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Summer Project Report

On

Loan Appraisal

(18th May, 2011 -15th July, 2011) Submitted in Partial Fulfilment for the Degree of Master of Finance and Control 2010-2012 (Delhi University, South Campus) By: Chirag Agrawal

ACKNOWLEDGMENT
I was fortunate enough to get an opportunity to work with overseas team in Bank of India New Delhi Overseas Branch. The successful completion of this project has been due to the invaluable help that I received from various quarters. First, I must acknowledge, Mr Atul Saxena HR Manager Bank of India for providing me this opportunity. My sincere gratitude to Mr H. S. Matta who helped me to gather information and know about the intricacies involved in carrying out loan appraisal business. Their immense banking experience especially in the field of loan appraisal gave me an insight into the working of overseas department. Special thanks to rest of the members of overseas department who always helped me in clarifying my doubts. I am highly indebted to my project guide Mr Arjun Kumar of advances department under whose guidance I was able to complete my internship report.

Chirag Agrawal Batch of 2012 Master of Finance and Control Delhi University

Contents
1) Executive Summary 2) Introduction 2.1 Company profile 2.2 Company products 3) Loan Appraisal process at Bank of India 3.1 Fund Based limit 3.2 Non Fund based limit 3.3 Credit Rating Models 3.4 Company Policies 3.5 Types of Risks 3.6 Risk Mitigation 3.7 Drawbacks in the Current Model 3.8 Learning from the project 4) Case Discussion

EXECUTIVE SUMMARY
This project intends to give an in dept knowledge about the procedure followed by the banks for credit appraisal before sanctioning loans to MSME sectors. A report is prepared for each client based on their financials provided by them to the bank named proposal report. A proposal report is explained in this report for better understanding of credit appraisal process. 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. There is no guarantee to ensure a loan does not run into problems; however if a proper credit evaluation techniques and monitoring are implemented then naturally the loan loss probability / problems will be minimized, which should be the objective of every lending officer. Lastly loan is a revenue department for any bank and hence becomes very critical to verify all the details before granting loans to its customers. According to Basel 3 norms, banking sector has to increase its capital adequacy ratio (CAR) and has to reduce its NPAs to mitigate the risks. In this light, loan appraisal becomes far more important for banks to run their business and fulfilling norms.

2) INTRODUCTION
2.1 Bank of India
Bank of India is one of the largest public sector banks in India. Bank of India was founded in September 1906 as a private entity. This bank was nationalised in July 1969. The Bank is now engaged in the business of banking. The business of banking is accepting of deposits for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawal by cheque, draft and order or otherwise. The shares of this bank are listed in both NSE as well as BSE. The Bank came out with its first public issue in 1997 and then with Qualified Institutions Placement in February 2008. Total number of shareholders as on 30/09/2009 is 2,15,790. The Bank has sizable presence abroad, with a network of 29 branches. Bank of India is the first Indian Bank to open a branch outside the country, at London, in 1946.

2.2 Product Offerings


Bank accepts deposits and uses these deposits for the purpose of lending or investment. Thus the product offering of the bank are related to the deposits and advances. Deposits can take the form of one of the following: Saving Banks Current Deposits Term Deposit Tax Saving Deposits Deposit Saving Schemes for NRI Entire credit is identified into 5 SBUs headed by General Manager for focused attention Large Corporate credit (Rs. 25 crore and above) Mid-Corporate Credit (Rs.5-25 crore) SME credit (upto Rs. 5 crore) Retail credit Agriculture Credit To cater to these different segments, the bank has established specialized branches to excel in those particular segments. The specialized branches are as follows C & P Branch: Loan against fixed deposit and other paper securities

Retail Hub: For retail loan Housing and Personal Finance SME Branches: Caters SME segment along with other services Agri-HI-Tech Branches: Credit related to agricultural activities Profit Centre Branches: Trade finance, SME, working capital loan, term loan Large Corporate: Large volume asset portfolios assessed Limits different for different sectors (2 branches have been established)

3) Loan Appraisal process at Bank of India


Bank of India has to first calculate the working capital requirement to provide the export credit facility. First the Maximum Permissible Banking Finance and non-fund based limit is calculated and one of the models of credit appraisal is applied depending upon the credit limit.

3.1 Fund Based Limit


Any customer who wants export credit facility has to submit CMA data which is a document consisting of last 2 years audited/provisional financials and projected/estimated financials of next 2 years for this company. As there is high possibility that the firm will not portray the true picture, the bank compares this data with industry average and evaluates this document. Let us take one example to understand how to calculate the MPBF. ABC Jewellery needs export credit facility from BOI. The summary of calculation of MPBF is shown below (Rs. in Crores) Previous Year (Actual) 31.03.09 (a) Total Current Assets (b) Other Current Liabilities (c) Working Capital Gap (a - b) (d) Minimum stipulated Net Working Capital (25% of "a" Excl. Exp. Rec.) (e) Actual/Projected Net Working Capital 115.29 133.01 144.28 350.01 101.00 249.01 53.31 Current Year (Estimates) 31.03.10 426.81 63.80 363.01 56.94 Next Year (Projections) 31.03.11 441.54 67.26 374.28 62.54

( f) (c - d) (g) (c - e) (h) MPBF (lower of "f" and "g") (i) Excess Borrowings, if any

195.71 133.72 133.72 ---------Table 4.2: MPBF calculation

306.07 230.00 230.00 ---------

311.74 230.00 230.00 --------

MPBF is lower out of two given below o o Working Capital Gap Minimum Stipulated Net Working Capital Working Capital Gap Actual/Projected Net Working Capital

3.2 Non- Fund Based Limit


In addition to Fund based facility, Bank of India also provides the Non-Fund based facility to its customers. This non-fund based facility is in form of guarantee/LC made by the bank in favour of the borrowers customers. As there is risk involved in this transaction, the bank asks for suitable collaterals. Suppose the XYZ Jewellery requires non-fund based credit facility for importing the raw materials. The raw material required for this company is Rs. 31, 30,000. The XYZ Jewellery requires letter of credit for this raw material. LC is valid for 3 months, then LC turnover would be (12/3=) 4. Hence non fund based limit for firm XYZ comes out to be (3130000/4=) Rs. 7, 82,500

