rohan proj report 6.08.09
TRANSCRIPT
A
Summer Project Report
On
LOAN SYNDICATION PROCESS
In the partial fulfillment of the Degree of
Master of Management Studies under the University of Mumbai
BYROHAN IRANNA MANGALURE [Roll No: 30]
Under the Guidance of
Mr.ROHAN GADKARI Prof. MOHANTY S.
(EXTERNAL GUIDE, QUEST PROFIN ADVISORY LTD) (INTERNAL GUIDE)
Aruna Manharlal Shah Institute of Management and Research
Ghatkopar [W], Mumbai-86
2010-11
1
PREFACE
An individual or a group of individuals start a business with a very simple and straightforward
approach i.e. “Develop the plan, fund the plan and work the plan.”
The success of the company is determined by hardwork, commitment and the ability of the
management to adjust the plan as per the changing conditions. Once the business has started, a lot of
unforeseen factors come up. Some to add value to the organization and some make management
think that how they can avoid them.
It is very difficult to survive in the competitive and customer dominated business environment. But
there is one thing that every business should try now-a-days and they must so follow, “Providing best
quality products at the lowest prices.”
As the time passes, most businesses examine the satisfaction of customer plays an imperative role in
the competitive market and increase the market value of the product and the company. A continuous
and dedicated effort helps the management to identify the problems consumer face and solve them.
And try to not to repeat the mistakes, thus which gives a strong stand in the market compare to the
marketers or competitors. It also promotes consistency, improves efficiency and increases overall
profitability and revenue through customer satisfaction and customer delight.
2
ACKNOWLEDGEMENT
No creative work is 100% anyone’s own. Several people’s inputs are hidden unsung in every project,
and mine is no exception.
I am highly thankful to Quest Profin Advisor Private Limited (Quest), Mumbai for enrolling me for
the summer internship and helping hand extended by team while working at the company premises.
Foremost, it is my pleasant duty to acknowledge Mr. Mohanty S, Mumbai: in every sense, a guiding
beacon to all the students on campus, a great motivating force to fresher’s in particular.
To Prof. Mr. Mohanty S (Faculty Guide), I owe a special debt of gratitude- for being there
constantly, clearing doubts and providing stimulus guidelines.
Next, it gives me immense pleasure to place on record, my grateful appreciation to Mr. Suresh
Vishwasrao, Mr. Dhiren Kothary, Mr. M. S. Srinivas Directors of Quest Profin Advisor Pvt. Ltd.,
and Mr. J. A. Kotian who acted as Company Guide on my project. In the midst of their hectic
professional schedule, they gave me “QUALITY TIME” helping me come face to face with the
reality of the corporate structure. Without his penetrating and insightful comments- constructive
critical comments- this work could not have been completed on time.
At last but not the least, I sincerely thank and express my deepest gratitude to all the employees of
Quest. As they have helped not only to attain knowledge but also for their spontaneous support,
guidance, encouragement and understanding this project would never have reached successful
completion.
3
INDEX
1. EXECUTIVE SUMMARY............................................................................................................5
2. COMPANY PROFILE...................................................................................................................8
3. OBJECTIVES OF THE STUDY.................................................................................................11
4. RESEARCH METHODOLOGY.................................................................................................13
4.1 What is business loan?...............................................................................................................13
4.2 Different Types of Loans...........................................................................................................13
4.3 What is project?..........................................................................................................................14
5. LOAN SYNDICATION..............................................................................................................16
5.1 Definition...................................................................................................................................17
5.2 Block Diagram of Loan Syndication Process............................................................................17
5.3 Roles within the syndication process.........................................................................................18
5.4 Time Chart required for completion of one Loan Syndication Cycle........................................19
5.5 Steps involved in Loan Syndication Process..............................................................................21
6. ANALYSIS & INTERPRETATION OF THE DATA................................................................46
6.1 Responsibility of different functionaries in the post-sanction credit process............................46
6.2 Inspection Report.......................................................................................................................55
6.3 Inspection & Follow-up by different branch functionaries........................................................56
7. SUGGESTIONS & CONCLUSION............................................................................................62
8. BIBLIOGRAPHY........................................................................................................................63
4
1. EXECUTIVE SUMMARY
India has become a better place for upcoming entrepreneurs to get a loan, but at the same
time the overall process to start a business here has become tougher in the last one year. The
recent World Bank study has found this fact. According to the 'Doing Business 2008' report
published by the World Bank and its private sector lending arm IFC, India has moved up 12
positions in terms of 'ease of availability of business loans', but is still ranked in the bottom
half at 120th position among 178 economies across the world.
The ranking format is based on ten different indicators of business regulation that track the
time and cost to meet government requirements for business start-up, operation, trade,
taxation and closure. India has improved significantly when it comes to getting easy credit
and trading across the world, but its position has deteriorated in areas like starting a business,
employing workers, registering a new property and paying taxes.
The country has been ranked 111th for starting business, down from 93rd in 2006. For
dealing with licenses, it has dropped one rank to 134th, while for employing workers it has
been placed two ranks down from previous 85th position. However, for getting business loan,
India has climbed 26 positions to 36th as compared to 62nd in 2007. On the indicator of
paying taxes, the country has lost seven positions to 165th, from 158th during 2006-07. For
registering a property, India has dropped four rankings standing at 112 against 108 last year.
For closing a business, it is down two places at 137th rank.
Noting that Indian government was taking liberal steps to speed up the reforms by making the
availability of business loans easier. The report said the time to obtain a business license in
5
India ranges from 159 days in Bhubaneswar to 522 in Ranchi, while the time to register
property ranges from 35 days in Hyderabad to 155 in Kolkata. Easy availability of business
loans to start a new venture has catapulted the growth prospective of Indian economy.
The great news for companies looking to grow through mergers, acquisitions or leveraged
buyouts. And lenders are on the hunt for new opportunities worthy of their cash. While many
businesses sat patiently through the past few years to ride out the sluggish economy, many
are now prepared to pull the trigger on their growth plans. Capital is the key to turning these
plans into reality, with many businesses looking to the syndicated loan market to finance
acquisitions or to pay down more expensive debt. Overall, syndicated loan volume grew 24
percent from $1.02 trillion in 1999 to 1.35 trillion in 2004, according to Loan Pricing Corp.
Mid-sized companies — defined as $20 million to $500 in annual revenue — accounted for
$168 billion of syndicated loans in 2004, compared to $107 billion the prior year.
6
Why to go for a Syndicated Loan?
Lenders — both banks and institutional providers — tightened their belts for a couple of
years, scrutinizing deals to minimize their risk or exposure. While lenders today may be cash-
heavy, they are not looking to throw cash at every deal that crosses their desks. Lenders today
may be reluctant to hold large amounts of debt from a single corporate customer, opting
instead to take a piece of the deal and syndicating the remainder to other banks or
institutional lenders. This strategy spreads the risk or exposure among multiple lenders. As
the borrower, you benefit by increasing your borrowing capacity with multiple credit
providers. And there are additional benefits.
Less-expensive financing than bonds — lower interest rates and upfront costs.
Prepayment option is usually available without penalty or premium.
Expanded access to noncredit products such as capital markets solutions and expertise
Short-term loans, traditionally up to five years.
Reliance on any one lender is reduced with multiple providers.
Competitive pressure often results in more market-driven structures and price.
REASON FOR SELECTING THE TOPIC
In the present scenario, the source of finance is the key element in the business process.
Hence understanding the loan syndication process is the first and far most step in financial
aspect. As the study on consideration of Loan Syndication Process at Quest gives the
researcher to understand the business environment of any organization and provides a broad
understanding of financial aspects, the researcher has taken up this study.
7
2. COMPANY PROFILE
Quest Profin Advisor Private Limited (Quest) is a Mumbai based Financial Advisors established in
1994. Quest is promoted by professionals having an experience of more than two decades in the field
of Corporate Finance and Advisory. Quest has a dedicated team of experience Professionals
specialized in a wide range of Financial Services and corporate Laws.
Quest is the Financial Consultancy arm of a 20-year-old firm of Chartered Accountants. They are
engaged in providing Corporate Advisory services to reputed Companies in Financial Structuring,
Project Funding, Private Equity, Loan Syndication, IPO Management, Compliance, Due Diligence
and Corporate Law matters. Over the years, they have provided their services to a number of
corporate clients including MNCs, NRI as well as Indian companies. They are a team of MBAs/
Chartered Accountants, have handled various types of assignments involving funds raising &
corporate advisory and earned reputation for their knowledge of corporate laws, diligence and task-
oriented approach and adaptation to the latest trends in the industry.
Mission of the organisation
To bestow value based chain of quality financial & consultancy services.
To build mutual beneficial long-term business relationship with the clients by delivering high
quality service with utmost confidentiality.
Vision of the Organisation
“To be a globally renowned Financial Consultancy House”
8
Professional Approach of Quest profin:-
The team members bring a rich transaction closure and consulting experience with senior
managements of large corporate. Leveraging on vast industry experience and incisive knowledge of
investment strategies, the organisation assists the clients in developing and executing capital raising
transactions. Clients like the two fold advantage they get with Quest- extensive knowledge and
capabilities to process and manage growth capital transactions. Quest work closely with the Board of
Companies and their management teams to support their acquisitions, recapitalization and business
enhancement objectives through both the equity (public and Private) and debt routes.
Services offered by the organisation
The company provides strategic advisory services to assist clients in choosing the best financing
option in congruence with their strategic goal. They provide end-to-end financing services to
corporate clients. The organisation is headed by young and dynamic professional, having immense
experience in financial sector. It has two divisions viz.
1. Corporate Advisory.
2. Corporate Finance.
Sr.
No.
Corporate Advisory Sr.
No.
Corporate Finance
1. Advisor for Initial Public Offerings 1. Providing range of services in sanction as
well as disbursement of the finance in
various classes.
2. Private Equity Syndication 2. Arranging funding for overseas
Acquisition.
3. Mergers and Acquisitions. 3. Syndication of corporate Loans/ Term
9
Loans.
4. Partner Search (Cross Border
Deals).
4. Arranging Short/ Long Term Rupee\
Foreign Currency Loans for corporates.
5. Project Advisory Services towards
SEZ approvals, Hotels, Townships
etc.
