RESEARCH METHODOLOGY

CORPORATE BANKING

STATEMENT OF PROBLEM:

To study the emergence and evolution of the corporate banking as an important division of

the commercial banking and also to study the credit appraisal models supporting the

increased activities of corporate lending by banks.

In today’s global Banking arena, Corporate Bankers are facing a string of unprecedented and

sweeping challenges in the areas like Treasury Management, Trade Finance, Risk

Management, Compliance Management, Electronic Trading and Derivatives Markets.

Compounding this are the mounting complexities from ongoing regulatory changes,

decreasing margins and fierce competition

NEED FOR STUDY:

Over the period of time, with the tremendous increase in the growth pattern of industrial

development, the need for the corporate loans have increased more than ever. So, the

increasing trend urges the banks and financial institutions to focus on corporate banking as a

separate division. So, the researchers have preferred to study the concept of corporate

banking and all the operational aspects attached to it in the entire process.

OBJECTIVE OF THE STUDY:

To study the banking industry, as a whole with the help of various analysis including

SWOT analysis, PEST analysis and Porter’s Five Force analysis.

To acquire basic knowledge about the corporate lending in India and its relevance

with respect to banks.

To analyze the credit risk models of both public bank and private bank and bring out

its comparative picture on the basis of various parameters.

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To study credit risk management strategies of bank.

RESEARCH DESIGN:

A research design is the arrangement of the condition for collection and analysis of data.

Actually it is the blueprint of the research project. The research type is descriptive research.

The main objective of this design is search primary and secondary data.

The research primarily focuses on the secondary sources and first hand information through

focus group interviews.

DATA COLLECTION:

As the research type is descriptive, the method of data collection was informal.

SOURCES:

The relevant information were collected from both primary and secondary sources like follow

up with bank managers web search, newspaper articles

TOOLS:

Focus group interviews with the managers of banks.

BENEFICIARIES:

For the banks:

It will give them the in depth review of the various aspects involved in the corporate banking

with emphasis on the credit risk management.

For the corporates:

The report shows the comparative study of the credit appraisal and sanctioning procedure

involved in the credit lending by banks as well as financial institutions. Secondly, they will

also get the relevance of the corporate lending by the banks and its various relevant aspects.

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For the management students:

The report studies the entire banking industry from various aspects using different analytical

tools. Secondly, it introduces into the world of credit lending and its trend in India. Moreover,

it also shows the operational procedures involved in the corporate lending with emphasis on

risk modeling and credit risk management.

LIMITATIONS OF THE STUDY:

The scope of the report is mainly depends on the information extracted from secondary

sources and the information given by the managers of banks. So, lack of the availability of

the first hand information may act as a limitation to the project report.

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CHAPTER: 1

AN OVERVIEW ON BANKING INDUSTRY

In recent years, the banking industry around the world has been undergoing a rapid

transformation. In India also, the wave of deregulation of early 1990s has created heightened

competition and greater risk for banks and other financial intermediaries. The cross-border

flows and entry of new players and products have forced banks to adjust the product-mix and

undertake rapid changes in their processes and operations to remain competitive. The

deepening of technology has facilitated better tracking and fulfillment of commitments,

multiple delivery channels for customers and faster resolution of miscoordinations.

Unlike in the past, the banks today are market driven and market responsive. The top concern

in the mind of every bank's CEO is increasing or at least maintaining the market share in

every line of business against the backdrop of heightened competition. With the entry of new

players and multiple channels, customers (both corporate and retail) have become more

discerning and less "loyal" to banks. This makes it imperative that banks provide best

possible products and services to ensure customer satisfaction. To address the challenge of

retention of customers, there have been active efforts in the banking circles to switch over to

customer-centric business model. The success of such a model depends upon the approach

adopted by banks with respect to customer data management and customer relationship

management.

Over the years, Indian banks have expanded to cover a large geographic & functional area to

meet the developmental needs. They have been managing a world of information about

customers - their profiles, location, etc. They have a close relationship with their customers

and a good knowledge of their needs, requirements and cash positions. Though this offers

them a unique advantage, they face a fundamental problem.

During the period of planned economic development, the bank products were bought in India

and not sold. What our banks, especially those in the public sector lack are the marketing

attitude. Marketing is a customer-oriented operation. What is needed is the effort on their part

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to improve their service image and exploit their large customer information base effectively

to communicate product availability. Achieving customer focus requires leveraging existing

customer information to gain a deeper insight into the relationship a customer has with the

institution, and improving customer service-related processes so that the services are quick,

error free and convenient for the customers.

Furthermore, banks need to have very strong in-house research and market intelligence units

in order to face the future challenges of competition, especially customer retention.

Marketing is a question of demand (customers) and supply (financial products & services,

customer services through various delivery channels). Both demand and supply have to be

understood in the context of geographic locations and competitor analysis to undertake

focused marketing (advertising) efforts. Focusing on region-specific campaigns rather than

national media campaigns would be a better strategy for a diverse country like India.

Customer-centricity also implies increasing investment in technology. Throughout much of

the last decade, banks world-over have re-engineered their organizations to improve

efficiency and move customers to lower cost, automated channels, such as ATMs and online

banking.

As is proved by the experience, banks are now realizing that one of their best assets for

building profitable customer relationships especially in a developing country like India is the

branch-branches are in fact a key channel for customer retention and profit growth in rural

and semi-urban set up. However, to maximize the value of this resource, our banks need to

transform their branches from transaction processing centers into customer-centric service

centers. This transformation would help them achieve bottom line business benefits by

retaining the most profitable customers. Branches could also be used to inform and educate

customers about other, more efficient channels, to advise on and sell new financial

instruments like consumer loans, insurance products, mutual fund products, etc.

There is a growing realization among Indian banks that it no longer pays to have a

"transaction-based" operating model. There are active efforts to develop a relationship-

oriented model of operations focusing on customer-centric services. The biggest challenge

our banks face today is to establish customer intimacy without which all other efforts towards

operational excellence are meaningless. The banks need to ensure through their services that

the customers come back to them. This is because a major chunk of income for most of the

banks comes from existing customers, rather than from new customers.

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Customer relationship management (CRM) solutions, if implemented and integrated

correctly, can help significantly in improving customer satisfaction levels. Data warehousing

can help in providing better transaction experiences for customers over different transaction

channels. This is because data warehousing helps bring all the transactions coming from

different channels under the same roof. Data mining helps banks analyse and measure

customer transaction patterns and behaviour. This can help a lot in improving service levels.

It must be noted, however, that customer-centric banking also involves many risks. The

banking industry world over is being thrust into a wild new world of privacy controversy.

The banks need to set up serious governance systems for privacy risk management. It must be

remembered that customer privacy issues threaten to compromise the use of information

technology which is at the very center of e-commerce and customer relationship management

- two areas which are crucial for banks' future.

The critical issue for banks is that they will not be able to safeguard customer privacy

completely without undermining the most exciting innovations in banking. These innovations

promise huge benefits, both for customers and providers. But to capture them, financial

services companies and their customers will have to make some critical tradeoffs. When the

stakes are so high, nothing can be left to chance, which is why banks must immediately begin

developing comprehensive approaches to the privacy issue.

The customer centric business models based on the applications of information technology

are sustainable only if the banks protect client confidentiality in the process - which is the

basic foundation of banking business.

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1.1 EVOLUTION OF BANKING IN INDIA

Banking in India has its origin as early as the Vedic period. It is believed that the transition

from money lending to banking must have occurred even before Manu, the great Hindu

Jurist, who has devoted a section of his work to deposits and advances and laid down rules

relating to rates of interest. During the Mogul period, the indigenous bankers played a very

important role in lending money and financing foreign trade and commerce. During the days

of the East India Company, it was the turn of the agency houses to carry on the banking

business.

The General Bank of India was the first Joint Stock Bank to be established in the year 1786.

The others which followed were the Bank of Hindustan and the Bengal Bank. The Bank of

Hindustan is reported to have continued till 1906 while the other two failed in the meantime.

In the first half of the 19th century the East India Company established three banks; the Bank

of Bengal in 1809, the Bank of Bombay in 1840 and the Bank of Madras in 1843. These three

banks also known as Presidency Banks were independent units and functioned well. These

three banks were amalgamated in 1920 and a new bank, the Imperial Bank of India was

established on 27th January 1921. With the passing of the State Bank of India Act in 1955 the

undertaking of the Imperial Bank of India was taken over by the newly constituted State

Bank of India.

The Reserve Bank which is the Central Bank was created in 1935 by passing Reserve Bank

of India Act 1934. In the wake of the Swadeshi Movement, a number of banks with Indian

management were established in the country namely, Punjab National Bank Ltd, Bank of

India Ltd, Canara Bank Ltd, Indian Bank Ltd, the Bank of Baroda Ltd, the Central Bank of

India Ltd. On July 19, 1969, 14 major banks of the country were nationalized and in 15 th

April 1980 six more commercial private sector banks were also taken over by the

government.

The Indian banking can be broadly categorized into nationalized (government owned),

private banks and specialized banking institutions. The Reserve Bank of India acts a

centralized body monitoring any discrepancies and shortcoming in the system. Since the

nationalization of banks in 1969, the public sector banks or the nationalized banks have 7

acquired a place of prominence and has since then seen tremendous progress. The need to

become highly customer focused has forced the slow-moving public sector banks to adopt a

fast track approach. The unleashing of products and services through the net has galvanized

players at all levels of the banking and financial institutions market grid to look anew at their

existing portfolio offering.

Conservative banking practices allowed Indian banks to be insulated partially from the Asian

currency crisis. Indian banks are now quoting a higher valuation when compared to banks in

other Asian countries (viz. Hong Kong, Singapore, Philippines etc.) that have major problems

linked to huge Non Performing Assets (NPAs) and payment defaults. Co-operative banks are

nimble footed in approach and armed with efficient branch networks focus primarily on the

‘high revenue’ niche retail segments.

The Indian banking has finally worked up to the competitive dynamics of the ‘new’ Indian

market and is addressing the relevant issues to take on the multifarious challenges of

globalization. It has come a long way from being a sleepy business institution to a highly

proactive and dynamic entity. Banks that employ IT solutions are perceived to be ‘futuristic’

and proactive players capable of meeting the multifarious requirements of the large customers

base. Private banks have been fast on the uptake and are reorienting their strategies using the

internet as a medium The Internet has emerged as the new and challenging frontier of

marketing with the conventional physical world tenets being just as applicable like in any

other marketing medium.

This transformation has been largely brought about by the large dose of liberalization and

economic reforms that allowed banks to explore new business opportunities rather than

generating revenues from conventional streams (i.e. borrowing and lending).

The banking in India is highly fragmented with 30 banking units contributing to almost 50%

of deposits and 60% of advances. Indian nationalized banks (banks owned by the

government) continue to be the major lenders in the economy due to their sheer size and

penetrative networks which assures them high deposit mobilization. The Indian banking can

be broadly categorized into nationalized, private banks and specialized banking institutions.

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The Reserve Bank of India acts as a centralized body monitoring any discrepancies and

shortcoming in the system. It is the foremost monitoring body in the Indian financial sector.

The nationalized banks (i.e. government-owned banks) continue to dominate the Indian

banking arena. Industry estimates indicate that out of 274 commercial banks operating in

India, 223 banks are in the public sector and 51 are in the private sector. The private sector

bank grid also includes 24 foreign banks that have started their operations here. Under the

ambit of the nationalized banks come the specialized banking institutions. These co-

operatives, rural banks focus on areas of agriculture, rural development etc., unlike

commercial banks these co-operative banks do not lend on the basis of a prime lending rate.

They also have various tax sops because of their holding pattern and lending structure and

hence have lower overheads. This enables them to give a marginally higher percentage on

savings deposits. Many of these cooperative banks diversified into specialized areas

(catering to the vast retail audience) like car finance, housing loans, truck finance etc. in

order to keep pace with their public sector and private counterparts, the co-operative banks

too have invested heavily in information technology to offer high-end computerized banking

services to its clients.

Complementing the roles of the nationalized and private banks are the specialized financial

institutions or Non Banking Financial Institutions (NBFCs). With their focused portfolio of

products and services, these Non Banking Financial Institutions act as an important catalyst

in contributing to the overall growth of the financial services sector. NBFCs offer loans for

working capital requirements, facilitate mergers and acquisitions, IPO finance, etc. apart from

financial consultancy services. Trends are now changing as banks (both public and private)

have now started focusing on NBFC domains like long and medium-term finance, working

cap requirements, IPO financing etc. to meet the multifarious needs of the business

community.

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1.2 STRUCTURE OF BANKING INDUSTRY:

Banking system plays an important role in a country’s economy. It promotes growth and

development of the country. Indian money market comprises organized and the unorganized

institutions. The organized and unorganized institutions in the Indian banking system serve a

source of short term credit to agriculture, industry, trade and commerce.

In the Indian banking structure the Reserve Bank of India is the central bank. It regulates,

direct and controls the banking and financial institutions in the country. There are three high

banking institutions, namely, RBI, NABARD and EXIM Bank. There are separate financial

institutions catering to the needs of different sectors of the economy. Development Banks,

Investment Banks, Co-operative Banks, Land Development Banks, Commercial Banks in

public and private sectors, NABARD, RRBs, EXIM Bank, etc. The indigenous bankers and

moneylenders dominate unorganized sector.

The Indian banking structure can be seen from the chart shown under:

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Apex Banking Institution

RBI IDBI NABARD EXIM Bank SIDBI NHB IRBI

Banking Institutions

Commercial Regional Rural Co- operative Land Development DevelopmentBanks Banks Banks Banks Bank

Public Private Foreign PAC’s CCB’s SCB’s PLD’s SLDBSector Sector exchangeBanks Bank Banks

All India State Level Level

SBI and NationalisedSubsidiaries Banks IDBI ICICI SIDBI SFC’s SIDC

Foreign Indian Non – Schedule

Bank Scheduled Bank Bank

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The chart reveals that there are several apex banking institutions working at the national

level. RBI is the highest banking authority regulating, directing and controlling all the

banking and financial institutions in the country. There are development banks, namely IDBI,

SIDBI, ICICI at the national level and State Financial Corporations and State Industrial

Development Corporations which have been set-up.

There are 29 public sector banks. Co-operative banks have three tier system. At the village

level there is Primary Agriculture Co-operative Society(PACs), at the district level there is

Central Co-operative Bank and at the state level there is State Co-operative Bank. Co-

operative banks provide short term and medium loans to the agriculture sector. Land

Development Banks provide long term agriculture credit. It comprises Primary Land

Development Bank(PLDB) at ht district level and State Land Development Bank(SLDB) at

the state level. RRBs provide loans and advances to the rural poor and NABARD is an apex

body regulating, directing and controlling the financial and banking institutions providing

finance for the agriculture and rural development.

TYPES OF BANKS

Modern age is the age of specialization with the changing situation worldwide, bank

functions have also undergone a major change. Economic conditions and financial needs of a

country are different than those of other countries throughout the world. Some financial

institutions deal in accepting deposits and making loans and advances to different sectors of

the economy. Some institution makes loans and advances for medium and short term, while

others are meant for long term advances. Some are financing industrial sector and foreign

trade while others are advancing loans to agriculture sector.

In broader sense of the term banks may be classified into following categories:

Central Bank

Commercial Banks

Development Banks

Investment Banks12

Co-operative Banks

Foreign Exchange Banks

Savings Banks

Export-Import Bank

Specialized National Banks

Indigenous Bankers

International Financial Institutions

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1.3 GROWTH OF BANKING SECTOR(DECADE WISE)

Pre-Liberalization: The growth of the Banking Sector in the pre liberalization period can be

analyzed as under.

1971-80:

This was the decade immediately following the Nationalization of 14 commercial banks.

Also the banking sector grew at the fastest pace in this decade.

1. Assets:

The assets of the sector grew at 21.58 % CAGR1. They increased from RS.82.52bn to

Rs.582.33bn. This kind of growth was achieved due to massive increase in the number of

branches resulting in a spurt in deposit mobilization.

2. Deposits:

The deposits grew from Rs.64.79bn to Rs.439.87bn. at a CAGR 21.11 %. The growth was

higher in later part of the decade. This growth rate would have been higher had the current

accounts grown at a rate higher than 18 %. This indicates people’s preference for using bank

as place to keep their savings. The bank was not used as a place to keep money to be used for

transaction motive. This is further clarified by the poor ratio of average current deposits to

total deposits at 23.45 %.

3. Advances:

The advances grew at 19.26 % CAGR from Rs.46.85bn to Rs.272.67bn. Also the growth was

higher in the later part of the decade. Thus the advances grew at a pace slower than the

deposits due to decreasing credit deposit ratio, which reduced from 72.30 % in 1970 to 61.99

% in 1980.

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4. Net worth:

The Net worth increased from Rs.1.16bn to Rs.5.33bn at a CAGR of 16.48 %.

The Capital of the banks remained flat throughout the decade growing at just 8.54 % and also

the growth came in the later part of the decade. The capital increased form Rs.470.2mn to

Rs.1.07bn.

