SBI Bank Project

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Credit risk management with reference to Punjab national bank Naupad, thane Dissertation Submitted to the Padmashree Dr. D.Y. Patil University in partial fulfillment of the requirements for the award of the Degree of MASTERS IN BUSINESS ADMINISTRATION Submitted by: KUNAL JOSHI (Roll No. 01102) Research Guide MR. MANGESH JADHAV Assistant Professor Department of Business Management Padmashree Dr. D.Y. Patil University CBD Belapur, Navi Mumbai APRIL 2013

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SBI Bank Project

Transcript of SBI Bank Project

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Credit risk management with reference to Punjab national bank

Naupad, thane

Dissertation Submitted to the

Padmashree Dr. D.Y. Patil University

in partial fulfillment of the requirements for the

award of the Degree of

MASTERS IN BUSINESS ADMINISTRATION

Submitted by:

KUNAL JOSHI

(Roll No. 01102)

Research Guide

MR. MANGESH JADHAV

Assistant Professor

Department of Business Management

Padmashree Dr. D.Y. Patil University

CBD Belapur, Navi Mumbai

APRIL 2013

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Declaration

I hereby declare that the dissertation “Credit risk management with

reference to Punjab national bank, naupada thane”

submitted for the MBA Degree at Padmashree Dr. D.Y. Patil

University’s

Department of Business Management is my original work and the

dissertation

has not formed the basis for the award of any degree, associate ship,

or any

other similar titles.

Place: Mumbai

Date:

KunalPratap Joshi

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CERTIFICATE

This is to certify that the dissertation entitled “Credit risk management with reference to Punjab national bank, naupada thane” is the bonafide research work carried out by Mr. Kunal Joshi student of MBA, at Padmashree Dr. D.Y. Patil University's Department of Business Management during the year 2011 -2013, in partial fulfillment of the requirements for the award of the Degree of Master in Business Management and that the dissertation has not formed the basis for the award previously of any degree, diploma, associate ship, fellowship or any other similar title.

Dr. R. Gopal, Mr. Mangesh jadhav

Director Assistant Professor

Department of Business Mgt,

Padmashree Dr. D. Y. Patil

University)

Place : Navi Mumbai

Date :

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Acknowledgement

In the first place, I thank MrMangeshjadhav, Lecturer,

Department of Business Management, Padmashree Dr. D.Y. Patil

University, Navi Mumbai for having given me her valuable guidance

for the project. Without her help it would have been impossible for

me to complete the project.

Success is the manifestation of diligence, perseverance,

inspiration, and motivation along with determination, discipline and

dedication. I take this opportunity to express my deep and sincere

gratitude to the persons who inspired and guided during my project

completion.

To all my faculty members of PadmashreeDr.D.Y.Patil,

Department of Business Management for co-operation during the

project. Also, I thank all the staff members of the DYPDBM and

friends in making this project successful.

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Preface

While searching for a suitable topic for the MBA Dissertation, I

had gone through the various projects & books, ultimately settling

on the topic risk management –A Study With Reference To

Punjab national bank

The topic inspired me, to go through the various books, articles,

reports etc. to know the process and also understand the real

issues plaguing the industry.

All these aspects then resulted in the development of the project

report titled ‘risk management –A Study With Reference To

Punjab national bank.’

It is strongly hoped that this project covers not only the various

requirements of the Project Study but also of the Industry.

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CHAPTERIZATION

Chapter

No

Title

A List of Tables

B List of Figures

C List of Abbreviations

1 Executive Summary

2 Objective of the Study

3 Research Methodology

4 REVIEW OF LITERATURE

5 LIMITATION OF THE STUDY

6 BANKING INDUSTRY IN INDIA – A

PERSPECTIVE

6.1

Introduction

6.2

Government init iatives

6.3

Bank initiatives

6.4

Current Banking scenario

6.5 Growth of Banking Sector

6.6 Growth of Banks

7 CREDIT RISK MANAGEMENT – AN

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INTRODUCTION

8 INTRODUCTION

9 CREDIT RISK MANAGEMENT

9.1 CREDIT RISK

9.2 CREDIT RISK MANAGEMENT SYSTEM IN PNB

10 POST SANCTION FOLLOW UP OF LOANS

11 ANALYSIS & INTERPRETATION

11.1 PNB’s LOAN POLICY

11.2 CREDIT APPRAISAL PROCESS AT PNB

12 CASE STUDY – ABC PARTS PVT. LTD

13 CONCLUSION& RECOMMENDATIONS

14 QUESTIONNAIRE

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1. EXECUTIVE SUMMARY

This project was undertaken at the Punjab National Bank Circle

Office Delhi, at the Credit Department. Financial requirements for

Project Finance and Working Capital purposes are taken care of at the

Credit Department. Companies that intend to seek credit facilities

approach the bank. Primarily, credit is required for following

purposes:

a. Working capital finance

b. Term loan for mega projects

c. Non Fund Based Limits like Letter of Guarantee, Letter of

Credit etc.

Project Financing discipline includes understanding the rationale for

project financing, how to prepare the financial plan, assess the risks,

design the financing mix, and raise the funds. In addition, one must

understand some project financing plans have succeeded while others

have failed. A knowledge-base is required regarding the design of

contractual arrangements to support project financing; issues for the

host government legislative provisions, public/private infrastructure

partnerships, public/private financing structures; credit requirements

of lenders, and how to determine the project's borrowing capacity;

how to analyze cash flow projections and use them to measure

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expected rates of return; tax and accounting considerations; and

analytical techniques to validate the project's feasibility

Project finance is different from traditional forms of finance because

the credit risk associated with the borrower is not as important as in

an ordinary loan transaction; what is most important is the

identification, analysis, allocation and management of every risk

associated with the project.

The purpose of this project is to explain, in a brief and general way,

the manner in which risks are approached by financiers in a project

finance transaction. Such risk minimization lies at the heart of project

finance. Efficient management of credit portfolio is of utmost

importance as it has a tremendous impact on the Banks’ assets quality

& profitability. The ongoing financial reforms have no doubt

provided unparallel opportunities to banks for growth, but have

simultaneously exposed them to various risks, which need to be

effectively managed.

The concept of Credit Management is undergoing radical changes.

Credit Risk in all exposures calls for precise measuring and

monitoring for taking considered credit decisions with suitable risk

mitigants, risk premium, etc. Credit portfolio should be well

diversified in various promising sectors with a cautious approach to

be adopted in risky segments.

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Also, lending continues to be a primary function in banking. In the

liberalized Indian economy, clientele have a wide choice. External

Commercial Borrowings and the domestic capital markets compete

with banks. In another dimension, retail lending- both personal

advances and SME advances- competes with corporate lending for

funds and for human resources. But lending by nature cannot be an

aggressive selling activity, disregarding the risks involved. Bank has

to be competitive without compromising on the basic integrity of

lending. The quality of the Bank’s credit portfolio has a direct and

deep impact on the Bank’s profitability.

The study has been conducted with the purpose of getting in-depth

knowledge about the credit appraisal and credit risk management

procedure in the organization for the above said first two purposes.

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2. OBJECTIVES

∑ To study broad contours of management of credit, the loan

policy, credit appraisal for business units i.e. for working capital

loan or Term Loan

∑ To understand the basis of credit risk rating and its significance

∑ To study the above learning and appraise the creditworthiness

organizations those approach PUNJAB NATIONAL BANK for

credit. This would entail undertaking of the following

procedures:

i. Management Evaluation

ii. Business / Industry Evaluation

iii. Technical Evaluation

iv. Legal Evaluation

v. Financial Evaluation

vi. Credit Risk Rating

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3. RESEARCH METHODOLOGY

The methodology being used involves two basic sources of

information primary sources and secondary source.

Primary sources of Information

∑ Meetings and discussion with the Chief Manager and the

Senior Manager of both Credit and Credit Risk Management

Department

∑ Meetings with the clients

Secondary sources of Information

∑ Loan Policy and Internal Circulars of the bank

∑ Research papers, power point presentations and PDF files

prepared by the bank and its related officials

∑ Referring to information provided by CIBIL, Income Tax

files, Registrar of Companies (Ministry of Corporate Affairs),

and Auditor reports

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4.REVIEW OF LITERATURE

4.1 WORKING CAPITAL AND ITS ASSESSMENT

The objective of running any industry is earning profits. An industry

will require funds to acquire “fixed assets” like land and building,

plant and machinery, equipments, vehicles etc… and also to run the

business i.e. its day to day operations.

Working capital is defined, as the funds required for carrying the

required levels of current assets to enable the unit to carry on its

operations at the expected levels uninterruptedly. Thus working

capital required (WCR) is dependent on

i. The volume of activity (viz. level of operations i.e. Production

and Sales)

ii. The activity carried on viz. manufacturing process, product,

production programme, and the materials and marketing mix.

The purpose of assessing the WC requirement of the industry is to

determine how the total requirements of funds will be met. The two

sources for meeting these requirements are the unit’s long-term

sources (like capital and long term borrowings) and the short-term

borrowings from banks. The long-term resources available to the unit

are called the liquid surplus or Net Working Capital (NWC).

It can be explained by visualizing the process of setting up of

industry. The unit’s starts with a certain amount of capital, which will

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not normally be sufficient, even to meet the cost of fixed assets. The

unit, therefore, arranges for a long-term loan from a financial

institution or a bank towards a part of the cost of fixed assets. From

these two sources after meeting the cost of fixed assets some funds

remain to be used for working capital. This amount is the Net

Working Capital or Liquid Surplus and will be one of the sources of

meeting the working capital requirements.

The remaining funds for working capital have to be raised from

banks; banks normally provide working capital finance by way of

advantage against stocks and sundry debtors. Banks, however, do not

finance the full amount of funds required for carrying inventories and

receivables: and normally insist on the stake of the enterprise at every

stage, by way of margins. Bank finance is normally restricted to the

amount of funds locked up less a certain percentage of margins.

Margins are imposed with a view to have adequate stake of the

promoter in the business both to ensure his adequate interest in the

business and to act as a protection against any shocks that the

business may sustain. The margins stipulated will depend on various

factors like salability, quality, durability, price fluctuations in the

market for the commodity etc. taking into account the total working

capital requirements as assessed earlier, the permissible limit, up to

which the bank finance cab be granted is arrived.

While granting working capital advances to a unit, it will be necessary

to ensure that a reasonable proportion of the working capital is met

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from the long-term sources viz. liquid surplus. Normally, liquid

surplus or net working capital be at least 25% of the working capital

requirement (corresponding to the benchmark current ratio of 1.33),

though this may vary depending on the nature of industry/ trade and

business conditions.

Various methods for assessment of Working Capital are discussed in

detail:

1. Operating cycle method:

Any manufacturing activity is characterized by a cycle of operations

consisting of purchase of raw materials for cash, converting them into

finished goods and realizing cash by sale of these finished goods. The

time that lapses between cash outlay and cash realization by sale of

finished goods and realization of sundry debtors is known as length

of operating cycle. That is, the operating cycle consists of:

i. Time taken to acquire raw materials and average period for

which they are in store.

ii. Conversion process time

iii. Average period for which finished goods are in store and

iv. Average collection period of receivables (sundry debtors).

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Operating Cycle is also called cash-to-cash and indicates how cash is

converted into raw materials, stocks in process, finished goods, bills

(receivables) and finally backs to cash. Working capital is the total

cash that is circulating in this cycle. Therefore, working capital can be

turned over or deployed after completing the cycle. Factors, which

influence working capital requirement, are Level of operating

expenses and Length of operating cycle.

Any reduction in either of the both will mean reduction in working

capital requirement or indicate an efficient working capital

management.

It can thus be concluded that by improving that by improving the

working capital turnover ratio (i.e. by reducing the length of operating

cycle) a better management (utilization) of working capital results. It

is obvious that any reduction in the length of the operating cycle can

be achieved only by better management only by better management of

one or more of the individual phases of the operating cycle period for

which raw materials are in store, conversion process time, period for

which finished goods are in store and collection period of receivables.

Looking at whole problem from another angle, we find that we can set

up extremely clear guidelines for working capital management viz.

examining the length of each of the phases of the operating cycle to

assess the scope for reduction in one or more of these phases.

The length of the operating cycle is different from industry to industry

and from one firm to another within the same industry. For instance,

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the operating cycle of a pharmaceutical unit would be quite different

from one engaged in the manufacture of machine tools. The operating

cycle concept enables to assess working capital need of each

enterprise keeping in view the peculiarities of the industry it is

engaged in and its scale of operations. Operating cycle is an important

management tool in decision –making.

2. Traditional method of assessment of working capital

requirement

The operating cycle concept serves to identify the areas requiring

improvement for the purpose of control and performance review. But,

as bankers, we require a more detailed analysis to assess the various

components of working capital requirement viz., finance for stocks,

bills etc.

Bankers provide working capital finance for holding an acceptable

level of current assets viz. raw materials, stock-in-process, finished

goods and sundry debtors for achieving a predetermined level of

production and sales. Quantification of these funds required to be

blocked in each of these items of current assets at any time will,

FUND RM SIP RECEIVABLES FUND

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therefore provide a measure of the working capital requirement of an

industry.

Raw material: Any industrial unit has to necessarily stock a

minimum quantum of materials used in its production to ensure

uninterrupted production. Factors, which affect or influence the funds

requirement for holding raw material, are:

i. Average consumption of raw materials.

ii. Their availability – locally or form places outside, easy

availability / scarcity, number of sources of supply

iii. Time taken to procure raw materials (procurement time or

lead time)

iv. Imported or indigenous.

v. Minimum quantity supplied by the market (Minimum

Order Quantity (MOQ)).

vi. Cost of holding stocks (e.g. insurance, storage, interest)

vii. Criticality of the item.

viii. Transport and other charges (Economic Order Quantity

(EOQ)).

ix. Availability on credit or against advance payment in cash.

x. Seasonality of the materials.

This raw material requirement is generally expressed as so many

months requirement (consumption).

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Stock in process: Barring a few exceptional types of industries, when

the raw material get converted into finished products within few

hours, there is normally a time lag or delay or period of processing

only after which the raw materials get converted into finished product.

