Introduction to Credit Appraisal:
Credit appraisal means an investigation/assessment done by the bank prior 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.
To study the Credit Appraisal System in SME sector, at State Bank of India (SBI), Uttarsanda.
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.
Analytical in nature
Data Collection: Primary Data:
• • Informal interviews with Branch Manager and other staff members at SBI bank. E-circulars of SBI
• • • • • Books and magazines Database at SBI Internal reports of the banks Library research Websites
Expected contribution of the study:
This study will help in understanding the credit appraisal system at SBI & to understand how to reduce various risk parameters, which are broadly categorized into financial risk, business risk, industrial risk & management risk associated in providing any loans or advances or project finance.
Researcher: This report will help researcher in improving knowledge about the credit appraisal system and to have practical exposure of the credit appraisal scenario in SBI. Management student:
The project will help the management student to know the patterns of credit appraisal in SBI bank.
The project will help bank in reducing the credit risk parameters and to improve its efficiencies. It will also help to reduce risk associated in providing any loans & advances or project finance in future and to overcome the loopholes.
Short write-up on the researcher and reason for taking up the project:
• The researcher are MBA 2nd year students, studying in N.R.INSTITUTE OF BUSINESS MANAGEMENT(GLS),AHMEDABAD. • • The reason for taking up the project is to know and understand the credit appraisal system in banking sector. Credit appraisal is the major focus of banking industries these days, so the project will help in understanding and analyzing the situation prevailing currently.
Limitations of the study: • • • As the credit rating is one of the crucial areas for any bank, some of the technicalities are not revealed which may have cause destruction to the information and our exploration of the problem. As some of the information is not revealed, whatever suggestions generated, are based on certain assumptions. Credit appraisal system includes various types of detail studies for different areas of analysis, but due to time constraint, our analysis was of limited areas only.
The banking sector is dominated by Scheduled Commercial Banks (SBCs). Scheduled commercial banks touched. Also. With a view to provide an institutional mechanism for sharing of information on borrowers / potential borrowers by banks and Financial Institutions. 31 Private. Higher provisioning norms. Retail Banking is the new mantra in the banking sector.3% of the earlier year. the retail segment is expected to grow at 30-40% in the coming years. The home loans alone account for nearly twothird of the total retail portfolio of the bank.
. processing and sharing credit information on borrowers of credit institutions. are among the measures in order to improve the banking sector. This included 27 Public Sector Banks (PSBs). ATMs and bill payments are the new buzz words that banks are using to lure customers.. there were 67 scheduled co-operative banks consisting of 51 scheduled urban co-operative banks and 16 scheduled state co-operative banks. a growth of 14% as against 18% registered in the previous year. on the deposit front. (CIBIL) was set up in August 2000. dispensing with the concept of ‘past due’ for recognition of NPAs. closely monitors developments in the whole financial sector.INTRODUCTION TO BANKING SECTOR AND SBI
A snapshot of the banking industry:
The Reserve Bank of India (RBI). the growth was 14. The Bureau provides a framework for collecting. phone banking. It is proposed to hike the CAR to 12% by 2004 based on the Basle Committee recommendations. SBI and HDFC are the promoters of the CIBIL. 42 Foreign and 196 Regional Rural Banks. as the central bank of the country. mobile banking.5% against 17. As at end-March 2002. And on advances. tighter asset classification norms. Net banking. A minimum stipulated Capital Adequacy Ratio (CAR) was introduced to strengthen the ability of banks to absorb losses and the ratio has subsequently been raised from 8% to 9%. there were 296 Commercial banks operating in India. According to one estimate. the Credit Information Bureau (India) Ltd. lowering of ceiling on exposure to a single borrower and group exposure etc.
5% of credit during the same period. this pilot project of the ministry would pave way for smoother functioning of the credit market in the country.the majority being held by ICICI Bank (24. During the year 2000. the State Bank of India (SBI) and its 7 associates accounted for a 25% share in deposits and 28. 3.5%).7%. Banks are free to acquire shares. This in turn resulted in a significant growth in the geographical coverage of banks. Also.1% share in credit. The share of foreign banks ( numbering 42 ). Eight new private sector banks are presently in operation. After the second phase of financial sector reforms and liberalization of the sector in the early nineties. 5
.41%. The government will hold 49% stake and private players will hold the rest 51%. convertible debentures of corporate and units of equity-oriented mutual funds. Every bank has to earmark a minimum percentage of their loan portfolio to sectors identified as “priority sectors”.2% respectively in deposits and 8.85% respectively in credit during the year 2000.The RBI is now planning to transfer of its stakes in the SBI.
Reforms in the banking sector: The first phase of financial reforms resulted in the nationalization of 14 major banks in 1969 and resulted in a shift from Class banking to Mass banking. The 20 nationalized banks accounted for 53. The next wave of reforms saw the nationalization of 6 more commercial banks in 1980. Since then the number scheduled commercial banks increased four-fold and the number of banks branches increased eight-fold. regional rural banks and other scheduled commercial banks accounted for 5. The manufacturing sector also grew during the 1970s in protected environs and the banking sector was a critical source.14% and 12. NHB and National bank for Agricultural and Rural Development to the private players. which in turn helps them to save on manpower costs and provide better services. The new private sector banks first made their appearance after the guidelines permitting them were issued in January 1993. 3. The finance ministry spelt out structure of the government-sponsored ARC called the Asset Reconstruction Company (India) Limited (ARCIL). This banks due to their late start have access to state-of-the-art technology. subject to a ceiling of 5% of the total outstanding advances (including commercial paper) as on March 31 of the previous year. the Public Sector Banks (PSB) s found it extremely difficult to complete with the new private sector banks and the foreign banks. the Government has sought to lower its holding in PSBs to a minimum of 33% of total capital by allowing them to raise capital from the market.5% of the deposits and 47.9% and 12.
Scheduled banks comprise commercial banks and the co-operative banks. The private sector banks are again spilt into old banks and new banks. commercial banks can be further grouped into nationalized banks. The Indian banking industry is a mix of the public sector.000 branches spread across the country.Classification of banks: The Indian banking industry. 1949 can be broadly classified into two major categories. These banks have over 67. In terms of ownership. which is governed by the Banking Regulation Act of India. the State Bank of India and its group banks. private sector and foreign banks. regional rural banks and private sector banks (the old / new domestic and foreign). non-scheduled banks and scheduled banks.
Banking System in India Reserve bank of India (Controlling Authority)
Development Financial institutions
IFCI IDBI ICICI
Regional Rural Banks
Land Development Banks
Public Sector Banks
Private Sector Banks
…… SHARE THE VIEWS …… The State Bank of India..000 villages in the next two years. It is also focusing at the top end of the market. structured products etc – each one of these initiatives having a huge potential for growth. on whole sale banking capabilities to provide India’s growing mid / large Corporate with a complete array of products and services. Private Equity.
. The Bank is forging ahead with cutting edge technology and innovative new banking models. Today. the Bank is the largest provider of infrastructure debt and the largest arranger of external commercial borrowings in the country.. General Insurance.ABOUT SBI:
THE PLACE TO SHARE THE NEWS . It is consolidating its global treasury operations and entering into structured products and derivative instruments. to expand its Rural Banking base. market capitalization and profits is today going through a momentous phase of Change and Transformation – the two hundred year old Public sector behemoth is today stirring out of its Public Sector legacy and moving with an agility to give the Private and Foreign Banks a run for their money. looking at the vast untapped potential in the hinterland and proposes to cover 100. Point of Sale Merchant Acquisition. Custodial Services. number of branches. The bank is entering into many new businesses with strategic tie ups – Pension Funds. the country’s oldest Bank and a premier in terms of balance sheet size. It is the only Indian bank to feature in the Fortune 500 list. Mobile Banking. Advisory Services.
Ltd.2-5. "All put together. Banking behemoth State Bank of India is planning to set up 15. Some of the training programes are attended by bankers from banks in other countries. and other electronic channels such as Internet banking. SBI Cards and Payment Services Ltd.300 ATMs in the country at present. deputy managing director (information technology) of the bank. debit cards. SBI Canada forming a formidable group in the Indian Banking scenario. It is in the process of raising capital for its growth and also consolidating its various holdings. We will add 15. With four national level Apex Training Colleges and 54 learning Centres spread all over the country the Bank is continuously engaged in skill enhancement of its employees. SBI DFHI Ltd. SBI factor and commercial services Ltd." The bank has almost 10.000 ATMs. the cost is around Rs 9 lakh per counter.The Bank is changing outdated front and back end processes to modern customer friendly processes to help improve the total customer experience.000 ATMs in the country by March 2010. RP Sinha.5 lakh to set up the infrastructure and almost Rs 3. mobile banking. It presently has 82 foreign offices in 32 countries across the globe. It has also 8 Subsidiaries in India – SBI Capital Markets Ltd.000 ATMs in the country by March 2010 investing more than Rs 1. Going by the estimate. The bank is also looking at opportunities to grow in size in India as well as internationally.000 ATMs to the existing ones by end of this fiscal." he said. SBI Life Insurance Company Ltd.000 crore. etc. According to a senior SBI official.5 lakh for an ATM machine. SBI Fund Management Pvt. said: "We plan to have 25. It requires Rs 5. With about 11448 of its own branches and another 6500+ branches of its Associate Banks already networked.
The Bank is also in the process of providing complete payment solution to its clientele with its ATMs. SBI Mutual Funds. the spot for an ATM counter is taken on lease.350 crore for setting up 15.
. SBI would require a whopping Rs 1. today it offers the largest banking network to the Indian customer.
Thebank has a branch network of over 17000 branches (including subsidiaries). Kolkata Stock Exchange. The bank provides a full range of corporate. Indian central bank namely Reserve Bank of India (RBI) is the major share holder of the bank with 59. SBI has displayed a continued performance in the last few years in scaling up its efficiency levels. In recent past.3% during the last five years. 45. National Stock Exchange.32%.7% stake.3%. Chennai Stock Exchange and Ahmedabad Stock Exchange while its GDRs are listed on the London Stock Exchange. SBI group accounts for around 25% of the total business of the banking industry while itaccounts for 35% of the total foreign exchange in India.9% in FY02 to 3. SBI has acquired banks in Mauritius.51% are officers. 2008. The bank had total staff strength of 198. Of this. SBI has the largest branch and ATM network spread across every corner of India.40% in FY06 and currently is at 3. Kenya and Indonesia.774 as on 31st March. During the same period.30% were sub-staff. The bank is listed on the Bombay Stock Exchange. Net Interest Income of the bank has witnessed a CAGR of 13.
. Apart fromIndian network it also has a network of 73 overseas offices in 30 countries in all time zones.646bn with the public holding (other than promoters) at 40. With this type of strong base. 29. commercial and retail banking services in India. net interest margin (NIM) of the bank has gone up from as low as 2. The bank is capitalized to the extent of Rs.Background:
State Bank of India is the largest and one of the oldest commercial bank in India. correspondent relationship with 520 International banks in 123 countries.19% clerical staff and the remaining 25. in existence for more than 200 years.
3) Agricultural Banking b.KEY AREAS OF OPERATION:
The business operations of SBI can be broadly classified into the key income generating areas such as National Banking.4) Mid Corporate Group a. 104 satellite offices and 679 extension counters. to reach out to customers.5) Stressed Assets Management
b) National banking The national banking group has 14 administrative circles encompassing a vast network of 9. Corporate Banking.3) Project Finance a.4) Government Banking
. This group consists of four business group which are enumerated below: b.1) Corporate Accounts a. International Banking. Out of the total branches.2) Small & Medium Enterprises b. even in the remotest corners of the country. & Treasury operations. 4 sub-offices.193bn. These SBUs are as follows: a. 809 are specialized branches.177 branches. 12 exchange bureaus. The functioning of some of the key divisions is enumerated below:
a) Corporate banking The corporate banking segment of the bank has total business of around Rs1. SBI has created various Strategic Business Units (SBU) in order to streamline its operations.2) Leasing a.1) Personal Banking SBU b.
through its various subsidiaries. e. at Gaborone. In recent years. provides a whole range of financial services which includes Life Insurance. The reorganization seeks to enhance the efficiencies in use of manpower resources and increase maneuverability of banks operations in the markets both domestic as well as international.755 branches of its seven Associate Banks dominates the banking industry in India.1) Associates Banks: SBI has six associate banks namely • State Bank of Indore • State Bank of Travancore 11
. Factoring. The bank incorporated a company SBI Botswana Ltd.
e) Associates & Subsidiaries The State Bank Group with a network of 14. robust credit growth and liquidity constraints. In recent years. In addition to banking. the Group.
d) Treasury The bank manages an integrated treasury covering both domestic and foreign exchange markets.c) International banking SBI has a network of 73 overseas offices in 30 countries in all time zones and correspondent relationship with 520 international banks in 123 countries. Security trading and primary dealership in the Money Market. Credit Card. 25 foreign offices were successfully switched over to Finacle software. Mutual Funds.061 branches including 4. SBI acquired 76% shareholding in Giro Commercial Bank Limited in Kenya and PT Indomonex Bank Ltd. SBI has installed ATMs at Male. During FY06. Reorganization of the treasury processes at domestic and global levels is also being undertaken to leverage on the operational synergy between business units and network. Merchant Banking. The bank diversified its operations more actively into alternative assets classes with a view to diversify the portfolio and build alternative revenue streams in order to offset the losses in fixed income portfolio. Muscat and Colombo Offices. the treasury operation of the bank has become more active amidst rising interest rate scenario. in Indonesia. The bank is keen to implement core banking solution to its international branches also.
2) Non-Banking Subsidiaries/Joint Ventures i) SBI Capital Markets Ltd. v) SBI Cards and Payment Services Ltd. vii) SBI Fund Management Pvt. SBI
. Ltd.• State Bank of Bikaner and Jaipur • State Bank of Mysore • State Bank of Patiala • State Bank of Hyderabad
ii) SBI Mutual Funds. iii) SBI factor and commercial services Ltd. vi) SBI Life Insurance Company Ltd. iv) SBI DFHI Ltd.
CHAPTER 2 INDUSTRY ANALYSIS
Competitive forces model in the banking industry (PORTER’S FIVE-FORCE MODEL)
Prof. (3) Threat from substitute is high due to competition from NBFCs and insurance companies as they offer a high rate of interest (4) Bargaining power of buyers is high as corporate can raise funds easily due to high competition. New products and improved customer services is the focus.
(2) Potential Entrants is high as development financial institutions as well as private and foreign banks have entered in a big way. Michael Porter’s competitive forces Model applies to each and every company as well as industry.
. (1) Rivalry among existing firms has increased with liberalization. (5) Organizing power of the supplier is high. This model with regards to the Banking Industry is presented below. With the new financial instruments they are asking higher return on the investments.
Bargaining Power of Suppliers With the advent of new financial instruments providing a higher rate of returns to the investors.
. Potential Entrants Previously the Development Financial Institutions mainly provided project finance and development activities. competition among the existing banks has increased. NBFCs offer a higher rate of interest. which will bring down the NPAs. As a result they have a higher bargaining power. 6. Overall Analysis The key issue is how can banks leverage their strengths to have a better future. the buyers have a high bargaining power. There should be a rational thinking in sanctioning loans. 5. Funding corporate at a low cost of capital is a special requisite. The suppliers demand a higher return for the investments. 4.1. Threats from Substitutes Banks face threats from Non-Banking Financial Companies. Rivalry among existing firms With the process of liberalization. 3. 2. But they now entered into retail banking which has resulted into stiff competition among the exiting players. This is mainly because of competition. The quality of services provided by banks has improved drastically. banks should evolve new products and services to the customers. Bargaining Power of Buyers Corporate can raise their funds through primary market or by issue of GDRs. Since the availability of funds is more and deployment of funds is less. Even in the case of personal finance. As there is a expected revival in the Indian economy Banks have a major role to play. FCCBs. the investments in deposits is not growing in a phased manner. Each bank is coming up with new products to attract the customers and tailor made loans are provided.
Private banks allowed to operate but they mainly concentrate in metropolis. 3. It mainly helps to know the strengths and Weakness of the industry and to improve will be known through converting the opportunities into strengths. 4. The performance of bank should therefore.
. Availability of Funds There are seven lakh crore wroth of deposits available in the banking system.SWOT ANALYSIS
The banking sector is also taken as a proxy for the economy as a whole. consumers prefer to deposit their money in banks. reflect “Trends in the Indian Economy”. Because of the recession in the economy and volatility in capital markets. Middle income people who want money for personal financing can look to banks as they offer at very low rates of interests. It also helps for the competitive environment among the banks. This is mainly because of liquidity for investors. Banking network After nationalization.
1. Large Customer Base This is mainly attributed to the large network of the banking sector. Consumer credit forms the major source of financing by banks. Low Cost of Capital Corporate prefers borrowing money from banks because of low cost of capital. Due to the reforms in the financial sector. The deregulation of the interest rate. 2. banking industry has changed drastically with the opportunities to the work with. banks have expanded their branches in the country. The performance of banking industry is done through SWOT Analysis. Depositers in rural areas prefer banks because of the failure of the NBFCs. new accounting standards new entrants and information technology. which has helped banks build large networks in the rural and urban areas. participation of banks in project financing has changed in the environment of banks.
