44371204 Processing a Loan Proposal at Sme Loan Factory

PRO CESSI NG A LOAN PROP OSAL

[2010]

[]

CONTENTSCONTENTS.....................................................................................................................................2 EXECUTIVE SUMMARY..............................................................................................................4 CHAPTER 1: INTRODUCTION.....................................................................................................5 Project Description.......................................................................................................................5 1.2 Relevance of the Project.........................................................................................................6 1.3 Objectives of the Study...........................................................................................................6 1.4 Limitations of the Study.........................................................................................................6 CHAPTER 2 : LITERATURE / CONCEPTUAL SUPPORT.........................................................9 3.1 Banking Sector[3]...................................................................................................................9 3.2 Indian Banking Industry[4].....................................................................................................9 3.4 Small And Medium Enterprises (SMEs) In India.................................................................11 3.5 Role of Small and Medium Enterprises (SMEs)..................................................................12 3.6 Financing the SMEs..............................................................................................................13 3.8 Domestic Loan Policy (Bank of Baroda)...........................................................................14 3.9 Important Concepts...............................................................................................................15 CHAPTER 3 : PROCESS / METHODOLOGY............................................................................17 4.1 Project Methodology...........................................................................................................17 4.3 Sample Size..........................................................................................................................17 4.4 Source of Data......................................................................................................................18 CHAPTER 4 : SME POLICY........................................................................................................19 5.1 Objectives.............................................................................................................................19 5.2 Scope of Policy.....................................................................................................................19 5.3 Small & Medium Enterprises Sector....................................................................................19 5.4 Banks Approach To SME Sector........................................................................................20 5.5 Establishment Of SME Loan Factories................................................................................21 5.6 Targets For Priority Sector / SME Sector Lending..............................................................22 5.7 Guidelines for Takeover of Advance Accounts:..................................................................22 5.8 SME Products.......................................................................................................................25 CHAPTER 5 : CREDIT APPRAISAL...........................................................................................26 6.1 Pre-Sanction Appraisal ........................................................................................................26 6.2 Assessment of Working Capital Limits................................................................................30 6.3 Margin..................................................................................................................................32 6.4 Rate of interest......................................................................................................................32 6.5 Financial Ratios for Credit Appraisal...................................................................................33 6.6 Credit rating..........................................................................................................................34 6.6.1 Internal Credit Rating System : ....................................................................................34 6.6.2 External Credit Rating System .....................................................................................37 6.7 Techno-economic viability study.........................................................................................37 6.8 Review after Sanction...........................................................................................................38Processing a Loan Proposal at SME Loan factory, Bank Of Baroda 2

CHAPTER 6- LOAN PROCESSING PROCEDURE AT BANKS..........................................39 7.1 SME MODEL.......................................................................................................................39 7.1.1 Relationship Managers/Branches Work.......................................................................40 7.1.2 Credit Officers Work....................................................................................................41 7.2 Procedure of Processing.......................................................................................................43 7.2.1 Preparation of Appraisal Note.......................................................................................44 CHAPTER 7 : ANALYSIS OF SME PROPOSALS.....................................................................50 8.1 Case I- GREENFIELD PROPOSAL....................................................................................51 8.2 CASE II- TAKEOVER PROPOSAL................................................................................72 CHAPTER 8: CONCLUSION.......................................................................................................86 9.1 Conclusion............................................................................................................................87 9.2 Findings &Recommendations..............................................................................................87 REFERENCES...............................................................................................................................88 ANNEXTURES..............................................................................................................................89

Processing a Loan Proposal at SME Loan factory, Bank Of Baroda

3

EXECUTIVE SUMMARYBank extends Loan facilities by way of fund-based facilities and non-fund based facilities. The fund-based facilities are usually allowed by way of term loans, cash credit, bills discounted/purchased, demand loans, overdrafts, etc. Further, the bank also provides non fundbased facilities by way of issuance of inland and foreign letters of credit, issuance of guarantees, deferred payment guarantees, bills acceptance facility etc. Efficient management of Loans and Advances portfolio has assumed greater significance as it is the largest asset of the Bank having direct impact on its profitability. In the wake of the continued tightening of norms of income recognition, asset classification and provisioning, increased competition and emergence of new types of risks in the financial sector, it has become imperative that the credit functions are strengthened. RBI has also been emphasizing banks to evolve suitable guidelines for effective management and control of credit risks. Credit appraisal is an important function of the bank. It is the process of appraising the credit worthiness of a loan applicant. Every bank or lending institution has its own panel of officials for this purpose. I have undertaken a study at Rai Pramod & Co. which is a C A F i r m w o r k i n g i n f i e l d of Accounts, Taxation, Auditing and Consultancy related to Project F i n a n c i n g e t c . . The study is on Processing a loan proposal. The process of appraisal & disbursement of loans has been explained in detail in the project. The main focus of my project was on Appraisal and disbursement of loans by following the banks rules & regulations. The project report is categorized into nine chapters. Chapter one deals with the introduction which talks of project description, the relevance of the project and the objectives of the study. Chapter 2 deals about the details of the bank. Chapter three deals with the overview of the banking industry, SME sector, some important banking concepts. Chapter four consists of the methodology adopted in making of the project, locale of the project, sample size and source of the data. Chapter five explains the SME Policy of the bank. The whole credit appraisal process explaining the various steps taken by bank in evaluating a borrower are discussed in chapter six. The loan procedure at Bank of Baroda from sanction to disbursement is dealt in chapter seven. Chapter eight explains the making of loan proposals with the help of two live cases from SME sector. Chapter nine finally deals with conclusion and important findings and recommendations of the project report.Processing a Loan Proposal at SME Loan factory, Bank Of Baroda 4

CHAPTER 1: INTRODUCTIONA loan is a type of debt. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower. The borrower initially receives an amount of money from the lender, which they are obligated to pay back, but not always in regular installments, to the lender. The loan is generally provided at a cost, referred to as interest on the debt. A borrower may be subject to certain restrictions known as loan covenants under the terms of the loan. Acting as a provider of loans is one of the principal tasks for financial institutions. Bank loans and credit are one way to increase the money supply. Now a days loans are easily available and the rate of interests at which they are available are very reasonable. Government too is encouraging people to take loans for certain purposes. For example, government is encouraging people to take housing loans by giving tax concessions. Running a business is never an easy task. One is bound to face financial hiccups during the process. Whether someone is a new generation entrepreneur venturing into a new business or an established businessman planning for a business expansion, whether its money required for an immediate official expansion or it could be the time of recession, when payments don't come on time but the expenditures can't wait, the business loans ease our way through a scary road of financial crisis and open the world of new business heights for you. Financial institutions like banks offer the business loan to bail us out.

Project DescriptionThe title of the project is Processing a loan proposal. This project deals with reviewing the credit worthiness of the borrower before sanctioning of a loan. It deals with analysis of the data provided by the company and following all the formalities as under the norms of the bank and finally making a loan appraisal.

Processing a Loan Proposal

1.2 Relevance

of the Project

The project deals with first getting the loan proposals from the clients and making the appraisal note. It gives a practical insight of the procedures followed by the bank in ascertaining the credit worthiness of the borrower. All the various parameters such as financial, management and industrial are studied. The borrowers are granted fund based (working capital) and non-fund based ((Bank guarantee and letter of credit) facilities. The project requires restructuring of Balance sheet and Profit and Loss Account into the CMA format provided by the Bank. Then filling the CRISIL input sheet for doing the Credit Rating for internal purposes basically for rating and ascertaining the interest rate for the fund based and non-fund based limits.. 1.3 Objectives

of the Study

The objectives of my study are as follows: To study the current market scenario/trends in the SME sector. To learn the importance and details of financing the SME sector. To study the chain of events of processing a loan proposal from receiving the application from the borrower, doing credit rating of the borrower and the company, analyzing the financial statements, sanctioning to disbursement and the post sanction reviews. Preparation of Credit Monitoring Arrangement (CMA) data and checking fund flow and for calculation of ratios. To learn the procedure of doing the rating and framing the rating reports using various CRISIL models 1.4 Limitations

of the Study

Study is limited to only the SME sectors Due to time limitations a detail analysis could not be done.

Processing a Loan Proposal at SME Loan factory

6

8

CHAPTER 2 : LITERATURE / CONC EPTUAL SUPPORTThe purpose of the literature review is to review what has previously been done on the subject and analyze it in the present context so that an effective understanding can be established.

3.1 Banking Sector[3]The Banking Industry was once a simple and reliable business that took deposits from investors at a lower interest rate and loaned it out to borrowers at a higher rate. However deregulation and technology led to a revolution in the Banking Industry that saw it transformed. Banks have become global industrial powerhouses that have created ever more complex products that A Banking sector performs three essential functions in an economy: the operation of the payment system, the mobilization of savings and the allocation of savings to the investment projects. By allocating capital to the highest value use while limiting the risks and the costs involved the banking sector can exert a positive influence on the overall economy and thus is of broad macroeconomic consequence (Roland, 2006; Jaffe and Levonian, 2001, Rajan and Zingales, 1998). The Banking Industry at its core provides access to credit. In the lenders case, this includes access to their own savings and investments, and interest payments on those amounts. In the case of borrowers, it includes access to loans for the creditworthy, at a competitive interest rate. Banking services include transactional services, such as verification of account details, account balance details and the transfer of funds, as well as advisory services, that help individuals and institutions to properly plan and manage their finances. Online banking channels have become key in the last 10 years. The collapse of the Banking Industry in the Financial Crisis, however, means that some of the more extreme risk-taking and complex securitisation activities that banks increasingly engaged in since 2000 will be limited and carefully watched, to ensure that there is not another banking system meltdown in the future.

