Total

1 Land & Site development 14.39 0 14.39
2 Factory Shed, Building & Civil Work 0 102.98 102.98
3 Plant & Machinery 2.39 296.92 299.31
4 Electrical Installation 0 25.11 25.11
5 Furniture & Fixture 1.06 2.10
6 Other fixed assets 0.34 0 0.34
7 Pre-op. Expenses 0 13.48 13.48
8 Margin for Working Capital 0 94.80 94.803.16
9 TOTAL 18.18 535.39 553.57
Means of Finance
1 Promoter’s Contribution 62.00 171.24 233.24
2 Term Loan from Bank 0 320.33 320.33
TOTAL 62.00 491.57 553.57
Table 25: Cost of project of M/s XYZ Pvt. Limited

FINANCIAL INDICATORS

 RATIO CALCULATION & ANALYSIS

RATIOS 2012 2013 2014 2015 2016 2017 2018

Operating Cost/NS (%) 99.35% 96.24% 91.33% 90.35% 90.02% 89.59% 89.28%
Bank Fin./Curr. Assets (%) 53.41% 56.52% 61.49% 57.12% 51.19% 44.51% 37.99%
Current Ratio 1.39 1.49 1.22 1.30 1.45 1.66 1.94
Acid Test Ratio 1.19 1.27 0.98 0.68 0.78 0.95 1.18
Bank Finance to WCG (%) 65.48% 63.08% 77.23% 71.12% 62.27% 52.74% 43.90%
Debt : Equity Ratio 0.00 0.00 1.12 0.73 0.40 0.16 0.00
TOL/TNW 1.88 1.48 2.29 1.76 1.24 0.83 0.53
Debt : Assets Ratio 0.00 0.00 0.34 0.27 0.18 0.09 0.00
Fixed Assets Coverage
Ratio 0.00 0.00 0.61 0.52 0.40 0.23 0.00
Interest Coverage Ratio 1.89 1.78 1.71 2.03 2.60 3.44 4.83
Inventory Turnover Period
(DAYS) 24 31 40 41 40 40 40
Average Collection Period
(DAYS) 91 94 30 37 38 38 38
Net Profit Margin (%) 0.81% 1.14% 0.86% 2.19% 3.50% 4.65% 5.61%
Net Income : Assets Ratio
(%) 1.69% 1.85% 0.68% 4.53% 8.04% 11.14% 13.56%
Return on Investment
(ROCE)(%) 7.32% 6.74% 9.97% 27.27% 29.31% 30.35% 30.35%
Return on Equity (%) 7.50% 4.95% 2.36% 15.16% 26.74% 38.03% 48.97%
Operating Profitability (%) 0.65% 3.76% 8.67% 9.65% 9.98% 10.41% 10.72%

54
Pre-Tax Profitability (%) 1.23% 1.47% 1.26% 3.16% 5.07% 6.73% 8.12%
Retained Profit (%) 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
Raw Material Content (%) 88.84% 85.05% 89.45% 90.58% 91.17% 91.63% 91.97%
OC/Sales (%) 99.35% 96.24% 91.33% 90.35% 90.02% 89.59% 89.28%

All the ratios are satisfactory. They indicate the organization’s capacity to repay back the
loan in positive terms.

 SENSITIVITY ANALYSIS

AVERAGE DSCR = 1.73 (Refer to Annexure)

CONCLUSION

The construction of the plant is under full swing. The company has already completed
acquisition and development of Land including construction of Boundary Wall. During the
site visit it has been observed that construction of structure for factory shed was in progress.

It has already obtained many permissions and approvals like consent to establish from
Pollution Board, Sales Tax Registration from Sales Tax Department, Clearance from the local
panchayat etc. It has also placed orders for supply of Plant & Machineries to various
manufacturers and suppliers. Civil construction of the factory shed, administrative building
and labour quarter is under progress and expected to be complete in time. It has also entered
into agreement with WESCO for supply of electricity. Electricity is already available at the
site. As informed the production has start from 1stApril 2012.

