finance project -2_4

8/2/2019 Finance Project -2_4

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EXECUTIVE SUMMARY

The South Indian Bank is one of the earliest banks in South India. It has become a major

player in banking. It has its operations all over the country and promises to deliver the

experience of next generation banking. The business of SIB is growing at higher rate both in

respect of deposits and advances. SIB offers a variety of loans for different categories of people.

It extends two types of credit facilities to their corporate customers. The first type known as

Working capital finance is extended to meet the day to day short term operational requirements

of the borrower. The second type of finance in the form of short term and medium term loans is

provided to customers to meet the long term capital requirements for setting up the new project,expansion and diversification of the existing project and so on. It is the funds of depositors i.e.,

the general public that are mobilized by means of advances. Thus it is extremely important for

the bank to assess the risk associated with the credit.

The process of credit appraisal begins when the customer approaches the bank and

applies for credit. The SIB has a special department called the Integrated Risk Management

Department(IRMD).The branch forwards the application to the Regional Office which initially

conduct an appraisal and sent for evaluation to IRMD. Based on the parameters set by the

Board of SIB, the IRMD analyses the details and rates the prospective customer. If the bank

finds the customer eligible, the loan is sanctioned.

The South Indian Bank has a comprehensive credit management policy which was tailored to

fall in line with the banking guidelines issued by the Reserve Bank of India. The study is based

on the credit appraisal process of loans in South Indian Bank.


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SECTION I

PROFILE STUDY OF THE ORGANIZATION


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CHAPTER 1

INDUSTRY PROFILE


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INDUSTRY PROFILE

Finance today, holds the key to all human activity. It consists of raising, providing and

managing of all money, capital or fund of any type to be used in connection with the business.

Banks being money transacting enterprises require finance as raw material for manufacturing

the finished goods i.e., Credit.

The upswing in the Indian economy, the younger population, the low penetration of

banking services in the country and the host of other factors, the Indian banking sector today

stands on the threshold of exponential growth. Without a sound and effective banking system of

India should not only be hassle free but it should be able to meet new challenges posed by the

technology and any other external and internal factors.

For the past three decades Indias banking system has several outstanding achievements

to its credit. The most striking is its extensive reach. It is no longer confined to only

metropolitans or cosmopolitan in India. In fact, Indian banking system has reached even to the

remote corner of the country. This is one of the main reasons of Indias growth process.

According to PricewaterhouseCoopers (PwC) report, India could become the third largest

banking hub in the world by 2040.

Banking in India

Banking in India originated in the last decades of 18th century. The oldest bank in

existence in India is the State Bank of India, a government-owned bank that traces its origin back

to June 1806 and that is the largest commercial bank in the country. Central banking is the

responsibility of the Reserve Bank of India, which in 1935 formally took over these

responsibilities from the then Imperial Bank of India, relegating it to commercial banking

functions. After India's independence in 1947, the Reserve Bank was nationalized and given

broader powers. In 1969, the government nationalized the 14 largest commercial banks; the

government nationalized the six next largest in 1980.

Origin

The word bank is derived from the Greek word "Banque" or Italian word "Banco". Both

means a bench at which money lenders and money changers used to display their coins and

transacts their business in market place.


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As per Section 5(b) of Banking Regulation Act, 1949, banking means the accepting, for

the purpose of lending or investment, of deposits of money from the public, repayable on

demand or otherwise, and withdrawable by cheque, draft, and order or otherwise.

Currently, India has 96 scheduled commercial banks, 27 public sector banks, 31 private

banks and 38 foreign banks. They have a combined network of over 55.000 branches and 44,000

ATMs. According to a report by ICRA Limited, a rating agency, the public sector banks hold

over 70% of total assets of the banking Industry, with the private and foreign banks holding

20.2% and 9.8% respectively.

Early History

At the end of late 18th century, there were hardly any banks in India in the modern sense

of the term. With large exposure to speculative ventures, most of the banks opened in India

during that period could not survive and failed. The depositors lost money and lost interest in

keeping deposits with banks. Subsequently, banking in India remained the exclusive domain ofEuropeans for next several decades until the beginning of the 20th century.

At the beginning of the 20th century, Indian economy was passing through a relative

period of stability. Around five decades have elapsed since the India's First war of Independence,

and the social, industrial and other infrastructure have developed. At that time there were very

small banks operated by Indians, and most of them were owned and operated by particular

communities. The banking in India was controlled and dominated by the presidency

banks, namely, the Bank of Bombay, the Bank of Bengal, and the Bank of Madras - which later

on merged to form the Imperial Bank of India, and Imperial Bank of India, upon India's

independence, was renamed as the State Bank of India. There were also some Exchange banks,

as also a number of Indian joint stock banks. All these banks operated in different segments of

the economy.

The Presidency banks were like the central banks and discharged most of the functions of

central banks. They were established under charters from the British East India Company. The

exchange banks, mostly owned by the Europeans, concentrated on financing of foreign trade.

Indian joint stock banks were generally undercapitalized and lacked the experience and maturity

to compete with the Presidency banks, and the Exchange banks. There was potential for many

new banks as the economy was growing. Lord Curzon had observed then in the context of Indian

banking: "In respect of banking it seems we are behind the times. We are like some old fashioned

sailing ship, divided by solid wooden bulkheads into separate and cumbersome compartments".Under these circumstances, many Indians came forward to set up banks, and many banks were

set up at that time, a number of which have survived to the present such as Bank of India and

Corporation Bank, Indian Bank, Bank of Baroda, and Canara Bank.


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Post-Independence

The partition of India in 1947 had adversely impacted the economies of Punjab and West

Bengal, and banking activities had remained paralyzed for months. India's independence marked

the end of a regime of the Laissez-faire for the Indian banking. The Government of Indiainitiated measures to play an active role in the economic life of the nation, and the Industrial

Policy Resolution adopted by the government in 1948 envisaged a mixed economy. This resulted

into greater involvement of the state in different segments of the economy including banking and

finance.

The major steps to regulate banking included:

In 1948, the Reserve Bank of India, Indias central banking authority was nationalized,

and it became an institution owned by the Government of India.

In 1949, the Banking Regulation Act was enacted which empowered the Reserve Bank of

India (RBI) "to regulate, control, and inspect the banks in India."

The Banking Regulation Act also provided that no new bank or branch of an existing bank

could be opened without a licence from the RBI, and no two banks could have common

directors.

Nationalization

By the 1960s, the Indian banking industry has become an important tool to facilitate the

development of the Indian economy. At the same time, it has emerged as a large employer, and a

debate has ensued about the possibility to nationalize the banking industry. Mrs. Indira Gandhi,

the-then Prime Minister of India expressed the intention of the Government of India in

the annual conference of the All India Congress Meeting in a paper entitled "Stray thoughts on

Bank Nationalization.The paper was received with positive enthusiasm. Thereafter, her move

was swift and sudden, and the Government of India issued an ordinance and nationalized the 14

largest commercial banks with effect from the midnight of July 19, 1969. Within two weeks of

the issue of the ordinance, the Parliament passed the Banking Companies (Acquisition and

Transfer of Undertaking) Bill, and it received the presidential approval on 9th August, 1969.

After the nationalization of banks in India, the branches of the public sector banks rose

approximately to 800% in deposits and advances took a huge jump by 11,000%.

1955: Nationalization of State Bank of India.

1959: Nationalization of SBI subsidiaries.

1969: Nationalization of 14 major banks.

1980: Nationalization of7 banks with deposits over 200crore.


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Liberalization

In the early 1990s, the then government headed by Mr. P V Narasimha Rao embarked on

a policy of liberalization and gave licenses to a small number of private banks, which came to be

known as New Generation tech-savvy banks, which included banks such as Global Trust Bank

which later amalgamated with Oriental Bank of Commerce, Axis Bank(earlier as UTI Bank),

ICICI Bank, HDFC Bank etc. This move, along with the rapid growth in the economy of India,

revitalized the banking sector in India, which has seen rapid growth with strong contribution

from all the three sectors of banks, namely, government banks, private banks and foreign banks.

The next stage for the Indian banking has been set up with the proposed relaxation in the

norms for Foreign Direct Investment(FDI), where all Foreign Investors in banks may be given

voting rights which has gone up to 49per cent with some restrictions.

The new policy shook the Banking sector in India completely. Bankers, till this time, were used

to the 4-6-4 method (Borrow at 4%; Lend at 6%; Go home at 4) of functioning. The new wave

ushered in a modern outlook and tech-savvy methods of working for traditional banks.

BANKING STRUCTURE IN INDIA

Commercial Banking in India

The commercial banking structure in India consists of:

Scheduled Commercial Banks Non-scheduled bank in India

Scheduled Banks in India constitute those banks which have been included in the Second

Schedule of Reserve Bank of India (RBI) Act, 1934. RBI in turn includes only those banks in

this schedule which satisfy the criteria laid down vide section 42 (6) (a) of the Act.

