credit appraisal
TRANSCRIPT
A
SUMMER TRAINING REPORT
ON
“CREDIT APPRAISAL”
UNDERTAKEN AT
SUBMITTED BY
TAILOR MAYANKKUMAR DINESHBHAI
MBA (Semester - II) 2010-2011
Enrollment No: 107160592050
UNDER THE GUIDANCE OF:
INTERNAL GUIDE: MRS. NUPUR ANGIRISH
EXTERNAL GUIDE: P.K.VESUNA
SUBMITTED TO
GIDC RAJJU SHROFF ROFEL INSTITUTE OF
MANAGEMENT STUDIES, VAPI
Gujarat Technological University
DECLARATION
I, Mr. MAYANK TAILOR Student of M.B.A – Semester-II, GIDC RAJJU SHROFF
INSTITUTE OF MANAGEMENT STUDIES VAPI. hereby declare that the Report on
Summer Training & project work entitled CREDIT APPRAISAL SURAT, GUJARAT is
been result of my own work and has been carried out under supervision of PROF. NUPUR
ANGIRISH.
I declare that this submitted work is done solely by me and to the best of my knowledge; no
such work has been submitted by any other person for the award of post graduation degree or
diploma.
I also declare that all the information collected from various secondary sources has been duly
acknowledged in this project report.
PLACE: Mayank Tailor
DATE:
CERTIFICATE
This is to certify that Mr. MAYANK TAILOR has satisfactory completed the project work
entitled, CREDIT APPRAISAL IN SURAT, GUJARAT. Based on the declaration made by
the candidate and me association as a guide for carrying out this project work, I
recommended this project for evaluation as a part of the MBA programme of Gujarat
Technological University.
Place: VAPI
Date: PROF: NUPUR ANGIRISH
Place: VAPI
Date: Dr D.S.Sarupria
Director
ACKNOWLEDGEMENT
My debts are many and I acknowledge them with much pride and delight. This summer
project was undertaken as a part of MBA Programme pursuing at GIDC RAJJU SHROFF
Rofel Institute of Management Studies, Vapi. (GRIMS). I would like to thank my institute
and Central Bank of India which has provided me with the infrastructure and opportunity for
doing this project work.
I am very great full to Mr. P.K.VESUNA (Loan/Advances), who has given me the permission
to carry out this project work at their esteemed organization.
I am extremely great full to Dr. Dalpat Sarupria, Director of GIDC RAJJU SHROFF Rofel
Institute of Management Studies, Vapi. (GRIMS), for his invaluable help and guidance
throughout my work. He kindly evinced keen interest in my work and furnished some useful
comments, which could enrich the work substantially.
I am very much thankful to my internal guide Prof. NUPUR ANGIRISH for her keen
guidance and support.
In fact it is very difficult to acknowledge all the names and nature of help and encouragement
provided by them. I would never forget the help and support extended directly or indirectly
to me by all.
TABLE OF CONTENTS
PARTICULARS PAGE NO.
1 RESEARCH METHODOLOGY 1
2 INTRODUCTION TO BANKING SECTOR 4
3 GLOBAL AND LOCAL SCENARIO OF BANKING
SECTOR 9
4 INDUSTRY ANALYSIS 22
5 INTRODUCTION TO CENTRAL BANK OF INDIA 28
6 INTRODUCTION TO SME 30
7 OVERVIEW OF CREDIT APPRAISAL 34
8 CREDIT APPRAISAL MODEL 58
9 CASE STUDY 70
10 OTHER DEPARTMENT OF BANKS 80
11 FINDING 83
12 CONCLUSION 85
13 BIBLIOGRAPHY 86
EXECUTIVE SUMMARY
I had a valuable experience doing my summer internship at Central Bank of India in Surat.
The duration for my internship was 23 days, starting from 7th july 2011 to 29th july 2011 in
Surat Main branch and, I was working on the “CREDIT APPRISAL”
My Project Guide was Mr.P.K.VESUNA for SURAT branch, respectively of his department.
This was my First exposure to the corporate world and had an experience of working in a
banking. I was directly working under loan/advances : I was working on the credit appraisal,
which I feel is the basic requirement of any bank. While working I observed the significance
of the loan/advances in a bank, its working. I also got to observe various functions of the
bank department.
The project, which was given to me in this period of my summer internship, project was to
know the credit appraisal. For that, I have to talk to manager and try to understand concept of
credit in the bank.
Thus during this internship-period working on project and simultaneously observing has
proved to be a great experience in all as I have got to see and understand various situations of
the employees. I would like to conclude by saying that it is been a great learning for me
through this internship. I understand some realities of the bank , as, I was part of the everyday
activities of the organization. I also learned the fact that no department can work on its own
each department have to depend on other in one-way or the other.
RESEARCH METHODOLOGY
INTRODUCTION:
Credit appraisal means investigation/assessment done by the bank before providing any loans and
advances/project finance and also checks the commercial, financial &industrial viability of the
project proposed its funding pattern and further checks the primary & collateral security cover
available for recovery of such funds.
PROBLEM STATEMENT :
To study the credit appraisal system in SME sector, at Central bank of India.
OBJECTIVES:
To study the credit appraisal methods.
To understand the commercial, financial & technical viability of the proposal
proposed and it’s finding pattern.
DATA COLLECTION :
Primary data:
Informal interview with manager and other staff members at Central bank of India
Secondary data:
Books
websites
database at Central bank of India
library research
BENEFICIARIES:
Researchers:
This report will help researchers improving knowledge about the credit appraisal system and to have
practical exposure of the credit appraisal system at Central bank of India.
Management Students:
The project will help the management student to know the patterns of credit appraisal in Central
bank of India.
LIMITATION OF THE STUDY
As the credit appraisal is one of the crucial areas for any bank, some of the
technicalities are not revealed.
Credit appraisal system includes various types of detail studies for different areas of
analysis, but due to time constraint, our analysis was of limited areas only.
INTRODUCTION TO BANKING SECTOR
A SNAPSHOT OF THE BANKING INDUSTRY
The Reserve Bank of India (RBI), as the central bank of the country, closely monitors developments in
the whole financial sector.
DEFINITION/MEANING OF A BANK
The word bank has originated from English word Banco, Bancus or Banque. Its meaning is bench or
table. In Europe in the middle age, the money transactions were undertaken sitting on a bench.
As per Indian Banking Act, “ A service to accept deposits from people with the intention to invest or
lend with the condition of returning it immediately whenever demanded at any predetermined time.
An institute this service is Bank”
Banking is a service helpful to the business, its function is to borrow money from people and further
lend the same.
While analyzing definition of bank as per Indian Banking Act, below mentioned matters are clarified:
(1) Bank accepts monetary deposits from people.
(2) The intention behind accepting these deposits is to invest or lend the respective fund.
(3) The function of accepting deposit or lending money is made under the condition that
on demand or as predetermined otherwise the same amount has to be refunded
immediately.
(4) The institution doing this type of business is called bank.
The banking sector is dominated by Scheduled Commercial Banks (SBCs). As at end March 2002,
there were 296 Commercial banks operating in India. This included 27 Public Sector Banks (PSBs), 31
Private, 42 Foreign and 196 Regional Rural Banks. Also, there were 67 scheduled co-operative banks
consisting of 51 scheduled urban cooperative banks and 16 scheduled state co-operative banks.
Scheduled commercial banks touched, on the deposit front, a growth of 14% as against 18%
registered in the previous year. And on advances, the growth was 14.5% against 17.3% of the earlier
year.
State Bank of India is still the largest bank in India with the market share of 20% ICICI and its two
subsidiaries merged with ICICI Bank, leading creating the second largest bank in India with a balance
sheet size of Rs. 1040bn.
Higher provisioning norms, tighter asset classification norms, dispensing with the concept of ‘past
due’ for recognition of NPAs, lowering of ceiling on exposure to a single borrower and group
exposure etc., are among the measures in order to improve the banking sector.
A minimum stipulated Capital Adequacy Ratio (CAR) was introduced to strengthen the ability of
banks to absorb losses and the ratio has subsequently been raised from 8% to 9%. It is proposed to
hike the CAR to 12% by 2004 based on the Basle Committee recommendations.
Retail Banking is the new mantra in the banking sector. The home Loans alone account for nearly
two-third of the total retail portfolio of the bank. According to one estimate, the retail segment is
expected to grow at 30-40% in the coming years.
Net banking, phone banking, mobile banking, ATMs and bill payments are the new buzz words that
banks are using to lure customers.
With a view to provide an institutional mechanism for sharing of information on borrowers /
potential borrowers by banks and Financial Institutions, the Credit Information Bureau (India) Ltd.
(CIBIL) was set up in August 2000. The Bureau provides a framework for collecting, processing and
sharing credit information on borrowers of credit institutions. SBI and HDFC are the promoters of the
CIBIL.
The RBI is now planning to transfer of its stakes in the SBI, NHB and National bank for Agricultural
and Rural Development to the private players. Also, the Government has sought to lower its holding
in PSBs to a minimum of 33% of total capital by allowing them to raise capital from the market.
Banks are free to acquire shares, convertible debentures of corporate and units of equity oriented
mutual funds, subject to a ceiling of 5% of the total outstanding advances (including commercial
paper) as on March 31 of the previous year.
REFORMS IN THE BANKING SECTOR
The first phase of financial reforms resulted in the nationalization of 14 major banks in 1969 and
resulted in a shift from Class banking to Mass banking. This in turn resulted in a significant growth in
the geographical coverage of banks. Every bank has to earmark a minimum percentage of their Loan
portfolio to sectors identified as “priority sectors”. The manufacturing sector also grew during the
1970s in protected environs and the banking sector was a critical source. The next wave of reforms
saw the nationalization of 6 more commercial banks in 1980. Since then the number scheduled
commercial banks increased four-fold and the number of banks branches increased eight-fold.
After the second phase of financial sector reforms and liberalization of the sector in the early
nineties, the Public Sector Banks (PSB) s found it extremely difficult to complete with the new private
sector banks and the foreign banks. The new private sector banks first made their appearance after
the guidelines permitting them were issued in January 1993. Eight new private sector banks are
presently in operation. These banks due to their late start have access to state-of-the-art technology,
which in turn helps them to save on manpower costs and provide better services.
During the year 2000, the State Bank of India (SBI) and its 7 associates accounted for a 25% share in
deposits and 28.1% share in credit. The 20 nationalized banks accounted for 53.5% of the deposits
and 47.5% of credit during the same period. The share of foreign banks ( numbering 42 ), regional
rural banks and other scheduled commercial banks accounted for 5.7%, 3.9% and 12.2% respectively
in deposits and 8.41%, 3.14% and 12.85% respectively in credit during the year 2000
CLASSIFICATION OF BANKS:
The Indian banking industry, which is governed by the Banking Regulation Act of India 1949 can
be broadly classified into two major categories, non-scheduled banks and scheduled banks.
Scheduled banks comprise commercial banks and the co-operative banks. In Terms of ownership,
commercial banks can be further grouped into nationalized banks, the State Bank of India and its
group banks, regional rural banks and private sector banks (the old / new domestic and foreign).
These banks have over 67,000 branches spread across the country. The Indian banking industry
is a mix of the public sector, private sector and foreign banks. The private sector banks are
again spilt into old banks and new banks.
Banking System in India
Reserve bank of India (Controlling Authority)
Development Financial institutions Bank
IFCI IDBI ICICI NABARD NHB IRBI EXIM Bank SIDBI
Commercial Regional Rural Land Development Cooperative Banks
Banks Banks Banks
Public Sector Banks Private Sector Banks
SBI Groups Nationalized Banks Indian Banks Foreign Bank
GLOBAL AND LOCAL SCENARIO OF BANKING SECTOR
INDIAN BANKING SYSTEM: THE CURRENT STATE & ROAD AHEAD
INTRODUCTION:
Recent time has witnessed the world economy develop serious difficulties in terms of lapse of
banking & financial institutions and plunging demand. Prospects became very uncertain causing
recession in major economies. However, amidst all this chaos India’s banking sector has been
amongst the few to maintain resilience.
A progressively growing balance sheet, higher pace of credit expansion, expanding profitability and
productivity akin to banks in developed markets, lower incidence of nonperforming assets and focus
on financial inclusion have contributed to making Indian banking vibrant and strong. Indian banks
have begun to revise their growth approach and re-evaluate the prospects on hand to keep the
economy rolling. The way forward for the Indian banks is to innovate to take advantage of the new
business opportunities and at the same time ensure continuous assessment of risks.
