final draft_raj vamsi

7/31/2019 Final Draft_raj Vamsi

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CHAPTER I

INTRODUCTION

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INTRODUCTION

Assessment of Fund Base and Non Fund Base Loans in terms of its economic, social and financial

viability is known as credit appraisal. Fund base includes Working Capital and Term Loan where

as Non Fund Base includes Letter of Credit and Bank Guarantee. Credit appraisal is an exercise

whereby a lending financial institution makes an independent assessment of various aspects of an

investment proposition to arrive at the financing decision. Appraisal exercises are basically aimed at

determining the viability of the project and sometimes, also in reshaping the project so as to upgrade its

viability. Here the financier takes a second look critically and carefully at a project as presented by the

promoter to a person who is in no way related to the project and is as such able to take independent view

of the project in its totality as also in respect of its various components. Since all activities involve risk in

a smaller or larger measure, credit appraisal aims at sizing up the quality of projects and their long term

profitability aims at minimizing the risk of lending by rectifying their weaknesses and improving their

quality by incorporating into them the features/safeguards missed by the promoters either because of the

lack of knowledge or information.

The factors generally considered by institutions while appraising a project include technical,

financial, ecological and managerial aspects. This makes it necessary to identify the inter-

relationships among the various elements of a project. For instance, the size of the initial

market and the estimates for demand build up would determine the plant capacity and

production planning, which in turn would affect the profitability and this has a direct bearing

on the means of financing. Above all, the management behind the project has a decisive

influence on most of these aspects. These considerations imply that credit appraisal is viewed

as a composite process as against the approach of viewing each aspect individually.

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1.1 Meaning

The exercise of credit appraisal simply means the assessment of a project in terms of its economic,

social and financial viability. This exercise is critical as it calls for a multi-dimensional

analysis of the project that is, a complete scanning of the project.

Financial institutions and banks make a critical assessment of projects which are submitted to them

by the entrepreneurs for getting loans. They have traditionally been accepting the data given by the

entrepreneur as valid while assessing the project. In fact, the emphasis has largely been on the cash

flow and financial viability of the project in assessing their suitability for extending the loans.

1.2 Definition

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.

1.3 Scope of Appraisal

The appraisal of a project is under taken by the financial institutions with the twin objectives of

determining the market potential and selecting an optimal strategy. The method of analysis varies

from project to project. Nevertheless, certain common aspects of study from the angle of

technology and engineering are mentioned below:

Choice of technical process and/or appropriate technology

Technical collaborations arrangements, if any

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Size and scale of operations

Location aspects of the project and availability of infrastructural facilities

Selection of plant, machinery, equipment together with background, competence and

capability of machinery / equipment suppliers.

Plant layout and factory building

Technical engineering services

Project design and network analysis for the assessment of project implementation schedule

Project cost and its comparison with other similar projects, based on technology,

equipment, product mix and time spread

Determination of project cost estimates and profitability projections etc.

Sensitivity analysis

It must be remembered that different aspects of a project are not independent entities but are highly

inter-related and a meaningful interpretation of the project depends on the appreciation of this fact.

1.4 Objectives of the Study

The objectives of the research study are:

To study the Credit Appraisal Methods.

To Understand the credit appraisal process for working capital loan and term loan

To learn about operating cycle

To understand the commercial, financial & technical viability of the project proposed & its

funding pattern.

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To understand the pattern for primary & collateral security cover available for recovery of

such funds.

1.5 Need for the study

Credit provided by commercial banks is an important driver of national economy. The

modern economy is driven by technology, and the most important variables of the

economy are consumption demands of the vast population as well as supply machineries

to meet the demand. Today, the total requirements cannot be possibly met by traditional

financiers alone. The role of modern commercial banks as providers of credit to the

economy begins at this point. But the credit has to be given with proper analysis and

reasoning based on the data. The quality of advance will definitely suffer if it is a wild

goose chase.

Small and medium enterprises play a vital role for the growth of the Indian economy by

contributing 45% of the Industrial output, 40% of exports, 42 million in employment,

create one million jobs every year and produces more than 8000 quality products for the

Indian and International market. Credit is one of the critical inputs for the promotion of

the Small and medium enterprises. An in-depth analysis is required to avoid the credit

risk for the lending institutions. The present study finds that there is a need to undertake a

comprehensive study on credit appraisal in SME segment. Hence an attempt is made on

the present study with specific reference to State Bank of India.

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1.6 Database of Study

The study is based on the primary data submitted by the promoter and secondary source of data.

Primary data is collected from the interview with the directors of the company, data submitted by

the company, discussions with the bank officials and the past financial statements of the sister

concern. The secondary data are collected from the news papers, magazines, internet etc.

1.7 Limitations of the study

Credit appraisal system includes various types of detail studies for different areas of

analysis, but due to time constraint, our analysis was of limited areas only.

As the credit rating is one of the crucial areas for any bank, some of the technicalities are

not revealed which may have cause destruction to the information and our exploration of

the problem.

As some of the information is not revealed, whatever suggestions generated, are based on

certain assumptions.

1.8 Literature Review

The assessment of a project, from all the possible dimensions, is the most important aspect foe the

financier / lender. In the wake of the global crisis, whose roots are tracked back mostly to the

subprime-lending, the process of project evaluation and the accuracy with which the entire process

is carried out assumes more significance than ever. In this context, it is imperative to identify those

parameters which are instrumental in the success of a firm/project. Below are the excerpts from a

few studies, which have carried out research on similar lines as this.

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Volker Bruns and Margaret Fletcher in their work Banks risk assessment of Swedish SMEs

taken from the journal Venture Capital, Vol.10, No.2, April 2008, pages 171-194, concentrates on

a variety of items ranging from the problems the SMEs receiving external finance may be

attributed to the fact that the vast majority is privately held and owner managed. As compared to

such as issuing new public stock Bankers therefore emphasize on the information on the

borrowers ability to repay the loan; alignment of risk preferences; and risk sharing affect their

willingness to grant credit. Results suggest that features that reduce the risk to the bank and shift

the risk to the borrower have the largest impact. Findings suggest that banks place the strongest

emphasis on the tangible accounting figures SMEs present, and factors that shift the risk from the

bank to the borrower.

Moodys Investors Service report in its work Sharp Ramp-Up One-Year Default Rate for Low-

DSCR Loans from journal Mortgage banking, Aug2005, Vol. 65 Issue 11, p112-112, articulates

the importance of Debt Service Coverage Ratio, the most important in any project financing

decision. The work concluded that loans for non-core properties default far more frequently than

the loans backed by core assets. The work quotes that in all classes of commercial ventures, the

lower the debt-service coverage ratio (DSCR), the greater the risk of default. The depth of a cash-

flow delinquency, as measured by a lower DSCR, is critical to the likelihood of default. Moving

down the coverage scale, the probability of a default progressively increases, according to this

work.

Thomas Ziwei and Tang in their work Delineating the predominant criteria for subcontractor

appraisal and their latent relationships taken from the journal Construction Management &

Economics Mar, 2008, Vol. 26 Issue 3, p249-259, have compiled a set of criteria that are helpful to

assess the sub-contractors performance. Through factor analysis, the 15 most important

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subcontractor performance appraisal criteria and their underlying relationships are identified. A

few of such criteria are: Workmanship, Progress, Resources control, Health and safety,

Environmental protection, Organization, General obligations, Industry awareness, Attendance to

emergency, Attitude to claims, Relationship, Communication. The results indicate that the three

overarching factors for subcontractor performance appraisal are 'team interaction',

'accomplishment of project goals' and 'track record'. The identified appraisal criteria lay a solid

foundation for the development of a centralized subcontractor performance appraisal system to

facilitate performance reporting, data sharing and benchmarking.

Ashish Kumar Rastogi, P.K.Jain, Surendra S. Yadav in their publication Debt financing of

corporate enterprises in India: a study showing impact of industry, size and age factors taken from

the journal Journal of Advances in Management Research, Year: 2006, Vol. 3, Issue: 2, p54-67

emphasizes on whether there are significant variations in the profile of debt-financing as a result of

differences in industry, size and age group of the sample corporate enterprises in India. The study

articulates that while industry and size have been observed to be a significant factor influencing

composition and maturity structure of debt financing, the empirical evidence does not support the

premise that the debt financing decisions vary significantly across age categories.

