Credit Appraisal of Lord Krishna Bank

7/30/2019 Credit Appraisal of Lord Krishna Bank

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SUMMER TRAINING

PROJECT REPORTON

CREDIT APPRAISALOF

LORD KRISHNA BANK

IN PARTIAL FULFILMENT FOR THE REQUIREMENT

OF TWO YEARS FULL TIME POST GRADUATEPROGRAMME IN MANAGEMENT, 2005-2007

SUBMITTED BY:

SONICA CHHABRA

PGDBM: SEMESTER II

ROLL NO: 46

NEW DELHI INSTITUTE OF MANAGEMENT

NEW DELHI


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ACKNOWLEDGEMENT

I would like to present my sincere thanks to LORD KRISHNA BANKfor providing me a first hand experience in this ever expandingBanking Sector. I express my heartiest gratitude towards Mr. P.K.Mahana, credit manger, regional office, ITO, for guiding me andhelping me in the successful completion of this project.

I also wish to convey my special thanks and veneration to all myseniors as well as my colleagues for providing me a valuable acumeninto the banking sector. I would like to express my gratitude towardsthem for helping me and cooperating with me at every step of myproject.

Last but not the least I would like to express my gratitude to theteachers at New Delhi Institute of Management for conducting ourcourse with utmost sincerity and Mrs. Prerna Sareen for her guidance

and support.

(Sonica Chhabra)


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PREFACE

The main business of a banking company is to receive deposits and

lend money. Receiving deposits involves no risk, since the banker is

the creditor but in case of lending the risk involved is very high sincethere is no guarantee of the repayment. But lending being the main

source of income for the bank although has high levels of risks

associated with it is the indispensable function of banking

companies .As this lending is not out of his own capital but out of the

deposits from the public , the banks have to be follow very cautious

policy .

The project is a detailed study of credit appraisals done by lord

Krishna bank. it is a step by step procedure including companys

profile, types of advances, comparative analysis of different bank on

certain parameters and lastly concluding the study while putting some

recommendation hoping that it would help the bank maintain its

expansion path.


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TABLE OF CONTENT

Introduction of the Banking Industry

Profile of Lord Krishna Bank

Loans and Advances Product offerings of the Bank

Fund Based Advances

Retail Loans

Determination of Credit Worthiness and Credit rating

Post lending Supervision and Follow Up

Non Performing Assets

Recommendations

Bibliography


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EXECUTIVE SUMMARY

.

.Lending is an imperative function of a bank .it is the main source of

income for the bank although has high levels of risks associated with

it because it is done out of deposits of public.

This project gives detailed study of how credit appraisals are done

.Once the proposal is received ,it is analysed on various parameters

like financial,managerial,technical viability.Each proposal is evaluated

by the bank by analyzing the candidates psychographic position,

demographic position, assets cushion and the status of the financials

of the applicant. A process cum recommendation note and a scoring

module is prepared by branches and sent to the regional office for the

approval of the loan .The bank has developed different scoring

modules according to the nature of the various loans.once the loan

is sanctioned it is monitored on regular basis.This project involves acomparative analysis of different banks on various parameters like

BPLR,MLR,rate of interest on various schemes,NPA..finally I have

discussed working capital assessment for service and manufacturing

sectorwith the help of case studies.


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BANKING INDUSTRY

Banks are very important for the smooth functioning of financial

markets as they serve as repositories of vital financial information

and can potentially alleviate the problems created by information

asymmetries.

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 of commercial banks and cooperative banks.

Commercial banks can be further grouped in to nationalized banks, the

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

private sector banks (the old/new domestic and foreign). These banks

have over 67000 branches spread across the country. Industry

estimates indicate that out of 274 commercial banks operating in India,

223 banks are in the public sector and 51 are in the private sector. The

private sector bank grid also includes 24 foreign banks that have

started their operations here.

In 1991, the Indian economy went through a process of economic

liberalization. Recognizing that the success of economic reforms was

contingent on the success of financial sector reform as well, the


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government initiated a fundamental banking sector reform package in

1992.These reforms were basically aimed at ensuring the safety andsoundness of financial institutions and at the same time at making the

banking system strong, efficient, functionally diverse and competitive.

The reforms included measures for arresting the decline in

productivity, efficiency and profitability of the banking sector.

Banking system plays a significant role in a nations economy. Abanking situation is indispensable in a modern society. It plays a

pivotal role in the economic development of a country and forms the

core of the money market in an advanced country. Being a prime

employment of the financial sector it forms an important sector on

which nearly all the other sectors depend. Management skills

acquired in banking sector can be utilized in other sector but not vice

versa.

Presently the banking sector contributes handsomely to the nation

building process not only by financing the priority/ weaker section but

also by including higher monetization in the economy. In June 1969

on the eve of nationalization, the share of priority sector in total credit

of SCB was a mere 14% (Rs. 504 Crore). By March 2002, with a

massive involvement of PSBs their outstanding lending to priority

sector had clam up to Rs 171,185.26 Crores. As percentage of net

bank credit the same was 43.12 %( against the mandated 40%

share.)


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The competitive environment created by financial sector reforms hascompelled the banks to gradually adopt modern technology, albeit to

a limited extent, to maintain their market share. The Indian banking

has finally worked up to the competitive dynamics of the new Indian

market and is addressing the relevant issues to take on the

multifarious challenges of globalization. Banks that employ IT

solutions are perceived to be futuristic and proactive players capable

of meeting the multifarious requirements of the large customers

base. Private Banks have been fast on the uptake and are reorienting

their strategies using the internet as a medium The Internet has

emerged as the new and challenging frontier of marketing with the

conventional physical world tenets being just as applicable like in any

other marketing medium.

The Indian banking has come from a long way from being a sleepy

business institution to a highly dynamic entity. This transformation

has been largely brought about by the large dose of liberalization and

economic reforms that allowed banks to explore new business

opportunities rather than generating revenues from conventional

streams (i.e. borrowing and lending).Modern day banks are not mere suppliers of money. They now

provide a basket of services such as selling insurance, mutual funds

and investment opportunities and playing the role of an advisor to

various individuals as well as Corporate. However, non-bank financial


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companies and development finance institutions are also emerging

as alternative sources of funding.

Banks are among the main participants of the financial system in India.

Banking offers several facilities & Opportunities. This section of the

provides comprehensive and updated information, guidance and

assistance on all areas of banking in India.

Bank of Hindustan, set up in 1870, was the earliest Indian Bank .

Banking in India on modern lines started with the establishment of

three presidency banks under Presidency Bank's act 1876 i.e. Bank of

Calcutta, Bank of Bombay and Bank of Madras. In 1921, all presidency

banks were amalgamated to form the Imperial Bank of India.

The commercial banking structure in India consists of: Scheduled

Commercial Banks & Unscheduled Banks. Banking Regulation Act of

India, 1949 defines Banking as "accepting, for the purpose of lending

or investment of deposits of money from the public, repayable on

demand or otherwise and withdrawable by cheques, draft, order orotherwise."

The Software Packages for Banking Applications in India had their

beginnings in the middle of 80s, when the Banks. spurred on by RBI


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and the Rangarajan Committee Report, started computerising the

branches in a limited manner.

The arrival of foreign and private banks with their superior state-of-the-

art technology-based services pushed Indian Banks also to follow suit

by going in for the latest technologies so as to meet the threat of

competition and retain customer base.

The evolution of IT services outsourcing in the Indian banks has

presently moved on to the level of Facilities Management (FM). Banks

now looking at business process management (BPM) to increase

returns on investment, improve customer relationship management

(CRM) and employee productivity.

For, these entities sustaining long-term customer relationship

management (CRM) has become a challenge with almost everyone in

the market with similar products


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LATEST TRENDS IN BANKING

Advancements in technology have led to improvement in the

ways in which bank process information. Use of cheque

imaging, which allows bank to store photographed cheques on

computer, is one such example that is implemented by some

banks.

Availability and growing use of credit rating software allows

loan to be approved in minutes, rather than days making

lending department more efficient.

Electronic banking by phone or computer allows customers to

pay the bill and transfer the money from one account to another

through these channels, bank customer can access information

such as account balance and statement history

Many routine banking services that required letter such as

making a withdrawal or deposit are now available throughATMs that allow people to access accounts 24 hours a day

Also direct deposit allows cos and government to electronically

transfer payments into various accounts.