LIMITATIONS

The major limitations of the study are listed below:

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

 The geographical scope of the project was limited to PNB Circle Office. So, detail
study of appraisal done in branch offices could not be studied.

55
  Due to ever changing environment, many risks are unexpected and the remedial
measures available are based on general experience from the past. Therefore risks can
only be minimized cannot be erased completely. Hence, out of the various ways in
which risks can be managed, none of the methods is perfect and may be very diverse
even for the work in a similar situation in the future.

RECOMMENDATIONS

In view of the financial ratios calculated & derived from the facts submitted the project is
studied to be Technically Feasible & Economically Viable. However the parameters on
which the pre sanction appraisal has been done are subject to variations hence proper post
sanction & post disbursal follow up from the branch is suggested to check any overrun in cost
& time.
Hence the need based credit facility may be provided to run the unit successfully subject to
the credit worthiness of the party.

56
 EXHIBITS
EXHIBIT 1 : PUNJAB NATIONAL BANK
BO ______________________ CO ______________________
PROFILE OF BORROWER
1 Name of the Account
-Credit Risk rating(with date)
-Constitution
2 Address
i) Office
Regd. /Corporate/Factory
ii) Residence
(Prop./Partners/Directors)
iii) Telephone : office
Res.
Mobile no.
3 Present Business Activity
4 Nature & Extent of Credit Facilities
Fund Based Limits Non Fund Based Limits

5 Rate of Interest as per Last Sanction

6 Date of Sanction or Renewal:
7 Details of Key Persons/Directors/Partners/Finance Head
Name Designation NW IP's CR Dated

8 Details of Guarantors
Name NM's IP's CR Dated

9 Details of Group Concerns/dealing with PNB:

Name Name of the Sanctioned Asset status
Banking Branch Limits

10 Whether Consortium/Multiple Advance:

If consortium, name of the Leader Bank:
Credit Facilities from other Banks/ FI's:
Total Working Capital limits PNB Share

11 Details of Security:
-Primary:
-Collateral:
ASSTT.GEN.MANAGER

57
 EXHIBIT 2 : CHECK LIST FOR SSI PROPOSALS

1 Detailed Project Report – The project report should cover broadly the following:
a) Details of the existing/proposed activity or products to be manufactured, together
with installed capacity and manufacturing process involved.
b) Background of the promoters and organizational set up
c) Details of location/site and land. In case of rented/leased premises copy of
executed rent/lease deed, if any (Rent Deed/leased deed should be registered with
appropriate authority).
d) Details of share holding with break up.
e) Details of proposed cost of construction of the building/shed together with copy of
estimates.
f) Details & Quotations of plant & machinery/equipment installed/proposed to be
installed together with names of suppliers.
g) Details of cost of project and means of financing together with schedule of
implementation.
h) Details of demand and supply position of the inputs and final product and
marketing network.
i) Details of Base assumptions underlying the profitability projections and
justifications for the same.
j) Projections of profitability, cash/fund flow and balance sheet for a period of
minimum 5 to 7 years together with other financial projections with DSCR, BEP
and IRR (DSCR, BEP, IRR can be ignored in small cases).

2 a) Copy of partnership deed together with Registration certificate with ROF or copy
of Memorandum & articles of Association.
b) Certificate of Incorporation/Commencement of Business

3 Status of Statutory Approvals

a) Copy of the proposed building plan, duly approved by the competent authority.
b) Land diversion certificate of the site where unit is being proposed to be
installed/already installed.
c) NOC from Town and Country Planning Deptt. and/or approval for change of land
use wherever applicable.
d) NOC/Consent from State Pollution Control Board for installed capacity.
e) Power connection status, availability of supply position/Details of
sanctioned/connected load etc. Permission to install Gen. Set.
f) Status of SSI registration/Certificate SIA Certificate where applicable.
g) Other statutory approvals e.g. explosive license, Boiler Test Certificate, Export-
Import License, Food Grain Storage License, License for Pesticides and
Insecticides, License for storage of Hazardous Chemicals/materials etc. wherever
applicable.

