raichur district center co-operative bank ltd

RDCC Bank Ltd, Raichur

DECLARATION

I Mr. Giridhar declare that the project report entitled

“CREDIT APPRAISAL ON WORKING CAPITAL”AT

RAICHUR DISTRICT CENTER CO-OPERATIVE BANK LTD. RAICHUR

Submitted in partial fulfillment of the requirement for the degree of

MASTERS OF BUSINESS ADMINISTRATION

To Sikkim-Manipal University, India, is my original work and not submitted for the award of any other degree, diploma, fellowship, or any other similar title or prizes.

Place: Raichur Giridhar Date: Reg. NO: 520863791

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EXAMINER’S CERTIFICATON

The project report of

GIRIDHAR

ON

“CREDIT APPRAIASAL ON WORKING CAPITAL”

WITH SPECIAL REFERENCE TO

RAICHUR DISTRICT CENTER CO-OPERATIVE BANK LTD, RAICHUR.

Is approved and is acceptable in quality and from

Internal Examiner External Examiner

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AKNOWLEDGEMENT

I take this opportunity to express my profound gratitude and deep regards to my

guide Prof. Ms. Shweta for her exemplary guidance, monitoring and constant

encouragement throughout the course of this thesis. The blessing, help and

guidance given by him time to time shall carry me a long way in the journey of

life on which I am about to embark.

I also take this opportunity to express a deep sense of gratitude to Mr.

H.Y. Gaddanakeri (D.R.C.S. & Incharge Managing Director) of RAICHUR

DISTRICT CENTER CO-OPERATIVE BANK LTD. for his cordial support,

valuable information and guidance, which helped me in completing this task

through various stages.

Lastly, I thank almighty, my parents, and friends for their constant

encouragement without which this assignment would not be possible.

Table of content:Executive summary

Introduction

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Aims and objectives MethodologyPart 1.An Overview of the Organization

Banking Regulation Act- 1949 Definition of Co-operative Bank Values of Co- operative Bank Principles of Co-operative Bank

Part 2.An Company Profile

Introduction History of the organization. Special features Services Competitors

Part 3 . Project overview

Introduction Aims and objectives Methodology Analysis Finding conclusion

Part 4. Bibliography

EXECUTIVE SUMMARY

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This project focuses on “Credit appraisal on working capital” In order to do the justice to the topic, there is a brief introduction of credit appraisal this includes the different types of credit sectors.

Further, the concept of credit appraisal has been elaborated upon, which includes various factors for appraising credit to working capital .

Primary aim of the project “ Credit appraisal on working capital” at the Raichur District Central Co-op Bank Ltd, Raichur. Was to analyses existing practices of co-operative banks for credit appraisal on working capital.

Basic objectives of the project

1) Study the credit appraisal in co- operative banks.

2) Study the credit appraisal on working capital.

3) Study the credit appraisal to different companies

Methodology:

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As my project work is based on credit appraisal in the Raichur District Central Co-op Bank Ltd, Raichur. I had put my self very much into the job to reach the depth of credit appraisal in different sectors. I involved myself directly interacting with various executives of loans and investment department.

The findings of the project included following steps:I. Collection of data:-

I. Primary Data: The data collected through face to face interaction with Managers and Executives.

II. Secondary Data: The data collected through magazines, internet. II. Analysis of data:-

I. Pie charts, II. Annual reports of bank.

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PART-1

An Industry Profile

Banking Regulation Act-1949Definition Of Co-Operative BankValues Of Co- Operative BankPrinciples Of Co-Operative Bank

Banking Regulation Act, 1949:

(As applicable to co-operative societies)

The Banking Regulation Act,1949(as applicable to co-operative societies) which had come into force from 1st March 1966, has vested the Reserve Bank with various statutory powers of

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control and supervision over the Co-operative Banks. The powers in regard to incorporation, management etc. of these banks, continue to vest in the Registrars of Co- operatives societies of the States concerned. Further the provisions of the B.R. Act 1949 shall be in addition to, and not, save as expressly provided in the Act, in derogation of any other law for the time being in force. This means that the Co-operative Banks are required not only to comply with the provision of the B.R. Act, but also other laws applicable to them. In respect of matters specifically provided for in the B.R. Act the provisions of the said Act will prevail over the provisions of the Co-operative societies Acts.

According to this Act, a “Primary Co-operative Bank” means a Co-operative Society other than a Primary Agriculture Credit Society:

1) The primary object or principal business of which is the transaction of banking business

2) The paid- up share capital and reserves of which are not less than one lakh of rupees.

3) The bye- laws of which gives only permit as a share holder or a member varies co-op institutions which are working in Raichur district. Like Primary Agriculture Co-op societies which are back bone of DCC Bank, Taluka Agricultural produces marketing co-op societies, Urban Co-op Banks & co-op societies.

Definition of Co- operative Banks:

A co-operative is an autonomous association of smaller co-op institutions or persons united voluntarily to meet their common economic, social and cultural needs and aspirations through a jointly owned and democratically controlled enterprise.

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Values of Co- operative Banks:

1) Self – responsibility

2) Democracy

3) Solidity

In tradition of their founders, co-operative members believe in the ethical values of honesty, openness, social responsibility and caring for others.

Principles of Co- operative Banks:

1) Voluntary and open membership only for co-op societies which are working in Raichur district only.

2) Democratic member control.

3) Member Economic Participation.

4) Autonomy and independence.

5) Education, Training, and Information.

6) Cooperation among Cooperatives.

7) Concern for Community.

PART- 2

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An Bank Profile

IntroductionSpecial FeaturesServicesCompetitors

Bank Profile:

RAICHUR DISTRICT CENTER CO-OPERATIVE BANK LTD.

Head Office: Rajendra Gunj Circle, Raichur-584102.

Established: 1919

First President: Late A. B. Patil (1960-67) (After State re-organisation1959)

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Present President: Sharane Gowda Bayyapur

The Raichur District central Co-op Bank Ltd, Raichur is a district level rural credit bank established in 1919 for the sake of people to help agricultures. Up to Independence in 1947, bank was worked under Hyderabad Nizam Sarkar Govt.

After Independence up to state re-organization bank were worked in 11 talukas namely Raichur, Manvi, Deodurga, Lingasugur , Sindhanur, Koppala Kushtigi, yalburga, Gangavati, Alampur & Gadval under the Hyderabad state. In 1959 Raichur District separated from Hyderabad State included in Karnataka State than called Mysore state. Gadval & Alampur talukas separated from RDCC Bank, because these two talukas included in newly formed Andhra Pradesh.

In 1959 than Deputy Commissioner of Raichur took over the charge as the President of RDCC Bank.

In 1960 A. B. Patil became the first president of RDCC Bank.

In the year 2001 Raichur district divided in to two district namely Raichur district & Koppal district. Koppal district includes Gangavati, yalburga, kushtagi, but RDCC Bank were not divided. So present it has operations in two district.

Fund collection is necessity of bank but this bank’s prime goal is protection of collected fund and useful investment. With the suitable directions given by Board of Directors and with efficient management, the bank is moving forward with success. Today it contains nineteen branches. Out of its nineteen branches today four branches are having their own building. Other building are well planned and furnished.

All of its nineteen branches well equipped computerized facilities are available.

This bank not only gives importance to co-operative sector but also gives importance to education, health and social programs and also encourages them. Without any discrimination it helps people according to their qualification. It helps the patients suffering from kidney problem, heart problem, cancer and other diseases. It is due to this bank that high- educational system and eye- specialist centre are established in Raichur town.

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Board of Directors:

The present members in board of directors of Raichur District Center Co-Operative Bank Ltd, Raichur.

Sharanegowda Bayyapur ( President) Ramesh vaidya ( Director) K. Sharanappa ( Director ) Pampanagowda Badarli ( Director ) S. B. Reddy ( Director ) Halappa achar ( Director ) Shyamrao Kulkarni ( Director )

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Vishwanath patil ( Director ) Rajshekhar Naik ( Director ) Amregowda ( Director ) M. Venkagowda ( Director ) Pratap Patil maski ( Director ) R.TimmayyaShetti (Apex Bank rep.) B.H. Patil (Co-op societies joint registrar) Rajashri B. Agsar (Co-op Societies sub-Registrar)

D.S. Velu (NABARD Raichur, Spl. Invity director )

H.K. Chandrashekar (D.G.M. Apex Bank Bangalore, Spl. Invity director)

VISION AND MISSION:

Protection of collected fund.

