A STUDY OF RISK MANAGEMENT BY STATE BANK OF INDIA FOR SMALL AND MEDIUM SCALE INDUSTRIES

A Case Study of Bhubaneswar Branch, Orissa

PROJECT REPORT SUBMITTED FOR MASTER IN BUSINESS ADMINISTRATION (MBA)

By
SASMITA JENA
Enrollment No. : 051693739

Under the guidance of

Mr. Brajabandhu Mishra
Administration-cum-Accounts Officer Institute of Life Science, Bhubaneswar

INDIRA GANDHI NATIONAL OPEN UNIVERSITY NEW DELHI

PREFACE
The project attempts to bring out an analytical study of the various risks that involved in State Bank of India, Main Branch, Bhubaneswar, Orissa. The concept of Risk Management is being adopted in State Bank of India. The main objective of preparing this project is to analyze and diagnose the risks taken and to judge the profitability and financial soundness of State Bank of India. This study is followed by several case studies of State Bank of India.

Sasmita Jena

CERTIFICATE
This is to certify that the project entitled Risk Management by State bank of India for Small and Medium Scale Industries A Case study of Bhubaneswar branch submitted by Ms. Sasmita Jena, a MBA student of IGNOU, Bhubaneswar for partial completion of Master of Business Administration (MBA) under my guidance is a result of sincere work on this part. It is an original contribution and no part of the project has been submitted anywhere else before. I wish her all the success in life.

Mr. Brajabandhu Mishra Administrative-cum-Accounts Officer ILS, Nalco Square, Bhubaneswar

DECLARATION
I do hereby declare that the project report entitled Risk Management by State bank of India for Small and Medium Scale Industries a case study of Bhubaneswar branch submitted by me for partial fulfillment of MBA of IGNOU is an original piece of work done by me under the guidance of Mr. Brajabandhu Mishra, Administrative-cumAccounts Officer, Institute of Life Science, Nalco Square, Bhubaneswar and has not been submitted by any other for award of any other degree elsewhere in full or part.

Sasmita Jena

ACKNOWLEDGEMENT
I wish to express my appreciation and thanks to all those with whom I have had the opportunity to work and whose thoughts & insights have helped me in furthering my knowledge and understanding of the subject. Every page of this report reminds me about the moral support and guidance that was bestowed on me by the respected Guide, professors, friends and family members throughout the duration of the project. My sincere gratitude goes to my Project guide Mr. Brajabandhu Mishra, Administrative-cum-Accounts Officer and Chief Manager of SME, Mr. Kailash Chandra Dash without whose valued guidance, encouragement and inspiration the project would ever have been possible. I am also indebted to the AGM Mr. R.C Jena for giving me valuable initial guidance for the project. Last but not the least I would like to express my gratefulness to my institute and my faculty guide for guiding me through out the project. I am also grateful to my Parents for their encouragement. I am unable to mention many others who have helped me greatly but it gives immense pleasure to appreciate and thanks all those without whose encouragement and help this project would never have been completed.

Sasmita Jena

CONTENTS
CHAPTER SUBJECT Approval Letter Certificate from the Guide Declaration Acknowledgement Synopsis I II III IV V VI VII Executive Summary Introduction Organization Profile Insight to Risk Management & its Importance Credit Risk Assessment Study at the Main Branch SBI, Bhubaneswar Methodology for Risk Management Recommendations Annexures Bibliography PAGE NO.

Chapter I EXECUTIVE SUMMARY

All of Life is the management of Risk, Not its Elimination.
Walter Writson, Former Chairman of Citigroup. The term Risk can be defined as the volatility of unexpected outcomes. In statistical terms, risk is defined as the degree of variability of possible outcomes for a particular event. In financial terms, risk is always associated with loss that is expected to be incurred due to the happening of certain or non happening of certain events or activities. So understanding risk means consciously planning for the consequences of adverse outcomes and by doing so being better prepared for the inevitable uncertainty. Therefore the underlying premise of Risk management is that every entity exists to provide value for its stakeholders. All entities face uncertainty and the challenge for management is to determine how much uncertainty is to accept as it strives to grow stakeholder value. Uncertainty presents both risk and opportunity, with the potential to erode or enhance value. Risk management enables management to effectively deal with uncertainty and associated risk and opportunity, enhancing the capacity to build value. Value is maximized when management sets strategy and objectives to strike an optimal balance between growth and return goals and related risks, and efficiently and effectively deploys resources in pursuit of the entitys objectives. Hence Risk management is five step processes which are as follows: Establishing the context. Identifying the risks. Assessing the risks. Treating the risks. Ongoing monitoring and review.

Assuming and managing risk is the core activity of a banker. Globalization, liberalization and deregulation of financial markets have resulted in enhanced volatility in interest and exchange rates, rapid growth of innovations and a reduction in barriers relating to business

diversification. All of this has been aided by rapid technological development. Consequently the risks in the financial markets and the availability of instruments to analyze or manage them have multiplied. Prominent types of risk: 1. Liquidity Risk Liquidity risk is the potential inability of a bank to generate sufficient cash to meet its normal operating requirements (cash expenses and repayment of liabilities). 2. Interest Rate Risk Interest rate risk is the risk of an adverse effect of interest rate movements on a banks profits or balance sheet. Interest rates affect a bank in two ways- by affecting the profits and by affecting the value of its assets and liabilities. 3. Foreign Exchange Risk Foreign exchange risk is the chance that a fluctuation in the exchange rate will change the profitability of a transaction from its expected value. It is the risk that arises due to unanticipated changes in the exchange rates. 4. Operations Risk Operations risk is the risk that deficiencies in information systems or internal controls will result in unexpected loss. This risk is associated with human error, system failures and inadequate procedures and controls. 5. Credit Risk Credit risk or default risk involves inability or unwillingness of a customer or counterparty to meet commitments in relation to lending, trading, hedging, settlement and other financial transactions. The credit risk of a banks portfolio depends on both external and internal factors. The external factors are the state economy, wide swings in commodity / equity prices, foreign exchange rates and interest rates, trade restrictions, economic sanctions, Government policies, etc. the internal factors are deficiencies in loan policies/ administration, absence of prudential credit concentration limits, inadequately defined lending limits for Loan Officers or Credit Committees, deficiencies in appraisal of borrowers financial position, excessive dependence on collaterals and inadequate risk pricing, absence of loan review mechanism and post sanction surveillance, etc.

Among the above mentioned types of risks, credit risk is the crown jewel as the profitability and liquidity of a bank depends largely on the forecasted cash flows. The goal of credit risk management is to maximize a banks risk-adjusted rate of return by maintaining credit risk exposure within acceptable parameters. Banks need to manage the credit risk inherent in the entire portfolio as well as the risk in individual credits or transactions. The effective management of credit risk is a critical component of a comprehensive approach to risk management and essential to the long term success of any banking organization. State Bank of India manages its Credit risk through CREDIT RISK ASSESSMENT (CRA) SYSTEM. Credit Risk Assessment: The CRA takes into account the possible factors which go into appraising the risk associated with a loan. The key ingredients for assessing risks are as follows Quality of management. Capital resources. Access to supplies and the terms of supply. Quality of customers. Internal control system. Business strategy. Financial risk. Industrial risk. Management risk. Market risk.

On the basis of above factors the risks are broadly classified into the following

These risks are rated separately. The factors are duly rated, aggregated and measured to arrive at the overall risk rating i.e. a single point indicator of the risk assessment with the credit. The overall rating of an account will be the aggregate of the scores obtained under the four categories of risk factors.

Credit Rating Assessment For a company enjoying working capital facility only is rated on SET 1 only. Where as for a company enjoying both working capital and term loan is rated on SET 1 and 2 both. Rating of the company is lower of the two ratings arrived at in the sets 1 and 2. ESSENTIAL POINTS OF SET 1 AND 2 To qualify for financial assistance, the company would have to secure full marks (02) under the parameter, Compliance of Environment Regulation. Due to its supreme importance in a business, Management risk factors are assessed first and only if the company meets the sub-hurdle requirements then only other risks are assessed otherwise not. INTEGRITY / CORPORATE GOVERNANCE, TRACK RECORD and MANAGERIAL COMPETENCE/ COMMITMENT are crucial management risk factors carrying maximum 3 marks each. In case company scores zero (0) in any of the three parameters, there is no need for further assessment of risk and the proposal would be declined. LIMITATIONS While risk management provides important benefits, limitations exist. Limitations result from the realities that human judgment in decision making can be faulty, decisions on responding to risk and establishing controls need to consider the relative costs and benefits, breakdowns can occur because of human failures such as simple errors or mistakes, controls can be circumvented by collusion of two or more people.

RISK RATING SUMMARY 10

SET 1 FINANCIAL RISK PARAMETERS A. STATIC RATIOS Current Ratio TOL/ TNW PAT/ Net Sales (%) PBDIT/ INTEREST (times) ROCE (%) (Inventory/ Net Sales) + ( Receivables/ Gross Sales) (DAYS) Trends in Performance Sub-total Score (out of 38) B. FUTURE PROSPECTS Projected Profitability Non-Achievement of Projected Profitability Sub-total Score (out of 3) C. RISK MITIGATION Sub-total Score (out of 6) Aggregate financial risk score (out of 47) Qualitative Risk Factors BUSINESS RISK PARAMETERS Technology Capacity utilization Vs. Break Even Point Compliance of Environment Regulations User/ product profile Consistency in quality Distribution Network Consistency of Cash Flows Aggregate Business Risk Score (out of 20) INDUSTRY RISK PARAMETERS Competition Industry Outlook Regulatory Risk Contemporary issues Aggregate Industry Risk Score (out of 8) Full Marks 5 5 10 5 5 5 3 38 3 (-3) 3 6 6 47 (-10) 4 2 2 2 4 2 4 20 2 2 2 2 8 Marks Obtained

RISK RATING SUMMARY SET 2 FINANCIAL RISK PARAMETERS A. STATIC RATIOS Full Marks Marks Obtained

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Current Ratio TOL/ TNW PAT/ Net Sales (%) PBDIT/ INTEREST (times) Trends in Performance Gross Average DSCR for all loans Sub-total Score (out of 38) B. FUTURE PROSPECTS Projected Profitability Non-Achievement of Projected Profitability Sub-total Score (out of 3) C. RISK MITIGATION Sub-total Score (out of 6) Aggregate financial risk score (out of 47) Qualitative Risk Factors BUSINESS RISK PARAMETERS Technology Capacity utilization Vs. Break Even Point Compliance of Environment Regulations User/ product profile Consistency in quality Distribution Network Consistency of Cash Flows Aggregate Business Risk Score (out of 20) INDUSTRY RISK PARAMETERS Competition Industry Outlook Regulatory Risk Contemporary issues Aggregate Industry Risk Score (out of 8)

5 5 10 5 3 10 38 3 (-3) 3 6 6 47 (-10) 4 2 2 2 4 2 4 20 2 2 2 2 8

CHAPTER-II
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2.0 2.1 2.2 2.3 2.4

INTRODUCTION BANKING SCENARIO RISK MANAGEMENT RISK MAN A GEMENT A T BANKS CONCLUSION

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2.0

INTRODUCTION

Human needs are unlimited. Besides the three basic needs i.e. food, clothing and shelter, man has a lot of other needs. He can never fulfill all his needs. Sometimes, in order to fulfill some of needs of man, he has to take the help of financial market. Financial market is a place where exists the financial instruments, financial intermediaries and financial institutions. Banks play the role of financial intermediaries. Commercial Banks play an important role in fulfilling the human needs to a great extent A commercial Bank is a financial intermediary that operates for a profit motive. It collects saving from public by accepting their surplus as deposits and grants loans to individuals, firms and the government. The modern time banking is being revolutionized. 2.1. BANKING SCENARIO - (Development in Commercial Banking) Financial intermediaries are going through significant changes all over the world under the impact of deregulation, technological up gradation and financial innovations. Indeed the traditional face of Banking is no longer as it was even a few years ago. The way of financial services is provided are changing dramatically. In many countries, Banks are now providing services that do not come under the domain of traditional banking. The old institutional demarcations are getting increasingly blurred. Consequently, increased competition from non-banking intermediaries has led to a decline in traditional banking where in banks only accepted deposits and made advances that stayed on their books till maturity. The business of banking has been moving rapidly in recent years to a 'one stop shop' of varied financial services. This process of transformation is particularly striking in emerging market economies like India.

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The gross bank and credit of select commercial banks recorded marginally higher growth during 2007-08 as compared with previous year. Source : Report on trend and progress of Banking in India, 07-08 by RBI.
SI. No. 1 2 3 4 Sector Priority Sector Industry (Medium and Large) Housing Non-banking financial companies 5 Wholesale trade (Other than food 6 7 procurement) Other Sector Total 12595 53587 18.0 12.5 9481 84678 11.5 17.5 2614 14.6 1939 9.5 Absolute 20845 9487 6203 1843 2006-07 Present 13.5 5.8 38.4 23.6 2007-08 (Amount in Rs. Crore Absolute Present 28540 16.3 28011 16.3 12,308 4399 55.1 45.6

Priority Sector Industry (Medium and Large) Housing Non-banking financial companies Wholesale trade (Other than food procurement) Other Sector

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Priority Sector Industry (Medium and Large) Housing Non-banking financial companies Wholesale trade (Other than food procurement) Other Sector

The overall exposure of commercial banks to sensitive sectors comprising capital market, real estate and commodities under went a compositional shift during 2007-08. There was a jump in housing finance so much so that the overall exposure to sensitive sectors of most bank groups has gone up.

Lending to sensitive sector by commercial banks.

SI. No. 1 2 3 4 Advances to Capital Market Real estate Commodities TOTAL Outstanding at 31st March 2007 4082 9012 2008 3504 12464 9979 25947 Percent to total 2007 14.8 43.3 41.9 100.0 2008 10.5 52.0 37.5 100.0

9727 22821

So in the developing scenario, Banks in the process of financial intermediation are conformed with various kinds of risks. These risks are of both financial and non-financial nature.

RISK MANAGEMENT:
Risk Management is present in all aspects of life; it is about the every day trade off between an expected reward and potential danger, in the business world, we often

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associate risk with some variability in financial outcomes. However, the notion of risk is much larger. The notion of risk management today is much necessary due to the globalization; increased competition and regulatory changes are creating new business and markets. Before defining the Risk management it is important to understand the two term Risk and Management separately. RISK: Risk can be defined as a relative measure of the degree of variability of possible outcomes over time. The etymology of the word Risk can be traced to the Latin word Rescum meaning risk at sea or that which cuts. Risk is associated with uncertainty and reflected by way of change on the fundamental/basic i.e. in case of business it is the capital, which is the cushion that protects the liability holders of an institution. MANAGEMENT: Management may be defined as The process of planning, organizing, leading and controlling the resources and activities of an organization in order to fulfill its objectives most cost effectively. In view of all these definitions, it is easy to see that we all are exposed to risks and management of them. From an organizational stand point it is also easy to see that may of us are in roles of managing to fulfill the objectives of the organization. Different organizations may have variety of objective such as profit, growth, and public service or like that, however the continuum of objectives is very similar. The basic objective of an organization can easily understood from following figure.

