sip report on credit appraisals at indian overseas bank

7/30/2019 SIP report on credit appraisals at Indian Overseas Bank

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SUMMER TRAINING REPORT

on

Credit Appraisals and Working Capital Finance

Indian Overseas bank

Submitted in partial fulfillment of the requirements of

Post Graduate Programme

by

Priyanka Dwivedi

2012-2014

FT-12-FS-414

IILM Institute for Higher Education

New Delhi


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DECLARATION FORM

I hereby declare that the Project work entitled CREDIT APPRAISAL AND WORKING

CAPITAL FINANCE submitted by me for the Summer Internship during the Post

Graduate Program to IILM Institute for Higher Education is my own original work and

has not been submitted earlier either to IILM or to any other Institution for the fulfillment of

the requirement for any course of study. I also declare that no chapter of this manuscript in

whole or in part is lifted and incorporated in this report from any earlier / other work done by

me or others.

Signature of Student: _____________

Name of Student: _______________

Date:

Place:


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ACKNOWLEDGEMENT

The satiation and euphoria that accompany the successful completion of task would be

incomplete without the mention of the people who made it possible.

I would first like to thank Indian Overseas Bank for providing me this opportunity for

working with them and provided assistance in completing the project to the best of my

abilities. I would like to extend my sincere gratitude to my project guide Mr. C. Krishna Kumar

and Mr. M.K. Gupta, the Chief Managers of the bank for their assistance, motivation and being

a continual source of encouragement and providing me an insight to the various issues

pertaining to the cases mentioned in the report. I would also mention the support and

guidance of the staff members at Regional Office of IOB who helped me throughout the

period of training. Their professional advice given throughout the completion of this project

will not be forgotten. I am also thankful to my institute IILM GSM for providing the

necessary guidelines that helped me to complete the project. I would also like to offer my

sincere thanks to my faculty guide, Ms.Swati Sharma for his benevolent and expertise

guidance. Her mentorship gave valuable suggestions that helped me during the internship

period. Her guidance gave immense confidence and encouragement that helped me to put my

best.


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TABLE OF CONTENTS

S.No Name of the Topic Page no. Remarks

Executive Summary 6

Objectives 7

Chapter - 1 Company Profile

1.1 Introduction 8

1.2 CSR activities 9

1.3 Socio- Economic responsibilities 11

Chapter- 2 Introduction to the Project2.1 Meaning of credit appraisal 12

2.2 Credit Appraisal process 13

Chapter - 3 Working Capital Finance

3.1 Introduction 14

3.2 Operating cycle 15

3.3 Working capital financing by banks 16

3.4 Form of assistance 16

Chapter - 4 Working Methodology

4.1 Procedure of Credit Appraisal 20

Chapter - 5 Analysis

5.1 Working Capital Analysis 29

5.2 Ratio Analysis 33

Chapter - 6 Case Study

XYZ Media Ltd. 34

Recommendations 45

Limitations 46

Conclusion 47

References 48


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FIGURES

S.No Figure Name Page no. Remarks1 Credit Appraisal Process 13

2 Operating Cycle 15

3 Credit Appraisal At IOB 21

TABLES

S.No Table Name Page no. Remarks

1 Research Methodology 18

2 Current Assets And Current Liabilities 31

3 Ratio Types 33

4 Financial Indicators 36

GRAPHS and SNAPSHOTS

S.NO Name of Graph /Snapshot Page no. Remarks

1 TNW 37

2 TOL/TNW 383 Funded Debt to TNW 38

4 NWC 39

5 Current Ratio 40

6 Net Sales 40

7 Gross Profit ratio 41

8 Operating Profit Ratio 41

9 NPBT To Sales 42

10 NPAT to TNW 42

11 NPAT To Sales 4212 Snapshot 1 Balance sheet 23

13 Snapshot 2 Profit /Loss A/c 25

14 Snapshot 3 Analytical Ratios 27


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Executive Summary

I have taken up the project Credit Appraisals and Working Capital Financeat IndianOverseas Bank Rajendra Place for the period of 2 months under Loans and Advances

department.IOB is a Chennai based and one of the nationalized bank of India that has

substantive history since 1937.It is a pioneer in many fields Banking, Insurance and Industry

with the twin objectives of specializing in foreign exchange business and overseas banking..

The project Credit Appraisals and Working Capital Finance deals with the process of

sanctioning a credit proposal.Credit appraisal means an investigation/assessment done by the

bank prior before providing any loans & advances/project finance & also checks the

commercial, financial & technical viability of the project proposed its funding pattern &

further checks the primary & collateral security cover available for recovery of such funds.The project work also included the working capital assessment. The methods that are used by

the banks in order to calculate the loan limits are Turnover method (Nayak committee) and

second method of lending of Tondons committee, also called MPBF. The financial viability

of the borrower and its firm is analysed through firms CMA data or through its proposed

financial statements like audited and provisional balance sheet and P/L account of previous

years, current financial year and assessment year.

The objective of this project is to study various kinds of cash credit facilities provided by the

bank such as the three categories of cash credit followed by the bank are OCC(Open Cash

credit),MCC (Miscellaneous cash credit )and ETF-CC(Easy Trade Finance).Another

objective is to know how to assess the working capital limits to be sanctioned by the bank

depending upon drawing power of the borrower, fims turnover and holding level of the firm.

The most important part of this project is the case analysis of XYZ private limited.The

company is availing the different kinds of cash credit facilities.It gives the clear

understanding of financial ratios.It also explains the method used for assessing working

capital limit.The project also contains the CMA data of the firm.

During this internship period, it has given an insight to legal procedures which are needed to

be verified before considering the proposal such procedures are CIBIL report

generation,ECGC specific approval list, RBI defaulter list and willful defaulter list

verification and watch out investors website approval. Different types of cash credit facilities

,term loans, methods of assigning working capital limits to the individuals and firms, has

been the integral part of the study during two months of internship program. The whole two

months period of internship gave me a richful experience of working in loans and advances

department with deep understanding of lending procedures followed at Indian Overseas

Bank.


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OBJECTIVES

The project Credit Appraisalsand Working Capital Finance deals with the procedures ofappraising a credit proposal and the methods to finance working capital required by the firms.

Appraising a credit proposal is an important activity carried out by the credit department of

the bank to determine whether to accept or reject the proposal for finance. The project deals

in banking such as working capital methods of assessment, appraisal of credit reports.

Working capital products include both fund and non-fund based products. The main

objectives of this project are:

To understand the entire process of sanctioning a credit proposal and various legalprocedures.

Study various types of working capital finance provided by banks. To know in detailsthe procedure of assessment of working capital finance extended by banks.

To study various kinds of cash credit facilities provided by the bank such as the threecategories of cash credit followed by the bank are OCC(Open Cash credit),MCC

(Miscellaneous cash credit )and ETF-CC(Easy Trade Finance).

To get the understanding of financial statements like balance sheet and profit& lossaccount of the borrowing firms and analyzing financials of the company through ratio

analysis

To understand the various lending facilities provided by the bank to borrower likefund based (bank overdraft, term loan) and nonfund based facilities (letter of credit

& letter of guarantee).

To know about various legal procedures required to be verified during appraisal of acredit proposal like CIBIL report generation, ECGC approval list, RBI defaulter list

etc.

To apply these procedure at a practical level with the help of case studies


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Chapter1

Company Profile

1.1 Introduction

Indian Overseas Bank (IOB) was founded in February 10th of the year 1937

Shri.M.Ct.M.Chidambaram Chettyar, a pioneer in many fields Banking, Insurance and

Industry with the twin objectives of specializing in foreign exchange business and overseas

banking. Presently, there are 10 Directors on the Board of the Bank. Shri. M.Narendra

is the current Chairman and Managing Director of IOB.. Indian Overseas Bank has an

ISO certified in-house Information Technology department, which has developed the

software that 900 branches use to provide online banking to customers. The various periods

of company are :

At the dawn of Independence

IOB had 38 branches in India and 7 branches abroad. The Products & Services of the bank

includes NRI Services, Personal Banking, Forex Services, Agri Business Consultancy, Credit

Cards, Any Branch Banking and ATM Banking.

Pre-nationalization era (1947- 69)

During the period, IOB expanded its domestic activities and enlarged its international

banking operations. IOB was the first Bank to venture into consumer credit. It introduced the

popular Personal Loan scheme during this period.

At the time of Nationalization (1969)

IOB was one of the 14 major banks that was nationalized in 1969.On the eve of

Nationalization in 1969, IOB had 195 branches in India with aggregate deposits of Rs. 67.70

Crs. and Advances of Rs. 44.90 Crs.

Post - nationalization era (1969-1992)

In 1973, IOB had to wind up its five Malaysian branches as the Banking law in Malaysia

prohibited operation of foreign Government owned banks. This led to creation of United

Asian Bank Berhad in which IOB had 16.67% of the paid up capital.

Computeraization:

The Bank setup a separate Computer Policy and Planning Department (CPPD) to implement

the programme of computerization, to develop software packages on its own and to impart

training to staff members in this field.