Useful investment of fun

Better customer service.

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Building transparency in all dealings.

SPECIAL FEATURES:

Fully computerized for efficient services. Secured deposits and high returns. “ EASY HOME LOANS” and many other attractive loan schemes.

BRANCHES:

Sl.no Branches

1 Head Office Raichur

2 Gunj Branch Raichur

3 City Talties Road Raichur

4 Gajgarpet Raichur

5 Nijalingappa Colony Raichur

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6 Station Area Raichur

7 I.D.S.M.T. Layout Raichur

8 Manvi

9 Sindhanur

10 Gangavati

11 Koppala

12 Yalburga

13 Kuknur

14 Kushtagi

15 Hanumasagar

16 Lingasugur

17

18

19

Devadurga

Kavital

Koppala Station Area

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PROGRESS AT A GLANCE:

Rupees in Lakhs

S.N

Details 2006-07

2007-08

2008-09

2009-10

(UnAdited)

1 Membershipa) Govt.

b) Co-op Societies

Total

1

782

783

1

787

788

1

791

792

1

792

792

2 Branches 16 16 18 18

3 Share Capitala) Govt.

b) Co-op Societies

381.87

630.13

1012.00

381.87

648.85

1030.72

381.87

795.72

1277.59

381.87

908.03

1289.90

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Total4 Reserve & other funds

a) Reserve fun

b) Other fund

Total

22.04

669.61

691.65

23.87

670.76

694.63

51.08

757.40

808.48

101.55

813.23

914.78

5 Depositsa) Individual Deposits

b) Institutions Deposits

c) Societies Deposits

Total

44223.17

1829.30

4171.05

10423.52

5477.13

1817.63

5200.55

12495.31

6794.58

1945.82

6627.61

15368.01

9068.49

2212.48

7806.16

19087.13

6 Loan Borroweda) Short term loan

b) Mid term loan (non form)

c) Mid term loan

d) Computer loan

total

5887.47

196.60

412.95

0.82

6497.84

7409.00

143.05

303.23

0.77

7856.05

9670.49

104.05

195.99

0.77

9971.79

9091.87

81.81

140.75

0.76

9315.19

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7 Loans & Advances a) Short term loan

b) Oil seed loan

c) KCC loan

d) Midterm agriculture loan

e) Renewed midterm loan

f) Security loan

g) Mortgage loan

h) Long term loan

i) Short term (non-agri)

j) Mid & long term loan (non-agri)

k) Housing loan

l) Vehicle loan

m) Liquidated societies loan arrears

Total

67.10

35.58

9341.38

233.98

29.14

893.77

754.21

259.93

594.09

471.99

81.09

54.05

9.37

12825.68

60.04

35.23

8625.24

296.28

28.33

981.18

268.02

411.93

555.53

530.19

90.22

54.01

38.14

11974.34

59.88

35.23

11670.22

380.33

24.62

1157.75

1230.99

564.01

759.08

867.13

187.03

79.90

32.83

17045.00

65.17

35.32

13718.48

513.57

23.54

1248.71

2133.90

782.44

1317.72

767.98

280.93

99.86

28.31

21015.33

8 Investments 4802.95 8211.59 8709.28 7949.87

9 Own fund 1703.65 1725.35 1986.07 2204.68

10

Working Capital 18625.01

23028.25 27325.87 32340.57

11

Profit & loss -158.5

335.58 336.98 -332.66

PROPORTION OF PROFIT & LOSS:IBMR, Hubli


Rupees in Lakhs

year 2006-07 2007-08 2008-09 2009-10

-400

-300

-200

-100

0

100

200

300

400

FINANCIAL PERFORMANCE:

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YEAR Profit

2006-07 -158.5

2007-08 335.58

2008-09 336.98

2009-10 -332.66


The Financial performance of RDCC Bank Ltd, Raichur for the year 2008-2009 & forecast for the year 2009-10, under the various parameters are as discussed here below:

Rupees in Lakhs:

Sl.no

Income & Expenditure 2007-08 2008-09 Forecast For the year 2009-10

1 Interest income 1699.67 1783.22 2545.16

2 Non interest income 52.26 52.35 104.84

3 Interest expenses 752.67 1043.97 1598

4 Net interest income (1+2-3) 999.26 791.16 1052

5 Staff expenses & others 669.09 454.63 700

6 Provisions & Contingencies ---- ---- ----

7 Profit 330.17 336.97 352.00

Bank under profit of Rs. 336.97 Lakhs for the year 2008-09 against to 2007-08 little high. In 2007-08 bank was under profit of Rs. 330.17 Lakhs due to payment of exceed in payment of interest by the bank. In the same time in the year 2007-08 salary expenses was Rs.669.09 Lakhs, where as the salary expenses was decreased to Rs. 454.63Lakhs in the year 2008-09 .

Non interest by the banking operating income, bank earned Rs. 52.26 Lakhs & 52.35 Lakhs for the year 2007-08 & 2008-09 accordingly.

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Bank audit for the year 2009-10 is going on. Bank’s forecasted profit for the year 2009-10 is Rs. 352 Lakhs. Bank expected interest income for the said year Rs. 2545.16 Lakhs and from other non-interest income by Rs. 105.84 lakhs whereas, expected expenditure of interest Rs. 1598 Lakhs, Salary and other expenses is Rs. 700 Lakhs.

RECOVERY PERFORMANCES:

The bank has recovered a loan amount of Rs. 8180.25 Lakhs as on 31.03.2009. Details are as shown below:

Agriculture Loan

Sl. No.

Details Demand Recovery Balance %

1. Short Term Loan 60.12 0.16 59.96

2. Short Term Oil Seed Loan 36.38 -- 36.38

3. KCC Loan 8551.31 7208.44 1342.87

4. Mid Term Loan 117.35 81.62 35.73

5. Mid Term Converted Loan

18.04 3.71 14.33

6. Long Term Loan 32.75 30.31 2.44

Total 8815.95 7324.24 1491.71 83.08

Non-Agriculture Loan

Sl. Details Demand Recovery Balance %

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No.1. Short Term Loan 459.53 439.90 19.63

2. Mid Term Loan 493.88 416.11 77.77

Total 953.41 856.01 97.40

3. Non-Renewal CC & OD Loan

18.75 -- 18.75

4. Credits of Societies under Liquidation

32.83 -- 32.83

Total (1+2+3+4) 9820.94 8180.25 1640.69 83.29

INVESTMENTS:

As on 31-3-2009 bank invested Rs.8709.28 Lakhs in various organizations.

Rs. 301.57 Lakhs invested in state & Central Government bonds, Rs. 354.40 Lakhs in NABARD, Rs. 4723.23 Lakhs in Karnataka Co-op Apex Bank ltd, Bangalore. Rs. 3328.88 Lakhs in local commercial bank for daily transaction. And also bank purchased shares from IIFCO for the worth of Rs. 1Lakhs.

WORKING CAPITAL:

Bank Working Capital was Rs. 22090.86 Lakhs as on ending 31-3-2008, it is increased in the year 2008-09 to Rs. 27325.87 Lakhs as on year ending 31-3-2009.

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In the year 2008-09 bank sanction the loan Rs. 11057.48 lakhs for short term agricultural loan, Rs. 175.25 Lakhs as mid term loan, Rs. 432.42 lakhs long term loan & for non- agricultural sector Rs. 7147.47 lakhs. Bank advanced in agricultural sector like Horticulture, irrigation, Agri land development, tanks formation dairy development & rural key loan etc.

Bank formed 3200 self service wings in Raichur & Koppala districts out of these SSG 1965 groups were sanctioned loan upto 31-3-2009. As per the direction of central Govt, State Govt . & NABARD. Bank given the priority for SSG. Bank given more attention to upliftment of Rural, BPL, women SSG.

