A PROJECT REPORT

ON

CREDIT APPRAISAL
A Project submitted in partial fulfillment for the award of
Degree
Of
MASTER OF BUSINESS ADMINISTRATION

Submitted to:
Submitted by:
Managing Director
Parmjeet Singh
Sr. J.S Safri
Roll No 511113351
RICDT Professional College
MBA- IV SEM.
LC Code : 00899

STUDENT DECLARATION
I hereby declare that the project report
entitled CREDIT APPRAISAL submitted for
the degree of MBA
is my original work
carried out by me under the guidance of Sr.
J.S Safri for the partial fulfillment of the
award of the degree of MASTER OF
BUSINESS ADMINISTRATION. The matter
embodied in this report has not submitted
anywhere else for the award of any other
degree/diploma.

Place : Roapr
Name : Parmjeet Singh
Date :
Roll No : 511113351

Forwarded by : RICDT Professional College, Ropar

(Pb)
Center Code : 00899

RICDT Professional College

Ropar
(Study Centre of Sikkim Manipal
University)

Certificate
This is to be certified that the Project work
entitled CREDIT APPRAISAL of MBA Revised
has been carried out by is approved and
acceptable.
3

Project Guide :
Centre Head :
Mr. Sanjeev Kumar
Sr. J.S Safri

Examiners Certificate
This is to certify that Parmjeet Singh has been
successfully completed the project entitled as
CREDIT APPRAISAL in partial fulfillment of
the requirement for the Award of

MBA
(of Sikkim Manipal University)
4

On
2011-2012 at
RICDT Professional College Ropar
(Study Centre of Sikkim Manipal University)

Signature
Signature
(Internal Examiner)
(External Examiner)

Acknowledgement
Preparing a project was great experience
for me which was possible only with the help
of people, whom I really want to say thanks.
I would like to express my deepest sense of
regards and gratitude RICDT Professional
College,
(Affiliated
to
Sikkim
Manipal
5

University) for
suggestions.

their

kind

regards

and

I wish to thanks Sr. J.S Safri Director of the

college and to all the teaching and nonteaching staff and friends who help me
directly or in-directly in the successful
completion of this project.

Parmjeet Singh
Roll No. 511113351

Curriculum Vitae

Name
Singh

Parmjeet

Father Name
Singh

S.Sukhwinder

Course

MBA

Roll No.

511113351

Semester

IV

Session

2012

LC Code

00899

Date of Submission

CONTENTS

Introduction
7

 Chapter
1. Introduction to Banking & SBI
2. Industry Analysis
3. Introduction to SME
4. Overview of Credit appraisal
5. SBI Norms for Credit Appraisal
6. Credit Risk Assessment
7. Case Study
8. Findings
9. Recommendation & Suggestions
10.

Conclusion.

Bibliography

Introduction to Credit Appraisal:

Credit appraisal means an investigation/assessment done by the bank prior before
providing any loans & advances/project finance & also checks the commercial,
financial & technical viability of the project proposed its funding pattern & further
checks the primary & collateral security cover available for recovery of such funds.
Problem Statement:
To study the Credit Appraisal System in SME sector, at State Bank of India (SBI),
Uttarsanda.
Objectives:
To study the Credit Appraisal Methods.
To understand the commercial, financial & technical viability of the project
proposed & its funding pattern.
To understand the pattern for primary & collateral security cover available
for recovery of such funds.
Research Design:
Analytical in nature
Data Collection:
Primary Data:
Informal interviews with Branch Manager and other staff members at SBI
bank.
E-circulars of SBI

Secondary Data:
Books and magazines
Database at SBI
Internal reports of the banks
Library research
Websites
Expected contribution of the study:
This study will help in understanding the credit appraisal system at SBI & to
understand how to reduce various risk parameters, which are broadly categorized
into financial risk, business risk, industrial risk & management risk associated in
providing any loans or advances or project finance.
Beneficiaries:
Researcher:
This report will help researcher in improving knowledge about the credit appraisal
system and to have practical exposure of the credit appraisal scenario in SBI.
Management student:
The project will help the management student to know the patterns of credit
appraisal in SBI bank.
SBI Bank:
The project will help bank in reducing the credit risk parameters and to improve its
efficiencies. It will also help to reduce risk associated in providing any loans &
advances or project finance in future and to overcome the loopholes.

10

Short write-up on the researcher and reason for taking up the project:
The researcher are MBA 4th year students, studying in RICDT Professional
College, Ropar (Pb)
The reason for taking up the project is to know and understand the credit
appraisal system in banking sector.
Credit appraisal is the major focus of banking industries these days, so the
project will help in understanding and analyzing the situation prevailing
currently.
Limitations of the study:
As the credit rating is one of the crucial areas for any bank, some of the
technicalities are not revealed which may have cause destruction to the
information and our exploration of the problem.
As some of the information is not revealed, whatever suggestions generated,
are based on certain assumptions.
Credit appraisal system includes various types of detail studies for different
areas of analysis, but due to time constraint, our analysis was of limited
areas only.

11

CHAPTER-1
INTRODUCTION TO BANKING
SECTOR AND SBI

Banking System:
The banking system in India was established in 18th century. The first Indian bank
which came into existence in1786 was THE GENERAL BANK OF INDIA
12

which is followed by BANK OF HINDUSTAN. Although both these banks do not

exist today but these banks made the foundation of banking system in India. The
oldest bank in existence in India is the state bank of India being established as
"The Bank of Bengal" in Calcutta in June 1806.The first fully Indian owned bank
was the Allahabad bank, which was established in 1865.
By the 1990s the market expanded with the establishment of
banks such as Punjab National bank in 1895 in Lahore and Bank of India in
1906, in Mumbai - both of which were founded under private ownership. The
Reserve bank of India formally took on the responsibility of regulating the
Indian banking Sector from 1935 After India's independence in 1947, the
Reserve Bank was nationalized and given broader powers.
Indian Banking System: The Current State & Road Ahead

Introduction
Recent time has witnessed the world economy develop serious difficulties in terms
of lapse of banking & financial institutions and plunging demand. Prospects
became very uncertain causing recession in major economies. However, amidst all
this chaos Indias banking sector has been amongst the few to maintain resilience.
A progressively growing balance sheet, higher pace of credit expansion, expanding
profitability and productivity akin to banks in developed markets, lower incidence
of nonperforming assets and focus on financial inclusion have contributed to
making Indian banking vibrant and strong. Indian banks have begun to revise their
growth approach and re-evaluate the prospects on hand to keep the economy
rolling. The way forward for the Indian banks is to innovate to take advantage of
13

the new business opportunities and at the same time ensure continuous assessment
of risks.
A rigorous evaluation of the health of commercial banks, recently undertaken by
the Committee on Financial Sector Assessment (CFSA) also shows that the
commercial banks are robust and versatile. The single-factor stress tests undertaken
by the CFSA divulge that the banking system can endure considerable shocks
arising from large possible changes in credit quality, interest rate and liquidity
conditions. These stress tests for credit, market and liquidity risk show that Indian
banks are by and large resilient.
Thus, it has become far more imperative to contemplate the role of the Banking
Industry in fostering the long term growth of the economy. With the purview of
economic stability and growth, greater attention is required on both political and
regulatory commitment to long term development programme. FICCI conducted a
survey on the Indian Banking Industry to assess the competitive advantage offered
by the banking sector, as well as the policies and structures that are required to
further the pace of growth. The results of our survey are given in the following
sections.
General Banking Scenario
The pace of development for the Indian banking industry has been tremendous
over the past decade. As the world reels from the global financial meltdown,
Indias banking sector has been one of the very few to actually maintain resilience
while continuing to provide growth opportunities, a feat unlikely to be matched by
other developed markets around the world. FICCI conducted a survey on the
Indian Banking Industry to assess the competitive advantage offered by the

14

banking sector, as well as the policies and structures required to further stimulate
the pace of growth.
The predicament of the banks in the developed countries owing to excessive
leverage and lax regulatory system has time and again been compared with
somewhat unscathed Indian Banking Sector. An attempt has been made to
understand the general sentiment with regards to the performance, the challenges
and the opportunities ahead for the Indian Banking Sector.
A majority of the respondents, almost 69% of them, felt that the Indian banking
Industry was in a very good to excellent shape, with a further 25% feeling it was in
good shape and only 6% of the respondents feeling that the performance of the
industry was just average. In fact, an overwhelming majority (93.33%) of the
respondents felt that the banking industry compared with the best of the sectors of
the economy, including pharmaceuticals, infrastructure, etc.
Most of the respondents were positive with regard to the growth rate attainable by
the Indian banking industry for the year 2009-10 and 2014-15, with 53.33% of the
view that growth would be between 15-20% for the year 2009-10 and greater than
20% for 2014-15.

Nationalization
The nationalization of banks added a new chapter in the Indian
banking system in 1969 when the Indra Gandhi Government nationalized the 14
15

largest commercial banks. A second phase of nationalization of banks took place in

1980 by the nationalization of 6 more commercial banks. The stated reason for the
nationalisation was to give the government more control of credit delivery.
Liberalizations
In the early 1990s the Narasimha Rao government embarked on a policy
of liberalization and gave license to a small number of private banks, which came to
be known as NEW GENERATION TECH-SAVVY BANK which included banks
such as UTI Bank, ICICI Bank and HDFC Bank. This move, along with the rapid
growth in the economy of India, kick started the banking sector in India, which has
seen rapid growth with strong contribution from all the three sectors of banks, namely,
government banks, private banks and foreign banks.
16

NO. OF COMMERCIAL BANKS IN INDIA

MAR.-03

MAR.04

MAR.05

MAR.
-06

NO.
OF
COMMERCIAL
BANKS (A+b)
297

292

290

289

222

{A}
SCHEDULE
COMMERCIAL BANKS
293

288

286

285

218

(-)OF WHICH: REGIONAL

RURAL BANKS
196

196

196

196

133

{B}
NON
SCHEDULE
COMMERCIAL BANKS
4

FINANCIAL YEAR

MAR.-02

Banks act as payment agents by conducting checking or current accounts for

customers, paying checks drawn by customers on the bank, and collecting checks
deposited to customers' current accounts. Banks also enable customer payments via
other payment methods such as Automated Clearing House (ACH), Wire
transfers or telegraphic, EFTPOS, and automated teller machine (ATM).
Banks borrow money by accepting funds deposited on current accounts, by
accepting term, and by issuing debt securities such as banknotes and bonds. Banks
lend money by making advances to customers on current accounts, by making
installment, and by investing in marketable debt securities and other forms of
money lending.

17

Since Indian banking sector is experience exponential growth, the profit made
by public sector and private sector banks are given below.
NET PROFIT OF COMMERCIAL BANKS IN INDIA (MN) Rs.

BANK

MAR.-05

MAR.-06

% CHANGE

PRIVATE SECTOR BANK

ICICI BANK

20,052.00

25,400.70

26.67

HDFFC BANK

6,655.60

8,707.80

30.83

UTI BANK

3,345.80

4,850.80

44.98

J& K BANK

1,150.70

1,768.40

53.68

KARUR VYSYA BANK

1,053.40

1,353.50

28.49

FEDRERAL BANK

900.90

2,252.10

149.98

KOTAK BANK

848.90

1,182.31

39.28

NA

2,700.00

NA

INDUSIND BANK

2,101.50

368.20

-82.48

ING VYSYA BANK

-381.30

90.60

NA

STATE BANK OF INDIA

43,045.20

44,066.70

2.37

BANK OF BARODA

6,768.40

8,269.60

22.18

BANK OF INDIA

3,400.50

7,014.40

106.28

CORPORATION BANK

4,021.60

4,444.60

10.52

IDBI LTD.

3,072.60

5,608.90

82.55

610.00

729.90

19.66

YES BANK

PUBLIC SECTOR BANK

DENA BANK

18

CANARA BANK

11,095.00

13,432.20

21.07

ALLAHABAD BANK

5,417.90

7,061.30

30.33

PUNJAB NATIONAL BANK

14,101.20

14,393.10

2.07

VIJAYA BANK

3,805.70

1,268.80

-66.66

BANK OF MAHARSHATRA

1,771.20

507.90

-71.32

3,015

3,610.00

19.7

UNION BANK OF INDIA

Source: reserve bank of India

Banks provide almost all payment services, and a bank account is considered
indispensable by most businesses, individuals and governments. Non-banks that
provide payment services such as remittance companies are not normally
considered an adequate substitute for having a bank account.
Banks borrow most funds from households and non-financial businesses, and lend
most funds to households and non-financial businesses, but non-bank lenders
provide a significant and in many cases adequate substitute for bank loans, and
money market funds, cash management trusts and other non-bank financial
19

institutions in many cases provide an adequate substitute to banks for lending

savings too.
Channels
Banks offer many different channels to access their banking and other services:

Automated Teller Machines

A branch is a retail location

Call center

Mail: most banks accept cheque deposits via mail and use mail to
communicate to their customers, e.g. by sending out statements

Mobile banking is a method of using one's mobile phone to conduct banking

transactions

Online banking is a term used for performing transactions, payments etc.

over the Internet

Relationship Managers, mostly for private banking or business banking,

often visiting customers at their homes or businesses

Telephone banking is a service which allows its customers to perform

transactions over the telephone with automated attendant or when requested
with telephone operator

Video banking is a term used for performing banking transactions or

professional banking consultations via a remote video and audio connection.
20

Video banking can be performed via purpose built banking transaction

machines (similar to an Automated teller machine), or via a video
conference enabled bank branch.clarification
Business model
A bank can generate revenue in a variety of different ways including interest,
transaction fees and financial advice. The main method is via charging interest on
the capital it lends out to customers. The bank profits from the difference between
the level of interest it pays for deposits and other sources of funds, and the level of
interest it charges in its lending activities.
This difference is referred to as the spread between the cost of funds and the loan
interest rate. Historically, profitability from lending activities has been cyclical and
dependent on the needs and strengths of loan customers and the stage of
the economic cycle. Fees and financial advice constitute a more stable revenue
stream and banks have therefore placed more emphasis on these revenue lines to
smooth their financial performance.
In the past 20 years American banks have taken many measures to ensure that they
remain profitable while responding to increasingly changing market conditions.
First, this includes the Gramm-Leach-Bliley Act, which allows banks again to
merge with investment and insurance houses. Merging banking, investment, and
insurance functions allows traditional banks to respond to increasing consumer
demands for "one-stop shopping" by enabling cross-selling of products (which, the
banks hope, will also increase profitability).
Second, they have expanded the use of risk-based pricing from business lending to
consumer lending, which means charging higher interest rates to those customers
21

that are considered to be a higher credit risk and thus increased chance
of default on loans. This helps to offset the losses from bad loans, lowers the price
of loans to those who have better credit histories, and offers credit products to high
risk customers who would otherwise be denied credit.
Third, they have sought to increase the methods of payment processing available to
the general public and business clients. These products include debit cards, prepaid
cards, smart cards, and credit cards. They make it easier for consumers to
conveniently make transactions and smooth their consumption over time (in some
countries with underdeveloped financial systems, it is still common to deal strictly
in cash, including carrying suitcases filled with cash to purchase a home).
However, with convenience of easy credit, there is also increased risk that
consumers will mismanage their financial resources and accumulate excessive
debt. Banks make money from card products through interest payments and fees
charged to consumers and transaction to companies that accept the credit- debit cards. This helps in making profit and facilitates economic development as a
whole.[9]
Retail banking

Checking account

Savings account

Money market account

Certificate of deposit (CD)

Individual retirement account (IRA)

22

Credit card

Debit card

Mortgage

Home equity loan

Mutual fund

Personal loan

Time deposits

Business (or commercial/investment) banking

Business loan

Capital raising (Equity / Debt / Hybrids)

Mezzanine finance

Project finance

Revolving credit

Risk management (FX, interest rates, commodities, derivatives)

Term loan

23

Cash Management Services (Lock box, Remote Deposit Capture, Merchant

Processing)

Risk and capital

Banks face a number of risks in order to conduct their business, and how well these
risks are managed and understood is a key driver behind profitability, and how
much capital bank is required to hold. Some of the main risks faced by banks
include:

Credit risk: risk of loss arising from a borrower who does not make
payments as promised.

Liquidity risk: risk that a given security or asset cannot be traded quickly
enough in the market to prevent a loss (or make the required profit).

Market risk: risk that the value of a portfolio, either an investment portfolio
or a trading portfolio, will decrease due to the change in value of the market
risk factors.

Operational risk: risk arising from execution of a company's business

functions.

Reputational risk: a type of risk related to the trustworthiness of business.

The capital requirement is a bank regulation, which sets a framework on how

banks and depository institutions must handle their capital. The categorization of
assets and capital is highly standardized so that it can be risk weighted.

24

Economic functions
The economic functions of banks include:
1. Issue of money, in the form of banknotes and current accounts subject
to check or payment at the customer's order. These claims on banks can act
as money because they are negotiable or repayable on demand, and hence
valued at par. They are effectively transferable by mere delivery, in the case
of banknotes, or by drawing a check that the payee may bank or cash.
2. Netting and settlement of payments banks act as both collection and
paying agents for customers, participating in interbank clearing and
settlement systems to collect, present, be presented with, and pay payment
instruments. This enables banks to economize on reserves held for
settlement of payments, since inward and outward payments offset each
other. It also enables the offsetting of payment flows between geographical
areas, reducing the cost of settlement between them.
3. Credit intermediation banks borrow and lend back-to-back on their own
account as middle men.
4. Credit quality improvement banks lend money to ordinary commercial and
personal borrowers (ordinary credit quality), but are high quality borrowers.
The improvement comes from diversification of the bank's assets and capital
which provides a buffer to absorb losses without defaulting on its
obligations. However, banknotes and deposits are generally unsecured; if
the bank gets into difficulty and pledges assets as security, to raise the
funding it needs to continue to operate, this puts the note holders and
depositors in an economically subordinated position.
25

5. Maturity transformation banks borrow more on demand debt and short

term debt, but provide more long term loans. In other words, they borrow
short and lend long. With a stronger credit quality than most other
borrowers, banks can do this by aggregating issues (e.g. accepting deposits
and issuing banknotes) and redemptions (e.g. withdrawals and redemption
of banknotes), maintaining reserves of cash, investing in marketable
securities that can be readily converted to cash if needed, and raising
replacement funding as needed from various sources (e.g. wholesale cash
markets and securities markets).
6. Money creation whenever a bank gives out a loan in a fractional-reserve
banking system, a new sum of virtual money is created.

Bank crisis
Banks are susceptible to many forms of risk which have triggered occasional
systemic crises. These include liquidity risk (where many depositors may request
withdrawals in excess of available funds), credit risk (the chance that those who
owe money to the bank will not repay it), and interest rate risk (the possibility that
the bank will become unprofitable, if rising interest rates force it to pay relatively
more on its deposits than it receives on its loans).
Banking crises have developed many times throughout history, when one or more
risks have materialized for a banking sector as a whole. Prominent examples
include the bank run that occurred during the Great Depression, the U.S. Savings
and Loan crisis in the 1980s and early 1990s, the Japanese banking crisis during
the 1990s, and the sub-prime mortgage crisis in the 2000s.

26

A snapshot of the banking industry:

The Reserve Bank of India (RBI), as the central bank of the country, closely
monitors developments in the whole financial sector.
The banking sector is dominated by Scheduled Commercial Banks (SBCs). As at
end-March 2002, there were 296 Commercial banks operating in India. This
included 27 Public Sector Banks (PSBs), 31 Private, 42 Foreign and 196 Regional
Rural Banks. Also, there were 67 scheduled co-operative banks consisting of 51
scheduled urban co-operative banks and 16 scheduled state co-operative banks.
Scheduled commercial banks touched, on the deposit front, a growth of 14% as
against 18% registered in the previous year. And on advances, the growth was
14.5% against 17.3% of the earlier year.
Higher provisioning norms, tighter asset classification norms, dispensing with the
concept of past due for recognition of NPAs, lowering of ceiling on exposure to a
single borrower and group exposure etc., are among the measures in order to
improve the banking sector.
A minimum stipulated Capital Adequacy Ratio (CAR) was introduced to
strengthen the ability of banks to absorb losses and the ratio has subsequently been
raised from 8% to 9%. It is proposed to hike the CAR to 12% by 2004 based on the
Basle Committee recommendations.
Retail Banking is the new mantra in the banking sector. The home loans alone
account for nearly two-third of the total retail portfolio of the bank. According to

27

one estimate, the retail segment is expected to grow at 30-40% in the coming
years.
Net banking, phone banking, mobile banking, ATMs and bill payments are the new
buzz words that banks are using to lure customers.
With a view to provide an institutional mechanism for sharing of information on
borrowers / potential borrowers by banks and Financial Institutions, the Credit
Information Bureau (India) Ltd. (CIBIL) was set up in August 2000. The Bureau
provides a framework for collecting, processing and sharing credit information on
borrowers of credit institutions. SBI and HDFC are the promoters of the CIBIL.
The RBI is now planning to transfer of its stakes in the SBI, NHB and National
bank for Agricultural and Rural Development to the private players. Also, the
Government has sought to lower its holding in PSBs to a minimum of 33% of total
capital by allowing them to raise capital from the market.
Banks are free to acquire shares, convertible debentures of corporate and units of
equity-oriented mutual funds, subject to a ceiling of 5% of the total outstanding
advances (including commercial paper) as on March 31 of the previous year.
The finance ministry spelt out structure of the government-sponsored ARC called
the Asset Reconstruction Company (India) Limited (ARCIL), this pilot project of
the ministry would pave way for smoother functioning of the credit market in the
country. The government will hold 49% stake and private players will hold the rest
51%- the majority being held by ICICI Bank (24.5%).
Reforms in the banking sector:
The first phase of financial reforms resulted in the nationalization of 14 major
banks in 1969 and resulted in a shift from Class banking to Mass banking. This in
28

turn resulted in a significant growth in the geographical coverage of banks. Every

bank has to earmark a minimum percentage of their loan portfolio to sectors
identified as priority sectors. The manufacturing sector also grew during the
1970s in protected environs and the banking sector was a critical source. The next
wave of reforms saw the nationalization of 6 more commercial banks in 1980.
Since then the number scheduled commercial banks increased four-fold and the
number of banks branches increased eight-fold.
After the second phase of financial sector reforms and liberalization of the sector in
the early nineties, the Public Sector Banks (PSB) s found it extremely difficult to
complete with the new private sector banks and the foreign banks. The new private
sector banks first made their appearance after the guidelines permitting them were
issued in January 1993. Eight new private sector banks are presently in operation.
This banks due to their late start have access to state-of-the-art technology, which
in turn helps them to save on manpower costs and provide better services.
During the year 2000, the State Bank of India (SBI) and its 7 associates accounted
for a 25% share in deposits and 28.1% share in credit. The 20 nationalized banks
accounted for 53.5% of the deposits and 47.5% of credit during the same period.
The share of foreign banks ( numbering 42 ), regional rural banks and other
scheduled commercial banks accounted for 5.7%, 3.9% and 12.2% respectively in
deposits and 8.41%, 3.14% and 12.85% respectively in credit during the year 2000.
Classification of banks:
The Indian banking industry, which is governed by the Banking Regulation Act of
India, 1949 can be broadly classified into two major categories, non-scheduled
banks and scheduled banks. Scheduled banks comprise commercial banks and the
co-operative banks. In terms of ownership, commercial banks can be further
29

grouped into nationalized banks, the State Bank of India and its group banks,
regional rural banks and private sector banks (the old / new domestic and foreign).
These banks have over 67,000 branches spread across the country. The Indian
banking industry is a mix of the public sector, private sector and foreign banks.
The private sector banks are again spilt into old banks and new banks.

