A

COMPREHENSIVE PROJECT REPORT ON

CREDIT RISK MANAGEMENT AT AXIS BANK

In Partial fulfillment for the requirement of two year full time Master in Business Administration programme of Gujarat Technological University Guided By: Dr. Sneha Shukla

Submitted By: Karansinh Suvan (GLS1050) Utsav Lavingiya (GLS1059)

Submitted To: GLS Institute of Computer Technology (MBA) Gujarat Technological University 2010-12

CERTIFICATE

GLS Institute of Computer Technology (GLS-MBA)

This is to certify that Mr. KARANSINH SUVAN Roll No. GLS1050 and Mr.UTSAV LAVINGIAYA Roll No. GLS1059 students of GLS Institute Of Computer Technology (GLS-MBA) has successfully completed their Comprehensive Project Report On CREDIT RISK MANAGEMENT AT AXIS BANK in partial fulfillment of the MBA programme of Gujarat Technological University.

________________ Dr. Hitesh Ruparel Director

____________________ Dr. Sneha Shukla Project Guide

Date: _________________

Place: _________________

DECLARATION
We, Karansinh Suvan (GLS1050) and Utsav Lavingiya (GLS1059), students of GLS Institute of Computer Technology, hereby declare that we have completed this project on CREDIT RISK MANAGEMENT AT AXIS BANK in the academic year 2011-12. The information submitted is true and original to the best of our knowledge.

Date:

Karansinh Suvan Utsav Lavingiya M.B.A. GLSICT

PREFACE

The ongoing development of contemporary risk management methods and increase use of innovative finance product such as securitization and credit derivatives have brought about substantial changes in the business environment faced by credit institution today. Especially in the field of lending, this changes and innovation are now forcing banks to adapt their in-house software systems and relevant business process to meet these new requirements. In recent years, many banks have for sake of economy pared down the credit analyst function and rely increasingly on using outside sources of information such as brokers reports and credit rating agency reports to rationalize their credit decisions. It never the less remains important for bankers to learn about an understand the frame works of credit analysis within the frame work of credit risk management. Aside from the arguments of due diligence, which means that every bank ultimately is responsible for safe keeping of depositors funds and accordingly effecting its own credit analysis, is the issue of comprehension. That is to say, for those banks deciding not to invest in the analytical function and rely on outside sources of analysis, it never the less remains important for the reader to not only understand the analysts arguments but how those argument have been reached at in the first place. This project aims to provide the reader with a structural road map of the analytical process to study credit risk management policy of the bank.

ACKNOWLEDGEMENT

With the pleasure by expressing our deepest gratitude to Dr. Hitesh Ruparel (Director, GLS Institute Of Computer Technology, Ahmadabad), Prof. Sneha Shukla and our all respected faculties at GLSICT. We are expressing our sincere thanks to AXIS BANK official for giving us their recorded data to carry out research and for providing their valuable suggestion and spend valuable time for us from their busy and hectic schedule. We have tried hard and our level best to make the research as useful as possible and get a thorough knowledge about the research. And last, but definitely not the least, an especially valuable asset to us was the help, support and the encouragement given to us by our family to overcome every hurdle which we came across during the making of the project.

Date:

Thanking You, Karansinh Suvan Utsav Lavingiya M.B.A. GLSICT

Executive summary
Credit risk management has always been on the radar of the top management of any company, but at no other time has its relevance been more felt by financial institution then in the current business scenario - plagued by increasing competition ; and that great nemesis the subprime lending crises. In this age of advancing and complex risk transfer mechanism, it may make sense to step back and take look into the very basics of the credit risk management. By understanding the overall life cycle of a typical credit risk management process, we can identify key priority areas and challenges in the credit risk arena and how a solution can be design to tackle the situation. Credit risk is the largest and the most elementary risk faced by banks, it essentially focuses on determining the likely hood of the default or the credit deterioration and how costly it will turn out to be if it does occur. And this is true for the consumer lending (Retail) or the Corporate lending (Commercial) as well as the counter party credit risk in capital markets. As we have seen in the U.S. the buzz of the subprime crises, it is really important for the financial institution like banks to minimize the exposure to the risk as they are dealing with the money of public. Although dependent on the organization requirement and the profile, credit risk management life cycles typically involves the process like the Collection of the data regarding the applicant, Computation of the credit risk, Monitor and manage risk ratings and Loan disbursement as per the ratings allotted.

The Credit Risk is mainly of two types: 1) Borrowers Risk 2) Transactional Risk

Risk Management Solution is consisting of three modules: 1) Risk Identification Module 2) Risk Measurement Module 3) Risk Mitigation Module

Generally, Banks have outsourced their credit rating system to the credit rating ageneses to make the working smoother and efficient. Here we have created credit rating model based on certain parameter to get accurate idea of customers credit rating. Here various cases are studied to evaluate the Credit Risk Management in the AXIS BANK. The cases are evaluated on the bases of suggested models.

TABLE OF CONTENTS
Preface Acknowledgement Executive Summary RESEARCH METHODOLOGY CH:1 1.1 1.2 INTRODUCTION OF INDIAN BANKING INDUSTRY A snapshot of Banking Industry Classification of Indian Banking Industry 10 12 12 15

CH:2 2.1 2.2 2.3 CH:3 3.1 3.2

GLOBAL & LOCAL SCENARIO OF BANKING SECTOR General Banking Scenario Global Expansion of Indian Banking Financial Inclusion & Expansion of Banking Services INDUSTRY ANALYSIS PORTERS FIVE FORCE MODEL SWOT ANALYSIS

17 19 24 29 33 33 36

CH:4

INTRODUCTION OF AXIS BANK

40

CH:5

INTRODUCTION TO CREDIT RISK MANAGEMENT

44

CH:6

CREDIT APPRAISAL & CREDIT APPRAISAL MODEL AT AXIS BANK

60

CH:7 7.1 7.2 7.3 7.4

CASE STUDY & ANALYSIS Case Study-I Case Study-II Case Study-III Case Study-IV

69 69 82 92 103

CH:8

FINDINGS
8

111

CH:9

CONCLUSION

113

BIBLIOGRAPHY

114

Research methodology

Introduction
The banking industry has undergone a sea change after the first phase of economic liberalization in 1991 and hence credit management. While the primary function of banks is to lend funds as loans to various sectors such as agriculture, industry, personal loans, housing loans etc., in recent times the banks have become very cautious in extending loans. The reason behind this is credit risk. Credit risk is the risk to a banks earnings or capital base arising from a borrowers failure to meet the terms of any contractual or other agreement it has with the bank. Credit risk arises from all activities where success depends on counterparty, issuer or borrower performance. Credit risk enters the books of a bank the moment the funds are lend, deployed, invested or committed in any form to counterparty whether the transaction is on or off the balance sheet. So now a day, management of credit risk is very important for the bank.

Objectives of the study To evaluate the credit appraisal system and risk assessment model. To study the live cases of the credit appraisal on the bases of suggested model.

Scope of the study This study is based on suggested credit risk models. Cases are evaluated on the basis of last 3 years financial data only.

Research design Exploratory in nature

10

Sources of data Secondary data - Information collected from the Credit Appraisal Officer of AXIS BANK. - Books, Journals & Magazines.

Methods of Data collection Visit of the credit appraisal department & recovery department of AXIS BANK. Collection of the various information regarding credit appraisal model from various books.

Beneficiaries: This study will be helpful to the followings: Banks & other Financial Institutions Students Researchers

Limitations: This study considers only Credit Risk Model. This model is not useful for new industry or new enterprise where past data is not available. Only five cases have been taken due to time constraint.

Expected Contribution of the Study: This study will help the bank to reduce the credit risk through the reducing procedural loopholes in the appraisal process.

11

CHAPTER 1

INTRODUCTION TO BANKING SECTOR

A snapshot of the banking industry

The Reserve Bank of India (RBI), as the central bank of the country, closely monitors developments in the whole financial sector.

The banking sector is dominated by Scheduled Commercial Banks (SBCs). As at end March 2002, there were 296 Commercial banks operating in India. This included 27 Public Sector Banks (PSBs), 31 Private, 42 Foreign and 196 Regional Rural Banks. Also, there were 67 scheduled co-operative banks consisting of 51 scheduled urban cooperative banks and 16 scheduled state co-operative banks.

Scheduled commercial banks touched, on the deposit front, a growth of 14% as against 18% registered in the previous year. And on advances, the growth was 14.5% against 17.3% of the earlier year. State Bank of India is still the largest bank in India with the market share of 20% ICICI and its two subsidiaries merged with ICICI Bank, leading creating the second largest bank in India with a balance sheet size of Rs. 1040bn. Higher provisioning norms, tighter asset classification norms, dispensing with the concept of past due for recognition of NPAs, lowering of ceiling on exposure to a single borrower and group exposure etc., are among the measures in order to improve the banking sector.

