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1
A
COMPREHENSIVE PROJECT REPORT ON
“CREDIT RISK MANAGEMENT AT AXIS BANK”
In Partial fulfillment for the requirement of two year full time
Master in Business Administration programme of Gujarat Technological University
Guided By:
Dr. Sneha Shukla
Submitted By:
Karansinh Suvan (GLS1050)
Utsav Lavingiya (GLS1059)
Submitted To:
GLS Institute of Computer Technology (MBA)
Gujarat Technological University
2010-12
2
CERTIFICATE
GLS Institute of Computer Technology (GLS-MBA)
This is to certify that Mr. KARANSINH SUVAN Roll No. GLS1050 and Mr.UTSAV LAVINGIAYA Roll No. GLS1059 students of GLS Institute Of Computer Technology (GLS-MBA) has successfully completed their Comprehensive Project Report On CREDIT RISK MANAGEMENT AT AXIS BANK in partial fulfillment of the MBA programme of Gujarat Technological University.
________________ ____________________
Dr. Hitesh Ruparel Dr. Sneha Shukla
Director Project Guide
Date: _________________
Place: _________________
3
DECLARATION
We, Karansinh Suvan (GLS1050) and Utsav Lavingiya (GLS1059), students of GLS Institute of Computer Technology, hereby declare that we have completed this project on ― CREDIT RISK MANAGEMENT AT AXIS BANK in the academic year 2011-12. The information submitted is true and original to the best of our knowledge. Date: Karansinh Suvan
Utsav Lavingiya
M.B.A. –GLSICT
4
PREFACE
The ongoing development of contemporary risk management methods and increase use
of innovative finance product such as securitization and credit derivatives have brought
about substantial changes in the business environment faced by credit institution today.
Especially in the field of lending, this changes and innovation are now forcing banks to
adapt their in-house software systems and relevant business process to meet these new
requirements.
In recent years, many banks have for sake of economy pared down the credit analyst
function and rely increasingly on using outside sources of information such as brokers
reports and credit rating agency reports to rationalize their credit decisions.
It never the less remains important for bankers to learn about an understand the frame
works of credit analysis within the frame work of credit risk management. Aside from the
arguments of due diligence, which means that every bank ultimately is responsible for
safe keeping of depositors funds and accordingly effecting its own credit analysis, is the
issue of comprehension. That is to say, for those banks deciding not to invest in the
analytical function and rely on outside sources of analysis, it never the less remains
important for the reader to not only understand the analyst„s arguments but how those
argument have been reached at in the first place.
This project aims to provide the reader with a structural road map of the analytical
process to study credit risk management policy of the bank.
5
ACKNOWLEDGEMENT
With the pleasure by expressing our deepest gratitude to Dr. Hitesh Ruparel (Director,
GLS Institute Of Computer Technology, Ahmadabad), Prof. Sneha Shukla and our all
respected faculties at GLSICT. We are expressing our sincere thanks to AXIS BANK
official for giving us their recorded data to carry out research and for providing their
valuable suggestion and spend valuable time for us from their busy and hectic schedule.
We have tried hard and our level best to make the research as useful as possible and
get a thorough knowledge about the research.
And last, but definitely not the least, an especially valuable asset to us was the help,
support and the encouragement given to us by our family to overcome every hurdle
which we came across during the making of the project.
Date: Thanking You,
Karansinh Suvan
Utsav Lavingiya
M.B.A. –GLSICT
6
Executive summary Credit risk management has always been on the radar of the top management of any
company, but at no other time has its relevance been more felt by financial institution
then in the current business scenario - plagued by increasing competition ; and that
great nemesis – the subprime lending crises. In this age of advancing and complex risk
transfer mechanism, it may make sense to step back and take look into the very basics
of the credit risk management. By understanding the overall life cycle of a typical credit
risk management process, we can identify key priority areas and challenges in the credit
risk arena and how a solution can be design to tackle the situation.
Credit risk is the largest and the most elementary risk faced by banks, it essentially
focuses on determining the likely hood of the default or the credit deterioration and how
costly it will turn out to be if it does occur. And this is true for the consumer lending
(Retail) or the Corporate lending (Commercial) as well as the counter party credit risk in
capital markets.
As we have seen in the U.S. the buzz of the subprime crises, it is really important for the
financial institution like banks to minimize the exposure to the risk as they are dealing
with the money of public.
Although dependent on the organization requirement and the profile, credit risk
management life cycles typically involves the process like the Collection of the data
regarding the applicant, Computation of the credit risk, Monitor and manage risk ratings
and Loan disbursement as per the ratings allotted.
The Credit Risk is mainly of two types:
1) Borrower„s Risk
2) Transactional Risk
7
Risk Management Solution is consisting of three modules:
1) Risk Identification Module
2) Risk Measurement Module
3) Risk Mitigation Module
Generally, Banks have outsourced their credit rating system to the credit rating
ageneses to make the working smoother and efficient. Here we have created credit
rating model based on certain parameter to get accurate idea of customer‟s credit rating.
Here various cases are studied to evaluate the Credit Risk Management in the AXIS
BANK. The cases are evaluated on the bases of suggested models.
8
TABLE OF CONTENTS
Preface
Acknowledgement
Executive Summary
RESEARCH METHODOLOGY 10
CH:1 INTRODUCTION OF INDIAN BANKING INDUSTRY 12
1.1 A snapshot of Banking Industry 12
1.2 Classification of Indian Banking Industry 15
CH:2 GLOBAL & LOCAL SCENARIO OF BANKING SECTOR 17
2.1 General Banking Scenario 19
2.2 Global Expansion of Indian Banking 24
2.3 Financial Inclusion & Expansion of Banking Services 29
CH:3 INDUSTRY ANALYSIS 33
3.1 PORTER„S FIVE FORCE MODEL 33
3.2 SWOT ANALYSIS 36
CH:4 INTRODUCTION OF AXIS BANK 40
CH:5 INTRODUCTION TO CREDIT RISK MANAGEMENT 44
CH:6 CREDIT APPRAISAL & CREDIT APPRAISAL MODEL AT AXIS BANK 60
CH:7 CASE STUDY & ANALYSIS 69
7.1 Case Study-I 69
7.2 Case Study-II 82
7.3 Case Study-III 92
7.4 Case Study-IV 103
CH:8 FINDINGS 111
9
CH:9 CONCLUSION 113
BIBLIOGRAPHY 114
10
Research methodology
Introduction
The banking industry has undergone a sea change after the first phase of economic
liberalization in 1991 and hence credit management. While the primary function of
banks is to lend funds as loans to various sectors such as agriculture, industry,
personal loans, housing loans etc., in recent times the banks have become very
cautious in extending loans. The reason behind this is credit risk. Credit risk ―is the
risk to a bank„s earnings or capital base arising from a borrower„s failure to meet the
terms of any contractual or other agreement it has with the bank. Credit risk arises
from all activities where success depends on counterparty, issuer or borrower
performance‖. Credit risk enters the books of a bank the moment the funds are lend,
deployed, invested or committed in any form to counterparty whether the transaction
is on or off the balance sheet. So now a day, management of credit risk is very
important for the bank.
Objectives of the study
- To evaluate the credit appraisal system and risk assessment model.
- To study the live cases of the credit appraisal on the bases of suggested model.
Scope of the study
- This study is based on suggested credit risk models.
- Cases are evaluated on the basis of last 3 years financial data only.
Research design
- Exploratory in nature
11
Sources of data
Secondary data
- Information collected from the Credit Appraisal Officer of AXIS BANK.
- Books, Journals & Magazines.
Methods of Data collection
- Visit of the credit appraisal department & recovery department of AXIS BANK.
- Collection of the various information regarding credit appraisal model from
various books. Beneficiaries:
This study will be helpful to the followings:
- Banks & other Financial Institutions
- Students
- Researchers
Limitations:
- This study considers only Credit Risk Model.
- This model is not useful for new industry or new enterprise where past
data is not available.
- Only five cases have been taken due to time constraint.
Expected Contribution of the Study:
- This study will help the bank to reduce the credit risk through the reducing
procedural loopholes in the appraisal process.
12
CHAPTER 1
INTRODUCTION TO BANKING SECTOR
A snapshot of the banking industry
The Reserve Bank of India (RBI), as the central bank of the country, closely
monitors developments in the whole financial sector.
The banking sector is dominated by Scheduled Commercial Banks (SBCs).
As at end March 2002, there were 296 Commercial banks operating in India.
This included 27 Public Sector Banks (PSBs), 31 Private, 42 Foreign and 196
Regional Rural Banks. Also, there were 67 scheduled co-operative banks
consisting of 51 scheduled urban cooperative banks and 16 scheduled state
co-operative banks.
Scheduled commercial banks touched, on the deposit front, a growth of 14%
as against 18% registered in the previous year. And on advances, the growth
was 14.5% against 17.3% of the earlier year.
State Bank of India is still the largest bank in India with the market share of
20% ICICI and its two subsidiaries merged with ICICI Bank, leading creating
the second largest bank in India with a balance sheet size of Rs. 1040bn.
Higher provisioning norms, tighter asset classification norms, dispensing with
the concept of „past due‟ for recognition of NPAs, lowering of ceiling on
exposure to a single borrower and group exposure etc., are among the
measures in order to improve the banking sector.
13
A minimum stipulated Capital Adequacy Ratio (CAR) was introduced to
strengthen the ability of banks to absorb losses and the ratio has
subsequently been raised from 8% to 9%. It is proposed to hike the CAR to
12% by 2004 based on the Basle Committee recommendations.
Retail Banking is the new mantra in the banking sector. The home Loans
alone account
For nearly two-third of the total retail portfolio of the bank. According to one
estimate, the retail segment is expected to grow at 30-40% in the coming
years.
Net banking, phone banking, mobile banking, ATMs and bill payments are the
new buzz words that banks are using to lure customers.
With a view to provide an institutional mechanism for sharing of information on
borrowers / potential borrowers by banks and Financial Institutions, the Credit
Information Bureau (India) Ltd. (CIBIL) was set up in August 2000. The
Bureau provides a framework for collecting, processing and sharing credit
information on borrowers of credit institutions. SBI and HDFC are the
promoters of the CIBIL.
The RBI is now planning to transfer of its stakes in the SBI, NHB and National
bank for Agricultural and Rural Development to the private players. Also, the
Government has sought to lower its holding in PSBs to a minimum of 33% of
total capital by allowing them to raise capital from the market. Banks are free
to acquire shares, convertible debentures of corporate and units of equity
oriented mutual funds, subject to a ceiling of 5% of the total outstanding
advances (including commercial paper) as on March 31 of the previous year.
14
Reforms in the Banking sector
The first phase of financial reforms resulted in the nationalization of 14 major
banks in 1969 and resulted in a shift from Class banking to Mass banking.
This in turn resulted in a significant growth in the geographical coverage of
banks. Every bank has to earmark a minimum percentage of their Loan
portfolio to sectors identified as “priority sectors”. The manufacturing sector
also grew during the 1970s in protected environs and the banking sector was
a critical source. The next wave of reforms saw the nationalization of 6 more
commercial banks in 1980. Since then the number scheduled commercial
banks increased four-fold and the number of banks branches increased eight-
fold.
After the second phase of financial sector reforms and liberalization of the
sector in the early nineties, the Public Sector Banks (PSB) s found it
extremely difficult to complete with the new private sector banks and the
foreign banks. The new private sector banks first made their appearance after
the guidelines permitting them were issued in January 1993. Eight new private
sector banks are presently in operation. This banks due to their late start have
access to state-of-the-art technology, which in turn helps them to save on
manpower costs and provide better services.
During the year 2000, the State Bank of India (SBI) and its 7 associates
accounted for a 25% share in deposits and 28.1% share in credit. The 20
nationalized banks accounted for 53.5% of the deposits and 47.5% of credit
during the same period. The share of foreign banks ( numbering 42 ), regional
rural banks and other scheduled commercial banks accounted for 5.7%, 3.9%
and 12.2% respectively in deposits and 8.41%, 3.14% and 12.85%
respectively in credit during the year 2000
15
Classification of Banks:
The Indian banking industry, which is governed by the Banking Regulation Act of India
1949 can be broadly classified into two major categories, non-
scheduled banks and scheduled banks. Scheduled banks comprise
commercial banks and the co-operative banks. In Terms of ownership,
commercial banks can be further grouped into nationalized banks, the State
Bank of India and its group banks, regional rural banks and private sector
banks (the old / new domestic and foreign). These banks have over
67,000 branches spread across the country. The Indian banking industry
is a mix of the public sector, private sector and foreign banks. The private
sector banks are again spilt into old banks and new banks.
16
Banking System
in India
Reserve bank of India (Controlling Authority)
Development Financial institutions Banks
IFCI IDBI ICICI NABARD NHB IRBI EXIM Bank SIDBI
Commercial Regional Rural Land Development Cooperative
Banks Banks Banks Banks
Public Sector Banks Private Sector Banks
SBI Groups Nationalized Banks Indian Banks Foreign
Banks
17
CHAPTER 2
GLOBAL AND LOCAL SCENARIO OF BANKING SECTOR
Indian Banking System: The Current State & Road Ahead
Introduction
Recent time has witnessed the world economy develop serious difficulties in
terms of lapse of banking & financial institutions and plunging demand.
