Toaz - Info PNB Summer Internship Report PR

PROJECT REPORT
ON
“FINANCING THE SME’s – SCOPE & ANALYSIS”
SUBMITTED BY
ANIL SASI ANAYATH

ROLL NO 1005
PROJECT GUIDE
PROF NAYAK
MUMBAI INSTITUTE OF MANAGEMENT & RESEARCH

WADALA (EAST), MUMBAI - 400037
DECLARATION
I hereby declare that this project is submitted in partial fulfillment of
requirement for the award of MMS Finance to Mumbai Institute of
Management & Research in my origin of work and has not been submitted
for any award of any other degree of diploma fellowship or for similar title
or prizes.
I further certify that I have no objection and grant the rights to Mumbai
Institute of Management & Research or Mumbai University to publish any
chapter/ Project if they deem fit in journals or magazines or newspapers
without any prior permission.
Financing the SME’s in PNB – Scope and Analysis 2

ACKNOWLEDGEMENT
I sincerely feel the credit of the project work could not be narrowed to only
one individual. This work is an integrated effort of all those concerned with
it, it would have been quite difficult without their direct & indirect co-
operation. I wish to express my appreciation and gratitude to all the
concerned people.
First and Foremost my intellectual debt is to Mr.Rushikesh

Dhimar (Manager of Circle Office Loan Department Section, Punjab
National Bank, Mumbai) who has contributed significantly towards the
completion of the project. He has provided the guidelines on which this
project was made.
I am thankful to the entire staff of PNB who have taken their

precious time and provided me with requisite data without which this
project would not have completed. I also thank them for giving their
valuable suggestions during the entire period of research.
However, I accept the sole responsibility for any errors of

omission and commission.
Anil S. Anayath

INDEX
Sr. No. Topics Page

No.
1 Introduction 7
1.1 Project Description 7
1.2 Relevance of the Project 8
1.3 Objective of the Study 8
1.4 Limitations of the Study 8
2 About the Bank 10

2.1 Mission Statement 10
2.2 Brief History 10
2.3 Products and Services 14
2.4 Awards and Recognitions 15
2.5 Bank’s Logo 16
2.6 Business and Financial Performance 17
3 Literature / Conceptual Support 18

3.1 Banking Sector 18
3.2 Indian Banking Industry 19
3.3 Small and Medium Enterprises in India 20
3.4 Role of SME’s 21
3.5 Financing the SME’s 23
3.6 Book Of Instructions 24
3.7 Important Concepts 25
4 Process / Methodology 26
4.1 Project Methodology 26
4.2 Locale of the Project 26
4.3 Sample Size of the Study 27
4.4 Source of Data 27
5 SME policy 28
5.1 Objective 28
5.2 Scope of the Policy 28

5.3 Small and Medium Enterprises Sector 29
5.4 Bank Approach to SME sector 29
5.5 SME products 30
6 Credit Risk Rating 32

6.1 An Overview 32
6.2 Methodology of CRR 34
6.3 General Guidelines 36
6.4 The Credit Risk Rating Tool 38
6.5 Financial Ratios 46
6.6 System for Assignment & Appraisal of Rating 53
6.7 Important Concepts 55
7 Loan Processing Procedure 56
8 Analysis of SME Proposal (Case Study) 65
9 Conclusion 85
9.1 Conclusion 85
9.2 Findings 87
9.3 Recommendations 88
10 Bibliography 89

EXECUTIVE SUMMARY
Bank extends Loan facilities by way of fund-based facilities and non-fund based
facilities. The fund-based facilities are usually allowed by way of term loans, cash
credit, bills discounted/purchased, demand loans, overdrafts, etc. Further, the
bank also provides non fund-based facilities by way of issuance of inland and
foreign letters of credit, issuance of guarantees, deferred payment guarantees,
bills acceptance facility etc.
Efficient management of Loans and Advances portfolio has assumed
greater significance as it is the largest asset of the Bank having direct impact on
its profitability. In the wake of the continued tightening of norms of income
recognition, asset classification and provisioning, increased competition and
emergence of new types of risks in the financial sector, it has become imperative
that the credit functions are strengthened. RBI has also been emphasizing banks
to evolve suitable guidelines for effective management and control of credit risks.
Credit risk rating is an important function of the bank. It is the process of
evaluating the credit worthiness of a loan applicant. Every bank or lending
institution has its own panel of officials for this purpose.
I have undertaken a study at Punjab National Bank which is an
international bank with its global presence in twenty five countries. The study is
on ‘Loans and Advances of Small and Medium Enterprises - Scope and
Analysis’. The process of Credit Rating & disbursement of loans has been
explained in detail in the project.

INTRODUCTION
A loan is a type of debt. Like all debt instruments, a loan entails the redistribution
of financial assets over time, between the lender and the borrower. The borrower
initially receives an amount of money from the lender, which they are obligated to
pay back, but not always in regular installments, to the lender. The loan is
generally provided at a cost, referred to as interest on the debt. A borrower may
be subject to certain restrictions known as loan covenants under the terms of the
loan.
Acting as a provider of loans is one of the principal tasks for financial
institutions. Bank loans and credit are one way to increase the money supply.
Now a days loans are easily available and the rate of interests at which
they are available are very reasonable. Government too is encouraging people to
take loans for certain purposes. For example, government is encouraging people
to take housing loans by giving tax concessions.
Running a business is never an easy task. One is bound to face financial
hiccups during the process. Whether someone is a new generation entrepreneur
venturing into a new business or an established businessman planning for a
business expansion, whether its money required for an immediate official
expansion or it could be the time of recession, when payments don't come on
time but the expenditures can't wait, the business loans ease our way through a
scary road of financial crisis and open the world of new business heights for you.
Financial institutions like banks offer the business loan to bail us out.
I have undertaken a study at Punjab National Bank on the topic
‘Financing the SME’s - Scope and Analysis’ which deals with studying the
market trends and learning the importance of financing the Sme Sector.
1.1 Project Description

This project deals with reviewing the credit worthiness of the borrower before
sanctioning of a loan. It deals with analysis of the data provided by the company

and following all the formalities as under the norms of the bank and finally
making a loan appraisal.
1.2 Relevance of the Project

The project deals with first getting the loan proposals from the clients and making
the appraisal note. It gives a practical insight of the procedures followed by the
bank in ascertaining the credit worthiness of the borrower. All the various
parameters such as financial, management and industrial are studied. The
borrowers are granted fund based (working capital) and non-fund based ((Bank
guarantee and letter of credit) facilities. The project requires restructuring of
Balance sheet and Profit and Loss Account into the CMA format provided by the
Bank. Then filling the CRISIL input sheet for doing the Credit Rating for internal
purposes basically for rating and ascertaining the interest rate for the fund based
and non-fund based limits..
1.3 Objectives of the Study
 To study the current market scenario/trends in the SME sector.

 To learn the importance and details of financing the SME sector.
 To study the chain of events of processing a loan proposal– from
receiving the application from the borrower, doing credit rating of the
borrower and the company, analyzing the financial statements,
sanctioning to disbursement and the post sanction reviews.
 To learn the procedure of doing the rating
1.4 Limitations of the Study
 Study is limited only to the SME sectors

 Due to time limitations a detailed analysis could not be done.

 The major limitation of this study shall be data availability as the data is
proprietary and not readily shared for dissemination.
 Also the geographical scope of the project was limited to PNB Circle
Office and the loans studied were of solely of businesses established
majorly in Mumbai
 The credit appraisal decision are more of intuition and experience and
since the time period was limited, hence best efforts were made to grasp
the process as much as possible
 Due to ever changing environment, many risks are unexpected and the
remedial measures available are based on general experience from the
past. Therefore risks can only be minimized cannot be erased completely.

2. ABOUT THE BANK
Punjab National Bank was founded in 1894 and today is the second largest
state-owned commercial bank in India with about 5000 branches across 764
cities. It serves over 37 million customers. The bank has been ranked 248th
biggest bank in the world by the Bankers Almanac, London. The bank's total
assets for financial year 2007 were about US$60 billion. PNB has a banking
subsidiary in the UK, as well as branches in Hong Kong, Dubai and Kabul, and
representative offices in Almaty, Dubai, Oslo, and Shanghai.
Punjab National Bank is one of the Big Four banks of India, along with ICICI
Bank, State Bank of India and HDFC Bank—its main competitors.
2.1 Bank’s Mission Statement

Vision
“ To evolve and position the bank as a world class
progressive, cost effective and customer friendly institution providing
comprehensive financial and related services; integrating frontiers of
technology and serving various segments of society especially the
weaker sections; committed to excellence in serving the public and
also excelling in corporate values ”.
Mission
“Banking for the unbanked”

2.2 Brief History
Punjab National Bank was registered on 19 May 1894 under the Indian
Companies Act with its office in Anarkali Bazaar Lahore. The founding board was
drawn from different parts of India professing different faiths and a varied back-
ground with, however, the common objective of providing country with a truly
national bank which would further the economic interest of the country. PNB's
founders included several leaders of the Swadeshi movement such as Dyal
Singh Majithia and Lala HarKishen Lal, Lala Lalchand, Shri Kali Prosanna Roy,
Shri E.C. Jessawala, Shri Prabhu Dayal, Bakshi Jaishi Ram, and Lala Dholan
Dass. Lala Lajpat Rai was actively associated with the management of the Bank
in its early years. The board first met on 23 May 1894.
PNB has the distinction of being the first Indian bank to have been started solely
with Indian capital that has survived to the present. (The first entirely Indian
bank, the Oudh Commercial Bank, was established in 1881 in Faizabad, but
failed in 1958.)
PNB has had the privilege of maintaining accounts of national leaders such as
Mahatma Gandhi, Shri Jawahar Lal Nehru, Shri Lal Bahadur Shastri, Shrimati
Indira Gandhi, as well as the account of the famous Jalianwala Bagh Committee.

TIMELINE
1895 PNB established in Lahore.
1904 PNB established branches in Karachi and Peshawar.
1939 PNB acquired Bhagwan Dass Bank Limited.
1947 Partition of India and Pakistan at Independence. PNB

lost its premises in Lahore, but continued to operate in
Pakistan.
1960 PNB amalgamated Indo-Commercial Bank Limited

(established in 1933) in a rescue.
1961 PNB acquired Universal Bank of India.
1963 The Government of Burma nationalized PNB’s branch in

Rangoon (Yangon).
1965 After the Indo-Pak war the government of Pakistan

seized all the offices in Pakistan of Indian banks,
including PNB’s head office, which may have moved to
Karachi. PNB also had branches in East Pakistan
(Bangladesh).
1969 The Government of India nationalized PNB and 13 other

major banks on 19th July, 1969.
1978 PNB opened a branch in London.
1986 The Reserve Bank of India required PNB to transfer its

London branch to State Bank of India after the branch

was involved in a fraud scandal.
1988 PNB acquired Hindustan Commercial Bank Limited in a

rescue.
1993 PNB acquired New Bank of India, which the

Government of India had nationalised in 1980.
1998 PNB set up a representative office in Almaty,

Kazakhstan.
2003 PNB took over Nedungadi Bank (established the bank in

1899), the oldest private sector bank in Kerala. It was
incorporated in 1913 and in 1965 had acquired selected
assets and deposits of the Coimbatore National Bank.
At the time of the merger with PNB, Nedungadi Bank's
shares had zero value, with the result that its
shareholders received no payment for their shares.
2004 PNB established a branch in Kabul, Afghanistan.
PNB Branches (National & International)
 Branches in all the 7 metropolitan and cosmopolitan cities in India.

 New Delhi, Mumbai, Calcutta, Chennai, Bangalore, Hyderabad and
Ahmedabad.
 It has branches in both urban as well as rural areas.

 PNB is always focusing on expanding abroad and till date has identified
some emerging economies. Some of them are in these places.
o Almaty.
o Kazakhstan.
o Shanghai.
o China.
o London.
o Kabul.
o Afghanistan
Forbes Global 2000 Ranking
Punjab National Bank was ranked 1243 in the Forbes Global 2000
2.3 Products And Services
Punjab National Bank provides it banking products and services in several

categories like personal, international, business, treasury, corporate and rural. In
personal banking section Punjab National Bank offers products like deposits,
debit cards, Gen-Next, merchant banking, insurance, personal banking services,
loans, lockers and credit cards.
 Investment banking
 Consumer Banking
 Commercial Banking
 Retail Banking
 Private Banking

 Asset Management
 Pensions
 Mortgage loans
 Credit Cards
In business banking sector, Punjab National Bank offers products and services
such as deposits, business banking services, loans and advances and lockers. In
corporate banking section, Punjab National Bank offers products and services
like wholesale banking, loans and advances, deposits and corporate banking
services.
2.4 Awards and Recognitions
o Received gold trophy of SCOPE Meritorious Award for Best Managed

Bank, Financial Institution or Insurance Company for the year 2009-2010
by Standing Conference of Public Enterprises, from the president of India.
o PNB adjudged as Top Indian Company under “Banks” Category by Dum

and Bradstreet – Rolta Corporate Award 2010.
o “Golden Peacock Corporate Social Responsibility Award, 2011” by

institute of Directors.
o Best Corporate Social Responsibility Practice Award, 2011 by Bombay

Stock Exchange for second year in a row.
o “BML Munjal Award for Excellence in Learning and Knowledge

Development” by Hero Mindmine Institute.
o “Golden Peacock National Training Award – 2011” for the best Training
provided by Institute of Directors.

o Bagged Second prize under the category of “Best Wind Power Project
Finance” 2011 by World Institute of Sustainable Energy.
2.5 Bank’s Logo
Punjab National Bank’s logo
 Punjab National Bank introduced its new symbol in 1972.

 The symbol is based on Hindi which is the first letter of our Bank.
 The top has been kept open which means access off all to the Bank which
is one of the main objectives of nationalization.
 The curved portion denotes mobility as well as it stands for the container
of money.
 The solid structure denotes coin i.e. Money and it also stands as a
watchful vigilant eye.
 The symbol is very bold and modern. It is flexible and adaptable.
 To keep in tune with the symbol an elegant and distinct logo has been
introduced.