A rigorous evaluation of the health of commercial banks, recently undertaken by the Committee on
Financial Sector Assessment (CFSA) also shows that the commercial banks are robust and versatile.
The single-factor stress tests undertaken by the CFSA divulge that the banking system can endure
considerable shocks arising from large possible changes in credit quality, interest rate and liquidity
conditions. These stress tests for credit, market and liquidity risk show that Indian banks are by and
large resilient.
Thus, it has become far more imperative to contemplate the role of the Banking Industry in fostering
the long term growth of the economy. With the purview of economic stability and growth, greater
attention is required on both political and regulatory commitment to long term development
programmed. FICCI conducted a survey on the Indian Banking Industry to assess the competitive
advantage offered by the banking sector, as well as the policies and structures that are required to
further the pace of growth. The results of our survey are given in the following sections.
GENERAL BANKING SCENARIO:
The pace of development for the Indian banking industry has been tremendous over the past
decade. As the world reels from the global financial meltdown, India’s banking sector has been one
of the very few to actually maintain resilience while continuing to provide growth opportunities, a
feat unlikely to be matched by other developed markets around the world. FICCI conducted a survey
on the Indian Banking Industry to assess the competitive advantage offered by the banking sector, as
well as the policies and structures required to further stimulate the pace of growth.
The predicament of the banks in the developed countries owing to excessive leverage and lax
regulatory system has time and again been compared with somewhat unscathed Indian Banking
Sector. An attempt has been made to understand the general sentiment with regards to the
performance, the challenges and the opportunities ahead for the Indian Banking Sector.
A majority of the respondents, almost 69% of them, felt that the Indian banking Industry was in a
very good to excellent shape, with a further 25% feeling it was in good shape and only 6% of the
respondents feeling that the performance of the industry was just average. In fact, an overwhelming
majority (93.33%) of the respondents felt that the banking industry compared with the best of the
sectors of the economy, including pharmaceuticals, infrastructure, etc.
Most of the respondents were positive with regard to the growth rate attainable by the Indian
banking industry for the year 2009-10 and 2014-15, with 53.33% of the view that growth would be
between 15-20% for the year 2009-10 and greater than 20% for 2014-15.
On being asked what is the major strength of the Indian banking industry, which makes it resilient in
the current economic climate; 93.75% respondents feel the regulatory system to be the major
strength, 75% economic growth, 68.75% relative insulation from external market, 56.25% credit
quality, 25% technological advancement and 43.75% our risk assessment systems.
Change is the only constant feature in this dynamic world and banking is not an exception. The
changes staring in the face of bankers relates to the fundamental way of banking-which is going
through rapid transformation in the world of today. Adjust, adapt and change should be the key
mantra. The major challenge faced by banks today is the ever rising customer expectation as well as
risk management and maintaining growth rate. Following are the results of the biggest challenge
faced by the banking industry as declared by our respondents (on a mode scale of 1 to 7 with 1 being
the biggest challenge):
They also asked their respondents to rate India on certain essential banking parameters (Regulatory
Systems, Risk Assessment Systems, Technological System and Credit Quality) in comparison with
other countries i.e. China, Japan, Brazil, Russia, Hong Kong, Singapore, UK and USA.
The recent financial crisis has drawn attention to under-regulation of banks (mainly investment
banks) in the US. Though, the Indian story is quite different. Regulatory systems of Indian banks were
rated better than China, Brazil, Russia, and UK; at par with Japan, Singapore and Hong Kong where as
all our respondents feel that we are above par or at par with USA. On comparing the results with
their previous survey where the respondents had rated Indian Regulatory system below par the US
and UK system, they see that post the financial crisis Indian Banks are more confident on the Indian
Regulatory Framework.
The global meltdown started as a banking crisis triggered by the credit quality. Indian banks seem to
have paced up in terms of Credit Quality. Credit quality of banks has been rated above par than
China, Brazil, Russia, UK and USA but at par with Hong Kong and Singapore and 85.72% of the
respondents feel that we are at least at par with Japan. Thus, they see that the resilience the Indian
Banks showed at the time of financial crisis has led to an attitudinal shift of our respondents with the
past survey indicating Credit quality of Indian banks being below par than that of US and UK.
As technology ingrains itself in all aspects of a bank’s functioning, the challenge lies in exploiting the
potential for profiting from investments made in technology. A lot needs to be done on the
technological front to keep in pace with the global economies, as is evident from the survey results.
Technology systems of Indian banks have been rated more advanced than Brazil and Russia but
below par with China, Japan, Hong Kong, Singapore, UK and USA. They find no change on
introspection of their past surveys which also highlighted the need for Indian banks to pace up in
adoption of advanced technology.
GLOBAL EXPANSION OF INDIAN BANKING
The idea of creating bigger banks to take on competition sounds attractive but one must realize even
the biggest among Indian banks are small by global standards. The lack of global scale for Indian
banks came into sharp focus during the recent financial crisis which saw several international banks
reneging on their funding commitments to Indian companies, but local banks could not step into the
breach because of balance sheet limitations.
In this light, 93.75% of all respondents to their survey are considering expanding their operations in
the future. They further asked participants on the methods that they consider suitable to meet their
expansion needs. They divide them into organic means of growth that comes out of an increase in
the bank’s own business activity, and inorganic means that includes mergers or takeovers.
We see from the above graph that amongst organic means of expansion, branch expansion finds
favor with banks while strategic alliances is the most popular inorganic method for banks
considering scaling up their operations. On the other hand, new ventures and buyout portfolios are
the least popular methods for bank expansion.
SCOPE FOR NEW ENTRANTS:
81.25% also felt that there was further scope for new entrants in the market, in spite of capital
management and human resource constraints, as there continue to remain opportunities in
unbanked areas. With only 30-35% of the population financially included, and the Indian banking
industry unsaturated with CAGR of well above 20%, participants in their survey felt that the market
definitely has scope to accommodate new players.
While there has been prior debate, they questioned banks on NBFCs and Industrial houses being
established as banking institutions and find opinion to be marginally against the notion, with 35.71%
in favour while 42.86% were against them being established as banks.
However, on further questioning, 57.14% of respondents feel that the above may be allowed but
only if it is along with specific regulatory limitations. Banks felt that limitations regarding track
record, ensuring adequate capitalization levels, a tiered license that enables new entrants to enter
into specific areas of the business only after satisfactorily achieving set milestones for the prior
stages, cap on promoter's holdings and wider public holding in addition to a common banking
regulator on a level playing field are essential before they may set themselves up as banks.
BANKING ACTIVITIES:
Over the last three decades, there has been a remarkable increase in the size, spread and scope of
activities of banks in India. The business profile of banks has transformed dramatically to include
non-traditional activities like merchant banking, mutual funds, new financial services and products
and the human resource development.
Their survey finds that within retail operations, banks rate product development and differentiation;
innovation and customization; cost reduction; cross selling and technological up gradation as equally
important to the growth of their retail operations. Additionally a few respondents also find pro-
active financial inclusion, credit discipline and income growth of individuals and customer
orientation to be significant factors for their retail growth.
There is, at the same time, an urgent need for Indian banks to move beyond retail banking, and
further grow and expand their fee- based operations, which has globally remained one of the key
drivers of growth and profitability. In fact, over 80% of banks in their survey have only up to 15% of
their total incomes constituted by fee- based income; and barely 13% have 20-30% of their total
income constituted by fee-based income.
Out of avenues for non-interest income, we see that Banc assurance (85.71%) and FOREX
Management (71.43%) remain most profitable for banks. Derivatives, understandably, remains the
least profitable business opportunity for banks as the market for derivatives is still in its nascent
stage in India.
There is nevertheless a visibly increased focus on fee based sources of income. 71% of banks in their
survey saw an increase in their fee based income as a percentage of their total income for the FY
2008-09 as compared to FY 2007-08. Indian banks are fast realizing that fee-based sources of income
have to be actively looked at as a basis for future growth, if the industry is to become a global force
to reckon with.
FINANCIAL INCLUSION AND EXPANSION OF BANKING SERVICES:
Transition from class banking to mass banking and increased customer focus is drastically changing
the landscape of Indian banking. Expansion of retail banking has a lot of potential as retail assets are
just 22% of the total banking assets and contribution of retail loans to GDP stands merely at 6% in
India vis-à-vis 15% in China and 24% in Thailand. All banks in their survey weigh Cost effective credit
delivery mechanisms (100%) as most important to the promotion of financial inclusion. This was
followed by factors such as identifying needs and developing relevant financial products (75%),
demographic knowledge and strong local relations (62.5%) and ensuring productive use and
adequate returns on credit employed (43.75%) in decreasing levels of importance. In fact, India has
an expanding middle class of 250 to 300 million people in need of varied banking services. While
60% of our population has access to banks, only 15% of them have loan accounts and an
overwhelming 70% of farmers have no access to formal sources of credit, reflective of immense
potential for the banking system This is mirrored in the fact that while our survey finds no
discernible shift in the lending pattern of banks across Tier 1, Tier 2 and Tier 3 cities over the last two
years, 93% Indian Banking System: The Current State & Road Ahead Page | 20 participants still find
rural markets to be to be a profitable avenue, with 53% of respondents finding it lucrative in spite of
it being a difficult market. Cost of accessing markets has been the only sour note in the overall
experience of our respondents in rural markets At the same time, more than 81.25% of our
respondents have a strategy in place to tap rural markets, with the remainder as yet undecided on
their plan of action. Tie ups with micro finance institutions (MFIs)/SHG and introduction of
innovative and customized products are considered most important to approaching rural markets
according to respondents, more so as compared to internet kiosks, post offices and supply chain
management techniques
Additionally, 81.25% of respondents found branchless banking to be an effective and secure way of
reaching out to rural markets, with mobile, biometric and handheld devices, equally popular
amongst banks. Some respondents also found the Business Correspondents model to be an
untapped model for financial inclusion.
As Indian financial markets mature over time, there is also a need for innovative instruments to
deepen the market further. Suggestions ranged from micro saving and micro insurance initiatives,
Cash deposit machines, warehouse receipts, to prepaid cash cards, derivatives, interest rate futures
and credit default swaps as a means to further the financial inclusion and expansionary process.
CREDIT FLOW AND INDUSTRY:
India Inc is completely dependent on the Banking System for meeting its funding requirement. One
of the major complaints from the industry has in fact been high lending rates in spite of massive cuts
in policy rates by the RBI. We asked the banks what they felt were major factors responsible for rigid
prime lending rates.
None of the banks in their survey considered the cap on bank deposit rates to be one of the causes
of inflexible lending rates. Due to long-term maturity, the trend seems to be changing. However,
there are other factors which have led to the stickiness of lending rates such as wariness of
corporate credit risk (33.33%), competition from government small savings schemes (26.67%).
Benchmarking of SME and export loans against PLR (20.00%) on the other hand, do not seem to
have as significant an influence over lending rates according to banks
The great Indian industrial engine has nevertheless continued to hum its way through most of the
year long crisis. We asked banks about the sectors that they consider to be most profitable in the
coming years (Fig. 12). All respondents were confident in the infrastructure sector leading the
profitability for the industry, followed by retail loans (73.33%) and others
(Source: Annual survey, February 2010)
(FEDERATION OF INDIAN CHAMBERS OF COMMERCE & INDUSTRY)
INDUSTRY ANALYSIS
Competitive Forces Model:
(Porter’s Five Force Model):
(2)
Potential Entrants is high as development financial institutions as well as private and Foreign Banks have entered in a big way
(1)
Rivalry among existing firms has increased with liberalization. New products and improved customer services is the focus.
(4)
Bargaining power of buyers is high as corporate can raise funds easily due to high Competition.
(3)
The threat of substitute product is very high like credit unions and investment houses. There are other substitutes as well banks like mutual funds, stocks, government securities, debentures, gold, real estate
(5)
Organizing power of the supplier is high. With the new financial instruments they are asking higher return on the investments
1. Rivalry among existing firms
With the process of liberalization, competition among the existing banks has increased. Each
bank is coming up with new products to attract the customers and tailor made Loans are provided.
The quality of services provided by banks has improved drastically.
2. Potential Entrants
Previously the development financial Institutions mainly provided project finance and
development activities. But they now entered into retail banking which has resulted into stiff
competition among the exiting players.
3. Threats from Substitutes
Competition from the non-banking financial sector is increasing rapidly. The threat of substitute
product is very high like credit unions and in investment houses. There are other substitutes as well
banks like mutual funds, stocks, government securities, debentures, gold, real estate etc.