Mile Terziovski in the study titled The relationship between networking practices and business

excellence: a study of small to medium enterprises (SMEs) taken from the journal: Measuring

Business Excellence, Year: 2003, Vol. 7, Issue: 2, p78-92, makes a mention of the relation between

networking practices and business excellence. In this paper, the author quotes that the Networking

practices regression (NPR) models were developed in order to test the strength of the relationship

between key components of networking practice and several dimensions of business excellence

such as success rate of new products, reduction in waste, increased market opportunities. He is of

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the opinion that groupings of network practices are required to explain business excellence. This

means that a single networking practice is not sufficient to explain business excellence

significantly. The most significant networking practices were found to be searching and

incorporating diverse points of view, challenging the status quo, learning from failures,

communicating with people outside the company, including experts, allocation of resources to

support communication linkages. The main implication of the research results for SME managers

is that a typical manufacturing SME is more likely to improve its chances of achieving business

excellence with networking practices than without these practices.

P.A.Thompson and J.D.Whitman in their publication Project Appraisal by Cost Model taken

from the journalManagement Decision, Year: 1973, Vol. 11, Issue: 5, p301-308, make a mention

of the delay in commissioning the project and the risk associated with it. The risk of delay in

commissioning the project is very instrumental, yet very rarely considered during feasibility

studies for a capital project, and the results of such studies are rarely updated during the

construction phase. Consequently project managers are deprived of reliable data relating to the

project as a whole upon which they might base their decisions.

Patricia R. Todd, Rajshekar G. Javalgi in their work Internationalization of SMEs in India:

Fostering entrepreneurship by leveraging information technology taken from the journal

International Journal of Emerging Markets, Year: 2007, Vol. 2, Issue: 2, p166-180, make a

mention of the importance of information technology in the performance of a Small and Medium

scale Enterprise. It is proposed that the primary method for fostering or promoting the growth of

entrepreneurship is through the utilization of technology. Advancements in information technology

and improvements in communication infrastructure have resulted in opportunities for SMEs to

participate in global markets in both developing and developed countries. Since, governmental

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reforms in 1991, SMEs in India have been faced with new competitive intensity. Improvements in

resource utilization, with special emphasis to information technology, make it possible to sell a

variety of products and services from anywhere in the world, around the clock.

S. Maguire, S. C. L. Koh, A. Magrys in their publication The Adoption of e-business and

knowledge management in SMEs taken from journal Benchmarking: An International Journal,

Mar2007, Vol. 14, Issue: 1, p37-58, emphasize the importance of information and communication

technology in the performance of a SME. They show that the small and medium-sized enterprises

(SMEs) using information and communications technology (ICT) to try and gain a competitive

advantage over those which do not exploit the technology. This paper provides sound evidence

that SMEs can gain competitive advantage through the use of Information and Communication

Technology. More than 70 per cent of the entrepreneurs identified Information and

Communication Technology as aiding their business in one or more of the accepted competitive

areas. However, there is potential for SMEs to gain further advantages by using an integrated and

strategic approach in their use of technology.

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CHAPTER II

INTRODUCTION TO BANKING

SECTOR AND SBI

INTRODUCTION TO BANKING SECTOR AND SBI

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2.1 A snapshot of the banking industry

The Reserve Bank of India (RBI), as the central bank of the country, closely monitors

developments in the whole financial sector. The Reserve Bank of India was established on April 1,

1935 in accordance with the provisions of the Reserve Bank of India Act, 1934.The Central Office

of the Reserve Bank was initially established in Calcutta but was permanently moved to Mumbai

in 1937. The Central Office is where the Governor sits and where policies are formulated. Though

originally privately owned, since nationalization in 1949, the Reserve Bank is fully owned by the

Government of India.

RBI data says that there are 171 different banks that operate in India, as on June 08. Together,

these banks have 76,003 reporting offices across the country. Deposits have been growing the

fastest in urban areas while credit has been growing the fastest in Metropolitan areas. Rural areas

have seen slightly faster growth in deposits than in Credit, while i metropolitan areas, credit

growth outpaced deposits growth by a large 7% margin. In semi - urban areas the two were more

or less balanced with deposits getting a minor 0.6 % edge

as on June 08

No. of Banks

All Scheduled Commercial Banks 166

Regional Rural Banks 88

Other scheduled commercial banks 78

Non-Scheduled Commercial Banks 5

Total 171

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Higher provisioning norms, tighter asset classification norms, dispensing with the concept of past

due for recognition of NPAs, lowering of ceiling on exposure to a single borrower and group

exposure etc., are among the measures in order to improve the banking sector.

A minimum stipulated Capital Adequacy Ratio (CAR) was introduced to strengthen the ability of

banks to absorb losses. The Reserve Bank of India (RBI) on day raised the minimum capital

adequacy ratio (CAR) for deposit-taking non-banking financial companies (NBFCs) from 12 per

cent to 15 per cent, effective from March 31, 2012.

With a view to provide an institutional mechanism for sharing of information on borrowers /

potential borrowers by banks and Financial Institutions, the Credit Information Bureau (India) Ltd.

(CIBIL) was set up in August 2000. The Bureau provides a framework for collecting, processing

and sharing credit information on borrowers of credit institutions. SBI and HDFC are the

promoters of the CIBIL.

The finance ministry spelt out structure of the government-sponsored ARC called the Asset

Reconstruction Company India Limited (ARCIL), this pilot project of the ministry would pave

way for smoother functioning of the credit market in the country.

2.2 Classification of banks

The Indian banking industry, which is governed by the Banking Regulation Act of India, 1949 can

be broadly classified into two major categories, non-scheduled banks and scheduled banks.

Scheduled banks comprise commercial banks and the co-operative banks. In terms of ownership,

commercial banks can be further grouped into nationalized banks, the State Bank of India and its

group banks, regional rural banks and private sector banks (the old / new domestic and foreign).

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These banks have over 67,000 branches spread across the country. The Indian banking industry is

a mix of the public sector, private sector and foreign banks. The private sector banks are again spilt

into old banks and new banks.

Banking System in India

Reserve bank of India (Controlling Authority)

Development Financial institutions Banks

IFCI IDBI ICICI NABARD NHB IRBI EXIM Bank SIDBI

Commercial Regional Rural Land Development Co-operative

Banks Banks Banks Banks

Public Sector Banks Private Sector Banks

SBI Groups Nationalized Banks Indian Banks Foreign Bank

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2.3 About SBI:

State Bank of India (SBI) is the largest Indian banking and financial services company (by

turnover and total assets) with its headquarters in Mumbai, India. It is state-owned. The bank traces

its ancestry to British India, through the Imperial Bank of India, to the founding in 1806 of

the Bank of Calcutta, making it the oldest commercial bank in the Indian Subcontinent. Bank of

Madras merged into the other two presidency banks, Bank of Calcutta and Bank of Bombay to

form Imperial Bank of India, which in turn became State Bank of India. The government of India

nationalized the Imperial Bank of India in 1955, with the Reserve Bank of India taking a 60%

stake, and renamed it the State Bank of India. In 2008, the government took over the stake held by

the Reserve Bank of India.

SBI provides a range of banking products through its vast network of branches in India and

overseas, including products aimed at non-resident Indians (NRIs). The State Bank Group, with

over 16,000 branches, has the largest banking branch network in India. It also has around 130

branches overseas. With an asset base of $352 billion and $285 billion in deposits, it is a regional

banking behemoth and is one of the largest financial institutions in the world. It has a market share

among Indian commercial banks of about 20% in deposits and loans.

The State Bank of India, the countrys oldest Bank and a premier in terms of balance sheet size,

number of branches, market capitalization and profits is today going through a momentous phase

of Change and Transformation the two hundred year old Public sector behemoth is today stirring

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out of its Public Sector legacy and moving with an ability to give the Private and Foreign Banks a

run for their money.

The State Bank of India is the 29th most reputed company in the world according toForbes. Also

SBI is the only bank featured in the coveted "top 10 brands of India" list in an annual survey

conducted by Brand Finance and The Economic Times in 2010.

The State Bank of India is the largest of the Big Four banks of India, along with ICICI

Bank, Punjab National Bank and HDFC Bank are its main competitors.