2.6 Business & Financial Performance

3. LITERATURE / CONCEPTUAL SUPPORT
The purpose of the literature review is to review what has previously been done
on the subject and analyze it in the present context so that an effective
understanding can be established.
3.1 Banking Sector
The Banking Industry was once a simple and reliable business that took deposits
from investors at a lower interest rate and loaned it out to borrowers at a higher
rate. However deregulation and technology led to a revolution in the Banking
Industry that saw it transformed. Banks have become global industrial
powerhouses that have created ever more complex products.
A Banking sector performs three essential functions in an economy: the

operation of the payment system, the mobilization of savings and the allocation
of savings to the investment projects. By allocating capital to the highest value
use while limiting the risks and the costs involved the banking sector can exert a
positive influence on the overall economy and thus is of broad macroeconomic
consequence (Roland, 2006; Jaffe and Levonian, 2001, Rajan and Zingales,
1998).
The Banking Industry at its core provides access to credit. In the lenders case,
this includes access to their own savings and investments, and interest
payments on those amounts. In the case of borrowers, it includes access to
loans for the creditworthy, at a competitive interest rate. Banking services include
transactional services, such as verification of account details, account balance
details and the transfer of funds, as well as advisory services, that help
individuals and institutions to properly plan and manage their finances. Online
banking channels have become key in the last 10 years.

The collapse of the Banking Industry in the Financial Crisis, however,
means that some of the more extreme risk-taking and complex securitization
activities that banks increasingly engaged in since 2000 will be limited and
carefully watched, to ensure that there is not another banking system meltdown
in the future.
3.2 Indian 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. As far as foreign banks
are concerned they are likely to succeed in the Indian Banking Industry.
In the Indian Banking Industry some of the Private Sector Banks operating
are IDBI Bank, ING Vyasa Bank, SBI Commercial and International Bank Ltd,
Bank of Rajasthan Ltd. and banks from the Public Sector include Punjab National
bank, Vijaya Bank, UCO Bank, Oriental Bank, Allahabad Bank among others.
ANZ Grindlays Bank, ABN-AMRO Bank, American Express Bank Ltd, Citibank
are some of the foreign banks operating in the Indian Banking Industry.
3.3 Small And Medium Enterprises (SMEs) In India
The small and medium enterprises segment has been a topic of intense
deliberation among banks, financial institutions, industry and academicians. In
India, ‘small and medium enterprises’ (SME) is a generic term used to describe
small scale industrial (SSI) units and medium-scale industrial units. As per the
Micro, Small and Medium Enterprises Development Act of 2006, any industrial
unit with a total investment in its fixed assets or leased assets or hire-purchase
asset upto Rs10 million is considered as a SSI unit and investment up to Rs. 100
million is considered as a medium unit. In addition, an SSI unit should neither be
a subsidiary of any other industrial unit nor can it be owned or controlled by any
other industrial unit.
The SME sector produces a wide range of industrial products such as food
products, beverage, tobacco and tobacco products, cotton textiles, wool, silk,
synthetic products, jute, hemp & jute products, wood & wood products, furniture
and fixtures, paper & paper products, printing publishing and allied industries,
machinery, machines, apparatus, appliances and electrical machinery. SME
sector also has a large number of service industries.

 In India, SME is the biggest provider of employment next only to
Agriculture. The SMEs constitute 95% of total industrial units and
constitute 40% of total industrial output.
 Formerly, both Government and RBI credit policy placed emphasis on
manufacturing units from the Small Scale Sector. However, in order to
make the size of the unit and the technology employed by firms to be
globally competitive, the definition of “Small Scale Sector” was revisited.
Keeping in view the same and the global practices, it was decided to
broaden the concept of SSI Sector by inclusion of services within its ambit
as also including the “Medium Enterprises” in a composite sector of “Small
& Medium Enterprises”.
 Subsequently, MSMED Act was operationalized with effect from 2nd
October 2006, which defines an “enterprise” instead of an “industry” to
give recognition to service sector and also defines a “medium enterprise”
to facilitate technology upgradation and graduation.
 Banks were advised to formulate comprehensive and more liberal policies
than the existing policies in respect of loans to SME Sector.
3.4 Role of Small and Medium Enterprises (SMEs)
SMEs have been playing a pivotal role in country’s overall economic growth, and
have achieved steady progress over the last couple of years. From the
perspective of industrial development in India, and hence the growth of the
overall economy, SMEs have to play a prominent role, given that their labour
intensiveness generates employment. The SME segment also plays a major role
in developing countries such as India in an effort to alleviate poverty and propel
sustainable growth. They also lead to an equitable distribution of income due to
the nature of business. Moreover, SMEs in countries such as India help in
efficient allocation of resources by implementing labour intensive production

processes, given the abundant supply of labour in these countries, wherein
capital is scarce.
The enactment of the Micro, Small and Medium Enterprises Development

(MSMED) Act, 2006 was a landmark initiative taken by the Government of India
to enable the SMEs’ competitive strength, address the issues and challenges
and reap the benefits of the global market. SME policy initiatives at the national
and state level are aimed at strengthening the role of SMEs at the base as well
as at the higher level.
With globalisation, all forms of production of goods and services are getting
increasingly fragmented across countries and enterprises. With large players
adopting different models of business that include involvement of the traditional
partners, suppliers or distributors at a different level, SMEs now are experiencing
a new model of functioning in the value chain. The past few years has seen the
role of the SME segment evolve from a traditional manufacturer in the domestic
market to that of an international partner. The restructuring of production at the
international level through increased outsourcing is having significant effects on
small and medium entrepreneurs in a positive as well as negative manner.
Demand in terms of new niche products and services are providing more
opportunities for SMEs that are in a better position to take advantage of their
flexible nature of operations. However, at the same time they have realized their
drawback in terms of inadequate availability of managerial and financial
resources, lack of working capital, personnel training and inability to innovate on
a faster pace.
The combined effect of market liberalisation and deregulation has forced

the SME segment to change their business strategies for survival and growth.
Some of the changes that SMEs are focusing on include acquiring quality
certifications, increasing use of ICT, creating e-business models and
diversification to meet the increasing competition. Globalisation, economic
liberalisation and the WTO regime would undoubtedly open up a unique

opportunity for the largest business community, i.e. SMEs through effective
involvement in international trade by streamlining certain factors, such as, access
to markets, access to technology, access to skills, finance, development of
necessary infrastructure, SME-tax friendly environment, exchanges of best
practices to name a few.
The SME sector has also registered a consistently higher growth rate than
the overall manufacturing sector. In fact, it plays a dual role since the output
produced by SMEs is not only about final consumption but also a source of
capital goods in the form of inputs to heavy industries.
3.5 Financing the SMEs

In Feb 2008, the Ministry of Micro, Small and Medium Enterprises (MSME),
continued with its dereservation policy by removing 79 items from the list of 114
items reserved specifically for SSI (small scale industries) manufacturing. Only
35 items remain in the reserved category from the total 836 selected in 1994
denoting the declining monopoly of the SSI segment on the reserved products.
However, the government has set up various schemes in place such as the
Credit Linked Capital Subsidy Scheme, MSME Cluster Development Scheme
and ISO 9000 Reimbursement Scheme to help SMEs for procuring timely funds.
Also the government has put in place the Credit Guarantee Scheme to
encourage banks to lend up to Rs 0.50 million without collateral. There has also
been a recent budget announcement of setting up of a Risk Capital Fund.
Though SMEs are being touted as the priority sector within the economy,
they continue to face problems pertaining to finance. When it comes to banks,
they have a very traditional way of lending to this segment against collateral and
SMEs end up being under financed. Evidently, the biggest challenge before the
SMEs today is to have access to non debt based and non-traditional financial
products such as external commercial borrowings, private equity, factoring etc.

Lately this segment has been witnessing winds of change in the new
sources of capital- in the form of private equity (PE) and foreign direct
investments (FDI). In Jan 2008, The Soros Economic Development Fund
(SEDF), Omidyar Network and Google.org announced a Small to Medium
Enterprise Investment Company with an initial corpus of $17 million for providing
capital to SMEs in underserved markets. Mauritius-based Frontline Strategy
launched a $200 million India Industrial Growth Fund (IIGF) for investment in
SMEs targeting companies, primarily in the industrial space with revenues
between Rs 200 – 1,000 million. In 2007, Mauritius-based Horizon advisors
launched Ambit Pragma Fund I, an India dedicated PE fund, with a corpus of
$100 million for providing equity capital and professional management advice to
SMEs.
Investments in the SME sector are not only by PE funds but this sector is
also attracting FDI. In this respect the government has removed the 24 per cent
cap on FDI in the SME sector. Foreign entities are also keen on promoting trade
and cooperation between SMEs of different countries. Genesis Initiative, an UK-
based organization consisting of entrepreneurs, policy makers and SMEs, is
trying to forge mutual cooperation between SMEs in India and UK for in terms of
JVs and partnerships in sectors such as textiles, IT, infrastructure etc.
3.6 Book of Instructions on Loans – (Punjab National Bank)

A book of instructions was provided to us to get a detailed understanding of the
terms used in the entire procedure. It was titled ‘Book Of Instructions on Loans’
which was meant for Internal Circulation among the Punjab National Bank staff.

3.7 Important Concepts
 BANK GUARANTEES: Banks come across a 'Guarantee' in two

capacities. One as a beneficiary when somebody guarantees the payment
of debt of bank's borrower in case of default. The other as a guarantor,
when the bank itself promises to pay the dues or discharge the liabilities of
its customers in favour of a third party. While in the former case, the Bank
is the creditor, in the latter case, Bank's liability is co-extensive with that of
the debtor.
 LETTERS OF CREDIT: Services of third party as an intermediary is

usually a bank who issues a letter of assurance to a seller at the request
of a buyer for payment of cost of goods/ services sold on certain terms
and conditions. Such an assurance letter is named as a "Letter of Credit".
 QUASI CAPITAL: Quasi capital will include (i) amount of Central/State

subsidy(ii) Long term unsecured interest free loans from government or
government agencies such as sales tax loan etc. (iii) long term unsecured
interest free loans from promoters provided such loans are subordinated
to the loans from banks/financial institutions (iv) Non-refundable deposits.
(v) Risk capital assistance provided by Risk Capital & Technology Finance
Corporation Ltd.

4. PROCESS / METHODOLOGY
Now after going through the conceptual support required for understanding the
project, a methodology has to be prepared for how to complete the project
successfully.
4.1 Project Methodology

The methodology/process followed is as follows :
a. The borrower submits the project report and all the relevant documents to
the bank.
b. The project report was given to me for an in depth analysis.
c. A pre-sanction appraisal and evaluation was then carried out by studying
the company’s financial statement.
d. Restructuring of the company’s Balance Sheet and Profit and Loss
Account in to the Credit Monitoring Arrangement (CMA) format.
e. The borrower company was rated using the CRISIL Credit Rating Model.
f. On being assured of the credit worthiness of the borrower, the loan is
disbursed.
 MAXIMUM PERMISSIBLE BANK FINANCE: MPBF is calculated when

the borrower wants loan for working capital requirement. The maximum
permissible bank finance will, therefore, be working capital gap less the
amount to be so contributed by the borrower.
4.2 Locale of the Project

Punjab National Bank is the second largest state-owned commercial bank
in India with about 5000 branches across 764 cities including 5 overseas
branches. The bank has its head office in New Delhi. The project is conducted
in the Punjab National Bank, Financing SME, Maker Tower, cuff parade,
Mumbai.
4.3 Sample Size

The sample chosen for appraisal was one, consisting of proposals of SME
accounts and takeover accounts.
4.4 Source of Data
The project is made through secondary data. Secondary data in terms of

Financial Statements i.e. Balance Sheet, Profit and loss and Cash Flow
Statement were studied. The data is then formatted as per the CMA requirement
of the bank. The given data was studied and the relevant ratios were computed
to ascertain the credit worthiness of the borrower. The various parameters such
as financial and industry were studied and hence a loan appraisal was created.

5. SME POLICY
5.1 Objectives
The SME Loan Policy is framed with the following objectives:

• To improve flow of credit to SME Sector.
• To formulate norms of lending to SME sector, to ensure availability of
adequate and timely credit to the sector
• To provide guidelines to the branches to dispense credit to SME Sector.
• To devise an organizational structure at all levels for handling SME credit
portfolio in a more focused manner.
• To comply with terms of Policy package announced by Hon’ble Union
Finance Minister on 10.08.2005 and further guidelines received from
Reserve Bank of India from time to time for improving flow of credit to
SME Sector.
5.2 Scope of Policy

This Policy will form a part of Bank’s Domestic Loan Policy and will cover
following:
 Composition of SME Sector
 Broad guidelines on lending to SME Sector
 SME Loan Factory Model
 Credit Rating and Pricing Policy
 Identifying Thrust Industries
 Discretionary lending powers
 Training needs

 Reporting and Monitoring System
Small & Medium Enterprises Sector
The SME segment is broadly classified as under in MSMED ACT, 2006 :

Particulars Investment in Plant & Investment in Equipment
Machineries in case of in case of Service Sector
Manufacturing Enterprises *
Enterprises *
Micro Enterprises Upto Rs. 25/- lacs Upto Rs.10/- lacs
Small Enterprises Above Rs. 25/- lacs and Above Rs.10/- lacs and
upto Rs.500/- lacs upto Rs.200/- lacs
Medium Above Rs.500/- lacs and Above Rs.200/- lacs and

Enterprises upto Rs.1000/- lacs up
to Rs.500/- lacs
* original cost excluding land and building and the items specified by the Ministry
of Small Scale Industries
** original cost excluding land & Building and Furniture, Fittings and other items
not directly related to the service rendered or as may be notified under MSMED
Act, 2006
5.4 Bank’s Approach To SME Sector
SMEs are growth engines for development of Economy. Bank has therefore for
internal purposes given focused attention to finance all Commercial enterprises
i.e. enterprises which may be outside the purview of regulatory definition of SME
but having turnover upto Rs 150.00 crores and new infrastructure and real estate
projects where the project cost is upto Rs. 50/- crores by treating them as part of
SME segment. SME Banking business will thus include the following across the
bank:

 Micro, Small and Medium Enterprises – as per regulatory definition
irrespective geographical location, i.e. rural, semiurban, urban, metro
areas.
 All other entities with their annual sales turnover of Rs. 1/- crore to Rs.
150/- crores and new infrastructure and real estate projects, where the
project cost is upto Rs. 50/- crores.
 SMEs which are Associate/sister concerns of Wholesale Banking
customers.
 Clubs, Trusts, etc.
 Financing under various Government schemes launched for MSME
Sector.
However, such units, which are outside the purview of regulatory definition will
not form part of Priority Sector lending.
5.5 The Bank’s SME Products
The following products are launched for SME sector across the country:
 SARTHAK UDYAMI – For setting up new units; expansion, modernization

& renovation of existing units; purchase of land, construction of building,
machinery, equipment etc; and working capital facilities.
 PNB PRAGATI UDYAMI – The financial assistance to both new and

existing units, for acquiring fixed assets i.e. land, factory, building, plants,
machinery and working capital facilities for Service industry like
Advertising Agencies, Marketing / Industry Consultancy, Typing / Xerox
Centre, Industrial Testing Labs, Cyber Café, Auto-repair, Laundry & Dry
Cleaning, ISD / STD Booths, Cable TV Networks, Beauty Parlor and
Crèche, etc.

