credit appraisal & risk management
DESCRIPTION
project on credit appraisal and risk management for punjab national bank ranchi.Punjab National Bank (PNB) was established in 1895 at Lahore. PNB has the distinction of being the first Indian bank to have been started solely with Indian capital. In 1969, Punjab National Bank was nationalized along with 13 other banks.TRANSCRIPT
PAGE
A PROJECT REPORT
ON
CREDIT APPRAISAL AND CREDIT RISK MANAGEMENT
At Punjab National Bank Circle Office, Ranchi Submitted To Rashtrasant Tukdoji Maharaj, Nagpur University in partial Fulfilment of
Degree of Master of Business Administration
For the Academic Year 2007-2009
Submitted By
Manoj Kumar Rao Researcher
B.Com
(Enrolment No NU/A8/37904) PROJECT GUIDE PROJECT GUIDE
Ms. Jyoti Mahajan Mr.Sanjay Prasad
Faculty MBA Dept. Senior Manager Credit
PNB Circle Office, Ranchi
============================2007-2009================================ G.H.RAISONI COLLEGE OF ENGINEERING
DEPARTMENT OF MANAGEMENT STUDIES, HINGNA , NAGPUR
A PROJECT REPORT
ON
CREDIT APPRAISAL AND CREDIT RISK MANAGEMENT
At Punjab National Bank Circle Office, Ranchi
Submitted To
Rashtrasant Tukdoji Maharaj, Nagpur University in partial Fulfilment of
Degree of Master of Business Administration
For the Academic Year 2007-2009
Time Period: 08-06-2008 to 08-08-2008
Geographical Area: Jharkhand
Submitted By
Manoj Kumar Rao
Researcher
B.Com
(Enrolment No NU/A8/37904)
PROJECT GUIDE PROJECT GUIDE
Ms. Jyoti Mahajan Mr.Sanjay Prasad
Faculty MBA Dept. Senior Manager Credit
PNB Circle Office, Ranchi
============================2007-2009================================ G.H.RAISONI COLLEGE OF ENGINEERING
DEPARTMENT OF MANAGEMENT STUDIES, HINGNA , NAGPUR
DECLARATION
I Manoj Kumar Rao here by declares that the project report entitle CREDIT APPRAISAL AND CREDIT RISK MANAGEMENT has been submitted by me in partial fulfilment of the requirement for awarding degree in Master of Business Administration from Nagpur University
I solemnly declare that this report is a result of research work undertaken by me. It is my original work and has not been published anywhere nor has been submitted to any university/institute for the award of any degree before this. Place: Nagpur
Date:
(Manoj Kumar Rao)
ACKNOWLEDGEMENT
First and foremost, I would like to express my deep sense of gratitude to my Project Guide, Ms. Jyoti Mahajan (Faculty, GHRCE) & Mr.Sanjay Prasad (Punjab National Bank, Circle Office Ranchi) for their valuable guidance and supervision throughout the project work.
I am grateful to Mr.Kamal Prasad(Circle Head) for permitting me to pursue my summer internship project in his Circle Office. I am also grateful to Mr.Amitabh Moitro, the new Circle Head, PNB Ranchi Circle for his guidance and support.I take this opportunity to thank my parents and my family members who have always been a motivating spirit behind my work and have supported me all throughout. I owe my highest acknowledgement to them without whose support I wouldnt have been where I am today.I would also like to thank all my friends and my seniors for their priceless contribution and kind help without which I couldnt have completed my project work.
I record my sincere gratitude to Mr. Narayan Biruli, Senior Manager HRD and Mr.Manish Kumar of Credit department, Circle office, PNB Ranchi for their encouragement and support.
Place: Nagpur
Date:
(Manoj Kumar Rao)
INDEX
Contents
Page no.
1. Bank Profile 1
2. Brief history of PNB .. 2
3. Credit appraisal (An overview) . 4
Pre sanction appraisal .. 6 Sanctioning of loan .. 17 Post sanction follow up .. 184. Credit Appraisal- A case study ... 205. Credit risk management 656. Research Methodology 837. Hypothesis . 858. Suggestions . 86
Bank Profile Punjab National Bank (PNB) was established in 1895 at Lahore. PNB has the distinction of being the first Indian bank to have been started solely with Indian capital. In 1969, Punjab National Bank was nationalized along with 13 other banks.
Punjab National Bank serves over 3.5 crore customers and has the largest branch network in India - 4540 branches and 421 extension counters spread all over the country. Again considering the importance of small scale industries bank has established 31 specialized branches to finance exclusively such industries. Its Debit card cum ATM card can be used to buy goods and services at over 99270 merchant establishments across the country, to withdraw cash at more than 25000 ATMs, where the 'Maestro' logo is displayed, apart from the PNB's over 1094 ATMs and tie up arrangements with other Banks.
Punjab National Bank has achieved many awards and distinctions. Major among them are: Ranked 38th amongst top 500 companies by the leading financial daily, Economic Times.
Ranked as 323rd biggest bank in the world by Bankers Almanac (January 2006), London.
Earned 9th place among India's Most Trusted top 50 service brands in Economic Times- A.C Nielson Survey.
Ranked 248 amongst the top 1000 banks in the world according to "The Banker" London.
Golden Peacock Award for Excellence in Corporate Governance - 2005 by Institute of Directors.
FICCI's Rural Development Award for Excellence in Rural Development - 2005.
Punjab National Bank was ranked at 1243 in the Forbes Global 2000 list of global giants and fast growing companies. one among 300 global companies and seven Indian companies which are expected to emerge as challengers to Worlds leading blue chip companiesBrief History of PNB
1895: PNB established in Lahore.
1904: PNB established branches in Karachi and Peshawar.
1939: PNB acquired Bhagwandas Bank.
1947: Partition of India and Pakistan at Independence. PNB lost its premises in Lahore, but continued to operate in Pakistan.
1961: PNB acquired Universal Bank of India.
1963: The Government of Burma nationalized PNB's branch in Rangoon (Yangon).
September 1965: After the Indo-Pak war the government of Pakistan seized all the offices in Pakistan of Indian banks, including PNB's head office, which has moved to Karachi. PNB also had one or more branches in East Pakistan (Bangladesh).
1960s: PNB amalgamated Indo Commercial Bank (est. 1933) in a rescue.
1969: The Government of India (GOI) nationalized PNB and 13 other top banks.
1978: PNB opened a branch in London.
1986 The Reserve Bank of India required PNB to transfer its London branch to State Bank of India after the branch was involved in a fraud scandal.
1988: PNB acquired Hindustan Commercial Bank in a rescue.
1993: PNB acquired New Bank of India, which the GOI had nationalized in 1980.
1998: PNB set up a representative office in Almaty, Kazakhstan.
2003: PNB took over Nedungadi Bank, the oldest private sector bank in Kerala.
HEAD OFFICEPUNJAB NATIONAL BANK7, Bhikaiji Cama Place
New Delhi 110 066Chairman and Managing DirectorSr. No.
1 Directors name
K C ChakrabartyDesignation
Chairman and Managing Director
2K RaghuramanExecutive Director
3Jag Mohan GargExecutive Director
4L M FonsecaDirector
5S R KhuranaDirector
6P K NayarDirector
7Mohan Lal BaggaDirector
8Harsh MahajanDirector
9Mohanjit SinghDirector
10Prakash AgarwalDirector
11Rakesh Singh Director
12Ramesh Kumar KocharCompany Secretary
Local Administrative OfficePunjab National Bank
CIRCLE Office
Ranchi-834001
Credit Appraisal (An Overview)
CREDIT APPRAISAL:-
The core area of activity of a commercial bank is accepting deposit from public and Lending to Public and making investments. In addition to that other tertiary services are there as defined in Banking Regulation Act.
Lending or Credit delivery has various dynamics which can be divided into two major parts viz. Asset Acquisition and Asset Maintenance. Credit portfolio is an asset for any bank, and its acquisition requires due diligence and a proper appraisal. Bank is utilizing the public deposit toward lending to public or making investments and it is the paramount duty of the Banks to thoroughly appraise the credit proposal and then take a decision so that the risk is minimized and quality credit portfolio grows.
As per the present norms any loan where the overdue is more than 90 days old will be treated as Non Performing Assets and the bank will not recognize the interest charged in the said NPA account unless actually recovered and they have to make provisions against the NPAs. These two things affect the profitability of the banks directly. Therefore a sound Credit Appraisal and Post sanction follow up along with Risk Management Approach is necessary for a healthy credit portfolio of any bank.
Punjab National Bank has developed a very sound system of credit appraisal and risk management. There is a detailed guideline for post sanction follow up (asset maintenance) also.
I had made a study of the credit appraisal techniques adopted by PNB and the post sanctions follow up guidelines of the bank. The risk management policy is also covered in my study. Apart from the theoretical aspects one case study has also been included.
