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SUMMER TRAINING REPORT
ON
“CREDIT RATING SYSTEM OF FEDERAL BANK LIMITED”
Report submitted in partial fulfillment of post graduate diploma in management(PGDM)
Under supervision of
Ms. Anupama Tewari
Asst. Manager
Submitted by
Durga Devi Nag
Roll No-69
Batch 2009-11
Submitted to
G.L BAJAJ INSTITUTE OF MANAGEMENT AND RESEARCH
Plot no-2, Knowledge park III, Greater Noida-201306
Website: www.glbimr.org
G.L.B.I.M.R Page 1
ACKWONLEDGEMENT
As a management student I dream it a privilege to have experience a panorama of Federal Bank Limited cherished and enviable legacy. I would like to thank all those who have directly or indirectly helped me to accomplish this project successfully.
I would like to express my deep sense of gratitude to my corporate, project guide, Ms Anupama Tewari,Asst Manager, Bhubaneswar whose support and guidance helped me, in converting my conception into visualization and also for the continuance guidance throughout the project.
Special thanks to my institute project guide Prof. Neeraj Saxena whose support and unflinching guidance and encouragement helped me a lot to go with the project.
Durga Devi Nag
(PGDM 2009-11)
G.L.B.I.M.R Page 2
DECLARATION
This is to certify that Miss Durgadevi Nag out of her project work presented in this entitled
“CREDIT RATING SYSTEM OF FEDERAL BANK LIMITED” for the award of PGDM
from G.L.Bajaj Institute of Management & Research under my supervision. The project
embodies result of original work and studies carried out by Student herself and the contents of
these do not form the basis for the award of any other degree to the candidate or to anybody else.
Ms. Anupama Tewari
Asst. Manager
G.L.B.I.M.R Page 3
TABLE OF CONTENTS Page.No
CHAPTER:- 1 INTRODUCTION TO FEDERAL BANK LTD. 1-11
CHAPTER:-2 OBJECTIVE OF THE STUDY 12
CHAPTER:-3 CREDIT RATING SYSTEM 13-61
CHAPTER:-4 RESEARCH METHODOLOGY 62
CHAPTER-5 DATA ANALYSIS & INTERPRETATION(CASE STUDY) 63-88
CHAPTER:-6 RECOMMENDATIONS 89
CHAPTER:-7 CONCLUSION 90-91
BIBLIOGRAPHY
G.L.B.I.M.R Page 4
EXECUTIVE SUMMARY
The project aims to develop a clear cut understanding of credit rating system being adopted by
Federal Bank Limited. The credit appraisal system act as a successful tool for credit assessment
in a bank and credit rating system is the backbone for assessing the risk inherent in a
credit/investment exposure. Thus identification of credit worthiness of credit limit/measurement
of credit risk can be achieved through a sound appraisal system and an appropriate credit rating
system.
At the initial stage through understanding was done as to get overview exposure as to how the
credit rating is organized, and then the parameters that are unique to the credit rating system
were identified. These factors create a major impact on the understanding of what credit should
be given to a particular project, while there prevails intense competition in the banking sector.
Credit rating has become very relevant to judge a project’s status and thereby helping the bank to
take important decisions. Various credit rating models are used by Federal Bank Limited to
assign the appropriate rating to the borrower are also studied. The project focuses more on the
models like what are the factors being used for credit rating
One case analysis is done on Displayline ltd which had applied to find out appropriate rating for
the applicant. As per the model the required parameters were consider to decide the credit rating.
G.L.B.I.M.R Page 5
CHAPTER-1
INTRODUCTION TO FEDERAL BANK LTD.
Federal Bank is a private sector bank in India. The head office of this prestigious bank is located
at Aluva, Kerala. By 2008, the Federal Bank India had successfully introduced 671 branches and
681 ATMs across the nation. In the month of March of 2008 alone, the bank had opened 26
branches across 11 Indian States.
Federal Bank India is well recognized for facilitating even the smaller branches consisting of
rural and partially-urbanized areas with technology enabled services.
BACKGROUND OF FEDERAL BANK:
Previously known as Travancore Federal Bank Limited, the Federal Bank Limited in its entire
span of customer services has seen both ups and downs. The bank started with an auction-chitty
business along with other banking transactions related to agriculture and industry. In the year
1945, the paid-up capital of the bank touched Rs.71000 and a new Board of Directors was
constituted. During this period, the bank also incorporated new Articles of Association. The
same year its branch was openedatAluva.
Subsequently, Federal Bank came with its branches in Angamally (1946) and Perumbavoor
(1947). However, it came with a massive expansion plan in the years 1975 and 1976 by opening
53 and 42 branches respectively.
From that time onwards till today, the bank has continued to incorporate the effective changes to
ensure smooth banking experience for its customers.
G.L.B.I.M.R Page 6
HISTORY OF FEDERAL BANK:
The history of federal Bank dates back to the pre-independence era. Though initially it was
known as the Travancore Federal Bank, it gradually transformed into a full-fledged bank under
the able leadership of its Founder, Mr. K.P Hormis. The name Federal Bank was officially
announced in the year 1947 with its headquarters nestled on the banks on the river Periyar. Since
then there has been no looking back and the bank has become one of the strongest and most
stable banks in the country.
Vision:
Develop into a stronger and more efficient and profitable financial institution with a growing
share of the market, providing an expanding range of products and services to a growing
clientele within and outside the country, adopting best industry practices and employing
contemporary technology, and be counted among the top private banks in the country.
Mission:
Devote balanced attention to the interests and expectations of stakeholders, and in particular:
Shareholders: Achieve a consistent annual post-tax return of at least 20% on net worth.
Employees: Develop in every employee a high degree of pride and loyalty in serving the Bank.
Customers: Meet and even exceed expectation of target customers by delivering appropriate
products and services, employing as far as feasible, the single window, and 24-hour-seven-day-
week concepts, leveraging strengthening branch infrastructure , ATMs, and other alternative
distribution channels, cross selling a range of products and services to meet customer needs
varying overtime, and ensuring the highest standards of service at all times, pursue excellence in
various facets of banking.
Adopt best industry practices.
Develop, adopt, and review a well-conceived business plan for achieving realistic targets of growth,
profitability, and market share over the medium term.
Operate within a well-defined, diversified, risk profile and adopt prudent risk-management norms and
processes and effective control practices.
Employ and leverage appropriate modern information technology to: enhance the quality, speed, and
G.L.B.I.M.R Page 7
accuracy of product/service delivery; provide ‘anytime-anywhere’ banking facility; strengthen
management information and control systems and processes; improve productivity; and reduce costs.
Increase awareness of the "Federal Bank" brand among targeted customer groups through cost-effective
marketing.
Adopt a robust corporate governance code emphasizing a high degree of professionalism of the Board
and the management, and accountability and disclosure to shareholders.
Decentralise decision making with accountability for decisions made, and assign cascading profit
responsibilities to middle and junior management.
Develop a conducive and transparent work environment that fosters staff commitment, competence,
initiative, innovation, teamwork and service-orientation.
Future:
Federal bank is the fourth largest bank in India in terms of capital base and can easily boast of a
Capital Adequacy Ratio of 19.11%, one of the highest in the industry. This along with the existence in
a highly regulated environment has helped the bank to tide over the recession with minimum impact to
its financial stability.
In fact it has been expanding organically over the past few months. It believes in extending its reach to
its customers by making services available to all, 24x7. It has over 690 ATMs and 669 Branches across
India in addition to the Representative Office at Abu Dhabi that serves as a nerve centre for the NRI
customers in UAE.
We are transforming ourselves, keeping our principles in tact, into an organisation that offers service
beyond par.
Being in the service industry we are conscious of our surroundings and what happens in the society.
1931: The Federal Bank Limited (the erstwhile Travancore Federal Bank Limited) was
incorporated with an authorised capital of rupees five thousand at Nedumpuram, a place near
Tiruvalla in Central Travancore on 28/4/1931 under the Travancore Company's Act. It started
business of auction -chitty and other banking transactions connected with agriculture and
industry.The bank though successful in the earlier periods, suffered set backs and was on the
verge of liquidation.
1944: Shri K P Hormis, and his close relatives /friends obtained controlling interest in the Bank.
G.L.B.I.M.R Page 8
1945:The paid up capital was increased to Rs.71000.The Board of Directors of the Bank was
reconstituted in 1945 and fresh Articles of Association adopted. On 18-5-1945, the Regd.Office
of the Bank was shifted to Aluva and the Bank commenced business by opening its first branch
at Aluva.
1946:The Bank opened its second branch at Angamally on 26-1-1946
1947:In the Board Meeting held on 24-3-1947, it was resolved to change the name of the Bank as
"The Federal Bank Limited". The third branch of the Bank was opened at Perumbavoor on 18-4-
1947
1959:The Bank was licensed under Sec.22 of the Banking Companies Act, 1949 on 11-7-1959.
Bank floated several kuries one after another. It also introduced several new deposit schemes.
These strategies helped the Bank to grow at a greater pace
1964:The Bank embarked for a massive take over bids, which accelerated its growth horizontally
and vertically. In that process it took over the assets and liabilities of the following banks
1. The Chalakudy Public Bank Ltd., Chalakudy
2. The Cochin Union Bank Ltd., Trichur
3. The Alleppey Bank Ltd., Alleppey
1965:The St. George Union Bank Ltd. Puthenpally was merged with the Bank
1968:The Marthandom Commercial Bank Ltd. Trivandrum was amalgamated with the Bank
1970:The Bank became a Scheduled Commercial Bank in 1970, which also coincided with the
Silver Jubilee Year, since the Bank commenced its operation in Aluva
1972:Witnessed expansion beyond the home state. The Bank became an Authorised Dealer in
Foreign Exchange in 1972.International Banking Department started functioning from Mumbai
in 1973.Since then, the Bank could substantially increase its market share of the NRI business.
G.L.B.I.M.R Page 9
The International Banking Department was later shifted to Cochin in 1982 as part of
consolidation and centralisation of activities
1973 to 1977:During the period, the bank adopted a massive branch expansion and growth
oriented programmes. To reflect the bank's approach towards the Industrial finance it adopted a
new emblem -Farmer in action encircled by an industrial wheel. A few hallmarks of the period:
In the year 1973,there was a quantum jump in deposits to the tune of 67% and in advances to the
tune of 56% over that of the previous year. The deposits grew by 52% while the advances
registered an increase of 45%. Increase in Priority sector advances was by 63%.
1975:Bank opened 53 branches and in 1976 it opened 42 branches. The total number of branches
reached 276 from a position of 114 in 1973
1977:The paid up capital was increased to Rs.100 Lakhs from a position of Rs.10.66 Lakhs.
1980:Mr.V Verghese took over the reigns of the bank as Chairman and Chief Executive Officer
on 2/7/1980.Having worked long years in State Bank of Travancore with well established
traditions, systems and methods, he placed his faith in introducing time tested and well proven
methods of organisation into the Bank
1983:1. Shri. V.K.Syamasundaran after long innings in Reserve Bank of India took over as
Chairman and Chief Executive Officer of the Bank as a successor to Mr.V.Verghese on 16/7/83.
2. The foundation stone of the multi-storied Administrative Building was laid by the Founder
Shri K.P.Hormis on 26-12-83
1984:As part of the organisation redesigning recommended by National Institute of Bank
Management in November, 1984, Bank has introduced Three Tier Organisational Setup with
Head Office, Regional Offices and Branches. Agricultural Finance Department was set up in
Head Office with technically qualified personnel at central office and field level. Bank's
performance in the field of agricultural and priority sector lending improved substantially
thereafter.
