47733306 Abhyudaya Bank 2

Credit Appraisal & Renewal

APROJECT REPORT

ON

“CREDIT APPRAISALAT ABHYUDAYA BANK”

A detailed study done in Submitted in partial fulfillment of the requirement for the award of

degree of Master of Management (MMS) under Mumbai University

Submitted by

HARSHAD RAJAN JOSHIROLL NO: 22

BATCH: 2009 – 2010

Under the guidance of

NAME OF THE GUIDE SADHANA OGALE

SARASWATI EDUCATION SOCIETY’SSARASWATI COLLEGE OF ENGINEERING,

Department ofMaster of Management Studies

Kharghar, Navi Mumbai


ABSTRACT

The project undertaken is credit appraisal and renewal. The project emphasis on understanding the procedure and process used by Abhyudaya Co-operative Bank Ltd. to assess the credit worthiness of the borrower.

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 first step in credit appraisal project is to understand the Indian Co-operative banking industry.

The credit appraisal for company starts with Understanding the need of loan to the borrower i.e. for which purpose the loan is required. After this next step is to analyse the financial statement of the company to whom the loan is to be sanctioned. The main things which are taken into consideration while analyzing the financial statement are type of statement, nature of activity, accounting policy, qualities of assets and liabilities , unit wise performance result of the company & director’s report.

After analyzing the financial statement the second step is to analyse the key financial ratios of the company such as:Creditors Ratio, Debtors Ratio, Debt Equity Ratio, Debt-service coverage ratio, liquidity ratio, turnover ratio, Stock Velocity Ratio etc.

The next step is to understand the methodology used to determine the credit rating. Since the credit rating methodology differ from bank to bank in term of the weight age given to the parameters but the parameter used by the banks to assess credit worthiness are almost same to all company.

The sensitivity analysis is used to check the company ability to pay back the loan by changing the independent variables and consequently monitoring the effect on dependent variables. The last step is to understand the classifications of Non Performing Assets and the provision to recovery of NPA. The research report contains the whole procedure & process which is used by the bank to give credit.


ACKNOWLEDGEMENT

A work is never a work of an individual. I owe a sense of gratitude to the intelligence and co-operation of those people who had been so easy to let me understand what I needed from time to time for completion of this exclusive project.

I am also grateful to Dr. J. G. Kori Principal and Prof. Pravin More, HOD of MMS, Saraswati College of Engineering Dept of MMS, for permitting me to undertake this study.

I am greatly indebted to my guides Prof. SADHANA OGALE, faculty guide for Finance (summer internship), Saraswati College of Engineering and Department of Master of Management Studies & Mr. K. B. Sawant, Dy. General Manager, Central Zonal Office, Abhyudaya Co-operative Bank Ltd., Ghatkopar for their constant guidance, advice and help which enabled me to finish this project report properly in time.

Last but not the least, I would like to forward my gratitude to my friends & other faculty members who always endured me and stood with me and without whom I could not have completed the project.

Harshad Rajan Joshi


DECLARATION

I do hereby declare that this piece of project report entitled “A Study on Credit Appraisal at Abhyudaya Co-op. Bank” for partial fulfillment of the requirements for the award of the degree of “MASTER OF MANAGEMENT STUDIES” is a record of original work done by me under the supervision and guidance of Prof. SADHANA OGALE, Sarawati College of Engineering & Dept of MMS .This project work is my own and has neither been submitted nor published elsewhere.

PLACE: SIGNATURE OF THE STUDENTDATE:


CERTIFICATE

This is to certify that the summer project work of Mr. Harshad Rajan Joshi titled Credit Appraisal is an original work and this work has notbeen submitted elsewhere in any form. The indebtness to other works/publications has been duly acknowledged at the relevant places. The project work was carried out during 3.05.2010 to 30.06.2009 in ABHYUDAYA CO-OPERATIVE BANK LTD.

Mr. K. B. Sawant, Dy.Gen.Manager, Date: Abhyudaya Co-operative Bank, Central Zonal Office, Ghatkopar, Mumbai.


TABLE OF CONTENTS

Sr. No. Contents Page No.1 Abstract 22 Acknowledgement 33 Declaration 44 Executive Summary5 Certificate 86 Introduction To The Study 9-11

(a) Objective Of The Study(b) Limitation Of The Study(c) Research Methodology7 Introduction - Banking sector an overview 12-17

(a) Indian Banking Structure 8 Evolution of Urban Co-operative Banks

(UCB’s)18-43

9 About Abhyudaya Co-operative Bank 44-45(a) Company Profile & features(b) Technological Progress and Services Offered

By Abhyudaya Bank(c) Key Developments(d) Future Goals of the Bank(e) Milestones(f) The Bank’s Mission / Vision Statement10 Loan process and credit analysis in

Abhyudaya Co-op. Bank46-48

11 Forms Of Bank Finance 49-5012 Factors to be taken into consideration while

determining requirements for working capital

51-53

13 Securities Required in bank finance14 Documentation Formalities15 NPA classification and recovery16 Case Study I: M/s Quality Crafts Store 54-5517 Case Study I: M/s A.M. Classic 5618 Glossary 5719 Recommendations & Suggestions 20 Conclusion21 Bibliography


EXECUTIVE SUMMARY

Once a project opportunity is conceived and it is considered after the preliminary screening, a detailed feasibility study has to be undertaken covering marketing, technical, and financial aspects of the project. The study in the form of cases deal with calculations of MPBF (Maximum Permissible Finance), along with going through the borrower’s information, general information of the proposal, past record of borrower and details of security mortgaged. Financial records of the borrower audited, provisional and projected such as Profit and loss account statements, Balance Sheet and Cash and Fund Flow Statements needed to be considered. The ratios such as current Ratio, Debt Service Coverage Ratio etc are also checked. The ultimate decision whether to grant the credit to borrower for the application or not and how to go about it , is undertaken after this study which discloses whether the borrower has good past record and information provided are true and fair.

My project concerns with the Calculations of MPBF i.e. Credit Appraisal and Renewal, in which I need to asses if the borrower should be granted credit, and what should be the recommended loan amount. This all is done after carefully evaluating the financials and securities provided by the borrower.

Various financial ratios are calculated for the past and future data provided by the borrower after checking the veracity of the same. The various ratios, which are frequently calculated include:

Current ratio: [(Receivables + material and finished good inventory)/ (creditors for goods and expenses)]

Long term debt-equity ratio [Long Term Debt/ Net worth]

Interest coverage ratio [(Profit Before Interest – Provision for Tax)]/(Interest payments due for the year]

Fixed assets coverage ratio [Fixed Assets/ (Term loan and other long term debt obligations)]

Debt-service coverage ratio [{(Profit after tax + Interest on term loan + Depreciation} + Other non-cash charges]/ [Interest on term loan + Principle Repayment]


Profit after tax/sales

Debtors Velocity

[Average Receivables/Credit Sales* No. of days in a year.]

Creditors Velocity

[Average Payables/Credit Purchase* No. of days in a year.]

Stock Velocity

[Average Stocks/Cost of goods Sold* No. of days in a year.]

Two other important criterions are IRR and DSCR

Financial institutions calculate the Internal Rate of Return (IRR). The Internal Rate of Return refers to the rate of return that the project is expected to generate based on its projected cash flows accruing over its expected lifespan. Institutions have a threshold IRR that the project needs to surpass to assess its viability.

DSCR refers to the ability of the project to generate sufficient cash flows to repay the debt taken to finance the project. This includes the principal along with the interest component.

The above ratios are taken and matched with the standard, though a certain amount of flexibility is exercised depending on the perception and personal judgment of the appraising officer. A rating is assigned to the project based on the scores of the different ratios. A cut-off rating determines financing decision (whether the project would financed or not). Above the rating, the projects maybe categorized into excellent, good and average. Based on this and the project characteristics, the final terms and conditions of financial assistance are decided upon like:

Moratorium Repayment period Availability period Security (like first charge, personal guarantee etc.) Interest rate

All the expenses like service fee, processing fee, document fee and other expenses like inspection of site, factory, etc. are charged to the applicant and are a source of income for the lending institution.


INTRODUCTION

Credit Appraisal:-

Credit appraisal 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. 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. These proposals analyze various risks associated with bank lending i.e. business risks, financial risks, management risks, etc. and clarify the process by which such risks will be managed on an on going basis.