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Many banks now offer customers financial planning and asset

management services as well as brokerage and insuranceservicesoften through subsidiary or third partyothers are

beginning to investment banking services that help cos and

government to raise money through issuance of stock and

bonds through subsidiary.

As banks respond to deregulation and as competition in this

sector grows,the nature of banking industry will continue to

undergo significant change.


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LORD KRISHNA BANK

IN 1940, LKB was born in a small Kolmet at Kodungallur in Thrissur

district of Kerala. Although the bank started at a very modest level, by

1960 the bank was in position to take over three commercial banks:

Thiya bank, Josna bank & Kara union bank. From 1999 majority

stake in the bank is held by Mohan group (Puri group), which is a

pioneer in the field of banking, financial services & international trade

etc.

Today, while the bank continues to retain its trademark values of

personalized customer care, it has grown exponentially in size and

scope, from a local player to a national player. It is one of the oldest &

most successful private sector banks in India. The 64 year old Kerala

based bank has today 106 branches spread in 11 States and U.T of

Chandigarh. To reach out more customers and offer them innovativeservices and financial products, the bank is opening more fully

automated branches across the country. The Bank has opened 10

branches since 31.03.2003.Further the bank holds license for

opening 8 more new branches spread over India during the current


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fiscal. From traditionally a people driven entity it is redefining

relationship banking with the ideal partnership of man and machine.In tune with this the network of 92 branches are well supported by 6

extensions counters & 23 ATMs. The bank has taken important

initiatives towards computerizing its network .It is investing heavily in

the field of IT. In order to provide easy & better access to its

customers, the bank is in negotiation with major software & solution

providers. At present 90% of the banks business is computerized.

The bank plans to adopt state-of-the-art technology for inter-

connectivity in anywhere, anytime banking

LKB has branches in 11 states and 1 union territory

ANDHRA PRADESH

DELHI

HARYANA

GUJARAT

KARNATAKA

KERALA

MAHARASHTRA

PUNJABTAMIL NADU

UTTER PRADESH

CHANDIGARH


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Lord Krishna bank has ambitious plans for business growth in the

year ahead.highlights of the plans are

Goals

Total business to cross Rs. 5000 crores

Reduce average cost of deposits by increasing focus on

mobalisation of low cost clients

Quantum increase in customer base through sustained focus

on retail and SME clients

Achieve zero NPA by 2007

Expand delivery channels through increase in branch network,

extention counters,ATMs and alternate banking channels

Customize existing products and develop new products in order

to attract specific target groups.

KEY PERFORMANCE INDICTORS

PARTICULARS 31-03-04 31-03-05 % GROWTH

Capital and reserves 1392454 1601278 15.00%Average deposits 17395900 20647300 18.69%

Average advances 8037000 11339700 41.09%

Investment 10471445 8470283 -19.11%

Working funds 26045614 25251505 -3.82%

CRAR 16.68% 11.74%


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LOANS AND ADVANCES

The main business of a banking company is to receive deposits and

lend money. Receiving deposits involves no risk, since the banker is

the creditor but in case of lending the risk involved is very high since

there is no guarantee of the repayment. But lending being the main

source of income for the bank although has high levels of risks

associated with it is the indispensable function of banking

companies .As this lending is not out of his own capital but out of the

deposits from the public , the banks have to be follow very cautious

policy .

The banking in India is highly fragmented with 30 banking units

contributing to almost 50% of deposits and 60% of advances. Indian

nationalized banks (banks owned by the government) continue to be

the major lenders in the economy due to their sheer size and

penetrative networks which assures them high deposit mobilization.

Through aggressive marketing efforts, Lord Krishna Bank increased

its gross Advances to Rs.1419 Cr. as on 31.03.2005 as compared to

Rs. 1118 Cr for the previous year,registering a growth of 26.92%


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during the year.

GENERAL PRINCIPLES OF SOUND LENDING

Safety of funds-the loan should be paid to reliable borrower

who could repay it within short period from reasonably

dependable sources.

Social objective

Assured repayment

Spread of risk

Purpose of loan

Law of limitation-

Security- safety of funds is assured by obtaining marketable

security as collateral besides primary security so that in the

event of default of repayment of advances by the borrower the

banker can fall back upon the securities for the realization of

dues to him

Profit earning of the bank- the aspect of profitability has

remained the ultimate objective of lending. No prudent banker

would like to do the business of lending which yields no return


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LIQUIDITYOF

BORROWER

PROFITEARNINGS

OFBANK

SECURITY

PURPOSEOF

LOAN

SPREAD OFCREDIT RISK

ASSUREDREPAY-

MENT

SOCIALOBJECTIVE

LAW OFLIMITATION

ACT

SAFETYOF

FUNDS

PRINCIPLESOF

LENDING

or which results in loss.banks have to see that the profit is kept

at an ascending level so as to be able to pay divident atincreasing rate year after year to sustain investors interest in

the bank.

Liquidity of the borrower

LKB offers wide range of retail products


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TwowheelerLoans

Used carLoan

Personalloan

HomeLoan

GoldLoan

Retail products


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CarLoan

PARTICULARS SALARIEDPERSONS

SELF EMPLOYED

Target Governmentservants,employeesof psus and listed

cos of repute

Self-employedbusinessmen

Eligible Confiremedemployee

Minimum 2 years inexisting line ofbusiness with 3


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years of totalexperience

Purpose Purchase of 2wheelers

Purachase of 2wheelers

Age Minimum-21 yearsMaximum-60 years

or the age ofretirement whichever

is earlier

Minimum-21 yearsMaximum-60 years

at the end ofrepayment period

Loan tenure 12-36 months 12-36 months

Rate of interest 13% 13%

Processing fees Rs.500 Rs.500

Penal interest 2.5% 2.5%

Cheque returncharges

Rs. 1000 per chequereturned

Rs. 1000 percheque returned

Income criteria Minimum net takehome-Rs

8000/month,Rs.1 lacp.a

Minimum annualincomers.1.25 lacs

Minimum loanamount

25000 25000

maximum loanamount

80% of market valueof approved valuer

80% of the price

Bank statement Last 6 months Last 6 months

Eligibility incomeratiosFOIR

EMI 50% of incomeafter tax

EMI 50% of cashgeneration or

income after tax

PCRI N/a N/a

Margin 20% 20%

Prepaymentcharges 2% of theoutstanding amount 2% of theoutstanding amount

Clubbing of spouseincome

Allowed Allowed

Guarantee Hypothecation of Two wheeler

Hypothecation ofTwo wheeler


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HOME LOANS

Purpose Purchase of land,construction,repair etc

Age Minimum-21 yearsMaximum-60 years or age of retirement

whichever is earlier

Maximum loan 50/45/50 times gross monthly salary as per thecategories

rent income-income upto-65% to be considered

Bank statement Last 6 months


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Eligibility criteriaCategory 1A

1. employee with central government/state

government/public sectorundertaking/MNCs in supervisororycategory without any maximum salary

stipulation2. professional and self employed individuals

like doctors,CAs,qualified architects3. all gazetted officers appointed through

UPSC like IAS, IPS, IRS, IFS,and statepublic service commission and state

administrative services

Category 1 1. employed with central government/stategovernment/MNCs/profit making cos withmonthly minimum gross income of 6000

and clubbed income of 100002. professionals and self employed individuals

like doctors.CAs,Qualifiedarchitects,management consultants

3. self employed businessmen having sameline of business for last 3 years having

latest IT return of minimum 1 lacs4. cluster home loans through society without

any minimum number5. borrowers having good repayment track of

12 months in respect of existing loansunder any category with us or other

banks/NBFC/FIs

General category All individuals other than above with minimumdeclared monthly income of 5000 or above

Rate of interest Category 1A and 1 generalcategory

Floating rates p/aUpto 5 years-7.25%

8.25%6-10 years 7.5%

8.5%


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Lord Krishna Banks exposure to housing loan for quarter ending 31-03-

06 is 3.24%

11-20 years- 8% 9%

fixed ratesUpto 5 years-7.5% 8.5%6-10 years 7.75%

8.75%11-20 years- not available not

available

all loans above 10 yearsshall be floating rates only

CAR LOANS

PARTICULARS SALARIEDPERSONS

SELF EMPLOYED

Target Governmentservants,employees ofpsus and listed cos of

repute

Self-employedbusinessmen

Eligible Confiremed employee Minimum 2 years inexisting line ofbusiness with 3years of totalexperience