12

A minimum stipulated Capital Adequacy Ratio (CAR) was introduced to strengthen the ability of banks to absorb losses and the ratio has subsequently been raised from 8% to 9%. It is proposed to hike the CAR to 12% by 2004 based on the Basle Committee recommendations. Retail Banking is the new mantra in the banking sector. The home Loans alone account For nearly two-third of the total retail portfolio of the bank. According to one estimate, the retail segment is expected to grow at 30-40% in the coming years. Net banking, phone banking, mobile banking, ATMs and bill payments are the new buzz words that banks are using to lure customers. With a view to provide an institutional mechanism for sharing of information on borrowers / potential borrowers by banks and Financial Institutions, the Credit Information Bureau (India) Ltd. (CIBIL) was set up in August 2000. The Bureau provides a framework for collecting, processing and sharing credit information on borrowers of credit institutions. SBI and HDFC are the promoters of the CIBIL. The RBI is now planning to transfer of its stakes in the SBI, NHB and National bank for Agricultural and Rural Development to the private players. Also, the Government has sought to lower its holding in PSBs to a minimum of 33% of total capital by allowing them to raise capital from the market. Banks are free to acquire shares, convertible debentures of corporate and units of equity oriented mutual funds, subject to a ceiling of 5% of the total outstanding advances (including commercial paper) as on March 31 of the previous year.

13

Reforms in the Banking sector

The first phase of financial reforms resulted in the nationalization of 14 major banks in 1969 and resulted in a shift from Class banking to Mass banking. This in turn resulted in a significant growth in the geographical coverage of banks. Every bank has to earmark a minimum percentage of their Loan portfolio to sectors identified as priority sectors. The manufacturing sector also grew during the 1970s in protected environs and the banking sector was a critical source. The next wave of reforms saw the nationalization of 6 more commercial banks in 1980. Since then the number scheduled commercial banks increased four-fold and the number of banks branches increased eightfold.

After the second phase of financial sector reforms and liberalization of the sector in the early nineties, the Public Sector Banks (PSB) s found it extremely difficult to complete with the new private sector banks and the foreign banks. The new private sector banks first made their appearance after the guidelines permitting them were issued in January 1993. Eight new private sector banks are presently in operation. This banks due to their late start have access to state-of-the-art technology, which in turn helps them to save on manpower costs and provide better services.

During the year 2000, the State Bank of India (SBI) and its 7 associates accounted for a 25% share in deposits and 28.1% share in credit. The 20 nationalized banks accounted for 53.5% of the deposits and 47.5% of credit during the same period. The share of foreign banks ( numbering 42 ), regional rural banks and other scheduled commercial banks accounted for 5.7%, 3.9% and 12.2% respectively in deposits and 8.41%, 3.14% and 12.85% respectively in credit during the year 2000

14

Classification of Banks:

The Indian banking industry, which is governed by the Banking Regulation Act of India 1949 can be broadly classified and scheduled into two banks. major categories, non-

scheduled

banks

Scheduled banks comprise ownership,

commercial banks and the co-operative banks. In Terms of

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

15

Banking System in India

Reserve bank of India (Controlling Authority)

Development Financial institutions

Banks

IFCI IDBI

ICICI

NABARD

NHB

IRBI

EXIM Bank

SIDBI

Commercial Banks

Regional Rural Banks

Land Development Banks

Cooperative Banks

Public Sector Banks

Private Sector Banks

SBI Groups Banks

Nationalized Banks

Indian Banks

Foreign

16

CHAPTER 2

GLOBAL AND LOCAL SCENARIO OF BANKING SECTOR

Indian Banking System: The Current State & Road Ahead

Introduction Recent time has witnessed the world economy develop serious difficulties in terms of lapse of banking & financial institutions and plunging demand. Prospects became very uncertain causing recession in major economies. However, amidst all this chaos Indias banking sector has been amongst the few to maintain resilience.

A progressively growing balance sheet, higher pace of credit expansion, expanding profitability and productivity akin to banks in developed markets, lower incidence of nonperforming assets and focus on financial inclusion have contributed to making Indian banking vibrant and strong. Indian banks have begun to revise their growth approach and re-evaluate the prospects on hand to keep the economy rolling. The way forward for the Indian banks is to innovate to take advantage of the new business opportunities and at the same time ensure continuous assessment of risks.

A rigorous evaluation of the health of commercial banks, recently undertaken by the Committee on Financial Sector Assessment (CFSA) also shows that the commercial banks are robust and versatile. The single-factor stress tests undertaken by the CFSA divulge that the banking system can endure considerable shocks arising from large possible changes in credit quality, interest rate and liquidity conditions. These stress tests for credit, market and liquidity risk show that Indian banks are by and large resilient.

17

Thus, it has become far more imperative to contemplate the role of the Banking Industry in fostering the long term growth of the economy. With the purview of economic stability and growth, greater attention is required on both political and regulatory commitment to long term development programme. FICCI conducted a survey on the Indian Banking Industry to assess the competitive advantage offered by the banking sector, as well as the policies and structures that are required to further the pace of growth. The results of our survey are given in the following sections.

18

General Banking Scenario

The pace of development for the Indian banking industry has been tremendous over the past decade. As the world reels from the global financial meltdown, Indias banking sector has been one of the very few to actually maintain resilience while continuing to provide growth opportunities, a feat unlikely to be matched by other developed markets around the world. FICCI conducted a survey on the Indian Banking Industry to assess the competitive advantage offered by the banking sector, as well as the policies and structures required to further stimulate the pace of growth.

The predicament of the banks in the developed countries owing to excessive leverage and lax regulatory system has time and again been compared with somewhat unscathed Indian Banking Sector. An attempt has been made to understand the general sentiment with regards to the performance, the challenges and the opportunities ahead for the Indian Banking Sector.

A majority of the respondents, almost 69% of them, felt that the Indian banking Industry was in a very good to excellent shape, with a further 25% feeling it was in good shape and only 6% of the respondents feeling that the performance of the industry was just average. In fact, an overwhelming majority (93.33%) of the respondents felt that the banking industry compared with the best of the sectors of the economy, including pharmaceuticals, infrastructure, etc.

Most of the respondents were positive with regard to the growth rate attainable by the Indian banking industry for the year 2009-10 and 2014-15, with 53.33% of the view that growth would be between 15-20% for the year 2009-10 and greater than 20% for 2014-15.

19

On being asked what is the major strength of the Indian banking industry, which makes it resilient in the current economic climate; 93.75% respondents feel the regulatory system to be the major strength, 75% economic growth, 68.75% relative insulation from external market, 56.25% credit quality, 25% technological advancement and 43.75% our risk assessment systems.

Change is the only constant feature in this dynamic world and banking is not an exception. The changes staring in the face of bankers relates to the fundamental way of banking-which is going through rapid transformation in the world of today. Adjust, adapt and change should be the key mantra. The major challenge faced by banks today is the ever rising customer expectation as well as risk management and maintaining growth rate. Following are the results of the biggest challenge faced by the banking industry as declared by our respondents (on a mode scale of 1 to 7 with 1 being the biggest challenge):

20

They also asked their respondents to rate India on certain essential banking parameters (Regulatory Systems, Risk Assessment Systems, Technological System and Credit Quality) in comparison with other countries i.e. China, Japan, Brazil, Russia, Hong Kong, Singapore, UK and USA. The recent financial crisis has drawn attention to under-regulation of banks (mainly investment banks) in the US. Though, the Indian story is quite different. Regulatory systems of Indian banks were rated better than China, Brazil, Russia, and UK; at par with Japan, Singapore and Hong Kong where as all our respondents feel that we are above par or at par with USA. On comparing the results with their previous survey where the respondents had rated Indian Regulatory system below par the US and UK system, they see that post the financial crisis Indian Banks are more confident on the Indian Regulatory Framework.

21

The global meltdown started as a banking crisis triggered by the credit quality. Indian banks seem to have paced up in terms of Credit Quality. Credit quality of banks has been rated above par than China, Brazil, Russia, UK and USA but at par with Hong Kong and Singapore and 85.72% of the respondents feel that we are at least at par with Japan. Thus, they see that the resilience the Indian Banks showed at the time of financial crisis has led to an attitudinal shift of our respondents with the past survey indicating Credit quality of Indian banks being below par than that of US and UK.