3.2 Indian Banking Industry[4]


9

The growth in the Indian Banking Industry has been more qualitative than quantitative and it is expected to remain the same in the coming years. Based on the projections made in the "India Vision 2020" prepared by the Planning Commission and the Draft 10th Plan, the report forecasts that the pace of expansion in the balance-sheets of banks is likely to decelerate. The total assets of all scheduled commercial banks by end-March 2010 is estimated at Rs 40,90,000 crores. That will comprise about 65 per cent of GDP at current market prices as compared to 67 per cent in 2002-03. Bank assets are expected to grow at an annual composite rate of 13.4 per cent during the rest of the decade as against the growth rate of 16.7 per cent that existed between 1994-95 and 2002-03. It is expected that there will be large additions to the capital base and reserves on the liability side. The Indian Banking Industry can be categorized into non-scheduled banks and scheduled banks. Scheduled banks constitute of commercial banks and co-operative banks. There are about 67,000 branches of Scheduled banks spread across India. As far as the present scenario is concerned the Banking Industry in India is going through a transitional phase. The Public Sector Banks(PSBs), which are the base of the Banking sector in India account for more than 78 per cent of the total banking industry assets. Unfortunately they are burdened with excessive Non Performing assets (NPAs), massive manpower and lack of modern technology. On the other hand the Private Sector Banks are making tremendous progress. They are leaders in Internet banking, mobile banking, phone banking, ATMs. As far as foreign banks are concerned they are likely to succeed in the Indian Banking Industry. In the Indian Banking Industry some of the Private Sector Banks operating are IDBI Bank, ING Vyasa Bank, SBI Commercial and International Bank Ltd, Bank of Rajasthan Ltd. and banks from the Public Sector include Punjab National bank, Vijaya Bank, UCO Bank, Oriental Bank, Allahabad Bank among others. ANZ Grindlays Bank, ABN-AMRO Bank, American Express Bank Ltd, Citibank are some of the foreign banks operating in the Indian Banking Industry.


10

3.4 Small And Medium Enterprises (SMEs) In IndiaThe small and medium enterprises segment has been a topic of intense deliberation among banks, financial institutions, industry and academicians. In India, small and medium enterprises (SME) is a generic term used to describe small scale industrial (SSI) units and medium-scale industrial units. As per the Micro, Small and Medium Enterprises Development Act of 2006, any industrial unit with a total investment in its fixed assets or leased assets or hire-purchase asset upto Rs10 million is considered as a SSI unit and investment up to Rs. 100 million is considered as a medium unit. In addition, an SSI unit should neither be a subsidiary of any other industrial unit nor can it be owned or controlled by any other industrial unit. The SME sector produces a wide range of industrial products such as food products, beverage, tobacco and tobacco products, cotton textiles, wool, silk, synthetic products, jute, hemp & jute products, wood & wood products, furniture and fixtures, paper & paper products, printing publishing and allied industries, machinery, machines, apparatus, appliances and electrical machinery. SME sector also has a large number of service industries. In India, SME is the biggest provider of employment next only to Agriculture. The SMEs constitute 95% of total industrial units and constitute 40% of total industrial output. Formerly, both Government and RBI credit policy placed emphasis on manufacturing units from the Small Scale Sector. However, in order to make the size of the unit and the technology employed by firms to be globally competitive, the definition of Small Scale Sector was revisited. Keeping in view the same and the global practices, it was decided to broaden the concept of SSI Sector by inclusion of services within its ambit as also including the Medium Enterprises in a composite sector of Small & Medium Enterprises. Subsequently, MSMED Act was operationalized with effect from 2nd October 2006, which defines an enterprise instead of an industry to give recognition to service sector and also defines a medium enterprise to facilitate technology upgradation and graduation.


11

Banks were interalia advised to formulate comprehensive and more liberal policies than the existing policies in respect of loans to SME Sector.

3.5 Role of Small and Medium Enterprises (SMEs)SMEs have been playing a pivotal role in countrys overall economic growth, and have achieved steady progress over the last couple of years. From the perspective of industrial development in India, and hence the growth of the overall economy, SMEs have to play a prominent role, given that their labour intensiveness generates employment. The SME segment also plays a major role in developing countries such as India in an effort to alleviate poverty and propel sustainable growth. They also lead to an equitable distribution of income due to the nature of business. Moreover, SMEs in countries such as India help in efficient allocation of resources by implementing labour intensive production processes, given the abundant supply of labour in these countries, wherein capital is scarce. The enactment of the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 was a landmark initiative taken by the Government of India to enable the SMEs competitive strength, address the issues and challenges and reap the benefits of the global market. SME policy initiatives at the national and state level are aimed at strengthening the role of SMEs at the base as well as at the higher level. With globalisation, all forms of production of goods and services are getting increasingly fragmented across countries and enterprises. With large players adopting different models of business that include involvement of the traditional partners, suppliers or distributors at a different level, SMEs now are experiencing a new model of functioning in the value chain. The past few years has seen the role of the SME segment evolve from a traditional manufacturer in the domestic market to that of an international partner. The restructuring of production at the international level through increased outsourcing is having significant effects on small and medium entrepreneurs in a positive as well as negative manner. Demand in terms of new niche products and services are providing more opportunities for SMEs that are in a better position to take advantage of their flexible nature of operations. However, at the same time they have


12

realized their drawback in terms of inadequate availability of managerial and financial resources, lack of working capital, personnel training and inability to innovate on a faster pace. The combined effect of market liberalisation and deregulation has forced the SME segment to change their business strategies for survival and growth. Some of the changes that SMEs are focusing on include acquiring quality certifications, increasing use of ICT, creating e-business models and diversification to meet the increasing competition. Globalisation, economic liberalisation and the WTO regime would undoubtedly open up a unique opportunity for the largest business community, i.e. SMEs through effective involvement in international trade by streamlining certain factors, such as, access to markets, access to technology, access to skills, finance, development of necessary infrastructure, SME-tax friendly environment, exchanges of best practices to name a few. The SME sector has also registered a consistently higher growth rate than the overall manufacturing sector. In fact, it plays a dual role since the output produced by SMEs is not only about final consumption but also a source of capital goods in the form of inputs to heavy industries.

3.6 Financing the SMEsIn Feb 2008, the Ministry of Micro, Small and Medium Enterprises (MSME), continued with its dereservation policy by removing 79 items from the list of 114 items reserved specifically for SSI (small scale industries) manufacturing. Only 35 items remain in the reserved category from the total 836 selected in 1994 denoting the declining monopoly of the SSI segment on the reserved products. However, the government has set up various schemes in place such as the Credit Linked Capital Subsidy Scheme, MSME Cluster Development Scheme and ISO 9000 Reimbursement Scheme to help SMEs for procuring timely funds. Also the government has put in place the Credit Guarantee Scheme to encourage banks to lend up to Rs 0.50 million without collateral. There has also been a recent budget announcement of setting up of a Risk Capital Fund. Though SMEs are being touted as the priority sector within the economy, they continue to face problems pertaining to finance. When it comes to banks, they have a very traditional way ofProcessing a Loan Proposal at SME Loan factory 13

lending to this segment against collateral and SMEs end up being under financed. Evidently, the biggest challenge before the SMEs today is to have access to non debt based and non-traditional financial products such as external commercial borrowings, private equity, factoring etc. Lately this segment has been witnessing winds of change in the new sources of capital- in the form of private equity (PE) and foreign direct investments (FDI). In Jan 2008, The Soros Economic Development Fund (SEDF), Omidyar Network and Google.org announced a Small to Medium Enterprise Investment Company with an initial corpus of $17 million for providing capital to SMEs in underserved markets. Mauritius-based Frontline Strategy launched a $200 million India Industrial Growth Fund (IIGF) for investment in SMEs targeting companies, primarily in the industrial space with revenues between Rs 200 1,000 million. In 2007, Mauritius-based Horizon advisors launched Ambit Pragma Fund I, an India dedicated PE fund, with a corpus of $100 million for providing equity capital and professional management advice to SMEs. Investments in the SME sector are not only by PE funds but this sector is also attracting FDI. In this respect the government has removed the 24 per cent cap on FDI in the SME sector. Foreign entities are also keen on promoting trade and cooperation between SMEs of different countries. Genesis Initiative, an UK-based organization consisting of entrepreneurs, policy makers and SMEs, is trying to forge mutual cooperation between SMEs in India and UK for in terms of JVs and partnerships in sectors such as textiles, IT, infrastructure etc.

