Final Report

A
PROJECT REPORT
ON
“CREDIT RISK MANAGEMENT FOR INDUSTRIAL

FINANCE”
WITH PUNJAB NATIONAL BANK,CHENNAI
SUBMITTED
BY
BHARAMBE VISHAL L.
MBA-II (FINANCE + MARKETING)
UNDER THE GUIDANCE OF
PROF. Anil. Agashe MR. Gopalkrishan A.P.

Visiting Faculty (PUMBA) (SENIOR MANAGER) PNB Chennai
IN PARTIAL FULFILLMENT OF THE

REQUIREMENTS FOR THE AWARD OF DEGREE
OF MASTERS IN BUSINESS ADMINISTRATION
DEPARTMENT OF MANAGEMENT SCIENCES

UNIVERSITY OF PUNE
(PUMBA)
(2006-08)
ACKNOWLEDEMENT
I wish to express my sincere thanks to Mr. Gopalkrishnan, Senior Manager, my guide
for the project and also thank Mr.Sekar, senior Manager from for their cooperation in this
learning session.
I particularly wish to thank the staff of Punjab National Bank at IZO for encouraging
and giving me this wonderful opportunity to understand and learn. On the other side it is my
internal college guide Mr.Anil Agashe (PUMBA), who has kept a steady vigil on.
My progress and the insight was it self very good learning which will see me through
many walks of life.Last but not least I am are thankful to all my friends, who have helped us
directly or indirectly to complete this training.
Vishal Bharambe
Department of Management Sciences 1

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Table of Contents
Sr. No. Chapter Name Page No.
1 Executive Summery 2
2 Organization Profile 3
3 Risk Management in Banking 8
4 Risk Components in Credit Risk Assessment 15
5 Loan Proposal 54
6 Credit Risk Rating 67
7 Conclusion 75
8 Recommendations 76
9 Bibliography 77

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1Executive Summery
1.1 Summery of Project
Risk is uncertainties resulting in the adverse variation of profitability or in losses.
In the banking universe there is large number of risks. There has been a significant extension
of focus, from traditional qualitative risk assessment towards the quantitative management of
risk, due to both evolving risk practices and strong regulatory incentives. The different risk
needs careful definition to provide sound bases serving for quantitative measures of risk.
Among the various risks in the banking system the credit risk is of great importance and
requires the quantitative approach for identification, measure, monitor and control of credit
risk. Credit risk is one of the important risks while lending money to any client that’s why it
has been given important aspect in the Basel committee recommendation, which the RBI is
planning to implement in Indian Banking system.
1.2 Objective of Project
To study the credit risk management policy of the bank. The study is to find out how the bank
assesses and evaluates credit risk of the various proposals.
1.3 Scope of the Project
To study credit risk assessment in Punjab National Bank specifically the proposals related to
Industrial Finance.
To study the policies and practices of Punjab National Bank for the proposals that the bank
receives.

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Organization Profile
2.1 Heritage
Established in 1895 at Lahore, undivided India, Punjab National Bank (PNB) has the
distinction of being the first Indian bank to have been started solely with Indian capital. The
bank was nationalized in July 1969 along with 13 other banks. From its modest beginning, the
bank has grown in size and stature to become a front-line banking institution in India at
present.
• A professionally managed bank with a successful track record of over 110 years.
• Largest branch network in India - 4525 Offices including 432 Extension Counters spread
throughout the country.
• Strategic business area covers the large Indo-Gangetic belt and the metropolitan centers.
• Ranked as 248th biggest bank in the world by Bankers Almanac, London.
• Strong correspondent banking relationships with more than 217 international banks of the
world.
• More than 50 renowned international banks maintain their Rupee Accounts with PNB.
• Well equipped dealing rooms; 20 different foreign currency accounts are maintained at major
centers all over the globe.
2.2 Profile of Punjab National Bank

With its presence virtually in all the important centers of the country, Punjab National
Bank offers a wide variety of banking services which include corporate and personal banking,
industrial finance, agricultural finance, financing of trade and international banking. Among
the clients of the Bank are Indian conglomerates, medium and small industrial units, exporters,
non-resident Indians and multinational companies.
The large presence and vast resource base have helped the Bank to build strong links
with trade and industry. Punjab National Bank is serving over 35 millions of customers through
4540 Offices including 421 extension counters - largest amongstNationalized Banks. Punjab
National Bank with 112 year tradition of sound and prudent banking is one among 300 global
companies and seven Indian companies

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which are expected to emerge as challengers to World’s leading blue chip companies. While
among top 1000 world banks, “The Banker”, the leading magazine in London, has placed PNB
at the 248th position, the bank features at 1308th position among Forbes Global 2000 list of
global giants and fast growing companies.
At the same time, the bank has been conscious of its social responsibilities by financing
agriculture and allied activities and smallscale industries (SSI). Considering the importance of
small-scale industries bank has established 31 specialized branches to finance exclusively such
industries. Strong correspondent banking relationship, which Punjab National Bank maintains
with over 200 leading international banks all over the world, enhances its capabilities to handle
transactions worldwide. Besides, bank has Rupee Drawing Arrangements with 15 exchange
companies in the Gulf and one in Singapore. Bank is a member of the SWIFT and over 150
branches of the bank are connected through its computer-based
terminal at Mumbai. With its state-of-art dealing rooms and welltrained dealers, the bank offers
efficient forex dealing operations in India. The bank has been focusing on expanding its
operations outside India and has identified some of the emerging economies, which offer large
business potential. Bank has set up representative offices at Almaty, Kazakhstan, Shanghai:
China and in London. Besides, Bank has opened a full-fledged Branch in Kabul, Afghanistan.
Keeping in tune with changing times and to provide its customers more efficient and speedy
service, the Bank has taken major initiative in the field of computerization. All the Branches of
the Bank have been computerized. The Bank has also launched aggressively the concept of
"Any Time, Any Where Banking" through the introduction of Centralized Banking Solution
(CBS) and over 2409 offices have already been brought under its ambit.
PNB also offers Internet Banking services in the country for Corporate Sector as well
as individuals. Internet Banking services are available through all Branches of the Bank
networked under CBS. Providing 24 hours, 365 days banking right from the PC of the user,
Internet Banking offers world class banking facilities like anytime, anywhere access to
account, complete details of transactions, and statement of account, online information of
deposits, loans overdraft account etc. PNB has recently introduced Online Payment Facility for
railway reservation through IRCTC Payment Gateway Project and Online Utility Bill Payment
Services which allows Internet Banking account holders to pay their telephone, mobile,
electricity, insurance and other bills anytime from anywhere from their desktop. Another step

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taken by PNB in meeting the changing aspirations of its clientele is the launch of its Debit
card, which is also an ATM card. It enables the cardholder to buy goods and services at over
99270 merchant establishments across the country. Besides, the card can be used to withdraw
cash at more than 25000 ATMs, where the 'Maestro' logo is displayed, apart from the PNB's
over 1094 ATMs and tie up arrangements with other Banks.
2.3 Mission and Vision

2.3.1 Mission
To provide excellent professional service and improve its position as a leader in the
field of financial and related services; build and maintain a team of motivated and committed
workforce with high work ethos; use latest technology aimed at customer satisfaction and act
as an effective catalyst for socio-economic development
2.3.2 Vision
To evolve and position the bank as a world class progressive, cost effective and
customer friendly institution providing comprehensive financial and related services;
integrating frontiers of technology and serving various segments of society especially the
weaker sections; committed to excellence in serving the public and also excelling in corporate
values.
2.4 Organization Structure

2.4.1 Board of Directors
The board is consist of following individuals –
• Dr. K.C. Chakrabarty - Chairman and Managing Director
• Mr. K. Raghuraman - Executive Director
• Mr. J.M. Garg - Executive Director
• Mr. Rakesh Singh - Government of India Nominee Director
• Mr. L.M. Fonseca - Reserve Bank of India Nominee Director
• Mr. S.R. Khurana - Director, Representative of C.A. Category
• Mr. P.K. Nayar - Officer Employee Director
• Mr. M.L. Bagga - Workmen Employee Director
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• Dr. H. Mahajan - Shareholder Director
• Mr. M. Singh - Shareholder Director
• Mr. Prakash Agrawal - Shareholder Director
2.4.2 Organization Setup

Bank is headquartered at New Delhi. It has got huge network throughout India, details
of whose are as –
• 25 Zonal Offices
• 48 Regional Offices
• 4056 Branches
2.5 Awards
Following are the awards and achievements of Punjab National Bank in recent times.
• "Best IT Team of the Year Award" at the IDRBT Banking Technology awards for the year
2005-06.
• SKOTCH Challenger Award for Change Management for the year 2005-06
• Best IT User in Banking & Financial Services Industry – 2004 by NASSCOM in partnership
with Economic Times
• Golden Peacock Award for Excellence in Corporate Governance - 2005 by Institute of
Directors
• FICCI's Rural Development Award for Excellence in Rural Development - 2005
• Skotch Challenger Award for Exemplary use of Technology for becoming a pioneer in Public
Banks - 2005
• Golden Peacock National Training - 2004 & 2005 by Institute of Directors
• National Award for Excellence in SSI Lending Ranked 2nd for 4 consecutive years - 2002,
2003, 2004 & 2005
• Banking Technology Awards 2004 and Runner up in 'Best IT Team of the Year Award 2005'
Jointly Adjudged by IBA, Finacle & TFCI
• Niryat Bandhu Gold Trophy for excellence in export performance for 3 consecutive years
2001, 2002 & 2003 by Federation of Indian Exporters Organization (FIEO)

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• 21st Amongst Top 500 Companies by the leading Financial Daily The Economic Times, June
2005
• 9th amongst India's Top 50 Most Trusted Service Brands A.C Nielson Survey, The Economic
Times Dec 2004
• 3rd Rank amongst Banking Sector in India and 323rd Rank in the World - The Bankers'
Almanac, January 2006
• 368 amongst Top 1000 Global Banks The Banker, London July 2005

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THEORTICAL BACKGROUND

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Risk Management in Banking
3.1 Risk Types in Banking
Banks are subjected to a wide array of risks in the course of their operations, as
illustrated by Figure 1.1. In general, banking risks fall into four categories: financial,
operational, business, and event risks.
3.1.1 Financial Risks
Financial risks in turn comprise two types of risk. Pure risks – including liquidity,
credit, and solvency risks - can result in loss for a bank if they are not properly managed.
Speculative risks, based on financial arbitrage, can result in a profit if the arbitrage is correct,
or a loss if it is incorrect. The main categories of speculative risk are interest rate, currency,
and market price (or position) risks. Financial risks are also subject to complex
interdependencies that may significantly increase a
bank's overall risk profile. For example, a bank engaged in the foreign currency business is
normally exposed to currency risk, but will also be exposed to additional liquidity and interest
rate risk if the bank carries open positions or mismatches in its forward book.
Following are few of the financial risks in banking operations –
• Balance Sheet Structure
• Income Statement Structure
• Capital Adequacy
• Credit
• Liquidity
• Market
• Currency
3.1.2 Operational Risk