22

As technology ingrains itself in all aspects of a banks functioning, the challenge lies in exploiting the potential for profiting from investments made in technology. A lot needs to be done on the technological front to keep in pace with the global economies, as is evident from the survey results. Technology systems of Indian banks have been rated more advanced than Brazil and Russia but below par with China, Japan, Hong Kong, Singapore, UK and USA. They find no change on introspection of their past surveys which also highlighted the need for Indian banks to pace up in adoption of advanced technology.

23

Global Expansion of Indian Banking

The idea of creating bigger banks to take on competition sounds attractive but one must realize even the biggest among Indian banks are small by global standards. The lack of global scale for Indian banks came into sharp focus during the recent financial crisis which saw several international banks reneging on their funding commitments to Indian companies, but local banks could not step into the breach because of balance sheet limitations.

In this light, 93.75% of all respondents to their survey are considering expanding their operations in the future. They further asked participants on the methods that they consider suitable to meet their expansion needs. They divide them into organic means of growth that comes out of an increase in the banks own business activity, and inorganic means that includes mergers or takeovers.

24

25

We see from the above graph that amongst organic means of expansion, branch expansion finds favor with banks while strategic alliances is the most popular inorganic method for banks considering scaling up their operations. On the other hand, new ventures and buyout portfolios are the least popular methods for bank expansion.

Scope for New Entrants

81.25% also felt that there was further scope for new entrants in the market, in spite of capital management and human resource constraints, as there continue to remain opportunities in unbanked areas. With only 30-35% of the population financially included, and the Indian banking industry unsaturated with CAGR of well above 20%, participants in their survey felt that the market definitely has scope to accommodate new players.

While there has been prior debate, they questioned banks on NBFCs and Industrial houses being established as banking institutions and find opinion to be marginally against the notion, with 35.71% in favour while 42.86% were against them being established as banks.

However, on further questioning, 57.14% of respondents feel that the above may be allowed but only if it is along with specific regulatory limitations. Banks felt that limitations regarding track record, ensuring adequate capitalization levels, a tiered license that enables new entrants to enter into specific areas of the business only after satisfactorily achieving set milestones for the prior stages, cap on promoter's holdings and wider public holding in addition to a common banking regulator on a level playing field are essential before they may set themselves up as banks.

26

Banking Activities

Over the last three decades, there has been a remarkable increase in the size, spread and scope of activities of banks in India. The business profile of banks has transformed dramatically to include non-traditional activities like merchant banking, mutual funds,new financial services and products and the human resource development.

Their survey finds that within retail operations, banks rate product development and differentiation; innovation and customization; cost reduction; cross selling and technological up gradation as equally important to the growth of their retail operations. Additionally a few respondents also find proactive financial inclusion, credit discipline and income growth of individuals and customer orientation to be significant factors for their retail growth.

There is, at the same time, an urgent need for Indian banks to move beyond retail banking, and further grow and expand their fee- based operations, which has globally remained one of the key drivers of growth and profitability. In fact, over 80% of banks in their survey have only up to 15% of their total incomes constituted by fee- based income; and barely 13% have 20-30% of their total income constituted by fee-based income.

Out of avenues for non-interest income, we see that Banc assurance (85.71%) and FOREX Management (71.43%) remain most profitable for banks. Derivatives, understandably, remains the least profitable business opportunity for banks as the market for derivatives is still in its nascent stage in India.

27

There is nevertheless a visibly increased focus on fee based sources of income. 71% of banks in their survey saw an increase in their fee based income as a percentage of their total income for the FY 2008-09 as compared to FY 2007-08. Indian banks are fast realizing that fee-based sources of income have to be actively looked at as a basis for future growth, if the industry is to become a global force to reckon with.

28

Financial Inclusion and Expansion of Banking Services

Transition from class banking to mass banking and increased customer focus is drastically changing the landscape of Indian banking. Expansion of retail banking has a lot of potential as retail assets are just 22% of the total banking assets and contribution of retail loans to GDP stands merely at 6% in India vis--vis 15% in China and 24% in Thailand. All banks in their survey weigh Cost effective credit delivery mechanisms (100%) as most important to the promotion of financial inclusion. This was followed by factors such as identifying needs and developing relevant financial products (75%), demographic knowledge and strong local relations (62.5%) and ensuring productive use and adequate returns on credit employed (43.75%) in decreasing levels of importance. In fact, India has an expanding middle class of 250 to 300 million people in need of varied banking services. While 60% of our population has access to banks, only 15% of them have loan accounts and an overwhelming 70% of farmers have no access to formal sources of credit, reflective of immense potential for the banking system This is mirrored in the fact that while our survey finds no discernible shift in the lending pattern of banks across Tier 1, Tier 2 and Tier 3 cities over the last two years, 93% Indian Banking System: The Current State & Road Ahead Page | 20 participants still find rural markets to be to be a profitable avenue, with 53% of respondents finding it lucrative in spite of it being a difficult market. Cost of accessing markets has been the only sour note in the overall experience of our respondents in rural markets At the same time, more than 81.25% of our respondents have a strategy in place to tap rural markets, with the remainder as yet undecided on their plan of action. Tie ups with micro finance institutions (MFIs)/SHG and introduction of innovative and customized products are considered most important to approaching rural markets according to respondents, more so as compared to internet kiosks, post offices and supply chain management techniques

29

Additionally, 81.25% of respondents found branchless banking to be an effective and secure way of reaching out to rural markets, with mobile, biometric and handheld devices, equally popular amongst banks. Some respondents also found the Business Correspondents model to be an untapped model for financial inclusion. As Indian financial markets mature over time, there is also a need for innovative instruments to deepen the market further. Suggestions ranged from micro saving and micro insurance initiatives, Cash deposit machines, warehouse receipts, to prepaid cash cards, derivatives, interest rate futures and credit default swaps as a means to further the financial inclusion and expansionary process.

30

Credit Flow and Industry

India Inc is completely dependent on the Banking System for meeting its funding requirement. One of the major complaints from the industry has in fact been high lending rates in spite of massive cuts in policy rates by the RBI. We asked the banks what they felt were major factors responsible for rigid prime lending rates. None of the banks in their survey considered the cap on bank deposit rates to be one of the causes of inflexible lending rates. Due to long-term maturity, the trend seems to be changing. However, there are other factors which have led to the stickiness of lending rates such as wariness of corporate credit risk (33.33%), competition from government small savings schemes (26.67%). Benchmarking of SME and export loans against PLR (20.00%) on the other hand, do not seem to have as significant an influence over lending rates according to banks. The great Indian industrial engine has nevertheless continued to hum its way through most of the year long crisis. We asked banks about the sectors that they consider to be most profitable in the coming years (Fig. 12). All respondents were confident in the infrastructure sector leading the profitability for the industry, followed by retail loans (73.33%) and others

31

(Source: Annual survey, February 2010) (FEDERATION OF INDIAN CHAMBERS OF COMMERCE & INDUSTRY)

32

CHAPTER 3

INDUSTRY ANALYSIS
Competitive Forces Model (Porters Five Force Model)

(2) Potential Entrants is high as development financial institutions as well as private and Foreign Banks have entered in a big way (5) Organizing power of the supplier is high. With the new financial instruments they are asking higher return on the investments (1) Rivalry among existing firms has increased with liberalization. New products and improved customer services is the focus. (3) The threat of substitute product is very high like credit unions and investment houses. There are other substitutes as well banks like mutual funds, stocks, government securities, debentures, gold, real estate etc. (4) Bargaining power of buyers is high as corporate can raise funds easily due to high Competition.

ubstitute is high due to competition from NBFCs and insurance33 companies as they offer a high rate of interest than Banks.

1. Rivalry among existing firms With the process of liberalization, competition among the existing banks has increased. Each bank is coming up with new products to attract the customers and tailor made Loans are provided. The quality of services provided by banks has improved drastically.

2. Potential Entrants Previously the Development Financial Institutions mainly provided project finance and development activities. But they now entered into retail banking which has resulted into stiff competition among the exiting players.

3. Threats from Substitutes Competition from the non-banking financial sector is increasing rapidly. The threat of substitute product is very high like credit unions and in investment houses. There are other substitutes as well banks like mutual funds, stocks, government securities, debentures, gold, real estate etc.

4. Bargaining Power of Buyers Corporate can raise their funds through primary market or by issue of GDRs, FCCBs. As a result they have a higher bargaining power. Even in the case of personal finance, the buyers have a high bargaining power. This is mainly because of competition.

5. Bargaining Power of Suppliers With the advent of new financial instruments providing a higher rate of returns to the investors, the investments in deposits is not growing in a phased manner. The suppliers demand a higher return for the investments.