3.7 Book of Instructions BanksVolume 5 was studied as they provide the various policies of the banks that are practiced. It talks of the appraisal process adopted by the Bank. It also provides clear guidelines on the documentation procedure carried out by the bank.

3.8 Domestic Loan Policy BanksThis document provides information on the policies and procedures that are followed at Banks


14

3.9 Important Concepts BANK GUARANTEES: Banks come across a 'Guarantee' in two capacities. One as a beneficiary when somebody guarantees the payment of debt of bank's borrower in case of default. The other as a guarantor, when the bank itself promises to pay the dues or discharge the liabilities of its customers in favour of a third party. While in the former case, the Bank is the creditor, in the latter case, Bank's liability is co-extensive with that of the debtor. LETTERS OF CREDIT: Services of third party as an intermediary is usually a bank who issues a letter of assurance to a seller at the request of a buyer for payment of cost of goods/ services sold on certain terms and conditions. Such an assurance letter is named as a "Letter of Credit". QUASI CAPITAL: Quasi capital will include (i) amount of Central/State subsidy(ii) Long term unsecured interest free loans from government or government agencies such as sales tax loan etc. (iii) long term unsecured interest free loans from promoters provided such loans are subordinated to the loans from banks/financial institutions (iv) Nonrefundable deposits. (v) Risk capital assistance provided by Risk Capital & Technology Finance Corporation Ltd. MAXIMUM PERMISSIBLE BANK FINANCE: MPBF is calculated when the borrower wants loan for working capital requirement. The maximum permissible bank finance will, therefore, be working capital gap less the amount to be so contributed by the borrower. ESCROW ACCOUNT: In case of syndication/consortium baking an account is maintained with only one bank which provides the maximum amount of funds, that monitors all the activities of the company. This account which shows all the credit and debit transactions is known as the Escrow Account.


15

FIXED ASSET COVERAGE RATIO: This ratio shows the number of times the value of fixed assets (after providing depreciation) covers term liabilities. Fixed Assets Coverage Ratio of more than 1 is considered reasonable.


16

CHAPTER 3 : PRO CESS / METHODOLOGY

Now after going through the conceptual support required for understanding the project, a methodology has to be prepared for how to complete the project successfully.

4.1 Project MethodologyThe methodology that was followed in completion of the project successfully was as follows: a. The borrower submits the project report and all the relevant documents to the bank. b. The project report was given to me for an in depth analysis. c. A pre-sanction appraisal and evaluation was then carried out by studying the companys financial statement. d. Restructuring of the companys Balance Sheet and Profit and Loss Account in to the Credit Monitoring Arrangement (CMA) format. e. The borrower company was rated using the CRISIL Credit Rating Model. f. On being assured of the credit worthiness of the borrower, the loan is disbursed. The whole process of credit appraisal is explained in detail in Chapter 4.

4.3 Sample SizeThe sample chosen for appraisal was two, consisting of proposals of SME accounts, Greenfield, and takeover accounts where the name of the account has not been disclosed. being


17

4.4 Source of DataThe project is made through secondary data. This data has been provided by the borrower company. Secondary data in terms of Financial Statements i.e. Balance Sheet, Profit and loss and Cash Flow Statement were studied. The data is then formatted as per the CMA requirement of the bank. The given data was studied and the relevant ratios were computed to ascertain the credit worthiness of the borrower. The various parameters such as financial and industry were studied and hence a loan appraisal was created.


18

CHAPTER 4 : SME POLICY

5.1 ObjectivesThe SME Loan Policy is framed with the following objectives: To improve flow of credit to SME Sector. To formulate norms of lending to SME sector, to ensure availability of adequate and timely credit to the sector. To provide guidelines to the branches to dispense credit to SME Sector. To devise an organizational structure at all levels for handling SME credit portfolio in a more focused manner. To comply with terms of Policy package announced by Honble Union Finance Minister on 10.08.2005 and further guidelines received from Reserve Bank of India from time to time for improving flow of credit to SME Sector.

5.2 Scope of PolicyThis Policy will form a part of Banks Domestic Loan Policy and will cover following: Composition of SME Sector Broad guidelines on lending to SME Sector SME Loan Factory Model Credit Rating and Pricing Policy Identifying Thrust Industries Discretionary lending powers Training needs Reporting and Monitoring System

5.3 Small & Medium Enterprises SectorThe SME segment is broadly classified as under in MSMED ACT, 2006 : Particulars Investment in Plant & Machineries in case of Investment in Equipment in case of Service Sector


19

Manufacturing Enterprises * Micro Enterprises Small Enterprises Medium Enterprises Upto Rs. 25/- lacs Above Rs. 25/- lacs and upto Rs.500/- lacs Above Rs.500/- lacs and upto Rs.1000/- lacs

Enterprises * Upto Rs.10/- lacs Above Rs.10/- lacs and upto Rs.200/- lacs Above Rs.200/- lacs and up to Rs.500/- lacs

* original cost excluding land and building and the items specified by the Ministry of Small Scale Industries ** original cost excluding land & Building and Furniture, Fittings and other items not directly related to the service rendered or as may be notified under MSMED Act, 2006

5.4 Banks Approach To SME SectorSMEs are growth engines for development of Economy. Bank has therefore for internal purposes given focused attention to finance all Commercial enterprises i.e. enterprises which may be outside the purview of regulatory definition of SME but having turnover upto Rs 150.00 crores and new infrastructure and real estate projects where the project cost is upto Rs. 50/- crores by treating them as part of SME segment. SME Banking business will thus include the following across the bank: Micro, Small and Medium Enterprises as per regulatory definition irrespective geographical location, i.e. rural, semiurban, urban, metro areas. All other entities with their annual sales turnover of Rs. 1/- crore to Rs. 150/- crores and new infrastructure and real estate projects, where the project cost is upto Rs. 50/crores. SMEs which are Associate/sister concerns of Wholesale Banking customers. Clubs, Trusts, etc. Financing under various Government schemes launched for MSME Sector.

However, such units, which are outside the purview of regulatory definition will not form part of Priority Sector lending.


20

5.5 Establishment Of SME Loan FactoriesBusiness Model which operates on assembly line principle is adopted by the bank for hassle free and faster dispensing of credit to SME segment. This model titled SME Loan factory has separate Hub for Centralized Processing of SME proposals. SME LOAN FACTORY : To grab vast business opportunities available and with an aim to extend focused attention to Industries & Service Sector, Bank of Baroda has come out with an unique model in the form of SME LOAN FACTORY exclusively for SMEs. It is a revolutionary step taken by Bank of Baroda amongst the Nationalised Banks. It envisages setting up of Centralized Processing Hub to ensure speedy appraisal and sanctioning of proposal of SME Sector within a time bound schedule. The model works on assembly line principles with simplified processes using latest technology and in-house skilled men power to deliver focused services to SME customers. A team of Relationship Officers/Relationship Managers have been stationed at different key places spread over the micro segment of the city who will reach out to SME customers. As of March, 2009, 34 SME Loan Factories have been operationalized across the country. Attractive features of the model are as under : Team of officers having expertises in the area of credit with positive approach is selected. Instead of appointing DSAs(Direct Selling Agents), bank has appointed officers from existing dedicated team only. The hubs main role is ensuring speedy appraisal & sanctioning of proposals pertaining to SME sector in a time bound program. The team members reach out to different market segments. Its important feature is working of the Sme Loan Factory on assembly line principles with simplified processes.Processing a Loan Proposal at SME Loan factory 21

We have two nodes to take care of the marketing /sales(SALES HUB) and credit processing sanction(CREDIT HUB), under a single umbrella of the SME Loan Factory.

5.6 Targets For Priority Sector / SME Sector LendingAs regards lending to SME Sector, Banks are advised to fix their own target in order to achieve a minimum 20% YOY growth in credit to SME as per statutory guidelines so as to double flow of credit to SME sector by the year 2009-10. There is no sub-target fixed for lending to small enterprises sector. However in order to ensure that credit is available to all segments of the Small Enterprises sector, banks are advised to ensure that 60% of the total advances to small enterprises sector should go to Micro Enterprises as under: 40% to Micro (manufacturing) enterprises with investment in plant and machinery upto Rs.5 lacs and Micro(service) enterprises having investment in equipment upto Rs.2 lacs 20% to Micro (manufacturing) enterprises with investment in plant and machinery above Rs.5 lacs and upto Rs.25 lacs and Micro(service) enterprises having investment in equipment above Rs.2 lacs and upto Rs.10 lacs.

5.7 Guidelines for Takeover of Advance Accounts:There are two types of compliances: Non-Financial norms to be complied in case of takeover of SME accounts as per regulatory guidelines or SME as per expanded coverage: Sr. No . a. Norms Profit-making (i.e. net profit before tax) concerns only as per last audited Balance Sheet. b. Accounts be rated as per the new credit rating model (BOBRAM) subject to minimum BOB 6. Accounts, which are not covered under BOBRAM Credit Rating System, may be considered under permitted deviation as per extant guidelines issued from time to time. Deviation allowed Zonal Head can permit deviations in respect of accounts with exposure upto Rs 3.00 crores in aggregate.