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IOB was one among the first to join Reserve Bank of India's negotiated dealing system for

security dialing online. The Bank has finalised an e-commerce strategy and has developed the

necessary Internet banking modules in-house. For the first time a Total Branch Automation

package developed in-house has been customised in one of the Overseas Branches of the

Bank. Most software developed in-house. During the year 2002-03, a new credit schemeShubh Yatra' was introduced to provide loans to those who undertake foreign travel for

tourism, employment and medical treatment. During the year 2004, the Government OF India

selected IOB for channelising government credit to other countries, which runs into billions

of dollars. And also in the same year the bank made tie up with Times Online Money to

launch an Internet-based remittance product, e-Cash Home, targeted at NRIs in the US

wishing to transfer money to India. IOB made pact with Chola for MF products. During the

year 2005, the bank joined hands with Visa to offer debit cards to its esteemed customers. In

the year 2006, IOB inked MoU with CRI Pumps. In September 2006, Indian Overseas Bank

(IOB) has finally taken control of Bharat Overseas Bank (BhOB), an unlisted private bank.This is the first instance of a public sector bank taking over a strong private sector bank

without resorting to the moratorium route. During May of the year 2007, Indian rating agency

ICRA assigned an 'A1+' rating to the proposed 20 bln rupee certificates of deposit

programme of Indian Overseas Bank, citing the bank's consistent and measured growth, the

improvement in its asset quality through effective monitoring and collection systems, and

improving core profitability. During June of the year 2008, IOB launched two new products

namely IOB Gold' and IOB Silver' in savings account and IOB Classic' and IOB Super' under

current account. IOB have a network of more than one thousand eight hundred branches all

over India located in various metropolitan cities, urban, suburban and rural areas. IOB plans

to set up banking operations in Malaysia in a joint venture with two other India-based banks

Bank of Baroda and Andhra Bank with a minimum capital investment of RM320 million

(US$100 million).

1.2 Corporate Social Responsibility

M Narendras commitment to serve the rural India is evident from the fact that the bank that

he heads Indian Overseas Bank has over 70 per cent of its branches in rural areas.

Narendra has treaded the uncharted territories owing to his passion to help the socially andeconomically underprivileged. Narendra has identified 30 villages in association with Friends

of Tribal Society in the Nilgiris, to set up one school each for tribal children providing them

with vocational training. The Bank has, always, supported worthy social causes and

endeavours. During the year, the Bank contributed Rs. one crore each to two states, viz.,

Andhra Pradesh and Karnataka, towards the respective Chief Minister's Relief Funds to give

relief to the flood affected people in these two states. Apart from these, the Bank also made

donations to other organizations serving the community at large. Awards has Given away in

presence of Mr P Chidambaram, Honble Home Minister; Mr Montek Singh Ahluwalia,

Honble Deputy Chairman, Planning Commission; and, Dr C Rangarajan, Honble Chairman,Economic Advisory Council on 27th Day of March 2012 at New Delhi.


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Several other CSR initiatives are:

Upgradation of FarmersA special grant of 25 million rupees has been earmarked for five farmers schools to

provide skill development and skill upgradation to farmers. Education academies havebeen set up in identified villages to support students who are weak in subjects like

math and science. Narendras efforts in providing support to various cancersocietys

have saved many life.

IOB-Sampoorna Project - A Total Village Development ProjectThe Bank launched an innovative rural development project aiming at Total Village

Development called IOB-Sampoorna in Kuthambakkam and Padur Villages in

TiruvallurDistrict, Kameshwaram village in Nagapattinam District, Dhaliyur Village

in CoimbatoreDistrict and Innambur village in Thanjavur District of Tamil Nadu.

IOB-Sampoorna is an unique Project encompassing several livelihood initiatives in

the villages to ensure all-inclusive growth of rural population.

Sakthi Memorial TrustThe Trust set up jointly by the Management of the Bank, Indian Overseas Bank

Officers Association and All India Overseas Bank Employees' Union, to perpetuate

the memory of Banks Founder Shri M.Ct.M. Chidambaram Chettiar, continued to

provide entrepreneurial development training to women thereby empowering them

socially and financially.The Trust has so far conducted 44 Entrepreneurial

Development Programmes (EDPs) exclusively for women at various centres,benefiting 1,601 women. For the women entrepreneurs and Self Help Groups, 1013

Sakthi Bazaars' were organized at many branches, for exhibition cum sale of their

products.

Rural Self Employment Training Institutes (RSETIs)In line with the guidelines issued by Ministry of Rural Development, Govt of India,

Bank had set up RSETIs at Thiruvananthapuram (Kerala State), Tirunelveli,

Thanjavur and Trichy (Tamilnadu State) to provide training to farmers, members of

SHGs, beneficiaries under SGSY, Educated Unemployed Youths, Artisans andBeneficiaries belonging to weaker sections.One Rural Training Centre was set up by

the Bank (jointly with NABARD and Indian Bank)at Karaikudi (Sivaganga District,

Tamil Nadu).

Financial Literacy and Credit Counselling Centres (FLCCC) viz., SNEHAWith a view to promoting financial education and awareness among general public

the Bank set up two FLCCCs at Nagercoil and Trichy during the year under review.

These centres will educate the people in rural and urban areas with regard to various

financial products/ services available from formal financial sector, provide face-to-

face financial counselling services and offer debt counselling to indebted individuals.


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1.3 Social -Economic Responsibilities

Rajbhasha (Official Language Policy)The Bank has taken all efforts to implement the Official Language Policy of Government of

India during the year 2012-13. During the year 160 Staff members who do not possess

working knowledge of Hindi were trained in IOB Praveen and Banking Pragya Courses.

Minutes of all meetings of all board level committees were translated in Hindi. Banking

terminology has been provided on IOB ONLINE for the benefit of staff members. Training

has been given to 1614 staff members for the use of Hindi in computers. Script Magic

packagehas been provided in all branches for issuing pass books, statement of account, DD

&Deposit receipts in Hindi. Four issues of quarterly Hindi Magazine "VANI" inprint as well

as in digital form. Bank's website has been made available in Hindi also.

Green Initiatives: The Bank has been taking various initiatives towards saving precious natural

resources and energy by adopting the latest technological advances. Video

Conferencing is very widely used both for Top Management level meetings /

promotion interviews /performance reviews and for virtual classrooms.

Paperless Banking Initiatives: As a step towards paperless banking initiative, Bankhas implemented Microsoft SharePoint which enables the Board members to access

the Agenda papers through their IPADs using Wi-Fi. All agenda papers are ported on

the website and no paper notes need be carried by the members.

Biometric SolutionsWith a view to increase Security, Biometric solutions were procured and implemented across

all our branches facilitating foolproof operational safety at all our branches. The solution

envisages authenticating the user every time he logs into the CBS with biometric as 3rd

authentication. IOB is one of the first banks to implement biometric authentication

successfully.

Contributing towards societyIOB has provided many other solutions that serves to the society like GENNEXT Branch tocater to the needs of techsavy younger generation, Aadhar registration through the branches

has been enabled, Bank has also introduced direct remittance facility at their overseas

branches.

Industrial RelationsIn order to maintain good Industrial Relations climate in all offices of the Bank, guidelines

are issued from time to time regarding enforcement of discipline, policies to be followed in

recruitment, promotion etc., which has led to reduction of cases The industrial relations

environment for the Bank remained cordial and conducive for achieving organization'sobjectives.


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Chapter2

Introduction to the project

2.1 Meaning of credit Appraisals

Credit appraisal is an important activity carried out by the loans and advances department of

the bank to determine whether to accept or reject the proposal for financing its project. The

project deals in credit facilities such as working capital methods of assessment, compilation

of credit reports. The methods that are used by the banks in order to calculate the loan limits

are Turnover method, MBPF system and Cash budget system. The financial viability of the

borrower and its firm is analysed through firms CMA data or through its proposed financial

statements like audited and provisional balance sheet and P/L account of previous years,

current financial year and assessment year. The firms financial performance is analyzed

through ratio analyses.

Financial requirements for project finance and working capital purposes are taken care of at

the credit department. Companies that intend to seek credit facilities approach the bank.

Primarily, credit is required for following purposes:-

1. Working capital finance

2. Term loan for projects

Credit appraisal is a means of an investigation/assessment done by the bank prior beforeproviding any loans & advances/project finance & also checks the commercial, financial &

technical viability of the project proposed its funding pattern & further checks the primary &

collateral security cover available for recovery of such funds. Credit Appraisal is a process to

ascertain the risks associated with the extension of the credit facility. It is generally carried by

the financial institutions which are involved in providing financial funding to its

customers.Credit appraisal decides everything. It is the process by which a lender appraises

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

the eligibility of a loan borrower for a loan. As has been mentioned, the eligibility of a

borrower for a loan depends on her/his creditworthiness.

Creditworthiness of a customer lies in assessing if that customer is liable to repay the loan

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

determine if a borrower is creditworthy or not. It is determined in terms of the norms and

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

borrower needs to be very careful in planning his financing modes. However, the borrower

alone doesnt have to do all the hard work. The banks need to be cautious, lest they end up

increasing their risk exposure. All banks employ their own unique objective, subjective,

financial and non-financial techniques to evaluate the creditworthiness of their customers.