This is good for the economy but banks have failed to manage the asset quality and their intensions were more towards fulfilling government norms. Differential Interest Rates
As RBI control over bank reduces. Universal Banking Banks have moved along the valve chain to provide their customers more products and services. Priority Sector Lending To uplift the society. High Non-Performing Assets Non-Performing Assets (NPAs) have become a matter of concern in the banking industry. SBI Bonds etc. Overseas Markets 16
. SBI Capital Markets. Loan Deployment Because of the recession in the economy the banks have idle resources to the tune of 3. For example: . 4. 4. But this had also proved detrimental in the form of strong unions. Banks should use this opportunity for raising funds.
3. which have a major influence in decision-making.3 lakh crores. priority sector lending was brought in during nationalization. High Household Savings Household savings has been increasing drastically.
c) OPPORTUNITIES 1. 3. they will have greater flexibility to fix their own interest rates which depends on the profitability of the banks. 2. Powerful Unions Nationalization of banks had a positive outcome in helping the Indian Economy as a whole. As a result lending was done for non-productive purposes. They are against automation.SBI is into SBI home finance. which has to be reduced to meet the international standards.b) WEAKNESS
1. This is because of change in the total outstanding advances. Corporate lending has reduced drastically 2. Investment in financial assets has also increased.
Capital Market Instruments and Mutual Funds are increasing. the investors will shift his investments to the other profitable sectors. 2. Thus.Banks should tape the overseas market. Inflation The interest rates go down with a fall in inflation. Capital Markets and Mutual funds There is a huge investment of household savings. The market oriented economy and globalization has resulted into competition for market share. 4. as the cost of capital is very low.
. Business can effectively carried out through internet banking. NBFCs. Change in the Government Policy The change in the government policy has proved to be a threat to the banking sector. They can introduce the new products and develop the existing services. Normally these instruments offer better return to investors. The investments in NBFCs deposits. The spread in the banking sector is very narrow. Interest Banking
The advance in information technology has made banking easier.
1. To meet the competition the banks has to grow at a faster rates and reduce the overheads. 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. 3.
presents an opportunity to the nation to harness local competitive advantages for achieving global dominance. The sector.
. therefore.CHAPTER 3 INTRODUCTION TO SME
The small-scale industries (SSI) produce about 8000 products. contribute 40% of the industrial output and offer the largest employment after agriculture.
which would enable the paradigm shift from small-scale industry to small and medium enterprises under consideration of Parliament. Units with investment in plant and machinery in excess of SSI limit and up to Rs. there is also a need to broaden the current concept of the sector and include the medium enterprises in a composite sector of Small and Medium Enterprises (SMEs). Small and Medium Enterprises Development (MSMED) Act 2006 which was notified on October 2. 25 crore may be treated as Medium Enterprises (ME). “ The Government of India has enacted the Micro. A comprehensive legislation. The definition of the small and medium enterprises as provided in the Act (Annex VII) will have immediate effect. The definition may be reviewed after enactment of the Small and Medium Enterprises Development Bill.
. drugs and pharmaceuticals. stationery items and sports goods. a small scale industrial unit is an undertaking in which investment in plant and machinery.10 crore may be treated as Medium Enterprises (ME).1 Government policy as well as credit policy has so far concentrated on manufacturing units in the small-scale sector.
3 Definition of SMEs“ At present. except in respect of certain specified items under hosiery. Units with investment in plant and machinery in excess of SSI limit and up to Rs. where this investment limit has been enhanced to Rs 5 crore. The Reserve Bank of India had meanwhile set up an Internal Group which has recommended:” Current SSI/tiny industries definition may continue.1 crore. The size of the unit and technology employed for firms to be globally competitive is now of a higher order. 2006. The definition of small-scale sector needs to be revisited and the policy should consider inclusion of services and trade sectors within its ambit. The lowering of trade barriers across the globe has increased the minimum viable scale of enterprises.2 From SSI to SME:
Defining the New Paradigm2. does not exceed Rs. In keeping with global practice. hand tools.
Banks may arrange to compile data on outstanding credit to SME sector as on March 31. hand tools. drugs and pharmaceuticals.
.1 crore except in respect of certain specified items under hosiery. while the sub-targets for financing tiny units and smaller units to the extent of 40% and 20% respectively may continue. Pending enactment of the above legislation. current SSI/tiny industries definition may continue. c) All corporate SMEs. Units with investment in plant and machinery in excess of SSI limit and up to Rs.5 crore. All banks may fix self-targets for financing to SME sector so as to reflect a higher disbursement over the immediately preceding year. A comprehensive legislation which would enable the paradigm shift from small scale industry to small and medium enterprises is under consideration of Parliament. Only SSI financing will be included in Priority Sector.10 crore under multiple/ consortium banking arrangement. irrespective of the level of dues to the bank. (iv) In respect of BIFR cases banks should ensure completion of all formalities in seeking approval from BIFR before implementing the package. a small scale industrial unit is an industrial undertaking in which investment in plant and machinery. stationery items and sports goods where this investment limit has been enhanced to Rs. (ii) Accounts involving willful default. b) All corporate SMEs. fraud and malfeasance will not be eligible for restructuring under these guidelines. does not exceed Rs.
SME: At present.4 Eligibility criteria
(i) These guidelines would be applicable to the following entities. which have funded and non-funded outstanding up to Rs.10 crore may be treated as Medium Enterprises (ME). which are viable or potentially viable: a) All non-corporate SMEs irrespective of the level of dues to banks. (iii) Accounts classified by banks as “Loss Assets” will not be eligible for restructuring. 2005 as per new definition and also showing the break up separately for tiny. small and medium enterprises. which are enjoying banking facilities from a single bank.
the ability of the banks to service the credit requirements of 21
. b) SMEs face fragmented markets in respect of their inputs as well as products and are vulnerable to market fluctuations.Banks may initiate necessary steps to rationalize the cost of loans to SME sector by adopting a transparent rating system with cost of credit being linked to the credit rating of enterprise. SMEs also lack access to private equity and venture capital and have a very limited access to secondary market instruments.
5 Challenges faced by SME: The challenges being faced by the small and medium sector may be briefly set out as followsa) Small and Medium Enterprises (SME). particularly the tiny segment of the small enterprises have inadequate access to finance due to lack of financial information and non-formal business practices. c) SMEs lack easy access to inter-state and international markets. With the deregulation of the financial sector. The banks may consider to take advantage of these models as appropriate and reduce their transaction costs.
A debt restructuring mechanism for nursing of sick units in SME sector and a One Time Settlement (OTS) Scheme for small scale NPA accounts in the books of the banks as on March 31. including Regional Rural Banks may make concerted efforts to provide credit cover on an average to at least 5 new small/medium enterprises at each of their semi urban/urban branches per year.
e) SMEs face considerable delays in the settlement of dues/payment of bills by the large scale buyers. all banks.
In order to increase the outreach of formal credit to the SME sector. d) The access of SMEs to technology and product innovations is also limited. SIDBI has developed a Credit Appraisal & Rating Tool (CART) as well as a Risk Assessment Model (RAM) and a comprehensive rating model for risk assessment of proposals for SMEs. There is lack of awareness of global best practices. 2004 are being introduced.
It is the process of appraising the credit worthiness of a loan applicant. nature of employment. number of dependents. Proper evaluation of the customer is performed which measures the financial condition and the ability of the customer to repay back the loan in future. are taken into account while appraising the credit worthiness of a person. banks are normally interested in the actual loan amount to be repaid along with the interest. continuity of employment. Thus it is necessary to appraise the credibility of the customer in order to mitigate the credit risk. etc.
CHAPTER 4 OVERVIEW OF CREDIT APPRAISAL
Credit appraisal means an investigation/assessment done by the bank prior before providing any loans & advances/project finance & also checks the commercial. • • • Character Capacity Collateral 22
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. But even though the loans are backed by the collateral. repayment capacity. previous loans. However the 3 ‘C’ of credit are crucial & relevant to all borrowers/ lending which must be kept in mind at all times. income. financial & technical viability of the project proposed its funding pattern & further checks the primary & collateral security cover available for recovery of such funds. Every bank or lending institution has its own panel of officials for this purpose. efficient recovery processes and available security. There is an immediate need for the banking sector to focus on credit and SMEs.the SME sector depends on the underlying transaction costs. credit cards. Generally the credit facilities are extended against the security know as collateral. Thus. Factors like age. the customer's cash flows are ascertained to ensure the timely payment of principal and the interest. Credit risk is a risk related to non repayment of the credit obtained by the customer of a bank.
In simple terms. There is no guarantee to ensure a loan does not run into problems.If any one of these are missing in the equation then the lending officer must question the viability of credit. By understanding how each works. With the issuance of a credit. Loans let you borrow cash. The first party is called a creditor. and instead arranges either to repay or return those resources (or material(s) of equal value) at a later date. thereby generating a debt. student loans. electricity. home loans. a credit is an agreement of postponed payments of goods bought or loan. also known as a borrower. vehicle loans. however if proper credit evaluation techniques and monitoring are implemented then naturally the loan loss probability / problems will be minimized. a debt is formed. Credit allows you to buy goods or commodities now. The most common way to avail credit is by the use of credit cards. small business loans. You often have to pay a deposit. gas. you will be able to get the most for your money and avoid paying unnecessary charges. Other credit plans include personal loans. We use credit to buy things with an agreement to repay the loans over a period of time. 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. which should be the objective of every lending officer. while the second party is called a debtor. and pay for them later. Money can be repaid in one lump sum or in several regular payments until the amount you borrowed and the finance charges are paid in full. Loans can be secured or unsecured.
. Service credit is monthly payments for utilities such as telephone. 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.
Basic types of credit
There are four basic types of credit. and water. Loans can be for small or large amounts and for a few days or several years. and you may pay a late charge if your payment is not on time. also known as a lender.
You usually sign a contract. and furniture are often purchased this way.
Brief overview of loans:
Loans can be of two types fund base & non-fund base: FUND BASE includes: • • Working Capital Term Loan
NON-FUND BASE includes: • • • Letter of Credit Bank Guarantee Bill Discounting
. banks. The borrower takes the goods home in exchange for a promise to pay later. major appliances. and agree to pay the balance with a specified number of equal payments called installments. Credit cards are issued by individual retail stores. or businesses. Cars. The item you purchase may be used as security for the loan. financing through the store or the easy payment plan. The finance charges are included in the payments. Using a credit card can be the equivalent of an interest-free loan--if you pay for the use of it in full at the end of each month.Installment credit may be described as buying on time. make a down payment.
for employment of labour. equipments. for storing finishing goods till they are sold out & for financing the sales by way of sundry debtors/ receivables. 2.. An industry will require funds to acquire “fixed assets” like land. level of operations i. for power charges etc. the materials & marketing mix. tools etc.. funds are needed for purchase of raw materials/ stores/ fuel. machinery. vehicles. mfg process. The excess of current assets over current liabilities is treated as net working capital or liquid surplus & represents that portion of the working capital. building. plant. product. production programme. Production & sales) (b) The activity carried on viz. Thus Working Capital Required is dependent on (a) The volume of activity (viz. DEFINITION Working capital is defined as the funds required to carry the required levels of current assets to enable the unit to carry on its operations at the expected levels uninterruptedly. its day to day operations. For production.e. Funds required for day to-day working will be to finance production & sales. General The objective of running any industry is earning profits. which has been provided from the long-term source.e. Working capital in this context is the excess of current assets over current liabilities.
.FUND BASE: WORKING CAPITAL: 1. & also to run the business i. Capital or funds required for an industry can therefore be bifurcated as fixed capital & working capital.
3.2 4. Methods & Application SEGMENT SSI SBF C&I Trade LIMITS Upto Rs 5 cr Above Rs 5 cr All loans & Upto Rs 1 cr Above Rs 1 cr & upto Rs 5 cr Above Rs 5 cr Industrial Below Rs 25 lacs Rs 25 lacs & Over but upto Rs 5 cr Above Rs 5 cr METHOD Traditional Method & Nayak Committee method Projected Balance Sheet Method Traditional / Turnover Method Traditional Method for Trade & Projected Turnover Method Projected Balance Sheet Method & Projected Turnover Method Projected Balance Sheet Method Traditional Method Projected Balance Sheet Method & Projected Turnover Method Projected Balance Sheet Method
4. 4.3 Diagrammatically. converting these into finished goods & realizing cash by sale of these finished goods.1 Any manufacturing activity is characterized by a cycle of operations consisting of purchase of purchase of raw materials for cash.
. Operating cycle method 4. the OPERATING CYCLE is represented as under The time that lapses between cash outlay & cash realization by sale of finished goods & realization of sundry debtors is known as the length of the operating cycle.
4.5 Operating cycle is also called the cash-to-cash cycle & indicates how cash is converted into raw materials. Therefore. the operating cycle consists of:
• • • •
Time taken to acquire raw materials & average period for which they are in store. bills (receivables) & finally back to cash.
. Conversion process time Average period for which finished goods are in store & Average collection period of receivables (Sundry Debtors)
4. finished goods. working capital can be turned over or redeployed after completing the cycle. stocks in process.4 That is. Working capital is the total cash that is circulating in this cycle.
but only Rs.m.m.00. That means each rupee of working deployed in the unit is turned over 3 times in a year. Therefore WCR = Operating Expenses No.000 per annum
But the working capital requirement.000 per annum = Rs.000/-
4.000/. there are 3 operating cycles in a year. (A) Rs. 24.000 p.000/3
WCR is therefore not Rs. 72. (This is also known as working capital turnover ratio).= Rs. 72. 1. 72. 14.000 p.4) If a = 60 days b = 10 days c = 20 days d = 30 days The operating cycle is 120 days (nearly 4 months). of cycles per annum = Rs. is not Rs. 20.4.6 The length of the operating cycle = a+b+c+d (as in 4. 28
.000/.7 Assessment of Working Capital Requirement & Permissible Bank Finance using Operating Cycle Concept
Let us consider a case of a unit where: Sales Raw Materials = = Rs. This means there are 365/120 = 3 cycles of operations in a year. as you know. In these cases. 24. 72.000. Sales Operating expenses = Rs.
Operating cycle is an important management tool in decisionmaking. 1. 2. the operating cycle of a pharmaceutical unit would be quite different from one engaged in the manufacture of machine tools.167/.000 p.000 P.m.000 p.(approx. (C)
The operating cycle is Raw Materials Stock in Process FG Sundry Debtors The total length of Operating cycle = 35 days (D) = = = 15 days 2 days 3 days
= 15 days
WCR = B * D = 19.
= Rs. The operating cycle concept enables us to assess the working capital need of each enterprise keeping in view the peculiarities of the industry it is engaged in and its scale of operations.000 p.Wages Other manufacturing Expenses Total expenses Profit
Rs.m.000 * 35 = Rs. 19. (B) = Rs. 3. For instance.
.m. 22. = Rs.) 30 30
Where B = Operating Expenses. & D = Length of Operating cycle
The length of the operating cycle is different from industry to industry and from one firm to another within the same industry.m.
stocks-in-process.. bills etc.
It can thus be summarized as follows:
. finished goods and sundry debtors for achieving a predetermined level of production and sales. Bankers provide working capital finance for holding an acceptable level of current assets. raw materials. as bankers. But. we require a more detailed analysis to assess the various components of working capital requirement viz.Traditional Method of Assessment of Working Capital Requirement The operating cycle concept serves to identify the areas requiring improvement for the purpose of control and performance review. finance for stocks. viz. Quantification of these funds required to be blocked in each of these items of current assets at any time will. therefore provide a measure of the working capital requirement (WCR) of an industry.
working capital would be turned over 4 times in a year).e. Nayak committee Guidelines correspond to working capital limits as per the Operating Cycle method where the average production / processing cycle is taken to be 3 months (i.5 cr. While accepting projected annual sales turnover. 25% of the output or annual turnover value should be computed as the quantum of working capital required by such unit .5 cr. Thus. an across the board credit limit equal to 15% of projected annual turnover be offered to business enterprises in the T&S sector.The unit should be required to bring in 5% of their annual turnover as margin money and the Bank shall provide 20% of the turnover as working capital finance. That is. the minimum working capital limit should be fixed on the basis of projected annual turnover. except where production capacity has been substantially increased.
Projected Annual Turnover Method for Business Enterprises in Trade & Services Sector: i) For working Capital limits up to Rs. It would be available for utilization
. a cap of 25% over actual annual sales turnover in the immediately preceding year should be set.
Projected Annual Turnover Method for C & I industrial units (limits upto Rs 5 cr) Bank has decided to extend Nayak Committee approach for assessment of limits to C&I industrial units requiring credit limits upto Rs.Projected Annual Turnover Method for SSI units (Nayak Committee) For SSI units which enjoy fund based working capital limits up to Rs.5 crores of C&I borrowers (industrial units) may be assessed at a minimum of 20% of projected annual turnover. of which 5% should be borne by entrepreneur as margin and 20% would be allowed as Bank Drawings. 5 cr to C&I(Trade) sector. credit requirement up to Rs. In other words. the assessment of credit limit is to be based upon annual turnover. the working capital requirement will be assessed at 25% of projected annual turnover.
including merchant exports and who require fund based working capital finance of Rs.a. iv) While accepting projected annual sales turnover.50% p. the borrower’s total business operations. are analyzed in detail to assess the working capital finance required and to evaluate the overall risk of the exposure. assessment under the traditional PBS method may be resorted to. ii) The credit limit would be secured by hypothecation charge on the current assets of the enterprise.5 cr. may also be allowed. Mortgage of property valued at least at 33% of the limit is to be prescribed. for the past periods is done to examine the profitability. etc. However. and trading activities. the limit shall be computed on the basis of Nayak Committee formula as well as that based on production and operating cycle of the unit and the higher of the two may be sanctioned. Projected Balance Sheet Method (PBS) The PBS method of assessment will be applicable to all C&I borrowers who are engaged in manufacturing.