However, the Reserves grew at a healthy pace of 20 % CAGR from Rs.690mn to Rs.4.27bn.

Thus the banks in this decade did not raise capital and funded their growth from internal

accruals. This resulted in a wide gap between Reserves and Capital indicating the banks’

hunger for Capital.

1981-90:

1. Assets:

The growth of the sector was significantly subdued since the last decade. The assets grew at

just 16.30 % CAGR compared to 21.58 % in the previous decade. The total assets increased

from Rs.582.33bn to Rs.2636.93bn.

2. Deposits:

Deposits increased from Rs.439.86bn to Rs.1820.46bn at a CAGR of 15.26 %. The current

accounts remained the usual laggards in terms of growth growing at just 12.67 % CAGR. The

term and saving deposits grew at a slightly faster pace of 16.17 % and 15.5 % CAGR.

3. Advances:

Advances grew at a CAGR of 16.79 % from Rs.272.67bn to Rs.1287.85bn. This is due to the

fact that the banks have stepped up their credit-deposit ratio from 62 % to 70.74 %. This

indicates higher investment than saving in the economy.

4. Net worth:

The Net worth increased from Rs.5.33bn to Rs.47.1bn. Thus the net worth grew at a

whopping 24.33 % CAGR.

The capital hungry banks went on capital raising spree in the latter half of the decade. Thus

the capital grew at a CAGR of 34.53 %. In absolute terms, the capital soared from Rs.1.06bn

at the beginning of the decade to Rs.20.73bn at the end of the decade.

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The Reserves however grew at more or less constant pace of 19.97 % CAGR throughout the

decade.

At the end of the decade the Capital had kept pace with the Reserves and the gap between

them had significantly narrowed down.

Post-Liberalization: The growth of this sector after 1991 can be represented as under.

1991-2000:

1. Assets:

The rate of the sector further slowed down during this decade. The assets grew at a CAGR of

15.24 % from Rs.2636.93bn to Rs.11103.68bn. The growth rate however, was greater in the

later part of the decade indicating future prospects of increase in growth.

2. Deposits:

The deposits grew from Rs.1820.47bn to Rs.9003.06bn at a CAGR of 16.69 %. There was a

spurt in the last 3-4 years of the decade indicating improving trend. In this decade however,

the savings accounts were the laggards in terms of growth at 13.34 % CAGR. The term

deposits grew at 18.38 % and current deposits grew at 15.23 %. This reversal of trend in

growth rates shows that the people are increasingly using banks to deposit money to be used

for transaction motive.

3. Advances:

The advances increased from Rs.1287.85bn to Rs.4434.69bn at a CAGR of 12.46 %. The

lower growth in advances is due to the decline in credit-deposit ratio from 70.74 % in 1990 to

49.26 %. This shows there was a marked decline in investment in this decade with savings

exceeding investment.

4. Net worth:

The Net worth grew at a feverish pace of 36.60 % CAGR, the highest in last three decades.

This was mainly because the RBI opened the Banking sector to Private sector. As many as 9

New Private Sector Banks started their operations in this period. They brought a lot of capital

in the period 1993-95. However in the later half of the decade, capital growth was virtually

nil.

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The Reserves grew at 37.54 % CAGR from Rs.26.36bn Rs.438.34bn. However, contrary to

Capital the Reserves recorded exceptional growth in the later half of the decade due to

improving profits of private as well as public sector banks. However the gap between

reserves and capital is once again widening.

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1.4 FUTURE LANDSCAPE OF INDIAN BANKING

Liberalization and de-regulation process started in 1991-92 has made a sea change in the

banking system. From a totally regulated environment, we have gradually moved into a

market driven competitive system. Our move towards global benchmarks has been, by and

large, calibrated and regulator driven. The pace of changes gained momentum in the last few

years. Globalization would gain greater speed in the coming years particularly on account of

expected opening up of financial services under WTO. Four trends change the banking

industry world over, viz. 1) Consolidation of players through mergers and acquisitions, 2)

Globalisation of operations, 3) Development of new technology and 4) Universalisation of

banking. With technology acting as a catalyst, we expect to see great changes in the banking

scene in the coming years. The Committee has attempted to visualize the financial world 5-10

years from now. The picture that emerged is somewhat as discussed below. It entails

emergence of an integrated and diversified financial system. The move towards universal

banking has already begun. This will gather further momentum bringing non-banking

financial institutions also, into an integrated financial system.

The traditional banking functions would give way to a system geared to meet all the financial

needs of the customer. We could see emergence of highly varied financial products, which

are tailored to meet specific needs of the customers in the retail as well as corporate

segments. The advent of new technologies could see the emergence of new financial players

doing financial intermediation. For example, we could see utility service providers offering

say, bill payment services or supermarkets or retailers doing basic lending operations. The

conventional definition of banking might undergo changes.

The competitive environment in the banking sector is likely to result in individual players

working out differentiated strategies based on their strengths and market niches. For example,

some players might emerge as specialists in mortgage products, credit cards etc. whereas

some could choose to concentrate on particular segments of business system, while

outsourcing all other functions. Some other banks may concentrate on SME segments or

high net worth individuals by providing specially tailored services beyond traditional banking

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offerings to satisfy the needs of customers they understand better than a more generalist

competitor.

International trade is an area where India’s presence is expected to show appreciable increase.

With the growth in IT sector and other IT Enabled Services, there is tremendous potential for

business opportunities. Keeping in view the GDP growth forecast under India Vision 2020,

Indian exports can be expected to grow at a sustainable rate of 15% per annum in the period

ending with 2010. This again will offer enormous scope to Banks in India to increase their

forex business and international presence. Globalization would provide opportunities for

Indian corporate entities to expand their business in other countries. Banks in India wanting

to increase their international presence could naturally be expected to follow these corporates

and other trade flows in and out of India.

Retail lending will receive greater focus. Banks would compete with one another to provide

full range of financial services to this segment. Banks would use multiple delivery channels

to suit the requirements and tastes of customers. While some customers might value

relationship banking (conventional branch banking), others might prefer convenience banking

(e-banking).

One of the concerns is quality of bank lending. Most significant challenge before banks is

the maintenance of rigorous credit standards, especially in an environment of increased

competition for new and existing clients. Experience has shown us that the worst loans are

often made in the best of times. Compensation through trading gains is not going to support

the banks forever. Large-scale efforts are needed to upgrade skills in credit risk measuring,

controlling and monitoring as also revamp operating procedures. Credit evaluation may have

to shift from cash flow based analysis to “borrower account behaviour”, so that the state of

readiness of Indian banks for Basle II regime improves. Corporate lending is already

undergoing changes. The emphasis in future would be towards more of fee based services

rather than lending operations. Banks will compete with each other to provide value added

services to their customers.

Structure and ownership pattern would undergo changes. There would be greater presence of

international players in the Indian financial system. Similarly, some of the Indian banks

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would become global players. Government is taking steps to reduce its holdings in Public

sector banks to 33%. However the indications are that their PSB character may still be

retained.

Mergers and acquisitions would gather momentum as managements will strive to meet the

expectations of stakeholders. This could see the emergence of 4-5 world class Indian Banks.

As Banks seek niche areas, we could see emergence of some national banks of global scale

and a number of regional players.

Corporate governance in banks and financial institutions would assume greater importance in

the coming years and this will be reflected in the composition of the Boards of Banks.

Concept of social lending would undergo a change. Rather than being seen as directed

lending such lending would be business driven. With SME sector expected to play a greater

role in the economy, Banks will give greater overall focus in this area. Changes could be

expected in the delivery channels used for lending to small borrowers and agriculturalists and

unorganized sectors (micro credit). Use of intermediaries or franchise agents could emerge as

means to reduce transaction costs.

Technology as an enabler is separately discussed in the report. It would not be out of place,

however, to state that most of the changes in the landscape of financial sector discussed

above would be technology driven. In the ultimate analysis, successful institutions will be

those which continue to leverage the advancements in technology in re-engineering processes

and delivery modes and offering state-of-the-art products and services providing complete

financial solutions for different types of customers.

Human Resources Development would be another key factor defining the characteristics of a

successful banking institution. Employing and retaining skilled workers and specialists, re-

training the existing workforce and promoting a culture of continuous learning would be a

challenge for the banking institutions.

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1.5 BANKING INDUSTRY REFORMS AND VISION 2010

“A vision is not a project report or a plan target. It is an articulation of the desired end

results in broader terms” - A.P.J.Abdul Kalam

Vision is of an integrated banking and finance system catering to all financial intermediation

requirements of customers. Strong market players will strive to uncover markets and provide

all services, combining innovation, quality, personal touch and flexibility in delivery. The

growing expectations of the customers are the catalyst for our vision. The customer would

continue to be the centre-point of our business strategy. In short, you lose touch with the

customer, and you lose everything.

It is expected that the Indian banking and finance system will be globally competitive. For

this the market players will have to be financially strong and operationally efficient. Capital

would be a key factor in building a successful institution. The banking and finance system

will improve competitiveness through a process of consolidation, either through mergers and

acquisitions through strategic alliances.

Technology would be the key to the competitiveness of banking and finance system. Indian

players will keep pace with global leaders in the use of banking technology. In such a

scenario, on-line accessibility will be available to the customers from any part of the globe;

‘Anywhere’ and ‘Anytime’ banking will be realized truly and fully. At the same time ‘brick

and mortar’ banking will co-exist with ‘on-line’ banking to cater to the specific needs of

different customers.

Indian Banking system has played a crucial role in the socio-economic development of the

country. The system is expected to continue to be sensitive to the growth and development

needs of all the segments of the society. The banking system that will evolve will be

transparent in its dealings and adopt global best practices in accounting and disclosures

driven by the motto of value enhancement for all stakeholders.

Financial Sector Reforms set in motion in 1991 have greatly changed the face of Indian

Banking. The banking industry has moved gradually from a regulated environment to a

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deregulated market economy. The market developments kindled by liberalization and

globalization have resulted in changes in the intermediation role of banks. The pace of

transformation has been more significant in recent times with technology acting as a catalyst.

While the banking system has done fairly well in adjusting to the new market dynamics,

greater challenges lie ahead. Financial sector would be opened up for greater international

competition under WTO. Banks will have to gear up to meet stringent prudential capital

adequacy norms under Basel II. In addition to WTO and Basel II, the Free Trade Agreements

(FTAs) such as with Singapore, may have an impact on the shape of the banking industry.

Banks will also have to cope with challenges posed by technological innovations in banking.

Banks need to prepare for the changes. In this context the need for drawing up a Road Map to

the future assumes relevance. The idea of setting up a Committee to prepare a Vision for the

Indian Banking industry came up in IBA, in this background.

Managing Committee of Indian Banks’ Association constituted a Committee under the

Chairmanship of Shri S C Gupta, Chairman & Managing Director, Indian Overseas Bank to

prepare a Vision Report for the Indian Banking Industry. The composition of the Committee

is given at the end of the report.

The Committee held its first meeting on 23rd June 2003 at Mumbai. Prior to the meeting the

members were requested to give their thoughts on the future landscape of the banking

industry. A discussion paper based on the responses received from members was circulated

along with a questionnaire eliciting views of members on some of the specific issues

concerning anticipated changes in the banking environment. In the meeting, which served as

a brainstorming session, members gave their Vision of the future. A second meeting of the

Committee was held at Chennai on 7th August 2003 to have further discussions on the

common views, which emerged in the first meeting, and also to examine fresh areas to be

covered in the study.

22

The Vision Statement prepared by the Committee is based on common thinking that

crystallized at the meetings. In the Chennai meeting it was decided to form a smaller

group from among the members to draft the report of the Committee. The group met

thrice to finalize the draft report. The report was adopted in the final meeting of the

Committee held at Mumbai.

When we talk about the future, it is necessary to have a time horizon in mind. The

Committee felt, it would be rather difficult to visualize the landscape of banking industry

say, 20 years hence due to the dynamic environment. While Government of India

brought out India Vision 2020, the Committee is of the view that the pace of changes

taking place in the banking industry and in the field of Information Technology would

render any attempt to visualize the banking scenario in 2020, inconceivable. The entire

financial services sector may undergo a dramatic transformation. It was, therefore, felt

that we should set our goals for the near future say, for 5-10 years hence and

appropriately call this exercise “Banking Industry – Vision 2010”. The three main

aspects focused in the banking vision includes product innovation, process re-engineering

and technology.

PRODUCT INNOVATION AND PROCESS RE-ENGINEERING

With increased competition in the banking Industry, the net interest margin of banks has

come down over the last one decade. Liberalization with Globalization will see the

spreads narrowing further to 1-1.5% as in the case of banks operating in developed

countries. Banks will look for fee-based income to fill the gap in interest income. Product

innovations and process re-engineering will be the order of the day. The changes will be

motivated by the desire to meet the customer requirements and to reduce the cost and

improve the efficiency of service. All banks will therefore go for rejuvenating their

costing and pricing to segregate profitable and non-profitable business. Service charges

will be decided taking into account the costing and what the traffic can bear. From the

23

earlier revenue = cost + profit equation i.e., customers are charged to cover the costs

incurred and the profits expected, most banks have already moved into the profit

=revenue - cost equation. This has been reflected in the fact that with cost of services

staying nearly equal across banks, the banks with better cost control are able to achieve

higher profits whereas the banks with high overheads due to under-utilisation of

resources, un-remunerative branch network etc., either incurred losses or made profits not

commensurate with the capital employed. The new paradigm in the coming years will be

cost = revenue - profit.

As banks strive to provide value added services to customers, the market will see the

emergence of strong investment and merchant banking entities. Product innovation and

creating brand equity for specialized products will decide the market share and volumes.

New products on the liabilities side such as forex linked deposits, investment-linked

deposits, etc. are likely to be introduced, as investors with varied risk profiles will look

for better yields. There will be more and more of tie-ups between banks, corporate

clients and their retail outlets to share a common platform to shore up revenue through

increased volumes.

24

Banks will increasingly act as risk managers to corporate and other entities by offering a

variety of risk management products like options, swaps and other aspects of financial

management in a multi currency scenario. Banks will play an active role in the

development of derivative products and will offer a variety of hedge products to the

corporate sector and other investors. For example, Derivatives in emerging futures

market for commodities would be an area offering opportunities for banks. As the

integration of markets takes place internationally, sophistication in trading and

specialized exchanges for commodities will expand. As these changes take place,

banking will play a major role in providing financial support to such exchanges,

facilitating settlement systems and enabling wider participation.

Bancassurance is catching up and Banks / Financial Institutions have started entering

insurance business. From mere offering of insurance products through network of bank

branches, the business is likely to expand through self-designed insurance products after

necessary legislative changes. This could lead to a spurt in fee-based income of the

banks.

Similarly, Banks will look analytically into various processes and practices as these exist

today and may make appropriate changes therein to cut costs and delays. Outsourcing

and adoption of BPOs will become more and more relevant, especially when Banks go in

for larger volumes of retail business. However, by increasing outsourcing of operations

through service providers, banks are making themselves vulnerable to problems faced by

these providers. Banks should therefore outsource only those functions that are not

strategic to banks’ business. For instance, in the wake of implementation of 90 days’

delinquency norms for classification of assets, some banks may think of engaging

external agencies for recovery of their dues and in NPA management.

25

Banks will take on competition in the front end and seek co-operation in the back end, as

in the case of networking of ATMs. This type of co-opetition will become the order of

the day as Banks seek to enlarge their customer base and at the same time to realize cost

reduction and greater efficiency.

TECHNOLOGY IN BANKING

Technology will bring fundamental shift in the functioning of banks. It would not only

help them bring improvements in their internal functioning but also enable them to

provide better customer service. Technology will break all boundaries and encourage

cross border banking business. Banks would have to undertake extensive Business

Process Re-Engineering and tackle issues like a) how best to deliver products and

services to customers b) designing an appropriate organizational model to fully capture

the benefits of technology and business process changes brought about. c) how to exploit

technology for deriving economies of scale and how to create cost efficiencies, and d)

how to create a customer - centric operation model.

Entry of ATMs has changed the profile of front offices in bank branches. Customers no

longer need to visit branches for their day to day banking transactions like cash deposits,

withdrawals, cheque collection, balance enquiry etc. E-banking and Internet banking

have opened new avenues in “convenience banking”. Internet banking has also led to

reduction in transaction costs for banks to about a tenth of branch banking.

Technology solutions would make flow of information much faster, more accurate and

enable quicker analysis of data received. This would make the decision making process

faster and more efficient. For the Banks, this would also enable development of appraisal

and monitoring tools which would make credit management much more effective. The

result would be a definite reduction in transaction costs, the benefits of which would be

shared between banks and customers.

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While application of technology would help banks reduce their operating costs in the

long run, the initial investments would be sizeable. With greater use of technology

solutions, we expect IT spending of Indian banking system to go up significantly.

