Report Copy For Sir - 03

Corporate Finance Bank of Baroda MMS 2009- 2011
Banking Industry
The growth in the Indian Banking Industry has been more qualitative than
quantitative and it is expected to remain the same in the coming years. Based on the
projections made in the "India Vision 2020" prepared by the Planning Commission
and the Draft 10th Plan, the report forecasts that the pace of expansion in the balance-
sheets of banks is likely to decelerate. The total assets of all scheduled commercial
banks by end-March 2010 is estimated at Rs 40,90,000 crores. That will comprise
about 65 per cent of GDP at current market prices as compared to 67 per cent in
2002-03. Bank assets are expected to grow at an annual composite rate of 13.4 per
cent during the rest of the decade as against the growth rate of 16.7 per cent that
existed between 1994-95 and 2002-03. It is expected that there will be large additions
to the capital base and reserves on the liability side.
The Indian Banking Industry can be categorized into non-scheduled banks and
scheduled banks. Scheduled banks constitute of commercial banks and co-operative
banks. There are about 67,000 branches of Scheduled banks spread across India. As
far as the present scenario is concerned the Banking Industry in India is going through
a transitional phase.
The Public Sector Banks (PSBs), which are the base of the Banking sector in India
account for more than 78 per cent of the total banking industry assets. Unfortunately
they are burdened with excessive Non Performing assets (NPAs), massive manpower
and lack of modern technology. On the other hand the Private Sector Banks are
making tremendous progress. They are leaders in Internet banking, mobile banking,
phone banking, ATMs.
The last decade has seen many positive developments in the Indian banking sector.
The policy makers, which comprise the Reserve Bank of India (RBI), Ministry of
Finance and related government and financial sector regulatory entities, have made
several notable efforts to improve regulation in the sector. The sector now compares
favourably with banking sectors in the region on metrics like growth, profitability and
non-performing assets (NPAs). A few banks have established an outstanding track
record of innovation, growth and value creation. This is reflected in their market
valuation. However, improved regulations, innovation, growth and value creation in
the sector remain limited to a small part of it. The cost of banking intermediation in
India is higher and bank penetration is far lower than in other markets. India‟s
banking industry must strengthen itself significantly if it has to support the modern
and vibrant economy which India aspires to be. While the onus for this change lies
mainly with bank managements, an enabling policy and regulatory framework will
also be critical to their success.
N. L. Dalmia Institute of Management Studies and Research Page 1

Overview of Bank of Baroda

Bank of Baroda started with a visionary Maharaja's uncanny foresight into the future
of trade. On the 20th July 1908, the founder Maharaja Sayajirao Gaekwad, in a small
building in Baroda and with a paid up capital of Rs 10 Lacs started the legend that has
now translated into a strong, trustworthy financial body, THE BANK OF BARODA.
The Maharaja had a vision that a bank of this calibre will prove a beneficial agency
for lending, transmission, and deposit of money and will be a powerful factor in the
development of art, industries and commerce of the State and adjoining territories.
It is one of the finest banks of India, which had the capability to survive the crisis
during 1913 to 1917 where as high as 87 banks failed in India. This can be clearly
contributed to its honest and prudent leadership. This financial integrity, business
prudence, caution and an abiding care and concern for the hard earned savings of hard
working people, are the central philosophy around which business decisions are
taken. The bank has global presence across 25 countries. The business indicators
show that as on 31st March 2009 the total deposits of the bank are Rs 1, 92,396.95
crores and the total advances are Rs. 1, 43,985.90 crores. In its relentless striving for
quality perfection, the Bank secured the ISO 9001:2000 certification for 15 branches
and the Bank is targeting 54 more branches for this quality certification.
Mission Statement
To be a top ranking National Bank of International Standards committed to
augmenting stake holders' value through concern, care and competence.
The Logo
Figure 1.1 Bank of Baroda Logo

The new logo is a unique representation of a universal symbol. It comprises dual „B‟
letterforms that hold the rays of the rising sun. This is called the Baroda Sun by the
bank. The single-colour, compelling vermillion palette has been carefully chosen, for
its distinctiveness as it stands for hope and energy.
The sun is an excellent representation of what the bank stands for. It is the single most
powerful source of light and energy – its far reaching rays dispel darkness to
illuminate everything they touch. Bank of Baroda seeks to be the source that will help

all their stakeholders realise their goals. To their customers, they seek to be a one-
stop, reliable partner who will help them address different financial needs. To their
employees, it offers rewarding careers and to their investors and business partners,
maximum return on their investment.
Bank of Baroda is characterised by diversity. The network of branches spans

geographical and cultural boundaries and rural-urban divides. The customers come
from a wide spectrum of industries and backgrounds. The Baroda Sun is a fitting face
for the bank‟s brand because it is a universal symbol of dynamism and optimism – it
is meaningful for the audiences and easily decoded by all. This corporate brand
identity is much more than a cosmetic change. It is a signal that the bank recognizes
and is prepared for new business paradigms in a globalised world. At the same time,
the bank will always stay in touch with the heritage and enduring relationships on
which it is founded.
The management at Bank of Baroda includes Mr. M. D. Mallya as the Chairman and
Managing Director, Mr. Rajiv Kumar Bakshi and Mr. N S Srinath as the Executive
Directors, Mr. Alok Nigam, Mr. A Somasundaram, Mr. Ajay Mathur, Mr. Ranjit
Kumar Chatterjee, Dr. Masarrat Shahid, Dr. Atul Agarwal, Dr. Dharmendra Bhandari,
Dr. Deepak B. Phatak and Mr. Maulin Vaishnav as the directors.
Shareholding Pattern

Corporate Finance
Corporate finance is the task of providing the funds for a corporation‟s activities. It
generally involves balancing risk and profitability, while attempting to maximize an
entity‟s wealth. Corporate Finance is an area of finance dealing with the financial
decisions and the tools and analysis used to make these decisions. The primary goal
of corporate finance is to enhance corporate value without taking excessive financial
risks. Corporate finance is also called Balance Sheet financing and provides recourse
of their balance to the lenders. It is different from project finance, where the
repayment obligation solely depends upon the cash flow of a particular project. The
companies are often undertaking the project by creating a special purpose vehicle for
this purpose. For the sake of convenience the companies having exposure of Rs 5.00
crores and above (other than project finance) from the banking system are treated as
corporate finance. Banks focus has been on entrepreneurial clients, whether
individuals or businesses and on providing funding and investment in entrepreneurial
businesses.
Types of Borrowers:
There are four main types of borrowers that approach the bank for loans. They are:
 Retail customers- These are individuals which approach the bank for loans required
for their personal use like housing loans, car loans etc.
 Priority Sector- Bank has to provide advances even to the priority sector; these form
some part of the total advances given by the bank.
 SME Sector- These are small-scale and medium-scale industries which approach the
bank for loans for their businesses.
 Corporate Sector: In this report the main focus will be on the corporate clients of the
bank and how the appraisal is done for these clients.
The corporate clients can be classified into small corporates, mid- corporates and
large- corporate on the basis of their annual sales turnover.
Small Corp- Annual Sales Turnover < 100 crores

Mid Corp- 100 < Annual Sales Turnover <500 crores
Large Corp Annual Sales Turnover >500 crores

Lending
Objective of Lending
The main objective is regulating the bank‟s resources towards remunerative means,
for directed national priorities and achieving uniformity in the lending activity bank
wide.
Type of Funds
Figure 2.1 Funding Options
Fund Based Limits (FBL)

This involves all those advances granted to borrowers where funds are actually
provided to the borrower. The actual transfer of possession of money takes place from
the Bank to the borrower. This takes place in the following forms: Cash Credit, Term
Loans/ Demand Loans, Overdraft, Free Bills purchased/ Discounted.
Some of the FBL can be explained as follows:
Loans: Since they are granted for New Projects that are ventured into by the
Borrower, conducting Break Even Analysis, Techno- Economic feasibility study and
industry analysis is very important, along with deciding the repayment schedule-
which includes the moratorium period, the interest, the monthly installments and the
recovery period. Also whether the Borrower is repaying as per schedule or not, can be
viewed entirely through the Bank‟s Internal System. Either the entire or part of the
amount is transferred to the Cash Credit Account. The borrower is free to debit or
credit up to the sanctioned limit. The interest is calculated on the daily debit balance.
At the end of the month the installment plus the interest amount is due to be paid by
the borrower. He is a given period within which he has to repay the amount plus

interest. This way the sanction limit will reduce every month. Every Term Loan
Account is broken down into three parts, namely Interest due by the bank from the
account, The Installments and The Bank charges. The Bank can at any point in time
calculate the amount of fund utilized and the interest due, through the Bank's internal
system. There are mainly two kinds of loans that are provided by the bank.
Term Loans: As the name suggests, these loans are given for fixed period of time
with the provision that its repayment shall also come in regular pre-fixed periodical
installments which may be equated or graduated. These loans are generally
sanctioned for various purposes like acquiring fixed assets for the company,
introducing a Greenfield project or an expansion project etc. This is a source of debt
finance for long term purpose as project implementation takes from one year to three
years and at times goes more than three years as well depending on the type of project
and the loan is generally repayable in five to 10 years. Therefore, it is also known as
„Term Finance‟. These loans are generally repayable on the basis of repayment
agreement made according to the generation of future cash flow. The bank provides
term loan in the form of Rupee Term Loan.
Demand Loans: This is the fund demanded instantaneously by borrower due to

uncertain changes in the situation (e.g. economic downturn, inflation, price rise in
manufacturing product etc.). This is the loan (such as an overdraft) with or without a
fixed maturity date, but which can be recalled anytime by the lender and must be paid
in full on the date of demand. This is generally not used for project finance but its
relevance with project finance becomes more important in adverse situations if term
loan is already financed for the project. These loans are generally repayable on the
basis of repayment agreement governed under negotiable instruments (e.g.
Promissory Notes, Bills of Exchange, etc.). Duration of these loans is generally 1-3
years.
Buyer’s Credit: According to FEMA guidelines on Trade Credits, Buyer‟s Credit

refers to loans for payment of imports into India arranged by the importer from a bank
or financial institution outside India for maturity of less than three years.
 Buyer‟s credit for imports of raw material/non capital goods into India can be
availed for maximum period of one year and Buyer‟s credit for capital goods can
be availed for maximum period of less than three years.
 The credit can be raised irrespective of whether import takes place under an
arrangement of letter of credit issued by a bank in India or whether the supplier
sends the bills on collection basis.

 Under the buyer‟s credit arrangement, the exporter i.e. supplier of the goods
receives payment instantly in case of sight documents and on due date of the
drafts/bills in case of usance (DA) documents.
 Buyer‟s Credit is arranged for a maturity of less than three years. No roll
over/extension is permitted beyond the permissible period. Buyer‟s credit for
three years and above comes under the purview of ECB, which are strictly
governed by ECB guidelines of RBI.
Procedure for Buyer’s Credit:
Inter Corporate
Importer‟s
Importer
bank
Request for LOC and Buyer‟s

credit
Arrangement
Shipment of
of buyer‟s
goods
credit
Payment
Overseas Supplier Overseas Bank

On receipt of documents under an Import Letter of Credit, the customer approaches

his banker in India with a request to arrange Buyer‟s Credit for a specific period, to
cover the imports. Application for buyer‟s credit is submitted by the
importer/borrower to his bank in duplicate in Form ECB.
Bank arranges Buyer‟s credit through its foreign Office or the foreign correspondent
bank (where no branch exists) for which it issues a Letter of Comfort in favour of the
foreign Branch/ Correspondent.
 Bank recovers commission every month as commitment charges for the period of
the credit. The commission charged is as per the schedule of charges and is
subject to negotiation with the corporate borrower.
 On receipt of documents under the Letter of Credit, LC liability is extinguished
and Acceptance liability is created in the books of importers‟ bank. Upon securing
buyer‟s credit due date of the import bill is extended till the maturity period of the
loan (maturity of buyer‟s credit).
 Where imports are not under LC (FIBC) acceptance liability is created and
recorded under Acceptance liability in the system for control purpose.
 Some of the branches instead of extending acceptance liability create guarantee
liability once the import bills are paid on due date by them.
 On the strength of Letter of Comfort, the Foreign Branch/ Correspondent arranges
buyer‟s credit and creates a loan account in the name of the importer customer
and makes payment directly to the supplier/exporter in the foreign country.
Foreign lender charge interest on loan amount at agreed rate/spread over 6months‟
LIBOR which is recovered along with the principal on due date.
 On the due date of loan under buyer‟s credit, importers‟ bank recovers the loan
amount with interest by debiting borrower‟s account with him and remits the
same to the foreign lender.
Overdraft: An overdraft is easier and faster to get a hold of and is more operative, as
it does not follow a repayment schedule but works on a Maturity period. Giving the
Borrower more liberty to do as he pleases, (Under certain constraints) within that
period. After the application is made and the Bank has verified all the necessary
submitted documents and security, a separate Overdraft Account is created. The Bank
will then transfer the amount requested by the borrower less the margin the Bank
keeps aside. Here the customer is free to debit or credit the account as he wishes, only
within the sanctioned limit. At the end of the maturity period, the customer is asked if
he wishes to renew the overdraft account or not. If so, he has to make an application
to the Bank, requesting for the same.

All of the above instruments work on a similar principal. The only variation that may
take place is with respect to the Margin, or the Rate of Interest. Whatever be the case,
all Overdraft Facilities are provided against the face value of the instruments and not
on the future value. The general documents required for enjoying this are: a) An
application/ proposal for overdraft facility which includes details such as the Name,
Business, Receipt no, Credit balance, Period and Date of maturity, Rate of interest,
Requirement for what purpose, Amount, Policy numbers. b) A transfer form,
transferring all securities in the name of the bank. c) An Overdraft Form. d)
Documents for continuing security bond along with Promissory Note. e) Deed of
guarantee. f) Profile of Borrower.
Non Fund Based Limits (NFBL):

This does not involve the actual transferring of funds. No actual transfer of possession
of funds takes place between the bank and the Borrower. Just a promise/ guarantee, is
made by the bank on behalf of its customer's/ borrower's performance, incase for
whatever reason the borrower fails to make good his promise to a third party
beneficiary. Some of the NFBL are explained as follows:
Bank Guarantee: A contract of guarantee can be defined as a contract to perform the

promise or discharge the liability of a third person in case of his default. The contract
of guarantee has three parties stated as under:
 Principal debtor- The person who has to perform or discharge the liability
and for whose default the guarantee is given
 Principal Creditor- The person to whom the guarantee is given for due
fulfillment of contract by principal debtor. Principal creditor is also sometimes
referred to a beneficiary.
 Guarantor- The person who gives the guarantee.
A bank guarantee is a guarantee made by a bank on behalf of a customer (usually an

established corporate customer) should it fail to deliver the payment, essentially
making the bank the co-signer for one of its customer‟s purchases. A letter from a
bank guaranteeing that a buyer‟s payment to the seller will be received on time and
for the correct amount. In the event that the buyer is unable to make the payment on
the purchase, the bank will be required to cover the full or remaining amount of the
purchase. With a bank guarantee the client can default and the ban assumes the
liability. Bank guarantees may broadly be divided into three categories

 Financial Guarantee: In this the bank guarantees the customer‟s financial worth,
credit worthiness and his capacity to take up financial risks. Therefore guarantees
issued in respect of constituents liability, such as guarantees favoring tax/
customs/ excise/ court authorities in respect of disputed claims, payment of taxes,
customs, excise etc will come under the classification of financial guarantees.
 Performance guarantees: Performance guarantees are issued on behalf of
constituents guaranteeing their performance as per contracts entered into
performance of machineries supplied, due discharge of other contractual
obligations undertaken etc. Guarantees covering security deposit/earnest
money/advance payment/mobilization advance, payments for supplies of goods.
 Deferred Payment guarantee: A DPG is essentially a guarantee in favor of a
supplier of a plant and machinery to a buyer on deferred payment basis, for
payment of installment on the due date if the buyer fails to pay the same. It is ,
therefore, another method of financing of fixed assets. Even though the bank
would be parting with funds only on the failure of the borrower to honor its
commitments, nevertheless the bank guarantee required it to treat it as a liability.
Assessment of bank guarantee limits

