A

Grand Project Report

On
Working capital Appraisal by banks for SSI
Submitted by:
Mehul Patel (33)
M.Ayaz Shaikh (49)

Project Guide:
Prof. Falguni Pandya

-: Submitted to:A. E. S. Post Graduate

Institute of Business Management

In requirement of partial fulfillment of

Master of Business Administration (M.B.A)
2006-08

CERTIFICATE
This is to certify that Mr.Mehul Patel and Mr.MahammadAyaz shaikh, the
students of MBA 2nd year of A. E. S. Post Graduate Institute of Business
Management have completed their Grand Project Working capital Appraisal by
banks for SSI in the year 2006-2008 in partial fulfillment of Gujarat University
requirements for the award of the degree of Master of Business Administration.

-------------------------Dr. A. H. Kalro

--------------------Prof. Falguni Pandya

Executive Director

Grand Project Guide

ACKNOWLEDGEMENT
Every project big or small, is successful largely due to the efforts of a number of
wonderful people, who have always given their valuable advice or helping hand. We
sincerely appreciate the inspiration; support & efforts of all team members making this
project a success.

We would like to express our gratitude to our Project Guide Prof. Falguni Pandya, for her
inspiration to do this project and get a wonderful & beneficial experience of learning
things in an innovative way. By doing this project, we have gain the knowledge of project
financing which has provides the activities the financial institutes.

We would like to thanks to Mr.Anil Vasava, CRE (ME), State Bank of India, Ankleshwar
Branch who help us and providing information of R P Industries & preparing the
proposal. Without his help it could not be a possible to complete project.

We would like to thanks to Mr.Harish Chauhan who helped us to complete the project
and shared his knowledge with us.

Mehul Patel
M.Ayaz Shaikh

PREFACE
Selection of the project is one of the most ticklish jobs for the entrepreneurs. However
most of the entrepreneur would approach the financial institution after careful selection of
the product, process, market and financial analysis of the project. The promoter is
supposed to have carried detail study about the financial return from the project
In our project we decided to prepare working capital appraisal in the terms of bank point
of view. How bank decide to finance the particular organization? And which criteria bank
taking in account for the finance of working capital and Term loan.
With the help of State Bank of India, Ankleshwar, we have gone through analysis of R P
Industries, Panoli which want to working capital finance for the increase the capacity of
the plant.
In this project first we introduced concept of the working capital appraisal for the project
financing like why appraisal need, what appraisal state, what should be essential for the
working capital appraisal, what kind of criteria must be satisfied of the bank for the
finance. Reports also include legal issues which are important for the entrepreneur for the
starting of project.
We have also gives the brief view of the small scale industries, small medium enterprise
in term of their growth, opportunities and also made explanation of limitation and
inability in terms of economically and technology. The financial institutes in India which
have various schemes to encourage the entrepreneurs for the new venture with eligible
criteria.

In each and every project risk and return associates with it. The financial institute lending
the finance on the basis of credit of the firm after its credit assessment. This project also
provides the assessment method applied by bank.
This project contains the process of risk identifications process, method of risk
minimization and type of risk according to the project.

INDEX
Chapter 1. Working capital appraisal ....................................................1

Operating cycle and Analysis2

Cash requirement of Working Capital.4

Working Capital Management

o Cash Management
o Inventory Management
o Debtors Management
o Short term finance

Decision Criteria

Term loan

Working capital and its assessment7

Projected Annual Turnover Method for SSI units (Nayak committee)

Important Clarification
Appraisal
Margins
Projected annual turnover method for C&I industrial units
Projected annual turnover method for Business enterprise in trade &
services sector

Tandon and Chore committee recommendation10

MPBF METHOD

Approaching to lending

o FIRST METHOD
o SECOND METHOD
o THIRD METHOD

Projected Balance sheet method12

Importance of Security in Corporate Credit16
5

Chapter 2. Small Medium Industries21

Definitions of Micro, Small & Medium Enterprises21

Opportunities & Challenges for SMEs in India22

Limitation of SMEs 24

Reason for inability of SMEs to identify their technological need .25

Arranging finance for SSI units .26

Chapter 3. Due Diligence process of working capital appraisal .28

Framework For Due Diligence ..28

Salient Features ..28

Areas of Due Diligence ...29

General Assessment
People
The market
Process

Legal Due Diligence 34

Financial Due Diligence ..34

Chapter 4. Risk analysis in working capital appraisal 38

How to appraise Risk? 38

Introduction

Risk minimization process

Risk Based supervision of Bank .39

Background
Previous Approach
SBI-New Approach

Credit Risk Assessment ..41
Important of Credit Risk assessment

SBI Scenario
Why Types of Rating is Awarded to Loan Proposal?
How the various Risks measured?

Chapter 5. Case Study on R. P. Industry 46

Chapter 6. Conclusion .. 76

Chapter 7. Bibliography 77

Aims and Objectives

The aim of this project is To study theoretical and practical applied criteria of the Bank
to prepare working capital appraisal for SSI in terms of investment finance.
The objectives of the project are
1) To study the process that bank follows for the find out viability and feasibility of
the project.
2) To study the process that bank follows for the risk and credit assessment of firm
associates with working capital.

Chapter 1. Working capital appraisal

Working capital management is a significant facet of financial management. Its
importance stems from two reasons:

Investment in current assets represents a substantial portion of total investment.

Investment in current assets and the level of current liabilities have to be geared
quickly to changes in sales. To be sure, fixed asset investment and long term
financing are also responsive to variation in sales. However, this relationship is
not as close and direct as it is in the case of working capital components.

The importance of working capital management is reflected in the fact that financial
managers spend a great deal of time in managing current assets and current liabilities.
Arranging short term financing, negotiating favorable credit terms, controlling the
movement of cash, administering accounts receivable and monitoring the investment in
inventories consume a great deal of time of financial managers.
Working capital is divided into section like

Characteristics of current assets While managing working capital bear in

mind two characteristics of current assets: (i) short life span, and (ii) swift
transformation into other asset forms.

Factor influencing working capital requirements The working capital needs

of a firm are influenced by numerous factors. The important ones are:
o Nature of business The working capital requirements of a firm are closely
related to the nature of its business. A service of firm, like an electricity
undertaking or a transport corporation, which has a short operating cycle and
which sells predominantly on cash basis, has modest working capital
requirements. On the other hand, a manufacturing concern like a machine
tools unit, which has a long operating cycle and which sells largely on credit,
has very substantial working capital requirements. Relative proportions of
investment in current assets and fixed assets for certain industries.
o Seasonality of operations firms which have marked seasonality in their
operations usually have highly fluctuating working capital requirements. To
illustrate, consider a firm manufacturing ceiling fans. The sale of ceiling fans
reaches a peak during the summer months and drops sharply during the
winter period. The working capital requirements of such a firm are likely to
increase considerably in summer months and decrease significantly during
the winter period. On the other hand, a firm manufacturing a product like
lamps, which have fairly even sales round the year, tends to have stable
working capital requirements.
o Production policy A firm marked by pronounced seasonal fluctuations in
its sales may pursue a production policy which may reduce the sharp
variations in working capital requirements.
o Market conditions The degree of competition prevailing in the market
place has an important bearing on working capital needs. When competition
is keen, a large inventory of finished goods is required to promptly serve
customers who may not be inclined to wait because other manufactures are
ready to meet their needs. Further, generous credit terms may have to be
offered to attract customers in a highly competitive market. Thus, working
capital requirements tend to be high because of greater investment in finished
goods inventory and account receivable. If the market is strong and
competition weak, a firm can manage with a smaller inventory of finished
goods because customers can be served with some delay. Further, in such a
situation the firm can insist on cash payment, partial or total.
o Conditions of supply The inventory of raw materials, spares and stores
depends on the conditions of supply. If the supply is prompt and adequate,
the firm can manage with small inventory. However if the supply is
unpredictable and scant, then the firm, to ensure continuity of production,
would have to acquire stocks as and when they are available and carry larger
inventory, on an average. A similar policy may have to be followed when the

raw material is available only seasonally and production operations are

carried out round the year.

Operating cycle analysis

The investment in working capital is influenced by the following events in the
operating cycle of the firm:
o Purchase of raw materials
o Payment for raw materials
o Manufacture of goods
o Sale of finished goods
o Collection of cash for sales

The firm begins with the purchase of raw materials which are paid for after a delay which
represents the accounts payable period. The firms convert the raw materials into finished
goods and then sell the same. The time lag between the purchase of raw materials and the
sale of finished goods is the inventory period. Customers pay their bills some time after
the sales. The period that elapses between the date of sales and the date of collection of
receivables is the accounts payable period (debt period).

Operating Cycle

10

The time that elapses between the purchase of raw materials and the collection of cash for
sales is referred to as the operating cycle, whereas the time length between the payment
for raw material purchases and the collection of cash for sales is referred to as the cash
cycle. The operating cycle is the sum of the inventory period and the accounts receivables
period, whereas the cash cycle is equal to the operating cycle less the accounts payable
period.
From the financial statements of the firm, we can estimate the inventory period, the
account receivable period, and the accounts payable period.
Inventory period = average inventory / (annual cost of goods sold/ 365)
Accounts receivable period = average accounts receivable / (annual sales/ 365)
Accounts payable period = average accounts payable / (annual cost of goods sold / 365)

Cash requirements for working capital

Working capital management

Working capital (also known as net working capital) is a financial metric which
represents the amount of day-by-day operating liquidity available to a business. Along
with fixed assets such as plant and equipment, working capital is considered a part of
operating capital.
It is calculated as current assets minus current liabilities.
A company can be endowed with assets and profitability, but short of liquidity, if these
assets cannot readily be converted into cash.
Current assets and current liabilities include three accounts which are of special
importance. These accounts represent the areas of the business where managers have the
most direct impact:

accounts receivable (current asset)

inventory (current assets), and

accounts payable (current liability)

11

In a situation where a company carries more cash than the minimum amount needed to
maintain operations, the excess portion is usually excluded from working capital.
In addition, the current (payable within 12 months) portion of debt is critical, because it
represents a short-term claim to current assets. Common types of short-term debt are
bank loans and lines of credit.
An increase in working capital indicates that the business has either increased current
assets (that is received cash, or other current assets) or has decreased current liabilities,
for example has paid off some short-term creditors.
Decisions relating to working capital and short term financing are referred to as working
capital management. These involve managing the relationship between a firm's shortterm assets and its short-term liabilities. The goal of Working capital management is to
ensure that the firm is able to continue its operations and that it has sufficient cash flow to
satisfy both maturing short-term debt and upcoming operational expenses.

Decision criteria
By definition, Working capital management entails short term decisions - generally,
relating to the next one year periods - which are "reversible". These decisions are
therefore not taken on the same basis as Capital Investment Decisions (NPV or related, as
above) rather they will be based on cash flows and / or profitability.

One measure of cash flow is provided by the cash conversion cycle - the net
number of days from the outlay of cash for raw material to receiving payment
from the customer. As a management tool, this metric makes explicit the interrelatedness of decisions relating to inventories, accounts receivable and payable,
and cash. Because this number effectively corresponds to the time that the firm's
cash is tied up in operations and unavailable for other activities, management
generally aims at a low net count.

In this context, the most useful measure of profitability is Return on capital

(ROC). The result is shown as a percentage, determined by dividing relevant
income for the 12 months by capital employed; Return on equity (ROE) shows
this result for the firm's shareholders. Firm value is enhanced when, and if, the
return on capital, which results from working capital management, exceeds the
cost of capital, which results from capital investment decisions as above. ROC
measures are therefore useful as a management tool, in that they link short-term
policy with long-term decision making.

Management of working capital

12

Guided by the above criteria, management will use a combination of policies and
techniques for the management of working capital. These policies aim at managing the
current assets (generally cash and cash equivalents, inventories and debtors) and the short
term financing, such that cash flows and returns are acceptable.

Cash management. Identify the cash balance which allows for the business to
meet day to day expenses, but reduces cash holding costs.

Inventory management. Identify the level of inventory which allows for

uninterrupted production but reduces the investment in raw materials - and
minimizes reordering costs - and hence increases cash flow.

Debtors management. Identify the appropriate credit policy, i.e. credit terms
which will attract customers, such that any impact on cash flows and the cash
conversion cycle will be offset by increased revenue and hence return on Capital.

Short term financing. Identify the appropriate source of financing, given the
cash conversion cycle: the inventory is ideally financed by credit granted by the
supplier; however, it may be necessary to utilize a bank loan (or overdraft), or to
"convert debtors to cash" through "factoring".

Term Loan

A term loan is granted for a fixed term of not less than three years intended normally for
financing fixed asssets acquired/to be acquired with a repayment schedule normally not
exceeding 8 years.
A term loan is a loan granted for the purpose of acquisition of capital assets, such as
purchase of land, construction of, buildings, purchase of machinery, modernization,
renovation or rationalization of plant, and repayable from out of the future earnings of the
enterprise, in installments, as per a prearranged schedule.
From the above definition, the following difference between a term loan and the working
capital credit afforded by the bank are apparent:
I.

The purpose of the term loan is for acquisition of capital assets.

II.

The term loan is an advance not repayable on demand but only in installments
ranging over a period of years.

III.

The repayment of term loan is not out of the sales proceeds of the goods and
commodities per se, whether given as security or not. The repayment should
come out of the future cash accruals from the activity of the unit.

IV.