Purpose Purchase of 2wheelers

Purachase of 2wheelers


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Age Minimum-21 yearsMaximum-60 years orthe age of retirementwhichever is earlier

Minimum-21 yearsMaximum-60 years

at the end ofrepayment period

Bank statement Last 6 months Last 6 months

Eligibility incomeratiosFOIR

EMI 50% of incomeafter tax

EMI 50% of cashgeneration or income

after tax

PCRI N/a N/a

Margin 10% 10%

Prepayment charges 2% of the outstandingamount

2% of theoutstanding amount

Clubbing of spouseincome

Allowed Allowed

Guarantee Hypothecation of Twowheeler

Hypothecation ofTwo wheeler

Lord Krishna Banks exposure to vehicle loan for quarter ending31-03-06 is 0.13%

Personal loan

Purpose Personal needs

Age Minimum-21 yearsMaximum-60 years at the time of repayment


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Tenure

12-48 months

Minimum loan 30000

Maximum loan 10 times of take home,maximum rs. 5 lacsBank statement 6 months

Rate of interest Category 1A13% interest.5% processing feescategory 114% interest1% processing fees

EDUCATION LOAN

Eligibility Courses in India school education including +2 stage

graduation,phd,PG, professional courses

computer certificate courses by universities/institutes

accredited to DoE ICWA,CA,CFA

Professional courses of foreign universities

Studies AbroadGraduation: job oriented professional/technical coursesoffered by reputed universities approved by AICTEPost graduation: MCA,MBA,MS,courses conducted byCIMA in London and CPA in USA

Studenteligibility

Should be Indian national

Secured admission to professional courses through


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entrance tests Minors represented by P/G

Major jointly with P/G Children of employees eligible: net take home pay

minimum 40% Flexibility in income criteria considered upto 10% in

deserving cases

Expenseseligible

All fees payable,purchase of

books,equipment/uniforms Caution deposit,building fund,refundable deposits

Travel expenses/ passage money for students

abroad Purchase of computer(for study)

Any other expenses like study tour,project

work,thesis

Quantum of finance

IndiaUpto and including 4 lacs-nil

Above 4 lacs-5%Abroad-15%Scholorship to be treated as margin

Security Common for inland and foreign studiesAbove 4 lacs-security equal to 125% of loan includinginterest accrued for moratarium periodLand/building/government securities/NSC/LIC/KVP etc

Rate of interest 12%

Processing fees Nil

Repayment Holiday/moratarium: course period + 1yearOr6 months after getting job whichever is earliar

to be repaid in 5-7 years after commencement ofrepayment


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Lord Krishna Banks exposure to Education loan for quarter ending 31-03-06 is .0018%

PROCESSING OF THE RETAIL LOANS

Each proposal is evaluated by the bank by analyzing the candidates

psychographic position, demographic position, assets cushion and

the status of the financials of the applicant.

A process cum recommendation note and a scoring module is

prepared by branches and sent to the regional office for the approval

of the loan .The bank has developed different scoring modules

according to the nature of the various loans taking the following

basic factors into consideration:

Qualifications of the Applicant

Occupation of the Applicant


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Experience of Work

Age of the Applicant

Family Background( Financial Support, No of

Dependents, Saving

habits, etc.)

Repayment history of the previous loans

Collateral Security

Income Category of the applicant (i.e. Salaried

or Self Employed )

Income of the Applicant for the past 2 Years.

Status of the Guarantor

The relevant score for the applicant is determined for each category

and evaluated against the minimum acceptance score, good score

and excellent score criteria of the bank.

The loan amount for the applicant is determined as follows:

Gross Income (A)

Add: Income through other sources (Rent etc.)(B)

Less: Deductions(C)

Eligible Loan Amount = (A+B-C)


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The following ratios are also calculated for the quantitative analyses

of the financial adequacy of the applicant:

Per Capita Residual

Income(PCRI)

Installment to Income Ratio

Fixed Obligation to Income

Ratio

LTV Ratio

Per Capita Residual Income (PCRI)

PCRI = Net Monthly Income - EMI

No of Dependents

This amount calculated as per this ratio presents the net per capita

disposable income of the applicant. Bank prefers an amount of more

than Rs. 1000 for sanctioning of the loan.

Installment to Income Ratio (IIR)

IIR = EMI X 100

Net Income


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IIR ratio indicates the percentage of income absorbed by the equalmonthly installments of the applicant. A figure higher than 40%

implies a high degree of risk for the bank. The bank generally avoids

granting loans to such applicants.

Fixed Obligation to Income Ratio (FOIR)

FOIR= EMI +Deductions from the salary+ Installments of other loans

x 100

Gross Income

The percentage calculated through this ratio should not be less than

70%

LTV RATIOLTV = Loan amount X 100Cost of Property


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FUNDBASED

NON FUNDBASED

CURRENTASSETS

FIXEDASSETS

CURRENTASSETS

FIXED

CASH CREDIT,

BANK

OVERDRAFT,

BILLS

PAYABLE,

PACKING

CREDIT LOAN

BANK

GAURANTE,

PAYMENT

GAURANTEE

LETTER

OF

CREDIT

BANK

GAURANTEELord Krishna Bank while confronting its competitionoffers a gallery of banking solutions such as:

ADVANCES


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OVERDRAFT AGAINST DIFFERENT TYPES OFSECURITIES

A borrower generally borrows from the bank against the following:

Term Deposits

LIC policies

Shares and Securities

Advances against Term Deposits


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Lord Krishna Bank also grants loans against term deposits, such a

loan is granted only on those deposits in respect of which there in nolien. Such deposits should be free from encumbrance, provided the

deposits are in the name of the applicants. Loan up to the amount of

90% of the deposit can be sanctioned and a rate of interest of 2%

above the deposit rate is charged. A lien is marked on the original

term deposit receipt and is retained by the bank.

Documents required:

Demand Promissory note

Letter of Delivery

Letter of Cancellation

Advances against LIC Policies

Policies issued by Life Insurance Corporation of India are an

approved security by Banks for the grant of advances. A loan amount

of 90% against the surrender value of the policy can be sanctioned by

the bank.

Policies acceptable for Loan

Endowment Policies


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Whole life Policies

Postal life insurance Policies

Policies not acceptable for Loan

Childrens endowment policies

until the policies are assigned in favor of the minor on

attaining majority.

Policies with nomination under

Marreid womens property act.

Children Deferred assurance

policies until the policies are adopted by the minor on

attaining majority.

Policies taken on the lives of

minors until they are assigned in their favor on their

attaining majority.

The following information concerning the policy offered as security

should be obtained:

1. Face value, Paid up Value, Surrender Value.

2. Due dates of premium and premium payable

monthly/quarterly /half yearly/ yearly.


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3. Whether the age assured has been admitted. If admitted, the

same will be mentioned on the front page of the policy itself.If admitted later (i.e. after issue of the policy), an

endorsement would be seen in the policy document.

4. All previous assignments and registration/reassignment of

each such assignment.

5. The latest premium paid receipt.

6. The bank also obtains the surrender value directly from the

insurance where the policy is being serviced.

Assignment:

The policy is charged in favor of the bank by the assured

/beneficiaries on the policy as well as in a separate document. The

copy of the assignment, the policy document containing the

assignment is sent to the office of the insurer along with his notice

of assignment. The same policy is reassigned in the name to the

assured on the closure of the loan amount.

Advances against Securities

The bank also issues overdraft against Government securities such

as stock certificates, Government promissory notes, NSCs, etc.

these government securities constitute the borrowings made by the

central and state government from public.


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Stock certificates are issued by the

President and the Governor of the state in token for

having registered the name of the owner as the

proprietor of a certain amount of a specified loan of a

particular government. Since stock certificate is not a

negotiable instrument, the property therein cannot be

transferred by mere endorsement and delivery. Thus

these certificates can only be transferred through the

means of a transfer deed (printed on the reverse side

of the certificate).

Government Promissory Note can be

transferred by endorsement and delivery as they are

the promissory notes.