During this period of processing, the raw materials get converted into

finished goods and expenses are being incurred. The period of

processing may vary from a few hours to a number of months and unit

will be blocked working funds in the stock-in-process during this

period. Such funds blocked in SIP depend on:

i. The processing time

ii. Number of products handled at a time in the process

iii. Average quantities of each product, processed at each time

(batch quantity)

iv. The process technology

v. Number of shifts.

Finished goods: All products manufactured by an industry are not

sold immediately. It will be necessary to stock certain amount of

goods pending sale. This stock depends on:

i. Whether the manufacture is against firm order or against

anticipated order

ii. Supply terms

iii. Minimum quantity that can be dispatched

iv. Transport availability and transport cost

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v. Pre-dispatch inspection

vi. Seasonality of goods

vii. Variation in demand

viii. Peak level/ low level of operations

ix. Marketing arrangement- e.g. direct sale to consumers or

through dealers/ wholesalers.

The requirement of funds against finished goods is expressed so many

months’ cost of production.

Sundry debtors (receivables): Sales may be affected under three

different methods:

i. Against advance payment

ii. Against cash

iii. On credit

A unit grants trade credit because it expects this investment to be

profitable. It would be in the form of sales expansion and fresh

customers or it could be in the form of retention of existing

customers. The extent of credit given by the industry normally

depends upon:

i. Trade practices

ii. Market conditions

iii. Whether it is bulky by the buyer

iv. Seasonality

v. Price advantage

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Even in cases where no credit is extended to buyers, the transit time

for the goods to reach the buyer may take some time and till the cash

is received back, the unit will have to be cut out of funds. The period

from the time of sale to receipt of funds will have to be reckoned for

the purpose of quantifying the funds blocked in sundry debtors. Even

though the amount of sundry debtors according to the unit’s books

will be on the basis of Sale Price, the actual amount blocked will be

only the cost of production of the materials against which credit has

been extended- the difference being the unit’s profit margin- (which

the unit does not obviously have to spend). The working capital

requirement against Sundry Debtors will therefore be computed on

the basis of cost of production (whereas the permissible bank finance

will be computed on basis of sale value since profit margin varies

from product to product and buyer to buyer and cannot be uniformly

segregated from the sale value).

The working capital requirement is expressed as so many months’

cost of production.

Expenses: It is customary in assessing the working capital

requirement of industries, to provide for 1 month’s expenses also. A

question might be raised as to why expenses should be taken

separately, whereas at every stage the funds required to be blocked

had been taken into account. This amount is provided merely as a

cushion, to take care of temporary bottlenecks and to enable the unit

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to meet expenses when they fall due. Normally 1-month total

expenses, direct and indirect, salaries etc. are taken into account.

While computing the working capital requirements of a unit, it will be

necessary to take into account 2 other factors,

i. Is the credit received on purchases- trade credit is a normal

practice in trading circles. The period of such credit

received varies from place to place, material to material

and person to person. The amount of credit received on

purchases reduces the working capital funds required by

the unit.

ii. Industries often receive advance against orders placed for

their products. The buyers, in certain cases, have to

necessarily give advance to producers e.g. custom made

machinery. Such funds are used for the working capital of

an industry. It can be thus summarized as follows:

Raw materials Months requirement Rs. A

Stock-in-process Months (cost of Production) Rs. B

Finished GoodsMonths cost of Production required

to be stockedRs. C

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Sundry DebtorsMonths cost of Production (o/s

credits)Rs. D

Expenses One month(normally) Rs. E

Total Current AssetsA+B+C+

D+E

Credit received on

Purchases (months’

Purchase value)

Rs. F

Advance payment on

order receivedRs. G

WORKING CAPITAL REQUIRED (H) = (A+B+C+D+E)- (F+G)

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3. Projected Annual Turnover Method for SME units (Nayak

Committee)

For SME units, which enjoy fund based working capital limits up to

Rs.5 core, the minimum working capital limit should be fixed on the

basis of projected annual turnover. 25% of the output or annual

turnover value should be computed as the quantum of working capital

required by such unit. The unit should be required to bring in 5% of

their annual turnover as margin money and the Bank shall provide

20% of the turnover as working capital finance. Nayak committee

guidelines correspond to working capital limits as per the operating

cycle method where the average production/ processing cycle is taken

to be 3 months.

Example:

Anticipated Annual Output (A) 120

Working Capital Requirement: 25% of A (B) 30

Margin : 5% of A (C) 6

Maximum Permissible Bank Finance (B-C) 24

In Rslacs

Important clarifications:

i. The assessment of WC limits should be done both as per

Projected Turnover Method and Traditional Method; the higher

of the two is to be sanctioned as credit limit. If the operating

cycle is more than 3 months, there is no restriction on extending

finance at more than 20% of the turnover provided that the

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borrower should bring n proportionally higher stake in relation

to his requirements of bank finance.

ii. While the approach of extending need based credit will be kept

in mind, the financial strengths of the unit is also important, the

later aspect assumes greater significance so as to take care of

quality of bank’s assets. The margin requirement, as a general

rule, should not be diluted.

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4. MPBF Method (Tandon and Chore Committee

Recommendations)

The Tendon Committee was appointed to suggest a method for

assessing the working capital requirements and the quantum of bank

finance. Since at that time, there was scarcity of bank’s resources, the

Committee was also asked to suggest norms for carrying current

assets in different industries so that bank finance was not drawn more

than the minimum required level. The Committee was also asked to

devise an information system that would provide, periodically,

operational data, business forecasts, production plan and resultant

credit needs of units. Chore Committee, which was appointed later,

further refined the approach to working capital assessment. The

MPBF method is the fall out of the recommendations made by

Tandon and Chore Committee.Regarding approach to lending: the

committee suggested three methods for assessment of working capital

requirements.

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i. First Method of lending: According to this method, Banks

would finance up to a max. of 75% of the working capital gap

(WCG= the total current assets - current liabilities other than

bank borrowing) and the balance 25 % of the WCG considered

as margin is to come out of long term source i.e. owned funds

and term borrowings. This will give rise to a minimum current

ratio of 1.17:1. The difference of (1.17-1) represents the

borrower’s margin which is popularly known as Net Working

Capital (NWC) of the unit

ii. Second Method of lending: As per the 2nd method Bank will

finance maximum up to 75% of total current assets (TCA) &

Borrowers has to provide a minimum of 25% of total current

assets as the margin out of long term sources. This will give a

minimum current ratio of 1.33:1

iii. Third Method of lending: Same as 2nd method, but excluding

core current assets from total assets and the core current assets is

financed out of long term funds. The term ‘core current assets’

refers to the absolute minimum level of investment in current

assets, which is required at all times to carry out minimum level

of business activity. The current ratio is further improved i.e.

1.79: 1

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Example:

Current Liabilities Current assets

Creditors for

purchase100 Raw material 200

Other current

liability50 Stock in process 20

Bank borrowings 200 Finished goods 90

Receivables 50

Other current

assets10

Total Current

Liabilities350

Total Current

Assets370

(In Rslacs)

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Calculating NWC

First method of lendingSecond method of

lending

Third method of

lending

Total CA 370 Total CA 370 Total CA 370

Less: CL – Bank

Borrowing150

Less: 25% of

CA92

Less: core CA

from LT95

275

Working Capital

Gap220

Less: CL -

Bank

Borrowing

150Less: 25%

from LTS69

25% of WCG

from long term

sources

55

Less: CL –

Bank

Borrowing

150

MPBF 165 MPBF 128 MPBF 56

Current ratio1.17:

1Current ratio

1.33:

1Current ratio

1.79:

1

The above example shows that the contribution of margin by the

borrower increases when financing is shifted from First method to

Second method which is known to be stringent from borrower point

of view (Third method was not accepted by RBI).

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5. Projected Balance Sheet Method (PBS)

The PBS method of assessment will be applicable to all borrowers

who are engaged in manufacturing, services and trading activities

who require fund based working capital finance of Rs. 25 lacs and

above. In case of SSI borrowers, who require working capital credit

limit up to Rs. 5 cr, the limit shall be computed on the basis of Nayak

Committee formula as well as that based on production and operating

cycle of the unit and the higher of the two may be sanctioned.. The

assessment will be based on the borrower’s projected balance sheet,

the funds flow planned for current/ next year and examination of the

profitability, financial parameters etc. unlike the MPBF method, it

will not be necessary in this method to fix or compute the working

capital finance on the basis of a stipulated minimum level of liquidity

(Current Ratio). The working capital requirement worked out is based

on the following:

i. CMA assessment method is continued with certain

modifications.

ii. Analysis of the Profit and Loss account, Balance Sheet,

Funds flow etc. for the past periods is done to examine the

profitability, financial position, and financial management

etc of the business.

iii. Scrutiny and validation of the projected income and expenses

in the business and projected changes in the financial

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position (sources and uses of funds). This is carried out to

examine whether these parameters are acceptable from the

angle of liquidity, overall gearing, efficiency of operations

etc.

In the PBS method, the borrower’s total business operations, financial

position, management capabilities etc. are analysed in detail to assess

the working capital finance required and to evaluate the overall risk.

The assessment procedure is as follows:

i. Collection of financial information from the borrower

ii. Classification of current assets / current liabilities

iii. Verification of projected levels of inventory/ receivables/

sundry creditors

iv. Evaluation of liquidity in the business operation

v. Validation of bank finance sought

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4.2 ASSESSMENT OF TERM LOANS

Term Loans are generally granted to finance capital expenditure, i.e.

for acquisition of land, building and plant and machinery, required for

setting up a new industrial undertaking or expansion/diversification of

an existing one and also for acquisition of movable fixed assets.

Term Loans are also given for modernization, renovation, etc. to

improve the product quality or increase the productivity and

profitability.

The basic difference between short-term facilities and term loans is

that short-term facilities are granted to meet the gap in the working

capital and are intended to be liquidated by realization of assets,

whereas term loans are given for acquisition of fixed assets and have

to be liquidated from the surplus cash generated out of earnings.

They are not intended to be paid out of the sale of the fixed assets

given as security for the loan. This makes it necessary to adopt a

different approach in examining the application of the borrowers for

term credits.

For the assessment to Term Loan Techno Economic Feasibility Study

is done. The success of a feasibility study is based on the careful

identification and assessment of all of the important issues for

business success. A detailed Project Report is submitted by an

entrepreneur, prepared by a approved agency or a consultancy

organization. Such report provides in-depth details of the project

requesting finance. It includes the technical aspects, Managerial

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Aspect, the Market Condition and Projected performance of the

company. It is necessary for the appraising officer to cross check the

information provided in the report for determining the worthiness of

the project.

The feasibility study is a part of Credit Appraisal process and the

same is discussed in the following chapter.

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4.3 BASEL ACCORD & RISK MANAGEMENT

The Basel accord/accords refer to the banking supervision accords

namely Basel I and Basel II issued by the Basel Committee on

Banking Supervision (BCBS).

BASEL I ACCORD

The 1988 Basel Accord primarily addressed banking in the sense of

deposit taking and lending. The main focus was Credit Risk. It

described the strength of the Bank as measured by the Capital

employed. Accordingly it put a minimum level of capital adequacy

(Capital to Credit Risk Weighted Assets ratio) at 8%. Basel I

allocated 4 risk weights i.e. 0%, 20, 50% and 100% to different

exposure types, based on the risk perceived on the exposure types

under the credit portfolio. Basel I provided a set norm for capital

allocation which helped many banks to allocate capital to counter the

risks faced by them.

CRAR = Capital

Risk Weighted Assets (Credit Risk+ Market Risk

+Operational Risk)

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CAPITAL

Tier I

Capital

Paid Up Equity Capital + Statutory Reserves +

Other disclosed free reserves + Capital Reserves

representing surplus arising out of sale proceeds

of Assets + Innovative Perpetual Debt

instruments

Tier II

Capital

Revaluation Reserves (at a discount of 55%) +

General Provisions and Loss Reserves +

Subordinated Debt + Hybrid Debt Capital

Instruments

Risk Weighted Assets

Basel I introduced the concept of Risk Weighted Assets (RWA). All

the assets of a bank (advances, investments, fixed assets etc.) carry

certain amount of risk. In proportion to the quantum of this risk, bank

must maintain capital. Quantification of risk is done in percentage

(0%, 20%, 50% etc.). Exposure when multiplied with these

percentages gives risk based value of assets. These assets are also

called Risk Weighted Assets (RWA).

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BASEL II ACCORD

Banking has changed dramatically since the Basel I document of

1988. Advances in risk management and the increasing complexity of

financial activities / instruments prompted international supervisors to

review the appropriateness of regulatory capital standards under Basel

I. To meet this requirement, the Basel I accord was amended and

refined which came out as the Basel II document. The Basel II

document is structured into three parts. Each part is called as a pillar.

Thus these three parts constitute three pillars of Basel II.

PILLAR I

This pillar is compatible with the credit risk, market

risk and operational risk. The regulatory capital will be

focused on these three risks

PILLAR II

This pillar gives the bank responsibility to exercise the

best ways to manage the risk specific to that bank. It

also casts responsibility on the supervisors to review

and validate banks’ risk measurement models.

PILLAR IIIThis pillar is on market discipline is used to leverage

the influence that other market players can bring

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DIFFERENCE BETWEEN

BASEL I BASEL II

1Limited role of collateral as risk

mitigant1

Recognizes wide range of

Collateral & Guarantees as risk

mitigant

2Not recognizing Operational

Risk2

Recognizes Operational Risk and

prescribes explicit capital charge

for

3Risk weights assignment on

transaction basis3

Risk weight assignment on risk

rating basis

4

Not recognizing tenure or

remaining time to maturity of

exposures in risk assessment

4

Recognizes the tenure or

remaining time to maturity of

exposures in risk assessment

5

Provisions are through Asset

Classification. 5Provisions are through Expected

Loss Estimation

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Scope of the study

All the questions have been analyzed by adding up the

responses against each alternative and answers from the

various respondents. The collected data has been subject to

statistical analysis to draw inferences and suitable

conclusions. Statistical tools like chi-square and percentage

are used. For calculating the table value for analysis with

chi-square, 5% significance level is used.