Prospects became very uncertain causing recession in major economies.
However, amidst all this chaos India‟s banking sector has been amongst the
few to maintain resilience.
A progressively growing balance sheet, higher pace of credit expansion,
expanding profitability and productivity akin to banks in developed markets,
lower incidence of nonperforming assets and focus on financial inclusion have
contributed to making Indian banking vibrant and strong. Indian banks have
begun to revise their growth approach and re-evaluate the prospects on hand
to keep the economy rolling. The way forward for the Indian banks is to
innovate to take advantage of the new business opportunities and at the same
time ensure continuous assessment of risks.
A rigorous evaluation of the health of commercial banks, recently undertaken
by the Committee on Financial Sector Assessment (CFSA) also shows that
the commercial banks are robust and versatile. The single-factor stress tests
undertaken by the CFSA divulge that the banking system can endure
considerable shocks arising from large possible changes in credit quality,
interest rate and liquidity conditions. These stress tests for credit, market and
liquidity risk show that Indian banks are by and large resilient.
18
Thus, it has become far more imperative to contemplate the role of the
Banking Industry in fostering the long term growth of the economy. With the
purview of economic stability and growth, greater attention is required on both
political and regulatory commitment to long term development programme.
FICCI conducted a survey on the Indian Banking Industry to assess the
competitive advantage offered by the banking sector, as well as the policies
and structures that are required to further the pace of growth. The results of
our survey are given in the following sections.
19
General Banking Scenario
The pace of development for the Indian banking industry has been
tremendous over the past decade. As the world reels from the global financial
meltdown, India‟s banking sector has been one of the very few to actually
maintain resilience while continuing to provide growth opportunities, a feat
unlikely to be matched by other developed markets around the world. FICCI
conducted a survey on the Indian Banking Industry to assess the competitive
advantage offered by the banking sector, as well as the policies and
structures required to further stimulate the pace of growth.
The predicament of the banks in the developed countries owing to excessive
leverage and lax regulatory system has time and again been compared with
somewhat unscathed Indian Banking Sector. An attempt has been made to
understand the general sentiment with regards to the performance, the
challenges and the opportunities ahead for the Indian Banking Sector.
A majority of the respondents, almost 69% of them, felt that the Indian
banking Industry was in a very good to excellent shape, with a further 25%
feeling it was in good shape and only 6% of the respondents feeling that the
performance of the industry was just average. In fact, an overwhelming
majority (93.33%) of the respondents felt that the banking industry compared
with the best of the sectors of the economy, including pharmaceuticals,
infrastructure, etc.
Most of the respondents were positive with regard to the growth rate
attainable by the Indian banking industry for the year 2009-10 and 2014-15,
with 53.33% of the view that growth would be between 15-20% for the year
2009-10 and greater than 20% for 2014-15.
20
On being asked what is the major strength of the Indian banking industry,
which makes it resilient in the current economic climate; 93.75% respondents
feel the regulatory system to be the major strength, 75% economic growth,
68.75% relative insulation from external market, 56.25% credit quality, 25%
technological advancement and 43.75% our risk assessment systems.
Change is the only constant feature in this dynamic world and banking is not
an exception. The changes staring in the face of bankers relates to the
fundamental way of banking-which is going through rapid transformation in
the world of today. Adjust, adapt and change should be the key mantra. The
major challenge faced by banks today is the ever rising customer expectation
as well as risk management and maintaining growth rate. Following are the
results of the biggest challenge faced by the banking industry as declared by
our respondents (on a mode scale of 1 to 7 with 1 being the biggest
challenge):
21
They also asked their respondents to rate India on certain essential banking
parameters (Regulatory Systems, Risk Assessment Systems, Technological
System and Credit Quality) in comparison with other countries i.e. China,
Japan, Brazil, Russia, Hong Kong, Singapore, UK and USA.
The recent financial crisis has drawn attention to under-regulation of banks
(mainly investment banks) in the US. Though, the Indian story is quite
different. Regulatory systems of Indian banks were rated better than China,
Brazil, Russia, and UK; at par with Japan, Singapore and Hong Kong where
as all our respondents feel that we are above par or at par with USA. On
comparing the results with their previous survey where the respondents had
rated Indian Regulatory system below par the US and UK system, they see
that post the financial crisis Indian Banks are more confident on the Indian
Regulatory Framework.
22
The global meltdown started as a banking crisis triggered by the credit quality.
Indian banks seem to have paced up in terms of Credit Quality. Credit quality
of banks has been rated above par than China, Brazil, Russia, UK and USA
but at par with Hong Kong and Singapore and 85.72% of the respondents feel
that we are at least at par with Japan. Thus, they see that the resilience the
Indian Banks showed at the time of financial crisis has led to an attitudinal
shift of our respondents with the past survey indicating Credit quality of
Indian banks being below par than that of US and UK.
23
As technology ingrains itself in all aspects of a bank‟s functioning, the
challenge lies in exploiting the potential for profiting from investments made in
technology. A lot needs to be done on the technological front to keep in pace
with the global economies, as is evident from the survey results. Technology
systems of Indian banks have been rated more advanced than Brazil and
Russia but below par with China, Japan, Hong Kong, Singapore, UK and
USA. They find no change on introspection of their past surveys which also
highlighted the need for Indian banks to pace up in adoption of advanced
technology.
24
Global Expansion of Indian Banking
The idea of creating bigger banks to take on competition sounds attractive but
one must realize even the biggest among Indian banks are small by global
standards. The lack of global scale for Indian banks came into sharp focus
during the recent financial crisis which saw several international banks
reneging on their funding commitments to Indian companies, but local banks
could not step into the breach because of balance sheet limitations.
In this light, 93.75% of all respondents to their survey are considering
expanding their operations in the future. They further asked participants on
the methods that they consider suitable to meet their expansion needs. They
divide them into organic means of growth that comes out of an increase in the
bank‟s own business activity, and inorganic means that includes mergers or
takeovers.
25
26
We see from the above graph that amongst organic means of expansion,
branch expansion finds favor with banks while strategic alliances is the most
popular inorganic method for banks considering scaling up their operations.
On the other hand, new ventures and buyout portfolios are the least popular
methods for bank expansion.
Scope for New Entrants
81.25% also felt that there was further scope for new entrants in the market,
in spite of capital management and human resource constraints, as there
continue to remain opportunities in unbanked areas. With only 30-35% of the
population financially included, and the Indian banking industry unsaturated
with CAGR of well above 20%, participants in their survey felt that the market
definitely has scope to accommodate new players.
While there has been prior debate, they questioned banks on NBFCs and
Industrial houses being established as banking institutions and find opinion to
be marginally against the notion, with 35.71% in favour while 42.86% were
against them being established as banks.
However, on further questioning, 57.14% of respondents feel that the above
may be allowed but only if it is along with specific regulatory limitations. Banks
felt that limitations regarding track record, ensuring adequate capitalization
levels, a tiered license that enables new entrants to enter into specific areas
of the business only after satisfactorily achieving set milestones for the prior
stages, cap on promoter's holdings and wider public holding in addition to a
common banking regulator on a level playing field are essential before they
may set themselves up as banks.
27
Banking Activities
Over the last three decades, there has been a remarkable increase in the
size, spread and scope of activities of banks in India. The business profile of
banks has transformed dramatically to include non-traditional activities like
merchant banking, mutual funds,new financial services and products and the
human resource development.
Their survey finds that within retail operations, banks rate product
development and differentiation; innovation and customization; cost reduction;
cross selling and technological up gradation as equally important to the
growth of their retail operations. Additionally a few respondents also find pro-
active financial inclusion, credit discipline and income growth of individuals
and customer orientation to be significant factors for their retail growth.
There is, at the same time, an urgent need for Indian banks to move beyond
retail banking, and further grow and expand their fee- based operations, which
has globally remained one of the key drivers of growth and profitability. In fact,
over 80% of banks in their survey have only up to 15% of their total incomes
constituted by fee- based income; and barely 13% have 20-30% of their total
income constituted by fee-based income.
Out of avenues for non-interest income, we see that Banc assurance
(85.71%) and FOREX Management (71.43%) remain most profitable for
banks. Derivatives, understandably, remains the least profitable business
opportunity for banks as the market for derivatives is still in its nascent stage
in India.
28
There is nevertheless a visibly increased focus on fee based sources of
income. 71% of banks in their survey saw an increase in their fee based
income as a percentage of their total income for the FY 2008-09 as compared
to FY 2007-08. Indian banks are fast realizing that fee-based sources of
income have to be actively looked at as a basis for future growth, if the
industry is to become a global force to reckon with.
29
Financial Inclusion and Expansion of Banking Services
Transition from class banking to mass banking and increased customer focus
is drastically changing the landscape of Indian banking. Expansion of retail
banking has a lot of potential as retail assets are just 22% of the total banking
assets and contribution of retail loans to GDP stands merely at 6% in India
vis-à-vis 15% in China and 24% in Thailand. All banks in their survey weigh
Cost effective credit delivery mechanisms (100%) as most important to the
promotion of financial inclusion. This was followed by factors such as
identifying needs and developing relevant financial products (75%),
demographic knowledge and strong local relations (62.5%) and ensuring
productive use and adequate returns on credit employed (43.75%) in
decreasing levels of importance. In fact, India has an expanding middle class
of 250 to 300 million people in need of varied banking services. While 60% of
our population has access to banks, only 15% of them have loan accounts
and an overwhelming 70% of farmers have no access to formal sources of
credit, reflective of immense potential for the banking system This is mirrored
in the fact that while our survey finds no discernible shift in the lending pattern
of banks across Tier 1, Tier 2 and Tier 3 cities over the last two years, 93%
Indian Banking System: The Current State & Road Ahead Page | 20
participants still find rural markets to be to be a profitable avenue, with 53% of
respondents finding it lucrative in spite of it being a difficult market. Cost of
accessing markets has been the only sour note in the overall experience of
our respondents in rural markets At the same time, more than 81.25% of our
respondents have a strategy in place to tap rural markets, with the remainder
as yet undecided on their plan of action. Tie ups with micro finance institutions
(MFIs)/SHG and introduction of innovative and customized products are
considered most important to approaching rural markets according to
respondents, more so as compared to internet kiosks, post offices and supply
chain management techniques
30
Additionally, 81.25% of respondents found branchless banking to be an
effective and secure way of reaching out to rural markets, with mobile,
biometric and handheld devices, equally popular amongst banks. Some
respondents also found the Business Correspondents model to be an
untapped model for financial inclusion.
As Indian financial markets mature over time, there is also a need for
innovative instruments to deepen the market further. Suggestions ranged from
micro saving and micro insurance initiatives, Cash deposit machines,
warehouse receipts, to prepaid cash cards, derivatives, interest rate futures
and credit default swaps as a means to further the financial inclusion and
expansionary process.
31
Credit Flow and Industry
India Inc is completely dependent on the Banking System for meeting its
funding requirement. One of the major complaints from the industry has in fact
been high lending rates in spite of massive cuts in policy rates by the RBI. We
asked the banks what they felt were major factors responsible for rigid prime
lending rates.
None of the banks in their survey considered the cap on bank deposit rates to
be one of the causes of inflexible lending rates. Due to long-term maturity, the
trend seems to be changing. However, there are other factors which have led
to the stickiness of lending rates such as wariness of corporate credit risk
(33.33%), competition from government small savings schemes (26.67%).
Benchmarking of SME and export loans against PLR (20.00%) on the other
hand, do not seem to have as significant an influence over lending rates
according to banks.
The great Indian industrial engine has nevertheless continued to hum its way
through most of the year long crisis. We asked banks about the sectors that
they consider to be most profitable in the coming years (Fig. 12). All
respondents were confident in the infrastructure sector leading the profitability
for the industry, followed by retail loans (73.33%) and others
32
(Source: Annual survey, February 2010)
(FEDERATION OF INDIAN CHAMBERS OF COMMERCE & INDUSTRY)
33
CHAPTER 3
INDUSTRY ANALYSIS
Competitive Forces Model
(Porter’s Five Force Model)
(2)
Potential Entrants is
high as development
financial institutions as
well as private and
Foreign Banks have
entered in a big way
(1)
Rivalry among existing
firms has increased with
liberalization. New
products and improved
customer services is the
focus.
(4)
Bargaining power of
buyers is high as
corporate can raise
funds easily due to
high Competition.
(3)
The threat of
substitute product is
very high like credit
unions and investment
houses. There are other
substitutes as well banks
like mutual funds,
stocks, government
securities, debentures,
gold, real estate etc.
ubstitute is high due to
competition from NBFCs
and insurance companies as
they offer a high rate of
interest than Banks.