Operational risks are related to a bank's overall organization and functioning of internal
systems, including computer-related and other technologies); compliance with bank policies
and procedures; and measures against mismanagement and fraud. Following are few of the
operational risks –
• Internal Fraud

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• External Fraud
• Employment Practice and Workplace Safety
• Clients, Products and Business Services
• Damage to Physical Assets
• Business Disruption and System Failures (Technology Risk)
• Execution, delivery and process management
3.1.3 Business Risk
Business risks are associated with a bank's business environment, including
macroeconomic and policy concerns, legal and regulatory factors, and the overall financial
sector infrastructure and payment system. Following is the list of business associated risks in
banks:
• Macro Policy
• Financial Infrastructure
• Legal Infrastructure
• Legal Liability
• Regulatory Compliance
• Reputation and Fiduciary
• Country Risk
3.1.4 Event Risk
Event risks include all types of exogenous risks, which, if they were to materialize,
could jeopardize a bank’s operations, or undermine its financial condition and capital
adequacy. Following is the list of event risk –
• Political
• Contagion
• Banking Crisis
• Other exogenous

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3.2 Risk Types in Lending
3.2.1 Credit Risk

This is the risk of non-recovery of loan or the risk of reduction in the value of asset.
The credit risk also includes the pre-payment risk resulting in loss of opportunity to the bank to
earn higher interest income. Credit Risk also arises due excess exposure to a single borrower,
industry or a geographical area. The element of country risk
is also present which is the risk of losses being incurred due to adverse foreign exchange
reserve situation or adverse political or economic situations in another country.
3.2.2 Interest Rate Risk
This risk arises due to fluctuations in the interest rates. It can result in reduction in the
revenues of the bank due to fluctuations in the interest rates which are dynamic and which
change differently for assets and liabilities. With the deregulated era interest rates are market
determined and banks have to fall in line with the market trends even though it may stifle their
Net Interest margins
3.2.3 Forex Risk
Risk may arise on account of maintenance of positions in forex operations and it
involves currency rate risk, transaction risks (profits/loss on transfer of earned profits due to
time lag) and transportation risk (risks arising out of exchange restrictions)
3.2.5 Regulatory Risk
It is defined as the risk associated with the impact on profitability and financial position
of a bank due to changes in the regulatory conditions, for example the introduction of asset
classification norms have adversely affected the banks of NPAs and balance sheet bottom
lines.
3.2.6 Technology Risk
This risk is associated with computers and the communication technology, which is
being increasingly introduced in the banks. This entails the risk of obsolescence and the risk of
losing business to Banks.

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3.2.7 Market Risk
The Bank for International Settlements (BIS) defines market risk as “The risk that the
value of ‘on’ or ‘off’ balance sheet positions will be adversely affected by movements in equity
and interest rate markets, currency exchange rates and commodity prices”. Thus, we can say
that Market Risk is the possibility of loss to a bank caused by changes in the market variables.
Market Risk is thus the risk to the bank’s earnings and capital due to changes in the market
level of interest rates or prices of securities, foreign exchange and equities, as well as the
volatilities of
those changes.
3.2.8 Strategic Risk
This is the risk arising out of certain strategic decisions taken by the banks for sustaining
themselves in the present day scenario for example decision to open a subsidiary may run the
risk of losses if the subsidiary does not do good business.

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3.3 Credit Risk Management
3.3.1 General Guidelines
Risk philosophy of the Bank is to sustain a diversified growth of business and healthy
net returns commensurate with risk taken in a controlled risk management environment by
adopting the following:
• Support growth of Bank by efficient deployment of funds within an acceptable risk-return
framework
• Avoidance of concentration of risk in individual, group borrowers/industry/country.
• Leadership approach in products and segments well understood by the Bank and having pre-
determined risk standards of moderate to low risk level.
• Watchful approach for products and segments having substantial future potential at moderate
to low risk level, till the Bank builds a critical mass of business and capability and establish
their risk standards
• Innovative approach for new emerging & perceived high risk areas taking limited exposure
• An independent and dynamic risk management setup with clearly laid down procedures and
well established linkages to guide functioning of various business units.
Risk management is the process by which a bank identifies, measures, monitors and
controls its risk exposures to ensure that Risks are understood, Risks are within tolerances set
by the Board of Directors, Decisions having inherent risks are consistent with strategic
business objectives, Risk taking decisions are explicit and clear, The expected return
compensates for the risk taken, Capital allocation is consistent with risk exposures, and The
banks performance incentives are aligned
with risk tolerances.
Risk Management Policy shall be in line with Risk Philosophy set by the Board or
RMC. The objectives of Credit Risk Management shall be to bring about a balanced and
healthier Credit portfolio at moderate to low level of risks. The objectives of Market Risk
Management will continue to strive to optimize return on surplus funds invested, to keep cost
of funds borrowed to the minimum and keep investment portfolio healthy and liquid. 100%
assets and liabilities are covered for preparing Gap reports to track liquidity risk. It is ensured
that gaps are within Board/RBI's prescribed limits. Bank has framed ALM Policy and

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Investment Policy to manage liquidity and interest rate risk. To minimize operational risk &
strengthen internal control, the objective of the Bank is to develop an appropriate policy,
procedures, strategy, framework, and risk culture by adopting best practices to achieve the goal
set by the Bank. Risk Based Internal Audit on the basis of Risk Profile Format developed by
bank has been got conducted in 157 identified branches.
Bank has developed and implemented Credit Risk Rating Models
applicable to
• Large Corporate Borrowal Accounts
• Mid Corporate Borrowal Accounts
• Small Borrowal Accounts
• Borrowers setting up New Projects and
• NBFCs covering exposures above Rs. 20 lacs
Bank has also developed industry-rating model and rates important industries in its
portfolio. All Borrowal accounts having sanctioned limits over Rs. 50 Lacs shall be rated as per
internal risk rating models developed by the bank. The applicability of various credit risk rating
models are explained in next section.
3.3.2 Credit Risk Rating Models
Credit Risk Rating Applicability of the Models

Models Limit Total Sales
Large Corporate Above Rs. 15 Cr (OR) Above Rs. 100 Cr
Mid Corporate Above Rs. 5 Cr and up Above Rs. 25 Cr and
to Rs. 15 Cr (OR) upto Rs. 100 Cr.
Small Loans Above Rs. 20 Lacs and Up to Rs. 25 Cr

Up to Rs. 5 Cr AND

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NBFC All banking financial cos. Irrespective of limit.
Borrowers setting
Up new projects Above Rs. 3.5 Cr (OR) Cost of Project
aboveRs. 15 Cr.
The above models are based on composition of various risk components, which are
described in depth in next chapter. These components are multiplied by already set weightage
to get the final score. According to final score the rating is given to the borrower and the
decision whether to lend or not depends on this rating to some extent.

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RISK COMPONENTS

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44 Risk Components in Credit Risk Assessment
4.1 Risk Components
The various aspects, which directly or indirectly affect the working of the business,
pose a risk to the continuity and stability of the business. Signals for risks can be picked up
from a number of sources. The credit risk-rating tool considers the following broad areas in
evaluating the default risk of a borrower. The areas are bifurcated into sub-areas and each sub-
area is further split into a number of parameters.
• Financial Performance
• Business Performance
• Industry outlook
• Management Evaluation
• Conduct of Accounts
4.2 Financial Performance

Financial Performance is measured under following different heads.
• Past Financial Performance
• Expectation of Future Performance
• Subjective assessment of financial figures
• Trends in financial performance
4.2.1 Past Financial Performance
4.2.1.1 Gross Sales Growth Rate

This refers to the compounded annual growth rate of the gross sales of a company over
the past three years. The growth rate of company’s gross sales compared to the growth rate of
other companies in the industry helps in assessing the performance of a company. The
compounded annual growth rate over the past 3 years is calculated in percentage terms. The

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compounded annual growth rates for the other companies in the industry are also calculated for
comparison purpose.
CAGR (Compounded annual growth rate) for three years =[{(Sales value in latest
completed Year i.e. year 0)/(Sales value in year –3 i.e. sales in the year which is 3 years
previous to latest completed year}(1/ 3) – 1}]*100, Thus it is the cube root of sales in latest
completed year divided by sales three years ago, minus 1, expressed as percent.
4.2.1.2 OPBDIT / Net Sales

This ratio measures the operating profit before depreciation, interest & tax and as a
proportion of the net sales. This ratio throws light on the current operating performance and
efficiency of the company. The ratio is a measure of the margin
available to a company from its operations. A company with a high OPBDIT to Net Sales ratio
is in a better position to withstand price increases for its raw materials as well as decrease in
sales price in the market. Thus higher the margin available to a company, the better is its
competitive position. Higher value of this ratio also implies higher profitability. This ratio is
computed by dividing the OPBDIT with Net
Sales.
OPBDIT
------------
Net Sales
4.2.1.3 Short term bank borrowings / Net Sales

The ratio measures the quantum of net sales achieved per unit of short term bank
borrowings The current assets are financed from long-term sources and/or current
liabilities including short-term bank borrowings. This ratio explains the efficiency of a
company in utilizing its short-term bank borrowings for generating sales. This value is looked
at in comparison to peer companies in the industry to indicate how efficiently a company is
utilizing its working capital. The ratio is worked out by dividing short-term bank borrowings
with net sales.