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2.2 Credit Appraisal ProcessFIGURE 1

Receipt of application from applicant

Receipt of documents

(Audited, Provisional or Projected Balance sheets, Valuation reports of properties, Legal

Opinion, ROC documents, Guarantors Statement, Debtors & Stock statements for 120 days)

Pre-sanction visit by bank officers

Verification of legal procedures

(Check for RBI defaulters list, Wilful defaulters list, CIBIL Report, ECGC specific approval

list, check for watchoutinvestors website etc.)

Property and unit /stock inspection

Preparation of CMA data

Proposal preparation

Assessment of working capital limits to be sanctioned

(Turnover method or MBPF method)

Sanction/approval of proposal by appropriate sanctioning authority

Documentations, agreements, mortgages

Disbursement of cash credit limits or term loan


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Chapter - 3

Working capital finance

3.1 Introduction

Working capital is the fund invested in current assets and is needed for meeting day to day

expenses. It occupies an important place in a firms Balance Sheet. Working capital financing

is a specialized area and is designed to meet the working requirements of a business. The

main sources of working capital financing are trade credit, bank credit, factoring and

commercial paper. Out of all these, the project deals with only bank credit which represents

the most important source for financing of current assets. The firms generally enjoy easy

access to the bank finance for meeting their working capital needs. But from time to time,

Reserve Bank of India has been issuing guidelines and directives to the banks to strengthenthe procedures and norms for working capital financing. The project attempts to analyse the

role of bank credit in financing working capital needs of firms.

Working capital is that portion of a firms capital which is employed in short term operations.

Current assets represent Gross Working Capital. The excess of current assets over current

liabilities is Net Working Capital. Current assets consists of all stocks including finished

goods, work in progress, raw material, cash, marketable securities, accounts receivables,

inventories, short term investments, etc. These assets can be converted into cash within an

accounting year. Current liabilities represent the total amount of short term debt which must

be settled within one year. They represent creditors, bills payable, bank overdraft, outstanding

expenses, short term loans, etc.The working capital is the finance required to meet the costs

involved during the operating cycle or business cycle. Operating cycle is the period involved

from the time raw materials are purchased to the time they are converted into finished goods

and the same are finally sold and realized. The need for current assets arises because of

operating cycle. The opera1ting cycle is a continuous process and therefore the need for

current assets is felt constantly. Each and every current asset is nothing but blockage of

funds. Therefore, these current assets need to be financed which is done through Working

Capital Financing. There is always a minimum level of current assets or working capital

which is continuously required by the firm to carry on its business operations. This minimum

level of current assets is known as permanent or fixed working capital. It is permanent in thesame way as the firms fixed assets are. This portion of working capital has to be financed by

permanent sources of funds such as; share capital, reserves, debentures and other forms of

long term borrowings. The extra working capital needed to support the changing production

and sales is called fluctuating or variable or temporary working capital. This has to be

financed on short term basis. The main sources for financing this portion are trade credit,

bank credit, factoring and commercial paper.


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3.2 Operating cycle:

The time between purchase of inventory items (raw material or merchandise) and their

conversion into cash is known as operating cycle or working capital cycle. The longer the

period of conversion the longer will be the period of operating cycle. A standard operating

cycle may be for any time period but does not generally exceed a financial year. Obviously,

the shorter the operating cycle larger will be the turnover of the fund invested for various

purposes. The channels of investment are called current assets.

Operating Cycle- FIGURE 2

Cash

Purchase of

Raw material

Receipt from

debtors

Creation of

Receivables (Debtors)

Sales of

Finished Goods

Creation of

A/c payable (Creditors)

Warehousing

Of Finished Goods

Payments to creditors

Office, selling, distribution

and other expenses

Manufacturing operation:

wages & salaries, fuel,

power, etc


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3.3 WORKING CAPITAL FINANCING BY BANKS

A commercial bank is a business organization which deals in money i.e. lending and

borrowing of money. They perform all types of functions like accepting deposits, advancing

loans, credit creation and agency functions. Besides these usual functions, one of the most

important functions of banks is to finance working capital requirement of firms. Working

capital advances forms major part of advance portfolio of banks. In determining working

capital requirements of a firm, the bank takes into account its sales and production plans and

desirable level of current assets. The amount approved by the bank for the firms working

capital requirement is called credit limit. Thus, it is maximum fund which a firm can obtain

from the bank. On the basis of the estimates submitted by the company, the bank may decide

the amount of assistance which may be extended, after considering the margin requirements.

This margin is to provide the cushion against the reduction in the value of security. If thecompany fails to fulfil its obligations, the bank may be required to realize the security for

recovering the dues. Margin money is meant to take care of the possible reduction in the

value of security

.

3.4 Form of Assistance:

After deciding the amount of overall assistance to be extended to the company, the bank can

disburse the amount in any of the following forms:

Fund Based Non-Fund Based Lending

3.4.1 FUND BASED LENDING

In case of Fund Based Lending, the lending bank commits the physical outflow of funds. As

such, the funds position of the lending bank gets affected. The Fund Based Lending can be

made by the banks in the following forms-

Cashcredit

Cash Credit is granted by banks for meeting daily business expenses keeping a certainpercentage of the current assets value as margin money. The Cash Credit facility is generally

granted for one year and it is subject to review at the expiry of one year. At the time of first

time sanction of Cash Credit or Renewal of Cash Credit, borrower is required to give to the

bank a Cash Credit Proposal along with CMA DATA, through which bank assesses the

Working Capital Gap of the borrower that can be funded by the bank.

Indian Overseas Bank offers three types of cash credit products, they are

Open Cash Credit (OCC) for SME, Manufacturers etc. Miscellaneous cash credit (MCC) for contractors. Easy Trade FinanceCash Credit (ETF-CC) for small traders, retail traders etc .


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Loan: -

In this case, the entire amount of assistance is disbursed at one time only, either in cash or by

transfer to the companys account. It is a single advance. The loan may be repaid in

instalments, the interests will be charged on outstanding balance.

Overdraft

Overdraft is a credit facility in the nature of a Credit Account from which the borrower can

avail the funds anytime at his convenience but whose Upper Limit is fixed depending on the

value of the security offered by the borrower to the bank. Overdraft can be availed against

any financial assets like Fixed Deposits, Bonds, Shares Securities, Gold & Silver Jewelry or

Physical Assets like Motor Car, Pool of Vehicles, Immovable Properties like Factory Land

etc.Overdraft helps you meet your short-term funding needs and allows you to leverage every

business opportunity that comes your way against the security of residential or commercial

property.

Bills purchased or discounted

This facility enables the company to get the immediate payment against the credit bills raised

by the company. The bank holds the bill as a security till the payment is made by the

customer. The entire amount of bill is not paid to the company. The Company gets only the

present worth of the amount of bill, the difference between the face value of the bill and the

amount of assistance being in the form of discount charges. On maturity, bank collects the

full amount of bill from the customer.

Packing Credit

This type of assistance may be considered by the bank to take care of specific needs of the

company when it receives some export order. Packing credit is a facility given by the bank to

enable the company to buy the goods to be exported. If the company holds a confirmed

export order placed by the overseas buyer or a letter of credit in its favour, it can approach the

bank for packing credit facility.

3.4.2 Non Fund Based Lending

In case of Non-Fund Based Lending, the lending bank does not commit any physical outflowof funds. As such, the funds position of the lending bank remains intact. The Non-FundBased Lending can be made by the banks in two forms

Bank Guarantee:Suppose Company A is the selling company and Company B is the purchasing company.

Company A does not know Company B and as such is concerned whether Company B will

make the payment or not. In such circumstances, D who is the Bank of Company B, opens

the Bank Guarantee in favour of Company A in which it undertakes to make the payment to

Company A if Company B fails to honour its commitment to make the payment in future. Assuch, interests of Company A are protected as it is assured to get the payment, either from


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Company B or from its Bank D. As such, Bank Guarantee is the mode which will be found

typically in the sellers market. As far as Bank D is concerned, while issuing the guarantee in

favour of Company A, it does not commit any outflow of funds. As such, it is a Non-Fund

Based Lending for Bank D. If on due date, Bank D is required to make the payment to

Company A due to failure on account of Company B to make the payment, this Non-FundBased Lending becomes the Fund Based Lending for Bank D which can be recovered by

Bank D from Company B. For issuing the Bank Guarantee, Bank D charges the Bank

Guarantee Commission from Company B which gets decided on the basis of two factors-

what is the amount of Bank Guarantee and what is the period of validity of Bank Guarantee.

In case of this conventional for of Bank Guarantee, both company A as well as Company B

get benefited as it is able to make the credit purchases from Company A without knowing

Company A. As such, Bank Guarantee transactions will be applicable in case of credit

transactions. In some cases, interests of purchasing company are also to be protected.

Suppose that Company A which manufactures capital goods takes some advance from thepurchasing Company B. If Company A fails to fulfil its part of contract to supply the capital

goods to Company B, their needs to be to be some protection available to Company B. In

such circumstances, Bank C which is the banker of Company A opens a Bank Guarantee in

Favour of Company B in which it undertakes that if Company A fails to fulfil its part of the

contract, it will reimburse any losses incurred by Company B due to this non fulfilment of

contractual obligations. Such Bank Guarantee is technically referred to as performance Bank

Guarantee and it ideally found in the buyers market.