"Scheduled banks in India" means the State Bank of India constituted under the State

Bank of India Act, 1955, a subsidiary bank as defined in the State Bank of India (Subsidiary

Banks) Act, 1959, a corresponding new bank constituted under section 3 of the Banking

Companies (Acquisition and Transfer of Undertakings) Act, 1970 or under section 3 of the

Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 or any other bank

being a bank included in the Second Schedule to the Reserve Bank of India Act, 1934 but doesnot include a co-operative bank".

"Non-scheduled bank in India" means a banking company as defined in clause (c) of

section 5 of the Banking Regulation Act, 1949 (10 of 1949), which is not a scheduled bank".


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THE RESERVE BANK OF INDIA

The central bank of the country is the Reserve Bank of India (RBI). It was established in

April 1935 with a share capital of Rs. 5 crores on the basis of the recommendations of the Hilton

Young Commission. The share capital was divided into shares of Rs. 100 each fully paid which

was entirely owned by private shareholders in the beginning. The Government held shares of

nominal value of Rs 2, 20,000. Reserve Bank of India was nationalized in the year 1949. The

general superintendence and direction of the Bank is entrusted to Central Board of Directors of

20 members, the Governor and four Deputy Governors, one Government official from the

Ministry of Finance, 10 nominated Directors by the Government to give representation to

important elements in the economic life of the country, and four nominated Directors by the

Central Government to represent the four local Boards with the headquarters at Mumbai,

Kolkata, Chennai and New Delhi. Local Boards consist of five members each Central

Government appointed for a term of four years to represent territorial and economic interests and

the interests of cooperative and indigenous banks.

Major Public Sector Banks in India

Allahabad Bank, Andhra Bank, Bank of Baroda, Bank of India, Bank of Maharashtra,

Canara bank, Central Bank of India, Dena Bank, Indian Bank, Indian Overseas Bank, Oriental

Bank of Commerce, Punjab & Sind Bank, Punjab National Bank, State Bank of India, State

Bank of Bikaner&Jaipur, State Bank of Hyderabad, State Bank of Travancore, State Bank of

Indore, State Bank of Saurashtra, Syndicate Bank, UCO Bank, Union Bank, United Bank of

India.

Major Private Sector Banks in India

Bank of Punjab, Bank of Rajasthan, Catholic Syrian Bank, Centurion Bank, City Union

Bank, Dhanalaxmi Bank, Development Credit Bank. Federal Bank, HDFC Bank, ICICI Bank.

IDBI Bank, Induslnd Bank, Jammu & Kashmir Bank, Karur Vysya Bank, Lakshmi Vilas Bank,

Nedungadi Bank, Ratnakar Bank, SBCL South Indian Bank, United Western Bank, UTI Bank,

Vijaya Bank.

Foreign Banks in India

Foreign banks have brought least technology and latest banking practices in India. They

have made Indian banking system more competitive and efficient. Major foreign banks in India

are ABN-AMRO Bank., Abu Dhabi Commercial Bank Ltd., American Express Bank Ltd BNP

Paribas., Citibank, DBS Bank Ltd, Deutsche Bank, HSBC Bank, Standard Chartered Bank, Tai

Bank.


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Banking in Kerala

Kerala boasts of a well-developed banking infrastructure. With progressing time Kerala

banking system has attained a high benchmark. Commercial, Nationalized a large number of

Grameen banks have sprung up within the state. In fact there was a surge of Banks in the state

following the nationalization of the banks in 1969. Kerala has been experiencing better growth of

economy in the banking sector.

The State Bank of India, Canara Bank and Syndicate Bank are the principal nationalized

banks. Apart from these commercial banks like Vijaya Bank, Dhanalaxmi Bank and the Federal

Bank also offer commendable finance and banking facilities. The Grameen Banks like South

Malabar Grameen Bank and North Malabar Grameen Bank provide loans at low interest rates,

special, subsidized lands and relief facilities to the local farmers and plays a great role in

enhancing the agrarian productivity of the state.

Recent Trends

Currently banking in India is generally fairly mature in terms of supply, product range

and reach- even though reach in rural India still remains a challenge for the private sector and

foreign banks. In terms of quality of assets and capital adequacy, Indian banks are considered to

have clean, strong and transparent balance sheets relative to other banks in comparable

economies in its region. The Reserve Bank of India is an autonomous body, with minimal

pressure from the government.

With the growth in the Indian economy expected to be strong for quite some time-

especially in its services sector-the demand for banking services, especially retail banking,mortgages and investment services are expected to be strong. One may also expect mergers and

acquisitions and takeovers.

GROWTH OF BANKING INDUSTRY

The banking system remains, as always, the most dominant segment of the financial sector.

Indian banks continue to build on their strengths under the regulator's watchful eye and hence,

have emerged stronger.

In the annual international ranking conducted by UK-based Brand Finance Plc, 18 Indian bankshave been included in the Brand Finance Global Banking 500. In fact, State Bank of India

(SBI), which is the first Indian bank to be ranked among the Top 50 banks in the world, has

improved its position from 36th to 34th, as per the Brand Finance study released on February 1,

2011. The brand value of SBI has enhanced to US$ 1.12 billion. ICICI Bank, the only other

Indian bank in the top 100 club has improved its position with a brand value of US$ 2.5 billion.


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Indian banks contributed 1.7 per cent to the total global brand value at US$ 14.74 billion and

grew by 19 per cent in 2011, according to the study.

Nationalized banks, as a group, accounted for 51.2 per cent of the aggregate deposits, while State

Bank of India (SBI) and its associates accounted for 22.5 per cent, according to Reserve Bank of

India's (RBI) 'Quarterly Statistics on Deposits and Credit of Scheduled Commercial Banks:September 2010'. The share of new private sector banks, Old private sector banks, foreign banks

and Regional Rural banks in aggregate deposits was 13.5 per cent, 4.5 per cent, 5.2 per cent and

3.1 per cent respectively. With respect to gross bank credit also, nationalized banks hold the

highest share of 50.9 per cent in the total bank credit, with SBI and its associates at 23.1 per cent

and New Private sector banks at 13.7 per cent. Foreign banks, Old private sector banks and

Regional Rural banks held relatively lower shares in the total bank credit with 5.2 per cent, 4.5

per cent and 2.5 per cent respectively. The report also found that scheduled commercial bank

offices (with deposits of US$ 2.25 or more) accounted for 66.2 per cent of the bank offices, 96.6

per cent in terms of aggregate deposits and 93.8 per cent in total bank credit.

Bank loans registered a growth of 21.38 per cent in 2010-11, while deposit growth stood at 15.84

per cent, according to data released by RBI. Analysts and bankers said a growth rate of 18 per

cent in deposits and 20 per cent in credit should be sustainable for banks in 2011-12.

PORTERS FIVE FORCES ANALYSIS OF BANKING INDUSTRY

1. Threat of New Entrants.

The average person can't come along and start up a bank, but there are services, such as

internet bill payment, on which entrepreneurs can capitalize. Banks are fearful of being squeezedout of the payments business, because it is a good source of fee-based revenue. Another trend

that poses a threat is companies offering other financial services.

2. Power of Suppliers.

The suppliers of capital might not pose a big threat, but the threat of suppliers luring

away human capital does. If a talented individual is working in a smaller regional bank, there is

the chance that person will be enticed away by bigger banks, investment firms, etc.

3. Power of Buyers.The individual doesn't pose much of a threat to the banking industry, but one major factor

affecting the power of buyers is relatively high switching costs. If a person has a mortgage, car

loan, credit card, checking account and mutual funds with one particular bank, it can be

extremely tough for that person to switch to another bank. In an attempt to lure in customers,

banks try to lower the price of switching, but many people would still rather stick with their

current bank. On the other hand, large corporate clients have banks wrapped around their little
http://www.investopedia.com/terms/s/switchingcosts.asphttp://www.investopedia.com/terms/s/switchingcosts.asp


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fingers. Financial institutions - by offering better exchange rates, more services, and exposure to

foreign capital markets - work extremely hard to get high-margin corporate clients.

4. Availability of Substitutes.

There are plenty of substitutes in the banking industry. Banks offer a suite of services

over and above taking deposits and lending money, but whether it is insurance, mutual funds or

fixed income securities, chances are there a non-banking financial services company that can

offer similar services. On the lending side of the business, banks are seeing competition rise from

unconventional companies. Sony, General Motors and Microsoft all offer preferred financing to

customers who buy big ticket items.

5 Competitive Rivalry.

The banking industry is highly competitive. The banking sector is in a race to see whocan offer both the best and fastest services, but this also causes banks to experience a lower

Return on assets. They then have an incentive to take on high-risk projects. In the long run, its

likely to see more consolidation in the banking industry. Larger banks would prefer to take over

or merge with another bank rather than spend the money to market and advertise to people.