G.L.B.I.M.R Page 10
1985: In tune with the NIBM recommendation, Personnel and Industrial Relations Department
was set up in July, 1985. With the active assistance of Tata Consultancy Service, bank also set up
its computer department. A WIPRO computer was installed at our Head Office on July, 1985
paving the way for computerisation of the Bank. Later, a PSI microcomputer was installed at our
International Banking Department at Cochin. The first Advanced Ledger Posting Machine
(ALPM-a Wipro banker) was installed at Br. Aluva-Bank Junction branch
1987: The long cherished dream of the Federal Family, the multi-storied administrative building
complex was inaugurated by Shri. A Ghosh, Dy. Governor, Reserve Bank of India
1988: Shri. M.P.K.Nair , a seasoned commercial banker trained in the Union Bank of India
assumed the captaincy of the Bank on 1-7-1988 as its Chairman and Chief Executive Officer
1989: Commenced Merchant Banking Operations
1992: Deposits crossed Rs.10,000 Million. Adopted profit sector banking as its slogan
1993: Roped in ICICI group as a shareholder through private placement
1994: Tapped the Capital Market with a public issue in March, 1994. The issue oversubscribed
by about 60 times. Started Leasing Business
1995: Registered 142.44% increase in PAT in FY 94-95.Bank registered a CAGR of 78.13% in
PAT during the period 1991-96. Emerged as a perfect banking partner with diverse products,
global reach and focus on automation and HRM. Deposits cross Rs.35,000 Million
1996: Shri. K Nandan, a veteran banker from State Bank of India took the stewardship on 1-1-
1996: The bank had steady growth. The bank's business crossed Rs.100000 Million mark as on
31/3/98 for the first time
1997: Bank's first ATM was inaugurated at Ernakulam North on 27-02-97
1999:1. On 1-1-1999, Shri. K.P.Padmakumar, the Executive Director of the Bank took over the
baton from Shri. K Nandan. He thus became the first Chairman and Chief Executive Officer of
the bank risen from the rank and file
G.L.B.I.M.R Page 11
2. Bank's 400th branch was inaugurated at Calcutta- Shakespeare Sarani on 19.2.1999. The total
business of the bank exceeded Rs.110000 Million as on 31/03/99
2000:1. On 24.1.2000 Bank started Any Where Banking at Bangalore connecting all branches
located in the Bangalore metro
2. Launched Depository Services in association with NSDL on 24.2.2000
3. The Bank has commenced Internet Banking 'FedNet' on 28th April 2000 with software support
from Infosys Technologies Ltd
4. Federal Millennium CD is released on 18.9.2000
2001:In March 2001, Wide Area Network was launched connecting Regional Offices at
Mumbai, Bangalore, Chennai, Ernakulam and Chennai F & I with Head Office
2002:1. All the 412 branches of the Bank were fully computerised (using FedSoft) as on
31.03.2002
2. The Installation of switch for networking all the ATMs, already installed/proposed to be
installed, started from 17/08/2002
3. Dec 10 2002 Federal Bank introduces FedAlerts, and FedMobile, another first of its kind
service among traditional banks in India. Real time transaction alerts across the globe, and
customisable options make the service unique
2003: International Debit Cards launched
January 2004: Federal Bank becomes the first traditional bank to network all its branches and
attain 100% connectivity
February 2004: Co-branded credit cards launched in association with ICICI Bank
October 2004: RTGS is enabled in all branches of the Bank and becomes the first bank in India
to implement RTGS facility in all the branches. Online Railway Reservation through FedNet
launched. The First Kiosk inaugurated at the Marine Drive ( Kochi) branch
G.L.B.I.M.R Page 12
December 2004:1. First Bank to launch automated telephone bill payment through Interactive
Voice Response System (IVR). Bank launched an innovative product 'Fed-e-Pay' for automated
payment of utility Bills
2. The Bank issued Bonus shares in the ratio of 2:1
February 2005: Federal Bank is awarded for Best Use of Information Technology in Retail
Banking by IBA and Infosys. The runner up status reveals the strength and innovation in
technology initiatives
May 2005: Shri.M Venugopalan joined the Bank as Chairman and Chief Executive Officer Prior
to joining the Bank, he was the Chairman and Managing Director of Bank of India, one of the
leading public sector banks in India, from August 2003 to April 2005, and was an executive
director of the Union Bank of India immediately prior to joining the Bank of India
June 2005: Federal Bank in association with AMRITA super specialty hospital launches
Fed+Amrita, an innovative online system for fixing medical consultation, Health check up, and
inpatient payments from anywhere
January 2006: Federal Bank becomes the first traditional bank to successfully issue GDR.
While the issue of 18 million Global Depository Receipts realised $71.46 million, the green shoe
option of 2 million GDR was also fully subscribed, bringing in a total of $80 million to the bank.
The GDR, each representing an underlying equity share, were priced at $3.97 each — working
out to approximately Rs.175 per share. The issue was subscribed by major banks and Financial
Institutions across the globe.
February 2006: Federal Bank wins two prestigious awards for BEST USE OF IT IN RETAIL
BANKING & BEST PAYMENTS INITATIVE from IBA and TFCI. This is the second
consecutive time that the Bank has won the award for best use of IT in Retail Banking. More
details available here
September 2006:1. Amalgamation of Ganesh Bank of Kurundwad with Federal Bank
2. Bank’s Total No. of Branches crossed 500
November 2006: Bank entered into Life Insurance Joint Venture with IDBI & FORTIS
G.L.B.I.M.R Page 13
January 2007: Bank won the award under category “Best Clearing & Settlement System” in the
Banking Technology Awards 2006 instituted by IBA, Infosys & TFCI
Mar 2007: A full fledged Data Center was set up by the Bank
June 2007: Bank formed a Centralized Processing Centre for centralizing the account opening
process to make it quick and efficient.
September 2007:All branches/offices of the Bank were migrated to Centralised Banking
Solution (CBS), Finacle
January 2008:1. Successfully completed 1:1 Rights Issue
2. Opened first overseas Representative Office at Abu Dhabi, UAE.
March 2008:1. Bank’s Total No. of Branches crossed 600
2. The Asian Banker, together with the Technology Advisory Council of The Asian Banker
Summit, has affirmed Federal Bank as sole recipient of the Best Core Banking Project Award
2007
September 2008: Bank started providing Online Stock Trading facility to the customers in
association with M/s Geojit Financial Services
January 2009: Bank won the award under category 'Best Customer Relationship Achievement'
in the Banking Technology awards 2008 instituted by IBA, Infosys & TFCI for the outstanding
achievements in technology infusion and dissemination. The Bank was winning IBA-TFCI
awards for the fourth time
March 2009:1. Total Business of the Bank crossed Rs.50,000/- Crores
2. Bank becomes BASEL-II compliant
August 2009: Bank has taken an important step in customer Service by dedicating 24 X 7
Contact Center to the customers. Started offering NEFT/RTGS facility through Internet Banking.
Bank started offering Telebanking facility through a Toll-free number
G.L.B.I.M.R Page 14
PRODUCTS AND SERVICES OF FEDERAL BANK LIMITED:
Federal Bank launched its International Debit Cards in the year 2004. The same year, it also
provided Real Time Gross Settlement (RTGS) facility in all the branches, followed by Online
Railway Reservation (with the first kiosk at the Marine Drive branch of Kochi). One year later,
the bank launched Fed+Amrita, an online system for fixing medical consultation, health check
up, and in-patient payments, from anywhere. In 2006, Federal Bank issued GDRs, becoming the
first traditional bank to do so.
Federal Bank also provides the following services:
Advances
BSNL Bill Payment
Cash Management Services
Cash -On- Line Express Cash Remittance
Credit Cards
Depository Services
Easy Pay-On-line Fee Payment System
E-shopping Payment Gateway
Export Credit Insurance Products in association with ECGC
Express Remittance Facility from Abroad - FEDFAST
General Insurance Products in association with United India Insurance
Life Insurance Products, in association with ICICI Prudential
Lock Box Service for NRI's in the US
Merchant Banking Services
NRI Services
Online Kiosks for Customers
Online LIC Insurance Payment
Online Railway Reservation System
Structured Derivative Products
G.L.B.I.M.R Page 15
The Firsts
First traditional bank in India to launch Internet Banking Service (FedNet)
First traditional bank in India to have all its branches automated
First and the only traditional bank in India to have all its branches inter-connected
First bank to launch Electronic Telephone Bill Payment in India
First and only one of the older banks with e-shopping payment gateway
First traditional bank in India introduce Mobile Alerts and Mobile Banking service
First bank in India to implement an Express Remittance Facility from Abroad
First bank in India to provide RTGS facility in all its branches
G.L.B.I.M.R Page 16
CHAPTER-2
OBJECTIVE OF THE STUDY
Nowadays, everyone has become increasingly dependent upon credit, and therefore it's essential
to understand what is a credit rating, why it is important, and how can we maintain a good credit
rating. Most people finance their homes with mortgages and pay for their cars with loans. Young
people often obtain loans to pay for college. And, of course, lots of people make purchases with
credit cards.You can't expect to receive credit as a matter of course, however. You must apply
for it. And just as you would hesitate to lend money to a stranger, banks, retailers, or finance
companies will not grant you credit without knowing something about you.
The main objective of the study of credit rating system is-
To understand about the credit rating system at Federal Bank Ltd.
To know about various advances that Federal Bank Ltd. disburse to its customer.
To determine the level of risk attached with an investment.
To know about the various ratings policy used by the federal bank ltd.
To know about the various rating agencies in india.
G.L.B.I.M.R Page 17
CHAPTER-2
CREDIT RATING SYSTEM
A credit rating assesses the credit worthiness of an individual, corporation, or even a country. It
is an evaluation made by credit bureaus of a borrower’s overall credit history. Credit ratings are
calculated from financial history and current assets and liabilities. Typically, a credit rating tells
a lender or investor the probability of the subject being able to pay back a loan. However, in
recent years, credit ratings have also been used to adjust insurance premiums, determine
employment eligibility, and establish the amount of a utility or leasing deposit. A poor credit
rating indicates a high risk of defaulting on a loan, and thus leads to high interest rates or the
refusal of a loan by the creditor.
Importance of credit ratings:-
Crediting a watch list
Value investing
Smart investing
Learn about market
Developing a trading plan
Maximize your profits
Choosing investment software
Trading opportunities
When to sell?
Finding a broker
Investment clubs
Gearing into a SMSF
Stock selection
Biotech market
Private equity investing
Protected equity loans
Conservatives option strategies
G.L.B.I.M.R Page 18
Evaluating new floats
Tax implication
Investing overseas
Corporate governance
1. Trade cancellation policy
OBJECTIVES OF CREDIT RATING:
The main objective is to provide superior and low cost information to investor for taking a
decision regarding risk return trade off, but it also helps to market participants in the following
ways :-
Improve a healthy discipline on borrowers
Lends greater credence to financial and other representation,
Facilitates formulation of public guidelines on institutional investment
Helps merchant bankers, brokers, regulatory authorities etc. in discharging their functions
related to debt issues,
Encourages greater information disclosure, better accounting standard and improve
financial information (helps investors protection),
May reduce interest cost for highly rated companys,
Acts as a market tool
CREDIT RATING AGENCIES IN INDIA
1. Credit Rating Information Services India limited(CRISIL)
2. Investment Information and Credit Rating Agency of India(ICRA)
3. Credit Analysis and Research(CARE)
4. Duffs Phelps Credit Rating Pvt. Ltd. (DCR India) and
5. Onicra Credit Rating Agency of India Ltd. is an established player in individual credit
assesment and scoring services space in the Indian market.
G.L.B.I.M.R Page 19
CREDIT RATING AND INFORMATION SERVICES OF INDIA LTD. (CRISIL) is
India’s leading Ratings, Research, Risk and Policy Advisory Company. CRISIL’s majority
shareholder is standard &poor’s, a division of The MCGRAW-HILL Companies and the world's
foremost provider of financial market intelligence.
CRISIL offers domestic and international customers with independent information, opinions and
solutions related to credit ratings and risk assessment; energy, infrastructure and corporate
advisory; research on India’s economy, industries and companies; global equity research; fund
services; and risk management.
We began our journey as India's first rating agency. Today, we are a diversified global analytical
platform with leadership positions in the ratings, research and advisory domains. Along the way,
our growth has been closely intertwined with India's development milestones.
We started in 1987 as a credit rating agency, at a time when lending rates in India were fixed,
and there was, therefore, little demand for credit ratings. We firmly established ourselves as the
country's leading rating agency, respected for our fiercely independent, highly credible, and
analytically rigorous views. Shouldering the mantle of a pioneer and a market leader, we
facilitated the development of India's credit market and built investor confidence in our risk
assessment capabilities.
India's transformation into a market-led economy greatly increased its need for capital, and
required extensive reforms and institution building. Accordingly, we diversified into the
infrastructure advisory and business research domains, and quickly built up a reputation for
independent, reliable and incisive information, research, models and advisory services. Today,
our services are key inputs in informed decision-making and the shaping of public policy in
India.
