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West Bengal University of Technology

Summer Project Report

On

Financing of SMEs by SIDBI with a focus on Project Appraisal

Study on the SMEs in the State of West Bengal

At

Small Industries Development Bank of India (SIDBI)

By

Roma Devnath

WBUT Reg. No.101360710078

WBUT Roll No.13600910022

Army Institute of Management

Kolkata


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TABLE OF CONTENT

TOPIC

Certificate

Acknowledgement

Executive Summary

Chapter IThe Company

Small Industries Development Bank of India

Chapter IIThe Project

Small and Medium Enterprises(SMEs)

SMEs and Their Development in West Bengal

Credit Appraisal Process

Credit Appraisal in SIDBI

Chapter IIICollection and Analysis of Data

i) XYZ India Ltd.ii) ABC Pvt. Ltd.iii) PQR India Pvt. Ltd.

Chapter IV - Finding and Recommendations

Findings

Recommendations

Constraints and Limitations of the Study

Conclusion

Annexure

Bibliography


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GUIDANCE-cum-COMPLETION CERTIFICATE

This is to certify that Ms. Roma Devnath, WBUT Regn. No. 101360710078

of MBA-14, WBUT Roll No. 13600910022 has undertaken the Project

titled Financing of SMEs by SIDBI with focus on Project Appraisal

under our guidance from 1 June 2011 to 01 Aug 2011 at Small Industries

Development Bank of India, Kolkata and has completed the said project

successfully.

(Sujatha Chowdhury)

Asst. General Manager

SIDBI, Kolkata

Mr. K Guhathakurata

Organisation Seal


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ACKNOWLEDGEMENT

This work is an integrated effort of all those concerned with it and would have been quite difficult

without their direct & indirect co-operation. I wish to express my appreciation and gratitude to all the

concerned people.

First and the foremost my intellectual debt is to Mr. K Guhathakurata (Academic Coordinator, Army

Institute of Management, Kolkata) and Mrs. Sujata Chowdhury (Assistant General Manager, SIDBI,

Kolkata Branch Office) who have contributed significantly towards the completion of the project.

They have given their proper guidelines and valuable suggestions during the entire period of research

and provided me with the requisite data without which this project would not have completed.

I also express my profound gratitude to the staff of the bank for maintaining a congenial attitude

towards me and giving their precious time that made the summer internship a great learning as well

as working experience.

However, I accept the sole responsibility for any errors of omission and commission.

Roma Devnath

MBA-14

Army Institute of Management, Kolkata


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EXECUTIVE SUMMARY

The project undertaken is credit appraisal of industrial finance for SMEs. The project emphasizes on

understanding the procedure and process used by Small Industries Development Bank of India

(SIDBI) to assess the credit worthiness of the borrower.

With the opening up of Indian economy, the financial environment in the country is undergoing a

major change. The Indian banking environment has become fiercely competitive with increasing

customer demands & reduced spreads. Thus, flexibility, responsiveness, & operational efficiencies

are becoming key distinguishing factors for garnishing desired business.

Small scale industry in India is booming, and plays a catalytic role in the development of anycountry. They are the engine of growth in developing and transition economies. Despite their

economic significance, SMEs face a number of bottlenecks that prevent them from achieving their

full potential. A major obstacle in SME development is its inability to access timely and adequate

finance. Hence, many banks are focusing their attention towards this sector. The credit appraisal

process is the scientific way of giving the credit to corporate client by analyzing the credit worthiness

of the company through different parameters.

The Project covers brief information about SIDBI, its operations and business domain, the SMEs

and their position as well as development in the State of West Bengal. The last part of the project

comprises of the basic credit appraisal process, the various parameters involved and the credit

appraisal followed in SIDBI using various case studies, findings and recommendations.


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CHAPTER - I

THE COMPANY :

Small Industries Development Bank Of India (SIDBI)


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SIDBI (Small Industries Development Bank of India)

Mission

To empower the MSME sector with a view to contributing to the process of economic growth,

employment generation and balanced regional development.

Vision

To emerge as a single window for meeting the financial and developmental needs of the MSME

sector to make it strong, vibrant and globally competitive, to position SIDBI brand as the preferred

and customer friendly institution and for enhancement of shareholders wealth and highest corporate

values through modern technology platform.

Small Industries Development Bank of India (SIDBI), set up on April 2, 1990 under an Act of

Indian Parliament, acts as the Principal Financial Institution for the Promotion, Financing and

Development of the Micro, Small and Medium Enterprise (MSME) sector and for Co-ordination of

the functions of the institutions engaged in similar activities.

Financial support is provided by way of:

- Refinance to eligible Primary Lending Institutions (PLIs), such as, banks, State FinancialCorporations (SFCs), Micro Finance Institutions (MFIs) for onward lending to MSMEs and

- Direct assistance to MSMEs which is channelized through the Banks network of 103 branchoffices (as at end-September 2010).

The Charter establishing it, The Small Industries Development Bank of India Act, 1989 envisaged

SIDBI to be "the principal financial institution for the promotion, financing and development of

industry in the small scale sector and to co-ordinate the functions of the institutions engaged in the

promotion and financing or developing industry in the small scale sector and for matters connected

therewith or incidental thereto.

Business Domain of SIDBI

The business domain of SIDBI consists of small scale industrial units, which contribute significantly

to the national economy in terms of production, employment and exports. Small scale industries are

the industrial units in which the investment in plant and machinery does not exceed Rs.10 million. In

addition, SIDBI's assistance flows to the transport, health care and tourism sectors and also to the

professional and self-employed persons setting up small-sized professional ventures.

State-owned SIDBI provides financial assistance to units in the small-scale sector. SIDBI provides

refinance against term loans granted by banks to SSIs, equity assistance, bills financing, project

financing and resource support to institutions that are engaged in the development of SSIs.


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SIDBIs objective was to help the masses and the industry that is the base of all development. Thus

came up the idea of financing these industries directly and on selective basis. So it was decided to

introduce direct assistance schemes to supplement the other available channels of credit flow to the

small industries sector.

The authorized capital of SIDBI is ` 10 billion. The paid-up capital is` 4.5 billion, which is held by35 financial institutions / public sector banks / insurance companies owned or controlled by

Government of India.

Details about Product & Services segment wise:

Operations

Any banks operational excellence is measured by aggregate sanctions, subsequent disbursement of

the sanctioned amount, the amount of revenue generated from the difference in spread over the loan

taken and advances granted, higher amount of fee based income and the last and the most important

timely recovery of dues. In addition, the banks assistance towards promotional and developmentalefforts in the form of loans and advances for project financing as well as its overall utilization of

SIDBI

Direct Finance Bills Financing International

Finance

Fixed

De osit

Refinance

Receivable

financing

scheme

Direct

discounting

equipment

Bills

rediscounting

inland supply

bill

Micro Finance

Direct Credit

scheme

Technology

upgradation

fund.

Fast tracking

financing

Credit linked

supply subsidy

KFW scheme

General

finance

National equity

fund

Mahila udhyam

nidhi

SRTOs

Technology

upgradation

fund

Credit linked

capital subsidy

Post shipment

credit

Pre shipment

credit

Foreign term loans

Opening of foreign

letter of credit

Line of credit

foreign currency

Booking of foreign

contract

On-lending

Capacity

building

Liquidity

management

Equity/quasi

equity

Micro

enterprise

loans

Direct credit

to clients.


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available resources lying with the bank under study is another significant indicator of operational

effectiveness.

The Bank recorded the highest ever sanctions and disbursements of ` 355.2 billion and ` 319.2 billion

during FY 2009-10.

Financial Highlights

0

5000

10000

15000

20000

25000

30000

35000

40000

2009 2010

Sanctions & Disbursement

Sanctions

Disbursement

Rs. Crore

Rs

Year

Particulars 1991 2009 2010

Capital

-Authorized 5000 10000 10000

-Paid Up 4500 4500 4500

Reserves & Funds 449 51494.5 54572

Net Worth 4796 53420 56120

Outstanding Portfolio 51768 308859.7 379690

Standard Asset 100 99.92 99.82

Capital to Risk Asset Ratio(%) 13.9 34.2 30.1

Total Income 4251 20823 25398

Net Profit 356 2992 4213


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1991 2007 2008 2009 2010

480

4436 47135342

6612

Net Worth

Year

Rs.(

Crore)

0

500

1000

1500

2000

2500

3000

3500

1991 2007 2008 2009 2010

Rs.