PRE SANCTION APPRAISAL
Whenever a proposal is received by the bank, the Key areas that are assessed by the bank for granting loan are as under:-
PROMOTERS: - The Entrepreneurs who form the company are known as Promoters .It is they who conceive the idea of forming the company or the business concern .The bank takes this factor of promoters as one of the most important one because it is the promoters who lay the foundation of the business of the company. Bank also takes into consideration their experience, whether they have been engaged in such type of industry or not. Promoters with high experience are better because they know the working mechanism of the industry and can successfully manage their company. The man behind the show is very important as there are many success stories which prove that even in adverse circumstances by sheer labour, perception and commitment of the promoters the company survives. The bank also studies the qualification of the promoters to ascertain whether the company is self sufficient or it has to hire the professional from outside for e.g.-: a doctor is not enough qualified and capable to run an iron and steel factory. On the other side he can successfully handle a hospital business. Also the experience is considered while taking a decision on sanction loan amount and margins. The bank investigates the past record of the promoters to confirm that there has been nothing is adverse against the promoters and the promoters have not indulged in any unlawful activity or they are not defaulters to any bank in earlier loans.
PROMOTERS FINANCIAL STRENGTH:-The bank also assesses the financial strength of the promoters, what are their immovable property, what are their net worth and how far they are financially sound .The bank also prepares the confidential report of each promoters for assessing their personal worth and their market reputation .If the bank is satisfied with the promoters the further processing takes place. However all the parameters discussed here is concurrent in nature and the assessments on all issues are done on a parallel basis.
COMPANYS FINANCIAL POSITION: - The bank analyses the financial position of the company as a whole. The Balance sheets, P/L A/c, Cash Flow and Fund Flow statement are required for assessing the financial strength of the company. They calculate the various ratios to see the trend of the companys growth .They critically assess the balance sheet for determining the true financial position. They calculate Cash Flow and Fund Flow for ascertaining the availability of cash/fund for short and long term requirement. The Fund Flow statement also indicates the movement of funds from long term to short term and from short term to long term. To assess the companys financial position, the bank sees the following points:
(a)SALES: - Its the most important indicator of financial position of the company. The bank analyses the sales of past 3- 5 years and studies the trend .If the sales are increasing then what are the rate of growth of sales. If it is increasing at decreasing rate then what are the reasons for deviations. The future sales are analysed keeping in view the capacity utilisation and probable demand of that product. Sales are an important indicator of the companys financial position because ultimately this will decide the profitability also.
(b)NET WORTH - Besides seeing the promoters net worth the bank also sees the companys net worth to determine their loan amount. The companys net worth is the Capital and Reserve & Surplus less Intangible Assets. The purpose of assessing the net worth is to determine the promoters contribution in the project.(c)LIQUIDITY:-By liquidity, we mean the organisational ability to meet liabilities in short term. The bank measure the liquidity ratios to measures the firms ability to meet short term current obligation. It is very important that a firm should maintain its liquidity because the short term success is a prerequisite for long term survival. The company should maintain a proper liquidity so that the company manages the working capital easily which is necessary for running the business. Under liquidity ratios the bank calculates the following ratios:
(i) CURRENT RATIO (CA/CL):-The current ratio of a firm measures its liquidity that is its ability to meet short term obligations. The benchmark current ratio is 1.33:1, because the promoters contribution towards current assets is 25%.
(ii)ACID-TEST/QUICK RATIO (CA-INVENTORIES/CL-BANK O/D):-The acid-test ratio is the ratio between quick current assets and current liabilities and is calculated by dividing the quick assets by the current liabilities. The benchmark acid test ratio is 1:1. This ratio indicates that even when there is large stock holding and sales are not taking place what is the position of the company liquidity.
(d)SOLVENCY: - It shows firms ability to pay its long term debts in time .It shows the proportion of debt and equity in financing the firm assets. The bank is highly interested in solvency of the firm .The bank judge the soundness of the firm on the basis of long term financial strength measured in terms of its ability to pay the interest regularly as well as repay the instalment of the principal on due dates. Under leverage ratios the bank calculates the following ratios:-
(i)Debt Equity ratio (Long term debts/shareholders fund):-It measures the ratio of long term or total debt to shareholders equity. This ratio shows the percentage of owners equity to long term outsiders liability. From the firms point of view higher debt equity ratio is better but for outsiders like bank lower ratio is considerable.
(ii)Interest coverage ratio:-It measures the firms ability to make contractual interest payments.
(iii)Debt service coverage ratio:-DSCR is the ability of a firm to make the contractual payments required on a basis over the life of the debt. This ratio is used in case of term loan.
(iv)Proprietary ratio:-It indicates the extent to which assets are financed by owners funds.
(v)Dividend coverage ratio:-It measures the ability of a firm to pay dividend on preference shares which carry a stated rate of return.
(vi)Capital gearing ratio:-It shows the relationship between equity funds and fixed income bearing funds.
(e)Profitability :-It shows the earning capacity of the organisation .The operating efficiency of a firm and its ability to ensure adequate returns to its shareholders depends ultimately on the profit earned by it .The profitability ratios are calculated to provide assures to questions such as:
(i)Is the profit earned by the firm adequate?
(ii)What rate of return does it represent?
(iii)What is the rate of profit for various division and segments of the firm?
(iv)What is the earning per share?
(v)What was the amount paid in dividend?
The bank measures profitability ratios in order to ensure that company is gaining sufficient profit and able to pay its dividend and debt in the right time. Various ratios under profitability are as follows:-
(i)Gross profit margin (Gross profit/sales):-It measures the percentage of each sales rupee remaining after the firm has paid for its goods.
(ii)Net profit margin (Net profit/sales):-It measures the percentage of each sales rupee remaining after all costs and expenses including interest and taxes have been deducted.
(iii)Return on total assets:-It is the net earnings available to owners and interest to lenders as assets are financed by owners as well as creditors. It is used for both term loan and working capital requirements.
(iv)Return on investments:-It measures the overall effectiveness of management in generating profit with its available assets.
(v)Return on equity: - It measures the return on the owners investment in the firm.
All the above ratios are calculated in terms of historical data and the projections. The banks calculate these ratios in order to ascertain their ability to meet their short and long term obligation and also ascertain their profit margin in order to see whether sufficient margin is earned by the company or not.
The above aspects are of core importance for any Project Appraisal. However the financial analysis and promoters background or their capacity to consume credit is not the only aspect which covers the complete project appraisal. We now discuss the various issues which form part of a comprehensive credit appraisal at the pre sanction stage and only after they satisfy the banks guidelines the final decision for sanction of loan is taken.
(a)Technical appraisal
(b)Commercial appraisal
(c)Economic appraisal
(d)Managerial appraisal
(e)Financial appraisal
Technical appraisal:- The technical appraisal on the following aspects is done by the Dy. Manager/Manager/Senior Manager, Industry, posted in the bank based on the data submitted by the company:
Manufacturing process/Technology
Technical Arrangements Size of the plant
Product Mix
Selection of plant and machinery
Plant layout
Location of the project
Density of industry
Innovations and technology
Technical diversification
Feasibility of the product
If the proposal is found to be technically feasible then only bank takes it up for further study.
Commercial Appraisal:
Sales
Demand forecasting
-Import substitution
-Past & future trends
-End- use
-Export market
-Correlation and regression
Global and future prospects of the business
Supply competition
Pricing policy
Current market position
Life cycle of the product
Brand name of the product
Packing and transportation
Distribution channel
Sales promotion
Sources of market information/publication
ECONOMIC APPRAISAL:
Competitive or monopoly product/market
Efficient and economical production
Large scale production
Availability of manpower, raw material and other factors of production
MANAGEMENT APPRAISAL:
Form of organisation
-Proprietorship
-Partnership
-Private/public limited company
-Trust/society etc.
Organizational set up: The companies in SME sector are mostly family run business enterprises. In large corporate sector the organisational set up is well defined. The bank assesses the ability of the managing promoters to run the organisation and also discusses the level of involvement of professionals.
Management problems: In most of the cases of SME sector the promoters are the main resource in all the activities. Bank mostly faces the problems of management of the organisation in this sector. In large corporate sector the problems are all the same as seen at the industry level.
Quality of entrepreneurs
-Integrity
-Involvement in the project
-Financial resources
-Compliance
-Risk taking ability
-Initiative
-Intelligence
-Drive and energy
-Self confidence
-Past track records
FINANCIAL APPRAISAL
Term Loan
Capital cost of
-Land and site development
-Building
-Plant and machinery
-Engineering and consultation fees
-Margin for working capital
Means of financing
-List of sources:-Promoters contribution, other debts & loan from bank
-Details of each sources of finance-:
Promoters contribution: - It includes owners capital, reserves, retained earnings, surplus etc. It is the major source of finance for a business. It is of utmost concern to the outside parties especially for bank because it decides the owners contribution in the project.