5. Syndication of Foreign Currency Loans.
6. Corporate Law. 6. Discounting Future Receivables.
7. Business Valuation 7. Debt Swaps
8. Due Diligence Review 8. Syndication of Working Capital Finance.
Fund based
Non-fund based
9. Corporate and Financial
Restructuring
ORGANIZATIONAL STRUCTURE
BOARD OF DIRECTORS
BUSSINESS DEVELOPMENT & STRATIGIES
CORPORATE ADVISORY CORPORATE FINANCE
10
3. OBJECTIVES OF THE STUDY
Syndicated lending is a form of lending in which a group of lenders collectively extend a loan to a
single borrower. The group of lenders is called a Syndicate. The loan is called a syndicated loan, in
contrast to a bilateral loan, which is a loan made by a single lender to a single borrower. Syndicated
Loans facility is extended to large corporates, sovereigns or other government bodies. They are also
used in project finance and to fund leveraged buyouts.
Syndicated loans are primarily originated by banks, but a variety of institutional investors participate
in syndications. Syndicate members play different roles. Some just lend money. Others also facilitate
the process. It is common to speak of an arranger, lead bank or lead lender that originates the loan,
forms the syndicate and processes payments. But several syndicate members may share these tasks.
Syndications with two or more arrangers are not uncommon. In a world where bragging rights are
important for securing future deals, a bank may be called an arranger for nothing more than
contributing a large part of the loan.
Suppose a project need 100 crore Rupees debt. The corporate approaches the Bank/ Financial
Institutions. If that Bank/ Financial Institution cannot finance more than 10 crore Rupees the
corporate move to a new lender. Here again it finds same difficulty. It leads an option to take loan
from multiple lenders for single investment project.
Here borrower corporate can use loan syndication facility. The company needs to appoint one
Arranger or Lead Manager. This Bank place the syndicated loan to other banks and makes sure that
syndication is fully subscribed. A syndicated facility is a lending facility, defined by a single loan
agreement, in which several banks can participate.
11
A borrower wants to raise a relatively large amount of money quickly and conveniently. The amount
exceeds the stipulated exposure limits or appetite of any one lender. The borrower may also does not
want to deal with a large number of lenders. So what should borrower do? Even lender doesn’t want
to miss this opportunity. They can simply use loan syndication facility.
By this approach borrower gets desired amount without dealing with multiple lenders while lenders
do not miss a profitable loan proposal due to low exposure limit and minimize their risk.
The market for syndicated loans is huge. In 2003 banks extended close to USD 2 trillion in
syndicated loans. The standard theory for why banks join forces in a syndicate is risk diversification.
The banks in the syndicate share the risk of large, indivisible investment projects. Syndicates may
also arise because additional syndicate members provide informative opinions of investment projects
or additional expertise after the funding has been extended.
So as a Business Administrator one needs to understand the way of procuring funds by using the
facility of Loan Syndication provided by the banks.
4. RESEARCH METHODOLOGY
12
4.1 What is business loan?
The Business Loan is a loan in which a corporate require a more extensive application in which the
business concept, cashflows, and profitability of the business activity is considered detail. These
loans currently make up 7 to 10% of the outstanding loan portfolio.
As a business owner, the most difficult task is finding the money to operate the business. Taking the
necessary steps to prepare for a business loan can minimize the difficulty. Yet, one can still get a
loan for the business by proper preparation. One should also avoid the common mistakes of thinking
that he would get grants from the government. The main requirements of attaining a business loan
are promoters credit history, business plan, experience, education, and feasibility of the project,
promoters, financial means and the market demand for the products.
The most important task to obtain a loan is preparing a detail business plan. The business plan needs
to show the lender that providing with a business loan is a low-risk proposition.
4.2 Different Types of Loans
1. Unsecured Loans
Some credit is granted on an unsecured basis. But most business loans are secured by the assets of
business, personal assets, or both. Unsecured means that there is no tangible security for the loan.
2. Secured Loans
Secured loans mean that there are assets pledged to secure the payment in the event of default.
13
4.3 What is project?
The word project comes from the Latin word projectum from the Latin verb proicere, "to throw
something forwards" which in turn comes from pro-, which denotes something that precedes the
action of the next part of the word in time and iacere, "to throw". The word "project" thus actually
originally meant "something that comes before anything else happens".
Project Requirements
Setting up of any project involves many steps and arranging financial assistance to fund the
projection is one of. Some of the steps involved are:-
Application:-
A detailed project report is made. In case of large projects, a report from the specialized agencies
too needs to be obtained. This report is known as the Techno- Economic viability report which has
commentary on Technical feasibility and economic viability of the project.
Government Permission:-
Clearances, permissions from various government departments that need to be obtained before hand
i.e. before start up and those which needs to be obtained during the implementation stages wherever
required.
Finance Approvals:-
Finance is the heart of any business. Funding can be from promoters borrowed funds raised through
Banks/ Financial Institutions.
Demand Loans
Demand loans are loan agreements that provide the lender with the ability to demand repayment of
the loan at any point in time. Unlike an installment loan, the demand loan format does not include a
14
specific maturity date and may not include a specific schedule for making payments to retire the
debt. Sometimes this loan is referred to as a call loan.
A demand loan is often beneficial to the borrower, in that the repayment schedule is very open-
ended. This can be especially important if the purpose of the loan was to fund a new venture that
may take some time to become profitable. The borrower may make token payments from time to
time as the project begins to take off, gradually increasing the amount and frequency of the payments
as the generated revenue increases. For the lender, a demand loan situation can also be quite
lucrative. As with most types of loans, a demand loan structure does include the application of
finance charges periodically.
Term Loans
Loans, with a fixed maturity and often featuring amortization of principal. If this loan is in the form
of a line of credit, the funds are drawn down shortly after the agreement is signed. Otherwise, the
borrower usually uses the funds from the loan soon after they become available. Bank term loans are
very a common kind of lending. Term Loans, as the name suggests, is for a fixed tenure. The
repayment of the loan is structured before hand i.e. at the time of sanction itself.
Short Term Finance
The Short Term Loan Repayment term of short term loan is usually for a short period of 3 years or
less. Some of the factors that needs to be critically examined in this regard are:
Integrity:
Integrity of the promoters is always considered important.
Promoters Past Experience:
The business sense of the promoter the level of past experience.
Market Scenario for the product:
The general business circumstances in the industry and the economy.
15
Long Term Finance
Long term financing is a form of financing that is provided generally for a period of more than three
year. It is different from short term financing. Short term financing is normally used to provide funds
for shorter period. The period may be shorter than one year as well. Long term finance are preferred
to fund new projects etc. The methods of financing these types of projects will generally be quite
complex and can involve billions of rupees. The following products are provided as part of long term
financing:
Debentures
Equity
Preference Shares
Private Equity.
Debts from Banks/ Financial Institutions.
Foreign Currency Loans (ECB/ FCNRB)
16
5. LOAN SYNDICATION
5.1 Definition
A syndicated facility is a lending facility, defined by a single loan agreement, in which several or
many banks/ Financial Institutions participate.
When is loan syndication the right solution?
A borrower wants to raise a relatively large amount of money towards the project undertaken.
The amount exceeds the exposure limits or appetite of any simple lender.
The borrower does not want to deal with a large number of lenders.
Preferred mode of Finance for large projects.
5.2 Block Diagram of Loan Syndication Process
Discussion of Terms & conditions
Preparation of Proposal by the bank
Application to Bank/ Financial Institution
Discussion with Bank/ Financial Institution
Submission of Additional
information/ details
required by the bank
Pre Sanction Visit
Documentation
Sanction LoanDisbursement Post Sanction
Visit
17
5.3 Roles within the syndication process
1. Arranger / lead manager
The bank that is awarded the mandate by the company and is responsible for placing the syndicated
loan with other banks and ensuring that the syndication is fully tied up.
2. Underwriting bank
The bank that commits to supplying the funds to the borrower- if necessary from its own
resources if the loan is not fully subscribed.
May be the arranging bank or another bank.
3. Participating bank
The bank that participates in the syndication by lending a portion of the total amount required.
Interest and participation fee.
Risks:
Borrower credit risk (as normal loans).
A participating bank may be led into passive approval and complacency (i.e. so many high
profile banks cannot be wrong!).
4. Facility manager / agent
The one that takes care of the administrative arrangements over the term of the loan (e.g.disbursements,
repayments, compliance).
18
5.4 Time Chart required for completion of one Loan Syndication Cycle
Sr.No.
Stage Duration (In Days)
1. Application to Bank/ Financial Institution 1
2. Discussion with Bank/ Financial Institution 7
3. Submission of Additional information/ details required by the bank
7
4. Pre-Sanction Visit 2
5. Preparation of Proposal by the bank 30- 45
6. Discussion of Terms & conditions 7
7. Sanction Loan 15
8. Documentation 15
9. Post-Sanction Visit 2
10. Disbursement 2
Total 88-103 Days
Pricing for the Loan
Fees for "front-end activities" – arrangement and underwriting fees.
Interest (margin over base rate).
Commitment fees for available but undrawn funds.
Agency fees - payable for administrative activity during the term of the loan.
Benefits of loan syndications for borrowers
Syndicated loans provide borrowers with a more complete menu of financing options. This has
resulted in a more competitive corporate finance market, which has permitted issuers to achieve more
market-oriented and cost-effective financing.
Benefits to the lead banks
Good arrangement and other fees can be earned without committing capital.
Enhancement of bank's reputation.
Enhancement of bank's relationship with the client.
19
Benefits to the participating banks
Access to lending opportunities with low marketing costs.
Opportunities to participate in future syndications.
In case the borrower runs into difficulties, participant banks have equal treatment.
Participant banks do not find themselves at a disadvantage vis-ά-vis a dominat bank or one with
high leverage over the client.
Bilateral Loans Syndicated Loans
Loan Size Normally Low Larger
Public Information disclosure Low High
Driving Factor Relationship Relationship or Transaction.
Covenants Extensive and frequently renegotiated
Extensive but less frequently renegotiated
Borrowing Rates Floating Rate/ Fixed Floating Rate/ Fixed
Funding Revolving credit or fully funded term loan.
Revolving credit or fully funded term loan.