Therefore, while taking an overdraft against such a security, the

bonds are endorsed by the borrower in favor of the Bank as

Pay Lord Krishna Bank Ltd. Before granting the loan the bank

examines all the prior endorsements carefully.

While granting the overdraft against Stock Certificates and GP Notes

a margin of 25- 40% is maintained on the market value for deciding

the quantum of advance. The market value of each these securities


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can be ascertained from the debt market quotations of any of the

leading stock exchange or NSE.

A demand loan or overdraft can be

availed by the borrower against the NSC/KVP of the

post office. The quantum of loan is ascertained as a

margin of 25% on the face value +accrued interest for

NSC and 25% of the purchase value+ accrued interest

in case of KVP.

TERM LOANS

Bank term loans are the basic vanilla commercial loan. They typically

carry fixed interest rates, monthly or quarterly repayment schedules


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and a set maturity date. Bankers tend to classify term loans into two

categories:

Intermediate-term loans: Usually running less than three years, these

loans are generally repaid in monthly installments (sometimes with

balloon payments) from a business's cash flow. Repayment is often

tied directly to the useful life of the asset being financed.

Long-term loans: These loans are commonly set for more than three

years. Most are between 3 and 10 years, and some run for as long as

20 years. Long-term loans are collateralized by a business's assets

and typically require quarterly or monthly payments derived from

profits or cash flow. These loans usually carry wording that limits the

amount of additional financial commitments the business may take on

(including other debts but also dividends or principals' salaries), and

they sometimes require a profit set-aside earmarked to repay the

loan.

Cash credit

It is fund based working capital credit facility provided totraders/manufactures and the like

It is a running account facility extended for a short period say 1

year and is reviewed .on review limits can be renewd ,enchanced


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or decreased,after fresh appraisal of working capital credit

reqirement of borrowerIt is a presale finance against stock of raw material,finished goods

So the primary security for a banker is stock of goods details of

which are furnished by the borrower in the form of statement of

stock every monthto the former

The drawable limit under cash credit is fixed by bank after applying

security margin over the value of stock declared in statement by

borrower.therefore borrower can draw funds under drawable limits

subject to availability of stock and maintenance of security margin.

The cash credit is extended by taking goods either under

hypothecation or under pledge or sometimes coupled with

personal guarantee of third party.

The stock of goods which is a primary security should have had

covered under insurance against all risks of loss such as against

fire and other warranties.

Overdraft

It is a running account facility where the account holder should

remit and draw funds freely subject to limit granted in the account


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It is granted against lien/pledge of current assets like- bills

receivables,government securities,units of mulual funds,companysshare and debentures,LIC policies,NSC, banks fixed deposit

Sometimes ordinary current account which is normally in credit

becomes overdrawn by passeage of a cheque drawn for a sum

more than credit balance at the foot of the account.it is alone at

specific request of account holder to help them tide over their

financial problems for a short period.it is reffered to as temporary

overdraft.

CREDIT DEPARTMENT

FUNCTIONING OF CREDIT DEPARTMENT AT REGIONALOFFICE,LORD KRISHNA BANK


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HIERARCHY

Chief ManagerManager3 Assistant managersBanking Assistant

Diagram showing the hierarchy of credit department

REGIONAL HEAD

CHIEF MANAGER

MANAGER

ASSISTANT ASSISTANT ASSISTANT

MANAGER MANAGER MANAGER

Line of command

Reporting system

Work allocation

Lord Krishna bank follows single window concept


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It follows parabolic system of reporting which means that

everyone repots directly to the regional head. Credit appraisals of 21 branches are done in regional office,

Delhi.

Branch heads for sanctioning the loans up to certain limits uses

managers discretionary power. These proposals subsequently

come to regional office for ratification and noting. While

sanctioning the loan under MDP, the branch head would:

1. Check for sanctioning power from DP chart

2. Rate of interest

3. Adequacy of security

The following duties have been allocated to the staff of the

credit department in the regional office

Chief Manager

He is responsible for the appraisals of credit proposals (fresh,

review, renew,ad_hoc sanction under RO and AO power)

He is handling CP ,Gurgoan


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He is responsible for the appraisal of credit proposals(fresh,review,renew, ad-hoc sanction under RO and AO power)

He is handling Amritsar ,Chandidarh ,kalkaji, lajpat nagar,

Ludhiana and rajouri garden branches

He is responsible for all matters emanating on the basis of AO

Credit circulars

Assistant Manager

Appraisals of credit proposals (fresh,review,renew, ad-hoc

sanction under RO and AO power)

He is handling Ghaziabad, Jalander, Karor Bagh and Shahdara

branches

He handles cases pending at AO and RO

CH118 and its Follow up

Assistant manager 2

All the powers relating to retail loan

MDP statement of all branches under the region

Appraisals of credit proposals (fresh,review,renew, ad-hoc

sanction under RO and AO power) of phagwara and faridabad

branches


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Assistant Manager 3

271 R of all branches under the region

Appraisals of credit proposals of Jaipur, Paschim Vihar, Patiala,

Preet Vihar, branches

Banking Assistant

MIS ,NPA, Standard and irregular accounts

All the proposals for Rs. !crore and above shall be put up by

concerned official through Chief Manager to Regional head

APPRAISAL OF CREDIT PROPOSALS

Importance


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Proper credit appraisal is vital from the point of view of meeting need

based credit facilities, improving recovery performance and keeping

the overdues down to minimum. To ensure that scarce lendable

resources are allocated judiciously to various segments of the

economy and to spread the risk is yet another objective of a sound

credit appraisal.

Credit information

An appraisal of a credit proposal begins with the gathering of

adequate background knowledge about the applicants character and

creditworthiness. The credentials of the applicant is prime

consideration in a proposal. An objective evaluation of applicant with

regard to his business standing, means and respectability is required.

This will form the basis for taking a decision on the proposal.

Information can be gathered tactfully from the following sources;

1. Customers other bankers, if applicant is having dealing with

other banks

2. Income/sales Tax assessment orders

3. Market sources

4. Financial statements

5. Property statement


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PROCESSING OF PROPOSALS

Information collected relevant to the borrower and business shall be

made use of for an objective assessment of credit needs of the

applicant. There

should not be any compromise or relaxation in this regard. It is also

advisable to call for the bank statement and peruse the same to

ascertain whether operations in the account are satisfactory.

1.Appraisal report

A detailed appraisal report must be prepared which shall cover the

following aspects

Purpose of advance

Mode and sources of repayment

Performance of industry/business

Technical and economical aspects of proposal

Financial position of the applicant

Brief resume of the past dealings of the applicant with the

bank/other banks

Borrowing, if any from other other banks/institutions

Securities offered and their easy realisability

Prospects of ancillary business/deposit

Comments made, if any by RBI Inspectors, statutory auditors,

internal inspectors on the account and rectification details


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For proposals that are to be sanctioned by the Board, it is advisableto prepare the above details in the Board note format itself. The

decision-making authority based on the above should be in position

to take an objective decision on the proposal.

GENERAL GUIDELINES

Inspection and in- Depth study.

The branch manager should study the proposal in depth and discuss

the various aspects with the applicant after a spot inspection. He

must be satisfied about the bank ability of the proposal. The actual

location of the factory/business place, its accessibility and other

features will come to light only if a visit is undertaken to the place.

A Banker and other lenders.A banker is different from other lenders; the banker lends for a

productive purpose and they look for repayment in ordinary course of

business of the borrower.Realising the security for the repayment of

dues is done only as a last resort as realization of a security is a long

drawn out and cumbersome process. The liquidity of every advance

should be beyond doubt and is an insurance against any unexpected

development.

Recommendations.

The branch manager while recommending a credit proposal is

conveying the meaning that the applicant is a suitable person to carry


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out this proposal with the help of this advance. Only the branch

manager can do a considered judgment of the applicant, as he is theman on the spot. The remarks and recommendations of the manager

should be accurate, specific and precise.

Sanction at branch level.

If the proposal comes within the powers granted to the branch

manager, he should sanction the same by making an order on the

proposal. Even when the advance comes within the discretionary

powers of the branch manager, there should not be any relaxation in

the care and diligence of the examination of the proposal.

Renewals.