. iii) Credit limits under this assessment method may be offered to established (at least 3 years old) profit making business enterprises.1 In the Projected Balance Sheet (PBS) method. Balance Sheet.generally as a cash credit limit. financial position. where needed an LC limit (as a sub-limit of total). who require working capital credit limit up to Rs. an interest rebate of 0. When circumstances warrant its breach. Funds Flow etc. 8. PBS method shall be followed. In the case of SSI borrowers. financial management. in the business. may be given to borrowers who offer mortgage of property valued at over 75% of the credit limit. financial position. services. For business enterprises in Trade and Services Sector. Further. eligible for credit rating of SB-4 and above. reasons therefor should be recorded. Fund based working capital credit limits beyond Rs 5 cr for SSI units shall be computed in the same way as for C&I units. The following financial analysis is also to be carried out:
Analysis of the borrower’s Profit and Loss account. management capabilities etc. 25 lacs and above. where the projected turnover method is not applicable. Periodical stock statements are to be obtained and margin of 25% be retained. v) Where borrowers indicate need for credit limits which are higher than the amount indicated above. a cap of 25% over actual annual sales turnover in the immediately preceding year should be set.
such as purchase of land. assessment of WC requirement will be carried out in respect of each borrower with proper examination of all parameters relevant to the borrower and their acceptability.
Detailed scrutiny and validation of the projected income and expense in the business.
TERM LOAN: 1. 3. overall gearing. efficiency of operations etc. and projected changes in the financial position (sources and uses of funds) are carried out to examine if these are acceptable from the angle of liquidity. A term loan is a loan granted for the purpose of capital assets. The term loan is an advance not repayable on demand but only in installments ranging over a period of years. The Bank’s commitment is for a long period 33
. A term loan is granted for a fixed term of not less than 3 years intended normally for financing fixed assets acquired with a repayment schedule normally not exceeding 8 years. construction of. The repayment should come out of the future cash accruals from the activity of the unit. 2. • The security is not the readily saleable goods & commodities but the fixed assets of the units. as per a prearranged schedule. & repayable from out of the future earning of the enterprise.2 There will not be a prescription like mandatory minimum current ratio or maximum level of a current asset (inventory and receivables holding level norms) under PBS method. From the above definition. in installments.
8. The repayment of term loan is not out of sale proceeds of the goods & commodities per se. modernization. the following differences between a term loan & the working capital credit afforded by the Bank are apparent: • • • The purpose of the term loan is for acquisition of capital assets. renovation or rationalization of plant. whether given as security or not. buildings. It may thus be observed that the scope & operation of the term loans are entirely different from those of the conventional working capital advances. Under the PBS method. purchase of machinery.
Financial Feasibility . its financial aspects. However. greater is the attendant uncertainty of repayment & consequently the risk involved also becomes greater. an industrial unit is a process comprising several are four broad aspects of appraisal. namely • Technical Feasibility .To determine the suitability of the technology selected & the adequacy of the technical investigation & design. This will involve a detailed scrutiny of the scheme. Term loans would be repaid in a regular way from the anticipated income of the industry/ trade. Appraisal of Term Loans Appraisal of term loan for. 6. flow of funds & profits. &
. say. The repayment of a term loan depends on the future income of the borrowing unit. it may be observed that term loans are not so lacking in liquidity as they appear to be. 5. • Economic Feasibility . the primary task of the bank before granting term loans is to assure itself that the anticipated income from the unit would provide the necessary amount for the repayment of the loan. technical aspects. Longer the duration of the credit. a projection of future trends of outputs & sales & estimates of cost.
7.& the risk involved is greater. economic aspects. An element of risk is inherent in any type of loan because of the uncertainty of the repayment.To determine the accuracy of cost estimates. steps. 4. These loans are subject to a definite repayment programme unlike short term loans for working capital (especially the cash credits) which are being renewed year after year. to adopt a different approach in examining the applications of borrowers for such credit & for appraising such proposals. suitability of the envisaged pattern of financing & general soundness of the capital structure. returns. These distinctive characteristics of term loans distinguish them from the short term credit granted by the banks & it becomes necessary therefore.To ascertain the extent of profitability of the project & its sufficiency in relation to the repayment obligations pertaining to term assistance. Hence.
c) Type of technology – An important feature of the feasibility relates to the type of technology to be adopted for a project. Too many projects have become uneconomical because sufficient care has not been taken in the location of the project. It is equally important to avoid adopting equipment or processes which are
. The size of the plant will be such that it will give an economic product.•
Managerial Competency – To ascertain that competent men are behind the project to ensure its successful implementation & efficient management after commencement of commercial production. e. which will be competitive when compared to the alternative product available in the market. One project was located near a river to facilitate easy transportation by barge but lower water level in certain seasons made essential transportation almost impossible.
7. It is in short a study of the availability. a woolen scouring & spinning mill needed large quantities of good water but was located in a place which lacked ordinary supply of water & the limited water supply available also required efficient softening treatment. The accessibility to the various resources has meaning only with reference to location. A new technology will have to be fully examined & tired before it is adopted. Inadequate transport facilities or lack of sufficient power or water for instance. Projects whose technical requirements could have been taken care of in one location sometimes fail because they are established in another place where conditions are less favorable. A smaller plant than the optimum size may result in increased production costs & may not be able to sell its products at competitive prices.g.1 Technical Feasibility The examination of this item consists of an assessment of the various requirement of the actual production process. b) Size of the plant – One of the most important considerations affecting the feasibility of a new industrial enterprise is the right size of the plant. can adversely affect an otherwise sound industrial project. a) The location of the project is highly relevant to its technical feasibility & hence special attention will have to be paid to this feature. quality & accessibility of all the goods & services needed. costs.
This involves getting answers to three questions. It is complicated because a variety of factors affect the demand for product e.2 Economic Feasibility An economic feasibility appraisal has reference to the earning capacity of the project. technological advances could bring substitutes into market while changes in tastes & consumer preference might cause sizable shifts in demand. Though labour in terms of unemployed persons is abundant in the country. wherever necessary. The principle underlying the technological selection is that “a developing country cannot afford to be the first to adopt the new nor yet the last to cast the old aside”. d) Labour – The labour requirements of a project. Care should be taken to see that there is no idle capacity in the existing industries.
7. the extent of competition prevailing.g. external consultants. whether machinery proposed to be acquired by the unit under the scheme will be sufficient for all stages of production. Forecasting of demand is a complicated matter but one of the vital importance.. Since earnings depend on the volume of sales. ii) Future – possible future changes in the volume & patterns of supply & demand will have to be
estimated in order to assess the long term prospects of the industry. it is necessary to determine how much output or the additional production from an established unit the market is likely to absorb at given prices. marketability of the products etc. there is shortage of trained personnel.absolute or likely to become outdated soon.
. should be obtained with specific comments on the feasibility of scheme. etc. its profitability. a) A thorough market analysis is one of the most essential parts of project investigation. a) How big is the market? b) How much it is likely to grow? c) How much of it can the project capture? The first step in this direction is to consider the current situation. taking account of the total output of the product concerned & the existing demand for it with a view to establishing whether there is unsatisfied demand for the product. need to be assessed with special care.. The quality of labour required & the training facilities made available to the unit will have to be taken into account e) Technical Report – A technical report using the Bank’s Consultancy Cell.
7. if at a particular level of production. parts for machines. tyres for automobiles).
The cash flow estimates will help to decide the disbursal of the term loan. start-up time etc. The profitability estimates will also give the estimate of the Debt Service Coverage which is the most important single factor in all the term credit analysis. Break-even point is expressed as a percentage of full capacity. Break-even point: In a manufacturing unit.3 Financial Feasibility The basis data required for the financial feasibility appraisal can be broadly grouped under the following heads i) Cost of the project including working capital
ii) Cost of production & estimates of profitability iii) Cash flow estimates & sources of finance. The market analysis in this case should cover the market for the ultimate product. this point of no profit/ no loss is known as the break-even point. A good project will have reasonably low break-even point which not be encountered in the projections of future profitability of the unit. Debt/ Service Coverage: The debt service coverage ratio serves as a guide to determining the period of repayment of a loan. The estimate of profitability & the break even point will enable the banker to draw up the repayment programme. the total manufacturing cost equals the sales revenue. The 37
. This is calculated by dividing cash accruals in a year by amount of annual obligations towards term debt. A study of the projected balance sheet of the concern is essential as it is necessary for the appraisal of a term loan to ensure that the implementation of the proposed scheme.g. paper for printing. jute bags.iii) Intermediate product – The demand for “Intermediate product” will depend upon the demand & supply of the ultimate product (e.
the success of the project may be put to test. The repayment programme should be so stipulated that the ratio is comfortable.
Debt Service Coverage Ratio
Cash accruals Maturing annual obligations
This ratio is valuable. appropriately included in the cash flow statements.
. Hence. In high cost schemes. an idea of the unit’s key personnel may also be necessary. therefore. The ratio may vary from industry to industry but one has to view it with circumspection when it is lower than the benchmark of 1. an appraisal of management is the touchstone of term credit analysis. on the relative strength of its management.cash accruals for this purpose should comprise net profit after taxes with interest. depreciation provision & other non cash expenses added back to it. in that it serves as a measure of the repayment capacity of the project/ unit & is. The integrity & credit worthiness of the personnel in charge of the management of the industry as well as their experience in management of industrial concerns should be examined.4 Managerial Competence In a dynamic environment.75. the capacity of an enterprise to forge ahead of its competitors depends to a large extent. If there is a change in the administration & managerial set up.
i. provided that the terms & conditions of the credit are complied with. iii. or is to accept & pay bills of exchange (drafts drawn by the beneficiary). or to accept & pay such bills of exchanges (drafts). Here arises the need of Letter of Credit (LCs).NON-FUND BASE: LETTER OF CREDIT Introduction The expectation of the seller of any goods or services is that he should get the payment immediately on delivery of the same. The objective of LC is to provide a means of payment to the seller & the delivery of goods & services to the buyer at the same time. Definition A Letter of Credit (LC) is an arrangement whereby a bank (the issuing bank) acting at the request & on the instructions of the customer (the applicant) or on its own behalf. or authorizes another bank to effect such payment. This may not materialize if the seller & the buyer are at different places (either within the same country or in different countries). At the same time the purchaser desires that the amount should be paid only when the goods are actually received. is to make a payment to or to the order of a third party (the beneficiary). Bankers and all concerned deal only in documents & not in goods. The seller desires to have an assurance for payment by the purchaser. Clean bills which do not have document of title to goods are not normally established by banks. If documents are in order issuing bank will pay irrespective of whether the goods are of 39
. Basic Principle: The basic principle behind an LC is to facilitate orderly movement of trade. Hence documentary LCs is those which contains documents of title to goods as part of the LC documents. ii. it is therefore necessary that the evidence of movement of goods is present. or authorizes another bank to negotiate against stipulated document(s).
the bank has to advice him to convert all his requirements in the form of documents to ensure quantity & quality of goods. the opening bank will direct the reimbursing bank to reimburse the negotiating bank with the payment made to the beneficiary. c) Guarantee: The person who undertakes to discharge the obligations of the applicant in case of his default. guarantee is a collateral contract. BANK GUARANTEES: A contract of guarantee is defined as ‘a contract to perform the promise or discharge the liability of the third person in case of the default’. consequential to a main contract between the applicant & the beneficiary.expected quality or not. In the case of transferable LC. the LC may be transferred to the second beneficiary & if provided in the LC it can be transferred even more than once. Purpose of Bank Guarantees 40
. If importer is your borrower. Here.
Parties to the LC 1) Applicant – The buyer who applies for opening LC 2) Beneficiary – The seller who supplies goods 3) Issuing Bank – The Bank which opens the LC 4) Advising Bank – The Bank which advises the LC after confirming authenticity 5) Negotiating Bank – The Bank which negotiates the documents 6) Confirming Bank – The Bank which adds its confirmation to the LC 7) Reimbursing Bank – The Bank which reimburses the LC amount to negotiating bank 8) Second beneficiary – The additional beneficiary in case of transferable LCs Confirming bank may not be there in a transaction unless the beneficiary demand confirmation by his own bankers & such a request is made part of LC terms. A bank will confirm an LC for his beneficiary if opening bank requests this as part of LC terms. The parties to the contract of guarantees are: a) Applicant: The principal debtor – person at whose request the guarantee is executed b) Beneficiary: Person to whom the guarantee is given & who can enforce it in case of default. Banks are also not responsible for the genuineness of the documents & quantity/quality of goods. Thus. Reimbursing bank is used in an LC transaction by an opening bank when the bank does not have a direct correspondent/branch through whom the negotiating bank can be reimbursed.
it should be ensured that customers should be in a position to reimburse the Bank in case the Bank is required to make the payment under the guarantee. etc. security. viz. creditworthiness & his capacity to take up financial risks. design/drawings in project finance. Guidelines on conduct of Bank Guarantee business Branches. as a general rule. The subtle difference between the two types of guarantees is that under a financial guarantee. Extant instructions stipulate an Administrative Clearance for issue of BGs for a
. In a performance guarantee. While issuing financial guarantees. b) Mobilization advance or advance money before commencement of the project by the contractor & for money to be received in various stages like plant layout. the bank’s guarantee obligations relate to the performance related obligations of the applicant (customer). a bank guarantee’s a customer financial worth. f) To allow units to draw funds from time to time from the concerned indenters against part execution of contracts. Branches should not issue guarantees for a period more than 18 months without prior reference to the controlling authority.. The guarantees executed by banks comprises both performance guarantees & financial guarantees. expertise. e) Performance guarantee for warranty period on completion of contract which would enable the suppliers to realize the proceeds without waiting for warranty period to be over. maturity & purpose. & means to perform the obligations under the contract & any default is not likely to occur. The guarantees are structured according to the terms of agreement. Branches may issue guarantees generally for the following purposes: a) In lieu of security deposit/earnest money deposit for participating in tenders.Bank Guarantees are used to for both both preventive & remedial purposes. capacity. g) Bid bonds on behalf of exporters h) Export performance guarantees on behalf of exporters favouring the Customs Department under EPCG scheme. should limit themselves to the provision of financial guarantees & exercise due caution with regards to performance guarantee business. c) In respect of raw materials supplies or for advances by the buyers. In case of performance guarantee. branches should exercise due caution & have sufficient experience with the customer to satisfy themselves that the customer has the necessary experience. d) In respect of due performance of specific contracts by the borrowers & for obtaining full payment of the bills.
.period in excess of 18 months. instances of invocation of bank guarantees. All deferred payment guarantee should ordinarily be secured. No bank guarantee should normally have a maturity of more than 10 years. c) for a specific amount 42
. branches should examine & satisfy themselves about the following aspects: a) The need of the bank guarantee & whether it is related to the applicant’s normal trade/business. Whenever an application for the issue of bank guarantee is received. f) Present o/s on account of bank guarantees already issued g) Margin h) Collateral security offered Format of Bank Guarantees Bank guarantees should normally be issued on the format standardized by Indian Banks Association (IBA). Appraisal of Bank Guarantee Limit Proposals for guarantees shall be appraised with the same diligence as in the case of fund-base limits. should be for a short period & for relatively small amounts. Unsecured guarantees. as may be demanded by some of the beneficiary Government departments. the reasons thereof. where furnished by exception. e. Bank guarantee beyond maturity of 10 years may be considered against 100% cash margin with prior approval of the controlling authority. e) Past record of the applicant in respect of bank guarantees issued earlier.. it should be ensured that the bank guarantee is a) for a definite period. However. the customer’s response to the invocation. Branches may obtain adequate cover by way of margin & security so as to prevent default on payments when guarantees are invoked. More than ordinary care is required to be executed while issuing guarantees on behalf of customers who enjoy credit facilities with other banks. b) Whether the requirement is one time or on the regular basis c) The nature of bank guarantee i.g. financial or performance d) Applicant’s financial strength/ capacity to meet the liability/ obligation under the bank guarantee in case of invocation. b) for a definite objective enforceable on the happening of a definite event. in cases where requests are received for extension of the period of BGs as long as the fresh period of extension is within 18 months. etc.e. When it is required to be issued on a format different from the IBA format.
registration no. | Title clearance reports of the properties to be obtained from empanelled advocates | Valuation reports of the properties to be obtained from empanelled valuer/engineers | Preparation of financial data | Proposal preparation | Assessment of proposal
.. CIBIL data. and Properties documents) | Pre-sanction visit by bank officers | Check for RBI defaulters list. AOA. Different govt. etc. ECGC caution list. KYC papers. e) contains the Bank’s standard limitation clause f) not stipulating any onerous clause.d) in respect of bona fide trade/ commercial transactions. MOA. willful defaulters list. & g) not containing any clause for automatic renewal of the bank guarantee on its expiry
CREDIT APPRAISAL PROCESS
Receipt of application from applicant | Receipt of documents (Balance sheet.
etc (on regular basis)
. review of accounts. renew of accounts. agreements. mortgages | Disbursement of loan | Post sanction activities such as receiving stock statements.| Sanction/approval of proposal by appropriate sanctioning authority | Documentations.