One area where the banking system can reduce the investment costs in technology

applications is by sharing of facilities. We are already seeing banks coming together to

share ATM Networks. Similarly, in the coming years, we expect to see banks and FIs

coming together to share facilities in the area of payment and settlement, back office

processing, data warehousing, etc. While dealing with technology, banks will have to

deal with attendant operational risks. This would be a critical area the Bank management

will have to deal with in future.

Payment and Settlement system is the backbone of any financial market place.

The present Payment and Settlement systems such as Structured Financial Messaging

System (SFMS), Centralised Funds Management System (CFMS), Centralized Funds

Transfer System (CFTS) and Real Time Gross Settlement System (RTGS) will undergo

further fine-tuning to meet international standards. Needless to add, necessary security

checks and controls will have to be in place. In this regard, Institutions such as IDRBT

will have a greater role to play.

27

CHAPTER: 2

STRATEGIC ANALYSIS OF BANKING INDUSTRY

2.1 PORTER’S FIVE FORCE ANALYSIS:

Prof. Michael Porter’s competitive forces Model applies to each and every company as

well as industry. This model with regards to the Banking Industry is presented below:

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Rivalry among existing firms

(2)Potential Entrants is high as Development Financial Institutions as well as Private and foreign banks have entered in a big way.

(1)Rivalry among Existing Firms has increased with liberalization. New products and improved customer services is the focus.

(4)Bargaining Power of Buyers is high as corporate can raise funds easily due to high competition.

(5)Organizing Power of the Supplier is high. With new financial instruments they are asking higher return on investment.

(3)Threat from Substitute is high due to competition from NBFCs & Insurance companies as they offer a higher rate of interest than banks.

29

With the process of liberalization, competition among the existing banks has increased.

Each bank is coming up with new products to attract the customers and tailor made loans

are provided. The quality of services provided by banks has improved drastically.

Potential Entrants

Previously the Development Financial Institutions mainly provided project finance and

development activities. But they have now entered into retail banking which has resulted

into stiff competition among the existing players

Threats from Substitutes

Banks face threats from Non-Banking Financial Companies. NBFCs offer a higher rate of

interest.

Bargaining Power of Buyers

Corporates can raise their funds through primary market or by issue of GDRs, FCCBs. As

a result they have a higher bargaining power. Even in the case of personal finance, the

buyers have a higher bargaining power. This is mainly because of competition.

Bargaining power of Suppliers

With the advent of new financial instruments providing a higher rate of returns to the

investors, the investments in deposits is not growing in a phased manner. The suppliers

demand a higher return for the investments.

Overall Analysis

The key issue is that how can banks leverage their strengths to have a better future. Since

the availability of funds is more and deployment of funds is less, banks should evolve

new products and services to the customers. There should be rational thinking in

sanctioning loans, which will bring down the NPAs. As there is expected revival in the

Indian economy banks have a major role to play. Funding corporate at a low cost of

capital is a major requisite.

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2.2 SWOT ANALYSIS:

The banking sector is often taken as a proxy for the economy as a whole. The

performance of bank should therefore, reflect “Trends in the Indian Economy”. Due to

the reforms in the financial sector, banking industry has changed drastically with the

opportunities to the work with, new accounting standards new entrants and information

technology. The deregulation of the interest rate, participation of banks in project

financing has changed in the environment of banks.

The performance of banking industry is done through SWOT Analysis. It mainly helps to

know the Strengths and Weakness of the industry and to improve will be known through

converting the opportunities into strengths. It also helps for the competitive environment

among the banks.

STRENGTHS

1. Greater securities of Funds

Compared to other investment options banks since its inception has been a better avenue

in terms of securities. Due to satisfactory implementation of RBI’s prudential norms

banks have won public confidence over several years.

2. Banking network

After nationalization, banks have expanded their branches in the country, which has

helped banks build large networks in the rural and urban areas. Private banks allowed to

operate but they mainly concentrate in metropolis.

3. Large Customer Base

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This is mainly attributed to the large network of the banking system. Depositors in rural

areas prefer banks because of the failure of the NBFCs

.

4. Low Cost of Capital

Corporate prefers borrowing money from banks because of low cost of capital. Middle

income people who want money for personal financing can look to banks as they offer at

very low rates of interests. Consumer credit forms the major source of financing by banks

WEAKNESSES

1. Basel Committee

The banks need to comply with the norms of Basel committee but before that it is

challenge for banks to implement the Basel committee standard, which are of

international standard.

2. Powerful Unions

Nationalization of Banks had a positive outcome in helping the Indian Economy as a

whole. But this has also proved detrimental in the form of strong unions, which have a

major influence in decision making. They are against automation.

3. Priority Sector Lending

To uplift the society, priority sector lending was brought in during nationalization. This is

good for the economy but banks have failed to manage the asset quality and their

intensions were more towards fulfilling government norms. As a result lending was done

for non-productive purposes.

4. High Non-Performing Assets

Non-Performing Assets (NPAs) have become a matter of concern in the banking

industry. This is because of change in the Accounting Standards (Prudential Norms). Net

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NPAs increased to large extent of the total advances, which has to be reduced to meet the

international standards.

OPPORTUNITIES

1. Universal Banking

Banks have moved along the value chain to provide their customers more products and

services. For example: - SBI is into SBI home finance, SBI Capital Markets, SBI Bonds

etc.

2. Differential Interest Rates

As RBI control over bank reduces, they will have greater flexibility to fix their own

interest rates which depends on the profitability of the banks.

3. High Household Savings

Household savings have been increasing drastically. Investment in financial assets has

also increased. Banks should use this opportunity for raising funds.

4. Overseas Markets

Banks should tap the overseas market, as the cost of capital is very low.

5. Internet Banking

The advances in information technology have made banking easier. Business transactions

can effectively carried out through internet banking.

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THREATS

1. NBFCs, Capital Markets and Mutual funds

There is a huge investment of household savings. The investments in NBFCs deposits,

Capital Market Instruments and Mutual Funds are increasing. Normally these instruments

offer better returns to investors.

2. Change in the Government Policy

The change in the government policy has proved to be a threat to the banking sector.

3. Inflation

The interest rates go down with a fall in inflation. Thus, the investors will shift his

investments to other profitable sectors.

4. Recession

Due to the recession in the business cycle the economy functions poorly and this has

proved to be a threat to the banking sector. The market oriented economy and

globalization has resulted into competition for market share. The spread in the banking

sector is very narrow. To meet the competition the banks have to grow at a faster rate and

reduce the overheads. They can introduce new products and develop the existing services.

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2.3. PEST ANALYSIS

POLITICAL/ LEGAL ENVIROMENT

Government and RBI policies affect the banking sector. Sometimes looking into the

political advantage of a particular party, the Government declares some measures to their

benefits like waiver of short-term agricultural loans, to attract the farmer’s votes. By

doing so the profits of the bank get affected. Various banks in the cooperative sector are

open and run by the politicians. They exploit these banks for their benefits. Sometimes

the government appoints various chairmen of the banks.

Various policies are framed by the RBI looking at the present situation of the country for

better control over the banks

ECONOMICAL ENVIROMENT

Banking is as old as authentic history and the modern commercial banking are

traceable to ancient times. In India, banking has existed in one form or the other from

time to time. The present era in banking may be taken to have commenced with

establishment of bank of Bengal in 1809 under the government charter and with

government participation in share capital. Allahabad bank was started in the year 1865

and Punjab national bank in 1895, and thus, others followed

Every year RBI declares its 6 monthly policy and accordingly the various

measures and rates are implemented which has an impact on the banking sector. Also the

Union budget affects the banking sector to boost the economy by giving certain

concessions or facilities. If in the Budget savings are encouraged, then more deposits will

be attracted towards the banks and in turn they can lend more money to the agricultural

35

sector and industrial sector, therefore, booming the economy. If the FDI limits are

relaxed, then more FDI are brought in India through banking channels.

SOCIAL ENVIROMENT

Before nationalization of the banks, their control was in the hands of the private

parties and only big business houses and the effluent sections of the society were getting

benefits of banking in India. In 1969 government nationalized 14 banks. To adopt the

social development in the banking sector it was necessary for speedy economic progress,

consistent with social justice, in democratic political system, which is free from

domination of law, and in which opportunities are open to all. Accordingly, keeping in

mind both the national and social objectives, bankers were given direction to help

economically weaker section of the society and also provide need-based finance to all the

sectors of the economy with flexible and liberal attitude. Now the banks provide various

types of loans to farmers, working women, professionals, and traders. They also provide

education loan to the students and housing loans, consumer loans, etc.

Banks having big clients or big companies have to provide services like

personalized banking to their clients because these customers do not believe in running

about and waiting in queues for getting their work done. The bankers also have to provide

these customers with special provisions and at times with benefits like food and parties.

But the banks do not mind incurring these costs because of the kind of business these

clients bring for the bank.

  Banks have changed the culture of human life in India and have made life much

easier for the people.

TECHNOLOGICAL ENVIROMENT

36

Technology plays a very important role in bank’s internal control mechanisms as

well as services offered by them. It has in fact given new dimensions to the banks as well

as services that they cater to and the banks are enthusiastically adopting new

technological innovations for devising new products and services.

The latest developments in terms of technology in computer and

telecommunication have encouraged the bankers to change the concept of branch banking

to anywhere banking. The use of ATM and Internet banking has allowed ‘anytime,

anywhere banking’ facilities. Automatic voice recorders now answer simple queries,

currency accounting machines makes the job easier and self-service counters are now

encouraged. Credit card facility has encouraged an era of cashless society. Today

MasterCard and Visa card are the two most popular cards used world over. The banks

have now started issuing smartcards or debit cards to be used for making payments.

These are also called as electronic purse. Some of the banks have also started home

banking through telecommunication facilities and computer technology by using

terminals installed at customers home and they can make the balance inquiry, get the

statement of accounts, give instructions for fund transfers, etc. Through ECS we can

receive the dividends and interest directly to our account avoiding the delay or chance of

loosing the post.

Today banks are also using SMS and Internet as major tool of promotions and

giving great utility to its customers. For example SMS functions through simple text

messages sent from your mobile. The messages are then recognized by the bank to

provide you with the required information.

All these technological changes have forced the bankers to adopt customer-based

approach instead of product-based approach.

37

CHAPTER: 3

CORPORATE BANKING: AN OVERVIEW

3.1 INTRODUCTION:

According to American author and humorist Mark Twain: ”A banker is a fellow who

lends his umbrella when the sun is shining and wants it back the minute it begins to rain.”

Many troubled businesses seeding credit in recent years might agree with Mr. Twain.

Indeed securing the large amounts of credit that many businesses require can be a

complicated and challenging task loan requests. Moreover, business loans, often called

commercial and industrial loans, rank among the most important assets that commercial

banks and their closest competitors hold.

Corporate finance is an area of finance dealing with financial decisions business

enterprises make and the tools and analysis used to make these decisions. The primary

goal of corporate finance is to maximize corporate value [1] while managing the firm's

financial risks. Although it is in principle different from managerial finance which studies

the financial decisions of all firms, rather than corporations alone, the main concepts in

the study of corporate finance are applicable to the financial problems of all kinds of

firms.

The discipline can be divided into long-term and short-term decisions and techniques.

Capital investment decisions are long-term choices about which projects receive

investment, whether to finance that investment with equity or debt, and when or whether

to pay dividends to shareholders. On the other hand, the short term decisions can be

38

grouped under the heading "Working capital management". This subject deals with the

short-term balance of current assets and current liabilities; the focus here is on managing

cash, inventories, and short-term borrowing and lending (such as the terms on credit

extended to customers).

The terms corporate finance and corporate financier are also associated with investment

banking. The typical role of an investment bank is to evaluate the company's financial

needs and raise the appropriate type of capital that best fits those needs.

Corporate banking is a part of commercial banking but the part that average depositor

with deposits account never sees. It is a division of commercial banking which extends

the financial support to the corporate for helping them achieve their organizational goals

and objectives. While banks hold money and mortgages, lend money, extend or open up a

line of credit for the average depositors, it is business that needs major financial services

to build plant, erect buildings, make structural improvements on old ones and start new

business ventures. This is one of the most competitive, risky and financially lucrative

areas of doing business in today’s world.

Commercial loans were the earliest form of lending banks did in their move than 2000

year old history. Later in the 20th century finance companies, insurance firms, and thrift

institutions entered the business lending field. Today loan officers skilled in evaluating

the credit of businesses are usually among the most experienced and highest paid people

in the financial services field, along with security underwriters.

As a part of commercial banking, corporate banking is focused on analyzing and

assessing the risk of the business, establishing the creditworthiness of the business and

trying to predict the likelihood of success or failure of business endeavour. These are the

professionals who help decide what business initiatives will be taken and when, whether

or not to expand the existing businesses, help develop new markets so that new clients

can be found and help develop new products for e-commerce, the internet and the

international markets.

39

Corporate Banking represents the wide range of banking and financial services provided

to domestic and international operations of large local corporate and local operations of

multinationals corporations. Services include access to commercial banking products,

including working capital facilities such as domestic and international trade operations

and funding, channel financing, and overdrafts, as well as domestic and international

payments, INR term loans (including external commercial borrowings in foreign

currency), letters of guarantee etc.

The Investment Banking and Markets division of various bank brings together the

advisory and financing, equity securities, asset management, treasury and capital markets,

and private equity activities to complete the CIBM structure and provide a complete

range of financial products to our clients. Increasingly, ECA financing is being

considered by customers and we work closely with our project export finance teams, both

onshore and offshore, to provide structured solutions.

The Corporate Bank in India was ranked 2nd overall in the 2004 Greenwich Survey.

This portfolio is largely spread within 9 sector teams divided as under :

Consumer Brands

Industrials

Energy and Utilities

Telecommunications

Automotive

Healthcare

Transport and Logistics

Metals and Mining

Media

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3.2 STRUCTURE OF CREDIT LENDING (CORPORATE)

IN INDIA:

Banks, finance companies, and competing business lenders grant many different types of

commercial loans. Among the most widely used forms of business credit are the

following:

SHORT-TERM BUSINESS LOANS:

Self-liquidating inventory loans

Working capital loans

Interim construction financing

Security dealer financing

Retailer and equipment financing

Asset-based loans (accounts receivable financing, factoring, and inventory

financing)

Syndicated loans

LONG-TERM BUSINESS LOANS:

Term loans to support the purchase of equipment, rolling stock, and structures

Revolving credit financing

Project loans

Loans to support acquisitions of others business firms

41

SHORT-TERM LOANS TO BUSINESS FIRMS:

Self-Liquidating Inventory Loans

Historically, commercial banks have been the leaders in extending short term credit to

businesses. These loans were used to finance the purchase of inventory, raw materials or

finished goods to sell. In this case the term of the loan begins when cash in needed to

purchase inventory and ends when cash is available in the firm’s account to write the

lender a check for the balance of its loan.

Working Capital Loans

Working capital loans provide businesses with short run credit, lasting from few days to

about one year. Working capital loans are most often used to fund the purchase of

inventories in order to put goods on shelves or to purchase raw materials; thus, they come

closest to the traditional self-liquidating loan described previously.

Frequently, the working capital loan is designed to cover seasonal peaks in the business

customer’s production levels and credit needs. Normally, working capital loans are

secured by accounts receivable or by pledges of inventory and carry a floating interest

rate on the amounts actually borrowed against the approved credit line. A commitment

fee is charged on the unused portion of the credit line and sometimes on the entire

amount of funds made available.

Interim Construction Financing

A popular form of secured short term lending is the interim construction loan, used to

support the construction of homes, apartments, office buildings, shopping centers, and

42

other permanent structures. The finance is used while the construction is going on but

once the construction phase is over, this short term loan usually is paid off with a longer

term mortgage loan issued by another lender, such as insurance company of pension

fund. Recently, some commercial banks have issued ‘minipermanent’ loans, providing

funding for construction and the early operation of a project for as long as five to seven

years.

Retailer and Equipment Financing

Banks support installment purchases of automobiles, appliances, furniture, business

equipment, and other durable goods by financing the receivables that dealers selling these

goods take on when they write installment contracts to cover customer purchases. In turn,

these contracts are reviewed by banks and other lending institutions with whom the

dealers have established credit relationships. If they meet acceptable credit standards, the

contracts are purchased by lenders at an interest rate that varies with the risk level of each

borrower, the quality of collateral pledged, and the term of each loan.

Asset-Based Financing

An increasing portion of short-term lending by banks and other lenders in recent years

has consisted of asset based loans, credit secured by the shorter term assets of a firm that

are expected to roll over into cash in the future. Key business assets used for many of

these loans are accounts receivables and inventories of raw materials or finished goods.

The lender commits funs against a specific percentage of the book value of outstanding

credit accounts or against inventory.

In most loans collateralized by accounts receivable and inventory, the borrowing firm

retains title to the assets pledged, but sometimes title is passed to the lender, which then

assumes the risk that some of those assets will not pay out as expected. The most

common example of this arrangement is factoring, where the bank actually takes on the

responsibility of collecting the accounts receivable of one of its business customers. It

43

typically assesses a higher discount rate and lends a smaller fraction of the book value of

the customer’s accounts receivable because the lender incurs both additional expense and

additional risk with a factored loan.