Banking System in India

Reserve bank of India (Controlling Authority)

Development Financial institutions

Banks

IFCI IDBI ICICI

Commercial

NABARD NHB

IRBI

Regional Rural

Co-operative
30

EXIM Bank

Land Development

SIDBI

Banks

Banks

Banks

Banks

Public Sector Banks

SBI Groups

Private Sector Banks

Nationalized Banks

Indian Banks

Bank

ABOUT SBI:

THE PLACE TO SHARE THE NEWS ...

SHARE THE VIEWS

31

Foreign

The State Bank of India, the countrys oldest Bank and a premier in terms of
balance sheet size, number of branches, market capitalization and profits is today
going through a momentous phase of Change and Transformation the two
hundred year old Public sector behemoth is today stirring out of its Public Sector
legacy and moving with an agility to give the Private and Foreign Banks a run for
their money.
The bank is entering into many new businesses with strategic tie ups Pension
Funds, General Insurance, Custodial Services, Private Equity, Mobile Banking,
Point of Sale Merchant Acquisition, Advisory Services, structured products etc
each one of these initiatives having a huge potential for growth.
The Bank is forging ahead with cutting edge technology and innovative new
banking models, to expand its Rural Banking base, looking at the vast untapped
potential in the hinterland and proposes to cover 100,000 villages in the next two
years.
It is also focusing at the top end of the market, on whole sale banking capabilities
to provide Indias growing mid / large Corporate with a complete array of products
and services. It is consolidating its global treasury operations and entering into
structured products and derivative instruments. Today, the Bank is the largest
provider of infrastructure debt and the largest arranger of external commercial
borrowings in the country. It is the only Indian bank to feature in the Fortune 500
list.
The Bank is changing outdated front and back end processes to modern customer
friendly processes to help improve the total customer experience. With about
11448 of its own branches and another 6500+ branches of its Associate Banks
already networked, today it offers the largest banking network to the Indian
32

customer. Banking behemoth State Bank of India is planning to set up 15,000

ATMs in the country by March 2010 investing more than Rs 1,000 crore.
RP Sinha, deputy managing director (information technology) of the bank, said:
"We plan to have 25,000 ATMs in the country by March 2010. We will add 15,000
ATMs to the existing ones by end of this fiscal." The bank has almost 10,300
ATMs in the country at present.
According to a senior SBI official, the spot for an ATM counter is taken on lease. It
requires Rs 5.2-5.5 lakh to set up the infrastructure and almost Rs 3.5 lakh for an
ATM machine. "All put together, the cost is around Rs 9 lakh per counter," he said.
Going by the estimate, SBI would require a whopping Rs 1,350 crore for setting up
15,000 ATMs.
The Bank is also in the process of providing complete payment solution to its
clientele with its ATMs, and other electronic channels such as Internet banking,
debit cards, mobile banking, etc.
With four national level Apex Training Colleges and 54 learning Centres spread all
over the country the Bank is continuously engaged in skill enhancement of its
employees. Some of the training programes are attended by bankers from banks in
other countries.
The bank is also looking at opportunities to grow in size in India as well as
internationally. It presently has 82 foreign offices in 32 countries across the globe.
It has also 8 Subsidiaries in India SBI Capital Markets Ltd, SBI Mutual Funds,
SBI factor and commercial services Ltd, SBI DFHI Ltd, SBI Cards and Payment
Services Ltd, SBI Life Insurance Company Ltd, SBI Fund Management Pvt. Ltd,
SBI Canada - forming a formidable group in the Indian Banking scenario. It is in
33

the process of raising capital for its growth and also consolidating its various
holdings.
Background:
State Bank of India is the largest and one of the oldest commercial bank in India, in
existence for more than 200 years. The bank provides a full range of corporate,
commercial and retail banking services in India. Indian central bank namely
Reserve Bank of India (RBI) is the major share holder of the bank with 59.7%
stake. The bank is capitalized to the extent of Rs.646bn with the public holding
(other than promoters) at 40.3%.
SBI has the largest branch and ATM network spread across every corner of India.
Thebank has a branch network of over 17000 branches (including subsidiaries).
Apart fromIndian network it also has a network of 73 overseas offices in 30
countries in all time zones, correspondent relationship with 520 International banks
in 123 countries. In recent past, SBI has acquired banks in Mauritius, Kenya and
Indonesia. The bank had total staff strength of 198,774 as on 31st March, 2008. Of
this, 29.51% are officers, 45.19% clerical staff and the remaining 25.30% were
sub-staff. The bank is listed on the Bombay Stock Exchange, National Stock
Exchange, Kolkata Stock Exchange, Chennai Stock Exchange and Ahmedabad
Stock Exchange while its GDRs are listed on the London Stock Exchange.
SBI group accounts for around 25% of the total business of the banking industry
while itaccounts for 35% of the total foreign exchange in India. With this type of
strong base, SBI has displayed a continued performance in the last few years in
scaling up its efficiency levels. Net Interest Income of the bank has witnessed a
CAGR of 13.3% during the last five years. During the same period, net interest

34

margin (NIM) of the bank has gone up from as low as 2.9% in FY02 to 3.40% in
FY06 and currently is at 3.32%.

KEY AREAS OF OPERATION:

The business operations of SBI can be broadly classified into the key income
generating areas such as National Banking, International Banking, Corporate
Banking, & Treasury operations. The functioning of some of the key divisions is
enumerated below:

a) Corporate Banking
The corporate banking segment of the bank has total business of around
Rs1,193bn. SBI has created various Strategic Business Units (SBU) in order to
streamline its operations.
These SBUs are as follows:
a.1) Corporate Accounts
a.2) Leasing
a.3) Project Finance
a.4) Mid Corporate Group
a.5) Stressed Assets Management
b) National banking

35

The national banking group has 14 administrative circles encompassing a vast

network of 9,177 branches, 4 sub-offices, 12 exchange bureaus, 104 satellite
offices and 679 extension counters, to reach out to customers, even in the remotest
corners of the country. Out of the total branches, 809 are specialized branches. This
group consists of four business group which are enumerated below:
b.1) Personal Banking SBU
b.2) Small & Medium Enterprises
b.3) Agricultural Banking
b.4) Government Banking

c) International banking
SBI has a network of 73 overseas offices in 30 countries in all time zones and
correspondent relationship with 520 international banks in 123 countries. The bank
is keen to implement core banking solution to its international branches also.
During FY06, 25 foreign offices were successfully switched over to Finacle
software. SBI has installed ATMs at Male, Muscat and Colombo Offices. In recent
years, SBI acquired 76% shareholding in Giro Commercial Bank Limited in Kenya
and PT Indomonex Bank Ltd. in Indonesia. The bank incorporated a company SBI
Botswana Ltd. at Gaborone.
d) Treasury
The bank manages an integrated treasury covering both domestic and foreign
exchange markets. In recent years, the treasury operation of the bank has become
more active amidst rising interest rate scenario, robust credit growth and liquidity
36

constraints. The bank diversified its operations more actively into alternative assets
classes with a view to diversify the portfolio and build alternative revenue streams
in order to offset the losses in fixed income portfolio. Reorganization of the
treasury processes at domestic and global levels is also being undertaken to
leverage on the operational synergy between business units and network. The
reorganization seeks to enhance the efficiencies in use of manpower resources and
increase maneuverability of banks operations in the markets both domestic as well
as international.
e) Associates & Subsidiaries
The State Bank Group with a network of 14,061 branches including 4,755
branches of its seven Associate Banks dominates the banking industry in India. In
addition to banking, the Group, through its various subsidiaries, provides a whole
range of financial services which includes Life Insurance, Merchant Banking,
Mutual Funds, Credit Card, Factoring, Security trading and primary dealership in
the Money Market.
e.1) Associates Banks:
SBI has six associate banks namely
State Bank of Indore
State Bank of Travancore
State Bank of Bikaner and Jaipur
State Bank of Mysore
State Bank of Patiala
State Bank of Hyderabad
37

e.2) Non-Banking Subsidiaries/Joint Ventures

i)

SBI Capital Markets Ltd,

ii)

SBI Mutual Funds,

iii)

SBI factor and commercial services Ltd,

iv)

SBI DFHI Ltd,

v)

SBI Cards and Payment Services Ltd,

vi)

SBI Life Insurance Company Ltd,

vii)

SBI Fund Management Pvt. Ltd, SBI

CHAPTER 2
INDUSTRY ANALYSIS
38

Competitive forces model in the banking industry

(PORTERS FIVE-FORCE MODEL)
Prof. Michael Porters competitive forces Model applies to each
and every company as well as industry. This model with regards to
the Banking Industry is presented below.
(2)
Potential Entrants is
high as development
financial institutions as
well as private and
foreign
banks
have
entered in a big way.
(5)

(1)

(4)

Organizing
power
of the supplier is
high. With the new
financial instruments
they are asking higher
return
on
the
investments.

Rivalry
among
existing
firms
has
increased
with
liberalization.
New
products and improved
customer services is the
focus.

Bargaining power of
buyers is high as
corporate can raise
funds easily due to
high competition.

39

(3)
Threat
from
substitute is high due
to
competition
from
NBFCs and insurance
companies as they offer
a high rate of interest

1. Rivalry among existing firms

With the process of liberalization, competition among the existing banks has
increased. Each bank is coming up with new products to attract the customers and
tailor made loans are provided. The quality of services provided by banks has
improved drastically.
2. Potential Entrants
Previously the Development Financial Institutions mainly provided project finance
and development activities. But they now entered into retail banking which has
resulted into stiff competition among the exiting players.
3. Threats from Substitutes
Banks face threats from Non-Banking Financial Companies. NBFCs offer a higher
rate of interest.
4. Bargaining Power of Buyers

40

Corporate can raise their funds through primary market or by issue of GDRs,
FCCBs. As a result they have a higher bargaining power. Even in the case of
personal finance, the buyers have a high bargaining power. This is mainly because
of competition.
5. Bargaining Power of Suppliers
With the advent of new financial instruments providing a higher rate of returns to
the investors, the investments in deposits is not growing in a phased manner. The
suppliers demand a higher return for the investments.
6. Overall Analysis
The key issue is how can banks leverage their strengths to have a better future.
Since the availability of funds is more and deployment of funds is less, banks
should evolve new products and services to the customers. There should be a
rational thinking in sanctioning loans, which will bring down the NPAs. As there is
a expected revival in the Indian economy Banks have a major role to play. Funding
corporate at a low cost of capital is a special requisite.
SWOT ANALYSIS
The banking sector is also taken as a proxy for the economy as a whole. The
performance of bank should therefore, reflect Trends in the Indian Economy.
Due to the reforms in the financial sector, banking industry has changed drastically
with the opportunities to the work with, new accounting standards new entrants
and information technology. The deregulation of the interest rate, participation of
banks in project financing has changed in the environment of banks.
The performance of banking industry is done through SWOT Analysis. It mainly
helps to know the strengths and Weakness of the industry and to improve will be

41

known through converting the opportunities into strengths. It also helps for the
competitive environment among the banks.
a) STRENGTHS

1. Availability of Funds
There are seven lakh crore wroth of deposits available in the banking system.
Because of the recession in the economy and volatility in capital markets,
consumers prefer to deposit their money in banks. This is mainly because of
liquidity for investors.

2. Banking network
After nationalization, banks have expanded their branches in the country, which
has helped banks build large networks in the rural and urban areas. Private banks
allowed to operate but they mainly concentrate in metropolis.
3. Large Customer Base
This is mainly attributed to the large network of the banking sector. Depositers in
rural areas prefer banks because of the failure of the NBFCs.
4. Low Cost of Capital
Corporate prefers borrowing money from banks because of low cost of capital.
Middle income people who want money for personal financing can look to banks
as they offer at very low rates of interests. Consumer credit forms the major source
of financing by banks.

42

b) WEAKNESS

1. Loan Deployment
Because of the recession in the economy the banks have idle resources to the tune
of 3.3 lakh crores. Corporate lending has reduced drastically
2. Powerful Unions
Nationalization of banks had a positive outcome in helping the Indian Economy as
a whole. But this had also proved detrimental in the form of strong unions, which
have a major influence in decision-making. They are against automation.
3. Priority Sector Lending
To uplift the society, priority sector lending was brought in during nationalization.
This is good for the economy but banks have failed to manage the asset quality and
their intensions were more towards fulfilling government norms. As a result
lending was done for non-productive purposes.
4. High Non-Performing Assets
Non-Performing Assets (NPAs) have become a matter of concern in the banking
industry. This is because of change in the total outstanding advances, which has to
be reduced to meet the international standards.
c) OPPORTUNITIES
1. Universal Banking
Banks have moved along the valve chain to provide their customers more products
and services. For example: - SBI is into SBI home finance, SBI Capital Markets,
SBI Bonds etc.

43

2. Differential Interest Rates

As RBI control over bank reduces, they will have greater flexibility to fix their
own interest rates which depends on the profitability of the banks.
3. High Household Savings
Household savings has been increasing drastically. Investment in financial assets
has also increased. Banks should use this opportunity for raising funds.
4. Overseas Markets
Banks should tape the overseas market, as the cost of capital is very low.
5. Interest Banking
The advance in information technology has made banking easier. Business can
effectively carried out through internet banking.
d) THREATS

1. NBFCs, Capital Markets and Mutual funds

There is a huge investment of household savings. The investments in NBFCs
deposits, Capital Market Instruments and Mutual Funds are increasing. Normally
these instruments offer better return to investors.
2. Change in the Government Policy
The change in the government policy has proved to be a threat to the banking
sector.
3. Inflation
The interest rates go down with a fall in inflation. Thus, the investors will shift his
investments to the other profitable sectors.
44

4. Recession
Due to the recession in the business cycle the economy functions poorly and this
has proved to be a threat to the banking sector. The market oriented economy and
globalization has resulted into competition for market share. The spread in the
banking sector is very narrow. To meet the competition the banks has to grow at a
faster rates and reduce the overheads. They can introduce the new products and
develop the existing services.

45

CHAPTER 3
INTRODUCTION TO SME

SME

46

1 Concept:
The small-scale industries (SSI) produce about 8000 products, contribute 40% of
the industrial output and offer the largest employment after agriculture. The sector,
therefore, presents an opportunity to the nation to harness local competitive
advantages for achieving global dominance.

2 From SSI to SME:

47

Defining the New Paradigm2.1 Government policy as well as credit policy has so
far concentrated on manufacturing units in the small-scale sector. The lowering of
trade barriers across the globe has increased the minimum viable scale of
enterprises. The size of the unit and technology employed for firms to be globally
competitive is now of a higher order. The definition of small-scale sector needs to
be revisited and the policy should consider inclusion of services and trade sectors
within its ambit. In keeping with global practice, there is also a need to broaden the
current concept of the sector and include the medium enterprises in a composite
sector of Small and Medium Enterprises (SMEs). A comprehensive legislation,
which would enable the paradigm shift from small-scale industry to small and
medium enterprises under consideration of Parliament. The Reserve Bank of India
had meanwhile set up an Internal Group which has recommended: Current
SSI/tiny industries definition may continue. Units with investment in plant and
machinery in excess of SSI limit and up to Rs.10 crore may be treated as Medium
Enterprises (ME). The definition may be reviewed after enactment of the Small
and Medium Enterprises Development Bill.
3 Definition of SMEs At present, a small scale industrial unit is an undertaking in which investment in
plant and machinery, does not exceed Rs.1 crore, except in respect of certain
specified items under hosiery, hand tools, drugs and pharmaceuticals, stationery
items and sports goods, where this investment limit has been enhanced to Rs 5
crore. Units with investment in plant and machinery in excess of SSI limit and up
to Rs. 25 crore may be treated as Medium Enterprises (ME).
The Government of India has enacted the Micro, Small and Medium Enterprises
Development (MSMED) Act 2006 which was notified on October 2, 2006. The
48

definition of the small and medium enterprises as provided in the Act (Annex VII)
will have immediate

effect.

4 Eligibility criteria
(i) These guidelines would be applicable to the following entities, which are
viable or potentially viable:
a) All non-corporate SMEs irrespective of the level of dues to banks.
b) All corporate SMEs, which are enjoying banking facilities from a single bank,
irrespective of the level of dues to the bank.
c) All corporate SMEs, which have funded and non-funded outstanding up to Rs.10
crore under multiple/ consortium banking arrangement.
(ii) Accounts involving willful default, fraud and malfeasance will not be
eligible for restructuring under these guidelines.
(iii) Accounts classified by banks as Loss Assets will not be eligible
for restructuring.
(iv) In respect of BIFR cases banks should ensure completion of all formalities in
seeking approval from BIFR before implementing the package.

SME: At present, a small scale industrial unit is an industrial undertaking in which

investment in plant and machinery, does not exceed Rs.1 crore except in respect of
certain specified items under hosiery, hand tools, drugs and pharmaceuticals,
stationery items and sports goods where this investment limit has been enhanced to
Rs.5 crore. A comprehensive legislation which would enable the paradigm shift
49

from small scale industry to small and medium enterprises is under consideration
of Parliament. Pending enactment of the above legislation, current SSI/tiny
industries definition may continue. Units with investment in plant and machinery
in excess of SSI limit and up to Rs.10 crore may be treated as Medium Enterprises
(ME). Only SSI financing will be included in Priority Sector.
All banks may fix self-targets for financing to SME sector so as to reflect a higher
disbursement over the immediately preceding year, while the sub-targets for
financing tiny units and smaller units to the extent of 40% and 20% respectively
may continue. Banks may arrange to compile data on outstanding credit to SME
sector as on March 31, 2005 as per new definition and also showing the break up
separately for tiny, small and medium enterprises.
Banks may initiate necessary steps to rationalize the cost of loans
to SME sector by adopting a transparent rating system with cost
of credit being linked to the credit rating of enterprise.
SIDBI has developed a Credit Appraisal & Rating Tool (CART) as
well as a Risk Assessment Model (RAM) and a comprehensive
rating model for risk assessment of proposals for SMEs. The banks
may consider to take advantage of these models as appropriate
and reduce their transaction costs.
In order to increase the outreach of formal credit to the SME sector, all banks,
including Regional Rural Banks may make concerted efforts to provide credit
cover on an average to at least 5 new small/medium enterprises at each of their
semi urban/urban branches per year.

50

A debt restructuring mechanism for nursing of sick units in SME sector and a One
Time Settlement (OTS) Scheme for small scale NPA accounts in the books of the
banks as on March 31, 2004 are being introduced.
5 Challenges faced by SME:
The challenges being faced by the small and medium sector may be briefly set out
as followsa) Small and Medium Enterprises (SME), particularly the tiny segment of the small
enterprises have inadequate access to finance due to lack of financial information
and non-formal business practices. SMEs also lack access to private equity and
venture capital and have a very limited access to secondary market instruments.
b) SMEs face fragmented markets in respect of their inputs as well as products and
are vulnerable to market fluctuations.
c) SMEs lack easy access to inter-state and international markets.
d) The access of SMEs to technology and product innovations is also limited.
There is lack of awareness of global best practices.
e) SMEs face considerable delays in the settlement of dues/payment of bills by the
large scale buyers. With the deregulation of the financial sector, the ability of the
banks to service the credit requirements of the SME sector depends on the
underlying transaction costs, efficient recovery processes and available security.
There is an immediate need for the banking sector to focus on credit and SMEs.

51

CHAPTER 4
OVERVIEW OF CREDIT
APPRAISAL

52

Credit appraisal means an investigation/assessment done by the bank prior before

providing any loans & advances/project finance & also checks the commercial,
financial & technical viability of the project proposed its funding pattern & further
checks the primary & collateral security cover available for recovery of such funds.
Brief overview of credit:
Credit Appraisal is a process to ascertain the risks associated with the extension of
the credit facility. It is generally carried by the financial institutions which are
involved in providing financial funding to its customers. Credit risk is a risk related
to non repayment of the credit obtained by the customer of a bank. Thus it is
necessary to appraise the credibility of the customer in order to mitigate the credit
risk. Proper evaluation of the customer is performed which measures the financial
condition and the ability of the customer to repay back the loan in future?
Generally the credits facilities are extended against the security know as collateral.
But even though the loans are backed by the collateral, banks are normally
interested in the actual loan amount to be repaid along with the interest. Thus, the
customer's cash flows are ascertained to ensure the timely payment of principal and
the interest.
It is the process of appraising the credit worthiness of a loan applicant. Factors like
age, income, number of dependents, nature of employment, continuity of
employment, repayment capacity, previous loans, credit cards, etc. are taken into
account while appraising the credit worthiness of a person. Every bank or lending
institution has its own panel of officials for this purpose.

53

However the 3 C of credit are crucial & relevant to all borrowers/ lending which
must be kept in mind at all times.
Character
Capacity
Collateral
If any one of these are missing in the equation then the lending officer must
question the viability of credit.
There is no guarantee to ensure a loan does not run into problems; however if
proper credit evaluation techniques and monitoring are implemented then naturally
the loan loss probability / problems will be minimized, which should be the
objective of every lending officer.
Credit is the provision of resources (such as granting a loan) by one party to
another party where that second party does not reimburse the first party
immediately, thereby generating a debt, and instead arranges either to repay or
return those resources (or material(s) of equal value) at a later date. The first party
is called a creditor, also known as a lender, while the second party is called a
debtor, also known as a borrower.
Credit allows you to buy goods or commodities now, and pay for them later. We
use credit to buy things with an agreement to repay the loans over a period of time.
The most common way to avail credit is by the use of credit cards. Other credit
plans include personal loans, home loans, vehicle loans, student loans, small
business loans, trade.