All proposals for renewal should be taken up at least three months

before the date of expiry of the limits and such proposals should

reach the sanctioning authorities duly completed and with all

requirements at least30days prior to the date of expiry. All limits

Sanctioned to the same borrower must be taken up for renewal

simultaneousely.If a party enjoys limits at more than one branch, the

branch, which has originally forwarded the proposal shall be

responsible for obtaining and forwarding the renewal papers. In such

cases the proposal shall include comments of the respective branch

managers as well as details of the accounts at the different branches.No facilities shall be extended to parties against expired credit limits.If

for any reson like non-finalization of accounts,borrowers being

unavailable at ststion etc.the branch is not in a position to obtain the

regular proposal with full details,the branch shall seek provisional


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extension of the validity of the credit limits from the sanctioning

authority.While seeking such extension branches shall obtain arequest for this purpose from the borrower and forward it with suitable

recommendations.Such extension of validity of limits shall be sought

and obtained before the expiry of the existing limits.Limits sanctioned

at branch level under Managers discretionary powers also have to be

reviewed and renewed as stated above.

Forwarding of proposals to higher authorities for sanction.

In case of proposals falling within the powers of the regional office, a

copy of the proposal with all requirements and branch

recommendation should be sent to the regional office concerned .In

case of proposals falling within the powers of the managing

director/executive director/chief general manager /general manager

one copy each of the proposal is to be sent to the regional office

under whose control the branch functions and toAO.

Time limit for attending to credit proposals.

Branches should not take more than 30 days for disposing of a credit

proposal.At Regional office/AO also proposals should be disposed off

within 30 days.

Lapse and revalidation of sanction.

Any advance not availed of within 30 days of the date of the letter of

sanction shall stand lapsed .While applying for revalidation branches

Post Lending Follow Up and Supervision


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In the present competitive economic scenario, credit worthiness ofthe borrower is the centre piece of credit appraisal. Post lending

follow up and supervision activity is aimed at ensuring compliance of

terms of sanction, picking up signals on the health status of the client,

taking action and ensuring results of actions on continuous basis. The

ultimate objective of follow up is to ensure safety of the bank funds

and proper end use by calling for relevant information, both financial

and non financial periodically. Such follow up ensues into a better

NPA position of the bank by taking timely signals of the safety of the

bank fund

Information system Follow up:

A comprehensive system of follow up is applied in Lord Krishna Bank:

FOLLOW UP SYSTEM

Non Financial Follow up Financial Followup

1) Post Sanction audit of compliance 1) Quarterlyof terms and conditionsInformation

System.


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2) Monthly Stock Statements 2) Credit

Rating based follow up.

3) Annual Review, Renewal.

.4) Operations in the account

and value of connection

Non Financial Follow up

Monthly Stock Statement

The actual drawings or borrowings are regulated on the basis of

actual build up current assets. Therefore, stock statements

indicating the actual levels of inventories and book debts are

obtained at the end of every month and the DRAWING POWER

(D.P) for the borrower is calculated after deducting the stipulated

margins. While calculating this drawing power the unpaid stock is

not included.Also, a physical verification of stock is conducted by

the Branch Manager on the monthly/ bimonthly basis.

Annual Renewal and Renewal of all working capital limits:

Since the credit worthiness of the borrower is established by

analyzing the financial statements of the borrower including the

projections for the following year thereby to protect the quality of


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loan assets, the borrowing party is required to submit a complete

proposal, giving all relevant details which are critical for taking acredit decision within the 12 months of last sanction. The audited

information includes critical information such as credit facilities

taken from other banks and the key financial parameters i.e. actual

and projections for the next year and current years actual Vis- a-

vis projection submitted, etc.

Operation in the account and value of connection

A stalk of the various operations conducted through the account is

kept by the bank. Such a close watch is required for unwavering

feedback about its conduct. A poor turnover in the account,

persistent excess drawings, recurrent cash withdrawal, and

frequent return of bills or cheques are taken as serious signs of

peril.

The value of the client for the bank is judged from the total

earnings from the accounts accruing through the year. Such

earnings include interest on advances, installments for the

repayment of loan and service charges earned by the bank, etc.

Financial Follow Up


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Quarterly information system

The information system for the financial follow up as

recommended by the Chore Committee (a modification of the

recommendations made by the Tandon committee) requires a

submission of the following statements by the borrowers enjoying

a capital limit of Rs. 50 lakh and above:

I. Estimates for the ensuing quarter:

The form contains the following information such as:

Projected level of current assets and current liabilities,

including short

term bank borrowings.

Estimates of production and sales for the current year i.e.

including the ensuing quarter.

Operating statements furnishing the details of sales, cost of

goods sold, selling, general and administrative expenses,

interest paid and operating profit on the quarterly basisincluding the estimates for comparison.

The Funds Flow Statement giving the details of sources and

uses of funds for the last year(actual), current year(budgeted),


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last half year (estimates and actual) and current half year

(estimates).

The timely submission of this information is very important on the

part of the borrower to avoid the penalty levied by the bank.

The actual of the last half year are compared with the projected

figures and reasons for any large variations over and above the

standard norm such as 10% are ascertained. The estimates of the

current year checked and ensured that the projected bank

borrowings are within the MPBF.

Credit Rating Based Follow Up

On the basis of the credit worthiness and credit rating, the

borrowers are classified into eight categories. This rating is


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applicable for both fund based capital rating limits as well as

Demand loans and other Term Loans which are over and above25 lacs.

The following credit rating parameters are taken into consideration

while ascertaining such rating:

1. Current ratio

2. Debt Equity Ratio

3. Tangible Net worth Ratio

4. Fixed asset to coverage ratio.

5. Interest coverage ratio

6. Debt service coverage ratio(DCSR)

7. Achievement of projected Sales

8. Profit or loss

9. Timely Repayments

10. Operations in the account: Utilization of working capital limits,

BP/BD returned unpaid and cheques and bills returned.

11. Renewal and submission of stock /book debt statements,

Audited Financial Statements and other performance

indicators.12.Availability of collateral security

13. Value of relationship with the client.

14. The economic scenario of the industry and the efficiency of

the management.


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For the above parameters a scoring module including all theparameters has been designed to facilitate quantitative analysis of

the performance of the borrower.

For example,

If, Current Ratio is

Marks

i. Above 1.5

10

ii. Less than 1.5 but more than 1.33

8

iii. Less than 1.33 but more than 1.20

6

iv. Less than 1.20 but more than 1.17

4

v. Less than 1.77 but more than 1

2vi. Less than 1

0


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Similarly the relative scoring for each of the above parameter is

determined.The total marks scored are converted into percentage terms to

arrive at the applicable slab rate for chargeable rate of interest on

the basis of the, level of risk associated with the borrower.

Example:

Total Marks scored =85

In percentage terms the same is equivalent to 85%

The various weight ages can be analyzed in the following manner:

Range onweight ageon a scaleof 100

Rate Code INTERESTRATE

96% andabove

RRR++ Top notchgrading rate

BPLR-2%

91% to95%

RRR+ Top ratinggrading rate

BPLR-1%

86% to 90%

RRR Blue chipcompanies

BPLR-0.5%

81% to85%

RR+ Moderate riskcategories

BPLR

76% to80%

RR Moderate riskCategories

BPLR+1%

71% to75%

R + Moderate riskCategories

BPLR+2%


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66% to70%

R More thannormal riskcategories BPLR+3%

60% to

65%

R-1 More than

Normal riskCategories

BPLR+3.5%

Less than60%

Not to befinanced

The blue chip borrowers falling in the top three categories do not

require more than normal monitoring on the behalf of the bank.

Similarly borrowers falling into the next three slots (RR+, RR and

R+) also require normal monitoring. These borrowers are kept

under effective watch with the help of non financial follow up and

financial follow up.

However, for the borrowers falling into the category of R and R-1,

a more frequent follow up is conducted, thus for such categories

the bank frequently follows up the fortnightly/weekly stock

statements, monthly statement of statutory dues, etc. These are

considered as high risk borrowers and are kept under high

alert /watch list till their position improves and classification is

updated.

A separate rate of interest is charged from different categories i.e.

a borrower in the RR+ category shall be charged a higher rate of

interest than a borrower in the RRR+ category.


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36%

11%17%17%

8%

6%

2%

3%

0%

RRR++

RRR+

RRR

RR++

RR

R+R

R-1

below R-1


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BORROWERS RATING WISE DISTRIBUTION OFSTANDARD ADVANCES.

