A PROJECT REPORT ON

"Ratio analysis for credit appraisal to SME by private sector bank"

Submitted in the partial fulfillment of the degree of the Master of

BusinessAdministration

By:

Aditi Raj

Major : Finance, Minor : HR

University roll no. : 95/MBA/220013

Registration no. :

To:

Departmentof Business Management, University of Calcutta

Date of submission: 15thApril,2023.

Batch: 2022 - 24
ACKNOWLEDGEMENT

Training Programme is a golden opportunity for learning and self development. I

consider myself very lucky and honored to have so many wonderful people lead me
through completion of this project.

I would like to express a deep sense of gratitude to the Department of Business

Management,University of Calcutta for extending me the opportunityfor an internship program.

I would take the opportunity to thank our HOD Dr. Sharmistha Banerjee Ma'am, who has

truly been my inspiration since day one and has constantly guided and supported us throughout

and Mr. Saurav Bose Sir (Placement officer) who has arranged an opportunity for me to

work with Axis Bankfor 2 months starting from3rdJanuary 2023 to 3rdMarch 2023.

My grateful thanks to Ms. Saswati Chowdhury, CBG head, Axis bank who in spite of being

extraordinarily busy with her duties, took time out to hear, guide and keep me on the correct

path.

Last but not the least there were so many who shared valuable information that helped in the

successful completion of this project.

PREFACE
There are always two sides of knowledge, practical as well as theoretical. Practical is the path

through which one can reach his destination. But it is essential to have clear ideas to reach that

destination and that is what theoretical knowledge means. In short, theoretical is the instruments

which push back the practical one.

Experience makes man perfect. By facing practical situation, one can get new ideas. Theoretical

studies are something, which came by practically. Management student can make use of

whatever he or she gets from his or her Academic background. Since, the commencement of

business and services importance hiked up day by day.

This project helped me to understand concept of credit appraisal and how credit appraisal process

is done in bank. I have tried to put my best effort to complete this task on the basis of skill that I

have achieved during my study in the institute. I have tried to put my maximum effort to get the

accurate statistical data. However I would appreciate if any mistakes are brought to me by the

reader.

Table of Content
Chapter no. Content Page no.

Executive Summary

1 Objective and Research Methodology 1

2 The Indian Banking System

2.1 Introduction 3

2.2 Banking Reforms 4

2.3 Classification of Banks 6

2.4 Sucess Path for bankers 8

2.5 Challenges 9

2.6 SWOT Analysis 10

3 Introduction to Axis Bank

3.1 Business Divisions 14

3.2 Advances 16

4 Introduction to SME
4.1 History 18

4.2 Description of SME in manufacturing sector 19

5 Introduction to MSME
5.1 Description 20

5.2 RBI defination of MSME 21

6 Literature Review 23

7 Conceptual Framework
7.1 Concept of Ratio Analysis 28

7.2 Usage of Ratio Analysis 29

 7.3 Types of Ratio Analysis 30

7.4 Applications of Ratio Analysis 40

7.5 Overview of Credit Appraisal 42

8 Credit Appraisal Model at Axis Bank

8.1 Scheme of credit to SME 44

8.2 Sanctioning power of schematic loan under 49

MSME and Mid corporate
9 Credit Risk Management
9.1 Introduction 51

9.2 Determinants 52

9.3 Credit tools 52

10 Case study in field of research 54

11 Findings 71

12 Conclusions 73

Bibliography
 EXECUTIVE SUMMARY

The pace of development for the Indian banking industry has been tremendous over the past

decade. As the world reels from the global financial meltdown, India’ s banking sector has been

one of the very few to actually maintain resilience while continuing to provide growth

opportunities, a feat unlikely to be matched by other developed markets around the world.

Growing percentage of Non Performing Assets is a big concern for modern as well as traditional

financial institutions. If credit appraisal system is effective then certainly it will reflect positively

on reducing percentage of NPA’ s.

Credit Appraisal is a process to ascertain the risks associated with the extension of the credit

facility. It is generally carried by the financial institutions which are involved in providing

financial funding to its customers. Credit risk is a risk related to non repayment of the credit

obtained by the customer of a bank. Thus it is necessary to appraise the credibility of the

customer in order to mitigate the credit risk. Proper evaluation of the customer is performed this

measures the financial condition and the ability of the customer to repay back the loan in future.

Generally the credit facilities are extended against the security know as collateral. But even

though the loans are backed by the collateral, banks are normally interested in the actual loan

amount to be repaid along with the interest. Thus, the customer's cash flows are ascertained to

ensure the timely payment of principal and the interest.

It is the process of appraising the credit worthiness of a loan applicant. Factors like age, income,

number of dependents, nature of employment, continuity of employment, repayment capacity,

previous loans, credit cards, etc. are taken into account while appraising the credit worthiness of

a person. Every bank or lending institution has its own panel of officials for this purpose.
There is no guarantee to ensure a loan does not run into problems; however if proper credit

evaluation techniques and monitoring are implemented then naturally the loan loss probability /

problems will be minimized, which should be the objective of every lending officer.

Project is about credit appraisal process of SME ( Small Medium Enterprise ) sector of Axis

bank. First chapter deals with research methodology and objective, second chapter deals with

introduction of banking sector and current scenario of banking sector. Third chapter is about

introduction to SME and its history. Fourth chapter deals with overview of credit appraisal,

credit appraisal process, pre and post sanction process. Next chapter depicts credit appraisal

process and schemes at Axis bank. Sixth chapter is about credit risk management and rating tool.

Case study of Dynamic Products Ltd. is done and how credit appraisal is done is stated in next

chapter. Finding and conclusion is made on the basis of research.

Chapter : 1

Objective and Research Methodology

PROBLEM STATEMENT:
To study the process of ratio analysis done during the credit appraisal
system by SME department of Axis Bank.
OBJECTIVES:
To study the Credit Appraisal Methods.
To understand the commercial, financial & technical viability of the project
proposed & it’s funding pattern.
To understand the pattern for primary & collateral security cover available
for recovery of such funds.
To study the credit appraisal process done by Axis Bank.
RESEARCH DESIGN:
A research design is the arrangement of the condition for collection and analysis
of data. Actually it is the blueprint of the research project.
Research design used will be Exploratory type. Exploratory research is a
methodology that helps researchers understand a problem before trying to
quantify mass responses into data that can be statistically inferred. It is often
qualitative and primary in nature, but can also be quantitative.
DATA COLLECTION:
Primary data:
It has been collected through Informal interviews with Branch Manager and
other staff members at Axis bank.
Secondary data:
It has been collected from Business Newspapers, magazines, internal
reports of Axis bank, books, Journal and websites.

1
 Case Study:
I have taken two case studies under this (not disclosing the names)
1. XYZ Ltd. which is in manufacturing of Food color product.
2. ABC Ltd. which is in manufacturing of organic green tea.

LIMITATIONS OF STUDY
As the credit rating is one of the crucial areas for any bank, some of the
technicalities may not reveal which might cause destruction to the
information and exploration of the problem.
As some of the information is not revealed, whatever suggestions
generated, will be based on certain assumptions.
Finding of the study will be based on the assumptions that respondents
have given correct information.
Information provided by respondents may be biased.
The study is academic in nature.

2
Chapter : 2

The Indian Banking System

2.1 INTRODUCTION:

Without a sound and effective banking system in India it cannot have a healthy
economy. The banking system of India should not only be hassle free but it should
be able to meet new challenges posed by the technology and any other external
and internal factors.
For the past three decades India's banking system has several outstanding
achievements to its credit. The most striking is its extensive reach. It is no longer
confined to only metropolitans or cosmopolitans in India. In fact, Indian banking
system has reached even to the remote corners of the country. This is one of the
main reasons of India's growth process.
Currently, India has 96 scheduled commercial banks(SCBs) - 27 public sector
banks (that is with the Government of India holding a stake), 31 private banks
(these do not have government stake; they may be publicly listed and traded on
stock exchanges) and 38 foreign banks. They have a combined network of over
53,000 branches and 49,000 ATMs. According to a report by ICRA (Investment
Information and Credit Rating Agency of India Limited) a rating agency, the public
sector banks hold over 75 percent of total assets of the banking industry, with the
private and foreign banks holding 18.2% and 6.5% respectively.
Not long ago, an account holder had to wait for hours at the bank counters for
getting a draft or for withdrawing his own money. Today, he has a choice. Gone
are days when the most efficient bank transferred money from one branch to
other in two days. Now it is simple as instant messaging or dial a pizza. Money
have become the order of the day.
The first bank in India, though conservative, was established in 1786. From 1786
till today, the journey of Indian Banking System can be segregated into three
distinct phases. They are as mentioned below:
 Early phase from 1786 to 1969 of Indian Banks

3
  Nationalization of Indian Banks and up to 1991 prior to Indian banking
sector Reforms.

 New phase of Indian Banking System with the advent of Indian Financial &
Banking sector reforms after 1991.
To make this write-up more explanatory, I prefix the scenario as Phase I, Phase II
and Phase III.
2.2 BANKING REFORMS:
Phase I
The General Bank of India was set up in the year 1786. Next came Bank of
Hindustan and Bengal Bank. The East India Company established Bank of Bengal
(1809), Bank of Bombay (1840) and Bank of Madras (1843) as independent units
and called it Presidency Banks. These three banks were amalgamated in 1920 and
Imperial Bank of India was established which started as private shareholders
banks, mostly Europeans shareholders.
In 1865 Allahabad Bank was established and first time exclusively by Indians,
Punjab National Bank Ltd. was set up in 1894 with headquarters at Lahore.
Between 1906 and 1913, Bank of India, Central Bank of India, Bank of Baroda,
Canara Bank, Indian Bank, and Bank of Mysore were set up. Reserve Bank of India
came in 1935.
During the first phase the growth was very slow and banks also experienced
periodic failures between 1913 and 1948. There were approximately 1100 banks,
mostly small. To streamline the functioning and activities of commercial banks,
the Government of India came up with The Banking Companies Act, 1949 which
was later changed to Banking Regulation Act 1949 as per amending Act of 1965
(Act No. 23 of 1965). Reserve Bank of India was vested with extensive powers for
the supervision of banking in India as the Central Banking Authority.
During those day’s public has lesser confidence in the banks. As an aftermath
deposit mobilization was slow. Abreast of it the savings bank facility provided by
the Postal department was comparatively safer. Moreover, funds were largely
given to traders.
Phase II

4
Government took major steps in this Indian Banking Sector Reform after
independence. In 1955, it nationalized Imperial Bank of India with extensive
banking facilities on a large scale especially in rural and semi-urban areas. It
formed State Bank of India to act as the principal agent of RBI and to handle
banking transactions of the Union and State Governments all over the country.
Seven banks forming subsidiary of State Bank of India was nationalized in 1960 on
19th July, 1969, major process of nationalization was carried out. It was the effort
of the then Prime Minister of India, Mrs. Indira Gandhi. 14 major commercial
banks in the country was nationalized.

