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CHAPTER I
INTRODUCTION
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INTRODUCTION
Assessment of Fund Base and Non Fund Base Loans in terms of its economic, social and financial
viability is known as credit appraisal. Fund base includes Working Capital and Term Loan where
as Non Fund Base includes Letter of Credit and Bank Guarantee. Credit appraisal is an exercise
whereby a lending financial institution makes an independent assessment of various aspects of an
investment proposition to arrive at the financing decision. Appraisal exercises are basically aimed at
determining the viability of the project and sometimes, also in reshaping the project so as to upgrade its
viability. Here the financier takes a second look critically and carefully at a project as presented by the
promoter to a person who is in no way related to the project and is as such able to take independent view
of the project in its totality as also in respect of its various components. Since all activities involve risk in
a smaller or larger measure, credit appraisal aims at sizing up the quality of projects and their long term
profitability aims at minimizing the risk of lending by rectifying their weaknesses and improving their
quality by incorporating into them the features/safeguards missed by the promoters either because of the
lack of knowledge or information.
The factors generally considered by institutions while appraising a project include technical,
financial, ecological and managerial aspects. This makes it necessary to identify the inter-
relationships among the various elements of a project. For instance, the size of the initial
market and the estimates for demand build up would determine the plant capacity and
production planning, which in turn would affect the profitability and this has a direct bearing
on the means of financing. Above all, the management behind the project has a decisive
influence on most of these aspects. These considerations imply that credit appraisal is viewed
as a composite process as against the approach of viewing each aspect individually.
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1.1 Meaning
The exercise of credit appraisal simply means the assessment of a project in terms of its economic,
social and financial viability. This exercise is critical as it calls for a multi-dimensional
analysis of the project that is, a complete scanning of the project.
Financial institutions and banks make a critical assessment of projects which are submitted to them
by the entrepreneurs for getting loans. They have traditionally been accepting the data given by the
entrepreneur as valid while assessing the project. In fact, the emphasis has largely been on the cash
flow and financial viability of the project in assessing their suitability for extending the loans.
1.2 Definition
Credit appraisal means an investigation/assessment done by the bank prior 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.
1.3 Scope of Appraisal
The appraisal of a project is under taken by the financial institutions with the twin objectives of
determining the market potential and selecting an optimal strategy. The method of analysis varies
from project to project. Nevertheless, certain common aspects of study from the angle of
technology and engineering are mentioned below:
Choice of technical process and/or appropriate technology
Technical collaborations arrangements, if any
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Size and scale of operations
Location aspects of the project and availability of infrastructural facilities
Selection of plant, machinery, equipment together with background, competence and
capability of machinery / equipment suppliers.
Plant layout and factory building
Technical engineering services
Project design and network analysis for the assessment of project implementation schedule
Project cost and its comparison with other similar projects, based on technology,
equipment, product mix and time spread
Determination of project cost estimates and profitability projections etc.
Sensitivity analysis
It must be remembered that different aspects of a project are not independent entities but are highly
inter-related and a meaningful interpretation of the project depends on the appreciation of this fact.
1.4 Objectives of the Study
The objectives of the research study are:
To study the Credit Appraisal Methods.
To Understand the credit appraisal process for working capital loan and term loan
To learn about operating cycle
To understand the commercial, financial & technical viability of the project proposed & its
funding pattern.
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To understand the pattern for primary & collateral security cover available for recovery of
such funds.
1.5 Need for the study
Credit provided by commercial banks is an important driver of national economy. The
modern economy is driven by technology, and the most important variables of the
economy are consumption demands of the vast population as well as supply machineries
to meet the demand. Today, the total requirements cannot be possibly met by traditional
financiers alone. The role of modern commercial banks as providers of credit to the
economy begins at this point. But the credit has to be given with proper analysis and
reasoning based on the data. The quality of advance will definitely suffer if it is a wild
goose chase.
Small and medium enterprises play a vital role for the growth of the Indian economy by
contributing 45% of the Industrial output, 40% of exports, 42 million in employment,
create one million jobs every year and produces more than 8000 quality products for the
Indian and International market. Credit is one of the critical inputs for the promotion of
the Small and medium enterprises. An in-depth analysis is required to avoid the credit
risk for the lending institutions. The present study finds that there is a need to undertake a
comprehensive study on credit appraisal in SME segment. Hence an attempt is made on
the present study with specific reference to State Bank of India.
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1.6 Database of Study
The study is based on the primary data submitted by the promoter and secondary source of data.
Primary data is collected from the interview with the directors of the company, data submitted by
the company, discussions with the bank officials and the past financial statements of the sister
concern. The secondary data are collected from the news papers, magazines, internet etc.
1.7 Limitations of the study
Credit appraisal system includes various types of detail studies for different areas of
analysis, but due to time constraint, our analysis was of limited areas only.
As the credit rating is one of the crucial areas for any bank, some of the technicalities are
not revealed which may have cause destruction to the information and our exploration of
the problem.
As some of the information is not revealed, whatever suggestions generated, are based on
certain assumptions.
1.8 Literature Review
The assessment of a project, from all the possible dimensions, is the most important aspect foe the
financier / lender. In the wake of the global crisis, whose roots are tracked back mostly to the
subprime-lending, the process of project evaluation and the accuracy with which the entire process
is carried out assumes more significance than ever. In this context, it is imperative to identify those
parameters which are instrumental in the success of a firm/project. Below are the excerpts from a
few studies, which have carried out research on similar lines as this.
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Volker Bruns and Margaret Fletcher in their work Banks risk assessment of Swedish SMEs
taken from the journal Venture Capital, Vol.10, No.2, April 2008, pages 171-194, concentrates on
a variety of items ranging from the problems the SMEs receiving external finance may be
attributed to the fact that the vast majority is privately held and owner managed. As compared to
such as issuing new public stock Bankers therefore emphasize on the information on the
borrowers ability to repay the loan; alignment of risk preferences; and risk sharing affect their
willingness to grant credit. Results suggest that features that reduce the risk to the bank and shift
the risk to the borrower have the largest impact. Findings suggest that banks place the strongest
emphasis on the tangible accounting figures SMEs present, and factors that shift the risk from the
bank to the borrower.
Moodys Investors Service report in its work Sharp Ramp-Up One-Year Default Rate for Low-
DSCR Loans from journal Mortgage banking, Aug2005, Vol. 65 Issue 11, p112-112, articulates
the importance of Debt Service Coverage Ratio, the most important in any project financing
decision. The work concluded that loans for non-core properties default far more frequently than
the loans backed by core assets. The work quotes that in all classes of commercial ventures, the
lower the debt-service coverage ratio (DSCR), the greater the risk of default. The depth of a cash-
flow delinquency, as measured by a lower DSCR, is critical to the likelihood of default. Moving
down the coverage scale, the probability of a default progressively increases, according to this
work.
Thomas Ziwei and Tang in their work Delineating the predominant criteria for subcontractor
appraisal and their latent relationships taken from the journal Construction Management &
Economics Mar, 2008, Vol. 26 Issue 3, p249-259, have compiled a set of criteria that are helpful to
assess the sub-contractors performance. Through factor analysis, the 15 most important
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subcontractor performance appraisal criteria and their underlying relationships are identified. A
few of such criteria are: Workmanship, Progress, Resources control, Health and safety,
Environmental protection, Organization, General obligations, Industry awareness, Attendance to
emergency, Attitude to claims, Relationship, Communication. The results indicate that the three
overarching factors for subcontractor performance appraisal are 'team interaction',
'accomplishment of project goals' and 'track record'. The identified appraisal criteria lay a solid
foundation for the development of a centralized subcontractor performance appraisal system to
facilitate performance reporting, data sharing and benchmarking.
