Professional Documents
Culture Documents
ON
{Commercial Credit Appraisals}
FOR
{HDFC Bank}
BY
()
Submitted in partial fulfillment of requirements for award of
ATHARVA SCHOOL OF BUSINESS
Marve Road, Charkop Naka, Malad (W), Mumbai 400 095
DECLARATION
I hereby declare that the Project titled "{Commercial Credit Appraisals With HDFC Bank
Ltd}" submitted as a part of the study of Post Graduate Diploma in Management (PGDM)
is my original work. The Project has not formed the basis for the award of any other
degree, diploma, associate ship, fellowship or any other similar titles.
Place: Mumbai
Date:
CERTIFICATE
This is to certify that () has completed the Project "{Commercial Credit Appraisals}"
under the guidance of Prof. in partial fulfillment of the requirements for the award of
Post Graduate Diploma in Management for the academic period 2009-11.
Place: Mumbai
Date:
ACKNOWLEDGEMENTS
I take this opportunity to express my gratitude and extend my thanks to all those whose
help and guidance made this endeavor successful.
I cannot end this page without thanking my family for their encouragement and support
while undertaking this Project.
EXECUTIVE SUMMARY
< This page is to be written at the end of completion of the Project, giving an overview
and summary of the Project>
TABLE OF CONTENTS
Sr. No. Topic Page No.
1.
2.
3.
4.
5.
6
7.
8.
9.
10.
11.
List of Annexure
List of Tables
List of Figures
AN OVERVIEW
Banking Sector
There have been major structural changes in the financial sector since
banking sector reforms were introduced in India in 1992. Since then Banks
have been lending aggressively providing funds towards infrastructure
sector. Major policy measures include phased reductions in statutory pre-
emption like cash reserve and statutory liquidity requirements and
deregulation of interest rates on deposits and lending, except for a select
segment. The diversification of ownership of banking institutions is yet
another feature which has enabled private shareholding in the public sector
banks, through listing on the stock exchanges, arising from dilution of the
Government ownership. Foreign direct investment in the private sector
banks is now allowed up to 74 per cent.
The co-existence of the public sector, private sector and the foreign banks
has generated competition in the banking sector leading to a significant
improvement in efficiency and customer service.
The rapid turnaround, after the global financial crisis induced slowdown,
evidences the resilience of the Indian economy as well as Indian banking
system. The monetary and fiscal stimulus measures initiated in the wake
of the global financial crisis, which included appropriate steps taken by the
Government as well as RBI, in mitigating the adverse impact from
contagion and ensuring that the financial sector in general and banking
sector in particular tide over the global financial crisis. Over the last several
years, RBI has undertaken wide ranging financial sector reforms which
ensured stability of the Indian banking system in times of global crisis
which underlines the significance of the regulatory regime in India. The
banking industry recorded deposit growth of 17%. The subdued growth in
deposits of the banking industry reflected the higher growth in currency
demand during the year. The disparity between the growth rate of credit
and aggregate deposits of banking industry widened during the year. With
economic growth consolidating around the pre-crisis levels, credit growth
continued at an accelerated pace. On account of rise in bank credit and
correspondingly lower deposit growth, banks investments in Government
bonds and other approved securities was relatively lower.
In the RBI Monetary Policy issued, RBI strongly expressed its view that
controlling inflation is imperative to sustaining growth over the medium-
term. As such, RBI signaled that the conduct of monetary policy will
continue to condition and contain perceptions of inflation in the range of
4.0-4.5% to be in line with the medium-term objective of 3.0% inflation
consistent with India’s broader integration into the global economy. Instead
of its earlier calibrated approach to fighting inflation, RBI took a large step
hiking key policy rates by 50 basis points. Accordingly, the Repo and
Reverse Repo rates have moved up to 7.50% and 6.50% respectively. RBI
has moderated its GDP growth projection around 8% for F.Y. 2011-12 from
the 8.6% last year. Money supply (M3 growth) has been estimated at 16%.
Aggregate bank deposit growth is projected at 17% and bank credit growth
at 19%. WPI Inflation has been estimated at 6% with an upward bias for end
March 2012.
Objective of Study
This study aims to analyze the credit health of organizations that approach
The Shamrao- Vithal Co-Op Bank Ltd for credit facilities. After analyzing
credit health, the credit rating is determined. On the basis of credit rating,
the interest rate guidelines circular is consulted to fix a price for the credit
facilities i.e. determine the interest rate.
About the Company
Exponential Growth
The Bank has an avowed mission to provide highly advanced banking and
allied services to customers in the most beneficial manner – and in an
environment of business focused friendliness. The Bank’s perspective has
always been global. As the decades unfolded, varied services were
introduced to address an ever-widening spectrum of retail, corporate and
institutional clients. Stupendous growth followed – most evident since the
turn of the millennium.