Second phase of nationalization Indian Banking Sector Reform was carried out in
1980 with seven more banks. This step brought 80% of the banking segment in
India under Government ownership.
The following are the steps taken by the Government of India to Regulate Banking
Institutions in the Country:
 1949: Enactment of Banking Regulation Act.
 1955: Nationalization of State Bank of India.
 1959: Nationalization of SBI subsidiaries.
 1961: Insurance cover extended to deposits.
 1969: Nationalization of 14 major banks.
 1971: Creation of credit guarantee corporation.
 1975: Creation of regional rural banks.
 1980: Nationalization of seven banks with deposits over 200 crore.
After the nationalization of banks, the branches of the public sector bank India
rose to approximately 800% in deposits and advances took a huge jump by
11,000%.
Banking in the sunshine of Government ownership gave the public implicit faith
and immense confidence about the sustainability of these institutions.
Phase III
This phase has introduced many more products and facilities in the banking sector
in its reforms measure. In 1991, under the chairmanship of M Narasimham, a

5
committee was set up by his name which worked for the liberalization of banking
practices.
The country is flooded with foreign banks and their ATM stations. Efforts are
being put to give a satisfactory service to customers. Phone banking and net
banking is introduced. The entire system became more convenient and swift.
Time is given more importance than money.
The financial system of India has shown a great deal of resilience. It is sheltered
from any crisis triggered by any external macroeconomics shock as other East
Asian Countries suffered. This is all due to a flexible exchange rate regime, the
foreign reserves are high, the capital account is not yet fully convertible, and
banks and their customers have limited foreign exchange exposure.

2.3 CLASSIFICATION OF BANKS:

The Indian banking industry, which is governed by the Banking Regulation Act of
India
1949 can be broadly classified into two major categories, non-scheduled banks
and scheduled banks. Scheduled banks comprise commercial banks and the co-
operative banks. In Terms of ownership, commercial banks can be further
grouped into nationalized banks, the State Bank of India and its group banks,
regional rural banks and private sector banks.
old / new domestic and foreign). The Indian banking industry is a mix of the public
sector, private sector and foreign banks. The private sector banks are again spilt
into old banks and new banks.

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Nationalized /Public sector banks

 Dominate the banking system in India.

 Nationalization of banks in India took place in 1969 by Mrs. Indira Gandhi.

Private Banks
 Made banking more efficient and customer friendly.
 Jolted public sector banks out of complacency and forced them to become
more competitive.
Foreign banks

 Have brought latest technology and latest banking practices in India.

 Have helped made Indian banking system more competitive and efficient.
2.4 SUCCESS PATH FOR BANKERS:
One of the biggest problems facing senior managers of banks today is attracting
customers and attaining growth, often in an environment where products and

7
prices among competitors are close substitutes. Traditional bases for
differentiation, such as product features or cost, are becoming less tangible. So
the management’s are forced to look for new ways to appear attractive to its
target market and simultaneously retain the existing one. From the annual survey
conduct by FICCI, we found that they rank their business strategies that have
helped them in increased customer acquisition and retention (On a scale of 1 to 8
with 8 being the most important marketing strategy). The results of the Mode
score being accorded by the Public, Private& Foreign banks are presented below:
Technology has moved from being just a business enabler to being a business
driver. Be it customer service, reducing operational costs, achieving profitability,
developing risk management systems, we turn to technology for providing
necessary solution. Technological up gradation was clearly identified as one of the
most successful strategy in Customer Acquisition and Retention followed by
Expansion of ATM Network, Advertisements and additional sales force.
Customer Retention and Customer Satisfaction are inexorably interred - linked.
While consumers may be happy to make payments and interact with their bank
through convenient – and cheaper – banking channels, they still expect high
standards of service. A consistent service reflects the bank’s brand and image
across all channels. 93.75 per cent of respondent banks informed that superior
service pre and post banking has been one of the essential factors rated high by
their customers. 75 per cent of respondent banks felt that Personal touch in the
dealings has helped them in winning customers.

2.5 CHALLENGES FACED BY BANKING INDUSTRY IN INDIA:

The banking industry in India is undergoing a major transformation due to
changes in economic conditions and continuous deregulation. These multiple
changes happening one after other has a ripple effect on a bank Refer fig. trying
to graduate from completely regulated sellers market to completed deregulated
customers market.

8
2.6 SWOT ANALYSIS:

The banking sector is also taken as a proxy for the economy as a whole. The
performance of bank should therefore, reflect “Trends in the Indian Economy”.
Due to the reforms in the financial sector, banking industry has changed
drastically with the opportunities to the work with, new accounting standards
new entrants and information technology. The deregulation of the interest rate,
participation of banks in project financing has changed in the environment of
banks.
The performance of banking industry is done through SWOT Analysis. It mainly
helps to know the strengths and Weakness of the industry and to improve will be

9
known through converting the opportunities into strengths. It also helps for the
competitive environment among the banks.
STRENGTHS
1. Greater securities of Funds
Compared to other investment options banks since its inception has been a better
avenue in terms of securities. Due to satisfactory implementation of RBI’s
prudential norms banks have won public confidence over several years.
2. Banking network
After nationalization, banks have expanded their branches in the country, which
has helped banks build large networks in the rural and urban areas. Private banks
allowed to operate but they mainly concentrate in metropolis.
3. Large Customer Base
This is mainly attributed to the large network of the banking sector. Depositors in
rural areas prefer banks because of the failure of the NBFCs.
4. Low Cost of Capital
Corporate prefers borrowing money from banks because of low cost of capital.
Middle income people who want money for personal financing can look to banks
as they offer at very low rates of interests. Consumer credit forms the major
source of financing by banks.

WEAKNESS
1. Basel Committee
The banks need to comply with the norms of Basel committee but before that it is
challenge for banks to implement the Basel committee standard, which are of
international standard.
2. Powerful Unions

10
Nationalization of banks had a positive outcome in helping the Indian Economy as
a whole. But this had also proved detrimental in the form of strong unions, which
have a major influence in decision-making. They are against automation.
3. Priority Sector Lending
To uplift the society, priority sector lending was brought in during nationalization.
This is good for the economy but banks have failed to manage the asset quality
and their intensions were more towards fulfilling government norms. As a result
lending was done for non-productive purposes.
4. High Non-Performing Assets
Non-Performing Assets (NPAs) have become a matter of concern in the banking
industry. This is because reduced to meet the international standardsof change in
the total outstanding advances, which has to be reduced to meet the
international standards.

OPPORTUNITIES
1. Universal Banking
Banks have moved along the value chain to provide their customers more
products and services. like home finance, Capital Markets, Bonds etc. Every Indian
bank has an opportunity to become universal bank, which provides every financial
service under one roof.
2. Differential Interest Rates
As RBI control over bank reduces, they will have greater flexibility to fix their own
interest rates which depends on the profitability of the banks.
3. High Household Savings
Household savings has been increasing drastically. Investment in financial assets
has also increased. Banks should use this opportunity for raising funds.
4. Untapped Foreign Markets

11
Many Indian banks have not sufficiently penetrated in foreign markets to
generate satisfactory business therefore, it can be concluded clear opportunity
exists in such markets.
5. Interest Banking
The advance in information technology has made banking easier. Business can
Effectively carried out through internet banking.

THREATS
1. NBFCs, Capital Markets and Mutual funds
There is a huge investment of household savings. The investments in NBFCs
deposits, Capital Market Instruments and Mutual Funds are increasing. Normally
these instruments offer better return to investors.
2. Changes in the Government Policy
The change in the government policy has proved to be a threat to the banking
sector. Due to some major changes in policies related to deposits mobilization
credit deployment, interest rates- the whole scenario of banking industry may
change.
3. Inflation
The interest rates go down with a fall in inflation. Thus, the investors will shift his
investments to the other profitable sectors.
4. Recession
Due to the recession in the business cycle the economy functions poorly and this
has proved to be a threat to the banking sector. The market oriented economy
and globalization has resulted into competition for market share. The spread in
the banking sector is very narrow.

12
Chapter : 3

Introduction to Axis Bank

Axis Bank was the first of the new private banks to have begun operations in
1994, after the Government of India allowed new private banks to be established.
The Bank was promoted jointly by the Administrator of the specified undertaking
of the Unit Trust of India (UTI - I), Life Insurance Corporation of India (LIC) and
General Insurance Corporation of India (GIC) and other four PSU insurance

13
companies, i.e. National Insurance Company Ltd., The New India Assurance
Company Ltd., The Oriental Insurance Company Ltd. and United India Insurance
Company Ltd.
The Bank's Registered Office is at Ahmedabad and its Central Office is located at
Mumbai. The Bank has a very wide network of more than 1281 branches and
Extension Counters (as on 31st March 2011). The Bank has a network of over
7591 ATMs (as on 30th September 2011) providing 24 hrs a day banking
convenience to its customers. This is one of the largest ATM networks in the
country.
The Bank has strengths in both retail and corporate banking and is committed to
adopting the best industry practices internationally in order to achieve excellence.
3.1 Business divisions
1. Treasury management
Treasury is responsible for the maintenance of the statutory requirements such as
the cash reserve ratio (CRR), statutory liquidity ratio (SLR) and the investment of
such funds. It also manages the assets and liabilities of the bank. Primary dealing
activities can be classified into

 Money market operations

 Foreign exchange operations
 Derivatives
 Merchant Banking and capital markets

Axis Bank is a registered merchant Banker. The services offered are:

Private placement/syndication
Issue management
Debenture trustees
Depository services
Project advisory services, capital market services, advisory on Mergers &
Acquisition

14
2. Retail financial services
All branches have a dedicated financial advisory desk, wherein the mutual fund
schemes are marketed. The objective is to provide customers with a larger
portfolio of investment avenues thereby enhancing customer relationship. Other
products handled by the department include sale of Gold Coins as well as
marketing of Depository services.
Corporate and institutional banking
Cash management Services
Business current Accounts
Correspondent Banking
Government Business
Retail Banking

Retail banking is one of the key departments in the bank. It has the largest variety
in its portfolio which consists of retail asset and retail liability products. Retail
Banking by definition implies banking services which are offered to individual
customers as opposed to corporate banking which is meant for companies.