NPA:

In the year 2001 NPA were 11.42%, but in decreased by 2008-09 to 3.09%. where as RBI & NABARD fixed NPA to max 5%.

BORROWINGS:

NABARD bank is main borrower of the bank. bank borrowed the Rs. 9670.49 lakhs in the year 2008-09. And payable to NABARD bank for the year 2007-08 was Rs. 7856.05 Lakhs. Bank refunded the total loan to NABARD through Apex bank which to be paid as on 31-3-2009 there is no out standing loan payable to NABARD.

AUDIT AND CONTROLS:

The audit and inspection serves the objective of ensuring safe and sound practices and policies. The concurrent audit of the bank which covers all the 19 branches has enabled early

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identification of defects/ deficiencies for initiating necessary actions for rectification and setting right the deficiencies. In the area of house keeping the bank continues to do well with the balancing of books and inter bank/ branch accounts been drawn up to March 31, 2009. Now as per the NABARD direction bank is under going the audit through the Charted Accountant those who are appointed by NABARD. Previously the was done by Karnataka Govt. co-op audit department.

HUMAN RESOURCES: Total staff strength of the bank as at the end of March 2009 stood at132.

The collective efforts of management and the employees enabled the bank to show progressive growth during the year and the relationship continued to be harmonious.

With a thrust to strengthen and improve competency, bank has been imparting training to the staff discharging their duties at various levels to enable them to perform their duties and responsibilities more effectively in a highly competitive customer driven environment. Bank has also been encouraging its employees to take up various examinations conducted by Indian Institute of Banking and Finance.

The bank is also encouraging its staff to enroll them for various specialized courses more particularly on Anti Money Laundering and Know Your Customer (AML & KYC), Trade Finance, Risk Management etc.

BOARD OF DIRECTORS:

The Board of Directors at the end of March 2009 comprised of 15 & 2 members are special invites. 17 members of the Board of Directors were held during the year. The board has constituted various sub committees, which met regularly and transacted various business entrusted to them. All the members on board contributed

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Their knowledge, expertise and experience in their respective fields towards all round development of the bank.

As per the directions of NABARD bank, DCC bank must have the Professional knowledge 3 directors from the field of Charted Accountant, Business developer & Professional development those who are highly skilled. Bank is going to co-opt 3 directors from the same field in forth coming year.

ACHIEVEMENTS AND AWARDS:

Won “ Best Co- operative Bank “ Award in 2005- 2006. By Apex Bank.

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Part 3.Project overview

Introduction Aims and objectives Methodology Analysis Findings Conclusion

INTRODUCTION:

Why Bank Credit?

Credit provided by banks is an important driver of National economy. In the olden days, when banking had not taken the present shape, individuals or families traditionally doing the banking business provided credit to the user. However, the present day economy is vastly different from the old economy.

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The modern economy is driven by technology, and the most important variable of the economy are the consumption demands of the vast population as well as the supply machineries to meet the demand. The sources of supply no longer confine to the area where the demand exists. With the improvement in transport and communication system, the demands can be easily met by supplies made from sources located in far- flung areas .

Today, the total output of by our industrial and non- industrial sectors is very large, the finance requirements of which cannot possibly be met by traditional financiers alone. The role of modern co- operative banks as providers of credit to the economy begins at this point.

Sectors in which banks provide credit:

During the post- independence period, a phenomenal growth in bank credit has been largely responsible behind the growth of industry in our country.

Most of the credit was directly provided to the production sector that fuelled the growth of manufacturing industries in India. However, even during the post- independence period, banks were owned / controlled by large business houses. This resulted in credit flowing to selected enterprises mainly belonging to these business houses. Consequently, the credit portfolio of many banks acutely suffered from high concentration risks, as the beneficiaries of credit were a select few and, also because credit was utilized in only a small number of activities pursued by these business houses. Many banks became unviable in the process. Besides, this approach of lending was not in tune with the prime objective of independent India i.e. welfare of society at large.

Priority Sector:

The nationalization of banks in 1969 and 1980 made an attempt to shift the focus of bank lending to a large extent.

RBI propagated the concept of priority sector and laid down guidelines that every bank would have to deliver credit to certain important sectors of the Indian economy. In order to ensure that these guidelines are met, RBI also stipulated a minimum level of credit the banks have to commit to these sub- sectors, are the following ,:

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Agriculture

Small scale industries. Indirect financing to the SSI sector include financing industrial estates, khadi and village industries etc

Small road and water transport operators, retail trade, small business, and professional and self- employed persons, State sponsored organization for Scheduled Caste and Tribes etc

Education , Housing, pure consumption loans , loans to self- help groups.

Food and agro- based industry

Software sector and Venture capital

others

According to RBI directives, the scheduled banks are required to ensured that priority sector advances constitute 40% of net bank credit and that a substantial portion is directed to the weaker sections. Within the overall main lending target of 40% of net bank credit to the priority sector, 10% of net bank credit should be delivered to the weaker sections and 1% of previous year’s total advances is given under the Differential Rate of Interest ( DRI) schemes.

Other Sector:

As we have already discussed, banks have traditionally been providing credit to the industrial and manufacturing sector. During the past two decades, services sector has emerged as a significant contributor to the gross domestic product of he nation. Services sector is therefore an area of tremendous opportunity for banks in India, so far as lending is concerned.

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Thanks to the economic liberalization and growing consumerism in the country, almost all banks ( including foreign banks) in India have identified personal business segment as the thrust area for providing credit. Dedicated branches are being opened for financing consumer durables as well as for consumption by banks.

Retail finance has been identified as the area in which maximum target for credit deployment is being set by a majority of banks. The core business in the personal business segment is dominated by housing loans and education loans in which there is keen competition for grabbing higher market share amongst banks.

LOAN POLICY AND EXPOSURE NORMS :

Banks accept deposit from the general public. The funds mobilized are invested by the banks in various types of securities, investments, and loans.

The deposits are repaid out of the proceeds of loan, advances and investments made by them. While dispensing credit, banks have to thoroughly examine the inherent risk element in a credit proposal.

In order to contain the risk to a manageable level, and also to ensure that the lending bank does not fall into an asset liability. Mismatch position, RBI has laid down elaborate guidelines on the maximum ceiling of the loan that can be given to provided to certain section of borrowers.

RBI has also prescribed that all banks should have an in house loan policy document ( which should be based on the broad guidelines given by RBI).

Such loan policy document would contain the ceiling level, the standards of appraisal, decision making powers at different levels of hierarchy, the documentation standards and the premise on which lending decision should be taken by credit officers.

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The exposure norms prescribed by RBI are given below in brief. An important point to be noted by the credit officers in this context is that the exposure norms relate to the exposure at the whole bank level.

Within the overall exposure limit, the individual lending banks may decide on the limit up to which credit officers can provide credit facilities at the ground / operating level:

The exposure ceiling is linked to the capital funds of the lending bank. Capital funds is the sum total of Tier 1 and Tier 2 capital recognized for the purpose of computation of capital adequacy.

With effect from April 1, 2002, the exposure ceiling is 15% of capital funds in case of single borrower and 40% in the case of a borrower group.

Exposure to borrowers belonging to a group may exceed the exposure norm of 40% of the bank’s capital funds by an additional 10% (i.e. up to 50%) , provided the additional exposure is on account of extension of credit to all infrastructure projects.

Lending rates :

Lending in India was in the nature of directed lending till about a decade ago. So were the lending rates , and banks were expected to offer interest rates for deposits and charge lending rates against credit in terms of RBI prescription most of the time. Through out the 1990s , the lending norms were gradually relaxed as a result of the steps initiated towards financial sector reforms.

