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Transcript of Final Report
Table of contents
1. Executive summary
1.1.1. Title of the project
1.1.2. Main objectives
1.1.3. Rationale behind choosing the project
2. Methodology
2.1.1. Research design
2.1.2. Data collection method
2.1.3. Data analysis method
3. Industry profile
4. Company Profile4.1.1. History of bank4.1.2. Mission
4.1.3. Bank statistics
5. Introduction to the project
6. Forms of bank finance
7. Steps in credit appraisal process
7.1.1. Conducting Feasibility Study
7.1.2. Financial analysis
7.1.3. Credit risk rating
7.1.4. Determination Of Interest Rate
7.1.5. Term Sheet
7.1.6. Appraisal note
7.1.7. Disbursement
7.1.8. Follow up
8. Case study
8.1.1. CC renewal of Raj pharma
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8.1.2. CC and term loan for Impact packaging
Chapter 1Executive summary
Executive Summary
As a part of curriculum, every student studying MBA has to undertake a project on a particular
subject assigned to him/her. Accordingly I have been assigned the project work on the study of
project financing in Banking Sector.
As it is rightly said that finance is the life blood of every business so every business need funds
for smooth running of its activities and bank is the one of the source through which the business
get funds, before financing the bank appraise the projects and if the projects meet the
requirement of the bank rules than only they will finance.
Project financing is commonly used as a financing method in capital-intensive industries for
projects requiring large investments of funds, such as the construction of power plants, pipelines,
transportation systems, mining facilities, industrial facilities and heavy manufacturing plants.
The core area of this project focuses on the financial appraisal of RAJ PHARMA and IMPACKT PACKAGING who belongs to pharma industry and manufacturing of corrugated boxes respectively.
Main objective of the project if to study the process of Financial Appraisal of the projects financed by Bank of Maharashtra”.
Once a project opportunity is conceived and it is considered after the preliminary screening, a detailed feasibility study has to be undertaken covering marketing, technical, and financial aspects of the project. The study in the form of cases deal with calculations of MPBF (Maximum Permissible Finance), along with going through the borrower’s information, general information of the proposal, past record of borrower and details of security mortgaged. Financial records of the borrower audited, provisional and projected such as Profit and loss account statements,
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Balance Sheet and Cash and Fund Flow Statements needed to be considered. The ratios such as current Ratio, Debt Service Coverage Ratio etc are also checked. The ultimate decision whether to grant the credit to borrower for the application or not and how to go about it , is undertaken after this study which discloses whether the borrower has good past record and information provided are true and fair.
My project concerns with the Calculations of MPBF i.e. Credit Appraisal and Renewal, in which I need to asses if the borrower should be granted credit, and what should be the recommended loan amount. This all is done after carefully evaluating the financials and securities provided by the borrower.
Rationale behind choosing this topic:
Project financing is a comparatively new field for Indian banks, at present scenario India is becoming developed country so because of that many projects are going on that may be infrastructure, power generation, mining etc. considering all these the projects must need finance, to fulfill these objectives the project undertaken companies raise the funds through capital market, debt market and through banks.
Whenever bank wants to finance these types of projects it must study the feasibility of the project and then it will go for financing that project
Because of this it is very necessary to study the process of project financed by the bank so I choose this topic to study how BOM study the projects and the method of financing the projects.
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Chapter 2Methodology
Methodology
Research design- in the project undertaken following research studies has been used:
Exploratory research The main purpose of using this study in our project is that of formulating a problem for more precise investigation or of developing the working hypotheses from an operational point of view. The major emphasis in such studies is on the discovery of ideas and insights. As such the research design appropriate for such studies must be flexible enough to provide opportunity for considering different aspects of a problem under study.
Three methods in the context of research design for such studies are talked about:
(a) The survey of concerning literature;
(b) The experience survey of the project guide and
(c) The analysis of ‘insight-stimulating’ examples.
Descriptive research studies have been used in the project to describe the characteristics of the firm whose projects have been financed.
Data collection method
In the project undertaken both primary and secondary data collection method has been used-
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The primary data were collected by visiting the firm with senior manager, BoM, M.I. road branch, Jaipur and talking to the owner and the employees of the firm. There we verified the stock statement, fixed assets, HR strength and infrastructure.
The secondary data was collected through-
Banks website - www.bankofmaharashtra.in Company manuals Commercial Banks Book RBI manuals for CRR Financial data (balance sheet, P & L account, stock statements) of the borrower.
Chapter 2Methodology
Data analysis methods:
Following techniques are used for analysis- Ratio analysis Financial indicators analysis NWC requirements Risk analysis MPBF calculations
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Chapter 3Industry Profile
Industry profile
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.
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 for India’s growth. The
government’s regular policy for Indian bank since 1969 has paid rich dividends with the
nationalization of 14 major private banks of India.
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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.
Chapter 3Industry Profile
1 Central Bank Reserve Bank of India
2 Nationalised
Banks
State Bank of India, Allahabad Bank, Andhra Bank,
Bank of Baroda, Bank of India, Bank of Maharastra,
Canara Bank, Central Bank of India, Corporation
Bank, Dena Bank, Indian Bank, Indian overseas
Bank, Oriental Bank of Commerce, Punjab and Sind
Bank, Punjab National Bank, Syndicate Bank, Union
Bank of India, United Bank of India, UCO Bank,and
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Vijaya Bank.
3 Private Banks
Bank of Rajastan, Bharath overseas Bank, Catholic
Syrian Bank, Centurion Bank of Punjab, City Union
Bank, Development Credit Bank, Dhanalaxmi Bank,
Federal Bank, Ganesh Bank of Kurundwad, HDFC
Bank, ICICI Bank, IDBI, IndusInd Bank, ING Vysya
Bank, Jammu and Kashmir Bank, Karnataka Bank
Limited, Karur Vysya Bank, Kotek Mahindra Bank,
Lakshmivilas Bank, Lord Krishna Bank, Nainitak
Bank, Ratnakar Bank,Sangli Bank, BOM
Commercial and International Bank, South Indian
Bank, Tamil Nadu Merchantile Bank Ltd., United
Western Bank, UTI Bank, YES Bank.
The growth in the Indian Banking Industry has been more qualitative than quantitative and it is expected to remain the same in the coming years. Based on the projections made in the "India Vision 2020" prepared by the Planning Commission and the Draft 10th Plan, the report forecasts that the pace of expansion in the balance-sheets of banks is likely to decelerate. The total assets of all scheduled commercial banks by end-March 2010 is estimated at Rs 40,90,000 crores. That will comprise about 65 per cent of GDP at current market prices as compared to 67 per cent in 2002-03. Bank assets are expected to grow at an annual composite rate of 13.4 per cent during the rest of the decade as against the growth rate of 16.7 per cent that existed between 1994-95 and 2002-03. It is expected that there will be large additions to the capital base and reserves on the liability side.
Structure of Indian Banking
Reserve Bank of India is the regulating body for the Indian Banking Industry. It is a mixture
of Public sector, Private sector, Co-operative banks and foreign banks. The private sector
banks are further spilt into old banks and new banks.
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The Indian Banking Industry can be categorized into non-scheduled banks and scheduled
banks. Scheduled banks constitute of commercial banks and co-operative banks. There are
about 67,000 branches of Scheduled banks spread across India. As far as the present scenario
is concerned the Banking Industry in India is going through a transitional phase.
The Public Sector Banks (PSBs), which are the base of the Banking sector in India account
for more than 78 per cent of the total banking industry assets. Unfortunately they are
burdened with excessive Non Performing assets (NPAs), massive manpower and lack of
modern technology. On the other hand the Private Sector Banks are making tremendous
progress. They are leaders in Internet banking, mobile banking, phone banking, ATMs. As
far as foreign banks are concerned they are likely to succeed in the Indian Banking Industry.
Chapter 3Industry Profile
Scheduled Banks
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Scheduled Commercial Banks
Scheduled Co-operative Banks
Reserve Bank of India
(Source: www.mapsofindia.com)
Chapter 4Company Profile
COMPANY PROFILE
Bank of Maharashtra is an Indian bank based in the city of Pune. The bank was established in the year 1935 with an initial authorized capital worth Rs. 10.00 Lacs, although it became operational in the early phase of the next year. The bank got nationalized by the Government of India in the year 1969. With a total number of 1421 branches located all over India as of April 2009, the bank claims to have the largest number of branches within
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Public Sector Banks
Private Sector Banks
Foreign Banks
Regional Rural Banks
Nationalized Banks
BOM & its Associates
Scheduled State co-operative Banks
Scheduled urban co-operative bank
the state of Maharashtra, among all the Public Sector banks.
Commonly known as a common man's bank, Bank of Maharashtra adopts a philosophy of "Technology with personal touch", and follows its motto stating "One Family, One Bank, Bank of Maharashtra".
Apart from providing regular banking services to the customers, Bank of Maharashtra has established two Joint Ventures to fulfill its other commitments towards the general public and society. These Joint Ventures are M-SETI and Mahabank Info Centre. Mahabank Self-Employment Training Institute (M-SETI) is an effort initiated by Mahabank Agricultural Research & Rural Development Fund (MARDEF), a trust run by Bank of Maharashtra receiving help from National Bank for Rural Development (NABARD). The institute runs various self-employments oriented training courses for the rural unemployed youth from the districts of Pune, Kolhapur, Satara, Sangli, Nashik, Ahmednagar, Jalgaon, Dhule and Nandurbar.
Mahabank Info Centre is a yet another initiative by Bank of Maharashtra aimed at providing various retail baking related information to the customers, and enabling smoother operations for them.
History of bank
THE GENESIS Prof. V. G. Kale and the late Shri D. K. Sathe and registered as a banking company on the 16th of September, 1935 at Pune. The authorized capital was Rs. 10 Lakhs and issued capital of Rs. 5 Lakhs. Their vision was to reach out to and serve the common man and meet all their banking needs. Successive leadership of the Bank and the employees have endevoured to fulfill their vision.
Chapter 4Company Profile
MILESTONES
Milestones: Pre Nationalization
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1936 : Commenced business on February 8th.1945 : Deposits crossed Rs. 1.00 crore mark.1946 : Maharashtra Executor and Trustee Company (METCO) established.1958 : Listed on Bombay Stock Exchange.