(Crore)

Income & Profit

Profit

Income

Year


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Direct Assistance Schemes

SIDBI directly assists SSIs under Project Finance Scheme, Equipment Finance Scheme, Marketing.

Scheme, Vendor Development Scheme, Infrastructural Development Scheme, ISO-9000,

Technology Development & Modernization Fund, Venture Capital Scheme, assistance for leasing toNBFCs, SFCs, SIDCs and resource support to institutions involved in the development and financing

of small scale sector.

These Schemes are mainly targeted at addressing some of the major problems of SSIs in areas such

as high tech project, marketing, infrastructural development, delayed realization of bills,

obsolescence of technology, quality improvement, export financing and venture capital assistance.

Indirect Assistance Schemes

Under its indirect schemes, SIDBI extends refinance of loans to small scale sector by Primary

Lending Institutions (PLIs) viz. SFCs, SIDCs and Banks. At present, such refinance assistance is

extended to 892 PLIs and these PLIs extend credit through a net work of more than 65,000 branches

all over the country.

All the Schemes of SIDBI both direct and indirect assistance are in operation in all the States of the

country through 39 regional/branch offices of SIDBI.

Promotional and Development Activities

The Promotional & Developmental (P&D) activities of SIDBI are designed to achieve the twin

objective of national importance, viz.

(a) Promotional - enterprise promotion resulting in setting up new units and creation of additional

employment through its select programmes, such as, Rural Industries Programme (RIP),

Entrepreneurship Development Programme (EDP) and Vocational Training Programme, etc.

(b) Developmental - enterprise strengthening to enable MSMEs to face the emerging challenges of

globalization and growing competition through select interventions, such as, Skill-cum-

Technology Upgradation Programme. (STUP), Small Industries Management Programme

(SIMAP), Cluster Development Programme (CDP) and Marketing Assistance

Highlights of select programmes are given below:

Rural Industries Programme

Rural Industries Programme (RIP) aims at promoting viable rural enterprises leading to employment

generation in rural areas and use of local resources. The programme addresses problems of rural

unemployment, urban migration, under utilization of know-how and latent rural resources and

marketing of rural products. Till September


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30, 2010, the RIP has been implemented in more than 120 districts in 24 States. More than 35,000

enterprises have been promoted. These enterprises have provided employment to over one lakh

persons.

Entrepreneurship Development

Entrepreneurship Development Programme (EDP) aims at promotion of self-employed ventures

capable of generating employment opportunities, especially targeting less privileged sections of the

society like women, Scheduled Castes / Scheduled Tribes, minorities and rural poor. Till September

30, 2010, SIDBI has supported 2,740 EDPs for various target groups benefitting over 68,000

participants all over the country.

Skill-cum-Technology Upgradation

With a view to strengthening the technical and managerial capacities of the MSME entrepreneurs,

the Bank supports reputed management / technology institutions to offer certain structured

management / skill development programmes, viz . Skill -cum -Technology Upgradation Programme

[STUP ] and Small Industries Management Programme [SIMAP]. STUP aims at enhancing

technology profile of MSME units and SIMAP targets qualified unemployed as well as industry-

sponsored candidates, with the overall objective of providing competent managers to the MSME

sector. As on September 30, 2010, SIDBI has cumulatively supported 1,475 STUPs and 290 SIMAPs

benefitting over 36,000 and 7,000 participants, respectively.

MSME Financing and Development Project

SIDBI is implementing a multi-agency / multi-activity MSME Financing and Development Project

(MSMEFDP). The Department of Financial Services, Ministry of Finance, Government of India is

the Nodal Agency for the Project. The World Bank; Department for International Development

(DFID), UK; KfW and GTZ, Germany are the international partners in the Project. The primary

objective of the

Project is to meet both the demand and supply side concerns of MSMEs through a judicious blend of

financial and nonfinancial services. The progress of the Project has been satisfactory as it has so

far reached out to about 28,000 beneficiaries comprising 26,000 MSMEs and 2,000 bankers and

other stakeholders. The Project has received Merit Award from the Association of Development

Financing Institutions in Asia and the Pacific (ADFIAP) in 2010.

Cluster Development Programme

SIDBI provides financial and capacity building assistance to MSME units in clusters through special

dispensations using customized products and processes keeping in view their needs and

requirements.

SIDBI and its associate concerns have adopted cluster based approach for providing credit and non-

credit support to the MSME sector which includes rendering technical services for technology

transfer, providing financial support including promotion of clean production, energy efficiency


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measures, organizing cluster development programme under its Promotional and Development

activities, etc. SIDBI is actively engaged in promoting several EE measures in more than 70 MSME

clusters by way of capacity building grant support in partnership with Government of India and

World Banks Global Environment Facility. SIDBI, along with international partners like World

Bank, DFID, UK and GTZ, Germany, is running its Cluster Development Programmes in 26 clustersby providing various Business Development Services (BDS), such as, new technologies, use of IT,

skill development, energy efficiency, marketing, etc.

Micro Finance

The micro finance sector has emerged as a potent tool of inclusive growth and attainment of

Millennium Development Goals. It has benefited from widespread international recognition as a

development tool, prompting multilateral lending agencies, bilateral donor agencies, developing and

developed country governments, and non-government organizations to extend active support for the

development of the sector. Donors and socially oriented investors, having recognized the potentialfor social and financial returns have oriented increased funding towards micro finance.

The cumulative assistance (including loans, grants, equity and quasi equity) sanctioned under

SIDBIs micro finance initiatives up to September 30, 2010 aggregated ` 75.44 billion, while

cumulative disbursements aggregated ` 66.04 billion. SIDBIs MF assistance through its partner

MFIs has benefited more than 30 million disadvantaged people, mostly women.


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CHAPTERII

THE PROJECT


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Small and Medium Enterprises (SMEs)

Small and medium enterprise (SMEs) are the backbone of all economies and are the key source of

economic growth, flexibility and dynamism in advanced industrialized countries as well as emerging

and developing economies. They play a vital role not only because of their number and variety but

also due to their involvement in all segments of economy. Their contribution to regional

development, their complementary role to support the large sector, and as basis for technological

innovations and adaptations are widely acknowledged. SMEs, in most countries, make up the

majority of businesses and account for the highest proportion of employment. SMEs account for a

considerable share of industrial enterprises, employment and production and therefore, occupy a

place of strategic importance in Indian economy as well. About 3.1 million such units, employing

17.2 million persons account for a share of 36 per cent of India's exports and 40 per cent of industrial

manufacture.

SMEs are developed in a manner, which made it possible for them to achieve the following

objectives:

High contribution to domestic production Significant export earnings Low investment requirements Operational flexibility Location wise mobility


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Low intensive imports Capacities to develop appropriate indigenous technology Import substitution Contribution towards defense production Technologyoriented industries Competitiveness in domestic and export markets

The MSME segment in India has been receiving focused attention. With the introduction of Micro,

Small & Medium Enterprises Development (MSMED) act 2006, this sector is being increasingly

viewed as an agent of economic growth by Government institutions, corporate body and banks.

In accordance with the MSMED act, 2006 the MSME are classified in two classes:

1. Manufacturing Enterprises

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 exceedRs 25 lakh.

The investment in plant and machinery in a small enterprise is more than Rs 25 lakh, but doesnot exceed Rs 5 crore.

A medium enterprise is one where the investment in plant and machinery is more than Rs 5crore, 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.

2. 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 exceedingten in number.

Small business, whose original cost price of equipment used for business, does not exceed Rs20 lakh.