4. Bargaining Power of Buyers
Corporate can raise their funds through primary market or by issue of GDRs, FCCBs. As a result
they have a higher bargaining power. Even in the case of personal finance, the buyers have a
high bargaining power. This is mainly because of competition.
5. Bargaining Power of Suppliers
With the advent of new financial instruments providing a higher rate of returns to the
investors, the investments in deposits is not growing in a phased manner. The suppliers demand
a higher return for the investments.
6. Overall Analysis
The key issue is how banks can leverage their strengths to have a better future. Since the
availability of funds is more and deployment of funds is less, banks should evolve new products
and services to the customers. There should be a rational thinking in sanctioning Loans, which will
bring down the NPAs. As there is a expected revival in the Indian economy Banks have a major
role to play.
SWOT ANALYSIS:
The banking sector is also taken as a proxy for the economy as a whole. The performance of bank
should therefore, reflect “Trends in the Indian Economy”. Due to the reforms in the financial sector,
banking industry has changed drastically with the opportunities to the work with, new accounting
standards new entrants and information technology. The deregulation of the interest rate,
participation of banks in project financing has changed in the environment of banks.
The performance of banking industry is done through SWOT Analysis. It mainly helps to know the
strengths and Weakness of the industry and to improve will be known through converting the
opportunities into strengths. It also helps for the competitive environment among the banks.
a) STRENGTHS
1. Greater securities of Funds
Compared to other investment options banks since its inception has been a better avenue in terms
of securities. Due to satisfactory implementation of RBI’s prudential norms banks have won public
confidence over several years.
2. Banking network
After nationalization, banks have expanded their branches in the country, which has helped banks
build large networks in the rural and urban areas. Private banks allowed to operate but they mainly
concentrate in metropolis.
3. Large Customer Base
This is mainly attributed to the large network of the banking sector. Depositors in rural areas prefer
banks because of the failure of the NBFCs.
4. Low Cost of Capital
Corporate prefers borrowing money from banks because of low cost of capital. Middle income
people who want money for personal financing can look to banks as they offer at very low rates of
interests. Consumer credit forms the major source of financing by banks.
b) WEAKNESS
1. Basel Committee
The banks need to comply with the norms of Basel committee but before that it is challenge for
banks to implement the Basel committee standard, which are of international standard.
2. Powerful Unions
Nationalization of banks had a positive outcome in helping the Indian Economy as a whole. But this
had also proved detrimental in the form of strong unions, which have a major influence in decision-
making. They are against automation.
3. Priority Sector Lending
To uplift the society, priority sector lending was brought in during nationalization. This is good for
the economy but banks have failed to manage the asset quality and their intensions were more
towards fulfilling government norms. As a result lending was done for non-productive purposes.
4. High Non-Performing Assets
Non-Performing Assets (NPAs) have become a matter of concern in the banking industry. This is
because reduced to meet the international standards of change in the total outstanding advances,
which has to be reduced to meet the international standards.
c) OPPORTUNITIES
1. Universal Banking
Banks have moved along the value chain to provide their customers more products and services. like
home finance, Capital Markets, Bonds etc. Every Indian bank has an opportunity to become
universal bank, which provides every financial service under one roof.
2. Differential Interest Rates
As RBI control over bank reduces, they will have greater flexibility to fix their own interest rates
which depends on the profitability of the banks.
3. High Household Savings
Household savings has been increasing drastically. Investment in financial assets has also increased.
Banks should use this opportunity for raising funds.
4. Untapped Foreign Markets
Many Indian banks have not sufficiently penetrated in foreign markets to generate satisfactory
business therefore, it can be concluded clear opportunity exists in such markets.
5. Interest Banking
The advance in information technology has made banking easier. Business can Effectively carried out
through internet banking.
d) THREATS
1. NBFCs, Capital Markets and Mutual funds
There is a huge investment of household savings. The investments in NBFCs deposits, Capital Market
Instruments and Mutual Funds are increasing. Normally these instruments offer better return to
investors.
2. Changes in the Government Policy
The change in the government policy has proved to be a threat to the banking sector. Due to some
major changes in policies related to deposits mobilization credit deployment, interest rates- the
whole scenario of banking industry may change.
3. Inflation
The interest rates go down with a fall in inflation. Thus, the investors will shift his investments to the
other profitable sectors.
4. Recession
Due to the recession in the business cycle the economy functions poorly and this has proved to be a
threat to the banking sector. The market oriented economy and globalization has resulted into
competition for market share. The spread in the banking sector is very narrow. To meet the
competition the banks has to grow at a faster rates and reduce the overheads. They can introduce
the new products and develop the existing services.
INTRODUCTION TO CENTRAL BANK OF INDIA
.
Build a better life around us.
Establish in 1911, Central Bank of India was the first Indian commercial bank which was wholly
owned and managed by Indians. The establishment of the Bank was the ultimate realization of
the dream of Sir Sorabji Pochkhanawala, founder of the Bank. Sir Pherozesha Mehta was the first
Chairman of a truly 'Swadeshi Bank'. In fact, such was the extent of pride felt by Sir Sorabji
Pochkhanawala that he proclaimed Central Bank of India as the 'property of the nation and the
country's asset'. He also added that 'Central Bank of India lives on people's faith and regards itself
as the people's own bank'.
During the past 99 years of history the Bank has weathered many storms and faced many
challenges. The Bank could successfully transform every threat into business opportunity and
excelled over its peers in the Banking industry.
A number of innovative and unique banking activities have been launched by Central Bank of
India and a brief mention of some of its pioneering services are as under:
1921 Introduction to the Home Savings Safe Deposit Scheme to build saving/thrift habits in all
sections of the society.
1924 An Exclusive Ladies Department to cater to the Bank's women clientele.
1926 Safe Deposit Locker facility and Rupee Travellers' Cheques.
1929 Setting up of the Executor and Trustee Department.
1932 Deposit Insurance Benefit Scheme.
1962 Recurring Deposit Scheme.
Subsequently, even after the nationalisation of the Bank in the year 1969, Central Bank continued
to introduce a number of innovative banking services as under:
1976 The Merchant Banking Cell was established.
1980 Centralcard, the credit card of the Bank was introduced.
1986 'Platinum Jubilee Money Back Deposit Scheme' was launched.
1989 The housing subsidiary Cent Bank Home Finance Ltd. was started with its headquarters at
Bhopal in Madhya Pradesh.
1994 Quick Cheque Collection Service (QCC) & Express Service was set up to enable speedy
collection of outstation cheques.
Further in line with the guidelines from Reserve Bank of India as also the Government of India,
Central Bank has been playing an increasingly active role in promoting the key thrust areas of
agriculture, small scale industries as also medium and large industries. The Bank also introduced a
number of Self Employment Schemes to promote employment among the educated youth.
Among the Public Sector Banks, Central Bank of India can be truly described as an All India Bank,
due to distribution of its large network in 27 out of 29 States as also in 3 out of 7 Union Territories
in India. Central Bank of India holds a very prominent place among the Public Sector Banks on
account of its network of 3656 branches and 178 extension counters at various centres
throughout the length and breadth of the country.
Customers' confidence in Central Bank of India's wide ranging services can very well be judged
from the list of major corporate clients such as ICICI, IDBI, UTI, LIC, HDFC as also almost all major
corporate houses in the country.In surat central bank have total 11 branches are works.
INTRODUCTION TO SME
In the Indian context, the small and medium enterprises (SME) sector is broadly a Term used for
small scale industrial (SSI) units and medium-scale industrial units. Any industrial unit with a total
investment in its fixed assets or leased assets or hire-purchase asset of up to Rs 10 million, can be
considered as an SSI unit and any investment of up to Rs 100 million can be Termed as a medium
unit. An SSI unit should neither be a subsidiary of any other industrial unit nor be owned or
controlled by any other industrial unit.
An SME is known by different ways across the world. In India, a standard definition surfaced only in
October 2, 2006, when the Ministry of Micro, Small and Medium Enterprises, Government of India,
imposed the Micro, Small and Medium enterprises Development (MSMED) Act,2006.
This definition, however was changed according to the changing economic scenario and thus has
separate definitions to it. For instance, an SME definition for manufacturing enterprises is different
from what an SME definition for service enterprises has to say.
HISTORY:
Small and Medium Enterprises or SMEs are vital for the growth and well being of the country. This
sector was recognized and given importance right from independence and is being encouraged ever
since then.
Though, it commenced on a small scale, it gradually gained significance, because it employed a
considerable number of people.
When it started gaining momentum, this sector was defined as an enterprise with investment in
plant and machinery of up to Rs 1 lakh and situated in towns and villages with strength of less than
50,000 people. The policy statement put in place special legislation to recognize and protect self
employed people in cottage and home industries. District industries canters (DICs) were set up and
made the focal point of SSI development, bypassing large cities and state capitals. Also, the
government started providing special services akin to product standardization, quality control and
marketing surveys in order to assist the SSIs in enabling them to market their products in an
underdeveloped market.
The scenario for the small-scale sector changed with the Industrial Policy of July 1991, which, for the
first time in India’s development history spoke of liberalization. What this meant was that medium
and large enterprises would no longer need licenses to run. Export-oriented enterprises could be
wholly foreign owned and foreign equity participation was selectively allowed. Industries could
import capital goods with much fewer restrictions.
1996 saw the government involved in the setting up of a higher level committee, known as the Abid
Hussain Committee, to review policies for small industries and recommend measures to help
formulate a strong and innovative policy package for the rapid development of SMEs. With
liberalization, rapid changes were seen in the Indian economy. Indian companies were no longer
insulated from the global economy. In fact, there was an urgent need to make them, especially
SMEs, more competitive and resilient.
In 1991, the growth rate of SSIs was almost three times that of the total industrial sector at 3.1
percent. From 1991 to 1995, the growth rate of SSIs exceeded that of the total industrial sector. Yet,
in 1995-96, the growth rate of SSIs was slightly lower than the total industrial sector, however it
increased again in 1996 and continued to be higher than the total industrial growth rate till 1999. till
2006, the SME segment saw a lot more development and support from the government.
DESCRIPTION OF SME IN THE MANUFACTURING SECTOR:
The Term enterprise in the manufacturing context stands for an industrial undertaking or a business
concern involved in the production, processing or preservation of goods for the list of eligible
industries in the First Schedule to the Industries (Development and Regulation Act), 1951.
For the Manufacturing Sector, the MSMED Act 2006 defines micro, small and medium enterprises
(MSMEs) as mentioned below:
A micro enterprise is an enterprise where investment in plant and machinery does not
exceed Rs 25 lakh.
The investment in plant and machinery in a small enterprise is more than Rs 25 lakh,
but does not exceed Rs 5 crore.
A medium enterprise is one where the investment in plant and machinery is more than
Rs 5 crore, but does not exceed Rs 10 crore.
In all these, the cost excludes that of land, building and the items specified by the Ministry of Small
Scale Industries with its notification No SO 1722 (E) dated October 5, 2006.
SME DEFINITION FOR SERVICE ENTERPRISES:
A service sector enterprise is defined as one involved in providing services. The following points will
explain how.
Small road and water transport operators that can now own a fleet of vehicles not
exceeding ten in number.
Small business, whose original cost price of equipment used for business, does not
exceed Rs 20 lakh.
Professional and self-employed persons, whose borrowing limits do not exceed Rs 10
lakh of which not more than Rs 2 lakh should be for working capital requirements
Professionally qualified medical practitioners setting up a practice in semi urban and
rural areas, whose borrowing limits should not be less than Rs 15 lakh with a sub-
ceiling of Rs 3 lakh for working capital requirements.
CHALLENGES FACED BY SME:
The challenges being faced by the small and medium sector may be briefly set out as
Follows-
Small and Medium Enterprises (SME), particularly the tiny segment of the small
enterprises have inadequate access to finance due to lack of financial information and
non-formal business practices. SMEs also lack access to private equity and venture
capital and have a very limited access to secondary market instruments.
SMEs face fragmented markets in respect of their inputs as well as products and are
vulnerable to market fluctuations.
SMEs lack easy access to inter-state and international markets.
The access of SMEs to technology and product innovations is also limited. There is
lack of awareness of global best practices.