CORPORATE GOVERNANCE
Housing Loan
The Shamrao Vithal Co- Op Bank at present gives home loans to its
customers under the name, “GOOD HOMZ”. An individual can borrow either
singly or jointly, for a maximum of Rs. 50 Lacs subject to;
For salaried applicants: Total deductions including installments of
proposed loan not exceed 60 % of gross salary.
For applicants having Business: Minimum debt service ratio should be 1.5:1
The rate of interest to be charged will be based on the rate chart,
exceptions to be made strictly by the corporate office. The funds could be
borrowed to purchase flat, construction of new house, bungalows on
ownership basis. The borrower has to repay the amount in maximum of
180 months, i.e. 15 years.
An individual to be eligible for the loan has to atleast of 21 years of age &
an Indian resident, should be an income tax assessee, need to be employed
or engaged on in lawful activity, and should have a savings account with
bank for atleast past 6 months.
Vehicle Loan
Personal loan
The Shamrao Vithal Co- Op Bank gives personal loans to its customers
under the name, “Lifestyle Finanz”. An individual can borrow a maximum
amount as per limits laid down for single party, group and as per financials
of specified party.
The rate of interest to be charged will be based on the rate chart,
exceptions to be made strictly by the corporate office. The funds can be
borrowed for the purpose of acquisition of Consumer durables, household
articles etc. The Bank hypothecates the article financed by it.
The repayment schedule here varies from 24 months to 60 months
depending on the amount sanctioned. As prerequisites the borrower should
be an Indian resident with 21 complete years of age. If employed should be
in 3 continuous years of service with the firm & should have fair repayment
capacity. If engaged in business or profession then should have sound
financials in past 3 years.
Industrial Credit
Term loan
The Shamrao- Vithal Bank Ltd provides term loan to its client under the
name of, “Asset Finance”, “Own Your Office”, & “Hello Doctor”
Under Own Your Office, the company lends to those business units/ firms/
companies/ individuals who plan and wish to run their business from their
own premises. The company lend maximum up to Rs. 50 lacs for office
premises & Rs. 5 lacs for its furnishings. The rate of interest will be
charged by the bank as per the norms declared by bank from time to time.
There will be an equitable mortgage of office premises and hypothecation
of office equipment and fixtures to be financed.
Personal guarantee of the proprietor, partners, and directors may be
required. The repayment schedule may be 60 months but can be extended
up to 7 years subject to strict discretion of the bank.
The company before approving any credit facility to its customers does a
detailed feasibility study.
Feasibility study of Industrial Credit and Retail Credit
Industrial Credit Assessment.
Retail Credit Assessment.
- Technical Analysis
B) Technical arrangements:
- Technical arrangement made to obtain technical knowhow required for
the proposed project.
- Support to be provided by technical collaborators in planning and
operations of the plant, training etc.
- Collaborator has agreed to provide the benefits of research and
development.
- Any restriction imposed by collaborators.
C) Size of the plant:
- Size of plant depends on the manufacturing process, availability of raw
material, capital investment and size of the market.
D) Product Mix:
- Product mix depends upon market requirement of certain items and may
have done in different sizes and quality to suit different consumers.
- If plant may have flexibility to change product mix according to changes in
the market conditions, such flexibility may need additional investment, its
impact on the viability of the project be analyzed.
G) Plant Layout:
- Proper plant layout can reduce manufacturing cost by saving time and
money.
- Plant layout is done in such a way that minimum time is taken in handling
equipment, raw material, consumables, goods- in- process and finished
goods.
H) Location of Plant:
1) Land:
-It should be sufficient for the proposed project and the future expansion
plans.
- Load bearing capacity of the land should be purchased.
- Proposed land should be non agriculture and approved for industrial use.
2) Raw Material:
- The requirement of raw material at full capacity should be ascertained
and it should be ensured that necessary raw material will be available at
reasonable price.
- If raw material is bulky and difficult to transport, it is better to locate the
plant near the source of raw material.
- Regular supply of raw material is very necessary for the successful
operation of the plant.
3) Market:
- While deciding location of the project, a comparative study regarding
transportation of raw material and finished products should also be done.
- If transportation of finished products is more difficult than its raw material,
it may be better to set up project near to the market.
4) Labor:
- Some times skilled labor is not available at a particular place. If labor has
to be obtained from outside, arrangement to provide housing facilities
analyzed.
5) Utilities:
- Arrangement for utilities power, water, fuel etc to be ensured. If there is
shortage of power supply alternative arrangement by way of Gen Sets etc
ensured.
6) Efficient Disposal:
- The problem of effluent differs from industry to industry depending on
nature and quantity of effluent.
- It should be ensured that necessary treatment is provided the effluent unit.
7) Transportation:
- If the proposed site is not connected with main road, an approach road
may have to be laid from the site to the main road.