The assessment of regular bank guarantee limits would depend upon the nature of
activity of the borrower, the nature, purpose and type of guarantees required in such
an activity and duration of such guarantee.
 The first step is to note down in detail the types of guarantees required in the line
of activity and classify them into financial and performance guarantees.
 Secondly identify and segregate those guarantees which are likely to be required
on a fixed basis and will be outstanding as long as the unit is in operation or the
bank finance is outstanding.
 Next the assessments of other types of guarantees that may be required are to be
made. It depends upon the volume of activity proposed and the duration of such
guarantees.
 Further the borrower may require guarantees to be issued favoring excise. Income
tax authorities against disputed liabilities, requirement of such guarantees can be
easily ascertained based on the level of such disputed liabilities and the demand
made by the concerned departments.
 The borrower may also require guarantees for import of capital goods on
concessional import duty under various schemes of Government, whose
requirement can be determined on a case to case basis.
 The cumulative requirements as enumerated in the earlier points will decide the
amount of Bank Guarantee limits and the nature of such limits.
 The Bank Guarantee limits once sanctioned should be reviewed every year along
with all other fund based and non fund based limits, At that time, the level of

utilization of the limits in the past year and the current year would be a guiding
factor for the limits to be renewed.
 The following points are to be kept in mind while sanctioning bank guarantee
limits
 As per RBI guidelines, no guarantee should be given covering a loan raised by a
client from third parties including from a bank or financial institution,
guaranteeing the repayment of the loan.
 As per the RBI guidelines, banks are precluded from issuing guarantees favouring
the financial institutions or other banks or lending agencies for the latter‟s loan
Letters of Credit
Letter of credit is a method of settlement of payment of a trade transaction and is
widely used to finance purchase of machinery and raw materials etc. It contains a
written undertaking given by the bank on behalf of the purchaser to the seller to make
payment of a stated amount on presentation of stipulated documents and fulfillment
of all terms and conditions incorporated therein. All letters of credit in India relating
to the foreign trade i.e. export and import letters of credit are subject to provisions of
„Uniform Customs and Practice for Documentary Credits‟ (UCPDC). Letter of credit
is an undertaking by issuer‟s bank. It is non – funded document.
Parties involved in LC transaction are
 The applicant is the party that arranges for the letter of credit to be issued.
The beneficiary is the party named in the letter of credit in whose favor the letter
of credit is issued.
 The issuing or opening bank is the applicants bank that issues or opens the letter
of credit in favor of the beneficiary and substitutes its creditworthiness for that of
the applicant.
 The advising bank may be named in the letter of credit to advise the beneficiary
that the letter of credit was issued. The role of the advising bank is limited to
establish authenticity of the credit, which it advised.
 The paying bank is the bank nominated in the letter of credit that makes payment
to the beneficiary, after determining that documents conform, and upon receipts of
funds from the issuing bank or another intermediary bank nominated by the
issuing bank.
 The confirming bank is the bank which under instruction from the issuing bank,
substitutes its creditworthiness for that of the issuing bank, It ultimately assumes
the issuing bank‟s commitment to pay.

Commercial flow of letter of credit
Figure 2.2 Commercial flow of letter of credit

 Applicant approaches Issuing/Opening bank with LC application form duly filed and
request issuing bank to issue a letter of credit in favor of beneficiary.
 Issuing bank issues a letter of credit as per the application submitted by an applicant
and sends it to the advising bank which is located in beneficiary‟s country to formally
advise the LC to the beneficiary.
 Advising bank advises the LC to the beneficiary.
Once beneficiary receives the LC and if it suits his/her requirements , he/she prepares
the goods and hands over them to the carrier for dispatching to the applicant.
 He/she then hands over the documents along with the transport document as per LC
to the negotiating bank to be forwarded to the issuing bank

Types of banking arrangements

Sole banking:
When the credit facilities required by a borrower are able to be sanctioned by one
single bank, the arrangement is called 'Sole Banking'. It is an ideal arrangement for
the borrower as well as the bank. It gives the bank more effective control over the
operations of the borrower and it also helps the borrower to deal with only one bank.
However, sometimes the nature of business of the borrower is such that it involves
requirement of various types of facilities like foreign L/C, foreign guarantees which
may not be available with the existing bankers. It may also happen that credit
requirements of the borrowers are so large that it may not be possible for his existing
bank or any one bank to fulfil the same due to financial constraints or prudential
exposure norms or from risk management point of view.
Banks also do have their prudential exposure norms. They also do have their own
loan policy document which specifies the priorities or limits the exposures to certain
industries. In such cases, the bank may not be able to entertain request for
enhancement in existing limits of the borrower. In certain cases bank may in fact like
to share its existing business with some other banker for sharing the risk. In sole
banking, the bank is expected to take care of all credit needs of the customers. The
customer should not be allowed to operate even current account at any other bank
without lending bank's specific permission. No credit facility should be availed by the
borrower from any other bank or financial institution without reference to the sole
banker. This will ensure discipline in the account and proper monitoring.
Multiple Banking:
Banks generally do not prefer to have multiple banking. It dilutes their control over
the borrower's account. The monitoring of business performance of the borrower
becomes difficult. The borrower can take advantage of the situation by taking finance
from one bank and crediting the proceeds in the account with other bank etc. Sharing
of security is another problem area and possibility of borrower obtaining finance from
other bank on same security cannot be ruled out.
The borrower may find multiple banking useful as it gives him advantage of getting
competitive rates and better service. It also helps him at the time of credit crunch, if
his limits with one bank get frozen, he can operate the limit with other bank.
However, multiple banking also has its disadvantages to the borrower. The borrower
has to constantly be in touch with various authorities. The system, procedures and
sanctioning requirements of the banks differ and the borrower has to adjust to these
and accordingly satisfy the needs of different banks which may prove to be difficult.

Creation of a charge over the security may pose problem. If the value of the security
charged to one banker is high and even if that bank is unable to sanction enhanced
credit limit, it is generally reluctant to cede second charge on the security. The
assessment and credit disbursements to the borrower by multiplicity of the banks may
not be proper and control may not be adequate. Borrower also will have to approach
the financing banks separately to assess and sanction any additional credit
requirements.
In this context, then, it becomes worthwhile to consider forming a consortium.

As a general policy, Bank of Baroda does not entertain/encourage Multiple Banking
Arrangement except in exceptional cases. Branches generally insist on existing
borrowers for having consortium arrangement, where Bank of Baroda is the leader, to
continue with the existing consortium arrangement without any change.
In a specific case where all the other existing members in the consortium are inclined
to allow switch over from consortium to multiple banking arrangement then the banks
Rate of
Interest/Margin and other stipulations will hold good in respect of their limit. The
Bank which has largest share in the existing funded working capital
facilities/proposed credit facilities in case of review with increase/fresh credit
facilities will act as the Main Banker. The Main Banker (i.e. Bank with whom largest
amount of credit limit is availed) will be responsible for preparation of appraisal note,
its circulation amongst lender banks, convening meeting of members in case of need
or representation received from any lender bank (preferably within a period of three
months). The onus of reporting under CMA to RBI should be on each of the bank,
sanctioning the limit. However, such reporting should be under advice to Main
Banker.
Consortium Banking:
When more than one bank join hands to finance the credit requirements under
participation arrangement to a corporate borrower, it is called Consortium Advance.
The participation of banks enable them to pool their talent and resources to take credit
risk on large scale and to apply uniform standards, terms and conditions etc. in regard
to a credit proposal. Following points may be kept in mind to understand consortium:
Two or more banks join in financing one borrower for working capital. Two or more
banks and/or financial institution/s join in financing fixed assets.
In the case of a borrower with different units (each one engaged in separate line of
production), each unit is financed by a separate bank or by a sub-consortium of banks
under the consortium of banks for the borrower as a whole. Under the consortium

arrangement, it is expected that the participating banks acquire common interest,

share the advance and same security on predetermined proportions. Every consortium
will have a leader.
The participating banks in consortium have been given freedom to frame modalities
of consortium lending arrangement. Accordingly Bank of Baroda has formulated
following ground rules on consortium lending.
 Applicability: The rules framed hereunder for the aforesaid specify areas will be
generally followed in consortium accounts where the bank is participating.
However, minor variations as may be necessary, may be made in the rules in
respect of each consortium account, depending upon the consensus/majority
views of the participating banks.
 Features:
 Maximum number of participating banks be limited to six where the total
fund-based requirements of the borrower are upto Rs. 100/- crores.
 For borrowers whose requirements of fund-based limit is Rs. 100/- crores
and above, maximum number of members may be decided on a case to
case basis. However, for the sake of meaningful participation which will
be preferred, the membership of consortium, may be limited to 10/12
members.
 As at present, both Public Sector Banks, Foreign Banks and Private Banks
can be members in any consortium accounts without any restriction.
However, concerned banks will have to keep in view their prudential
exposure limit while participating in the consortium accounts.
 Minimum share of each bank: Minimum share of each bank should be 5% of

the funded credit limit or Rs. 1.5 crore, whichever is more. If in a specific case
because of the prudential exposure constraint of any bank lower amount of
participation is sought for, the same may be considered after discussion with other
consortium members.
 Assessment of financial requirements - application of 2nd method of lending:

In the assessment of the requirements 2nd Method of lending (current ratio
minimum 1.33) is to be kept in view. Based on the consensus of the consortium,
Bank is to submit credit proposal for its share of facilities to its appropriate
authority and convey the decision to the Lead Bank and the company in due
course, without undue delay.

 Sharing of non-fund based business: Generally, the participating members are

to share non-fund based and other ancillary business pro-rata in proportion to
their share in fund based limits. If on account of operational difficulties, location
problems etc. any borrower desires to avail of any non-fund based facilities from
one member bank only, the same can be considered on case to case basis subject
to sharing of risk and relative income by all the member banks in the consortium.
 Documentation: Security documents for credit facilities under consortium

arrangement should be obtained as per draft of Indian Banks' Association under
Single Window Concept of lending. Upon sanction of credit facilities by
consortium banks, it may be endeavoured to complete entire documentation
matter (including creation of charge on securities, Exchange of Pari passu letters
wherever necessary) within a period of -3- months.
 Disbursement: Generally consortium members should follow an uniform

approach in regard to various terms and conditions for disbursement of credit
facilities to the borrower. If there is any difference of opinion, the same should be
first sorted out by the consortium members. Wherever the bank acts as a Lead
Bank, it may, after obtaining clearance from appropriate authority and on merits
of each case, allow additional disbursement of credit limit by earmarking
unutilised share of member banks who are not in a position to disburse their share
of credit limits for a temporary period. This will also be subject to the consensus
of the consortium.

Lending Process
Overview of the Process of Lending (At Bank of Baroda):
Submission of the application form by the borrower
Providing the information memorandum to the bank
Preparation of In principal approval by the bank
Accepted
Rejected
Project Appraisal
Risk Measurement and Credit rating
Preparation of Final Proposal
Proposal forwarded to sanctioning authority
Sanctioned Rejected
Sanctioned letter issued
Documentation and Disbursements
Post Sanction Control and follow up of advances, Credit

Monitoring

The above flowchart can be explained as follows:

Firstly, the borrower approaches the bank with the proposal to finance a project.
Borrower has to give a written application in favour of branch head containing the
brief information of applicant, company, industry, about Project, Project duration and
fund requirement from that bank.
The borrower has to then provide the Bank with the preliminary information or the
project information memorandum. The borrower has to prepare a detailed project
report, which is submitted to the bank and on the basis of which the final report is
prepared. In case of a syndication arrangement, the lead arranger prepares an
Information Memorandum in consultation with the borrowing entity and provides it to
the banks it approaches for the loan.
The Information Memorandum (IM) (similar to prospectus) incorporates – Borrower's

financial position carrying out financial and accounting due-diligence and his detailed
business profile, summarized preparation of Income Statement and Analysis of
Balance Sheet - present and future periods, industrial/ business sector analysis,
comments on management and their strategic plans, the projects economic analysis,
engineering design, financing arrangement, etc.
The Information memorandum/ project report generally contains the following

information:
I. Details of the company:
a. Brief history
b. Promoters
c. Board of directors
d. Group associates
e. Shareholding pattern and Capital structure
f. Financial performance
g. Financial assistance from banks and financial institutions
II. Industry details:

a. Industry profile
b. Performance of the industry
c. Prospects of the industry
d. SWOT analysis of the industry.
III. Project details:

a. Project at a glance

b. Brief description of the project

c. Detailed cost of the project
d. Technical consultancy/ engineering services
e. Raw material and utilities requirements
f. Statutory approvals
g. Status of ongoing project
IV. Marketing strategy:

a. Market size of the industry
b. Product mix
c. Strategy
d. Market segments
e. Market share
f. Distribution channels
g. Competition and competitors
V. Feasibility study:
a. Technical feasibility study
b. Financial feasibility study
c. Commercial viability
d. Risk analysis and mitigation mechanism
Now, now based on the information memorandum prepared by the company or the
loan syndicator as the case may be, an In- principal approval is prepared by the bank,
which is then sent to the sanctioning authority. If the approval is accepted then the
next step is to carry the pre sanction appraisal and prepare the final proposal and if the
In- principal itself is rejected the process stops there itself.
After the authority approves the In-principal approval, the next step is to carry out the
detailed appraisal process. The other steps from the appraisal process to the
disbursement will be explained in the further parts of the report separately.
Project Appraisal
Appraisal- Systematic and comprehensive review of the economic,
environmental, financial, social, technical and other such aspects of a project, to
determine if it will meet its objectives.
Importance of Appraisal:-
 The success of a company depends on how efficiently and effectively its capital
resources are used and the CAPEX (capital expenditure) decisions within the

company require several functions. NPV is arguably the best method while IRR
seems to be the one preferred as it shows the yield of the invested capital.
Payback is used a lot as it is so easy to use.
 Safety: It is one of the major concerns of a banker. It essentially means the ability
of a banker to critically assess the borrower‟s capacity to repay the amount lent to
him. This is one of the important factors to stringent NPA norms.
 Liquidity: It deals with the banker‟s ability to get advance liquidated
expeditiously. The deposits are payable on demand or at short notice and hence
the banker should not lock up funds in long term loans. This aspect has now
assumed great importance due to introduction of ALM.
 Profitability: This is the key word for every business organization including
banks. The profit is the result of sound business decision and is related to the cost
of funds and other related risks.
 Spread: Banks should strike a balance between short term, medium term and long
term loans. Banks should concentrate advances on varied sectors and fields
 Purpose: Lending should be for an approved purpose. Banks should lend for
productive purposes as well as consumption purposes. It should formulate its
lending policy in respect of purpose.
 Own Stake: The borrower should have reasonable financial stake in the business
so that he keeps his interest going in the business.
Pre sanction Appraisal

When a credit proposal is presented to a branch by a prospective borrower for
sanction by an appropriate authority, the appropriate authority may either sanction or
reject the proposal. The decision to sanction or reject the proposal has to be based on
a careful analysis of various facts and data presented by the borrower concerning him
and the proposal. Such an objective and in-depth study of the information and data
should convince the sanctioning authority that the money lent to the borrower for the
desired purpose will be safe and it will be repaid with interest over the desired period
,if the assumptions and terms and conditions on which it is sanctioned, are fulfilled.
Such an in-depth study is called the pre-sanction credit appraisal. Credit Appraisal
can be segregated into seven parts, namely:
 Borrower Appraisal
 Technical Appraisal
 Management Appraisal
 Financial Appraisal
 Economic Appraisal
 Market Appraisal
 Environmental Appraisal

Borrower Appraisal:
Every credit proposal, howsoever, small or big, is sponsored either by an individual,
group of individuals or a body run by individuals. Thus, every project which may be
considered technically feasible, economically viable and financially sound may run
into difficulties if it is not backed by a competent person who will be manning the
enterprise. Thus, the man behind the project is very important. Confidence is the basis
of all credit transactions. Thus, if the lender has no confidence in the honesty,
willingness and ability of the borrower to repay the loans at maturity or when called
upon to repay, he would never think of granting the loan. This confidence is generally
derived from the 5C‟s which are as follows:
Character: Character is the greatest and the most important asset, which any
individual can have. Character of a borrower is constituted by honesty, sobriety, good
habits, personality, the ability and willingness to keep his word under all
circumstances, reputation of the people with whom he deals etc.
Capacity: It deals with the ability of the borrower to manage an enterprise or venture
successfully with the resources available to him. His educational, technical and
professional qualifications, his antecedents, present activity, experience in the line of
business, experiences of the family, special skill or knowledge possessed by him, his
past record etc. would give a hindsight into his capacity to manage the show
successfully and repay the loan.
Capital: It is his ability to meet the loss, if any, sustained in the business or venture
from his own investment or capital without shifting it to his creditor or banker. Unless
a borrower has some stake in the business, he may not take much interest in its
success.
Collateral: It is the security that the borrower has to keep with the bank as against the
availability of the loan.
Conditions: The conditions are the economic conditions prevailing in the economy.
Change in any condition can lead to the decrease in profitability of the business.
There can be also changes in the government laws which may affect the business.
Besides this, other qualities of a borrower like competence, initiative, intelligence,

drive & energy self confidence, frankness and patience may also help the bank in
appraising the borrower for a lending decision.
For gathering the above information about the borrower, the bank can use various
sources for making a credit report on the borrower. Some of the sources of
information are as follows:
 Application form
 Borrower's past dealings with the branch and dealings in other accounts
maintained with the bank

 Reports obtained from persons having dealings, links with the borrower
 Reports from the guarantors
 Reputation in the line of trade in which he is engaged
 Reputation in the society or community to which he belongs
 Credit information from other banks and financial institutions with whom he is
having dealings
 Credit information from Reserve Bank of India
 Other sources
Technical Appraisal:
The technical appraisal of a credit proposal involves a detailed study of some of the
aspects that are explained below:
Availability of Basic Infrastructure:

Land: Land is the most basic requirement for setting up any project. The land should
be freely marketable and its title deed free and clear of all encumbrances. Size of the
land should be selected keeping in mind the future expansion, nature of the land is
also an important factor.
Location: Mere availability of land would not be sufficient. It's location should be
such that it is near to the market for sale of goods produced, availability of raw
materials and other inputs like power, water, fuel, skilled manpower, infrastructure
support (developed roads, railway lines, schools, hospitals etc.). Climatic conditions
also have a bearing on the location of land.
Power: For setting up industrial units availability of regular and adequate amount of
power is very important. If it is not so, arrangement for installation of a captive power
plant/ generator etc. should be made which would result in escalation of project cost
and thus affect profitability.
Water: Many projects involve consumption of large amount of water either in the
manufacturing process as a raw material or as a cooling agent or for use in generating
steam. So ensuring availability of adequate supply of water either through regular
connection or through sinking bore wells is very vital for appraisal of the project.
Licensing/Registration Requirements:
Wherever necessary obtaining of valid licenses from the Central, State Government,
Municipalities etc. for setting up the unit are ensured. An illustrative list of major
approvals/approvals required by an industrial unit is given in the appendix. While all
the items included in the list may not be applicable to all types of industries and in all
the States, the list is indicative and is used to ensure that wherever such
approvals/approvals are required they are to be obtained. Such licenses are obtained
and produced before actual disbursement of the advances are sanctioned.