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5. LIMITATION OF THE STUDY

1. The study is confined to the city of Panvel only.

2. The respondents were generally co-operative, yet some of

them might have biased their reply for certain sensitive

questions.

3. The duration of the study is also in accordance with the

academic objective of the course curriculum. So in pursuit

of academic exercise, the restriction on time has also

brought into study some limitations.

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6. BANKING INDUSTRY IN INDIA – A PERSPECTIVE

6.1 Introduction

Banking in India originated in the last decades of the 18th

century. The oldest bank in existence in India is the State

Bank of India, a government-owned bank that traces its

origins back to June 1806 and that is the largest commercial

bank in the country. Central banking is the responsibility of

the Reserve Bank of India, which in 1935 formally took over

these responsibilities from the then Imperial Bank of India,

relegating it to commercial banking functions. After India's

independence in 1947, the Reserve Bank was nationalized and

given broader powers. In 1969 the government nationalized

the 14 largest commercial banks; the government nationalized

the six next largest in 1980.

The Indian Banking industry, which is governed by the

Banking Regulation Act of India, 1949 can be broadly

classified into two major categories, non-scheduled banks and

scheduled banks. Scheduled banks comprise commercial

banks and the co-operative banks. In terms of ownership,

commercial banks can be further grouped into nationalized

banks, the State Bank of India and its group banks, regional

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rural banks and private sector banks (the old/ new domestic

and foreign). These banks have over 67,000 branches spread

across the country.

The first phase of financial reforms resulted in the

nationalization of 14 major banks in 1969 and resulted in a

shift from Class banking to Mass banking. This in turn

resulted in a significant growth in the geographical coverage

of banks. Every bank had to earmark a minimum percentage

of their loan portfolio to sectors identified as “priority

sectors”. The manufacturing sector also grew during the

1970s in protected environs and the banking sector was a

critical source. The next wave of reforms saw the

nationalization of 6 more commercial banks in 1980. Since

then the number of scheduled commercial banks increased

four-fold and the number of bank branches increased eight-

fold.

After the second phase of financial sector reforms and

liberalization of the sector in the early nineties, the Public

Sector Banks (PSB) s found it extremely difficult to compete

with the new private sector banks and the foreign banks. The

new private sector banks first made their appearance after the

guidelines permitting them were issued in January 1993.

Eight new private sector banks are presently in operation.

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These banks due to their late start have access to state-of-the-

art technology, which in turn helps them to save on manpower

costs and provide better services.

During the year 2000, the State Bank of India (SBI) and its 7

associates accounted for a 25 percent share in deposits and

28.1 percent share in credit. The 20 nationalized banks

accounted for 53.2 percent of the deposits and 47.5 percent of

credit during the same period. The share of foreign banks

(numbering 42), regional rural banks and other scheduled

commercial banks accounted for 5.7 percent, 3.9 percent and

12.2 percent respectively in deposits and 8.41 percent, 3.14

percent and 12.85 percent respectively in credit during the

year 2000.

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6.2 Government initiatives

The Cabinet, on December 1, 2010 approved to provide an

additional amount of US$ 1.33 billion, in addition to the US$ 3.32

billion already provided in the Budget 2010-11, to ensure Tier I

CRAR (Capital to Risk Weighted Assets) of all Public Sector

Banks (PSBs) at 7 per cent and also to raise Government of India

holding in all PSBs to 58 per cent. It also approved that the exact

amount, mode of capitalization and other terms and conditions

would be decided in consultation with the banks at the time of

infusion.

The proposed capital infusion would enhance the lending capacity

of the PSBs to meet the credit requirement of the economy in

order to maintain and accelerate the economic growth momentum.

The RBI has allowed banks to make changes in the repayment

schedules or drawdown without prior approval from the central

bank. However, such a change could be made on the condition that

the average maturity of the loan should remain the same. The

move is expected to make external commercial borrowing (ECB)

transactions easier. Transactions both through automatic and

approval routes can take advantage of this change. Now, without

the prior approval of RBI, Indian companies may borrow up to

US$ 500 million in a year.

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As part of further liberalization of the extant branch licensing

policy in respect of regional rural banks (RRBs), they have been

permitted to open branches in Tier 3 to Tier 6 centres (with

population up to 49,999 as per Census 2001) without the Reserve

Bank's prior authorization provided-

∑ The capital to risk-weighted assets ratio (CRAR) is at least 9 per

cent;

∑ The net non-performing assets (NPAs) are less than 5 per cent;

∑ They have not defaulted in the maintenance of cash reserve ratio

(CRR)/statutory liquidity ratio (SLR) during the last year; and

∑ They have earned a net profit in the last financial year.

On the lending side, the Base Rate system replaced the

Benchmark Prime Lending Rate (BPLR) system with effect

from July 1, 2010. Base Rates of scheduled commercial banks

(SCBs) were fixed in the range of 5.50-9.00 per cent.

Subsequently, several banks reviewed and increased their Base

Rates in the range of 10–50 basis points by October 2010. Base

Rates of major banks, accounting for over 94 per cent in total

bank credit, are in the range of 7.50-8.50 per cent. Banks have

also raised their BPLRs in the range of 25-75 basis points for

their old loans.

As at end-July 2010, around 70,000 branches of 98 banks had

participated in the national electronic funds transfer (NEFT)

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system and the volume of transactions processed increased to

9.5 million in July 2010.

The repo rate and the reverse repo rate under the liquidity

adjustment facility (LAF) have been increased since November

2, 2010 as under:

The repo rate has been raised by 25 basis points from 6.0 per

cent to 6.25 per cent with immediate effect.

The reverse repo rate has been raised by 25 basis points from

5.0 per cent to 5.25 per cent with immediate effect.

The cash reserve ratio (CRR) of scheduled banks has been

retained at 6.0 per cent of their net demand and time liabilities

(NDTL).

Meanwhile, outstanding bank credit in the 15 days up to

October 8, 2010 rose by US$ 10.56 billion to US$ 784.58

billion, according to scheduled banks' statement of position

released by the RBI.

On a year-on-year basis, credit has grown at more than 20 per

cent till date, the RBI data showed.

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6.3 Bank initiatives

Since December 2008, the government has announced series

of measures to augment flow of credits to around US$ 2,

66,274 to SMEs. To improve the flow of credit to industrial

clusters and facilitate their overall development, 15 banks

operating in Orissa including the public sector State Bank of

India (SBI) and the Small Industries Development Bank of

India (SIDBI) have adopted 48 clusters specially in sectors

like engineering tools, foundry, handloom, food processing,

weaving, rice mill, cashew processing, pharmaceuticals, bell

metals and carpentry etc.

PSBs are now cashing in the auto loan segment after the exit

of private players owing to the slowdown. Auto loans usually

have three components - car loans, two-wheeler loans and

commercial vehicle loans. PSBs are primarily focusing on car

and two-wheeler loans. Prevalent interest rates in the car loan

segment now range between 11 per cent and 12.5 per cent per

annum. For instance, according to the Union Bank of India

Chairman and Managing Director, MV Nair, his bank had

recently tied up with Maruti Suzuki India for financing the

latter's product and it has a US$ 163.84 million auto loan

portfolio.

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The government has told public sector banks (PSBs) to extend

credit to fund-starved Indian industry, especially exporters

and small and medium sector enterprises to address their

credit needs. SIDBI would be lending US$ 1.33 billion out of

US$ 1.47 billion credit from RBI to public sector banks. This

is being provided to the PSBs at 6.5 per cent (SIDBI is

getting the credit at 5.5 per cent) under the condition that the

banks will have to lend this credit to the medium and small-

scale industry units at an interest rate of 10 per cent before

March 31, 2010.

According to SBI Chairman, O P Bhatt, contribution of small

and medium enterprises (SMEs) is nearly 40-50 per cent to

GDP growth of the nation, and this sector also accounts for 50

per cent of the industrial output. "Banks could accrue revenue

of over US$ 5.73 billion by encouraging the SMEs," Bhatt

said adding, "SME's sector is to grow fastest in the next five

years, with 14 per cent growth in terms of revenue and 13 per

cent in terms of profits." The bank in order to help units tide

over the current downturn, had introduced products like

“SME Care” specially in Jharkhand, which provides units to

access 20 per cent additional funds over and above their

existing overdraft limit. Already, according to an official, the

MSME ministry has proposed to RBI that the sector be given

a mandatory 15 per cent share of the total priority sector

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lending. The banking industry is thereby now lending both

strength and support in form of cash and policies majorly in

putting back the economy into track.

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6.4 Current Banking scenario

The industry is currently in a transition phase. On the one hand, the

PSBs, which are the mainstay of the Indian Banking system, are in the

process of shedding their flab in terms of excessive manpower,

excessive non Performing Assets (NPAs) and excessive governmental

equity, while on the other hand the private sector banks are

consolidating themselves through mergers and acquisitions.

PSBs, which currently account for more than 78 % of total banking

industry assets are saddled with NPAs (a mind-boggling Rs 830

billion in 2000), falling revenues from traditional sources, lack of

modern technology and a massive workforce while the new private

sector banks are forging ahead and rewriting the traditional banking

business model by way of their sheer innovation and service. The

PSBs are of course currently working out challenging strategies even

as 20 percent of their massive employee strength has dwindled in the

wake of the successful Voluntary Retirement Schemes (VRS)

schemes.

The private players however cannot match the PSB’s great reach,

great size and access to low cost deposits. Therefore one of the means

for them to combat the PSBs has been through the merger and

acquisition (M& A) route. Over the last two years, the industry has

witnessed several such instances. For instance, Hdfc Bank’s merger

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with Times Bank, Icici Bank’s acquisition of ITC Classic, Anagram

Finance and Bank of Madura. Centurion Bank, Indusind Bank, Bank

of Punjab, Vysya Bank are said to be on the lookout. The UTI bank-

Global Trust Bank merger however opened a Pandora’s box and

brought about the realization that all was not well in the functioning

of many of the private sector banks.

Private sector Banks have pioneered internet banking, phone banking,

anywhere banking, and mobile banking, debit cards, Automatic Teller

Machines (ATMs) and combined various other services and

integrated them into the mainstream banking arena, while the PSBs

are still grappling with disgruntled employees in the aftermath of

successful VRS schemes.

The Indian banking industry is currently termed as strong, having

weathered the global economic slowdown and showing good numbers

with strong support flowing in from the Reserve Bank of India (RBI)

measures. Furthermore, a report "Opportunities in Indian Banking

Sector", by market research company, RNCOS, forecasts that the

Indian banking sector will grow at a healthy compound annual growth

rate (CAGR) of around 23.3 per cent till 2011. Banking, financial

services and insurance (BFSI), together account for 38 per cent of

India's outsourcing industry (worth US$ 47.8 billion in 2007).

According to a report by McKinsey and NASSCOM, India has the

potential to process 30 per cent of the banking transactions in the US

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by the year 2010. Outsourcing by the BFSI to India is expected to

grow at an annual rate of 30–35 per cent.

According to a study by Dun & Bradstreet (an international research

body)—"India's Top Banks 2008"—there has been a significant

growth in the banking infrastructure. Taking into account all banks in

India, there are overall 56,640 branches or offices, 893,356 employees

and 27,088 ATMs. Public sector banks made up a large chunk of the

infrastructure, with 87.7 per cent of all offices, 82 per cent of staff and

60.3 per cent of all ATMs.

According to the RBI, Indian financial markets have generally

remained orderly during 2008-09. In view of the tight liquidity

conditions in the domestic money markets in September 2008, the

Reserve Bank announced a series of measures beginning September

16, 2008. Thus, the average call rate which was at 10.52 per cent

declined to 7.57 per cent in November 2008 under the impact of these

measures.

Measures aimed at expanding the rupee liquidity, included significant

reduction in the cash reserve ratio (CRR), reduction of the statutory

liquidity ratio (SLR), opening a special repo window under the

liquidity adjustment facility (LAF) for banks for on-lending to the

non-banking financial companies (NBFCs), housing finance

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companies (HFCs) and mutual funds (MFs), and extending a special

refinance facility, which banks could access without any collateral.

The reserve money lying with the RBI as on November 21, 2008 as

per the January 2009 bulletin, is a total amount of US$ 179.28 billion

and RBI’s credit to the commercial sector stood at US$ 3.65 billion.

Further, banks in India put up strong growth and profit numbers in the

October-end-December 2008 period owing to high credit growth and

easing of yield on government bonds. Top Indian banks have

increased their earnings by almost 40 per cent year-on-year for the

same period. According to latest Reserve Bank of India (RBI) data,

bank credit grew by 24.6 per cent year-on-year as of December 19,

2008. The resulting credit growth was even better at 41 per cent

during the April-end-December 2008 period. Deposits grew by 20.6

per cent as of December 19, 2008.

The growth in advances reflects that the net interest income (NIM)

too would indicate higher growth rate. RBI has taken a number of

steps to lower the cost of credit in this quarter like cutting cash

reserve ratio (CRR), the amount of funds banks have to keep on

deposit with it, repo and reverse repo rate. The CRR rate, which had

been reduced in December 2008, to 5.50 per cent, repo rate to 6.50

and reverse repo rate to 5.00, were further reduced – CRR to 5 per

cent, (its lending rate) repo rate to 5.5 per cent and reverse repo, at

which it absorbs cash from the banking system, to 4 per cent in

January 2009.

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6.5 Growth of Banking Sector

An analysis of Indian Banking sector include the Growth in advances

and deposits, Market share, NPAs, CAR, Exposure norms, Retail

Banking Initiatives and Major Players.

∑ The Reserve Bank of India (RBI), as the central bank of the

country, closely monitors developments in the whole financial

sector.

∑ The banking sector is dominated by Scheduled Commercial

Banks (SCBs). As at end-March 2002, there were 296

Commercial banks operating in India. This included 27 Public

Sector Banks (PSBs), 31 Private, 42 Foreign and 196 Regional

Rural Banks. Also, there were 67 scheduled co-operative banks

consisting of 51 scheduled urban co-operative banks and 16

scheduled state co-operative banks.

