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GrandGrandGrandGrand Project Report onProject Report onProject Report onProject Report on

Credit Risk Management at Credit Risk Management at Credit Risk Management at Credit Risk Management at

State Bank of MysoreState Bank of MysoreState Bank of MysoreState Bank of Mysore

2010

N. R. Institute of Business Management

23/3/2010

A

Grand Project Report on

Credit Risk Management at

State Bank of Mysore

N. R. Institu

Grand

Credit Risk Manag

(IN PARTIAL FULFILLMENT O

MASTER OF BUSINESS ADMIN

Submitted To:

Prof. Dharmesh Shah

(Asst. Professor, NRIBM)

Prof. Viral Pandya

(Asst. Professor, NRIBM)

itute of Business Manag

A

rand Project Report on

anagement at State Bank of M

LMENT OF PROJECT STUDY COURSE, IN TWO YEAR

SS ADMINISTRATION PROGRAMME OF GUJARAT U

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Subm

Sandip A. Makwa

Luv D. Palk

(Batch: 2008-10)

agement

k of Mysore

WO YEARS FULL TIME

UJARAT UNIVERSITY)

Submitted By:

akwana (08056)

. Palkar (08064)

N. R. Institu

This is to certify that

Mr. Sandip A. MakwaMr. Sandip A. MakwaMr. Sandip A. MakwaMr. Sandip A. Makwa

students of N.R.Institute

their grand project on “

in partial fulfillment o

Programme of Gujarat U

been submitted elsewhere

_________________________

Dr. Hitesh Ruparel

Director In-charge,

NRIBM

Date: / / 2010

Place: Ahmedabad

nstitute of Business Management

CERTIFICATECERTIFICATECERTIFICATECERTIFICATE

wana (08056)wana (08056)wana (08056)wana (08056) and and and and Mr. Luv D. PalkMr. Luv D. PalkMr. Luv D. PalkMr. Luv D. Palk

te of Business Management has successf

“Credit Risk Management Credit Risk Management Credit Risk Management Credit Risk Management atatatat State BaState BaState BaState Ba

of two years Master of Business A

t University. This is their original wor

ere.

_____________________________

Prof. Dharmesh Shah

Asst. Professor, NRIBM &

Internal Project Guide

______________

Prof. Vir

Asst. Profess

Internal Pr

ent

alkar (08064alkar (08064alkar (08064alkar (08064))))

essfully completed

Bank of Mysore Bank of Mysore Bank of Mysore Bank of Mysore””””

s Administration

work and has not

_______________________

of. Viral Pandya

st. Professor, NRIBM &

nternal Project Guide

ii

Preface

Banks are regarded as the blood of the nation’s economy without them one cannot imagine

economy moving. Therefore banks should be operated very efficiently.

Advance is heart and recovery is oxygen for the bank and to survive it is necessary to give

advances and recover the amount at the appropriate time. Through credit risk management

we have tried to learn the various aspects related to credit appraisal and credit policy of

SBM. Credit RiskManagement covers all the areas right from the beginning like inquiry till

the loan is paid up.

We are preparing comprehensive report on “Credit Risk Management at State Bank of

Mysore”. The basic idea of project is to augment our knowledge about the industry in its

totality and appreciate the use of an integrated loom. This makes us more conscious about

Industry and its pose and makes us capable of analyzing Industry’s position in the

competitive market. This may also enhance our logical abilities.

There are various aspects, which have been studied in detail in the project and have been

added to this project report.

Though credit management, a very vast topic, we have tried to incorporate to the best of our

capacity from all possible aspects in this project.

Sandip A. Makwana

Luv D. Palkar

iii

Acknowledgement

A journey is easier when we travel together. Interdependence is certainly more important

than

independence. It will always be our pleasures to thank those who have helped us in making

this project a lifetime experience for us.

We would like to express our heartiest gratitude to State Bank of Mysore, for giving us an

opportunity to work with its Ahmedabad Branch, in the Department of Loans and Advances,

our Institute and important persons associated with this project as without their guidance

and hard work we would have never ever have got a chance to have real life experience of

working with a Public Sector Bank of such a great repute and learn practically about the

Credit Risk Management.

We would also like to extend our gratitude to Mr. Nagesh B. (Assistant General Manager)for

giving us an opportunity to join them to know and learn various aspects of the Loans and

Advances in the organization.

It is our privilege to thank Mr. Navneet Dwivedi (Assistant Manager)whose guidance has

made us learn and understand the finer and complicated aspects of banking, in general and

of Credit Risk Management Process, in particular. The help and guidance which he has

extended to me has made me feel as being an integral part of the organization.

Our heartiest gratitude extends to our faculty Prof. Dharmesh Shah (Assistant Professor,

NRIBM)and Prof. Viral Pandya (Assistant Professor, NRIBM) who have helped us in every

aspect of our work.

Finally, we thank all those who directly and indirectly contributed to this project.

23rdMarch, 2010 Sandip A. Makwana

Ahmedabad

Luv D. Palkar

iv

Executive Summary

Our prima facie objective for taking up this project is to acquire knowledge of banking

sector and to take a practical exposure and expertise of credit risk management.

The Credit Risk Management is a holistic exercise which starts from the time a prospective

borrower walks into the branch and culminates in credit delivery and monitoring with the

objective of ensuring and maintaining the quality of lending and managing credit risk.

The process of Credit Appraisal is multidimensional and includes- Management Appraisal,

Technical Appraisal, Commercial Appraisal, and Financial Appraisal.

Management Appraisal has received lot of attention these days as it is one of the long term

factors affecting the business of the concern.

Technical Appraisal emphasizes on the technical feasibility of the venture and also finds out

the possible economic life period of the present technology.

Commercial Appraisal focuses on the commercial viability of the project .It tries to find

mattersregarding demand in market, the acceptance of product in market. It also focuses on

the presence of other substitutes of the product in the market. It also focuses on the

multiple scope of the product.

Financial Appraisal is done to find out whether the promoter is having the capacity to raise

finance – both own equity and debt? What are the sources of margin? Will the business

generate sufficient funds to service the debt and other stakeholders? Is the capital structure

optimal?

The scope of credit structure is incomplete without examination of credit proposal. Credit

proposal has to be examined from the point of 6 C’s viz. Character, Capacity, Capital,

Condition, Collateral and Cash flow.

Initially we have introduced banking as a whole sector in India. Earlier banking industry

was highly protected by sovereign government but in 1991 it has opened the door in the

form of liberalization for the growth and progressive future of this sector. Banking as a

sector provides life and blood in the form of finance for the industrial growth.

As our objective is to gain practical exposure it was necessary to be precise and focused to a

particular bank so as to understand their techniques of Credit Risk Management;we have

v

taken up State Bank of Mysore as a part of banking network in India. For better

understanding of Credit Risk Management, we have also studied the loan proposals

provided by SBM.

The Credit Policy of State Bank of Mysore has undergone changes to cope with

theenvironmental changes, tap the available opportunities, achieve their commercial

objective, fulfill social obligations and adhere to mandatory directed lending norms over the

years. The credit policy consists of both fund based credit exposure and non fund based

credit exposure.

One of the important monitoring aspects in the credit risk management is the periodic

review of advance accounts. The vital decision to deploy the Bank’s resources should

necessarily be based upon the thorough assessment and evaluation of the needs of the

borrower. For this, a proper periodical review of any account is inevitable.

After analyzing the proposal and Credit Risk Management process, we have rationalized our

observation and tried to provide practical and feasible suggestions that may help them to

improve upon their present practices.

Table of Contents

Chapter 1

Research Methodology ............................................................................................................................. 1

1.1) Introduction to Credit Risk Management ....................................................................................................... 1

1.2) Objectives of the Study ......................................................................................................................................... 1

1.3) Research Design....................................................................................................................................................... 1

1.4) Sources of Data ......................................................................................................................................................... 1

1.5) Expected contribution of the study ................................................................................................................. 2

1.6) Beneficiaries of the Study .................................................................................................................................... 2

1.7) Limitations ................................................................................................................................................................. 2

Chapter 2

Introduction to Banking Sector ........................................................................................................... 3

2.1) History of Banking in India ................................................................................................................................. 3

2.2) Reserve Bank of India (RBI) ............................................................................................................................... 7

Banking structure .................................................................................................................................................... 8

2.3) Types of banks ....................................................................................................................................................... 9

2.3.1) Scheduled Banks.................................................................................................................................................... 9

2.3.2) Non-scheduled banks ....................................................................................................................................... 12

2.4) Opportunities and Challenges for Players ................................................................................................. 14

2.5) Current trend in banking .................................................................................................................................. 15

Chapter 3

Industry Analysis ....................................................................................................................................... 16

3.1) Competitive Forces Model (Porter’s Five-Force model) ..................................................................... 16

3.2) SWOT Analysis ...................................................................................................................................................... 18

Chapter 4

Introduction to SBM ................................................................................................................................. 21

4.1) SBM - Introduction ................................................................................................................................................ 21

4.2) Key areas of operation ....................................................................................................................................... 22

4.3) Technical Initiatives ............................................................................................................................................ 24

Chapter 5

Credit Risk Management ....................................................................................................................... 25

5.1) Introduction ........................................................................................................................................................... 25

5.2) Definition ................................................................................................................................................................. 26

5.3) Scope of Credit Risk............................................................................................................................................. 26

5.4) what is the role of Credit Analysis? .............................................................................................................. 27

5.5) Credit Risk Management Process ............................................................................................................. 28

5.5.1) Collect Obligor and Loan data...................................................................................................................... 28

5.5.2) Compute Credit Risk ........................................................................................................................................ 29

5.5.3) Monitor and Manage Risk Rating ............................................................................................................... 31

5.5.4) Manage portfolio and allocate capital ...................................................................................................... 31

5.5.5) Summary of the key priority areas ............................................................................................................ 32

5.6) Significance of Credit Risk Measurement and Management ............................................................. 34

Chapter6

Overview Of Credit Appraisal ............................................................................................................. 36

6.1) Brief overview of credit ..................................................................................................................................... 36

6.2) Basic Types of Credit ....................................................................................................................................... 37

6.2.1) Brief Overview of Loans: .............................................................................................................................. 38

(A) Fund Base .................................................................................................................................................. 38

(B) Non-Fund Base ........................................................................................................................................ 45

6.3) Credit Risk Assessment (CRA) ................................................................................................................... 49

6.3.1) Indian Scenario: ............................................................................................................................................... 49

6.3.2) SBM Scenario: ................................................................................................................................................... 49

6.3.3) Credit Risk Assessment (CRA) – Minimum Scores / Hurdle Rates ............................................ 50

6.3.4) Salient Features of CRA Models: ............................................................................................................... 52

(a) Type of Models .......................................................................................................................................... 52

(b) Type of Ratings ......................................................................................................................................... 52

(c) Type of Risks Covered ........................................................................................................................... 53

(i) Borrower Rating ............................................................................................................................... 53

(ii) Facility Rating (Regular Model) ................................................................................................ 53

(d) New Rating Scales ................................................................................................................................... 54

6. 4) Comparative Analysis of Credit Risk Appraisal ........................................................................................ 57

Chapter 7

Risk Management in Banks .................................................................................................................. 59

7.1) Introduction ........................................................................................................................................................... 59

7.2) Classification of Risks ......................................................................................................................................... 59

Chapter 8

SBM Norms for Credit Appraisal & Credit Risk management ............................................ 62

8.1) Loan Policy – An Introduction .................................................................................................................... 62

Credit Appraisal Standards ......................................................................................................................... 64

(A) Qualitative ................................................................................................................................................ 64

(B) Quantitative ............................................................................................................................................. 64

Required Documents for Process of Loan ............................................................................................ 67

Delegation of Powers ..................................................................................................................................... 67

Pricing .................................................................................................................................................................. 69

Credit Monitoring & Supervision ............................................................................................................. 70

8.2) Loan Administration - Pre-Sanction Process..................................................................................... 72

8.2.1) Appraisal ............................................................................................................................................................. 72

8.2.2) Assessment ........................................................................................................................................................ 79

8.2.3) Sanction ............................................................................................................................................................... 80

8.2.4) Monitoring Delay in Processing Loan Proposal ................................................................................. 81

8.3) Loan Administration - Post Sanction Credit Process .................................................................... 82

8.3.1) Need ...................................................................................................................................................................... 82

8.3.2) Stages of post sanction process................................................................................................................. 82

8.4) Types of Lending Arrangements ............................................................................................................... 83

A. Sole Banking ................................................................................................................................................ 83

B. Consortium Lending ................................................................................................................................ 83

C. Multiple Banking Arrangement ........................................................................................................... 84

D. Credit Syndication .................................................................................................................................... 84

Chapter 9

Proposals and Analysis .......................................................................................................................... 86

Proposal: I – GDP Ltd. ..................................................................................................................................................... 86

Analysis – GDP Ltd. ............................................................................................................................................................. 93

Proposal: II – CAB Ltd. .................................................................................................................................................... 95

Analysis – CAB Ltd. ...........................................................................................................................................................102

Proposal: III – IMP Ltd. ................................................................................................................................................104

Analysis – IMP Ltd. ...........................................................................................................................................................110

Proposal: IV - ABC Enterprises Ltd. ......................................................................................................................111

Analysis - ABC Enterprises Ltd. ..................................................................................................................................114

Proposal: V - VANRAJ Tractors ...............................................................................................................................116

Analysis - VANRAJ Tractors ..........................................................................................................................................117

Comparative Analysis of the proposals .............................................................................................................119

Proposal I & II ..............................................................................................................................................................119

Proposal III & IV .........................................................................................................................................................120

Chapter 10 Findings ..................................................................................................................................... 121

Chapter 11 Suggestions .............................................................................................................................. 122

Chapter 12 Conclusion ................................................................................................................................ 123

Bibliography ...................................................................................................................................................... 124

Appendix ....................................................................................................................................................... A1-A10

Credit Risk Management at SBM

N R Institute of Business Management Page 1

Chapter 1

Research Methodology

1.1) Introduction to Credit Risk Management

Credit risk "is the risk to a bank's earnings or capital base arising from a borrower's failure to

meet the terms of any contractual or other agreement it has with the bank. Credit risk arises

from all activities where success depends on counterparty, issuer or borrower

performance".

Credit appraisal means an investigation/assessment done by the bank before providing any

loans & advances/project finance & also checks the commercial, financial & industrial viability of

the project proposed its funding pattern & further checks the primary & collateral security cover

available for recovery of such funds.

1.2) Objectives of the Study

· The main objective of the study is, to evaluate the Credit Appraisal system & Risk

Assessment Model for effective credit risk management.

@ Sub-Objectives:

· To understand the commercial, financial & technical viability of the proposal

proposed & it's funding pattern.

· To understand the pattern for primary & collateral security cover available for

recovery of such funds and management of credit risk.

1.3) Research Design

ð It is a descriptive research.

1.4) Sources of Data

Primary Data:

· Information collected from the Credit Appraisal Officer of Bank as well as

informal interviews with Assistant General Manager and Assistance Manager.

Research Methodology


Secondary Data:

· Details regarding the Live Cases of applicant companies which are provided by the

Bank

· E-circulars of Bank

· Books

· Library research

· Websites

1.5) Expected contribution of the study

This study will help in understanding the credit Risk Management system at SBM& to

understand how to reduce various risk parameters, which are broadly categorized into

financial risk, business risk, industrial risk & management risk, associated in providing any

loans or advances or project finance.

1.6) Beneficiaries of the Study

Researcher

This report will help researcher in improving knowledge about the credit appraisal system

and to have practical exposure of the credit appraisal scenario in bank.

Management Student

The project will help the management student to know the patterns of credit appraisal in

bank.

Bank

The project will help bank in reducing the credit risk parameters. It will also help to reduce

risk associated in providing any loans & advances or project finance in future and to

overcome the loopholes.

1.7) Limitations

· As the credit risk management is one of the crucial areas for any bank, some of the

technicalities are not revealed which might cause destruction to the information and

our exploration of the problem.

· Credit appraisal system includes various types of detail studies for different areas of

analysis, but due to time constraint, our analysis will be of limited areas only.



Chapter 2

Introduction to Banking Sector

2.1) History of Banking in India

Without a sound and effective banking system in India it cannot have a healthy economy.

The banking system of India should not only be hassle free but it should be able to meet

new challenges posed by the technology and any other external and internal factors.

The word bank is derived from the Italian banca, which is derived from German and means

bench. The terms bankrupt and “broke” are similarly derived from bancarotta, which refers

to an out of business bank, having its bench physically broken. Moneylenders in Northern

Italy originally did business in open areas, or big open rooms, with each lender working

from his own bench or table.

Banking in India originated in the first decade of 18th century with The General Bank of

India coming into existence in 1786. This was followed by Bank of Hindustan. Both these

banks are now defunct. The oldest bank in existence in India is the State Bank of India being

established as "The Bank of Bengal" in Calcutta in June 1806. A couple of decades later,

foreign banks like Credit Lyonnais started their Calcutta operations in the 1850s. At that

point of time, Calcutta was the most active trading port, mainly due to the trade of the

British Empire, and due to which banking activity took roots there and prospered. The first

fully Indian owned bank was the Allahabad Bank, which was established in 1865.

By the 1900s, the market expanded with the establishment of banks such as Punjab

National Bank, in 1895 in Lahore and Bank of India, in 1906, in Mumbai - both of which

were founded under private ownership. The Reserve Bank of India formally took on the

responsibility of regulating the Indian banking sector from 1935. After India's

independence in 1947, the Reserve Bank was nationalized and given broader powers.

For the past three decades India's banking system has several outstanding achievements to

its credit. The most striking is its extensive reach. It is no longer confined to only

metropolitans or cosmopolitans in India. In fact, Indian banking system has reached even to

the remote corners of the country. This is one of the main reasons of India's growth process.



The government's regular policy for Indian bank since 1969 has paid rich dividends with

the nationalization of 14 major private banks of India.

Not long ago, an account holder had to wait for hours at the bank counters for getting a

draft or for withdrawing his own money. Today, he has a choice. Gone are days when the

most efficient bank transferred money from one branch to other in two days. Now it is

simple as instant messaging or dials a pizza. Money has become the order of the day.

The first bank in India, though conservative, was established in 1786. From 1786 till today,

the journey of Indian Banking System can be segregated into three distinct phases. They are

as mentioned below:

· Early phase from 1786 to 1969 of Indian Banks

· Nationalization of Indian Banks and up to 1991 prior to Indian banking sector

Reforms

· New phase of Indian Banking System with the advent of Indian Financial & Banking

Sector Reforms after 1991

· Scenario of Bank as per Phase I, Phase II and Phase III

Phase I

The General Bank of India was set up in the year 1786 followed by Bank of Hindustan and

Bengal Bank. The East India Company established Bank of Bengal (1809), Bank of Bombay

(1840) and Bank of Madras (1843) as independent units and called it Presidency Banks.

These three banks were amalgamated in 1920 and Imperial Bank of India was established

which started as private shareholders banks, mostly Europeans shareholders.

In 1865 Allahabad Bank was established and first time exclusively by Indians, Punjab

National Bank Ltd. was set up in 1894 with headquarters at Lahore. Between 1906 and

1913, Bank of India, Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank, and

Bank of Mysore were set up. The Reserve Bank of India which is the Central Bank was

created in 1935 by passing Reserve Bank of India Act, 1934 which was followed up with the

Banking Regulations in 1949. These acts bestowed Reserve Bank of India (RBI) with wide

ranging powers for licensing, supervision and control of banks. Considering the

proliferation of weak banks, RBI compulsorily merged many of them with stronger banks in

1969.

During the first phase the growth was very slow and banks also experienced periodic



failures between 1913 and 1948. There were approximately 1100 banks, mostly small.

To streamline the functioning and activities of commercial banks, the Government of India

came up with The Banking Companies Act, 1949 which was later changed to Banking

Regulation Act 1949 as per amending Act of 1965 (Act No. 23 of 1965). Reserve Bank of

India was vested with extensive powers for the supervision of banking in India as the

Central Banking Authority.

During those day public has lesser confidence in the banks. As an aftermath deposit

mobilization was slow. Abreast of it the savings bank facility provided by the Postal

department was comparatively safer. Moreover, funds were largely given to traders.

Phase II

Government took major steps in this Indian Banking Sector Reform after independence. In

1955, it nationalized Imperial Bank of India with extensive banking facilities on a large scale

especially in rural and semi-urban areas. It formed State Bank of India to act as the principal

agent of RBI and to handle banking transactions of the Union and State Governments all

over the country.

Seven banks forming subsidiary of State Bank of India was nationalized in 1960 on 19th

July, 1969, major process of nationalization was carried out. It was the effort of the then

Prime Minister of India, Mrs. Indira Gandhi. 14 major commercial banks in the country were

nationalized.

Second phase of nationalization Indian Banking Sector Reform was carried out in 1980 with

seven more banks. This step brought 80% of the banking segment in India under

Government ownership.

The following are the steps taken by the Government of India to Regulate Banking

Institutions in the Country:

1949: Enactment of Banking Regulation Act.

1955: Nationalization of State Bank of India.

1959: Nationalization of SBI subsidiaries.

1961: Insurance cover extended to deposits.



1969: Nationalization of 14 major banks.

1971: Creation of credit guarantee corporation.

1975: Creation of regional rural banks.

1980: Nationalization of seven banks with deposits over 200 crore.

After the nationalization of banks, the branches of the public sector bank India rose to

approximately 800% in deposits and advances took a huge jump by 11,000%. Banking in

the sunshine of Government ownership gave the public implicit faith and immense

confidence about the sustainability of these institutions.

Phase III

This phase has introduced many more products and facilities in the banking sector in its

reforms measure. In 1991, under the chairmanship of M Narasimham, a committee was set

up by his name which worked for the liberalization of banking practices.

The country is flooded with foreign banks and their ATM stations. Efforts are being put to

give a satisfactory service to customers. Phone banking and net banking is introduced. The

entire system became more convenient and swift. Time is given more importance than

money.

The financial system of India has shown a great deal of resilience. It is sheltered from any

crisis triggered by any external macroeconomics shock as other East Asian Countries

suffered.

This is all due to a flexible exchange rate regime, the foreign reserves are high, the capital

account is not yet fully convertible, and banks and their customers have limited foreign

exchange exposure.



2.2) Reserve Bank of India (RBI)

The central bank of the country is the Reserve Bank of India (RBI). It was established in

April 1935 with a share capital of Rs. 5 crore on the basis of the recommendations of the

Hilton Young Commission. The share capital was divided into shares of Rs. 100 each fully

paid which was entirely owned by private shareholders in the beginning. The Government

held shares of nominal value of Rs. 2,20,000.

Reserve Bank of India was nationalized in the year 1949. The general superintendence and

direction of the Bank is entrusted to Central Board of Directors of 20 members, the

Governor and four Deputy Governors, one Government official from the Ministry of Finance,

ten nominated Directors by the Government to give representation to important elements

in the economic life of the country, and four nominated Directors by the Central

Government to represent the four local Boards with the headquarters at Mumbai, Kolkata,

Chennai and New Delhi. Local Boards consist of five members each Central Government

appointed for a term of four years to represent territorial and economic interests and the

interests of co-operative and indigenous banks.

The Reserve Bank of India Act, 1934 was commenced on April 1, 1935. The Act, 1934 (II of

1934) provides the statutory basis of the functioning of the Bank.