Objective of the study:-

The objective of research is to study the Co-operative Banking in Abhyudaya Co-operative Bank Ltd. The area of study in Abhyudaya Co-operative Bank Ltd. include:-

1. To make an item wise study of the component of Credit Appraisal and renewal Process.

2. The study also involves the study of procedural formalities included in sanctioning the finance to its clients.

3. This study would involve analyzing the balance sheets of their clients in determining their financial needs.

4. To suggest the step to be taken to increase the efficiency in Credit Appraisal.


Place of study:-

The project study is carried out at the Loan Department of Abhyudaya Co-operative Bank Ltd. Central Zonal office Situated at Ghatkopar, Mumbai. The study is undertaken as a part of the MMS curriculum from 03th MAY 2010 to 30th JUNE 2010 in the form of summer placement.

Study design and methodology:-

Two types of data are collected, one is primary data and second one is secondary data. The primary data were collected from the Loan Department of Abhyudaya Co-operative Bank Ltd. The secondary data were collected from the books, Abhyudaya Co-operative Bank website, etc.

Limitations:-

There may be limitations to this study because the study duration (summer placement) is very short and it’s not possible to observe every aspect of Credit Appraisal practices.


RESEARCH METHODOLOGY

Data Collection:-

Data collected specifically for the study of Credit Appraisal & Renewal from Abhyudaya Co-operative Bank Ltd.

Since the research carried out for this project is descriptive in nature, the various documents and official files would require for understanding the methodology used by the banks. The data collection is done by personal interview or direct observations. At the same time, related articles, newspapers, magazines, in-house journals, Credit Policy of banks, etc were referred. The information on the project under consideration is obtained by the bank employees and officials. Also I went through various files and the official correspondence of the bank for better understanding the topic under the study. The methodology also include finding out the financial ratio, understanding the credit rating and assessment of Credit Appraisal and renewal of the companies.

Secondary Data:-

This data is collected from bank’s internal documents which make on monthly basis & from Web sites. Secondary data is scrutinized on the basis of suitability, reliability, adequacy and accuracy.

Suitability:

It has been ensured that the data available is suitable for the purpose of inquiry on hand.

Reliability:

The data is reliable because it is collected from the bank’s internal sources.


Banking Sector: An overview

Banking Regulation Act of India, 1949 defines Banking as “accepting, for the Purpose of lending or investment of deposits of money from the public, repayable on demand or otherwise and withdraw able by cheques, drafts, and order or otherwise.”

Most of activities a Bank performs are derived from the above definition. In addition, Banks are allowed to perform certain activities which are ancillary to this business of accepting deposits and lending. A bank’s relationship with the public, therefore, revolves around accepting deposits and lending money. Another activity which is assuming increasing importance is transfer of money –both domestic and foreign – from one place to another. This activity is generally known as “remittance business” in banking parlance. The so called forex (foreign exchange) business is largely a part of remittance albeit it involves buying and selling of foreign currencies.

The law governing Banking Activities in India is called “Negotiation Instruments Act 1881”. The banking activities can be classified as:

Accepting Deposits from public/others (Deposits) Lending money to public (Loans) Transferring money from one place to anther (Remittances) Acting as trustees Acting as intermediaries Keeping valuables in safe custody Collecting Business Government business


Indian Banking Structure


Evaluation of Urban Co-operative Banks

The term Urban Co-operative Bank (UCBs), though not formally defined, refers to primary co-operative banks located in urban and semi –urban areas. These banks, till 1996 were allowed to lend money only for non-agricultural purposes. This distinction does not hold today. These banks were traditionally centered on communities, localities work place group. They essentially lent to small borrowers and businesses. Today, theirScope of operations has widened considerably.

The origin of the urban co-operative banking movement in India can be traced to the chose of nineteenth century when, inspired by the success of the experiments related to the co-operative movement in Britain and the co-operative credit movement in Germany such societies were set up in India. Co-operative societies are based on the principles of co-operation,-mutual help, democratic decision making and open membership. Co-operative represented anew and alternative approach to organization as against proprietary firm, partnership firm and joint stock companies which represent the dominant form of commercial organization.

Main features of Co-operative Organization:

The main features of co-operative organization are: Voluntary Association Democratic Administration Self- help and Mutual Aid Common Welfare through Common Action Participation of Members on the basis of Equality


A dedicated group of social workers and labour movement activist, imbued with the spirit of service to the cause of mill workers, other industrial workers and economically weaker sections started the Abhyudaya Co-op. Credit Society Ltd in 1964, with a small share capital of Rs.5000/-. The area of Parel, Parel village, Kalachowki, Sewri and their surroundings where at that time predominantly populated with low income industrial labour and middle class. The promoters realized that there was the need for providing this hard working, less educated, economically weaker but honest section of the society with a dependable, trustworthy and self institutional source for channelizing their savings and meeting small credit needs. The credit society provided the answer. The enthusiastic response from the people and the confidence reposed by them in the credit society encouraged the promoters, in just a few months, to get it converted in to and Urban Co-op. Bank. Thus, the Abhyudaya Co-op. Bank Ltd. was bourn in June 1965 with the motto “Prosperity through Co-operation”.


COMPANY PROFILE

Abhyudaya Co-op. Bank Ltd., one of the leading Urban Co-operative Banks in India, in its outlook and approach, has the objective of progress and prosperity of all. From a humble beginning in January 1964 as a Co-operative Credit society with a share capital of a merely Rs.5,000/- held by 83 members, today Abhyudaya Co-op bank has become one of the large Urban Co-operative Banks with a "Scheduled Bank" status. The bank has been converted into a “Multi-State Scheduled Urban Co-op. Bank” w.e.f. 11th January, 2007. The area of operation which was restricted to the State of Maharashtra has now been extended to Karnataka & Gujarat State. Currently, the capital base of the bank stands at Rs. 45.77 crores and Reserves and surpluses at Rs.682.54 crores as on 31.03.2009. The bank has 1,23,011 members and more than 12 lakh depositors. The Bank has seen a tremendous growth in deposits. The deposits of the bank are over Rs. 3176.81 crores as on 31.03.2009, which were Rs. 2625 crores as at the end of the financial year 2007-2008. The loans and advances stood at Rs. 1856.39 crores as on 31.03.2009. The bank had posted a as on 31.03.2009. “The growth rate of the bank compares well with that of others in the sector. The Bank has maintained a steady growth. The bank has been paying dividend @ 15% to its members which is maximum permissible as per the MCS Act.

The Bank has launched different loan schemes tailor-made to suit the needs of various customers. The schemes aim at providing loans for purchase or construction of residential premises, repair/renovation of house property, purchase of car, seeking higher education and for purchase of household consumer durable. One of the loan schemes, viz. "Udyog Vikas Yojana" is specially designed for the benefit of small entrepreneurs and businessmen. The procedure for sanctioning of loans under the schemes has been simplified and relaxed with a view to attract new customers and facilitating speedy sanction of loans. The Bank has total 87 branches including a Mobile Bank at Navi Mumbai. Bank is committed to spread network of branches throughout the State and provide much needed banking services to the population, which has been deprived of the banking facilities.

The Bank has total 87 branches including a Mobile Bank at Navi Mumbai. 11 Hours fully computerized services and 7 days working at 15 branches and 24 hours ATM service at 60 branches. Bank is committed to spread network of branches throughout the State and provide much


needed banking services to the population, which has been deprived of the banking facilities.

Innovative Banking is another area of operation that Abhyudaya is currently focusing on for a sustainable long term growth. The Bank has always endeavored for providing satisfactory customer service the help of the latest technology. The Bank has provided fully computerized services to its valued clients. Bank is offering 11 Hours fully computerized services and 7 days working at 15 branches and 24 hours ATM service at 60 branches.

Our features:

1. Attractive Interest Rates on Deposits.2. 0.50% additional interest on Deposits for Co-operative Society.3. 1.00% additional interest on Deposits for Senior Citizens.4. Various Loan Facilities to fulfill your needs.5. We have cheque drawing and cheque collection faculty on major

cities all over India.6. Electricity bills of B.E.S.T., M.S.E.B. etc. accepted.7. NO TDS to our shareholders.8. Lockers available at lowest rates.

