A PROJECT REPORT

ON

Risk Management in Punjab National Bank for Working Capital and Term Loan

At

Punjab National Bank

(Submitted toward partial fulfillment of the requirements for the award of the Post Graduate in Management 2013-15)

Submitted by:Anik(Roll No: 221020)

FMG XXII

Under the Guidance of

Mr. Anil JhanjiManager (Credit)PNB C.O. Kapurthala

&

Prof. Neeti Shikha

Internal Project Guide

FORE School of Management, New Delhi

B-18, Qutab Institutional Area,

New Delhi

CERTIFICATE

This is to certify that Mr. Anik, Roll No. 221020, has completed his summer internship at PNB, and has submitted this project report entitled (Risk Management in Punjab National Bank for Working Capital and Term Loan) towards partial fulfillment of the requirements for the award of the Post Graduate Diploma in Management (FMG-22) 2013-2015.

This Report is the result of his own work and to the best of my knowledge no part of it has earlier comprised any other report, monograph, dissertation or book. This project was carried out under my overall supervision.

Date:

Place:___________________Internal Faculty Guide(Prof. Neeti Shikha)

ACKNOWLEDGEMENTBehind every fruitful endeavor lies the advice, guidance and inspiration of all the people directly or indirectly involved with the report. I wish to express my gratitude to all the people involved in the completion of this report. I am thankful to all of them for their help and encouragement throughout the completion of the report. They have been a constant source of support for me.I would like to extend my sincere gratitude to the management of PNB for providing me the enriching opportunity of working with the organization for a period of 2 months. In particular, I would like to thank my Company Guide, Mr. Anil Jhanji, for sparing the time to provide me with necessary guidance and advice from time to time, with utmost patience, in spite of their extremely busy schedule. I would also like to express my sincere gratitude to Mr. Sanjeev Sharma and Mr. Rajesh Verma for sparing their time to provide me with necessary guidance and many helpful comments.My heartfelt gratitude and warm salutations are also due to Prof. Neeti Shikha, my Internal Faculty Guide, the faculty of our Institute, for inculcating in me the principles of dedication and hard work, and proving their guidance and support throughout the Project.Their constructive criticism of the approach to the problem and the result obtained during the course of this work has helped me to a great extent in bringing work to its present shape.

ANIK

Table of ContentsEXECUTIVE SUMMARY11. INTRODUCTION21.1 Background21.2 Banking Industry at a Glance21.3 Structure of Indian Banking Industry41.4 Company Profile51.5 Objective of the Project72. LITERATURE REVIEW83. METHODOLOGY OF THE STUDY123.1 Universe of the Study123.2 Locale of the Study123.3 Sample Selection123.4 Data Collection133.5 Analysis of Data144. ANALYSIS154.1 Sources of risks considered in the model164.2 Usage of the credit risk rating model184.3 Important factors considered in the rating process of the clients204.4 Special considerations in case of unavailability of data for clients214.5 Parameters considered in the PNBs Credit Risk Model244.5.1 Financial Strength Of The Clients244.5.2 Business Performance Of The Clients244.5.3 Industry Outlook Of The Clients244.5.4 Management Evaluation Of The Clients244.5.5 Conduct Of Account254.6 Assessment of the Parameters of the Model254.6.1 Assessment of financial strength254.6.2 Assessment of business performance294.6.3 Assessment of Industry Outlook of the Client314.6.4 Assessment of Management Quality of the Client314.6.5 Assement of Conduct of Account of the Client334.7 Comparison Of The Model With The Industry Standard344.8 Review Of The Model Based On Basel-III Norms354.9 Review Of The Model Based On RBI Guidelines385. RESULTS AND RECOMMENDATIONS405.1 Major Findings405.2 Recommendations415.3 Further Scope Of The Study426. LIMITATIONS437. REFERENCES44ANNEXURES45

List of FiguresFigure 1 Structure of the Indian Banking Industry4Figure 2: Hierarchical Structure of the Organization6Figure 3: Types of Risks15Figure 4: CRAR in PNB36Figure 5: Capital and NPA Levels for PNB37

List of TablesTable 1: Credit Risk Rating Entity Model17Table 2: Weightage of Parameters in the Model19Table 3: Risk Rating Classification20Table 4: Achievement of Sales Targets by the Management32

15

EXECUTIVE SUMMARYThis project report titled Risk Management in Punjab National Bank for Working Capital and Term Loans is concerned with the study of the techniques and procedures followed by Punjab National Bank for determining and sanctioning the working capital limits and term loan credits.The study is related to the review of the existing Credit Risk Model being implemented in PNB for the credit services. Various secondary data sources such as research papers, journals and online web portals have been used to arrive at benchmark data for analysis of the model. The RBI monitors the Credit Risk Models for all the banks in India and also provides guidelines for the bank to maintain their procedures.The study helps to understand the working of the Credit Risk Model of PNB in detail and also the various parameters it uses to rate a client/project. The model being discussed analyses the financial, operational, historical and industrial aspects of the business/project of the client. The analysis of the model is also done by comparing it with the industry benchmarks, and reviewing the compliance with the Basel-III and RBI norms.Various proposals and the general procedures followed at the bank were closely observed and the conclusions, thus, drawn upon.

1. INTRODUCTION1.1 Background

In India, the definition of the business of banking has been given in the Banking Regulation Act, (BR Act), 1949. According to Section 5(c) of the BR Act, 'a banking company is a company which transacts the business of banking in India.' Further, Section 5(b) of the BR Act defines banking as, 'accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable, by cheque, draft, and order or otherwise.' Banking is the business of providing financial services to consumers, The basic services a bank provides are saving account, Time deposit, Loans that consumers can use to purchase goods and services and basic cash management services such as foreign currency exchange.1.2 Banking Industry at a Glance

The commercial banking industry in India started in 1786 with the establishment of the Bank of Bengal in Calcutta. The Indian Government at the time established three Presidency banks, viz., the Bank of Bengal (established in 1809), the Bank of Bombay (established in 1840) and the Bank of Madras (established in 1843). In 1921, the three Presidency banks were amalgamated to form the Imperial Bank of India, which took up the role of a commercial bank, a bankers' bank and a banker to the Government. The Imperial Bank of India was established with mainly European shareholders. It was only with the establishment of Reserve Bank of India (RBI) as the central bank of the country in 1935, that the quasi-central banking role of the Imperial Bank of India came to an end.To better align the banking system to the needs of planning and economic policy, it was considered necessary to have social control over banks. In 1969, 14 of the major private sector banks were nationalized. This was an important milestone in the history of Indian banking. This was followed by the nationalization of another six private banks in 1980. With the nationalization of these banks, the major segment of the banking sector came under the control of the Government. The nationalization of banks imparted major impetus to branch expansion in un-banked rural and semi-urban areas, which in turn resulted in huge deposit mobilization, thereby giving boost to the overall savings rate of the economy. It also resulted in scaling up of lending to agriculture and its allied sectors. However, this arrangement also saw some weaknesses like reduced bank profitability, weak capital bases, and banks getting burdened with large non-performing assets.To create a strong and competitive banking system, a number of reform measures were initiated in early 1990s. The thrust of the reforms was on increasing operational efficiency, strengthening supervision over banks, creating competitive conditions and developing technological and institutional infrastructure. These measures led to the improvement in the financial health, soundness and efficiency of the banking system.One important feature of the reforms of the 1990s was that the entry of new private sector banks was permitted. Following this decision, new banks such as ICICI Bank, HDFC Bank, IDBI Bank and UTI Bank were set up.1.3 Structure of Indian Banking Industry