2.3.1 International Presence

As of 31 December 2009, the bank had 151 overseas offices spread over 32 countries. SBI operates

several foreign subsidiaries or affiliates.

2.3.2 Associate Banks

SBI has FIVE associate banks:

State Bank of Bikaner & Jaipur

State Bank of Hyderabad

State Bank of Mysore

State Bank of Patiala

State Bank of Travancore

Earlier SBI had only seven associate banks that constituted the State Bank Group. All use the same

logo of a blue keyhole and all the associates use the "State Bank of" name, followed by the

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regional headquarters' name. Originally, the then seven banks that became the associate banks

belonged toprincely states until the government nationalized them between October 1959 and May

1960. In tune with the first Five Year Plan, emphasizing the development of rural India, the

government integrated these banks into the State Bank of India system to expand its rural outreach.

There has been a proposal to merge all the associate banks into SBI to create a "mega bank" and

streamline operations.

2.3.3 Branches of SBI

State Bank of India has 131 foreign offices in 32 countries across the globe.

SBI has about 25,000 ATMs (25,000th ATM was inaugurated by the Chairman of State

Bank Shri O.P.Bhatt on 31st March 2011, the day of his retirement) and SBI group

(including associate banks) has about 45,000 ATMs

SBI has 26,500 branches, including branches that belong to its associate banks

SBI includes 99345 offices in India

2.3.4 Symbol and slogan

The symbol of the State Bank of India is a circle and not key hole and a small man at the centre of

the circle. A circle depicts perfection and the common man being the centre of the bank's business.

Slogans of SBI include with you all the way, Pure banking nothing else, The Banker to every

Indian, The Nation banks on us.

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2.3.5 Key areas of operation:

The business operations of SBI can be broadly classified into

a) Corporate banking

The Corporate banking of SBI include Working Capital Financing, Term loans, Deferred Payment

Guarantees, Corporate Loans, Export Credit, Strategic Business Units, Pricing.

b) National banking

This National Banking includes Personal Banking SBU, Small & Medium Enterprises, Agricultural

Banking, and Government Banking

c) International banking

As of 31 December 2009, the bank had 151 overseas offices spread over 32 countries.

d) Treasury

The bank manages an integrated treasury covering both domestic and foreign exchange markets.

In recent years, the treasury operation of the bank has become more active amidst rising interest

rate scenario, robust credit growth and liquidity constraints.

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SME SECTOR

3.1 Definition of SMEs

A small scale industrial unit is an undertaking in which investment in plant and machinery,

does not exceed Rs.1 crore, except in respect of certain specified items under hosiery, hand tools,

drugs and pharmaceuticals, stationery items and sports goods, where this investment limit has been

enhanced to Rs 5 crore. Units with investment in plant and machinery in excess of SSI limit and

up to Rs. 25 crore may be treated as Medium Enterprises (ME).

The Government of India has enacted the Micro, Small and Medium Enterprises Development

(MSMED) Act 2006 which was notified on October 2, 2006. Small and medium enterprises

(SMEs), particularly in developing countries, are the backbone of the nation's economy. They

constitute the bulk of the industrial base and also contribute significantly to their exports as well as

to their Gross Domestic Product (GDP) or Gross National Product (GNP).India has nearly three

million SMEs, which account for almost 50 percent of industrial output and 42 percent of Indias

total exports.

Special roles for SMEs were earmarked in the Indian economy with the advent of planned

economy from 1951 and the subsequent industrial policy followed by government. By and large,

SMEs developed in a manner, which made it possible for them to achieve the following objectives:

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1. High contribution to domestic production

2. Significant export earnings

3. Low investment requirements

4. Operational flexibility

5. Low intensive imports

6. Capacity to develop appropriate indigenous technology

7. Import substitution

8. Technology-oriented industries

9. Competitiveness in domestic and export markets

However, those SMEs who had a strong technological base, international business outlook,

competitive spirit and willingness to restructure themselves withstood the current challenges and

came out successful to make their own contribution to the Indian economy.

It is the most important employment-generating sector and is an effective tool for promotion of

balanced regional development. These account for 50 percent of private sector employment and 30

to 40 percent of value-addition in manufacturing. It produces a diverse range of products (about

8000 odd items), including consumer items, capital and intermediate goods.

However, the SMEs in India, which constitute more than 80 percent of the total number of

industrial enterprises and form the backbone of industrial development, are as yet, in technological

backwaters vis--vis advances in science and technology. These suffer from problems of

suboptimal scales of operations and technological obsolescence.

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While most of the large companies, even in developing countries, have financial as well as

technical capacity to identify technological sources and evaluate alternate technologies that would

suit their requirements, unfortunately this capacity is missing in most SMEs.

3.2 Growth of SME Sector in India: An Analysis

SME is the abbreviation for Small and Medium Enterprises. These enterprises can be rightly called

as the backbone of the GDP of India. The SME sector in India is growing at an exceptionally fast

rate due to which it is proving to be beneficial to the Indian Economy. However, there are some

important points that need to be considered for further development of the SME sector. The current

figures related to the SME sector in India are as follows:

The contribution of the SME sector to the entire output of the country is 40 %.

Currently, there are over 11 million SME units in India that produces more than 8000

products.

90 % of the Industrial Units in India belong to the SME sector.

These SME units contribute 35 % to the Indian Industrial Export.

The below mentioned are the factors that have contributed to the growth of the SME sector in

India.

SME units in India are being funded by foreign and local fund providers.

The advancement in technology has also contributed highly to the SME sector. There are

numerous business directories and trade portals available online that contains a rich

database of manufacturers, sellers and buyers

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These enterprises contribute almost 35 percent to the Indian industrial export

Finally, these enterprises are estimated to grow at the rate of 20 percent per year for

upcoming years

3.3 Main Reasons for SME Growth

Foreign and local fund providers are taking huge interest in the small and medium

enterprises of India

Banking sector has also shown a keen interest in lending credit to these enterprises

Many recent mergers have taken place in the sector

The sector has significantly contributed towards the domestic production as well as the

export earnings

Low investment is required to start and maintain these enterprises

The sector has contributed impressively towards job creation and increase in individual

incomes

Technological growth is also a factor for growth of SME's in India as there are

several trade portals and business directories available online with huge database of buyers,

sellers, manufacturers who are basically back bone of SME's

Banks may initiate necessary steps to rationalize the cost of loans to SME sector by adopting a

transparent rating system with cost of credit being linked to the credit rating of enterprise

SIDBI has developed a Credit Appraisal & Rating Tool (CART) as well as a Risk Assessment

Model (RAM) and a comprehensive rating model for risk assessment of proposals for SMEs. The

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banks may consider taking advantage of these models as appropriate and reduce their transaction

costs. In order to increase the outreach of formal credit to the SME sector, all banks, including

Regional Rural Banks may make concerted efforts to provide credit cover on an average to at least

5 new small/medium enterprises at each of their semi urban/urban branches per year.

A debt restructuring mechanism for nursing of sick units in SME sector and a One Time

Settlement (OTS) Scheme for small scale NPA accounts in the books of the banks as on March 31,

2004 are being introduced.

3.4 Challenges faced by SME:

The challenges being faced by the small and medium sector may be briefly set out as follows-

a) Small and Medium Enterprises (SME), particularly the tiny segment of the small enterprises

have inadequate access to finance due to lack of financial information and non-formal business

practices. SMEs also lack access to private equity and venture capital and have a very limited

access to secondary market instruments.

b) SMEs face fragmented markets in respect of their inputs as well as products and are vulnerable

to market fluctuations.

c) SMEs lack easy access to inter-state and international markets.

d) The access of SMEs to technology and product innovations is also limited. There is lack of

awareness of global best practices.

e) SMEs face considerable delays in the settlement of dues/payment of bills by the large scale

buyers. With the deregulation of the financial sector, the ability of the banks to service the credit

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4. CREDIT APPRAISAL PROCESS AND BRIEF ABOUT

LOANS

4.1 Credit Appraisal Process

Credit appraisal can be defined as the promoter taking a second look critically and carefully at a

project as presented by the promoter to a person who is in no way involved in or connected with its

preparation and who is as such able to take an independent, dispassionate and objective view of the

project in its totality as also in respect of its various components.