54

A credit is a legal contract where one party receives resource or wealth from
another party and promises to repay him on a future date along with interest. In
simple terms, a credit is an agreement of postponed payments of goods bought or
loan. With the issuance of a credit, a debt is formed.
Basic types of credit
There are four basic types of credit. By understanding how each works, you will be
able to get the most for your money and avoid paying unnecessary charges.
Service credit is monthly payments for utilities such as telephone, gas, electricity,
and water. You often have to pay a deposit, and you may pay a late charge if your
payment is not on time.
Loans let you borrow cash. Loans can be for small or large amounts and for a few
days or several years. Money can be repaid in one lump sum or in several regular
payments until the amount you borrowed and the finance charges are paid in full.
Loans can be secured or unsecured.
Installment credit may be described as buying on time, financing through the
store or the easy payment plan. The borrower takes the goods home in exchange
for a promise to pay later. Cars, major appliances, and furniture are often
purchased this way. You usually sign a contract, make a down payment, and agree
to pay the balance with a specified number of equal payments called installments.
The finance charges are included in the payments. The item you purchase may be
used as security for the loan.

55

Credit cards are issued by individual retail stores, banks, or businesses. Using a
credit card can be the equivalent of an interest-free loan--if you pay for the use of it
in full at the end of each month.

Brief overview of loans:

Fund-based lending
This is the most direct form of lending. It is granted as a loan or advance with
an actual outflow of cash to the borrower. It is supported by prime or collateral
securities.
Non fund based lending
There is no funds outlay for the Bank. It may crystallise into fund-based
advances, on account of the failure to fulfil the contract. Letters of credit and
bank guarantees, fall under this category.
FUND BASE includes:
Working Capital
Term Loan
NON-FUND BASE includes:
Letter of Credit
Bank Guarantee
Bill Discounting
Financial Guarantee
56

 Performance Guarantee
Deferred Payment Guarantee
Shipping & Delivery Guarnatee

FUND BASE: WORKING CAPITAL: 1. General

The objective of running any industry is earning profits. An industry will require
funds to acquire
fixed assets like land, building, plant, machinery, equipments, vehicles, tools
etc., & also to run the business i.e. its day to day operations.
Funds required for day to-day working will be to finance production & sales. For
production, funds are needed for purchase of raw materials/ stores/ fuel, for
employment of labour, for power charges etc., for storing finishing goods till they
are sold out & for financing the sales by way of sundry debtors/ receivables.
Capital or funds required for an industry can therefore be bifurcated as fixed
capital & working capital. Working capital in this context is the excess of current
assets over current liabilities. The excess of current assets over current liabilities is
treated as net working capital or liquid surplus & represents that portion of the
working capital, which has been provided from the long-term source.
2. DEFINITION

57

Working capital is defined as the funds required to carry the required levels of
current assets to enable the unit to carry on its operations at the expected levels
uninterruptedly.
Thus Working Capital Required is dependent on
(a) The volume of activity (viz. level of operations i.e. Production & sales)
(b) The activity carried on viz. mfg process, product, production programme,
the materials & marketing mix.
Negotiable instruments
PROMISSORY NOTE
A promissory note, also referred to as a note payable in accounting, is a contract
where one party (the maker or issuer) makes an unconditional promise in writing to
pay a sum of money to the other (the payee), either at a fixed or determinable
future time or on demand of the payee, under specific terms. They differ from
IOUs (I owe unto) in that they contain a specific promise to pay, rather than simply
acknowledging that a debt exists. The terms of a note typically include the
principal amount, the interest rate if any, and the maturity date. Sometimes there
will be provisions concerning the payee's rights in the event of a default, which
may include foreclosure of the maker's assets.
Demand promissory notes are notes that do not carry a specific maturity date, but
are due on demand of the lender. Usually the lender will only give the borrower a
few days notice before the payment is due.
For loans between individuals, writing and signing a promissory note is often
considered a good idea for tax and recordkeeping reasons. In the United States, a
promissory note that meets certain conditions is a negotiable instrument governed
by Article 3 of the Uniform Commercial Code.

58

Negotiable promissory notes are used extensively in combination with mortgages

in the financing of real estate transactions. Other uses of promissory notes include
the capitalization of corporate finances through the issuance and transfer of
commercial paper.
At various times in history, promissory notes have acted as a form of privately
issued currency. In many jurisdictions today, bearer negotiable promissory notes
are illegal precisely because they can act as an alternative currency. All Scottish
and Northern Irish banknotes are effectively standardized demand promissory
notes.

BILL OF EXCHANGE
A bill of exchange or "Draft" is a written order by the drawer to the drawee to pay
money to the payee. The most common type of bill of exchange is the cheque,
which is defined as a bill of exchange drawn on a banker and payable on demand.
Bill of exchange is most popular instrument of payment in financing the internal
and foreign trade in India. Funds lent under BP/BD are recoverable/ receivable
after short period of time. Banks provide credit facilities against such bills of
exchange in following ways, when banks,
Negotiate such bills payable on demand/ against acceptance
59

 Purchases bills payable on demand

Discount bills drawn on DA basis
Grant advances against supply bills under collection
In the first 3 cases Bank becomes holder in due course for full value of bills and in
the fourth case it is holder in due course for value up to the advances granted
against such bills.
Bills of exchange are written orders by one person to his bank to pay the bearer a
specific sum on a specific date sometime in the future.
When bills are purchased, such bills are payable on demand. When bills are
discounted, such bills are payable after some usance period.
Banks collect commission and interest on the day of purchase/discount, the
advance sanctioned results into higher yield. The effective rate of interest is more
than what bank earns under Cash Credit or Term Loan.
Types of bills:
Bills to be purchased/ discounted could be documentary or clean and demand or
usance. When the instrument (bill) is accompanied by document of title of goods
(such as bill of lading, railway receipt, motor receipt etc.) it is documentary bill
and when no such documents of title to the goods accompany the bill, it is a clean
bill. However when documents of title to goods are delivered against acceptance of
a bill, the documentary usance bill gets converted into a clean bill.
An example of bill of exchange

60

Transaction Process

61

CHEQUE
A cheque is an unconditional order, drawn on a specified banker and is payable on
demand.
Cheque is one of the earliest forms of a credit instrument. It is utilized by
consumers as a legitimate means of paying for goods and services received; the
value of the cheque is underwritten by funds that are placed in a bank account.
Upon the presentation by the recipient of the credit instrument, the bank deducts
the specified amount as recorded on the cheque by the debtor. While the cheque is
no longer the main credit instrument employed in many financial transactions, it
remains in use by many businesses and individuals.

3. Methods & Application

62

SEGMENT

LIMITS

METHOD

SSI

Upto Rs 5 cr Traditional Method & Nayak Committee method

Above Rs 5 Projected Balance Sheet Method
cr

SBF

All loans

C&I Trade & Upto Rs 1 cr

Services

Traditional / Turnover Method

Traditional Method for Trade &

Projected Turnover Method

Above Rs 1 Projected Balance Sheet Method &
cr

Projected Turnover Method

& upto Rs 5
cr
Above Rs 5 Projected Balance Sheet Method
C&I
Industrial nits

cr
Below

Traditional Method

Rs 25 lacs
Rs 25 lacs &

Projected Balance Sheet Method &

Over but upto Projected Turnover Method

Rs 5 cr
Above Rs 5 Projected Balance Sheet Method
cr
4. Operating cycle method
4.1 Any manufacturing activity is characterized by a cycle of operations consisting
of purchase of purchase of raw materials for cash, converting these into
finished goods & realizing cash by sale of these finished goods.

63

4.2 Diagrammatically, the OPERATING CYCLE is represented as under

4.3 The time that lapses between cash outlay & cash realization by sale of finished
goods & realization of sundry debtors is known as the length of the operating
cycle.

64

4.4 That

is,

the

operating

cycle

c
a
s
h

d
e
b
t
o
r
s

F
s
d
g
o

consists

of:

R a
w
m a
W o rt e r
ia l
k in - s
p ro
g re
s s

in i
h e
o
d s

Time taken to acquire raw materials & average period for which they are in
store.
Conversion process time
Average period for which finished goods are in store &
Average collection period of receivables (Sundry Debtors)
65

4.5 Operating cycle is also called the cash-to-cash cycle & indicates how cash is
converted into raw materials, stocks in process, finished goods, bills (receivables)
& finally back to cash. Working capital is the total cash that is circulating in this
cycle. Therefore, working capital can be turned over or redeployed after
completing the cycle.
4.6 The length of the operating cycle = a+b+c+d (as in 4.4)
If a = 60 days
b = 10 days
c = 20 days
d = 30 days
The operating cycle is 120 days (nearly 4 months). This means there are
365/120 = 3 cycles of operations in a year.
Sales

= Rs. 1,00,000 per annum

Operating expenses

= Rs.

72,000 per annum

But the working capital requirement, as you know, is not Rs. 72,000.
In these cases, there are 3 operating cycles in a year. That means each rupee of
working deployed in the unit is turned over 3 times in a year. (This is also known
as working capital turnover ratio).
Therefore WCR =

Operating Expenses
66

Rs. 72,000/- = Rs. 24,000/-

No. of cycles per annum

WCR is therefore not Rs. 72,000/- but only Rs. 24,000/-

4.7 Assessment of Working Capital Requirement & Permissible Bank Finance

using Operating Cycle Concept

Let us consider a case of a unit where:

Sales

Rs. 20,000 p.m. (A)

Raw Materials

Rs. 14,000 p.m.

Wages

Rs. 2,000 p.m.

Other manufacturing
Expenses

= Rs. 3,000 p.m.

Total expenses

= Rs. 19,000 p.m. (B)

Profit

= Rs. 1,000 P.m. (C)

The operating cycle is

Raw Materials

= 15 days

Stock in Process

2 days

FG

3 days

Sundry Debtors

= 15 days

The total length of

67

Operating cycle

= 35 days (D)

WCR = B * D = 19,000 * 35 = Rs. 22,167/- (approx.)

30

30

Where B = Operating Expenses; &

D = Length of Operating cycle
The length of the operating cycle is different from industry to industry and from
one firm to another within the same industry. For instance, the operating cycle of a
pharmaceutical unit would be quite different from one engaged in the manufacture
of machine tools. The operating cycle concept enables us to assess the working
capital need of each enterprise keeping in view the peculiarities of the industry it is
engaged in and its scale of operations. Operating cycle is an important
management tool in decision-making.
Traditional Method of Assessment of Working Capital Requirement
The operating cycle concept serves to identify the areas requiring improvement for
the purpose of control and performance review. But, as bankers, we require a more
detailed analysis to assess the various components of working capital requirement
viz., finance for
stocks, bills etc. Bankers provide working capital finance for holding an acceptable
level of current assets, viz. raw materials, stocks-in-process, finished goods and
sundry debtors for achieving a predetermined level of production and sales.
Quantification of these funds required to be blocked in each of these items of
current assets at any time will, therefore provide a measure of the working capital
requirement (WCR) of an industry.

68

69

It can thus be summarized as follows:

70

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 (i.e. working capital
would be turned over 4 times in a year).

Projected Annual Turnover Method for C & I industrial units (limits upto Rs
5 cr)
Bank has decided to extend Nayak Committee approach for assessment of limits to
C&I industrial units requiring credit limits upto Rs.5 cr. That is, credit requirement
up to Rs.5 crores of C&I borrowers (industrial units) may be assessed at a
minimum of 20% of projected annual turnover. In other words, the working capital
requirement will be assessed at 25% of projected annual turnover, of which 5%
should be borne by entrepreneur as margin and 20% would be allowed as Bank
Drawings. While accepting projected annual sales turnover, a cap of 25% over

71

actual annual sales turnover in the immediately preceding year should be set,
except where production capacity has been substantially increased.

Projected Annual Turnover Method for Business Enterprises 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. Thus, an across the board credit
limit equal to 15% of projected annual turnover be offered to business enterprises
in the T&S sector. It would be available for utilization generally as a cash credit
limit. However, where needed an LC limit (as a sub-limit of total), may also be
allowed.
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 of 25% over actual
annual sales turnover in the immediately preceding year should be set. When
circumstances warrant its breach, reasons therefor should be recorded.

72

v) Where borrowers indicate need for credit limits which are higher than the
amount indicated above, assessment under the traditional PBS method may be
resorted to.

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 credit 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.
8.1 In the Projected Balance Sheet (PBS) 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 is also to be carried out:

Analysis of the borrowers Profit and Loss account, Balance Sheet, Funds
Flow etc. for the past periods is done to examine the profitability, financial
position, financial management, etc. in the business.
73

 Detailed scrutiny and validation of the projected income and expense in

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

8.2 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.
TERM LOAN:
1. A term loan is granted for a fixed term of not less than 3 years intended
normally for financing fixed assets acquired with a repayment schedule
normally not exceeding 8 years.
2. A term loan is a loan granted for the purpose of capital assets, such as
purchase of land, construction of, buildings, purchase of machinery,
modernization, renovation or rationalization of plant, & repayable from out
of the future earning of the enterprise, in installments, as per a prearranged
schedule.
From the above definition, the following differences between a term loan &
the working capital credit afforded by the Bank are apparent:
The purpose of the term loan is for acquisition of capital assets.
The term loan is an advance not repayable on demand but only in
installments ranging over a period of years.

74

 The repayment of term loan is not out of sale proceeds of the goods &
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.
The security is not the readily saleable goods & commodities but the
fixed assets of the units.
3. It may thus be observed that the scope & operation of the term loans are
entirely different from those of the conventional working capital advances.
The Banks commitment is for a long period & 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 & consequently the risk involved also becomes
greater.
4. 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 a regular way from the anticipated income of the industry/ trade.
5. These distinctive characteristics of term loans distinguish them from the
short term credit granted by the banks & it becomes necessary therefore, to
adopt a different approach in examining the applications of borrowers for
such credit & for appraising such proposals.
6. The repayment of a 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
75

aspects, technical aspects, a projection of future trends of outputs & sales &
estimates of cost, returns, flow of funds & profits.
7. Appraisal of Term Loans
Appraisal of term loan for, say, an industrial unit is a process comprising
several steps. There are four broad aspects of appraisal, namely
Technical Feasibility - To determine the suitability of the technology
selected & the adequacy of the technical investigation & design;
Economic Feasibility - To ascertain the extent of profitability of the
project & its sufficiency in relation to the repayment obligations
pertaining to term assistance;
Financial Feasibility - To determine the accuracy of cost estimates,
suitability of the envisaged pattern of financing & general soundness
of the capital structure; &
Managerial Competency To ascertain that competent men are behind
the project to ensure its successful implementation & efficient
management after commencement of commercial production.
7.1 Technical Feasibility
The examination of this item consists of an assessment of the various
requirement of the actual production process. It is in short a study of the
availability, costs, quality & accessibility of all the goods & services needed.
a) The location of the project is highly relevant to its technical feasibility &
hence special attention will have to be paid to this feature. Projects whose
technical requirements could have been taken care of in one location
sometimes fail because they are established in another place where
76

conditions are less favorable. One project was located near a river to
facilitate easy transportation by barge but lower water level in certain
seasons made essential transportation almost impossible. Too many
projects have become uneconomical because sufficient care has not been
taken in the location of the project, e.g. a woolen scouring & spinning
mill needed large quantities of good water but was located in a place
which lacked ordinary supply of water & the limited water supply
available also required efficient softening treatment. The accessibility to
the various resources has meaning only with reference to location.
Inadequate transport facilities or lack of sufficient power or water for
instance, can adversely affect an otherwise sound industrial project.
b) Size of the plant One of the most important considerations affecting the
feasibility of a new industrial enterprise is the right size of the plant. The
size of the plant will be such that it will give an economic product, which
will be competitive when compared to the alternative product available in
the market. A smaller plant than the optimum size may result in increased
production costs & may not be able to sell its products at competitive
prices.
c) Type of technology An important feature of the feasibility relates to the
type of technology to be adopted for a project. A new technology will
have to be fully examined & tired before it is adopted. It is equally
important to avoid adopting equipment or processes which are absolute
or likely to become outdated soon. The principle underlying the
technological selection is that a developing country cannot afford to be
the first to adopt the new nor yet the last to cast the old aside.
d) Labour The labour requirements of a project, need to be assessed with
special care. Though labour in terms of unemployed persons is abundant
77

in the country, there is shortage of trained personnel. The quality of

labour required & the training facilities made available to the unit will
have to be taken into account
e) Technical Report A technical report using the Banks Consultancy Cell,
external consultants, etc., should be obtained with specific comments on
the feasibility of scheme, its profitability, whether machinery proposed to
be acquired by the unit under the scheme will be sufficient for all stages
of production, the extent of competition prevailing, marketability of the
products etc., wherever necessary.
7.2 Economic Feasibility
An economic feasibility appraisal has reference to the earning capacity of the
project. Since earnings depend on the volume of sales, it is necessary to determine
how much output or the additional production from an established unit the market
is likely to absorb at given prices.
a) A thorough market analysis is one of the most essential parts of project
investigation. This involves getting answers to three questions.
a) How big is the market?
b) How much it is likely to grow?
c) How much of it can the project capture?
The first step in this direction is to consider the current situation, taking account of
the total output of the product concerned & the existing demand for it with a view
to establishing whether there is unsatisfied demand for the product. Care should be
taken to see that there is no idle capacity in the existing industries.
ii) Future possible future changes in the volume & patterns of supply & demand
will have to be estimated in order to assess the long term prospects of the industry.
78

Forecasting of demand is a complicated matter but one of the vital importance. It is

complicated because a variety of factors affect the demand for product e.g.
technological advances could bring substitutes into market while changes in tastes
& consumer preference might cause sizable shifts in demand.
iii) Intermediate product The demand for Intermediate product will depend
upon the demand & supply of the ultimate product (e.g. jute bags, paper for
printing, parts for machines, tyres for automobiles). The market analysis in this
case should cover the market for the ultimate product.
7.3 Financial Feasibility
The basis data required for the financial feasibility appraisal can be broadly
grouped under the following heads
i)

Cost of the project including working capital

ii)

Cost of production & estimates of profitability

iii)

Cash flow estimates & sources of finance.

The cash flow estimates will help to decide the disbursal of the term loan. The
estimate of profitability & the break even point will enable the banker to draw up
the repayment programme , start-up time etc. The profitability estimates will also
give the estimate of the Debt Service Coverage which is the most important single
factor in all the term credit analysis.
1. A study of the projected balance sheet of the concern is essential as it is
necessary for the appraisal of a term loan to ensure that the implementation
of the proposed scheme.
The cost of the project & the estimated time for execution is an important factor.
The promoters efficiency to complete the project within the given period is most
79

important. The source of finance, without leaving any gap & availability of cash at
the right time is to be ensured. Possibility of cost escalation, cost overruns etc. to
be assessed. The financial feasibility is assessed by financial projection, fund flow
and cash flow statement, ratio analysis and by non discounted and discounted cash
flow statements.
Pay back period method: Payback period is calculated by comparing cash out
flow (investment) with cash inflow (cash profit) and finding out that at what time
they will be equal. Lower the payback period better the project.
Average rate of return :
It is calculated as

Average profit after tax

Average book value of investmen

It is compared with the rate of return of other market investments.

Discounted cash flow technique
I. Net present value
It is calculated as =present value of cash inflow present value of cash
outflow
The project is accepted if NPV is positive and rejected if NPV is negative
2 Benefit cost ratio:
The entire cash inflow is discounted at the rate of interest to arrive at
present value rate.
BCR= present worth of the benefits (cash inflow)
Present worth of cost (investment)
80

The project is accepted if the BCR is more than one and rejected if BCR is less
than one.
Break-even point:
Break even point is the point of sales at which a units makes no profit or no loss. A
unit can earn profit only if its level of sale is above the break even point. Once the
BEP is calculated, the sales projection made in the profitability statement is
compared with the break even point of sale. In case the difference between
projected sale and BEP sale is very low, it is very risky to finance the project. On
the other hand if projected sale is high than BEP the profitability of earning some
profit is still there are some deviations in the project.
BEP can be classified in three ways
1 in terms of no. of units of sale
2 in terms of sale in rupees
3 in terms of capacity utilisation

1 BEP in units =

fixed cost
Contribution/ unit

OR
fixed cost
Sales price/unit variable cost/ unit

2 BEP in rupees =

fixed cost

Total contribution
81

total sales in rupees

3 BEP in terms of capacity utilisation

BEP in capacity =

No. of units at BEP

* 100

Total capacity
To study the viability of the project the project having BEP above of 75% of
capacity utilisation should not be accepted for finance
Debt/ Service Coverage:
The debt service coverage ratio serves as a guide to determining the period of
repayment of a loan. This is calculated by dividing cash accruals in a year by
amount of annual obligations towards term debt. The cash accruals for this purpose
should comprise net profit after taxes with interest, depreciation provision & other
non cash expenses added back to it.