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In the process of fulfilling of the basic objectives of any organization. Risk management takes a vital role. As we know that Risk is inherent in any walk of life. The Risk management process starts with Identification of risk and passing through various stages such as risk removal, risk redumption, risk evaluation and risk assumption it ends with the risk transfer finally. The Risk management structure is as shown below graphically. RISK MANAGEMENT STRUCTURE

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RISK MANAGEMENT AT BANKS:

Till recently all the activities of banks were regulated and hence operational environment was not conductive to risk taking. Better insight, sharp intuition and longer experience were adequate to manage the limited risks. Business is the art of extracting money from other's pocket, sans resorting to violence. But profiting in business without exposing risk is like trying to live without being born. Every me knows that risk taking is failure prove as otherwise it would be treated as sure taking. Hence risk is inherent in any walk of life in general and in financial sector in particular. Of late Banks have grown from financial intermediary into a risk intermediary at present. In the process of financial intermediation the gap of which becomes thinner and thinner, banks are exposed to server competition and hence are compelled to encounter various types of financial and non-financial risk. Risks and uncertainties form an integral part of banking which by nature entails taking risks.

CONCLUSION
As the risk in present market scenario is inherent in any walk of life it also more important incase of financial concerns the bank should introduced a proper structure for risk management.

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Chapter III Organizational Profile

3.0 3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 How it began

Banks Mission Banks Vision Focus Strengths of SBI Use of Information Technology at Bank SBI challenges and responses Development of the Bank over the years Conclusion

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PROFILE OF THE BANK

3.0

HOW IT BEGAN

State Bank Of India was previously called as IMPERIAL BANK OF INDIA. It was nationalized and rechristened as STATE BANK OF INDIA in the year 1st July 1955. The respected former Finance Minister, Dr.John Matthai was appointed as the first Chairman of the Bank. The newly christened State Bank of India responded very well to Indias needs. In 1955 State Bank Of India began spreading its wings from PORT BLAIR to BASSEIN, from CHANDIGARH to TIRUPATI and all over the nation. Not many financial institutions in the world today can claim the antiquity and majesty of the State Bank of India. Founded nearly two centuries ago with the primary intent of imparting stability to the money market, the Bank from its inception mobilized funds for supporting both the public credit of the Company's Governments in the three presidencies of British India and the private credit of the European and Indian merchants. From about the 1860s, when the Indian economy took a significant leap forward under the impulse of quickened world communications and ingenious methods of industrial and agricultural production, the Bank became intimately involved in the financing of practically every trading, manufacturing and mining activity of the sub-continent. Although large European and Indian merchants and manufacturers were undoubtedly the principal beneficiaries, the 'small man' was never ignored as loans as low as Rs.100 were disbursed in agricultural districts against gold ornaments. Added to these functions the Bank also carried out numerous central bank functions till the creation of the Reserve Bank in 1935.

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Adaptation to a changing world and the needs of the hour has been one of the strengths of the Bank. In the post-Depression era, for instance, when business opportunities became extremely restricted, rules laid down in the book of instructions were relaxed to ensure that good business did not go past. Yet seldom did the Bank contravene its rules or depart from sound banking principles to retain or expand its business. An innovative array of offices, unknown to the world then, was devised in the form of branches, sub-branches, treasury pay-offices, pay offices, sub-pay offices and outstations to exploit the opportunities of an expanding economy, internal discipline and above all credibility. An impeccable financial status, consistent maintenance of the lofty traditions of banking and observance of a high standard of integrity in its operations helped the Bank gain a preeminent status. No wonder the admiration for the Bank was universal as key functionaries of the India Office and Government of India, successive finance ministers of independent India, Reserve Bank governors and representatives of the chambers of commerce showered encomiums on it. Modern day management techniques were also very much evident in the good old days. Years before corporate governance had become a buzzword; the Bank's board functioned with a high degree of responsibility and concern for the shareholder. An unbroken record of profits and a fairly high rate of dividend in all these years of functioning ensured the faith and satisfaction of the stakeholders. Prudential management and asset-liability management not only protected the interests of the Bank but also ensured that the obligations to customers were also met. The traditions of the past continue to be upheld even to this day as the State Bank gears itself to meet the emerging challenges of the new millennium.

3.1 MISSION OF THE BANK:

To retain the bank's position as the Premier Indian Financial Services Group, with world class standards and significant global business committed to excellence in customer, shareholder and employee satisfaction and to play a leading role in the expanding and diversifying financial services sector while continuing emphasis on its development banking role.

3.2 VISION STATEMENT (QUALITATIVE)

Perspective, world class standards of efficiency and Premier Indian Financial Services Group with global professionalism and core institutional values. Retain its position in the country as a pioneer in development banking. Maximize shareholder value through high sustained earnings per share. To make it an institution with a culture of mutual care and commitment, a satisfying and exciting work environment and continuous learning opportunities and excellence in customer service. ROLE OF STATE BANK: The State Bank played a major role in projects like 1. The Bhakra Nangal Project 2. The Bhilai Steel Plant 3. The Hindustan Aeronautics 4. The Neyveli Lignite corp 22

5. The Bhabha atomic research Centre.

3.3 FOCUS:
State Bank was mainly focusing on financial aspects. The rich economy of India provided a need for the growth of foreign exchange and bilateral trade which in turn required an enlarged Foreign Department. Small Scale Industries were in focus, a pilot scheme was drawn up for them. Indirect Financing was adopted for the growth of Agriculture. AMBIENCE POLICY OF SBI Ambience means the character and atmosphere of a place. A good ambience attracts customers, generates enthusiasm, radiates energy, improves efficiency and enhances the professional image. SBI has derived an Ambience Policy, which is based on following objectives a. Uniform approach b. Focused and concerted efforts for creating the required ambience at branches c. Excellent maintenance of premises and furniture d. Create awareness to all. For the Implementation of the above two approaches were followed i. Project Metro-Ambience for Metro Branches ii. Project Universal-Ambience for all Urban, SU and Rural Branches. Categories: Branches are classified under the following four heads Platinum: Excellent Ambience Gold : Good Ambience Silver : Tolerable Ambience Bronze- : Unacceptable

3.4 STRENGTHS OF STATE BANK OF INDIA

NETWORK: Largest commercial Bank (more than 9000 Branches) in the country and abroad with presence in all time zones (32 countries) of the world. It also maintains comprehensive correspondent relationship with 593 top ranking banks in 127 countries. SBI is a macro economy proxy for the Indian economy. According to the chairman Sri A K Purwar, the Bank plans to expand its overseas offices to 75 in 38 countries, presently Bank has overseas network of 52 offices. As at the end of March 2004, SB Group has 13635 branches.

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Super-Shoppe: SBI emerged as a Financial services Supermarket (Super-shoppe), market leader having expertise in many financial services like Gold Banking, Factoring, Forfeiting, Credit Card, Treasury Management, Mutual Fund, Insurance and enormous customized products to cater the needs of each and every customers. Market share: SBI holds around 20% market share in Deposit and Advances. Its business is 4 times greater than that of its next 2 competitors (PNB & BOB). 13635 Branches of SB Group cover remotest part of the country and share 27.4 % in deposits and 24.4 % in advances (as on march 2003) Work Force: SBI has 2.09 lacs qualified and dedicated work force specialized in various areas of banking and whose skills are continuously updated through on job and institutional training. Brand Name: Excellent Brand name, synonymous with trust and are security. More than 7.30 lacs shareholders are associated with the bank and SBI keep its position always in TOP TEN in terms of Market capitalization. Loyal Customers: 90 million (115 m for SB Group) loyal and trustworthy customers. It has strong relationship with 80% top corporates. Every 10th Indian is an effective customer of SBI and is focused on MIS, decision support system, office automation and data processing capabilities. Training: Excellent in-house training infra-structure. 4 staff colleges, 52 Staff Training Colleges having training facility for more than 60000 employees per year. Specialized Branches in all segments and for big corporates. Decentralized decision-making by Senior Manager within the business units. Cheapest Cost of funds available in the market. Strong Government and Political Support.

3.5 USE OF INFORMATION TECHNOLOGY AT THE BANK

SBI is adopting technology aggressively and extensively. It is cost effective, comprehensive which is focused on MIS, decision support systems, office automation, data processing capabilities and customer satisfaction. .Technology helps in Improved customer service, Customer Relationship management, Better management of Bank funds and risks, Reduced transaction cost, Increased staff productivity, Management and monitoring of NPAs, Fulfilling US GAAP requirements, Providing cash management services to customers, Facilitate to launch and market new products effectively, 24

SINGLE POINT VIEW OF CUSTOMER STATE BANK OF INDIA is having 10137 branches of SBI are under CBS as on 31st March 2005, and all SBI Connect branches are expected to be net-worked by the end of September 2006 and remaining branches by the end of March 2007. All 16537 branches of State Bank Group are fully computerized. Over 8500 fully networked Group ATMs spread over 1400 centers. 1000 more ATMs (including 600 of SBI) to be installed during 2005-06. Internet Banking Facilities in 1800 branches at 404 Centers provided to 4.15 lacs individual retail customers and 18232 corporate (as on 24.11.04) 15 MICR Cheque processing centers. Remote Login Facilities to corporates in over 250 Branches. Other Products and Packages STEPS, Govt. Software, PPF Software, ELENOR in, ELRECON, SFMS/ SWIFT, OLTAS in all of our important Branches. Total No. of SBI Branches 10137 No. of SBI Associates Branches 6400 ATMs 8500 CBS Branches 1100 Computerized 16537

Benefits of IT in SBI: Cost effective: CBS cuts cost of high volume, IOA transactions & reconciliation; SWS reduces staff costs, Centralized structure will reduce manpower costs. Transaction processing capabilities harness rapid business growth. Higher Efficiency: Straightway transactions and reconciliation, reduced system complexity, faster launch of new products, improved funds management and higher productivity of staff. Internal Controls: error free, near real-time, easy retrieval; Audit of remote branch; Timely submission of whole bank BS, Fs and Stat. Returns; Improved ALM, Treasury & Risk Management; Better regulatory compliance US GAAP etc; On-line monitoring of customer/ segment exposure/ centralized tracking of NPA; Analyses of profitability across customers and products. Customer Service: Anytime, Anywhere & Any Device Banking; Customer satisfaction will lead to delight. Technology will boost CUSTOMER: EMPOWERMENT through IMPROVED SERVICE QUALITY, BANK: TOOL to meet COMPETITION and retain & enhance MARKET SHARE, CONTROLLERS: EFFECTIVE CONTROL & QUALITATIVE MONITORING, and BRANCH: Reduced office work & focus on MARKETING & CROSS SELLING.

3.6 SBI CHALLENGES AND RESPONSES:

CHALLENGES STRATEGY

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1. Increasing competition in Retail banking.

Restructuring and formulation of Strategic Business Units. Centralized Processing of Credit approval system. Business process Re-engineering. Business process Re-engineering. Incentives for staff. Early exit for staff. Business performance management sy De-risking of Investment Portfolio. Accent on loan growth. Thrust on fee income services charges revised Recently.

2. Change management

3. Trading profit under pressure

SALIENT FEATURES: Redesigning of the Business Processes. Creation of centralized processing centers. Performance management re-designs.

3.7 DEVELOPMENT OF THE BANK OVER THE YEARS:

1959: Subsidiary Banks Act was passed which led to the birth of State Bank Group. State Bank Of Hyderabad was the first subsidiary created followed by 1. State Bank of Bikaner. 2. State Bank of Jaipur. 3. State Bank of Indore. 4. State Bank of Travancore. 5. State Bank of Patiala. 6. State Bank of Mysore. 7. State Bank of Saurashtra. 1961: State Bank Staff College was inaugurated in 2nd December to hone skills of Officers and orient new entrants into this fold. 1964-1967: More Local Head Offices were created for the purpose of enhancing efficiency. 1968: State Bank launched its direct financing of agriculture and its allied activities.

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1970: Induction of IIM Ahmedabad as consultants in the Banks reorganization. Strategy and modern tools of management were introduced leading to specialization of sectors like Agricultural , Commercial ,Institutional , SIB and Personal Banking even as early as the seventies supported by new age management mantras of Performance Budgeting and Long Range Planning. 1972: Merchant Banking division, a pioneering venture of the bank was set up. State Bank of India provided for the poverty alleviation schemes with its end to end financing. In order to recognize the potential of Small industries and business in Indias financial strength, a set of schemes was set up in order to promote the sectors like Entrepreneurial Development Scheme, Equity Fund Scheme , Self employed professionals, transport operators, they were all part of successful exercise. 1980: State bank saw the arrival of financial conglomerate. 1985: Authorized capital of the bank was raised from Rs. 20 crores to Rs.200 crores. The issued and paid up capital was increased from Rs.5.62 crores to Rs.50 crores. 1986: SBI Capital Markets Ltd was created. 1987: SBI Mutual Fund (a trust) was created. 1989: SBI got laurel (international) from Moodys and Standard and Poor (two reputed international rating agencies). The 90s saw the era of computerization 1990: SBI established State Bank Institute of Information and Communication Management whose main aim was to create computer savvy employee base. 1991: SBI Factors and Commercial Services Ltd began its operations. The authorized capital increased from 200crores to 1000crores rupees. The issued and subscribed capital was increased from 150 crores to 200 crores rupees. 1994: Issued and subscribed capital was further raised through public rights and employee share issue from Rs.200 crores to Rs.473.82 crores. 1995: SBIs first ATM machine was installed. 1996:To capture foreign investments ,SBI mobilized $370 million through Global Depository Receipts ( it was the first Indian Commercial Bank which was adjudged by the Asian Equity Issue of the Year by World Equity Journal.) 1997: Global Link Services set up to provide international corresponding banking services to various Banks branches as well as to other banks. 1998: Collaborated with GE capital and launched SBI Cards was launched. Other highlights in 1990 were: 1. SBI co-sponsored two main depositories. 2. McKinsey was appointed as consultants. 3. Bank was grouped under 4 heads --- corporate, retail, international, associates to meet their demands. 4. SBI was identified to garner deposits from Non Residents Indians and overseas corporate bodies. 2000-2001: Ventured a new foray into Life Insurance. Internet banking and Networking of ATM were developed. 2002-2003: Product customization was developed for professionals like Doctors, Teachers, Police, and Lawyers. 1. SBI tied up with leading Private and Public sector undertakings for personal loans. 2. Online introduction of collection and transmission of tax. 3. The bank also acted as Chief promoter of Clearing Corporation of India Ltd. For the purpose of imparting liquidity through widening debt mark. 2004:13600 branches were computerized. ATM network usage extended to VISA and Master Cards holders.

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Bank set up SBU to capture niche markets in mid-corporate, personal banking, small and medium enterprises.