Milestones: Since Nationalization
1969 The Bank was nationalized with 153 branches.
1978 Set up first Regional Rural Bank (RRB) 'Marathwada Gramin Bank' with headquarters at Nanded.
The Bank was appointed as Convener to the State Level Bankers' Committee (SLBC)
1979 Bank's business crossed Rs.1,000 crore.
1980 500th branch of the Bank at Narian Point, Mumbai inaugurated by the late Smt. Indira Gandhi, the then Prime Minister of India.
1981 Set up the second RRB “Aurangabad Jalna Gramin Bank”.
1984 Dr Manmohan Singh, the then Governor, Reserve Bank of India, launched the Bank's Golden Jubilee Celebration.
1986 Set up the third RRB “Thane Gramin Bank”
1987 1000th branch of theBank opened at Indira Vasahat, Pune.
1996 Bank's Diamond Jubilee Celebration launched by the then RBI
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Governor, Dr. C. Rangarajan
2004 Bank came up with Initial Public Offering (IPO)
2006 Launched ATM-cum-International Debit Car Commenced Bancassurance business
Commenced distribution of Mutual Fund products.
Surpassed business landmark of Rs. 50,000 crore.
1st CBS branch rolled out on 13th November at Karve Nagar, Pune.
2009 1444 branches, 345 ATMs, Total Business over Rs. 90,000 crore, 902 CBS branches.
2nd Mar 2010 The Bank achieved 100% CBS coverage.
Mission
To ensure quick and efficient response to customer expectations. To innovate products and services to cater to diverse sections of society. To adopt latest technology on a continuous basis. To build proactive, professional and involved workforce. To enhance the shareholders’ wealth through best practices and corporate governance. To enter international arena through branch network.
Our Logo
The DeepmalWith its many lights rising to greater heights.
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The Pillar Our institution- Symbolizing strength.
The DiyasOur Branches- Symbolizing service.
The 3 M's symbolizing Mobilization of MoneyModernization of Methods and Motivation of Staff.
Bank is the convener of State level Bankers committee. Bank offers Depository services and Demat facilities at 131 branches. Bank has a tie up with LIC of India and United India Insurance Company for sale of Insurance policies. All the branches of the Bank are fully computerized.
Parameters March 2008 March 2009 March 2010Total Business 57381.62 71556.36 87072.20Total deposits 33919.34 41758.33 52254.92Aggregate deposits 33663.20 41580.37 52219.43Net Bank Credit 23220.87 29285.81 34290.77CD ratio 69.70 71.66 66.67Total Investments 11298.40 12282.95 18382.14Operating Profit 613.20 672.63 793.52Net profit 271.84 328.39 375.16No. of branches 1345 1375 1421Metro 264 351 368Urban 290 257 271Semi-urban 202 251 262Rural 589 516 520
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(Source: website Bank of Maharashtra)
Chapter 5Introduction to project
Project - Credit appraisal
Introduction
Credit appraisal
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 repay back the loan in future? Generally the credits facilities are extended against the security know as collateral. But even though the loans are backed by the collateral, banks are normally interested in the actual loan amount to be repaid along with the interest. Thus, the customer's cash flows are ascertained to ensure the timely payment of the principal and the interest.
Objectives of the project
To assess the financial health of organizations those approach Bank of Maharashtra for
credit for import export purposes. This would entail undertaking of the following
procedures:
Analysis of past and present financial statements
Analysis of Balance Sheet
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Analysis of Cash Flow Statements
Examination of Profitability statements
Examination of projected financial statements
Examination of CMA data
To assess the suitability of the company for disbursement of credit. This would involve
the following actions:
Use of credit rating charts
Evaluation of management risk
Evaluation of financial risk
Evaluation of market-industry risk
Evaluation of the facility
Evaluation of compliance of sanction terms
Calculation of credit rating
Determination of interest rate: This would entail the following sequence of actions.
Collect data regarding financial health evaluation
Noting down of credit rating
Referencing the banks’ interest rate guidelines circular
Choosing the interest rate from the circular on the basis of financial health and credit
rating
RATIONALE OF STUDY
Credit appraisal also known as project financing. Project financing is commonly used as a
financing method in capital-intensive industries for projects requiring large investments of funds,
such as the construction of power plants, pipelines, transportation systems, mining facilities,
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industrial facilities and heavy manufacturing plants. The sponsors of such projects frequently are
not sufficiently creditworthy to obtain traditional financing or are unwilling to take the risks and
assume the debt obligations associated with traditional financings. Project financing permits the
risks associated with such projects to be allocated among a number of parties at levels acceptable
to each party.
Chapter 6Form of bank finance
FORM OF BANK FINANCE
A firm can draw funds from its bank within the maximum credit limit sanctioned. It can draw
fund in the following forms:
6.1) OverdraftUnder the overdraft facility, the borrower is allowed to withdraw funds in excess of the balance in his current account up to a certain specified limit during a stipulated period.Though overdrawn amount is repayable on demand, they generally continue for a long period by annual renewals of the limits. It is a very flexible arrangement from the borrower’s point of view since he can withdraw and repay funds whenever h desires within the overall stipulations. Interest is charged on daily balances- on the amount withdrawn-subject to some minimum charges. The borrower operates the account through cheques.
6.2) Cash CreditIt is the most popular method of bank finance for working capital in India. Under this method a borrower is allowed to withdraw funds from the bank up to the sanctioned credit limit. Borrower is not required to borrow the entire sanctioned credit once, rather, he can draw periodically to the extent of his requirements and repay by depositing surplus funds in his cash credit account. There is no commitment charge; therefore, interest is payable on the amount actually utilized by the borrower. Cash credit limits are sanctioned against the security of current assets. Though funds borrowed are repayable on demand, banks usually do not recall such advances unless they
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are compelled by adverse circumstances. Cash credit is the most flexible arrangement from borrower’s point of view. It is more often than not is used for working capital.
6.3) Purchase of Discounting BillsUnder the purchase or discounting of bills, a borrower can obtain credit from bank against its bills. The bank purchases or discounts the borrower’s bills. The provided under this agreement is covered within the overall cash credit or overdraft limit. Before purchasing or discounting the bills, the bank satisfies itself as to the creditworthiness of the drawer. Though the term bills purchased implies that the bank becomes owner of the bills, in practice, bank holds bills as security for the credit. When a bill is discounted, the borrower is paid the discounted amount of the bill.
6.4) Letter of CreditSuppliers, particularly the foreign suppliers, insist that the buyer should ensure that his bank will make the payment if he fails to honor its obligation. This is ensured through a letter of credit arrangement. A Bank opens a Letter of Credit in favor of a customer to facilitate his purchase goods. If the customer does not pay to the supplier within the credit period, the bank makes the
Chapter 6Form of bank finance
payment under the L/C arrangements. This arrangement passes the risk of the supplier to the bank. Bank charges the customer for opening the L/C. The Bank extends such facility to the financially sound customers. Unlike cash credit or overdraft facility, the L/C arrangement is an indirect financing; the bank makes payment to the suppliers on behalf of the customer only when he fails to meet the obligation.There are two banks involved in L/C arrangements. The L/C opener Bank on behalf of the applicant or purchaser and the advisory bank on behalf of the beneficiary or supplier.The L/C opener Bank issues L/C after taking required security. The beneficiary or supplier gives the goods invoice & bill of exchange to the advisory bank. The advisory bank sends the same to the Opener Bank for acceptance, the opener bank take an acceptance from the applicant and sends back the same to the advisory bank. Now theL/C opener Bank makes payment to the beneficiary or supplier in case of purchaser default. The bank charges the customer for opening the L/C.
6.5) Education loan
BOM also provide assistance to gain education to the Indian Nationals, who have secured admission to professional/technical courses through entrance test/selection process or have secured admission to foreign universities/institutions or have passed the qualifying examination for admission to the courses or to employed person intending to improve their educational
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qualification and/or receive training in modern technology in India or abroad provided training offers prospects of better placement.
Maximum amount In India : Rs. 10.00 lacs
Abroad : Rs. 20.00 lacs
Security
Up to Rs. 4.00 lacs - Clean
Guarantor
Above Rs.4.00 lacs to Rs.7.50 lacs - Satisfactory third party Guarantee
Above Rs. 7.50 lacs -Value of collateral security after providing requisite margin as below should be equal to the quantum of finance plus 2 acceptable guarantors.Computers purchased out of loan are hypothecated.
Chapter 6Form of bank finance
Margin
Up to Rs. 4.00 lacs – Nil
Above Rs.4.00 lacs - 5% for studies in India 15% for studies abroad
Rate of Interest Loans up to Rs. 4.00 lacs (BPLR – 2.00%) Loans above Rs. 4.00 lacs (BPLR - 1.25%)
Simple interest during moratorium period, there after compounded monthly 1% interest concession may be provided to the loanees if the interest is serviced regularly
as and when applied during the study period when repayment holiday is specified for interest/ repayment under the scheme. Interest concession is available only for moratorium period.
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Repayment EMI – 60 Months (Loan plus interest accrued together)Moratorium: Course Period + 1 year OR 6 months after getting job whichever is earlier.
6.6) Housing LoanThe Bank provides facility of housing loan to consumers fork purchase, construction, Renovations or for repairs of the house.
Eligibility
Salaried Persons, Professionals, Businessmen with sufficient disposable income. Farmers having min five acres of irrigated land holding. Non Resident Indians are also eligible.
Age
Minimum 21 years - Maximum 50 yrs. for salaried persons. Maximum 55 years for other than salaried persons
Quantum of Loan:
For salaried class 50 times of Gross Salary or 60 times of Net Monthly salary whichever is higher subject to applicable margin
For Businessmen Equal to avg annual income (Net profit + Depreciation) of last 3 yrs X 4 times (B/S, IT returns) Also note repayment of any other term liabilities.
For Farmers4 times of avg annual net income. Cross check Gross income, land holding, cropping pattern, Sugar Factory/APMC/ other agencies bills etc.
Maximum Loan Quantum:No maximum limit for Metro/Urban area Rs.15 lakh in Semi Urban/Rural area Rs.5 lakh for repairs/renovation in all areas
Security
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Upto Rs 25000/- One Guarantor with sufficient income/networthAbove Rs 25000/- Equitable/Regd. Mortgage of property or Equal amount of paper security (NSCs, FDRs of our Bank etc. excluding shares) guarantee of the spouse, guarantee of relatives whose income is considered for quantum.
Tenor Fixed/ Floating P.A.