This also resulted in gradual deregulation of interest rates by RBI . Today, almost the entire interest scenario is deregulated except loans up to Rs. 2.00 Lakh in priority sector ( where interest rates are prescribed by RBI)And in the DIR ( differential interest rates) lendings. IBMR, Hubli


As things stand now , the most important elements of lending rates and the directives issued by RBI in this direction are given below:

PLR ( Prime Lending Rates) : PLRs are benchmark rates set by the policy framers of the bank. During the second half of the 1990s, banks were allowed to set different PLRs for the purpose of pricing loans of various maturities. Banks in India are now generally pricing their loan products on the basis of individual benchmarks fixed by them w. e. f. the financial year 2004 – 2005.

Individual banks fix their PLRs after taking into account their actual cost of funds , operating expenses and a minimum margin to cover regulatory requirement of provisioning / capital charge besides factoring their profit margin.

Commercial banks apply interest to the loan accounts on a monthly basis. This is also a recent development and has been effective from April 2002. This is popularly known as application of interest on diminishing balance method.

RBI has now given the freedom to banks to offer all categories of loans on fixed or floating rates. The floating rate credit products are usually priced using their PLRs or other market benchmarks.

Now banks are offering loans at sub – PLR rates to their creditworthy borrowers. This has been permitted in view of the prevailing international practice , integration of the domestic credit dispensation with international platforms and also to provide operational flexibility to banks in deciding their lending rates.

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CREDIT APPAISAL:

In the credit appraisal process, the decision maker makes an attempt to find answer to two questions. First, whet her the entrepreneur requires fund, and also what are his credentials. If the answer to the first question is positive, the second question is all about the extent of his requirement and the ways and means to fund the requirement.

Assessment of credit requirement for enterprises working at a small scale is often difficult because of lack of data relating to operations of the unit. Often, the promoters are skilled personnel or artisans without having any knowledge of financial management or accountancy. Besides, the low level of operations may not allow the promoter to employ a regular accountant.

A credit appraising officer may not find any profit and loss account or balance sheet of the borrowing enterprise, on the basis of which he may work out the level of credit required. In many situations, a credit analyst may have to counsel the borrower , and even work out the likely profit/ loss and balance sheet on the basis of available information.

It is therefore necessary that a credit analyst has a good knowledge of accountancy. RBI has therefore suggested that lending banks may not insist on submission of audited financial statements up to credit requirements of Rs. 25 lakh from prospective borrowers.

Beyond this level, lending bankers usually compute the credit requirements after undertaking a structured analysis of the financial statements of the borrowing enterprises. The financial management textbooks as well as the internal guidelines of individual banks prescribe the various methods of undertaking these exercises. The problem in credit assessment and dispensation , however, lies elsewhere.

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The financial statements are mostly prepared from the tax management angle. These statements may not necessarily be built on the prudential principles of financial management. Credit analysts therefore face a daunting task of uncovering the mask of window dressing from the financial statements and undertake the analysis only on the resultant figures that represent the situation in reality. Thus, besides being a good accountant, a credit analyst must possess a basic undertaking of the principles of financial management as well as taxation matters to understand the nuances of financial engineering.

METHODS OF CREDIT APPRAISAL:

Till about, 1990 , bank credit was considered a scarce commodity and therefore there was a strong focus on the need to optimally use this resource towards creation of primary assets. In banking parlance , these assets were known as a primary security, as a primary charge is created in favour of the lending bank on the assets created out of bank finance. With the gradual liberalization of the Indian economy , co- operative banks began providing credit to other sectors and also for activities that do not fall strictly under the manufacturing sector.

As a result, the consumption sector got a big boost and personal banking segment emerged as a lucrative business proposition for credit delivery. In its turn, a credit provided to the personal segment also meant a thrust to the industries manufacturing consumer goods. On the other hand, general services and software sector emerged as another area to which the label of industrial

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production may not strictly fit. The importance of this sector in the Indian economy as a whole has only been increasing which the co-operative banks cannot afford to ignore.

These developments in the last decade gradually brought in a revolution in the methods of financing so far followed by co- operative banking. In the monetary policy of 1997 – 98 , RBI declared the MPBF method as optional and suggested that co- operative banks may evolve their own rational methods for financing various types of activities . RBI also suggested cash budget method as a viable option. In fact , cash budget method of financing has already gained recognition as a suitable method of financing activities. Where no tangible security can be created or changed in favour of the bank.

Cash flow based assessment is emerging as the most important method of appraisal of bank finance, where the lending banks finance a portion of the cash gap or deficit occurring at any point of time , the remaining portion being met by the promoters as their margin.

Income recognition norms:

There has been a sea change in the manner in which Indian co- operative banking has been dispensing credit during the last decade.

A credit portfolio is recognized as a non- performing asset in books of the bank if the borrower has not serviced the interest or repayment obligation.

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This is regardless of whether the borrowing enterprise is a profit making entity. Credit appraisal methods are therefore increasingly focusing on the assessment of the repayment capacity of the borrower , which in turn depends on his cash generating ability.

Mere assessment of accounting profit is no more the most important criteria of credit assessment. Today, credit appraisal has emerged as an area which require adequate domain knowledge on the part of the appraising officer, with a mix of experience and the ability to see through the maze of financial statements .

Fair practices code for lenders:

There have been far reaching changes in the arena of banker - borrower relationship during the year 2002 and 2003.

The changes relate to both the recovery aspects of the credit provided by the lending bankers as well as the responsibility of the lending bankers in this regard . Thus, while the lending banks have been provided with a very strong recover weapon by means of SARFAESI

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Act during the year 2002, RBI has also advised the lending bankers to adopt the prescribed guidelines regarding Fair Practices code. The important guidelines prescribed by RBI in this regard have been listed in Annexure no. 2.

CREDIT APPAISAL FOR WORKING CAPITAL

MEANING OF WORKING CAPITAL:

The term working capital refers to the current asset holding of an enterprise. This is also sometimes called the Gross Working Capital. For a manufacturing enterprise, the average levels of holding of raw material, goods in process, finished goods , receivables, cash and other current assets together constitute a working capital . How does it differ from the other forms of capital employed in a business ? Let us consider a example of a house owner . The house owner purchases the house and furniture for the purpose of having a comfortable life . However , merely owning a house and various pieces of furniture is not a sufficient condition for running the daily chores of the household .

Fixed capital and working capital :

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We may therefore broadly classify the funds employed in a business enterprise into two components viz. fixed capital and working capital .

Fixed capital is invested in fixed assets which enable an enterprise manufacture goods for sale and earning profit . on the other hand , working capital is employed in purchasing those items , which are transformed into saleable goods by the production process .

Working capital refers to the merchandise itself . The difference between the fixed capital and and working capital may be expressed in another manner . The assets representing working capital rapidly convert from one form to another in a short period of time. Thus, cash converts into raw material , raw material converts into goods in process and finally into finished goods. The finished goods can be sold in market and in the process is converted back to cash again.

All these forms of current assets constitute working capital . The cash conversion time in respect of fixed assets may be very high , usually years .

T.G. Rose has used the phrase circulating capital to express working capital movement in his book titled The Internal Finance Of Industrial Undertakings. The dynamics of circulating capital vis- a- vis infusion of funds , withdrawal of funds and relatively stationary character of fixed capital is summed up in the diagram below :

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First circle is circulating capital

Middle circle is fixed capital

The above diagram captures the movement as well as the magnitude of both the categories of capital . The fixed capital forms the core of the total funds invested in business. The circulating capital continuously moves around the nucleus , i.e. core capital. The diagram indicates that there is a continuous churning of the circulating capital . If the profit earned and other funds infused in the business are retained and further ploughed back , the circle dimension grow over a period of time. The dimensions of the nucleus and the outer circle may also undergo changes , if the firm acquires new fixed assets or dispose the old ones.

Operating cycle concept of working capital:

The operating cycle concept of working capital envisages measurement of the average time taken by an enterprise in manufacturing the goods and selling them for cash so that the funds can be deployed for starting another batch of production . The system completes one cycle when cash is realized out of the sale proceeds of finished goods from the receivable / debtors .

Working capital has different components , the most important being the raw material . Manufacturing enterprises ensure that there always remain a minimum level of stock of raw material , which takes care of any abrupt discontinuity in supply. The raw material is then

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pressed into production . The processing time largely depends on the nature and specification of the final product .