3.8 CONCLUSION ABOUT THE BANK:

The SBI acted as a true catalyst for the Indian economy. The bank has 65 offices in 29 countries and is still on the path of growing. In sync with technological advancement towards a centralized data base, the SBI developed a core banking solution both for domestic and overseas branches of the group. The SBI proved to be the largest network in India of interconnected ATMs. STATE BANK ELECTRONIC PAYMENT SYSTEMS (STEPS) provided internet banking for customers with value additions like e-mail, e-pay and other facilities for corporate customers. Trade finance, ALM and treasury solutions, RTGS, RBI-EFT, SBI-connect, the Wide Area Networking project carrying data, voice and images on real time basis. The State Bank Group was also committed to corporate governance. The bank was also known for providing training to its staff. The bank has 45 Staff Training centres across the country to keep the staff abreast of techniques and developments. The four apex training institutions were all ISO-9001 certified.

CHAPTER IV AN INSIGHT TO RISK MANAGEMENT IN SBI

Banking in India is passing through a major phase of metamorphosis under the financial sector reforms initiatives of the Government of India and the Reserve bank of India. It can be postulated that todays rapid changes will only accelerate in the future and the change will reshape the banking business forever. For example, In the changed environment, as the intermediation moves increasingly out of banking. Banks must decide how to position themselves in the new market. Strategic business positioning effort implies that each bank should continue to transform themselves into tough 21st century competitors. To navigate successfully in the uncertain water of the future, banks need to develop a set of strategies that is right for their target market. Gradual integration of the domestic markets with the external markets and increasing use of information and technology, the risk associated with the banking system are assuming more complex form. As a result, improving organizational effectiveness has been adopted as one of the major agenda for the second phase of the banking sector reform. This clearly implies that the touch stone of the success of any individual bank will be its ability to manage risks. The capability of risk management in the banks is gradually emerging as a competitive advantage in itself. Those banks that can manage risk better than their competitors are likely to be rewarded with both higher income and more consistent earnings. Business of banking is shouldering risk. The portfolio of risk in the banking can be broadly classified into two groups: Balance sheet risks. Off- balance sheet risks. Balance sheet risks include leverage risk, capital adequacy, asset management risk (liquidity and credit risk), liability management risk, interest rate risk.

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Off-balance sheet risks include technology risk, the regulatory risk, operating risk and the customer risk. New risks are abound in both number and type, however it needs to be appreciated that these risks stem from customer demands for innovative financing, sophisticated information technology, volatile regulatory regimes etc. The art of risk management lies in knowing which, when and how much of risk to accept to strengthen the bottom line. But first, the able banker must be in a position to appreciate and assess the risk. Therefore risk management is nothing but a judicious mixture of both art and science. The scale of competition has become sharper and more focused day by day. The essence of a comfortable margin in a venture has become history and the companies are required to operate on a slender margin to keep business afloat. The Banks are also not sheltered from this intense competition. Booking of business is the compulsion for the survival. In such a scenario, Risk Management is essence and also the need of the hour. Any model especially a financial model is a time dependent entity. This entity is always a combination of quantifiable and unquantifiable parts commonly referred to as objective and subjective elements in assessment. The degree of objectivity and subjectivity in a particular scenario is dependent on the level of mathematical techniques developed and employed in a particular place. In financial institutions like banks, the judgmental input at the operating level has a matching role to play to supplement the quantitative methods applied to assess the risks associated with the credit proposal. The risk equivalence can be expressed as follows: Risk in a financial proposal = Fixed part + Perturbative Fluctuations = Quantifiable + Unquantifiable = Objectivity + Subjectivity. There are two dimensions to Risk fluctuations: Even the fixed part has its elements of uncertainty which can be termed as an aberration or interruption on the system. Measurement of such an interruption is indeterminate to the extent of limitations of the observer in a particular framework. The subjectivity swings from one extreme to the other. The extent of risk and the human capability to identify that risk becomes central to this measurement process. State Bank of India manages its Credit risk through CREDIT RISK ASSESSMENT (CRA) SYSTEM.

29

CHAPTER V CREDIT RISK ASSESSMENT

5.0 5.1 5.2 5.3 5.4 5.5 5.6

Types of Credit Assessment Applicability and Structures of Credit Risk Assessment Rating on a Scale Impact of Rating on Exposure and Pricing Review of Rating Effecting Date Term Loan Ratings

30

The CRA takes into account the possible factors which go into appraising the risk associated with a loan. The key ingredients for assessing risks are as follows Quality of management. Capital resources. Access to supplies and the terms of supply. Quality of customers. Internal control system. Business strategy.

5.0

Types of Credit Risk Assessment

On the basis of above factors the risks are broadly classified into the following Financial risk. Industrial risk. Management risk. Market risk. These risks are rated separately. The factors are duly rated, aggregated and measured to arrive at the overall risk rating i.e. a single point indicator of the risk assessment with the credit. The overall rating of an account will be the aggregate of the scores obtained under the four categories of risk factors. Financial risk The financial risks are assessed on the basis of a range of scores for different financial or performance parameters through benchmarks of corporate performance. The overall financial risk is assessed in three parts which are as follows: 1. Quantitative ratios: The ratios that look into the borrower units i.e. Liquidity, Profitability, Turnover and efficiency of operations are considered. 2. Quantitative Industry Division: The various indicators are also compared with that of others in the industry.

3. Qualitative Financial Factors: Here financial risks are also assessed on the basis of certain Qualitative factors that could have impact on the financial and profitability of the borrowing company, Such as contingent liabilities, auditors qualifying remarks and accounting policies. For example valuation of inventories, capitalization, depreciation, revaluation etc. A negative score up to 10 can be given on the basis of the negative impacts. Industrial Risk Apart from the basic strength of the company, Risks are also attributed to exposure on the account of the industry in which the company is operating. The various factors under industrial Risks are as follows:

31

1. Competition faced from concerns engaged in the same or similar line of activity and the market for their products. 2. Industry and its trends, the cyclicality in the industry trade cycle. 3. The Regulatory risks due to various governmental controls, checks and inspections incorporating aspects of labor and environment. 4. The technology levels of the unit especially in relation to pace of developments taking place in the country and abroad. A set of value statement is furnished to facilitate assessment of risks and consequently scores. Management Risk Efficient management to a business is like Backbone to a human body. The Management of a Company or unit means the promoters or directors or partners and the key operating functionaries. The ability and response of the management of a company to the various challenges posed by the environment has a bearing on the possible risk of default. Therefore following are the parameters for judgment of Risks associated with management. 1. Integrity based on the past experience of the Bank, in respect of this or any other account, as also based on other information, reports etc. 2. Expertise, Competence, and Commitment of the management. 3. Track record of the management in running successful business in the particular or any other field. 4. Structure and systems that have been laid down in the concern. 5. The perception of the capital market of the company and promoters. A set of value statements for determining management risk scoring is given. Due to its supreme importance in a business, Management risk factors are assessed first and only if the company meets the sub-hurdle requirements then only other risks are assessed otherwise not. Business Risk: Following are the parameters for the judgment of the risks associated with market. 1. Technology. 2. Entry barriers into the industry. 3. Brand Equity. 4. Rate of growth of market share. 5. Dependence on one or few buyers. 6. Range of products. 7. Area of operation. 8. Numbers of orders in hand. 9. Market trends. 10. Product life cycle. 11. Capacity utilization vs. Break Even point. 12. Availability of new markets. 13. Quality control measures. 14. The product or user characteristics, the alternatives or substitutes available to the buyers etc.

32

15. The inputs profile, the availability of raw materials, infrastructure and their pricing. 16. Distribution Network. 17. Consistency of cash flows. A set of value statements for determining business risk scoring is given. To qualify for financial assistance, the company would have to secure full marks under the parameter, Compliance of Environment Regulations.

5.1 Applicability and Structures of Credit Risk Assessment

1. For a company enjoying working capital facility only is to be rated on SET 1 only. 2. For a company enjoying both working capital and term loan is to be rated on both SET 1 and SET 2. Rating of the company is lower of the two ratings arrived at in the sets 1 and 2. SET 1: A. FINANCIAL RISK (a) Static ratios: Serial No. 1 2 3 4 5 6 7 Ratios Current ratio TOL/TNW PAT/ Net sales (%) PBDIT/ Interest Return on Capital employed (ROCE) (%) Inventory/ Net Sales + Receivables / Gross Sales (Days) Trends in Performance TOTAL Score 3 projected -3 3 Score 5 5 10 5 5 5 3 38

(b) Future Prospects: Serial number Parameters 1 Projected Profitability 2 Non-Achievement of profitability TOTAL

(c) Risk Mitigation: Collateral Security or Financial Standing Serial No. Parameters Score 1 Collateral security/ financial standing 6 TOTAL 6 B. BUSINESS RISK Serial No. 1 2 Parameters Technology Capacity Utilization Break Even Point Score 4 vs 2

33

3 4 5 6 7 C. INDUSTRY RISK Serial No. 1 2 3 4

Compliance of environment regulations User/ Product Profile Consistency in quality Distribution Network Consistency of cash flows TOTAL Parameters Competitions Cyclicality/ Industry Outlook Regulatory Risk Contemporary Issues like WTO, etc TOTAL

2 2 4 2 4 20 Score 2 2 2 2 8 Score 3

D. MANAGEMENT RISK Serial No. 1

Parameters Integrity: sole proprietary firm / partnership firm / private Ltd. Companies Or Integrity (for Corporate) : Corporate Governance 2 Track Record 3 Managerial Competence / Commitment 4 Expertise 5 Structure and Systems 6 Experience in the Industry 7 Credibility: Ability to meet sales projections 8 Credibility: Ability to make profit projections 9 Payment Record 10 Strategic Initiatives 11 Length of relationship with the Bank. TOTAL E. QUALITATIVE FACTORS: Negative Parameters Serial No. Parameters 1 Marks under qualitative factors SUMMARY: Risk Category

3 2 2 2 2 2 2 2 2 2 25 Score -10

Sub-Total Score

Total Score 34

1. Financial Risk Static Ratios Future Prospects Risk Mitigation: Collateral Securities / Financial Standing 2. Business Risk 3. Industry Risk 4. Management Risk TOTAL 5. Qualitative Factors (Negative parameter) 38 03 06 20 25 25 100 (-10) 20 25 25 100 (-10) 47

35

6. Quantitative Industry Comparison Ratios for Companys comparison ratio as per (A) their latest audited financials (B) Current Ratio TOL/ TNW PAT/ Net Sales Inventory/Net Sales + Receivables / Gross Sales (Days) Industry Average is an approximation and has its limitations, still its comparison with the ratios of a particular company indicates the degree of variance on this score. Variance of large degrees is taken into note as a measure of abundant precaution. SET 2: A. FINANCIAL RISK (a) Static Ratios: Serial No. 1 2 3 4 5 6 Ratios Current Ratio TOL/ TNW PAT/ Net sales (%) PBDIT/ Interest Trends in Performance Gross Average DSCR TOTAL RANGE >=2.00 >=1.80 >=1.60 >=1.40 >=1.25 < 1.25 (b) Future Prospects: Serial number Score 5 5 10 5 3 10 38 Latest Industry Average figures as per CMIE database (C) Comparative position Of B vs C Better At par Worse

Gross Average DSCR (for all loans) SCORE 10 8 6 4 2 0 Parameters Score

36

1 2

Projected Profitability Non-Achievement projected profitability TOTAL

3 of -3 3

(c) Risk Mitigation: Collateral Security or Financial Standing Serial No. Parameters Score 1 Collateral security/ financial 6 standing TOTAL 6 B. BUSINESS RISK Serial No. 1 2 3 4 5 6 7 C. INDUSTRY RISK Serial No. 1 2 3 4 Parameters Technology Capacity Utilization vs. Break Even Point Compliance of environment regulations User/ Product Profile Consistency in quality Distribution Network Consistency of cash flows TOTAL Parameters Competitions Cyclicality/ Industry Outlook Regulatory Risk Contemporary Issues like WTO, etc TOTAL Score 4 2 2 2 4 2 4 20 Score 2 2 2 2 8

37

D. MANAGEMENT RISK Serial No. 1

2 3 4 5 6 7 8 9 10 11

Parameters Integrity: sole proprietary firm / partnership firm / private Ltd. Companies Or Integrity (for Corporate) : Corporate Governance Track Record Managerial Competence / Commitment Expertise Structure and Systems Experience in the Industry Credibility: Ability to meet sales projections Credibility: Ability to make profit projections Payment Record Strategic Initiatives Length of relationship with the Bank. TOTAL

Score 3

3 2 2 2 2 2 2 2 2 2 25

E. QUALITATIVE FACTORS: Negative Parameters Serial No. Parameters Score 1 Marks under qualitative -10 factors

SUMMARY: Risk Category Score

Sub-Total Score

Total

38

1. Financial Risk Static Ratios Future Prospects Risk Mitigation: Collateral Securities / Financial Standing 2. Business Risk 3. Industry Risk 4. Management Risk TOTAL 5. Qualitative Factors (Negative parameter) 38 03 06 20 25 25 100 (-10) 20 25 25 100 (-10) 47

6. Quantitative Industry Comparison Ratios for Companys comparison ratio as per (A) their latest audited financials (B) Current Ratio TOL/ TNW PAT/ Net Sales Inventory/ Net Sales + Receivables / Gross Sales (Days) Latest Industry Average figures as per CMIE database (C) Comparative position Of B vs C Better At par Worse

39

Structure applicable to both the sets 1and 2: Risk Factors Quantitative (Static/ Dynamic) Financial (maximum score) a) Static Ratios (Out of maximum 38) b)Future Prospects (Out of maximum 3) c) Risk Mitigation (Out of maximum 6) Qualitative (maximum -10) Term Loam Parameters (Aggregating 25) Business Risk Industry Risk Management Risk TOTAL Scoring/ Weightage out of 100 Working Capital Advances New Units # 25 Term Loan Existing units 25 New units# 25

Existing Units Risk 47

25 20 8 25 100 25@ 10@ 40@ 100

25 25@ 10@ 40@ 100

25 25@ 10@ 40@ 100

In the case of existing units this score (out of 25) is to be added to the financial score (out of 47) and the total normalized out of 25 to the nearest whole number, provided the term loan is for a related project. @ The Business risk score and, Industry Risk score is multiplied by a factor of 1.25 each while the Management Risk scores by a factor of 1.6 and rounded off.(The multipliers are used to facilitate aggregation of 100) # A new unit in this context refers to a newly incorporated company /firm and should continue to be regarded as new for a period of three years. However, in the case of companies/ firms promoted by an established group, the sanctioning authority takes a view after one years of performance. QUANTITVE (DYNAMIC) INDUSTRY COMPARISON 6. Quantitative Industry Comparison

40

Ratios for Companys comparison ratio as per (A) their latest audited financials (B) Current Ratio TOL/ TNW PAT/ Net Sales Inventory + Receivables / Net Sales (Days)

Latest Industry Average figures as per CMIE database (C)

Comparative position Of B vs C Better At par Worse

Although the Industry Average is an approximation and has its limitations, still its comparison with the ratios of one Company indicates the degree of variance on this score. Variance of a large degree is to be taken note of a measure of abundant precaution. However, all the variances are examined and commented as a collateral tool for hedging the inherent risk that these variances represent. This analysis forms an integral part of the Companys risk assessment under financial risk. APPLICABILITY OF SETS 1 AND 2 TO WORKING CAPITAL AND TERM LOAN FACILITIES In case of company enjoying working capital facilities only, the risk assessment is done on parameters listed in set 1 only. In case of company already enjoying working capital facilities from the bank and applying for a term loan facility will have two ratings one for working capital facility and the other for the term loan facility. After one full year of running from the date of commissioning of the plant/ machinery (for which the term loan facility has been availed), the company is rated on both the sets 1 and 2. The lower of the two ratings is the rating awarded to the company. Let the ratings arrived at in the two sets (1 and 2) be as under: Sets Marks Rating 1 73 SB3 2 64 SBTL4 Lower of the above two ratings is SB4. Hence the risk rating awarded to the company enjoying both working capital and term loan facilities is SB4. Once the term loan outstanding is liquidated, the risk assessment of the company is done on the parameters listed on the Set 1 only.