Selection of Technology:
An important aspect of technical appraisal of a proposal is the critical examination of
the technology/technical process selected for the project. The main points considered
in this regard are:
Availability: It is checked whether that the technical process/technology selected for
the project is readily available either indigenously or necessary arrangements for
importing it or for a foreign collaboration are finalised. Obtaining of necessary
permission from RBI/Government of India may become necessary in some cases.
Application: In case of foreign technology, the selected technology must find a
successful application in Indian environment and the management should be capable
of fully absorbing the technology. It is ensured that the technology is not obsolete and
is appropriate from the local, social and cultural conditions.
Plant Size and Production Capacity: The selection of plant size and production
capacity is mainly dependent on the total capital outlay by the promoter and also on
the desired level of quality and quantity determined by the market. Further the plant
size has broad economic connotations, as creation of over capacity may increase the
cost of capital and affect the working of the project. Similarly, under utilisation of
plant capacity also results in reduced profitability. Equipments for utilities (power,
fuel water etc.) should also have sufficient capacity to meet the requirement of main
plant and machinery.
Continuous updating: The selected technology should not only be modern, state of
the art and of proven track record but it should also be ensured that a provision is
made for the technology to be constantly upgraded. The R & D (Research &
Development) facilities should be provided for absorption and continuous updation of
technology.
Availability of Skilled Technical Personnel and required raw material: Mere
availability of a sophisticated technology or machinery would not make the process
more productive. It requires skilled and technically qualified personnel to run these
machines efficiently and to carry out preventive maintenance and regular repairs. So
availability of such technically qualified/competent persons either indigenous or
foreign has to be ensured.
The easy and regular availability of raw materials and consumables should be a pre-
condition for successful operation of a project. If the suppliers are few, necessary firm
tie-up arrangements with them should be ensured. In case of import of raw material,
licensing requirements should be looked into. Further, in case of imported raw
materials, their import in a bunch or bigger lots may sometime become necessary
resulting in excess inventory for a long time and the unit will have to incur additional
working capital cost. This is one of the most vital aspect of project appraisal and any
misjudgment may result in failure of the projects.

Management Appraisal:
In case of projects, units or enterprises run by individuals as sole proprietors or
partnership firms, it is usually one or two persons who manage the entire project, unit
or the enterprise whether it be of manufacturing or trading. In such cases a careful
appraisal of the individual borrowers who run the show is done to decide whether to
finance such a project, firm or enterprise or not. However, in case of corporate
borrowers and also in case of large borrowal ccounts, it is usually a set of
professionals who manage the entity each specialised in a specific area of
management i.e. production, finance, marketing, personnel etc.
Various Forms of Organisations:

The borrowers approaching banks for financial assistance can be divided into 4 broad
categories:
 Individuals
 Proprietary concerns
 Partnership firms
 Corporate sector
Individuals and Proprietary Concerns: In case of proprietary concerns, it is the

sole proprietor who will be primarily liable to repay the bank's loan and as such
qualities of the sole proprietor are studied carefully as per the borrower appraisal. It is
also possible that even though the unit is owned by a sole proprietor, the actual
production, sales etc. are managed by qualified personnel. In such cases their
experience, qualifications etc. are studied with reference to their responsibility and
requirements of the project.
Partnership Firms: In case of partnership firms, knowledge and experience of each

of the partners is studied in relation to the requirement of the project as well as the
relationship among all the partners is studied.
Corporate Borrower: In case of corporate borrowers, the most important criteria is

the main promoter of the company. A promoter having a good track record, reputation
in the financial and commercial markets is likely to ensure the success of the
company even against all odds. This will ensure the timely repayment of banks dues.
Due to the constraints of prudential exposure norms and 'Group approach' concept
enumerated by the RBI, Bank of Baroda has set limits for financing to individual
borrowers singly or in a group. Again, the RBI circulates a caution list of borrowers
to whom, banks are advised, not to grant any credit facilities. A perusal of all such

guidelines is also necessary to ensure that the borrower is not an undesirable borrower
to the bank.
Many companies are so closely held that the entire shareholding of the company rests
with a few individuals and even the different managerial personnel are their close
associates. In such cases, a very careful appraisal of the management/the board of
directors is carried out. In the case of widely held companies i.e. companies where the
shareholding is spread over a wide range of individuals and corporates, it is ensured
that independent persons with experience in diverse fields like finance, marketing,
technical, legal, personnel etc. are inducted into the board of directors.
Chief Executive: The Chief Executive is really the nerve centre of the unit. He is
required not only to carry out the policy laid down by the board, but should also
possess necessary qualities to manage the business and the people managing the
business. Ideally, he should possess necessary knowledge and experience in either
technical, financial or marketing areas of the project. However, what is important is
that he should possess qualities of a leader to lead a team of people with diverse
background and skills.
Organisational Set-up: The company should have a well defined organisational

setup with definite and unambiguous reporting relationships and defining the
responsibility and the decision making levels in the company. Proper planning and
budgeting, participation of workers in the management, decentralising decision-
making, developing effective internal control system etc. are some of the major
factors which help contribute to a managerial effectiveness of the unit.
Financial Appraisal:
The term financial appraisal refers to the study of the following aspects of the
project/unit:
 Determination of the cost of the project
 Assessment of the source of funds/means of financing the project
 Profitability estimates
 Break even analysis
 Cash flow projections
 Projected balance-sheet
Determination of the Cost of the Project: A realistic assessment of project cost is

necessary to determine the source for its availability and to properly evaluate the
financial viability of the project. For this purpose, the various items of cost are sub-
divided into as many sub- heads as possible, so that all factors are taken into account

while arriving at the total cost. It is desirable to provide for sufficient cushion into
costs for any inflationary increase.
Assessment of the Source of Funds/Means of Financing the Project: After

estimation of the cost of the project, the next step is to find out the sources of funds
by means of which the project will be financed. The project may be financed by
contribution of the funds by the promoter himself and also raising loans from others
including term loans from financial institutions.
The important sources of financing are:
 Issue of share capital including ordinary/preference shares
 Issue of secured debentures (convertible or non- convertible)
 Secured long term and medium term loans (including the loans applied for the
project)
 Unsecured loans and deposits from promoters, directors etc
 Fixed deposit from public
Profitability Estimates: Once the cost of the project and the source of financing it
are finalised, the viability of the project will depend on its capacity to earn profit to
service the debts and capital. Banks as lenders are interested that the unit will
generate sufficient profit to repay its instalments and interest in time. For this, it is
necessary to estimate the cost of production and projected sales so as to arrive at the
profitability estimates. These should not only be prepared on a realistic basis but also
should be based on production capacity, market potential, sales realisation etc.
Break Even Analysis: Estimation of working results or profitability figures pre-

supposes a definite level of production and sales and all calculation are based on that
level. It may, however, not be possible to achieve these levels immediately and at all
times. So it is necessary to ascertain the minimum level of production and sale at
which the unit will run on "no profit no loss" basis. This is known as Break Even
Point (BEP) and the prime goal of any project would be to reach that level and as
lenders banks are keen to ensure that the unit achieves this level at the earliest and
operates well above this level to sustain profitability and ensure repayment.
Cash Flow Projections:

After carrying out the profitability analysis and determining the expected flow of
profit, it is required to prepare a projected cash flow statement giving a narration of
all the sources of cash inflow and outflow during (deployment) the course of
operation within a specified time frame (1 year). This helps to find out the total
surplus funds created during the operational year. This also helps to determine the
ability of the project to service its debt and fix the repayment periods of loans granted

for a project and also to determine the moratorium period for repayment of the loan.
This is important because repayment of loan has to be from the surplus cash
generated during the operations in a year.
Projected Balance Sheet: On the basis of profitability and cash flow statements
already drawn as above, the projected balance sheet for a period of 10 years is
prepared to know the financial position of the project at any given point of time.
Economic Appraisal:
The performance of a project is influenced by a variety of other economic, social and
cultural factors. Even if a project is technically feasible and financially viable, it may
not satisfy the economic needs viz. employment potential, development of
industrially backward areas, environmental pollution etc. Further as capital is a scarce
resource, it is necessary that it must be allocated in such a way that it yields best
possible return to the society in general and the investor in particular.
Two important means by which the economic appraisal is done are as follows:
Internal Rate of Return (IRR): IRR is defined as the discount rate at which the
present values of all investments made in a project are equal to the present value of all
future returns from the project over the assumed life period of the project. Thus (IRR)
is an indicator of the earning capacity of the project. A higher IRR indicates a better
prospect for the unit. The investment is treated as cash out flow and the return on the
same is treated as cash inflow. The discounted values of the cash inflows and cash
outflows shall be zero at a particular rate of discount. The task is to calculate this rate
which is called the Internal Rate of Return. Normally IRR is compared with the cost
of capital and if IRR exceeds the cost of capital, the project is termed viable.
Sensitivity Analysis: The normal financial appraisal of a project is based on certain

assumed values for certain critical variables/parameters viz. sales realisation, unit
value of product sold, cost of raw material, capacity utilisation etc. However, any
variation in the assumed values of these parameters may result in a more favourable
or unfavourable IRR. The process of computing the IRR and the repaying capacity of
the borrower for different values of each of these parameters is called the sensitivity
analysis.
Market Appraisal:
While appraising a proposal it is not only necessary to find out whether it is
technically feasible and financially viable, but also important to ascertain the
marketability of the product manufactured/ sold. Existence of a market for the product
provides the rationale for its production. If the product sought to be manufactured is

the only one of its kind for which there are no substitutes, the marketing of the same
may not be a problem excepting when it can be freely imported and that too at a lesser
cost. However, if there are many competitors, the entrepreneur may find the going
tough. Therefore, a careful survey of the market to determine the following aspects is
called the Market Appraisal.
General Market Prospects for the Product: This is done by an analysis of the
official policy regarding industrial licensing import-export norms, SSI units,
monetary and fiscal policies of RBI and Government of India. Also relevant would be
total number of industries producing similar products, their installed capacities,
utilisation of their capacities, their general levels of performance, the degree of health
or sickness prevalent in the industry and other such data.
Position of the product vis-a-vis the competitors: Here the emphasis is on the in-
depth study of competitive strength/weakness of the proposed product in relation to
its rivals/competitors. Such a study is very vital to develop a proper strategy to launch
the product. The comparison may be done in terms of quality or price and accordingly
the future strategies be decided.
Size of the market and share of the proposed unit: After studying the general
marketability of the product and its relative position vis-a-vis the competitors, it is
necessary to estimate the share of the market that may be claimed by the new product.
For this the macro level market is required to be segmented into smaller
homogeneous segments and the share ascertained. There are many factors which may
affect the proposed share viz. suppliers from outside the region, imports, other
proposed units etc.
Price structure: The prices assumed by the entrepreneur should be realistic vis-a-vis
those of his competitors. If his prices are out of tune with those prevalent in the
market, he will definitely be placed out of the market. Further since his products are
still new, they must have a competitive edge to make the presence felt.
Marketing Strategy: The final strategy to market the goods would evolve out of the
various points as above and the marketing strategy of the competitors.
The collection of data for the purpose of the market survey may involve desk
research, field investigations, discussion with knowledgeable sources etc.

Risk Measurement:
Risk in banking: Risk in banking is the possibility that the outcome of an event
could bring up adverse impacts. Such outcome could either result in a direct loss
earnings or may result in imposition of constraints on bank‟s ability to meet its
business objectives. Such constraints pose a risk as these could hinder a bank‟s ability
to conduct its ongoing business to take benefit of opportunities to enhance its
business. Regardless of the sophistication of the measures, banks often distinguish
between expected and unexpected losses. Expected losses are those where the bank
knows with reasonable certainty that they will occur, whereas unexpected losses are
those which are associated with unforeseen events.
Risks are usually defined by the adverse impact on profitability of several distinct
sources of uncertainty.
Credit Risk:
The credit risk is generally made up of transaction risk and portfolio risk. The
portfolio risk in turn comprises intrinsic and concentration risk. The credit risk of a
bank‟s portfolio depends on both external and internal factors.
External Factors are State of the economy, Wide swings in commodity/equity prices,
Foreign exchange rates and interest rates, Trade restrictions, Economic sanctions,
Government policies etc
Internal factors are Deficiencies in loan policies/administration, Absence of
prudential credit concentration limits, Inadequacy defined lending limits for Loan
Officers/Credit Companies, Excessive dependence on collaterals, Inadequate risk
pricing, Absence of loan review mechanism etc.
Credit Risk Management:

Credit Risk Management encompasses a host of management techniques, which help
the banks in mitigating the adverse impacts of credit risk.
 Credit Approving Authority
 Prudential Limits
 Risk Rating
 Portfolio management
 Loan Review Mechanism(LRM)
Credit approving authority: Each bank should have a carefully formulated scheme
of delegation of powers. The banks should also evolve multi-tier credit approving
system where the loan proposals are approve by an Approval Grid or a Committee.