Debt Service
Coverage Ratio

Cash accruals
Maturing annual obligations

This ratio is valuable, in that it serves as a measure of the repayment capacity of

the project/ unit & is, therefore, appropriately included in the cash flow statements.
The ratio may vary from industry to industry but one has to view it with
circumspection when it is lower than the benchmark of 1.75. The repayment
programme should be so stipulated that the ratio is comfortable.
7.4 Managerial Competence

82

In a dynamic environment, the capacity of an enterprise to forge ahead of its

competitors depends to a large extent, on the relative strength of its management.
Hence, an appraisal of management is the touchstone of term credit analysis.
If there is a change in the administration & managerial set up, the success of the
project may be put to test. The integrity & credit worthiness of the personnel in
charge of the management of the industry as well as their experience in
management of industrial concerns should be examined. In high cost schemes, an
idea of the units key personnel may also be necessary.
NON-FUND BASE: LETTER OF CREDIT
Letter of Credit L/c also known as Documentary Credit is a widely used term to
make payment secure in domestic and international trade. The document is issued
by a financial organization at the buyer request. Buyer also provide the necessary
instructions in preparing the document.
The International Chamber of Commerce (ICC) in the Uniform Custom and
Practice for Documentary Credit (UCPDC) defines L/C as:
"An arrangement, however named or described, whereby a bank (the Issuing bank)
acting at the request and on the instructions of a customer (the Applicant) or on its
own behalf :
Is to make a payment to or to the order third party ( the beneficiary ) or is to
accept bills of exchange (drafts) drawn by the beneficiary.
Authorised another bank to effect such payments or to accept and pay such bills of
exchange (draft).
Authorised another bank to negotiate against stipulated documents provided that
the terms are complied with.
A key principle underlying letter of credit (L/C) is that banks deal only in
documents and not in goods. The decision to pay under a letter of credit will be
83

based entirely on whether the documents presented to the bank appear on their face
to be in accordance with the terms and conditions of the letter of credit.
Parties to Letters of Credit
Applicant (Opener): Applicant which is also referred to as account party is
normally a buyer or customer of the goods, who has to make payment to
beneficiary. LC is initiated and issued at his request and on the basis of his
instructions.
Issuing Bank (Opening Bank) : The issuing bank is the one which create a letter
of credit and takes the responsibility to make the payments on receipt of the
documents from the beneficiary or through their banker. The payments has to be
made to the beneficiary within seven working days from the date of receipt of
documents at their end, provided the documents are in accordance with the terms
and conditions of the letter of credit. If the documents are discrepant one, the
rejection thereof to be communicated within seven working days from the date of
of receipt of documents at their end.
Beneficiary : Beneficiary is normally stands for a seller of the goods, who has to
receive payment from the applicant. A credit is issued in his favour to enable him
or his agent to obtain payment on surrender of stipulated document and comply
with
the
term
and
conditions
of
the
L/c.
If L/c is a transferable one and he transfers the credit to another party, then he is
referred to as the first or original beneficiary.
Advising Bank : An Advising Bank provides advice to the beneficiary and takes
the responsibility for sending the documents to the issuing bank and is normally
located in the country of the beneficiary.
Confirming Bank : Confirming bank adds its guarantee to the credit opened by
another bank, thereby undertaking the responsibility of payment/negotiation
acceptance under the credit, in additional to that of the issuing bank. Confirming
bank play an important role where the exporter is not satisfied with the undertaking
of only the issuing bank.
Negotiating Bank: The Negotiating Bank is the bank who negotiates the
documents submitted to them by the beneficiary under the credit either advised
84

through them or restricted to them for negotiation. On negotiation of the

documents they will claim the reimbursement under the credit and makes the
payment to the beneficiary provided the documents submitted are in accordance
with the terms and conditions of the letters of credit.
Reimbursing Bank : Reimbursing Bank is the bank authorized to honor the
reimbursement claim in settlement of negotiation/acceptance/payment lodged with
it by the negotiating bank. It is normally the bank with which issuing bank has an
account from which payment has to be made.
Second Beneficiary : Second Beneficiary is the person who represent the first or
original Beneficiary of credit in his absence. In this case, the credits belonging to
the original beneficiary is transferable. The rights of the transferee are subject to
terms of transfer.
Types of Letter of Credit
1. Revocable Letter of Credit L/C
A revocable letter of credit may be revoked or modified for any reason, at any time
by the issuing bank without notification. It is rarely used in international trade and
not considered satisfactory for the exporters but has an advantage over that of the
importers and the issuing bank.
There is no provision for confirming revocable credits as per terms of UCPDC,
Hence they cannot be confirmed. It should be indicated in LC that the credit is
revocable. if there is no such indication the credit will be deemed as irrevocable.
2. Irrevocable Letter of Credit L/C
In this case it is not possible to revoked or amended a credit without the agreement
of the issuing bank, the confirming bank, and the beneficiary. Form an exporters
point of view it is believed to be more beneficial. An irrevocable letter of credit
from the issuing bank insures the beneficiary that if the required documents are
presented and the terms and conditions are complied with, payment will be made.
3. Confirmed Letter of Credit L/C

85

Confirmed Letter of Credit is a special type of L/C in which another bank apart
from the issuing bank has added its guarantee. Although, the cost of confirming by
two banks makes it costlier, this type of L/C is more beneficial for the beneficiary
as it doubles the guarantee.
4. Sight Credit and Usance Credit L/C
Sight credit states that the payments would be made by the issuing bank at sight,
on demand or on presentation. In case of usance credit, draft are drawn on the
issuing bank or the correspondent bank at specified usance period. The credit will
indicate whether the usance draft are to be drawn on the issuing bank or in the case
of confirmed credit on the confirming bank.
5. Back to Back Letter of Credit L/c
Back to Back Letter of Credit is also termed as Countervailing Credit. A credit is
known as backtoback credit when a L/c is opened with security of another L/c.
A backtoback credit which can also be referred as credit and countercredit is
actually a method of financing both sides of a transaction in which a middleman
buys goods from one customer and sells them to another.
The parties to a BacktoBack Letter of Credit are:
1. The buyer and his bank as the issuer of the original Letter of Credit.
2. The seller/manufacturer and his bank,
3. The manufacturer's subcontractor and his bank.
The practical use of this Credit is seen when L/c is opened by the ultimate buyer in
favour of a particular beneficiary, who may not be the actual supplier/
manufacturer offering the main credit with near identical terms in favour as
security and will be able to obtain reimbursement by presenting the documents
received
under
back
to
back
credit
under
the
main
L/c.
The need for such credits arise mainly when :
The ultimate buyer not ready for a transferable credit
The Beneficiary do not want to disclose the source of supply to the openers.
86

The manufacturer demands on payment against documents for goods but the
beneficiary of credit is short of the funds
6. Transferable Letter of Credit L/c
A transferable documentary credit is a type of credit under which the first
beneficiary which is usually a middleman may request the nominated bank to
transfer credit in whole or in part to the second beneficiary.
The L/c does state clearly mentions the margins of the first beneficiary and unless
it is specified the L/c cannot be treated as transferable. It can only be used when
the company is selling the product of a third party and the proper care has to be
taken about the exit policy for the money transactions that take place.
This type of L/c is used in the companies that act as a middle man during the
transaction but dont have large limit. In the transferable L/c there is a right to
substitute the invoice and the whole value can be transferred to a second
beneficiary.
The first beneficiary or middleman has rights to change the following terms and
conditions of the letter of credit:
Reduce the amount of the credit.
Reduce unit price if it is stated
Make shorter the expiry date of the letter of credit.
Make shorter the last date for presentation of documents.
Make shorter the period for shipment of goods.
Increase the amount of the cover or percentage for which insurance cover must be
effected.
Substitute the name of the applicant (the middleman) for that of the first
beneficiary (the buyer).
Standby Letter of Credit L/c
87

Initially used by the banks in the United States, the standby letter of credit is very
much similar in nature to a bank guarantee. The main objective of issuing such a
credit is to secure bank loans. Standby credits are usually issued by the applicants
bank in the applicants country and advised to the beneficiary by a bank in the
beneficiarys country.
Unlike a traditional letter of credit where the beneficiary obtains payment against
documents evidencing performance, the standby letter of credit allow a beneficiary
to obtains payment from a bank even when the applicant for the credit has failed to
perform as per bond.
A standby letter of credit is subject to "Uniform Customs and Practice for
Documentary Credit" (UCP), International Chamber of Commerce Publication No
500, 1993 Revision, or "International Standby Practices" (ISP), International
Chamber of Commerce Publication No 590, 1998.
Import Operations Under L/c
The Import Letter of Credit guarantees an exporter payment for goods or services,
provided the terms of the letter of credit have been met.
A bank issue an import letter of credit on the behalf of an importer or buyer under
the following Circumstances
When a importer is importing goods within its own country.
When a trader is buying good from his own country and sell it to the another
country for the purpose of merchandizing trade.
When an Indian exporter who is executing a contract outside his own country
requires importing goods from a third country to the country where he is executing
the contract.
The first category of the most common in the day to day banking
BANK GUARANTEES:

88

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

discharge the liability of the third person in case of the default. The parties to the
contract of guarantees are:
a) Applicant: The principal debtor person at whose request the guarantee is
executed
b) Beneficiary: Person to whom the guarantee is given & who can enforce it in
case of default.
c) Guarantee: The person who undertakes to discharge the obligations of the
applicant in case of his default.
Thus, guarantee is a collateral contract, consequential to a main contract
between the applicant & the beneficiary.
Purpose of Bank Guarantees
Bank Guarantees are used to for both both preventive & remedial purposes. The
guarantees executed by banks comprises both performance guarantees & financial
guarantees. The guarantees are structured according to the terms of agreement,
viz., security, maturity & purpose.
Branches may issue guarantees generally for the following purposes:
a) In lieu of security deposit/earnest money deposit for participating in tenders;
b) Mobilization advance or advance money before commencement of the
project by the contractor & for money to be received in various stages like
plant layout, design/drawings in project finance;
c) In respect of raw materials supplies or for advances by the buyers;
d) In respect of due performance of specific contracts by the borrowers & for
obtaining full payment of the bills;

89

e) Performance guarantee for warranty period on completion of contract which

would enable the suppliers to realize the proceeds without waiting for
warranty period to be over;
f) To allow units to draw funds from time to time from the concerned indenters
against part execution of contracts, etc.
g) Bid bonds on behalf of exporters
h) Export performance guarantees on behalf of exporters favouring the
Customs Department under EPCG scheme.
Guidelines on conduct of Bank Guarantee business
Branches, as a general rule, should limit themselves to the provision of financial
guarantees & exercise due caution with regards to performance guarantee business.
The subtle difference between the two types of guarantees is that under a financial
guarantee, a bank guarantees a customer financial worth, creditworthiness & his
capacity to take up financial risks. In a performance guarantee, the banks
guarantee obligations relate to the performance related obligations of the applicant
(customer).
While issuing financial guarantees, it should be ensured that customers should be
in a position to reimburse the Bank in case the Bank is required to make the
payment under the guarantee. In case of performance guarantee, branches should
exercise due caution & have sufficient experience with the customer to satisfy
themselves that the customer has the necessary experience, capacity, expertise, &
means to perform the obligations under the contract & any default is not likely to
occur.

90

Branches should not issue guarantees for a period more than 18 months without
prior reference to the controlling authority. Extant instructions stipulate an
Administrative Clearance for issue of BGs for a period in excess of 18 months.
However, in cases where requests are received for extension of the period of BGs
as long as the fresh period of extension is within 18 months. No bank guarantee
should normally have a maturity of more than 10 years. Bank guarantee beyond
maturity of 10 years may be considered against 100% cash margin with prior
approval of the controlling authority.
More than ordinary care is required to be executed while issuing guarantees on
behalf of customers who enjoy credit facilities with other banks. Unsecured
guarantees, where furnished by exception, should be for a short period & for
relatively small amounts. All deferred payment guarantee should ordinarily be
secured.
Appraisal of Bank Guarantee Limit
Proposals for guarantees shall be appraised with the same diligence as in the case
of fund-base limits. Branches may obtain adequate cover by way of margin &
security so as to prevent default on payments when guarantees are invoked.
Whenever an application for the issue of bank guarantee is received, branches
should examine & satisfy themselves about the following aspects:
a) The need of the bank guarantee & whether it is related to the applicants
normal trade/business.
b) Whether the requirement is one time or on the regular basis
c) The nature of bank guarantee i.e., financial or performance
d) Applicants financial strength/ capacity to meet the liability/ obligation
under the bank guarantee in case of invocation.
91

e) Past record of the applicant in respect of bank guarantees issued earlier; e.g.,
instances of invocation of bank guarantees, the reasons thereof, the
customers response to the invocation, etc.
f) Present o/s on account of bank guarantees already issued
g) Margin
h) Collateral security offered
Format of Bank Guarantees
Bank guarantees should normally be issued on the format standardized by Indian
Banks Association (IBA). When it is required to be issued on a format different
from the IBA format, as may be demanded by some of the beneficiary Government
departments, it should be ensured that the bank guarantee is
a) for a definite period,
b) for a definite objective enforceable on the happening of a definite event,
c) for a specific amount
d) in respect of bona fide trade/ commercial transactions,
e) contains the Banks standard limitation clause
f) not stipulating any onerous clause, &
g) not containing any clause for automatic renewal of the bank guarantee on its
expiry
Financial Guarantees
The bank guarantees its customers credit-worthiness and his or her capacity to
take up financial risks. Financial guarantees are typically issued for the following
purposes:
In lieu of Earnest Money/Tender deposit/Retention money.

92

 Issued to Government departments for releasing disputed claim money like

excise duty/customs duty etc.
For example, if a contractor wants to bid for a tender, he or she needs to deposit a
specified sum of money known as Earnest Money Deposit (EMD). This amount
will be refunded to him or her if the work is not allotted to him or her. This
involves blocking of funds for a specified period which varies depending on the
nature of contract. This can be avoided by submitting a bank guarantee in the place
of EMD. The bank undertakes to pay the money if the contractor is awarded the
work but fails to pay the EMD.
Performance Guarantees
The bank guarantees obligations that relate to the technical, managerial,
administrative experience and capacity of the customer. The liabilities under the
performance guarantees are reduced to monetary terms. Performance guarantees
typically cover the following areas:
For performance of machinery/goods supplied deposit/Retention money
For satisfactory performance of Turnkey projects for a specific period for
releasing disputed claim money like excise duty/customs duty, etc.
In the above example, if the contract is awarded to the contractor, then the agency
awarding the contract seeks an assurance that the contract completed is up to their
satisfaction. Hence, they insist for a bank guarantee where a bank undertakes to
compensate the agency for any loss suffered consequent to poor performance/nonperformance.
Deferred Payment Guarantee

93

This guarantee is issued for guaranteeing payment of specified amount over a

period of time. The required margin, security and commission payable are
determined on the basis of type of guarantee and creditworthiness of the customer.
In cases of equipment financing by banks, the manufacturer by him or her or
through a financing tie-up offers credit to the buyers at very attractive terms to
generate additional demand for his or her products. However, the manufacturer
may not be willing to assume the risk of default by the buyer and consequently
demand a guarantee from the buyers bankers that the terms of such financing
would be met.
Notwithstanding the classification of guarantees into financial and performance,
the liability of a bank will always be determined in financial terms and banks are
obliged to pay the amount demanded by the beneficiary subject to the limit up to
which the bank agreed to make itself liable under a guarantee.
While these guarantees do serve as non-fund based services serving the purpose of
working capital management, there are also instances where banks may issue
guarantees for financing capital equipment.
The Deferred Payment Guarantee (DPG) is a bank facility where the bank does not
directly extend a loan to a unit for acquiring equipment. Instead, it extends a
guarantee to the equipment manufacturer on behalf of its client that the finance
extended by the manufacturer (by himself or through its preferred financier) would
be repaid as per the terms agreed upon. The advantage to the buyer here is that he
or she benefits to the extent of savings in interest charges accruing on account of
opting for equipment financing, minus the guarantee charges paid to the bank.
In the normal course where the guarantee does not transfer onto the banker, the
banker stands to earn fee-based income.
94

Normally, such financing is done by extending a term loan. Suppose a supplier of

capital equipment is willing to extend a long-term credit to the buyer. This will
involve the supplier taking a credit risk and also blocking funds over the term of
the credit. If the supplier is not willing to take the credit risk then he or she may
insist a bank guaranteeing the credit extended to the buyer. In such circumstances,
the bank can extend a deferred payment guarantee. The bank, under the deferred
payment guarantee, undertakes to pay the installments if the buyer fails to pay the
same.
While these guarantees were in vogue earlier they have slowly disappeared from
the scene with the entry of Bill Rediscounting Scheme introduced by IDBI/SIDBI.
Under the scheme, the supplier draws different Bills of Exchange for each of the
installment and have the same accepted by the buyer and the buyers banker as
well. He or she will then have these bills discounted with his or her banker, which
will eliminate the need for him or her to block the funds. The sellers bank will in
turn rediscount these bills with IDBI/SIDBI. Thus, the sale of capital equipment is
effectively financed by IDBI/SIDBI.
However, the credit risk is taken by the buyers banker since all others have a
banker to fall back on. When the sellers bank rediscounts these bills they appear
as contingent items in the banks balance sheet even though credit has been
initially extended to the seller. Hence, these items are added to the Net Bank Credit
to obtain Gross Bank Credit.
Shipping and Railway Guarantee
A bank is requested to issue shipping and railway guarantee when the shipping
documents are not received but the ship carrying the goods has arrived and the
shipping company agrees to deliver the goods against the production of a bank
95

guarantee. As this guarantee does not specify the amount of guarantee it is issued
only on behalf of very respectable customers and usually against 100% margin.
Normally, these guarantees are issued only when the bill is routed through the
bank. Margin is fixed after determining the value covered by the bill. Full margin
should be stipulated even when the bill is drawn against a letter of credit issued by
the bank. However, where the borrower enjoys Trust Receipt Limit, the guarantee
can be issued against the execution of TR without insisting on 100% margin.
The features of Shipping and railway guarantee are that they Enable immediate possession of the goods before payment.
Avoid unnecessary delays to the day-to-day running of your business.
Eliminate expensive demurrage/storage charges.
Defer payment until your suppliers documents have been presented.
Banks issue a shipping guarantee to the shipping company, undertaking to forward
the title documents (e.g. Bills of Lading) when they are received. This allows the
trader to take immediate control of the goods without the transport documents.
Shipping guarantees are usually applicable under import Documentary Credit
transactions, allowing prompt clearance of goods ahead of documents arrival.
However, by taking the goods, protection against discrepant documents will be
lost. Under normal circumstances, 100% cash margin against the value of the
goods will be required if the trader does not have Trust Receipt facility. Shipping
guarantees are only of value if they are issued immediately.
In the case of since bill with trust receipt facility, the usance should start to run
from the date of issue of a guarantee and not from the date of acceptance of the
bill. Before issuing the shipping guarantee the bank must obtain an undertaking to

96

the effect that the borrower must honor the bill irrespective of discrepancy, if any,
with the terms of the LC.

CREDIT APPRAISAL PROCESS

Receipt of application from applicant
|
Receipt of documents
(Balance sheet, KYC papers, Different govt. registration no., MOA, AOA, and
Properties documents)
|
Pre-sanction visit by bank officers
|
Check for RBI defaulters list, willful defaulters list, CIBIL data, ECGC caution
list, etc.
|
Title clearance reports of the properties to be obtained from empanelled advocates
|
Valuation reports of the properties to be obtained from empanelled
valuer/engineers
|
Preparation of financial data
|
Proposal preparation
97

|
Assessment of proposal
|
Sanction/approval of proposal by appropriate sanctioning authority
|
Documentations, agreements, mortgages
|
Disbursement of loan
|
Post sanction activities such as receiving stock statements, review of accounts,
renew of accounts, etc
(on regular basis)

98

CHAPTER-5
SBI NORMS FOR CREDIT
APPRAISAL

99

SBI loan policy contains various norms for sanction of different types of loans
These all norms does not apply to each & every case SBI norms for providing
loans are flexible & it may differ from case to case After case study, we found that
in some cases, loan is sanctioned due to strong financial parameters From the case
study analysis it was also found that in some cases, financial performance of the
firm was poor, even though loan was sanctioned due to some other strong
parameters such as the unit has got confirm order, the unit was an existing profit
making unit & letter of authority was received for direct payment to the bank from
ONGC which is public sector
1. Loan policy An Introduction
1.1 State Bank of Indias (SBI) Loan Policy is aimed at accomplishing its mission
of retaining the banks position as a Premier Financial Services Group, with
World class standards & significant global business, committed to excellence
in customer, shareholder & employee satisfaction & to play a leading role in
the expanding & diversifying financial services sector, while continuing
emphasis on its Development Banking role.
1.2 The Loan Policy of the any bank has successfully withstood the test of time
and with inbuilt flexibilities, has been able to meet the challenges in the
market place. The policy exits & operates at both formal & informal levels.
100

The formal policy is well documented in the form of circular instructions,

periodic guidelines & codified instructions, apart from the Book of
Instructions, where procedural aspects are highlighted.
1.3 The policy, at the holistic level, is an embodiment of the Banks approach to
sanctioning, managing & monitoring credit risk & aims at making the systems
& controls effective.
1.4 The Loan Policy also aims at striking a balance between underwriting assets of
high quality, and customer oriented selling. The objective is to maintain
Banks undisputed leadership in the Indian Banking scene.
1.5 The Policy aims at continued growth of assets while endeavoring to ensure
that these remain performing & standard. To this end, as a matter of policy the
Bank does not take over any Non-Performing Asset (NPA) from other banks.
1.6 The Central Board of the Bank is the apex authority in formulating all matters
of policy in the bank. The Board has permitted setting up of the Credit Policy
& Procedures Committee (CPPC) at the Corporate Centre of the Bank of
which the Top Management are members, to deal with issues relating to credit
policy & procedures on a Bank-wide basis. The CPPC sets broad policies for
managing credit risk including industrial rehabilitation, sets parameters for
credit portfolio in terms of exposure limits, reviews credit appraisal systems,
approves policies for compromises, write offs, etc. & general management of
NPAs besides dealing with the issues relating to Delegation of Powers.

Based on the present indications, following exposure levels are prescribed:

101

Individuals as borrowers

Maximum

aggregate

credit

facilities of
Rs. 20 crores
( Fund based & non-fund based )

Non-corporates
(

e.g.

Partnerships,

Maximum
JHF,

aggregate

credit

facilities of Rs. 80 crores

Associations )

( Fund based & non-fund based )

Corporates

Maximum

aggregate

credit

facilities as
per prudential norms of RBI on
exposures

Term Loans (loans with residual maturity of over 3 years) should not in the
aggregate exceed 35% of the total advances of SBI.
The Bank shall endeavour to restrict fund based exposure to a particular
industry to 15% of the Banks total fund based exposure.
The Bank shall restrict the term loan exposure to infrastructure projects to
10% of Banks total advances.

102

 The Bank shall endeavour to restrict exposure to sensitive sectors (i.e. to

capital market, real estate, and sensitive commodities listed by RBI) to 10%
of Banks total advances.
The Banks aggregate exposure to the capital markets shall not exceed 5% of
the total outstanding advances (including commercial paper) as on March 31
of the previous year.
2. Credit Appraisal Standards
1 (A) Qualitative:
At the outset, the proposition is examined from the angle of viability & also from
the Banks prudential levels of exposure to the borrower, Group & Industry.
Thereafter, a view is taken about our past experience with the promoters, if there is
a track record to go by. Where it is a new connection for the bank but the
entrepreneurs are already in business, opinion reports from existing bankers &
published data if available are carefully pursued. In case of a maiden venture, in
addition to the drill mentioned heretofore, an element of subjectively has to be
perforce introduced as scant historical data weightage to be placed on impressions
gained out of the serious dialogues with the promoter & his business contacts.
1 (B) Quantitative:
(a) Working capital:
The basis quantitative parameters underpinning the Banks credit appraisal are
as follows:Sector/ Parameters

Mfg

Others

Liquidity

1.33

1.20
(For FBWC limits above Rs. 5

103

Current Ratio (min.)

cr.)
1.00
(For FBWC limits upto Rs. 5
cr.))