(5)
Organizing power of the
supplier is high. With the
new financial instruments
they are asking higher
return on the investments
34
1. Rivalry among existing firms
With the process of liberalization, competition among the existing banks
has increased. Each bank is coming up with new products to attract the
customers and tailor made Loans are provided. The quality of services
provided by banks has improved drastically.
2. Potential Entrants
Previously the Development Financial Institutions mainly provided project
finance and development activities. But they now entered into retail banking
which has resulted into stiff competition among the exiting players.
3. Threats from Substitutes
Competition from the non-banking financial sector is increasing rapidly. The
threat of substitute product is very high like credit unions and in investment
houses. There are other substitutes as well banks like mutual funds, stocks,
government securities, debentures, gold, real estate etc.
4. Bargaining Power of Buyers
Corporate can raise their funds through primary market or by issue of GDRs,
FCCBs. As
a result they have a higher bargaining power. Even in the case of personal
finance, the buyers have a high bargaining power. This is mainly because of
competition.
5. Bargaining Power of Suppliers
With the advent of new financial instruments providing a higher rate of
returns to the investors, the investments in deposits is not growing in a
phased manner. The suppliers demand a higher return for the investments.
35
6. Overall Analysis
The key issue is how banks can leverage their strengths to have a better
future. Since the availability of funds is more and deployment of funds is
less, banks should evolve new products and services to the customers.
There should be a rational thinking in sanctioning Loans, which will bring down
the NPAs. As there is a expected revival in the Indian economy Banks
have a major role to play.
36
SWOT Analysis
The banking sector is also taken as a proxy for the economy as a whole. The
performance of bank should therefore, reflect “Trends in the Indian Economy”.
Due to the reforms in the financial sector, banking industry has changed
drastically with the opportunities to the work with, new accounting standards
new entrants and information technology. The deregulation of the interest
rate, participation of banks in project financing has changed in the
environment of banks.
The performance of banking industry is done through SWOT Analysis. It
mainly helps to know the strengths and Weakness of the industry and to
improve will be known through converting the opportunities into strengths. It
also helps for the competitive environment among the banks.
a) STRENGTHS
1. Greater securities of Funds
Compared to other investment options banks since its inception has been a
better avenue in terms of securities. Due to satisfactory implementation of
RBI‟s prudential norms banks have won public confidence over several years.
2. Banking network
After nationalization, banks have expanded their branches in the country,
which has helped banks build large networks in the rural and urban areas.
Private Banks allowed operating but they mainly concentrate in metropolis.
3. Large Customer Base
This is mainly attributed to the large network of the banking sector. Depositors
in rural areas prefer banks because of the failure of the NBFCs.
37
4. Low Cost of Capital
Corporate prefers borrowing money from banks because of low cost of
capital. Middle income people who want money for personal financing can
look to banks as they offer at very low rates of interests. Consumer credit
forms the major source of financing by banks.
b) WEAKNESS
1. Basel Committee
The banks need to comply with the norms of Basel committee but before that
it is challenge for banks to implement the Basel committee standard, which
are of international standard.
2. Powerful Unions
Nationalization of banks had a positive outcome in helping the Indian
Economy as a whole. But this had also proved detrimental in the form of
strong unions, which have a major influence in decision-making. They are
against automation.
3. Priority Sector Lending
To uplift the society, priority sector lending was brought in during
nationalization. This is good for the economy but banks have failed to manage
the asset quality and their intensions were more towards fulfilling government
norms. As a result lending was done for non-productive purposes.
4. High Non-Performing Assets
Non-Performing Assets (NPAs) have become a matter of concern in the
banking industry. This is because reduced to meet the international standards
of change in the total outstanding advances, which has to be reduced to meet
the international standards.
38
c) OPPORTUNITIES
1. Universal Banking
Banks have moved along the value chain to provide their customers more
products and services. like home finance, Capital Markets, Bonds etc. Every
Indian bank has an opportunity to become universal bank, which provides
every financial service under one roof.
2. Differential Interest Rates
As RBI control over bank reduces, they will have greater flexibility to fix their
own interest rates which depends on the profitability of the banks.
3. High Household Savings
Household savings has been increasing drastically. Investment in financial
assets has also increased. Banks should use this opportunity for raising
funds.
4. Untapped Foreign Markets
Many Indian banks have not sufficiently penetrated in foreign markets to
generate satisfactory business therefore, it can be concluded clear
opportunity exists in such markets.
5. Interest Banking
The advance in information technology has made banking easier. Business
can effectively carried out through internet banking.
39
d) THREATS
1. NBFCs, Capital Markets and Mutual funds
There is a huge investment of household savings. The investments in NBFCs
deposits, Capital Market Instruments and Mutual Funds are increasing.
Normally these instruments offer better return to investors.
2. Changes in the Government Policy
The change in the government policy has proved to be a threat to the banking sector. Due to some major changes in policies related to deposits mobilization credit deployment, interest rates- the whole scenario of banking industry may change.
3. Inflation
The interest rates go down with a fall in inflation. Thus, the investors will shift
his investments to the other profitable sectors.
4. Recession
Due to the recession in the business cycle the economy functions poorly and
this has proved to be a threat to the banking sector. The market oriented
economy and globalization has resulted into competition for market share.
The spread in the banking sector is very narrow. To meet the competition the
banks has to grow at a faster rates and reduce the overheads. They can
introduce the new products and develop the existing services.
40
CHAPTER 4
INTRODUCTION TO AXIS BANK
Axis Bank was the first of the new private banks to have begun operations in
1994, after the Government of India allowed new private banks to be
established. The Bank was promoted jointly by the Administrator of the
specified undertaking of the Unit Trust of India (UTI - I), Life Insurance
Corporation of India (LIC) and General Insurance Corporation of India (GIC)
and other four PSU insurance companies, i.e. National Insurance Company
Ltd., The New India Assurance Company Ltd., The Oriental Insurance
Company Ltd. and United India Insurance Company Ltd.
The Bank today is capitalized to the extent of Rs. 403.63 crores with the
public holding (other than promoters and GDRs) at 53.72%.
The Bank's Registered Office is at Ahmedabad and its Central Office is
located at Mumbai. The Bank has a very wide network of more than 896
branches and Extension Counters (as on 31st December 2009). The Bank
has a network of over 4055 ATMs (as on 31st December 2009) providing 24
hrs a day banking convenience to its customers. This is one of the largest
ATM networks in the country.
The Bank has strengths in both retail and corporate banking and is committed
to adopting the best industry practices internationally in order to achieve
excellence.
Mission
Customer service and product innovation tuned to diverse needs of
individual and corporate clientele.
Continuous technology up gradation while maintaining human values.
Progressive globalization and achieving international standards.
41
Core values
Customer satisfaction through
Providing quality service effectively and efficiently
“smile, it enhances your face value” a service quality stressed on
Periodic customers service audits
Maximization of stakeholder value
Business divisions
Treasury management
Treasury is responsible for the maintenance of the statutory requirements
such as the cash reserve ratio (CRR), statutory liquidity ratio (SLR) and the
investment of such funds. It also manages the assets and liabilities of the
bank. Primary dealing activities can be classified into
Money market operations
Foreign exchange operations
Derivatives
Merchant Banking and capital markets
Axis Bank is a registered merchant Banker. The services offered are:
Private placement/syndication
Issue management
Debenture trustees
Depository services
Project advisory services, capital market services, advisory on Mergers
& Acquisition
42
Retail financial services
All branches have a dedicated financial advisory desk, wherein the mutual
fund schemes are marketed. The objective is to provide customers with a
larger portfolio of investment avenues thereby enhancing customer
relationship. Other products handled by the department include sale of Gold
Coins as well as marketing of Depository services.
Corporate and institutional banking
Cash management Services
Business current Accounts
Correspondent Banking
Government Business
Retail Banking
Retail banking is one of the key departments in the bank. It has the largest
variety in its portfolio which consists of retail asset and retail liability products.
Retail banking by definition implies banking services which are offered to
individual customers as opposed to corporate banking which is meant for
companies.
International banking
Major functions include
Handling regulatory issues which include compliance with
regulations of various authorities such as RBI regulations, FEMA
etc
Keeping a track of the business volumes being generated by the
branches and controlling the margins
Maintaining relationship with correspondent Banks outside India
43
Advances
The function involves extending fund and non-fund based credit facilities to
different clients in the country, the department aims to maximize the interest
spread earned on funds available with the bank while keeping the risk on the
credit portfolio at acceptable limits. The department also tries to maximize fee-
based income from both fund based and non-fund based activities.
Board of Directors:
Shri N.C. Singhal
Shri J.R. Varma
Dr. R.H. Patil
Smt. Rama Bijapurkar
Shri R.B. L. Vaish
Shri M.V. Subbiah
Shri Ramesh Ramanathan
Shri K.N. Prithviraj
44
CHAPTER 5
Introduction to Credit Risk Management
Definition
Of all different types of risks that a bank is subject to, credit risk can be
defined as the risk of failure on the part of the borrower to meet obligations
towards the bank in accordance with the Terms and conditions that have been
agreed upon. Inability and/or unwillingness of the borrower to repay debts
may be the cause of such default.
The bank aims at minimizing this risk that could arise from individual
borrowers or the entire portfolio. The former can be addressed by having well-
developed systems to appraise the borrowers; the latter, on the other hand,
can be minimized by avoiding concentration of credit exposure with a few
borrowers who have similar risk profiles. Credit risk management becomes
even more relevant in the light of the changes that have been brought about
in the economic environment, including increasing competition and thinning
spreads on both the sides of Balance sheet
Determinants of Credit Risk
Factors determining credit risk of a bank‟s portfolio can be divided into
external and internal factors. The banks do not have control on external
factors. These include factors across a wide spectrum ranging from the state
of the economy to the correlation among different segments of industry. The
risk arising out of external factors can be mitigated via diversification of the
credit portfolio across industries especially in light of any expectations of
adverse developments in the existing portfolio.
45
Given that the banks have very little control over such external factors, the
bank can minimize the credit risk that it faces mainly by managing the internal
factors.
These include the internal policies and processes of the bank like Loan
policies, appraisal processes, monitoring systems etc. These internal factors
can be taken care of, partly, via effective rating and monitoring systems, entry
level criteria etc. These processes would enable improvement in the quality of
credit decisions.
This would effectively improve the quality (and hence profitability) of the
portfolio. While monitoring systems are useful tool at post-sanction stage,
rating systems act as important aid at the pre-sanction stage.
Introduction to Credit Tools
The Bank has developed tools for better credit risk management. These focus
on the areas of rating of corporate (pre-sanctioning of Loans) and monitoring
of Loans (post-sanctioning). The focus of this manual is to familiarise the user
with the credit rating tool.
Credit Rating: Definition
Credit rating is the process of assigning a letter rating to borrowers indicating
the creditworthiness of the borrower. Rating is assigned based on the ability
of the borrower (company) to repay the debt and his willingness to do so. The
higher the rating of a company, the lower the probability of its default. The
companies assigned with the same credit rating have similar probability of
default.
46
Use in decision-making
Credit rating helps the bank in making several key decisions regarding credit
including:
• Whether to lend to a particular borrower or not; What price to charge
• What are the products to be offered to the borrower and for what tenor
• At what level should sanctioning be done
• What should be the frequency of renewal and monitoring
It should, however, be noted that credit rating is one of the inputs used in
taking credit decisions. There are various other factors that need to be
considered in taking the decision (e.g., adequacy of borrower‟s cash flow,
collateral provided, and relationship with the borrower). The rating allows the
bank to ascertain a probability of the borrower‟s default based on past data.
Main features of the rating tool:
i) Comprehensive coverage of parameters.
ii) Extensive data requirement.
iii) Mix of subjective and objective parameters.
iv) Includes trend analysis.
v) 13 parameters are benchmarked against other players in the segment. The
tool contains the latest available audited data/ratios of other players in the
segment. The data is updated at intervals.
vi) Captures industry outlook.
vii) Eight grade ratings broadly mapped with external credit rating agency‟s
ratings prevalent in India.
47
Special features of the web based credit rating tool
i) Centralized data base.
ii) Easy accessibility and faster computation of scores.
iii) Selective access to users based on the area of operation. Branches have
access to the data pertaining to their branch only, Zonal offices have access
to the data pertaining to all the branches under their control and the Credit
Department and Risk Department at Central Office have access to all
accounts.
iv) Adequate security system and provision of audit trails for confidentiality.
v) Maintaining of past rating records in the system for collection of empirical
data on rating migrations. This will enable the bank to arrive at PDs
(Probability of Default) factor.
48
Rating Tool for Small and Medium Enterprises (SME)
The SME rating tool has been developed for the purpose of assigning a credit
rating to the SME borrower of the Bank. The aim of the tool is to provide a
standardised system for the bank to evaluate the credit risk of different
borrowers. It should, however, be noted that this tool is not the standalone
exercise for the purpose of sanctioning of Loan to a SME borrower. It should
be supplemented with other inputs important in the sanctioning process.