22

c.

There should not have been any reschedulement to GM powers (Zonal Head or Corporate GM) /restructuring in the account during last two years. CMD in all other cases. Satisfactory report from the existing bank/FI Deviation can be and/or satisfactory conduct of account allowed by the ED as per latest statement of / CMD in respect of d, e or f. accounts. with existing lenders should be under Accounts the category of Standard Assets. All other existing norms, guidelines as applicable to borrowal accounts are to be scrupulously followed.

d. e. f.

Financial norms in case of takeover of SME accounts as per regulatory guidelines or SME accounts as per expanded coverage: Ratio Norms 1 Micro & Small Industries under manufacturing sector and service Sector as per regulatory guidelines Minimum 1.17 & above 2 Medium Enterpris es under manufact uring sector and service Sectot as per regulatory guidelines Minimum 1.20 & above 3 Units outside the purview of regulatory definition but covered under SME Sector as Per expanded definition. Minimum 1.33 & above Authority who can allow deviation Proposed

Current Ratio

Deviations as under can be allowed by Zonal Head provided exposure does not exceed Rs.3/crores in aggregate and by Corporate General Manager if the exposure does not exceed Rs.5/crore in aggregate. (A) up to 1.15 in case of SME accounts as per regulatory definition & (B) Up to 1.25 in case of SME accounts falling outside the purview of regulatory guidelines provided exposure does not


23

aggregate In all other cases, ED / CMD can permit deviation. Deviations as under can be allowed by Zonal Head provided exposure does not exceed Rs.3/crores in aggregate and by Corporate General Manager if the exposure does not exceed Rs.5/crore in aggregate. (A) up to 4.5:1 in case of accounts of Micro & Small Enterprises as per regulatory definition & (B)Up to 3.5:1 in case of accounts of Medium Enterprises as per regulatory definition and SME accounts falling outside the purview of regulatory definition. Total outside liability / TNW Maximum 4.5:1 Maximum 4.5:1 Maximum 4.5:1 In all Head can permit deviation Zonal other cases, ED / upto 5:1 in all cases i.e. Micro, Small & Medium Enterprises as per regulatory definition and SME accounts falling outside the purview of regulatory definition. In all other cases, ED / CMD can Deviations canpermit be allowed by Zonal Head provided exposure does not exceed Rs.3/- crores in aggregate and by Corporate General Manager if the exposure does not exceed Rs.5/- crore in aggregate. In all other cases ED / CMD is authorized to allow24

Debt Equity Ratio (TTL / TNW)

Maximum 4:1

Maximum 3:1

Maximum 3:1

Averag e DSCR for Term Loan

Minimum 1.75 with a condition that in any one year it should not be below 1.25

Minimum 1.75 with a conditio n that in any one year it should not be below 1.25

Minimum 1.75 with a condition that in any one year it should not be below 1.25


5.8 SME ProductsThe following products are launched for SME sector across the country: Baroda SME Gold Card providing additional 10% facility over the assessed MPBF for meeting emergent business requirements. Baroda SME Loan Pack providing single line of credit for meeting SME borrowers working capital as well as long term requirements within the overall limit approved by the bank as per the eligibility, i.e. 4 times of borrowers tangible net worth as per last audited Balance Sheet, or Rs. 2/- crores, whichever is lower. Baroda Overdraft against Land & Building is a unique product for financing working capital requirements, long term margin requirements of SME borrowers against the security of unencumbered land and building belonging to the unit, or, promoters of the unit, upto a maximum limit of Rs. 2/- crores depending on the location, viz. rural and semi-urban, urban and metro. Baroda Vidyasthali Loan providing finance to Educational Institutional upto a limit of Rs. 5/- crores on liberalized terms. This scheme is implemented at select branches of the Bank depending on the business potential. Baroda Arogyadham Loan for providing finance for setting up new Nursing Homes, Hospitals including Pathological Laboratories, renovation of existing Nursing Homes/Hospitals, purchase of medical diagnostic equipments as also office equipments etc. and to meet working capital requirement upto a maximum limit of Rs.5/- crores, depending on the location, on liberalized terms. This scheme is also implemented at select branches of the bank. Scheme for financing existing SME customers/Current Account holders for purchase of new vehicles upto a limit of Rs. 50/- lacs with 10% margin.


25

CHAPTER 6 : CREDIT APPRAISALCredit Appraisal is a process to ascertain the risks associated with the extension of the credit facility. It is generally carried by the financial institutions which are involved in providing financial funding to its customers. Credit risk is a risk related to non repayment of the credit obtained by the customer of a bank. Thus it is necessary to appraise the credibility of the customer in order to mitigate the credit risk. Proper evaluation of the customer is performed, which measures the financial condition and the ability of the customer to repay back the loan in future. Generally the credit facilities are extended against the security know as collateral. But even though the loans are backed by the collateral, banks are normally interested in the actual loan amount to be repaid along with the interest. Thus, the customer's cash flows are ascertained to ensure the timely payment of the principal and the interest.

6.1 Pre-Sanction Appraisal(i) When a credit proposal is presented to a branch by a prospective borrower for sanction by an appropriate authority, the appropriate authority may either sanction or reject the proposal. The decision to sanction or reject the proposal has to be based on a careful analysis of various facts (ii) and data presented by the borrower concerning him and the proposal. Such an objective and in-depth study of the information and data should convince the sanctioning authority that the money lent to the borrower for the desired purpose will be safe and it will be repaid with interest over the desired period ,if the assumptions and terms and conditions on which it is sanctioned, are (iii) fulfilled. sanctioning authority with the reasons and justifications for either sanctioning or rejecting a credit proposal. It, thus, helps in the decision making process of the sanctioning authority. (v) The entire gamut of credit appraisal can be segregated into 7 sections is under: a. Borrower Appraisal. (iv)Such an in-depth study is called the pre-sanction credit appraisal. It provides the


26

b. Technical Appraisal. c. Management Appraisal. d. Financial Appraisal. e. Economic Appraisal. f. Market Appraisal. g. Environmental Appraisal. 1. BORROWER APPRAISAL / KNOW YOUR CUSTOMER (KYC) NORMS: The borrower is appraised on the following parameters also known as the 3 Cs of the borrower i.e. character, capacity and capital. (1) Character: Character is the greatest and the most important asset, which any individual can have. Even if a borrower has the capacity and capital to repay a loan, it is the character of the borrower which indicates his intention to repay. If the character or integrity of a borrower is known to be questionable, every banker would avoid him even if backed by sufficient collaterals. (2) Capacity: It deals with the ability of the borrower to manage an enterprise or venture successfully with the resources available to him. His educational, technical and professional qualifications, his antecedents, present activity, experience in the line of business, experiences of the family, special skill or knowledge possessed by him, his past record etc. would give a hindsight into his capacity to manage the show successfully and repay the loan. (3) Capital: It is his ability to meet the loss, if any, sustained in the business or venture from his own investment or capital without shifting it to his creditor or banker. Unless a borrower has some Stake in the business, he may not take much interest in its success. KNOW YOUR CUSTOMER (KYC) GUIDELINES The guidelines relating to Know Your Customer (KYC) principle are applicable to all borrower customers including Foreign Currency borrower customers / transactions. Guidelines are issued under Section 35(A) of the Banking Regulation Act 1949 and any contravention of the same attracts penalties under the relevant provisions of the Act. Know Your Customer (KYC) procedures should be the key principle for identification of an individual / corporate whileProcessing a Loan Proposal at SME Loan factory 27

opening an account. The customer identification / verification should be through an introductory reference from an existing account holder / a person known to the bank or on the basis of documents provided by the customer. The guidelines of KYC are not only for establishing the identity of the person but also satisfying about his credentials by obtaining an introductory reference from a known person. The due diligence expected under KYC procedures involves going into details. It is not a responsibility, which ends with opening of the accounts and monitoring of transactions in the initial few months of opening of the account, but monitoring should be an on-going process. Key Elements of the KYC Policy: a) Customer Acceptance Policy b) Customer Identification Procedures c) Monitoring of Transactions and d) Risk Management.. 2. TECHNICAL APPRAISAL: The technical appraisal of a credit proposal involves a detailed study of the following aspects: (1) Availability of basic infrastructure. (2) Licensing/registration requirements. (3) Selection of technology. (4) Availability of suitable technical process, raw material skilled labor etc. 3. MANAGEMENT APPRAISAL: In case of projects, units or enterprises run by individuals as sole proprietors or partnership firms, it is usually one or two persons who manage the entire project, unit or the enterprise whether it be of manufacturing or trading. However, in case of corporate borrowers and also in case of large borrowal accounts, it is usually a set of professionals who manage the entity each specialized in a specific area of management i.e. production, finance, marketing, personnel etc. Unless there is a complete integration of all these functions within an organization, it cannot function effectively.Processing a Loan Proposal at SME Loan factory 28

