1

ANALYSIS OF CREDIT ADMINISTRATION PROCESS AND APPRAISAL OF TERM LOAN AND WORKING

CAPITAL FINANCING PROPOSALS

By

Keshika Wadhwa

Enrollment No. 11BSP1431

PUNJAB NATIONAL BANK, Head Office

2

A REPORT

ON

ANALYSIS OF CREDIT ADMINISTRATION PROCESS AND APPRAISAL OF TERM LOAN AND WORKING

CAPITAL FINANCING PROPOSALS

By

Keshika Wadhwa Enrollment No. 11BSP1431

PUNJAB NATIONAL BANK, Head Office

A report submitted in partial fulfillment of

the requirements of PGPM program of

IBS Gurgaon

Submitted to:

1. Prof. Monica Chopra 2. Mr. Anil sharma, Asst. General Manager, PNB, Head Office.

Date of submission: 11th June 2012

3

CERTIFICATE OF APPROVAL The following Summer Project Report titled "Analysis of Credit Administration Process and Appraisal of Term Loan and Working Capital Financing Proposals " is hereby approved as a certified study in management carried out and presented in a manner satisfactory to warrant its acceptance as a prerequisite for the award of Post-Graduate Diploma in Management for which it has been submitted. It is understood that by this approval the undersigned do not necessarily endorse or approve any statement made, opinion expressed or conclusion drawn therein but approve the Summer Project Report only for the purpose it is submitted. Summer Project Report Examination Committee for evaluation of Summer Project Report Name Signature 1. Faculty Examiner ___________________ ___________________ 2. PG Summer Project Co-coordinator ________________ ___________________

4

ACKNOWLEDGEMENT

I wish to express my gratitude to PUNJAB NATIONAL BANK for giving me an opportunity to be a part of their esteemed organization and enhance my knowledge by granting permission to do summer training project under their guidance. I am deeply indebted to my company guide, Mr. Anil Sharma (AGM), of Punjab national bank for their valuable and enlightened guidance. They provided me with the opportunity to learn in the bank and spare their valuable time to help me. He provided me with immense opportunity to learn about the working at Credit Administration Department (CAD), HO. A special thanks to my faculty guide, Prof. Monika Chopra who has been the chief facilitator of this project and helped me enhance my knowledge in the field of banking sector. I am also thankful to the employees of PNB for providing great support and help in completion of the training. I am also highly thankful to Library staff of PNB who provided me the study materials and helped me during training. The learning during the project was immense and valuable. My work included the study of various aspects of Credit Administration. Regards, Keshika Wadhwa IBS-Gurgaon

5

Executive Summary  Bank is the main confluence that maintains and controls the “flow of money” to make the commerce

of lending possible. Government uses it to control the flow of money by managing the CRR and

thereby influencing the inflation level. The functions of the banks include accepting deposits from the

public and other institutions and then to direct the deposits as loans and advances to parties for growth

and development.

Today, corporate bodies require capital for two main purposes:

To finance their new projects

To meet their working capital requirements

However, bank uses their deposits to provide credit facilities to various companies. It should be noted

that there is always a limit on the amount of exposure, depending on the policies of the banks.

This project explains various credit facilities and policies followed by one of the most reputed bank in

the country, Punjab National Bank. Each bank has its own set of policies that must be followed

while sanctioning a loan and care must be taken that the money provided by the bank is being used up

for the intended purpose only. The task ranging from acceptance of loan proposal to sanctioning of

loan is carried out at Credit Administration Division of the bank. Moreover, each loan proposals fall

under powers of different levels depending on the size of the proposal.

Working here at PNB, I have learnt a lot of new things and have come across the practical

implementations of various financial topics read during the course.

The study is undertaken to understand the process of Term Loans sanctioning and project appraisal

carried out at PNB. With a developing economy and many multinational companies coming up, new

projects are being undertaken. These projects require huge amount of capital and thus banks come

forward to finance these projects depending on the feasibility of the project. PNB carries out an

extensive of the project and checks for it feasibility and if the project seems to be feasible, a decision

is taken. This process of carrying out the feasibility test of the project based on the financial position

of the company is called Project Appraisal.

The project also covers the most important aspect of a company, Working Capital. Gross Working

capital refers to the fund required for financing total current assets of a business unit. Net Working

Capital, on the other hand, is the difference between the total current assets and current liabilities.

This working capital is desired by the company for day to day operations and thus the company

6

approaches a bank for the financing of this requirement. PNB caters to most of the well known

companies of India and is the leading lender in the country.

Along with this, the project includes an Overview of the PMS Section at HO. Preventive Monitoring

System (PMS) is a post sanction credit-monitoring tool consisting of a number of signals/parameters

for evaluating the health of a borrower account on a continuous basis. It assigns numerical score to

each signal and denotes the health of an account based on indicators of past one year in a single

numerical value called PMS Index Score.

Further, the project also covers the Credit Risk Rating carried out at Risk Management Department

(RMD) of the bank. Rating is done in order to find out the capability or the willingness of the

company to pay its debt. PNB uses its own model to rate a company and this model is one of its kind

in the country. Depending on the type of project, a suitable model is chosen and based on financials of

the company and the track record of the management, rating is done. This rating also helps in

determining the rate of interest at which the loan should be given. Generally, a company with good

ratings is gives loan at a lower ROI since the risk involved is lower.

Working at PNB has proved to be fruitful for me and I wish learn a lot more things in the next phase of training.

7

List of Tables

Table No. Description

1 PNB Annual Results 2012

2. PNB Rating Chart

3 PNB Risk Rating Models

4 Sector Exposure Norms

5 Gist Of the Proposal For Term Loan

6 Company's Profile

7 Facilities Recommended For Loan

8 Exposure to the group and company

9 Financial Statement Analysis Of The Company

10 Key Financials Of The Company

11 Primary Security For The Loan

12 Security Description

13 Collateral For The Loan

14 Position Of The Account

15 Cost Of The Project

16 Means Of Finance

17 Important Ratios

18 Sensitivity Analysis Of Ratios

19 Future Projections And Calculations

20 CMA Sheet Form 2: Operating Statement

21 CMA Sheet Form 3: Analysis Of Balance Sheet

22 CMA Sheet Form 4: Current Assets And Liabilities

23 CMA Sheet Form 5: MPBF

8

Contents CERTIFICATE OF APPROVAL .................................................................................................................... 3 

ACKNOWLEDGEMENT ............................................................................................................................. 4 

Executive Summary ................................................................................................................................. 5 

List of abbreviations .............................................................................................................................. 11 

1.  About Punjab National Bank ......................................................................................................... 12 

2.  Credit Division (CD) ....................................................................................................................... 15 

3.  Risk Management Department (RMD) ......................................................................................... 16 

4.  About Project ................................................................................................................................ 17 

4.1.  Objectives of the Project ....................................................................................................... 17 

4.2.  Scope of the Study ................................................................................................................ 17 

4.3.  Methodology ......................................................................................................................... 18 

5.  Credit Facilities .............................................................................................................................. 18 

5.1.  Fund Based Facilities ............................................................................................................. 19 

5.2.  Non‐fund Based Credit .......................................................................................................... 20 

6.  Term Loans and Working Capital Loans ........................................................................................ 21 

6.1.  Term Loans ............................................................................................................................ 21 

6.2.  Working Capital Loans .......................................................................................................... 21 

7.  Term Loan Appraisal ..................................................................................................................... 22 

7.1.  Financial Evaluation .............................................................................................................. 23 

7.1.1.  Reclassification and Rearrangement of Balance Sheet items ....................................... 23 

7.1.2.  Cost of Project & Means of Financing ........................................................................... 25 

7.1.3.  Projections of Sales, Profits, Cash Flows and Balance Sheet ........................................ 26 

7.1.4.  Calculating key Financial Ratios .................................................................................... 26 

7.1.5.  Sensitivity Analysis ........................................................................................................ 27 

7.2.  Techno‐Economic Viability (TEV) .......................................................................................... 28 

7.2.1.  Technical Appraisal ....................................................................................................... 28 

7.2.2.  Economic Viability ......................................................................................................... 28 

7.2.3.  Financial Viability .......................................................................................................... 29 

7.3.  Risk Analysis .......................................................................................................................... 29 

7.4.  Management Evaluation ....................................................................................................... 30 

8.  Working Capital Financing Appraisal ............................................................................................ 32 

8.1.  Methods Of Lending.............................................................................................................. 32 

8.2.  Working Capital Financing Guidelines .................................................................................. 33 

9

8.2.1.  Tandon Committee Recommendations ........................................................................ 33 

8.2.2.  Chore Committee Recommendations .......................................................................... 34 

8.2.3.  Nayak Committee Recommendations .......................................................................... 34 

8.3.  Data required for assessment of working capital requirement ............................................ 34 

8.4.  Other Details ......................................................................................................................... 35 

9.  Security ......................................................................................................................................... 35 

10.  Pricing ........................................................................................................................................ 35 

11.  Post‐Sanction Processes ........................................................................................................... 36 

11.1.  Ensuring end‐use of funds ................................................................................................ 36 

11.2.  Preventive Monitoring System (PMS) ............................................................................... 36 

11.3.  Stock Audit ........................................................................................................................ 37 

11.4.  Monitoring of Weak and Irregular Accounts .................................................................... 37 

12.  CASE I : Term Loan Financing ( ABC Limited) ............................................................................ 37 

12.1.  Introduction ...................................................................................................................... 37 

12.2.  The loan proposal ............................................................................................................. 37 

12.3.  Management Evaluation ................................................................................................... 39 

12.4.  Present proposal ............................................................................................................... 39 

Existing .................................................................................................................................................. 40 

12.5.  Compliance to Exposure Norms ........................................................................................ 40 

12.7.  Financial Evaluation .......................................................................................................... 40 

Key Financials upto last quarter ............................................................................................................ 43 

12.8.  SECURITY ........................................................................................................................... 43 

12.8.1.  Primary .......................................................................................................................... 43 

12.8.2.  Collateral    : ...................................................................................................................... 44 

12.9.  Position of Account as on 22.03.2012 (Rs. In crs) .......................................................... 44 

Limit ...................................................................................................................................................... 44 

Last year 2010‐11 .................................................................................................................................. 44 

12.10.  COST OF THE PROJECT ...................................................................................................... 45 

12.11.  Strengths & Weakness ...................................................................................................... 46 

12.12.  Ratio Analysis .................................................................................................................... 47 

12.13.  Sensitivity Analysis: ........................................................................................................... 48 

12.14.  FUTURE PROJECTIONS AND CALCULATION ...................................................................... 49 

1.  CASE II: Working Capital Financing (ABC Traders Ltd.) ................................................................. 50 

1.1.  CMA Data Analysis for Working Capital Financing ................................................................ 61 

10

1.2.  Working Capital Loan Proposal ............................................................................................. 69 

Existing .................................................................................................................................................. 71 

9.  Position of Account as on 13‐04‐2011 .......................................................................................... 74 

2.  Conclusion and Recommendations .............................................................................................. 76 

2.1.  Conclusions ........................................................................................................................... 76 

2.2.  Recommendations ................................................................................................................ 79 

3.  References .................................................................................................................................... 81 

11

Abbreviations AGM Assistant General Manager BG Bank Guarantee CC Cash Credit CMD Chairman and Managing Director CO Circle Office CRMD Circle Risk Management Department CCA Core Current Assets CAD Credit Administration Department CD Credit Division CARD Credit Audit Review Division CASA Current Account/Savings Account CRMC Credit Risk Management Committee DSCR Debt Service Coverage Ratio DER Debt-Equity Ratio DTL Defered Tax Liability DPG Deferred Payment Gurantee DTA Deferred Tax Liability BD Discount of Bills ED Executive Director FACR Fixed Asset Coverage Ratio FB Fund Based GM General Manager HO Head Office IRMD Integrated Risk Management Division LCB Large Corporate Branch LC Letter of Credit LOC Letter of Credit MC Management Committee MPBF Maximum permissible Bank Finance MCB Mid Corporate Branch NWC Net Working Capital NFB Non Fund Based PMS Preventive Monitoring System PF Provident Fund PNB Punjab National Bank RBI Reserve Bank of India RMC Risk Management Committee RMD Risk Management Division TEV Techno-Economic Valuation TL Term Loan WC Working Capital ZO Zonal Office

12

1. About Punjab National Bank  

Punjab National Bank (PNB) was established in 1894 and is the second largest government owned

and over all fourth largest bank in India. It has about 5100 branches across 764 cities and serves over

63 million customers. It has presence throughout the length and breadth of the country and offers a

wide variety of banking services that include corporate and personal banking, industrial finance,

agricultural finance, financing of trade and international banking. Among the clients of the bank are

multinational companies, Indian conglomerates, medium and small industrial units, exporters and

non-resident Indians. The large presence and vast resource base have helped the bank to build strong

links with trade and industry. The strength of the bank lies in its corporate belief of growth and

stability.

Vision of Punjab National Bank

To evolve and position the bank as a world class progressive, cost effective and customer friendly

institution providing comprehensive financial and related services, integrating frontiers of technology

and serving various segments of society especially the weaker sections, committed to excellence in

serving the public and also excelling in corporate values.

Mission of Punjab National Bank

To provide excellent professional services and improve its position as a leader in the field of financial

and related services, build and maintain a team of motivated and committed workforce with high

work ethos, use latest technology aimed at customer satisfaction and act as effective catalyst for

socio-economic development.

Financial Performance (2011-2012)

PNB continued its strong performance for the year 2011-12.Total business of the bank

crossed Rs.6.73 lakh crore. Net Profit increased by 10.2 % in the Year 2012. Total income

during FY 2012 increased to Rs. 40631 crore, recording a growth of 32.8% on account of

35.0% growth in Interest Income. Market share of the Bank in both deposits and Advances

improved from 5.28% and 5.43% respectively in March’11 to 5.60% (Deposits) and 5.55%

(Advances) in March 2012. PNB continues to be among leading banks amongst nationalized banks

in net profit, operating margins, total business, deposits, advances, CASA deposits and customer base.

Summary of the financials for this year is as below:

PARAMETERS Mar’11 (in Crore Rs.) Mar’12(in Crore Rs.)

Operating Profit 18130.28 25848.03

13

Net Profit 4433 4884

Deposit 312899 379588

Total Business 555005 673000

Source: Annual Results 2012

Table1: Financial Summary of PNB for Year 2011-12

Global Footprint

Backed by strong domestic performance, the Bank is planning to realize its global aspirations. Bank

continues its selective foray in international markets with presence in 9 countries, with 2 branches at

Hongkong, 1 each at Kabul and Dubai; representative offices at Almaty, Dubai, Shanghai and Oslo; a

wholly owned subsidiary in UK; a joint venture with Everest Bank Ltd. Nepal and a JV banking

subsidiary “DRUK PNB Bank Ltd.” in Bhutan. Bank is pursuing upgradation of its representative

offices in China & Norway and is in the process of setting up a representative office in Sydney,

Australia and taking controlling stake in JSC Dana Bank in Kazakhastan.

Punjab National Bank also maintains strong correspondent banking relationship with 200 leading

international banks all over the world. It enhances its capacities to handle transaction world-wide.

Besides, bank has Rupee Drawing arrangement, with exchange companies in the Gulf. Bank is a

member of the SWIFT and 85 branches of the bank are connected through its computer-based

terminal at Bombay. With its state-of-art dealing rooms and well-trained dealers, the bank offers

efficient FOREX dealing operations in India. The bank has been focusing on expanding its operations

outside India and has identified some of the emerging economies which offer large economies which

offer large business potential. Bank has set up a representative office at Almaty, Kazakhstan w.e.f.

23rd October 1998.

New Initiatives • Initiatives are being taken to install Cash Deposit Machines in the branches which can provide a self

service terminal where customers can deposit cash which will be directly credited to their account on

real time basis.

• Also, Self Service Pass Book Printer terminals are being installed in the branches and e-lobbies,

which would help the customers to get the passbook updated at their convenience. Thus, improving

day to day operational efficiency of the bank.

14

Organizational Structure

Fig1: Organization Structure at PNB

Product and Services

Saving Accounts: Total Freedom Salary Account, PNB Prudent Sweep, PNB Vidyarthi SF Account

Current Accounts: PNB Vaibhav, PNB Gaurav, PNB Smart Roamer

Fixed Deposit Schemes: Spectrum Fixed Deposit Scheme, Anupam Account, Mahabachat Schemes,

Multi Benefit Deposit

Scheme Credit Schemes- Housing Laons, Car finanace, Personal Loan, Credit Cards

Social Banking: Mahila Udyam Nidhi Scheme, Krishi Card, PNB Farmers Welfare Trust

Corporate Banking: Term Loan and Working Capital Financing, fund Based and Non-fund based

financing, Gold card scheme for exporters, EXIM Finance

Business Sectors: PNB Karigar Credit Card, PNB Kushal Udhai, PNB PRagati Udhami, , NB Vikas

Udhami, Cash Management Services

Other Services and Businesses: Locker Facilites, Senior Citizens Scheme, PPF Schemes and

Internet Banking , Mutual Fund Business, Gold Coin Business, Depository Services, Online Trading

Facility, Insurance Business, Merchant Banking etc.