Technological Progress and Services Offered By Abhyudaya Bank:

The bank has successfully implemented the Core Banking Solution (CBS). After centralized connectivity the bank is now able to offer anywhere banking services to customers. Now customers can transact cash, transfer of fund, clearing, remittances, etc from any branch of the bank and also use ATM installed at any branch for cash withdrawals, statement of accounts and balance enquiry. Reserve Bank of India has also conferred license to open five offsite ATMs and the same will be installed at A.Nagar, Worli, Wadala, Ghatkoper, Bhandup area shortly. The bank is providing all types of Foreign Exchange, MoneyGram and X-press Money services. Bank has also offering telebanking, Mobile banking services and Internet Banking services.

The Bank has also implemented/adopted other RBI schemes such as RTGS, ECS, NEFT, Speed Clearing, etc. Bank has taken corporate Agency of LIC of India and now all types of LIC’s Policies are available at our branches. Out of 87 branches, 16 branches are working in double


shift, rendering 11 hours service to the customers. 62 branches having ATM facility and our customers are free to operate on more than 6000 ATMs through BANCS network. Now bank has also developed Acquirer module and customers of other banks in BANCS network can withdraw the amount from ATM machines installed by our bank. In 3 of our branches namely Vashi, Dadar and New Panvel ‘Franking’ facility has been made available for the General Public.

The Bank has launched different loan schemes tailor-made to suit the needs of various customers. The schemes aim at providing loans for purchase or construction of residential premises, repair/renovation of house property, purchase of car, seeking higher education and for purchase of household consumer durable. One of the loan schemes, viz. "Udyog Vikas Yojana" is specially designed for the benefit of small entrepreneurs and businessmen. The procedure for sanctioning of loans under the schemes has been simplified and relaxed with a view to attract new customers and facilitating speedy sanction of loans. Bank is committed to spread network of branches throughout the State and provide much needed banking services to the population, which has been deprived of the banking facilities.

Insurance offered by Abhyudaya Bank:

Bank has taken corporate Agency of LIC of India and now all types of LIC’s Policies are available at Abhyudaya Co-op. Bank branches.

Customer Service:

The Abhyudaya Co-operative Bank has proved to be customer driven organization and the people in the organization understand that innovation creates opportunity, quality creates demand and teamwork makes it happen. The Bank, feeling the pulse of customers need that they demand more for less, has endeavored to provide them better quality service, wider choice and above all innovative products. The Bank is always ready to add value to its customers and takes every possible step to improve quality of customer service. The Abhyudaya Co-op. Bank has a very efficient complaint redress mechanism. The Bank has a robust grievance redressal structure and processes to ensure prompt in-house redressal of all their customer complaints. It handles the customer queries and complaints on priority. One can find ‘Customer Suggestion Card’, at


all branches of the Bank and also on its website. Customers accessing the website of the Bank have the option to send their queries through e-mail.

Bank on Information Technology:

The bank has a constant focus on application and augmentation of the information technology in order to modernize Bank’s operations and deliver value-added services to the customers. The Bank covers more and more branches under the computerization programmes. The bank has extended Anywhere Banking and Tele-Banking facilities to many new locations/branches, the number of ATMs (both off-site and on-site) installed by the Bank has increased to 62, and our customers are free to operate on more than 6000 ATMs through BANCS network. Now bank has also developed Acquirer module and customers of other banks in BANCS network can withdraw the amount from ATM machines installed by our bank. In 3 of our branches namely Vashi, Dadar and New Panvel ‘Franking’ facility has been made available for the General Public.

Branch Expansion:

With a view to increasing its reach to potential markets and extending banking facilities to un-banked areas coupled with catching on new business opportunities Bank has been opening new branches selectively at centers offering highest business potential.


Milestones:

1964 Established as Co-operative Credit Society.

1965 Converted into a Bank with one Branch at Abhyudaya Nagar.

1985 Inauguration of Bank's own Building, Staff Training College and Auditorium at Vashi. RBI Permitted the Bank to open and maintain NRI Accounts.

1986 Instituted Educational Prizes to the children of Members and Employees. Became 3rd Biggest Urban Co-op. Bank in India.

1988 Became Scheduled Bank.

1990 Inauguration of Bank's own Building at New Panvel.

1995 Decision to set up "Development Reserve Fund" to undertake special schemes.

1997 All Branches fully computerised.

1999 Eleven Hours & Sunday Banking started in 16 Branches.

2000 ATM installed at 3 Branches. Bank's website: www.abhyudaya.com launched.

2003 Opened 40th Branch with ATM Facility & 11 hours and sunday banking at Lokmanya Nagar (Thane). Setup Treasury Dept. at Fort.

2004 Started RTGS and NDS facilities.

2006 * Franking facility at Dadar, Vashi, New Panvel* Citizens Co-op. Bank Ltd. Pune with 13 Branches merged with our Bank.

2007 * Bank registered under Multi-State Co-op. Societies Act, 2002on 11th Jan. 2007.

2008June 19

Merger of Shri Krishna Co Operative Bank, Vadodara

2008Aug 20

Merger of Janata Sahakari Bank, Udupi

2008Oct 10

Merger of Manekchowk Co-op Bank Ltd,Ahmedabad withour bank.


Growth and Strength:

The Bank has 1,30,000 members and more then 13.20 lakh depositors. During first year 2009-10, our bank has achieved substantial growth in all perspectives reflecting an overall growth of 34% in business mix which has reached up to mark of Rs.6735 crore. It is the highest among leading large sized urban co-operative Banks in India. With a rise of 31.4%, Deposits reached up to Rs.4170.62 crore and rise of 38.20%, Advances reached up to Rs.2564.73 crore. Our bank has also been able to maintain ratio of CASA deposits to total Deposits as high as 42.35%. The strength of the Bank is reflected in fact that its paid up capital and Reserves amounted to Rs.818.56 V and investment are to the tune of Rs.2126.74. CRAR maintained by our Bank stood at Rs.29.95 crore.

Key Developments:

With the expanding horizons and continuing developments and competition he bank propose to become full fledged financial service provider, fulfilling requirements of customers and other stakeholders by providing all allied services, as permitted by the regulatory authorities. The bank has adopted advanced technology for providing faster and convenient services to clients and within a short span of time we will be providing additional services like Demat, Issuance of PAN card etc. these major long term proposals will enable the bank to increase its market share and better fulfillment of expectations of all the stakeholders.

Future Goals of the Bank:

To build a global brand, the Bank feels a need to do two things – go global physically and second, more importantly, have a unique business model, product offering and service standards, all of which are globally recognized.


THE BANK’S MISSION / VISION STATEMENT

Mission Statement:

A “Mission” to continuously strive for synergy between technology, systems and human resource so as to provide products and services that meet the quality, performance and aspiration of its vast clientele. For this, we maintain highest standards of ethics and societal responsibilities constantly innovate products and processes and develop teams that keep the momentum going to take the Bank to excellence in the new millennium.

Vision Statement:

A “vision” of relentlessly pursuing our aim and objective of making the bank emerge as a luminous stand in the tapestry of India’s Banking System. We will strive to mould the Abhyudaya Bank into agile and resilient Organisation by adopting the fine-tuned customer relationship, management strategies, operations based on asset-liability and risk management systems, upgradation of required technology capabilities and developing the human resource to meet the challenges of the paradigm shift. Our vision seeks to serve, as our Chairman has aptly put it, as a reference point for making strategic decisions, conveying benefits to stakeholder, articulating competitive advantage and underscoring the driving principles of Organisation.


ABHYUDAYA CO-OPERATIVE BANK

FINANCIAL POSITION (LAST 2 YEARS)

31.03.2008 31.03.2009 Paid upShare Capital

40.46 45.77

Reserves 629.65 671.95 Deposits 2625.50 3174.81 Loans & Advances

1616.10 1856.39

Gross Profits

126.07 175.87

Net Profits 40.81 92.36 Working Capital

3434.28 4122.15

Investments 1420.72 1883.20 Membership(Nos.)

1,20,577 1,23,011

The Deposits have grown by Rs. 549.31 crores at the previous year end and registered growth of 21%. Advanced have growth by 15% and gone up by Rs. 240.29 crores. As a result bank has achieved a CD ratio 58.47 %. Paid Up Capital of the bank increased form Rs. 40.46 crores to Rs. 45.77 crores, registering growth of 13 % over the previous year. The reserves and other funds have increased from Rs. 629.65 crores to Rs. 671.95 crores in the previous year.