Ashish Kumar Rastogi, P.K.Jain, Surendra S. Yadav in their publication Debt financing of
corporate enterprises in India: a study showing impact of industry, size and age factors taken from
the journal Journal of Advances in Management Research, Year: 2006, Vol. 3, Issue: 2, p54-67
emphasizes on whether there are significant variations in the profile of debt-financing as a result of
differences in industry, size and age group of the sample corporate enterprises in India. The study
articulates that while industry and size have been observed to be a significant factor influencing
composition and maturity structure of debt financing, the empirical evidence does not support the
premise that the debt financing decisions vary significantly across age categories.
Mile Terziovski in the study titled The relationship between networking practices and business
excellence: a study of small to medium enterprises (SMEs) taken from the journal: Measuring
Business Excellence, Year: 2003, Vol. 7, Issue: 2, p78-92, makes a mention of the relation between
networking practices and business excellence. In this paper, the author quotes that the Networking
practices regression (NPR) models were developed in order to test the strength of the relationship
between key components of networking practice and several dimensions of business excellence
such as success rate of new products, reduction in waste, increased market opportunities. He is of
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the opinion that groupings of network practices are required to explain business excellence. This
means that a single networking practice is not sufficient to explain business excellence
significantly. The most significant networking practices were found to be searching and
incorporating diverse points of view, challenging the status quo, learning from failures,
communicating with people outside the company, including experts, allocation of resources to
support communication linkages. The main implication of the research results for SME managers
is that a typical manufacturing SME is more likely to improve its chances of achieving business
excellence with networking practices than without these practices.
P.A.Thompson and J.D.Whitman in their publication Project Appraisal by Cost Model taken
from the journalManagement Decision, Year: 1973, Vol. 11, Issue: 5, p301-308, make a mention
of the delay in commissioning the project and the risk associated with it. The risk of delay in
commissioning the project is very instrumental, yet very rarely considered during feasibility
studies for a capital project, and the results of such studies are rarely updated during the
construction phase. Consequently project managers are deprived of reliable data relating to the
project as a whole upon which they might base their decisions.
Patricia R. Todd, Rajshekar G. Javalgi in their work Internationalization of SMEs in India:
Fostering entrepreneurship by leveraging information technology taken from the journal
International Journal of Emerging Markets, Year: 2007, Vol. 2, Issue: 2, p166-180, make a
mention of the importance of information technology in the performance of a Small and Medium
scale Enterprise. It is proposed that the primary method for fostering or promoting the growth of
entrepreneurship is through the utilization of technology. Advancements in information technology
and improvements in communication infrastructure have resulted in opportunities for SMEs to
participate in global markets in both developing and developed countries. Since, governmental
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reforms in 1991, SMEs in India have been faced with new competitive intensity. Improvements in
resource utilization, with special emphasis to information technology, make it possible to sell a
variety of products and services from anywhere in the world, around the clock.
S. Maguire, S. C. L. Koh, A. Magrys in their publication The Adoption of e-business and
knowledge management in SMEs taken from journal Benchmarking: An International Journal,
Mar2007, Vol. 14, Issue: 1, p37-58, emphasize the importance of information and communication
technology in the performance of a SME. They show that the small and medium-sized enterprises
(SMEs) using information and communications technology (ICT) to try and gain a competitive
advantage over those which do not exploit the technology. This paper provides sound evidence
that SMEs can gain competitive advantage through the use of Information and Communication
Technology. More than 70 per cent of the entrepreneurs identified Information and
Communication Technology as aiding their business in one or more of the accepted competitive
areas. However, there is potential for SMEs to gain further advantages by using an integrated and
strategic approach in their use of technology.
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CHAPTER II
INTRODUCTION TO BANKING
SECTOR AND SBI
INTRODUCTION TO BANKING SECTOR AND SBI
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2.1 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 Reserve Bank of India was established on April 1,
1935 in accordance with the provisions of the Reserve Bank of India Act, 1934.The Central Office
of the Reserve Bank was initially established in Calcutta but was permanently moved to Mumbai
in 1937. The Central Office is where the Governor sits and where policies are formulated. Though
originally privately owned, since nationalization in 1949, the Reserve Bank is fully owned by the
Government of India.
RBI data says that there are 171 different banks that operate in India, as on June 08. Together,
these banks have 76,003 reporting offices across the country. Deposits have been growing the
fastest in urban areas while credit has been growing the fastest in Metropolitan areas. Rural areas
have seen slightly faster growth in deposits than in Credit, while i metropolitan areas, credit
growth outpaced deposits growth by a large 7% margin. In semi - urban areas the two were more
or less balanced with deposits getting a minor 0.6 % edge
as on June 08
No. of Banks
All Scheduled Commercial Banks 166
Regional Rural Banks 88
Other scheduled commercial banks 78
Non-Scheduled Commercial Banks 5
Total 171
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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.
A minimum stipulated Capital Adequacy Ratio (CAR) was introduced to strengthen the ability of
banks to absorb losses. The Reserve Bank of India (RBI) on day raised the minimum capital
adequacy ratio (CAR) for deposit-taking non-banking financial companies (NBFCs) from 12 per
cent to 15 per cent, effective from March 31, 2012.
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 finance ministry spelt out structure of the government-sponsored ARC called the Asset
Reconstruction Company India Limited (ARCIL), this pilot project of the ministry would pave
way for smoother functioning of the credit market in the country.
2.2 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).
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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.
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 Co-operative
Banks Banks Banks Banks
Public Sector Banks Private Sector Banks
SBI Groups Nationalized Banks Indian Banks Foreign Bank
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2.3 About SBI:
State Bank of India (SBI) is the largest Indian banking and financial services company (by
turnover and total assets) with its headquarters in Mumbai, India. It is state-owned. The bank traces
its ancestry to British India, through the Imperial Bank of India, to the founding in 1806 of
the Bank of Calcutta, making it the oldest commercial bank in the Indian Subcontinent. Bank of
Madras merged into the other two presidency banks, Bank of Calcutta and Bank of Bombay to
form Imperial Bank of India, which in turn became State Bank of India. The government of India
nationalized the Imperial Bank of India in 1955, with the Reserve Bank of India taking a 60%
stake, and renamed it the State Bank of India. In 2008, the government took over the stake held by
the Reserve Bank of India.
SBI provides a range of banking products through its vast network of branches in India and
overseas, including products aimed at non-resident Indians (NRIs). The State Bank Group, with
over 16,000 branches, has the largest banking branch network in India. It also has around 130
branches overseas. With an asset base of $352 billion and $285 billion in deposits, it is a regional
banking behemoth and is one of the largest financial institutions in the world. It has a market share
among Indian commercial banks of about 20% in deposits and loans.
The State Bank of India, the countrys oldest Bank and a premier in terms of balance sheet size,
number of branches, market capitalization and profits is today going through a momentous phase
of Change and Transformation the two hundred year old Public sector behemoth is today stirring
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out of its Public Sector legacy and moving with an ability to give the Private and Foreign Banks a
run for their money.
The State Bank of India is the 29th most reputed company in the world according toForbes. Also
SBI is the only bank featured in the coveted "top 10 brands of India" list in an annual survey
conducted by Brand Finance and The Economic Times in 2010.
The State Bank of India is the largest of the Big Four banks of India, along with ICICI
Bank, Punjab National Bank and HDFC Bank are its main competitors.
2.3.1 International Presence
As of 31 December 2009, the bank had 151 overseas offices spread over 32 countries. SBI operates
several foreign subsidiaries or affiliates.
2.3.2 Associate Banks
SBI has FIVE associate banks:
State Bank of Bikaner & Jaipur
State Bank of Hyderabad
State Bank of Mysore
State Bank of Patiala
State Bank of Travancore
Earlier SBI had only seven associate banks that constituted the State Bank Group. All use the same
logo of a blue keyhole and all the associates use the "State Bank of" name, followed by the
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regional headquarters' name. Originally, the then seven banks that became the associate banks
belonged toprincely states until the government nationalized them between October 1959 and May
1960. In tune with the first Five Year Plan, emphasizing the development of rural India, the
government integrated these banks into the State Bank of India system to expand its rural outreach.
There has been a proposal to merge all the associate banks into SBI to create a "mega bank" and
streamline operations.