Prudential limits: In order to limit the magnitude of credit risk, prudential limits
should be laid down on various aspects of credit like stipulated benchmarks for the
different ratios, borrowing limits prescribed by Reserve Bank to provide a filtering
mechanism, maximum exposure limits to industry, sector, etc.
Risk rating: Banks should have a comprehensive risk scoring/ rating system that
serves as a single point indicator of diverse risk factors of counterparty and for taking
credit decisions in a consistent manner. To facilitate this, a substantial degree of
standardization is required in ratings across borrowers. The risk rating system should
be designed to reveal the overall risk of lending, critical input for setting pricing and
non-price terms of loans as also present meaningful information for review and
management of loan portfolio. The risk rating, in short, should reflect the underlying
credit risk of the loan book.
Risk pricing: Risk-return pricing is a fundamental principle of risk management. In a

risk-return setting, borrowers with weak financial position and hence placed in high
credit risk category should be priced high. Thus, banks should evolve scientific
systems to price the credit risk, which should have a bearing on the expected
probability of default. The pricing of loans normally should be linked to risk rating or
credit qualiy. The probability of default could be derived from the past behaviour of
the loan portfolio, which is the function of loan loss provision/charge offs for the last
five years or so.
Portfolio management: The existing framework of tracing the nonperforming loans

around the balance sheet date does not signal the quality of the entire Loan Book.
Banks should evolve proper systems for identification of credit weaknesses well in
advance. Most of international banks have adopted various portfolio management
techniques for gauging asset quality.
The CRMD, set up at Head Office should be assigned the responsibility of periodic
monitoring of the portfolio. The portfolio quality could be evaluated by tracking the
migration (upward or downward) of borrowers from one rating scale to another. This
process would be meaningful only if the borrower-wise ratings are updated at
quarterly/half-yearly intervals. Data on movements within grading categories provide
a useful insight into the nature and composition of loan book.
Loan Review Mechanism: LRM is an effective tool for constantly evaluating the
quality of loan book and to bring about qualitative improvements in credit
administration. Banks should, therefore, put in place proper LRM for large value of
accounts with responsibilities assigned in various areas such as, evaluating the
effectiveness of loan administration, maintaining the integrity of credit grading

process, assessing the loan loss provision, portfolio quality, etc. The complexity and
scope of LRM normally vary based on bank‟s size, type of operations and
management practices.
Business Risk:
The assessment of this module is based on internal working of the Borrower and
relates to parameters such as market position, operating efficiency, after sales service,
distribution set up, capacity utilization etc.
The various parameters taken into consideration for Business risk are:
Position of entity in target Market: The factors that need to be taken into account
include presence in a niche market, strong and established relationship with the
customers, perceived quality of products of the company, market share, threat of
substitutes, etc.
Assessment of immediate buyers: Immediate buyers for the purpose of this
parameters are those buyers who account for more than 40% of the business of the
entity. The factors to be taken into account are reputation, payment track record,
financial health, etc.
Dependence of customers: The smaller the number of customers, the greater is the
level of dependence.
Marketing and selling agreement: A long-term contract gives a great degree of
stability to the business, as compared to an adhoc arrangement.
Criticality of component manufactured- The criticality of the component in the end
product determines the leverage that the entity has with its customers on various
business aspects.
Proximity to customers: An entity that is closer to its target market is at a relative
advantage. However the term proximity has to be evaluated not just in terms of
geographical proximity but should also take into account several critical factors
including distribution network, dealer network, branch network, warehouses,
communication channels etc.
Pricing/bargaining powers with customers: There are many customers willing and
able to purchase products and services provided by the industry. They have
information necessary to compare true price and features of alternative competitors.
The trend in the number of customers, size of their purchases and their negotiating
power can be captured through this manpower.
Availability of skilled manpower: Any kind of labour supply constraint/unrest for a
long period of time will have an adverse impact on the profitability of the entity.
Environment Risk: This factor assesses the measures adopted by the entity against
environmental issues like pollution, depletion of ground water / forest cover etc.
Capacity utilisation: Optimum utilisation of installed capacity will reflect the cost
effectiveness and efficiency of the entity.

Nature of technology employed: Use of advanced technology helps in improving the

efficiency. Better the technology used better is the score.
Flexibility in manufacturing: The entity having facilities capable of manufacturing
a number of products with minimal additional investments would score high in this
parameter.
Availability of power and other facilities: This factor evaluates the ability of the
entity to ensure trouble free availability of power and other utilities. Thus an entity
with captive source of power will score higher than others with not so reliable
sources.
Trend in price of raw material: The ability of an entity to bring down its unit price
on raw materials may be viewed positively. The trend in unit cost of raw materials in
relation to industry trend may be compared while scoring this factor.
Availability of key Raw material: This factor evaluates the ability of the entity to
ensure trouble free availability of key raw materials.
Bargaining power with suppliers: Suppliers bargaining power is likely to be high
when:
 The market is dominated by a few large suppliers rather than a fragmented
source of supply.
 There are no substitutes for a particular input.
 The suppliers customers are fragmented so their bargaining power is low.
 The switching costs from one supplier to another are high.
Financial risk:
The assessment of this module is based on internal working of the Borrower and
relates to parameters such as past and projected financials.
The various parameters taken into consideration for Business risk are:
ROCE: Profit Before Interest and Taxes (PBIT) / Capital Employed. Where capital
employed=(Equity Capital + Preference Capital > 12 years+ Share premium +
Revaluation Reserves + General Reserves + Other Reserves & surplus + Short term
debt + Long term debt + Deferred Tax liability- Intangible Assets-Revaluation
reserves). The parameter gets automatically scored by RAM based on the benchmarks
provided.
PAT/Net sales: The ratio is defined as PAT after Extraordinary & prior period items.
Total outside liabilities/Total Networth: TOL/TNW = (long term debt + short term
debt + other current liabilities)/( equity capital + preference capital >12 years + share
premium + revaluation reserves + general reserves + other reserves & surplus –
intangible assets – revaluation reserves). If this case is being assessed as a ”company
without project” this ratio is to be computed based on the first year of projections. If
this case is being assessed as a “company with project” this ratio is to be computed

based on the Total Outside Liabilities for the company including the project for the
optimum year of operations.
Current Ratio: Current assets/ liabilities.
This ratio is to be computed based on the latest available financial results.
Accounting Quality: Accounting Quality measures the quality of financial
statements. Poor financial accounting practises will result in inflated results.
Interest Coverage:
Profit before interest, depreciation and tax (PBDIT) / Interest and Finance Charges.
If this case is being assessed as a “company without project this ratio is to be
computed based on the first year of projections. If this case is being assessed as a
“company with project” this ratio is to be computed for the company including the
project based on the Interest Coverage ratio for the optimum year of operations.
DSCR: The ratio is calculated to check if the borrower will be able to repay the debt.
Ability to raise debt from banks / financial institutions: Scoring to be based on

 long term debt equity ratio.
 total outside liabilities to tangible net worth.
 number of banks dealing with
 investments in liquid assets
 whether the entity has raised debt from the market in the past or not
 entity‟s external credit rating if available
 market reputation of the entity.
Ability to raise equity from market: Subjective scoring based on

 Whether company is listed in the stock market, especially NSE/BSE
 if listed, stock market perception reflected by statistics like p/e ratio, current
share price, 52 week h/l , trading volumes etc
 Stake of FI/FII in the company
 Market reputation of the company
Ability to raise equity from own sources: subjective scoring based on

 Personal wealth of promoters
 Commitment of the promoters to the entity
 Financial strength of group companies (TOL/TNW, Current Ratio and other
ratios)
 Any instances in the past when the group companies have bailed out any
ailing company in the group.

Industry Risk
The assessment of this module which is external to borrower and is done by
assessment of industry related macroeconomic parameters like demand supply
gap/capacity utilization level/financial ratios like ROCE etc applicable to the specific
industry and having different risk weights.
The various parameters taken into consideration for Business risk are
Length of operating cycle: Operating cycle refers to the sum of debtors days and
inventory days less creditors days.
Demand supply scenario: Demand supply gap would critically determine the
volumes, realizations and consequently the profitability of companies operating in an
industry. Industries wherein demand is expected to exceed available supply over a 3-
year horizon would score highly on this parameter. The outlook on demand supply
position would be largely be a function of expected demand growth. Present installed
capacities and commissioning of new capacities which would determine the supply
pattern in an industry.
Competition: Industries with high level of competition would score low on this
parameter.
Impact of change of technology: A heavily technology dependent entity will score
lower than the one which is relatively independent of technology.
Impact of government policies: This parameter captures the impact of government
policy on the industry over a 3-year time horizon. Issues relating to government
policies may include fiscal incentives/ disincentives, clarity in regulatory framework,
reservation of industries / sectors for SSIs, EXIM policies, government stance on
child labour, removal of subsidies/ quotas under different agreements etc. Industries
with favourable government policies would score high on this parameter.
Environmental Issues: This factor assesses the impact of environmental legislation
on the industry.
Stages in life cycle of the industry: There are many factors that influence the
product life cycle like the entry of a competitor into a common market or the sudden
emergence of a new fad. Hence, product life cycle management becomes extremely
crucial for maximizing the duration that a product proves to be viable. This factor
assesses the seasonal characteristics of an industry and hence is very crucial to gauge
the overall stability of the industry.
Management Risk
The assessment of this module is based on the internal working of the borrowers
management and relates to parameters such as repayment record, quality of
information submitted and group support etc.

Years of experience in the same business: A management with greater experience

in business places a company in an adventegeous position vis s vis the competition.
Credentials and background of the promoter: this factor assesses the credentials of the
family running or owning the business and also checks the integrity of the top
management.
Strategic initiatives of the management: These comprise of new initiatives taken by
the management, their implementation and overall impact on the company.
Management Succession plans: Assesses the clarity in succession plans, management
with sound succession plans should be taken positively.
Paying Method: This factor looks at the previous payment record of the entity
towards the company. It also looks at delays or defaults in the payment in the last 2-3
years.
Market Risk:
There are three types of market risks
 Liquidity Risk
 Interest Rate Risk
 Foreign Exchange Rate ( Forex ) Risk
Liquidity risk
The liquidity risk of banks arises from funding of long-term assets by short term
liabilities, thereby making the liabilities subject to rollover or refinancing risk.
Liquidity is the ability to efficiently accommodate deposit and other liability
decreases, as well as, fund loan portfolio growth and the possible funding of off-
balance sheet claims.
A bank has adequate liquidity when sufficient funds can be raised, either by
increasing liabilities or converting assets, promptly and at a reasonable cost. It
encompasses the potential sale of liquid assets and borrowings from money, capital
and forex markets. Thus, liquidity should be considered as a defence mechanism from
losses on fire sale of assets.
Interest rate risk

Interest Rate Risk (IRR) refers to potential impact on Market Value of Equity (MVE),
caused by unexpected changes in market interest rates. The management of Interest
Rate Risk should be one of the critical components of market risk management in
banks. The regulatory restrictions in the past has greatly reduced many of the risks in
the banking system. Deregulation of interest rates has, however, exposed them to the
adverse impacts of interest rate risk. The Net Interest Income (NII) or Net Interest
Margin (NIM) of banks is dependent on the movements of interest rates.

Any mismatches in the cash flows (fixed assets or liabilities) or re pricing dates,
expose banks NII or NIM to variations. The earnings of assets and the cost of
liabilities are now closely related to market interest rate volatility.
Foreign exchange risk

Forex risk is the risk that a bank may suffer losses as a result of adverse exchange rate
movements during a period in which it has an open position, either spot or forward, or
a combination of the two, in an individual foreign currency. The banks are also
exposed to interest rate risk, which arises from the maturity mismatching of foreign
currency positions. Even in cases where spot and forward transactions may produce
mismatches. As a result, banks may suffer losses as a result in premium/discounts of
the currencies concerned.
Banks are concerned about the financial strength and the performance of the
borrowers. It is necessary that all borrowers are of good credit risk and there should
not be any shadow of doubt about the safety of the funds lent. The investigation
process carried out by the Bank for taking a credit decision is called "credit analysis".
The main source of information for judging the viability and financial strength of
operations of the borrower, are financial statements which consist of two parts, viz.
Balance Sheet and Profit & Loss Account and these are studied together for a
meaningful analysis. The system or approach for analysing a balance sheet depends
upon the purpose for which the study is undertaken.
The credit analysis that is performed by the bank mainly includes the following:
 Promoters and their business background
 Nature of the industry/business
 Factors of production
 Past financial record, present position and future profitability
 Financial Planning
 Borrower's integrity
 Purpose of advance
 Repayment programme
 Security and other terms and conditions
 Associate concerns, if any, and their performance
 Promoters'/Borrowers' dealings with the Bank and other banks, where
applicable
Statement Analysis:

Statement analysis is analysis of financial statements alone, while the decision to lend
should be taken only on the basis of total analysis or appraisal of all the relevant
information which includes analysis of financial statements.
Balance Sheet: Balance sheet is a statement of assets and liabilities of a concern as of

the close of business on a particular day. In a nutshell, it shows what the concern
owes (liabilities) to others and what others owe to it (assets) which should be equal.
The mode of classification of assets and liabilities for the bank‟s analysis of the
balance sheet is different from the mode of classification as per the Companies Act,
e.g. term loan instalments falling due within one year from the date of the balance
sheet, are to be shown as current liabilities even though the entire term loan is shown
as term liability in the printed balance sheet.
Profit and Loss account: The profit and loss account is an important statement, as it
shows the income and expenditure of a concern during the year. The real protection to
the lender is the ability of the concern to perform well and make a reasonable profit
and this information will be available only in the profit and loss account. A weak
balance sheet may not necessarily represent a bad credit risk if profitability is good
and is improving from year to year. Conversely, a concern with a sound balance sheet
may not be a good credit risk, if it is incurring losses consistently.
A careful study of the profit and loss is carried out for determining the credit
worthiness of the borrower. This is mainly done by checking the various ratios.
Ratio Analysis: Ratio analysis is of prime importance in the analysis and

interpretation of balance sheet and Profit and Loss Account. Any study thereof, will
be incomplete without ratio analysis.
Some of the key ratios calculated by the bank for analysis are as follows:
Current Ratio:
Current Ratio = Current Assets/Current Liabilities
It is the barometer of short term liquidity of the company. In other words, the working
capital resources position is reflected in current ratio and hence higher the ratio, better
the liquidity. Slip back or fall in current ratio would generally indicate diversion of
short term funds (either for acquisition of fixed assets or for outside investment) or
cash loss. Hence, any adverse trend in current ratio should be carefully examined.
Generally a current ratio of 2:1 is considered satisfactory. However, this benchmark is
not applied uniformly as it varies from industry to industry.
Acid Test or Quick Ratio: This is a refinement of current ratio and here "Quick

Assets" are related to "Quick Liabilities". The former include all current assets
excluding inventory and the latter include all current liabilities excluding bank
borrowings and quick ratio is arrived at as under:
Quick Ratio = (Current Assets – Inventory)/ (Current Liabilities - Bank Borrowings)
Though a benchmark level of 1 is considered satisfactory as in the case of any other
ratio, this cannot be considered as ideal under all circumstances.
Solvency Ratios: This ratio measures the ability of the concern to repay all external
debts or outside liabilities out of its own assets on a long term basis.
Solvency Ratio = Net Tangible Assets/ Total Outside Liabilities
Net tangible assets mean total assets of the concern less all intangible and fictitious
assets. Total outside liabilities mean total liabilities of the concern other than its net
worth. Ideally this ratio should be more than 1. Larger the ratio, better is the solvency
of the unit.
Debt-Equity Ratio: The debt equity ratio is arrived at as under:

Debt-Equity Ratio = Debt/ Equity
This indicates relationship between the external borrowings and the own funds of the
concern. In certain cases, only the long term debt is taken into account whereas in
certain other cases all debts including current liabilities are taken into account. A
debt-equity ratio of 2:1 is considered reasonable.
In Bank of Baroda, following ratio is considered for financial statement analysis:
Total Outside Liabilities (TOL)/ Net Worth
Here TOL means Total Liabilities - Net Worth. This should be less than 2:1 in
general.
Fixed Assets Coverage Ratio: This shows the number of times the value of fixed
assets (after providing depreciation) covers term liabilities.
Fixed Assets Coverage Ratio = Net Fixed Assets/Long/Medium Term Debts
This should be more than 1.
Debt Service Coverage Ratio (DSCR): Ability of a concern to service its term
liabilities can be gauged from this ratio. This ratio is applied while appraising all term
loan proposals and investment decisions. Debt servicing means payment of interest
and installments on term loans. DSCR measures whether interest and installments can
be paid out of internal generation of funds. The ratio is worked out as under:
DSCR = (PAT + DEPRECIATION + INTEREST ON TERM LOAN) /(INTEREST
ON TERM LOAN + TERM LOAN INSTALMENTS)

A ratio of 2 would indicate the concern's internal generation of funds would be twice
of its commitments towards term loan obligations and interest thereon. This ratio
should be more than one in order to take care of any eventualities in the profits
position of the concern and also to leave certain surplus with the concern for its
normal growth and withdrawal. The ideal ratio would be around two. However, a
larger ratio, say more than two, would indicate that the concern's capacity to repay is
much more than its commitments and hence repayment schedule is required to be
accelerated. If the ratio is too low, the amount of instalment is required to be reduced.
However, the repayment schedule should not extend beyond the maximum period
permitted under the relative scheme.
Break Even Analysis:

Break- even point (BEP) of a firm refers to that level of sales at which, it recovers all
its costs. This is the point where the unit neither makes profit nor loss. It is important
while assessing the performance or processing a credit proposal to ascertain the level
at which the firm breaks even, so as to know its shock absorbing capacity. Thus,
break even analysis is an important tool in the hands of a credit officer while
analysing a credit proposal.
BEP in Quantity = Fixed Costs / (Unit Sale Price - Unit Variable Cost)
OR
BEP in Value (Rs.) = Fixed Cost x Sales / (Sales - Variable Cost (VC))
Fund Flow Analysis:

Funds flow analysis has assumed great importance in the study of the financial
position of a business concern. It is basically a study of movement of funds during a
particular period. Change in the financial position of an enterprise is brought about by
"Flow" of funds from time to time and in different segments.
Sensitivity analysis: Sensitivity analysis to be done for increase in input cost,

decrease in selling price, decrease in production capacity, increase in interest rate or
any other major factor affecting the profitability. Effect of these changes on average
Debt Service Coverage Ratio/minimum Debt Service Coverage Ratio /Internal Rate
Return is ascertained.
Net present Value: Net present value (NPV) or net present worth (NPW) is defined
as the total present value (PV) of a time series of cash flows. It is a standard method
for using the time value of money to appraise long-term projects. Used for capital
budgeting, and widely throughout economics, it measures the excess or shortfall of
cash flows, in present value terms, once financing charges are met.