Financial Soundness

3.00

5.00

Net (min.)

2:1

2:1

Gros (min.)

1.75:1

1.75:1

2:1

2:1

Promoters contribution

30% of

20% of equity

(min.)

equity

TOL/TNW (max.)
DSCR

Gearing
D/E (max.)

(i) Liquidity:
Current Ratio (CR) of 1.33 will generally be considered as a benchmark level of
liquidity. However the approach has to be flexible. CR of 1.33 is only indicative &
may not be deemed mandatory. In cases where the CR is projected at a lower than
the benchmark or a slippage in the CR is proposed, it alone will not be a reason for
rejection for the loan proposal or for the sanction of the loan at a lower level. In
such cases, the reason for low CR or slippage should be carefully examined & in
deserving cases the CR as projected may be accepted. In cases where projected CR
is found acceptable, working capital finance as requested may be sanctioned. In
104

specific cases where warranted, such sanction can be with the condition that the
borrower should bring in additional long-term funds to a specific extent by a given
future date. Where it is felt that the projected CR is not acceptable but the borrower
deserves assistance subject to certain conditions, suitable written commitment
should be obtained from the borrower to the effect that he would be bringing in
required amounts within a mutually agreed time frame.
(ii)Net Working Capital:
Although this is a corollary of current ratio, the movements in Net Working Capital
are watched to ascertain whether there is a mismatch of long term sources vis--vis
long term uses for purposes which may not be readily acceptable to the Bank so
that corrective measures can be suggested.
(iii)

Financial Soundness:

This will be dependent upon the owners stake or the leverage. Here again the
benchmark will be different for manufacturing, trading, hire-purchase & leasing
concerns. For industrial ventures a Total Outside Liability/ Tangible Net worth
ratio of 3.0 is reasonable but deviations in selective cases for understandable
reasons may be accepted by the sanctioning authority.
(iv)

Turn-Over:

The trend in turnover is carefully gone into both in terms of quantity & valve as
also market share wherever such data are available. What is more important to
establish a steady output if not a rising trend in quantitative terms because sales
realization may be varying on account of price fluctuations.
(v) Profits:
While net profit is ultimate yardstick, cash accruals, i.e., profit before depreciation
& taxation conveys the more comparable picture in view of changes in rate of
105

depreciation & taxation, which have taken place in the intervening years. However,
for the sake of proper assessment, the non-operating income is excluded, as these
are usually one time or extraordinary income. Companies incurring net losses
consistently over 2 or more years will be given special attention, their accounts
closely monitored, and if necessary, exit options explored.
(vi)

Credit Rating:

Wherever the company has been rated by a Credit Rating Agency for any
instrument such as CP / FD this will be taken into account while arriving at the
final decision. However as the credit rating involves additional expenditure, we
would not normally insist on this and only use this tool if such an agency had
already looked into the company finances.
(b) Term Loan
(i) In case of term loan & deferred payment guarantees, the project report is
obtained from the customer,
(ii)which may be compiled either in-house or by a firm of consultants/
merchant bankers. The technical feasibility & economic viability is vetted by
the bank & wherever it is felt necessary, the Credit Officer would seek the
benefit of a second opinion either from the Banks Technical Consultancy
cell or from the consultants of the Bank/ SBI Capital Markets Ltd.
(iii)

Promoters contribution of at least 20% in the total equity is what we

normally expect. But promoters contribution may vary largely in mega

projects. Therefore there cannot be a definite benchmark. The sanctioning
authority will have the necessary discretion to permit deviations.
(iv)

The other basic parameter would be the net debt service coverage

ratio i.e. exclusive of interest payable, which should normally not go below
106

2. On a gross basis DSCR should not be below 1.75. These ratios are
indicative & the sanctioning authority may permit deviations selectively.
(v) As regards margin on security, this will depend on Debt: Equity gearing for
the project, which should preferably be near about 1.5: 1 & should not in any
case be above 2:1, i.e., Debt should not be more than 2 times the Equity
contribution. The sanctioning authority in exceptional cases may permit
deviations from the norm very selectively.
(vi)

Other parameters governing working capital facilities would also

govern Term Credit facilities to the extent applicable.

(C) Lending to Non-Banking Financial Companies (NBFCs)
(D) Financing of infrastructure projects
(E) Lease Finance
(F) Letter of Credit, Guarantees & bills discounting
(G) Fair Practices for lenders
Documentation standards
1: The systems and procedures for documentation have been laid down keeping in
view the ultimate objective of documentation which is to serve as primary
evidence in any dispute between the Bank and the borrower and for enforcing the
Bank's right to recover the loan amount together with interest thereon (through a
court of law as a final resort), in the event of all other recourses proving to be of no
107

avail. In order that this objective is achieved, our documentation process attempts
to ensure that:
The owing of the debt to the Bank by the borrower is clearly established by
the documents.
The charge created on the borrower's assets as security for the debt is
maintained and enforceable
The Bank's right to enforce the recovery of the debt through court of law is
not allowed to become time-barred under the Law of Limitation.
2: Documentation is not confined to mere obtention of security documents at the
outset. It is a continuous and ongoing process covering the entire duration of an
advance comprising the following stages:
(i) Pre-execution formalities:
These cover mainly searches at the Office of Registrar of Companies and search of
the Register of Charges (applicable to corporate borrowers), also capacity of
borrowers to borrow and the formalities to be completed by the borrowers,
searches at the office of the sub-Registrar of Assurances or Land Registry to check
the existence or otherwise of prior charge over the immovable property offered as
security, besides taking other precautions before creating equitable / registered
mortgage.
(ii) Execution of Documents
This covers obtention of proper documents, appropriate stamping and correct
execution thereof as per terms of the sanction of the advance and the internal
directives of a corporate borrower such as Memorandum and Articles of
Association, etc.
108

(iii) Post-execution formalities

This phase covers the completion of formalities in respect of mortgages, if any,
registration with the Registrar of Assurances, wherever applicable, and the
registration of charges with the Registrar of Companies within the stipulated
period, etc..
(iv) Protection from Limitation / Safeguarding Securities
These measures aim at saving the documents from getting time-barred by
limitation and protecting the securities charged to the Bank from being diluted by
any charge that might be created by the borrower to secure his other debts, if any.
These objectives are sought to be achieved by:
(a) Obtention of revival letter within the stipulated period
(b) Obtention of Balance Confirmation from the borrower at least at annual
intervals
(c) Making periodical searches at the Office of the Registrar of Companies.
(d) Insurance of Assets charged - (unless specifically waived) to insure the Bank
against the risk of fire, other hazards, etc..
3. Keeping the above broad objectives and the documentation process in view, the
Bank has devised standard documents in most cases for various types of loans
given to the borrowers. Wherever standard specimens have not been evolved, these
are suitably drafted on a case-by-case basis with the help of in-house legal
department and, on occasions, with the help of reputed outside solicitors.
Furthermore, changes in the documentation procedures and the implications
involved are circularised from time to time to all the branches/offices so that those
who are responsible for obtaining and safeguarding the documents are made fully
109

conversant with them. This is further strengthened through on-the-job training at

the branches as well as at the Bank's training colleges / centres, where the officials
are briefed on the documentation procedures so that the Bank's interest is protected
in this crucial area.
4. In respect of consortium advances, the documents are generally executed in
consultation with the other member banks in accordance with the guidelines laid
down by RBI /IBA in the matter. Similarly, where advances are extended jointly
with the financial institutions, documents are specially drafted in consultation with
the solicitors / in-house legal experts to ensure pari passu charge and / or second
charge, whichever is applicable, of the movable / immovable assets of the borrower
to protect the Bank's interests.
5. While it is the Bank's endeavor to standardize documents for all types of
facilities, in cases where documents have to be specially drafted, the Local
Head Offices are empowered to vet and approve such documents for facilities
which are sanctioned at their level. For facilities requiring sanction of
COCC / ECCB, such specially drafted documents are cleared by
the Corporate Centre.

3. Requirement of documents for process of loan

110

1. Application for requirement of loan

2. Copy of Memorandum & Article of Association
3. Copy of incorporation of business
4. Copy of commencement of business
5. Copy of resolution regarding the requirement of credit facilities
6. Brief history of company, its customers & supplies, previous track records,
orders in hand. Also provide some information about the directors of the
company.
7. Financial statements of last 3 years including the provisional financial
statement for the year 2008-09
8. Copy of PAN/TAN number of company
9. Copy of last Electricity bill of company
10.Copy of GST/CST number
11.Copy of Excise number
12.Photo I.D. of all the directors
13.Address proof of all the directors
14.Copies related to the property such as 7/12 & 8A utara, lease/ sales deed, 2R
permission, Allotment letter, Possession
15.Bio-data form of all the directors duly filled & notarized
16.Financial statements of associate concern for the last 3 years

4. Delegation of powers

111

1. A scheme of Delegation exercise by the various functional Powers

comprehensively documented in 1985 and amended from time to time is in
operation in the Bank in respect of financial and administrative matters for rise.
This is based on the premise that an executive is required to exercise only those
powers which are related to the responsibilities and duties entrusted to him/her. In
exercising the powers, the authorities concerned are required to ensure compliance
also with the relevant provisions of the State Bank of India Act and the State Bank
of India General Regulations and any rules, regulations, instructions or orders
issued from time to time by appropriate controlling authorities.
2. The Executive Committee of the Central Board (ECCB) has full powers for
sanctioning all credit facilities.
3. The Scheme of Delegation of Financial powers for advances and allied matters
in the Bank has a graded authority structure. The Executive Committee of the
Central Board (ECCB) has full powers for sanctioning credit facilities. The
sanctioning powers have been delegated down the line to Committees of officials
at various administrative offices and individual line functionaries.
4. An appropriate control system is also in operation in tune with the Delegation
structure. The powers, exercised by various functionaries, are required to be
reported to the next higher authority as laid down in the Scheme of Delegation of
Financial Powers.
5. A system of loan review styled 'Credit Audit' which inter alia covers audit of
credit sanction decisions at various levels has been implemented. Presently, all
accounts with total fund based indebtedness of Rs.5 cr. and above are subjected to

112

credit audit. The audit system serves as an effective control on the system of
sanction of loans in the bank through widely delegated powers.

SCHEME OF DELEGATION OF FINANCIAL POWER

S PARTICUL

LIMIT

CCC

WBC CCC

CCC-

NLC

L ARS

-I

II

SB-1

250.0

100.0 50.00

NA

(35.0

CORPORA
TES

Ove 500.0

& SB- rall

2

(TL NA
)

FBL

(15.00) (TL)

7.50

(5.00)

0)

AGM

2.00

(1.25)
(WC1.00)

Others Ove 400.0

rall

(TL NA

200.0

SB-1
NONCORPORA
TES

Ove 60.00

NFBL

7.50

1.00

0
NA

)
2

70.00 35.00

(20.0

(10.00) Overal 15.00

0)

60.00

40.00 20.00

FBL

5.00

NA

(10.0

(TL)

(3.00)

3.00

1.00

& SB- rall

2

(TL NA
)

(5.00)

0)

(1.00)
(WC0.60)

Others Ove 50.00

50.00

rall
113

30.00 15.00

NFBL

5.00

0.60

(TL NA

NA

(8.00) (4.00)

)
3

SB-1
INDIVIDUA
LS

Ove 15.00

Overal 10.00

1.20

l
15.00

15.00 6.00

FBL

2.00

NA

(TL)

1.00

& SB- rall

2

(TL NA

(1.00)
(WC0.60)

Others Ove 10.00

10.00

10.00 5.00

NFBL

2.00

0.60

NA

Overal 4.00

1.20

rall
(TL NA
)

5. Pricing (Factors deciding interest rates and other charges)

1. Pricing in the Bank can be divided into interest pricing and non-interest pricing.
Pricing of loans up to Rs.2 lacs will be as prescribed by RBI. In line with RBI
guidelines, he Bank announces from time to time its single Benchmark Prime
Lending Rate (BPLR), i.e., reference / indicative rates at which the Bank would
lend to its best customers. The BPLR would be referred to as State Bank Advance
Rate (SBAR) in our Bank. Interest rate without reference to SBAR could be
charged in respect of certain categories of loan / credit like discounting of bills,
lending to intermediary agencies etc. Interest rates below SBAR could be offered
to exporters or other credit worthy borrowers including public enterprises on the
lines of a transparent and objective policy approved by the Bank's Board. All other
loans are to be priced on the basis of Bank's SBAR with the pricing being linked to
114

grade of the risk in the exposure. The maximum spread over SBAR which could be
charged by the Bank will be decided by the Bank from time to time. Within such
ceiling, the pricing for various credit facilities, schemes, products, credit related
services etc., including sub-SBAR pricing would be determined by ALCO or
COCC, as considered appropriate. Bank may also price floating rate products by
using market benchmarks (e.g. G-Sec rates, MIBOR etc.) in a transparent manner
as per Board approved policies.
2. An internal Credit Risk Rating system covering all advances of Rs.25 lacs and
above in C&I, SSI and AGL segments has been put in place to facilitate structured
assessment of credit risks. The system enables evaluation of the fundamental
strength of the borrower so as to charge a graded rate of interest based on different
ratings. However, taking into consideration the trends in movement of interest rates
and market competition, the Bank has also adopted an appropriate authority
structure to facilitate competitive pricing of loan products linked both to risk rating
and overall business considerations.
3. Bank has introduced fixed interest rates in respect of certain categories of loans
in personal segment, e.g. housing term loans to individuals. Fixed interest rates are
also extended for commercial loans, albeit highly selectively.
4. Market related charges and a discretionary structure that enables branches to
effectively face competition are in place. These would be reviewed periodically
based on feedback from operating units and the market.
5. Pricing of Bank's funds and services while being basically market driven is also
determined by two important considerations, i.e., minimum desired profitability
and risk inherent in the transaction. At the corporate level, the applicable price for
a particular advance or service is fixed taking into account the marginal cost of
115

Bank's funds and desired rate of return as calculated from indices like profitability
levels and return on capital employed. In case of corporate relationship where the
value of connections and overall potential for profitability from a particular
account are more important than a particular transaction, the price is fine tuned
even to level of no-loss-no-profit in the transaction. For long term exposures, the
factors that weigh are the rate charged by the financial institutions, the period of
exposure, the pattern of volatility in the interest rates and the expected movement
of the rates in the long term perspective.
Review / Renewal of advances
1. Working capital facilities are granted by the Bank for a period of 1 year and
thereafter they are required to be renewed each year, i.e., fresh sanction is accorded
for the limits. Where, however, renewal is not possible for some reason, sanction
for the continuance of the limits is obtained in each case by reviewing the facilities.
2. Term loans which are irregular will be reviewed once in six months. (However,
review of Term Loans will be included in the periodical review of Special Mention
Accounts.)
A separate authority structure, as given below, has been prescribed for above noted
half-yearly review of term loans:

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3. In the case of all listed companies with credit rating of SB4/SBTL4 and below, a
brief review is to be put up on the basis of half-yearly working results published by
them duly incorporating comments such as extent of exposure, conduct of the
account etc. Such review is to be submitted to the respective GE in respect of
ECCB sanctions, to the CGM (Circle) / CGM (CAG-Cen.) in respect of COCCI&II sanctions and to the GM (Network) in all other cases.
4. There will be no CRA rating review for term loans. However, in respect of term
loans, the following set of financial covenants is to be stipulated:
(i) Current Ratio
(ii)TOL/TNW
(iii)

Interest Coverage Ratio

(iv)

Default in payment of interest / installment

(v) Cross Default (default in payment of instalment/ interest to other

institutions/ banks)

Default of these covenants would attract penal interest of 1% as under:

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(a) Any adverse deviation by more than 20% from the stipulated levels in
respect of any two of the items (i) to (iii) above - penal interest to be levied
for the period of non-adherence subject to a minimum period of 1 year.
(b) Default in payment of interest/installments to the Bank or to other FI/Bankspenal interest to be levied for the period of such defaults.

Takeover of advances
Bank needs to aggressively market for good quality advances. One of the strategies
for increasing good quality assets in the Bank's loan portfolio, would be to take
over advances from other banks/FIs. Keeping this in view and with the prime
objective of adding only good quality assets, a common set of norms / guidelines
for C&I, SSI and AGL segments has been laid down for take over of advances.
A. Advances under SSI / C&I Segments
(i) The advance to be taken over should be rated SB3/SBTL3 or above.
(ii)The unit should score the minimum scores as prescribed, under the various
risk
segments, in the Credit Risk Assessment.
(iii)

The account should have been a standard asset in the books of the

other bank/FI during the preceding 3 years. (If this information is not
forthcoming from the bank/FI, a certificate should be obtained from the
borrowers Auditor that the loan has been a standard asset during the
preceding 3 years in the books of the bank/FI in terms of the asset
classification norms of RBI. The services of statutory auditors of our Bank
may also be sought for this purpose). However, if a unit is not having a track
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record for 3 years, as it has been in existence for a shorter duration, takeover
can be considered based on the track record for the available period, which
should be at least one year.

(iv)

The unit should have earned net profits (post tax) in each of the

immediately preceding 3 years. However, if the unit has been in existence

for a lesser period, it should have earned net profit (post tax) in the
preceding year of operation.

(v) The Term Loan proposed to be taken-over should not have been rephased,
generally, by the existing FI/Bank after commencement of commercial
production. However, if a rephasement was necessitated due to external
factors and viability of the unit is not in doubt, such proposals may also be
considered for sanction on a case to case basis.

(vi)

The remaining period of scheduled repayment of the term loan should

be at least 2 years, when only TLs are taken over.

For takeover of existing TLs, while the original time frame for repayment will be
generally adhered to, flexibility may be allowed in the quantum of periodical
repayments. If sanction of fresh term loan is proposed along with the takeover, the
schedule of repayment for the existing term loans, if necessary, may be permitted
to extend up to 8 years. [The norms at (v), (vi) and (vii) above are not applicable
for take-over of working capital advances.

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Note 1 : In the case of take-over proposals involving advances up to Rs.25 lacs, the
rating
should be carried out, as per the scoring model prescribed under SME Smart Score
(Refer page 170, Chapter 34, Part III, Volume III of Manual on Loans &
Advances). Other factors that may be kept in view are: Continued viability
Track record
Standing in the market of the unit/ promoter.
Note 2: Take-over of units from our Associate Banks is not permitted.
Note 3 : In the cases of working capital finance through consortium or multiple
banking, increasing our share, and joining a consortium (or when a member bank
exits consortium and we join the consortium in its place), are not reckoned as takeover of advances from other banks.

B. Advances under Trade and Services Sector:

i) The current ratio and TOL/TNW ratio should be at acceptable levels, as per
audited balance sheet not older than 12 months. Current ratio of not below 1 is
acceptable up to FBWC limit of Rs.5 cr. For FBWC limits of above Rs.5 Cr. the
current ratio of 1.33 will be indicative. It may be considered acceptable up to 1.20,
depending on the activity. TOL/TNW ratio higher than 3 would be permissible
depending on the type of activity.

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ii) The unit should have earned post-tax profits in each of the immediately
preceding 3 years. However, if the unit has been in existence for a lesser period, it
should have earned net profit (post-tax) in the preceding year of operation.
C. Other Guidelines:
(i) In all cases of take-over of advances from other banks, the credit information
report in the format prescribed by IBA should be obtained. The experience of the
present banker (item 13 of the format) should show satisfactory dealings with the
unit. Where, from the point of competition, it is necessary not to alert the bank
concerned, the report may be obtained after the sanction of facilities but before
release of the facilities.
(ii) In all cases of take-over, branches should ensure proper documentation and
other formalities to protect the interest of our Bank.
(iii) In all cases of take-over, branches should assess the requirements of the
borrower and obtain sanction for the proposed limits before actually taking over
the outstanding liability of the borrower to their existing bank/ FI.
(iv) The following aspects should invariably be examined in each case of takeover.
Reasons for take-over
Market perception including the existing banks/FIs perception
regarding the unit and its management. (For this, the appraising
officials may record briefly on their enquiries with market
sources/other bank/FI);
Potential ancillary business accruing to the Bank;

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 Terms and conditions stipulated by the existing bank and those

proposed by our Bank, particularly to ensure against dilution of
security cover. No takeover of advances from any Public Sector Bank
will be resorted to by quoting finer rates

(v) The credit rating should be done based on the audited balance sheet which is
not older
than 12 months. However if the audited balance sheet is more than 12 months old
and the proposal has to be considered from the business angle, then a provisional
balance sheet as on a recent date may be obtained from the unit and the CRA
exercise done based on these figures, additionally. Unit should clear the stipulated
hurdle rate in both the exercises.
D. Administrative Clearance (AC)
In all the cases of take-over proposals, AC is required to be obtained. For this
purpose, a brief proposal containing, inter alia, the comments on compliance with
the norms and the other guidelines as above should be submitted to the appropriate
authority as under:
(i) For take-over of units complying with all the norms prescribed:

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(ii) For take-over of units not complying with any one or more of the norms
prescribed:

E. While takeover of 'P' segment advances is not generally encouraged, in

consideration of

larger business interests / valuable connections, takeover of

housing loans is considered selectively after due diligence and precautions, in

cases where possession of the house / flat has been taken, repayment of existing
loan has already commenced and installments have been paid as per terms of
sanction.
Credit facilities to companies whose directors are in the defaulters' list of RBI:
1. The Directors of any company may be classified as promoter / elected /
professional/ nominee / honorary directors. RBI has been collecting and circulating
information on defaulting companies amongst banks / FIs, including names of
directors of such companies. Though RBI's defaulters' list is given due cognizance
in the appraisal process, a general policy on the issues relating to sanction /
continuation of credit facilities to such companies whose directors are in the RBI's
defaulters' list needs to be put in place.
Accordingly, it has been decided to adopt the following approach:

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124

The above policy on defaulters will be a broad framework for sanction /

continuation of credit facilities to companies whose directors are in the RBI's list of
defaulting borrowers of banks / FIs with dues of Rs.1 Cr. and above. When the list
of such defaulters is circulated by CIBIL instead of RBI), the same Policy would
continue to apply.
2. Willful default & action there against - The penal measures would be made
applicable to all borrowers identified as willful defaulters or the promoters
involved in diversion / siphoning of funds with outstanding balance of Rs.25 lacs
or more without any exception. Similarly, the limit of Rs.25 lacs will also be
applied for the purpose of taking cognizance of instances of siphoning and
diversion of funds.
3. Where a Letter of Comfort or guarantee furnished by the companies within a
Group in favour of a willfully defaulting unit is not paid when invoked by the
Bank, such Group companies also may be reckoned as willful defaulters.
4. In cases of project financing, Bank would endeavor to ensure end-use of funds
by, inter alia, obtaining certification from Chartered Accountants. In case of short
term corporate/clean loans, such an approach would be supplemented by due
diligence on the part of the Bank. It shall be the endeavor of the Bank to ensure
that such loans are limited to borrowers whose integrity and reliability are above
board. Bank will also retain the right to get investigative audit conducted whenever
it is prima facie satisfied that there is a case for such investigative audit to detect
siphoning/ diversion of funds or other malfeasance.
5. No additional facilities shall be granted by the Bank to the listed willful
defaulters. Further, entrepreneurs / promoters of companies where the Bank has
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identified siphoning /diversion of funds, mis-representation, falsification of

accounts and fraudulent transactions shall be debarred from Bank finance for
floating new ventures for a period of 5 years from the date the name of the willful
defaulter is published by RBI / CIBIL.
6. The legal process, wherever warranted, against the borrowers / guarantors and
foreclosure of recovery of dues should be initiated expeditiously. The Bank may
also initiate criminal action against willful defaulters, where necessary.
7. Where possible, Bank shall adopt a proactive approach for a change of
management of the willfully defaulting borrowing unit.