Unsecured loans: - A firm acquires both secured and unsecured loans from outside. Secured loan is provided by banks and other financial institutions and they are secured by assets or immovable property. The rate of unsecured loan is higher than that of secured loans.
Share application money: - It is the part of current liabilities. It is the amount of money paid by the person to become a shareholder of the company.
Debenture: - It is a kind of long term debt. The company issues debentures for raising the funds. After a fixed period of time company redeems these debentures.
Loan from bank: - It is also the source of finance for the business. Bank provides the loan at a reasonable rate and also helps in taking correct financial decision .This may be short term or long term loan.
Financial projections
Balance sheet and Profit and Loss analysis. Operating Statement
Basis of sales assessment.
Cost of sales/ Gross profit ratio.
PBDIT/ Sales
PBT/PAT (absolute)
Cash accruals/ sales
Retained cash earnings
-Cash flow estimates
-Break-even point:-
- A very important tool to determine resilience
- Fixed costs x Sales/ (Sales Variable costs)
- Sensitivity to BEP
- Sensitivity to DSCR
-Ratio analysis: As discussed at the beginning.
-Sensitivity analysis:- The bank makes +/- study of major factors of production to understand its sensitivity towards sales,profits,DSCR etc. The bank studies the sensitivity analysis by increasing raw-material price by 5% and reducing sales price by5%. On the aforesaid situation, DSCR is checked. If it indicates that the unit shall be able to withstand adverse price situation then it is considered good.
RISK MANAGEMENT: After the implementation of Basel I and II every assets has a risk weightage. To assess and mitigate risks the bank has developed its model and it has a risk management policy. Every account undergoes an online risk rating.
RISK RATING:-The bank adopts its own criteria for giving the risk rating. The bank has developed its own software which assesses credit risk parameter. It has 6 category under which various parameters are given. They are basically:-
(i) Future risk
(ii) Subjective Assessment of financial
(iii) Adjustment for financial trend
(iv) Business and industry evaluation
(v) Management evaluation
(vi) Account evaluation
Each sub category under category has standard weights. The bank measures the weight of the organization as a whole and compare it with standard and finds the deviation if any. Then reasons are searched for the deviations and their explanations are mentioned. The bank then provides the weighted average risk and then decides whether to accept the proposal or not.
RISK PRICING:-Interest rates are based upon the risk weight age of the company as per risk management policy. There are 8 categories of risk weight.ie: AAA, AA, A, BBB, BB, B, C&D. Based on the risk rating of the company, Interest rates are determined. This is known as risk pricing .e.g.:- If the co. Is having AAA then interest rates will be low and the company is having excellent market credit, superior assets, excellent debt capacity and coverage.
Risk Mitigation: Banks opt for collateral securities to cover the loan amount which in turn mitigates the risk.
Focus on:
IRR/NPV
Schedule of implementation
Gearing/ Liquidity.
Moratorium/ Repayment
Working Capital
Focus on
Volumes/ Sales growth
Operating efficiency
Liquidity
Gearing
Quality of current assets.
Efficiency in asset turnover.
Methods of WC Assessment
NAYAK COMMITTEE - : Working capital:-According to Nayak committee/simplified method:
- Under SSI up to 5 crores.
- Other up to 2 crores.
Calculation under NAYAK COMMITTEE:-
(1)Working capital requirement is 25% of sales.
(2)Minimum promoters margin is 20% of WCR i.e. 5% of sales.
(3)Permissible bank finance: 1-2
Ex: - Sales 100
WCR 25 (25% of sale)
Margin 05 (20% of WCR)
PBF 20(Permissible
Bank finance)
OPERATING CYCLE METHOD & WORKING CAPITAL GAP METHOD (based on TANDON committee model): -Holding of raw-materials, finished goods and semi industrial products.
PBF calculation under this method:
1. Total Current Asset
2. Less Other current liability (Excluding Bank finance)
3. Working Capital requirement (1-2)
4. Minimum margin: 25% of TCA
5. PBF : 3-4
The total current assets are based on the holding period required for the company and the operating cycle.
Ex:-
1. Total Current Asset 100
2. Less Other current liability 60
3. Working Capital requirement 40
4. Minimum margin 25(25% of TCA)
5. PBF 15
Operating Cycle
CASH FLOW METHOD: - For special types of business requirement which is based on the future cash flow only, like future lease financing.
We again wish to mention here that ratio analysis is an integral part of working capital finance also.
Financial Analysis What are we looking at?
Manufacturing efficiency
Operating efficiency
Is it turning over the assets efficiently
Yield pattern
Appropriation of yield
Liquidity to meet day to day operations
What is the quality of current assets
Can the unit sustain in difficult times
Can it service our interest and repayments
Effective appraisal: An effective appraisal includes all the above points which are either a part of Techno Economic Viability or the Management aspect. Any appraisal to be called as effective need to be:
Authentic
Brief
Analysis-correctly interpreted
Exceptions only
SWOT analysis :- To assess the overall position of the project and the promoters the bank is required to make the swot analysis and submit its report which includes:-
STRENGTHS:-The strong points in favour of the organisation and the project are mentioned in order to show that organization has a good reputation and it can repay the loan amount in right time. The strong points of the organization shows excellent business credit, superior assets quality, liquidity, excellent debt capacity and coverage.
WEAKNESS:-Perceived weakness is mentioned and the real solution to the problem is also mentioned.
OPPORTUNITIES:-The prospects of the organisation are mentioned. The prospect of the development of the product or the organisation in the economy is assessed and the opportunities are mentioned for the firm. It also shows the efficiency of organisation to capitalise opportunities. It also gives an idea of global and future aspect of the organisation.
THREAT:-Potential threats against the organisation are identified and their possible solutions are also sought for the better of the organisation. Some of the threats are:-cut throat competition, escalating prices, scarcity of factors of production, incapable management etc.
Sanctioning of Loan
In PNB the sanctioning of loan is at various stages. Powers are delegated in a very structured manner which is decentralised and keeping in view the business requirement and the level of Managers working in different scales.
Our study pertains to the loans under the powers of Circle Head and above. At this stage the proposal is received from the branches and after the pre sanction appraisal is done at Circle office on the above mentioned points the Credit Departments places the proposal with their recommendation before the credit committee which comprises of different functional heads and the Chief Managers in form of a standard credit appraisal format popularly known as Board Note.
RECOMMENDATIONS & SANCTION:- The credit committee goes through the proposal in detail and thereafter recommends the same for final sanction before the sanctioning authority as per terms and conditions of the bank.
POST-SANCTION FOLLOW UP
As discussed earlier Asset Management is of Prime Importance in any business activities. In banking sector it has gained too much importance after the implementation of Prudential norms since 1991. PNB is having a sound policy for this purpose which we discuss hereunder.
a) Documentation Vetting of Loan Documents
Bank has in place a system of Vetting of Loan Documents from the approved advocate in case of borrowal accounts, with sanctioned limits of Rs. 5 crore & above (both fund based and non-fund based). The system is followed meticulously.
b) Legal Compliance Certificate
Under this system, for all credit limits of Rs.10 lakh & above, branches submit legal compliance certificate, certifying the compliance of all the formalities contained therein. Pending formalities, if any, are reported in terms of extant guidelines and are submitted in respect of all fresh sanctions/ enhancement/renewal, to the respective controlling office, within the stipulated time.
c) Ensuring end-use of fundsIn order to ensure end-use of funds it has lent. The Bank does not depend entirely on the end-use certificates issued by the Chartered Accountants but on its internal controls and the Credit Risk Management System which enhance the quality of the loan portfolio. Some of the illustrative measures that are taken by the branches to ensure end-use of funds are:
I. Meaningful scrutiny of quarterly progress reports/operating statements, balance sheets of the borrowers;
II. Regular inspection of borrowers assets charged to the Bank as security;
III. Periodical scrutiny of borrowers books of accounts:;
IV. Periodical visits to the assisted units;
V. System of periodical stock audit, in case of working capital finance;
d) Loan Review Mechanism
It is an effective tool for constantly evaluating the quality and risk of loan book of the bank and to bring about qualitative improvements in credit administration.
The Credit Audit and Review system covers all borrowal accounts beyond a threshold limits and identifies weak accounts. Under the system independent team of Credit Auditors examines the credit process.
Credit audit facilitates focusing the attention about overall assessment of the borrowal entity. Loan Review Mechanism has been made applicable to all loan accounts in standard category having total exposure of Rs. 5.00 crore & above and identified High Risk accounts having total exposure of Rs. 1 crore & above.