4. FINANCIAL APPRAISAL: The term financial appraisal refers to the study of the following aspects of the project/unit: (i) Determination of the cost of the project. (ii) Assessment of the source of funds/means of financing the project. (iii) Profitability estimates. (iv) Break even analysis. (v) Cash flow projections. (vi) Projected balance-sheet. 5. ECONOMIC APPRAISAL: The performance of a project is influenced by a variety of other economic, social and cultural factors. Even if a project is technically feasible and financially viable, it may not satisfy the economic needs viz. employment potential, development of industrially backward areas, environmental pollution etc. Further as capital is a scarce resource, it is necessary that it must be allocated in such a way that it yields best possible return to the society in general and the investor in particular. As such a detailed appraisal of the project in terms of the return it generates to the investor and the lending institutions is necessary before a decision is taken to commit resources. One of the most important methods of appraising this is the computation of the Internal Rate of Return of the project. Internal Rate of Return (IRR): IRR is defined as the discount rate at which the present values of all investments made in a project are equal to the present value of all future returns from the project over the assumed life period of the project. Thus (IRR) is an indicator of the earning capacity of the project. A higher IRR indicates a better prospect for the unit. The investment is treated as cash out flow and the return on the same is treated as cash inflow. The discounted values of the cash inflows and cash outflows shall be zero at a particular rate of discount. The task is to work out this rate which is called the Internal Rate of Return. Normally IRR is compared with the cost of capital and if IRR exceeds the cost of capital, the project is termed viable.Processing a Loan Proposal at SME Loan factory 29

IRR is worked out on a trial and error basis and interpolated to obtain the required rate.

Sensitivity Analysis: The normal financial appraisal of a project is based on certain assumed values for certain critical variables/parameters viz. sales realization, unit value of product sold, cost of raw material, capacity utilization etc. However, any variation in the assumed values of these parameters may result in a more favorable or unfavorable IRR. The process of computing the IRR and the repaying capacity of the borrower for different values of each of these parameters is called the sensitivity analysis. 6. MARKET APPRAISAL: While appraising a proposal it is not only necessary to find out whether it is technically feasible and financially viable, but also important to ascertain the marketability of the product manufactured/sold. If goods produced cannot be sold there would be no point in producing them. Hence the marketability or salability of goods is of great importance. Existence of a market for the product provides the rationale for its production. If the product sought to be manufactured is the only one of its kind for which there are no substitutes, the marketing of the same may not be a problem excepting when it can be freely imported and that too at a lesser cost. However, if there are many competitors, the entrepreneur may find the going tough. However a combination of the factors like man behind the show, the quality of the product and the strategy for its sale will result in its successful marketing.

6.2 Assessment of Working Capital LimitsPresently, the following guidelines are in place for financing Working capital facilities of SME units: Limits upto Rs. 5.00 crores: The credit requirements of village industries, Micro Enterprises, Small Enterprises and Medium Enterprises having aggregate fund based working capital limits upto Rs.5.00 crores from the banking system, will be computed on the basis of a minimum of 20 % of their acceptable projected annual turnover for new as well as existing units.


30

Method of assessment: The assessment of working capital credit limits should be done based on acceptable projected turnover basis and also as per the first method of lending. If credit requirement based on first method of lending is higher than the one assessed on accepted projected turnover basis, the same may be sanctioned as the guidelines stipulate that the working capital finance should be 20% of the projected accepted turnover or computed on the basis of first method of lending whichever is higher. If the assessed credit requirement is lower than the one assessed on projected turnover basis, the credit limit can be sanctioned at 20% of the acceptable projected turnover. . Limits above Rs. 5.00 crores: For assessment of Working Capital requirements beyond Rs.5.00 crores, the extant guidelines will be followed. 1st and LENDING 2nd METHOD OF 2nd Method 1 2 1-2=3 4 1-4 25% of 1 3-6 3-5 Lower of 7 or 8

Method of Lending 1st Method 1. Total Current Assets 1 2. Less: Current liabilities (Other 2 than Bank Borrowings) 3. 4. 5. 6. Working Capital Gap Total Current Liablities Actual Net Working Capital Minimum stipulated Net working Capital i.e 25% of CA 7. WC Gap Minimum NWC 8. WC GapActual/Projected NWC 9. MPBF 1-2=3 4 1-4 25% of 3 3-6 3-5 Lower of 7 or 8

TURNOVER METHOD

1. Turnover Achieved/Projected

131


2. Gross Working Capital requirement 3. Minimum stipulated Net working Capital 4. Actual Margin 5. Gross Working Capital Requirement-Minimum Margin 6. Gross Working Capital Requirement-Actuals Margin 7. MPBF 8. % of turnover

25% of 1 5% of 1 CA-CL 2-3 2-4 Lower of 5 or 6 7 as % of 1

6.3 Margin(a) For Term Loan In case of factory land & building, overall margin of 30% In case of Plant & Machineries and Equipment margin is proposed at 25% In exceptional cases, finance may be made available against second hand machinery, with a minimum margin of 40% at the discretion of sanctioning authority, keeping in view the extant guidelines for financing against second hand machinery. (b) For Working Capital 25% uniform margin is proposed on stocks and receivables. For export credit margin may be stipulated @ 10 %. The next higher authority is authorized to reduce margin maximum by 5% in serving cases in respect of Land & Building & Plant & Machineries & Equipments/Current Assets. If deviation is proposed beyond 5 %, Executive Director / Chairman & Managing Director is authorized for the same.

6.4 Rate of interestIf accounts are falling under SME category as per, regulatory definition, rates as applicable to Micro, Small & Medium Enterprises to be applied. However, if accounts are falling under SME category based on expanded coverage i.e. they are outside the purview of regulatory definition, interest to be applied as per separate guidelines being issued from time to time. The interest rate circular is added in the anexture.Processing a Loan Proposal at SME Loan factory 32

6.5 Financial Ratios for Credit Appraisal(Not applicable in case of takeover of accounts) Following ratios can be accepted for granting credit facilities to SME units falling as per regulatory guidelines or SMEs as per expanded coverage Sr. No Micro & Small Medium Enterprises under manufacturing Sector falling under regulatory 1.20 & above guidelines 3:1 Units covered under SME Sector as per expanded and outside the purview of regulatory 1.33 & above. definition 3:1 Enterprises under manufacturing sector and Service Sector falling under regulatory 1 2 Current Ratio Debt Equity Ratio (Total Liability /Tangible 3 Worth) FACR FA/Term 4 Debts) Average DSCR for Term Loan 1.75 with a condition that in any one year it should not be below 1.00 instead of 1.25 as per extantProcessing a Loan Proposal at SME Loan factory

Ratio

Norms

sector and Service definition

guidelines 1.17& above 3:1

Term Net (Net Not below 1.25 Not below 1.25 Not below 1.25 1.75 with a condition that in any one year it should not be below 1.25 1.75 with a condition that in any one year it should not be below 1.2533

The above ratios are indicative and deviations can be considered by the sanctioning authority / competent authority on case-to-case basis, depending on industry specific problems of unit, etc. incorporating justification for the same in the sanction note.

6.6 Credit rating6 . 1 Internal Credit Rating System : .6The internal comprehensive credit rating system under BOBRAM (CRISIL) Model has been approved by the bank and is already in place as advised to all branches. The BOBRAM model is applicable to MSME accounts having exposure of above Rs. 2 Crores. New Scoring Card type of Model for rating the MSME accounts with exposure of Rs. 25 Lac to Rs. 2 Crore. As per extant guidelines, periodicity of credit rating in respect of borrowal accounts enjoying credit facilities (Fund Based and Non Fund Based) of Rs.5 crores and above is half yearly and in other accounts on annual basis. Pricing of loan to be decided based on the guidelines issued from time to time. The New (CRISIL) models and their applicability details are as under Sr. No. 1 Model Applicable for Rating of

Large Corporate 1. Manufacturing units with Annual Net Sales of over Rs. 100 Crore and Investments in Plant & Machinery of Rs.10 Crore & above and for infrastructure projects which have started cash generations from the project operations with part / full implementation. 2. Service sector units with net annual sales over Rs. 100 Manufacturing units with Annual Net Sales of Rs. 100 Crore & below and / or Investments in Plant & Machinery less than incl. Rs.10 Crore.

2

SME (Manufacturing Sector) Enterprises Commercial


34

3

SME (Services)

Service Sector units with Annual Net Sales of Rs. 100 Crore & below and / or Investment in Equipment of Rs 5 Crore & below. Units engaged in trading activities irrespective of sales turnover.

4

Traders

CREDIT RATING METHODOLOGY The New CRISIL Rating Models for Commercial Advances are based on two dimensional rating methodology specified under Basel -II Accord requirements. The credit risk rating process as per New CRISIL Rating Models involves three types of ratings for each credit facility viz. a. Obligor ( Borrower) Rating - for credit worthiness indicating the Probability of Default (PD) b. Facility Rating - representing the Loss Given Default (LGD) and c. Composite Rating - which is indicative of the Expected Loss (EL). The risk rating flow chart under CRISIL NEW rating models is as under:

Composite Rating (Indicator of Expected Loss i.e. EL)

Obligor (Borrower) Rating (indicator of Probability of Default i.e. PD) Evaluation of Creditworthiness of a Obligor (Borrower).