15

2. Credit Division (CD) 

Commercial lending organization structure in PNB consists of Branches, Mid Corporate Branches

(MCBs), Large Corporate Branches (LCBs) and Head Office (CD). Credit Division (CD) looks after

the loan proposals which fall into the purview of GMs-HO/ED/CMD/MC/Board. Medium corporate

branches are headed by AGMs and LCB as DGM. Authority to handle loan proposals is distributed as

detailed below:

1) Loan proposals less than 35 Cr are dealt by MCBs and LCBs at their level and all other

proposals are referred to Circle Office which are finally handled at Head Office.

2) MCBs handle proposals between Rs.5 crore and Rs.25 crore at places where LCBs are also

located and loan proposals of Rs.5 crore and above at places where LCBs are not located.

LCBs will handle loan proposals above Rs. 25 crore.

3) CD at Head Office prepares finals proposals which are then placed before ED, CMD or MC as

per the quantum of proposals.

4) ED has authority to approve loan proposals less than 75 Cr. CMD approves proposals between

75 Cr and 100 Cr. Any proposal greater than need the approval of Management Committee.

The bank has introduced “Grid/Committee” system in credit sanction process wherein every loan

proposal falling within the vested powers of DGM and above is discussed in a credit committee which

on the merit of the case recommends the proposal to the sanctioning authority. Such committee have

been formed both at HO and ZO level, The credit committee at HO includes GM Credit and

CGM/GM-RMD. For credit proposals falling within the vested power of CGM/GM, the credit

committee at HO includes DGM/AGM/Chief Manager-CD and DGM/AGM/Chief Manager RMD.

The credit administration division is to be assisted by Risk Management Division (RMD) and

Industry desk for risk vetting and techno-economic feasibility of credit proposal.

16

3. Risk Management Department (RMD)  “Credit risk” is the possibility of loss associated with changes in the credit quality of the borrowers or

counter parties. In a bank’s portfolio, losses stem from outright default due to inability or

unwillingness of a borrower or counter party to honor commitments in relation to lending, settlement

and other financial transactions.

PNB has an elaborate risk management structure in place. Credit Risk management structure at PNB

involves

‐ Integrated Risk Management Division (IRMD)

RMD frames policies related to credit risk and develops systems and models for identifying,

measuring and managing credit risks. It also monitors and manages industry risks.

‐ Circle Risk Management Departments (CRMDs)

Risk Management Departments at circle level are known as CRMD.

Their responsibilities include monitoring and initiating steps to improve the quality of the

credit portfolio of the Circle, tracking down the health of the borrowal accounts through

regular risk rating, besides assisting the respective Credit Committee in addressing the issues

on risk.

‐ Risk Management Committee (RMC)

It is a sub-committee of Board with responsibility of formulating policies/procedures and

managing all the risks.

‐ Credit Risk Management Committee (CRMC)

It is a top level functional committee headed by CMD and comprises of EDs, CGMs/GMs of

Risk Management, Credit, Treasury etc. as per the directives of RBI.

‐ Credit Audit Review Division (CARD )

It independently conducts Loan Reviews/Audits.

The risk management philosophy & policy of the bank focuses reducing exposure to high risk areas,

emphasizing more on the promising industries, optimizing the return by striking a balance between

the risk and the return on assets and striving towards improving market share to maximize

shareholders’ value.

The credit risk rating tool has been developed with a view to provide a standard system for assigning

a credit risk rating to the borrowers of the bank according to their risk profile. This rating tool is

applicable to all large corporate borrower accounts availing total limits (fund based and non-fund

based) of more than Rs. 12 crore or having total sales/ income of more than Rs. 100 crore. The Bank

has robust credit risk framework and has already placed credit risk rating models on central server

based system ‘PNB TRAC’, which provides a scientific method for assessing credit risk rating of a

client. Taking a step further during the year, the Bank has developed and placed on central server

score based rating models in respect of retail banking. These processes have helped the Bank to

17

achieve fast & accurate delivery of credit; bring uniformity in the system and facilitate storage of data

& analysis thereof. The analysis also involves analyzing the projections for the future years.

4. About Project 

4.1. Objectives of the Project 1. To gain insights into the Credit Administration processes of the banks.

2. To understand the different types of credit facilities and credit delivery mechanisms provided

to industrial costumers viz. Overdraft, Cash Credit, Drawing Rights, Fund Based Credit, Non

Fund Based Credit etc.

3. To understand the methods available for risk vetting of lending proposals, risk assessment

models and the credit rating procedures used in Punjab National Bank.

4. To understand the appraisal process of Term Loan and Working Capital Financing proposals

5. To understand the factors affecting rate of interest levied viz. risk assessment, bank

guidelines, sectoral policies, business considerations etc.

6. To understand various norms like credit exposure limits etc., that influence credit disbursal

for various sectors, companies and business groups.

4.2.  Scope of the Study This report covers:

1) Credit Administration at PNB

2) Various types of Bank Finance

Term Loans Financing

3) Corporate Loan Financing

4) Working Capital Financing

5) Appraisal Process of Term Loans and Working Capital

6) Post Sanction Processes

7) Case Study describing actual appraisal of a Term Loan proposal, Corporate loan and a

Working Capital Financing Proposal 

18

4.3. Methodology In order to learn and observe the practical applicability and feasibility of various theories and

concepts, the following sources are being used:

Primary Sources of Information

1. Discussions with the project guide and staff members.

2. Discussions with various other department head.

Secondary Sources of Information

1. RBI guidelines regulating the activities of the banks

2. Banks Credit policy and related circulars and guidelines issued by the bank.

3. Research papers, power point presentations and PDF files prepared by the bank and its related

officials.

4. Study of proposals and manuals

5. Website of Punjab national bank and other net sources

5. Credit Facilities Punjab National Bank provides different types of credit facilities according to the banking

norms and convenience of the clients. Different type of facilities provided can be classified as

below:

19

5.1. Fund Based Facilities Fund based facilities are those in that require immediate outlay of funds towards the borrowing party.

Punjab National Bank provides following fund based facilties:

1. Overdrafts

Overdraft accounts are treated as current accounts. Normally overdrafts are allowed against the

Bank’s own deposits, government securities approved shares and/or debentures of companies, life

insurance policies, government supply bills, cash incentive and duty drawbacks, personal security etc.

Overdraft accounts should be kept in the ordinary current account head at branches.

2. Demand Loans

A demand loan account is an advance for a fixed amount and no debits to the account are made

subsequent to the initial advance except for interest, insurance premium and other sundry charges. As

an amount credited to a demand loan account has the effect of permanently reducing the original

advance, any further drawings permitted in the account will not be secured by the demand promissory

note taken to cover the original loan. A fresh loan account must, therefore be opened for every new

advance granted and a new demand promissory note taken as security.

Demand loan would be a loan , which is payable on demand in one shot i.e. bullet repayment.

Normally, demand loans are allowed against the Bank’s own deposits, government securities,

20

approved shares and/or debentures of companies, life insurance policies, pledge of gold/silver

ornaments, mortagage of immovable property.

3. Cash credit Advances

Cash credit account is a drawing account against the credit granted by the bank and is operated in

exactly the same way as a current account on which an overdraft has been sanctioned. The various

types of securities against which cash credits are allowed are pledge/hypothecation of goods or

produce, pledge of documents of title to goods, mortgage of immovable property, book debts. Trust

securities etc. In cash credit accounts the borrower is allowed to draw on account within the

prescribed limit as and when required.

4. Bill Finance

Bill finance are the advances against the inland bills are sanctioned in the form of limits for purchase

of bills (ODD) or discount of bills (BD) or bills sent for collection. Bills are wither payable on

demand or after usage period.

5.2. Non­fund Based Credit 

While fund based credit facilities require immediate outlay of funds from the bank, non-fund based

facilities basically include the promises made by banks in favor of third party to provide monetary

compensation on behalf of their clients if certain situations emerge or certain conditions are fulfilled.

The non-fund based business is one of the main sources of bank income. Income is in the form of fees

and commissions as compared to interest income in case of fund based lending.

Non-fund based credit plays an important role in trade and commerce. The borrowing clients of banks

prefer to avail of the non –fund based facilities mainly because:

a) The facility does not require immediate outlay of funds and therefore the cost of such funds

tend to be lower than the cost of fund based credit facilities.

b) A bank guarantee (BG) or letter of credit (LOC) issued by a bank on behalf of its client is an

off-balance sheet item in the books of clients, hence do not show up as debt or liability.

For the lending banks, cost of providing non-fund based facilities is significantly lower than the cost

of providing fund-based facilities.

Nevertheless, inherent risk associated with NFB credit facility are same as that attached with FB

credit proposals. In case of default, provision of funds becomes necessary. Also, NFB exposure is

facilities are not treated as off-balance sheet exposure and minimum capital adequacy need to be

maintained against the NFB exposures as well.

Assessment of Non Fund based facilities shall be subjected to the same degree of appraisal, scrutiny

as in the case of fund based limits because outstanding in these facilities are to be reckoned at 100%

for exposure purposes. Therefore, need based requirement of a borrower should be assessed after

21

reckoning the lead time, credit period available, source of supply, proximity of supplier, etc. in case of

LCs and industry practices and business requirements in case of LGs. The working of NFB

assessment is to be incorporated in the appraisal note. Further, while assessing non-fund facilities,

cash flow aspects should also be taken into account.

1. Bank Guarantees

BGs may be financial or performance in nature. In a financial guarantee, the issuing banks assumes an

usual credit risk which is the domain of the banks. However, issue of a performance guarantee

involved technical competency and managerial ability of a customer to ensure the performance of the

contract for which guarantee has been drawn. Issuing bank’s responsibility against the BG is absolute.

So proper appraisal needs to be done before issuing BG as it is the responsibility of the issuing bank

to honor its guarantee when invoked.

2. Letter of Credit

A document issued by a bank that guarantees the payment of a customer's draft; substitutes the bank's

credit for the customer's credit. It is an undertaking issued by bank on behalf of the buyer to the seller,

to pay for the goods and services, provided that the seller presents the documents which comply with

the terms and conditions stipulated in the LOC. All letters of credit are irrevocable, i.e., cannot be

amended or canceled without prior agreement of the beneficiary, the issuing bank and the confirming

bank, if any. It is different from BG in the sense that in case of LOC, the issuing bank does not wait

for the buyer to default, and for the seller to invoke the undertaking. While in BG, comes into play

only when the principal party (the buyer) has failed to pay its supplier.

6. Term Loans and Working Capital Loans 

6.1. Term Loans 

Term loans are those loans that are lent for extended period of time majorly for the capital expenditure

by the firm. This is different from the short term loans which are mainly provided for meeting

working capital requirements and maintaining short term liquidity.

Term loans are provided for acquisition of fixed assets are to be repaid from the cash generated from

the operations. Credit delivery for term loans are broadly through two means: Fund based and Non –

fund based. Fund based term loans like cash credit provided outright cash while non-fund based loans

like Deferred Payment Guarantee(DPG) where the liability to make payment crystallizes after the bill

again such guarantees are presented for payments.

Term loans are sanctioned for acquisition of fixed assets like land, building , plant/machinery, office

equipment, furniture-fixture and other capital expenditure like purchase of transport vehicles and

22

other vehicles, agricultural equipment etc. The term loan is a loan which is not a demand loan and is

repayable in terms of i.e. in Instalments irrespective of the period or the security cover.

Term loans are normally granted for the periods varying from three to seven years and under

exceptional circumstances beyond seven years. The term loans with remaining maturity period of

above 5 years shall not exceed 50% of the term deposits with remaining maturity period of above 5

years after taking into account the renewal of term deposits as per the past trend, as is being done for

ALM.

Since term loans are provided for a long tenure ensuring the viability of the project and sufficient

generation of cash over a the long tenor of the loan becomes critical. Detailed process of appraising

Term Loan proposals is given in next section.

6.2. Working Capital Loans 

Working Capital refers to the current asset holdings of the firm.Net working capital is the difference

between Current Assets and Current Liabilities. Working capital requirements depend on various

business specific internal factors like operating efficiency, technology employed and the level of

quality control.

Current Assets may further be classified in to two components:

i) A permanent Core Component

ii) Fluctuating Component

A manufacturing enterprise has to maintain a minimum level of inventory at any point of time below

which production could get impacted. This minimum level of current asset is called Core Current

Asset level. This would be constantly tied up in the business with changes in sales and activity level.

Fluctuating component is the portion above this level that is continuously changing due to changes in

demand, seasonality of product etc.

Businesses finance permanent core component through long-term sources of fund like equity or long

term loans. Fluctuating Component is financed mainly by availing the short term loans and other

credit facilities from the bank. Main focus here is to avoid overfunding or underfunding of the

operations. While over funding will amount to locking up of assets unproductively as idling cash or

inventories, at the same time under funding would seriously hamper the day-to-day operations and

pose a threat to the survival of the businesses. Hence it is critical to correctly determine the maximum

bank finance that should be provided. The process for this is explained in details in section 8.

7. Term Loan Appraisal Prior to the sanctioning of a loan it goes through a well defined appraisal process where it is evaluated

on various parameters . Proper due diligence is followed to mitigate the risk of default and fraud

inherent in the lending process. The process followed is reviewed regularly to account for new

23

guidelines from the RBI and changes in bank’s credit policies. Various components of the appraisal

process are as detailed below:

7.1. Financial Evaluation 

It involves evaluation of financial statements of the borrowers to ascertain the financial health of the

company. Financial statements are rearrangement as described in detail below and rearranged

financial statements are used to ascertain the capital requirements, liquidity, long-term solvency, debt-

repayment capacity etc. of the business involved. Various components of financial evaluation are as

follows:

7.1.1. Reclassification and Rearrangement of Balance Sheet items Financial statements contain the information about the financial health of enterprise. Since different

applicants use different formats and classification of some of the items present in the balance sheet is

subjective, it becomes necessary to re-arrange the balance sheet items to achieve standardization.

Components of the balance sheet. are used in calculating ratios like Debt Equity Ratio (DER), Debt-

Service Coverage Ratio (DSCR), Current Ratio, Fixed Asset Coverage Ratio (FACR), Maximum

Permissible Bank Finance (MPBF) etc. There are guidelines from the RBI and Bank on the

permissible values of these ratios and relaxation permissible, if any. So proper rearrangement of

financial statements becomes critical in credit lending decision making.

Classification of items into various heads depends on the policies of the bank. For PNB Classification

of a particular liability as a current liability or long term liability etc. depends on the internal

guidelines of the Bank.

The reclassifications to be done as per the Bank’s/RBI’s guidelines are detailed below:

Current Liabilities

Current liabilities include the known obligations to be within a year. These are classified as:

1. Short term borrowings including bills purchased and discounted excluding bank finance

2. Unsecured Loans

3. Public deposits maturing within the year

4. Sundry Creditors

5. Interest and Other Charges accrued but not due for payment

6. Advance/Progress Payments from customers

7. Deposits from dealers, selling agents etc.

8. Instalments of deferred payments, debentures, redeemable preference shares, long term

deposits payable within one year

9. Statutory Liabilities like provision for PF dues, Taxes etc.

24

10. Miscellaneous Current Liabilities like proposed dividends, liabilities for expenses, gratuity

payable within one year etc.

Current Assets

1. Cash and Bank balances

2. Investments in Govt./Trust Securities, for short term and fixed deposits with banks.

Investments in shares and debentures etc. should be excluded from current assets.

3. Recoverable arising out of sales.

4. Instalment of deferred receivable due within one year.

5. Raw material and consumable spares including that under transit. But slow moving and

obsolete items should be excluded from current assets and should be grouped as non-current

assets.

6. Stock in process, and finished goods( including goods-in-transit)

7. Advance payment for tax, prepaid expenses, advance for purchase of raw material and

consumables. But security deposit/tender deposit are classified as non-current assets

irrespective of their maturity.

8. Monies receivable from contracted sales of fixed asset during the next 12 months.

Treatment of Export Receivables

a. For calculating MPBF, the amount of export receivables may be excluded from the current

assets as need based limits for export receivables could be sanctioned and in respect of such

receivables borrowers are not required to bring in 25% by way of Net Working Capital.

b. Where an exporter desires, export receivable may be included in the total current assets for

arriving at MPBF, but the minimum stipulated NWC(i.e. 25% of total current assets) may be

reckoned after excluding the quantum of export receivables from the total current assets for

fixing up the post shipment credit limit.