With increasing globalization, we also focused on making our income streams more global. We
acquired Irevna, a pioneer in the investment research outsourcing space; Irevna has since been
G.L.B.I.M.R Page 20
voted no.1in high-end investment research and analytics outsourcing by the US-based Brown
and Wilson Group two years in a row in 2006 and 2007. We have a thriving business that meets
increasing global demand for better understanding of the Indian business environment, through
the services offered by our research and advisory groups.
Guided by our core values of integrity, independence, innovation, analytical rigor and
commitment, we are proud to have built a globally-acknowledged institution of repute over these
20 years. We have facilitated the setting up of credit rating agencies in several countries around
the world. Our association and integration with standard & poor’s has further enhanced our
capabilities and opened up newer vistas of opportunity, for our businesses and people.
The macro environment trends, both in India and globally, present myriad business
opportunities. At a youthful 20, we are ideally positioned to service the needs of our expanding
client base by maintaining our focus on our mission:
» Making markets function better
» Helping clients manage and mitigate business and financial risks
» Shaping public policy
CRISIL GROUP businesses:
» Ratings
» Research
» Advisory
G.L.B.I.M.R Page 21
CRISIL Ratings
CRISIL Ratings is the only ratings agency in India to operate on the basis
of sectoral specialization. It reflects our sharpness of analysis, the
responsiveness of the process and the large-scale dissemination of opinion.
CRISIL Ratings plays a leading role in the development of the debt
markets in India.
The Rating Criteria & Product Development Centre, responsible for policy research, new product
development and ratings' quality assurance, has developed new ratings methodologies for debt
instruments and innovative structures across sectors.
CRISIL Ratings provides technical know-how to clients worldwide. We have helped set up
ratings agencies in Malaysia (RAM), Israel (MAALOT) and in the Caribbean.
CRISIL Research
CRISIL Research is India's largest independent
integrated research house providing accurate and reliable
research, analysis and forecasts on the Indian economy,
industries and companies to over 500 Indian and
international clients across financial, corporate,
consulting and public sectors.
CRISIL Research leverages on its unique, integrated research platform and capabilities
spanning the entire economy-industry-company spectrum to deliver superior perspectives and
insights to its clients, through both, subscription products and customized solutions. CRISIL
Research also offers consistent, high quality financial data analysis to users within and outside
the CRISIL group, enhancing the efficacy of the conventional financial analysis frameworks
G.L.B.I.M.R Page 22
adopted in the marketplace
CRISIL FUND SERVICES :
CRISIL Fund Services is India's leading provider of fund evaluation
services and risk solutions to the mutual fund industry.
Through innovative analytics, benchmarks and analytical tools, CRISIL
Fund Services plays a significant role in shaping investor confidence and
facilitating the introduction of best practices in the mutual fund industry.
Widely reputed as the industry standard, CRISIL Fund Services is the official provider of
valuation tools and market benchmarks.
THE CENTRE FOR ECONOMIC RESEARCH
The Centre for Economic Research is uniquely positioned to provide benchmarks and analyses
for India's policy and business decision makers.
Manned by a team of senior economists, the Centre applies economic principles to live business
applications, creating conceptual and contextual linkages that are unique to CRISIL.
The Centre also works with other CRISIL businesses, contributing to both the range and depth of
products, services and consulting assignments that CRISIL offers.
INVESTMENT RESEARCH OUTSOURCING
Irevna
CRISIL added equity research to its wide canvas of work, by acquiring
Irevna, a leading global equity research and analytics company.
G.L.B.I.M.R Page 23
Irevna, a division of CRISIL, provides high-end customized equity research and analytics, and
knowledge process outsourcing, to the world's leading financial institutions, investment banks,
private equity firms and consulting companies, helping them achieve sustainable competitive
advantage.
Irevna offers investment research services to the world's leading investment banks and financial
institutions. Founded in 2001, Irevna pioneered the 'outsourced research' concept, where the firm
helps large financial institutions to carry out investment research, at a time when accepted
wisdom did not consider this possible.
POLICY, REGULATORY AND TRANSACTION ADVISORY
CRISIL INFRASTRUCTURE ADVISORY
Our Infrastructure Advisory enhances CRISIL's franchise in the areas of
policy-making and economic development. Our spectrum of activities
includes catalyzing economic development through creation of appropriate
policy frameworks, sector reforms, regulatory support, project structuring
and global competitive bid process management for large and complex
projects.
CRISIL Infrastructure Advisory blends the best global practices with analytical excellence and a
deep understanding of the local environment to provide policy, regulatory and transaction level
advice to governments and leading organizations across sectors.
We work closely with our clients to facilitate an environment for public-private partnerships and
ensure the success of projects undertaken.
INVESTMENT AND RISK ADVISORY
Investment and Risk Management Services
G.L.B.I.M.R Page 24
CRISIL Risk Solutions business provides integrated risk management
solutions and advice to Banks and Corporate by leveraging the experience
and skills of CRISIL in the areas of credit and market risk.
Taking cognizance of the market needs for integrated solutions that
quantify and manage complex risks, CRISIL Risk Solutions uses cutting-
edge research and
methodologies. Also, the Group brings together the experience of all business teams to offer
modular or integrated solutions and advisory services that are customized to meet client needs.
Credit rating is useful for the determination of the risk---
A credit rating is important, if not the most important measure o f the financial health of a
company. It gives an indication of how the company is performing in absolute terms and is also
makes it possible to compare a company credit worthiness against other company’s in similar
markets or industries worldwide. It gives indication of how a company in similar markets or
industries company expected to perform in the future and whether it is well placed to repay its
debts downgrade can see a company share price tumble as markets are particularly sensitive to
news of his nature a downgrade can also result in higher costs of capital lowering profitability
which can also lower the share price.
Credit ratings agency uses different alphanumeric and alphanumeric scales to rate companies
(such as AAA, Aaa for the highest rated companies,BB+,Ba1,for medium risk and D for the
lowest ).
However, it is relatively easy to compare the ratings of different agencies to see if there is any
difference in the assessment of the same company.
In addition, most ratings include an outlook forecast such as ‘stable’, positive, or negative giving
a signal as to which direction the credit ratings is likely to move in the future.
G.L.B.I.M.R Page 25
Essentially, there are two kinds of credit ratings. The more traditional rating agencies put out
what are known as qualitative ratings- these ratings are essentially opinions about a company’s
financial health by analysts who use a combination of financial data, company interviews and
ither market information to determine a rating. These ratings are more subject to bias as they
involve an analyst’s opinion in their determination- in the Enron debacle traditional ratings
agencies and investment houses came under intense scrutiny and criticism for failing to spot the
problems at the energy giant, with some even recommending the company as good investment
just months prior to its collapse.
The qualitative ratings market is dominated by only few major global player who are entrenched
with very strong brand names.
CREDIT RATING BY FEDERAL BANK LIMITED
Credit rating of Banks deposits and Debt instrument:
The rating factors in the long standing track record of the bank, high level of capitalization added
by the successful GDR issue and internal accruals, strong solvency position, higher profitability
and improving risk management systems and technology orientation.
Shorty term deposits: P1 + by CRISIL:
This rating ‘p’ indicates that the degree of safety regarding timely payment on the instrument is
very strong.
The “+” (plus) sign for ratings reflects a comparatively higher standing within the category.
Certificate of Deposits: P1+ by CRISIL
The Certificate of deposit issued by the bank are rated P1 + by CRISIL.
This rating ‘P’ indicates that degree of safety regarding timely payment on the instrument is
very strong.
The ‘+’ (plus) sign for ratings reflect a comparatively higher standing within the category.
G.L.B.I.M.R Page 26
Long term debt- AA- (ind) by FITCH
‘AA’ national ratings denote a comparatively low credit risk relative to other issuers or issues in
the country. The credit risks inherent in these financial commitments differ only slightly from the
country’s highest rated issuers or issues.
The suffix ‘(ind)’ refers to national ratings assigned by Fitch India.
CUSTOMER RELATIONS:
Ever since its inception, Federal bank has constantly being striving to make your banking
experience as enjoyable and comprehensive as possible. Even while embracing the latest in
technology to offer you state of the art services like ATM, Internet banking , Mobile banking and
any branch banking , we at federal bank have always take utmost care to retain the vital element
touch in our relationship with customers. Be in 24*7 phone banking service; or the opening of
representative office at Abu Dhabi , which turn out to be a boon to the large number of NRIs in
the middle east; or the implementation of the modern concept of customer relationship
management(CRM) and priority banking with dedicated relationship managers; or the ambitious
branch expansion plan undertaken by the bank ; or the recent launch of the innovative facility of
online account opening; the business initiative of federal bank has consistently been customer
oriented. Coupled with this, our dedicated and customer friendly staff ensures you a banking
experience that is unmatched.
FINANCIAL STANDING:
Financial risk are measured by taking into consideration the borrower’s liquidity, financial
strength, loan serving capability and the ability of the unit in generating optimal returns from the
capital employed
Here, the financial ratio of the firm and its operating efficiency are evaluated and analyzed for
the rating. Some of the factors are discussed here which may vary from companies to companies
depending on the type of the industry and its operations.
G.L.B.I.M.R Page 27
Current ratio is very important to judge the liquidity of the borrower. Low ratio gives poor
signal for the company, thus making it to get less mark in rating. But at the same time, it also
depends on type of industry & business.
Return on capital employed is an indicator of managerial effectiveness and method of earning
by the borrower. Higher ratio is good for the company. It gives the capital convertibility
capability of the firm. it is the ratio between profit before interest and tax to the total capital.
This ratio should be as a general rule of thumb more than the interest rate on the long term
borrowed capital.
PAT/net sales –indicated the ultimate accretion to the net worth. It shows the strength and
potential for the future growth.
Total liabilities/tangible net worth – determines the overall financial strength of the
company .gearing over 4 times should be regarded as critical risk. The ideal risk, however,
differs from industry to industry which needs to be kept in mind while appraising.
Interest service coverage ratio –in volatile markets, it is essential to estimate the number of
times the gross earning cover the interest payable. It is measure of comfort that the profitability
of the unit provides to the lender.
Debt services coverage ratio—it gives the number of times earning of the firm cover payment of
interest and repayment of the principal. Basically it tells us the capacity of a firm to pay loan out
of its profit. It indicates the margin of safety which exists for the bank and is a very important
parameter in case of term loans.
Management parameters:
Here the managerial capability of the promoter with the commitment to the company the data is
collected from both past and present records. In brief it judges the quality and goodwill of the
company.
Bank evaluates the policies and measures for the management of inventory and receivables on
monthly basis. The transparency in accounting statements is also judged from different angle of
G.L.B.I.M.R Page 28
the firm to have a fair picture in the bank’s point of view. The firm transaction with bank, if it is
an existing account is also analyzed to draw a clear picture of the borrower with the bank.
Firm standings:
Various aspects of the firm is analyzed under this heading. Like the age of the firm which
determines its experiences in the industry, reputation with customers and suppliers, the firms
credit track record. Technology also plays an important role over here. It shows whether the firm
is also improving according to the whole industry or not. The firm’s ability to raise funds, its
reputation with bank, supplier quality and concentration customer quality and concentration are
also analyzed. Accordingly scores are given based on the parameters.
Customer dealing with BANK/compliance:
The behavior of the customer as reflected in the books of Bank to be taken into account as a
likely behavior in the future and hence they are factored into. It is desirable to minimize
subjectivity while allocating marks under this head.
In case of new borrowers, item may ignore and accordingly marks allotted there of needs to be
deducted from the total assigned score to work percentage then accordingly allot appropriate
rating.
Score obtained and rating to be assigned
Based on the scores, various ratings are given to the project for example:
Score obtained Ratings to be assigned
80% &above AAA
65% to 79% AA
50% to 64% A
Below B
G.L.B.I.M.R Page 29
Description of the ratings:
AAA
Quality of lending is considered to be high and risk is at minimal. Probability of default and
perceived loan loss is minimal. Historically, it is recorded that the borrower is maintaining
liquidity and financial strength consistently for the last 3 to 4 years. Business is having enough
potential to service the debt and interest there on. Management is known for the sharing the
factual position of business happenings with bank honoring their commitments in time. Risk
mitigators are sound enough to safe guard bank interest in the unlikely event of default.