20
5.5 Steps involved in Loan Syndication Process
1. Application to Bank/ Financial Institution
In order to get the loan an application is submitted to the bank. Along with it project information
memorandum is submitted. The information memorandum consists of the details of the proposed
project. Company details such as various business areas, existing operations and past financials
(if it is a existing company) should be mentioned in the information memorandum. It also
includes the information about the Board of Directors of the company. It may include details
such as name of the directors, their qualification and work experience, their vision and mission.
As 100% finance from the bank is not obtained the company needs to show its various sources of
finance for the remaining amount as well as the share holding pattern of the company. If the
present company has been promoted by another company or has associates group of companies
their details should be provided to the bank. The company should give maximum details about
the project such as background, salient features of the undertaken project. Providing information
about the marketing and sales arrangement will help the borrower in making good impression on
the lender. Along with this bank requires the Memorandum of Association and Article of
association of the company. The balance sheets and profit and loss accounts of past years for
existing company are required by the bank. The financial model cover following aspects:
Assumptions or the premises which financial statements are proposed for the project.
Cost of Project and means of Finance.
Balance Sheet.
Income Statement.
Cash Flow Statement.
Debt Drawn Down.
21
Debt Repayment Schedule.
Income Working statement.
Deprecation and Tax Working.
Sensitivity Analysis.
DSCR Working.
Return on Investment.
Initial list of requirements to be procured from the client
1. Company Profile with brief background of the company.
2. Details of the Company such as Registered Address, other offices / factories, contact nos.
of key persons etc.
3. Audited Financial Statements for the previous years.
4. Sanction Letters of all existing facilities with all the Banks (Existing companies).
5. Profile of the Promoters/Directors / Partners viz. Full name, Father’s / Husband’s name,
residential & office address with telephone nos., Academic Qualification, Experience,
Functional Responsibilities in the unit, Capital or Loan contribution in the unit, other
concerns with which he/she is associated along with other brief details, etc.
6. Profile of the Key Managerial / Technical Personnel with Qualification & Experience.
7. Details of Associate Concerns with their borrowing arrangements, last 3 years Financial
Statements, major Shareholders, etc.
8. Capital Structure and Share Holding Pattern of the Company.
9. Brief write-up on the nature of the business, products/services, technology employed,
manufacturing process, etc.
10. Details of the proposed Project.
11. Cost of Project.
22
12. Means of Finance proposed.
13. Schedule of Implementation.
14. Details of Suppliers of Machineries (with copies of Invoices).
15. If some portion of the expenditure has already been incurred, necessary proof.
16. Copy of the Techno-economic viability study report (if any).
17. Industry overview and competitive scenario.
18. Markets and Marketing Strategies.
19. Income Tax / Wealth Tax Returns and Personal Balance Sheets of all
Promoters / Directors / Guarantors for the last three years.
20. Details of Collaboration arrangements, if any.
21. Tenure and Purpose of proposed loans (Term Loan / Corporate Loan).
22. Estimates of Sales Turnover for the current year and the future projections till term loan
is outstanding.
23. Copy of Memorandum & Articles of Association / Partnership Deed etc.
24. List of Orders and inquiries on Hand.
25. Details of Jobs done in the past.
26. Details of Collateral Securities to be offered.
27. If Letter of Credit required, whether Inland or Import, whether for materials or other
items, terms of L/C etc.
28. If Bank Grantee required, reasons for the same, nature of Bank Guarantees, terms and
nature of Beneficiaries, etc.
29. List of top 5-10 Customers with contact details
30. List of top 5-10 Suppliers with contact details
31. List of top 5-10 Competitors
23
32. Copies of Licenses / permissions / approvals by Regulatory Authorities, where
applicable.
33. In case of switch over from another Bank, reason for the same.
34. Copies of Tax Returns of the Company for the last three years.
35. PAN Card copy of the Company and Directors/Guarantors.
2. Discussion with Bank/ Financial Institution
After providing with the above information to the bank, it is not always that bank will be
satisfied with the provided information. It may require some additional information regarding the
project and the customer needs to provide the bank with what is required. The bank needs to
compile its own assessment. The lender might have some doubts regarding certain polices or
terms of the borrower. So the lender might ask some detailed insights about the project or any
other area related to it. The lender has to assist the bank in order to create a proposal.
3. Submission of Additional information/ details required by the bank
The bank verifies the authenticity of the given information and makes their own proposal. This is
the most lengthiest period of the loan syndication process. This involves various set of steps. The
bank tries to make the proposal as healthy as possible in order to get it sanctioned from the
appropriate authority. The various steps can be explained as follows.
Pre –Sanction Process
Funds are the very important factor of any business. Funds can either be raised by the owners
themselves or by approaching the banks. When one approaches the bank it has to take many
factors under consideration. There are certain set of procedures which are to be followed in order
to get a loan. It is not the case that all the proposals submitted to it are sanctioned by the bank.
Loans might get rejected depending on the other related factors. The pre-sanction process can be
sub divided into three phases:
24
I. Appraisal
II. Assessment & Recommendation
III. Sanction
Appraisal
Appraisal Functions involve following list of activities:-
Preliminary Appraisal
Following things should be obtained
The company has to produce application/ Project Report for finance.
The company has to produce audited financials for the previous three years.
Details of existing borrowing arrangements should be produced by the company.
Reports from existing bankers on the applicant Company.
Financial statements, borrowing relationship of Associate firms/ Group Companies.
Profile of promoters/senior management personnel.
If request includes project finance obtain additionally
Project Report should be obtained about the project work which is to be undertaken.
Appraisal report from financial institutions in case appraisal has been done by them.
NOC from term lenders if already financed by them.
Report from merchant bankers in case capital market is being accessed.
25
Examine the following
Bank’s lending policy/ RBI guidelines, policies.
Prudential Exposure norms.
Industry related risk factors.
List of defaulters indicating the history of the borrower (Credit Information Bureau of
India Ltd.)
Caution lists (ECGC- Exporters Caution List etc.)
Compliance regarding transfer of borrowal accounts from one bank to another, if
applicable.
Govt. regulations/ legislations impacting on the industry.
Acceptability of the promoters.
Applicant’s status vis-à-vis other units in the industry.
Financial status in broad and whether it is acceptable.
Examine the following in the case of project finance
Whether project cost is prima face acceptable.
Debt/Equity gearing proposed and whether the same is acceptable.
Promoter’s ability to access capital market for debt/equity support.
Whether critical aspects of project-demand, product cost, profitability etc. are prima facie
in order.
Debt component i.e. debentures, term loans, deferred payment facilities, unsecured
loans/deposits.
26
Feasibility of arrangements to access capital market.
Feasibility of the projections/estimates of sales, cost of production and profits covering
the period of repayment.
BEP in terms of sales value and percentage of installed capacity under a normal
production year.
Cash Flows and Fund Flows.
Proposed amortisation schedule if applicable.
Whether profitability is adequate to meet stipulated repayments with reference to DSCR,
ROI.
Industry profile & prospects.
Critical factors of the industry and whether the assessment of these and management
plans in this regard are acceptable.
Technical feasibility with reference to report of Technical consultants if available.
Management Quality, competence, track record.
Company’s structure & systems.
Applicant’s strength on inter-firm comparisons.
By sourcing information where necessary from:
Market share of the units under comparison.
Unique features
Profitability factors
Financing pattern of the business
Inventory/Receivable levels.
Capacity utilisation.
Production effiency and costs.
27
Bank borrowings patterns.
Financial ratios & other relevant ratios Capital Market Perceptions.
Current Price
Market View (if anything adverse)
Project implementation schedule.
Status of approvals from other Term Lenders.
Detailed Appraisal
Carry out a detailed appraisal after a pre-sanction visit to the applicant company their
office/project site.
Working capital facilities
Examine/Analysis/Assess:
Financials (in the prescribed forms)
Financial ratios and other ratios relevant to the project dividend policy
Other aspects viz
Depreciation method.
Revaluation of fixed assets.
Record of defaults (tax dues etc.)
Pending suits having financial implications (customs, excise etc.)
Qualifications to balance sheets, auditors remarks etc.
Trends in sales and profitability.
Past deviations in sales and profit projection.
28
Production capacity & use past & projected
Estimates/Projections of sales values
Estimated build up inventory/ receivables/ other current assets/ current liabilities/ Bank
borrowings.
Project levels : whether acceptable.
Compliance with mandatory guidelines as applicable.
Assessed bank finance.
Assess requirements of off balance sheet facilities viz L/C, BGs etc.
Different Methods of Appraisal
Ratio Analysis
Financial analysis is used primarily to gain insights into operating problems and financial
problems confronting the firm. One of the major tools of financial analysis is Ratio Analysis.
Ratios by themselves however do not locate the problems directly. At this point it is
important to distinguish between a problem its cause and its cause and its symptom while
high costs would be the cause. Financial ratios are classified in a number of ways
i) Liquidity Ratios
ii) Profitability Ratios
iii) Leverage Ratios
Liquidity ratios examine the adequacy of funds and are based on the relationship between
current assets and current liabilities. If a company has sufficient net working capital it is
generally deemed to have sufficient liquidity. The ratios which play a vital role in loan
syndication process are Current Ratio, Profit Before Depreciation Interest and Tax (PBDIT)
29
to Sales, Profit Before Tax (PBT) to Sales, Interest Coverage Ratio, Debt Equity Ratio, Total
outside Liabilities to Tangible Net Worth (TNW), Growth Ratios, DSCR ( Debt Service
Coverage Ratio).
Funds Flow Analysis
A statement of the sources and application of funds also known as a funds flow statement is a
technical device designed to highlight the changes in the financial condition of a business
enterprise between two dates. This statement, variously referred to as funds flow statement,
has been recognized for long in the Western Countries as an important tool in the hands of
the credit analyst to examine the working capital flow. However in India funds flow analysis
in its present form was not extensively used by the commercial banks for their working
capital appraisal until late Sixties. A funds flow statement is quite simply a movement of
funds to and from the company’s coffers. Thus sources include increase in owner’s equity,
increase in debt and sale of assets, liquidation of loans and other liabilities and reduction in
owner’s equity.
Cash Flow Analysis
Contrasted with the broad level of a funds flow statement the cash flow is basically a
functional statement concerning itself with the pure cash management aspect. It is designed
to throw light on (i) what cash commitments are likely to arise within a short span of time
and (ii) and what cash resources will be available to meet them. For instance if the Finance
Manager has to pay an installment of a term loan to a financial institution within a period of
three months, he needs to visualize a cash budget to decide whether he can meet his
commitment without an additional bank loan.