SMEs face considerable delays in the settlement of dues/payment of bills by the large
scale buyers. With the deregulation of the financial sector, the ability of the banks to
service the credit requirements of the SME sector depends on the underlying
transaction costs, efficient recovery processes and available security. There is an
immediate need for the banking sector to focus on credit and SMEs
OVERVIEW OF CREDIT APPRAISAL
Credit appraisal means an investigation/assessment done by the banks before providing any Loans &
advances/project finance & also checks the commercial, financial & technical viability of the project
proposed, its funding pattern & further checks the primary & collateral security cover available for
recovery of such funds.
BRIEF OVERVIEW OF CREDIT:
Credit Appraisal is a process to ascertain the risks associated with the extension of the credit facility.
It is generally carried by the financial institutions, which are involved in providing financial funding to
its customers. Credit risk is a risk related to non-repayment of the credit obtained by the customer
of a bank. Thus it is necessary to appraise the credibility of the customer in order to mitigate the
credit risk. Proper evaluation of the customer is performed this measures the financial condition and
the ability of the customer to repay back the Loan in future. Generally the credits facilities are
extended against the security know as collateral. But even though the Loans are backed by the
collateral, banks are normally interested in the actual Loan amount to be repaid along with the
interest. Thus, the customer's cash flows are ascertained to ensure the timely payment of principal
and the interest.
It is the process of appraising the credit worthiness of a Loan applicant. Factors like age, income,
number of dependents, nature of employment, continuity of employment, repayment capacity,
previous Loans, credit cards, etc. are taken into account while appraising the credit worthiness of a
person. Every bank or lending institution has its own panel of officials for this purpose.
However the 3 ‘C’ of credit are crucial & relevant to all borrowers/ lending, which must be kept in
mind, at all times.
Character
Capacity
Collateral
If any one of these is missing in the equation then the lending officer must question the viability of
credit. There is no guarantee to ensure a Loan does not run into problems; however if proper credit
evaluation techniques and monitoring are implemented then naturally the Loan loss probability /
problems will be minimized, which should be the objective of every lending Officer.
Credit is the provision of resources (such as granting a Loan) by one party to another party where
that second party does not reimburse the first party immediately, thereby generating a debt, and
instead arranges either to repay or return those resources (or material(s) of equal value) at a later
date. The first party is called a creditor, also known as a lender, while the second party is called a
debtor, also known as a borrower.
Credit allows you to buy goods or commodities now, and pay for them later. We use credit to buy
things with an agreement to repay the Loans over a period of time. The most common way to avail
credit is by the use of credit cards. Other credit plans include personal Loans, home Loans, vehicle
Loans, student Loans, small business Loans, trade. A credit is a legal contract where one party
receives resource or wealth from another party and promises to repay him on a future date along
with interest. In simple Terms, a credit is an agreement of postponed payments of goods bought or
Loan. With the issuance of a credit, a debt is formed.
BASIC TYPES OF CREDIT:
There are four basic types of credit. By understanding how each works, you will be able to get the
most for your money and avoid paying unnecessary charges.
Service credit is monthly payments for utilities such as telephone, gas, electricity, and water. You
often have to pay a deposit, and you may pay a late charge if your payment is not on time.
Loans let you borrow cash. Loans can be for small or large amounts and for a few days or several
years. Money can be repaid in one lump sum or in several regular payments until the amount you
borrowed and the finance charges are paid in full. Loans can be secured or unsecured.
Installment credit may be described as buying on time, financing through the store or the easy
payment plan. The borrower takes the goods home in exchange for a promise to pay later. Cars,
major appliances, and furniture are often purchased this way. You usually sign a contract, make a
down payment, and agree to pay the balance with a specified number of equal payments called
installments. The finance charges are included in the payments. The item you purchase may be used
as security for the Loan.
Credit cards are issued by individual retail stores, banks, or businesses. Using a credit card can be
the equivalent of an interest-free Loan- end of each month.-if you pay for the use.
BRIEF OVERVIEW OF LOANS:
Loans can be of two types fund base & non-fund base:
Fund Base includes:
Working Capital
Term Loan
Non-fund Base includes:
Letter of Credit
Bank Guarantee
Fund Base:
Working capital
The objective of running any industry is earning profits. An industry will require funds to acquire
“fixed assets” like land, building, plant, machinery, equipments, vehicles, tools etc., & also to run the
business i.e. its day-to-day operations.
Funds required for day to-day working will be to finance production & sales. For production, funds
are needed for purchase of raw materials/ stores/ fuel, for employment of labor, for power charges
etc. financing the sales by way of sundry debtors/ receivables.
Capital or funds required for an industry can therefore be bifurcated as fixed capital & working
capital. Working capital in this context is the excess of current assets over current liabilities. The
excess of current assets over current liabilities is treated as net, for storing finishing goods till they
are sold out & for working capital or liquid surplus & represents that portion of the working capital,
which has been provided from the long-Term source.
Assessment of Working Capital in Central bank of India
Particulars Amount
25% of estimated sales
Less : 5% of estimated sales(A) *****
OR
Net working capital(B) *****
Which is higher ( A or B)
*****
*****
MPBF
(Maximum Permissible Bank Finance)
*****
Term Loan
A Term Loan is granted for a fixed Term of 3 years to 7 years intended normally for financing fixed
assets acquired with a repayment schedule normally not exceeding 8 years.
A Term Loan is a Loan granted for the purpose of capital assets, such as purchase of land,
construction of, buildings, purchase of machinery, modernization, renovation or rationalization of
plant, & repayable from out of the future earning of the enterprise, in installments, as per a
prearranged schedule.
From the above definition, the following differences between a Term Loan & the working capital
credit afforded by the Bank are apparent:
The purpose of the Term Loan is for acquisition of capital assets.
The Term Loan is an advance not repayable on demand but only in installments ranging
over a period of years.
The repayment of Term Loan is not out of sale proceeds of the goods & commodities per
se, whether given as security or not. The repayment should come out of the future cash
accruals from the activity of the unit.
The security is not the readily saleable goods & commodities but the fixed assets of the
units.
It may thus be observed that the scope & operation of the Term Loans are entirely different from
those of the conventional working capital advances. The Bank’s commitment is for a long period &
the risk involved is greater. An element of risk is inherent in any type of Loan because of the
uncertainty of the repayment. Longer the duration of the credit, greater is the attendant uncertainty
of repayment & consequently the risk involved also becomes greater.
However, it may be observed that Term Loans are not so lacking in liquidity as they appear to be.
These Loans are subject to a definite repayment programmed unlike short Term Loans for working
capital (especially the cash credits) which are being renewed year after year. Term Loans would be
repaid in a regular way from the anticipated income of the industry/ trade.
These distinctive characteristics of Term Loans distinguish them from the short Term credit granted
by the banks & it becomes necessary therefore, to adopt a different approach in examining the
applications of borrowers for such credit & for appraising such proposals.
The repayment of a Term Loan depends on the future income of the borrowing unit. Hence, the
primary task of the bank before granting Term Loans is to assure itself that the anticipated income
from the unit would provide the necessary amount for the repayment of the Loan. This will involve a
detailed scrutiny of the scheme, its capital assets. Financial aspects, economic aspects, technical
aspects, a projection of future trends of outputs & sales & estimates of cost, returns, flow of funds &
profits.
Eligibility of term loan
Particulars Amount
Cost of machineries *****
Cost of accessories/equipment *****
Total cost of machines *****
Less : 25% of margin *****
Eligible amount of term loan *****
Non-fund Base:
Letter of credit
The expectation of the seller of any goods or services is that he should get the payment immediately
on delivery of the same. This may not materialize if the seller & the buyer are at different places
(either within the same country or in different countries). The seller desires to have an assurance for
payment by the purchaser. At the same time the purchaser desires that the amount should be paid
only when the goods are actually received. Here arises the need of Letter of Credit (LCs). The
objective of LC is to provide a means of payment to the seller & the delivery of goods & services to
the buyer at the same time.
Definition
A Letter of Credit (LC) is an arrangement whereby a bank (the issuing bank) acting at the request &
on the instructions of the customer (the applicant) or on its own behalf,
Is to make a payment to or to the order of a third party (the beneficiary), or is to accept &
pay bills of exchange (drafts drawn by the beneficiary); or
Authorizes another bank to effect such payment, or to accept & pay such bills of exchanges
(drafts); or
Authorizes another bank to negotiate the Terms & conditions of the credit are complied
with. against stipulated document(s), provided that
Bank Guarantees:
A contract of guarantee is defined as ‘a contract to perform the promise or discharge the liability of
the third person in case of the default’. The parties to the contract of guarantees are:
a) Applicant: The principal debtor – person at whose request the guarantee is executed
b) Beneficiary: Person to whom the guarantee is given & who can enforce it in case of default.
c) Guarantee: The person who undertakes to discharge the obligations of the applicant in case
of his default.
Thus, guarantee is a collateral contract, consequential to a main co applicant & the beneficiary.
Purpose of Bank Guarantees
Bank Guarantees are used to for both preventive & remedial purposes. The guarantees executed by
banks comprise both performance guarantees & financial guarantees. The guarantees are structured
according to the Terms of agreement, viz., security, maturity & purpose.
Branches may issue guarantees generally for the following purposes:
a) In lieu of security deposit/earnest money deposit for participating in tenders;
b) Mobilization advance or advance money before commencement of the project by the
contractor & for money to be received in various stages like plant layout, design/drawings in
project finance;
c) In respect of raw materials supplies or for advances by the buyers;
d) In respect of due performance of specific contracts by the borrowers & for obtaining full
payment of the bills;
e) Performance guarantee for warranty period on completion of contract which would enable
the suppliers to period to be over; realize the proceeds without waiting for warranty) To
allow units to draw funds from time to time from the concerned indenters against part
execution of contracts, etc.
f) Bid bonds on behalf of exporters
g) Export performance guarantees on behalf of exporters favoring the Customs Department
under EPCG scheme.
CREDIT APPRAISAL PROCESS:
Receipt of application from applicant
Receipt of documents
(Balance sheet, KYC papers, Different govt. registration no., MOA, AOA, and properties documents
Pre-sanction visit by bank officers
Check for RBI defaulters list, willful defaulters list, CIBIL data, ECGC, Caution list etc
Title clearance reports of the properties to be obtained from empanelled
Advocates
Valuation reports of the properties to be obtained from empanelled valuer/engineers
Preparation of financial data
LOAN ADMINISTRATION PRE- SANCTION PROCESS:
Appraisal, Assessment and Sanction functions
1. Appraisal
A. Preliminary appraisal
Sound credit appraisal involves analysis of the viability of operations of a business and the
capacity of the promoters to run it profitably and repay the bank the dues as and when they fall
Towards this end the preliminary appraisal will examine the following aspects of a proposal.
Bank’s lending policy and other relevant guidelines/RBI guidelines,
Prudential Exposure norms,
Industry Exposure restrictions,
Group Exposure restrictions,
Industry related risk factors,
Credit risk rating,
Profile of the promoters/senior management personnel of the project,
List of defaulters,
Caution lists,
Acceptability of the promoters,
Compliance regarding transfer of borrower accounts from one bank to another, if applicable;
Government regulations/legislation impacting on the industry; e.g., ban on financing of
industries producing/ consuming Ozone depleting substances;
Applicant’s status vis-à-vis other units in the industry,
Financial status in broad Terms and whether it is acceptable The Company’s Memorandum
and Articles of Association should be scrutinized carefully to ensure (i) that there are no
clauses prejudicial to the Bank’s interests, (ii) no limitations have been placed on the
Company’s borrowing powers and operations and (iii) the scope of activity of the company.
Required Documents for Process of Loan
Application for requirement of loan
Proposal preparation
Assessment of proposal
Documentations, agreements, mortgages
Sanction/approval of proposal by appropriate sanctioning authority
Disbursement of Loan
Post sanction activities
Copy of Memorandum & Article of Association
Copy of incorporation of business
Copy of commencement of business
Copy of resolution regarding the requirement of credit facilities
Brief history of company, its customers & supplies, previous track records, orders In hand.
Also provide some information about the directors of the company
Financial statements of last 3 years including the provisional financial statement for the year
2010-11
Copy of PAN/TAN number of company
Copy of last Electricity bill of company
Copy of GST/CST number
Copy of Excise number
Photo I.D. of all the directors
Address proof of all the directors
Copies related to the property such as 7/12 & 8A utara, lease/ sales deed, 2R Permission,
Allotment letter, Possession
Bio-data form of all the directors duly filled & notarized
Financial statements of associate concern for the last 3 years
After undertaking the above preliminary examination of the proposal, the branch will arrive at a
decision whether to support the request or not. If the branch (a reference to the branch includes
a reference to SECC/CPC etc. as the case may be) finds the proposal acceptable, it will call for
from the applicant(s), a comprehensive application in the prescribed proforma, along with a
copy of the proposal/project report, covering specific credit requirement of the company and
other essential data/ information. The information, among other things, should include:
Organizational set up with a list of Board of Directors and indicating the qualifications,
experience and competence of the key personnel in charge of the main functional areas
e.g., purchase, production, marketing and finance; in other words a brief on the managerial
resources and whether these are compatible with the size and scope of the proposed
activity.