Professional and self-employed persons, whose borrowing limits do not exceed Rs 10 lakh ofwhich not more than Rs 2 lakh should be for working capital requirements

Professionally qualified medical practitioners setting up a practice in semi urban and ruralareas, whose borrowing limits should not be less than Rs 15 lakh with a sub-ceiling of Rs 3

lakh for working capital requirements.
http://business-directory.made-from-india.com/http://business-directory.made-from-india.com/


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SMEs have been established in almost all-major sectorsin the Indian industry such as:

Food Processing Agricultural Inputs Chemicals & Pharmaceuticals Engineering; Electricals; Electronics Electro-medical equipment Textiles and Garments Leather and leather goods Meat products Bio-engineering Sports goods Plastics products Computer Software, etc.

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 enterpriseshave 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 avery limited access to secondary market instruments.

SMEs face fragmented markets in respect of their inputs as well as products and arevulnerable 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 scalebuyers. 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

In spite of these limitations, the SMEs have made significant contribution towards technological

development and exports.


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Quick Estimates of the 4th

Census (2006-2007)

Parameters Values

Number of Enterprises 26.1 million

Number of Manufacturing Enterprises 7.3 million

No of Service Enterprises 18.8 million

Number of Rural Enterprises 14.2 million (54.4%)

Employment 59.7 million

Per unit fixed investment Rs. 33.78 lakh

Per unit gross output 46.13 lakh

Percentage of SME exports to Indias total exports 31.9%


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SME Development in West Bengal

The Micro & Small Scale Enterprises and Textiles Department of the Government of West Bengal

has brought about a phenomenal revival in the sector with the help of three directorates, namely,

Sericulture, Cottage & Small Scale Enterprise and Handloom & Cotton Textiles. These directorates,in turn, work in unison with the government organizations and corporations, which are West Bengal

Small Industries Development Corporation, West Bengal Handicrafts Development Corporation,

West Bengal Khadi and Village Industries Board, West Bengal Small Industries Development

Agency etc.

West Bengal has major advantages of easy availability of raw materials, a

comfortable power situation, skilled human resources, stable socio-political environments which are

the basic needs in the industrial development. Moreover, the affordable cost of infrastructure, strong

agricultural base, powerful and dynamic rural sector having panchayat administration and rich

cultural heritage make West Bengal investor friendly in all respect. West Bengal also hasgeographical advantage with respect to marketing and export. Govt. of West Bengal has been

rendering all possible assistance with emphasis for growth.

Keeping in mind the new Economic Policy, West Bengal formulated its Industrial Policy Resolution

in 1994 with a view to secure faster and balanced economic development with the active cooperation

of the private sector. The key features of West Bengal's present industrial policy are as follows:

Appropriate foreign technology and investment are welcomed on mutually advantageous terms. The Government recognizes the importance and key role of Private, Public & Joint sectors in

providing accelerated growth and in improvement and upgradation of industrial as well as

social infrastructure.

Based upon the available opportunities and the potential of this region, the State Govt, hasidentified certain segments of industries as thrust areas for special attention viz:

Petro chemicals & Downstream Industries Electronics & Information Technology Iron & Steel, Metallurgical and Engineering Textiles Leather & Leather Products Food Processing, Edible Oil, Vegetable Processing and Aquaculture Development of Medicinal plants, Rubber, Palm oil and Tea Manufacture of basic drugs, chemicals and pharmaceuticals Optimal utilization of minerals and development of mine based industries Gems and Jewelers Promotion of Tourism and Tourism related activities.

Keeping in mind the recent surge in entrepreneurs interest to set up industry in the State, thegovernment is drawing up a comprehensive document on its approach to industrialization


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considering matters such as location policy for industries, areas of development and focus, needs for

remote connectivity and meeting the challenges of industrialization without harming farm growth.

This state occupies a predominant position so far as the development of micro and small scale

enterprises is concerned. There are close to 9, 00,419 small scale enterprises in West Bengal, which

account for 7% of the total such units in the country. The state occupies the sixth position in the

country in terms of the number of small scale enterprises, after Uttar Pradesh, Andhra Pradesh,

Maharashtra, Tamil Nadu and Madhya Pradesh. In terms of employment generation in the sector,

West Bengal ranks second after Uttar Pradesh. Nearly 25.22 lac people are employed in West Bengal

in small scale enterprises, accounting for 9% of the total employment generation in this sector in the

country. In West Bengal, the micro & small scale enterprises account for nearly 90% of the industrial

units and more than 50% of industrial production. The export from this sector is close to 40% of the

total export from the state.

Industry variety

The State has skilled and educated man power which is still considered as one of the best human

resources centre in the world. All the resources available in the State have helped the growth of other

industries like Mining, Jute, Tea, Silk and Gems and Jeweler etc. and recently the IT industries.

Service sector has provided opportunities of employment with rejuvenation of IT and service sector

growth.

West Bengal is rich in handicrafts. Handicrafts are traditionally the heritage items of the state. There

are as many as 5, 50,000 craftsmen engaged for producing wide range of handicrafts item while

staying in their home.

C&SSI Directorate

The Cottage and Small Scale Enterprise (C&SSI) Directorate identifies the low-capital entrepreneurs

and provides them with intermediary assistance at all levels of production. Fine arts and handicrafts

have labels of legacy upon them, and for ages they have been mainstays of livelihood among the

economically challenged people in society. A staggering number of about half a million people is

engaged in production of various handicrafts items. West Bengal ranks third among the states to have

provided maximum employment opportunities in this sector. The state is all worked up to implement

a package of schemes and programmes for the betterment of the conditions prevalent among the

artisans. Manjusha stands up to making provisions for marketing their commodities as well. StateHandicraft Fairs are held in Kolkata and Siliguri at regular intervals. The directorate has taken

initiatives to confer social security to the craftsmen by granting those stipends and other incentives.

The State Government has successfully implemented the rural employment generation programmes

in order to safeguard the rural face of art and craft. The directorate addresses practical problems

pertaining to cottage and small scale industry, i.e., land acquisition, obtaining no-objection

certificates from competent authorities, power connectivity, financial assistance etc. It also assists

industrial units, craftsmen and entrepreneurs financially to take part in trade fairs, exhibitions and

other promotional activities.


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The West Bengal Small Industries Development Corporation Limited (WBSIDCL) is empowered to

effect infrastructural development, maintenance and to upgrade for the industry with lesser

investments but not of less importance. A great number of small industrial units are operational in 34

commercial estates. Besides these, the corporation also supervises national programmes in relation to

organic gases and fertilizer management units. West Bengal is one of the top-listed states in leatherand leather goods production. About 0.2 million people are engaged in 22 thousand production units.

A cognizable quantity of leather is exported also. In 2003-04, the export of leather and leather goods

fetched a yield of Rs. 1611.72 crore.

Geographic Advantage of the State

The State is located at the Eastern region of India and is bounded on the north by the Himalayan

range and on the south by Bay of Bengal. To the north-west, west and south-west lie Nepal and

States of Bihar and Orissa. West-Bengal offers definite advantage in marketing of industrial &

consumer items as the traditional domestic markets in Eastern India, the north east and the land

locked countries of Nepal, Bhutan and Sikkim are easily accessible from the State. The State stands

as a gate-way to the much coveted market in south-east Asia and Far-east. There is an international

airport at Kolkata, a domestic airport at Bagdogra and two river ports at Kolkata and Haldia. A third

port at Kulpi in South 24-Parganas is in active consideration of the authority.

Resources and skills

West Bengal has the advantage of natural and mineral resources itself and nearby states. It has also

skilled workforces and educated human resources. Further, rural sector of West Bengal is very

much known for its traditional heritage in crafts. A wide range of handicrafts are produced in the

State where the artisans and artifacts have got recognition all over the country.

SMEs in cluster

SME sector is highly diversified in terms of industry segments & geographical terrain. Therefore a

large segment of SMEs operate in clusters which have developed at certain different geographical

locations due to various factors like historical availability of certain skill craftsmanship in the

location, proximity to raw material or customer etc. the SMEs located in clusters have similar

characteristics & face similar problems.


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Credit Appraisal Process

What is a Credit?

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. There are 3 C of credit that is crucial & relevant to all borrowers/

lending, which must be kept in mind, at all times. These are:-

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. There are four

basic types of credit namely Service Credit, loans, Installment Credit, Credit Cards.