Treatment of Margin Money on account of LC/BG

RBI advises that banks should exclude the margin money from counting the current assets

while assessing the working capital requirements

Treatment of Investment Made in Associate/Allied Companies/Subsidiaries etc.

Investments made in shares, debentures, etc. of a current nature, units of UTI and other

mutual funds and in associate companies/subsidiaries and inter corporate deposits and loans

are to be excluded from the current assets build up for calculating MPBF (Maximum

Permissible Bank Finance).

25

Treatment of Redeemable Preference Shares

Preference shares redeemable within one year should be considered as current liabilities.

However, preference shares redeemable after one year should be considered as term

liabilities.

Treatment of Unsecured Loans

In case of Partnership, Proprietorship, and Private Ltd. Companies, the unsecured loans raised

by friends, relatives, and directors etc. that remain in the business for continuous basis may be

treated as quasi capital to the extent not exceeding 100% of tangible net worth of the party

subject to the condition that these loans shall not be withdrawn during the currency of the

loan and shall be subordinate to bank borrowings. Amount of unsecured loans over and above

the net worth of the party should be treated as term liability for calculating various financial

ratios. For Public Ltd. companies, the unsecured loans should be treated as long term debts.

Treatment of DTL and DTA(Deferred Tax Asset and Liability)

The tax effect of the timing difference originating during a period (Difference between

Accounting Income and Taxable Income) is referred to as Deferred Tax Asset/Liability

depending on whether the Tax rebate relating to the current accounting period would be

available in the subsequent accounting periods has been claimed in advance during the current

accounting period.

DTA is arrived at through increasing the profits/ reducing the loss. The eligible tax rebate

reflected as DTA can be recognized only if it is reasonably certain that the company will earn

adequate profits in the subsequent accounting period(s). Till such time, it is in the nature of an

intangible asset. Therefore, it should be reduced from the Net Worth to arrive at the TNW.

Using similar logic, DTL is to be treated as part of the Net Worth. Since DTL/DTA are

accounting treatments only, DTL is to be added to, and DTA is to be subtracted from, the net

profit for arriving at PAT.

7.1.2. Cost of Project & Means of Financing Cost of project and sources of finance are ascertained to ensure the Financial viability of the project

for which funding is sought.The major cost components of the project is given including land and

building including transfer, registration and development charges as also plant and machinery,

equipment for auxiliary services, including transportation, insurance, duty, clearing, loading and

unloading charges etc. The means of financing the project cost may be one or more of the following:

• Equity capital from shareholders

• Preference capital from preference shareholders

• Capital subsidies from government

26

• Debentures/ bonds issued by the company – public issue or private placement

• Public deposits

• Unsecured loans from friends and relatives

• Term loans (including deferred payment guarantees)

• Lease finance

7.1.3. Projections of Sales, Profits, Cash Flows and Balance Sheet Revenues during the tenor of the loan are estimated for the project, base on the Techno-Economic

evaluation and past performance. Revenue projection, in addition to the estimates of sales and other

expenses are used to generate projection of profits and cash accruals during the loan tenor. Similarly,

financing, repayment schedule etc. are used to arrive at balance sheet projections. Generally speaking,

a unit may be considered as financially viable, progressive and efficient if it is able to earn enough

profits not only to service its debts timely but also for future development/growth.

7.1.4.  Calculating key Financial Ratios   Current financials of existing operations, project funding information like sources of funds etc. and

future projections are used for calculating key financial ratios for a period of time. These ratios tell us

a lot about a unit's liquidity position, managements' stake in the business, capacity to service the debts

etc. The financial ratios which are considered important are discussed as under:

Debt-Equity Ratio (DER)

DER =

DER signifies how much the project is leveraged. For a project of private firm, equity capital is

brought in by promoter and hence lower the DER higher are the promoter’s stake in the project. DER

also vary from industry to industry. In capital intensive industries involving large capital investment,

DER is normally higher as compared to the other industries.

Debt Service Coverage Ratio (DSCR)

27

DSCR=

This ratio provides a measure of the ability of an enterprise to service its debts i.e. `interest' and

`principal repayment' besides indicating the margin of safety. The ratio may vary from industry to

industry but has to be viewed with circumspection when it is less than 1.5. This ratio shows the

relationship between cash generating capacity of the unit and its repayment obligation and indicates

whether the cash flow would be adequate to meet the debt obligations and whether there is sufficient

margin for the lending banker.

Tangible Net Worth to Total Outside Liabilities (TNW/TOL)

TNW/TOL=

This ratio gives a view of borrower's capital structure. If the ratio shows a rising trend, it indicates

that the borrower is relying more on his own funds and less on outside funds and vice versa.

Profit-Sales Ratio

PSR =

This ratio gives the margin available after meeting cost of manufacturing. It provides a yardstick to

measure the efficiency of production and margin on sales price i.e. the pricing structure.

7.1.5. Sensitivity Analysis   The sensitivity analysis is carried out by the bank in order to evaluate capacity of the project to absorb

shocks due to adverse movement in prices/ some other adverse developments and sustain financial

viability.

The viability of a project is dependent on various factors which include selling price, cost of raw

materials, cost of finance, availability of critical inputs and dependence on market like buyer/seller

market, other key technical parameters etc.

In the absence of any defined factors and its values for carrying out the sensitivity analysis, it has

been decided that a common 5% sensitivity factor on sale price/cost price of major raw materials

28

should be applied in appraisals of all the projects irrespective of the industry. However, 10%

sensitivity factor may be applied in highly volatile industries by assessing the expected volatility in

sale price/ cost price of major raw materials in future on case to case basis.

7.2. Techno­Economic Viability (TEV) 

Techno Economic Valuation is mandatory for all the term loan proposals. Term loan proposals are for

the funding requirements for new business development and business expansion. Since, loans are to

repaid from the cash flow generated from the new business, it becomes necessary to ascertain the

feasibility of the project and economic viability. Assets created from the capital expenditure done

from the Term loan funds should have enough revenue generation potential so as to ensure the

servicing of the loan. It is also necessary to make sure that finances sought are indeed meant for

expenditure on the project and will not be deviated to capital markets and other activities. TEV

involves market potential studies, stage of business cycle, technology related inputs and cost

components including the reports on equipment/raw material suppliers, comparative study of similar

projects and preparation of financial models for the individual project. Financial evaluation described

in sub-section 7.1. is also a part of the TEV study.

7.2.1. Technical Appraisal Technical appraisal focuses on the feasibility of the project. Various components of the projects are

evaluated for their technical soundness, cost expenditure on them and quality etc. some of the aspects

of the projects that are looked upon are as below:

a) Location and Site

b) Raw material

c) Plant & machinery, plant capacity and manufacturing process

d) Land

e) Building

f) Technology & process

g) Size of the plant

h) Power Supply

i) Water Supply

j) Labour supply

k) Implementation Schedule

7.2.2.  Economic Viability This has bearing on the earning capacity of the project and earnings are dependent on sales.

Therefore, the borrower’s projection of sales should be assessed keeping in view the following

factors:

a) Demand and Supply position of the product and its substitutes;

29

b) Proposed selling price vis-a-vis prices of the competing products;

c) Quality of the product as against the quality of competing products

7.2.3. Financial Viability Financial viability seeks to determine:

a) Whether cost of project and means of finance are realistic;

b) Whether project is capable of profitable operations;

c) Whether project is capable of generating adequate surpluses for servicing the debt and interest

and can take care of future organizational development;

d) Whether estimates of cost of production fully cover all items of expenditure;

e) Whether sources of finance are adequate;

f) Whether there is a reasonable basis for competitive profitable operations.

7.3. Risk Analysis 

PNB has elaborate risk management structure, process and procedures in place. Structure has been

already described in section 7.3. . For the appraisal of the loan proposals, RMD provides the risk

ratings for the client and project based in the patented internal models of the PNB that have been

developed based on statistical analysis of data. These models are placed on central server based

system ‘PNB TRAC’, which provides facility to assess credit risk rating of a client.

This credit risk rating captures risk factors under four areas:

1. Financial evaluation (40%)

2. Business or industry evaluation (30%)

3. Management evaluation (20%)

4. Conduct of account (10%)

Cumulative weighted score is calculated and rating of the project/company is ascertained as per the

chart below:

Rating

category

Description score obtained Grade

AAA Minimum risk Above 80.00 AAA

AA Marginal risk Between 77.50 - 80.00 AA+

Between 72.50 – 77.50 AA

Between 70.00 – 72.50 AA-

A Modest risk Between 67.50 – 70.00 A+

Between 62.50 – 67.50 A

Between 60.00 – 62.50 A-

30

BB Average risk Between 57.50 – 60.00 BB+

Between 52.50 – 57.50 BB

Between 50.00 – 52.50 BB-

B Marginally

acceptable risk

Between 47.50 – 50.00 B+

Between 42.50 – 47.50 B

Between 40.00 – 42.50 B-

C High risk Between 30.00 – 40.00 C

D Caution risk Below 30.00 D

Some of the important risk rating models used in loan appraisals are summarized as below:

S.No. Credit Risk Rating Applicability

Total Limit Sales

1 Large Corporate Above Rs. 15 Cr. Above Rs 100Cr.

2 Mid Corporate Between 5 Cr.and 15 Cr. Between Rs 25 Cr

and 100 Cr

3 New Project Rating

Models

Above Rs. 5 Cr. Cost of Project

above 15 Cr

4 Entrepreneur New

Business Model

New Business et requiring finance b/w

20 Lakh and 5 cr

Cost of Project upto

Rs.15 Cr

5 Credit Risk Rating model

for banks and FI

All Banks and Financial Institutions

Table1. Rating Models and Their Applicability

PNB also takes into account the ratings of the company/project from the independent credit rating

agencies like ICRA, CRISIL, Fitch, CARE etc. Rating history of the borrower is studied and any

degradation in the rating demands causal analysis. In some cases, final sanction is conditional upon

the completion of credit rating by external agencies.

7.4.  Management Evaluation 

Management is examined carefully and methodically during the credit appraisal.

Management evaluation entails:

a. Credit History of the Directors, Promoters etc

b. Professional, experience and qualification of the promoters, directors and top management

31

c. Reputation of the promotors in project execution

d. Performance of the management

Credit history of the management and the company is sought from the centralized credit

databases like CIBIL, Equifax etc. Directors etc. should have positive credit reports and

should not be there in the list of wilful defaulters circulated by RBI etc. Credit history is also

sought from other banks where the company has accounts to find out any abnormal

behaviour. Moreover, credit history and account behaviour of the companies belonging to the

same business group (i.e. business houses) as the borrower is also taken into account. In case

the accounts of any unit belonging to a Group become irregular and the concerned promoters

do not co-operate with the Bank and Financial Institution to settle their dues, the Group will

not be provided accommodation from the Bank. According to the banks guidelines, financial

support for setting up of new ventures or expansion should not be extended to unit belonging

to a group which is willful defaulter or non cooperative so as to ensure that no amount lent to

a healthier unit of a group for its Working Capital requirements is transferred to another unit

within the group by reducing the Current Ratio of transferor unit. For identification of cases

of Promoter Groups/Companies for deterrent action, a coordinated approach be taken with

Banks and Financial Institutions. However, Industrial Units in Public Sector are to be kept

out of the purview of Group Approach.

7.5. Compliance to Exposure Norms 

Exposure includes credit exposure (funded and non-funded credit limits) and investment

exposure (including underwriting and similar commitments) as well as certain types of

investments in companies. The sanctioned limits or outstandings, whichever are higher, shall

be reckoned for arriving at exposure limit. Further, nonfund based exposure is calculated at

100 percent of the limits or outstandings, whichever are higher. In case of fully drawn term

loans, where there is no scope for re-drawal of any portion of the sanctioned limits, the

outstanding shall be reckoned as exposure. However, in

the case of other term loans, the exposure shall be computed as usual i.e. “sanctioned limits

or outstandings, whichever are higher”.

Maximum Industry Exposure Limit

The bank has developed a model for fixation of industry wise credit exposure ceilings. The

model captures external factors like rating of industry by external agency, nature of industry

and its importance in economy as well as internal factors like level and trend of asset

32

impairment, exposure level and quality of exposure in the industry. This model provides

scientific assessment and corresponding exposure ceiling level to an industry. These limits

shall be reviewed on the basis of data analysis regularly. As the ceilings proposed are internal

ceilings to achieve diversified growth of portfolio and reduce portfolio concentration, it is

provided that the monitoring against such limits would be based on actual outstanding.

However, undisbursed term loan amounts in any industry shall also be monitored closely.

Further, the industry-wise exposures shall also be monitored closely by

Credit Division, HO to especially those industries which have reached trigger level of 85% of

exposure limit so that instances of breach of ceiling could be averted.

Industry/Sector Ceiling in percentage

S.

No.

Sector Exposure

1. All Engineering 6%

2. Chemicals, Dyes, Paints 3%

3. Construction 5%

4. Food Processing 5%

5. Iron and Steel 10%

6. Other Textiles 5%

7. Paper and Paper Products 3%

8. Petroleum 3%

9. Sugar 5%

Table 2. Business Sector Exposure Limits

8. Working Capital Financing Appraisal Appraisal of working capital financing proposals is mainly focussed on accurate assessment

of working capital needs of the business. Objective here is to avoid overfunding or

underfunding of the operations. Working capital assessment is widely researched topic and

has evolved over a time.

8.1.  Methods Of Lending i) Simplified method linked with turnover Simplified method based on turnover for assessing

working capital finance upto Rs.2 crore (upto Rs. 5 crore in case of SME units) shall

continue.

33

ii) MPBF System

Existing MPBF system with flexible approach is followed for units requiring working

capital finance exceeding the above-mentioned amount.

iii) Cash Budget System

Cash Budget System shall be followed in Sugar, Tea, Service Sector, construction

activity, Film Production accounts etc.

8.2.  Working Capital Financing Guidelines 

8.2.1. Tandon Committee Recommendations This committee was formed in 1974 under the chairmanship of Shri P.L.Tandon for the

purpose of calculating the effective working capital requirement. It fixed norms for 15 major

industries and indicate the maximum permissible limits for inventory holdings. However,

deviations weren’t allowed to meet unforeseen conditions. The three methods suggested for

lending were:

First Method of Lending:

Banks can work out the working capital gap, i.e. total current assets less current

liabilities other than bank borrowings (MPBF) and finance a maximum of 75 per cent

of the gap; the balance to come out of long-term funds, i.e., owned funds and term

borrowings. This approach was considered suitable only for very small borrowers i.e.

where the requirements of credit were less than Rs.10 lacs.

MPBF: 75% of working capital gap( Total Current Assets – Other Current Liabilities)

Second Method of Lending:

Under this method, it was thought that the borrower should provide for a minimum of

25% of total current assets out of long-term funds i.e., owned funds plus term

borrowings. A certain level of credit for purchases and other current liabilities will be

available to fund the build up of current assets and the bank will provide the balance

(MPBF). Consequently, total current liabilities inclusive of bank borrowings could not

exceed 75% of current assets. RBI stipulated that the working capital needs of all

borrowers enjoying fund based credit facilities of more than Rs. 10 lacs should be

appraised (calculated) under this method.

34

MPBF: 75% Total Current Assets – Other Current Liabilities

Third Method of Lending: Under this method, the borrower's contribution from long

term funds will be to the extent of the entire CORE CURRENT ASSETS, which has

been defined by the Study Group as representing the absolute minimum level of raw

materials, process stock, finished goods and stores which are in the pipeline to ensure

continuity of production and a minimum of 25% of the balance current assets should

be financed out of the long term funds plus term borrowings.

MPBF: 75% [(Total Current Assets – Core Current Assets) - Other Current Liabilities

Third method of lending was not accepted by RBI for practical implementation and

hence is of only academic interest.

8.2.2. Chore Committee Recommendations This committee streamlined the above guidelines further by stipulating annual review of

working capital credit limits above 50 lac. Also the bifurcation of cash credit into demand

loan and cash credit components has also been withdrawn.

8.2.3. Nayak Committee Recommendations Nayak committee recommended not to apply the norms for inventory and receivables. Rather,

the working capital limits shall be computed on the basis of a minimum of 20% of their

projected annual Turnover for new and existing units. Out of this, the borrower shall provide

1/5th of the estimated working capital requirement(5% of PATO) as margin money of

working capital.

The Bank has the policy of evaluating MPBF for those limits that exceed 2 crore and upto 5

crore, for limits less than 2 crore, the bank has a policy of following the simplified turnover

method.

8.3. Data required for assessment of working capital requirement For assessing the working capital needs of an organization, bank follows CMA (Credit

Monitoring Arrangement). It is required by banks and other financial institutions, to

introspect or study the minutes of balance sheet and other financial statements of a body

corporate for financing their projects. In other words it is the detailed explanation of the

balance sheet and other financial ratios of the firm or any other corporate.