5.3 Rating on a Scale

The accounts are rated on an 8- point scale from SB1 to SB8 and SBTL1 to SBTL8 pertaining to working capital loan and term loan respectively. The rating scale is as follows:

41

 SB1/SBTL1 >= 90. SB2/SBTL2 >= 75. SB3/SBTL3 >= 65. SB4/SBTL4 >= 50. SB5/SBTL5 >= 45. SB6/SBTL6 >= 35. SB7/SBTL7 >= 25. SB8/SBTL8 < 25 Out of maximum Score of 100. HURDLE RATE SB4 or SBTL4 is the hurdle rate for new connections / enhancements in case of existing accounts in terms of the new loan policy. A few exceptions:1. Approved rehabilitation plan under FIBR. 2. Availability of central government guarantee. 3. Other security/collateral 4. Strategic reasons. 5.3 Impact of the rating on Exposure and Pricing: The purpose of CRA is to measure and grade risks .While quoting the interest rate, higher the risk higher the prices will continue through exceptions are permitted. PRICES DRIVEN BY RISK RATING AND THE INDICATIVE LINKAGE: FACILITY RATINGS RANGE OF INTEREST RATES 1. Working Capital SB1 SB2 SB3 SB4 SB5, 6, 7, 8 SBTL1 SBTL2 SBTL3 SBTL4 SBTL5, 6, 7, 8 SBAR+1.25% SBAR+1.75% SBAR+2.25% SBAR+3% SBAR+3.5% SBMTLR+1.25% SBMTLR+1.75% SBMTLR+2.25% SBMTLR+3% SBMTLR+3.5%

2. Term loan

5.4 Review of Rating:

42

The CRA need not necessarily be done as part of renewal but is done annually based on the audited financial results. The risk rating is applicable for a subsequent period of 12 months with the renewal proceedings simultaneously or subsequently, as soon as the balance sheet is received the risk rating is done. For accounts where the CRA is to be reviewed annually the risk rating is applicable for a period of 12 months. For accounts where the CRA is to be reviewed on half yearly basis, the risk rating is applicable for six months.

5.5 Effective Date:

The effective date of CRA is 6 months from the date of balance sheet(CRA in respect of balance sheet date 30.04.06 the effective date is 1.11.06 and the corresponding interest rate is applicable from the effective date of CRA) . Based on this necessary refund or recovery of interest is made. These guidelines are all applicable to all accounts with Working Capital limit of Rs 1 crore and above regardless of market segment.

FINANCIAL RISK: WORKING CAPITAL

Static Ratios Maximum Score: 38 1. Current Ratios (CR) (Current Assets/ Current Liabilities) Range >= 1.33 >= 1.25 >= 1.17 >= 1.10 >= 1.00 < 1.00 Score 5 4 3 2 1 0

2. TOL/ TNW (Total Outside Liabilities/ Tangible Net Worth) Range Score <= 1.50 5 <= 2.00 3 <= 2.50 2 <= 3.00 1 > 3.00 0 3. PAT/ Net Sales (%) (Profit After Tax/ Net Sales) Range >= 7.50 >= 6.00 >= 4.50 >= 4.00 >= 2.50 < 2.50 Score 10 8 6 4 2 0

43

4. PBDIT/INT. (Profit Before Depreciation, Interest and tax/ Interest) Range >= 3.50 >= 3.00 >= 2.50 >= 2.00 >= 1.50 < 1.50 Score 5 4 3 2 1 0

5. Return on Capital Employed (ROCE) ( PBDIT/ Total Assets) Range >= 15.50 >= 12.50 >= 10.00 >= 8.50 >= 7.00 < 7.00 Score 5 4 3 2 1 0

6. (Inventory/ Net Sales) +( Receivables/ Gross Sales) (Days) 7. (Turnover of current assets) Range <= 90 <= 120 <= 150 <= 180 <= 210 > 210 Score 5 4 3 2 1 0

8. TRENDS IN PERFORMANCE: Maximum Marks (+03): TABLE 1 Serial No. Static ratios Score in the past three years as per Latest year Score as per static ratios score Audited Year 1 Year 2 Year 3 Financials 1. Current Ratio 2. TOL/ TNW 3. PAT/ Net sales (%) 4. Return on capital 44

employed (ROCE) (%) TOTAL SCORE

The total mark scored by a company in table 1 is to be put in the relevant brackets in the Table 2 given below to indicate the aggregate score. TABLE 2 RANGE SCORE Continuous improvement in performance 03 compared to the base year 1 as evidenced by continuous increase in score from year 2 to year 4 as per the score table. Deterioration in performance in year 2 02 compared to year 1 but improvement in the year 3 and year 4 (in comparison to year 1 and 2) as per the score table / continuous improvement for a company in existence for only three years. Improvement in performance only in year 4 01 compared to earlier years / improvement in performance for a company in existence for only 02 years/ static performance for a company in existence for >=< 4 years. Deterioration as evidenced by reduction in 00 score over the years for companies belonging to any existence range (minimum 02 years) to facilitate comparison. To score the maximum marks of 3, the borrowing company should be in existence for at least 04 years to facilitate the above comparison.

5.6 Financial Risk : Term Loan Ratings

(Maximum score: 25) 1. Project D/E RANGE < 1.50 >= 1.50 >= 1.60 >= 1.70 >= 1.80 >= 2.00 2. Gross Average DSCR of the project RANGE SCORE 5 4 3 2 1 0 SCORE

45

>= 2.00 >= 1.80 >= 1.60 >= 1.40 >= 1.25 < 1.25 3. TOL / TNW RANGE <= 1.50 <= 2.00 <= 2.50 <= 3.00 > 3.00 4. Gross Average DSCR for all loans RANGE >= 2.00 >= 1.80 >= 1.60 >= 1.40 >= 1.25 < 1.25 5. Terms of Repayment RANGE <5 >= 5 >= 6 >= 7 >= 8 >= 10

5 4 3 2 1 0 SCORE 5 3 2 1 0 SCORE 5 4 3 2 1 0 SCORE 5 4 3 2 1 0

For existing companies, this score (out of 25) should be added to the financial score (out of 47) and the total is normalized out of 25bto the nearest whole number, provided the term loan is for a related project. A. FUTURE PROSPECTS PARAMETER (Maximum Score 03 marks) 1 A. Projected profitability (PAT/ Net Sales) (%) i. The profitability projection for the coming year is 6% more than the immediate last financial year. ii. The profitability projection for the coming year is 3 to 4 % more than the immediate financial year. iii. The profitability projection for the coming year exceeds by less than 3% than the immediate financial year. Score 3 1 0

46

1 B. Non-achievement of projected profitability (PAT / Net sales) (%) [Maximum Marks: (-3)] i. The actual profitability >= 90% of the projections. ii. The actual profitability >= 80% but <90% of the projections. The actual profitability < 80% of the projections.

Score 0 -1 -3

B. RISK MITIGATION PARAMETER (COLLATERAL SECURITY OR FINANCIAL STANDING): Maximum score:06 The following types of collateral security would be reckoned for the purpose of risk assessment associated with a proposal. The band of scores in each case as well as its probable combinations is indicated herein. TYPE (A) TANGIBLE COLLATERAL (TC) (a) Grade1 TC: Liquid Collateral Security NSC/ KVP/ Fixed Deposit Receipts/ Any other instrument issued by GOI or RBI etc. which can be legally pledged to the bank as security and converted into cash either immediately or upon maturity. (b) Grade 2 TC: Mortgage of property The realizable value would be the benchmark for evaluation of such securities for the Purpose of scoring marks. In respect of each security, therefore, the normal value and the Realizable value would be assessed and indicated separately in the proposal. Either of The two sets of evaluation methods indicated below would suffice: 1st Evaluation Method The property is valued by a valuer of rupee under the banks list of approved valuers and Independent further evaluation has been carried out by the banks team including the Appraising officer and the assessing officer with final endorsement by the sanctioning Authority and such evaluation are carried out at the end of every two years. 2nd Evaluation Method In situations where the valuation from outside valuer is not considered essential, the Valuation is carried out by the banks team and assessed every two years indicated above Under 1st evaluation method. (c) Grade 3 TC: charge over assets (No marks for 2nd and 3rd charge) Evaluation of securities as suggested in paragraph (b) above to be done and realizable value arrived at for scoring. In case of cross collateralization of various facilities, i.e., Working capital loan, Term loan etc., the residual security value over and above the loan for which such security has been furnished as primary security, would be reckoned as collateral for the other loan (for which extension of charge is deemed essential) and would be dealt with in the manner stated as above.

47

In the event of a combination of TCs offered in a particular proposal, the individual scores under each TC would be aggregated but the maximum marks to be awarded to a company with all types of collateral securities taken together would not exceed the cap of 6. Scoring Band for Tangible Collateral (TC) Realizable value of Collateral security as a percentage of total exposure RANGE SCORE >=40% 6 >=30% 5 >=20% 3 >= 10% 2 < 10% >5% 1 < 5% 0 TYPE (B): GUARANTEES Serial No. (a) (b) (c) (d) (e) Type of Guarantee Government of India (GOI) Guarantee State Government Guarantee (SGG) Personal Guarantee / Third party Guarantee @ Corporate Guarantee given by a limited company # A combination of Guarantees $ Score 3 0 1 1 or 2 or 3 6

@ The net worth of the guarantor(s) as arrived at from their asset- liability statement should be positive and reasonable to be accepted as guarantee. The total amount guaranteed in the company/ companies should not exceed his personal Net Worth. # Corporate Guarantee (CG) given by a Limited Company The companies offering CG may either be rated or not rated by an established Rating Agency. It is also possible that some of them may have borrowing arrangements with SBI and their accounts rated on SBIs CRA Rating system. In the case of non- rated categories, TNW of the Corporate Guarantor that is the exposure has been taken as the point of reference. The scoring band designed in this background is given below: Corporate Guarantor* Rating of Corporate CRA Rating of the Guarantor by Co. furnishing CG External Rating Agency AAA AA+ AA SB1/SB2 SB3 SB4 Or/ and additionally the TNW of the guaranteeing company as a % of exposure to the borrowing company >= 300% >= 200%< 300% >=100% < 200% Score

3 2 1

* The total amount guaranteed by a particular corporate in a company / companies shouldnt exceed its TNW to enable it to qualify to be a guarantor of some standing. A certificate in this regard would have to be obtained from the guarantor.

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$ A Combination of Guarantees: The score from each would be aggregated with the total marks not to exceed the maximum marks 6 under Risk Mitigation parameter. TYPE (C): FINANCIAL STANDING Applicable to corporate borrowers where, on account of forces of market dynamics, insistence on collateral security perceived as an impediment in booking of new business. If the corporates are listed companies and they issue Bonds/ CPs etc which are rated / get regularly rated by the established Rating agencies, such ratings reflect the financial strength of not only that particular issue but that of the issuer Company itself to a great measure. This strength may be referred to as its FINANCIAL STANDING. Further, these ratings give credit enhancement comfort and marks can be awarded to such companies depending on the ratings of their issues as under: RATING GRADES BY RATING AGENCIES* SCORE CRISIL ICRA AAA LAAA 6 AA+ LAA+ 5 AA LAA 4 AALAA3 A+ LA+ 2 A LA 1 * The rating given by the rating agency should not be more than a year old. The rating grades of other established rating agencies like FITCH, CARE etc. would be accordingly applied. TYPE (D): VARIOUS COMBINATIONS OF CS/ FS FOR SCORING 1. Tangible Collateral only; 2. Only Guarantees; 3. Only Financial Standing; 4. A combination of Tangible Collateral and (b) Guarantees; 5. A combination of (a) Tangible Collateral and (b) Financial Standing; 6. A combination of (a) Guarantees and (b) Financial Standing. LIMITING FACTOR IN ALL THE ABOVE COMBINATIONS The aggregate score under Risk Mitigation parameter would not exceed the maximum score of 6. BUSINESS RISK Rated on a 3 point Scale Maximum Score: 20

To qualify for financial assistance, the company would have to secure full marks (02) under the parameter, Compliance of Environment Regulation. In case the existing units in the books of the bank do not secure full marks (02), the bank would explore all possibilities for exercise of the exit option. 1 (i) TECHNOLOGY SCORE World class technology and capability systems or tie up with a world 4

49

(ii)

(iii)

class major. The Company is capable to withstand competition. OR The company has a proven technology to withstand competition. OR The technological capability to be built up by the new company would enable it to withstand competition. The existing technology is adequate to a great extent and not subject 2 to any vast changes in medium term. The company can sustain competition for sometime. OR The existing technology allows the company to meet the demands of the competition for some extent. OR The technological base designed for the new company would be sufficient enough to enable them to compete in the market for some time. Obsolete technology. The company lacks the financial capability/ 0 will to undertake technology up gradation and hence is unable to withstand competition in the event of even moderate fluctuation. OR The technological plan of the new company is obsolete and it would be difficult for them to compete in the market to sustain their operations. CAPACITY UTILIZATION vs BREAK EVEN POINT The existing capacity utilization is 30% above BEP. OR The capacity utilization projected for the new company is 30% above BEP. The existing capacity utilization is 20% above BEP. OR The capacity utilization projected for the new company is 20% above BEP. The existing capacity utilization is less than 20% above BEP. OR The capacity utilization projected for the new company is less than 20% above BEP. COMPLIANCE OF ENVIRONMENT REGULATIONS Full compliance of environment regulations. OR The project report of the new company envisages full compliance of environment regulations before the start of the commercial production. Partial compliance of environment regulations. OR The new is not expected to be fully compliant with the environment regulations before the start of the commercial production. Lopsided compliance of Environment regulations. SCORE 2