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Short Term Bank Borrowings
-----------------------------------
Net Sales
4.2.1.4 Operating Cash Flow / Total Debt

This calculates the cash generated by a company from its operations in proportion to its
total debt.The repayment of debt is primarily made out of the funds generated by a business.
This ratio indicates the extent to which a company’s cash
flows are sufficient to meet its debt obligations The ratio is calculated by dividing the amount
of operating cash flow with the total debt.
Operating Cash flow

-------------------------
Total Debt
4.2.1.5 Net Operating Cash Flow / Total Debt

This ratio measures the cash available with a company from its operations to repay its
debt obligations after servicing the interest, tax, and dividend payments. The cash generated by
a company is put to a variety of uses. It is ploughed back into the business, distributed among
the shareholders in the form of dividends or used to repay the debt obligations. The debt
coverage provided by the operating cash flow of a company after servicing the interest and
dividend payment is an important indicator of the solvency of a company. This ratio is
computed by dividing net operating cash flow by total debt.
Net Operating Cash flow

------------------------------
Total debt
4.2.1.6 Debt-Equity Ratio

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This ratio measures a company’s long-term debt in proportion to its tangible net worth.
The equity of a company is the margin of safety available for a creditor. This ratio is a measure
of the owner’s stake in the company compared to the long-term obligations of the company.
Higher the ratio, lower is the margin of safety and hence greater is the risk. Excessive outside
debt may cause insolvency of the business during downturns in the business cycle. The ratio is
calculated by dividing the long-term debt with equity.
Long term debt

-------------------
Equity
4.2.1.7 TOL / TNW

This ratio measures the total outside liabilities as a proportion of the tangible net worth.
The total outside liabilities are divided with the tangible net worth of the company.
Total outside Liabilities
------------------------------
Tangible Net Worth
This ratio is a measure of the extent to which outside funds are invested in the business
compared to funds provided by the promoters or shareholders. Lower the ratio, greater is the
long-term stability of the company and the margin of safety for the creditors.
4.2.1.8 Current Ratio

Current ratio measures the proportion of a company’s current assets to its current
liabilities and thus gives a measure of the short-term liquidity. Current assets of company are
the assets, which can be easily liquidated and converted into cash. Current liabilities are those
liabilities, which are expected to become due in the current business period. A high current
ratio indicates that the borrower is in a good position to repay its current liabilities. On the
other hand a low ratio means that the borrower may default on its liabilities due to lack of
liquidity. Liquidity is a very important factor for a business as poor liquidity may force the
company out of business. The ratio is worked out by dividing the Current Assets with Current
Liabilities.

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Current Assets
-------------------
Current Liabilities
4.2.1.9 Interest Coverage

This measures the number of times a company’s earnings cover its interest payment
liability This is one of the best indicators of a company’s ability to pay interest
on its debt. High interest coverage indicates that the company is in a comfortable position to
service its interest payments. Thus a high value of the ratio implies a lower risk of default in
payment of interest for the borrower. The ratio is worked out by dividing the PBDITA with
interest.
PBDITA
----------
Interest
4.2.1.10 Debt Service Coverage Ratio

DSCR measures the number of times a company’s earnings cover its total long-term
debt, including interest and principal repayments in term debts, over a period of one year. The
profit before depreciation and interest is divided by installments due during the year plus
interest.
PBDIA
------------------------------------------------------------------------
Installments due for the year + Interest on long-term debt
This ratio is a good indicator of the long-term solvency of a company and its ability to
service its debt obligations. Default risk covers both non-payments of interest as well as
principal. This ratio is a measure of the degree of comfort that the borrower would have in
repaying its long-term debt out of the funds generated by the company.

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4.2.1.11 Return on Capital Employed (ROCE)
This ratio measures the income earned per unit of capital committed in the business.
The main purpose of any business is to maximize the returns from the invested capital. Higher
the return on invested capital, stronger is the company and higher is its profitability. The
ROCE is a good indicator of the overall health and performance of the business. The ratio is
worked out by dividing the profit before interest and tax with average capital employed.
PBIT
--------------------------------
Average capital employed
4.2.2 Expectations of Future Performance
4.2.2.1 Impact of Contingent Liability

Contingent liabilities are those liabilities, which would devolve on the company on the
occurrence of some event. Contingent liabilities are listed as notes to the balance sheet. The
various items of such liabilities such as suits filed against the company, claims not
acknowledged as debts, guarantees given on behalf of the company’s group/other accounts
should be carefully examined to assess the probability of their devolvement.
4.2.2.2 Foreign Transaction Risk

Foreign Transaction Risk refers to risk due to adverse exchange rate fluctuations,
dependence on foreign trade, risk due to concentration and country risk. It may affect the
earnings of the firm or future business prospectus resulting in adverse cash flows.
Foreign Transaction Risk are
• Exchange Rate Risk - Exchange rate risk refers to risk relating to exchange rate fluctuations
having adverse affect on foreign currency borrowings, on receivables and on creditors of the
company. Volatility of foreign exchange rate can have direct or indirect impact. e.g.
devaluation of local currency may hurt the business of importers and may put them at severe
cost disadvantages vis-à-vis their competitors. This risk arises only on the un-hedged exposures

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of foreign exchange inflows/outflows. Exchange rate risk may also arise due to transaction
based or portfolio based factors. Transaction based risk is due to time lags between purchases
being made and payment being made, or sales being made and payment being received against
these sales. Portfolio based risk is on account of foreign exchange loans where the repayment
is made on future dates in foreign currency.
• Foreign Trade Risk - Foreign trade risk relates to risk associated with import of raw material
and export of goods/ services. It may arise due to change in Govt. policies, structural changes
taking place in global competition, WTO impact and the
uncertainties associated with lead-time between placement of order and receipt of goods. This
risk may affect the earning potentials of the firm.
• Country Risk - Country risk refers to risk of trading with a country due to economic &
political uncertainties, restrictions on free exchange of currencies & export/imports of goods
from that country. The firms having larger economic dependence on such country will face
greater country risk.
4.2.2.3 Impact of Merger/De-merger/Expansion on key financials

This parameter measures the values that are expected to prevail over the next year, for
some key ratios. Three sub-parameters are considered in evaluating this parameter. These are:
• Current Ratio
• Debt/Equity ratio
• ROCE
The ratios, which are evaluated in the previous section, consider the value of the ratio as of
date. The actual value of these ratios over the horizon for which the rating is being done can
vary significantly e.g. in case of any major restructuring these ratios can be adversely affected.
This parameter is included to take into account the expected value of these ratios over the next
one year.

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4.2.2.4 Cash Flow Adequacy
Cash flow adequacy analysis is critical as it reveals the capability of the company to
meet both its long term and short-term commitments during the next 12 months. Computations
should be made for the next year. Scoring of this parameter would require accurate forecasting
of the company’s performance and its financials. It is ultimately this cash flow that would
enable the company to meet its debt obligations. Impact of diversion on future financials. The
cash flow is calculated as
Follows
1. PBDITA
+ Non- cash Expenses / Non-cash Income
2. Revenue Cash Flow
+ Decrease/Increase in current assets (other than cash)
+ Increase/decrease in current liabilities (other than short term debt)
3. Operating Cash Flow
Less: Interest / Income Tax / Dividend Paid
4. Net Operating Cash Flow
+ Cash inflow / cash outflow from investing activities including
repayment of long-term loan
Less: Capital Expenditure
5. Cash after Capital Expenditure
+ Increase / decrease in equity
6. Net Cash Flow after Equity
+ Increase in Long-term Debt
+ Increase / Decrease in Short-term Debt
7. Net Cash Position
4.2.2.5 Impact of diversion on future financials

Diversion of funds refers to utilization of short-term funds for long-term purposes or
the diversion of funds outside the business. Companies sometimes utilize short term funds for
long term purposes like investment in fixed assets, repayment of long-term loans/liabilities,
investment in securities or loans and advances to group companies/other companies. The

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utilization of short-term funds for long-term purposes has an adverse impact on the liquidity of
the company and diversion of funds even for major expansion within acceptable debt equity
ratio and current ratio may not always be a positive feature. Funds diverted from operations
may have an impact on future operations of business, depending upon the purpose for which
funds have been utilized. The utilization of short-term funds for long-term purpose is
calculated from the fund flow statement.
4.2.3 Subjective assessment of financial figures

4.2.3.1 Transparency in Accounting
This refers to the accuracy and reliability of the figures given in the financial statements
of a company. The financial performance of a company is gauged to a large extent based on the
figures given in the financial statements of the company. If these figures are distorted or
unreliable then any estimate of the financial strength based on the financial statements would
be inaccurate. Hence depending on the accounting quality, one will have to change the
assessment of financial strength, which is based on the financial statements.
4.2.3.2 Realisability of Inventory

figures given in the financial statements of the company. If these figures are distorted or
unreliable then any estimate of the financial strength based on the financial statements would
be inaccurate. Hence depending on the accounting quality, one will have to change the
assessment of financial strength, which is based on the financial statements. This refers to the
ease and extent to which the value of the inventory of a borrower can be realized in the open
market. The inventory with a company constitutes a major part of total current assets and is
also the security for advance under short-term working capital limits. A high current ratio is
generally considered as a good indicator of liquidity. However, liquidity depends not only on
the level of inventory but the quality of inventory held by a company at any point of time.
Nonmoving and slow moving inventory, which may be the result of obsolescence, or high WIP
inventory which cannot be sold easily, may result in a high current ratio but does not provide

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liquidity. Thus the quality of inventory needs to be explicitly considered in assessing the risk of
a borrower.
4.2.2.3 Realisability of Debtors
figures given in the financial statements of the company.
If these figures are distorted or unreliable then any estimate of the financial strength based on
the financial statements would be inaccurate. Hence depending on the accounting quality, one
will have to change the assessment of financial strength, which is based on the financial
statements.
Debtors outstanding constitute a major part of current assets and also form a part of
security for the purpose of advance under working capital. Faster the customers pay; less is the
risk from bad debts, the lower the expenses in collection and more liquid the nature of current
assets. Any delay in receipt of payment from debtors/non-receipt of amount can hamper the
production cycle of a company as well as increase in collection costs and the probability of
default on part of the debtors of the company. Hence realisability of the debtors of a company
is a critical input for assessing the financial risk of a borrower.
4.2.2.4 Quality of Investments and Loans & Advances

Investment refers to investment in shares/debentures other than Govt. securities. Loans
and advances refer to loans/advances made to group companies/other companies or to its
employees. A company can have substantial investments in marketable securities. The value of
these investments would fluctuate with changes in market conditions thereby affecting the
company’s repayment capacity and liquidity. The repayment of loans and advances made to
other companies is linked to the performance of those companies. If the quantum of these
investments is large, then changes in their value can have a substantial impact on the financials
of the company. Hence the quality of these investments and advances needs to be considered
for evaluating the riskiness of a borrower.