The CMA includes analysis of following six documents:

i) Existing and proposed banking arrangements

35

ii) Operating statement

iii) Analysis of Balance Sheet

iv) Buildup of current assets and current liabilities

v) Calculation of MPBF (Maximum Permissible Bank Finance)

vi) Fund Flow Statement

8.4.  Other Details Assessment of PBF is most important part of Working Capital proposal evaluation. Working

Capital proposals do not require viability studies viz. TEV and Financial viability as

described in section 7.1. and 7.2. Apart from these differences Working capital financing

proposals are evaluated on similar lines as the term loan proposals and involve risk analysis,

management evaluation, compliance to exposure norms etc. as described in Section 7.

9. Security All the loans are secured against the collaterals. During the loan appraisal process collateral are

valued for margin of safety requirements and valuation is verified. Type of bank’s claim on the

collateral i.e. mortgage, hypothecation, first pari-passu charge, lein etc is decided. In addition, the

terms and condition for maintenance of the collateral are laid down.

Further Guarantee is sought for the loan from the group holding company. This is known as Corporate

Guarantee. Sometimes personal guarantee is also sought from the Promoters in case of privately held

companies or partnerships. FACR is one critical financial ratio which is ascertained to ensure that

loans are adequately covered by fixed assets.

10. Pricing Loan pricing which was earlier based on the BPLR (Benchmark Prime Lending Rate) regime has now

been administered under BR (Base Rate) regime as per the RBI directives. Under BR system banks

specify a base rate above which all the loans are priced. Base rate is revised from time to time as per

the leads of RBI review of interest rates that depends on the macroeconomic situations. At PNB

pricing of loans depends on following factors:

a) Credit Rating of the Client

Better the risk rating of a business lower is the spread (interest charged) over the base rate.

b) Nature of the business sector

Apart from the credit rating business sector to which a borrower belongs also effects the

pricing of the loan. For example pricing for a business in Food processing sector with credit

rating “AA” will be different from a business in Real estate sector having the same credit

rating “AA”.

36

c) Special Business Considerations and Competitive Pressures

In consortium financing, PNB have to keep the pricing in line with the other business

partners. Also due to competitive consideration and a view of garnering further business from

reputed clients discounts can be offered. Sometimes, there are special lending schemes for

various sectors having specific pricing guidelines.

11. Post­Sanction Processes After the appraisal and sanctioning process, procedures for loan disbursal, legal

documentation and continuous monitoring of the loan implementation i.e. end-use, collateral

maintenance, financial health of the loanee etc. come into picture. Some of the important

processes are as described below:

11.1. Ensuring end­use of funds One aspect of the credit risk management and control is to ascertain the end use of the funds.

This is because the risk profile of a loan is directly related to its prospected use. For example ,

if a loan issued for purchase of machinery is diverted to real estate investment or say to

capital markets, then probability of its default increases considerably. Hence, it becomes

necessary for banks to monitor the usage of the loaned funds. Financial statement issued by

Chartered Accountants are analyzed to observe the spending of the funds. Moreover, PNB

has put in place guidelines and procedure to ascertain the use of funds through actual

inspection. Some of the illustrative measures that could be taken by the branches to ensure

end-use of funds are:

i) Meaningful scrutiny of quarterly progress reports/operating statements, balance sheets of

the borrowers;

ii) Regular inspection of borrowers’ assets charged to the Bank as security;

iii) Periodical scrutiny of borrowers’ books of accounts:

iv) Periodical visits to the assisted units;

v) System of periodical stock audit, in case of working capital finance;

11.2. Preventive Monitoring System (PMS) 

Bank has introduced Preventive monitoring system for large borrowal accounts. The system

is applicable to all borrowal accounts having sanctioned limits (FB plus NFB) above Rs. 1

crore. The model for PMS has also been placed in central server environment. This system is

a dynamic system for tracking the health and conduct of borrowal accounts to capture the

37

signals of early warning. Timely decision should be taken on the future course of action in

the borrowal accounts depending upon PMS rank.

11.3. Stock Audit 

Bank has a policy to conduct annual stock audit (including book debts) for all accounts with

fund based working capital limits of Rs.5 crore and above whether standard or NPAs. Annual

Stock Audit is compulsorily conducted in all accounts with risk rating ‘B’ & below and

having fund based working capital limits of Rs. 1 crore and above.

11.4. Monitoring of Weak and Irregular Accounts 

The bank has established systems for Inspection and control of its lending activity to ensure

that loan accounts are conducted in terms of sanction so as to have a sound credit portfolio.

Credit Division, HO monitors all weak and irregular loan accounts below standard category

having outstanding of above Rs.10 lac on monthly basis.

12. CASE I : Term Loan Financing ( ABC Limited) 

12.1. Introduction ABC Industries Limited (AIL) was incorporated in the year 20XX. It has established a unit for manufacturing SPONGE IRON or DIRECTLY REDUCED IRON (DRI) with an installed capacity of 100 TPD/30000 TPA. The company wants to avail loan for Ore Pelletising and Benefication Plant.

12.2. The loan proposal  Name of the Borrower : M/s ABC Industries Limited, BO and Circle Office : XYZ

38

GIST OF THE PROPOSAL • Sanction of TL III of Rs 100 crs for setting up Pelletizing and Beneficiation project at COP of

Rs 315.50 crs (debt component of Rs 195 crs ) at existing unit at abc district, AP. The door to door repayment is 10 years.

For Term Loan :

Purpose Setting up Iron Ore Pelletising and Beneficiation Plant with 600000 MTPA (6 lacs) and 612000(6.12 lacs) MTPA capacity respectively in abc district, AP

Cost of Project Rs. 315.50 Total Debt Rs. 195.00 Promoter’s contribution Rs. 120.50 i.e 38.19 % Proposed TL(our share) Rs. 100.00 DER 1.62: 1 Repayment Period 7 years (28 quarterly Installments) Door to door tenor 10 years ( including 7 years repayment period) + 3 years

moratorium and implementation period)

Whether fresh/ renewal/ enht Fresh Term LoanAsset Classification as on 31.12.2011 and last PMS score

Standard, PMS 2250 Rank-3

Credit Risk Rating by Bank is B indicating Marginally Acceptable Risk

Rating Date ofRating

Score ABS Reasons fordegradation

Present B 23.03.12 43.71% Under New Project

*Given below

Previous B 17.09.11 44.67% 31.03.11 *Main reasons for the decline in the rating are as follow. - Delayed in implementation of the project - Increase in the Debts.

Rating from External Agency #The external rating is mapped to the internal rating of B

Facility rated

Rating Date of rating

Rating Agency

Remarks

Long Term of Rs. 220.86 Cr.

CARE BB+#

26/12/2011 CARE NA

Short Term of Rs. 16.Cr.

CARE A4+

26/12/2011 CARE

Whether priority/non priority sector as per PS&LB guidelines (Latest being PS&LB/LBC/Codified Circular No. 11 dated 16.7.2011)

Non Priority Sector

Whether Agriculture/Retail/ SME/Others

Large

39

a) Whether Sensitive Sector – Real Estate/Capital Market b) Applicable Risk weight

NO 150%

Consortium/Multiple Banking Sole Banker for working capital limit & existing TL. However proposed term loan will be in participation with other Bank

Lead Bank NA PNB’s Share % Sole BankingDate of application 03.01.2012Date of last sanction & authority/’In Principle’ Consent

NBG in its meeting dated 21.01.2012 has approved expression of interest for consideration of term loan of Rs. 100 cr at the rate of 14.50% per annum i.e., BR + 3.25% + TP, with 50% concession in upfront fee.

Customer ID No. BRB003528Activity code (as per ladder) 7502 .

12.3. Management Evaluation 

12.3.1. Promoters and Director’s Profile

The company AIL. is a public limited company with 4 percent share holding with Promoter

of the Company.

Group Name M/s ABC INDUSTRIES LIMITED

a. Constitution & constitution code Public Limited Company,36 b. Date of incorporation/ Establishment 11th March 2008 c. Dealing with PNB since 2008 d. Industry/Sector Steel Industry e. Business Activity (Product)/

Installed Capacity.

Existing Setup: Sponge Iron -60000 TPA Billets - 72000 TPA Project under Implementation: Sponge Iron -90000 TPA Rolling Mill -90000 TPA Captive Power Plant -16 MW Proposed Beneficiation 612000TPA Pelletising 600000TPA

12.4. Present proposal  

40

In order to improve the efficiency of the kiln and quality of sponge iron ,the company has now planning to install an Iron ore pelletizing unit & Beneficiation plant on the existing land . This project is a major step towards backward integration and would enable the company to become an integrated Steel plant as the Sponge iron and Steel billets will be used as basic raw material for the rolling mill and the final product will be produced from Iron.The installed capacity of Iron Ore Pelletizing and Beneficiation Plant would be 6.00 lacs MTPA and 6.12 lacs MTPA respectively. The total cost of project is Rs.315.50 cr with promoter contribution of Rs. 120.50 cr ie. 38% and debt component of Rs. 195.00 cr. NBG in its meeting dt. 20.01.2012 has approved expression of interest for considering of Term Loan limit of Rs. 100.00 crs @ 14.50 p.a. i.e. BR+3.25% + TP, with 50% concession in applicable Upfront fee.

a) Beneficiation Plant: Beneficiation helps in conservation of natural resources and waste management by upgrading of low grade and complex ores, which would have been otherwise considered as uneconomical. It improves the supply chain management as lower grade ores discarded in the mines can be upgraded. b) Pelletisation Plant: Pelletising turns very fine grained iron ore into balls of a certain diameter, known as pellets, which are suitable for blast furnace and direct reduction. The process of pelletisation combines mixing of raw material, forming the pellet and a thermal treatment baking the soft raw pellet to hard spheres.

Facilities Recommended : (Rs. in Crore)

Nature Existing Proposed Secured/Unsecured along with the basis thereof (As per RBI’s guidelines)

Fund Based

CC(H) 30.00

30.00 Secured

Non Fund Based: FLC/ILC/SBLC* 15.00 15.00 Secured BG 1.00 1.00 Secured Term Loan1 (O/s) 50.32 50.32 Secured Term loan 2** 134.24 134.24 Secured Term loan 3 - 100.00 Secured Limit of credit exposure on account of all derivative products

Nil Nil

TOTAL COMMITMENT

230.56 330.56 Secured

*The Company has requested for approval of SBLC as in terms of its business model the company plans to purchase the Raw Material at lower price than Market Price for which supplier insist for SBLC/Bank Guarantee **Term loan 2 amount not fully disbursed.

41

12.5. Compliance to Exposure Norms 

Existing Proposed %age of Bank’s Capital Funds as on 31.03.2011 (Rs.30887.68 crs)

As per Exposure NormsAmount (%age)

Company 230.56 330.56 1.07% 3706.52 12% Group 609.81 709.81* 2.29% 9266.30 30% Observations: Exposure to the group and company is within the prescribed norms

12.6. Credit Rating by External Agencies   Agency Rating Date of

Rating Significance of Rating Purpose Validity

Date CARE BB+ 05.01.2012 Moderate Risk of default

regarding timely servicing of financial obligation

For long term facilities

04.01.2013

CARE A4+ 05.01.2012 Minimal degree of safety regarding timely payment of financial obligations

For NFB limits

04.01.2013

12.7. Financial Evaluation 

12.7.1. Financial Statement Analysis  Two years

earlier (say 31.3.09)

One year earlier (say 31.3.10)

Previous year (say 31.3.11)

Projections for the year 2011-12

Audited Audited Estimated Audited ProjectedGross Sales 0.00 0.07 105.83 110.18 148.33- Domestic 0.00 0.07 105.83 110.18 148.33- Export 0.00 0.00 0.00 0.00 0.00% growth 0.00 0.00 0.00 0.00 34.64%Net sales (net of excise duty etc.)

0.00 0.07 105.83 110.18 148.33

Other Income 0.00 0.00 0.00 0.00 0.00Operating Profit/Loss 0.00 0.01 14.31 0.36 5.59Profit before tax 0.00 0.01 14.31 0.36 5.59Profit after tax 0.00 -2.80 9.48 -1.29 3.36Depreciation/ Amortization of exp

0.00 0.00 8.50 5.40 8.50

Cash profit/ (Loss) 0.00 (2.80) 17.98 4.11 11.86EBIDTA/PBIDTA 0.00 0.11 27.35 6.76 26.96Paid up capital 1.57 3.21 9.81 5.74 9.190

42

Reserves and Surplus excluding revaluation resv

13.50 43.52 97.65 91.54 121.89

Misc. expenditure not written off

0.09 0.09 0.00 0.07 0.00

Accumulated losses 0.00 2.80 0.00 4.09 0.00Deferred Tax Liability/ Asset

0.00 2.81 1.44 4.38 5.20

a) Tangible Net Worth b) Investment in allied concerns and amount of cross holdings c) Net owned funds/ Adjusted TNW (a –b)

14.98

Nil

14.98

46.65

3.16

43.49

108.90

Nil

108.90

97.50

3.16

94.34

136.28

3.16

133.12

Share application money

8.20 0.00 0.00 2.83 0.00

Total Borrowings 13.30 78.66 115.38 131.12 232.02Secured 12.79 77.54 115.38 129.87 217.02Unsecured 0.51 1.12 0.00 1.25 15.00Investments 0.00 0.00 0.00 0.00 0.00Total Assets 37.23 128.96 235.26 279.16 384.85Out of which net fixed assets

33.30 91.81 190.14 198.21 308.48

Current Assets 3.93 33.81 45.12 77.60 70.81Non current Assets 0.00 3.34 0.00 3.35 5.56Net Working Capital 3.18 11.15 14.47 15.16 24.26Current Ratio 5.24 1.49 1.47 1.24 1.52Debt Equity Ratio 0.57 1.28 0.88 1.16 1.48Term liability/ Adjusted TNW

1.57 2.28 1.88 2.16 2.43

TOL/Adjusted TNW 0.61 1.76 1.16 1.78 1.82Operating Profit/Sales Nil 0.14 0.14 0.0033 0.04Long Term Sources 36.48 106.30 204.61 216.72 338.30Long Term Uses 33.30 95.15 190.14 201.56 314.04Surplus/ Deficit 3.18 11.15 14.47 15.16 24.26Short Term Sources 0.75 22.66 30.65 62.44 46.55Short Term Uses 3.93 33.81 45.12 77.60 70.81Surplus/ Deficit (3.18) (11.15) (14.47) (15.16) (24.26)

43

Key Financials upto last quarter (Rs. Crore)

Period ended

Cumulative position as on last quarter/ HY/Q1 ended Dec 11

Corresponding position as at Dec’10

% Change

Accepted for the current year

%age achievement upto latest quarter/HY/Q1

Remarks

Sales 99.89 62.13 60.78 148.33 *67.34 -- Other Income

0..0 0.00 0.00 0.00 0.00 --

PBT 3.56 0.24 1483.33 5.59 63.68 -- PAT 2.46 0.16 1537.50 3.36 73.21 -- Reason: Sales during three quarter of current year are slightly lower than the proportionate sales of 75 % of annual target for 2011-12 as during first quarter sales are generally low on account of rainy season. During the corresponding period last year sales achievement was 56.38 % of the annual budget. The company has informed that during 1st half year the sale achievement is lower in this industry on account of rainy season, particularly during first quarter of financial year. The sales normally peaked in the last quarter of year, as during 2010-11 the company posted sales of Rs. 48.04 cr during last quarter which was 44% of annual sales. The Company has achieved the sales of Rs. 31.68 cr during Jan & Feb 12. The company has achieved total sale of Rs. 131.57 crs. till Feb 12 against the annual target of Rs. 148.33 cr. i.e 88.70 %.

12.8. SECURITY 

12.8.1. Primary  For Term Loan: The term loan is secured by way of following charge over the block assets both present and future .

Term Loan Security Term Loan-I ( Rs 58 crore)

Ist charge over the block assets of the company present and future. The project cost is Rs. 98.00 cr.

Term Loan-II ( Rs 134.24 crore)

Ist charge on block Assets of the company Present and future. The project cost is Rs. 218.00 cr.

Term Loan-III 1st pari passu charge with other consortium members on the present and future block assets of company (for their term loan of Rs 95 crores). The project cost is Rs 315.50 Cr.