The security is not the readily saleable gods and commodities but the fixed
assets of the units.
13

It may thus be observed that the scope and operation of the term loans are entirely
different from those of the conventional working capital advances. The banks
commitment is for a long period and the risk involved is greater. An element of risk is
inherent in any type of loan because of the uncertainty of the repayment. Longer the
duration of the credit, greater is the attendant uncertainty of repayment and consequently
the risk involves also becomes greater.
However, it may be observed that term loans are not so lacking in liquidity as they appear
to be. These loans are subject to a definite repayment programme unlike short term loans
for working capital (especially the cash credits) which are being renewed year after year.
Term loans would be repaid in regular way from the anticipated income of the industry
trade.
These distinctive characteristic of term loans distinguish them from the short term credit
granted by banks and it becomes necessarily therefore, to adopt a different approach in
examining the applications of borrowers for such credit and for appraising such
proposals.
The repayment of term loan depends on the future income of the borrowing unit. Hence,
the primary task of the bank before granting term loans is to assure itself that the
anticipated income from the unit would provide the necessary amount for the repayment
of the loan. This will involve a detailed scrutiny of the scheme, its financial aspects,
economic aspects, technical aspects, a projection of future trends of outputs and sales and
estimates of cost, returns, flow of funds and profits.

Working capital and its assessment

Projected Annual Turnover Method for SSI units

(Nayak committee)

For SSI units which enjoy fund based working capital limits up to Rs. 5 cr, the minimum
working capital limit should be fixed on the basis of projected annual turnover. 25% of
the output or annual turnover value should be computed as the quantum of working
capital required by such unit. The unit should be required to bring in 5% of their annual
turnover as margin money and the bank shall provide 20% of the turnover as working
capital finance. Nayak committee guidelines correspond to working capital limits as per
the operating cycle method where the average production/ processing cycle is taken to be
3 months.

IMPORTANT CLARIFICATIONS:
I.

The assessment of WC limits should be done both as per projected turnover

method and the traditional method, wherever applicable as given in the Table
14

on Methods and Application; and the higher of the two is to be sanctioned

as credit limit. If the credit requirement based on production/ processing cycle
or projected balance sheet method is higher than the one assessed under
Nayak committee method, the same (meaning that the limit arrived as per
traditional/ PBS method) may be sanctioned, as Nayak Committee guidelines
stipulate bank finance at a minimum of 20% of the projected turnover on the
other hand, if the assessed credit requirement is lower than the one assessed
under Nayak committee method, while the credit limit can be sanctioned at
20% of the turnover actual drawals may be allowed on the basis of drawing
power to be determined by the banks after excluding unpaid stocks.

II.

If the operating cycle is more than three months, there is no restriction on

extending finance at more than 20% of the turnover provided that the
borrower should bring in proportionally higher stake in relation to his
requirement of bank finance.

III.

The projected turnover/ output value may be interpreted as projected gross

sales which will include excise duty also.

IV.

While the approach of extending need based credit will be kept in mind, the
financial strengths of the unit is also important, the later aspect assumes
greater significance so as to take care of the quality of banks assets. The
margin requirement, as a general rule, should not be diluted.

Appraisal
I.

It is to be ensured that the projected annual turnover is reasonable and

achievable by the unit and further, the estimated growth if any over the
previous year is realistic.

II.

The returns filed with statutory authorities may be useful guiding documents
for verification of sales & assessment of reasonableness of the projections.

III.

The entire proceeds should be routed through the cash credit account of the
bank.

IV.

Date of actual sales pertaining to the last five years, estimated for the current
year, and projected for the next year, together with trend analysis of the
industry to which the unit belongs, would also be useful while appraising the
sales projections.

15

V.

Other information regarding modernization, expansion of the existing

manufacturing capacity, government policies, taxation and other relevant
internal and external factors also need to be taken into account.

VI.

Any projection say beyond 15% of the previous year actual or current year
estimates would need closer look.

MARGINS
I.

The SSI units would be required to bring in 5% of their annual turnover as

their margin money for meeting the working capital. The margin will be
1/5th of the working capital required, except in cases of units financed
under entrepreneur scheme and sick units.

II.

If however, excess liquid surplus is available, the proportion of the

borrowers margins to the bank finance may be higher than the 1:4 ratio
stipulated.

III.

Besides the liquid surplus as above, the units debt-equity ratio should be
within the acceptable range.

IV.

Sundry creditors, and advance payments received will not be reckoned

towards margin of 5%, mentioned above.

Projected annual turnover method for C&I industrial units (limit up to 5 cr)
Bank has decided to extend Nayak committee approach for assessment of limit to C&I
industrial units requiring credit limit up to rs.5 cr of C&I borrower may be assessed at a
minimum of 20% of projected annual turnover .in other words the working capital

16

requirement will be assessed at 25% of projected annual turnover, of which 5% should be

borne by entrepreneur as a margin and 20% would be allowed as ban drawings.
Projected annual turnover method for Business enterprise in trade & services
sector:

I.
For working capital limits up to Rs.5 cr to C&I (trade) sector, the
assessment of credit limit is to be based upon annual turnover be offered to
business enterprises in the T&S sector. It would be available for utilization
generally as a cash credit limit.

II. The credit limit would be secured by hypothecation charge on the current
assets of the enterprise. Periodical stock statements are to be obtained and margin
of 25% be retained.

III. Credit limits under this assessment method may be offered to established
(at least 3 years old) profit making business enterprises, eligible for credit rating
of SB-4 and above. Mortgage of property valued at least at 33% of the limit is to
be prescribed. Further, an interest rebate of 0.50% p.a. may be given to borrowers
who offer mortgage of property valued at over 75% of the credit limit.

IV.
While accepting projected annual sales turnover a cap 25% over actual
annual sales turnover in the immediately preceding year should be set.

V.

When borrower indicate need for credit limit which are higher than the
amount indicate above, assessment under the traditional PBS method may
be resorted to.

Tandon and Chore committee recommendation

Till the year 1996-97, banks in India were following the concept of maximum
permissible bank finance (MPBF) for working capital limit, as enunciated in Tandon
committee and chore committee report. In the monetary and credit policy for the first half
of 97-98, RBI announced withdrawal of their guidelines on assessment of working capital
finance based on the MPBF concept. State bank of India felt that many aspect of the
CMA (Credit monitoring arrangement) followed till then, were based on sounds
principles of lending. Hence, while there was a need to continue to adopt these, certain
flexibility was required to be brought in to the method to avoid and rigid approach to
fixing the quantum of finance. In the area of supervision, there was a need to rationalize

17

the existing financial follows up procedure. As a consequence, the bank adopted the
projected balance sheet method in the second half of the year 1997-98 onwards.
Before we discuss this method, it would be useful to understand the earlier concept of
MPBF.
MPBF METHOD
The tandon committee was appointed to suggest a method for assessing the working
capital requirements and the quantum of bank finance. Since at that time, there was
scarcity of banks resources, the committee was also asked to suggest norms for carrying
current assets in different industries so that bank finance was not drawn more than the
minimum required level. The committee was also asked to devise an information system
that would provide, periodically, operational data, business forecasts, production plan and
the resultant credit needs of units. Chore committee, which was appointed later, further
refined the approach to working capital assessment. The MPBF method is the fall out of
the recommendations made by Tandon and chore committees.
Tandon committee also recommended inventory/ receivable norms for 22 major
industries.

Approaching to lending
Regarding approach to lending, the committee suggested three methods for assessment of
working capital requirements.
FIRST METHOD
The quantum of banks short-term advances will be restricted to 75% of working capital
gap where working capital gap is equal to current assets minus current liabilities
other than bank borrowings. Remaining 25% is to be met from long term sources (net
working capital)
MPBF=0.75(CA-CL)

SECOND METHOD
Networking capital should at least be equal to 25% of total value of acceptable level of
current assets. The remaining 75% should first be financed by other current liabilities
(OCL) and the bank may finance balance of the requirements.
MPBF=0.75(CA)-CL
THIRD METHOD

18

The borrower should provide for entire core current assets and 25% balance current
assets from the networking capital.
To compute the level of working capital requirement of the unit, the analyst has to assess
the level of current assets it has to carry, consistent with its projected level of production
and sales. Inventory and receivables constitute most of the current assets. On the basis of
the committee report, RBI gave inventory norms and advised the banks to decide the
levels of inventory and receivables taking in to account, production, processing cycles
and other relevant factors.
The computed of bank finance is facilitated by CMA forms prescribed by RBI. The
format provides, a fund of information/ data to the banker in respect of the past, present
and future financial position of borrower. CMA formats are used in the projected balance
sheet method also.

MPBF=0.75(CA-CCA)-CL

Where CCA= Core current assets

Projected Balance sheet method (PBS)

The PBS method of assessment will be applicable to all C& I borrowers who are engaged
in manufacturing, services and trading activities, including merchant exports and who
require fund based working capital finance of Rs 25 lacs and above. In the case of SSI
borrowers, who require working capital limit up to Rs 5 cr, the limit shall be computed on
the basis of Nayak Committee formula as well as that based on production and operating
cycle of the unit and the higher of the two may be sanctioned. Fund based working
capital credit limits beyond Rs 5 cr for SSI units shall be computed in the same way as
for C & I units. For business enterprises in trade and services sector, where the projected
turnover method is not applicable. PBS method shall be followed.

In the project balance sheet method, the borrowers total business operations,
financial position, management capabilities etc. are analyzed in detail to assess
the working capital finance required and to evaluate the overall risk of the
exposure. The following financial analysis also to be carried out:
a. Analysis of the borrowers profit and loss account, balance sheet,
funds flow etc. for the past periods done to examine the
profitability, financial position, financial management, etc. in the
business.

19

b. Detailed scrutiny and validation of the projected income and

expense in the business and projected changes in the financial
position (source and uses of funds) are carried out to examine if
these are acceptable from the angle of liquidity, overall gearing,
efficiency of operations etc..

There will not be a prescription like mandatory minimum current ratio or

maximum level of a current asset (inventory and receivables holding level norms)
under PBS method.
Under the PBS method, assessment of WC requirement will be carried out in
respect of each borrower with proper examination of all parameters relevant to the
borrower and their acceptability. The assessment procedure is as follows:

Collection of financial information from the borrower

Classification of current assets(CA) / current liabilities (CL)

Verification of projected levels of inventory / receivables / sundry creditors

Evaluation of liquidity in the business operation

Validation of bank finance sought

Assessment of limits for purchase of bills drawn under letter of credit (LCs)

Fixing of sub limits,

Collection of financial data

For working capital assessment, the required financial data are obtained from the
borrower in the following forms:
Form I: Particulars of existing / proposed limits from the banking system
Form II: Operating statement
Form III: Analysis of balance sheet
Form IV: Comparative statement of CA / CL

20

Information provided in the forms II, III and IV serves the detailed financial analysis. In
Form I, in addition to information relating to working capital and term loan borrowings
(existing and proposed) information regarding borrowings from NBFCs, borrowings from
term leading institutions for WC purposes, Inter Corporate Deposits taken, lease finance
availed will also be collected.
In addition a borrower also has to provide balance sheet projections as on an intermediate
date for fixing limits needed at the peak level of operations.
In respect of traders and merchant exporter who required bank finance of Rs. 100 lacs
and above, data will be collected in the CMA forms applicable to them.

Classification of current assets and current liabilities (Form III analysis of Balance
Sheet):
From the data presented in published balance sheet of a borrower, their Current Assets
and Current Liabilities are analyzed as per the classification is done to arrive at the
current ratio and net working capital of the borrowers to evaluate their liquidity.
Broadly speaking, current liabilities would include items payable or expected to be turned
over within one year from the date of balance sheet and the term is used principally to
designate obligations whose liquidation is reasonably expected to require the use of
resources properly classified as current assets or the creation of other current liabilities.
The term current assets is used to designate cash and other assets or resources commonly
identified as those which are reasonably expected to be realized in cash or sold or
consumed or turned over during the operating cycle of the business usually not exceeding
one year.
1. Current Liabilities would include estimated or accrued amounts which are
anticipated to cover expenditure within the year. Known obligations, the
amounted which can he determined only approximately, as for example,
provisions, accrued bonus payment, taxes etc., are also classified as current
liabilities.
2. In cases where specific provisions have not been made for these liabilities and
will be eventually paid out of general reserves, estimated amount should be
shown as current liabilities.
3. Investments in shares and advances to the firms / companies, not connected with
the business of the borrowing firm should be excluded from current assets.
4. Dead inventory i.e. slow moving or obsolete items should not be classified as
current assets.

21

5. Amounts representing inter-connected company transactions should be treated as

current only after examining the nature of transactions and merits of the case. For
example, advance paid for suppliers for a period more than the normal trade
practice, in spite of any other considerations such as regular and assured supply
should not be considered as current.
6. Advance / progress payments from customers Where on account of different
accounting procedure progress payments received are shown on the liabilities side
with out deduction from work in progress payments may be set off against workin-process. Outstanding advance payments received are to be reckoned as current
liabilities or otherwise, depending upon whether they are adjustable within a year
or later.
7. Deposits from dealers selling agents etc. These deposits may be treated as term
liabilities irrespective of their tenure if such deposits are accepted to be repayable
only when the dealership/ agency is terminated. The deposits which do not satisfy
the above condition should continue to be classified as current liabilities. Security
deposits/ Tender deposits made by the unit may be classified as non-current
assets.
8. Provision for taxation Netting of tax provision and advance tax paid may be
effected for all the years uniformly and, as such, for the current year also the
advance tax paid can be set off against the provision, if any made for that year.
9. Sales-tax, excise etc. Provision for disputed excise duty, for example, should be
classified as current liability, unless the amount is payable in installments spread
over a period exceeding one year are classified as long-term liability, no objection
may be taken to such classification. Where the provision made for disputed excise
duty is invested separately say in fixed deposits with banks, such provision may
be set off against the relative investment.
10. Other consumable spares Projected levels of spares on the basis of past
experience but not exceeding 12 months consumption of imported items and 9
months consumption for

11. Indigenous items may be treated as current assets for the purpose of assessment of
working capital requirements.
12. Bills negotiated under L/Cs The facility for purchase of demand and usance
bills drawn under LCs will be computed outside the main assessment of working
capital finance. Therefore, receivables in the form of sale bills (inland/ export)
drawn under LCs need not be included in Current Asset in Form III.
Correspondingly, bank borrowings in the form of LC bill purchase limits will not
be included in the projected in the bank finance under current liabilities. Bank

22

finance through LC bill purchased will, however, be shown separately as

contingent liability under the additional information in Form III.
13. Cash margin for LCs and Guarantees: - Margins deposits for LCs and guarantees
relating to working capital will be included in the current assets.
14. Investments Fixed deposits with banks and trustees securities are to be classified
as current assets. In addition, temporary investment of a borrower in SBIMF, and
money market instrument like Mme, CP, CD etc. which are for the purpose of
parking short term surplus will also be classified as current assets. All other
investments like inter corporate deposits, investments in shares and debentures
will be classified as non current assets.