30
Project Finance
Obtain the following:
Statutory clearance from various govt. Departments./ Agencies
Licences/permits/approvals/clearances/No Objection Certificates/ Collaboration
agreements as applicable.
Details of sourcing of energy requirements- Power fuel etc.
Pollution control clearance.
Examine/analyse/assess commercial/economic and financial viability
Cost of project and source of finance.
Projected costs with reference to estimates, quotations, certificates etc. to ensure
correctness.
Build up of fixed assets
Requirement of funds for investment in fixed assets to be critically examined with regard
to production factors, improvement in quality of products, economies of scale etc.)
Arrangements proposed for raising debt/equity.
Capital structure.
Concessions extended and value thereof.
Compliance with other terms and conditions.
Action taken on comments/observations contained in
RBI Inspection Reports.
Other Inspection & Audit Reports.
Verification Audit Reports.
Concurrent Audit Reports.
Stock Audit Reports.
31
Spot Audit reports.
Statutory Audit Reports.
Present relationship with Bank
Compile for existing customers profile of present exposures.
Facilities now granted
Conduct of the accounts.
Utilization of Limits – FB & NFB.
Occurrence of irregularities, if any.
Frequency of irregularity No. of times – Total No. of days last 12 mnths.
Repayment of term commitments.
Compliance with requirements regarding submission of stock statements, FFR, renewal
data etc.
Stock turnover, realisation of book debts.
Value of account with break-up of income.
Arrive at a preliminary decision to support or not to support the request.
Credit Rating
Draw up ratings for
Working Capital
Term Finance
Opinion Reports
Compile opinion reports on partners/promoters and the proposed guarantors.
Existing charges on Assets
Report on search of charges with ROC.
Structure of facilities and term of sanction
32
Fix term for exposures proposed- facility wise and overall
Limit for each facility- sub limits.
Security- Primary & collateral, Guarantee.
Margins- For each facility as applicable.
Rate of interest.
Rate of commission/Exchange/Other fees.
Concessional facilities and value thereof.
Repayment Terms, where applicable.
ECGC cover where applicable.
Other standard covenants.
Review of the proposal
Strengths and weaknesses of the exposure proposed.
Risk factors and steps proposed to mitigate them.
Deviations proposed from usual norms of the Bank and the reasons therefore.
Proposal for sanction
Prepare a draft proposal in prescribed format with required back up details and with
recommendations for sanction.
Assistance to Assessment
Interact with the assessor, provide additional inputs arising from the assessment,
incorporate these and required modifications in the draft proposal and generate an
integrated final proposal for sanction.
Assessment Indicative Lists of activities involved in the assessment Function
Review the draft proposal together with back-up details/notes and the borrower’s
application, financial and other reports/documents examined by the appraiser.
33
Interact with the borrower and the appraiser.
Carry our pre-sanction visit to the applicant company and their project/factory site.
Peruse the financial analysis (Balance Sheet/Operating Statement/ Ratio Analysis/Fund
Flow Statement/Working Capital assessment/Project cost & sources/break even
analysis/Debt Service/Security Cover etc.) to see if this is prima facie in order. If any
deficiencies are seen, arrange with the appraiser for the analysis on the correct lines.
Examine critically the following aspects of the proposed exposure
Bank’s Lending policy.
RBI Guidelines
Promoters/Senior Management background.
Inter-firm comparison
Technology in use in the company.
Market conditions.
Projected Performance of the borrower vis-à-vis past estimates and performance
Viability of the project.
Strength & weaknesses of the borrower’s entity.
Proposed structure of facilities.
Adequacy/Correctness of limits/Sub limits, margins, moratorium & repayment
schedule.
Adequacy of proposed security cover.
Credit Risk Rating.
Pricing and other charges and concession, if any, proposed for the facilities.
Risk factors of the proposal steps proposed to mitigate the risk.
Deviations proposed from the norms of the Bank, duly reasoned.
34
Recommendation for sanction.
To the extent the inputs/comments are inadequate or require modification, arrange for
additional inputs/modifications to be incorporated in the proposal with any required
modification to the initial recommendation by the appraiser.
Arrange with the Appraiser to draw up the proposal in the final form.
4. Pre- Sanction Visit
The bank officials arrange visits to the project site and try to get some rough idea about the
proposed project.
5. Preparation of Proposal by the bank
After going through the various documents, the team of the bank studies the various strengths
and weakness of the corporates. The team of the bank who are looking after that particular
corporate loan compile their own proposal.
Analysis and interpretation of Financial Statements
Financial information forms the basis for financial planning and analysis, and this information is
provided by the financial statements or accounting reports of a business enterprise. The objective
of accounting are to provide information for making decisions concerning the limited resources
of an enterprise, direct the controlling of the organisation human and material resources and
permit information judgments and decisions by users of the financial information. Apart from
gathering information on the clients, bankers rely on the financial data of an organisation, which
are contained in two statements: Balance Sheet and Profit and Loss Accounts.
Balance Sheet
Balance sheet as the name indicates is a statement of balances, depicting the state of affairs or
position of a business enterprise on a given date. Since it is an aggregation of balance, it pertains
35
obviously to a particular date. As on the date of reckoning it discloses to the user of the statement
the investment of funds made by the enterprise and the various sources from which funds have
been drawn to enable investment. It would be useful to visualize a balance sheet essentially in
terms of the resources of an enterprise and claims held against such resources provided to it.
Assets
Assets can be described as economic sources owned by an enterprise whose cost at the time of
their acquisition can be objectively can be objectively measured. Thus any item to be called an
asset should satisfy three attributes viz capability to generate an economic benefit, ownership
and measurement of cost. Thus skilled labour and managerial personnel, though very powerful
assets doubtless are not regarded as such managerial personnel, through very powerful asset.
Share Capital
The Bank’s form classifies redeemable preference share which are redeemable within 12 years as
term liabilities and not under net worth. This classification is based on the principle that the
redeemable preference shares have to be redeemed.
Current Liabilities and Provisions
The banker will have to obtain some more details about current liabilities from the company as
the classification in the companies act format does not fully meet the banker’s requirements. For
example statutory liabilities need not be separately delineated in the companies act format
whereas the banker is interested in knowing the quantum statutory liabilities. Further sundry
creditors as indicated in companies act is an all-embracing term but the banker should know how
much is towards trade creditors i.e. those arising out of purchase of raw materials and stores and
for others.
36
Inventory
Inventory comprises goods held for processing and conversion into saleable products and
finished products held for sale. Inventory would also consist of goods-in-process and other items
of stores and spares used in the process of manufacture and packing material. As inventory is
still the predominant asset financed by the Indian Bankers. While classification of raw materials,
stocks-in-process and finished goods would not pose any problem, identifying stores and
consumable spares would have to be examined carefully. Coal, fuel oil etc which are used in the
process of manufacture would be classified as stores.
Gross Block
The gross block would not include the intangible assets. If there has been a revaluation in assets
the amount by which the asset value has been increased, should be deducted from gross block
and shown os intangible assets
6. Discussion of Terms & Conditions
Terms & Conditions can be defined as ‘A specification of restrictions for the use of goods or
services’. Before sanctioning the loan the bank, wants its client to know about the various norms
that they have to follow.
7. Sanction Loan
Indicative List of Activities Involved in the Sanction Function
Peruse the proposal to see if the report prima facie presents the proposal in a comprehensive
manner as required. If any critical information is not provided in the proposal, remit it back
to the Assessor for the requires data/ Clarifications.
Examine critically the following aspects of the proposed exposure.
37
Banks Lending Policy.
Borrower’s status in the industry.
Industry prospects.
Experience with units in similar industry.
Overall strength of the borrower.
Projected level of operations.
Risk Factors critical to the exposure and adequacy of safeguards there against
proposed.
Value of the existing connection with the borrower.
Credit Risk Rating.
Security pricing charges and concessions proposed for the exposure and conveants
stipulated vis-à-vis the risk perception.
Accord sanction of the proposal on the terms proposed or by stipulating modified or
additional conditions/safeguards.
OR
Defer decision on the proposal and return it for additional data/clarifications.
OR
Reject the proposal, if it is not acceptable, setting out the reason therefore.
Sanctioning authority is to endure that the sanction is within the powers delegated to the
authority and that the sanction is reported to a higher authority as required.
8. Documentation
In this phase various documents which are submitted to the bank are verified.
38
9. Post Sanction Visit
Once the loan is sanctioned the bank officials again visits the project site.
10. Disbursement
In this phase finally the amount is disbursed to the customer. The whole amount may not be
distributed in one time. Bank may disburse the loan in various phases as per the requirement of
the project.
Post sanction credit process
The post-sanction credit process can be broadly classified into three stages viz., follow-up,
supervision and monitoring, which together facilitate ensuring an efficient and effective credit
management and maintaining high level of standard assets. The indicative tasks associated with
the three stages. Broadly, the objectives of the three functions are as under:
Follow up function
The follow up function covers the following:
Ensuring on an ongoing compliance with terms and conditions of sanction through the
system of control measures/feedback viz. terms and conditions of sanction through the
system of control measures/feedback viz. Inspection visits, prescribed financial/operating
statements from the borrower, interactions with borrowers etc.
Tracking performance of the borrower, ensuring safety and recover-ability of the advances.
Ensuring compliance with all internal and external reporting requirements covering the
advances.
Indicative list of the activities involved in the follow-up function is as follows:
Conveying sanction of advances to the borrower detailing the terms and conditions and
obtaining acceptance thereof.
39
Preparation submission of control returns for sanction.
Completion of applicable documentation; maintaining custody and validity of the documents.
Creation of charge over security and completion of all relevant and applicable formalities
including.
Creation of Registered or Equitable mortgage.
Creation of second charge.
Registration of charge with ROC.
Periodical search of charge with ROC.
Ensuring borrower’s compliance with all pre-disbursal formalities and requirements and
ongoing compliance with the term of sanction.
Conducting pre-disbursal inspection and verifications (including verification of subsisting
charges on the assets of limited companies by search at ROC) as laid down
Arranging for and supervising computation and recording of Drawing Power for the disbursal
of the facilities.
Obtention from the borrowers and scrutiny/analysis of the following financial and other
statements; initiating appropriate action thereon:
Stock statements.