The Reserve Bank of India (RBI) is the central banking and monetary authority of India, and also acts as the regulator and supervisor of commercial banks.Scheduled banks comprise scheduled commercial banks and scheduled co-operative banks. Scheduled commercial banks form the bedrock of the Indian financial system, currently accounting for more than three-fourths of all financial institutions' assets. SCBs are present throughout India, and their branches, having grown more than four-fold in the last 40 years now number more than 80,500 across the country (see Table 1.1). Our focus in this module will be only on the scheduled commercial banks. A pictorial representation of the structure of SCBs in India is given in figureFigure 1 Structure of the Indian Banking Industry1.4 Company Profile

Punjab National Bank (PNB) was established in 1894 and is the second largest government owned and over all fourth largest bank in India. It has about 5800 branches across 764 cities and serves over 80 million customers. It has presence throughout the country and offers a wide variety of banking services that include corporate and personal banking, industrial finance, agricultural finance, financing of trade and international banking. Among the clients of the bank are multinational companies, Indian conglomerates, medium and small industrial units, exporters and non-resident Indians. The strength of the bank lies in its corporate belief of growth and stability.Vision: "To be a Leading Global Bank with Pan India footprints and become a household brand in the Indo-Gangetic Plains providing entire range of financial products and services under one roof"Mission: "Banking for the unbanked"

Figure 2: Hierarchical Structure of the Organization

1.5 Objective of the Project

The objective of this project is to study in depth the credit appraisal procedure followed by PUNJAB NATIONAL BANK, which includes Understanding the different types of credit facilities and credit delivery mechanisms provided to industrial customers viz. Overdraft, Cash Credit, Drawing Rights, Fund Based Credit, Non Fund Based Credit etc. Understanding the different methods available for risk vetting of lending proposals, different risk assessment models and the different credit rating procedures used in Punjab National Bank. Understanding the appraisal process of Term Loan and working Capital financing and sanctioning of working capital, issuing term loan, to corporate, through different case studies, on the job training. Assessing the qualitative factors which influence the decision making of lending to a particular client apart from theoretical parameters.

2. LITERATURE REVIEWAccording to Mann and Srivastava, the fast changing financial environment exposes the banks to various types of risk. The concept of risk and management are core of financial enterprise. The financial sector especially the banking industry in most emerging economies including India is passing through a process of change. Rising global competition, increasing deregulation, introduction of innovative products and delivery channels have pushed risk management to the forefront of today's financial landscape. Ability to gauge the risks and take appropriate position will be the key to success. Jain, Mukul in his research paper titled A Critical Review of Basel-III norms implementation in Indian Banks explains that the banking operations worldwide have undergone phenomenal changes in the last two decades since 1990s. The financial crisis episodes surfaced since 2006 have highlighted this paradox to a number of central banks operating in different countries and RBI and Indian banking sector is no exception to this phenomenon. The global Basel-III requirements, which require all banks to hold top-quality capital equal to 7% of their assets, adjusted for risk, are aimed at improving financial stability. But the sharply higher capital requirements have drawn warnings from analysts and financiers about their impact on banking lending rates and wider economic growth across the developing world. Buchelt and Unteregger feel that long before the advent of Basel II, financial institutions had put in place various control mechanisms and procedures. The process of managing operational risk is different from those of managing market risk and credit risk only in so far as operational risk is different from the other two kinds of risk.Kaiser and Kohne argue that the distinctive feature of operational risk may cause significant divergence of the individual steps of operational risk management from the corresponding steps of market and credit risk management. Kingsley state the following objectives of operational risk management: avoiding catastrophic losses, generating a broader understanding of operational risk issues, enabling the firm to anticipate risk more effectively, providing objective performance measurement, changing behavior to reduce operational risk, providing objective information so that services offered by the firm take account of operational risk, ensuring that adequate due diligence is shown when carrying out mergers and acquisitions. All of these objectives, it seems, fall under the headings, risk avoidance and risk reduction but operational risk management is more than that as it encompasses risk transfer and risk financing. Raghavan, R.S in his research has found out that there are various key factors that must be considered for a credit risk model for Indian banks. According to him, the banks must adopt a disciplined way of looking at Credit Risk and estimation of the overall health status of an account captured under Portfolio approach as contrasted to stand-alone or asset based credit management. Impact of a new loan asset on the portfolio can be assessed. Taking a fresh exposure to the sector in which there already exists sizable exposure may simply increase the portfolio risk although specific unit level risk is negligible/minimal. He stresses on the need for relationship managers in banks to capture, monitor and control the over all exposure to high value customers on real time basis to focus attention on vital few so that trivial many do not take much of valuable time and efforts and that rating should be used for the anticipatory provisioning.Tarashev and Zhu used a standard portfolio credit risk model to estimate links between capital and the probability of bank default, which is treated as a signal for a systemic banking crisis. They interpret the banking system as a portfolio of banks and estimate the loss distribution arising from bank defaults. They concluded that bank failures are correlated and the correlations can be estimated from market information. In a master circular issued by RBI to all the banks in India, it has drafted a certain set of guidelines that the banks must strictly follow in accordance with the Basel-III instructions adjusted by RBI. Saran, Prashant summarizes these guidelines that the banks can outsource the financial services done by them to external companies but necessary safeguards to address the risks inherent in such a case should be put in place. According to the RBIs journal and guidelines on Risk Management in banks, the broad parameters of risk management function should encompass an organisational structure, comprehensive risk measurement approach, risk management policies approved by the Board, guidelines and other parameters used to govern risk taking including detailed structure of prudential limits, strong MIS for reporting, monitoring and controlling risks, well laid out procedures, effective control and comprehensive risk reporting framework, separate risk management framework independent of operational Departments and with clear delineation of levels of responsibility for management of risk and periodical review and evaluation.

3. METHODOLOGY OF THE STUDY

Methodology is description of the process, rules, methods employed in a study. Research in common parlance refers to a search for knowledge. One can also define research as a scientific and systematic search for pertinent information on a specific topic. In fact, research is an art of scientific investigation. This chapter deals with universe of the study, locale of the study, method of data collection, tools used for data collection, types of sampling used, sample sized used for study and analysis of the study.3.1 Universe of the Study

The universe of the study consists of all the employees of the organization (Punjab National Bank).3.2 Locale of the Study

The locale of the study has been narrowed down to the PNB, Circle Office Kapurthala (Punjab). The study is categorized into the credit department of PNB. The office receieved a number of proposals for Working Capital Limits and Term Loans on daily basis. So the researcher decided to take up these proposals for analysis purpose. The findings may or may not be similar to the other branches of the company.3.3 Sample Selection

The sampling of study has been done as per convenience sampling. A convenience sample is a sample where the samples are selected, in part or in whole, at the convenience of the researcher. The researcher makes no attempt, or only a limited attempt, to insure that this sample is an accurate representation of some larger group or population. Owing to time constraint and being a learning experience the research was narrowed down to 20 samples out of average number of 70 proposals received per month so that an in depth analysis can be carried out. 3.4 Data Collection

For the purpose of data collection, two different sources were adopted for the study: Primary Sources Secondary Sources

The primary data collection method has been used to complete the research activity. But the researcher has done secondary research study also.Primary - For this study the researcher has considered the proposals and the observed the procedures that were followed for the same. Various documents were taken from the company to complete the analysis. The management was interviewed for clarifications, wherever required. The researcher also consulted the manuals and guidelines provided by PNB.Secondary - The researcher has gathered material from various risk management related research papers and journals. The official website of PNB, RBI and other web portals on financial topics were also studied to understand the process.

3.5 Analysis of Data

The gathered data has been analyzed to draw inferences and finding for this research study on Cedit Risk Management for Working Capital and Term Loan and evaluate the feasibility and the soundness of the model under discussion.For the research study, 20 proposals were shortlisted such that it covers a number of situtations that are/are not covered by the existing model that PNB follows. The proposals were then assessed based on the parameters defined under the model of the bank. The staff working on the cases and the authorized officials were consulted for the cases that could not be arrived on a conclusion under standard parameters of the model. The data gathered from Literature review was used in the comparison of the current model in use by PNB with the industry requirements from the same.