AA
Well established borrowers with the financial liquidity, strength and stability. The probability of
default and risk perception among this group of clients is a little higher than the of AAA
borrowers. They share business results freely with the bank and are to honor to their
commitments in a reasonable time. Risk mitigators ‘value is lower than on case of AAA
customer.
A
This group belongs to the lower end quality range. Their financial liquidity, financial strength
and stability are relatively weak. Lending to such borrowers is, no doubt, sound but temporary
disruptions. More likely to be affected by fluctuation in business cycles and thereby may look for
intermittent support by way of additional funds etc. they demand for constant monitoring.
B
The borrowers are average liquidity, financial strengths and stability. Unless they are with bank
for long with satisfactory dealings it cannot be said they are risk free.
LIMITATIONS OF MODELS:
The existing model at that time was evaluated by risk management consultants as a part of
setting up credit risk management system. And it was found out that those models have some
limitations like:-
G.L.B.I.M.R Page 30
Those models were mainly judgmental models wherein the parameters & weight ages
were fixed by the sharing of experience of staff involved in the model designing.
Number of rating was four with one upgrade (AAA to prime). There should be at least 6
performing & 2 non-performing risk grades, to ensure granularity.
The predictive power of models needed to be improved.
The risk score model didn’t take into account qualitative factors crucial for proper credit
evaluation for small accounts like
i. Assessment of management skills & reputation
ii. Business condition
In small business, experience suggests that quality of financial information may not be up
to a desired level and this needed to be factored into the model.
Thus, in 2005, as a part of the risk management consultancy some rating models have been
developed which have been demonstrated better predictive power. These credit risk models have
been developed on the basis of bank’s own data and have also been validated on bank’s data. The
rating models have been classified according to the limits sanctioned to the borrower (both
fund & non-fund based taken together).
i. Large corporate market
ii. Mid segment model ( fund/non-fund based limits of Rest. 1 crore & above but not
exceeding Rs 5 crore & turnover below Rs 50 crores)
iii. SBS (including SSI up to the limits specified) Model (fund/non-fund based limits of Rest.
10 lacs & above but not exceeding Rest. 1 crore.
LARGE CORPORATE MODEL:
It is a statistical model (using multiple discriminant analysis) developed using bank’s own data.
It was affected from 01.
From 01.11.2006.
G.L.B.I.M.R Page 31
This model is applicable to the following categories of borrowers-
All domestic exposures for which credit limit (fund/non-fund based) is Rs 5 crore &
above or turnover of the borrower is Rs 50 crore or above.
ECBs (External commercial borrowings and)
Syndicate loans.
The following advantages are not covered by the model
Certain agriculture/ other priority sector advances.
Advances against deposits/NSC/LIC policies/relief bonds etc.
Advances to stock brokers ( only for stock exchange branch)
PARAMETERS OF THE MODEL:
The model considers both quantitative (financial) & qualitative parameters.
Quantitative parameters like generic ratios which give financial information, while qualitative
parameters like management risk. Firm standing & industry risk are considered in this model.
QUANTITATIVE PARAMETERS:
Generic ratio Parameter Remarks
Leverage Tangible net worth/
total outside
liabilities
(TNW/TOL)
TNW: Equity/preference capital + free reserves + P&L
Ac- Misc. Expenditure (Intangible assets) + unsecured
loans (long-term unsecured loans from promoters)
Liquidity Net working
capital/total assets
Long-term
profitability
Retained
earnings/total
assets
Long –term profitability (measures the extend of
financing total assets through internal accruals. A higher
ratio shows a higher level of historical profitability &
greater financial resilience in the face of an economic
downtown)
profitability Earnings before tax
G.L.B.I.M.R Page 32
&interest/ total
assets (EBIT/TA)
Efficiency Sales/ Total assets The ratio (commonly known as asset turnover ratio)
shows how efficiently the firm uses its assets to generate
sales. Higher levels indicate greater efficiency)
QUALITATIVE PARAMETERS:
Parameters
1. Management risks
A. Management character B. Management capacity
a. Integrity (willingness to pay) a. key managerial persons (promoters & key
persons) competence
b.Diversion of funds b.Key managerial persons (promoters & key
persons) Business experience
c. Business environment c. Industrial/ employee relations
d. payment record of group cos. With the bank. d. Internal control
e. corporate governance e. Business planning
f. financial strength/ Group support
g. Intra company/Group conflicts
C. Management succession
a. Succession planning
b. succession preparation
II. Firm standing III. Industry risk
a. Age of firm a. Industry phase
b. Reputation with the customers & suppliers b. Competition impact on GP margin
c. Competitive position of firms c. Regulatory issues/ fiscal policy risk
d. Technology d. Technology dependence.
e. Customer quality & concentration e. Environmental concern
f. supplier quality & concentration f. Demand supply situation
G.L.B.I.M.R Page 33
g. Ability to raise funds (next 12 months)
h. reputation with bank
i.Business loan history
j. credit track record
The values of the quantitative & qualitative parameters are combined to arrive at a discriminant
score which is mapped to the different risk grades (on the basis of relationship established
through discriminate analysis).
The model consists of 10 borrowers risk grades from LC1 to LC10. The risk grades represent as
follows
LC1 & LC2 Good quality credit
LC3 & up to LC5 No immediate concern
LC6 Require intensive monitoring
LC7 & up to LC10 NPA/ could turn NPA over the midterm term
The minimum grade for considering sanction of advance (including additional limits) to a
borrower other than PSU is LC5. For PSU the minimum grade for considering sanction is LC7.
As these borrower risk grades will be used as a basis for calculating probability of default, which
will be an input of capital charge calculation under the advanced approaches of Basel II, It is
very important that all eligible borrowers be rated. The credit rating grades will also represent the
risk of the asset. The borrower risk grade is to be input as credit rating of the borrower in the
CCIS returns.
Adjusted borrower grade:
For existing accounts the account operation will impact the Borrower risk grade & the adjusted
borrower grade will be arrived at by upgrading/downgrading the borrower risk grade based on
the monitoring parameters. While borrower risk grade will be used for entry level as mentioned
G.L.B.I.M.R Page 34
above & for arriving at the probability of default, the adjusted borrower grade will be considered
for monitoring.
Various monitoring factors proposed to be considered for adjusted borrower grade are:
Number of days delay in receipt of
Installment’s (principal/equated)
Interest
Submission of progress reports/stock statements
Compliance with sanctioned/disbursement conditions
Key employee turnover
Conduct of the account
Comments during site visits
Number of time rescheduling/relief obtained from lending institutions
The spreads for fixing rate of interest for the risk grades will be as follows
Grade Quality Representation Spread applicable
LC1 to LC2 Good quality credit As applicable to existing ‘AAA’
accounts
LC3 to LC4 No immediate concern As applicable to existing ‘AA’
accounts
LC5 No immediate concern As applicable to existing ‘A’
accounts
LC1 to LC2 Require intensive monitoring As applicable to existing ‘A’
accounts
LC1 to LC2 NPA/couls turn NPA over the
medium term
As applicable to existing ‘B’ rated
accounts
SBS Model:
G.L.B.I.M.R Page 35
This is a scoring model with immediate effect. SBS model is applicable to all borrowers with
aggregate limits less than Rs1 crore including the following:
Small business & services (SBS) borrowers who are involved in trade & services &
manufacturing with aggregate limits between Rs 10 lacs to less than Rest 1 crore
Small Scale Industries (SSI) accounts with aggregate limits between rest 10 lakhs & less
than 1 crore
The model doesn’t cover the following advances:
All advances up to Rs 10 lacs (fund based + non-fund based)
Certain agriculture/other priority sector advances.
Advances against deposits/NSC/LIC policies/Relief bonds etc.
All staff loans
All other personal loans
Education loans
Final risk score is calculated from financial, management & business score & is risk graded on a
1 to 10 scale as specified in the score sheet attached.
SBS1 to SBS 3 Good quality credit
SBS 4 to SBS 6 No immediate concern
SBS 7 Require intensive monitoring
SBS 8 to SBS 10 NPA/ could turn NPA over the medium term
The following risk grades are to be treated as minimum grades for considering sanction of
advance to a borrower-
For SBS obligors, an entry grade of SBS 5.5 (total score of 196)
For SSI obligors, an entry grade of SBS 5.0 (total score of 180)
The spreads for fixing rate of interest for the risk grades will be as follows:
Grade Quality Representation Spread applicable
SBS 1 to SBS 3 Good quality credit As applicable to existing
G.L.B.I.M.R Page 36
‘AAA’ accounts
SBS 4 to SBS 6 No immediate concern As applicable to existing ‘AA’
accounts
SBS 7 Require intensive monitoring As applicable to existing ‘A’
accounts
SBS 8 to SBS 10 NPA/could turn NPA over the
medium term
As applicable to existing ‘B’
accounts
SBS model (Accounts less than 1 crore):
This model uses three components i.e. financial, management, industry parameter which is
giving different weightings (given below) & converted into a risk score by multiplying the factor
by respective weight assigned to that factor.
Components Weight age
Financial risk score 24%
Management risk score 52%
Business risk score 24%
The aggregate score is then used to arrive at the final grade of the borrower.
A. Financial risk score
Sales growth
Profitability: PBDITA/sales
Leverage:TOL/TNE
Liquidity: Current ratio
Coverage
I. DSCR
II. Interest coverage
Each parameter is filled in by considering 1 as the best tier & 4 as the worst tier. Each financial
factor is given a weight age of 4%.
G.L.B.I.M.R Page 37
B.Management risk score:
Management factors Sub factors weight age
Management character Diversion of funds 4
Integrity 4
Business environment 4
Management capacity Financial strength 4
Competence 2
Business expertise 2
Internal control 2
Employee quality 2
Management succession Successor identification 4
Successor preparedness 4
Management reputation Business loan history 4
Credit track record 4
Firm’s age 8
Reputation with customer &
supplier
4
52
C.Business risk score:
Business factors weight age
Customer quality & concentration 4
Supplier quality & concentration 4
Impact of competition on GP margins 4
Sales trend 4
Regulatory/ fiscal risk 4
Technology dependence (product) 2
Environmental impact (product) 2
24
G.L.B.I.M.R Page 38
Parameters Measure Assigned
Score
I. Financial Risk Based on latest Balance Sheet(audited/provisional)
1. Sales Growth 15% & above increase over previous
year
1
5% & above but below 15% increase
over previous year
2
0% & above but below 5% increase
over previous year
3
Negative over previous year 4
2. Profitability
(PBDITA/SALES)*100
25% & above increase over the
previous year
1
15% & above but below 25% increase
over previous year
2
0% & above but below 25% increase
over previous year
3
Negative over previous year 4
3. Liquidity
(Current ratio)
1.33 & above 1
Less than 1.33 but more than 1.25 2
1.24 to 1.1 3
Less than 1.1 4
4. leverage
( TOL/ TNW)
0 above but below 1 1
1 & above but below 3 2
3 & above but below 4 3
4 & above 4
G.L.B.I.M.R Page 39
5. Coverage
Debt service coverage
ratio
2 & above 1
1.5 & above but below 2 2
1 & above but below 1.5 3
-1 & above but below 1. 4
Interest Service Coverage
Ratio
2 & above 1
1.5 & above but below 2 2
1 & above but below 1.5 3
-1 & above but below 1. 4
G.L.B.I.M.R Page 40
(i)Diversion of funds There is no possibility of diversion of
funds & there are no group companies.
1
Diversion of funds is unlikely, though
there are group entities, marginal
amounts may be divided for personal
use.
2
Diversion of funds is likely on a
regular basis to group entities & for
personal use.
3
The borrowing entity is only a front for
diversion to the rest of the group or for
personal use.
4
SUB TOTAL OF FINANCIAL RISK SCORE (A1TO A5 ABOVE)
(B) Management risk score
(1) Management character
G.L.B.I.M.R Page 41
G.L.B.I.M.R Page 42
G.L.B.I.M.R Page 43
(ii) Integrity Well established member of the
community whose integrity is
unquestionable.
1
Generally respected by peers & by the
community.
2
Does not always act in an upright &
honest manner.
3
Should repayment capacity be
impaired, management may not
cooperate with lender or no
information could be obtained about
management’s integrity.
4
(iii) Business commitment Promoter is highly in this business, has
long standing exposure in the business
contributes significantly to his overall
business environment.
1
Promoter is fairly committed to this
business but has substantial investment
in other business.
2
This business occupies only small
portion of his time & investment & his
most significant business interest lies
elsewhere.