Credit Monitoring & Supervision

1. Broadly, the objectives of post-sanction follow up, supervision and monitoring
are as under:
(a) Follow up function:
To ensure the end-use of funds
To relate the outstandings to the assets level on a continuous basis
To correlate the activity level to the projections made at the time of the
sanction / renewal of the credit facilities
To detect deviation from terms of sanction.
To make periodic assessment of the health of the advances by noting some
of the key indicators of performance like profitability, activity level, and
management of the unit and ensure that the assets created are effectively
utilized for productive purposes and are well maintained.
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 To ensure recovery of the installments of the principal in case of term loans

as per the scheduled repayment programme and all interest.
To identify early warning signals, if any, and initiate remedial measures
thereby averting the incidence of incipient sickness.
To ensure compliance with all internal and external reporting requirements
covering the credit area.

(b) Supervision function:

To ensure that effective follow up of advances is in place and asset quality of
good order is maintained.
To look for early warning signals, identify incipient sickness and initiate
proactive remedial measures.
(c) Monitoring function:
To ensure that effective supervision is maintained on loans / advances and
appropriate responses are initiated wherever early warning signals are seen.
To monitor on an ongoing basis the asset portfolio by tracking changes from
time to time.
Chalking out and arranging for carrying out specific actions to ensure high
percentage of Standard Assets.
2. Detailed operative guidelines on the following aspects of effective credit
monitoring are in place:
Post-sanction responsibilities of different functionaries
Reporting for control
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 Security documents, Statement of stocks and book debts

Computation of drawing power (DP) on eligible current assets and
maintaining of DP register
Verification of assets
Inspection by branch functionaries frequency, reporting, register etc.
Stock Audit
Follow up based on information systems
Follow up during project implementation stage
Follow up post-commercial production
Monitoring and control
Detection and prevention of diversion of working capital finance
Monitoring of large withdrawals
Allocation of limit
Handling of NPA accounts etc.

7. Loan Administration - Pre-Sanction process

Appraisal, Assessment and Sanction functions
1. APPRAISAL
A. Preliminary appraisal
1.1 Sound credit appraisal involves analysis of the viability of operations of a
business and the capacity of the promoters to run it profitably and repay the bank
the dues as and then they fall

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1.2. Towards this end the preliminary appraisal will examine the following aspects
of a proposal.
Banks lending policy and other relevant guidelines/RBI
guidelines,
Prudential Exposure norms,
Industry Exposure restrictions,
Group Exposure restrictions,
Industry related risk factors,
Credit risk rating,
Profile of the promoters/senior management personnel of the
project,
List of defaulters,
Caution lists,
Acceptability of the promoters,
Compliance regarding transfer of borrower accounts from one
bank to another, if applicable;
Government regulations/legislation impacting on the industry;
e.g., ban on financing of industries producing/ consuming
Ozone depleting substances;
Applicants status vis--vis other units in the industry,
Financial status in broad terms and whether it is acceptable

The companys Memorandum and Articles of Association should be scrutinized

carefully to ensure (i) that there are no clauses prejudicial to the Banks interests,
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(ii) no limitations have been placed on the Companys borrowing powers and
operations and (iii) the scope of activity of the company.

1.3. Further, if the proposal is to finance a project, the following aspects have to be
examined:
Whether project cost is prima facie acceptable
Debt/equity gearing proposed and whether acceptable
Promoters ability to access capital market for debt/equity support
Whether critical aspects of project - demand, cost of production, profitability, etc.
are prima facie in order
1.4. After undertaking the above preliminary examination of the proposal, the
branch will arrive at a decision whether to support the request or not. If the branch
(a reference to the branch includes a reference to SECC/CPC etc. as the case may
be) finds the proposal acceptable, it will call for from the applicant(s), a
comprehensive application in the prescribed proforma, along with a copy of the
proposal/project report, covering specific credit requirement of the company and
other essential data/ information. The information, among other things, should
include:
Organizational set up with a list of Board of Directors and indicating the
qualifications, experience and competence of the key personnel in charge of the
main functional areas e.g., purchase, production, marketing and finance; in other
words a brief on the managerial resources and whether these are compatible with
the size and scope of the proposed activity.
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 Demand and supply projections based on the overall market prospects together
with a copy of the

market survey report. The report may comment on the

geographic spread of the market where the unit proposes to operate, demand and
supply gap, the competitors share, competitive advantage of the applicant,
proposed marketing arrangement, etc.
Current practices for the particular product/service especially relating to terms of
credit sales, probability of bad debts, etc.
Estimates of sales, cost of production and profitability.
Projected profit and loss account and balance sheet for the operating years during
the

currency of the Bank assistance.

If request includes financing of project(s), branch should obtain additionally

(i)Appraisal report from any other bank/financial institution in case appraisal has
been done by them,
(ii) No Objection Certificate from term lenders if already financed by them and
(iii) Report from Merchant bankers in case the company plans to access capital
market, wherever necessary.
1.5. In respect of existing concerns, in addition to the above, particulars regarding
the history of the concern, its past performance, present financial position, etc.
should also be called for. This data/information should be supplemented by the
supporting statements such as:
a) Audited profit loss account and balance sheet for the past three years (if the
latest audited balance sheet is more than 6 months old, a pro-forma balance
sheet as on a recent date should be obtained and analysed). For non131

corporate borrowers, irrespective of market segment, enjoying credit limits

of Rs.10 lacs and above from the banking system, audited balance sheet in
the IBA approved formats should be submitted by the borrowers.
b) Details of existing borrowing arrangements, if any,
c) Credit information reports from the existing bankers on the applicant Company,
and
d) Financial statements and borrowing relationship of Associate firms/Group
Companies.
B. Detailed Appraisal
1.6 The viability of a project is examined to ascertain that the company would have
the ability to service its loan and interest obligations out of cash accruals from the
business. While appraising a project or a loan proposal, all the data/information
furnished by the borrower should be counter checked and, wherever possible, interfirm and inter-industry comparisons should be made to establish their veracity.
1.7 The financial analysis carried out on the basis of the companys audited balance
sheets and profit and loss accounts for the last three years should help to establish
the current viability.
1.8 In addition to the financials, the following aspects should also be examined:
The method of depreciation followed by the company-whether the company is
following straight line method or written down value method and whether the
company has changed the method of depreciation in the past and, if so, the reason
therefor;

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 Whether the company has revalued any of its fixed assets any time in the past and
the present status of the revaluation reserve, if any created for the purpose;
Record of major defaults, if any, in repayment in the past and history of past
sickness, if any;
The position regarding the companys tax assessment - whether the provisions
made in the balance sheets are adequate to take care of the companys tax
liabilities;
The nature and purpose of the contingent liabilities, together with comments
thereon; Pending suits by or against the company and their financial implications
(e.g. cases relating to customs and excise, sales tax, etc.);
Qualifications/adverse remarks, if any, made by the statutory auditors on the
Companys accounts;
Dividend policy;
Apart from financial ratios, other ratios relevant to the project;
Trends in sales and profitability, past deviations in sales and profit projections,
and Estimates/projections of sales values;
Production capacity & use: past and projected;\
Estimated requirement of working capital finance with reference to acceptable
build up of inventory/ receivables/ other current assets;
Projected levels: whether acceptable; and
Compliance with lending norms and other mandatory guidelines as applicable

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1.9. Project financing:

If the proposal involves financing a new project, the commercial, economic and
Financial viability and other aspects are to be examined as indicated below:
Statutory clearances from various Government Depts./ Agencies

Licenses/permits/approvals/clearances/NOCs/Collaboration

agreements,

as

applicable.
Details of sourcing of energy requirements, power, fuel etc.
Pollution control clearance
Cost of project and source of finance
Build-up of fixed assets (requirement of funds for investments in fixed assets to
be critically examined with regard to production factors, improvement in quality of
products, economies of scale etc.)
Arrangements proposed for raising debt and equity
Capital structure (position of Authorized, Issued/ Paid-up Capital, Redeemable
Preference Shares, etc.)
Debt component i.e., debentures, term Loans, deferred payment facilities,
unsecured loans/ deposits. All unsecured loans/ deposits raised by the company for
financing a project should be subordinate to the term loans of the banks/ financial
institutions and should be permitted to be repaid only with the prior approval of all
the banks and the financial institutions concerned. Where central or state sales tax
loan or developmental loan is taken as source of financing the project, furnish

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details of the terms and conditions governing the loan like the rate of interest (if
applicable), the manner of repayment, etc.
Feasibility of arrangements to access capital market
Feasibility of the projections/ estimates of sales, cost of production and profits
covering the period of repayment
Break Even Point in terms of sales value and percentage of installed capacity
under a normal production year
Cash flows and fund flows
Proposed amortization schedule
Whether profitability is adequate to meet stipulated repayments with reference to
Debt Service Coverage Ratio, Return on Investment
Industry profile & prospects
Critical factors of the industry and whether the assessment of these and
management Plans in this regard are acceptable
Technical feasibility with reference to report of technical consultants, if available
Management quality, competence, track record
Companys structure & systems
Applicants strength on inter-firm comparisons
For the purpose of inter-firm comparison and other information, where necessary,
source data from Stock Exchange Directory, financial journals/ publications,

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professional entities like CRIS-INFAC, CMIE, etc. with emphasis on following

aspects:
Market share of the units under comparison
Unique features
Profitability factors
Financing pattern of the business
Inventory/Receivable levels
Capacity utilization
Production efficiency and costs
Bank borrowings patterns
Financial ratios & other relevant ratios
Capital Market Perceptions
Current price
52week high and low of the share price
P/E ratio or P/E Multiple
Yield (%)- half yearly and yearly

Also examine and comment on the status of approvals from other term lenders,
market view (if anything adverse), and project implementation schedule. A presanction inspection of the project site or the factory should be carried out in the
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case of existing units. To ensure a higher degree of commitment from the

promoters, the portion of the equity / loans which is proposed to be brought in by
the promoters, their family members, friends and relatives will have to be brought
upfront. However, relaxation in this regard may be considered on a case to case
basis for genuine and acceptable reasons. Under such circumstances, the promoter
should furnish a definite plan indicating clearly the sources for meeting his
contribution. The balance amount proposed to be raised from other sources, viz.,
debentures, public equity etc., should also be fully tied up.

C. Present relationship with Bank:

Compile for existing customers, profile of present exposures:
Credit facilities now granted
Conduct of the existing account
Utilization of limits - FB & NFB
Occurrence of irregularities, if any
Frequency of irregularity i.e., number of times and total number of days the
account was irregular during the last twelve months
Repayment of term commitments
Compliance with requirements regarding submission of stock statements,
Financial Follow-up Reports, renewal data, etc.
Stock turnover, realization of book debts
Value of account with break-up of income earned
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 Pro-rata share of non-fund and foreign exchange business

Concessions extended and value thereof
Compliance with other terms and conditions
Action taken on Comments/observations contained in RBI Inspection Reports:
CO Inspection & Audit Reports
Verification Audit Reports
Concurrent Audit Reports
Stock Audit Reports
Spot Audit Reports
Long Form Audit Report (statutory audit)
D. Credit risk rating: Draw up rating for (i) Working Capital and (ii) Term
Finance.
E. Opinion Reports: Compile opinion reports on the company, partners/
promoters and the proposed guarantors.
F. Existing charges on assets of the unit: If a company, report on search of
charges with ROC.
G. Structure of facilities and Terms of Sanction:
Fix terms and conditions for exposures proposed - facility wise and overall:
o Limit for each facility sub-limits
o Security - Primary & Collateral, Guarantee
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o Margins - For each facility as applicable

o Rate of interest
o Rate of commission/exchange/other fees
o Concessional facilities and value thereof
o Repayment terms, where applicable
o ECGC cover where applicable
o Other standard covenants
H. Review of the proposal: Review of the proposal should be done covering
(i) strengths and weaknesses of the exposure proposed
(ii) risk factors and steps proposed to mitigate them
(iii) deviations, if any, proposed from usual norms of the Bank and the reasons
therefor.
I. Proposal for sanction: Prepare a draft proposal in prescribed format with
required backup details and with recommendations for sanction.
J. Assistance to Assessment: Interact with the assessor, provide additional inputs
arising
from the assessment, incorporate these and required modifications in the draft
proposal and generate an integrated final proposal for sanction.

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2. ASSESSMENT: Indicative List of Activities Involved in Assessment Function

is given below:
Review the draft proposal together with the back-up details/notes, and the
borrowers
application, financial statements and other reports/documents examined by the
appraiser.
Interact with the borrower and the appraiser.
Carry out pre-sanction visit to the applicant company and their project/factory
site.
Peruse the financial analysis (Balance Sheet/ Operating Statement/ Ratio
Analysis/ Fund Flow Statement/ Working Capital assessment/Project cost &
sources/ Break Even analysis/Debt Service/Security Cover, etc.) to see if this is
prima facie in order. If any deficiencies are seen, arrange with the appraiser for the
analysis on the correct lines.
Examine critically the following aspects of the proposed exposure.
o Banks lending policy and other guidelines issued by the Bank from time to time
o RBI guidelines
o Background of promoters/ senior management
o Inter-firm comparison
o Technology in use in the company
o Market conditions
o Projected performance of the borrower vis--vis past estimates and performance
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o Viability of the project

o Strengths and Weaknesses of the borrower entity.
o Proposed structure of facilities.
o Adequacy/ correctness of limits/ sub limits, margins, moratorium and repayment
schedule
o Adequacy of proposed security cover
o Credit risk rating
o Pricing and other charges and concessions, if any, proposed for the facilities
o Risk factors of the proposal and steps proposed to mitigate the risk
o Deviations proposed from the norms of the Bank and justifications therefor
To the extent the inputs/comments are inadequate or require modification, arrange
for additional inputs/

modifications to be incorporated in the proposal, with

any required modification to the initial recommendation by the Appraiser

Arrange with the Appraiser to draw up the proposal in the final form.
Recommendation for sanction: Recapitulate briefly the conclusions of the
appraisal and state whether the proposal is economically viable. Recount briefly
the value of the companys (and the Groups) connections. State whether, all
considered, the proposal is a fair banking risk. Finally, give recommendations for
grant of the requisite fund-based and non-fund based credit facilities.

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3. SANCTION: Indicative list of activities involved in the sanction function is

given below:
Peruse the proposal to see if the report prima facie presents the proposal in a
comprehensive manner as required. If any critical information is not provided in
the proposal, remit it back to the Assessor for supply of the required
data/clarifications.
Examine critically the following aspects of the proposed exposure in the light of
corresponding instructions in force:
o Banks lending policy and other relevant guidelines
o RBI guidelines
o Borrowers status in the industry
o Industry prospects
o Experience of the Bank with other units in similar industry
o Overall strength of the borrower
o Projected level of operations
o Risk factors critical to the exposure and adequacy of safeguards proposed there
against
o Value of the existing connection with the borrower
o Credit risk rating
o Security, pricing, charges and concessions proposed for the exposure and
covenants stipulated vis--vis the risk perception.
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 Accord sanction of the proposal on the terms proposed or by stipulating

modified or additional conditions/ safeguards, or Defer decision on the proposal
and return it for additional data/clarifications, or Reject the proposal, if it is not
acceptable, setting out the reasons.

5. MONITORING DELAY IN PROCESSING LOAN PROPOSAL :

Branches have to submit a report on credit proposals pending for more than 30
days in two parts. Part I will comprise proposals requiring sanctions at the Branch/
SECC/ ZCC and Part II will contain sanctions by CCC-II and above. Review
reports to CCC-I and later to Group Executive for information at prescribed
intervals will be coordinated by DGM (CCFO). The consolidated position in this
regard in respect of all the Circles will be put up to MD & GE (NB) through GM
(SME).

Loan Administration - Post sanction credit process

General
1. Need
Lending decisions are made on sound appraisal and assessment of credit
worthiness. Past record of satisfactory performance and integrity are no guarantee
for future though they serve as a useful guide to project the trend in performance.
Credit assessment is made based on promises and projections. A loan granted on
the basis of sound appraisal may go bad because the borrower did not carry out his
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promises regarding performance. It is for this reason that proper follow up and
supervision is essential. A banker cannot take solace in sufficiency of security for
his loans. He has to a) make a proper selection of borrower
b) Ensure compliance with terms and conditions
c) Monitor performance to check continued viability of operations
d) Ensure end use of funds.
e) Ultimately ensure safety of funds lent.
2. Stages of post sanction process
The post-sanction credit process can be broadly classified into three stages viz.,
follow-up, supervision and monitoring, which together facilitate efficient and
effective credit management and maintaining high level of standard assets. The
objectives of the three stages of post sanction process are detailed below.

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8. TYPES OF LENDING ARRANEMENTS

Introduction
Business entities can have various types of borrowing arrangements. They are
One Borrower One Bank
One Borrower Several Banks (with consortium arrangement)
One Borrower Several Banks (without consortium arrangements
Multiple Banking
One Borrower Several Banks (Loan Syndication)
A. One Bank
The most familiar amongst the above for smaller loans is the One Borrower-One
Bank arrangement where the borrower confines all his financial dealings with only
one bank. Sometimes, units would prefer to have banking arrangements with more
than one bank on account of the large financial requirement or the resource
constraint of his own banker or due to varying terms & conditions offered by
different banks or for sheer administrative convenience. The advantages to the
bank in a multiple banking arrangement/ consortium arrangement are that the
exposure to an individual customer is limited & risk is proportionate. The bank is
also able to spread its portfolio. In the case of borrowing business entity, it is able
to meet its funds requirement without being constrained by the limited resource of
its own banker. Besides this, consortium arrangement enables participating banks
to save manpower & resources through common appraisal & inspection & sharing
credit information.

145

The various arrangements under borrowings from more than one bank will differ
on account of terms & conditions, method of appraisal, coordination,
documentation & supervision & control.
B. Consortium lending
When one borrower avails loans from several banks under an arrangement among
all the lending bankers, this leads to a consortium lending arrangements. In
consortium lending, several banks pool banking resourses & expertise in credit
management together & finance a single borrower with a common appraisal,
common documentation & joint supervision & follow up. The borrower enjoys the
advantage similar to single window availing of credit facalities from several banks.
The arrangement continues until any one of the bank moves out of the consortium.
The bank taking the highest share of the credit will usually be the leader of
consortium. There is no ceiling on the number of banks in a consortium.
C. Multiple Banking arrangement
Multiple Banking Arrangement is one where the rules of consortium do not apply
& no inter se agreement among banks exists. The borrower avails credit facility
from various banks providing separate securities on different terms & conditions.
There is no such arrangement called Multiple Banking Arrangement & the term is
used only to donote the existence of banking arrangement with more than one
bank.
Multiple Banking Arrangement has come to stay as it has some advantages for the
borrower & the banks have the freedom to price their credit products & non-fund
based facility according to their commercial judgment. Consortium arrangement
occasioned delays in credit decisions & the borrower has found his way around this
difficulty by the multiple banking arrangement. Additionally, when units were not
doing well, consensus was rarely prevalent among the consortium members. If one
146

bank wanted to call up the advance & protect the security, another bank was
interested in continuing the facility on account of group considerations.

Points to be noted in case of multiple banking arrangements

Though no formal arrangement exists among the financing banks, it is
preferable to have informal exchange of information to ensure financial
discipline
Charges on the security given to the bank should be created with utmost care
to guard against dilution in our security offered & to avoid double financing
Certificates on the outstandings with the other banks should be obtained on
the periodical basis & also verified from the Balance sheet of the unit to
avoid excess financing.
D. Credit Syndication
A syndicated credit is an agreement between two or more lending institutions to
provide a borrower a credit facility using common loan documentation. It is a
convenient mode of raising long-term funds.
The borrower mandates a lead manager of his choice to arrange a loan for him. The
mandate spells out the terms of the loan & the mandated banks rights &
responsibilities. The mandated banker the lead manger prepares an information
memorandum & circulates among prospective lender banks soliciting their
participation in the loan. On the basis of the memorandum & on their own
147

independent economic & financial evolution the leading banks take a view on the
proposal. The mandated bank convenes the meeting to discuss the syndication
strategy relating to coordination, communication & control within the syndication
process & finalises deal timing, management fees, cost of credit etc. The loan
agreement is signed by all the participating banks. The borrower is required to give
prior notice to the lead manger about loan drawal to enable him to tie up
disbursements with the other lending banks

Features of syndicated loans

Arranger brings together group of banks
Borrower is not required to have interface with participating banks, thus
easy & hassle fee
Large loans can be raised through syndication by accessing global markets
For the borrower, the competition among the lenders leads to finer terms
Risk is shared
Small banks can also have access to large ticket loans & top class credit
appraisal & management
Advantages
Strict, time-bound delivery schedule & drawals
Streamlined process of documentation with clearly laid down roles &
responsibilities
Market driven pricing linked to the risk perception
Competitive pricing but scope for fee-based income is also available
148

 Syndicated portions can be sold to another bank, if required

Fixed repayment schedule & strict monitoring of default by markets which
punish indiscipline

CHAPTER 6
CREDIT RISK
ASSESSMENT
149

WHAT IS CREDIT RISK?