4. ANALYSIS

The credit risk rating model has been developed with a view to provide a standard system for assigning a credit risk rating to the borrowers of the bank according to their risk profile. This model is applicable to all large corporate borrowal accounts availing total limits (fund based and non-fund based) of more than Rs. 15 crore or having total sales of more than Rs. 100 crore. Inputs to the model are the financial data of the borrower, industry information and the evaluation of the borrower on various objective and subjective parameters.The model evaluates the credit risk rating of a borrower on a scale of AAA to D with AAA indicating minimum risk and D indicating maximum risk. The credit risk-rating model incorporates and includes possible factors of risk for determining the credit rating of the borrower. These risks could be internal and specific to the company, the industry in which the company is operating or the entire economy and can influence the repayment capacity and / or willingness of the company.

Figure 3: Types of Risks

4.1 Sources of risks considered in the model

Signals for credit risks can be picked up from a number of sources. The credit risk-rating model considers the following broad areas in evaluating the default risk of a borrower: Financials Quality of Management

Business Performance Conduct of Account

Industry Outlook

The rating model is focused on the above-mentioned areas for assessing the credit risk rating of a company. The areas are bifurcated into sub-areas and each sub-area is further split into a number of parameters. The sub-areas as well as parameters used in the different sections have been explained in detail in the following part of the report.There are various models adopted for different projects and accounts which are categorized and briefly explained below:Credit Risk Rating ModelApplicability

Total Limits from our BankSalesSector

Large CorporateAbove Rs. 15 Crore ORAbove Rs.100 CroreManufacturing andService

Mid CorporateAbove Rs. 5 Cr and up to Rs. 15 Cr. ORAbove Rs. 25 Cr. andUp to Rs.100 Cr. for manufacturing and service industry and irrespective of limit in case of trading activities.Manufacturing,Service andTrading

Small LoansAbove Rs.50.00 lakh and Up to Rs.5 Crores ANDUp to Rs.25 Cr.All sectors except NBFC/ Banks/FIs

Small Loans IIAbove Rs. 2 lakhs & up to Rs. 50 lakh ANDUp to Rs.25 Cr.All sectors except NBFC/ Banks/FIs

NBFCAll Non Banking Financial Companies irrespective of Limit

New ProjectsAbove Rs. 5 CrORCost of Project above Rs.15Cr.All sectors, except NBFC/Banks/FIs and trading up to two years of operations.

Entrepreneur New BusinessBorrower setting up new business and requiring finance above Rs. 20 lakh and up to Rs. 5 cr. ANDCost of project up to Rs. 15 cr.All sectors, except NBFC/Banks/FIs. However, all new trading business irrespective of limits shall be rated under this model.

Half Yearly Review of RatingApplicable to all listed companies as well as all accounts having exposure from our bank (Fund Based+Non Fund Based) of above Rs. 50 crore

Counter PartyAll banks and Financial Institutions

Table 1: Credit Risk Rating Entity ModelAs shown in the Table above, the bank considers different business clients as different type of entities based on a certain criteria. These parameters are explained as follows: Large Corporates: The clients who have net sales of over Rs. 100 crore are categorized in this class. This class is qualified to avail limits of more than Rs. 15 crore from the bank. This class generally has clients from Manufacturing and Service sectors. Mid Corporates: The clients who have net sales between Rs 25 crore and Rs 100 crore are categorized as Mid Corporates. This class is qualified for limits between Rs 5 crore and Rs 15 crore. This class generally has clients from Manufacturing, Trading and Service sectors. Small Loans-I: The firms that have sales upto Rs 25 crore can be classified as Small Loans-I clients. These can avail limits ranging from Rs 50 lakh to Rs 5 crore. This class is applicable to all the sectors except NBFC/Bank/FIs. Small Loans-II: The firms that have sales upto Rs 25 crore can be classified as Small Loans-II. These can avail limits ranging from Rs 2 lakh to Rs 50 lakh from the bank. This class is applicable to all the sectors except NBFC/Bank/FIs. NBFC: There is no limit to this category in terms of sales or limits. This category is specially reserved for Non Banking Financial Companies (NBFC). New Projects: This class has clients that have cost of project more than Rs 15 crore. A limit of over Rs 5 crore can be availed by these firms. All sectors are applicable in this class except NBFC/Banks/FIs and trading firms for the first two years of operations. Entrepreneur New Business: The new projects that cost less than Rs 15 crore qualify for this class. Funding of the project that can be availed by the bank lies between Rs 20 Lakh and Rs 5 crore. Counter Party: All banks and financial Institutions4.2 Usage of the credit risk rating model

The following text describes the basic rating procedure followed when implementing the rating model for a client.1. The scores are assigned to each of the parameters in the different sections on a scale of 0 to 4 up to two decimal points with 0 being very poor and 4 being excellent. The scoring of some of these parameters is subjective while for some others it is done on the basis of pre-defined objective criteria. Wherever a particular parameter is not applicable, no score should be given. The parameter should be made NA so that the weight assigned to that parameter gets distributed among the other parameters in that section automatically.

2. The scores given to the individual parameters multiplied by allocated weights are aggregated and a composite score for the company is arrived at in percentage terms. Weights have been assigned to different parameters based on their importance.The following table shows the various parameters and the weights assigned to them:

S No.FactorWeight Assigned

1Financial 40

2Business / Industry20

3Management20

4Conduct of Account20

Total100

Table 2: Weightage of Parameters in the Model

3. The overall percentage score obtained from step 2 on a scale of 0 to 100 is then translated into a rating on a scale from AAA to D according to a pre-defined range as under:

Rating categoryRisk Profile (Description)Score (%) obtained

Grade within the rating category

PNB AAAMinimum RiskAbove 80.00PNB- AAA

PNB-AAMarginal RiskAbove 77.50 up to 80.00PNB- AA+

Above 72.50 up to 77.50PNB- AA

Above 70.00 up to 72.50PNB- AA-

PNB-AModest RiskAbove 67.50 up to 70.00PNB- A+

Above 62.50 up to 67.50PNB- A

Above 60.00 up to 62.50PNB- A-

PNB-BBAverage RiskAbove 57.50 up to 60.00PNB- BB+

Above 52.50 up to 57.50PNB- BB

Above 50.00 up to 52.50PNB- BB-

PNB-BMarginally Acceptable RiskAbove 47.50 up to 50.00PNB- B+

Above 42.50 up to 47.50PNB- B

Above 40.00 up to 42.50PNB- B-

PNB-CHigh RiskAbove 30.00 up to 40.00PNB- C

PNB-DCaution Risk30.00 and belowPNB- D

Table 3: Risk Rating Classification4.3 Important factors considered in the rating process of the clients

The rating model contains several qualitative parameters that are to be evaluated subjectively. It is, therefore, necessary to be adequately familiar with the company and the industry. Visiting the company and interacting with its management generally helps the rater in understanding the underlying activity behind the financial data of the company being analysed; the business prospect of the company and its management. Information should be collected about the company from all possible sources to conduct this exercise completely, accurately and in an authenticated manner.The data used to rate companies should be annualised & made comparable before it is used for rating purposes. Similarly the financials of the company should be made comparable with peers in case of change in accounting policies, merger, demerger, acquisition, sell-off etc. While evaluating a company against the industry the following points should be kept in mind: The companys value should be compared only with peers. Size / capacity / volume are indicative factors in selecting peers. The sample of companies chosen for the industry comparison should be identical as far as possible for rating all companies under one particular industry having similar size / capacity / nature of activity. The number of companies in sample should be reasonable i.e. neither too low nor too high. The sample size should be of at least 5 companies. The sample should preferably be selected from the activities in which company is operating. 4.4 Special considerations in case of unavailability of data for clients