The Working Capital have grown by Rs. 687.87 crores at the previous year end and registered a growth of 20 %.

The Net Profit has increased from Rs. 40.81 to Rs. 92.36 crores.


Capital to Risk Asset Ratio:

NPA’s:


ABHYUDAYA BANK HEAD-OFFICE: K.K.TOWER, Abhyudaya Bank Lane, G. D. Ambedkar Marg, Parel Village, Mumbai-400 012


Lone Process & Credit Analysis in Abhyudaya Co-op. Bank:

The Lone Process Flow In Abhyudaya Bank Is As Follows:

Stage 1 Stage 2 Stage 3 Stage 4 Stage 5

Pre-Qualifying Application Processing sanctioning Closing

The popularity of loan and advance facility provided by Abhyudaya bank is due to its effectively structured loan process and credit policy .The credit policy is being revised at regular interval. These efforts resulted in maintaining the NPAs almost at zero level Credit analysis of the lone proposal is been carried out as per the outline of credit policy.


FORMS OF BANK FINANCE

A firm can draw funds from its bank within the maximum credit limit sanctioned. It can draw fund in the following forms:

Overdraft:

Under the overdraft facility, the borrower is allowed to withdraw funds in excess of the balance in his current account up to a certain specified limit during a stipulated period. Though overdrawn amount is repayable on demand, they generally continue for a long period by annual renewals of the limits. It is a very flexible arrangement from the borrower’s point of view since he can withdraw and repay funds whenever h desires within the overall stipulations. Interest is charged on daily balances- on the amount withdrawn-subject to some minimum charges. The borrower operates the account through cheques.

Cash Credit:

It is the most popular method of bank finance for working capital in India. Under this method a borrower is allowed to withdraw funds from the bank up to the sanctioned credit limit. Borrower is not required to borrow the entire sanctioned credit once, rather, he can draw periodically to the extent of his requirements and repay by depositing surplus funds in his cash credit account. There is no commitment charge; therefore, interest is payable on the amount actually utilized by the borrower. Cash credit limits are sanctioned against the security of current assets. Though funds borrowed are repayable on demand, banks usually do not recall such advances unless they are compelled by adverse circumstances. Cash credit is the most flexible arrangement from borrower’s point of view. It is more often than not is used for working capital.

Purchase of Discounting Bills:

Under the purchase or discounting of bills, a borrower can obtain credit from bank against its bills. The bank purchases or discounts the borrower’s bills. The provided under this agreement is covered within the overall cash credit or overdraft limit. Before purchasing or discounting the bills, the bank satisfies itself as to the creditworthiness of the drawer. Though the term bills purchased implies that the bank becomes owner of


the bills, in practice, bank holds bills as security for the credit. When a bill is discounted, the borrower is paid the discounted amount of the bill.

Letter of Credit:

Suppliers, particularly the foreign suppliers, insist that the buyer should ensure that his bank will make the payment if he fails to honor its obligation. This is ensured through a letter of credit arrangement. A Bank opens a Letter of Credit in favor of a customer to facilitate his purchase goods. If the customer does not pay to the supplier within the credit period, the bank makes the payment under the L/C arrangements. This arrangement passes the risk of the supplier to the bank. Bank charges the customer for opening the L/C. The Bank extends such facility to the financially sound customers. Unlike cash credit or overdraft facility, the L/C arrangement is an indirect financing; the bank makes payment to the suppliers on behalf of the customer only when he fails to meet the obligation. There are two banks involved in L/C arrangements. The L/C opener Bank on behalf of the applicant or purchaser and the advisory bank on behalf of the beneficiary or supplier. The L/C opener Bank issues L/C after taking required security. The beneficiary or supplier gives the goods invoice & bill of exchange to the advisory bank. The advisory bank sends the same to the Opener Bank for acceptance, the opener bank take an acceptance from the applicant and sends back the same to the advisory bank. Now the L/C opener Bank makes payment to the beneficiary or supplier in case of purchaser default. The bank charges the customer for opening the L/C.

Bank Guarantee:

A Bank Guarantee is a guarantee made by a bank on behalf of a customer (usually an established corporate customer) should it fail to deliver the payment, essentially making the bank a co-signer for one of its customer's purchases. A bank guarantee is more risky for the merchant and less risky for the bank. A letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount. In the event that the buyer is unable to make payment on the purchase, the bank will be required to cover the full or remaining amount of the purchase. With a bank guarantee, a client can default and the bank assumes the liability. Thus it can be said that Bank Guarantee is a commitment made by a bank to a foreign buyer that the bank will pay an exporter for goods shipped if the buyer defaults.


Housing Loan:

The Bank provides facility of housing loan to consumers for purchase, construction, renovations or for repairs of the house. The Bank as against the loan amount asks for security from the borrower, the conditions for which are as follows:

Primary: Mortgage of the house Property to be purchased / constructed.

Collateral: Third party Guarantee of two person, or assignment of LIC Policies, pledge of Govt. securities etc.

Share Amount: 2.5% of the Loan amount sanctioned.

Purchase of Flats in Building more than 15 years old: For purchase of flat in Building which is more than 15 years old, loan will be considered only if it is certified by the Structural Engineer that the residual life of the building is more than 20 years and the building is in good condition.

Repayment :Upto 180 installments to Salaried Persons & 120 installments in case of others / businessmen

In the view of above conditions bank sanctions the loan to the borrower. The Abhyudaya Co-operative Bank charges a processing fee @0.6% of loan amount.

Following is the table for rate of interest that bank charges against housing loan amount. They are subject to change.

Rate of Interest (Subject to change)

FloatingFixedAbhyudaya Special Housing Loan Schemeupto 30.09.2011

Up to Rs.20 lacs

Above Rs.20 lacs upto 50 lacs

Up to Rs.20 lacs

10.00% 11.00% 9.00%

Credit Appraisal & Renewal Education loan:

The Abhyudaya Co-operative Bank also provide assistance to gain education to the Indian Nationals under” Abhyudaya Gyan Vardhini Educational Loan Scheme”, who have secured admission to professional/technical courses through entrance test/selection process or have secured admission to foreign universities/institutions or have passed the qualifying examination for admission to the courses or to employed person intending to improve their educational qualification and/or receive training in modern technology in India or abroad provided training offers prospects of better placement.

Vehicle Loan:

The Abhyudaya Co-operative Bank provides car loan facility for the following purpose:

Purchase of Private / Commercial Vehicles (New or Used)Maximum amount, Eligibility

For Private Vehicles (New) For Private Vehicles (Used)(a) Max Rs.10.00 Lakh (b) 30 times net salary (c) 3 times of average net profit / net income p.a. for Businessman (d) 80% of cost of vehicle

(a) Max Rs.3.00 Lakh(b) 30 times net salary(c) 2 times of average Net Profit / Net Income p.a. for Businessman(d) 60% of valuation / agreement value whichever is lower

For Commercial Vehicles (New) For Commercial Vehicles (Used)(a) Max Rs.10.00 Lakh(b) 5 times of average Net Profit / Net Income p.a.(c) 80% of cost of vehicle

(a) Max Rs.3.00 Lakh(b) 2 times of average Net Profit / Net Income p.a.(c) 50% of valuation / agreement value whichever is lower

Repayment: up to 60 installments

Service Charges: 1.2% of the sanctioned amount.

Share Amount: 2.5 % of the sanctioned amount.


Personal Loan:

The Abhyudaya Co-operative Bank grants Personal Loan for for following purpose:

Purchase of Consumer Durables / Furniture / Fixtures / Computers Repairs / Renovations of Flat / House Purchase of 2 wheelers Purchase of Gold Ornaments Marriage & other religious ceremonies Domestic / Foreign Tours & Travels Repayment of existing debt Takeover of personal loan from other banks Medical expenses for self / family members etc.

Maximum Loan Amount: Rs.2.00 Lakh

Eligibility:

For Salaried Persons:(a) Minimum take home pay after EMI amount of loan Rs.4,500/- and net salary above Rs.7,000 /-p.m.