Other control/MIS statements viz. MSOD (Monthly Select Operational Data),
FFR (Financial Follow up Reports), Cash Budget.
Annual and mid term financial statements.
Ongoing scrutiny of transactions in the various accountants by perusal of ledgers, registers,
vouchers etc. to watch for proper conduct of the accounts, healthy turnover therein and
proper end-use of funds.
40
Ongoing verification of assets charged as security, to ensure availability and safety of the
assets.
Maintaining ongoing contact with the borrower and CO-lenders and keeping abreast of
developments in the borrower entities and business environment.
Securing and maintaining ECGC (Export Credit Guarantee Corporation) cover where
applicable.
Timely recognition of unsatisfactory features in the conduct of the advances, such as
Delays in project implementation.
Unusual developments/changes in the business or business environment.
Shortfall in achievement of production/sales as compared to the projections.
Defaults in payments due under Fund Based facilities/Defaults in the commitments
under NFB facilities.
Non-fulfillment of financial obligations to the bank, colanders, creditors and statutory
dues etc. Any other deficiency observed during periodic inspection visits.
Initiating required action by the borrower on the foregoing unsatisfactory features and
submitting reports thereon.
Ensuring obtention of Refinance from concerned agency wherever applicable.
Ensuring maintenance of proper records/files covering the advances to a borrower for
scrutiny/inspection by various internal and external authorities.
Ensuring collation/maintenance of data as appropriate for submitting reports/returns/reviews
etc. to various higher authorities in the Bank and to external agencies.
Obtention of required data proposal from borrower and preparation of reviews/renewals of
credit facilities, as prescribed.
41
Initiating required action by the borrower on the foregoing unsatisfactory features and
submitting reports, including.
RBI Inspection Report.
Other Inspection & Audit Report/Credit Audit Report.
Verification Audit Report.
Concurrent Audit Report.
Stock Audit Report.
Spot Audit Report.
Statutory Audit Report
Recovery of applicable charges/fees/penalties etc. as per extant instructions.
Preparation of reviews of IRAC (Income Recognition And Asset Classification),
identification of deteriorating assets and initiation of corrective action where warranted.
Accountwise Follow-up of NPAs for recovery/rehabilitation preparation of related
recommendations to appropriate authority for approval.
Supervision
I. Supervision function should primarily ensure that effective follow-up of advances is in
place and asset quality of a good order is maintained. Supervisor should look out for early
warning signals, identify incipient sickness and initiate proactive remedial actions.
i)Indicative lists of activities involved in the supervision function is as follows:
Ensuring proper follow-up of advances and observance at the operating level of system laid
down by the Bank. Periodic and random examination of registers, accounts and books at the
branch, scrutiny of periodical statements received, control registers and files/records covering
the advances will assist this process.
42
Ensuring that security documents are kept current and that all related documentation
formalities are observed by the officials responsible.
Ensuring that system is in force for the recovery of applicable charges/fees/penalties etc. and
that income leakages are avoided.
Engaging in ongoing interaction with the official responsible for follow-up on all critical
matters relating to the advances.
Maintaining ongoing contact with the borrower and co-lenders and keeping abreast of
developments in the borrower entities and business environment.
Scrutiny of periodical statements and financials from borrowers, control statements/reports
prepared on the advances. Ensuring that corrective as required are taken and reports to higher
authorities where necessary are submitted.
Periodicals inspection of security at the intervals prescribed for the supervisor.
Ensuring that compliance is maintained with instructions laid down regarding systems and
procedures, maintenance of books/registers is in order, and action is taken for rectification of
irregularities pointed out in the various Audit/Inspection reports.
Conduct periodic assessment of the information thrown up by IRAC reviews and ensure
identification of deteriorating assets and initiation of corrective steps.
Exercise control over NPA management and ensure effective follow up for
recoveries/rehabilitation with approvals from concerned/appropriate authority.
Ensure timely reviews/renewals of credit facilities.
Initiate appropriate measures for upgradation of credit skills of level functionaries.
Monitoring & Control
Monitoring and control function ensures that effective supervision is maintained on advances and
appropriate responses are imitated wherever early warning signals are seen. The function also
43
tracks customer satisfaction and provides responses where necessary. Indicative list of activities
involved in the Monitoring and Control function is as follows:
Ensuring that effective supervision is maintained on advances by the lower level
functionaries responsible for follow up and supervision. Scrutiny of returns/reports received
from these lines functionaries, interaction with them, feedback from customers, commentary
in inspection/audit reports etc. will assist this process.
Monitoring of high value advances through specific focus on these in the return/reports
received on advances and by keeping watch on the developments in the borrower
company/industry.
Ensuring non-recurrence at the operating levels of commonly noticed lapses/irregularities
pointed out in various audit reports.
Ongoing monitoring of asset portfolio by tracking changes from time to time, chalkout and
arrange for carrying out specific actions to ensure high standards asset content.
Extending guidance to down the line functionaries on the follow-up and supervision of the
exposure at risk.
Examination of NPAs with a view to recognizing problem assets, drawing up recovery
upgradation path for these and monitoring the recovery process.
Redressal of customer’s complaints.
Ongoing evaluation of credit management skills at the branches and office under control
through Annual Appraisal Reports (AARs), interaction with the supervisors and imitating
appropriate interventions.
44
6. ANALYSIS & INTERPRETATION OF THE DATA
6.1 Responsibility of different functionaries in the post-sanction credit
process
The tasks associated with the post-sanction follow-up, supervision and monitoring & control
in respect of individual accounts shall be handled by the designated officials Wherever two
functionaries are assigned the functions relating to a single stage (e.g. follow-up), they will
carry out all the functions relating to this stage either individually or jointly and with due
diligence. The senior functionary will decide the requirement in this regard.
The controllers of the concerned networks will have responsibility for monitoring the overall
credit portfolio in their respective networks.
Follow up the compliance of remarks made by higher authorities on credit proposals,
irregularity reports, etc. The cells viz., Advances Monitoring Cell, NPA (Non Performing
Assets) Management Cell or the Rehabilitation Cell will assist the controllers to oversee the
credit portfolio of the Commercial Network.
Reporting for control
Bank officials exercising financial powers delegated to them for
sanctioning of loans should promptly report to their respective controlling
authorities in the manner stipulated in the Scheme of Delegation of
Financial Powers in force. The controlling offices should diligently
scrutinise the control returns. If they notice any unusual feature, they
should initiate suitable follow-up action to rectify the position with a view
to protecting the Bank’s interest.
45
Non-submission of control returns in time should be viewed seriously. Necessary steps
should be initiated to obtain the pending returns and ensure regular submission of such
returns in future.
Security documents
Security documents necessary for different types of credit facilities have been furnished in
the Manual on Documentation. Branches should not release any of the sanctioned limits, new
or enhancements, before obtaining the relevant documents in terms of sanction duly complete
in all respects. However, in cases where creation of mortgage or obtaining the documents
related to a third party guarantee is sought to be deferred beyond the date of release of credit
facilities for genuine reasons, prior approval of the sanctioning authorities for the deviation
should be obtained.
Branches may provide true certified copies of security documents to a borrower/guarantor,
whenever a request for such copies is received.
Statement of stocks & book debts
Each borrower should submit a statement of stocks and book-debts, on the standard format
usually at monthly intervals. Non-submission of such statement in time would attract penal
interest as per instructions in force. While timely submission of stock statements should
remain under constant attention of the concerned field officers, for the purpose of
supervision/monitoring, branch managers/managers of division should verify the register
every month.
The stock statements should be filed unit-wise and in chronological order and retained as part
of the record. The borrower has to submit the stock statement, duly signed by an authorised
person, at intervals as specified in the sanction letter. Further, such statement as on the annual
46
balance sheet date should be obtained from every borrower enjoying advances against
security of stocks/book debts.
Computation of drawing power on eligible current assets and maintaining of DP Register
As assessment of working capital is based on the financial statements, the method of
valuation of current assets in the stock statement should be consistent with the norms
followed in preparation of the annual financial statements. While regulating drawings in a
cash credit (including WCDL) account within the drawing power (DP) of a borrowing
company, it should be ensured that the DP is not given against such assets which have not
been considered as current assets at the time of assessment and are accordingly ineligible for
DP. For example, where ‘plant spares` are classified as non-current asset for working capital
assessment, this asset should not be considered eligible for DP though included in the stock
statement. Stocks purchased under usance LCs should not be reckoned for the purpose of
drawing power. While allowing drawings in accounts on the basis of stock statements, it
should be ensured that there is no double financing involved. Similarly, drawing power may
not be given against old accumulated (non-moving) or slow moving stocks. Borrowers
should be advised to make special efforts to clear such stocks.
In cases where cash credit limits are granted against book debts, a statement of book debts
with age-wise break-up should be obtained along with the stock statement. Such book debts
should be based on invoices and delivery challans. Drawing power should be allowed only
on such book-debts as are within the norms accepted at the time of sanction. Generally, book
debts of more than six months old should not be reckoned for giving drawing power.
For the purpose of fixation of drawing power, different components of stocks may be valued
as detailed below:
47
ITEM TO BE VALUED ATImported raw material Landed cost (i.e., invoice value plus customs duty
but excluding sales-tax and demurrage, if any.) or
market price whichever is lower
Indigenous raw materials,
packing materials,
consumable stores and spares
Invoice price or market price or Govt. controlled
price, whichever is the lowest
Semi-finished goods Cost of production or selling price or market price
or Govt. controlled rates, whichever is the lowest
Finished goods Cost of production or selling price or market price
or Govt. controlled rates, whichever is the lowest
Variations in the prices of commodities, against which advances are granted, should be
carefully examined to ensure that the stock statements represent correct value of assets.
When stock statements are received at the branch, details like date of stock statement,
date of its receipt at the branch, brief particulars of the security held, the value thereof,
the stipulated margin and the resultant drawing power (i.e., value of security after
deducting margin) should be recorded in words and figures in the Drawing Power (DP)
Register, a separate folio being allotted to each account. It should be ensured that the
drawing power in each account should not exceed the corresponding sanctioned limit.
Each drawing power must be dated and signed by the branch manager or any authorised
official, obsolete drawing powers at the same time being cancelled. At the head of the
current page of each cash credit account, the amount of authorised drawing power will be
entered (in figures and words) under the full signature of the BM/manager of the division.