For companies where industry data is not available, data for other comparable industries can be used. For example, blade-manufacturing companies can be compared with combined sample of companies manufacturing blade and other shaving products etc. Similarly Hindustan Aeronautics Ltd. may be compared with other heavy engineering companies, which also uses intensive technologies and have a similar size, say in terms of sales turnover.For multi-divisional companies, which are involved in more than one industry, evaluation should be done separately for each business. Thus the management evaluation, conduct of account and financial evaluation will be done on a common basis. For the business section, each business should be evaluated and scored separately, taking into account the different industries involved. A weighted average of these business scores should be calculated, where the weights are proportional to the contribution of each business to the companys total sales. This weighted average should then be combined with the scores in the other sections to arrive at the overall rating for the company.The credit risk rating exercise should be done immediately after receipt of audited financial results of the company and should be delinked invariably from the regular renewal exercise. The updating of the credit ratings should be undertaken normally at quarterly intervals or at least at half-yearly intervals, operationalising of Preventive Monitoring System (PMS) will be an aid in this regard.In case latest data of peers is not available for industry comparison, then last available data, not more than one year old, may be considered. For companies, which have not been banking with PNB earlier, the score obtained excluding conduct of account should be scaled up to 100 and the rating assigned accordingly, as the PMS score will not be available.The Credit Policy and Risk Management Department (CPRMD), Head Office will provide the industry score to be used for all major industries, progressively. Until such time the industry score may be assigned as 50%.

4.5 Parameters considered in the PNBs Credit Risk Model

4.5.1 Parameter 1: Financial Strength Of The Clients

The financials of a company are indicative of the health of the company and potential risks in lending to the company e.g. if the company already has a large amount of debt on its balance sheet, compared to its cash flow generation capacity, a loan to this company would be risky. 4.5.2 Parameter 2: Business Performance Of The Clients

The business performance of a company has a direct relationship with the credit risk of the company as the business performance determines the generation of cash for debt repayment.The companys competence in its activities as well as its position relative to its competitors are key indicators of how a company is expected to perform and its ability to generate funds to repay its debts. 4.5.3 Parameter 3: Industry Outlook Of The Clients

The credit rating of a company cannot be assessed without considering the outlook of the industry in which the company is operating. Industry performance very often has a direct bearing on the performance of a company. Two companies in different industries would have different credit worthiness depending on the outlook for their industries.4.5.4 Parameter 4: Management Evaluation Of The Clients

The quality of management and management structure are very important indicators of a companys credit risk. The performance of a company driven by a strong management is likely to be better than that of a company having a poor management irrespective of the industry to which it belongs. Evaluation of management is important not only due to its impact on the companys performance, which determines its capability to repay, but also from the point of view of its integrity. This is because the intentions of the management determine the willingness of the company to repay its debts.The management quality thus influences both aspects of default risk, the ability as well as the willingness of the borrower to repay its debts. Thus the evaluation of management quality is an essential input for credit risk assessment. 4.5.5 Parameter 5: Conduct Of Account

The conduct of account refers to as to how the borrowers existing accounts with our Bank as also with other banks are being conducted and whether any problems are being faced. The conduct of account provides useful indications about the ability and willingness of the borrower to meet his obligations. The manner in which a borrower has been conducting his accounts in the past is a good indicator of how the account is likely to behave in future as well.

4.6 Assessment of the Parameters of the Model4.6.1 Assessment of financial strength

The financial strength of a company may be assessed by critically analysing the past financial performance, its trend and expected future performance. This analysis help in predicting the potential risk involved. These parameters are taken normally from the annual financial statements of the company i.e. Balance Sheet, Profit & Loss Statement and the Cash Flow statement. Past performance is taken as a guide to realistically assess future performance.Besides, it is essential to determine the quality of these financial statements as to what extent these can be accepted at face value. Further, the trends in financial performance over the past few years also indicate how the companys performance has been changing over the past few years.The financials are evaluated under four broad areas as under:

1. Past financial performanceWhile credit risk rating is done to evaluate the ability of a company to repay its debts in future, evaluation of past financials is very important as it reflects the present financial health of a company, which is a good indicator of how a company is expected to perform in future.The past performance is evaluated on the basis of figures given in the financial statements of the company as well as industry data. Some of the parameters are evaluated against absolute benchmarks while some are judged in comparison to peers. In respect of certain parameters percentage growth of the company over the past few years are compared while in respect of certain parameters, the ratios derived from the previous years financial reports are compared. The evaluation of each of the individual parameters is explained in detail in the following pages.

2. Future risk expectationsThe expectation of future financial risk is an important input to the credit rating process. This is used to evaluate the cash flows of a company as well as any major risks, which the company might be facing in future that may adversely impact its financial performance.The evaluation of future risk expectations is a subjective matter based on the assessment of the companys future performance. These expectations are based on the performance of the company in the past as well as its plans for the future. The contingent liabilities of the company, the Foreign Transaction Risk and the cash flow adequacy etc. are considered in this section.

3. Subjective assessment of quality of financial figuresThe assessment of the financial figures of a company is very essential to determine the extent of reliability of the figures given in the financial statements of a company. Companies often resort to tactics meant to distort the figures in the financial statements such as adjustments in depreciation method, income recognition, capitalisation of interest/expenses, pricing of inventory etc. Hence there is a need to assess the extent to which the figures given in the balance sheet are reliable and how transparent the accounts of the company are. Further, the actual realisable value for these assets may also be different from that given in the balance sheet. These aspects are to be taken into consideration while evaluating the financials of a company.

4. Trends in financial performance over the past few yearsThe assessment of past financials relies on figures for the previous year. The pattern of change over the previous years is an important indicator of the companys future performance. The evaluation of trends in respect of certain identified parameters is done using the figures given in the financial statements of the company. The evaluation of these parameters takes into account the direction & magnitude of changes over the past years.Within these areas, parameters are defined to determine the companys position on each of these areas. Scores are assigned to the parameters within these areas and they are combined to arrive at a score for each of the above areas. The scores for these areas are then combined according to the weights assigned to different areas to arrive at the cumulative financial score.The subjective assessment of financials as well as trends in financial performance is used to adjust the score obtained under past financials.

Past financial performanceThe assessment of past financial performance is done on the following parameters and each of them is assigned a different weightage in order to arrive at a cumulative rating for the past performance. Gross Sales Growth Rate Debt-Equity ratio

OPBDIT Total Net Worth

Short Term Borrowings Current Ratio

Operating Cash flow Interest Coverage Ratio

Net Cash Flow DSCR

4.6.2 Assessment of business performance

The performance of a company is influenced both by its own set up as well as its competitive position within the industry. Thus the two broad sub-areas used to assess the business performance of a company are:1. Operating Efficiency2. Market Position Within these areas parameters are defined separately for manufacturing and service sectors. The parameters defined for Service Sector and detailed guidance for evaluating these parameters are given under Section 4.5. Scores are assigned to the parameters within these areas and they are combined to arrive at a score for each of the above areas. The scores for these areas are then aggregated according to the weights assigned to different areas to arrive at the cumulative score for the company on business performance.1. Operating Efficiency of the ClientThis covers the operations of a company and how efficient it is at performing its core activities and takes care of aspects like the asset utilisation of the company, its working capital management, cost effectiveness of operations etc. These factors play an important role in determining the business performance of a company and thus are evaluated for determining the business performance.The evaluation of the parameters under this area is done on an objective basis using the figures in the financial statements of the company. Within these, some parameters might require a subjective assessment and have to interpret from the financial statements. This would be applicable specifically to parameters like Credit Period Availed and Credit Period Allowed. e.g. if credit period availed is very high as obtained from the financial statements, then it could be due to a very good reputation of company in the market, or because the company is not paying its suppliers in time. Thus an interpretation of these figures will have to be made to decide what score is to be assigned. There are various parameters on which the evaluation is done but the most important parameters out of these will be selected and scores assigned to them. The selection of these parameters may be made on the basis of its relevance in a particular industry & these will be decided by the Credit Systems and Tools Team and updated from time to time as needed.2. Market Position of the ClientThe business performance of a company is not governed simply by its own operations but also by the competition in the industry as well as the companys position vis--vis its competitors. This also covers risks related to buyers, suppliers and technology used by the company. An evaluation of the parameters helps in determining how well the company is placed to compete in the market and how efficient its operations are. It also reflects how fluctuations in the market and developments in the industry would influence the operations of the company.The parameters that would be used for evaluating the market position of a company would vary from industry to industry. Also, within these parameters, assignment of scores would require a large number of sub-parameters to be considered. The Credit Systems & Tools Team in association with the industry specialist teams would decide these parameters and sub-parameters for different industries.The rater assigns scores to the individual sub-parameters, which would then lead to a final score for the parameters, after combination of weightage assigned to the individual sub-parameter. Assignment of scores to the parameters/sub-parameters will be subjective.4.6.3 Assessment of Industry Outlook of the Client