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4.2.4 Trends in Financial Performance
The parameters used for evaluating this sub-area are:
• Net Sales
• PBDT – Non Recurring Income & Expenditure/Net Sales
• Operating Cash Flow/Total Debt
• Total Current Assets/Short Term bank Borrowings
While it is important to analyze the financials of a company on a particular date, it is

equally important to analyze the trend of these financials over a number of years. The values of
ratios can be increasing or decreasing consistently, though marginally, from one period to the
next or vary considerably in some periods. Examination of these trends is therefore essential to
asses the direction in which the company is moving. When we compare a company’s financial
ratios over a number of periods, and the trend analysis is made of the magnitude, direction and
quality of a company’s operating performance and financials conditions, it is a better indicator
of the company’s future potential than a single period measure.
The assessment of the past financial performance of a unit is based largely on figures
of the previous years. However, the momentum created by the pattern of change in a particular
performance parameter usually impacts the performance of the future. Thus the trend
evaluation, which is used to evaluate this pattern for its likely impact gives an important insight
into future performance of a unit.
`For effectively evaluating the trend, the criteria for evaluation should capture the
magnitude, direction and quality.
4.3 Business Performance

This section measures operational efficiency and core competence of a company vis-à-
vis its competitors. The business performance of a company has a direct relationship with the
credit risk of the company as the business performance determines the generation of cash for
debt repayment.
The company’s competence in its activities as well as its position relative to its
competitors are key indicators of how a company is expected to perform and its ability to
generate funds to repay its debts.The performance of a company is influenced both by its own

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set up as well as its competitive position within the industry. Thus the two broad sub-areas
used to assess the business performance of a company are:
• Operating Efficiency – Manufacturing Sector
• Market Position - Manufacturing Sector
• Service Sector Evaluation
4.3.1 Operating Efficiency – Manufacturing Sector

This covers the operations of a company and how efficient it is at performing its core
activities and takes care of aspects like the asset utilisation of the company, its working capital
management, cost effectiveness of operations etc. These factors play an important role in
determining the business performance of a company and thus are evaluated for determining the
business performance.
4.3.1.1 Operating Leverage

The operating leverage indicates the extent to which the profits will increase/decrease
with increase/decrease in sales. This parameter helps us in assessing the profit sensitivity of the
company with regard to sales. The ratio indicates the number of times the profits will change
when compared to change in sales. Higher the figure greater is the risk as even a small dip in
sales will reduce profits to a large extent The ratio is calculated by dividing the contribution
with contribution– fixed cost.
Total Contribution
-----------------------------
Contribution-fixed cost
4.3.1.2 Inventory Turnover

Inventory Turnover Ratio indicates the number of times inventory is turned over,
during the period. This ratio indicates the efficiency of the company in utilizing its inventory
and maintaining it at an optimum level. Higher the ratio, higher the sales per unit of investment
in inventories. Lower ratio results in high carrying cost, blocking of funds and thus limiting the

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liquidity of the company. The ratio is worked out by dividing the net sales with average
inventory maintained.
Cost of Goods Sold

-------------------------
Average Inventories
4.3.1.3 Net Sales / Current Assets

This ratio measures how efficiently the current assets are being utilized for generating
sales. This parameter is a key indicator for assessing the efficiency of the management in
managing the level of current assets at an optimum level. Higher the ratio, the better it is, since
it indicates more sales are being produced by per unit of investment in current assets. The ratio
is worked out by dividing the net sales with the amount of current assets.
Net Sales
------------------
Current Assets
4.3.1.4 Net Sales / Operating Assets

This parameter measures the efficiency with which the company is utilizing the
operating assets. This ratio is an important indicator of the operating efficiency. Higher the sale
per unit of investment in operating assets the better is the utilization of operating assets. Low
sales in relation to operating assets mean under utilization of operating assets or inefficiency of
business operations. The ratio is calculated by dividing the amount of sales with operating
assets.
Net Sales
---------------------
Operating Assets

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4.3.1.5 Raw Material / Cost of Production
This ratio measures the proportion of raw material cost in the total cost of production.
This ratio when compared to other players in the industry gives a very important indication
whether the expenses are increasing/decreasing or high/low, which in turn indicates the
operating efficiency of the company. Also a lower raw material cost compared to peers implies
a cost advantage for the company. On the
other hand a higher figure means that the company is at a disadvantage to its peers. The ratio is
computed by dividing the amount of raw material consumed with the cost of production.
Raw Material Expenses

----------------------------
Cost of Production
4.3.1.6 Wages / Cost of Production

This parameter measures the cost of salary & wages in the total cost of production. This
ratio calculates the proportion of employee cost in the total cost of production. A lower value
of this ratio is an indicator of high employee productivity and is thus good for the company.
This parameter will be more relevant in manpower intensive industries. The ratio is calculated
by dividing the cost of wages with total cost of production.
Wages
------------------------
Cost of Production
4.3.1.7 Power Cost / Cost of Production

The ratio measures the cost of power as a proportion of the total cost of production.
This parameter will be very relevant in industries, which are highly power intensive like steel,
aluminum, cement etc. In such industries a lower power cost will constitute a significant
advantage for a company. The ratio is calculated by dividing the power cost with cost of
production.

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Power
------------------------
Cost of Production
4.3.1.8 Administrative & Selling Expenses / Net Sales

This ratio measures the relationship between the administrative & selling expenses and
net sales. The ratio is calculated by dividing the cost of administrative & selling expenses with
net sales.
Administration & Selling Expenses
------------------------------------------
Net Sales
This ratio is a measure of the administrative efficiency and marketing expenses of a
company. Lower the value higher the margins for the company.
4.3.1.9 Cost of Goods Sold / Net Sales

This parameter measures the gross profit margin of a company. This factor will help in
determining the operating efficiency of company. This is a measure of how efficiently a
company is conducting its operations. The ratio is calculated by dividing the cost of goods sold
with net sales.
Cost of Goods Sold

-----------------------
Net Sales
4.3.1.10 Credit Period Allowed

It measures the average length of time that customers who buy on credit take to pay
their dues and indicates the efficiency of management in debt collection.
Average Debtors
------------------------
Average Daily Sales

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The credit period allowed by a company is an indicator of two things. One is the
bargaining power enjoyed by the company in the market with respect to the buyers, and the
other is the efficiency of its collection network. A lower credit period than competitors means
that the company is able to sell to the customers at better terms. Also a low credit period
indicates an efficient collection system. The period of collection is calculated by dividing the
average debtors outstanding with average daily sales.
4.3.1.11 Credit Period Availed

It measures the average time taken by the co. to pay its suppliers for purchases made on
credit. The credit period availed is computed by dividing average creditors outstanding during
the year with average daily cost of sales.
Average Creditors
----------------------------------
Average Daily Cost of Sales
This parameter is a measure of the bargaining power that the company enjoys with its
suppliers. A stronger company will avail a longer credit period from its suppliers than a weak
company. A longer credit period offered by suppliers also indicates that the suppliers are
confident of the ability of the company to pay them. This parameter is thus a direct indicator of
the credit worthiness of a borrower as perceived in the market.
4.3.2 Market Position – Manufacturing Sector

The business performance of a company is not governed simply by its own operations
but also by the competition in the industry as well as the company’s position vis-à-vis its
competitors. This also covers risks related to buyers, suppliers and technology used by the
company. An evaluation of the parameters helps in determining how well the company is
placed to compete in the market and how efficient its operations are. It also reflects how
fluctuations in the market and developments in the industry would influence the operations of
the company.
Within these areas parameters are defined separately for manufacturing and service sectors.
The parameters defined for Service Sector and detailed guidance for evaluating these
parameters are given under Section 4.3.3. Scores are assigned to the parameters within these

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areas and they are combined to arrive at a score for each of the above areas. The scores for
these areas are then aggregated according to the weights assigned to different areas to arrive at
the cumulative score for the company on business performance.
The broad parameters used for evaluating the market position are listed in the table
below. A list of possible sub-parameters that should be considered while evaluating these
parameters is given along with the parameter definitions.
4.3.2.1 Competitive Position

This parameter is a measure of the competitive position of the company amongst
players in the Industry.
This parameter measures the strength of a company relative to its competitors. A
company’s competitive position is a key determinant of the growth that a company is likely to
experience in the industry. Companies with strong competitive position are more resilient to
change in the business environment and benefit more from favorable industry conditions and
are hurt less by unfavorable conditions. In general, companies with strong competitive position
are more profitable than companies with weak position and are in a better position to operate in
the industry. The Factors to be considered are –
• Expected sales growth - Expected sales growth of the company depends upon demand &
supply position of the products, expected growth of industry and market position of the
company. This parameter is a good indicator of the competitive
position of the company in the industry.
• Market dominance - Companies with large market share generally are more profitable than
companies with small share. Market leaders benefit from economies of scale in operations,
experience curve efficiencies and strong bargaining power with customers and suppliers. This
factor will be more relevant in case of those industries, which are concentrated in few hands.
• Trend in market share - Trends in market share give valuable information about the
position of the company’s product in the market in relation to its competitors. A declining

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trend in market share implies that the company’s position in the market is eroding. This is a
bad portend for the company’s performance in the future.
4.3.2.2 Input Related Risk

This parameter measures the risk faced by a company relating to the availability of
basic raw materials and other critical inputs. • Uninterrupted supply of inputs at an economic /
competitive price level is a very important determinant of the operating performance of a
company. If input availability is uncertain, or there is high price volatility, then the operations
as well as bottom line of a company will be subjected to great risk. Hence this aspect is very
important to determine the business position of a company. An assured supply of raw materials
of good quality, and at stable prices can be a key source of competitive advantage for a
company. Following are the factors to be considered-
• Availability of raw material and other critical inputs –Demand and supply position of the
key inputs should be studied to determine if there is a mismatch. If demand were more than
supply then there would be competition for the input, which may lead to inadequate supply for
a company, with the potential of disrupting the operations.
• Suppliers power - If there is a limited number of suppliers in the market, or the company is
over dependent on only a couple of suppliers, then the risk is more. The suppliers can raise
prices or reduce quality of the input, which would adversely affect the profitability &
competitiveness of company in an industry by increasing its costs or affecting the quality of its
products
• Availability of alternate raw material/fuel - Whether alternate raw material/other critical

inputs like power are available in case of short supply/non availability of the main inputs.
• Management of price volatility - How far and to what extent the manufacturer is capable of
managing volatility in price of the input.

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• Reliable vendor base for components - Whether the vendors from whom the company
sources its components/requirements are reliable and capable of honoring their commitment in
respect of quality, price, quantity and time schedule.
• Dependence on imports - The extent to which the company is dependent on imports for its
inputs should be considered. Higher the dependence, greater the risk.
• Proximity to raw material sources - In freight-sensitive industries, the location of the

manufacturing plant assumes significant importance in determining its competitive position
• Status of backward integration - Whether the company has the benefit of backward
integration when compared to other players in the industry needs to be taken into account
4.3.2.3 Production Related Risk

• This measures the risk of a company with respect to its production activities.
• The production activities of a company constitute the backbone on which the profitability
depends. If there were a problem in production, then there would be no goods to sell. Thus the
efficiency, stability and consistency of quality of the production activities are a critical
determinant of its performance. The risk related to the production activities of a company
needs to be assessed as it has a large correlation with the ability of a company to generate
money to repay its debt. Following are the factors to be considered –
• Capacity Utilization - Capacity utilization is an important indicator of the production

activities of a company. High capacity utilization implies better use of assets and lower per unit
costs. This would become increasingly important due to the emergence of global players
capable of operating on low margins and high capacity. Thus optimum capacity utilization and
the break even capacity are important factors determining a company’s performance. The
impact of this factor should be studied in the context of the industry situation. High capacity
utilization can sometimes be the result of the company operating in a supply driven industry. If
the sales of a company are getting constrained by its capacity then a lower score should be

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assigned. This is particularly true in fast growing industries where surplus capacity can be a
source of competitive advantage.
• State of technology used - The technology used by a company can be a source of

competitive advantage in some industries. The technology used by the company should be
compared to that used by other company in the industry A firm with better technology is
generally better placed compared to another with poorer technology. The ease of maintenance
of this technology and machinery should be considered. Presence of existing manpower to use
this technology should also be taken into account. The rates of change of technology as well as
the frequency with which the company updates its technical know how are also important
factors. Vintage of plant & machinery and plan for modernization of old plant be also
considered.
• Flexibility in product manufacturing - In industries where demand shows significant inter

year variations like fertilizer industry, companies with flexibility to switch over from one
product-mix to another product-mix would be well positioned to take advantage of higher
growth. Thus the flexibility of a company to alter its manufacturing operations to account for
shift in the type of demand is an important source of competitive advantage for a company.
• Patents and proprietary technology - With the establishment of international treaties,

compliance with international law is inevitable. Local govt. and local agencies will be forced to
launch compliance measures and many process industries can be affected. Companies having
patents for their products or access to proprietary technology would be placed in a better
competitive position. The life span of these patents should also be taken into consideration.
• R&D Expenses - Research & Development will help in introducing new products, so as to
maintain future growth. Also, this is expected to emerge as a very important factor for high
profitability. A company with a better research department would be better placed to maintain
its competitiveness in the market. This parameter will be more important in industries, which
are research intensive like pharmaceuticals, software etc.