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CHAPTER 2

COMPANY PROFILE


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Company profile of South Indian Bank Ltd.

SOUTH INDIAN BANK LTD (SIB) is a private sector bank headquartered at Thrissur in

Kerala. It is headed by Dr.V.A Joseph, Managing Director & CEO of the bank. The bank has

been successful in widening its coverage across the country with 642 branches and 3 extension

counters transforming it into a pan India institution. The branch network now covers 26states/union territories and has a network of 489 ATMs. The bank offers major services in

various segments of accounts & deposits, loans, mutual funds, insurance, money transfers and

other value added services .The Kerala government had given permission to SIB to accept

commercial taxes. The bank has been appointed as the largest service provider (point of sale) for

the New Pension Scheme (India) launched by the govt. of India.

History of South Indian Bank Ltd.

South Indian Bank is one of the leading scheduled commercial banks in India with a strongfocus on technology and service culture. South Indian Bank had a very humble beginning. SIB

was formed on the 29th January 1929 by a group of 44 enterprising men, who with a capital of

only Rs 22,000 joined together at Thrissur to liberate the business community from the clutches of

greedy money lenders. The bank gained the confidence and received the patronage of the public

in increasing measure over the years and in the 1960s when there was a crisis in the banking

industry in Kerala, South Indian Bank took over fifteen other smaller banks.

South Indian Bank came into being during the Swadeshi movement. The establishment of

the bank was the fulfillment of the dreams of a group of enterprising men who joined together at

Thrissur, a major town in the erstwhile State of Cochin to provide for the people a safe, efficient

and service oriented repository of savings of the community on one hand and t o free the business

community from the clutches of greedy money lenders on the other by providing need based

credit at reasonable rates of interest. Translating the vision of the founding fathers as its corporate

mission, the bank has during its long sojourn been able to project itself as a vibrant, fast growing,

service oriented and trend setting financial intermediary.

MILESTONES

SIB was the FIRST among the private sector banks in Kerala to become a scheduled bankin 1946 under the RBI Act.

SIB was the FIRST bank in the private sector in India to open a Currency Chest on behalfof the RBI in April 1992.

SIB was the FIRST private sector bank to open a NRI branch in November 1992. SIB was the FIRST bank in the private sector to start an Industrial Finance Branch in

March 1993.


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SIB was the FIRST among the private sector banks in Kerala to open an "OverseasBranch" to cater exclusively to the export and import business in June 1993.

SIB was the FIRST bank in Kerala to develop in-house, fully integrated branchautomation software in addition to the in-house partial automation solution operational

since 1992. SIB was the FIRST Kerala based bank to implement Core Banking System. SIB was the THIRD largest branch network among Private Sector banks, in India, with all

its branches under Core banking System.CORPORATE VISION

To emerge as the most preferred bank in the country in terms of brand, values, principles

with core competence in fostering customer aspirations, to build high quality assets leveraging on

the strong and vibrant technology platform in pursuit of excellence and customer delight and tobecome a major contributor to the stable economic growth of the nation.

CORPORATE MISSION

To provide a secure, agile, dynamic and conducive banking environment to customers with

commitment to values and unshaken confidence, deploying the best technology, standards,

processes and procedures where customer convenience is of significant importance and to

increase the stakeholders value.

BOARD OF DIRECTORS

Sri Amitabha Guha, Chairman

Dr. V.A. Joseph, Managing Director& Chief Executive Officer

Sri Jose Alapatt

Sri Paul Chalisserry

Sri Mathew L Chakola

Dr N.J Kurian

Sri Mohan E Alapatt

Sri K Thomas Jacob

Sri H.Suresh Prabhu


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PERFORMANCE OF THE BANK

Table 2.1

The performance highlights of the bank for the financial year ended march 31, 2011 are as follows:

Key parameters Rs in crores

Deposits

Gross advances

Total gross business

Net profit

Capital & reservesCapital adequacy(%)-Basel-I

Basel-II

Earnings per share(EPS) :

a)basic EPS(In Rs)(face value Rs 1)

b)diluted EPS(In Rs)(face value Rs 1)

book value per share(in Rs)(face value Rs 1)

gross NPA as % of gross advances

net NPA AS % OF NET ADVANCES

RETURN ON AVERAGE ASSETS (%)

29721

20659

50380

292.56

1845.1613.17

14.01

2.59

2.58

16.33

1.11

0.29

1.05

(Source:-annual report of sib-2010-11)


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FINANCIAL PERFORMANCE

PROFIT

The bank has achieved a record net profit of Rs 292.56 crores during the year 2010-2011

registering a growth of 25.25% over the previous year. The bank could achieve this quantitative

enhancement in net profit essentially on account of higher scale of operations and better

management of assets and liabilities of the bank.

The profit and loss account shows an operating profit of Rs 548.08 crores before depreciation, tax

and provision as per details given below:

(Rs in crores)

Profit before depreciation, taxes & provisions 548.08

Less: Depreciation : 22.82

Provision for NPA/NPIs : 28.84

Provision for depreciation on investments : 9.37

Provision for contingencies : 20.00

Provision for income tax/wealth tax : 152.94

Provision for standard advances : 21.60

Provision for restructured advances : (0.05) 255.52

Net profit 292.56

Transfer from investment share : 4.70

Brought forward from last year : 17.03

Profit available for appropriation : 314.29

BUSINESS ACHIEVEMENTS

The bank could achieve a total gross business of Rs 50380 crore,consisting of total deposits of

Rs 29721 crores and gross advances of Rs 20659 crores as on March 31,2011 registering a

growth of 29.24% over the previous year. In CASA segment, the bank has achieved a year to year

growth of 20%.During the year 2010-11,7.51 lakh new SB A/Cs were opened, of which ,2.82


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lakh accounts belong to students. This was specifically aimed at inculcating banking and savings

habit among the younger generation.

SHAREHOLDING PATTERN OF SOUTH INDIAN BANK

Table 2.2

Holders name No. of shares % shareholding

Other companies 109008966 9.65%

General public 468695832 41.48%

Foreign institutions 409106518 36.20%

Financial institutions 82091810 7.26%

N.banks Mutual Funds 36091133 3.19%

Others 25070641 2.22%

The banks shares are listed on:

The Cochin Stock Exchange Ltd(CSE) The Stock Exchange Mumbai(BSE) The National Stock Exchange of India Ltd Mumbai(NSE)

Employee strength of South Indian Bank

As on March 31, 2011, the Bank had 5619 personnel on its rolls as against 5132 as on

March 31, 2010.Cadre wise break up of personnel is as under:

Table 2.3

Designation Male Female Total

Officers

Clerks

Sub-staff

Part -time employees

TOTAL STAFF

1813

1160

596

3569

98

3667

675

1092

21

1788

164

1952

2488

2252

617

5357

262

5619


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SIB-A Customer Oriented Bank

Despite acquiring the latest technological capabilities available to the banking industry in

the country, the Bank continues its emphasis on personalized customer service, which has been

the Bank's core strength for all these 79 years. Incidentally, the Bank had also been selected, in

the Outlook Money - C- Fore Survey, as the best private sector Bank in India in the 'Service

Quality 'segment.

AUTOMATION AND COMPUTERISATION

Rapid advancement in Information Technology (IT) made a paradigm shift in the way

business has been conducted and banking was also not an exception. The stiff and fierce

competition being experienced in the banking horizon especially from foreign banks as well as

new generation private sector banks forced the managements of old generation private sector

banks to ponder upon new dimensions of banking, deploying IT in the best possible manner.

The Board of Directors and the Top Management embraced this idea in early 2000 and thus the

'SIBerTech' initiative was born. 'SIBerTech' was the initiative to deploy Core Banking Solution

(CBS) and Bank could achieve 100% CBS status as on March 31, 2007. Leveraging on the CBS

platform Bank could introduce a host of services such as Anywhere Banking, on line ATMs, Net

Banking, Mobile Banking, E commerce, M commerce etc.

The following are some of the new products and services that are being introduced during

the current year.

SIB recently signed a marketing agreement with Life Insurance Corporation of India, thelargest and the most popular public sector insurer in our country, servings their corporate

agent to market all their life insurance products, which have a ready acceptability among

the masses in our country. This approach making tie up will be a forerunner for many

more things to come in the service of the customers.

The fully automated platform for online trading in stocks and shares listed on bothBombay Stock Exchange and National Stock Exchange, in association with a few leading

stock brokers is in final stages and is expected to be commissioned shortly.

The Bank has already put place in association with Bajaj Allianz General InsuranceCompany Ltd. An arrangement to offer online health, travel and motor insurance in

addition to all general insurance products, which are already available through the

network of our branches.