The Bank was constituted for the need of following:

Ø To regulate the issue of banknotes

Ø To maintain reserves with a view to securing monetary stability and

Ø To operate the credit and currency system of the country to its advantage



Banking structure



2.3) Types of banks

2.3.1) Scheduled Banks

Scheduled banks are those banks that come under the purview of the second schedule of

Reserve Bank of India act 1934. The banks that are included under this schedule are those

that satisfy the criteria laid down vide section 42(6) of the act.

1) The bank is dealing in banking business in India only.

2) The paid up capital and total funds of the bank should not be less than five lacs.

3) It should convince RBI that its activities would not be against the interest of the

investors.

4) The bank must be:

Ø State co-operative bank, or

Ø A company according to the definition of the companies act 1956, or

Ø An institution notified by the central government, or

Ø A corporation or a company incorporated by or under any law in force in any place

outside India.

Thus, Indian Commercial Banks, Foreign commercial banks, and state cooperative banks

fulfilling the above conditions are considered as scheduled banks. Moreover under the RBI

Act section 42, the central Government has declared the following banks as scheduled

banks.

i. State bank of India and its 7 subsidiary banks,

ii. 20 Nationalized banks, and

iii. Urban banks

In June 1980 there were 149 scheduled banks which included

i. Public Sector banks

ii. Private sector banks

iii. Foreign exchange banks and

iv. State cooperative banks.

A bank which wants to register its name as scheduled bank has apply to the central

government. On receiving such applications, the central government orders RBI to



investigate Banks’ accounts. If RBI gives favorable reports, the central government

sanctions its proposal, and the bank is listed under schedule annexure II and is considered

as a scheduled bank.

Some co-operative banks come under the category of scheduled commercial banks though

not all cooperative banks.

@ PUBLIC SECTOR BANKS

Public sector banks are those in which the government of India or the RBI is a majority

shareholder. These banks include the State Bank of India (SBI) and its subsidiaries, other

nationalized banks, and regional rural banks (RRBs). Over 70% of the aggregate branches in

India are those of the public sector banks. Some of the leading banks in this segment include

Allahabad Bank, Canara Bank, Bank Of Maharashtra, Central Bank Of India, Indian overseas

bank, state bank of India, State bank of Patiala, state bank of Bikaner and Jaipur, state bank

of Travancore, bank of Baroda, Bank of India, oriental bank of commerce, UCO Bank, Union

Bank of India, Dena Bank and corporation Bank.

@ PRIVATE SECTOR BANKS

Private Banks are essentially comprised of 2 types:

Old banks

The old private sector banks comprise those, which were operating before banking

nationalization act was passed in 1969. On account of their small size, and regional

operations, these banks were not nationalized these banks face intense rivalry from the

new private banks and the foreign banks. The banks that are included in this segment

include: Bank Of Madura ltd.(now a part of ICICI bank), Bharat overseas bank ltd., Bank of

Rajasthan, Karnataka bank ltd., Lord Krishna bank ltd., the Catholic Syrian bank ltd., the

Dhanlakshmi bank ltd., the federal bank ltd., the Jammu & Kashmir bank ltd., The

KarurVyasya bank ltd., The Lakshmi Vilas bank ltd., The Nedungadi Bank ltd. and Vysya

Bank.



New banks

The new private sector banks were established when the banking regulation act was

amended in 1993. Financial institutions promoted several of these banks. After the initial

licenses, The RBI has granted no more licenses. These banks are gearing up to face the

foreign banks by focusing on service and technology. Currently, these banks are on an

expansion spree, spreading into semi-urban areas and satellite towns. The leading banks

that are included in this segment includes bank of Punjab ltd., Centurion Bank ltd., HDFC

Bank ltd., ICICI Bank corporation ltd., CITI Bank ltd., IndusInd Bank ltd. And UTI bank ltd.

@ Co-operative banks

Co-operative banks act as substitutes for money lenders, and offer timely and adequate

short-term and long-term institutional credit at reasonable rates of interest. Co-operative

banks are relatively similar in terms of functions to the other banks except for the following:

a) They are organized and managed on the principle of co-operation, self-health, and

mutual health.

b) They operate under the rule of “One member, one vote”.

c) Operate on “No profit, no loss” basis.

d) Co-operative bank conducts all the main banking functions of the deposit mobilization,

supply of credit and provision of remittance facility. Co-operative Banks offer limited

banking products and are functionally specialists in agriculture- related products, and

even in providing housing loans of late. Urban co-operative banks offer working capital

loans and term loan as well.

e) Co-operative banks primarily operate in the agriculture and rural sector. However,

UCBs, SCBs, and CCBs function in the semi urban, urban, and metropolitan areas too.

f) Co-operative banks are probably the first government sponsored, government-

supported, and government- subsidized financial agency in India. They get financial and

other aid from the reserve bank of India NABARD, central governments and state

governments. They are the “Most favored” banking sector with risk of nationalization.

g) Co-operative banks normally concentrate on “High revenue” niche retail segments.



@ Development Banks

Development banks are primarily intended to encourage industrial development by

providing adequate flow of funds to industrial projects. In other words, these institutions

undertake the responsibility of aiding all- round development in the country’s economy by

promoting new industrial projects, and providing financial assistance for the expansion,

diversification, and up gradation of the existing units. Development banks may be classified

as all India developments banks and regional development banks. While all India

development banks include industrial development banks of India and industrial finance

corporation of India, examples of regional development banks include state finance

corporation and state industrial development corporation.

2.3.2) Non-scheduled banks:

The banks, which are not included in the second schedule of RBI act, 1934, are known as

non-scheduled banks. Such banks total share capital is less than 5 lacs. These banks are not

governed according to the RBI act and they receive no benefits from the RBI. These banks

have no place in the list of recognized banks of the RBI. These banks are not much trusted

by the people and they do not get handsome deposits. Since 1951 the numbers of such

banks have been gradually decreasing. In 1979 there were only 5 non-scheduled banks.

Generally now days we found many co-operative banks which are belongs to the non-

scheduled co-operative banks. Following are the types of non-scheduled banks they are

work like the schedule banks but here the difference in it status and it not having the status

of the scheduled banks.

a. Deposits bank

b. Co-operative banks

c. Central banks

d. Exchange banks

e. Investment or industrial banks

f. Land development banks

g. Savings banks

a) Deposits banks:

Generally, banks which provide short-term loans to business and industrial units and which

mobilize savings of people as deposits are called deposit banks. Deposit banks accept

deposits from people, and provide short-term advances. They provide over draft and cash



credit facilities to merchants. To meet long-term requirement of industrial units is not

possible for these banks. They accept 3 types of deposits saving bank deposits, fix deposits

and current account deposits. They accept these deposits which are payable on demand or

on short notice, and provide funds to trading and commercial units for short durations.

b) Cooperative Banks

Cooperative banks meet the short-term financial needs of farmers. Agriculturists, Petty

farmers and artisans organized themselves on cooperative principles and form cooperative

societies and banks. Cooperative banks raise funds through various means, besides

receiving all kinds of deposits to make them available as lendable funds to its members. In

India developed cooperative banks supply finance for agriculture and non-agriculture

activities.

c) Central Banks

A central bank is a special institution which controls and regulatesthe entire banking

structure of country. It also strives to maintain monetary stability of the country. Central

bank is also known as the Apex bank of the country. Since it functions in the best interest of

the country and making profits is unknown to it, it is entrusted the right it issue currency

notes. No other bank is allowed this right. It operates in close cooperation with the

government of implementing economic policies, thereby promoting economic development.

d) Exchange Banks:

There is a difference in financing of foreign trade and financing of internal trade. Generally a

person carrying on international trade requires foreign currencies to meet this obligation. It

is here that exchange banks play the role of financing the dealer for setting transactions

involved in foreign trade, there are specialized banks for exchange business. In India, there

is an export-import bank (EXIM).

e) Investment or industrial banks:

Investment banks provide long-term credit to industries. They raise their funds by way of

share capital, debentures, and long-term deposits from the public. They also raise fund by

the issue of bonds for business operations and government agencies. Usually they

underwrite fresh issue of shares and debentures of companies. Such banks also buy the



entire issue of new securities of public limited companies and try to get them subscribed at

a higher price by the public.

f) Land Development Banks:

Land development banks were earlier known as land mortgage banks. In India, there is

limited number of such banks. There are special institutions providing long-term loans to

agricultures and farmers. They provide loans on security of land and other immovable

properties. They supply long-term funds for periods exceeding 6 years. Agriculturists and

farmers need such funds for making permanent improvements to land and for buying

farming machinery and equipment.

g) Savings Banks:

Saving banks are specialized institutions, which encourage general public to save something

from their earnings. In other words such banks pool the small savings of middle and lower

income sections of society. They are the banks in the true sense of the term and their main

aim is to promote and collect of the public. Not only the depositors are given interest, but

also they are allowed to withdraw in times of need. The numbers of withdrawal are,

however, restricted. Separate saving banks are organized in various nations. The

government can also run a savings bank. In India the postal department runs the postal

saving bank allover the country. It is very popular in rural areas where no branches of

established commercial bank operate. In urban areas, commercial bank handles savings

business.

2.4) Opportunities and Challenges for Players

The bar for what it means to be a successful player in the sector has been raised. Four

challenges must be addressed before success can be achieved. First, the market is seeing

discontinuous growth driven by new products and services that include opportunities in

credit cards, consumer finance and wealth management on the retail side, and in fee-based

income and investment banking on the wholesale banking side.

These require new skills in sales & marketing, credit and operations. Second, banks will no

longer enjoy windfall treasury gains that the decade-long secular decline in interest rates

provided. This will expose the weaker banks. Third, with increased interest in India,

competition from foreign banks will only intensify. Fourth, given the demographic shifts



resulting from changes in age profile and household income, consumers will increasingly

demand enhanced institutional capabilities and service levels from banks.

2.5) Current trend in banking

Currently (2009), banking in India is generally fairly mature in terms of supply, product

range and reach-even though reach in rural India still remains a challenge for the private

sector and foreign banks. In terms of quality of assets and capital adequacy, Indian banks

are considered to have clean, strong and transparent balance sheets relative to other banks

in comparable economies in its region. The Reserve Bank of India is an autonomous body,

with minimal pressure from the government. The stated policy of the Bank on the Indian

Rupee is to manage volatility but without any fixed exchange rate-and this has mostly been

true.

With the growth in the Indian economy expected to be strong for quite some time-

especially in its services sector-the demand for banking services, especially retail banking,

mortgages and investment services are expected to be strong. One may also expect M&As,

takeovers, and asset sales.

Currently, India has 88 scheduled commercial banks (SCBs) - 28 public sector banks (that is

with the Government of India holding a stake), 29 private banks (these do not have

government stake; they may be publicly listed and traded on stock exchanges) and 31

foreign banks. They have a combined network of over 53,000 branches and 17,000 ATMs.

According to a report by ICRA Limited, a rating agency, the public sector banks hold over 75

percent of total assets of the banking industry, with the private and foreign banks holding

18.2% and 6.5% respectively.

Industry Analysis


Chapter3

Industry Analysis

3.1) Competitive Forces Model (Porter’s Five-Force model)

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:



1. Rivalry among existing firms

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

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

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

2. Potential Entrants

Previously the Development Financial Institutions mainly provided project finance and

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

stiff competition among the exiting players.

3. Threats from Substitutes

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

interest.

4. Bargaining Power of Buyers

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

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

have a high bargaining power. This is mainly because of competition.

5. Bargaining Power of Suppliers

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

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

demand a higher return for the investments.

Overall Analysis

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

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

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

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

economy Banks have a major role to play. Funding corporate at a low cost of capital is a

special requisite.

Industry Analysis


3.2) SWOT Analysis

The banking sector is also taken as a proxy for the economy as a whole. The performance of

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

financial sector, banking industry has changed drastically with the opportunities to the

work with, new accounting standards new entrants and information technology. The

deregulation of the interest rate, participation of banks in project financing has changed in

the environment of banks.

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

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

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

among the banks.

STRENGTHS

1. Availability of Funds

There are seven lakh crore wroth of deposits available in the banking system. Because of

the recession in the economy and volatility in capital markets, consumers prefer to deposit

their money in banks. This is mainly because of liquidity for investors.

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 operating

but they mainly concentrate in metropolis.

3. Large Customer Base

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

areas prefer banks because of the failure of the NBFCs.

4. Low Cost of Capital

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

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

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



WEAKNESSES

1. Loan Deployment

Because of the recession in the economy the banks have idle resources to the tune of 3.3

lakh crore. Corporate lending has reduced drastically

2. Powerful Unions

Nationalization of banks had a positive outcome in helping the Indian Economy as a whole.

But this had also proved detrimental in the form of strong unions, which have a major

influence in decision-making. They are against automation.

3. Priority Sector Lending

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

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

were more towards fulfilling government norms. As a result lending was done for non-

productive purposes.

4. High Non-Performing Assets

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

This is because of change in the total outstanding advances, which has to be reduced to

meet the international standards.

OPPORTUNITIES

1. Universal Banking

Banks have moved along the valve 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

Industry Analysis


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

increased. Banks should use this opportunity for raising funds.

4. Overseas Markets

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

5. Interest Banking

The advance in information technology has made banking easier. Business can effectively

carried out through internet banking.

THREATS

1. NBFCs, Capital Markets and Mutual funds

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

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

offer better return to investors.

2. 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 the other profitable sectors.

4. Recession

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

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

resulted into competition for market share. The spread in the banking sector is very

narrow. To meet the competition the banks has to grow at a faster rates and reduce the

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



Chapter4

Introduction to SBM

STATE BANK OF MYSORE

Working for a better tomorrow

Mission

“A premier commercial Bank in Karnataka, with all India presence, committed to provide

consistently superior and personalized customer service backed by employee pride and will

to excel, earn progressively high returns for its shareholders and be a responsible corporate

citizen contributing to the well being of the society.”

4.1) SBM - Introduction

State Bank of Mysore was established in the year 1913 as Bank of Mysore Ltd. under the

patronage of the erstwhile Govt. of Mysore, at the instance of the banking committee headed

by the great Engineer-Statesman, Late Dr. Sir M.Visvesvaraya. Subsequently, in March 1960,

the Bank became an Associate of State Bank of India. State Bank of India holds 92.33% of

shares. The Bank's shares are listed in Bangalore, Chennai, and Mumbai stock exchanges.

The Bank has a widespread network of 682 branches (as on 30.09.2009)and20 extension

counters spread all over India which includes5 specialized SSI branches, 4 Industrial Finance

branches, 3 Corporate Accounts Branches, 4 specialized Personal Banking Branches, 10

Agricultural Development Branches, 3 Treasury branches, 1 Asset Recovery Branch and 8

Service Branches, offering wide range of services to the customers.

The Bank has a dedicated workforce of 9720 employees consisting of 3169 supervisory staff,

6551 non-supervisory staff (as on 31.03.2008). The skill and competence of the employees

Introduction to SBM


have been kept updated to meet the requirement of our customers keeping in view the

changes in the environment. The Chairman of State Bank of India is also the Chairman of

this Bank; The Managing Director is assisted by a Chief General Manager and 6 General

Managers.

The paid up capital of the Bank is Rs.360 Millions as on 31.03.2009 out of which State Bank

of India holds 92.33%. The net worth of the Bank as on 31.03.2009 is Rs.1619.44 Crores and

the Bank has achieved a capital adequacy ratioof12.99% as at the end of March 2009. The

Bank has an enviable track record of earning profits continuously and uninterrupted

payment of dividend since its inception in 1913. The Bank earned a net profit of Rs.336.91

Crores for the year ended March 2009 and earnings per share are at Rs.94.

Total deposits of the Bank as at the end of March 2009 isRs.32915.76 Crores and the total

advances stood at Rs. 25616.05 Crores which include export credit of Rs. 1158.13 Crores. The

Forex Merchant turnover of the Bank is Rs.19607.42 Crores and the Forex Trading turnover is

Rs.82197.27 Crores at the end of March 2009.

4.2) Key areas of operation:

1) Personal Banking Schemes:

The personal banking scheme consists of the following types of services:

Ø Personal loan

Ø Mortgage loan

Ø Housing loans

Ø Educational loan

Ø Cash Key: To meet unforeseen expenses, without premature withdrawal of term

deposit. Immediate overdraft facility is available

Ø ATM Facility: Round the clock ATM facility for customers of Bangalore city and

different parts of the country.

2) Commercial And Institutional Banking Schemes:

Ø Scheme for Traders-Liberalized Trade Finance: State Bank of Mysore has designed

schemes for traders to meet their working capital needs – under C&I and SME Segment.

The following categories of borrowers will be covered:

» Small business enterprises.

» Retail traders/ wholesale traders.



» Professional and Self employed.

Ø Handy Loans Scheme - For Trade and Services sector: Handy Loan can be availed for :

» Holding stocks / Receivables

» Acquisition of land and buildings for establishing trading house

» Building construction & renovation of offices, showrooms, godowns, etc.

» Purchase of equipment, furniture & vehicles

» Augmenting networking capital

» Payment of long term deposits / advances to supplier

» General trade purposes

Ø Corporate Loan (Earlier Name: Short Term Corporate Loan):The Short Term

Corporate Loan is essentially in the form of Term Loan for corporate for certain

specific purposes with maturity not exceeding three years

Ø Current Account Plus: The services offered under this services are as follows:

» Issue of 30 DDs cumulative value not exceeding Rs.25 lacs per month free of charges

» Collection of 30 outstation cheques per month with a cumulative value of Rs.10 lacs,

free of collection charges (This facility is only for the account holder’s instruments

and not for third party cheques). Handling charges of Rs.20/- per instrument to be

collected

» SBI Life policy of Rs. 1 lakh coverage. In the unfortunate event of death, SBI Life

would pay the assured to the nominee. In the event of the death due to an accident,

SBI Life would pay the Nominee double the sum assured. Free of cost, for

individuals/proprietor of concern. In case of Partnership firms / Company Accounts

any one partner/ Director.

Ø Rent Plus: This scheme is to meet liquidity mismatch / any other purpose of the

applicants.

3) Agricultural Schemes:

The schemes under agricultural are as under:

Ø Kisan Gold Card Scheme

Ø Kisan Credit Card Scheme

Ø GraminBhandaranYojana (GBY)

Ø Scheme for Combined Harvesters

Introduction to SBM


Ø Kisan Chakra Scheme

4) Micro & Small Enterprises Scheme: The various schemes under MSE schemes are as

follows:

Ø Credit Guarantee Fund Trust Scheme For Micro & Small Enterprises (CGTMSE)

Ø Loans to Micro & Small Enterprises (MSEs)

Ø Small Business Finance

Ø Small Business Enterprises

Ø Professionals & Self-Employed persons

Ø Transport Operators

Ø LaghuUdyami Credit Card Scheme

4.3) Technical Initiatives:

State Bank of Mysore is the first Karnataka-based Bank with fully networked branches. The

Bank made significant investment in order to upgrade technology and the major

developments are as under:

(1) Core Banking Solution: Which contains,

Ø Facilitates 24 X 7 Banking

Ø Anywhere Banking

Ø Integration with strategic sectors

Ø Business Process Re-engineering (BPR) enabler

(2) Internet Banking

(3) Real Time Gross Settlement (RTGS)

(4) National Electronic Funds Transfer (NEFT) System

(5) Mobile Banking



Chapter5

Credit Risk Management

“Banks are in the business of managing risk,

not avoiding it……………”

5.1) Introduction

Lending has always been the primary function of banking, and accurately assessing a

borrower's creditworthiness has

always been the only method of

lending successfully. The method of

analysis varies from borrower to

borrower. It also varies in function of

the type of lending being considered.

For example, the banking risks in

financing the building of a hotel or rail

project, or providing lending secured

by assets or a large overdraft for a

retail customer would vary considerably. For the financing of the project, you would look to

the funds generated by future cash flows to repay the loan, for asset secured lending, you

would look at the assets and for an overdraft facility, you would look at the way the account

has been run over the past few years.

Credit risk is the oldest risk among the various types of risks in the financial system,

especially in banks and financial institutions due to the process of intermediation. Managing

credit risk has formed the core of the expertise of these institutions. While the risk is well

known, growth in the markets, disintermediation, and the introduction of a number of



innovative products and practices have changed the way credit risk is measured and

managed in today's environment.

5.2) Definition

Credit risk "is the risk to a bank's earnings or capital base arising from a borrower's failure

to meet the terms of any contractual or other agreement it has with the bank. Credit risk

arises from all activities where success depends on counterparty, issuer or borrower

performance". Credit risk enters the books of a bank the moment the funds are lend,

deployed, invested or committed in any form to counterparty whether the transaction is on

or off the balance sheet.

5.3) Scope of Credit Risk

It can be understood from the above that credit risk arises from a whole lot of banking

activities apart from traditional lending activity such as trading in different markets,

investment of funds, provision of portfolio management services, providing different type of

guarantees and opening of letters of credit in favour of customers etc.

For example, even though guarantee is viewed as a non-fund based product, the moment a

guarantee is given, the bank is exposed to the possibility of the non- funded commitment

turning into a funded position when the guarantee is invoked by the entity in whose favour

the guarantee was issued by the bank. This means that credit risk runs across different

functions performed by a bank and has to be viewed as such.

The nature, nomenclature and the quantum of credit risk may vary depending on a number

of factors. The internal organization of credit risk management should recognize this for

effective credit risk management. Credit risk can be segmented into two major segments viz.

intrinsic and portfolio (or concentration) credit risks. The focus of the intrinsic risk is

measurement of risk at individual loan level.

This is carried out at lending unit level. Portfolio credit risk arises as a result of

concentration of the portfolio to a particular sector, geographic area, industry, type of

facility, type of borrowers, similar rating, etc. Concentration risk is managed at the bank

level as it is more relevant at that level.



5.4) what is the role of Credit Analysis?

The role of credit analysis generally encounters the following questions:

· In which stage of the life cycle the

companyis?

· Is the company's business cyclical or

counter cyclical?

· How will this affect the long-term cash

flow of the firm?

· What are the considerations of

generaleconomic conditions and, if appropriate, political conditions in the country

where the company is operating?

Credit analysis supports the work of marketing officers by evaluating companies before

lending money to them. This is essential so that new loan requests can be processed, a

company's repayment ability assessed, and existing relationships monitored. The extent of

the credit analysis is determined by

Ø The size and nature of the enquiry,

Ø The potential future business with the company,

Ø The availability of security to support loans,

Ø The existing relationship with the customer.

The analysis must also determine whether the information submitted is adequate for

decision-making purposes, or if additional information is required. An analysis can

therefore cover a wide range of issues.

For example, in evaluating a loan proposal for a company, it may be necessary to:

Ø Obtain credit and trade references,

Ø Examine the borrower's financial condition,

Ø Consult with legal counsel regarding a particular aspect of the draft loan agreement.

By making these checks you are ensuring that your report does not look at a company's

creditworthiness in a narrowly defined sense. You will be taking the further step of deciding

whether the provisions in the loan agreement are appropriate for the borrower's financial



condition. Often it will be necessary for the analyst to place the assessment of the

borrower's financial condition within the wider context of the conditions existing in the

industry in which it is operating.

5.5) Credit Risk Management Process

Credit risk is the largest and most elementary risk faced by banks. It essentially focuses on

determining likelihood of default or credit deterioration and how costly it will turn out to be

if it does occur. And this is true for consumer lending (retail) or corporate lending

(commercial) in banking.