Demand and supply projections based on the overall market prospects together with a copy
of the market survey report. The report may comment on the geographic spread of the
market where the unit proposes to operate, demand and supply gap, the competitors’ share,
competitive advantage of the applicant, proposed marketing arrangement, etc.
Current practices for the particular product/service especially relating to Terms of credit
sales, probability of bad debts, etc.
Estimates of sales cost of production and profitability.
Projected profit and loss account and balance sheet for the operating years during the
Currency of the Bank assistance.
If request includes financing of project(s), branch should obtain additionally
Appraisal report from any other bank/financial institution in case appraisal has been
done by them.
‘No Objection Certificate’ from Term lenders if already financed by them and
Report from Merchant bankers in case the company plans to access capital market,
wherever necessary.
In respect of existing concerns, in addition to the above, particulars regarding the history of the
concern, its past performance, present financial position, etc. should also be called for. This
data/information should be supplemented by the supporting statements
Such as:
Audited profit loss account and balance sheet for the past three years (if the latest audited
balance sheet is more than 6 months old, a pro-forma balance sheet as on a recent date
should be obtained and analyzed). For non-corporate borrowers, irrespective of market
segment, enjoying credit limits of Rs.10 lacs and above from the banking system, audited
balance sheet in the IBA approved formats should be submitted by the borrowers.
Details of existing borrowing arrangements, if any,
Credit information reports from the existing bankers on the applicant Company, and
Financial statements and borrowing relationship of Associate firms/Group Companies.
B. Detailed Appraisal
The viability of a project is examined to ascertain that the company would have the ability to
service its Loan and interest obligations out of cash accruals from the business. While appraising
a project or a Loan proposal, all the data/information furnished by the borrower should be
counter checked and, wherever possible, inter-firm and inter-industry comparisons should be
made to establish their veracity.
The financial analysis carried out on the basis of the company’s audited balance sheets and
profit and loss accounts for the last three years should help to establish the current viability.
In addition to the financials, the following aspects should also be examined:
The method of depreciation followed by the company-whether the company is following
straight line method or written down value method and whether the company has changed
the method of depreciation in the past and, if so, the reason therefore;
Whether the company has revalued any of its fixed assets any time in the past and the
present status of the revaluation reserve, if any created for the purpose;
Record of major defaults, if any, in repayment in the past and history of past sickness,
The position regarding the company’s tax assessment - whether the provisions made in the
balance sheets are adequate to take care of the company’s tax liabilities;
The nature and purpose of the contingent liabilities, together with comments thereon;
Pending suits by or against the company and their financial implications (e.g. cases relating
to customs and excise, sales tax, etc.);
Qualifications/adverse remarks, if any, made by the statutory auditors on the company’s
accounts;
Dividend policy;
Apart from financial ratios, other ratios relevant to the project;
Trends in sales and profitability, past deviations in sales and profit projections, and
estimates/projections of sales values;
Production capacity & use: past and projected;
o Estimated requirement of working capital finance with reference to acceptable build
up of inventory/ receivables/ other current assets;
Projected levels: whether acceptable; and
Compliance with lending norms and other mandatory guidelines as applicable
Project financing:
If the proposal involves financing a new project, the commercial, economic and
Financial viability and other aspects are to be examined as indicated below:
Statutory clearances from various Government Depts. / Agencies
Licenses/permits/approvals/clearances/NOCs/Collaboration agreements, as applicable
Details of sourcing of energy requirements, power, fuel etc.
Pollution control clearance
Cost of project and source of finance
Build-up of fixed assets (requirement of funds for investments in fixed assets to be critically
examined with regard to production factors, improvement in quality of products, economies
of scale etc.)
Arrangements proposed for raising debt and equity
Capital structure (position of Authorized, Issued/ Paid-up Capital, Redeemable
o Preference Shares, etc.)
Debt component i.e., debentures, Term Loans, deferred payment facilities, unsecured
Loans/ deposits. All unsecured Loans/ deposits raised by the company for financing a project
should be subordinate to the Term Loans of the banks/ financial institutions and should be
permitted to be repaid only with the prior approval of all the banks and the financial
institutions concerned. Where central or state sales tax Loan or developmental Loan is taken
as source of financing the project, furnish details of the Terms and conditions governing the
Loan like the rate of interest (if applicable), the manner of repayment, etc.
Feasibility of arrangements to access capital market
Feasibility of the projections/ estimates of sales, cost of production and profits covering the
period of repayment
Break Even Point in Terms of sales value and percentage of installed capacity under a
o Normal production year
Cash flows and fund flows
Proposed amortization schedule
Whether profitability is adequate to meet stipulated repayments with reference to Debt
Service Coverage Ratio, Return on Investment
Industry profile & prospects
Critical factors of the industry and whether the assessment of these and management plans
in this regard are acceptable
Technical feasibility with reference to report of technical consultants, if available
Management quality, competence, track record
Company’s structure & systems
Applicant’s strength on inter-firm comparisons
For the purpose of inter-firm comparison and other information, where necessary, source data from
Stock Exchange Directory, financial journals/ publications, professional entities like CRIS-INFAC,
CMIE, etc. with emphasis on following aspects:
Market share of the units under comparison
Unique features
Profitability factors
Financing pattern of the business
Inventory/Receivable levels
Capacity utilization
Production efficiency and costs
Bank borrowings patterns
Financial ratios & other relevant ratios
Capital Market Perceptions
Current price
52week high and low of the share price
P/E ratio or P/E Multiple
Yield (%)- half yearly and yearly
Also examine and comment on the status of approvals from other Term lenders, market view (if
anything adverse), and project implementation schedule. A pre-sanction inspection of the project
site or the factory should be carried out in the case of existing units. To ensure a higher degree of
commitment from the promoters, the portion of the equity / Loans which is proposed to be brought
in by the promoters, their family members, friends and relatives will have to be brought upfront.
However, relaxation in this regard may be considered on a case to case basis for genuine and
acceptable reasons. Under such circumstances, the promoter should furnish a definite plan
indicating clearly the sources for meeting his contribution. The balance amount proposed to be
raised from other sources, viz., debentures, public equity etc., should also be fully tied up.
C. Present relationship with Bank:
Compile for existing customers, profile of present exposures:
Credit facilities now granted
Conduct of the existing account
Utilization of limits - FB & NFB
Occurrence of irregularities, if any
Frequency of irregularity i.e., number of times and total number of days the account was
irregular during the last twelve months
Repayment of Term commitments
Compliance with requirements regarding submission of stock statements, Financial
Follow-up Reports, renewal data, etc.
Stock turnover, realization of book debts
Value of account with break-up of income earned
Pro-rata share of non-fund and foreign exchange business
Concessions extended and value thereof
Compliance with other Terms and conditions
Action taken on Comments/observations contained in RBI Inspection Reports: CO
Inspection & Audit Reports
D. Credit risk rating : Draw up rating for (i) Working Capital and (ii) Term Finance.
E. Opinion Reports : Compile opinion reports on the company, partners/ promoters
and the proposed guarantors.
F. Existing charges on assets of the unit : If a company, report on search of charges
with ROC.
G. Structure of facilities and Terms of Sanction:
Fix Terms and conditions for exposures proposed - facility wise and overall:
Limit for each facility – sub-limits
Security - Primary & Collateral, Guarantee
Margins - For each facility as applicable
Rate of interest
Rate of commission/exchange/other fees
Concessional facilities and value thereof
Repayment Terms, where applicable
ECGC cover where applicable
Other standard covenants
H. Review of the proposal:
Review of the proposal should be done covering (i) strengths and weaknesses of the exposure
proposed (ii) risk factors and steps proposed to mitigate them
(ii) Deviations, if any, proposed from usual norms of the Bank and the reasons therefore
I. Proposal for sanction:
Prepare a draft proposal in prescribed format with required backup details and with
recommendations for sanction.
J. Assistance to Assessment:
Interact with the assessor, provide additional inputs arising from the assessment, incorporate these
and required modifications in the draft proposal and generate an integrated final proposal for
sanction.
2. Assessment :
Indicative List of Activities Involved in Assessment Function is given below:
Review the draft proposal together with the back-up details/notes, and the borrower’s
application, financial statements and other reports/documents examined by the appraiser.
Interact with the borrower and the appraiser.
Carry out pre-sanction visit to the applicant company and their project/factory site.
Peruse the financial analysis (Balance Sheet/ Operating Statement/ Ratio Analysis/
Fund Flow Statement/ Working Capital assessment/Project cost & sources/ Break Even
analysis/Debt Service/Security Cover, etc.) to see if this is prima facie in order. If any
deficiencies are seen, arrange with the appraiser for the analysis on the correct lines.
Examine critically the following aspects of the proposed exposure.
Bank’s lending policy and other guidelines issued by the Bank from time to time
RBI guidelines
Background of promoters/ senior management
Inter-firm comparison
Technology in use in the company
Market conditions
Projected performance of the borrower vis-à-vis past estimates and performance
Viability of the project
Strengths and Weaknesses of the borrower entity.
Proposed structure of facilities.
Adequacy/ correctness of limits/ sub limits, margins, moratorium and repayment schedule
Adequacy of proposed security cover o Credit risk rating
Pricing and other charges and concessions, if any, proposed for the facilities
Risk factors of the proposal and steps proposed to mitigate the risk
Deviations proposed from the norms of the Bank and justifications there for
To the extent the inputs/comments are inadequate or require modification, arrange for
additional inputs/ modifications to be incorporated in the proposal, with any required
modification to the initial recommendation by the Appraiser
Arrange with the Appraiser to draw up the proposal in the final form.
Recommendation for sanction: Recapitulate briefly the conclusions of the appraisal and
state whether the proposal is economically viable. Recount briefly the value of the
company’s (and the Group’s) connections. State whether, all considered, the proposal is a
fair banking risk. Finally, give recommendations for grant of the requisite fund-based and
non-fund based credit facilities.
3. Sanction:
Indicative list of activities involved in the sanction function is given below:
Peruse the proposal to see if the report prima facie presents the proposal in a
comprehensive manner as required. If any critical information is not provided in the
proposal, remit it back to the Assessor for supply of the required data/clarifications.
Examine critically the following aspects of the proposed exposure in the light of
corresponding instructions in force:
Bank’s lending policy and other relevant guidelines
RBI guidelines
Borrower’s status in the industry
Industry prospects
Experience of the Bank with other units in similar industry
Overall strength of the borrower
Projected level of operations
Risk factors critical to the exposure and adequacy of safeguards proposed
There against
Value of the existing connection with the borrower
Credit risk rating
Security, pricing, charges and concessions proposed for the exposure and covenants
Stipulated vis-à-vis the risk perception.
Accord sanction of the proposal on the Terms proposed or by stipulating modified or additional
conditions/ safeguards, or Defer decision on the proposal and return it for additional
data/clarifications, or Reject the proposal, if it is not acceptable, setting out the reasons.
Loan administration - Post sanction Credit process:
.
Need
Lending decisions are made on sound appraisal and assessment of credit worthiness. Past record of
satisfactory performance and integrity are no guarantee for future though they serve as a useful
guide to project the trend in performance. Credit assessment is made based on promises and
projections. A loan granted on the basis of sound appraisal may go bad because the borrower did
not carry out his promises regarding performance. It is for this reason that proper follow up and
supervision is essential. A banker cannot take solace in sufficiency of security for his loans. He has to
-
a) Make a proper selection of borrower
b) Ensure compliance with terms and conditions
c) Monitor performance to check continued viability of operations
d) Ensure end use of funds.
e) Ultimately ensure safety of funds lent.
Stages of post sanction process
The post-sanction credit process can be broadly classified into three stages viz., follow-up,
supervision and monitoring, which together facilitate efficient and effective credit management and
maintaining high level of standard assets. The objectives of the three stages of post sanction process
are detailed below.