Letter of Credit:The non-fund based lending in the form of letter of credit is very regularly found in the

international trade. In case the exporter and the importer are unknown to each other. Under

these circumstances, exporter is worried about getting the payment from the importer and

importer is worried as to whether he will get the goods or not. In this case, the importer

applies to his bank in his country to open a letter of credit in favour of the exporter whereby

the importers bank undertakes to pay the exporter or accept the bills or drafts drawn by the

exporter on the exporter fulfilling the terms and conditions specified in the letter of credit .


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Chapter -4

Working Methodology

This is analytical research area where we analyses information with cause and its effectsrelationship. This analysis leads to the simple conclusions of whether to provide assistance of

working capital to the institution for business. When entrepreneurs for financing working

capital requirements approach the banks, the bank has to examine the viability of the project

before agreeing to provide working capital for it. Financial institutions & bank while

providing term loan finance to unit for acquisition of fixed assets does a detailed viability

study. They have to ensure that the project will generate sufficient return on the resources

invested in it. The viability of a project depends on technical feasibility, marketability of the

products, at a profitable price, availability of financial resources in time & proper

management of the unit. In brief the project should satisfy the tests of technical, commercial,financial & managerial feasibility. The proposed methodology for fulfilling the objectives is

as follows:

The project is based on secondary source of data. Secondary data have been mainlyobtained from reports, records and books of M/s. XYZ Media LTD. The data also

collected from audited financial statements periodicals and other records maintained by

M/s. XYZ Media LTD.

The methodology includes the detailed study of data of the borrower as provided by thebank officials for analytical study which have been utilised for the case study.

After the detailed study of the data, the pre and post requisites of lending are analysed. Preparation of CMA data of the borrowing firm.RESEARCH METHODOLOGY

TABLE -1

Research Type Analytical

Source of Data Primary and Secondary

Sample Unit Industries applying for loan

Sample Case studies

Sample Technique Allocation of Case

Analysis Tool used Financial Analysis


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Primary Data:Observation, Discussion with the company guide at the bank.

The company profile , its guidelines and principles.

Secondary Data:Secondary data relating to the procedure of assessment of working capital finance, old

sanction proposals, RBI guidelines etc., financial statements have been sourced from

the branch and referenced books.

4.1 Procedure of Credit Appraisal at IOBCredit appraisal is a means of an investigation/assessment done by the bank prior before

providing any loans & advances/project finance & also checks the commercial, financial &

technical viability of the project proposed its funding pattern & further checks the primary &

collateral security cover available for recovery of such funds. At Indian Overseas Bank

,Credit Appraisal is a long procedure which are required to be done before the credit

document is sent to higher authorities. Credit Appraisal process at IOB involves major 5

steps. They are as follows:


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CREDIT APPRAISALFIGURE 3

PRE SANCTION

PROCESS

Preparation of CMA

data

Assessment of Working

Capital Limits

APPRAISAL &

RECOMMANDATION


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1. PRE SANCTION PROCESS: -When a customer required any credit facility or working capital loan he is required to

complete application form and submit the same to the bank.Also the borrower has to submit

the required information along with the application form.

Pre sanction process requires following documents and information which are analysed prior

to raising the credit proposal

Audited balance sheets and profit and loss accounts for the previous three year Estimated balance sheet for current year. Projected balance sheet for next year Profile for promoters/directors, senior management personnel of the company Obtain Guarantors statement Examine for preliminary appraisal RBI guidelines and Policies Prudential exposure norms and bank lending policy Industry exposure restriction and related risk factors. Obtain RAM rating ,CRISIL rating Compliance regarding transfer of borrowers accounts from one bank to another bank Government regulation / legislation impact on the industry Acceptability of the promoter and applicant status with regards to other unit to

industries. Credit report of accounts running with other banks Arrive at the preliminary decision. Evaluation of prime and collateral security Examine/analysis /assessment Financial ratio & Dividend policy. Depreciation method Revaluation of fixed assets. Records of defaults (Tax, dues etc.) Pending suits having financial implication (Customs, excise etc.) Check for RBI defaulter list, Willful defaulter list, ECGC specific approval list,CIBIL

report.

Qualifications to balance sheet auditors remarks etc. Trend in sales and profitability and estimates /projection of sales. Production capacities and utilization: past & projected production efficiency and cost. Estimated working capital gap W.R.T acceptable build-up of

inventory/receivables/other current assets and bank borrowing patterns.

Assess MPBFdetermine facilities required Companys structure and system Profitability factor, Inventory/Receivable level, Capacity utilization


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2. Preparation of CMA dataCredit Monitoring Arrangement (CMA) data is a very important area in the process of credit

appraisals. It is a critical analysis of current & projected financial statements of a loan

applicant by the banker. CMA data is a systematic analysis of working capital managementof a borrower and objective of this statement is to ensure the usage of long term and short

term fund have been used for the given purpose.CMA data is also beneficial for analysing

financial indicators .CMA data at Indian Overseas Bank is prepared in main 3 components

statements.

Balance sheet - Balance sheet analysis for the current & projected financial years is the first

statement in CMA data. This statement gives the detailed analysis of Current & noncurrent

assets, fixed assets, cash & bank position, current & noncurrent liabilities of the borrower.

Also this statement indicates the net worth position of the borrower for the projected years.

Balance sheet analysis gives a complete financial position of the borrower and cashgenerating capacity during the projected years. Below is the snapshot of CMA data of XYZ

Media Ltd. Co. prepared at IOB as a part of the project.

SNAPSHOT - 1

Type of Financials Audited Audited Provisional Projected

Year ended 2011 2012 2013 2014

BALANCE SHEET

1.ASSETS

1.1CURRENT ASSETS

I. Inventories

Raw Materials 198.59 240.45 160.00 110.00

Stock in process 0.00 0.00 0.00 0.00

Finished Goods 0.00 0.00 0.00 0.00

Consumable Spares 0.00 0.00 0.00 0.00

TOTAL INVENTORIES 198.59 240.45 160.00 110.00

II. Trade Debtors

Domestic Debtors over six months 0.00 0.00 0.00 0.00Domestic Debtors less than six months 701.89 990.10 1,000.00 1,100.00

Export Debtors over six months 0.00 0.00 0.00 0.00

Export Debtors less than six months 0.00 0.00 0.00 0.00

TOTAL DEBTORS 701.89 990.10 1,000.00 1,100.00

III. Other Current Assets

Cash and Bank Balance 11.32 20.11 19.97 25.67

Prepaid Expenses 0.00 0.00 0.00 0.00

Advance Tax 0.00 0.00 0.00 0.00

Deposits with Excise and Sales Tax 750.75 831.84 900.00 850.00

Loans and Advances 0.00 0.00 0.00 0.00Others/Dep margin with Bank/cenvat input 0.00 0.00 0.00 0.00


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Total Other Current Assets 762.07 851.95 919.97 875.67

SUB- TOTAL (a) 1,662.55 2,082.50 2,079.97 2,085.67

1.2 FIXED ASSETS

I. Land & Buildings 0.00 0.00 0.00 0.00

II. Plant & Machinery 0.00 0.00 0.00 0.00

III. Sundries 394.33 506.79 600.00 700.00

Gross Fixed Assets 394.33 506.79 600.00 700.00

Less: Depreciation to date 85.87 131.91 180.00 240.00

Net Fixed Assets (b) 308.46 374.88 420.00 460.00

Capital Work in Progress 0.00 0.00 0.00 0.00

1.3 NON-CURRENT ASSETS

I. Investments in/Loans to subsidiaries/associates 0.00 136.51 91.00 91.00

II. Others Non Current Assets

Investment in other companies 0.00 0.00 0.00 0.00

Loans and Advances 0.00 0.00 0.00 0.00

Overdue debitors 0.00 0.00 0.00 0.00

security and other deposits 56.51 120.13 140.00 145.00

Non-Moving Inventories 0.00 0.00 0.00 0.00

Others

56.51 120.13 140.00 145.00

Total Other Non Current Assets

56.51 256.64 231.00 236.00

SUB-TOTAL (c) 0.00 0.00 0.00 0.00

Deferred Tax Asset (d) 0.00 0.00 0.00 0.00

1.4 INTANGIBLE ASSETS (e)

TOTAL ASSETS (a+b+c+d+e) 2,027.52 2,714.02 2,730.97 2,781.67

2011 2012 2012 2014

Year ended 31-Mar-1131-Mar-

12 31-Mar-12 31-Mar-14

2. LIABILITIES

2.1.CURRENT LIABILITIES

I. Borrowings from IOB 312.35 439.76 440.00 500.00

From other Banks 0.00 0.00 0.00 0.00

Commercial Paper 0.00 0.00 0.00 0.00

sub- total 312.35 439.76 440.00 500.00

II. Creditors for Purchases 3.35 9.31 10.00 12.00

III. Other Current Liabilities

Creditiors for Expenses 0.00 0.00 0.00 0.00

Provision 14.50 26.00 23.00 28.00

TL due within one year 42.70 16.67 29.00 66.00

Outstanding Expenses 0.00 0.00 0.00 0.00


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Others/Advances taken 91.61 67.37 72.25 65.30