The industry rating is used to adjust the score obtained by a company on business performance. The rationale for this is that a company belonging to an industry that score highly on industry rating would be in a better position to strengthen its business position. Conversely a company belonging to an industry with a poor industry outlook would have adverse impact on its business position. Good performers are given greater benefit and penalised less for the industry outlook because they would be in a better position to exploit the opportunities in the industry as well as protect against the uncertainties in the industry.The Credit Policy and Risk Management Department (CPRMD) provide the industry score to be used for all major industries, progressively. Until such time the industry score may be assigned as 50%. 4.6.4 Assessment of Management Quality of the Client

Evaluation of management is done to determine both their competence as well as their integrity. The two sub-areas considered for this purpose are: Achievement of past targets by the company Subjective assessment of management qualityWithin these two sub-areas, parameters are defined which enable us to determine the companys position on each of these sub-areas. Scores are assigned to the parameters within these areas and they are combined to arrive at a score for each of the above areas. The scores for these areas are then aggregated in accordance with the weights assigned to different areas to arrive at the cumulative score for the company on management quality.

1. Achievement of targets by the ClientThe targets quoted by the company at the beginning of the year are used as the benchmark with which the actual performance is compared. This gives an indication of the managements ability to drive the company by properly gearing it to the performance target set by them.The actual results of the company are compared to the targets that had been set by the company at the beginning of the year and the extent to which the targets have been achieved is used to assign scores to the parameters.Achievement of actual sales against estimated/projected salesScore

< 75%0

75% to 79%1

80% to 89%2

90% to 95%3

> 95%4

Table 4: Achievement of Sales Targets by the Management2. Subjective assessment of the management of the clientThe assessment of management on criteria like integrity, honesty, and track record is assessed in this section. This area is important as this indicates both the quality as well as integrity of management. Hence it is essential to be completely familiar with the management of the company and its track record, organisation structure and reporting relationships within the organisation as well as the qualifications of the top management personnel.4.6.5 Assement of Conduct of Account of the Client

The evaluation of the conduct of an account is done on the basis of its PMS Rank or PMS Index Score (Maximum). The outlook and performance of an industry depend on a number of parameters that include the structure of the industry as well as its financials. Some of the broad parameters that are used for evaluating an industry are:1. Expected industry growth rate2. Capital market perception: The industry P/E ratio is a useful indicator in this regard3. Regulatory framework Tax Concessions Tariff Protection4. Demand-supply mismatch5. Financial performance of industry Return on capital employed Price stability Operating profit margins Earning stability6. Threat from globalisation7. Structural attractiveness Supplier power Buyer power Threat of product substitution Threat of new entrants and entry barriers Competition within the industry

4.7 Comparison Of The Model With The Industry Standard

The current Credit Risk Model of PNB can be compared to the Industry standard that has been arrived at by the secondary research done through research papers. The model used by PNB is evaluated on the basis of each of those parameters that are considered important for a banks credit rating system as follows: Disciplined way of looking at Credit Risk and estimation of the overall health status of an account: The model has predefined sub parameters in different sub areas that help the bank to evaluate a project on various different areas that can affect the Credit Risk to the bank. The financial, management, operation, industrial and historical data is all taken into consideration while evaluating an account. Assessment of impact of a new loan asset on the portfolio: The bank follows strict guidelines that limit the funding of the projects. These limits are prescribed as a percentage of the total funding available to the bank. This helps the bank to limit the risk involved in its operations. This characteristic of the model helps the bank to cover for the losses in case of defaults. Sector wise Risk monitoring: The bank has operational poilicies in the credit risk model that helps the bank to monitor its activites in a particular sector. This helps the bank to limit the risk involved in case of changing traditions and policies of the entire industry that might have an adverse effect. Relationship managers for high value accounts: Bank does not have a policy of appointing relationship managers for high value account. However, bank has included a structure of approval of the projects such that the projects are looked into by the different offices in terms of power and hierarchy. High Value projects are generally handled by Regional or Zonal Offices while smaller projects can be handled at the District Headquarter level or Branch Office level. Rating procedures should be implemented: PNB has a rating system of the clients set up in place that considers a number of parameters and sub-parameters to calculate the worthiness and risk quotient of the client. These parameters are based on financial, environmental, internal, operational and historical performance of the firms.4.8 Review Of The Model Based On Basel-III Norms

Under Basel III the total capital a bank is required to hold is 8.0% of its risk-weighted assets. Total capital is divided into two broad categories: Tier I capital and Tier II capital. Broadly speaking, Tier I capital is capital that is available to absorb losses on a "going- concern" basis, or capital that can be depleted without placing the bank into insolvency, administration or liquidation. Tier II capital is capital that can absorb losses on a "gone-concern" basis, or capital that absorbs losses in insolvency prior to depositors losing any money. Additional Tier I capital mainly consists of instruments issued by the bank, which are able to meet specific criteria (and are not included in Common Equit y Tier I capital). Basel III has introduced stricter criteria for determining what constitutes Additional Tier I capital in order to ensure these instruments absorb losses of a bank on a going- concern basis. Basel III has also introduced a capital conservation buffer that requires an additional 2.5% of Common Equity Tier I capital to be held over and above the absolute minimum requirements. This buffer is intended to be available to be deployed during periods of stress. If the buffer falls below 2.5%, constraints on a bank's ability to distribute earnings will be progressively applied on a sliding scale. The regulator has been given authority to determine the level of the buffer according to its perception of the systemic risk that has built up in the banking system as a result of excess credit growth.

Figure 4: CRAR in PNBThe graph shown above clearly shows that there has been consistent increase in tier I capital (except 2011), which has not been supported by Tier II.

Figure 5: Capital and NPA Levels for PNB

As shown in graph above, at present the bank is satisfactory capital adequacy but Net NPA has rose to almost 400% in past five years, which calls for additional provision. A combined impact of this could adversely affect overall capital adequacy especially in terms of Basel III. The Banks profit in the latest year has grown by about 10 %. Government ownership is above 54 % and last Public Issue by the bank was brought in 2005 so if needed bank can look for raising public equity.

4.9 Review Of The Model Based On RBI GuidelinesThe model used by PNB for Credit Risk Mangement can be reviewed as per the RBI guidelines and evaluated on those terms as follows:1. Organisational structure: PNB has an organizational structure defined and set up in place. Hierarchy and power distribution has clearly been defined on individual as well as office terms.2. Comprehensive risk measurement approach: PNB has developed and adopted a risk management model that verifies the viability of the project to be funded rigorously.3. Risk management policies approved by the Board: The board of PNB has set up its internal risk management policies in tandem with the guidelines set by the RBI.4. Strong MIS for reporting, monitoring and controlling risks: The Finacle from Infosys has been implemented by PNB as their MIS which is used by them for their services to their customers as well as for their internal functioning. PNB also uses CIBIL to verify the reliability, history and background of the clients before proceeding with their proposals.5. Separate risk management framework independent of operational Departments: PNB has set up in place their risk management model named TRAC that is used for all the credit services offered by the bank.6. Periodical review and evaluation: High value and large funded projects are reviewed at least bi-annually and others at least annually to have an updated information about the project and their credit status. This review helps PNB to moderate the funding that it has provided to the project and to establish a check on the credit risk it has from those projects.