TYPES OF LENDING ARRANGEMENTS:
Introduction
Business entities can have various types of borrowing arrangements. They are
One Borrower – One Bank
One Borrower – Several Banks (with consortium arrangement)
One Borrower – Several Banks (without consortium arrangements – Multiple Banking
One Borrower – Several Banks (Loan Syndication)
One Bank
The most familiar amongst the above for smaller loans is the One Borrower-One Bank arrangement
where the borrower confines all his financial dealings with only one bank.
Sometimes, units would prefer to have banking arrangements with more than one bank on account
of the large financial requirement or the resource constraint of his own banker or due to varying
terms & conditions offered by different banks or for sheer administrative convenience. The
advantages to the bank in a multiple banking arrangement/ consortium arrangement are that the
exposure to an individual customer is limited & risk is proportionate. The bank is also able to spread
its portfolio. In the case of borrowing business entity, it is able to meet its funds requirement
without being constrained by the limited resource of its own banker. Besides this, consortium
arrangement enables participating banks to save manpower & resources through common appraisal
& inspection & sharing credit information.
The various arrangements under borrowings from more than one bank will differ on account of
terms & conditions, method of appraisal, coordination, documentation & supervision & control.
Consortium Lending
When one borrower avails loans from several banks under an arrangement among all the lending
bankers, this leads to a consortium lending arrangements. In consortium lending, several banks pool
banking recourses & expertise in credit management together & finance a single borrower with a
common appraisal, common documentation & joint supervision & follow up. The borrower enjoys
the advantage similar to single window availing of credit facilities from several banks. The
arrangement continues until any one of the bank moves out of the consortium. The bank taking the
highest share of the credit will usually be the leader of consortium. There is no ceiling on the number
of banks in a consortium.
Multiple Banking Arrangement
Multiple Banking Arrangement is one where the rules of consortium do not apply & no inter se
agreement among banks exists. The borrower avails credit facility from various banks providing
separate securities on different terms & conditions. There is no such arrangement called ‘Multiple
Banking Arrangement’ & the term is used only to denote the existence of banking arrangement with
more than one bank. Banking Arrangement has come to stay as it has some advantages for the
borrower & the banks have the freedom to price their credit products & non-fund based facility
according to their commercial judgment. Consortium arrangement occasioned delays in credit
decisions & the borrower has found his way around this difficulty by the multiple banking
arrangements. Additionally, when units were not doing well, consensus was rarely prevalent among
the consortium members. If one bank wanted to call up the advance & protect the security, another
bank was interested in continuing the facility on account of group considerations.
Points to be noted in case of multiple banking arrangements
Though no formal arrangement exists among the financing banks, it is preferable to have
informal exchange of information to ensure financial discipline
Charges on the security given to the bank should be created with utmost care to guard
against dilution in our security offered & to avoid double financing
Certificates on the outstanding with the other banks should be obtained on the periodical
basis & also verified from the Balance sheet of the unit to avoid excess financing
Credit Syndication
A syndicated credit is an agreement between two or more lending institutions to provide a borrower
a credit facility using common loan documentation. It is a convenient mode of raising long-term
funds.
The borrower mandates a lead manager of his choice to arrange a loan for him. The mandate spells
out the terms of the loan & the mandated bank’s rights & responsibilities.
The mandated banker – the lead manger – prepares an information memorandum & Circulates
among prospective lender banks soliciting their participation in the loan. On the basis of the
memorandum & on their own independent economic & financial evolution the leading banks take a
view on the proposal. The mandated bank convenes the meeting to discuss the syndication strategy
relating to coordination, communication & control within the syndication process & finalizes deal
timing, management fees, cost of credit etc. The loan agreement is signed by all the participating
banks. The borrower is required to give prior notice to the lead manger about loan drawal to enable
him to tie up disbursements with the other lending banks.
Features of syndicated loans
Arranger brings together group of banks
Borrower is not required to have interface with participating banks, thus easy & hassle fee
Large loans can be raised through syndication by accessing global markets
For the borrower, the competition among the lenders leads to finer terms
Risk is shared
Small banks can also have access to large ticket loans & top class credit appraisal &
management
Advantages
Strict, time-bound delivery schedule
Streamlined process of documentation with clearly laid down roles & responsibilities
Market driven pricing linked to the risk perception
Competitive pricing but scope for fee-based income is also available
Syndicated portions can be sold to another bank, if required
Fixed repayment schedule & strict monitoring of default by markets which punish
indiscipline
CREDIT APPRAISAL MODEL
CREDIT TO SME SECTOR
Central bank of India provides credit to SME sector under following Schemes
SME – Schematic (Fast Track)
It includes structured products basically to provide fast services to clients. It includes various
products like:
Business Loan for Property
Power Rent
Power Trade
Zero Collateral Loans (ZCL) to MSE under CGS
Card Power
Enterprise Power
Business Power .
Business Loan for Property:
The product is aimed at providing finance to business enterprises for acquition of
an immovable property. The facility is in the form of a Term Loan repayable by
EMIs. The maximum Loan amount under the product is Rs. 5 crores.
Power Rent:
The product generally known in market parlance as “Lease Rental Discounting” is
aimed at providing a Term Loan to owners of properties against their lease rental
receivables. The Loan amount is assessed on the basis of the net present value of
the rental receivables over the lease period (after deducting margin and taxes).
The lease rentals are hypothecated in bank’s favor and the Loan is further
collateralized by charge over the property. The product specifies a minimum-
security coverage of 1.5 times. Maximum Loan amount under the product is Rs.
20 crores.
Power Trade:
The product aims to provide both working capital and Term finance requirements
of a trade enterprise. The facility is in the form of a cash credit (for working
capital requirements) and Term Loan (financing capital expenditure). The facility
is secured by hypothecation of working capital assets and further collateralized by
charge over an immovable property/ financial asset. Non- fund based facilities can
also be granted under the product. The maximum Loan amount under the product
is Rs. 2.5 crores.
Zero Collateral Loans (ZCL) to MSE under CGS:
This product facilitates the MSEs and software/IT related services to avail both
working capital and term finance from bank. The facility is secured by guarantee
cover of credit guarantee fund trust for micro and small enterprises (CGTMSE)
and there is no collateral security to be taken in such cases. Maximum loan
amount under the product is Rs. 1.00 crore.
Card Power:
This is a scheme for financing credit/debit card receivables of units installing pour
EDC machines. Both demand loan & term loan facilities are offered to the
borrowers, subject to a maximum of Rs. 2.5 crores. All trading/ retailing activities
(with a few exceptions like liquor, tobacco, seasonal business etc.), where credit/
debit cards are used are eligible for the loans.
Enterprise Power:
This product has been developed to meet the credit needs of the Micro and small
enterprises covering both manufacturing and the service sectors. The facilities
offered include CC Rupee export credit; pre & post shipment credit & non-fund
based facilities like LC & BG. The maximum limit is restricted to Rs. 1.00 Crore.
Business Power:
Business Power is an unsecured Term Loan (Maximum loan amount under the
product is Rs. 35 lacs) to be repaid by way of EMI’s over a maximum period of 4
years.
SME- Non Schematic (Standard)
For a business on the growth phase with a wide range of opportunities to explore, timely
availability of credit is an integral ingredient needed to scale new heights. Central Bank
understands this and endeavor to be not just a bank but also financing partner, so that focus
on business needs becomes possible whereas Bank cater to meet financing needs.
Their services ranging from Funded to Non-Funded, from Short Term to Long Term and
from Credit to Trade Services ensures to get finance the way it is best suited for business.
Services:
Cash Credit
Working Capital Demand Loan
Export Finance
Short Term Loan
Term Loan
Clean Bill Discounting
LC Backed Bill Discounting
Co-Acceptance of Bills
Credit Facilities against Guarantee or Stand By Letter of Credit issued by Foreign
Banks
Letter of Credit
Bank Guarantee
Solvency Certificates
Cash Credit:
Bank offer Cash Credit facilities to meet day-to-day working capital needs. Cash Credit is
provided against the primary security of stock, debtors, other current assets, etc.,
and/or collateral security of movable fixed assets, immovable property, personal or
corporate guarantee, etc. Interest is charged not on the sanctioned amount but on the
utilized amount
Working Capital Demand Loan:
Bank also provides working capital facilities in the form of Working Capital Demand
Loan instead of cash credit facility. The primary or collateral security will be as
mentioned in cash credit facility. Here also interest is levied on the amount drawn
rather than on the amount utilized.
Export Finance:
Bank provides finance for export activities in the form of Pre-Shipment Credit against
firm order and or Letter of Credit and Post shipment credit. Credit is available for
procuring raw materials, manufacturing the goods, processing and packaging the goods
and shipping the goods. Finance is provided in Indian or foreign currency depending
upon the need of the borrower.
Short Term Loan:
Bank provides Working Capital facilities to meet day-to-day working capital needs and
Term Loan for capacity. However there may be occasions where there is need of ad hoc
or short-Term finance for general corporate purposes, meeting temporary mismatches
in working capital or for meeting contingent expenses. In such situations it provides
Short Term Loans for tenure up to a year to ensure that business runs smoothly.
Term Loan:
When there is need of long-Term funds for capacity expansions or plant modernization
and so on. Keeping these requirements in mind Bank provides Term Loans up to
acceptable tenor with suitable moratorium, if required, and repayment options
structured on the basis of customer’s estimated cash flows. These Loans are primarily
secured by a first charge on the fixed assets acquired through the Loan amount.
Suitable collateral security is also taken whenever required.
Clean Bill Discounting:
Bank provides clean bill discounting facilities to fund receivables. Bank discount bills or
receivables and provide credit against that. This facility is provided for a period of 3-6
months depending upon the tenor of the bill.
LC Backed Bill Discounting:
Bank discount trade bills drawn under Letters of Credit issued by reputed banks to fund
receivables. This facility is provided for a period of 3-6 months depending upon the
tenor of the bill or Letter of Credit.
Co-Acceptance of Bills:
Bank also provides co-acceptance of trade bills depending upon the need of the
borrower.
Credit Facilities against Guarantee or Stand By Letter of Credit issued by Foreign
Banks:
Various foreign companies set up subsidiary in India. Bank provides funding to such
companies against guarantees or SBLCs of acceptable foreign banks.
Letter of Credit:
Apart from fund based working capital facilities Bank provides a range of Non-Fund
Based facilities such as Letter of credit, Bank Guarantees, Solvency certificates, etc.
Letter of Credit is provided to meet trade purchases. These are generally provided for 3-
6 months depending upon Trade cycle. Apart from this it provides Import Letter of
Credit for importing machinery or capital goods. Such LCs are for tenure ranging from 1-
3 years depending upon the need of the borrower.
Bank Guarantee:
Bank provides Bank Guarantee on behalf of its client to various other entities such as
Government, quasi government bodies, corporate and so on. it provides a range of
guarantee such as Performance guarantee, financial guarantee, EPCG etc. The tenure of
Bank Guarantee range from 1 year to 10 years depending upon the purpose of the
guarantee.
Solvency Certificates:
Bank also provides solvency certificate depending upon the need of the borrower.
Sanctioning powers for schematic Loans under MSME and Mid Corporate:
In order to have better control over the portfolio, it is felt that the budget for schematic advances
should be allotted only to select branches, where the potential and manpower support exist for such
business.
Accordingly, the budget for FY 11 has been restricted to select branches, to be decided by Advances
Cells. The Branch Heads of branches located at centers where Advances Cells have been set up will
not have any sanctioning powers. Branch Heads of stand-alone branches where budgets have been
allocated will have sanctioning powers as per delegation of powers given below. The Branch Heads
of other stand-alone branches where budgets have not been allocated will not have any sanctioning
powers. These branches would, however, continue to source business and such proposals would be
processed / sanctioned at the respective Advances Cells. Review / renewal of existing Loans at such
branches would also be done at the Advances Cells.
Branches would continue to be responsible for all post sanction formalities, maintaining quality of
assets held in their books, periodic updating of drawing power, and obtention of stock statements
and periodical inspection of borrowed units.
All requests for interest rate concessions are to be forwarded to the Advances Cells.
The proposals sanctioned at Advances Cells / Zonal Offices during a particular month are to be
submitted for review by the next higher authority through a monthly control return, latest by the 5th
of the succeeding month, in the prescribed format and not on a case-by-case basis. Similarly, the
proposals sanctioned by the Branch Heads /Advances Cells (headed by AVPs/Managers) during a
particular month are to be submitted for review by the appropriate authority at Zonal Office or
Advances Cells as the case may be through a monthly control return, latest by the 5th of the
succeeding month, in the prescribed format and not on a case-by-case basis. The concessions in
rates of interest / variations authorized by the VP (Advances) and SVP (Advances) during a particular
month are to be submitted for review by the SVP(Advances)/ Zonal Head respectively through a
monthly control return, in the prescribed format by the 5th of the succeeding month.