. while continuing emphasis on its Development Banking role. 1. financial & technical viability of the project proposed its funding pattern & further checks the primary & collateral security cover available for recovery of such funds. apart from the Book of Instructions. committed to excellence in customer.3 The policy. The formal policy is well documented in the form of circular instructions.1 State Bank of India’s (SBI) Loan Policy is aimed at accomplishing its mission of retaining the bank’s position as a Premier Financial Services Group. at the holistic level. has been able to meet the challenges in the market place. shareholder & employee satisfaction & to play a leading role in the expanding & diversifying financial services sector. 1. with World class standards & significant global business. 1. The policy exits & operates at both formal & informal levels. is an embodiment of the Bank’s approach to sanctioning. and customer oriented selling. managing & monitoring credit risk & aims at making the systems & controls effective. 1.2 The Loan Policy of the any bank has successfully withstood the test of time and with inbuilt flexibilities.4 The Loan Policy also aims at striking a balance between underwriting assets of high quality. The objective is to maintain Bank’s undisputed leadership in the Indian Banking scene. periodic guidelines & codified instructions. where procedural aspects are highlighted.
Loan policy – An Introduction
1.CHAPTER-5 SBI NORMS FOR CREDIT APPRAISAL
Credit appraisal means an investigation/assessment done by the bank prior before providing any loans & advances/project finance & also checks the commercial.
The Board has permitted setting up of the Credit Policy & Procedures Committee (CPPC) at the Corporate Centre of the Bank of which the Top Management are members. reviews credit appraisal systems. 1. to deal with issues relating to credit policy & procedures on a Bank-wide basis. To this end. Associations )
Maximum aggregate credit facilities of Rs. The CPPC sets broad policies for managing credit risk including industrial rehabilitation.1. 80 crores
( Fund based & non-fund based )
Maximum aggregate credit facilities as
per prudential norms of RBI on exposures
Term Loans (loans with residual maturity of over 3 years) should not in the aggregate exceed 35% of the total advances of SBI.5 The Policy aims at continued growth of assets while endeavoring to ensure that these remain performing & standard. & general management of NPAs besides dealing with the issues relating to Delegation of Powers. etc. sets parameters for credit portfolio in terms of exposure limits. Partnerships.
. JHF.6 The Central Board of the Bank is the apex authority in formulating all matters of policy in the bank. approves policies for compromises. following exposure levels are prescribed:
Individuals as borrowers
Maximum aggregate credit facilities of Rs. 20 crores ( Fund based & non-fund based )
Non-corporates ( e.g. write offs.
Based on the present indications. as a matter of policy the Bank does not take over any NonPerforming Asset (NPA) from other banks.
5 cr. 5 cr. Group & Industry.20 (For FBWC limits above Rs. Credit Appraisal Standards
1 (A) Qualitative: At the outset. in addition to the drill mentioned heretofore. opinion reports from existing bankers & published data if available are carefully pursued.00 (For FBWC limits upto Rs.) 1.
2.33 Others 1. The Bank shall endeavour to restrict exposure to sensitive sectors (i. a view is taken about our past experience with the promoters. an element of subjectively has to be perforce introduced as scant historical data weightage to be placed on impressions gained out of the serious dialogues with the promoter & his business contacts. The Bank shall restrict the term loan exposure to infrastructure projects to 10% of Bank’s total advances. Where it is a new connection for the bank but the entrepreneurs are already in business.00
.)) Financial Soundness TOL/TNW (max.) Mfg 1. The Bank’s aggregate exposure to the capital markets shall not exceed 5% of the total outstanding advances (including commercial paper) as on March 31 of the previous year. Thereafter. 1 (B) Quantitative:
(a) Working capital:
The basis quantitative parameters underpinning the Bank’s credit appraisal are as follows:Sector/ Parameters Liquidity Current Ratio (min.) 3.00 5.• • • •
The Bank shall endeavour to restrict fund based exposure to a particular industry to 15% of the Bank’s total fund based exposure. real estate. to capital market.e. and sensitive commodities listed by RBI) to 10% of Bank’s total advances. if there is a track record to go by. the proposition is examined from the angle of viability & also from the Bank’s prudential levels of exposure to the borrower. In case of a maiden venture.
33 will generally be considered as a benchmark level of liquidity.
.33 is only indicative & may not be deemed mandatory. However the approach has to be flexible. In such cases.
This will be dependent upon the owner’s stake or the leverage.) Gros (min. it alone will not be a reason for rejection for the loan proposal or for the sanction of the loan at a lower level. In specific cases where warranted. working capital finance as requested may be sanctioned. the movements in Net Working Capital are watched to ascertain whether there is a mismatch of long term sources vis-à-vis long term uses for purposes which may not be readily acceptable to the Bank so that corrective measures can be suggested.DSCR Net (min. In cases where projected CR is found acceptable.) 2:1 30% of equity 2:1 20% of equity 2:1 1. Here again the benchmark will be different for manufacturing. CR of 1. trading.75:1 2:1 1. the reason for low CR or slippage should be carefully examined & in deserving cases the CR as projected may be accepted. For industrial ventures a Total Outside Liability/ Tangible Net worth ratio of 3. hire-purchase & leasing concerns.) Gearing D/E (max.
(ii) Net Working Capital:
Although this is a corollary of current ratio.) Promoters’ contribution (min. such sanction can be with the condition that the borrower should bring in additional long-term funds to a specific extent by a given future date.0 is reasonable but deviations in selective cases for understandable reasons may be accepted by the sanctioning authority. In cases where the CR is projected at a lower than the benchmark or a slippage in the CR is proposed. suitable written commitment should be obtained from the borrower to the effect that he would be bringing in required amounts within a mutually agreed time frame. Where it is felt that the projected CR is not acceptable but the borrower deserves assistance subject to certain conditions.75:1
Current Ratio (CR) of 1.
as these are usually one time or extraordinary income. for the sake of proper assessment. The
technical feasibility & economic viability is vetted by the bank & wherever it is felt necessary.(iv) Turn-Over:
The trend in turnover is carefully gone into both in terms of quantity & valve as also market share wherever such data are available. and if necessary. However. profit before depreciation & taxation conveys the more comparable picture in view of changes in rate of depreciation & taxation. i. But promoters’ contribution may vary largely in mega projects. exit options explored.
(vi) Credit Rating:
Wherever the company has been rated by a Credit Rating Agency for any instrument such as CP / FD this will be taken into account while arriving at the final decision.
While net profit is ultimate yardstick. Companies incurring net losses consistently over 2 or more years will be given special attention. What is more important to establish a steady output if not a rising trend in quantitative terms because sales realization may be varying on account of price fluctuations.e.
. Therefore there cannot be a definite benchmark.
(b) Term Loan
(i) In case of term loan & deferred payment guarantees.. the project report is obtained from the
customer. which have taken place in the intervening years.
Promoter’s contribution of at least 20% in the total equity is what we normally expect. their accounts closely monitored. the Credit Officer would seek the benefit of a second opinion either from the Bank’s Technical Consultancy cell or from the consultants of the Bank/ SBI Capital Markets Ltd. the non-operating income is excluded. we would not normally insist on this and only use this tool if such an agency had already looked into the company finances. The sanctioning authority will have the necessary discretion to permit deviations. However as the credit rating involves additional expenditure. cash accruals.
(ii) which may be compiled either in-house or by a firm of consultants/ merchant bankers.
5: 1 & should not in any case be above 2:1.
(v) As regards margin on security.e.
(vi) Other parameters governing working capital facilities would also govern Term Credit facilities to
the extent applicable.75. Guarantees & bills discounting (G) Fair Practices for lenders
(C) Lending to Non-Banking Financial Companies (NBFCs) (D) Financing of infrastructure projects (E) Lease Finance (F) Letter of Credit. this will depend on Debt: Equity gearing for the project. The sanctioning authority in exceptional cases may permit deviations from the norm very selectively.(iv) The other basic parameter would be the net debt service coverage ratio i. exclusive of interest
payable..e. On a gross basis DSCR should not be below 1. These ratios are indicative & the sanctioning authority may permit deviations selectively. Debt should not be more than 2 times the Equity contribution. i. which
should preferably be near about 1. which should normally not go below 2.
The charge created on the borrower's assets as security for the debt is maintained and enforceable The Bank's right to enforce the recovery of the debt through court of law is not allowed to become time-barred under the Law of Limitation. (ii) Execution of Documents This covers obtention of proper documents. In order that this objective is achieved.
2: Documentation is not confined to mere obtention of security documents at the outset. appropriate stamping and correct execution thereof as per terms of the sanction of the advance and the internal directives of a corporate borrower such as Memorandum and Articles of Association. in the event of all other recourses proving to be of no avail. etc. our documentation process attempts to ensure that: • • • The owing of the debt to the Bank by the borrower is clearly established by the documents. besides taking other precautions before creating equitable / registered mortgage. also capacity of borrowers to borrow and the formalities to be completed by the borrowers. (iii) Post-execution formalities 51
1: The systems and procedures for documentation have been laid down keeping in view the ultimate objective of documentation which is to serve as primary evidence in any dispute between the Bank and the borrower and for enforcing the Bank's right to recover the loan amount together with interest thereon (through a court of law as a final resort). It is a continuous and ongoing process covering the entire duration of an advance comprising the following stages : (i) Pre-execution formalities: These cover mainly searches at the Office of Registrar of Companies and search of the Register of Charges (applicable to corporate borrowers). searches at the office of the sub-Registrar of Assurances or Land Registry to check the existence or otherwise of prior charge over the immovable property offered as security.
other hazards.. on occasions. 4. While it is the Bank's endeavor to standardize documents for all types of facilities. etc. registration with the Registrar of Assurances. in cases where documents have to be specially drafted. these are suitably drafted on a case-by-case basis with the help of in-house legal department and. Furthermore. where advances are extended jointly with the financial institutions. whichever is applicable. Similarly. (d) Insurance of Assets charged . In respect of consortium advances. with the help of reputed outside solicitors.(unless specifically waived) to insure the Bank against the risk of fire. 5. For facilities requiring
. These objectives are sought to be achieved by: (a) Obtention of revival letter within the stipulated period (b) Obtention of Balance Confirmation from the borrower at least at annual intervals (c) Making periodical searches at the Office of the Registrar of Companies. and the registration of charges with the Registrar of Companies within the stipulated period. where the officials are briefed on the documentation procedures so that the Bank's interest is protected in this crucial area. Wherever standard specimens have not been evolved. (iv) Protection from Limitation / Safeguarding Securities These measures aim at saving the documents from getting time-barred by limitation and protecting the securities charged to the Bank from being diluted by any charge that might be created by the borrower to secure his other debts. 3. wherever applicable.. documents are specially drafted in consultation with the solicitors / in-house legal experts to ensure pari passu charge and / or second charge. changes in the documentation procedures and the implications involved are circularised from time to time to all the branches/offices so that those who are responsible for obtaining and safeguarding the documents are made fully conversant with them. Keeping the above broad objectives and the documentation process in view. of the movable / immovable assets of the borrower to protect the Bank's interests. the documents are generally executed in consultation with the other member banks in accordance with the guidelines laid down by RBI /IBA in the matter. the Bank has devised standard documents in most cases for various types of loans given to the borrowers. the Local Head Offices are empowered to vet and approve such documents for facilities which are sanctioned at their level.This phase covers the completion of formalities in respect of mortgages. This is further strengthened through on-the-job training at the branches as well as at the Bank's training colleges / centres. if any. etc. if any.
sanction of COCC / ECCB. Requirement of documents for process of loan
1. Copy of commencement of business
5. Also provide some information about the directors of the company
7. Copy of resolution regarding the requirement of credit facilities
6. Brief history of company.
3. its customers & supplies. orders in hand. Copy of last Electricity bill of company
10. Copy of Memorandum & Article of Association
3. Financial statements of last 3 years including the provisional financial statement for the
8. Copy of incorporation of business
4. Copy of PAN/TAN number of company
9. previous track records. such specially drafted documents are cleared by the Corporate Centre. Application for requirement of loan 2. Copy of GST/CST number
Financial statements of associate concern for the last 3 years
4. instructions or orders issued from time to time by appropriate controlling authorities. the authorities concerned are required to ensure compliance also with the relevant provisions of the State Bank of India Act and the State Bank of India General Regulations and any rules. Address proof of all the directors
14. lease/ sales deed. Possession
15. of all the directors
13. This is based on the premise that an executive is required to exercise only those powers which are related to the responsibilities and duties entrusted to him/her. 2R permission.D. The Scheme of Delegation of Financial powers for advances and allied matters in the Bank has a graded authority structure. Copies related to the property such as 7/12 & 8A utara. Allotment letter. The Executive Committee of the Central Board (ECCB) has full powers for sanctioning all credit facilities.
2. Photo I. Copy of Excise number
12. Delegation of powers
1. 3. The Executive Committee of the Central Board (ECCB) has full powers for 54
. regulations. A scheme of Delegation exercise by the various functional Powers comprehensively documented in 1985 and amended from time to time is in operation in the Bank in respect of financial and administrative matters for rise. In exercising the powers.11. Bio-data form of all the directors duly filled & notarized
.sanctioning credit facilities. The sanctioning powers have been delegated down the line to Committees of officials at various administrative offices and individual line functionaries. all accounts with total fund based indebtedness of Rs. The audit system serves as an effective control on the system of sanction of loans in the bank through widely delegated powers. and above are subjected to credit audit. are required to be reported to the next higher authority as laid down in the Scheme of Delegation of Financial Powers. Presently. 5. 4. The powers. An appropriate control system is also in operation in tune with the Delegation structure.5 cr. exercised by various functionaries. A system of loan review styled 'Credit Audit' which inter alia covers audit of credit sanction decisions at various levels has been implemented.
(1.00) 20.25) (WC-1.00
Over all (TL)
Over all (TL)
Over all (TL)
NA 15.00) (WC-0.00) 40.00
(10.SCHEME OF DELEGATION OF FINANCIAL POWER
S L 1
SB-1 CORPORATES SB-2
Over all (TL)
500.00 1. Pricing (Factors deciding interest rates and other charges)
Over all (TL)
Over all (TL)
Bank may also price floating rate products by using market benchmarks (e. Within such ceiling. An internal Credit Risk Rating system covering all advances of Rs. However. albeit highly selectively. Interest rate without reference to SBAR could be charged in respect of certain categories of loan / credit like discounting of bills. products... the Bank has also adopted an appropriate authority structure to facilitate competitive pricing of loan products linked both to risk rating and overall business considerations.e. taking into consideration the trends in movement of interest rates and market competition. schemes.2 lacs will be as prescribed by RBI.g. Pricing of loans up to Rs. 5. including sub-SBAR pricing would be determined by ALCO or COCC. SSI and AGL segments has been put in place to facilitate structured assessment of credit risks.) in a transparent manner as per Board approved policies. lending to intermediary agencies etc. MIBOR etc. Fixed interest rates are also extended for commercial loans. Bank has introduced fixed interest rates in respect of certain categories of loans in personal segment. In line with RBI guidelines. i. 4. All other loans are to be priced on the basis of Bank's SBAR with the pricing being linked to grade of the risk in the exposure. G-Sec rates. e. the pricing for various credit facilities. 2. he Bank announces from time to time its single Benchmark Prime Lending Rate (BPLR). The maximum spread over SBAR which could be charged by the Bank will be decided by the Bank from time to time. The system enables evaluation of the fundamental strength of the borrower so as to charge a graded rate of interest based on different ratings. The BPLR would be referred to as State Bank Advance Rate (SBAR) in our Bank. Pricing of Bank's funds and services while being basically market driven is also determined by two important considerations. credit related services etc. the applicable price for a particular advance or service is fixed taking into account the marginal cost of Bank's funds and desired rate of return as calculated from indices like profitability levels and return on capital employed. minimum desired profitability and risk inherent in the transaction. At the corporate level. In case of corporate relationship where the value of connections and overall potential for profitability from a particular account are more important than a particular 57
. 3. Market related charges and a discretionary structure that enables branches to effectively face competition are in place. as considered appropriate.e.g. i.. Interest rates below SBAR could be offered to exporters or other credit worthy borrowers including public enterprises on the lines of a transparent and objective policy approved by the Bank's Board. Pricing in the Bank can be divided into interest pricing and non-interest pricing.1. These would be reviewed periodically based on feedback from operating units and the market.25 lacs and above in C&I. reference / indicative rates at which the Bank would lend to its best customers. housing term loans to individuals.
as given below. Review / Renewal of advances 1. the period of exposure. Working capital facilities are granted by the Bank for a period of 1 year and thereafter they are required to be renewed each year.transaction. Such review is to be submitted to the respective GE in respect of ECCB sanctions. Term loans which are irregular will be reviewed once in six months.
. i.e. review of Term Loans will be included in the periodical review of Special Mention Accounts. the factors that weigh are the rate charged by the financial institutions. 2. conduct of the account etc.) A separate authority structure. to the CGM (Circle) / CGM (CAG-Cen. has been prescribed for above noted half-yearly review of term loans:
3. fresh sanction is accorded for the limits. In the case of all listed companies with credit rating of SB4/SBTL4 and below. (However. however.. the price is fine tuned even to level of no-loss-no-profit in the transaction.) in respect of COCC-I&II sanctions and to the GM (Network) in all other cases. renewal is not possible for some reason. the pattern of volatility in the interest rates and the expected movement of the rates in the long term perspective. Where. a brief review is to be put up on the basis of half-yearly working results published by them duly incorporating comments such as extent of exposure. sanction for the continuance of the limits is obtained in each case by reviewing the facilities. For long term exposures.
Takeover of advances Bank needs to aggressively market for good quality advances. (If this information is not forthcoming from the bank/FI.