MONITORING

The following reports are required for monitoring of loan

1. 271R to check overdraw on weekly basis

2. FRR-first review report is sent by branch to regional office

within 45 days from thye date of disbursement

3. Compliance Certificates-it is signed by the customeracknowledging that he will comply with terms and conditions

after the loan proposal has been sanctioned by the branch

4. Legal Report made by rating agencies or advocates like clear

title certificates


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5. Valuation report prepared by approved valuer.

6. CH_118 report-it is a report generated by regional office andsent to branchs to check overdrawals of any account.

7. cash credit and overdraft are subject to renewal after 12

months from the date of sanction.Regional office has to follow

up 3 months before the expiry of 12 months

8. If cash credit limit is more than 500000,then regional office

requests for audited balance sheetin case audited balance

sheet is not available RO would ask for CA certified provisional

balance sheet with the condition that the customer will have to

submit audited balance sheet

9. review report-it is prepared at the time of renewal of cash credit

or overdraft.it contains all the information about the accounts

like frequency of overdrawals,maximum amont drawn,minimum

amount drawn.

SCHEME FOR LOAN AGAINST RENT RECEIVABLES.

1. rent discounting/repayment period:The maximum rent

discounting/repayment period enchanced to 84 monthssubject

to enabling renewal clause in lease/rent agreement

2. guidelines for arriving at the loan quantum where leave and

licence system is in vogue


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3. prepayment charges:prepayment charges stands reduced from

2% to 1%

4. The amount paid under various heads by licence as part of

total monthly payment for usage of the building/premises along

with fixture and furniture stipulated in lease, rental may be

considered for the purpose of discounting and arriving at loan

quantum.

5. Financial analysis of the borrower- relaxation

The main criteria for considering loans under the scheme shall be

on the future cash flow out of rent,lease,strength of lessee and

security(property) being situated in good commercial area and

easily marketable

6. Maximum exposure shall be limited to 10% of gross advances

PURPOSE

For meeting any business and/or personal needs of applicants.

ELIGIBILITY


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a. bonus of commercial property/house

property.getting regular income as per lease/rentdeed

b. commercial properties rented out to reputed

corporates,MNCs,Banks,insurance cos,govt

department,PSUs etc

c. house property located in good and posh locality

owned by individuals and let out to reputed

corporates, banks,mncs,insurance cos etc

the house property should be free from all

encumbrances

HUF properties can be accepted

The building proposed to be mortgaged should be

not older than 25 yrs and should be in good condition

RATE OF INTEREST

The rate of interest to be charged is PLR +2% i.e. 14.5% at

present.However where branch desires to charge lower ratedepending on the merits of proposal like reputation of lessee and

lessor, value of security,loan amount,other business connections.

REPAYMENT PERIOD


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Repayment period to be arrived at based on net amount available forEMI for unexpired period subject to maximum of 60 months

SECURITY

Mortagage of property against which lease rentals are to be

securitised.

Any of the following may be accepted as substituted securities

1. Alternate commercial ,residential property with clear title

equivalent to 150% of loan amount.

2. LIC policies with adequate surrender value upto 125% of loan

amount.

3. NSCs /KVPs/ IVPs having face value/invested amount upto

125% of loan amount.

4. Banks own term deposit either in name of borrower or 3rd party

deposits and 115% of loan quantum in other cases.

LOAN AMOUNT

The lessor can get a loan upto an amount that can be serviced by

rent receivables for the unexpired period of lease,excluding

TDS,Building tax/municipal tax/security deposit/advance

deposit,amrgin for meeting maintenance,repair and other expenses


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ASSESSMENT OF A LOAN

1. Gross rent receivables for the unexpired lease periodexcluding

subsequent renewals in-built in lease deed.

LESS

a. TDS

b. Building Tax,Municipal Tax

c. Security deposit

d. Advance rent

= Net rent receivables

LESS margin 20%

= Margin available for EMI

EXAMPLE

Eligibe loan amount is to be worked out as follows

1. Gross rent received 3.00Lacs/month

2. Unexpired period of lease(months) 48 months

3.Rent advance/security deposit(6months) 18.00 Lacs


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Rent receivable for the unexpired period of lease 144(3.00 lacs *48)

LESS:TDS @ 16.5% 23.76

----------

120.24

LESS: security deposit 18.00

-----------

102.24

LESS Building Tax/Municipal Tax .50

----------

101.74

LESS: margin of 20% 20.35

-----------

Amount available for repayment of principal interest 81.39

-------------

Based on the amount available for repayment we have to arrive at

eligible loan amount as follows

Rate of interest 16%

Loan period (max) 48 months

Amount available for EMI 1.69 L


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(Rs. 81.39 lacs/28 months)

Eligible loan amount

Repayment factors for 48 mths @16%=35.4230

1.69 L * 35.4230=58.86 Lacs

Lord Krishna Banks exposure to loan againt rent receivables for

quarter ending31-03-06 is .0289%

Rate of interest charged by different banks for loan against rent

receivables

Name of bank Rate of interest

Lord Krishna bank 14.5

United bank of india 12.5

Punjab and sind bank 10.5


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0

5

10

15

BANKS

lord krishna bank

punjab and sind

bank

united bank of

india

CASE STUDY DEPICTING LOAN AGAINST RENT

RECEIVABLES WHERE LKB BRANCH IS A TENANT.

Proposal for loan against rent receivables of Mr. Praveen kapoor, Ms.

Sunita kapoor,Ms.neeru kapoor for 50 lacs(land loard of branc

premises)


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Calculation of eligible amount

Gross rent received 3 lacs per month

Unexpired period of lease 106 months

Period for which rent is discounted 60 months

Rent advance/security deposit 9 lacs for 3 months

Rent receivable for the unexpired 180 lacs

period of lease

(3 lacs * 60)

less TDS say @10.5% 29.7

150.3

less security deposit 9

141.3

less building tax/municipal tax 5.0

136.3


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less margin 20% 27.26

amount available for repayment

of principal and interest 109.04

amount available for repayment 109.04

interest and principal

rate of interest 9%

loan period 60 months

amount available for EMI

(112.64 ) 1.82 lacs

( 60 mnths )

amount available for loan 1.82 = 87.02

2077

amount applied for loan 50 lacs

EMI 103850


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THE LOAN PROPOSAL IS SANCTIONED ON FOLLOWING

TERMS AND CONDITIONS

Facility- loan against rent receivable by discounting of rent paid for

pitam pura branch

Limit- 50 lacs

ROI- BPLR-3.5%=9%

Period of 60 months

Repayment reduction from DP to the extent of EMI i.e. 104000

every month

SC/PC-nil

Security-

Primary security-assignment of rent to be paid by our branch

Collateral security-nil

Personal guarantee-

Praveen kapoor- net worth -232.57 lacs

Neeru kapoor- net worth 134.90 lacs

Sunita kapoor- net worth 133.72 lacs

CASE STUDY DEPICTING ASSESSMENT TO CASH CREDIT

UNDER TRADE LOAN SCHEME


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M/S Banbros Engineering pvt ltd is a company having 2 directots on

its board i.e. Mr. V.S. Bansal (aged 44) and Mr. Sunil Garg (aged35). The company was eastablished in the year 1996 and is engaged

in the business of trading and assembling of scientific equipment like

profile projectors, industrial microscope and microphotography, image

analysis etc

They have approached lord Krishna bank for cash credit limit of 20

lacs and FLC limit of 5 lacs.

The details are given below.