Facility Risk Rating (indicator of Loss Given Default i.e. LGD) Evaluation of Riskiness of a Facility

Obligor (Borrower) Rating 1. Industry Risk 2. Business Risk 3. Financial Risk 4. Management Risk

Project Risk Rating 1. Project Implementation 2. Post Implementation

Project Implementation Risk 1.Construction Risk 2. Funding Risk

Post Project Implementation 1. Industry Risk 2. Business Risk 3. Financial Risk 4. Management Risk


35

OBLIGOR (BORROWER) RATING The obligor (Borrower) rating is indicative of creditworthiness of an obligor or the Probability of Default (PD) and it is based on the assessment of past and projected cash flows of the company. Obligor Rating Grades range from BOB-1 to BOB-10. However depending upon the model used, the rating grades ranging from BOB-1 to BOB- 10 or BOB-3 to BOB-10 or BOB-6 to BOB -10 are generated as follows: Sr.No 1 Model a) For Borrowers under Large Corporate (Mfg / Services), Banks, NBFCs and Broker categories. b) For Borrowers under Infrastructure project having operations phase or expansion / diversification projects categories. 2 a) For Borrowers under SME BOB-3 to BOB-10 (Manufacturing) and SME (Services) categories. b) For Existing and New Borrowers under Trader Category Green Field Project Borrowers under Large BOB-6 to BOB-10 Corporate (Mfg / services) -with project, SME (Mfg./ Services)- with project and Infrastructure (Power/ Port/ Road/ Telecom)- Build Phase categories. Obligor (Borrower) Rating Grades BOB-1 to BOB-10

3


36

FACILITY RATING Facility Rating involves assessment of the security coverage for a given facility and indicates the Loss Given Default (LGD) for a particular facility. Facilities proposed/ sanctioned to a company are assessed separately under this dimension of rating. Facility Rating grades range from FR-1 to FR-8. COMPOSITE RATING The Composite Rating (CR) which is the matrix or the combination of PD and LGD; indicates the Expected Loss in case the facility is defaulted. The Composite Rating is worked out automatically by the software based on the matrix of Obligor (Borrower) Grade (BOB Rating) and Facility Rating Grade (FR). Composite rating grade ranges from CR-1 to CR-10 CUT- OFF GRADE FOR ACCEPTANCE Bank has accepted BOB-6 as the cut-off point for the acceptance of an obligor (borrower) based on Obligor (Borrower) rating carried out as per the applicable model.

6 . 2 External Credit Rating System .6External Credit Rating should be carried out in all SME loan accounts with credit limits of above Rs 5 crores by any one of the RBI approved external credit rating agencies. Presently ICRA, CARE, CRISIL and FITCH are the only Reserve Bank of India approved external credit rating agencies in India

6.7 Techno-economic viability studyIt is done to ensure that the project is technically and economically viable. Amount Below 5 crores 5-10 crores Above 10 crores Conducted By TEV study not needed Empanelled consultant of bank Official of Project Finance Dept from Mumbai


37

6.8 Review after SanctionCredit facilities sanctioned to borrowers are subjected to annual review as per the prevailing guidelines. Branches have been authorized to review advance accounts of borrowers in trading activities, Micro & Small Enterprises, borrowers in rural area, borrowers having only term loan accounts, financed under government sponsored programme, borrowers enjoying only guarantee facility, etc, with limits upto Rs. 20/- lacs pending receipt of audited financial statements provided the conduct of the account is satisfactory in terms of various parameters stated below: a. Satisfactory conduct and turnover in the account b. Fulfilment of repayment obligations (Interest/ Instalments) c. Adequacy of securities, drawing power, insurance coverage etc. d. Rectification of inspection irregularities (other than non submission of financial statements) e. Compliance of all terms and conditions of previous sanction. f. Satisfactory trend in production and /or Sales as per projections. g. Documentations and mortgages in the account being complete, valid and enforceable h. Prompt payment of bills under L/cs, realization of BP/BDs, Guarantee Commission etc. i. Submission of Income Tax / Sales Tax returns filed with statutory Authority as per time schedule prescribed, wherever applicable (which will also indicate about the sales and profitability of the operations). The financial statements should, however, be obtained within 9 months from the close of the financial year and is satisfied upon by the sanctioning authority on financial parameters emerging out of the Balance Sheet/ Profit and Loss Account submitted by the borrowers at a later date. If the financial parameters emerging from the submitted Balance Sheet are not found satisfactory, appropriate actions, as may be warranted, should be initiated. The account should not be reviewed without financial statements for two consecutive years. The above procedure has been adopted to ensure timely review of small sized advance accounts and to reduce the number of unreviewed accounts.


38

Short Review/Status Note: The bank has also the practice of Short Review/Status Note, which is done when it is not possible to carry out a comprehensive Regular Review of the account within the stipulated period pending receipt of certain particulars/information or where the account is placed under special monitoring, etc.

CHAPTER 7- LOAN PROCESSING PROCEDURE AT BANK OF BARODA

7.1 SME MODEL

SME LOAN FACTORY HEAD SME LF

SALES HUB HEAD_ SH

CREDIT HUB HEAD- CH


39

RELATIONSHIP MANAGERS/ BRANCHES

CREDIT OFFICERS

Normally SME loan factory has the above model but in Kolkata, the sales Hub was not separately present. Only the credit officers are present, they are also doing the work of sales Hub for some proposal whereas in other cases the sales Hub are the various branches and they send the lead to the SME loan factory.

7.1.1 Relationship Managers/Branches Work


40

Lead generation : Its when the loan proposal first comes to the bank. When the client shows interst in taking loans and gives the relevant papers. Proposal Generation : From the lead the proposal is made ready for sending to the credit hub for processing The sales hub demands all the additional information from the client on behalf of the credit hub and periodically contact the borrower.

7.1.2 Credit Officers Work


41


42

7.2 Procedure of ProcessingBORROWER / CLIENT PROJECT REPORT & ALL DOCUMENTS & SUBMISSION OF APPLICATION BANK

PRE-SANCTION APPRAISAL & EVALUATION

CREDIT RATING

PRE SANCTION INSPECTION OF SECURITIES & FIELD VISITS SANCTION OF LOAN

DOCUMENTATION (including T & C) VERIFICATION OF DOCUMENTS

INSPECTION OF SECURITIES & FIELD VISITS REPAYMENT OF INTEREST AND INSTALLMENTS

POST-SANCTION MONITORING

GENERATION OF LOAN ACCOUNT

DISBURSEMENT OF TERM LOAN/ CC FACILITY


43

7.2.1 Preparation of Appraisal Note


44

7.2.1.1 APPLICATIONS FOR LOANS AND THEIR PROCESSING

Standard schedule of fee / charges relating to the loan application depending on the segment to which the accounts belong, will be made available to all the prospective borrowers in a transparent manner, along with the loan application, irrespective of the loan amount. Likewise, amount of fee refundable in the event of non-acceptance of the application, prepayment options and any other matter which affects the interest of the borrower will also be made known to the borrower at the time of application. Receipt of completed application forms will be duly acknowledged. The acknowledgement would also include the approximate date by which the applicant should call on the Bank for preliminary discussions, if deemed necessary. All loan applications will be disposed of within a period of 4 weeks from the date of receipt of duly completed loan applications i.e. with all the requisite information/papers. In case of rejection of loan application, irrespective of category of loans or threshold limits, the same would be conveyed in writing along with the main reason(s), which led to rejection of the loan application 7.2.1.2 CHECKLIST OF DOCUMENTS There are separate checklist for separate type of accounts Checklist for Fresh proposal Checklist for Review cum enhancement

The checklist is added in the annexture. 7.2.1.3 ROC SEARCH REPORT It is done for limited company to see whether they are registered or not. It cannot be done for proprietorship/partnership firms. It is to ensure whether there is charge against the Director/company, whether the balance sheet submitted to bank is the same submitted to the registrar. The search report is done by Chartered Accountant.Processing a Loan Proposal at SME Loan factory 45

7.2.1.4 LEGAL SEARCH REPORT It is done by empanelled advocate of the bank. It is to ensure that the land is mortgagable or not, to ensure that there is no legal restrictions on the land(land being agricultural). 7.2.1.5 VALUATION REPORT It is done by the empanelled valuer of the bank. He does the valuation of the land to ensure whether the land is worth the value which the borrower is showing. 7.2.1.6 CIBIL REPORT It is done to ensure the whether the credit worthiness of the borrower, to ensure there are no filed cases against him. Moreover it can also disclose where has the borrower applied other than our bank for the loan. 7.2.1.7 RBI WILLFUL DEFAULTERS LIST It is to ensure the borrower name is not there. The list is updated by all banks into RBIs database of the defaulters and the information can be checked there. 7.2.1.8 ICAI There banks check the whether the Chartered Accountant of the company is genuience CA or not. 7.2.1.9 RESTRUCTURING OF BALANCE SHEET AS PER CMA REQUIREMENT a. The balance sheet of a corporate entity as per Companies Act needs to be restructured by the Bank before a meaningful analysis can be made. b. The balance sheet prepared as per the Companies Act lists the assets and liabilities in the descending order of "Security". However, as per the CMA format the assets and liabilities are listed out in the descending order of "Liquidity". c. The CMA format has also incorporated certain changes in respect of classification of preference share capital, fixed assets, current assets, etc.