Upto and inclusive of 5 years
Above 5 years and Upto and inclusive of 10 years
Above 10 years but below & inclusive of 20 years
Sanctioned Loan amount upto Rs.30.00 lakh.
floating BPLR-3.75% 8.50%
BPLR-3.50% 8.75%
BPLR-3.25% 9.00%
fixed 9.50% 10.00% -
Sanctioned Loan amount above Rs.30.00 lakh.
floating BPLR-3.25% 9.00%
BPLR-2.75% 9.50%
BPLR-2.50% 9.75%
fixed 10.25% 10.50% -
(source: website Bank of Maharashtra)
For Repairs and renovation: BPLR-3.00% i.e.9.25% p.a. Margin : 25%
Chapter 6Form of bank finance
Project undertaken was to analyze the financial position of firms and determine their credit worthiness. We mainly dealt with cash credit and term loans.
Cash credit or working capital loan
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Banks are the main institutional sources of working capital finance in India. After trade credit, bank credit is the most important source of financing working capital requirements. A bank considers a firm’s sales and production plans and the desirable levels of current assets in determining its working capital requirements. The amount approved by the bank for the firm’s working capital requirements is called credit limit.Credit limit is the maximum funds which a firm can obtain from the banking system.In case of firms with seasonal businesses, banks may fix separate limits for the peak level credit requirements indicating the periods during which the separate limits will be utilized by the borrower. In practice, banks do not lend 100% of the credit limit; they deduct margin money. A margin requirement is based on the principle of conservatism and is meant to ensure security. If the margin requirement is 30%, bank will lend only up to 70% of the value of the asset. This implies that security of bank’s lending should be maintained even if the asset’s value falls by 30%.A borrower may sometimes require ad hoc or temporary accommodation in excess of sanctioned credit limit to meet unforeseen contingencies. Banks provide such accommodation through a demand loan account or a separate non operable cash credit account. The borrower is required to pay a higher rate of interest above the normal rate of interest on such additional credit.Cash credit is the issuance of a short term cash loan to a business. A cash loan of this type if often utilized to meet the expenses associated with a specific task or project, with repayment expected within a period of one year or less. Successfully receiving cash credit and paying off the loan within terms can open the way for the business to be extended a more liberal line of credit for future use.
Cash credit works in a manner that is very similar to that of a line of credit. The difference is that cash credit establishes a cash account with the lender institution that can be drawn upon by the debtor. This is different from a conventional loan, in that the debtor does not have to receive the entire amount of the loan at one time. Cash credit is also different from a line of credit, as the amount of resources extended are pre-approved and the repayment schedule is the same whether the debtor is actively using the cash credit or not.
As with many types of financial assistance, cash credit is extended under terms that are set and controlled by the institution that provides the loan. Typically, cash credit involves the presentation of some form of security in order to be covering the amount of cash credit that is extended by the bank or loan agency. The security of collateral remains accessible to the lender until the cash credit is repaid in full.
One of the advantages for a new company is that cash credit can be an excellent way of setting the stage for a long term working relationship with a lender. Upon successfully complying with the terms of the cash credit agreement, the company may become eligible for other forms of assistance from the financial institution, including other forms of cash loans and the establishment of a conventional line of credit.
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For working capital facilities with or without Term Loan component:
Risk grade as per CRRF
Existing rate of interest
Concessional ROI For Micro Enterprises
Concessional ROI for Small & Medium Enterprises
AAA BPLR–1.75% BPLR–2.75% BPLR–2.25%
AA BPLR–1.25% BPLR –2.25% BPLR–1.75%
A BPLR–0.75% BPLR–1.75% BPLR–1.25
BBB BPLR–0.50% BPLR–1.50% BPLR–1.00%
BB BPLR–0.25% BPLR–1.25% BPLR–0.75%
B BPLR+0.25% BPLR–0.75% BPLR–0.25%
C BPLR+0.75% BPLR–0.25% BPLR+0.25%
(Source: website Bank of Maharashtra)
Interest rates are determined by the risk grade assigned to borrower on the basis of credit risk rating models given by RBI.
Chapter 6
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Form of bank finance
TERM LOANS: Term loan is an installment credit repayable over a period of time in monthly/quarterly/half yearly/yearly installments. Term loan is generally granted for creation of fixed assets required for long-term use by the unit. Term loans are further classified in three categories depending upon the period of repayment as under:
Short term repayable in less than 3 years. Medium term loans repayable in a period ranging from 3 years to 7 years. Long term loans repayable in a period over 7 years.
Risk grade as per CRRF
Existing Rate of Interest
Concessional ROI For Micro Enterprises
Concessional ROI for Small & Medium Enterprises
AAA BPLR–1.25% BPLR–2.25% BPLR–1.75%
AA BPLR–0.75% BPLR–1.75% BPLR–1.25%
A BPLR–0.50% BPLR–1.50% BPLR–1.00%
BBB BPLR+0.25% BPLR–0.75% BPLR–0.25%
BB BPLR+0.75% BPLR –0.25% BPLR+0.25%
B & C BPLR+1.25% BPLR+0.25% BPLR+0.75%
(Source: website Bank of Maharashtra)
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Chapter 6Form of bank finance
Factors to be taken into consideration while determining requirements for working capital:
Production policies:A sugar factory which belongs to a seasonal industry would obviously have its workingCapital need affected by the length of the crushing season. The production schedule i.e. the plan for production, has great influence on the level of inventories. In some cases raw material can be procured only in a particular season and have to be stocked for the production of the whole year. In many others, the production cycle is limited to a part of the year and raw materials have to be accumulated throughout the year. In all such cases the need for working capital will vary according to the production plans. Similarly, the decision of the management regarding automation, etc, also affects working capital requirements. In a labor- intensive process, the requirements of working capital will be higher. In the case of highly automatic plant, the requirements of long-term funds would be greater.
Nature of the businessThe shorter the manufacturing process, the lower is the requirements of working capital.This is because, in such a case, inventories have to be maintained at a low level. Longer the manufacturing process, higher will be the requirements of working capital. This is the reason why highly capital-intensive industries require large amount of working capital to run their sophisticated and long production process. Similarly, a trading concern requires lower working capital than a manufacturing concern.
Credit policyThe credit policy of the company also determines the requirements of working capital. A company, which allows liberal credit to its customers, may have higher sales but consequently will have large amount of funds tied up in sundry debtors. Similarly a company, which has very efficient debt collection machinery and offers strict credit terms, may require lesser amount of working capital than the one where debt collection system is not so efficient or where the credit terms are liberal. The credibility of a company in the market also has an effect on the working capital requirements. Reputed and established concerns can purchase raw material on credit and enjoy many other services also like door delivery, after sales service etc. This would mean that they could easily have large current liabilities; therefore the required working capital may not be very high.
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Inventory policyThe inventory policy of a company also has an impact on the working capital requirements since a large amount of funds is normally locked up in inventories. An efficient firm may stock material for a smaller period and may, therefore, require lesser amount of working capital.
Abnormal factorsAbnormal factors like strikes and lockouts also require additional working capital.Recessionary conditions necessitate a higher amount of stock of finished goods remaining in stock. Similarly, inflationary conditions necessitate more funds for working Capital to maintain same amount of current assets.
Market conditionsWorking capital requirements are also affected by market conditions like degree of competition. Large inventory is essential as delivery has to be off the shelf or credit has to be extended on liberal terms when market competition is fierce or market is not very strong is a buyer’s market.
Conditions of supplyIf prompt and adequate supply of raw materials, spares, stores etc. is available it is possible to manage with small investments in inventory or work on the just in time (JIT) principle. However if the supply is erratic, scant seasonal, channel zed through government agencies etc., it is essential to keep large stocks increasing working capital requirements.
Business CycleBusiness fluctuations lead to cyclical and seasonal changes in production and sales and affect the working capital requirements.
Growth and expansionThe growth in volume and growth in working capital go hand in hand. However, the change may not be proportionate and the increased need for working capital is felt right from the initial stages of growth.
Level of taxesThe amount of taxes paid depends on taxation laws. These amount usually have to be paid in advance. Thus need for working capital varies with tax rates and advance tax provisions.
Dividend policyPayment of dividend utilizes cash while retaining profits acts as a source of working capital. Thus working capital gets affected by dividend policies.
Price level changes
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Inflationary trends in the economy necessitate more working capital to maintain the same level of activity.
Chapter 7Credit appraisal process
Steps in process of Credit Appraisal
Submission of Project Report along with the Request Letter
Financial analysis
Credit risk rating
Determination of interest rates
Preparing and submission of Term Sheet
Preparation of appraisal note
Submission of Proposal to designated authority
If No queries raised If queries raised
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If approved If not approved
Project Rejected Solve the queries
Chapter 7Credit appraisal process
7.1) CONDUCTING FEASIBILITY STUDY
The success of a feasibility study is based on the careful identification and assessment of all of
the important issues for business success. A detailed Project Report is submitted by an
entrepreneur, prepared by a approved agency or a consultancy organization. Such report provides
in-depth details of the project requesting finance. It includes the technical aspects, Managerial
Aspect, the Market Condition and Projected performance of the company. It is necessary for the
appraising officer to cross check the information provided in the report for determining the
worthiness of the project.
Project Details:
Definition of the project and alternative scenarios and models
List the type and quality of product(s) or service(s) to be marketed.
Outline the general business model (ie. how the business will make money).
Include the technical processes, size, location, kind of inputs
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Disbursement
Follow up
Specify the time horizon from the time the project is initiated until it is up and running at
capacity.
Relationship to the surrounding geographical area
Identifies economic and social impact on local communities.
Identifies environmental impact on the surrounding area.
7.1.1) MARKET FEASIBILITY
Industry description
Describes the size and scope of the industry, market and/or market segment(s).
Estimates the future direction of the industry, market and/or market segment(s).
Chapter 7Credit appraisal process
Describes the nature of the industry, market and/or market segment(s) (stable or going through rapid change and restructuring).
Identifies the life-cycle of the industry, market and/or market segment(s) (emerging, mature)
Industry Competitiveness
Investigates industry concentration (few large producers or many small producers).
Analyzes major competitors.
Explores barriers/ease of entry of competitors into the market or industry.
Determines concentration and competitiveness of input suppliers and product/service
buyers.
Identifies price competitiveness of product/service.
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Market Potential
Will the product be sold into a commodity or differentiated product/service market?
Identifies the demand and usage trends of the market or market segment in which the
proposed product or service will participate.
Examines the potential for emerging, niche or segmented market opportunities.
Explores the opportunity and potential for a "branded product".
Assesses estimated market usage and potential share of the market or market segment.
