STATE BANK LEARNING CENTRE PANCHKULA

SITUATIONAL ANALYSIS

1. M/s Modern Automobile Manufacture Xeta Premium Brand Car costing Rs. 10-12
lacs. They enjoy Cash Credit (Hyp) limit of Rs. 10.00 Crores and Book Debt limit of
Rs. 5 Crores from us. The Unit is generating sufficient Profit for the last 4 years &
the account was running satisfactory till 2008. Now the position of above accounts is
as under:

FACILITY LIMIT DP OUTSTANDING

1. Cash Credit (Hyp) Rs. 10 Crores Rs. 10 Crores Rs. 11.85 Crores

2. CC(Book Debts) Rs. 5 Crores Rs. 5 Crores Rs. 5.75 Crores

Branch Manager had interaction with CEO of the Company for ascertaining the reasons of
irregularities in the accounts. He advised that due to present slowdown of economy their
inventory is piling up due to decreased demand of Cars. Due to the same problem, they are
also facing difficulty in getting payment from their dealers. Due to these reasons stock of
finished goods i.e Cars is piling up and realization from Debtors is also delayed. He has
requested BM for helping the Company in hours of Crisis by making some adhoc
arrangements. CEO has given assurance that they will liquidate the adhoc facility within one
& half year.

In view of the above & keeping in view the past track of Company which facility BM can
offer and whether it can be offered for such a long period. What will be other terms &
conditions like:

Maximum loan amount

Maximum period
Margin
Repayment period
Nature & Quantum of Security
Rate of interest

Ans.

From the given situation the party’s conduct seems to be satisfactory in past i.e before
recession. Due to recent slowdown of economy the Company’s finished stock is piling up
and the payment is delayed from S. Debtors. If timely help will not be granted to the Unit,
the account will become NPA.

In the given situation, we can help the Unit by granting adhoc facility under SME Care.
However, as per the scheme the facility is repayable in one year. We will have discussion

Compiled by Mr. Sanjay Seth, Manager (Trg.), SBLC Panchkula

 STATE BANK LEARNING CENTRE PANCHKULA

with CEO, if the Unit is in a position to repay the adhoc facilities in a one year then SME
Care product can be offered with under noted terms and conditions:

a) Maximum loan amount 20% of the existing limit i.e max

Rs. 3 Crores

b) Maximum period 1 Year

c) Margin Same as taken at the time of original

sanction

d) Repayment period 1 year inclusive of moratorium period

of 6 months

e) Nature & Quantum of Security Extension on Charge over existing

assets

f) Rate of interest 8%

2. A Proprietorship trading firm has a current account at the branch for the past 5 years
and the account has been conducted satisfactorily. Recently the firm has been
converted into a Private Ltd. Company. The Company has approached you for an
advance of Rs. 45 lacs as working Capital. Detail the precautions you will take for
entertaining the proposal?

Ans.

We have to exercise caution before acceding to the Company’s request for loan.
When a Company is formed which takes over the assets of the proprietorship firm,
legally it is the sale of his assets to the Company. The Company is a distinct and
separate legal entity independent of trader. The creditors of the trader cannot proceed
against the company for the recovery of the debts of the trader. In case the trader is
heavily indebted before formation of the Company, the Court may held the transfer as
the fraudulent one, made with the intention of defeating the creditor’s rights. In fact,
such a transfer itself may be held as an act of insolvency. Further, if the trader is
adjudged an insolvent, the transactions including sale of the assets may be held
fraudulent and the bank will lose its security.

3. Sheela Dikshit Proprietor of M/s Weldon Steel Strips, a Micro enterprises

approaches you for Term Loan of Rs. 60 lacs and Letter of Credit limit of Rs. 30 lacs.
She requests you that she is not in a position to furnish any Collateral Security. Your
Pre-Sanction survey reveals that Mrs. Sheela is an experienced and credit worthy
borrower and proposal is viable. Please advise whether you can grant credit facility
without Collateral Security, if yes, please list out the scheme under which you can
grant either Fund based or non-Fund based limit to Mrs. Sheela without Collateral
Security. Tomorrow, if liability under LC is crystallized and Term Loan become

Compiled by Mr. Sanjay Seth, Manager (Trg.), SBLC Panchkula

 STATE BANK LEARNING CENTRE PANCHKULA

NPA, upto which amount you can safeguard Bank’s interest and what are other terms
and conditions, which have to be compiled with.

Ans.

Since our Pre Sanction survey has revealed that Ms. Sheela Dixit is an experienced
and credit worthy borrower and proposal is viable, we can examine the proposal
under Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE). There is
separate provision for Women Micro Enterprises. If she is covered under this scheme then
there is no need to obtain Collateral Security, as our loan will be covered to the Maximum
extent of Guarantee in the category of above Rs.50 lakh and upto Rs.100 lakh. The available
cover is:

“Rs.40 lakh plus 50% of amount in default above Rs.50 lakh subject to overall
ceiling of Rs.65 lacs.”

One time Guarantee Fee of 1.5% and Annual Service Fee of 0.75% will be sent to SIDBI.

4. M/s ABC Ltd engaged in the manufacture of steel billets, rolled products etc are the
Bank’s constituents for the past 15 years. They are banking with one of our branches
in Chennai and enjoy credit limit aggregating Rs. 5.00 Crore. The turnover of the
Company has almost doubled in the last year, in view of which the company
approached the branch for enhancement in credit limits from the existing level of Rs.
5.00 crore to Rs. 8.00 crore. The branch has submitted a month back its
recommendations to the controllers and is yet to hear from them in the matter.
Meanwhile, drawings in excess of the sanctioned limits are being permitted in a
limited manner for meeting genuine working capital needs.