Syndicated Loan

A type of large corporate loan that is increasingly used today is the syndicated loan. This

is typically a loan or loan package extended to a corporation by a group of banks and

other institutional lenders. These loans may be “drawn” by the borrowing company, with

the funds used to support business operations or commercial expansion, or “undrawn”,

serving as lines of credit to back a security issue or other venture. Banks engage in

syndicated loans both to spread the heavy risk exposures of these large loans, often

involving hundreds of lakhs or crore of rupees in credit for each loan, and to earn fee

income.

44

LONG-TERM LOANS TO BUSINESS FIRMS:

Term Business Loans

Term loans are designed to fund long and medium term business investments, such as the

purchase of equipment or the construction of physical facilities, covering a period longer

than one year. Usually the borrowing firm applies for a lump sum loan based on the

budgeted cost of its proposed project and then pledges to repay the loan in a series of

installments.

Term loans normally are secured by fixed assets e.g. Plant and Equipment owned by the

borrower and may carry either a fixed or a floating interest rate. That rate is normally

higher than on shorter term business loans due to the lender’s greater risk exposure from

such loans.

Revolving Credit Financing

A revolving credit line allows a business customer to borrow up to a pre specified limit,

repay all or a portion of the borrowing, and re borrows as necessary until the credit line

matures. One of the most flexible of all the forms of business loans, revolving credit is

often granted without specific collateral to secure the loan and may be short term or caver

a period as long as three, four, or five years. This form of business financing is

particularly popular when the customer is highly uncertain about the timing of future cash

flows or about the exact magnitude of the future borrowings needs.

Loan commitments are usually of two types namely,

1. Formal Loan Commitment, and

2. Confirmed Credit Line.

45

Formal Loan Commitment is a contractual promise to lend to a customer up to a

maximum amount of money at a set interest rate or rate markup over the prevailing base

loan rate. Whereas, Confirmed Credit Line is a looser form of loan commitment where

the banks indicate its approval of customer’s request for credit in an emergency, though

the prices of such a credit line may not be set in advance and the customer may have little

intention to draw upon the credit line.

Long-Term Project Loans

The most risky of all business loans are project loans, credit to finance the construction of

fixed assets designed to generate a flow of revenue in future periods. Prominent examples

include oil refineries, pipelines, mines, power plants and harbor facilities. Project loans

are usually granted to several companies jointly sponsoring a large project.

Project loans may be granted on a recourse basis, in which the lender can recover funds

from the sponsoring companies if the project does not pay out as planned. At the other

end, loan may be extended on a non recourse basis, in which no sponsor guarantees; the

project stands or falls on its own merits. Many such loans require that the project‘s

sponsors pledge enough of their own capital to see the project through to completion.

46

Term Loan / Deferred Payment Guarantees

In case of term loans and deferred payment guarantees, the project report is

obtained from the customer, who may have been compiled in-house or by a

firm or consultants/ merchant bankers.

Term loan is provided to support capital expenditures for setting up new

ventures as also for expansion, renovation etc.

The technical feasibility and economic viability is vetted by the Bank and

wherever it is felt necessary.

Banks normally expects at least 20% contribution of Promoter’s contribution.

But the promoter contribution may vary largely in mega projects. Therefore,

there cannot be a definitive benchmark.

The sanctioning authority will have the necessary discretion to permit

deviations.

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3.3 EMERGENCE OF CORPORATE BANKING IN INDIA

The bank lending has expanded in a number of emerging market economies, especially in

Asia and Latin America, in recent years. Bank credit to the private sector, in real terms,

was rising at a high rate. Several factors have contributed to the significant rise in bank

lending in emerging economies such as strong growth, excess liquidity in banking

systems reflecting easier global and domestic monetary conditions, and substantial bank

restructuring. The recent surge in bank lending has been associated with important

changes on the asset side of banksí balance sheet. First, credit to the business sector -

historically the most important component of banksí assets – has been weak, while the

share of the household sector has increased sharply in several countries. Second, banksí

investments in Government securities increased sharply until 2004-05. As a result,

commercial banks continue to hold a very large part of their domestic assets in the form

of Government securities - a process that seems to have begun in the mid-1990s.

There has been a sharp pick up in bank credit in India in recent years. The rate of growth

in bank credit which touched a low of 14.4 per cent in 2002-03, accelerated to more than

30.0 per cent in 2004-05, the rate which was maintained in 2005-06. The upturn in the

growth rate of bank credit can be attributed to several factors. One, macroeconomic

performance of the economy turned robust with GDP growth rates hovering between 7.5

per cent and 8.5 per cent during the last few years. Two, the hardening of sovereign

yields from the second half of 2003-04 forced banks to readjust their assets portfolio by

shifting from investments to advances. While the share of gross advances in total assets

of commercial banks grew from 45.0 per cent to 54.7 per cent that of investments

declined from 41.6 per cent to 32.1 per cent in the last few years.

However, the credit growth has been broad-based making banks less vulnerable to credit

concentration risk. The declining trend of priority sector loans in 2001-02 in the credit

48

book of banks was due to prudential write offs and compromise settlements of a large

number of small accounts which was reversed from 2002-03 on the strength of a spurt in

the housing loan portfolio of banks. Even though credit to industry and other sectors have

also picked up, their share in total loans has declined marginally. Retail loans, which

witnessed a growth of over 40.0 per cent in 2004-05 and again in 2005-06, have been the

prime driver of the credit growth in recent years. Retail loans as a percentage of gross

advances increased from 22.0 per cent in March 2004 to 25.5 per cent in March 2006.

The cyclical uptrend in the economy along with the concomitant recovery in the business

climate brings with it improved abilities of the debtors to service loans, thereby greatly

improving banks asset quality. Despite the sharp rise in credit growth in recent years, not

only the proportional levels of gross non-performing loans (NPLs) have declined, but the

absolute levels of gross NPLs declined significantly. Several factors have contributed to

the marked improvement in the Indian banksí asset quality. One, banks have gradually

improved their risk management practices and introduced more vigorous systems and

scoring models for identifying credit risks. Two, a favourable macroeconomic

environment in recent years has also meant that many entities and units of traditionally

problematic industries are now performing better. Three, diversification of credit base

with increased focus on retail loans, which generally have low delinquency rates, has also

contributed to the more favourable credit risk profile. Four, several institutional measures

have been put in place to recover the NPAs. These include Debt Recovery Tribunals

(DRTs), Lok Adalats (peopleís courts), Asset Reconstruction Companies (ARCs) and

corporate debt restructuring mechanism (CDRM). In particular, the Securitisation and

Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI)

Act, 2002 for enforcement of security interest without intervention of the courts has

provided more negotiating power to the banks for resolving bad debts.

49

50

Sectoral Deployment of Gross Bank Credit

During 2008-09 total deployment of gross bank credit increased to Rs.1.87,515 crores

from Rs.1,69.536 crores in 2008-07

Non-food bank credit increased sharply during 2005-06. The credit growth was broad

based. Credit to services (including personal loans and other services) increased by 52.8

per cent in 2005-06, accounting for 58.3 per cent of incremental non-food gross bank

credit (NFGBC). Personal loans increased sharply in recent years mainly on account of

housing loans. Real estate loans more than doubled. Other personal loans such as credit

card outstanding and education loans also recorded sharp increases of 59.3 per cent and

96.5 per cent, respectively.

Priority Sector Advances

Credit to the priority sector decreased to 34.1 per cent in the previous year against 39.5 in

2008. In terms of revised guidelines on lending to priority sector , broad category of

advances under priority sector include agriculture, micro and small enterprises, retail

trade, micro-credit, education and housing.

The agriculture and housing sectors were the major beneficiaries, which together

accounted for more than two-third of incremental priority sector lending. Credit to small

scale industries also accelerate. Several favourable policy initiatives undertaken by the

Central Government and the Reserve Bank including, inter alia, the policy package for

stepping up of credit to small and medium enterprises (SMEs) announced on August 10,

2005, have had a positive impact. At the individual bank-level, all the nationalised banks,

and all but two of the State Bank group (State Bank of India and State Bank of Patiala)

were able to meet the priority sector target of 40 per cent of NBC. However, only ten

PSBs (Allahabad Bank, Andhra Bank, Bank of India, Indian Bank, Indian Overseas

Bank, Punjab National Bank, Syndicate Bank, State Bank of Bikaner and Jaipur, State

Bank of Indore and State Bank of Saurashtra) were able to achieve the subtargets for

agriculture, while the sub-target for weaker sections was met by eight PSBs (Allahabad

51

Bank, Andhra Bank, Bank of India, Indian Bank, Indian Overseas Bank, Punjab National

Bank, Syndicate Bank and State Bank of Patiala).

Lending to the priority sector by foreign banks constituted 34.6 per cent of net bank

credit as on the last reporting Friday of March 2006, which was well above the stipulated

target of 32 per cent. The share of export credit in total netbank credit at 19.4 per cent

was significantly above the prescribed sub-target of 12.0 per cent. Foreign banks,

however, fell a little short of the sub-target of 10.0 per cent in respect of lending to SSIs.

Special Agricultural Credit Plans

The Reserve Bank had advised public sector banks to prepare Special Agricultural Credit

Plans (SACP) on an annual basis in 1994. The SACP mechanism for private sector banks

was made applicable from 2005-06, as recommended by the Advisory Committee on

Flow of Credit to Agriculture and Related Activities from the Banking System

(Chairman:Prof. V.S. Vyas) and announced in the Mid-term Review of Annual Policy for

2004-05. Public sector banks were advised to make efforts to increase their

disbursements to small and marginal farmers to 40.0 per cent of their direct advances

under SACP by March 2007. The disbursement to agriculture under SACP by public

sector banks aggregated Rs.94,278 crore during 2005-06, which was much above the

target of Rs.85,024 crore and the disbursement of Rs.65,218 crore during 2004-05. The

disbursement by private sector banks during 2005-06 at Rs.31,119 crore was above the

target of Rs.24,222 crore. 3.21 Public sector banks were advised to earmark 5.0 per cent

of their net bank credit to women. At end-March 2006, aggregate credit to women by

public sector banks stood at 5.37 per cent of their net bank credit with 22 banks achieving

the target. A consortium of select public sector banks was formed, with the State Bank of

India as the leader of the consortium, to provide credit to the Khadi and Village Industries

Commission (KVIC). These loans are provided at 1.5 per cent below the average prime

lending rates of five major banks in the consortium. An amount of Rs.322 crore was

outstanding at end-July 2006 out of Rs.738 crore disbursed by the consortium under the

scheme.

52

Micro-finance

The Reserve Bank has been making consistent efforts to strengthen credit delivery,

improve customer service and encourage banks to provide banking services to all

segments of the population. Despite considerable expansion of the banking system in

India, large segments of the country’s population do not have access to banking services.

Expanding the outreach of banking services has, therefore, been a major thrust area of the

policy of the Government of India and the Reserve Bank in recent years.     

The self-help group (SHG)-bank linkage programme has emerged as the major micro-

finance programme in the country and is being implemented by commercial banks, RRBs

and co-operative banks. As on March 31, 2008 3.6 million SHGs had outstanding bank

loans of Rs.17,000 crore, an increase of 25 per cent over March 31, 2007 in respect of

number of SHGs credit linked. During 2007-08, banks financed 1.2 million SHGs for

Rs.8,849 crore. As at end-March 2008, SHGs had 5 million savings accounts with banks

for Rs.3,785 crore.

Retail Credit

Continuing the strong growth in recent years, retail advances increased by 40.9 per cent

to Rs.3,75,739 crore in 2007-08, which was significantly higher than the overall credit

growth of 31.0 per cent. As a result, their share in total loans and advances increased

during the year. Auto loans experienced the highest growth, followed by credit card

receivables, other personal loans (comprising loans mainly to professionals and for

educational purposes) and housing finance. Loans for consumer durables increased by

17.3 per cent as against the decline of 39.1 per cent in the previous year.

Major steps earlier taken by the Reserve Bank of India were somewhat more oriented

towards price stability and the related monitory instruments like the bank rate, reverse

repo rate, repo rate and CRR were adjusted to rein in the price instability. Naturally, the

priority was inflation control for overall growth of the economy and we must

53

congratulate the RBI for a wonderful job done. The inflation today is at a moderate level

and in line with a developed economy.With these steps taken by RBI, the latest scenario

is that the non-food credit growth got moderated, agricultural and service sector credit

went up but the retail credit growth actually took a beating due to northbound interest

rates.

Such positive impact on inflation helped the economy for price stability and we feel what

is important for India now is to ensure that there is sufficient focus on growth of the

economy along with price stability.

Lending to the Sensitive Sectors

Lending by SCBs to the sensitive sectors (capital market, real estate and commodities)

increased sharply during 2005-06 mainly on account of a sharp increase in exposure to

the real estate market. Total exposure of SCBs to the sensitive sectors consituted 18.9 per

cent of aggregate bank loans and advances (comprising 17.2 per cent to real estate, 1.5

per cent to the capital market and 0.3 per cent to the commodities sector). During 2008-

2009 total lending to sensitive sector increased by 19.1 percent in capital market.

Among bank groups, new private sector banks had the highest exposure to the sensitive

sectors (measured as percentage to total loans and advances of banks) mainly due to the

increase in exposure to the real estate market, followed by foreign banks, old private

sector banks and public sector banks.

54

MEASURES BY SIDBI

SIDBI has developed a Credit Appraisal & Rating Tool (CART) as well as a Risk

Assessment Model (RAM) and a comprehensive rating model for risk assessment of

proposals for SMEs. The banks may consider to take advantage of these models as

appropriate and reduce their transaction costs.

.

Public Sector Banks are advised to follow a transparent rating system with cost of credit

being linked to the credit rating of the enterprise.

SIDBI in association with Credit Information Bureau (India) Ltd. (CIBIL) expedited

setting up a credit rating agency.

SIDBI in association with Indian Banks’ Association (IBA) would collect and pool

common data on risk in each identified cluster and develop an IT-enabled application,

appraisal and monitoring system for small (including tiny) enterprises. This would help

reduce transaction cost as well as improve credit flow to small (including tiny) enterprises

in the clusters.

The National Small Industries Corporation has introduced a Credit Rating Scheme for

encouraging SSI units to get themselves credit rated by reputed credit rating agencies.

Public Sector Banks will be advised to consider these ratings appropriately and as per

availability, and structure their rates suitably.

 

55

ROADMAP BY RBI

The Reserve Bank of India (RBI) has worked out the roadmap for the Indian banks to

graduate from the simpler approaches of the Basel II framework to more advanced ones.

Basel II is the second among Basel Accords, which are primarily, recommendations on

banking laws and regulations issued by the Basel committee on banking supervision.

It sets up rigorous risk and capital management requirements aimed at ensuring that a

bank holds capital reserves appropriate to the risk it exposes itself to through its lending

and investment practices.

Since March 2008, foreign banks operating in India and Indian banks having presence

outside the country have migrated to simpler approaches under Basel II framework. Other

commercial banks are required to migrate to these norms by March 31, 2009.

These include standardised approach for credit risk which arising from default by

borrowers, basic indicator approach for operational risk (arising from day to operations of

the banks such robbery or power failure) and standardised duration approach for market

risk (arising from fluctuations in interest rate and share prices) which affects the

investment and market portfolio of the banks.

In the framework, the RBI had earlier specified the date by which banks may file

application for approvals and the the likely date by which approvals can be obtained from

the central bank.

While banks have the discretion to adopt the advanced approaches, they need to seek

prior approval.

Under market risk, banks may apply to RBI for graduating to more advanced method of

internal models approach (IMA) by April 1, 2010 and then, RBI may approve it by

March 31, 2011. IMA sets out a framework for applying capital charges to the market

risks (both on balance sheet and off-balance sheet) incurred by banks by an internal

56

model. The current standardised duration approach specifies a specific average duration

of the banks at large, which the banks follow and make it a basis for applying capital

charges to only open positions.

Similarly, for operational risk, banks may graduate to standardised approach by April 1,

2010 and RBI can approve the plan by September 30, 2010. After that, they can graduate

to advanced measurement approach for operational risk by April 1, 2011 and get RBI

approval by March 31, 2013.

While advanced measurement approach (AMA) sets the framework for banks to develop

their own empirical model to quantify required capital for operational risk, it can be used

after they get regulatory clearances.

Under the standardised approach, a bank's activities are divided into eight business lines:

corporate finance, trading and sales, retail banking, commercial banking , payment and

settlement, agency services, asset management and retail brokerage. Within each business

line, gross income is a broad indicator for the scale of business operations and so, the

scale of operational risk exposure within each of these business lines. The capital charge

for each business line is calculated by multiplying gross income by a factor .

Currently, banks are using the basic indicator approach as per which they must hold

capital for operational risk equal to the average over the previous three years of a fixed

percentage of positive annual gross income.