 PNB KUSHAL UDYAMI – LOANS TO CRAFTSMEN & TECHNICALLY
QUALIFIED ENTREPRENEURS
To set up Micro and Small units, for purchase of fixed assets and meeting
working capital needs.
 PNB GARRAGE YOJANA- For technology upgradation of Automobile

Garrage (Workshops)
 Loans for setting up Industrial Estates- Cooperative Societies,

partnership firms and joint stock companies who have sponsored projects
for establishing economically viable industrial estates and have the
necessary approval of State Directorate of Industries and local authorities,
would be assisted under the Scheme.
 PNB VIKAS UDYAMI – For acquiring ISO-9000 certification, Expenses on

consultancy, documentation, audit certification fees, equipment and
calibrating instruments required would be taken into account for
determining loan requirement.
 PNB SME SAHAYOG SCHEME – For contingencies like additional

purchase of raw material including packing material/ handling charges for
the execution of bulk orders, taking part in national / international trade
exhibition, payment of consultancy charges, machinery repair, labour
payments, etc.

6. CREDIT RISK RATING
6.1 Introduction
 Introduced in July 2001
 Credit Risk Rating software was put into internal server of the bank with
the name ‘‘PNB-TRAC’’ (Techniques for Risk Assessment of Credit) on
15.03.2006
 The objective of the credit risk management is to bring about a balanced

and healthy credit portfolio at low to moderate levels of risks.
 Credit Risk
Credit Risk is the risk of default by borrower due to inability and/or
unwillingness to repay his debts in accordance with the agreed terms and
conditions.
 Credit Risk Rating

Credit Risk Rating is a rating assigned to borrowers, based on an analysis
of their ability and willingness to repay the debt taken from the bank. This
rating is assigned on a scale, which generally has 6 to 8 levels.
Companies falling in the same credit risk category have similar probability
of default. Better the rating, lower is the probability of default. The
probability of default increases in an exponential manner as the credit risk
rating deteriorates.
 The bank has developed the following Credit Risk Rating Models
Sr. No. Credit Risk Rating Applicability
Model
Total Limits Sales
1 Large Corporate Above Rs 15 crore Above Rs 100 crore

(OR) except Trading
concerns
2 Mid Corporate Above Rs 5 cr and Above Rs 25 cr and
upto Rs 15 cr (OR) upto Rs 100 cr
All trading concerns falling in the large

corporate category shall also be rated under
this model
3 Small Loans Above Rs 50 lakh and Upto Rs 25 Cr
upto Rs 5 cr (AND)
4 Small Loans II Above Rs 2 lakh and

upto Rs 50 lakhs
5 NBFC All Non Banking Financial Companies

irrespective of Limit
6 New Projects Rating Above Rs 5 Cr (OR) Cost of project above
Model Rs 15 Cr
Sources of risks considered in the rating models

The credit risk rating model considers the following broad areas in evaluating the
default risk of a borrower
1. Financials

2. Business/Industry Performance
3. Industry Outlook
4. Quality of Management
5. Conduct of Account
The rating tool is focused on the above-mentioned areas for assessing the credit
risk rating of a company. The areas are bifurcated into sub-areas and each sub-
area is further split into a number of parameters.
Different weights (in %) assigned for the above mentioned areas under various
models as under –
Models
Parameters Large Mid Small loan SL II New Project
Financial 40% 40% 40% 36% 25%
Business and 25% 25% 20% 16% 30%
Industry
Management 25% 20% 20% 28% 45%
Conduct of A/C 10% 15% 20% 20% ---
Weights in bold denote highest weights assigned in particular model.
6.2 Methodology of the credit risk rating tool
1. The rating is done based on parameters such as- financials, business/

industry, management, conduct of account, etc. The scores are assigned to
each of the parameters in the different sections on a scale of 0 to 4 up to 2
decimal points with 0 being very poor and 4 being excellent. The scoring of
some of these parameters is subjective while for some others it is done on
the basis of pre-defined objective criteria. Guidelines for assigning scores to
the different parameters have been discussed in concerned rating manuals.

2. The scores given to the individual parameters multiply by allocated weights
are aggregated and a composite score for the company is arrived at in
percentage terms. Higher the score obtained by a company, better is its credit
rating. Weights have been assigned to different parameters based on their
importance.
Weights assigned to different parameters have been loaded in the ‘‘PNB TRAC’’
software. After allocating scores to all the parameters, the aggregate score is
calculated and displayed by the software.
3. Wherever a particular parameter is not applicable, no score should be given.

The parameter should be made ‘NA’ so that the weight assigned to that
parameter gets distributed among the other parameters in that section
automatically.
4. The overall percentage score obtained from step 2 on a scale of 0 to 100 is

then translated into a rating on a scale from AAA to D according to a pre-defined
range as under
Rating Risk profile Score (%) obtained Grade within
category the rating
category
PNB - AAA Minimum Above 80.00 PNB - AAA
Risk
PNB - AA Marginal Risk Above 77.50 up to 80.00 PNB – AA +
Above 72.50 up to 77.50 PNB - AA
Above 70.00 up to 72.50 PNB - AA -
PNB - A Modest Risk Above 67.50 upto 70.00 PNB - A +
Above 62.50 up to 67.50 PNB - A
Above 60.00 up to 62.50 PNB - A -
PNB - BB Average Risk Above 57.50 up to 60.00 PNB - BB +
Above 52.50 up to 57.50 PNB - BB
Above 50.00 up to 52.50 PNB - BB -
PNB - B Marginally Above 47.50 up to 50.00 PNB - B +
Acceptable Above 42.50 up to 47.50 PNB - B
Risk Above 40.00 up to 42.50 PNB - B -
PNB - C High Risk Above 30.00 up to 40.00 PNB - C

PNB - D Caution Risk 30.00 and below PNB - D
Ratings with AAA, AA, A, BB AND B grades signify ‘Investment Grade’ and
C and D rating grades are called ‘‘High Risk Grade’’.
5. Impact of Single Most Crucial Factor on Rating
The vetting authority on the basis of the crucial factors mentioned below may
downgrade the rating of an account.
‘‘Effects of any major developments which are not yet cleared, major damage to
plant/stocks, court judgement on environmental threats, involvement of
promoters/company in excise/FERA/tax-evasion, recovery suit/winding-up
petition filed by Creditors/FIs/Banks, any civil/criminal proceedings against the
promoters/company, change of management etc.’’
OR
Any other crucial factor, which has come to the notice of the bank and has a
substantial effect on the operational efficiency/viability of the unit such as
i. Affecting willingness/capability of the promoters to repay the debt as per
agreed terms and conditions
ii. Substantial impairment in the value of assets including Block
Assets/Loans and Advances/ Investments. Inventory/Debtors
iii. Obsolescence of the product or any major change in the Govt. Policies
having the substantial impact on the performance of the company, etc
The factors stated above are only indicative and the account may be
downgraded on any other crucial factor, which affects the operating
efficiency/viability of the unit.
6.3 GENERAL GUIDELINES

1. The credit risk rating model is applicable to the small borrowal accounts
under STANDARD category availing aggregate limits (Fund based, TL
and Non-Fund based) above Rs 2 Lacs and upto Rs 5 crores and having
turnover upto Rs 25 crores p.a
2. All borrowers under small loans category i.e. Manufacturing concerns,

Traders, Contractors, Service Sector, etc including borrowers who are
already in operation and coming to our fold first time are covered.
However following categories of borrowers shall be excluded
- Non-Banking Financial Companies (NBFC)
- New Companies
3. The rating should be done on the basis of latest Audited Financial

Statements (not more than 1 year old) only and should be for a complete
year of operations. On stabilization of the rating model at branch level, it is
proposed to undertake the risk rating exercise at half yearly intervals.
4. It is to be ensured that each parameter of the Credit Risk Rating format is

evaluated and the parameter should be left un-assessed.
5. All eligible accounts under the small loan segment in the branch should be
rated.
6. In case a borrower availing term loan/approaching for fresh term loan the
parameters for term loan must be invariably assessed and the total score
obtained by the party out of 120 must be converted to score out of 100.

6.4 THE CREDIT RISK RATING TOOL – AN OVERVIEW
Introduction
The credit risk rating tool has been developed with a view to provide a standard
system for assigning a credit risk rating to the borrowers of the bank according to
their risk profile.
Credit Risk Rating Structure
The credit risk rating model has been developed to capture credit risk factors
under areas viz.
1. Financials
2. Business/Industry
3. Management
4. Conduct of Account
Each parameter is further discussed:
INTRODUCTION
Effectiveness of Credit Management in the bank is highlighted by the quality of

its loan portfolio. Every Bank is striving hard to ensure that its credit portfolio is
healthy and that Non Performing Assets are kept at lowest possible level, as both

of these factors have direct impact on its profitability. In the present scenario
efficient project appraisal has assumed a great importance as it can check and
prevent induction of weak accounts to our loan portfolio. All possible steps need
to be taken to strengthen pre sanction appraisal as always “Prevention is better
than Cure”. With the opening up of the economy rapid changes are taking place
in the technology and financial sector exposing banks to greater risks, which can
be broadly classified as under:
Government regulations and policies, availability of infrastructure

Industry Risks facilities, Industry Rating, Industry Scenario & Outlook, Technology
Up gradation, availability of inputs, product obsolescence, etc.
Operating efficiency, competition faced from the units engaged in

similar products, demand and supply position, cost of labor, cost of
Business Risks
raw material and other inputs, pricing of product, surplus available,
marketing, etc.
Background, integrity and market standing/ reputation of promoters,

organizational set up and management hierarchy,
Management expertise/competence of persons holding key position in the
Risks organization, delegation and decentralization of authority,
achievement of targets, track record in execution of project, debt
repayment, industry relations etc.
Financial strength/standing of the promoters, reliability and

reasonableness of projections, past financial performance, reliability
Financial Risks
of operational data and financial ratios, adequacy of provisioning for
bad debts, qualifying remarks of auditors/inspectors etc.
In light of the foregoing risks, the banks appraisal methodology should keep pace
with ever changing economic environment. The appraisal system aims to
determine the credit needs/requirements of the borrower taking into account the
financial resources of the client. The end objective of the appraisal system is to
ensure that there is no under - financing or over - financing. Following are the
aspects, which need to be scrutinized and analyzed while appraising:

 MARKET ANALYSIS
(Demand & Potential)
The market demand and potential is to be examined for each product item and
its variants/substitutes by taking into account the selling price of the products to
be marketed vis-a-vis prices of the competing products/substitutes, discount
structure, arrangement made for after sale service, competitors' status and their
level of operation with regard to production and products and distribution
channels being used etc. Critical analysis is required regarding size of the market
for the product(s) both local and export, based on the present and expected
future demand in relation to supply position of similar products and availability of
the other substitutes as also consumer preferences, practices, attitudes,
requirements etc. Further, the buy-back arrangements under the foreign
collaboration, if any, and influence of Government policies also needs to be
considered for projecting the demand. Competition from imported goods,
Government Import Policy and Import duty structure also need to be evaluated.
 TECHNICAL ANALYSIS
In a dynamic market, the product, its variants and the product-mix proposed to
be manufactured in terms of its quality, quantity, value, application and current
taste/trend requires thorough investigation.
Location and Site
Based on the assessment of factors of production, markets, Govt. policies and

other factors, Location (which means the broad area) and Site (which signifies
specific plot of land) selected for the Unit with its advantages and disadvantages,
if any, should be such that overall cost is minimized. It is to be seen that site
selected has adequate availability of infrastructure facilities viz. Power, Water,
Transport, Communication, state of information technology etc. and is in
agreement with the Govt. policies. The adequacy of size of land and building for
carrying out its present/proposed activity with enough scope for accommodating
future expansion needs to be judged.
Raw Material
The cost of essential/major raw materials and consumables required their past
and future price trends, quality/properties, their availability on a regular basis,
transportation charges, Govt. policies regarding regulation of supplies and prices
require to be examined in detail. Further, cost of indigenous and imported raw
material, firm arrangements for procurement of the same etc. need to be
assessed.
Plant & Machinery, Plant Capacity and Manufacturing Process
The selection of Plant and Machinery proposed to be acquired whether

indigenous or imported has to be in agreement with required plant capacity,
principal inputs, investment outlay and production cost as also with the
machinery and equipment already installed in an existing unit, while for the new
unit it is to be examined whether these are of proven technology as to its
performance. The technology used should be latest and cost effective enabling
the unit to compete in the market. Purchase of reconditioned/old machinery is to
be dealt in terms of laid down guidelines. Compatibility of plant and machinery,
particularly, in respect of imported technology with quality of raw material is to be
kept in view. Also plant and machinery and other equipments needed for various
utility services, their supply position, specification, price and performance as also
suppliers' credentials, and in case of collaboration, collaborators' present and
future support requires critical analysis. Plant capacity and the concept of

economic size has a major bearing on the present and future plans of the
entrepreneur(s) and should be related to the availability of raw material, product
demand, product price and technology.
The selected process of manufacturing indicating the adequacy, availability and

suitability of technology to be used along with plant capacity, manufacturing
process needs to studied in detail with capacities at various stages of production
being such that it facilitates optimum utilization and ensures future expansion/
debottlenecking, as and when required. It is also to be ensured that
arrangements are made for inspection at intermediate/final stages of production
for ensuring quality of goods on successful commencement of production and
completion, wherever required.
 FINANCIAL ANALYSIS
The aspects which need to be analyzed under this head should include cost of
project, means of financing, cost of production, break-even analysis, financial
statements as also profitability/funds flow projections, financial ratios, sensitivity
analysis which are discussed as under:
Cost of Project & Means of Financing
a. The major cost components of any project are land and building including
transfer, registration and development charges as also plant and machinery,
equipment for auxiliary services, including transportation, insurance, duty,
clearing, loading and unloading charges etc. It also involves consultancy
and know-how expenses which are payable to foreign collaborators or
consultants who are imparting the technical know-how. Recurring annual
royalty payment is not reflected under this head but is accounted for under
the profitability statements. Further, preliminary expenses, such as, cost of
incorporation of the Company, its registration, preparation of feasibility

report, market surveys, pre-operative expenses like salary, travelling, start up
expenses, mortgage expenses incurred before commencement of
commercial production also form part of cost of project. Also included in it
are capital issue expenses which can be in the form of brokerage,
commission, advertisement, printing, stationery etc. Finally, provisions for
contingencies to meet any unforeseen expenses, such as, price escalation or
any other expense which have been inadvertently omitted like margin for
working capital requirements required to complete the production cycle,
interest during construction period, etc. are also part of capital cost of project.
It is to be ensured while appraising the project that cost and various
estimates given are realistic and there is no under/over estimation. Further,
these cost components should be supported by proper quotations,
specifications and justifications of land, machinery and know-how expenses
etc.
ii. Besides Bank’s loan, the project cost is normally financed by bringing capital
by the promoters and shareholders in the form of equity, debentures,
unsecured long term loans and deposits raised from friends and relatives
which are not repayable till repayment of Bank's loan. Resources are raised
for financing project by raising term loans from Institutions/Banks which are
repayable over a period of time, deferred term credits secured from suppliers
of machinery which are repayable in installments over a period of time. The
above is an illustrative list, as the promoters have now started raising funds
through Euro-issues, Foreign Currency loans, premium on capital issues,
etc. which are sometimes comparatively cheap means of finance. Subsidies
and development loans provided by the Central/State Government in notified
backward districts to attract entrepreneurs are also means of financing a
project. It is to be ascertained that requirement of finance has been properly
tied-up for unhindered implementation of a project. The financing structure
accepted must be in consonance with generally accepted levels along with

adequate Promoters' stake. The resourcefulness, willingness and capacity
of promoter to contribute the same have also to be investigated.
In case of project finance, the promoter/borrower may bring in upfront his

contribution (other than funds to be provided through internal generation) and
the branches should commence its disbursement after the stipulated funds
are brought in by the promoter/borrower. A condition to this effect should be
stipulated by the sanctioning authority in case of project finance, on case to
case basis depending upon the resourcefulness and capacity of the promoter
to contribute the same. It should be ensured that at any point of time, the
promoter’s contribution should not be less than the proportionate share.
Profitability Statement
The profitability statement which is also known as Ìncome and Expenditure