Probability of loss from a credit transaction is the plain vanilla definition
of credit risk. According to the Basel Committee, Credit Risk is most simply
defined as the potential that a borrower or counter-party will fail to meet its
obligations in accordance with agreed terms.
The Reserve Bank of India (RBI) has defined credit risk as the probability of
losses associated with diminution in the credit quality of borrowers or counterparties. Though credit risk is closely related with the business of lending (that is
BANKS) it is Infact applicable to all activities of where credit is involved (for
example, manufactures /traders sell their goods on credit to their customers).the
first record of credit risk is reported to have been in 1800 B.C.

Risk is inability or unwillingness of borrower-customer or counter-party to

meet their repayment obligations/ honor their commitments, as per the
stipulated terms.

150

Lender task
Identify the risk factors, 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)
Uncertainties in the business environment (External factor)
Uncertainties in the industrial environment (External factor)
Weakness in the financial position (Internal factor)
To put in another way, success factors behind a business are: Managerial ability
Favorable business environment
Favorable industrial environment
Adequate financial strength
As such, these are the broad risk categories or risk factors built into our CRA
models. CRA takes into account the above types of risks associated with the
151

borrowal unit. The eventual CRA rating awarded to a unit (based on a score of 100)
is a single-point risk indicator of an individual credit exposure, & is used to
indentify, to measure & to monitor the credit risk of an individual proposal. At the
corporate level, CRA is also used to track the quality of Banks credit portfolio.
Credit & Risk
Go hand in hand.
They are like twin brothers.
They can be compared to two sides of the same coin.
All credit proposals have some inherent risks, excepting the almost
negligible volume of lending against liquid collaterals with adequate margin.
Lending despite risks:
So, risk should not deter a Banker from lending.
A bankers task is to identify/ assess the risk factors/ parameters & 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/ riskhedging capacity & risk-mitigation techniques of the Bank.
CREDIT RISK ASSESSMENT (CRA):
Credit is a core activity of banks & an important source of their earnings, which go
to pay interest to depositors, salaries to employees & 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.
152

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 the implementation of Basle-II accord4, capital has to be allocated
for loan assets depending on the risk perception/ rating of respective assets. It is,
therefore, extremely important for every bank to have a clear assessment of risks of
the loan assets it creates, to become Basle-II compliant.
That is why Credit Risk Assessment (CRA) system is an essential ingredient of the
Credit Appraisal exercise.
Indian Scenario:
In Indian banks, there was no systematic method of Credit Risk Assessment
till late 1980s/ early 1990s.
Health Code System (1985) / IRAC norms (1993) are Asset (loan)
classification systems, not CRA systems.
RBI came out with its guidelines on Risk Management Systems in Banks in
1999 & Guidance Note on Management of Credit in October, 2002.

SBI Scenario:
However, like in many other fields, in the field of Credit Risk Assessment too, our
Bank played a proactive & pioneering role. We had our Credit Rating System
(CRA) in 1988. Then, the CRA system was introduced in the Bank in 1996. The
first CRA model was rolled out in 1996 to take care of exposures to the C & I
(Manufacturing) segment. Thereafter, separate models for SSI & AGL segments
were introduced in 1998, when the C&I (Mfg) CRA model was developed for Non
Banking Finance Companies (NBFCs).
153

As of now, in SBI, CRA is the most important component of the Credit Appraisal
exercise for all exposures > 25 lacs & a very important tool in decision-making (a
Decision Support System) as well as in pricing.

CREDIT RISK ASSESSMENT (CRA) Minimum scores / Hurdle rates

1. The CRA models adopted by the Bank take into account all possible factors
which go into appraising the risks associated with a loan. These have been
categorized broadly into financial, business, industrial & management risks
and are rated separately. To arrive at the overall risk rating, the factors duly
weighted are aggregated & calibrated to arrive at a single point indicator of
risk associated with the credit decision.
2. Financial parameters: The assessment of financial risk involves appraisal
of the financial strength of the borrower based on performance & financial
indicators. The overall financial risk is assessed in terms of static ratios,
future prospects & risk mitigation (collateral security / financial standing).
3. Industry parameters: The following characteristics of an industry which
pose varying degrees of risk are built into Banks CRA model:
Competition
Industry outlook
Regulatory risk
Contemporary issues like WTO etc.

154

4. Management parameters: The management of an enterprise / group is

rated on the following parameters:
Integrity (corporate governance)
Track record
Managerial competence / commitment
Expertise
Structure & systems
Experience in the industry
Credibility: ability to meet sales projections
Credibility: ability to meet profit (PAT) projections
Payment record
Strategic initiatives
Length of relationship with the Bank
Bank has introduced New Rating Scales for borrower for giving loans. Rating is
given on the basis of scores out of 100. Bank gives loans to the borrower as per
their rating like SBI gives loans to the borrower up to SB8 rating as it has average
risk till SB8 rating. From SB9 rating the risk increases. So banks do not give loans
after SB8 rating.
5. The risk parameters as mentioned above are individually scored to arrive at
an aggregate score of 100 (subject to qualitative factors negative
parameters). The overall score thus obtained (out of a max. of 100) is rated
on a 8 point scale from SB1/SBTL1 to SB 8 /SBTL8.

155

 CRA model also stipulates a minimum score under financial, business,

industry and management risk parameters for a proposal to be considered
acceptable in a given form.
The details of such minimum scores are as under:
a. Minimum scores General
b. Minimum

scores

under

Governance,

Management

Risk

(Integrity/Corporate

Track Record and Managerial Competence/

Commitment)
An applicant unit will be required to score minimum 2 marks each (out of 3) in the
above three parameters of Management Risk to qualify for Banks assistance. In
case of existing accounts if the company scores less than this stipulated minimum
marks (02), the Bank would explore all possibilities to exercise exit option.
c. Minimum Score under Business Risk:

Compliance of Environment Regulations To qualify for financial assistance, an

applicant unit would have to secure full marks (02) under the parameter,
Compliance of Environment Regulations. In case, the existing units in the books
of the bank do not secure full marks (02), the bank would explore all possibilities
for the exercise of exit option.
Hurdle rates:
No new connections are to be considered in respect of accounts rated below
SB4/SBTL4, subject to exceptions like availability of Central Govt.
guarantees and / or
156

availability of a Corporate guarantee of parent / group company with a CRA

rating of SB3 / SBTL3 and above.
No enhancements in credit limits are to be considered in existing accounts
rated below SB4/SBTL4. (Deviations may be permitted by CCC-I and
above, as provided in the Loan Policy.)
Risk Management Dept., would issue advisories on the general outlook for
the industry from time to time.

Salient features of CRA models:

(a) Type of Models

Exposure Level (FB

Non Trading

Trading

+ NFB Limits )

Sector

Sector

(C&I , SSI ,

AGL)

( Trade &
Services)

o
.
(i)

Over Rs. 5.00 crore

(ii) Rs 0.25 crore to Rs.

Regular Model

Regular Model

Simplified Model

Simplified

5.00 crore

Model
157

(c)
S.

Type of Ratings
Model

Type of Rating

No
.
(i)
(ii)

Regular Model i Borrower Rating

Simplified

ii Facility Rating
Borrower Rating

Model

c Type of Risks Covered:

i Borrower Rating
S.
No.

Risk Category

Maximum
Score
Regular
Model

Simplified
Model
Existin

Exist
ing
Com
pany
158

New

Compa Compa
ny
ny

New
Comp
any

(i)

Financial Risk (FR)

65

25

70

(65 x

35
(70/2)

0.39)
(ii)

Qualitative Factors

(-10)

(-10)

(-10)

(-10)

20

30

20

40

(-ve)
(iii)

Business & Industry

Risk (BR & IR)

(20 x

/Business Risk (for

1.5)

Trading Sector)
(iv)

Management Risk

15

(MR)

(v)

Qualitative Parameter

(20 x 2)

45

10

25

( 15 x

( 10 x

3)

2.5)

(+5)

(+5)

(+5)

(+ 5)

100

100

100

100

(External Rating)
Total
(vi)

Borrower Rating based

on the above Score

(vii)

Country Risk (CR)

(viii) Final Borrower Rating

after CR
(ix)

Financial Statement
Quality

Excellent/Good/Satisfactory/Poo
r

(x)

Risk Score/Rating

Comments on Trend in
159

Transition Matrix

Rating

(ii) Facility Rating (Regular Model)

160

161

S.

Param
No

Maximum Score

eter

.
(a)

Risk Drivers for Loss Given

Default (LGD)

(i)

Current Ratio [Working Capital/

Non-Fund Based Facility (except
Capex)]

Or

Debt/Equity[Term

Project
Loan/Non-Fund

Based Facility (for Capex)]

(ii)

Nature of Charge

(iii)

Industry

/(Trade-

for

Trading

Sector) #

(iv)

Geography #

(v)

Unit Characteristics
(a) Leverage/ Enforcement of
Collateral-4
b

Safety, Value & Existence of

Assets-4

(vi)

Macro-Economic Conditions
a

GDP Growth Rate : Impact162

of Business
Cycle - 2

No Scoring under these two parameters for AGL & Trade

Segments due to non-availability of relevant LGD Data; Score out

of 92 to be normalised to 100 for these segments.
@ Marks linked to Borrower Rating Score of the Unit.
(d)

New Rating Scales - Borrower Rating:

16 Rating

Grades
S.

Borro

N
o
.

Risk Comfort

wer

Ran

Ratin

ge

of

Level

Level

Scor
es

SB1

94-100

Virtually Zero risk

Virtually Absolute
safety

SB2

90-93

Lowest Risk

Highest safety

SB3

86-89

Lower Risk

Higher safety

SB4

81-85

Low Risk

High safety

SB5

76-80

Moderate Risk with

Adequate safety

Adequate Cushion
6

SB6

70-75

SB7

64-69

SB8

57-63

SB9

50-56

Moderate Risk

Moderate Safety

Average Risk

Above Safety
Threshold

163

10

SB10

45-49

Acceptable

Safety

Risk

Threshold

(Risk Tolerance
Threshold)
11

SB11

40-44

Borderline risk

Inadequate safety

12

SB12

35-39

High Risk

Low safety

13

SB13

30-34

Higher Risk

Lower safety

14

SB14

25-29

Substantial risk

Lowest safety

15

SB15

<24

Pre-Default Risk
(extremely

Nil

vulnerable to
default)
16

SB16

Default Grade

(e) New Rating Scales - Facility Rating (Separate for each

Fund Based / Non- Fund Based Facility): 16 Rating Grades
S RANGE
FACILI
N

LGD LEVEL

TY

FR1

LE

(Recovery

GRAD
O
SCORES
ES
1

RISK
VE

Level)

COMFORT
LEVEL

94-

Virtually Zero

Virtually Zero

Virtually

100

LGD

Risk

Absolute

164

Safety
2

FR2

87-93

Lowest LGD

Lowest Risk

Highest
Safety

(Highest
Recovery)
3

FR3

80-86

Lower LGD

Lower Risk

Higher
Safety

(Higher
Recovery)
4

FR4

73-79

Very Low LGD

Low Risk

High Safety

Moderate

Adequate

(High Recovery)
5

FR5

66-72

Low LGD
(Adequate
Recovery)

Risk with

Safety

Adequate
Cushion

FR6

59-65

FR7

52-58

Moderate LGD

Moderate

Moderate

(Moderate

Risk

Safety

recovery)
8

FR8

45-51

FR9

38-44

1
0

FR10

31-37

Average LGD
(Average

Average
Risk

Above
Safety

Recovery)

Threshold

LGD Tolerance

Safety

Threshold
(Recovery
Tolerance
165

Acceptable
Risk
(Risk

Threshold

Threshold)

Tolerance
Threshold)

11

FR11

24-30

High LGD (Low

High Risk

Low Safety

Higher Risk

Lower

recovery)
12

FR12

17-23

Higher LGD

Safety

(Lower Recovery)
13

FR13

11-16

14

FR14

5-10

15

FR15

1-4

16

FR16

Substantial LGD

Substantial
Risk

(Small recovery)
Highest LGD

Safety

Highest Risk

(Minimal/zero

NIL

recovery

(f) Mapping to Existing Borrower Rating Bands

S.
No.

New CRA

Existing CRA

Model

Model

Score

Grade

Grade

Score

94-100

SB1

SB1

>= 90

90-93

SB2

86-89

SB3

81-85

SB4

SB2

>=75

76-80

SB5

166

Lowest

70-75

SB6

64-69

SB7

57-63

SB8

50-56

SB9

10

45-49

11

SB3

>=65

SB4

>=50

SB10

SB5

>=45

40-44

SB11

SB6

>35

12

35-39

SB12

13

30-34

SB13

SB7

>=25

14

25-29

SB14

15

< 24

SB15

SB8

<25

16

SB16

(g) Qualitative Parameter (External Rating)

Solicited Rating by a recognized External Credit Rating Agency

(ECRA) translates to additional Score. Following ECRAs recognised
by RBI are considered for this purpose:

Type

ECRA

S.N No.

167

Domestic

Credit Analysis & Research Limited;

CRISIL Limited;
FITCH India;
(d)

Internation
al

(d) ICRA Limited.

a FITCH;
Moodys;
Standard & Poors

RBI has clarified that Cash Credit Exposures tend to be generally

rolled over and also tend to be drawn on an average for a major
portion of the sanctioned limits. Hence even though a cash credit
exposure may be sanctioned for a period of one year or less,
these exposures should be reckoned as Long Term Exposures and
accordingly, the Long Term Ratings accorded by the chosen Credit
Rating Agencies will be relevant.

168

CHAPTER 7
CASE STUDY

Case Study-1
169

Details of case:
Company:- Akshat Polymers
Firm:- Partnership Firm (M/S Umiya Polymers)
* Shri Amrutbhai Laljibhai Desai
* Shri Gunvantbhai Ambaramdas Patel
* Shri Natvarlal Mohanlal Patel
* Shri Dharamsinhbhai Lallubhai Desai
* Shri Kanjibhai Maljibhai Desai
Industry:- Manufacturing
Activity:- Maufacturing of HDPP woven sacks
Segment:- SSI
Date of Incorporation:- 19.11.07
Banking arrangement:- Sole Banking
Regd. & Admin. Office:- RS No. 840,
Kadi Thol Road,
Tal-Kadi, Dist-Mehsana
The unit will have installed capacity of 2520 MT. The unit is
expected to start commercial production from first week of
September, 2008. The capacity utilization for the year 2008-09
170

has been projected at 70% of installed capacity in terms of the

utilization of the machines. Accordingly the unit is projected to
achieve a sale of Rs.9.26 crores for the year 2008-09 in the first
six months of operations.
Further, the unit is projected to achieve capacity utilization of
80% during the year 2009-10 (the first full year of operations) and
accordingly the sale for the year is projected at Rs.19.77 crores.
The projections are considered acceptable in view of the following
factors:
i)

The unit plans to initially market its product in Gujarat,

Maharastra, Rajasthan and sale to Central Govt. who
purchases the HDPP woven sacks for grains through open
tenders. The unit has started negotiating for booking of
the orders for the proposed plant and results are
promising as advised.

ii)

HDPP woven sacks are widely used as packaging material

in Cement, Fertiliser, storage of the AGL commodities. All
these segments are reported to have good demand for the
HDPP/PE woven sacks in the Indian market.

iii)

As per ICRA report, grading and research services (2006)

Flexible packaging sector is expected to grow at the rate
of 12.40%.

iv)

The promoters have sufficient experience in the line of

activity. The promoters had already made negotiations of
the some of the industries as detailed under for selling the
HDPP woven sacks:
171

 Indian Farmers Fertilizers Company Limited

GUJCOMASOL
Birla cement
Sanghi Cement
Ambuja cement
Various grain & Food Export units of Gujarat,
etc.
v)

The firm has also started marketing activity for their products by making
personnel contacts & writing introductory letters to potential customers
& as the promoters are in the same line of business activity for the last 15
years they are having very good market contacts for the sales of the
Finished Goods.

vi)

The orders worth Rs.2.50 crores is expected to be finalized

by end of August, 2008 and before commissioning of the
plant as advised.

Proposal:
Sanction for;
i)
FBWC limits of Rs.2.25 crores
ii) Fresh Term Loan of Rs.2.00 crores
Approval for:
i)
CRA rating of SB- 6 (71 marks) based on projected financials as on 31.03.2010.
ii) Pricing for WC facilities @1.00% above SBAR as applicable for SB-5 minimum
@13.75and for TL 1.50% above SBAR minimum @14.25%

172

Performance & Financial Indicators:

(Rs.

in Crores)
Year
Installed cap Qty.

2009
2520

2010
2520

2011
2520

2012
2520

2013
2520

2014
2520

(approx) (MT)
Net Sales (Value)
(Export)
Operating profit
Profit before tax

1029
9.26
0.00
0.44
0.43

2016
19.77
0.00
1.18
1.17

2091
20.58
0.00
1.19
1.18

2142
21.09
0.00
1.23
1.22

2217
21.82
0.00
1.31
1.30

2268
22.34
0.00
1.33
1.32

PBT/Net sales (%)

4.64

5.92

5.73

5.78

5.96

5.91

Profit after tax

0.29

0.78

0.79

0.82

0.87

0.88

Cash accruals

0.66

1.10

1.09

1.15

1.24

1.32

PBDIT

1.20

2.04

1.96

1.97

2.02

2.05

Paid up capital

0.95

0.95

0.95

0.95

0.95

0.95

Tangible net worth

1.23

2.01

2.80

3.62

4.49

5.38

1.73
4.11

2.51
2.50

3.30
1.67

4.12
1.19

4.99
0.88

5.88
0.66

2.64
1.34

1.80
1.52

1.27
1.53

0.92
1.53

0.81
1.57

0.62
1.81

(MT/pa.)
Net Sales Qty.

Adjusted TNW
TOL/TNW
TOL/Adjusted TNW
Current ratio

173

NWC

1.01

1.71

2.40

2.57

2.74

3.28

Balance Sheet: (Rs. In crores )

Sources of funds
Share Capital
Reserves and Surplus
Secured Loans : short term CC
: long term TL
Unsecured Loans
Deferred Tax Liability
Total
Application of Funds
Fixed Assets (Gross Block)
Less Depreciation
Net Block
Capital Work in Progress
Investments
Inventories
Sundry debtors
Cash & bank balances
Loans & advances to suppliers of
Raw material / spares
Advance tax
( Less : Current liabilities )
(Less : Provisions )
Net Current Assets
Misc. Expenditure

31.03.2009
0.95
0.29
2.25
2.00
0.50

31.03.2010
0.95
1.07
2.25
1.60
0.50

5.99

6.37

2.67
0.37
2.30

2.67
0.69
1.98

1.73
1.85
0.15
0.14

2.13
2.40
0.15
0.12

0.10
0.31

0.23
0.67

3.66

4.36

0.03
5.99

0.03
6.37

(To the extent not written off or

adjusted )
Non-Current Assets/ Deposits
Total

174

Movement in TNW: Movement in TNW

Projected
31.03.2009
0.00
0.29
0.95
-0.01

Opening TNW
+ PAT
+ Inc. in Equity / Premium
+/- Change in Int. Assets
+/- Adj. of prior year exp.
- Dividend payment
Closing in TNW

1.23

31.03.2010
1.23
0.78

31.03.2011
2.01
0.79

2.01

2.80

Bank Income Analysis

(Rs. in crores)
From

Projection

Projection

WC Int.
TL Int.
LC
BG
Bill
Others loan processing
Total

31.03.2009
0.16
0.14
0.03
0.33

31.03.2010
0.27
0.29
0.01
0.57

Deviations in Loan Policy:

Parameters

Liquidity
TOL/TNW

Indicative Min/Max

Company's

Company's level

level

level as on

as on 31.03.2010

as per loan policy

1.33
3.00

31.03.2009 @
1.34
1.52
4.11
2.50

175

TOL/Adj. TNW
Average gross DSCR (TL) 1.75
Debt / equity
2:1

2.64
2.54
2.01:1

1.80
2.54
1.03:1

Debt/Quasi equity
Any others

1.15:1
-

0.64:1
-

Defaulters List:Whether names of promoters, directors, company, group concerns figure in :

RBI defaulters list dated 30.09.2007 No
Wilful defaulters list dated
No
31.12.2007
ECGC caution list
Warning signals / Major irregularities

No

in
Credit audit:

Not applicable new unit

inspection report :
Other audit reports :
Adverse observations in Balance

Not applicable new unit

sheet
Adverse observations in Auditors

Nil.

report
Any NPAs among associate concerns

None

About unit and the promoters:

AKSHAT POLYMERS (AP) has been established as a partnership firm on 19th
November, 2007 at Kadi. The partnership was constituted for manufacturing and
selling of HDPP woven sacks to be manufactured from HDPP granules.

176

The firm consists of total six partners. The brief background of the partners is as
follows :

Name

Ag

Brief Background

M/s Umiya Polymers

e
46

Sri Prahaladbhai Hargovandas Patel is

the main partner in M/s Umiya
Polymers with 30 share. Sri
Prahaladbhai is SSC and have 10
years of experience as Production
Manager in Asia Woven Sacks Ltd.,
Kadi who are engaged in similar
activity. M/s Umiya Polymers are
engaged in plastic waste recycling at
Kadi.

Sri Amrutbhai Laljibhai Desai

43

Sri Desai is SSC and have 15 years of

experience as Production Manager in
reputed Gopala Polyplast Ltd., Santej.
He had good contacts in the market
and will look after production

Shri Dharamsingbhai Lallubhai

35

department & raw material purchases.

Sri Dharamsinhbhai is a partner in the

Desai

local unit M/s Ajay Ginning

Shri Kanjibhai Malibhai Desai

Industries, Kadi
Sri Kanjibhai is a farmer by profession

44

and sleeping partner.

177

Shri Gunvantbhai Ambaramdas Patel 42

Sri Gunvantbhai also is a partner in

M/s Ajay ginning Industires, Kadi and
has been inducted in the partnership as

Shri Natvarlal Mohanlal Patel

a investment partner.
Shri Natvarlal Patel is a B.Com. and

48

has 10 years of experience in

accounting. He is also partner in M/s
Shiv Shakti Steel, Kadi. He will be
looking after general administration
and accounts of the firm.
The overall quality of the management is considered satisfactory.