5. RESULTS AND RECOMMENDATIONS

This chapter deals with the findings conclusions and suggestions of the report. So that relevant facts does not get lost in heap of information generated during the analysis and the interviews.5.1 Major Findings

The major findings from the study can be listed as follows: The Credit Risk Model of PNB is very well incorporated. The Model follows RBI Guidelines and strictly adheres to the instructions issued by RBI. The Model is quite ready for RBIs milestone set for the PSU banks to comply with the procedures as per Basel-III norms. The model does not comply well with the Basel-III norms of maintaining the ratios of Tier-I and Tier-II Capital The financial status of the clients is a very important factor in determining the funding limits and loans to the firms. For new projects, viability of the projects is an essential factor in determining whether the project should be funded or not. For large corporate accounts, PMS rating and account history is the most crucial factors along with the project viability. The subjectivity in evalutating the parameters for a project provide the bank with a provision to incorporate the reports made by Lending Engineers for the projects. The model also has a provision for including the reviews of external rating agencies (CRISIL, ICRA etc.) in case of need of external verificaton.5.2 Recommendations

Based on the analysis and the results arrived from the research, various recommendation that can be made to enhance the existing model for PNB are: Financial and operational performance of the company applying for loan should be compared with its industry peers. Relative performance comparisons will not only highlight the management capability but also help in identifying any abnormalities in the information submitted by the company. Compliance with Basel-III norms has to be met by 2018, as prescribed by the RBI. The bank must be pro-active in developing and designing the policies to meet the requirements and stabilize the Tier-I and Tier-II capital ratios. Forward looking statements with respect to sales, profitability etc. provided in the DPR and other reports submitted by the company should be treated with caution. Market analysis, demand analysis, sales projections etc. should be evaluated on with prevailing norms of the RBI. If any of the critical ratios is marginally unfavorable, then additional collaterals could be charged or pricing of the loan could be revised upward to compensate for the additional risk Due to increased activism and regulatory crisis like that with spectrum allocation, mining leases, land acquisitions issues, environmental considerations etc. viability of otherwise sound projects is threatened. Social, political and economical risks should also be taken into consideration while deciding project viability. Evaluation of these risks should be made mandatory in TEV report Bank should be more stringent now as RBI has changed the norms for restructuring of the accounts and the time period for declaration of a bad account as NPA has also been shortened which will certainly effect the performance of the bank.5.3 Further Scope Of The Study

As it is known no study is an end in itself, scope exists for further exploration of the study. So, more samples can be studied and an in-depth analysis can be carried out. Due to time constraints study is restricted to credit risk management for working capital and term loans and it can be extended to other areas as well.The scope could be increased by taking projects of different industries and different regions of India and evaluating them to enhance the visibility and efficiency of the model.

6. LIMITATIONS

The data availability is proprietary, not readily shared for dissemination and is highly confidential. Due to non availability of data, peer comparision could not be done. Constraints related to non-disclosure of the confidential data hindered the inclusion in the study and thus, limiting the scope of the study. Assumptions and projections are based on current market conditions and have not taken into account the price volatility. The staff although was very helpful but was not able to give much of its time due to its own work constraints. The study is being done keeping in mind the policies of the Head Office. Due to the ongoing process of globalization and increasing competition, no single model or method will suffice over a long period of time and constant up gradation will be required.

7. REFERENCES

Kanchu, Thirupathi & Kumar, M. Manoj (2013) Risk Management in Indian Banking Sector- An Empirical Study - International Journal of Marketing and Finance Arora, Swarnjeet (2013) Credit Risk Analysis in Indian Commercial Banks An Investigation Asia-Pacific Finance and Accounting Review Bhaskar, Patil Jaykar (2014) Credit Risk Management in Indian Banks International Journal of Advance Research in Management Studies ALShubiri, Faris Nasif (2011) The Effect of Working Capital Practices on Risk Management Global Journal of Business Research Jain, Mukul (2013) A Critical Review of Basel-III Norms for Indian PSU Banks Balasubramaniam, C.S. (2011) Indian Banking and Basel Norms National Monthly Refreed Journal of Research in Commerce & Management http://www.ssrn.com/ accessed on May 17, 2014 http://pnbindia.com accessed on May 21, 2014 http://www.researchjournali.com/ accessed on May 21, 2014 http://jetems.scholarlinkresearch.com/ accessed on May 25, 2014 http://www.rbi.org.in/SCRIPTs/BS_ViewMasCirculardetails.aspx?id=8121 accessed on June 01, 2014 Risk Policy Manual, Punjab National Bank Master Circular on Credit Risk Policies, Reserve bank of India Instruction Manual on Loan, Punjab National BankANNEXURES

ANNEXURE-ICRAR for PNB:

The full document is available at: http://pnbindia.in/new/Upload/English/Financials/PDFs/Disclosure_Basel_II_Pillar_3.pdf NPA LEVELS for PNB:

The full document is available at: http://pnbindia.in/new/Upload/English/Financials/PDFs/Disclosure_Basel_II_Pillar_3.pdf

ANNEXURE-II

Term Loans And Working Capital Limits Proposal Format:

Annexure-I

SANCTIONING AUTHORITY

MCCMD EDOthers

Theproposal falls under the powers of GM/ED/CMD/MC on account of

____________________

Reference No. / Date :

1. Name of the Borrower and BO & Controlling Office :

Rs. In _________

GIST OF THE PROPOSAL

A. Sanction of Working Capital Limits

ExistingProposed

FB

NFB

B. For Term Loan

Purpose

Cost of Project

Total Debt

Promoters contribution

Proposed TL (our share)

DER

Repayment Period

Door to door tenor

C. Approval of ROI/ Service charges as under:-

FacilityExistingProposedApplicableIncome Earned

rate

Last YearCurrentyear

upto_______

Intt.Non-Intt.Non-

RateofIntt.Intt.

interestCC

PC

TL

Processing

Fee

Upfront Fee

Lead Bank

Fee

Commission

on NFB

Other

charges, if

any

D. Approval of other Issues, if any :

Whether fresh/renewal/

enhancement

AssetClassificationas

on________ and last PMS score

Credit Risk Rating by Bankis ----RatingDate ofScoreABSReasons for

------ indicating ------------ riskRatingdegradation

Present

Previous

Rating from External Agency (TheFacilityRatingDateofRatingRemarks

external rating should be mapped toratedratingAgency

the internal rating)

Whether priority/non priority sector

as per PS&LB guidelines (Latest

beingPS&LB/LBC/Codified

Circular No. 11 dated 16.7.2011)

Sub-sectormayalsobe

mentioned.

Whether Agriculture/Retail/

SME/Others (Please specify)

a) Whether Sensitive Sector

Real Estate/Capital Market

b) Applicable Risk weight

Consortium/Multiple Banking

Lead Bank

PNBs Share %

Date of application

Date of receipt of proposal

- At BO/CO/HO

Date of clarifications, if any,

received at CO/HO

Date of submission of proposal

Remarks

Date of last sanction &

authority/In Principle Consent

Customer ID No.

Activity code (as per ladder)

PART I

2. Borrowers Profile

a. Group Name

b. Address of Regd./Corporate Office

b. Works/Factory

c. Constitution and constitution code as per ladder d. Date of incorporation/ Establishment

e. Dealing with PNB since

f. Industry/Sector

g. Business Activity (Product)/ Installed Capacity.