∑ Scheduled commercial banks touched, on the deposit front, a

growth of 14% as against 18% registered in the previous year.

And on advances, the growth was 14.5%against 17.3 % of the

earlier year.

∑ State Bank of India is still the largest bank in India with the

market share of 20%. Icici and its two subsidiaries merged with

Icici Bank, leading creating the second largest bank in India

with a balance sheet size of Rs1040bn.

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∑ Retail Banking is the new mantra in the banking sector. The

home loans alone account for nearly two-third of the total retail

portfolio of the bank. According to one estimate, the retail

segment is expected to grow at 30-40% in the coming years.

∑ Net banking, phone banking, mobile banking, ATMs and bill

payments are the new buzz words that banks are using to lure

customers.

∑ With a view to provide an institutional mechanism for sharing of

information on borrowers/ potential borrowers by banks and

Financial Institutions, the Credit Information Bureau (India)

Ltd. (Cibil) was set up in August 2000. The Bureau provides a

framework for collecting, processing and sharing credit

information on borrowers of credit institutions. SBI and Hdfc

are the promoters of the Cibil.

∑ The RBI is now planning to transfer of its stakes in the SBI,

NHB and National Bank for Agricultural and Rural

Development to the private players. Also, the Government has

sought to lower its holding in PSBs to a minimum of 33 per cent

of total capital by allowing them to raise capital from the

market.

∑ Banks are free to acquire shares, convertible debentures of

corporate and units of equity-oriented mutual funds, subject to a

ceiling of 5% of the total outstanding advances (including

Commercial Paper) as on March 31 of the previous year.

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∑ The finance ministry spelt out structure of the government-

sponsored ARC called the Asset Reconstruction Company

(India) Limited (Arcil), this pilot project of the ministry would

pave way for smoother functioning of the credit market in the

country. The Government will hold 49% stake and private

players will hold the rest 51% - the majority being held by ICICI

Bank (24.5%).

6.6 Growth of Banks

HDFC Bank and Axis Bank continue to remain as leaders of the

private sector banks. Both the banks have maintained the advances

growth and NIM. SBI, Punjab National Bank, Bank of India and

Union Bank are expected to lead among PSU Banks.

The State Bank of India is planning to open 1,000 new branches

across the country to cover 100,000 villages in the coming FY 2009-

10, according to the bank Chairman, Mr. O P Bhatt. The bank had

decided to rope in 300 new customers every year for each branch

using initiatives. According to Mr. Bhatt, the bank could get a record

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US$ 5.54 billion during December 2008, the highest amount collected

by any bank in the country.

Further, public sector banks (PSBs) on January 12, 2009 also decided

to lower interest rates on bulk deposits and to offer a maximum rate of

7.5 per cent for one-year maturity. Earlier, on January 1, banks had

lowered the interest rates on bulk deposits from 9.5 per cent to 8.5 per

cent. According to the latest RBI data, growth in broad money (M3),

year-on-year (y-o-y), was 19.6 per cent (US$ 151.04 billion) on

January 2, 2009 lower than 22.6 per cent (US$ 141.82 billion) a year

ago. Aggregate deposits of banks, year-on-year, expanded 20.2 per

cent (US$ 133.08 billion) on January 2, 2009 as compared with 24.0

per cent (US$ 127.49 billion) a year ago.

The growth in bank credit continued to remain high. Non-food credit

by scheduled commercial banks (SCBs) was 23.9 per cent (US$

102.78 billion), year-on-year, as on January 2, 2009 from 22.0 per

cent (US$ 77.79 billion) a year ago. Scheduled commercial banks’

credit to the commercial sector expanded by 27.0 per cent (year-on-

year) as on November 21, 2008, as compared with 23.1 per cent a

year ago. Non-food credit of scheduled commercial banks expanded

by 26.9 per cent, year-on-year, as on November 21, 2008, higher than

23.7 per cent a year ago.

According to earlier RBI data, for the third quarter (September 26-

December 27, 2008), total bank credit was up US$ 21.91 billion

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compared with a growth of US$ 22.91 billion in the same period a

year ago. In the preceding quarter, credit had risen by US$ 26.50

billion.

RBI data for deposits shows that for the Oct-end December 31, 2008

period, although deposit growth has slowed to US$ 25.99 billion

against US$ 33.18 billion in the April-end to September, 2008 period,

it was still stronger in the December 31 quarter period, 2008, as

compared to the year-ago quarter when absolute growth was US$

16.37 billion.

Net banking capital amounted to US$ 4.8 billion in April-September

2008 as compared with US$ 5.7 billion in April-September 2007.

Accounting for a part of banking capital, non-resident Indian (NRI)

deposits showed a net inflow of US $ 1.1 billion in April-September

2008, increasing from net outflow of US$ 78 million in April-

September 2007.

Lending by banks also rose more than 76 per cent to Rs 2,80,000

crore (US$ 57.26 billion) during April-November 2008-09 from

the same period a year ago, according to data available with the

Reserve Bank of India (RBI). The Reserve Bank of India on

January 21, 2009 fixed the Reference rate for the US currency at

Rs 48.93 per dollar and the single European unit at Rs 63.70 per

euro from Rs 49.12 per dollar and Rs 63.61 per euro, respectively.

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7. CREDIT RISK MANAGEMENT – AN INTRODUCTION

Project / Credit RISK MANAGEMENTis a skill which has to be

acquired by study and supplemented by practice. Intuitive guess work

has little place in appraising the credit rating or credit needs of a

corporate unit. The credit managers of banks and Non-Banking

Finance Companies (NBFCs) are duty bound to accept or reject a

proposal on the basis of its viability or non - viability.

Project / Credit appraisal is done by banks or financial institutions by

obtaining credit information of the borrowing company.

Credit information of the borrowing company can be obtained by

the following sources:

1. Banks and Financial Institution

2. Bank References

3. Trade References

4. Credit Rating Agencies

5. Published Books: Basic information about a company may be

taken from printed sources like the Stock Exchange Year book,

Corporate Path finder’s data base, etc.

6. Company Financial Reports

7. Press Reports

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8. Stock Market Opinion

9. Charges Registered: Charges created on the assets of a

company have to be registered with the Registrar of Companies.

10. Personal discussion

11. Factory Visit

12. Study of Financial Statements: Financial analysis

determines the significant operating and financial characteristics

of a firm form accounting data and financial statements.

Analysis can be done through:

a. Ratio Analysis

b. Trend analysis: Trend analysis can be through:

i. Intra firm comparison that is review of the trend of

the ratios over the years within the firm and

ii. Inter firm comparison.

c. Reading of notes to accounts and other information:

Careful reading and analysis of the notes on accounts, one

can gauge the policies of the management, performance of

the company, and its future planning.

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Information required to be submitted by the Company

(Borrower) to the Bank

The company should make sure that the following information

required for processing credit requests are collected by the company

for submitting it to the bank or financial institution in order to obtain

the required credit facility:

1. Basic background information on the company:

2. Required facility

3. Key industry dynamics:

4. Management:

5. Management information system: Details of the planning,

controlling and monitoring systems which have been put in

place have to given.

6. Financials

7. Details of the Security to be pledged:

8. Present banking relationship: The bank requires full details of

the present credit facilities being enjoyed at the moment.

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8.INTRODUCTION

Punjab National Bank (PNB) was set up in 1895 in Lahore - and has

the distinction of being the first Indian bank to have been started

solely with Indian capital. The bank was nationalized in July 1969

along with 13 other banks. Today, PNB is a professionally managed

bank with a successful track record of over 110 years. The bank has

the 2nd largest branch network in India, with 4525 branches including

432 extension counters spread throughout the country. PNB was

ranked as 248th biggest bank in the world by Bankers Almanac,

London. Punjab National Bank is not only the first bank to specialize

in credit rating models in India but also the first one to launch image

based cheque transaction system for collection of intra bank intercity

cheques thereby providing credits merely in 48 hrs in 13 cities.

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CORPORATE

VISION

To be a Leading Global Bank with Pan India

footprints and become a household brand in the

Indo-Gangetic Plains providing entire range of

financial products and services under one roof

MISSION Banking for the unbanked

With over 56 million satisfied customers and 5002 offices, PNB has

continued to retain its leadership position amongst the nationalized

banks. From its modest beginning; the bank has grown in size and

stature to become a front-line banking institution in India at present.

Based on its sound and prudent banking experience and consistent

profit performance, PNB looks confidently to the future………the

name you can bank upon………

PNB has achieved significant growth in business which at the end of

March 2010 amounted to Rs 4,35,931crore. Today, with assets of

more than Rs 2,96,633crore, PNB is ranked as the 3rd largest bank in

the country (after SBI and ICICI Bank) and has the 2nd largest

network of branches (5002 offices including 5 overseas branches ).

During the FY 2009-10, with 40.85% share of CASA deposits, the

bank achieved a net profit of Rs 3905 crore. Bank has a strong capital

base with capital adequacy ratio of 14.16% as on Mar’10 as per Basel

II with Tier I and Tier II capital ratio at 9.15% and 5.01%

respectively. As on March’10, the Bank has the Gross and Net NPA

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ratio of 1.71% and 0.53% respectively. During the FY 2009-10, its’

ratio of Priority Sector Credit to Adjusted Net Bank Credit at 40.5%

& Agriculture Credit to Adjusted Net Bank Credit at 19.7% was also

higher than the stipulated requirement of 40% & 18%.

The performance highlights of the bank in terms of business and

profit are shown below:

Parameters Mar'08 Mar'09 Mar'10 CAGR(%)

Operating Profit 4006 5744 7326 22.29

Net Profit 2049 3091 3905 23.98

Deposit 166457 209760 249330 14.42

Advance 119502 154703 186601 16.01

Total Business 285959 364463 435931 15.09

(Rs in Crore)

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ORGANIZATIONAL STRUCTURE

HEAD OFFICE

CIRCLE OFFICE

BRANCH OFFICE

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9.CREDIT RISK MANAGEMENT

9.1 CREDIT RISK

Credit risk means the possibility of loss associated with diminution in

the credit quality of borrowers. In a bank’s portfolio, losses stem from

outright default due to inability or unwillingness of a customer or

counter party to meet, commitments in relation to lending, trading,

settlement and other financial transactions.

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9.2 CREDIT RISK MANAGEMENT SYSTEM IN PNB

A comprehensive credit risk management system, which is in place in

the bank, encompasses the following processes:

∑ Identification of Credit Risk

∑ Measurement of Credit Risk

∑ Grading of Credit Risk

∑ Reporting and analysis of rating related data

∑ Control of Credit Risk

CREDIT RISK IDENTIFICATION

In order to take informed credit decisions, it is necessary to identify

the areas of credit risk in each borrower as well as each industry. Risk

Management Division HO, in coordination with other HO divisions

involved in disbursal of credit and also the risk management

departments of various zonal offices identifies these risks areas and

develops necessary tools and processes to measure and monitor the

risk.

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CREDIT RISK MEASUREMENT

In order to measure the credit risk in banks’ portfolio, the bank has

Rating

categoryDescription Score (%) obtained

Grade within

the rating

Category

PNB –

AAAMinimum Risk Above 80.00 PNB- AAA

PNB-AA

Marginal RiskAbove 77.50 up to

80.00PNB- AA +

Above 72.50 up to

77.50PNB- AA

Above 70.00 up to

72.50PNB- AA -

PNB-A

Modest RiskAbove 67.50 up to

70.00PNB- A +

Above 62.50 up to

67.50PNB- A

Above 60.00 up to

62.50PNB- A -

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Rating

categoryDescription Score (%) obtained

Grade within

the rating

Category

PNB-BB

Average RiskAbove 57.50 up to

60.00PNB- BB +

Above 52.50 up to

57.50PNB- BB

Above 50.00 up to

52.50PNB- BB -

PNB-B

Marginally

Acceptable Risk

Above 47.50 up to

50.00PNB- B +

Above 42.50 up to

47.50PNB- B

Above 40.00 up to

42.50PNB- B -

PNB-C High RiskAbove 30.00 up to

40.00PNB- C

PNB-D Caution Risk 30.00 and below PNB – D

developed the following models:

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SYSTEM FOR ASSIGNMENT & APPRAISAL OF RATING

The process of rating and vetting is as under:

Loan

Sanctioning

Authority

Credit Risk Rating

Authority

Vetting/Confirming

Authority

Head Office

i. Zonal CRMD in

consultation with

branches

ii. Large Corporate

Branches

GM (RMD), HO

Zonal / Circle

Office

i. In case of Large

Corporate Model,

ELB/VLB

ii. In case of other Models,

branches to rate the

accounts

Zonal CRMD

Branch OfficeOfficer/Manager, Credit

Section

An official designated

by the Incumbent not

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Loan

Sanctioning

Authority

Credit Risk Rating

Authority

Vetting/Confirming

Authority

connected with

Processing/

recommending/rating

of the concerned loan

proposal

In order to adopt internal rating based approaches (IRB) for credit

risk, Basel II has placed certain minimum requirements which inter-

alia require, validation of rating system, process and estimation of all

relevant risk components. Banks must regularly compare realized

default rates with estimated probability of default (PD) of each grade

and able to demonstrate to its supervisor (RBI), that the internal

validation process enable it to assess the performance of internal

rating and risk estimation system consistently and meaningfully. In

view of above fact, not only rating but consistent practices in

evaluation of credit risk rating as well as evolving and updating

robust data on various risk components is must for adopting IRB

approaches.