2. (i)

(ii)

(iii)

3. (i)

SCORE 2

(ii)

(iii)

0 50

OR The compliance of environment regulations have not been touched upon in the project report of the new company / the project report is sketchy about the compliance of environmental regulations. 4. (i) USER/ PRODUCT PROFILE Product of wide acceptance/ uses. The product is distinctive. There are no complaints about the rejections of the products. The delivery schedules of the products are adhered to it. OR The products of the company have an edge over others; the chances of rejections are expected to be minimum. User of product has not many substitutes. There are only a few instances of rejections and by and large the company is able to adhere to the delivery schedules. OR The products of the new company are expected to be well accepted to sustain in the market. The product is custom made to specifications and has no alternative use. The company is unable to meet the delivery schedule. Frequent rejection of the companys product. OR The proposed product profile of the new companies is of a general nature and the user has other alternative substitutes in case of rejections. SCORE 2

(ii)

(iii)

51

5. (i)

(ii)

(iii)

6. (i)

(ii)

CONSISTENCY IN QUALITY The record of the company in maintaining the quality of its products is excellent. Sales rejections on account of poor quality are almost non-existent. OR The company is having ISO certification. OR The proposed operations of the new company are geared towards obtaining an ISO certification on account of their stress on maintaining highest quality standards/ consistency in quality is to be the hallmark of their operation. The record of the company in maintaining the quality of its products is good. There are only a few cases of sales rejections. There is no ISO certification. OR Although the proposal of the new company does not talk of obtaining ISO certification as one of its goals, there is enough stress on maintaining consistency in quality of its product. There is no consistency in quality and there is no anxiety on the part of the management to rectify the situation. Sales rejections on account of poor quality are common. There is no ISO certification. OR There is neither adequate stress nor any mechanism designed to be built in for maintaining consistency in quality of the product of the new company. DISTRIBUTION NETWORK Wide distribution network for the companys products either its own or in a conjunction with others. OR Although the company does not have a wide distribution network, the sales are increasing year after year. OR The new company proposes adequate distribution network for marketing and sale of its products. OR The management of the new company is optimistic about gradual in sales year after year on account of the uniqueness of its products and its quality even without a wide distribution network. Distribution network in important areas but not large enough to penetrate the entire market. OR Despite a small distribution network, the sales are not declining significantly/ show a marginal increase/ remain roughly at the same level. OR The new company proposes a small distribution network for its products. OR The new company expects a marginal increase in sales even without a chain of distribution network.

SCORE 4

(iii) 7. (i)

A feeble distribution structure/ no structure of its own and the sales show a declining.

CONSISTENCY OF CASH FLOWS SCORE Cash inflows adequate to meet companys requirements (seldom needs 4 over drawings) and / or on account of a well laid out policy to take care

52

(ii)

(iii )

of their unhedged portion of forex risk, their cash flows are not going to be affected. OR The cash inflows projected by the new company seem to be adequate and request for over drawings is not envisaged and/ or on account of a well laid out policy to take care of their unhedged portion of forex risk, their cash flows are not going to be affected. Cash in flows is slightly short of companys projections (sometimes needs over drawings) and/ or the policy to contain the unhedged portion of the forex risk has not been firmed up. OR The cash in flows projected by the new company falls slightly short of the requirements and hence would require additional assistance to meet this gap and/ or the policy to contain the unhedged portion of the forex risk has not been firmed up. Cash in flows are not consistent with the projections (often needs over drawings) and/ or no policy in place to contain unhedged forex risk. OR A scrutiny of the cash flows projected by the new company shows that it would be grossly inadequate to meet its requirements and for meeting this gap, it does not have any credible sources to rely on and/ or no policy in place to contain unhedged forex risk.

TOTAL SCORE: 20

53

INDUSTRY RISK Rated on a 4-point Scale 8 1. (i) Maximum Score: SCORE 2

(ii)

(iii)

(iv)

COMPETITION Turnover growth faster than the industry growth. OR The turnover growth higher than the industry growth projected for the new company. Turnover growth remains faster but it is at the level of the industry growth rate. OR Turnover growth at par with the industry growth projected for the new company. Turnover growth remains static, though there is recession in the market. OR Static turnover growth projected for the new company in view of recession at present in the market. Turnover growth declining. OR It would be difficult for the new company to compete in view of the poor turnover growth projected. INDUSTRY OUTLOOK Long term prospects of the industry are excellent. Outlook stable except for some critical factors. Susceptible to unfavorable changes in the economy. Industry in the declining phase. REGULATORY RISK Business operations (BO) remain unaffected by Regulatory Risk. Effect of Regulatory Risk can be contained. Delicately balanced, Business Operations can be affected if immediate steps not taken. Unable to cope with the situation. CONTEMPORARY ISSUES LIKE WTO, ETC. Adequate capability to handle the effects of contemporary issues. Adequate capability but it requires to be translated into action. Complacency evident. Adhoc response to industry issues. Not able to cope with.

1.5

2. (i) (ii) (iii) (iv) 3. (i) (ii) (iii) (iv) 4 (i) (ii) (iii) (iv)

SCORE 2 1.5 1 0 SCORE 2 1.5 1 0 SCORE 2 1.5 1 0

MANAGEMENT RISK Maximum Score: 25

54

INTEGRITY / CORPORATE GOVERNANCE, TRACK RECORD and MANAGERIAL COMPETENCE/ COMMITMENT are crucial management risk factors carrying maximum 3 marks each. In case company scores zero (0) in any of the three parameters, there is no need for further assessment of risk and the proposal would be declined. In case, the existing units in the books of the bank score zero (0), the bank would explore all possibilities for the exercise of exit option to protect its interest. 1.A INTEGRITY: sole proprietary firm/ partnership firm/ Pvt. Ltd. SCORE Companies (i) The integrity and character of the management is beyond reproach. 3 (ii) The management is having good reputation about integrity in the 2 market. (iii) Features revealed by reports on conduct of account/ stock audit / spot 0 audit/ periodic inspection reports go against the integrity of the company/ the company is a defaulter under RBIs willful defaulters list and hence the bank should exercise exit option. 1.B INTEGRITY (for corporates): CORPORATE GOVERNANCE SCORE (i) Corporate Governance (CG) systems are in place and are adhered to 3 fully. OR The new company has envisioned to fully complying with CG systems. (ii) Corporate governance systems are not fully functional/ operational. 2 OR The new company does not have a specific plan to fully comply with CG system/ plans for CG systems need further concretization. (iii) There is a partial implementation of corporate governance system; 0 sufficient effort is not made. OR There seems to be absolutely no plan for implementation of CG system in the new company. 2 (i) TRACK RECORD Maintains financial discipline, absolutely no irregularity in the account. The management is very sincere and open to any suggestions to bring excellence in the financial management. OR Although the new company does not have any borrowing arrangement with any bank/ FIs, its other accounts say, current account etc. are conducted as per norms and they are open to any suggestions to conform to the rules. On a few occasions, repayment of loans is delayed. The management tries to set things right but professional approach in adherence to financial discipline is lacking. OR By and large the conduct of other accounts of the new company is satisfactory. Professional approach in adherence to financial discipline is lacking. Accounts are rendered frequently irregular and the company does not respond to counsel to enforce financial discipline. Diversion of funds by routing of sale proceeds through other banks on record. OR SCORE 3

(ii)

(iii)

55

The conduct of other accounts of the new company is not satisfactory and the management is also not responsive to any suggestions for improvement in the same. 3 (i) MANAGERIAL COMPETENCE/ COMMITMENT An exceptionally high level of competence and commitment evidenced by their record in timely execution of projects as gathered from various market sources including banks/ PSUs/ Government Departments/ Multinational Companies. OR An exceptionally high level of competence and commitment in respect of new company as gathered from market sources. Although managerial competence / commitment exists, but due to lack of proper planning / strategy, execution of projects / work undertaken are delayed. OR Although managerial competence/ commitment in the new company exist, market reports suggest lack of proper plan/ strategy for execution of a project/ work. A cohesive thrust is lacking. There is total chaos in the execution of projects/ works undertaken, the completion of which are either inordinately delayed or not completed at all. The managerial competence is totally lacking and there is no commitment on the part of the management to bring an improvement in the affairs of the company. OR Market reports suggest lack of managerial competence/ commitment in the new company set up to continue any venture. EXPERTISE Eminently qualified professionals are working as a cohesive team. Company has few professionals on its roll and is basically run/ managed by non-professional owners. The management centers on one or two persons only. Professional expertise is lacking. SCORE 3

(ii)

(iii)

4. (i) (ii) (iii) 5. (i)

SCORE 2 1 0

(ii)

STRUCTURE AND SYSTEM SCORE Excellent budgeting and costing system are in place. MIS is perfect and 2 working. OR Design of an excellent budgeting and costing system proposed in the project of the new company. Although budgeting, costing and MIS are in place, proper 1 implementation efforts are lacking. OR Although the design of an excellent budgeting and costing system are proposed in the project of the new company but given the profile of the personnel, there seems to be a concern about their actual implementation.

56

(iii)

Systems not in place. All decisions centre around one person who takes 0 adhoc decisions. Reporting systems are non-existent. OR All systems in the new company are designed with only one person as the fulcrum without any proper structured set-up to carry out the planning work in his absence. No proper reporting system envisaged. EXPERIENCE IN THE SYSTEM SCORE The management has along experience in the industry (>= 10 years). The management has a moderate experience in the particular field (>= 5 <=10). The management has got relatively less experience in the particular field (< 5 years). CREDIBILITY: ABILITYTO MEET SALES PROJECTIONS SCORE The managements ability in meeting sales projections is beyond doubt 2 as is evidenced by their past record of three years (projected vs. actuals). There is a negative variance of less than 10% in the comparison of actual vs. the projected sales figure. OR The management of the new company seems to be capable of meeting sales projections with a negative variance of less than 10% as per plan drawn up by them. There is a negative variance of 10% and above but less than 20% in the actual vs. the projected sales as is evidenced by their record of past 03 years. OR The management of the new company seems to be capable of meeting sales projections with a negative variance of less than 20% or so as per the discussions held with the promoter in the event of their operations getting affected by external factors beyond their control. The record of the management in achieving sales projections in the past 03 years is poor (actual sales less than 80% of projections). OR A perusal of the project plan of the new company shows that it would not be able to meet even 80% of its sales projections given the type of products, their demand pattern as also its average market penetrating capabilities as extrapolated from the profile of the personnel/ poor marketing structure. CREDIBILITY: ABILITY TO MEET PROFIT (PAT) PROJECTION The managements ability in meeting profit projections is excellent. In the last three years of record, every year, actuals have either exceeded projections or have shown a negative variance of less than 10%. OR The management of the new company seems to be capable enough to meet profit projections with a negative variance of less than 10% or so as per its plan to meet the sales projections and the corresponding margin of profit in the venture. The managements ability in meeting profit projections may be rated 1

6. (i) (ii) (iii) 7. (i)

(ii)

(iii)

8. (i)

SCORE 2

(ii)

1 57

(iii)

good. In the last three years of record, every year, actuals have shown a negative variance of either 10% or more but less than 20%. OR The management of the new company seems to be capable enough to meet profit projections with a negative variance of less than 20% or so even in a not too favorable environment as per the plan drawn up by the promoter(s) to meet the sales projections and the margin of profit in the venture. The managements ability in meeting profit projections is poor. In the 0 last three years of record, every year, actual profit has always been less than 80% of the projection. OR A perusal of the proposal of the company shows that it would not be able to achieve even 80% of the profit projection. PAYMENT RECORD The record of meeting commitments to lenders and creditors is excellent. The company has rarely defaulted on this score. OR Market reports suggest that the new company have an impeccable record in meeting their financial commitments. The record of meeting commitments to lenders and creditors is good. The company have defaulted only once or twice on this score. OR Market report suggests that by and large, the new company have a good record in meeting their financial commitments. The record of meeting commitments to lenders and creditors is poor. The company has rarely met their commitments in time. OR Market reports suggest that the promoters of the new company lack in their resolve in meeting their financial commitments in time. STRATEGIC INITIATIVES The management is proactive in taking well thought out initiatives for creating a leadership position for the company. OR The management of the company or new company has the requisite capability to make it one of the leading ventures in its line of business. The management is capable of taking initiatives but the necessary thrust is lacking or seems to be lacking. The leadership position at a particular time is on account of a probability factor and not due to any concerted efforts in this regard. OR Although the promoter is capable but the necessary thrust seems to be lacking to transform the venture into a frontline one or the current leading position is just by chance and not by any concerted efforts in this regard or the and the personnel profiles do not contain any leadership statement. Both the will and the capacity to take any strategic initiative are nonexistent. The survival of the company in the market is merely on SCORE 2

9. (i)

(ii)

(iii)

10. (i)

SCORE 2

(ii)

(iii)

58

account of its past reputation and not on account of any on going effort of the management in this regard or the current downsizing in the market allows such a complacency to survive. OR A perusal of the project does not yield any vision or capability or strategic statement for transforming the company to a leadership position. 11. (i) (ii) (iii) (iv) LENGTH OF RELATIONSHIP WITH THE BANK Dealing with the bank for more than 10 years and their conduct is fully satisfactory. Dealing with the bank for more than 5 years and their conduct is by and large satisfactory. Dealing with the bank for less 5years and their conduct is by and large satisfactory. Dealing with the bank for than 10 years or 5 years or less than 5 years and their conduct is not satisfactory. SCORE 2 1.5 1 0

QUALITATIVE FACTORS: NAGATIVE PARAMETER MAXIMUM SCORE: (-10) Details Amount as Balance Sheet A. Contingent 1 Liability (a) Claims against disputed tax liabilities/ Excise Duties (b) Claims against the company not acknowledged as debts (c) Corporate guarantees given without Banks permission or approval B. Auditors qualifying remarks having impact on financials or profitability C. Accounting policies (a) Valuation of inventory (b) Capitalization, per Probability
of Amount assessed to Invocation (mentioned be at default in % terms)

3 = 1*2

59

Depreciation, Revaluation D. Any other factors Total Linkages between the total marks (negative) and the effect on the TNW of the company to be graded as under: If the total amount under 3 is > 10% of TNW > 8% of TNW > 6% of TNW > 4% of TNW > 2% of TNW < = 2% of TNW Negative marks to be given 10 8 6 4 2 0