58
4 a) Audited Balance Sheets for the last 3 years in respect of existing units where sale is
more than Rs.40 lacs and provisional Balance Sheet, if the last Balance Sheet is
more than 6 months old. Balance sheet of the unit and its allied/associate units and
group concerns on one even date to ascertain the actual position of groups.
b) Details of Associate/allied concerns/units and group accounts with names of their
present bankers.

5 Details of agreements, if any, with any other concern e.g. MOU.

6 Details of Orders in hand along with copies thereof.

* * * *

59
 REFERENCES
Ben McClure. Working Capital Works. Investopedia.
From http://www.investopedia.com/articles/fundamental/03/061803.asp

Jagdish Capoor. Risk Management in Financial Institutions. From

http://www.coolavenues.com/know/fin/jagdish_capoor_a.php3

Principles for the Management of Credit Risk, from http://www.bis.org/publ/bcbsc125.pdf

MSMEs: The biggest inclusion opportunity

http://m.economictimes.com/PDAET/articleshow/msid-7540597,curpg-2.cms

PNB Journals (For internal circulation only)

Book of instruction of loans for internal circulation

Credit Management & Risk Policy for the year 2011-12
Loans & Advances Circulars on
• BPLR

• Project Finance

• Industry Rating

• Loaning Powers and Guidelines for exercising such powers

RBI Circulars and Guidelines

Prime Minister's Employment Generation Programme (PMEGP) Circular

Master Circular ‐ Lending to Micro, Small & Medium Enterprises (MSME) Sector

60
 APPENDIX

APPENDIX 1: Projected Balance Sheet of M/s ABC Pvt. Ltd.

Year Constru. 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17
Period
Liabilities
Equity Share Capital 160.4 160.4 160.4 160.4 160.4 160.4 160.4 160.4
Reserves & Surplus 35.01 87.11 154.27 237.36 336.44 435.77 533.1
Term Loan 200 166.67 133.33 100 66.67 33.33 0 0
Bank borrowings for 74.79 93.36 108.89 124.39 139.9 140.79 140.92
working capital
Other Current Liabilities 65.9 79.08 92.26 105.44 118.62 118.62 118.62
Total 360.4 502.77 553.29 615.82 694.26 788.69 855.58 953.04
Assets
Gross block 281.51 281.51 281.51 281.51 281.51 281.51 281.51 281.51
Less: Accumulated 12.87 25.74 38.61 51.48 64.35 77.22 90.1
Depreciation
Net Block 281.51 268.64 255.77 242.9 230.03 217.16 204.29 191.41
Prelim.& Pre-op. 32 32 32 32 32 32 32 32
Expenses
Current assets
Inventory 102.54 124.23 144.77 165.27 185.78 186.23 186.41
Sundry debtors 85.04 105.69 123.43 141.17 158.9 159.63 159.63
Other Current Assets 0 0 0 0 0 0 0
Cash & Bank Balance 46.89 14.55 35.6 72.72 125.79 194.85 273.43 383.58
Total 360.4 502.77 553.29 615.82 694.26 788.69 855.58 953.04

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 APPENDIX 2: Projected Profitability Statement of M/s ABC Pvt. Ltd.