3. International banking
Major functions include
Handling regulatory issues which include compliance with regulations of various
authorities such as RBI regulations, FEMA etc
Keeping a track of the business volumes being generated by the branches and
controlling the margins
Maintaining relationship with correspondent Banks outside India
3.2 Advances

15
The function involves extending fund and non-fund based credit facilities to
different clients in the country, the department aims to maximize the interest
spread earned on funds available with the bank while keeping the risk on the
credit portfolio at acceptable limits. The department also tries to maximize fee-
based income from both fund based and non-fund based activities.
In the Indian context, the small and medium enterprises (SME) sector is broadly a
Term used for small scale industrial (SSI) units and medium-scale industrial units.
Any industrial unit with a total investment in its fixed assets or leased assets or
hire-purchase asset of upto Rs 10 million, can be considered as an SSI unit and any
investment of upto Rs 100 million can be termed as a medium unit. An SSI unit
should neither be a subsidiary of any other industrial unit nor be owned or
controlled by any other industrial unit.
An SME is known by different ways across the world. In India, a standard
definition surfaced only in October 2, 2006, when the Ministry of Micro, Small and
Medium Enterprises, Government of India, imposed the Micro, Small and Medium
enterprises Development (MSMED) Act,2006.
This definition, however was changed according to the changing economic
scenario and thus has separate definitions to it. For instance, an SME definition
for manufacturing enterprises is different from what an SME definition for service
enterprises has to say.

Chapter: 4

Introduction to SME

4.1 HISTORY:

Small and Medium Enterprises or SMEs are vital for the growth and well being of
the country. This sector was recognized and given importance right from
independence and is being encouraged ever since then.
Though, it commenced on a small scale, it gradually gained significance, because
it employed a considerable number of people.

16
When it started gaining momentum, this sector was defined as an enterprise with
investment in plant and machinery of up to Rs 1 lakh and situated in towns and
villages with strength of less than 50,000 people. The policy statement put in
place special legislation to recognize and protect self employed people in cottage
and home industries. District industries canters (DICs) were set up and made the
focal point of SSI development, bypassing large cities and state capitals. Also, the
government started providing special services akin to product standardization,
quality control and marketing surveys in order to assist the SSIs in enabling them
to market their products in an underdeveloped market.
The scenario for the small-scale sector changed with the Industrial Policy of July
1991, which, for the first time in India’s development history spoke of
liberalization. What this meant was that medium and large enterprises would no
longer need licenses to run. Export-oriented enterprises could be wholly foreign
owned and foreign equity participation was selectively allowed. Industries could
import capital goods with much fewer restrictions.
1996 saw the government involved in the setting up of a higher level committee,
known as the Abid Hussain Committee, to review policies for small industries and
recommend measures to help formulate a strong and innovative policy package
for the rapid development of SMEs. With liberalization, rapid changes were seen
in the Indian economy. Indian companies were no longer insulated from the
global economy. In fact, there was an urgent need to make them, especially SMEs,
more competitive and resilient.
In 1991, the growth rate of SSIs was almost three times that of the total industrial
sector at 3.1 percent. From 1991 to 1995, the growth rate of SSIs exceeded that
of the total industrial sector. Yet, in 1995-96, the growth rate of SSIs was slightly
lower than the total industrial sector, however it increased again in 1996 and
continued to be higher than the total industrial growth rate till 1999. till 2006, the
SME segment saw a lot more development and support from the government.
4.2 Description of SME in the manufacturing sector
The Term enterprise in the manufacturing context stands for an industrial
undertaking or a business concern involved in the production, processing or
preservation of goods for the list of eligible industries in the First Schedule to the
Industries (Development and Regulation Act), 1951.

17
For the Manufacturing Sector, the MSMED Act 2006 defines micro, small and
medium enterprises (MSMEs) as mentioned below:
1. A micro enterprise is an enterprise where investment in plant and machinery
does not exceed Rs 25 lakh.
2. The investment in plant and machinery in a small enterprise is more than Rs 25
lakh, but does not exceed Rs 5 crore.
3. A medium enterprise is one where the investment in plant and machinery is
more than Rs 5 crore, but does not exceed Rs 10 crore.
In all these, the cost excludes that of land, building and the items specified by the
Ministry of Small Scale Industries with its notification No SO 1722 (E) dated
October 5, 2006.

Chapter : 5

Introduction to MSME

5.1 Introduction to MSME:

As per Banking Codes and Standards Board of India for Micro and Small and
Medium
Enterprises disposal of application for a credit limit or enhancement in existing
credit
limit up to Rs.5 lac within two weeks and for credit limit above Rs.5 lac and up to

18
Rs.25 lac within 3 weeks and for credit limit above Rs.25 lac within 6 weeks from
the
date of receipt, provided the application is complete in all respects and is
accompanied by documents as per check list provided.
The Micro, Small and Medium Enterprises (MSMEs) support industries as ancillary
units, thereby contributing enormously to the overall industrial development of
the
country. These enterprises are engaged in the production, manufacturing and
processing of goods and commodities.
According to the Micro, Small and Medium Enterprises Development Act, 2006,
MSMEs are classified into three categories:
1. Micro enterprise:
An enterprise where the investment in the plant and machinery or equipment
does
not exceed ₹1 crore, and turnover does not exceed ₹5 crores.
2. Small enterprise:
An enterprise where the investment in the plant and machinery or equipment
does
not exceed ₹10 crores, and turnover does not exceed ₹50 crores.
3. Medium enterprise:
An enterprise where the investment in the plant and machinery or equipment
does
not exceed ₹50 crores, and turnover does not exceed ₹250 crores.
The Government of India has introduced several programs for employment
generation. It has implemented financing schemes to promote businesses and
local

19
manufacturing in India.
Business owners can apply for MSME business loans at attractive interest rates
through HDFC Bank for easy financing options.
5.2 RBI definition of MSME
In terms of RBI circular Number RBI/FIDD/2017-18/56-dated 25 th April 2018 and
RBI/2020-21/10/FIDD- dated 2 July 2020 and RBI/2021/26FIDD dated 21August
2020
an enterprise shall be classified as micro,small or medium enterprise on the basis
of
a composite criteria of investment in plant and machinery/equipment and
turnover.
The limit of investment in plant and machinery/equipment and turnover in order
that an enterprise be classified as MSME as notified by RBI are as under:

20
Classification/ reclassification of MSMEs is the statutory responsibility of the GoI,
Ministry of MSME as per the provisions of the MSMED Act 2006. All enterprises
are
required to register online and obtain “Udyam Registration Certificate”. All
lenders
may , therefore , obtain “ Udyam Registration Certificate” from the
entrepreneurs.

Chapter : 6

Literature Review

Literature Review of Ratio Analysis:

Review of Literature refers to the collection of the results of the
various researches
relating to the present study. It takes into consideration the research of the
previous
researchers which are related to the present research in any way. Here are the
reviews
of the previous research related with the present study:

1. Bollen (1999) conducted a study on Ratio Variables on which he found three

different uses of ratio variables in aggregate data analysis:
(1) as measures of theoretical concepts,
(2) as a means to control an extraneous factor, and

21
(3) as a correction for heteroscedasticity. In the use of ratios as indices of
concepts, a problem can arise if it is regressed on other indices or variables that
contain a common component. For example, the relationship between two per
capital measures may be confounded with the common population component in
each variable. Regarding the second use of ratios, only under exceptional
conditions will ratio variables be a suitable means of controlling an extraneous
factor. Finally, the use of ratios to correct for heteroscedasticity is also often
misused. Only under special conditions will the common form forgers soon with
ratio variables correct for heteroscedasticity. Alternatives to ratios for each of
these cases are discussed and evaluated.

2. Cooper (2000) conducted a study on Financial Intermediation on which he

observed that the quantitative behavior of business-cycle models in which the
intermediation process acts either as a source of fluctuations or as a propagator
of real shocks. In neither case do we find convincingevidence that
the intermediation process is an important element of aggregate fluctuations. For
an economy driven by intermediation shocks, consumption is not smoother than
output,investment is negatively correlated with output, variations in the capital
stock are quite large, and interest rates are procyclical. The model economy thus
fails to match unconditional moments for the U.S. economy. We also structurally
estimate parameters of a model economy in which intermediation and
productivity shocks are present, allowing for the intermediation process to
propagate the real shock. The unconditional correlations are closer to those
observed only when the intermediation shock is relatively unimportant.

3. According to Mcleary (1992) ratio means “an expression of a relationship

between any two figures or groups of figures in the financial statements of an
undertaking”. Firms and Companies include ‘Ratios’ in their external report to
which it can be referred as ‘highlights’. Only with the help of ratios the financial
statements are meaningful. It is therefore, not surprising that ratio analysis
feature are prominently in the literature on financial management.

4. Beaver (1966) conducted a study on ratio analysis and identified the origin of
ratio analysis to the early 1900, when the analysis was confined to the current

22
ratio for the evaluation of creditworthiness. This ratio is expressed in percentage.
If the ratio is high it shows that the company is utilizing its assets in better way to
generate its income. If the ratio is less it shows that the company is in difficult
position to meet its debt. Formula to find the return on assets ratio is: - return on
assets = net profit / total assets. Whereas net profit means the amount arriving
after deducting all the expenses which includes taxes also. In addition to this he
also explains about the profit margin ratio (PMR). PMR is the ratio which
expresses the relationship between profit and sales.
In this ratio he explains about the three types of business inventory like raw
materials, work in progress and finished goods. Formula to find the inventory
turnover ratio and average age of inventory is: - inventory turnover = costs of
goods sold/average inventory, Average age of inventory = 360 days/inventory
turnover ratio.