Again , because the process of delivery takes some time , the enterprise may have to ensure that a minimum level of finished goods always remains available. This would take care of any sudden influx of order that may have to be supplied immediately . Finally , though the products have been delivered according to schedule , not all the supplies are paid for immediately . A portion of sale proceeds may remain locked for sometime in the form of receivables. The receivables holding period is the time allowed by manufacturer / supplier of the finished products to its customers for making payments. The receivables are realized by the enterprise on expiry of the credit period allowed by it .

Thus, every rupee invested in current assets at the beginning of the cycle comes back to the promoter with the profit element added , after a lapse of a specific period of time . This length of time is popularly known as the operating cycle or the working capital cycle. The cycle may be diagrammatically represented in the following manner :

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Measuring operating cycle :

The operating capital concept raises a fundamental issue – how to measure this time ? It is not possible to physically track every element of raw material pressed into production , and observe its movement across every stage of processing through the final production . When it comes

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Cash

Raw materi

al

Goods in

process

Finished

goods

Receivables


out in the shape of finished goods. The operating cycle is therefore measured in terms of days of average inventory held for every major category of working capital component. The holding ratios play a very important role at this stage. The holding periods of the individual WC components are computed in the manner on analysis of financial statements. The aggregate of all these holding periods represents the length of the operating cycle.

The following diagram makes the point clear :

Working capital policy :

The working capital management policy of an enterprise is inextricably linked to its approach towards current asset funding . From the point of view of currency, the assets of an enterprise may be broadly divided into two categories i.e. current and non – current assets . The capital assets are funded by long term sources of finance , generally in a combination of long term loans from banks / DFI s and a margin contributed by the promoters. On the other hand ,

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RM purchaed


current assets may further be classified into two components ( I ) a core component and ( ii) a fluctuating component.

A manufacturing enterprise has to maintain a minimum level of inventory at any point of time in order to run the production at specified level . Fall of inventory below this level may trigger a discontinuity in production and the required synchronization between the various stages of production may get lost. We may call this minimum level of current assets as the permanent or core current asset level.

The fluctuating current assets refer to the portion above this level that undergoes a change continually on account of changes in demand , seasonality of product etc . during the various period of the year.

LENDING AGAINST WORKING CAPITAL REQUIREMENT (PRE- NATIONALISATION SCENARIO) :

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During the pre- nationalization period, lending operation of co- operative banks in India was largely confined to funding credit requirement of individual companies engaged mainly in agro – based industries / activities such as jute , sugar , textile etc. The lending covenants were almost always governed by the security provided by the borrowers , both primary and collateral. Besides, as the industrial activity of the country was largely agro based, large swings in the operations on account of seasonal fluctuations in a business year were common occurrences. This led to large seasonal variations in the demand for bank credit as well.

In fact, availability of bank credit was not necessarily a function of the level of production or operation , as it is today . The lending bankers followed a security – centric approach in credit dispensation.

The establishment of new industries and introduction of new technologies in the post- independence period brought about a change in the outlook of commercial lending by banks in India . The working capital requirement of many new generation industries were uniform throughout the year , the demand for credit was at a higher level and agricultural inputs were not necessarily required for many products .

Co-operative banks adopted an operating cycle approach towards working capital related lending operations , where the requirement was determined in terms of holding periods of individual current asset components . for example , raw material holding would be in terms of ‘X ‘ months of consumption and so on . The sum total of the current assets would then be netted against other sources of funding such as trade credit received etc.

The balance amount represented the working capital requirement against which bank credit was provided. The lending banker would then determine the extent to which the above gap should be funded after considering the margin available against individual components. The borrowing company would have to fund the residual amount, by infusing fresh capital or by mobilizing funds from other sources .

Co- operative banks in India were thus already in search of a logical and rational system of lending for working capital purposes during the initial years of the post independence period . In the late sixties , Dehejia Committee made an observation that the ratio of bank credit to inventory had grown rather disproportionately . Also, the growth in the quantum of bank

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credit extended far exceeds the value of the output of industrial production . These two observations indicated that bank credit was perhaps not being used for the purpose of production alone .

Indications were quite strong that the increased bank credit was used for hoarding essential commodities for the purpose of making undue profits. In order to rectify the situation , Dehejia Committee made a few strong recommendations . one of the recommendations was to use funds flow analysis for ascertaining the sources and end use of funds . In order to contain the rapid and disproportionate growth of credit , RBI took certain stringent measures in 1973 which resulted in Credit Squeeze in the lending scenario of India .

Finally, RBI appointed a committee in 1974 under the chairmanship of Shri P.L. Tondon , the then chairman and managing director of Punjab National Bank . The main agenda before the committee was to examine the various patterns and methods of financing working capital requirement adopted by banks in India and to suggest necessary changes in these methods , which would ensure judicious allocation of bank credit . Bank credit was scarce and RBI wanted to ensure that there should at least be a need based distribution of credit amongst the borrowing community or a credit rationing system , if possible .

Working capital requirement up to Rs.1 crore:

Following are the requirement for working capital up to Rs. 1 crore.

The assessment of working capital requirement of borrowers , other than SSI units , requiring fund based working capital limits up to Rs.1 crore and SSI units requiring fund

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based working capital limits up to Rs 5.oo crore from the banking system may be made on basis of their projected annual.

In accordance with these guidelines , working capital requirement is to be assessed at 25% of the projected turnover to be shared between the borrower and the bank viz. borrower contributing 5% of the turnover as net working capital and bank providing finance at a minimum of 20 % of the turn over .

The banks may carry out the assessment based on projected turnover basis or the traditional method. If the requirement based on traditional production / processing cycle is higher than the one assessed on projected turn over basis , the same may be sanctioned , as borrower must be financed up to the extent of minimum 20 percent of their projected annual turnover .

The bank may satisfy themselves about the reasonableness of the projected annual turnover of the applicants , both for new as well as existing units, on the basis of annual statements of account or any other documents such as return filed with sales- tax / revenue authorities and also ensure that the estimated growth during the year is realistic.

The borrowers would be required to bring in 5 % of their annual turnover as margin money. In cases, where out put exceeds the projections or where the initial assessment of working capital is found inadequate , suitable enhancement in the working capital limits should be considered by the competent authority as and when deemed necessary.

Drawals against the limits should be allowed against the usual safeguards so as to ensure that the same are used for the purpose intended. Banks will have to ensure regular and timely submission of monthly statements of stocks , receivables , etc. by the borrowers and also periodical verification of such statements by their officials.

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Working capital requirements above Rs. 1 Crore:

Method of Assessment :

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The revised guidelines in respect of borrowers of other than SSI units , requiring working capital limits above Rs. 1 crore and for SSI units requiring fund based working capital limits above Rs. 5 crore from the banking system bestow greater level of flexibility to the primary Co- operative banks in their day today operations without diluting the prudential norms for lending as prescribed by RBI.

The earlier prescription regarding Maximum Permissible Bank Finance ( MPBF ) , based on a minimum current ratio of 1.33 :1, recommended by Tondon Working Group has been withdrawn. Banks are now free to decide on the minimum current ratio and determine the working capital requirement according to their perception of the borrowers and their credit needs.

Banks may evolve an appropriate system for assessing the capital credit needs of borrowers whose requirement are above Rs. 1 crore . Banks may adopt any of the under noted methods for arriving at the working capital requirement of such borrower .a) The turnover method , as prevalent for small borrowers may be used as a tool of

assessment for this segment as well ,b) Since major corporates have adopted cash budgeting as a tool of funds management ,

banks may follow cash budget system for assessing working capital finance in respect of large borrowers.

c) The banks may even retain the concept of the MPBF with necessary modification.

Tondon committee on Financing Working Capital requirements :

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The Tondon Committee examined the different aspects of prevalent bank lending practices during the period and suggested implementation of some far reaching steps that would streamline and rationalize the process of credit dispensation process by the banks in India.

The important suggestions are given below :

Assessment of the credit requirements of the borrowers should be directly related to the level of operations and activity of the borrowing enterprise . This envisaged distinct shift from the security- centric approach of lending to a production- oriented approach of lending in future.