44

(Rs inCr)

Security Description

Area in Sq M or Sq Ft

Ownership

Value Basis for valuation

Date Whether existing/ fresh

Last sanction

Present book value

Realizable value

Industrial land (Existing) situated at Anantapur, Andhra Pradesh

67 acres 13 cents

In the name of the company

1.44 1.440 1.44 Purchase price

2008 Existing

12.8.2. Collateral    :   

Second charge on following assets (Rs. in Crore)

Nature of limits

Security Value of block assets as on: (as on 31-3-11)

Value of block assets excluding specific charge if any

Extent of first / second charge holders

Balance / residual value of charge available to bank/ consortium

Term Loan

Current Assets

45.12 45.12 19.67 25.45

12.9. Position of Account as on 22.03.2012 (Rs. In crs) Nature Limit VS DP Balance Irregularity

TL-1 58.00 92.10 49.71 49.71 Nil TL-2 134.24 143.37 88.29 88.29 Nil CC 30.00 41.71 30.00 29.49 Nil ILC/FLC 15.00 12.06 ILG 1.00 00.000

Value of the Account

(Rs. In crs) Limit Last year 2010-11 Current year up to Jan 12

Nature Amount Interest/ Commission

Yield(%) Interest/ Commission

Yield(%)

Working capital (FB) 30.00 1.88 6.26 2.85 9.50NFB 16.00 - - 0.16 1.00Term Loan -1 58.00 7.43 12.81 6.89 11.88Term Loan -2 134.24 4.41 3.29 9.27 6.91Bills purchased/ collected

-

45

Any other income such as Escrow account fee, etc.

Total 238.24 13.72 5.76 19.17 8.05 Nature of Limit: LC/LG From 01.04.2011 to 31.12.2011 Nature of Limit: LC/LG Amount : Rs.16.00 cr In Cr

Nature of limit

Amount of limit

Aggregate No

Value Commission Max Availment

LC Development/BG Invocation

No. Amt. ILC/FLC 15.00 2 14.92 0.07 14.92 Nil Nil ILG/FLG 1.00 2 0.14 0.09 0.14 Nil Nil

12.10. COST OF THE PROJECT  Rs in crs

Sl. No.

PARTICULARS

BENEFICIATION PLANT

PELLETIZING PLANT

Total

1 Land & Site Development - 1.40 1.402 Buildings 11.00 25.14 36.14

3 Plant and Machinery 75.00 131.32 206.3

24 Misc. Fixed Assets 2.00 4.50 6.505 Contingencies 4.40 8.12 12.52

6 Preoperative Expenses 14.10 22.52 36.627 Preliminary Expenses - - -8 Margin Money for Working

Capital 6.00 10.00 16.00

Total Cost of the Project 112.50 203.00 315.50

MEANS OF FINANCE

In crs Sl. No

PARTICULARS

BENEFICIATION PLANT

PELLETISING PLANT

Total

1. Equity Share Capital 78.00 42.50 120.50 2. Term Loan from Banks 125.00 70.00 195.00 TOTAL 203.00 112.50 315.50

Total Cost of Project including Existing project: Rs in crs Sl. No.

PARTICULARS

Proposed Expansion Beneficiation &

Project under Implementation (Sponge Iron, Rolling

Total

46

Pelletising Plant Mill & Power Plant)

1 Land & Site Development

1.401.25 2.65

2 Buildings 36.14 27.19 63.333 Plant and Machinery 206.32 149.44 355.764 Misc. Fixed Assets 6.50 8.00 14.505 Contingencies 12.52 9.29 21.81

6 Preoperative Expenses

36.6216.32 52.94

7 Preliminary Expenses

-- -

8 Margin Money for Working Capital

16.006.51 22.51

Total Cost of the Project

315.50218.00 533.50

MEANS OF FINANCE INCLUDING EXISTING PROJECT Rs. In crores

12.11. Strengths & Weakness 

Strengths/Opportunities:

1. The promoters are highly experienced and have knowledge of Steel Industry

2. Proven and Efficient technology

3. Rich Mineral Resources & Proximity to raw materials makes the transportation of raw material easier and cheaper.

4. There are number of steel units are operating in the region. The availability of skilled and unskilled labor is evident and easily available.

5. Level of integration: The Company proposes to install sponge iron, induction furnace, Continuous casting machine for billets and rolling mill which will supply the end product i.e. long products. Apart from the core activity, the company also proposes to have beneficiation and pelletisation plant which will reduce the dependency on the quality iron ore and improve the efficiency of the rotary kiln, reduction of dust emission and also utilize the waste heat generated during sponge iron manufacturing to generate power. The level of integration will help in rationalizing the plant operation and plant economics

Sl. No

PARTICULARS

Proposed Expansion Beneficiation & Pelletising Plant

Project under Implementation (Sponge Iron, Rolling Mill & Power Plant)

Total

1. Equity Share Capital 120.50 83.76 204.26 2. Term Loan 195.00 134.24 329.24 TOTAL 315.50 218.00 533.50

47

6. Weakness/ Threats:  

1. Endemic Deficiencies: Poor quality of some of the essential raw materials available

in India, e.g., high ash content of indigenous coking coal is adversely affecting the productive efficiency of iron-making. As a result some of the raw materials have to be imported, increasing cost.

Mitigant As the Company are using imported Coal in their existing Plant and from the proposed expansion of Beneficiation & Pelletisation Project, company will convert low grade iron ore into high grade iron ore that will help the Company to get better production at lower consumption of Coal.

2. Low Labor Productivity: In India the advantages of cheap labor get offset by low labor productivity. Labor productivity in Indian companies such as SAIL and TISCO is ~ 75 t/man year and ~100 t/man year, whereas for POSCO (Korea) and NIPPON (Japan) the productivity values are 1345 t/man year and 980 t/man year.

Mitigant

In the Company’s proposed expansion total workmanship requirement is 290 man power for Beneficiation & Pelletisation Project of 0.60 Million TPA.

Labour productivity for the project @ 70% utilization =600000/290*70/100= 1448.28 T/man per year.

3. Slowing Global Economy: Global economic recession has adversely affected the demand for iron & steel products around the world. With slowing global economies and uncertain economic climate in Europe with the advent of European debt crisis, economic activity in these regions will slow down and contract, leading to low demand from these major export markets for Indian manufacturers.

Mitigant Indian economy is still growing comparative to European Country.

4. Price Sensitivity and Demand Volatility: The demand of iron & steel depends on the end-user requirements. The traders tend to exhibit price sensitivity and buy when there are at discounts. This volatility of price and demand often affects manufacturers because of their inability to tune their production in line with the market demand fluctuations. Mitigant: The demand of iron & steel are increasing day by day, if any change in the prices of raw material will not adverse effect towards demand & the party may transfer the increase to the customers.

12.12. Ratio Analysis  Detailed projected profitability projections, balance-sheet, cash flow are as per Appendix

48

VII

Stand Alone Project

Company as a whole After completion of the project

Debt-Equity Ratio 1.62 1.54 Average DSCR 2.33 1.85 Minimum DSCR 1.90 1.23 Interest coverage ratio (ISCR) 3.04 3.41 Internal Rate of Return (Pre Tax) 22.19 16.29 Break Even Point 32.11 41.94 Cash Break Even 22.09 20.69 Note: Above DSCR has been arrived at by taking interest rate of 14%.

12.13. Sensitivity Analysis: 

A) Sensitivity Analysis for Stand Alone Project: a) Selling Price - Reduced by 5% - Case A b) Raw Material Prices - Increased by 5% - Case B c) Interest Rate - increased by 1% - Case C

Particulars Base Case Case – A Case – B Case- C Average DSCR 2.33 2.16 2.24 2.30 Minimum DSCR 1.90 1.75 1.81 1.84 IRR 22.19% 20.32% 21.10% 22.39% Pay Back Period – Years 4.20 4.64 4.45 4.26 BEP (2015- 70% util.) (%) 32.11 35.36 33.93 33.41 Cash BEP (2015) (%) 22.09 24.33 24.33 23.40

B) Sensitivity Analysis for the Company as a whole:

a) Selling Price - Reduced by 3% - Case A b) Raw Material Prices - Increased by 3% - Case B c) Interest Rate - increased by 1% - Case C

Particulars Base Case Case – A Case – B Case- C Average DSCR 1.85 1.65 1.72 1.82 Minimum DSCR 1.23 1.09 1.17 1.33 IRR 16.29% 14.13% 14.97% 16.41% Pay Back Period – Years 7.03 8.10 7.70 7.20 . Summary of profitability, Break-Even, DSCR and IRR Total Capacity & projected sales ( Company as a whole)

49

Particulars 2012 2013 2014 2015 2016 2017 Installed Capacity (MT) ROLLING - 90000 90000 90000 90000 90000 Capacity Utilisation - 60% 70% 80% 80% 80% Total Production(MT) ROLLING - 27000 63000 72000 72000 72000 Installed Capacity (MT) SMS 72000 72000 72000 72000 72000 72000 Capacity Utilisation 70% 80% 80% 80% 80% 80% Total Production(MT) 50400 57600 57600 57600 57600 57600 Captive Consumption - 28485 66465 75960 75960 75960 Balance for sale 50,400 29,115 - - - - Installed Capacity (MT) SI 60000 150000 150000 150000 150000 150000Capacity Utilisation 70% 50% 74% 80% 90% 100% Total Production(MT) 42000 75000 111000 120000 135000 150000Captive Consumption 37800 43200 43200 43200 43200 43200 Balance for sale 4200 31800 67800 76800 91800 106800Inst. Capacity (LACSMT)PELLETISING 6.00 6.00 6.00 6.00 6.00 Capacity Utilisation - - 70% 80% 90% Total Production(Lacs MT) - - 4.20 4.80 5.40 Captive Consumption ( lacs MT) - - 1.80 2.03 2.25 Balance for sale ( Lacs MT) - - 2.40 2.78 3.15 Balance for sale in Crs - - 192.00 222.00 252.00 Total Sales Relisation 149.52 235.84 347.28 587.52 647.52 677.52 Add. Opening Stock 2.30 3.49 5.50 8.10 8.10 8.10 Less Closing Stock 3.49 5.50 8.10 8.10 8.10 8.10 Sales Realisation ( Net) 148.33 233.83 344.68 587.52 647.52 677.52

12.14. FUTURE PROJECTIONS AND CALCULATION  (Amt in Crores)

Year Ended 2015 2016 2017 2018 2019 2020 2021 Proj. Proj. Proj. Proj. Proj. Proj. Proj. Share Capital/ Warrants 120.50 120.50 120.50 120.50 120.50 120.50 120.50Internal Cash accruals - - - - - - - Reserves and Surplus 40.86 92.86 157.31 223.26 291.41 362.26 435.78Deferred Tax 9.34 16.60 22.08 26.05 28.72 30.29 30.91 Tangible Net Worth 170.70 229.96 299.90 369.81 440.64 513.05 587.19Term liabilities and Debantures

195.00 172.00 149.00 126.00 94.50 63.00 31.50

Working Capital Loans 73.17 83.60 94.03 94.06 94.06 94.06 94.06 Net Block 299.50 269.61 254.67 239.73 224.78 209.84 194.90Total Current assets 101.82 116.32 130.84 130.88 130.90 130.91 130.93Current Liabilities 4.25 4.86 5.47 5.47 5.47 5.47 5.47

50

Net Current Assets 97.56 111.46 125.37 125.41 125.43 125.44 125.46Net Sales / Receipts 336.00 384.00 432.00 432.00 432.00 432.00 432.00Profit before tax 61.60 78.41 97.16 99.42 102.75 106.81 110.85Profit after tax 40.86 52.01 64.45 65.95 68.15 70.84 73.52 Depreciation 14.94 14.94 14.94 14.94 14.94 14.94 14.94 Internal Cash Accruals 55.80 66.95 79.39 80.89 83.10 85.79 88.47 Debt Equity Ratio* 1.14 0.75 0.50 0.34 0.21 0.12 0.05 Total outside liabilities to TNW

1.57 1.11 0.81 0.60 0.43 0.31 0.21

FACR 1.54 1.57 1.71 1.90 2.38 3.33 6.19 Pay Back Period - Years 4.20 DSCR - Average 2.33 Years IRR 22.19% IMPOTANT FINANCIAL INDICATORS (Company as a Whole)

Year 2012 2013 2014 2015 2016 2017 2018 Equity Share Capital 6.96 9.08 10.29 10.29 10.29 10.29 10.29 Share Premium 124.85 183.27 218.21 218.21 218.21 218.21 218.21Reserves and Surplus 4.47 22.73 50.10 97.27 155.89 208.31 261.15Deferred Tax 5.20 7.19 9.18 19.21 25.79 29.38 30.38 Tangible Net Worth 136.28 215.08 278.60 325.77 384.39 436.81 489.65Term liabilities 187.02 295.67 343.21 315.74 265.28 214.82 164.35Unsecured Loan 15.00 16.50 16.50 16.50 16.50 16.50 16.50 Working Capital Loans 30.00 76.93 91.81 150.49 161.55 176.62 176.62Net Block 314.48 471.09 542.49 506.55 469.84 432.35 394.08Investments 3.16 3.16 3.16 3.16 3.16 3.16 3.16 Net Current Assets 46.44 108.09 122.57 204.43 221.38 237.14 237.14Net Sales / Receipts 148.33 233.83 344.68 587.52 647.52 677.52 677.52Profit before tax 5.59 21.99 40.11 59.00 82.19 77.29 81.81 Profit after tax 3.36 16.26 26.59 38.95 54.45 51.23 54.25 Depreciation 8.50 18.31 28.11 43.44 44.21 44.99 45.76 Internal Cash Accruals 11.87 34.57 54.69 82.38 98.67 96.22 100.02Equity Dividend Paid - - 1.20 1.81 2.41 2.41 2.41 Dividend (%) - - 12% 18% 23% 23% 23% Debt Equity Ratio 1.24 1.28 1.16 0.92 0.66 0.47 0.32 Total outside liabilities to TNW 1.75 1.58 1.46 1.16 0.95 0.75 0.59 FACR 1.68 1.59 1.58 1.60 1.77 2.01 2.40 Average DSCR 1.85 Pay back period 7.03 Years IRR 16.29%

51

Project as standalone Debt Service Coverage Ratio

2015 2016 2017 2018 2019 2020 2021 2022 Total Inflows

Profit after Tax 40.86 52.01 64.45 65.95 68.15 70.84 73.52 77.26 513.04

Depreciation 14.94 14.94 14.94 14.94 14.94 14.94 14.94 13.33 117.93

Amortisation of expenses

-

Interest on term loans 27.30 26.09 22.87 19.65 15.99 11.58 7.17 2.76 133.40

Total Inflows (A) 83.10 93.04 102.26

100.54 99.08 97.36 95.63 93.35

764.38

Outflows -

- Interest on term loans 27.30 26.09 22.87 19.65 15.99 11.58 7.17 2.76

133.40

- Repayment of term loan 0.00 23.00 23.00 23.00 31.50 31.50 31.50 31.50

195.00

Total Outlows (B) 27.30 49.09 45.87 42.65 47.49 43.08 38.67 34.26 328.40

-

DSCR ( A / B ) 3.04 1.90 2.23 2.36 2.09 2.26 2.47 2.72 2.33

MINIMUM DSCR 1.90

AVERAGE DSCR 2.33 DSCR- Raw Material Price increased by 5%

2015 2016 2017 2018 2019 2020 2021 2022 Total

Inflows

Profit after Tax 37.13 47.75 59.66

61.16

63.37

66.06

68.74

81.33

485.19

Depreciation 14.94 14.94 14.94

14.94

14.94

14.94

14.94

13.33

117.93

Amortisation of expenses

-

Interest on term loans 27.30 26.09 22.87

19.65

15.99

11.58 7.17 2.76

133.40

Total Inflows (A) 79.38 88.79 97.4 95.7 94.3 92.5 90.8 97.4

52

8 5 0 8 5 2 736.52

Outflows -

- Interest on term loans 27.30 26.09 22.87

19.65

15.99

11.58 7.17 2.76

133.40

- Repayment of term loan 0.00 23.00

23.00

23.00

31.50

31.50

31.50

31.50

195.00

Total Outlows (B) 27.30 49.09 45.87

42.65

47.49

43.08

38.67

34.26

328.40

DSCR ( A / B ) 2.91 1.81 2.12 2.24 1.99 2.15 2.35 2.84 2.24

MINIMUM DSCR 1.81

AVERAGE DSCR 2.24 DSCR-Sale price decrease by 5%

2015 2016 2017 2018 2019 2020 2021 2022 Total Inflows

Profit after Tax 34.48 44.72 56.24 57.74 59.95 62.64 65.32 77.66 458.75

Depreciation 14.94 14.94 14.94 14.94 14.94 14.94 14.94 13.33 117.93

Amortisation of expenses

-

Interest on term loans 27.30 26.09 22.87 19.65 15.99 11.58 7.17 2.76 133.40

Total Inflows (A) 76.72 85.75 94.06 92.34 90.88 89.16 87.43 93.74 710.09

Outflows -

- Interest on term loans 27.30 26.09 22.87 19.65 15.99 11.58 7.17 2.76

133.40

- Repayment of term loan 0.00 23.00 23.00 23.00 31.50 31.50 31.50 31.50

195.00

Total Outlows (B) 27.30 49.09 45.87 42.65 47.49 43.08 38.67 34.26 328.40

DSCR ( A / B ) 2.81 1.75 2.05 2.16 1.91 2.07 2.26 2.74 2.16

MINIMUM DSCR 1.75

AVERAGE DSCR 2.16

53

DSCR-Rate of Interest increased by 1%

2015 2016 2017 2018

2019

2020

2021 2022 Total

Inflows

Profit after Tax 39.56 50.77

63.36

65.01

67.40

70.30

73.18

85.86

515.45

Depreciation 14.94 14.94

14.94

14.94

14.94

14.94

14.94

13.33

117.93

Amortisation of expenses

-

Interest on term loans 29.25

27.96

24.51

21.06

17.13

12.40 7.68 2.95

142.93

Total Inflows (A) 83.76 93.67

102.81

101.01

99.47

97.64

95.81

102.15

776.32

Outflows -

- Interest on term loans 29.25

27.96

24.51

21.06

17.13

12.40 7.68 2.95

142.93

- Repayment of term loan 0.00

23.00

23.00

23.00

31.50

31.50

31.50

31.50

195.00

Total Outlows (B) 29.25 50.96

47.51

44.06

48.63

43.90

39.18

34.45

337.93

DSCR ( A / B ) 2.86 1.84 2.16 2.29 2.05 2.22 2.45 2.96 2.30

MINIMUM DSCR 1.84

AVERAGE DSCR 2.30 Projected Profitability Statement (Project as standalone)