Total Other Current Liabilities 148.81 110.04 124.25 159.30

IV. Creditors on Capital Account 0.00 0.00 0.00 0.00

SUB-TOTAL (e) 464.51 559.11 574.25 671.30

2.2.DEFERRED LIABILITIES

I. Term Loan from IOB 97.51 65.00 56.00 0.00

II. Term Loan from institutions 84.16 100.00 80.00 70.00

III. Other Long Term Liabilities

Preference Shares 0.00 0.00 0.00 0.00

Long-term loans from other banks 0.00 0.00 0.00 0.00

Foreign currency loans 0.00 0.00 0.00 0.00

NCD borrowings 0.00 0.00 0.00 0.00Others 0.00 0.00 0.00 0.00

Other Long term liability which have been taken asQuasi Equity 159.35 621.14 600.00 550.00

Total Other Long Term Liabilities 159.35 621.14 600.00 550.00

SUB-TOTAL (f) 341.02 786.14 736.00 620.00

2.3.CAPITAL AND SURPLUS

I. Paid up Capital 51.94 65.96 66.56 72.56

II. Reserves and Surplus 1,141.30 1,297.82 1,348.16 1,411.81

III. Revaluation Reserves 0.00 0.00 0.00 0.00Share Application Money 29.00 5.00 6.00 6.00

0.00 0.00 0.00 0.00

SUB-TOTAL (g) 1,222.24 1,368.78 1,420.72 1,490.37

Deferred Tax Liability (h) 0.00 0.00 0.00 0.00

TOTAL LIABILITIES (e+f+g+h) 2,027.77 2,714.03 2,730.97 2,781.67

Off Balance Sheet Debt 0.00 0.00 0.00 0.00

Current Portion of Long Term Debt 42.70 16.67 29.00 66.00

Profit and lossP &L is the second component of CMA data of a company and shows thecompany's revenues and expenses during a particular period. It indicates net sales, gross

profit, operating profit, profit before tax (PBT), and net profit after tax (NPAT).

SNAPSHOT -2

Year ended 31-Mar-11 31-Mar-12 31-Mar-13 31-Mar-14

PROFIT AND LOSS

1.NET SALES

I.Domestic Sales - Cash 1,470.58 1,976.42 2,400.00 2,600.00

II.Domestic Sales - Credit 0.00 0.00 0.00 0.00

iii. Exports 0.00 0.00 0.00 0.00

Less Excise Duty 0.00 0.00 0.00 0.00

Total Net Sales 1,470.58 1,976.42 2,400.00 2,600.00
http://en.wikipedia.org/wiki/Revenuehttp://en.wikipedia.org/wiki/Expensehttp://en.wikipedia.org/wiki/Expensehttp://en.wikipedia.org/wiki/Revenue


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2. COST OF SALES

Opening stock finished goods 0.00 0.00 0.00 0.00

Opening stock WIP 0.00 0.00 0.00 0.00

Opening stock RM - Indigenous 774.15 997.87 1,260.00 1,325.00

Opening stock RM - Imported 0.00 0.00 0.00 0.00Add Purchases RM - Indigenous 0.00 0.00 0.00 0.00

Add Purchases RM - Imported 0.00 0.00 0.00 0.00

Stores consumed 0.00 0.00 0.00 0.00

Manufacturing Expenses 51.99 56.91 95.20 105.10

Depreciation 45.31 46.34 55.00 60.00

Add:Purchases Finished Goods 0.00 0.00 0.00 0.00

Less Closing stock finished goods 0.00 0.00 0.00 0.00

Less closing stock WIP 0.00 0.00 0.00 0.00

Less closing stock RM - Indigenous 0.00 0.00 0.00 0.00

Less closing stock RM -- Imported 0.00 0.00 0.00 0.00

Cost of Sales 871.45 1,101.12 1,410.20 1,490.10

Cost of Production 871.45 1,101.12 1,410.20 1,490.10

3. GROSS PROFIT(+)/LOSS(-) (1-2) 599.13 875.30 989.80 1,109.90

4. SELLING & ADM. EXP. 498.37 735.02 845.40 954.25

5. INTEREST & FIN.CHARGES 63.83 81.02 87.00 97.00

Total (4+5) 562.20 816.04 932.40 1,051.25

6.OPERATING PROFIT/LOSS 36.93 59.26 57.40 58.65

7.I.OTHER INCOME

Sale of Scrap 2.35 5.10 0.00 7.00

Interest Received 0.00 0.00 0.00 0.00

Profit on Sale of FA / INV 0.00 0.00 0.00 0.00

Others 6.74 11.82 16.20 15.00

Total Other Income 9.09 16.92 16.20 22.00

7 II.LESS OTHER EXPENSES

Loss on Sale of FA / INV 0.00 0.00 6.00 0.00

Loss on Currency Fluctuation 0.00 0.00 0.00 0.00

Misc. Exp written off 0.00 0.00 0.00 0.00

Others 0.00 0.00 10.00 0.00

Total Other Expenses 0.00 0.00 16.00 0.00

Other Income Net of Expenses 9.09 16.92 0.20 22.00

8.PROFIT BEFORE TAX/LOSS 46.02 76.18 57.60 80.65

9.INCOME-TAX PROVISION 14.50 26.00 23.00 28.00

10.NET PROFIT AFTER TAX/LOSS 31.52 50.18 34.60 52.65

11.N.P.BEFORE DEP.&TAX 91.33 122.52 112.60 140.65

12.N.P.BEFORE DEP.TAX&INT. 155.16 203.54 199.60 237.65

13. CASH GENERATION 76.83 96.52 105.60 112.65


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14.DIVIDEND 0.00 0.00 0.00 0.00

15. PREFERENCE DIVIDEND 0.00 0.00 0.00 0.00

16.RETAINED PROFIT 31.52 50.18 34.60 52.65

17.NET CASH ACCRUAL 76.83 96.52 105.60 112.65

Analytical and comparative Ratios- Ratio Analysis is a form of Financial Statement

Analysis that is used to obtain a quick indication of a firm's financial performance in several

key areas. The computation of ratios facilitates the comparison of firms which differ in size.

Ratios can be used to compare a firm's financial performance with industry averages. In

addition, ratios can be used in a form of trend analysis to identify areas where performance

has improved or deteriorated over time.

SNAPSHOT - 3

Year ended 31-Mar-11 31-Mar-12 31-Mar-13 31-Mar-14

ANALYTICAL AND COMPARATIVE RATIOS

I.FINANCIAL INDICATORS

1.TANGIBLE NETWORTH 1,222.24 1,368.78 1,420.72 1,490.37

2.TOTAL OUTSIDE LIAB.TO TNW 0.66 0.98 0.92 0.87

(TOL-USL)/(TNW+USL) 0.30 0.26 0.27 0.32

3.FUNDED DEBT TO TNW 0.28 0.57 0.52 0.42

4.NET WORKING CAPITAL 1,198.04 1,523.39 1,505.72 1,414.37

5.CURRENT RATIO 3.58 3.72 3.62 3.11

6.STOCK HOLDINGS 0.00 0.00 0.00 0.006.1.RAW MATERIALS 198.59 240.45 160.00 110.00

R.M. HOLDING (IN MTHS) 3.08 2.89 1.52 1.00

6.2.STOCK IN PROCESS 0.00 0.00 0.00 0.00

SIP HOLDING (IN MTHS) 0.00 0.00 0.00 0.00

6.3.FINISHED GOODS 0.00 0.00 0.00 0.00

FG HOLDING (IN MTHS) 0.00 0.00 0.00 0.00

6.4.CONSUMABLE SPARES 0.00 0.00 0.00 0.00

CON.SPARE CONSUMED 0.00 0.00 0.00 0.00

CON.SPARE HOLD(MTHS) #DIV/0! #DIV/0! #DIV/0! #DIV/0!

7.SUNDRY DEBTORS (DOMESTIC) 701.89 990.10 1,000.00 1,100.00

SUNDRY DEBTORS (EXPORT) 0.00 0.00 0.00 0.00

GROSS SALES (DOMESTIC) 1,470.58 1,976.42 2,400.00 2,600.00

GROSS SALES (EXPORT) 0.00 0.00 0.00 0.00

RECEIVABLES HOLD(MTHS) (DOMESTIC) 5.73 6.01 5.00 5.08

RECEIVABLES HOLD(MTHS) (EXPORT) #DIV/0! #DIV/0! #DIV/0! #DIV/0!

8. CREDITORS FOR PURCHASES 3.35 9.31 10.00 12.00

PURCHASES 0.00 0.00 0.00 0.00CREDIT AVAIL (MONTHS) #DIV/0! #DIV/0! #DIV/0! #DIV/0!