A comprehensive Credit Risk Management Process encompasses the following steps:

Fig.1: Processes of a typical Credit risk management lifecycle

5.5.1) Collect Obligor and Loan data

The very foundation of a sound credit risk management system lies in the data that it gets.

The inputs needed in this stage are the obligor (borrower), Facility (Loan) and external

(ratings) data. This is first critical step in any loan process and all necessary data about the

obligor needs to be collected. Fig 2. highlights the key tasks and challenges involved in this

step.

Fig.2: Key tasks and chal enges involved in col ecting obligor & Loan Data



The key steps here include,

Get the Obligor Data: The crucial task here is to get the financial, demographic and

qualitative data related to the obligor. A majority of the data comes from the financial

statements but other sources also exist for example past repayment performances.

Get the Loan Data: Next on, the system must beadequately designed to capture Loan data

related to the type of loan, amount, maturity etc accurately. Of particular concern here is

data related to collaterals, guarantees and contract terms on netting and liquidation. These

must be accurately captured in the system as they are crucial in the rating process.

Get External Ratings Data: The system must be capable enough to pull relevant data from

external systems such as data from rating agencies and also information such as loan data

from internal systems.

5.5.2) Compute Credit Risk

The next and one of the most crucial phases is calculating the credit risk in the form of risk

ratings to meaningfully differentiate risk among different firms or exposures. Fig 3 shows a

typical credit risk calculation scenario.

Fig.3: Key tasks and challenges involved in Computing Credit Risk

Key Tasks

The basic approach involves combining internal rating models (point of time) with external

risk information (through the cycle). The basic tasks involved in the rating process of a

Commercial obligor are highlighted as follows:



Develop Rating Model: The obligor has to be rated using an appropriate model for example

there are different models for a Commercial & Industrial category obligor and a Commercial

Real Estate category obligor.

Calculate Probability of Default (PD): The Probability of Default is the likelihood that a loan

will not be repayed and fall into default. The credit history of the counterparty and nature of

the investment will all be taken into account to calculate the PD figures. The following steps

will commonly be used

· Analyze the credit risk aspects of the

counterparty; This will involve not only

the quantitative aspects of the obligor

based on his/her financial statements

but also qualitative factors related to

contingencies, management quality and

other factors which are yet to be

reflected.

Fig. 4 shows a sample of quantitative

and qualitative factors in a typical risk

grading model for a commercial obligor.

· Map the counterparty to an internal risk grade which has an associated PD.

Calculate Loss Given Default (LGD), Exposure At Default (EAD) & Expected Loss (EL):The

Credit Risk Solution also needs to calculate

Ø Loss Given Default – It is the magnitude of likely loss on the exposure in the event of

default. Both quantitative and qualitative factors are used to calculate Facility LGD

which may include Government guarantees, Collateral Support, Guarantor Support

etc.

Ø Exposure At Default - It is defined as the exposure to the borrower at any point of

time.

Ø Expected Loss – It is calculated using the PD, LGD and EAD together. It is the

probability weighted loss which is also used for pricing.



5.5.3) Monitor and Manage Risk Rating

The job is not over with the credit risk rating process. In fact, it is quintessential to monitor

and manage the risk ratings as highlighted below in Fig 5

Fig .5: Key tasks and chal enges involved in Monitoring and managing Risk Rating

Key Tasks

Develop Workflow to manage approval of Ratings: The Credit Risk Solution should ensure

that the risk ratings and exceptions go through proper approvals by appropriate authorities

as laid down by guidelines such as the Bank’s credit policy. The workflow should also

accord traceability to ratings, changes and approvals.

Ensure notification on external rating changes: The system should ensure that external

ratings changes or other material changes are reflected as early and accurately as possible

in the credit risk ratings of an obligor. The system should ensure ratings are reviewed

periodically and also based on criteria such as likelihood of credit changes.

Interface with Internal Collections: Adequate interface with internal collections is needed so

that the system is updated consistently with any default information.

Perform Back Testing of Ratings: The system should provide for back testing and

calibrating credit risk models within Basel-II guidelines.

5.5.4) Manage portfolio and allocate capital

Portfolio Management has become one of the most difficult challenges in the financial

world especially from the point of view of credit risk management. Efficient portfolio

management and capital allocation is a process which an organization must put on the top

of its agenda. Illustrated below in Fig 6 are the steps in this process



Fig 6: Key tasks and chal enges involved in Portfolio Management and Capital Al ocation

Key Tasks

Compute and monitor Portfolio risk: The System must be capable of computing and

monitoring the credit risk at a portfolio level and also enable drill down based upon criteria

such as different lines of businesses etc. The system should provide interface with a risk

engine to calculate regulatory and economic capital, allocate capital and calculate RAROC

Allow creation of SPVs for transfer of risk: The system must facilitate the creation of SPVs for

the appropriate transfer of credit risk.

Reporting on risk: The system must be capable enough to satisfy the reporting requirements

of the organization. There are different levels of reporting that are required especially in the

case of portfolio management.

Stress Testing/ Scenario Analysis: The system should also allow for stress testing of the

portfolio under differing conditions specially taking into consideration varying economic

circumstances.

5.5.5) Summary of the key priority areas

It will be quite safe to assume that any competitive and proactive financial institution must

have already started laying down the foundation blocks of a robust credit risk management

system. However it would be pertinent to summarize the key priority areas for this

process. These areas are highlighted in Fig 7.



Fig 7: Key Priority Areas in Credit Risk management

Notification of External Rating changes: It is crucial that an organization effectively uses a

combination of internal models with external ratings. Therefore changes in the external

inputs should be reflected as soon as possible in the internal ratings. This can be achieved

through the use of notifications in the form of real time alerts.

Data Architecture: A robust data backbone is crucial to enable credit assessment process.

The data backbone should have adequate and accurate data history. Care should be taken

to make sure the data design incorporates relevant data fields which are required in current

and future models.

Back Testing: The models should be properly back tested to improvise them and also for

regulatory approvals.

Compute & Monitor Portfolio Risk: Measuring and managing individual credit ratings

contribute to the management of portfolio risk. This is a crucial phase for the risk

department within the organization as credit risk levels have to be maintained within

statutory and organizational requirements.



5.6) Significance of Credit Risk Measurement and Management

Increase in Bankruptcies:

Compared to the past, bankruptcies have increased. As a result of this, the permanent,

accurate credit risk analysis practices h a v e become more important than in the past.

Deregulation:

Innovation stimulated by deregulation has led to new entrants into the markets to provide

services. The credit risk assessment of the new entrants is very much essential for the well

functioning of the market.

Disintermediation:

As large institutions with strong credit quality are less dependent on bank funds, banks are

left to serve institutions with weaker credit quality. A recent study by Subramanian and

Umakrishnan (2004) of 876 corporate in India, the bank debt to total debt ratio for very

small firms (sales turnover not more than Rs. 10 crores per annum) was 73% while the

ratio for very large firms (sales turnover Rs. 1000 crores and above per annum) was only

41%. A similar fall in the ratio was witnessed as the size measured by sale turnover

increased. This disintermediation has led to fall in the overall credit quality of the lending

book, increasing the importance of credit risk measurement and management.

Shrinking Margins on Loans:

Trends in international markets reveal that the interest margins or spreads, i.e. the

difference between interest income and interest expenses has been falling. Apart from other

factors, the increasing competition in the market is cited as the major reason for this.

Growth of off-Balance Sheet Risks:

The phenomenal expansion of the Over-the- Counter (OTC) derivative products which carry

counterparty risk unlike the exchange traded derivatives has increased the exposure of a

number of banks to such products.



Volatility in the Value of Collateral:

It has been observed that predicting the market value of collateral held against loan is very

difficult. This may lead to a situation where the value of collateral may fall below the value

of loan granted against it. Falling value of the collateral had been the cause for banking

crises in well developed countries such as Switzerland and Japan.

Advances in Finance Theory and Computer Technology:

These advances have paved the way for banks to test very sophisticated credit risk models

that would not have been possible in the absence of finance theory and computer

technology.

Risk-based Capital Regulations:

Apart from the above, the development of risk- based capital requirements pronounced by

the Basle Committee has been one of the important drivers of credit risk initiatives. This is

more so with the Basle Accord -II which recognizes the differences in credit quality in the

form of ratings and availability of collateral unlike the previous accord which is in force till

date.

Overview of Credit Appraisal


Chapter6

Overview Of Credit Appraisal

Credit appraisal means an investigation/assessment done by the banks before providing

any loans & advances/project finance & also checks the commercial, financial & technical

viability of the project proposed, its funding pattern & further checks the primary &

collateral security cover available for recovery of such funds.

6.1) Brief overview of credit

Credit Appraisal is a process to ascertain the risks associated with the extension of the

credit facility. It is generally carried by the financial institutions, which are involved in

providing financial funding to its customers. Credit risk is a risk related to non-repayment

of the credit obtained by the customer of a bank. Thus it is necessary to appraise the

credibility of the customer in order to mitigate the credit risk. Proper evaluation of the

customer is performed which measures the financial condition and the ability of the

customer to pay back the loan in future. Generally the credit facilities are extended against

the security know as collateral. But even though the loans are backed by the collateral,

banks are normally interested in the actual loan amount to be repaid along with the

interest. Thus, the customer's cash flows are ascertained to ensure the timely payment of

principal and the interest.

It is the process of appraising the credit worthiness of a loan applicant. Factors like age,

income, number of dependents, nature of employment, continuity of employment,

repayment capacity, previous loans, credit cards, etc. are taken into account while

appraising the credit worthiness of a person. Every bank or lending institution has its own

panel of officials for this purpose.

There is no guarantee to ensure a loan does not run into problems; however if proper credit

evaluation techniques and monitoring are implemented then naturally the loan loss

probability / problems will be minimized, which should be the objective of every lending

officer.



Credit is the provision of resources (such as granting a loan) by one party to another party

where that second party does not reimburse the first party immediately, thereby generating

a debt, and instead arranges either to repay or return those resources (or material(s) of

equal value) at a later date. The first party is called a creditor, also known as a lender, while

the second party is called a debtor, also known as a borrower.

Credit allows you to buy goods or

commodities now, and pay for them later. We

use credit to buy things with an agreement

to repay the loans over a period of time. The

most common way to avail credit is by the use

of credit cards. Other credit plans include

personal loans, home loans, vehicle loans,

student loans, small business loans, trade.

A credit is a legal contract where one party receives resource or wealth from another party

and promises to repay him on a future date along with interest. In simple terms, a credit is

an agreement of postponed payments of goods bought or loan. With the issuance of a credit,

a debt is formed.

6.2) Basic Types of Credit

There are four basic types of credit. By understanding how each works, you will be able to

get the most for your money and avoid paying unnecessary charges.

Service credit is monthly payments for utilities such as telephone, gas, electricity,

andwater. You often have to pay a deposit, and you may pay a late charge if your payment is

not on time.

Loans let you borrow cash. Loans can be for small or large amounts and for a few daysor

several years. Money can be repaid in one lump sum or in several regular payments until

the amount you borrowed and the finance charges are paid in full. Loans can be secured or

unsecured.

Installment credit may be described as buying on time, financing through the store orthe

easy payment plan. The borrower takes the goods home in exchange for a promise to pay

later. Cars, major appliances, and furniture are often purchased this way. You usually sign a



contract, make a down payment, and agree to pay the balance with a specified number of

equal payments called installments. The finance charges are included in the payments. The

item you purchase may be used as security for the loan.

Credit cards are issued by individual retail stores, banks, or businesses. Using a creditcard

can be the equivalent of an interest-free loan--if you pay for the use of it in full at the end of

each month.

6.2.1) Brief Overview of Loans:

Loans can be of two types fund base & non-fund base:

FUND BASE includes NON-FUND BASE includes

Working Capital Letter of Credit

Term Loan Bank Guarantee

Bill Discounting

(A) FUND BASE

Ø WORKING CAPITAL: -

1. General

The objective of running any industry is earning profits. An industry will require funds to

acquire “fixed assets” like land, building, plant, machinery, equipments, vehicles, tools etc.,

& also to run the business i.e. its day-to-day operations.

Funds required for day to-day working will be to finance production & sales. For

production, funds are needed for purchase of raw materials/ stores/ fuel, for employment

of labor, for power charges etc., for storing finishing goods till they are sold out & for

financing the sales by way of sundry debtors/ receivables.

Capital or funds required for an industry can therefore be bifurcated as fixed capital &

working capital. Working capital in this context is the excess of current assets over current

liabilities. The excess of current assets over current liabilities is treated as net working

capital or liquid surplus & represents that portion of the working capital, which has been

provided from the long-term source.



2. Definition

Working capital is defined as the funds required to carry the required levels of current

assets to enable the unit to carry on its operations at the expected levels uninterruptedly.

Thus Working Capital Required is dependent on

a) The volume of activity (viz. level of operations i.e. Production & sales)

b) The activity carried on viz. mfg process, product, production programme, the

materials & marketing mix.

3. Methods & application

SEGMENTS LIMITS METHODS

SSI UPTO 5 CRORES Traditional method &Nayak Committee method

ABOVE 5 CRORES Projected Balance Sheet Method

SBF All loans Traditional/ Turnover Method

C&I TRADE &

SERVICES

UPTO Rs. 1 CRORE Traditional method for trade & projected

turnover method

ABOVE Rs. 1 CRORE

& UPTO Rs. 5

CRORE

Projected Balance Sheet Method & Projected

Turnover Method.

ABOVE Rs. 5 CRORE Projected Balance Sheet Method

C&I INDUSTRIAL

UNITS

BELOW Rs. 25 Lacs TRADITIONAL METHOS

Above Rs. 25 Lacs

but up to Rs. 5

crores

Projected Balance Sheet Method & Projected

Turnover Method

ABOVE Rs. 5 Crores Projected Balance Sheet Method



Ø TERM LOAN:-

1. A term loan is granted for a fixed term of not less than 3 years intended normally for

financing fixed assets acquired with a repayment schedule normally not exceeding 8

years.

2. A term loan is a loan granted for the purpose of capital assets, such as purchase of land,

construction of, buildings, purchase of machinery, modernization, renovation or

rationalization of plant, & repayable from out of the future earning of the enterprise, in

installments, as per a prearranged schedule.

From the above definition, the following differences between a term loan & the working

capital credit afforded by the Bank are apparent:

· The purpose of the term loan is for acquisition of capital assets.

· The term loan is an advance not repayable on demand but only in installments

ranging over a period of years.

· The repayment of term loan is not out of sale proceeds of the goods & commodities

per se, whether given as security or not. The repayment should come out of the

future cash accruals from the activity of the unit.

· The security is not the readily saleable goods & commodities but the fixed assets of

the units.

3. It may thus be observed that the scope & operation of the term loans are entirely

different from those of the conventional working capital advances. The Bank’s

commitment is for a long period & the risk involved is greater. An element of risk is

inherent in any type of loan because of the uncertainty of the repayment. Longer the

duration of the credit, greater is the attendant uncertainty of repayment & consequently

the risk involved also becomes greater.

4. However, it may be observed that term loans are not so lacking in liquidity as they

appear to be. These loans are subject to a definite repayment programme unlike short

term loans for working capital (especially the cash credits) which are being renewed

year after year. Term loans would be repaid in a regular way from the anticipated

income of the industry/ trade.



5. These distinctive characteristics of term loans distinguish them from the short term

credit granted by the banks & it becomes necessary therefore, to adopt a different

approach in examining the applications of borrowers for such credit & for appraising

such proposals.

6. The repayment of a term loan depends on the future income of the borrowing unit.

Hence, the primary task of the bank before granting term loans is to assure itself that

the anticipated income from the unit would provide the necessary amount for the

repayment of the loan. This will involve a detailed scrutiny of the scheme, its financial

aspects, economic aspects, technical aspects, a projection of future trends of outputs &

sales & estimates of cost, returns, flow of funds & profits.

7. Appraisal of Term Loans

Appraisal of term loan for, say, an industrial unit is a process comprising several steps.

There are four broad aspects of appraisal, namely

· Technical Feasibility - To determine the suitability of the technology selected & the

adequacy of the technical investigation & design

· Economic Feasibility - To ascertain the extent of profitability of the project & its

sufficiency in relation to the repayment obligations pertaining to term assistance

· Financial Feasibility - To determine the accuracy of cost estimates, suitability of the

envisaged pattern of financing & general soundness of the capital structure and

· Managerial Competency – To ascertain that competent men are behind the project to

ensure its successful implementation & efficient management after commencement

of commercial production.

Technical Feasibility

The examination of this item consists of an assessment of the various requirement of the

actual production process. It is in short a study of the availability, costs, quality &

accessibility of all the goods & services needed.

a) The location of the project is highly relevant to its technical feasibility & hence

special attention will have to be paid to this feature. Projects whose technical

requirements could have been taken care of in one location sometimes fail because

they are established in another place where conditions are less favorable. One



project was located near a river to facilitate easy transportation by barge but lower

water level in certain seasons made essential transportation almost impossible. Too

many projects have become uneconomical because sufficient care has not been

taken in the location of the project, e.g. a woolen scouring & spinning mill needed

large quantities of good water but was located in a place which lacked ordinary

supply of water & the limited water supply available also required efficient softening

treatment. The accessibility to the various resources has meaning only with

reference to location. Inadequate transport facilities or lack of sufficient power or

water for instance, can adversely affect an otherwise sound industrial project.

b) Size of the plant – One of the most important considerations affecting the feasibility

of a new industrial enterprise is the right size of the plant. The size of the plant will

be such that it will give an economic product, which will be competitive when

compared to the alternative product available in the market. A smaller plant than

the optimum size may result in increased production costs & may not be able to sell

its products at competitive prices.

c) Type of technology – An important feature of the feasibility relates to the type of

technology to be adopted for a project. A new technology will have to be fully

examined & tired before it is adopted. It is equally important to avoid adopting

equipment or processes which are absolute or likely to become outdated soon. The

principle underlying the technological selection is that “a developing country cannot

afford to be the first to adopt the new nor yet the last to cast the old aside”.

d) Labour – The labour requirements of a project, need to be assessed with special care.

Though labour in terms of unemployed persons is abundant in the country, there is

shortage of trained personnel. The quality of labour required & the training facilities

made available to the unit will have to be taken into account.

e) Technical Report – A technical report using the Bank’s Consultancy Cell, external

consultants, etc., should be obtained with specific comments on the feasibility of

scheme, its profitability, whether machinery proposed to be acquired by the unit

under the scheme will be sufficient for all stages of production, the extent of

competition prevailing, marketability of the products etc., wherever necessary.



Economic Feasibility

An economic feasibility appraisal has reference to the earning capacity of the project. Since

earnings depend on the volume of sales, it is necessary to determine how much output or

the additional production from an established unit the market is likely to absorb at given

prices.

a) A thorough market analysis is one of the most essential parts of project

investigation. This involves getting answers to three questions.

1) How big is the market?

2) How much it is likely to grow?

3) How much of it can the project capture?

The first step in this direction is to consider the current situation, taking account of

the total output of the product concerned & the existing demand for it with a view to

establishing whether there is unsatisfied demand for the product. Care should be

taken to see that there is no idle capacity in the existing industries.

b) Future – possible future changes in the volume & patterns of supply & demand will

have to be estimated in order to assess the long term prospects of the industry.

Forecasting of demand is a complicated matter but one of the vital importance. It is

complicated because a variety of factors affect the demand for product e.g.

technological advances could bring substitutes into market while changes in tastes &

consumer preference might cause sizable shifts in demand.

c) Intermediate product – The demand for “Intermediate product” will depend upon

the demand & supply of the ultimate product (e.g. jute bags, paper for printing, parts

for machines, tyres for automobiles). The market analysis in this case should cover

the market for the ultimate product.



Financial Feasibility

The basis data required for the financial feasibility appraisal can be broadly grouped under

the following heads

i) Cost of the project including working capital

ii) Cost of production & estimates of profitability

iii) Cash flow estimates & sources of finance.

The cash flow estimates will help to decide the disbursal of the term loan. The estimate of

profitability & the break even point will enable the banker to draw up the repayment.

programme, start-up time etc. The profitability estimates will also give the estimate of the

Debt Service Coverage, which is the most important single factor in all the term credit

analysis.

A study of the projected balance sheet of the concern is essential as it is necessary for the

appraisal of a term loan to ensure that the implementation of the proposed scheme.

Ø Break-even point:

In a manufacturing unit, if at a particular level of production, the totalmanufacturing cost

equals the sales revenue, this point of no profit/ no loss is known as the break-even point.

Break-even point is expressed as a percentage of full capacity. A good project will have

reasonably low break-even point which not be encountered in the projections of future

profitability of the unit.

Ø Debt/ Service Coverage:

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

a loan. This is calculated by dividing cash accruals in a year by amount of annual obligations

towards term debt. The cash accruals for this purpose should comprise net profit after taxes

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

Debt Service

Coverage Ratio =

Cash accruals

Maturing annual obligations



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

project/ unit & is, therefore, appropriately included in the cash flow statements. The ratio

may vary from industry to industry but one has to view it with circumspection when it is

lower than the benchmark of 1.75. The repayment programme should be so stipulated that

the ratio is comfortable.

Managerial Competence

In a dynamic environment, the capacity of an enterprise to forge ahead of its competitors

depends to a large extent, on the relative strength of its management. Hence, an appraisal of

management is the touchstone of term credit analysis.

If there is a change in the administration & managerial set up, the success of the project may

be put to test. The integrity & credit worthiness of the personnel in charge of the

management of the industry as well as their experience in management of industrial

concerns should be examined. In high cost schemes, an idea of the unit’s key personnel may

also be necessary.

(B) NON-FUND BASE

(1) LETTER OF CREDIT

The expectation of the seller of any goods or services is that he should get the payment

immediately on delivery of the same. This may not materialize if the seller & the buyer are

at different places (either within the same country or in different countries). The seller

desires to have an assurance for payment by the purchaser. At the same time the purchaser

desires that the amount should be paid only when the goods are actually received. Here

arises the need of Letter of Credit (LCs). The objective of LC is to provide a means of

payment to the seller & the delivery of goods & services to the buyer at the same time.

Ø Definition

A Letter of Credit (LC) is an arrangement whereby a bank (the issuing bank) acting at the

request & on the instructions of the customer (the applicant) or on its own behalf,

i. is to make a payment to or to the order of a third party (the beneficiary), or is to

accept & pay bills of exchange (drafts drawn by the beneficiary); or



ii. authorizes another bank to effect such payment, or to accept & pay such bills of

exchanges (drafts); or

iii. authorizes another bank to negotiate against stipulated document(s), provided that

the terms & conditions of the credit are complied with.

Ø Basic Principle:

The basic principle behind an LC is to facilitate orderly movement of trade; it is therefore

necessary that the evidence of movement of goods is present. Hence documentary LCs is

those which contain documents of title to goods as part of the LC documents. Clean bills

which do not have document of title to goods are not normally established by banks.

Bankers and all concerned deal only in documents & not in goods. If documents are in order

issuing bank will pay irrespective of whether the goods are of expected quality or not.

Banks are also not responsible for the genuineness of the documents & quantity/quality of

goods. If importer is your borrower, the bank has to advice him to convert all his

requirements in the form of documents to ensure quantity & quality of goods.