5. According to Barth, Beaver and Landsman (2014) concluded in their study that
the value relevance literature provides fruitful insights for the standard setting
process. However, Holthousen and Watts (2014) in their study pointed out that
value relevance research offers little or no insight for standard setting. As
mentioned before, much of the studies are investigating the relative value
relevance of various accounting figures reported in the financial statements.

6. Brief and Zarowin, in their study on value relevance of dividends, book value
and earnings, pointed out that the variables, book value and dividends, have
almost the same explanatory power as book value and reported earnings.
According to Barne, (2015) States that Financial ratio are widely used to develop
insights in to the financial performance of companies’ by both the evaluators’ and
researchers’. The firm involves many interested parties, like the owners,
management, personnel, customers, suppliers, competitors, regulatory agencies,
and academics, each having their views in applying financial statement analysis in
their evaluations. Evaluators ‘use financial ratios, for instance, to forecast the
future success of companies, while the researchers' main interest has been to
develop models exploiting these ratios many distinct areas of research involving
financial ratios can be differentiated.

23
7. Mingyi Hung (2016) in his paper on “Accounting Standards and Value
Relevance of Financial Statements: An International Analysis” concluded that the
use of accrual accounting (versus cash accounting) negatively affects the value
relevance of financial statements in countries with weak shareholder protection.
This negative effect, however, does not exist in countries with strong shareholder
protection.

8. Cooper (2000) conducted a study on Financial Intermediation on which he

observed that the quantitative behavior of business-cycle models in which the
intermediation process acts either as a source of fluctuations or as a propagator
of real shocks. In neither case do we find convincing evidence that the
intermideation process is an important element of aggregate fluctuations. For an
economy driven by intermediation shocks, consumption is not smoother than
output, investment is negatively correlated with output, variations in the capital
stock are quite large, and interest rates are procyclical. The model economy thus
fails to match unconditional moments for the U.S. economy. We also structurally
estimate parameters of a model economy in which intermediation and
productivity shocks are present, allowing for the intermediation process to
propagate the real shock. The unconditional correlations are closer to those
observed only when the intermediation shock is relatively unimportant.

9. Gerrard (2001) conducted a study on The Financial Performance on which he

found that using ratio analysis the financial performance of a sample of
independent single-plant engineering firms in Leeds is examined with regard to
structural and location differences in establishments. A number of determinants
of performance are derived and tested against the constructed data base. Inner-
city engineering firms perform relatively less well on all indicators of performance
compared with outer-city firms. The study illustrates the importance of using
different measures of performance since this affects the magnitude and
significance of the results. Financial support is necessary to sustain engineering in
the inner city in the long run.

10. Schmidgall (2003) conducted a study on Financial Analysis Using the

Statement of Cash Flows on which he observed that Managers use many financial

24
ratios to judge the health of their businesses. With the recent requirement of a
statement of cash flow (SCF) by the Financial Accounting Standards Board,
managers now have a new set of ratios that will give a realistic picture of the
business. The ratios include cash flow-interest coverage, cash flow-dividend
coverage, and cash flow from operations to cash flow in investments.

25
Chapter : 7

Conceptual Framework

7.1 Concept of Ratio Analysis

Ratio analysis is a quantitative procedure of obtaining a look into a firm’s
functional efficiency, liquidity, revenues, and profitability by analyzing its financial
records and statements. Ratio analysis is a very important factor that will help in
doing an analysis of the fundamentals of equity.
Analysts and investors make use of the methods for ratio analysis to study and
evaluate the fiscal well being of businesses by closely examining the historical
performance and monetary statements.
Comparative data and analysis can give an insight into the performance of
the business over a given period of time by comparing it with
the industry standards. At the same time, it also measures how well a business
racks up against other businesses functioning in the same sector.

Key Takeaways :
1. Ratio analysis compares line-item data from a company's financial statements
to reveal insights regarding profitability, liquidity, operational efficiency, and
solvency.
2. Ratio analysis can mark how a company is performing over time, while
comparing a company to another within the same industry or sector.
3. Ratio analysis may also be required by external parties that set benchmarks
often tied to risk.

26
4. While ratios offer useful insight into a company, they should be paired with
other metrics, to obtain a broader picture of a company's financial health.
5. Examples of ratio analysis include current ratio, gross profit margin ratio,
inventory turnover ratio.
7.2 Usage of Ratio Analysis
Investors and analysts employ ratio analysis to evaluate the financial health of
companies by scrutinizing past and current financial statements. Comparative
data can demonstrate how a company is performing over time and can be used to
estimate likely future performance. This data can also compare a company's
financial standing with industry averages while measuring how a company stacks
up against others within the same sector.
Investors can use ratio analysis easily, and every figure needed to calculate the
ratios is found on a company's financial statements.
Ratios are comparison points for companies. They evaluate stocks within an
industry. Likewise, they measure a company today against its historical numbers.
In most cases, it is also important to understand the variables driving ratios as
management has the flexibility to, at times, alter its strategy to make it's stock
and company ratios more attractive. Generally, ratios are typically not used in
isolation but rather in combination with other ratios. Having a good idea of the
ratios in each of the four previously mentioned categories will give you a
comprehensive view of the company from different angles and help you spot
potential red flags.
A ratio is the relation between two amounts showing the number of times one
value contains or is contained within the other.
Most ratio analysis is only used for internal decision making. Though some
benchmarks are set externally, ratio analysis is often not a required aspect of
budgeting or planning.

7.3 Types of Ratio Analysis

Ratio Analysis Types refer to different forms of ratio analyses that are conducted
to figure out the exact status or progress of a business. The ratio analysis forms
help analyze the company’s financial and trend of the company’s results over

27
years. It is a fundamental tool that every company uses to ascertain the financial
liquidity, debt burden, profitability, and how well it is placed in the market
compared to its peers.

Some of the categories of ratio analysis include liquidity ratios, solvency ratios,
profitability ratios, efficiency ratio, and coverage ratio which indicates the
company’s performance. Various examples of these ratios include the current
ratio, return on equity, debt-equity ratio, dividend payout ratio, and price-
earnings ratio. These different types of ratio analysis make financial analysis
easier to conduct for companies, thereby helping them plan their progress
accordingly.
Ratio analysis types exist in several form and based on the figures and assessment
data that firms need to generate to understand its progress or decline, the
analysts choose a specific type of it for further calculation and quantitative
derivations. This is because not all ratio analysis type suits all kinds of
requirements of a business. Hence, the ratio to be calculated for analysis must be
chosen based on the kind of data required for it.
Though there are five widely used types of ratio analysis, choosing a random type
may not help firms assess their current position in the market. For example, if a
business desires to check its debt-to-equity ratio, it has to compute this particular
ration for valid figures. Finding out gross profit ratio in such a scenario would not
help organizations.

28
Therefore, it is important to choose the appropriate ratio analysis type for a more
accurate and reliable overview of the business performance. So far as being
correct in deriving a proper conclusion is concerned, multiple ratio analysis should
be conducted for better support to the figures obtained. If more ratio analysis
suggests growth, that means the business is on the right track. The numerator
and denominator of the ratio to be calculated are taken from the financial
statements, thereby expressing a relationship with each other. This is done based
on the type of ratio selected for analysis. For example, if a business wants to learn
about the returns expected on the capital employed, the numerator will be
Earnings Before Interests and Taxes (EBIT) and the denominator will be the capital
employed. On the other hand, if the ratio to be obtained is the return on net
worth, the numerator and denominator would be different, i.e., net profit and
equity shareholder’s funds, respectively.

Top 5 Types of Ratio Analysis

Every company divides ratios and does ratio analysis as per their needs, but
broadly ratio analysis can be divided into these 5 types which are mentioned as
below:

Type #1 – Profitability Ratios

This type of ratio analysis suggests the returns generated from the Business with
the Capital Invested.
1.1 Gross Profit Ratio
It represents the company’s operating profit after adjusting the cost of the goods
that are sold. The higher the gross profit ratio, the lower the cost of goods sold,
and the greater satisfaction for the management.
Gross Profit Ratio Formula = Gross Profit/Net Sales*100.

29
1.2 Net Profit Ratio
It represents the company’s overall profitability after deducting all the cash & no
cash expenses: the higher the net profit ratio, the higher the net worth, and the
stronger the balance sheet. It is basically a measure of what Profit a company
generates after deducting its taxes from the total revenue.
It is expressed as a percentage and can help company in improving their pricing
strategy.
Net Profit Ratio Formula = Net Profit/Net Sales*100

1.3 Operating Profit Ratio

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The operating profit ratio (OPR), also known as operating margin, is a financial
metric that measures a company's earning efficiency by comparing its operating
profit to its net sales. The OPR is calculated by dividing operating profit by net
sales, and is expressed as a percentage.
The OPR is a good indicator of how well a company is run and how effectively it
can generate profits from its sales. For example, a company with an OPR that
outperforms the industry average is considered to have a competitive
advantage. Tracking the OPR on a historical trend line can help identify long-term
changes.
It represents the soundness of the company and the ability to pay off its debt
obligations.
Operating Profit Ratio Formula = Ebit/Net sales*100

1.4 Return on Capital Employed

ROCE represents the company’s profitability with the capital invested in the
business.
Return on Capital Employed Formula = Ebit/Capital Employed
Return on Capital Employed (ROCE) is a financial metric that measures how well a
company uses its capital to generate profits. It's a key indicator of a company's
profitability and capital efficiency.

31
Type #2 – Solvency Ratios
These ratio analysis types suggest whether the company is solvent & can pay off
the lenders’ debts or not.
Also called financial leverage ratios, solvency ratios compare a company's debt
levels with its assets, equity, and earnings, to evaluate the likelihood of a
company staying afloat over the long haul, by paying off its long-term debt as well
as the interest on its debt. Examples of solvency ratios include: debt-equity ratios,
debt-assets ratios, and interest coverage ratios.
2.1 Debt Equity Ratio

This ratio represents the leverage of the company. A low d/e ratio means that the
company has a lesser amount of debt on its books and is more equity diluted. A
2:1 is an ideal debt-equity ratio to be maintained by any company.
Debt Equity Ratio Formula = Total Debt/Shareholders Fund.
Where, total debt = long term + short term + other fixed payments shareholder
funds = equity share capital + reserves + preference share capital – fictitious
assets.