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II. PROFITABILITY RATIOS

9. NET SALES 1,470.58 1,976.42 2,400.00 2,600.00

INCREASE/DECR.SALES #REF! 505.84 #REF! 200.00

10.PERCENT.INCR. SALES #REF! 34.40 #REF! 8.33

11.GROSS PROFIT TO SALES 40.74 44.29 41.24 42.69

12.OP.PROFIT TO SALES 2.51 3.00 2.39 2.26

13.N.P.BEFORE TAX TO SALES 3.13 3.85 2.40 3.10

14.N.P.AFTER TAX TO TNW 2.58 3.67 2.44 3.53

15. TOTAL BANK BORROWINGS 312.35 439.76 440.00 500.00

16. NPAT/Sales 2.14 2.54 1.44 2.03

3. Assessment of working capital limits - A unit needs working capital funds mainly tocarry current assets required for its operations. Proper assessment of funds required

for working capital is essential not only in the interest of the concerned unit but also

in the national interest to use the scare credit according to production requirements.When a borrower demands for a credit facility from the bank, the bank has to assess

the limits of working capital to be sanctioned. Proper assessment of working capital

requirement may be done as under-

i. TURNOVER METHOD (Nayak Committee Recommendations)a. Mainly used for SMEs (Small and Medium Enterprises).

b. Not appropriate for manufacturing and big trading companies.ii. CASH BUDGET SYSTEM

a.

Mainly used for service sector companiesb. Cash inflowCash outflow = Bank finance in form of WC

iii. TONDON COMMITTEE RECOMMENDATIONSa. It has three methods of lending.

b. Out of 3 methods recommended, method II also known as MaximumPermissible Bank Finance (MPBF) is mainly used by the banks for assessment

of WC finance

4. Appraisal and RecommendationThis is the last step of appraising the credit proposal. All lending made or proposed by the

branches must be in conformity with banks lending policy and within the budget allocations

made from time to time. In this connection officers are expected to be thorough with the Loan

Policy Document. Managers should strictly adhere to all the instructions and guidelines

issued by the Central Office from time to time. It is primarily the responsibility of the Branch

Managers to ensure the safety of all the advances of their branches. It is the basic duty of the

Branch Managers and the other officials to protect the banks interest in all the transactions of

the bank handled by them including advances. When the entire assessment is done ,the

proposal is sent to discretionary powers to appraise the credit proposal


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Chapter5

ANALYSIS

The project involves the following tools for analysing the given project proposal:

Working capital analysis Ratio analysis

5.1 Working capital analysis

All enterprises engaged in manufacturing or trading or providing services require finance for

their day-to-day operations, the amount required to finance day-to-day operation is called

working capital & the assets & liabilities are created during the operating cycle are calledcurrent assets & current liabilities. The total of all the current assets is called gross working

capital & the excess of current assets over current liabilities is called net working capital.

When entrepreneurs for financing working capital requirements approach the banks, the bank

has to examine the viability of the project before agreeing to provide working capital for it.

Financial institutions & bank while providing term loan finance to unit for acquisition of

fixed assets does a detailed viability study. They have to ensure that the project will generate

sufficient return on the resources invested in it. In brief the project should satisfy the tests of

technical, commercial, financial & managerial feasibility. Proper co-ordination amongst

banks & financial institution is necessary to judge the viability of a project & to provide

working capital at appropriate time without any delay.

In the view of scarcity of bank credit, its increasing demand from various sectors of economy

& its importance in the development of economy, bank should provide working capital

finance according to production requirements. Therefore it is necessary to make a proper

assessment of total requirement of the working capital, which depends on the nature of the

activities of an enterprise & the duration of its operating cycle. It has to be ensured that the

unit will have regular supply of raw material to facilitate uninterrupted production. The unit

should be able to maintain adequate stock of finished goods for smooth sales operation. The

requirement of trade credit, facilities to be given by the unit to its customers should also be

assessed on the basis of practice prevailing in the particular industry/trade which assessing

above requirements, it should also be ensured that carrying cost of inventories & duration of

credit to customers are minimized. After assessing the total requirement of working capital, a

part of working capital requirement should be financed for the long term & partly by

determining maximum permissible bank finance.


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5.1.2 Factors for Deciding Working Capital Limits

Drawing power of the borrower Security

1. DRAWING POWER OF THE BORROWERThe drawing power that a borrower enjoys at any one point depends on each components of

working capital. The bank for each component, which the borrower must hold as his

contribution to finance working capital, prescribes margins. The drawing power of the

borrower can be best explained with the following illustration

Illustration:

Suppose a borrower has Rs 100.00 lacs as working capital limit sanctioned to him by a bank.

The security provided by the borrower to the bank is the hypothecation of inventory.

Suppose, the borrower needs to hold an inventory level of say 130 lacs in order to enjoy Rs

100 lacs as his working capital limit.

The actual level of inventory with the borrower at a point is say 110 lacs.The inventory

margin prescribed by the bank is say 25 %

Therefore with this inventory level, the borrower enjoys only Rs 82.5 lacs as his working

capital limit as against Rs 100 lacs.

2. SECURITYBanks provide credit on the basis of the following modes of security from the borrowers.

Hypothecation: the banks provide credit to borrowers against the security of movable

property, usually inventory of goods.

Mortgage: It is the transfer f a legal / equitable interest in specific immovable property for

securing the payment of debt.

Pledge: The goods which are offered as security, are transferred to the physical possession of

the lender.


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5.1.3 Assessment of working capital limit:

In order to calculate net working capital & maximum permissible bank finance, it is

necessary to have proper classification of various items of current assets & current liabilities.

All illustrative lists of current assets & current liabilities for the purpose of assessment ofworking capital are furnished below:

TABLE - 2

Current Assets Current Liabilities

Cash and bank balances Short term borrowings

Investments Unsecured loan

Receivables Sales-tax, excise, etc.

Inventories Deposits

Advance payment Interest and financial charges accrued

Prepaid expenses Provision for taxesSundry debtors Sundry creditors

5.1.4 Methods of financing working capital

Bank follows certain norms in granting working capital finance to companies. These norms

have been greatly influenced by the reconditions of various committees appointed by the RBI

from time to time.RBI has made certain recommendations for lending credit facilities

especially to SMEs (Small and Medium Enterprises) for which no tangible security is

needed. Recommendations suggested that bank credit will be provided on the basis of

operating cycle and its inventories or turnover period. Following committees were appointed

to provide bank credit to SMEs-

Tondon Committee Nayak Committee1. Tondon Committee (Operating cycle Method)

Reserve Bank of India constituted a 'Study Group' with Shri Prakash Tandon as Chairman in

July, 1974 to frame necessary guidelines on bank credit for commercial banks for follow-up

& supervision of bank credit for ensuring proper end-use of funds. Its main

recommendations related to norms for inventory and receivables, the approach to lending,

style of credit, follow ups & information system.

As per the recommendations of Tondon Committee, the corporates should be discouraged

from accumulating too much of stocks of current assets and should move towards very lean

inventories and receivable levels. The committee even suggested the maximum levels of Raw

Material, Stock-in-process and Finished Goods which a corporate operating in an industry

should be allowed to accumulate These levels were termed as inventory and receivable


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norms. Depending on the size of credit required, the funding of these current assets (working

capital needs) of the corporates could be met by one of the following methods:

First method of lendingBanks can work out the working capital gap, i.e. total current assets less current liabilities

other than bank borrowings (called Maximum Permissible Bank Finance or MPBF) and

finance a maximum of 75 per cent of the gap; the balance to come out of long-term funds,

i.e., owned funds and term borrowings. This approach was considered suitable only for very

small borrowers i.e. where the requirements of credit were less than Rs.10 lacs

Second method of lendingThis is the most commonly used methods by bnks.Under this method, it was thought that the

borrower should provide for a minimum of 25% of total current assets out of long-term funds

i.e., owned funds plus term borrowings. A certain level of credit for purchases and other

current liabilities will be available to fund the build up of current assets and the bank will

provide the balance (MPBF). Consequently, total current liabilities inclusive of bank

borrowings could not exceed 75% of current assets. RBI stipulated that the working capital

needs of all borrowers enjoying fund based credit facilities of more than Rs. 10 lacs should be

appraised (calculated) under this method.

Third methods of lendingUnder this method, the borrower's contribution from long term funds will be to the extent of

the entire CORE CURRENT ASSETS, which has been defined by the Study Group as

representing the absolute minimum level of raw materials, process stock, finished goods and

stores which are in the pipeline to ensure continuity of production and a minimum of 25% of

the balance current assets should be financed out of the long term funds plus term

borrowings. But This method was not accepted for implementation.

2. Nayak committee (Turnover Method)Reserve Bank of India constituted a Committee on 9 December 1991 under the Chairmanship

of Shri P.R. Nayank, Deputy Governor to examine the difficulties confronting the small scale

industries (SSI) in the country in the matter of securing finance. The representative of the SSI

associations had earlier placed before the Governor, Reserve Bank of India, various

problems, issues and the difficulties which the SSI sector had been facing.

Turnover method can be illustrated as:

i. Lets say ,sales or Turnover is Xii. Now, calculate 25% of X

iii. Also, Calculate 5% of Xiv. Now,Net Working Capital Availablev. Take Y as the maximum of (iii or iv)

vi. Subtract Y from (ii),lets say this amount as Z.


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vii. Therefore Z is the amount that would be financed by the banks.The level of credit limits to be assessed by turnover method ' has since been increased to Rs.

2.00 crores for all categories of borrowers and further to Rs. 5.00 crores for SSI units. The

banks have further been given discretion to apply this method upto any level of limits notbelow the limits specified by Reserve Bank of India and frame a suitable policy in this

regard.