Borrower : m/s Banbros engineer

Address : 105 usha chambers

Dealing with bank jan 04

Constitution : pvt ltd company

Director: V.S. Bansal

Sunil Garg

Activity trading and assembling

Classification: non priority sector

Present requirement: CC (HYPO) of 20 lacs

FLC of 5 lacs

FINANCIAL INDICATORS OF THE FIRM


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Last 2

year

Current

year

projected

31-03-

03

31-03-

04

31-03-05 31-03-06

Sales and

other income

89 59.2 70.39 101

Net profit /loss .50 .30 .63 1.57

Paid up capital

and reserve

and surplus

8.01 8.31 8.94 10.51

Total net worth 8.01 8.31 8.94 10.51

Unsecured

loan from

others

1.13 .43 .04

Unsecured

loan from

others

1 4.3 4.3 7.5

Term loan .86 3.76 2.9 0

Current loan 44.3 39.89 29.48 32.22

Total outside

liabilities

47.29 48.42 36.72 39.72

Fixed assets 11.69 11.24 10.5 9.82

Current assets 43.58 45.47 35.14 40.40

Debt equity

ratio

.11 .45 .32

TOL/TNW 5.9 5.83 4.11 3.78

Current ratio .98 1.14 1.19 1.25

Net working

capital

-.72 5.58 5.66 8.18


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Assessment of PBF (as per Nayak committee)

Acceptable projected sales for the year ending 06 101 lacs

25% of projected sales (i.e. rs 101 lacs) 25.25 lacs

1/5 less margin 5.05 lacs

4/5 PBF @ 20% of projected sales 20.02 lacs

Assessment as per trade loan scheme

Average of last 2 yrs sale

(59.20 +70.39)/2 = 67.79 lacs

projected sales for current year

120 % of 64.74 = 77.75

PBF based on projection = 20% of 77.75=15.55 lacs


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Branch as has recommended CC limit of 20 lacs which is justified

from Nayak committee method

The loan was sanctioned on the following terms.

1. primary security- hypothecation of stock and book debts with

25% and 40% margin respectively.

2. rate of interest 11.5%

3. period 12 months

4. commission on flc as per bank norms

5. period 90 days

6. margin-25%

7. collateral security

EM of residential property

8. servise charges 1.1% upfront

9. Third party guarantee

Mr. V.s. Bansal networth 62.41 lacs

Mr. Sunil Garg networth 46.93lacs

Lord Krishna Banks exposure to Trade loan for quarter ending 31-03-

06 is .101%


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Rate of interest under trade loan scheme

NAME OF THE

BANK

TYPE OF

BANK

RATE OF INTEREST

Punjab and sind Public BPLR+2=13.5

State Bank Of

Patiala

State bank BPLR+1=12

ING Vysya Private BPLR-1=11.5

Lord Krishna bank private BPLR-2=10.5

United bank of

India

Private BPLR+.75=12


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0

2

4

6

8

10

12

14

BANKS

lord krishna bank

state bank of

patiala

ING vysya

punjab and sind

united bank of

india

CASE STUDY DEPICTING ASSESSMENT OF

TRADE LOAN TO ROAD TRANSPORT

OPERATORS

Mr.Fateh singh Libra is the promoter and MD of M/s libra highways

(p) ltd.The company is a leading bus service operator of north India.

The company was floated in the year 1973 and is having fleet of

approximately 60 deluxe /semi deluxe and Volvo buses. The

companys buses are plying on different routes of Punjab and


82/116

adjoining states including the prestigiousDelhi Lahore route. The

group cosare already running 3 volvo buses under theagreementwith the DTC.The present proposal is for the purchase of

Volvo bus and 1 super deluxe bus which will ply on all India tourist

permit as per the resolution passed by the company.

He approaches lord Krishna bank for the sanction of term loan of Rs.

54 lacs for the purchase of Volvo bus at a cost of 60.36 lacs.

ASSESSMENT OF TERM LOAN

The following calculations have been made by assuming that the

proposed bus will run 600 km/day and the payment will be

RS.13.16/km as per rates of association of state transport

undertaking

S.N

O

ITEM Year 1 Year 2 Year 3 Year 4 Year 5

1 Insurance 125000 108000 95000 83000 70000

2 Maintenance

s

418000 418000 418000 418000 418000

3 Tyre tubes 18000 20000 50000 120000 1200004 Staff 90000 90000 90000 90000 90000

5 Term loan

installments

500000 400000 350000

0

200000 150000

6 Depreciation 120000

0

960000 768000 614000 491500


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TOTAL

EXPENSES

235100

0

199600

0

177100

0

152540

0

132950

0

Total income 288204

0

288204

0

288204

0

288204

0

288204

0

profit 531040 886040 111104

0

135664

0

155254

0

Calculation of DEBT SERVICE COVERAGE RATIO

Year 1 Year 2 Year 3 Year 4 Year 5

PAT 5.31 8.86 11.11 13.57 15.52

Dep 12 9.6 7.68 6.14 4.91

Term loan

interest

5 4 3.5 2 1.5

Term loan

installment

14.64 14.64 14.64 14.64 10.97

DSCR 1.52 1.53 1.52 1.48 1.97


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Average DSCR= 1.61

The average DSCR ratio is above the benchmark norm of Bank i.e.

1.5

The above proposal was accepted on following terms

Nature: term loan

Limit: 54 lacs

ROI :BPLR 3% i.e. 9% as against ROI of 15.5%

SC/PC : .25% as against applicable SC/PC of 1.1%

Purpose:

1. for the purchase of bus chasis volvo make at the cost of Rs.41.06

lacs as per invoice dated 30.05.05

2. for construction of body at cost of Rs. 19.3 lacs

period: 60 months

repayment: 57 EMI of 116900 to commence 3 months after

disbursement. Interest to be serviced every month during moratoriumof 3 months

margin 1.06 lacs on chassis(2.58%)

_ 5.3 lacs on the body(27.46%)


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primary security hypothecation of Volvo buscollateral nil

personal guarantee

MR. Kesar singh ENW rs. 46.20 lacs

Mr. Jasjit singh ENW Rs. 85 lacs

lord Krishna banks exposure to road transport operators for quarter

ending 31-03-06 is .006%

Lord Krishna Banks exposure to service sector loan for quarter ending

31-03-06 is .169%

Case study depicting assessment of cash credit facility

for a manufacturer.

M/s Shellhon Fibres ltd ,a joint stock company established in the year

1980 is manufacturing acrylic and cotton yarn, which has a

requirement of 30 lacs term loan and 120 lacs cash credit

,approaches LKB for the enhancement of cash credit limit from 80

lacs to 120 lacs.


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Profit and loss account

Particulars 31.03.05 31.03.06 31.03.07

Expenditure

Opening stock

Raw material

Work in process

Finished goods

25.3

9

25.7

311.1

9

24.2

44.5

10.5

29.5Raw material

purchased

324.2 393.1 537.2

Finished goods

purchased

35.6 36.8 42.1

Wages and

other direct

labour

32.1 39.5 54.1

Power and fuel 25.2 32.1 42.3

Repair and

maintenance

1.5 1.9 2.2

Salaries and

wages other

than factory

7.5 9.2 13

Interest ion

working capital

9.5 15 20

Interest on term

loan

4 6.5 5.5

Other bank

charges

.5 .7 10

Loss on sale of .2 0 0


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fixed assets

Depreciation 19 37.5

39

Selling

expenses

6 9.2 15.6

Profit before tax 45.3 55.9 104.5

Total 570.6 701.7 961

Tax paid 14.2 20 34

Dividend

payable

11.1 15.9 205

Income

Sales 503.9 614.2 839.4

Interest on

securities

1.5 1.8 2.7

Dividend

received

.5 .1 .1

Profit on sale of

fixed assets

.4 2 0

Insurance claim

relating to

previous year

0 0 1.2

Closing stock

Raw material

Work in process

Finished goods

31.1

9

24.2

44.5

10.5

29.5

64.2

16

36.5

total 570.6 701.7 961


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ANALYSIS OF BALANCE SHEET

Particulars 31.03.05

(actual)

31.03.06

(actual)

31.03.07

(projected)

Opening raw material 25.3 31.1 44.5

Add: raw material purchased 324.2 393.1 537.2

Less closing stock of raw

material

31.1 44.5 64.2

Raw material consumed 318.4 379.7 517.5

Add: factory wages 32.1 39.5 54.1

Add: power and fuel 25.2 32.1 42.3Prime cost 375.7 451.3 613.9

Add: opening work in progress 9.0 9.0 10.5

Less: closing work in progress 9.0 10.5 16.0

375.7 449.8 619.4


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Add repair and maintenance 1.5

1.9 2.2

Add: salaries 7.5 9.2 13.0

Add: depreciation 19.0 37.5 39.0Cost of production 403.7 498.4 673.6

Add: opening stock of finished

goods

25.7 24.2 29.5

Less : closing stock of finished

goods

24.2 29.5 36.5

Cost of production of goods

sold

402.5 493.1 666.6

Add: selling expenses 6.0 9.2 15.6

Cost of sales 411.2 502.3 682.2

For the calculation of MPBF following figures have been taken

Raw material 45

Work in progress 8

Finished goods 21

Debtors 45

Creditors 20

Particulars 31.03.0

5

31.03.06 31.03.07

Raw material closing raw 35.65 42.77 45.28


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material *365

Raw material

consumed

Work in progress closingW.I.P *365

Cost of

production

8.1 7.69 8.67

Finished goods closing finish

goods*365

Cost of sales

21.4 21.4 19.53

Debtors closingdebtors*365

Credit

sales

43 42.2 47.85

Creditors closing

creditors*365

Credit

purchases

38 20.4 16.9

CALCULATION OF MAXIMUM POSSIBLE BANK

FINANCE.