32
The debt-to-equity ratio (D/E ratio) is a financial metric that compares a
company's total debt to its total equity. It's calculated by dividing a company's
total debt by its total shareholder equity.

2.2 Interest Coverage Ratio

The ICR is calculated by dividing a company's earnings before interest and taxes
(EBIT) by the total amount of interest expense on all of its outstanding debts. A
higher ICR means that a company is more likely to be able to pay its debts. A
lower ICR may be unattractive to investors because it may mean the company is
not poised for growth.

It represents how many times the company’s profits can cover its interest
expense. It also signifies the company’s solvency shortly since the higher the ratio,
the more comfort to the shareholders & lenders regarding servicing of the debt
obligations and smooth functioning of the business operations of the company.
Interest Coverage Ratio Formula = Ebit/Interest Expense
Type #3 – Liquidity Ratios

33
These ratios represent whether the company has enough liquidity to meet its
short-term obligations or not. Higher liquidity ratios are more cash-rich for the
company.
Liquidity ratios measure a company's ability to pay off its short-term debts as they
become due, using the company's current or quick assets. Liquidity ratios include
the current ratio, quick ratio, and working capital ratio.
3.1 Current Ratio
Current ratio, also known as working capital ratio, is a metric that measures a
company's ability to meet its short-term obligations. It's calculated by dividing a
company's current assets by its current liabilities, with current assets being assets
that can be converted to cash within a year, and current liabilities being
obligations expected to be paid within one year.

It represents the company’s liquidity to meet its obligations in the next 12

months. Higher the current ratio, the stronger the company to pay its current
liabilities. However, a very high current ratio signifies that a lot of money is stuck
in receivables that might not be realized in the future.
Formula = Current Assets / Current Liablities

34
3.2 Quick Ratio
The quick ratio, also known as the acid-test ratio, is a financial metric that
measures a company's ability to pay off its current debts. It compares a
company's short-term liquidity to its short-term obligations.
Quick ratios are also helpful for business owners, lenders, vendors and even
individuals who want to monitor their short-term solvency.
It represents how cash-rich the company is to pay off its immediate liabilities in
the short term.
Quick Ratio Formula = Cash & Cash Equivalents+Marketable Securities+Accounts
Receivables/Current Liabilities

Type #4 – Turnover Ratios

In business, a turnover ratio is a measurement of a company's efficiency. It can be
calculated by dividing a company's annual income by its annual liability. A high
turnover ratio is generally a good sign for a business.
A turnover ratio can also refer to a fund's trading activity. It's calculated by
dividing the lesser of a fund's purchases or sales by its average monthly net
assets. Securities with a maturity of less than a year are not included in the
calculation.
4.1 Fixed Turnover Ratio

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Fixed asset turnover represents the efficiency of the company to generate
revenue from its assets. In simple terms, it is a return on the investment in fixed
assets. Net Sales = Gross Sales – Returns. Net Fixed Assets = Gross Fixed Assets –
Accumulated Depreciation.
Average Net Fixed Assets = (Opening Balance of Net Fixed Assets + Closing
Balance of Net Fixed Assets)/2.
Fixed Assets Turnover Ratio Formula = Net Sales / Average Fixed Assets

4.2 Inventory Turnover Ratio

The Inventory Turnover Ratio represents how fast the company can convert its
inventory into sales. It is calculated in days signifying the time required to sell the
stock on an average. The average inventory is considered in this formula since the
company’s inventory keeps on fluctuating throughout the year.
Inventory Turnover Ratio Formula = Cost of Goods Sold/Average Inventories

4.3 Receivable Turnover Ratio

36
Receivables Turnover Ratio reflects the efficiency of the company to collect its
receivables. It signifies how many times the receivables are converted to cash. A
higher receivable turnover ratio also indicates that the company is collecting
money in cash.
Receivables Turnover Ratio Formula = Net Credit Sales/Average Receivables

#5 – Earning Ratios

Earning ratio, also known as the price-to-earnings ratio (P/E ratio), is a metric
used to value a company by comparing the price of its stock to its earnings per
share (EPS). The P/E ratio is calculated by dividing the price of a stock by the
company's annual EPS.

5.1 P/E Ratio

PE Ratio represents the company’s earnings multiple and the market value of the
shares based on the pe multiple. A high P/E Ratio is a positive sign for the
company since it gets a high valuation in the market for m&a opportunities.
P/E Ratio Formula = Market Price per Share/Earnings Per Share
5.2 Earnings Per Share
Earnings Per Share represents the monetary value of the earnings of each
shareholder. It is one of the major components looked at by the analyst while
investing in equity markets.

37
Earnings Per Share Formula = (Net Income – Preferred Dividends) / (Weighted
Average of Shares Outstanding)
5.3 Return on Net Worth
It represents how much profit the company generated with the invested
capital from equity & preference shareholders both.
Return on Net Worth Formula = Net Profit/Equity Shareholder Funds. Equity
Funds = Equity+Preference+Reserves -Fictitious Assets.

7.4 Application of Ratio Analysis

The fundamental basis of ratio analysis is to compare multiple figures and derive a
calculated value. By itself, that value may hold little to no value. Instead, ratio
analysis must often be applied to a comparable to determine whether or a
company's financial health is strong, weak, improving, or deteriorating.

1. Ratio Analysis Over Time

A company can perform ratio analysis over time to get a better understanding of
the trajectory of its company. Instead of being focused on where it is today, the
company is more interested n how the company has performed over time, what
changes have worked, and what risks still exist looking to the future. Performing
ratio analysis is a central part in forming long-term decisions and strategic
planning.
To perform ratio analysis over time, a company selects a single financial ratio,
then calculates that ratio on a fixed cadence (i.e. calculating its quick ratio every
month). Be mindful of seasonality and how temporarily fluctuations in account
balances may impact month-over-month ratio calculations. Then, a company
analyzes how the ratio has changed over time (whether it is improving, the rate at
which it is changing, and whether the company wanted the ratio to change over
time).
2. Ratio Analysis Across Companies

38
Imagine a company with a 10% gross profit margin. A company may be thrilled
with this financial ratio until it learns that every competitor is achieving a gross
profit margin of 25%. Ratio analysis is incredibly useful for a company to better
stand how its performance compares to similar companies.
To correctly implement ratio analysis to compare different companies, consider
only analyzing similar companies within the same industry. In addition, be mindful
how different capital structures and company sizes may impact a company's
ability to be efficient. In addition, consider how companies with varying product
lines (i.e. some technology companies may offer products as well as services, two
different product lines with varying impacts to ratio analysis).
3. Ratio Analysis Against Benchmarks
Companies may set internal targets for their financial ratios. These calculations
may hold current levels steady or strive for operational growth. For example, a
company's existing current ratio may be 1.1; if the company wants to become
more liquid, it may set the internal target of having a current ratio of 1.2 by the
end of the fiscal year.
Benchmarks are also frequently implemented by external parties such lenders.
Lending institutions often set requirements for financial health as part of
covenants in loan documents. Covenants form part of the loan's terms and
conditions and companies must maintain certain metrics or the loan may be
recalled.
If these benchmarks are not met, an entire loan may be callable or a company
may be faced with an adjusted higher rate of interest to compensation for this
risk. An example of a benchmark set by a lender is often the debt service coverage
ratio which measures a company's cash flow against it's debt balances.

7.5 Overview of Credit Appraisal

Credit appraisal means an investigation/assessment done by the banks before
providing any Loans & advances/project finance & also checks the commercial,
financial & technical viability of the project proposed, its funding pattern &
further checks the primary & collateral security cover available for recovery of
such funds.

39
Brief overview of Credit
Credit Appraisal is a process to ascertain the risks associated with the extension of
the credit facility. It is generally carried by the financial institutions, which are
involved in providing financial funding to its customers. Credit risk is a risk related
to non-repayment of the credit obtained by the customer of a bank. Thus it is
necessary to appraise the credibility of the customer in order to mitigate the
credit risk. Proper evaluation of the customer is performed this measures the
financial condition and the ability of the customer to repay back the Loan in
future. Generally the credits facilities are extended against the security know as
collateral. But even though the Loans are backed by the collateral, banks are
normally interested in the actual Loan amount to be repaid along with the
interest. Thus, the customer's cash flows are ascertained to ensure the timely
payment of principal and the interest.
It is the process of appraising the credit worthiness of a Loan applicant. Factors
like age, income, number of dependents, nature of employment, continuity of
employment, repayment capacity, previous Loans, credit cards, etc. are taken into
account while appraising the credit worthiness of a person. Every bank or lending
institution has its own panel of officials for this purpose.
However the 3 ‘C’ of credit are crucial & relevant to all borrowers/ lending, which
must be kept in mind, at all times.
1. Character
2. Capacity
3. Collateral
If any one of these are missing in the equation then the lending officer must
question the viability of credit. There is no guarantee to ensure a Loan does not
run into problems; however if proper credit evaluation techniques and monitoring
are implemented then naturally the Loan loss probability / problems will be
minimized, which should be the objective of every lending Officer.
Credit is the provision of resources (such as granting a Loan) by one party to
another party where that second party does not reimburse the first party
immediately, thereby generating a debt, and instead arranges either to repay or
return those resources (or material(s) of equal value) at a later date. The first

40
party is called a creditor, also known as a lender, while the second party is called a
debtor, also known as a borrower.
Credit allows you to buy goods or commodities now, and pay for them later. We
use credit to buy things with an agreement to repay the Loans over a period of
time. The most common way to avail credit is by the use of credit cards. Other
credit plans include personal Loans, home Loans, vehicle Loans, student Loans,
small business Loans, trade. A credit is a legal contract where one party receives
resource or wealth from another party and promises to repay him on a future
date along with interest. In simple Terms, a credit is an agreement of postponed
payments of goods bought or Loan. With the issuance of a credit, a debt is
formed.