(b) Default in payment of interest/installments to the Bank or to other FI/Banks-penal interest to be
levied for the period of such defaults. the following set of financial covenants is to be stipulated:
(i) Current Ratio (ii) TOL/TNW (iii)
Interest Coverage Ratio
(iv) Default in payment of interest / installment (v) Cross Default (default in payment of instalment/ interest to other institutions/ banks)
Default of these covenants would attract penal interest of 1% as under:
(a) Any adverse deviation by more than 20% from the stipulated levels in respect of any two of the
items (i) to (iii) above .4. Keeping this in view and with the prime objective of adding only good quality assets. a certificate should be obtained from the borrower’s Auditor that the loan has been a standard asset during the 59
. in respect of term loans. (ii) The unit should score the minimum scores as prescribed. SSI and AGL segments has been laid down for take over of advances.penal interest to be levied for the period of non-adherence subject to a minimum period of 1 year. However. in the Credit Risk Assessment.
The account should have been a standard asset in the books of the other bank/FI during the preceding 3 years. One of the strategies for increasing good quality assets in the Bank's loan portfolio. under the various risk
segments. There will be no CRA rating review for term loans.
A. would be to take over advances from other banks/FIs. a common set of norms / guidelines for C&I. Advances under SSI / C&I Segments
(i) The advance to be taken over should be rated SB3/SBTL3 or above.
as per the scoring model prescribed under SME Smart Score (Refer page 170. Note 1 : In the case of take-over proposals involving advances up to Rs. Volume III of Manual on Loans & Advances). if the unit has been in existence for a lesser period. Part III.
(v) The Term Loan proposed to be taken-over should not have been rephased. However. Other factors that may be kept in view are: • • • Continued viability Track record Standing in the market of the unit/ promoter. [The norms at (v). such proposals may also be considered for sanction on a case to case basis.25 lacs. However.
(iv) The unit should have earned net profits (post tax) in each of the immediately preceding 3 years. the rating should be carried out. which should be at least one year. if a rephasement was necessitated due to external factors and viability of the unit is not in doubt. while the original time frame for repayment will be generally adhered to.
However. may be permitted to extend up to 8 years. it should have earned net profit (post tax) in the preceding year of operation. if a unit is not having a track record for 3 years.
(vi) The remaining period of scheduled repayment of the term loan should be at least 2 years.preceding 3 years in the books of the bank/FI in terms of the asset classification norms of RBI. Chapter 34. flexibility may be allowed in the quantum of periodical repayments. the schedule of repayment for the existing term loans. If sanction of fresh term loan is proposed along with the takeover. when
only TLs are taken over.
For takeover of existing TLs. if necessary. (vi) and (vii) above are not applicable for takeover of working capital advances. by the
existing FI/Bank after commencement of commercial production. The services of statutory auditors of our Bank may also be sought for this purpose). as it has been in existence for a shorter duration. takeover can be considered based on the track record for the available period. generally. 60
Other Guidelines: (i) In all cases of take-over of advances from other banks. (ii) In all cases of take-over. from the point of competition. branches should assess the requirements of the borrower and obtain sanction for the proposed limits before actually taking over the outstanding liability of the borrower to their existing bank/ FI.20.Note 2: Take-over of units from our Associate Banks is not permitted. if the unit has been in existence for a lesser period.33 will be indicative. For FBWC limits of above Rs. TOL/TNW ratio higher than 3 would be permissible depending on the type of activity. It may be considered acceptable up to 1. Note 3 : In the cases of working capital finance through consortium or multiple banking. it should have earned net profit (post-tax) in the preceding year of operation. branches should ensure proper documentation and other formalities to protect the interest of our Bank. (iii) In all cases of take-over. the report may be obtained after the sanction of facilities but before release of the facilities. Advances under Trade and Services Sector: i) The current ratio and TOL/TNW ratio should be at acceptable levels. depending on the activity. The experience of the present banker (item 13 of the format) should show satisfactory dealings with the unit. it is necessary not to alert the bank concerned. as per audited balance sheet not older than 12 months. and joining a consortium (or when a member bank exits consortium and we join the consortium in its place). However. the current ratio of 1.
B.5 cr. ii) The unit should have earned post-tax profits in each of the immediately preceding 3 years. the credit information report in the format prescribed by IBA should be obtained. 61
C. Current ratio of not below 1 is acceptable up to FBWC limit of Rs. increasing our share.5 Cr. are not reckoned as take-over of advances from other banks. (iv) The following aspects should invariably be examined in each case of take-over. Where.
AC is required to be obtained. particularly to ensure against dilution of security cover. Terms and conditions stipulated by the existing bank and those proposed by our Bank. For this purpose. D. Administrative Clearance (AC) In all the cases of take-over proposals. the appraising officials may record briefly on their enquiries with market sources/other bank/FI). No takeover of advances from any Public Sector Bank will be resorted to by quoting finer rates
(v) The credit rating should be done based on the audited balance sheet which is not older than 12 months.• •
Reasons for take-over Market perception including the existing bank’s/FI’s perception regarding the unit and its management.
Potential ancillary business accruing to the Bank. a brief proposal containing. the comments on compliance with the norms and the other guidelines as above should be submitted to the appropriate authority as under: (i) For take-over of units complying with all the norms prescribed:
(ii) For take-over of units not complying with any one or more of the norms prescribed:
. then a provisional balance sheet as on a recent date may be obtained from the unit and the CRA exercise done based on these figures. inter alia. additionally. (For this. However if the audited balance sheet is more than 12 months old and the proposal has to be considered from the business angle. Unit should clear the stipulated hurdle rate in both the exercises.
in cases where possession of the house / flat has been taken. While takeover of 'P' segment advances is not generally encouraged. in consideration of larger business interests / valuable connections. repayment of existing loan has already commenced and installments have been paid as per terms of sanction. RBI has been collecting and circulating information on defaulting companies amongst banks / FIs. Though RBI's defaulters' list is given due cognizance in the appraisal process. including names of directors of such companies. Accordingly. Credit facilities to companies whose directors are in the defaulters' list of RBI: 1. a general policy on the issues relating to sanction / continuation of credit facilities to such companies whose directors are in the RBI's defaulters' list needs to be put in place. The Directors of any company may be classified as promoter / elected / professional/ nominee / honorary directors.E. it has been decided to adopt the following approach:
. takeover of housing loans is considered selectively after due diligence and precautions.
inter alia. It shall be the endeavor of the Bank to ensure that such loans are limited to borrowers whose integrity and reliability are above board.The penal measures would be made applicable to all borrowers identified as willful defaulters or the promoters involved in diversion / siphoning of funds with outstanding balance of Rs. such an approach would be supplemented by due diligence on the part of the Bank. such Group companies also may be reckoned as willful defaulters. Similarly. Willful default & action there against . In cases of project financing.
.1 Cr. Bank would endeavor to ensure end-use of funds by. When the list of such defaulters is circulated by CIBIL instead of RBI). 3.The above policy on defaulters will be a broad framework for sanction / continuation of credit facilities to companies whose directors are in the RBI's list of defaulting borrowers of banks / FIs with dues of Rs. Further. and above. Where a Letter of Comfort or guarantee furnished by the companies within a Group in favour of a willfully defaulting unit is not paid when invoked by the Bank. 4. falsification of accounts and fraudulent transactions shall be debarred from Bank finance for floating new ventures for a period of 5 years from the date the name of the willful defaulter is published by RBI / CIBIL. No additional facilities shall be granted by the Bank to the listed willful defaulters.
entrepreneurs / promoters of companies where the Bank has identified siphoning /diversion of funds. In case of short term corporate/clean loans. the same Policy would continue to apply. the limit of Rs.25 lacs or more without any exception. misrepresentation. 2. Bank will also retain the right to get investigative audit conducted whenever it is prima facie satisfied that there is a case for such investigative audit to detect siphoning/ diversion of funds or other malfeasance.25 lacs will also be applied for the purpose of taking cognizance of instances of siphoning and diversion of funds. obtaining certification from Chartered Accountants. 5.
6. and initiate remedial measures thereby averting the incidence of incipient sickness. To make periodic assessment of the health of the advances by noting some of the key indicators of performance like profitability. Credit Monitoring & Supervision
1. and management of the unit and ensure that the assets created are effectively utilized for productive purposes and are well maintained.
(b) Supervision function: • • To ensure that effective follow up of advances is in place and asset quality of good order is maintained. 7. if any. • • • To ensure recovery of the installments of the principal in case of term loans as per the scheduled repayment programme and all interest. activity level. To identify early warning signals. Bank shall adopt a proactive approach for a change of management of the willfully defaulting borrowing unit. 65
. wherever warranted. where necessary. identify ‘incipient sickness’ and initiate proactive remedial measures. To look for early warning signals. Where possible. The Bank may also initiate criminal action against willful defaulters.6. To ensure compliance with all internal and external reporting requirements covering the credit area. against the borrowers / guarantors and foreclosure of recovery of dues should be initiated expeditiously. supervision and monitoring are as under: (a) Follow up function: • • • • • • To ensure the end-use of funds To relate the outstandings to the assets level on a continuous basis To correlate the activity level to the projections made at the time of the sanction / renewal of the credit facilities To detect deviation from terms of sanction. the objectives of post-sanction follow up. The legal process. Broadly.
.(c) Monitoring function: • • • To ensure that effective supervision is maintained on loans / advances and appropriate responses are initiated wherever early warning signals are seen. Chalking out and arranging for carrying out specific actions to ensure high percentage of ‘Standard Assets’. Detailed operative guidelines on the following aspects of effective credit monitoring are in place: • • • • • • • • • • • • • • • Post-sanction responsibilities of different functionaries Reporting for control Security documents. reporting. register etc. Statement of stocks and book debts Computation of drawing power (DP) on eligible current assets and maintaining of DP register Verification of assets Inspection by branch functionaries – frequency. To monitor on an ongoing basis the asset portfolio by tracking changes from time to time. Stock Audit Follow up based on information systems Follow up during project implementation stage Follow up post-commercial production Monitoring and control Detection and prevention of diversion of working capital finance Monitoring of large withdrawals Allocation of limit Handling of NPA accounts etc.
Industry Exposure restrictions. Loan Administration . Government regulations/legislation impacting on the industry. (ii) no limitations have been placed on the Company’s borrowing powers and operations and (iii) the scope of activity of the company. Profile of the promoters/senior management personnel of the project. Applicant’s status vis-à-vis other units in the industry. Financial status in broad terms and whether it is acceptable
The company’s Memorandum and Articles of Association should be scrutinized carefully to ensure (i) that there are no clauses prejudicial to the Bank’s interests. e.. Caution lists. APPRAISAL A. Industry related risk factors.2. Towards this end the preliminary appraisal will examine the following aspects of a proposal. Group Exposure restrictions. Compliance regarding transfer of borrower accounts from one bank to another. if applicable. ban on financing of industries producing/ consuming Ozone depleting substances. Acceptability of the promoters. Prudential Exposure norms.1 Sound credit appraisal involves analysis of the viability of operations of a business and the capacity of the promoters to run it profitably and repay the bank the dues as and then they fall 1. Preliminary appraisal 1. • • • • • • • • • • • • • • Bank’s lending policy and other relevant guidelines/RBI guidelines.Pre-Sanction process
Appraisal. Credit risk rating.
.g.7. List of defaulters. Assessment and Sanction functions 1.
competitive advantage of the applicant. the competitors’ share. • Current practices for the particular product/service especially relating to terms of credit sales. The information. profitability. probability of bad debts.demand. purchase. production.. in other words a brief on the managerial resources and whether these are compatible with the size and scope of the proposed activity. • If request includes financing of project(s). If the branch (a reference to the branch includes a reference to SECC/CPC etc. the following aspects have to be examined: • Whether project cost is prima facie acceptable • Debt/equity gearing proposed and whether acceptable • Promoters’ ability to access capital market for debt/equity support • Whether critical aspects of project . etc. are prima facie in order 1.g. Further.3. branch should obtain additionally currency of the
. covering specific credit requirement of the company and other essential data/ information. the branch will arrive at a decision whether to support the request or not. • Demand and supply projections based on the overall market prospects together with a copy of the market survey report. experience and competence of the key personnel in charge of the main functional areas e.1. should include: • Organisational set up with a list of Board of Directors and indicating the qualifications. marketing and finance. etc. along with a copy of the proposal/project report. cost of production and profitability. • Estimates of sales. etc. if the proposal is to finance a project. it will call for from the applicant(s). cost of production. a comprehensive application in the prescribed proforma. among other things. • Projected profit and loss account and balance sheet for the operating years during the Bank assistance. demand and supply gap. proposed marketing arrangement. After undertaking the above preliminary examination of the proposal. as the case may be) finds the proposal acceptable. The report may comment on the geographic spread of the market where the unit proposes to operate.4.
should also be called for. inter-firm and inter-industry comparisons should be made to establish their veracity. 1.
b) Details of existing borrowing arrangements. audited balance sheet in the IBA approved formats should be submitted by the borrowers. the following aspects should also be examined:
.5. (ii) ‘No Objection Certificate’ from term lenders if already financed by them and (iii) Report from Merchant bankers in case the company plans to access capital market. irrespective of market segment. all the data/information furnished by the borrower should be counter checked and. wherever necessary. For non-corporate borrowers.6 The viability of a project is examined to ascertain that the company would have the ability to service its loan and interest obligations out of cash accruals from the business. This data/information should be supplemented by the supporting statements such as:
a) Audited profit loss account and balance sheet for the past three years (if the latest audited balance sheet is more than 6 months old. in addition to the above. its past performance.
1.10 lacs and above from the banking system. a pro-forma balance sheet as on a recent date should be obtained and analysed). if any. In respect of existing concerns.7 The financial analysis carried out on the basis of the company’s audited balance sheets and profit and loss accounts for the last three years should help to establish the current viability.8 In addition to the financials. etc. 1. While appraising a project or a loan proposal. B. enjoying credit limits of Rs. c) Credit information reports from the existing bankers on the applicant Company. wherever possible. and d) Financial statements and borrowing relationship of Associate firms/Group Companies. Detailed Appraisal 1.(i)Appraisal report from any other bank/financial institution in case appraisal has been done by them. particulars regarding the history of the concern. present financial position.
• The method of depreciation followed by the company-whether the company is following straight line method or written down value method and whether the company has changed the method of depreciation in the past and, if so, the reason therefor; • Whether the company has revalued any of its fixed assets any time in the past and the present status of the revaluation reserve, if any created for the purpose; • Record of major defaults, if any, in repayment in the past and history of past sickness, if any; • The position regarding the company’s tax assessment - whether the provisions made in the balance sheets are adequate to take care of the company’s tax liabilities; • The nature and purpose of the contingent liabilities, together with comments thereon; • Pending suits by or against the company and their financial implications (e.g. cases relating to customs and excise, sales tax, etc.); • Qualifications/adverse remarks, if any, made by the statutory auditors on the Company’s accounts; • Dividend policy; • Apart from financial ratios, other ratios relevant to the project; • Trends in sales and profitability, past deviations in sales and profit projections, and Estimates/projections of sales values; • Production capacity & use: past and projected;\ • Estimated requirement of working capital finance with reference to acceptable build up of inventory/ receivables/ other current assets; • Projected levels: whether acceptable; and • Compliance with lending norms and other mandatory guidelines as applicable
1.9. Project financing: If the proposal involves financing a new project, the commercial, economic and Financial viability and other aspects are to be examined as indicated below: • Statutory clearances from various Government Depts./ Agencies • Licenses/permits/approvals/clearances/NOCs/Collaboration agreements, as applicable • Details of sourcing of energy requirements, power, fuel etc. • Pollution control clearance • Cost of project and source of finance • Build-up of fixed assets (requirement of funds for investments in fixed assets to be critically examined with regard to production factors, improvement in quality of products, economies of scale etc.) • Arrangements proposed for raising debt and equity • Capital structure (position of Authorized, Issued/ Paid-up Capital, Redeemable Preference Shares, etc.) • Debt component i.e., debentures, term Loans, deferred payment facilities, unsecured loans/ deposits. All unsecured loans/ deposits raised by the company for financing a project should be subordinate to the term loans of the banks/ financial institutions and should be permitted to be repaid only with the prior approval of all the banks and the financial institutions concerned. Where central or state sales tax loan or developmental loan is taken as source of financing the project, furnish details of the terms and conditions governing the loan like the rate of interest (if applicable), the manner of repayment, etc. • Feasibility of arrangements to access capital market • Feasibility of the projections/ estimates of sales, cost of production and profits covering the period of repayment • Break Even Point in terms of sales value and percentage of installed capacity under a normal production year • Cash flows and fund flows • Proposed amortization schedule 71
• Whether profitability is adequate to meet stipulated repayments with reference to Debt Service Coverage Ratio, Return on Investment • Industry profile & prospects • Critical factors of the industry and whether the assessment of these and management Plans in this regard are acceptable • Technical feasibility with reference to report of technical consultants, if available • Management quality, competence, track record • Company’s structure & systems • Applicant’s strength on inter-firm comparisons For the purpose of inter-firm comparison and other information, where necessary, source data from Stock Exchange Directory, financial journals/ publications, professional entities like CRIS-INFAC, CMIE, etc. with emphasis on following aspects: • Market share of the units under comparison • Unique features • Profitability factors • Financing pattern of the business • Inventory/Receivable levels • Capacity utilization • Production efficiency and costs • Bank borrowings patterns • Financial ratios & other relevant ratios • Capital Market Perceptions • Current price
and project implementation schedule. relaxation in this regard may be considered on a case to case basis for genuine and acceptable reasons. public equity etc. if any • Frequency of irregularity i. profile of present exposures: • Credit facilities now granted • Conduct of the existing account • Utilization of limits .• 52week high and low of the share price • P/E ratio or P/E Multiple • Yield (%). friends and relatives will have to be brought upfront. The balance amount proposed to be raised from other sources. Under such circumstances.