The credit appraisal process is the scientific way of giving the credit to corporate client by

analyzing the credit worthiness of the company through different parameters. The first step in

credit appraisal project is to understand the Indian banking industry and the performance of the

Indian banks and small scale industry in India and the steps taken by the banks to development and

welfare of SSI.

The credit appraisal for SME starts with Understanding the need of loan to the borrower i.e. for

which purpose the loan is required. After this next step is to analyze the financial statement of the

company to whom the loan is to be sanctioned. The main things which are taken into consideration

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while analyzing the financial statement are type of statement, nature of activity, accounting policy,

qualities of assets and liabilities , unit wise performance result of the company & directors report.

After analyzing the financial statement the second step is to study the principle given by Basel

committee on banking supervision which basically Indian banks have to be following as per the

order by Reserve Bank of India. The third step is to analyze the key financial ratios of the company

such as leverage ratio, liquidity ratio, profitability ratio, turnover ratio, and inventory norms.

The next step is to understand the methodology used to determine the credit rating. Since the credit

rating methodology differ from bank to bank in term of the weightage given to the parameters but

the parameter used by the banks to assess credit worthiness are almost same to all company. The

banks mainly provide two types of credit facility known as term loan and working capital loan.

The working capital loan is given by three methods namely- projected balance sheet method,

MFBF method and cash budget method.

Term loan is the loan given by the company for a long term generally more than one year and less

than 10 years to company. The term loan is assessed by the break even analysis, cost benefit ratio,

payback period. While appraising the term loan technical, managerial, financial feasibility is

checked. The debt service coverage ratio is used for assessing the company capacity to pay back

installment of loan and interest on term loan.

The sensitivity analysis is used to check the company ability to pay back the loan by changing the

independent variables and consequently monitoring the effect on dependent variables. The last step

is to understand the classifications of nonperforming asset and the provision to recovery of NPA.

The research report contains the whole procedure & process which is used by the bank to give

credit to SMEs.

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capital & working capital. Working capital in this context is the excess of current assets over

current liabilities. The excess of current assets over current liabilities is treated as net working

capital or liquid surplus & represents that portion of the working capital, which has been provided

from the long-term source.

1. Definition

Working capital is defined as the funds required carrying the required levels of current assets to

enable the unit to carry on its operations at the expected levels uninterruptedly.

Thus Working Capital required is dependent on

(a) The volume of activity (viz. level of operations i.e. Production & sales)

(b) The activity carried on viz. mfg process, product, production programme, the materials &

marketing.

2. Method Application

SEGMENT LIMITS METHOD

SSI Upto Rs 5 cr Traditional Method & Nayak Committee method

Above Rs 5 cr Projected Balance Sheet Method

SBF All loans Traditional / Turnover Method

C&I Trade &

Services

Upto Rs 1 cr Traditional Method for Trade &Projected Turnover Method

Above Rs 1 cr& upto Rs 5 cr

Projected Balance Sheet Method &Projected Turnover Method


C&I Industrial

Units

BelowRs 25 lacs

Traditional Method

Rs 25 lacs &Over but uptoRs 5 cr

Projected Balance Sheet Method &Projected Turnover Method


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Average period for which finished goods are in store &

Average collection period of receivables (Sundry Debtors)

Operating cycle is also called the cash-to-cash cycle & indicates how cash is converted into raw

materials, stocks in process, finished goods, bills (receivables) & finally back to cash.

Working capital is the total cash that is circulating in this cycle. Therefore, working capital can be

turned over or redeployed after completing the cycle.

The length of the operating cycle is different from industry to industry and from one firm to

another within the same industry. For instance, the operating cycle of a pharmaceutical unit would

be quite different from one engaged in the manufacture of machine tools. The operating cycle

concept enables us to assess the working capital need of each enterprise keeping in view the

peculiarities of the industry it is engaged in and its scale of operations. Operating cycle is an

important management tool in decision-making.

4. Traditional Method of Assessment of Working Capital Requirement

The operating cycle concept serves to identify the areas requiring improvement for the purpose of

control and performance review. But, as bankers, we require a more detailed analysis to assess the

various components of working capital requirement viz., finance for stocks, bills etc. Bankers

provide working capital finance for holding an acceptable level of current assets, viz. raw

materials, stocks-in-process, finished goods and sundry debtors for achieving a predetermined

level of production and sales. Quantification of these funds required to be blocked in each of these

items of current assets at any time will, therefore provide a measure of the working capital

requirement (WCR) of an industry.

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The examination of this item consists of an assessment of the various requirement of the actual

production process. It is in short a study of the availability, costs, quality & accessibility of all the

goods & services needed.

location of the project

Size of the plant

Type of technology

Labor

Technical Report

Economic Feasibility

An economic feasibility appraisal has reference to the earning capacity of the project. Since

earnings depend on the volume of sales, it is necessary to determine how much output or the

additional production from an established unit the market is likely to absorb at given prices.

i) A thorough market analysis is one of the most essential parts of project investigation. This

involves getting answers to three questions.

a) How big is the market?

b) How much it is likely to grow?

c) How much of it can the project capture?

ii) Future

iii) Intermediate product

Financial Feasibility

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4.2.2NON-FUND BASE

Letter of Credit

The expectation of the seller of any goods or services is that he should get the payment

immediately on delivery of the same. This may not materialize if the seller & the buyer are at

different places (either within the same country or in different countries). The seller desires to have

an assurance for payment by the purchaser. At the same time the purchaser desires that the amount

should be paid only when the goods are actually received. Here arises the need of Letter of Credit

(LCs). The objective of LC is to provide a means of payment to the seller & the delivery of goods

& services to the buyer at the same time.

Definition

A Letter of Credit (LC) is an arrangement whereby a bank (the issuing bank) acting at the request

& on the instructions of the customer (the applicant) or on its own behalf,

i. is to make a payment to or to the order of a third party (the beneficiary), or is to accept &

pay bills of exchange (drafts drawn by the beneficiary); or

ii. authorizes another bank to effect such payment, or to accept & pay such bills of exchanges

(drafts); or

iii. Authorizes another bank to negotiate against stipulated document(s), provided that the

terms & conditions of the credit are complied with.

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CHAPTER V

CREDIT APPRAISAL STANDARDS

AND CRA

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5. CREDIT APPRAISAL STANDARDS AND CRA

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.

5.1 State Bank of Indias Loan Policy

State Bank of Indias (SBI) Loan Policy is aimed at accomplishing its mission of retaining the

banks position as a Premier Financial Services Group, with World class standards & significant

global business, committed to excellence in customer, shareholder & employee satisfaction & to

play a leading role in the expanding & diversifying financial services sector, while continuing

emphasis on its Development Banking role.

The Loan Policy of the any bank has successfully withstood the test of time and with inbuilt

flexibilities, has been able to meet the challenges in the market place. The policy exits & operates

at both formal & informal levels. The formal policy is well documented in the form of circular

instructions, periodic guidelines & codified instructions, apart from the Book of Instructions,

where procedural aspects are highlighted.

The policy, at the holistic level, is an embodiment of the Banks approach to sanctioning,

managing & monitoring credit risk & aims at making the systems & controls effective.

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(i) Liquidity

Current Ratio (CR) of 1.33 will generally be considered as a benchmark level of liquidity.

However the approach has to be flexible. CR of 1.33 is only indicative & may not be deemed

mandatory. In cases where the CR is projected at a lower than the benchmark or a slippage in the

CR is proposed, it alone will not be a reason for rejection for the loan proposal or for the sanction

of the loan at a lower level. In such cases, the reason for low CR or slippage should be carefully

examined & in deserving cases the CR as projected may be accepted. In cases where projected CR

is found acceptable, working capital finance as requested may be sanctioned. In specific cases

where warranted, such sanction can be with the condition that the borrower should bring in

additional long-term funds to a specific extent by a given future date. Where it is felt that the

projected CR is not acceptable but the borrower deserves assistance subject to certain conditions,

suitable written commitment should be obtained from the borrower to the effect that he would be

bringing in required amounts within a mutually agreed time frame.

(ii) Net Working Capital

Although this is a corollary of current ratio, the movements in Net Working Capital are watched to

ascertain whether there is a mismatch of long term sources vis--vis long term uses for purposes

which may not be readily acceptable to the Bank so that corrective measures can be suggested.