Chapter :8

Credit Appraisal Model at Axis Bank

8.1 Scheme of credit to SME sector

AXIS bank provides credit to SME sector under following Schemes

41
A. SME – Schematic (Fast Track)
It includes structured products basically to provide fast services to clients. It
includes various products like:
Mpower OD and Mpower Term Loan
Business Loan for Property
Power Rent
Power Trade
Zero Collateral Loans (ZCL) to MSE under CGS
Card Power
Enterprise Power
Business Power

1. Mpower OD and Mpower Term Loan:

The product aims at to provide both Working capital and Term finance
requirements of a trade enterprise. The facility is in the form of a Cash Credit (for
Working Capital requirements) and Term Loan (Financing Capital expenditure).
The facility is secured by hypothecation of Working Capital assets and further
collateralized by charge over an
immovable property/ financial asset. Non-Fund based facilities can also be
granted under the product. The maximum Loan amount under the product is Rs.
2.50 Crs.

2. Business Loan for Property:

The product is aimed at providing finance to business enterprises for acquition of
an immovable property. The facility is in the form of a Term Loan repayable by
EMIs. The maximum Loan amount under the product is Rs. 5 crores.

42
3. Power Rent:
The product generally known in market parlance as “Lease Rental Discounting” is
aimed at providing a Term Loan to owners of properties against their lease rental
receivables. The Loan amount is assessed on the basis of the net present value of
the rental receivables over the lease period (after deducting margin and taxes).
The lease rentals are hypothecated in bank’s favor and the Loan is further
collateralized by charge over the property. The product specifies a minimum-
security coverage of 1.5 times. Maximum Loan amount under the product is Rs.
20 crores.
4. Power Trade:
The product aims to provide both working capital and Term finance requirements
of a trade enterprise. The facility is in the form of a cash credit (for working capital
requirements) and Term Loan (financing capital expenditure). The facility is
secured by hypothecation of working capital assets and further collateralized by
charge over an immovable property/ financial asset. Non- fund based facilities can
also be granted under the product. The maximum Loan amount under the
product is Rs. 2.5 crores.
5. Zero Collateral Loans (ZCL) to MSE under CGS:
This product facilitates the MSEs and software/IT related services to avail both
working capital and term finance from bank. The facility is secured by guarantee
cover of credit guarantee fund trust for micro and small enterprises (CGTMSE)
and there is no collateral security to be taken in such cases. Maximum loan
amount under the product is Rs. 1.00 crore.
6. Card Power:
This is a scheme for financing credit/debit card receivables of units installing pour
EDC machines. Both demand loan & term loan facilities are offered to the
borrowers, subject to a maximum of Rs. 2.5 crores. All trading/ retailing activities
(with a few exceptions like liquor, tobacco, seasonal business etc.), where credit/
debit cards are used are eligible for the loans.

B. SME- Non Schematic (Standard)

43
For a business on the growth phase with a wide range of opportunities to explore,
timely availability of credit is an integral ingredient needed to scale new heights.
Axis Bank understands this and endeavor to be not just a bank but also financing
partner, so that focus on business needs becomes possible whereas Bank cater to
meet financing needs.
Their services ranging from Funded to Non-Funded, from Short Term to Long
Term and from Credit to Trade Services ensures to get finance the way it is best
suited for business.
Services:
Cash Credit
Working Capital Demand Loan
Export Finance
Short Term Loan
Term Loan
Clean Bill Discounting
LC Backed Bill Discounting
Co-Acceptance of Bills
Credit Facilities against Guarantee or Stand By Letter of Credit issued by Foreign
Banks
Letter of Credit
Bank Guarantee
Solvency Certificates

1. Cash Credit:
Bank offer Cash Credit facilities to meet day-to-day working capital needs. Cash
Credit is provided against the primary security of stock, debtors, other current
assets, etc., and/or collateral security of movable fixed assets, immovable

44
property, personal or corporate guarantee, etc. Interest is charged not on the
sanctioned amount but on the utilized amount

2. Working Capital Demand Loan:

Bank also provides working capital facilities in the form of Working Capital
Demand Loan instead of cash credit facility. The primary or collateral security will
be as mentioned in cash credit facility. Here also interest is levied on the amount
drawn rather than on the amount utilized.
3. Export Finance:
Bank provides finance for export activities in the form of Pre-Shipment Credit
against firm order and or Letter of Credit and Post shipment credit. Credit is
available for procuring raw materials, manufacturing the goods, processing and
packaging the goods and shipping the goods. Finance is provided in Indian or
foreign currency depending upon the need of the borrower.
4. Short Term Loan:
Bank provides Working Capital facilities to meet day-to-day working capital needs
and Term Loan for capex. However there may be occasions where there is need of
ad hoc or short-Term finance for general corporate purposes, meeting temporary
mismatches in working capital or for meeting contingent expenses. In such
situations it provides Short Term Loans for tenure up to a year to ensure that
business runs smoothly.
5. Term Loan:
When there is need of long-Term funds for capex or capacity expansions or plant
modernization and so on. Keeping these requirements in mind Bank provides
Term Loans up to acceptable tenor with suitable moratorium, if required, and
repayment options structured on the basis of customer’s estimated cash flows.
These Loans are primarily secured by a first charge on the fixed assets acquired
through the Loan amount. Suitable collateral security is also taken whenever
required.
6. Clean Bill Discounting:

45
Bank provides clean bill discounting facilities to fund receivables. Bank discount
bills or receivables and provide credit against that. This facility is provided for a
period of 3-6 months depending upon the tenor of the bill.
7. LC Backed Bill Discounting:
Bank discount trade bills drawn under Letters of Credit issued by reputed banks to
fund receivables. This facility is provided for a period of 3-6 months depending
upon the tenor of the bill or Letter of Credit.
8. Co-Acceptance of Bills:
Bank also provides co-acceptance of trade bills depending upon the need of the
borrower. Credit Facilities against Guarantee or Stand By Letter of Credit issued
by Foreign Banks. Various foreign companies set up subsidiary in India. Bank
provides funding to such companies against guarantees or SBLCs of acceptable
foreign banks.
9. Letter of Credit:
Apart from fund based working capital facilities Bank provides a range of Non-
Fund Based facilities such as Letter of credit, Bank Guarantees, Solvency
certificates, etc. Letter of Credit is provided to meet trade purchases. These are
generally provided for 3-6 months depending upon Trade cycle. Apart from this it
provides Import Letter of Credit for importing machinery or capital goods. Such
LCs are for tenure ranging from 1-3 years depending upon the need of the
borrower.
10. Bank Guarantee:
Bank provides Bank Guarantee on behalf of its client to various other entities such
as Government, quasi govt bodies, corporate and so on. it provides a range of
guarantee such as Performance guarantee, financial guarantee, EPCG etc. The
tenure of Bank Guarantee range from 1 year to 10 years depending upon the
purpose of the guarantee.
11. Solvency Certificates:
Bank also provides solvency certificate depending upon the need of the borrower.

46
8.2 Sanctioning powers for schematic Loans under MSME and Mid Corporate
In order to have better control over the portfolio, it is felt that the budget for
schematic advances should be allotted only to select branches, where the
potential and manpower support exist for such business.
Accordingly, the budget has been restricted to select branches, to be decided by
Advances Cells. The Branch Heads of branches located at centers where Advances
Cells have been set up will not have any sanctioning powers. Branch Heads of
stand-alone branches where budgets have been allocated will have sanctioning
powers as per delegation of powers given below. The Branch Heads of other
stand-alone branches where budgets have not been allocated will not have any
sanctioning powers. These branches would, however, continue to source business
and such proposals would be processed / sanctioned at the respective Advances
Cells. Review / renewal of existing Loans at such branches would also be done at
the Advances Cells.
Branches would continue to be responsible for all post sanction formalities,
maintaining quality of assets held in their books, periodic updating of drawing
power, obtention of stock statements and periodical inspection of borrowal units.
The sanctioning powers, to be exercised by various officials would be as under.

Sanctioning Exposure Limits (in Interest rates Reviewing

Authority Rs. Lacs) Concessions Authority
Senior Manager 50 NIL AVP / VP
AVP 250 NIL DVP/VP
DVP / VP 1000 Upto 100 bps SVP - Advances
SVP (Advances) at 2000 Upto 100 bps Zonal Head
ZO

All requests for interest rate concessions are to be forwarded to the Advances
Cells.

47
The proposals sanctioned at Advances Cells / Zonal Offices during a particular
month are to be submitted for review by the next higher authority through a
monthly control return, latest by the 5th of the succeeding month, in the
prescribed format and not on a case-by-case basis. Similarly, the proposals
sanctioned by the Branch Heads /Advances Cells (headed by AVPs/Managers)
during a particular month are to be submitted for review by the appropriate
authority at Zonal Office or Advances Cells as the case may be through a monthly
control return, latest by the 5th of the succeeding month, in the prescribed
format and not on a case-by-case basis. The concessions in rates of interest /
variations authorised by the VP (Advances) and SVP (Advances) during a particular
month are to be submitted for review by the SVP(Advances)/ Zonal Head
respectively through a monthly control return, in the prescribed format by the 5th
of the succeeding month.
If a combination of schematic Loan products is to be offered, the combined
exposure should be the criterion while sanctioning the limits.

Chapter : 9

Credit Risk Management

9.1 Introduction to Credit Risk Management

Of all different types of risks that a bank is subject to, credit risk can be defined as
the risk of failure on the part of the borrower to meet obligations towards the
bank in accordance with the Terms and conditions that have been agreed upon.
Inability and/or unwillingness of the borrower to repay debts may be the cause of
such default.

48
The bank aims at minimizing this risk that could arise from individual borrowers or
the entire portfolio. The former can be addressed by having well-developed
systems to appraise the borrowers; the latter, on the other hand, can be
minimized by avoiding concentration of credit exposure with a few borrowers
who have similar risk profiles. Credit risk management becomes even more
relevant in the light of the changes that have been brought about in the economic
environment, including increasing competition and thinning spreads on both the
sides of Balance sheet.