5.2 Ratio analysis

Ratio analysis is a widely used tool of financial analysis. It can be used to compare the risk

and return relationships of different sizes. It is defined as the systematic use of ratio to

interpret the financial statements so that the strengths and weaknesses of a firm as well as its

historical performance and current financial condition can be determined. A ratio is a

quantity that denotes the proportional amount or magnitude of one quantity relative toanother. The ratios show the relationship in the more meaningful way so as to enable us to

draw conclusion from than a single figure.Ratios are calculated from current year numbers

and are then compared to previous years, other companies, the industry, or even the economy

to judge the performance of the company. Ratio analysis is predominately used by proponents

of fundamental analysis.

Ratios which are used by Indian Overseas Bank for the purpose of financial analysis are:

TABLE - 3

FINANCIAL INDICATORS PROFITABILITY RATIOS

TNW Net Sales

TOL/TNW Gross Profit to Sales

TOL-USW/TNW+USW Operating profit to Sales

Funded Debt to TNW NPBT To sales

Net Working Capital ratio NPAT to TNW

Current ratio NPAT To Sales

Detailed ratio analysis for the case study of XYZ Media Ltd. Has been mentioned in the next

section.


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Chapter6

CASE STUDY

XYZ Media Ltd.

XYZ Media Ltd was incorporated as a private limited company with an objective to provide

for outdoor advertising solutions to various companies for marketing their products. It is

reportedly known as one among the first five advertising companies in Delhi NCR to provide

complete outdoor advertising solutions.

Company is engaged in renting out display advertising spaces at various media/ public

utilities which are developed & maintained by the subject company such as Countdown

Timers, Bus Queue Shelters, Public Utilities, etc.Also the company has to maintain the

allotted sites for such term as mentioned in the contract. In turn company gets the advertisingrights on those spaces/ infrastructure developed, which it rents out to corporate and other

clients. Company is taking orders from various other companies and advertising agencies to

advertise their products or services on various media available with the subject, and charge

monthly service rentals/ display charges for the advertisements so displayed.

Date of establishment 18.03.2002

Sector MSME

Industrial classification Media Advertising

Banking with us since

Enjoying Credit facilities since

March 2005

March 2006

Names of

Directors

Designation Age Worth (Rs in

lacs)

Amount As on

Experience (in brief)

Mr. X Director 54 102.69 31.01.13 He has experience of more than a

decade in the field of advertising. Hasrich experience in the field of real

estate, hospitality & timber imports.

Mr. Y Director 27 25.55 31.01.13 More than four years of experience in

advertising field.

Mr. Z Director 45 34.60 31.01.13 Worked as director in MNC. He is

associated with advertising field for

more than 9 years.


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REQUIREMENT OF:

Enhancement in cash credit limits & LG limit to Rs.5.00crs & Rs.2.60crs respectivelywith projected sales of Rs 26 crores for the year 2013-14

To raise term loan of 6.60 croresPURPOSE:

In 2010, company acquired two major tenders for a term of five years from DMRC.For the same purpose we issued a bank Guarantee ofRs 216.00lacs on behalf of the

subject company in favour of DMRC.

Company requires term loan to erect 42 super structures at Gwalior for advertisingSecurity

Prime Security -Stocks- Rs 160.00 lacs

-Book Debts- Rs 1000.00 lacs

-Fixed Assets- Rs 420.00 lacs (As per ABS- 31.03.13)

Total value: Rs.1580 lacs

Collateral security Forced Sales Value of property (FSV)Agra- 35.00 lacs

Faridabad- 156.00 lacs

IP Extn. Delhi- 115.00 lacs

Gujarat-60.00 lacs

Fixed Deposit- 57.00 lacs

Collateral Coverage: 51%

Total value: Rs. 423 lacs

Banking Arrangement:

Subject is presently enjoying CC limit ofRs 330.00lacs, Term loan ofRs 175.00lacs and LG

ofRs 230.00lacs, from IOB, Vanasthali branch. Limits are utilized judiciously and operations

in the account are reported to be satisfactory.

Past Performance:

Sales of the company are increasing continuously over the last 3 years. It achieved sales ofRs

910.74lacs in 2009-10 compared toRs 884.70lacs in 2008-09, which translated in increase of

2.94% over previous year. In FY2010-11 they achieved sales ofRs 1470.58lacs i.e. 73.53%

of their projections (`2000.00lacs). In FY 2011-12, company has estimated sales of Rs

2200.00lacs


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FINANCIAL ANALYSIS

TABLE -4

BRIEF FINANCIAL INDICATORS OF SUBJECT COMPANY: (Rs in

lacs)

31.03.11

(audited)

31.03.12

(audited)

31.03.13

(Provisional)

31.03.14

(Projections)

31.03.15

(Projections)

Net Sales 1,470.58 1,976.42 2,400.00 2,600.00 2,800.00

Operating Profit 36.93 59.26 57.40 58.65 83.95

Net Profit after Tax 31.52 50.18 34.60 52.65 72.95

Cash Accrual 76.83 96.52 105.60 112.65 137.95

Net Working Capital 1,198.04 1,523.39 1,505.72 1,414.37 1,460.32

Current Ratio 3.58 3.72 3.62 3.11 3.20

Tangible Networth 1,222.24 1,368.78 1,420.72 1,490.37 1,581.32

TOL/TNW 0.66 0.98 0.92 0.87 0.81

(TOL-USL)/(TNW+USL) 0.30 0.26 0.27 0.32 0.30

Abridged financial position

31.03.11

(audited)

31.03.12

(audited)

31.03.13

(Provisional)

31.03.14

(Projections)

31.03.15

(Projections)

Capital & Reserves 1,222.24 1,368.78 1,420.72 1,490.37 1,581.32

Long Term Liabilities 341.02 786.14 736.00 620.00 620.00

Current Liabilities 464.51 559.11 574.25 671.30 662.35

TOTAL 2,027.77 2,714.03 2,730.97 2,781.67 2,863.67

Fixed Assets 308.46 374.88 420.00 460.00 500.00

Non-Current Assets 0.00 0.00 0.00 0.00 0.00

Current Assets 1,662.55 2,082.50 2,079.97 2,085.67 2,122.67

Intangible Assets 0.00 0.00 0.00 0.00 0.00

TOTAL 2,027.52 2,714.02 2,730.97 2,781.67 2,863.67


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RATIO ANALYSIS

1. Financial Ratios TNW- Tangible Net Worth

A measure of the physical worth of a company, which does not include any value derived

from intangible assets such as copyrights, patents and intellectual property.

Tangible Net Worth = Total AssetsLiabilitiesIntangible Assets.

TNW of the company is increasing continuously over the last 4 years. This can be seen

from the table given below (in lacs):

31.03.2011 31.03.2012 31.03.2013 31.03.2014

TNW 1222.24 1368.78 1420.72 1490.37

+ NPAT 50.18 34.60 52.65 72.95

(Additions) 96.36 17.34 17.00 18.00

TNW for

Next FY

1368.78 1420.72 1490.37 1581.32

The TNW increased fromRs 1222.24 lacs in 2010-11 toRs 1368.78 lacs in FY 2011-12

by retention of profits of Rs 50.18 and balance by induction of capital by Rs 96.36 lacs.

Further in 2012-13 the TNW of the company increased to Rs 1420.72 lacs by retaining

profits of Rs 34.60 lacs and balance by induction of fresh capital of Rs 17.34 lacs.The

company further projected to achieve the TNW ofRs 1490.37 lacs in FY 2013-14 by

retention of profits of Rs 52.65 lacs and balance by induction of fresh capital of Rs 17.00

lacs. The subjects projected TNW ofRs 1581.32 lacs for the FY 2014-15 by retention of

Rs 72.95 lacs and balance by increasing the capital by Rs 18.00 lacs, which is

acceptable.

GRAPH - 1

1222.24

1368.781420.72

1490.37

0

200

400

600

800

1000

1200

1400

1600

2011-12 2012-13 2013-14 2014-15

TNW(in lacs)


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TOL/TNW - Total outside Liabilities / Tangible Net WorthIndicate size of stakes, stability and degree of solvency. : The ratio for the company has

improved to 0.66 in FY 2010-11, which is well below the maximum acceptable level of 4:1.The ratio has improved due to increase in TNW, reflecting availability of sufficient TNW as

compared to the outside liability. For FY 2011-12 & 2012-13, the ratio is projected at 0.98 &

0.92 respectively. For FY 2013-14 & 2014-15, the ratio projected at 0.87 & 0.81 respectively,

which is at a comfortable level and may be accepted.

GRAPH 2

Funded debt to TNWMeasures a company's leverage or the safety of principal on long-term debt. The larger the

ratio,the riskier the enterprise. The value is computed by dividing total debt by total equity

minus intangible assets. The long term debt and the total outside liabilities are quite low

compared to equity. Hence, the financial position of the unit is good.

GRAPH - 3

0.66

0.98 0.920.87

0

0.2

0.4

0.6

0.8

1

1.2

2011-12 2012-13 2013-14 2014-15

TOL/TNW

0.28

0.57

0.52

0.42

0

0.1

0.2

0.3

0.4

0.5

0.6

2011-12 2012-13 2013-14 2014-15

Funded debt to TNW


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Net Working CapitalNet working capital= Current assets- Current liabilities.The ratio shows that the company has

good working capital in hand to meet its obligations and it also increasing gradually and

hence the project looks feasible.