34

6. Overall Analysis The key issue is how banks can leverage their strengths to have a better future. Since the availability of funds is more and deployment of funds is less, banks should evolve new products and services to the customers. There should be a rational thinking in sanctioning Loans, which will bring down the NPAs. As there is a expected revival in the Indian economy Banks have a major role to play.

35

SWOT Analysis

The banking sector is also taken as a proxy for the economy as a whole. The performance of bank should therefore, reflect Trends in the Indian Economy. Due to the reforms in the financial sector, banking industry has changed drastically with the opportunities to the work with, new accounting standards new entrants and information technology. The deregulation of the interest rate, participation of banks in project financing has changed in the environment of banks.

The performance of banking industry is done through SWOT Analysis. It mainly helps to know the strengths and Weakness of the industry and to improve will be known through converting the opportunities into strengths. It also helps for the competitive environment among the banks.

a) STRENGTHS 1. Greater securities of Funds Compared to other investment options banks since its inception has been a better avenue in terms of securities. Due to satisfactory implementation of RBIs prudential norms banks have won public confidence over several years.

2. Banking network After nationalization, banks have expanded their branches in the country, which has helped banks build large networks in the rural and urban areas. Private Banks allowed operating but they mainly concentrate in metropolis.

3. Large Customer Base This is mainly attributed to the large network of the banking sector. Depositors in rural areas prefer banks because of the failure of the NBFCs.

36

4. Low Cost of Capital Corporate prefers borrowing money from banks because of low cost of capital. Middle income people who want money for personal financing can look to banks as they offer at very low rates of interests. Consumer credit forms the major source of financing by banks.

b) WEAKNESS 1. Basel Committee The banks need to comply with the norms of Basel committee but before that it is challenge for banks to implement the Basel committee standard, which are of international standard.

2. Powerful Unions Nationalization of banks had a positive outcome in helping the Indian Economy as a whole. But this had also proved detrimental in the form of strong unions, which have a major influence in decision-making. They are against automation.

3. Priority Sector Lending To uplift the society, priority sector lending was brought in during nationalization. This is good for the economy but banks have failed to manage the asset quality and their intensions were more towards fulfilling government norms. As a result lending was done for non-productive purposes.

4. High Non-Performing Assets Non-Performing Assets (NPAs) have become a matter of concern in the banking industry. This is because reduced to meet the international standards of change in the total outstanding advances, which has to be reduced to meet the international standards.

37

c) OPPORTUNITIES 1. Universal Banking Banks have moved along the value chain to provide their customers more products and services. like home finance, Capital Markets, Bonds etc. Every Indian bank has an opportunity to become universal bank, which provides every financial service under one roof.

2. Differential Interest Rates As RBI control over bank reduces, they will have greater flexibility to fix their own interest rates which depends on the profitability of the banks.

3. High Household Savings Household savings has been increasing drastically. Investment in financial assets has also increased. Banks should use this opportunity for raising funds.

4. Untapped Foreign Markets Many Indian banks have not sufficiently penetrated in foreign markets to generate satisfactory business therefore, it can be concluded clear opportunity exists in such markets.

5. Interest Banking The advance in information technology has made banking easier. Business can effectively carried out through internet banking.

38

d) THREATS 1. NBFCs, Capital Markets and Mutual funds

There is a huge investment of household savings. The investments in NBFCs deposits, Capital Market Instruments and Mutual Funds are increasing. Normally these instruments offer better return to investors.

2. Changes in the Government Policy The change in the government policy has proved to be a threat to the banking sector. Due to some major changes in policies related to deposits mobilization credit deployment, interest rates- the whole scenario of banking industry may change.

3. Inflation The interest rates go down with a fall in inflation. Thus, the investors will shift his investments to the other profitable sectors.

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

39

CHAPTER 4
INTRODUCTION TO AXIS BANK
Axis Bank was the first of the new private banks to have begun operations in 1994, after the Government of India allowed new private banks to be established. The Bank was promoted jointly by the Administrator of the specified undertaking of the Unit Trust of India (UTI - I), Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC) and other four PSU insurance companies, i.e. National Insurance Company Ltd., The New India Assurance Company Ltd., The Oriental Insurance Company Ltd. and United India Insurance Company Ltd. The Bank today is capitalized to the extent of Rs. 403.63 crores with the public holding (other than promoters and GDRs) at 53.72%. The Bank's Registered Office is at Ahmedabad and its Central Office is located at Mumbai. The Bank has a very wide network of more than 896 branches and Extension Counters (as on 31st December 2009). The Bank has a network of over 4055 ATMs (as on 31st December 2009) providing 24 hrs a day banking convenience to its customers. This is one of the largest ATM networks in the country. The Bank has strengths in both retail and corporate banking and is committed to adopting the best industry practices internationally in order to achieve excellence.

Mission
Customer service and product innovation tuned to diverse needs of individual and corporate clientele. Continuous technology up gradation while maintaining human values. Progressive globalization and achieving international standards.

40

Core values
Customer satisfaction through Providing quality service effectively and efficiently smile, it enhances your face value a service quality stressed on Periodic customers service audits Maximization of stakeholder value

Business divisions
Treasury management Treasury is responsible for the maintenance of the statutory requirements such as the cash reserve ratio (CRR), statutory liquidity ratio (SLR) and the investment of such funds. It also manages the assets and liabilities of the bank. Primary dealing activities can be classified into Money market operations Foreign exchange operations Derivatives

Merchant Banking and capital markets Axis Bank is a registered merchant Banker. The services offered are: Private placement/syndication Issue management Debenture trustees Depository services Project advisory services, capital market services, advisory on Mergers & Acquisition

41

 Retail financial services All branches have a dedicated financial advisory desk, wherein the mutual fund schemes are marketed. The objective is to provide customers with a larger portfolio of investment avenues thereby enhancing customer relationship. Other products handled by the department include sale of Gold Coins as well as marketing of Depository services.

Corporate and institutional banking Cash management Services Business current Accounts Correspondent Banking Government Business

Retail Banking Retail banking is one of the key departments in the bank. It has the largest variety in its portfolio which consists of retail asset and retail liability products. Retail banking by definition implies banking services which are offered to individual customers as opposed to corporate banking which is meant for companies. International banking Major functions include Handling regulatory issues which include compliance with regulations of various authorities such as RBI regulations, FEMA etc Keeping a track of the business volumes being generated by the branches and controlling the margins Maintaining relationship with correspondent Banks outside India

42

 Advances The function involves extending fund and non-fund based credit facilities to different clients in the country, the department aims to maximize the interest spread earned on funds available with the bank while keeping the risk on the credit portfolio at acceptable limits. The department also tries to maximize feebased income from both fund based and non-fund based activities.

Board of Directors:
Shri N.C. Singhal Shri J.R. Varma Dr. R.H. Patil Smt. Rama Bijapurkar Shri R.B. L. Vaish Shri M.V. Subbiah Shri Ramesh Ramanathan Shri K.N. Prithviraj

43

CHAPTER 5 Introduction to Credit Risk Management

Definition Of all different types of risks that a bank is subject to, credit risk can be defined as the risk of failure on the part of the borrower to meet obligations towards the bank in accordance with the Terms and conditions that have been agreed upon. Inability and/or unwillingness of the borrower to repay debts may be the cause of such default.

The bank aims at minimizing this risk that could arise from individual borrowers or the entire portfolio. The former can be addressed by having welldeveloped systems to appraise the borrowers; the latter, on the other hand, can be minimized by avoiding concentration of credit exposure with a few borrowers who have similar risk profiles. Credit risk management becomes even more relevant in the light of the changes that have been brought about in the economic environment, including increasing competition and thinning spreads on both the sides of Balance sheet

Determinants of Credit Risk Factors determining credit risk of a banks portfolio can be divided into external and internal factors. The banks do not have control on external factors. These include factors across a wide spectrum ranging from the state of the economy to the correlation among different segments of industry. The risk arising out of external factors can be mitigated via diversification of the credit portfolio across industries especially in light of any expectations of adverse developments in the existing portfolio.

44

Given that the banks have very little control over such external factors, the bank can minimize the credit risk that it faces mainly by managing the internal factors. These include the internal policies and processes of the bank like Loan policies, appraisal processes, monitoring systems etc. These internal factors can be taken care of, partly, via effective rating and monitoring systems, entry level criteria etc. These processes would enable improvement in the quality of credit decisions. This would effectively improve the quality (and hence profitability) of the portfolio. While monitoring systems are useful tool at post-sanction stage, rating systems act as important aid at the pre-sanction stage.