The official checking the ledger will ensure that this is invariably done. The drawing
48
powers recorded in the cash credit account ledgers will be periodically checked by the
BM/manager of the division with the Drawing Power Register. All changes in the
authorised drawing powers of borrowers must be promptly recorded in the ledger
accounts under the signature of the BM/ manager of the division or any authorised
official handling loans and advances.
Exceptions: In case of seasonal industries, the assessment is done on the basis of
monthly/quarterly cash budgets. Correspondingly, drawings should be regulated on the
basis of the monthly/quarterly cash budgets subject to the condition that the out standings
should not exceed the advance value of the security charged or the sanctioned limit,
whichever is lower. For determining the advance value of security charged (value of
security minus stipulated margin) the stock statements may continue to be obtained on
the usual format. Similarly, considering the special features of tea, coffee and other
plantations, the drawing power should be fixed corresponding to the methods followed
for assessment.
Stock audit
Units that are exhibiting symptoms of liquidity crunch may be considered for stock audit.
Some of the symptoms are as follows:
Pressing creditor
Overdue interest and term loan instalment
Stagnant stocks
Undue delay in submission of stock statements
Falsification of chargeable current assets
49
Too many and significant qualifying remarks about stock/ receivables in auditors'
report in the balance sheet, etc.
If on considerations of the above aspects, an unsatisfactory scene emerges, a stock audit
may be considered. Stock audit would cover audit of stocks and receivables. The
quantity, quality and value of the current assets should be examined and compared with
the build-up of current assets projected at the time of assessment of the WC advances.
The system of inventory and receivables management followed by the unit should also be
studied. Wherever necessary, approved valuers or Chartered Accountants may be
engaged for conducting stock audit, but care should be taken to keep the cost reasonable
and minimum, as it is to be borne by the borrower.
Stock audit should be resorted to only in exceptional cases and not to be used as a regular
periodical tool. In other words, excessive dependence on external agencies is not
desirable and the stock audit proposed should be with a view to initiate result oriented
action plans aimed at improvement in management of inventory and receivables and
thereby quality of our lending.
To ensure that the process of stock audit is completed within a reasonable time, while
assigning the stock audit work, a time limit should be prescribed for completion of the
audit and submission of the report. Such a prescription to be made taking into
consideration the nature and magnitude of the work involved and in consultation with the
auditors. The past record of adherence to the specified time limit should form one of the
necessary criteria for assigning further work to auditors.
Inspection & follow-up
The principal objective of effective credit management is to maintain soundness of the
loan assets. The operative guidelines for inspection and follow-up to achieve the
50
objective are broadly outlined in this section. However, dealing officials should adapt
these suitably on merits of each borrowing unit (e.g., its market performance, the
management strength, reliability of its information system, etc.) with focus on an
effective credit management in a cost effective manner. Thus, the rigour of inspection
and follow-up may be varied depending on the general health of the unit and the conduct
of advances. Periodic inspection and follow-up would afford an opportunity to not merely
assess the quantity, quality and value of stocks, but also to
Know the tempo of activity,
Have a look at the books of accounts and other relevant records/returns,
Old discussions with the borrower,
Satisfy oneself that the borrower is alive to his responsibilities,
Supplement and constantly update the Bank’s knowledge about operations of the
borrower in particular and the industry in general,
Ensure that all the fixed assets charged to the Bank are not only intact and well
maintained but also put to optimum use and that the unit's profitability is
maintained, at least, at the level projected at the time of sanction of advances,
Ensure that the security coverage is not diluted at any time for any reason and that
the servicing of the loan does not suffer under any circumstances.
The follow-up system consists of financial follow-up and physical follow-up. The
financial follow-up lays stress on monitoring of the unit’s performance based on the level
of production, sales and profitability, while physical follow-up consists of physical
verification of assets and ensuring end-use of funds lent.
The follow-up and supervision procedure delineated above involves monitoring on the
basis of relevant information/ data to be furnished by the borrowers. For this purpose, the
51
borrowers would need to have in place an information system. Though supervision is
basically based on the information system of the borrower, it is desirable that the central
discipline of financial analysis, inter-firm comparisons and study of variances between
projected and actual balance sheets, are always kept in view.
Monitoring receipt of the statements: For making use of the information system
successfully, monitoring timely receipt of the various statements is an essential pre-
requisite. A suitable register should be maintained. The date of receipt of the statement
should be entered in the appropriate column. If a statement is received late, it should be
entered in red. An inspection of this register will reveal the extent of compliance of the
borrower in submitting the information. The register will help in sending reminders for
getting the pending statements and initiating other measures.
Inspecting officials may carry with them
a list of the fixed assets charged to the Bank
a copy of the latest monthly stock statement and
a copy of the latest half-yearly operating statement received from the borrowing units.
The quarter/year-end stock statements should be compared and reconciled with the
corresponding items in the financial follow-up statements such as FFR-I & II/ and year-end
balance sheet.
Verification of assets
Stocks pledged/hypothecated to the Bank must be inspected at irregular intervals which should
ordinarily not exceed one month. The basic objective is to ensure that the stated stocks are
physically there and the advances are adequately secured. Wherever possible, all stocks should
be thoroughly verified and compared with that mentioned in the stock statement. Where the
number of items charged to the Bank is large, goods should be stacked according to sizes,
52
weight, lots, groups, etc., to facilitate inspection. The inspecting official should make an ABC
analysis of stocks and check all high value items during each visit. In other cases, verification
would be possible only on a random sample basis. Different items should, however, be checked
in different visits so that all the major items would be covered over a period of, say, four to six
months. Checking on random sample basis should not, however, rule out repetitive checking of
certain items. Where goods are stored in different places, inspection of all the godowns should be
conducted simultaneously or on the same day. Inspecting officials must see that the godowns are
properly secured and that all the conditions of the fire insurance policies covering them and their
contents are being observed. Particular attention should be paid to the effect on the insurance
cover of any adjacent structures, whether permanent or temporary, which are of an inflammable
nature.
Whenever a godown cannot for any reason be inspected, a note must be made in the inspection
register in order to ensure that the contents of the godown are examined at the next inspection.
Verification of stocks-in-process may present some difficulties. One may have to look for
fluctuations in their value over a period and verify the data in the context of production capacity,
production cycle, cross tally for raw materials and production figures in the stock statement,
records on input output at different stages and other relevant factors. The available storage
capacities for various items, including for stocks-in-process, should also be examined.
Where goods are excisable or subject to other statutory controls, the stock statement could be
crosschecked with the relative records. The position of book debts should be checked, specially
where advances have been granted there against. This again may have to be done on a sample
basis by reference to Debtors’ Ledger and other relevant records such as invoices and bills raised
and by checking position regarding periodic confirmations from debtors, age of book debts in
relation to normal credit period, system of control over book debts and periodic reports to top
53
management of the unit. Checking quality of assets is another problem area and much would
depend on the experience and technical competence of the inspecting officials. A feel could be
had by looking for slow moving, old and accumulated stocks, rejections at the time of both
purchases and sales by examining the relative records of purchases and sales returns, records of
quality control and scrap, book debts under dispute and age of book debts.
Verification of systems
All borrowers enjoying large value credit should be asked to give to the Bank a write-up on their
inventory control, verification and valuation systems. The branch officials will have to
familiarise themselves with the operation of such declared systems with reference to the relative
records and get satisfied about their efficacy, at least at quarterly intervals. A reference to the
cost records, where available, would also be of help in checking valuation. Where internal cost
audit reports are available, these too could be seen. Where such systems do not exist or are not in
operation, this in itself would be a major warning signal calling for being circumspect about the
functioning of the unit. The absence of any such system would raise doubts about the
competence and also perhaps about the integrity of the management and call for urgent remedial
action, if necessary by engaging consultants.
6.2 Inspection Report
On completion of the inspection, the inspection officials should set out their observations in
inspection reports commenting, inter alia, about the important issues taken up with the borrower
and the corrective measures proposed to be initiated by the borrower for rectifying the
aberrations. The inspection report should also cover comments about the issues taken up with the
borrower during the previous inspection and the impact of the corrective measures initiated by
the borrower on that basis. Copies of the half-yearly progress report, half-yearly operating
54
statements and the inspection report as above should be filed chronologically and made available
for scrutiny by the Bank’s Inspectors/Auditors. The inspection reports would also help in the
periodic review of accounts of borrowers.
6.3 Inspection & Follow-up by different branch functionaries
The Branch Manager has overall responsibility for the quality and efficient management of the
credit portfolio at the branch. He has, therefore, to deploy his organisation- Manager of the
Division, Deputy Manager, Field Officers (FOs)- in such a manner that the total follow-up
coverage of all the units is achieved at the level of FOs, with each successive higher level of
managers covering the units selectively.
Frequency of inspection
In respect of working capital credit facilities, the inspection should be conducted by different
officials at frequencies as mentioned below:
A. Field Officers should inspect the units at monthly irregular intervals. The Field Officer need
not conduct monthly inspection during the month in which Branch Manager/ Manager of the
Division has inspected the unit unless the circumstances so demand.
B. Branch Managers of branches Division/Special Branches should visit units with large limits
once in 6 months.
C. Managers of Divisions should inspect all units with limits over Rs.5 lacs once in 6 months.
Where such units are very few, they should cover units enjoying limits above Rs.2 lacs also.
Where Deputy Managers have been posted besides the Managers of the Division, the inspection
may be organised between them so that there is no overlapping.
55
D. Where there is genuine shortage of field staff, Branch Manager can entrust the inspection of
units with smaller limits to other officers, with the approval of the Controlling Authority.
E. In the case of unsatisfactory accounts or where the exigencies so warrant (wide fluctuation in
stocks, etc.) or units put under nursing plans, irrespective of the loan amount, inspection has to
be carried out at shorter intervals, till the unit’s activity stabilises or it is nursed back to health or
the loan amount is recovered.
F. Where term loans/other term assistance are granted as stand-alone facilities or granted along
with working capital facilities, until the repayment of the last instalment under the term loan,
inspection of the borrowing unit must be carried out half-yearly by the Manager of
Division/Branch Manager assisted by the concerned field officer.