Term loan

Term loans are a lump-sum payment with payback over a specified period of time. They may be used

to finance equipment, a change in ownership, a new business acquisition or other long-term needs ofa company. Investment of these loans from firms is in plant and machinery, vehicles and certain

other equipments.

The scope & operation of the Term Loans are entirely different from those of the conventional

working capital advances. The Banks commitment is for a long period & the risk involved is

greater. The period of loan vary from 3 to 10 years. 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.

Repayment period for the term loan is calculated by DSCR and the repayment should start

immediately after the cash generation. Thus 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.


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There are many issues in providing a term loan. Some of the issues are:

Check if the purpose of loan is valid or not. The unit should undertake detailed market study. Thedemand & supply gap of the product should be accessed. Purpose of the loan could be for land,

building, plant and machinery etc.

Verify the cost of Project: Check the estimated cost given for the project. It should not beoverstated. For example:

- If the loan is taken for machinery then verify the price.- If the loan is demanded for buying land then check if the acres of the land are optimum.- If the loan is demanded for building then check if the dimensions and the structure

proposed is optimum.

Check all means of finance. It is useful to check how a borrower can finance the project. Thevarious means of finance could be bank loans, internal accruals, unsecured loans etc.

Calculations should be based upon future projections and estimates given by the party in theirreport.

If all the conditions are favorable, then the loan is issued.

Risk associated with bank lending:

Banks mainly faces three kind of risk which has impact on profitability of the bank. These risks are

1. Credit risk2. Market risk3. Operational risk

Credit Risk

Credit risks basically is the major risk which is faced by the bank on account of their business

activity, which including the lending to corporate world, individual bank, another bank or financial

institution.

Credit risk is of two types borrower risk and portfolio risk

- Borrower risk may be the possibility of that a borrower will fail to meet his financialobligations in accordance with agreed term.

- Portfolio risk arises due to credit concentration/ investment concentration i.e. most of thecredit is given to only one type of group and the possibility of default.


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Market Risk

Market riskis the variability in the profitability of the firm due to change in market variables. This

can of the followings:

- Interest rate risk: The risk in the erosion of earning due to variation in the interest ratewithin the time period is referred as interest rate risk. Changes in the interest rate affect

earnings, value of assets, liability off - balance sheet items and cash flow. Management of

interest rate risk aims at capturing the risk arising from maturity and re-pricing mismatches

and is measured both from the earnings and economic value perspective.

- Exchange rate risk: This risk is of two types Transaction risk: is the risk basically arises due to the fluctuation in the price of a

currency, upward or down ward; result in a loss on a particular transaction.

Translation risk: in a situation of a translation the balance sheet of a bank effectedadversely due to exchange rate movement and change in the level investment or

borrowing in foreign currency even without having translation at a particular time.

- Liquidity risk: Liquidity risk consists of funding risk, time risk, & call risk.

Operational Risk

Always banks live with the risks arising out of human error, financial fraud and natural disasters.

Operational risk, though defined as any risk that is not classified as market or credit risk, is the risk

of loss arising from inadequate or failed internal process, people and systems or from external

events. In order to mitigate this, internal control and internal audit systems are used as primary

means. Insurance cover is one of the important mitigates of operational risk.

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. It is done to evaluate the credit worthiness of a borrower. The credit proposal

is prepared to indicate the need based requirement and the rationale for its recommendation. 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 . Bank has in place a

well-defined framework for approving credit limits of different segments. Requests for credit

facilities from the prospective borrowers shall be on the prescribed format and the full-fledged

proposal should be prepared for submission to the appropriate sanctioning authority for approval.


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There are two types of proposals that are received by the bank for funds

Proposals for starting a new project or for setting up a new company, also known as projectfinancing.

Proposals for additional funds requirements.The credit appraisal of any organization basically follows the following process:

1. Assessment of credit needs2. Financial statement analysis3. Credit rating4. Working Capital requirement5. Term loan and sensitivity analysis6. Submission of Documents

Appraisal for long term in case of an industry or a project is a long term investment decision. So it

requires a detailed study. The appraisal is done on the basis of following aspects:

1. Technical Feasibility:The infrastructure required for the manufacturing process is studied here. The location selected

should be ideal with regard to transportation, communication network, availability of water, climatic

conditions, and availability of manpower and disposal of waste. Size of the plant & type of

technology adopted is another important aspect. The size of the plant or its capacity should be

matching to the requirements of the estimates of the project.

2. Economic Feasibility:The unit should undertake detailed market study. The demand & supply gap of the product should be

assessed. The time of the unit entering into the market is also important.

3. Financial Feasibility:The cost of the project & the estimated time for execution is an important factor. The promoters

efficiency to complete the project within the given period is most important. The source of finance,

without leaving any gap & availability of cash at the right time is to be ensured. Possibility of cost

escalation, cost overruns etc. to be assessed. The financial feasibility is assessed by financial

projection, fund flow and cash flow statement, ratio analysis and by non discounted and discounted

cash flow statements.

- Financial Statement AnalysisKey points to be checked in financial statement:

o Type of statement: Examine weather financial statement is audited or unaudited. If the report isaudited study the auditor certificate.


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o Nature of activity: Engaged in trading or manufacturing activity or services, what kind of theproducts the company dealt in. If it is a software industry whether it has technical component and

skilled manpower.

oSeries of statement: Examine the financial statements important factor to note the trend hastaken place from one year to another year. To know about the trend in the performance of the

firm for the last 2 or 3 years.

o Accounting policy: Which accounting policy the organization is following. Weatherdepreciation is charged on WDV {written down value} method or using SLM {straight line

method}.

o Qualities of assets/ liabilities: A financial statement, which is based on accounting standard,however not shows the quality of assets and liability. The banker should therefore to check on

periodical checking, quality control certification like ISO certification.

o Unit wise result: The Company which has diversified business should ask to produce activitywise financial statement for the better understanding.

o Directors report: Finally a director report of the company should study which shows thecompany future plans, new initiative taken by the company etc.

Discounted cash flow technique

I. Net present valueIt is calculated as:

Present value of cash inflowPresent value of cash outflow

The project is accepted if NPV is positive and rejected if NPV is negative

II. Benefit cost ratio:The entire cash inflow is discounted at the rate of interest to arrive at present value rate.

Present worth of the benefits (cash inflow)

BCR =

Present worth of cost (investment)

The project is accepted if the BCR is more than one and rejected if BCR is less than one.

Break even analysis:

Break even point is the point of sales at which a units makes no profit or no loss. A unit can earn

profit only if its level of sale is above the break even point. Once the BEP is calculated, the sales


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projection made in the profitability statement is compared with the break even point of sale. In case

the difference between projected sale and BEP sale is very low, it is very risky to finance the project.

On the other hand if projected sale is high than BEP the profitability of earning some profit is still

there are some deviations in the project.

BEP can be classified in three ways:

o In terms of no. of units of saleo In terms of sale in rupeeso In terms of capacity utilization

Fixed cost

BEP in units =

Contribution/ unit

OR

Fixed cost

Sales price/unitvariable cost/ unit

Fixed cost

BEP in rupees =

Total contribution

No. of units at BEP * 100BEP in capacity =

Total capacity

To study the viability of the project the project having BEP above of 75% of capacity utilization

should not be accepted for finance

Sensitivity Analysis:

While giving credit to the company an exercise is done known as sensitivity analysis. It is what if

type of analysis which examines the behavior or sensitivity of the project and its viability as reflected

by key parameters such as IRR, DSCR, BEP, ROCE etc. Sensitivity analysis is usually carried out

by examining project viability in event of following changes:

- Increase in raw materials price.- Decrease in sales price- Decrease in capacity utilization- A suitable combination of the above.

In this method we basically check the volatility in the profit of the company due to change in

independent variable. The subsequent DSCR is calculated and the ability to pay back term loan is

calculated.


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Earnings per Share:

An Earnings per Share (EPS) is the true measure of the net profitability of a company available to its

owners who are commonly known as Equity Shareholders. Theoretically speaking, higher earnings

per Share (EPS) reveal the better profit available to shareholders after distributing dividend to

preference share holders.