C. A pre-sanction inspection of the project site or the factory should be carried out in the case of existing units.
. the promoter should furnish a definite plan indicating clearly the sources for meeting his contribution.. Present relationship with Bank: Compile for existing customers. etc. viz. their family members.. should also be fully tied up..half yearly and yearly
Also examine and comment on the status of approvals from other term lenders. number of times and total number of days the account was irregular during the last twelve months • Repayment of term commitments
• Compliance with requirements regarding submission of stock statements. Financial Follow-up Reports.FB & NFB • Occurrence of irregularities.e. However. debentures. the portion of the equity / loans which is proposed to be brought in by the promoters. renewal data. market view (if anything adverse). To ensure a higher degree of commitment from the promoters.
Opinion Reports: Compile opinion reports on the company. realization of book debts • Value of account with break-up of income earned • Pro-rata share of non-fund and foreign exchange business • Concessions extended and value thereof • Compliance with other terms and conditions • Action taken on Comments/observations contained in RBI Inspection Reports: CO Inspection & Audit Reports Verification Audit Reports Concurrent Audit Reports Stock Audit Reports Spot Audit Reports Long Form Audit Report (statutory audit) D. G. E. Guarantee o Margins . partners/ promoters and the proposed guarantors.facility wise and overall: o Limit for each facility – sub-limits o Security . F. Structure of facilities and Terms of Sanction: Fix terms and conditions for exposures proposed .• Stock turnover. Existing charges on assets of the unit: If a company. report on search of charges with ROC. Credit risk rating: Draw up rating for (i) Working Capital and (ii) Term Finance.For each facility as applicable o Rate of interest 74
.Primary & Collateral.
. proposed from usual norms of the Bank and the reasons therefor.
• Interact with the borrower and the appraiser. Assistance to Assessment: Interact with the assessor. incorporate these and required modifications in the draft proposal and generate an integrated final proposal for sanction. etc. If any deficiencies are seen. I. where applicable o ECGC cover where applicable o Other standard covenants H.) to see if this is prima facie in order. provide additional inputs arising from the assessment. financial statements and other reports/documents examined by the appraiser.
2. • Peruse the financial analysis (Balance Sheet/ Operating Statement/ Ratio Analysis/ Fund Flow Statement/ Working Capital assessment/Project cost & sources/ Break Even analysis/Debt Service/Security Cover. arrange with the appraiser for the analysis on the correct lines. Proposal for sanction: Prepare a draft proposal in prescribed format with required backup details and with recommendations for sanction. J.
• Carry out pre-sanction visit to the applicant company and their project/factory site. and the borrower’s application. if any. Review of the proposal: Review of the proposal should be done covering (i) strengths and weaknesses of the exposure proposed (ii) risk factors and steps proposed to mitigate them (iii) deviations. ASSESSMENT: Indicative List of Activities Involved in Assessment Function is given below: • Review the draft proposal together with the back-up details/notes.o Rate of commission/exchange/other fees o Concessional facilities and value thereof o Repayment terms.
if any. arrange for additional inputs/ modifications to be incorporated in the proposal. • Recommendation for sanction: Recapitulate briefly the conclusions of the appraisal and state whether the proposal is economically viable. with any required modification to the initial recommendation by the Appraiser • Arrange with the Appraiser to draw up the proposal in the final form. o Adequacy/ correctness of limits/ sub limits. o Proposed structure of facilities. o Bank’s lending policy and other guidelines issued by the Bank from time to time o RBI guidelines o Background of promoters/ senior management o Inter-firm comparison o Technology in use in the company o Market conditions o Projected performance of the borrower vis-à-vis past estimates and performance o Viability of the project o Strengths and Weaknesses of the borrower entity. proposed for the facilities o Risk factors of the proposal and steps proposed to mitigate the risk o Deviations proposed from the norms of the Bank and justifications therefor • To the extent the inputs/comments are inadequate or require modification. moratorium and repayment schedule o Adequacy of proposed security cover o Credit risk rating o Pricing and other charges and concessions.• Examine critically the following aspects of the proposed exposure. margins. Recount briefly the value of the company’s (and the Group’s)
all considered. pricing.
. • Examine critically the following aspects of the proposed exposure in the light of corresponding instructions in force: o Bank’s lending policy and other relevant guidelines o RBI guidelines o Borrower’s status in the industry o Industry prospects o Experience of the Bank with other units in similar industry o Overall strength of the borrower o Projected level of operations o Risk factors critical to the exposure and adequacy of safeguards proposed there against o Value of the existing connection with the borrower o Credit risk rating o Security. Finally. setting out the reasons.
3. If any critical information is not provided in the proposal. • Accord sanction of the proposal on the terms proposed or by stipulating modified or additional conditions/ safeguards. charges and concessions proposed for the exposure and covenants stipulated vis-à-vis the risk perception.connections. the proposal is a fair banking risk. or Defer decision on the proposal and return it for additional data/clarifications. give recommendations for grant of the requisite fund-based and non-fund based credit facilities. SANCTION: Indicative list of activities involved in the sanction function is given below: • Peruse the proposal to see if the report prima facie presents the proposal in a comprehensive manner as required. remit it back to the Assessor for supply of the required data/clarifications. or Reject the proposal. if it is not acceptable. State whether.
A loan granted on the basis of sound appraisal may go bad because the borrower did not carry out his promises regarding performance. supervision and monitoring. MONITORING DELAY IN PROCESSING LOAN PROPOSAL : Branches have to submit a report on credit proposals pending for more than 30 days in two parts. Review reports to CCC-I and later to Group Executive for information at prescribed intervals will be coordinated by DGM (CCFO). which together facilitate efficient and effective credit management and maintaining high level of standard assets.
Loan Administration . The consolidated position in this regard in respect of all the Circles will be put up to MD & GE (NB) through GM (SME).5. Past record of satisfactory performance and integrity are no guarantee for future though they serve as a useful guide to project the trend in performance. The objectives of the three stages of post sanction process are detailed below. Stages of post sanction process The post-sanction credit process can be broadly classified into three stages viz. e) Ultimately ensure safety of funds lent. Need Lending decisions are made on sound appraisal and assessment of credit worthiness. A banker cannot take solace in sufficiency of security for his loans. Credit assessment is made based on promises and projections. He has to a) make a proper selection of borrower b) Ensure compliance with terms and conditions c) Monitor performance to check continued viability of operations d) Ensure end use of funds. Part I will comprise proposals requiring sanctions at the Branch/ SECC/ ZCC and Part II will contain sanctions by CCC-II and above..Post sanction credit process
General 1. 2. It is for this reason that proper follow up and supervision is essential. follow-up.
8. documentation & supervision & control. TYPES OF LENDING ARRANEMENTS Introduction
Business entities can have various types of borrowing arrangements. coordination. units would prefer to have banking arrangements with more than one bank on account of the large financial requirement or the resource constraint of his own banker or due to varying terms & conditions offered by different banks or for sheer administrative convenience.
. One Bank
The most familiar amongst the above for smaller loans is the One Borrower-One Bank arrangement where the borrower confines all his financial dealings with only one bank. In the case of borrowing business entity. Sometimes. consortium arrangement enables participating banks to save manpower & resources through common appraisal & inspection & sharing credit information. Besides this. They are • • • • One Borrower – One Bank One Borrower – Several Banks (with consortium arrangement) One Borrower – Several Banks (without consortium arrangements – Multiple Banking One Borrower – Several Banks (Loan Syndication)
A. method of appraisal. it is able to meet its funds requirement without being constrained by the limited resource of its own banker. The advantages to the bank in a multiple banking arrangement/ consortium arrangement are that the exposure to an individual customer is limited & risk is proportionate. The bank is also able to spread its portfolio. The various arrangements under borrowings from more than one bank will differ on account of terms & conditions.
this leads to a consortium lending arrangements. Points to be noted in case of multiple banking arrangements • •
Though no formal arrangement exists among the financing banks. The bank taking the highest share of the credit will usually be the leader of consortium. consensus was rarely prevalent among the consortium members. it is preferable to have informal exchange of information to ensure financial discipline Charges on the security given to the bank should be created with utmost care to guard against dilution in our security offered & to avoid double financing Certificates on the outstandings with the other banks should be obtained on the periodical basis & also verified from the Balance sheet of the unit to avoid excess financing.B.
. Additionally. Multiple Banking Arrangement has come to stay as it has some advantages for the borrower & the banks have the freedom to price their credit products & non-fund based facility according to their commercial judgment. Multiple Banking arrangement
Multiple Banking Arrangement is one where the rules of consortium do not apply & no inter se agreement among banks exists. There is no ceiling on the number of banks in a consortium. The borrower avails credit facility from various banks providing separate securities on different terms & conditions. There is no such arrangement called ‘Multiple Banking Arrangement’ & the term is used only to donote the existence of banking arrangement with more than one bank. another bank was interested in continuing the facility on account of group considerations. Consortium arrangement occasioned delays in credit decisions & the borrower has found his way around this difficulty by the multiple banking arrangement. several banks pool banking resourses & expertise in credit management together & finance a single borrower with a common appraisal. In consortium lending. when units were not doing well. The arrangement continues until any one of the bank moves out of the consortium. common documentation & joint supervision & follow up. The borrower enjoys the advantage similar to single window availing of credit facalities from several banks. If one bank wanted to call up the advance & protect the security.
C. Consortium lending
When one borrower avails loans from several banks under an arrangement among all the lending bankers.
The mandate spells out the terms of the loan & the mandated bank’s rights & responsibilities. the competition among the lenders leads to finer terms Risk is shared Small banks can also have access to large ticket loans & top class credit appraisal & management
. It is a convenient mode of raising long-term funds. thus easy & hassle fee Large loans can be raised through syndication by accessing global markets For the borrower. management fees. On the basis of the memorandum & on their own independent economic & financial evolution the leading banks take a view on the proposal. The mandated banker – the lead manger – prepares an information memorandum & circulates among prospective lender banks soliciting their participation in the loan. Credit Syndication
A syndicated credit is an agreement between two or more lending institutions to provide a borrower a credit facility using common loan documentation. The mandated bank convenes the meeting to discuss the syndication strategy relating to coordination. The borrower mandates a lead manager of his choice to arrange a loan for him. The loan agreement is signed by all the participating banks.D. cost of credit etc. communication & control within the syndication process & finalises deal timing. The borrower is required to give prior notice to the lead manger about loan drawal to enable him to tie up disbursements with the other lending banks Features of syndicated loans • • • • • • Arranger brings together group of banks Borrower is not required to have interface with participating banks.
time-bound delivery schedule & drawals Streamlined process of documentation with clearly laid down roles & responsibilities Market driven pricing linked to the risk perception Competitive pricing but scope for fee-based income is also available Syndicated portions can be sold to another bank. if required Fixed repayment schedule & strict monitoring of default by markets which punish indiscipline
.Advantages • • • • • • Strict.
Lender’ task • • Identify the risk factors. and Mitigate the risk
How does risk arise in credit? In the business world.CHAPTER 6 CREDIT RISK ASSESSMENT
For a bank. success factors behind a business are: • • • • Managerial ability Favorable business environment Favorable industrial environment Adequate financial strength
. Risk arises out of • • • • Deficiencies / lapses on the part of the management (Internal factor) Uncertainties in the business environment (External factor) Uncertainties in the industrial environment (External factor) Weakness in the financial position (Internal factor)
To put in another way. what is RISK? • Risk is inability or unwillingness of borrower-customer or counter-party to meet their repayment obligations/ honor their commitments. as per the stipulated terms.
All credit proposals have some inherent risks. But it’s always prudent to have some idea about the degree of risk associated with any credit proposal. based on risk-absorption/ risk-hedging capacity & risk-mitigation techniques of the Bank.
Lending despite risks: • • • • So. Credit & Risk • • • • Go hand in hand. The eventual CRA rating awarded to a unit (based on a score of 100) is a single-point risk indicator of an individual credit exposure. & is used to indentify. CRA is also used to track the quality of Bank’s credit portfolio. At the corporate level. these are the broad risk categories or risk factors built into our CRA models. They can be compared to two sides of the same coin. The banker has to take a calculated risk. They are like twin brothers.As such.
. to measure & to monitor the credit risk of an individual proposal. risk should not deter a Banker from lending. A banker’s task is to identify/ assess the risk factors/ parameters & manage / mitigate them on a continuous basis. CRA takes into account the above types of risks associated with the borrowal unit. excepting the almost negligible volume of lending against liquid collaterals with adequate margin.
Then. capital has to be allocated for loan assets depending on the risk perception/ rating of respective assets. with the implementation of Basle-II accord4. which go to pay interest to depositors. to become Basle-II compliant. therefore. To ensure asset quality. it is not enough that we have sizable growth in quantity/ volume. separate models for SSI & AGL segments were introduced in 1998. We had our Credit Rating System (CRA) in 1988. The first CRA model was rolled out in 1996 to take care of exposures to the C & I (Manufacturing) segment. when the C&I (Mfg) CRA model was developed for Non Banking Finance Companies (NBFCs). SBI Scenario: However. It is. that is. salaries to employees & dividend to shareholders In credit. extremely important for every bank to have a clear assessment of risks of the loan assets it creates.CREDIT RISK ASSESSMENT (CRA): Credit is a core activity of banks & an important source of their earnings. the CRA system was introduced in the Bank in 1996. like in many other fields. Indian Scenario: • • • In Indian banks. proper risk assessment right at the beginning. Moreover. RBI came out with its guidelines on Risk Management Systems in Banks in 1999 & Guidance Note on Management of Credit in October. Health Code System (1985) / IRAC norms (1993) are Asset (loan) classification systems. our Bank played a proactive & pioneering role.
. Thereafter. That is why Credit Risk Assessment (CRA) system is an essential ingredient of the Credit Appraisal exercise. there was no systematic method of Credit Risk Assessment till late 1980’s/ early 1990’s. it is also necessary to ensure that we have only good quality growth. not CRA systems. is extremely important. in the field of Credit Risk Assessment too. 2002. at the time of taking an exposure.
Financial parameters: The assessment of financial risk involves appraisal of the
financial strength of the borrower based on performance & financial indicators. business. future prospects & risk mitigation (collateral security / financial standing). These have been categorized broadly into financial.
3. Management parameters: The management of an enterprise / group is rated on the
following parameters: • • • • Integrity (corporate governance) Track record Managerial competence / commitment Expertise
. To arrive at the overall risk rating. industrial & management risks and are rated separately.
4. The CRA models adopted by the Bank take into account all possible factors which go into appraising the risks associated with a loan. the factors duly weighted are aggregated & calibrated to arrive at a single point indicator of risk associated with the credit decision.As of now. Industry parameters: The following characteristics of an industry which pose varying
degrees of risk are built into Bank’s CRA model: • • • • Competition Industry outlook Regulatory risk Contemporary issues like WTO etc. in SBI.
2. The overall financial risk is assessed in terms of static ratios. CRA is the most important component of the Credit Appraisal exercise for all exposures > 25 lacs & a very important tool in decision-making (a Decision Support System) as well as in pricing.
CREDIT RISK ASSESSMENT (CRA) – Minimum scores / Hurdle rates
From SB9 rating the risk increases.• • • • • • •
Structure & systems Experience in the industry Credibility: ability to meet sales projections Credibility: ability to meet profit (PAT) projections Payment record Strategic initiatives Length of relationship with the Bank
Bank has introduced New Rating Scales for borrower for giving loans. The risk parameters as mentioned above are individually scored to arrive at an aggregate score of 100 (subject to qualitative factors – negative parameters). Rating is given on the basis of scores out of 100. Bank gives loans to the borrower as per their rating like SBI gives loans to the borrower up to SB8 rating as it has average risk till SB8 rating. and ‘Managerial Competence/ Commitment’) An applicant unit will be required to score minimum 2 marks each (out of 3) in the above three parameters of Management Risk to qualify for Bank’s assistance. the Bank would explore all possibilities to exercise exit option. The details of such minimum scores are as under: a. The overall score thus obtained (out of a max. In case of existing accounts if the company scores less than this stipulated minimum marks (02). of 100) is rated on a 8 point scale from SB1/SBTL1 to SB 8 /SBTL8. business. •
CRA model also stipulates a minimum score under financial. Minimum Score under Business Risk: ‘Track Record’
. c. industry and management risk parameters for a proposal to be considered acceptable in a given form. 5. Minimum scores under Management Risk : (‘Integrity/Corporate Governance’. Minimum scores – General b. So banks do not give loans after SB8 rating.
25 crore to Rs.
• No new connections are to be considered in respect of accounts rated below SB4/ SBTL4. 5. (i) (ii) Model Regular Model Simplified Model Type of Rating (i) Borrower Rating Exposure Level (FB + NFB Limits ) Non – Trading Sector (C&I .) Risk Management Dept. the existing units in the books of the bank do not secure full marks (02).Compliance of Environment Regulations To qualify for financial assistance. • • No enhancements in credit limits are to be considered in existing accounts rated below SB4/SBTL4. (Deviations may be permitted by CCC-I and above. would issue advisories on the general outlook for the industry from time to time. subject to exceptions like availability of Central Govt.00 crore (b) Type of Ratings S.00 crore Rs 0. guarantees and / or availability of a Corporate guarantee of parent / group company with a CRA rating of SB3 / SBTL3 and above. the bank would explore all possibilities for the exercise of exit option. as provided in the Loan Policy. AGL) Regular Model Simplified Model Trading Sector ( Trade & Services) Regular Model Simplified Model
(ii) Facility Rating Borrower Rating
. No. (i) (ii) Over Rs.