Sales Projection
Estimates sales or usage.
Identifies and assess the accuracy of the underlying assumptions in the sales projection.
Projects sales under various assumptions (ie. selling prices, services provided).
Chapter 7Credit appraisal process
7.1.2.) MANAGERIAL FEASIBILITY
Managerial Personnel play a key role in directing the working of the company. It is important for
an organization to have a pool of efficient personnel who bear the capacity to bail the company
out from crisis situation and work towards optimum utilization of organizational resources. Such
capacity of the personnel can be determined by having complete details on following key
aspects:
Market reputation on the promoter / management of the company
Hands on experience of the management personnel in the industry / Business managed by
qualified personnel
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Ability of the promoters / management to bail out the company in case of crisis (for example,
this could be derived from a strong group company)
Decision making – Is it concentrated?
Organisation structure / Succession planning / Labour relations
Is any group company in default / Any Directors on RBI’s negative list / Borrower’s track-
record in honouring financial commitment
Length of relationship with the bank
7.1.3) TECHNICAL FEASIBILITY
Technology plays an important role in maintaining a competitive position in this highly
competitive market conditions. Investing in the proper technology is the key to success it
irrespective of size of business thus for achieving its projected performance, it is important for it
to have sound technological background. Such technical competence of the project can be
determined by having detailed study done on following key aspects:
Chapter 7Credit appraisal process
Determining Facility Needs
Estimates the size and type of production facilities.
Investigates the need for related buildings, equipment, rolling-stock
Suitability of Production Technology
Investigates and compare technology providers.
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Determines reliability and competitiveness of technology (proven or unproven, state-of-the-
art).
Identifies limitations or constraints of technology.
Availability and Suitability of Location
Access to markets. Access to raw materials. Access to transportation. Access to a qualified labor pool. Access to production inputs (electricity, natural gas, water, etc.). Investigate emissions potential. Analyze environmental impact. Identifies regulatory requirements.
Raw materials
Estimates the amount of raw materials needed.
Investigates the current and future availability and access to raw materials.
Assesses the quality and cost of raw materials and markets of easily substituted inputs.
Other inputs
Investigates the availability of labor including wage rates, skill level, etc.
Assesses the potential to access and attract qualified management personnel.
Chapter 7Credit appraisal process
7.1.4) FINANCIAL FEASIBILITY
Estimate the total capital requirements.
Assesses the capital needs of the business project and how these needs will be met.
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Estimates capital requirements for facilities, equipment and inventories.
Determines replacement capital requirements and timing for facilities and equipment.
Estimates working capital needs.
Estimates start-up capital needs until revenues are realized at full capacity.
Estimates contingency capital needs (construction delays, technology malfunction, market
access delays, etc.
Estimates other capital needs.
Estimates equity and credit needs.
1. Identifies alternative equity sources and capital availability -- producers, local
investors, angel investors, venture capitalists, etc.
2. Identifies and assess alternative credit sources -- banks, government (ie. direct
loans or loan guarantees), grants, local and state economic development
incentives.
3. Assesses expected financing needs and alternative sources -- interest rates, terms,
conditions, covenants, liens, etc.
4. Establishes debt-to-equity levels.
Budgets expected costs and returns of various alternatives.
Estimates expected costs and revenue.
Estimates the profit margin and expected net profit.
Estimates the sales or usage needed to break-even.
Estimates the returns under various production, price and sales levels. This may involve
identifying "best case", "typical", and "worst case" scenarios or more sophisticated analysis
like a Monte Carlo simulation.
Assesses the reliability of the underlying assumptions of the financial analysis (prices,
production, efficiencies, market access, market penetration, etc.)
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Creates a benchmark against industry averages and/or competitors (cost, margin, profits,
ROI, etc.).
Identifies limitations or constraints of the economic analysis.
Determines project expected cash flow during the start-up period.
Identifies project an expected income statement, balance sheet, etc. when reaching full
operation.
7.2) Financial analysis
Various financial indicators are calculated and a credit report is prepared which is an important
determinant of an individual's financial credibility. They are used by lenders to judge a person's
creditworthiness. They also help the person concerned to narrow down on the financial problem
areas. Credit report is a document, which comprises detailed information about the credit
payment history of an applicant. It is mostly used by the lenders to determine the credit
worthiness of an applicant. The business credit reports provide information on the background of
a company. This assists one to take crucial business related decisions.
Various financial ratios are calculated for the past and future data provided by the borrower after checking the veracity of the same. The various ratios, which are frequently calculated include:
Current ratio= (Receivables + material and finished goods inventory)/ (creditors for goods and expenses)
It determines the liquidity position of the company over a period of one year. The current ratio is an indication of a firm's market liquidity and ability to meet creditor's demands. It is excess of current assets over current liability. If current liabilities exceed current assets (the current ratio is below 1), then the company may have problems meeting its short-term obligations. If the current ratio is too high, then the company may not be efficiently using its current assets.
Chapter 7Credit appraisal process
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The ideal level is at 1.33:1 however the acceptable level is more than 1. however its level
depends on the industry.
Long term debt-equity ratio= [Long Term Debt/ Net worth]
Indicates the relative proportion of equity and debt used to finance a company's assets. This
ratio is also known as Risk, Gearing or Leverage. A high debt equity ratio is not preferable
by an investor as the company already has acquired high amount of funds from market
thereby reducing the investor share over the securities available, increasing the risk.
BoM permits this ratio up to 3:1. If a firm has 25% of the funds bank can provide the rest of
the 75%.
Interest coverage ratio= [(Profit Before Interest – Provision for Tax)]/(Interest payments due for the year]
Fixed assets coverage ratio= [Fixed Assets/ (Term loan and other long term debt obligations)]
Debt-service coverage ratio= [{(Profit after tax + Interest on term loan + Depreciation} + other non-cash charges]/ [Interest on term loan + Principle Repayment]
Debtors Velocity= [Average Receivables/Credit Sales* No. of days in a year.]
Creditors Velocity= [Average Payables/Credit Purchase* No. of days in a year.]
Stock Velocity= [Average Stocks/Cost of goods Sold* No. of days in a year.]
Two other important criterions are IRR and DSCR
Financial institutions calculate the Internal Rate of Return (IRR). The Internal Rate ofReturn refers to the rate of return that the project is expected to generate based on itsProjected cash flows accruing over its expected lifespan. Institutions have a thresholdIRR that the project needs to surpass to assess its viability.DSCR refers to the ability of the project to generate sufficient cash flows to repay the debt taken to finance the project. This includes the principal along with the interest component. Its minimum acceptable level is 1.50.
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Chapter 7Credit appraisal process
The above ratios are taken and matched with the standard, though a certain amount of flexibility is exercised depending on the perception and personal judgment of the appraising officer. A rating is assigned to the project based on the scores of the different ratios. A cut-off rating determines financing decision (whether the project would financed or not). Above the rating, the projects may be categorized into excellent, good and average. Based on this and the project characteristics, the final terms and conditions of financial assistance are decided upon like: Moratorium Repayment period Availability period Security (like first charge, personal guarantee etc.) Interest rateAll the expenses like service fee, processing fee, document fee and other expenses likeInspections of site, factory, etc. are charged to the applicant and are a source of income for the lending institution.
Following financial indicators are also calculated
Net sales (% Increase/ Decrease)
Net Profit after tax (% of NP to Net Sales)
Cash availableNWC(Long term source- Long term uses)
Tangible NetWorth (NW-Intangible assets)=capital + reserves & surplus- intangible assetsDebt Equity Ratio=total outsiders liability/net worth
Current Ratio= current assets / current liabilities(Source: company manuals)
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Chapter 7Credit appraisal process
7.3) Credit risk rating
Credit risk rating is done to assess various aspects of the projects and assigns scores against them
thereby determining the risk level involved with the project.
In October 1991, RBI has issued guidelines on implementation of risk management system in
banks. In line with these guidelines bank has put in a place a risk management policy for 2003-
04 vide circular dated 19-05-2003 duly approved by BoDs.
The objective of risk management is about taking risk with prudential safeguard and not
avoidance of risk. The objective is to optimize the risk and maximize the returns.
Credit risk is one of the major risk faced by the bank and credit risk management (CRM) is the
most important element of risk management. As such CRR framework is recognized as a key
instrument for CRM.
Following risks are considered:
Financial risk
Account operating risk
Management risk
Industry risk
Business risk
Project risk
There are 8 models for CRM
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CRR model1 - industrial and hi-tech agricultural activities(excluding PSUs) for
exposure exceeding Rs. 100 lakhs.
CRR model2 - industrial and hi-tech agricultural activities(excluding PSUs) for
exposure between 10 to Rs. 100 lakhs.
Chapter 7Credit appraisal process
CRR model3- industrial and hi-tech agricultural activities(excluding PSUs) for
exposure between Rs. 2 to 10 lakhs.
CRR model 4 – for PSUs
CRR model 5 – traders (general and agriculture indirect) and services(exceeding 100
lakhs)
CRR model 6 – traders (general and agriculture indirect) and services(10 to 100 lakhs)
CRR model 7 – traders (general and agriculture indirect) and services(2 to10 lakhs)
CRR model 8 - Agricultural borrowers(2.00 lakhs and above)
CRR models are based on activity and size of the credit exposure. These are the scientific tools
that help all functionaries in decision making process as well as in monitoring the account.
Types of risk
a) Financial risk
These are the risks associated with the sponsors or the borrowers themselves. The question is
whether they have sufficient resources to manage the construction and operation of the project
and to efficiently resolve any problems which may arise. Of course, credit risk is also important
for the sponsors' completion guarantees. To minimize these risks, the financiers need to satisfy
themselves that the participants in the project have the necessary human resources, experience in
past projects of this nature and are financially strong (e.g. so that they can inject funds into an
ailing project to save it).
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Past financial performance
o Achievement of sales target
o Net profit
o TOL/TNW
o Net profit/sales
o Current ratio
Chapter 7Credit appraisal process
Future risk
o Ability of promoter funding
o Cash flow adequacy
o TOL/TNW
o Current ratio
o Debt service coverage ratio(DSCR)
Ability of promoter/parent group funding shall be perceived from their
resourcefulness and their market standing and credibility. In cases where associate
concerns are existing, a perception about their operations can help the rating official for
deciding a judgmental value and assign score as per scoring norms.
b) Account operating risk-
These are general risks that may affect the cash-flow of the project by increasing
the operating costs or affecting the project's capacity to continue to generate the
quantity and quality of the planned output over the life of the project. Operating
risks include, for example, the level of experience and resources of the operator,
inefficiencies in operations or shortages in the supply of skilled labour. The usual
way for minimising operating risks before lending takes place is to require the
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project to be operated by a reputable and financially sound operator whose
performance is secured by performance bonds. Operating risks are managed
during the loan period by requiring the provision of detailed reports on the
operations of the project and by controlling cash-flows by requiring the proceeds
of the sale of product to be paid into a tightly regulated proceeds account to
ensure that funds are used for approved operating costs only.