(iii)Financial Soundness

This will be dependent upon the owners stake or the leverage. Here again the benchmark will be

different for manufacturing, trading, hire-purchase & leasing concerns. For industrial ventures a

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Total Outside Liability/ Tangible Net worth ratio of 3.0 is reasonable but deviations in selective

cases for understandable reasons may be accepted by the sanctioning authority.

(iv) Turn-Over

The trend in turnover is carefully gone into both in terms of quantity & valve as also market share

wherever such data are available. What is more important to establish a steady output if not a rising

trend in quantitative terms because sales realization may be varying on account of price

fluctuations.

(v) Profits

While net profit is ultimate yardstick, cash accruals, i.e., profit before depreciation & taxation

conveys the more comparable picture in view of changes in rate of depreciation & taxation, which

have taken place in the intervening years. However, for the sake of proper assessment, the non-

operating income is excluded, as these are usually one time or extraordinary income. Companies

incurring net losses consistently over 2 or more years will be given special attention, their accounts

closely monitored, and if necessary, exit options explored.

(vi)Credit Rating:

Wherever the company has been rated by a Credit Rating Agency for any instrument such as CP /

FD this will be taken into account while arriving at the final decision. However as the credit rating

involves additional expenditure, we would not normally insist on this and only use this tool if such

an agency had already looked into the company finances.

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Lending to Non-Banking Financial Companies (NBFCs)

Financing of infrastructure projects

Lease Finance

Letter of Credit, Guarantees & bills discounting

Fair Practices for lenders

5.3 CREDIT RISK ASSESSMENT

Risk: definition with reference to bank

Risk is inability or unwillingness of borrower-customer or counter-party to meet their repayment

obligations/ honor their commitments, as per the stipulated terms.

In the business world, Risk arises out of

Deficiencies / lapses on the part of the management (Internal factor)

Uncertainties in the business environment (External factor)

Uncertainties in the industrial environment (External factor)

Weakness in the financial position (Internal factor)

To put in another way, success factors behind a business are

Managerial ability

Favorable business environment

Favorable industrial environment

Adequate financial strength

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6. A case study on credit appraisal: case on Manufacturing

Industry

Company: - Paark Turbo Profiles Private Limited

Firm:-partnership

Industry: - Manufacturing

Activity: Manufacturing of Moving Blades, Nozzles, Welded Diaphragms, Nozzles Segments,

Guide Wheel Carriers, Grid Valves, Riorar Assembly, Base Plate, Exhaust Casings, Pump set,

Derater Heater, Storage Tank, Gas Tank, Columns, Separator Body and Heat Exchanger.

Segment:-C&I

Date of incorporation: - 15-01-1991

Banking arrangement: - Sole Banking

Regd Office: - Plot No. 12 of A3 and A4, Industrial Estate, Patancheru, Medak District.

Brief Background of the company

Paark Turbo Profiles Private Limited (PTPPL) was incorporated in Feb 1991 with an objective to

carry on the business of manufacturing of Moving Blades, Nozzles, , Welded Diaphragms, Nozzles

Segments, Guide Wheel Carriers, Grid Valves, Riorar Assembly, Base Plate, Exhaust Castings,

pump set, derater Heater, Storage Tank, Gas Tank, Columns, Separator Body and Heat Exchanger.

Shri Eechampati Siddhartha is the Managing Director of PTPPL.

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Shareholding pattern

SERIAL NO NAME OF THE SHAREHOLDER

% SHARE HOLDING

1. Shri E.Siddhartha 55

2 Shri Sanata Srikanth 30

3 Smt Sri Vani 15

Total 100

Industry Scenario

The major end-user industries for heavy engineering goods are power, infrastructure, steel, cement,

petrochemicals, oil & gas, refineries, fertilizers, mining, railways, automobiles, textiles, etc. Light

engineering goods are essentially used as inputs by the heavy engineering industry.

Key Growth Drivers of Indian Engineering Sector

The engineering sector in India has been growing on the back of growth in the user industries and several

new projects been undertaken in various core industries such as railways, power, infrastructure, etc.

Capacity creation in sectors such as infrastructure, oil & gas, power, mining, automobiles, auto

components, steel, refinery, consumer durables, etc, is driving growth of the engineering industry.

Growth of the key user industries

Governments thrust on the power and construction industries

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India being preferred by global companies as an outsourcing destination as it enjoys lower labour

cost and better designing capabilities

Heavy Engineering Sector

The heavy engineering sector can be classified into two broad segments capital goods/machinery (which

is further classified as electrical machinery/equipment and non-electrical machinery/equipment), and

equipment segments.

Electrical machinery includes the following: power generation, transmission and distribution equipments

such as generators and motors, transformers and switchgears. Non-electrical machinery includes

machines/equipments used in various sectors such as material handling equipments (earth moving

machinery, excavators, cranes, etc), boilers, etc

Heavy Electrical Industry

The fortunes of the heavy electrical industry have been closely linked to the development of the power

sector in India. The heavy electrical industry has under its preview power generation, transmission,

distribution and utilization equipments. These include turbo generators, boilers, turbines, transformers,

switchgears and other allied items. These electrical equipments (transformers, switchgears, etc) are used

by almost all the sectors. Some of the major areas where these are used include power generation projects,

petrochemical complexes, chemical plants, integrated steel plants, non-ferrous metal units, etc.

The existing installed capacity of India heavy electrical industry is 4,500 MW of thermal, 1,345 mw of

hydro and about 250 MW of gas-based power generation equipment per annum. The industry has the

capability to manufacture transmission and distribution equipment up to 400KV AC and high voltage DC.

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TNW & TOL/TNW:

The TNW of the unit is increasing and is estimated to increase further with infusion of additional

capital of Rs 3.6 crores. The company has already brought in Rs 2.44 crores which was invested in

fixed assets. Balance of Rs 116 lac will be brought by the end of Apl11. The gearing ratio is

expected to improve comfortably with infusion of capital in FY11 & FY 12 and retaining of profit

margins. The estimated increase in the gearing ratio in FY12 over FY11 is on account of expansion

and increase in term liabilities. However the ratio is expected to be well below the bench mark.

Current Ratio & NWC:

The current ratio is not on estimated lines and far below the bench mark level in Fy09 & 10.

However it is estimated to improve and will be above the bench mark level in FY11 with

improvement in NWC. The company is bringing in capital of Rs 50 lac in FY 12 and the ratio is

expected to improve further. The company has never defaulted in payment of its liabilities.

Movement in TNW (Past three years) (Rs in crs)

Year 2008 2009 2010

Opening TNW 0.94 1.18 1.43

Add PAT 0.24 0.17 0.18

Add. Increase in equity / premium 0.14 0.04

Add./Subtract change in intangible assets

Adjust prior year expenses

Deduct Dividend Payment

Closing TNW 1.18 1.48 1.65

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Synopsis of Balance Sheet

(Rs in crs)

Sources of funds Previous Year Last Year

2009 2010

Share Capital 0.30 0.39

Reserves and Surplus 1.18 1.26

Secured Loans : Short Term 0.16 0.60

: Long Term 0.68 0.00

Unsecured Loans 0.05 0.05

Deferred Tax Liability 0.00 0.00

Other Liabilities 0.00 0.00

Total 2.37 2.30

Application of Funds

Fixed Assets [Gross Block] 5.19 5.37

Less Depreciation 1.66 1.94

Net Block 3.53 3.43

CAPEX in Progress / Adv.to CAPEX 0.00 0.00

Investments 0.00 0.00

Inventories 0.04 0.01

Sundry Debtors 1.26 1.69

Cash & bank balances 0.19 0.16

Loans & advances to0.80 0.80

subsdiaries & group companies

Loans & advances to others 0.20 0.12

Total Current Assets 2.49 2.78

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[Less : Current Liabilities] 3.60 3.84

[Less : Current Provisions] 0.05 0.07

Total Current Liabilities 3.65 3.91

Net Current Assets -1.16 -1.13

Misc. Expenditure0.00 0.00

[To the extent not written off or adjusted]

Total 2.37 2.30

ASSETS 6.02 6.21

LIABILITIES 6.02 6.21

Current liabilities are more than current assets in FY09 & FY10 due to mounting of creditors which

includes creditors for capex. However the company has improved its liquidity position and the current

ratio is expected to be well above the bench mark with increased NWC and infusion of capital of Rs 50

lac for funding of current assets.