Ø Parties to the LC

1) Applicant – The buyer who applies for opening LC

2) Beneficiary – The seller who supplies goods

3) Issuing Bank – The Bank which opens the LC

4) Advising Bank – The Bank which advises the LC after confirming authenticity

5) Negotiating Bank – The Bank which negotiates the documents

6) Confirming Bank – The Bank which adds its confirmation to the LC

7) Reimbursing Bank – The Bank which reimburses the LC amount to negotiating bank

8) Second beneficiary – The additional beneficiary in case of transferable LCs

Confirming bank may not be there in a transaction unless the beneficiary demand

confirmation by its own bankers & such a request is made part of LC terms. A bank will

confirm an LC for his beneficiary if opening bank requests this as part of LC terms.

Reimbursing bank is used in an LC transaction by an opening bank when the bank does not

have a direct correspondent/branch through whom the negotiating bank can be

reimbursed. Here, the opening bank will direct the reimbursing bank to reimburse the

negotiating bank with the payment made to the beneficiary. In the case of transferable LC,

the LC may be transferred to the second beneficiary & if provided in the LC it can be



transferred even more than once.

(2) BANK GUARANTEES:

A contract of guarantee is defined as ‘a contract to perform the promise or discharge the

liability of the third person in case of the default’. The parties to the contract of guarantees

are:

a) Applicant: The principal debtor – person at whose request the guarantee is executed

b) Beneficiary: Person to whom the guarantee is given & who can enforce it in case of

default.

c) Guarantee: The person who undertakes to discharge the obligations of theapplicant

in case of his default.

Thus, guarantee is a collateral contract, consequential to a main contract between the

applicant & the beneficiary.

Ø Purpose of Bank Guarantees

Bank Guarantees are used to for both preventive & remedial purposes. The guarantees

executed by banks comprise both performance guarantees & financial guarantees. The

guarantees are structured according to the terms of agreement, viz., security, maturity &

purpose.

Branches may issue guarantees generally for the following purposes:

a) In lieu of security deposit/earnest money deposit for participating in tenders;

b) Mobilization advance or advance money before commencement of the project by the

contractor & for money to be received in various stages like plant layout,

design/drawings in project finance;

c) In respect of raw materials supplies or for advances by the buyers;

d) In respect of due performance of specific contracts by the borrowers & for obtaining

full payment of the bills;

e) Performance guarantee for warranty period on completion of contract which would

enable the suppliers to realize the proceeds without waiting for warranty period to

be over;

f) To allow units to draw funds from time to time from the concerned indenters

against part execution of contracts, etc.



g) Bid bonds on behalf of exporters

h) Export performance guarantees on behalf of exporters favoring the Customs

Department under EPCG scheme.

Ø Appraisal of Bank Guarantee Limit

Proposals for guarantees shall be appraised with the same diligence as in the case of fund-

base limits. Branches may obtain adequate cover by way of margin & security so as to

prevent default on payments when guarantees are invoked. Whenever an application for

the issue of bank guarantee is received, branches should examine & satisfy themselves

about the following aspects:

a) The need of the bank guarantee & whether it is related to the applicant’s normal

trade/business.

b) Whether the requirement is one time or on the regular basis

c) The nature of bank guarantee i.e., financial or performance

d) Applicant’s financial strength/ capacity to meet the liability/ obligation under the

bank guarantee in case of invocation.

e) Past record of the applicant in respect of bank guarantees issued earlier; e.g.,

instances of invocation of bank guarantees, the reasons thereof, the customer’s

response to the invocation, etc.

f) Present o/s on account of bank guarantees already issued

g) Margin

h) Collateral security offered

Ø Format of Bank Guarantees

Bank guarantees should normally be issued on the format standardized by Indian Banks

Association (IBA). When it is required to be issued on a format different from the IBA

format, as may be demanded by some of the beneficiary Government departments, it should

be ensured that the bank guarantee is

a) for a definite period,

b) for a definite objective enforceable on the happening of a definite event,

c) for a specific amount

d) in respect of bona fide trade/ commercial transactions,

e) contains the Bank’s standard limitation clause



f) not stipulating any onerous clause, &

g) not containing any clause for automatic renewal of the bank guarantee on its expiry

6.3) Credit Risk Assessment (CRA):

Credit is a core activity of banks & an important source of their earnings, which go to pay

interest to depositors, salaries to employees & dividend to shareholders

In credit, it is not enough that we have sizable growth in quantity/ volume; it is also

necessary to ensure that we have only good quality growth.

To ensure asset quality, proper risk assessment right at the beginning, that is, at the time of

taking an exposure, is extremely important.

Moreover, capital has to be allocated for loan assets depending on the risk perception/

rating of respective assets. It is, therefore, extremely important for every bank to have a

clear assessment of risks of the loan assets it creates, to become Basle-II compliant.

That is why Credit Risk Assessment (CRA) system is an essential ingredient of the Credit

Appraisal exercise.

6.3.1) Indian Scenario:

Ø In Indian banks, there was no systematic method of Credit Risk Assessment till late

1980’s/ early 1990’s.

Ø Health Code System (1985) / IRAC norms (1993) are Asset (loan) classification systems,

not CRA systems.

Ø RBI came out with its guidelines on Risk Management Systems in Banks in 1999 &

Guidance Note on Management of Credit in October, 2002.

6.3.2) SBM Scenario:

However, like in many other fields, in the field of Credit Risk Assessment too, SBM played a

proactive & pioneering role. Bank had its Credit Rating System in 1988. Then, the CRA

system was introduced in the Bank in 1996. The first CRA model was rolled out in 1996 to

take care of exposures to the C & I (Manufacturing) segment. Thereafter, separate models

for SSI segments were introduced in 1998, when the C&I (Mfg.) CRA model was developed



for Non Banking Finance Companies (NBFCs) too.

As of now, in SBM, CRA is the most important component of the Credit Appraisal exercise

for all exposures > 25 lacs & a very important tool in decision-making (a Decision Support

System) as well as in pricing.

6.3.3) Credit Risk Assessment (CRA) – Minimum Scores / Hurdle Rates

1. The CRA models adopted by the Bank take into account all possible factors, which go

into appraising the risks, associated with a loan. These have been categorized broadly

into financial, business, industrial & management risks and are rated separately. To

arrive at the overall risk rating, the factors duly weighted are aggregated & calibrated to

arrive at a single point indicator of risk associated with the credit decision.

2. Financial parameters: The assessment of financial risk involves appraisal of the

financial strength of the borrower based on performance & financial indicators. The

overall financial risk is assessed in terms of static ratios, future prospects & risk

mitigation (collateral security / financial standing).

3. Industry parameters: The following characteristics of an industry which pose varying

degrees of risk are built into Bank’s CRA model:

Ø Competition

Ø Industry outlook

Ø Regulatory risk

Ø Contemporary issues like WTO etc.

4. Management parameters: The management of an enterprise / group is rated onthe

following parameters:

Ø Integrity (corporate governance)

Ø Track record

Ø Managerial competence / commitment

Ø Expertise

Ø Structure & systems

Ø Experience in the industry

Ø Credibility: ability to meet sales projections

Ø Credibility: ability to meet profit (PAT) projections



Ø Length of relationship with the Bank

Ø Strategic initiatives

Ø Payment record

Bank has introduced New Rating Scales for borrower for giving loans. Rating is given on the

basis of scores out of 100. Bank gives loans to the borrower as per their rating like SBM

gives loans to the borrower up to SB8 rating as it has average risk till SB8 rating. From SB9

rating the risk increases. Thus, SBM do not give loans after SB8 rating.

5. The risk parameters as mentioned above are individually scored to arrive at an

aggregate score of 100 (subject to qualitative factors – negative parameters). The

overall score thus obtained (out of a max. of 100) is rated on a 16 point scale from

SB1/SBTL1 to SB 16 /SBTL16.

Ø CRA model also stipulates a minimum score under financial, business, industry and

management risk parameters for a proposal to be considered acceptable in a given

form.

The details of such minimum scores are as under:

a. Minimum scores – General

b. Minimum scores under Management Risk : (‘Integrity/Corporate Governance’, ‘Track

Record’ and ‘Managerial Competence/ Commitment’)

An applicant unit will be required to score minimum 2 marks each (out of 3) in the

above three parameters of Management Risk to qualify for Bank’s assistance. In case of

existing accounts if the company scores less than this stipulated minimum marks (02),

the Bank would explore all possibilities to exercise exit option.

c. Minimum Score under Business Risk:

Compliance of Environment Regulations to qualify for financial assistance, an applicant

unit would have to secure full marks (02) under the parameter, “Compliance of

Environment Regulations.” In case, the existing units in the books of the bank do not

secure full marks (02), the bank would explore all possibilities for the exercise of exit

option.



d. Hurdle Scores:

RISK TYPES

REGULAR MODEL SIMPLIFIED MODEL

EXISTING

COMPANY

NEW

COMPANY

EXISTING

COMPANY

NEW

COMPANY

FINANCIAL RISK 25/65 10/25 30/70 15/35

BUSINESS & INDUSTRY

RISK 12/20 16/30 10/20 20/40

MANAGEMANT RISK 8/15 22/45 5/10 13/25

AGGREGATE HURDLE

SCORE 45/100 48/100 45/100 48/100

OVERALL HURDLE GRADE SB10 SB10 SB10 SB10

6.3.4) Salient Features of CRA Models:

(a) Type of Models

No. Exposure Level (FB + NFB

Limits )

Non – Trading Sector

(C&I , SSI , AGL)

Trading Sector ( Trade & Services)

(i) Over Rs. 5.00 crore Regular Model Regular Model

(ii) Rs 0.25 crore to Rs. 5.00 crore Simplified Model Simplified Model

(b) Type of Ratings

No. Model Type of Rating

(i) Regular Model Borrower Rating

Facility Rating

(ii) Simplified Model Borrower Rating



(c) Type of Risks Covered:

(i) Borrower Rating

No. Risk Category

Maximum Score

Regular Model Simplified Model

Existing

Company

New

Company

Existing

Company

New

Company

(i) Financial Risk (FR) 65 25(65 x 0.39) 70 35 (70/2)

(ii) Qualitative Factors (-‘ve) (-10) (-10) (-10) (-10)

(iii)

Business & Industry Risk

(BR& IR) /Business

Risk(for Trading Sector)

20 30 (20 x 1.5) 20 40 (20 x 2)

(iv) Management Risk (MR) 15 45 ( 15 x 3) 10 25 ( 10 x 2.5)

(v) Qualitative Parameter

(External Rating) (+5) (+5) (+5) (+ 5)

Total 100 100 100 100

(ii) Facility Rating (Regular Model)

NO. Parameter Maximum Score

(a) Risk Drivers for Loss Given Default (LGD)

(i)

Current Ratio

[Working Capital/ Non-Fund Based Facility (except Capex)]

OR Project Debt/Equity

[Term Loan/Non-Fund Based Facility (for Capex)]

6

(ii) Nature of Charge 4

(iii) Nature of Charge 6

(iv) Geography 2

(v)

Unit Characteristics

(a) Leverage/ Enforcement of Collateral-4

(b) Safety, Value & Existence of Assets-4

8

(vi)

Macro-Economic Conditions

(a)GDP Growth Rate : Impact of Business Cycle- 2

(b) Insolvency Legislation in the Jurisdiction-1

(c) Impact of Systemic/Legal Factors on Recovery-1

(d) Time Period for Recovery-1

5



(vii) Total Security (Primary + Collateral) 60

(b) Risk Drivers for Exposure at Default (EAD)

(i) Nature of Commitment

(Revolving/Non-Revolving) 1

(ii) Credit Quality of Borrower 5

(iii) Tenor of Facility 3

Total Score 100

(d) New Rating Scales - Borrower Rating: 16 Rating Grades

No. Borrower

Rating

Range of

Scores Risk Level Comfort Level

1 SB1 94-100 Virtually Zero Risk Virtually Absolute Safety

2 SB2 90-93 Lowest Risk Highest Safety

3 SB3 86-89 Lower Risk Higher Safety

4 SB4 81-85 Low Risk High Safety

5 SB5 76-80 Moderate Risk with Adequate

Cushion Adequate Safety

6 SB6 70-75 Moderate Risk Moderate Safety

7 SB7 64-69

8 SB8 57-63 Average Risk Above safety threshold

9 SB9 50-56

10 SB10 45-49 Acceptable Risk (Risk

Tolerance Threshold) Safety Threshold

11 SB11 40-44 Borderline risk Inadequate safety

12 SB12 35-39 High Risk Low safety

13 SB13 30-34 Higher Risk Lower safety

14 SB14 25-29 Substantial risk Lowest safety

15 SB15 <24 Pre-Default Risk (extremely

vulnerable to default) NIL

16 SB16 - Default Grade



(e) Qualitative Parameter (External Rating)

Solicited Rating by a recognized External Credit Rating Agency (ECRA) translates to

additional Score. Following ECRAs recognized by RBI are considered for this purpose:

No. Type External Credit Rating Agency

1 Domestic

(a) Credit Analysis & Research Limited

(b) CRISIL Limited

(c) FITCH India

(d) ICRA Limited

2 International

(a) FITCH

(b) Moody’s

(c) Standard & Poor’s

RBI has clarified that “Cash Credit Exposures tend to be generally rolled over and also tend

to be drawn on an average for a major portion of the sanctioned limits. Hence even though a

cash credit exposure may be sanctioned for a period of one year or less, these exposures

should be reckoned as Long Term Exposures and accordingly, the Long Term Ratings

accorded by the chosen Credit Rating Agencies will be relevant.”



CREDIT APPRAISAL PROCESS (In General)

Receipt of application from applicant

Receipt of documents

(Balance sheet, KYC papers, Different govt. registration no., MOA, AOA,

and Properties documents)

Pre-sanction visit by bank officers

Check for RBI defaulters list, willful defaulters list, CIBIL data, ECGC

caution list, etc.

Title clearance reports of the properties to be obtained from empanelled

advocates

Valuation reports of the properties to be obtained from empanelled

Valuer/engineers

Preparation of financial data

Proposal preparation

Assessment of proposal

Sanction/approval of proposal by appropriate sanctioning authority

Documentations, agreements, mortgages

Disbursement of loan

Post sanction activities such as receiving stock statements, review of

accounts, renew of accounts, etc.

(On regular basis)



6. 4) Comparative Analysis of Credit Risk Appraisal at different types of banks:

Particulars Public

Banks

Private

banks

Co-

operative

banks

Evaluation of types of risks

Financial risk ü ü ü

Business and industry risk ü ü

Management risk ü ü

Country risk ü ü

Documents needed for loan proposal

3 years balance sheet ü ü

6 months balance sheet ü ü

Projected financial statements for the term of the

loan in case of term loan ü ü

2 years projected financial statements in case of C.C. ü ü

Details of accounts with other banks and their

passbooks ü ü ü

Different types of ratings

In-house ratings for loan up to 5 crores ü ü

CRISIL or care ratings for loans ü ü

CIBIL check ü ü

Different types of check

Industry check ü ü

Check of availability of raw material, skilled labour,

etc. ü ü

Salability of the product ü ü ü

Level of competition ü ü

Infrastructural capability ü ü

Availability of power, fuels, etc. ü ü

Trend in sales ü ü ü

Price fluctuations ü ü

Management’s capability ü ü



Record of payment to banks ü ü

Age of the borrower ü ü

Consideration of geographical proximity of the

borrower’s place ü

Borrower’s background ü ü

Production capacity ü

Stock check ü ü ü

Extent of promoter’s investment ü

Technical capability of the borrower ü ü ü

Check with other banks ü ü

Reporting

Monthly ü ü

Quarterly ü

Interest period

Monthly ü ü

Quarterly ü

Insurance factor

Insurance of the owner’s item stored in the godown

in the name of bank ü

Other factors

Follow up & monitoring ü ü ü

Qualitative factors(TNW related) ü ü

Financial statement quality ü ü

Visits to the borrower’s place

Visits prior to the sanctioning of loan ü ü ü

Visits after the sanctioning of loan on a regular basis ü ü

Third party guarantee ü ü ü

Collateral security ü ü ü



Chapter 7

Risk Management in Banks

7.1) Introduction

Risk management is the strategic tool, which helps in identifying, qualifying, monitoring and

controlling risks. Risk management protects an organization from dying due to insolvency

resulting from the adverse effects of risk. Though universally relevant it is of immense

importance to a banking organization or financial institution.

The economic scenario has undergone considerable changes as compared that a few

decades ago. Some of the changes that we have been witnessed are deregulation of the

banking industry, development of financial markets, transition into floating rate of

exchanges, increasing roles of capital markets and global competition, etc. In the past the

banking institution functioned in a regulated environment thereby limiting to various types

of risks. However, today that legacy no more exists.

A banking organization has to constantly strike a balance between risk and reward. A

proposal, which may seem very rewarding in the short term, may wipe out the bank

completely in the long run due to high risk embedded in it. Risk management helps the bank

in striking this balance. Thus risk management systems are not a solution, but a tool to aid

decision making.

7.2) Classification of Risks

Risk normally has two dimensions i.e. the quality of risk and the quantity of risk. Quality of

risk is essentially the probability of the risk turning into an actual loss. Quantity of risk is

the financial effect of the risk turning into loss. Both these dimensions are extremely

difficult to measure, primarily because it is an estimation of the future, which is highly

uncertain. To understand Risk Management it is extremely important to understand the

various types of risks, their characteristics and their interrelationships.

Risk Management in Banks


Ø Interest rate risk

It is the risk of loss of revenue or increase or decrease in cost due to adverse movements in

the market interest rates. Risk due to a client exercising its option of pre-payment of a loan

due to lower interest rates is known as the optional interest rate risks. Most of the balance

sheet items generate revenue or incur costs, which are benched against one or the other

interest rate. This has become more significant with the emergence of floating interest rate

instruments.

The immediate impact of change in interest rate is on bank’s earnings by changing net

interest income. A long term impact of changing interest rate is on bank’s market value of

equity or net worth as the economic value of bank’s assets, liabilities and off balance sheet

items affected due to variation in market interest rate. The interest rate risk when viewed

from these two perspectives is known as “Earning Perspective” and “Economic value

Perspectives” respectively.

Ø Liquidity Risk

The bank always borrows short-term and lends long term. Due to this nature of banking

activities it is vulnerable to an asset-liability mismatch thereby resulting into an inability in

meeting its commitments. Liquidity risk is essentially a result of adverse movements of

other risks i.e. Credit risk, interest risk, foreign exchange risk. Small information in the

market about the liquidity problems faced by a bank may result into withdrawal of

enormous deposits, thereby aggravating the problem. Liquidity risk also includes rising of

funds at an abnormal cost to meet its commitments.

Management of Interest Rate risk and Liquidity risk is together known, as Asset-Liability

Management is a subset of the whole gamut of risk management tools.

Ø Credit Risk

Credit Risk is the most fundamental risk faced by a banking company. Credit Risk is the risk

of default by a borrower of funds or decline in the credit standing of a borrower. It is the

most difficult to quantify due to the large amount of subjectivity involved in it. Thus credit

risk management can assist in decision making; it cannot be a substitute to the judgmental

decision of a credit officer.



Traditionally credit risk has been managed by setting up limits to the global exposure,

industry exposure, country exposure and individual client/group exposure. Credit Risk

Management is extremely important as the pricing of a portfolio or a transaction is

dependent on the risk factor built in it. However, sometimes a bank may only be an adopter

of the prevailing market rate of interest. Nothing the else it is important to judge the

rational behind accepting and rejecting a credit proposal.

Ø Market Risk

It is a risk of loss due to adverse movements in the market rates during the compulsory

holding period having an impact on the portfolio held by the bank. Compulsorily holding

period denotes the duration during which instrument cannot be sold by an organization.

This is normally the time period, which is required in taking delivery of the instrument. Any

adverse movements beyond the compulsory holding period are due to the judgmental error

and therefore should be analyzed differently. Market risk is also important in constantly

determining the true worth of a collateral security provided by the borrower. Foreign

exchange risk is often regarded as a part of the market risk, but may be bifurcated for

facilitating better analysis.

Ø Operational Risk

It is the risk faced by an organization, arising due to malfunctioning of internal systems,

wrong entering of transaction details, wrong interpretation and judgmental errors made by

manpower. Operational risk is difficult to quantify and monitor. However certain critical

operations or systems have to be identified, the failure of which would raise survival issues

for the company. Close and constant monitoring of these systems is an essential part of

operational risk management.

The list above is not exhaustive but only indicative of some of primary risks faced by a

banking organization. All the risks are interdependent on each other. For e.g., Default by a

borrower (Credit Risk) may affect the liquidity position of the bank (Liquidity Risk)

SBM norms for Credit Appraisal & Credit Risk Management


Chapter 8

SBM Norms for Credit Appraisal

& Credit Risk management

Credit appraisal means an investigation/assessment done by the bank prior before

providing any loans & advances/project finance & also checks the commercial, financial &

technical viability of the project proposed its funding pattern & further checks the primary

& collateral security cover available for recovery of such funds.

8.1) Loan Policy – An Introduction

1.1 State Bank of Mysore’s (SBM) Loan Policy is aimed at accomplishing its mission of

retaining the bank’s position as a Premier Financial Services Group, with World class

standards & significant global business, committed to excellence in customer,

shareholder & employee satisfaction & to play a leading role in the expanding &

diversifying financial services sector, while continuing emphasis on its Development

Banking role.

1.2 The Loan Policy of the any bank has successfully withstood the test of time and with

in-built flexibilities, has been able to meet the challenges in the market place. The

policy exits & operates at both formal & informal levels. The formal policy is well

documented in the form of circular instructions, periodic guidelines & codified

instructions, apart from the Book of Instructions, where procedural aspects are

highlighted.

1.3 The policy, at the holistic level, is an embodiment of the Bank’s approach to

sanctioning, managing & monitoring credit risk & aims at making the systems &

controls effective.

1.4 The Loan Policy also aims at striking a balance between underwriting assets of high

quality, and customer oriented selling. The objective is to maintain Bank’s

undisputed leadership in the Indian Banking scene.



1.5 The Policy aims at continued growth of assets while endeavoring to ensure that

these remain performing & standard. To this end, as a matter of policy the Bank does

not take over any Non-Performing Asset (NPA) from other banks.

1.6 The Central Board of the Bank is the apex authority in formulating all matters of

policy in the bank. The Board has permitted setting up of the Credit Policy &

Procedures Committee (CPPC) at the Corporate Centre of the Bank of which the Top

Management are members, to deal with issues relating to credit policy & procedures

on a Bank-wide basis. The CPPC sets broad policies for managing credit risk

including industrial rehabilitation, sets parameters for credit portfolio in terms of

exposure limits, reviews credit appraisal systems, approves policies for

compromises, write offs, etc. & general management of NPAs besides dealing with

the issues relating to Delegation of Powers.

Based on the present indications, following exposure levels are prescribed:

Individuals as borrowers

Maximum aggregate credit facilities of Rs. 20

crores

(Fund based and Non fund based)

Non-corporate

(E.g. Partnerships, Associations, etc.)

Maximum aggregate credit facilities of Rs. 80

crores

(Fund based and Non fund based)

Corporate Maximum aggregate credit facilities as per

prudential norms of RBI on exposures

Ø Term Loans (loans with residual maturity of over 3 years) should not in the

aggregate exceed 35% of the total advances of SBM.

Ø The Bank shall endeavor to restrict fund based exposure to a particular industry to

15% of the Bank’s total fund based exposure.

Ø The Bank shall restrict the term loan exposure to infrastructure projects to 10% of

Bank’s total advances.