For credit risk, banks can use internal ratings-based approach which allows them to

develop their own model to estimate the probability of default for individual clients or

groups of clients. Currently, banks use standardised approach where they are required to

use ratings from external credit rating agencies to quantify the required capital for credit

risk.

57

CHAPTER: 4

CRM STRATEGIES FOR CORPORATE BANKING

4.1 RAROC

Risk-Adjusted Return on Capital –– RAROC–– is a measure of the expected return on

Economic Capital over the life of an investment. This prospective measure of risk-

adjusted profitability allows for apples-to-apples comparison of activities across risk

types of business.

RAROC helps senior management maximize shareholder value by addressing strategic

business questions such as:

How much capital is needed to support the company’s enterprise-wide risks?

Is the company over or under capitalized?

Are individual business units creating or destroying shareholder value?

What opportunities for growth or diversification exist within the company?

How should the economics of the business be managed within regulatory and

rating agency capital constraints?

What is an optimal strategy for reinsurance?

RAROC allows for both relative comparisons between business units and absolute

comparisons to shareholders’ minimum required return on risk, or hurdle rate. A business

line is value-neutral if its RAROC is equal to the hurdle rate. It creates value if its

RAROC is higher than the hurdle rate and destroys value if it is lower.

58

COMPUTATION

RAROC is computed by dividing risk-adjusted net income by the total amount of

economic capital assigned based on the risk calculation. RAROC allocates a capital

charge to a transaction or a line of business at an amount equal to the maximum expected

loss (at a 99% confidence level) over one year on an after-tax basis. The higher the

volatility of the returns, the more capital is allocated. The higher capital allocation means

that the transaction has to generate cash flows large enough to offset the volatility of

returns, which results from the credit risk, market risk, and other risks taken. The

RAROC process estimates the asset value that may prevail in the worst-case scenario and

then equates the capital cushion to be provided for the potential loss.

RAROC is an improvement over the traditional approach in that it allows one to compare

two businesses with different risk (volatility of returns) profiles. A transaction may give a

higher return but at a higher risk. Using a hurdle rate (expected rate of return), a lender

can also use the RAROC principle to set the target pricing on a relationship or a

transaction. Although not all assets have market price distribution, RAROC is a first step

toward examining an institution's entire balance sheet on a mark-to-market basis - if only

to understand the risk-return trade-offs that have been made.

What is RAROC ?

RevenuesExpensesExpected Losses+ Return on economic capital+ transfer values / prices

Capital required forCredit RiskMarket RiskOperational Risk

Risk Adjusted Return

Risk Adjusted Capital or Economic

Capital

RAROC

What is RAROC?

The concept of RAROC (Risk adjusted Return on Capital) is at the heart

of Integrated Risk Management.

59

4.2 RATING BASED METHODS:

Banks should have a comprehensive risk scoring / rating system that serves as a single point

indicator of diverse risk factors of a counterparty and for taking credit decisions in a

consistent manner. To facilitate this, a substantial degree of standardization is required in

ratings across borrowers. The risk rating system should be designed to reveal the overall risk

of lending, critical input for setting pricing and non-price terms of loans as also present

meaningful information for review and management of loan portfolio. The risk rating, in

short, should reflect the underlying credit risk of the loan book. The rating exercise should

also facilitate the credit granting authorities some comfort in its knowledge of loan quality at

any moment of time.

The risk rating system should be drawn up in a structured manner, incorporating, inter

alia, financial analysis, projections and sensitivity, industrial and management risks. The

banks may use any number of financial ratios and operational parameters and collaterals as

also qualitative aspects of management and industry characteristics that have bearings on the

creditworthiness of borrowers. Banks can also weigh the ratios on the basis of the years to

which they represent for giving importance to near term developments. Within the rating

framework, banks can also prescribe certain level of standards or critical parameters, beyond

which no proposals should be entertained. Banks may also consider separate rating

framework for large corporate / small borrowers, traders, etc. that exhibit varying nature and

degree of risk. Forex exposures assumed by corporates who have no natural hedges have

significantly altered the risk profile of banks. Banks should, therefore, factor the unhedged

market risk exposures of borrowers also in the rating framework. The overall score for risk is

to be placed on a numerical scale ranging between 1-6, 1-8, etc. on the basis of credit quality.

For each numerical category, a quantitative definition of the borrower, the loan’s underlying

quality, and an analytic representation of the underlying financials of the borrower should be

presented. Further, as a prudent risk management policy, each bank should prescribe the

minimum rating below which no exposures would be undertaken. Any flexibility in the

minimum standards and conditions for relaxation and authority therefore should be clearly

articulated in the Loan Policy.

60

The credit risk assessment exercise should be repeated biannually (or even at shorter

intervals for low quality customers) and should be delinked invariably from the regular

renewal exercise. The updating of the credit ratings should be undertaken normally at

quarterly intervals or at least at half-yearly intervals, in order to gauge the quality of the

portfolio at periodic intervals. Variations in the ratings of borrowers over time indicate

changes in credit quality and expected loan losses from the credit portfolio. Thus, if the rating

system is to be meaningful, the credit quality reports should signal changes in expected loan

losses. In order to ensure the consistency and accuracy of internal ratings, the responsibility

for setting or confirming such ratings should vest with the Loan Review function and

examined by an independent Loan Review Group. The banks should undertake

comprehensive study on migration (upward – lower to higher and downward – higher to

lower) of borrowers in the ratings to add accuracy in expected loan loss calculations.

Value At Risk

The VaR method is employed to assess potential loss that could crystalise on trading

position or portfolio due to variations in market interest rates and prices, using a given

confidence level, usually 95% to 99%, within a defined period of time. The VaR method

should incorporate the market factors against which the market value of the trading position

is exposed. The top management should put in place bank-wide VaR exposure limits to the

trading portfolio (including forex and gold positions, derivative products, etc.) which is then

disaggregated across different desks and departments. The loss making tolerance level should

also be stipulated to ensure that potential impact on earnings is managed within acceptable

limits. The potential loss in Present Value Basis Points should be matched by the Middle

Office on a daily basis vis-à-vis the prudential limits set by the Board. The advantage of

using VaR is that it is comparable across products, desks and Departments and it can be

validated through ‘back testing’. However, VaR models require the use of extensive

historical data to estimate future volatility. VaR model also may not give good results in

extreme volatile conditions or outlier events and stress test has to be employed to

complement VaR. The stress tests provide management a view on the potential impact of

large size market movements and also attempt to estimate the size of potential losses due to

stress events, which occur in the ’tails’ of the loss distribution. Banks may also undertake

scenario analysis with specific possible stress situations (recently experienced in some

61

countries) by linking hypothetical, simultaneous and related changes in multiple risk factors

present in the trading portfolio to determine the impact of moves on the rest of the portfolio.

VaR models could also be modified to reflect liquidity risk differences observed across assets

over time. International banks are now estimating Liquidity adjusted Value at Risk (LaVaR)

by assuming variable time horizons based on position size and relative turnover. In an

environment where VaR is difficult to estimate for lack of data, non-statistical concepts such

as stop loss and gross/net positions can be used.

62

63

4.3 INSPECTION METHODOLGY

The supervision of commercial banks and financial institutions is vested in the Reserve

Bank in terms of the provisions of the Banking Regulation Act, 1949 and the Reserve

Bank of India Act, 1934. This task is carried out by the Department of Banking

Supervision (DBS) under the guidance of the BFS. The basic objective of supervision of

banks is to assess the solvency, liquidity and operational health of banks. The onsite

inspection of banks referred to as Annual Financial Inspection (AFI) is conducted

annually (except in the case of State Bank of India in which case it is done once in two

years). For this purpose, the unit of inspection is the Head Office (HO) of the bank. A

team of Inspecting Officers from the Reserve Bank led by the Principal Inspecting

Officer (PIO) visits the bank and conducts the inspection based on the internationally

adopted CAMEL (Capital Adequacy, Asset Quality, Management, Earnings, Liquidity)

model, modified as CAMELS (S for Systems and Control) to suit the needs of the Indian

banking system. The focus of the AFI in recent years has been on supervisory issues

relating to securitisation, business continuity plan, disclosure requirements and

compliance with other existing guidelines. In order to have an overall perspective, units

of the bank throughout the country are also taken up for inspection either by the same

team inspecting the HO or by additional teams from the Regional Offices (RO) of the

Reserve Bank. These units could be treasury operations, specialised branches and

controlling offices in general, where there may be concerns relating mainly to frauds,

NPAs and exposure to sensitive sectors. Major findings of these other unit inspections are

incorporated in the Report. The timeframe for carrying out the inspection of the corporate

HO of the bank is two to three months. The inspection report is generally finalised

within four months. On completion of the inspection, the RO of the Reserve Bank,

under whose jurisdiction the HO of the bank is situated, issues the inspection report to the

bank for perusal, corrective action and compliance. Further, a detailed discussion on the

findings of the inspection and the road ahead is conducted by the Reserve Bank with the

CEO/CMD and other senior functionaries of the bank and a monitorable action plan is

decided and/or supervisory action is taken, wherever warranted. The findings recorded in

64

the inspection report along with the responses of the CEO/CMD of the bank are placed

before the BFS. Based on the findings of the inspection and other inputs, a supervisory

rating is assigned to the bank. Efforts are afoot to move to a risk based supervision (RBS)

approach, which envisages the monitoring of banks by allocating supervisory resources

and focusing supervisory attention depending on the risk profile of each institution.

The process involves continuous monitoring and evaluation of the appropriateness of the

risk management system in the supervised institution in relation to its business strategy

and exposures, with a view to assessing its riskiness.

65

4.4 RISK MANAGEMENT IN BANKS

Risk is inherent in any commercial activity and banking is no exception to this rule.

Rising global competition, increasing deregulation, introduction of innovative products

and delivery channels have pushed risk management to the forefront of today’s financial

landscape. Ability to gauge the risks and take appropriate position will be the key to

success. It can be said that risk takers will survive, effective risk managers will

prosper and risk averse are likely to perish. In the regulated banking environment,

banks had to primarily deal with credit or default risk. As we move into a perfect market

economy, we have to deal with a whole range of market related risks like exchange risks,

interest rate risk, etc. Operational risk, which had always existed in the system, would

become more pronounced in the coming days as we have technology as a new factor in

today’s banking. Traditional risk management techniques become obsolete with the

growth of derivatives and off-balance sheet operations, coupled with diversifications.

The expansion in E-banking will lead to continuous vigilance and revisions of

regulations.

Building up a proper risk management structure would be crucial for the banks in the

future. Banks would find the need to develop technology based risk management tools.

The complex mathematical models programmed into risk engines would provide the

foundation of limit management, risk analysis, computation of risk-adjusted return on

capital and active management of banks’ risk portfolio. Measurement of risk exposure is

essential for implementing hedging strategies.

Under Basel II accord, capital allocation will be based on the risk inherent in the asset.

The implementation of Basel II accord will also strengthen the regulatory review process

and, with passage of time, the review process will be more and more sophisticated.

Besides regulatory requirements, capital allocation would also be determined by the

market forces. External users of financial information will demand better inputs to

make investment decisions. More detailed and more frequent reporting of risk positions

66

to banks’ shareholders will be the order of the day. There will be an increase in the

growth of consulting services such as data providers, risk advisory bureaus and risk

reviewers. These reviews will be intended to provide comfort to the bank managements

and regulators as to the soundness of internal risk management systems.

Risk management functions will be fully centralized and independent from the business

profit centres. The risk management process will be fully integrated into the business

process. Risk return will be assessed for new business opportunities and incorporated

into the designs of the new products. All risks – credit, market and operational and so on

will be combined, reported and managed on an integrated basis. The demand for Risk

Adjusted Returns on Capital (RAROC) based performance measures will increase.

RAROC will be used to drive pricing, performance measurement, portfolio management

and capital management.

Risk management has to trickle down from the Corporate Office to branches or operating

units. As the audit and supervision shifts to a risk based approach rather than transaction

orientation, the risk awareness levels of line functionaries also will have to increase.

Technology related risks will be another area where the operating staff will have to be

more vigilant in the coming days.

Banks will also have to deal with issues relating to Reputational Risk as they will need to

maintain a high degree of public confidence for raising capital and other resources. Risks

to reputation could arise on account of operational lapses, opaqueness in operations and

shortcomings in services. Systems and internal controls would be crucial to ensure that

this risk is managed well.

The legal environment is likely to be more complex in the years to come. Innovative

financial products implemented on computers, new risk management software, user

interfaces etc., may become patentable. For some banks, this could offer the potential for

realizing commercial gains through licensing.

67

Advances in risk management (risk measurement) will lead to transformation in capital

and balance sheet management. Dynamic economic capital management will be a

powerful competitive weapon. The challenge will be to put all these capabilities together

to create, sustain and maximise shareholders’ wealth. The bank of the future has to be a

total-risk-enabled enterprise, which addresses the concerns of various stakeholders’

effectively.

Risk management is an area the banks can gain by cooperation and sharing of experience

among themselves. Common facilities could be considered for development of risk

measurement and mitigation tools and also for training of staff at various levels.

Needless to add, with the establishment of best risk management systems and

implementation of prudential norms of accounting and asset classification, the quality of

assets in commercial banks will improve on the one hand and at the same time, there will

be adequate cover through provisioning for impaired loans. As a result, the NPA levels

are expected to come down significantly.

68

CHAPTER: 5

AN OVERVIEW OF PUNJAB NATIONAL BANK LTD

5.1 PNB PROFILE

With over 38 million satisfied customers and 4668 offices, PNB has continued to

retain its leadership position among the nationalized banks. The bank enjoys

strong fundamentals, large franchise value and good brand image. Besides being

ranked as one of India's top service brands, PNB has remained fully committed to

its guiding principles of sound and prudent banking. Apart from offering banking

products, the bank has also entered the credit card & debit card business; bullion

business; life and non-life insurance business; Gold coins & asset management

business, etc.

Since its humble beginning in 1895 with the distinction of being the first Indian

bank to have been started with Indian capital, PNB has achieved significant

growth in business which at the end of March 2009 amounted to Rs 3,64,463

crore. Today, with assets of more than Rs 2,46,900 crore, PNB is ranked as the

3rd largest bank in the country (after SBI and ICICI Bank) and has the 2nd largest

network of branches (4668 including 238 extension counters and 3 overseas

offices).During the FY 2008-09, with 39% share of low cost deposits, the bank

achieved a net profit of Rs 3,091 crore, maintaining its number ONE position

amongst nationalized banks. Bank has a strong capital base with capital adequacy

ratio as per Basel II at 14.03% with Tier I and Tier II capital ratio at 8.98% and

5.05% respectively as on March’09. As on March’09, the Bank has the Gross and

Net NPA ratio of only 1.77% and 0.17% respectively. During the FY 2008-09,

its’ ratio of priority sector credit to adjusted net bank credit at 41.53% &

agriculture credit to adjusted net bank credit at 19.72% was also higher than the

respective national goals of 40% & 18%.

69

PNB has always looked at technology as a key facilitator to provide better

customer service and ensured that its ‘IT strategy’ follows the ‘Business strategy’

so as to arrive at “Best Fit”. The bank has made rapid strides in this direction.

Alongwith the achievement of 100% branch computerization, one of the major

achievements of the Bank is covering all the branches of the Bank under Core

Banking Solution (CBS), thus covering 100% of it’s business and providing

‘Anytime Anywhere’ banking facility to all customers including customers of

more than 2000 rural branches. The bank has also been offering Internet banking

services to the customers of CBS branches like booking of tickets, payment of

bills of utilities, purchase of airline tickets etc.Towards developing a cost

effective alternative channels of delivery, the bank with more than 2150 ATMs

has the largest ATM network amongst Nationalised Banks.

With the help of advanced technology, the Bank has been a frontrunner in the

industry so far as the initiatives for Financial Inclusion is concerned. With it’s

policy of inclusive growth in the Indo-Gangetic belt, the Bank’s mission is

“Banking for Unbanked”. The Bank has launched a drive for biometric smart card

based technology enabled Financial Inclusion with the help of Business

Correspondents/Business Facilitators (BC/BF) so as to reach out to the last mile

customer. The BC/BF will address the outreach issue while technology will

provide cost effective and transparent services. The Bank has started several

innovative initiatives for marginal groups like rickshaw pullers, vegetable

vendors, diary farmers, construction workers, etc. The Bank has already achieved

100% financial inclusion in 21,408 villages.

Backed by strong domestic performance, the bank is planning to realize its global

aspirations. In order to increase its international presence, the Bank continues its

selective foray in international markets with presence in Hongkong, Dubai,

Kazakhstan, UK, Shanghai, Singapore, Kabul and Norway. A second branch in

70

Hongkong at Kowloon was opened in the first week of April’09. Bank is also in

the process of establishing its presence in China, Bhutan, DIFC Dubai, Canada

and Singapore. The bank also has a joint venture with Everest Bank Ltd. (EBL),

Nepal. Under the long term vision, Bank proposes to start its operation in Fiji

Island, Australia and Indonesia. Bank continues with its goal to become a

household brand with global expertise.