Repayment: Upto 60 installments

Rate of Interest: 14% [With 50% Collateral securities 13%]

Service Charges: 1.2% of amount sanctionedShare Amount: 5% of the amount sanctioned

Mortgage Loan:

The main purpose of mortgage loan provided at Abhyudaya Co-operative Bank is as follows: - The loan amount can be used for any purpose but shall not be used for purposes prohibited by law. The property should be in the name of Applicant or Co-applicant of family member.

Credit Appraisal & Renewal Maximum Amount: (a) Rs.20 lakh to Individuals / Self employed persons / Professionals.(b) Rs.100.00 lakh to business enterprises and self employed and Professional for use in business against own Flat / House / Gala / Office / Factory Premises, etc. kept in mortgage.

Repayment: Up to 84 months.

Eligibility: Amount of loan will depend on repaying capacity / DSCR / Loan to the extent of 60 % of the present value of the property.

Sureties: One surety of good means acceptable to the bank.

Service Charges: 1.2 % of the sanctioned amount.

Share Amount: 2.5 % of the sanctioned amount.

Working Capital Loan/Term Loan or Mortgage loan for Trade & Service Sector:

Banks are the main institutional sources of working capital finance in India. After trade credit, bank credit is the most important source of financing working capital requirements. A bank considers a firm’s sales and production plans and the desirable levels of current assets in determining its working capital requirements. The amount approved by the bank for the firm’s working capital requirements is called credit limit. Credit limit is the maximum funds which a firm can obtain from the banking system.

In case of firms with seasonal businesses, banks may fix separate limits for the peak level credit requirements indicating the periods during which the separate limits will be utilized by the borrower. In practice, banks do not lend 100% of the credit limit; they deduct margin money. A margin requirement is based on the principle of conservatism and is meant to ensure security. If the margin requirement is 30%, bank will lend only up to 70% of the value of the asset. This implies that security of bank’s lending should be maintained even if the asset’s value falls by 30%.

A borrower may sometimes require ad hoc or temporary accommodation in excess of sanctioned credit limit to meet unforeseen

Credit Appraisal & Renewal contingencies. Banks provide such accommodation through a demand loan account or a separate non operable cash credit account. The borrower is required to pay a higher rate of interest above the normal rate of interest on such additional credit.

The purpose of such loan is to provide hassle free working capital finance to the borrower. The nature of this loan can be cash credit, overdraft or a term loan. The borrower should have a good track record of 3 years.

The security in this case goes as follows: Primary Hypothecation of stocks and book-debts Collateral Mortgage of Unencumbered residential house/flat, commercial or industrial property with a clear marketable title in the name and possession of the borrower/Proprietor/ Partner/s/Director/s either self occupied or vacant.

The Rate of interest is PLR+1% with monthly rests. The term loan (against mortgage of immovable property) from a minimum Rs. 0.50 lacs to maximum Rs. 50 lacs or 30 times net monthly income whichever is lower. The security is the Mortgage of the unencumbered residential house/flat, commercial or Industrial property with a clear marketable title in the name and possession of borrower/proprietor or partner/s/Director/s either self occupied or vacant with a security cover of 1.5 times the amount of loan. The Rate of Interest is PLR+2.5% with a repayment period of 60 months.


Factors to be taken into consideration while determining requirements for working capital:

Production Policies:

A sugar factory which belongs to a seasonal industry would obviously have its working capital need affected by the length of the crushing season. The production schedule i.e. the plan for production, has great influence on the level of inventories. In some cases raw material can be procured only in a particular season and have to be stocked for the production of the whole year. In many others, the production cycle is limited to a part of the year and raw materials have to be accumulated throughout the year. In all such cases the need for working capital will vary according to the production plans. Similarly, the decision of the management regarding automation, etc, also affects working capital requirements. In a labor- intensive process, the requirements of working capital will be higher. In the case of highly automatic plant, the requirements of long-term funds would be greater.

Nature of the business:

The shorter the manufacturing process, the lower is the requirements of working capital. This is because, in such a case, inventories have to be maintained at a low level. Longer the manufacturing process, higher will be the requirements of working capital. This is the reason why highly capital-intensive industries require large amount of working capital to run their sophisticated and long production process. Similarly, a trading concern requires lower working capital than a manufacturing concern.

Credit policy:

The credit policy of the company also determines the requirements of working capital. A company, which allows liberal credit to its customers, may have higher sales but consequently will have large amount of funds tied up in sundry debtors. Similarly a company, which has very efficient debt collection machinery and offers strict credit terms, may require lesser amount of working capital than the one where debt collection system is not so efficient or where the credit terms are liberal. The credibility of a company in the market also has an effect on the working capital requirements. Reputed and established concerns can


purchase raw material on credit and enjoy many other services also like door delivery, after sales service etc. This would mean that they could easily have large current liabilities; therefore the required working capital may not be very high. Inventory policy:

The inventory policy of a company also has an impact on the working capital requirements since a large amount of funds is normally locked up in inventories. An efficient firm may stock material for a smaller period and may, therefore, require lesser amount of working capital.

Abnormal factors:

Abnormal factors like strikes and lockouts also require additional working capital. Recessionary conditions necessitate a higher amount of stock of finished goods remaining in stock. Similarly, inflationary conditions necessitate more funds for working capital to maintain same amount of current assets.

Market conditions:

Working capital requirements are also affected by market conditions like degree of competition. Large inventory is essential as delivery has to be off the shelf or credit has to be extended on liberal terms when market competition is fierce or market is not very strong is a buyer’s market.

Conditions of supply:

If prompt and adequate supply of raw materials, spares, stores etc. is available it is possible to manage with small investments in inventory or work on the just in time (JIT) principle. However if the supply is erratic, scant seasonal, channel zed through government agencies etc., it is essential to keep large stocks increasing working capital requirements.

Business Cycle:

Business fluctuations lead to cyclical and seasonal changes in production and sales and affect the working capital requirements.


Growth and expansion:

The growth in volume and growth in working capital go hand in hand. However, the change may not be proportionate and the increased need for working capital is felt right from the initial stages of growth.

Level of taxes:

The amount of taxes paid depends on taxation laws. These amount usually have to be paid in advance. Thus need for working capital varies with tax rates and advance tax provisions.

Dividend policy:

Payment of dividend utilizes cash while retaining profits acts as a source of working capital. Thus working capital gets affected by dividend policies.

Price level changes:

Inflationary trends in the economy necessitate more working capital to maintain the same level of activity.

Operating efficiency:

Efficient and coordinated utilization of capital reduces the amount required to be invested in working capital


Securities Required in bank finance

Banks generally do not provide working capital without adequate security. The following are the modes of security which a bank may require:

Hypothecation:

Under hypothecation, the borrower is provided with working capital finance by the bank against the security of movable property, generally inventories. The borrower does not transfer the property to the bank; he remains in the possession of property made available as security for the debt. Thus hypothecation is a charge against property for an amount of debt where neither ownership nor possession is passed to his creditor. Banks generally grant credit hypothecation only to first class customers with highest integrity. They do not usually grant hypothecation facility to new borrowers.

Pledge:

Under this arrangement, the borrower is required to transfer the physical possession of the property for the payment of debt. In case of mortgage, the possession of the property may remain with the borrower, with the lender getting the full legal title. The transferor of interest (borrower) is called mortgager, the transferee (bank) is called mortgagee, and the instrument of transfer is called the mortgage deed.The credit granted against immovable property has some difficulties. They are not self liquidating. Also, there are difficulties in ascertaining the title and assessing the value of the property. There is limited marketability and therefore security may often b difficult to realize. Also, without the court’s decree the property can not be sold. Usually, for working capital finance, the mode of security is either hypothecation or pledge. Mortgages may be taken as additional security.

Lien:

Lien means right of the lender to retain property belonging to the borrower until he repays credit. It can be either a particular lien or general lien. Particular lien is a right to retain property until the claim associated with the property is fully paid. General lien, on the other hand, is applicable till all dues of the lender are paid. Banks usually enjoy general lien.


DOCUMENTATION FORMALITIES

Once the credit limits are sanctioned main documents are obtained from

the client concerned. The nature of documents varies depending upon the

type of facility sanctioned and terms of sanction. They may include one

or more of the following-

Loan agreement conveying in terms and conditions of loan.