Ø The Bank shall endeavor to restrict exposure to sensitive sectors (i.e. to capital

market, real estate, and sensitive commodities listed by RBI) to 10% of Bank’s total

advances.

Ø The Bank’s aggregate exposure to the capital markets shall not exceed 5% of the



total outstanding advances (including commercial paper) as on March 31 of the

previous year.

@ Credit Appraisal Standards

(A) Qualitative:

At the outset, the proposition is examined from the angle of viability & also from the Bank’s

prudential levels of exposure to the borrower, Group & Industry. Thereafter, a view is taken

about our past experience with the promoters, if there is a track record to go by. Where it is

a new connection for the bank but the entrepreneurs are already in business, opinion

reports from existing bankers & published data if available are carefully pursued. In case of

a maiden venture, in addition to the drill mentioned heretofore, an element of subjectively

has to be perforce introduced as scant historical data weights to be placed on impressions

gained out of the serious dialogues with the promoter & his business contacts.

(B) Quantitative:

(a) Working capital: The basis quantitative parameters underpinning the Bank’s credit

appraisal are as follows:-

(i) Liquidity:

Current Ratio (CR) of 1.33 will generally be considered as a benchmark level of liquidity.

However the approach has to be flexible. CR of 1.33 is only indicative & may not be deemed

mandatory. In cases where the CR is projected at a lower than the benchmark or a slippage

in the CR is proposed, it alone will not be a reason for rejection for the loan proposal or for

the sanction of the loan at a lower level. In such cases, the reason for low CR or slippage

should be carefully examined & in deserving cases the CR as projected may be accepted. In

cases where projected CR is found acceptable, working capital finance as requested may be

sanctioned. In specific cases where warranted, such sanction can be with the condition that

the borrower should bring in additional long-term funds to a specific extent by a given

future date. Where it is felt that the projected CR is not acceptable but the borrower

deserves assistance subject to certain conditions, suitable written commitment should be

obtained from the borrower to the effect that he would be bringing in required amounts

within a mutually agreed time frame.



(ii) Net Working Capital:

Although this is a corollary of current ratio, the movements in Net Working Capital are

watched to ascertain whether there is a mismatch of long term sources vis-à-vis long term

uses for purposes which may not be readily acceptable to the Bank so that corrective

measures can be suggested.

(iii) Financial Soundness:

This will be dependent upon the owner’s stake or the leverage. Here again the benchmark

will be different for manufacturing, trading, hire-purchase & leasing concerns. For industrial

ventures a Total Outside Liability/ Tangible Net worth ratio of 3.0 is reasonable but

deviations in selective cases for understandable reasons may be accepted by the

sanctioning authority.

(iv) Turn-Over:

The trend in turnover is carefully gone into both in terms of quantity & value as also market

share wherever such data are available. What is more important to establish a steady

output if not a rising trend in quantitative terms because sales realization may be varying

on account of price fluctuations.

(v) Profits:

While net profit is ultimate yardstick, cash accruals, i.e., profit before depreciation &

taxation conveys the more comparable picture in view of changes in rate of depreciation &

taxation, which have taken place in the intervening years. However, for the sake of proper

assessment, the non-operating income is excluded, as these are usually one time or

extraordinary income. Companies incurring net losses consistently over 2 or more years

will be given special attention, their accounts closely monitored, and if necessary, exit

options explored.

(vi) Credit Rating:

Wherever the company has been rated by a Credit Rating Agency for any instrument such as

CP / FD, this will be taken into account while arriving at the final decision. However as the

credit rating involves additional expenditure, we would not normally insist on this and only

use this tool if such an agency had already looked into the company finances.



(b) Term Loan

(i) In case of term loan & deferred payment guarantees, the project report is obtained

from the customer, which may be compiled either in-house or by a firm of consultants/

merchant bankers. The technical feasibility & economic viability is vetted by the bank &

wherever it is felt necessary, the Credit Officer would seek the benefit of a second

opinion either from the Bank’s Technical Consultancy cell or from the consultants of

the Bank/ SBI Capital Markets Ltd.

(ii) Promoter’s contribution of at least 20% in the total equity is what we normally expect.

But promoters’ contribution may vary largely in mega projects. Therefore there cannot

be a definite benchmark. The sanctioning authority will have the necessary discretion

to permit deviations.

(iii) The other basic parameter would be the net debt service coverage ratio i.e. exclusive of

interest payable, which should normally not go below 2. On a gross basis DSCR should

not be below 1.75. These ratios are indicative & the sanctioning authority may permit

deviations selectively.

(iv) As regards margin on security, this will depend on Debt: Equity gearing for the project,

which should preferably be near about 1.5: 1 & should not in any case be above 2:1, i.e.,

Debt should not be more than 2 times the Equity contribution. The sanctioning

authority in exceptional cases may permit deviations from the norm very selectively.

(v) Other parameters governing working capital facilities would also govern Term Credit

facilities to the extent applicable.



@ Required Documents for Process of Loan

1) Application for requirement of loan

2) Copy of Memorandum & Article of Association

3) Copy of incorporation of business

4) Copy of commencement of business

5) Copy of resolution regarding the requirement of credit facilities

6) Brief history of company, its customers & supplies, previous track records, orders in

hand. Also provide some information about the directors of the company

7) Financial statements of last 3 years including the provisional financial statement for

the year 2007-08

8) Copy of PAN/TAN number of company

9) Copy of last Electricity bill of company

10) Copy of GST/CST number

11) Copy of Excise number

12) Photo I.D. of all the directors

13) Address proof of all the directors

14) Copies related to the property such as 7/12 & 8A utara, lease/ sales deed, 2R

permission, Allotment letter, Possession

15) Bio-data form of all the directors duly filled & notarized

16) Financial statements of associate concern for the last 3 years

@ Delegation of Powers

1. A scheme of Delegation of Powers comprehensively documented in 1985 and

amended from time to time is in operation in the Bank in respect of financial and

administrative matters for exercise by the various functionaries. This is based on the

premise that an executive is required to exercise only those powers which are

related to the responsibilities and duties entrusted to him/her. In exercising the

powers, the authorities concerned are required to ensure compliance also with the

relevant provisions of the State Bank of India Act and the State Bank of India General

Regulations and any rules, regulations, instructions or orders issued from time to

time by appropriate controlling authorities.

2. The Scheme of Delegation of Financial powers for advances and allied matters in the

Bank has a graded authority structure. The Executive Committee of the Central



Board (ECCB) has full powers for sanctioning credit facilities. The sanctioning

powers have been delegated down the line to Committees of officials at various

administrative offices and individual line functionaries.

3. An appropriate control system is also in operation in tune with the Delegation

structure. The powers, exercised by various functionaries, are required to be

reported to the next higher authority as laid down in the Scheme of Delegation of

Financial Powers.

SN PARTICULARS LIMITS CCCC WBCC CCC-I CCC-II NLCC AGM

1 CORPORATES

SB-1 &

SB-2 OVERALL 500.00 250.00 100.00 50.00 FBL 7.50 2.00

TL NA NA 35.00 15.00 TL 5.00

1.25

(WC-1.00)

OTHERS OVERALL 400.00 200.00 70.00 35.00 NFBL 7.50 1.00

TL NA NA 20.00 10.00 OVERALL 15.00 3.00

2 NON-

CORPORATES

SB-1 &

SB-2 OVERALL 60.00 60.00 40.00 20.00 FBL 5.00 1.00

TL NA NA 10.00 5.00 TL 3.00

1.00

(WC-0.60)


TL NA NA 8.00 4.00 OVERALL 10.00 1.20

3 INDIVIDUALS

SB-1 &

SB-2 OVERALL 15.00 15.00 15.00 6.00 FBL 2.00 1.00

TL NA NA - - TL -

1.00

(WC-0.60)


TL NA NA - - OVERALL 4.00 1.20



@ Pricing (Factors deciding interest rates and other charges)

1. Pricing of loans up to Rs.2 lacs will be as prescribed by RBI. In line with RBI guidelines,

he Bank announces from time to time its single Benchmark Prime Lending Rate (BPLR),

i.e., reference / indicative rates at which the Bank would lend to its best customers. The

BPLR would be referred to as State Bank Advance Rate (SBAR) in our Bank. Interest rate

without reference to SBAR could be charged in respect of certain categories of loan /

credit like discounting of bills, lending to intermediary agencies etc. Interest rates below

SBAR could be offered to exporters or other credit worthy borrowers including public

enterprises on the lines of a transparent and objective policy approved by the Bank's

Board. All other loans are to be priced on the basis of Bank's SBAR with the pricing

being linked to grade of the risk in the exposure. The maximum spread over SBAR which

could be charged by the Bank will be decided by the Bank from time to time. Within

such ceiling, the pricing for various credit facilities, schemes, products, credit related

services etc. Bank may also price floating rate products by using market benchmarks

(e.g. MIBOR etc.) in a transparent manner as per Board approved policies.

2. An internal Credit Risk Rating system covering all advances of Rs.25 lacs and above in

C&I, SSI segments have been put in place to facilitate structured assessment of credit

risks. The system enables evaluation of the fundamental strength of the borrower so as

to charge a graded rate of interest based on different ratings. However, taking into

consideration the trends in movement of interest rates and market competition, the

Bank has also adopted an appropriate authority structure to facilitate competitive

pricing of loan products linked both to risk rating and overall business considerations.

3. Bank has introduced fixed interest rates in respect of certain categories of loans in

personal segment, e.g. housing term loans to individuals. Fixed interest rates are also

extended for commercial loans, albeit highly selectively.

4. Pricing of Bank's funds and services while being basically market driven is also

determined by two important considerations, i.e., minimum desired profitability and

risk inherent in the transaction. At the corporate level, the applicable price for a

particular advance or service is fixed taking into account the marginal cost of Bank's

funds and desired rate of return as calculated from indices like profitability levels and

return on capital employed. In case of corporate relationship where the value of

connections and overall potential for profitability from a particular account are more



important than a particular transaction, the price is fine tuned even to level of no-loss-

no-profit in the transaction. For long term exposures, the factors that weigh are the rate

charged by the financial institutions, the period of exposure, and the pattern of volatility

in the interest rates and the expected movement of the rates in the long term

perspective.

@ Credit Monitoring & Supervision

1. Broadly, the objectives of post-sanction follow up, supervision and monitoring are as

under:

(a) Follow up function:

Ø To ensure the end-use of funds

Ø To relate the outstanding to the assets level on a continuous basis

Ø To correlate the activity level to the projections made at the time of the

Ø sanction / renewal of the credit facilities

Ø To detect deviation from terms of sanction.

Ø To make periodic assessment of the health of the advances by noting some of the

key indicators of performance like profitability, activity level, and management

of the unit and ensure that the assets created are effectively utilized for

productive purposes and are well maintained.

Ø To ensure recovery of the installments of the principal in case of term loans as

per the scheduled repayment programme and all interest.

Ø To identify early warning signals, if any, and initiate remedial measures thereby

averting the incidence of incipient sickness.

Ø To ensure compliance with all internal and external reporting requirements

covering the credit area.

(b) Supervision function:

Ø To ensure that effective follow up of advances is in place and asset quality of

good order is maintained.

Ø To look for early warning signals, identify ‘incipient sickness’ and initiate

proactive remedial measures.



(c) Monitoring function :

Ø To ensure that effective supervision is maintained on loans / advances and

appropriate responses are initiated wherever early warning signals are seen.

Ø To monitor on an ongoing basis the asset portfolio by tracking changes from

time to time.

Ø Chalking out and arranging for carrying out specific actions to ensure high

percentage of ‘Standard Assets’.

v Detailed operative guidelines on the following aspects of effective credit monitoring are

in place:

Ø Post-sanction responsibilities of different functionaries

Ø Reporting for control

Ø Security documents, Statement of stocks and book debts

Ø Computation of drawing power (DP) on eligible current assets and maintaining

of DP register

Ø Verification of assets

Ø Inspection by branch functionaries – frequency, reporting, register etc.

Ø Stock Audit

Ø Follow up based on information systems

Ø Follow up during project implementation stage

Ø Follow up post-commercial production

Ø Monitoring and control

Ø Detection and prevention of diversion of working capital finance

Ø Monitoring of large withdrawals

Ø Allocation of limit

Ø Handling of NPA accounts etc.



8.2) Loan Administration - Pre-Sanction Process

Appraisal, Assessment and Sanction Functions

8.2.1) Appraisal

A. Preliminary Appraisal

1. Sound credit appraisal involves analysis of the viability of operations of a business and

the capacity of the promoters to run it profitably and repay the bank the dues as and then

they fall

2. Towards this end the preliminary appraisal will examine the following aspects of a

proposal.

Ø Bank’s lending policy and other relevant guidelines/RBI guidelines,

Ø Prudential Exposure norms,

Ø Industry Exposure restrictions,

Ø Group Exposure restrictions,

Ø Industry related risk factors,

Ø Credit risk rating,

Ø Profile of the promoters/senior management personnel of the project,

Ø List of defaulters,

Ø Caution lists,

Ø Acceptability of the promoters,

Ø Compliance regarding transfer of borrower accounts from one bank to another, if

applicable;

Ø Government regulations/legislation impacting on the industry; e.g., ban on financing

of industries producing/ consuming Ozone depleting substances;

Ø Applicant’s status vis-à-vis other units in the industry,

Ø Financial status in broad terms and whether it is acceptable

The company’s Memorandum and Articles of Association should be scrutinized carefully to

ensure (i) that there are no clauses prejudicial to the Bank’s interests, (ii) no limitations

have been placed on the Company’s borrowing powers and operations and (iii) the scope of

activity of the company.



3. Further, if the proposal is to finance a project, the following aspects have to be examined:

Ø Whether project cost is prima facie acceptable

Ø Debt/equity gearing proposed and whether acceptable

Ø Promoters’ ability to access capital market for debt/equity support

Ø Whether critical aspects of project - demand, cost of production, profitability, etc.

are prima facie in order

4. After undertaking the above preliminary examination of the proposal, the branch will

arrive at a decision whether to support the request or not. If the branch (a reference to the

branch includes a reference to SECC/CPC etc. as the case may be) finds the proposal

acceptable, it will call for from the applicant(s), a comprehensive application in the

prescribed proforma, along with a copy of the proposal/project report, covering specific

credit requirement of the company and other essential data/ information. The information,

among other things, should include:

Ø Organizational set up with a list of Board of Directors and indicating the

qualifications, experience and competence of the key personnel in charge of the

main functional areas e.g., purchase, production, marketing and finance; in other

words a brief on the managerial resources and whether these are compatible with

the size and scope of the proposed activity.

Ø Demand and supply projections based on the overall market prospects together with

a copy of the market survey report. The report may comment on the geographic

spread of the market where the unit proposes to operate, demand and supply gap,

the competitors’ share, competitive advantage of the applicant, proposed marketing

arrangement, etc.

Ø Current practices for the particular product/service especially relating to terms of

credit sales, probability of bad debts, etc.

Ø Estimates of sales cost of production and profitability.

Ø Projected profit and loss account and balance sheet for the operating years during

the currency of the Bank assistance.

Ø If request includes financing of project(s), branch should obtain additionally



» Appraisal report from any other bank/financial institution in case appraisal has

been done by them,

» ‘No Objection Certificate’ from term lenders if already financed by them and

» Report from Merchant bankers in case the company plans to access capital

market, wherever necessary.

5. In respect of existing concerns, in addition to the above, particulars regarding the history

of the concern, its past performance, present financial position, etc. should also be called for.

This data/information should be supplemented by the supporting statements such as:

Ø Audited profit loss account and balance sheet for the past three years (if the latest

audited balance sheet is more than 6 months old, a pro-forma balance sheet as on a

recent date should be obtained and analyzed). For non-corporate borrowers,

irrespective of market segment, enjoying credit limits of Rs.10 lacs and above from

the banking system, audited balance sheet in the IBA approved formats should be

submitted by the borrowers.

Ø Details of existing borrowing arrangements, if any,

Ø Credit information reports from the existing bankers on the applicant Company, and

Ø Financial statements and borrowing relationship of Associate firms/Group

Companies.

B. Detailed Appraisal

1) The viability of a project is examined to ascertain that the company would have the

ability to service its loan and interest obligations out of cash accruals from the business.

While appraising a project or a loan proposal, all the data/information furnished by the

borrower should be counter checked and, wherever possible, inter-firm and inter-

industry comparisons should be made to establish their veracity.

2) The financial analysis carried out on the basis of the company’s audited balance sheets

and profit and loss accounts for the last three years should help to establish the current

viability.

3) In addition to the financials, the following aspects should also be examined:

Ø The method of depreciation followed by the company-whether the company is

following straight line method or written down value method and whether the



company has changed the method of depreciation in the past and, if so, the reason

therefore;

Ø Whether the company has revalued any of its fixed assets any time in the past and

the present status of the revaluation reserve, if any created for the purpose;

Ø Record of major defaults, if any, in repayment in the past and history of past

sickness, if any;

Ø The position regarding the company’s tax assessment - whether the provisions made

in the balance sheets are adequate to take care of the company’s tax liabilities;

Ø The nature and purpose of the contingent liabilities, together with comments

thereon;

Ø Pending suits by or against the company and their financial implications (e.g. cases

relating to customs and excise, sales tax, etc.);

Ø Qualifications/adverse remarks, if any, made by the statutory auditors on the

company’s accounts;

Ø Dividend policy;

Ø Apart from financial ratios, other ratios relevant to the project;

Ø Trends in sales and profitability, past deviations in sales and profit projections, and

estimates/projections of sales values;

Ø Production capacity & use: past and projected;

Ø Estimated requirement of working capital finance with reference to acceptable build

up of inventory/ receivables/ other current assets

Ø Projected levels: whether acceptable; and

Ø Compliance with lending norms and other mandatory guidelines as applicable

4) Project financing:

If the proposal involves financing a new project, the commercial, economic and financial

viability and other aspects are to be examined as indicated below:

Ø Statutory clearances from various Government Depts./ Agencies

Ø Licenses/ permits/ approvals/ clearances/ NOCs/ Collaboration agreements, as

applicable

Ø Details of sourcing of energy requirements, power, fuel etc.

Ø Pollution control clearance

Ø Cost of project and source of finance

Ø Build-up of fixed assets (requirement of funds for investments in fixed assets to be



critically examined with regard to production factors, improvement in quality of

products, economies of scale etc.)

Ø Arrangements proposed for raising debt and equity

Ø Capital structure (position of Authorized, Issued/ Paid-up Capital, Redeemable

Preference Shares, etc.)

Ø Debt component i.e., debentures, term Loans, deferred payment facilities, unsecured

loans/ deposits. All unsecured loans/ deposits raised by the company for financing a

project should be subordinate to the term loans of the banks/ financial institutions

and should be permitted to be repaid only with the prior approval of all the banks

and the financial institutions concerned. Where central or state sales tax loan or

developmental loan is taken as source of financing the project, furnish details of the

terms and conditions governing the loan like the rate of interest (if applicable), the

manner of repayment, etc.

Ø Feasibility of arrangements to access capital market

Ø Feasibility of the projections/ estimates of sales, cost of production and profits

covering the period of repayment

Ø Break Even Point in terms of sales value and percentage of installed capacity under a

normal production year

Ø Cash flows and fund flows

Ø Proposed amortization schedule

Ø Whether profitability is adequate to meet stipulated repayments with reference to

Debt Service Coverage Ratio, Return on Investment

Ø Industry profile & prospects

Ø Critical factors of the industry and whether the assessment of these and

management plans in this regard are acceptable

Ø Technical feasibility with reference to report of technical consultants, if available

Ø Management quality, competence, track record

Ø Company’s structure & systems

Ø Applicant’s strength on inter-firm comparisons



For the purpose of inter-firm comparison and other information, where necessary, source

data from Stock Exchange Directory, financial journals/ publications, professional entities

like CRIS-INFAC, CMIE, etc. with emphasis on following aspects:

Ø Market share of the units under comparison

Ø Unique features

Ø Profitability factors

Ø Financing pattern of the business

Ø Inventory/Receivable levels

Ø Capacity utilization

Ø Production efficiency and costs

Ø Bank borrowings patterns

Ø Financial ratios & other relevant ratios

Ø Capital Market Perceptions

Ø Current price

Ø 52week high and low of the share price

Ø P/E ratio or P/E Multiple

Ø Yield (%)- half yearly and yearly

Also examine and comment on the status of approvals from other term lenders, market

view (if anything adverse), and project implementation schedule. A pre-sanction inspection

of the project site or the factory should be carried out in the case of existing units. To ensure

a higher degree of commitment from the promoters, the portion of the equity / loans which

is proposed to be brought in by the promoters, their family members, friends and relatives

will have to be brought upfront. However, relaxation in this regard may be considered on a

case to case basis for genuine and acceptable reasons. Under such circumstances, the

promoter should furnish a definite plan indicating clearly the sources for meeting his

contribution. The balance amount proposed to be raised from other sources, viz.,

debentures, public equity etc., should also be fully tied up.

C. Present relationship with Bank:

Compile for existing customers, profile of present exposures:

Ø Credit facilities now granted

Ø Conduct of the existing account

Ø Utilization of limits - FB & NFB



Ø Occurrence of irregularities, if any

Ø Frequency of irregularity i.e., number of times and total number of days the account

was irregular during the last twelve months

Ø Repayment of term commitments

Ø Compliance with requirements regarding submission of stock statements, Financial

Follow-up Reports, renewal data, etc.

Ø Stock turnover, realization of book debts

Ø Value of account with break-up of income earned

Ø Pro-rata share of non-fund and foreign exchange business

Ø Concessions extended and value thereof

Ø Compliance with other terms and conditions

Ø Action taken on Comments/observations contained in RBI Inspection Reports:

» CO Inspection & Audit Reports

» Verification Audit Reports

» Concurrent Audit Reports

» Stock Audit Reports

» Spot Audit Reports

» Long Form Audit Report (statutory audit)

D. Credit risk rating:

Draw up rating for (i) Working Capital and (ii) Term Finance.

E. Opinion Reports:

Compile opinion reports on the company, partners/ promoters and the proposed

guarantors.

F. Existing charges on assets of the unit:

If a company, report on search of charges with ROC.

G. Structure of facilities and Terms of Sanction:

Fix terms and conditions for exposures proposed - facility wise and overall:

Ø Limit for each facility – sub-limits

Ø Security - Primary & Collateral, Guarantee o Margins - For each facility as applicable

Ø Rate of interest

Ø Rate of commission/exchange/other fees o Concessional facilities and value thereof



Ø Repayment terms, where applicable

Ø ECGC cover where applicable

Ø Other standard covenants

H. Review of the proposal:

Review of the proposal should be done covering

i) Strengths and weaknesses of the exposure proposed

ii) Risk factors and steps proposed to mitigate them

iii) Deviations, if any, proposed from usual norms of the Bank and the reasons therefor.

I. Proposal for sanction:

Prepare a draft proposal in prescribed format with required backup details and with

recommendations for sanction.

J. Assistance to Assessment:

Interact with the assessor, provide additional inputs arising from the assessment,

incorporate these and required modifications in the draft proposal and generate an

integrated final proposal for sanction.

8.2.2) Assessment:

Indicative List of Activities Involved in Assessment Function is given below:

Ø Review the draft proposal together with the back-up details/notes, and the

borrower’s application, financial statements and other reports/documents

examined by the appraiser.

Ø Interact with the borrower and the appraiser.

Ø Carry out pre-sanction visit to the applicant company and their project/factory site.