Risk Assessment

Credit Rating

Borrower rating Facility rating

WC 31.03.10 ABS TL (31.03.10) ABS Facilities Existing Proposed

CC(hyp) --- FR5

(70/100)

CRA SB7 65/100 SB7 69/100 TL -- FR6

(67/100)

@ECRA -- -- -- -- -- BG -- FR5

(66/100)

-- -- -- -- -- -- -- --

Others -- -- -- -- -- -- -- --

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The company presently manufacturing some components of turbines with its expansion it

is able to manufacture majority of components of power generation turbines.

6.2 Appraisal Memorandum for term loan:

Circle Hyderabad

Branch Saifabad Branch, Hyderabad

Company Paark Turbo Profiles Private Limited

TERM LOAN / DPG:

a) Proposal : Sanction for Term Loan of Rs.464 lac

b) Project / Purpose

To meet part cost of construction of Shed and Building and for purchase of Machinery for its

expansion project of manufacturing facility of Heavy Fabrication works.

c) Cost of Project & Means of finance

Project Cost amount

Land 144.00

Civil Construction 238.00

Plant & Machinery 445.00

Preliminary and Preoperative Expenses 15.00

Contingencies at 2% of P&M 15.00

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Margin for Working Capital 50.00

To Total 907.00

d) Means of Finance

Term Loan 464.00

Equity

360.00

Internal Accruals 83.00

Total 907.00

e) Remarks on Cost of the project & Means of finance:

The Total Project cost of the proposed expansion is Rs.907 lac and the company requires a

Term Loan of Rs. 464 lac with Promoters contribution of Rs. 443 lac which resulted in to a Debt Equity

Ratio as 1:1.28. The company has already increased its Authorized Capital to Rs 400 lac. They have

already brought in funds to the extent of Rs 244 lac (Rs 144 lac- Land purchase & Rs 100 lac for civil

constructions). Balance Capital of Rs 116 lac will be brought by Sri Eechampati Siddhartha Managing

Director -Rs 70 lac and Rs 46 lac by other directors by the end of Apl11.

The detail of each item of project cost is given below.

Details of Project Cost:

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Land: The company proposes the intended project in plot no. 23-c(part), part of Sy. No. 359 & 409

phase-I IDA Patancheru, Medak dt. Admeasuring 10030.07 sy yards. The company has purchased from

ARCIL in the auction by paying consideration of Rs 136 lac In 2007. The value of the land including

stamp duty is Rs 144 lac. Legal opinion from panel advocate indicates that the company holds absolute

clear and marketable title over the property.

Civil Works

Civil works consists of land development, civil constructions and fabrication of pre-engineered structure

required to construct the primary and secondary framing etc., the cost of civil work is estimated at Rs. 238

lac The Company is constructing shed and Building of area 36133.35 sq. ft of covered area. Cost of civil

works has been vetted by panel engineer. The cost of construction works out to be Rs 659 per sq.ft which

is considered reasonable. The company has already invested Rs 100 lacs for civil works. The same has

been certified by the Chartered Accountant.

Plant & Machinery

The cost of plant and machinery is estimated at Rs. 445 lac including taxes and erection charges.The

suppliers are standard suppliers of engineering machinery. The machinery includes import of second

Horizontal Boring Machine & Vertical Turrent Lathe Machine from Walter kames Germany. The life and

condition of the Machine will be certified by Chartered Engineer along with invoice which is required for

customs clearance. Opinion report on Walter kames Germany is being obtained from Dun & Bradstreet.

Preliminary & Preoperative Expenses

Preliminary Expenses is estimated at Rs. 15 lac and includes interest during construction and other

establishment expenses.

Contingencies

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The contingency is estimated at 2% of the plant and machinery and civil construction i.e. Rs. 15 lacs.

Margin for Working Capital:

The company has estimated 25% margin on Inventory and receivables to Rs.50 lacs.

Project Financing

Item Cost Margin% Contribution fromcompany

Bank finance

Land 144 100 144 --

Civil Construction 238 45.38 108 130

Machinery &Equipments

445 25 111 334

PreliminaryExpenses

15 100 15 --

Contingencies 15 100 15 --

WC Margin 50 100 50 --

Total 907 443 464

The promoters margin includes Equity of Rs 360 lac and Rs 83 lac internal accruals. The company has

already started the project work to stick on to the schedule and the amount expended by the unit will be

treated as their margin.

Production factors:

The proposed facility has been coming up at the companys newly acquired industrial land in Medak

Dist. where all the necessary infrastructural facilities are already available.

Raw material

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X22 CRMOV 1 and X 20 CR (Steel alloy bars) which are to be imported from Germany and they are

available at STAR WIRE Ltd. Gujarat and SNO3,5 & 6 and IS 2062 which are procured from Sail and

Gindal. In addition to above Steel Bars and sheets are needs which are available from local market.

Power

The company is installing 11 KV substation which is included in project cost and is also arranging

standby power supply with 500 KV Generator.

Water Sufficient Ground water through bore wells available.

Labour

Labour contractors are available locally for unskilled work.

Skilled staff: The activity requires ITI and Mechanical Engineers/Diploma Holders and the

company has already been in the process of employing the required employees for the new unit.

Marketing: The company receives orders from various units of BHEL, Triveni Engineering works ltd

Bangalore

Commercial Viability [` in crores]

2012 2013 2014 2015 2016 2017

Capacity utilization 80% 85% 85% 85% 85% 85%

Sales 8.86 12.83 15.15 16.18 17.21 18.36

Net Profit 1.06 1.61 1.95 2.08 2.22 2.40

Depreciation+Ammortised Exp.

0.64 0.50 0.40 0.38 0.34 0.28

Interest on Term Loan [s] 0.63 0.54 0.42 0.30 0.17 0.06

Less: Accruals used asMargin

0.00 0.00 0.00 0.00 0.00 0.00

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TOTAL 2.33 2.65 2.77 2.76 2.73 2.74

TL / DPG Repayments 0.44 0.88 0.88 0.88 0.88 0.68

Interest on Term Loan [s] 0.63 0.54 0.42 0.30 0.17 0.06

TOTAL 1.07 1.42 1.30 1.18 1.05 0.74

Gross DSCR 2.18 1.87 2.13 2.34 2.60 3.70

Average Gross DSCR 2.36

Average Net DSCR 2.99

The average gross DSCR is 2.36 and the cash generation in the project is comfortable to service the debt

and interest.

Security Margin

Particulars 2011 2012 2013 2014 2015 2016 2017

WDV of fixed assets 5.54 7.97 6.77 5.75 4.89 4.16 3.54

Agg. TL / DPG outstanding 4.64 4.2 3.32 2.44 1.56 0.68 0.00

Security Margin available 0.9 3.77 3.45 3.31 3.33 3.48 3.54

% of Margin 16.25 47.30 50.96 57.57 68.10 83.65 100.00

Security margins are adequate. It is initially high in 2010-11 as the company is debt free (long term) and

the estimated disbursement in 2011 is only Rs130 lac. Subsequently margin slips down to 47.30% in 2012

(as the disbursement of the entire term loan will be completed). However the margin is comfortable and

gradually increases in subsequent years.

Break Even Analysis (Rs in crores)

BREAK EVEN ANALYSISIst full yearof Year of highest

production capacity utilization

2013

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Capacity utilization [as % of IC] 85%

[A] Production Value in Sales 12.88

[B] Variable Expenses 8.01

[C] Contribution 4.87

[D] Fixed & Semi Variable Expenses 2.58

Operating Profit 2.29

Break Even Point [Sales] 6.82

Break Even Point [Installed Capacity] [%] 45.03%

Break Even Point [Cash] [%] 36.30%

Break even Analysis carried out for FY 2013 and the break even sales are at Rs 6.82 crores in value and

the margin of safety is 45.03%. As the margin of safety is below 50% it is considered acceptable for

engineering industry. Cash break even at an installed capacity is 36.30% which is below 50% and is quite

acceptable.