In case of higher value accounts with total exposure of Rs. 50 crore & above and having risk rating of (PNB-BB) or below, Follow Up Credit Audit is done after 6 months is being done.
e) Preventive Monitoring System (PMS)
Bank has introduced Preventive monitoring system for large borrowal accounts. The system is applicable to all borrowal accounts having sanctioned limits (FB plus NFB) above Rs. 1 crore in CBS branches and above Rs. 12 crore in other branches. The model for PMS has also been placed in central server environment. This system is a dynamic system for tracking the health and conduct of borrowal accounts to capture the signals of early warning. Timely decision should be taken on the future course of action in the borrowal accounts depending upon PMS rank.
f) Stock Audit
Bank has a policy to conduct annual stock audit (including book debts) for all accounts with fund based working capital limits of Rs.5 crore and above whether standard or NPAs, which is followed by the branches. Further, in respect of borrowers enjoying fund based limits of less than Rs. 5 crore, the extant guidelines for getting the stock audit done in emergent cases and/or, wherever banks interest demands, with prior concurrence of ZM is done.
Annual Stock Audit should is compulsorily conducted in all accounts with risk rating B & below and enjoying fund based working capital limits of Rs. 1 crore and above.
In cases of Consortium/Multiple Financing where the borrower is enjoying working capital limits (fund based) of less than Rs. 5 crore from the Bank and Rs. 20 crore and above in aggregate from the banking system, branches take up with lead bank/major share-holder banks in multiple banking arrangement for getting the stock audit conducted. The final decision regarding stock audit in the account, however, is based on the consensus amongst the member banks.
Further, in BB to AAA* risk rated accounts, which signify lower risk, GM-Credit, Head Office may permit exemption for conducting of Stock Audit.
g) Recovery in Loans
After the introduction of NPA norms and capital adequacy requirements, Recovery has assumed greater importance. Hence at all levels, meticulous follow up continued to ensure that the recovery is made in terms of sanction and the targets fixed for recovery are achieved.
Case Studies:
1. M/s ABC Co.(P) Ltd
(Fund Based Limit)
Whether fresh/renewal/ enhancementEnhancement in term loan and additional facilities in existing loan account.
Asset Classification as on 14.12.2007 Standard
Credit Risk Rating by Bank
Rating
Score
ABS
Present
BB
52.15
31.03.07
Previous
BB
58.65
31.03.06
a)Whether sensitive Sector Real Estate/Capital Market
b) Applicable Risk weight
NO
Consortium/Multiple BankingMultiple Banking
Lead BankNA
PNBs Share %NA
Date of Receipt of Proposal at BO
10.11.2007
Date of last sanction & authority/NBG Clearance10.05.2007, Zonal Manager (TL2)
PUNJAB NATIONAL BANK
ADITYAPUR, JAMSHEDPUR
The Zonal Manager
Zonal office,
Ranchi
Gist of proposal
( For Tube unit)
Term Loan Rs. 197.00 lac
Cash Credit (BD) - Rs. 60.00 lac
Bank Guarantee - Rs. 140.00 lac
TOTAL - Rs. 397.00 lac
1.Name of the Borrower:M/S BINA METAL WAY PVT LTD.
a. Address of Regd. Office
:
9C, 9 th Floor, Crescent Tower, 229, A.J.C.Bose Road, Kolkata- 700020
b.Works/Factory:B-4,Phase-II,Industrial Area,Adityapur, Jamshedpur 8310013
c.Constitution Private Limited
d.Date of incorporation/
Establishment:20.12.1986
e.Dealing with PNB since:27.02.2006
f.Industry/SectorManufacturing Industry
g.Business Activity (Product)/
Installed Capacity.Existing
Manufacturing different types of switches and crossings for railways track material and auto components for M/s. Tata Motors, Jamshedpur. Steel Tubes for TATA Steel
2.Branch Office/Zone:Adityapur, Jamshedpur/Jharkhand
3. A)Directors (S/Shri)
1. Mr. Probal Mukherjee
2. Mr. Pradip Mukherjee
3. Mr. Pronab Mukherjee
B (i) If any of them, in RBI's / Wilful defaulters' list/caution list of ECGC / CIBIL database - No none of the promoters are in any defaulter list.
(ii) If any one of them connected in the past with any NPA/OTS /
Compromise/ unscrupulous defaulters- None of the director is connected in the past with any NPA/OTS / Compromise/ unscrupulous defaulters.
(iii) If any of them, related to Directors/Senior Officers of PNB
None of them are relatives of directors /senior officers of PNB.
c) Management Change since last sanction, if any:None .
d) Shareholding Pattern- As on 28.09.2007Particulars No. of Shares @ Amount
Mr. Pronab Mukherjee357624 10 3576240.00
Mr. Pradip Mukherjee349283 10 3492830.00
Mr. Probal Mukherjee347523 10 3475230.00
Mr. Bina Mukherjee30 10 300.00
Mrs. Samprity Mukherjee18300 10 183000.00
Mrs. Surita Mukherjee115500 10 1155000.00
Mrs Nandini Mukherjee10000 10 100000.00
Mrs. Rohini Mukherjee101600 10 1016000.00
Thermatix Developers p ltd.11500 10 115000.00
Mr. Santanu Ganguly2000 10 20000.00
Mrs. Sheela Ganguly100 10 1000.00
TOTAL1313460 13,134,600
4.A Facilities Recommended: (Rs in lacs)
NatureExistingProposedSecured/Unsecured alongwith the basis thereof
(As per RBIs guidelines)*
Fund Based
CC(H)0.0060.00Secured
WCDL0.000.00
FOBP/FOUBP/FABC0.000.00
Others0.000.00
Fund Based Ceiling0.0060.00Secured
Non Fund Based
ILC/FLC
ILG300.00440.00Secured
FLG
Non Fund Based Ceiling
Term Loan1226.001423.00Secured
TOTAL COMMITMENT1526.001923.00Secured
Present proposal
Term Loan Rs. 197.00 lac
Cash Credit (BD) - Rs. 60.00 lac
Bank Guarantee - Rs. 140.00 lac4.B Our Commitment and Maximum Permissible Exposure Norms
(Rs in lac)
Unit ITube Div.Total
a)Fund Based Working Capital limitsNil60.00(BD) 60.00
b)Non Fund Based
440440.00
c)Term Loan 226.0011971423
d)Investments in shares, debentures etc.NilNilNil
e)Total of (a), (b), (c) & (d)226.0016971923
f)Total exposure as %age of Banks capital funds
g)Banks permissible exposure level in terms of our latest audited Balance Sheet
5. A Facilities from PNB Subsidiaries/Exposure by way of investment in Equity/Debentures/Derivatives/Foreign Exchange etc. : NIL
(Rs. in lac)
Name of the InstitutionNature of facilitySecurity O/s
as onPurposeOverdue, if any
a)
b)
5.B Term Loans from other Banks/Financial Institutions/Other Institutions - (including Lease, ICDs, Corporate Loans, Debentures etc.)
(Rs. in lac)
Name of the Bank/FIFacility SanctionedBalance O/s
As on 31.12.2007Overdue, if anyRate of Interest
HDFC
Car Loan1.11Nil 7.5%
ICICIMortgaged Loan29.32Nil11.25%
5.C Credit Rating by agencies {CRISIL/ICRA/CARE etc.} with purpose of such rating. No credit rating has been done by rating agencies.
5D. Details of Working Capital Limits from the Consortium/Multiple Banking:
Name of the BankExistingShare %ProposedShare %ROI
FBNFBFBNFBFBNFBFBNFB
Canara Bank6001000100%100%NANANANA
Confidential report from Canara Bank is obtained & enclosed
6.A Details of Group /Allied/Associate firms and the facilities sanctioned to them
(Rs in lac)
Name of the CompanyActivityFinancialsDealing BankFacilities
Nature & Amount
M/s Thermatix Developers Pvt. Ltd.Development and promotion of Real estate Period
31.03.07
31.03.06
Share Capital
3.053.05
Add Reserves & Surplus
57.38
47.40
Less Acc. Losses & Intangible Assets
Nil
Nil
TNW
60.43
50.45
PBT
Sales
61.36
47.95
Canara BankCurrent Account
M/s Bina Krishi UdyogAgriculturePeriod
31.03.07
31.03.06
Share Capital
6.63
7.23
Add Reserves & Surplus
Nil
Nil
Less Acc. Losses & Intangible Assets
Nil
Nil
TNW
6.63
7.23
PBT
-
-
Sales
1.12
3.19
Canara BankCurrent Account
6.B Comments on conduct of these accounts with our bank/other banks
Conduct of account with Canara Bank is satisfactory. There is no loan in the above firms. The activities are also very minimal without having much impact on the overall functioning of the group.