NPV is an indicator of how much value an investment or project adds to the firm.
If It means Then….
NPV the investment would add the project may be
>0 value to the firm accepted
NPV the investment would the project should
<0 subtract value from the be rejected
firm
NPV the investment would We should be
=0 neither gain nor lose value indifferent in the
for the firm decision whether to
accept or reject the
project. This project
adds no monetary
value. Decision
should be based on
other criteria, e.g.
strategic
positioning or other
factors not
explicitly included
in the calculation.
Credit rating model used by Bank of Baroda:
The CRISIL rating model (11 models) has been implemented for commercial
advances customers enjoying credit limits of Rs 25 lacs and above (FB+ NFB) from
February 2007 onwards. The 11 models can be stated as follows:
1. Large Corporate
2. SME (Manufacturing Sector) incl. Commercial Enterprises
3. SME (Services)
4. Traders
5. Banks
6. NBFCs
7. Brokers
8. Infrastructure (Power)
9. Infrastructure (Roads & Bridges)
10. Infrastructure (Ports)
11. Infrastructure (Telecom)

Credit rating methodology:

The New CRISIL Rating Models for Commercial Advances are based on two
dimensional rating methodology specified under Basel -II Accord requirements. The
credit risk rating process as per New CRISIL Rating Models involves three types of
ratings for each credit facility viz.
 Obligor (Borrower) Rating - for credit worthiness indicating the Probability of
Default (PD)
 Facility Rating - representing the Loss Given Default (LGD)
 Composite Rating - which is indicative of the Expected Loss (EL)
Figure 4.1 Credit Rating Model
Obligor (Borrower) Rating:

The obligor (Borrower) rating is indicative of creditworthiness of an obligor or the
Probability of Default (PD) and it is based on the assessment of past and projected
cash flows of the company.

For assessment of an obligor, the rating structure consists of evaluation by way of

four modules viz. 1) Industry Risk, 2) Business Risk, 3) Financial Risk and 4)
Management Quality.
Industry Risk: The assessment of this module which is external to the Borrower and
is done by assessment of Industry related macro economic parameters like demand
supply gap / capacity utilisation level / financial ratios like ROCE / OPM etc.
applicable to the specific Industry and having different risk weights.
Business Risk: The assessment of this module is based on internal working of the
Borrower and relates to parameters such as after sales service, distribution set up,
capacity utilisation etc. The parameters, which are only relevant to a particular
industry, are selected for scoring having different risk weights.
Financial Risk: The assessment of this module is based on Internal working of the
Borrower and relates to parameters such as past (not in case of a green field /
infrastructure company under implementation stage) and projected financials. The
CMA based data input sheet is loaded into the software and the same allows
computation of financial rating automatically based on the computation of financial
ratios like Net Profit Margin, Current Ratio, DSCR, Interest Coverage etc.
Management Quality: The assessment of this module is based on internal working
of the Borrower‟s management and relates to parameters such as past repayment
record, quality of information submitted, group support etc.
Obligor Rating Grades range from BOB-1 to BOB-10.
Grade Nature Description Definition of

No of obligor grade
Grade
1 BOB -1 Investment Companies Rated
Grade- BOB –1 are judged
Highest to offer highest
Safety safety of timely
payment. Though
the circumstances
providing this
degree of safety is
likely to change,
such changes as
can be envisaged

are more unlikely

to affect adversely
the fundamentally
strong position of
such issues.
2 BOB- 2 Investment Companies rated
Grade High BOB 2 are judged
Safety to offer high safely
of timely payment.
Changes in
circumstances
providing this
degree of safety
have low impact on
the fundamentally
strong position of
such issues.
Grade High BOB 3 are judged
to offer high safety
of timely payment.
They differ in
safety from BOB 2
only marginally.
Grade BOB 4 are judged
Adequate to offer adequate
payment. However
changes in
circumstances can
adversely affect
such issues more
than those in higher
rated grades.
Moderate to offer moderate
payment of interest

and principal for

the present.
However changing
circumstances are
likely to lead to a
weakened capacity
to re-pay interest
and principal than
for companies in
higher rated grades.
Moderate to offer moderate
payment of interest
and principal for
the present. There
is only a marginal
difference in the
degree of safety
provided by issues
rated BOB 5.
7 BOB- 7 Sub Companies rated
Investment BOB 7 are judged
Grade to carry inadequate
Inadequate safety of timely
Safety payment. While
they are less
susceptible to
default than other
speculative grades
in the immediate
future, the
uncertainties that
the issuer faces
could lead to
inadequate capacity
to make timely
payments.
8 BOB- 8 Sub Companies rated

Investment BOB 8 have a

Grade – High greater
Risk susceptibility to
default. While
currently payments
are met, adverse
business or
economic
conditions can lead
to lack to ability or
willingness to
repay.
9 BOB- 9 Default Companies rated
Substantial BOB 9 are
Risk vulnerable to
default. Timely
payment of interest
and principal is
possible only if
favourable
circumstances
continue.
10 BOB- Default Companies rated
10 BOB 10 are in
default or are
expected to default
on maturity. Such
investments are
extremely
speculative and
returns from these
may be realised
only on re-
organisation or
liquidation.
Table 4.1 Obligor rating
Bank has accepted BOB-6 as the cut-off point for the acceptance of an obligor
(borrower) based on Obligor (Borrower) rating carried out as per the applicable
model.

Facility Rating: Facility Rating involves assessment of the security coverage for a
given facility and indicates the Loss Given Default (LGD) for a particular facility.
Facilities proposed/ sanctioned to a company are assessed separately under this
dimension of rating.
Grade No Nature of Grade Description

I FR- 1 Highest Safety
II FR- 2 Higher Safety
III FR- 3 High Safety
IV FR- 4 Adequate Safety
V FR- 5 Reasonable Safety
VI FR- 6 Moderate Safety
VII FR- 7 Low Safety
VIII FR- 8 Lowest
Safety/Unsecured
Table 4.2 Facility rating
Composite Rating: It is the matrix or the combination of PD and LGD; indicates the
Expected Loss in case the facility is defaulted. The Composite Rating is worked out
automatically by the software based on the matrix of Obligor (Borrower) Grade (BOB
Rating) and Facility Rating Grade (FR).
Grade Nature of Combined Grades

No Grade
I CR- 1 Minimum (Lowest) Expected Loss
II CR- 2 Lower Expected Loss
III CR- 3 Low Expected Loss
IV CR- 4 Reasonable Expected Loss
V CR- 5 Adequate Coverable expected Loss
VI CR- 6 Moderate Expected Loss
VII CR- 7 Extra Expected Loss
VIII CR- 8 High Probability of Loss
IX CR- 9 Higher Probability of Loss
X CR- 10 Highest Expected Loss
Table 4.3 Composite rating
Pricing: The composite Rating or the Combined Rating (CR-1 to CR-10) is

computed on the basis of matrix of Obligor Rating for credit worthiness and the
Facility Rating representing the expected loss in case of default. This loss has to be

recovered from the borrower by way of risk premium over the BPLR. For the purpose
of fixing of rate of interest the mapping of existing (AAIPL Models) rating grades
with the CRISIL Rating Models is as under:
Grade Nature Combined Grade ROI for

No of borrowers
Grade mapped
with
existing
ratings
1 CR- 1 Minimum (Lowest) AAA
Expected Loss
2 CR- 2 Lower Expected Loss AA
3 CR- 3 Low Expected Loss A/BBB
4 CR- 4 Reasonable Expected BB
Loss
5 CR- 5 Adequate Coverable B
Expected Loss
6 CR- 6 Moderate Expected C
Loss
7 CR- 7 Extra Expected Loss C
8 CR- 8 High Probability of D
Loss
9 CR- 9 Higher Probability of D
Loss
10 CR- 10 Higher Probability of D
Loss
Table 4.4 Combined rating
Process of Credit rating:

Step 1: Selection of Appropriate Model- Based on the criteria above, the applicable
model is to be selected for rating exercise.
Step 2: Data Sheet Preparation- Having selected one of the applicable models for
the rating purpose, the prescribed data sheet is filled in by the credit officers in the
off-line mode after due diligence of the CMA / Project financials etc by the
appropriate authority, for that particular borrower.
Step 3: Rating Exercise- A credit officer is supposed to have done prior study of
company‟s operations and should have analysed rating parameters which are to be

rated / scored for that particular company under different modules. Prior study is
essential, as the allotted score for a particular parameter has to be supported with
proper justification at the space provided for the said purpose on the computer screen.
 Rating of Industry Risk Score (except for SME / trading) – The credit rating
officer has to select the relevant industry sub sector at the activity page during
the rating process. Industry Risk score for all applicable parameters are
already uploaded on the server for all industry sub sectors and the same is
automatically filled in for the selected industry sub sector at the industry risk
module during the rating process. The credit risk rating officer or the validator
will not be able to change the industry risk score.
 Rating of Industry Risk Score (for SME / trading) – The credit Rating
officer has to carry out the rating of all parameters after selecting the
dependent industry and the risk scores under various parameters are not made
available as in the case of other models.
 Financial Risk Assessment: Data sheet for that particular borrower is to be

uploaded at appropriate prompt. While most of the parameters are scored
automatically, only certain subjective parameters like comments on Obligor‟s
(Borrower‟s) ability to raise debt / equity etc. are required to be scored with
proper justification.
 Business Risk / Management Quality Risk assessment: The parameters

relevant to the industry of operations of the Obligor (Borrower) are
automatically made available for scoring. The other subjective parameters are
required to be scored by credit officer with proper justification.
.
Step 4: Facility Rating- After completing the obligor rating as above, facility rating
is to be carried out. For this purpose, the security value is to be appropriated first
against the respective facilities and thereafter the excess security over the outstanding
amount of facility enjoyed is to be worked out. This excess security is distributed over
the remaining facilities in proportion to the availment.
Step 5: Composite Rating (CR Rating)- This rating is automatically worked out,
once the obligor rating and the facility rating are in place. With the completion of
above five steps, the credit risk rating process is over.
Step 6: Submission of the credit rating to the Validator: The credit rating officer is
required to get the hard copy print outs of the “Interim Company Report”. One copy

of the above stated “Interim Company Report” is to be sent to the appropriate

validator. A credit officer has also to submit the hard copies of the financial data
(audited or provisional) along with the relevant records, which have been used during
the risk rating process to the validator for further processing. The second copy of the
“Interim Company Report” has to be kept by the credit rating officer for records.
Step 7: Validation- The validator is required to validate the credit risk rating based
on the financial data (audited or provisional) & other relevant records, which have
been used during the credit risk rating process by the rating officer. However, all
proposals falling under the powers of branch Manager are to be validated at Regional
Office Level or the reporting authority level as the case may be. After due validation,
the validator is required to take out - - hard copy print outs of the „Interim Company
Report‟ and send one copy to the credit rating officer, the other copy to the
sanctioning authority and the third copy may be kept on records.
Step 8: Submission of Validated Credit Risk Rating Report and other MIS
Reports to the Sanctioning Authority- The sanctioning authority has no role during
the process of credit risk rating as also during the process of validation. After the
completion of validation process, the concerned credit officer at the office of
sanctioning authority will receive a hard copy of the validated rating from the
validator as also a soft copy through the system. A copy of the validated rating report
is to be attached to the proposal.
Preparation of Proposal:
When a decision has been taken by the Branch Manager to consider favourably the
borrower's request for sanctioning of various credit facilities, the branches prepare a
formal proposal in writing. The proposal is prepared for all borrowers irrespective of
size of the credit facilities. The proposal is made depending upon the information
memorandum submitted by the borrower or the debt syndicator as the case may be.
For a credit proposal exceeding Rs. 50 lacs (fund based), the format contains about 32
pages, of which Part I contains 15 pages and incorporates salient features of the
proposal and Part-II contains Annexures A to L analysing the financial statement of
the company in various forms.
Section I of the proposal: It contains information like:

 Borrower profile
 The gist of the project
 Banking arrangement
 Promoter‟s background and shareholding pattern

 Issue for consideration

 Some key financials
 Group companies
 Security coverage
 Other information, if any
 Justification (to the authority as to why should the bank consider this project)
 Any concessions, modifications, deviations
 Recommendation
Section II of the proposal: It assesses the financial parameters:

 Financial performance using the various statements
 Comments on projections
Section III of the proposal: It assesses the current industry trend and perception
 The sector overview
 Other companies in the same sector
 SWOT of the borrower
Further, some annexures may be attached as required by the proposal.
Documentation and Disbursals

After a credit proposal is appraised and Sanctioned/Reviewed by competent
authorities, the detailed terms & conditions of the sanction should be communicated
to the borrowers, co-signatories and guarantors. Similarly any
modification/variation/waiver in the terms & conditions from time to time, should
also be promptly conveyed to the borrowers, co-signatories and guarantors in writing
& suitable acknowledgement/acceptance obtained. After obtaining the
acknowledgement as above, it is essential that before any disbursement/facility is
made available to the borrower, bank completes the Documentation in all respects.
The bank has adopted the policy of “No Documentation, no Disbursal”.
Documentation is the process of charging securities covering the advance in favour of
the bank. It involves obtaining all relevant standard documents depending on the
nature of facility, securities stipulated, constitution of the borrower etc. duly executed
by all the concerned parties.
Execution of Documents: There are certain rules that the bank follows while the
execution of the documents takes place. Some of them are as follows:
 All documents should be duly filled in and adequately stamped, wherever

necessary, before execution.

 Ante-dating of documents to cover the advances/facilities already released is

fraught with serious consequences.
 Documents should be executed at the branch and in case of consortium/joint
documents at the office of one of the consortium members. It is not correct
practice to hand over the documents to the parties for getting the same executed
without the presence of Branch officials.
 Documents must ordinarily be executed in the presence of the Manager. If the
documents are to be executed other than at the branch premises, they should be
signed in the presence of an authorised official.
 The nature of documents to be obtained depends upon the type of the facility and
the constitution of the borrower. It is ensured that all the prescribed documents are
executed and the securities are charged before the advance is disbursed.
 When fresh documents are obtained, new account need not be opened. Details of
fresh documents should be recorded in the ledger folio and other registers.
 Where the facilities are guaranteed by a third party, the guarantor should sign the
Letter of Acknowledgement of Debt alongwith the principal debtors.
 New account should be opened and fresh documents obtained when there is a
change in the constitution of the borrower.
 Where an existing charge on securities is to be extended to cover either
enhancement or additional facilities, the extension should be restricted to the
amount of enhancement or additional facility and the documents should be taken
accordingly.
 It may be noted that the extension of charge will not hold good once the facility,
for which the charge was originally created, is liquidated. Therefore, whenever a
charge on securities created for a term loan/demand loan facility is extended to
secure the other facilities, the original charge should be kept alive by maintaining
a nominal debit balance of Rs. 100/- in the term/demand loan account.
 Where an advance is made against securities standing in the name of a third party
(and not in the name of the borrower), branches should obtain his/her guarantee
for the said facility. The person in whose name the securities are standing should
not join in the execution of documents (other than the general form of guarantee)
in such cases as otherwise he/she would become a joint borrower.
 RBI has instructed all banks to include a suitable clause in the loan documents to
the effect that the borrower is prohibited from using the loan amount or any part
thereof for any purpose other than for which it has been sanctioned and if the bank
apprehends or it as reasons to believe that the borrower has violated or is violating
this condition, it has a right to recall the loan amount or any part thereof at once
notwithstanding anything to the contrary contained in the above or any other
agreement.