Sensitivity Analysis

PAARK TURBO PROFILES PRIVATE LIMITED

SENSITIVITY ANALYSIS

[` in crores]

2014 5% 5% 5%

Increase invariable cost.

decrease involume of sales

decreaseinsellingprice

Sales 15.15 15.15 14.39 14.39

Prod.Value of Sales 15.40 15.40 14.63 14.63

Less: Variable Cost 9.66 10.14 9.18 9.66

Contribution 5.74 5.26 5.45 4.97

Less Fixed Cost 2.96 2.96 2.96 2.96

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Break Even Sales 7.94 8.71 9.77 11.30

Gross DSCR 2.13 1.54 0.95 0.35

Sensitivity analysis indicates that the project can sustain adverse impact of decrease in volume of sales

upto 15% and increase in variable cost and decrease in selling price up to 15%

6.3 ASSESSMENT OF WC FACILITIES

80

Inventory & Receivable levels :

[` in crores]

Inventory / Payments YR.BEFORELASTAUDITED

LAST YEAR CURRENTYEARESTIMATED

FOLLOWINGYEARPROJECTEDESTIMATED AUDITED

2009 2010 2011 2012

Raw Material

Imported [Amount] - - 1.00 1.30

[Months] - - 3.49 4.31

Domestic [Amount] - - - -

[Months] - - - -

Semi Finished Goods [Amount] - - 0.85 1.35

[Months] - - 2.22 2.75

Finished Goods [Amount] 0.04 0.01 - -

[Months] 0.11 0.03 - -

Receivables

Export [Amount] - - - -

[Months] - - - -

Domestic [Amount] 1.26 1.69 0.80 2.82

[Months] 2.71 4.22 1.49 3.82

Sundry Creditors

Import / Domestic [Amount] 3.23 3.52 0.35 0.45

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Raw Materials & SIP

The company has started its activity in the beginning with job works for BHEL (BHEL used to

provide material). As such the company did not have any raw material and negligible level of SIP

in FY10. However they have started regular commercial operations four months back in FY11 on

the stipulations of various units of BHEL and other units at Bangalore and going for expansion in

view of the change in the style of activity and also going to add some more products to their

existing product profile. The RM SIP holding period is going to stabilize from 2012 onwards.

Receivables

The receivables are estimated at 1.49 M. However it is estimated to increase to 3.82 M in view of

the expansion and increase in sales.

Creditors

The amount of creditors includes creditors for CAPEX which is funded through long term sources

by bringing additional equity. In view of this the creditor realization period is estimated to improve

to 0.35 M in FY11 and it is increased by 0.45 M in Fy12 due to the expansion and increase of raw

materials required for finished goods.

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Assessed Bank Finance ( in crores)

Particulars 2010 2011 2012

LAST YEAR

AUDITED

CURRENT YEAR

ESTIMATED

Following Year

PROJECTED

Total Current Assets 1.98 3.27 6.86

Other Current Liabilities 3.91 1.17 2.25

Working Capital Gap -1.93 2.10 4.61

Net Working Capital -2.53 1.10 3.61

Assessed Bank Finance 0.60 1.00 1.00

NWC to TCA (%) -127.78 33.64 52.62

Bank Finance to TCA (%) 30.30 30.58 14.58

Other CL To TCA (%) 197.47 35.78 32.80

The ve NWC is due to utilization of short term sources for capex. However the NWC is expected

to improve with utilization of internal accruals for funding of current assets and brining of addition

equity of Rs 50 lacs in FY12. NWC will be prime funding factor of current assets from 2012

onwards which is a welcome sign.

AS PER NAYAK COMMITTEE RECOMMENDATIONS (in crores)

2011

1. Gross Turnover estimated for the year 6.45

2. Working Capital required [25% of 1] 1.61

3. Eligible Minimum Bank Finance - 80% of [2] 1.29

4. Borrower's Margin required - Minimum - 20% of [2] 0.32

5. Net Working Capital available -2.53

6. Additional Margin to be infused. 2.85

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The company is eligible for a fund based WC limit of Rs 1.29 crores as per Nayak Committee Method

while the company is requesting for renewal of the limits at enhanced level of Rs 1 crores.

Efficiency Ratios

ParticularsYR.BEFORE

LASTAUDITED

LAST YEAR CURRENTYEAR

ESTIMATED

FOLLOWINYEARPROJECTEDAUDITED

2009 2010 2011 2012

Net Sales to Total Tangible Assets 0.93 0.77 0.71 0.59

[]

PBT to Total Tangible Assets[%] 3.65% 4.03% 8.78% 9.98%

[]

Operating Cost to Sales [%] 87.00% 87.00% 76.00% 67.00%

[]

Bank Finance to Current Assets[%] 9.47% 30.30% 30.58% 14.58%

[]

Inventory / Net Sales + Receivables /Gross Sales[Days]

85 129 150 238

[]

Net Sales to TTA: The ratio is estimated to be lower than that of FY 10 in view of the increase in

current assets. This is due to change in the operations from job work to regular commercial sales. The

ratio is low in the year 2012 also due to the acquiring of fixed assets

PBT to TTA: The profitability shows upward trend.

Operating Cost to Sales: The operating cost to sales ratio shows decreasing trend.

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The other efficiency ratios are in sync with line of activity. The increase in INV+Rec/ net sales

for 2011 & 12 is due to change in the line of activity.

6.4Computation of BG limits

The company was sanctioned BG limit of Rs 10 lac as sub limit under CC (HYP) in the last

sanction. The company has not utilized the limits so far. But the company is requesting for

enhancement of the limit to Rs 100 lac as they will be required to furnish BG for performance of

the contracts awarded by units of BHEL as the activity is changed from job works to regular sales.

(Rs in lacs)

B G O/S as at 31.12.10 Nil

Estimated BGs requirement in next 12months ( performance)

10% of Rs 10 cr

100

Expiry of BGs in next 12 months Nil.

Requirement of BG limit 100

BG limit recommended 100

2010 2011 2012

Long Term Sources 0.55 6.01 5.58

Long Term Uses 0.96 2.38 3.07

Net Long Term Surplus -0.41 3.63 2.51

The long term deficit is on account of utilization of short term sources for CAPEX. However the

position is expected to improve in FY11 & FY12 with infusion of additional capital.

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6.5 COLLATERAL SECURITY

Primary: CC, BG & TL

S No Property details

1. Hypothecation of all chargeable current assets of the Company.

2. Charge over Plant & Machinery proposed to be acquired under bank finance

3. EM of all that piece of land belong to M/s Paark Turbo Profiles together withBuilding and Sheds to be built in Plot No. 23-C, (Part), part of Sy. No. 359 & 409,Phase I, IDA, Patancheru, Medak District, A.P. admeasuring 10030.07 Sq. Yards.

Collateral: CC, BG & TL

S No Property details Valuation as per Panel valuer dt.31.12.10

Branch AssessedValue

1. EM of Shed No. D -12, measuring area1540 Sq. Yards, built up area of 2735 Sft.In Sy. No. 15/part & 18/part situated atIndustrial Estate, Patancheru, G.P.Bandalguda, Dist. Medak, Patancheru

Municipality belonging to M/s PaarkTurbo Profiles Pvt Ltd

72.28 60.00

2 E.M of Plot No. 12/D, admeasuring 458.6Sq. Yards with Building and Shed in Sy.No. 419 & 435 situated at IndustrualEstate, Patancheru, Medak District,belonging to M/s. Paark Turbo ProfilesPvt Ltd

145.00 125.00

3. E.M. of Plot No. 12/A, admeasuring

377.6 Sq. Yards with Building and Shedsin Sy. No. 419 & 435 situated atIndustrial Estate, Patancheru, MedakDistrict, belonging to M/s Paark TurboProfiles Pvt Ltd

4. Hyp of Existing unencumberedMachinery WDV as on 31.03.10

148.11 148.11

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Total 365.39 333.11

Guarantees

NAME

Personal Guarantees of

NET WORTH

( Rs in lac) as on30.03.2010

1. Shri E.Siddhartha(As on 4.1.11) 187.00

2. Smt Shri Vani (As on 4.1.11) 21.00

3. Shri S.Srikanth ( As on 04.1.11 ) 78.00

Worth of the guarantors is net of collaterals and investment in the business.

Collateral percentage

For SBI : 50.16 %( 333.11/664)

For others : NA

(Besides the collateral, Bank has cushion of EM of 10030.07 Sq yards of project site which is taken as

primary security for bank exposure of Rs 100 lac towards civil structures. The document value of the land

itself is Rs 136.13 lac).