6.C Comments on adverse Financial Indicators, if any Nil
7.A(i) Financial Position of the Company
(Rs. in Crore)
31.3.0531.3.0631.3.0730.09.2007
AuditedAuditedAudited
Gross Sales11.3214.1815.099.04
-Domestic11.2814.1815.099.04
-Export 0.04--
% growth-39.9%25.26%6.42%
Other Income0.730.230.920.10
PBIDT0.061.821.231.40
Operating Profit/Loss0.140.530.080.32
Profit before tax0.060.600.050.08
Profit after tax-0.050.40-0.020.08
Cash profit/ (Loss)0.310.810.360.32
Paid up capital0.160.161.311.31
Reserves and Surplus excluding revaluation reserves5.065.466.846.92
Misc. expenditure not written off0.150.080.020.02
Accumulated losses0.000.000.000.00
Deferred Tax Liability/Asset-0.38-0.25-0.20-0.20
a)Tangible Net Worth
b)Investment in allied concerns and amount of cross holdings
c) Net owned funds (a b)4.69
0.0
4.695.29
0.0
5.297.93
0.0
7.938.01
0.00
8.01
Investments0.020.020.020.02
Unsecured Loans1.603.841.883.46
Net Working Capital 2.675.424.065.99
Current Ratio1.301.571.321.53
Debt Equity Ratio0.270.861.442.73
Operating Profit/Sales -6%2.6%
31.3.0531.3.0631.3.07
AuditedAuditedAudited
TOL/TNW2.032.572.98
Fund flow
Long Term Sources6.6510.4519.90
Long Term Uses3.985.0315.84
Short Term Sources8.889.3912.51
Short Term Uses11.5514.8116.57
7A (ii) Key Financials up to last quarter (as per published Unaudited Results in case of listed companies) : NA . Company is not listed.
(Rs. Crore)
Period endedLatest quarter ended Corresponding quarter of last year % ChangeCumulative upto this quarter of current yearCumulative upto this quarter of previous year% Change
Sales
Other Income
PBT
PAT
7A (iii) Capital Market Perception
Stock is not traded in any stock exchange
ListingBSE/NSE
Face Value
Current Share Price as on
52 weeks High / Low
7.A (iv) Comments on Financial Indicators (growth, achievement vis--vis estimate)
Comments on financials
Growth: Growth of the firm is increasing gradually. In the FY 2004-05, there is negative growth of 39.9% over the previous FY due to irregularity in export orders from countries like Malaysia, Thailand, and Bangladesh Railways.The domestic sales have been more of less stable in all the years. There is positive growth of 26% in FY 2005-06 & 6.42% in FY 2006-07 over their previous years.
Profitability: Profit after tax in FY 2006-07 is negative by amount of Rs. Two & half lac, although there were no cash losses and the PBT is positive. During the FY 2006-07, Company has executed certain jobs other than Railway, which involved procurement of entire material from Companys own fund, which resulted increase in the cost of purchase of raw material and consumption, where as during the year 2005-06, total sale was out of rail supplied by Indian Railway. Over and above, escalation clause allowed in purchase order was supposed to be raised during the year but due to non-availability of price index from the Railway, Company could not raise escalation bill amounting to Rs. 68 Lacs. The same has been raised during the current financial year, resulted decrease in profitability in comparison to earlier year. During the current financial year Company received contract from private parties amounting to Rs. 400 Lacs having substantial margin over and above order received from Railway. This order will have to be executed by March 2008.This will ensure increase in profitability of current financial year.
Liquidity: The Company is in comfortable position to meet their current liabilities. Since company was under construction, hence investment in fixed assets led to the decreasing the value of current assets, resulting reduction in NWC compared to previous year. Although it is at present 1.32 as on 31.03.2007, which has further improved on 30.09.2007. In the coming year it is in comfortable position. Solvency: The long-term solvency of the company is very comfortable at present, which is evident from low debt equity ratio. The TOL/TNW ratio is also low, suggesting better overall solvency position of the company. The amount of unsecured loan was converted in to share capital.
Hence amount of unsecured loan decreased.
BM has further informed that as on 31.12.2007, share capital of the company is Rs.131.3 Lacs and including the share premium accounts the amount as on 31.12.2007 is Rs.271.88 lacs. There will be subsequent infusion of capital and unsecured loan till 31.03.2008. Position of actual share capital and unsecured loan and R&S vis--vis projections are as under:-
Rs.in lacs
MeansBefore Tube Mill ProjectEnvisaged for Tube MillActual as on 31.03.2007Actual as on 31.12.2007
Share Capital and Premium16.00390.00271.88271.88
Unsecured Loan160.20187.29188.11394.83
Reserve & Surplus506.040.00543.38543.38
Total682.24577.291003.371210.09
From the above table, it can be observed that the present net owned fund of Rs. 1210 Lacs, which is 49.44 Lacs short from the projected level ( i.e. Rs.682.24 lacs+Rs.577.29 lacs= 1259.53 lacs). The promoters of the company are arranging further fund to meet this shortfall and will complete the project by the end of the current financial year.
Debt Service: The present track record of the firm is good. The average DSCR is coming at 1.66 ( excluding the DSCR for the last year of repayment which is quite high).
Target vis a vis Achievement :
ParticularsAccepted during
last assessment for 2006-07 ActualVariance
Net Sales22.5515.097.46
PBT0.760.050.71
PAT0.69-0.020.71
Net Working Capital1.652.771.12
Note- Tube Div. Came in production in May 2007,so there is variance between accepted and actual parameters.
In view of the above, the financial position of the company may be termed as satisfactory. 7.B Details of investment in Shares, Debentures, Units or diversion of funds outside the business etc. Nil7.C Details of Liabilities not accounted for/Contingent liabilities- a) Claims against the Company not acknowledged as debt Rs.1721 thousand.
b) Outstanding Bank Guarantees Rs. 68674 thousand.As far as contingent liability other than BGs of the Company is concerned, it is AMG bill of JSEB (for unit I). Till date decision of the Board is pending, in case if it is payable the same will be paid by the partys own generation (Party has submitted undertaking on this subject).
7.D Status/details of adverse comments by Auditors of the borrowing unit- No adverse comment has been given by auditors.
7.E Position of assessment of income tax/sales tax/wealth tax of the borrowing concern/ partners/proprietor IT returns are being filed regularly
7F. Information on litigation initiated by other banks/FIs against the borrower as per latest Audited Balance Sheet, if NIL
7.G Overall likely impact of ( 7.B to 7.F) on the financial position of the borrowing unit
NIL
8.SECURITY A.Primary :
For working capital limits
Hypothecation of raw material, stock in process, finished goods, bill receivable arising out of genuine business and any other current asset acceptable to the Bank.
For Term Loan
Continuation of EM of existing block assets comprising factory land & building and hypothecation of plant and machineries and other moveable asset not embedded to ground. Lease hold land at plot no. A36(P), A37(F) to A43(F) & A44(P) situated at Adityapur, Area 8.60 acre
Collateral Securities
i) Hypothecation/ Mortgage of Block Assets Immovable Properties
(Rs in lac)
roperty DetailsOwned byValue as per Last sanction Present
Value as per valuer
report Realisable valueBasis for valuationDateWhether existing/ fresh
1. EM of land at mauza Kandedbera,Chandil,Seraikela-kharsawan,thana no. 327,Area 9.92 acre,khata no. 10, plot no.539,540,541,542,543,551
2..EM of factory shed, building & land of area 2.078 Acre situated at Phase III, plot no.B/23,B/24 & B/25, Industrial area, Adityapur.
3. EM of IP situated at 70,Rajendra Nagar, Sakchi, Jamshedpur. M/s Bina Krishi Udyog, Mr. Pranab Mukherjee & others
M/s Bina Metal way pvt. Ltd.
Mr. Pranab Mukherjee & others.250
NA
250250
96.57
250250
96.57
250Valuer report
Valuer report
Valuer report
15.02.2006
14.11.2007
15.02.2006Existing
To be extended
Fresh
Existing
To be extended
ii) Second charge : none
(Rs. in lac)
Nature of limitsSecurityValue of block assets as on: (as per B/Sheet as on 31.03.2007)Value of block assets excluding specific charge if anyExtent of first / second charge holdersBalance / residual value of charge available to bank/consortium
NANA
iii) Personal /Corporate Guarantee (Rs in lac)
Name of GuarantorNet Worth
Immovable propertyDate of confidential report
Prev.