The Branch Manager was recently transferred and the new incumbent has taken over
charge of the branch. A Cheque of Rs. 2.00 crore was issued by the Company in
favour of the raw materials supplier. The Cheque presented in clearing was however
returned by the branch with the remarks “Exceeds Arrangements”. Aggrieved by the
action of the branch, the MD of the Company sent a letter to the branch that he is
arranging to switch over the account to the local branch of Canara Bank, which it
appears has been canvassing for the account.

How will you deal with the situation as the Branch Manager?

Ans.

Not only the branch has submitted its recommendations for enhancement in the limit
but has also been permitting drawings in excess of the limit. The unit has been
dealing with us for a long period and the turnover of the unit has increased very fast
last year. This shows that the branch is convinced of the viability of operations of the
unit and the need to support the same. As such, the branch should have discussed
with the borrower regarding its stand in granting further excess drawings before

Compiled by Mr. Sanjay Seth, Manager (Trg.), SBLC Panchkula

 STATE BANK LEARNING CENTRE PANCHKULA

resorting to the extreme step of returning of a cheque. The reasons for the sudden
change in the approach of the branch by returning the cheque are not stated. Any
such decision should have been taken after due deliberation and communication to the
unit. It is now imperative that the senior level executive of the company are met and
convinced of the action of the branch in the matter. Early sanction of enhanced limit
would dissuade the company from switching over its a/c to other bank.

5. XYZ & Co. is engaged in the manufacture of railway bogies. The orders obtained by
them from Railways are executed through their sister concern, M/s Shaym Brothers.
The limit enjoyed by the two firms was note renewed for long after original sanction.
However excess drawings were liberally permitted for execution of railway orders.

As the outstandings in the accounts of the units reached disproportionate levels

compared to the limits sanctioned, a stock-cum-receivables audit was conducted as a
prelude to consider suitable re-structuring/enhancement in limits which revealed huge
clean drawings in the accounts. The audit also revealed that double financings has
also been availed by the units. Further, it came to light that one of the units had
opened account with another Bank and was transacting with that Bank. Besides
calling for explanations from the concerned officials for the lack of requisite
Supervision and follow up of the accounts, operations in the account were stopped
pending decision of the future course of action.

Meanwhile XYZ & Co. bagged a sizable order for Rs. 15.00 crores from Railways for
supply of bogies within 6 months. The propertier of the firm has approached with a
request to sanction an adhoc limit of Rs. 1.00 crore for a period of 6 months purely
for execution of the railway orders. He promises that besides servicing interest on the
existing loan accounts, he would fully repay the adhoc limit within 6 months on
execution of the order.

As Branch Manager, what action you would take?

Ans.

Both accounts of the borrower have revealed huge clean drawings. The endeavor of
the Bank should be to bring back the units to rails provided the honesty and integrity
of the borrower is not doubtful and the units’ operations, in the present conditions,
would be commercially viable. The position will have to be examined through a
techno-economic viability study where after the future course of action would need to
be firmed up by the Branch. As this may take some time, the feasibility of granting
adhoc assistance for execution of the orders on hand, in the meanwhile, may be
considered after examining the following:

i) Whether the existing orders can be executed within the time schedule and it
would not result in further increase in the clean drawings.
ii) The borrower should arrange to bring in his margin for the adhoc limit of Rs. 1.00
crore sought by him.

Compiled by Mr. Sanjay Seth, Manager (Trg.), SBLC Panchkula

 STATE BANK LEARNING CENTRE PANCHKULA

iii) Besides extending the existing securities, additional collateral securities may be
insisted from the borrowers to secure the adhoc limit.
iv) Account should be monitored closely, preferably by means of a cash budget to
ensure against any possible escalation in the outstanding/clean drawings in the
accounts.
v) It should also be ensured that the payment from Railways for the supplies is
directly received for credit to the account of the units by execution of a power of
attorney by the borrower in favour of the Bank, which should be registered with
the Railways.
vi) The borrower should forthwith close the account with other bank and undertake
to route all the transactions in the account with the Bank.
vii) As the proposed arrangement is essentially a holding-on operations, the final
course of action viz. considering a Rehabilitation/nursing programme or calling
up of the advances for early recovery of the dues should be considered fast.
viii) The exercise relating to examination of staff accountability should also be
completed quickly.

6. XYZ Ltd. A small scale industry has been banking with the branch for the past 15
years. The present limits are:

M.T.L: Rs. 10 lacs; outstanding Rs. 5.5 lacs

The accounts are regular. The Company has entered into a contract with a newly
established multinational giant for regular supply of structures as a sub-contractor.
The multinational company has called for a Bank guarantee to be issued in respect of
raw materials supplied by them to XYZ Ltd. The guarantee contains a clause reading
“we are agreeable to renew the guarantee from time to time on mutually agreed
terms”. Will you agree to issue the guarantee?

Ans.

We have to ensure that ordinarily only a ‘financial guarantee’ is issued and that no
‘performance guarantee’ is issued. The Bank does not give performance guarantee,
as it is difficult to assess the technical capability of the customer to execute contacts.

Generally, guarantees are to be issued only for periods of 18 months or less. The
Bank does not issue guarantees for longer periods, as the liability will be difficult to
gauge. However, in the case of valued customers with good reputation a guarantee as
worded in the question can be issued with the prior approval of the Controlling
Authority. The guarantee provides for extension of the guarantee only on mutually
agreed terms. As and when the Bank feels that it cannot extend the commitment it
need not renew the guarantee.

Compiled by Mr. Sanjay Seth, Manager (Trg.), SBLC Panchkula