CLASSIFICATION OF CURRENT ASSETS AND CURRENT LIABILITIES
(Form III Analysis of Balance Sheet) :
From the data presented in published balance sheet of borrower, their current assets and
current liabilities are analyzed as per the classification given in Form III. The
classification is done to arrive at the current ratio and net working capital of the
borrowers to evaluate their liquidity.
Broadly speaking, current liabilities would include items payable or expected to be turned
over within year from the date of balance sheet and the term is used principally to
designate obligations whose liquidation is reasonably expected to require the use of
existing resources properly classified as current assets or the creation of other current
liabilities. The term current assets is used to designate cash and other assets or resources
commonly identified as those which are reasonably expected to be realized in cash or
sold or consumed or turned over during the operating cycle of the business usually not
exceeding one year.
1) Current liabilities would include estimated or accrued amounts which are
anticipated to cover expenditure within the year. Known obligations, the amount
of which can he determined only approximately, as for example, provisions,
accrued bonus payment, taxes etc., are also classified as current liabilities.
2) In cases where specific provisions have not been made for these liabilities and
will be eventually paid out of general reserves, estimated amounts should be
shown as current liabilities.

Importance of Security in Corporate Credit

A banker who has taken the deposits of customers cannot rest by keeping the money
received under lock and key in safety vault. The banker has to pay interest to the
depositors along with the repayment of principal. Therefore, the banker has to use
deposits and earn interest. A banker has to either invest the money received by way of

23

deposits in securities such as bonds or lend the money to a borrower. The major portion
of banks funds is employed by way of loans and advances because it is the most
profitable method of deployment of the funds of the bank.
It is very important that the funds lent by a bank, by way of loans and advances must
return to the bank in the form of proper repayment of the loans. The amount repaid is
both principle and interest. To ensure that the loans and advances of the bank are properly
repaid, bankers generally insist on securities, in the form of:

Personal guarantee of a reputed third person

Security of assets which can be independently realized

Bankers insist on either one or both of the preceding securities. Personal guarantee of a
third person ensures that in case the borrower does not repay the loan according to the
agreement, the bank can look upon the guarantor to realize the banks dues. When some
security is offered to the banker, the banker can independently realize dues by taking
possession and selling the goods or property. The security offered to a banker may
consist of the following:

Land and building

Shares and securities

Goods and commodities

Life insurance policies

Generally, secure advances are advances in which the banker gets certain rights in the
assets of either the borrower or the guarantor over which a charge is created. The charge
over the asset is created over an asset in favor of a bank, the bank can arrange for the sale
of the assets and realize it dues in case the borrower fails to repay the advance. There are
several methods of creating a charge over an asset in favor of the bank. The methods are:


Lien

Pledge

Hypothecation

Mortgage

Assignment

Lien

24

This is one of the importance rights conferred upon the banker under section 171 of the
Indian Contracts Act, 1872 which states that bankers may, in the absence of a contract the
contrary, retain as a security any goods bail to them.
The salient features of bankers lien are:

Bankers can exercise their right of lien on all goods and securities in their
possession in their capacity as bankers. In case of articles that are deposited with
the banker for safe custody they cannot exercise the right of lien over it.

There is no need for any separate agreement in favor of the banker of creating a
right of general lien. In fact, section 171 of the Indians Contracts Act confers the
right of general lien upon the banker.

There must be no contract between the customer and the banker which prohibits
or restricts or is inconsistent with the bakers right of lien.

Bankers have the power to sell the goods and securities under lien in case of
default by the borrower and such a power is called an implied pledge.

Bankers cannot exercise lien over securities owned by the borrower jointly with
another person, for example with a brother.

Pledge
Under pledge the borrower hands over possession of goods to the bank. The definition of
pledge according to section 172 of the Indian contract act, 1872 is bailment of goods as
security for payment of debt.
The salient features of pledge are:

Under pledge, the ownership of the goods remains with the borrower but the
possession of the goods is in the hands of the banker.

When the loan is fully repaid the banker must handover possession of goods
pledge back to the borrower.

Right of sales means that in case the loan is not repaid, the bank can sell the
pledged goods after giving adequate notice of sale to the borrower / pledgor.

Delivery of possession of goods may also be symbolic as in the case of a godown

receipt issued by a central warehousing corporation.

25

Under section 151 of the Indian contract act, banks are responsible to take care of
the goods in their possession and return them to the borrower when the loan is
repaid. The bank is bound to take as much care of the goods pledges as a man of
ordinary prudence would be under similar circumstances.

In view of the preceding provision the banker should be cautious about maintaining the
goods under pledged in proper condition.

Hypothecation
Under hypothecation, both possession and ownership of the goods are with the borrower
only. When the borrower creates a charge of hypothecation in favor of the bank, by
executing a hypothecation agreement, the bank gets right to take possession of the goods,
sell them by auction and realize dues, in case the borrower fails to repay the loan.
There is difference between pledge and hypothecation. While under pledge possession is
handed over to the bank under hypothecation possession is retained with the borrower.
The bank normally displays a board on the premises where the goods are stored.
The borrower normally submits a stock statement once in a fortnight or a month
indicating the details of the stocks and its present value. The banker should conduct a
periodic inspection of the stocks to ensure that the borrower does not sell the stocks and
misappropriate the money.

Mortgage
The preceding three charges are possible in the case of movable goods. In the case of
immovable properties such as land and building the charge has to be created by way of
mortgage. When the borrower wants a housing loan, the borrower creates mortgage over
the house in favor of the bank. Section 58 of the transfer of property act defines mortgage
as:
Transfer of an interest in specific immovable property for the purpose of securing the
payment of money, to be advance by way of loan.
Therefore, in case of mortgage both the ownership and possession continues to remain
with the borrower and only a special right of a mortgage is created in favor of the bank.
The main features of a mortgage are:

Under mortgage, the immovable property remains charged to the bank until the
loan continues. When the loan is closed the bank must transfer the right of
ownership absolutely to the borrower.

26

The property to be mortgaged must be specific by giving clear description of the

property.

During the subsistence of the mortgage the borrower can not sell the property
without the consent of the bank.

In case the borrower fails to repay the loan the bank can sell the mortgaged
property and realize its due after giving adequate notice to the borrower.

WORKING CAPITAL APPRAISAL

MACRO LEVEL
Overall economics conditions of the
country in which the venture will be
established.

MICRO LEVEL
The demand of the product.

The industry structure of the venture.

Infrastructure availability.

The strength of the national currency.

Price stability of basis raw material.

The political stability of the country

Guesstimates of sales for three years.

The geographical condition of the country

and the countries in which the output will
be sold

Financial statement of three years

27

28

Chapter 2.
Small medium Enterprise- An Introduction

Small - and medium-scale enterprises (SMEs) occupy an important and strategic place in
economic growth and equitable development in all countries. Constituting as high as 90%
of enterprises in most countries worldwide, SMEs are the driving force behind a large
number of innovations and contribute to the growth of the national economy through
employment creation, investments and exports. Their contribution to poverty reduction
and wider distribution of wealth in developing economies cannot be underrated.
The Working Group has tried to look at SMEs from the view-point of S&T interventions,
examined the global scenario of SMEs, status of the Indian perspective, looked into
various schemes in existence in India and finally suggested ways to improve the health of
SMEs and impart them an edge to compete in the global market.
According to the newly enacted Micro, Small and Medium Enterprises Development Act
2006, which will come into effect from October 2, 2006, enterprises are classified into
Micro, Small and Medium according to the following criteria

Type of enterprise Engaged in

Manufacture or production of goods

Engaged in providing or rendering of services

Definitions of Micro, Small & Medium Enterprises

In accordance with the provision of Micro, Small & Medium Enterprises Development
(MSMED) Act, 2006 the Micro, Small and Medium Enterprises (MSME) are classified
in
(a) Manufacturing EnterprisesThe enterprises engaged in the manufacture or production of goods pertaining to any
industry specified in the first schedule to the industries (Development and regulation)
Act, 1951). The Manufacturing Enterprise are defined in terms of investment in Plant &
Machinery.
(b) Service Enterprises: The enterprises engaged in providing or rendering of services
and are defined in terms of investment in equipment.

29

The limit for investment in plant and machinery / equipment for manufacturing / service
enterprises, as notified, vide S.O. 1642(E) dtd.29-09-2006 are as under:

Manufacturing Sector
Enterprises
Micro
Enterprises
Small
Enterprises
Medium
Enterprises

Investment in plant & machinery

Does not exceed twenty five lakh rupees
More than twenty five lakh rupees but
does not exceed five crore rupees
More than five crore rupees but does not
exceed ten crore rupees

Service Sector
Enterprises
Micro
Enterprises
Small
Enterprises
Medium
Enterprises

Investment in equipments
Does not exceed ten lakh rupees:
More than ten lakh rupees but does not
exceed two crore rupees
More than two crore rupees but does not
exceed five core rupees

Opportunities & Challenges for SMEs in India

Major policy reforms aimed at substantially deregulating industrial sector and liberalizing
foreign investment as well as technology imports, have been the most significant
development in India since 1991.The post liberalization era in the Indian economy has
enhanced opportunities and challenges for the small industries sector.
The following factors strengths coupled with opportunities work in favor of Indian
SMEs
High contribution to domestic production
Significant export earnings
Low investment requirements
Operational flexibility
Location wise mobility
30

 Low intensive imports

Capacities to develop appropriate indigenous technology
Import substitution
Contribution towards defense production
Technology oriented industries
Competitiveness in domestic and export markets
By the very nature of their operations, industrial units in the small-scale sector enjoy
certain inherent advantages over their larger counterparts. The free economy ushers in
accessibility to bigger markets, greater linkages for SMEs with larger companies and
marketing outfits, improved manufacturing techniques and processes.
Various measures adopted by Government of India, Reserve Bank of India and SIDBI
have attempted to alleviate the problems of SME sector. These initiatives coupled with
other developments in the economic environment will enhance the prospects of SMEs.
With increasing globalization and entry of multinationals, immense opportunities have
been created for outsourcing, sub-contracting and ancillarisation of the products
manufactured by corporates particularly in non-core sectors like automobiles, engineering
and consumer electronics.
A vibrant SME sector can derive maximum benefit of these developments. By its less
capital intensive and high labor absorption nature, SME sector will make significant
contributions to employment generation and also to rural industrialization. This sector is
ideally suited to build on the strengths of the traditional skills and knowledge, by infusion
of technologies, capital and innovative marketing practices. This is the opportune time to
set up projects in the small-scale sector.
This expectation is based on an essential feature of the Indian industry and the demand
structures. The diversity in production systems and demand structures will ensure long
term co-existence of many layers of demand for consumer products/ technologies/
processes. There will be flourishing and well grounded markets for the same product/
process, differentiated by quality, the value added and sophistication.
This characteristic of the Indian economy will allow complementary existence for
various diverse types of units. However, the SMEs in India, which constitute more than
90% of the total number of industrial enterprises and form the backbone of industrial
development, continue to be in technological backwaters vis--vis advances in science
and technology. These suffer from problems of sub optimal scales of operations and
technological obsolescence.

31

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
for their requirements, unfortunately, this capacity is conspicuously missing in most
SMEs.
It is these features of SMEs that make them an ideal target for technological up gradation
through technological cooperation with larger enterprises, with R&D institutions,
academic institutions and canters of technology development. As the countries merge into
a global village, these SMEs will have to respond accordingly and thus deserve special
attention.
To enable SMEs to mitigate problems of technological backwardness and enhance their
access to new technologies, it is imperative to give them a conducive environment, which
in the present context of globalization, calls for redefining approaches with knowledge
(Innovation, Technology, Entrepreneurship) playing a predominant role.

Limitations of SMEs

Low Capital base

Concentration of management functions in one / two persons

Inadequate exposure to international environment
Inability to face impact of WTO regime
Inadequate R & D
Lack of professionalism
Besides these, the most formidable problem gripping the SMEs has been in accessing
technology and maintaining competitiveness.

32

Reasons for the inability of SMEs to identify their technology needs

Poor financial situations and low levels of R&D

Poor adaptability to changing trade trends

Desire to avoid risk
Non-availability of technically trained human resources
Emphasis on production and not on production costs
Lack of management skills
Lack of access to technological information and consultancy services
Isolation from technology hubs

In order to enable SMEs overcome the above problems and enhance their access to new
technologies for increasing their competitiveness in the international market, it is
imperative to give them a conducive environment, which includes:
(1) Formulation of appropriate national policies and programmes;
(2) Building up technological capacity;
(3) Knowledge flows and technology databases;
(4) R&D and inter firm linkages.