As at 31.03.06Present
As at 31.03.07Prev. As at
31.03.06Present
As at 31.03.07Prev.Present
Mr. Pronab Mukherje 205 300 64 -19.01.0714.12.07
Mr.Probal Mukherjee 186 224 61 -19.01.0714.12.07
Mr.Pradip Mukherjee 111 147 60 -19.01.0714.12.07
Smt. Nandini Mukherje 22 22 01 0119.01.0714.12.07
Smt. Sampritee Mukherjee 73 77 10 1019.01.0714.12.07
Smt. Surita Mukherjee 72 83 13 1319.01.0714.12.07
Mr. Barun Mukherjee -73 - - -12.01.08
Smt. Raka Mukherjee -20 - - -12.01.08
M/s Bina Krishi Udyog 07 02
.Comments on changes, if any No change
Status of creation of charge: As per previous sanction charge has been modified with Registrar of Companies on 13.07.2007. 8. CSecurity Margin ( Fixed Asset Coverage Ratio for term loans)
ExistingProposed
NatureBook value
(Rs in lac)FACRBook ValueFACR on project completion
Primary15321.2518111.27
Collateral 5000.415970.42
Total20321.6624081.69
9. Position of Account as on 30.12.2007 (Rs. in lac)
NatureLimitVSDPBalanceIrregularity
T/L I (IC 18)Tube mill plant1000 1481 950 950 0.00
T/L II (IC 72) CNC machine226 300 215 226 11.30*
B/G300 - - 226.39 Nil
C/C(BD)0.00 0.00 0. 00
* The installment due in December quarter for Rs.11.30 lacs is due and party will be depositing the same within 15 days. The interest is paid up to date.
10.AConduct of the Account including details of terms & conditions not complied with
Conduct of the account is satisfactory & all terms and conditions of the sanction have been complied with.
10 BReview of the Account (as per General Instructions) - NA10. C i)Value of the Account
(Rs. in Lac)
PeriodNature of LimitLimitInterest/Commission EarnedYield (%)
8 monthTerm loan1000414.1%
7 monthBG30015.865.28%
The Yield on TL is low because the disbursement was gradual during the year.
ii)Concessions allowed, if any : 1.50% in ROI.
10.DSummary of serious irregularities pointed out by Banks Inspectors, Concurrent Auditors, Credit Audit & Review Division (CA&RD), RBI Inspectors, Statutory Auditors, observations of Stock Audit Report, Comment on Preventive Monitoring Score Trends, (and status of rectification of these irregularities)
NO SERIOUS IRREGULARITY POINTED OUT BY AUDITORS
11.Brief History
11.A General :
M/s. Bina Metal Way (P) Ltd has set up tube mill at Gamharia, Dist. Seraikela Kharswan, which manufactures tubes of different sizes and specification for M/s. Tata Steel. The company has entered into an agreement with M/s. Tata Steel for the said conversion job.
BMW is engaged in manufacture and supply of Railway Turnouts for the last few decades. Recently Indian Railway has decided to upgrade /modernize its existing Turnout system with improved Thick Web Switches instead of conventional one. To become a part and parcel of this programme of modernization of Thick Web Switches, BMW has already entered in to a technical collaboration agreement with M/s Balfour Beatty Rail Track System Ltd. This Company has offered to manufacture the Thick Web Switches with the help of latest international technology.
11.B Comments on Industry Scenario and industry outlook with particular
Activities of the company fall under light engineering industry, for which neither RMD nor ICRA has given any specific industry rating in the year 2007, As such we have assumed neutral status of the industry.The firm is not having many competitors in this area. Moreover the company is having agreement for supply with Tata Steel.
11.C Comments on management , production and marketing
The Directors of the Company are as under-
1. Mr. Probal Mukherjee
2. Mr. Pradip Mukherjee
3. Mr. Pronab Mukherjee
Mr. Probal mukherjee has got Diploma in Hotel management, but he has been associated with this firm since long. He has more than 20 years working experience in the field of manufacture of Permanent way items. He is the Director Commercial of BMW and looking after entire finance and HRD activities of the Company. He is also Director of M/s Thermatix Developers Pvt. Ltd. engaged in the field of real estate.
Mr. Pronab Mukherjee is Diploma holder in Civil Engineering. He has about 30 years working experience in the field of manufacture of Permanent way items. Presently he is holding the position of Managing Director of BMW & he is also Director of M/s Thermatix Developers Pvt. Ltd.
Its tube division is presently engaged in tube manufacturing, with a capacity to manufacture more than 50000 MT per annum. The tube mill is engaged in manufacturing circular pipes of sizes varying from 4 NB to 14 NB and corresponding sizes of square/ rectangular cross sectional structural as per ISI and API standards. The firm has entered into an agreement with M/s. Tata Steel for processing of slitting HR coils to required diameters as per technical specifications initially for 36 months with further renewable up to 24 months. M/s. Tata Steel shall be requiring around 3500 to 5000MT of piping materials per month from the firm. The non circular pipes of different sections are basically meant for construction purpose, now a days required for modern construction activities especially in modern airports and some new high profile construction.
11.D. Borrowers' diversification, expansion, modernization programme, if any-The present proposal is for additional term loan of Rs. 197.00 lacs to meet the above requirement and new credit facilities of CC(BD) Rs. 60.00 lacs & BG limit of Rs. 140.00 lacs over and above the existing term loan limit of Rs. 1000.00 lacs for its tube division. Although there is no diversification or moderninsation program but to complete the project as per the requirement of full capacity utilization and supply as per the contract the party requires the present fund.12. Present Proposal
Term Loan Rs. 197.00 lac
Cash Credit (BD) - Rs. 60.00 lac
Bank Guarantee - Rs. 140.00 lac
TOTAL - Rs. 397.00 lac
a) Brief of the proposal
This proposal is for following credit facilities:--
b) Justification for working capital sanction(For unit II) Comments on Sales estimation /projections and Justification for acceptance
Working Capital Requirement: (CC(BD):
The company has requested for working capital limit of Rs. 60.00 lacs for its tube division unit. The assumptions for financial figures are as under:
The production capacity of the tube 74400 MT per annum, based on 20 MT per hr, 12 working hour per day and 310 working days per year.
The capacity utilization for the mill has been taken 60%, 75%, 80% for 1st,2nd, 3rd year respectively. For rest of the years, production capacity has been taken 85%. It is acceptable.
The conversion charges of Rs. 1630/- per MT has been taken.
PBF CALCULATION
II method of lending2007-08
Chargeable Current asset90.95
Other current asset102.73
Total current asset193.68
Other current liab.15.60
Work cap gap178.08
Min stip.margin48.42
Available margin118.08
MPBF129.66
MPBF60.00
As per II method of lending, pbf works out to Rs. 60.00 lacs. The party has requested for CC(BD) limit of Rs. 60.00 lacs, which is acceptable. (The NWC taken for calculation here in above is only for unit II whereas the NWC given at para 7 A is for the whole company).
Holding period for current assets:
SrParticularHolding period (in months)
1st year2nd year 3rd year
1Receivables1.501.501.50
Since the company is dealing only with TISCO, the bills realization normally takes approx 40-45 days. The holding period as mentioned above is reasonable.
Assessment of non-fund based facilities
LETTER OF CREDIT: NA
(Rs in lac)
Letter of Guarantee
Nature & amount of limit sanctioned440.00
Outstanding as on 31.12.2007236.15
Name of the beneficiary / ies in whose favour guarantees to be issuedRailways, Tatas
Nature of the guarantee limit required i.e. performance/ financial/ Bid Bond etc.Performance
Margin proposed10%
SecurityCounter Indemnity of borrower
Justification for the proposed limitThe company does conversion job for Indian Railways and Tata Steel and Tata Tube. For getting the Raw material they need to submit the BG.
BANK GUARANTEE:
Party has requested us for further Bank Guarantee limit of Rs. 140 lacs for Tube Mill unit. This amount is required for furnishing Bank Guarantee to Tata Steel for getting H.R. Coil for the purpose of converting Tubes.
d) Justification for term loan/DPG
(i) Purpose
As per revised cost of project submitted by the party, the cost of project works out to Rs. 1857.38 lacs. The actual cost incurred in the project so far is Rs.1456.86 lacs as declared by the party. Certification from chartered accountant has been obtained regarding the matter which is dated 09.01.2008. It may be noted that there has been significant increase in the cost of factory shed and plant & machineries in revised cost of project. The additional expenses to be incurred in the project mainly comprises of additional cost of Rs. 281.60 lacs for plant machineries and Rs. 90.69 lacs for civil construction. The quotations for plant and machineries & estimation for proposed civil construction have been submitted.
Considering 30% margin on the proposed additional investment only under plant & machineries, the term loan component works out to Rs. 197.00 lacs and is acceptable.
For tube division:
Break even, capacity utilization and break even sales works out to be 48.01% 38.41% and Rs. 465.79 lacs respectively during the year 2009-10.
(ii) Appraising agency : The project was got studied by our Industry officer .As per his report the project is technically feasible and economically viable. The report is enclosed herewith.