Renewal of documents
A Letter of Acknowledgement of Debt duly signed by all the singatories to the
original documents is obtained at the end of every second year and a fresh set of
documents should be obtained once in four years. However, in case of advances to
limited companies, except by way of pledge, and advances secured by mortgage,
fresh documents need not be obtained once in four years and it would suffice if a
LAD is taken once in two years. In every Letter of Acknowledgement of Debt,
mention is made not only to the documents, but also to all the previous letter/s of
acknowledgement of debt obtained subsequent to the execution of original
documents.
There are some other documents required which are kept on record like:
 Registration/modification of charge within 30 days of the execution of documents

with Registrar of companies in the case of limited companies; Registering the
power of attorney favouring the Bank where stipulated; Noting of
lien/assignment/rights etc. favouring the Bank with transport authorities, LIC,
UTI etc.
 Obtaining title deeds of the property to be mortgaged, approved lawyer's title
report and clearance certificate thereof; invoice of the assets financed; municipal
tax/land tax receipts; copies of licences wherever applicable; insurance policies;
valuation reports.
 Obtaining RBI's/Central Office approval of Selective Credit Control advances.
 No objection letter from the existing bankers/financial institutions, if any.
Scrutiny of documents: The documents prepared are verified by the Manager/ Jt.
Manager as to their correctness before they are handed over to the borrowers for
execution. After execution and delivery of the documents, they see to it themselves
that the documents are complete in all respects and that they are properly executed.
The following points are kept in view while scrutinising the documents:
 The prescribed documents as per sanction/administrative instructions are

taken.
 They are adequately stamped and duly defaced. In no case the date on the
stamps should be subsequent to the date of documents.
 They are executed in accordance with the constitution of the borrower and
also in personal capacities, where applicable.
 In the case of joint stock companies, necessary board resolution is passed for
execution of documents and a certified copy of the same is obtained.

Wherever necessary, the common seal is affixed in accordance with the

resolution and the relative narration is mentioned in the documents.
 Where the documents are signed by the attorneys, the relative powers of
attorney are registered in the books of the Bank. It should be ensured that they
have been conferred necessary powers to execute the documents on behalf of
the principals. Their representative capacity should clearly be indicated in the
documents.
 The guarantor's signature is duly verified.
 The partnership letter and all other documents are signed by all the partners of
the firm on behalf of the firm and also in their individual capacity.
 In the case of joint stock companies, the charges which require registration
under the Companies Act are registered with the concerned Registrar of
Companies within 30 days from the date of document/creation of charge. The
Certificate of Registration should be obtained at the earliest and attached to
the documents.
 The guarantee letter obtained from a firm in respect of facilities sanctioned to
another is signed by all the partners on behalf of the firm and also in their
individual capacity.
Documentation under single window concept of lending: There is a separate

procedure to be followed when there is consortium advances under the Single
Window Concept of Lending and particularly when the bank is the leader of the
consortium:
 The borrower should be required to execute only one document, which will be
signed by the Lead Bank on its own behalf and on behalf of other members.
 The Lead Bank shall complete the formalities connected with creation of
charge, etc. with the Registrar of companies.
 As soon as the documents are executed, the Lead Bank shall send a
confirmation in this regard to other members.
 The sharing of the security and the rights and responsibilities of the banks,
including the Lead Bank, should be documented by means of an inter-se
agreement among the members of the consortium. Such an inter-se agreement
could be of the nature of an omnibus agreement for all the consortia
arrangements, executed only one time among various banks participating in
consortia arrangements. Once an omnibus agreement has been executed, a
separate short agreement could be executed as a continuation of the omnibus
agreement as and when an individual consortium is formed.
 When documents as above have been executed, it would be the responsibility
of the Lead Bank to initiate the legal/recovery proceedings, where necessary

and share the proceeds of realisation on the basis of outstandings in the

accounts with different members as on the date of determination for starting
the recovery proceedings, provided the outstandings are within the sharing
pattern agreed to initially and no bank has exceeded its pre-determined share.
Disbursement of credit facilities
 No disbursement of the fresh sanction of / increase in credit facilities is made

without fulfilling following conditions:-
 Ensuring full compliance of the stipulated terms and conditions
(unless specifically exempted for compliance by the competent
authority).
 Getting the document duly vetted (wherever required) as per the
bank‟s extant guidelines.
 Ascertaining that the borrower has obtained necessary license,
permissions, clearance required for running the business.
 The pre- disbursement inspections/site visits.
 As per extant guidelines, following extra measures to be followed. In case of

advance accounts falling within the Branch Manager‟s powers, the Branch
Manager has to make necessary arrangement to ensure that aspects mentioned
above are complied with before disbursement.
 In respect of advances falling beyond the Branch Manager‟s powers, the
following procedure is to be adopted: -
 In respect of branches headed by officers upto middle management
grade/scale III, the necessary clearance may be obtained from the Deputy
Regional Manager (wherever posted) or from the Regional Head after
confirming due compliances as stipulated.
 In case of branches headed by executives in the rank of Chief Managers
necessary clearance may be obtained from the Regional Head (in the rank of
Assistant general Manager & above) after confirming due compliances as
stipulated.
 In case of branches headed by executives in the rank of Assistant General
Managers, necessary compliance may be obtained from the Zonal Head as
hitherto.
 All disbursements should be made strictly in terms of sanction.
 Where sanction stipulates direct payment to suppliers of
goods/machinery/services, it should be made accordingly without any
deviation.

 Every care and effort should be made to ensure that funds lent are utilised for
the purpose for which the same are intended to.
 The assets purchased out of the disbursals should be physically verified in
respect of make, number, capacity, manufacturer etc. by comparing with the
details shown in the invoices.
Post Sanction Control and Follow up of advances

Effective and thorough follow-up and monitoring of borrowal accounts are major
areas of credit administration. Howsoever carefully and meticulously an advance
proposal is appraised and considered, unless post-disbursement control is effective,
the whole purpose would be defeated.
Objectives of the follow- up procedure: The important objectives of follow-up of

credit facilities are:
 To ensure proper end use of funds, the funds should be used for the purpose,
for which these are given. It should not be used for any other purpose.
 To ensure that the operations of the borrower are on expected lines both
physically and financially.
 To test the assumptions of lending, advance is granted on the basis of
projections. All projections depend on a bundle of assumptions. Many of such
assumptions can and do go wrong. Actual working only shows whether the
assumptions have proved correct or not. Most important are capacity
utilisation, costs incurred, price level, market conditions etc.
 To ensure that the terms and conditions of sanction are satisfied, while
sanctioning an advance, bank stipulates certain conditions to be satisfied, such
as restrictions on declaration of dividend, expansion in capacity, or acquisition
of fixed assets, repayment of private borrowings etc.
 To ensure that the securities offered/charged are and continue to be in order.
Physical existence, valuation, quality turnover etc. are important.
 To detect whether any danger signals are developing indicating sickness.
Many a time, warning signals are thrown up indicating the
existence/emergence of a problem situation. Proper follow-up action only can
take care of such situation.
 To see whether there is any change in management structure, reconstitution,
death or resignation of a key person leading to the possible failure of the firm.
 To examine whether there is any change in the environment affecting the unit,
like Government Policies, Economic situations, crop failures etc.

 To evaluate the operations of the borrower in a constructive way and to

advise/devise measures for correction/ improvement etc. This will require a
total study of the operations, results and trends of the borrower.
 To formulate future programme/lines of action in the light of the operational
results or records.
 To anticipate problems and reorient plans of action in order to contain such
problems effectively. This requires the banker to take a futuristic view of
things and advise the borrower suitably.
Follow-up measures are of varied nature and would differ from case to case and
hence no set rules and procedures could be prescribed. Bank officials, at all levels are
expected to follow-up the borrowal accounts in their credit administration functions
with the professional skill and competence as the circumstances warrant. Basically, it
may be considered that so long as the borrower‟s business operations and availment
of credit are on the projected and approved lines, with adequate cash generation and
reasonable assets formation, the business is healthy and concomitantly, bank‟s
advance would also be healthy. Any imbalance to the above would be of serious
concern to the Bank, as it would adversely affect the Bank‟s advances. Hence,
monitoring measures are primarily aimed at detecting and locating the above
imbalance, if any. For this purpose, information and reporting system, which is
prompt and reliable, should be evolved.
Some of the sources available to the banks for monitoring and the scrutiny of the
available information is as follows:
Terms and conditions of sanction: These are stipulated after due processing of the
information relevant to the advances and hence would form the core of follow-up
action. These terms are usually stated by way of conditions precedent as well as
conditions subsequent to disbursement. The terms of sanction should be carefully
studied and the total compliance thereof, should be ensured so as to channelize the
Bank‟s funds only for approved purpose, that is ensuring end-use of funds.
Ledger account of borrowers: In most of the cases, ledger account of a borrower is
a mirror reflecting the conduct of business. An examination of the ledger folio
alongwith the stock and book-debt statements, would reveal the health of business
and about any diversion/siphoning of funds. Some of the aspects which are checked
in this case are the withdrawls from the account, the deposits in the account, the
debits and credits turnover, frequent of outward or inward cheques.
Stock Statements: It is a very effective tool for follow-up action as it contains
valuable information, such as production, performance, level of inventory etc.
Monthly scrutiny of each category of the inventory like raw materials, finished goods

etc. and its turnover, would reveal the validity of assumptions made at the time of
assessment of credit facilities. Some of the points on which the bank pays attention
are the place of storage and description of goods, accuracy of the valuation etc.
Quarterly/Half yearly statements: The purpose of these statements is to ensure the
regulation of credit on the basis of quarterly projections. For this purpose, operative
limits are to be worked out on the basis of these statements subject to a tolerance of
maximum 10% either way, utilisation beyond this level, would call for corrective
steps.
Apart from the above mentioned things the bank also makes certain follow up visits
to the company or the plant. Some of the inspections made by the banks, as a part of
the follow-up procedure are as follows:
Inspection of securities: Periodical inspection of the securities charged to the bank is

carried out. In case of certain infrastructure projects, the inspection is carried out at
every stage of the construction to ensure the progress of the construction. Further
instalments are disbursed only if the work progressing is found to be satisfactory.
Field visit by Authorities: As suggested by the “Study Group on Large Bank
Frauds” constituted by RBI, bank prefers periodical visits/interface/interaction with
the borrower by bank Officers / Executives at various levels to capture the features
causing concern in any advance account at an early stage and also to take corrective
action.
Stock Audit: In addition to conducting stock inspections and book debts inspection
by branch officials, random inspection by concurrent auditors, annual stock Audit is
to be conducted compulsorily in all accounts having fund based working capital limits
plus DA LC limit of Rs.5 crores.
Credit Audit/Loan Review mechanism:

Credit Audit of eligible accounts of one Region is to be carried out by Officers of
another Region within the Zone. Each Zone to identify number of officers having
adequate credit background, Region wise, depending upon the eligible accounts in the
Zone. The officers identified for carrying out Credit Audit may be from the Regional
Office or any of the Branches in the Region. Zone to allot the eligible accounts to
identified officers in such a manner that all eligible accounts of one Region are
allotted to officers of another Region within the Zone and the Credit Audit is
completed within the overall stipulated period i.e. within 3 to 6 months from the date
of sanction / review.
Job role of Credit Auditor: The Credit Auditor is to visit the branch which has
appraised the advance and where the main operative credit limits are made available

and complete the audit work as per the format approved by the Board. Credit Auditor
is not required to visit the Borrower‟s factory / office premises. While preparing the
Credit Audit Report, he will call for report on the conduct of accounts from the
respective branches where limits are parked. The main emphasis of the Credit Auditor
will be on the following:
 To verify compliance of Bank‟s laid down policies and regulatory compliance

with regard to sanction
 To examine adequacy of documentation
 To conduct the credit risk assessment (including verification of latest Credit
Rating)
 To examine the conduct of account and follow up looked at by the line
functionaries
 To oversee action taken by the line functionaries in respect of serious
irregularities
 To detect early warning signals and suggest remedial measures thereof
Credit Monitoring
The bank has time and again introduced various systems for monitoring large
borrowal accounts whether sanctioned by the corporate office or by other authorities
to have close monitoring of such accounts.
Objectives: The basic objectives of introducing such systems are:
 Understand the current financial condition of the borrower.

 Confirm that the credit is in compliance with the sanction terms.
 Ensure that the interest and principal-repayments are serviced timely.
 Ensure that the drawings are covered by adequate drawing power.
 Ensure that the customer is using the envisaged cash flows are being timely
realized by the borrower.
 Ensure that securities / collaterals are in conformity with the sanction terms
and have not deteriorated.
 Identify potential problem, external and / or internal, well in time for taking
corrective measures.
 Keep a watch over the changing policies of the Government, changing
market- paradigms, and change in management control of the account to sense
a feature likely to cause concern and take preventive measures.
 To detect sickness at an early stage, to take timely corrective action and to
improve the quality of bank‟s advances

 To prevent emergence of NPAs which have an adverse impact on the bank in

several ways
Advance account with weak financials and poor credit rating is to be monitored and
Status Review of these accounts is to be done on regular basis to protect interest of
the bank. Branches therefore submit „Status Notes‟ on all „B‟ & „C‟ rated accounts
with limit Rs. 10 crores and above for every quarter.
Slippage Prevention Task Force (SPTF): The high level of NPAs is a cause of
concern for everyone in the Bank. Prevention of slippage and reduction of NPAs has,
therefore, been one of the key thrust areas for our bank. It was in this context that the
idea of constituting Slippage Prevention task Force (SPTF) has been conceived and
implemented in the bank. SPTF at the Zonal level may comprise of 3 to 4 members,
one of whom should be an Assistant General Manager or a Chief Manager, who will
be Head of the team.
The main job role of the members of the SPTF is:

 To build up and maintain a database of all account in their Zone having credit
facilities of Rs. 1 crore and above. With a view to exercise risk based
monitoring of the account, a separate data base of accounts which are „B‟ &
„C‟ rated and where there is continuous decline in credit rating, besides all
restructured accounts is also maintained.
 To lay focused attention to accounts which are potential NPAs (though
classified as standard) and have features which indicate tendency to slip
downward because of financial or technical reasons. To initiate the process of
intensified monitoring with a view to address all disbursing features in each of
the accounts and coordinate with branch managers to work out strategies of
tackling the adverse features and problems in the account.
 To visit the critical branches (branches which have large amount of potential
NPAs) once in 2 to 3 months to make on the spot study of key features in the
accounts like, submission of Stock/ Book Debts statements, adequacy of
Drawing Power, insurance, valuation of fixed assets, Stock Inspection,
Review of accounts, turnover/transaction in the accounts, Documentation and
creation of charges, etc. Based on such observations, necessary guidance can
be given to the Branch Managers for quick corrective actions.
 Accounts that may require restructuring keeping in view their viability and
ability to stand rehabilitate are identified and restructuring implemented
quickly while the account remain standard. Timely restructuring can help units
in turning around and overcoming problems faced by them.

 Having periodic meetings with credit officers at branches and Regional

Offices to have effective qualitative monitoring

Term Loan Assessment

Definition: Any credit facility which is stipulated to be repaid in fixed instalments
over a period of not less than 3 years is to be classified as Term Loans. Loans where
the repayment period is less than 3 years are to be classified as Demand Loans.
Purpose of Term Loans:

 Term loans are usually granted to various types of borrowers for acquiring
fixed assets like land, buildings, plant & machinery, equipments, vehicles etc.
 In the case of individuals and firms, term loans are granted usually for
purchase of vehicles, construction of a house/flat, purchase of equipments, etc.
 In the case of industrial undertakings, term loans are granted to meet the
capital expenditure in the form of acquiring land, building, plant & machinery
etc. either for setting up a new unit, expansion or diversification of an existing
unit. Such loans are also considered for modernisation or renovation
programmes of the existing industrial undertakings for improving the quality
of the products manufactured, reducing the cost of production or otherwise
improving the efficiency and profitability of the organisation.
The request for the term loan in the bank is considered only if the activity in which
the unit is engaged is eligible for bank finance as per Bank's loan policy. Preference is
generally given to the industries in the priority sector, export oriented and those in
other higher priority category.
Appraisal: The term loan appraisal and processing of the application requires very
careful scrutiny in view of the complexities involved. The essence of the term loan
appraisal is to assess the ability of the unit to repay the loan and interest thereon, from
surplus generated by utilising the fixed assets acquired. For this purpose, all the
techniques of project appraisal should be employed in all cases, irrespective of loan
amount or whether it is considered for the purpose of one item or for setting up
entirely a new unit.
Some of the important points for assessment of term loan are as follows:
Project Appraisal: The term 'Project Appraisal' includes a detailed study of the
various aspects of implementation of a project viz. production, financing and
marketing. The entire process includes borrower appraisal, technical appraisal,
management appraisal, financial appraisal, economic appraisal and market appraisal
as explained in the earlier part of the report.