Commercial viability:

(Rs. in crores)

Year ending

2008-

2009-10

2010-11 2011-12

2012-13

2013-14

Total

31st March
Net Sales
Net Profit
Cash Accruals
Interest on

09
9.26
0.29
0.66
0.16

19.77
0.78
1.10
0.27

20.58
0.79
1.09
0.22

21.09
0.82
1.15
0.16

21.82
0.87
1.24
0.11

22.34
0.88
1.32
0.05

6.56
0.97

TLs
Sub Total

0.82

1.37

1.31

1.31

1.35

1.37

7.53

(A)
Total

0.00

0.40

0.40

0.40

0.40

0.40

2.00

repayment
Interest on TL 0.16
Sub Total (B) 0.16
DSCR
5.13

0.27
0.67
2.04

0.22
0.62
2.11

0.16
0.56
2.34

0.11
0.51
2.65

0.05
0.45
3.04

0.97
2.97

(Gross)
178

Net DSCR
Average

2.54

Gross DSCR
Average Net

3.28

2.75

2.73

2.88

3.10

3.30

DSCR
Break-even and sensitivity analysis and whether
acceptable:

(Rs. in crores)
31-Mar-

31-Mar-

30-Mar-

31-Mar-

31-Mar-

Break even analysis

Capacity Utilization
Net Sales (A)
Variable costs
Raw material
Consumable spares
Power and Fuel
Other operating Exp.
Stock Changes
Total Variable

31/03/09 10
70%
80%
9.26
19.77

11
83%
20.58

12
85%
21.09

13
88%
21.82

14
90%
22.34

8.74
0.00
0.26
0.09
0.73

17.13
0.00
0.47
0.13
0.39

17.77
0.00
0.50
0.15
0.06

18.20
0.00
0.53
0.16
0.03

18.84
0.00
0.56
0.17
0.04

19.27
0.00
0.59
0.18
0.04

Cost(B)
Fixed Costs
Direct Labour
Selling, Admin. &

8.36

17.34

18.36

18.86

19.53

20.00

0.08

0.13

0.14

0.15

0.16

0.17

General Expenses
Interest Expenses
Depreciation
Total Fixed Cost ( C)
Contribution (D=A-B)
Contribution ratio

0.06
0.40
0.37
0.91
0.90

0.10
0.55
0.32
1.10
2.43

0.11
0.48
0.30
1.03
2.22

0.12
0.42
0.33
1.02
2.23

0.13
0.35
0.37
1.01
2.29

0.14
0.29
0.44
1.04
2.34

(E=D/A)
BE sales (F=C/E)
BE sales as % of Net

0.10
9.10

0.12
9.17

0.11
9.36

0.11
9.27

0.10
10.10

0.10
10.40

Sales

98.27

46.38

45.48

43.95

46.29

46.55

179

Interfirm Comparison: (To be given only where data from

comparable units is available.)
(Amt in Cr)
Name of

FBL

NFBL

Year

Sales

Company

PBT /

TOL /

Sales

TNW

CR

%
Ahmedabad
Packaging

3.30

1.20

2007 23.11

2.16

1.47

6.70

--

2010

15.19

6.52

2.90

1.00 2008

22.98

4.53

3.14

19.77

5.92

2.50

1.16

Industries Ltd.
Singhal Industries
Pvt. Ltd
Asia Woven Sacks

7.44

Pvt. Ltd.
Akshat Polymers

4.25

--

2010

1.90
1.08

1.52

Raw material The major raw material for this plant is HDPP in the form of
granules. This raw material is available locally by sales & distribution network of
the major suppliers as under:
Reliance Industries Limited
Nand Agencies
Labdhi International
Hadlia petrochemicals Ltd.
Sharada Polymers
180

 IPCL
The raw materials are purchased from the suppliers against the advance payment
only and cash discounts are offered resulting in the increase n profitability. Any
variation in the cost of raw material is proposed to be passed on to the finished
products and will not affect the profitability.
Analysis: The firm is into manufacturing of HDPP woven sacks which are widely used
as packaging material in cement, fertilizer, etc.
As per ICRA report, grading and research services (2006) Flexible
packaging sector is expected to grow at the rate of 12.40%.
The promoters have sufficient experience in the line of activity. The
promoters had already made negotiations of the some of the industries as
detailed under for selling the HDPP woven sacks:
GUJCOMASOL
Birla cement
Sanghi cement
Ambuja cement
Various grain & Food Export Unit of Gujarat
The orders worth Rs.2.50 crores is expected to be finalized
by end of Agust, 2008 and before commissioning of the plant
as advised.
181

 The companys borrower rating is SB-6 based on projected

financials as on 31.03.2010 (the first full year of operations).
Projected financials are in line with the financials of the some
of the unit in similar line of activity and production level.
The promoters are having experience of more than 15 years
in the line of the activity.
The affairs of the firm are expected to be managed on
professional lines based on their past experience.
The conduct of accounts of associate with the existing
bankers has been satisfactory.
The short and medium term outlook for the industry is stable
Availability of collateral security reflected in collateral
coverage of 50.566%.
Gross average DSCR of 2.54.
Average security margin of 48%.
The

company

has

adequate

management

skills

and

production/marketing infrastructure in place to achieve the

projected trajectory. There is steady demand for the product.
Case Study 2
(1). Details of case study
Company:- Janak Transport Co.
Firm:- Partnership
* Shri Harisinghbhai Lavjibhai Chaudhari;
182

* Shri Jesangbhai Lavjibhai Chaudhari;

* Shri Vinodkumar Lavjibhai Chaudhari;
* Shri Pratapbhai Lavjibhai Chaudhari;&
* Shri Janakkumar Jesangbhai Chaudhari
Industry:- Transport Activity
Segment:- C& I
Date of Incorporation:- 03.09.82
Banking with SBI since:- 16 years as a current A/C holder
Banking arrangement:- Multiple Banking Arrangement
Regd. & Admin. Office:- Opp. Simandhar Flat,
Nr. Pashabhai Petrol Pump,
Highway, Mehsana.
Janak Transport Co. is a partnership firm established in 1982 for carrying a
transport business.
As the company is in this business since incorporation & the unit has good
contracts with ONGC since last 26 years so it has a good repo with ONGC.
As the company has a good repo with ONGC, the ONGC outlook of the business is
considered positive.

183

The firm has approached for term loan of Rs. 295 lacs to finance the purchase of
Mahindra-Bolero. The total project cost is estimated to be Rs. 363.44 lacs.
Brief of Contract:
(1). Fixed hire charges/ taxi/ month: Rs. 29150
(with fixed 3000 Km run/ month & 12 hours duty/ day)
(2). Additional/ km charges beyond 3000 km. Rs. 3.57
(3). Duration of contract = 3 Years
Proposed Credit Requirement:
Fund Based

= Rs. 295 lacs

Performance Details
a) PERFORMANCE AND FINANCIAL INDICATORS:
(Rs. in lacs)

31st March

Aud.

Aud.

Esti.

Proj.

Proj.

Proj.

Proj.

2007

2008

2009

2010

2011

2012

2013

184

Net Sales

501.78

546.65

Operating Profit (after

interest)

713.8

898.6

898.6

898.6

898.6

234.2

326.6

374.3

404.0

425.0

149.64

182.92

1.20

2.90

22.48

92.62

125.4

143.5

151.9

PBT
PBT/Sales (%)

0.24

0.53

3.15

10.31

13.96

15.97

16.91

1.20

2.90

22.48

92.62

125.4

143.5

151.9

PAT
39.05

40.51

Cash Accruals
54.44

52.41

PBDIT
21.04

22.56

129.2

233.7

224.2

212.6

200.3

150.0

266.9

247.2

226.2

203.7

91.00

113.4

181.1

256.5

340.0

113.4

181.1

256.5

340.0

427.0

113.4

181.1

256.5

340.0

427.0

Paid up Capital
21.04

22.56

TNW

Adjusted TNW

21.04

22.56

TOL/TNW

12.22

12.80

5.04

2.15

1.01

0.47

0.27

TOL/Adjusted TNW

12.22

12.80

5.04

2.15

1.01

0.47

0.27

Current Ratio

1.57

1.42

2.22

2.53

2.71

3.80

6.47

Current Ratio (Excl.

2.34

1.97

3.93

4.49

5.66

5.83

6.47

100.20

103.87

386.1

349.1

323.8

361.2

438.2

TL instalments)
NWC

185

b) Synopsis of Balance Sheet :

Sources of funds
Share Capital
Reserves and Surplus

31.03.2007
21.04

31.03.2008
22.56

Secured Loans : short term

: long term
Unsecured Loans
Deferred Tax Liability
Total
Application of Funds
Fixed Assets (Gross Block)
Less Depreciation
Net Block
Capital Work in Progress
Investments
Inventories (Movable Assets)
Sundry debtors
Cash & bank balances
Loans & advances to

2.57
102.87
39.92

14.66
100.10
36.21

166.40

173.53

52.48
110.59
92.61
11.93

39.3
134.66
78.70
48.15

10.58
109.22
2.57
113.92

10.49
136.74
1.03
134.23

166.40

173.53

subsidiaries and group companies

Loans & advances to others
( Less : Current liabilities )
(Less : Provisions )
Net Current Assets
Misc. Expenditure
(To the extent not written off or
adjusted )
Total
c) Movement in TNW

(Rs. in lacs)

186

Opening TNW

2007

2008

2009

17.63

21.0

22.56

4
Add PAT

1.20

2010

113.48 181.10

2.90
22.48

Add. Increase in

8.42

equity / premium

2011

10.1

2012

2013

256.5

340.0

143.5

151.9

92.62

125.47

25.00

50.00

60.00

65.00

340.0

427.0

68.44

Add./Subtract
change in intangible
assets
Adjust prior year
expenses
Deduct Dividend

6.21

11.55

21.04

22.5

Payment
/Withdrawals
Closing TNW

113.48 181.10 256.57

Appraisal Memorandum for term loan:

Circle: Ahmedabad
Branch: Mehsana
Company: Janak Transport Company(JTC)
Term Loan :
a)

Proposal: Term Loan of Rs.295.00 lacs under the Transport Plus Scheme.

187

b)

Project / Purpose: To purchase 59 new Mahindra Bolero under tie-up

arrangement with
c)

ONGC.

Appraised by: Inhouse examined by the Branch and found to be

economically viable
d)

Cost of Project & Means of finance:

Cost
MAHINDRA Bolero DI2WD
Insurance
RTO Tax
WC Margin
Total

e)

328.6

Means
Equity :

68.44

Debt:
Total

295.00
363.44

3
15.34
19.47
363.4

4
Remarks on Cost of project & Means of finance (in brief):
Each vehicle shall cost Rs. 6.16 lacs as per details given below:
Basic Price: Rs. 5.57 lacs
RTO

: Rs. 0.33 lacs

Insurance : Rs. 0.26 lacs

The cost mentioned above is as per the quotation submitted by Shrijee
Motors, Mehsana.
The firm is required to purchase 59 Mahindra Bolero for this purpose.
Total cost of vehicle including the insurance and R.T.O. is Rs.363.44
lacs.
The project is proposed to be financed by way of medium term loan
188

of Rs.295.00 lacs and firm shall raise capital of Rs. 68.44 lacs as a
margin.

Break-even and sensitivity analysis and whether acceptable:

189

31/03/0

31/03/1

31/03/1

Break even analysis

31/03/12

Net Sales (A)

Variable costs
Power and Fuel
Other operating Exp.
Total Variable Cost(B)
Fixed Costs
Direct Labour
Selling, Admin. &

713.82

898.65

898.65

898.65

898.65

223.76
44.89
268.65

253.68
47.39
301.07

253.68
48.89
302.57

253.68
50.89
304.57

253.68
55.98
309.66

72.40

85.52

87.52

90.72

94.07

General Expenses
Interest Expenses
Depreciation
Total Fixed Cost ( C)
Contribution (D=A-B)
Contribution ratio

8.50
20.76
106.77
208.43
445.17

9.50
33.25
141.12
269.39
597.58

10.50
22.96
98.78
219.76
596.08

11.50
13.54
69.15
184.91
594.08

12.50
3.36
48.40
158.33
588.99

(E=D/A)
BE sales (F=C/E)
BE sales as % of Net

0.62
336.18

0.66
408.17

0.66
332.97

0.66
280.17

0.66
239.89

Sales
Fixed cost with out

47.10

45.42

37.05

31.18

26.69

depriciation G
Contribution (H=A-B)
Contribution ratio

101.66
445.17

128.27
597.58

120.98
596.08

115.76
594.08

109.93
588.99

0.62

0.66

0.66

0.66
175.39

0.66

Cash BE sales (J=G/I)

CASHBE sales as % of

163.97

194.35

183.30

Net Sales

22.97

21.63

20.40

(I=D/A)

190

31/03/1

166.56
19.52

18.53

Commercial viability:
Year ending 31st March
Capacity utilization %

2009
100%

Sales

2010
100%

2011
100%

2012
100%

2013
100%

Total

898.6
713.82

898.65

898.65

898.65

22.48

92.62
141.1

125.47

143.51

151.96

536.04

106.77

98.78

69.15

48.40

464.22

129.25

233.7

224.25

212.66

200.36

Net Profit
Depreciation
Cash Accruals
4

1000.26

Interest
20.76

33.25
266.9

22.96

13.54

3.36

93.87

150.01

9
132.9

247.21

226.20

203.72

1094.13

83.75

94.58

93.85

43.02

448.12

20.76

33.25
166.1

22.96

13.54

3.36

93.87

104.51

117.54

107.39

46.38

541.99

1.44
1.54

1.61
1.76

2.10
2.37

2.11
2.27

4.39
4.66

TOTAL
TL / DPG repayments
Interest
TOTAL
Gross DSCR
Net DSCR

191

Average Gross DSCR

Average Net DSCR

2.02
2.23

Deviations in Loan Policy/ Scheme:

Parameters

Indicative

Company's level as on

Min/Max level as

31/03/2008

Liquidity
TOL/TNW
Average gross DSCR (TL)
Promoters contribution

per Scheme
Min. 1.33
Max. 3.00
Min. 2.00
Min. 10 %

1.42
12.80*
2.002
18.86%

(under tie-up)
profits in the last two

Min. Rs.3.00 lacs

Actual profit Rs.

with rising trend

lacs for year 2006-07 and

1.20

Rs.2.90 lacs for year 2007Others

08*
Nil

Nil

Analysis: Janak Transport Company is an existing profit making unit

The main chunk behind giving loan is that Janak Transport Company is
doing contract with ONGC since incorporation

192

 The promoters are having considerable experience as transport contractor

with ONGC
The unit has got confirm order/ tie-up with ONGC
A letter of authority from ONGC was received, that if Janak Transport
Company will not make the payment than ONGC will directly make the
payment to the bank
The promoters contribution to the project is 18.86% which is above the
margin requirement
The current ratio is 1.42 that is satisfactory
Profits in the last two years:Min. Rs. 3 lacs with rising trend
Actual profit Rs. 1.20 lacs for year 2006-07 & Rs. 2.90 lacs for the 2007-08
If the partners remuneration & interest is included, the profit for the year
ended 31.03.07 & 31.03.08 is Rs. 4.81 lacs & Rs. 6.21 lacs
TOL/TNW should be max. 3 which is 12.80 here, as the co. has done
multiple banking arrangement it has o/s loans with other banks also but the
co. is regularly making the payment of loans of principal amount along with
the interest so the loan is given.

193

Also the contract awarded is backed by guarantee from ONGC regarding

direct payment of monthly bills to SBI. Hence, surety of repayment is
assured.
The bank also checks commercial viability of the company & found that the
DSCR for term loan is 2.02 which is considered satisfactory
Despite that the bank has also done B.E. analysis & found that the B.E. sales
was 47.10% of net sales for this current year
The net sales & PAT of the company is increasing year after year so overall
profitability is good.

The overall projected performance & financial of the unit are considered
satisfactory.

194

CHAPTER 8
FINDINGS

195

 Credit appraisal is done to check the commercial, financial & technical

viability of the project proposed its funding pattern & further checks the
primary or collateral security cover available for the recovery of such funds.
Credit is core activity of the banks and important source of their earnings
which go to pay interest to depositors, salaries to employees and dividend to
shareholders
Credit and risk go hand in hand
In the business world risk arises out of:Deficiencies /lapses on the part of the management
Uncertainties in the business environment
Uncertainties in the industrial environment
Weakness in the financial position

SBI loan policy contains various norms for sanction of different types of
loans

These all norms does not apply to each & every case
SBI norms for providing loans are flexible & it may differ from case to case
Different appraisal scheme has been introduced by the bank to cater different
industries such as:Doctor plus scheme for doctors
Transport plus scheme for transport
School, colleges and educational institutions
Traders easy loan
Warehouse receipt financing for commodity traders
(agriculture related stock, cotton ginning, etc.)

196

 Banks main function is to lend funds/ provide finance but it appears that
norms are taken as guidelines not as a decision making
A bankers task is to identify/ assess the risk factors/ parameters and
manage/ mitigate them on continuous basis.
The CRA models adopted by the bank take into account all possible factors
which go into appraising the risk associated with a loan.
These have been categorized broadly into financial, business, industrial,
management risks & are rated separately.
The assessment of financial risk involves appraisal of the financial strength
of the borrower based on performance & financial indicators
After case study, we found that in some cases, loan is sanctioned due to
strong financial parameters
From the case study analysis it was also found that in some cases, financial
performance of the firm was poor, even though loan was sanctioned due to
some other strong parameters such as the unit has got confirm order, the unit
was an existing profit making unit and letter of authority was received for
direct payment to the bank from ONGC which is public sector

197

CHAPTER 9
RECOMMENDATIONS
AND SUGGESTIONS

The problems faced by the bank and the suggestions given are
with regards to increase credit flow the SMEs not only with

198

respect to working capital finance but also project finance and

asset finance.
Problems

faced

by

the

Bank

for

SME

lending

and

suggestions to overcome some of these problems:

Banks are now better equipped to handle the varied needs of the SME sector due to
better technology and risk management. Thus, it recommends, may be achieved by
extending banking services to recognize SME clusters by adopting the 4-C
approach: Customer focus, cost control, cross-selling and containing risk.
To enable the banks take more objective decisions, the Government plans to
introduce a rating mechanism for designated industrial clusters; this may be
designed jointly by CRISIL, IBA, SIDBI and SSI Associations. This would enable
institutional funding to be channeled through homogenous recognized clusters.
There is a critical need to devote substantial resources to improving the skills and
capabilities of banks' lending officers, especially with regard to the analysis of the
SMEs' financial statements. Understanding the nature of the borrower's business
and the cash-flow required is paramount to preventing the creation of NPAs.
Another way of extending loans to the SMEs is the relationship-lending rule,
where the lending partly bases its decision on proprietary information about the
firm and its owner through a variety of contacts over time. The information may be
gathered from such stakeholders as suppliers and customers, who may give
specific information about the owner of the firm or general information about the
business environment in which it operates.
Insufficient data on the SMEs, the lack of credible published information about
their financial health, the high vulnerability of small players in a liberalizing
199

market and the inadequacy of risk management systems in banks are factors
leading to higher NPAs and lower profitability than potential in SME lending. This
can be overcome by collection of authentic data on the SME segment, educating
the enterprises on the need for reliable financial data, evolving suitable risk models
and close monitoring of accounts by the bank.
SMEs are increasingly using products such as derivatives to manage their forex
flows. Bank needs to offer sophisticated products to the SMEs in a simplified
manner.
They need to innovate their delivery platforms by using Internet banking, mobile
banking and card-based platforms for delivery of transaction-banking as well as
credit products, and enhance the service element. SMEs look for convenience and
simplicity in their banking requirements and banks should deliver these through an
effective use of technology.
The Bank should keep on revising its Credit Policy which will help Banks effort to
correct the course of the policies
The Chairman and Managing Director/Executive Director should make
modifications to the procedural guidelines required for implementation of the
Credit Policy as they may become necessary from time to time on account of
organizational needs.
Banks has to grant the loans for the establishment of business at a moderate rate of
interest. Because of this, the people can repay the loan amount to bank regularly
and promptly.

200

Bank should not issue entire amount of loan to agriculture sector at a time, it
should release the loan in installments. If the climatic conditions are good then
they have to release remaining amount.
SBI has to reduce the Interest Rate.
SBI has to entertain indirect sectors of agriculture so that it can have more number
of borrowers for the Bank.

201

CHAPTER 10
CONCLUSION

It is boom time for those working in the financial sector. There are opportunities
galore in finance and more will come in the next few years so finance is exciting is
exciting both as a subject and a career option with the greater expansion of the
global economy.

202

Finance management is the backbone of any organizations and hence yields a

number of job options ranging from strategic financial planning to sales.
SBI load policy contains various norms for sanction of different types of loans.
There all norms does not apply to each & every case. SBI norms for providing
loans are flexible & it may differ from case to case.
The CRA models adopted by the bank take into account all possible factors, which
go into appraising the risk associated with a loan, these have been categorized
broadly into financial, business, industrial, and management risks & are rated
separately.
Usually, it is seen that credit appraisal is basically done on the basis of fundamental
soundness. But, after different types of case studies, our conclusion was such that,
in SBI, credit appraisal system is not only looking for financial wealth. Other
strong parameters also play an important role in analyzing creditworthiness of the
firm.
Moreover, The study at SBI gave a vast learning experience to us and has helped to
enhance our knowledge. During the study We learnt how the theoretical financial
analysis aspects are used in practice during the working capital finance assessment.
We have realized during my project that a credit analyst must own multidisciplinary talents like financial, technical as well as legal know-how.
The credit appraisal for working capital finance system has been devised in a
systematic way. There are clear guidelines on how the credit analyst or lending
officer has to analyze a loan proposal. It includes phase-wise analysis which
consists of 5 phases:
1.

Financial statement analysis

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2.

Working capital and its assessment techniques

3.

Credit risk assessment

4.

Documentation

5.

Loan administration
To ensure asset quality, proper risk assessment right at the beginning, is extremely
important. That is why Credit Risk Assessment system is an essential ingredient of
the Credit Appraisal exercise. The SBI was the first to formulate a Credit Risk
Assessment model. It considers important parameters like profitability, repayment
capacity, efficiency of the unit, historical / industry comparisons etc which were
not factored in other models. It is equally efficient as the SIDBIs CART (Credit
Assessment and Rating Tool) model.
In all, the viability of the project from every aspect is analyzed, as well as type of
business, industry, promoters, past records, experience, projected data and
estimates, goals, long term plans also plays crucial role in increasing chances of
getting project approved for loan.

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BIBLIOGRAPHY

WEBSITES:
www.rbi.org.in
www.sbi.co.in
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www.indianbankassociation.com
www.bankersindia.com
www.wikipedia.com
www.iibf.co.in

BOOKS:
Vaidhyanathan, T.S., Credit Management
Internal circular of SBI
Credit and Banking
By: K. C. Nanda
JOURNALS:
1) Agarwal , R. G., Banking Finance A Leading monthly of Banking and
Finance
Published by Sashi Publications
2) K. Ramakrishna, Indian Bankers
Published by Indian Bank Association

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