Following are included in this risk-
i. Security coverage
1. Execution of document and compliance with the terms of sanction
Chapter 7Credit appraisal process
2. Collateral support
3. Realizable value of collateral
4. Aggregate net worth of all guarantors
ii. Conduct of the account
1. Submission of hypothecation statement by the borrower-
(timeliness and quality)
2. Submission of financial statement
3. Trend of overdrawing
4. Turnover in the account
5. Servicing of principal and interest
6. Delay in realization of discounted bills
iii. Observation of financial disciplines
1. Return of cheques issued by the borrowers
2. Cooperation in review/renewal of the facility
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c. Management and business risk
It is the management of the company that acts as guiding force for the firm. The key
managerial personnel should bear the capacity to bail out the company frm crisis
situation. Inorder to remain competitive it is essential to take initiatives. Such skills
are developed over years of experience, thus for better performance it is required to
have a team of well qualified and experienced personnel.\
No. of years of experience in activity
Product quality and competitiveness
Selling arrangement
Achievement in sales projections
Achievement in profit projections
Achievement in net working capital projections
Increase/decrease in net sales over last years
Chapter 7Credit appraisal process
Increase/decrease in net profit over last years
Debtor’s velocity
d. Project risk
This is the risk of technical difficulties in the construction and operation of the
project's plant and equipment, including latent defects. Financiers usually minimize
this risk by preferring tried and tested technologies to new unproven technologies.
Technical risk is also minimized before lending takes place by obtaining experts
reports as to the proposed technology. Project risks are managed during the loan
period by requiring a maintenance retention account to be maintained to receive a
proportion of cash-flows to cover future maintenance expenditure.
e. Industry risk
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A Company does not operate in isolation there are various market forces
that acts in either favorable or unfavraouble manner towards its
performance. Thus the rating would not give true picture if does take
market or demand situation in consideration.
The demand supply situation / market Potential plays an important role in
determining the growth level of the company like
i) Level of competition: monopoly, favorable , unfavorable
ii) Seasonality in demand : affected by short term seasonality, long term
seasonality or may not be affected by seasonality in demand.
Iii ) Raw Material Availability
iv) Location Issues like proximity to market, inputs, infrastructure:
Favorable, neutral, unfavorable.
Chapter 7Credit appraisal process
v) Technology ie, proven Technology- not to be changed in immediate future,
technology undergo change, outdated technology.
vi) Capacity utilization
Rating of the Facility:
The company can start functioning only after completing statutary obligations
laid down by the governing authority. Such statutary obligation involves
obtaining licenses, permits for ensuring smooth operations. Perparation and
Submission of Finacial Statements, Stock statements in the standard format
within the given time schedule.
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Business Consideration:
The length of relationship with the bank enables the lender to assess the
previous performance of the account holder. A good track record acts in the
favour of the applicant, however a underperformance make the lender more
vigilant.
Credit rating scales
Weighted average score Rating scale description
>75 MBR1 Low risk (AAA)
65-75 MBR2 Moderate risk(AA)
60-64 MBR3 Fair risk(A)
55-59 MBR4 High risk(BBB)
40-54 MBR5 Very high risk(BB)
<40 MBR6 Exceptionally high risk
MBR7 Doubtful accounts
(Source: company manuals)
Chapter 7Credit appraisal process
7.4) DETERMINATION OF INTEREST RATE
The interest rate is determined from the interest rate guidelines circular. This circular is
regularly updated to reflect the bank’s latest credit policies. The rupee credit is based on
BPLR and the foreign exchange loans are based on LIBOR.
The guidelines define how much interest rate is to be assigned for a particular credit rating
and credit duration(as per the tables shown on page13). However, credit rating and its use
43
in determining interest rate is a theoretical concept and the bank may allow a reduction in
interest rate under the following conditions:
Good Client
The organization is a long term client and brings good business to the bank.
The organization’s actions show that it intends to become a long term customer of the bank
Banking Consortium
The organization is seeking credit from a consortium of banks. In some cases like this, the
lead bank might decide the interest rate and all the member banks of the consortium follow
this interest rate.
7.5) TERM SHEET
Following a favorable feasibility check, credit rating the next step is preparing term sheet . A Term Sheet
is brief document that provides details on aspects like:
Account Details
Financial highlights for immediate previous two audited years and projection for proceeding year
Nature of Project
Cost of Project
Means of finance
a. Nature of Facility
b. Purpose
Chapter 7Credit appraisal process
c. Tenure of Term Loan
d. Interest rate Reset
e. Margin
f. Interest Rate, Commission
Door to Door Tenor i.e. the period within which the entire amount I sto be disbursed.
44
o Repayment Terms
o Prime Security
o Collateral Security
o Upfront fees i.e. the charges levied by the bank for processing the documents.
7.6) Appraisal note
An approved term sheet leads to preparation proposal. A proposal is prepared in standard format,
this enables the bank to keep a proper track record and also facilitates proper comparision. A
proposal a full fledged document providing details on project submitted and requesting finance
from bank. A proposal contains information on following aspects:
* Details of Account: It includes name of the Account Holder, Date of incorporation, Line of
Activity, Internal Credit Rating level, Address of the Registered Office, Name of Directors,
Share Holding Pattern, Asset Classification, Purpose of the Loan.
* Securities: Lenders often feel more confident about a loan if they are given a security interest
in the assets of a business. Then, if the borrower does not repay the loan as promised, the lender
can take the property the borrower pledged, sell it and use the proceeds to repay (or partially
repay) the borrowed amount. It provides detailed information on nature of securities given in lieu
of the Loan. They are of two type’s Prime securities, Collateral Securities
Chapter 7Credit appraisal process
45
Prime Securities: is a term used in banking transactions which means that the charge to
be created is in continuation of an earlier charge which might be held by the same
institution or by another institution.
Collateral Securities: In lending agreements, collateral is a borrower's asset that is
forfeited to the lender if the borrower is insolvent --- that is, unable to pay back the
principal and interest on the loan. When insolvent, the borrower is said to default on the
loan, in which case the lender becomes the owner of the collateral. It includes details on
Nature / Description of collateral security indicating area & location of property
Value in Rupees.
Date of valuation along with name of owner
Insurance Amount & Date of Expiry
Personal guarantee / Corporate Guarantee if any, includes Name of the guarantor, Value of
Guarantee.
* Financial Highlights:
It provides details of important financial elements over a period of years.
It includes details on Paid capital, Tangible NetWorth, Net working Capital, Current Assets,
Current Liabilities, Net Profit, Net Sales, Reserves and Surplus, Intangible Assets, Long Term
Liabilities, Fixed Assets, Investments, Non-current Assets like guarantees , Cash Accruals,
Capital employed.
It also includes ratios like Debt Equity Ratio, Current Ratio, Debt Service Coverage Ratio and
so.
The interpretation of the financial data presented provides information on the performance trend of the company also of the Projections made. Such financial highlight plays an important role in assessing the financial strengths and weakness of the business.
46
Chapter 7Credit appraisal process
* Status of the project:
A brief of Project is prepared. In this part of proposal a brief about the project is explained, it
includes information on nature, type of project, purpose of the project, commencement details,
the promoters and related details of the project. If it is a on-goin project it also gives details on
progress and status of progress.
* Evaluation of Industry:
This Section gives brief details on the
1. Scope of the industry
2. Growth level and overall performance of the industry
3. Recent Developments and Trend Evaluation
* Conduct of the Account:
This section provides details on :
Regularity in Submission of—
Stock Statements / Book Debt Statement
QPR Statements / Half Yearly Statement
Financial Statements
CMA Data
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Chapter 7Credit appraisal process
Compliance to Terms of Sanction
It furnishes information on following aspect:
Completion of Mortgage formalities
Registration of Charges with RoC
Whether documents valid and in force
Compliance of RBI guidelines
Whether consortium meetings held at prescribed periodic intervals where the Bank is the
leader.
* Terms and Condition:
It is important both for the bank and the applicant to safeguard its interest, this could be achieved
by settling at mutually acceptable terms and condition in order to ensure that both the parties the
lender and borrower perform their part of obligation thereby not putting other party at loss. All
loans are subject to regulations and conditions. The legal information relating to these
regulations and conditions can be viewed in this section. It is advisable for both the parties to
read this information carefully before approval.
7.7) DISBURSEMENT:
After submission Proposal to Designated/ Sanctioning Authority for sanctioning the Term Loan.
The authorities may raise queries, if any relating to projects and thereby convey it to the
processing officer the processing officer in turn addresses them to the borrower for necessary
48
step to be taken; such queries are required to be solved to the earliest by the applicant for further
processing of the proposal.
If the authorities are satisfied and have no further queries with respect to proposal, the Loan gets
sanctioned and the disbursement would be released in as per the terms decided.
7.8) FOLLOW-UP:
This is most crucial stage in the process of term loan assessment. Since amount of credit required
is usually high, such amount is disbursed in one installment, but they are paid in several
Installments. This lender bank to is required to assess periodically the utilization of funds
disbursed. Such evaluation is done by obtaining Lender’s Engineer Report; it is report that
provides complete details of the status of the project. It is prepared on monthly basis. It also
provides CA Report, it verifies the Financial details furnished to bank for further disbursement.
This is known as renewal of account.
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Chapter 8.1Case study-Raj Pharma
Case study
RAJ PHARMA
Brief Summary of the Firm:
Raj Pharma is a trading firm. It trades in medical and pharmaceutical products. It was established in the year 2008. Mr. Naresh Jain is an experienced entrepreneur as he worked for more than 10 years with Raj Medicals agencies. He purchased SHOP NO. 20 and established his own business of trading in medical and pharmaceutical equipments or products.
Name of the Applicant Borrower: Mr. Naresh Jain
Address of the Regional Office: SHOP NO. 20, Mayur Tower, Nehru Bazar, Jaipur (Raj.)
