BFSM CASE ANALYSIS

BY AISWARYA JOHNY
MBA – B
B2309
LOANS FOR FERTILIZER DISTRIBUTION – CASE ANALYSIS
The case is about how a bank should make its decision regarding sanctioning loan to two
applicants. The applicants, firm X and firm Y are fertilizer distributors in Gujarat state. The
decision is to be made based upon the various facts regarding the fertilizer industry, consumption
rate, and sales of fertilizers in the state of Gujarat. Each firm is analyzed separately.

When we look at exhibit 7: sales for fertilizer of Gujarat state Fertilizer Corporation.

YEAR METRIC TONNES

1967-68 92,167

1968-69 2,32,539

1969-70 3,16,734

1970-71 3,59,079

This table clearly shows us that every year the sales of fertilizer is keep on increasing. When
we compare sale of fertilizer in the year 1967-68 with 1970 -71, we can see the sales has
increased almost 4 times of the sales for the year 1967-68. This shows that the demand for
fertilizers in Gujarat keep on increasing year after year.

Firm X
• New firm
• Firm X need a loan amount of Rs. 220000 out of which Rs. 200000 is needed for pledging
of Stock and Rs. 20000 for the Stock hypothecation.
• They are willing to give 25% margin which is required by the bank.
• Their sales for last month were Rs. 25000. By this their annual estimated sales would be
Rs. 300000. With limited distribution network they achieved these sales.
• They have been appointed as distributor by Fertilizer Corporation of India in districts of
Kaira and Baroda.
• The loan is to improve the distribution network by which they intend to supply fertilizers
to the door step of farmers.
Decision
In my opinion loan amount of Rs. 220000 as requested should be sanctioned to Firm X. The
reasons for the same are

• Firm X is concentrating more on the retail distribution which will be contributing more
revenues considering the wholesale sector.
• Being appointed as the distributor of Fertilizer Corporation of India would e having a
positive impact on the sales.
• They are willing to pledge stock for Rs. 200000 which is the requirement for loan in case
of a new firm as per the bank scheme. So their revenue need not be considered. They are
willing to meet the required margin of 25% also.
• With Rs. 200000 they are willing to give margin of 25% of stock which will make the value
of pledged stock to Rs. 250000. So Rs. 20000 for the Stock hypothecation is not a problem.
The bank charges an interest of 9% per annum. On Rs. 220000, the interest for 1 year would
be Rs. 239000 which is still below the value of stock pledged.
• Consumption of fertilizer in Baroda and Kaira in metric tons is shown below

Year Baroda Kaira

N % change P % N % P %
change change change
1964-65 4536 1392 6341 1576
1965-66 3344 -26 1174 -16 4742 -25 1512 -4
1966-67 7109 113 1503 28 12218 158 1372 -9
1967-68 5744 -19 1750 16 111111 809 2105 53
1968-69 4913 -14 1177 -33 10216 -91 2407 14

• The fertilizer N’s consumption declines in the in past 3 years considered. Increase in
Fertilizer P is seen only in the Kaira district which itself is very slow. As per Exhibit 6 the
overall consumption of fertilizer N and P increased in the state of Gujarat in the year 1969-
70. With overall Gujarat state showing a positive trend towards use of Fertilizers, the
fertilizer consumption in districts of Baroda and Kaira would also increase. As firm X
claims that there is problem in retail distribution, it is one of the possible factors for low
demand. Improving retail distribution would surely create an impact.
Firm Y
• Firm Y was established in 1957
• They mainly operates in the districts of Mehsana and Banaskantha
• They mainly sell the products of Bayer Agricultural Chemical, ICI and Indian Explosives
Ltd.
• Their previous year Annual sales were Rs. 1086000 with a net profit of Rs. 66500.
• They were appointed as the sole distributor of fertilizers of Indian Explosives for the
districts of Mehsana and Banaskantha.
• They need a revolving Letter of Credit for indenting fertilizers from the Indian Explosives
Ltd for an amount of Rs. 100000.
• They are selling at lesser price than the price fixed by the government, Rs. 945. They offer
fertilizers at Rs. 870 per tonne for wholesale, Rs. 890 per tonne for semi-wholesale and Rs.
900 for retailers. The cost of fertilizers is Rs. 865 per tonne.

Decision
In my opinion Letter of Credit for an amount of Rs. 100000 as requested can be sanctioned
to Firm X. The reasons for the same are
• The firm Y is a well established firm which has been operating successfully for a period
over 13 years. This would also imply that they already have a good distribution network.
• As they have been appointed as the sole distributor of fertilizers of Indian Explosives for
the districts of Mehsana and Banaskantha they would enjoy the benefits of less competition.
• The rate fixed by the government is Rs. 945 which is higher than what is offered by Firm
Y. Now as the sole distributor of Indian Explosives Ltd they could increase the price of the
product and thereby increase the sales revenue.
• The Consumption of fertilizer in the districts of Mehsana and Banaskantha in metric tonnes
as per Exhibit 6 are given below

Year Mehsana Banaskantha

N % change P % N % P %
change change change
1964- 1127 226 464 435
65
1965- 1916 70 230 2 803 73 316 -27
66
1966- 2208 15 532 131 1104 37 452 43
67
1967- 3007 36 375 -30 924 -16 232 -49
68
1968- 3271 9 392 5 1455 57 487 110
69

There is been increase in the consumption of Fertilizer N over past years. While fertilizer
P does not show much change.
• The company earns a net profit of Rs. 66500 last year. This shows that they are in a
financially strong position.
• As per Exhibit 6 the overall consumption of fertilizer N and P increased in the state of
Gujarat in the year 1969-70. With overall Gujarat state showing a positive trend towards
use of Fertilizers, the fertilizer consumption in districts of Mehsana and Banaskantha would
also increase.
• Also firm Y is asking for Letter of Credit which is only a guarantee and might not even
require actual payment. Given the financial status and period of operation of the firm it is
safe to give Letter of Credit
• However it is required for an established firm to give the past three years profit and loss
statements and balance sheets which are not given by the firm. The bank should ask them
to submit these documents before granting the Letter of Credit.