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PRODUCTS AND SEVICES

The main products and services of SIB are divided into three main heads:

PERSONAL BANKING

A) ACCOUNTS AND DEPOSITS

SIB initiates customers to begin a relationship by opening an account as a window to experience

next generation banking .with all their branches networked under core banking system; SIB has

the latest product offerings, and value added services.

Savings account- for routing the personal cash flow Term deposits- for high Returns on your investments Financial Inclusion Smart Card Account

B) LOANS

As time changes, needs change and so does the spending solutions available. As a result,

mindset has also changed. Nowadays, loans are an integral part of personal finance. It

makes sense in todays financial scenario. The South Indian Bank foresees every kind o

need and offers various special packages as given.

PERSONALBANKING SERVICES

NRI BANKINGSERVICES

BUSUNESSBANKING SERVICES


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Personal Loan - Easy general purpose loans

Vehicle loans - for private, commercial or agricultural purposes

Home Loans - for residents, NRIs and Senior Citizens

Gold Loans - Easy Loans against Gold

Educational Loans - for higher studies

Agriculture Loans - for various agricultural needs

Flexi loan - Loan against property (Residential/Non-residential)

Other loans-for certain specific purposes

OTS scheme for Micro & small enterprises(MSE)

C) MUTUAL FUNDS

Mutual Funds is one of the preferred investment options for all those who want to play

safe, yet save more than what traditional saving avenues offer. South Indian Bank has

tied-up with the leading Mutual Funds, so that customers may pick and choose, as per

their investment goals.

D) INSURANCE

At every point of life risks are many. Coverage for life and property are always advisable

to ensure protection. South Indian Bank offers its customers the most beneficial policies

from insurance majors. Whether for households or for businesses, the bank has all kinds

of policies:

General Insurance - tie-up with Bajaj Allianz Insurance

ECGC Export Credit Guarantee Corporation joins hands with SIB under bank

assurance mode

E) MONEY TRANSFERS

Fast, reliable and with minimal charges, money transfers with South Indian Bank is a no-

hassle affair. Be it within the country or abroad, the online money transfer services make

the business of transferring money look one of the easiest jobs. With all branches

networked under the Core Banking system, customer can send and receive money in an

instant and meet their urgent needs.

Domestic Transfers - Transfer/Receive funds within India

International Transfers - Transfer/Receive funds to/from abroad

F) VALUE ADDED SERVICES

Value Addition is the norm when customers open an account with SIB. SIB offers

different types of value added services to opt from, as per customers convenience, with

the power of online services.

New Pension System


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Any Branch Banking Global ATM cum Debit Card Internet Banking Mobile Banking Credit Card SIB Collect Demit ServicesNRI BANKING

A) ACCOUNTS AND DEPOSITS

SIB with its rich experience serving NRIs helps in creating products and services that suit

customers exact needs. The wide range of accounts and technology based value added

services. Presents a great opportunity to begin a relationship with us. In addition to

Savings. Accounts, under NRE, NRO category, SIB also offer high return deposit

schemes, in Indian Rupees (NRE/NRO) and Foreign Currency (FCNR/RFC).

NRE Rupee Account - Non Resident External Rupee Account (Savings/ Deposits).

NRO Rupee Account - Non Resident Ordinary Rupee Account (Savings/Deposit)

Foreign Currency Deposits - In USD, GBP and Euro- (FCNR / RFC )

B) LOANS

Loan schemes for NRIs include apart from the usual personal loans, home loans, loan

against deposits, etc. to help meet financial goals. SIB has different schemes for different

purposes.

Personal Loans - Easy general purpose loanHome Loans - For individuals and Senior Citizens

Pravasi Swagat - For NRIs returning for ever to India

SIB Flexi Loan - Loan against property (Residential/Non-residential

C) MONEY TRANSFERS

Fast, reliable and with minimal charges, money transfers with South Indian Bank is a no hassle

affair. From across the globe, our services of online money transfers, tele transfers and DD

drawing arrangements, make the business of transferring from any place around the globe look

quite easy.

International transfers-transfer/receive funds to/from abroad

Within India-transfer/receive funds within India


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D) INSURANCE

Customers working outside their country and away from loved ones, take the trouble to ensure

security for all .At every point of life risks are many. Coverage for life and property are always

advisable to ensure protection. South Indian Bank has the most beneficial policies from the

insurance majors. Whether it is for households or for businesses, SIB brings for its customers allkinds of policies.

E) VALUE ADDED SERVICES

Value addition is the norm when customers utilize SIB services. These range from ATM cards to

special debit cards. On introduction of the prestigious CORE banking solution in technology

partnership with the Infosys Technologies Ltd, South Indian Bank is now providing absolutely

on-line anywhere banking facilities at all branches, covering all the major centers in the country

and abroad.

The different value added services include:

Any Branch Banking Welcome Kit International ATM cum Shopping Card Internet Banking Mobile Banking Demit Services NRI Branches NRI Division Hadi Express Exchange SIB FlashBUSINESS BANKING

A) BUSINESS ACCOUNTSThe bank offers different types of Business Accounts such as Current Account, Overdrafts (OD),Cash Credits (CC) and Mercantile Credits. These accounts allow the convenience of conductingday-to-day banking operations, in addition to offering working capital credit requirements.

Normal Accounts Premium - CD SMART Premium AccountsGeneraL


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B) DOMESTIC FINANCEA business requires a constant flow of finance for its growth. The finance can be from varioussources, including Bank finance. The bank helps help to understand each and everyrequirement of business, and provide you the right mix of finance.

Working Capital finance Long Term Finance Non Fund Based finance

C) INTERNATIONAL FINANCEExport Finance

To cater to the high growth export sector, the bank offers the following:-

Pre-shipment credit to take care of purchase and processing of raw materials, for makingthe goods ready for export. Advances such as Packing Credits (against LCs/ confirmedorders) shall help the customer to maintain his cash flow.

Post-shipment credit is extended to exporters against assured sale receivables, till theactual sale proceeds are realized. Facilities such as Purchase/Discount of exportdocuments under Export Orders, Advances against export bills sent on collection, arefew of such advances.

We also offer foreign currency loans, advances against export incentives receivablesetc.

Our SWIFT services help instant financial services for exporters. Click here for SWIFTservice details.

We facilitate insurance through Export Credit Guarantee Corporation (ECGC)Import Finance

To help our customers in Import finance, bank offers

Letter of Credit services remittance services Import Bill collection services etc.

D) MONEY TRANSFERSFast, reliable and with minimal charges, money transfers with South Indian Bank is a no-hassle affair. Be it within the country or abroad , our online money transfer services,make the business of transferring money look one of the easiest jobs. With all ourbranches networked under the Core Banking system, you can send and receive money inan instant and meet your urgent needs.


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Domestic Transfers - Transfer/Receive funds within India International Transfers - Transfer/Receive funds to/from abroad

E) VALUE ADDED SERVICES

We offer best-of-the-breed technology based online services which would take care of yourbusiness needs. We also offer personalized value added services forthe owners and staff of every kind of business concern. We invite you to a world of nextgeneration banking

Any Branch Banking - For your business accounts

International ATM cum Shopping card - For proprietorship firms

Internet Banking - For all types of business concerns Mobile Banking - For proprietorship firms

SIB Collect - Fast collection of cheques/drafts

Demat Services - for online holding of shares

Insurance - general insurance and life insurance

BRAND IMAGE

The incorporation of the new logo has helped to attract the youth into the bank and

thereby substantially improve the savings deposit base. Banks website

www.southindianbank.com is also redesigned every year to make it more communicative,

informative and educative to the visitors.

BRAND AMBASSADOR

SIBs optimism is visibly radiated through hoardings that feature Malayalam super hero

Mammooty,the banks brand ambassador. The bank, as part of the global brand building

exercise, has signed South Indian actor Padmashree Bharath Mammootty as its brand

ambassador banking on the film star's `pan India appeal, clean image and popularity among the

NRI community'. His tech savvy image goes hand-in-hand with the bank which has always been
http://www.southindianbank.com/http://en.wikipedia.org/wiki/Mammoottyhttp://en.wikipedia.org/wiki/Mammoottyhttp://www.southindianbank.com/


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in the forefront of embracing technology. The initial contract between the bank and actor was for

three years which was later extended for five more years.[4] Currently SIB is the only bank in

South India that has a brand ambassador. Through endorsing Mammootty as its global brand

ambassador, SIB has received a huge boost especially in the Middle East.

Corporate Social Responsibility (CSR) initiatives of SIB

The banks CSR policy epitomizes active participation in the social and economic

development of the society. The policy on Corporate Social Responsibility strictly confirms to

the guidelines of RBI and Ministry of company affairs on CSR. The bank necessarily focuses on

major areas like education, healthcare, sustainable livelihood, infrastructure development and

social causes and a specific budget is allocated for such activities. As a responsible corporate

citizen, the bank supports and pursues the Green Initiative of the Ministry of corporateaffairs.(MCA).in conformance with such initiatives, the bank started undertaking electronic

delivery of documents including the notice and explanatory statement of Annual General

Meeting ,Audited Financial Statements, Directors Report, Auditors Report etc for the year

ended March 31,2011,to the email address of the shareholders.