2.3.3 Branches of SBI
State Bank of India has 131 foreign offices in 32 countries across the globe.
SBI has about 25,000 ATMs (25,000th ATM was inaugurated by the Chairman of State
Bank Shri O.P.Bhatt on 31st March 2011, the day of his retirement) and SBI group
(including associate banks) has about 45,000 ATMs
SBI has 26,500 branches, including branches that belong to its associate banks
SBI includes 99345 offices in India
2.3.4 Symbol and slogan
The symbol of the State Bank of India is a circle and not key hole and a small man at the centre of
the circle. A circle depicts perfection and the common man being the centre of the bank's business.
Slogans of SBI include with you all the way, Pure banking nothing else, The Banker to every
Indian, The Nation banks on us.
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2.3.5 Key areas of operation:
The business operations of SBI can be broadly classified into
a) Corporate banking
The Corporate banking of SBI include Working Capital Financing, Term loans, Deferred Payment
Guarantees, Corporate Loans, Export Credit, Strategic Business Units, Pricing.
b) National banking
This National Banking includes Personal Banking SBU, Small & Medium Enterprises, Agricultural
Banking, and Government Banking
c) International banking
As of 31 December 2009, the bank had 151 overseas offices spread over 32 countries.
d) Treasury
The bank manages an integrated treasury covering both domestic and foreign exchange markets.
In recent years, the treasury operation of the bank has become more active amidst rising interest
rate scenario, robust credit growth and liquidity constraints.
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SME SECTOR
3.1 Definition of SMEs
A small scale industrial unit is an undertaking in which investment in plant and machinery,
does not exceed Rs.1 crore, except in respect of certain specified items under hosiery, hand tools,
drugs and pharmaceuticals, stationery items and sports goods, where this investment limit has been
enhanced to Rs 5 crore. Units with investment in plant and machinery in excess of SSI limit and
up to Rs. 25 crore may be treated as Medium Enterprises (ME).
The Government of India has enacted the Micro, Small and Medium Enterprises Development
(MSMED) Act 2006 which was notified on October 2, 2006. Small and medium enterprises
(SMEs), particularly in developing countries, are the backbone of the nation's economy. They
constitute the bulk of the industrial base and also contribute significantly to their exports as well as
to their Gross Domestic Product (GDP) or Gross National Product (GNP).India has nearly three
million SMEs, which account for almost 50 percent of industrial output and 42 percent of Indias
total exports.
Special roles for SMEs were earmarked in the Indian economy with the advent of planned
economy from 1951 and the subsequent industrial policy followed by government. By and large,
SMEs developed in a manner, which made it possible for them to achieve the following objectives:
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1. High contribution to domestic production
2. Significant export earnings
3. Low investment requirements
4. Operational flexibility
5. Low intensive imports
6. Capacity to develop appropriate indigenous technology
7. Import substitution
8. Technology-oriented industries
9. Competitiveness in domestic and export markets
However, those SMEs who had a strong technological base, international business outlook,
competitive spirit and willingness to restructure themselves withstood the current challenges and
came out successful to make their own contribution to the Indian economy.
It is the most important employment-generating sector and is an effective tool for promotion of
balanced regional development. These account for 50 percent of private sector employment and 30
to 40 percent of value-addition in manufacturing. It produces a diverse range of products (about
8000 odd items), including consumer items, capital and intermediate goods.
However, the SMEs in India, which constitute more than 80 percent of the total number of
industrial enterprises and form the backbone of industrial development, are as yet, in technological
backwaters vis--vis advances in science and technology. These suffer from problems of
suboptimal scales of operations and technological obsolescence.
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While most of the large companies, even in developing countries, have financial as well as
technical capacity to identify technological sources and evaluate alternate technologies that would
suit their requirements, unfortunately this capacity is missing in most SMEs.
3.2 Growth of SME Sector in India: An Analysis
SME is the abbreviation for Small and Medium Enterprises. These enterprises can be rightly called
as the backbone of the GDP of India. The SME sector in India is growing at an exceptionally fast
rate due to which it is proving to be beneficial to the Indian Economy. However, there are some
important points that need to be considered for further development of the SME sector. The current
figures related to the SME sector in India are as follows:
The contribution of the SME sector to the entire output of the country is 40 %.
Currently, there are over 11 million SME units in India that produces more than 8000
products.
90 % of the Industrial Units in India belong to the SME sector.
These SME units contribute 35 % to the Indian Industrial Export.
The below mentioned are the factors that have contributed to the growth of the SME sector in
India.
SME units in India are being funded by foreign and local fund providers.
The advancement in technology has also contributed highly to the SME sector. There are
numerous business directories and trade portals available online that contains a rich
database of manufacturers, sellers and buyers
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These enterprises contribute almost 35 percent to the Indian industrial export
Finally, these enterprises are estimated to grow at the rate of 20 percent per year for
upcoming years
3.3 Main Reasons for SME Growth
Foreign and local fund providers are taking huge interest in the small and medium
enterprises of India
Banking sector has also shown a keen interest in lending credit to these enterprises
Many recent mergers have taken place in the sector
The sector has significantly contributed towards the domestic production as well as the
export earnings
Low investment is required to start and maintain these enterprises
The sector has contributed impressively towards job creation and increase in individual
incomes
Technological growth is also a factor for growth of SME's in India as there are
several trade portals and business directories available online with huge database of buyers,
sellers, manufacturers who are basically back bone of SME's
Banks may initiate necessary steps to rationalize the cost of loans to SME sector by adopting a
transparent rating system with cost of credit being linked to the credit rating of enterprise
SIDBI has developed a Credit Appraisal & Rating Tool (CART) as well as a Risk Assessment
Model (RAM) and a comprehensive rating model for risk assessment of proposals for SMEs. The
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banks may consider taking advantage of these models as appropriate and reduce their transaction
costs. In order to increase the outreach of formal credit to the SME sector, all banks, including
Regional Rural Banks may make concerted efforts to provide credit cover on an average to at least
5 new small/medium enterprises at each of their semi urban/urban branches per year.
A debt restructuring mechanism for nursing of sick units in SME sector and a One Time
Settlement (OTS) Scheme for small scale NPA accounts in the books of the banks as on March 31,
2004 are being introduced.
3.4 Challenges faced by SME:
The challenges being faced by the small and medium sector may be briefly set out as follows-
a) Small and Medium Enterprises (SME), particularly the tiny segment of the small enterprises
have inadequate access to finance due to lack of financial information and non-formal business
practices. SMEs also lack access to private equity and venture capital and have a very limited
access to secondary market instruments.
b) SMEs face fragmented markets in respect of their inputs as well as products and are vulnerable
to market fluctuations.
c) SMEs lack easy access to inter-state and international markets.
d) The access of SMEs to technology and product innovations is also limited. There is lack of
awareness of global best practices.
e) SMEs face considerable delays in the settlement of dues/payment of bills by the large scale
buyers. With the deregulation of the financial sector, the ability of the banks to service the credit
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4. CREDIT APPRAISAL PROCESS AND BRIEF ABOUT
LOANS
4.1 Credit Appraisal Process
Credit appraisal can be defined as the promoter taking a second look critically and carefully at a
project as presented by the promoter to a person who is in no way involved in or connected with its
preparation and who is as such able to take an independent, dispassionate and objective view of the
project in its totality as also in respect of its various components.
The credit appraisal process is the scientific way of giving the credit to corporate client by
analyzing the credit worthiness of the company through different parameters. The first step in
credit appraisal project is to understand the Indian banking industry and the performance of the
Indian banks and small scale industry in India and the steps taken by the banks to development and
welfare of SSI.
The credit appraisal for SME starts with Understanding the need of loan to the borrower i.e. for
which purpose the loan is required. After this next step is to analyze the financial statement of the
company to whom the loan is to be sanctioned. The main things which are taken into consideration
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while analyzing the financial statement are type of statement, nature of activity, accounting policy,
qualities of assets and liabilities , unit wise performance result of the company & directors report.