3
No involvement by the promoter,
business merely a legacy or promoter
diversifying into other areas where his
involvement will increase in future or
unable to gauge commitment.
4
B1 SUB TOTAL MNAGEMENT CHARACTER SCORE
(2)Management capacity
(i) Financial strength Financial very strong : high net worth
& flourishing group entities (if any)
1
Good financial strength: minor group
entity may not be doing well or short
term personal problems.
2
Financial strength is ok: however poor
group entity could the borrowing
entity.
3
Very poor financials Or financial
strength couldn’t be ascertained or
widely differing opinions obtained.
4
(ii) Competence Management is very good: person is
well organized & knowledgeable about
the company & the industries in which
he operates.
1
Person has reasonable management
skills but weakness in one or two areas
is evident. Tasks are performed
satisfactory.
2
Person exhibits limited managerial
skills. Individual doesn’t have a
complete understanding of a business.
3
Person exhibits a total lack of skills.
Decisions are illogical & loan
repayment could be at risk.
4
G.L.B.I.M.R Page 44
G.L.B.I.M.R Page 45
(i) Business experience Several years of sound business
experience in the same line &
extremely successfully.
1
Fairly long experience in the same line
of business with limited success.
2
Fair experience but related line of
business
3
Very short or no experience in any
business.
4
(ii) Internal controls Internal control is fairly good & is
dependent on the owner’s long
standing relationship with his
employees.
1
Internal control is not very light &
employees have too much discretion
2
Internal control is totally dependent on
the owner’s presence in the business
location & his personal supervision.
3
No internal control at all the owner
does not have a clue to what is
happening.
4
(iii) Employee quality Motivated & loyal employees who
have a sound understanding of the
business.
1
Employees are loyal but don’t have
much experience.
2
Employees are not motivated & don’t
contribute their best.
3
Employees are neither motivated nor
competent.
4
G.L.B.I.M.R Page 46
B2 SUB TOTAL OF MANAGEMENT CAPACITY SCORE
(2)Management succession
G.L.B.I.M.R Page 47
B3 SUB TOTAL OF MANAGEMENT SUCCESSION SCORE (3(i) TO
G.L.B.I.M.R Page 48
(i) Succession identification Well defined succession plan in place,
business not dependent in one person.
1
Business dependent on one person at
present.
2
Succession is not addressed adequately
& hence dealing with a change in the
management team could adversely
affect the company’s performance
however the damages can be obtained.
3
Succession is not addressed & in the
event of incapacitation of the key
person, the business would suffer
financial setbacks.
4
(ii) Successor preparedness Successors have far more than the
necessary skills, experience &
knowledge about the business.
1
Successors have adequate skills,
experience & knowledge.
2
They have some skills. But a lot of
learning adjustment needed to be fully
capable of replacing current
management.
3
Successors are poorly prepared for
assuming the role of current
management & are not currently, nor
could they be made capable of
replacing current management.
4
3(ii)
(i) Business history Obligation to creditors are met before
or within agreed terms.
1
Payments are extended beyond agreed
upon terms of an infrequent basis.
2
Often borrower allows bills to extend
60-9- days beyond permanent date
3
Credit checks indicate the borrower is
consistently late without cause in
paying its suppliers.
4
(ii) Credit track record Company has never violated any terms
& condition of its loan agreement
1
Company rarely does not meet all
terms & conditions of its loan
agreement.
2
Now & then the company breaches a
significant term of condition of the
credit agreement.
3
Company consistently violates loan
agreement covenants.
4
(iii) Firm’s age More than 10 years 1
More than 5 years 2
More than 2 years 3
Less than 2 years 4
(iv) Reputation with
customers & suppliers
Excellent relationship with suppliers
with no disruption of suppliers.
Excellent relationship with customers
resulting in growth & timely payments.
1
Good relationship with suppliers with 2
G.L.B.I.M.R Page 49
some disruption of suppliers. Fair
reputation with customers resulting in
growth & generally timely payments.
Fair relationship with suppliers with
frequent disruption of suppliers. Fair
relationship with customers but
increase in credit period & some
defaults.
3
Poor relationship with suppliers. Poor
relationship with customers but
substantial increase in credit period &
high defaults.
4
(4) Management reputation
SUB TOTAL OF MANAGEMENT REPUTATION SCORE
B4 SUB TOTAL OF MANAGEMENT RISK SCORE
Business/industry Risk Score
(i) Customer quality &
concentration
Diversified customer having
reasonable size, stable Purchase
pattern from the firm & likely to pay
outstanding invoices on a timely basis.
1
Generally diversified customer based
that may not have either a reasonable
size or a stable purchase pattern from
the firm but is likely to pay
outstanding invoices on a timely basis.
There may be a few large customers.
2
Customer has neither reasonable size 3
G.L.B.I.M.R Page 50
nor a stable purchase pattern from the
firm but is likely to pay outstanding
invoices on a timely basis. The firm
may have only a few customers with
little product diversification.
Customers are not expected to pay on
time. The firm may have only 1-2
customers.
4
(ii) Supplier quality &
concentration
Firm has a choice of suppliers
supplying quality goods & services.
1
Firm has a choice of suppliers
supplying average quality of goods &
services.
2
Firm has very few suppliers supplying
quality goods & services. Quality of
goods & services isn’t very good.
3
Monopolistic situation with no control
over quality.
4
(iii) Impact of competition on
GP margins
Current industry structure not expected
to lead to decline in GP margin.
1
Industry competition may result in
marginal decline in margins.
2
Industry competition has resulted in
significant decline in margins.
3
GP margins have declined significantly
due to competition & expected to
decline further.
4
(iv) Sales trend (product) Product have no substitutes, regulatory
threats demand will remain stable or
grow.
1
Product has limited substitute & 2
G.L.B.I.M.R Page 51
regular threats.
Demand for product may be affected
by lower price substitutes &
regulation.
3
Demand faces serious threats due to
substitutes & regulation.
4
(v) Regulatory/ fiscal risk There are no foreseen changes in the
direct/ indirect tax structure or
import/export restrictions which could
impact the industry profitably.
1
While some changes in the direct/
indirect tax structures or import/ export
restrictions which impact the industry
are fore seen, these may have some
impact on industry profitability.
2
Some changes are foreseen in the
direct/indirect tax structure or
import/export restrictions which
impact the industry. These may have
major impact on industry profitability
& affect viability of marginal players.
3
Significant changes are foreseen in the
direct/indirect tax structures or
import/export restrictions which
impact the industry. These may have
significant impact on industry
profitability & viability players.
4
(vi) Technology dependence Technology is tested & not expected to
change in the long run.
1
Technology is tested & not unlikely to 2
G.L.B.I.M.R Page 52
change in the medium term
Technology is tested but likely to
change in the medium term.
3
Outdated technology or tech. subject to
very fast obsolescence or technology
as yet untried/untested.
4
(vii) Environmental impact Unlikely to face pollution related
problems in future.
1
Limited likelihood to face pollution
related problems in future.
2
Polluting industry but complies with
current norms which are subject to
change.
3
Polluting industry & doesn’t comply
current norms.
4
SUB TOTAL BUSINESS/ INDUSTRY RISK SCORE (C(i) to (vii) above
VBA MODEL (VERY LARGE BORROWER ACT)
This model is for an amount of 5 crore or above credit. It helps in quantification of certain
qualitative factors, which are very crucial in determining the credit worthiness of a borrower.
Though the quantification is not so accurate but it is precise one. Various factors consider in this
model are:
1. Financial risk
2. Management risk
3. Business risk
G.L.B.I.M.R Page 53
4. Monitoring risk
FINACIAL RISK
Sales Sales generated in connection with the
principal operation of the business
should be entered in this head. Trading
sales should be clubbed with gross
sales. Income & revenues from other
source should be included with other
operating income.
GST/VAT/Turnover tax/National
security levy
GST/VAT/Turnover tax/National
security levy or any other indirect tax.
Excise duty Excise duty paid on sales. If sales are
shown net of excise duty then this
should be left blank.
Raw material and consumables used Expenses arising out of material &
related expenses used to produce
finished goods. Example of account
names raw material consumed,
packing material, trading purchases.
Changes in inventories of finished
goods and WIP
This head relates to change in opening
& closing stock of finished goods &
goods in progress or work in progress.
Other direct expenses This head relates to other direct
expenses incurred during production or
break up of expenses isn’t given then
cost of sales fig. may be input here.
Example of account names- power &
fuel, coal costs, repairs & maintenance
on plant & machinery etc.
Employee expenses Expense arising out of the payment of
G.L.B.I.M.R Page 54
wages & or salaries. Example of
accounts- salaries, wages, bonus,
allowances, contribution to provident
fund, gratuity, employee welfare.
Selling and distribution expenses All operating expenses relating to
selling & marketing efforts, example
of account names- sales expenses,
sales commission, marketing expenses,
advertising expenses, sales man’s
salaries, bad debt written off, freight
outward.
Administrative expenses and
establishment expenses
All general & administrative operating
expenses not specially identified & it
shouldn’t include any depreciation &
amortization expenses. Example of
accounts names-office expenses,
insurance, supplies, donations, repairs,
& maintenance on office & travel.
Other operating expenses All other operating expenses.
Work performed by enterprise and
capitalized
All revenue expenses incurred before
commencement of commercial
borrowings. Example of accounts-
interest on long-term loans, cash
credit, debentures, loss of foreign
exchange fluctuations etc.
Lease expenses Total interest expense incurred on
lease obligations.
MANAGEMENT RISK
G.L.B.I.M.R Page 55
INTERGITY (WILLINGNESS TO PAY) SCORES
Excellent Promoter/group well known to meet its
commitment even under adverse circumstances.
1
Good Known group/promoter who generally meets its
commitment.
2
Marginal Known group/promoters who doesn’t always
meet its commitment?
3
Doubtful No information could be obtained about
management’s integrity or promoter already in
default with some institutions.
4
DIVERSIION OF FUNDS SCORES
Excellent No diversion of funds was observed in the past. 1
Good Minor diversion of funds was observed in the
past.
2
Marginal Diversion of funds has been a regular affair in
the past.
3
Doubtful The borrowing entity has been the front for
diversion to funds.
4
BUSINESS COMMITMENT SCORES
Very high Promoter is highly involved in this business,
has long standing exposure in the business &
the business contribute significantly to his
overall business investment.
1
High Promoter is fairly committed to this business
but has substantial investment in other business.
2
Marginal This business occupies only a small portion of
his time & investment & his most significant
business interest lies elsewhere.
3
G.L.B.I.M.R Page 56
Low No improvement by the promoter, business
merely a legacy or promoter diversifying into
other areas where his involvement will increase
in future or unable to gauge commitment.
4
KEY MANAGERIAL PERSONS-BUSINESS EXPERIEENCE SCORES
Excellent Excellent business experience & management
skills in the same line of business.
1
Good Adequate business experience & requisite
management skills in the same line of business.
2
Marginal Limited business experience or managerial
skills in the same line of business.
3
Inadequate Very little business experience or weak
managerial skill in the same line of business.
4
KEY MANAGERIAL PERSONS-COMPETENCE SCORES
Excellent Excellent business experience & management
skills in the same line of business.
1
Good Adequate business experience & requisite
management skills in the same line of business.
2
Marginal Limited business experience or managerial skill
in the same line of business.
3
Inadequate Very little business experience or weak
managerial skill in the same line business.
4
INDUSTRIAL/EMPLOYEE RELATION SCORES
Excellent No labour problems in past 2 years & cordial
relationship.
1
Good Minor labor problems in past 2 years & cordial 2
G.L.B.I.M.R Page 57
relationship.
Marginal Labour problems in past 2 years lending to
disruptions.
3
Weak Frequent labour problems & weak relations. 4
SUCCESSION PREPARATION
Excellent Successors have far more than necessary skills,
experience & knowledge about the business.
Good Successors have adequate skills, experience &
knowledge about the business even though there
would be some learning & adjustment needed to
be capable of replacing current management.
Marginal Successors are somewhat prepared for assuming
the role of current management but are expected
to be capable of replacing current management.
Inadequate Successors are weakly prepared for assuming the
role of current management & are not currently,
nor could they be made capable of replacing
current management.
INTERNAL CONTROL
Excellent Internal control is fairly good or has obtained
international certification like ISO certificate etc.