- Financial RatiosDebt Service Coverage Ratio:

The debt service coverage ratio serves as a guide to determining the period of repayment of a loan.

This is calculated by dividing cash accruals in a year by amount of annual obligations towards term

debt. The cash accruals for this purpose should comprise net profit after taxes with interest,

depreciation provision & other non cash expenses added back to it.

Debt Service Cash accruals

Coverage Ratio =

Maturing annual obligations

Or

Profit after tax + depreciation + interest * 100

Interest + Installments of term liabilities Payable during the year

This ratio is valuable, in that it serves as a measure of the repayment capacity of the project/ unit &

is, therefore, appropriately included in the cash flow statements. The ratio may vary from industry to

industry but one has to view it with circumspection when it is lower than the benchmark of 1.75. The

repayment program should be so stipulated that the ratio is comfortable.

Current Ratio

Current AssetCurrent ratio =

Current Liabilities

It is necessary that current asset should be sufficient to meet current liabilities. Current ratio should

be at least 1.33:1.

Debt Equity Ratio (DER)

Debt

DER =

Tangible Net Worth


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If the company has more of debt and less of capital, it may be problem with regard to repayment of

installments and payment of interest.

Profit to sales ratio

Net Profit

The formula is given by: *100

Sales

It indicates profitability of the firm after accounting for all the expenses and taxes.

Return on Investment

PBIT * 100

ROI =

Capital employed (Net fixed assets + Total CA)

It indicates the rate of return on total funds employed. It should be more than average cost of capital.

Return on Net Worth (RNW)

Net profit after preference dividend * 100

RNW =

Equity capital +reserves and surplus

It is the ratio of return on owners fund.

4. Management and Organization of Project FeasibilityIdentification of the borrower needs to be done carefully through scrutiny of his antecedents,

experience etc. This may be done by obtaining status reports from previous bankers. The

management structure of the organization, the back ground of the top management needs to be

scrutinized. The name of the prospective borrower/promoters should not appear in the defaulters list

by RBI/ECGC etc, or any other list of undesirable customers.

Credit Rating

Credit report is a document, which comprises detailed information about the credit payment history

of an applicant. It is mostly used by the lenders to determine the credit worthiness of an applicant.

The business credit reports provide information on the background of a company. This assists one to

take crucial business related decisions.

The lender can also assess the amount of business risk associated with a company and then decide

whether they would be comfortable in providing them with credit facilities. Since these records are

updated at regular intervals of time they enable people to identify the risk levels associated with a


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business as well as its future. These reports also allow businesses to get detailed information about

the financial status of business partners and suppliers.

The credit rating technique used by the banks differs from bank to bank.

As stated in the Basel committee reports the top management is responsible for framing the policy of

bank. The credit rating model studies various aspects of the projects and assigns scores against themthereby determining the risk level involved with the project.

It is divided in Four Sections:

1. Rating of the Borrower

- Financial Risk- Management Risk

2. Market Condition/ Demand Situation

3. Rating of the Facility

4. Business Consideration

5. Cash Flow related parameters

The common parameters, which are taken into consideration before preparing the credit rating

module, are below:

Operational performance of unit Sales and Profit trend during last 3 years. Net worth Geographical location Threat of obsolescence Industry type (sunrise, old, sunset) and industrial relation Regulatory risks and transaction/ compliance risk Repayment records and relationships of clients with the banks a/c Sector specific threat (external macro economic factors) Compliance of terms and conditions stipulated by banks while sanctioning of loan. Nature and value of securities (primary/ collateral) offered to cover loan facility. Transparency and disclosures in audited annual accounts. Position with regard to submission of balance sheet and P&L account, monitoring data and

inventory statement etc.

Auditors comments on quality and valuation of all types assets. Financial risk and strategic risk Financial ratios and financial statement. Qualification, experience and knowledge of industry/ business. Market reputation and credibility. Track record of debt repayment. No. of NPA units of same sector Competitive threat (global, industry, new entrant) Threat of substitute product ( if any) Future potential


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Market demand and growth potential of products. Position with regard to availability of raw material.

Points are given for each field out of a maximum limit and these points are added. Credit rating is

done on a percentage basis.

SMERA

SME Rating Agency of India Ltd. is the dedicated rating agency for SME sector in India which was

formally launched at the hands of Union finance minister.

SMERA has been set up by SIDBI in association with (D&B), Credit information bureau (India) Ltd.

and leading public and private sector banks. SMERAs primary objective is to provide ratings that

are comprehensive, transparent and reliable. SMERA aims to be the countrys premier agency that is

focused primarily on providing ratings to SMEs so as to reflect their intrinsic strength, with a view to

facilitate faster and easier access to credit. It is an independent third party comprehensive assessment

of the overall condition of the SME. It takes into account the financial condition and several

quantitative factors that have bearing on credit worthiness of the SME.

Risk Rating Score

Lowest Risk CR-1 >90

Minimal Risk CR-2 81-90

Moderate Risk CR-3 76-80

Satisfactory Risk CR-4 71-75

Acceptable Risk CR-5 66-70

Watch Risk CR-6 61-65

Risk Prone CR-7 56-60

High Risk CR-8 55 & below

Sub Standard CR-9 Default-

NPA

Doubtful CR-10 -

Loss CR-11 -


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CIBIL is a composite credit bureau catering to both the commercial and consumer segments. It

therefore serves as a repository of valuable payment information, which plays a major role in

reducing information asymmetries and credit risk. With a view to provide an institutional mechanism

for sharing of information on borrowers / potential borrowers by banks and Financial Institutions, theCredit 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.

SMERA rating consists of two parts

- A composite Appraisal/Condition indicator- A size indicator

PostSanction Supervision and FollowUp

This helps the banks in keeping a close watch on their performance and for initiating timely

corrective action. Maine objective of post-sanction supervision is to ensure that the project financed

is successfully implemented.

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.

Some of the important goals of monitoring are:

Interacting periodically with the borrowers through timely inspection in order to ascertain:

- Borrowers (management) stake and interest in day to day business operations.- As to whether funds invested in business are adequately protected and if day to day problems,

if any, are resolved satisfactorily.

- As to whether the banks funds are put to productive use.- As to whether there is any threat to the recovery of banks funds invested in the business and

to initiate timely, appropriate recovery measures n potentially non-performing asset.

Follow Up Supervision Monitoring

Ensuring compliance withterms & conditions of

sanction on an ongoing basis.

Ensuring performance safety& recoverability of assets

Ensuring effective followup to maintain asset

quality.

Keeping look-out for earlywarning signals.

Ensuring effectivesupervision

Monitor customersatisfaction

Ensuring quick responseto early warning signals.


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Credit Appraisal at SIDBI

Preliminary Appraisal

The preliminary appraisal examines the following aspects of a proposal:- Bank lending policy and other relevant guidelines- Industry related risk factors- Credit Risk Rating- Profile of the Promoters/ senior management personnel of the project etc.- List of Defaulters- Government regulations/legislation impacting on the industry- Financial status in broad Terms and whether it is acceptable The Companys Memorandum

and Articles of Association should be scrutinized carefully to ensure(i) That there are no clauses prejudicial to the Banks interests(ii) No limitations have been placed on the Companys borrowing powers and

operations

(iii) The scope of activity of the company. Required Documents for Process of Loan are:

i. Application for requirement of loanii. Copy of Memorandum & Article of Associationiii. Copy of incorporation of businessiv. Copy of commencement of businessv. Copy of resolution regarding the requirement of credit facilitiesvi. Brief history of company, its customers & supplies, previous track records, orders In hand.

Also provide some information about the directors of the company

vii. Financial statements of last 3 years including the provisional financial statement for the yearviii.Copy of PAN/TAN number of companyix. Photo I.D. of all the directorsx. Address proof of all the directorsxi. Bio-data form of all the directors duly filled & notarizedxii. Financial statements of associate concern (if any) for the last 3 years.

After undertaking the preliminary examination of the proposal, the branch will arrive at adecision whether to support the request or not. If the branch finds the proposal acceptable, it will

call for from the applicant(s), a comprehensive application in the prescribed format by the bank,

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:


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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.