The promoters must bring in a minimum amount of margin out of total working capital requirement of the unit . Banks should finance only the residual portion of working capital requirement as bank credit should be viewed only as a supplementary source of finance .

The committee prescribed standard norms for holding raw material , stock in process , finished goods , consumables and receivables etc . for different industries. This would ensure a level of homogeneity is assessment of working capital requirements of similar industries . The holding levels of individual component of working capital therefore could no longer be fixed arbitrarily. This measure would effectively reduce the scope for arbitrarily setting the level of bank credit for working capital purposes without having any linkage with the level of production of the borrowing enterprise.

The committee also felt that it was necessary to standardize the different methods practiced by bank for computing the levels of bank credit for working capital requirements . The committee prescribed 3 methods for computation of MPBF in this regard.

Depending on holding level of the individual component of working capital, the total amount of bank credit computed in accordance with the MPBF prescription would be

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bifurcated into different components of credit. Delivery of different components of credit would also confirm to specific prescription pertaining to that working capital component, if anualy. The committee also suggested methods to follow up the bank credit after delivery to verify whether actual levels of production and utilization of bank credit were closed to the initially projected levels on the basis of which assessments were done .

We elaborate further the specific suggestion made by the committee in context of financing of working capital requirement made by The Committee.

Inventories and Norms:

While prescribing holding norms for the different components of working capital, the Committee classified the inventory in to the following categories:

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Normal inventory :

Normal inventory is the level of inventory carried by an enterprise required to maintain a normal production schedules. A normal level of inventory sustains the production as initially planned . It also includes the cushion level or safety level of inventory designed to take care of contingent situations .

Flabby inventory :

Inventory in excess of the normal level resulting on account of poor working capital management or inefficient distribution was identified as flabby inventory by the committee.

Profit making inventory :

Inventory held by a unit for a realization of stock profit is a profit making inventory . Hording of essential commodities was a common phenomenon during the relevant period , which is a example of profit making inventory .

Safety inventory :

A safety inventory level is built up to meet unexpected short fall in supply of basic material or to take care of a sudden spurt of demand .

The committee treated build – up of safety inventory as a mode of insurance cover .

Excessive inventory :

The committee also recognized that some time an enterprise may have to build an inventory level much in excess of normal level . excessive inventory may built if the enterprise imports and stocks a large quantity of material require for production . Excessive inventory built up may also occur as a result of governmental control on sale of a commodity. Sugar is an example were the sale of which is subject to government control. Build up of excessive inventory is common occurrence in sugar manufacturing unit which may not necessarily be on account of inefficient working capital management policy followed by the enterprise.

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The committee made the recommendations in very clear terms . It suggested that flabby and profit making inventories should not be financed by banks . Further , borrowing enterprise have to make a constant and endeavours to bring down the flabby or otherwise excessive inventory to the normal inventory level by employing prudent inventory management techniques. The committee summed up its recommendations in respect of financing inventory by banks in following words

“ carrying inventory in excess of normal inventory which includes reasonable factor of safety , is but an avoidable luxury, which the banker should not encourage “

The committee also felt that a level of receivables which is not in tune with the past trend of the enterprise and also with the general industry practices, should not be financed by a banker.

Inventory norms :

The committee identified the following as the main component of working capital of a manufacturing enterprise :

Raw material including stores and other items used in the manufacturing process Stock in process Finished goods Receivables and Spares

Holding periods in respect of different components of working capital are expressed in months . Where as raw material holding period is expressed in terms of months of consumption. Holding period of stocks in process is expressed in terms of months of cost of production . for example, if cost of production per annum is Rs.120 lakh and stocks in process holding is worth Rs. 5 lakh, the holding period of SIP is one half of a month . On the other hand , the holding period of finished goods is expressed in terms of months of cost of sale ( i.e. cost of production + change in stock of finished goods ) . Finally, holding period of receivables is expressed in terms of months of sales. Receivable arising out of export sales or deferred payments sale etc. were not included while working out the holding level for receivables . No specific norms were

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prescribed by the committee for holding period of spares . This is in view of the fact that the value of spares is generally in significant compare to that of other component of inventory. However , the value of spare is not expected to exceed 5% of the total inventory . The committee is expected that lending banks should enquire into the reasons if the holding level of spares exceeds this level or is inconsistent with the past trend of the enterprise in this regard .

The Tondon committee had initially prescribed holding norms for fifteen industry group. It was also prescribed that these norms should be reviewed on a periodical basis and modified , if necessary . As, suggested , such reviews were undertaken several times subsequently and norms revised in respect of a no. of industry groups. Besides, norms for new industry group were also prescribed from time to time . Compliance with these norms by the lending banks was mandatory. In its Monetary and Credit Policy of 1997- 98 , RBI declared these compliance norms optional . Banks were now free to set their own bench marks on holding norms on the basis of their own data base or industry wise databases accepted and recognized by them .

Nevertheless , the holding norms prescribed by the Tondon Committee are still recognized as important sources both for the purpose of reference and assessment by the banks engaged in lending against working capital requirements. A list of the holding norms of the various industry groups is annexed . Salient features of the holding norm prescriptions of Tondon Committee are summarized below :

Holding norms prescribed by committee were not static in nature. The norms were subjected to review periodically.

Separate holding norms were prescribed for same product for different geographical locations whenever warranted .

For the purpose of prescribing holding norms , finished goods and receivables were taken together , and a composite holding norm suggested .

Holding norms prescribed for a particular industry is the ceiling level and these should not be treated as rights or entitlements .

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The norms indicate the average level of the inventory holding for a class of current assets , and not necessarily for any sub – components of such current assets.

The committee recognized the need to allow deviations from the prescribed norms in certain deserving situations.

Tandon Committee prescription for assessment for assessment of working capital credit requirement :

Tandon Committee made an observation that a banker’s role as a working capital lender should be to supplement the resources already available to the borrower in carrying a reasonable level of current asset in relation to his production requirements . Such resources may in the form of promoters’ margin or other liabilities e.g. trade credit made available by suppliers of materials etc .

The Committee recognized that the other current liabilities are very important sources for funding the on going working capital requirements and these should be used diligently before availing bank credit as a source of last resort which should be taped only after all the internal and external sources of funding working capital requirements at the disposal of the enterprise were exhausted .

The role of NWC as the promoters’ margin towards working capital requirements was firmly established in the process . In view of the above observations , the committee prescribed three alternative methods of computation of MPBF. All the three methods recognized that the banks would lend only a portion of the WCG , which is the value of the acceptable level of current assets after netting of f the other sources of funding WC requirements.

The other sources of funding were represented by all the current liabilities except bank borrowing for working capital .In other words, current assets would be funded first by raising the other current liabilities . The residual portion of current asset in working capital gap which would be part financed by the lending banks.

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First Method :

In the first method of computation of MPBF , the margin contribution of the borrowing enterprise would be at a minimum level of 25% of the WCG . Such margin is contributed by the NWC of the enterprise . In the first method of computation , the NWC of the enterprise would be at a minimum level of 25 % of WCG . A bank may lend a maximum amount of 75 % of the WCG.

Second Method :

The second method provides a more stringent prescription , where the enterprise has to meet a minimum margin requirement of 25% of the current assets ( as against 25% of WCG stipulated in the first method ) .

WCG is always lower than the level of current assets , and therefore , the margin requirement in the second method is always higher than that stipulated in the first method . The MPBF is worked out by subtracting the stipulated amount of margin from the WCG.

Third Method :

As discussed earlier , the committee recognized that there always exists a core element in the working capital requirement of an enterprise . This core element is the permanent level of current assets maintained by an enterprise so long it remains a going concern . This level of asset was termed as the core current asset ( CCA) by the committee . This is an idea very close to concept of minimum level of inventory maintained by enterprise to ensure uninterrupted production . The third method of lending prescribes that the borrowing enterprise should have the financial strength to fund the entire core current assets on its own ( or from long term surplus ).