Good Internal control is adequate or the company has
applied for international certificate like ISO
certificate.
Marginal Internal control is totally dependent on the
management’s presence in the business location
& their personal supervision.
Inadequate No internal control at all. The management
doesn’t have a clue to what is happening.
G.L.B.I.M.R Page 58
FINANCIAL STRENGTH/ GROUP SUPPORT SCORES
Excellent Financially very strong, high net worth &
flourishing group entities.
1
Good Good financial strength; few group entities
mayn’t be doing well.
2
Marginal Financial strength is adequate; however, group
situation may affect the borrowing entity
adversely.
3
Inadequate Weak financial or financial strength couldn’t be
ascertained or widely differing opinions
obtained.
4
PAYMENT RECORD OF GROUP COMPANIES SCORES
Excellent All the group companies are meeting their
commitments without any delay.
1
Average Group companies are meeting their
commitments. However delays of < 1 quarter
are observed in some companies.
2
Weak Group companies are delaying payments
beyond 1 quarter.
3
Not applicable If there are no group companies with the bank. 4
BUSINESS PLANNING SCORES
Excellent Management is highly committed in strategic
planning & has a long track record in meeting
targets.
1
Good Management is committed in strategic planning
& has a reasonable track record in meeting
targets.
2
Marginal Management is committed in strategic planning 3
G.L.B.I.M.R Page 59
but has short comings in meeting targets.
Inadequate Management is unable to develop strategic plan
& the company lacks future direction.
4
CORPORATE GOVERNANCE SCORES
Above average The company has complied with all the
conditions of corporate governance.
1
Average The compliance with the condition of corporate
governance as stipulated.
2
Below average The compliance with the condition of corporate
governance as stipulated.
3
Not applicable The company is not a listed company & no
information is available.
4
INTRA COMPANY / GROUP CONFLICTS SCORES
Excellent The relationship among promoters/directors is
excellent.
1
Good The promoters/directors enjoy good
understanding.
2
Marginal There have been instances of conflicts between
promoters/ directors, which could affect the
performance of the company.
3
Weak Major differences between promoters/directors,
which is adversely affecting the performance of
the company.
4
FIRM STANDING SCORES
AGE OF FIRM
>10 1
G.L.B.I.M.R Page 60
5-10 years 2
2-5 years 3
<2 years 4
REPUTATION WITH CUSTOMERS AND SUPPLIERS SCORES
Excellent Excellent relationship with the supplier with no
disruptions of supplies. Excellent reputation
with customers resulting in growth & timely
payments.
1
Good Good relationship with the suppliers with some
disruptions of supplies. Good reputation with
customers resulting in growth & generally
timely payments.
2
Marginal Fair relationship with the suppliers with
frequent disruption of supplies. Fair reputation
with customers but increase in credit period &
some defaults.
3
Unfavorable Poor relationship with the supplier. Poor
reputation with customers resulting in
substantial increase in credit period & high
defaults.
4
BUSINESS LOAN HISTORY SCORES
Excellent Obligation to the creditors are met before or
within agreed terms.
1
Good Payments have extended beyond agreed terms
on an infrequent basis.
2
Marginal Often companies delay bills to the extent of 60-
90 days beyond payment days.
3
Weak Credit checks indicate the company is
consistently late, without cause in paying its
suppliers or information couldn’t be obtained
4
G.L.B.I.M.R Page 61
on how the borrower handles its payment
responsibility.
CREDIT TRACK RECORD SCORES
Excellent Companies have never violated any term &
condition of its loan agreement.
1
Good Companies sometimes break terms &
conditions of its loan agreement which are not
significant.
2
Marginal Now & then the company breaches a significant
term or condition of the credit agreement.
3
Weak Company regularly violates loan agreement
covenants.
4
COMPETITIVE POSITION OF THE FIRM SCORES
Very high A significant player & has strong ability to
increase or maintain market share.
1
High A significant player with adequate ability to
maintain market share.
2
Marginal A marginal player with moderate ability to
maintain market share.
3
Low Low market share & not likely to withstand the
market competition.
4
TECHNOLOGY- FIRM STANDING SCORES
Excellent Latest proven technology, which is leading to
efficiencies.
1
Good Widely accepted technology which is fairly 2
G.L.B.I.M.R Page 62
efficient.
Marginal Technology is likely to be phased out in the
medium term.
3
Unfavorable Outdated technology. 4
CUSTOMER QUALITY AND CONCENTRATION SCORES
Excellent Diversified customer base having reasonable
size & stable purchase pattern from the firm.
1
Good Generally diversified customer base that may
not have either a reasonable size or a stable
purchase pattern from the firm. There may be a
few large customers.
2
Marginal Customer has neither reasonable size nor a
stable purchase pattern from the firms. There
may be only a few customers with little product
diversification.
3
Unfavorable Customer concentration is high. 4
SUPPLIER QUALITY & CONCENTRATION SCOR
ES
Excellent Firm has a choice of suppliers supplying
quality goods & services.
1
Good Firm has a choice of suppliers supplying
average quality goods & services.
2
Marginal Firm has a very few suppliers supplying goods
& services. Quality of goods & services is not
very good.
3
Unfavorable Monopolistic situation with no control over
quality.
4
REPUTATION WITH BANKERS/FINANCIAL INSTITUTION SCOR
G.L.B.I.M.R Page 63
ES
Excellent Excellent reputation with bankers for timely
payments of commitments.
1
Good Good reputation with bankers for timely
payment of commitments.
2
Marginal Fair reputation with bankers. However there
are some delays in meeting commitments.
3
Unfavorable Poor reputation with bankers or no
information.
4
BUSINESS RISK
INDUSTRY PHASE SCORES
Growth Industry is in growth phase. 1
Stable Industry is in stable phase. 2
Uncertain Industry susceptible to unfavorable changes in
the economy.
3
Decline Industry is in declining phase. 4
COMPETION IMPACT ON GP MARGIN SCORES
Excellent Current industry structure (including
substitutes/entry barriers) not expected to lead
to decline in GP margin.
1
Good Industry competition may result in marginal
decline in margins.
2
Marginal Industry competition has resulted/may result in
significant.
3
Unfavorable GP margins have declined significantly due to
competition & expected to decline further.
4
REGULATORY ISSUES/ FISCAL POLICY DEPENDENCE SCORES
Low There are no foreseen changes in the 1
G.L.B.I.M.R Page 64
regulations, which could affect the industry
profitability. These changes include
direct/indirect tax structure, import/export
restrictions etc.
Moderate Some changes in the regulation, which affect
the industry, are foreseen. These may have
some impact on industry profitability.
2
High Some changes are foreseen in regulations.
These may have a major impact on industry
profitability & affect viability of marginal
players.
3
Very high Significant changes are foreseen in regulations.
These may have a major impact industry
profitability & viability of players.
4
TECHNOLOGY DEPENDENCE SCORES
Low Technology isn’t expected to change in the
long-term.
1
Moderate Technology is unlikely to change in the
medium term.
2
High Technology is likely to change in short term. 3
Very high Outdated technology or technology subject to
very fast obsolescence or technology as yet
untried/untested.
4
DEMAND SUPPLY SITUATION SCORES
Excellent Demand exceeds supply & the situation is
unlikely to change in medium term.
1
Good Demand is likely to match supply in the
medium term.
2
G.L.B.I.M.R Page 65
Marginal Moderate oversupply in the industry & low
demand growth envisaged in the medium term.
3
Unfavorable Significant oversupply in the industry, which is
unlikely to change in medium term.
4
MONITORING RISK
SUBMISSION OF PROGRESS REPORTS SCORES
Within due date 1
<=15 days Within 15 days 2
<=30 days Within 30 days 3
>30 days Over 30 days 4
COMPLIANCE WITH SANCTIOND/DISBURSEMENT CONDITIONS SCORES
Excellent Complied fully-security & financial covenants 1
Good Complied with creation of security. 2
Marginal Complied with financial covenants only. 3
Not complied The sanctioned/disbursement conditions have
not been complied.
4
KEY EMPLOYEES TURNOVER SCORES
Low No significant change in the key employees in 1
year, other than for a valid reason.
1
Medium Few changes in the key employees in last 1
year.
2
High Moderate change in the key employees in the
last 1 year.
3
Abnormal Frequent change in the key employees in the 4
G.L.B.I.M.R Page 66
last 1 year.
COMMENTS IN OPERATIONS / ASSETS DURING SITE VISITS SCORES
Excellent No adverse comments & turnover greater than
90%.
1
Good Normal adverse comments & turnover between
75% to 90%.
2
Marginal Major adverse comments & turnover between
50% to 75%.
3
Unfavorable Comments causing anxiety or turnover below
50%.
CHANGE IN ACCOUNTING PERIOD DURING THE LAST FIVE YEARS
Not done 1
Once 2
Twice 3
More than twice 4
NO. OF TIMES RESCHEDULING / RELIEFS OBTAINED FROM LENDING
INSTITUTIONS
Not done 1
Once 2
Twice 3
More than twice 4
NO. OF TIMES OVERLIMIT / AD-HOC LIMIT ALLOWED SCORES
Two times Twice a year 1
Four times Four times a year 2
Six times Six times a year 3
G.L.B.I.M.R Page 67
>six times More than six times or exceeding six months
total in a year.
4
NUMBER OF CHEQUES/BILLS RETURNED SCORES
<6 per year Less than 6 per year 1
<12 per year Less than 12 per year 2
<24 per year Less than 24 per year 3
> 24 per year More than 24 per year 4
CHAPTER-4
RESEARCH METHODOLOGY
The research was mainly of secondary research consisted of literature search and internet search.
Regarding the research on the topic “credit rating system of federal bank ltd.” I have used all the
methods adopted by credit rating agency i.e CRISIL for calculating credit rating . The methods
include:-
I. Credit rating methodology Bond/debenture rating
Equity rating
Commercial paper rating
Fixed deposits rating
Individuals rating
Mutual fund rating
Rating structure obligations
II. Credit rating process
Receipts of information
Analysis of information
G.L.B.I.M.R Page 68
III. The major ratios computed
Coverage ratio
Financial leverage ratio
Liquidity ratio
Cash flow ratio
Profitability ratio
CHAPTER-5
DATA ANALYSIS & INTERPRETATION (CASE STUDY)
ABC Pvt. Ltd had applied for a loan above an amount of 1 crore. Thus, on the basis of the
amount one credit rating model was applied to find out the appropriate rating for the applicant.
As per the model, the required parameters were considered to decide the credit rating. Those
parameters are –
Financial standing
Information system
Financial discipline
General observations in conduct of the account & ancillary business.
Based on these factors scores were given & according to the score obtained, the rating was done.
ASSESSMENT OF WORKINGCAPITAL REQUIREMENTS OF ABC PVT. LTD.
G.L.B.I.M.R Page 69
Amounts in Rs Lakhs
Last 2 years actual Current year Estim.