Salient features of CRA models:
(a) Type of Models S. “ Compliance of Environment Regulations. 5. an applicant unit would have to secure full marks (02) under the parameter. SSI . No ..” In case.
5) 45 ( 15 x 3) (v) Qualitative Parameter (External Rating) Total (vi) Borrower Rating based on the above Score (vii) (viii) Country Risk (CR) Final Borrower Rating after CR (ix) (x) Financial Statement Quality Risk Score/Rating Transition 89 Excellent/Good/Satisfactory/Poor Comments on Trend in Rating 100 100 100 100 (+5) (+5) (+5) 10 (-10) 20 (-10) 40 (20 x 2) 25 ( 10 x 2.(c) Type of Risks Covered: (i) S.5) (+ 5) 70 35 (70/2) New Compan y Existing Company y New Compan Maximum Score Simplified Model
. Borrower Rating Risk Category Regular Model Existi ng Compa ny (i) Financial Risk (FR) 65 25 (65 x 0.39) (ii) (iii) Qualitative Factors (-‘ve) Business & Industry Risk (BR & IR) /Business Risk (for Trading Sector) (iv) Management Risk (MR) 15 (-10) 20 (-10) 30 (20 x 1. No.
Matrix (ii) Facility Rating (Regular Model)
2 (b) Insolvency Legislation in the Jurisdiction1 (c) Impact of Systemic/Legal Factors on Recovery-1 (d) Time Period for Recovery-1 5
Total Security (Primary + Collateral) 91
Risk Drivers for Exposure at Default
.S.for Trading Sector) #
Unit Characteristics (a) Leverage/ Enforcement of Collateral-4 (b) Safety. N o. Value & Existence of Assets-4 8
Macro-Economic Conditions (a) GDP Growth Rate : Impact of Business Cycle . (a)
Risk Drivers for Loss Given Default (LGD)
Current Ratio [Working Capital/ Non-Fund Based Facility (except Capex)] Or Project Debt/Equity[Term Facility (for Capex)] 6 Loan/Non-Fund Based
Nature of Charge
(d) New Rating Scales .Borrower Rating: 16 Rating Grades
. @ Marks linked to Borrower Rating Score of the Unit. Score out of 92 to be normalised to 100 for these segments.# No Scoring under these two parameters for AGL & Trade Segments due to nonavailability of relevant LGD Data.
S. 1 2 3 4 5
Borrowe r Rating
Range of Scores
SB1 SB2 SB3 SB4 SB5
94-100 90-93 86-89 81-85 76-80
Virtually Zero risk Lowest Risk Lower Risk Low Risk Moderate Risk with Adequate Cushion
Virtually Absolute safety Highest safety Higher safety High safety Adequate safety
6 7 8 9 10
SB6 SB7 SB8 SB9 SB10
70-75 64-69 57-63 50-56 45-49
Above Safety Threshold
Acceptable Risk (Risk Tolerance Threshold)
11 12 13 14 15
SB11 SB12 SB13 SB14 SB15
40-44 35-39 30-34 25-29 <24
Borderline risk High Risk Higher Risk Substantial risk Pre-Default Risk (extremely vulnerable to default)
Inadequate safety Low safety Lower safety Lowest safety
New Rating Scales .Fund Based Facility): 16 Rating Grades
.Facility Rating (Separate for each Fund Based /
LGD LEVEL (Recovery Level)
Virtually Zero LGD
Virtually Zero Risk
Virtually Absolute Safety
Lowest LGD (Highest Recovery)
Lower LGD (Higher Recovery)
Very Low LGD (High Recovery)
Low LGD (Adequate Recovery)
Moderate Risk with Adequate Cushion Moderate Risk Average Risk
6 7 8 9
FR6 FR7 FR8 FR9
59-65 52-58 45-51 38-44
Moderate LGD (Moderate recovery) Average LGD (Average Recovery) LGD Tolerance
Moderate Safety Above Safety Threshold
Acceptable Risk (Risk Tolerance Threshold) High Risk Higher Risk
Threshold (Recovery Tolerance Threshold)
High LGD (Low recovery) Higher LGD (Lower Recovery)
Low Safety Lower Safety
13 14 15 16
FR13 FR14 FR15 FR16
11-16 5-10 1-4 0
Substantial LGD (Small recovery) Highest LGD (Minimal/zero
Highest Risk NIL
New CRA Model Score 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 94-100 90-93 86-89 81-85 76-80 70-75 64-69 57-63 50-56 45-49 40-44 35-39 30-34 25-29 < 24 Grade SB1 SB2 SB3 SB4 SB5 SB6 SB7 SB8 SB9 SB10 SB11 SB12 SB13 SB14 SB15 SB16 SB8 <25 SB7 >=25 SB5 SB6 >=45 >35 SB3 SB4 >=65 >=50 SB2 >=75 Existing CRA Model Grade SB1 Score >= 90
(g) Qualitative Parameter (External Rating) Solicited Rating by a recognized External Credit Rating Agency (ECRA) translates to additional Score. No.(f) Mapping to Existing Borrower Rating Bands S. Following ECRAs recognised by RBI are considered for this purpose:
. S. No. 1
Credit Analysis & Research Limited; CRISIL Limited; FITCH India; (d) (d) ICRA Limited.
FITCH; Moodys; Standard & Poor’s
RBI has clarified that “Cash Credit Exposures tend to be generally rolled over and also tend to be drawn on an average for a major portion of the sanctioned limits. Hence even though a cash credit exposure may be sanctioned for a period of one year or less, these exposures should be reckoned as Long Term Exposures and accordingly, the Long Term Ratings accorded by the chosen Credit Rating Agencies will be relevant.”
CHAPTER 7 CASE STUDY
Details of case:
Company:- Akshat Polymers Firm:- Partnership Firm (M/S Umiya Polymers)
* Shri Amrutbhai Laljibhai Desai * Shri Gunvantbhai Ambaramdas Patel * Shri Natvarlal Mohanlal Patel 96
* Shri Dharamsinhbhai Lallubhai Desai
* Shri Kanjibhai Maljibhai Desai Industry:- Manufacturing Activity:- Maufacturing of HDPP woven sacks Segment:- SSI Date of Incorporation:- 19.11.07 Banking arrangement:- Sole Banking Regd. & Admin. Office:- RS No. 840, Kadi Thol Road, Tal-Kadi, Dist-Mehsana
The unit will have installed capacity of 2520 MT. The unit is expected to start commercial production from first week of September, 2008. The capacity utilization for the year 2008-09 has been projected at 70% of installed capacity in terms of the utilization of the machines. Accordingly the unit is projected to achieve a sale of Rs.9.26 crores for the year 2008-09 in the first six months of operations. Further, the unit is projected to achieve capacity utilization of 80% during the year 2009-10 (the first full year of operations) and accordingly the sale for the year is projected at Rs.19.77 crores. The projections are considered acceptable in view of the following factors:
The unit plans to initially market its product in Gujarat, Maharastra, Rajasthan and sale to Central Govt. who purchases the HDPP woven sacks for grains through open tenders. The unit has started negotiating for booking of the orders for the proposed plant and results are promising as advised.
HDPP woven sacks are widely used as packaging material in Cement, Fertiliser, storage of the AGL commodities. All these segments are reported to have good demand for the HDPP/PE woven sacks in the Indian market.
As per ICRA report, grading and research services (2006) Flexible packaging sector is expected to grow at the rate of 12.40%. The promoters have sufficient experience in the line of activity. The promoters had already made negotiations of the some of the industries as detailed under for selling the HDPP woven sacks: • • • • • • Indian Farmers Fertilizers Company Limited GUJCOMASOL Birla cement Sanghi Cement Ambuja cement Various grain & Food Export units of Gujarat, etc.
The firm has also started marketing activity for their products by making personnel contacts & writing introductory letters to potential customers & as the promoters are in the same line of business activity for the last 15 years they are having very good market contacts for the sales of the Finished Goods.
The orders worth Rs.2.50 crores is expected to be finalized by end of August, 2008 and before commissioning of the plant as advised.
Proposal: Sanction for; i) FBWC limits of Rs.2.25 crores ii) Fresh Term Loan of Rs.2.00 crores Approval for: i) CRA rating of SB- 6 (71 marks) based on projected financials as on 31.03.2010. ii) Pricing for WC facilities @1.00% above SBAR as applicable for SB-5 minimum @13.75and for TL 1.50% above SBAR minimum @14.25%
Performance & Financial Indicators:
(Rs. in Crores)
Year Installed cap Qty.
2.62 1.00 1.2010 0.20 0.99 0.30 5.32 5.24 2.71
1.04 0.25 2.01
2091 20.81 1.26 0.60
2142 21.19 1.62
2217 21.73 4.09 1.67
4.09 0.95 5.(MT/pa.11
2.88 0.95 3.57
0.00 1.97 0.96 0.03.44 0.82 0.87 1.00 0.73 0.18 5.96 0.38
1.17 5.92 1.00 1.88
3.00 1.79 1.22 5.58 0.74
0.10 2.78 1.2009 0.80 1.66
4.31 1.) Net Sales Qty.43 4.30 1.95 2.01
1.02 0.92 0.95 1.29 0.64 1.82 1.25 1.91 0.34
Balance Sheet: (Rs.95 2.12 1.15 1.34 0.23 1.52
1.51 2.64 0.07 2.27 1.95 0.88 1.40
0.77 0.95 4.33 1.29 2.49
2268 22.05 0. In crores)
Sources of funds Share Capital Reserves and Surplus Secured Loans : short term CC : long term TL 31.23
2016 19.66 1.81
3.32 2. (approx) (MT) Net Sales (Value) (Export) Operating profit Profit before tax PBT/Net sales (%) Profit after tax Cash accruals PBDIT Paid up capital Tangible net worth Adjusted TNW TOL/TNW TOL/Adjusted TNW Current ratio
0.00 0.50 5.23
31.Unsecured Loans Deferred Tax Liability Total Application of Funds Fixed Assets (Gross Block) Less Depreciation Net Block Capital Work in Progress Investments Inventories Sundry debtors Cash & bank balances Loans & advances to suppliers of Raw material / spares Advance tax ( Less : Current liabilities ) (Less : Provisions ) Net Current Assets Misc.95 -0.03 6.69 1.80
2.23 0.37 2. in Equity / Premium +/.29 0.99 2.03.37 2. Expenditure (To the extent not written off or adjusted ) Non-Current Assets/ Deposits Total
0.15 0.Adj.12 0.03 5. of prior year exp.36
31.2009 0.73 1.14 0.Change in Int.67 4.03.10 0.99
0. Assets +/.98 2.40 0.23 0.13 2.31 3.2010 1.01 1. .67 0.67 0.50 6.01 0.2011 2.85 0.15 0.03.79
Movement in TNW: Movement in TNW Opening TNW + PAT + Inc.30 1.Dividend payment Closing in TNW Projected 31.
01 0.Bank Income Analysis (Rs.34 4.03 0.33 Projection 31.54 2.2009 0.50 1.14 0.27 0.03.03.64:1 -
Liquidity TOL/TNW TOL/Adj.03:1 0.11 2. TL Int.15:1 -
Company's level as on 31.2009 @ 1.52 2.01:1 1.57
Deviations in Loan Policy:
Indicative Min/Max level as per loan policy
Company's level as on 31. in crores)
From WC Int.29 0.03.00 1.33 3.54 1.16 0.75 2:1 -
. TNW Average gross DSCR (TL) Debt / equity Debt/Quasi equity Any others
1. LC BG Bill Others loan processing Total Projection 31.80 2.2010 0.64 2.2010 1.03.
2007 at Kadi.2007 No Wilful defaulters’ list dated 31.09.2007 No ECGC caution list No Warning signals / Major irregularities in Credit audit: inspection report : Other audit reports : Adverse observations in Balance sheet Adverse observations in Auditors report Any NPAs among associate concerns Not applicable new unit Not applicable new unit Nil. The partnership was constituted for manufacturing and selling of HDPP woven sacks to be manufactured from HDPP granules. The brief background of the partners is as follows :
. directors. None
About unit and the promoters:
AKSHAT POLYMERS (AP) has been established as a partnership firm on 19th November. The firm consists of total six partners.Whether names of promoters.12. company. group concerns figure in : RBI defaulters’ list dated 30.
Kadi who are engaged in similar activity.M/s Umiya Polymers
Sri Prahaladbhai Hargovandas Patel is the main partner in M/s Umiya Polymers with 30 share. He will be looking after general administration and accounts of the firm. Sri Dharamsinhbhai is a partner in the local unit M/s Ajay Ginning Industries. and has 10 years of experience in accounting. He is also partner in M/s Shiv Shakti Steel. Kadi and has been inducted in the partnership as a investment partner. Sri Prahaladbhai is SSC and have 10 years of experience as Production Manager in Asia Woven Sacks Ltd. Shri Natvarlal Patel is a B.
Sri Amrutbhai Laljibhai Desai
Sri Desai is SSC and have 15 years of experience as Production Manager in reputed Gopala Polyplast Ltd.. Santej. He had good contacts in the market and will look after production department & raw material purchases.Com. Kadi Sri Kanjibhai is a farmer by profession and sleeping partner. Sri Gunvantbhai also is a partner in M/s Ajay ginning Industires.
Year ending 2008-09 2009-10 2010-11 2011-12
Shri Dharamsingbhai Lallubhai Desai Shri Kanjibhai Malibhai Desai Shri Gunvantbhai Ambaramdas Patel
35 44 42
Shri Natvarlal Mohanlal Patel
The overall quality of the management is considered satisfactory.. M/s Umiya Polymers are engaged in plastic waste recycling at Kadi.in crores)
2012-13 2013-14 Total
11 0.16 0.14 0.09 0.26 8.45 3.26 0.34 0.37 0.50 0.27 0.10 46.16 0.10 0.31st March Net Sales Net Profit Cash Accruals Interest on TLs Sub Total (A) Total repayment Interest on TL Sub Total (B) DSCR (Gross) Net DSCR Average Gross DSCR Average Net DSCR
9.11 9.10 2.65 3.15 0.10 98.97 7.29 0.82 0.36 45.10
22.31 0.14 0.55
.03 2.39 17.00 0.66 0.77 0.73
21.03 18.53 2.40 0.10 10.40 0.31 0.00 0.01 2.47 0.06 0.16 0.13 0.55 0.22 1.54 3.10 10.12 0.34 17.84 0.16 1.06 18.62 2.33 1.32 1. Admin.73 8.27 31-Mar-10 31-Mar-11 30-Mar-12 31-Mar-13 31-Mar-14 80% 83% 85% 88% 90% 19.17 0.75
6.00 0.00 0.09 0.05 0.00 0.13 2.16 0.00 0.74 0.22 0.23 0.40 0.13 0.82 1.24 0.87 1.04 2.40 46.20 0.05 1.15 0.04 2.40 0.02 2.42 0.26 0.78 1.51 2.97 2.15 0.34 0.27 1.11 9.29 0.40 0.88 1.36 0. & General Expenses Interest Expenses Depreciation Total Fixed Cost ( C) Contribution (D=A-B) Contribution ratio (E=D/A) BE sales (F=C/E) BE sales as % of Net Sales
17.17 0.12 9.29 0.00 0.91 0.82 22.36 0.82 0.35 0.16 0.90 0.22 0.29
19.56 0.32 0.97
Break-even and sensitivity analysis and whether acceptable: (Rs.13 0.27 0.00 0.04 19.18 0.58 0.28
19.44 1. Stock Changes Total Variable Cost(B) Fixed Costs Direct Labour Selling.48 0.30 1.59 0.34 0.11 1.17 46.43 0.38
Break even analysis Capacity Utilization Net Sales (A) Variable costs Raw material Consumable spares Power and Fuel Other operating Exp.11 0.40 0.04 3.35 0.37 1.27 43. in crores)
31/03/09 70% 9.53 0.56 0.95
18.16 5.04 20.10 9.53 0.34 2.86 0.09 0.67 2.56 2.77 0.11 2.00 0.13 0.79 1.37 0.37 0.08 0.10 0.58 21.48
Raw material – The major raw material for this plant is HDPP in the form of granules.52 2.92 2.19 6.Interfirm Comparison: (To be given only where data from comparable units is available.16
1.98 4. Akshat Polymers 4. Singhal Industries Pvt.00 2008 22.53 3.50 7.11
1.) (Amt in Cr) Name of Company FBL NFBL Year Sales PBT / Sales % Ahmedabad Packaging Industries Ltd. Ltd Asia Woven Sacks Pvt.20
23.70 -2010 15.14 6.77 5.44 1.90
1. This raw material is available locally by sales & distribution network of the major suppliers as under: • • • • • • Reliance Industries Limited Nand Agencies Labdhi International Hadlia petrochemicals Ltd. Sharada Polymers IPCL
TOL / TNW
1.25 -2010 19. Ltd.
As per ICRA report. grading and research services (2006) Flexible packaging sector is expected to grow at the rate of 12.The raw materials are purchased from the suppliers against the advance payment only and cash discounts are offered resulting in the increase n profitability. The promoters have sufficient experience in the line of activity.40%. etc. fertilizer.
Analysis:• • • The firm is into manufacturing of HDPP woven sacks which are widely used as packaging material in cement. The promoters had already made negotiations of the some of the industries as detailed under for selling the HDPP woven sacks: • GUJCOMASOL
. Any variation in the cost of raw material is proposed to be passed on to the finished products and will not affect the profitability.