In addition , the promoters have to bring in a minimum margin to the extent of 25% to the remaining portion of the current assets . In this method , therefore , MPBF is the residual portion of WCG after subtracting the CCA and margin component , calculated in the above method .

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The third method is the most stringent of the all three methods prescribed by the committee . Though recognition of core current asset was a very bold and realistic step and the prescribed method of financing working capital requirement was perhaps an answer to address the problem of allocation of scarce bank funds during the relevant period , the third method was not accepted by RBI for the purpose of implementation . RBI accepted the lending prescription as per the first and second methods for implementation of lending banks . to start with , it was suggested the bank credit for working capital requirements would be computed using first method for limits of Rs. 10 lakh and above up to Rs.50 lakh . The method of computation would then be replaced by second method during the subsequent year .

The three methods of computing MPBF are summarized in the table below :

First method MPBF = ( CA – OCL ) – 25% of ( CA- OCL)

Second method MPBF = ( CA- OCL ) – 25% of CA

Third method MPBF = ( CA- OCL ) – CCA - 25 % of ( CA- OCL)

Comments and Observation :

1. The enterprise has made short term borrowing fro the banking system in excess of MPBF , though the amount of excess borrowing varies with the method of computation of MPBF. The excess borrowing is at the highest level when the third method is employed for computing MPBF.

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2. The impact of selecting a particular method of computation of MPBF on the Current Ratio is discernible . In the first method , the extent of margin that the enterprise has to mobilize from its long term surplus depends on its ability to tap the other short term sources of finance .

3. On the other hand , the second method envisages a minimum current ratio of 1.33 . A transition from the first method to the second method therefore always puts pressure on the enterprise to bring in more margin from long term surplus / other long term sources .

4. Theoretically, the minimum current ratio in respect of the 3rd method also stands at 1.33 . However , a business enterprise has always maintain a certain level of core current asset .

A lending bank may continue to follow these methods or evolve other methods for working capital lending. The alternative methods suggested by RBI included cash budget method, which has been discussed in detail .

Holding period method of assessment of working capital :

Banks have traditionally been assessing working capital credit requirements on the basis of holding period of the components of chargeable current assets i.e. raw material , stocks in process, finished goods etc. The holding period method of assessment follows the operating cycle concept of working capital.

The working capital requirement and compute the permissible level of bank credit of an enterprise by this method in the following manner :

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To start with , the assessing officer firms up the projection for sales, the important cost element related to production and weighs such projections against benchmark set by lending bank, if any. For existing units, validation of projected figures may be done by undertaking a trend analysis of sales, the various expenses and holding and other ratios over a period of time . For new enterprises , validation of the projections may be done on the basis of his own experience and the industry average figures for such activity .

The holding period method of assessment of working capital requirements generally adopts a simplified approach towards recognition of the various elements of cost. In this method, the assessing officer usually adds all the expenses with the cost of raw materials and consumables .

The amount of working capital required for holding the different components of current assets are then worked out on the basis of the prospective holding periods as projected and validated above.

In addition , some lending bankers prefer to include the amount of expenses for reasonable period in the amount of working capital required. This is generally applied in case of small units in order to provide an extra cushion while computing the working capital requirement .

The individual margin requirement against working capital requirement against working capital requirements for holding various component of current asset are computed using the specified rates .

The amount mobilized from the other sources of financing current assets are now subtracted from the aggregate of the individual current asset holdings. The other sources of financing current assets are :

Actual NWC available in the business . Amount of trade credit allowed by the suppliers Advance payment received from customers against future supplies to be made by

the enterprise .

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The permissible amount of bank finance is lower of the following :

Total of the net working capital credits limits calculated as per step four and

The aggregate of the working capital limit as reduced by the other available sources of finance , as worked out .

Working capital assessment for small loans :

Small business, retailer , village and tiny industries in the SSI sector form an important business segment for co-operative banks . Thus, providing timely assistance to these small entrepreneurs is also equally important for lending banks. A timely and adequate level of bank credit helps generate employment in this sector .

Besides , co-operative banks in India are given specific targets for lending to this segment of priority sector by the Government and RBI. This is a weak and vulnerable sector where the units may become non-performing even if there are temporary mismatches in their cash flows. In t view of this , it is important that assessment and delivery of working capital credit facilities for such units are done on realistic parameters and also that the monitoring of credit facilities are done on a regular basis.

This is possible if the characteristic feature of the small enterprise are understood properly. The most important features of such units are the following :

They usually do not maintain proper books of account.

A full scale application of holding norms for the purpose of assessing working capital credit limits in these situations may not be necessary in practice.

Monitoring the withdrawal of funds and the position of outstanding balance in these small loan accounts against a permitted level of drawing power may not always be a practicable proposition in respect of small loan.

Small entrepreneurs tend to divert the amount of credit provided for business needs towards consumption needs at the slightest provocation.

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A simple method of SSI of their WC credit needs :

Work out an estimate of sales and the corresponding production related item - wise expenses per month.

The average holding period of important items viz . raw material , semi finished goods, may be assessed by credit officer on the basis of his experience in dealing with similar kind of activity.

If the operating cycle is estimated in months , the product of the OC and the total expenses per month may be considered as the gross working capital .

Financing working capital requirements of Trading Enterprises :

Trading enterprises include wholesale dealers and retail outlets of consumer goods tat require a substantial amount of working capital . During the pre- liberalization years, lending for working capital to traders did not rank high in the priority list of commercial banks . The scenario is changing fast. Not only the sector has attracted a higher level of bank lending during the recent year, co-operative banks are also competing with each other to have a higher market share in bank credit in this sector of economy .

Characteristic feature of Trading Enterprise :

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Trading is a traditional business activity , usually carried on by a family. In India, trading activity is carried on mostly by HUF’s , partnerships, and proprietorship

concerns. In case of established trading units , a major portion of the working capital requirement

is usually met by trade credit made available by supplier , are very common . Trading units generally have low NWC and profit figures both in absolute and percentage

terms .

Usually , trading enterprise offer significant amount of collateral securities , often in the form of immovable properties.

The asset side of the balance sheet of trading enterprise characteristically merchandise , receivables, and current assets as the as the main items.

On the liability side of the balance sheet , trading units usually carry a small amount of capital. This is sometime associated with high level of trade credit s and unsecured loans, the latter often made available by friends and relatives of promoter (s).

Assessment of working capital requirement of trading units :

The trading enterprise s have a higher asset turn over ratio compared to that in respect of enterprises in the manufacturing segment. A low level of bank credit provided for working capital purposes to a trading unit may therefore support a comparatively high turn over of sales.

It is not unusual for an inland trading unit to register an annual sale turnover in the range of Rs. 2 crore – Rs. 10 crore or perhaps even beyond , on the strength of a working capital credit limit of 50 lakh provided by banks .

The level of the turn over depends to a large extent of the commodity traded in . Banks usually employ the traditional holding method for assessing working capital credit requirement of trading enterprises . However, many banks , follow the method prescribed by Tandon committee , especially when credit limits are high , say Rs. 25 lakh and above .

Margin requirements :

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The skill of credit analyst does not lie in working capital out the permissible amount of finance against an acceptable level of holding of current assets . This is a simple arithmetical process, and very often the projection are made very close to the permissible level of bank finance .

The real test of a quantitative appraisal of bank credit lies in validating the the propriety of the margin requirement and whether the available sources of finance and also the financial statements indicate that the amount of margin required can actually mobilized .

The assumption in funding the margin required in respect of trading units may often go wrong . Most commonly, the margin – deficit situations are explained by making statements that the margin requirement would be funded by way of the existing NWC in the business , plough back of profit / cash accrual etc.

If there still sources is commonly proposed .Quite often , the projected financial statement do not corroborate these proposition . As a result , assessment of working capital requirement largely reduces to a theoretical exercise.

System of credit delivery by Banks :

The banks lend the credit in following ways :

Cash credit system .

Working capital Demand loan ( WCDL ) system

Consortium system of credit delivery

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Multiple Banking system

Syndication of credit

Commercial paper

Cash credit system :

Bank in India have traditionally been using the cash credit system for delivery of bank credit for working capital purposes . The system is quite popular and several reasons are attributed to its popularity.