ORGANIZATIONAL STRUCTURE

The organization structure of SIB has been shown in the following pages:-

They have been shown in 3 LEVELS

HEAD OFFICE level REGIONAL OFFICE level BRANCH level
http://en.wikipedia.org/wiki/South_Indian_Bank#cite_note-Our_ambassador_Mammootty_quite_young:_South_Indian_Bank-3http://en.wikipedia.org/wiki/South_Indian_Bank#cite_note-Our_ambassador_Mammootty_quite_young:_South_Indian_Bank-3


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HEAD OFFICE

BOARD OF DIRECTORS

CHAIRMAN

MANAGING

DIRECTOR

DY.GM

(MKTG)

EXECUTIVE

GM (TREASURY)GM

ADMINISTRATION

DY.GM

(PERSONNEL)

DY.GM

(CR.RECOVERY)

DY.GM (CFM)

CHIEF

MANAGER

DY.GM

(INS)

DY.G

M

(CR.A

GM

(IRMD)

AGM

(MKTG)

AGM

(PERSONNEL)

AGM

(CR.

RECOVERY

) AGM

(INS)

AGM

(CR.AD

MN)


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REGIONAL OFFICE

REGIONAL HEAD(GM, DGM, ASST.GM)

CHIEF MANAGER

SR.MANAGER

MANAGERS

ASST.MANAGER

CLERKS

SUB STAFF

PART TIME WORKERS


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BRANCHES

BRANCH HEAD

ASST.MANAGERS

CLERKS

SUB STAFF

PART TIMEWORKERS


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IMPORTANT DEPARTMENTS OF SIB

1. Accounts Department

2. Credit Monitoring Department

3. Corporate Financial Management

4. IT Division Department

5. Integrated Risk Management Department (IRMD)

6. Inspection and Vigilance department

7. Legal department

8. Marketing department

9. Personnel department

10. Planning & development, NRI cell department

11. Secretarial department

12. Organization methods & compliance department.

1. ACCOUNTS DEPARTMENT

Accounts department of SIB has sub-departments like Credit department and Credit recovery

department

The main functions of accounts department are as follows:

Inter branch reconciliation Maintaining employee provident fund

2) CREDIT MONITERING DEPARTMENT

Credit department carries out three major functions:

Credit sanctioningThe loan proposal from the branches and regional offices are processed in this department and

also loans above a certain limit are sanctioned from this department.

Credit recoveryThe main function of this division is the recovery of loans advanced and NPA management.


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Credit monitoringThe function of this division is to monitor whether the operations are running smoothly and also

to carry out the recovery of loans and NPAs.

3) CORPORATE FINANCIAL MANAGEMENT

The main functions of CFM department consist of:

Preparation of balance sheet and allied activities Computation and filling of service tax, income tax etc. Chest management Statutory requirement maintenance as per the regulation of RBI. Interbank deposits Sanctions for the interbank deposits must be given from this department and also the rate

for this is fixed by the CFM.

Filing of returns with RBI Statutory liquidity ratio is calculated on a daily basis Record information regarding maintaining CRR with RBI.

4) INFORMATION TECHNOLOGY (IT) DIVISION DEPARTMENT

The main function of IT department in the Head office is to record the data in MIS

regarding credit information, payroll etc to the credit department and to the personnel department

respectively. All the functions concerned with various departments are coordinated by this

department. The head office of IT department is at Cochin. The software used in south Indian

bank is finacle, from Infosys. This department has a major role to play after the introduction of

core banking, internet banking etc. All branches are connected to this data centre through a

private wide area network. There is a disaster recovery center with those departments. In case of

any disaster as a part of business, continuity plan is thus established. If there occurs any

complaint to the system in one branch, their work will not become pending as they could get the

assistance from the nearest branch. All such activities are coordinated by this department.

5) INTERGRATED RISK MANAGEMENT DEPARTMENT (IRMD)

Risk is an integrals part of banking business. IRMD has classified risk into 3 categories:

Operational risk Market risk Credit risk


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The bank aims to achieve an appropriate tradeoff between risk and return and thereby maximize

shareholder value. the IRMD which is independent of operational departments takes care of

various risks associated with banking business.

6) INSPECTION AND VIGILANCE DEPARTMENT:This department ensures adherence to the set rules and regulations by the branches ,regional

offices or departments at administrative office. The inspection is conducted at regular intervals

and reports are submitted to the Audit Committee of the executives or the board, which reviews

these reports and ensures corrective actions are taken to rectify the lapses or irregularities.

7) LEGAL DEPARTMENT:The main functions of legal department are

All legal aspects with respect to customers or outsiders are dealt by this departmentMonitoring of suits filed and decreed accounts (above Rs. 500000).Verification of local advocates report in respect of credit facilities( above Rs25000000)Monitoring of suits or consumer complaints against banks.Settlement of claimed petitions of deceased depositorsFraming documents according to law.Issuing circulars to branches in matters involving legal issues.Liaison with regional offices, advocates etc.

8) .MARKETING DEPARTMENTThe marketing department at the Bank has taken various marketing oriented initiatives to

ensure business growth and competitiveness in the market. An array of products and services

were introduced keeping in view customer preferences and as a result, the bank was able to live

up to their expectations. This exercise has helped the bank to design each customer contact point

as easy and result oriented as possible. The bank has leveraged on the Core Banking platform to

offer varied financial products and services in a seamless and effective manner.

9) PERSONNEL DEPARTMENTThe human resource department at SIB is known by the name Personnel Department. The main

functions of this department are the recruitment of staff, internal promotions and salary payments

to the employees. Other functions include conducting training programs, performance appraisal,

motivation, employee safety, grievance handling etc.


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10) PLANNING AND DEVELOPMENT, NRI CELL DEPARTMENTPlanning and development department is responsible for taking up important decisions on

different new plans such as opening a new branch, getting RBI permission, lease agreement of

new premises etc. The department also formulates deposit schemes. Its interest rates, service

charges etc .It also looks after various security aspects for the bank. They are also responsible fortaking long range plans, sets yearly targets etc.

The NRI cell department is fully dedicated to the service of NRIs .This department publish

quarterly newsletters exclusively for the NRIs. It makes arrangement for smooth remittance for

the NRIs. The cell also offers best support to branches in matters relating to NRI accounts and

closely monitors the growth of NRI business.

11) SECRETARIAL DEPARTMENTThis department consists of a number of departments like Risk Management Committee,

Customer Service Committee, and Shareholders Committee etc. Their function includes:

Issue of shares Conducting board meetings, committees etc Bond issues Dividend payment Redemption of shares Investors complaints and their redressal

12) ORGANISATION AND METHODS COMPLIANCE DEPARTMENTThe main function of this department is to inform the recent arguments from RBI to the top

management periodically. This department acts as an intermediary between RBI and SIB. The

main function of this department is Anti Money Laundering.

FUTURE EXPANSION PLANS OF THE SOUTH INDIAN BANK

South Indian Bank is planning to raise its capital during the current fiscal to take care of its

future requirement and also to start a non-banking finance company as a fully-owned

subsidiary. SIB's Chief Executive Officer and Managing Director, Dr V.A Joseph, said the bank

proposed to raise Rs 1,000 crores to start the NBFC arm, which would focus on bullion business

and also meet its future business growth plans. The bank is targeting a business volume of Rs

62,000 crores this fiscal; it plans to open more new branches and ATMs in the current financial

year so as to reach the corporate goal of 700 branches and 600 ATMs by March 31, 2012.


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AWARDS AND RECOGNITIONS

South Indian Bank has bagged the Business world Indias Best Bank 2010 Award.

South Indian Bank received the award for the Best Bank in the old generation banks

category.

South Indian Bank bagged THE BEST WEB SITE AWARD FROM Kerala Management

Association.

South Indian Bank was awarded the BEST BANK IN ASSET QUALITY among all private

sector banks in India.

The best Asian Banking Web Site award from Asian Banking & Finance Magazine.

South Indian Bank Bagged the Special Award from IDRBT for Banking Technology Excellence.


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SWOT ANALYSIS OF SOUTH INDIAN BANK

A) STRENGTHS

1) 100% technology driven operations with 100% CORE banking Branches

2) Strong clientele base in South India and Middle East

3) Attractive financial products for the youth

4) Faithful employee base

5) Efficient management

6) Staff attrition rate is very low.

7) NPA rate is very low.

8) Industry experience of more than 80 years.

B) WEAKNESS

1) Inflexibility in decision making

2) Operational complexities due to diversification of services

C) OPPORTUNITIES

1) Expanding operations to all the states in India.