Networking offers an important route for individual SMEs to address their problems as
well as to improve their competitive position. Evidence from developing and developed
countries shows that networking is more likely when enterprises operate in proximity and
share business interests such as markets for products, infrastructure needs or challenging
external competition.

33

Arranging Finance for SSI Units

No SSI unit can take off without monetary support. This need for finance can be
classified into the following types:

Long and medium term loans

Short term or working capital requirements

Risk Capital - Seed Capital/Marginal Money Bridge loans

The financial assistance in India for SSI unit is available from a variety of
institutions.

The important ones are:

SIDBI: Small Industries Development Bank of India (refinance and direct

lending)

SFCs: State level Financial Corporation e.g. AP State Financial Corporation.

NSIC: National Small Industry Corporation.

Small Industry Development Corporations of various states.

Commercial/Co-operative Banks.

DIC: District Industry Centre.

State Financial Corporations, SIDBI and State Industrial Development Corporations

provide long and medium term loans. Banks also finance term loans. This type of
financing is needed to fund purchase of land, construction of factory building/shed and
for purchase of machinery and equipment. The term loans are secured against mortgage
of assets such as land, building, machines, equipment and other stocks. The short-term
loans are required for working capital requirements, which fund the purchase of raw
material and consumable, payment of wages and other immediate manufacturing and
administrative expenses. Such loans are generally available from commercial banks.
There is, however, a Single Window Scheme, for SSI units. Under the scheme, one
agency, either the bank or the financial institution, funds both the term loan and working
capital requirements. This scheme applies to all SSI projects with project cost up to Rs 50
Lacs. The working capital loan is generally secured against

34

Pledging of stocks, raw materials and finished goods,

Advances against work-in-progress (WIP),

Advance against bills.

For loans from financial institutions and commercial banks a formal application needs to
be made. The details of documentation that need to be provided with the loan
applications are shown here.

Documentation for Loan Application

Balance Sheet and Profit Loss Statement for last three consecutive

years of firms held by promoters

Income Tax Assessment Certificates of Partners/Directors

Proof of Possession of Land/Building

Architects estimate for construction cost

Partnership deed/Memorandum and Articles of Associations of Company.

Project Report

Budgetary Quotations of Plant and Machinery

A sanction or rejection letter is issued by bank after its assessment of the application.
After receiving sanction letter applicants need to indicate in writing their acceptance of
terms and conditions laid down by FI/ Banks. Subsequent loan is disbursed according to
the phased implementation of the project.
In today's environment there are other choices apart from commercial banks and
Government owned financial institutions. These options include venture capital funds and
non-government finance companies.

35

Chapter 3. Due diligence process of working capital appraisal

Due diligence is a vital exercise any investment activity. It assumes more importance in
venture capital financing because what is at stake is equity investment. If there is a
failure, there is no recourse to the assets or any collateral. Risk is more because the
money is managed by some body else to whom at the time of investment the venture
capitalist does not know. In Indian context, looking at the number of fly-by-night
operators in every boom in the stock market and the size of non-performing assets held
by the banks and financial institutions, a careful diligence exercise is very important to
have quality deals in venture capitalists portfolio.

FRAMEWORK FOR DUE DILIGENCE

The entire process of working capital appraisal and due diligence is a long and pain
staking journey for a venture capitalist. It starts with preparation of business plan and
ends with actual investment. It takes normally one month to six months for venture
capitalist to finally sanction the investment.
After studying the business proposal from the promoter, venture capitalist appraises the
proposal against his selection criteria. Venture capitalist appraises the proposal against
his selection criteria. Venture capitalists generally examine two vital issues: (i) technical
and commercial feasibility and (ii) credibility and quality management.

SALIENT FEATURES

It is a framework for gathering and verifying materials fact and experts/third party
opinions.

There is no standard process or formal for carrying out due diligence exercise.
Each venture is unique and therefore it is difficult to set out standard rules that
may apply in all cases.

Its sophistication depends upon experience and chemistry of person performing

due diligence.

An experienced venture capitalist does not proceed step by step. Many venture
capitalists found to believe more on their instincts rather digging out information
from various places. Larger capitalists may follow a systematic step by step
process.

Due diligence is inherently an iterative process. It proceeds gradually at each

stage of investment appraisal process beginning from spotting the deal.

36

Degree of due diligence and appraisal depends upon the objective and nature of
venture financing.

Due diligence is a complex mix of subjective judgment, detailed quantitative

analysis, negotiation and investigation.

This exercise provides substantive information that enables the venture capitalist
to understand the business and promoter more meaningfully and thereby reduce
the inherent risks involved in financing venture.

Venture capitalist starts serious appraisal once the offer letter is accepted. He appoints
professional accountants and solicitors for financial appraisal, due diligence and
preparation of new documents.

AREAS OF DUE DILIGENCE

Conventionally, process of due diligence and working capital appraisal is divided into
following categories;

General assessment

People

Market

Financial due diligence

GENERAL ASSESSMENT
Due diligence in this area starts with defining and understanding the nature of existing
business and its prospects and the managerial capability of the promoters. The key issues
are:

Establishing a precise definition of the nature of business and assessing the

corporate objectives and strategies.

Examining how well corporate objectives have been defined and documented.

Performing SWOT analysis and identifying principal areas of risks in products,

finance and market.

Assessing the overall quality of business plan.

Analysis of the critical assumptions.

37

Scrutinizing the contingency planning for tentative variations in assumptions.

Determining the non-commercial factors with a significant impact on the business

activities legislation, taxation, trade practice, import-export regulations, and
exchange rates.

Obtaining the details (for e.g. parties, consideration, duration, condition) of all
major contracts into which the company has entered and has plans to enter (for
e.g. purchase of raw materials, supply of goods, distributions, joint venture,
licensing)

Establishing any interests (either direct or indirect) that the company individuals
may have in other business.

PEOPLE
This is the most subjective and difficult analysis where ability of appraising officer to
judge promoter and its team plays a vital role. Lessons may be learnt hard way if venture
capitalist is not equipped with adequate experience to judge the quality and credibility of
management team.
Symptoms of managerial weakness may be exhibited in defensive or secretive behavior.
The hidden agenda, confrontational style, poor communication skills, lack of ability to
delegate and insecurity. Due diligence in this section consists of detailed investigation of
all key decision makers and include an assessment of the level of motivation and
commitment to success of business. It also includes a review of the quality of middle
management and ability of individuals to work together as a team and their general
interpersonal skills.
The Main Issues:It is said that to know what a child will be in future, ask him - what he does in his spare
time? However, the same is not the case in lending money to first time venture
enthusiasts. The primary source of information for assessing the management is analysis
of the track record and meeting them personally. Few key questions that need to be
addressed in this area are:

Is there enough management talent in the organization to reap success from a new
start up?

Effectiveness in making decisions.

Do the promoters have sufficient level of education to carry on the business?

38

History of promoter:
It is one of the vital area of investigation in due diligence. History of promoter would
give a good assessment of his dealing with others and his sincerity in the business. The
promoter who might have done window dressing in his subsidiary or associates in the
past is very likely to indulge in the same of the company he is presenting. Therefore the
venture capitalist by analyzing the history of the promoter pierces through his ostensible
behavior.

Third party opinions

The venture capitalist should seek opinions about the promoter from various parties
dealing with him. The most common class from where such opinion could be tactfully
sought:

Bankers

Term lending institutions

Suppliers

Customers

Partners in business

His own employees (key personnel of his business)

Evaluation of the management team

The venture capitalist has to carryout reference checks on key personnel regarding their
educational qualifications, career history, personality, business ethics and behavior. It is
necessary to obtain a profile of companys employees. He may meet and discuss with
them the project and also go through their brief profile qualifications, experience, service
contracts, previous achievements etc.

39

THE MARKET
Quality of the investment generally mirrors the underlying strengths of the market in
which it operates. But normally venture capital list has to largely invest in products
whose markets are emerging and growing.
Due diligence in these area can be divided in two sections.

First, study of the market itself size, growth competition and substitutes

Second, how the business of the venture firm meshes in to the market and its
chances of growth as represented in the business plan.

Key issues
It is important to seek detailed analysis of market for companys product with reference
to:

Geographical analysis

Price trends

Analysis of sales by quantity and value

Analysis of major customers including buying behavior of the customers

In addition, it is necessary to:

Examine the competitor analysis provided in the business plan

Obtain the summery of the companys approach to public relation, sales

promotion and advertising functions

Carry out reference check on wide range of customers and third party
organisations to verify

Quality and reliability, past, present and future requirements of the products,
personal relationships, pricing and financial strengths

40

THE PROCESS
Key issues
Significance of due diligence in this area largely depends upon the level of expansion and
capital expenditure projected in the business plan. Generally, this area has been given
limited prominence in plans. Therefore, sometimes, appraising officer may gain valuable
insight into the quality of planning process by asking some critical questions around this
area.

Whether the technological know how is properly acquired or not.

Whether the promoter has adequate and complimentary plant and machineries to
support the implementation of such technology know how. If not, he has made
any provision for acquiring or not. If they are to be acquired indigenously, then
what would be the effect on the quality and quantity of the final output?

Many times, technology is successful only for specific kind of inputs and in
specific conditions and inputs prevalent there. The rate of success or output would
be affected to that extent. Whether these issues are considered in output
projections or not.

Imported process requires trained man power to handle the process. Whether the
promoter has such trained manpower or has made any such provisions to train the
existing manpower.

It is quite normal to show a rapid build up in output ignoring adequate provisions

for the availability of the premises, cost of additional infrastructure facility and
working capital investment.

The purpose of due diligence in this area is to examine whether adequate attention
has been given to the expansion of operating facilities to meet the needs of the
business growth.

It is importance to ensure that the company is adequately insured with particular

reference to property, product liability, fire, theft and key human resources.

41

LEGAL DUE DILIGENCE

Enquiry at this stage has two dimensions: one, ensuring that ownership of the properties
and the liabilities are according to claimed under various financial documents. Second,
ensuring that the promoter is complying with the necessary legal requirements of his
business.
CONCLUSION
Due diligence is a continuous process through out the investment period. It is more vital
before the investment is sanctioned. The most vital aspects of this exercise are the people
and the product. If these two aspects are properly taken care of, most likely that other
things will be put in place.

FINANCIAL DUE DILIGENCE

Introduction
It is a continuing process of enquiry and appraisal of the business plan right through till
completion of the deal. It is a detailed review of the profit and cash flow forecasts. It is
also a tool for periodic monitoring of performance. It includes specific reports by
independent experts, generally in respect of financial and legal aspects of the firm, as
well as summary of comments on due diligence performed by appraising officer of the
venture capital firm.
Key questions to be answered
The purpose of financial due diligence is to test the reasonableness of quantification of
business plan. It aims at answering following questions:

If there is an existing business, how well has management performed historically?

How realistic are managements forecasts?

What internal rate of return (IRR) could this investment earn at a given price?

What are the cash flow and working capital requirements of the business and how
they are going to be financed?

How sensitive are managements profit and cash flow forecasts to changes in their
underlying assumptions? And, hence, how vulnerable is the potential IRR?

42

Appraising officer needs to ascertain:

How the numbers that form the financial aspects of the business plan are generate
and complied?

Degree of reliability of these numbers

Adequacy of the existing system to cope with proposed growth

Adequacy of the existing system to cope with proposed growth

Tangible fixed assets

The valuation of free hold and leased properties is to be carried out. The terms of
major leases is required to be reviewed. It is imperative to physically inspect plants
and machines and other key assets and identify crucial and high value assets. In this,
the appraiser has to review age, capacity and condition of premises and plant for to
assessing whether they are adequate in view of project growth of the business.
Stock
The valuer assesses the stock valuation methods and physically inspects stocks for
estimating the market value. The stock turnover is computed and it is examined if the
stocks leveled are excessive
Debtors
Review of the ageing of debtors is a standard practice. The adequacy of bad debts
provisions id established. The debtor collection period is calculated and compared
with industry and historical norms.
Creditors
Ageing of creditors is reviewed and the average credit period is computed. Then it is
compare with the industry norms.
Provisions
The valuer obtains details of all provisions and assesses the reasons for and adequacy
of provisioning. The movement of provisions is scheduled to detect profit smoothing,
if any.
Debt and equity financing
It is important to obtain facility letters for all current loans and contracts for long term
borrowing, maturity dates, collateral securities, interest and capital repayment terms.
It is required to establish whether or not the business is currently operating in excess
of facilities or is in breach of any borrowing covenants. Then a review of existing
share capital is undertaken. Usually an investigation is carried out into any
significantly large transfer among promoters. Investigation into difference between
subscribed and paid up capital reveals the share holders who have not paid their dues.
Examination of the issue of shares in kind to promoters or suppliers or anybody in the
43

recent past is important with a view to assessing the reasonableness of the value of
these transactions and establishing if there are any special rights attached to any class
of shares.
Contingencies
An enquiry as to the existence of any contingent liabilities (legal disputes, guarantees)
forward foreign exchange commitments. And liabilities for any off balance sheet
items are performed. Then a fair estimate is made and the financial statements are
recast to reveal the firms true financial position.
Taxation
The details of all outstanding liabilities and deferred tax payments are collected. It is
necessary to enquiry about the status of tax liability for which the assessment is
pending or company has filed an appeal.

Financial position: analysis of future prospects

Review of financial forecast is the core of financial due diligence. Most difficult
part of this exercise is to estimate forecasting period. Number of forecasting
periods depends on nature of cyclicality of particular business and period of
investment for venture capitalist.

First step in this process is to see whether forecasting period is sufficiently long
for incorporating substantial part of revenue generation. Generally it ranges
between 3 to 7 years depending upon the nature of business and period of
investment.