RATE OF INTEREST:

Facility CRAPricing

Comments, if

pricing differs

from CRA

Term Loan SB 7 7.25%above SBBR ---

Working Capital SB 7 6.50% above SBBR ---

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REPAYMENT SCHEDULE

The term loan is repayable in 22 quarterly installments starting from Dec 2011 as per schedule given

below. Interest is to be serviced on monthly basis.

PROCESSING FEE

1.50% of the loan amount for term loan ( Upfront fee) and Rs 400 per lac for WC limits

INSURANCE: All the chargeable assets of the company should be comprehensively

covered, with Banks Clause.

OTHER CRITICAL CONVENANTS: (These covenants are in addition to the Banks

standard covenants applicable to Working Capital limits).

The company shall provide copies of all statutory permissions obtained from the

regulatory authorities to the Bank.

Disbursement will be done progressively based on the certificates from Chartered

Civil Engineer & Chartered Accountant.

The promoters should finance any shortfall in project expenditure from their own

resources to ensure smooth implementation of the project.

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CHAPTER VII

FINDINGS

7. FINDINGS

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Credit appraisal is done to check the commercial, financial & technical viability of the

project proposed its funding pattern & further checks the primary or collateral security

cover available for the recovery of such funds

Credit is core activity of the banks and important source of their earnings which go to pay

interest to depositors, salaries to employees and dividend to shareholders

Credit and risk go hand in hand

SBI loan policy contains various norms for sanction of different types of loans and all

norms does not apply to each & every case

SBI norms for providing loans are flexible & it may differ from case to case

Banks main function is to lend funds/ provide finance but it appears that norms are taken

as guidelines not as a decision making

A bankers task is to identify/ assess the risk factors/ parameters and manage/ mitigate

them on continuous basis

The CRA models adopted by the bank take into account all possible factors which go into

appraising the risk associated with a loan and these have been categorized broadly into

financial, business, industrial, management risks & are rated separately

The assessment of financial risk involves appraisal of the financial strength of the borrower

based on performance & financial indicators

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CHAPTER VIII

RECOMMENDATIONS AND

SUGGESTIONS

RECOMMENDATIONS AND SUGGESTIONS

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Banks has to grant the loans for the establishment of business at a moderate rate of interest. So that

the people can repay the loan amount to bank regularly and promptly.

The Bank should keep on revising its Credit Policy which will help Banks effort to correct the

course of the policies.

Insufficient data on the SMEs, the lack of credible published information about their financial

health, the high vulnerability of small players in a liberalizing market and the inadequacy of risk

management systems in banks are factors leading to higher NPAs and lower profitability than

potential in SME lending. This can be overcome by collection of authentic data on the SME

segment, educating the enterprises on the need for reliable financial data, evolving suitable risk

models and close monitoring of accounts by the bank.

Follow the tight set of rules and restrictions in assessing the working capital and term loan for the

sectors of those with higher NPAs

Extend the loans to the SMEs is the relationship-lending rule, where the lending partly bases its

decision on proprietary information about the firm and its owner through a variety of contacts over

time. The information may be gathered from such stakeholders as suppliers and customers, who

may give specific information about the owner of the firm or general information about the

business environment in which it operates.

SBI bank has to update the details of debtors to Credit Information Bureau of India Limited (CIBIL) so

that they can take necessary measures of not issuing or providing new loan.

There is a critical need to devote substantial resources to improving the skills and capabilities of

banks' lending officers, especially with regard to the analysis of the SMEs' financial statements.

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Understanding the nature of the borrower's business and the cash-flow required is paramount to

preventing the creation of NPAs.

They need to innovate their delivery platforms by using Internet banking, mobile banking and

card-based platforms for delivery of transaction-banking as well as credit products, and enhance

the service element. SMEs look for convenience and simplicity in their banking requirements and

banks should deliver these through an effective use of technology.

The Chairman and Managing Director/Executive Director should make modifications to the

procedural guidelines required for implementation of the Credit Policy as they may become

necessary from time to time on account of organizational needs.

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CHAPTER IX

CONCLUSION

9. CONCLUSION

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SBI load policy contains various norms for sanction of different types of loans. There all norms do

not apply to each & every case.

SBI norms for providing loans are flexible & it may differ from case to case.

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

But, after different types of case studies, my conclusion was such that, in SBI, credit appraisal

system is not only looking for financial wealth. Other strong parameters also play an important role

in analyzing creditworthiness of the firm.

During the study at SBI I learnt how the theoretical financial analysis aspects are used in practice

during the working capital and term loan assessment.

I have realized during my project that a credit analyst must own multi-disciplinary talents like

financial, technical as well as legal.

The method of assessing working capital facilities is mainly done depending on the companys

segment. In my case study the company is eligible for a fund based WC limit as per Nayak

Committee Method.

the chance of getting project approved for loan depends on the technical, financial ecological and

managerial feasibility, Debt Service Coverage Ratio, Breakeven analysis and Collateral security.

The CRA models adopted by the bank take into account all possible factors, which go into

appraising the risk associated with a loan, these have been categorized broadly into financial,

business, industrial, and management risks & are rated separately.

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In the case study viability of the project from every aspect is analyzed, as well as type of business,

industry, promoters, past records, experience, projected data and estimates, goals, long term plans

played crucial role in getting project approved for loan

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CHAPTER X

BIBLIOGRAPHY

10. BIBLIOGRAPHY

WEBSITES

http://www.rbi.org.in

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http://www.rbi.org.in/http://www.rbi.org.in/


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http://www.sbi.co.in

http://www.indianbankassociation.com

http://www.bankersindia.com

http://www.iibf.co.in

http://www.projectfinancemagazine.com

http://en.wikipedia.org

http://www.iba.org.in

BOOKS

D. D. Mukherjee, Credit Appraisal, Risk Analysis and Decision Making, 5th edition, copy

right 2010, Snow White Publications Pvt Ltd

G. Vijayaragavan, Bank Credit Management, Himalaya Publishing House

IM Pandey (2005), Financial Management 9th edition, Vikas Publication House Pvt Ltd,

New Delhi

Brigham and Houston (2009),Fundamentals of Financial Management 10th edition, South

Western Cengage learning, USA

JOURNALS

Banks risk assessment of Swedish SMEs taken from journal Venture Capital, Vol.10, No.2, April

2008, pages 171-194 by Volker Bruns and Margaret Fletcher

97
http://www.sbi.co.in/http://www.indianbankassociation.com/http://www.bankersindia.com/http://www.iibf.co.in/http://www.projectfinancemagazine.com/http://en.wikipedia.org/http://www.iba.org.in/http://www.sbi.co.in/http://www.indianbankassociation.com/http://www.bankersindia.com/http://www.iibf.co.in/http://www.projectfinancemagazine.com/http://en.wikipedia.org/http://www.iba.org.in/


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Delineating the predominant criteria for subcontractorappraisaland their latent relationships taken

from the journal Construction Management & Economics Mar, 2008, Vol. 26 Issue 3, p249-259 by

Thomas Ziwei and Tang

Debt financing of corporate enterprises in India: a study showing impact of industry, size and age

factors taken from the journalJournal of Advances in Management Research, Year: 2006, Vol. 3,

Issue: 2, p54-67 by Ashish Kumar Rastogi, P.K.Jain, Surendra S. Yadav

Biases in Appraising Creditworthiness taken from International Journal of Bank Marketing

Year: 1992 Vol. 10 Issue:3 p10-16 by Bala Shanmugam, Philip Bourke

The relationship between networking practices and business excellence: a study of small to

medium enterprises (SMEs) taken from the journal: Measuring Business Excellence, Year: 2003,

Vol. 7, Issue: 2, p78-92 by Mile Terziovski

Internationalization of SMEs in India: Fostering entrepreneurship by leveraging information

technology taken from the journal International Journal of Emerging Markets, Year: 2007, Vol.

2, Issue: 2, p166-180 by Patricia R. Todd, Rajshekar G. Javalgi

The Adoption of e-business and knowledge management in SMEs taken from journal

Benchmarking: An International Journal, Mar2007, Vol. 14, Issue: 1, p37-58 by S. Maguire, S. C.

L. Koh, A. Magrys

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