Ø Peruse the financial analysis (Balance Sheet/ Operating Statement/ Ratio Analysis/

Fund Flow Statement/ Working Capital assessment/Project cost & sources/ Break

Even analysis/Debt Service/Security Cover, etc.) to see if this is prima facie in order.

If any deficiencies are seen, arrange with the appraiser for the analysis on the

correct lines.

Ø Examine critically the following aspects of the proposed exposure.



» Bank’s lending policy and other guidelines issued by the Bank from time to time

o RBI guidelines

» Background of promoters/ senior management o Inter-firm comparison

» Technology in use in the company o Market conditions

» Projected performance of the borrower vis-à-vis past estimates and performance

» Viability of the project

» Strengths and Weaknesses of the borrower entity.

» Proposed structure of facilities.

» Adequacy/ correctness of limits/ sub limits, margins, moratorium and

repayment schedule

» Adequacy of proposed security cover

» Credit risk rating

» Pricing and other charges and concessions, if any, proposed for the facilities o

Risk factors of the proposal and steps proposed to mitigate the risk

» Deviations proposed from the norms of the Bank and justifications therefore

Ø To the extent the inputs/comments are inadequate or require modification, arrange

for additional inputs/ modifications to be incorporated in the proposal, with any

required modification to the initial recommendation by the Appraiser

Ø Arrange with the Appraiser to draw up the proposal in the final form.

Ø Recommendation for sanction: Recapitulate briefly the conclusions of the appraisal

and state whether the proposal is economically viable. Recount briefly the value of

the company’s (and the Group’s) connections. State whether, all considered, the

proposal is a fair banking risk. Finally, give recommendations for grant of the

requisite fund-based and non-fund based credit facilities.

8.2.3) Sanction:

Indicative list of activities involved in the sanction function is given below:

Ø Peruse the proposal to see if the report prima facie presents the proposal in a

comprehensive manner as required. If any critical information is not provided in the

proposal, remit it back to the Assessor for supply of the required data/clarifications.

Ø Examine critically the following aspects of the proposed exposure in the light of



corresponding instructions in force:

» Bank’s lending policy and other relevant guidelines o RBI guidelines

» Borrower’s status in the industry o Industry prospects

» Experience of the Bank with other units in similar industry o Overall strength of

the borrower

» Projected level of operations

» Risk factors critical to the exposure and adequacy of safeguards proposed there

against

» Value of the existing connection with the borrower

» Credit risk rating

» Security, pricing, charges and concessions proposed for the exposure and

covenants stipulated vis-à-vis the risk perception.

Ø Accord sanction of the proposal on the terms proposed or by stipulating modified or

additional conditions/ safeguards, or Defer decision on the proposal and return it for

additional data/clarifications, or Reject the proposal, if it is not acceptable, setting

out the reasons.

8.2.4) Monitoring Delay in Processing Loan Proposal:

Branches have to submit a report on credit proposals pending for more than 30 days in two

parts. Part I will comprise proposals requiring sanctions at the Branch/ SECC/ ZCC and Part

II will contain sanctions by CCC-II and above. Review reports to CCC-I and later to Group

Executive, for information, at prescribed intervals will be coordinated by DGM (CCFO). The

consolidated position in this regard in respect of all the Circles will be put up to MD & GE

(NB) through GM (SME).



8.3) Loan Administration - Post Sanction Credit Process

8.3.1) Need

Lending decisions are made on sound appraisal and assessment of credit worthiness. Past

record of satisfactory performance and integrity are no guarantee for future though they

serve as a useful guide to project the trend in performance. Credit assessment is made

based on promises and projections. A loan granted on the basis of sound appraisal may go

bad because the borrower did not carry out his promises regarding performance. It is for

this reason that proper follow up and supervision is essential. A banker cannot take solace

in sufficiency of security for his loans. He has to -

a) make a proper selection of borrower

b) Ensure compliance with terms and conditions

c) Monitor performance to check continued viability of operations

d) Ensure end use of funds

e) Ultimately ensure safety of funds lent.

8.3.2) Stages of post sanction process

The post-sanction credit process can be broadly classified into three stages viz., follow-up,

supervision and monitoring, which together facilitate efficient and effective credit

management and maintaining high level of standard assets. The objectives of the three

stages of post sanction process are detailed below.



8.4) Types of Lending Arrangements

Introduction

Business entities can have various types of borrowing arrangements. They are

A. One Borrower – One Bank (Sole Banking)

B. One Borrower – Several Banks (with consortium arrangement)

C. One Borrower – Several Banks (Without consortium arrangements – Multiple

Banking)

D. One Borrower – Several Banks (Loan Syndication)

A. Sole Banking

The most familiar amongst the above for smaller loans is the One Borrower-One Bank

arrangement where the borrower confines all his financial dealings with only one bank.

Sometimes, units would prefer to have banking arrangements with more than one bank on

account of the large financial requirement or the resource constraint of his own banker or

due to varying terms & conditions offered by different banks or for sheer administrative

convenience. The advantages to the bank in a multiple banking arrangement/ consortium

arrangement are that the exposure to an individual customer is limited & risk is

proportionate. The bank is also able to spread its portfolio. In the case of borrowing

business entity, it is able to meet its funds requirement without being constrained by the

limited resource of its own banker. Besides this, consortium arrangement enables

participating banks to save manpower & resources through common appraisal & inspection

& sharing credit information.

The various arrangements under borrowings from more than one bank will differ on

account of terms & conditions, method of appraisal, coordination, documentation &

supervision & control.

B. Consortium Lending

When one borrower avails loans from several banks under an arrangement among all the

lending bankers, this leads to a consortium lending arrangements. In consortium lending,

several banks pool banking resources & expertise in credit management together & finance

a single borrower with a common appraisal, common documentation & joint supervision &

follow up. The borrower enjoys the advantage similar to single window availing of credit



facilities from several banks. The arrangement continues until any one of the bank moves

out of the consortium. The bank taking the highest share of the credit will usually be the

leader of consortium. There is no ceiling on the number of banks in a consortium.

C. Multiple Banking Arrangement

Multiple Banking Arrangement is one, where the rules of consortium do not apply & no

inter se agreement among banks exists. The borrower avails credit facility from various

banks providing separate securities on different terms & conditions. There is no such

arrangement called ‘Multiple Banking Arrangement’ & the term is used only to denote the

existence of banking arrangement with more than one bank.

Multiple Banking Arrangement has come to stay as it has some advantages for the borrower

& the banks have the freedom to price their credit products & non-fund based facility

according to their commercial judgment. Consortium arrangement occasioned delays in

credit decisions & the borrower has found his way around this difficulty by the multiple

banking arrangements. Additionally, when units were not doing well, consensus was rarely

prevalent among the consortium members. If one bank wanted to call up the advance &

protect the security, another bank was interested in continuing the facility on account of

group considerations.

Points to be noted in case of multiple banking arrangements

Ø Though no formal arrangement exists among the financing banks, it is preferable to

have informal exchange of information to ensure financial discipline

Ø Charges on the security given to the bank should be created with utmost care to guard

against dilution in our security offered & to avoid double financing

Ø Certificates on the outstanding with the other banks should be obtained on the

periodical basis & also verified from the Balance sheet of the unit to avoid excess

financing

D. Credit Syndication

A syndicated credit is an agreement between two or more lending institutions to provide a

borrower a credit facility using common loan documentation. It is a convenient mode of

raising long-term funds.

The borrower mandates a lead manager of his choice to arrange a loan for him. The

mandate spells out the terms of the loan & the mandated bank’s rights & responsibilities.



The mandated banker – the lead manger – prepares an information memorandum &

circulates among prospective lender banks soliciting their participation in the loan. On the

basis of the memorandum & on their own independent economic & financial evolution the

leading banks take a view on the proposal. The mandated bank convenes the meeting to

discuss the syndication strategy relating to coordination, communication & control within

the syndication process &finalizes deal timing, management fees, cost of credit etc. The loan

agreement is signed by all the participating banks. The borrower is required to give prior

notice to the lead manger about loan drawal to enable him to tie up disbursements with the

other lending banks.

Features of syndicated loans

Ø Arranger brings together group of banks

Ø Borrower is not required to have interface with participating banks, thus easy &

hassle fee

Ø Large loans can be raised through syndication by accessing global markets

Ø For the borrower, the competition among the lenders leads to finer terms

Ø Risk is shared

Ø Small banks can also have access to large ticket loans & top class credit appraisal &

management

Advantages

Ø Strict, time-bound delivery schedule & drawals

Ø Streamlined process of documentation with clearly laid down roles &

responsibilities

Ø Market driven pricing linked to the risk perception

Ø Competitive pricing but scope for fee-based income is also available Syndicated

portions can be sold to another bank, if required

Ø Fixed repayment schedule & strict monitoring of default by markets which punish

indiscipline

Proposals and Analysis


Chapter 9


Proposal: I – GDP Ltd.

Details of Proposal

Company : GDP Ltd. (GDPL)

Constitution : Public Limited Company

Industry : Fertilizers & Chemicals

Segment : C& I

Date of Incorporation : 10th May, 1976

Banking with SBM since : New Connection

Banking arrangement : Consortium

Regd. & Admin. Office : Narmadanagar,

Dist. Bharuch,

Pin No: 392 015

Gujarat State

Company Overview:

GDPL was incorporated in May 1976 and commenced production in July 1982 with its

Ammonia-Urea complex on stream. The plant, located at Bharuch, Gujarat State (in Western

India), is well connected by road and rail trunk routes. The plant, one of the world’s largest

single stream Ammonia-Urea facilities, is based on fuel oil feedstock with an installed

capacity of 1350 tonnes per day (TPD) of Ammonia and 1800 TPD of Urea. GDPL is the

largest fuel-oil based Ammonia plant and was the first largest single stream Urea plant in

the world when commissioned.

Subsequently, the company diversified into the manufacture of other fertilizers and

industrial chemicals, primarily with a view to increase margins and utilizing the surplus

Ammonia capacity. The company’s foray into chemicals was aimed at value addition to



various gases produced in Ammonia Plant. It initially started with a 20,000 TPA Methanol

plant in 1985 and then, in March 1991, 1,00,000 TPA Methanol plant was commissioned,

which is one of the largest in the country. The company ventured into Formic acid

production to utilize excess Carbon monoxide gas generated in the Ammonia plant. The 17

TPD plant was commissioned in 1989. The Acetic Acid plant was set up in 1995 and it was

the first Methanol based plant in India (all other Acetic Acid plants in India are Ethyl Alcohol

based). The 50,000 TPA plant was based on the technology provided by BP Chemicals, UK.

GDPL is the only company in the world to whom BP Chemicals, UK has sold the technology

as a Licensor, as it insists on forming joint ventures with all companies where it provides

technology.

Almost fifteen projects of the company are now operating at over 100% capacity utilization.

The company is now one of the largest manufacturers of CNA and WNA in the country.

Recently, PKI project has been selected for CSI e-Governance award for the best deployment

of technology.

Shareholding Pattern:

Proposal:

To Sanction:

Ø Term Loan of Rs.100.00 crores (out of the total debt of Rs.2001.11 crores)

repayable in 9 years (Including 2 years disbursement and 6 months moratorium

period)

41.2

10.213.4

4.6

4.5

25.5

0.1

0.3

0.2

% Shareholding

Promoters

Mutual Funds

Banks, FIs & Insu. Cos

FIIs

Bodies Corporate

Indian Public

Other Trust

C.M. pool account

Custodians



To Approve:

Ø Concessionary interest rate of 1.00% below SBAR; presently 11.25% p.a. floating

(i.e. 1.75% below SBMPLR)

Ø Reduce upfront fee of 0.10% for the Term Loan.

Ø Nine months’ time to the company (from the date of signing of Common Loan

Agreement) for creation of stipulated security in favour of the Bank

Project/Purpose:

For various investments including TDI(Toluene Di Isocyanate) Complex at Dahej, Cogen

Power & Steam Plant, WNA/CNA Plant, Wet Sulphuric Acid Plant, 21 MW Wind Power

Project and various other revamp jobs at Bharuch.

Performance and Financial Indicators (Rs. in crores)

As on 31.03 Actual

2007

Actual

2008

Estimates

(Current year)

2009

Projections

(Next Year)

2010

Net sales 2739.27 3433.92 2869.70 3055.70

(Exports) --- --- --- ---

Operating profit 575.84 638.32 423.14 500.82

PBT 489.30 576.21 228.18 296.85

PBT/ Net sales % 17.86 16.78 7.95 9.71

PAT 326.46 372.88 152.56 198.47

Cash accruals 435.97 483.31 316.46 375.47

PBDIT 575.84 638.32 423.14 500.82

PUC 155.42 155.42 155.42 155.42

TNW 1802.51 2061.64 1918.99 2036.50

Adjusted TNW 1802.51 2061.64 1918.99 2036.50

TOL / TNW 0.5 0.4 1.47 1.84

TOL / Adjusted

TNW

0.5 0.4 1.47 1.84

Net working capital 870.61 715.31 717.86 647.54

Current ratio 2.60 2.50 2.00 1.88



External Rating

In April 2008, ICRA has assigned credit rating to company’s fund based and non-fund based

limits. It had assigned LAA (L double A) rating, indicating high-credit quality to the Rs

430.00 crores fund based limits and A1+ (A one plus) rating, indicating highest credit

quality in the short term to the Rs 400.00 crores non fund based limits of GDPL.

Cost of Project & Means of finance: (Rs. in crores)

COST OF PROJECT MEANS OF FINANCE

Particulars Amount Particulars Amount

Project Land Cost 50.96 Equity Component 857.62

Land Development and Civil work 202.86

License, know-how and Basic

Engineering 221.04

Plant & Machinery 1877.61 Debt component 2001.11

Pre-operating Expenses 37.84

IDC & Financing Cost 309.13

MMWC 37.61

Contingency 121.67

Total 2858.73 Total 2858.73

Funds flow analysis:

Only brief observations regarding cash accruals as well as projections, repayment of TLs,

infusion of E / QE, investments in fixed assets / Dividends, Retentions of profit and

diversion if any is as follows:



(Rs. in crores)

FY ending

March 2009 2010 2011 2012 2013 2014 2015 2016

Sources

PAT 152.56 198.47 194.98 221.25 258.18 273.73 273.25 324.43

Deferred Tax 22.34 (10.52) 66.93 55.60 (8.50) (21.35) (31.76) (10.00)

Depreciation 163.90 177.00 288.51 285.14 285.14 285.14 283.56 192.06

Increase in

Short Term

Debt

667.83 -- --- --- --- --- --- ---

Increase in

Project Debt --- 1490.83 510.28 --- ---- ---- --- ---

Sale of

Investment(Ex

isting Bonds)

248.26 --- --- --- --- --- --- ---

Total Sources 1254.89 1855.78 1060.70 561.99 534.82 537.51 525.05 506.49

Uses

Increase in

Net Working

Capital

80.15 6.46 32.28 4.95 3.26 (0.15) (0.20) (0.30)

Repayment of

Short Term

Borrowings

-- 667.83 --- --- --- --- --- ---

Repayment of

Existing Debts 4.69 --- --- --- --- --- --- ---

Repayment of

Project debts --- --- --- 210.12 290.16 300.17 300.17 300.17

Social Welfare

Contribution 5.70 7.42 7.38 8.27 9.65 10.24 10.21 12.11

Dividend 73.55 73.55 73.55 73.55 73.55 73.55 73.55 73.55

Project Capex 777.43 1161.93 728.96 --- --- --- --- ---

Other Capex 82.50 21.39 21.39 21.39 21.39 21.39 21.39 21.39

Total Uses 1024.02 1938.57 863.56 318.28 398.01 405.18 405.12 406.91

Surplus 382.29 299.49 496.63 740.35 877.16 1009.49 1129.42 1229.0



Commercial Viability: (Rs. in crores)

Particulars 2009 2010 2011 2012 2013 2014 2015 2016

Sales 2875.13 3078.85 3594.27 4143.15 4256.33 4290.84 4273.38 4255.89

Net Profit 152.56 198.47 194.98 221.25 258.18 273.73 273.25 324.43

Depreciation 163.90 177.00 288.51 285.14 285.14 285.14 283.56 192.06

Interest 0.06 --- 57.53 221.07 189.57 155.34 120.82 86.30

Deferred

Taxes 22.34 (10.52) 66.93 55.60 (8.50) (21.35) (31.76) (10.00)

Less Social

Welfare

Contribution

5.70 7.42 7.38 8.27 9.65 10.24 10.21 12.11

Total 333.16 357.52 600.57 774.78 714.736 682.61 635.65 580.68

TL/DPG

Repayment 4.69 -- -- 210.12 290.16 300.17 300.17 300.17

Interest 0.05 --- 57.53 221.06 189.57 155.33 120.81 86.29

Total 4.74 -- 57.53 431.18 479.73 455.50 420.98 386.46

DSCR --- --- 10.44 1.80 1.49 1.50 1.51 1.50

Min DSCR 1.49

Average DSCR 1.74

Security Margin: (Rs. in crores)

Particulars 2009 2010 2011 2012 2013 2014 2015 2016

WDV of fixed

assets 1369.03 1467.47 3456.03 3192.28 2928.53 2664.78 2402.62 2231.94

Aggregate

TL/DPG

outstanding

4.69 --- --- 2001.13 1791.01 1500.85 1200.68 900.51

Security

Margin

Available

1364.34 1467.47 3456.03 1191.15 1137.52 1163.93 1201.94 1331.43

% of Margin --- --- --- 59.52 63.51 77.55 100.10 147.85



Break even and sensitivity analysis and whether acceptable:

Scenarios Min DSCR Avg. DSCR

Base Case 1.49 1.74

Increase in Capex by 10% 1.38 1.61

Increase in Opex by 5% 1.21 1.44

Fall in Revenue by 5% 1.14 1.37

Increase in Interest Rate by 50 bps 1.46 1.71

Social benefit cost @ 30% and tax deductibility @ 50% 1.25 1.51

Comment:

It can be seen from above, that in all the above scenarios the debt service capacity of the

Company is satisfactory.

Deviations in Loan Policy

Parameters Indicative Level Company’s levels as on

31.03.2008

1. Liquidity Min 1.33 2.5

2. TOL/TNW Max 3.00 0.5

3. Promoters’ contribution to the

project (TL) Min 20% 30%

4. Average Gross DSCR (TL) Min 1.75 1.74

5. Debt / Equity Max 2:1 2.32:1



Analysis – GDP Ltd.

Ø The company is a profit earning and dividend paying company.

Ø The main chunk behind giving loan is that globally there are limited players in TDI

manufacture and the technology is closely guarded. GDPL’s Plant is the only TDI plant in

SAARC region and TDI production is licensed in India.

Ø Considering the company’s implementation capability and past track record of different

projects, no delay or cost overrun in implementation of various projects is envisaged.

Ø The promoters are having considerable experience and market presence in the field

where the bank is financing.

Ø The demand estimated by TSMG indicates that there will be sufficient domestic and

export demand potential for TDI production of the company as the company being the

only seller of TDI in the South East Asia region will have no problem in marketing the

product.

Ø The promoters’ contribution to the project is 30% which is considerable and is above

the margin requirement.

Ø The current ratio was 2.5,which is satisfactory.

Ø Profits have increasing trend for the last two years and projections are also satisfactory.

Ø TOL/TNW should be maximum 3, which is 0.5 here, as the company has done

consortium banking arrangement and it has also outstanding loans with other banks,

still the company is being able to maintain the lower TOL/TNW ratio.

Ø The bank also checks commercial viability of the company & found that the DSCR for

term loan is 1.74 instead of 1.75 which is not satisfactory as per credit policy but looking

to the other areas and future prospect of the company TL has been sanctioned.

Ø Further, the bank has also done B.E. analysis & found that in all the scenarios the debt

service capacity of the Company is satisfactory

Ø The bank has significantly higher Debt to Equity ratio but based on the various

implementation, costing, financing, profitability, operating assumptions and subject to



the risks & sensitivities enumerated the overall debt to equity of the company has been

considered as satisfactory.

Ø The net sales & PAT of the company is increasing year after year so overall profitability

is good.

Remarks:

Here bank has sanctioned loan to the company, but there are some issues which seems to be

ignored due to its reputation and future prospects.

1) DSCR is not as per the hurdle score

2) Debt to equity ratio is above the maximum limit prescribed

3) Interest rate charged, is also low as compare to other lending arrangements

4) As the term loan has maximum limit of 8 yrs. still bank has sanctioned this corporate

loan for 9 yrs. which will come back after 11.5 yrs.



Proposal: II – CAB Ltd.

Details of Proposal

Company : CAB Ltd. (CABL)

Constitution : Public Limited Company

Industry : Infrastructure

Segment : C & I

Date of Incorporation : 26th May, 1998

Banking with SBM since : New Connection

Banking arrangement : Syndication of term loan

Regd. & Admin. Office : CAB House

Mahalakshmi Six Roads,

Paldi,

Ahmedabad- 380 013

Company Overview:

CABL’s Port is located in the Kutch District in the State of Gujarat on the northwest coast of

India. Initially, Gujarat Maritime Board (GMB) granted permission to CABL for the

construction of a captive jetty at Mundra Port. Subsequent to the announcement of Port

Policy and BOOT guidelines, which envisaged privatization of the construction and

operations of new wharves / jetties at selected site, Mundra was identified for development

of a direct berthing deep-water port in the joint sector.

CABL received approval as a developer of a multi-product SEZ at Mundra and the

surrounding areas from the Government of India on April 12, 2006, making it one of the

first port-based multi-products SEZ in India. CABL is the conservator and developer of the

Mundra Port including jet-ties / quays, SPMs, rail-road -pipeline connectivity, pilotage,

towage and related ancillary facilities.



Shareholding Pattern:

Proposal:

To sanction

Ø A Rupee term loan and FCNR (B) interchangeable limit of Rs. 100.00 crores (out of

total debt of Rs.1178.50 crores) to part finance the company for developing a

dedicated coal terminal to cater to the imported coal requirement of the two power

plants; payable in 13.5 years (construction and moratorium period of 3.5 years+

repayment period of 10 years).

To Approve:

Ø Reduced interest rate of 12.00% p.a. (1.25% below SBMPLR )

Ø Reduced upfront fee of Rs.20.00 lacs (Banks standard rate 1.25% of loan amount).

Ø Tenor of loan -13.5 years ( Banks norms of 8 years)

Ø To approve CRA rating of SBMTL-2 based on unaudited balance sheet of 31.03.2008.

Purpose:

To part finance for developing a dedicated coal terminal to cater the imported coal

requirement of the two power plants. Out of the two power plants, one is of CAB ltd.