After analyzing the financial statement the second step is to study the principle given by Basel
committee on banking supervision which basically Indian banks have to be following as per the
order by Reserve Bank of India. The third step is to analyze the key financial ratios of the company
such as leverage ratio, liquidity ratio, profitability ratio, turnover ratio, and inventory norms.
The next step is to understand the methodology used to determine the credit rating. Since the credit
rating methodology differ from bank to bank in term of the weightage given to the parameters but
the parameter used by the banks to assess credit worthiness are almost same to all company. The
banks mainly provide two types of credit facility known as term loan and working capital loan.
The working capital loan is given by three methods namely- projected balance sheet method,
MFBF method and cash budget method.
Term loan is the loan given by the company for a long term generally more than one year and less
than 10 years to company. The term loan is assessed by the break even analysis, cost benefit ratio,
payback period. While appraising the term loan technical, managerial, financial feasibility is
checked. The debt service coverage ratio is used for assessing the company capacity to pay back
installment of loan and interest on term loan.
The sensitivity analysis is used to check the company ability to pay back the loan by changing the
independent variables and consequently monitoring the effect on dependent variables. The last step
is to understand the classifications of nonperforming asset and the provision to recovery of NPA.
The research report contains the whole procedure & process which is used by the bank to give
credit to SMEs.
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capital & working capital. Working capital in this context is the excess of current assets over
current liabilities. The excess of current assets over current liabilities is treated as net working
capital or liquid surplus & represents that portion of the working capital, which has been provided
from the long-term source.
1. Definition
Working capital is defined as the funds required carrying the required levels of current assets to
enable the unit to carry on its operations at the expected levels uninterruptedly.
Thus Working Capital required is dependent on
(a) The volume of activity (viz. level of operations i.e. Production & sales)
(b) The activity carried on viz. mfg process, product, production programme, the materials &
marketing.
2. Method Application
SEGMENT LIMITS METHOD
SSI Upto Rs 5 cr Traditional Method & Nayak Committee method
Above Rs 5 cr Projected Balance Sheet Method
SBF All loans Traditional / Turnover Method
C&I Trade &
Services
Upto Rs 1 cr Traditional Method for Trade &Projected Turnover Method
Above Rs 1 cr& upto Rs 5 cr
Projected Balance Sheet Method &Projected Turnover Method
Above Rs 5 cr Projected Balance Sheet Method
C&I Industrial
Units
BelowRs 25 lacs
Traditional Method
Rs 25 lacs &Over but uptoRs 5 cr
Projected Balance Sheet Method &Projected Turnover Method
Above Rs 5 cr Projected Balance Sheet Method
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Average period for which finished goods are in store &
Average collection period of receivables (Sundry Debtors)
Operating cycle is also called the cash-to-cash cycle & indicates how cash is converted into raw
materials, stocks in process, finished goods, bills (receivables) & finally back to cash.
Working capital is the total cash that is circulating in this cycle. Therefore, working capital can be
turned over or redeployed after completing the cycle.
The length of the operating cycle is different from industry to industry and from one firm to
another within the same industry. For instance, the operating cycle of a pharmaceutical unit would
be quite different from one engaged in the manufacture of machine tools. The operating cycle
concept enables us to assess the working capital need of each enterprise keeping in view the
peculiarities of the industry it is engaged in and its scale of operations. Operating cycle is an
important management tool in decision-making.
4. Traditional Method of Assessment of Working Capital Requirement
The operating cycle concept serves to identify the areas requiring improvement for the purpose of
control and performance review. But, as bankers, we require a more detailed analysis to assess the
various components of working capital requirement viz., finance for stocks, bills etc. Bankers
provide working capital finance for holding an acceptable level of current assets, viz. raw
materials, stocks-in-process, finished goods and sundry debtors for achieving a predetermined
level of production and sales. Quantification of these funds required to be blocked in each of these
items of current assets at any time will, therefore provide a measure of the working capital
requirement (WCR) of an industry.
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The examination of this item consists of an assessment of the various requirement of the actual
production process. It is in short a study of the availability, costs, quality & accessibility of all the
goods & services needed.
location of the project
Size of the plant
Type of technology
Labor
Technical Report
Economic Feasibility
An economic feasibility appraisal has reference to the earning capacity of the project. Since
earnings depend on the volume of sales, it is necessary to determine how much output or the
additional production from an established unit the market is likely to absorb at given prices.
i) A thorough market analysis is one of the most essential parts of project investigation. This
involves getting answers to three questions.
a) How big is the market?
b) How much it is likely to grow?
c) How much of it can the project capture?
ii) Future
iii) Intermediate product
Financial Feasibility
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4.2.2NON-FUND BASE
Letter of Credit
The expectation of the seller of any goods or services is that he should get the payment
immediately on delivery of the same. This may not materialize if the seller & the buyer are at
different places (either within the same country or in different countries). The seller desires to have
an assurance for payment by the purchaser. At the same time the purchaser desires that the amount
should be paid only when the goods are actually received. Here arises the need of Letter of Credit
(LCs). The objective of LC is to provide a means of payment to the seller & the delivery of goods
& services to the buyer at the same time.
Definition
A Letter of Credit (LC) is an arrangement whereby a bank (the issuing bank) acting at the request
& on the instructions of the customer (the applicant) or on its own behalf,
i. is to make a payment to or to the order of a third party (the beneficiary), or is to accept &
pay bills of exchange (drafts drawn by the beneficiary); or
ii. authorizes another bank to effect such payment, or to accept & pay such bills of exchanges
(drafts); or
iii. Authorizes another bank to negotiate against stipulated document(s), provided that the
terms & conditions of the credit are complied with.
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CHAPTER V
CREDIT APPRAISAL STANDARDS
AND CRA
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5. CREDIT APPRAISAL STANDARDS AND CRA
Credit appraisal means an investigation/assessment done by the bank prior 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.
5.1 State Bank of Indias Loan Policy
State Bank of Indias (SBI) Loan Policy is aimed at accomplishing its mission of retaining the
banks position as a Premier Financial Services Group, with World class standards & significant
global business, committed to excellence in customer, shareholder & employee satisfaction & to
play a leading role in the expanding & diversifying financial services sector, while continuing
emphasis on its Development Banking role.
The Loan Policy of the any bank has successfully withstood the test of time and with inbuilt
flexibilities, has been able to meet the challenges in the market place. The policy exits & operates
at both formal & informal levels. The formal policy is well documented in the form of circular
instructions, periodic guidelines & codified instructions, apart from the Book of Instructions,
where procedural aspects are highlighted.
The policy, at the holistic level, is an embodiment of the Banks approach to sanctioning,
managing & monitoring credit risk & aims at making the systems & controls effective.
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(i) Liquidity
Current Ratio (CR) of 1.33 will generally be considered as a benchmark level of liquidity.
However the approach has to be flexible. CR of 1.33 is only indicative & may not be deemed
mandatory. In cases where the CR is projected at a lower than the benchmark or a slippage in the
CR is proposed, it alone will not be a reason for rejection for the loan proposal or for the sanction
of the loan at a lower level. In such cases, the reason for low CR or slippage should be carefully
examined & in deserving cases the CR as projected may be accepted. In cases where projected CR
is found acceptable, working capital finance as requested may be sanctioned. In specific cases
where warranted, such sanction can be with the condition that the borrower should bring in
additional long-term funds to a specific extent by a given future date. Where it is felt that the
projected CR is not acceptable but the borrower deserves assistance subject to certain conditions,
suitable written commitment should be obtained from the borrower to the effect that he would be
bringing in required amounts within a mutually agreed time frame.
(ii) Net Working Capital
Although this is a corollary of current ratio, the movements in Net Working Capital are watched to
ascertain whether there is a mismatch of long term sources vis--vis long term uses for purposes
which may not be readily acceptable to the Bank so that corrective measures can be suggested.