Introduction to Credit Tools The Bank has developed tools for better credit risk management. These focus on the areas of rating of corporate (pre-sanctioning of Loans) and monitoring of Loans (post-sanctioning). The focus of this manual is to familiarise the user with the credit rating tool.

Credit Rating: Definition Credit rating is the process of assigning a letter rating to borrowers indicating the creditworthiness of the borrower. Rating is assigned based on the ability of the borrower (company) to repay the debt and his willingness to do so. The higher the rating of a company, the lower the probability of its default. The companies assigned with the same credit rating have similar probability of default.

45

 Use in decision-making Credit rating helps the bank in making several key decisions regarding credit including: Whether to lend to a particular borrower or not; What price to charge What are the products to be offered to the borrower and for what tenor At what level should sanctioning be done What should be the frequency of renewal and monitoring

It should, however, be noted that credit rating is one of the inputs used in taking credit decisions. There are various other factors that need to be considered in taking the decision (e.g., adequacy of borrowers cash flow, collateral provided, and relationship with the borrower). The rating allows the bank to ascertain a probability of the borrowers default based on past data.

Main features of the rating tool: i) Comprehensive coverage of parameters. ii) Extensive data requirement. iii) Mix of subjective and objective parameters. iv) Includes trend analysis. v) 13 parameters are benchmarked against other players in the segment. The tool contains the latest available audited data/ratios of other players in the segment. The data is updated at intervals. vi) Captures industry outlook. vii) Eight grade ratings broadly mapped with external credit rating agencys ratings prevalent in India.

46

 Special features of the web based credit rating tool i) Centralized data base. ii) Easy accessibility and faster computation of scores. iii) Selective access to users based on the area of operation. Branches have access to the data pertaining to their branch only, Zonal offices have access to the data pertaining to all the branches under their control and the Credit Department and Risk Department at Central Office have access to all accounts. iv) Adequate security system and provision of audit trails for confidentiality. v) Maintaining of past rating records in the system for collection of empirical data on rating migrations. This will enable the bank to arrive at PDs (Probability of Default) factor.

47

Rating Tool for Small and Medium Enterprises (SME) The SME rating tool has been developed for the purpose of assigning a credit rating to the SME borrower of the Bank. The aim of the tool is to provide a standardised system for the bank to evaluate the credit risk of different borrowers. It should, however, be noted that this tool is not the standalone exercise for the purpose of sanctioning of Loan to a SME borrower. It should be supplemented with other inputs important in the sanctioning process. The following broad areas have been considered for determining the rating of Borrowers in the SME category: Financial performance Business performance Industry outlook Quality of management Conduct of account (after roll out of the Monitoring tool)

Within each of these broad areas, various parameters have been used for obtaining an overall rating of the borrower. In the following sections, we shall discuss in greater detail the structure of the tool and the methodology of using it.

Parameters used in credit rating of SME:

The rating tool for SME borrowers assigns the following weightages to each one of the four main categories i) Scenario (I) without monitori Parameter Financial performance Weightage (%) 40

48

Operating performance of business Quality of management Industry outlook

22.5 22.5 15

ii) Scenario (II) with monitoring tool: The weightages would be conveyed separately on roll out of the tool.

Parameters used in the SME tool Financial performance The tool in its current form uses various parameters for rating a borrower on its financial strength. These various sub-parameters give us an idea of the different sources of risk being faced by a company in different areas. Operating performance of business Operational efficiency of a borrower is important in deTermining the generation of cash for repayment of its debt obligations. The parameters in this category assess the borrowers competence in its primary activities. Quality of management Quality of the management of a borrowal unit has a direct impact on the performance of the unit. Also, it would have a direct impact on the integrity of the borrower especially in Terms of its willingness to repay its debt.

49

Industry In order to undertake the credit rating of any borrower, it is important to assess the riskiness of the industry to which that borrower belongs. Borrowers, which are similarly ranked in Terms of financial

performance, operating performance of business and quality of management may have different credit ratings due to the risks inherent in their industry. The risk assessment in industry sectors is done at the Central Office level and appropriate score for each industry has been allocated in the tool. On selection of the relevant industry sector, the tool will automatically reckon the allocated score.

Three types under SME tool

i) Manufacturing ii) Services and iii) Trading

50

Various parameters under each of the above stated parameters for these three types of SME tool are as under:

Manufacturing

i) Financial performance Sr. No. F1 F2 F3 F6 F7 F8 F9 F12*$ F13 Sub parameters Net Sales Growth Rate (%) PBDIT Growth Rate (%) PBDIT/Sales (%) TOL/TNW Current Ratio Operating Cash Flow DSCR Foreign exchange risk Expected values of D/E, if 50% of NFB credit devolves (corrected for margin) F24 F27* F28* Realisability of Debtors State of export country economy Fund repatriation risk TOTAL * Applicable for export units $Applicable for units having imports and or exports
51

Weightage (%) 10 7 10 10 10 8 8 10 5

12 5 5 100

ii) Operating performance of business

Sr. No. B7 B8 B9 B10 B13 B14 B15 B20 B21

Sub parameters Credit period allowed Credit Period Availed Working Capital Cycle Tax incentives Production Related Risk Product Related Risks Price Related Risk Client Risk Fixed Asset Turnover TOTAL

Weightage (%) 10 10 20 10 10 10 10 10 10 100

iii) Quality of management

Sr. No. M1 M2 M3 M4

Sub parameters HR policy/track record of industrial unrest Track Record in Default of Statutory Dues Market Report of Management reputation History of FERA violation/ED enquiry

Weightage (%) 15 16 15 8

52

M6

Too Optimistic Projections of Sales and Other Financials

16

M9 M8

Technical & Managerial Expertise Capability to raise money TOTAL

15 15 100

53

Services

i) Financial performance

Sr. No. F1 F2 F3 F6 F7 F8 F9 F12*$ F13

Sub parameters Net Sales Growth Rate (%) PBDIT Growth Rate (%) PBDIT/Sales (%) TOL/TNW Current Ratio Operating Cash Flow DSCR Foreign exchange risk Expected values of D/E, if 50% of NFB credit devolves (corrected for margin)

Weightage (%) 10 7 10 10 10 8 8 10 5

F24 F27* F28*

Realisability of Debtors State of export country economy Fund repatriation risk TOTAL

12 5 5 100

* Applicable for export units $Applicable for units having imports and or exports

54

ii) Operating performance of business

Sr. No. M1 M3 M4 M6

Sub parameters HR Policy/Track Record in Industrial Unrest Market Report of Management Reputation History of FERA violation/ED enquiry Too Optimistic Projections of Sales and Other Financials

Weightage (%) 15 20 10 20

M8 M12

Capability to raise money Mix of Professional and Traditional Management TOTAL

15 20

100

iii) Quality of management

Sr. No. M1 M3 M4 M6

Sub parameters HR Policy/Track Record in Industrial Unrest Market Report of Management Reputation History of FERA violation/ED enquiry Too Optimistic Projections of Sales and Other

Weightage (%) 15 20 10 20

55

Financials M8 M12 Capability to raise money Mix of Professional and Traditional Management TOTAL 100 15 20

56

Trading

i) Financial performance Sr. No. F1 F2 F3 F6 F7 F8 F9 F12*$ F13 Sub parameters Net Sales Growth Rate (%) PBDIT Growth Rate (%) PBDIT/Sales (%) TOL/TNW Current Ratio Operating Cash Flow DSCR Foreign exchange risk Expected values of D/E, if 50% of NFB credit devolves (corrected for margin) F24 F27* F28* Realisability of Debtors State of export country economy Fund repatriation risk TOTAL * Applicable for export units $Applicable for units having imports and or exports 12 5 5 100 Weightage (%) 10 7 10 10 10 8 8 10 5

57

ii) Operating performance of business

Sr. No. B3 B7 B8 B9 B10 B14 B15 B24

Sub parameters Inventory Turnover Credit period allowed Credit Period Availed Working Capital Cycle Tax incentives Product Related Risks Price Related Risk Sustainability of Sales TOTAL

Weightage (%) 16 10 12 16 10 12 12 12 100

iii) Quality of management Sr. No. M1 M2 M3 M4 M6 Sub parameters HR Policy/Track Record in Industrial Unrest Track Record in Default of Statutory Dues Market Report of Management Reputation History of FERA violation/ED enquiry Too Optimistic Projections of Sales and Other Financials Weightage (%) 15 16 15 8 16

58

M8 M12

Capability to raise money Mix of Professional and Traditional Management TOTAL

15 15

100

59

CHAPTER 6 OVERVIEW OF CREDIT APPRAISAL

Credit appraisal means an investigation/assessment done by the banks before providing any Loans & advances/project finance & also checks the commercial, financial & technical viability of the project proposed, its funding pattern & further checks the primary & collateral security cover available for recovery of such funds.