Having established a reasonable forecasting period, appraising officer may divide

due diligence process in two stages: review of short term forecast and long term
forecast. This is useful as the depth of appraisal required at each stage is different.
Depending upon the demands of the proposal due diligence may be carried out at
respective stages.

Short term forecast

A review of short term forecast aims at:

Establishing the likely profitability or otherwise of the business in its initial 1-2 years
of post investment, particularly in terms of cash flows.


Identifying the key risk areas in the forecasts.

Developing different scenarios that can be used to assess the degree of sensitivity
of the forecasts to the key business risks.

44

Medium term forecasts

A review of the medium term profit projection aims at:

Assessing the overall growth achievable by the business.

Calculating the potential return to the investor, in terms of capital gain and
income yield, over the investment period.

General review of the forecasts

Quality of the forecasts depends upon the type of processes and people involved in the
exercise. Therefore, to judge quality of forecast, appraising officer may look into the
following aspects:


What are the assumptions underlying the forecasts?

Is the forecast perceived by the management as a target to aim for or as a

conservative estimate of the minimum level of growth achievable?

How accurate has the management team has been in the past?

Whether the profit forecast is consistent with balance cash flow forecasts?

What are the external assumptions used in the projections and what are their
rationale?

Whether an adequate provision has been made in forecasts for contingencies or

unforeseeable losses?


How does current trading periods performance compare with forecasted

performance?

Is the projected turnover substantiated by specific action plans?

Are the assumptions reasonable in the terms of recent operating results,

managements strategy and industrys norms?

What is the sensitivity of the forecasts to changes in the underlying assumptions?

45

Chapter 4. Risk analysis in working capital appraisal

How to appraise risk?

Introduction
Project financing is an innovative and timely financing technique that has been used on
many high-profile corporate projects. Project financing is emerging as the preferred
alternative to conventional methods of financing infrastructure and other large-scale
projects worldwide.
Project Financing discipline includes understanding the rationale for project financing,
how to prepare the financial plan, assess the risks, design the financing mix, and raise the
funds. In addition, one must understand the cogent analyses of why some project
financing plans have succeeded while others have failed. A knowledge-base is required
regarding the design of contractual arrangements to support project financing; issues for
the host government legislative provisions, public/private infrastructure partnerships,
public/private financing structures; credit requirements of lenders, and how to determine
the project's borrowing capacity; how to prepare cash flow projections and use them to
measure expected rates of return; tax and accounting considerations; and analytical
techniques to validate the project's feasibility
Risk minimization process
Financiers are concerned with minimizing the dangers of any events which could have a
negative impact on the financial performance of the project, in particular, events which
could result in: (1) the project not being completed on time, on budget, or at all; (2) the
project not operating at its full capacity; (3) the project failing to generate sufficient
revenue to service the debt; or (4) the project prematurely coming to an end.
The minimization of such risks involves a three step process. The first step requires the
identification and analysis of all the risks that may bear upon the project. The second step
is the allocation of those risks among the parties. The last step involves the creation of
mechanisms to manage the risks.
If a risk to the financiers cannot be minimized, the financiers will need to build it into the
interest rate margin for the loan.
STEP 1- Risk identification and analysis

The project sponsors will usually prepare a feasibility study, e.g. as to the construction
and operation of a mine or pipeline. The financiers will carefully review the study and
may engage independent expert consultants to supplement it. The matters of particular
focus will be whether the costs of the project have been properly assessed and whether
the cash-flow streams from the project are properly calculated. Some risks are analysed
46

using financial models to determine the project's cash-flow and hence the ability of the
project to meet repayment schedules. Different scenarios will be examined by adjusting
economic variables such as inflation, interest rates, exchange rates and prices for the
inputs and output of the project. Various classes of risk that may be identified in a project
financing will be discussed below.
STEP 2-Risk allocation
Once the risks are identified and analysed, they are allocated by the parties through
negotiation of the contractual framework. Ideally a risk should be allocated to the party
who is the most appropriate to bear it (i.e. who is in the best position to manage, control
and insure against it) and who has the financial capacity to bear it. It has been observed
that financiers attempt to allocate uncontrollable risks widely and to ensure that each
party has an interest in fixing such risks. Generally, commercial risks are sought to be
allocated to the private sector and political risks to the state sector.
STEP 3-Risk management

Risks must be also managed in order to minimize the possibility of the risk event
occurring and to minimize its consequences if it does occur. Financiers need to ensure
that the greater the risks that they bear, the more informed they are and the greater their
control over the project. Since they take security over the entire project and must be
prepared to step in and take it over if the borrower defaults. This requires the financiers to
be involved in and monitor the project closely. Such risk management is facilitated by
imposing reporting obligations on the borrower and controls over project accounts. Such
measures may lead to tension between the flexibility desired by borrower and risk
management mechanisms required by the financier

Risk based supervision of banks

Background
With globalization and liberation the stability of the financial system has become the
main challenge to bank regulator and supervision all over the world. In the last decade
Indian banking scene has witnessed progressive deregulation, institution of the prudential
norms and a gradual move towards international best practices especially in the role of
supervisor. Over a period RBI has consistently tightened the exposure and prudential
norms of the bank and enhanced the disclosure standard in the phases in order to
strengthen the efficiency of its supervisory process. The growing diversities and
complexities I banking business, the spate of product innovation and contagion effect that
a crisis can spread to the entire financial system are causing pressure on supervisory
resources and calls for the further streaming of supervisory processes.
The second Bessel accord has the supervisory review process as the second pillar. The
regulators are required to focus on the risk management system adopted by the banks and

47

moderate the supervision based on the adequacy and robustness of these system. The risk
based supervision announced by RBI in its monetary and credit policy statement.

Previous approach
Supervisory process was applied uniformly to all supervised institutions.
It was essentially on site inspection driven (direct inspection of bank branches).
On the site inspections were conducted largely with reference to audited balance sheet
dates.
Supervisory follow up commenced with detailed findings of annual financial inspection.
The process inspection was based on CAMELS (i.e. capital adequacy, assets quality,
management aspects, earnings, liquidity and system and control)

RBS The new approach

The objectives of RBS are two fold Optimize utilization of supervisory resources (i.e.
Time, manpower, and efficiency).Minimize impact of crisis situation on the financial
system.
RBS process essential involves continuous monitoring and evaluation of the risk profile
of the supervised institutions in their relation to their business strategy and exposures.
This assessment will be based on construction of a risk matrix for each institution. The
efficiency of the RBS would clearly depend on banks preparedness in certain critical
areas such as quality and reliability of data, soundness of system and technology,
appropriateness of risk control mechanism, supporting human resources and
organizational back up.

The advantages of RBS approach over past approach are Effective use of
supervisory resources.


Systematic improvement

Cushion against risk

Flexibility of timing the on site inspection

Reduction of vulnerabilities by varying inspection cycles

Focused attention on weak banks

Improvement in quality of internal audit

Focused follow up

48

Major elements of RBS approach

Risk profiling of banks

Supervisory cycle

Supervisory program

Inspection process

Review, evaluation and follow up

Monitorable action plan

Supervisory organization

Enforcement process and incentive framework

Role of external auditors in banking supervision

Change management implications

Credit risk assessment

Important of credit risk assessment

Credit is a core activity of banks and an important source of their earnings, which go to
pay interest to depositor, salaries to employee and dividend to shareholders. In credit it is
not enough that we have sizable growth in quantity volume, it is also necessary to ensure
that we have only good quality growth.
To ensure asset quality, proper risk assessment right at the beginning that is at the time of
taking an exposure is extremely important. Moreover, with implementation, capital has to
be allocated for loan assets depending on the risk perception/rating of respective assets. It
is there for extremely important for every bank to have clear assessment of risk of the
loan assets.
Indian scenario
In Indian banks, there was no systematic method of credit risk assessment till late
1980s/early 1990s. RBI came out with its guidelines on risk management systems in
banks in 1990 and guidance note on management of credit in October ,2002.

49

SBI scenario
However, like in many other fields, in the field of credit risk assessment too, SBI played
a proactive and pioneering role. SBI had credit rating system in 1988.then CRA system
was introduced in the bank 1996.the first CRA model was rolled out in 1996 to take care
of exposure to credit and investment segment .there after models for SSI and AGL
segment were introduced in 1998,when C&I CRA model was also modified. CRA trade
was developed in the year 1999.in 2000a separate CRA model was developed for non
banking finance companies.
There after, a pilot scheme for unified model for C&I/SSI was introduced in Chandigarh
circle in July 2003, which ran parallel to existing model. The unified model was later
extended to other circle. The existing CRA model for C&I trade and regular model for
NBFC remained unchanged.
Inter-relationship between credit and risk


Go hand in hand

They are like twin brothers

They can be compared to the two sides of the same coin.

All credit proposals have some inherent risk, excepting the almost negligible
volume of lending against liquid collaterals with adequate margin.

Lending despite risks



Risk should not deter a banker from lending.

A bankers task is to identify/assess the risk factor /parameter and manage

/mitigate them on a continuous basis.

But its always prudent to have some idea about the degree of risk associated with
any credit proposal.

The banker has to take a calculated risk, based on risk absorption /risk-hedging
capacity & risk mitigation techniques of the bank.

50

For a bank, what is risk?

Risk is inability or unwillingness of borrower-customer or counter party to meet their
repayment obligation /honor their commitments, as per the stipulated terms.
Lenders task
Identify the risk factor, and
Mitigate the risk
How does risk arise in credit?
In the business world, risk arises out of
 Deficiencies /lapses on the part of the management(internal factor)


uncertainty in the business environment(external factor)

uncertainty in the industrial environment(external factor)

weaknesses in the financial position(internal factor)

To put it in another way, success factor behind a business are:

 managerial ability


favorable business environment

favorable industrial environment

adequate financial strength

As such these are the broad risk categories or risk factor built into CRA model.CRA
taking into account the above types of risks associated with a borrower unit. The
eventual CRA rating awarded to unit (based on a score out of 100)is a single point
risk indicator of an individual credit exposure and used to identify, to measure and
monitor the credit risk of an individual proposal. At the corporate level, CRA is also
used to track the quality of banks credit portfolio.

51

Why type of rating is awarded to loan proposal?

Under CRA, the rating is graded into 8 tier,viz,SB1 to SB8 and SBTL1 to SBTL8 for
working capital limits and term loan s respectively in an ascending order of risk levels
perceived in the borrower accounts on the basis of aggregate score out of 100.
The model also prescribes the hurdle rate Sb-4/SbTL4 is SB3/SBTL3.some credit
products like sub prl product, corporate loan, flexi loan etc have their own hurdle rates.
How is credit rating linked to loan pricing?

Rating

Scoring
band

SB1/SBTL1
SB2/SBTL2
SB3/SBTL3
SB4/SBTL4
SB5/SBTL5
SB6/SBTL6
SB7/SBTL7
SB8/SBTL8

>=90
>=75
>=65
>=50
>=45
>=35
>=25
<25

Spread(%)SBAR/BPLR
SSI
0.25
1.00
1.50
2.00
2.00
2.00
2.00
2.00

AGL
0.50
1.25
1.75
2.00
2.00
2.00
2.00
2.00

C&I
0.75
1.50
2.00
2.50
2.50
2.50
2.50
2.50

ACCOUNTS COVERED UNDER THE CREDIT RATING SYSTEM: - all large value
loans (rs.25 lacs and above) for commercial/trade/NBFC segment are covered under
credit rating system
Size of credit limit

Above Rs.5 lacs but

below rs.25 lacs
Rs.25 lacs and
above but up to
Rs.50 lacs

Repayable on
demand or up to 1
year(% p.a)
0.25%above SBAR
10.50%
0.75% above SBAR
11%

Repayable beyond 1
year but before 3
years(%p.a)
0.25%above SBAR
10.50%
0.75% above SBAR
11%

Repayable in 3
years and
above(%p.a)
0.75% above SBAR
11%
1.25% above SBAR
11.50%

SSI units scoring less than 60% marks will not qualify for consideration under SME
smart score scheme dated 25 march 2006.

52

How are various risks measured/ assessed?

 Financial risks are measured on the basis of a range of scores obtained in respect
of the different financial/performance parameter under static ratio, future
prospects and risk mitigation by accounting for the marks obtained under
qualitative parameter. The parameter and scores are different for units enjoying
working capital limits and term loan, to take care of the varying tenure of the
facilities.


Again the financial management, industry and business risk factor carry different
weight for existing and new units. However, in the case of companies/firms
promoted by established group, the sanctioning authority may take a view on its
status after one years performance.

For assessment of the other types of risk, business, industry and management, the
scoring is on the basis of a subjective analysis, based on prescribed value
statement.

Appropriate weightages are accorded to the various type of risk(i.e financial,

business, industry and management)

53

Chapter 5
CASE STUDY OF R. P. INDUTRIES

54

MEMORANDOM FOR ZONAL OFFICE CREDIT COMMITTEE

CIRCLE: AHMEDABAD

BRANCH: ANKLESHWAR I.E

1. GENERAL
Name of the industrial concern
Segment
Industry

R P INDUSTRIES
SSI
Chemicals and pharmaceuticals
intermediates
Partnership firm
01/09/2006
June 2007

Constitution
Date of incorporation
Banking with SBI

Address of the Regd/ corporate office:

Registered office
Plot no.314-315,GIDC Estate,Panoli
taluka,Ankleshwar

Corporate office
Plot no.314-315,GIDC
Estate,Panoli taluka,Ankleshwar

PROPOSAL
Sanction for1
2

Renewal with enhancement of FBWC (stocks & book-debt) limit from

RS.50.00 lacs to RS.125.00 lacs
Sanction of letters of credit(import,usance) limit of RS.25.00 lacs

CREDIT LIMIT (EXISTING AND PROPOSED)

LIMITS
FUND BASED
CC(STOCKS & BD)
SLC
EPC
LC Bills discount
Total fund based
Non Fund based
LC*(import,usance)
Total NFB
Total FB+NFB

EXISTING
SBI
%

PROPOSED
SBI
%

(RS. in Lacs)
CHANGE
SBI

50.00
0.00
0.00
0.00
50.00
0.00
50.00

125.00
0.00
0.00
0.00
125.00
25.00
25.00
150.00

75.00
0.0
0.00
0.00
75.00
25.00
25.00
100.00

100
100

100
-

55

The proposal falls within the sanctioned powers of the zonal office credit committee, as
the proposal Total FB/NFB/Total limit is RS.125.00/25.00/150.00 lacs.