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• Dependence on single manufacturing plant - Companies’ dependent on single
manufacturing plants have higher risk than companies having more than one manufacturing
plant at different centers. This is because in case of closure of a plant due to strikes, natural
calamities or any other reason attributable to a region production can continue in the other
plants. This will be more relevant in case of those industries, where product loyalty of
customers can be shifted very quickly, if product of company is not available in market even
for a short duration.
4.3.2.4 Product Related Risk

• This parameter measures the risk relating to the products manufactured by the company. A
company generates revenues through the sales of its products. The riskiness associated with the
products of the company is thus an important input in determining the business risk of the
company. The risks associated with the product can be those related to obsolescence,
substitution, decrease in demand etc. Following is the list of factors to be considered –
• Product Range - Presence in multiple product categories and within sub segments within a
product category helps a company to diversify specific risks making it less susceptible to
downturns in a single product market/industry. It improves the bargaining power of the
company with retail outlets and enables them to push certain product lines through the existing
network for other products, as well as ask for a higher share of shelf pace. A vast product range
straddling all price ranges would help in increasing market share.
• Product Quality - The quality of a product is an important indicator of the long-term

viability of the product in the market. A poor quality product is unlikely to survive for long in
the market. However the quality here needs to be looked at in relation to the price at which the
product is being offered in the market. The product may be catering to the lowest price
segment that is not quality conscious.

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• Some of the factors that can be considered in evaluating this parameter, in addition to market
feedback, include the total product returns from the customers, the proportion of goods, which
come for repair, quality certification from standard
agencies etc.
• Highly Customized Product - Companies who are engaged in manufacturing of customised

products are exposed to higher risk compared to companies that manufacture general products.
This is because any decrease in demand for the particular product can severely affect the
company’s profits. The risk of the company is concentrated on one product/use and very few
customers. If the need for the product decreases then the demand goes down and the company
will suffer.
• Threat of substitution/ obsolescence - Obsolescence of products can happen due to change

in taste/preferences of consumers or the appearance of a better product in the market. Easy
substitutability of a product implies a high degree of risk as demand for the product depends on
the supply of the substitute as well. Ease of substitution depends upon the availability and price
of the substitute goods.
4.3.2.5 Price Competitiveness

This parameter measures the ability of a company to dictate prices in the marketplace
as well as cut its prices in case of a price war. The price competitiveness of a company is an
important indicator of the competitive position of a company. A company that is in a position
to charge a premium over its competitors is better placed in the industry.
Similarly a company with lower costs is in a good position to withstand price
competition in the market. Following are the factors to be considered-
• Economies of Scale - Whether the company is having cost advantage over its competitors
due to scale of its operation/cost effective technology.
• Brand Equity - The brand image of a product in the market can be a significant source of
competitive advantage as it allows a company to charge a premium from the customers. In case

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of similar prices, brand image can be the deciding factor in purchase decision of customers. A
strong brand image also helps the company to establish itself in the new areas using its existing
brand name..
• Pricing Flexibility - A company with high margins enjoys a greater cushion to cut prices.
This price flexibility is an important advantage in case of price wars in the market, and where
the demand is highly price sensitive.
• Financing Edge Over Competitors - The availability of financing schemes is often an

important driver of demand in some industries. In these industries, companies, which have in
house financing arms or have tie-ups with banks or financing companies, are better placed as
compared to the companies, which do not have these facilities.
• Buyers Power - The bargaining power of buyers determines how much control a company
has over the price it can charge for its products. If the bargaining power of buyers is high then
the price competitiveness of the company will be poor. Bargaining power of the buyers
depends on a number of factors like their number, size, proportion of sales they account for etc.
and often determines the terms like price, supply duration, credit period etc. that a company
can dictate to the buyers.
4.3.2.6 Marketing
This measures the marketing and distribution strengths of a company Marketing and
distribution are increasingly emerging as key activities for companies. In some industries like
FMCG, it is the marketing and distribution strength, which determines the competitiveness of a
company. Thus an evaluation of this parameter is essential for determining the business
strength of a company. Following are the Factors to be considered
• Selling & Distribution Network - The breadth and reach of a company’s distribution
network is an important determinant of the sales. The number of distributors, their
geographical spread, and their size needs to be determined. All the different distribution
channels that the company uses need to be assessed.

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The relations of the company with its distributors and those of the distributors with
their final customers need to be studied.
• After Sales & Service Network - For products sensitive to after sales service a well
managed and diversified after sales & service network improves the image of the company.
• Geographical Diversity of Market - Different geographical regions may have different
demand curves and different determinants of demand. A company having a diversified market
will be in a better position than others as it will be less susceptible to changes in one particular
area.
• Proximity to Market - In an industry, which is freight sensitive, the proximity of the
manufacturing plant to market assumes an importance in determining its competitiveness.
• Long Term Contracts / Assured Offtake - The risk of not being able to sell a product is low
if a company has some long-term contracts or assured off take of production from some
customers or agency arrangements for serving the clients.
• Advertising / Other Promotional Strategies - A company’s emphasis on advertising and
promotions helps in determining the prospects of sales growth. Very often higher advertising
leads to faster sales growth. This factor would be particularly important in industries where
customer loyalty is low and advertising can be used to shift customers. In industries where
demand can be created through advertising this factor is important. Firms having tie-up
arrangements with reputed companies may be placed better than others.
4.3.2.7 Other Factors
This parameter is used to cover any points left out in the above parameters, which can
significantly impact the business position of a company.
• Threat from environmental factors - The above parameter is generally applicable in case of
those manufacturing units which may pose a threat to the environment or which produce
hazardous substances. Such units face a risk that if the pollution caused is high, they may be
asked to shut down or move. They may also face higher costs in controlling the pollution or for
disposal of hazardous waste. This threat is there even for companies that meet the statutory
requirements and have NOC
clearance from the environmental authorities.

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• Vulnerability to event risk - Certain units are more prone to event related risks like fire,
explosion, cyclone & flood, etc. E.g. a fireworks factory would suffer very large losses in a
fire. These factors should be taken into consideration for specific companies where applicable.
• Regional rating of states - The location of a unit can be an important factor governing its
riskiness. If the unit is in a state that is politically unstable, or where the government policies
are not industry friendly, where there is social disorder or unrest, where the level of crime is
very high etc. then a low score should be given.
4.3.3 Service Sector Evaluation
A service is any act of performance that one party can offer to another that is essentially
intangible and does not result in the ownership of anything. Its production may or may not be
tied to a physical product. The service organizations are quite varied and different from each
other and may consist of the following activities - Consultancy, Construction / contractors,
Commercial complexes, Training/ Educational Services, Electricity distribution, Health/
Medical Services,
Hotel, Hospitality services, Media, Offshore drilling, Entertainment/ Recreational services,
Call Centers, Storage & distribution, Software / information technology, Telecommunication,
Tourism, Transport – Road, Rail, Air, Shipping, Courier service, Publicity etc.
Following are the general characteristics of service sector
• Intangibility - Services are intangible. They cannot be seen, tasted, felt, heard or smelled
before they are bought. When a service is purchased, there is generally nothing tangible to
show for it. Services are consumed but not possessed, therefore the absence of tangible
features means that it is difficult for the seller to demonstrate or display services, and for
buyers to sample, test, or make a thorough evaluation. To reduce uncertainty, the buyers look
for signs or evidence of the service quality. Therefore the service provider’s task is to “manage
the evidence”, to “tangiblise the intangible”.
• Simultaneous production and consumption - Services are typically produced and
consumed at the same time. The relationship between production and consumption therefore
dictates that production and marketing are highly integrated processes. Services are usually

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sold first, then produced and consumed simultaneously. Since client is usually present as the
service is produced and consumed, both provider and client affect the outcome.
• Variability - Since the services depend on who provides them and when and where they are
provided, services are highly variable.
• Perishability - Services cannot be stored. The perishability of service is not a problem when
demand is steady. When demand fluctuates, service firms have problems. This problem can be
overcome by adopting several strategies for producing a better match between demand and
supply in a service business such as Differential pricing, Cultivation of non peak demand,
Development of complementary services during peak time to provide alternatives to waiting
customers, Reservation systems, Hiring of part time employees, Introduction of peak-time
efficiency routines, Increased customer participation, Development of shared services etc.
The various parameters on which evaluation of service sector is done is as –
• Operating Efficiency
• Market Position
4.3.3.1 Operating Efficiency
• Operating Leverage
• Operating Income/ Operating Assets
• Wages/Operating Income
• Other Operating Cost/ Operating Income
• Administrative and Selling Expenses/Operating Income
• Credit Period Allowed
• Credit Period Availed
4.3.3.2 Market Position

Following are the factors, which are considered in market position for service industry.
Few of them are already explained in previous section. These factors are very easy to digest so
they are not explained in details in the section.
• Competitive Position
• Expected Growth
• Core competency

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• Market segment /Niche area
• Location advantage/delivery of services
• Market dominance
• Infrastructure Available
• Quality of basic infrastructure
• Attitude & skills of employees
• Agency / back-up arrangements
• Internal systems & procedures
• Technology adopted in the processes
• Service Related Factors
• Occupancy / utilization rate
• Quality of services offered
• Range of services
• Customer’s perceived value
• Level of customer’s satisfaction
• Services features & packaging of allied benefits
• Level of standardization & homogeneity of services
• Price Competitiveness
• Economies of Operation
• Brand equity / Image of co.
• Pricing flexibility
• Ability to extend credit
• Market Related Factors
• Ambience of service outlet and accessibility to desired service
• Distribution channels / supply chain
• Effectiveness of distribution coverage on target customers
• Extent of customer base / customers’ loyalty
• Tie-up arrangements / joint venture / franchise
• Advertisement / other promotional strategy