81.29

0.05

18.66

% Shareholding

Promoters and

Promoter Group

Directors

Public Holdings+

Institutions



Performance and Financial Indicators

(Rs. in crores)

Year ended March 31, Aud. 2006 Aud. 2007 Un Aud. 2008

Net Sales 384.50 579.70 818.20

Operating Expenses 173.40 272.10 282.80

EBIDTA 211.20 307.60 535.40

EBIDTA/ Net Sales (%) 55% 53% 65.4%

PBT 116.20 174.90 366.80

PBT/ Net Sales (%) 30% 30% 44.8%

PAT 67.20 187.40 213.40

PAT/ Net Sales (%) 17% 32% 26.10%

Share Capital 183.00 363.20 403.40

Reserves & Surplus 409.90 377.30 2269.10

TNW 1056.30 1529.00 3531.10

Investments (in group companies) 122.80 78.90 256.10

Adj. TNW 933.50 1403.00 3279.00

Secured Loans 891.90 1281.30 1884.70

Unsecured Loans 69.90 0.90 21.90

Total Outside Liabilities (TOL) 1226.20 1554.20 2200.10

TOL/TNW 1.2 1.0 0.62

Adj. TNW 1.3 1.1 0.67

Net Fixed Assets 1485.80 1983.50 2841.80

Total Debt 961.80 1282.20 1906.60

Total Debt /TNW 0.9 0.9 0.54

Current Asset 262.20 555.80 1398.90

Current Liability 199.30 224.90 293.30

Current Ratio 1.30 2.50 4.76

Rating & Pricing

Working capital Term loan

Existing Proposed Existing Proposed

CRA --- ---- ---- SBMTL-2

Pricing --- --- --- 1.25% below

SBMPLR

Other ratings, if available ICRA had assigned LA+ rating to bank limits of CABL in

July, 2008.



Cost of the project and Means of finance:

The estimated Project Cost of Rs. 1964.20 crores is proposed to be funded at a debt-equity

ratio of 60:40 and the break-up of means of finance is given below:

Source of Funds Amount % of Project Cost

Equity Share Capital 785.70 40%

Debt 1178.50 60%

Total Project Cost 1964.20 100%

Funds flow analysis

Projected Cash Flow of the Project

(Rs. in crores)

FY 2009 2011 2013 2015 2017 2019 2021 2023

Sources of Fund

PAT+

Depreciation +

Non cash items

0.00 83.65 459.26 568.80 659.29 758.26 832.62 933.56

Equity 374.20 291.10 --- --- --- --- --- ---

RTL 26.88 436.67 --- --- --- --- --- ---

Bank Borrowings --- --- --- --- --- --- --- ---

Total 401.08 811.43 459.26 568.80 659.29 758.26 832.62 933.56

Uses of Funds

Capital

Expenditure 401.8 727.78 --- --- --- --- --- ---

Change in

Working Capital --- --- --- --- --- --- --- ---

RTL repaid --- --- 117.85 117.85 117.85 117.85 117.85 ---

Dividend Paid

during the period --- --- --- --- --- --- --- ---

Total 401.80 727.78 117.85 117.85 117.85 117.85 117.85 ---

Net Cash Flow --- 83.65 341.41 450.95 541.44 640.41 714.78 933.56



Commercial Viability:

Ø Projected profitability statement of the project (Rs. in crores)

March 31 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

No of days 182 366 365 365 365 366 365 365 365 366

Throughput

(in MMTPA) 4.6 15.5 26.0 28.0 31.0 31.0 31.0 31.0 31.0 31.0

Total

Revenue 189.91 522.54 827.28 888.41 968.43 1035.14 1071.25 1108.98 1187.03 1228.26

O&M

expenses 33.44 118.95 198.67 218.58 243.55 260.77 271.47 284.61 302.87 317.44

EBITDA 156.47 403.59 628.61 669.83 724.88 774.37 799.78 824.38 884.16 910.82

EBITDA

margin% 82.4 77.2 76.0 75.4 74.9 74.8 74.7 74.3 74.5 74.2

Depreciation 41.83 83.88 83.88 83.88 83.88 83.88 83.88 83.88 83.88 83.88

Int. on RTL 67.58 134.20 121.99 108.44 94.88 81.54 67.78 54.22 40.67 27.18

Pre Exp. 0.33 0.66 0.66 0.66 0.66 0.33 0.0 0.0 0.0 0.0

PBT 46.73 184.84 422.07 476.85 545.46 608.62 648.12 686.27 759.60 799.76

Tax 5.24 20.74 47.36 53.50 61.20 68.29 72.72 77.00 85.23 89.73

Def Tax Prov 0.0 0.0 0.0 21.56 23.31 16.37 10.41 5.30 0.90 -2.89

PAT 41.49 164.10 374.72 401.79 460.94 523.96 564.99 603.97 673.48 712.92

PAT/

Revenue % 21.8 31.4 45.3 45.2 47.6 50.6 52.7 54.5 56.7 58.0

Ø DSCR Calculations (Rs. in crores)

FY 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Revenue 189.91 522.54 827.28 888.41 968.43 1035.14 1071.25 1108.98 1187.03 1228.26

Less: Op

Costs 33.44 118.95 198.67 218.58 243.55 260.77 271.47 284.61 302.87 317.44

Less: Tax

Paid 5.24 20.74 47.36 53.50 61.20 68.29 72.72 77.00 85.23 89.73

Cash Flow

available for

debt

servicing

151.23 382.85 581.25 616.33 663.68 706.08 727.06 747.38 798.93 821.09

Int. on RTL 67.58 134.20 121.99 108.44 94.88 81.54 67.78 54.22 40.67 27.18

Principal

Repayment

for RTL

0.0 58.92 117.85 117.85 117.85 117.85 117.85 117.85 117.85 117.85



Total Debt

Servicing

Requirement

67.58 193.13 239.84 226.28 212.73 199.39 185.63 172.07 158.52 145.03

Annual DSCR 2.2 2.0 2.4 2.7 3.1 3.5 3.9 4.3 5.0 5.7

Security Margin:

(Rs. in crores)

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

WDV 2841 3667 4523 5392 5775 6203 6780 7670 8906 8583 8260 7937

Aggr TL 1906 2041 2523 2664 2381 2048 1740 1477 1189 910 629 355

Security

Margin 935 1626 2000 2728 3394 4155 5039 6192 7716 7672 7630 7581

% of

Margin 49 79 79 102 142 202 289 419 648 842 1211 2130

Break even and sensitivity analysis:

The same has not been attempted in view of the project size and comfortable DSCR of the

project

Total Score Obtained

Particulars Max. Score Score Obtained Min. Acceptable

Financial Risk 25 20 11

Business Risk 25 25 10

Industrial Risk 10 6.875 5

Management risks 40 35.20 24

Total 100 87.07 50



Loan Policy Guidelines:

The following quantitative parameters as set out in the Loan Policy Document have been

examined.


31.03.2008(Unaudited)


2. TOL/TNW Max 3.00 0.62


project (TL) Min 20% 40%

4. Average Gross DSCR (TL) Min 1.75 3.99

5. Debt / Equity Max 2:1 0.54:1



Analysis – CAB Ltd.

Ø The company is one of the most successful private port operators and has positive

influence on the project implementation and operations.

Ø The project is being set up near the existing port of company at Mundra and, therefore,

the project is not likely to experience issues related with Greenfield port project.

Ø India has severe power and energy shortages currently. The 2001 Census revealed that

only 55.8% of the households in India have access to electricity. Thus, GOI has a vision of

achieving “Power for all by 2012”. These signify the requirement of proposed term loan.

Ø The promoters are having considerable experience and market presence in the field

where the bank is financing.

Ø Considering the company’s financial past track record, company has a good proportion

of liquidity. So we can anticipate that the project will utilize the term loan purposefully

and no issues related to shortage of working capital will be envisaged.

Ø The promoters’ contribution to the project is 40% which is considerable and is above

the margin requirement. This indicates promoters’ confidence in the project.

Ø The current ratio is 4.76, which is satisfactory.

Ø The net sales & PAT of the company is increasing year after year. So, overall profitability

is good.

Ø TOL/TNW is 0.62 here, which eligible the company to take extra credit to expand as well

as enter into new project.

Ø Considering the debt to equity proportion i.e. 0.54:1; company is able to achieve the

loan proposed.

Ø The company has average gross DSCR of approx. 4 times which show a good credit cover

for the loan proposed.

Ø High liquidity and higher DSCR ensures there are less chances of nonpayment of

interest.

Ø SBM has a good credit cover in term of security margin over the term of the project.



Remarks:

Here bank has sanctioned loan to the company, but there are some issues which seems to be

ignored due to its reputation and future prospects.

1) Interest rate charged, is low as compare to credit policy of bank.

2) As the term loan has maximum limit of 8 yrs. still bank has sanctioned this corporate

loan for 10 yrs. which will come back after 13.5 yrs.



Proposal: III – IMP Ltd.

Details of Proposal

Company : IMP Ltd.

Constitution : Private Limited Company

Industry : Service Sector

Segment : C & I

Date of Incorporation : 11th October, 1994

Banking with SBM since : July, 2005

Banking arrangement : Consortium

Regd. & Admin. Office : Jeevan Baug Society,

Paldi,

Ahmedabad.

Company Overview:

IMP Ltd. is one of the Group companies of Jeevan Group. It was formed in the year 1994

with an objective to bring all the Service Activities of the group under one umbrella/banner

and to cater to the needs of NRIs especially from Gujarat who is settled abroad. IMP Ltd is a

group company of M/s Jeevan Ltd (one of the giants of Pharmaceuticals industry) which has

taken over the travel business of M/s GCTS Pvt. Ltd w.e.f. 31.03.2003 under the scheme of

merger and acquisition, along with seven investment companies and internet business of

M/s WC Pvt. Ltd.

Since last five years GCTS is licensed as Full Fledged Money Changers by Reserve Bank of

India. GCTS is handling foreign currency transactions of ICICI Bank as their Implant in

Mumbai and Gujarat Region. The Implant operations are in 3 branches of ICICI in Mumbai

and 8 in Gujarat. The money changing operations are being presently handled at 18 cities

across India.

The company is also engaged in the facility management. At present the co. is managing

guest house building at Mumbai, Delhi and Bangalore for Jeevan Ltd, apart from managing

guest house at Ahmedabad, canteen business center etc. for corporate office and factory.

These facilities are provided to third parties, besides mainly to cater M group of companies.



The company is also engaged in various event management and various consultancies,

inside and outside the group.

IMP Ltd is also in the process of setting up further branches countrywide.

Proposal:

To Sanction:

Ø Fund based working capital limit sanctioned to the company to Rs. 11.00 crores

from Rs. 8.50 crores (Renewal with enhancement)

Ø Non-fund based working capital limit(BG) of Rs.1.84 crores(Renewal at the existing

level)

To Approve:

Ø Reduced rate of interest of 2.75% BELOW SBMPLR presently @10.75% p.a. (In line

with the consortium leader)

Ø Continuation of concessionary BG issuing charges 1.50% p.a. (as against 3.00%)

Credit limits (Existing / Proposed)

(In crores)

Limits Existing Proposed Change

SBM % Cons SBM % Cons SBM Cons

Working Capital 8.50 45.95 10.00 11.00 38.60 17.50 2.50 7.50

Total FBWC 8.50 45.95 10.00 11.00 38.60 17.50 2.50 7.50

Term loans - - - -- -- -- - -

Total FB 8.50 45.95 10.00 11.00 38.60 17.50 2.50 7.50

LCs - - - -- -- - - -

BGs 1.84 -- 2.16 1.84 --- 2.16 --- ---

Total NFB 1.84 --- 2.16 1.84 --- 2.16 --- ---

FB + NFB 10.34 45.95 12.16 12.84 38.60 19.66 2.50 7.50



Name of the lead Bank and Names of other banks and their % share

Bank

Fund Based Non Fund Based


Limit %

share Limit

%

share Limit

%

share Limit

%

share

Indian Bank

(Lead Bank)

10.00 54 12.50 44 2.16 54 2.16 54

SBM 8.50 46 11.00 39 1.84 46 1.84 46

Bank of

Maharashtra --- --- 5.00 17 --- --- --- ---

Total 18.50 100 28.50 100 4.00 100 4.00 100

Performance and Financial Indicators:

As on 31.03 2006-07

Audited

2007-08

Audited

2008-09

Estimates

2009-10

Projections

Net sales 762.84 600.91 796.30 1180.63

(Exports) (224.63) --- (115.20) (432.00)

Operating profit 5.69 7.09 8.73 10.85

PBT 2.65 3.47 4.04 5.27

PBT/ Net sales % 0.35 0.58 0.51 0.45

PAT 1.77 2.39 2.76 3.61

Cash accruals 3.24 4.19 4.89 5.95

PBDIT 7.62 9.06 10.96 13.30

PUC 3.00 3.00 3.00 3.00

TNW 21.77 22.83 24.73 27.46

Adjusted TNW 20.44 21.50 23.40 26.13

TOL / TNW 2.36 2.34 2.65 2.30

TOL / Adjusted TNW 2.21 2.20 2.50 2.18

Net working capital 7.87 9.12 12.76 13.35

Current ratio 1.33 1.34 1.33 1.34



Rating & Pricing

Working capital Term loan


CRA SBM-3 SBM-3 N.A. N.A.

Pricing 3.25% below

SBMPLR

2.75% below

SBMPLR N.A. N.A.

Other ratings, if available The company has assigned the job to ICRA.

Deviations in Loan Policy


31.03.2008


2. TOL/TNW Max 3.00 2.34


project (TL) Min 20% N.A.

4. Average Gross DSCR (TL) Min 1.75 N.A.

5. Debt / Equity Max 2:1 N.A.

Assessment of working capital facilities:

Indian Bank, the lead bank of the consortium, has assessed the working capital requirement

of the company. Our proposal is based on the appraisal done by the lead bank and is as

detailed below:

a) Inventory & receivable levels: (Months / Days)

(Rs. in crores)

Inventory / Payments Actual Estimated Projected

Raw material

Currency Export

Money Changer

--

5.54 (3.48 days)

3.05 ( 3.17 days)

6.33 (3.50 days)

3.55 ( 3 days)

6.96 (3.50 days)

FG 0.55 (24.66 days) 0.70 (27.50 days) 0.74 ( 27.50 days)

Receivables 18.81 (11.18 days) 26.24 ( 9.18 days) 27.84 ( 8.45 days)

Other CA 8.46 9.78 8.13



b) Assessed Bank finance

(Rs. in crores)

Particulars Actual Estimated Projected

Total Current Assets (TCA) 32.04 46.10 47.20

Other Current Liabilities (OCL) 5.85 6.07 6.68

Working Capital Gap 26.19 40.02 40.52

Net Working Capital 8.05 11.52 12.02

Assessed Bank Finance 18.14 28.50 28.50

NWC To Total Current Assets % 25.12 25.01 25.46

Bank Finance To TCA % 56.61 61.82 60.38

Other Current Liabilities to Total Current Assets % 18.25 13.16 14.15

S. Creditors To TCA % 7.27 6.29 6.67

Assessment of BG limit:

The company has requested for continuation of Bank Guarantee limit of Rs.4.00 crores

(SBM share 1.84 crores). The Bank Guarantee limit is utilized for issue of guarantees

favoring American Express for supply of travelers’ cheque. The lead bank has assessed the

bank guarantee limit at Rs.4.00 crores for the current year also as under:

Expected sales of TCs (Rs. in crores)

Projected TC Stock 5.50

Margin proposed to Amex (75%) 4.12

BG Required 4.00

SBM share 1.84

Efficiency ratios:

Particulars Actual Actual Estimate Projection

Net Sales to Total Tangible Assets (times) 7.55 5.71 6.00 8.75

PBT to Total Tangible Assets (%) 2.62 3.30 3.04 3.91

Bank Finance to Current Assets (%) 58.57 56.61 61.82 60.38

Inventory + Receivables to Net Sales (days) 11 15 14 12



Brief comments on the assessment of the above limits:

The FFMC division of the company buys and sells foreign exchange to various corporate

customers in various cities such as Mumbai, Delhi, Bangalore, Delhi etc. by way of foreign

currency notes and travelers cheques on account basis. The travel division of the company

provides car rental services to various corporate clients.

The inventory carried are stocks of foreign currency notes and travelers cheques purchased

from various clientele and the receivables’ outstanding to be received from various clients

on account of sale foreign exchange and cost of services provided. The working capital

requirement for the current year is assessed based on the carry levels of inventory and

receivables which are in line with the levels maintained during the past two years.

Security:

(Rs. in crores)

Nature of

security Description Value As on

Date of

creation

of EM

Date of

filing of

charge

with ROC

Nature of

charge

Primary Hypo of stocks and

Book Debts

3.90

20.96 31.10.08 NA 21.12.06

1stparipassu

charge with

Indian Bank

Collateral

EM on office

premises at

Ahmedabad &

Hypo of computers,

Laptops, PCs etc.

0.73 11.02.08

19.05.05

Extn

06.09.07

--- As above

EM of 4th , 5th , 6th&

7th floors of

Mumbai based

office

5.98 16.05.05

11.08.05 at

Syndicate

Bank

---

2ndparipassu

charge in

consortium with

Indian Bank

EM of plot No. D-

1011, New Delhi

based property

11.86 28.05.08 As above --- As above.



Analysis – IMP Ltd.

Ø Company is engaged in very sensitive activity of money changer but at the same time

company has diversified itself in activities like ticket booking, rent a car, facility

management, event management etc. to mitigate the risk factor.

Ø They have the backing of M/s Jeevan Ltd., a leading pharmaceuticals co.

Ø The conduct of the account is satisfactory, interest is being serviced regularly & there is

growth in business. Thus, proposed extension of the FB and NFB limits have been given

due consideration.

Ø Total Income for the year 2007-08 was Rs.2664.10 lacs as against Rs. 2425.95 lacs for

the year 2006-07 i.e. increase of 9.81%

Ø PBT has gone up to Rs.346.77 lacs in 2007-08 as against Rs.265.52 lacs in 2006-07 i.e.

increase of 30.60%.

Ø PAT has gone up to Rs.238.82 lacs in 2007-08 as against Rs.176.97 lacs in 2006-07 i.e.

increase of 35%

Ø Cash profit has gone up to Rs.708.79 lacs in 2007-08 as against Rs. 569.27 lacs in 2006-

07 i.e. increase of 24.50%

Ø The Business of the company proposes to expand overseas also and the operational

base of the travel division is even growing by entering into the field of International

Touring Operations along with Ticketing and Cargo Business.

Ø Interest rate charged is too low. But Consortium Leader Indian Bank has recommended

Rate of Interest @ 10.75%, so bank may also fall in line with the Lead Bank.

Ø Operating cycle of the business is also satisfactory as we look at estimation of inventory

and receivables.

Ø No delay in the payment of interest and reporting has been observed in business with

the company.

Ø Looking to the past performance and current trend of achievement up to December

2009, the estimated sales is considered realistic and achievable.



Proposal: IV - ABC Enterprises Ltd.

Details of Proposal

Company/Firm : ABC Enterprises Ltd.

Constitution : Partnership Firm

Industry : Trading whole sale & retail

Segment : C & I

Date of Incorporation : April-1995

Banking with SBI since : New Connection

Banking arrangement : Sole Banking

Regd. & Admin. Office : 2, 3AanganArcade,

Maktampur,

Bharuch-392012.

Firm Overview:

M/s ABC Enterprise is engaged in the business of distribution of various branded Glassware

items, Crockery, Cutlery & other miscellaneous gift items in Gujarat State. It also supplies

corporate gift items to various institutions. The firm also distributes goods under its own

brand “KITCHEN’S” after outsourcing the manufacture and finishing and packing at their

end. The firm has wide network at Gujarat and is in the same line of activity since 1984. The

firm is having its outlets at Bharuch and Ahmedabad.

Proposal:

To Sanction:

Ø Enhancement of Working Capital Limits from the existing level of Rs 60.00 lacs to 67.00

lacs under Traders Easy Loan Scheme.

Ø Renewal of Bank Guarantee Limit of Rs 1.50 lacs

Ø Sanction of Ad-Hoc Limit of Rs 6.50 lacs for a period of 3 months from the date of

disbursal (Expected 25.03.10)



Synopsis of Balance Sheet:

Sources of Funds As on 31st March 2008 2009

Share Capital (Partners capital account) 71.24 77.41

Reserves and Surplus -- --

Others (including Pref. Shares, debentures etc.) -- --

Secured Loans : Short term 31.76 28.97

Secured Loans : Long term 2.91 1.27

Unsecured Loans 51.01 52.62

Deferred Tax Liability -- --

Total 156.92 160.27

Application of Funds

Fixed Assets (Gross Block) 23.15 24.70

Less Depreciation 7.60 10.25

Net Block 15.55 14.45

Capital Work in Progress -- --

Investments -- --

Inventories 57.04 71.74

Sundry debtors 125.32 89.10

Cash & bank balances 8.30 2.87

Loans & advances to subsidiary/group companies 0.94 1.33

Loans & advances to others 6.90 9.33

Others -- --

Deferred Tax Assets -- --

Total Current Assets 198.50 174.37

( Less : Current liabilities ) 50.86 23.95

(Less : Provisions ) 6.27 4.60

Net Current Assets 141.37 145.82

Misc. Expenditure (To the extent not written off or adjusted ) -- --

Total 156.92 160.27



Performance and Financial Indicators

(Rs in Lacs)

Audited

2007-08

Audited

2008-09

Estimates

2009-10

Projections

2010-11

Sales/ Income 411.07 451.57 603.50 629.00

Net Profit 9.64 3.46 4.58 6.87

PBT/Sales (%) 3.09 1.25 1.26 1.65

Cash Accruals 12.37 6.11 7.08 9.07

Paid up Capital 71.24 77.41 80.00 83.00

TNW 71.24 77.41 80.00 83.00

TOL/TNW 2.00 1.44 2.31 1.85

Current ratio 2.18 2.94 1.90 2.23

Deviations in Loan Policy:

Parameters Indicative Company's level as on

31.03.2009


2. TOL/TNW Max 3.00 2.94

3. Average gross DSCR (TL) Min 1.75 N.A.

4. Debt / equity Max 2:1 N.A.

5. Promoters contribution Min 20% 30%

6. Prudential norms - Within limit



Analysis - ABC Enterprises Ltd.

Objective behind loan:

The unit has now received an order worth Rs. 1.02 crores from Pantaloons (India) Ltd.,

Mumbai (through one of its associate concern viz. M/s Trade Links). The unit will purchase

the goods, viz., Coffee Set, Tea Set and other kitchen items and supply the same to M/s

Trade Links. Thereafter, packing of goods as per customer’s requirement and logistics will

be taken care by M/s Trade Links. M/s Trade Links has no bank borrowing.

Management analysis:

Mr. M who is looking after the administration of the business is having an experience of 30

years in this same line of activity and Mr. R, brother of Mr. M, who is a graduate in B.E

(Mechanical) is looking after the marketing of the products and is having an experience of

25 years in this line of business and he himself handles the shop at Bharuch. Mr. S who is a

science graduate and son of Mr. M handles the outlets situated at Ahmedabad.

Market analysis:

The credibility of the promoters of the firm in the market is very good and the firm also

enjoys a good reputation in the market. They have many good and reputed companies as

their consumers from which they gain orders every year during some festivals season for

some gift items. This proves that the firm has a good reputation in the market and that the

promoters are capable enough to attract new customers and retain old customers. Even the

new order gained by them from a big company such as Pantaloons (India) Ltd. shows that

the promoters are having good capability to bag such a big order from such a big company.

Technical analysis:

The firm has a wide network in Gujarat and the promoters of the firm are in the same line of

activity since 1984. The firm is having its outlets at two places; one is situated at BARODA

the other is situated at AHMEDABAD. Both the outlets are under the direct control of the

Partners.

Financial indicators Analysis:

SALES: The unit had achieved sales of Rs 451.07 lacs as on 31.03.2009 with 9.73% increase

over the previous year. The unit is trading in variety of products and the increase in sales



cannot be appropriated to few specific products. The sales have been estimated at Rs

603.50 lacs for the FY ending 2009-10 and the firm has already achieved sales of Rs 419.50

lacs as on 31.01.10. Looking into the present order in hand the estimated sales for the year

ending 2009-10 are considered as realistic and achievable.