The following broad areas have been considered for determining the rating of
Borrowers in the SME category:
Financial performance
Business performance
Industry outlook
Quality of management
Conduct of account (after roll out of the Monitoring tool)
Within each of these broad areas, various parameters have been used for
obtaining an overall rating of the borrower. In the following sections, we shall
discuss in greater detail the structure of the tool and the methodology of using
it.
Parameters used in credit rating of SME:
The rating tool for SME borrowers assigns the following weightages to each
one of the four main categories
i) Scenario (I) without monitori
Parameter Weightage (%)
Financial performance 40
49
Operating performance of business 22.5
Quality of management 22.5
Industry outlook 15
ii) Scenario (II) with monitoring tool: The weightages would be conveyed
separately on roll out of the tool.
Parameters used in the SME tool
Financial performance
The tool in its current form uses various parameters for rating a
borrower on its financial strength. These various sub-parameters give
us an idea of the different sources of risk being faced by a company in
different areas.
Operating performance of business
Operational efficiency of a borrower is important in deTermining the
generation of cash for repayment of its debt obligations. The
parameters in this category assess the borrower‟s competence in its
primary activities.
Quality of management
Quality of the management of a borrowal unit has a direct impact on
the performance of the unit. Also, it would have a direct impact on the
integrity of the borrower especially in Terms of its willingness to repay
its debt.
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Industry
In order to undertake the credit rating of any borrower, it is important to
assess the riskiness of the industry to which that borrower belongs.
Borrowers, which are similarly ranked in Terms of financial
performance, operating performance of business and quality of
management may have different credit ratings due to the risks inherent
in their industry. The risk assessment in industry sectors is done at the
Central Office level and appropriate score for each industry has been
allocated in the tool. On selection of the relevant industry sector, the
tool will automatically reckon the allocated score.
Three types under SME tool
i) Manufacturing
ii) Services and
iii) Trading
51
Various parameters under each of the above stated parameters for these
three types of SME tool are as under:
1 Manufacturing
i) Financial performance
Sr. No. Sub parameters Weightage (%)
F1 Net Sales Growth Rate (%) 10
F2 PBDIT Growth Rate (%) 7
F3 PBDIT/Sales (%) 10
F6 TOL/TNW 10
F7 Current Ratio 10
F8 Operating Cash Flow 8
F9 DSCR 8
F12*$ Foreign exchange risk 10
F13 Expected values of D/E, if 50% of NFB credit
devolves (corrected for margin)
5
F24 Realisability of Debtors 12
F27* State of export country economy 5
F28* Fund repatriation risk 5
TOTAL 100
* Applicable for export units
$Applicable for units having imports and or exports
52
ii) Operating performance of business
Sr. No. Sub parameters Weightage (%)
B7 Credit period allowed 10
B8 Credit Period Availed 10
B9 Working Capital Cycle 20
B10 Tax incentives 10
B13 Production Related Risk 10
B14 Product Related Risks 10
B15 Price Related Risk 10
B20 Client Risk 10
B21 Fixed Asset Turnover 10
TOTAL 100
iii) Quality of management
Sr. No. Sub parameters Weightage (%)
M1 HR policy/track record of industrial unrest 15
M2 Track Record in Default of Statutory Dues 16
M3 Market Report of Management reputation 15
M4 History of FERA violation/ED enquiry 8
53
M6 Too Optimistic Projections of Sales and Other
Financials
16
M9 Technical & Managerial Expertise 15
M8 Capability to raise money 15
TOTAL 100
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2 Services
i) Financial performance
Sr. No. Sub parameters Weightage (%)
F1 Net Sales Growth Rate (%) 10
F2 PBDIT Growth Rate (%) 7
F3 PBDIT/Sales (%) 10
F6 TOL/TNW 10
F7 Current Ratio 10
F8 Operating Cash Flow 8
F9 DSCR 8
F12*$ Foreign exchange risk 10
F13 Expected values of D/E, if 50% of NFB credit
devolves (corrected for margin)
5
F24 Realisability of Debtors 12
F27* State of export country economy 5
F28* Fund repatriation risk 5
TOTAL 100
* Applicable for export units
$Applicable for units having imports and or exports
55
ii) Operating performance of business
Sr. No. Sub parameters Weightage (%)
M1 HR Policy/Track Record in Industrial Unrest 15
M3 Market Report of Management Reputation 20
M4 History of FERA violation/ED enquiry 10
M6 Too Optimistic Projections of Sales and Other
Financials
20
M8 Capability to raise money 15
M12 Mix of Professional and Traditional
Management
20
TOTAL 100
iii) Quality of management
Sr. No. Sub parameters Weightage (%)
M1 HR Policy/Track Record in Industrial Unrest 15
M3 Market Report of Management Reputation 20
M4 History of FERA violation/ED enquiry 10
M6 Too Optimistic Projections of Sales and Other 20
56
Financials
M8 Capability to raise money 15
M12 Mix of Professional and Traditional
Management
20
TOTAL 100
57
3 Trading
i) Financial performance
Sr. No. Sub parameters Weightage (%)
F1 Net Sales Growth Rate (%) 10
F2 PBDIT Growth Rate (%) 7
F3 PBDIT/Sales (%) 10
F6 TOL/TNW 10
F7 Current Ratio 10
F8 Operating Cash Flow 8
F9 DSCR 8
F12*$ Foreign exchange risk 10
F13 Expected values of D/E, if 50% of NFB credit
devolves (corrected for margin)
5
F24 Realisability of Debtors 12
F27* State of export country economy 5
F28* Fund repatriation risk 5
TOTAL 100
* Applicable for export units
$Applicable for units having imports and or exports
58
ii) Operating performance of business
Sr. No. Sub parameters Weightage (%)
B3 Inventory Turnover 16
B7 Credit period allowed 10
B8 Credit Period Availed 12
B9 Working Capital Cycle 16
B10 Tax incentives 10
B14 Product Related Risks 12
B15 Price Related Risk 12
B24 Sustainability of Sales 12
TOTAL 100
iii) Quality of management
Sr. No. Sub parameters Weightage (%)
M1 HR Policy/Track Record in Industrial Unrest 15
M2 Track Record in Default of Statutory Dues 16
M3 Market Report of Management Reputation 15
M4 History of FERA violation/ED enquiry 8
M6 Too Optimistic Projections of Sales and Other
Financials
16
59
M8 Capability to raise money 15
M12 Mix of Professional and Traditional
Management
15
TOTAL 100
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CHAPTER 6
OVERVIEW OF CREDIT APPRAISAL
Credit appraisal means an investigation/assessment done by the banks
before providing any Loans & advances/project finance & also checks the
commercial, financial & technical viability of the project proposed, its funding
pattern & further checks the primary & collateral security cover available for
recovery of such funds.
Credit Appraisal Process
Receipt of application from applicant
Receipt of documents
(Balance sheet, KYC papers, Different govt. registration no., MOA, AOA, and
properties documents
Pre-sanction visit by bank officers
Check for RBI defaulters list, willful defaulters list, CIBIL data, ECGC, Caution
list etc
Title clearance reports of the properties to be obtained from empanelled
Advocates
Valuation reports of the properties to be obtained from empanelled
valuer/engineers
61
Documentations, agreements, mortgages
Disbursement of Loan
Post sanction activities such as receiving stock statements, review of
accounts, renew of accounts, etc
(On regular basis)
62
CREDIT APPRAISAL MODEL AT AXIS BANK
Credit to SME Sector
AXIS bank provides credit to SME sector under following Schemes
SME – Schematic (Fast Track)
It includes structured products basically to provide fast services to clients. It
includes various products like:
Mpower OD and Mpower Term Loan
Business Loan for Property
Power Rent
Power Trade
Zero Collateral Loans (ZCL) to MSE under CGS
Card Power
Enterprise Power
Business Power
Mpower OD and Mpower Term Loan:
The product aims at to provide both Working capital and Term
finance requirements of a trade enterprise. The facility is in the form
of a Cash Credit (for Working Capital requirements) and Term Loan
(Financing Capital expenditure). The facility is secured by
hypothecation of Working Capital assets and further collateralized
by charge over an immovable property/ financial asset. Non-Fund
based facilities can also be granted under the product. The
maximum Loan amount under the product is Rs. 2.50 Crs.
63
Business Loan for Property:
The product is aimed at providing finance to business enterprises
for acquition of an immovable property. The facility is in the form of
a Term Loan repayable by EMIs. The maximum Loan amount under
the product is Rs. 5 crores.
Power Rent:
The product generally known in market parlance as “Lease Rental
Discounting” is aimed at providing a Term Loan to owners of
properties against their lease rental receivables. The Loan amount
is assessed on the basis of the net present value of the rental
receivables over the lease period (after deducting margin and
taxes). The lease rentals are hypothecated in bank‟s favor and the
Loan is further collateralized by charge over the property. The
product specifies a minimum-security coverage of 1.5 times.
Maximum Loan amount under the product is Rs. 20 crores.
Power Trade:
The product aims to provide both working capital and Term finance
requirements of a trade enterprise. The facility is in the form of a
cash credit (for working capital requirements) and Term Loan
(financing capital expenditure). The facility is secured by
hypothecation of working capital assets and further collateralized by
charge over an immovable property/ financial asset. Non- fund
based facilities can also be granted under the product. The
maximum Loan amount under the product is Rs. 2.5 crores.
Zero Collateral Loans (ZCL) to MSE under CGS:
This product facilitates the MSEs and software/IT related services
to avail both working capital and term finance from bank. The facility
is secured by guarantee cover of credit guarantee fund trust for
micro and small enterprises (CGTMSE) and there is no collateral
64
security to be taken in such cases. Maximum loan amount under
the product is Rs. 1.00 crore.
Card Power:
This is a scheme for financing credit/debit card receivables of units
installing pour EDC machines. Both demand loan & term loan
facilities are offered to the borrowers, subject to a maximum of Rs.
2.5 crores. All trading/ retailing activities (with a few exceptions like
liquor, tobacco, seasonal business etc.), where credit/ debit cards
are used are eligible for the loans.
Enterprise Power:
This product has been developed to meet the credit needs of the
Micro and small enterprises covering both manufacturing and the
service sectors. The facilities offered include CC Rupee export
credit; pre & post shipment credit & non-fund based facilities like LC
& BG. The maximum limit is restricted to Rs. 1.00 Crore.
Business Power:
Business Power is an unsecured Term Loan (Maximum loan
amount under the product is Rs. 35 lacs) to be repaid by way of
EMI‟s over a maximum period of 4 years.
SME- Non Schematic (Standard)
For a business on the growth phase with a wide range of opportunities to
explore, timely availability of credit is an integral ingredient needed to
scale new heights. Axis Bank understands this and endeavor to be not
just a bank but also financing partner, so that focus on business needs
becomes possible whereas Bank cater to meet financing needs.
Their services ranging from Funded to Non-Funded, from Short Term to
Long Term and from Credit to Trade Services ensures to get finance the
way it is best suited for business.
65
Services:
Cash Credit
Working Capital Demand Loan
Export Finance
Short Term Loan
Term Loan
Clean Bill Discounting
LC Backed Bill Discounting
Co-Acceptance of Bills
Credit Facilities against Guarantee or Stand By Letter of Credit
issued by Foreign Banks
Letter of Credit
Bank Guarantee
Solvency Certificates
Cash Credit:
Bank offer Cash Credit facilities to meet day-to-day working capital
needs. Cash Credit is provided against the primary security of
stock, debtors, other current assets, etc., and/or collateral security
of movable fixed assets, immovable property, personal or
corporate guarantee, etc. Interest is charged not on the sanctioned
amount but on the utilized amount
Working Capital Demand Loan:
Bank also provides working capital facilities in the form of Working
Capital Demand Loan instead of cash credit facility. The primary or
collateral security will be as mentioned in cash credit facility. Here
also interest is levied on the amount drawn rather than on the
amount utilized.
66
Export Finance:
Bank provides finance for export activities in the form of Pre-
Shipment Credit against firm order and or Letter of Credit and Post
shipment credit. Credit is available for procuring raw materials,
manufacturing the goods, processing and packaging the goods and
shipping the goods. Finance is provided in Indian or foreign
currency depending upon the need of the borrower.
Short Term Loan:
Bank provides Working Capital facilities to meet day-to-day
working capital needs and Term Loan for capex. However there
may be occasions where there is need of ad hoc or short-Term
finance for general corporate purposes, meeting temporary
mismatches in working capital or for meeting contingent expenses.
In such situations it provides Short Term Loans for tenure up to a
year to ensure that business runs smoothly.
Term Loan:
When there is need of long-Term funds for capex or capacity
expansions or plant modernization and so on. Keeping these
requirements in mind Bank provides Term Loans up to acceptable
tenor with suitable moratorium, if required, and repayment options
structured on the basis of customer‟s estimated cash flows. These
Loans are primarily secured by a first charge on the fixed assets
acquired through the Loan amount. Suitable collateral security is
also taken whenever required.
67
Clean Bill Discounting:
Bank provides clean bill discounting facilities to fund receivables.
Bank discount bills or receivables and provide credit against that.