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In lacs

Raw material consumed (45*517.5)/365 63Work in progress (8*673.6)/365 14.8

Finished goods (21*682.2)/365 39.24

Debtors collection period (45*839.4)/365 103.48

Less

Creditors payment period (537.2*20)/365 29.43

Working capital gap 191.09

Less

25% margin 47.77

maximum possible bank finance 143.32

Assessment of PBF (as per Nayak committee)

In lacs

Acceptable projected sales for the year ending 07 839.40

25% of projected sales 209.85

1/5 less margin 41.97

4/5 PBF @ 20% of projected sales 167.88


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2004-05 2005-06

2006-07

Last 2 yearsactual

CurrentYear

PERFORMANCEHIGHLIGHTS

Projection

KEY RATIOS

Current Ratio 1.22 1.31 1.36

L.T debt to equity Ratio 0.64 0.76 0.38

Net profit ratio 6.17 5.84 8.39

Gross profit ratio 18.07 21.63 28.37

Growth of sales

- 22% 37%

Net worth 700 900 1550


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0

100

200

300

400

500

600

700

800

900

1st Qtr 2nd Qtr 3rd Qtr

sales

0

200

400

600

800

1000

1200

1400

1600

1800

1s t Qtr 2nd Qtr 3rd Qtr

net worth


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Should the Bank Sanction the Credit Limit?

On the basis of the above analysis the bank is in position to grant

the desired credit limit to the borrower.

The credit worthiness of XYZ Ltd has been analyzed by keeping allthe prescribed parameters in mind.

The industrial market for the product profile of the company

is growing

there is no significant competitor in this industry which

promises greater profit margins for the company for the

following years.

The future of the company is secure under the management

of its current promoter Mr. A, who through his managerial

competence along with his expertise and experience in the

1.15

1.2

1.25

1.3

1.35

1.4

1st Q tr 2nd Qtr 3rd Q tr

current ratio

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

1st Qtr 2nd Qtr 3rd Qtr

debt-equity ratio


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industry can help the company to achieve new heights of

success. The financial analysis of the company also provides a

satisfactory delineation of the business. sales figures are

showing upward trend

The net worth of the company is also showing a steady

increase

Overall, the financial position of the company is at the desired

level of profitability and the credit sanctioned by the bank to the

borrower involves low level of risk.

Non fund Based Advances

The non fund based advances of the bank include instruments

such as

Letters of Credit

Bank Guarantee


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Letters of Credit

Letters of Credit is an instrument which facilitates trade and

commercial transactions. It is an undertaking issued by the banker

on the behalf of the buyer to the seller, to pay for the goods and

services, provided that the seller presents documents that satisfy

the terms and conditions stipulated in the L/C .The documents

under a L/C include transport documents, bills of exchange,

commercial invoice, special invoice, certificate of origin, packing

list, inspection report or quality certificate or the beneficiary

certificate. Such a letter is issued by the bank at the request of the

buyer (customer) in favour of a seller (beneficiary).

Letters of Credit is broadly classified into two categories:

Inland letter

Foreign letter

By issuing a L/C, the banker is undertaking a future financialcommitment. Hence it becomes imperative for the banker to analyze

the following factors:

Credit worthiness of the Applicant.


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Integrity shown by the applicant in the conduct of thebusiness.

The financial solvency of the business.

Projected liquidity of the business when the payment is due.

Whether the applicant meets the requirements for exchangecontrol and trade control, if any.

The maximum limit of L/C.

Determination of Maximum Limit for L/C

Various different variables are taken into consideration while

computing the L/C limit which is taken as part of determining the

overall working capital credit requirements of the enterprise.

The major variables that are taken into consideration for this purposeare:

a) Annual consumption of materials under purchase


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b) The lead time from opening of credit to shipment.

c) The transit period for goods till they arrive at the factory.

d) Credit period

Reserve bank of India has issued detailed guidelines to commercial

banks in respect of credit for their customers who enjoy credit

facilities with them.some of the important points to be kept in view in

this regard are discussed below

Letter of credit

1. bank has to normally open letter of credit for their own

customers who enjoy credit facilities with them.customers

maintaining current account only and not enjoying any credit

limits should be granted L/C facilities except in cases where no

other credit facility is needed by the customer.

2. the request of such customer for sanctioning and opening ofletter of credit should be properly scrutinized to establish the

genuine need of the customer.the customer may be required to

submit a complete loan proposal including the financial


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statements to satisfy the bank about his needs and also his

financial resources to retire the bills drawn under L/C.3. where customer enjoys credit facilities with other bank,the

reason for his approaching the bank for sanctioning l/c limits

have to be clearly stated.the bank opening l/c on the behalf of

such customer should invariably make a reference to the

existing banker of the customer.

4. in all cases of opening of letter of credit,the bank has to ensuer

that the customer is able to retire the bills drawn under l/c as

per the financial arrangement already finalized.

Guarantees

1. the conditions relating to obligant being a customer of the bank

enjoying credit facilities as discussed in case of letter of credit

are equally applicable for guarantees also.in fact,guarantee

facilities also cannot be sanctioned in isolation.

2. financial guarantees can be issued by the bank only if they are

satisfied that the customer will be in a position to reimburse the

bank in case the guarantee is invoked and bank is required to

make the payment in terms of guarantee.3. performance guarantee will be issued by the banks only on the

behalf of those customers with whom the bank has sufficient

experience and is satisfied that the customer has the necessary


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experience and means to perform the obligation under the

contract and is not likely to commit any default.4. banks should not normally issue guarantees on behalf of those

customers who enjoy credit facilities with other banks.

Co-acceptance of bills

1. limits for co-acceptance of bills will be sanctioned by the banks

after detailed appraisal of customers requirement is completed

and bank is fully satisfied about the genuineness of the need of

the customer.

2. co-acceptance facilities will normally not be sanctioned to

customers enjoying credit limits with other banks.

A contract of guarantee is a contract to perform the promise or

discharge the liability of a third party in case of his default. The bank

which gives the guarantee is called Guarantor, the person in respect

of whose default the guarantee is given is called The Principal

Debtor and the person to whom the guarantee is given is called the

Beneficiary. A guarantee can be oral or written.


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There are two types of Guarantees:

Financial Guarantees

These are guarantees issued for purely monetary obligations. Such

guarantees are usually requested by contractors who are engaged in

civil works for various Government departments like PWD, CPWD,

etc. since these departments insist for specific amount as a

percentage of work from the contract bid, bank guarantees are issued

by the banks in lieu of the amount. The Guarantees are also issued

by the bank in lieu of customs duty payment, dealers of large

companies as security for securing dealership, release of money from

a company or department for works which are yet to be inspected,

etc.

Performance Guarantees

These are guarantees issued in respect of performance of a contract

or obligation. In such guarantees, in the event of non or short

performance of the obligation, the bank is called upon to make good

the monetary loss arising out of non fulfillment of the obligation.

A guarantee is a source of income as the bank charges a commission

on the guarantees.


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For example, on a Performance Guarantee Lord Krishna Bank

Charges Rs. 100 + 0.50% of the guarantee amount per quarter orpart thereof with a minimum of charges for six months.

Similarly on Financial Guarantee the rate charged by Lord Krishna is

Rs.100 + 0.75% of the guarantee amount per quarter or a part

thereof with a minimum of charges for six months.

The procedure for the apprai

Credit Appraisal of Lord Krishna Bank

Documents

Transcript of Credit Appraisal of Lord Krishna Bank