PROFIT: Even though there was an increase in sales, the profit of the firm declined to Rs

3.46 lacs from the previous year’s profit of Rs 9.64 lacs. As said by the partner, it was mainly

on account of lower margins during the year on account of overall recession in the

economy.

TNW & TOL/TNW: By plough back of profits and by reducing the level of sundry creditors,

the TOL/TNW of the firm improved to 1.44 as on 31.03.09 from 2.00 as on 31.03.2008. But

the ratio is estimated to decline to 2.31 as on 31.03.2010 with the full utilisation of Bank’s

limit and raising of short term funds to execute the new supply order. The ratio is still well

within the Bank’s bench mark.

CURRENT RATIO: This ratio also improved to 2.94 from the existing level of 2.18 as on

31.03.09. The ratio will be further estimated at 1.90 as on 31.03.2010 due to above said

reason. However the ratio is well within the banks bench mark.

In Brief:

Ø The partners are well experienced and qualified enough to successfully run the venture.

Ø The proposal complies with the loan policy guidelines and other aspects as laid down by

the Bank.

Ø The conduct of the account is satisfactory.

Ø The unit is eligible for working capital limit of Rs 67.00 lacs under Trades Easy Loan

Scheme.

Ø The proposed exposure of Rs.75.00 lacs will be collaterally secured by mortgage of

immovable assets worth Rs.106.54 lacs, besides, personal guarantee of all the partners.

Ø The overall financial position of the firm is satisfactory and the proposed exposure is

considered a fair banking risk.



Proposal: V - VANRAJ Tractors

Details of Proposal

Company/Firm : VANRAJ Tractors

Constitution : Partnership Firm

Industry : Farm equipment

Segment : C & I (Channel Finance)

Date of Incorporation : N.A

Banking with SBI since : Dec 2006

Banking arrangement : Sole Banking

Regd. & Admin. Office : Rajlaxmi Arcade,

Old N.H. no. 8,

Ankleshwar.

Firm Overview:

VANRAJ TRACTORS is a firm situated at Ankleshwar, which is in the business of selling

Escort make tractors. It is a partnership firm and there are three partners involved in it Mr.

C, Mr. D & Mr. A. One of the partners is also engaged in the business of constructing factory

sheds. The business was started in the month of December of the year 2006.



Analysis - VANRAJ Tractors

Objective behind loan:

The loan was taken to start the business of selling tractors made by Escorts. The amount

was needed for some business related activities such as the purchase and maintain stock,

etc.

Management Analysis:

The partners of the firm were having a good track record and one of the partners who is in

the business of constructing factory sheds was in that business since a long time and was

running that business successfully. The other two partners were new in the business.

Market Analysis:

The prospects of the business were found to be good as Vanraj Tractors was the sole firm

selling Escorts made tractors in Ankleshwar and there are very few other firms which are in

the business of selling of tractors in Ankleshwar. Ankleshwar is surrounded with many

other small villages in which there are many agricultural fields situated, which led to a

decision that the business will nourish in a near future.

Technical Analysis:

The promoters of the business were also involved in some other business, along with this

business and they were running those businesses successfully which showed that they were

good entrepreneurs. Even a letter of comfort was provided by Escorts Tractors to the bank

for the sanctioning of the facility of C.C.

Reason for Default by the firm:

The firm faced the problem because the managing partner sold away the tractors to some

farmers on credit whose loans were yet to be sanctioned aided by the misguidance of the

sales representatives of the Escorts Company. The farmer’s loan was not sanctioned to

whom the tractors were sold on credit. The tractors are now lying scattered at various

places and cannot be captured and sold.

Recovery Aspect:

The partners agreed for the repayment of Rs.12,00,000.00 by March 20th in stages and



repayment of remaining 7,50,000.00 in equal monthly installments of 1.5lacs from June 1st.

total compromise offer is Rs. 19.50 lacs only. The Managing partner who is engaged in the

business of contracts for constructing factory sheds has submitted in writing on Feb 17, that

he will repay partly from surplus in that business & partly from realizing dues in respect of

sale of tractor components amounting to Rs. 3 lacs. Therefore the net loss arises to 3,84,782.

Reasons for facing this default by the bank:

1) The first mistake that had been done by the bank is that it should have properly checked

the capability of all the three partners. Only one of the three partners was having an

existing business and the other two partners were new to the business without any

experience. So on the basis of the managerial capability of only one partner; they should

not have sanctioned so much of credit facility to them.

2) The second mistake done by the bank officials is that they should have kept a proper

check on the stock regularly and other books related to the business such as the sales

book & other financial statements.

3) The bank officials came to know about the situation only when the Escorts Co. withdrew

from the bank the letter of credit given to the bank. This shows that the bank officials

didn’t monitor the firm’s activities after the sanctioning of the CC facility.

4) As we can analyze from the case facts that the default is caused due to the mistake of

one of the partner who sold away all the tractors on credit to the farmers whose loan

was yet to be sanctioned by the bank. This shows the lack of managerial capability of the

partner which bank failed to recognize.

5) The stocks that are provided by the firm as guarantee are worth only Rs. 4500 today.

They should have asked for some other guarantee such as the shop or godown or some

other personal assets of the partners against such a huge amount of CC facility provided

to them.

6) This case shows the carelessness of the banks officials beginning from the sanctioning of

the loan till the default caused by the firm. As we can see that on the basis of only one

manager’s capability the bank officials sanctioned the C.C facility and even didn’t

monitored the firms activities after that.



Comparative Analysis of the proposals

@ Proposal I & II:

1) Both the proposals are new connection to the bank, applying for the term loan of Rs.

100 crores.

2) The bank has sanctioned both the loan after doing all credit analysis related to credit

policy of the bank. But some of very sensitive aspects have been neglected by the

bank.

3) In proposal I, the company has not attained the minimum level of DSCR still it gets

eligible for the loan at a comparatively low rate of interest than it has been charged

to the company in proposal II; having more than doubled DSCR from the required

level.

4) The same contradiction has been observed in debt to equity proportion. In proposal I,

company has a very high proportion of debt and its not falling under the maximum level

of credit policy where as company in proposal II has sound D/E proportion. This shows

the bank’s liberal view towards the credit policy norms.

5) Both the proposals have been sanctioned at a concessional rate of interest i.e. below the

SBMPLR.

6) The term loan has maximum limit of 8 yrs. still bank has sanctioned these corporate

loans for 9 yrs. and 10 yrs. which will come back after 11.5 yrs. and 13.5 years

respectively. The decision seems to right one in term of extension of tenure of loan;

because both the project have investment in long term developmental activities and are

needs of society.

7) After going through both of the proposals, we can say that the management of both the

company have enough influence on the bank to get sanctioned their proposals. Another

view point is that the bank seems to be liberal and has sanctioned the loan to comply

with the proportion of priority and non-priority sector lending.



@ Proposal III & IV:

1) Both the proposals are for the extension of the limit of working capital facility (FB)

provided by the bank.

2) They also proposed for the renewal of the bank guarantee at the existing level. The

difference is just that Proposal IV has also proposed for the cancellation the letter of

credit of Rs.7 lacs.

3) Both the firms’ Liquidity ratios & TOL/TNW are in the limits prescribed by the bank.

4) Looking at the past performance of the business, financial projections and other

parameters; no discrepancy has been found in both the proposals and therefore

bank has sanctioned their respective proposals.

5) Both the firms are regular in their code of conduct and doing periodic reporting and

bank also does regular visits to check the reported conditions and proper utilization

of funds to avoid default or credit risk.



Chapter 10

Findings

Ø Credit Risk Management is done to check the commercial, financial & technical viability

of the project proposed its funding pattern & further checks the primary or collateral

security cover available for the recovery of such funds.

Ø Credit & risk go hand in hand. Credit is the core activity of the banks & important source

of their earnings. In the business world risk arises out of:

» Deficiencies / lapses on the part of the management

» Uncertainties in the business environment

» Uncertainties in the industrial environment

» Weakness in the financial position

Ø Bank’s main function is to lend funds/ provide finance but it appears that norms are

taken as guidelines not as a decision making.

Ø A banker’s task is to identify/assess the risk factors/parameters and manage/mitigate

them on continuous basis.

Ø The CRA models adopted by the bank takes into account all possible risk factors like

financial, industrial, business, and management; which are rated separately.

Ø After analyzing proposals, we found that in some cases, loan is sanctioned due to strong

financial parameters.

Ø Where as in some cases, financial performance of the company/firm was poor, even

though loan was sanctioned due to some other strong parameters such as the unit has

got confirm order, the unit was an existing profit making unit, management was very

sound or the company is working in the developmental needs of the society.

Ø Thus, we can say that bank considers the subjective matters which generally CRA model

ignores.



Chapter 11

Suggestions

After studying the CRA process and credit policy of bank, we are of the opinion that the

Bank is required to have a system for monitoring the over all composition and quality of the

various portfolios since credit related problems in banks are concentrated within the credit

portfolio. It can take many forms and can arise whenever a significant number of credits

have similar risk characteristics.

Also the Bank will not necessarily forego booking sound credits solely on the basis of

concentration. Bank may use alternatives to reduce or mitigate concentration. Such

measure includes:

1) Pricing for additional risk

2) Ask borrower to increase holdings of capital to compensate for the additional risk

3) Making use of loan participation in order to reduce dependency on a particular sector of

economy or group of related borrowers

4) Fixing exposure limits for borrowers and for various industrial sectors

5) Collateral security in addition to main securities stipulating asset coverage ratio on case

to case basis

6) Personal Guarantees / Corporate Guarantees having reasonable net worth

7) Escrow mechanism for meeting the financial commitments on time



Chapter 12

Conclusion

Credit risk management in today’s deregulated market is a challenge. To avoid being

blindsided, banks must develop a competitive Early Warning System which combines

strategic planning, competitive intelligence and management action.

Here in our study, SBM loan policy contains various norms for sanction of different types of

loans. These all norms do not apply to each & every case. SBM norms for providing loans are

flexible & it may differ from case to case.

The CRA models adopted by the bank take into account all possible risk factors to mitigate

the risk with a loan. These have been categorized broadly into financial, business, industrial,

and management risks.

Usually, it is seen that credit appraisal is basically done on the basis of fundamental

soundness. But, after analyzing different types of proposals, our conclusion was such that, in

SBM, credit appraisal system is not only looking for financial wealth; other strong

parameters also play an important role in analyzing creditworthiness of the firm.

Out of the 5 proposals, in one proposal, loan was sanctioned despite of having poor financial

records. In another case, even the financial performance was good and loan was defaulted

due to management related issues.

In all, the viability of the project from every aspect is analyzed, as well as type of business,

industry, promoters, past records, experience, projected data and estimates, goals, long

term plans also plays crucial role in increasing chances of getting project approved for loan.

At last we can say that…,

“…….…A bank’s success lies in its ability to assume and

aggregate risk within tolerable and manageable limits”.



Bibliography

Books:

Credit Risk Assessment (CRA) system. State Bank of Mysore, 2010.

Khan, M Y. "Financial Services" 4/e. New Delhi: Tata McGraw-Hill, 2008.

Vaidhyanathan, T.S. "Credit Management".

Reports:

IBEF. "Industry update: Banking." IBEF website. March 9, 2010. http://www.ibef.org

(accessed March 9, 2010).

Rana, Babita. "Modest growth expected in net profit of banking industry in March 2010

quarter." CMIE, March 2010.

V, Leeladhar. "Basel II and credit risk management." BIS website. Sept 15, 2007.

httpwww.bis.orgreviewr071002e.pdf (accessed March 3, 2010).

Websites:

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

http://www.wikipedia.com/ (accessed Jan 9, 2010).

http://www.rbi.gov.in/ (accessed Jan 25, 2010).

http://www.bankersindia.com/ (accessed Feb 2, 2010).

http://www.statebankofmysore.co.inprofile.htm (accessed March 1, 2010).

��

A-1

CRA MODELS FOR TRADING SECTOR

TRADING SECTOR: REGULAR MODEL BORROWER RATING

SUMMARY

(A) FINANCIAL RISK (FR) Marks

(a)

Weight

(b)

Maximum

Weighted Score

(a) x (b)

( c )

Company’s

Weighted Score

(d)

Sl.

No.

Parameter

TOL / TNW

(i) (a) Latest Ratio - 8

(b)Average of last 3 years-2

10 3 30

(ii) Current Ratio

(a)Latest Ratio - 8

(b) Average of last 3 years-2

10 1.5 15

(iii) ROCE (PBDIT/ Total Assets)

(a) Latest Ratio-8


10 2 20

(iv) Retained Profit /TA

(a) Latest Ratio-8


10 1 10

(v) PBDIT/Interest

(a) Latest Ratio-8


10 2 20

(vi) PAT/Operating Income

(a) Latest

Ratio - 8


10 2 20

(vii) Net Cash Accrual/Total Debt (TOL)

(a) Latest Ratio-8


10 1.5 15

(viii) Average Year to Year growth in Net Sales

in last two quarters

10 1.0 10

(ix)

Financial Flexibility

(a) Ability to raise funds through

internal sources (like internal

accruals, saleable assets);

(b) Ability to raise resources through

external sources (relationship with

bankers, liquidity back-ups & the

like); 10 0.5 5

A-2

(c) Record in raising funds from

capital markets;

(d) Flexibility to defer its capital

expenditure in case of

weakening

financial position.

(x )Group Risk 10 0.5 5

( x i ) Forex Risk 10 0.5 5

( x i i )Future Prospects (Projected Ratios) 10 2 20

( x i i i )

(a) Gross Average DSCR (for all loans)

(for a company availing TL

facility only)

or

(b) (Inventory/Net Sales +

Receivables/Gross Sales)x 365

(days) ( for a company availing WC

facility only)

or

(c) [Sum of scores under {(a ) + (b)}]/2

(for a company availing both WC &

TL facilities)

10 2.0 20

Total Score 195

Total Score Normalized to 65 195/3=65

Qualitative Factors (-ve) (-10) 1 (-10)

Total Score (FR) 65

(B ) Business Risk (BR) Parameters Maximum

Score

Company’s

Score

(i) Competition 10

(ii) Line of Activity & Market Risk 7.5

(iii) Outlook/ Cyclicality 7.5

(iv) Regulatory Risk 2.5

(v) Technology 2.5

(vi) Business Environment 2.5

(vii) Vulnerability to macro-economic environment 2.5

(viii) Distribution Network 2.5

(ix) Restructuring 2.5

Total Score( BR) 40

A-3

Score under BR normalized to 20 40/2=20

(C) Management Risk (MR) Parameters

(i) Integrity 4

(ii) Track Record / Conduct of Account 4

(iii) Managerial Competence / Commitment / Expertise 4

(iv) Payment Record 3

(v) Structure & Systems 2

(vi) Experience in the Trade 1

(vii) Strategic Initiatives 1

(viii) Length of relationship with the Bank 3

(ix) Credibility : Ability to make Sales /profit projections 1

(x) Past success in introducing new trading products 1

(xi) Ability to manage change 2

(xii) Risk Appetite level 1

(xiii) Succession Plan/Key Person 2

(xiv) Adherence to covenants of sanction 1

Total Score (MR) 30

Score under MR normalized to 15 30/2=15

(D) Qualitative Parameter (External Rating) (+5)

(E)

Aggregate Score under (FR+ BR +MR) out of 100 100

~ ( A +B+C+D) ~ [ 65 + 20+ 15 + (+5)]

(F) Borrower Rating based on the above Score

(G) Country Risk (CR)

(H) Final Borrower Rating after CR

(I) Financial Statement Quality Excellent/Good/

Satisfactory/Poor

(J) Risk Score / Rating Transition Matrix Qualitative Comments on

Trends

A-4

TRADING SECTOR: SIM P LIFIED MODEL

BORROWER RATING SUMMARY

(A) Financial Risk (FR) Marks

(a)

Weight

(b)

Maximum Weighted

Score = (a) x (b)

( c )

Company’s

Weighted Score

(d)

S.

No. Parameters

(i)

TOL/ TNW

(a) Latest ratio -8


10 2.5 25

(ii)

Current Ratio

(a) Latest Ratio -8


10 2 20

(iii)

Return on Capital Employed (ROCE) (%)

(a) Latest ratio -8


10 2 20

(iv)

PBDIT/Int.

(a) Latest ratio -8


10 1.5 15

(v)

PAT/Operating Income

(a) Latest ratio -8


10 1 10

(vi)

(A) Gross Average DSCR (for All loans)

(for TL only)

(B) Inventory/Net Sales +

Receivables/Gross Sales (Days)

(a) Latest ratio -8


(for WC only)

or

(C) Sum of Scores under (A+B)]/2

(for a company enjoying both WC &

TL facilities)

10 2 20

(vii) Group Risk 10 0.5 5

(viii) Forex Risk 10 0.5 5 (ix) Future Prospects (FP) (Projected

Ratios)

10 2 20

Total Score 140

Total Score normalized to 70

140/2=70

Qualitative Factors (-ve) (-10) 1 (-10 )

Total Score (FR) 70

A-5

( B ) Business Risk (BR)

S. No. Parameters Maximum

Score

Company’s

Score

(i) Competition & Market Risk 8

(ii) Outlook/Cyclicality 6

(iii) Technology 2

(vi) Business Environment 2

(vii) Regulatory Risk 2

Total Score (BR) 20

(C) Management Risk (MR)

(i) Integrity 4

(ii) Track Record/Conduct of Account 4

(iii) Expertise, Managerial Competence & Commitment 3



(vi) Experience in the Trade 2

(vii) Length of Relationship with the Bank 3

(viii) Succession Plan/Key Person 1

Total Score (MR) 20

MR Score Normalized to 10 20/2=10


(E) Aggregate Risk Score :(FR + BR + MR) :

(A+B+C+D) ~ [70 + 20 + 10 + (+5)]

100

(F) CRA Rating Based on the above Score



(I) Financial Statement Quality Excellent/Good/

Satisfactory/Poor

(J) Risk Score/Rating Transition Matrix Qualitative Comments on Trends

A-6

CRA MODELS FOR NON-TRADING SECTOR

NON-TRADING SECTOR: REGULAR MODEL

BORROWER RATING SUMMARY

(A)

S.

No.

Financial Risk (FR) Marks

(a)

Weight

(Wt.)

(b)

Maximum

Weighted

Score

(a) x (b)

( c )

Company’s weighted

Score

(d)

Parameter

(i)

TOL / TNW

(a) Latest Ratio - 6


(c) Industry comparison - 2

10 3 30

(ii)

Current Ratio

(a) Latest Ratio-6


(c) Ind. comparison-2

10 1.5 15

(iii)

ROCE (PBDIT/ TA)

(a) Latest Ratio-8


10 2 20

(iv)

Retained Profit /TA

(a) Latest Ratio-8


10 1 10

(v)

PBDIT/Interest

(a) Latest Ratio-8


10 2 20

(vi)

PAT/Operating Income

(a) Latest Ratio - 8


10 2 20

(vii) Net Cash Accrual/Total Debt

(a) Latest Ratio-8


10 1.5 15

(viii) Average Year to Year growth in

Net Sales in last two quarters

10 1.0 10

Financial Flexibility

(a) Ability to raise funds through

A-7

internal sources ( like internal

accruals ,saleable assets);

(b) Ability to raise resources

through external sources

(ix)

(relationship with bankers, liquidity

back-ups & the like);

(c) Record in raising funds from

capital markets;

(d) Flexibility to defer its capital

expenditure in case of weakening

financial position.

10 0.5 5

(x) Group Risk 10 0.5 5

(xi) Forex Risk 10 0.5 5

(xii) Future Prospects (Projected

Ratios)

10 2 20

(xiii)

(a) Gross Average DSCR (for all

loans) (for a company availing

TL facility only)

or

(b) (Inventory/Net Sales +

Receivables/Gross Sales)x

365 (days) ( for a company

availing WC facility only)

or

(c ) [Sum of scores under

{(a ) + (b)}]/2

(for a company availing both WC

& TL facilities)

10 2.0 20

Total Score ( FR) 195

Total Score Normalized to 65 195/3=65

Qualitative Factors(-ve) (-10) 1 (-10)

Total Score (FR) 65

A-8

(B ) Business & Industry Risk

(B & I R) Parameters

Maximum

Score

Company’s

Score

(i) Competition & Market Risk 10

(ii) Industry Outlook 10

(iii) Industry Cyclicality 4

(iv) Regulatory Risk 7

(v) Business Environment 3

(vi) Technology & Vulnerability to Technological change 8

(vii) Vulnerability to macro-economic environment 4

(viii) Access to Resources (Input profile) 7

(ix) User /product profile 7

(x) Capacity utilization & Flexibility in operation 5

(xi) Consistency in Quality 5

(xii) Research & Development/innovation 4

(xiii) Distribution Network 2

(xiv) Restructuring 2

(xv) Level of Integration 2

Total Score (B & I R) 80

B & I Risk Score normalized to 20 80/4 = 20

(C) Management Risk (MR) Parameters

(i) Integrity 4

(ii) Track Record / Conduct of Account 4

(iii) Managerial Competence / Commitment / Expertise 4



(vi) Experience in the Industry 1

(vii) Strategic Initiatives 1

(viii) Length of relationship with the Bank 3

(ix) Credibility : Ability to make Sales /profit projections 1

(x) Past success in introducing new products 1

(xi) Ability to manage change 2

(xii) Risk Appetite level 1

(xiii) Succession Plan/Key Person 2

(xiv) Adherence to covenants of sanction 1

Total Score (MR) 30

A-9

MR Score normalized to 15 30/2 = 15


(E) Aggregate Score under (FR+ B & IR +MR) out of 100 100

~ ( A +B+C+D) ~ [ 65 + 20+ 15 + (+5)]

(F) Borrower Rating based on the above Score



(I Financial Statement Quality Excellent/Good/

Satisfactory/Poor

(J) Risk Score/Rating Transition Matrix Qualitative comments on trends

NON-TRADING SECTOR: SIMPLIFIED MODEL BORROWER RATING SUMMARY

(A)

Financial Risk (FR) Marks

(a)

Weight

(b)

Maximum Weighted

Score

(a) x(b)

( c )

Company’s

Weighted Score

(d)

Parameters

(i) TOL/ TNW

(a) Latest ratio -7


(c) Industry Comparison-1

10 2.5 25

(ii) Current Ratio

(a) Latest Ratio -7



10 2 20

(iii) Return on Capital Employed

(ROCE) (%)

(a) Latest ratio -8


10 2 20

(iv)

PBDIT/Intt.

(a) Latest ratio -8


10 1.5 15

A-10

PAT/Operating income

(v) (a) Latest ratio -7 10 1 10



(a) Gross Average DSCR (for All

loans) (for TL only)

or

(vi)

(b) Inventory/Net Sales +

Receivables/Gross Sales (Days)

(a) Latest ratio -6



10 2 20

(for WC only)

or

(c) [ Sum of Scores under (A+B)]/2

(for a company enjoying both

WC & TL facilities)

(vii) Group Risk 10 0.5 5

( v i i i ) Forex Risk 10 0.5 5

(ix) Future Prospects (FP) (Projected

Ratios)

10 2 20

Total Score 140

Total Score normalized to 70 140/2=70

Qualitative Factors (-ve) (-10) 1 (-10)

Total Score (FR)

70

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