CIBIL (Credit Information Bureau (India) Limited) report of the

borrower company.

Valuation report of the property to be mortgaged if any.

A comprehensive credit agreement.

CR’s (Confidential Report) of the borrower from the banks.

Agreement of hypothecation of book debts.

Power of attorney to receive the business receivables.

Pledge letters of agreement in respect of documents of title to

goods covering credit limits.

Insurance / contingency insurance policy.

Appropriate standard policy or specific policy.

Corporate and personal guarantee.

Documents conveying equitable mortgage on primary security i.e.

fixed assets pertaining to the project and on the additional security

(collateral)

Personal guarantee of the borrower and guarantor (if any)

Compliance of registration of charge formalities.

Search report form an Advocate indicating a clear title for the last

fifteen years as per the land records; and Approved building plans

incase of constructed property.


This would involve submission of the relevant documents by enterprise.

The legal department in the financial institution would scrutinize these

documents for their validity and completeness.


Non Performing Asset

Non Performing Asset means an asset or account of borrower, which has been classified by a bank or financial institution as sub-standard, doubtful or loss asset, in accordance with the directions or guidelines relating to asset classification issued by RBI.

With a view to moving towards international best practices and to ensure greater transparency, it has been decided to adopt the '90 days overdue' norm for identification of NPAs, from the year ending March 31, 2004. Accordingly, with effect form March 31, 2004.

A Non performing asset (NPA) shall be an advance where

i. Interest and /or installment of principal remain overdue for a period of more than 90 days in respect of a Term Loan,

ii. The account remains 'out of order' for a period of more than 90 days, in respect of an Overdraft/ Cash Credit(OD/CC),

iii. The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted,

iv. Interest and/ or installment of principal remains overdue for two harvest seasons but for a period not exceeding two half years in the case of an advance granted for agricultural purpose, and

v. Any amount to be received remains overdue for a period of more than 90 days in respect of other accounts.

Reserve Bank of India (RBI) has issued guidelines on provisioning requirement with respect to bank advances. They are classified mainly into:

Standard Assets: Such an asset is not a non-performing asset. In other words, it carries not more than normal risk attached to the business.

Sub-standard Assets: It is classified as non-performing asset for a period not exceeding 12 months.

Doubtful Assets: Asset that has remained NPA for a period exceeding 12 months is a doubtful asset.


Loss Assets: Here loss is identified by the banks concerned or by internal auditors or by external auditors or by Reserve Bank India (RBI) inspection.

It should be noted that the above classification is only for the purpose of computing the amount of provision that should be made with respect to bank advances and certainly not for the purpose of presentation of advances in the banks balance sheet.

After the implementation of Securitization Act, 2002 banks issue notice to the defaulter to either pay back the dues to the bank or give the ownership of the secured assets mentioned in the notice. However, there is a potential threat to recovery if there is substantial attrition in the value of security given by the borrower or if borrower has committed fraud with the concerned bank. Under such a situation it will be prudent to directly classify the advance as a doubtful or loss asset, as appropriate.

DRT:

The bank can file a suit against the clients in court to recover its due. It is filed in court so that the dues can be recovered through the Debt Recovery Tribunal. The DRT came into existence in 1993 for debts with outstanding of Rs.10 lakhs and more.

The other courts will not have authority to hear cases falling under this jurisdiction, once the case is referred to DRT. The DRT has the powers to attach and sell, to arrest and detain in jail.

DEBT ASSET SWAP:

It is the takeover of unproductive / non core assets by mutual agreement. Absence of legal problems in taking over is a precondition. Minimum value of asset should be Rs.5 Crores. ONE TIME SETTLEMENT (OTS):

One time settlement is one the resource for the bank to recover its debts. The settlement amount is arrived at by the bank and borrower in order to settle the loan account. The doubtful or loss account as on 31.03.2000, the settlement amount is minimum 100 % of O/s as on the date it became NPA. Sub standard as on 31.03.2000, which later became

Credit Appraisal & Renewal Doubtful/loss, the settlement amount is minimum 100% O/s on date it became Doubtful/ Loss + interest at PLR from 01.04.2000 to date of

settlement. Amount is to be paid in lump sum. And if it is payable in installments, the minimum no of installments are 12. The minimum amount to be paid immediately is 25%, Interest at PLR from date of settlement to date of payment.

CORPORATE DEBT RESTRUCTURING:

Corporate debt restructuring is a viable and transparent mechanism for ailing but viable corporate outside the structure of BIFR/legal proceedings. It is applicable for only sub standard assets. Only manufacturing companies are covered under the scheme. In corporate restructuring scheme only the accounts of Rs. 20 Crores and above are covered. It is a three tier structure- CDR Forum, CDR Empowered Group, and CDR cell CDR Forum frames policies and guidelines. CDR Empowered Group makes sanctions, approvals, commitments, etc. CDR cell scrutinizes, assesses, and monitors.

Features of the scheme are:1. Revival plans is to be ready in 90 days 2. Lenders cannot exit from the agreement3. Creditors with 20% or more exposure can approach the CDR 4. Restoration plan approved by 60% of value of creditors is binding5. Amount of sacrifice is the amount of interest measured in P V terms,

which is provided fully or written off


Case Studies

Assessment of Working Capital /Cash Credit Facility/Term Loan


M/S Quality Crafts Store

M/S Quality Crafts Store Proprietor Mr. Shah Salim, 256-D 1st floor, Green Towers, established in the year 2002, is engaged in retail business of shawls particularly trading of woolen shawls and allied items. The party has been in connection with and dealing with the Abhyudaya Co-op. Bank, Ghatkopar branch since year 2006 with satisfactory dealings and good conduct. The turnover of account is encouraging. The party has established good trade connections and is involved in related trade. No negative complaints has been registered or found against the party ever since the opening of account with the bank branch. The amount is frequently routed through the account and the performance of account is good.

Borrower’s InformationName of Applicant Borrower : Mr. Shah Salim MateenAddress of the Head/Regd. Office : 256-D 1st floor, Green TowersConstitution : IndividualDate of Establishment : Year 2002Period since dealing with branch : Year 2006Net worth as on 31.10.2009 : Rs. 9.00 lacs

General Information of the ProposalExisting Banking Arrangements : Sole BankingProposed Banking Arrangements : Sole BankingSanction Comes Under Powers of : Branch HeadActivity : Trading of woolen shawls etc.Sector : TradingPresent Facilities by the Applicant : NilFacility Requested by the Applicant : Cash CreditPurpose of Borrowing : For Expansion of Existing BusinessAmount Requested : Rs. 5.00 Lacs.

Securities Proposed for the Facility:Primary SecurityHypothecation of stocks and Book Debts

Collateral SecurityThird Party Guarantee of two persons:

1. Mr. Azam Ahmad S/o Mr. Naseeruddin Ahamad 2. Mr Shoeb Tak S/o Mr. Younis Tak


Both the guarantors are dealing with the Abhyudaya Co-op. Bank Branches. As reported both are availing cash credit facility with their respective branches and with a satisfactory performance.

Financials of the Firm (Amt. in Rs. Lacs)

Particulars 31/03/2009 31/03/2010Projected

Sales 6.12 19.00Purchases 4.12 17.53% of Sales Growth 325.00Net Profit 1.42 2.23LiabilitiesShare Capital 2.64 3.30Total Term Liabilities 2.64 3.30Current LiabilitiesWorking Capital 0.00 8.00Sundry Creditors 0.38 1.20Expenses Payable 0.23 0.65Borrowings 0.00 0.00Other liabilities 0.00 0.00Total Current Liabilities 0.61 9.85Tolal Liabilities 3.25 13.15AssetsInvestments 0.00 0.00Fixed Assets 0.24 0.72Total Fixed Assets 0.24 0.72Current AssetsStocks 1.24 8.50Sundry Debtors 0.52 3.16Cash in hand/Bank Balance 1.25 0.77Loans/Advances 0.00 0.00Total Current Assets 3.01 12.43Total Assets 3.25 13.15

Credit Appraisal & Renewal Financial Indicators

Particulars 31/03/2009 31/03/2010Net Working Capital (In Rs. Lacs) 2.40 2.58Current Ratio 4.93 1.26Stocking Velocity ( Days) 108 175Debtors Velocity (Days) 31 60Creditors Velocity (Days) 33 25

Apart from the above financials of the party, the account statement reveals the following transactions of the party with the Bank Branch (Amt. in Rs. Lacs):

Debit Summation

Credit Summation

From 01/04/2008 to 31/03/2009 (1 year)

6.52 6.50

From 01/04/2008 to 31/10/2009 (7 months)

11.62 11.10

Comments and Observations:

Financial Indicators has been calculated as follows:

a) Net Working Capital: Total Current Assets less Total Current Liabilities.

b) Current Ratio: Total Current Assets divided by Total Current Liablities.

c) Stocking Velocity: Stock for the year divided by Cost of Goods Sold or Credit Purchase during the year multiplied by 360 days.

d) Debtors Velocity: Average Receivables or Debtors for the year divided by Credit Sales during the year multiplied by 360 days.

e) Creditors Velocity: Average Payables or Creditors for the year divided by Credit Purchase during the year multiplied by 360 days.