(iii) Summary of cost of project and means of finance :
DETAILS OF ORIGINAL AND REVISED COST OF PROJECT:SrParticularOriginal costRevised CostCost incurredTo be incurred
1Land & Land Development84.1099.0694.065.00
2Shed & Building260.00461.72371.0390.69
3Plant & Machinery849.73885.62604.02281.60
4Testing & material handling65.0027.8226.021.80
5Electrical installation165.00117.88116.381.50
6Furniture5.005.332.762.57
7Security deposit30.0011.2611.260.00
8Preop expn63.46231.33231.330.00
9Contingency37.310.000.000.00
10Margin money for WC17.3617.360.0017.36
Total1576.961857.381456.86400.52
MEANS OF FINANCE
1Share capital390.00390.00
2Unsecured loan186.96270.38
3Term loan1000.001197.00
Total1576.961857.38
At the time of submitting original proposal, cost of construction was considered @ 300/- per sq.ft., which was prevailed during that time. Due to various reasons beyond the control and prolong rain delayed the project by more than 3 months. Due to delayed in construction work, material as well as labour charges increased heavily. Therefore cost of project increased.
Original cost of the project1576.96/- Lac
Revised cost of the project1857.38/- Lac
Difference
280.42/- Lac
As per the above chart the total investment in the project has been Rs.1456.86 lacs. As against the balance of Rs.400.52 lacs the promoters will bring in Rs.203.52 lacs.
(iv) Brief explanation for each major individual item of cost of Project with present status along with comments on the reasonableness/competitiveness
The firm has requested for term loan of Rs. 197.00 lacs in addition of existing limit of Rs. 1000 lac against investment in fixed asset of Rs. 1597.43 lacs, which yields 75%. As we have discussed earlier party is seeking additional facilities due to excessive hike in the cost of building materials. The proposed term loan will be utilized for both, P & M and shed & building. Quotation regarding machinery has obtained and kept in record at the branch.
v) Sources of Promoters Contribution : By increasing share capital to the tune of Rs.390.00 lac and raise unsecured loan to the tune of Rs. 267.38 lac till March 2008.
vi) Status of tie-up of loans : NA
viiComments on all major technical aspects like location advantage, Technology/ manufacturing process, power, man power, utilities, transportation, etc.
The company is situated at the Adityapur Industrial Area, which is the industrial hub of the state. They have advantage in having backward forward linkage and technical support as Jamshedpur is a fully industrial township.
Process:
The raw material for pipe manufacturing process is slitted HR coils of suitable sizes, which is supplied by M/s. Tata Steel, Jamshedpur. The coils are fed to the decoiler unit. The coils pass through forming section, cluster section, fin section, seam guide section, welding section, ironing section, sliding section, sizing stand and finally turk head stand.
Initially the coils pass through end shear, butt welding set where next coil is butt welded as per requirement of length of finished pipes. After getting welded, the coils are passed through leveling and pinch rolls. The coils are then allowed to pass through vertical cage where the coils are getting accumulated and from here the coils are fed to stands. The coils are passed through forming, cluster section. fin stand and seam guide, where the rollers of different sizes, profiles and inclination are installed as per the specification of end product. The coils get the shape of tube with open slit at the top. Then the welding unit comes into play and open seam is heated by HP induction generator. Immediately after heating, the edges of the pipes are forged or fused in the squeezing unit and it takes the shape of complete pipe. The pipe is then passed through cooling unit, where the weld formed pipe is cooled to ambient temperature. The welded pipe thus prepared is slightly of oversize. To get rid of this problem, the welded pipe is then passed through sizing unit, where with the help of rolls and dies the pipe is made to the exact size as per the requirement. After this the pipe is allowed to pass through turks heads, where the pipe get straightened. The pipes are passed through Non Destructive Testing unit, where with the help of eddy currents the defects are marked and the required length of pipe is cut and rejected to separate pockets.
The pipes are then cut into required sizes and collected in pockets. Thereafter the pipes are sent to end facing and beveling machine. After beveling, the pipes are ready for dispatch.
Water availability:
Presently the firm is having one deep boring, which is quite sufficient to meet the requirement of plant and for drinking & sanitation purpose. The manufacturing process does not require significant quantity of water.
Raw Material:
The raw material for the process of tube manufacturing is slit HR coils, which is supplied by M/s. Tata Steel, Jamshedpur. The proximity of raw material is very easy as supplier and recipient are in same city. The firm has entered into an agreement with M/s. Tata Steel for supply of raw material and then finished goods shall be supplied the them.
Land & Building:
Adityapur Industrial Development Authority at Industrial Area Adityapur has allotted the firm the land measuring approx 8.60 acres.
viii) Comments on product marketing with particular reference to industry position
Product & Market:
Its tube division is presently engaged in tube manufacturing, with a capacity to manufacture more than 50000 MT per annum. The proposed tube mill is engaged in manufacturing circular pipes of sizes varying from 4 NB to 14 NB and corresponding sizes of square/ rectangular cross sectional structural as per ISI and API standards. The firm has entered into an agreement with M/s. Tata Steel for processing of slitting HR coils to required diameters as per technical specifications initially for 36 months with further renewable up to 24 months. M/s. Tata Steel shall be requiring around 3500 to 5000MT of piping materials per month from the firm. The non circular pipes of different sections are basically meant for construction purpose, now a days required for modern construction activities especially in modern airports and some new high profile construction.
IX) Summary of profitability, Break-Even, DSCR and IRR with comments thereon including Assumptions underlying profitability projections:
For tube division:
Break even, capacity utilization and break even sales works out to be 48.01% 38.41% and Rs. 465.79 lacs respectively during the year 2009-10.
Debt equity ratio works out to be 2.60 for the year 2007-08, which reduces further, in subsequent years.
For company as a whole:The company has achieved gross sales of RS.1518.65 lacs for the year 2006-07. It has achieved sales of Rs. 785.43 lacs during the period ended August 2007 i.e. for a period of 5 months.
The company has given sale projection of Rs. 2513.71 lacs for the year 2007-08. Recently te company has procured one CNC plano milling machine, which shall exclusively be used for complex and accurate milling jobs. Presently the company has orders worth more than Rs. 800.00 lacs from railways, besides this, it is also taking initiation for additional work orders. It is also expecting a work order from TGS ( Tata Growth Shop) of sizable amount in a month or so. It is envisaged that the company may achieve the projected sales for the year 2007-08 provided it gets orders in time.
Considering company as a whole, DSCR and other financial calculation are as under:
Break even and break even sales works out to be 51.41% and Rs. 1634.42 lacs respectively during the year 2009-10, which sounds comfortable.
Debt equity ratio works out to be 1.37 for the year 2007-08, which reduces further, in subsequent years.
A. Project on stand alone basis
ParticularsProjections
Year 1Year 2Year 3Year 4Year 5
Installed Capacity(MT)7440074400744007440074400
Capacity Utilisation60%75%80%85%85%
Net sales363.82909.54970.181133.891133.89
Profit after Tax15.13188.80253.98380.99422.44
Cash Profit120.86386.45425.85530.49552.54
DSCR
2007-082008-092009-102010-112011-122012-13
Profit after tax15.13188.80253.98380.99422.44515.01
Add depreciation105.73197.65171.87149.50130.10113.25
Add intt on term loan 100.21 133.74 103.35 69.71 26.33 3.25
Prel exp 0.50 0.50 0.50 0.50 0.50 -
Total (A)221.57520.69529.70600.71579.36631.51
Term loan repayment50.00205.73230.73305.73280.7330.73
Intt on term loan 100.21 133.74 103.35 69.71 26.33 3.25
Total (B)150.21339.47334.08375.44307.0533.98
DSCR= A/B1.471.53.591.601.8918.59
Avg. DSCR1.66(excl.2012-13)
Average DSCR works out to be 1.62 as per above, which is satisfactory.
B. Company as a whole
(Rs in lac)
ParticularsProjections
Year 1Year 2Year 3Year 4Year 5
Installed Capacity(MT)
Capacity Utilisation
Net sales
Profit after Tax
Cash Profit
Note- Since Company is having no. of products, so it is difficult to calculate capacity utilization as a whole.
DSCR (Combined)
2007-082008-092009-102010-112011-122012-13
Profit after tax21.36216.06307.50438.90498.99594.66
Add depriciation182.16263.31228.43198.35172.37149.92
Add intt on term loan 123.09 158.64 120.81 82.04 33.49 5.53
Deffered tax 0.60 2.34 1.34 0.56 (0.04) (0.50)
Total (A)327.22640.35658.08719.86704.81749.60
Term loan repayment72.60262.80288.05363.33338.6366.36
Intt on term loan 123.09 158.64 120.81 82.04 33.49 5.53
Total (B)195.69421.44408.86445.37372.1271.89
DSCR= A/B1.671.521.611.621.8910.43
Avg DSCR1.66(excl.2012-13)
Average DSCR works out to be 1.66 without taking into account 2012-13 , which is quite satisfactory. (As per the report of the Dy. Mgr. Industries the TL installment was taken as Rs.122.60 lacs but since the installment for December 2007 and March 2008 quarter has been rescheduled from June 08, the same has been taken for the calculation herein above).
x) Detailed Sensitivity Analysis:
The sensitivity analysis carried out considering 5% decrease in selling price and other increase in different head of cost of production taking other factors as unchanged. It is found that net profit and cash accruals are quite satisfactory in each case.