(iii)Financial Soundness
This will be dependent upon the owners stake or the leverage. Here again the benchmark will be
different for manufacturing, trading, hire-purchase & leasing concerns. For industrial ventures a
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Total Outside Liability/ Tangible Net worth ratio of 3.0 is reasonable but deviations in selective
cases for understandable reasons may be accepted by the sanctioning authority.
(iv) Turn-Over
The trend in turnover is carefully gone into both in terms of quantity & valve as also market share
wherever such data are available. What is more important to establish a steady output if not a rising
trend in quantitative terms because sales realization may be varying on account of price
fluctuations.
(v) Profits
While net profit is ultimate yardstick, cash accruals, i.e., profit before depreciation & taxation
conveys the more comparable picture in view of changes in rate of depreciation & taxation, which
have taken place in the intervening years. However, for the sake of proper assessment, the non-
operating income is excluded, as these are usually one time or extraordinary income. Companies
incurring net losses consistently over 2 or more years will be given special attention, their accounts
closely monitored, and if necessary, exit options explored.
(vi)Credit Rating:
Wherever the company has been rated by a Credit Rating Agency for any instrument such as CP /
FD this will be taken into account while arriving at the final decision. However as the credit rating
involves additional expenditure, we would not normally insist on this and only use this tool if such
an agency had already looked into the company finances.
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Lending to Non-Banking Financial Companies (NBFCs)
Financing of infrastructure projects
Lease Finance
Letter of Credit, Guarantees & bills discounting
Fair Practices for lenders
5.3 CREDIT RISK ASSESSMENT
Risk: definition with reference to bank
Risk is inability or unwillingness of borrower-customer or counter-party to meet their repayment
obligations/ honor their commitments, as per the stipulated terms.
In the business world, Risk arises out of
Deficiencies / lapses on the part of the management (Internal factor)
Uncertainties in the business environment (External factor)
Uncertainties in the industrial environment (External factor)
Weakness in the financial position (Internal factor)
To put in another way, success factors behind a business are
Managerial ability
Favorable business environment
Favorable industrial environment
Adequate financial strength
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6. A case study on credit appraisal: case on Manufacturing
Industry
Company: - Paark Turbo Profiles Private Limited
Firm:-partnership
Industry: - Manufacturing
Activity: Manufacturing of Moving Blades, Nozzles, Welded Diaphragms, Nozzles Segments,
Guide Wheel Carriers, Grid Valves, Riorar Assembly, Base Plate, Exhaust Casings, Pump set,
Derater Heater, Storage Tank, Gas Tank, Columns, Separator Body and Heat Exchanger.
Segment:-C&I
Date of incorporation: - 15-01-1991
Banking arrangement: - Sole Banking
Regd Office: - Plot No. 12 of A3 and A4, Industrial Estate, Patancheru, Medak District.
Brief Background of the company
Paark Turbo Profiles Private Limited (PTPPL) was incorporated in Feb 1991 with an objective to
carry on the business of manufacturing of Moving Blades, Nozzles, , Welded Diaphragms, Nozzles
Segments, Guide Wheel Carriers, Grid Valves, Riorar Assembly, Base Plate, Exhaust Castings,
pump set, derater Heater, Storage Tank, Gas Tank, Columns, Separator Body and Heat Exchanger.
Shri Eechampati Siddhartha is the Managing Director of PTPPL.
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Shareholding pattern
SERIAL NO NAME OF THE SHAREHOLDER
% SHARE HOLDING
1. Shri E.Siddhartha 55
2 Shri Sanata Srikanth 30
3 Smt Sri Vani 15
Total 100
Industry Scenario
The major end-user industries for heavy engineering goods are power, infrastructure, steel, cement,
petrochemicals, oil & gas, refineries, fertilizers, mining, railways, automobiles, textiles, etc. Light
engineering goods are essentially used as inputs by the heavy engineering industry.
Key Growth Drivers of Indian Engineering Sector
The engineering sector in India has been growing on the back of growth in the user industries and several
new projects been undertaken in various core industries such as railways, power, infrastructure, etc.
Capacity creation in sectors such as infrastructure, oil & gas, power, mining, automobiles, auto
components, steel, refinery, consumer durables, etc, is driving growth of the engineering industry.
Growth of the key user industries
Governments thrust on the power and construction industries
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India being preferred by global companies as an outsourcing destination as it enjoys lower labour
cost and better designing capabilities
Heavy Engineering Sector
The heavy engineering sector can be classified into two broad segments capital goods/machinery (which
is further classified as electrical machinery/equipment and non-electrical machinery/equipment), and
equipment segments.
Electrical machinery includes the following: power generation, transmission and distribution equipments
such as generators and motors, transformers and switchgears. Non-electrical machinery includes
machines/equipments used in various sectors such as material handling equipments (earth moving
machinery, excavators, cranes, etc), boilers, etc
Heavy Electrical Industry
The fortunes of the heavy electrical industry have been closely linked to the development of the power
sector in India. The heavy electrical industry has under its preview power generation, transmission,
distribution and utilization equipments. These include turbo generators, boilers, turbines, transformers,
switchgears and other allied items. These electrical equipments (transformers, switchgears, etc) are used
by almost all the sectors. Some of the major areas where these are used include power generation projects,
petrochemical complexes, chemical plants, integrated steel plants, non-ferrous metal units, etc.
The existing installed capacity of India heavy electrical industry is 4,500 MW of thermal, 1,345 mw of
hydro and about 250 MW of gas-based power generation equipment per annum. The industry has the
capability to manufacture transmission and distribution equipment up to 400KV AC and high voltage DC.
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TNW & TOL/TNW:
The TNW of the unit is increasing and is estimated to increase further with infusion of additional
capital of Rs 3.6 crores. The company has already brought in Rs 2.44 crores which was invested in
fixed assets. Balance of Rs 116 lac will be brought by the end of Apl11. The gearing ratio is
expected to improve comfortably with infusion of capital in FY11 & FY 12 and retaining of profit
margins. The estimated increase in the gearing ratio in FY12 over FY11 is on account of expansion
and increase in term liabilities. However the ratio is expected to be well below the bench mark.
Current Ratio & NWC:
The current ratio is not on estimated lines and far below the bench mark level in Fy09 & 10.
However it is estimated to improve and will be above the bench mark level in FY11 with
improvement in NWC. The company is bringing in capital of Rs 50 lac in FY 12 and the ratio is
expected to improve further. The company has never defaulted in payment of its liabilities.
Movement in TNW (Past three years) (Rs in crs)
Year 2008 2009 2010
Opening TNW 0.94 1.18 1.43
Add PAT 0.24 0.17 0.18
Add. Increase in equity / premium 0.14 0.04
Add./Subtract change in intangible assets
Adjust prior year expenses
Deduct Dividend Payment
Closing TNW 1.18 1.48 1.65
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Synopsis of Balance Sheet
(Rs in crs)
Sources of funds Previous Year Last Year
2009 2010
Share Capital 0.30 0.39
Reserves and Surplus 1.18 1.26
Secured Loans : Short Term 0.16 0.60
: Long Term 0.68 0.00
Unsecured Loans 0.05 0.05
Deferred Tax Liability 0.00 0.00
Other Liabilities 0.00 0.00
Total 2.37 2.30
Application of Funds
Fixed Assets [Gross Block] 5.19 5.37
Less Depreciation 1.66 1.94
Net Block 3.53 3.43
CAPEX in Progress / Adv.to CAPEX 0.00 0.00
Investments 0.00 0.00
Inventories 0.04 0.01
Sundry Debtors 1.26 1.69
Cash & bank balances 0.19 0.16
Loans & advances to0.80 0.80
subsdiaries & group companies
Loans & advances to others 0.20 0.12
Total Current Assets 2.49 2.78
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[Less : Current Liabilities] 3.60 3.84
[Less : Current Provisions] 0.05 0.07
Total Current Liabilities 3.65 3.91
Net Current Assets -1.16 -1.13
Misc. Expenditure0.00 0.00
[To the extent not written off or adjusted]
Total 2.37 2.30
ASSETS 6.02 6.21
LIABILITIES 6.02 6.21
Current liabilities are more than current assets in FY09 & FY10 due to mounting of creditors which
includes creditors for capex. However the company has improved its liquidity position and the current
ratio is expected to be well above the bench mark with increased NWC and infusion of capital of Rs 50
lac for funding of current assets.