3.3 Credit Rating Models in BOI


A credit rating estimates the credit worthiness of an individual, corporation, or even a country. It is an evaluation made by credit bureaus of a borrowers overall credit history. A credit rating is also known as an evaluation of a potential borrowers ability to repay debt, prepared by a credit bureau. Credit Ratings are calculated from financial history and current assets and liabilities. Typically, a credit rating tells a lender or investor the probability of the subject being able to pay back a loan. At present two credit rating models are used for credit appraisal in BOI. The internal rating model is used for if the aggregate credit limit is below Rs. 5 crore else the Large Corporate Model developed by ICRA is used. Both these models lay emphasis on non-financial parameters. In these ratings only 25% weight age is given to financials of the corporate customer. The financial parameters used by Bank of India are

o o o o o

net worth to total liabilities, working capital to total assets, retained earnings to total assets, EBIT to total assets sales to total assets

It uses both quantitative and qualitative parameters. Quantitative parameters include Financial Ratios and Parameters and qualitative parameters include management and sector specific parameters.

3.4 Bank policies


The bank has a credit policy of its own. This credit policy has been circulated in all branches. This policy stresses to avoid long term exposure. Certain steps taken by the bank to reduce risks are o Fixing exposure limits for single and group borrowers (15 % for single borrower and 40% for group borrowers, it is worth mentioning that these exposure limits are not fixed limits and it is up to the discretion of bank to select these limits. The BOI uses 15% and 40% as its single borrower and group borrower limit respectively. ) o Linking ROI with Rating Grades- the BOI sets its interest rate pricing based on credit rating (adding margin to minimum lending rate set by bank, i.e., Benchmark Prime Lending Rate, BPLR). Form 1st April 2009, the BOI changed its BPLR from 12.5% to 12%. Following table shows the interest rate pricing corresponding to each grade followed in BOI (for commercial advances exceeding Rs. 10 Lacs in large and mid corporate SBUs). Rating Model Prime AAA AA A B& Others LC1 to LC2 LC1 to LC2 LC3 to LC4 LC5 & LC6 LC7 to LC10 Spread % over BPLR Nil 1 2 3.25 3.5 Revised w.e.f. 1 April 2009 12.00% 13.00% 14.00% 15.25% 15.50%

Table 4.1: Interest Rates As evident from the above table, higher the risks higher are the interest rates charged. o Industry wise exposure limits- Different sectors have different sensitivity to market changes (also referred as beta- coefficient). Risks can be reduced by making a portfolio of sectors to which bank can extend its loan facility. Loan facility to each sector is restricted by setting exposure limits. These exposure limits ensure that banks are not highly dependent on only one sector and hence can diversify their risks.

3.5 Types of Risk


The various types of risks in the banking business are o o o o Credit Risk Market Risk Liquidity Risk Operational Risk

The credit risk is of two types; Default risk and Country risk. Market risk takes the form of Interest Rate risk, Foreign-Exchange risk. Scope of operational risk is quite broad. It takes the form of Fraud risk, Communication risk, Documentation risk, Transaction risk and Compliance risk. Risk exposure of Bank of India is shown below.

Liquidity Risk

Credit Risk

Market Risk

Fig. 5.1: Types of risks in Bank of India

3.5.1 Credit Risk


Credit risk is one of the important risks in the banking industry. It is defined as potential of bank borrower to fail to meet its obligations according to the agreed terms. Loans are the largest source of credit risk in bank. Credit Risk not only occurs in direct lending but also in course of issuing guarantees or letters of credit. The shortfall in payment is debited to the profit and loss statement. Loans and Advances form the major part of credit risk followed by Cheques Purchased, Bills of Exchange and Accured Interest. 3.5.1.1 Default Risk Default Risk is defined as the potential failure of the borrower to make promised payments; either partly or wholly. In event of default, a fraction of the obligation will normally be paid. This is known as recovery rate. 3.5.1.2 Country Risk Country Risk is type of credit risk which occurs due to constraints or restrictions imposed by a country. The reason for non-performance is external factors on which the borrower has no control. 3.5.2 Market Risk Market risk is the risk of adverse deviations of the mark-to-market value of the trading portfolio, due to market movements, during the period required to liquidate the transactions. This results from adverse movements in the level or volatility of market price of interest rate instruments, equities, commodities and currencies. Market Risk is also referred to as Price Risk. The Market risk appears both on the asset side as well as the liability side. Debentures, Borrowings, Investments and T-bills contribute to the market risk. 3.5.2.1 Forex Risk Forex risk is the risk that the bank may suffer losses as a result of adverse exchange rate movements during the period in which it has a open position, either spot or forward, or a combination of the two, in an individual foreign currency. 3.5.2.2 Interest Rate Risk Interest Rate Risk refers to potential impact on Net Income or the Net Interest Margin. It is the exposure of Banks financial condition to the adverse movements in interest rates. The impact of Interest Rate Risk can be seen on earnings of the bank or on the economic value of banks assets and liabilities.

3.5.3 Liquidity Risk Liquidity risk arises when long term assets are funded by short term liabilities. The short term liabilities are then subject to refinancing risk. Funding liquidity risk is defined as the inability to obtain funds to meet cash flow obligations. Deposits from banks and deposits from

customers form the liquidity risk in banking system. 3.5.4 Operational Risk Operational Risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. The scope of operational risk is quite broad. Compliance risk and Transactional risk form major part of Operational Risk. 3.5.4.1 Transactional Risk Transactional Risk occurs because of fraud both internal and external, failed business processes and the inability to maintain business continuity and manage information. 3.5.4.2 Compliance Risk The bank may suffer a loss because of its inability to comply with all the applicable laws, regulations, code of conduct and standards of good practice. Loss in case of such situations is because of compliance risk. This risk is also called integrity risk as banks reputation is linked to this risk.