Other Comments and observations:

f) The party has projected to achieve a sales target of Rs. 19.00 Lacs over previous year achievement of Rs. 6.12 Lacs. The projected sales target seems to be achievable owing to the fact that up to 31/10/2007 (7 months) the party has a sales turnover of Rs. 11.62 lacs through the account.

Credit Appraisal & Renewal g) Stock Velocity reveals the part of sales always invested in stock

during the year or in other words it refers to the period of sales sans obstacles out of the current stock in case the production halts due to strike or other reason.The stocking period of 175 days is on higher side hence its been accepted at 90 days level.

h) Debtors Velocity reveals the duration within the debtors are expected to be realized. The projected debtors’ period seems reasonable hence accepted for assessment as projected.

i) Creditors Velocity reveals the duration within the creditors are expected to be paid. Lesser the days better is the position of the firm. The projected creditors velocity is at a lower level, keeping the kind of stocks in trade into consideration, the velocity has been accepted at 50 days level.

Assessment of MPBF (Amt. in Rs. Lacs)

Particulars AmountAccepted Sales 19.00Accepted Purchase 17.53Current Assets Stock (17.53*90÷360) 90 days 4.38Debtors (19*60÷360 60 days 3.16Cash in hand 0.54Loans & advances 0.00Total Current Assets (a) 8.08Current LiabilitiesCreditors (17.53*50÷360) 50 days 2.50Other liabilities 0.00Total Current liabilities (b) 2.50Working Capital Gap (a-b) 5.58Margin (as projected by the party) 2.58MPBF 3.00

Recommendations of Bank Branch

In view of above, it is proposed, if agreed, to allow Cash Credit Facility of Rs. 3 Lacs (Rupees three lacs only) in favor of M/S Quality Crafts Store Prop. Mr. Shah Alam Mateen for a period of one year subject to renewal after review against securities as discussed.

Credit Appraisal & Renewal Rate of Interest: PLR presently 13 % with monthly rests or any other rate. This may be prescribed by the Bank from time to time.

Margin: 40% on Stocks 50% on Book-Debts (excluding book debts older than 6 months).

.


M/S A.M. CLASSIC

M/S A.M. Classic Proprietor Mr. Saleem Siddique E-115 King Circle Mumbai, established in the year 1997, is engaged in wholesale and retail trading of shawls, dress material and artificial jewelries. The party has been in connection with and dealing with the Abhyudaya Co-op. Bank, Neharu Nagar branch with satisfactory dealings and good conduct. The turnover of account is encouraging. The party has established good trade connections and is involved in related trade. No negative complaints has been registered or found against the party ever since the opening of account with the bank branch. The amount is frequently routed through the account and the performance of account is good. The party was maintaining current account with Abhyudaya Co-operative Bank Neharu Nagar Branch and was accommodated by way of cash credit facility of Rs. 5.50 lacs in December 2007 against collateral security of 3rd party guarantee of two persons. The said C/C limit was renewed on 31/01/2009.

Borrower’s Information

Name of Applicant Borrower : Mr. Saleem SiddiqueAddress of the Head/Regd. Office : E-115 King Circle MumbaiConstitution : Sole ProprietorshipDate of Establishment : Year 1997

General Information of the Proposal

Existing Banking Arrangements : Sole Banking ArrangementsProposed Banking Arrangements : Sole Banking ArrangementsSanction Comes Under Powers of : Zonal Office, Ghatkopar.Activity : Trading Sector : HandicraftsPresent Facilities by the Applicant : C/C facility of Rs. 5.50 lacs againstCollateral security of 3rd party Guarantee of two persons.Facility Requested by the Applicant : Cash Credit under bank’s scheme of Mortgage loan for Trade & Service SectorPurpose of Borrowing : For Expansion of Existing BusinessAmount Requested : Rs. 35.00 Lacs.


Securities Proposed for the Facility

Primary SecurityHypothecation of stocks and Book Debts

Collateral SecurityThird Party Guarantee of two persons:

1 Existing : 3rd Party Guarantee of two persons2 Offered : Mortgage of flat at F-87, First Floor, King

Circle,Mumbai.

The security offered as mortgage comprises of residential flat at F-87, King Circle, Mumbai standing in the name of Mr. Saleem Siddique S/o Mr. Shahid Siddique (Proprietor of the Firm). As per the valuation report of P. Kumar, the market value of the said flat is Rs. 54.00 lacs and the realizable value (Forced Sale Value) is less by 15% of the cost. It is to be mentioned that the against said flat, the party is presently availing Home Loan Facility from IDBI Bank and the party will adjust the said loan in full and final prior to availing the fresh facility from the Branch. The papers regarding clearance of title deeds in respect of flat to be offered as mortgage have been forwarded to Bank’s approved lawyer/Legal Department Zonal Office Mumbai for Legal Opinion.


Financials of the Firm (Amt. in Rs. Lacs)

Particulars31/03/2008

31/03/2009

31/03/2010

Sales 64.08 127.00 163.46Purchases 60.32 115.40 151.48% of Sales Growth 98.19 28.71Net Profit 3.55 4.41 5.57LiabilitiesShare Capital 4.20 7.85 12.77Car Loan- IDBI Bank 0.00 2.42 1.55Home Loan- IDBI Bank 14.53 12.01 0.00Unsecured Loans 0.00 6.00 6.00Total Term Liabilities 18.73 28.28 20.32Current LiabilitiesWorking Capital 0.00 0.00 39.51Sundry Creditors 31.13 10.78 12.39Expenses Payable 1.08 0.68 0.96Sales Tax Payable 0.00 0.72 1.25Other liabilities 0.00 0.00 0.00Total Current Liabilities 32.21 12.18 54.11Total Liabilities 50.94 40.46 74.43AssetsInvestments 0.00 0.52 0.84Fixed Assets 16.96 19.31 17.87Total Fixed Assets 16.96 19.83 18.71Current AssetsStocks 5.15 11.43 27.15Sundry Debtors 22.43 3.46 28.52Cash in hand/Bank Balance 6.20 5.74 0.05Loans/Advances 0.00 0.00 0.00Others 0.20 0.00 0.00Total Current Assets 33.98 20.63 55.72Total Assets 50.94 40.46 74.43


Financial Indicators

Particulars31/03/2008

31/03/2009

31/03/2010

Net Working Capital (In Rs. Lacs) 1.77 8.45 1.61Current Ratio 1.05 1.69 1.03Stocking Velocity ( Days) 31 36 65Debtors Velocity (Days) 126 10 63Creditors Velocity (Days) 186 34 29

Apart from the above financials of the party, the account statement reveals the following transactions of the party with the Bank Branch (Amt. in Rs. Lacs):

Months Debit Summation

Credit Summation

April-2008 11.94 20.91May-2008 7.67 1.50June-2008 2.62 0.36July-2008 2.99 0.00August-2008 6.52 6.53September-2008 3.49 0.00October-2008 3.40 4.69November-2008 6.32 3.55December-2008 12.58 13.04January-2009 18.45 18.97February-2009 14.87 32.41March-2009 15.27 7.84Total 106.12 109.80

Comments and Observations:

Financial Indicators has been calculated as follows:

a) Net Working Capital: Total Current Assets less Total Current Liabilities.

b) Current Ratio: Total Current Assets divided by Total Current Liablities.

c) Stocking Velocity: Stock for the year divided by Cost of Goods Sold or Credit Purchase during the year multiplied by 360 days.


d) Debtors Velocity: Average Receivables or Debtors for the year divided by Credit Sales during the year multiplied by 360 days.

e) Creditors Velocity: Average Payables or Creditors for the year divided by Credit Purchase during the year multiplied by 360 days.