Amongst Top 1000 Banks in the World, ‘The Banker’ listed PNB at 250th place.

Further, PNB is at the 1166th position among 48 Indian firms making it to a list of

the world’s biggest companies compiled by the US magazine ‘Forbes’.

New Delhi, Jan 5: The Delhi-based Punjab National Bank (PNB) has received the

necessary approvals for patenting its rating model -- PNB Trac -- for its entire

category of lending. The loans with exposure of above Rs 20 lakh have been rated

individually, while loans with exposure under Rs 20 lakh have been rated

segment-wise on portfolio basis as per the terms of Basel II accord. This means

that the bank would be able to do credit ratings on its own for its lendings.

In terms of rating, PNB already has data for default rates for the last five years.

"The results of the exercise are extremely satisfactory," BM Mittal, chief general

manager, PNB, said, when contacted.

The default rates and migration matrix are comparable to that of leading credit

international rating agencies such as Standard & Poor's, Moody's, Fitch and with

international benchmarks. The default rates are also within the limits given in

Basel-II. Mittal added that the bank is fully equipped to implement the stringent

norms. "Though the deadline for the Basel II norms implementation has been

extended by Reserve Bank of India, PNB is ready to come up with the parallel

run," he added.

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Financial Performance:

Punjab National Bank continues to maintain its frontline position in the Indian banking

industry. In particular, the bank has retained its NUMBER ONE position among the

nationalized banks in terms of number of branches, Deposit, Advances, total Business,

operating and net profit in the year 2008-09. The impressive operational and financial

performance has been brought about by Bank’s focus on customer based business with

thrust on SME, Agriculture, more inclusive approach to banking; better asset liability

management; improved margin management, thrust on recovery and increased efficiency

in core operations of the Bank.

The performance highlights of the bank in terms of business and profit are shown below:

*Respective figure for the corresponding financial year

Parameters Mar'07 Mar'08 Mar'09 CAGR

Operating Profit* 3617 4006 5744 26.02

Net Profit* 1540 2049 3091 41.67

Deposit 139860 166457 209760 22.47

Advance 96597 119502 154703 26.55

Total Business 236456 285959 364463 24.15

(Rs.Crores)

ORGANIZATIONAL STRUCTURE OF

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PUNJAB NATIONAL BANK

Head Office

      

Circle Offices

(58)

          

Branches (4267)

5.2 CORPORATE BANKING AT PNB

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PNB has introduced a new scheme for property owners having their property situated in

Metro/Urban/ Semi Urban/rural centres and who have let out such properties.

Eligibility

Property Owners having their properties situated in metro, urban, semi-urban and rural

areas who have leased out such properties to the following:

(i) Public Sector Undertakings / Govt. / Semi / State Govt. & reputed

corporates, Banks, Financial Institutions, Insurance Companies and

Multinational Companies.

(ii) Reputed private schools/colleges (approved by/affiliated to State

Board/University/ AICTE/ any other govt. body).

(iii) Reputed private hospitals/ nursing homes.

Nature & Extent of loan

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Remaining period of the lease Quantum of Loan

(Maximum upto following %age of the

future lease rentals receivable for

unexpired period of lease)

Upto 3 years 80

Beyond 3 years & upto 5 years 70

Beyond 5 years & Upto 7 years 65

Beyond 7 years & Upto 10 years 55

*Branches while financing under the scheme should ensure that the TDS, wherever

applicable have been taken into account.

Security

Assignment of lease rentals.

Equitable mortgage of the leased property or any other immovable property:-

In case of loans having repayment period upto 5 years, the amount of loan should

not exceed the value of the property mortgaged.

In case of loans having repayment period beyond 5 years, the amount of loan

should not exceed 75% of the value of the property mortgaged.

In case of Company - Personal Guarantee of promoter directors.

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Rate of interest

Repayment

Maximum 120 monthly installments or remaining period of lease whichever is

less.

Processing Fee

0.70% of the loan amount + Service Tax & Education Cess

Documentation Charges

Rs.270/- upto Rs.2 Lac + Service Tax & Education Cess

Rs.450/- over Rs.2 Lac + Service Tax & Education Cess

Exim Finance

Services offered to Exporters

Pre-shipment finance in foreign currency and Indian rupees

Post-shipment finance in foreign currency and Indian rupees

Handling export bills on collection basis

Outward remittances for purposes as permitted under Exchange Control

guidelines

Inward remittances including advance payments

Quoting of competitive rates for transactions

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Maintenance of Exchange Earners Foreign Currency (EEFC) accounts

Assistance in obtaining credit reports on overseas parties

Forfeiting for medium term export receivables

Services offered to Importers

Establishment of Import Letters of Credit covering import into India and handling

of bills under Letter of Credit

Handling of import bills on collection basis

Remittance of advance payment against imports

Offering utilisation of PCFC ( pre-shipment credit in foreign currency) for

imports

Credit reports on overseas suppliers

Exchange Earners Foreign Currency (EEFC) Deposits Scheme

The Exchange Earners Foreign Currency (EEFC) Deposits Scheme was started by RBI in

the year 1992 with the introduction of Liberalised Exchange Rate Management System.

Under this scheme, the recipient of inward remittances, exporters and other eligible

bodies are allowed to keep a portion of their inward remittances / export proceeds in

foreign currency with the banks in India which can later be utilised for permissible

purposes.

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PNB sets up connectivity with the Customs Deptt. for the benefit of exporters/importers:

To provide efficient service to our importer/exporter clients, PNB has set up connectivity

with the Customs Department to facilitate payment of custom duty and receipt of duty

draw back by the importer/exporter clients through the electronic media. Under this

system of Electronic Data Interchange (EDI), Custom Authorities process the shipping

bills and also effect on line payment of duty draw back for exporters. Further, they

undertake processing of Bill of Entry and deposit of custom duty for imports. This is a

pilot project in the country successfully implemented at Indira Gandhi International

Airport, Custom House branch of PNB. This has now been replicated at PNB's extension

counters at Inland Container Depot, Tughlakabad, Delhi and Patpar Ganj, Delhi.

 

LOANS TO MANUFACTURING INDUSTRIES

 

To set up SSI units, for purchase of fixed assets and meeting working

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capital needs.

 

PURPOSE

For acquisition of fixed assets (plant, machinery, land, building,

tools, etc.).

For working capital requirements within the ceiling limits of Rs 3

lakh / Rs 5 lakh as the case may be.

 

ELIGIBILITY FOR FINANCING SSI

Technically qualified entrepreneurs and / or those having adequate technical

practical experience in a particular field of technology.

 

MARGIN

  For Term Loan  

(i) Upto Rs 2 lakh Nil

(ii) Above Rs 2 lakh Upto Rs 3 lakh 10%

(iii) Above Rs 3 lakh Upto Rs 4 lakh 15%

(iv) Above Rs 4 lakh Upto Rs 5 lakh 20%

 

AMOUNT OF LOAN

Maximum Rs 3 lakh in case of individuals and Rs 5 lakh in case of

partnership firms or joint stock companies. (In case of ancillary unit or

industry with joint financing of SF / Bank higher assistance of Rs 5 lakh for

individual and Rs 10 lakh for groups).

 

REPAYMENT

5 to 7 years for term loan including moratorium period.

 

COLLATERAL SECURITY

No collateral security for loans upto Rs 5 lakh. For loans in excess of Rs 5

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lakh and upto Rs 25 lakh no collateral security required, if the unit is having

good track record & financial position. In other cases collateral security or

third party guarantee is asked only in cases where primary security is

inadequate or for other valid reasons and not as a matter of routine.

 

LOCATION OF PROJECT

Preferably the unit should be set up in an industrial estate where there is

provision for suitable accommodation with the requisite facilities such as

water, power, transport and communication. Project set up in industrial

areas, zones or sites specifically declared as undeveloped by the State

Government, concerned agencies / departments will be considered.

 

The required accommodation should, as far as possible, be acquired on

rental or hire-purchase basis. This will ensure that the investment in fixed

assets is made for purchase of the required machinery and equipment,

thereby enabling the entrepreneurs to make the best use of our financial

assistance.

 

 

 

 

CHAPTER: 6

AN OVERVIEW OF ICICI BANK LTD

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6.1 ICICI PROFILE

ICICI Bank is India's second-largest bank with total assets of about Rs. 1 trillion and a

network of about 540 branches and offices and over 1,000 ATMs. ICICI Bank offers a

wide range of banking products and financial services to corporate and retail customers

through a variety of delivery channels and through its specialized subsidiaries and

affiliates in the areas of investment banking, life and non-Banking , venture capital, asset

management and information technology. ICICI Bank's equity shares are listed in India

on stock exchanges at Chennai, Muzaffarnagar, Kolkata and Vadodara, the Stock

Exchange, Mumbai and the National Stock Exchange of India Limited and its American

Depositary Receipts (ADRs) are listed on the New York Stock Exchange (NYSE).

ICICI Bank was originally promoted in 1994 by ICICI Limited, an Indian financial

institution, and was its wholly owned subsidiary. ICICI's shareholding in ICICI Bank was

reduced to 46% through a public offering of shares in India in fiscal 1998, an equity

offering in the form of ADRs listed on the NYSE in fiscal 2000, ICICI Bank's acquisition

of Bank of Madura Limited in an all-stock amalgamation in fiscal 2001, and secondary

market sales by ICICI to institutional investors in fiscal 2001 and fiscal 2002. ICICI was

formed in 1955 at the initiative of the World Bank, the Government of India and

representatives of Indian industry. The principal objective was to create a development

financial institution for providing medium-term and long-term project financing to Indian

businesses. In the 1990s, ICICI transformed its business from a development financial

institution offering only project finance to a diversified financial services group offering a

wide variety of products and services, both directly and through a number of subsidiaries

and affiliates like ICICI Bank. In 1999, ICICI become the first Indian company and the

first bank or financial institution from non-Japan Asia to be listed on the NYSE.

After consideration of various corporate structuring alternatives in the context of the

emerging competitive scenario in the Indian banking industry, and the move towards

81

universal banking, the managements of ICICI and ICICI Bank formed the view that the

merger of ICICI with ICICI Bank would be the optimal strategic alternative for both

entities, and would create the optimal legal structure for the ICICI group's universal

banking strategy. The merger would enhance value for ICICI shareholders through the

merged entity's access to low-cost deposits, greater opportunities for earning fee-based

income and the ability to participate in the payments system and provide transaction-

banking services. The merger would enhance value for ICICI Bank shareholders through

a large capital base and scale of operations, seamless access to ICICI's strong corporate

relationships built up over five decades, entry into new business segments, higher market

share in various business segments, particularly fee-based services, and access to the vast

talent pool of ICICI and its subsidiaries. In October 2001, the Boards of Directors of

ICICI and ICICI Bank approved the merger of ICICI and two of its wholly owned retail

finances subsidiaries, ICICI Personal Financial Services Limited and ICICI Capital

Services Limited, with ICICI Bank. The merger was approved by shareholders of ICICI

and ICICI Bank in January 2002, by the High Court of Gujarat at Ahmedabad in March

2002, and by the High Court of Judicature at Mumbai and the Reserve Bank of India in

April 2002. Consequent to the merger, the ICICI group's financing and banking

operations, both wholesale and retail, have been integrated in a single entity.

6.2 CORPORATE BANKING AT ICICI BANK

Escrow Account

82

At ICICI Bank, we extend the trust you have in us by providing you with escrow services

for safe custody of assets or for revenue streams. These services are customised to meet

your needs. Some of the escrow services offered are in relation to the following:

Project financing

Debt repayments

Sale purchase transactions

Mergers and acquisitions

Features

Specialised and dedicated services

Risk reduction in new relationships

Security towards contingencies

Mandatory in certain transactions

Benefits

Simplified documentation

Customised transaction structure

Online tracking of your escrow account

Fixed Deposit

Corporates can invest their surplus funds in fixed deposits for a wide range of tenures.

The minimum deposit amount is Rs.10,000. Other features of the account are:

Funding through a debit to the operative account/cheque for clearing

While interest is compounded quarterly, payment of interest is quarterly, monthly or on

maturity

Interest payouts can be through credit to your account or through banker's cheque

Benefits

Wide range of tenures

Choice of investment plans

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Partial withdrawal permitted

Availability of auto-renewal facility

Structured Finance

In the Structured Finance space, our approach is totally client-centric. We believe that

every problem is unique and therefore we endeavour to develop and offer the widest

range of solutions tailored to address specific requirements of each client. Services

offered are:

Structured finance for Corporate clients

The Structured Finance Group aims to enable its corporate clients access funds through

cost efficient structures. The group's strength lies in its experience and expertise in

providing tailor-made solutions after understanding the client's requirements.

To deliver these customized structures, it leverages on ICICI Bank's global presence,

industry expertise, large underwriting capability and comprehensive product suite. Strong

capabilities in end-to-end solutions and timely execution have enabled ICICI Bank to

become one of the leading arrangers and underwriters of structured finance transactions.

The Structured Finance Group provides an array of services to its clients including:

Acquisition finance

Asset-backed finance

Receivables purchase

Subordinated debt

Convertibles / Hybrid instruments

Non-recourse structures

Investment opportunities in securitized debt instruments

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We offer a plethora of investment opportunities in securitised debt instruments (SDIs)

involving both Pass-Through and Pay-Through structures which:

offer a premium in yield to corporate debt instruments having similar risk profiles

are customizable to meet both quantum and tenor requirements of the investors

have well-diversified risk profiles

could be customized (using different levels of credit protection) to meet the

specific risk appetites of the investors

could be offered as collateral by the investors at a later date for additional

leveraging

For clients desirous of growth through the inorganic route, we can structure solutions

around sale of specific asset category(ies) as per the clients' needs.

Further, we could also structure solutions for clients desirous of getting involved in

market making or investing at specific points in time through structuring of appropriate

Put Options.

Securitization & structured finance advisory solutions

We help structure selling or buying of asset portfolios (in whole or in part) for clients

through securitisation or otherwise, thereby effectively limiting their exposures to future

risks arising out of such asset pools. We can even offer to buy such identified asset pools

from clients if the commercials suit the Bank's risk-return appetite.

Being involved in more than 100 securitisation transactions till date, we can provide

85

advice to clients for structuring securitisation transaction efficiently. We have the

distinction of structuring and placing some of the largest securitisation transactions in the

Indian market including the solitary transaction which exceeded USD 1.00 billion in

size.

Traditionally Corporate borrowing has been on the basis of strength or weakness of

balance sheet, with the credit quality of the borrower being the single most important

factor. But of late the borrowings are being closely linked to the value of the asset or the

revenue earning capability of the asset. This could be achieved by means of appropriate

structuring wherein customized borrowing propositions could be evolved for different

business.

A few examples of such structured financing could entail evolving solutions around

dealer financing, vendor financing, transporter financing, brand financing, Export &

Packing Credit (EPC) contract financing, investment monetisation, etc.

Leveraging on our rich experience and wide reach in the Indian debt markets, we can

provide arranging services for clients interested in securitising their assets.

Being a SEBI registered Category - I merchant banker, we can provide underwriting

services for securitisation transactions originated by clients.

We can also provide protection to the client from interest rate / currency risks for

their structured finance exposures through interest rate swaps, currency swaps and

associated derivatives.

We can also provide protection to the client from credit risks for their structured

finance exposures by tailoring suitable credit protection offerings.

We can also participate in market making or investing at specific points in time through

structuring of appropriate Put Options.

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Dealer financing

Dealers of large corporates can be provided finance which can be either with a limited

recourse (on a first loss basis) to the corporate or based on the creditworthiness of the

dealer and its relationship with the manufacturer. Bill discounting / Web-based financing

with/without recourse, Cash credit / Demand loan facilities, Financing for auto dealers,

could be some of the examples in this space.

Vendor financing

Vendor financing can be structured as a direct line of credit to the vendors specifically to

be used for supplies to the company or as a revolving line for discounting bills raised by

the vendors on the company. The former can be integrated into the Internet banking

model of ICICI Bank and a web-based vendor financing structure can be created. The

web-based structure would offer the company the convenience of operating the credit line

of the vendors for making payments through the net immediately after accepting goods.

Vendor financing programs can be set up for specific vendors recommended by the

company. Through the widespread branch network of ICICI Bank, the program can

include vendors at multiple locations.

Transporter financing

This is a product designed to finance the truck operators who are dedicated transport

service providers to a company. The truck operators are typically small players and hence

have limited sources for raising funds. It is likely that the vehicles used by them have

been financed at a high cost which they would indirectly be passed on to the company in

the form of increased freight rates. A financing facility could be set up for the truck

operators with some support from the corporates they serve, which could be used for

refinancing their existing vehicles or could be used for expansion of their fleet in line

with the company's growth requirements.

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Brand financing

Borrowings could be structured against security of specific brand(s) or a sale and lease

back of the brand(s). Borrowers could even be financed to fund purchase of a brand. In

the first option, the brand would be mortgaged in the name of the lender and only in the

event of default of the loan would the brand be transferred to the lender. The lender could

alternatively purchase the brand from the borrowing company and lease / license it out to

the same entity. After expiry of the lease / license period the brand could either revert to

the company or be sold to someone else. In the second option, the loan could be given to

the company exclusively for purchasing the brand/s which would then be mortgaged in

the name of the lender.