2. PROMOTERS
R P INDUSTRIES is a partnership firm engaged in manufacturing firm of chemical and
pharmaceuticals intermediates. it was established on 01-09-2006.however, operation got
started after taking over of business of GALAXY LABORATORIES PVT LTD. in
19.10.2006.MOU of this effect was entered into between GLPL and RPI on 19.10.2006.A
deed of rectification was executed between GIDC and R.P.Industries on 13.02.2007 for
transferring lease hold rights of the industrial plot No.314-315 to M/S R P Industries and
permission for the same was received from GIDC, Ankleshwar on 16.05.2007.
GLPL was enjoying Debit cash credit limit of RS.30 Lacs with branch, therefore the
company and promoters were known to bank. Conduct account was also satisfactory.
Shri Ishwar Mali and shri Alpesh M Purani, partner of R P industries were also director
in GLPL at the time of forming the partnership, there were total five partners in the firm
viz. Shri Ishwar Mali, shri Alpesh M Purani, Smt.Gomati Mali, Shri Narayan R Mali, and
Shri Deepak K Joshi. Shri Deepak K Joshi has since retired from the firm and presently
there are only four partners in the firm as per deed of the partnership dt.21/11/2007.shri
Ishwar R Mali and Shri Alpesh M.Purani are active partner who managed the day- to
day affairs of the firm.
Shri Ishwar Mali, aged 37, CEO and one of the partners of the firm is a science graduate
with 15 years of experience in chemical industry. Shri Mali handles production and
marketing of the firm.Shri Alpesh Purani aged 24 years, post graduate in commerce,
handles accounts of the firm.
Promoters contribution in RPI
In a private limited company entire capital is to be brought in or arranged by the private
promoters. The promoters group may subscribe to the capital either directly or through
their friend, relatives and associates. Thus the entire responsibility of arranging the funds
lies on the promoters. Private limited companies have no recourse to public for raising
the share capital. it is only the public limited company which can go to the public for
raising capital or the fixed deposit.
In the R P Industries, promoters have made contribution to the project is 20%,in the
project worth of RS.81.30 Lacs.

56

Where units or name/s appear in the defaulters list:

RBIs defaulters list (31.03.2006)
: No
RBIs willful defaulters list (31.03.2006)
: No
ECGCs caution list (SAL) (31.03.2006)
: No
CIBIL (suit filed accounts of RS.0.25 cr & RS.1.00 cr above as 31.03.2006): No
Litigation against borrower directors by other lenders
: No

3. PRODUCT AND RAW MATERIAL

RPI is in the line of manufacturing of anti-oxidant chemical, drug intermediates and
specific chemical. Anti-oxidant chemical along with its two derivatives i.e. 5-Methyl and
5-Methoxy derivatives are the main product. These are mainly used in manufacturing of
Nylon Tyre cord & drug intermediates and has good demand in local as well as overseas
market. Besides, there is a demand of its product from Indian pharmaceuticals industry
also.
Major Raw Material of the firm and their suppliers are as below
Sr.No Raw material

Supplier

Ortho Phenelyne Di Amine

2
3
4
5
6

OrthoAnisidine
Ortho Toluedyne Di Amine
Caustic Soda Flakes
Aniline oil
Carbon Di-Sulphide

Meghani organics
Ahmedabad,Aarti organics
Ltd,Vapi
Aarti organics Ltd,Vapi
NCPL,Bharuch
Local
Aarti organics Ltd,Vapi
Indian Rayon Ltd.Veraval

Credit
available
30 days

30 days
Cash
30 days
30 days
30 days

57

Major products of the unit and their customers are as below

Sr.No Products

Customers

Credit
offered

2-Mercapto benzimidazole

60 days

2-Mercapto 5-Methoxy
benzimidazole

2-Mercapto 5-Methyle
benzimidazole

Pukhraj industrial
corpo.Mumbai,
Yasho industries Pvt
Ltd,Vapi,
Anuradha chemicals
Hyderabad.
DR.Raddys
laboratories,
Hyderabad
Pukhraj industrial
corpo.Mumbai,
Yasho industries Pvt
Ltd,Vapi
,Nirayu Pvt ltd
Baroda,
Global Chemical
Baroda
Pukhraj industrial
corpo.Mumbai,
Yasho industries Pvt
Ltd,Vapi,

Present
installed
capacity
25 MT
p.m

60 days

25 MT
p.m

60 days

25 MT
p.m

4. LOCATION & PRODUCTION FACILITY:

Units manufacturing facilities are located in very well developed estate of Panoli, Taluka
Ankleshwar, which is situated on the N.H.8.the place is well connected through road and
frail to major cities/industrial center of the country. Other infrastructural facilities like
labor, power, water, etc are also available easily. The place is conveniently located in
relation to sources of raw material and customer of finished products as mentioned above.
Regarding the location of the plant of RPI has the advantages which have the suitability
with the view of economic growth, Adequacy of water supply, Availability of power,
raw material, skilled and unskilled labors, transport and communication facilities,
nearness to a police station and market for the product of industries.
Other main advantages are, as per the semi urban area land availability is as per the
GIDC norms.

58


Tax exemption : NIL

Subsidy

: 5% of sanction loan

as per the governments policy subsidy is applicable for only on term loan which would
be taken for acquiring land, plant & machinery, and building premises which is 5%
of sanction loan ,subsidy is not available for the working capital requirement .

5. TECHNOLOGY
Evaluation of technologies
The cost of the project is plant and machinery which is the outcome of selection of
particular technology if alternate technologies are available for the manufacture of the
same product.
The various advantages offered by the technology so selected should be jotted down.
These may be
(1) Increased profitability due to:
a. Saving of labor
b. Better consumption norms
(2) Lesser requirement of plant and machinery thus reducing the interest burden.
(3) Ease of availability of indigenous material.

In the RPI, Manufacturing of Chemicals and pharmaceutical intermediates are easier

because of efficient technology. Normally the well established technologies should be
selected even through these may be expensive by 5-10% but those have not risk because
of all ready tried technology. The CAE technique is one of the efficient technologies
which is implemented. encouraged by FDA initiatives such as PAT which require
companies to provide better verification of their manufacturing processes and chemical
Current Good Manufacturing Practices (CGMP) which encourages a science-based
approach and the early adoption of new technological advances by the chemical industry.
2-Mercapto 5 -methoxy Benzimidazole and 2-Mercapto 5 -methyl Benzimidazole are
mainly Yellowish white to cream color powder and off white powder is insoluble in
water and soluble in methanol.
Plant & machinery
The selection of plant and machinery is done after technology has been selected and the
process of manufacture has been well defined. Before going in for the plant and
machinery it is better if a process flow chart/product flow chart is made and discussed
with technical consultant.

59

The choice has been made equipments should be listed in the following fashion.
(1) Standard equipments.
(2) Non-standard equipment
In the RPI, the plant and machinery are standard and took delivery from the standard
suppliers. The cost of the plant and machinery in the RPI is RS.26.61 lacs excluding
laboratory equipment, electrical installation, fire prevention equipment.

6. FINANCIAL PERFORMANCE
1. P&L A/C.
R. P. INDUSTRIES PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED ON
31ST MARCH 2007
Dr

PARTICULARS
Opening stock
Purchase
Duties and taxes, paid or
payable
Operations
Interest
Depreciation
Profit

Cr

AMOUNT
---------16949348
2915675
3478815
169135
364469
18068
23895510

PARTICULARS
Sales and others
Duties, Taxes and cess,
received
Other income
Closing stock

AMOUNT
19848986
2909482
9018
1128023

23895510

60

2. BALANCE SHEET
R. P. INDUSTRIES BALANCE SHEET ON 31ST MARCH 2006 AND 2007
(Amt. in Rs. Lacs)
LIABILITIES
Amt.
Amt.
ASSETS
Amt. Amt.
31313131marmarmarmar06
07
06
07
Current Liabilities
Current assets
Short term borrowing
Cash and bank balances
2.09
from banks(including
Investments
bills purchased,
i.
Govt. and
discounted & excess
other trustee
borrowing placed on
securities
repayment basis)
ii.
Fixed deposits
0.00
i.
from
with banks
0.00 121.27
applicant
bank
i.
Receivables
ii.
from other
other than
banks
95.72
deferred &
_____ _____
iii.
(of which BP
0.00
exports
0.00
& BD)
ii.
Export
sub total (i+ii) (A)
receivables
Short term borrowings
from others
Sundry creditors
Advance payments from
customers
Provision for taxation
Dividend payable
Other statutory liabilities
(due within 1 year)
Deposits / installments
of term loans/ DPGs/
debentures etc (due
within 1 year)
Other current liabilities
& provisions
a. creditors for
expense
b. car loan
installment
c. other provisions
d. others
Sub total

0.00

Installment of deferred
receivables

0.00
0.00 Inventory
i.
Raw materials
0.00
a. imported
b. indigenous
3.65
ii.
stocks in
process
iii.
finished goods
iv.
other
0.00
consumable
spares
10.75
a. imported
0.00
b. indigenous
1.15 Advances to suppliers of
0.09 raw materials & stores
136.91 Advance payment of
taxes
Other current assets

10.61

0.00
0.67
0.00

0.00

61

a. advance
receivables in
cash or kind
b. deposit with GEB
c.
d.
Total current liabilities
(A+B)
TERM LIABILITIES
Debentures
Preference shares
Term loans
Deferred payment
credits
Term deposits
Other term liabilities
Total term liabilities
Total outside liabilities

0.00 136.91 Total current Assets

Fixed assets
Gross block
Depreciation to date
0.00

12.23

121.32

64.42
3.64

5.27

0.00

5.27 Net block

142.18

60.78

62

NET WORTH
Ordinary share capital
General reserve
Revaluation reserve
Other reserves
Surplus/ deficit in P&L
a/c
a. deferred tax
liability
b. subsidy reserve
c. share application
money

Net worth

TOTAL LIABILITIES

39.92
0.00

0.00

0.00
0.00
0.00

Other non current

assets
investments/ book debts/
advances/ deposits which
are non current assets
i.
a. investments
in subsidy
companies
b. others
ii.
Advances to
suppliers of
capital goods
and
contractors
iii.
Deferred
receivables
iv.
Others
a. sundry deposits
b. others
c.
d. receivables over 6
months

Non consumable stores

and spares
Other non current assets
including dues from
directors
39.92 Total other non current
assets
Intangible assets (patents,
good will, prelim.
Expenses, bad/ doubtful
debts not provided for,
etc)
182.10 TOTAL ASSETS

0.00

0.00

0.00

0.00

182.10

63

R. P. INDUSTRIES PROJECTED BALANCE SHEET OF

31ST MARCH 2008 and 2009
(Amt. in Rs. Lacs)
LIABILITIES
Amt.
Amt.
ASSETS
Amt.
Amt.
31313131marmarmarmar08
09
08
09
Current Liabilities
Current assets
Short term borrowing
Cash and bank balances
2.65 3.24
from banks(including
Investments
bills purchased,
a)Govt. and other trustee
discounted & excess
securities
borrowing placed on
b)Fixed deposits with
repayment basis)
banks
0.00 0.00
i. from applicant
bank
100.00 150.00 a)Receivables other than
ii. from other banks
deferred & exports
163.00 224.50
iii.
(of which BP
b)Export receivables
& BD)
_____ _____ Installment of deferred
sub total (i+ii) (A)
100.00 150.00 receivables
Short term borrowings
from others
Inventory
118.44 146.98 i)Raw materials
Sundry creditors
Advance payments from
a)imported
38.00 48.00
0.00
0.00
customers
b)indigenous
0.00
0.00
Provision for taxation
0.00
0.00
Dividend payable
ii)stocks in process
38.00 52.00
Other statutory liabilities
iii)finished goods
(due within 1 year)
iv)other consumable
Deposits / installments
spares
of term loans/ DPGs/
3.65
1.62
debentures etc (due
a)imported
3.86
3.43
within 1 year)
b)indigenous
Other current liabilities
Advances to suppliers of
& provisions
raw materials & stores
3.35
3.00 Advance payment of
a)creditors for expense
0.00
2.97 taxes
26.10 32.40
b)car loan installment
0.00
4.00 Other current assets
c)other provisions
10.23
9.00 _____ a)advance receivables in
d)others
134.44 158.57 cash or kind
14.32
Sub total B
1.03
1.03
b)deposit with GEB
c)
d)

64

Total current liabilities

(A+B)
TERM LIABILITIES
Debentures
Preference shares
Term loans
Deferred payment
credits
Term deposits
Other term liabilities