46

7.2.1.10 ANALYZING & BENCHMARKING WITH RATIOS As mentioned earlier the benchmark required , all the ratios are checked and analysed. Assesing Working Capital Limits It is done by the two methods mentioned earlier. It is done only for CC facility. 7.2.1.11 PRE-SANCTION INSPECTION It is done by the bank officials. They visit the site and do the inspection of securities. Also they look at the present status of the project in case of TL facility. 7.2.1.12 TEV REPORT It is done to ensure whether the fresh proposal is techno-economically viable or not. Other details have been mentioned earlier. 7.2.1.13 CREDIT RATING Bank has taken the Crisil Model for rating. Crisil Input sheet is first filled according to the model and then rating is done 7.2.1.14 INTEREST RATE DETERMINED After the credit rating accordingly interest rate is determined. Interst Rate Structure is attached in the annexture. Finally the APPRAISAL NOTE is made according to Banks format along with Terms and conditions. LOAN APPRAISAL AND TERMS / CONDITIONS In accordance with Banks prescribed risk based assessment procedures, each loan application will be assessed and suitable margin/securities will be stipulated based on such risk assessment and Banks compromising on due diligence. The sanction of credit limit along with the terms and conditions thereof is to be conveyed to the loan applicant in writing and applicants acceptance of such terms and conditions extant guidelines, however without


47

will be obtained in writing. Such terms and conditions as have been mutually agreed upon between the bank and borrower prior to the sanction will only be stipulated. Copy of loan documents, along with a copy each of all relevant enclosures quoted in the loan agreement should be furnished to all the borrowers at the time of sanction / disbursement of loans. Standard sanction letter would include instances of approval, disallowance, etc. The bank is under no legal obligation to consider increase/additional limits/facilities without proper review/assessment. In case of lending under consortium arrangement, the participating bank would decide the timeframe to complete appraisal of the proposal and communication of the decision. The Bank will abide by the decision of the consortium. 7.2.1.16 SANCTION OF LOAN Sanctioning is done by higher authorities in MUMBAI. If any advance sanctioned is not availed within four months (six months in case of priority sector advance) from the date of sanction, the facility should not be allowed without referring the matter to the sanctioning authority. DOCUMENTATION Documentation forms an important part of lending which establishes the following: Legally enforceable contractual relationship between the Bank and the constituent such as Lender/Borrower. The nature and description of the security, if any, offered for the advance, and the terms and conditions of sanctioning the advance. Banks unfettered rights for crystallization of securities when necessary .When an unlikely event of default happens, as a last resort, documents obtained by the Bank form the basis upon which the Bank may file a suit, as and when found necessary, in a competent Court of Law against the defaulting borrower/guarantor. Creation of Security is also an important aspect involving creation of mortgage, assignment etc. Such charges are also to be registered with competent authorities in case


48

of certain type of organization say with Registrar of Companies in case the borrower is a Limited Company. 7.2.18 VERIFICATION OF DOCUMENTS Advances accounts with aggregate limit of above Rs. 1 crore (Funded plus Non-Funded) would be verified by the Banks Law officer posted in their respective Zone / Region and the documents relating to Advance Accounts with aggregate of Rs. 10 lacs and above but up to and inclusive of Rs. 1 crore shall be verified by the Banks identified Advocate / Lawyer other than the one who has given the Title Opinion / Non-Encumbrance Certificate (NEC) /Report in respect of mortgage(s) in the account. 7.2.19 REQUIREMENTS BEFORE DISBURSEMENTS In case of advances accounts falling within the discretionary Lending Powers of the Branch Manager: The Branch Manager has to make necessary arrangements to ensure compliance of the following aspects before making any disbursement under fresh / increase credit facilities and the proper record in this respect has to be kept by the Branches for perusal of higher authorities / inspecting officers /auditors: a. Full compliance of the stipulated terms and conditions (unless specifically exempted by the competent authority) b. Getting the documents duly vetted (wherever required) as per Banks extant guidelines. c. Ascertaining that the Borrower has obtained necessary license, permission, clearance required for running the business. d. Pre-disbursement inspection / site visits. Insurance All assets (stocks / fixed assets) charged to the Bank as security for advances are to be comprehensively insured against the risk of theft / burglary, fire &Strikes, Riots, Malicious Damages (SRMD), with an insurance company, in the name of borrower / guarantor, with Bank Clause, at the borrower's expenses, unless insurance is specifically waived or not required to be taken as per provisions relevant to the lending scheme.


49

7.2.1.20 DISBURSEMENT OF LOANS INCLUDING CHANGES IN TERMS AND CONDITIONS Disbursement of loans sanctioned is to be made immediately on total compliance of terms and conditions including execution of loan documents governing such sanction. Any change in terms and conditions, including interest rate and service charges, will be informed individually to the borrowers. Changes in interest rates and service charges will be effected prospectively. Consequent upon such changes any supplemental deeds, documents or writings are required to be executed, the same shall also be advised. Further, availability of facility will be subject to execution of such deeds, documents or writings. 7.2.1.21 POST DISBURSEMENT SUPERVISION

Before taking a decision to recall/accelerate payment or performance under the agreement or seeking additional securities the Bank would give reasonable notice to the borrower.

All securities pertaining to the loan would be released on receipt of full and final payment of the loans subject to any legitimate right or lien and set off for any other claim that the Bank may have against the borrowers.

Facility Net Security Value % Effective Existing Processing a Loan Proposal at SME Loan factory LGD Score Proposed Facility Increase Asset Classification

50

Combined Rating 635Banks Credit Rating As per Term + 635.00 table given above. External Credit Rating Loan Non Fund Based Limits out after Nil Will be carried 1188.51 commissioning of Hospital. Constitution 48.48 Nil FR4 Nil Private Limited Company CIN NO. Total Exposure Adequate Nil ***** Safety Date CHAPTER 8 : ANALYSIS OF SME PROPOS ALS BOB6 635.00 of Establishment 28/08/2009 +635.00 Investment grade moderate safety CR6 This chapter deals with the analysis of the SME proposals. Moderate Expected The analysis is carried out on three cases, each case consist of three sections, Loss

namely: (i) Details of

the proposal (ii) Financial parameters and assessment (iii) Industry perception

8 1 Case I- GREENFIELD PROPOSAL .Name of the Account Branch Region Zone : : : : XYZ Private Ltd. BEHALA BRANCH, KOLKATA KOLKATA METRO REGION EASTERN ZONE

SECTION I: DETAILS OF THE PROPOSAL Gist of the Proposal 1.1) a) Fresh Proposal for Term Loan for 81 months (72+9 months moratorium) for setting up a multi specialty hospital at-ABC, Kolkata in the name of XYZ Private Ltd. 1.2) Fresh sanction of Fund Based Limits. ( Rs. in lacs)

Sanction / Ratification Modifications in Terms & Condition: waiver of the personal guarantee of Dr. SP, Professional director. CRISIL RAM SECURITY COVER SCORE

N.B. Project is being considered as a Greenfield project. Project rating under CRISIL RAM based on the future projections from 2010-11 onwards, has been carried out by us. Validation/Finalization of rating to be done by competent authority before sanction of the facility. 2.0 Basic Data:


51

Location: Registered Office Hospital Group Industry and Nature of Activity Registration under MSMED Act

ABC ABC, kolkata NA Healthcare, 82 bed Multi Speciality Hospital To be classified as medium enterprise under MSME (services) as per circular No.BCC: BR: 101/191 dtd. 08.07.09. Enterpreneur Memorandum Number : 1) ******, issued by DIC, Kolkata, on 29.10.09, to set up the pathological and diagnostic clinic at ABC, Kolkata-34 2) *****, issued by DIC, South 24 PGN, on 09.03.2010, to set up Hospital at ABC which is valid for 2 years. Fresh proposal Nil. 100% in case of the proposed Term Loan 1.75 % over BPLR [email protected] %p.a. With monthly rests.. As per BCC: BR: 102/352 dtd. 26.11.2009 on ROI for SME Sector. As per Annexure D of the proposal enclosed Not applicable. Fresh Proposal. ******, issued by ITO WD52(3) ******** issued by KMC, for the year 2009-10. NOC issued by CMO of Health, South 24 PGN, on 08.03.2010 Memo No: ******* dtd. 09.11.09, issued by DG, WB Fire Emergency Services. Prof. Indemnity Medical establishment Policy No. ******** dtd. 22.02.2010, obtained from United India Co. Insurance Ltd. To cover the casualty during treatment due to unavoidable circumstances. Registered with United medical practitioners and Establishment Pvt. Ltd. Not applicable Not Applicable Nil Name of Bank N.A. Nil Fund Based LMN Non-fund Based % Share The company has applied for Consent to establish, the health care Amount unit vide letter dtd. 04.11.09. % Share Amount Processing a Loan Proposal at SME Loan factory 52 Existing Propose d Existing