3.6 Risk Mitigation


From the interest rate table, it is clear that the interest rate increases as the rating given to the firm by the bank decreases. Least interest rate is applied to the LC1, LC2 and AAA rated firm, maximum interest rate is applied to the LC7, LC8, LC9, LC10 and the firms below B and below rated firm. This industry requires credit mostly for working capital on a continuous basis. The borrower firms internal credit rating is arrived at by the bank. Every firm rated B and below are reviewed every six months. The following alternatives are used by Bank of India to mitigate risk o o o Pricing for additional risk as seen above Increased holding of capital to compensate for additional risk. Collateral security in addition to primary security is obtained which varies from case to case basis.

3.7 Drawbacks in the Current Model

As discussed above two models are used for credit appraisal. In both the models, the total score is calculated depending on financial as well as non-financial parameters. Even if the financial parameters are not good then the overall score of the firm can be good if it scores high in non-financial parameters. It is seen that more emphasis is given on the non-financial parameters.

3.8 Learning from the Project


This project gave me a tremendous learning experience. Some of the experiences are listed below o I read the credit policy of Bank of India. This helped me understand the various steps taken by the bank to serve such diverse group of customer base. Bank of India gives more emphasis on short term exposure. o This project helped me understand the risks in the banking business especially the risk associated with MSMEs.

4) Case Discussion

MEMORANDUM FOR SANCTION/APPROVAL OF ZONAL MANAGER Proposal No. Date Branch : 1. New Delhi Overseas Branch Zone : NDO/ADV/AK/26/ 29.3.2011 New Delhi

Name of Account

SHRI BALAJI EDUCATIONAL & CHARITABLE TRUST (SME Advance)

Admn. Office: Shri Balaji Polytechnic, Bubka Road, Radaur, Tehsil Jagadhari, District Yamuna Nagar, Haryana

College: Post Radaur, Tehsil Jagadhari, District Yamuna Nagar, Haryana

PAN No. AAHTS1861J

2.

Constitution

Public Charitable Trust registered under Indian Registration Act

3a

Business/Activity

To establish and run educational , professional , research and training institutions

3b 4.

BSR Occupation code.

80003 2007 5. Advance since: Sept 2008

Established in

6.

If the account is new , name of the earlier Banker : N.A. Existing Proposed*

7.

a) Borrower Risk Grade b) Adj Borr. Risk Grade c) Pricing Grade d) External Credit Rating

LC 3 LC 3 LC 3

LC 8 LC 8 LC 8

8.

Asset Code: (No./Description)

11 / Standard

* Scoring Sheet to be attached. 9. 10a. Group Chief Executive/ Promoter Directors 10b Management N.A. Mr. Sudarshan Kumar Mittal, Mr. Ravinder Kumar Mittal, President of the Trust Secretary of the Trust

Mr. Sudarshan Kumar Mittal (President) is the graduate (B.Com) having about 30 years of business experience in construction industry and since last three years he is associated with the trust. Mr. Ravinder Kumar Mittat (Secretary) looks after the day tot day affairs of the college. The secretary is assisted by Director and Principal, who are experienced professionals.

11 a Consortium

No

Leader / Share Main Banker/

NA

Our Share

NA

Other Banks/ Share Other Banks/

NA

Multiple Banking

No

We shall be sole banker

Our Share

NA

NA

Arrangements

Share

Share

PRESENT REFERENCE

12. 13.

Last Sanction / Review: GM/ZM/24.8.2009 Present Request: Annual review of Existing Term Loan on present drawing limit. No additional limit being proposed.

FACILITIES (Rs. in lacs)


Existing Proposed Inc. (+) / Dec.(-) in limits Pricing* ROI/ Commission Present Outstanding Date Over-dues **

14a .

Limits (with purpose)

Term Loan I

480.00

340.00

-140.00

6% over BR presently 15.50% p.a with monthly rests including tenor premium 6% over BR presently 15.00 % p.a with monthly rests including tenor premium

345.93

5.93

Term Loan II

400.00

350.00

-50.00

359.38

9.38

Working Capital (Fund Based) Non Based Fund

--

--

--

--

--

--

880.00 Total

690.00

-190.00

15.31

** Interest for the months of Jan and Feb 2011 is overdue. We are following up for recovery. We have received instalments for the quarter ended 31/1/22010. Base rate for LC 8 is 14.50 % plus term premium of less than 8 years is 1 % for non EMI.

Repayment of Term Loans A/c Term Loan Term Loan II Original Limit Rs.480.00 lacs Repayment schedule Repayable in 24 quarterly installments of Rs.20.00 lacs each commencing from June 2009. The interest will be serviced separately as and when applied during moratorium and thereafter. Repayable in 24 quarterly installments of Rs.16.67 lacs each commencing from June 2010. The interest will be serviced separately as and when applied during moratorium and thereafter.

Rs.400.00 lacs

PURPOSE

14b

Purpose

TL I: For construction of college building and hostel. TL II: For construction of second building block of the college and creation of other educational amenities.

15a

Security

Particulars

Date of valuation report

Value (our share) (Rs. in lacs) Present Proposed

Principal

1. Equitable Mortgage of freehold college land and building having total plotted area of 42 Kanals, 02 Marlas (i.e. 5.26 acres) situated at Bubka Road, Vill. & Post Radaur, Tehsil Jagadhari, District Yamuna Nagar , Haryana in the name of Shri Balaji Educational & Charitable Trust. Market value of Land has been assessed at Rs.184.00 lacs and that of building at Rs.497.00 lacs. Thus present market value is Rs.681.00 lacs.