3. Directors (S/Shri)

Name andAddress/Mobile No./e-mailWhether Promoter/

Designationaddress of Main Directors/Professional/Nominee

Guarantor Directors/

Key persons

a)If any of them, inthe list of Caution AdvicesYes/No

circulated by the Bank from time toDetails be furnished in case of

time/RBI's/Wilful defaulters' list/Caution List ofYes

ECGC/

b)If any one of them connected in the past with any

NPA/OTS/Compromise/unscrupulous defaulters

c)If any of them, related to Directors/Senior Officers

of PNB:

d)i) Management Change since last sanction, if any

e)i)Report on due diligence carried out in terms of

L&A Circular No. 170 dated 25.10.2008 and

comments on adverse features, if any.

ii) In case of multiple banking/consortium lending

Due diligence report on prescribed format as per

L&A Circular No. 24/09 and 139/09 has been

obtained

ii) Confirmation that CRs have been

compiled/reviewed as per extant guidelines

iii)Confirmation that CRs have been drawn

from CIBIL Database and comments on adverse

features, if any

:

f) Share Holding Pattern as on:

Name of the Promoters/Major ShareNo. ofAmt. in Rs.%

holderssharesCrores.Holding

Promoters Holding

FIs/ Mutual Funds/UTI/Banks/FIIs

NRIs/OCBs

Public

Total

g)Whether Shares pledged to any Bank/FI/othersYes/No

If yes, Percentage of shares pledged

Institution

Purpose

h) Brief history

Profile of the borrowing concern alongwith brief about the various divisions and their activities and any other borrower specific major/significant features to be mentioned.

4.A Facilities Recommended :(Rs. in Crore)

NatureExistingProposedSecured/Unsecuredalong with

Fund Basedthe basis thereof

(As per RBIs guidelines)

CC(H)

WCDL

FOBP/FOUBP/FABC

Others

Fund Based Ceiling

Non Fund Based

ILC/FLC

ILG/ FLG

Non Fund Based Ceiling

Term Loan

Limit of credit exposure on

account of all derivative

products

TOTAL COMMITMENT

4.B Our Commitment and Maximum Permissible Exposure Norms

ExistingProposed%age of Banks Capital FundsAs per Exposure Norms

as on 31.03.______

Amount(%age)

Company

Group

4. C Short Term Loans sanctioned by PNB in last 12 months, if any

Date of sanctionAmountPeriodROIDate of

AdjustmentRoll over

4. D Details of facilities provided outside consortium including exposure on account of derivatives, if any

NameoftheNatureofSecurityO/sPurposeRateof

Institutionfacilityas onInterest

a)

b)

5.AFacilities from PNB Subsidiaries/Exposure by way of investment in

Equity/Debentures/Derivatives/Foreign Exchange etc. :(Rs. in Crore)

NameoftheNatureofSecurityO/sPurposeOverdue,if

Institutionfacilityas onany

a)

b)

5.B Term Loans from other Banks/Financial Institutions/Other Institutions - (including Lease, ICDs, Corporate Loans, Debentures etc.)(Rs. in Crore)

Name of the Bank/FIFacilityBalance O/sOverdue, ifRate of

SanctionedAs onanyInterest

5.C Credit Rating by agencies {CRISIL/ICRA/CARE/FITCH INDIA} with purpose of such rating.AgencyRatingDate ofSignificancePurposeValidity

Ratingof RatingDate

5D. Details of Working Capital Limits from the Consortium/Multiple Banking

(Rs. in Crore)

Name of theExistingShare %ProposedShare %ROI

BankFBNFBFBNFBFBNFBFBNFB

6. Details of Group /Allied/Associate firms and the facilities sanctioned to them along with conduct of these accounts with our Bank/ other Banks and comments on adverse indicators, if any.

As per Appendix II

7.A(i) Financial Position of the Company as on close of financial year for last three years and estimated for last year and projected for the next year(Rs. in Crore)Two yearsOne yearPrevious year (sayProjections

earlierearlier31.3.09)for the

(say(saycurrent year

31.3.07)31.3.08)(say 31.3.10)

AuditedAuditedEstimatedAudited

Gross Sales

-Domestic

-Export

% growth *

Net sales(net of

excise duty etc.)

Other Income

OperatingProfit/Loss

*

Profit before tax

Profit after tax

Depreciation/

Amortization of

expenses

Cash profit/ (Loss) *

EBIDTA/PBIDTA

Paid up capital

Reserves and Surplus

excluding

revaluation reserves

Misc. expenditure not

written off

Accumulated losses *

Deferred Tax

Liability/Asset

a) Tangible Net Worth b) Investment in allied concerns and amount of cross holdings

c) Net owned funds/Adjusted TNW (a b) *

Share application money

Total Borrowings

Secured

Unsecured

Other investments (excluding investment in allied concerns considered for arriving at Net Owned Funds)

Total Assets

Current assets

Non current assets

Out of which net fixed assets

Net Working Capital *

Current Ratio

Debt Equity Ratio

Term liability/Adjusted TNW

TOL/Adjusted TNW

Operating Profit/Sales

Long Term Sources

Long Term Uses

Surplus/ Deficit

Short Term Sources

Short Term Uses

Surplus/ Deficit **

In case of negative growth/loss/erosion in TNW and NWC, the figures should be prefixed with -ve sign.

To match with NWC

7A (ii) Key Financials upto last quarter

(as per published Un-audited Results in case of listed companies)(Rs. Crore)

PeriodCumulativeCorresponding%Accepted%ageRemarks

endedposition as onposition ofChangefor theachievement

lastquarter/HY/Q3currentupto latest

quarter/HY/Q3of last yearyearquarter/HY/Q3

ended

Sales

Other

Income

PeriodCumulativeCorresponding%Accepted%ageRemarks

endedposition as onposition ofChangefor theachievement

lastquarter/HY/Q3currentupto latest

quarter/HY/Q3of last yearyearquarter/HY/Q3

ended

PBT

PAT

7B. Brief discussion on Financial Indicators (Interpretation/inference drawn in respect of Latest financial/ last FY indicators to be discussed)

(The financial parameters of the borrowing company may be discussed/commented upon as mentioned hereunder. However, it is only an indicative list. The appraising authority should also discuss parameters showing abnormal variation/trend and any other proposal specific parameters.)

Paid up capital/TNW

(Details of authorised/issued/paid up capital alongwith share application money to be given.)

Reconciliation of TNW

(Rs. in lacs)

TNW as on close of FY ended 31.3.2011

Add

Less

TNW as on close of FY ended 31.3.2012

(In case TNW is lower than the estimates or if there is fall in TNW, reasons for the same should be duly incorporated. In case there is movement in paid up capital, reasons viz. issue of fresh capital, issue of bonus shares, conversion of FCCB into equity, buy back of shares, etc. should be mentioned. In case of issue of fresh capital, premium amount, if any, IPO or private placements, should also be mentioned. There should be comment whether the company is making provisions for redemption of FCCB on due date. Comments on residual period of preference shares should be given.)

(In case of partnership/proprietorship firm, stipulation is to be made that the firm would maintain the capital at the actual/estimated level during the currency of advance.)

Sales

(Actual sales should be compared to the sales of the last year/estimated sales (in actual and percentage terms). The reasons for decrease in sales from last year/variations from the estimated sales should be given. The current year estimates and its acceptability with due justification should be mentioned. Justification for accepting the increase in sales, viz. expansion, diversification, marketing strategies should be given.)

Other income

(The sources of other income should be mentioned and any variation from the estimates should be commented upon. The income from the core activity vis-a-vis other income should also be commented.)

Profitability

(Reasons for positive/negative movement in profitability of the borrowing company should be given. Actual EBIDTA and net profit compared to the figures of last year/the estimated figures should be commented upon. The current year estimates of net profit and its acceptability with due justification should be mentioned.)

Investments

(Details and nature of investments including cross holdings, investment in subsidiaries/group companies should be mentioned. The key financials parameters of the companies in which the borrowing company has invested should be given.)

Diversion of funds

Details of use of funds for the purpose other than the one for which the sanction is accorded alongwith the reasons and proposed action thereof

Current ratio/Debt Equity Ratio

(Reasons for movement and steps taken to improve the same be given.)