Apart from what have been mentioned above, the inspecting official should also keep the
following guidelines in mind:
(i). The Field Officer must check the correctness of the production and sales information supplied
to him and which he has not had occasion to check previously. Stocks of raw materials, etc., with
the unit should be verified with the latest Stock Statement.
(ii). The Field Officer must assess the level of activity from various sources, such as the order
book, the work on the shop floor, number of shifts of working, accumulation of finished products
and the general tempo of activity in the plant. When there is a decline in sales, production, and
profitability, the reasons therefore should be ascertained. Frequent visits to the same unit will
automatically give him enough experience to get a quick feel of the tempo of activity.
(iii). The Field Officer must check if the books of accounts e.g., cash book, sales, purchase and
stock registers are being maintained properly and kept up to date. If he notices any slackness in
this respect, he must impress on the borrower the need to keep the books updated. Special
attention must be given to the cashbook. Invoices may be checked at random to know the mode
56
(credit or cash basis) and terms of purchase. Sales through associates or sister concerns and bills
drawn on them should be monitored with extra care. Credit summations in the operative account
should be compared with the amount of realisation of sale proceeds during the relevant period. If
the credit summations and the amount of sale proceeds realised are not comparable, the reasons
therefore should be enquired into. Bills outstanding in the Bank's books should be compared and
crosschecked with the unit's bills receivable registers. If bills are returned or payments delayed,
the reasons therefore should be enquired into. Order position - pending, being executed and
anticipated- should be enquired into and matched with production and sales. This should be
followed up in the subsequent inspections. With the accent of follow-up on the activity level, the
inspections could be held on the basis of pre-arranged visits to the unit instead of surprise visits.
This does not rule out surprise visits altogether. The intention is that inspections based on pre-
arranged visits would be more meaningful and mutually beneficial to the Bank and the
borrowers. In cases where the unit has a separate administrative office, which maintains the
books of accounts, the Field Officer must give advance intimation of his visit so that the
necessary books could be brought to the factory for his inspection, if the duplicates are not
maintained there. Large transactions in the unit’s books of accounts particularly payments to
branch/associate firms should be enquired into.
(iv). The Field Officer must discuss with the borrower all factors that may have a bearing on the
operation of the unit such as, potential changes in the market conditions, raw material supply
position, power shortage, transport and labour problems, etc. Since the Field Officer has an
opportunity of visiting a number of units in the area, he would be better informed about the
environmental conditions and be able to guide the borrower, should the need arise. He could
also be on the look out for any possible signs of dissension among partners.
57
(v). The Field Officer must impress on the borrower the need for continued financial discipline.
This can be monitored by the degree of promptness in the preparation of annual balance sheets,
submission of various statements such as stock statement, monthly select operational data, etc. to
the Bank, submission of income tax and sales tax returns, etc. The Field Officer must check the
progress in the preparation of these statements from time to time.
(vi). The accounts of the units should be regularly scrutinised and in case of those found irregular
due to non-payment of instalments or excess drawings, the concerned units should be advised in
writing to regularise the position. In view of the irregularity in the account, the Field Officer’s
visit assumes greater significance as he would then be required to monitor the actions being
taken by the borrower towards the adjustment of the irregularity. In fact, the visits to units
whose accounts are irregular must be accorded a priority in the timetable for Field Officers. He
should act as a continuous channel of communication between the borrower and the Branch
Manager during the period the irregularity persists and provide the Branch Manager with his
personal assessment of the effectiveness of the action taken by the borrower.
(vii). The Field Officer will have special responsibilities during his visits, if the unit has asked for
enhancement either on account of receipt of a large order or on account of the need to buy raw
materials in bulk. The Field Officer should follow-up the end-use of the additional facilities
granted in order to ensure that the terms thereof are strictly adhered to.
(viii). A list of all items of machinery pledged/hypothecated to the Bank should be prominently
displayed in the factory premises and a legend ‘Pledged/hypothecated to XYZ Branch’ boldly
painted on the body of each machine. At the time of inspection, the field staff should physically
verify each item of the fixed assets with those listed as per the records with the branch. The
working condition of plant, machinery and equipment should be checked to ascertain that none
of them remain idle. The inspecting official should ascertain the reasons for any machine lying
58
idle. No item of machinery charged to the Bank should be removed from the factory, even for
repairs, without the permission of the Branch. Where any machinery is taken out of the unit,
prompt return thereof should be ensured and the relative item checked during subsequent
inspection of the unit.
(ix).The Bank’s officials should not record their observations on the books/ registers of the
borrowers, not even on the stock statements submitted by them. The observations, if any, should
be recorded on the prescribed inspection report on the unit on return to the branch and submitted
to the Branch Manager. It should be retained in the file of the respective unit after taking
necessary action, where warranted. The borrower should be advised in writing, about the
irregularities observed, with a request to set right the position immediately. During the next visit,
attention should be paid to check the progress made to rectify the irregularities observed during
the previous visits.
Inspection Register
Each branch should maintain a suitable register showing at a glance, dates of inspection
conducted. Inspection register has to be filled in after each inspection and duly authenticated by
the officers concerned. During the first week of a month, the Branch Manager should verify the
register to find out the units not inspected during the previous month. He should ensure that such
units are inspected during the current month at the frequency laid down by the Bank.
Monitoring of units not inspected: Branch Manager should get from the Field Officers/Manager
of the Division, for his own monitoring, a list of units not inspected during the quarter as at the
end of March, June, etc. He should submit to the Controlling Authority at quarterly intervals as
at the end of March, June, September, and December a list of units with outstandings of over
Rs.2 lacs, not inspected during the last quarter, indicating the date of last inspection, reasons for
delay, and plan of action proposed to rectify the position.
59
Freezing accounts
Where even levy of penal interest does not evoke financial discipline, branches may freeze the
accounts of such borrowers. However, before doing so, the reasons for violating financial
discipline should be ascertained from the borrower. If there is no acceptable reason for such non-
compliance with the terms and conditions of sanction, a decision to freeze the accounts may be
taken only in consultation the controlling authority. The accounts may be frozen only after
giving due notice to the borrower by registered post with A/D. Full implications of freezing must
be considered, more so in the case of consortium/multiple banking arrangement where in the
absence of a consensus among all banks, a freeze on any account will serve no useful purpose as
the borrowers may transact further in another bank. Branches must be circumspect in freezing as
a measure to enforce financial discipline.
Disclosure of names of defaulters
On the basis of the borrower’s consent for disclosure as per the ‘consent clause’ in the
documents, a decision to publicize the names of borrowers who have defaulted in the repayment
of loans can be taken only with the approval of the following authorities and after giving a notice
of 30 days to the borrowing company of the Bank’s intention to make public the information,
unless the borrower rectifies the default within such period.
60
7. SUGGESTIONS & CONCLUSION
Getting the money is only the first step. One should strive to be a good customer so that the
specified client can get cooperation if it is needed later. A good customer sticks to the agreement.
Understand the requirements and perform to them as much as possible. In a business
relationship, lenders will ask for regular financial statements, which you should produce on time.
There may be covenants. A covenant is a written agreement in which you promise to meet
specified obligations such as submitting the aging of your accounts receivable. The "aging"
report will show the lenders if your credit customers are paying on time or not. One should be
proactive. One should contact the lender if there is some problem. Getting to the next highest
level is important.
The time period required for sanction of a business loan can be reduced and hence the procedure
can be shortened in days. One needs to provide the various documents required by the bank to
create the proposal. One should try to share as maximum information with the bank to allow
them to complete their work of preparing proposal in time.
Etiquettes of building good relationship with the lender
Being well dressed and neat in appearance at bank meetings will reflect positively.
Produce Business plan whenever lender demands for it.
Keeping lenders informed on the status of the business whether it is good or bad.
If one is not able to make his loan payments on time call the lender in advance and share
your problem and request the extension needed.
Explaining sources of repayment
61
8. BIBLIOGRAPHY
Survey of Indian Industries ( The Hindu) edition 2008
Credit Risk Assessment by D.D. Mukherjee
www.coolavenues.com/know/fin/soumiya_1.php
www.investopedia.com/terms/l/loansyndication.asp
www.answers.com/topic/loan-syndication
www.riskglossary.com/articles/syndicated_loan.htm
www.businessdictionary.com/definition/loan-syndication.html
Discussions with various bank officals.
62
9. ANNEXURE
Format of Credit Monitoring Arrangement (CMA)
Particular Year Year
1. Gross Sales i)Domestic sales ii)Export salesiii) Export Incentive TOTAL :2. Less:Excise duty3. Net Sales (1-2)4.%age rise(+) or fall(-) in Net Sales5. Cost of sales i)Purchases a) Imported b) Indigeneous ii)Other spares a) Imported b) Indigenous iii) Direct Expenses iv)Depreciation SUB TOTAL(i to vii) Add: Opening W.I.P. Sub total Less: Closing W.I.P. Cost of ProductionA/c.M/S. B/F. Add:Opening stk.of FG Sub total Less:Closing stk.of FG TOTAL COST OF SALES6 Administration,Selling & Distribution and Other Exp.7. Sub Total (5+6)8.Operating profit before interest(3-7)9 Interest10. Operating profit after interest(8-9)11.i)Add: other non-opera -ting income (a) Misc. Income
63
(b) (c) Sub total(Income) ii)Less:other non-opera -ting Expenses (a) (b) (c) Sub total (Expenses) iii)Net of [11(i)-11(ii)]12. Profit before Tax/Loss [10+11(iii)]13. Provision for Taxes14. Net Profit/Loss (12-13)15 Appropriations16 (a) Equity Dividend paid (b) Dividend Rate17. Retained Profit(14-15)18. %age of Net ProfitA/c.M/S.LIABILITIESCURRENT LIABILITIES1.Short Term Borrowings from Banks(incl.BP/BD) i)From applicant Bank ii)From other Bank iii)(of which BP/BD) Sub Total2. Short term Borrowings from others3. Sundry Creditors(Trade&Exp)4. Advance payments from customers/Deposits from dealers5. Provision for Taxation6. Dividend Payable7. Other statutory liabili- ties(due in 1 Year)8 Deposits/Instalment of T.L./DPG. etc. (Due within 1 year)9. Other current Liabi- lities & Provisions Sub Total (2 to 9)10.TOTAL CURRENT LIABILI.