04.02.2009 / 31.03.2011

1046.40

1046.40

As per estimates submitted by the trust & vetted by architect , total amount to be spent on construction of second building block is Rs.365.40 lacs . Thus eventual value of the property, upon completion of building would be Rs.1046.40 lacs. (Rs.681.00 lacs + Rs.365.40 lacs )

Title search verification carried out by Mr. V.P.S. Trehan, Advocate, Yamuna Nagar.(Banks panel advocate)

Valuation & Estimates report dated 04.02.2009 of M/s Sharma & Sinha Associates , approved valuer on the banks panel

2. Hypothecation furniture / fixture

of

equipments,

31.03.2010/

Total (a) (b) Collateral Nil

1191.73 -1191.73

1169.93 -1169.93

Total (Principal + Collateral) (a +b)

(Rs in lacs) 16 Partner/Guarantors' name Mr. Sudarshan Kumar Mittal s/o M.P. Mittal Mr. Ravinder Kumar Mittal s/o M.P. Mittal Mr. Banarsi Dass Gupta s/o Laxmi Narain Gupta Mr. N.K. Goel s/o Chandu Lal Goel (Since he is no more proposed to be released) Mr. Pradeep Kumar Goyal s/o Mr. N.K Goel (Proposed) Mr. Munish Mittal Sudarshan Kumar Mittal Mr. Vikas Goel Prakash Goel s/o

Assets 177.75

Liabilities 35.00

Net worth * 142.75

Basis

151.77

--

151.77

67.35

--

67.35

CBD 23 dated
154.75 -154.75 28.01.2010

151.50

--

151.50

29.45

--

29.45

s/o Jai

9.25

--

9.25

Excluding value of property / assets mortgaged to our Bank / other Banks / FIs. We are obtaining fresh CBD 23 from the guarantors.

CONDUCT OF ACCOUNT

17 a) b)

Conduct of the account : Satisfactory Cheques returned during the year under review for financial reasons : Nil LC devolved and BG invoked : NONE

18.

FINANCIAL POSITION
Audited Est. Audited Est. Est. Est. Est. Est. Est.

2009 a)

2010 400.00

2010 327.33

2011 480.00

2012 480.00

2013 480.00

2014 480.00

2015

2016 480.00

Trusts Capital :

250.32

480.00

b)

TNW (Excl. rev. reserve & Net of Intangible Assets) Investment in cos. Of which associated co/ subsidiaries Adjusted TNW Capital Employed* (total funds employed) Net Block Net sales : Domestic Exports Total

248.57

469.80

301.20

523.03

606.75

708.70

828.47

962.35

1106.28

c)

--

--

--

--

--

--

--

--

---

d) e)

248.57

469.80

301.20

523.03

606.75

708.70

828.47

962.35

1106.28

695.83

1143.13 1099.59 1074.74 1011.78

988.34

1025.95

997.16

1136.09

f) g)

827.60 104..66 -104.66 2.74 54.76 34.86 19.90 1.84 18.06 19.81 -1.75 (-)ve 34.77

1193.96 1242.06 1183.87 1185.46 399.96 -399.96 10.00 244.55 82.75 161.80 -161.80 72.55 89.25 6.83 112.34 199.37 -199.37 1.43 67.49 54.94 12.55 0.31 12.24 39.63 -24.38 (-)ve 52.62 425.70 -425.70 1.50 251.22 106.62 144.60 -144.60 75.39 69.21 6.43 62.55 429.66 -429.66 1.75 243.53 84.42 159.11 -159.11 75.39 83.72 8.27 64.99

1133.86 433.62 -433.62 2.00 241.55 64.21 177.34 -177.34 75.39 101.95 10.31 111.86

1058.47 437.58 -437.58 2.00 239.03 43.87 195.16 -195.16 75.39 119.77 11.67 146.77

983.08

907.70 437.58 -437.58 2.00 226.27 6.96 219.31 -219.31 75.39 143.92 12.66 335.60

437.58

-437.58 2.00 232.81 23.54

h) i) j) k)

Other Income EBIDTA / PBIDTA Interest Gross Profit / Loss (PBDT) Taxes Cash Accruals

209.27

l) m ) n) o) p)

--

209.27

Depreciation Net profit/loss Net profit/ Capital Employed (%) Current Assets

75.39 133.88

13.42

q)

196.03

r)

Current Liabilities RATIOS :

166.54

163.17

195.10

171.68

173.68

206.67

129.29

131.95

56.21

s) t)

Current ratio Debt/Equity

0.21

0.69

0.27

0.37

0.37

0.54

1.14

1.48

5.97

1.45 Quasi DER Total Term Liab./TNW Total Outside Liab./ TNW u) Profitability % PAT/Net Sales 1.80 1.43

2.01

1.25

0.86

0.61

0.34

0.15

0.05

2.65

1.05

0.66

0.34

0.20

0.004

NA

2.50

1.78

3.30

1.39

0.95

0.65

0.38

0.19

0.08

(-)ve 1.52

21.77 1.50

(-)ve 0.76

16.25 0.85

19.48 1.05

23.51 1.15

27.37 1.25

30.59

32.88 3.08

v)

DSCR

1.37

Average DSCR for remaining period is 1.35 w) x) Interest Coverage Inventory + Receivables/ Sales 1.57 -2.96 -1.23
--

2.36 --

2.88 --

3.76
--

5.45
--

9.88
--

32.51
--

Details of unaudited quarterly results (cumulative): (Rs. in lacs) Current Year Estimates Upto June 2008 Current Year Net Sales EBIDTA Net Profit Upto Q1/H1/Q3 of previous Year

Share price : Rs.

as on

Not applicable /Rs. - Source:

(52 week's High/Low : Rs.

19. COMMENTS IN BRIEF ON FINANCIAL POSITION (including cash flow and Contingent Liabilities Annexed to the company's balance sheet ).

19.1 CAPITAL/CORPUS FUND /TNW (a) As per audited balance sheet as on 31.03.2009, the capital fund/Corpus fund aggregates to Rs. 250.32 lacs. The same has increased to Rs. 327.33 lacs as on 31.03.2010 as per the audited balance sheet against the estimates of Rs. 400.00 lacs. The trust has estimated/ projected capital fund at same level of Rs. 480.00 lacs as at 31.03.2011 & 31.03.2012 with infusion of additional corpus fund. TNW of the trust was Rs. 248.57 lacs as on 31.03.2009 and the same has increased to Rs. 301.20 lacs as at 31.03.2010 on account of infusion of the corpus fund against the estimates of Rs. 469.80 lacs. Trust has incurred loss of Rs. 24.38 lacs during the financial year ended as on 31.03.2010. Therefore the TNW of the trust increased only to Rs. 301.20 lacs despite the infusion of corpus fund of Rs. 77.01 lacs during the year 2009-10. Reconciliation of TNW is as follow: Rs. In lacs

Sr. No. 1. 2. 3. 4.