NWC is estimated to increase in 2011-12 fromRs 1198.04 lacs as on 31.03.11 toRs 1523.39

lacs as on 31.03.2012. The subjects estimated NWC ofRs 1534.72 lacs in the current FY

whereas the subjects projected to achieve NWC ofRs 1480.37 and Rs 1460.32 in the FY

2013-14 & 2014-15 respectively which is acceptable. However as CR is at a comfortable

level, it reflects availability of sufficient NWC in to system.

GRAPH-4

Current ratioIt helps to measure liquidity and financial strength, indication of availability of current assets

to pay current liabilities. The higher the ratio betters the liquidity position. Generally it shouldbe at least 1.33.Current ratio for the company is at a comfortable level from last 4 years

Current ratio for the company is at a comfortable level from last 4 years. CR for the company

as on 31.03.2011 was 3.58, which is well above the benchmark level of 1.25:1(for SME

units). For FY 2011-12, it is at 3.72 & estimated at 3.62 as on 31.03.13. The projected CR is

3.11 & 3.20 as on 31.03.14 & 31.03.15 respectively, which may be accepted. However debtor

needs to be realized on a faster pace to improve liquidity

1198.04

1523.39 1505.72

1414.37

0

200

400

600

800

1000

1200

1400

1600

2011-12 2012-13 2013-14 2014-15

Net Working Capital (in lacs)


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40

GRAPH -5

2. Profitability ratios Net sales

Sales of the company are increasing continuously over the last 3 years. It achieved sales ofRs

1976.42lacs in 2011-12 compared to Rs 1470.58 lacs in FY 2010-11. In FY2012-13 the

company has achieved actual sales of Rs. 2686 lacs against estimated sales of Rs. 2400 lacs.

The subjects have projected to achieve sales of Rs 2600lacs & Rs 2800 lacs for the FY 2013-

14 & 2014-15 respectively which is acceptable.

GRAPH- 6

3.58

3.72

3.62

3.11

2.8

3

3.2

3.4

3.6

3.8

2011-12 2012-13 2013-14 2014-15

Current Ratio

1470.58

1976.42

2400 2600

0

500

1000

1500

2000

2500

3000

2011-2 2012-13 2013-14 2014-15

Net Sales(in lacs)


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Gross profit RatioA higher ratio of gross profit to sales is a sign of good management as it implies that the cost

if production of the firm is relatively low. : Profit for the FY 2010 wasRs 31.52 lacs which

increased to Rs 50.18 lacs in the FY 2010-11. The provisional profits for the FY 2012-13dropped toRs 34.60 lacs in FY 2012-13 whereas the subjects projected to achieve profits of

Rs 52.65 lacs &Rs 72.95 lacs for 2014 & 2015 respectively, which is acceptable.

GRAPH-7

Operating Profit ratioThis ratio is the test of the operational efficiency with which the business is being carried. The operating ratio should be low enough to leave a portion of sales to give a fair return to

the investors. Compared to other years 2012-13 is very high thus decreasing the efficiency of

the comapany. The increase may be due to increase in overhead and other financial charges

and the management should check the increase. Operating profit ratio = op. profit / net sales.

GRAPH-8

40.74

44.28

41.24

42.69

38

39

40

41

42

43

44

45

2011-2 2012-13 2013-14 2014-15

Gross Profit to Sales

2.51

3

2.39 2.26

0

0.5

1

1.5

2

2.5

3

3.5

2011-2 2012-13 2013-14 2014-15

Operating Profit to Sales


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NPBT TO Sales (Net Profit Before Tax)GRAPH -9

NPAT to TNW (Net Profit After Tax)GRAPH-10

NPAT TO SALES - GRAPH 11

3.13

3.85

2.4

3.1

0

1

2

3

4

5

2011-2 2012-13 2013-14 2014-15

NPBT to Sales

2.58

3.67

2.44

3.53

0

0.5

1

1.5

2

2.5

3

3.5

4

2011-2 2012-13 2013-14 2014-15

NPAT to TNW

2.14

2.54

1.44

2.03

0

0.5

1

1.5

2

2.5

3

2011-2 2012-13 2013-14 2014-15

NPAT to Sales


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Working Capital Assessment

A. Acceptability of projected level of operation (Sales & Profitability)

Sales: Sales of the company are increasing continuously over the last 3 years,which isacceptable.Profits: Profits are satisfactory to accept the proposal.

B.Acceptability of inventory holdingParticulars 31.03.2011

(Audited)

31.03.2012

(Audited)

31.03.2013

(Provisional)

31.03.2014

(Projected)

31.03.2015

(Projected)

Stocks 3.08 2.89 1.52 1.00 0.87

Sundry Debtors 5.73 6.01 5.00 5.08 5.14

Sundry Creditors 0.05 0.11 0.10 0.11 0.13

Stock

The average inventory period for raw material is reducing over the years. It has reduced from

3.08 months as on 31.03.11 to 2.89 months as on 31.03.12. It is further reducing to 1.52

months & 1 month as on 31.03.13 & 31.03.14 respectively. The subjects further projected to

reduce the stovk holding to 0.87 months which is acceptable.

Sundry Debtors

The holding level for Debtors is 5 months of sale. In view of the activity and past trend the

said holding level is acceptable. However branch to arrive at DP on Debtors upto 120 days

old debtors only.

Sundry CreditorsThe holding level of creditors has increased from 0.05 months to 0.11 months as on

31.03.2012. It has reduced to 0.10 months as on 31.03.2013. the projected holding level

as on 31.03.2013 &b 31.03.2014 is 0.11 months & 0.13 months respectively which is

acceptable.


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Assessment As Per Second Method Of Lending: (Tondon Committee)

Rs (in lacs)

Total Current Assets 2085.67

Total current Liability(OTBB) 105.30

Working Capital Gap 1980.37

Margin (25%of TCA) 521.42

Actual/Projected NWC 1480.37

MPBF 500.00

Assessment Of Term LoanThe T/L of Rs175 lacs was sanctioned to party showing outstanding of Rs52.05 lacs against

DP of Rs 52.14 Lacs as at 23.05.13. In view of this and considering profitability position and

DSCR we may review and DP whichever is lower with existing repayment programme


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RECOMMENDATIONS

1. All the documents required to appraise the project should be asked at the time ofapplication only rather than later by the bank

2. The bank must bring more transparency in appraisal of the project, there should beexplanation for a appraisal of the project that was sanctioned by higher authority.

3. The bank must not rely on software or information provided by the client the bankshould dig in for other sources in order to draw a real picture for the company.

4. Credit scoring allows lenders to determine whether or not you fill the profile of thetype of customers they are looking for.

5. Banks should not rely on the documents provided by the client,they must inspect eachand every element of credit document.

6. Banks concerned should continuously monitor loans to identify accounts that havepotential to become non-performing.

7. At the time of projections due to lack of documents, the projections are done.8. Indian Overseas Bank uses only ratio analysis tool for assessment, it should also bring

Capital Budgeting Techniques for assessment of working capital.

9. Bank provide loan on the basis of only re-payment capacity of the borrower and henceit is suggested to adopt some modern methods to appraise the loan to the business to

check the feasibility of the project for appraising such high amount of loan.

10.Bank must extend working capital finance through non-fund based facilities.11.Another ideal method would be to use LC as the primary source of extending,

working capital clubbed with bill discounting. This would ensure that the credit isput

to the right use by the borrower and repayment is guaranteed to the bank.

12.The bank must further secure themselves by holding a second charge on all the fixedassets of the borrower.


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LIMITATIONS

1. As far as the illustration and analysis of the case study is concerned, the project islimited to Indian Overseas Bank,Regional office ,Rajendra place

2. Matters related to Banks asset classification / income recognition procedures,investment are not given by the bank.

3. The project involves a case study of a firm for which the entire assessment has beendone but the personal details and the companys name are intentionally kept hidden.

4. The project uses only ratio analysis tool for working capital assessment and it doesnot involve various other financial tool like capital budgeting technique.

5. The study of the project is limited to the types of advances funded by the bank i.e.IOBand not all types of advances.


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

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

available for the recovery of such funds

Following points has been taken out of the project as the main crux of the study which Bank

considers while sanctioning the working capital limit to the concern:

1. Turnover size of the concern: The bank normally gives working capital limit upto 20-25 % of the turnover estimated (for the year under review) by the concern.

2. Current ratio should be 1.33: 1. Hence all the CR ratio level must above thebenchmark level of 1.33 ,only then the proposal would be accepted.

3. Total Outside Liability/ Net Worth Ratio should lie in the limit of 4:1.4. As a measure to incentive to export sector while calculating the margin i.e. 25% of

current assets, export receivables are excluded from current assets.

5. Additional credit needs of exporters arising out of firm order/ confirmed letter ofcredit (which are not taken into account while fixing regular credit limits of

borrowers) are to be met in full even if sanction of such additional credit limit exceeds

MPBF

6. Credit limits of the

sip report on credit appraisals at indian overseas bank

Documents