A brief on the managerial resources and whether these are compatible with the size and scopeof the proposed activity.

Estimates of sales cost of production and profitability. Projected profit and loss account and balance sheet for the operating years If request includes financing of project(s), branch should obtain additionally

a) Appraisal report from any other bank/financial institution in case appraisal has beendone by them.

b) No Objection Certificate from Term lenders if already financed by them . Audited profit loss account and balance sheet for the past three years.

Detailed Appraisal

The viability of a project is examined to ascertain that the company would have the ability toservice 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 companys

audited balance sheets and profit and loss accounts for the last three years help to establish the

current viability.

Whether the company has revalued any of its fixed assets any time in the past and the presentstatus 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, if any; 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 companysaccounts;

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;

Credit Appraisal and Rating Tool (CART)

SIDBI has developed Credit Appraisal and Rating Tool (CART) software in Lotus Notes 5.0, for

internal users. The software is being used extensively and, is well accepted by users. The software is

required to be developed and migrated from Lotus Notes to Web based model using J2EE platform.

There are three modules in the systems at present:

1. Tiny units: The module will be used for credit rating and appraisal of Tiny units.2. Green field projects (New units): The module will be used for credit rating and appraisal of

green field projects.

3. Existing units. The module will be used for credit rating and appraisal of existing units.


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There may be changes in it as per requirement from Module to module. Many of the parameters /

fields will be common in these modules but may have different values and scores. The system

should be configurable i.e. it should be possible to attach same parameter in different Modules

and assign different values to it. Hence, effectively one parameter will be stored once (in best

case) and attached to different modules and carry different values, scores & different

computation logic. These parameters will be defined by SIDBI. Also, it should be possible to addmore modules.

All the above modules will have following processes:

1). Rating Process:

The objective of Rating Module is to analyse the credit-worthiness of the applicant based on pre-

defined parameters. After the user enters all the parameters, it generates a score using a

mathematical algorithm. There are 4 Sections in Rating Module:

1). Management2). Financial

3) Operational

4). Industry.

2). Appraisal Process

The objective of Appraisal Module is to appraise and analyze the borrowers financials,

strengths, and weaknesses etc. The Main points to be covered under the appraisal process are as

below:

1. Issue under Consideration2. Check Points3. Financials of the applicant unit4. Arrangement for additional working capital requirement:5. Project Cost and Means of Finance as accepted6. Eligibility under the Scheme and comment on basic eligibility factors7. Important Indicators and Details of Guarantors providing unsecured loans / Details of

Corporate Guarantee Details

8. Comments on Strengths and Weaknesses, if any9. Additional remarks (if any)10.

Recommendation


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The workflow for each of the document involves a Maker and a Checker. The workflow

pertaining to processes at different stages is below

Case Wise Analysis Document

Status

Remarks

Maker Creates / Edits thedocument

New Maker can edit thedocument. Checker can only

view the document

Maker has done the Rating and

Appraisal and sends to Checker

for verification

Locked Maker can only view the

document. Checker can

view / send back the

document to maker. No one

can edit the document at this

state

Checker validates the content of

document but want to send back

to Maker for modifications.

Unlocked Maker can edit the

document. Checker can only

view the document

Checker validates the content of

document and approves the

document

Confirme

d /

Finalised

Maker and Checker can

only view the document

Each Branch will be having at least one Maker, one Checker and one administrator who can

change Maker and Checker for the documents created within the branch. Role assignments

should also be possible by systems administrator.


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CHAPTERIII

COLLECTION AND ANALYSIS OF DATA


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CASE STUDY - I

Credit Appraisal of XYZ India Ltd. using CART tool

XYZ India Ltd. is a manufacturing enterprise set up for engineering job works. The company was

incorporated in 1991 and is in business till date. Besides this unit the promoter has another

partnership which is engaged in manufacture of plastic surgical parts.

There are two promoters of the unit. Both the promoters are from the same family and have high net

worth.

There has been satisfactory feedback on promoters from the existing banker. The CIBIL consumer

reports of both the promoters are satisfactory with relatively high scores. BBI willful defaulters list

have also been searched. KYC documents have also been furnished. Hence it is found that the overall

promoters credentials are satisfactory.

The project is eligible as per CART. Other relevant details found out using CART:

i) The management is this field for more than 5 years and dealing with the bank for the firsttime.

ii) The term loan of Rs. 11 lakh is availed for the expansion and modernization of their businessunit by purchasing of machinery from the supplier. The loan is taken under the direct credit

scheme.iii) Audited balance sheet and P/L account for the last 3 years have been taken into consideration.iv) CART rating isRAA-, High Safetyv) The combined net worth (CNW) of the promoters is greater than 60% of the total long term

borrowings. The sales turnover of the group as a whole is 280 lakh.

vi) The average current ratio had been greater than 1.25 and less than 1.33vii) DER for the company as a whole including the proposed project is more than 2:1viii) Average DSCR for repayment period is more than 2 times.ix) 100% of assistance is provided under CGTMSE cover as the loan is less than 50 lakh.x)

The associate concern has had profitable track record. The gross income growth is more than10%.

xi) The distance of the office from the branch is less than 10 kms.xii) The industry is seasonal in nature.xiii) The borrower proposes to have a firm marketing/promotion/distribution arrangement.xiv) Under the risk score matrix, the company has /is allotted a total score of 2 and therefore it has

been categorized under low risk category.

xv) Visits were done during the appraisal and the visit report was generated which wassatisfactory.

xvi) The project cost of 14 lakh comprises Rs. 11 lakh for the Lathe machine and balance otherrelated expenses such as installation, accessories and tools.


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SWOT Analysis

Strengths:- Good technical credentials and long past experience of the promoters.- Satisfactory feedback from customers who are expected to be particular on technical issues,

finishing etc.

- Satisfactory feedback from the banks.- Good demand for the product.- Resourceful promoters.- Industry linkages of the promoter.

Weakness:- The prime weakness is the low level of past operations, profit margins etc. of the unit and

the small size of the unit. However, the promoters are having firm demand for products

from the customers with whom they already have past association/dealings and are hencegoing for this expansion. It is envisaged that the companys turnover wou ld improve after

the proposed expansion.

- Competition from other more established units. The company proposes to compete withother manufacturers based on strength of its past relationship with its customer.

- The borrower is not a critical supplier to its customer and the product is also not branded. The project will increase the current production capacity from 480 sets to 4000 sets at 100%

capacity utilization of the machine. The quality of the output is far better than the conventional

process of production.

Marketing & Selling Arrangements

Items Remarks

Main Markets Jamshedpur, West Bengal, Maharashtra, etc.

Main Buyer Automobile sector, Auto Profiles Ltd. etc

Indicate competitors SRC Engg. Ltd.

Whether product has multiple applications No

Distribution channels Direct Sales

Orders on hand Yes

Marketing team details Self

The loan was sanctioned with an interest payable at the rate of 11.75% p.a., with monthly rests, onthe 8th day of each month, on the amount of loan outstanding from time to time.


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Financials of the applicant unit:

Parameter Brief comment during the immediate 3 previous years

Net Worth The net worth of the unit has increased from 1.7 lakh to 1.85 lakh due

to retained profit.

Long term borrowings

from banks/ FIs

The unit has no long term borrowings as o March 31, 2010

Unsecured loans

(amounts, nature, sourcesand tenures)

The unit has an unsecured loan of Rs. 0.01 lakh which is very small in

nature.

Net Block The net block is Rs. 0.8 lakh as at 31/3/09 and Rs. 0.7 lakh as at

31/3/10. The decrease is mainly due to depreciation. There has been no

addition of any machinery so far.

Current Ratio The current ratio of the unit has decreased from 1.33 in FY09 to 1.24 in

FY10. This decrease is due to steep increase in creditors & other current

liabilities.

DER DER is 0.01. The position is satisfactory and indicates scope for further

leverage.

Net Sales The net sales increased from 5.5 lakh to 11.5 lakh. Further growth is

envisaged after implementation of the proposed project.

Gross Profit Gross profit has increased from Rs. 0.2 lakh in FY09 to .024 lakh in

FY10.