Particulars TNW as on 31.03.2009 Add: Profit/ (loss) during the year Add: Infusion of Corpus fund TNW as on 31.03.2010

Amounts 248.57 (24.38) 77.01 301.20

The same is estimated / Projected to Rs. 523.03 lacs / Rs. 606.75 lacs on account of the infusion of corpus fund and retention of profit in the business. The General Reserves are increasing on year to year basis, due to retention of surplus of income over expenditure. We may accept the position.

9.2 NET SALES/ FEE RECEIPTS (b) The trust has established an engineering polytechnic institution at Bubka Road, Village & Post Radaur, Tehsil Jagadhari, District. Yamuna Nagar. The number of students has been increasing with the institution gaining name in the market. At present they have 900 students. (b) The admissions in the polytechnic colleges are centralized and 75% of the admissions are done by Department of Technical Education, Haryana through central counseling with the balance 25% being the management quota. This trend is reinforced by the fact that during the first year, Session 2008-09, the polytechnic had admitted total of 308 students against the total student capacity of 300 and that figure has cumulated to 900 during the current year. During the last year 2009-10, trust has received sales of Rs. 199.37 lacs against the estimates of Rs. 399.96 lacs. Trust has not achieved the estimated sales as the increase in number of students was not approved in time by the government department. Besides, the government delayed the payment of subsidy payable for reserved seats. Trust has estimated/ projected gross receipt of Rs. 425.70 lacs/ Rs. 429.66 lacs for the financial year 2010-11 and 2011-12. Keeping in view of

accumulated no of students in first two years of its operation and in current year we may accept the position. 19.3 OTHER INCOME

(c) Other income is interest on FDRs. Trust has booked other income of Rs. 1.43 lacs during last year against the estimates of Rs. 10.00 lacs due to the tight cash flow. Trust has estimated other income of Rs. 1.50 lacs. We may accept the same. 19.4 PROFITS/ PROFITABILITY

(d) The Polytechnic had been assigned highest rating by the State Board of Technical Education, Govt of Haryana, Chandigarh while assessing the polytechnic infrastructure and accordingly the polytechnic has been allotted higher annual tuition fee by the State Board of Technical Education, Haryana. Trust has incurred losses during the first two year of its operation due to the lower gross receipt (fee). Having regard to initial year of operations we may accept the position. Trust has estimated profit of Rs. 69.21 lacs and projected Rs. 83.72 lacs for the year ended as on 31.03.2011 and 31.03.2012. Trust has not incurred any cash losses since first year of its operation. We may accept. 19.5 None 19.6 CUREENT RATIO INVESTMENTS

(e) In case of educational institutions, the current liability mainly comprises of Term Loan instalment payable & the advance fee collected by it from the students to be appropriated in the P&L in subsequent months. In the present case more than 75% of the total current liability comprises term loan instalments due within one year. If we exclude Term Loan instalments payable during the year from current liabilities, current ratio as at 31.03.2010 will increased to 1.08 from 0.27. Current ratio shows an increasing trend due to the retention of profits. The current ratio in the initial years is low mainly due to term loan repayment during the year. It is pertinent to note that in the education industry, the institutes receive fees for the entire academic year in advance and therefore working capital is not required, hence the ratio is considered reasonable. We are seeking approval for deviation.
19.7 DEBT EQUITY RATIO

(e) The debt equity ratio is at 3.30 as on 31.3.2010, as per audited balance sheet. The same is estimated at 1.39 as on 31.03.2011, and is projected at 0.95 as on 31.03.2012. DER is reasonable and within the acceptable bench mark of the bank. We may accept

19.8 DSCR / ISCR DSCR The DSCR was observed at 0.76 during the year ended 31/3/2010. The estimated DSCR for the year ending 31/3/2011 is 0.85. Average DSCR for the remaining prepayment period works out to 1.35. In the estimates considered earlier, the trust had made assumptions that they will be able to take 25% of the seats from the open market under management quota where in they get higher fees. However during

the academic year 2010-11, it is observed that there was not enough interest shown by students in management quota, Hence the trust had to take all the students through the normal channel. Hence based on this assumption they have revised the CMA and income statements. This has resulted in reduced level of DSCR. We would like to mention that position will keeps changed depending on interest shown by the students. We are seeking approval for deviations. We may accept.
ISCR

The ISCR was observed at 1.23 during the year ended 31.3.2010 lower than the prescribed level. It is estimated at 2.36 for the year ending 31.3.2011. We may accept. We are seeking approval for deviation. 19.9 NET BLOCK

The trust purchased land admeasuring 42 Kanal & 2 Marla (i.e. 5.26 acres) at Vill. & Post Radaur, Tehsil Jagadhari , District Yamuna Nagar , Haryana and constructed an Engineering Polytechnic after obtaining all the necessary approvals from concerned authorities including AICTE/ State Board of Technical Education, Haryana. . The net block is consisting of land and building and other fixtures. The value of net block, as at 31.3.2010 is Rs.1242.06 lacs. No major addition is proposed.

19.10 CONTINGENT LIABILITIES: None 19.11 STATUTORY AUDITORS REMARKS/ QUALIFICATIONS: None To sum up, overall estimated financial position of the trust appears to be under strain due to delay in receipt of subsidy from the government. However, the trust has been meeting its liabilities.
20 INTER COMPANY COMPARISON Name of Co. Year Sales PBT/Sales (Rs. In lacs) TOL/TNW C.R.

21

FAVOURABLE FACTORS Vast experience of members of governing body Value of securities (Principal + Collateral ) is 1.51 times of proposed exposure (as on 31.03.2010) Ever increasing scope for technical education institutes. RISK FACTORS AND MITIGANTS

Availability of experienced faculty Mitigant: The trust will endeavour to hire best faculty available by paying prevailing remuneration. Competition by other Engineering Colleges in Private Sector Mitigant: The trust is creating world class infrastructure with all amenities and employing best of faculty and thus will be able to withstand competition.
22. Borrowers Exposure : (Existing) Facility* (Rs. in lacs)

Outstanding/

Asset Status (Brief details, if any)

Amou nt
With Us With Other Banks With FIs Under Lease Finance/Invt. Total Term Loan 880.00 Term Loan 880.00

29.3.2011

705.31

Standard

0.00 0.00

23. GROUP EXPOSURE (including this proposal) Name of company/ Zone/ firm Branch AC/ CR FB Shree Balaji New Educational & Delhi / N.D. Charitable Trust Overseas (GM NDZO Dated 24.8.2009 M.G.Metal Linkers New Delhi / (Sanction : DGM /ZO N.D. NDOB ) 26.3.2010 Overseas Total 11 AA / 100.00 200.00 11 AA / 880.00 Limit

(Rs. in lakhs) Total/ Max. NFB -880.00 FB 705.31 Outstanding Out of Order NFB -15.31 Interest for Jan and Feb 240.00 77.13 178.13 --

980.00

200.00

1120.00

728.44

178.13

--

24.