Particulars 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17

Income:-
Sale 1034.66 1285.93 1501.73 1717.53 1933.33 1942.2 1942.2
Other income 0 0 0 0 0 0 0
Total income
1034.66 1285.93 1501.73 1717.53 1933.33 1942.2 1942.2
Expenditure:-
Raw material 801.75 962.1 1122.45 1282.8 1443.15 1443.15 1443.15
Evaporation loss 20.04 24.05 28.06 32.07 36.08 36.08 36.08
Power & electricity 15 18 21 24 27 27 27
Salary and wages 28.26 29.67 31.15 32.71 34.34 36.06 37.87
Repair & maintenance 14.11 15.52 17.07 18.78 20.66 22.72 24.99
Factory overheads 36.21 45.01 52.56 60.11 67.67 67.98 67.98
Depreciation 12.87 12.87 12.87 12.87 12.87 12.87 12.87
Cost of Production 928.24 1107.22 1285.17 1464.34 1641.77 1645.86 1649.93
Add: Opening stock of FG 0 36.64 45.15 52.51 59.84 67.17 67.62
Less: Closing stock of FG 36.64 45.15 52.51 59.84 67.17 67.62 67.8
Cost of Sales 891.6 1098.71 1277.8 1456.02 1634.43 1645.41 1649.76
Gross Profit 143.06 187.22 223.93 261.51 298.9 296.79 292.43
Administrative expenses 46.56 57.87 67.58 77.29 87 87.4 87.4
Selling expenses 20.69 25.72 30.03 34.35 38.67 38.84 38.84
Profit before Int 75.8 103.64 126.31 149.87 173.23 170.55 166.2
Interest
Term loan 27 24.53 19.13 13.73 8.32 2.92 0
Working Capital 10.1 12.6 14.7 16.79 18.89 19.01 19.02
Profit before tax 38.71 66.51 92.49 119.36 146.02 148.62 147.81
Tax 5.06 17.11 27.44 37.78 47.86 49.6 49.84
Profit after tax 33.65 49.4 65.05 81.58 98.16 99.02 97.33

APPENDIX 3: DSCR Calculation of M/s ABC Pvt. Ltd.

Year 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17

Funds available
Profit after tax 35.01 52.1 67.15 83.09 99.08 99.34 48.67
Depreciation 12.87 12.87 12.87 12.87 12.87 12.87 12.87
Interest on term loan 24.94 20.44 15.94 11.44 6.94 2.44 0
Total 72.82 85.41 95.96 107.4 118.89 114.65 61.54
Long term debt to be serviced
Interest on term loan 24.94 20.44 15.94 11.44 6.94 2.44 0
Term loan principal system 33.33 33.33 33.33 33.33 33.33 33.33 0
Total 58.27 53.77 49.27 44.77 40.27 35.77 0
Annual DSCR 1.25 1.59 1.95 2.4 2.95 3.21 0
Average DSCR 2.11

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 APPENDIX 4: Working Capital Calculation of M/s ABC Pvt. Ltd.

Particulars Collection 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17

Period

Raw materials 30 65.9 79.08 92.26 105.44 118.62 118.62 118.62

Finished goods 15 36.64 45.15 52.51 59.84 67.17 67.62 67.8
Sundry debtors 30 85.04 105.69 123.43 141.17 158.9 159.63 159.63
Chargeable CA 187.58 229.92 268.2 306.44 344.69 345.87 346.05
Other CA 0 0 0 0 0 0 0
Total CA 187.58 229.92 268.2 306.44 344.69 345.87 346.05
Other CL 30 65.9 79.08 92.26 105.44 118.62 118.62 118.62
WCG 121.68 150.85 175.94 201 226.07 227.25 227.43
Margin 46.89 57.48 67.05 76.61 86.17 86.47 86.51
MBPF 74.79 93.36 108.89 124.39 139.9 140.79 140.92
Interest 13.50% 10.1 12.6 14.7 16.79 18.89 19.01 19.02

APPENDIX 5: Weighted Average Cost of Capital of M/s ABC Pvt. Ltd.

Average tax rate 31.92%

Means of finance
Amount ROI Cost Amount
Equity Share Capital 160.29 15% 15% 24.04
Term loan 200 13.50% 9.19% 18.38
42.42
WACC 11.78%

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 APPENDIX 6: Breakeven point of M/s ABC Pvt. Ltd.
At optimum capacity utilization

Sale 1933.33
Variable cost
Raw materials 1443.15
Evaporation loss 36.08
Power & electricity 27
Salary and wages 34.34
Repair & maintenance 20.66
Factory overheads 67.67
Selling Expenses 38.67
Int on WC 18.89
Stock variation 7.33
1679.12
Contribution 254.21

Fixed cost
Administrative
expenses 87
Depreciation 12.87
Int on term loan 6.94
106.81
BEP 42.01%

APPENDIX 6: Breakeven point of M/s XYZ Pvt. Ltd.