Investment monetization

This is a product designed to cater to the requirement of the business groups to streamline

the cross-holdings within their own group companies. A Trust could be set up to acquire

the intra-group cross holdings from the various companies in the group at current market

prices. To fund this, the Trust would issue Pass-through Certificates (PTCs) to the lender.

The take-out could be through a put option provided by the identified holding company

of the group wherein the lender could sell the PTCs to the put option provider at a pre-

determined price on a fixed date. The deal could be secured through a pledge of shares.

Project Finance Group

ICICI Bank Project Finance Group (PFG) has developed comprehensive domain

expertise and knowledge in the infrastructure & manufacturing sector, having ensured

timely financial closure of several big ticket projects. PFG has unmatched capabilities of

discovering, creating and structuring project finance transactions.

Group structure

PFG is the “One Stop Shop” fulfilling the funding requirements of Greenfield &

Brownfield projects in infrastructure & manufacturing sector. It comprises of three sub-

groups as follows:

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Infrastructure Finance Group (IFG): IFG caters to the funding requirement in the

infrastructure sector like Power, Telecom, Roads, Ports, Airports, Railways and

Urban infrastructure.

Manufacturing Projects group (MPG): MPG caters to the funding requirement in

the manufacturing sector like Oil & Gas, Steel, Aluminium, Cement, Auto, and

Mining

Infrastructure Equity Group (IEG): IEG is engaged in providing equity support to

projects in various established as well as upcoming sectors.

The project finance team of ICICI Bank has developed substantial insight in the

dynamics and trends in the infrastructure sector, having assisted the Government of India

in formulating policies relating to various segments of the infrastructure sector. The

unique insight and understanding thus derived from the exercise has not only enabled

ICICI Bank to provide optimum solutions to its clients, but has also provided ICICI Bank

with an appropriate decision support for strategic measures, going forward.

Service offerings

PFG provide a wide range of services including the following:

Rupee term loans

Foreign currency term loans

External Commercial Borrowings

Subordinated debt and mezzanine financing

Export Credit Agency backed funding

Non fund based facilities like Letter of Credit, Bank Guarantee, Supplier’s Credit,

Buyer’s Credit etc.

Equity funding

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Technology Finance

The Technology Finance Group (TFG) of ICICI Bank implements various programmes

for international agencies such as World Bank and USAID. The programmes currently

running are designed to help the industry and institutions undertake collaborative R&D

and technology development projects. These programmes focus on the following sectors:

Biotechnology/ Healthcare

Electrical

Electronics & communication

Energy

Environment

Materials

Manufacturing/ Control technologies

Financial/ Security services

The core group handling these programmes assists projects, which introduce new

concepts, products, and processes that will have a positive impact on the industry and

help in improving competitiveness and operational efficiencies.

The programmes being implemented are:

Technology Development and Commercialization (TDC) programme

The objective of this programme is to facilitate technology development,

commercialisation and strengthen Indo-US technology collaboration. Till date, the

Technology Finance Group has assisted 29 projects. Private sector companies which

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would like to commercialize innovative concepts, products and processes in the areas of

energy, environment & healthcare are eligible for concessional Rupee Term Loans up to

a maximum of 50% of the project cost. The repayment is structured as per project and

programme requirements.

Guidelines for Financial Assistance

The project is evaluated in terms of innovative content, likely impact on industry and

Indo-US linkages. The company is requested to submit a project profile covering the

following information:

Brief particulars of the company

Project title

Description of existing facilities

Current development activities

Proposed commercialisation project

Innovative content of the project in terms of comparison with current methods and

aim of project in quantitative terms

Major steps/ activities involved in proposed EE/ESCO/DSM project

Brief on product / processes to be developed

Brief particulars of the work already carried out

Details on Indo-US technology collaboration (if any)

Cost of project with breakup and proposed means of financing

Schedule of implementation

Business plan for commercialisation

Details on market size, demand/supply drivers, etc.

The programme is currently under renewal

The objective of this programme is to stimulate technology development through private

investment in R&D and strengthen industry & technology institution (TI) collaboration.

The companies eligible for availing these facilities should be from the private sector

undertaking R&D in collaboration with TI.

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Following are the eligible sectors

Biotechnology/ Healthcare

Electrical

Electronics & communication

Energy

Environment

Materials

Manufacturing/ Control technologies

Financial/ Security services

The facilities include concessional Rupee Term Loans of up to 50% of the eligible project

cost. The repayment is structured as per project and programme requirements. Till date

the SPREAD has assisted 120 projects.

Guidelines for Financial Assistance: To avail the facilities, the companies are requested

to submit a project profile covering the following information:

Project title

Brief particulars of the company

Description of existing facilities

Current R&D activities

Proposed R&D project

Collaborating technology institution

Brief on product / processes to be developed

Innovative content of the project in terms of comparison with current practice and

aim of project in quantitative terms

Major steps / activities involved in proposed R&D

Break-up of activities to be taken up by the company and by the Technology

Institution

Brief particulars of the work already carried out

Cost of project with breakup and proposed means of financing

Schedule of implementation

Business plan for commercialisation

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Details on market size, demand/supply drivers, etc.

The project is evaluated in terms of

Innovative content & likely impact

Contribution from the technology institution

Commercial potential.

DOCUMENTS

Please return the form along with the following documents

1. Firm/Company profile

2. List of 5 major suppliers and customers including contact person and contact no

3. Constitution documents

4. Audited financial statements of last 3 years along with IT return and tax audit report

and schedules and notes to accounts

5. Bank statement of the last 6 months

6. IT PAN card of concern (entity) and all Promoters / Directors / Partners

7. Provisional Balance Sheet and P/L a/c of ...............-................... as certified by

proprietor / partner / director

Projected Balance Sheet and P/L a/c of ....,...........-................... as certified by proprietor /

partner / director

8. Proprietor's / Partner's/Directors personal ITR and Balance Sheet of last 1 year - CA

certified/signed by individual

9. Current performance ( P/L & Balance Sheet ) from April ........................,.... to till date

10. VAT assessment order or sales tax registration certificate or shop & establishment or

VAT return

For Limited Co.

11. Latest list of Directors

12. Form no: 32 and shareholding pattern or annual return

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For Partnership

13. Registration certificate in case of partnership/application for registration

Property papers (for loan against collaterals)

14. Title deed

15. Completion certificate & occupancy certificate

16. Tax receipts & sanction plan

Additional documents for loan against credit card securitisation

17. CA certified last 12 months credit card sales of Master & Visa only (excluding

Dinners & Amex)

If applicable

18. Loan no of ICICI Bank loans (if any)

19. Latest 1 year audited financials of sister concern (If any)

20. Agreement with principal (if any) - Applicable to distributors/sole selling

agents/franchisee etc.

21. Existing Banks sanctions letter (if applicable).

22. Any other document as required and deemed fit.

CHAPTER: 7

AN OVERVIEW OF BLISS PHARMA LTD

7.1 PHARMA INDUSTRY

94

The Indian pharmaceutical industry is a success story providing employment for millions

and ensuring that essential drugs at affordable prices are available to the vast population

of this sub-continent.”

Richard Gerster

The Indian Pharmaceutical Industry today is in the front rank of India’s science-based

industries with wide ranging capabilities in the complex field of drug manufacture and

technology. A highly organized sector, the Indian Pharma Industry is estimated to be

worth $ 4.5 billion, growing at about 8 to 9 percent annually. It ranks very high in the

third world, in terms of technology, quality and range of medicines manufactured. From

simple headache pills to sophisticated antibiotics and complex cardiac compounds,

almost every type of medicine is now made indigenously.

Playing a key role in promoting and sustaining development in the vital field of

medicines, Indian Pharma Industry boasts of quality producers and many units

approved by regulatory authorities in USA and UK. International companies associated

with this sector have stimulated, assisted and spearheaded this dynamic development in

the past 53 years and helped to put India on the pharmaceutical map of the world.

The Indian Pharmaceutical sector is highly fragmented with more than 20,000 registered

units. It has expanded drastically in the last two decades. The leading 250 pharmaceutical

companies control 70% of the market with market leader holding nearly 7% of the market

share. It is an extremely fragmented market with severe price competition.

The pharmaceutical industry in India meets around 70% of the country's demand for bulk

drugs, drug intermediates, pharmaceutical formulations, chemicals, tablets, capsules,

orals and injectibles. There are about 250 large units and about 8000 Small Scale Units,

which form the core of the pharmaceutical industry in India (including 5 Central Public

Sector Units). These units produce the complete range of pharmaceutical formulations,

i.e., medicines ready for consumption by patients and about 350 bulk drugs, i.e.,

chemicals having therapeutic value and used for production of pharmaceutical

95

formulations.

Following the de-licensing of the pharmaceutical industry, industrial licensing for most of

the drugs and pharmaceutical products has been done away with. Manufacturers are free

to produce any drug duly approved by the Drug Control Authority. Technologically

strong and totally self-reliant, the pharmaceutical industry in India has low costs of

production, low R&D costs, innovative scientific manpower, strength of national

laboratories and an increasing balance of trade. The Pharmaceutical Industry, with its rich

scientific talents and research capabilities, supported by Intellectual Property Protection

regime is well set to take on the international market.

7.2 CASE FACTS

7.2.1. COMPANY PROFILE

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Bliss Gvs Pharma Limited was incorporated on 11th December, 1984 as Public Limited

Company. It is listed on Bombay and Delhi Stock Exchange. The Manufacturing Plant is

located at Palghar (approximately 90 kms from Bombay) in an industrial area which is

well developed with all infra-structural facilities. The plant is 1.5 kms. from Palghar

Railway Station on the Western Railway. The company's most unique product is 'Today'

Vaginal Contraceptive, a safe female contraceptive aimed at furthering planned

parenthood and is also an established method for preventing conception

Bliss Gvs Pharma Limited was incorporated on 11th December, 1984 as Public Limited

Company. It is listed on Bombay and Delhi Stock Exchange. The Manufacturing Plant is

located at Palghar (approximately 90 kms from Bombay) in an industrial area which is

well developed with all infra-structural facilities. The plant is 1.5 kms. from Palghar

Railway Station on the Western Railway. The company's most unique product is 'Today'

Vaginal Contraceptive, a safe female contraceptive aimed at furthering planned

parenthood and is also an established method for preventing conception.

Bliss Gvs Pharma Limited has the most modern plant to manufacture Female

Contraceptives, Soft Pessaries and Suppositories. Its most popular product is 'Today'

Vaginal Contraceptive pessaries containing Nonoxynol 9. Bliss also manufactures to U.S.

specification vaginal pessaries of Clotrimazole & Povidone Iodine in addition to Anal

Suppositories for treatment of Piles.

BLISS complies with all norms laid down by Food & Drug Administration for

manufacture of its products and maintains high International GMP standards.

BLISS also manufactures wide range of Pessary Formulations, Suppository

Formulations, Calcium Preparation, Protein Powders, Iron Preparation, Antibiotics,

Analgesic & Antipyretics, Respiratory, Anti-inflammatory, Dermatological Preparations,

Anti-Diarrhoeal products.

7.2.2. LOCATION

It is a sophisticated automatic plant situated at Palghar (approx. 90 kms away from

Mumbai City) in an Industrial area which is well-developed with all Infra-structural

facilities. This site is around 1.5 kms away from Palghar Railway Station on the Western

97

Railway and is well-connected by Road and Rail to most parts of the country, including

Mumbai.

The plant aims to be as the most modern and one of its kinds in Indian sub-continent, to

manufacture suppositories. Complete overhaul and annual maintenance has kept the plant

in excellent condition and fully operational with minimum down time. Spares and

consumables are maintained at proper levels to prevent unnecessary delays and the

company has made efforts to employ a qualified Maintenance Engineer since production

should not be hampered in any way.

7.2.3. AWARDS AND ACCOLADES

Bliss GVS Pharma receives award from Pharmexil

In recognition of commendable performance in exports of pharmaceuticals Bliss GVS

Pharma has announced that the company has received an Award from Pharmexcil,

Outstanding Export Performance Award in the recognition of commendable performance

in the exports of pharmaceuticals in the category of Small Scale Industries for the year

2008-2009.

7.2.4. PRODUCTS

Antimalarial

Alaxin Gvither P-Alaxin

98

Gsunate Lonart    

Anal Suppositories

Rectol Poroxicam Parafen

Vomitin Slipizem Anomex

Prochloperazine Conlax Xtacy

Meloxicam Rectcin Glycerin

Vaginal Pessaries

Imazole Gvgyl Terconazole

Vagid Gvgyl - N Clindemycin

Povid / Gevid Blissfast / Gynanfort Klovinal

Micozole Blissnox / Wellgynax    

Ecozole Vagikit    

 

General

Lofnac Comit Zinvite

Funbact-A Aceclofenac Gudapet

Gvfluc Clamoxin Gbactin

40

7.3 FINANCIAL DATA

BALANCE SHEET AS AT 31ST MARCH 2009

(Rs. In crores)

Balance sheet

Mar ' 09 Mar ' 08

99

Sources of funds

Owner's fund

Equity share capital 10.31 6.45

Share application money - -

Preference share capital - -

Reserves & surplus 87.2 55.43

Loan funds

Secured loans 2.41 12.23

Unsecured loans - -

Total 99.93 74.1

Uses of funds

Fixed assets

Gross block 34.53 21.3

Less : revaluation reserve - -

Less : accumulated depreciation 10.17 6.6

Net block 24.36 14.7

Capital work-in-progress 0.13 0.04

Investments - -

Net current assets

Current assets, loans & advances 102.56 92.75

Less : current liabilities & provisions 27.12 33.39

100

Total net current assets 75.44 59.37

Miscellaneous expenses not written - -

Total 99.93 74.1

Profit loss account

Mar ' 09 Mar ' 08

Income

Operating income 132.96 102.4

Expenses

101

Material consumed 69.84 44.59

Manufacturing expenses  2.43 2.09

Personnel expenses 2.64 2

Selling expenses 6.71 4.58

Adminstrative expenses 12.03 7.35

Expenses capitalised - -

Cost of sales 93.65 60.62

Operating profit 39.31 41.77

Other recurring income 0.19 0.09

Adjusted PBDIT 39.49 41.86

Financial expenses 2.26 1.38

Depreciation  3.59 2.93

Other write offs - -

Adjusted PBT 33.64 37.55

Tax charges  2.77 1.27

Adjusted PAT 30.87 36.28

Non recurring items 6.71 -1.16

Other non cash adjustments -0.03 0.98

Reported net profit 37.55 36.09

Earnigs before appropriation 73.14 39.01

Equity dividend 1.55 0.65

Preference dividend - -

Dividend tax 0.26 0.11

Retained earnings 71.33 38.25

CHAPTER: 8

Case study analysis

8.1. ICICI RATING MODEL

102

ICICI Bank’s corporate banking strategy is based on providing customized financial

solutions to clients, tailored to meet their specific requirements. The corporate banking

strategy focuses on careful management of credit risk and adequate return on risk capital

through risk-based pricing and proactive portfolio management, rapid growth in fee-

based services and extensive use of technology to deliver high levels of customer

satisfaction in a cost effective manner.

Financial performance

  Manufacturing     Max. Score Co.Score

Parameter Range Score Weight

Turnover/total

income

>= 750 mn 5 4% 5 20 20

550 to 750 mn 4  

400 to 550 mn 3  

250 to 400 mn 2  

100 to 250 mn 1  

<100 mn 0  

Turnover Growth >=15% 5 2% 5 10 10

12% to 15% 4  

9% to 12% 3  

6% to 9% 2  

3% to 6% 1  

<3% 0  

Operating margin

(PBDIT/TOI%)

>=18% 5 5% 5 25 25

16% to 18% 4  

13% to 16% 3  

10% to 13% 2  

6% to 10% 1  

<6% 0  

Interest coverage

ratio

>=5 times 5 2% 5 10 10

4 to 5 times 4  

3 to 4 times 3  

103

2 to 3 times 2  

1.5 to 2 times 1  

<1.5 times 0  

Total debt to net

cash accruals

<=4 5 4% 5 20 20

4 to 6 4  

6 to 7 3  

7 to 8 2  

8 to 10 1  

>10 0  

Debtors collection

period

<=60 days 5 3% 2 15 6

60 to 90 4  

90 to 120 3  

120 to 150 2  

150 to 180 1  

>180 days 0  

Networth >=200 mn 5 2% 5 10 10

150 to 200 mn 4  

100 to 150 mn 3  

50 to 100 mn 2  

30 to 50 mn 1  

<30 mn 0  

TOL/TNW <=1 5 5% 1 25 5

1 to 1.25 4  

1.25 to 1.5 3  

1.5 to 1.75 2  

1.75 to 2.5 1  

>2.5 0  

Current ratio >=1.75 times 5 4% 5 20 20

1.33 to 1.75 4  

1.25 to 1.33 3  

1.15 to 1.25 2  

1 to 1.15 1  

<1 0  

Inventory to

turnover ratio

<=30 days 5 2% 0 10 0

30 to 45 4  

45 to 60 3  

104

60 to 75 2  

75 to 90 1  

>90 days 0  

No. of years

Profitable

More than 10

years

5 6% 3 30 18

  Minimum 10

years

4  

  Minimum 8

years

3  

  Minimum 5

years

2  

  Minimum 2

years

1  

  Less than 2

years

0  

PAT (%) >=6% 5 2% 5 10 10

5% to 6% 4  

4% to 5% 3  

3% to 4% 2  

2% to 3% 1  

<2% 0  

Total     41% 46 205 154

Business segment and market position

Parameter Range Score Weight Max.