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4.4 Industry Outlook
The credit rating of a company cannot be assessed without considering the outlook of
the industry in which the company is operating. Industry performance very often has a direct
bearing on the performance of a company. Two companies in different industries would have
different credit worthiness depending on the outlook for their industries.
The outlook and performance of an industry depend on a number of parameters. These
factors include the structure of the industry as well as its financials. Some of the broad
parameters that are used for evaluating an industry are:
• Expected industry growth rate
• Capital Market Perception - The industry P/E ratio is an useful
indicator in this regard.
• Regulatory Framework
• Tax Concessions
• Tariff Protection
• Industry Cyclicality
• Demand-Supply Mismatch
• Financial Performance of Industry
• Return on Capital Employed
• Price Stability
• Operating Profit Margins
• Earning Stability
• Technology Used in the Industry and Its Rate of Obsolescence
• Threat from Environmental Factors
• Threat from Globalization
• Structural Attractiveness
• Supplier Power
• Buyer Power
• Threat of Product Substitution
• Threat of New Entrants and Entry Barriers
• Competition within the Industry

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The industry rating is used to adjust the score obtained by a company on business
performance. The rationale for this is that a company belonging to an industry that score highly
on industry rating would be in a better position to strengthen its business position. Conversely
a company belonging to an industry with a poor industry outlook would have adverse impact
on its business position.

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4.5 Management Evaluation
The quality of management and management structure are very important indicators of
a company’s credit risk. The performance of a company driven by a strong management is
likely to be better than that of a company having a poor management irrespective of the
industry to which it belongs. Evaluation of management is important not only due to its impact
on the company’s performance, which determines its capability to repay, but also from the
point of view of its integrity. This is because the intentions of the management determine the
willingness of the company to repay its debts.
The management quality thus influences both aspects of default risk, the ability as well
as the willingness of the borrower to repay its debts. Thus the evaluation of management
quality is an essential input for credit risk assessment. Evaluation of management is done to
determine both their competence as well as their integrity. The two sub-areas considered for
this purpose are:
• Achievement of past targets by the company
• Subjective assessment of management quality
Within these two sub-areas, parameters are defined which enable us to determine the
company’s position on each of these sub-areas. Scores are assigned to the parameters within
these areas and they are combined to arrive at a score for each of the above areas. The scores
for these areas are then aggregated in accordance with the weights assigned to different areas to
arrive at the cumulative score for the company on management quality.
4.5.1 Achievement of targets
The targets quoted by the company at the beginning of the year are used as the
benchmark with which the actual performance is compared. This gives an indication of the
management’s ability to drive the company by properly gearing it to the performance target set
by them.
4.5.1.1 Achievement of gross sales target
The borrower is required to submit the projections for the current year or following
year for assessing his working capital requirements. The extent to which the company achieves
these projections gives a valuable insight about the management’s ability to forecast its results
in a realistic manner as well as achieve them.

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4.5.1.2 Achievement of profit before tax target
The achievement of the profit target for the company indicates how well the
management conducted the company’s operations. This one factor combines together all the
aspects which can be used to judge the management’s performance as both the sales as well as
costs are considered in this.
4.5.2 Subjective assessment of the management

The assessment of management on criteria like integrity, honesty, and track record is assessed
in this section. This area is important as this indicates both the quality as well as integrity of
management. The parameters used for assessing this section are:
4.5.2.1 Management Set up and Corporate Governance
Following factors to be considered -
• Constitution Management set up varies according to the constitution of the company. The
constitution can be soleproprietary/ partnership/ private limited company/ public limited
company. The risk level of the company generally decreases in the order in which these factors
are stated herein.
• Board of directors The composition of the board (whether it consists of professionals,
reputed people or relatives and friends of the promoter), the regularity with which its meetings
are held, and the relations between the directors should be considered
• Professionalism The qualifications of the top management should be considered here. Also
whether there are professional managers to take care of different functional areas should be
looked into.
• Corporate Governance The Corporate Governance is defined as the distribution of rights
and responsibilities among different participants in the organization, such as, the Board,
Managers, Shareholders and other stakeholders and spells out rules and
procedures for making decisions on corporate affairs. The focus will be on the business
practices followed by a corporate and quality of disclosure standards with respect to its
equitable treatment of, and fairness to, the interests of its financial
stakeholders i.e. its shareholders, lenders and creditors. The Corporate Governance ratings
assigned by the external rating agencies like CRISIL/ ICRA may also to be considered.

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• Organization structure and systems The following factors should be considered here
• Planning and control mechanisms.
• Delegation of authority and presence of a strong second line of managers
• Inter-departmental coordination.
• Management Information Systems
4.5.2.2 Commitment and Sincerity Following are factors, which should be considered while
rating for this part –
Wilful default - As per the definition of wilful default as circulated by RBI, a ‘wilful default’
would be deemed to have occurred in any of the following events:
• The unit has defaulted in meeting its payment/repayment obligations to the lender even when
it has the capacity to honor the said obligation. • The unit has defaulted in meeting its
payment/repayment obligation to the lender and has not utilized the finance from the lender for
the specific purpose for which finance was availed of but has diverted the funds for other
purposes.
• The unit has defaulted in meeting its payment/repayment obligation to the lender and has
siphoned off the funds so that the funds have not been utilized for the specific purpose for
which finance was availed of, nor are the funds available with
the unit in the form of other assets.
Diversion of Funds - Referred to in point 2 above, would be construed to include any one of
the under noted occurrences:
• Utilization of short-term working capital funds for long-term purposes not in conformity with
the terms of sanction.
• Deploying borrowed funds for purposes/activities or creation of assets other than those for
which the loan was sanctioned.
• Transferring funds to the subsidiaries/Group Companies or other corporate by whatever
modalities;
• Routing of funds through any bank other than the lender bank or members of consortium
without prior permission of the lender;
• Investment in other companies by way of acquiring equities/debt instruments without
approval of lenders;

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• Shortfall in deployment of funds vis-à-vis the amounts disbursed/drawn and the difference
not being accounted for.
Siphoning of funds - Referred to at point above, should be construed to occur if any funds
borrowed from banks/FI’s are utilized for purposes un-related to the operations of the
borrower, to the detriment of the financial health of the entity or of the lender. The decision as
to whether a particular instance amounts to siphoning of funds would have to be a judgment of
the lenders based on objective facts and
circumstances of the cases.
4.5.2.3 Track record in execution of projects The above parameter measures the experience
of the management in successful and timely implementation of various projects. It is thus
indicative of the ability of the management to run the business. These projects can include any
business or financial restructuring, setting up of new plants, expansion or modernization of
existing facilities etc.
4.5.2.4 Track record in debt repayment
This measures the past record of the management in repaying the debt obligations of
the company as well as other group companies under the same management. A poor past
record is an indicator of poor ability or willingness on the part of the promoters to repay the
debt.
4.5.2.5 Track record in Industrial relations
The industrial relations in a business determine the morale of the workforce and
consequently the productivity. Problems in industrial relations can lead to disruptions in the
operations of a plant and adversely affect the business. The ability of the management in
managing industrial relations is an important factor determining management efficiency.
Following are the factors for track record in industrial relations
• Relations with workers.
• History of strikes.
• HRD policies of management.
• Employee turnover ratio
4.5.2.6 Financial strength/ flexibility /Group support
This parameter measures the ability of the company to infuse additional capital into the
business if required.

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• Financial position of the promoters/other companies in-group.
• The character, stability, and history of the company’s banking relationships.
• The nature, history and reliability of a company’s alternative borrowing sources.
• Timing by which funds would be available through each source and facility.
• Impact of new projects outside the company’s business, on existing company.
4.5.2.7 Capital market perception
This indicates the confidence of investors in a company’s management, prospects of
company & their perception regarding treatment at the times of stress. If the capital market is
efficient then the capital market perceptions are a reasonably good indicator of a company’s
credit worthiness.
• Price earning ratio and earning per share.
• Track record of dividend payment.
• History of issuing bonus shares.
• Liquidity & volume of trading in stock exchanges.
• Compliance of listing norms.
• 52 Week high/low price of equity share
4.6 Conduct of Accounts

The conduct of account refers to as to how the borrower’s existing accounts with our
Bank as also with other banks are being conducted and whether any problems are being faced.
The conduct of account provides useful indications about the ability and willingness of the
borrower to meet his obligations. The manner in which a borrower has been conducting his
accounts in the past is a good indicator of how the account is likely to behave in future as well.
So all the below mentioned factors are taken into consideration while calculating risk.
4.6.1 Status of Financial Discipline
This aspect takes care of factors like:
• Credit summations in Cash Credit account being less than the sales realizations
• Returning of cheques
• Devolvement of LCs
• Invocation of LGs
• Requests for ad hoc limits

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4.6.2 Operational and Financial Performance Indicators
This Section includes factors like:
• Achievement of quarterly and half-yearly sales targets
• Achievement of half yearly target of profit
• Decline in current ratio
4.6.3 Status/Quality of Bills Realization
This area covers:
• Delay in realization of outward cheques & bills
• Returning of outward cheques & bills
4.6.4 Status of Feedback by the Borrower
This takes care of indicators like:
• Delay in submission of stock/book debt statements
• Delay in submission of QMS forms
• Delay in submission of audited balance sheet
• Delay in submission of CMA data and other papers necessary for renewal of credit limits
• Delay in renewal of credit limits
4.6.5 Level of Current Assets & Current Liabilities
This Section accounts for:
• Build up of inventory
• Build up of debtors
• Build up of creditors
4.6.6 Status of Security Value
This area takes care of indicators like:
• Deterioration in value of primary security
• Proportion of old debtors to total debtors
• Reduction in value of collateral security
• Inadequacy of insurance cover for security
4.6.7 Irregularity in the Account with Bank
This aspect covers factors like:

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• Overdrawing in accounts due to reasons like non-payment of term loan installments, non-
servicing of interest, devolvement of LCs, debiting of overdue/returned bills, overdue packing
credits, invocation of LGs, devolvement of Deferred Payment Guarantees, etc.
• Excess allowed under BM’s powers
• Overdue in packing credit
• Overdue in outward bills & cheques purchased/discounted
• Irregularity in term loan or demand loan accounts
• Overdraft liability created due to devolvement of DPG installments
• Credit summations in CC accounts being less than the interest chargeable during the quarter
4.6.8 Irregularities with Other Banks/FIs, etc

This Section looks into the conduct of the borrower’s account with Other Banks/FIs in
terms of default, devolvement of LCs, invocation of LGs as also the aspect of default in
payment of liabilities like CPs, NCDs, ICDs, Public Deposits etc., by the borrowers dealings
with banks outside the financing arrangement and other important developments having
adverse bearing on conduct of account with our Bank vis-à-vis conduct with Other Banks/FIs.
4.6.9 Other Important Developments
The factors considered here are:
• Days lost due to labor unrest/strike/lockout etc.
• Exit or turnover of key personnel
• Major market default to suppliers/default in payment of statutory dues
• Delay in payment of salaries and wages
• Any restructuring/ hive-off being contemplated
• Any expansion/modernization/investments without proper tying up of matching funds
• Adverse report about the company from market/company’s suppliers or customers etc.