2) Changing environment

Being a developing sector, banking offers a lot of opportunities like rural banking, retail

banking etc, which can be effectively utilised by the bank.

3)Technological Development

The South Indian bank being an early adapter of technology can utilize its technological

leadership to venture into new opportunities.

D) THREATS

1) Cut throat competition from foreign banks and new generation banks

2) Changing reforms in banking sector may pose threats to current operations.


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SECTION II

PROBLEM CENTERED STUDY OF THE

ORGANIZATION


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A STUDY ON THE CREDIT APPRAISAL OF LOANS IN SOUTH INDIAN

BANK LTD.

Submitted to

MAHATMA GANDHI UNIVERSITY, KOTTAYAM

In partial fulfilment of the requirement for the award of

MASTERS DEGREE IN BUSINESS ADMINISTRATION

(20102012)

By

ELIZABETH MARY ALEXANDER

Reg No:21788

RAJAGIRI COLLEGE OF SOCIAL SCIENCES

RAJAGIRI P.O

KOCHI683 104


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CHAPTER 1II

RESEARCH METHODOLOGY


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STATEMENT OF THE PROBLEM

A credit appraisal is an important part of determining the eligibility for a loan, and the quantum

of the loan. A prospective borrower has to go through the various stages of the credit appraisal

process of the bank. Each bank has its own criteria to satisfy itself on the credit worthiness of the

borrower. The eligibility for the loan that a person can get depends on his credit worthiness,

determined in terms of the norms and standards of the bank. Being a crucial step in the loan

process, a borrower needs to be careful in planning his financing modes. The credit worthiness,

basically, assures the repayment capacity of the borrower - whether the borrower is capable of

repaying the loan and dues on time. If the credit appraisal is not done carefully, it would affect

the loan repayment, which in turn affects the profitability of the bank. The purpose of carrying

out study on this topic is to understand the steps involved in credit appraisal, the factors

affecting it and to understand the credit appraisal process followed at South Indian Bank Ltd.

SIGNIFICANCE OF THE STUDY

This study helps to understand the various processes involved in the credit appraisal process of

the bank. It also helps the bank to evaluate the efficiency of the techniques used for evaluating

the credit worthiness of the borrowers.

OBJECTIVES OF THE STUDY

a) To study the credit appraisal of loans in South Indian bank Ltd.

b) To evaluate the advances and deposits of the bank

c) To evaluate the working capital loan and term loan allotted by the bank

RESEARCH DESIGN

Research design is descriptive study.

METHODOLOGY ADOPTED FOR DATA COLLECTION

The study was done with the help of secondary sources of data-data from files and annual reportsof the bank for the past 5 years from 2006-07 to 2010-11. Personal communication with guide

and other officers at the SIB Regional office, Bangalore also helped in collecting information.


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PERIOD OF THE STUDY

The study was conducted for a period of 40 days commencing from May 2 to June 10, 2011 at

South Indian Bank Regional office, Bangalore.

LIMITATIONS OF THE STUDY

Lack of availability of breakup of data. Limited time was another constraint.


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CHAPTER IV

CREDIT APPRAISAL PROCESS AND CONCEPTUALFRAMEWORK


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INTRODUCTION TO CREDIT APPRAISAL

Credit Appraisal is the process by which a lender appraises the creditworthiness of the

prospective borrower. It is a very important step in determining the eligibility of a loan

borrower. Every potential borrower has to go through the various stages of a credit appraisal

process of the bank, which might include an interview with the bank officials. However, just

like every bank charges different rates for different loans from different customers, in the same

way, each bank has its own set criteria that one must satisfy to qualify as a certified borrower of

money/assets from the bank. All banks have their own rules to decide the credit worthiness of

their borrowers. Creditworthiness of a customer lies in assessing if that customer is liable to

repay the loan amount in the stipulated time, or not. Here also, every bank has their own

methodology to determine if a borrower is creditworthy or not. It is determined in terms of the

norms and standards set by the banks. Being a very crucial step in the sanctioning of a loan, the

borrower needs to be very careful in planning his financing modes. The banks need to becautious, lest they end up increasing their risk exposure. All banks employ their own unique

objective, subjective, financial and non-financial techniques to evaluate the creditworthiness of

their customers.

While assessing a customer, the bank needs to know the following information: Incomes of

applicants and co-applicants, age of applicants, educational qualifications, profession,

experience, additional sources of income, past loan record, family history, employer/business,

security of tenure, tax history, assets of applicants and their financing pattern, recurring

liabilities, other present and future liabilities and investments (if any). Out of these, the incomes

of applicants are the most important criteria to understand and calculate the credit worthiness of

the applicants. As stated earlier, the actual norms decided by banks differ greatly. Each has

certain norms within which the customer needs to fit in to be eligible for a loan. Based on these

parameters, the maximum amount of loan that the bank can sanction and the customer is eligible

for is worked out.

TECHNIQUES USED IN CREDIT APPRAISAL

Credit appraisal is a skill which has to be acquired by study and supplemented by practice.

Intuitive guess work has little place in appraising the credit rating or credit needs of a corporate

unit. The credit managers of banks and Non Banking Finance Companies (NBFCs) are duty

bound to accept or reject a proposal on the basis of its viability or non - viability.

Credit appraisal is done by banks or financial institutions by obtaining credit Information of the

borrowing company. Credit information of the borrowing company can be obtained by the

following sources:

1.Bank references:-Information from the bankers with whom the company has its account and

also the bankers who might have lent to the company.

2. Trade reference: References from the companys customers, suppliers, etc.


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3. Credit rating agencies: These are agencies that provide ready and detailed information

required by banks and financial institutions for financing the capital requirements of the

companies which are credit rated by these agencies. Examples:-agencies like CRISIL, CARE,

ICRA etc

4. Company financial reports: One of the most convenient and commonly used tools of creditevaluation by the banks.

5. Press reports and published books.

6. Stock market opinion: Banks may also refer to shareholders or share dealers to know the

market sentiments about the prospective company.

7. Charges registered: The information about the charges created on the assets of a company

would indicate to what extent the companys assets present and future are charged.

OTHER TECHNIQUES USED IN CREDIT APPRAISAL:

1. Personal discussion

2. Factory visit

3. Study of financial statements

1. PERSONAL DISCUSSION:

This is the most significant source of primary information which is original, detailed and most

trustworthy. We can know better the details about the history of the company, background of

the promoters, nature of the companys business etc. We can also know about;

a. Character of the borrower

b. Market, product (share of market, competition, price, sales volume).

c. Investors perception (dividend policy).

2. FACTORY VISIT:

Under factory visit information collected are:

a. operating capacity

b. infrastructure and other utilities

c. labor relations

d. internal control system for raw material (imported, indigenous)

3. STUDY OF FINANCIAL STATEMENTS:

Financial statements contain a wealth of information. If properly analyzed and interpreted they

can provide valuable insights into a firms performance and position. Financial analysis

determines the significant operating and financial characteristics of a firm.


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CREDIT RATING MODELS FOR DIFFERENT LOANS AT SIB

CREDIT RISK RATING FRAMEWORK FOR TINY & SSI UNITS

Rating Summary based on AFS as on 31.03.2008 (Tax Audit) Marks Max

I. INDUSTRY RISKS(Production Stage Risk)

16

Raw Materials Indigenous, easily available,non-seasonal,steady price

3 3

Seasonal / Almost steady price 2

Perishable /Imported 1

Availability uncertain,fluctuating price

0

Infrastructure (Building, Power, fuel, labour,

transportation etc)

Building own or lease more than

10 years, others excellent

3 3

Rented where the remainingagreement period is more than 5years

2

Rented building with shortduration, satisfactory

1

Else 0

Location Prime / Industrial area 3 3

Non Industrial area / by lanes 2

Else 0

Technology State-of-the-art 3 3

Current technology 2

Obsolete technology 0

Industrial climate & relationships Trouble free environment andco-ordial relationships

3 3

Medium type relation ship andenvironment

2

Strained relations and Prone tothreat of Strike

0

R & D Arrangement R&D Available / Not required 1 1

Required but not available 0

II. MANAGEMENT RISKS 10

Experience group Reputed Business group 3 3

Moderate 2

New Venture 0

Experience of the promoter/s At least one of the promoters are 3 3


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technocrat or experienced

New in the field 0

Employed executives Skilled /Qualified person in allkey areas

4 4

Skilled /Qualified person in few

key areas

1-3

No Skilled /Qualified person areemployed

0

III. OPERATIONAL RISK 16

Supply of informations to the Bank Promt supply of informations 2 2

Delayed supply of informations 1

Defaults in supply ofinformations

0

Record of Irregularity * No irregularity 2 2

Any instance of irregularity 0Irregularity means LCdevolvement, BG invocation,non-payment of installment andinterest within a reasonable time, Discounted cheque return morethan 5% etc."