CREDIT RATING ASSESSMENT OF S S LIMITED

BRIEF BACK GROUND (COMPANY GROUP/ PROMOTERS/ MANAGEMENT) The Company, S S Limited was incorporated on 03.11.2004 (Registration No. 15-07846) by Mr. N. K. Agrawal, Mr. A.K. Mundra, Mr. A.K. Aggrawal, Mr P.K. Agrawal, Mr. B. Agrawal, Mr. H. Bhandari and Mr. M.K. Kedia. Mr. M.K. Kedia is represented by his wife Mrs. S. Kedia as director in the board. Subsequently, three directors namely Sri A, B and C resigned from the board w.e.f. 31.03.2005 and Mr. G. Agrawal joined the board w.e.f. 01.04.2005. The Company has decided to establish a 2 * 100 TPD Sponge Iron Plant at village: Kalendamal, Post: Gudigoan in Jharsuguda district. Mr. G. Agrawal, director of this company is running a coal transport and handling business in the name and style of M/s. GA, Brajanagar, which is engaged in coal transportation and loading from Mahanadi Coal Fields Limited. He is also plying tippers and trucks in the transportation business of his own. He is banking with SBI, Brajarajnagar and Union Bank of India, Brajarajnagar. He has not availed any limits from any bank. Mr. A.K.Mundra, another director of this company is the managing director of M/s Vijaylaxmi private limited. The company is engaged in coal transportation and running a petrol pump at Brajarajnagar. SBI jharsuguda branch has also opined that the account of M/s Vijaylaxmi private limited is regular and IRAC status is standard assets. Sri P.K.Agrawal, another director of this company is managing director of M/s Ashok bricks Industries private limited. The company is engaged in construction contract for state govt. and PSUs. The company has availed both fund based and non fund based credit facility from commercial branch, sambalpur to the tune of Rs.99.36 lacs as on 31.03.06. All their accounts are conducted satisfactorily and are standard assets. Mr. H.Bhandari, another director is the proprietor of M/s jivaraj Amarchand and engaged in the trading of paints and hardware, soft wares and is the distributor for BSNL Excel cards for Rourkela Telecom district. They are banking with SBI, jharsuguda branch and is availing a cash credit limit of Rs. 30.00 lakhs. Jharsuguda branch has opined that the account is regular and dealing satisfactorily. The company purchased a land measuring 20 acres at mauza-kalendamal near gudigoan in jharsuguda district and has started construction of its 2*100 TPD sponge iron project. The company was incorporated on 3rd November 2004 vide registration no. 15-07846 and subsequently got the certificate for commencement of business on 9th November 2004 from registrar of Companies, Orissa. In fact the director Mrs. S. Kedia is representative of 60

one of the promoter Mr. M.K. Kedia in the board of the company. Mr. Kedia is a chartered Accountant and promoting this company. All the promoters and directors are having long stint of business experience. They hail from families with sound financial background. INDUSTRY SCENARIO: The projected demand and supply position for next 3 years is comfortable for sponge iron industry in India. Growth in demand for sponge iron is directly proportionate to trend in growth of finished steel consumption. During the year 1990-91 to 2001-02 period, demand for sponge iron increased at a CAGR of 18.6%. CRIS INFAC study projects demand for sponge iron to increase at CAGR of 6% for the period 2002-03 to 2006-07. The capacity addition in this period will be slightly less than the demand and hence there will be no oversupply position. Although the price of the sponge iron has taken a beating in the recent months, in the long term, prices are expected to rise gradually. However, ultimately prices would depend on the prices of the imported scrap and input costs. Inter company comparison: ( Rs. in Crores ) Name of FBL Operating Year Sales the Capacity Ended Company 1.S M Ltd 4.75 980TPD 2006 200.83 2. G S Ltd 1.15 200TPD 2006 10.82 3.T S Ltd 9.80 800TPD 2006 240.5 4. S S Ltd 3.35 200TPD 2007 43.81 PBT/ Sales 15.31 8.11 39.53 8.26 TOL/ TNW 1.08 1.04 0.29 1.07 Current Ratio 1.27 0.93 1.98 1.36

The financial parameters of S S limited are comparable with other units.

61

Corporate Governance practices followed: 1. Procedure adopted for selection, orientation and succession of Directors 2. The Directors and their core competencies. 3. Accounting standard followed.

Closely held limited company and all the promoters except one are directors. All the Directors have long stint of business experience. Standard accounting policies, as prescribed by INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA, are followed. 4. Existence of independent Audit Audit committee is formed and functioning committee and its function under the Chairmanship of H S Bhandari. 5. Transparency in the disclosure of Transparency will be maintained. financial information, executive compensation. Environment and Effluent Treatment: The ash coming out of the unit will be utilized for filling the low lying area. Water used in the unit will be treated in water treatment plant installed in the unit. The gas coming out of the process will be treated in E.S.P. to be installed in the unit before exposed to the air. The company has already applied for NOC from State Pollution Control Board and is expected to get the same soon. Since the unit is meeting all the citing criteria prescribed by the OPCB for establishment of Sponge iron and is prepared to take all the pollution measures prescribed by the Board, the unit will get the NOC. The company has made provision for installing all necessary pollution control equipments and measures in strict compliance with the guidelines of the State Pollution Control Board. The order for supply of pollution the pollution control equipments have already been placed and will be installed in the unit. Marketing: The marketing of the products will be done directly by the company. The promoters of the unit are already in contact with primary and secondary steel producers by way of transporting their coal requirements for the past several years. Further, there exists a gap between demand and supply of sponge iron and most of the mini DRI producers operating in the area are not facing any problem pertaining to marketing of their product. The promoters of this unit are established and reputed businessmen of the area and have good business contacts and hence the unit is unlikely to have any problem as far as marketing of the product is concerned. Security margin: Particulars as on 31/ 03 WDV of fixed outstanding Aggregate TL/ DPG outstanding Security margin available % of margin 2008 1729.45 805.00 924.45 53% 2009 1546.37 575.00 971.37 63% 2010 1363.29 345.00 1018.29 75% 2011 1180.21 115.00 1065.21 90% 2012 997.13 0.00 997.13 100%

62

Security Margin of 46% in the very first year and more than 50% in the subsequent years is at comfortable level and is considered adequate. Break-even analysis BREAK EVEN POINT PARTICULARS 2007-08 (1) Capacity Utilization 85% A. Sales 4075.39 B. Variable Cost Raw Materials 2999.76 Consumable Stores 38.45 Power and Fuel 222.75 Salary and Wages 44.07 Interest on working 34.34 capital Sellings 20.38 TOTAL 3359.75 C. Contribution (A-B) D. Fixed/ Semi Variable Costs Salary and Wages Administration Expenses Interest on term loan Insurance Repairs and Maintenance Depreciation TOTAL E. Profit (C-D) 715.64 13.35 21.78 97.25 1.94 18.94 183.08 336.34 379.30 2008-09 (2) 90% 4315.40 3177.57 40.71 234.51 49.85 34.34 21.58 3558.56 756.84 14.69 23.96 73.67 1.94 20.83 183.08 318.17 438.67 0.18 37.84 42.04 2009-10 (3) 90% 4320.00 3181.34 40.71 234.51 49.85 34.34 21.60 3562.42 757.65 16.16 26.36 50.09 1.94 20.83 183.08 298.46 459.19 0.18 35.45 39.39 2010-11 (4) 90% 4320.00 3181.44 40.71 234.51 49.85 34.34 21.60 3562.42 757.58 17.78 29.00 26.52 1.94 20.83 183.08 279.15 478.43 0.18 33.16 36.85 2011-12 (5) 90% 4320.00 3181.44 40.71 234.51 49.85 34.34 21.60 3562.42 757.58 19.56 31.90 4.42 1.94 20.83 183.08 261.73 495.85 0.18 31.09 34.55

F. P/ V Ratio 0.18 G. Break even 39.95 point (at installed capacity) G. Break even Point 47.00 (at utilized capacity)

The project breaks even at 42.38% of the installed capacity in the very first year of its operation. In the next year the project will break even at 39.95% of installed capacity and 47.00% of utilized capacity. In subsequent year i.e. at 90% capacity utilization it breaks even at 37.84% of installed capacity and 42.04% of utilized capacity. The break even point is at a very comfortable position. Sensitivity Analysis 63

CONDITION- 1 2006-07 Selling Price Decrease by 5% (1) 1. Net Sales 3578.04 2. PAT 113.46 3. Cash Accrual 296.54 4. D.S.C.R. 1.78 CONDITION-2 Raw materials price increase by 5% 1. Net Sales 3766.37 2. PAT 150.04 3. Cash Accrual 333.12 4. D.S.C.R. 1.94

2007-08 (2) 3871.61 138.92 322.00 1.28

2008-09 (3) 4099.64 158.63 341.71 1.37

2009-10 (4) 4104.00 162.00 345.08 1.41

2010-11 (5) 4104.00 166.13 349.21 1.46

2011-12 (6) 4104.00 170.29 353.37 3.00

4075.39 173.95 357.03 1.39

4315.40 195.66 378.74 1.49

4320.00 199.09 382.17 1.54

4320.00 203.21 386.29 1.61

4320.00 207.38 390.46 3.31

CONDITION-3 Both selling price decrease by 5% and Raw material price Increase by 5% 1. Net Sales 3578.04 3871.61 4099.64 2. PAT (14.87) 24.30 59.61 3. Cash Accrual 168.21 207.38 242.69 4. D.S.C.R. 1.23 0.93 1.04

4104.00 78.05 261.13 1.11

4104.00 72.98 256.06 1.10

4104.00 64.67 247..75 2.11

The sensitivity analysis done above with 3 variables in 5% indicates that the companys resilience is in the long range and it will be able to withstand adverse impacts stemming from uncertainties. SECURITY 1. Primary: a) For Term Loan: EM of land and building where the plant is proposed to be located and pledge of, plant and machinery and other fixed assets valued at Rs. 2095.61 lacs as per acceptable project cost. b) For Working Capital: Hypothecation of raw materials, work-in-process, finished goods, receivables and other current assets. Details of landed property (PRIMARY SECURITY) (a) Property in the name of the company Mouza/ Village M.S. Khata No. Plot No. Area in Acres Kelendamal P.S. 57 581 1.41 Kolabira, 34 786 1.33 Jharsuguda 2 583 3.75 2 785 2.84 126 572 4.81 66 584 2.41 60 585 2.26 60 787 0.96 112 571 0.31 Total property in the name of the company is 20.08 acres. COLLATERAL SECURITY: a) Property in the name of Mr. NLS Village M.S. Khata No. Plot No. Area in acres Value Rs. in

64

Brajaj Nagar, 305/501 Town Unit No. 305/501 3 31

2047/3735 1873/3736 1825 TOTAL

0.04 0.11 0.12 0.27

lacs 3.90 18.31 22.81

b) Pledge of STDR/NSC/LIC policy of face value of Rs. 50.00 lakhs. 3. Personal Guarantee of the Directors: Name G. Agrawal P.K. Agrawal A.K. Mundra H.S. Bhandari S. Kedia K. Kedia TOTAL Cost of project and means of finance: Estimated Cost of the Project i) Land and Developments ii) Civil Constructions iii) Plant and Machineries iv) Other Fixed Assets v) Contingencies vi) Preliminary and Pre-operative Expenses vii) Margin money for working capital TOTAL Means of Finance i) Term Loan from SBI ii) Promoters Contribution as Equity Shares iii) Unsecured Loan --TOTAL 2281.46 Comments on means of Finance: The project will be financed to the extent of 49.59% by the promoters equity contribution including share premium and unsecured loan from the directors of the company. The project has a debt equity ratio of 1.02:1 for the entire project, which is considered satisfactory and indicates promoters involvement in the project. Critical Risk Factors and Their Mitigations: Risk Factors 1. The promoters are associated with five other units. It may prove to be a source of weakness in case of interlocking of funds in associates and sister concerns. 2. The volatile power tariff in Orissa and its unsteady supply. 3. Steel Industry is the only consumer of Sponge iron. Any fluctuation in the fortune of the Steel industry is likely to impact Sponge iron manufactures badly. 2281.46 1150.00 1000.00 131.46 ------------Net Worth 165.04 32.17 86.11 22.82 11.91 40.83 358.88 Total 19.80 428.07 1507.67 4.00 83.94 61.63 176.35 --------------

65

4. Lack of entry barrier, substantial profit margin and lower cost of project is alluring many a new entrant-profitability is likely to be squeezed in years to come. Mitigators 1. The common association would be strength when combined with other units. However, the branch has to closely monitor interlocking of funds. 2. Since there is a steady demand for the product, the rise in input costs can always be passed on to the consumers. The unit has the necessary financial muscle to withstand such rises. The company has made provision for a stand by generator of adequate capacity to meet the situation arising out of unsteady power supply. In medium-term the company will look forward to set up waste heat co-generation plent for in-house consumption. 3. As of now Sponge Iron is the only substitute of merit scrap. The secondary steel producers are growing in numbers and will continue to consume sponge iron. Even integrated plant i.e. TISCO and SAIL has started using sponge iron opening an additional market and paving way for other such large plants. 4. In medium term the company is looking forward to integrate the plant by addition of induction furnace, re-rolling mill for value addition to take care of the likely squeeze in profit in the Sponge iron unit. FINANCIAL ANALYSIS OPERATING STATEMENT
Projection s 2008 12 4740.50 Amount in Rs. Lacs Projection Projection Projection s s s 2009 2010 2011 12 12 12 5019.67 5025.02 5025.02 Projections 2012 12 5025.02

Financial Year ended/ ending No. of months 1.Gross Sales i. Domestic Sales ii. Export Sales Total 2. Less Excise Duty 3. Net Sales (1- 2) 4. % rise (+) or fall (-) in Net sales as compared to previous Year 5. Cost of sales i. Raw materials (Including stores and other items used in the process of

4740.50 665.11 4075.39 8.20%

5019.67 704.27 4315.40 5.89%

5025.02 705.02 4320.00 0.11%

5025.02 705.02 4320.00 0.00%

5025.02 705.02 4320.00 0.00%

3004.67

3181.41

3181.4

3181.4

3181.4

66

manufacture) a. Imported b. Indigenous ii. Other spares a. Imported b. Indigenous iii. Power and Fuel iv. Direct Labor (Factory wages and salaries) v. Other manufacturing expenses vi. Depreciation vii. Sub total (i to vi) viii. Add: Opening Stockinprocess Sub total (vii + viii) ix. Deduct: Closing Stockin-process x. Cost of Production xi. Add: Opening Stock of finished goods Sub-total (x + xi) xii. Deduct: Closing Stock of finished goods xiii. Sub-total (Total Cost of Sales) 6.Selling, general and administrativ e expenses 7. Sub-total (5+6) 8. Operating Profit before Interest (3- 7) 9. Interest