If a combination of schematic Loan products is to be offered, the combined exposure should be the
criterion while sanctioning the limits
INTRODUCTION TO CREDIT RISK MANAGEMENT:
DEFINITION:
Of all different types of risks that a bank is subject to, credit risk can be defined as the risk of failure
on the part of the borrower to meet obligations towards the bank in accordance with the Terms and
conditions that have been agreed upon. Inability and/or unwillingness of the borrower to repay
debts may be the cause of such default.
The bank aims at minimizing this risk that could arise from individual borrowers or the entire
portfolio. The former can be addressed by having well-developed systems to appraise the
borrowers; the latter, on the other hand, can be minimized by avoiding concentration of credit
exposure with a few borrowers who have similar risk profiles. Credit risk management becomes even
more relevant in the light of the changes that have been brought about in the economic
environment, including increasing competition and thinning spreads on both the sides of Balance
sheet
DETERMINANTS OF CREDIT RISK:
Factors determining credit risk of a bank’s portfolio can be divided into external and internal factors.
The banks do not have control on external factors. These include factors across a wide spectrum
ranging from the state of the economy to the correlation among different segments of industry. The
risk arising out of external factors can be mitigated via diversification of the credit portfolio across
industries especially in light of any expectations of adverse developments in the existing portfolio.
Given that the banks have very little control over such external factors, the bank can minimize the
credit risk that it faces mainly by managing the internal factors.
These include the internal policies and processes of the bank like Loan policies, appraisal processes,
monitoring systems etc. These internal factors can be taken care of, partly, via effective rating and
monitoring systems, entry level criteria etc. These processes would enable improvement in the
quality of credit decisions.
This would effectively improve the quality (and hence profitability) of the portfolio. While monitoring
systems are useful tool at post-sanction stage, rating systems act as important aid at the pre-
sanction stage.
INTRODUCTION TO CREDIT TOOLS:
The Bank has developed tools for better credit risk management. These focus on the areas of rating
of corporate (pre-sanctioning of Loans) and monitoring of Loans (post-sanctioning). The focus of this
manual is to familiarize the user with the credit rating tool.
Credit Rating: Definition
Credit rating is the process of assigning a letter rating to borrowers indicating the creditworthiness of
the borrower. Rating is assigned based on the ability of the borrower (company) to repay the debt
and his willingness to do so. The higher the rating of a company, the lower the probability of its
default. The companies assigned with the same credit rating have similar probability of default.
Use in decision-making
Credit rating helps the bank in making several key decisions regarding credit including:
Whether to lend to a particular borrower or not; what price to charge
What are the products to be offered to the borrower and for what tenor?
At what level should sanctioning be done?
What should be the frequency of renewal and monitoring?
It should, however, be noted that credit rating is one of the inputs used in taking credit decisions.
There are various other factors that need to be considered in taking the decision (e.g., adequacy of
borrower’s cash flow, collateral provided, and relationship with the borrower). The rating allows the
bank to ascertain a probability of the borrower’s default based on past data.
Main features of the rating tool:
i) Comprehensive coverage of parameters.
ii) Extensive data requirement.
iii) Mix of subjective and objective parameters.
iv) Includes trend analysis.
v) 13 parameters are benchmarked against other players in the segment. The tool contains the latest
available audited data/ratios of other players in the segment. The data is updated at intervals.
vi) Captures industry outlook.
vii) Eight grade ratings broadly mapped with external credit rating agency’s ratings prevalent in India.
Special features of the web based credit rating tool
i) Centralized data base.
ii) Easy accessibility and faster computation of scores.
iii) Selective access to users based on the area of operation. Branches have access to the data
pertaining to their branch only, Zonal offices have access to the data pertaining to all the branches
under their control and the Credit Department and Risk Department at Central Office have access to
all accounts.
iv) Adequate security system and provision of audit trails for confidentiality.
v) Maintaining of past rating records in the system for collection of empirical data on rating
migrations. This will enable the bank to arrive at PDs (Probability of Default) factor.
RATING TOOL FOR SMALL AND MEDIUM ENTERPRISES (SME):
The SME rating tool has been developed for the purpose of assigning a credit rating to the SME
borrower of the Bank. The aim of the tool is to provide a standardized system for the bank to
evaluate the credit risk of different borrowers. It should, however, be noted that this tool is not the
standalone exercise for the purpose of sanctioning of Loan to a SME borrower. It should be
supplemented with other inputs important in the sanctioning process.
The following broad areas have been considered for determining the rating of
borrowers in the SME category:
Financial performance
Business performance
Industry outlook
Quality of management
Conduct of account (after roll out of the Monitoring tool)
Within each of these broad areas, various parameters have been used for obtaining an overall rating
of the borrower. In the following sections, we shall discuss in greater detail the structure of the tool
and the methodology of using it.
Parameters used in the SME tool
Financial performance
The tool in its current form uses various parameters for rating a borrower on its financial
strength. These various sub-parameters give us an idea of the different sources of risk being
faced by a company in different areas.
Operating performance of business
Operational efficiency of a borrower is important in determining the generation of cash for
repayment of its debt obligations. The parameters in this category assess the borrower’s
competence in its primary activities.
Quality of management
Quality of the management of a borrower unit has a direct impact on the performance of
the unit. Also, it would have a direct impact on the integrity of the borrower especially in
Terms of its willingness to repay its debt.
Industry
In order to undertake the credit rating of any borrower, it is important to assess the riskiness
of the industry to which that borrower belongs. Borrowers, which are similarly ranked in
Terms of financial performance, operating performance of business and quality of
management may have different credit ratings due to the risks inherent in their industry.
The risk assessment in industry sectors is done at the Central Office level and appropriate
score for each industry has been allocated in the tool. On selection of the relevant industry
sector, the tool will automatically reckon the allocated score.
RATING SCALES:
The rating tool for SME has an 9-point rating scale, which ranges from A++ to D.
Borrower Rating Range of Scores Risk Level
A++ Above 90 Lowest risk
A+ 85-90 Lower risk
A 80-84 Low risk
B+ 70-79 Low risk
B 60-69 Moderate risk
C+ 56-69 Moderate risk
C 51-55 High risk
D+ 45-50 Higher risk
D Below 45 Highest risk
CASE STUDY
DETAILS OF CASE STUDY
Name Shree rang traders
Constitution Public Limited Company
Office Address B- 301, city light road , athawagate
Surat-395 003, Gujarat
Line of activity Manufacturing of Food Colour Products
Sector Chemical and Chemical Products
Dealing with us New Connection
Incorporation 15th june 2004
Name of Directors Mr. Atulbhai Prahladbhai Patel
Mr. Rameshbhai Bhagwanbhai Patel
Mr. Hitendra Hargovinddas Patel
Group Not a recognized group
Rating SME 3 (ABS 31.03.2009)
Associate Concern Dynemic Overseas (India) Private Limit
BRIEF BACKGROUND:
The Company was incorporated on 15th june 2004 as Private Limited Company. The Company was
promoted with the objective of carrying on the business of manufacturing S.P.C.P, the raw material
for Food Color, reactive & Raazole Dyes.
In the Year 2008 the company acquired the running business of M/s Safforn Dye Stuff Industries and
started manufacturing wide range of food colors at the premises 3709/6, GIDC Estate, Ankleshwar
having plot area of admeasuring 3700 Sq.Mtr.
As the company aims to provide entire range qualitative and quantitative service to food industry, as
its Unit I. The company commenced manufacturing of food colors namely Tratrazine in the year
2007-08. Both the units at Ankleshwar are Ultra modern and have eco friendly plants with in house
testing facilities to control quality at every level of manufacturing. The Company gained goodwill in
the short span of time due to its quality product. The company has well equipped state of art in
house laboratory which conduct test of every parameter of food color & Dye intermediates laid
down under national and international authorities.
QUALITATIVE FACTORS:
The Company has a pro-active Management and Promoters who have hands on
experience in manufacturing of Dyes Intermediaries and Food Colours.
Profit making Company since last 5 years.
The company has obtained certificate of approval From Bureau Verities Quality
International (BVQI) for achievement of ISO 9001: 2000 quality standards, the Company
has also received certificate of approval from Bureau Verities Quality International
(BVQI) for achievement of 14001:1996 and 14001:2004 quality standards for both its
units satiated at Ankleshwar.
The company was awarded with trophy for export performance of more than Rs. 6.00 &
8.00 Crore for Self.
Marketing Strategy/Marketing arrangement
Strong and experience people are leading company’s marketing department. Company’s total
turnover is divided into:
Exports Sales
Local Sales
Exports Sales:
Company’s 70% turnover is generated by way of exports sales. Company has its own
presence in all most all countries. The company is exporting Food colors in Latin America,
African countries, Middle East, Far East, US and Europe. Almost all export customers are
dealing with company for many years.
Out of total exports turnover 60 to 70% percentage orders are repeated orders and rest of
the orders are new orders.
The Company has region wise Export Managers who can cater the need of customers
individually. Due to the quality and timely delivery of the material the company have less
competition from these countries.
Globally many countries have discontinued production of Dyes, Food colors and
Intermediates, new market has opened for Indian manufacturer of Dyes and Intermediates.
As Dynemic Products Ltd is already a well recognized name in the field globally, it has more
opportunities to grab from growing International market.
Local Sales:
In Local Market Company is doing marketing its Dyes & Intermediates to the end customers.
The company is the largest manufacturer of S.P.C.P in India which generating repeated order
from the local customers.
Now, company is planning to market the food colors in small packing through its dealers and
distributors which cater the local needs.
Company is also planning to arrange marketing arrangement with soft drink manufactures
and pharmaceutical manufactures for food colors.
Proposal for
Proposal for fresh sanction of credit facilities by way of take over
(with enhancement) from HDFC Bank
a) Sanction of Cash Credit Limit of Rs. 500.00 lacs for working capital
requirement ( take over of Rs. 500.00 lacs from HDFC Bank).
b) Sanction of Letter of Credit (Inland/Foreign) of Rs. 300.00 lacs for
working capital requirement as a sub-limit of cash credit limit (take
over of Rs. 300.00 lacs from HDFC Bank).
c) Sanction of EPC/FBD/FBP/PCFC/PSCFC of Rs. 500.00 lacs for
working capital requirement as a sub -limit of cash credit limit (take
over of Rs. 500.00 lacs from HDFC Bank).
d) Sanction of Corporate Loan of Rs. 200.00 lacs (take over of
Working Capital Term Loan of Rs. 200.00 lacs from HDFC Bank).
e) Sanction of LER limit of Rs. 25.00 lacs (equivalent to forward cover
of Rs.500.00 lacs).
f) Concession in processing fees at Rs. 1.00 lacs against norm of
1.00%.
g) Permitting time of 30 days for completion of take over formalities
with HDFC and creation of mortgage by CMC.
Existing & Proposed Facilities
(Rs. in lacs)
Type of FacilityExisting
Limits
(HDFC)
Proposed
+ Inc /
– Dec
Proposed
Limits
(CBI)
Cash Credit Limit – Stock cum Book Debt
500.00 -- 500.00
Corporate Loan 200.00 -- 200.00
EPC/FBD/FBP/PCFC/PSCFC – As a sub limit of Cash Credit Limit
(500.00) -- (500.00)
LC(Inland /Foreign) - As a sub limit of Cash Credit Limit
(300.00) -- (300.00)
LER Limit (as a sub-limit of CC limit)
(15.00) +25.00 +25.00
Total700.00 +25.00 725.00
PurposeWC/LC/LER : To meet working capital requirements.
Corporate Loan : For NWC built up.
Tenor WC/LC/LER : 12 months.
Corporate Loan : 24 months from the date of first disbursement.
Repayment
WC/LC/LER : On Demand.
Corporate Loan : 23 monthly instalments of Rs. 834000 each and last
instalment of Rs. 818000.
Interest to be serviced as and when debited.
Security Primary Hypothecation of entire current assets (Pari
passu) of the company (Both present &
future). (Value as on 31.03.2009 is of Rs.
1326.42 lacs).
Hypothecation over Plant and Machinery
(Pari Passu) (Both present & future).
(Value is of Rs. 1529.55 lacs as per
empanelled valuer of Citi Bank).