Statement' is prepared after considering the net sales figure and details of direct
costs/expenses relating to raw material, wages, power, fuel, consumable
stores/spares and other manufacturing expenses to arrive at a figure of gross
profit. Thereafter, all other expenses like salaries, office expenses, packing,
selling/distribution, interest, depreciation and any other overhead expenses and
taxes are taken into account to arrive at the figure of net profit. The projections
of profit/loss are prepared for a period covering the repayment of term loans.
The economic appraisal includes scrutinizing all the items of cost, and examining
the assumptions, if any, to ensure that these are realistic and achievable. There
should not be any optimism or pessimism in working out profitability projections
since even a little change in the product-mix from non-remunerative to
remunerative or vice-versa can distort the picture. While preparing profitability
projections, the past trends of performance in an industry and other
environmental factors influencing the cost and revenue items should also be
considered objectively.

Generally speaking, a unit may be considered as financially viable, progressive
and efficient if it is able to earn enough profits not only to service its debts timely
but also for future development/growth.
Break-Even Analysis
Analysis of break-even point of a business enterprise would help in knowing the

level of output and sales at which the business enterprise just breaks even i.e.
there is neither profit nor loss. A business earns profit if it operates at a level
higher than the break-even level or break-even point. If, on the other hand,
production is below this level, the business would incur loss. The break-even
point in an algebraic equation can be put as under:
Break-even point Total Fixed Cost / (Sales price per unit - Variable Cost per
(Volume or Units)
unit)
Break-even point
(Total Fixed Cost x Sales) / (Sales - Variable Costs)
(Sales in rupees)
The fixed costs include all those costs which tend to remain the same up to a
certain level of production while variable costs are those costs which tend to
change in proportion with the volume of production. As regards unit sales price,
it is generally the same for all levels of output.
The break-even analysis can help in making vital decisions relating to fixation of
selling price make or buy decision, maximizing production of the item giving
higher contribution etc. Further, the break-even analysis can help in
understanding the impact of important cost factors, such as, power, raw material,
labor, etc. and optimizing product-mix to improve project profitability.
Fund-Flow Statement
A fund-flow statement is often described as a ‘Statement of Movement of Funds’

or ‘where got: where gone statement’. It is derived by comparing the successive

balance sheets on two specified dates and finding out the net changes in the
various items appearing in the balance sheets.
A critical analysis of the statement shows the various changes in sources and
applications (uses) of funds to ultimately give the position of net funds available
with the business for repayment of the loans. A projected Fund Flow Statement
helps in answering the under mentioned points.
• How much funds will be generated by internal operations/external

sources?
• How the funds during the period are proposed to be deployed?
• Is the business likely to face liquidity problems?
Balance Sheet Projections
The financial appraisal also includes study of projected balance sheet which
gives the position of assets and liabilities of a unit at a particular future date. In
other words, the statement helps to analyze as to what an enterprise owns and
what it owes at a particular point of time.
An appraisal of the projected balance sheet data of the unit would be concerned
with whether the projections are realistic looking to various aspects relating to the
same industry.
6.5 Financial Ratios
While analyzing the financial aspects of project, it would be advisable to analyze

the important financial ratios over a period of time as it may tell us a lot about a
unit's liquidity position, managements' stake in the business, capacity to service
the debts etc. The financial ratios which are considered important are discussed
as under:

Ratio Formula Remarks
There cannot be a rigid rule to a satisfactory
debt-equity ratio, lower the ratio higher is the
degree of protection enjoyed by the creditors.
These days the debt equity ratio of 1.5:1 is
considered reasonable. It, however, is higher
Debt- in respect of capital intensive projects. But it
1 Equity Debt (Term Liabilities) is always desirable that owners have a
Ratio substantial stake in the project. Other features
Equity
like quality of management should be kept in
(Where, Equity = Share view while agreeing to a less favorable ratio.
capital, free reserves,
In financing highly capital intensive projects
premium on shares, , etc. after
adjusting loss balance)
like infrastructure, cement, etc. the ratio could
be considered at a higher level.
This ratio of 1.5 to 2 is considered reasonable.
Debt + Depreciation + A very high ratio may indicate the need for
Net Profit (After Taxes) lower moratorium period/repayment of loan in

Debt- + Annual interest on a shorter schedule. This ratio provides a
Service long term debt measure of the ability of an enterprise to
2
Coverage service its debts i.e. ìnterest' and `principal
Ratio Annual interest on long repayment' besides indicating the margin of
term debt + safety. The ratio may vary from industry to
Repayment of debt industry but has to be viewed with
circumspection when it is less than 1.5.
3 TOL / Tangible Net Worth This ratio gives a view of borrower's capital

(Paid up Capital +
Reserves and Surplus
- Intangible structure. If the ratio shows a decreasing
Assets) trend, it indicates that the borrower is relying

TNW Ratio
more on his own funds and less on outside
Total outside Liabilities funds and vice versa
(Total Liability - Net
Worth)
Operating Profit
This ratio gives the margin available after
(Before Taxes
Profit- meeting cost of manufacturing. It provides a
excluding Income from
4 Sales yardstick to measure the efficiency of
other Sources)
Ratio production and margin on sales price i.e. the
pricing structure
Sales
This ratio is of a primary importance to see
how best the assets are used. A rising trend
of the ratio reveals that borrower has been
Sales-
making efficient utilization of his assets.
Tangible Sales
5 However, caution needs to be exercised when
Assets
Total Assets - fixed assets are old and depreciated, as in
Ratio
Intangible Assets such cases the ratio tends to be high because
the value of the denominator of the ratio is
very low.
Higher the ratio greater the short term liquidity.
This ratio is indicative of short term financial
position of a business enterprise. It provides
margin as well as it is measure of the business
Current enterprise to pay-off the current liabilities as
6
Ratio they mature and its capacity to withstand
Current Assets
sudden reverses by the strength of its liquid
Current Liabilities position. Ratio analysis gives indications; to be
made with reference to overall tendencies and
parameters in relation to the project.

Sales
Output This ratio is indicative of the efficiency with
7 Investment Total capital employed which the total capital is turned over as
Ratio (in fixed & current compared to other units in similar lines.
assets)
MANAGEMENT & ORGANIZATION ANALYSIS
Appraisal of project would not be complete till it throws enough light on the
person(s) behind the project i.e. management and organization of the unit. It is
seen that some projects may fail not because these are not viable but because of
the ineffectiveness of the management and the organization in controlling various
functions like production, marketing, finance, personnel, etc. The appraisal
report should highlight the strengths and weaknesses of the management by
commenting on the background, qualifications, experience, and capability of the
promoter, key management personnel, and effectiveness of the internal control
systems, relation with labor, working conditions, wage structure, and the other
assigned essential functions. In case the promoter(s) have interest, in other
concerns as Proprietor or Partner or Director, the appraisal report should also
comment on their performance in such concerns.
A business is more vulnerable if decision making in all the functional areas rests
with a particular person, in other words, òne man show'. Further, the
management and the organization should be conducive to the size and type of
business. In case it is not so, it should be ensured that professional managers
are inducted to strengthen the organization.

 APPRAISAL OF PROJECT - A CHECK LIST
An indicative list of issues which need to be looked into while appraising a project
is given below:
1. Reasonable demand projections keeping in view the

size of the market, consumption level, supply position,
export potential, import substitute, etc.
2. Competitors' status and their level of operation with
regard to production and sales.
3. Technology advancement/Foreign Collaborator's
Status/Buy-back arrangements etc.
4. Marketing policies in practice, for promotion of
MARKETING
product(s) and distribution channels being used.
Expenses on marketing are done so as to popularize the
product.
5. Local/foreign consumer preferences, practices adopted,
attitudes, requirements etc.
6. Influence of Govt. policies, imports and exports in terms
of quantity and value.
7. Marketing professionals employed their competence,

knowledge and experience.

1.Product and its life cycle, product-mix and their
application.
2.Location, its advantages/disadvantages, availability of
infrastructural facilities, Govt. concessions, if any,
available there.
3.Plant and machinery with suppliers' credentials and
capacity attainable under normal working condition.
TECHNICAL
4.Process of manufacturing indicating the choice of
technology, position with regard to its commercialization
and availability.
5.Plant and machinery - its availability, specification,
price, performance.
6.Govt. clearance/ license, if any, required.
7.Labor/ Manpower, type of skills required and its

availability position in the area.
FINANCIAL
1.Total project cost and how it is being funded/financed.

2.Contingencies and inflation duly factored in project
cost.
3.Profitability projections based on realistic capacity
utilization and sales forecast with proper justification.
Unrealistic/ambitious sales projections without
reference to past performance and justification to be
avoided.
4.Break-even analysis, fund flow and cash flow
projections.
5.Balance sheet projections should be realistic and
based on latest available data. The components of

financial ratios should be subjected to close scrutiny.
6.Aspect of support of parent company, wherever

applicable, may be taken into account.
1. Financial standing and resourcefulness

of the management.
2. Qualifications and experience of the
promoters and key management personnel.
3. Understanding of the project in all of its
aspects - financing pattern, technical knowledge and
MANAGERIAL marketing programme etc.
4. Internal control systems, delegation of
adequate powers and entrusting responsibility at
various levels.
5. Other enterprises, if any, wherein the
promoters have the interest and how these are
functioning.
1.Impact on increase in level of savings and income

distribution in society and standard of living.
2.Project contribution towards creation and rate of
increase of employment opportunity, achieving self
ECONOMIC
sufficiency etc.
3.Project contribution to the development of the region,

its impact on environment and pollution control

To judge whether the project is viable, i.e. it can generate adequate surplus for
servicing its debts within a reasonable period of time and still left with some
funds for future development. This involves taking an over-all view to analyse the
strengths and weaknesses of the project. It should also be analysed to see
whether the management and organisation can prove effective for successful
implementation of the project
6.6 SYSTEM FOR ASSIGNMENT & APPRAISAL OF RATING

The process of rating and vetting is as under:
Loan
Vetting/Confirming
Sanctioning Credit Risk Rating Authority
Authority
Authority
i. Zonal CRMD in consultation
with branches
Head Office GM (RMD), HO
ii. Large Corporate Branches
i. In case of Large Corporate

Model, ELB/VLB
Zonal / Circle
Zonal CRMD
Office ii. In case of other Models,
branches to rate the accounts
An official designated by
the Incumbent not
connected with
Branch Office Officer/Manager, Credit Section Processing/
recommending/rating of
the concerned loan
proposal
In order to adopt internal rating based approaches (IRB) for credit risk, Basel II
has placed certain minimum requirements which inter-alia require, validation of

rating system, process and estimation of all relevant risk components. Banks
must regularly compare realized default rates with estimated probability of
default (PD) of each grade and able to demonstrate to its supervisor (RBI), that
the internal validation process enable it to assess the performance of internal
rating and risk estimation system consistently and meaningfully. In view of above
fact, not only rating but consistent practices in evaluation of credit risk rating as
well as evolving and updating robust data on various risk components is must for
adopting IRB approaches.
CONTROLS
The Credit Risk Management process in the bank encompasses the following
management Control techniques which help in mitigating the adverse impacts of
credit risk in its credit portfolio.
i. Credit Approving Authority
a. Credit Committee
b. Linkage of loaning powers with risk rating categories
ii.Prudential Exposure limits
iii.Risk Based Pricing
iv.Portfolio Management
v.Loan Review Mechanism
vi.Legal documentation
vii.Preventive Monitoring System
viii.Others
a. Use of CIBIL data and RBI defaulters list
b. Diversification of Risks

6.7 IMPORTANT CONCEPTS
 Internal Rate of Return
The discount rate often used in capital budgeting that makes the net present
value of all cash flows from a particular project equal to zero. Higher a project's
IRR the more desirable it is to undertake the project. IRR should be higher than
the Cost of the project (interest rate in case of project financing)
 Sensitivity Analysis
While preparing and appraising projects certain assumptions are made in respect
of certain critical/sensitive variables like selling price/cost price per unit of
production, product-mix, plant capacity utilization, sales etc. which are assigned
a `VALUE' after estimating the range of variation of such variables. The `VALUE'
so assumed and taken into consideration for arriving at the profitability
projections is the `MOST LIKELY VALUE'. Sensitivity Analysis is a systematic
approach to reduce the uncertainties caused by such assumptions made. The
Sensitivity Analysis helps in arriving at profitability of the project wherein critical
or sensitive elements are identified which are assigned different values and the
values assigned are both optimistic and pessimistic such as increasing or
reducing the sale price/sale volume, increasing or reducing the cost of inputs etc.
and then the project viability is ascertained. The critical variables can then be
thoroughly examined by generally selecting the pessimistic options so as to

make possible improvements in the project and make it operational on viable
lines even in the adverse circumstances.
PROCEDURE OF PROCESSING

7.1 APPLICATIONS FOR LOANS AND THEIR PROCESSING

 Standard schedule of fee / charges relating to the loan application
depending on the segment to which the accounts belong, will be made
available to all the prospective borrowers in a transparent manner, along
with the loan application, irrespective of the loan amount. Likewise,
amount of fee refundable in the event of non-acceptance of the
application, prepayment options and any other matter which affects the
interest of the borrower will also be made known to the borrower at the
time of application.
 Receipt of completed application forms will be duly acknowledged.
 The acknowledgement would also include the approximate date by which
the applicant should call on the Bank for preliminary discussions, if
deemed necessary.
 All loan applications will be disposed of within a prescribed time limit from
the date of receipt of duly completed loan applications i.e. with all the
requisite information/papers.
 In case of rejection of loan application, irrespective of category of loans or
threshold limits, the same would be conveyed in writing along with the
main reason(s), which led to rejection of the loan application
7.2 CHECKLIST OF DOCUMENTS

There are separate checklists for separate type of accounts
 Checklist for Fresh proposal
 Checklist for Renewal cum enhancement
7.3 ROC SEARCH REPORT

It is done for limited company to see whether they are registered or not. It cannot
be done for proprietorship/partnership firms. It is to ensure whether there is
charge against the
Director/company, whether the balance sheet submitted to bank is the same
submitted to the registrar. The search report is done by Chartered Accountant.