Table-5.1 (As per audited a/cs)
Year 31st Mar
07
31st Mar 08 31st Mar
09
31st Mar
10
1. Gross sales
i. Domestic sales 310.95 438.24 647.79 906.90
ii. Export sales - - - -
iii. Other operating/revenue
income
- - - -
Total 310.95 438.24 647.79 906.90
2. Less Excise duty - - - -
3. Net sales (1-2) 310.95 438.24 647.79 906.90
4. % rise (+) or fall (-) in net sales as
compared to previous year
(annualized)
N/A 40.94% 47.82% 40.00%
5. Cost of sales
i. Raw materials (including
stores & other items used in
the process of manufacture)
a) Imported
b) Indigenous
0.00 0.00 0.00 0.00
ii. Other spares
a) Imported
b) Indigenous
0.00 0.00 0.00 0.00
iii. Power & fuel - - - -
iv. Direct labour (factory wages
& salaries)
- - - -
v. Other manufacturing expenses 279.31 390.03 578.19 780.56
vi. Depreciation 1.15 1.35 1.22 1.03
Other costs - - - -
G.L.B.I.M.R Page 70
vii. Sub- total (i-vi) 280.46 391.38 579.41 781.59
viii. Add: Opening stock in
process
0.00 0.00 0.00 0.00
Sub-total (vii-viii) 280.46 391.38 579.41 781.59
ix. Deduct: Closing stock in
process
- - - -
x. Cost of production 280.46 391.38 579.41 781.59
xi. Add: Opening stock of
finished goods
0.00 0.00 0.00 0.00
Sub- total (x-xi) 280.46 391.38 579.41 781.59
xii. Deduct: Closing stock of
finished goods
- - - -
xiii. Sub- total (Total cost of sales) 280.46 391.38 579.41 781.59
6. Selling, general & administrative
expenses
22.00 34.96 43.93 76.72
7. Sub- total (5+6) 320.46 426.34 623.34 858.31
8. Operating Profit before interest (3-7) 8.49 11.90 24.45 48.59
9. Interest 1.48 2.00 2.50 3.25
10. Operating profit after interest (8-9) 7.01 9.90 21.95 45.34
11. i. Add: Other non- operating income
a) Sold of old newspapers
b) Comm. Received from ABC
ltd.
c) Fly high incentive &
incentive Dharitri
d) Rent research & mis.income
Sub- total ( income)
iii. Deduct: Other non- operating
expenses
iv. Net of other non- operating
income /expenses
0.03
0.22
0.00
0.00
0.25
0.00
0.03
0.00
0.57
0.42
1.02
0.00
0.05
0.00
0.00
0.00
0.05
0.00
0.04
0.00
0.00
0.00
0.04
0.00
G.L.B.I.M.R Page 71
0.25 1.02 0.05 0.04
12. Profit before tax/ loss (10+
11(iii))
7.26 10.92 22.00 45.38
13. Profit for taxes - - - -
14. Net profit/loss (12-13) 7.26 10.92 22.00 45.38
15. A) Equity dividend paid amount
(already paid + B.S prov.)
B) Dividend rate (%)
-
-
-
-
-
-
-
-
16. Retained profit (14-15) 7.26 10.92 22.00 45.38
17. Retained profit/ net profit (%) 100% 100% 100% 100%
ANALYSIS OF BALANCESHEET LIABILITIES
Amounts in Rs. Lakhs
Last 2 year actual Current Estimated
Table-5.2 (As per audited a/cs) year year
Year 31st Mar
07
31st mar
08
31stMar
09
31st Mar
10
CURRENT LIABILITIES
1. Short-term borrowing from banks
(including bill purchased, discounted
& excess borrowing placed on
repayment basis)
i. From applicant bank
ii. From other banks
iii. (of which BP & BD)
Sub- total (i+ii) (A)
6.63
6.63
20.00
20.00
20.00
20.00
20.00
20.00
2. Short term borrowings from others 1.00 2.00 2.50 2.50
G.L.B.I.M.R Page 72
3. Sundry creditors (trade) 52.87 88.14 111.82 108.00
4. Advance payments from customers/
deposits from dealers
- - - -
5. Prov. For taxation 1.41 2.88 6.17 12.50
6. Dividend payable - - - -
7. Other statutory liabilities (due within
1 year)
- - - -
8. Deposits/ installments of term loans/
DPGs/ debenture etc. ( due within
1 year )
- - - -
9. Other current liabilities & Provisions
(due within 1year)
2.22 2.60 3.30 7.00
a. Liabilities for exps
b. Branch division
1.95
0.27
2.60 3.30 7.00
Sub- total (2-9) (B) 57.50 95.62 123.79 130.00
10. Total current liabilities (A+B) 64.13 115.62 143.79 150.00
TERM LIABILITIES
11. Debentures ( not maturing within 1
year)
- - - -
12. Preference shares (redeemable after
1 year)
- - - -
13. Term loans (excluding installments
payable within 1 year)
1.59 1.06 0.63 0.20
14. Deferred payment credits (excluding
installments due within 1 year)
- - - -
15. Term deposits (repayable after
1year)
- - - -
16. Other term liabilities - - - -
17. Total term liabilities (11-16) 1.59 1.06 0.63 0.20
18. Total outside liabilities (10-17) 65.72 116.68 144.42 150.20
NET WORTH
G.L.B.I.M.R Page 73
19. Ordinary share capital 11.67 17.58 30.68 66.06
20. General reserve - - - -
21. Revaluation reserve - - - -
22. Other reserves (excluding provision) - - - -
23. Surplus (+) or deficit (-) in profit &
loss A/C
- - - -
24. Net worth 11.67 17.58 30.68 66.06
25. Total liabilities (18+24) 77.39 134.26 175.10 216.26
ANALYSIS OF BALANCESHEET ASSETS
AMOUNTS IN Rs LAKHS
Last 2 years actual Current Estimated
Table-5.3 (As per audited b/s) Year Year
Year 31st Mar
07
31st Mar
08
31st Mar
09
31st Mar
10
Current Assets
26. Cash & bank balances 0.11 0.22 0.13 0.18
27. Investments (other than long-term)
i. Govt. & other trustee securities
ii. Fixed deposit s with banks
1.65 2.42 2.42 2.42
28. i. Receivables other than deferred &
exports (including bills purchased &
discounted by banks)
iii. Export receivables (including
bills purchased & discounted
by banks)
66.68 121.50 162.28 203.77
G.L.B.I.M.R Page 74
29. Installments of deferred receivables
(due within 1 year)
- - - -
30. Inventory:
i. Raw materials (Including
stores & other items used in the
process of manufacture)
a) Imported
b) Indigenous
ii. Stock in process
iii. Finished goods
iv. Other consumable spares
a) Imported
b) Indigenous
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
31. Advances to suppliers of raw
materials & stores/spares
1.50 0.00 0.00 0.00
32. Advance payment of taxes 1.71 4.04 4.91 5.00
33. Other current assets 0.00 0.00 0.00 0.00
34. Total current assets (26-33) 71.75 128.18 169.74 211.37
Fixed Assets:
35. Gross block (land, building,
machinery, work-in-progress)
6.79 7.43 6.58 5.92
36. Depreciation to date 1.15 1.35 1.22 1.03
37. Net block (35-36) 5.64 6.08 5.36 4.89
Other Non- current Assets:
38. Investments/book
debts/advances/deposits which are not
current assets.
i. a) Investments in subsidiary
companies/affiliates
c) others
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
G.L.B.I.M.R Page 75
ii. Advances to suppliers of
capital goods & contractors
iii. Deferred receivables (Maturity
exceeding 1 year)
iv. Others
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
39. Non- consumable stores & spares - - - -
40. Other Non-current assets (including
dues from directors)
- - - -
41. Total other noncurrent assets - - - -
42. Intangible assets (patents, goodwill,
prelim, expenses)
- - - -
43. Total assets (34+37+41+42) 77.39 134.26 175.10 216.26
44. Tangible net worth 11.67 17.58 30.68 66.06
45. Net working capital (34-10) 7.62 12.56 25.95 61.37
Adjusted TNW 11.67 17.58 30.68 66.06
46. Current ratio (34/10) 1.12 1.11 1.18 1.41
47. Total Outside liabilities/ tangible net
worth (18/44)
5.63 6.64 4.71 2.27
48. Total term liabilities/ tangible net
worth (17/44)
0.41 0.06 0.02 0.00
49. TOL / adjusted TNW 5.63 6.64 4.71 2.27
FUNDSFLOW STATEMENT OF ABC PVT. LTD.
Amounts in Rs lakhs
Table-5.4 Last year Current year Estimated year
Year 2008 Prov. 31st Mar 09 31st Mar 10
1. Sources
G.L.B.I.M.R Page 76
a. Net profit 10.92 22.00 45.38
b. Depreciation o.20 -0.13 -0.19
c. Increase in capital 5.91 13.10 35.38
d. Increase in term liabilities (including
public deposits)
- - -
e. Decrease in
i. Fixed assets
ii. Other non-current assets
0.85 0.66
f. Others - - -
g. Total 17.03 35.82 81.23
2. Uses
a. Net loss - - -
b. Decrease in Term liabilities
(including public Deposits)
0.53 0.43 0.43
c. Increase in
i.Fixed assets
ii.Other Non current assets
0.64
0.00
-
0.00
-
0.00
d. Dividend payments 0.00 0.00 0.00
e. Others 10.92 22.00 45.81
f. Total 12.09 22.43 45.81
3. Long-term surplus (+)/ Deficit (-) 4.94 13.39 35.42
4. Increase/decrease in current assets (As per
details given below)
56.43 41.56 41.63
5. Increase/Decrease in current liabilities
other than bank borrowings
38.12 28.17 6.21
6. Increase/decrease in working capital gap 18.31 13.39 35.42
7. Net surplus/Deficit(-) -13.37 0.00 0.00
8. Increase/ decrease in bank borrowings 13.37 0.00 0.00
9. Increase / decrease in Net sales 127.29 209.55 259.11
10. Increase/decrease in Receivables
a) Domestic 54.72 40.78 41.49
G.L.B.I.M.R Page 77
b) Export 0.00 0.00 0.00
11. Increase/decrease in other current assets 1.71 0.78 0.14
Total 56.43 41.56 41.63
Given below is the model which is used in the case analysis.
Table-5.5
Parameters Measure Assigned score
I. Financial Risk (Static) Based on latest Balance Sheet(audited/provisional)
Current Ratio 1.33& above 5
Less than 1.33 but more than
1.25
4
1.24 to 1.1 2
Less than 1.1 0
Total liabilities to tangible net
worth
Less than 2 5
2 to 3 4
3 to 4 2
More than 4 0
Interest service coverage ratio More than 3 5
3 to 2 4
1.99 to 1.5 2
Less than 1.5 1
PAT/Net sales (%) 5% & above 5
Average between 4% & 5% 3
Between 3% & 4% 2
Less than 3% 1
Loss 0
G.L.B.I.M.R Page 78
II. Financial Risk - moving averages (Dynamic) (Based on last 3 years' balance sheets)
Current ratio 1.33& more than during last 3
years with increasing trend
4
1.33 & more during last 3
years with uneven or
decreasing trend
3
Between 1.33 & 1.1 during
last 3 years with increasing
trend
2
Between 1.33 & 1.1 during
last 3 years with uneven or
decreasing trend
1
All others 0
Total liabilities to tangible net
worth
3 & less during the last 3
years with decreasing trend
4
3 & less during the last 3
years with uneven or
increasing trend
3
More than 3 but less than 4
during the last 3 years with
decreasing trend
2
More than 3 but less than 4
during the last 3 years with
uneven or increasing trend
1
All others 0
Interest service coverage ratio 3 & more during last 3 years
with increasing trend
4
3 or more during last 3 years
with uneven or decreasing
3
G.L.B.I.M.R Page 79
trend
Between 3 & 2 during last 3
years with increasing trend
2
Between 3 &2 during last 3
years with uneven or
decreasing trend
1
All others 0
Net sales Increasing trend & last year
achievement more than 90%
of projection
5
Uneven or decreasing trend &
last year’s achievement more
than 90% of projection
4
Increasing trend & last year’s
achievement more than 75%
of projection but less than
90%
3
Decreasing/uneven trend &
last year’s achievement more
than 75% of projection but
less than 90%
2
Others 0
III. Market Risk
1. Competition including
threat from imports
Monopoly situation/highest
market shares
3
Increasing market shares 2
Supply exceeds demand yet
the unit has a niche market of
its own
1
Low capacity utilization 7
company with insignificant
0
G.L.B.I.M.R Page 80
market share / high threat
from imports
2. Industry cycle Fairly stable industry cycles;
with long-term prospects
2
Susceptible to unfavorable
changes in the
market/industry cycle on the
upswing/downswing
0
3. Regulatory risk Not affected by regulatory
frame work
2
Regulatory 7 legislative
issues likely to create stress
but company has got capacity
to tackle them properly
1
Regulatory changes likely to
threaten viability
0
4. Technology Proven technology; not
subjected to changes in the
immediate future/ leading
technology in the industry
2
Technology likely, to undergo
changes & the company is
capable of surviving the
change
1
Outdated
technology/technology not
tested/substitutes are many
0
IV. Managerial Risks
1. Expertise Promoters directors/owners of
the unit are highly qualified
professionals or employing
5
G.L.B.I.M.R Page 81
qualified professionals
Owner managed with no
professionals but by persons
with experience
3
Owner managed (with no
professionals)/ new company/
firms
0
2. Track record Financially disciplined;
commitments to lenders
honored timely & no defaults
in the group companies
4
Accounts are regular but
repayment s is slightly
delayed. Group companies
are not doing well but mgt.
co-operates in settling them
3
Repayments are delayed but
account continues to be
standard; overall performance
of group companies is
average
2
No financial discipline; poor
adherence to sanction terms;
accounts are frequently
irregular, group companies in
default
0
V. Security Value
1. Assets (including
collaterals, cash margins
etc.) coverage ratio % (this
>175 4
>150 but <175 3
>100 but <150 2
G.L.B.I.M.R Page 82
is to total exposure
including NFB limits)
<100 0
2. Guarantees Central Govt./ reputed
scheduled banks
2
Promoter –Directors
guarantee/3rd party guarantee
1
No guarantee 0
VI. Capital Market Perception
1. Dividend payment Continuously for the last
3 years 2
2 years 1
Less than 2 years O
2. P/E ratio Above sector/ industry
average
2
At average 1
< average 0
VII. Contingent Risk
1. Balance sheet practices Unqualified audit report for
the past 3 years
2
2 years 1
Other cases 0
2. Contingent liabilities (% to
total net worth) (only such
liabilities which may
affect net worth/profit of
the borrower to be taken
into account)
<10 2
>10<30 1
>30 0
3. Reliability/accuracy of
data including QIS etc.