3004.67 38.45 38.45 222.75 44.07

3181.41 40.71 40.71 234.51 49.85

3181.4 40.71 40.71 234.51 49.85

3181.4 40.71 40.71 234.51 49.85

3181.4 40.71 40.71 234.51 49.85

20.88 183.08 3513.90 0.00 3513.90

22.77 183.08 3712.33 0.00 3712.33

22.77 183.08 3712.33 0.00 3712.33

22.77 183.08 3712.33 0.00 3712.33

22.77 183.08 3712.33 0.00 3712.33

3513.90 62.57 3576..47 67.48

3712.33 67.48 3779.81 71.32

3712.33 71.32 3783.65 71.39

3712.33 71.39 3783.72 71.39

3712.33 71.39 3783.72 71.39

3508.99 55.51

3708.49 60.23

3712.26 64.12

3712.33 68.38

3712.33 73.06

3564.50 510.89 131.59

3768.72 546.68 108.01

3776.38 543.62 84.43

3780.71 539.29 60.86

3785.39 534.61 38.76

67

10. Operating Profit after Interest (8-9) 11. i. Add: Other non-operating income a. Sale of fixed Assets b. Others Sub-total income ii. Deduct: Other nonoperating expenses iii. Net of other nonoperating income/ expenses [ net of 11 (i) and 11 (ii) ] 12. Profit before tax [ 10 + 11 (iii) ] 13. a. provision for taxes b. Deferred for Tax Liability(-) Assets(+) 14. Net Profit/ loss (12 13) 15. a. Equity dividend paid. b. Dividend Rate (% age) c. Other Appropriations 16. Retained Profit (14 -15) 17. Retained Profit/ Net profit (% age) CASH ACCRUALS

379.30

438.67

459.19

478.43

495.85

0.00 0.00

0.00 0.00

0.00 0.00

0.00 0.00

0.00 0.00

0.00

0.00

0.00

0.00

0.00

379.30 105.75 -21.70

438.67 137.49 -9.90

459.19 154.49 0.20

478.43 169.59 8.84

495.85 182.85 16.25

251.85

291.28

304.90

317.68

329.25

0.0%

0.0%

0.0%

0.0%

0.0%

251.85 100.00% 434.93

291.28 100.00% 474.36

304.90 100.00% 487.98

317.68 100.00% 500.76

329.25 100.00% 512.33

68

FINANCIAL ANALYSIS ANALYSIS OF BALANCE SHEET (LIABILITIES)

AMOUNT IN RS. (LACS) Projection Projection Projection s s s 2009 2010 2011 12 12 12 335 335 335

Financial year ended/ ending No. of Months CURRENT LIABILITIES 1. Short term i. State Bank borrowing of India from the banks ii. Others (including bills purchased, discounted, and excess, iii. Sub total borrowing placed on the repayment basis 2.Short term borrowings from others 3.Sundry Creditors (Trade) 4. Advance payment from Customers/ Deposits from dealers 5. Provision for Taxation 6. Dividend payable 7.Other Statutory liabilities (due with in 1 year) 8. Deposits/ installments of term loans/ DPGs/ debentures etc. (due with in 1 year) 9. Other current

Projection s 2008 12 335

Projections 2012 12 335

335

335

335

335

335

10.00

10.00

10.00

10.00

10.00

105.75

137.49

154.49

169.59

182.85

230.00

230.00

230.00

115.00

0.00

10.00

10.00

10.00

10.00

10.00

69

liabilities and provisions (due with in 1 year) a. Other 10.00 Outstanding Liabilities payable b. other Liabilities Sub Total 355.75 [ 2 to 9 ] (B) Total 690.75 10.00 10.00 10.00 10.00

387.49 722.49

404.49 739.49

304.59 639.59

202.85 537.85

10. Current Liabilities [A + B] TERM LIABILITIES 11.Debenture s (not maturing with in 1 year) 12. Preference Shares (redeemable after 1 year) 13. Term Loans (excluding installments payable with in 1 year) 14.Deffered payment credits (excluding installments due with in 1 year) 15.Term deposits (repayable after 1 year) 16. Other term liabilities 17.Total Term Liabilities [11 to 16] 18.Total Outside Liabilities [10 + 17] NET

575.00

345.00

115.00

0.00

0.00

575.00 1265.75

345.00 1067.49

115.00 854.49

0.00 639.59

0.00 537.85

70

WORTH 19. Ordinary Share Capital 20. General Reserve 21. Revaluation Reserve 22.Other Reserves 23.Surplus (+) or Deficit (-) in Profit & Loss a/c

1000.00

1000.00

1000.00

1000.00

1000.00

458.52

749.80

1054.70

1372.38

1701.63

24.Net Worth 25.TOTAL LIABILITIES [18 + 24]

a. Share application money b. Share premium account c. Deferred 57.16 tax liability d. Others e. Unsecured 131.46 Loans from directors 1647.17 2912.92

67.09 131.46 1948.35 3015.84

66.89 131.46 2253.05 3107.54

58.05 131.46 2561.89 3201.48

41.80 131.46 2874.89 3412.74

FINANCIAL ANALYSIS ANALYSIS OF BALANCE SHEET (ASSETS)

Financial year ended/ending No. of months 26.Cash and Bank Balances 27.Investments (other than long Term) i. Govt. and other trustee securities ii. Fixed Deposits with banks i. Receivables other than deferred and
Projections Projections Projections Projections Projections

2008 12 443.74 0.00

2009 12 669.53 0.00

2010 12 928.91 0.00

2011 12 1192.73 0.00

2012 12 1573.81 0.00

28.

197.52

209.15

209.38

209.38

209.38

71

exports (including bills purchased and discounted by banks) 29. Installments of deferred receivables (due with in 1 year) 30. Inventory i. Raw materials ( including stores and other items used in the process of manufacture ) a. Imported b. Indigenous ii. Stocks in progress iii. Finished goods iv. Other Consumable spares a. Imported b. Indigenous 6.32 80.00 6.69 80.00 6.69 80.00 6.69 80.00 6.69 80.00

320.76

339.50

339.57

339.57

339.57

246.96

261.49

261.49

261.49

261.49

246.96 0.00 67.48 6.32

261.49 0.00 71.32 6.69

261.49 0.00 71.39 6.69

261.49 0.00 71.39 6.69

261.49 0.00 71.39 6.69

31. Advances to suppliers of raw materials and stores/spares 32.Advance payment of taxes 33.Other advances 34.Total Current Assets[ 26 to 33] FIXED ASSETS 35. Gross Block (land, building, machinery, work-in-progress) 36. Depreciation to date 37. Net Block (35- 36) OTHER NONASSETS 38. Investments/book debts/advances/deposit

105.75 10.00 1157.77 2095.61 366.16 1729.45 20.00

137.49 10.00 1445.67 2095.61 549.24 1546.37 20.00

154.49 10.00 1722.35 2095.61 732.32 1363.29 20.00

169.59 10.00 2001.27 2095.61 915.40 1180.21 20.00

182.85 10.00 2395.61 2095.61 1098.48 997.13 20.00

72

s which are not current assets i. a. Investments in subsidiary companies/ affiliates b. Others ii. Advances to suppliers of capital goods and contractors iii. Deferred receivables ( maturity exceeding 1 year) iv. others a. Security Deposit b. Sales Tax under Appeal c. Tax Deducted 39. Non- consumable stores and spares 40. Other non-current assets including dues from directors 41. Total Other NonCurrent Assets (38 to 40) 42. Intangible assets (patents, goodwill, prelim, expenses, bad/ doubtful debts not provided for etc.) 43. Total Assets (34 + 37 + 41 + 42) 44. Tangible net worth (24 42) 45. Net working capital(34 - 10) 46. Current Ratio (34/ 10) 47. Total outside liabilities/ Tangible net worth (18/ 44) 48. Total term liability / Tangible net worth (17/44)

20.00 20.00

20.00 20.00

20.00 20.00

20.00 20.00

20.00 20.00

20.00 5.70

20.00 3.80

20.00 1.90

20.00 0.00

20.00 0.00

2912.92 1641.47 467.02 1.68 0.77 0.35

3015.84 1944.55 723.18 2.00 0.55 0.18

3107.54 2251.15 982.86 2.33 0.38 0.05

3201.48 2561.89 1361.68 3.13 0.25

3412.74 2874.89 1857.76 4.45 0.19

73

COMPARATIVE STATEMENT FOR CURRENT ASSETS AND CURRENT LIABILITIES

AMOUNTS IN Rs. LACS
Projections Projections Projections Projections Projections

Financial Year ended/ ending No. of months CURRENT ASSETS 1. Raw materials (including stores and other items used in the process of manufacture) a. Imported Months consumption b. Indigenous Months consumption 2. Other consumable spares, excluding those included in 1 above a. Imported Months consumption b. Indigenous Months consumption 3. Stock in process Months cost of production 4. Finished goods Months cost of sales 5. Receivables other than export and deferred receivables (including bills purchased and discounted by bankers) Months domestic sales: excluding deferred payment sales 6.Export receivables(includin g bills purchased and discounted) Months export sales 7. Advance to suppliers of raw

2008 12

2009 12

2010 12

2011 12

2012 12

0.00 246.96 (0.99)

0.00 261.49 (0.99)

0.00 261.49 (0.99)

0.00 261.49 (0.99)

0.00 261.49 (0.99)

0.00 6.32 (1.97) 0.00 67.48 (0.23) 197.52

0.00 6.69 (1.97) 0.00 71.32 (0.23) 209.15

0.00 6.69 (1.97) 0.00 71.39 (0.23) 209.38

0.00 6.69 (1.97) 0.00 71.39 (0.23) 209.38

0.00 6.69 (1.97) 0.00 71.39 (0.23) 209.38

(0.50)

(0.50)

(0.50)

(0.50)

(0.50)

0.00

0.00

0.00

0.00

0.00

80.00

80.00

80.00

80.00

80.00

74

materials and stores/ spares, consumables 8. Other current assets including cash and bank balances and deferred receivables due within one year Cash and Bank Balances Investments (other than long-term): (i) Govt. and other trustee securities (ii) Fixed deposits with banks Installments of deferred receivables (due within one year) Advance payment of taxes Other current assets 9. Total current assets CURRENT LIABILITIES (other than bank borrowings for working capital) 10. Creditors for purchase of raw materials, stores and consumable spares Months purchases 11. Advances form customers 12. Statutory liabilities 13. other current liabilities: Short term borrowings from others Provision for taxation

559.49

817.02

1093.40

1372.32

1766.66

443.74 0.00 0.00 0.00 0.00

669.53 0.00 0.00 0.00 0.00

928.91 0.00 0.00 0.00 0.00

1192.73 0.00 0.00 0.00 0.00

1573.81 0.00 0.00 0.00 0.00

105.75 10.00 1157.77

137.49 10.00 1445.67

154.49 10.00 1722.35

169.59 10.00 2001.27

182.85 10.00 2395.61

10.00

10.00

10.00

10.00

10.00

(0.04) 0.00 0.00 345.75 0.00 105.75

(0.04) 0.00 0.00 377.49 0.00 137.49

(0.04) 0.00 0.00 394.49 0.00 154.49

(0.04) 0.00 0.00 294.59 0.00 169.59

(0.04) 0.00 0.00 192.85 0.00 182.85

75

Dividend payable Deposits/ installments of term loans/ DPGs/ debentures etc. (due with in one year) Other current liabilities and provisions (due with in one year) Total

0.00 230.00

0.00 230.00

0.00 230.00

0.00 115.00

0.00 0.00

10.00

10.00

10.00

10.00

10.00

355.75

387.49

404.49

304.59

202.85

ASSESSED BANK FINANCE AMOUNTS IN Rs LACS Projections Projections Projections 2008 2009 2010 12 1157.77 355.75 802.02 467.02 335.00 40.34% 28.93% 30.73% 0.86% 28.73 15.21 1.21 12 1445.67 387.49 1058.18 723.18 335.00 50.02% 23.17% 26.80% 0.69% 28.72 15.21 1.14 12 1722.35 404.49 1317.86 982.86 335.00 57.07% 19.45% 23.48% 0.58% 28.69 15.21 1.13 Projections 2011 12 2001.27 304.59 1696.68 1361.68 335.00 68.04% 16.74% 15.22% 0.50% 28.69 15.21 1.13 Projections 2012 12 2395.61 202.85 2192.76 1857.76 335.00 77.55% 13.98% 8.47% 0.42% 28.69 15.21 1.13

Financial Year ended/ ending No. of months Total Current Assets (TCA) Current Liabilities (other than bank borrowing) Working capital Gap Net Working Capital (actual/ projected) Assessed bank finance NWC/ TCA (%) Bank finance to TCA (%) Other CL/ TCA (%) Sundry Creditors/ TCA (%) Investment/ Net Sales (DAYS) Receivables/ Gross Sales (DAYS) Sundry Creditors/ Purchase (DAYS)

PERFORMANCE AND FINANCIAL INDICATORS 76

AMOUNT IN Rs. LACS Projections Financial year 2008 ended/ ending No. of months 12 Net sales 4075.39 Operating profit 510.89 Net other income 0.00 Profit Before Tax 379.30 PBT/ NET SALES 9.31% (%) Profit After Tax 251.85 Cash Accruals 434.93 Paid Up Capital 1000.00 Tangible Net 1641.47 Worth (TNW) Adjusted TNW 1641.47 (exclusive invest/ loans in subsidiaries) TOL/ TNW 0.77 Total term 0.35 liabilities/ TNW Current Ratio 1.68 Total Tangible 2907.22 Assets (TTA) EFFICIENCY RATIOS: Net sales/ TTA 1.40 (times) PBT/ TTA (%) 13.05% Operating cost/ Net 87.46% Sales (%) LIQUIDITY RATIOS: Current Ratio 1.68 Acid test Ratio 1.21 Bank Finance to 41.77% WCG (%) LEVERAGE RATIOS: Debt : Equity ratio 0.35 TOL/ TNW 0.77 Debt : Asset ratio 0.20 Fixed asset 0.33 coverage ratio Interest coverage 5.27 ratio

Projections Projections Projections Projections 2009 2010 2011 2012 12 4315.40 546.68 0.00 438.67 10.17% 291.28 474.36 1000.00 1944.55 1944.55 12 4320.00 543.62 0.00 459.19 10.63% 304.90 487.98 1000.00 2251.15 2251.15 12 4320.00 539.29 0.00 478.43 11.07% 317.68 500.76 1000.00 2561.89 2561.89 12 4320.00 534.61 0.00 495.85 11.48% 329.25 512.33 1000.00 2874.89 2874.89

0.55 0.18 2.00 3012.04

0.38 0.05 2.33 3105.64

0.25 0.00 3.13 3201.48

0.19 0.00 4.45 3412.74

1.43 14.56% 87.33%

1.39 14.79% 87.42%

1.35 14.94% 87.52%

1.27 14.53% 87.62%

2.00 1.53 31.66%

2.33 1.87 25.42%

3.13 2.60 19.74%

4.45 3.82 15.28%

0.18 0.55 0.11 0.22 6.76

0.05 0.38 0.04 0.08 8.61

0.00 0.25 0.00 0.00 11.87

0.00 0.19 0.00 0.00 18.52

77

TURNOVER RATIO Inventory Turnover period (DAYS) Average collection period (DAYS) Total assets turnover (TIMES) Average credit period (DAYS) Bank finance turnover Current asset turnover PROFITABILITY RATIOS Net profit margin (%) Net income: assets ratio (%) Return on investment (ROCE) (%) Return on equity (%) Operating profitability (%) Pre-tax profitability (%) PBT/ TTA (%) STRUCTURAL RATIOS Retained profit (%) Raw material content (%) Operating cost/ sales (%)