7.4 LEGAL SEARCH REPORT
It is done by empanelled advocate of the bank. It is to ensure that the land is
mortgagable or not, to ensure that there is no legal restrictions on the land (land
being agricultural).
7.5 VALUATION REPORT

It is done by the empanelled valuer of the bank. He does the valuation of the
property to ensure whether the property is worth the value which the borrower is
showing.
7.6 CIBIL REPORT

It is done to ensure whether there are no filed cases against the Borrower.
Moreover it can also disclose where has the borrower applied other than our
bank for the loan.
7.7 RBI WILLFUL DEFAULTER’S LIST

It is to ensure the borrower name is not there. The list is updated by all banks
into RBI’s database of the defaulters and the information can be checked there.
7.8 ICAI
There banks check the whether the Chartered Accountant of the company is
genuine CA or not.

7.9 FILLING OF BALANCE SHEET AS PER CMA REQUIREMENT
The balance sheet of a corporate entity as per Companies Act needs to be filled
by the Borrower before a meaningful analysis can be made.
7.10 ANALYZING & BENCHMARKING WITH RATIOS

All the ratios are checked and analyzed, as per their respective benchmarks
7.11 PRE-SANCTION INSPECTION

It is done by the bank officials. They visit the site and do the inspection of
securities. Also they look at the present status of the project in case of TL facility.
7.12 TEV REPORT

It is done to ensure whether the fresh proposal is techno-economically viable or
not. Other details have been mentioned earlier.
7.13 INTEREST RATE DETERMINED

After the credit rating accordingly interest rate is determined.
Finally the APPRAISAL NOTE is made according to Bank’s format along with
Terms and conditions.
7.14 LOAN APPRAISAL AND TERMS / CONDITIONS

 In accordance with Bank’s prescribed risk based assessment procedures,
each loan application will be assessed and suitable margin/securities will
be stipulated based on such risk assessment and Bank’s extant
guidelines, however without compromising on due diligence.
 The sanction of credit limit along with the terms and conditions thereof is
to be conveyed to the loan applicant in writing and applicant’s acceptance
of such terms and conditions will be obtained in writing. Such terms and

conditions as have been mutually agreed upon between the bank and
borrower prior to the sanction will only be stipulated.
 Copy of loan documents, along with a copy each of all relevant enclosures
quoted in the loan agreement should be furnished to all the borrowers at
the time of sanction / disbursement of loans. Standard sanction letter
would include instances of approval, disallowance, etc.
 In case of lending under consortium arrangement, the participating bank
would decide the timeframe to complete appraisal of the proposal and
communication of the decision. The Bank will abide by the decision of the
consortium.
7.15 SANCTION OF LOAN

If any advance sanctioned is not availed within 6 months from the date of
sanction, the sanction gets lapsed and the sanction should be revalidated before
its disbursement.
7.16 DOCUMENTATION
Documentation forms an important part of lending which establishes the
following:-
 Legally enforceable contractual relationship between the Bank and the
constituent such as Lender/Borrower.
 The nature and description of the security, if any, offered for the advance,
and the terms and conditions of sanctioning the advance.
 Bank’s unfettered rights for crystallization of securities when necessary
.When an unlikely event of default happens, as a last resort, documents
obtained by the Bank form the basis upon which the Bank may file a suit,
as and when found necessary, in a competent Court of Law against the
defaulting borrower/guarantor.
 Creation of Security is also an important aspect involving creation of
mortgage, assignment etc. Such charges are also to be registered with

competent authorities in case of certain type of organization say with
Registrar of Companies in case the borrower is a Limited Company.
7.17 VETTING OF DOCUMENTS
It is done by an approved advocate. Advances accounts with aggregate limit of

above Rs. 1 crore (Funded plus Non-Funded) would be verified by the
Bank’s Approved Advocate.
7.18 REQUIREMENTS BEFORE DISBURSEMENTS
The Branch Manager has to make necessary arrangements to ensure

compliance of the following aspects before making any disbursement under fresh
/ increase credit facilities and the proper record in this respect has to be kept by
the Branches for perusal of higher authorities / inspecting officers /auditors:
a. Full compliance of the stipulated terms and conditions (unless specifically

exempted by the competent authority)
b. Getting the documents duly vetted (wherever required) as per Bank’s
extant guidelines.
c. Ascertaining that the Borrower has obtained necessary license,
permission, clearance required for running the business.
d. Pre-disbursement inspection / site visits.
Insurance
All assets (stocks / fixed assets) charged to the Bank as security for advances
are to be comprehensively insured against the risk of theft / burglary, fire
&Strikes, Riots, Malicious Damages (SRMD), with an insurance company, in the
name of borrower / guarantor, with Bank Clause, at the borrower's expenses,
unless insurance is specifically waived or not required to be taken as per
provisions relevant to the lending scheme.

7.19 DISBURSEMENT OF LOANS INCLUDING CHANGES IN
TERMS AND CONDITIONS
 Disbursement of loans sanctioned is to be made immediately on total

compliance of terms and conditions including execution of loan documents
governing such sanction.
 Any change in terms and conditions, including interest rate and service
charges, will be informed individually to the borrowers.
 Changes in interest rates and service charges will be effected
prospectively.
 Consequent upon such changes any supplemental deeds, documents or
writings are required to be executed, the same shall also be advised.
Further, availability of facility will be subject to execution of such deeds,
documents or writings.
POST DISBURSEMENT SUPERVISION
1. PREVENTIVE MONITORING SYSTEM (PMS)
Objectives of PMS
The objective of PMS is to track & evaluate the health of borrower’s account on a
continuous basis and detect:
• Unsatisfactory/adverse signals/indicators at an early stage in a
comprehensive manner.
• Thorough probe into reasons behind observed signals and analysis

thereof.
• Speedy corrective/remedial actions/steps to prevent the account from

becoming NPA as well as to minimize the loan losses.

Preventive Monitoring System consists of two parts:
i. PMS Index and Rank
PMS Index is a numerical index consisting of 29 indicators Parameters

grouped into 6 sections. Penalty rates (weights) in the form of numerical
values have been assigned to each indicator (parameter) depending upon
their degree of impact on health of an account. The score assigned to any
parameter is stored for last one year at any point of time, which is known
as Cumulative score. The section-wise maximum of cumulative scores is
to be summed up to arrive at PMS Index Score. Based on PMS Index
Scores a scale of 1 to 10 has been devised, which is known as PMS
Ranking Scale. The PMS Rank indicates the state of health of an account.
The lower the PMS Rank, better the health of account and vice-versa.
ii. PMS Report
PMS Report, which has eight parts, describes brief profile of the borrower,
position of accounts, details of signals contributing to PMS Index Score,
reasons behind adverse signals and proposes corrective/ remedial steps
with time frame.
2. QUARTERLY MONITORING SYSTEM (QMS)
Bank has prescribed the QMS system for monitoring performance of big
borrower accounts enjoying working capital facilities of Rs. 1crore & above from
the banking system. QMS includes the submission of data on the prescribed
formats depending upon the economic activity of the borrower. Under this system
financial and operational information/ data is required to be submitted in two
different sets of formats
i. QMS I
This form is required to be submitted within six weeks from the close of
the quarter to which it relates. It gives information about the operations

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

8. ANALYSIS OF SME PROPOSAL
This chapter deals with the analysis of the SME proposals.

The analysis is carried out on various sections, namely:
(i) Details of the proposal
(ii) Financial parameters and assessment
(iii) Industry perception
8.1 Case Study - GREENFIELD PROPOSAL
Name of the Account : XYZ Private Ltd.

Branch : BEHALA BRANCH, KOLKATA
Region : KOLKATA METRO REGION
Zone : EASTERN ZONE
SECTION I: DETAILS OF THE PROPOSAL
Gist of the Proposal
1.1) a) Fresh Proposal for Term Loan for 81 months (72+9 months moratorium) for
setting up a multi specialty hospital at-ABC, Kolkata in the name of XYZ Private Ltd.
1.2) Fresh sanction of Fund Based Limits. ( Rs. in lacs)

Existing Proposed Increase
Fund Based Limits Nil 635 + 635.00
Non Fund Based Limits Nil Nil Nil
Total Exposure Nil 635.00 +635.00
Sanction / Ratification
Modifications in Terms & Condition: waiver of the personal guarantee of Dr. SP, Professional
director.
CRISIL RAM
SECURITY COVER SCORE
Facility Net % Effective Facility Borrower Rating Combined
Security LGD Score Rating Rating
Value
Term 1188.51 48.48 FR4 PNB6 CR6
Loan Adequate Investment grade – Moderate
Safety moderate safety Expected Loss
N.B. Project is being considered as a Greenfield project. Project rating under CRISIL RAM
based on the future projections from 2010-11 onwards, has been carried out by us.
Validation/Finalization of rating to be done by competent authority before sanction of the facility.

2.0 Basic Data:
Asset Classification NA, New Proposal
Bank’s Credit Rating As per table given above.
External Credit Rating Will be carried out after commissioning of Hospital.
Constitution Private Limited Company
CIN NO. *****
Date of Establishment 28/08/2009
Location: - ABC
Registered Office
Hospital ABC, kolkata
Group NA
Industry and Nature of Activity Healthcare, 82 bed Multi Speciality Hospital
To be classified as medium enterprise under MSME
(services) as per circular No.BCC: BR: 101/191 dtd.
08.07.09.
Registration under MSMED Act Enterpreneur Memorandum Number :
1) ******, issued by DIC, Kolkata, on 29.10.09, to set up the

pathological and diagnostic clinic at ABC, Kolkata-34
2) *****, issued by DIC, South 24 PGN, on 09.03.2010, to set

up Hospital at ABC which is valid for 2 years.
Dealing with the Bank since Fresh proposal
MPBF Nil.
Our Bank’s Share 100% in case of the proposed Term Loan
Rate of Interest
Term Loan 1.75 % over BPLR i.e.@13.75 %p.a. With monthly rests..
As per BCC: BR: 102/352 dtd. 26.11.2009 on ROI for SME

Sector.
Security Available As per Annexure – D of the proposal enclosed
Yield in the account Not applicable. Fresh Proposal.
PAN NO. ******, issued by ITO WD52(3)
Trade license ******** issued by KMC, for the year 2009-10.
Permission to establish Nursing NOC issued by CMO of Health, South 24 PGN, on

Home 08.03.2010
Fire safety Clearance Memo No: ******* dtd. 09.11.09, issued by DG, WB Fire
Emergency Services.
Insurance Prof. Indemnity Medical establishment Policy No. ********

dtd. 22.02.2010, obtained from United India Co. Insurance
Ltd. To cover the casualty during treatment due to
unavoidable circumstances.
Other Registration Registered with United medical practitioners and

Establishment Pvt. Ltd.

Major inspection irregularities Not applicable
Internal Audit Not Applicable
Concurrent Audit Nil

RBI Inspection N.A.
Statutory Audit Nil
Auditors of the company. LMN
Pollution Clearance The company has applied for Consent to establish, the
health care unit vide letter dtd. 04.11.09.
The consent to operate will be obtained after construction of
hospital.
Certificate of Enlistment Issued by Maheshtala Municipality on 12.11.09, to establish
the Hospital, vide license No. ****, valid upto 30.06.2010.
Municipal license (Enlistment certificate No. ***** dtd.