EXPOSURE CAP BASED ON CAPITAL

(Rs. in lacs) Maximum exposure (FBL+NFBL) based on capital funds of the Bank as at the end of last year. Borrower Group

Cap. Actual

Cap. Actual

62500

705.31

837500

1120.00

25.

EXPORSURE TO INDUSTRY (including present exposure) (wherever applicable)

(Rs. in lacs) a) b) c) d) e) Sectoral Cap for Industry Banks Exposure Zones Exposure* NPA Bank NPA Zone* : : : : : Not available at our end Nil Not available at our end Not available at our end

UTILISATION/ VALUE OF ACCOUNT (Rs. In lacs)


26. Utilization of : Last Year 2010-11 Amount a) Fund Based limits -i. Term Loans -i) Term Loan 880 100 616.67 % Amount % Current Year (Est . ) 2011-12

ii.

Working Capital

b) Non Fund Based Limits

27.

i) ii)

Export Turnover Import Turnover

28.

Earning (Rs. In lacs) Interest Other non-interest income Bills Purchased/ collected LCs opened Guarantees issued Any other Income (Processing charges etc) Total Yield % (Annualised) No. -

Last Year 98.57 Amt. Earnings No.

Current Year 98.66 Amt. Earnings

0.58 99.15 13.92% 99.26 16.10

0.60

29. DETAILS OF FLOAT AVAILABLE Rs. In lacs Current year position(2009-10) No. of a/cs (Estimated) Saving Bank Current Deposit Term Deposit Total 1 1 2 20 15 35 4.00 2.00 6.00 -2.00 2.00 Amount Position during last year Average balance Outstanding as on 31.3.10

30.
Item Rate of Interest LC BG

TARIFF CONCESSIONS:
Applicable charges Present charges Proposed /Charges

No Concession in Rate of Interest / Other Charges is Proposed

Processing/ TEVS Charges

AUDIT/INSPECTION/MEETINGS 31 Last Date Remarks/observations & Br./Z.O. comments on rectification 05-01-2011 (Unit Inspection) Not Applicable Not Applicable

Stock inspection Stock audit Consortium meeting 32a

Any adverse comments of Statutory/ Audit observations are as under Internal/Concurrent/revenue/RBI Auditors and Borrower's Auditors (as extracted from the Balance sheet) Closure of CPA (Authority & Date)

32b

Observation Fresh CBD 23 though obtained , worth not verified. Inspection not conducted CPA dated 9.9.2009 not closed Bill receipts for disbursement not on record Term Loan is out of order

Reply Since verified.

Last inspection was conducted on 5.1.2011


CPA closed ref; ZO: Rmcmc: Kbl; 3422 dated 23.12.2009. ( HO C&IC MCC: KLP: 4325 dated 6.1.2010) Bills receipts are on record.

The overdue amount mentioned was as per system. However, as the repayment schedule was wrongly fed as monthly in place of quarterly, we have opened new account after obtaining consent of the borrower. Only interest is overdue for Jan and Feb 2011. Proposal being put up

Review.. overdue 33. FLOW CHART

Date application received at Branch In principle approval from NBG H.O. received on Provisional B/S as on 31.03.2008 and additional information received on 153.2011

Date of Branch Proposal / Sanction Date proposal received at Zonal Office Date proposal received at Head Office Date clarifications received at Head Office Date of Head Office Proposal Remarks

29.3.2011

ASSESSMENT/JUSTIFICATION FOR PROPOSED LIMITS 34. PROJECT FINANCE /TERM LOAN ASSESSMENT:

The trust purchased land admeasuring 42 kanal & 02 marla at Bubka Road, Vill. & Post Radaur, Tehsil Jagadhari, District Yamuna Nagar, Haryana, and after obtaining necessary approvals from concerned authorities including AICTE/State Board of Technical Education (SBTE), established an engineering polytechnic. The polytechnic admitted 308 students, in its first year of operation and started functioning from Oct 2008 onwards. The trust was sanctioned a term loan of Rs.480 lacs for construction of polytechnic building and purchase of furniture and other fixtures such as Office Equipments, Computers lab, Air-conditioners, Generator etc. The trust has also added subsequently course of Civil Engineering and increased the seats of the Mechanical Engineering by 100% to cater to increasing preference for these courses by the students. At the time of submission of initial proposal in 2008, total project cost was estimated at Rs.728.00 lacs which was financed by term loan of Rs.480 lacs with Capital/ Corpus Fund Rs.248 lacs, details as per follows
COST OF PROJECT PROJECTIONS ACCEPTED IN LAST PROPOSAL ACTUAL COST AS ON

31.3.2009

1. LAND 2. BUILDING incl Site Development 3. LAB & Workshop Equipment

61.08 465.75 38.00

61.39 526.45 31.39

4. FURNITURE & FIXTURE 5. LIBRARY 6. MISC FIXED ASSETS 7. PREOP. EXP 8. VEHICLES 9. FIXED DEPOSIT 10. CONTINGENCIES 11. MARGIN MONEY - W/C TOTAL