Balance Sheet analysis to be enclosed.

7C Capital Market Perception

ListingBSE/NSE

Face Value

Current Share Price as on

52 weeks High / Low

Market Capitalisation as on

7.DDetails of investment in Shares, Debentures, Units or investment of funds outside the business etc. (Along with comments in case of increase)

ParticularsNo. of shares/FaceMarket value, ifRemarks

debentures/ unitsvaluequoted

TOTAL

7.EDetails of Liabilities not accounted for/Contingent liabilities

ParticularsAmounPeriod (for likely devolvementRemarks

Invocation

Disputed taxes

Corporate guarantee

Bank guarantee

Pending court cases

Any other

Details of derivatives transactions

7.F Position of assessment of income tax/sales tax/wealth tax of theborrowing

concern/partners/proprietor/promoter directors/guarantors

7.GInformation on litigation initiated by other banks/FIs against the borrower as per latest Audited Balance Sheet, if any

7.HOverall likely impact of (7.C to 7.G) on the financial position of the borrowing unit

8. SECURITY

A. Primary

i) For working capital limits

ii) For Term Loan

B. Collateral (Information in respect of mortgage of IP to be given only in the following format:

i) Hypothecation/ Mortgage of Block Assets Immovable Properties

(Rs. in Crore)

SecurityAreaOwnershipValueBasis forDateWhether

Descriptionin SqLastPresentRealisablevaluationexisting/

M orsanctionbookvaluefresh

Sq Ftvalue

ii) First/Second/Third charge/Paripassu charge

(Rs. in Crore)

Nature ofSecurityValue of blockValue of blockExtent ofBalance / residual

limitsassets as on:assetsfirst /value ofcharge

(as perexcludingsecondavailable to bank/

B/Sheet)specific chargechargeconsortium

if anyholders

Term

Loan

Working

Capital

iii) Personal /Corporate Guarantee

Name ofRelationshipNet WorthImmovable propertyDate of

Guarantorwithconfidential report

borrower

Prev.PresentPrev.PresentPrev.Present

As atAs at .As atAs at .

..

iv) Comments on changes, if any.

v) Status of creation of charge:

8. C Security Margin ( Fixed Asset Coverage Ratio for term loans)

ExistingProposed

NatureBook valueFACRBook ValueFACR on project

completion

Primary

Collateral

Total

9. Position of Account as on

(Rs. in _____)

NatureLimit*VSDPBalanceIrregularity

* To be reported strictly as per sanction. Any irregularity to be reported separately

10.A Conduct of the Account including details of terms & conditions not complied with. Comments on following should be given

Availment of limit, overdrawings,

Routing of proportionate business in consortium, routing of sale proceeds, honouring of commitment in non fund based facilities(details of LC/LG devolved/invoked with amount),

Regularity in submission of CMA data/ financial statement/QMS/Stock Statement. The information regarding no. of cheques returned with amount involved due to financial reasons during the review period should be mentioned.

The amount/frequency of irregularity in the account during the review period should be mentioned.

10.B i) Value of the Account

(Rs. in _______)

LimitLast yearCurrent year

NatureAmountInterest/Yield(%)Interest/Yield(%)

CommissionCommission

Working capital (FB)

NFB

Term Loan

Billspurchased/

collected

Anyotherincome

suchasEscrow

account fee, etc.

Total

Details of other ancillary business such as opening of staff salary account/ availment of retail lending schemes by staff members/opting of cash management system of the bank, etc.

10.B ii) Deposits including Escrow/TRA account with details

Current yearLast year

No. of A/cAmount *Average balanceO/S

Saving

Current

Escrow

Term deposit

Total

* Whether asmargin moneyor free float

10.B (iii) Value of group accounts

10.CReview of the Account and Summary of irregularities under zero tolerance level and fraud sensitive index pointed out by Banks Inspectors, Concurrent Auditors, Credit Audit & Review Division (CA&RD), RBI Inspectors, Statutory Auditors, observations of Stock Audit Report, Comment on Preventive Monitoring Score Trends, (and status of rectification of these irregularities)

As per Appendix III

10.D(i)CONFIRMATION

1.Compliance of last sanctioned termsYes/No

2.Security documents are valid/duly vetted/enforceableYes/No

3.Proper charge on securities createdYes/No

4.Confirm that company/directors are not under bank/RBI/ECGC/Yes/No

CIBIL defaulters/caution list

5.Confirm that payment of statutory liabilities is not in arrearsYes/No

6.Confirm that no litigation against/by the company is pendingYes/No

7.Corporate governance practices are being followed as perYes/No

Auditors report

8.Confirm that no deviations are made from usual norms/policyYes/No

guidelines

9.Confirm that Exposure is within banks internal ceilings/RBIYes/No

prudential norms

In case of No, details alongwith the reasons, justifications and action proposed should be furnished.

10.D(ii) AUDIT/INSPECTION/MEETINGS

ParticularsLast dateRemarks/Observations/Steps taken

a)Annual inspection

b)Stock audit

c)Consortium meeting

d)Closure of IR

Indicative list of pre-disbursement conditions

Lead bank/processing/upfront/syndication/documentation fee etc. to be recovered prior to disbursement.

Authorised capital/paid up capital to be raised to at least Rs....................

which should be supported by resolution passed by the company/certificate from the companys CA/stamped undertaking from the company.

Unsecured loans to be raised to Rs................. before release of facilities and supported by the companys CA/stamped undertaking from the company.

Total term loan and working capital requirements to be tied up fully before release of limits.

The company to execute necessary security/renewal documents duly supported by Board resolution and to get the charge registered within the time limit.

In case of sharing of securities on pari passu basis, the disbursement shall be made after receipt of pari passu letter/execution of interest agreement with the other lenders. In case of creation of 2nd charge, stamped letter from the first charge holder confirming 2nd charge favouring our bank should be obtained for release of limits for which suitable stamped undertaking to be obtained from the borrower.

All statutory approvals/NOCs applicable/related to the project/ business/activity should be submitted before release of funds.

Disbursement of Term Loan to be made subject to the promoters bringing in their contribution strictly as per terms of sanction.

Sanction of any credit facility to the borrower outside the consortium arrangement should be duly informed to the consortium members.

A stamped undertaking to be submitted in favour of the bank to the following effect that during the currency of banks credit facilities, the company/firm shall not without our permission in writing:

Effect any adverse changes in companys/firms capital structure.

Formulate any scheme of amalgamation or merger or reconstruction. Implement any scheme of expansion on diversification or capital expenditure except normal replacements indicated in funds flow statement submitted to and approved by the bank. Enter into any borrowing or non borrowing arrangements either secured or unsecured with any other bank, Financial Institution, company, firm or otherwise or accept deposits in excess of the limits laid down by Reserve Bank of India. Invest by way of share capital or lent or advance funds to or place deposits with any other company/firm, concern including group companies/associates/persons. Normal trade credit or security deposit in the normal course of business or advance to employees can, however, be extended.

Undertake guarantee obligations on behalf of any other company/firm/person.

Declare dividend for any year except out of profits relating to that year after meeting all the financial commitments to the bank and making all due and necessary provisions. Make any drastic change(s) in the management set up. Approach capital market for mobilising additional resources either in the form of debts or equity.

Sell or dispose off or create security or encumbrances on the assets charged to the bank in favour of any other bank, Financial Institutions, company, firm, individual. Repay moneys brought in by the promoters, partners, directors, share holders, their relatives and friends in the business of the company/firm by way of deposits/loans/share application money etc. Avail credit facilities/loan from outside the bank/consortium arrangement without their knowledge and permission.

The release of credit facilities is also subject to:

Vetting of security documents by the banks approved advocate and banks internal procedure of Credit Audit. The charges for vetting of documents by the banks advocate are payable by firm/company.

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