Total current Assets

282.87 378.92

Fixed assets
Gross block
Depreciation to date

97.91 110.00
14.80 27.50

234.44 308.57

1.62

0.00

0.00

12.00

1.62 12.00 Net block

Total term liabilities
236.06
320.57
Total outside liabilities
NET WORTH
Other non current
Ordinary share capital
82.00 105.00 assets
General reserve
investments/ book debts/
Revaluation reserve
advances/ deposits which
Other reserves
are non current assets
Surplus/ deficit in P&L
28.28 30.03 i) a. investments in
a/c
subsidy companies
a. deferred
b. others
tax
ii)Advances to suppliers
liability
0.00 of capital goods and
b. subsidy
contractors
reserve
0.00 iii)Deferred receivables
c. share
iv)Others
applicatio
a. sundry deposits
n money
b. others
c.
d. receivables over 6
months

83.11

82.50

1.32

1.32

0.00

0.00

0.00

0.00

Non consumable stores

and spares
Other non current assets
including dues from
directors

65

Net worth

110.28 135.03 Total other non current

assets
Intangible assets (patents,
good will, prelim.
Expenses, bad/ doubtful
debts not provided for,
etc)

TOTAL LIABILITIES

346.34 455.60 TOTAL ASSETS

1.32

1.32

367.30 462.74

66

3. CASH FLOW STATEMENT of RPI for 31st march, 2007

Cash flows from operating activities

Net profit before tax
Depreciation
Interest
Operating profit before working capital changes

18000
364000
169000
213000

Changes in assets and liabilities

Increase in liabilities
Sundry creditors
Deposits/ installments of term loans
Credit of expenses
Other provisions
Others
Increase in assets
Receivables
Inventory
Other current assets

Net cash from operating activities

12127000
365000
1075000
110000
9000
1368000
(9572000)
(1128000)
(1432000)
(12132000)

1767000

Cash flows from investing activities

Gross block (land, building, machinery, work in
progress)

(6442000)

Net cash used in investing activities

(6442000)

Cash flows from financing activities

Ordinary share capital
Loan

Net cash used in financing activities

Cash and cash equivalents and at beginning
of period

Cash and cash equivalents at end of period

3992000
892000

4884000

----

_________

209000
67

4. FUND FLOW STATEMENT

(Amounts in RS. Lacs)
Current
Next year
yr.estimates projection 3131-Mar-08
mar-09

1.Sources

Last year
Actual 31Mar-07

a. Net Profit
b. Depreciation
c. Increase in capital
d. Increase in term liability
(including public deposits)
e. Decrease in
1.Fixed Assets
2.Other non current assets
f. Others
g. Total
2. Uses
a. Net loss
b. Decrease in Term loan liabilities
(including public deposits)
c. Increase in
1.Fixed Assets
2.Other non-current Assets
d. Dividend paid
e. Others
f. Total
3.Long Term Surplus/deficit[1-2]
4.increase/decrease in current assets
5.increase/decrease in current liabilities
6.Increase/decrease in working capital gap
7.Net Surplus/Deficit[3-6]
8. Increase/decrease in banking borrowings
9. Increase/decrease in NET SALES
* Break up of item-4
1. Increase/decrease in Raw materials
2. Increase/decrease in Stocks in process
3. Increase/decrease in Finished Goods
4. Increase/decrease in Receivables
a) Domestic
b) Export
5. Increase/decrease in Stores and Spares
6. Increase/decrease in other Current assets
TOTAL

0.18
3.64
39.92
5.27

28.28
11.16
42.08

30.03
12.70
23.00
10.38

49.01

0.00
81.52

76.11

3.65

64.42
0.00
0.00
0.18
64.60
-15.59
121.32
136.91
-15.59
0.00
0.00
N/A

33.49
1.32
0.00
38.46
43.06
161.55
-2.47
164.02
-120.96
100.00
603.51

12.09
0.00
0.00
28.28
40.37
35.74
96.05
24.13
71.92
-36.18
50.00
118.00

10.61
0.00
0.67

27.39
0.00
37.33

10.00
0.00
14.00

95.72
0.00
0.00
14.32
121.32

67.28
0.00
3.86
25.69
161.55

61.50
0.00
-0.43
10.98
96.05

68

FUND FLOW ANALYSIS:

Particulars as on

(Rs. In lacs)
Audited 2007
Estimated 2008

Long term sources

Long term uses
Surplus/Deficit

49.01
64.60
-15.59

81.52
38.46
43.06

Projected
2009
76.11
40.37
35.44

Fund flow of the unit shows there is deficit of RS.15.59 lacs at 31.03.2007 because of
working capital were used for acquiring fixed assets. The position is expected to improve
in the 2007-08 with the estimated surplus of RS.43.06 lacs. In the projected year there is
slightly decrease the surplus amount because of the term liability.
Performance & financial indicators:
Sr. Performance and
no financial indicator

1
2
3
4
5
6
7
8
9
10
11

12
13
14
15
16

Net Sales
(Export)
Operating profit(after
interest)
PBT
PBT/ sales(%)
PAT
Cash Accruals
PBDIT
Paid up capital
TNW
Adjusted TNW
TOL/ TNW
TOL/ Adjusted TNW
Current Ratio
Current Ratio(Excl.TL
installments)
Efficiency Ratio
Net sales/Total Tangible
assets
ROA(PBT/TTA)%
Operating Costs/Sales %
Bank Finance/Current
Assets (%)
Inventory and Receiv./Net
sales(days)

Amounts in RS. Lacs

audited
31-Mar-06
0.00
0.00
0.00

audited
31-Mar-07
198.49
0.00
0.09

estimates
31-Mar-08
802.00
0.00
27.48

Projection
31-Mar-09
920.00
0.00
30.23

0.00
0.00
0.00
0.00
0.00
0.00
0.00
-

0.18
0.09
0.18
3.82
5.71
39.92
39.92
39.92
3.56
3.56
0.89
0.91

28.28
3.53
28.28
39.43
42.68
82.00
110.28
110.28
2.14
2.14
1.21
1.23

32.28
3.51
30.03
42.62
60.81
105.00
135.03
135.03
2.37
2.37
1.23
1.23

31-Mar-06 31-Mar-07 31-Mar-08

1.09
2.18

31-Mar-09
1.99

0.10
14.91
0.00

7.70
16.32
35.35

6.98
15.34
39.59

197

111

130

69

1
2
3
4
5
6
7
8

Assessed
BK.Finance(ABF)
Total Curr.Assets(TCA)
Other Current liabilities
Working capital Gap
Net Working capital
Sundry Cred.to TCA (%)
Inventories to Net
Sales(days)
Receivables to Gross
sales(days)
Sundry Cred.to
Purchases(days)

As on 31/03/07

Net Sales
Exports
Op.profit
PBT
PBT/Net
sales%
PAT
Cash accruals
PBDIT
PUC
TNW
Adjusted TNW
TOL/TNW
TOL/Adj.TNW
CR
CR
Excl.TL
Inst.

31-Mar-06

31-Mar-07

31-Mar-08

31-Mar-09

0.00
0.00
0.00
0.00
-

121.32
136.91
-15.59
-15.59
99.96
21

282.87
134.44
148.43
48.43
41.87
36

378.92
158.57
220.35
70.35
38.79
41

154

74

89

260

63

73

GLPL
RPI
2006
2007(*) 2007(#) 2007(#) 2008
2008
2009
Actual Aud.
Estimat Aud.
Est. at Fresh
Proj.
ed at the
the time Estd.
time of
of last due to
last
sanction increase
sanction
in sales
138.42 306.24 198.49
227..59
500.00
802.00
918.0
0
(40.26) 0.00
0.00
0.00
0.00
0.00
29.29
7.88
0.09
31.93
18.92
27.36
2.49
-19.98 6.20
0.18
23.75
19.72
28.36
1.80
-6.52
3.12
0.09
4.75
2.46
3.09
1.57
6.11
-73.39
57.98
57.98
1.89
1.89
1.02
---

-20.02
-18.91
-14.76
73.39
27.91
27.91
2.53
2.53
2.24
2.24

5.45
6.00
8.58
48.10
53.55
53.55
2.11
2.11
1.00
1.00

0.18
3.82
5.71
39.92
39.92
39.92
3.56
3.56
0.89
0.89

16.73
22.13
37.53
63.10
85.28
85.28
1.77
1.77
1.18
1.18

15.22
26.37
34.49
86.00
101.22
101.22
2.55
2.55
1.12
1.14

22.78
32.28
41.51
116.0
154.0
154.0
1.74
1.74
1.34
1.35

70

(*)--- Figures are of Galaxy Laboratories Pvt. Ltd and for 8 months in 2006-2007.
(#)---figures for 2006-07 are only for four months after RPI took over the operations of
the unit from Galaxy Laboratories Pvt. Ltd, which was enjoying the limit of RS.30.00
lacs with the branch.
a) Net sales:
RPI has achieved net sales of RS.227.58 lacs on 31.03.2007, which is more than the
estimated figure of RS.198.49 lacs for the same period. During the current year rpi has
achieved sales of 713.55 by 29.02.2008 and thus it has already surpassed the projected
figures of RS.500.00 lacs for the same period. As scale of operation has gone up
substantially the estimated and projected net sales figure of RS.802.oo lacs and 918.oo
lacs for ensuring and next year is considered achievable.
b) Profitability
Profitability ratio as at 31.03.2007 stands at 0.09%, which is very low. As RPI started the
operation in nov.2007 by purchasing the existing company GLPL it had to incur huge
infrastructure expenses in order to start the unit. The profitability ratio is estimated at
2.46% in 2007-08 and at 3.095 during 2008-09.as per provisional financials of the unit as
at 30.11.2007 the same has been shown at 2.06%.
c) TNW AND TOL/TNW RATIO:
The TOL/TNW as per audited balance sheet of 06-07 stands at 3.56 which is slightly
higher than the benchmark level. however the ratio is expected to improve to 2.55 and
1.74 as at 31.03.2008 and 31.03.2009 on account of plough back of profits and fresh
infusion of capital by the promoter to the tune of RS.46.08 lacs .in 2007-08 and RS 30.00
lacs in 2008-09.as per provisional balance sheet of the firm as on 30.11.2007, promoter
have already brought in capital of RS.24.02 lacs during the current year.
It is stipulated that unit will infuse fresh capital of RS.46.08 lacs during the year 2007-08
apart from this unsecured loan of RS 12.00 lacs will also be brought by the unit during
2007-08.during the financial year 2008-09 promoter will further infuse capital of
RS.30.00 lacs in the unit and earlier introduced unsecured loan of rs.12.00 lacs will be
retained during the currency of loan. The unit has already infused RS.24.02 lacs during
the current financial year.
d) CURRENT RATIO
The current ratio stands at 0.89 for the year 2006-07.the reason for low ratio is because of
unit has invested funds in fixed assets and for maintenance of machinery for
improvement in the production capacity of the firm. However the unit is able to manage
the affairs without resorting to a tiny irregularity in cc account. In the view of infusion of
fresh capital by the promoters the current ratio for the year 2007-08 and 2008-09 is
estimated at 1.12 and 1.34 respectively. Besides this unit has been advised not to divert
short term fund for long term uses.

71

e) WORKING CAPITAL ASSESSMENT

As a scale of operations has gone up, the unit has requested for increase in its FBWC
limits from Rs. 50.00 lacs to Rs. 125.00 lacs. The estimated net sales of Rs. 802.00 lacs
for the year 2007-08 and Rs. 918.00 lacs for the year 2008-09 appears to be achievable.
The firms marketing efforts are expected to result in higher sales as well as profitability.
The units projected annual turnover for the year 2008-09 is Rs. 918.00 lacs and as per
Nayak committees recommendations the unit is eligible for the fund based working
capital finance of Rs. 183.60 lacs and as unit has requested for 125.00 lacs we have
proposed the same.

7. Status of Auditors remark, which have an impact on the credit risk

on the unit:
Particulars

Inspection & Audit

report

Credit Audit report

(warning signals)
Branch statutory
Auditors report
Companys audited
balance sheet
(qualification)

Date

Serious irregularities/adverse
features remaining
unattended
24.01.2008 1)Insurance policy of the
unit is not produced for
verification.(since
produced)
The following stipulation of
sanction are not compiled
a)partnership deed dated
01.09.06 should be
registered with registrar of
firm.(since Rectified)
b)current account with Icici
bank to be closed.(since
obtained)
c)partnership letter to be
obtained.(since obtained)
29.12.2005 Not covered

Branch reply

It is evident from
comment of the
inspecting official
that all the
irregularities
pointed out by him
were rectified
during the course
of inspection

13.04.07

Not commented upon

31.3.2007

Not commented upon

72

Conduct of Account
Particulars
Irregularities in Cash credit & other
accounts
Development of letter of credit
Over-due to other banks/ FIs
Non-compliance of term and conditions of
sanction
Any other adverse features (e.g. nonrouting of proceeds etc.)