Risk Assessment
Credit Rating
Borrower rating Facility rating
WC 31.03.10 ABS TL (31.03.10) ABS Facilities Existing Proposed
CC(hyp) --- FR5
(70/100)
CRA SB7 65/100 SB7 69/100 TL -- FR6
(67/100)
@ECRA -- -- -- -- -- BG -- FR5
(66/100)
-- -- -- -- -- -- -- --
Others -- -- -- -- -- -- -- --
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The company presently manufacturing some components of turbines with its expansion it
is able to manufacture majority of components of power generation turbines.
6.2 Appraisal Memorandum for term loan:
Circle Hyderabad
Branch Saifabad Branch, Hyderabad
Company Paark Turbo Profiles Private Limited
TERM LOAN / DPG:
a) Proposal : Sanction for Term Loan of Rs.464 lac
b) Project / Purpose
To meet part cost of construction of Shed and Building and for purchase of Machinery for its
expansion project of manufacturing facility of Heavy Fabrication works.
c) Cost of Project & Means of finance
Project Cost amount
Land 144.00
Civil Construction 238.00
Plant & Machinery 445.00
Preliminary and Preoperative Expenses 15.00
Contingencies at 2% of P&M 15.00
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Margin for Working Capital 50.00
To Total 907.00
d) Means of Finance
Term Loan 464.00
Equity
360.00
Internal Accruals 83.00
Total 907.00
e) Remarks on Cost of the project & Means of finance:
The Total Project cost of the proposed expansion is Rs.907 lac and the company requires a
Term Loan of Rs. 464 lac with Promoters contribution of Rs. 443 lac which resulted in to a Debt Equity
Ratio as 1:1.28. The company has already increased its Authorized Capital to Rs 400 lac. They have
already brought in funds to the extent of Rs 244 lac (Rs 144 lac- Land purchase & Rs 100 lac for civil
constructions). Balance Capital of Rs 116 lac will be brought by Sri Eechampati Siddhartha Managing
Director -Rs 70 lac and Rs 46 lac by other directors by the end of Apl11.
The detail of each item of project cost is given below.
Details of Project Cost:
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Land: The company proposes the intended project in plot no. 23-c(part), part of Sy. No. 359 & 409
phase-I IDA Patancheru, Medak dt. Admeasuring 10030.07 sy yards. The company has purchased from
ARCIL in the auction by paying consideration of Rs 136 lac In 2007. The value of the land including
stamp duty is Rs 144 lac. Legal opinion from panel advocate indicates that the company holds absolute
clear and marketable title over the property.
Civil Works
Civil works consists of land development, civil constructions and fabrication of pre-engineered structure
required to construct the primary and secondary framing etc., the cost of civil work is estimated at Rs. 238
lac The Company is constructing shed and Building of area 36133.35 sq. ft of covered area. Cost of civil
works has been vetted by panel engineer. The cost of construction works out to be Rs 659 per sq.ft which
is considered reasonable. The company has already invested Rs 100 lacs for civil works. The same has
been certified by the Chartered Accountant.
Plant & Machinery
The cost of plant and machinery is estimated at Rs. 445 lac including taxes and erection charges.The
suppliers are standard suppliers of engineering machinery. The machinery includes import of second
Horizontal Boring Machine & Vertical Turrent Lathe Machine from Walter kames Germany. The life and
condition of the Machine will be certified by Chartered Engineer along with invoice which is required for
customs clearance. Opinion report on Walter kames Germany is being obtained from Dun & Bradstreet.
Preliminary & Preoperative Expenses
Preliminary Expenses is estimated at Rs. 15 lac and includes interest during construction and other
establishment expenses.
Contingencies
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The contingency is estimated at 2% of the plant and machinery and civil construction i.e. Rs. 15 lacs.
Margin for Working Capital:
The company has estimated 25% margin on Inventory and receivables to Rs.50 lacs.
Project Financing
Item Cost Margin% Contribution fromcompany
Bank finance
Land 144 100 144 --
Civil Construction 238 45.38 108 130
Machinery &Equipments
445 25 111 334
PreliminaryExpenses
15 100 15 --
Contingencies 15 100 15 --
WC Margin 50 100 50 --
Total 907 443 464
The promoters margin includes Equity of Rs 360 lac and Rs 83 lac internal accruals. The company has
already started the project work to stick on to the schedule and the amount expended by the unit will be
treated as their margin.
Production factors:
The proposed facility has been coming up at the companys newly acquired industrial land in Medak
Dist. where all the necessary infrastructural facilities are already available.
Raw material
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X22 CRMOV 1 and X 20 CR (Steel alloy bars) which are to be imported from Germany and they are
available at STAR WIRE Ltd. Gujarat and SNO3,5 & 6 and IS 2062 which are procured from Sail and
Gindal. In addition to above Steel Bars and sheets are needs which are available from local market.
Power
The company is installing 11 KV substation which is included in project cost and is also arranging
standby power supply with 500 KV Generator.
Water Sufficient Ground water through bore wells available.
Labour
Labour contractors are available locally for unskilled work.
Skilled staff: The activity requires ITI and Mechanical Engineers/Diploma Holders and the
company has already been in the process of employing the required employees for the new unit.
Marketing: The company receives orders from various units of BHEL, Triveni Engineering works ltd
Bangalore
Commercial Viability [` in crores]
2012 2013 2014 2015 2016 2017
Capacity utilization 80% 85% 85% 85% 85% 85%
Sales 8.86 12.83 15.15 16.18 17.21 18.36
Net Profit 1.06 1.61 1.95 2.08 2.22 2.40
Depreciation+Ammortised Exp.
0.64 0.50 0.40 0.38 0.34 0.28
Interest on Term Loan [s] 0.63 0.54 0.42 0.30 0.17 0.06
Less: Accruals used asMargin
0.00 0.00 0.00 0.00 0.00 0.00
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TOTAL 2.33 2.65 2.77 2.76 2.73 2.74
TL / DPG Repayments 0.44 0.88 0.88 0.88 0.88 0.68
Interest on Term Loan [s] 0.63 0.54 0.42 0.30 0.17 0.06
TOTAL 1.07 1.42 1.30 1.18 1.05 0.74
Gross DSCR 2.18 1.87 2.13 2.34 2.60 3.70
Average Gross DSCR 2.36
Average Net DSCR 2.99
The average gross DSCR is 2.36 and the cash generation in the project is comfortable to service the debt
and interest.
Security Margin
Particulars 2011 2012 2013 2014 2015 2016 2017
WDV of fixed assets 5.54 7.97 6.77 5.75 4.89 4.16 3.54
Agg. TL / DPG outstanding 4.64 4.2 3.32 2.44 1.56 0.68 0.00
Security Margin available 0.9 3.77 3.45 3.31 3.33 3.48 3.54
% of Margin 16.25 47.30 50.96 57.57 68.10 83.65 100.00
Security margins are adequate. It is initially high in 2010-11 as the company is debt free (long term) and
the estimated disbursement in 2011 is only Rs130 lac. Subsequently margin slips down to 47.30% in 2012
(as the disbursement of the entire term loan will be completed). However the margin is comfortable and
gradually increases in subsequent years.
Break Even Analysis (Rs in crores)
BREAK EVEN ANALYSISIst full yearof Year of highest
production capacity utilization
2013
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Capacity utilization [as % of IC] 85%
[A] Production Value in Sales 12.88
[B] Variable Expenses 8.01
[C] Contribution 4.87
[D] Fixed & Semi Variable Expenses 2.58
Operating Profit 2.29
Break Even Point [Sales] 6.82
Break Even Point [Installed Capacity] [%] 45.03%
Break Even Point [Cash] [%] 36.30%
Break even Analysis carried out for FY 2013 and the break even sales are at Rs 6.82 crores in value and
the margin of safety is 45.03%. As the margin of safety is below 50% it is considered acceptable for
engineering industry. Cash break even at an installed capacity is 36.30% which is below 50% and is quite
acceptable.