Score

Co,'s

Score

Industry Positive 5 6%

(Classification given in

Annexure F)

Moderately

positive

4  

105

  Stable 3   3 (crisil

site)

30 18

  Moderately

negative

1  

  Negative 0  

Contracts in hand /

confirmed orders/

assured off take

>=40% of last

year's turnover

5 5% 3 25 15

30% to 40% of

last year's

turnover

4  

20% to 30% of

last year's

turnover

3  

10% to 20% of

last year's

turnover

2  

0% to 10% of

last year's

turnover

1  

No contracts /

confirmed

orders

0  

Bargaining power High 5 5% 25 15

Moderate 3   3

Low 1  

Nil 0  

Product range Wide 5 4% 20 15

Niche 3   3

Limited 1  

Single 0  

No. of large customers

contributing to >5% of

turnover)

5 5 3% 3 15 9

4 4  

3 3  

2 2  

1 1  

106

0 0  

Length of association

with large customers

>= 5 years 5 3% 5 15 15

3 to 5 years 4  

2 to 3 years 3  

1 to 2 years 2  

6 months to 1

year

1  

< 6 months 0  

% of turnover from

large customers

30% to 50% of

turnover

5 3%

between 20% to

30% or 50% to

60%

4   4 15 12

between 15% to

20% or 60% to

70%

3  

between 10%to

15% or 70% to

80%

2  

between 5%to

10% or 80% to

90%

1  

<5% or >90% 0  

Total     29% 24 145 99

Parameter Range Scor

e

Weigh

t

Max

score

Cos.scor

e

Business vintage (years) 0 – 10   3%

5 15 15

107

Personal networth of promoters

(Rs. in mn)

0 – 50   3%

Constitution of the entity Public limited

company

5 3%

5 15 15

Private limited

company

4  

Registered

partnership firm

3  

Unregistered

partnership

firm/HUF

2  

Sole proprietorship

concern

1  

Trade reference/ Market

feedback about promoters

Excellent 5 4% 20 12

Very Good 4  

Good 3   3

Above average 2  

Average 1  

Below average 0  

Promoter's financial flexibility Excellent

(deposits/investm

ents >=100.0 mn)

5 3%

5 15 15

Promoters /management

108

4  

5 15 15

Good

(deposits/investments

50.0 to 70.0 mn)

3  

Above average

(deposits/investments

20.0 to 50.0 mn)

2  

Average

(deposits/investments

10.0 to 20.0 mn)

1  

Below average

(deposits/investments

<10.0 mn)

0  

Promoter's payment record with other

banks/FIs/NBFCs/creditors

Excellent 5 2% 5 10 10

Very Good 4  

Good 3  

Above average 2  

Average 1  

Below average 0  

Total     18% 28 90 82

109

Collateral Security

  Manufacturi

ng

    MAX

SCORE COs. SCORE

Parameter Range Score Weight

Collateral as % of

limits

>= 35% 5 6% 5 30 30

30% to

35%

4  

25% to

30%

3  

20% to

25%

2  

15% to

20%

1  

<15% 0  

Corporate

Guarantee (Rating

of Guarantor)

AAA or AA+ 5 6% 4 30 24

AA 4  

AA- 3.5  

A+ 3  

A 2.5  

A- 2  

BBB 1  

Total     12% 9 60 54

OVERALL TOTAL 500 389

110

CREDIT RATING

Category Score

range

Trading

and

services

Manufactur

ing

A 85 and

above

80 100

B 65-85 60 80

C 55-65 40 50

COMPANY NAME SCORE CATEGORY EXPOSURE LIMIT

BLISS PHARMA 77.8 B 80 millions

111

8.2. PNB CREDIT RATING MODEL

Bank has developed online comprehensive risk rating system that serves as a single point

indicator of diverse risk factors of counter-party and for taking credit decisions in a

consistent manner. The risk rating system is drawn up in a structured manner,

incorporating different factors such as borrower’s specific characteristics, industry

specific characteristics etc. Bank is also undertaking periodic validation exercise of its

rating models and also conducting migration and default rate analysis to test robustness

of its rating models.

Name of borrower : Bliss Pharma Ltd

Branch Office : Large Corporate Branch, Mumbai

Constitution

: Public Limited Company

S

r

N

o. Parameters

Co's

value

Bencmark

Value

Sco

re

Benc

mark

Valu

e

S

c

o

r

e

Ben

cm

ark

Val

ue Score

Bencma

rk Value Score

Benc

mark

Value Score

Score

award

ed

1 Financials:      

I TOL:TNW 2.47 >5.00 OR

<0

[0] >4.0

0 &

[2

]

>2.

50

[4] 1.00 &

upto 2.50

[6] <1.00 [8] 6.00

112

upto

5.00

&

upt

o

4.0

0

Ii Current Ratio 3.36 <1.00 [0]

1.00

&

upto

1.25

[2

]

>1.

25

&

upt

o

1.5

0 [4]

>1.50 &

upto 2.00 [6] >2.00 [8] 8.00

Iii ROCE

35.92

% <4% [0]

4% &

upto

8%

[2

]

8%

&

upt

o

12

% [4]

12% &

upto 16% [6] >16% [8] 8.00

Iv

Inventory & Debtors

Holding (Months) 3.13 >5 [0]

>4.0

0 &

upto

5.00

[2

]

>3

&

upt

o 4 [4]

2 & upto

3 [6] <2.00 [8] 4.00

V Score under past financials 26.00

  Subjective Assessment of Financials

vi

Reliability of Annual

Financial Statements  

80% &

below  

80%

&

upto

85%  

85

% &

upt

o

90

%  

90% &

upto 95%   >95%    

Vi

i

Discounting Factor for

scre inder (vi) above.   (-) 50%  

(-)

30%  

(-)

20

%   (-) 10%   NIL  

-

30.00

%

Vi

ii

Net score under

Financial after

discounting (v-vii) 18.00

Ix

Estimated cash profit of

current year to Net

Repayment obligations

of current year

303.09

% <100% [0]

100

% &

upto

125

%

[2

]

125

% &

upt

o

175

%

[4

] [0] [6] >250% [8]  8.00

A NET SCORE OF

FINANCIALS

(viii+ix)  

113

2 BUSINESS/INDUSTRY                        

i Expected Sales Growth  

Growth of

less than

5% or

negative

growth

during the

last 3 years

consecutive

ly. [0]

Positi

ve

growt

h of

mini

mum

5%

durin

g any

one

year

out of

past

3

years

and

positi

ve

growt

h of

mini

mum

5% is

expe

cted

to

conti

nue

durin

g

curre

nt

year.

[2

]

Pos

itive

gro

wth

of

mini

mu

m

5%

for

any

2

yea

rs,

out

of

past

3

yea

rs

and

exp

ecte

d to

cont

inue

duri

ng

curr

ent

yea

r.

[4

]

Positive

growth

of

minimu

m 5% for

consecut

ively 2

years

during

past 3rd

year &

expecte

d to

continue

during

current

year. [6]

Positive

growth of

minimum

5% for last

3 years

continously

and

expected to

continue

during

current

year.   8.00

Positive growth of minimum 5% is expected to continue in the current year

114

Ii

Availability of

inputs  

Scarcity/low

availability [0]

High

depe

nden

ce on

suppl

iers/i

nstab

ility

of

suppl

ies

[1

]

Eas

y

avai

labil

ity

of

inpu

ts

[2

]

Adequat

e

availiblit

y at

competiti

ve prices [3]

Buyers'

market [4] 2.00

Iii

Production/

Product Strength  

Poor

Quality [0]

Quali

ty not

maint

ained

[1

]

Goo

d

Qua

lity/

Nor

ms

mai

ntai

ned

[2

]

Standar

d Quality

& Post

Sales

Services [3]

Market

Leader [4] 2.00

Iv

Marketing

Strength  

Poor

Customer

base/

marketing

network [0]

Inade

quate

custo

mer

base/

mark

eting

netw

ork

[1

]

Sati

sfac

tory

cust

om

er

bas

e/

mar

keti

ng

net

wor

k

[2

]

Good

Marketin

g

Network/

Growing

Market [3]

Sellers'

market [4] 3.00

B

TOTAL SCORE

OF

BUSINESS/IND

USTRY   15.00

3 MANAGEMENT:

i

% Achievement

of Sales vis-à-vis

estimates 92.00%

<75% [0]

75 &

upto

80%  

>80 &

upto

90%  

>90 &

upto

95%   >95%   3.00

 

Sales

Achievement 132.95

  Sales Target

145(40%

)

115

ii

Actual Profits

vis--vis

Estimated Profits 89.00%

<75% [0]

75 &

upto

80%  

>80 &

upto

90%  

>90 &

upto

95%   >95%   2.00

 

Profit

Achievement 40.26

  Profit Target 45(20%)

iii

Constitution/

Establishment  

Proprieto

rship

upto 5

years

standing/

Partners

hip upto

2 Years

standing  

Propri

etorshi

p >5

years

upto

10

years

standi

ng or

Partne

rship

upto 5

Years

standi

ng but

>2

years

or Pvt

ltd.

Co. or

any

other

constit

utions

having

upto 2

years

standi

ng  

Propriet

orship

>10

years

but upto

15 years

or

Partners

hip >5

Years

but upto

10

standing

or Pvt

ltd.

Co.>2

years

upto 2

years

standing

or any

other

constitut

ions

such as

Co-op.

Societie

s etc. >2

years

standing  

Propri

etorshi

p >15

years

or

Partne

rship

>2

Years

and

upto

15

years

or

Pvt.ltd.

>5

years

upto

10

years

or

Public

Ltd

Comp

any

upto 5

years

but>2

years

standi

ng  

Partne

rship

>15

years

or Pvt.

Ltd.

Co.

>10

Years

or

Public

Ltd

Comp

any >5

years

in

busine

ss

operati

on   4.00

iv

Integrity/

Commitment &

Sincerity  

Poor/

willful

defaulter  

Margin

ally

Accept

able  

Satifact

ory  

Reliabl

e  

Beyon

d

Doubt   3.00

116

v

Track Record in

Debt Repayment

and Statutory

Dues  

Irregular

for over 3

months/s

tatutory

liabilities

overdue  

Occasi

onally

Irregul

ar due

to

interes

t/no

statuto

ry

liabiliti

es

overdu

e  

No

irregular

ities

during

past 1

years/no

statutory

liabilities

overdue  

No

irregul

arity

during

past 3

years/

no

statuto

ry

liabiliti

es

overdu

e  

No

irregul

arity

during

past 3

years

&

capabl

e of

repayi

ng on

deman

d/no

statuto

ry

liabiliti

es

overdu

e   3.00

C

TOTAL SCORE

OF

MANAGEMENT  

15.0

0

4 CONDUCT OF ACCOUNT

I

Conduct of

Accounts

Un-

satisfactory [0] Average

[3

] Good

[6

]

Very

Good [9] Excellent [12] 6.00

ii

Submission and

reliabilities of

Feedback

statements &

Other

Information  

Delay in

submission

beyond 30

days of due

date/ lack of

reliability of

data/renew

al overdue

beyond 90

days  

Delay in

submissio

n not

exceeding

30 days of

due date

but

reliable

data/rene

wal

overdue

>60 days

& upto 90

days  

Occasio

nally

delayed

but

reliable

data/

renewal

overdue

>30

days &

upto 60

days  

Timely

submissi

on/reliabl

e

data/rene

wal

overdue

upto 30

days  

Prompt

submission/rel

iable

data/renewal

not overdue   6.00

D

TOTAL SCORE

FOR CONDUCT

OF ACCOUNT  

12.0

0

 

E

TOTAL SCORE

(A+B+C+D)

(E)    

117

5

FOR TERM

LOAN:                        

i

Debt-Equity

Ratio of

Company 0.02

>3.00

or <0 [0]

>2.00 &

upto 3.00 [2]

>1.50

& upto

2.00 [4]

1.00 &

upto 1.50 [6] <1.00 [8] 8.00

ii

DSCR/

Repayment

Period:                        

 

a) In case of

existing

companies

already availing

TL/DPG: OR N.A. <1.25  

1.25 & upto

1.75  

>1.75

& upto

2.25  

2.25 &

upto 2.50   >2.5   N.A.

 

b) In case of

existing

companies

proposes to avail

fresh term

loan/DPG

>6

years  

>5 & upto 6

years  

>4 &

upto 5

years  

>3 &

upto 4

years  

3 years or

below   4

F TOTAL FOR TL    

12.0

0

 

G

GRAND

TOTAL SCORE

(E+F) Out of total 120 80

 

Adjusted

Score Out of total 100 (G*100/120)  66.67

Score >80 >70 & upto

85

>60 & upto

70

>50 & upto

60

>40 & upto

50

>30 & upto

40

30 and

below

Grade AAA AA A BB B C D

CREDIT RISK RATING A

118

8.3. COMPARATIVE ANALYSIS

ICICI model is divided into five parameters viz Promoters/ management, business

and market position, financial performance, transaction history and collateral and

each parameter is divided in various sub parameters while PNB model is divided

in four parameters viz financials, business/industry, management, conduct of

account and each parameter is relatively divided in less number of sub parameters

compared to ICICI bank

Collateral securities are not considered by PNB whereas these parameters are

included in ICICI model. PNB bank should consider collateral securities of a

company while evaluating and rating company as collateral securities are

important to judge company’s soundness.

Transaction history of a company is considered by ICICI in detail as compared to

PNB model. ICICI bank considers various sub parameters under transaction

history like cheque bouncing, LC devolvement and utilization of fund based limits

that are lacking in PNB bank.

ICICI bank focuses on company’s relationship with customer in detail as it is

important to measure stability of a company and demand of its products and

services in market whereas PNB does not consider company’s relations with

customer.

119

Personal networth of promoters and their flexibility is considered by ICICI bank

whereas PNB bank does not consider.

ICICI model gives weightage along with score whereas in PNB model only scores

are given to each parameter. In ICICI credit rating model separate score and

weightage is given to all sub parameters along with parameters

Bliss pharma scores 77.8 and category - B as per ICICI model whereas it scores

66.67 and category - A as per PNB model

In case if total exposure of an individual borrower exceeds maximum exposure

according to scorecard special approval is needed as per ICICI model whereas

there is no such limit in PNB model

120

121

CHAPTER 9

9.1 RECOMMENDATIONS TO PNB

PNB bank should consider personal net worth of promoters, promoters financial

flexibility and their payment records with other banks, financial institutions,

creditors and non financial institutions while rating a company to evaluate

efficiency of a company and its repayment abilities.

PNB bank should conduct in depth study of a company viz it should consider

customers of a company and transaction history in detail to judge its stability in

market.

As PNB bank ignores weightage of each parameters, scores loses its relevance.

Bank should consider weightage for each parameter along with each sub

parameter.

PNB bank should include maximum exposure limit in its credit rating model to be

very specific and clear.

122

9.2 RECOMMENDATIONS TO COMPANY

Bliss pharma should reduce its inventory turnover ratio for effective utilization of

resources.

It should reduce debtor’s collection period for smooth running of business cycle

and working capital cycle.

Company should increase its trade reference to increase its brand image.

The company should increase its ratio between total outstanding liabilities and

total net worth to avail more credit from banks at easier terms. For this purpose it

has to increase its networth and reduce its outstanding liabilities.

123

CHAPTER 10

CONCLUSION

During my project I realized that a credit analyst must own multi-disciplinary

talents like financial, technical as well as legal know-how about corporate lending

and credit rating model for the purpose of lending loan

A study of both private bank and public bank enhanced my knowledge and I

gained a great learning experience

During the study I learnt how the theoretical financial analysis aspects are used in

practice during the term loan finance assessment

The credit appraisal for term loan 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

Credit Appraisal Model of both PNB and ICICI bank are based on sound

principles of lending

Method of lending of both banks is different.

Compared to PNB model, ICICI model is complicated as ICICI considers more

aspects and in detail compared to PNB.

Both banks follow inventory and receivable norms as suggested by RBI.

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BIBLIOGRAPHY

WEB LINKS:

www.rbi.com

www.icicibank.com

www.crisil.com

www.pnb.com

www.moneycontrol.com

www.icicidirect.com

LITERATURE SURVEY

Economics times

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