Status of the Dealer: Proprietorship
Nature of the Business: Trading of Pharmaceutical Products
Banking with BOM since: 2008
Type of loan: Cash Credit
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Mr. Naresh Jain wants to take some additional distributorship for 3 companies so he need more funds for giving them advance. Uptill now firm has distributorship of-
1.) Aristo2.) Cipla3.) Alensic4.) Unifass5.) Life medicare6.) Blare mark
Chapter 8.1Case study-Raj Pharma
VISIT REPORT:
We with our senior manager Anil Gupta visited the shop on 17 th may 2010 at given address. We have verified the stocks and Fixed Assets with system generated register. Business is going well. Firm has achieved sales of 150lacs in march 2010. It is as per the statement of Naresh Jain on 17th may,2010:
1.) Stock: 19.20lacs2.) Debtors: 7.42lacs3.) Creditors: 3.92lacs4.) Fixed Assets: 2.34lacs
Details of Security:
1.) Primay Security: Hypothecation of stock and recievables2.) Collateral Security: Equitable Mortgage of SHOP NO. 20, Mayur Tower,
Nehru Bazar, Jaipur , which is valued at 17.00lacs.
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NOTE ON PROPOSAL: NEW/REVIEW/RENEWAL WITH ENHANCEMENT REVIEW/RENEWAL WITHOUT ENHANCEMENT
Request: For the sanction of the under noted facilities:
FACILITIES EXISTING AMT ( in lacs) PROPOSED AMT. ( in lacs)A) Fund Based 10.00 20.00B) Non Fund Based
Total 10.00 20.00 The unit was initially granted a cash credit limit of 10 lacs on 11 th march,2008 against the
security of land property worth 14.28lacs, which was proposed to increase to 20lacs, for which review is to be done.
Chapter 8.1Case study-Raj Pharma
Details of Existing Facilities (funded and non funded )
Sr. no. Facility Amount (in lacs)
Sanctioned by
Date of sanction
Particular of M.V. of securities (in lacs)
Drawing power (in lacs)
Balance Outstanding (in lacs)
1. Cash Credit
10.00 BOM 11.03.08 Equitable mortgage of shop
10.00 9.63
Name of Proprietor/ Directors and their worth
Sr. no. Names Net Worth (in lacs)1. Naresh Jain 39.39
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Name of the Guarontors and their worth:
1. Rekha Devi Jain 77.50
Details of collaterals: Equitable mortgage of Shop no. 20 Mayur Tower , Nehru bazaar, jaipur. MARKET VALUE is 14.28 lacs
Insurance Details:
Whether all terms and conditions of sanction in force are fulfilled? If not, what are the reasons: Whether existing set of documents are in order & in force? YES
Turnover of the Account:
2009 2010 2011Credit turnover 10.83 92.3 66.83
Chapter 8.1Case study-Raj Pharma
Abridged Balance Sheet:
Particulars 2008 2009 2010 2011Capital Employed
N.W. Capital 0.69 1.39 7.32 11.99Profit 1.83 3.03 5.13 6.21Term Loans
Term Liability
Dep/Borrowing repayable after one yearLong Term u/s Loans 1.18
Other Term Liab.
Current Liabilities Bank C/C 7.14 9.37 20.00 20.00Creditors 0.30 8.02 1.50 2.50
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ProvisionsTerm Liabilities payable within 1 yearOther CLTotal CL 7.47 17.38 21.50 22.50
Total Liabilities 8.17 19.96 28.82 34.49Fixed Assets 0.50 1.99 3.10 2.01Current Assets
Cash/Bank 0.06 0.98 1.09 2.46Debtors/Receivers 2.54 6.24 12.85 15.59Other CA 1.00Stocks 5.10 10.26 11.53 13.43Total CA 7.67 18.46 26.47 32.50
Non Current Assets
InvestmentsOther NCAPreliminary Expenses
Intangible Assets
Preliminary ExpensesLossesOthers
TOTAL ASSETS 8.17 19.96 28.82 34.49Achievement vis-à-vis Projection:
(Source: submitted by the firm)
Chapter 8.1Case study-Raj Pharma
Observations on Balance Sheet:-
1.) The capital of the firm is continuously increasing due to the ploughing back of profits. The projected figures are in line with past trends, hence accepted.
2.) Creditor’s Payment Period:
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AMOUNT (in lacs)
Particulars 2008 2009 2010 2011Purchases 7.99 86.89 138.45 167.09Creditors 0.304 8.02 1.50 2.50Creditors payment period
0.46mnthns 1.11mnths 0.13mnths 0.18mnths
There is a bit fluctuation in creditors payment period because as the firm could not get required c/c limit, it could not pay creditors in advance. So its amount increased.
3.) Debtor’s collection period:
AMOUNT (in lacs)
Particulars 2008 2009 2010 2011Sales 3.47 89.86 150.88 181.73Debtors 2.54 6.22 8.75 15.59Debtor’s collection period
8..82mnths 0.83mnths 0.70mnths 1.09mnths
Debtor’s collection period is increasing. As the sales and profitability is increasing, lenient credit policy adopted by them is accepted.
4.) Stock holding period:
AMOUNT (in lacs)
Particulars 2008 2009 2010 2011Stock 5.06 10.26 11.52 13.43Purchases 7.99 86.89 138.45 167.09Stock holding period
1.58mnths 1.42mnths 0.998mnths 0.9646mnths
Firm is slightly increasing its stock in comparison to its purchases. Hence its turnover increases, thereby reducing the stock cost.
Chapter 8.1Case study-Raj Pharma
Key Financial indicators:
55
2009 2010 2011Net sales (% Increase/ Decrease)
89.9 150.9 (67.80%) 181.73 (20.43%)
Net Profit after tax (% of NP to Net Sales)
3.03 (3.37%) 5.13 (3.4%) 6.21 (3.42%)
Cash 3.53 5.88 2.46NWC(Long term source/ Long term uses)
1.08 4.95 10.00
Tangible NW (NW/Intangible assets)
1.39 7.32 11.99
Debt Equity Ratio 13.33 2.93 1.83
Current Ratio 1.06 1.23 1.45(Calculated figures as per the Bank’s standard format)
Observations on Key Financial Indicators:
1. The sales of unit have grown 67.88%in 2009-10 and is expected to grow by 20.43% in 2010-11 which is reasonable and can be accepted.
2. The net profit is increasing in both absolute as well as in percentage terms. The projected figures are in line with past trends.
3. NWC is increasing. But it is less than projected and is not in line with projected figures.
4. TNW is increasing due to ploughing back of profits.5. TL/TNW is decreasing as firm is increasing its NW due to increase in profits.6. Current ratio is increasing as projected.
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Chapter 8.1Case study-Raj Pharma
Computation of Working Capital Requirement as per Nayak/ vaz Committee recommendations:
Rs. (in lacs) as per the projected figures of 2011
a Projected accepted turnover 181.73b W/C requirement i.e. 25% of “a” 45.43c Minimum margin required { 5% of sales ( item “a”)} 9.08d Actual Margin Available 10.00e Item “b” minus item “c” 36.34f Item “b” minus item “d” 35.43g Maximum PBF (item “e” of “f” whichever is less) 35.43
Drawings in the account should be allowed as per the Drawing Power based on Stocks Debtors Creditors statements.
Computation of limits by traditional method (based on accepted projections):
Working of MPBF:
Particulars Year Audited Year Estimated Year ProjectedA) Total Current Assets 18.46 26.47 32.50B) Other Current
Liabilities(excluding short term bank borrowings)
8.02 1.50 2.50
C) WC gap (a-b) 10.44 24.03 30.00D) Minimum stipulated
NWC [25% of (c)] 4.61 6.62 7.50
E) Actual Projected NWC 1.08 4.97 10.00F) Item (c)-(d) 5.83 17.41 22.50G) Item (c)-(e) 9.36 19.06 20.00H) MPBF 5.83 17.41 20.00I) Excess borrowing, if
any4.17 0 0
Comments: (access borrowing if any and acceptability of MPBF): In 2009, there is some excess borrowing because firm has started in January, 2008. But this was accepted because of the growth potential and profit making capability of the firm.
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Ratio analysis
1. Current ratio= Current assets/current liabilities
Year 2009 2010 2011Current assets(in lacs)
18.46 26.47 32.50
Current liabilities(in lacs)
17.38 21.50 22.50
Current ratio 1.06 1.23 1.45(Source: calculated from firm’s balance sheet)
2009 2010 20110
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.06
1.23
1.45
Interpretation
It is an indicator of the extent to which short term creditors are covered by assets that are expected to be converted to cash in a period corresponding to the maturity of claims. The ideal current ratio is 2:1. The firm current ratio indicate that the firm is in a position to meet its
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short term obligation because the ratio is in increasing trend , by observing the above table we can say that though the firm does not maintain ideal current ratio, it is still in a position to meet its current obligations. After clearing all the dues the firm is still in a position to maintain liquidity.
Chapter 8.1Case study-Raj Pharma
2. Debt equity ratio- This ratio measures the long term or total debt to shareholders equity.
This ratio reflects claims of creditors and shareholders against the assets of the firm. Debt
Equity Ratio is given by: Long term debt
Debt Equity Ratio =
Shareholders’ equity
(Source: calculated from firm’s balance sheet)
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Particulars 2000 2010 2011
Debt 18.5
6
21.5 22.5
Equity(Promoter contribution) 1.39 7.32 11.99
Debt equity ratio 13.3 2.94 1.88
2009 2010 2011
13.3
2.941.88
Interpretation-
The debt equity ratio is an important tool of financial analysis to appraise the financial structure of the firm. The ratio reflects the relative contribution of creditors and owners of the business in its financing. A high ratio shows a large share of financing by the creditors of the firm; a low ratio implies a smaller claim of the creditors. Debt –Equity ratio indicates the margin of safety to the creditors. Here debt-equity ratio is continuously decreasing by increase in capital and almost negligible increase in loan and creditors.
Chapter 8.1Case study-Raj Pharma
3. Net profit margin-
It is also known as net margin. This measures the relationship between the net profits and sales
of a firm. This ratio is based on the premise that a firm should earn sufficient profit on each
rupee of sales. If adequate profits are not earned on sales, there will be difficulty in meeting the
operating expenses and no returns will be available to the owners.