Credit Appraisal Process

Receipt of application from applicant

Receipt of documents (Balance sheet, KYC papers, Different govt. registration no., MOA, AOA, and properties documents

Pre-sanction visit by bank officers

Check for RBI defaulters list, willful defaulters list, CIBIL data, ECGC, Caution list etc

Title clearance reports of the properties to be obtained from empanelled Advocates

Valuation reports of the properties to be obtained from empanelled valuer/engineers

60

Documentations, agreements, mortgages

Disbursement of Loan

Post sanction activities such as receiving stock statements, review of accounts, renew of accounts, etc (On regular basis)

61

CREDIT APPRAISAL MODEL AT AXIS BANK Credit to SME Sector

AXIS bank provides credit to SME sector under following Schemes SME Schematic (Fast Track) It includes structured products basically to provide fast services to clients. It includes various products like:

Mpower OD and Mpower Term Loan Business Loan for Property Power Rent Power Trade Zero Collateral Loans (ZCL) to MSE under CGS Card Power Enterprise Power Business Power

Mpower OD and Mpower Term Loan: The product aims at to provide both Working capital and Term finance requirements of a trade enterprise. The facility is in the form of a Cash Credit (for Working Capital requirements) and Term Loan (Financing Capital expenditure). The facility is secured by hypothecation of Working Capital assets and further collateralized by charge over an immovable property/ financial asset. Non-Fund based facilities can also be granted under the product. The maximum Loan amount under the product is Rs. 2.50 Crs.

62

Business Loan for Property: The product is aimed at providing finance to business enterprises for acquition of an immovable property. The facility is in the form of a Term Loan repayable by EMIs. The maximum Loan amount under the product is Rs. 5 crores.

Power Rent: The product generally known in market parlance as Lease Rental Discounting is aimed at providing a Term Loan to owners of properties against their lease rental receivables. The Loan amount is assessed on the basis of the net present value of the rental receivables over the lease period (after deducting margin and taxes). The lease rentals are hypothecated in banks favor and the Loan is further collateralized by charge over the property. The product specifies a minimum-security coverage of 1.5 times. Maximum Loan amount under the product is Rs. 20 crores.

Power Trade: The product aims to provide both working capital and Term finance requirements of a trade enterprise. The facility is in the form of a cash credit (for working capital requirements) and Term Loan (financing capital expenditure). The facility is secured by

hypothecation of working capital assets and further collateralized by charge over an immovable property/ financial asset. Non- fund based facilities can also be granted under the product. The maximum Loan amount under the product is Rs. 2.5 crores.

Zero Collateral Loans (ZCL) to MSE under CGS: This product facilitates the MSEs and software/IT related services to avail both working capital and term finance from bank. The facility is secured by guarantee cover of credit guarantee fund trust for micro and small enterprises (CGTMSE) and there is no collateral

63

security to be taken in such cases. Maximum loan amount under the product is Rs. 1.00 crore.

Card Power: This is a scheme for financing credit/debit card receivables of units installing pour EDC machines. Both demand loan & term loan facilities are offered to the borrowers, subject to a maximum of Rs. 2.5 crores. All trading/ retailing activities (with a few exceptions like liquor, tobacco, seasonal business etc.), where credit/ debit cards are used are eligible for the loans.

Enterprise Power: This product has been developed to meet the credit needs of the Micro and small enterprises covering both manufacturing and the service sectors. The facilities offered include CC Rupee export credit; pre & post shipment credit & non-fund based facilities like LC & BG. The maximum limit is restricted to Rs. 1.00 Crore.

Business Power: Business Power is an unsecured Term Loan (Maximum loan amount under the product is Rs. 35 lacs) to be repaid by way of EMIs over a maximum period of 4 years.

SME- Non Schematic (Standard) For a business on the growth phase with a wide range of opportunities to explore, timely availability of credit is an integral ingredient needed to scale new heights. Axis Bank understands this and endeavor to be not just a bank but also financing partner, so that focus on business needs becomes possible whereas Bank cater to meet financing needs. Their services ranging from Funded to Non-Funded, from Short Term to Long Term and from Credit to Trade Services ensures to get finance the way it is best suited for business.
64

Services: Cash Credit Working Capital Demand Loan Export Finance Short Term Loan Term Loan Clean Bill Discounting LC Backed Bill Discounting Co-Acceptance of Bills Credit Facilities against Guarantee or Stand By Letter of Credit issued by Foreign Banks Letter of Credit Bank Guarantee Solvency Certificates

Cash Credit: Bank offer Cash Credit facilities to meet day-to-day working capital needs. Cash Credit is provided against the primary security of stock, debtors, other current assets, etc., and/or collateral security of movable fixed assets, immovable property, personal or corporate guarantee, etc. Interest is charged not on the sanctioned amount but on the utilized amount

Working Capital Demand Loan: Bank also provides working capital facilities in the form of Working Capital Demand Loan instead of cash credit facility. The primary or collateral security will be as mentioned in cash credit facility. Here also interest is levied on the amount drawn rather than on the amount utilized.

65

Export Finance: Bank provides finance for export activities in the form of PreShipment Credit against firm order and or Letter of Credit and Post shipment credit. Credit is available for procuring raw materials, manufacturing the goods, processing and packaging the goods and shipping the goods. Finance is provided in Indian or foreign currency depending upon the need of the borrower.

Short Term Loan: Bank provides Working Capital facilities to meet day-to-day working capital needs and Term Loan for capex. However there may be occasions where there is need of ad hoc or short-Term finance for general corporate purposes, meeting temporary mismatches in working capital or for meeting contingent expenses. In such situations it provides Short Term Loans for tenure up to a year to ensure that business runs smoothly.

Term Loan: When there is need of long-Term funds for capex or capacity expansions or plant modernization and so on. Keeping these requirements in mind Bank provides Term Loans up to acceptable tenor with suitable moratorium, if required, and repayment options structured on the basis of customers estimated cash flows. These Loans are primarily secured by a first charge on the fixed assets acquired through the Loan amount. Suitable collateral security is also taken whenever required.

66

Clean Bill Discounting: Bank provides clean bill discounting facilities to fund receivables. Bank discount bills or receivables and provide credit against that. This facility is provided for a period of 3-6 months depending upon the tenor of the bill.

LC Backed Bill Discounting: Bank discount trade bills drawn under Letters of Credit issued by reputed banks to fund receivables. This facility is provided for a period of 3-6 months depending upon the tenor of the bill or Letter of Credit.

Co-Acceptance of Bills: Bank also provides co-acceptance of trade bills depending upon the need of the borrower.

Credit Facilities against Guarantee or Stand By Letter of Credit issued by Foreign Banks: Various foreign companies set up subsidiary in India. Bank provides funding to such companies against guarantees or SBLCs of acceptable foreign banks.

Letter of Credit: Apart from fund based working capital facilities Bank provides a range of Non-Fund Based facilities such as Letter of credit, Bank Guarantees, Solvency certificates, etc. Letter of Credit is provided to meet trade purchases. These are generally provided for 3-6 months depending upon Trade cycle. Apart from this it provides Import Letter of Credit for importing machinery or capital goods. Such LCs are for tenure ranging from 1-3 years depending upon the need of the borrower.

67

Bank Guarantee: Bank provides Bank Guarantee on behalf of its client to various other entities such as Government, quasi govt bodies, corporate and so on. it provides a range of guarantee such as Performance guarantee, financial guarantee, EPCG etc. The tenure of Bank Guarantee range from 1 year to 10 years depending upon the purpose of the guarantee.

Solvency Certificates: Bank also provides solvency certificate depending upon the need of the borrower.