12.11.09) issued by Maheshtala municipality for the use of
premises for Non-residential purpose.
NOC on Public Health WB municipal NOC issued by Maheshtala municipality to carry out the
act 1993 business, valid till 30.06.2010
License from food deptt. Issued by Health officer Maheshtala Municipality for storing
of Medicine materials.
Clearance from Electric deptt for At present the electric connection has been taken in the
electric supply name of Mr. SK, consumer number *****, to carry out the
construction work at the site.
However, the company has deposited Rs. 4.88 lacs on
26.05.10 towards installing the dedicated, underground
powers lines with appropriate load.
Whether statutory dues have been Yes

paid
Whether the names of the Company / No
Associates or Directors appear in
RBI defaulters’ list and / or caution
list
Whether the Company / firm / No
promoters and their Associates are
on ECGC caution list. / Special
Approvals List.
Compliance of earlier sanctioned N.A. Presently no borrowing from BOB.
Terms
2.1) Banking arrangement: Sole Banking Arrangement (Rs in

lacs)
Name of Bank Non-fund Based
Fund Based
% Share Amount % Share Amount
Existin Propos Existin Propose Existi Propos Existin Propos
g ed g d ng ed g ed

PNB 100% 100% Nil 635.00 Nil Nil Nil Nil
Total 100% 100% Nil 635.00 Nil Nil Nil Nil
• Proposed Term Loan from Bank of Baroda, Behala Branch is related to finance for the
project of XYZ Hospital at ABC, kolkata against the primary security of 1 st charge of all
the moveable and immoveable assets of the Hospital and collateral security in the form of
EM of Hospital land and Building.
2.07) Names of Guarantors:

(Rs in lacs)
Sl. No Name of the Guarantors Net worth as on
31/03/2009
1 SK 67.78
2 RK 65.77
3 GK 23.73
Total 157.28
2.8) Business experience of Directors:
SK, M.D.
He is an educationist and a reputed entrepreneur in ABC, South Kolkata. He is in the business for
the last 40 years and has vast knowledge and experience in various areas of business. At
present Mr. P is associated with many institutions where either he is founder of the institution or
owning himself.
2.09) Share Holding Pattern of the Society as on 31/03/2009:
Particulars No of Share Amount (Rs) % Of

Shareholding
A Promoters’ Holding
1. a. Indian Promoters 10000 100000.00 100%
B. Foreign Promoters
2. Personal acting in concert
Sub-Total 10000 100000.00 100%
B Financial Institution / Bank / Mutual Funds
C Public
D Bodies Corporate
E Others (General Fund of Society)
Sub-Total
Grand Total 10000 100000.00 100 %
3) List of Major Shareholders:
Name and Address No. of Shares Held

SK 5000
RK 3000

GK 2000
4.0) BACKGROUND OF THE COMPANY:
In India the Health Care industry has been identified as one of the potential sector for investment
in the present day scenario. Till date, approximately 12% of the scope offered by the Health Care
sector in India has been tapped. Health Care industry in India is worth $17 billion and is
anticipated to grow by 13% every year. This sector encompasses hospitals enrolled to the
hospital networks, health care instruments, health care in the retail market. This prevailing
scenario has attracted the promoters to set up a modern health care centre at ABC, West Bengal.
They have incorporated a company on 28.08.2009 in the name of “XYZ Pvt. Ltd.”.
The unit has requested the Bank of Baroda for sanctioning Term Loan of Rs.635.00 lacs towards
the cost of medical equipment, medical furniture & accessories, electric installation, computer &
electronic systems etc.
Details of the entire projects is given below:
Line of Activity : Multi Speciality Hospital

Capacity ( Installed ) : 82 Beds (Including ICCU, HDU & NICU)
5.0 RANGE OF SERVICES PROPOSED TO BE CATERED AND FACILITIES PROPOSED

TO BE AVAILABLE AT THE HOSPITAL
6.0 MEDICAL EXPERTS INTERESTED TO RENDER THEIR SERVICES AND THEIR

PROFESSIONAL COMPETENCE
7.0 TECHNICAL APPRAISAL
MARKET PROSPECT
At present there are more than 10 lacs people in and around the location of the hospital. Majority
of population belong to Lower to Lower middle class category. Quite a few industries located
close by namely – Garden Reach Ship Builders, Budge Budge Bharat Petroleum Oil Terminus,
Bata Nagar, Kolkata Port Trust along with few thousands SMB industrial units. New housing
complexes (Greenfield city, Eden city, Purti Abasan, Hiland Riverside etc.) coming up in near
vicinity will introduce High and Middle class population to this hospital. But with the development
of new high rise and housing complexes mentioned herein the medical facilities for high and
middle class population will need to be catered. People here generally do not get the facility of
public medical care as the public hospitals are not equipped with the facilities of all sorts of
modern treatment. Moreover the treatments are delayed at those hospitals. People from this
locality therefore do not like to go to the public hospitals, rather, they prefer to go to private
hospitals where they know that proper care & treatment would be available. Major Private
hospitals are located at far from the area.
Competitor
There is no major competition in the area within 10 KM. Most of the hospitals are in South or
Central Kolkata. Few medium size hospitals & nursing homes i.e. G located at Kasba. CMRI at

Ekbalpur, AMRI at Dhakuria, R G Hospital are situated in the prime location, but away from the
locus of this Hospital.
SECURITY COVERAGE:
The company is offering following securities to secure the exposure:
Particulars (Rs. in Lacs)
Proposed Exposure: Term Loan 635.00
Primary Security for the proposed Term Loan

Hypothecation of moveable Fixed Assets as per the Project Report 898.71
Total Primary security 898.71
Primary security Coverage 141.53%
Collateral Security
Equitable mortgage of Hospital Land(12.14 cottahs) and proposed G+4 289.80
storied building thereon at ABC belonging to Mr. Sudip Kumar Khanna, vide
sale deed No. **** dtd. 10.01.2008. Valuation of the property is proposed to
be Rs. 289.80 after completion, as per report submitted by M/s
R.M.Engineers, bank’s approved valuer, dtd. 07.05.2010.
Total Collateral security 289.80

Collateral coverage 45.64%
Total Security 1188.51

Total security coverage (%) 187.17
FACR 1.87
Comments on Security Coverage & Scope for additional collateral security–

 Collateral Security Coverage
Percentage is 45.64%
 Total Security Coverage Percentage is
187.17%
 Project FACR is 1.41 times
The security coverage from the assets created out of bank’s loan is 141.53%, which ensures the
sufficient security of our funds.
However, We had the discussions with the promoters for additional collaterals. They agreed to it
and informed that:
The proposed collateral coverage for the exposure is 45.64%, which further ensure the security
of our exposure.
Besides the above detailed security the proposed exposure to the company is to be further
secured by the personal guarantee of the promoter directors and their son, having joint worth at
Rs. 157.28 lacs as on 31.03.2009.
The Total security coverage and total FACR is 187.17 %, which is quite satisfactory and
acceptable.
we propose for acceptance of the proposed security coverage.

6.0 OTHER INFORMATION:
• Documentation – To be executed at branch after sanction and before disbursement .
• Whether proposed limits are within Bank’s prudential Single Borrower/ Group
exposure norms: Yes
• Pro-rata non-fund based business: Presently it does not need any non-fund based
facilities.
Inspection of the office & Project site:
• Pre sanction unit inspection was carried out on 01.06.2010 by Mr. A.K.Khandelwal, Sr
Manager (SME), Kolkata at ABC and office of the company at B.
• The company has already started the construction of the building. The progress of the
project is satisfactory.
• No adverse feature has been observed (Copy of the unit inspection report enclosed)
•However the branch is advised to carry out the Pre/Post disbursement inspection as per
extent guidelines of the bank and ensure progress as reported, though periodic
inspections and keep a copy of the inspection report on the record.
• Comments regarding credit rating – New Account. Project under Implementation.

As per our Domestic loan policy guideline’2009, the cut off point for acceptance of new
borrower is Obliger rating of BOB6 and above, under CRISIL BOBRAM. The obliger
rating is BOB6 in the present project. Hence the proposed borrower is acceptable to us.
Justification for the proposed rate of interest: ROI is based on the ‘Combined Rating’
of the CRISIL RAM based on which is CR6 and the unit has been classified as medium
industry.
In this case the ROI would be 1.75 % over BPLR i.e.@13.75 %p.a. With monthly rests.
(As per BCC: BR: 102/352 dtd. 26.11.2009 on ROI for SME Sector.)
Facilities enjoyed by Associate/ Sister Concerns - Asset Classification / Credit

Rating / Reference of last sanction. Associate/ Sister concerns:
Name Bank/Branc Facility Asset Remarks
h Classific
ation
SE FOUNDATION: PQR Bank, Current Account NA This is the flagship
N higher Behela institution of the group
secondary school branch
TConstruction PQR Bank, Cash Credit Standard Engaged in promoting
India Limit: 1.04 crores business.
Exchange
R.K. Associates ST Bank Car Loan: 2.24 lacs Standard Garment manufacturing
Performance of the Group concerns During last FY2008-09: Rs in Lacs

Name of the Company N School Tconstruction R.K.Associates
Income/Sales 564.46 7.30* 24.54
Surplus/profits. 196.00 4.75 1.32
TNW 158.51 29.96 1.67
Secured Loans NIL 130.41 2.21
• *During last FY, the company has not sold the flats, since the projects at various
locations were not ready for handover. Other wise the performance of the various units
under the same group is satisfactory.
KYC norms is carried out as under –
 The name, address and Membership Nos. of the Chartered Accounts Firm and its
Proprietor as mentioned in the copy of the Audited Balance Sheets has been verified
from the Website of the Institute of Chartered Accountants of India – http://icai.org
 The name of the company and its directors is not appearing in the RBI Defaulters List
or the Willful Defaulter List.
 We have also carried out the CIBIL search for all the directors/guarantors. As per
report generated from CIBIL website, they are not the defaulter of any bank/FIs.
 Our officers have inspected the site and the opinion of inspecting officer is satisfactory.
 Details of PAN of the Proprietor / Guarantor has been verified from the website of the
Income Tax Department – http://incometaxindiaefiling.gov.in and is found to be correct
(Copies of the printouts is enclosed).
7.0 JUSTIFICATIONS for Fresh Term Loan.
1. Average DSCR for the project on Standalone basis is 2.05 against the benchmark level
of 1.75 as per our Domestic Loan Policy Guidelines, 2009.
2. Project Specific FACR is 1.41 times against the acceptable level of 1.25.
3. Collateral Security Coverage Percentage is 45.64 and the total Security Coverage
Percentage is 181.17 %.
4. Project DE ratio is 2.30.
5. Project is being considered as a Greenfield, and the Borrowers Rating is BOB6, The
borrower is acceptable as per our Domestic Loan Policy Guidelines, 2009
6. TEV Study for the Project has been carried out by M/s Effective consultants, Bank’s
empanelled Consultant and the project has been certified to be techno-economically
viable.
7. Although the proposed hospital will be a new entrant, however, Mr.SK is a experienced
and successful businessman in the locality.
8. The proposed new project is to be situated at ABC. There is no major competition in the
area within 10 KM.
9. The unit falls under the Service Sector and is classified as a Small Enterprise as per
MSMED Act 2006, which is a priority sector.

Important points to be noted at Branch level
Unquote
1. Branch to cross sell Bank’s products viz. Bancassurance, Baroda Health Insurance
scheme, India First Life Insurance, Birla Sun Life Insurance, UTI Mutual fund, gold coin,
retail loan products to friends, relatives and staff of Mr. SK
2. Branch to mobilize CASA deposits through opening of CA/SB accounts of friends and
relatives of Mr. SK
Quote
3 Branch should follow/observe KYC norms and verify the documents with originals.
4 Inspection of the site to be done. Branch to ensure the progress made by the trust
regarding set up of the project.
5 Branch to carry out Pre/post disbursement inspection and keep copy of inspection
report on record.
6 Branch to seek prior disbursement authority.
7 Credit Rating to be carried out from time to time as per Bank’s extant Guidelines.
8 Branch to send the Monthly monitoring report on monthly basis to RO (KMR).
9 Branch to obtain the copy of approved plan of the property, duly sanctioned by
appropriate authorities.
SECTION II- FINANCIAL PARAMETERS AND ASSESSMENT
1.0 FINANCIAL PERFORMANCE:

a) Snap Short of Balance Sheet : Projections for the next –7 years
b) Operational Data. (Rs in lacs)
31-03- 31-03-
31.03.11 31-03-14 31-03-15 31-03-16 31-03-17
12 13
a) Balance Sheet Data /
Capital Structure
Paid up Capital Equity 276.00 276.00 276.00 276.00
Share Capital including 276.00 276.00 276.00
premium
Reserves & Surplus (Excl.
Revaluation reserves and 22.09 137.91 330.62 536.59 743.35 954.83 1175.35
net of intangible assets)*
Tangible Net worth 298.09 413.91 606.62 812.59 1019.35 1230.83 1451.35
Term Liabilities 575.00 455.00 335.00 215.00 95.00
Capital Employed 873.09 868.91 941.62 1027.59 1114.35 1230.83 1451.35
Net Block 863.98 794.53 725.08 655.63 586.18 516.73 447.28
Funds Invested outside
Business/non-current assets
Current Assets 69.11 194.38 336.54 491.96 648.17 809.10 1004.07

Less: Current Liabilities 60.00 120.00 120.00 120.00 120.00 95.00
Net Current Assets 9.11 74.38 216.54 371.96 528.17 714.10 1004.07
Capital Deployed 873.09 868.91 941.62 1027.59 1114.35 1230.83 1451.35
b) Operational Data
13.31Sales 336.29 786.11 898.40 954.54 954.54 954.54 954.54
Net other income -0.18 -0.18 -0.18 -0.18 -0.18 -0.18 -0.15
Medicines and equipments 29.85 69.65 79.60 84.57 84.57 84.57 84.58
Other spares 7.20 16.80 19.20 20.40 20.40 20.40 20.40
Power & Fuel 13.50 31.50 36.00 38.25 38.25 38.25 38.25
Salaries & wages 128.66 257.33 257.33 257.32 257.33 257.32 257.33
Rep & maintainance 12.00 28.00 32.00 34.00 34.00 34.00 34.00
Other misc exp. 20.66 45.22 49.10 51.05 51.05 51.05 51.05
Adm. & Selling Expenses 17.08 39.86 45.55 48.40 48.40 48.40 48.40
Depreciation 34.73 69.45 69.45 69.45 69.45 69.45 69.45
Interest 42.87 83.70 69.53 53.33 37.13 20.93 1.66
Net Profit before Tax 29.56 144.42 240.46 297.59 313.78 329.99 349.27
Net Profit After Tax 23.67 115.64 192.54 205.80 206.57 211.30 220.36
Dividend - - - - - - -
c) Profitability Ratio
(NP/Sales) % 7.04 14.71 21.43 21.56 21.64 22.14 23.09
Net Profit / Capital
2.71 13.31 20.46 20.03 18.54 17.17 15.18
Employed
PAT / TNW 7.94 27.94 31.74 25.33 20.26 17.17 15.18
Operating Profit Margin 21.54 29.02 34.50 36.76 36.76 36.76 36.76
Return on Capital
Employed(ROCE) 8.30 26.25 32.92 34.15 31.49 28.51 24.18
Current Ratio 1.15 1.62 2.80 4.10 5.40 8.52 7.68
Debt Equity Ratio
(TOL/TNW) 2.13 1.39 0.75 0.41 0.21 0.08 0.00
Debt Equity Ratio
(TTL/TNW) 1.93 1.10 0.55 0.26 0.09 0.00 0.00
Debtors Collection(days) 0 0 0 0 0 0 0
Inventory Holding
Period(days) 129 55 48 45 45 45 45
Creditors Payment Period
in days 0 0 0 0 0 0 0
Cash Flow Interest
Coverage 3.52 3.93 4.77 6.16 8.44 13.23 118.45
DSCR 3.52 2.29 1.75 1.90 1.99 1.96 2.03
c) Whether Fund Flow Statement Submitted: Yes. (Rs

in lacs)
SUMMARY: 31/03/11 31/03/12 31/03/13 31/03/14 31/03/15 31/03/16 31/03/17

Long Term Sources
(A+B+F, if F is positive) 909.58 185.27 262.17 275.43 276.20 280.93 289.96
Less: Long Term Uses
(D+G) 900.47 120.00 120.00 120.00 120.00 95.00 0.00
Surplus (+) / Shortfall (-) 9.11 65.27 142.17 155.43 156.20 185.93 289.96
Short Term Sources (C) 60.00 60.00 0.00 0.00 0.00 0.00 0.00
Less: Short Term Uses (E) 69.11 125.27 142.16 155.42 156.21 185.93 289.97