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CONTROLS

The Credit Risk Management process in the bank encompasses the

following management Control techniques which help in mitigating

the adverse impacts of credit risk in its credit portfolio.

i. Credit Approving Authority

a. Credit Committee

b. Linkage of loaning powers with risk rating categories

ii.Prudential Exposure limits

iii.Risk Based Pricing

iv.Portfolio Management

v.Loan Review Mechanism

vi.Legal documentation

vii.Preventive Monitoring System

viii.Others

a. Use of CIBIL data and RBI defaulters list

b. Diversification of Risks

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10.POST SANCTION FOLLOW UP OF LOANS

Supervision and Follow-up of bank credit has assumed considerable

significance particularly after introduction of new norms of assets

classification, provisioning and derecognition of interest income on

NPAs, affecting profitability. System of supervision and follow up

can be defined as the systematic evaluation of the performance of a

borrowal account to ensure that it operates at viable level and, if

problems arise, to suggest practical solutions. It helps in keeping a

watch on the conduct and operational/financial performance of the

borrowal accounts. Further, it also helps in detecting

signals/symptoms of sickness and deteriorations, if any, taking place

in the conduct of the account for initiating timely corrective actions to

check slippage of accounts to NPA category.

The goals and objectives of monitoring may be classified into

fundamental and supplementary goals. Fundamental goals help a

bank to ensure safety of funds lent to an enterprise while,

supplementary goals are directed towards keeping abreast of problems

arising out of changes in both the internal and the external

environment for initiating timely corrective actions. Some of the

important goals of monitoring are listed as under:

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i. To keep a watch on the project during implementation stage so

that there are no time & cost overruns.

ii. To ensure that the funds released are utilized for the purpose

for which these have been provided and there is no diversion of

such funds.

iii. To evaluate operational and financial results, such as

production, sales, profit/loss, flow of funds, etc. and comparing

these with the projections/estimates given by the borrower at

the time of sanction of credit facilities.

iv. To ensure that the terms and conditions as stipulated in the

sanction have been complied with.

v. To monitor operations in the account particularly cash credit

facilities which indicate health of the account.

vi. To obtain market report on the borrower, to gather information

like reputation/financial standing etc.

vii. To detect signals and symptoms of sickness or deterioration

taking place in conduct/performance of the account.

viii. To ensure that the unit's management and organizational set-up

is effective.

ix. To keep a check on aspects like accumulation of statutory

liabilities, creditors, debtors, raw-material, stocks-in-process,

finished goods, etc.

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x. To ensure charging of applicable rate of interest/penal interest/

commitment charges as per bank's guidelines.

System of supervision & monitoring of credit as laid down by the

Bank needs to be meticulously followed by the branches/controlling

offices which, inter alia, covers the following:

i. Conveying the sanction

ii. Maintenance of Loan Document File

iii. Quarterly Review Sheet

iv. Preventive Monitoring System

v. Quarterly Monitoring System

vi. Inspection and Physical Verification of stocks – Stock Audit

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11.ANALYSIS& INTERPRETATION

11.1 PNB’s LOAN POLICY

11.1.1 OBJECTIVE

The Credit Management & Risk Policy of the bank at the macro level

is an embodiment of the Bank’s approach to understand, measure and

manage the credit risk and aims at ensuring sustained growth of

healthy loan portfolio while dispensing the credit and managing the

risk. This would entail reducing exposures in high risk areas,

emphasizing more on the promising industries / productive sectors/

segments of the economy, optimizing the return by striking balance

between the risk and the return on assets and striving towards

maintaining/improving market share.

11.1.2 BASIC TENETS OF THE POLICY

∑ All loan facilities considered only after obtaining loan

application from the borrower and compilation of Confidential

Report on them and the guarantor. The borrowers should have

the desired background, experience/expertise to run their

business successfully

∑ Project for which the finance is granted should be technically

feasible and economically/commercially viable i.e. it should be

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able to generate enough surplus so as to service the debts within

a reasonable period of time.

∑ Cost of the project and means of financing the same should be

properly assessed and tied up. Both, under-financing and over-

financing can have an adverse impact on the successful

implementation of the project.

∑ Borrowers should be financially sound, enjoy good market

reputation and must have their stake in the business i.e. they

should possess adequate liquid resources to contribute to the

margin requirements.

∑ Loans should be sanctioned by the competent sanctioning

authority as per the delegated loaning powers and should be

disbursed only after execution of all the required documents.

∑ Projects financed must be closely monitored during

implementation stage to avoid time and cost overruns and

thereafter till the adjustment of the bank's loan.

∑ The policy sets out minimum or benchmark lending rate, BPLR

= 11 %

∑ The policy lays down norms for takeover of advances from

other banks/ financial institutions

∑ As a matter of policy the bank does not take over any Non-

performing Asset (NPA) from other banks

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11.1.3 METHODS OF LENDING

1. For Working Capital

i. Simplified method linked with turnover

Simplified method based on turnover for assessing

working capital finance up to Rs.2 crore (uptoRs. 5 crore

in case of SSI units)

ii. MPBF System

Existing MPBF system with flexible approach shall be

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 and Film Production accounts. It will be our

endeavor to introduce the same selectively in other areas

also

2. Term Loan

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In case of infrastructure/mega projects, proper appraisal will be

made by utilizing the services of specialized / Technical officers.

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.

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11.2 CREDIT APPRAISAL PROCESS AT PNB

11.2.1 FLOWCHART:

Not feasible

No Queries

Queries

Feasible

Submission of Project Report along with the Request Letter

Carrying out Due Diligence on the Client

Submission of Proposal to designated Authority (Circle office)

Re-verification and analysis of the Proposal

Submission of Proposal to designated Authority

Preparing Credit Report / Feasibility Report and Risk Rating

Determining of Interest Rate and Preparation of Proposal

Meeting with the client to clarify the queries

Vetting of Credit Risk Rating Report Approval of request made by the client like Reduction of Interest Rates etc

Sanction of Proposal on various Terms & Conditions

Acknowledgement of Sanction Terms &Condition by the client

Application to comply with Sanction T&C.ExecutionofLoan Documents

Disbursement of Sanctioned Amount from the branch office

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11.2.2 BRIEF ON THE PROCESS

At Punjab National Bank, proposal for financing working capital

limits and term loans can relate to any of the following:

1. New proposal

2. Renewal of existing limits

3. Enhancement of existing limits

Once a proposal is received, financial statements, project report and

other important documents are used to evaluate:

1. Maximum permissible bank finance (in case of WC limit)

2. Techno Economic Feasibility Analysis of the project (includes

all the 5 evaluation)

3. Various risks associated, if any

4. Various approvals of issues the borrower seeks (reduction of

ROI, processing fee etc)

5. Risk rating of the borrower

6. Reasonableness of estimates/projection in regard to sales,

chargeable current assets, current liabilities (other than bank

borrowings) and net working capital

7. Classification of current assets and current liabilities in

conformity with the guidelines issued by the Reserve Bank/HO.

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8. Maintenance of minimum current ratio of 1.33:1 (Except where

a relaxation is permitted as in the case of sick/weak units,

diamond exporters, etc.).

9. An undertaking by the borrower to submit his annual accounts

promptly. Further annual review is carried out regularly by the

bank even where enhancement in credit limits is not involved

10. Provisions of Foreign Exchange Management Act, 2000

(FEMA), wherever applicable are complied with

11. In respect of industries where norms relating to inventory

and receivables have been laid down by Reserve Bank/HO,

credit limits should be determined in accordance with such

norms and in other cases in tune with past trends.

12. In cases where deviations from norms/past trends are

warranted, it should be ensured that these are justified and

specific comments in this behalf are incorporated in the notes

placed before the competent authority for sanction.

13. Specific guidelines issued by RBI/HO for sanctioning

credit limits for financing certain specific activities such as

diamond exports, leasing and hire-purchase, tea, sugar and

computer software industries will continue to be in force.

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11.2.3 RISK RATING OF THE BORROWER

Punjab National Bank uses a system of internal ratings for the

assessment of the credit quality and risk profile of its borrowers. An

internal rating refers to a summary indicator of the risk inherent in an

individual credit quality in an individual credit . Ratings typically

embody an assessment of the risk of loss due to failure by a given

borrower to pay as promised, based on consideration of relevant

counterparty and facility characteristics. A rating system includes the

conceptual methodology, management process, and systems that play

a role in the assignment of a rating.

Credit risk rating tools at Punjab national bank

With respect to Punjab National Bank, credit risk rating has been

developed with a view to provide a standard system for assigning a

credit rating to the borrowers of the bank according to their risk

profile. The management of credit risk at PNB includes a continuing

review of credit limits, policies and procedures; the approval of

specific exposures and workout situations; the constant re-evaluation

of the loan portfolio and the sufficiency of provisions thereof. PNB

was also one of the first banks to develop their own credit models to

ease up their way to risk management, PNB Trac -- for its entire

category of lending. The loans with exposure of above Rs 20 lacs

have been rated individually, while loans with exposure under Rs 20

lakh have been rated segment-wise on portfolio basis as per the terms

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of Basel II accord. This means that the bank would be able to do

credit ratings on its own for its lending’s.

Inputs (parameters) to PNB Trac

The rating tool is designed to cater all the industry. The difference

between ratings of two borrowers lie in the limits he/she is seeking

from the bank and the industry of the same. There are broad

categories defined in every model that require different parameters or

inputs (both quantitative and subjective) depending on the industry

the borrower serves.

To explain the above statement an example of the inputs is described

below.

Rating Model New Project

ModelIndustry ABC Sector

Facilities

RequiredTerm Loan Limits Rs. 1200 lacs

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Inputs to the Model for the above mentioned loan will be:

CATEGORY PARAMETERS / INPUTS

Management

Evaluation

Capital market perception

of the groupManagement Setup

Risk bearing capacity Integrity, commitment and

sincerity

Track record in debt

repaymentFinancial flexibility

Business

Evaluation

Range of servicesLevel of customer

satisfaction

Quality of service offeredAdvertising / promotional

strategies

Economies of operation Brand equity

Ambience of service outlet Expected market growth

Effectiveness of

distribution channels Locational advantage

Quality of infrastructure

available

Technology adopted in the

process

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Financial

Evaluation

Debt – Equity Ratio Internal Rate of Return

Repayment Period (in yrs) TOL / TNW

Foreign exchange riskWorking capital cycle (in

months)

Project

Implementation

Risk

Evaluation

Project complexities Expected time overrun

Expected cost overrunStatus of obtaining

clearances

Funding risk Service period (in yrs)

How the Rating is done

1. The scores are assigned to each of the parameters of each of the

broad category in the different sections on a scale of 0 to 4 up to

two decimal points with 0 being very poor and 4 being excellent.

The scoring of some of these parameters is subjective while for

some others it is done on the basis of pre-defined objective criteria.

2. The scores given to the individual parameters multiply by allocated

weights are aggregated and a composite score for the company is

arrived at in percentage terms. Higher the score obtained by a

company, better is its credit rating. Weights have been assigned to

different parameters based on their importance.

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Example:

Factor % score

obtained

Weight Weighted

Score

Financial Evaluation 55.00 40.00% 22.00

Business & Industry

Evaluation

50.00 25.00% 12.50

Management

Evaluation

80.00 20.00% 16.00

Conduct of Account 75.00 15.00% 11.25

AGGREGATE

SCORE

61.75

The Aggregate Score of 61.75 refers to PNB- A-

THIS MEANS THE RATING OF THE BORROWER IS PNB A-

11.2.4 DETERMINATION OF THE APPLICABLE RATE OF

INTEREST

Benchmark Prime Lending Rate (BPLR)

Bank has determined Benchmark PLR (BPLR) after taking into

account actual cost of funds, operating expenses and a minimum

margin to cover regulatory requirement of provisioning / capital

charge and profit margin. At present, BPLR has been fixed at 11%.

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BPLR is the reference rate for determination of rate of interest for the

borrower’s accounts.

Sub-BPLR Lending

In order to remain competitive in the market, sub-BPLR lending is

also permitted. The sub-BPLR lending lies in the vested powers of

CMD/ED/GMs (Head Office)/Circle Heads. These powers are

defined in the Internal Circular of the bank, which eventually depends

on the rank of the officer and the credit risk rating of the borrower.

For instance:

i. Sub-BPLR Lending permitted by CMD: up to 5.50%

below BPLR

ii. Sub-BPLR Lending permitted by ED: up to 3.00%

below BPLR

iii. Sub-BPLR Lending permitted by Circle Heads:up to 1.00%

below BPLR

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Applicable Rate of Interest (ROI)

The BPLR attracts further a term premia of 0.50% for term loans

having a repayment reschedule over 3 years. Also the applicable ROI

depends upon the credit risk rating and the Industry of the borrower.

RBI also grants certain rebates or lower ROI for lending to few

sectors, like Agriculture, SME etc. to boost the sector and

encouraging more participation.

Example: for Advances to NBFCs above Rs. 20 lacs

CREDIT RISK

RATINGAPPLICABLE ROI

AAA BPLR + 1.50 %

A BPLR + 3.00 %

BB BPLR + 3.50 %

(The Base Rate system will replace the BPLR system with effect from

July 1, 2010)

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11.2.5 POST SANCTION FOLLOW UP

If the proposal is considered viable and accepted by the bank then

proper account in name of the borrower is created. The account is

reviewed from time to time in order to know whether the company

has met with all the terms & conditions or not, whether the interest is

being paid on time or not, whether there is overdraft in accounts or

the funds are not utilized by the company at all, whether the bank’s

interest income is increasing or not. Two of the most used methods

for post sanction follow up are:

1. PREVENTIVE MONITORING SYSTEM (PMS)

Objectives of PMS

The objective of PMS is to track & evaluate the health of borrower’s

account on a continuous basis and detect:

∑ Unsatisfactory/adverse signals/indicators at an early stage in a

comprehensive manner.

∑ Thorough probe into reasons behind observed signals and

analysis thereof.

∑ Speedy corrective/remedial actions/steps to prevent the account

from becoming NPA as well as to minimize the loan losses.