32.00 17.00 40.00 19.05 0.00 15.00 28.79 11.33 728.00

33.77 15.27 34.16 0.46 0.00 15.00 0.00 11.33 729.22

MEANS OF FIN ANCE

TRUST CAPITAL FUNDS INCL UNSECURED LOANS TERM LOANS I TOTAL

248.00

249.22

480.00 728.00

480.00 729.22

It may be noted that against the total estimated cost of building including site development for Rs.465.75 lacs, the trust has actually incurred Rs.526.45 lacs. As per the explanation given by the trust, the building costs had escalated due to very high prevailing building material prices last year and include contingencies of Rs.28.79 lacs and preoperative exp of Rs.18.68 which were capitalised. In respect of Lab & Workshop equipment the estimated cost was Rs.38.00 lacs whereas the actual cost is Rs.31.39 lacs and for Misc. Fixed Assets the estimated cost was Rs.40.00 against the actual cost of Rs.34.16 lacs. The costs in respect of Lab & Workshop equipment and Misc. Fixed Assets was lower due to economies in purchasing and quantities of equipment and misc. Fixed assets. As the overall project cost has remained at around estimated cost of Rs.728 lacs at Rs.729.22 lacs, the variations in different heads of project cost may be accepted. Total cost of the project for the second term loan was estimated at Rs.592.77 lacs including cost of land, construction of college second building block and creation of other educational amenities. The break up of project cost is as under, the expenditure was vetted by panel engineer. Cost of Project (Rs. In lacs)

EXISTING

ADDITIONAL

TOTAL

1. LAND 2. BUILDING incl Site Development 3. BUILDING - II (Under Construction) 4. LAB & WORKSHOP EQUIPMENTS 5. FURNITURE & FIXTURE 6. LIBRARY 7. MISC FIXED ASSETS 8. PREOPERATIVE EXP 9. VEHICLES 10. FIXED DEPOSIT 11. CONTINGENCIES 12. MARGIN MONEY - W/C

61.39 526.45

0.00 0.00 366.88

61.39 526.45 366.88 116.39 63.77 30.27 54.16 26.96 20.00 15.00 28.17 12.55

31.39 33.77 15.27 34.16 0.46 0.00 15.00 0.00 11.33

85.00 30.00 15.00 20.00 26.50 20.00 0.00 28.17 1.22

TOTAL

729.22

592.77

1321.99

Against the total project cost, of Rs.592.77 lacs, details of means of finance were as under: Term Loan II for Building & Fixed assets Corpus Fund incl unsecured loans Rs. 400.00 lacs Rs. 192.77 lacs

Total:

Rs. 592.77 lacs

The term loan 2 of Rs 400 lacs was accordingly sanctioned.

Haryana is one of the fastest developing State of India. Besides Gurgaon which is home to the Indias second most sought after destination in Software Development and IT enabled services after Banglore and the automobile industry, the cluster of towns of Ambala, Kurukshetra, Panipat, Yamuna Nagar and Karnal, located on national highway no. 1, has the best growth rate in industrial development. Moreover the districts of Yamuna Nagar and Kurukshetra have become educational hubs for the aspiring students for getting technical education. The district of Yamuna Nagar has a large number of industries like ISGEC, BILT, Ply Board units and Brass industry, which require the services of qualified and trained engineers. Moreover the district of Yamuna Nagar is surrounded by highly industrialized towns of Kurukshetra, Ambala, Karnal and Saharanpur (UP) and Kala Amb (Himachal Pradesh) requiring skilled technical manpower. Furthermore, today is the era of globalization where boundaries, areas or location do not matter, but the quality of professionals do. In order to cater to the needs of industry, there is great

scope for additional institutions for imparting diploma in engineering, especially in Distt. Yamuna Nagar where there is a great demand for the quality manpower. With this aim in view, Shri Balaji Educational & Charitable Trust, Jagadhri started its institution under the name and style of SHRI BALAJI POLYTECHNIC for imparting technical education for various Polytechnic courses at Village Radaur, Yamuna Nagar, Haryana. After establishing the necessary infrastructure, the college started functioning from Oct 2008 and admitted 308 students against the sanctioned student intake of 300 students. Encouraged by the preference of the students in seeking admission in the college, the trust decided to add another course of Civil Engineering besides increasing the seats in Mechanical Engineering by 100% to fulfil the needs of the students and has applied to AICTE / SBTE Haryana for additional intake of students. . The total capacity of college will be 1386 students with 06 streams. During the year 2010 -2011 they have 900 students. The college has started functioning from the current academic year 2008-09. The total capacity would be reached in four years. The number of students in the second year of operation will be 792, 1254 in the third year and 1386 in the fourth year of operation. The average fees per student per annum is assumed to be Rs.35500/- (as per the approval received from State Board of Technical Education Haryana. Besides, transportation and miscellaneous charges have been considered at Rs.10000 per student per annum.
Calculation of DSCR

[RS IN III 2012 Projected PROFIT AFTER TAX IV 2013 Projected V 2014 Projected VI 2015 Projected VII 2016 Projected

LACS] VIII

Total

83.72

101.95

119.77

133.88

143.92

DEPRECIATION

75.39

75.39

75.39

75.39

75.39

INTEREST ON TERMLOAN

84.42

64.21

43.87

23.54

6.96

TOTAL INFLOW

159.11

177.34

195.16

209.27

219.31

1183.19

PAYMENT OF TERMLOAN

146.68

146.68

146.68

146.68

66.60

PAYMENT OF INT ON T/L

84.42

64.21

43.87

23.54

6.96

TOTAL OUTFLOW

231.10

210.89

190.55

170.22

73.56

876.32

D.S.C.R.

1.05

1.15

1.25

1.37

3.08

AVERAGE DSCR for remaining period.

1.35

35.

Working Capital Assessment (should cover acceptability of projected sales , inventory and receivable holding levels and current liabilities including trade creditor levels): No working capital limit is sought.

36.

Non Fund Based Limits Assessment : L.C.s Guarantees

No Non Fund Based limit is sought

37.

CONFIRMATION: Compliance of last sanctioned terms Security Documents are valid/in force Proper charge on securities created in Bank's favour Exposure is within Banks prudential Norms/RBI guidelines : : : : Yes Yes Yes Yes No

a.
b. c. d. E

Whether company/directors are under Banks/RBI/ ECGC : defaulters list Any deviation from usual norms :

f. g.

No No

Whether directors are disqualified under Section 274 of : Companies Act Any arrears in payment of statutory liabilities by the Co. Whether status report/D&B report, if applicable, obtained : :

h. i. j.