Debt-Equity ratio: Normally the acceptable debt- equity ratio is 1.5:1 except for
large projects where the debt-equity ratio could go upto 2:1. The above norms are
only as broad guidelines or a general indicator and the exact ratio in a particular
project is to be decided depending upon nature of the industry, the size of the project,
the gestation period, the profitability potential, the debt service capacity of the
project, the risk attendant on the project in view of factors such as background of the
promoters, nature of technology employed, likely demand for the product, current
capital market conditions and economic situation etc.
Promoter's contribution: The promoter must have his own financial stake in a
project to ensure his sincerity in implementation of the project and his continued
interest thereafter. The share, the promoter shall bring as percentage of total cost of
project, inter alia depends upon the resources of the promoter, the type of the project
and its size. The promoters are expected to bring in maximum possible contribution.
Contribution can be in the form of share capital, internal generation of sources during
the period of implementation of the project, additional capital or unsecured
deposits/loans to be brought or arranged by promoters. The minimum level of
promoters' contribution shall be 25% of the project cost with 'core promoters'
contribution to be not less than 15% of the project cost. For large sized projects (i.e.
project costing more than Rs.200 crores), a minimum promoters contribution of 20%
with core promoters' contribution of not less than 12.5% of the project cost is
accepted.
Fixing of means of financing: Once the cost of the project is finalised the next step
is to identify and finalise the sources from where resources for financing the cost of
the project will be raised. Although various sources as above are available, the extent
of tapping a particular source will depend upon some of the regulatory framework
applicable in the market with regard to Debt-equity ratio, Promoters' contribution,
Security margin, SEBI and stock exchange regulations, Difficulty in raising external
financing etc. Therefore, the decision to raise resources from any source would
require careful planning and cost benefit analysis.
Estimation of cost of production and profitability: As already stated the purpose of

term loan appraisal is to ensure that the unit will be in a position to generate sufficient
surplus/profit to repay the loan and interest thereon, by utilising the fixed assets
acquired from bank's loan. Thus, the repayment capacity of the borrower to repay the
loan is not linked to the value of security etc. but it is linked to its ability to generate
sufficient surplus from its operations. The method by which this is done is by
estimating the profitability of the project over the entire project period or the

proposed repayment period of the loan, whichever is higher. The aim in the
estimation of cost of production and profitability is primarily to assess –
 the earning capacity of the project
 the capacity of the unit to amortise and service the borrowed cost
 the capability of the unit to service the share capital
 the surplus available with the unit to finance its future growth
Estimating Cost of Production: For estimating the cost of production, several

factors have to be considered, some of which are installed capacity, capacity
utilisation, product mix, selling price, unit cost of production, labour, maintenance
and repairs, plant overheads, administrative expenses, packing costs, sales expenses,
financial expenses, income tax, depreciation, project life, sales, price rise and
inflation etc.
Debt Service Coverage Ratio (DSCR): Once the estimation of cost of production
and profitability is made, it will usually reveal that the operations during the initial
years may show a low profitability or even losses due to high initial cost or low
capacity utilisation. In subsequent years, it should improve and should show sufficient
profit. The viability of the project or safety of the term loan is determined by the
ability of the unit to generate sufficient surplus income to meet the instalments of
term loans and servicing of interest thereon. This capacity to service the debts is
indicated by computing the DSCR. The DSCR should be more than 1 and the usually
acceptable DSCR is 1.5 to 2. More the DSCR, better is the ability to repay the
instalment and interest. Where the DSCR is below the acceptable norm, the proposal
is not considered unless there are other overwhelming and justifiable reasons like
export orientation, import substitution etc. Even in such cases, it should be clearly
ensured that the unit will not have any difficulty in honouring its commitments to the
bank. Where the DSCR is high, bank can consider reducing the repayment period as
the unit is having higher capacity to repay the loan instalment and interest and where
the DSCR is less than 1.5, banks can consider increasing the repayment period.
Apart from the DSCR, the project IRR and NPV is also calculated to get a better idea
from the cash flows of the project, also the Break-even analysis is performed.
Sensitivity Analysis: The DSCR and IRR, as explained above have been computed
after assuming certain values for various variable parameters like capacity utilisation,
cost of raw material, sales price per unit, sales volume etc. Any adverse variation in
the values of these parameters may alter the values of DSCR and IRR so drastically
that the proposal may become unviable and unacceptable. The variations in the values
of these parameters does not affect the profitability estimates uniformly. For some,

the effect may be more drastic and for some it may not have appreciable effect. So,
the bank computes the values of DSCR and IRR by altering the values of following
parameters by +10% or -10%.
 Capacity utilisation
 Sale price per unit
 Sales volume
 Cost of raw material
If the values of DSCR and IRR computed as above get altered dramatically to a -10%
change in the value of any of the above variable so as to make it unviable, the bank
may state that the project is sensitive to variations in that parameter. This is called the
sensitivity analysis. This provides an opportunity to the Bank to analyse the financial
viability even in adverse situations.
Fixing up of repayment schedule: The usual repayment period of a term loan varies
from 3 years to 7 years. In case of capital intensive projects, it may be higher. The
repayment period of a term loan is, therefore, fixed taking into account the DSCR and
the IRR. In cases, where DSCR is more than 2, branches consider reducing the
repayment period suitably after considering all aspects.
Moratorium period: Moratorium period is the initial repayment holiday allowed to

the borrower i.e. the time gap allowed between the date of disbursement and the due
date of first instalment. The due date should be so fixed that repayment does not fall
during the period when the unit is incurring cash loss or cash accruals are very poor.
Payment of Interest: Normally interest on term loan is to be paid with quarterly rests
from the date of disbursement. However, in the case of new projects under
implementation and in other deserving cases, moratorium on payment of interest may
be considered depending upon cash generating capacity of the unit.
Security: The term loan is secured by way of hypothecation/ mortgage of fixed assets
for which the loan is sanctioned. Besides, the bank normally is further secured by first
charge on the assets of the firm by way of hypothecation/mortgage of other fixed
assets and hypothecation of movable assets. Where the existing block of fixed
assets/movable machineries are already charged to other banks or financial
institutions, their specific permission is obtained for creating a charge in bank's favour
on any specific item of machinery etc. financed by the bank in the absence of a pari-
passu charge.

Wherever possible additional collateral securities in the form of equitable mortgage of

landed property in the personal name of partners / directors / guarantors is obtained.
Pre Sanction Inspection: Before sanctioning the proposal, a pre-sanction inspection

of the unit is essential to ensure the purpose and end use of the funds. In case of an
existing unit, a visit to the factory/site of production would give an idea about the
operations of the unit, the actual use of the machinery proposed to be acquired, its
location etc. It will also give an idea about the existing plant and machinery and other
fixed assets which are to be charged to the bank. Such an inspection would also
enable the branch to verify that the unit is genuine, it is in operation and the name,
address and other details furnished are correct and also enable the bank to physically
verify the collateral securities offered as security and ensure its location, valuation
and saleability. While submitting the proposal, a pre sanction report is also submitted
along with it.
Documentation and Disbursement: Loan amount is not disbursed before the

completion of documentation and other formalities. Prior to documentation, full
details of the terms and conditions of sanction are conveyed to the borrower and his
concurrence obtained in writing.
Schedule of Implementation: The project report contains the schedule of

implementation of the project. The progress of implementation of the project should
continuously be monitored. Wherever the terms and conditions stipulate disbursement
of loan in stages, it is ensured that the work is complete upto the desired level before
making further disbursements. For this purpose, spot inspection is carried out by the
Branch Manager or the officer authorised at each stage. Where considered necessary,
technical officer of the bank or consultants are also associated with such inspections.
Where the progress of the project is not satisfactory, the reasons for the delay are
ascertained and analysed. Any such delay would entail cost over-run. It may also
result in larger commitment by way of foreign exchange, wherever imported
machinery or equipment is involved, adding to the cost. In case of seasonal industries,
the delay in implementation may result in loss of business for the season. Where
contractual obligations are involved, the unit may be called upon to pay penalty for
not maintaining delivery schedule. All the above situations have serious financial
implications. Hence the bank is extremely vigilant in monitoring the progress of the
project. In the case of a term loan for purchase of a particular equipment either for
replacement or for expansion, even though a close supervision of the entire working
of the unit may not be warranted, branches ensure that the machinery is installed in
time and operating satisfactorily to give the desired results.

Post implementation follow-up: After the project has been implemented and the
trial production commenced, the bank keeps a close watch on the performance of the
unit. It is ensured that the schedule of commercial production is maintained at
satisfactory levels. The following aspects should be looked into:
 Efficiency of the plant and machinery
 Quality and quantity of the project
 Percentage of rejections and production loss
 Marketing of the product, its acceptance by the consumers/ users, price,
realisation, repeat orders etc.
 Availability of raw materials, labour productivity, sales turnover etc
After the operations of the borrowing unit are stabilised, inspection of the factory is
carried out at least once in six months with specific reference to term loan granted.
Cost over-run: Cost over-run may occur due to delay in implementing the project,
increase in the cost of assets purchased, escalation clause in the purchase contract,
adverse exchange fluctuations changes in customs and excise duties etc. Normal
fluctuations on account of the said reasons are expected to be covered by the
provision for contingencies which forms part of the project cost. Any over-run in the
project cost should be met by the borrower from his own sources and this is stipulated
while sanctioning the facilities.

Working Capital Assessment

The amount of current assets required for a smooth conduct of business is dependent
on the nature of the activity, availability of the raw materials, level of production,
storage capacity and funds available. So the funds/capital actually required to
maintain this required level of current assets, is called the gross working capital.
Appraisal of Bank Finance: The appraisal of bank finance for working capital thus
involves the following steps:
 Estimation of the Level of Gross Working Capital

 Estimation of the Level of Current Liabilities
 Computation of Net Working Capital Gap
 Computing the share of NWC Gap required to be brought by the borrower as
Margin.
 Computation of the Level of Bank Finance.
Estimation of the Level of Gross Working Capital: For a systematic and proper
estimation of the gross working capital requirements of a firm, it is essential to
identify its various components and analyse them.
Operating Cycle Theory: To estimate the gross working capital requirements, the
understanding of the operating cycle of manufacture/production is very important.
 The function of any manufacturing unit is to procure raw materials, process

the same to produce finished goods, sell the finished goods and realise money
and utilise the money so received, to procure raw material again and to
continue the cycle all over again.
 Thus, the process starts with purchase of raw materials required for the
manufacturing of the product. The raw materials once procured are made to
undergo the production process, the duration of which may range from a day
to 1 1/2 months. During this period, various raw materials etc. will be in
different stages of production in different forms. Besides, the cost of raw
material, labour charges, electricity, water, rent etc. are also incurred during
the period of processing. All this requires funds/capital.
 Once the goods are produced, it may not be sold immediately and it may have
to be stored in a godown for some days before they are sold. Storing of such
finished goods involves cost of raw material used in such finished products,
labour and other manufacturing expenses incurred in producing them, etc.

 It is not necessary that all the goods will be sold in cash. Some goods will be
sold on credit. Till such time sale proceeds are not realised, funds are blocked
in such receivables.
 Finally, when the sales proceeds are realised, the funds are again used to
procure raw material, etc. as above and the whole process/cycle starts all over
again.
 The total time taken from the purchase of raw material, till realisation of sale
proceeds is called the operating cycle and the amount of capital/funds required
to sustain this cycle is called the gross working capital.
 The components of Gross working capital are Raw materials, Consumable
stores and spares, Stock in process, Finished goods, Receivables, Cash and
bank balance and other current assets.
Estimation of Level of Current Liabilities: Once the gross working capital or

current assets are computed as above, it is essential to find out the amount of credit
available to the borrowers in purchase of raw materials, advance payment received
from buyers, deposits from dealers, provisions for statutory liabilities, etc.
The current liabilities include short term bank borrowings, public deposits, sundry
creditors, Interest and other charges accrued but not due for payment, some
miscellaneous current liabilities like dividends payable, liabilities for expenses,
gratuity payable within 1 year etc.
Computation of Net Working Capital: Net working capital is defined as gross

working capital minus total current liability. Total Current Liability is Short Term
Bank Borrowing + Other Current Liabilities. If short term bank borrowings is NIL,
then the gross working capital is financed entirely by other current liability. Normally
it is not the case. So the difference between gross working capital and other current
liabilities (excluding bank borrowings) is called the working capital gap. The question
is how much of this gap is to be financed by the bank and how is the borrower
required to make up the remaining amount.
Various methods of lending: Various committees have been set up by RBI to

suggest the methods of lending.
First Method of Lending (I METHOD): Under the first method of lending, the
borrower is required to contribute a minimum of 25% of the working capital gap from
the long term sources. The balance amount i.e. 75% of the working capital gap
represents the maximum permissible bank finance (MPBF). Where the net working
capital is more than the amount required to be provided by the borrower, the

maximum permissible bank finance would get reduced to that extent. To ensure
compliance under this method of lending, the current ratio of the concern should not
be less than 1.17:1.
Second Method of Lending (II METHOD): The second method of lending

stipulates that the borrower is required to contribute a minimum of 25% of the total
current assets from the long term sources (Net Working Capital) irrespective of the
working capital gap. The maximum permissible bank finance will, therefore, be
working capital gap less the amount to be so contributed by the borrower. Where the
net working capital is more than the stipulated minimum contribution, the maximum
permissible bank finance would get reduced to that extent. To ensure compliance
under this method of lending, the current ratio of the concern should not be less than
1.33:1.
Nayak Committee Method: Under this method originally proposed for SSI
borrowers and later made applicable for all borrowers with Fund based Working
Capital limits upto Rs.5/- crore, the computation is made at 20% of projected gross
sales as under. The gross working capital is uniformly assumed to be a minimum of
25% of projected gross sales. On this, the borrower is required to maintain a margin
equivalent to 20% of gross working capital computed as above.
Eg: The bank finance on projected sales of Rs. 100/- would be:
Projected Sales Rs.100/-
Gross Working Capital Rs. 25/-
Minimum margin required Rs. 5/-
Minimum bank finance Rs. 20/- or 20% of projected sales
Computation of the Level of Bank Finance: After ascertaining the margin or NWC
to be brought by the borrower appropriate to the method of lending applied, the level
of Bank Finance should be assessed. Computation of Bank Finance depends upon the
Method Lending.
Bank of Baroda’s Permissible Bank Finance System: The Bank has decided to
replace the system of assessment of working capital finance, based on MPBF-
computations, i.e. the Tandon Committee recommendations by a new system of
assessment of working capital finance called Permissible Bank Finance (PBF)
System. The PBF system has retained, with appropriate modifications, the strengths,
and removed the weaknesses, of existing MPBF-system simultaneously doing away
with its rigidities as regards to computation of working capital bank finance, and

supervision & monitoring of the credit dispensed by the banks thus, the new system
ensures faster credit delivery with INHERENT need & merit based flexibilities.
Cash Requirement Lending: The need for Working Capital finance arises
essentially because of the asynchronous and uncertain nature of cash flows. By
projecting future cash receipts & disbursements, the cash budget enables the
corporate to determine its cash needs. The bank, therefore, shift emphasis from the
"Security Obsessed Lending" (i.e. which is de facto based on holding - level (s) of
inventory & receivables), to the "Cash Requirement Lending" (which is envisaged to
be a need based lending -- indicating the financial support required by a borrower
from the Bank). Cash flow ( requirement) financing, thus, conceives self-liquidating
finance during various timezones unlike the present MPBF system which is de facto a
perpetual financing of the working capital requirements.
Cash Requirement Lending is aimed at to perceive the borrower's requirement, rather

than to monotonously assess with arithmetical rigidities, after the necessary risk-
analysis and risk-perceptions on case to case basis with perusal of the acceptability of
the borrower's estimated Cash Flow-position as per his overall financial status,
projected level of liquidity & activity, market reports, industry/activity profile and the
economic strata which a particular borrower belongs to. More subtly, Working
Capital finance on the basis of future cash flows facilitates a more holistic view of the
company‟s earning capacity rather than on the basis of its capacity to maintain a
particular asset holding level.
Line of Credit: Under the PBF-method, a Line of Credit (i.e., the outer limit for
entire working capital finance) shall be fixed, within which, the borowers shall be
given freedom to select, for full one year or for a part of the year, sublimits in one or
more out of the various existing types of credit facilities. In other words, the line of
credit is not a credit facility or credit delivery mode per se, but, is an outer limit for
total Fund Based working capital finance, and within this outer limit, various existing
types of Fund Based working capital credit facilities with appropriate limits shall be
made available to the borrower at the discretion of the sanctioning authorities.