Sensitivity Analysis
PAARK TURBO PROFILES PRIVATE LIMITED
SENSITIVITY ANALYSIS
[` in crores]
2014 5% 5% 5%
Increase invariable cost.
decrease involume of sales
decreaseinsellingprice
Sales 15.15 15.15 14.39 14.39
Prod.Value of Sales 15.40 15.40 14.63 14.63
Less: Variable Cost 9.66 10.14 9.18 9.66
Contribution 5.74 5.26 5.45 4.97
Less Fixed Cost 2.96 2.96 2.96 2.96
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Break Even Sales 7.94 8.71 9.77 11.30
Gross DSCR 2.13 1.54 0.95 0.35
Sensitivity analysis indicates that the project can sustain adverse impact of decrease in volume of sales
upto 15% and increase in variable cost and decrease in selling price up to 15%
6.3 ASSESSMENT OF WC FACILITIES
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Inventory & Receivable levels :
[` in crores]
Inventory / Payments YR.BEFORELASTAUDITED
LAST YEAR CURRENTYEARESTIMATED
FOLLOWINGYEARPROJECTEDESTIMATED AUDITED
2009 2010 2011 2012
Raw Material
Imported [Amount] - - 1.00 1.30
[Months] - - 3.49 4.31
Domestic [Amount] - - - -
[Months] - - - -
Semi Finished Goods [Amount] - - 0.85 1.35
[Months] - - 2.22 2.75
Finished Goods [Amount] 0.04 0.01 - -
[Months] 0.11 0.03 - -
Receivables
Export [Amount] - - - -
[Months] - - - -
Domestic [Amount] 1.26 1.69 0.80 2.82
[Months] 2.71 4.22 1.49 3.82
Sundry Creditors
Import / Domestic [Amount] 3.23 3.52 0.35 0.45
[Months] 12.65 0.79 1.03
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Raw Materials & SIP
The company has started its activity in the beginning with job works for BHEL (BHEL used to
provide material). As such the company did not have any raw material and negligible level of SIP
in FY10. However they have started regular commercial operations four months back in FY11 on
the stipulations of various units of BHEL and other units at Bangalore and going for expansion in
view of the change in the style of activity and also going to add some more products to their
existing product profile. The RM SIP holding period is going to stabilize from 2012 onwards.
Receivables
The receivables are estimated at 1.49 M. However it is estimated to increase to 3.82 M in view of
the expansion and increase in sales.
Creditors
The amount of creditors includes creditors for CAPEX which is funded through long term sources
by bringing additional equity. In view of this the creditor realization period is estimated to improve
to 0.35 M in FY11 and it is increased by 0.45 M in Fy12 due to the expansion and increase of raw
materials required for finished goods.
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Assessed Bank Finance ( in crores)
Particulars 2010 2011 2012
LAST YEAR
AUDITED
CURRENT YEAR
ESTIMATED
Following Year
PROJECTED
Total Current Assets 1.98 3.27 6.86
Other Current Liabilities 3.91 1.17 2.25
Working Capital Gap -1.93 2.10 4.61
Net Working Capital -2.53 1.10 3.61
Assessed Bank Finance 0.60 1.00 1.00
NWC to TCA (%) -127.78 33.64 52.62
Bank Finance to TCA (%) 30.30 30.58 14.58
Other CL To TCA (%) 197.47 35.78 32.80
The ve NWC is due to utilization of short term sources for capex. However the NWC is expected
to improve with utilization of internal accruals for funding of current assets and brining of addition
equity of Rs 50 lacs in FY12. NWC will be prime funding factor of current assets from 2012
onwards which is a welcome sign.
AS PER NAYAK COMMITTEE RECOMMENDATIONS (in crores)
2011
1. Gross Turnover estimated for the year 6.45
2. Working Capital required [25% of 1] 1.61
3. Eligible Minimum Bank Finance - 80% of [2] 1.29
4. Borrower's Margin required - Minimum - 20% of [2] 0.32
5. Net Working Capital available -2.53
6. Additional Margin to be infused. 2.85
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The company is eligible for a fund based WC limit of Rs 1.29 crores as per Nayak Committee Method
while the company is requesting for renewal of the limits at enhanced level of Rs 1 crores.
Efficiency Ratios
ParticularsYR.BEFORE
LASTAUDITED
LAST YEAR CURRENTYEAR
ESTIMATED
FOLLOWINYEARPROJECTEDAUDITED
2009 2010 2011 2012
Net Sales to Total Tangible Assets 0.93 0.77 0.71 0.59
[]
PBT to Total Tangible Assets[%] 3.65% 4.03% 8.78% 9.98%
[]
Operating Cost to Sales [%] 87.00% 87.00% 76.00% 67.00%
[]
Bank Finance to Current Assets[%] 9.47% 30.30% 30.58% 14.58%
[]
Inventory / Net Sales + Receivables /Gross Sales[Days]
85 129 150 238
[]
Net Sales to TTA: The ratio is estimated to be lower than that of FY 10 in view of the increase in
current assets. This is due to change in the operations from job work to regular commercial sales. The
ratio is low in the year 2012 also due to the acquiring of fixed assets
PBT to TTA: The profitability shows upward trend.
Operating Cost to Sales: The operating cost to sales ratio shows decreasing trend.
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The other efficiency ratios are in sync with line of activity. The increase in INV+Rec/ net sales
for 2011 & 12 is due to change in the line of activity.
6.4Computation of BG limits
The company was sanctioned BG limit of Rs 10 lac as sub limit under CC (HYP) in the last
sanction. The company has not utilized the limits so far. But the company is requesting for
enhancement of the limit to Rs 100 lac as they will be required to furnish BG for performance of
the contracts awarded by units of BHEL as the activity is changed from job works to regular sales.
(Rs in lacs)
B G O/S as at 31.12.10 Nil
Estimated BGs requirement in next 12months ( performance)
10% of Rs 10 cr
100
Expiry of BGs in next 12 months Nil.
Requirement of BG limit 100
BG limit recommended 100
2010 2011 2012
Long Term Sources 0.55 6.01 5.58
Long Term Uses 0.96 2.38 3.07
Net Long Term Surplus -0.41 3.63 2.51
The long term deficit is on account of utilization of short term sources for CAPEX. However the
position is expected to improve in FY11 & FY12 with infusion of additional capital.
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6.5 COLLATERAL SECURITY
Primary: CC, BG & TL
S No Property details
1. Hypothecation of all chargeable current assets of the Company.
2. Charge over Plant & Machinery proposed to be acquired under bank finance
3. EM of all that piece of land belong to M/s Paark Turbo Profiles together withBuilding and Sheds to be built in Plot No. 23-C, (Part), part of Sy. No. 359 & 409,Phase I, IDA, Patancheru, Medak District, A.P. admeasuring 10030.07 Sq. Yards.
Collateral: CC, BG & TL
S No Property details Valuation as per Panel valuer dt.31.12.10
Branch AssessedValue
1. EM of Shed No. D -12, measuring area1540 Sq. Yards, built up area of 2735 Sft.In Sy. No. 15/part & 18/part situated atIndustrial Estate, Patancheru, G.P.Bandalguda, Dist. Medak, Patancheru
Municipality belonging to M/s PaarkTurbo Profiles Pvt Ltd
72.28 60.00
2 E.M of Plot No. 12/D, admeasuring 458.6Sq. Yards with Building and Shed in Sy.No. 419 & 435 situated at IndustrualEstate, Patancheru, Medak District,belonging to M/s. Paark Turbo ProfilesPvt Ltd
145.00 125.00
3. E.M. of Plot No. 12/A, admeasuring
377.6 Sq. Yards with Building and Shedsin Sy. No. 419 & 435 situated atIndustrial Estate, Patancheru, MedakDistrict, belonging to M/s Paark TurboProfiles Pvt Ltd
4. Hyp of Existing unencumberedMachinery WDV as on 31.03.10
148.11 148.11
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Total 365.39 333.11
Guarantees
NAME
Personal Guarantees of
NET WORTH
( Rs in lac) as on30.03.2010
1. Shri E.Siddhartha(As on 4.1.11) 187.00
2. Smt Shri Vani (As on 4.1.11) 21.00
3. Shri S.Srikanth ( As on 04.1.11 ) 78.00
Worth of the guarantors is net of collaterals and investment in the business.