No deviation/deviation
moderate
1
G.L.B.I.M.R Page 83
furnished Deviation to considerable
extent
0
VIII. Compliance
1. Submission of stock
statements. Various
statements under QIS
& MSOD
Timely submission 2
Delayed /Irregular submission
up to 30 days
1
Non-submission /delayed
submission beyond 30 days
0
2. Submission of audited
balance sheet & P/L
A/Cs & financial data
in CMA forms
Timely submission i.e. at least
1 month before due date of
review
2
Delayed/ irregular submission
(within 2 months after due
date of review)
1
Non-submission /delayed
submission beyond 2 months
after due date of review
0
3. Over limit business No occasions generally for
over limits/adhocs/drawals
beyond sanctioned/drawing
limits without prior
approval/no return of cheques
for financial reasons
3
Occasions for over
limits/adhocs/drawals beyond
sanctioned/drawing limits
without prior approval/return
of cheques for financial
reasons, for not more than
twice in a year
2
Occasions for over 0
G.L.B.I.M.R Page 84
limits/adhocs/drawals beyond
sanctioned/drawing limits
without prior approval/return
of cheques for financial
reasons, for more than twice in
a year
4. Compliance with terms
of sanction
Complied with no deviation 3
Major terms/creation of
securities complied
2
Major terms pending 0
Risk rating parameter Max. score Max.
applicable
score(B)
Marks scored(c)
Financial risk static 20
Financial risks-dynamic 17
Market risks 9
Managerial risks 9
Security value 6
Capital market perception 4
Contingent risks 5
Compliance 10
Total 80
Percentage on risk factors= C/B*100
IX. Additional Factors to determine price
1. General observations
in conduct & ancillary
Extent conduct of account ,
trouble-free nature of
operations, group business /all
5
G.L.B.I.M.R Page 85
business the business routed through us
Satisfactory conduct of
account with some ancillary
business diverted to others
with or without bank’s
approval
2
Unsatisfactory conduct of
account with some ancillary
business diverted to others
with or without bank’s
approval
0
2. Length of satisfactory
relationship
More than 10 years 3
More than 5 years but less
than 10
2
More than 3 years but less
than 5
1
Less than 3 years 0
3. Share in non-fund
based business
100% share with our bank 3
Proportionate to our share in
fund based limits
2
Others 0
4. Collateral coverage
available for total
limits (%)
More than 100% cover 3
Between 90% & 100% 2
Between 70% & 90% 1
Others 0
5. Threat of loss of
business due to
competition
Significant 2
Not much significant 1
No threat 0
6. Rater’s perception
about long-term
benefit to bank from
Substantial large 2
Not large but definite benefits 1
G.L.B.I.M.R Page 86
the borrower/group
expected
Others 0
7. overall image/reputation of
the company/group
Excellent image 2
No adverse factors 1
Others 0
Grand summary for pricing
Table-5.6
Parameters Max. marks Marks applicable to
the particular
customer (B)
Marks secured (c)
Risk factors (items 1
to 7)
80
Additional factor for
pricing (item 9)
20
Total 100
Percentage obtained=(C/B)*100
Table-5.7
Percentage obtained Final rating
80% above ‘AAA’
65% & above but below 80% ‘AA’
50% & above but below 65% ‘A’
Below 50% ‘B’
CALCULATIONS:
According to the information, all above parameters analyzed & scores have been given to them.
G.L.B.I.M.R Page 87
1. Financial Risk (static):
a) Current ratio= C.A/C.L=169.74/143.79= 1.18
b) Total liabilities to tangible Net worth=TOL/TNW=175.10/30.68=5.70
c) PAT/Net sales (%)=22/647.79=3.39%
Table-5.8
Parameters Measure Assigned score
Current ratio 1.18 2
Total liabilities to tangible Net
worth
5.70 0
PAT/Net sales (%) 3.39% 2
2. Financial Risk (Dynamic):
a) Current ratio= (1.12+1.11+1.18)/3=1.14
b) Total liabilities to tangible Net worth
2007 2008 2009
77.39/11.67=6.63 134.26/17.58=7.63 175.10/30.68=5.70
Avg. = (6.63+7.63+5.70)/3=6.65
Table-5.9
Parameters Measure Assigned score
Current Ratio 1.14 1
Total liabilities to Tangible
Net worth
6.65 0
3. Market Risk:
G.L.B.I.M.R Page 88
Table-5.10
Parameters Measure Assigned score
Competition Increasing market share 2
Industry cycle Fairly stable 2
Regulatory risk Not affected by regulatory
framework
2
Technology Technology likely to go
under changes
1
4. Management Risk:
Table-5.10
Parameters Measure Assigned score
Expertise Highly qualified 5
Track record Repayments are slightly
delayed
3
5. Security value:
Table-5.11
Parameters Measure Assigned score
Assets >175 4
Guarantee Promoter- directors 1
Security= Principal+ collateral security/ Facility & security covered (proposed)
= 1455.95 +156.75/647.79 =248%
6. Capital market perception:
a) Dividend payment- No score is given
b) P/E ratio- No score is given
7. Contingent risk:
G.L.B.I.M.R Page 89
a) B/S practices- Other cases-0
b) Contingent liabilities-
c) Reliability:- No deviation- 1
8. Compliance
Table-5.12
Parameters Measure Assigned score
Submission of stock
statement
Timely submission 2
Submission of audited B/S
& P/L A/C
Timely submission 2
Over limit business No occasions 3
Compliance with terms of
sanction
No deviation 3
Table-5.13
Risk rating
parameter
Max. score Max. applicable
score
Marks scored
Financial risks-static 20 15 4
Financial risks-
dynamic
17 8 1
Market risks 9 9 7
Managerial risks 9 9 8
Security value 6 6 5
Capital market
perception
4 0 0
Contingent risks 5 3 1
Compliance 10 10 10
G.L.B.I.M.R Page 90
Total 80 60 36
Percentage on Risk factors= (36/60)* 100= 60%
9. Additional factors:
Table-5.14
Parameters Measure Score
General observation in
conduct of business
Satisfactory 3
Length of satisfactory
relationship
More than 3 years but less
than 5
1
Share of non-fund based
business
Proportionate to our share in
fund-based limits
2
Collateral coverage
available for total business
Others 0
Threat of loss of business
due to competition
Significant 2
Rater’s perception about
long-term benefit to bank
from the borrower
Not large but definite
benefits expected
1
Overall image of the
company
No adverse factors 1
Collateral/Total business= 156.75/647.79=24.19%
G.L.B.I.M.R Page 91
Grand summary of pricing:
Table-5.15
Parameters Max. marks (A) Marks available to
the particular
customer (B)
Marks scored (C)
Risk factors (item 1
to8)
80 60 36
Additional factor for
pricing (item 9)
20 20 10
Total 100 80 46
Percentage obtained=Marks scored/marks available to a customer(C/B)*100
=(46/80)*100=57.5%
Table-5.16
Percentage obtained Final rating
80% & above ‘AAA’
65% & above but below 80% ‘AA’
50% & above but below 65% ‘A’
Below 50% ‘B’
Thus, the final rating for ABC pvt. Ltd. was found to be ‘A’
G.L.B.I.M.R Page 92
ANALYSIS OF THE CASE:
From the above analysis we came to know that credit rating plays an important role to evaluate
the credit worthiness of an individual or corporation. It tells a lender or investor the probability
of the subject being able to pay back a loan. Almost every financial dealing that everyone
undertake will involve credit in some manner. Hard, liquid cash is obsolete and credit worthiness
is what helps lenders decide how much credit to extend and to whom. This reality has brought
out the need for a universally accepted and standardized means of evaluating a person's credit
worthiness. Here we have calculated credit ratings from the financial history and balance sheet of
ABC Ltd. And finally we rated “A”to the company as it has scored 57.5%. A good credit rating
system helps a lender or an investor against bankruptcy. It helps for the easy understability of the
investment proposal and in choosing profitable investment security. It also saves resources i.e
time and money of investors as the rating task is performed by the credit rating agency like
CRISIL in the above example. Providing independent objective assessments of the credit
worthiness of companies and countries, a credit ratings company helps investors decide how
risky it is to invest money in a certain country and/or security.
A credit rating is a useful tool not only for the investor, but also for the entities looking for
investors. An investment grade rating can put a security, company or country on the global radar,
attracting foreign money and boosting a nation's economy. Indeed, for emerging market
economies, the credit rating is key to showing their worthiness of money from foreign investors.
And because the credit rating acts to facilitate investments, many countries and companies will
strive to maintain and improve their ratings, hence ensuring a stable political environment and a
more transparent capital market
G.L.B.I.M.R Page 93
As investment opportunities become more global and diverse, it is difficult to decide not only
which companies but also which countries are good investment opportunities. There are
advantages to investing in foreign markets, but the risks associated with sending money abroad
are considerably higher than those associated with investing in your own domestic market. It is
important to gain insight into different investment environments but also to understand the risks
and advantages these environments pose. Measuring the ability and willingness of an entity -
which could be a person, a corporation, a security or a country - to keep its financial
commitments or its debt, credit ratings are essential tools for helping you make some investment
decisions.
G.L.B.I.M.R Page 94
CHAPTER-6
RECOMMENDATIONS
In any business, the first & foremost thing is to acquire the right customers. It is always
important to target right customers. Thus, the bank must try to get to know its customer,
their business & occupation details. Asking questions where they find problems in surety.
Sharing the information of the products & services that the customer is interested in is
very much necessary. Ensuring all the relevant literature is provided to the customer
upfront. A customer who makes an informed decision is much more likely to stay with
the bank.
Time is always an important factor. Every customer wants his/her job to be over in the
earliest possible time. Bank must try to ensure that by the use of modern technologies the
customers must be served in time. So that it will be easy to retain the existing customers.
G.L.B.I.M.R Page 95
CHAPTER-7
CONCLUSION
Generally a bank is found to be of sound health, if its credit portfolio is also sound.
An effective credit portfolio of a bank largely concentrates on the achievement of the following 3
benchmarks
Qualitative deployment of credit to ensure maximum yield.
Containment of fresh generation of NPA through their monitoring follow up and
timely action in all levels.
Up gradation & reduction of NPAs
An ideal advance is one which is granted to a reliable customer for an approved purpose in
which the customer has adequate experience, safe in knowledge that the money will be used to
advantage & repayment made will be within a reasonable period from trading receipts or known
maturities does on or about given data. So emphasizing on the above all points discussed Federal
bank limited have also designed its loan policy document and manual of instructions with a
broader concept maximizing its credit facilities to the right borrower. The bank, before
sanctioning a loan, the bank officials have to follow all instructions and guide from the loan
policy document, which is reviewed every year. The bank have to try all is effort to look into that
the advances made should not turn into NPAs in future. The credit department is also having a
proper and systematic approach for the supervision, monitoring and follow –up of advances. For
this reason Federal bank have given lot emphasis on the credit appraisal system and credit rating
G.L.B.I.M.R Page 96
system before sanctioning and disbursement of any type of loans whether it is retail finance, cash
credit, term loan or any nonfund based credit facilities.
Bank has given a huge effort to make its credit appraisal system a successful tool for its credit
assessment.
BIBLIOGRAPHY:
www.Google.com
www.federalbank.co.in
www.wikipedia.com
www.scribd.com
G.L.B.I.M.R Page 97
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