PARTICULARS 2015-16 2016-17

Sale 1825.96 1948.03
Variable cost
Raw materials 1480.43 1579.12
Consumables 0 0
Other Mfg. expenses 4.79 5.27
TOTAL 1485.22 1584.39
Contribution 340.74 363.64
Fixed cost
Power & Fuel 33.55 35.79
Salary and wages 48.55 53.41
Repair & maintenance 7.28 7.67
Administrative expenses 25.33 27.37
Depreciation 41.10 35.68
Int on term loan 67.19 50.67
TOTAL 223.00 210.59
BEP % (D/C) 65.45 57.91
BEP AT 100% CAPACITY 49.08 46.33

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 APPENDIX 7: Projected Profitability Statement of M/s XYZ Pvt. Ltd.

Particulars 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18

Capacity Utilization 60% 65% 70% 75% 80% 85%
RESIN CHEMICAL 435.00 1131.00 1218.00 1305.00 1392.00 1479.00
Less : Closing Stock 18.13 47.13 50.75 54.38 58.00 61.63
Add : Opening Stock 0 18.13 47.13 50.75 54.38 58.00
Sales Quantity 416.88 1102.00 1214.38 1301.38 1388.38 1475.38
Selling Price / MT 70000 70000 70000 70000 70000 70000
Sale Receipts 291.81 771.40 850.06 910.96 971.86 1032.76
OLEO CHEMICAL
Petrol/Veg. Oil base 274.50 713.70 768.60 823.50 878.40 933.30
Less : Closing Stock 11.44 29.74 32.03 34.31 36.60 38.89
Add : Opening Stock 0 11.44 29.74 32.03 34.31 36.60
Sales Quantity 263.06 695.40 766.31 821.21 876.11 931.01
Selling Price / MT 70000 70000 70000 70000 70000 70000
Sale Receipts 184.14 486.78 536.42 574.85 613.28 651.71
Bituminous Products 183.00 475.80 512.40 549.00 585.60 622.20
Less : Closing Stock 7.63 19.83 21.35 22.88 24.40 25.93
Add : Opening Stock 0 7.63 19.83 21.35 22.88 24.40
Sales Quantity 175.38 463.60 510.88 547.48 584.08 620.68
Selling Price / MT 40000 40000 40000 40000 40000 40000
Sale Receipts 70.15 185.44 204.35 218.99 233.63 248.27
DOLOWAX 90 234 252 270 288 306
Less : Closing Stock 3.75 9.75 10.50 11.25 12.00 12.75
Add : Opening Stock 0 3.75 9.75 10.50 11.25 12.00
Sales Quantity 86.25 228.00 251.25 269.25 287.25 305.25
Selling Price / MT 45000 45000 45000 45000 45000 45000
Sale Receipts 38.81 102.60 113.06 121.16 129.26 137.36
TOTAL 584.92 1546.22 1703.89 1825.96 1948.03 2070.10

APPENDIX 8: DSCR Calculation of M/s XYZ Pvt. Ltd.

Year 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18
Funds available
Profit after tax 5.26 33.83 59.66 84.86 109.26 132.86
Depreciation 24.46 54.61 47.36 41.10 35.68 30.99
Interest on term loan 17.21 37.18 28.91 20.65 12.39 4.13
Total 46.93 125.62 135.93 145.61 157.33 167.98
Long term debt to be serviced
Interest on term loan 17.21 37.18 28.91 20.65 12.39 4.13
Term loan principal system 0 66.09 66.09 66.09 66.09 66.09
Total 17.21 103.27 95.00 86.74 78.48 70.22
Annual DSCR 2.73 1.22 1.43 1.69 2.00 2.39
Average DSCR 1.73