64
A/c.M/S. TERM LIABILITIES11. Debentures (not matur- ing within 1 year)12. Preference Shares redeemable after one year13. Term loans(Excluding payable within 1 year)14. Vehicle Loan & Home Loan (Excl.payable within one year)15. Term Deposits (excluding payable within one year)16. Other Term Liabilities17. TOTAL TERM LIABILI. (Total of 11 to 16)18. TOTAL OUTSIDE LIABI. (10 + 17) NET WORTH19.Ordinary Share Capital20.General Reserve21. Capital Reserve (On Amalgamation)22.Share Premium23.Surplus(+)/Deficit(-) in Profit & Loss A/c.24. Net Worth (19 to 23)25. TOTAL LIABILITIES (18+24)A/c.M/S. ASSETSCURRENT ASSETS26. Cash and Bank Balance27. Investments (i)Govt.& Other Trustee securities (ii)F.D. with Banks (ii) In Subsidiary28. (i) Receivables other than deferred & Exports(incl.BP/BD with Banks) (ii)Export Receivables29. Instal. of Def. Rec. (Due within one year)30. Inventory : (i) Raw materials
65
(incl.stores) (a)Imported (b)Indigeneous (ii) Work-in-process (iii) Finished Goods (iv) Other consu.spares (a)Imported (b)Indigeneous31. Advances to Suppliers of RM & Expenses32. Adv. Payment of Taxes33. Other Current Assets34. TOTAL CURRENT ASSETS FIXED ASSETS35. Gross Block36. Depreciation to-date37. Net Block(35-36) OTHER NON CURRENT ASSETS38.Investments/Bookdebts/ Advances/Deposits (i)(a)Inv.in Subsidiaries (b)Others (ii) Adv.to suppliers of Capital Goods(iii) Deferred Receivables (Maturity above 1 Yr.) (iv) Others39.Non consu.Stores/Spares40.Other Non Current Assets 41.TOTAL NON CURRENT ASSTS.42. INTANGIBLE ASSETS43. TOTAL ASSETS44. TANGIBLE NET WORTH45. NET WORKING CAPITAL46. CURRENT RATIO(34/10)47. T.O.L./T.N.W.(18/44) CURRENT ASSETS1. Raw Materials(incl. Stores) (a) Imported (Month's Consu.) (b) Indigeneous (Month's Consu.)2. Other Spares
66
(a)Imported (Month's Consu.) (b)Indigeneous (Month's Consu.)3. Stocks-in-process (Month's c.o.p.)4. Finished Goods (Month's c.o.s.)5. Receivables(other than Export and Deferred) (Month's Dome. Sales)6. Export Receivables (Month's Expo. Sales)7. Adv. to Suppl.of RM/ stores/spares8. Other C.A. (incl. Cash & Bank Bal.)9. TOTAL CURRENT ASSETS:CURRENT LIABILITIESother than Bank Borr-owings for W.C.)10. Creditors for purch- ases of R.M./stores/ spares. (Month's Purchases & Direct Exp)11. Adv. from customers12. Statutory Liabilties 13. Other Curr. Liabili.14. TOTAL: (Total of 10 to 13)First Method of Lending1. Total Current Assets (Item 9 in form IV)2. Current Liabi.other than B.B.& T.L.Instal. (Item 14 of form IV)3. Working Capital Gap (1-2)4. Min.stipulated N.W.C. (25% of WCG OR Total C.A. other than Exp. Recei.-as the case may be).5. Actual/Proj. N.W.C.
67
(Item 45 in Form III)6. Item 3 - Item 47. Item 3 - Item 58. M.P.B.F.9. Excess Borrowings representing short -fall in N.W.C.Second Method of Lending1. Total Current Assets (Item 9 in form IV)2. Current Liabi.other than B.B.& T.L.Instal. (Item 14 of form IV)3. Working Capital Gap (1-2)4. Min.stipulated N.W.C. (25% of WCG OR Total C.A. other than Exp. Recei.-as the case may be).5. Actual/Proj. N.W.C. (Item 45 in Form III)6. Item 3 - Item 47. Item 3 - Item 58. M.P.B.F.9. Excess Borrowings representing short -fall in N.W.C. (Item 4-5).1. SOURCES a) Net Profit(after tax) b) Depreciation c) Increase in Capital d) Increase in others e) Increase in Term Liab. f) Decrease in (i) Fixed Assets (ii) Other N.C.A. g) Decrease in others T O T A L2. USES a) Net Loss b) Decrease in Term Liabilities c) Decrease in others
68
d) Increase in (a) Fixed Assets (b) N.C.A. e) Dividend f) increase in others T O T A L3. LONG TERM SURPLUS(+)/ DEFICIT(-). (1-2)3. LONG TERM SURPLUS(+)/ DEFICIT(-).4. Increase/Decrease in Current Assets(as per details given below)*5. Increase/Decrease in Current Liabilities other than B.B.6. Increase/Decrease in Working Capital Gap7. Net Surplus(+)/Deficit (-)- (Diff. of 3 & 6)8. Increase/Decrease in Bank Borrowings INCREASE/DECREASE IN NET SALES* Break-up of (4) ' i) Increase/Decrease in Raw Materials ii) Increase/Decrease in S.I.P. iii) Increase/Decrease in Finished Goods iv) Increase/Decrease in Receivables (a) Domestic (b) Exports v) Increase/Decrease in Stores & Spares iv) Increase/Decrease in other C.A. T O T A L :
69
Format of Financial Follow up Report (FFR)
Activity Annual Plan Actuals (cumulative) % of (current year) upto quarter ending achievement 2007-08 30.06.07 1 2 3(i) Production (quantity) (ii) Net sales (Rs. in Lacs) (a) Domestic (b) Exports (Direct)
* Since we do tailor made products it is difficult to establish quantity
Status of working capital funds
(Rs. in Lacs)
At the end of At the quarter Change during
the Estimates of the last year ending current year end of current year
ended
31.03.2007 30.06.07 (2 minus 1) 2007-08 (Provisional) (+) or (-) 1 2 3 4Current Assets (CA) a. Inventoryb. Receivablesc. Other CAd. Total CA Current Liabilities (CL) e. Bank borrowingsf. Sundry Creditorsg. Other CLh. Total CLI. NWC (d-h)j. Current Ratio (d/h)
Cont…2
: : 2 : :ANEXURE II (a) contd..
70
Current Assets : How Financed: (Rs. in Lacs)
At the end of Upto the quarter Estimates of the
last year endingend of current
year 30.06.07 1 2 3k. Bank Borrowings (e/d*%)l. Sun. Creditors (f/d*%)m. Other CLs (g/d*%)n. NOW (f/d %)
Total
Levels of Inventory / Receivables / Sundry Creditors (No of days)
At the end of Upto the quarter Estimates of the
last year endingend of current
year 30.06.07 1 2 3o. Inventoryp. Receivablesq. Sun. Creditors
SalesPurchases
Format of Quarterly Information Systems
71
QUARTERLY INFORMATION SYSTEM--FORM
Estimates for the ensuing quarter ending (Amount : Rs. In lacs)
Name of Borrower:
A. Estimates for the current accounting (a) Production :year indicated in the annual plan (b) Gross Sales :
i) Domestic :ii) Exports :iii) Other Income :
(c) Net Sales :
B. Estimates for the ensuing quarter (a) Production :ending June, 2009 (b) Gross Sales :
i) Domestic :ii) Exports :iii) Other Income :
(c) Net Sales :
C. Estimates of current assets and current liabilities **for the ensuing quarter ending June, 2009Current Assets
I Inventory
i) Raw Materials (including stores & spares used in the process of manufacture) a) Imported S (months' consumptions)@ b) Indigenous S (months' consumptions)@ii) Stocks-in-process (months' cost of production)@iii) Finished Goods (months' cost of sales)@iv) Spares excluding those under item (i) above (months' consumptions)@
IIReceivables (other than exports & deferred) including billspurchased and discounted with Bankers ++ (months' domestic sales)@
IIIExport receivables including bills purchased & discounted with Bankers (months' export sales)@
IVAdvances to suppliers of raw materials & stores / spares& consumables
VOther current assets including cash and bank balances(specify major items)
VI Total (estimated) current assets
Current Liabilities
VII Short Term bank borrowings from banks (including bills
72
purchased/discounted with Bankers) +++Bank of Baroda, Matunga Branch, Chandavarkar Road.
VIII
Creditors for purchase of raw materials and stores/spares& consumables ( including those under Usance Letter of Credit / Co-acceptances facility from the banks)+++a) Imported (months' purchases)@b) Indigenous (months' purchases)@
IX Advance payments from customersX Statutory liabilities
XI Other Current Liabilities (specify major items)XII Total (estimated) current liabilities
Notes:
Information should be furnished for each line of activity/unit separately as also for the Company as a whole. In cases where the different activities/units are financed by different banks, theconcerned activity/unit-wise data and data relating to the Company as a whole should be furnished to each financing bank.
The valuation of current assets or current liabilities in these forms should be on the same basisas adopted for the statutory balance sheet, and it should be applied on a consistent basis.
The period should be shown in relation to the annual projection for the relative item. If the levelsof inventory/receivables are higher than the stipulated norms, reasons therefor should be given.
If the canalized items form a significant part of raw materials inventory, these may be shownseparately.
Amount of bills discounted with bankers, included in items of Part C should be indicated separately.
Amount of bills discounted with bankers in respect of purchases, included in item VII or item VIII of Part C should be indicated separately.
The classification of current assets or current liabilities should be made as per the usuallyaccepted approach of bankers and not as per definitions in the Companies Act.
Format Of Cash Budget(Rs. in
lacs)
73
CASH BUDGET Year Year Year Year Year
CASH RECEIPTS (i) Sales Proceeds
(ii)Realisation of sundry debtors
(iii)Other receipt (share capital moines, loan proceeds, fixed deposit, receipt etc.)
(A) Total ReceiptsCASH DISBURSEMENTS
(i)
Payments to creditors towards supplies of material/ stores & capital goods
(ii) Salaries & wages payments
(iii)
Other routine production expenses in cash (energy bill, water bill, rent, taxes, duties, insurance, etc.
(iv) Advance income tax
(v)Other (Repayment of Term loan, interest on CC & TL etc.)
(vi)Interest paid (working capital)
(B) Total Disbursements(C ) Surplus/ deficit
Add: Opening Balance Closing Balance
74