Preventive Monitoring System consists of two parts:

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i. PMS Index and Rank

PMS Index is a numerical index consisting of 29 indicators

Parameters grouped into 6 sections. Penalty rates (weights) in

the form of numerical values have been assigned to each

indicator (parameter) depending upon their degree of impact on

health of an account. The score assigned to any parameter is

stored for last one year at any point of time, which is known as

Cumulative score. The section-wise maximum of cumulative

scores is to be summed up to arrive at PMS Index Score. Based

on PMS Index Scores a scale of 1 to 10 has been devised, which

is known as PMS Ranking Scale. The PMS Rank indicates the

state of health of an account. The lower the PMS Rank, better

the health of account and vice-versa.

ii. PMS Report

PMS Report, which has eight parts, describes brief profile of the

borrower, position of accounts, details of signals contributing to

PMS Index Score, reasons behind adverse signals and proposes

corrective/ remedial steps with time frame.

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2. QUARTERLY MONITORING SYSTEM (QMS)

Bank has prescribed the QMS system for monitoring performance of

big borrower accounts enjoying working capital facilities of Rs.

1crore & above from the banking system. QMS includes the

submission of data on the prescribed formats depending upon the

economic activity of the borrower. Under this system financial and

operational information/ data is required to be submitted in two

different sets of formats

i. QMS I

This form is required to be submitted within six weeks from the

close of the quarter to which it relates. It gives information

about the operations of the unit and its performance for the

quarter, also giving reasons for non-achievement of

sales/production targets.

ii. QMS II

This form is required to be submitted within two months from

the close of the half-year to which it relates. In addition to

providing comparative position of the actuals vis-a-vis the

projections accepted at the time of sanction relating to the

operations of the unit, this form also indicates the `SOURCES'

and `USES' of the funds generated by the unit, during the half

year. Critical analysis of this form can reveal the diversion of

short-term funds for long term uses.

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12.CASE STUDY – ABC PARTS PVT. LTD

12.1BORROWER’S PROFILE

Group Name ABC Parts Private Limited

Address of

Regd./Corporate Office

41, DLF, Industrial Area, New Delhi-

110015

Constitution Private Limited

Date of incorporation 18/08/1960

Dealing with PNB sinceMaintaining current account with PNB,

New Delhi for the last 8 years.

Industry/SectorManufacturing of Auto & Tractor Parts

(Large Scale)

Business Activity

(Product)

Engaged in Designing, Engineering and

Manufacturing of Auto and Tractor

components.

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BACKGROUND

The Company ABC Parts Pvt. Ltd. was incorporated in 1960. The

borrower has setup manufacturing units at 4 locations for

manufacturing of Automotive Parts. This company is an ISO-9001 –

2000 Certified Company and working speedily on achieving the TQ

14000. The Management of the company is experienced and working

in the line since long and the party is having the regular orders for

marketing of products and as well as contracts with corporate

manufacturing units of Vehicles/Auto Mobiles. Because of their

standing the company is getting repeated orders. The Company is

supplying its product to manufacture of Automobile/Vehicles

Manufacturer unit as Original Equipment Manufacturers. The

company has set up in- house R&D facility in their unit, sophisticated

instrumentation laboratory, testing laboratory etc., which reflects the

broad vision of the company to withstand the changing environment.

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SHAREHOLDING

Major Share holdersNo. of

shares

Amt. in Rs.

Lacs

%

Holding

Promoters Holding 100000 100.00 100%

FIs/ Mutual

Funds/UTI/Banks/FIIsNIL NIL NIL

NRI’s/OCBs NIL NIL NIL

Public NIL NIL NIL

Total 100000 100.00 100%

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FACILITIES REQUIRED

Nature Proposed

Secured/Unsecured

(As per RBI’s

guidelines)

Fund Based

CC(H) 900.00 Secured

Fund Based Ceiling 900.00

Non Fund Based

ILC/FLC NIL

ILG/ FLG NIL

Non Fund Based

CeilingNIL

Term Loan 1600.00 Secured

TOTAL

COMMITMENT2500.00 Secured

Rs. In Lacs

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12.2 CREDIT APPRAISAL FOR ABC PARTS PVT. LTD

I. MANAGERIAL EVALUATION

1. Market reputation on the promoter / management of the

company: Satisfactory

2. Brief Profile of Directors

∑ ShriMahender Kumar Bhunsali, aged 80 years, promoted

the business of auto ancillaries after completing his

education. He has been founder of the company and is

presently the chairman of the company. Looking at his rich

experience along with his forward looking capabilities,

excellent work and ability to progress as per the changing

industry scenario, he was honored by UdyogPatra Award

∑ ShriMunish Kumar Bhunsali, aged 46 years, son of

ShriMahendra Kumar Bhunsali joined his father’s business

after completing his Graduation. He has now been

associated with this business for twenty-four years and is

presently Managing Director of the company

∑ Smt. MeenalBhunsali ̧ W/o of ShriMunish Kumar

Bhunsali aged 44 years, is also a graduate. She has also

been associated with the business for last eight years and

presently Director in the company

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3. Quality of Management (Including Corporate Governance):

Management of the company is well experienced and have more

than 40 year experience in the auto parts line.

4. Succession Planning: Is been taken care of

5. Confidential Reports: Satisfactory

6. Marketing: The endless pursuit for quality excellence for over

four decades has earned ABC the unswerving confidence of

leading automotive and tractor manufactures, that's why its

components are used as Original Equipment in vehicles

manufactured. The company supplies its products to various

ORIGINAL VEHICLE MANUFACTURERS like:

• Escorts Tractors Limited,

• Tractors and Farm Equipment Limited (Massey

Ferguson U.K)

• Carraro India Ltd., (Carraro Spa, Italy)

• SameyDeutzFahr India Ltd.,(Samey, Italy)

• Eicher Tractors (Valtra, Brazil)

• Ford New Holland (CNH, Italy)

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• "Sonalika" International Tractors Ltd (Renault, France)

• International Auto Ltd. etc.

On the other hand company have well experienced management,

good marketing team and vide market network of customers of

its products.

7. Borrowers' diversification, expansion, modernization

program: The company is setting up a new manufacturing

facility, as a part of company’s overall expansion/integration

plant for its production activities. For the above purpose, a plot

of land measuring about 11,190 sq. meters has been allotted to

the company by New Okhala Industrial Development

Association, near New-Delhi. The Company Intend to set up

new machinery there for setting up a new plant to cater growing

demands of its customers, who have already placed orders to

increase supply.

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II. BUSINESS EVALUATION

Comments on industry scenario and industry outlook:

The past few years have witnessed a continuous influx of global

auto majors in India. Many auto majors have established

facilities, which have also been aided by the liberal government

policy. India crossed million-mark last fiscal, which has set the

domestic auto ancillary industry on a roll. Auto MNC’s are also

launching their latest models in India. The domestic auto

industry has also come up with new and quality models.

Consequently, the importance for precision auto components has

been growing. The increase in demand for auto components in

India has also resulted in an increase in revenues and exports.

Exports of auto components from India have witnessed a CAGR

of over 19% over the last six years.

The auto component sector is on a growth trajectory as is

evident by the fact that an auto component has been designated

as a “Thrust Sector” by the Government of India under the

EXIM Policy.

Also, the problems of high rejection rates which plagued the

domestic auto ancillary industry has been overcome which is

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exhibited in number of overseas deals concluded by the

domestic industry amidst stiff competition from other Asian

countries. The Government has extended various fiscal

incentives and policy measures which have helped the industry.

Critically, outsourcing of automobile components that have

relatively high engineering and design content from suppliers in

low cost countries like India, is gaining momentum fast. It is

estimated that in the next 10 years the auto components industry

will reach USD 33-40 billion.

Going by the current trends in the domestic automotive industry

and as stated above, it is expected that the indigenous demand

for auto components will also reach USD 13-15 billion in the

next 10 years and about USD 20-25 billion would be exported.

To meet the combined demand from domestic and international

customers the industry will have to make significant incremental

investment Hence, the Indian auto component industry (and by

sequel the forging industry) is poised to achieve a position in the

top slot in the world and will be in all probability a major driver

of growth and employment in the domestic economy.

The fortunes of the auto ancillary sector are closely linked to

those of the auto sector. Demand swings in any of the segments

(cars, two-wheelers, commercial vehicles) have an impact on

auto ancillary demand. Demand is derived from original

equipment manufacturers (OEM) as well as the replacement

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market. Replacement demand accounts for close to 57% of total

demand, while OEMs account for 27%, with exports accounting

for the balance 16%.

The Indian auto component industry had an estimated 480

companies operating in this area in FY05, employing more than

250,000 people and the industry exported goods worth estimated

at US$ 1.4 bn. Share of exports to output is estimated to have

increased from 15% in FY04 to 16% in FY05.

One area where domestic units compare favorably with their

international peers is it terms of costs. Lower labour costs give

Indian auto ancillary companies an absolute cost advantage.

India's strength in exports lies in forgings, castings and plastics

historically. But this is changing with more component

manufactures investing in upgradation of technology in recent

years

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III. TECHNICAL EVALUATION

1. Land & Building - The Party has proposed to setup the

designing , engineering and manufacturing unit at Noida –II

having the area of 11,190 sqMts The Party has already

constructed approx 45000 sq feet Industrial Shed. The building

area is sufficient for the installation of the plant and machinery

and for smooth working of the unit.

2. Plant and Machinery: It is reported by the party that they are

one of the largest integrated plant of its kind for manufacturing

Auto and Tractor Component in North India spread over

sprawling area of 57,340 sq feet at different locations in Delhi,

Faridabad and Noida. There are different types of shops i.e

grinding shop, Turning centers, Machine Shops, ensuring high

productivity and better quality to keep pace with the ever rising

quality standards. The party is also having HEAT

TREATMENT SHOP with hardening, annealing, carbonizing,

tampering furnaces which make the component to withstand

strength in operating conditions of the parts.. The party has

submitted the quotations from the suppliers/manufacturers with

the term and conditions for supply. The credential of the

suppliers is verified for the supply of the machinery as per bank

guidelines.

Page 103: SBI Bank Project

3. Raw Materials: The basic raw material required for the unit is

forging of auto parts , stainless steel, welding rods and store

items etc. The material is available through local suppliers/ units

and most of the raw material is purchased from Delhi & NCR.

4. Manufacturing Process: The auto parts being manufactured

under strict quality control by using latest CNC Machines of

improved technology, modern process control devices

monitored by microprocessors and backed by a competent team

of technical personnel to ensure strict quality norms as laid

down by the OEM units/ Manufacturer of Tractors and other

Vehicles.

5. Production Capacity: The stated projections are accepted by

the bank as they both match and are in sync the installed

capacity and the market demand. The new plant will become

operational in the mid of the financial year 2010-11 and

production capacity of the company will increased.

6. Quality Control: The party has proposed to set up in- house

R&D facility comprising of pilot plant facility, sophisticated

instrumentation laboratory, testing laboratory etc. for Raw

Page 104: SBI Bank Project

Material and finished goods etc. Quality control test are being

undertaken for raw material and other products at stages of

production. The product shall meet all the specification

requirement of their client.

7. Staff and Labor: As the machines are semi automatic and the

unit is located at the Nodia, which is the approved industrial

area. So, there is no problem of skilled and unskilled labor and it

will be easily available as per the requirement of the party as

and when required for the proposed unit at Noida.

8. Power: The party has taken the temporary power load

connection of 20KW for completion of construction at Noida

unit.

9. Other Infrastructure: The unit of the party is situated at

Noida, it is a developed industrial area and is connected to other

parts of the country by roads and rails routes. All types of

facilities like postal, telecommunication, transportation etc. are

easily/already available.

Page 105: SBI Bank Project

IV. LEGAL EVALUATION

Status of various statutory approvals and clearances:

For the Noida Unit Company has already obtained the Various

approvals such as sanction of building plan, Electricity/Power Load

Connection, Water Connection, Pollution Control Clearance. The

other units of the Company are already working at different

locations in Faridabad and Delhi. The Director of the company has

reported that they have obtained the all approvals required for the

units for manufacturing of auto parts i.e, registration of the units

with the concerned departments i.e. SSI registration, Income tax,

Sales Tax, authorization from Pollution control board.

Page 106: SBI Bank Project

V. FINANCIAL EVALUATION

Financial Statements of the company are as follows

PROFIT AND LOSS ACCOUNT: ABC PARTS PVT. LTD

(In Rs. Lacs)

31.03.2007 31.03.2008 31.03.2009 31.03.2010 31.03.2011

Audited Audited Audited Provisional Projection

Sales

Turnover1995.39 2047.12 2584.65 2379.88 4840.00

% rise or

fall in sales2.59 26.26 -7.92 103.37

Cost of sales 1868.41 1954.42 2502.28 2270.66 4405.56

Operating

Profit126.98 92.70 82.37 109.22 434.44

Other

Income17.40 7.44 17.84 12.39 20.00

Profit

Before Tax144.38 100.14 100.21 121.61 454.44

Provision

for taxes40.00 40.00 69.74 3.67 113.59

Profit After

Tax104.38 60.14 30.47 117.94 340.85

Depreciation 41.97 52.91 74.08 84.98 344.00

Page 107: SBI Bank Project

Cash Profit 146.35 113.05 104.55 202.92 684.85

BALANCE SHEET: ABC PARTS PVT. LTD

(In Rs. Lacs)

31.03.2007 31.03.2008 31.03.2009 31.03.2010 31.03.2011

Audited Audited Audited Provisional Projection

Share

capital100.00 100.00 100.00 100.00 175.00

Reserves

and Surplus482.55 542.69 573.16 691.10 1064.68

Share App.