This facility is provided for a period of 3-6 months depending upon
the tenor of the bill.
LC Backed Bill Discounting:
Bank discount trade bills drawn under Letters of Credit issued by
reputed banks to fund receivables. This facility is provided for a
period of 3-6 months depending upon the tenor of the bill or Letter
of Credit.
Co-Acceptance of Bills:
Bank also provides co-acceptance of trade bills depending upon
the need of the borrower.
Credit Facilities against Guarantee or Stand By Letter of Credit
issued by Foreign Banks:
Various foreign companies set up subsidiary in India. Bank
provides funding to such companies against guarantees or SBLCs
of acceptable foreign banks.
Letter of Credit:
Apart from fund based working capital facilities Bank provides a
range of Non-Fund Based facilities such as Letter of credit, Bank
Guarantees, Solvency certificates, etc. Letter of Credit is provided
to meet trade purchases. These are generally provided for 3-6
months depending upon Trade cycle. Apart from this it provides
Import Letter of Credit for importing machinery or capital goods.
Such LCs are for tenure ranging from 1-3 years depending upon
the need of the borrower.
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Bank Guarantee:
Bank provides Bank Guarantee on behalf of its client to various
other entities such as Government, quasi govt bodies, corporate
and so on. it provides a range of guarantee such as Performance
guarantee, financial guarantee, EPCG etc. The tenure of Bank
Guarantee range from 1 year to 10 years depending upon the
purpose of the guarantee.
Solvency Certificates:
Bank also provides solvency certificate depending upon the need
of the borrower.
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CHAPTER-7
CASE STUDY- 1
Details of case study
Name M/s Dynemic Products Limited (DPL)
Constitution Public Limited Company
Office Address B- 301, Satyamev Complex-1, Opp. New Gujarat High Court,
S.G.Highway, Sola, Ahmedabad-380 060, Gujarat, India.
Line of activity Manufacturing of Food Colour Products
Sector Chemical and Chemical Products
Dealing with us New Connection
Incorporation 14th June 1990
Name of Directors Mr. Dashrathbhai Prahladbhai Patel (DIN : 00008160)
Mr. Rameshbhai Bhagwanbhai Patel (DIN : 00037568)
Mr. Hitendra Hargovinddas Sheth (DIN : 00037705)
Mr. Jagdishbhai Sevantilal Shah (DIN : 00037826)
Mr. Harishbhai Keshavlal Shah (DIN : 00037932)
Mr. Bhagwandas Kalidas Patel (DIN : 00045845)
Mr. Dixit Bhagwandas Patel (DIN : 00045883)
Mr. Shashikant Purshottambhai Patel (DIN : 00045957)
Mr. Vishnubhai Gangarambhai Patel (DIN : 00270413)
Mr. Shankarlal Baluram Mundra (DIN : 00388204)
Group Not a recognized group
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Brief Background:
The Company was incorporated on 14th June, 1990 as Private Limited
Company. The Name was subsequently changed to Dynamic Products
Limited on 31/12/1992. The Company was promoted with the objective of
carrying on the business of manufacturing S.P.C.P, the raw material for Food
Color, reactive & Raazole Dyes.
In the Year 2000 the company acquired the running business of M/s Safforn
Dye Stuff Industries and started manufacturing wide range of food colors at
the premises 3709/6, GIDC Estate, Ankleshwar having plot area of
admeasuring 3700 Sq.Mtr.
As the company aims to provide entire range qualitative and quantitative
service to food industry, as its Unit I. The company commenced
manufacturing of food colors namely Tratrazine in the year 2000-01. Both the
units at Ankleshwar are Ultra modern and have eco friendly plants with in
Rating External: Not done.
Internal: SME 3 (ABS 31.03.2009)
Associate Concern Dynemic Overseas (India) Private Limited
Dynemic USA Inc.
Share holding pattern As mentioned below
Share Price movement Listed on the BSE
Current Market Price – Rs.14.55/- (27.11.2009)
52 week high/low – Rs. 29.20 ( 22 Apr' 09) / Rs. 10.00 ( 16
Jan' 09)
71
house testing facilities to control quality at every level of manufacturing. The
Company gained goodwill in the short span of time due to its quality product.
The company has well equipped state of art in house laboratory which
conduct test of every parameter of food color & Dye intermediates laid down
under national and international authorities. The Company exports its product
to around 41 countries worldwide. All these have led the company to acquire
and retain a status of largest manufacturer and supplier of food colors and
dye intermediates in India.
Qualitative Factors:
The Company has a pro-active Management and Promoters who have
hands on experience in manufacturing of Dyes Intermediaries and
Food Colors.
Profit making Company since last 13 years.
The company has to its credit an award for Indirect Export of Self
Manufactured Dyes for the year 2001-02 & 2002- 03 received by
Gujarat Dyestuffs Manufacturers‟ Association.
The company has obtained certificate of approval From Bureau Verities
Quality International (BVQI) for achievement of ISO 9001: 2000 quality
standards, the Company has also received certificate of approval from
Bureau Verities Quality International (BVQI) for achievement of
14001:1996 and 14001:2004 quality standards for both its units
satiated at Ankleshwar.
The company has also obtained HAACP Code: 2003 certificate of
registration from TQCS International (Group) Pty Ltd under food safety
programme for both its units situated at Ankleshwar
The company was awarded with trophy for export performance of more
than Rs. 6.00 & 8.00 Crore for Self
Manufactured Indirect Export of Dyes & inTermediates in the year
2002-03 by Gujarat Dyestuffs Manufacturers‟Asso
72
Both the Units of the company are exporting Oriented Units and have
obtained the status of One Star Export House.
Marketing Strategy/Marketing arrangement
Strong and experience people are leading company‟s marketing department.
Company‟s total turnover is divided into:
Exports Sales
Local Sales
Exports Sales:
Company‟s 70% turnover is generated by way of exports sales.
Company has its own presence in all most all countries. The company
is exporting Food colors in Latin America, African countries, Middle
East, Far East, US and Europe. Almost all export customers are
dealing with company for many years.
Out of total exports turnover 60 to 70% percentage orders are repeated
orders and rest of the orders are new orders.
The Company has region wise Export Managers who can cater the
need of customers individually. Due to the quality and timely delivery of
the material the company have less competition from these countries.
Globally many countries have discontinued production of Dyes, Food
colors and Intermediates, new market has opened for Indian
manufacturer of Dyes and Intermediates. As Dynemic Products Ltd is
already a well recognized name in the field globally, it has more
opportunities to grab from growing International market.
73
Local Sales:
In Local Market Company is doing marketing its Dyes & Intermediates
to the end customers.
The company is the largest manufacturer of S.P.C.P in India which
generating repeated order from the local customers.
Now, company is planning to market the food colors in small packing
through its dealers and distributors which cater the local needs.
Company is also planning to arrange marketing arrangement with soft
drink manufactures and pharmaceutical manufactures for food colors.
Proposal
for
Proposal for fresh sanction of credit facilities by way of take over
(with enhancement) from HDFC Bank
a) Sanction of Cash Credit Limit of Rs. 500.00 lacs for working capital
requirement ( take over of Rs. 500.00 lacs from HDFC Bank).
b) Sanction of Letter of Credit (Inland/Foreign) of Rs. 300.00 lacs for
working capital requirement as a sub-limit of cash credit limit (take
over of Rs. 300.00 lacs from HDFC Bank).
c) Sanction of EPC/FBD/FBP/PCFC/PSCFC of Rs. 500.00 lacs for
working capital requirement as a sub -limit of cash credit limit (take
over of Rs. 500.00 lacs from HDFC Bank).
d) Sanction of Corporate Loan of Rs. 200.00 lacs (take over of Working
Capital Term Loan of Rs. 200.00 lacs from HDFC Bank).
e) Sanction of LER limit of Rs. 25.00 lacs (equivalent to forward cover of
Rs.500.00 lacs).
f) Waiver of credit opinion report from existing bankers of M/s. DPL
(HDFC Bank) and group concerns of M/s. DPL i.e. M/s. Dynemic
Overseas (India) Limited based on justifications given in the proposal.
g) Concession in processing fees at Rs. 1.00 lacs against norm of
1.00%.
h) Permitting time of 30 days for completion of take over formalities with
HDFC and creation of mortgage by CMC.
74
Existing &
Proposed
Facilities
(Rs. in lacs)
Type of Facility Existing
Limits
(HDFC)
Propose
d
+ Inc /
– Dec
Proposed
Limits
(Axis Bank)
Cash Credit Limit – Stock
cum Book Debt
500.00 -- 500.00
Corporate Loan 200.00 -- 200.00
EPC/FBD/FBP/PCFC/PSCF
C – As a sub limit of Cash
Credit Limit
(500.00) -- (500.00)
LC(Inland /Foreign) - As a
sub limit of Cash Credit Limit
(300.00) -- (300.00)
LER Limit (as a sub-limit of
CC limit)
(15.00) +25.00 +25.00
Total 700.00 +25.00 725.00
Purpose WC/LC/LER : To meet working capital requirements.
Corporate Loan : For NWC built up.
Tenor WC/LC/LER : 12 months.
Corporate Loan : 24 months from the date of first disbursement.
Repaymen
t
WC/LC/LER : On Demand.
Corporate Loan : 23 monthly instalments of Rs. 834000 each and last
instalment of Rs. 818000. Repayment to commence from December
2009.
Interest to be serviced as and when debited.
Security Primary Hypothecation of entire current assets (Pari
passu) of the company (Both present & future).
(Value as on 31.03.2009 is of Rs. 1326.42 lacs).
Hypothecation over Plant and Machinery (Pari
Passu) (Both present & future). (Value is of Rs.
1529.55 lacs as per empanelled valuer of Citi
75
Bank).
Collateral Pari – Passu charge being shared by Citi Bank Limited
on following properties :
i. Factory Land and Building, Plant and Machinery at
Plot No. 6401,6415,6416, G.I.D.C., Ankleshwar,
Dist.Bharuch admeasuring 5664 sq.mts. standing in
name of M/s. Dynemic Products Limited.
ii. Office situated at B- 301,308,309,310 Satyamev
Complex-1, Opp. New Gujarat High Court,
S.G.Highway, Sola, Ahmedabad-380 060, Gujarat
admeasuring 4272 square feets standing in the
name of M/s. Dynemic Products Limited.
iii. Factory Land and Building, Plant and Machinery at
Plot No. 3709/6,3710/3,3710/1, G.I.D.C.,
Ankleshwar, Dist.Bharuch admeasuring 12290.80
sq. mts. standing in name of M/s. Dynemic Products
Limited.
Guarantee Personal Guarantee of :
Mr. B.K.Patel having net worth of Rs. 264.88 lacs
(approx.) as on 31.03.2009.
Mr. Ramesh B.Patel having net worth of Rs.
152.57 lacs (approx.) as on 31.03.2009.
Mr. Dashrath P.Patel having net worth of Rs.
257.89 lacs (approx.) as on 31.03.2009.
Mr. Shashikant P.Patel having net worth of Rs.
148.22 lacs (approx.) as on 31.03.2009.
Mr. Dixit B.Patel having net worth of Rs. 36.33
lacs (approx.) as on 31.03.2009.
Credit
enhancem
ent
Nil.
Interest
Rate
BPLR - 3.50% i.e. 11.25% p.a. with monthly rests (presently BPLR @
14.75%).
76
LC
Charges
Bank‟s standard schedule of charges.
Processin
g fees
Rs. 1 lacs for the sanctioned facilities plus applicable taxes.
Banking
Arrangem
ent
Multiple with Citi Bank (Proposed).
Unit visit
The unit was visited Mr. Asim Bhaduri (VP – SME and Center Head), Mr.
P.C.Dash (AVP and SCO – SME) and Mr. Kuntal Bhatt (Manager and RM -
SME) on 13th November 2009 and the overall operations of the unit were
found to be satisfactory.
77
Operational & Financial Analysis
(Rs. in lacs)
Particulars
31.03.07 31.03.08 31.03.09 31.03.10 31.03.11
(Actuals) (Actuals) (Actuals) (Proj.) (Proj.)