Year 2015 2016 2017 2018 2019 2020 2021 2022 Raw Materials 182.3 208.4 234.4 234.4 234.4 234.4 234.4 234.4 Iron Ore for Benefication 131.7 150.6 169.4 169.4 169.4 169.4 169.4 169.4 Other Raw Materials 50.61 57.84 65.07 65.07 65.07 65.07 65.07 65.07 Electricity 18.41 21.04 23.67 23.67 23.67 23.67 23.67 23.67 Labour & Plant Salaries Direct wages including all benefits 2.94 3.23 3.56 3.91 3.91 3.91 3.91 3.91 Factory Supervision 2.32 2.55 2.81 3.09 3.09 3.09 3.09 3.09 Total Factory Salaries (D) 5.26 5.79 6.37 7 7 7 7 7 Other Manufacturing Costs Repairs & Maintenance 5.07 5.32 5.59 5.87 6.16 6.47 6.79 7.13 Factory Insurance 0.75 0.79 0.83 0.87 0.91 0.96 1 1.05 Total Factory Overheads (E) 5.82 6.11 6.41 6.73 7.07 7.43 7.8 8.19

Estimated Cost of Production (A+B+C+D+E) 211.8 241.3 270.9 271.9 272.2 272.6 272.9 273.3 Cost of Production 211.8 241.3 270.9 271.9 272.2 272.6 272.9 273.3 Administrative expenses 3.36 3.84 4.32 4.32 4.32 4.32 4.32 4.32 Selling & Distribution Expenses 6.72 7.68 8.64 8.64 8.64 8.64 8.64 8.64 Total Cost of Sales 221.9 252.9 283.9 284.8 285.2 285.5 285.9 286.3

54

Total sales Realisation- without Captive consumption 336 384 432 432 432 432 432 432 EBITDA 114.1 131.2 148.1 147.2 146.9 146.5 146.1 145.7 Interest on Term Loans 27.3 26.09 22.87 19.65 15.99 11.58 7.17 2.76 Interest on Working Capital Loans 10.24 11.7 13.16 13.17 13.17 13.17 13.17 13.17 Total Finance Cost 37.54 37.8 36.04 32.82 29.15 24.74 20.33 15.92 Depreciation 14.94 14.94 14.94 14.94 14.94 14.94 14.94 13.33 Profit Before Tax 61.6 78.41 97.16 99.42 102.8 106.8 110.9 116.5 Provision for Tax 11.4 19.14 27.23 29.51 31.92 34.39 36.7 39.12 Deffered Tax 9.34 7.26 5.48 3.97 2.67 1.57 0.62 0.1 UNIT PROFIT AFTER TAX 40.86 52.01 64.45 65.95 68.15 70.84 73.52 77.26

Projected Balance Sheet (Project as standalone)

Year 2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

SOURCES OF FUNDS Shareholders' Funds: - Equity capital with premium/Warrants

30.13

84.35

120.50

120.50

120.50

120.50

120.50

120.50

120.50

120.50

120.50

- Warrants/Others - - - - - - - - - - - - Internal Generation - - - - - - - - - - - - Reserves & Surplus - - 40.

86 92.86

157.31

223.26

291.41

362.26

435.78

513.04

- Defered Tax - - 9.34

16.60

22.08

26.05

28.72

30.29

30.91

31.01

Loan Funds: - Secured - Term Loans from FIs / Banks

25.00

120.00

195.00

195.00

172.00

149.00

126.00

94.50

63.00

31.50

-

- Working capital - 73.17

83.60

94.03

94.06

94.06

94.06

94.06

94.06

- Unsecured - - - - - - - - - - - TOTAL LIABILITIES 55.

13 204.35

315.50

438.87

485.56

542.92

589.87

629.19

670.11

712.75

758.61

APPLICATION OF FUNDS

Gross Block - 299.50

299.50

299.50

299.50

299.50

299.50

299.50

299.50

299.50

Less : Depreciation - - 14.94

29.89

44.83

59.77

74.72

89.66

104.60

117.93

Net Block - 299.50

284.56

269.61

254.67

239.73

224.78

209.84

194.90

181.57

Capital Work-in-Progress

50.00

200.00

- - - - - - - - -

Investments Current Assets :

55

- Inventories - - 51.42

58.72

66.04

66.08

66.10

66.11

66.13

66.15

- Receivables - - 50.40

57.60

64.80

64.80

64.80

64.80

64.80

64.80

- Loans and advances - - - - - - - - - - Total current assets - - 101

.82 116.32

130.84

130.88

130.90

130.91

130.93

130.95

Less : Current Liabilities & Provisions

- - 4.25

4.86

5.47

5.47

5.47

5.47

5.47

5.47

Net current assets - - 97.56

111.46

125.37

125.41

125.43

125.44

125.46

125.48

Bank Balance (Surplus) 5.13

4.35

16.00

56.75

104.48

162.88

224.73

278.98

334.82

392.39

451.57

TOTAL ASSETS 55.13

204.35

315.50

438.87

485.56

542.92

589.87

629.19

670.11

712.75

758.61

Projected Cash Flow Statement (Project as standalone)

YEAR 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 SOURCES OF FUNDS Internal Cash Accruals - - - - - - - - - - - Equity Capital /Warrants 30.1 54.23 36.15 - - - - - - - - - Warrants/Others - - - - - - - - - - - PBT with term interest added back - - 88.9 104.5 120 119.1 118.7 118.4 118 119.2 Depreciation and amortisation provision - - 14.94 14.94 14.94 14.94 14.94 14.94 14.94 13.33 Increase in term loans 25 95 75 - - - - - - - - Increase in borrowings for Work. Cap. - - - 73.17 10.43 10.43 0.03 - - - - Increase in current liabilities - - 4.25 0.61 0.61 - - - - - Sale of Investments - - - - - - - - - - Increase in Unsecured Loans - - - - - - - - - - - T O T A L ( A ) 55.1 149.2 111.2 181.3 130.5 146 134.1 133.7 133.3 133 132.6 APPLICATION OF FUNDS Capital expenditure 50 150 99.5 Preliminary Expenses - - - - - - - - - - Increase in current assets - - - 101.8 14.51 14.51 0.04 0.02 0.02 0.02 0.02 Decrease in term loans - - - 23 23 23 31.5 31.5 31.5 31.5 Interest on term loan - - 27.3 26.09 22.87 19.65 15.99 11.58 7.17 2.76 Decrease in bank borrowings - - - - - - - - - - Taxation - - 11.4 19.14 27.23 29.51 31.92 34.39 36.7 39.12 Decrease in Unsecured Loans - - - - - - - - - - Decrease in current liabilities - - - - - - - - - - T O T A L ( B ) 50 150 99.5 140.5 82.74 87.62 72.2 79.42 77.49 75.38 73.39 Op. Bal. of Cash & Bank Balances - 5.13 4.35 16 56.75 104.5 162.9 224.7 279 334.8 392.4 Net Surplus (A-B) 5.13 -0.77 11.65 40.75 47.73 58.4 61.85 54.25 55.84 57.57 59.17 Cl. Bal. of Cash & Bank Balances 5.13 4.35 16 56.75 104.5 162.9 224.7 279 334.8 392.4 451.6

56

Break Even Point (Project as standalone)

Ist Year 2nd Year Fixed Variable Fixed Variable Raw Materials - 182.34 - 208.39 Power and Fuel - 18.41 - 21.04 Salary and wages 1.50 3.76 1.50 4.29 Repair & Maint. 0.15 4.92 0.15 5.17 Depreciation 14.94 - 14.94 - Other Mnufacturing expenses - 5.07 5.32 Insurance - 0.75 0.79 Sell & Adm. Exps. 4.00 6.08 5.00 6.52 Intt. on Term Loan 27.30 - 26.09 - Intt. on Bank Borr. 10.24 11.70 Total 47.89 231.58 47.69 263.23 Total Sales Turnover 336.00 384.00 Capacity Utilisation avg 70% 80% Break Even Point(%) 32.11 31.59 Cash Break Even 22.09 21.69 Calculation of I.R.R. (Project as standalone)

Years (As on 31st March) 2012 2013 2014 2015

2016 2017 2018

2019

2020 2021 2022

A) OUT FLOW Increase in Fixed Asset 50.00

150.00

99.50 - - - - - -

-

-

Net Working Capital - -

101.82

14.51

14.51 0.04 0.02 0.02 0.02 0.02

Total 50.00 150.00

99.50

101.82

14.51

14.51 0.04 0.02 0.02 0.02 0.02

B) INFLOW Cash Accruals - 0.00 0.00

55.80

66.95

79.39

80.89

83.10

85.79 88.47 90.59

Divide - - - - - - - - -

-

-

57

nd (added back) Interest added back - -

27.30

26.09

22.87

19.65

15.99

11.58

7.17

2.76

Modvat - - - - - - - - -

-

-

Total - - - 83.10

93.04

102.26

100.54

99.08

97.36 95.63 93.35

Net of inflow - outflow

( B - A )

-50.00

-150.00

-99.50

-18.72

78.53

87.75

100.50

99.07

97.35 95.62 93.33

Net amount

-50.00

-150.00

-99.50

-18.72

78.53

87.75

100.50

99.07

97.35 95.62 93.33

Add : 5% of Fixed Assets 9.08 Add : 100% of Current Assets 582.52 - - - - - - - -

Total

-50.00

-150.00

-99.50

-18.72

78.53

87.75

100.50

99.07

97.35 95.62 684.92

I.R.R 22.19%

Pay Back Period Calculation (Project as standalone)

Years 2013 2014 2015 2016 2017 2018 2019

2020

NET CASH ACCRUALS 0.00

0.00

55.80

66.95 79.39 80.89

83.10

85.79

ADD DIVIDEND - -

-

-

-

-

-

-

58

NET INFLOW 0.00 0.00

55.80

66.95 79.39 80.89

83.10

85.79

NET CUMULATIVE INFLOW 0.00

0.00

55.80

122.75

202.14

283.03

366.13

451.92

CAPITAL COST OF THE PROJECT 299.50 PAYBACK PERIOD (YEARS) 4.20

Years

Debt Equity Ratio (Project as standalone)

Years 2013 2014 2015 2016 2017 2018 2019 2020 2021

Term Loan 120.00

195.00

195.00

172.00

149.00

126.00 94.50 63.00 31.50

Total Debt 120.00

195.00

195.00

172.00

149.00

126.00 94.50 63.00 31.50

Equity Share and prem. 84.35

120.50

120.50

120.50

120.50

120.50

120.50

120.50

120.50

Deffered Tax - - 9.34 16.60 22.08 26.05 28.72 30.29 30.91

Reserve & Surplus 0.00 0.00 40.86 92.86 157.31

223.26

291.41

362.26

435.78

- - - - - - - - -

Total Equity 84.35 120.50

170.70

229.96

299.90

369.81

440.64

513.05

587.19

Debt Equity Ratio 1.42 1.62 1.14 0.75 0.50 0.34 0.21 0.12 0.05 Fixed Assets Coverage Ratio (Project as standalone)

Years 2015 2016 2017 2018 2019 2020 2021 Net Fixed Assets 284.56 269.61 254.67 239.73 224.78 209.84 194.90 Total Debt 195.00 172.00 149.00 126.00 94.50 63.00 31.50 FACR 1.46 1.57 1.71 1.90 2.38 3.33 6.19 TOL/TNW Ratio (Project as standalone)

Years 2013 2014 2015 2016 2017 2018 2019 2020 2021 Debt 120. 195.0 195.0 172.00 149.00 126.0 94.50 63.00 31.50

59

00 0 0 0 Bank Borrowing

- 0.00 73.17 83.60 94.03 94.06 94.06 94.06 94.06

Current Lia. - 0.00 4.25 4.86 5.47 5.47 5.47 5.47 5.47

Unsecured Loans

-

-

-

-

-

-

-

-

-

TOL 120.00

195.00

272.43 260.46 248.50

225.53 194.03 162.53

131.03

Interest Coverage Ratio (Project as standalone)

Years 2015 2016 2017 2018 2019 2020 2021 Profit After Tax 40.86 52.01 64.45 65.95 68.15 70.84 73.52 Depreciation 14.94 14.94 14.94 14.94 14.94 14.94 14.94 Intt. on Term Loan 27.30 26.09 22.87 19.65 15.99 11.58 7.17 Total 83.10 93.04 102.26 100.54 99.08 97.36 95.63 Intt. on Term Loan 27.30 26.09 22.87 19.65 15.99 11.58 7.17 Interest Coverage Ratio 3.04 3.57 4.47 5.12 6.20 8.41 13.34 Various Ratios at a Glance (Project as standalone)

Particulars 2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

0 % of Total Income - - - - Avg.

DSCR 3.04

1.90

2.23

2.36

2.09

2.26

2.47

2.72

2.33

BEP 32.11

31.59

IRR 22.19%

PAY BACK PERIOD ( in years) 4.20

FACR 1.46

1.57

1.71

1.90

2.38

3.33

DEBT EQUITY 1.42

1.62

1.14

0.75

0.50

0.34

0.21

0.12

0.05

TOL/TNW 1.42

1.62

1.60

1.13

0.83

0.61

0.44

0.32

0.22

INTEREST COVERAGE RATIO

3.04

3.57

4.47

5.12

6.20

8.41

13.34

60

Term Loan Repayment Schedule

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

Term Loan - Total

Opening Balance - 25.00

120.00

195.00

195.00

172.00

149.00

126.00

94.50

63.00

31.50

Sanctions/disbursement during the year

25.00

95.00

75.00 - - -

25.00

120.00

195.00

195.00

195.00

172.00

149.00

126.00

94.50

63.00

31.50

Less : Repayment during the year - - - -

23.00

23.00

23.00

31.50

31.50

31.50

31.50

Closing balance 25.00

120.00

195.00

195.00

172.00

149.00

126.00

94.50

63.00

31.50 -

Interest on Term Loan (14.00%) - - -

27.30

26.09

22.87

19.65

15.99

11.58

7.17

2.76

INTEREST COST ON TERM LOAN - I - 0.0

0 - 27.30

26.09

22.87

19.65

15.99

11.58

7.17

2.76

SUMMARY - TERM LOAN Closing Balance - Year-end

25.00

120.00

195.00

195.00

172.00

149.00

126.00

94.50

63.00

31.50 -

Interest cost on term loans - - -

27.30

26.09

22.87

19.65

15.99

11.58

7.17

2.76

 

61

 

13. CASE II: Working Capital Financing (ABC Traders Ltd.) 

13.1. CMA Data Analysis for Working Capital Financing  PREPARATION OF CMA DATA FOR M/S XYZ LIMITED AND UNDERSTANDING WC ASSESSMENT This section illustrates how the company asking for working capital financing prepares CMA data. This involves analysis of balance sheet and calculation of maximum permissible bank finance. This CMA data is prepared using the balance sheet and the profit and loss account in the annual report of the company. CMA data contains six forms as illustrated: Form II: Operating statement This form is similar to the profit and loss account of the company and tells about the income and the expenditure of the company during the financial year. The cost of production and total cost of sales are determined which helps in calculating the net profit of the company. Items such as raw materials, depreciation, and spares consumption are directly involved with manufacturing activity and thus used to calculate the cost of production. Income from other sources is considered under item other income which is not directly related to the main activity of the company.