Tube Division
Capacity Sales Raw Materials consumable Power & Fuel Other var. Fixed & semi-
Utilisation Price Price Price Rate cost variable exp.
80% Decrease Increase Increase Increase Increase Increase
2009-10-5%5%5%5%5%10%
Sales (Net) 970.18 921.67
Raw Materials -
Consumables -
Power & Fuel 166.01 174.31
Other Variable Cost 104.64 109.87
Fixed & semi-Var. Cost 210.92 232.01
Net Profit
(After tax & Dividend) 253.98 205.47253.98253.98245.68248.75232.89
Cash Accrual 425.85377.34425.85425.85417.55420.61404.75
Combined Unit
Capacity Sales Raw Materials consumable Power & Fuel Fixed & semi-
Utilisation Price Price Price Rate variable exp.
0% Decrease Increase Increase Increase Increase
2009-10-5%5%5%5%10%
Sales (Net) 3179.18 3,020.22
Raw Materials 1443.20 1,515.36
Consumables 66.00 69.30
Power & Fuel 248.51 260.94
Other Variable Cost 525.17
Fixed & semi-Var. Cost 505.71 556.28
Net Profit
(After tax & Dividend) 307.50 148.54235.34304.20295.07256.93
Cash Accrual 535.93376.97463.77532.63523.51485.36
Status of various statutory approvals and clearances
The necessary statutory approvals and clearance are available.
Power connection:The firm requires power load of approximately 1500 KVA. The firm has got sanction letter from state electricity board for the requisite power load of 1500 KVA from 33 KV line of JSEB vide their letter no 3159 dtd. 14/11/2006. The firm is having 1 D.G. set of 62.5 KVA for its requirement of auxiliary power in case of power failure. The operation of the unit is totally dependent upon the power supply from JSEB because such a huge load cannot be met through D.G. set of such high rating. Pollution Control:
The process of manufacturing tubes involves neither any smoke generation nor usage of chemicals. But even then the firm has applied for pollution clearance. PCB has communicated vide their letter no. 2833 dtd. 03/09/07 for compliance of certain terms and conditions like providing details of production process/ details of pollution control measures etc. The company has replied to pollution control board vide their letter no. nil dtd. 11/09/2007 and provided the required information. Now the company is awaiting for the NOC, which shall be issued from the board.
Factory license:
Consequent upon its application for factory license, the chief factory inspector has instructed to factory inspector to issue the factory license vide his letter no 185 dtd. 10/07/2006. As of now the company has yet to get factory license.
(XI) Present physical & financial status of project, if any
Factory shed II, which is an extension of existing shed I. The remaining construction of 11090 sq ft to be taken place. The estimated expenditure to be incurred in the extension of shed is Rs. 75.97 lacs. The other constructions to be taken place are underground tank, internal concrete road and security room with estimated value of Rs.14.72 lacs. The total estimated expenditure for shed and building works out to Rs. 90.69 lacs, which is yet to be incurred.
xiii) Implementation schedule
The main shed of the factory is already constructed and extension of the shed on the eastern portion of the existing one is under construction with plinth area of approx 1008 sq mtr. 06 nos of structural columns on each side of the stretch have been erected on concrete foundation. The required truss has been also erected over the columns and sheeting works are to be done over the structural truss. Flooring works on the extension are yet to be taken up. The other civil constructions to be taken place are internal concrete road, underground water reservoir and ramp or approach to the weighbridge. Completion of the said civil works and installation of EOT shall be completed by the end of December 2007.
xiv)Proposed repayment schedule
Term loan II (Rs. 197.00 lac) : Entire loan to be repaid in 20 quarterly installment of Rs 10.00 lac + interest starting from June 2008.
13. A.Pricing
FacilityExistingProposedApplicable rateJustification for
concessions, if any
Rate of interestCC-BDNA13.5%BPLR+2% i.e15.0%Applicable rate-1.5%
TL12.25%, 14.00 % 14.00%BPLR+2%+Term premia 0.5% i.e
15.5%Applicable rate-1.5%
Processing FeeWCAs per Bank schedule Rs 250/= per lac
Upfront Fee1.25 % of the loan amount
Lead Bank FeeNANANANA
Commission on NFBNANANANA
Other charges, if any
Documentation charges
As per Bank scheduleRs. 220/ per lac.
Cost Benefit Analysis:
Earning at applicable rate: TL: Rs.31.00 lacs approx pa
CC: Rs. 09.00 lacs aprox pa
Total
Rs.40.00 lacs pa
Earning at proposed rate: TL: 28.00 lacs aprox pa
CC: 08.50 lacs aprox pa
Total
Rs.36.50 lacs pa
Concession: Rs.3.50 lacs pa
HO interest on FD kept against BG : Rs.3.74 lacs pa
Keeping in view the high value client and earnings in various loan facilities and the above calculations we propose for the concession in interest rates as above.
B.ROI/other charges stipulated by other participating banks, if applicable Not applicable
14.Other Issues Nil
15. a) Credit Risk Rating including Risk Factors & mitigation
The account has been rated under BB category indicating Average risk in Bank exposure.
b) Loan Policy The company is categorized under large scale industry and light engineering sector.
c) Industry Exposure as on
Industry
Outstanding ( Rs. in crore)
% of Gross Credit in the Industry
Ceiling in terms of outstanding as per current loan policy
Amount of NPA in industry
% to total advances in --------industry
16. SWOT Analysis:
Strength:
The company has successfully installed its machineries and it has started its commercial production.
The job activity is basically conversion activity for M/s. Tata Steel. Hence the companys customer base is already established. It does not have to go for another customers for its products. They have an agreement for sale and conversion with Tata Steel.
The company is having very well technically qualified workforce in its operation and maintenance team.
The additional CNC plano milling machine shall add value to its products in quality and quantity as well in Unit I.
The promoters are very resourceful and experienced in this field.
Weakness:
There is no provision for alternate power.
The firm shall be totally dependent on power supply of 33 KV from JSEB.
Mitigation: Jusco is coming with power in Adityapur.
Opportunities:
Government is trying to boost up industrial sector by providing road and basic infrastructure.
Threat:
As far as tube division is concerned, the business of the company is totally dependent on the work orders from M/s. Tata Steel.
Mitigation: The company has got the 36 months of agreement for supply to Tata Steel
17 Recommendations:
In view of the foregoing, we recommend for sanction of following credit facilities in favour of the company for tube unit on the terms and conditions annexedTerm Loan Rs. 197.00 lac
Cash Credit (BD) - Rs. 60.00 lac
Bank Guarantee - Rs. 140.00 lac
TOTAL - Rs. 397.00 lac
Sr. Manager
Sr Manager(Credit)
Annexure to Board Note: M/s Bina Metal Way Pvt. Ltd.
Facility No. 1Nature :CC (BD)
Limit
:Rs. 60.00 lac
Margin:30%
Interest : BPLR+0.5% i.e presently 13.5%Period: One year subject to renewal on merit basis.
Security : Hypothecation of entire book debts, present and future arising out of genuine credit sale transactions.
1) Stock Statements: The borrower has to submit statement of receivables on the Performa prescribed by the bank as on the last day of each month within 10 days of the following month. Statement should contain all the required information such as realization of book debts during the period and their deposit with the bank, age of book debts and debts outstanding for 0-90 days, 91-180 days etc. DP shall however be allowed against book debts of the age up to 90 days. Branch tol obtain statement of Book Debts duly certified by CA in each quarter.
2) Verification: bank officials will verify the statement from the books of the party at least once in a month at irregular intervals and satisfy that:
a)The statement is in agreement with the books of the accounts maintained by the party.
b)Ages-wise classifications of debts are correctly done.
c)The realization of book debts are routed through our bank.
d) Book debts are out of genuine trade transaction and for the activities for which the limit has been sanctioned.
3) Drawing Power.
No DP shall be allowed against:
a)Book debts outstanding more than 90 days.
b)Book debts relating to allied/associate/group concerns.
Facility 2
Nature:Term Loan(Enhancement)
Amount: Rs. 197.00 lac Margin: 25%
Interest : BPLR+0.50% +0.50% (term premia) i.e @14.00% p.a on monthly rest subject to change from time to time as per HO guidelines.
Repayment : : Entire loan to be repaid in 20 quarterly installment of Rs 1000000 w.e f June 08.Interest to be paid as and when levied.
Security:Loan to be secured by EM of block