Gross Sales 3231.12 3657.70 4911.20 6500.00 7500.00
Net Sales 3231.12 3657.70 4911.20 6500.00 7500.00
Net Sales Growth Rate % 12.79% 13.20% 34.27% 32.35% 15.38%
Operating Profit 227.49 313.80 261.62 621.29 729.97
Other Income 141.52 (5.36) 56.07 55.00 65.00
PBDIT 322.88 412.89 503.87 881.74 1018.09
Depreciation 47.94 50.62 96.12 110.94 107.00
Interest 47.45 48.47 146.12 149.50 181.12
PBT 369.01 308.44 317.69 676.29 794.97
PAT 266.95 184.99 190.03 446.42 524.76
Cash Profit 182.35 103.07 153.62 424.83 499.22
Operating Profit Margin % 7.04% 8.58% 5.33% 9.56% 9.73%
PBDIT Margin % 9.99% 11.29% 10.26% 13.57% 13.57%
PAT Margin % 8.26% 5.06% 3.87% 6.87% 7.00%
Paid up Capital - Equity 1132.84 1132.84 1132.84 1132.84 1132.84
Unadjusted TNW 2649.73 2707.33 2764.96 3078.84 3471.06
Unadjusted TOL 1109.42 1589.26 2331.73 2890.12 3094.44
78
Rating The rating of the company as per SME Rating Tool comes to SME - 3 (ABS
31.03.2009). The segment wise scoring is as under:
Particulars Rating
Overall Scoring SME-3
Financial scoring SME-4
Business scoring SME-3
Management scoring SME-3
Industry scoring SME-3
Unadjusted TOL/ TNW 0.42 0.59 0.84 0.94 0.89
Adjusted TNW 2710.84 2725.68 2828.34 3237.48 3629.70
Adjusted TOL 1048.31 1570.91 2268.35 2731.48 2935.80
Adjusted TOL/ TNW 0.39 0.58 0.80 0.84 0.81
Interest Coverage 9.82 8.44 3.84 6.27 5.98
Current Ratio 1.76 1.34 0.94 1.13 1.24
DSCR 7.67 1.83 1.21 2.35 2.20
NOCF 105.69 230.12 654.38 (269.99) 149.24
Net Profit / NOCF 2.53 0.80 0.29 (1.65) 3.52
NOCF / Interest 2.23 4.75 4.48 (1.81) 0.82
NOCF / Financing Payments 0.08 0.13 0.29 (0.08) 0.04
Total Debt / NOCF (No. of
years)
1.17 0.78 0.60 (0.45) (0.00)
79
CIBIL/RBI/ECGC Defaulters’ List/CA Verification/ Auditor Verification
Reference Check
Reference check was made through some of Bank‟s clients in the same line
of activity financed by Axis bank and the same was reported to be
satisfactory.
Analysis
a) The promoters of the company are having rich experience of more than
19 years in various Industries.
b) The proposed expansion of the company is having huge market
potentials.
c) The Company is the leader in Manufacturing and export of food
colours.
d) The overall credit rating of company is SME –3.
e) The business is 19 years old.
Particulars As of Date Position
RBI Defaulters list 31.12.2008 No match found.
ECGC Specific Approval List 31.07.2008 No match found.
CIBIL Defaulters List Satisfactory.
CA Verification (Auditor) 13.11.2009 Verified.
Auditor‟s Firm Verification 13.11.2009 Verified.
80
f) The sale of the company has been showing an increasing trend
throughout the years under consideration. The sale of the company
was increased from Rs. 3231.12 lacs in FY06-07 (Aud) to Rs. 3657.70
lacs (Aud) in FY07-08 and further to Rs. 4911.20 lacs in FY08-09
(Aud).
g) Since the company is into Manufacturing of Food Colours, the net
margin normally remains between 5.00% - 9.00%. The net profit of the
company was decreased from Rs. 266.95 lacs in FY06-07 (Aud)
showing margin of 8.26% to Rs. 184.99 lacs in FY07-08 (Aud) showing
margin of 5.06%. However, the same was maintained at Rs. 190.03
lacs in FY08-09 (Aud) showing margin of 3.87% due to decrease in
margins in the chemical industry on account of raw material price
fluctuations worldwide. The same was an aberration. But, now the
industry is on revival and boom path. Considering the same, the
company has estimated the profit of Rs. 446.42 lacs for FY09-10 @
margin of 6.87%, which may be accepted.
h) The TOL/TNW of the company increased from 0.42 in FY06-07 (Aud)
to 0.59 in FY07-08 (Aud) and to 0.84 in FY08-09 (Aud). The company
has estimated TOL/TNW at 0.94 and 0.89 for FY09-10 and FY10-11
respectively on account of increased bank borrowings, which may be
considered comfortable.
i) The current ratio of the company was 1.76 in FY06-07 (Aud) which
decreased to 1.34 in FY07-08 (Aud) and which further plummeted to
0.94 in FY08-09 (Aud), on account of capex expansion which will be
completed in the current fiscal. The company has estimated its current
ratio at 1.13 and 1.24 for FY09-10 and FY10-11, which is reasonably
acceptable as regards to the liquidity position of the company.
81
j) The NOCF is positive during FY 2008-09 (Aud) by Rs. 654.38 lacs.
NOCF is estimated negative in FY 2009 –10 at Rs. 269.99 lacs, as per
projected financials submitted by the company on account of increase
in stock and receivables which is keeping in line with the increase in
turnover and the holding levels are as per the industry practice.
k) The overall conduct of the account, repayment status etc. at Citi Bank
and HDFC is satisfactory.
l) The main director is dynamic and has rich experience of more than 20
years in his line of activity.
m) The company is a registered SSI unit.
n) Market reference of the company is satisfactory
o) The overall projected performance and financial of the unit are
satisfactory.
82
CASE STUDY-2
Details of case study
Name Sankalp Recreation Pvt. Ltd. (SRPL)
Constitution Private Limited Company
Group Sankalp
Date of
Incorporation
05.02.2002
Name of
Directors
Mr. Kailash R. Goenka
Mr. Robin R. Goenka
Mr. Ramavatar R. Goenka
Registered Office “Sankalp Square”, Opp. Gurukul, Drive-in Road,
Ahmedabad – 350052
Ph.: 079-27499200 (F) 079-27499300
Proposed Hotel
Site
FP # 4, TPS # 45, Survey # 948, Near AUDA Garden,
Off. 100 ft. Road, Prahaladnagar, Near S. G. Highway,
Ahmedabad – 350051
Line of activity Existing: Restaurant / Franchisee income from
Restaurant
Proposed: Hotel/Hospitality
Dealing with us New Connection
Rating Internal: SME-2 (ABS 31.03.2009)
External: Not rated
83
Brief Background
The “SANKALP” group is a chain of specialty theme based retail restaurant
outlets. SRPL has been incorporated on 05.02.2002. However, the group is
having its presence into the Hospitality business for more than two decades
and has their esteemed reputation in the market. The company has been
floated by the promoters Mr. Ramavatar Ranglal Goenka & his two sons Mr.
Kailash Goenka and Mr. Robin Goenka. The Founder of this chain Mr.
Ramavtar Goenka, ventured in to the business in 1981 with the opening of its
flagship restaurant at Ashram Road, Ahmedabad, India and there has been
no looking back since then. Knowing the South Indian cuisine very well, he set
up the theme-based restaurant in Ahmedabad and got an overwhelming
response.
It has been the culmination of inherent desire to give customer an innovative
specialty brand that gave birth to Sankalp Restaurant. With over forty highly
profitable outlets and a large loyal customer base to boast off, the group is all
set to launch into international market with its brands and food product
exports merchandising too.
Proposal Details
Proposal Sanction of Term Loan of Rs. 1500.00 lacs for Hotel Project
Sanction of one-time Foreign Letter of Credit (capex) facility of Rs.
150.00 lacs (as a sub-limit of Term Loan) for import of
machineries/equipments
Sanction of Buyer‟s Credit (capex) Limit of Rs. 150.00 lacs in lieu of
Foreign L/C (capex) as a sub-limit of Term Loan
Sanction of LER limit of Rs. 7.50 lacs (equivalent to forward cover
exposure of Rs. 150.00 lacs) as a sub-limit of Term Loan
Concession in Interest Rate and Processing Fees
84
Existing
&
Proposed
Facilities
(Rs. in lacs)
Type of Facility Existi
ng
Limits
Proposed
Limits
+ Inc /
– Dec
Term Loan Nil 1500.00 +1500.00
Foreign L/C capex (as a sub-limit of
TL)
Nil (150.00) + (150.00)
Buyer‟s Credit (as a sub-limit of TL) Nil (150.00) + (150.00)
LER limit equivalent to forward cover
of Rs. 150.00 lacs (as a sub-limit of
TL)
Nil (7.50) +(7.50)
Total Nil 1500.00 +1500.00
Purpose For construction of 3-star Hotel
Tenor 82 months (including moratorium period of 16 months)
Repayment to start from April 2011
Repayme
nt
i) 12 monthly instalments of Rs. 9.50 lacs each (April 2011 to March
2012)
ii) 12 monthly instalments of Rs. 22.00 lacs each (April 2012 to March
2013)
iii) 12 monthly instalments of Rs. 25.00 lacs each (April 2013 to March
2014)
iv) 12 monthly instalments of Rs. 28.00 lacs each (April 2014 to March
2015)
v) 12 monthly instalments of Rs. 31.25 lacs each (April 2015 to March
2016)
vi) 6 monthly instalments of Rs. 18.50 lacs each (April 2016 to
September 2016)
Interest to be serviced separately as and when debited.
85
Security & Guarantee
Primary EM of Land & Building at the Project Site located at FP # 4, TPS # 45,
Survey # 948, Near AUDA Garden, Off. 100 ft. Road, Prahaladnagar,
Near S. G. Highway, Ahmadabad – 51 (Projected Cost Rs. 15.07
crores)
Hypothecation of entire movable fixed assets at the Project Site
(Projected Cost Rs. 7.06 crores)
Collateral Nil.
Guarantee Personal guarantee of the directors of the company. The net worth details
are as under:
(Rs. in crores)
Name of the Director Net Worth
Mr. Kailash R. Goenka 4.61
Mr. Robin R. Goenka 3.03
Mr. Ramavatar R. Goenka 2.18
Total 9.82
Unit visit
The proposed site of the hotel project of the company was visited by Mr. Asim
Bhaduri (Vice President - SME), Mr. P. C. Dash (AVP/SCO - SME) and Mr.
Nishant Sharma (AVP/SSO - SME) and the same was reported satisfactory.
86
Proposed Project
SRPL has been incorporated as a Private Limited Company with main object
of business of running hotel in all its aspects, lodging and boarding and to run,
manage, acquire, control, own, purchase, hire the same including restaurant,
café, tavern, refreshment-room, lodging-house keepers etc. The company has
proposed to set up a three star hotel with 96 rooms at S.G. highway.
The project is located at one of the best locations and in the newly developed
area of Ahmedabad City. This is situated at “Sankalp Hotel” Near AUDA
Garden, Off 100 ft. Road, Prahaladnagar, S.G.Highway, Ahmedabad -
380051. This area is the fastest developing area in the city and is surrounded
by various business office premises, residential plots, various restaurants and
other commercial complexes. Ahmedabad Railway Station is just 20 mins
from the Hotel and International Airport is almost 30 mins from the location.
Company‟s main purpose of the hotel is to encourage the corporate people
who come for the business purposes. Hence the location of the project is
ideal & the company wants to be a part of the growing popularity of this area.
COST OF PROJECT Rs. in Crores
A Land & Building 9.01
B Civil Construction and Civil Finishing 6.06
C Furniture & Fixtures 5.49
D Plant and Machinery 1.57
E Preliminary and Pre-operative Cost 2.11
F Contingencies 0.76
TOTAL 25.00
87
Against the total cost of project of Rs. 25.00 crores, the company has
1requested for Term Loan assistance of Rs. 15.00 crores. Hence, the margin
to be brought in by way of promoters‟ contribution would be 40% of the total
CAPEX for the proposed hotel project of the company by way of share
capital/premium and unsecured Loans.