Money0.00 0.00 0.00 75.00 0.00

Quasi

Capital17.45 32.79 45.84 60.88 75.00

Def. Tax

liability/

Loss

0.00 0.00 32.81 32.81 0.00

Revaluation

Reserves0.00 0.00 0.00 0.00 0.00

Net Worth 600.00 675.48 751.81 959.79 1314.68

Secured

Loans496.55 685.86 981.12 1119.01 1819.54

Unsecured 0.00 0.00 0.00 0.00 0.00

Page 108: SBI Bank Project

Loans

Term

Liabilities496.55 685.86 981.12 1119.01 1819.54

Working

Capital

Advances

0.00 461.01 482.21 442.79 900.00

Sundry

Creditors496.60 400.67 694.94 633.65 100.00

Statutory

Liabilities0.00 0.00 0.00 0.00 0.00

Adv from

Customers0.00 0.00 0.00 0.00 0.00

Other

current

Liabilities

707.92 187.91 105.32 85.00 138.59

Current

Liabilities1204.52 1049.59 1282.47 1161.44 1138.59

Total

Outside

Liabilities

1701.07 1735.45 2263.59 2280.45 2958.13

Total

Liabilities2301.07 2410.93 3015.40 3240.24 4272.81

Fixed Assets 1640.29 1830.50 2372.27 2590.20 3998.99

Depreciation 792.19 845.10 919.18 1004.16 1398.16

Page 109: SBI Bank Project

Lease Asset 0.00 0.00 0.00 0.00 0.00

Net Block 848.10 985.40 1453.09 1586.04 2600.83

Inventories 426.89 602.67 796.42 932.02 979.28

Sundry

Debtors735.23 353.35 473.80 326.43 403.33

Cash &

bank

balance

13.38 68.33 3.72 37.19 19.30

Advances to

suppliers0.00 64.57 38.14 44.23 0.00

Loans &

advances0.00 0.00 0.00 0.00 0.00

Advance

Tax0.00 0.00 0.00 0.00 113.59

Other

Current

Assets

277.47 330.22 243.75 307.85 150.00

Current

Assets1452.97 1419.14 1555.83 1647.72 1665.50

Investments 0.00 6.39 6.48 6.48 6.48

Security

Deposits0.00 0.00 0.00 0.00 0.00

Margin

Money0.00 0.00 0.00 0.00 0.00

Exp. Not 0.00 0.00 0.00 0.00 0.00

Page 110: SBI Bank Project

WO

Non-

current

Assets

0.00 6.39 6.48 6.48 6.48

Total

Assets2301.07 2410.93 3015.40 3240.24 4272.81

FINANCIAL INDICATORS: ABC PARTS PVT. LTD

(In Rs. Lacs)

31.03.2007 31.03.2008 31.03.2009 31.03.2010 31.03.2011

Audited Audited Audited Provisional Projection

Intangible

Assets0.00 0.00 0.00 0.00 0.00

TNW 600.00 675.48 751.81 959.79 1314.68

Investments

in allied co.0.00 0.00 0.00 0.00 0.00

Adjusted

TNW600.00 675.48 751.81 959.79 1314.68

Current

Ratio1.21 1.35 1.21 1.42 1.46

Debt/Equity 0.83 1.02 1.31 1.17 1.38

NWC 248.45 369.55 273.36 486.28 526.91

TOL/TNW 2.84 2.57 3.01 2.38 2.25

TOL/ 2.84 2.57 3.01 2.38 2.25

Page 111: SBI Bank Project

Adjusted

TNW

Operating

Profit /

Sales (%)

6.36 4.53 3.19 4.59 8.98

PAT / Sales

(%)5.23 2.94 1.18 4.96 7.04

FACR 1.71 1.44 1.48 1.42 1.43

Page 112: SBI Bank Project

Brief discussion on Financial Indicators

1. Paid up capital / TNW

a. Authorized capital of the company is Rs.100 Lacs

comprising of 1 Lac-equity shares of Rs. 100/- each. Paid

up capital are Rs. 100 Lacs comprising of 1 Lac-equity

shares of Rs 100/- each. It has been projected at the level

of Rs 175.00 Lacs during current year. The company

already inducted Rs. 75.00 Lacs as Share application

money, which will be converted in to Paid up share Capital

before disbursement of limits by the bank. The Company

will increase the Authorized Capital Limit after the

Sanction of the Proposal but before the disbursement of

the loan.

b. TNW of the company is steadily increasing with full

retention of profits. It was Rs. 582.55 Lacs as on

31.03.2007 and increased to Rs. 675.48 Lacs as on

31.03.2008 and further increased to Rs. 751.81 Lacs as on

31.03.2009. It has been estimated / projected at Rs. 959.79

Lacs and Rs.1314.68 Lacs respectively as at 31.03.2010

and 31.03.2011 due to retention of estimated/projected

internal accruals and proposed induction of capital in the

business. Keeping in view of the past trend of profitability,

estimates/projections of TNW can be accepted.

Page 113: SBI Bank Project

2. Sales: Gross Sales of the company is showing increasing trend.

Sales have increased from Rs. 20.47 crores in 2007-08 to Rs.

25.85 crores in 2008-2009. Thus the company has registered a

growth of more than 26% over the last year. But sale during the

financial year 2009-10 did not register any growth, due to

fluctuation in the foreign market export sale of the company

decreased from the last financial year. The company has

achieved net sales of Rs 22.30 crore during the financial year

2009-10. The company is estimating the sale on the basis of

order in hand. In view of the recovery of economy since Oct.

2009, Company is expecting the good growth rate in sale in

coming financial years, Another reason of the healthy estimates

are good government policies for export out of India and

recovery of overall global market from the financial crunch. The

new plant of the company will become function in the mid of

the financial year 2010-11, which will increase the production

capacity of the company. The company has good demand of its

product in the market. Increase in the production capacity of the

company will increase the turnover of the company. Based on

its existing clientele and the demand in the market of the

products of the company, the company is estimating its Gross

turnover for the financial year 2010-11 at Rs.48.40 Crore.

Keeping in view the overall growth in the automobile and auto

part manufacturing market, the estimated turnover of the

company can be accepted.

Page 114: SBI Bank Project

3. Other income: The other income of the company includes

interest on FDR, Rebate and Discounts received, Foreign

Exchange Benefit etc. The other incomes for the year end

31.03.2008 were Rs. 7.44 Lacs and for the year ending

31.03.2009 were Rs. 17.84 Lacs. The other incomes of the

company as per the provisional balance sheet for the financial

year 2009-10 have Rs. 12.39 Lacs. The company is estimating

other income at Rs. 20.00 for the financial year 2010-11.The

Company estimated these income by taking care of interest

receivable on FDR and current discounts /rebate policies of the

suppliers. Keeping in view the past records of the company,

Estimates/Projections of Other Incomes can be accepted.

4. Profitability: PAT / Sale of the company for the financial year

2007-08 was 3% and for the financial year 2008-09 was 1% .

The PAT of the company for the financial year 2008-09 was

decreased because of increase in the depreciation and Interest

expenditure of the company. Due to expansion and installation

of new equipments during the financial year, depreciation and

financial expenses of the company increased disproportionately

as compared to the increase in gross sale of the company. These

expenses were 10.68% of turnover for the financial year 2008-

09 in comparison to 8.59% for the financial year 2007-08. As

Page 115: SBI Bank Project

per the provisional balance sheet for the financial year 2009-10

the company achieved profitability @ 4.96% (PAT/Sale) upto

31.03.2010. The company is estimating the profitability for the

financial year 2010-11 at 7.04%. Increase in the production

capacity of the company will reduce the operation cost of the

company and the profitability of the company will increase.

Keeping in view the industry scenario and past trends of the

company projections/estimates of the profitability of the

company can be accepted.

5. Investments: The Company has made investments in Fixed

Deposits. The value of Fixed Deposits at the end of the financial

year 2008-09 is Rs. 6.48 Lacs.

6. Current ratio: Current ratio of the company for the financial

year ending 31.03.2007 & 31.03.2008 was 1.21:1 & 1.35:1 .But

current ratio for the financial year 2008-09 was 1.22:1 which is

little lower than the bench mark of the bank i.e, 1.33:1 which

was due to expansion plan of the company and formation of

long term assets of the company during the financial year 2008-

09 to increase the overall profitability of the company. The

company used its internal accrual for purchase of capital assets

of the company. In spite of using its short term funds for the

purchase of the capital assets the NWC of the company is

Page 116: SBI Bank Project

positive. The expansion in the capital assets has increased the

size of the plant and profitability of the company which also

improve the short term liquidity of the company. As per the

provisional balance sheet for the financial year 2009-10 the

current ratio of the company is 1.42, which is above the bench

mark of the bank. Keeping in view the past records/trends of the

company estimated level current ratio can be accepted.

7. Debt Equity Ratio: Debt Equity Ratio of the company for the

financial year 2007-08 was 1.02:1 and for the financial year

2008-09 was 1.31:1. As per provisional Balance sheet of the

company the debt equity ratio for the financial year 2009-10 is

1.17. The Company has estimated it debt equity ratio for current

financial year at 1.38:1. The debt equity ratio of the company is

below the acceptable bench mark of the bank i.e. 3:1 and proves

the long term solvency of the company. Hence keeping in view

the past trends of the company estimates/ projections of Debt

Equity ratio of the company can be accepted.

Page 117: SBI Bank Project

12.3 PRESENT PROPOSAL

The Borrower, ABC PARTS Pvt. Ltd. approached to the Bank for the

Sanction of following facilities:-

∑ For Sanction of Working Capital Limit of Rs. 900.00 Lacs

∑ And, for Sanction of Term Loan of Rs.1600.00 Lacs (by way of

takeover of Term Loan of Rs. 612.00 Lacs from SBBJ,

Barakhamba Road, New Delhi and sanction of Fresh Term Loan

of Rs. 988.00 Lacs for New Plant & Machinery at Noida Unit)

Page 118: SBI Bank Project

1. JUSTIFICATION FOR WORKING CAPITAL SANCTION

MAXIMUM PERMISSIBLE BANK FINANCE: ABC PARTS PVT. LTD

(In Rs. Lacs)

31.03.2007 31.03.2008 31.03.2009 31.03.2010 31.03.2011

Audited Audited Audited Provisional Projection

Inventories 426.89 602.67 796.42 932.02 979.28

Sundry Debtors 735.23 353.35 473.80 326.43 403.33

Chargeable

Current Assets1162.12 956.02 1270.22 1258.45 1382.61

Other Current

Assets290.85 463.12 285.61 389.27 282.89

Total Current

Assets1452.97 1419.14 1555.83 1647.72 1665.50

Other Current

Liabilities1204.52 588.58 800.26 718.65 238.59

Working Capital

Gap (A)248.45 830.56 755.57 929.07 1426.91

Minimum

Stipulated

Working Capital -

363.24 354.79 388.96 411.93 416.38

Page 119: SBI Bank Project

25% of TCA (B)

Actual / Projected

NWC (C)248.45 369.55 273.36 486.28 526.91

PBF 1 ( A - B ) -114.79 475.78 366.61 517.14 1010.54

PBF 2 ( A - C ) 0.00 461.01 482.21 442.79 900.00

MPBF -114.79 461.01 366.61 442.79 900.00

Page 120: SBI Bank Project

2. JUSTIFICATION FOR TERM LOAN

a. Purpose: Sanction of Fresh Term Loan of Rs. 988.00 Lacs

for purchase of New Plant & Machinery at new unit at

New Okhla Industrial Area, Noida.

b. Summary of Cost of Project and Means of Finance

Cost of Project Amount

Cost of Machinery 1313.79

Electricity and Water

Connection20.00

Total 1333.79

Means of Finance Amount

Term Loan 988.00

Unsecured Loans 75.00

Share Capital & internal

accruals270.79

Total 1333.79

(In Rs. Lacs)

c. Sources of Promoters’ Contribution and the time

schedule as to when the funds will be brought.

Promoters of the company have already contributed Rs.

Page 121: SBI Bank Project

75.00 Lacs by way of share application money and Rs.

60.88 Lacs as unsecured loan up to 31.03.2010 as

unsecured loans. Promoters will introduce remaining

amount of unsecured loans Rs.14.12 Lacs during the

current financial year. The balance amount of promoters

contribution & internal accrual will be arranged by 100%

retention of profits for the financial year 2009-10 and

2010-11.

Page 122: SBI Bank Project

d. Projections for the profitability of the project

2010-

11

2011-

12

2012-

13

2013-

14

2014-

15

2015-

16

2016-

17

Net sales 4251.33 4677.46 5145.21 5648.73 6202.6 6811.86 7482.05

Profit after

Tax256.83 316.38 350.91 385.66 414.55 489.72 551.54

Depriciation 224.81 266.09 226.17 207.25 176.16 164.74 140.03

Cash Profit 481.64 582.47 577.08 592.91 590.71 654.46 691.57

(In Rs. Lacs)

Page 123: SBI Bank Project

e. DSCR calculation

DEBT SERVICING COVERAGE RATIO - ABC PARTS PVT. LTD.

2010-

11

2011-

12

2012-

13

2013-

14

2014-

15

2015-

16

2016-

17

2017-

18

PAT 256.83 316.38 350.91 385.66 414.55 489.72 551.54 570.83

Depreciation 224.81 266.09 226.17 207.25 176.16 164.74 140.03 149.02

Interest 220.62 240.23 213.89 188.2 165.27 151.41 143.8 136.15

Sub Total 702.26 822.7 790.97 781.11 755.98 805.87 835.37 856

Loan

Instalment228.29 207.94 197.44 197.7 155.02 58.34 58.66 58.98

Interest 220.62 240.23 213.89 188.2 165.27 151.41 143.8 136.15

Sub Total 448.91 448.17 411.33 385.9 320.29 209.75 202.46 195.13

DSCR 1.56 1.84 1.92 2.02 2.36 3.84 4.13 4.39

Average

DSCR2.59

Imp: Detailed projected financial statements are not shown in the

report due to confidentiality of the data

Page 124: SBI Bank Project

f. Detailed Sensitivity Analysis on DSCR

VariationAverage

DSCR

Minimum

DSCR

Impact of Reduction of Selling price by

5%1.95:1 1.21:1

Impact of Increase in Cost of Goods

sold by 5%2.08:1 1.28:1

Impact of Increase in Rate of Interest by

1%1.89:1 1.17:1

g. Present physical & financial status of project, if any

Basement of the factory building is already constructed.