University of Pune
LOAN PROPOSAL

University of Pune
Loan Proposal :
Credit Appraisal Note:
Whether fresh/renewal/enhancement Fresh

Asset Classification NA(New A/C)
Credit risk rating by bank B
Consortium/ multiple banking Consortium
Lead Bank PNB
SSI/Priority sector No
Export Oriented No
PNB share 46.08% for TL
Gist of the proposal:
- sanction of TL of Rs. 10000 lakh out of total debt component of 21700 lakh. For
setting up of coal based captive power plant.
- Total Project cost of 31000 lakhs.
- Repayment 9 years after moratorium of 3 years.
- At ROI of 9 % P.A. linked to BPLR.
1. A: Name of the borrower: M/S OPG power generation pvt ltd.(OPGPG)

B: Date of incorporation: 21/02/2005.
C: dealing with PNB : New A/C.
D Business/activity(product)/installed capacity: power generation coal based 77
MW.
2. Directors:
1. A. Gupta: CMD
2. K Ramamurthy: Director

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- any of them in RBI willful defaulter list- No
-realted to directors/ senior officer of PNB: No
-Management change since last sanction: NA\
-MOA permits the activity and power of borrowing: Yes.
3. Shareholding pattern:
-Authorized share capital: Rs.10 lakhs.
- issued/subscribed/paid up capital: 1 lakh.
-Share application money received: 1070 lakhs.
4. For project:
-Promoter’s contribution: 9300 lakhs.
To be raised by equity/preference capital.
- Capital contribution to be raised from following sources:
Investor Amount
OPGE 5000
Shriram EPC Ltd. 2000
KSIL 1500
Pooja equiresearch pvt. Ltd. 2000
JV partners( captive users) 3000
Total 13500
As proposed sources of contribution are more than the proposed contribution as per the
project cost, no difficulty is envisaged in raising the promoter contribution.
D. Name of the borrower doesn’t appear in CIBIL , RBI willful defaulter list.
3. Facilities recommended:
Fund based Existing Proposed

Fund based --- ----

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Non fund based ---- ----
Term loan ---- 10000
Total commitment ---- 10000
B. commitment and max. permissible exposure norms:
OPGE OPGPG Total

Fund based working --- ---- -----
capital limits
Non fund based 200 --- 200
Term loan 7000 10000 17000
outstanding
Investment in ---- ----- ----
shares/debentures.
Total a,b,c,d 7200 10000 17200
Total exposure as a
% of bank capital
fund.
5.facilities from PNB subsidiaries/ exposures by way of investment in equity/

debentures.: NIL
6. Facilities from other banks/ FIs/ other institutions:
Indian Bank 6700

Oriental Bank of Commerce 5000
C. Details of limits from consortium:

-No working capital for now.
Term Loan: consortium
: PNB

University of Pune
: Indian Bank
Oriental Bank of Commerce.
Details of the group companies/allied associate firms and facilities sanctioned to

them.
Name FB NFB Bank Classification

KSIL
Steel division 550 2150 SB indore Std
Sponge iron
450 935 SB Indore TL Availed.
WC not yet
availed
1000 TL
300 565 SB Patiala Not availed
600 TL
OPG
Energy(OPGE)
TL 2366 SB Indore Std.
125 190 SB Indore Not availed
For other companies there are no common directors and thus not to be treated as
concerns under same management/ sister concerns. Thus details are not
incorporated.
B. conduct of accounts with Bank
KSIL SB Indore Satisfactory

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OPGE SB Indore Yet to be obtained
C. Past financials:
A. KSIL
Sales: 11753.02
PBT: 343.54
Cash Profit: 380.44
Other Income: 14.61
PAT: 317.19
B. OPGE:
Sales: 2054.10
Other income: 53.83
PBT: 1110.59
PAT:1110.59
Cash Profit: 1296.14
Comments on financial indicators: Satisfactory.
8.A. Primary security:
a. first charge by way of hypothecation of movable assets & mortgage of all immovable
assets of project( present and future).
b. Assignment of rights/ titles, interest of borrowers into & all project related contracts.
All above securities both primary & collateral will be charged on first pari-passu basis of
participating banks/ FIs
.
7.B. Collateral security
a. Guarantors
NMS IP CR date
M/S A. Gupta 126.51 13.51
Corporate guarantee TNW 3009.58

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b. Collateral security by way of mortgage.
No collateral security proposed.
7.(C). Total commitment by guarantors: The company informs that the above person has
given personal guarantee for facilities sanctioned by SB Indore. Present outstanding is 23.66
Cr.
(D). collateral security (including details of charges in IPs as security from last sanction
if any: NIL
8 Summary of serious irregularities pointed by bank inspector, concurrent auditors,

credit auditor, RBI inspector. Statutory auditors, observation of stock report, comment
on preventive monitoring score trends. -NA(New Account).
9. Brief History:
A. Company background:
OPGE was incorporated in 2000. it has established a natural gas based power plant of 17.98
capacity in Chennai.It is the subsidiary of M/S. Kanishk steel industries Ltd.
OPGE has formed joint venture with power consuming customer companies as per the captive
power policy of Tamil Nadu.
Other promoters of OPGE belonging to OPG group are as follows:

- M/S Sonal Vyapar Ltd.
- O.P. Steels Ltd.
- Salem Foods product Ltd.
- South India Steel & Starch ltd.
Joint Venture partners:

- Ennore Foundries ltd.
- Meridian Industries ltd.
- Adyar Gate Hotels Ltd.

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- Super Spinning and Weaving mills Ltd.
- KICL textiles Ltd.
Present proposal:
A. Brief of proposal:
This proposal is for building 77 MW coal based captive power plant, costing Rs.31000
lakhs. The proposal is for sanction of term loan of 10000 lakhs by PNB out of total loan
component of Rs. 21700 for part financing of total project cost of Rs.31000 lakhs.
B. Justification for working capital sanction:
Working capital limit for first year has been worked out as Rs.3000 lakhs. However
considering the implementation period of 2 years no proposal of working capital has
been made yet. Detailed Assessment will be done at the time of commissioning of the
plant.
C. Justification for NFB facilities:N.A.
D. Justification for term loan:
1. purpose:
for establishing 77 MW coal based captive power plant costing Rs.31000 lakhs.
2. Appraising agency:
Appraisal has been done by PNB, Chennai, Zonal office and found technically
and economically viable.
3. Summary of cost of project and means of finance.
Cost of project:
1 Land cost 1055.00

Site development 270.00
Total cost 1325.00
2. Civil construction and foundation 2500.00
3 Plant and machinery 21630.00
4 Design, engineering,consultancy and technical 200.00
knowhow fees

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5 Misc.fixed assets 380.00
6 Preliminary and preoperative expenses 345.00
7 Contingency provision 1290.00
8 Margin money for working capital 1600.00
9 Interest during construction 1760.00
Comments on product marketing:

¾ The company has already established 17.98 MW natural gas based
power plant through joint venture and same is the case with this power
plant.
¾ The plant is 77 MW captive power plant for which more than 20
customers having total requirement of 157.50 MW have expressed
willingness for joint venture. This power off take is 2.5 times the
generation capacity, so there should be no problem in selling generated
electricity. In case of no off take from some members, it can be sold to
other members. The company will also be entering into power sharing
agreement with above mentioned joint venture companies.
¾ The company is also eligible to sell 49 % of the generation to Tamil
Nadu Electricity Board as per tariff agreed by state electricity regulation.
Hence there should be no difficulty in selling the generated electricity.

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Risk factors and mitigants:
Management Risk
Risk factor Justification Mitigation

Promoters experience Promoters are well No risk is envisaged in
experienced in industry respect of this item.
and have already set up
17.98 MW gas based
power plant which is
operating successfully
Implementation risk
Land availability Already acquired 98 acre No risk envisaged. But
land. NOC obtained for 30 NOC for balance land
acre which is sufficient for should be obtained.
project.
Construction period time EPC contract has been The lender may stipulate
over run awarded to Shri ram EPC that EPC contractor
Ltd which is reputed and provide for liquidated
experienced contractor. damages in case of delay.
Also the project will be
executed on fixed time,
fixed cost basis. The
project should be
completed in 2 years time
Cost over run Cost/MW estimates are Lender may stipulate that
4.02 cr, after taking into in case of cost over run it
account prevailing rates of should be funded by
various items of cost of promoter out of their own
project.Project is to be funds.
executed on fixed time ,

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fixed cost basis.A cushion
of 5 % is provided for
contingency. Promotors
have already set up gas
based power plant. The
cost of that was less than
estimated . Hence no cost
over run is expected
Contractor Performance Shri Ram enterprises is Lenders should stipulate
reputed contractor and that EPC contractor
project is executed on should provide for
fixed time fixed cost basis. liquidated damages.
Funding Risk Out of the total debt of Term Loan to be released

217 cr. 100 cr. Will be only after tie up of entire
funded by PNB and rest debt.
will be by syndication of
banks.
Post implementation Risk
Environmental Clearance Implementation is to be Project is in industrial
done as per emission area and company will be
standards stipulated. acquiring equipment from
Environmental impact reputed manufacturers to
assessment study will be ensure that the emission
conducted as per the norms by PCB are
requirements of the state adhered to. Moreover
government and necessary company has also
clearance to be obtained. appointed M/S/ Creative
Engg. As consultants for
getting clearance.
Water availability Adequate and necessary

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provision for bore well has
been made. DM plant will
be installed to make up
water requirements. As
air cooled condenser also
is included in project
water requirements will
be curtailed.
Evacuation Power plant will be Lender may stipulate
connected to TNEB grid condition regarding
at a distance 6 km from execution of wheeling
site. Necessary provision agreement with TNEB
has been made in the before the release of
project for stepping up the working capital limits.
generation as per TNEB
requirements and for
transmission lines.
Wheeling agreement will
be signed with TNEB.
Hence no problem in
evacuation of generated
power.
Market Risk
Off take risk The project is
implemented under group
captive power plant policy
of state govt. the
requirement of joint
venture is much more
than estimated generation

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and purchasing of power
form company will result
in substantial savings for
them.Power sharing
agreement will be signed
with buyers and no
problem is envisaged in
selling.
Payment risk The company will work However post dated
out the feasibility of cheques covering one
opening LC/LG to months billing amount
mitigate the risk of non pa should be obtained from
yment of power supplied. customers.
In respect of other group
companies the payments
are received without
above agreement. As
power will be wheeled to
only JV promoters no risk
is envisaged in receiving
monthly billing payments.
Operational risk
Fuel availability Company is entering into Lenders may stipulate a
regular supply contract condition that a company
with Indonesian and should enter into
Australian coal supplier to necessary contract for
ensure availability of coal. coal supply before release
In one of the group of working capital limits.
companies engaged in coal
trading, contract has
already been signed with

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foreign supplier for 5 lakh
MT/annum.
Plant maintenance and O & M contract to either
achievement of estimated EPC contractor or to
PLF some reputed agency to
ensure proper
maintenance and pant
load factor.
Financial Risk
Fuel price hike, interest Adequate cushion is The plant has the
rate change available in projected versatility of using
profitability to take case imported coal/domestic
of increase in cost of coal coal as well as lignite.
and interest rates. Hence the company may
choose optimum fuel to
overcome the price and
interest rate sensitivity.