- The quality of road may be decided keeping in view the quantum of goods
to be transported.
- If the unit proposes to buy their own vehicles cost benefit analysis be
made, by calculating depreciation, interest and other expenses of
maintaining vehicle compared to vehicles engaged on hire basis.
Financial Analysis
Lenders generally are taking an undertaking from the promoter to meet the
cost overrun, if any, in the implementation of the project. But such an
undertaking does not have much practical meaning. Many a times a
promoter is not in a position to bring additional resource to finance the
overrun, ultimately lenders have to provide the additional resource to
safeguard the money already invested in the project.
Means of Finance
- Promoters Contribution:
The minimum promoter’s contribution envisaged in the project is worked
out on the basis of Debt- Equity norm and the security norm applicable at
the time of sanction of the loan. The Debt equity ratio is the ratio of loan
component and the equity contribution of in the total project cost. The
maximum amount of assistance shall be lower of the two amounts worked
out on the basis of Debt- Equity norm and the security margin norm. The
normal lending norm for debt- equity in 2:1. However in some specific
schemes this norm may be flexible.
Debt – equity ratio is generally allowed about 2:1 depending upon nature of
the project, its location, promoter’s background etc.
Higher debt equity is allowed for project promoted by Technocrats, capital
intensive project, projects located in backward area etc.
Profitability Estimates
Breakeven point is the point at which the unit is neither earns profit nor
incurs losses. The cost of production is just recovered at breakeven point.
The cost of production is divided into two categories: Fixed Cost & Variable
Cost.
The break up fixed cost & variable cost:
Fixed cost
Salaries and wages
Repairs and maintenance
Administration and misc expenses
Fixed portion of selling expenses
Fixed royalty and know how payments
Interest on term debt
Deprecation on straight line basis
Variable cost
Raw materials
Consumable stores and spares
Packing material
Power fuel and water
Royalty payment linked to sales
Variable selling expenses
Interest on working capital
Other variable expenses varying directly in proportion to output
Internal rate of return (IRR) is that rate of discount which would equate the
present value of investment (Cash outflow) to the present value of benefits
(Cash inflows) over the life period of the project.
Management Analysis
Qualities of an entrepreneur
Honesty and integrity
Involvement in the project
Financial resources
Competence
Initiative
Intelligence
Drive and energy
Self confidence
Frankness
Patience
1> Gross NPA shows a positive figure from last 3 years i.e.
For year ended 31/03/2009 = 3.94%
For year ended 31/03/2010 = 3.11%
For year ended 31/03/2011 = 2.67%
Non-Performing Asset
(NPA): An asset becomes
NPA when it ceases to generate income for the bank. This would mean that
interest, which is debited to borrower’s account, has to be realized by the
bank. An account has to be classified as NPA on the basis of record of
recovery rather than security charged in favor of the bank in respect of
such account. Thus, an ac-count of a borrower may be-come NPA if
interest charged to that particular borrower is not realized despite the ac-
count being fully secured.
RBI has laid down the regulations regarding the NPA ie when the asset has
not serviced its interest or principal for more than 90 days when its due
then in such case it is to be recognized as NPA.
2>Now, how the company managed to reduce the Gross NPA over the
period of 3 years, various steps taken by the company
The bank has managed to bring its rate of Gross NPA down through
various ways of post disbursement supervision i.e.
-Physical inspection
The physical inspection of the borrower unit cannot be merely checking the
existence of stocks. The inspecting banker needs to look in to other
aspects such as:
Existence of security cover.
Correctness of data declared in the stock statement.
Quality of goods.
Correctness of prices of purchases.
Regular update of book keeping.
Compliance with maintenance of statutory records.
Realization pattern of book debts.
Status of labor relations.
Availability of raw materials.
Changes in management set up.
-Monitoring performance
The bank has monitored the operations to ensure that the operations of the
organisations are viable and profitable. For this purpose, the banker has to
carefully examine the operating statement, funds flow statement, and
statement of current assets and current liabilities. The bank also verifies
that the performance of the borrower is in tune with the projections made
at the time of sanction of limits.
A bank to keep its NPA at Zero needs to be financially strong, it can provide
for gross NPA, only after meeting all other statutory obligations.
As per regulations there is no specific requirement to keep the Net NPA at
zero, but the company engaged in banking business should make sure that
its Gross NPA is within the band of 7% - 8%, or else the Reserve Bank asks
the bank to wind up its operations restricting it from accepting deposits
from customers.
•The credit appraisal process carried out at SVC Bank Ltd is sound and
bank has good parameters to appraise the project.
•The credit department thoroughly analyses the credit requirement of the
company and the capacity to service the debt.
•The bank has conservative norms to appraise the project.
•The credit appraisal passes through various stages and evaluations before
it is appraised.
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