The cash credit system of credit delivery dominates the scenario of credit dispensation by banks . A recent survey has shown that despite the various modes of bank credit introduced by banks in India , the amount of credit delivered by way of cash credit is reigning at level of 46 %.

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Cash credit system of credit delivery poses some real operational problem for the lending banks at the apex management level as well.

Working capital Demand Loan system :

RBI had introduced the Loan system of delivery of bank credit in April 1995. The loan system is commonly known as the WCDL system of lending. It was implemented in phases proportion of borrowing accounts in the Indian banking system . Presently , the WCDL system is applicable to borrowers enjoying working capital credit limits of Rs. 10 crore and above from the banking system . The loan system envisages that a larger portion of WC credit provided by the banks should be in the form of a loan repayable over a period of time. The remaining portion can be provided by way of cash credit .

Consortium system of credit delivery :

In the pre nationalization period , the Indian banks practiced a crude form of multiple banking relating to credit delivery . The system was not bound by any laid down code of conduct or regulation . The nature and amount of security offered was very important factor in the decision making process of banks . the beneficiaries of bank credit were generally a big industrial and business houses. It was felt that this system of indisciplined lending was likely to adversely affect the health of the lending banks .It was therefore necessary to regulate this system of lending prevalent in the Indian banking system and also to frame and implement a proper system of risk sharing amongst banks.

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Multiple Banking System :In the monetary policy, of 1997- 98 , the RBI declared that borrowing enterprise might also use multiple banking routes for availing working capital credit requirement . However , no concrete set of guidelines regarding the use of this new platform for delivery of credit has yet been issued by RBI or any other regulatory authority. This has resulted in a certain degree of heterogeneity and indiscipline in credit delivery by lending banks through the multiple banking channel . companies with slack financial principles and governance may exploit the situation in a manner that may be determined to the interest of lending banks .

Syndication of credit

Syndication of credit is another mode of risk sharing and credit participation by a group of lending bankers . This is a preferred mode of credit delivery especially when the amount of credit is large in nature. In the monetary policy of 1997 – 98 , RBI had indicated that bank might opt for syndication mode of lending in lieu of the consortium route . Syndication of credit for providing working capital credit requirement has not yet gained ground in India.

Commercial paper Commercial paper has emerged as popular instrument for financing working capital requirement of corporate borrowers of banks . Commercial Paper is an unsecured money market instrument issued in the form of a promissory note .This instrument was introduced in India in 1990 so as to enable the highly rated corporate borrowers of banks to diversify their sources of borrowing.

ANALYSIS OF OPENING WORKING CAPITAL :

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When a business enterprise approaches a bank for providing certain credit facilities , a enterprise is required to submit the important financial statements and any further information relating to its activity, as required by lending bank. The lender undertakes an analysis of above statements before he takes a decision on the credit proposal.

Analysis of profit and loss and balance sheet :

The following methods are applied for analysis of the statement :

For analysis of profit and loss statement Percent of sales method Incremental sales method Time series analysis

For analysis of balance sheet Percentage balance sheet method Trend percentage Ratio analysis Fund flow analysis Cash flow analysis

Analysis of operating ( profit & loss) statement by percent of sales method :

In this method the individual cost component are expressed as percentage of net sales during the year.

Analysis of operating statement by incremental sales method : The management of the enterprise has made endeavors to neutralize the impact of increasing cost of consumption of raw material by ensuring that other inputs and factor of production are made cost effective in best possible manner.

Analysis of balance sheet by ratios: The balance sheet ratios are :Liquidity ratio :It used in considering in working capital.

Current ratio :

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This is done by comparing the short term assets of enterprise with its short term liabilities .Current ratio = current assets Current liabilities

Quick ratio : It measure degree of liquidity of an enterprise may be gauged by weighing the liquid component of current asset and CL.

Quick ratio = Current assets – Inventory Current liability

Holding ratios :Bankers attach a great degree of importance of these ratios .

a) Raw material holding = stock of raw material x 365 Annual consumption of raw material

b) Stock in process stock in process level x 365 Cost of production

c) Finished goods holding = finished goods level x 365 Cost of sales

d) Receivable holding level = BR level x 365

e) trade creditors level = trade credit level x 365 annul purchase

f) advances paid to suppliers = advances to future supplies x 365

annual purchase

g) advances received against future sale = advance received againstle s x 365/ annual gross sale

To know credit appraisal to working capital. I take the one trading company and try to know how bank lend the credit to that trading company. Its name is KIRAN TRADERS.

And its balance sheet as follows: Profit and loss account for marh 31 - 2008

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Sale 22360Purchase cost of material sold 21070Other expenses ( including interest ) 1065Depreciation 18Profit before Tax 207Tax 51Drawing 48Retained profit 108

Balance sheet particulars

particulars 2007 2008 particulars 2007 2008Capital 104 212 Fixed

assets(net)91 85

Unsecured loan (quasi equity)

996 1176 Stock (merchandised)

1535 2634

Unsecured loan ( CL)

816 874 Advance to suppliers

787 1590

Bank borrowing

1257 1950 Receivables 2045 2516

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Trade credit

1809 2860 Advance tax 28 51

Statutory liability

44 Other current assets

254 63

Other current liabilities

26 10 Cash/ bank 312 143

Total 5052 7082 Total 5052 7082

The enterprise has purchased fixed assets worth Rs. 12000 during 2008.

Important holding ratios are :

Particular 2007 2008Stock 1.27 1.5Receivable 1.57 1.35Advances to suppliers 0.63 0.86Trade credit 1.44 1

Calculation of ratios :

a) Stock in process holding = stock in process level * 365 Cost of production

b) Receivable holding level = Bills receivable level * 365 Annual purchase

c) Advances to suppler = Advances paid against * 365 future supplies ______________________________ Annual purchase

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d) Trade creditors holding = trade creditos level * 365

Level Annual purchase

The working capital of the KIRAN TRADER’s is calculated in the following manner after taking into account account the related components of current assets and liabilities : in Rs. ooo’s

Projected level of stock 1.5 of consumption 2634Projected level of receivables

1.35 of sales 2516

Projected level of advance payment made to suppliers

0.86 of purchases 1590

Less: trade credit available

1.55 of purchases 2860

Working capital required

3880

Working capital required = 2634+ 2516+ 1590 – 2860 = 3880 ( 38,80,000)

Bank has to demand a 30 % margin against paid up stock and a 40% margin against receivables / trade debtors . The individual credit limits may therefore be worked out as under :

WC Credit limit against paid – up stock = ( 4224000 – 2860000) x 70%

= 955000.= 950000

WC Credit limit against receivables = 2516000 x 60% = 1509000

= 1000000

Here bank decide to put to put a ceiling of Rs. 10,00,000 . on credit limit against receivables.

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Margin requirement is 38,80,000 – 1950000 = 19,30,000.

Findings and

conclusion

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Findings :

I find the following points:

1) Banks apply holding method to lend money for Kiran Traders.

2) Bank apply 1.3 current ratio for lend credit money which is above Rs 1 crore .

3) Bank apply Tandon Committee suggestion for lending money with some alteration.

4) Bank lend only 20% of working capital requirement .

5) Trader ready to contribute 5% for working capital.

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Conclusion :

By doing project in Raichur District Center Co-op Bank Ltd, Raichur. I come to the conclusion that

1) Bank achieving very good financial performance

2) Bank’s lending rates are very competitive in nature.

3) Banks growth rate is very high as compare to other co-operative banks.

4) Banks administration is very good .

5) It is playing a vital role in the rural credit in Raichur

6)

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BIBLIOGRAPHY:

D.D. Mukherjee – Credit appraisal and analysis

I.M.Pandey - Financial Management

John D’silva - Co- operative Banking

Website:www.rbi.org.in www.indyainfoline.in

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http://www.indyainfoline.in/

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

raichur district center co-operative bank ltd

Documents

rdcc bank

primary cooperative

reserve bank

project credit appraisal

raichur methodology

y bibliographyibmr

raichur declarationi

raichur aknowledgementi