9.2 Determinant to Credit Risk

Factors determining credit risk of a bank’s portfolio can be divided into external
and internal factors. The banks do not have control on external factors. These
include factors across a wide spectrum ranging from the state of the economy to
the correlation among different segments of industry. The risk arising out of
external factors can be mitigated via diversification of the credit portfolio across
industries especially in light of any expectations of adverse developments in the
existing portfolio.
Given that the banks have very little control over such external factors, the bank
can minimize the credit risk that it faces mainly by managing the internal factors.
These include the internal policies and processes of the bank like Loan policies,
appraisal processes, monitoring systems etc. These internal factors can be taken
care of, partly, via effective rating and monitoring systems, entry level criteria etc.
These processes would enable improvement in the quality of credit decisions.
This would effectively improve the quality (and hence profitability) of the
portfolio. While monitoring systems are useful tool at post-sanction stage, rating
systems act as important aid at the pre-sanction stage.

9.3 Introduction to Credit Tools

The Bank has developed tools for better credit risk management. These focus on
the areas of rating of corporate (pre-sanctioning of Loans) and monitoring of
Loans (post-sanctioning). The focus of this manual is to familiarize the user with
the credit rating tool.

49
Credit Rating: Definition
Credit rating is the process of assigning a letter rating to borrowers indicating the
creditworthiness of the borrower. Rating is assigned based on the ability of the
borrower (company) to repay the debt and his willingness to do so. The higher the
rating of a company, the lower the probability of its default. The companies
assigned with the same credit rating have similar probability of default.
Use in decision-making
Credit rating helps the bank in making several key decisions regarding credit
including:
• Whether to lend to a particular borrower or not; What price to charge
• What are the products to be offered to the borrower and for what tenor
• At what level should sanctioning be done
• What should be the frequency of renewal and monitoring
It should, however, be noted that credit rating is one of the inputs used in taking
credit decisions. There are various other factors that need to be considered in
taking the decision (e.g., adequacy of borrower’s cash flow, collateral provided,
relationship with the borrower). The rating allows the bank to ascertain a
probability of the borrower’s default based on past data.
Main features of the rating tool:
i) Comprehensive coverage of parameters.
ii) Extensive data requirement.
iii) Mix of subjective and objective parameters.
iv) Includes trend analysis.
v) 13 parameters are benchmarked against other players in the segment. The tool
contains the latest available audited data/ratios of other players in the segment.
The data is updated at intervals.
vi) Captures industry outlook.

50
vii) Eight grade ratings broadly mapped with external credit rating agency’s
ratings prevalent in India.
Special features of the web based credit rating tool
i) Centralised data base.
ii) Easy accessibility and faster computation of scores.
iii) Selective access to users based on the area of operation. Branches have access
to the data pertaining to their branch only, Zonal offices have access to the data
pertaining to all the branches under their control and the Credit Department and
Risk Department at Central Office have access to all accounts.
iv) Adequate security system and provision of audit trails for confidentiality.
v) Maintaining of past rating records in the system for collection of empirical data
on rating migrations. This will enable the bank to arrive at PDs (Probability of
Default) factor.

Chapter : 10

Case Study in Field of Research

10.1 Details of Case Study - I

Name ABC Ltd.
Constitution Public Limited Company
Line of Activity Manufacturing of Food Colour Products
Sector Chemical and Chemical Products
Dealing with us New Connection

51
Group Not a recognized group
Share holding pattern As mentioned below

10.2 Breif Background

As the company aims to provide entire range qualitative and quantitative service
to food industry, as its Unit I. The company commenced manufacturing of food
colors namely Tratrazine in the year 2000-01. Both the units at Ankleshwar are
Ultra modern and have eco friendly plants with in house testing facilities to
control quality at every level of manufacturing. The Company gained goodwill in
the short span of time due to its quality product. The company has well equipped
state of art in house laboratory which conduct test of every parameter of food
color & Dye intermediates laid down under national and international authorities.
The Company exports its product to around 41 countries worldwide. All these
have led the company to acquire and retain a status of largest manufacturer and
supplier of food colors and dye intermediates in India.

Marketing Strategy/Marketing arrangement

Strong and experience people are leading company’s marketing department.
Company’s total turnover is divided into:
Exports Sales
Local Sales
Exports Sales:
Company’s 70% turnover is generated by way of exports sales. Company has its
own presence in all most all countries. The company is exporting Food colors in
Latin America, African countries, Middle East, Far East, US and Europe. Almost all
export customers are dealing with company for many years.
Out of total exports turnover 60 to 70% percentage orders are repeated orders
and rest of the orders are new orders.

52
The Company has region wise Export Managers who can cater the need of
customers individually. Due to the quality and timely delivery of the material the
company have less competition from these countries.
Globally many countries have discontinued production of Dyes, Food colors and
Intermediates, new market has opened for Indian manufacturer of Dyes and
Intermediates. As Dynemic Products Ltd is already a well recognized name in the
field globally, it has more opportunities to grab from growing International
market.
Local Sales:
In Local Market Company is doing marketing its Dyes & Intermediates to the end
customers.
The company is the largest manufacturer of S.P.C.P in India which generating
repeated order from the local customers.
Now, company is planning to market the food colors in small packing through its
dealers and distributors which cater the local needs.
Company is also planning to arrange marketing arrangement with soft drink
manufactures and pharmaceutical manufactures for food colors.

10.3 Operational and Financial Analysis

31.03.09 31.03.10 31.03.11 31.03.12 31.03.13

Particulars
(Projected (Projecte
(Actuals) (Actuals) (Actuals) ) d)

Gross Sales 3231.12 3657.70 4911.20 6500.00 7500.00

Net Sales 3231.12 3657.70 4911.20 6500.00 7500.00

Net Sales Growth Rate % 12.79% 13.20% 34.27% 32.35% 15.38%

53
Operating Profit 227.49 313.80 261.62 621.29 729.97

Other Income 141.52 (5.36) 56.07 55.00 65.00

PBDIT 322.88 412.89 503.87 881.74 1018.09

Depreciation 47.94 50.62 96.12 110.94 107.00

Interest 47.45 48.47 146.12 149.50 181.12

PBT 369.01 308.44 317.69 676.29 794.97

PAT 266.95 184.99 190.03 446.42 524.76

Cash Profit 182.35 103.07 153.62 424.83 499.22

Operating Profit Margin % 7.04% 8.58% 5.33% 9.56% 9.73%

PBDIT Margin % 9.99% 11.29% 10.26% 13.57% 13.57%

PAT Margin % 8.26% 5.06% 3.87% 6.87% 7.00%

Paid up Capital - Equity 1132.84 1132.84 1132.84 1132.84 1132.84

Unadjusted TNW 2649.73 2707.33 2764.96 3078.84 3471.06

Unadjusted TOL 1109.42 1589.26 2331.73 2890.12 3094.44

Unadjusted TOL/ TNW 0.42 0.59 0.84 0.94 0.89

Adjusted TNW 2710.84 2725.68 2828.34 3237.48 3629.70

Adjusted TOL 1048.31 1570.91 2268.35 2731.48 2935.80

Adjusted TOL/ TNW 0.39 0.58 0.80 0.84 0.81

54
Interest Coverage 9.82 8.44 3.84 6.27 5.98

Current Ratio 1.76 1.34 0.94 1.13 1.24

DSCR 7.67 1.83 1.21 2.35 2.20

NOCF 105.69 230.12 654.38 (269.99) 149.24

Net Profit / NOCF 2.53 0.80 0.29 (1.65) 3.52

NOCF / Interest 2.23 4.75 4.48 (1.81) 0.82

NOCF / Financing Payments 0.08 0.13 0.29 (0.08) 0.04

Total Debt / NOCF (No. of 1.17 0.78 0.60 (0.45) (0.00)

years)

10.4 Ratings
Particulars Rating
Overall Scoring SME-3
Financial scoring SME-3
Business Scoring SME-3
Management Scoring SME-3
Industry Scoring SME-3

10.5 CIBIL/RBI/ECGC Defaulters’ List/CA Verification/ Auditor Verification

Particular As of date Position

55
RBI Defaulters list 31.12.22 No match Found
ECGC Specific Approval 31.12.22 No match found
List
CIBIL Defaulters List 31.12.22 Satisfatory
CA Verification (Auditor) 31.12.22 Verified
Auditor’s Firm 31.12.22 Verified
Verification

10.6 Analysis
The promoters of the company are having rich experience of more than 19 years
in various Industries. The proposed expansion of the company is having huge
market potentials. The Company is the leader in Manufacturing and export of
food colours.
The overall credit rating of company is SME –3. The business is 19 years old. The
sale of the company has been showing an increasing trend throughout the years
under consideration. The sale of the company was increased from Rs. 3231.12
lacs in FY08-09 (Aud) to Rs. 3657.70 lacs (Aud) in FY09-10 and further to Rs.
4911.20 lacs in FY10-11 (Aud). Since the company is into Manufacturing of Food
Colours, the net margin normally remains between 5.00% - 9.00%. The net profit
of the company was decreased from Rs. 266.95 lacs in FY08-09 (Aud) showing
margin of 8.26% to Rs. 184.99 lacs in FY09-10 (Aud) showing margin of 5.06%.
However, the same was maintained at Rs. 190.03 lacs in FY10-11 (Aud) showing
margin of 3.87% due to decrease in margins in the chemical industry on account
of raw material price fluctuations worldwide. The same was an aberration. But,
now the industry is on revival and boom path. Considering the same, the
company has estimated the profit of Rs. 446.42 lacs for FY11-12 @ margin of
6.87%, which may be accepted.
The TOL/TNW of the company increased from 0.42 in FY08-09 (Aud) to 0.59 in
FY09-10 (Aud) and to 0.84 in FY10-11 (Aud). The company has estimated
TOL/TNW at 0.94 and 0.89 for FY11-12 and FY12-13 respectively on account of
increased bank borrowings, which may be considered comfortable. The overall

56
conduct of the account, repayment status etc. at Citi Bank and HDFC is
satisfactory.
The main director is dynamic and has rich experience of more than 20 years in his
line of activity. The company is a registered SSI unit. Market reference of the
company is satisfactory. The overall projected performance and financial of the
unit are satisfactory.