31/3/2010 31/3/2011 31/3/2012 AUDITED AUDITED ESTIMATES 1. Gross sales (i) Domestic sales 14687.70 15992.98 19092.25 (ii)Export sales 8405.07 10636.80 11947.41 Add Revenue Income 110.57 181.99 100.00 Total 23203.34 26811.77 31139.66 2. Less Excise duty 0.00 0.00 0.00 3. Net Sales 23203.34 26811.77 31139.66 4. % age rise(+)or fall (-) 9.96 15.55 16.14 in net sales as compared to preveous year(annualised) 5. Cost of sales i)Raw materials(including 14653.32 16861.20 19952.45 stores and other items used in the process of manufacture) (a)Imported 0.00 5.98 0.00 (b)Indigeneous 14653.32 16855.22 19952.45 ii)Other spares 1561.70 1724.71 2097.75 (a)Imported 429.55 519.53 550.00 (b)Indigenous 1132.15 1205.18 1547.75 iii)Power and fuel 2229.21 2402.54 2593.11

62

iv) Direct labour 1183.16 1289.45 1377.46 (Factory wages and salaries) v)Other mfg. expenses 3.36 2.81 5.00 vi)Depreciation 1449.97 1389.10 1454.94 vii)SUB TOTAL 21080.72 23669.81 27480.72 viii) Add :Opening stock 670.13 414.29 565.04 in process Sub total 21750.85 24084.10 28045.76 ix)Deduct :Closing stock 414.29 565.04 684.04 in process x) Cost of production 21336.56 23519.06 27361.71 xi) Add Opening stock of 879.64 486.62 481.11 finished goods xii) Less Closing stock 486.62 481.11 679.09 of finished goods xiii)SUB TOTAL(Total cost 21729.58 23524.57 27163.73 of sales) 6. selling,general and 1495.94 1516.44 1639.20 administrative expenses 7. SUB TOTAL 23225.52 25041.01 28802.93 8. Operating profit before -22.18 1770.76 2336.73 Interest 9. Interest 1565.93 1490.89 1610.06 10. Operating profit after -1588.11 279.87 726.66 Interest 11. (i) Add other non operating income (a) Waste sales 0.00 0.00 0.00 (b) Export incentive 0.00 0.00 0.00 (c) Insurance claim 0.00 0.00 0.00 (d) Interest 0.00 0.00 0.00 (e) others 0.00 0.00 0.00 sub total (income) 0.00 0.00 0.00 (ii) Deduct othe non operating expenses (a) quota expenses (b) loss on sale of fixed asset (c) Prior period adjustment (d) sub total (expenses) 0.00 0.00 0.00 (iii) Net other non operating income\exp 0.00 0.00 0.00 12. Profit before tax/loss -1588.11 279.87 726.66 {10 + 11 (iii)} 13. Provision for taxes -2.11 0.23 138.84 Provision for defeered tax liability -281.19 87.46 19.31 14. Net profit/loss (12-13) -1304.81 192.18 568.51 15. (a) Equity dividend paid-amt 0.00 0.00 0.00 (Already paid+B.S.provision) (b) Dividend rate (on p.shares only) 16. Retained profit (14-15) -1304.81 192.18 568.51 17. Retained profit/loss profit (%age) 100.00 100.00 100.00

63

Form III: Analysis of balance sheet This form gives a detailed analysis of the balance sheet of the company. The balance sheet contains two important parts assets and liabilities. However, while talking about working capital assessment, we are basically interested in Current assets and current liabilities. Current Assets are those assets for the companies that are reasonably expected to be converted into cash within one year during the normal course of business. Current assets include cash, account receivables, inventories, short term investments, prepaid expenses and many others as explained in the form. These assets are used for the main activity of the business and must be kept at certain reasonable level for the efficient working of the business. For example, cash can be used to purchase raw materials from which finished goods can be manufactured. These current assets are very necessary for day to day operations of the company. Current Liabilities are the company’s debts or obligations that are due within one year. They appear on the balance sheet and include many important items such as short term debt, sundry creditors, provisions for taxation, dividend payable, advances from customers and installments of term loans. These liabilities are obligations that must be fulfilled within one year and form an important part of working capital since these are the short term sources of funds. The form gives a detailed analysis of current assets and current liabilities which can be used to calculate the working capital requirements as shown in form V of CMA data.

ANALYSIS OF BALANCE SHEET 31/3/2010 31/3/2011 31/3/2012 LIABILITIES AUDITED AUDITED ESTIMATES CURRENT LIABILITIES 1. Short term bank borrowing from banks (including bills purchased, discounted and excess borrowing placed ib repayment basis) (i) From applicant bank 5879.31 7143.26 8272.23 (ii) From other banks 0.00 0.00 0.00 (iii) (of which BP & BD) (925.00) (644.80) (769.52) Sub total (A) 5879.31 7143.26 8272.23 2. Short term borrowings from 0.00 0.00 0.00 Others 3. Sundry creditor (Trade) 347.50 1261.06 1104.92 4. Advance payments from 43.57 29.01 30.00 customers/deposits from dealers 5. Provision for taxation 0.00 0.00 0.00 6. Dividend payable 0.00 0.00 0.00 7. Other statutory liabilities 54.70 60.75 60.00 (due within one year) 8. Deposits/Instalments of term 684.43 1075.27 1664.08 loans/DPGs/Debentures, etc. (due within one year) Deposits/Redemption of Pref.capital 0.00 0.00 0.00 (due within one year) 9. Other current liabilities & 548.79 618.57 620.00

64

provisions (due within 1 yr) (Specify major items) Interest accrued but not due 66.37 68.03 65.00 Commission payable 123.11 132.88 130.00 Others 359.31 417.66 425.00 capital creditors 0.00 0.00 0.00 Sub-total (B) 1678.99 3044.66 3478.99 10. Total current liabilities 7558.30 10187.92 11751.23 (total of 1 to 9 excld 1(iii) 11. TERM LIABILITIES 12. Preferance shares 1729.80 1904.80 1854.80 (redeemable after one year) 13. Term loans (excld instalments 12067.56 10670.11 9856.03 payable within one year) 14. Deferred Payment Credits (creditors for capital items) (excluding instalments due 229.48 223.75 312.50 within one year) 15. Others- Capital Creditors & provisions 388.04 166.08 200.00 16. Other term liabilities 90.44 98.86 200.00 17. TOTAL TERM LIABILITIES 14505.32 13063.60 12423.33 18. TOTAL OUTSIDE LIABILITIES 22063.62 23251.52 24174.56 (item 10 plus item 17) 19. Ordinary share capital 2129.20 2129.20 2129.20 20. Capital Subsidy 0.00 0.00 0.00 21. Deferred Tax Liability 68.94 156.40 175.71 22. Other reserves (excluding 1479.10 1462.85 1450.35 provisions) Share Premium 23. Surplus(+) or deficit(-) in -1610.85 -1418.67 -850.16 Profit & Loss account 23a. Others ( 0.00 0.00 0.00 24. NET WORTH 2066.39 2329.78 2905.10 25. TOTAL LIABILITIES 24130.02 25581.30 27079.66 31/3/2009 31/3/2010 31/3/2011 ASSETS AUDITED AUDITED ESTIMATES CURRENT ASSETS 26. Cash and Bank Balances 70.95 21.44 21.44 27. Investments(other than long 0.00 0.00 0.00 term Investments) (i) Government & other trustees Securities (ii) Fixed deposits with banks 28. (i) Receivables other than 1936.86 2172 2625.18 deferred & exports (including bills purchased and discounted by banks) Local Sale 1936.86 2172.00 2625.18 (ii) Export receivables 1387.80 1125.44 1244.52 29. Instalments of deferred receivables within one year 30. Inventory 4049.74 6367.75 7718.44 (i) Raw materials (including

65

stores & other items used in the process of manufacture) a) Imported 0.00 0.00 0.00 b) Indigenous 2908.78 5055.42 6055.31 (ii) Stocks-in-process 414.29 565.04 684.04 (iii) Finished Goods 486.62 481.11 679.09 (iv) Other consumables spares a) Imported 67.32 83.52 75.00 b) Indigenous 172.73 182.66 225.00 31. Advance to suppliers of raw 93.84 322.55 150.00 materials & stores/spares 32. Advance payment of taxes 17.45 26.40 25.00 33. Other current assets 888.75 1307.71 1265.00 (specify major items) cst/export incentive receivables 179.96 470.75 415.00 Other 708.79 836.96 850.00 Prepaid Exp. 0.00 0.00 0.00 34. TOTAL CURRENT ASSETS 8445.39 11343.29 13049.59 (Total of 26 to 33) 35. FIXED ASSETS 36. Gross Block (land & building 26809.06 26746.43 27993.43 machinery, work-in-process) 36. Depreciation to date 11242.18 12625.67 14080.61 37. NET BLOCK (35-36) 15566.88 14120.76 13912.82 OTHER NON-CURRENT ASSETS 38. Investments/book debts/advances/ 117.75 117.25 117.25 deposits which are not Current Assets 39. Non-consumables stores & spares 0.00 0.00 0.00 40. Other non-current assets 0.00 0.00 0.00

41. TOTAL OTHER NON CURR.ASSETS 117.75 117.25 117.25

42. Intangible assets (patents, 0.00 0.00 0.00 goodwill, prelim, expenses, bad/ doubtful expenses not provided for etc.) 43. TOTAL ASSETS (34+37+41+42) 24130.02 25581.30 27079.66 44. TANGIBLE NET WORTH (24-42) 2066.39 2329.78 2905.10 45. NET WORKIG CAPITAL 887.08 1155.37 1298.36 [(17+24)-(37+41+42)] The above table shows the calculation of net working capital for XYZ Limited the working capital requirements for 2011 is Rs 1298.36 lacs and for the next year, it is Rs 1428.60 lacs. The next form shows the various holding levels of current assets which is very important from banker’s point of view. The banker verifies these various holding periods and compares it with the peers and previous years so as to get to know the acceptable level. This can be very important in working capital assessment.

66

Form IV: Comparative statement of current assets and liabilities This form explains the operating cycle of the company. Operating cycle forms an integral part of the company’s business and helps in understanding the health of the business. The operating cycle is calculated using various parameters as given below (Raw material holding period + Work in process holding period + finished goods holding period + receivables collection period) –accounts payable period The figures in brackets in the form indicate these stated parameters and can be used to calculate the operating cycle. The company analyzes these parameters comparing it with previous years to understand the trend, check whether the values are reasonable or not and to finally know the health of the business. It must be noted these values can be in days or months.

ANALYSIS OF CURRENT ASSETS AND LIABILITIES

31/3/2010 31/3/2011 31/3/2012 A. CURRENT ASSETS - - -

1. Raw materials (including stores

& other items used in the process

of manufacturing) a) Imported Amount 0.00 0.00 0.00 b) Indigenous Amount 2908.78 5055.42 6055.31 Months' consumption 2.38 3.60 3.64 2. Other consumables spares, excluding those included in (1) above a) Imported Amount 67.32 83.52 75.00 Months' consumption 1.88 1.93 1.64 b) Indigenous Amount 172.73 182.66 225.00 Months' consumption 0.62 0.61 0.65 3. Stocks-in-process: 414.29 565.04 684.04 Amount Months' cost of production 0.23 0.29 0.30

67

4. Finished Goods 486.62 481.11 679.09 Months' cost of sales 0.27 0.25 0.30

5. Receivables other than export & 1936.86 2172.00 2625.18

deferred receivables (including

bills purchased & discounted by banks) Amount Months' domestic sales 1.58 1.63 1.65 (excldg def payment sales)

6. Export receivables (including

bills purchased & discount) Amount 1387.80 1125.44 1244.52 Months' export sales 1.98 1.27 1.25 7. Advances to suppliers of 93.84 322.55 150.00 materials & stores/spares, Consumables

8. Other current assets including cash

& bank balances & defer receivables 977.15 1355.55 1311.44

due within one yr (specify major

items) Cash & Bank balances Invstmt

except long-term instlmts of def

recoverables others

9. TOTAL CURRENT ASSETS 8445.39 11343.29 13049.59

31/3/2009 31/3/2010 31/3/2011 II. CURRENT LIABILITIES - - - (other than bank borrowings for AUDITED AUDITED ESTIMATES working capital

10. Creditors for purchase of raw

materials, stores and consumable

Spares Amount 347.50 1261.06 1104.92 Month's purchases) 0.21 0.63 0.50 11. Advances from Customers 43.57 29.01 30.00 12. Statutory liabilities 54.70 60.75 60.00

13. Other current liabilities-specify

major items) a) S.T. borrowings-Others 0.00 0.00 0.00

68

b) Dividend payable 0.00 0.00 0.00

c) Instalments of TL.DPG and 684.43 1075.27 1664.08

public deposits

d) Redemption of Pref. Shares due within year 0.00 0.00 0.00

e) Other current liabilities and 548.79 618.57 620.00

Provisions 14. TOTAL 1678.99 3044.66 3478.99 The month’s cost of sales or holding period is compared with previous years so as to understand the working capital requirements. There has not been enough variation for the company and the holding level seems reasonable. Form V: Maximum permissible bank finance

COMPUTATION OF MPBF FOR WORKING CAPITAL

31/3/2010 31/3/2011 31/3/2012 AUDITED AUDITED ESTIMATES FIRST METHOD OF LENDING 1. Total Current Assets 8445.39 11343.29 13049.59 2. Other current liabilities 994.56 1969.39 1814.92

(Other than bank borrowings/ term loan)

installment payable in next year) 3. Working capital gap 7450.83 9373.90 11234.67 4. Min. stipulated Net working capital 1515.76 2062.12 2497.54 (25% of WCG excluding export receivables) 5. Actuals/projected net working Capital 887.08 1155.37 1298.36 6. Item 3 minus item 4 5935.07 7311.79 8737.13 7. Item 3 minus item 5 6563.75 8218.53 9936.31 8. Maximum permissible bank finance (lower of 6 or 7) 5935.07 7311.79 8737.13 9. Excess borrowings representing shortfall in NWC SECOND METHOD OF LENDING 1. Total current assets 8445.39 11343.29 13049.59 2. Other current liabilities 994.56 1969.39 1814.92

(Other than bank borrowings/ term loan)

installment payable in next year) 3. Working capital gap 7450.83 9373.90 11234.67 4. Min.stipulated Net w.capital 1764.40 2554.46 2951.27 (25% of Total current assets excluding export receivables) 5. Actuals/projected net working 887.08 1155.37 1298.36 Capital

69

6. Item 3 minus item 4 5686.43 6819.44 8283.41 7. Item 3 minus item 5 6563.75 8218.53 9936.31 8. Maximum permissible bank finance (lower of 6 or 7) 5686.43 6819.44 8283.41 9. Excess borrowings representing shortfall in NWC Following analysis can be made on basis of above table:

• The bank is eligible to give Rs 8283.41 lacs as working capital in the year 2013. • Actual NWC is basically the Working capital that must be arranged by the owner in

order to meet the requirements. • In the year 2013, owner could arrange only 1298.36 lacs as against 2951.27 lacs

required and thus, he ends up having an excess borrowing of Rs 1652.91 lacs. • The bank provides the company with bank finance of 8283.41 lacs.

It must be noted that the bank can only provide company with 75% of working capital gap and not more than that.

13.2. Working Capital Loan Proposal  Name of the Borrower : ABC International Ltd, BO & Controlling Office : BO ECE House, New Delhi. CO South Delhi

GIST OF THE PROPOSAL: Renewal of existing working capital limits of the Co and sanction of adhoc CC limit of Rs 3.00 crs , review of existing TLs and approval of other issues as per item 13& 14 of the note.

Sanction of Working Capital Limits

Existing As per last ED sanction Proposed

FB 22.35 21.00 NFB 1.35 1.35

Approval of other Issues, if any

Whether fresh/renewal/ enhancement

Review of WC limits

Asset Classification as on 31-03-12 and last PMS score

Standard, PMS score 300

Credit Risk Rating by Bank is B

Rating

Date of Rating

Score ABS Reasons fordegradation

Present B 21-07-11

42.77 31-03-11

Previous

C 22-09-10

38.89 31-03-10

70

Rating from External Agency (The external rating should be mapped to the internal rating) Not yet done.