Depreciation The depreciation has decreased from Rs. 0.13 lakh to .011 lakh due to

no addition of plant and machinery.

Profit After tax PAT has increased from .01 lakh in FY09 to Rs. 0.06 lakh in FY10.

Gross Profit Margin (%) It has decreased from 2.55% to 1.8%. This is due to increase in the

price of raw materials.

Net Profit Margin (%) It has increased from 0.15% to 0.67%


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Profitability Projections for the Unit as a whole for the entire tenure of the loan

S

No.

Items Accruals

forprevious

year

Y1 Y2 Y3 Y4 Y5

1 Total Income 1235850 6200000 7250000 7985000 8784500 9662400

2 Raw materials 725920 3465480 3805328 4196855 4616547 5077855

Power and Fuel 13385 71000 79100 87100 95830 105415

Wages & salaries 38000 415000 457500 503307 553695 609066

Selling expenses 0.00 22000 254000 304910 363362 430415

Other expenses 429555 600000 614800 762862 860135 969770

Total Cost 1206860 4573480 5210728 5855034 6489569 7192521

3 PBDIT (2-1) 28990 1626520 2039272 2129966 2294931 2469879

4 Interest on term loan

5 Interest on workingcapital

6 Interest on unsecured

loans

7 Depreciation 11880 247500 210370 178815 151995 129195

8 PBT (3-4-5-6-7) 17110 1379020 1828902 1951151 2142936 2340684

9 Tax 5860 472314 626399 668269 733955 801684

10 PAT (8-9) 11250 906706 1202503 1282882 1408981 1539000

11 Dividends/Withdrawals

12 Cash Accruals (10-11+7)

13 Repayments of all

liabilities

14 DSCR (10+7+4) / (13+4)

15 Average DSCR


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Synopsis of the Balance Sheet

Liabilities Amount(Rs)

As on

31.03.2009

Amount(Rs)

As on

31.03.2010

Assets Amount(Rs)

As on

31.03.2009

Amount(Rs)

As on

31.03.2010

Authorized ShareCapital

10,000 equity share ofRs. 100/each

1000000 1000000

Fixed AssetsCurrent Assets

- Closing Stock79532

97565

69217

37493

Issued Subscribed &

Paid up Capital

- 1000 equity shareof Rs 100/each

- Fully paid up100000

76366.79

100000

85037.06

Sundry Debtors

(Not exceeding six

months)

Cash in Hand

Loans & Advances

- Advance to staff

176242.32

31158.3

-

390537.47

55049.81

-

Reserves & Surplus

- Secured loansBank overdraftwith SBBJ

- Unsecured loans82141.98

1483.49

84078.14

1483.49

- Vat in Excess- Security Deposit

(with sales taxdeph. In NSC(With CESCLtd.)

3408

4000

12935

3408

4000

12395

Sundry Creditors - Sales Tax Deposit 872.45 872.45- For Labour

Charges52086.44 45733.44 - Vat Input Tax

Credit

Advance from

Income Tax

574.12 -

- For Raw materials 17287.92 168162.6 - Ay. 01-02- Ay. 08-09 40007000 40007000

- Advance fromParties

- - - Ay.10-11 - 5000Outstanding

Liabilities

- For Accountingcharges

51000 69000

- For Audit fees 11000 11000- For Purchase Tax 3047 -- For C.S.T. Tax 7421- For Electric

Charges

2360 1130

- For Salary 3000 3000- For Interest on

C.S.T- 51

- For ProfessionalTaxes

2500 2500

- For Duties &Taxes

495.57 -

Provision for Income

Tax

6647

- For Ay 08-09 6647 -- For Ay 09-10 2707 4269- Provision for

F.B.T Tax5164 -

417287.19 589512.73 417287.19 589512.73


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CASE STUDYII

Credit Appraisal for ABC Pvt. Ltd. which is a Greenfield Project

ABC Pvt. Ltd. was incorporated on 10.07.2009 as a Private Limited Company. The Company

belongs to RS group of industries. The group has been in the Plastic & Packaging industry since

1997. It has excellent knowledge base of the Product & Market. There are four promoters who are

well versed with Plastic manufacturing and have 10 years of experience in this line of activity.

They want to set up a unit for manufacturing of Plastic Master Batch. The product has wide

requirement and applications in the plastic products sector as a key input material. These include

plastic end products being manufactured for household, engineering, automobile and industrial items.The units engaged in manufacturing by way of injection, moulding, sheeting, extrusion, blow

moulding, blown films, box strapping etc have requirement of masterbatches. The packaging

industry also has wide applications across various sectors & is expected to grow at a CAGR of 12-

15% due to changing consumer habits & growth in end use segments. The broad industry / demand

scenario for the units customer segment is therefore encouraging in medium term.

The total cost of project has been envisaged at Rs. 185 lakhs. Thepromoters contribution will be

32%. The Company requires a term loan of Rs. 100 lakhs for the purchase of machineries and other

equipments.

The Plant is located in well compounded Industrial cluster which is well connected with the city, and

in the close proximity of the raw material supplier. The full project report details were submitted

with the application.

Since the loan is for a new plant/unit set up, therefore the project comes under Greenfield Project.

Term loan of 100 lakh was sanctioned under the direct credit scheme.

There has been satisfactory feedback on promoters from the existing banker. The CIBIL consumer

reports of all the promoters are satisfactory with relatively good scores. No willful defaulters have

been found from the search result. The net worth of the promoters was satisfactory.

Since this is a Greenfield project, hence detailed study of the company profile of all the associate

concern of the group industries was done to check the feasibility of the new project and the extent of

its success.

The audited Balance sheet and P/L A/c of the last 3 years of the associate concerns have been taken

into consideration to check the condition of the group.


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Break Even Analysis

Calculation of BEP 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16

Utilized capacity 65% 70% 75% 80% 80% 80%

Net sales 973.09 1047.9 1122.78 1197.6 1197.6 1197.6Fixed cost

Interest on term loan 16.50 14.26 11.51 8.76 6.01 3.61

Financial Expenses 0.60 0.72 0.86 1.03 1.24 1.49

Depreciation 28.50 24.23 20.59 17.50 14.88 12.65

Labour fixed 31.75 33.34 35.01 36.76 38.60 40.53

Admn expenses 4.92 4.92 4.92 4.92 4.92 4.92

Total fixed cost 82.27 77.47 72.89 68.97 65.65 63.20

Net PBT 95.81 11.28 118.35 136.71 139.36 141.81

Variable cost 794.99 870.17 931.54 991.95 992.62 992.62

Contribution 178.08 177.75 191.24 205.68 205.01 205.01

BEP sales 449.54 456.72 427.94 401.60 383.51 369.20

BEP sales in terms of

installed capacity

30.03% 30.51% 28.59% 26.83% 25.62% 24.66%

Margin of safety 523.53 591.20 694.84 796.03 814.12 828.43

Marin of safety (%) 116.46 129.44 162.37 198.22 212.28 224.38

Projected Balance Sheet (Rs. in lakhs)

Particulars Construction

Period

2010-11 2011-12 2012-13 2013-14 2014-15

LIABILITIES

Partners capital 75 75 75 75 75 75

Subsidy from Govt. 0 0 0 0 0 0

Term Loan 100 90 70 50 30 10

Balance C/F from P&L A/C 69.23 140.75 223.42 317.51 412.65

Unsecured loan 0 0 0 0 0 0

Current liabilities 100 100 100 100 100

Total 175 334.23 385.75 448.42 522.51 597.65

ASSETSGross fixed assets 153 153 153 153 153 153

Cumulative Depreciation 0 22.95 42.46 59.04 73.13 85.11

Net fixed assets 153 130.05 110.54 93.96 79.87 67.89

Current assets 22 204.18 275.21 354.46 442.64 529.76

Stock 54.94 59.21 63.41 67.6 67.62

Raw material 41.33 44.51 47.69 50.86 50.86

WIP 4.55 4.9 5.24 5.58 5.59

Finished goods 9.06 9.8 10.48 11.16 11.18

Receivables 81.09 87.33 93.57 99.80 99.80

Cash & Bank balance 22 68,10 128 197.5 275.2 362.34Total 175 334.23 385.75 448.42 522.51 597.65