Limit Management Within DP with fluctuatingbalances

3 3

Occassional over drawings, butwithin permissible level

2

Limit rarely used and within DP 1

Overdrwan frequently and watchcategory

0

Dealing with the bank More than 10 years 4 4

Less than 10 years but more than6 years

3

Less than 6 years but more than3 years

2

Less than 3 years 1

New account 0

Limit Utilization Credit turn over More than 4times of limit and more than80% of the sales are routedthrough a/c

3 3

Credit turn over More than 3times of limit and more than60% of the sales are routedthrough a/c

2


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Credit turn over More than 2times of limitand more than 40%of the sales are routed througha/c

1

Credit turn over less than 2 times

of limit and less than 40% of thesales are routed through a/c

0

Compliance of sanction stipulations 100% compliance 2 2

Majority complied 1

Poor compliance 0

IV MARKET RISK 8

Product Product is regular consumable/Industrial item with demand

5 5

Product is short shelf life butwith demand

4

Fashionable goods but withdemand

3

Short life goods withcompetition from Indian counterpart

2

Short life goods withcompetition from overseasproducers=

0

Marketing arrangements Fully tied up through organizedmarketing net work

3 3

Through marketing agents 2

Own arrangements with goodmarketing strategy

1

Open Marketing 0

V. Collateral Security 10

Collateral >= 125% 10 10

2. Prorata for all coverages 25-125%

25% 2

= 1.33 5 5

CR < 1.33 > 1.25 4


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CR < 1.25 > 1.10 3

CR < 1.10 > 1.00 2

CR= 1.00 4 4

QR < 1.00 > 0.90 3

QR < 0.90 > 0.75 2

QR < 0.75 0

B Profitability

Operating Profit margin (Operating profit /sales)

Increased 3 3

Maintained 2

Reduced 1

Loss 0

Return on capital employed Increased 3 3

Maintained 2

Reduced 0Cash Profitability (Computed leaving stockvariation)

Increased 5 5

Maintained 4

Reduced 2

Loss 0

C Interest Coverage (PBDIT/Interest)

Interest Coverage Ratio If >=2 5 5

If 1.5 3

If 1.25 2If


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Stock Turn over Ratio >=6 3 3

=4 2

=3 1

6 months)

>=6 3 3

=4 2

=3 1


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RATING SCORE FOR TERM BORROWERS

A. MANAGEMENT RISKS. Max. Marks

1 Age of applicant/

Average age ofapplicants

Below 25 years 5 7

Above 25 years upto 50 yrs 7

Above 50 years upto 75yrs 5

Above 75 years 0

2 Source of Income Profit / Salaried ReputedPublic/Pvt cos or govt service

6 6

Trader /Contractor / otherbusiness of established nature

5

Agriculture 2

Broker / Capital market (wide

fluctuation in income anticipated)

0

3 Past satisfactorydealings with our bank.

1. > 8 years SB/CD a/c 7 7

2. > 4 years upto 8 years 6

3. > 2 years upto 4 years 3

4. < 2 years 0

20

B.Operational Risks:

1 Supply of informationto the Bank.

Regular 5

Delayed 2

Blocked 0

2 Record of irregularity Prompt repayment 5

Stray case of Minor Irregularity 4

Occassional irregularity 2

Irregular 0

3 Compliance of sanctionstipulations

100% compliance 5

Majority complied 3

Poor compliance 0

4 Security Cover >= 200% 6 6

(Primary + Collateral) Pro-Rata basis for 125 to 200%

125% 4=50% 4 4

25% > 50% 3

25% 2

Available 1

Nil 0


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6 Type of security Residential property along withor without commercial property

5 5

Commercial / industrial propertyalone

3

Agriculture/ vacant plot 2

Movables only 0

15

C. Market Risks

1 Variation in Incomelevel of Borrower(Gross Income/ TurnOver)

Up by 10% or more 6 6

Up but less than 10% 4

Remained at Same 2

Reduced 0

2 Appreciation /depreciation of the

value of asset

Highly Apreciated 6 6

Appreciated 5

Remained at same level 2Reduced / No asset acquired 0

3 Utilization of the asset For own business / occupation 6 6

For letting out / let out 4

Investment 2

No asset acquired 0

4 Location of the Security Urban area with good demand 6 6

Urban area moderate demand 4

Rural area with good demand 3

Rural area with moderate demand 2Rural developing area 0

5 Purpose of theAsset/Loan

1. Consumption 0 6

2. InvestmentCapital maket 2

3. Investment Others 4

4. Productive-and Remunerative 6

30

D Financial Risks

1 Return on Capital

employed

More than 15% 5 5

More than 10% 4

More than 5% 3

More than 0 2

Negative 0

2 Ratio of cash surplus torepayment commitment

>3.0 5 5

>2.5


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(incase of entity withBalance sheet & P&Laccount DSCR for theyear to be taken)

>2.001.50 5times loan & loan less than30 times monthly income, (2.5times annual income)

5 5

(2) Medium income & Net worthNW>3 times loan & loan lessthan 36 times monthly income, (3times annual income)

3

(3) Average income & Net worthNW>1.5 times loan & loan lessthan 42 times monthly income,

(3.5 times annual income)

2

(4) Else, Low income & Low networth. NW >= loan & Loanamount . 48 times MI

0

4 Gross Income to LoanBorrowings

>3.5 times 5 5

>3 times to 3.5 times 3

>2.5 times to 3.5 times 2

Else 0

RATING AWARDED

1. Above 80% SIB: AAA HighestSafety

2. Above 70% & up to80 %

SIB: AA HighSafety

3. Above 60% & up to70 %

SIB: A AdequateSafety

4. Above 55 & up to 60%

SIB: BBB ModerateSafety

5 Above 50% & up to55%

SIB: BB InadequateSafety

6 Above 45 & up to50%

SIB: B High Risk

7 Above 40% & up to45 %

SIB: C Very HighRisk

8 Below 40% SIB: D Default


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RATING SUMMARY OF MANUFACTURING FIRMS

I. INDUSTRY RISKS Maximum

A. Production Stage Risk 10

1 Raw Materials 3

2 Powe & Fuel & Labour 2

3 Technology 2

4 Infrastructure 2

5 R & D Arrangement 1

B. Post-Production Risk 10

1 Demand 5

2 Competition 3

3 Marketing Arrangements 2

II. MANAGEMENT RISKS

A. Promoters 10

1 Experience of the Group 3

2 Management Proficiency 2

3 Experience of the Promoters. 2

4 Employed Executives 3

III Operational Risks 10

1 Supply of informations to the 2


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Bank

2 Record of Irregularity. 4

3 Limit Management 2

4 Compliance of sanctionstipulations

2

IV Collateral Security 5

Collateral cover 5

V Financials 55

Liquidity 13

CR 8

NWC 5

Profitability 15

Op. profit (Excl. Int.) 4

Op. profit margin(Excl. Int.) 3

Return on Capital Employed 4

Net Profit 4

Interest Coverage 5

PBDIT/Interest 5

Solvency 12

Term Indebtness 6


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Rating Grading

Above 60 to 70 SIB A AdequateSafety

Above 70 to 80 SIB AA High

SafetyAbove 80 SIB

AAAHighestSafety

Above 45 to 50 SIB B High Risk

Above 50 to 55 SIB BB InadequateSafety

Above 55 to 60 SIB BBB ModerateSafety

Above 40 to 45 SIB C Very HighRisk

Less than 40 SIB D Default

Overall Indebtness 6

Efficiency in utilisation of CA 10

Stock Velocity 5

Debtors Velocity 5


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RATING MODEL FOR TRADING COMPANIES

Max Marks

A. FINANCIAL RISKS

I Profitability 40

A Net Profit / Sales

>=10% 4

4

=5% 3

=2% 2

=20% 4

42) =10% 33) =5% 2

4) =0% 1

5) Operating loss 0

c. PBDIT/Interest

1. If >=2 3

32. If 1.5 2

3. If 1.25 1

4. If =1.33 4

4

2 CR=1.25 3

3 CR=1.1 2

4 CR1. 1

5


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4) >4.5 0

BWorking Capital

Borrowing / Sales

1) 20%30% 40% 0

CGrowth in sales / turn overcompared to previous year

1) Above 50% 4

4

2) Above 25% 3

3) Above 10% 2

4) Less than 10% 1

5) Reduced 0

D Stock Turn over Ratio

1) >=6 3

32) =4 2

3) =3 1

4) 6

months)

1) >=6 3

32) 4 2

3) =3 1

4)


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2. Rented, where remainingagreement period more than 5 years 2

3. Else 1

E Locational advantage

1. Prime 3

32. High floors / bylanes 2

3. Others 1

C MANAGEMENT RISKS 15

AExperience of the trader/

group

1. Reputed Business group 3

32. Moderate 1-2

3. New Venture by 1st generation

Entrepreneurs 0

B

Total Networth of theproprietor/partners/director

s (If Personal Gtee)

1 . Over 10 times loan amount 4

4

2. Over 5 times but less than 10 times 3

3. Over 2 times but less than 5 times 2

3. More than loan amount 1

4.Less than loan amout 0

C Dealing with us

1. More than 10 years 5

5

2. Less than 10 years but more than 8years 4

3. Less than 8 years but more than 5

years 34. Less than 5 years but more than 3years 2

5. Less than 3 years 1

6. New Customer 0

DPerformance of group

concerns

1) All concerns are profit making andwell managed 1 1

2) All other cases 0

EAny instance of attachment

by Govt Dept. / Court

1. No instance 22

2. There are instance 0

D OPERATIONAL RISKS 15

A Supply of informations to 1.Prompt supply 2 2


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the Bank 2.Delayed supply 1

3.Defaults in supply 0

B Record of irregularity

1. No irregularity 3

32. Single instance 1

3. More than once instances ofirregularity 0

CCompliance of sanction

terms

1. 100% compliance 2

22. No major non-compliance 1

3. All others 0

D

Whether any of the groupconcerns are highly

irregular / NPA

1. Yes 02

2. No 2

E

Any qualification byauditors affecting

financials.