Case-study
I had opportunity to study about six case- studies that were from different sectors
namely, power, road, pharmaceuticals and telecommunication. I also had the
opportunity to work on some of the approvals and proposals made by the bank for the
sanction of the loans and get a practical experience of how credit rating is being done
in the bank for a particular borrower. Following is one of the case studies that I have
studied from the power sector.
Borrower: ABC Power Limited, which is a SPV set up under the ABC Fund
Project: Setting up a 44 MW Bagasse Based Cogeneration Power Plant in Kolhapur

district at a total cost of Rs 2811.7 mn
About the project: The Project consists of a 44 MW capacity bagasse-based

cogeneration power plant adjacent to the host‟s sugar factory in Kolhapur District in
Maharashtra, with implementation on Build, Own, Operate and Transfer (BOOT)
basis. The Project is promoted by the ABC fund (“the Fund”). The Fund includes
contributions from the Government of Maharashtra (which shall be administered
through MEDA) and the XYZ group, who are a private equity fund manager in India.
The Co-generation Project is located adjacent to the existing sugar factory. The Host
Sugar Factory is situated in the Panhala Taluka, Kolhapur district in Maharashtra.
Shareholding pattern: Out of the total equity of ABC Power Limited, ABC Fund
shall hold 66.67%. The balance of 33.33% will come from the XYZ Group.
Project Structure:

Figure 7.1 Deal diagram
Project Details:
Appointment of Technical/Environment Consultant: MITCON has been appointed
as the EPC consultant for the HSF modification component of the Project. MITCON
is a consultancy company promoted by financial institutions, state development
corporations and public sector commercial banks. It has a successful track record of
25 years and has been working in energy efficiency, renewable energy and
environment protection for 18 of those years.
Avant Garde Engineers & Consultants Private Ltd has been appointed as the EPC
consultants for the cogeneration component of the Project. Avant-Garde Engineers &
Consultants Private Ltd offers engineering services for chemical and petrochemical
projects, drugs & pharmaceutical industries, energy and power system, steam
generators, waste heat recovery systems, mini hydroelectric power plants, wind power
plants and pollution control systems.
IL&FS Ecosmart Limited, a leading environmental management services and

advisory firm promoted by Infrastructure Leasing and Financial Services Ltd
(IL&FS) has been appointed as Environment Consultant. Ecosmart offers services in
environmental information processing, geo-spatial solutions, urban infrastructure,
inter alia.
Project Implementation: ABC Ltd has appointed Walchandnagar Industries Limited

(WIL), a reputed organization, as the EPC contractor for the Co-generation project.
WIL was selected through bidding process.
Power Sale Agreement: ABC Ltd shall enter a Power Purchase Agreement with a
power trading licensee for the sale of power to the latter. The PPA shall designate the
sale price of each unit of power to be Rs 4.30 subject to a 2% escalation. Upsides to
this sale rate shall be wholly passed on to ABC Ltd. Based on disclosures by power
trading licensees, it may be observed that prices of power sold to Maharashtra are as
high as Rs 7.3 per unit
Power Evacuation: Power evacuation is proposed through a 110 KV line through

MSETCL‟s Wathar substation located 10 km from site. The company has floated bids
for the development of the power evacuation lines
Bagasse/Fuel Supply: The average crushing capacity of host sugar mill is 8000 TCD.
On an average, the bagasse content as a percentile of cane crushing is 28%. It is

expected that HSF will crush 12,50,000 MT of cane per annum. Hence, about
3,26,400 MT of bagasse shall be available on which Co-gen plant will run for 149
days during season and 161 days during off season on imported coal.
Project Development Agreement: The HSF executed a Project Development

Agreement (PDA) with ABC Ltd on August 14, 2008. The project will be developed
on a BOOT basis. HSF to provide bagasse to the SPV at no cost and in return will get
a royalty linked to cane crushed and free power and steam for captive use as per the
terms of the PDA.
Project Cost
The cost of the Project has been estimated at Rs 2811.70 mn as under:
Amount in
Project Cost
Rs. Mn.
EPC – Cogen Unit 1713.6
EPC – HSF 252.0
EPC – Power Evacuation 90.1
Site Development & non-EPC

costs 177.3
Contingencies 106.1
Construction Supervision /
Project Management 67.0
Insurance 22.3
Total Hard Costs 2428.4
Preliminary & Pre. Op.

Expenses 75.9
Working capital 17.1
Debt Service Reserve 108.7
Interest During
Construction 181.5
Total Project Cost 2811.7
Table 7.1 Project Cost


Means of Finance
The fund requirement for the Project shall be met through a mix of Shareholders‟
equity, MNRE Capital Subsidy and Rupee Term Loans as follows:
Amount Total
Source of Funds
(Rs mn) (Rs mn)
Equity
ABC Fund 551.90
XYZ Group 275.90
Total Equity 827.80
MNRE Capital 80.00

Subsidy
Debt 1903.90
Total 2811.70
Table 7.2 Project Capital Structure
 The debt equity ratio for this project is 2.1:1 considering the MNRE Capital
Subsidy of Rs 80.0 mn as equity. However, excluding the Grant component
from the Project Cost, the Debt-Equity ratio is 2.3:1 (i.e. 70:30)
 The debt will carry an interest rate of 11.5% p.a. The total tenure of the debt
will be 10 years Repayment of the debt will commence after a moratorium of
5 months from COD.
 As the MNRE Capital Subsidy is expected to be received after Commercial
Operations Date, to complete the project as per schedule, additional debt
amounting to Rs 80.0 mn shall be drawn from the banks/FIs and the same
shall be repaid directly from the grant proceeds. Hence, the total debt
requirement of the project shall be Rs 1983.9 mn including the borrowing for
Rs 80.0 mn
Promoter’s background: ABC Fund is a dedicated private equity fund set up to

promote the development of non-conventional energy projects in the State of
Maharashtra. It is an initiative of the Government of Maharashtra (GoM) through the

Maharashtra Energy Development Agency (MEDA) and IL&FS, with a view to

giving an impetus to the development of the renewable energy sector in Maharashtra.
The Fund is constituted as a Contributory Trust, registered with the Securities and
Exchange Board of India (SEBI) as a Venture Capital Fund
XYZ Group is a prominent private equity fund manager in India. It manages
approximately Rs 68.0 bn on behalf of leading Indian and international institutions,
and has been an active investor in the Indian market since 1997.
Financial parameters:
Financial Year 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Gross Power Generated (MW)
- Season 41 41 41 41 41 41 41 41 41
41
- Off Season 44 44 44 44 44 44 44 44 44 44
Exportable Generation (MW)
- Season 20.4 20.4 20.4 20.4 20.4 20.4 20.4 20.4 20.4 20.4
- Off Season 30.8 30.8 30.8 30.8 30.8 30.8 30.8 30.8 30.8 30.8
Annual Operations
50% 100% 100% 100% 100% 100% 100% 100% 100% 100%
Factor
Capacity Utilisation
80% 85% 90% 90% 90% 90% 90% 90% 90% 90%
Factor
Net Tariff (Rs./kWh) 4.86 4.96 5.06 5.16 5.26 5.37 5.47 5.58 5.70 5.81
Table 7.3 Financial Parameters

Projected Profit and Loss account:

FY 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Annual
Operating
Factor 50% 100% 100% 100% 100% 100% 100% 100% 100% 100%
Revenue 466.68 1030.51 1131.18 1153.81 1176.88 1200.42 1224.43 1248.92 1273.90 1299.37
Other
Income -
Interest
From DSRA 2.40 6.71 6.32 6.23 6.10 5.93 5.72 5.47 3.44 0.77
Total
Income 469.07 1037.22 1137.50 1160.04 1182.98 1206.35 1230.15 1254.38 1277.33 1300.14
Op.
Expenses 207.26 453.90 496.19 521.00 547.05 574.40 603.12 633.28 664.94 698.19
Operating
Profit 261.82 583.32 641.31 639.04 635.94 631.95 627.03 621.11 612.39 601.96
Tax 8.34 28.44 41.39 44.91 48.78 52.93 57.34 62.01 66.63 68.91
Profit After
Tax 40.74 138.89 202.16 219.33 238.25 258.51 280.07 302.87 325.43 336.57
Dividend 0.00 0.00 40.43 43.87 47.65 51.70 56.01 60.57 65.09 302.91
Profit to
Reserves 40.74 138.89 161.73 175.47 190.60 206.81 224.05 242.30 260.35 33.66
Table 7.4 Projected Profit and Loss account

Projected balance sheet:

FY Implm’n 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
LIABILIT
IES
Share
Capital 827.78 827.78 827.78 827.78 827.78 827.78 827.78 827.78 827.78 827.78 827.78
Reserves
& Surplus 40.74 179.63 341.36 516.83 707.42 914.23 1138.28 1380.5 1640.9 1674.5
Term Debt 1983.89 1954.1 1755.7 1577.1 1378.8 1160.5 922.51 664.60 386.86 89.28 0.00
WC Debt 51.38 111.05 119.68 123.54 127.55 131.73 136.06 140.57 145.25 150.13
MNRE
Subsidy 0.00 80.00 80.00 80.00 80.00 80.00 80.00 80.00 80.00 80.00
Total 2811.67 2874.0 2954.2 2946.0 2926.9 2903.3 2876.2 2846.72 2815.7 2783.2 2732.4
ASSETS
Fixed
Assets /
WIP 2685.82 2685.8 2685.8 2685.8 2685.8 2685.8 2685.8 2685.82 2685.8 2685.8 2685.8
Less Acc
Depreciati
on 83.93 251.80 419.66 587.52 755.39 923.25 1091.11 1258.9 1426.8 1594.7
Net Fixed
Assets 2685.82 2601.8 2434.0 2266.1 2098.3 1930.4 1762.5 1594.70 1426.8 1258.9 1091.1
Current
Assets
Sundry
Debtors 38.89 85.88 94.27 96.15 98.07 100.03 102.04 104.08 106.16 108.28
Raw
Materials 29.62 62.20 65.31 68.57 72.00 75.60 79.38 83.35 87.52 91.89
DSRA 108.72 108.72 97.76 96.71 95.03 92.72 89.77 86.19 81.98 23.74 0.00
Cash &
Bank 17.13 94.92 274.36 423.57 568.90 710.11 848.27 984.41 1119.5 1306.8 1441.2
Total 2811.67 2874.0 2954.2 2946.0 2926.9 2903.3 2876.2 2846.72 2815.7 2783.2 2732.4
Table 7.5 Projected Balance Sheet

Key Project Indicators:

FY 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Gross Margin 56% 56% 56% 55% 54% 52% 51% 50% 48% 46%
PAT Margin 9% 13% 18% 19% 20% 21% 23% 24% 25% 26%
DE Ratio 2.25 1.61 1.26 0.97 0.72 0.51 0.32 0.17 0.04 0.00
ICR 2.03 2.35 2.79 3.09 3.51 4.14 5.15 7.03 11.67 21.04
FACR 1.33 1.39 1.44 1.52 1.66 1.91 2.40 3.69 14.10 ------
DSCR 1.61 1.43 1.49 1.49 1.49 1.51 1.53 1.56 1.60 2.27
Average DSCR 1.54
DSCR with
DSRA 2.31 1.66 1.74 1.73 1.74 1.75 1.77 1.80 1.67 2.27
Average DSCR 1.57
Table 7.6 Key Project Indicators

Sensitivity Analysis:
Project IRR Min DSCR Average DSCR with
Assumption with DSR DSR
Base Case 20.44% 1.43 1.54
O&M increases 13.30% 1.13 1.16
by 5%
Number of days 19.51% 1.4 1.48
on bagasse
reduces by 5%
Table 7.7 Sensitivity Analysis
Conclusion: In this project, the average DSCR is 1.54, which is above the minimum
requirement as per the extant guidelines of the bank. Also, it‟s a renewable energy
project which is a plus point for the project. As it is a new account with the bank, it
will perform its credit rating and as per that quote the pricing of the loan to the
borrower.

Conclusion
My association with Bank of Baroda for the project titled “Financing the corporate
sector (Corporate Finance)” has been a learning experience. I got the opportunity to
read and make proposals for the bank, which provided me with practical insights and
thus it has helped me in understanding that how a bank uses the theory that we have
studied for appraising any borrower.
While appraising any project, the bank takes care of a lot of factors. Also, I got an
opportunity to see how the process of credit in being performed in a bank as credit
risk is considered to be the most important risk in any given project. The study also
how with a view to ensuring a healthy loan portfolio, banks have taken various steps
to bring their policies and procedures in line with changing scenario which also aim at
effective management and dispersal of credit risks, strengthening of pre- appraisal
and post- sanction monitoring systems. The officers in the bank take care that the
entire procedure remains robust and runs smoothly.
I got to see how a bank prepares its approvals and proposals, also had the chance to
make the proposal myself and get a hands on experience of the same. Through the
project period I got to study various case- studies from different sectors namely
power, road, pharmaceuticals and telecommunication. The bank has a different
approach to mitigate the risk involved in the various sectors while providing credit. I
also got to learn about these sectors and how they actually work. Knowing about the
sector gave me an understanding of how the bank views a particular sector and the
different points it takes into account while issuing credit to the borrower.

Bibliography
 Financial Management by Prasanna Chandra
 Handbook on Project Appraisal and Follow-up by D.P.Sarda
 Bank of Baroda circulars, manuals, book of instruction and proposals
 www.bankofbaroda.com
 www.google.com

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Corporate Finance Bank of Baroda MMS 2009- 2011

N. L. Dalmia Institute of Management Studies and Research Page 1

Overview of Bank of Baroda

Figure 1.1 Bank of Baroda Logo

N. L. Dalmia Institute of Management Studies and Research Page 2

Bank of Baroda is characterised by diversity. The network of branches spans

N. L. Dalmia Institute of Management Studies and Research Page 3

Small Corp- Annual Sales Turnover < 100 crores

N. L. Dalmia Institute of Management Studies and Research Page 4

Figure 2.1 Funding Options

Fund Based Limits (FBL)

N. L. Dalmia Institute of Management Studies and Research Page 5

Demand Loans: This is the fund demanded instantaneously by borrower due to

Buyer’s Credit: According to FEMA guidelines on Trade Credits, Buyer‟s Credit

N. L. Dalmia Institute of Management Studies and Research Page 6

Procedure for Buyer’s Credit:

Request for LOC and Buyer‟s

Overseas Supplier Overseas Bank

N. L. Dalmia Institute of Management Studies and Research Page 7

On receipt of documents under an Import Letter of Credit, the customer approaches

N. L. Dalmia Institute of Management Studies and Research Page 8

Non Fund Based Limits (NFBL):

Bank Guarantee: A contract of guarantee can be defined as a contract to perform the

A bank guarantee is a guarantee made by a bank on behalf of a customer (usually an

N. L. Dalmia Institute of Management Studies and Research Page 9

Assessment of bank guarantee limits

N. L. Dalmia Institute of Management Studies and Research Page 10

N. L. Dalmia Institute of Management Studies and Research Page 11

Commercial flow of letter of credit

Figure 2.2 Commercial flow of letter of credit

N. L. Dalmia Institute of Management Studies and Research Page 12

Types of banking arrangements

N. L. Dalmia Institute of Management Studies and Research Page 13

In this context, then, it becomes worthwhile to consider forming a consortium.

N. L. Dalmia Institute of Management Studies and Research Page 14

arrangement, it is expected that the participating banks acquire common interest,

 Minimum share of each bank: Minimum share of each bank should be 5% of

 Assessment of financial requirements - application of 2nd method of lending:

N. L. Dalmia Institute of Management Studies and Research Page 15

 Sharing of non-fund based business: Generally, the participating members are

 Documentation: Security documents for credit facilities under consortium

 Disbursement: Generally consortium members should follow an uniform

N. L. Dalmia Institute of Management Studies and Research Page 16

Submission of the application form by the borrower

Providing the information memorandum to the bank

Preparation of In principal approval by the bank

Risk Measurement and Credit rating

Preparation of Final Proposal

Proposal forwarded to sanctioning authority

Sanctioned letter issued

Documentation and Disbursements

Post Sanction Control and follow up of advances, Credit

N. L. Dalmia Institute of Management Studies and Research Page 17

The above flowchart can be explained as follows:

The Information Memorandum (IM) (similar to prospectus) incorporates – Borrower's

The Information memorandum/ project report generally contains the following

II. Industry details:

III. Project details:

N. L. Dalmia Institute of Management Studies and Research Page 18

b. Brief description of the project

IV. Marketing strategy:

N. L. Dalmia Institute of Management Studies and Research Page 19