Surplus (+) / Shortfall (-) -9.11 -65.27 -142.16 -155.42 -156.21 -185.93 -289.97
 From the above fund flow statement summary, it is observed that there is no diversion
of funds from short-term sources to long-term. The company is generating the surplus
long term funds to be utilized for short term purpose (Repayment of term loan.)
2.0 COMMENTS ON PERFORMANCE:
Sales : (Rs in lacs)

Particulars 2010- 2011-12 2012-13 2013 2014- 2015-16 2016-17
11* -14 15
Capacity utilisation (%) 60 70 80 85 85 85 85
Income from Medical 336.29 786.09 898.39 954.54 954.54 954.54 954.54
Services
The projected sales / income of the society on stand alone basis is as under:
The income generation is to commence from October’2010. The first year income has been
estimated at Rs.336.29 lacs in 2010-11(For 6 months at 60% Capacity utilization), which
increased to Rs.786.09 lacs in 2011-12 (70% Capacity utilization). The income further increasing
to Rs. 898.39 lacs( with 70% Capacity utilization). The income is likely to be stabilize at 85%
capacity utilization with Rs. 954.54 lacs, from 2013-14 onwards.
Net Profit:
The Net Profit of the company and various profitability ratios of the company are as under: (Rs.
lacs)
Particulars 2010- 2011- 2012-

2013 -14 2014-15 2015-16 2016-17
11* 12 13
Net Profit before Tax 29.56 144.42 240.46 297.59 313.78 329.99 349.27
Net Profit After Tax 23.67 115.64 192.54 205.80 206.57 211.30 220.36
(NP/Sales) % 7.04 14.71 21.43 21.56 21.64 22.14 23.09
Net Profit / Capital Employed 2.71 13.31 20.46 20.03 18.54 17.17 15.18
PAT / TNW 7.94 27.94 31.74 25.33 20.26 17.17 15.18
Operating Profit Margin 21.54 29.02 34.50 36.76 36.76 36.76 36.76
Return on Capital Employed
(ROCE) 8.30 26.25 32.92 34.15 31.49 28.51 24.18
The Net profit is quite sufficient to pay the installment of the proposed loan to be granted to the
company.
The profitability ratios are also very favorable and reflecting the increasing trend Y-on-Y.
(Rs in lacs)
Income / 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17
Expenditure
Profit after Tax 23.67 115.64 192.54 205.80 206.57 211.30 220.36
Cash Profit 58.57 185.26 262.16 275.43 276.20 280.93 289.81
Repayment - 60.00 120.00 120.00 120.00 120.00 95.00
It is observed that the profit from Hospital itself can generate sufficient fund from 2010-11 and
can repay the loan as mentioned above out of cash profit.
Tangible Net Worth:

Movement of TNW of the Society is as per table given below -
(Rs. lacs)
31.03.11 31/03/12 31/3/13 31/3/14 31/3/15 31/3/16 31/3/17
Opening TNW NIL 299.67 415.31 607.84 813.64 1,020.22 1,231.52
Add: Profit after tax 23.67 115.64 192.54 205.80 206.57 211.30 220.36
Add: Increase in 276.00 - - - - - -
Equity/Share Premium
Closing TNW 299.67 415.31 607.84 813.64 1,020.22 1,231.52 1,451.88
It is observed that the Net worth is increasing steadily over the years due to retention of profit
after tax.
Ratios
Current Ratio:
31.03.11 31/03/12 31/3/13 31/3/14 31/3/15 31/3/16 31/3/17
Current Ratio 1.15 1.62 2.80 4.10 5.40 8.52 -
Current Ratio is above the benchmark level of 1.20 as per domestic loan policy guidelines’09,
from 2011-12 onwards, which is favourable to bank. In 2010-11, the current ratio is bit low, since
it is the 1st year of the operations. The current ratio is improving Y-on-Y, which is good sign.
The Term Liability /TNW of the company is quite satisfactory and below 3.5: 1.00. The ratio is
very low and decreasing during the span of years from 31/03/2011 to 31/03/2017
The Total Outside Liabilities / TNW is also very low, within the benchmark level of 4.5:1.00.
The Debt equity ratio on both the count appears to be quite satisfactory.
All other ratios are at reasonable level
3.0 ASSESSMENT OF WORKING CAPITAL:
Not applicable
Comments on inventory holding / creditors / debtors’ level / reasons for accepting large
variance in inventory / creditors / debtors level
Particulars 31.03.11 31.03.1 31.03.1 31.03.1 31.03.1 31.03.1 31.03.1

2 3 4 5 6 7
Inventory (days) 129 55 48 45 45 45 45
Receivables (days) 0 0 0 0 0 0 0
Creditors 0 0 0 0 0 0 0
Comments:
INVENTORY:
The inventory holding is related to medicines / chemicals for use in the hospitals. The inventory
holding level is 129 days as on 31/03/2011, because it is the initial year of project and figures for
6 months have been considered for estimation but thereafter the inventory holding level is
decreasing and stabilises at 45 days.
SUNDRY DEBTORS:
There is no sundry debtors, as the claims/ demand / bill are proposed to be paid immediately
and hence no sundry debtors projected.

SUNDRY CREDITORS:
There is no creditor of the company as every payment is made on demand. No creditor projected.
3.1 REQUIREMENT OF OTHER FACILITIES:

• Terms Loan requirement:
The company has requested for Term Loan of Rs.635 lacs (as per project report) for setting up
Multi speciality Hospital at ABC
The TEV Study on XYZ Private Limited has been vetted by Effective Consultants, Bank’s
approved consultant for TEV Study, who has justified the cost of project and requirement of Term
Loan of Rs. 635 lacs.
The cost of project vis-à-vis means of finance is as under:

Statement showing proposed means of financing
Sl. Means of Finance Amount
A. Promotors Contribution 276.00
B. Term Loan from Bank of Baroda 635.00
Total: 911
.00
Sources of Fund : (Rs.in lacs)
A. Amount invested till 31.05.2010 :
SK, M.D. 85.00
Unsecured loan from relatives & friends (interest free) 54.90
139.90
B. Balance amount to be brought in :
Mrs. RK, Director 10
(from sale of Real-estate property) 0.00
SK, M.D. 25.00
GK, Share holder 11.10
136.10
Total Promoter’s Fund required(A + B): 276.00
PRESENT STATUS OF THE PROJECT :

• The RCC structure of the building has already been constructed upto G+4 alongwith the
boundary wall. As discussed with the representative of the society, the civil work will
include Building (Rs.447.72 lacs), Ancillary work (Rs.27.25 lacs). These expenses has to
be borne by the promoters from their own sources, since this land belongs to Mr.
SK(Director), in his personal capacity and this cost has not been included in cost of the
project.
• The company has already extended the advance payments for supply of various
equipments/furnitures/electrification work/computers etc. which may be treated as
promoters contribution(margin) required for the projects.

DSCR Calculation
Statement showing Debt Servicing Coverage Ratio (DSCR) analysis
(Rs. in Lacs)
Sl. Particulars 2010- 2011- 2012- 2013 2014- 2015- 2016- Total
No. 11* 12 13 -14 15 16 17
A. Availability of funds
I. Profit after Tax (PAT) 23.67 115.64 192.54 205.80 206.57 211.30 220.36 1175.88
Add, Depreciation 34.73 69.45 69.45 69.45 69.45 69.45 69.45 451.43
Add, Preliminary 0.18 0.18 0.18 0.18 0.18 0.18 0.18 1.23
Expenses written Off
Cash Surplus 58.57 185.26 262.16 275.43 276.20 280.93 289.98 1628.53
II. Interest on Term Loan 42.86 83.70 69.53 53.33 37.13 20.93 1.66 309.12
Total (A): 101.44 268.96 331.69 328.75 313.32 301.85 291.64 1937.66
B. Servicing of Debts
I. Repayment of Term Loan 0.00 60.00 120.00 120.00 120.00 120.00 95.00 635.00
II. Interest on Term Loan 42.86 83.70 69.53 53.33 37.13 20.93 1.66 309.12
Total (B) : 42.86 143.70 189.53 173.33 157.13 140.93 96.66 944.12
C. Debt Service Coverage 2.37 1.87 1.75 1.90 1.99 2.14 3.02 2.05
Ratio
Note - In 2010 - 11, only 6 months' operations have been considered
Note: From the above DSCR calculation it is observed that the proposed hospital can generate
adequate fund to repay the term Loan. The average DSCR arrives at 2.05 against the
acceptable level of 1.75 as per our Domestic Loan Policy Guidelines, 2009.
Sensitivity Analysis
Summary of the Sensitive analysis as per the Project Report is as per the table shown below:
SCENARIOS
Scenario 1 Reduction in Revenue by 10%
Scenario 2 Increase in Operating Expenses by 10%(Except staff salaries
when RM, Power & Fuel and Direct Labour increase by 10%
Scenario 3
when selling & general expenses increase by 10%
No. Case Adjusted Average

DSCR
1 Base Case 2.05
2 Scenario 1 1.63

3 Scenario 2 1.92
4 Scenario 3 1.77
Statement showing Sensitivity Analysis

(Rs.in lacs)
Particulars Years under projection
2010- 2011- 2012- 2013 2014- 2015- 2016-
11* 12 13 -14 15 16 17
Normal projection
Income from Medical Services 336.29 786.09 898.39 954.54 954.54 954.54 954.54
PAT 23.67 115.64 192.54 205.80 206.57 211.30 220.36
Cash Profit 58.57 185.26 262.16 275.43 276.20 280.93 289.98
DSCR (times) : 2.37 1.87 1.75 1.90 1.99 2.14 3.02
Avg.- 2.05
Scenario - I
(Income goes down by 10%)
PAT -4.06 52.69 120.60 161.85 142.83 147.56 156.61
Cash Profit 30.84 122.32 190.23 231.48 212.45 217.18 226.24
DSCR (times) : 1.72 1.43 1.37 1.64 1.59 1.69 2.36
Avg.- 1.63
Scenario - II
(Expenditure other than salary goes up by 10%)
PAT 15.64 97.14 171.60 187.32 188.10 192.83 201.88
Cash Profit 50.54 166.76 241.23 256.95 257.72 262.45 271.51
DSCR (times) : 2.18 1.74 1.64 1.79 1.88 2.01 2.83
Avg.-1.92
Note: In 2010-11, only 6 months' operations have been considered
Scenario – III DSCR: when RM, Power & Fuel and Direct Labour increase by 10%
when selling & general expenses increase by 10%
PAT 4.42 63.40 125.09 161.97 172.71 183.46 196.25
Depreciation 34.73 69.45 69.45 69.45 69.45 69.45 69.45
Preliminary Expenses W/O 0.18 0.18 0.18 0.18 0.18 0.18 0.15
Interest on Term Loan 42.87 83.70 69.53 53.33 37.13 20.93 1.66
Total Fund Generated 82.20 216.73 264.25 284.93 279.47 274.02 267.51
Interest on Term Loan 42.87 83.70 69.53 53.33 37.13 20.93 1.66
Installment of Term Loan 0.00 60.00 120.00 120.00 120.00 120.00 95.00
Total repayment obligation 42.87 143.70 189.53 173.33 157.13 140.93 96.66
DSCR 1.92 1.51 1.39 1.64 1.78 1.94 2.77
Average DSCR 1.77
7.08 Schedule of Implementation

a) Term Loan sanction & disbursement : End of June, 2010
b) Term Loan disbursement : 1st week of July, 2010
c) Completion of outstanding civil work : By end of August, 2010

d) Receiving of electric connection : By middle of July, 2010
e) Placement of order for medical equipment
& utility items which are not yet done : By July, 2010

f) Receiving of medical equipment, utility
items, installation & testing : By September, 2010
g) Commencement of services : October, 2010
Statement showing Break-Even-Point analysis

(Considering projected performance of 2012-13)
(Rs. in Lacs)
Sl. No. Particulars Amount Amount
I. Income from Services 898.39
Sub-total (I): 898.39
II. Expenditure 463.63
III. Contribution 434.76
IV. Fixed Cost
a. Fixed Expenses 55.15
b. Interest 69.53
c. Depreciation 69.45 194.13
V. Preliminary expenses written Off 0.18

VI. Profit before Tax (PBT) 240.46
VII. Provision for Tax 47.92
VIII. Profit after Tax (PAT) 192.54
IX. Break Even analysis
Gross Break Even Sales (Value )= 401.15

Fixed cost/Contribution X Income
(%) 45%
The company is expected to achieve the breakeven at 45% level, which is satisfactory. The
breakeven level upto 70% is considered ideal in this type of activity.
Repayment Schedule:
Year Amount Due Receipt Repayment Balance
2010-11
Q1 0.00 0.00 0.00 0.00
Q2 0.00 635.00 0.00 635.00
Commencement of
operation
Q3 635.00 0.00 0.00 635.00
Q4 635.00 0.00 0.00 635.00
635.00 0.00
2011-12
Q1 635.00 0.00 0.00 635.00
Q2 635.00 0.00 0.00 635.00
Q3 635.00 0.00 30.00 605.00
Q4 605.00 0.00 30.00 575.00
Total : 60.00
2012-13
Q1 575.00 0.00 30.00 545.00