29 15 1.40 1 12.17 3.52

29 15 1.43 1 12.88 2.99

29 15 1.39 1 12.90 2.51

29 15 1.35 1 12.90 2.16

29 15 1.27 1 12.90 1.80

6.18% 8.66% 23.87% 25.19% 12.54% 9.31% 13.05% 100.00% 86.60% 87.46%

6.75% 9.67% 24.23% 29.13% 12.67% 10.17% 14.56% 100.00% 86.80% 87.33%

7.06% 9.82% 23.40% 30.49% 12.58% 10.63% 14.79% 100.00% 86.80% 87.42%

7.35% 9.92% 22.56% 31.77% 12.48% 11.07% 14.94% 100.00% 86.80% 87.52%

7.62% 9.65% 21.03% 32.93% 12.38% 11.48% 14.53% 100.00% 86.80% 87.62%

FINANCIAL SUMMARY AMOUNT IN Rs LACS Financial Year ended/ ending 1.Gross Sales (i) Domestic (ii) Exports 2.Less Excise Duty 3. Net Sales (1-2) 4.Depreciation 2008 4740.50 0.00 665.11 4075.39 183.08 2009 5019.67 0.00 704.27 4315.40 183.08 2010 5025.02 0.00 705.02 4320.00 183.08 2011 5025.02 0.00 705.02 4320.00 183.08 2012 5025.02 0.00 705.02 4320.00 183.08

78

5.Operating Profit (before interest) 6. Interest 7. PBT 8.Tax 9. PAT 10. PBDIT (4+6+7) 11. Paid up Capital (PUC) 12. Total Outside Liabilities (TOL) 13.Tangible Net Worth (TNW) 14.ADJUSTED TNW 15.Total Assets 16.Intangible Assets 17. TTA 18. PBDIT/ INT (10/ 6) 19.PBT/ NET SALES 20.PAT/ NET SALES 21.ROCE (PBDIT/ TTA) 22.(INVESTMENT +RECEIVABLES)/ NET SALES (DAYS) 23.Current ratio 24.TOL/ TNW 25. TOL/ TNW (Adjusted) 26. Cash Accrual 1. Long term sources 2.Long term uses 3.Surplus/ deficit

510.89 131.59 379.30 105.75 273.55 693.97 1000.00 1265.75 1641.47 1641.47 2912.92 5.70 2907.22 5.27 9.31% 6.71% 23.87% 46 1.68 0.77 0.77 456.63 458.53 230.00 228.53

546.68 108.01 438.67 137.49 301.18 729.76 1000.00 1067.49 1944.55 1944.55 3015.84 3.80 3012.04 6.76 10.17% 6.98% 24.23% 46 2.00 0.55 0.55 484.26 486.16 230.00 256.16

543.62 84.43 459.19 154.49 304.70 726.70 1000.00 854.49 2251.15 2251.15 3107.54 1.90 3105.64 8.61 10.63% 7.05% 23.40% 46 2.33 0.38 0.38 487.78 489.88 230.20 259.68

539.29 60.86 478.43 169.59 308.84 722.37 1000.00 639.59 2561.89 2561.89 3201.48 0.00 3201.48 11.87 11.07% 7.15% 22.56% 46 3.13 0.25 0.25 491.92 502.66 123.84 378.82

534.61 38.76 495.85 182.85 313.00 717.69 1000.00 537.85 2874.89 2874.89 3412.74 0.00 3412.74 18.52 11.48% 7.25% 21.03% 46 4.45 0.19 0.19 496.08 512.33 16.25 496.08

PERFORMANCE AND FINANCIALS Sales: The Company proposes to start the commercial operation of its 2*100 TPD sponge iron unit from september, 2006 and accordingly has projected a sales of Rs. 4381.03 Lakhs for 2006-07. The sales projections for 2007-08 and subsequent years are reasonable and achievable. Profitability: The unit has projected PBT/Net Sales at 8.26 for the year 2006-07. The average PBT/ Net Sales for the 6 years period comes to 10.15% which is in tune with the profitability shown by the other similar units in the same area. The profit projected is considered reasonable and acceptable. TNW: The projected TNW of the company as on 31.03.2007 shown at Rs. 1366.02 lacs is considered comfortable. It will increase further in the next year due to ploughing back of the profit in the company. The position of the TNW of the company is considered comfortable.

79

TOL/TNW: The TOL/TNW projected by the company for 2006-07 is 1.07 which is well below the indicative benchmark. The ratio has been projected to improve further in 200708 to 0.77 due to strengthening of TNW. It is estimated to improve further with repayment of term loans. Current Ratio: Current ratio projected by the company is better than our benchmark level. The current ratio projected by the company for the rest of the years during the loan period is much better and acceptable. Comments on performance of major segments identified in the balance sheet Manufacturing of sponge Iron is the only activity of the company. So the question of intra segmental transfer of funds or comparison between performances of different segments does not arise. Fund Flow Analysis: The fund flow statement reveals surplus of long term sources over long term uses. The projected fund is given below: Particulars Long Term Sources Long Term Uses Surplus/ Deficit Projections 2008 458.53 230.00 228.53 Projections 2009 486.16 230.00 256.16 Projections 2010 489.88 230.20 259.68 Projections 2011 502.66 123.84 378.82 Projections 2012 512.33 16.25 496.08

80

500 450 400 350 300 250 200 150 100 50 0 2008 2009 2010 2011 2012

The company has undertaken not to repay the unsecured loan during the currency of the bank loans. The cash accrual of the company is quite comfortable to service the term loan. No diversion of short term funds for long term Considering all the factors mentioned above about S S limited, following is the CREDIT RISK ASSESSMENT of S S Limited.

81

RISK RATING SUMMARY (WC/ TL) A (a) (i) (ii) (iii) (iv) (v) (vi) (vii) (b) (i) (ii) (c) (i) FINANCIAL RISK PARAMETERS VALUE FULL MARKS 2007 MARKS OBTAINED STATIC RATIOS Current Ratios 1.36 5 5 TOL/ TNW 1.07 5 5 PAT/ Net Sales (%) 6.43 10 8 PBDIT/ Interest (Times) 4.28 5 5 Return on capital employed (ROCE) (%) 22.83 5 5 Inventory/ Net Sales + Receivables/ Gross 47 5 5 Sales (DAYS) Trends in Performance NA 3 NA Sub- total score Out of 35 38 33 FUTURE PROSPECTS Projected profitability NA 3 NA Non-Achievement of Projected Profitability NA (-3) NA Sub-total score out of 3 NA 3 NA RISK MITIGATION: COLLATERAL SECURITY/ FINANCIAL STANDING Collateral Security/ Financial standing 6 0 Sub-total score (out of 6) 6 0 Aggregate Financial Risk Score out of 41 33 Aggregate Financial Risk Score 47 37.83 Normalized out of 47 Qualitative Risk Factors -10 0 Net Financial Risk Score out of 47 37.83 Net Financial Risk Score out of 25 20.12

FINANCIAL RISK PARAMETERS (i) (ii) (iii) (iv) (v) Project Debt Equity TOL/ TNW Gross Average DSCR Gross Average DSCR (all Loans) Term of repayment Total score out of 25 Normalized Financial Score: both TL and CASH CREDIT

VALUE 1.02 1.07 2.11 2.11 6years months

FULL MARKS 5 5 5 5 3 5 25 25

MARKS OBTAINED 5 5 5 5 3 23 21.56

82

83

B. (i)

BUSINESS RISK PARAMEETRS TECHONOLOGY The technology capability to be built up by the new Company would enable it to withstand the competition. CAPACITY UTILIZATION Vs BREAK EVEN POINT The capacity utilization projected for the new company is 30% above BEP. COMPLIANCE OF ENVIRONMENT REGULATIONS The project report of the new company envisages full compliance of environmental regulations before the start of the commercial productions. USER/ PRODUCT PROFILE The products of the new company are expected to be well accepted to sustain in the market. CONSISTENCY IN QUALITY Although the proposal of the new Company does not talk of obtaining ISO certification as one of its goals, there is enough stress on maintaining consistency in quality of its product. DISTRIBUTION NETWORK The new Company expects a marginal increase in sales even without a chain of network. CONSISTENCY IN CASH FLOWS The cash in flows projected by the new company seems to be adequate and request for over drawing is not envisaged. Aggregate Business Risk Score (out of 20) Marks obtained after multiplying with factor of 1.25 (i.e. out of 25). INDUSTRY RISK PARAMETERS COMPETITION Turnover growth at par with industry growth projected for the new company. CYCLALITY/ INDUSTRY OUTLOOK Outlook stable except for some critical factors. REGULATORY RISK Effect of regulatory risk can be contained. CONTEMPORARY ISSUES Adequate capability but it requires to be translated into action. Aggregate Business Risk Score (out of 8)

FULL MARKS 4

MARKS OBTAINED 4

(ii)

(iii)

(iv) (v)

2 4

1 2

(vi) (vii)

2 4

1 4

20

16 20.00 MARKS OBTAINED 1.5 1.5 1.5 1.5 6.00 84

C. (i) (ii) (iii) (iv)

FULL MARKS 2 2 2 2 8

Marks obtained after multiplying with a factor of 1.25 (i.e. out of 10) D. (i) (ii) MANAGEMENT RISK PARAMETERS INTEGRITY: Pvt. Ltd. COMPANY The management is having a good reputation about integrity in the market. TRACK RECORD Although the new Company does not have any borrowings arrangement with any bank/ FIs, its other accounts, say current account etc are conducted as per norms and they are open to any suggestions to confirm to the rules. MANGERIAL COMPETENCE/ COMMITMENT An exceptionally high level of competence and commitment in respect of new Company as gathered from market sources. EXPERTISE Company has few professional on its rolls and is basically managed by non professional owners. STRCTURE AND SYSTEM Although the design of an excellent budgeting and costing system are proposed in the project of the new company but given the profile of the personnel, there seems to be a concern about their actual implementation. EXPERIENCE IN THE INDUSTRY The management has got relatively less experience in the (< 5 years). CREDIBILITY: ABILITY TO MEET SALES PROJECTIONS The management of the new Company seems to be capable of meeting sales projections with a negative variance of less than 10% as per the plan drawn up by them. CREDIBILITY: ABILITY TO MEET PROFIT (PAT) PROJECTIONS The management of the new Company seems to be capable to meet profit projections with a negative variance of less than 10% or so as per its plan to meet the sales projections and the corresponding margin of profit in the venture. PAYMENT RECORD Market reports suggest that by and large, the new Company have a good record in meeting their financial commitments. STRATEGIC INITIATIVES Although the promoters are capable, the project FULL MARKS 3 3

7.50 MARKS OBTAINED 2 3

(iii)

(iv) (v)

2 2

1 1

(vi) (vii)

2 2

0 2

(viii)

(ix)

(x)

85

(xi)

and the personnel profiles do not contain any leadership statement. LENGTH OF RELATIONSHIP WITH THE 2 BANK New Connections Aggregate Management Risk Score (out of 25 25) Marks obtained after multiplying with factor of 1.60 (i.e. out of 40) TOTAL SCORE 100

0 16 25.60 74.66 MARKS OBTAINED ---Companys Score

E.

QUALITATIVE FACTORS: PARAMETER Marks under qualitative factors

NEGATIVE FULL MARK (-10) Rationalized since new unit

F. SUMMARY: Risk Category SubScore (i) Financial Risk: (a) Static ratios 38 (b) Future 03 prospects (c) Risk 06 Mitigation/ Collateral Security/ Financial Standing (ii) Business 20 Risk (iii) Industry 08 Risk (iv) Management 25 Risk TOTAL (v) Qualitative (-10) Factors (Negative parameters)

Total Total Score

47

25

21.56

20 8 25 100

25 10 40

20.00 7.50 25.60 74.66 0

(vi)Quantitative (Dynamic) Industry Comparison (A) Ratios comparison (B) (C) (D) for Companys ratio as Latest Industry Comparative position per their latest Average figures as Of (B Vs C)

86

audited financials (i) Current Ratio Not applicable (ii) TOL/ TNW (iii)PAT/ Net Sales (%) (iv) Inventory/ Net Sales + Receivables/ Gross Sales (DAYS)

per CMIE data base

At Worse par No comparable data Not applicable for units available

Better

THEREFORE RECOMMENDED CRA IS SB-2.

87

RECOMMENDATIONS
Borrowers must submit balance sheet, profit and loss account

statements timely as required.

Borrowers approaching the bank for the first time must be educated on their duties, obligations and responsibilities. list supplied by the bank at the time of submission of the proposal.

The borrower should furnish all the required information in the check

Inter bank exchange of information for taking credit decisions may be

strengthened to prevent dishonest borrowers.

There should be more stress given to constant monitoring of

performance of the units.

Credit Risk of a firm is assessed by ratios. These ratios are static on a

particular date that is on 31st march. Ratios may change when there occurs change in the financial condition. These ratios may lead to misconception in the minds of the borrowers.
The benchmark value of different static ratios should be different for

various Industries.
The Risk management policies of the bank should be updated on a

continuous basis to ensure that they reflect the changing Industry dynamics.
Risk management should be viewed as an evolutionary process and top

management must develop a risk management culture and philosophy that permeates the bank.

88

ANNEXURE
TNW --------- TOTAL NET WORTH SLC ---------- STAND BY LINE OF CREDIT CONS -------- CONSORTIUM DSCR---------DEBT SERVICE COVERAGE RATIO MMMF------ MONEY MARKET MUTUAL FUND ECCB ------EXECUTIVE COMMITTEE OF CENTRAL BOARD COCC -----CENTRAL OFFICE CREDIT COMMITTEE STCs--------STAFF TRAINING CENTRE CBS---------CORE BANKING SOLUTION LSCs--------LOCAL SHORT CREDIT IRAC--------INCOME RECOGNITION AND ASSET CLASSIFICATION TOL---------TOTAL OUTSIDE LIABILITY PUC---------PAID UP CAPITAL NPA---------NON PERFORMING ASSET GAAP-------GENERALLY ACCEPTED ACCOUNTING PRINCIPLES PLR----------PRIME LENDING RATE NWC--------NET WORKING CAPITAL CC-----------CASH CREDIT SBAR--------STATE BANK ADVANCE RATE

89

BIBLIOGRAPHY

Financial Management. (Pandey I.M) Financial Management. (Ravi M. Kishore) Journals of Institute of Chartered Financial Analysts of India. February 2006. Annual Reports of State Bank of India (Year 2004-05, 05-06, 06-07, 07-08) Business World. 20 October 2005. Page 26. Advancedge MBA (Volume 1, Issue-2, September 2003) Executive Refresher on Banking by T.N. Ramesam & M.R. Satyanarayana. Report on Trend and Progress of Banking in India by Reserve Bank of India Website of State Bank of India

90