Comments
None
None
None
None
None

Details of other borrowing arrangements and defaults, if any (Excluding

information given under credit limit)
Firm has taken a car loan of RS.9.36 Lacs from ICICI banks per the information
provided by the firm has not defaulted any single installments with the said bank.
Validity of GPCB consent:
RPI is holding the necessary consent from GPCB for production of three products
(1) 2-Mercapto benzimidazole (2) 2-Mercapto 5-Methoxy benzimidazole (3) 2-Mercapto
5-Methyle benzimidazole products valid for five years from the date of issue
dt.30.11.2007.the GPCB consent is proposed for the product capacity as per given below
Sr.No

Product

1
2

2-Mercapto Benzimidazole
2-Mercapto 5-Methoxy
Benzimidazole
2-Mercapto 5-Methyle
Benzimidazole

Existing
MT/Month
25
---

Proposed
MT/Month
5
10

Total
MT/Month
5
10

---

10

10

73

8. Assessment of WC facilities
a) Inventory & receivables levels:
Inventory/payments Accepted in
last renewal
Raw materials(months
consumption)
Finished
goods(months cost
of sales)
Receivables
(months sales)export
Domestic
Sundry
creditors(Months
consumption)

31.03.07
Actual
0.80

31.03.08
Estimated
1.07

31.03.09
projected
0.90

0.40

0.32

0.49

2.05

2.60

3.20

5.05

2.35

2.60

8.56

1.82

1.96

Due to take over of business from GLPL the directors position was at the higher side at
the end of the year 2006-2007.for ensuring and next year the same is placed at
comfortable level.

b) Assessed bank Finance

Sr. no
1
2
3
4
5
6
7
8
9
10
11
12

Total current asset(TCA)

Other current liability(OCL)
Working capital gap
Net working capital (NWC)
Assess bank finance(ABF)
NWC to total current asset
BK finance To TCA%
Sundry cred. To TCA%
Other cl less sundry cred.to TCA%
Inventories to Net sales(days)
Receivables to gross sales(days)
Sundry cred.to purchases(days)

31.03.07
Audited
121.32
136.91
-15.59
-15.59
0.00
-12.85
0.00
99.96
12.89
21
154
260

31.03.08
Estimated
274.17
119.77
154.40
29.40
125.00
10.72
45.59
38.91
4.78
35
72
55

31.03.09
projected
342.91
130.37
212.54
87.54
125.00
25.53
36.45
34.99
3.02
35
81
60

74

c) Computation of LC limits for WC (import, usance)

The major raw materials purchased by the company are sodium sulphideflakes,
brimopole and textile ethoxylated etc. The above mentioned raw material is imported
mainly from USA and china due to lower prices as compared to domestic market. the
annual purchase of raw material under LC is estimated at RS.100 Lacs in year 200809.the unit has requested to sanctioned LC facility of RS 25.00Lacs which is assessed
under.
(Amount Rs. in Lacs)
739.00
100.00
8.33
3.0 months
24.99
25.00

RM purchased projected for 2008-09

Estimated purchase under LC
Monthly purchase under LC
Average usance period + Lead time
L/C limit required
Recommended LC limit
Cash margin for LC is proposed at 25% by way of fixed deposits

d) Efficiency ratio
Particulars
Net sales/Total Tangible assets (Time)
Return on Assets (PBT/TTA)%
Operating cost to sales (%)
Bank finance to current Assets (%)
Inventory and recei/net sales(days)

31.03.07
Audited
1.09
0.10
14.91
0.0
197

31.03.08
Estimated
2.23
5.48
15.61
45.59
115

31.03.09
projected
2.18
6.73
16.02
36.45
125

75

e) Assessment of working capital limits as per Nayak Committee Recommendation

RPI is a SSI entity and assessment as per recommendation of the Nayak Committee is
applicable to it based on projected turnover of RS.918.00 Lacs(excluding other income)
for the year 2008-09, fund based working capital limit works out at RS.183.60 lacs.as
unit has requested for RS.125.00 Lacs in the same has been proposed
Nayak Committee Norms:

(RS.in lacs)

1) Projected turn over for the year 2008-09

2) Total working capital required (25% of projected T.O)
3) Eligible minimum working capital limits to be sanctioned
by the bank(80% of total working capital required)


RS.918.00
RS.229.50
RS.183.60

Working Capital recommended RS.125.00 lacs

F) Working capital assessment By MPBF

Current assets
(Amt. in Rs. Lacs)
Cash and bank balances
Receivables
Raw materials
Finished goods
Advance receivables in cash or kind
other consumable spares
Advance payment of taxes
deposit with GEB

2007
2.09
95.72
10.61
0.67
12.23

2008
2.65
163.00
38.00
38.00
10.23
3.86
26.10
1.03

2009
3.24
224.50
48.00
52.00
14.32
3.43
32.40
1.03

Total current Assets

121.32

282.87

378.92

Current Liabilities (Amt. in Rs. Lacs)

Short term borrowings from others
Other statutory liabilities
Other current liabilities
Short term borrowing from banks

2007
----3.65
11.99
121.27

2008
118.44
3.65
12.35
100.00

2009
146.98
1.62
9.97
150.00

Total current liabilities

136.91

234.44

308.57

76

FORMULA
Method 1
Method 2
Method 3

MPBF = 0.75 (CA CL)

MPBF = 0.75 (CA) CL
MPBF = 0.75 (CA CCA) CL

MPBF = Maximum Permissible Bank Finance

CA = Total Current Assets
CL
= Statutory liabilities + other current liabilities + Sundry Creditors (Trade)
CCA = Core Current Assets
Maximum Permissible Bank Finance
Method (Amt. in Rs. Lacs)
Method 1
Method 2
Method 3

2007
79.26
75.35
73.78

2008
111.32
77.71
75.73

2009
165.26
125.62
123.19

By first method, the quantum of banks short term advance will be restricted to 75% of
working capital gap is equal to current asset Minus current liability other than bank
borrowing. In year 2007 total MPBF is Rs.79.26 lacs which give credit to the firm so the
bank has no any objection for assessment of working capital and in 2008 the amount is
Rs.111.32 lacs
By second method the total MPBF is Rs.75 .35 lacs which is slightly lower than first
method, in this method the net working capital should at least be equal to 25% of the total
value of acceptable level of current asset. The bank would have some aggressive criteria
that why the amount is slightly decreased and in 2008 it is Rs.77.71 lacs, so by this
method assessment of working capital from existing Rs.50 lacs to Rs.125 lacs which is
total Rs.75 lacs can be sanctioned because it satisfied all the criteria of Nayak committee.

g) Comments on the assessment of the above limits:

The working capital limits are recommendation and justified based on acceptable levels
of operation, current assts and current liability. These are considered reasonable and
realistic keeping in the view the projected level of the production, sales, past trend and
industry trends. According to sales position as on month ending January-2008 and
existing orders on the hand we considered the requirement of units finance genuine.

77

9. TERMS AND CONDITION

(A) SECURITY:

Facility
Debit
cash
credit

Primary
Hypothecation
of
entire
current assets
of the firm.

Collateral
a)Equitable mortgage of the immovable
properties of the firm including and,
building(market value of the property
RS.29.25 lacs)
b)Hypothecation over units plant &
machinery situated 314-315,GIDC industrial
estate, Panoli.(market value of the property
RS.49.05 lacs)
c)equitable mortgage of the residential house
of
shri.Ishwar
R.Mali
situated
at
235,Adityanagar,Bhadkodra,Ankleshwar,DistBharuch.(market value of the property
RS.3.00 lacs)

Based
Valuation
report
dt.23.08.2005

Valuation
report
dt.23.08.2005
Valuation
report
dt.23.08.2005

(B)GUARANTEE:

S.N

NAME

NW(RS.IN LACS)

1
2
3
4

Shri.Ishwar R.Mali
Smt.Gomati I. Mali
Shri.Alpesh M.Purani
Shri.Narayan R.Mali

8.00
0.50
0.50
5.00

OPENION
REPORT DATE
12.04.2007
Do
Do
Do

As shri Deepak K.Joshi has since retired from the partnership firm, his personal
guarantee has not been proposed.
Deviation from existing security (if any): None
(C) MARGINS: (FOR EACH FACILITY AS APPLICABLE)
Cash credit
Raw Material: Imported
: Indigenous
SIP
FG
RECEIVABLE(Cover 90 days)
LC Import, usance

Existing

Proposed

25%
30%
40%
50%
Nil

25%
30%
40%
50%
NA
78

(D) RATE OF INTEREST:

Facility
Cash credit

CRA as
31.03.08
SB-6

on Pricing

Comments if pricing
differs from CRA
Corresponding
to
CRA NA
rating. present effective rate
being 1.50% above SBAR i.e
13.75% p.a applicable at
monthly rest

(E)OTHER CONDITIONS:




The firm will not incur major capital expenditure without banks prior consent.
The firm to submit GPCB consent for enhanced production capacity for new
product and consent for other new product proposed to be introduced by the
company.
The branch to obtain suitable letter from the unit for availing working capital
limits at a level lower than the eligible limit under Nayak Committee
recommendations.

79

10. CREDIT RATING

NON-TRADING SECTOR: SIMPLIFIED MODEL
BORROWING RATING SUMMARY
(A)

(i)

(ii)

(iii)

(iv)

(v)

Financial Risk(FR)

TOL/ TNW
(a) latest ratio -7
(b) average of last 3 years -2
(c) industry comparison -1
Current ratio
(a) latest ratio -7
(b) average of last 3 years -2
(c) industry comparison -1
Return on capital employed
(ROCE) (%)
(a) Latest ratio -8
(b) Average of last 3 years -2
PBDIT /intt.
(a) Latest ratio -8
(b) Average of last 3 years -2
PAT/ Operating income
(a) latest ratio -7
(b) average of last 3 years -2
(c) industry comparison -1

Marks Weight

Maximum
weighted
score
(a)x(b)
(c)

Company
s
weighted
score

(a)

(b)

(d)

10

2.5

25

19.65

10

20

5.71

10

20

17.50

10

1.5

15

15.00

10

10

00.00

80

(a) Gross Average DSCR (for

all loans) (for TL only)
or
(b) Inventory / net sales +
Receivables/ Gross Sales
(Days)

10

20

16.67

(vi)
(a) latest ratio -6
(b) average of last 3 years -2
(c) industry comparison -2
(for WC only) or
(c) [sum of Scores under
(a+b)] / 2
(for a company enjoying
both WC & TL facilities)
(vii) Group risk
(viii Forex risk
(ix) Future prospects (FP)
(Projected Ratio)
Total score

Total score normalized to 70

Qualitative Factors (-ve)
Total score (FR)

10
10
10

0.5
0.5
2

5
5
20
140

(-10)

140/2 =70
(-10)
70

(74.53/
110)*140
=94.86
47.00
0.00
47.00

81

NON-TRADING SECTOR: SIMPLIFIED MODEL

BORROWING RATING SUMMARY
(B)
(i)
(ii)
(iii)
(iv)
(v)
(vi)

Business and industry risk (B & I R)

Access to resources (input profile)

User/ Product Profile
Technology & Consistency in quality
Competition & Market Risk
Industry outlook/ cyclicality
Regulatory, Labor & Environment Risk/
contemporary issues
Total (B & I R)
(C)
MANAGEMENT RISK (MR)
(i)
Integrity
(ii)
Track record / Conduct of Account
(iii) Expertise, Managerial Competence & Commitment
(iv) Payment & Record
(v)
Structure & Systems
(vi) Experience in the Industry
(vii) Length of Relationship with the Bank
(viii) Succession plan / key Person
Total Score under MR
Management Risk (MR) Score Normalized to 10
(D)
Qualitative Parameter (External Rating)
(E)
Aggregate Risk Score:
(A+B+C+D) = (70+20+10+(+5))
(F)
CRA Rating Based on the above the score
(G) Country Risk (CR) Assessment
(H) Final Borrower Rating after CR
(I)
Financial Statement Quality
(J)
Risk Score/ Rating Transition Matrix

Maximum
Score
4
4
2
4
4
2

Companys
Score
3.00
3.00
1.00
3.00
3.00
1.00

20

14.00

4
4
3
2
1
2
3
1
20
20/2 =10
(+5)
100 (+5)

3.00
4.00
2.00
2.00
1.00
2.00
3.00
1.00
18.00
9.00
0.00
70.15
SB-6

SB-6
Good
Qualitative comments on
Trends

82

JUSTIFIACTION AND RECOMMENDATION FOR THE PROPOSED

FACILITIES:
a) The promoters are reasonably experienced and qualified enough to run the
venture successfully on profitable lines.
b) Unit has scored 70.00 marks out of 100 under new credit risk assessment
model, which comes under moderate risk level as per new CRA rating.
c) Collateral worth RS.81.30 lacs is offered against proposed exposure of
RS.150 lacs which comes at 54.20%.besides personal guarantee of all four
partner are also available.

10. RECOMMENDATIONS:
1.
2.

Renewal with enhancement of DCC limit(stocks & book-debts) from RS.50 lacs to
RS.125 lacs
Sanction of letter of credit limit of RS.25.00 lacs

In view of what has been stated above and elsewhere in proposal sanction of fund based
working capital limit of RS.125.00 lacs and NFB limit of RS.25.00 lacs to R P industries
is consider at fair banking risk .

83

CONCLUSION
Sanction of the working capital financing mainly depends on the viability and feasibility
of the project which assures the lender, fulfills their own respective criteria, and limits set
by Tandon & Chore Committee etc.
The financial institutes which are engaged in corporate finance, have criteria which must
be fulfilled by all organization .The banks which are engaged in financing to SSI, SMEs
for term loan and working capital financing, for expansion, modernizations and for new
venture purpose appraise based on RBI Norms.
Working capital appraisal contains mainly appraisal of promoters, contribution of
promoters, guarantee from promoter, past track record, technological, financial and
market analysis.
While sanctioning the loan proposal, the Banks keeps in consideration their own
performance measurement criteria as well as the rating by professional agencies like
CRISIL, ICRA etc.
The Bank frequently goes for the plant visit for the inspection purpose and also for find
out whether the firm has utilizes the borrowing money in proper way or not.
If any firm would fail to satisfy the bank about their criteria, the bank is authorized to
Withdraw & stop the proposal of loan and take legal action and can suit the file if the
borrower fails to repay the loan.

84

BIBLIOGRAPHY
REFERENCE BOOKS:


Project financing (policies, procedure& practice) with relevant SEBI guidelines

BY H.P.S.PAHWA.

Corporate and international Banking by institute of Finance, Banking and

Insurance.

Financial management by Prasanna Chandra.

Credit management

WEBSITES:


www.google.com

www.investopedia.com

www.sbibank.com

http://en.wikipedia.org/wiki/corporate_finance

www.rbi.org.in

*****

85