The promoters are having experience of more than 15 years in the line of the activity. The company’s borrower rating is SB-6 based on projected financials as on 31. The affairs of the firm are expected to be managed on professional lines based on their past experience.2. 107
. Firm:. Average security margin of 48%.03.
Case Study 2
• • •
• • • • • • • • • • •
Sanghi cement Ambuja cement Various grain & Food Export Unit of Gujarat
The orders worth Rs.50 crores is expected to be finalized by end of Agust.54.2010 (the first full year of operations). 2008 and before commissioning of the plant as advised.Partnership
* Shri Harisinghbhai Lavjibhai Chaudhari. The short and medium term outlook for the industry is stable Availability of collateral security reflected in collateral coverage of 50. The company has adequate management skills and production/marketing infrastructure in place to achieve the projected trajectory. The conduct of accounts of associate with the existing bankers has been satisfactory.Janak Transport Co. Details of case study
Company:. There is steady demand for the product. Gross average DSCR of 2.566%. Projected financials are in line with the financials of the some of the unit in similar line of activity and production level.
Office:. * Shri Pratapbhai Lavjibhai Chaudhari. * Shri Vinodkumar Lavjibhai Chaudhari.C& I Date of Incorporation:.* Shri Jesangbhai Lavjibhai Chaudhari.
. As the company has a good repo with ONGC.09. Pashabhai Petrol Pump.Multiple Banking Arrangement Regd.
Janak Transport Co.Transport Activity Segment:.Opp. is a partnership firm established in 1982 for carrying a transport business.16 years as a current A/C holder Banking arrangement:. Highway. & Admin.&
* Shri Janakkumar Jesangbhai Chaudhari Industry:. Simandhar Flat. the ONGC outlook of the business is considered positive.03. As the company is in this business since incorporation & the unit has good contracts with ONGC since last 26 years so it has a good repo with ONGC. Mehsana.82 Banking with SBI since:. Nr.
Rs. 2011 898. Fixed hire charges/ taxi/ month: Rs. 2010 898.06
.The firm has approached for term loan of Rs.69 Proj.82 234.08 Proj. Brief of Contract: (1). Duration of contract = 3 Years Proposed Credit Requirement: Fund Based = Rs. 2008 546. 2013 898.65 326. 2012 898.78 149. 3.32 Proj.24 Proj. 2009 713. in lacs) Aud.65 404. 29150 (with fixed 3000 Km run/ month & 12 hours duty/ day) (2).92 109 Esti.65 182. The total project cost is estimated to be Rs.44 lacs.64 Aud.65 425. 295 lacs
Performance Details a) PERFORMANCE AND FINANCIAL INDICATORS: (Rs. 295 lacs to finance the purchase of MahindraBolero.65 374.57 (3). Additional/ km charges beyond 3000 km. 363. 31st March Net Sales Operating Profit (after 2007 501.
42 1.2008 22.31 92.40
31.15 22.91 151.22 12.99 113.3
.57 1.04 5.04 2.53
52.47 3.57 256.87 386.66 143.interest) PBT PBT/Sales (%) PAT Cash Accruals PBDIT Paid up Capital TNW Adjusted TNW TOL/TNW TOL/Adjusted TNW Current Ratio Current Ratio (Excl.04 21.08 0.53 4.51 15.80 5.47 0.24 1.53 2.21 181.29 438.20 0.08 340.51 52.48 5.44 21.04 12.27 0.22 3.10 36.80 1.74 266.96 125.47
b) Synopsis of Balance Sheet :
Sources of funds Share Capital Reserves and Surplus Secured Loans : short term : long term Unsecured Loans Deferred Tax Liability Total Application of Funds Fixed Assets (Gross Block) Less Depreciation Net Block Capital Work in Progress Investments
39.62 10.96 200.47 13.04 427.34 2.72 340.56 14.57 340.10 181.01 91.25 150.36 203.97 143.71 5.87 39.48 113.93 92.27 6.80 361.20 103.83 151.56 12.10 256.56 22.62 233.18 323.66 226.48 181.20 256. TL instalments) NWC 100.97 22.15 2.01 2.51 212.00 113.21 173.04 2.14 349.56 22.96 16.05 54.57 2.48 129.03.10 2.22 1.25 247.2007 21.48 3.49 125.20 39.01 1.04 0.08 427.15 2.41 22.80 12.47 224.92 166.57 102.66 100.47 6.90 0.03.90 40.25 1.04 21.
59 92.04 2.04
11.58 109.66 78.21 21.15
10.55 22.49 136.51
2013 340.00 427.56 113.96
60.00 256.00 340.70 48.93
134.74 1.10 125.90 10.08 151. Expenditure (To the extent not written off or adjusted ) Total
c) Movement in TNW 2007 2008 21./Subtract change in intangible assets Adjust prior year expenses Deduct Dividend Payment /Withdrawals
6.20 8.48 92.40
65.Inventories (Movable Assets) Sundry debtors Cash & bank balances Loans & advances to subsidiaries and group companies Loans & advances to others ( Less : Current liabilities ) (Less : Provisions ) Net Current Assets Misc.63 1.48
Add.03 134. in lacs)
2009 22.57 113.22 2.23
50.61 11.48 68.47
110. Increase in equity / premium Add.00 181.
00 363.57 lacs RTO : Rs.44
Remarks on Cost of project & Means of finance (in brief):
Each vehicle shall cost Rs.44
68. Project / Purpose: To purchase 59 new Mahindra Bolero under tie-up arrangement with
Cost MAHINDRA Bolero DI-2WD Insurance RTO Tax WC Margin Total
328.Appraisal Memorandum for term loan:
Circle: Ahmedabad Branch: Mehsana Company: Janak Transport Company(JTC) Term Loan : a) b) ONGC.63 15. 6.16 lacs as per details given below: Basic Price: Rs. 5.34 19. 0.00 lacs under the Transport Plus Scheme.33 lacs
. c) d) Appraised by: Inhouse examined by the Branch and found to be economically viable Cost of Project & Means of finance: Means Equity : Proposal: Term Loan of Rs.295.
Insurance : Rs. 0.26 lacs The cost mentioned above is as per the quotation submitted by Shrijee Motors, Mehsana. The firm is required to purchase 59 Mahindra Bolero for this purpose. Total cost of vehicle including the insurance and R.T.O. is Rs.363.44 lacs. The project is proposed to be financed by way of medium term loan of Rs.295.00 lacs and firm shall raise capital of Rs. 68.44 lacs as a margin. Break-even and sensitivity analysis and whether acceptable:
Break even analysis Net Sales (A) Variable costs Power and Fuel Other operating Exp. Total Variable Cost(B) Fixed Costs Direct Labour Selling, Admin. & General Expenses Interest Expenses Depreciation Total Fixed Cost ( C) Contribution (D=A-B) Contribution ratio (E=D/A) BE sales (F=C/E) BE sales as % of Net Sales Fixed cost with out depriciation G Contribution (H=A-B) Contribution ratio (I=D/A) Cash BE sales (J=G/I) CASHBE sales as % of Net Sales
31/03/09 713.82 223.76 44.89 268.65 72.40 8.50 20.76 106.77 208.43 445.17 0.62 336.18 47.10 101.66 445.17 0.62 163.97 22.97
31/03/10 898.65 253.68 47.39 301.07 85.52 9.50 33.25 141.12 269.39 597.58 0.66 408.17 45.42 128.27 597.58 0.66 194.35 21.63
31/03/11 898.65 253.68 48.89 302.57 87.52 10.50 22.96 98.78 219.76 596.08 0.66 332.97 37.05 120.98 596.08 0.66 183.30 20.40
31/03/12 898.65 253.68 50.89 304.57 90.72 11.50 13.54 69.15 184.91 594.08 0.66 280.17 31.18 115.76 594.08 0.66 175.39 19.52
31/03/13 898.65 253.68 55.98 309.66 94.07 12.50 3.36 48.40 158.33 588.99 0.66 239.89 26.69 109.93 588.99 0.66 166.56 18.53
Year ending 31st March Capacity utilization % Sales
2009 100% 713.82
2010 100% 898.65
2011 100% 898.65
2012 100% 898.65
2013 100% 898.65
Net Profit Depreciation Cash Accruals Interest TOTAL TL / DPG repayments Interest TOTAL Gross DSCR Net DSCR Average Gross DSCR Average Net DSCR
22.48 106.77 129.25 20.76 150.01 83.75 20.76 104.51 1.44 1.54 2.02 2.23
92.62 141.12 233.74 33.25 266.99 132.92 33.25 166.17 1.61 1.76
125.47 98.78 224.25 22.96 247.21 94.58 22.96 117.54 2.10 2.37
143.51 69.15 212.66 13.54 226.20 93.85 13.54 107.39 2.11 2.27
151.96 48.40 200.36 3.36 203.72 43.02 3.36 46.38 4.39 4.66
536.04 464.22 1000.26 93.87 1094.13 448.12 93.87 541.99
Deviations in Loan Policy/ Scheme:
Parameters Indicative Min/Max level as per Liquidity TOL/TNW Average gross DSCR (TL) Promoters contribution (under tie-up) profits in the last two Scheme Min. 1.33 Max. 3.00 Min. 2.00 Min. 10 % Min. Rs.3.00 lacs with rising trend Others Nil 1.42 12.80* 2.002 18.86% Actual profit Rs. year 2007-08* Nil Company's level as on 31/03/2008
1.20 lacs for
year 2006-07 and Rs.2.90 lacs for
Analysis:• • Janak Transport Company is an existing profit making unit The main chunk behind giving loan is that Janak Transport Company is doing contract with ONGC since incorporation • The promoters are having considerable experience as transport contractor with ONGC
The unit has got confirm order/ tie-up with ONGC A letter of authority from ONGC was received, that if Janak Transport Company will not make the payment than ONGC will directly make the payment to the bank
The promoters contribution to the project is 18.86% which is above the margin requirement
The current ratio is 1.42 that is satisfactory Profits in the last two years:-
Min. Rs. 3 lacs with rising trend Actual profit Rs. 1.20 lacs for year 2006-07 & Rs. 2.90 lacs for the 2007-08 If the partners remuneration & interest is included, the profit for the year ended 31.03.07 & 31.03.08 is Rs. 4.81 lacs & Rs. 6.21 lacs • TOL/TNW should be max. 3 which is 12.80 here, as the co. has done multiple banking arrangement it has o/s loans with other banks also but the co. is regularly making the payment of loans of principal amount along with the interest so the loan is given. • Also the contract awarded is backed by guarantee from ONGC regarding direct payment of monthly bills to SBI. Hence, surety of repayment is assured. • The bank also checks commercial viability of the company & found that the DSCR for term loan is 2.02 which is considered satisfactory • Despite that the bank has also done B.E. analysis & found that the B.E. sales was 47.10% of net sales for this current year
CHAPTER 8 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
The net sales & PAT of the company is increasing year after year so overall profitability is good
The overall projected performance & financial of the unit are considered satisfactory.
salaries to employees and dividend to shareholders
Credit and 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
SBI loan policy contains various norms for sanction of different types of loans
These all norms does not apply to each & every case
SBI norms for providing loans are flexible & it may differ from case to case
Different appraisal scheme has been introduced by the bank to cater different industries such as:Doctor plus scheme for doctors Transport plus scheme for transport School. etc.•
Credit is core activity of the banks and important source of their earnings which go to pay interest to depositors. colleges and educational institutions Trader’s easy loan Warehouse receipt financing for commodity traders (agriculture related stock. cotton ginning.)
Bank’s main function is to lend funds/ provide finance but it appears that norms are taken as guidelines not as a decision making 117
A banker’s task is to identify/ assess the risk factors/ parameters and manage/ mitigate them on continuous basis
The CRA models adopted by the bank take into account all possible factors which go into appraising the risk associated with a loan
These have been categorized broadly into financial. even though loan was sanctioned due to some other strong parameters such as the unit has got confirm order. business. financial performance of the firm was poor. industrial. we found that in some cases. management risks & are rated separately
The assessment of financial risk involves appraisal of the financial strength of the borrower based on performance & financial indicators
After case study. the unit was an existing profit making unit and letter of authority was received for direct payment to the bank from ONGC which is public sector
. loan is sanctioned due to strong financial parameters
From the case study analysis it was also found that in some cases.
the lack of credible published information about their financial health. SIDBI and SSI Associations. especially with regard to the analysis of the SMEs' financial statements. evolving suitable risk models and close monitoring of accounts by the bank. educating the enterprises on the need for reliable financial data. Insufficient data on the SMEs. IBA. cost control. To enable the banks take more objective decisions. Problems faced by the Bank for SME lending and suggestions to overcome some of these problems: Banks are now better equipped to handle the varied needs of the SME sector due to better technology and risk management. This can be overcome by collection of authentic data on the SME segment. The information may be gathered from such stakeholders as suppliers and customers. There is a critical need to devote substantial resources to improving the skills and capabilities of banks' lending officers. Thus. where the lending partly bases its decision on proprietary information about the firm and its owner through a variety of contacts over time. who may give specific information about the owner of the firm or general information about the business environment in which it operates.RECOMMENDATIONS AND SUGGESTIONS
The problems faced by the bank and the suggestions given are with regards to increase credit flow the SMEs not only with respect to working capital finance but also project finance and asset finance. may be achieved by extending banking services to recognize SME clusters by adopting the 4-C approach: Customer focus. Another way of extending loans to the SMEs is the relationship-lending rule. the high vulnerability of small players in a liberalizing market and the inadequacy of risk management systems in banks are factors leading to higher NPAs and lower profitability than potential in SME lending. 119
. This would enable institutional funding to be channeled through homogenous recognized clusters. the Government plans to introduce a rating mechanism for designated industrial clusters. this may be designed jointly by CRISIL. Understanding the nature of the borrower's business and the cash-flow required is paramount to preventing the creation of NPAs. cross-selling and containing risk. it recommends.
mobile banking and card-based platforms for delivery of transaction-banking as well as credit products. SMEs look for convenience and simplicity in their banking requirements and banks should deliver these through an effective use of technology. Banks has to grant the loans for the establishment of business at a moderate rate of interest. Because of this. The Bank should keep on revising its Credit Policy which will help Bank’s effort to correct the course of the policies The Chairman and Managing Director/Executive Director should make modifications to the procedural guidelines required for implementation of the Credit Policy as they may become necessary from time to time on account of organizational needs. Bank should not issue entire amount of loan to agriculture sector at a time. and enhance the service element. SBI has to reduce the Interest Rate. the people can repay the loan amount to bank regularly and promptly.
. Bank needs to offer sophisticated products to the SMEs in a simplified manner. If the climatic conditions are good then they have to release remaining amount. They need to innovate their delivery platforms by using Internet banking. it should release the loan in installments.SMEs are increasingly using products such as derivatives to manage their forex flows. SBI has to entertain indirect sectors of agriculture so that it can have more number of borrowers for the Bank.
Morover. During the study We learnt how the theoretical financial analysis aspects are used in practice during the working capital finance assessment. and management risks & are rated separately. It includes phase-wise analysis which consists of 5 phases:
. credit appraisal system is not only looking for financial wealth.CHAPTER 9 CONCLUSION
It is boom time for those working in the financial sector. in SBI. industrial. our conclusion was such that. Usually. Finance management is the backbone of any organizations and hence yields a number of job options ranging from strategic financial planning to sales. But. technical as well as legal know-how. these have been categorized broadly into financial. There are opportunities galore in finance and more will come in the next few years so finance is exciting is exciting both as a subject and a career option with the greater expansion of the global economy. SBI load policy contains various norms for sanction of different types of loans. business. We have realized during my project that a credit analyst must own multi-disciplinary talents like financial. it is seen that credit appraisal is basically done on the basis of fundamental soundness. The CRA models adopted by the bank take into account all possible factors. The credit appraisal for working capital finance system has been devised in a systematic way. after different types of case studies. which go into appraising the risk associated with a loan. SBI norms for providing loans are flexible & it may differ from case to case. Other strong parameters also play an important role in analyzing creditworthiness of the firm. The study at SBI gave a vast learning experience to us and has helped to enhance our knowledge. There are clear guidelines on how the credit analyst or lending officer has to analyze a loan proposal. There all norms does not apply to each & every case.
is extremely important. efficiency of the unit.1. It considers important parameters like profitability. experience. The SBI was the first to formulate a Credit Risk Assessment model. industry. the viability of the project from every aspect is analyzed. long term plans also plays crucial role in increasing chances of getting project approved for loan. as well as type of business. historical / industry comparisons etc… which were not factored in other models. past records. Financial statement analysis 2. In all. Credit risk assessment 4. Working capital and its assessment techniques 3. projected data and estimates. It is equally efficient as the SIDBI’s CART (Credit Assessment and Rating Tool) model. Documentation 5. goals. That is why Credit Risk Assessment system is an essential ingredient of the Credit Appraisal exercise.
. promoters. repayment capacity. Loan administration To ensure asset quality. proper risk assessment right at the beginning.
“Banking Finance” A Leading monthly of Banking and Finance Published by Sashi Publications
2) K. “Credit Management” Internal circular of SBI
“Credit and Banking” By: K.wikipedia.S.com www.bankersindia. C.com www.in
BOOKS: Vaidhyanathan. Nanda
1) Agarwal.com www..indianbankassociation. “Indian Bankers” Published by Indian Bank Association
.co.in www.Ramakrishnan. T. G. R.iibf..sbi.in www.rbi.co.org.BIBLIOGRAPHY