Facility rated

Rating Date of rating

Rating Agency

Remarks

Long Term

BB 30-08-2011

Care

Short Term

PS4 30-08-2011

Care

Whether Agriculture/Retail/ SME/Others (Please specify)

Others

a) Whether Sensitive Sector – Real Estate/Capital Market b) Applicable Risk weight

NO 100%

Consortium/Multiple Banking Consortium Lead Bank BOI PNB’s Share % Existing 30% Proposed 22.06% Date of application 20-03-12 Date of receipt of application at BO/CO/HO

20-03-12

Date of last sanction &authority 05-01-2011, ED Customer ID No. 100502671 Activity code (as per ladder) 6502 2. Borrower’s Profile

a. Group Name NO group b. Address of Regd./Corporate Office RC Industrial Area, NKP, Distt.

b. Works/Factory RC Industrial Area,NKP, Distt. c. Constitution and constitution code as

per ladder Ltd Co,35

d. Date of incorporation/ Establishment

24.04.1984

e. Dealing with PNB since October 1999 f. Industry/Sector Textile – Cotton yarn and woven fabrics g. Business Activity (Product)/

Installed Capacity. Manufacturing & Export of Cotton Yarn, Woven & Knitted Fabric, Installed capacity as on 31-03-2012 Spindles airjet : 39312 Nos. Looms : 126 Nos Denim fabric in million mtrs 15

71

4.A Facilities Recommended :

(Rs. in Crore) Nature Existing Proposed Secured/Unsecured along with

the basis thereof (As per RBI’s guidelines)

Fund Based

CC(H)/PC 11.10 11.10 SecuredWCDL - -FOBP/FOUBP/CCBD 3.90 3.90 Unsecure/securedBD(LC) with in FOBP/FOUBP

(1.00) 1.00) Secured

Others(outside PBF) FOBP/FOUBLC 5.55 4.20 Unsecured Standby PC/PCFC 1.80 1.80 DoFund Based Ceiling 22.35 21.00Non Fund Based ILC/FLC ILG/ FLG Non Fund Based Ceiling 1.35 1.35Corp Loan(OS) I 3.30 3.30 Secured Term Loan(OS) II 4.90 4.90 Do Limit of credit exposure on account of all derivative products

TOTAL COMMITMENT 31.90 30.55 4.B Our Commitment and Maximum Permissible Exposure Norms

Existing Proposed %age of Bank’s Capital Funds as on 31.03.______

As per Exposure Norms

Amount (%age) Company 31.90 30.55 Group 31.90 30.55 Credit Rating by agencies {CRISIL/ICRA/CARE/FITCH INDIA} with purpose of such rating : Agency Rating Date of

Rating Significance of Rating

Purpose Validity Date

CARE BB(long term)

30-08-2010 satisfactory General One Year

19.3 OTHER INCOME Other income is on account of scrap sales, interest received from buyers and Misc. Income. During the year 2010-11, the company earned other income of Rs. 1.81 crores and has estimated / projected the same at 1.00 crores for the current year and next year respectively. Considering the level of operations of the company, the estimates/projections appear reasonable and may be accepted.

72

PROFITABILITY

Year Net Profit Net Profit/

Sales (%) Cash Profit % Change

2008-09 (Audited) -14.67 -6.99 -1.82 - 2009-10 (Audited) -13.05 -5.65 1.45 179.96 2010-11 (Audited) 1.92 0.72 15.81 990.34 2011-12 (Estimated) 5.69 1.83 20.24 28.02 2012-13 (Projected) 10.37 2.94 24.92 23.12

The company recorded net profit of Rs. 1.92 crores for the year 2010-11 on a sales turnover of Rs. 266.30 crores (Net Profit/sales ratio: 0.72%) against estimated net profit of Rs. 0.11 crores and sales turnover of Rs. 243.07 crores. The company has surpassed all the estimates. In the previous year (2010-11), company has crossed their break even point and registered profit of Rs. 1.92 crores. In the current year company has estimated profit of Rs. 5.69 crores and projected net profit of Rs. 10.37 crores for the year 2012-13. The company has identified that out of its three divisions i.e. spinning, weaving and denim, denim division being a value addition is performing better as compared to other divisions. The company therefore is going to increase its denim capacity by 50% and the same will be operational from 1/1/2012. OBC have already sanctioned Rupee Term Loan of Rs. 8.50 crores. The pay back period is three years for the additional investment in denim division. The company has further informed that it is continuously trying to improve its productivity, efficiency, and net realization and reducing its cost by regular training of its personnel, changing product mix, developing new markets etc. There are efforts are reflected in the performance. In view of the above, we may accept profitability estimates / projections submitted by the company. CURRENT RATIO

Year Current Ratio 2008-09 (Audited) 1.19 2009-10 (Audited) 1.11 2010-11 (Audited) 1.11 2011-12 (Estimated) 1.11 2012-13 (Projected) 1.12 The current ratio of the Company as on 31.03.2011 was at 1.11 as against estimates of 1.12, submitted at the time of last review so the current ratio as on 31.03.2011 was more or less as per the estimates only. It is pertinent to mention that the current ratio of the company has been below the bank’s benchmark of 1.33 in earlier years also. The reasons explained by the company are:-

a) The company has incurred losses during the year 2008-09 & 2009-10 resulting in reduction in NWC.

b) Increase in repayment of Term loans as majority of terms loan instalments are going to commence from the year 2011-12 only. Term loan installments falling due within one year are shown as part of Current Liabilities as per details given below :-

73

As on Amount (Rs. In Crores)

Repayments during

31.03.08 3.32 2009-10 31.03.09 6.84 2010-11 31.03.10 10.75 2011-12 31.03.11 16.64 2012-13 31.03.12 20.57 2013-14

Current ratio is estimated at 1.11 and 1.12 as on 31.03.2012 & 31.03.2013 respectively. Therefore, treatment of term loan installments falling due within one year as current liabilities is affecting current ratio. However, despite of above constraints, company has been regular in meeting its obligation towards servicing of interest on WCFBL and interest and installments of corporate loan availed at our end. In view of the above, we may accept lower estimated / projected current ratio of 1.11 as on 31.03.2011 and 31.03.2012 respectively. 19.7 DEBT EQUITY RATIO (DER)

Year Debt equity Ratio Term Liab/TNW 2008-09 (Audited) 6.94 4.36 2009-10 (Audited) 11.05 7.26 2010-11 (Audited) 10.70 6.35 2011-12 (Estimated) 8.85 4.55 2012-13 (Projected) 6.09 2.70 The Debt Equity ratio was 11.05 as on 31.03.2010 and 10.70 as on 31.03.2011 (as against 10.83 estimated at the time of last review). The higher DER is attributed to losses incurred by the company during the year 2008-09 & 2009-10 which has resulted in erosion of TNW. DER is estimated at 8.85 and projected at 6.09 as on 31.03.2012 and 31.03.2013 respectively in view of improved profitability and repayment of term loan. 8. SECURITY A. Primary

For existing working capital limits -

o 1st pari-passu charge on existing and future current assets of the company which has been created by execution of Joint documents by the consortium on 08-02-2012 for Rs 92.50 for the consortium and charge registered with ROC on 11.02.2012.

For existing Corporate Loan & Term Loan

o 1st pari-passu charge on existing and future fixed assets of the company has been created on 22-01-09 on the IP at plot No SP-2/1(A) &SP -2-2 at NKP industrial Area , Distt Alwar Raj (leasehold land measuring 160,000 sq mts) as confirmed by IFCI for our Corp loan of Rs 6.00 crs and TL of Rs 6.20 crs.(charge registered on 26-02-09)

74

B. Collateral i) Personal /Corporate Guarantee (Rs. In crs)

Name of Guarantor

Relation with borrower

Net Worth

IP Date of confidential report

Prev. 31.3.10

Present 31.3.11

Prev.

Present

Prev. Present*

Sh. XXX CMD 0.65 0.78 - - 17-08-10 ……. M/s. KP Ltd. Group Co 12.75 12.80 -- -- 17-08-10 …….

Latest CR being complied ii) 2nd charge on block assets for working capital limits Rs in crs

As per ABS 31.03.11

a) Value of block assets as on 31.03.2011 141.21 b) Extent of first charge holders 117.45 c) Balance (residual charge) 23.76 d) Our share 30% 7.13

Security Description

Area inSq M orSq Ft

Ownership

Value(block assets) Basis for valuation

Date

Whether existing/ fresh

Last sanction

Present BV

Realisable value(31-03-11)

SP2/1(A) &SP -2-2

160,000 sq mts

The CO 138.67 138.67 138.67 Balance sheet

31-03-11

existing

8 c Status of creation of second charge:

Second charge on the above mentioned IPs at Neemrana Raj. for present enhanced working capital limits as per our sanction dated 5.1.2011 has since been created on 25.03.2012.

9. Position of Account as on 13-04-2012 (Rs. in crs)

Nature Limit* VS DP Balance Irregularity PC/CC 16.80 23.06 16.00 15.86 Nil FOBNLC 4.20 2.93 2.93 Nil ILC/FLC 1.35 0.90 Nil TLI 6.00 3.30 3.30 Nil TLII 6.20 4.90 4.90 Nil

75

Justification for working capital sanction

i) Assessment of Fund Based Limit

Previous Year (Actuals)

Current Year 2011-12 (Estimates)

Accepted 2011-12

(a) Total Current Assets

113.43 130.50 130.50

(b) Current Assets net of exports receivables

102.18 118.05 118.05

(c) Other Current Liabilities* 30.45 34.79 34.79 (d)Term Loan Instalments due in next one year

10.75 16.64 16.64

(e) Working Capital Gap (a –(c-d)) 93.73 112.35 112.35 (f) Minimum stipulated Net Working Capital (25% of "b")

25.55 29.51 29.51

(g) Actual/Projected Net Working Capital

11.55 12.98 12.98

(h) (e –f) 68.18 82.84 82.84 (i) (e-g) 82.18 99.37 99.37 (h) MPBF (lower of "h" and "I") 68.18 82.84 82.84 (i) Excess Borrowings, if any -- -- -- *Including TL instalments Strengths & Weakness with mitigants, if any Strengths

• Promoters have experience in textile line and are well known in their industry. • State of the Art manufacturing facilities. • Cost competitiveness and knowledge of the market.

Weak nesses 1. Increasing competition from new entrants and existing exporters. Mitigant: In view of good standing of the Co, it is capable of meeting the competition. 2. Being agricultural commodity, supplies / prices at times are affected by weather / climatic conditions. This may affect profit margins. Mitigant long experience of the Co enables it to withstand such adversities. Company purchases cotton during crop season and is having experience in hedging against adverse movements. Recommendations:

In view of the above we recommend for sanction of the following limits

76

(Rs. in crs) Limits Existing proposed TL 1&2,Rs 8.20 1&2, Rs 8.20 WC (FB) 22.35 21.00 NFB 1.35 1.35 Total/ Ceiling

31.90 30.55

14. Conclusion and Recommendations 

14.1. Conclusions • Lending is more of an art than an exact science. Taking perfect lending decision requires

understanding the business of the company and analyzing it from multiple perspectives.

While attempt is made to infuse objectivity in the appraisal, sound lending decision involves

taking subjective view of the proposal. This is where experience and judgement of the

appraiser play a key role.

• Since banks lend the funds deposited by the general public with expectation of safety and

security the lending decisions taken by banks primarily focus on the safety of funds. Risk

aversion and risk diversion are the main parameters in bank lending.

• To remain viable, a bank must earn adequate profit on its investment. This calls for adequate

margin between deposit rates and lending rates. In this respect, appropriate fixing of interest

rates on both advances and deposits is critical. Unless interest rates are competitively fixed

and margins are adequate, banks may lose customers to their competitors and become

unprofitable.

• To mitigate risk, banks lend to a diversified customer base. Diversification should be in terms

of geographic location, nature of business etc. If, for example, all the borrowers of a bank are

concentrated in one region and that region gets affected by a natural disaster, the bank's

profitability can be seriously affected.

• Banks achieve diversification by specifying strict exposure norms that limit the exposure to a

particular industry, business group and company.

• Term loan appraisal mainly focuses on the viability of the project and its ability to generate

enough cash to service the debt over the tenure of the loan.

77

• Appraisal Working capital financing proposal is focused on ascertaining the working capital

requirements of the fund. Over funding will lead to operational inefficiencies while under

funding could impact the normal operation.

• Different industries possess different challenges in WC assessment as, the WC cycle vary

from industry to industry.

• Post sanction processes that include monitoring of accounts, ensuring end-use of funds etc.

are as critical as pre-sanction appraisal process for the security of funds.

• In general terms, the project is likely to receive favorable consideration and detailed appraisal

is taken if:

o It has priority according to Govt and bank guidelines

o The promoters inspire confidence

o The technology being adopted is well proven.

o The product to be traded has market potential

o The promoter’s contribution is not unreasonably low.

o Profitability estimates are conservative and indicate repayment of proposed

institutional loans.

• The project is rejected without detailed appraisal if it has some of the following features:

o Banker’s report on the promoters is not satisfactory

o Promoters are reported to have indulged in illegal and anti social activities.

o Financial position of the promoter company is not satisfactory.

o Cost of the project is unduly high.

o Promoter’s contribution is unusually low and promoters decline to increase it

o Debt equity ratio abnormally low

o Industry to which a particular unit belongs has low priority or is included in the

negative list in govt. guidelines.

o Location of the proposed unit has apparent disadvantages eg far removed from

sources of raw materials.

78

o Second hand equipment to be acquired is too old and will not have trouble free

residual life

o Process know how has become obsolete

o There is no certainty that utilities like power, water will be available by the time the

project needs them.

79

 

14.2. Recommendations 

1. More stress should be placed on collateral valuations. Since term loans are advanced

for diverse category of businesses, sector expert should be roped in for collateral

valuations.

2. Collaterals should be estimated gross amount, expressed in terms of money, that

could be typically realized from a liquidation sale, given a reasonable period of time

to find a purchaser (or purchasers), with the seller being compelled to sell on an as-

is, where-is basis, as of a specific date.

3. If any of the critical ratios is marginally unfavorable then additional collaterals

could be charged or pricing of the loan could be revised upward to

compensate for the additional risk.

4. Working capital loan financing requires frequent interaction between lender

and loanee. Bank should also finance working capital requirements of the

company in addition to the term loan to the same. Not only this will bring

additional business to the bank but also, in effect, it will lead to continuous

monitoring of financial and operational health of the business.

5. Due to increased activism and regulatory crises like that with spectrum

allocation, mining leases, land acquisitions issues, environmental

considerations etc. viability of otherwise sound projects is threatened. Social,

political and economical risks should also be taken into consideration while

deciding project viability. Evaluation of these risks should be made

mandatory in TEV report. In addition, while assessing the risk rating for a

particular project, these factors must be taken into account.

6. Intercompany transactions should be taken into account while analyzing

financial statements. This is particularly important for the companies

belonging to a closely held group because intercompany transaction may be

used to make financial of the borrowing group companies look good.

7. More stress should be placed on the analysis of cash flows. Income is

calculated based on accounting principles while debt has to be serviced

80

through the cash flows. With short term perspective, a profitable firm may not

be good for lending purpose if it do not generate enough cash to service the

debt. Cash flow based computation of working capital requirement has also

been recommended by the RBI for assessment of working capital

requirement. Cash flows factor in the past trends and also take into account

the company specific factors

8. As described above a profitable firm is not necessarily also good for lending

purpose in short term. Firm may be generating good accounting profits but

there could be serious liquidity problems. To identify these issues, NWC to

Sales ratio could be calculated while appraising working capital financing

proposals. Ideally this ratio should be around 8% - 12%. If NWC to Sales

ratio is less then it means that business is growing too fast without building an

adequate backup in the form of NWC also there are chances of serious

liquidity problems and company is relying more on short term funds.

9. Financial and operational performance of the company applying for loan

should be compared with its industry peers. Relative performance

comparisons will not only highlight the management capability but also help

in identifying any abnormalities in the information submitted by the

company.

10. Forward looking statements with respect to sales, profitability etc. provided in

the DPR and other reports submitted by the company should be treated with

caution. Market analysis, demand analysis, sales projections etc. should be

evaluated on with prevailing norms. Earlier performance and trend analysis

could be used to ensure objectivity in forward looking statements.

81

References 1. Mukherjee, DD (2010), Credit Appraisal Risk Analysis & Decision Making, Jain

Book Depot

2. Ganguin, B. and Bilardello,J (2005), Fundamentals of Corporate Credit Analysis,

McGraw-Hill

3. PNB, Annual Report ( 2010-2011)PNB

4. Ready Reckoner 2010

5. Martin, J. P. and Cendrowski, H. (2010), Financial Statement Fraud and the Lending

Decision, COMMERCIAL LENDING REVIEW

6. Kiehnau, L. and Budyak, J. T. (2009),The Valuation of Collateral, THDE SECURED

LENDER

7. Gunjan,M; Vikram,S. and Soumyadeep,S.(2010), Indian Banks' Methods for

Assessing Working Capital, Advances In Management, Vol. 3 (12) Dec. (2010) pp7-

16

8. Bidani,S.N. and Sahay,B. (1988), How Bank Credit is Administered:Supervision and

Follow-up, Vision Books, Delhi

9. Hale, Roger H.H. (1983), Credit Analysis-A Completer Guide, John Wiley & Sons

Inc., NewYork

10. Donaldson, T.H. (1983), Understanding Corporate Credit, Macmillan

11. Chatterjee, A. (1978), Bank Credit Management (How to Lend Effectively), Suneja

Publishing Corporation, Delhi

12. Earlier studies done on Credit Division