Other Comments and observations:

f) The party has achieved sales target of Rs. 127.00 lacs during the financial year 2008-2009, out of which Rs. 109.80 lacs has been routed through the C/C account thorough the Bank Branch. It is about 86% of sales that have been routed through the account.

g) The conduct of account has remained satisfactory.h) The firm is running on profitable lines and capital of the firm is

showing continuous increasing trend.i) The firm is availing Car Loan Facility from IDBI Bank and is

regularly depositing installments in the said account.j) The proprietor of the firm is also availing Home Loan facility again

from IDBI Bank and the party intends to adjust the same.

Assessment Of Working Capital : (Under Mortgage Loan Scheme)

Particulars Amount (in lacs)

Sales achieved during the year 2008-2009 127.00

Projected Sales for the year 2009-2010 163.46

Accepted Sales(Maximum 125% of the achieved turnover)

158.75

Permissible Limit(20% of the accepted sales)

31.75 A

Market Value of property as per valuation report

54.00

Forced Value (85% of market value) 45.90

Permissible Limit(75% of the forced Sale Value)

34.43 B

Maximum Permissible Limit(Lower of A or B)

31.75

Limit Recommended by the branch 32.00


Recommendations of the Bank

In view of above, it is recommended to sanction Cash Credit Facility of Rs. 32.00 Lacs (Rupees Thirty Two Lacs only) in favor of M/S A.M. Classic proprietor Mr. Saleem Siddique under Bank’s scheme “Mortgage Loan for Trade and Service Sector” against before said securities for a period of one year subject to renewal after review.

Rate of Interest : As per CAD guidelines

Validity : One year

Other Conditions

1. Prior to release of facility, the party shall have to adjust C/C facility of Rs. 5.50 lacs sanctioned under Normal Cash Credit Scheme of Bank.

2. Prior to release of facility, party to adjust Home loan facility with IDBI Bank in full and final


GLOSSARY

Acid test A stern measure of a company's ability to pay its short term debts, in that stock is excluded from asset value. (liquid assets/current liabilities) Also referred to as the Quick Ratio.

Cost of goods sold (COGS)

The direct costs attributable to the production of the goods sold by a company. The directly attributable costs of products or services sold (usually materials, labour, and direct production costs). COGS = net sale -gross profit.

Cash flow statement

The statement showing the movement of cash in and out of a business from day-to-day direct trading and other non-trading or indirect effects, such as capital expenditure, tax and dividend payments.

Capital employed The value of all resources available to the company, typically comprising share capital, retained profits and reserves, long-term loans and deferred taxation.

Cost of debtThe rate that has to be received from an investment in order to achieve the required rate of return from the creditors

Coverage ratiosA group of ratios that measures a firm’s ability to meet its recurring fixed charge obligations, such as interest on long term debt, lease payments, and/or proffered stock dividends

Average collection period

This represents the no. of days’ worth credit sales that is locked in debtors.

Current liabilities Liabilities that is normally payable within a year and are not for along term.

Current ratio A liquidity measures defined as current assets divided by current liabilities.

Default risk

The uncertainty of expected returns from a security attributable to possible changes in the financial capacity of the security issuer to make future payments to the security owner. Treasury securities are considered to be default free. Default risk is also referred to as “financial risk” in the context of marketable securities management.

The ratio of net sales to inventory.

Credit Appraisal & Renewal Inventory turnover

Letter of credit A letter from a bank mentioning that it has established a line of credit in favor of a certain party

Letters of guarantee

letters of guarantee are concerned with providing safeguards to buyers that suppliers will meet their obligations or vice-versa, and are issued by the supplier's or customer's bank depending on which party seeks the guarantee.

Net working capital

Net working capital is the difference between total current assets total current liabilities.

Operating cycleThe operating cycle of a firm begins with the acquisition of raw materials and ends with the collection of receivables.

Sensitivity analysis

A technique of risk analysis which studies the responsiveness of the criterion of merit like net present value or internal rate of return to variations in underlying factors like selling price, quantity sold, etc.

Term loan A loan which is generally repayable in more than one year and less than ten years.

Turn over ratiosTurn over ratios, also referred to as activity ratios or asset management ratios, measure how efficiently the firm employs the assets.

Working capital

There are two measures of working capital- gross working capital and net working capital. Gross working capital is the total of current assets. Net working capital is the difference between the total current assets and the total current liabilities.


RECOMMENDATIONS AND SUGGESTIONS

After studying the credit appraisal process at Abhyudaya C-operative Bank and observing the findings, I put forth some of my recommendations which, I firmly believe, would enhance the overall credit delivery process of the Bank and experience of corporate clients. My suggestions are as follows:

Findings:

Currently, the processing of credit proposal is done on office 2003

The Suggestions:

The processing of credit proposal can be done by using upgraded software’s like office 2007.

Findings:

The government and Reserve Bank of India have devised compromise settlement schemes to help banks recover non-performing assets especially for genuine borrowers. The scheme provides concessions and interest waivers so that immediate settlement can take place.

The Suggestions:

There are special software available that enables the bank and the user in respect of:

Speedy preparation, evaluation and approval of settlement proposals.

Availability of reliable information and systems to monitor and control the recovery process.

Thus, such software could be install to prepare and evaluate settlement schemes. The benefits of such software can be summerised as follows:

Realistic approach for evaluation of the proposal by calculating interest using different interest rates and methods.


Saves time by enabling speedy preparation of settlement proposals giving a total picture of the outstanding.

Gives comprehensive information including details of Borrowers, Credit Facilities, Present asset position and scope for recoveries.

Automates respective task in preparing the proposal, office notes/memorandum and other correspondence.

Extensive MIS reports facilitate monitoring and reporting to Central office/ RBI and other regulatory authorities.


CONCLUSION

The study at Abhyudaya Co-operative Bank gave a vast learning experience to me and has helped to enhance my knowledge. During the study I learnt how the theoretical financial analysis aspects are used in practice during the working capital finance assessment. I have realized during my project that a credit analyst must own multi-disciplinary talents like financial, technical as well as legal know-how.

The credit appraisal for working capital finance system has been devised in a systematic way. There are clear guidelines on how the credit analyst or lending officer has to analyze a loan proposal. It includes phase-wise analysis which consists of 5 phases:

1. Financial statement analysis2. Working capital and its assessment techniques

3. Credit risk assessment

4. Documentation

5. Loan administration

Abhyudaya Co-operative bank’s adoptions of the Projected Balance Sheet method of assessment procedures are based on sound principles of lending. This method of assessment has certain flexibility required to avoid any rigid approach to fixing quantum of finance. It is superior and more rational compared to the Turnover Method, Cash Budget Method of assessment. It also facilitates the Bank to carry on follow up procedures. The PBS method have been rationalized and simplified to facilitate complete flexibility in decision-making.

To ensure asset quality, proper risk assessment right at the beginning, is extremely important. That is why Credit Risk Assessment system is an essential ingredient of the Credit Appraisal exercise. It considers important parameters like profitability, repayment capacity, efficiency of the unit, historical / industry comparisons etc…

The Credit Policy of the Bank should be reviewed periodically by taking into account changes in money market, changes in credit policy announced y Reserve Bank of India and happening of other events to protect the interest of the bank and to maintain profitability.


Proper credit appraisal involving performance of the client, sureties and industrial visits can help bank to reduce its NPA’s and hence to reduce its credit risk.


BIBLIOGRAPHY Reference:

Books & Publications:

Macro Economics: D.N. Mithani.

Financial Management: Prasanna Chandra.

Abhyudaya Bank manuals and circulars

Credit Policy of Abhyudaya Bank

Webliography:

Websites: www.abhyudayabank.com

www.google.co.in

www.rbi.org.in

www.wikipedia.org

www.investopedia.com

http://www.investopedia.com/

http://www.wikipedia.org/

http://www.rbi.org.in/

http://www.google.co.in/

http://www.abhyudayabank.com/

47733306 Abhyudaya Bank 2

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