1) Does exist 02

2) Does not exist 2

F Turn over in the account

More than 4 times of limit 4

43-4 times of limit 3

1-2 times limit 1

Less than 1 time 0

E FACILITY RISK 15

A Security coverage

1. >= 150% 10

10

Pro-rata Marks for 50% to 150%

=50% 2

< 50% 0

B Nature of collateral

1. Liquid security as NSC, LIC , FDat least equal 5

5

2. Pro-rata for liquid security/ Primeurban property / Residential Urbanproperty 3-4

3. Other urban / village residential 2

4. Other mortuguages 1

5. Only personal guarantee 0


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Rating Grading

Above 60 to 70 SIB A Adequate

SafetyAbove 70 to 80 SIB AA High

Safety

Above 80 SIB AAA HighestSafety

Above 45 to 50 SIB B HighRisk

Above 50 to 55 SIB BB MediumRisk

Above 55 to 60 SIB BBB ModerateRisk

Above 40 to 45 SIB C VeryHighRisk

Less than 40 SIB D Default


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APPLICATION OF FINANCIAL TOOLS IN CREDIT APPRAISAL

Creditworthiness and credit risk are closely but inversely related concepts. A high

creditworthiness implies good financial soundness of the company and this is judged in terms ofliquidity position and solvency position of the company .Thus in order to be rated as financially

sound, the company has to satisfy the twin criteria of liquidity and solvency. The following

financial ratios are generally used for ascertaining these twin tests:-

1. Liquidity ratios

Current liabilities are paid out of current assets. Hence the extent of current assets over

current liabilities is a test of short term liquidity. Therefore higher the net working capital of a

company better and more creditworthy it is from the angle of liquidity .The two ratios

calculated are:-

a) Current ratio= Current assetsCurrent liabilities

b) Quick ratio= Total current assets - inventoryTotal current liabilities

Quick ratio is a slightly stricter test of liquidity of a firm. It is considered as a satisfactory index

of short term liquidity of a business unit.

2) Solvency ratios

These ratios are also known as long term debt paying capacity ratios. The two main

solvency ratios from the angle of long term creditors and the total outside creditors (long term

and short term) are as follows:

A) Long term Debt-Equity ratio= Long term debt

Tangible net worth

B) Total outside liabilities equity ratio= Total outside liabilities

Tangible net worth

A lower quotient is a better test of solvency.

Liquidity and solvency ratios are based on balance sheet of a company and they relate to

past period. But healthy ratios of previous years cannot be taken as indicator of futurecontinued creditworthiness of the company. A company can continue to maintain its

creditworthiness in future only when it is able to maintain good profitability. Hence the

banks have to ascertain the profit earning capacity of the concern to determine its future

creditworthiness. The following profitability ratios are calculated in this regard.

a) Margin ratio = Operating profit before interest and tax(OPBITSales


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b) Return on investment (ROI) = Operating profit before interest and tax

Total capital employed

b) Plough back ratio=Net profit retained in businessNet profit after tax

The margin ratio indicates the available margin on sales and return on total capital employed

indicates the earning power of the company. An increasing ROI year after year or a higher

ROI of the company as compared to the industry average is a healthy sign and indicates

continued creditworthiness of the company under appraisal.

An important process in the credit appraisal is the credit rating. Based on the parameters set

by the Board of SIB, the concerned officer analyses the details and rates the prospective

customer. Pricing for the loans are determined based on the ratings given to the proposed

loans.

Assessment of working capital needs of a firm involves:

1) Critical examination of business plan

2) Computation of maximum permissible bank finance (M.P.B.F)

Apart from M.P.B.F, turnover method is also used for assessing the working capital

requirements of borrowers.

Turnover method will apply for credit needs up to Rs 2 crores of small scale industry, small

business and traders. Bank will provide credit up to 20% of projected turnover of the

company.

M.P.B.F method applies to corporate wanting credit up to Rs 10 crores. Large companies with

credit needs above Rs 10 crores will be assessed by using cash budget route. The companywould be asked to draw up a cash budget for next year detailing the periodicity and quantum

of fund needs. This will be helpful both to bank and the borrowers in managing efficiently

their funds. Funds will be provided by banks up to 75% of cash deficit, while 25% deficit

will be contributed by the company.

CREDIT APPRAISAL PROCESS AT SOUTH INDIAN BANK

The credit appraisal process at South Indian Bank is considered very thorough and conservative.

The bank undertakes the following steps to complete the credit appraisal process:

1. Meet the client: The branch manager finds the suitable clients with credit requirements for

their business or clients approach directly to the bank. If the Branch manager is satisfied with the

client, the case goes to the regional office for a complete check and evaluation.

2) The branch manager after the first course of interaction with the client asks for the various

documents required to appraise the project.


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In the starting of the business deal, broadly two requirements are needed.

a) Mandatory requirements

b) Statutory requirements

Mandatory requirements and the documentary evidences needed for each case of appraising are;

Mandatory Requirements Documentary Evidence

1) A suitable premise in a suitable place tooperate from

Copy of the rent agreement in case of leasedproperties and copy of the title deed in case ofowned premises along with the land tax andbuilding receipts.

2)Power allocation Power allocation letter from the electricityboard/electricity bill

3)Water connection Water connection letter from the waterauthority /water bill

4)Nature of Associationa)Proprietorshipb)Partnershipc)Joint ventured)Private limited companye)Public limited company

DeclarationCopy of partnership deedJoint venture agreementMemorandum and Articles of AssociationCertificate of Commencement of Business

Statutory requirements and documentary evidences needed for each case are:

Statutory requirements Documentary evidencesState government licensesEx. sales tax registration certificate Copy of sales tax registration certificate

Central government license VAT registration certificate

Local body licenseFactory license Factory registration certificate

Department specific licenses:a)Drug controller in the case ofpharmaceutical connected activities includingmedical shopsb)forest department in case of timber basedindustries including furniturec)pollution control board in the case ofmanufacturing industriesd) Excise department in case of distilleries,manufacturing process where alcohol contentare involved.e)explosives department in case of quarriesand firework related businessf)geological survey in case of service

Copy of license

Copy of license

Copy of license

Copy of license

Copy of license

Copy of license


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industries, job works and excisable itemsg)approved plan and construction permissionsfrom the competent authority in case ofbuilding /housing finance along withestimates

h)land tax, building tax, approved plan andcompletion certificate in case of buildings

Approved plan/permission letter/estimates

Tax paid receipts

These documents provide:-

Evidence of association and activity Legality of association and activity Name and addresses of institutions Name and addresses of persons behind the show

3) Initial de-dupe check: This is better known as the de-duplication checks in which the bank

checks the credit reporting of the client ,whether he holds any over-dues etc. the bank also

checks the client in RBI defaulter list.

4) Check the banking: The bank checks the banking of the existing account if any, and also the

existing association of the client with other banks.

5): Audited financial test: The bank undertakes a complete check of financials as mentioned in

the requirements, these audited financials are put in software of the bank and then projections are

made on the basis of the financials and then various profitability ratios are analyzed and the

financial soundness of the company is analyzed. The financial viability of the company is

checked on various parameters.

6) Deviation check: The bank after checking the financial soundness of the company goes for

the verification of the deviation check of policy compliance if any, in case of major deviations

the case is presented in front of the regional office.

7) Internal verification: the bank through its various sources makes a complete thorough

investigationof the handling of business of the client. This enables the bank to make sure that the

client is not forging with the financials of the company.

8) Approval by Credit Department: Credit limits of the loan decides which level of

management has to take decisions .If the amount is too high the approval has to be taken from

the Credit Sanction Department of the head office located at Thrissur.9) Decision on disbursement of

finance project -2_4

Documents