Dealing with the Bank since MPBF Our Banks Share Rate of Interest Term Loan

Security Available Yield in the account PAN NO. Trade license Permission to establish Nursing Home Fire safety Clearance Insurance

Other Registration Major inspection irregularities Internal Audit Concurrent Audit RBI Inspection Statutory Audit Auditors of the company. Pollution Clearance

Existin g Propose d Existing Propose d The consent to operate will be obtained after construction of Bank Of Baroda hospital. 100% Certificate of Enlistment Issued by Maheshtala Municipality on 12.11.09, to establish 100% the Nil Hospital, 635.00 vide license No. ****, valid upto 30.06.2010. Nil Nil Municipal license (Enlistment certificate No. ***** dtd. 12.11.09) Nil issued by Maheshtala municipality for the use of premises Nil for Non-residential purpose. NOC on Public Health WB municipal act Totalissued by Maheshtala municipality to carry out the NOC 1993 business, 100% valid till 30.06.2010 100% License from food deptt. Issued by Health officer Maheshtala Municipality for storing of Nil Medicine 635.00 materials. Nil At Clearance from Electric deptt for Nilpresent the electric connection has been taken in the name of electric supply Mr. Nil SK, consumer number *****, to carry out the construction work at the site. Nil However, the company has deposited Rs. 4.88 lacs on 26.05.10 towards installing the dedicated, underground powers lines with appropriate load. Whether statutory dues have been paid Whether the names of the Company / Associates or Directors appear in RBI defaulters list and / or caution promoters Whether the Company / firm / list and their Associates are on ECGC caution list. / Special Approvals List. Compliance of earlier sanctioned Terms Yes No No N.A. Presently no borrowing from BOB.

2.1)

Banking arrangement: Sole Banking Arrangement

(Rs in lacs)

Proposed Term Loan from Bank of Baroda, Behala Branch is related to finance for the project of XYZ Hospital at ABC, kolkata against the primary security of 1st charge of all the moveable and immoveable assets of the Hospital and collateral security in the form of EM of Hospital land and Building. Sl. No Name of the Guarantors Net worth as on 2.07) Names of 31/03/2009 Guarantors: 1 (Rs in lacs) SK 67.78 2 RK 65.77 3 GK 23.73


53

Total

157.28

2.8)

Business experience of Directors:

SK, M.D. He is an educationist and a reputed entrepreneur in ABC, South Kolkata. He is in the business for the last 40 years and has vast knowledge and experience in various areas of business. At present Mr. P is associated with many institutions where either he is founder of the institution or owning himself.

2.09) Share Holding Pattern of the Society as on 31/03/2009: Particulars A Promoters Holding 1. a. Indian Promoters B. Foreign Promoters 2. Personal acting in concert Sub-Total Financial Institution / Bank / Mutual Funds Public Bodies Corporate Others (General Fund of Society) Sub-Total Grand Total 2.10) List of Major Shareholders: Name and Address SK RK GK 3.0. ISSUE FOR CONSIDERATION: 4.0) BACKGROUND OF THE COMPANY: In India the Health Care industry has been identified as one of the potential sector for investment in the present day scenario. Till date, approximately 12% of the scope offered by the Health Care sector in India has been tapped. Health Care industry in India is worth $17 billion and is anticipated to grow by 13% every year. This sector encompasses hospitals enrolled to the hospital networks, health care instruments, health care in the retail market. This prevailing scenario has attracted the promoters to set up a modern health care centre at ABC, West Bengal. They have incorporated a company on 28.08.2009 in the name of XYZ Pvt. Ltd.. The unit has requested the Bank of Baroda for sanctioning Term Loan of Rs.635.00 lacs towards the cost of medical equipment, medical furniture & accessories, electric installation, computer & electronic systems etc. Details of the entire projects is given below: Processing a Loan Proposal at SME Loan factory 54 No. of Shares Held 5000 3000 2000 No of Share Amount (Rs) % Of Shareholding

10000

100000.00

100%

10000

100000.00

100%

B C D E

10000

100000.00

100 %

Line of Activity Capacity ( Installed )

: :

Multi Speciality Hospital 82 Beds (Including ICCU, HDU & NICU)

5.00

RANGE OF SERVICES PROPOSED TO BE CATERED AND FACILITIES PROPOSED TO BE AVAILABLE AT THE HOSPITAL MEDICAL EXPERTS INTERESTED TO RENDER THEIR SERVICES AND THEIR PROFESSIONAL COMPETENCE TECHNICAL APPRAISAL 7.02 7.03 Servicing Process After registration of the names of patients, doctors of different discipline will take care for treatment of the patients. Infrastructural facilities a) Site The unit is situated at ABC. The resident of this area are lower middle class group. Nearest hospital are BS Hospital & BB Hospital at a distance of 12 Km from the site. b) Land The area of land on which Ground plus four storeyed building has been constructed for hospital purpose is 12 cottahs. Under three deeds this land has been purchased by Sri SK, who is Managing Director of the project. c) B u ild in g This is a R.C.C. column load bearing Ground plus four storeyed building having ACC roof which has been constructed in R.C.C. column and R.C.C. beams. Lay out plan attached. Floor to floor layout Power The power load will be 125 KVA. A distribution transformer is to be installed by CESC Ltd. & the company has paid Rs.4,87,769 therefor. Water Water will be available from deep tube well. Main water sources is Corporation water supply. Overhead & underground water reservoir of sufficient capacity have been planned to be constructed. Pollution The company has applied for NOC before the West Bengal Pollution Control Board.

6.00

7.00

d)

e)

f)

g) Fire License Fire safety recommendation for existing construction of G + 4 storeyed building under group institutional building has been made by the office of the Director General W.B. Fire & Emergency services. The company has made arrangement for Fire and Hydrant systems(with sprinklers and Detectors). The installation work is already started. h) NOC from Chief Medical Officers of Health, 24 - Parganas The above has been received under cover of letter dated 08.03.2010. (Photocopy attached)


55

7.04

Management & Manpower A. Management : Managing Body | | Policy Decision Directors Medical Director C.E.O. Day to Day Administration and Implementation C.E.O. & Executive Director Department Managers Clinical Department in charges (Doctors)

B. Manpower : The proposed manpower has been estimated on the basis of hospital activities. The category-wise break up as is follows: Sl. No. A. B. C. Category Administrative & Specialists Staff Personnel Maintenance Assistance Total : Nos. 18 138 54 210

In addition to above, there will be visiting consultants: With the help of the above manpower and the services available from Doctors in panel, it is expected that the unit will run without any problem. 7.05 Medical Equipment Use-wise details of medical equipment are as under : A. Out patient Department Equipment i. Dental Equipment - Rs. 2, 82,697/ii. Eye Equipment Rs.55, 98,754/iii. ENT Equipment Rs. 6, 93,306/--------------------B. Eye & ENT & Minor Operation Theatre C. ICCU & HDU Furniture & Equipment D. Nursery NICU Furniture & Equipment E. Ward Furniture & Equipment F. Pathology, Microbiology & Serology G. Central sterile supply dept. (CSSD) H. Gyne & Operation Theatre I. Orthopedic cum general operation theatre J. Labour operation theatre & Furniture K. Diagnostic Equipment L. Centralised medical oxygen, nitrous oxide & Vaccum services Total : Rs. 65,74,757/Rs. 37,89,980/- Rs. 45,25,794/Rs. 17,70,246/Rs. 5,58,176/Rs. 31,43,046/Rs. 16,52,352/Rs. 12,84,864/Rs. 35,26,216/Rs. 6,13,328/Rs.2, 01,41,680/Rs. 21,86,000/----------------------Rs.4, 97,66,439/-

Sources of supply of these medical equipments have been found out and quotations have been received. For some equipment orders have been placed. 7.06 Medical Furniture & Accessories Department-wise medical furniture & accessories are as under : Processing a Loan Proposal at SME Loan factory 56

an

posed Term Loan

d Assets as per the Project Report A. Out patient Department furniture i. Dental Furniture - Rs. 1, 99,108/ii. Eye Furniture Rs. 1, 97,600/iii. ENT Furniture Rs. 2, 13,200/---------------------

Rs. 6,09,908/B. Eye & ENT & Minor Operation Theatre Rs. 8,88,488/C. ICCU & HDU Furniture Rs. 6,58,174/D. Nursery NICU Furniture Rs. 54,902/E. Ward Furniture Rs. 29,13,622/l Land(12.14 cottahs) and proposed G+4 storied F. Central sterile supply dept. (CSSD) Rs. 4,83,807/ng to Mr. Sudip Kumar Khanna, vide sale deed No. G. Gyne & Operation Theat

44371204 Processing a Loan Proposal at Sme Loan Factory

Documents

Transcript of 44371204 Processing a Loan Proposal at Sme Loan Factory