Present Financial Status of the project is

PARTICULARSCost

Incurred

Cost to be

IncurredTotal Cost

Cost of Construction NIL 1313.79 1313.79

Cost of Electricity and

Water Connection1.65 18.35 20.00

Total 1.65 1332.14 1333.79

Page 125: SBI Bank Project

(In Rslacs)

h. Implementation Schedule

Activity Start Date Completion Date

Land Acquisition Already Done

Building and Civil

ConstructionAlready

June 2010 ( Shed Measuring

45000 Sq Ft is already

Constructed)

Delivery of Equipment

at siteMarch ,2010 June,10

Installation of

EquipmentsJune, 2010 July,10

Commissioning of plant August,2010 Sept,10

Page 126: SBI Bank Project

i. Proposed Repayment Schedule

Scheduled date of Completion of

Project

Sept 2010

Commercial Operations Date (COD Oct 2010

Implementation period (in months) 6 Months

Moratorium (in months) 12 Months

Repayment period in months/quarters/

Half year

84 Months

No. of installment 84

Starting Date Oct 2011

End Date (Last installment) Sept 2018

Door to door tenor 102 months

Page 127: SBI Bank Project

12.4SECURITY

1. Primary

i) For working capital limits: Hypothecation of Company’s

present and future raw material, Stock in process, finished

goods, stores and spares and other current assets and Book

Debts

ii) For Term Loan:

∑ First charges on plant and machinery purchased from

fresh term loan of Rs. 988.00 Lacs. Security Cover

Available

Description of Security Book ValueMarket

Value

Land Situated at, Nodia,

U.P.365.68 1100.00

Building and Sheds 519.55 519.55

Plant & Machinery* 1671.87 1671.87

Other Fixed Assets** 56.21 56.21

Total 2613.31 3347.63

(In Rslacs)

Page 128: SBI Bank Project

iii) Personal /Corporate Guarantee:

Name of GuarantorPositio

n

Net Worth

As on

31.03.10

Immovable

property As on

31.03.10

Mr. M K BhunsaliChairm

an394.95 261.00

Mr. Munish Kumar

BhunsaliMD 389.45 261.00

Mrs. KumadBhunsaliDirecto

r124.56 40.50

(In Rslacs)

Page 129: SBI Bank Project

12.5 CREDIT RISK RATING – ABC PARTS PVT LTD.

The account was rated under the Large Corporate Model. The

following rating have been obtained by both: branch office and zone

office

1. FINANCIAL EVALUATION

i. Past Financials

Category ParameterCO

Value

Benchmark

ValuesRate

0 1 2 3 4

Past

Financials

Absolute

Comparison

TOL/TNW 2.38 >5.005.00-

4.00

4.00-

2.50

2.50-

1.00<1.00 3.08

Current

Ratio1.42 <1.00

1.00-

1.25

1.25-

1.50

1.50-

2.00>2.00 2.68

DSCR 1.56 <1.001.00-

1.25

1.25-

1.75

1.75-

2.50>2.50 2.62

ROCE 12.29 <8%8-

12%

12-

15%

15-

25%>25% 2.10

(Inv +

Rec) / Net

sales

0.53 >6.006.00-

5.00

5.00-

4.00

4.00-

3.00<3.00 4.00

Page 130: SBI Bank Project

ii. Future risk and subjective assessment

Category Parameter Comments Rate

Future risk

Impact of

contingent

liability

There is no other contingent liability 4.00

Impact of

ExpansionIt will lead to more sales. 3.00

Subjective

Assessment

of

Financials

Transparency in

accounting

The financial statements are

prepared in accordance with

generally accepted accounting

principles

2.00

Quality of

inventory

The expected variance in the value

may be less than 5%3.00

Reliability of

DebtorsThere is no disclosure of debtors 2.00

Page 131: SBI Bank Project

2. BUSINESS EVALUATION

A. Market position evaluation

Parameter Comments Rate

Competitive position 3.00

Expected sales

growth

The firm has achieved a sales growth

of around 48% during the years 2007

– 08. It is expected that company

will be in a position to achieve a

sales growth of around 10 – 25% in

the current year

3.00

Input related risk 3.00

Availability of raw

material and other

critical inputs

Raw material is easily available from

nearby states

3.00

Proximity to skilled

Labor

The firm is located in industrial in

NOIDA inputs are available easily

3.00

Production related

risk

4.00

State of technology

used

The firm has adopted proven

technology better than its peers

4.00

Page 132: SBI Bank Project

Product related risk 3.00

Product range Firm is mainly engaged in the

processing of OEM

3.00

Product quality Quality of product is reported to be

better than the peers

3.00

Marketing 3.00

Distribution network Firm has a well developed

distribution network

3.00

Geographical

diversity of the

market

Firm is selling its product directly to

the vehicle manufacturers

3.00

Page 133: SBI Bank Project

B. Industry risk evaluation

Industry risk evaluation for auto ancillary industry 75%

3. MANAGEMENT EVALUATION

A. Objective

ParameterCo

Value0 1 2 3 4 Rate

Actual gross

sales2379.88

<75%75% -

79%

80% -

89%

90% -

95%>95% 4.00Targeted

sales2208.91

Actual PBT 144.38

<75%75% -

79%

80% -

89%

90% -

95%>95% 4.00

Targeted

PBT137.57

(inRslacs)

Page 134: SBI Bank Project

B. Subjective

S.

No.Parameter Comments Rate

1 Management set upThe firm is in operation since

19603.00

2Commitment and

sincerity

The management is reported to be

reliable and sincere3.00

3Track record in debt

payment

The account is running

satisfactorily with us2.00

4Financial strength/

flexibility

Management is capable of

arranging funds but with a time

lag

2.00

Page 135: SBI Bank Project

4. CONDUCT OF ACCOUNT EVALUATION

Parameter Comments Rate

Status of account No irregularity is observed with our

bank in last 2 yrs

3.00

Operations in account Operations in account are healthy 3.00

Submission of

financial data

Timely submission of data 3.00

TOTAL SCORE

Factor % score

obtained

Weight Weighted

Score

Financial Evaluation 75.00 40.00% 30.00

Business & Industry

Evaluation

60.00 25.00% 15.00

Management

Evaluation

75.00 20.00% 15.00

Conduct of Account 75.00 15.00% 11.25

AGGREGATE

SCORE

71.25

(The Aggregate Score of 71.25 refers to PNB- AA-)

Page 136: SBI Bank Project

THIS MEANS THE RATING OF THE BORROWER IS PNB AA-

DETERMINATION OF ROI

From the internal circular of the bank on ROI the corresponding ROI

for auto ancillary firm having a credit risk rating of AA- are:

• BPLR + 1.50% for Working Capital limit, and

• BPLR + 1.50% + 0.50% for Term loan

Imp: The rating as shown in the above section is not a replication of the original

model in any form,

Page 137: SBI Bank Project

12.6 RECOMMENDATIONS:

On examining the request of the Company, the following were

observed:

• The Management of the company is well experienced.

• The Company has been in operation for past 40 years and

has been earning profits continuously.

• The company has good track record in dealing with Banks.

• The overall financial position of the company is

satisfactory.

Keeping in view the increasing profitability and financial

position of the company, the following are recommended

i For Sanction Term Loan of Rs. 1600.00 Lacs ( including Takeover of

Term Loan of Rs. 612 Lacs from State Bank of Bikaner and Jaipur)

for purchase of new plant and machinery .

ii For Sanction Working Capital limit of Rs. 900.00 Lacs

Page 138: SBI Bank Project

The facilities desired by the borrowers are subject to the given ROI

and Terms and Conditions.

Nature Applicable ROILimits

Sanctioned

Fund Based BPLR + 1.50% 900.00

Term LoanBPLR + 1.50% +

0.50%1600.00

TOTAL COMMITMENT 2500.00

(In Rslacs)

Page 139: SBI Bank Project

13.CONCLUSION& RECOMMENDATIONS

The study at PNB gave a vast learning experience to me and has

helped to enhance my knowledge. During the study I learnt how the

theoretical financial analysis aspects are used in practice during the

working capital finance and term loan assessment. I have realized

during my project that a credit analyst must own multi-disciplinary

talents like financial, technical as well as legal know-how.

The credit appraisal for business loans has been devised in a

systematic way. It is a process of appraising the credit worthiness of

loan applicants. Thus it extremely important for the lender bank to

assess the risk associated with credit; thereby ensure the security for

the funds deposited by the depositors. There are clear guidelines on

how the credit analyst or lending officer has to analyze a loan

proposal. It includes phase-wise analysis which consists of 6 phases:

1. Financial statement analysis

2. Working capital and its assessment techniques

3. Techno Economic Feasibility Analysis

4. Credit risk assessment

5. Documentation

6. Loan administration

Punjab National Bank’s adoptions of the Projected Balance Sheet

method (CMA) of assessment procedures are based on sound

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principles of lending. This method of assessment has certain

flexibility required to avoid any rigid approach to fixing quantum of

finance. The PBS method have been rationalized and simplified to

facilitate complete flexibility in decision-making.

To ensure asset quality, proper risk assessment right at the beginning,

is extremely important. That is why Credit Risk Management system

is an essential ingredient of the Credit Appraisal exercise. PNB has

formulated a Credit Risk Rating model, PNB Trac. It considers

important parameters like profitability, repayment capacity, efficiency

of the unit, historical / industry comparisons etc… depending on the

industry. PNB Trac is one of the best rating models present till date.

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FINDINGS

After completing the entire project at Punjab National Bank the

following key findings as mentioned below were observed.

1. At PNB naupada branch thane the priority to appraise a proposal

was given to new or fresh clients over the existing clients

presenting proposals for renewal

2. Ratings, as being performed at PNB, are done once a year.

Therefore, the ratings do not take into account short term drastic

changes like price level changes (which are an issue with any

method based on accounting statements, since annual reports are

based on historical cost basis of accounting and other changes

like sudden mishap/ of the counterparty are not readily

accounted for by the rating system due to long lag between

repeat ratings on the same account.

3. Some of the parameters in Business and industry evaluation are

based on the information provided by company, which in some

cases may not be sufficient. No specific guidelines are followed

in such cases. Also, some of the parameters here may be

rendered redundant in some cases and may push up/ push down

the rating needlessly in these cases.

4. The present risk rating model does not have any mechanism to

prioritize certain sectors of the economy. There are certain

sector in the economy where risk spread is low and certain

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sectors where spread of risk is high like real estate. Also, there

are certain infrastructural projects which need to be prioritized.

The risk rating model is not flexible to incorporate all these

issues.

5. The BPLR system will soon be replaced by Base Rate system.

Banks may choose any benchmark to arrive at the Base Rate for

a specific tenor that may be disclosed transparently.

6. With the deregulation of the financial sector, the ability of the

banks to service the credit requirements of the SME sector

depends on the underlying transaction costs, efficient recovery

processes and available security. There is an immediate need for

the banking sector to focus on credit and finance requirements

of SMEs.

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RECOMMENDATIONS

The Credit Department at PNB naupada branch thane, works at its full

potential and the staff is highly experienced and has a very strong

intuitive sense. So, there is no such recommendation on the entire

process. However to make the process more flexible and efficient, an

electronic database should be designed carrying all the available and

important information related to the proposals accepted, and it should

be easily accessible to the Credit Department. This will help reduce

paperwork and loss of information.

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LIMITATIONS

Like any other study this study too is not free from limitations. The

major limitations of the study are listed below:

1. The major limitation of this study shall be data availability as

the data is proprietary and not readily shared for dissemination.

2. Also the geographical scope of the project was limited to PNB

Circle Office and the loans studied were of solely of businesses

established majorly in NCR

3. The credit appraisal decision are more of intuition and

experience and since the time period was limited, hence best

efforts were made to grasp the process as much as possible

4. Due to ever changing environment, many risks are unexpected

and the remedial measures available are based on general

experience from the past. Therefore risks can only be minimized

cannot be erased completely. Hence, out of the various ways in

which risks can be managed, none of the methods is perfect and

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may be very diverse even for the work in a similar situation in

the future

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REFERNCES

Mckinsey& Company. “India Banking 2010 - Towards a High-

performing Sector”

Ben McClure. Working Capital Works.Investopedia. From

http://www.investopedia.com/articles/fundamental/03/061803.asp

Richard Loth.The Working Capital Position.Investopedia. From

http://www.investopedia.com/articles/basics/06/workingcapital.asp

NailaIqbal.Paradigms of Working Capital Management. From

http://ezinearticles.com/?Paradigms-of-Working-Capital-

Management&id=1251489

JagdishCapoor. Risk Management in Financial Institutions. From

http://www.coolavenues.com/know/fin/jagdish_capoor_a.php3

Principles for the Management of Credit

Risk,fromhttp://www.bis.org/publ/bcbsc125.pdf

M.Y.Khan&P.K.Jain, Financial Management, Seventh Edition

PNB Journals (For internal circulation only)

Credit Management & Risk Policy for the year 2008-09

Book of Instructions on Loans, March 2005

Loans & Advances Circulars on

• BPLR

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• Project Finance

• Industry Rating

• Loaning Powers and Guidelines for exercising such

powers

RBI Circulars and Guidelines

Guidelines on Credit Appraisal

Basel II Accord

Base Rate

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List of Questionnaire

1. On what parameters you would allow the credit risk to the

investors.?

a) Type of project b) Investment amount c) Both.

2. Upto what amount you would allow the credit riks to the

investor?

a) 50 lakhs c) 5 crore- 10 crore

b) 5o lakhs- 5 crore d) 10 crore

3. Do you provide credit risk to the company other than

individuals?

a. Yes b. no

4. Is the credit risk benefited to the bank?

a. Yes b. no

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5. Providing credit risk will increase your profitability?

a. Yes b. no

6. If the party defaults and doesn’t refund the money then will you

extend the credit period?

a. Yes b. no

7. Did you apply the credit risk concept on money only?

a. Yes b. no

8. Did you check all the documents before allowing the credit riks?

a. Yes b. no

9. How much time you take to verify the documents?

a. 1-3 days c. 4-5days

b. 3-4 days d. 1 week

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10. Are the credit risks secured in nature?

a. Yes b. no

11. Do you follow the concept of credit risk transfer in your

bank?

a. Yes b. no

12. Do you provide the credit risk ______________?

a. Internationally b. nationally c. both

13. Can you transfer the credit to some other parties institute

irrespective of the amount?

a. Yes b. no