No ** Not Applicable

Auditors comments on Corporate Governance Practices :

followed in case of Limited Companies

(**) Will be obtained as and when required 38. INDUSTRY PERCEPTION: Industry Perception: Business Scenario Perception (SWOT) Industry average/benchmark (as extracted from CRIS INFAC/Capital line wherever available) Net Sales/ PBT/ Net Sales -Total Tangible Assets -Bank Finance/ Current Assets Inventory + Receivables/ Net Sales ---

39. BRANCH COMMENTS & RECOMMENDATIONS: Background Shri Balaji Polytechnic for Engineering has been promoted by a private trust, named, M/s Shri Balaji Educational & Charitable Trust, Jagadhari. The main object of the Polytechnic is to impart quality technical education as per course syllabi of Department of Technical Education, Haryana and AICTE. The trust proposes to create the necessary building and other educational infrastructure required for running an engineering polytechnic institution. Governing body of the consist of following people i. ii. iii. iv. v. vi. Mr. Sudarshan Kumar Mittal s/o M.P. Mittal Mr. Ravinder Kumar Mittal s/o M.P. Mittal Mr. Banarsi Dass Gupta s/o Laxmi Narain Gupta Mr. N.K. Goel s/o Chandu Lal Goel Mr. Munish Mittal s/o Sudarshan Kumar Mittal Mr. Vikas Goel s/o Jai Prakash Goel (Chairman) (Secretary) (Vice Chairman) (Jt. Secretary) (Treasurer) (Jt. Secretary)

All the trustees are well established in their respective business and are also actively involved in welfare and charitable activities in and around District Yamuna Nagar. The trust has established an engineering polytechnic institute in Haryana in the name & style of SHRI BALAJI POLYTECHNIC, in a spacious campus measuring 5.26 acres at Bubka Road, Post Radaur, Tehsil Jagadhari, District Yamuna Nagar, Haryana after obtaining all the necessary approvals from the concerned authorities including AICTE/ State Board of

Technical Education Haryana and started operations from Oct 2008 admitting 308 students against sanctioned intake of 300 students. For this the trust had initially availed a term loan of Rs.480 lacs from the bank. The trust has created state of art educational infrastructure and has been awarded with ISO-9001: 2008 certification in March 2009 and it is the first engineering polytechnic institute in Haryana to receive such certification. Present Request Present request is for a) Review of term loans at the present drawing limit aggregating total limit of Rs. 690 lacs. b) Release of personal guarantee of Shri N K Goel as he has expired. Financial Position and Justification of Limits Financial position of the Trust and justification of the limits have already been commented upon under the head Comments on Financial Position and Project finance and term loan assessment. Though the income was under stress due to inordinate delay in receipt of subsidy from the government, the trustees have made payment of instalments due till Dec 2010. Security The exposure is secured by EQM of the college building worth Rs 1046.40 lacs and hypothecation of equipments worth Rs 123.53 lacs. The asset coverage ration for the mortgaged security works out to 1.52. Others Joint & Several Guarantee of following trustees
Mr. Sudarshan Kumar Mittal s/o M.P. Mittal Mr. Ravinder Kumar Mittal s/o M.P. Mittal Mr. Banarsi Dass Gupta s/o Laxmi Narain Gupta Mr. N.K. Goel s/o Chandu Lal Goel Mr. Munish Mittal s/o Sudarshan Kumar Mittal Mr. Vikas Goel s/o Jai Prakash Goel

Shri N K Goel has since expired. The promoters have combined worth of all the trustees is Rs. 414.04 lacs. Credit Rating The credit rating has deteriorated primarily due to not so good performance on the financial front. The approval for increasing number of students was received late and hence the college could not admit the desired number of students under management quota. Resultantly the trust incurred losses during the year ended 31/3/2010 against estimates of profits of Rs 89.25 lacs. The rating has deteriorated from LC 3 to LC 8. Rate of Interest

The applicable rate of interest is 6.00% over Base Rate, presently i.e., 15.50%. p.a including tenor premium. (As applicable to AA rated SME advance for LC 8 rated accounts as per Branch Circular No. 104/155 dated 08.03.2011). Charges In term of Branch Circular No. 102/218 dated 20.03.2009, we will recover proposal processing charges of Rs. 41400/- i.e Rs. 60/- per lacs for existing term loans aggregating Rs. 690.00 lacs (Proposed) as applicable to SME. Inspection Charges of Rs. 2000/- per inspection plus out of pocket expenses if any would be recovered. CIBIL Search We have obtained CIBIL search of guarantors and trust and there are no adverse finding except an overdue amount of Rs. 12000/- in the name of Sudarshan Kumar Mittal. We have asked the borrower to pay off the same and submit us the receipt or bank statement for the same. All the report are in placed on record.

Details of Retail banking/ any other business to be generated by cross selling. We shall endeavour for selling of our other products as under:
1. Opening of Savings Bank accounts of Trustees alongwith ATM & Debit Card and

Internet banking facility.


2. Issue of Credit Cards to Trustees 3. Sale of gold coins. 4. We shall endeavour to sell NICL Swasthya Bima Yojna policies to

employees of the trust. 5. To obtain insurance of principal / collaterals charged to us through NICL RECOMMENDATIONS We recommend review of the account at the existing drawing limit as under: Existing S/L Drawing Limit Proposed limit Rs 480.00 lacs Rs 340.00 lacs Rs 340.00 lacs Rs 400.00 lacs Rs 350.00 lacs Rs 350.00 lacs We do not propose any change in repayment schedule. II. Approval for: 1) Assigning Credit Rating of LC 8 in the account. 2) releasing guarantee of Shri N K Goel as he is no more.

Upon sanction of the proposal we will put up our memorandum for approval of deviations at appropriate level.

Delegation

In terms of BC 104/134 dated 25.1.2011, the delegation of term loans at the proposed level vests with the Zonal Manager as the borrower is a trust.

RECOMMENDED.

(M.S.Shahani) Senior Manager

(Gopal) DGM

CREC: The CREC has endorsed recommendations in its meeting held on ----------------.

( A K Arora) Chief Manager and Convener of CREC

Sanctioned/ Approved

(Prem Kumar) Zonal Manager (New Delhi Zone)