57
10.7 Credit Ratios:
The following key financial parameters may inter-alia be considered as a
benchmark while sanctioning credit proposals:
Sectors Current Average
TOL/ATNW
Ratio DSCR
<=4.00 >=1.20
Hotel, Restaurant, Tourism >=1.10
<=3.00 >=1.20
>=1.10
Iron & Steel
Manufacturing
<=3.00 >=1.20
>=1.10
Logistics
<=3.00 >=1.20
>=1.10
FMCG
<=5.75 ------
>=0.50
Aviation
<=4.00 >=1.20
>=1.10
Automobile
<=3.00 >=1.20
>=1.10
Plastic Product Manufacturing
<=3.00 >=1.20
>=1.10
Logistics
<=3.00 >=1.20
>=1.10
Chemicals
<=3.00 >=1.20
>=1.10
Mining
<=3.50 >=1.20
>=1.10
Textiles
<=9.75 >=1.20
>=1.10
Commercial
<=4.75 >=1.20
>=1.10
Others not specified above

58
NOTES:
1. The above ratios are applicable where aggregate existing exposure to
lending institutions collectively exceeds Rs. 25 crs.
2. The above threshold ratios are applicable for operating companies based on
latest audited balance sheet.
3. In case of operating companies with no existing/proposed term loan from our
bank, the threshold of Average DSCR will be tested on DSCR based on the latest
audited balance sheet.
4. In case of Non-Operating company including project companies, thresholds for
DSCR shall only be applicable.

5. The ratios are not applicable to NBFCs.

6. Compliance to the above ratios to be distinctly captured in the proposal note in

a tabular form as under:

Key Ratios Threshold Actual (FY_____) Comments

TOL/ATNW

Current Ratio

Avg. DSCR

10.8 Case Study II:

XYZ Company Ltd.

Balance sheet as at 31st March, 2021

As at 31st
March, 2021

Equities And Liabilities

59
Shareholder's Fund:

Share Capital 2,00,000.00

Reserves and Surplus 11,224.92 2,11,224.92

Non-Current Liabilities

Long term Borrowings 1,86,450.00

Other long term Borrowings -------- 1,86,450.00

Current Liabilities

Short term Borrowings 45,461.64

Trades Payables

Total outstanding dues of 46,606.95

MSME

Total outstanding dues of 1,52,107.01 1,98,713.96

creditors other than MSME

Other Current Liabilities 31,619.60

Short Term Provisions 1,120.01 2,76,915.21

6,74,590.13
TOTAL

asset

Non-Current asset

Property, Plant and Equipments 1,33,817.58

Tangible Assets 1,981.67 1,35,799.25

60
 deferred Tax Assets 1,785.34

Long term loan and advances 35,991.09 1,73,575.68

Current Assets

Inventories 3,88,312.86

Trade Receivables 14,068.08

Cash and Cash Equivalents 85,368.34

Short term loan and advances 13,129.84

Other Current Assets 135.33 5,01,014.45

6,74,590.13
TOTAL

Statement of Profit and Loss for thr period 31/03/2020 to 31/03/2021

Income
3,90,410.00
Revenue from Operations
14,034.82
Other Income
4,04,444.83
Total
Revenue

Expenses
6,64,688.16
Purchase of Stock-in-trade
(3,88,312.86)
Change in Inventory
32,689.06

Employee Benefit Expense

61
 10,960.90
Finance Cost
12,294.92
Depreciation And
Amortisation
Expense
57,082.06 3,89,402.23
Other Expenses
3,89,402.23
Total
Expenses
15,042.59
Profit Before Tax

Tax Expenses:
5,603.02
Current Tax
(1,785.34) 3,817.67
deferred Tax
11,224.92
Profit for the Year

Earning per Share (Face value

Rs.10)
0.81
basic
0.81
Diluted

Cash Flow Statement for the year ended 31st March, 2021

A. Cash Flow from Operating Activity 15,042.59

62
Adjustments for:

Depreciation 12,294.92
Finance Cost 10,960.90 23,255.82

Operating profit/(loss) before working 38,298.41

capital changes

Adjustment for (increase)/decrease in

operating assets:

Trade Receivables, loans, advances and

(63,324.33)
other assets
(3,88,312.86)
Inventories

Adjustment for increase/(decrease) in

operating liabilities:

Trades payable and other liabilities 2,30,333.56 (2,21,303.62)

Cash Generated from operations (1,83,005.21)

B. Cash Flow from Investing Activities

Investments in Bank Deposites (16,000.00)

Purchase of property, plant and (1,48,094.17)

equipment, Intangible etc.

Net Cash used in Investing Activity (1,64,094.17)

C. Cash flow from Financing Activities

Proceeds from issue of share capital 2,00,000.00

Proceeds from short term borrowings 45,461.64

Proceeds from non-current borrowings 1,86,450.00

63
 Interest Paid (10,960.90)

Net Cash from Financing Activities 4,20,950.74

Net Increase in Cash and Cash Equivalents 69,368.34

Opening Cash and Cash Equivalents -------

Closing Cash and Cash Equivalents 69,368.34

Notes:

1. The above cash flow statements has been prepared under "Indirect Method" as
set out in accounting Standards - 3 "Cash Flow Statements".

2. Cash and Cash Equivalents

Cash and Cash Equivalents as above 69,368.34

Other Bank Balances 16,000.00

Cash and Bank Balances ______________

85,368.34
10.9 Ratio Analysis and its elements

Ratio Numerator Denominator Current Previous Variance Reason for

Year Year (in %) Variance

Current Current Assets Current Liabilities 1.16 0.98 18.02% -------

Ratio (in
times)

Debt- Total debt= Shareholder's 0.36 1.23 (70.73%) Debt equity

equity Total debt Equity ratio in
ratio (in (excluding current yea
times) lease liability)+ has been

64
 Short term improved
borrowings - on account
Cash and cash of increase
equivalents in equity
due to right
issue and
profit and
repayment
of debt.

Debt Earnings for Debt Service= 0.72 1.37 (47.26%) Debt service
service debt service= Interest and Lease coverage
coverage Net profit Payments+ Principal ratio has
ratio (in after taxes+ Repayments reduced on
times) Non cash account of
operations Principal
expenses like Repayments
depreciation falling due
and during the
amortizations+ Fy 2022-23.
Interest

Return on Net Profit Average 33.21% 10.37% 220.37% The

equity after taxes- Shareholder's company
ratio (%) Preference Equity has earned
Dividend (if higher
any) profit as
compared
to the last
FY mainly
due to
Covid and
increase in

65
 operation in
current
year.

Inventory Cost of goods Average inventory= 2.22 2.00 11.18%

turnover sold OR sales (opening+closing
ratio (in balance/2)
times)

Trade Net credit Average Trade 7.59 4.99 52.19% Increase in

receivables sales= Net Debtors = credit sales
turnover credit sales (Opening+closing/2) and better
ratio (in consists of realisation
times) gross credit of trade
sales minus receivables.
sales return.

Trade Net Credit Average Trade 5.13 4.74 8.14%

payables Purchase= Net Payables
ratio (in credit
times) purchase
consists of
gross credit
purchase
minus
purchase
return

Net capital Net sales= Working Capital= 17.89 (135.86) 113.17% The change
turnover Total sales- Working capital is mainly
ratio (in sales return shall be calculated because
times) as current assets working
minus current capital in
liabilities last FY was

66
 negative.

Net Profit Net profit Net sales= Total 5.68% 1.81% 213.93% The
Ratio (%) after tax sales-sales return company
has earned
higher
profit as
compared
to the last
FY mainly
due to
decline in
sales in that
year due to
covid and
increase in
operations
in current
year.

67
Chapter : 11

Findings

Credit appraisal is done to check the commercial, financial & technical viability of
the project proposed its funding pattern & further checks the primary or collateral
security cover available for the recovery of such funds

Credit is the core activity of the banks & important source of their earnings which
go to pay interest to depositors, salaries to employees & dividend to shareholders

Credit & risk go hand in hand

In the business world risk arises out of:-

Deficiencies / lapses on the part of the management

Uncertainties in the business environment

Uncertainties in the industrial environment

Weakness in the financial position

Bank’ s main function is to lend funds/ provide finance but it appears that norms
are taken as guidelines not as a decision making

A banker’ s task is to indentify/assess the risk factors/parameters &

manage/mitigate them on continuous basis

The Credit Appraisal process adopted by the bank take into account all possible
factors which go into appraising the risk associated with a loan

68
These have been categorized broadly into financial, business, industrial,
management risks & are rated separately

The assessment of financial risk involves appraisal of the financial strength of the
borrower based on performance & financial indicators

The norms of the bank for providing loans are not stringent, i.e. even if a particular
client is not having the favorable estimated and financial performance, based on its
past record and future growth perspective, the loan is provided.

By providing various schemes of loans, Axis bank tries to cater to the financial
requirements of almost all the types of SME units.

69
Chapter : 12

Conclusion

Finance management is the backbone of any organizations and hence yields a

number of job options ranging from strategic financial planning to sales.

From the study of Credit appraisal of SME, it can be concluded that credit
appraisal should therefore be based on the following factors, the same are applied
at Axis Bank:

Financial performance

Business performance

Industry outlook

Quality of management

Conduct of account

Axis Bank loan policy contains various norms for sanction of different types of
loans. These all norms do not apply to each & every case. Axis Bank norms for
providing loans are flexible & it may differ from case to case.

Usually, it is seen that credit appraisal is basically done on the basis of

fundamental soundness. But, after different types of case studies, our conclusion
was such that credit appraisal system is not only looking for financial wealth.
Other strong parameters also play an important role in analyzing credit worthiness
of the firm/company.

In all, the viability of the project from every aspect is analyzed, as well as type of
business, industry, promoters, past records, experience, projected data and

70
estimates, goals, long term plans also plays crucial role in increasing chances of
getting project approved for loan.

71
BIBLIOGRAPHY

Web Sites

www.rbi.org.in

www.Axis Bank.com

www.indianbankassociation.com

www.bankersindia.com

www.wikipedia.com

Books:

“ Credit and banking” By: K. C. Nanda

AxisBank(2022).“Axis BankCorporateCredit Policy”.

B.DChatterjee(2021).“APracticalguidetoFinancialDueDiligence”
PrasannaChandra(2001).“Financial Management-Theoryandpractices”

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73
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