68

CHAPTER-7

CASE STUDY- 1
Details of case study
Name Constitution Office Address M/s Dynemic Products Limited (DPL) Public Limited Company B- 301, Satyamev Complex-1, Opp. New Gujarat High Court, S.G.Highway, Sola, Ahmedabad-380 060, Gujarat, India. Line of activity Sector Dealing with us Incorporation Name of Directors Manufacturing of Food Colour Products Chemical and Chemical Products New Connection 14th June 1990 Mr. Dashrathbhai Prahladbhai Patel (DIN : 00008160) Mr. Rameshbhai Bhagwanbhai Patel (DIN : 00037568) Mr. Hitendra Hargovinddas Sheth (DIN : 00037705) Mr. Jagdishbhai Sevantilal Shah (DIN : 00037826) Mr. Harishbhai Keshavlal Shah (DIN : 00037932)

Mr. Bhagwandas Kalidas Patel (DIN : 00045845)

Mr. Dixit Bhagwandas Patel (DIN : 00045883) Mr. Shashikant Purshottambhai Patel (DIN : 00045957) Mr. Vishnubhai Gangarambhai Patel (DIN : 00270413) Mr. Shankarlal Baluram Mundra (DIN : 00388204) Group Not a recognized group

69

Rating

External: Not done. Internal: SME 3 (ABS 31.03.2009)

Associate Concern

Dynemic Overseas (India) Private Limited Dynemic USA Inc.

Share holding pattern Share Price movement

As mentioned below Listed on the BSE

Current Market Price Rs.14.55/- (27.11.2009)

52 week high/low Rs. 29.20 ( 22 Apr' 09) / Rs. 10.00 ( 16 Jan' 09)

Brief Background: The Company was incorporated on 14th June, 1990 as Private Limited Company. The Name was subsequently changed to Dynamic Products Limited on 31/12/1992. The Company was promoted with the objective of carrying on the business of manufacturing S.P.C.P, the raw material for Food Color, reactive & Raazole Dyes.

In the Year 2000 the company acquired the running business of M/s Safforn Dye Stuff Industries and started manufacturing wide range of food colors at the premises 3709/6, GIDC Estate, Ankleshwar having plot area of admeasuring 3700 Sq.Mtr.

As the company aims to provide entire range qualitative and quantitative service to food industry, as its Unit I. The company commenced manufacturing of food colors namely Tratrazine in the year 2000-01. Both the units at Ankleshwar are Ultra modern and have eco friendly plants with in
70

house testing facilities to control quality at every level of manufacturing. The Company gained goodwill in the short span of time due to its quality product. The company has well equipped state of art in house laboratory which conduct test of every parameter of food color & Dye intermediates laid down under national and international authorities. The Company exports its product to around 41 countries worldwide. All these have led the company to acquire and retain a status of largest manufacturer and supplier of food colors and dye intermediates in India.

Qualitative Factors:

The Company has a pro-active Management and Promoters who have hands on experience in manufacturing of Dyes Intermediaries and Food Colors.

Profit making Company since last 13 years. The company has to its credit an award for Indirect Export of Self Manufactured Dyes for the year 2001-02 & 2002- 03 received by Gujarat Dyestuffs Manufacturers Association.

The company has obtained certificate of approval From Bureau Verities Quality International (BVQI) for achievement of ISO 9001: 2000 quality standards, the Company has also received certificate of approval from Bureau Verities Quality International (BVQI) for achievement of 14001:1996 and 14001:2004 quality standards for both its units satiated at Ankleshwar.

The company has also obtained HAACP Code: 2003 certificate of registration from TQCS International (Group) Pty Ltd under food safety programme for both its units situated at Ankleshwar

The company was awarded with trophy for export performance of more than Rs. 6.00 & 8.00 Crore for Self

Manufactured Indirect Export of Dyes & inTermediates in the year 2002-03 by Gujarat Dyestuffs ManufacturersAsso

71

Both the Units of the company are exporting Oriented Units and have obtained the status of One Star Export House.

Marketing Strategy/Marketing arrangement Strong and experience people are leading companys marketing department. Companys total turnover is divided into:

Exports Sales Local Sales

Exports Sales: Companys 70% turnover is generated by way of exports sales. Company has its own presence in all most all countries. The company is exporting Food colors in Latin America, African countries, Middle East, Far East, US and Europe. Almost all export customers are dealing with company for many years.

Out of total exports turnover 60 to 70% percentage orders are repeated orders and rest of the orders are new orders.

The Company has region wise Export Managers who can cater the need of customers individually. Due to the quality and timely delivery of the material the company have less competition from these countries.

Globally many countries have discontinued production of Dyes, Food colors and Intermediates, new market has opened for Indian manufacturer of Dyes and Intermediates. As Dynemic Products Ltd is already a well recognized name in the field globally, it has more opportunities to grab from growing International market.

72

 Local Sales:

In Local Market Company is doing marketing its Dyes & Intermediates to the end customers.

The company is the largest manufacturer of S.P.C.P in India which generating repeated order from the local customers.

Now, company is planning to market the food colors in small packing through its dealers and distributors which cater the local needs.

Company is also planning to arrange marketing arrangement with soft drink manufactures and pharmaceutical manufactures for food colors.

Proposal for

Proposal for fresh sanction of credit facilities by way of take over (with enhancement) from HDFC Bank
a) Sanction

of Cash Credit Limit of Rs. 500.00 lacs for working capital

requirement ( take over of Rs. 500.00 lacs from HDFC Bank).

b) Sanction

of Letter of Credit (Inland/Foreign) of Rs. 300.00 lacs for

working capital requirement as a sub-limit of cash credit limit (take over of Rs. 300.00 lacs from HDFC Bank).
c)

Sanction of EPC/FBD/FBP/PCFC/PSCFC of Rs. 500.00 lacs for working capital requirement as a sub -limit of cash credit limit (take over of Rs. 500.00 lacs from HDFC Bank).

d) Sanction

of Corporate Loan of Rs. 200.00 lacs (take over of Working

Capital Term Loan of Rs. 200.00 lacs from HDFC Bank).

e)

Sanction of LER limit of Rs. 25.00 lacs (equivalent to forward cover of Rs.500.00 lacs).

f)

Waiver of credit opinion report from existing bankers of M/s. DPL (HDFC Bank) and group concerns of M/s. DPL i.e. M/s. Dynemic Overseas (India) Limited based on justifications given in the proposal.

g)

Concession in processing fees at Rs. 1.00 lacs against norm of 1.00%.

h)

Permitting time of 30 days for completion of take over formalities with HDFC and creation of mortgage by CMC.

73

Existing & Proposed Facilities Existing Type of Facility Limits (HDFC) Cash Credit Limit Stock cum Book Debt Corporate Loan EPC/FBD/FBP/PCFC/PSCF C As a sub limit of Cash Credit Limit LC(Inland /Foreign) - As a sub limit of Cash Credit Limit LER Limit (as a sub-limit of CC limit) Total WC/LC/LER : To meet working capital requirements. Purpose Tenor Corporate Loan : For NWC built up. WC/LC/LER : 12 months. Propose d + Inc / Dec 500.00 --

(Rs. in lacs) Proposed Limits (Axis Bank)

500.00

200.00 (500.00)

---

200.00 (500.00)

(300.00)

--

(300.00)

(15.00)

+25.00

+25.00

700.00

+25.00

725.00

Corporate Loan : 24 months from the date of first disbursement. Repaymen WC/LC/LER : On Demand. t Corporate Loan : 23 monthly instalments of Rs. 834000 each and last instalment of Rs. 818000. Repayment to commence from December 2009. Interest to be serviced as and when debited. Security Primary

Hypothecation of entire current assets (Pari passu) of the company (Both present & future). (Value as on 31.03.2009 is of Rs. 1326.42 lacs).

Hypothecation over Plant and Machinery (Pari Passu) (Both present & future). (Value is of Rs. 1529.55 lacs as per empanelled valuer of Citi
74

Bank). Collateral Pari Passu charge being shared by Citi Bank Limited on following properties :
i.

Factory Land and Building, Plant and Machinery at Plot No. 6401,6415,6416, G.I.D.C., Ankleshwar, Dist.Bharuch admeasuring 5664 sq.mts. standing in name of M/s. Dynemic Products Limited.

ii.

Office situated at B- 301,308,309,310 Satyamev Complex-1, Opp. New Gujarat High Court,

S.G.Highway, Sola, Ahmedabad-380 060, Gujarat admeasuring 4272 square feets standing in the name of M/s. Dynemic Products Limited.
iii.

Factory Land and Building, Plant and Machinery at Plot No. 3709/6,3710/3,3710/1, G.I.D.C.,

Ankleshwar, Dist.Bharuch

admeasuring 12290.80

sq. mts. standing in name of M/s. Dynemic Products Limited. Guarantee Personal Guarantee of :

Mr. B.K.Patel having net worth of Rs. 264.88 lacs (approx.) as on 31.03.2009. Mr. Ramesh B.Patel having net worth of Rs. 152.57 lacs (approx.) as on 31.03.2009. Mr. Dashrath P.Patel having net worth of Rs. 257.89 lacs (approx.) as on 31.03.2009. Mr. Shashikant P.Patel having net worth of Rs. 148.22 lacs (approx.) as on 31.03.2009. Mr. Dixit B.Patel having net worth of Rs. 36.33 lacs (approx.) as on 31.03.2009.