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Projected Profitability Statement (Rs. In Lakhs)

Particulars 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15

No of months 1 12 12 12 12 12

Capacity Utilization (%) 60 65 70 75 80 80

Annual Production 3208.92 3455.76 3702.60 3949.44 3949.44

Raw materials 743.94 801.14 858.34 915.54 915.22

Utilities & Services 32.09 34.56 37.03 39.49 39.49

Salary & wages 31.75 33.34 35.01 36.76 38.60

Factory Overhead 11.84 13.09 13.09 13.09 13.09

Administrative Overhead 4.92 4.92 4.92 4.92 4.92

Sales Overhead 9.73 10.48 11.23 11.98 11.98

Total Operating Cost 834.27 897.53 959.62 1021.78 1023.30

Add opening WIP 0 4.5 4.9 5.24 5.58

Less closing WIP 4.55 4.9 5.24 5.58 5.59

Sub Total 829.72 897.18 959.28 1021.44 1023.29

Add opening finished goods 9.06 9.80 10.48 11.16

Less closing finished goods 9.06 9.8 10.48 11.16 11.18

Cost of Sales 820.66 896.44 958.60 1020.76 1023.27

Gross Sales 995.60 1072.18 1148.77 1225.35 1225.35

Taxes etc 22.52 24.26 25.99 27.72 27.72

Net sales realization 973.08 1047.92 1122.78 1197.63 1197.63

Gross Profit 152.42 151.48 164.18 176.87 174.36

Financial Expenses 0.60 0.72 0.86 1.03 1.24

Interest on Term loan 10.59 8.53 6.33 4.13 1.93

Interest on unsecured loan 2.92 2.92 2.92 2.92 2.92

Interest on Working Capital 11 11.99 12.87 12.87 12.87

PBDT 127.31 127.32 141.20 155.92 155.40

Depreciation 22.95 19.51 16.58 14.09 11.98

PBT 104.36 107.81 124.62 141.83 143.42

Provision for IT 35.13 36.29 41.95 47.74 48.28Profit/(loss) after tax 69.23 71.52 82.67 94.09 95.14

Add Depreciation 22.95 19.51 16.58 14.09 11.98

Cash Accrual 92.18 91.03 99.25 108.18 107.12

Cash Accruals (Cumulative) 92.18 183.21 282.46 390.64 497.76

Repayment of term loan 10 20 20 20 20

Net Cash Accrual 82.18 153.21 232.46 320.64 407.76


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A detailed Appraisal note was prepared for the loan sanction.

The project secured a Borrower rating of SME4.

Combined rating of CR 3. Risk rating score was low.

The key parameters of the project are as follows:

Promoters Contribution (%) 45.95

Promoters Contribution by Equity (%) 100

Debt-Equity Ratio (DER) 1.18

Maximum DSCR 2.55

Minimum DSCR 1.7

Avg DSCR 2.05

BEP 26.8%

Cash BEP 21.40%

ROCE % 39.5

Cost of Capital 10.08%

IRR before tax 39.53%

Margin on Overall security 31.97%

Overall asset coverage 1.47

SWOT Analysis

Strengths

Competent promoters with experience in the same line of activity and running similar units. Satisfactory credit history of the promoters/group with other banks.

Weaknesses

Greenfield nature of the project. However, the project has a relatively low gestation period,and the promoters are well established/experienced in the line of activity. The risk level is

also lower compared to a pure Greenfield projects.

Security structure envisages charge on movable assets only. The loan has been requestedcoverage under CGTMSE.

Location of the unit is on rented premises; long term agreement has been entered into.


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Opportunities

The group is setting up facilities in Eastern India with a desire to capitalize on first moveradvantage and establish its presence in this region, which has demand but relatively few

manufacturers.

Threats

There are larger entities engaged in this line of activity that may benefit from their economiesof scale and be able to price their products more competitively. In this regard, the company is

banking on establishing a manufacturing facility in proximity to the target market that will

result in substantial savings in transportation cost of the material.

There is volatility in raw material prices and in some cases; it may be difficult o pass on thesame to the end customer. The promoters are aware of the risk and they have been mitigating

the same by regular monitoring of prices, ordering of materials on bulk basis, availing

discounts and maintaining healthy relationships with alternate suppliers.

Sensitivity Analysis

Scenario % DSCR BEP Cash BEP ROCE IRR

(before

tax)

Base Case 2.05 26.82% 21.40% 39.54% 39.53%Decr Sales by 5% 1.38 37.83% 30.18% 26.75% 25.34%

Incr RM Cost by 5% 1.52 34.79% 27.75% 29.01% 28.07%

Decr Cap. Util. by 5% 1.86 26.82% 21.40% 37.76% 36.47%

Decr Sales by 10% 0.64 64.14% 51.17% 13.02% 10%

Incr RM Cost by 10% 1 49.48% 39.47% 18.47% 16.49%

Decr Cap. Util. by 10% 1.67 26.83% 21.4% 35.8% 33.26%

The key variable is cost of raw material and the unit is expected to be able to withstand (i.e has

positive DSCR) fluctuations just at 0% and approx. upto 7.75% for sales price reduction. The resultof sensitivity analysis is satisfactory.

Financials of the various associate concerns

The financials of the various associate concerns engaged in manufacturing activity are satisfactory.

The DER appears high on account of unsecured loans being taken as part of debt. Operational results

in terms of sales, level of profits & cash profits etc are satisfactory. The group between its various

concerns has a good client base. The overall perception on the group/ associate concerns based on

banker, financial/CIBIL reports are satisfactory.


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CASE STUDYIII

PQR India Pvt. Ltd.

The company is already in business for the past few years. The promoter/director has experience in

similar line of activity for more than 10 years. They want a term loan of 80 lakhs for the expansion

of their business activities by setting up new machines and products. The companys production

capacity will enhance 30% more from the existing capacity; new machines will help the company

manufacture new products also. The company also has past association with SIDBI and hence does

not require very detailed appraisal report as much of the work regarding the companys information

has already been done.

Details of the product/ Services

S No. Industry Product Installed

capacity p.a.

capacity

utilization

End use of the product

1 Plastics Polythene container 500 tonne 75 % Packaging products used by

2 Plastics Plastic buckets 200 tonne Various industries. Main

3 Plastics Plastic components 200 tonne Customers are in paints &

4 Plastics Container HDPE 100 tonne Batteries.

The total cost of project is 119.32 lakhs

Means of Finance

Particulars Amount ( in Lakhs)

Internal accruals 34.32

Term loan 85

Total 119.32

The existing DER of the company at 0.9 is well within the norms & offers adequate leverage for

further borrowings. The post project DER is 1.24 which is also well within the norms.

The companys current ratio is good & well above the benchmark of 1.33 times. The average DSCR

is 2.47 and minimum DSCR is 1.89.

The project is proposed to be covered under CGTMSE scheme.

The main market of the company is the Eastern region. The company follows direct sales and the

director looks after the marketing with his teams. The firm receives regular orders from the clients.

The various clients are from the paint industry, automotive industry, battery industry etc.


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SWOT Analysis

Strength

Established relationship with leading corporate customer. Good capacity for injection moulding Adequate infrastructure Cutting edge technology which will help them in cost cutting as the machines in this projects

are energy saving.

Weaknesses

Competition from the company in the similar line of activity. But the unit gets continuousorders.

Opportunities

Favorable location which is among the premier industrial estates in the region. Growing market demand.

Threats

Thin margins & susceptibility to price fluctuations in paint industry & automotive industrywhich determine the pricing of the companys end product.

Audited Summary of financial statement

Particulars For the year ended as on

31/03/08 31/03/09 31/03/10

Net block 103.66 283 360.27

Equity share capital 71 100 100

Net Worth 148.72 236.61 277.64

Long term loan 101.92 203.56 249.54

Working capital borrowings 97.85 24.9 24.55

Current Asset 313.02 299.17 338.34

Current Liabilities 165.18 135.63 165.05

Net Working Capital 147.84 163.54 173.29

22 Roma Devnath

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