Collateral Pari – Passu charge being shared by Citi Bank Limited
on following properties :
i. Factory Land and Building, Plant and Machinery at
Plot No. 6401,6415,6416, G.I.D.C., Ankleshwar,
Dist.Bharuch admeasuring 5664 sq.mts. standing
in name of M/s. Dynemic Products Limited.
ii. Office situated at B- 301,308,309,310 Satyamev
Complex-1, Opp. New Gujarat High Court,
S.G.Highway, Sola, Ahmedabad-380 060, Gujarat
admeasuring 4272 square feets standing in the
name of M/s. Dynemic Products Limited.
iii. Factory Land and Building, Plant and Machinery at
Plot No. 3709/6,3710/3,3710/1, G.I.D.C.,
Ankleshwar, Dist.Bharuch admeasuring 12290.80
sq. mts. standing in name of M/s. Dynemic
Products Limited.
Guarantee Personal Guarantee of :
Mr. B.K.Patel having net worth of Rs. 264.88 lacs (approx.) as on 31.03.2009.
Mr. Ramesh B.Patel having net worth of Rs. 152.57 lacs (approx.) as on 31.03.2009.
Mr. Dashrath P.Patel having net worth of Rs. 257.89 lacs (approx.) as on 31.03.2009.
Credit
enhance
ment
Nil.
Interest
Rate
BPLR - 3.50% i.e. 11.25% p.a. with monthly rests (presently BPLR @
14.75%).
LC
Charges
Bank’s standard schedule of charges.
Processin
g fees
Rs. 1 lacs for the sanctioned facilities plus applicable taxes.
Banking
Arrange
ment
Multiple with Sutex Bank (Proposed).
Unit visit
The unit was visited Mr. Asim Bhaduri (VP – SME and Center Head), Mr. P.C.Dash (AVP
and SCO – SME) and Mr. Kuntal Bhatt (Manager and RM - SME) on 13th November 2009
and the overall operations of the unit were found to be satisfactory.
Operational & Financial Analysis
(Rs. in lacs)
Particulars
31.03.07 31.03.08 31.03.09 31.03.10 31.03.11
(Actuals) (Actuals) (Actuals) (Proj.) (Proj.)
Gross Sales 3231.12 3657.70 4911.20 6500.00 7500.00
Net Sales 3231.12 3657.70 4911.20 6500.00 7500.00
Net Sales Growth Rate % 12.79% 13.20% 34.27% 32.35% 15.38%
Operating Profit 227.49 313.80 261.62 621.29 729.97
Other Income 141.52 (5.36) 56.07 55.00 65.00
PBDIT 322.88 412.89 503.87 881.74 1018.09
Depreciation 47.94 50.62 96.12 110.94 107.00
Interest 47.45 48.47 146.12 149.50 181.12
PBT 369.01 308.44 317.69 676.29 794.97
PAT 266.95 184.99 190.03 446.42 524.76
Cash Profit 182.35 103.07 153.62 424.83 499.22
Operating Profit Margin
%
7.04% 8.58% 5.33% 9.56% 9.73%
PBDIT Margin % 9.99% 11.29% 10.26% 13.57% 13.57%
PAT Margin % 8.26% 5.06% 3.87% 6.87% 7.00%
Paid up Capital – Equity 1132.84 1132.84 1132.84 1132.84 1132.84
Unadjusted TNW 2649.73 2707.33 2764.96 3078.84 3471.06
Unadjusted TOL 1109.42 1589.26 2331.73 2890.12 3094.44
Unadjusted TOL/ TNW 0.42 0.59 0.84 0.94 0.89
Adjusted TNW 2710.84 2725.68 2828.34 3237.48 3629.70
Adjusted TOL 1048.31 1570.91 2268.35 2731.48 2935.80
Adjusted TOL/ TNW 0.39 0.58 0.80 0.84 0.81
Interest Coverage 9.82 8.44 3.84 6.27 5.98
Current Ratio 1.76 1.34 0.94 1.13 1.24
DSCR 7.67 1.83 1.21 2.35 2.20
NOCF 105.69 230.12 654.38 (269.99) 149.24
Net Profit / NOCF 2.53 0.80 0.29 (1.65) 3.52
NOCF / Interest 2.23 4.75 4.48 (1.81) 0.82
NOCF / Financing
Payments
0.08 0.13 0.29 (0.08) 0.04
Total Debt / NOCF (No. of
years)
1.17 0.78 0.60 (0.45) (0.00)
Rating
The rating of the company as per SME Rating Tool comes to SME - 3 (ABS 31.03.2009).
The segment wise scoring is as under:
Particulars Rating
Overall Scoring SME-3
Financial scoring SME-4
Business scoring SME-3
Management scoring SME-3
Industry scoring SME-3
Reference Check
Reference check was made through some of Bank’s clients in the same line of activity financed by
Axis bank and the same was reported to be satisfactory.
Analysis
a) The promoters of the company are having rich experience of more than 5 years in various
Industries.
b) The proposed expansion of the company is having huge market potentials.
c) The Company is the leader in Manufacturing and export of food colours.
d) The overall credit rating of company is SME –3.
e) The business is 5 years old.
f) The sale of the company has been showing an increasing trend throughout the years under
consideration. The sale of the company was increased from Rs. 3231.12 lacs in FY06-07 (Aud)
to Rs. 3657.70 lacs (Aud) in FY07-08 and further to Rs. 4911.20 lacs in FY08-09 (Aud).
g) Since the company is into Manufacturing of Food Colours, the net margin normally remains
between 5.00% - 9.00%. The net profit of the company was decreased from Rs. 266.95 lacs
in FY06-07 (Aud) showing margin of 8.26% to Rs. 184.99 lacs in FY07-08 (Aud) showing
margin of 5.06%. However, the same was maintained at Rs. 190.03 lacs in FY08-09 (Aud)
showing margin of 3.87% due to decrease in margins in the chemical industry on account of
raw material price fluctuations worldwide. The same was an aberration. But, now the
industry is on revival and boom path. Considering the same, the company has estimated the
profit of Rs. 446.42 lacs for FY09-10 @ margin of 6.87%, which may be accepted.
h) The TOL/TNW of the company increased from 0.42 in FY06-07 (Aud) to 0.59 in FY07-08 (Aud)
and to 0.84 in FY08-09 (Aud). The company has estimated TOL/TNW at 0.94 and 0.89 for
FY09-10 and FY10-11 respectively on account of increased bank borrowings, which may be
considered comfortable.
i) The current ratio of the company was 1.76 in FY06-07 (Aud) which decreased to 1.34 in
FY07-08 (Aud) and which further plummeted to 0.94 in FY08-09 (Aud), on account of capex
expansion which will be completed in the current fiscal. The company has estimated its
current ratio at 1.13 and 1.24 for FY09-10 and FY10-11, which is reasonably acceptable as
regards to the liquidity position of the company.
j) The NOCF is positive during FY 2008-09 (Aud) by Rs. 654.38 lacs. NOCF is estimated negative
in FY 2009 –10 at Rs. 269.99 lacs, as per projected financials submitted by the company on
account of increase in stock and receivables which is keeping in line with the increase in
turnover and the holding levels are as per the industry practice.
k) The overall conduct of the account, repayment status etc. at Sutex Bank and HDFC is
satisfactory.
l) The main director is dynamic and has rich experience of more than 15 years in his line of
activity.
m) The company is a registered SSI unit.
n) Market reference of the company is satisfactory
.
o) The overall projected performance and financial of the unit are satisfactory.
OTHER DEPARTMENT OF BANKS:
SAVING DEPARTMENT
In individuals have create he/she open the which first step to create relationship between bank
and customers with minimum balance which is Rs. 1000/- . In saving account bank will be give
interest @ 3.50% on balance amount. Also nominee facility available for this account. There are
no limits of numbers of withdrawal/deposit money in the bank.
Document requires for opening saving account are below:
2 passport size color photo
Voting card/driving license
Pan card
Sign of recognition person (who have already account in bank)
CURRENT DEPARTMENT
Current account is useful for business. Amount can be withdrawn any number of times from this
account. Bank does not pay interest or pay at very lower rate. I this account minimum certain
amount has to be kept credit. In this account overdraft facility can be availed. The account holder is
issued with passbook, cheque book, pay-in-slip etc. Account holder open the account in central bank
of India with minimum balance is Rs. 7500/-.
Document requires for opening current account in bank are below:
Identification of each partner
Pan card
Electricity bills of firm/business
India non-judicial stamp paper
Whom to be eligible for open this account
Proprietary firm
Partnership firm
Pvt. Ltd
Public. ltd
Trust
Club
Association
H.U.F.
Other (please specify)
FIXED DEPOSIT RECEPIT
The account; in which deposit is kept for certain fixed term, is called fixed deposit account. Bank can
utilize this deposit for fixed term. The depositor cannot withdraw amount for specific term. On
completion of term the depositor has to discharge the receipt by signing on the back side of the
receipt over the revenue stamp and tender it to bank for payment. Then bank returns the amount of
deposit together with interest. The highest interest is earned on this deposit account.
Demand Draft
DD stands for Demand Draft. Demand draft is a cheque written by one bank to its representative
bank or cheque issued by one bank to another on its (issuing bank’s) credit. There is an order to
pay the amount to the person mentioned in the draft. It is safe and easy to send money to
outstation through draft. The person who is sending money can get the draft issued from his bank
drawn in the name of receiver on the bank of the receiver’s village/town. For this sender has to
request the banker to issue draft by paying draft amount and its commission. The issuing bank
orders the addressed bank to make payment of the draft amount to the person indicated in the
draft. The person making payment collects the draft issued and sends it to the person, whom he to
make payment. The respective individual can get the draft amount. Draft can be crossed. Payment of
such crossed draft is credited to the respective account.
ATM
ATM stands for Automatic Teller Machine. If any person with his fixed deposit/saving
account/current account has given guarantee for his financial soundness bank gives ATM card /
Debit card. In certain branches of the bank the machines are installed which can accept such cards.
The card holder can withdraw the amount greater than minimum decided and lesser than the credit
he has in his account with the help of such card. The required amount can be received for 24 hours
by operating buttons of the machines. This machine can pay cash, accept deposit and can handle
other simple banking transactions.
FINDINGS
Credit appraisal is done to check the commercial, financial & technical viability of the project
proposed its funding pattern & further checks the primary or collateral security cover
available for the recovery of such funds
Credit is the core activity of the banks & important source of their earnings which go to pay
interest to depositors, salaries to employees & dividend to shareholders
Credit & risk go hand in hand
In the business world risk arises out of:-
Deficiencies / lapses on the part of the management
Uncertainties in the business environment
Uncertainties in the industrial environment
Weakness in the financial position
Bank’s main function is to lend funds/ provide finance but it appears that norms are taken as
guidelines not as a decision making
A banker’s task is to indentify/assess the risk factors/parameters & manage/mitigate them
on continuous basis
The Credit Appraisal process adopted by the bank take into account all possible factors
which go into appraising the risk associated with a loan
These have been categorized broadly into financial, business, industrial, management risks &
are rated separately
The assessment of financial risk involves appraisal of the financial strength of the borrower
based on performance & financial indicators
The norms of the bank for providing loans are not stringent, i.e. even if a particular
client is not having the favorable estimated and financial performance, based on its
past record and future growth perspective, the loan is provided.
CONCLUSION
Finance management is the backbone of any organizations and hence yields a number of job
options ranging from strategic financial planning to sales.
From the study of Credit appraisal of SME, it can be concluded that credit appraisal should
therefore be based on the following factors, the same are applied at Central bank of India:
Financial performance
Business performance
Industry outlook
Quality of management
Conduct of account
Central Bank of India loan policy contains various norms for sanction of different types of
loans. These all norms do not apply to each & every case. Central bank of India norms for
providing loans are flexible & it may differ from case to case.
Usually, it is seen that credit appraisal is basically done on the basis of fundamental
soundness. But, after different types of case studies, our conclusion was such that credit
appraisal system is not only looking for financial wealth. Other strong parameters also play
an important role in analyzing credit worthiness of the firm/company.
In all, the viability of the project from every aspect is analyzed, as well as type of business,
industry, promoters, past records, experience, projected data and estimates, goals, long
term plans also plays crucial role in increasing chances of getting project approved for loan.
BIBLIOGRAPHY
WEB SITES:
www.rbi.org.in
www.centralbankof india.com
www.indianbankassociation.com
www.scird.com
www.project99.com
BOOKS:
“Credit and banking” By: K. C. Nanda