Depending on the concept of net profit employed. , this ratio can be computed as follows-
Earnings after tax
Net Profit ratio = 100
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Net sales
particulars 2009 2010 2011
Profit after tax 3.03 5.13 6.21
Net sales 89.9 150.9 (67.80%) 181.73 (20.43%)
Net sales margin 3.37% 3.4% 3.42%
(Source: calculated from firm’s balance sheet)
Interpretation
The net profit margin is indicative of management’s ability to operate the business with
sufficient success not only to recover from revenues of the period, the cost of services, the
operating expenses and the cost of borrowed funds, but also to leave a margin of reasonable
compensation to the owners for providing their capital at risk. A high profit margin would ensure
the adequate return to the owners as well as enable the firm to withstand adverse economic
conditions. A low net profit margin has the opposite implications. This firm has low margin
however this is considerable as the firm is new and has high future growth potential.
Chapter 8.1Case study-Raj Pharma
Return on assets-
The profitability ratio is measured in terms of relationship between net profits and assets. It
measures the overall effectiveness of management in generating profits with its available assets.
The ROA may also be called profit-to-asset ratio. It can be computed as follows-
Net profit after tax
Return on Assets = 100
Average total assets
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particulars 2009 2010 2011
Profit after tax 3.03 5.13 6.21
Average total assets 19.96 28.82 34.49
ROA 15.18% 17.8% 18.0%
2009 2010 201113.50%14.00%14.50%15.00%15.50%16.00%16.50%17.00%17.50%18.00%
15.18%
17.80% 18.00%
ROA
Interpretation-
Return on assets employed is favorable. That means the firm is in a position to employ its assets
in an efficient manner.
Chapter 8.1Case study-Raj Pharma
Return on Capital Employed-
It is similar to ROI except in one respect. Here the profits are related to the total capital
employed. The term capital employed refers to long term funds supplied by the lenders and
owners of the firm. It is given by the formula-
EBIT
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Return on Capital employed = 100
Average total capital employed
particulars 2009 2010 2011
Profit after tax 3.03 5.13 6.21
Total capital employed 1.39 7.32 11.99
ROA 217.99% 70.08% 51.79%
(Source: calculated from firm’s balance sheet)
Interpretation:-
The ROCE provides a basis for the test of profitability related to the source of long term funds. The higher the ratio, the more efficient is the use of capital employed. Here the ratio is very high in 2009 while it follows a decreasing trend because the firm is introducing more and more capital by ploughing back of profits and thus reducing the dependence on outside sources.
Chapter 8.1Case study-Raj Pharma
RISK ANALYSIS
Assessment of financial risk
Past financial performance
Value Score Weight Weighted score
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Achievement of sales target 92.3 4 1.5 6.00
Net profit __ __ 1.0 N.A.
TOL/TNW 13.36 3 1.0 4.5
Net profit/sales 3.3% 0 1.5 0
Current ratio 1.06 1 1.0 1.00
(Determined as per CRR model given by RBI)
Future risk
Value Score Weight Weighted score
Ability of promoter funding 4 1.0 4.00
Cash flow adequacy __ __ 1.0 N.A.
TOL/TNW 5.28 0 1.0 0.0
DSCR N.A. N.A. N.A. N.A.
Current ratio 1.23 1 1.0 1.00
(Determined as per CRR model given by RBI)
o Total weighted score – 16.50
o Maximum weighted score – 40.00
o Weighted score percentage – 41.25%
o Risk rating – MBR5 (BB)
Chapter 8.1Case study-Raj Pharma
Assessment of account operating risk
Security coverage
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Value Score Weight Weighted score
Execution of document and
compliance with the terms of
sanction
Full 5 5.0 25
Collateral support 14.3 lacs 4 4.0 16
Realizable value of collaterals 143% 5 5.0 25
Aggregate NW of all
guarantors
77lacs 5 5.0 25
Total 91.00
(Determined as per CRR model given by RBI)
Conduct of the account
Value Score Weight Weighted
score
Submission of hypothecation
statement by the borrower
(timeliness & quality)
15days 4 3.0 12
Submission of financial
statements
Within 4
months
4 2.0 8
Trend of overdrawing Not more than
5 times
3 4.0 12
Turnover in the account 96% 4 5.0 20
Servicing of principal and
interest
Within 5 days 4 5.0 20
Total 72.0
Chapter 8.1Case study-Raj Pharma
Observation of financial discipline
65
Value Score Weight Weighted score
Return of cheques issued by
borrower
None 5 2.0 10
Cooperation in review and
renewal of facility
Well in
time
5 2.0 10
Total 20
o Total weighted score – 183.0
o Maximum weighted score – 210.0
o Weighted score percentage – 87.14%
o Risk rating – MBR1 (AAA)
Assessment of management and business risk
Value Score Weight Weighted score
No. of years of experience in
activity
10 years 5 6.0 30
Product quality and
competitiveness
Wide
range &
general
5 2.0 10
Selling arrangement Sufficient 3 5.0 15
Achievement in sales
projection
92.3% 4 6.0 24
Achievement in profit
projection
152% 5 5.0 25
Achievement in net working
capital projection
99% 2 4.0 8
Debtor’s velocity 0.7 month 4 4.0 16
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Total 134.0
(Determined as per CRR model given by RBI)
o Total weighted score – 134.0
o Maximum weighted score – 175.0
o Weighted score percentage – 76.57%
o Risk rating – MBR1 (AAA)
Assessment of overall rating
Total weighted
score
Maximum
weighted score
Weighted score
percentage
Rating
Financial risk 16.5 40.00 41.25% MBR5
BB
Account operating risk
183.00 210.0 87.14% MBR1
AAAManagement
and business risk
134.00 175.0 76.47% MBR1
AAATotal 333.5 425.0 78.47% MBR1
AAA(Determined as per CRR model given by RBI)
OVERALL RATING – MBR1 (AAA)
Based on details embodied in the note following facilities are recommended:
Nature of Facility: Cash Credit
Amount: Rs. 10 lacs
Margin: 25%
Rate of interest: as per CRR Rating, BPLR + 1% i.e. 13.25% (at present BPLR is 12.25%)
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Chapter 8.1Case study-Raj Pharma
Security: hypothecation of stocks and receivables
Other Conditions: The facilities to be secured collaterally by following:
(i) Equitable mortgage of Shop no. 20, mayor tower, Nehru bazaar, Jaipur owned by Naresh Jain, valued at 14.28 lacs as a security for c/c limit.
(ii) The facility is further secured by personal guarantee of SMT. REKHA DEVI JAIN.(iii) Non submission of stock statements every month will attract penal interest @1% over
& above regular rate of interest chargeable to the facility.(iv) Any overdrawing in c/c account will attract penal interest @ 2% over & above
regular rate of interest chargeable to the facility.
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Chapter 8.2Case study-Impackt Packaging
IMPACKT PACKAGING
Brief Summary of the Firm:
Impackt Packaging is in the field of paper and packaging since last 35 years and have experience in packaging of 30 years. Group is dealing with BOM since 30 years at BOM’s Nasik Branch. Group was catering needs of packaging of North India from Nasik. In view of good demand of the product in the northern states, they have decided to install one unit at Reengus (Sikar), and have required land from RIICO admeasuring 1000square meter at G-102 Industrial area, SKS Reengus. On perusal of Balance Sheet of the firm from last 3years, it is revealed that the sales of the firm have increased from 201.36 lacs (2005-06) to 333.63 lacs (2007-08) & profit has also shown increase from 3.61 lacs (2005-06) to 7.37 lacs (2007-08).
Since the group is new in Rajasthan, they are not comfortable in providing any collateral security in the form of house/landed property. In view of their satisfactory dealings with the bank for past so many years, the proposal is being considered under CGTSME scheme.
INDUSTRY SCENARIO:
However it is the first unit of its kind, but looking to the balance sheet of the unit for past 3 years at Nasik. The product has shown good demand and Jaipur, being the center of export , is likely to provide good business to unit.
BORROWER’S INFORMATION:
Name of the Applicant Borrower: Mr. Pramod Jagdish Kabra
Address of the Regional Office: GI-102, SKS RIICO Industrial Area, Reengus, (Distt- Sikar) (RAJ.)
Status of the Dealer: Proprietorship
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Nature of the Business: Manufacturing of the Corrugated Boxes
Banking with BOM since: 2008
Category: Priority/ SSI
Type of Loan: Cash Credit and Term Loan
Chapter 8.2Case study-Impackt Packaging
VISIT REPORT:
It’s a manufacturing SSI unit of carborated angel packaging material mainly used in packaging of large electronic industries. We have also visited the following:
1. One paper cultivating machine.2. Gum pest machine of various size.3. 16 Middle Machine of various sizes.4. Eze Machine5. One cutter Machine.
At the site of the factory G1/150, there was raw material of paper is approximate Rs. 60lacs and finished goods were of almost Rs. 40lacs at hand.
Their various products are as follows:
1. Angle Board.2. Flat Board.3. Edge Board.4. O.D. Protector5. U Profile
These products are very useful to protect the edges and corners of precious products from heavy pressure due to mishandling during transportation.
Manpower available with the Firm:
1. Managers - 022. Supervisors - 04
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3. Skilled Workers - 084. Unskilled Workers- 105. Marketing - 05
Chapter 8.2Case study-Impackt Packaging
NOTE ON PROPOSAL: NEW/REVIEW/RENEWAL WITH ENHANCEMENT REVIEW/RENEWAL WITHOUT ENHANCEMENT
Request: For the sanction of the under noted facilities:
FACILITIES EXISTING PROPOSEDC) Fund Based 33.25 33.25D) Non Fund Based Nil Nil
Total 33.25 33.25
Details of Existing Facilities ( funded and non funded )
Sr. no.
Facility Amount (in lacs)
Sanctioned by
Date of sanction
Particular of M.V. of securities (in lacs)
Drawing power (in lacs)
Balance Outstanding (in lacs)
1. Term Loan
23.25 BOM Jan,2009 Equitable mortgage of land
2. Cash Credit
10.00 BOM Jan,2009 Hypothecation of stock and book debts
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Firm is provided with term loan of 23.25lacs for the purchase and installation of machinery and construction of building and c/c worth 10lacs to support the manufacturing process of corrugated boxes.
Details of Primary Security:
Description Nature of charge Total Value (in lacs)Land and Building Equitable mortgage 5+12Plant and Machinery Hypothecation 17Stock and Book Debts Hypothecation 25.45
Name of Proprietor/ Directors and their worth
Sr. no. Names Net Worth (in lacs)1. Pramod jagdish kabra 38.01
Chapter 8.2Case study-Impackt Packaging
Details of Facilities sanctioned to Allied/ Associates/Group concern from our Branch/Bank
Name of Account
Nature of facility
Amount (in lacs)
Outstanding(in lacs)
Status of account
Remarks/ comments
Shree Traders Term Loan and c/c
50
Details of collaterals: N.A.