Operational & Financial Analysis
MEANS OF FINANCE
A Equity Share Capital / Premium 3.00
B Unsecured Loans 7.00
C Term Loan 15.00
TOTAL 25.00
Particulars 31.03.08 31.03.09 31.03.10 31.03.11 31.03.12
(Aud) (Aud) (Est) (Proj) (Proj)
Net Sales / Receipts 483.62 489.64 609.00 1333.00 2386.00
Operating Profit 63.32 85.68 143.84 476.00 916.00
Other Income 12.80 0.51 0.00 0.00 0.00
PBDIT 76.12 86.19 143.84 476.00 916.00
Depreciation & Amortisation 7.56 7.49 12.00 121.00 216.00
Interest & Financial Charges 4.98 7.59 39.00 146.00 247.00
Profit Before Tax (PBT) 63.58 71.11 92.84 209.00 453.00
Profit After Tax (PAT) 46.63 48.96 64.84 136.00 295.00
Cash Accruals 54.19 56.45 76.84 257.00 511.00
88
Share Capital 1.00 1.00 201.00 301.00 301.00
Reserves & Surplus 74.64 123.59 188.43 324.43 619.43
Misc. Exp. Not W/off 0.00 0.00 0.00 0.00 0.00
Tangible Net Worth (TNW) 75.64 124.59 389.43 625.43 920.43
USL as Quasi Equity 0.00 0.00 139.20 139.20 139.20
Adjusted TNW 75.64 124.59 528.63 764.63 1059.63
Total Term Liabilities (TTL) 30.20 11.00 1646.80 2192.80 1846.80
Total Outside Liabilities (TOL) 156.95 169.30 1848.80 2579.80 2497.80
Net Sales Growth % 0.31% 1.38% 22.44% 118.88% 78.99%
PBDIT Margin % 15.74% 17.60% 23.62% 35.71% 38.39%
PAT Margin % 9.64% 10.00% 10.65% 10.20% 12.36%
ROCE 64.78% 58.04% 6.06% 12.00% 24.08%
TOL / TNW 2.07 1.36 5.10 4.35 2.86
Adj. TOL / TNW 2.07 1.36 3.50 3.37 2.36
TTL / TNW 0.40 0.09 4.59 3.73 2.16
Adj. TTL / TNW 0.40 0.09 3.12 2.87 1.74
Current Ratio 1.60 1.42 1.51 1.44 1.52
Current Ratio w/o TL inst. 1.60 1.52 2.41 2.80 3.24
Interest Coverage Ratio 15.29 11.36 3.69 3.26 3.71
Net Operating Cash Flow (NOCF) (49.39) 51.87 77.57 300.00 650.00
Net Profit / NOCF (0.94) 0.94 0.84 0.45 0.45
NOCF / Interest (9.92) 6.83 1.99 2.05 2.63
89
Rating
The rating of the company as per SME Rating Tool comes to SME-2 (ABS
31.03.2009). The segment wise scoring is as under:
Particulars Rating
Overall Scoring SME-2
Financial scoring SME-3
Business scoring SME-2
Management scoring SME-2
Industry scoring SME-4
CIBIL/RBI/ECGC Defaulters’ List
The name of the company and its directors are not appearing in CIBIL/RBI‟s
defaulter/willful defaulter list as of 31.12.2008 (latest available). The name of
the company and its directors are not appearing in ECGC‟s defaulter list as of
31.07.2008 (latest available)
NOCF / Financing Payments (0.28) 0.23 0.26 0.50 0.59
Total Debt / NOCF (No. of years) (0.61) 0.21 4.11 7.31 2.84
90
Analysis
a) The company belongs a recognized group named SANKALP, who has
created a niche in the hospitality sector.
b) The group is having its presence since 1981 and has emerged as a
reputed name since inception. The promoters of the company have rich
experience in their line and belong to a resourceful family.
c) The promoters are having sound entrepreneur skills to acquire
business opportunities to scale new heights.
d) The sales/receipts of the restaurant/franchisee business (existing) of
the company were increased from Rs. 483.62 lacs in FY07-08 to Rs.
489.64 lacs in FY08-09. The company has achieved the sale of Rs.
373.74 lacs (Restaurant income of Rs. 300.25 lacs and Franchisee
income of Rs. 73.49 lacs) upto 30.09.2009 against the estimated sale
of Rs. 609.00 lacs (Restaurant income of Rs. 484.00 lacs and
Franchisee income of Rs. 125.00 lac) for the year 2009-10, which
indicates around 61% achievement of the estimated sales/receipts for
the year 2009-10 and can be considered reasonable.
e) The net profit of the existing business of the company was increased
from Rs. 46.63 lacs (NP margin of 9.64%) in FY07-08 to Rs. 48.96 lacs
(NP margin of 10.00%) in FY08-09. The PBDIT of the existing activity
of the company was increased from Rs. 76.12 lacs (PBDIT margin of
15.74%) in FY07-08 to Rs. 86.19 lacs (PBDIT margin of 17.60%) in
FY08-09
f) The TOL/TNW of the company remained at 2.07 in FY07-08 and 1.36
in FY08-09. The TOL/TNW of the company has been estimated at 5.10
for FY09-10 considering the Loan Against Property of Rs. 420.00 lacs
91
taken for existing business and the proposed Term Loan disbursement
of Rs. 1000.00 lacs during the current FY09-10.
g) The current ratio of the company remained above the benchmark level
at 1.60 in FY07-08 and 1.42 in FY08-09. The same has been estimated
at 1.51 for FY09-10 considering the existing business activity of the
company during 2009-10. While considering the existing as well as
proposed business activity of the company, the current ratio has been
projected at 1.44 for FY10-11 and 1.52 for FY11-12.
h) The net operating and all ratios pertaining to NOCF were positive in
FY08-09. The same have been estimated to be positive from FY09-10
onwards.
i) The company has shown a consistent growth since its inception and
financials of the company are satisfactory.
92
CASE STUDY 3
Details of case study
AApppplliiccaanntt DDeettaaiillss
1 Name of the
Applicant
M/S. Vishesh Distributors Pvt. Ltd. (New Relationship)
2 Registered
Office
Showroom
(Fragrances)
Showroom
(Airtel)
Godown
(Beverage)
Contact Details
401, Kalasagar, Behind Ratnamani Complex, Jodhpur Cross
Road, Satellite, Ahmedabad - 380015
F/101, Swagat Plaza I, Bopal Amli Road, Bopal, Ahmedabad.
M: 9898052002
19, Rudra Square, Judges bunglow cross road, Bodakdev,
Ahmedabad.
M: 9898052616
Sola Timber Market, After Sola Over Bridge, Behind
Mahindra Showroom, Sola, Ahmedabad.
M: 9898052041
Tel. No. 079-26747999
Mobile: 9898052001 (Ketan Shah)
E-Mail: [email protected]
3 Constitution Private Limited Company
Directors:
1. Mr. Ketan P. Shah (ACPPS7169H)
2. Mr. Pankaj C. Shah (ACYPS5908B)
3. Mrs. Dhara K. Shah (AMFPS2018F)
4. Mrs. Pina P. Shah (APAPS7788E)
93
Company PAN No. AABCV2348Q
4 Date of
Establishment
Certificate of incorporation No.
U51229GJ2001PTC39423, Dated 17.04.2001
Gujarat Sales Tax Registration No. 24074300543,
dated 01.07.2002
Import Export Code No. 0807004081, dated
24.05.2007
5 Nature of
Business
Distributorship of Pepsi products, Airtel, Levi‟s Struss
Signature
94
Brief Background
M/S. Vishesh Distributors Pvt. Ltd. Is a private limited company, held by close
family members. The company was established in year 2001.
The group has been engaged in distribution of branded company products like
Pepsico beverage products, Airtel, Levi‟s Struss Signature, Amul, TATA,
fragment shop, etc.
The group was earlier distributor for companies like Himalaya, Wipro, Godrej,
Parker, Parle, Adani & Lays.
Now, due to strong marketing channel, the company is also entered in
agreement with Levi‟s signature for distribution of garments to their outlets &
franchises in all over the Gujarat. Further the company is also having 14
commercial vehicles for distribution activities.
.
Present Proposal
To meet the increasing business demand for the various distribution schemes,
the company has requested for the OD limit of Rs. 180.00 lacs. by takeover of
existing LAP from HDFC Bank & also requested to allow the Cash credit limit
of Rs. 55.00 lacs from Vijaya Bank. The company wants to expand their
existing business activity by enhancing working capital limit for smooth
business operation.
Purpose of
loan
For General Business Purpose
Limits
Proposed
OVERDRAFT - Rs. 180.00 lacs
Rate of
Interest
Validity of
Limits
BPLR –2.50% i.e. 12.25% p.a. with monthly rests. (Presently BPLR
is at 14.75% p.a.)
12 months only subject to review every year.
Security
Details
Primary Security: NIL
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Collateral Security:
Equitable Mortgage of following properties:
1. Residential flat situated at 401, Kalasagar Appartment,
Opp. Star India Bazaar, Jodhpur, Satellite, Ahmedabad,
belonging to Mr. Ketan P. Shah (Director). Estimated
market value Rs. 80.00 lacs.
2. Shop at 101, 1st floor, Swagat Plaza I, Near Bopal Amli
road, Bopal, Ahmedabad, belongs to Mrs. Dhara K. Shah
(Director). Estimated market value Rs.41.00 lacs.
3. Shop at 19, 1st floor, Rudra Square, Near Bodakdev
police chowki, Bodakdev, Ahmedabad, belongs to Mr.
Ketan P. Shah (Director). Estimated market value Rs.
80.00 lacs.
4. Shop at 9-10, Ground floor, Sukriti Annexie, Near
Prernatirth Bunglows-2, Satellite, Ahmedabad, belongs
to Mr. Ketan P. Shah (Director). Estimated market value
Rs. 100.00 lacs.
Total market value of above properties is Rs. 301.00 lacs (Approx).
Guarantee: Personal guarantee of:
1. Mr. Ketan P. Shah (Director & property holder).
2. Mrs. Dhara K. Shah (Director & property holder)
3. Mr. Pankaj C. Shah (Director)
4. Mrs. Pina P. Shah (Director)
PDC’s:
Two PDC‟s for the entire overdraft limit each dated 3 months and 9
months from the date of first disbursement.
96
Processing
Fees
0.75% of the limit sanctioned plus applicable taxes (Non-
refundable)
Documentation As per bank‟s extent guidelines.
Risk
Associated
The company is facing competition from the other distributors in the
market.
Risk mitigates The above risk factor is mitigated as below:
1. Directors of the company, are having 10 years of rich
experience in the field of distributorship
2. The company is frequently offering promotional schemes to
its retail distributors
3. The company is having diverse clientele base in the market.
Unit Visit The company has been visited by Mr. N. Ramachandran (AVP-
SME), Ms. Disha Badani (Executive-SME), Mr. Nirav Ayer
(Executive-SME), on 04.02.2010:
Overall visit was found satisfactory.
Login Fees Rs. 5000/- plus applicable taxes (Non refundable)
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Defaulter List Whether the names of the borrower or any of the promoters/directors
appear(s) in: -
RBI defaulters List: No (The firm name and directors are not featuring in
RBI Defaulters‟ List as of 31.03.2009 - Latest Available).
ECGC defaulter List: No
CIBIL:
Credit card repayment record of Director Mr. Ketan P. Shah:
In CIBIL of Mr. Ketan, it is observed that one credit card account from
Standard Chartered Bank, with overdue amount Rs. 0.43 lacs, was
observed written-off. However, Mr. Ketan has submitted that it was a due
of Rs. 1100/-. Due to non - receipt of bill on time, there was interest
charge levied on the actual amount.
He, subsequently paid the actual amount, but not the interest amount,
which as on date has become overdue of Rs. 43,723/- with interest
charge.
The director has also filed a case against SCB regarding the same, to the
“Consumer Education & Research Society” and it is in process till date.
The director has submitted the copy of the relevant documents to our
bank.
However, considering below facts, we may consider the Credit Card
written-off status as acceptable:
1. The borrower is having satisfactory repayment track record of CC,
LAP & term loan with HDFC Bank & Vijaya bank.
2. Relevant documentary proofs available for CIBIL case.
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Credit Score
(Enclosed Credit
Scoring Sheet)
Parameters Present Score
(ABS – 31.03.09)
Financial 36.00
Non – Financial 30.00
Overall 66.00
Rating SME 3
(Acceptable)
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Performance details
Particulars 31.03.2007 31.03.2008 31.03.2009 31.03.2010 31.03.2011 31.03.2012
Audited Audited Audited Estimated Projected Projected
Sales 1273.31 1032.33 884.53 1125.00 1475.00 1525.00
Other Income 23.49 32.39 30.33 30.00 30.00 30.00
Total Income 1296.80 1064.72 914.86 1155.00 1505.00 1555.00
PBDIT 23.44 28.59 31.58 45.27 50.54 52.29
Depreciation 3.78 6.38 6.58 6.91 6.91 6.91
Interest 12.92 17.55 18.94 28.61 30.63 30.63
Interest &
remuneration to
Directors 4.80 2.40 2.50 2.75 3.00 3.25
PBT 1.94 2.26 3.56 7.00 10.00 11.50
PAT 1.68 2.03 2.40 5.00 7.00 8.00
PBT Margin % 0.15 0.21 0.39 0.61 0.66 0.74
Cash Accruals 5.46 8.41 8.98 11.91 13.91 14.91
TNW(Unadjusted) 13.44 14.01 15.95 37.96 44.96 52.96
Unsecured Loans
from friends &
relatives 38.94 56.25 95.46 78.46 78.46 78.46
TNW (Adjusted) 52.38 70.26 111.41 116.42 123.42 131.42
TOL(Adjusted) 183.99 148.91 127.13 250.71 259.41 260.79
TOL(Unadjusted) 222.93 205.16 222.59 329.17 337.87 339.25
100
TOL/TNW(Unadjust
ed) 16.59 14.64 13.96 8.67 7.51 6.41
TOL/TNW(Adjusted) 3.51 2.12 1.14 2.15 2.10 1.98
Debtors 64.97 45.88 71.60 117.19 153.65 158.85
- Less than 6
months 64.97 45.88 71.60 117.19 153.65 158.85
- More than 6
months 0.00 0.00 0.00 0.00 0.00 0.00
Debtors holding (in
days) 18.62 16.22 29.55 38.02 38.02 38.02
Current Ratio 1.61 1.70 2.26 1.33 1.37 1.43
Current Asset 187.52 160.33 185.98 328.10 350.71 367.00
Current Liabilities 116.30 94.37 82.16 246.72 255.42 256.80
101
Analysis
a) The group has been engaged in distribution of branded company
products like Pepsico beverage products, Airtel, Levi‟s Struss
Signature, Amul, TATA, fragment shop, etc.
b) Key promoter and pioneer of the company is Mr. Ketan P. Shah.,
engaged in the distribution activities since last more than 10 years.
c) He has gained good knowledge and skill especially in the field of
marketing aspects. He is handling total business affairs with sound
business and management policy.
d) The company had registered sales of Rs. 1273.31 lacs in FY. 2006-07,
Rs. 1032.33 lacs in FY. 2007-08 and sales of Rs. 884.53 lacs in FY.