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CREDIT RISK RATING

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Management set-up
SUBJECTIVE Rate
It is a private Ltd company managed by promotor,
experienced mainly in steel industry & is also running 2.00
Management set-up one gas based power plant.
Risk bearing capacity of
The capacity matches with risk appetite. 2.00
Management
Track record in debt Track record of KSIL to which the company belongs is
2.00
repayment satisfactory.
Track record in execution The track record in execution of projects of group
2.00
of projects companies KSIL,OPGE is good.
Integrity, Commitment and There are apparently no adverse features or reasons to
2.00
sincerity doubt the commitment & sincerity of promoter.
Financial flexibility /Group Management is capable of arranging funds with time
2.00
support lag.
Capital market perception
The main company KSIL is listed on BSE. 2.00
of group
Business Evaluation----Infrastructure Projects

Parameter Comments RATE(A)
Input Related Risk
Comments
1.33
Proximity to raw material The company is mainly dependent on imported coal
1.00
- Import related The company will be dependent on imports to a larg

procurement risk extent but has the access to alternate domestic sources 1.00
but of lower quality in case of need.
The company is dependent on imported coal for which
Availability of raw it has entered into contract for 5 years from November 2.00
material 05.For water company is dependent on ground water.
Production related Risk
2.50
- State of technology The project will be using latest technology
used 3.00
- Technical & Managerial The management of company is experienced in steel

Capability industry. However they have successfully established
one gas based power plant, running successfully.
3.00
Marketing The company is proposed to sell power to its promoter

2.00
company or TNEB.
Capacity utilization Economics of scale is at par with peers. 2.00

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Others 2.00
- Threat to environment Being coal based power plant, it is polluting industry,
however it will be obtaining necessary clearances. 1.00
- Regulatory Govt. policies are currently favorable to power

3.00
consideration producing companies.
FINANCIAL
EVALUATION
UPTO
IMPLEMENTATIO
N OF PROJECT
Co.
Valu
e 0 1 2 3 4 Rate
Debt-equity Ratio >4.00 or
3.97 3.00 2.00 1.00 <0.5 0.03
<0.00
Repayment Period in
years for
infrastructure/ service 9.00 >10 years 8 yrs. 6 yrs. 5 yrs. <3 yrs. 0.00
sector (excluding
moratorium)
IRR
PLR+
< PLR+1% PLR+ PLR+3% >PLR+5%
15.36 4% i.e. 3.71
i.e. 1 % 2% i.e. i.e. 3 % i.e. 5 %
4%
2%
Foreign Exchange Likely Likely
Risk No
adverse adverse
adverse
impact to impact to
impact N.A.
the extent of the extent
likely on
> 5% of of 2% of
project
COP COP
TOL/TNW Ratio >6.00 or
3.32 5.00 3.50 2.00 <1 2.12
(optimum year) 0.00
Working capital cycle
during optimum year 4.65 >5.00 4.00 3.00 2.00 <1 0.35
(in months)
DSCR (Average of
1.35 <0.60 0.75 1.00 1.25 >1.50 3.40
initial 2 years)

University of Pune
Standing/reputation of Average
Highly
appraiser /Financial Low reputation
reputed
stake of the appraiser 3.00 reputation and 3.00
and higher
and no stake average
stake
stake
Sensitivity Analysis
PLR+
< PLR i.e. 0 PLR+ PLR+2% >PLR+4%
13.62 3% i.e. 2.37
% 1% i.e. i.e. 2 % i.e. 4 %
3%
1%
Project Implementation Risk Evaluation
Co. Value 0 1 2 3 4 Rate

Project Highly The Average The Project is
Complexities/Con complex project complex project of
struction Risk , needs is highly ity, comple general
specialis complex skills/tec xity is nature
ed , needs hniques below requiring
techniqu specialis availabl average simple
es/skills ed e . technique
2.00
techniqu s etc.
es but
skills/
techniqu
es
availabl
e
Impementation >4 years 3 years 2 years 1 year <6
period for months
infrastructure/serv 2.00 1.00
ice projects (in
years)
% of Project > 80% 60.00% 40.00% 20.00% 0.00%
Remaining to be 90.00 0.00
completed
Expected cost >10% 7.00% 5.00% 3.00% No Cost
3.00 3.00
overrun Over-run

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Expected time > 15% 10% of 7.50% Upto No time
overrun of original of 5% of overrun
original period original original
period or upto period period
or > 6 6 or upto or upto
1.00
months months 3 1
whichev whichev months months
er is er is whichev whiche
higher higher er is ver is
higher higher
Funding risk Funds Part of Over Funds Finanacia
(award score in have not funds 75% have l closure
range of 0-4) been have funds been has been
tied up been have fully achieved
and may tied up been tied up
take and it tied up
longer may and 2.00
period take balance
longer is
period expected
for the to be
balance sanction
ed.
Status of Certain Certain All All All
obtaining critical critical critical critical clearance
clearances/permis clearanc clearanc clearanc clearan s
sions (award es are es are es are ces obtained
score in range of difficult yet to be obtained obtaine
0-4) to obtain obtained and d and 1.00
but no remainin remaini
difficult g will be ng are
y is obtained expecte
envisage in due d
d. course. shortly.
% Score Weight Weighted

obtained Score
Management Evaluation 50.00% 40.00% 20.00%

Business Evaluation 50.00% 35.00% 17.50%
Financial Evaluation 46.81% 25.00% 11.70%

University of Pune
AGGREGATE SCORE 49.2 %
Adjusted Score after impact of project
41.81%
implementation risk
Impact of industry risk 5.00%

Final score 43.92%
Final Rating of company B
Note: CRISIL rating for power industry – IPP’s is ‘A’ which means marginally favorable.
Credit Rating Score % Risk Profile
AAA > 80 Minimum risk

AA >70 and upto 80 Marginal risk
A >60 and upto 70 Modest risk
BB >50 and upto 60 Average risk
B >40 and upto 50 Marginally acceptable risk
C >30and upto 40 High Risk
D ≤ 30 Caution

University of Pune
CONCLUSION

University of Pune
Conclusion:
The existing credit risk management system in the bank is performing well and it is showing
good results in the field of risk management. That’s why the NPA ratio is low compared to
other public sector banks but need some changes keeping in view the dramatic changes in the
financial market and implementation of BASEL II framework.

University of Pune
. Recommendations:
Following are the recommendations that I like to suggest regarding credit risk management in
bank.
¾ Exposure to the agriculture and agro based industries sector was very less and should
be increased.
¾ Various factors which are qualitative need to be transferred in quantitative form as
much as possible.
¾ Bank can also think about outsourcing the credit rating from external sources.
¾ Bank needs some changes in existing components of credit risk regarding
implementation of BASEL II in 2008.
¾ Bank should focus on factors of risk minimization like credit derivative.

University of Pune
Bibliography
¾ Indian Financial System by M.Y.Khan

¾ Bank Finance by H.R. Machiraju
¾ Balance Sheet and Lending Banker by J.H. Clemens and L.S. Dyer
¾ Risk Management by S.B.Verma
¾ Credit Risk Management by Arundeep Singh and N.S. Toor
¾ Risk Management in Banking by Joel Basis

University of Pune

Final Report

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A

“CREDIT RISK MANAGEMENT FOR INDUSTRIAL

UNDER THE GUIDANCE OF

PROF. Anil. Agashe MR. Gopalkrishan A.P.

IN PARTIAL FULFILLMENT OF THE

DEPARTMENT OF MANAGEMENT SCIENCES

Department of Management Sciences 1

Department of Management Sciences 2

Department of Management Sciences 3

2.2 Profile of Punjab National Bank

Department of Management Sciences 4

Department of Management Sciences 5

2.3 Mission and Vision

2.4 Organization Structure

2.4.2 Organization Setup

Department of Management Sciences 7

Department of Management Sciences 8

Department of Management Sciences 9

3.1.2 Operational Risk

Department of Management Sciences 10

Department of Management Sciences 11

3.2.1 Credit Risk

Department of Management Sciences 12

Department of Management Sciences 13

Department of Management Sciences 14

3.3.2 Credit Risk Rating Models

Credit Risk Rating Applicability of the Models

Small Loans Above Rs. 20 Lacs and Up to Rs. 25 Cr

Department of Management Sciences 15

Department of Management Sciences 16

Department of Management Sciences 17

4.1 Risk Components

4.2 Financial Performance

4.2.1 Past Financial Performance

4.2.1.1 Gross Sales Growth Rate

Department of Management Sciences 18

4.2.1.2 OPBDIT / Net Sales

4.2.1.3 Short term bank borrowings / Net Sales

Department of Management Sciences 19

4.2.1.4 Operating Cash Flow / Total Debt

Operating Cash flow

4.2.1.5 Net Operating Cash Flow / Total Debt

Net Operating Cash flow

4.2.1.6 Debt-Equity Ratio

Department of Management Sciences 20

Long term debt

4.2.1.7 TOL / TNW

4.2.1.8 Current Ratio

Department of Management Sciences 21

4.2.1.9 Interest Coverage

4.2.1.10 Debt Service Coverage Ratio

Department of Management Sciences 22

4.2.2 Expectations of Future Performance

4.2.2.1 Impact of Contingent Liability

4.2.2.2 Foreign Transaction Risk

Department of Management Sciences 23

4.2.2.3 Impact of Merger/De-merger/Expansion on key financials

Department of Management Sciences 24

4.2.2.5 Impact of diversion on future financials

Department of Management Sciences 25

4.2.3 Subjective assessment of financial figures

4.2.3.2 Realisability of Inventory

Department of Management Sciences 26