Insurance Details: have personal insurance policies worth Rs.27,02,000
Whether all terms and conditions of sanction in force are fulfilled? If not, what are the reasons: YES
Whether existing set of documents are in order & in force? YES
Amount of loan: 23.25 lacs
Purpose: for construction of building, installation of machinery & manufacturing of corrugated boxes.
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Turnover of the Account:
2009 2010 2011Credit turnover 4.72 2.032 1.96Max. Debit BalanceMax. Credit Balance
Chapter 8.2Case study-Impackt Packaging
Abridged Balance Sheet:
Particulars 2009 2010 2011Capital Employed
N.W. Capital 2.47 11.80 68.36Profit -4.62 1.72 49.07Term Loans 20.15 17.44 14.14
Term Liability
Dep/Borrowing repayable after one yearLong Term u/s Loans 0.50
Other Term Liab.
Current Liabilities Bank C/C 4.84 6.48 10.00Creditors 25.74 53.69 42.62Provisions 0.46 2.18 0.46Term Liabilities payable within 1 year
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Other CLTotal CL 31.04 62.34 53.08
Total LiabilitiesFixed Assets 37.30 33.80 27.90Current Assets
Cash/Bank 2.25 2.73 28.80Debtors/Receivers 4.63 40.27 50.30Other CAStocks 9.45 15.27 25.15Total CA 16.33 58.27 104.25
Non Current Assets
Investments 3.00Other NCAPreliminary Expenses
Intangible Assets
Preliminary ExpensesLossesOthers
TOTAL ASSETS 53.63 92.07 135.15Achievement vis-à-vis Projection:
(Source: submitted by the firm)
Chapter 8.2Case study-Impackt Packaging
Key Financial indicators:
2009 2010 2011Net sales (% Increase/ Decrease)
4.95 139.91 (2714%) 153.00 (9.34%
Net Profit after tax (% of NP to Net Sales)
-4.62 (13.33%) 1.72 (1.23%) 49.07 (32.07%)
Cash 1.42 1.75 28.00NWC(Long term source/ Long term uses)
-14.11 -4.07 51.17
Tangible NW (NW/Intangible assets)
2.47 11.80 68.36
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Debt Equity Ratio 20.72 6.62 0.98
Current Ratio 0.53 0.93 1.94( Calculated as per BOM’s standard format)
OBSERVATIONS ON KEY FINANCIAL INDICATORS:
1.) In 2009-10 the sales of unit have grown up by 2714% because the firm started its production in JAN 2009. However, sales growth in 2010-11 is 9.34% which is reasonable, and thus accepted.
2.) In 2009 the firm has incurred loss because the firm was planning to start operating in OCTOBER 2008 but because of non availability of power connection, it could start its production in JAN 2009 (a delay of 4 months). But in 2009-10 and 2010-11 there is increase in profit both in absolute and in percentage terms.
3.) In 2008-09, working capital is negative because of delay in production process and functioning. While in 2010-11 it has proposed to increase up to 51lacs because cash and bank balance of 28lacs which is according to us, not justified.
4.) Net Worth is increasing due to ploughing back of profits.5.) TL/TNW ratio is decreasing as the profit, hence NET WORTH is increasing.6.) Current Ratio is increasing due to increase in debtors.
Chapter 8.2Case study-Impackt Packaging
Computation of Working Capital Requirement as per Nayak/ vaz Committee recommendations:
Rs. ( In lacs )a Projected accepted turnover 153.00b W/C requirement i.e. 25% of “a” 38.25c Minimum margin required { 5% of sales ( item “a”)} 7.65d Actual Margin Available 51.61e Item “b” minus item “c” 30.6f Item “b” minus item “d” -13.36
75
g Maximum PBF (item “e” of “f” whichever is less) -13.36 Drawings in the account should be allowed as per the Drawing Power based on Stocks
Debtors Creditors statements.
Working of MPBF:
Particulars Year Audited2009
Year Estimated2010
Year Projected2011
J) Total Current Assets 16.33 58.27 104.25K) Other Current
Liabilities(excluding short term bank borrowings)
25.74 53.69 42.62
L) WC gap (a-b) -9.41 4.58 61.63M) Minimum stipulated
NWC [25% of (c)] -2.35 1.14 15.41
N) Actual Projected NWC -14.17 -4.07 51.17O) Item (c)-(d) -7.06 3.44 46.22P) Item (c)-(e) 4.76 8.65 10.46Q) MPBF 3.44 10.46R) Excess borrowing, if
anyComments: (access borrowing if any and acceptability of MPBF)
Chapter 8.2Case study-Impackt Packaging
TERM LOAN:
Purpose: Construction of building & installation of machinery.
Cost of Project & Means of Finance: 23.25 lacs
Profitability Estimates:
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DSCR: 1.7
CREDIT RISK RATING SUMMARY:
Parameters Component Weighted Score
Max. Weighted Score
Weighted Score %age
Rating
Financial Risk 133 170 78.24 AAAAccount Operating Risk
N.A. N.A. N.A. N.A.
Management Risk
N.A. N.A. N.A. N.A.
Industry Risk 52 100 52 BBBusiness Risk 75 95 78.95 AAATotal 260 365 71.23 AAProject Risk (if applicable)
Nil NIL NIL N.A.
Grand Total 260 365 71.23 AA(Determined as per CRR model given by RBI)
OVERALL RATING: AA – LOW RISK
BPLR- 12.25% at present
Chapter 8.2Case study-Impackt Packaging
OBSERVATIONS ON BALANCE SHEET:
1.) Firm is increasing its capital by ploughing back of profit in the business.
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2.) The firm could not start its production process on time due to failure in power connection. That’s why firm had to bear losses in its very first year but after that,it recovered speedly.
3.) Creditor’s Payment Period:
AMOUNT (in lacs)
Particulars 2009 2010 2011
Purchases 12.15 109.14 83.52Creditors 25.74 53.69 42.62Creditors payment period
25mnths 5.90mnths 6.12mnths
(calculated from firm’s balance sheet)
Creditors payment period has been decreasing during 2009-10. There is a bit fluctuation in 2011 because the projected figures are old and not compared with 2010 figures reasonably.
4.) A big question mark is there on the firm’s projected cash and bank balances of about 29lacs. A proper justification should be sought from the firm for this.
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Chapter 8.2Case study-Impackt Packaging
5.) Debtor’s Payment Period:
AMOUNT (in lacs)Particulars 2009 2010 2011Sales 4.95 139.91 153Debtors 4.63 40.27 50.3Debtor’s collection period
11.22mnths 3.45mnths 3.94mnths
(calculated from firm’s balance sheet)
values0
2
4
6
8
10
1211.22
3.45
2
2009 2010 2011
Debtor’s collection period has decreased and is supposed to remain almost same, as per the projected figures.
79
Chapter 8.2Case study-Impackt Packaging
6.) Stock Holding Period:
AMOUNT (in lacs)Particulars 2009 2010 2011Purchase 12.15 109.14 83.52Stock 9.45 15.27 25.15Stock Holding Period 9.375mnths 1.68mnths 3.61mnths
(calculated from firm’s balance sheet)
Category 10
1
2
3
4
5
6
7
8
9
10
200920102011
Stock turnover has increased during 2009-10 but due to bit older projected figures of 2011, there are some fluctuations, which should be cross checked with new estimations.
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Chapter 8.2Case study-Impackt Packaging
SWOT ANALYSIS:
Favorable Points:
1.) Impackt Packaging is in the field of paper and packaging since last 35years.2.) Firm is dealing with the Bank of Maharashtra since last 30years at Nasik Branch.3.) Nasik unit of the group has earned profit of 7.37lacs in 2007-08 and sales of
333.63lacs in 2007-08.4.) There is a good demand of its product and Jaipur is a major center of export.
Unfavorable Points:
1.) Firm is more dependent on outsiders liability and hence NWC is negative.2.) Projected cash figures of cash in hand is very high which shows improper utilization
of funds and low return on assets.3.) Firm is new in Rajasthan, hence risk is more.
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Chapter 9Findings and Conclusion
Findings of the project:
For Impackt packaging-
As we can see that projected cash-in-hand in 2011 is 28.00 lakhs which is very big amount. And it shows that management is not utilizing the funds properly. The CC limit from BoM is 10.00lakh but firm already has 28.00 lakhs in hand so CC cannot be renewed to the firm.
For Raj Pharma-All financial indicators are favorable for the firm. Also the projected figures are in line with the present data. Firm has sufficient NWC limit available with it (i.e. 5% of turnover), so CC limit is renewed for the firm.
Recommendations:
Bank checks only financial, technical and commercial feasibility of the project and it
does not consider sensitivity analysis and social cost benefit analysis of the project so
bank should consider this because these are also important from the point of view of
risk and economy growth.
Bank should be cautious about the availability of security and ensure honesty of the
guarantor also so as to avoid the account becoming the loss account.
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Bank should reduce the paper work as managers waste a lot of time in writing the
details manually. There must be software to calculate all the financial indicators so
as to free managers for analysis of the project.
Limitations in the study
In bank our guide was too busy to devote us much time in explaining the things so we
rely much on company manuals and files.
Time was a limitation.
Some of the information is confidential in nature that could not divulge for study.
Chapter 8.2Case study-Impackt Packaging
Conclusion
The project undertaken has helped a lot in understanding the concept of project financing in
nationalized bank with reference to Bank of Maharashtra. The project financing is an important
aspect which helps in increasing the profit of the banks.
Project financing is a vast subject and it is very difficult to apply all the aspect in all type of
project when bank want to finance, and it is very difficult to cover all aspect in this project.
To sum up it would not be out of way to mention here that the Bank of Maharashtra has given a
special impetus on “Project Financing” .the concerted efforts of the management and staff of
Bank of Maharashtra has helped the bank in achieving remarkable progress in almost all
important aspects.
Finally the success of project financing would mostly depend on the proper analysis of the
projects before financing.
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Bibliography
Internet
o www.bankofmaharashtra.com
o www.mapsofindia.com
o www.scribd.com
o www.wikepedia.com
o www.indiainbusiness.nic.in
o www.wisegeek.com
Books
o Financial management by Khan and Jain
o Management accounting by S. N. Maheshwari
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