Collateral percentage
For SBI : 50.16 %( 333.11/664)
For others : NA
(Besides the collateral, Bank has cushion of EM of 10030.07 Sq yards of project site which is taken as
primary security for bank exposure of Rs 100 lac towards civil structures. The document value of the land
itself is Rs 136.13 lac).
RATE OF INTEREST:
Facility CRAPricing
Comments, if
pricing differs
from CRA
Term Loan SB 7 7.25%above SBBR ---
Working Capital SB 7 6.50% above SBBR ---
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REPAYMENT SCHEDULE
The term loan is repayable in 22 quarterly installments starting from Dec 2011 as per schedule given
below. Interest is to be serviced on monthly basis.
PROCESSING FEE
1.50% of the loan amount for term loan ( Upfront fee) and Rs 400 per lac for WC limits
INSURANCE: All the chargeable assets of the company should be comprehensively
covered, with Banks Clause.
OTHER CRITICAL CONVENANTS: (These covenants are in addition to the Banks
standard covenants applicable to Working Capital limits).
The company shall provide copies of all statutory permissions obtained from the
regulatory authorities to the Bank.
Disbursement will be done progressively based on the certificates from Chartered
Civil Engineer & Chartered Accountant.
The promoters should finance any shortfall in project expenditure from their own
resources to ensure smooth implementation of the project.
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CHAPTER VII
FINDINGS
7. FINDINGS
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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 core activity of the banks and important source of their earnings which go to pay
interest to depositors, salaries to employees and dividend to shareholders
Credit and risk go hand in hand
SBI loan policy contains various norms for sanction of different types of loans and all
norms does not apply to each & every case
SBI norms for providing loans are flexible & it may differ from case to case
Banks main function is to lend funds/ provide finance but it appears that norms are taken
as guidelines not as a decision making
A bankers task is to identify/ assess the risk factors/ parameters and manage/ mitigate
them on continuous basis
The CRA models adopted by the bank take into account all possible factors which go into
appraising the risk associated with a loan and 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
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CHAPTER VIII
RECOMMENDATIONS AND
SUGGESTIONS
RECOMMENDATIONS AND SUGGESTIONS
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Banks has to grant the loans for the establishment of business at a moderate rate of interest. So that
the people can repay the loan amount to bank regularly and promptly.
The Bank should keep on revising its Credit Policy which will help Banks effort to correct the
course of the policies.
Insufficient data on the SMEs, the lack of credible published information about their financial
health, the high vulnerability of small players in a liberalizing market and the inadequacy of risk
management systems in banks are factors leading to higher NPAs and lower profitability than
potential in SME lending. This can be overcome by collection of authentic data on the SME
segment, educating the enterprises on the need for reliable financial data, evolving suitable risk
models and close monitoring of accounts by the bank.
Follow the tight set of rules and restrictions in assessing the working capital and term loan for the
sectors of those with higher NPAs
Extend the loans to the SMEs is the relationship-lending rule, where the lending partly bases its
decision on proprietary information about the firm and its owner through a variety of contacts over
time. The information may be gathered from such stakeholders as suppliers and customers, who
may give specific information about the owner of the firm or general information about the
business environment in which it operates.
SBI bank has to update the details of debtors to Credit Information Bureau of India Limited (CIBIL) so
that they can take necessary measures of not issuing or providing new loan.
There is a critical need to devote substantial resources to improving the skills and capabilities of
banks' lending officers, especially with regard to the analysis of the SMEs' financial statements.
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Understanding the nature of the borrower's business and the cash-flow required is paramount to
preventing the creation of NPAs.
They need to innovate their delivery platforms by using Internet banking, mobile banking and
card-based platforms for delivery of transaction-banking as well as credit products, and enhance
the service element. SMEs look for convenience and simplicity in their banking requirements and
banks should deliver these through an effective use of technology.
The Chairman and Managing Director/Executive Director should make modifications to the
procedural guidelines required for implementation of the Credit Policy as they may become
necessary from time to time on account of organizational needs.
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CHAPTER IX
CONCLUSION
9. CONCLUSION
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SBI load policy contains various norms for sanction of different types of loans. There all norms do
not apply to each & every case.
SBI 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, my conclusion was such that, in SBI, credit appraisal
system is not only looking for financial wealth. Other strong parameters also play an important role
in analyzing creditworthiness of the firm.
During the study at SBI I learnt how the theoretical financial analysis aspects are used in practice
during the working capital and term loan assessment.
I have realized during my project that a credit analyst must own multi-disciplinary talents like
financial, technical as well as legal.
The method of assessing working capital facilities is mainly done depending on the companys
segment. In my case study the company is eligible for a fund based WC limit as per Nayak
Committee Method.
the chance of getting project approved for loan depends on the technical, financial ecological and
managerial feasibility, Debt Service Coverage Ratio, Breakeven analysis and Collateral security.
The CRA models adopted by the bank take into account all possible factors, which go into
appraising the risk associated with a loan, these have been categorized broadly into financial,
business, industrial, and management risks & are rated separately.
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In the case study 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
played crucial role in getting project approved for loan
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CHAPTER X
BIBLIOGRAPHY
10. BIBLIOGRAPHY
WEBSITES
http://www.rbi.org.in
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http://www.sbi.co.in
http://www.indianbankassociation.com
http://www.bankersindia.com
http://www.iibf.co.in
http://www.projectfinancemagazine.com
http://en.wikipedia.org
http://www.iba.org.in
BOOKS
D. D. Mukherjee, Credit Appraisal, Risk Analysis and Decision Making, 5th edition, copy
right 2010, Snow White Publications Pvt Ltd
G. Vijayaragavan, Bank Credit Management, Himalaya Publishing House
IM Pandey (2005), Financial Management 9th edition, Vikas Publication House Pvt Ltd,
New Delhi
Brigham and Houston (2009),Fundamentals of Financial Management 10th edition, South
Western Cengage learning, USA
JOURNALS
Banks risk assessment of Swedish SMEs taken from journal Venture Capital, Vol.10, No.2, April
2008, pages 171-194 by Volker Bruns and Margaret Fletcher
97
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Delineating the predominant criteria for subcontractorappraisaland their latent relationships taken
from the journal Construction Management & Economics Mar, 2008, Vol. 26 Issue 3, p249-259 by
Thomas Ziwei and Tang
Debt financing of corporate enterprises in India: a study showing impact of industry, size and age
factors taken from the journalJournal of Advances in Management Research, Year: 2006, Vol. 3,
Issue: 2, p54-67 by Ashish Kumar Rastogi, P.K.Jain, Surendra S. Yadav
Biases in Appraising Creditworthiness taken from International Journal of Bank Marketing
Year: 1992 Vol. 10 Issue:3 p10-16 by Bala Shanmugam, Philip Bourke
The relationship between networking practices and business excellence: a study of small to
medium enterprises (SMEs) taken from the journal: Measuring Business Excellence, Year: 2003,
Vol. 7, Issue: 2, p78-92 by Mile Terziovski
Internationalization of SMEs in India: Fostering entrepreneurship by leveraging information
technology taken from the journal International Journal of Emerging Markets, Year: 2007, Vol.
2, Issue: 2, p166-180 by Patricia R. Todd, Rajshekar G. Javalgi
The Adoption of e-business and knowledge management in SMEs taken from journal
Benchmarking: An International Journal, Mar2007, Vol. 14, Issue: 1, p37-58 by S. Maguire, S. C.
L. Koh, A. Magrys
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