2008-09.
e) The company is having Airtel distributorship, under which it was selling
prepaid mobile cards also. This business was with high turnover and
low margin basis. The company has closed that prepaid card section in
year 2007. Further to this company was having TATA‟s distributorship,
which was closed in the mid of the year 2009 & hence, there was
decline in sales during past 3 years. Current year, company has
entered into new agreement with Levi‟s Signature, through which it is
expecting turnover of Rs. 50.00 lacs every month.
f) The company has booked net profit (PBT) of Rs. 2.26 lacs during FY
2007-08 as against Rs. 1.94 lacs of FY 2006-07, registering Y-o-Y
growth of 16.50%. During FY. 2008-09, the net profit of the company
increased to Rs. 3.56 lacs.
g) Despite of decrease in turnover of the company, profitability is on
increasing trend. Also, PBDIT of the company is at quite higher level of
Rs. 31.58 lacs for the FY 2008-09 & Rs. 28.59 lacs for the FY 2007-08,
which can be considered as satisfactory.
102
h) The company has been marginally increasing its TNW (unadjusted) Y-
o-Y basis i.e. from Rs. 13.44 lacs in FY. 2006-07 to Rs. 15.95 lacs in
FY. 2007-09. The TNW for the FY 2009-10 is estimated at higher side
of Rs. 37.96 lacs, mainly due to ploughing back of entire profit and
infusion of fresh capital by directors with decrease in unsecured Loans
from directors. .
i) The current ratio of the company for FY 2007-08 has been 1.70 & at
2.26 for FY 2008-09. The current ratio estimated for FY 2009-10 is 1.33
times, mainly on account of proposed credit limit of Rs. 180.00 lacs
from our bank and the same may be considered as satisfactory.
103
CASE STUDY 4
Details of case study
Name of the
Applicant
Suchi Wires (New Relationship)
Work Office Address
Residence Address
Contact Details
189, G.I.D.C. Estate, Por-Ramangamdi, Dist. Vadodara-391243
Deep Jyoti-2, Block No. 404, 405, Opp. Gujarat Tractor,
Vishwamitri, Vadodara.
0265-2645431, 3098431
0265-2831649 (O)
M: 9824034470 (Rajendrabhai)
Constitution
Proprietorship Firm
Proprietor: Mr. Rajendra
Vallavhbhai. Patel
PAN: ACSPP2512N
Date of Establishment
31.01.1992
(GST Registration No.
24691601368)
(SSI Registration No.
240191100480, dated
07.06.2007)
Nature of
Business
Manufacturer of HB (Half hard bend) & MS (Mild stone) wires
104
Brief Background
M/s Suchi Wires is a proprietorship firm established in year 1992. Mr.
Rajendra Vallabhbhai Patel is a proprietor of the firm.
Firm is mainly engaged in the business of manufacturing of iron wires, cutting
& stretching it into different sizes according to customers‟ requirements.
The proprietor was working with administrative department of school in his
initial career before 20 years. Proprietor then started trading in wires with
friends at small level, on seeing the business potential, he decided to
establish the business in the name of Suchi Wires.
The proprietor is Commerce Graduate & aged about 51 years. He started
business in year 1992 and having experience of around 17 years in the same
line of business.
Mrs. Niyati Patel (sister of the proprietor) manages administrative work related
to the business. Mr. Kalpesh Patel (Brother-in-law of the proprietor) looks
after the technical support. The proprietor looks after the finance & overall
management.
There are 16 workers in the firm, working in 2 shifts a day.
Applicant purchases wires of different diameters & then processes it through
different machines to stretch them and prepare wires of particular diameter &
size, as per the requirements/specifications of the clients.
To prepare the wires according to customers requirement, work processes
like wire drawing, cutting, bending etc. are performed. Iron wires are used in
making grill of fridge back, table fan cover, stapler pins, u-pins, etc.
105
Major Suppliers of the applicant are:
National Small Industries Corporation Ltd. (Ahmedabad)
Shanti Fintrade Ltd. (Raipur)
Roundwell Steel Corporation (Ahmedabad)
Shree Vinayak Steels (Billimora)
Major Buyers of the applicant are:
Gandhi Special Tubes Ltd. (Halol)
Vijay jyot Seats Pvt. Ltd. (Halol)
Lalit Engineers (Vadodara)
Almonard Pvt. Ltd. (Vadodara)
106
Present Proposal
Purpose of
Loan
Working capital limit
Limits
Proposed
CC limit of Rs. 50.00 lacs.
Rate of Interest
& Validity of
Limits
BPLR-2.25% i.e. 12.50% (BPLR at present is 14.75%)
12 months only subject to review every year.
Security Details
Primary: Hypothecation of current assets of the firm.
Collateral:
A) Equitable mortgage of following properties:
1. Factory premise of Suchi Wires situated at Plot No. 428,
GIDC, Ramangamdi, Por, Vadodara. Property belongs to
Mr. Rajendra V. Patel (proprietor) & approximate market
value of the property is Rs. 45.00 lacs.
2. Residential property situated at Deep Jyot-2, Block No. 404
& 405, Opp. Gujarat tractor, Vshwamitri, Vadodara. The
property belongs to Mr. Rajendra V. Patel (proprietor) &
approximate market value of the property is Rs. 15.00 lacs.
B) Hypothecation of fixed assets of the firm.
Guarantee:
Personal guarantee of:
1. Mr. Rajendra Vallabhbhai Patel (Proprietor)
2. Mr. Kalpesh Patel (Brother-in-law of the proprietor)
Visit to the
location of Firm
The unit of the firm was jointly visited by Mr. N Ramachandran
(AVP-SME), Mr. Sachin gupta (Deputy Manager-SME) & Mr.
Sameep Buch (Manager-Axis Sales) on 12.10.2009.
Overall conduct of the business was found regular. The visit was
satisfactory.
107
Processing
Fees
1.00% of sanctioned CC limit, plus applicable taxes (non-
refundable).
Login Fees Rs. 5000/- plus applicable taxes, to be taken upfront (Non -
refundable)
Defaulter List Whether the names of the borrower or any of the
promoters/directors appear(s) in:
RBI defaulters List: No (The firm name and proprietor‟s name are
not featuring in RBI defaulters list latest available of 31.12.2008)
ECGC defaulter List: No
CIBIL: Satisfactory
Credit Scoring
Credit Score
(Enclose Credit
Scoring Sheet)
Rating
SME 2
Parameters
Score
(ABS 31/03/2009)
Financial 28.00
Business & Management 42.78
Industry 11.14
Overall 81.92
108
Performance details
Particulars 31.03.2007 31.03.2008 31.03.2009 31.03.2010 31.03.2011
Audited Audited Audited Estimated Projected
Sales 119.73 204.49 431.02 568.57 625.43
Other Income 1.06 1.69 3.39 4.08 4.9
Total Income 120.79 206.18 434.41 572.65 630.33
PBDIT 3.91 5.16 11.13 21.04 22.80
Depreciation 0.52 1.23 1.31 1.18 1.06
Interest 0.11 0.22 1.27 5.47 5.48
PBT 3.28 3.71 8.55 14.39 16.26
PAT 3.28 3.71 8.55 14.39 16.26
PBT Margin % 2.72 1.80 1.97 2.51 2.58
Cash Accruals 3.8 4.94 9.86 15.57 17.32
TNW(Unadjusted) 20.63 26.27 34.08 46.96 61.72
Unsecured Loans
from friends &
relatives 16.50 19.90 76.03 68.53 66.53
TNW (Adjusted) 37.13 46.17 110.11 115.49 128.25
TOL(Adjusted) 26.89 27.98 64.05 80.95 83.95
TOL(Unadjusted) 43.39 47.88 140.08 149.48 150.48
TOL/TNW(Unadjusted) 2.10 1.82 4.11 3.18 2.44
TOL/TNW(Adjusted) 0.72 0.61 0.58 0.70 0.65
109
Debtors 22.08 33.74 74.13 94.76 104.24
- Less than 6 months 22.08 33.74 74.13 94.76 104.24
- More than 6 months 0.00 0.00 0.00 0.00 0.00
Debtors holding (in
days) 67.31 60.22 62.78 60.83 60.83
Current Ratio 1.40 1.44 1.77 1.66 1.76
Current Asset 37.76 43.57 113.59 134.55 147.88
Current Liabilities 26.89 30.36 64.05 80.95 83.95
110
Analysis
a) The market reputation of promoter is satisfactory.
b) Firm has achieved sales of Rs. 204.49 lacs in FY. 2007- 08 and Rs.
431.02 lacs in FY. 2008-09, this is more than double of the last year.
Firm has submitted estimated sales of Rs. 568.57 lacs for FY 2009-10,
against which firm has achieved sales turnover of Rs. 235.70 lacs till
31st October 2009, which is 41.45 % of estimated sales.
c) Profitability of the firm is also showing increasing trend y-o-y bases.
Firm has achieved PBT of Rs. 3.71 lacs in FY 2007-08 & Rs. 8.55 lacs
in FY 2008-09. Profitability has also rose in line with increase in sales
of previous financial year. PBDIT of the firm is also on increasing trend,
which can be considered as satisfactory.
d) Net worth of the firm is increasing y-o-y bases, with plough back of the
profit in the business. Unadjusted gearing of the firm is on higher side
for FY 2008-09 mainly due to higher side of creditors at particular point
in March 2009. In March 2009, proprietor submitted that purchase of
raw material was at better price & the suppliers also allowed credit
period. Hence, the creditor base was on higher side.
e) Debtor‟s level of the firm is average 60 days for all the past 3 years.
Proprietor has submitted that average payment duration is 60 days
maintained in the business. Debtors maintain regularity in payment,
which can be considered as acceptable.
f) The Current Ratio of the firm has been on higher side, above the
benchmark level of 1.33 for all the past 3 years. Current ratio for FY
2007-08 was 1.44 & for FY 2008-09 was at 1.77. Estimated ratio is
1.66 for FY 2009-10. Although, it has been maintained above the
benchmark level, which can be considered as acceptable.
111
CHAPTER 8
FINDINGS
Credit appraisal is done to check the commercial, financial & technical
viability of the project proposed its funding pattern & further checks the
primary or collateral security cover available for the recovery of such
funds
Credit is the core activity of the banks & important source of their
earnings which go to pay interest to depositors, salaries to employees
& dividend to shareholders
Credit & risk go hand in hand
In the business world risk arises out of:-
Deficiencies / lapses on the part of the management
Uncertainties in the business environment
Uncertainties in the industrial environment
Weakness in the financial position
Bank‟s main function is to lend funds/ provide finance but it appears
that norms are taken as guidelines not as a decision making
A banker‟s task is to indentify/assess the risk factors/parameters &
manage/mitigate them on continuous basis
The Credit Appraisal process adopted by the bank take into account all
possible factors which go into appraising the risk associated with a loan
112
These have been categorized broadly into financial, business,
industrial, management risks & are rated separately
The assessment of financial risk involves appraisal of the financial
strength of the borrower based on performance & financial indicators
The norms of the bank for providing loans are not stringent, i.e. even if
a particular client is not having the favorable estimated and financial
performance, based on its past record and future growth perspective,
the loan is provided.
By providing various schemes of loans, Axis bank tries to cater to the
financial requirements of almost all the types of SME units.
113
CHAPTER 9
CONCLUSION
Finance management is the backbone of any organizations and hence
yields a number of job options ranging from strategic financial planning
to sales.
From the study of Credit appraisal, it can be concluded that credit
appraisal should therefore be based on the following factors, the same
are applied at Axis Bank:
Financial performance
Business performance
Industry outlook
Quality of management
Conduct of account
Axis Bank loan policy contains various norms for sanction of different
types of loans. These all norms do not apply to each & every case.
Axis Bank norms for providing loans are flexible & it may differ from
case to case.
Usually, it is seen that credit appraisal is basically done on the basis of
fundamental soundness. But, after different types of case studies, our
conclusion was such that credit appraisal system is not only looking for
financial wealth. Other strong parameters also play an important role in
analyzing credit worthiness of the firm/company.
In all, the viability of the project from every aspect is analyzed, as well
as type of business, industry, promoters, past records, experience,
projected data and estimates, goals, long term plans also plays crucial
role in increasing chances of getting project approved for loan.
114
BIBLIOGRAPHY
Web Sites:
www.bankersindia.com
www.wikipedia.com
www.rbi.org.in
www.Axis Bank.com
www.indianbankassociation.com
Books:
“Credit and banking” By: K. C. Nanda
115