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 APPENDIX 9: Projected Balance Sheet of M/s XYZ Pvt. Ltd.
2012 2013 2014 2015 2016 2017 2018

A. CURRENT ASSETS
1. Raw materials (incl. stores & other items
used in the process of manufacture)
a. Imported 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Month's Consumption
b. Indigenous 0.00 0.00 41.12 106.92 115.14 123.37 131.59
Month's Consumption (1.00) (1.00) (1.00) (1.00) (1.00)
2. Other Consumable spares, excluding
those included in 1 above
a. Imported 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Month's Consumption
b. Indigenous 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Month's Consumption
3. Stock-in-process 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Month's cost of production
4. Finished goods 13.19 22.58 25.43 66.12 71.21 76.29 81.38
Month's cost of sales (0.83) (1.22) (0.56) (0.58) (0.57) (0.57) (0.57)
5. Receivables other than export & deferred
receivables (incl. bills purchased &
discounted by bankers) 51.01 69.67 50.83 154.62 177.49 190.20 202.92
Month's domestic sales: excluding
deferred payment sales (2.99) (3.10) (1.00) (1.20) (1.25) (1.25) (1.25)
6. Export receivables (incl. bills purchased
and discounted) 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Month's export sales
7. Advances to suppliers of raw materials &
stores / spares, consumables 7.07 1.84 12.00 13.20 15.00 16.50 18.00
8. Other current assets incl. cash & bank
balances & deferred receivables due
within one year 17.56 54.00 207.41 21.71 25.69 58.87 111.22
Cash and Bank Balances 17.56 24.00 207.41 21.71 25.69 33.87 71.22
Investments (other than long
term): 0.00 30.00 0.00 0.00 0.00 25.00 40.00
Govt.
and other
trustee
i. securities 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Fixed
Deposits
with
ii. banks 0.00 30.00 0.00 0.00 0.00 25.00 40.00
Instalments of deferred
receivables
(due within 1 year) 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Advance payment of taxes 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Other current assets 0.00 0.00 0.00 0.00 0.00 0.00 0.00
9. Total Current Assets 88.83 148.10 336.79 362.57 404.53 465.24 545.11
B. CURRENT LIABILITIES
(Other than bank borrowings for working capital)

10. Creditors for purchase of raw materials,

stores & consumable spares 16.38 15.41 1.35 3.52 3.79 4.06 4.33

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 Month's purchases (0.94) (0.04) (0.03) (0.03) (0.03) (0.03)
11. Advances from customers 0.00 0.00 0.00 0.00 0.00 0.00 0.00
12. Statutory liabilities 0.00 0.00 1.20 1.80 2.10 2.40 3.00
13. Other current liabilities: 0.00 0.00 66.09 66.09 66.09 66.09 66.09
Short term borrowings from others 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Provision for taxation 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Dividend payable 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Deposits / instalments of term loans / DPGs
/ debentures etc. (due within 1 year) 0.00 0.00 66.09 66.09 66.09 66.09 66.09
Other current liabilities & provisions
(due within 1 year) 0.00 0.00 0.00 0.00 0.00 0.00 0.00
14. Total (To agree with total B of Form-III) 16.38 15.41 68.64 71.40 71.97 72.54 73.42

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 GLOSSARY OF ABBREVIATIONS

MSME Micro, Small and Medium Enterprises

SME Small and Medium Enterprises
PNB Punjab National Bank
HO Head Office
CO Circle office
BO Branch Office
GDP Gross Domestic Product
CAGR Compound Annual Growth Rate
NPA Non-performing assets
BPLR Benchmark Prime Lending Rate
KVIC Khadi and Village Industries Commission
CRISIL Credit Rating and Information Services of India Ltd.
ICRA Investment information and Credit rating agency of India
SIDBI Small Industries Development Bank of India
CPCB Central Pollution Control Board
TEV Techno-Economic Viability
ROI Rate of interest
TOL Total outsider liabilities
TNW Tangible net worth
DSCR Debt Service coverage ratio
IRR Internal Rate of return

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