Q2 545.00 0.00 30.00 515.00
Q3 515.00 0.00 30.00 485.00
Q4 485.00 0.00 30.00 455.00
Total : 120.00
2013-14
Q1 455.00 0.00 30.00 425.00
Q2 425.00 0.00 30.00 395.00
Q3 395.00 0.00 30.00 365.00
Q4 365.00 0.00 30.00 335.00
Total : 120.00
2014-15
Q1 335.00 0.00 30.00 305.00
Q2 305.00 0.00 30.00 275.00
Q3 275.00 0.00 30.00 245.00
Q4 245.00 0.00 30.00 215.00
Total : 120.00
2015-16
Q1 215.00 0.00 30.00 185.00
Q2 185.00 0.00 30.00 155.00
Q3 155.00 0.00 30.00 125.00
Q4 125.00 0.00 30.00 95.00
Total : 120.00
2016-17
Q1 95.00 0.00 30.00 65.00
Q2 65.00 0.00 30.00 35.00
Q3 35.00 0.00 35.00 0.00
Q4 0.00 0.00 0.00 0.00
Total : 95.00
Note - In 2010-11, 6 months' operations have been
considered
The Statement suggests the repayment of Term Loan commencing from 2011-12 to 2016-17.
Total repayment in 24 quarterly instalments of Rs. 30.00 lacs after 9 months moratorium, i.e.
from 1st quarter of the FY 2011-12 and onwards. The last instalment will for Rs. 35.00 lacs.
Interest to be repaid as and when debited to the account.
Based on the above facts and figures, the term loan requirement of Rs. 635.00 lacs for the
set up of the Hospital is justified and recommended for sanction.
SECTION III- INDUSTRY PERCEPTION
1.0. INDUSTRIAL BUSINESS SCENARIO PERCEPTION:
Education and Health Care are 2 such areas, which is needed by every citizen in a state. Mr.
Khanna and his associates are engaged in Health care and education industry, which is
considered as the most viable business at present and in coming 10 years.
HEALTH CARE SCENARIO IN INDIA/WEST BENGAL

India with 112+ cr. population with steady rate of increase in population truly requires enormous
healthcare facilities, where Govt. and state Hospital, Clinical centers are neither adequate nor
fully equipped to cater to it. Out of the projected $14 Billion expenditure in Healthcare in India in
2013, approx. 50% will happen in six states including west Bengal.
In West Bengal, the Hospitals are becoming worst due to negligence of the administration & fund
crisis. The patients, having a little resource, prefer private Nursing Homes / Diagnostic Centers
than to Hospitals. The state needs more & more Hospitals in organized manner to take care of
the patients to the international standard not only in Kolkata but also in greater Kolkata.
As such the future of these two sectors is very bright.
10.00 SWOT ANALYSIS
Strengths: Weakness:
Multi-specialty under one roof • Difficult to target lower class population
Necessary infrastructure has been made at • Referral of critical patients to other high degree
right spot by the company to attract customers sophisticated hospitals
Location in densely populated area. • Commercial approach of physicians to patients

leading to bad names.
• Nearest Private Hospital about 10 Km
away. Mitigation: The good quality service with low /affordable
cost will certainly attract the customers from far areas.
• Modern and Advanced equipments, both
indigenous and imported. • The hospital is located near the crowded area of
local bazaar (Haat). The approach road of
• Association of Good doctors proposed project is quite narrow. Which may hinder
the movement of ambulance/hospital emergency
• Tie-ups with Corporate and Insurance vehicle during emergency.
companies
• The car parking space is inadequate. At present
• Competitive and Affordable price points the hospital can accommodate at best 15 cars,
of Services which will be occupied by doctors, leaving no space
for patient’s vehicles.
• Management capable of running multi- Mitigation: The company has informed that they have
specialty Hospital acquired adjacent landed property to convert into car
parking space
• Being in the Health care industry, the • They are further negotiating for buying the land
demand for the services rendered by the at the back side of the hospital for parking purpose.
society will go on increasing.
Opportunities: Threats:
Huge demand for Private hospitals • Changes in Government policies on Private

Hospitals
• Providing ambulance to rural and lower
class populated areas, more market can • Increase in competition by development of new
be captured hospital nearby in future
• Doctors practicing nearby will refer Mitigation: Good and low cost service will attract patient
patients for the hospital inspite of availability of hospitals.

• Absence of many competitors in that Aggrieved patients may, alleging wrong treatment, may
locality. cause damage to hospital property
Mitigation: Adequate insurance to be taken
• Favourabvle Government policy giving
thurst on education / health care
ANNEXURE- D
TERMS AND CONDITIONS

Nature of Facility : Term Loan (Fresh)
Limit : Rs.635.00 lacs
Purpose : Purchase of medical equipments and miscellaneous fixed assets
to set up the 82 bed multi specialty hospital.
Security : 1. D.P. Note
2. Letter of Installment with acceleration clause.
3. Hypothecation of machineries and other fixed assets.
4. Certified copy of resolution of company authorizing
borrowing, execution of document and operation in the
account.
5. Stamped Declaration cum Undertaking cum Authority.
Margin : Rs. 276.00 lacs (30.30% on Project cost of Rs.911.00 lacs)

Rate of Interest : 1.75% over BPLR i.e.@13.750%p.a With monthly rests .
Period : 81 months (including 09 months moratorium)

Repayment 24 quarterly instalments of Rs. 30.00 lacs after 9 months
moratorium, i.e. from 1st quarter of the FY 2011-12 and
onwards. The last instalment will for Rs. 35.00 lacs.
Collateral Securities:
1. Equitable mortgage of Land(12.14 cottahs) and proposed G+4 storied building thereon at
ABC belonging to Mr SK(On which the proposed hospital is being established), vide sale
deed No. 00256, 00258 & 00260 dtd. 10.01.2008. Valuation of the property is proposed to
be Rs. 289.80 after completion, as per report submitted by M/s R.M.Engineers, bank’s
approved valuer, dtd. 07.05.2010.
Other specific conditions and Pre- Disbursement requirements

1. As far as possible Term Loan is to be disbursed directly to the suppliers / dealers of the
proposed Hospital project.
2. Wherever advance payment to suppliers or contractors has already been already made,
the company should submit relative bill / invoices to the bank for obtention of latter’s
specific authority and reimbursement. Photocopies of all such bills along with C/A
certificate certifying that cost has been incurred by the Company to be submitted to the
Bank for record.
3. Promoter’s contribution is to be brought in upfront for which documentary evidence is to
be submitted to the bank before disbursement of the limit.
4. Satisfactory credit Report of various loan accounts of associate concerns and Closure
certificate of the Loan Accounts of M/s Trinyani construction with SBI & BOM to be obtained
before disbursement.
5. Branch to obtain the copy of Long term lease deed(At lease for 7 years) to be executed
by Mr. SK (Director of the company and owner of the property on which the proposed hospital is
going to be established), in favour of M/S XYZ PRIVATE LIMITED to let out the building on
monthly rental basis.

9. CONCLUSION
9.1 Conclusion
The study at PNB gave a vast learning experience to me and has helped to
enhance my knowledge. During the study I learnt how the theoretical financial
analysis aspects are used in practice during the working capital finance and term
loan assessment. I have realized during my project that a credit analyst must
own multi-disciplinary talents like financial, technical as well as legal know-how.
The credit appraisal for business loans has been devised in a systematic
way. It is a process of appraising the credit worthiness of loan applicants. Thus it
extremely important for the lender bank to assess the risk associated with credit;
thereby ensure the security for the funds deposited by the depositors. There are
clear guidelines on how the credit analyst or lending officer has to analyze a loan
proposal. It includes phase-wise analysis which consists of 6 phases:
1. Financial statement analysis

2. Working capital and its assessment techniques
3. Techno Economic Feasibility Analysis
4. Credit risk assessment
5. Documentation
6. Loan administration
Punjab National Bank’s adoptions of the Projected Balance Sheet method

(Credit Monitoring Arrangement) of assessment procedures are based on sound
principles of lending. This method of assessment has certain flexibility required to
avoid any rigid approach to fixing quantum of finance. The PBS method have
been rationalized and simplified to facilitate complete flexibility in decision-
making.

To ensure asset quality, proper risk assessment right at the beginning, is
extremely important. That is why Credit Risk Management system is an essential
ingredient of the Credit Appraisal exercise. PNB has formulated a Credit Risk
Rating model, PNB Trac. It considers important parameters like profitability,
repayment capacity, efficiency of the unit, historical / industry comparisons etc
depending on the industry. PNB Trac is one of the best rating models present till
date.
Small and Medium Enterprises play a vital role for the growth of Indian
economy by contributing 45% of the industrial output, 40% of exports, 42 million
in employment, create one million jobs every year and produces more than 8000
quality products for the Indian and international markets. As a result, MSMEs are
today exposed to greater opportunities for expansion and diversification across
sectors.
The Indian market is growing rapidly and Indian industry is making

remarkable progress in various Industries like Manufacturing, Precision
Engineering, Food Processing, Pharmaceuticals, Textile & Garments, Retail, IT,
Agro and Service sectors. SMEs are finding increasing opportunities to enhance
their business activities in core sectors.
Though the SME industries are spread all over the urban areas, proper
infrastructure needs to be developed in the rural areas to establish these
industries there.
The SME units are functioning efficiently and effectively, but even now
there is lack of information regarding the inputs of these industries, like the raw
materials, skills, machinery and equipment.
There is need of high level research and development required to develop

these sectors in both the urban and rural areas.

The SME sector is almost at the initial stage of its growth. With further
advancements in technology, this sector is likely to grow further and contribute
greatly to the economy of India.
Therefore, it is vital to provide proper funds to these emerging industries

and strengthen the backbone of the economy.
9.2 Findings
After completing the entire project at Punjab National Bank the following key
findings as mentioned below were observed.
1. At Punjab National Bank, Circle Office the priority to appraise a proposal

was given to new or fresh clients over the existing clients presenting
proposals for renewal
2. Ratings, as being performed at PNB, are done once a year. Therefore, the
ratings do not take into account short term drastic changes like price level
changes (which are an issue with any method based on accounting
statements, since annual reports are based on historical cost basis of
accounting and other changes like sudden mishap/ of the counterparty are
not readily accounted for by the rating system due to long lag between
repeat ratings on the same account.
3. Some of the parameters in Business and industry evaluation are based on
the information provided by company, which in some cases may not be
sufficient. No specific guidelines are followed in such cases. Also, some of
the parameters here may be rendered redundant in some cases and may
push up/ push down the rating needlessly in these cases.
4. The present risk rating model does not have any mechanism to prioritize
certain sectors of the economy. There are certain sector in the economy
where risk spread is low and certain sectors where spread of risk is high

like real estate. Also, there are certain infrastructural projects which need
to be prioritized. The risk rating model is not flexible to incorporate all
these issues.
5. The BPLR system will soon be replaced by Base Rate system. Banks may
choose any benchmark to arrive at the Base Rate for a specific tenor that
may be disclosed transparently.
6. With the deregulation of the financial sector, the ability of the banks to
service the credit requirements of the SME sector depends on the
underlying transaction costs, efficient recovery processes and available
security. There is an immediate need for the banking sector to focus on
credit and finance requirements of SMEs.
9.3 Recommendations
The Credit Department at PNB Circle Office, Mumbai works at its full potential
and the staff is highly experienced and has a very strong intuitive sense. So,
there is no special recommendation on the entire process.
However, the procedure starting from getting loan application to

disbursement of loan takes around two-three months and by the time
disbursement is made, the market scenario changes. The process of loan
sanctioning should be more speedy.
In order to make the process more flexible and efficient, an electronic

database should be designed carrying all the available and important information
related to the proposals accepted, and it should be easily accessible to the Credit
Department. This will help reduce paperwork and loss of information.

BIBLIOGRAPHY
Web
https://www.pnbindia.in/en/ui/SMEBanking.aspx
http://en.wikipedia.org/wiki/Punjab_National_Bank
rbidocs.rbi.org.in/rdocs/content/PDFs/78396.pdf
http://www.rbi.org.in/scripts/BS_CircularIndexDisplay.aspx?Id=2494
Books
 PNB Monthly Review May 2011
 Book of Instruction On Loans (PNB)
 PNB Annual Report
 Small and Medium Enterprises – S.K. Bagchi
 RBI Circulars and Guidelines

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PROJECT REPORT

“FINANCING THE SME’s – SCOPE & ANALYSIS”

ANIL SASI ANAYATH

MUMBAI INSTITUTE OF MANAGEMENT & RESEARCH

I hereby declare that this project is submitted in partial fulfillment of

requirement for the award of MMS Finance to Mumbai Institute of

Institute of Management & Research or Mumbai University to publish any

chapter/ Project if they deem fit in journals or magazines or newspapers

without any prior permission.

Financing the SME’s in PNB – Scope and Analysis 2

First and Foremost my intellectual debt is to Mr.Rushikesh

I am thankful to the entire staff of PNB who have taken their

However, I accept the sole responsibility for any errors of

Financing the SME’s in PNB – Scope and Analysis 3

Sr. No. Topics Page

2 About the Bank 10

3 Literature / Conceptual Support 18

Financing the SME’s in PNB – Scope and Analysis 4

6 Credit Risk Rating 32

7 Loan Processing Procedure 56

8 Analysis of SME Proposal (Case Study) 65

Financing the SME’s in PNB – Scope and Analysis 5

Financing the SME’s in PNB – Scope and Analysis 6

1.1 Project Description

Financing the SME’s in PNB – Scope and Analysis 7

1.2 Relevance of the Project

1.3 Objectives of the Study

 To study the current market scenario/trends in the SME sector.

1.4 Limitations of the Study

 Study is limited only to the SME sectors

Financing the SME’s in PNB – Scope and Analysis 8

Financing the SME’s in PNB – Scope and Analysis 9

2.1 Bank’s Mission Statement

Financing the SME’s in PNB – Scope and Analysis 10

Financing the SME’s in PNB – Scope and Analysis 11

1895 PNB established in Lahore.

1904 PNB established branches in Karachi and Peshawar.

1939 PNB acquired Bhagwan Dass Bank Limited.

1947 Partition of India and Pakistan at Independence. PNB

1960 PNB amalgamated Indo-Commercial Bank Limited

1961 PNB acquired Universal Bank of India.

1963 The Government of Burma nationalized PNB’s branch in

1965 After the Indo-Pak war the government of Pakistan

1969 The Government of India nationalized PNB and 13 other

1978 PNB opened a branch in London.

1986 The Reserve Bank of India required PNB to transfer its

Financing the SME’s in PNB – Scope and Analysis 12

1988 PNB acquired Hindustan Commercial Bank Limited in a

1993 PNB acquired New Bank of India, which the

1998 PNB set up a representative office in Almaty,

2003 PNB took over Nedungadi Bank (established the bank in

2004 PNB established a branch in Kabul, Afghanistan.

PNB Branches (National & International)

 Branches in all the 7 metropolitan and cosmopolitan cities in India.

Financing the SME’s in PNB – Scope and Analysis 13

Forbes Global 2000 Ranking

2.3 Products And Services

Punjab National Bank provides it banking products and services in several

Financing the SME’s in PNB – Scope and Analysis 14

2.4 Awards and Recognitions

o Received gold trophy of SCOPE Meritorious Award for Best Managed

o PNB adjudged as Top Indian Company under “Banks” Category by Dum

o “Golden Peacock Corporate Social Responsibility Award, 2011” by