Credit enhancem ent Interest Rate

Nil.

BPLR - 3.50% i.e. 11.25% p.a. with monthly rests (presently BPLR @ 14.75%).
75

LC Charges Processin g fees Banking Arrangem ent

Banks standard schedule of charges.

Rs. 1 lacs for the sanctioned facilities plus applicable taxes.

Multiple with Citi Bank (Proposed).

Unit visit The unit was visited Mr. Asim Bhaduri (VP SME and Center Head), Mr. P.C.Dash (AVP and SCO SME) and Mr. Kuntal Bhatt (Manager and RM SME) on 13th November 2009 and the overall operations of the unit were found to be satisfactory.

76

Operational & Financial Analysis (Rs. in lacs)

Particulars

31.03.07 (Actuals)

31.03.08 (Actuals) 3657.70 3657.70 13.20% 313.80 (5.36) 412.89 50.62 48.47 308.44 184.99 103.07 8.58% 11.29% 5.06% 1132.84 2707.33 1589.26

31.03.09 (Actuals) 4911.20 4911.20 34.27% 261.62 56.07 503.87 96.12 146.12 317.69 190.03 153.62 5.33% 10.26% 3.87% 1132.84 2764.96 2331.73

31.03.10 (Proj.) 6500.00 6500.00 32.35% 621.29 55.00 881.74 110.94 149.50 676.29 446.42 424.83 9.56% 13.57% 6.87% 1132.84 3078.84 2890.12

31.03.11 (Proj.) 7500.00 7500.00 15.38% 729.97 65.00 1018.09 107.00 181.12 794.97 524.76 499.22 9.73% 13.57% 7.00% 1132.84 3471.06 3094.44

Gross Sales Net Sales Net Sales Growth Rate % Operating Profit Other Income PBDIT Depreciation Interest PBT PAT Cash Profit Operating Profit Margin % PBDIT Margin % PAT Margin % Paid up Capital - Equity Unadjusted TNW Unadjusted TOL

3231.12 3231.12 12.79% 227.49 141.52 322.88 47.94 47.45 369.01 266.95 182.35 7.04% 9.99% 8.26% 1132.84 2649.73 1109.42

77

Unadjusted TOL/ TNW Adjusted TNW Adjusted TOL Adjusted TOL/ TNW Interest Coverage Current Ratio DSCR NOCF Net Profit / NOCF NOCF / Interest NOCF / Financing Payments Total Debt / NOCF (No. of years)

0.42 2710.84 1048.31 0.39 9.82 1.76 7.67 105.69 2.53 2.23 0.08 1.17

0.59 2725.68 1570.91 0.58 8.44 1.34 1.83 230.12 0.80 4.75 0.13 0.78

0.84 2828.34 2268.35 0.80 3.84 0.94 1.21 654.38 0.29 4.48 0.29 0.60

0.94 3237.48 2731.48 0.84 6.27 1.13 2.35 (269.99) (1.65) (1.81) (0.08) (0.45)

0.89 3629.70 2935.80 0.81 5.98 1.24 2.20 149.24 3.52 0.82 0.04 (0.00)

Rating The rating of the company as per SME Rating Tool comes to SME - 3 (ABS 31.03.2009). The segment wise scoring is as under: Particulars Overall Scoring Financial scoring Business scoring Management scoring Industry scoring Rating SME-3 SME-4 SME-3 SME-3 SME-3

78

CIBIL/RBI/ECGC Defaulters List/CA Verification/ Auditor Verification Particulars RBI Defaulters list ECGC Specific Approval List CIBIL Defaulters List CA Verification (Auditor) Auditors Firm Verification 13.11.2009 13.11.2009 As of Date 31.12.2008 31.07.2008 Position No match found. No match found. Satisfactory. Verified. Verified.

Reference Check Reference check was made through some of Banks clients in the same line of activity financed by Axis bank and the same was reported to be satisfactory.

Analysis a) The promoters of the company are having rich experience of more than 19 years in various Industries. b) The proposed expansion of the company is having huge market potentials. c) The Company is the leader in Manufacturing and export of food colours. d) The overall credit rating of company is SME 3. e) The business is 19 years old.

79

f) The sale of the company has been showing an increasing trend throughout the years under consideration. The sale of the company was increased from Rs. 3231.12 lacs in FY06-07 (Aud) to Rs. 3657.70 lacs (Aud) in FY07-08 and further to Rs. 4911.20 lacs in FY08-09 (Aud).

g) Since the company is into Manufacturing of Food Colours, the net margin normally remains between 5.00% - 9.00%. The net profit of the company was decreased from Rs. 266.95 lacs in FY06-07 (Aud) showing margin of 8.26% to Rs. 184.99 lacs in FY07-08 (Aud) showing margin of 5.06%. However, the same was maintained at Rs. 190.03 lacs in FY08-09 (Aud) showing margin of 3.87% due to decrease in margins in the chemical industry on account of raw material price fluctuations worldwide. The same was an aberration. But, now the industry is on revival and boom path. Considering the same, the company has estimated the profit of Rs. 446.42 lacs for FY09-10 @ margin of 6.87%, which may be accepted.

h) The TOL/TNW of the company increased from 0.42 in FY06-07 (Aud) to 0.59 in FY07-08 (Aud) and to 0.84 in FY08-09 (Aud). The company has estimated TOL/TNW at 0.94 and 0.89 for FY09-10 and FY10-11 respectively on account of increased bank borrowings, which may be considered comfortable.

i) The current ratio of the company was 1.76 in FY06-07 (Aud) which decreased to 1.34 in FY07-08 (Aud) and which further plummeted to 0.94 in FY08-09 (Aud), on account of capex expansion which will be completed in the current fiscal. The company has estimated its current ratio at 1.13 and 1.24 for FY09-10 and FY10-11, which is reasonably acceptable as regards to the liquidity position of the company.

80

j) The NOCF is positive during FY 2008-09 (Aud) by Rs. 654.38 lacs. NOCF is estimated negative in FY 2009 10 at Rs. 269.99 lacs, as per projected financials submitted by the company on account of increase in stock and receivables which is keeping in line with the increase in turnover and the holding levels are as per the industry practice.

k) The overall conduct of the account, repayment status etc. at Citi Bank and HDFC is satisfactory. l) The main director is dynamic and has rich experience of more than 20 years in his line of activity. m) The company is a registered SSI unit. n) Market reference of the company is satisfactory o) The overall projected performance and financial of the unit are satisfactory.

81

CASE STUDY-2
Details of case study
Sankalp Recreation Pvt. Ltd. (SRPL) Name Constitution Group Date of Incorporation Name of Directors Mr. Kailash R. Goenka Mr. Robin R. Goenka Mr. Ramavatar R. Goenka Registered Office Sankalp Square, Opp. Gurukul, Drive-in Road, Private Limited Company Sankalp 05.02.2002

Ahmedabad 350052 Ph.: 079-27499200 (F) 079-27499300 Proposed Hotel Site FP # 4, TPS # 45, Survey # 948, Near AUDA Garden, Off. 100 ft. Road, Prahaladnagar, Near S. G. Highway, Ahmedabad 350051 Line of activity Existing: Restaurant Proposed: Hotel/Hospitality Dealing with us Rating New Connection Internal: SME-2 (ABS 31.03.2009) External: Not rated Restaurant / Franchisee income from

82

Brief Background The SANKALP group is a chain of specialty theme based retail restaurant outlets. SRPL has been incorporated on 05.02.2002. However, the group is having its presence into the Hospitality business for more than two decades and has their esteemed reputation in the market. The company has been floated by the promoters Mr. Ramavatar Ranglal Goenka & his two sons Mr. Kailash Goenka and Mr. Robin Goenka. The Founder of this chain Mr. Ramavtar Goenka, ventured in to the business in 1981 with the opening of its flagship restaurant at Ashram Road, Ahmedabad, India and there has been no looking back since then. Knowing the South Indian cuisine very well, he set up the theme-based restaurant in Ahmedabad and got an overwhelming response. It has been the culmination of inherent desire to give customer an innovative specialty brand that gave birth to Sankalp Restaurant. With over forty highly profitable outlets and a large loyal customer base to boast off, the group is all set to launch into international market with its brands and food product exports merchandising too.

Proposal Details Proposal Sanction of Term Loan of Rs. 1500.00 lacs for Hotel Project Sanction of one-time Foreign Letter of Credit (capex) facility of Rs. 150.00 lacs (as a sub-limit of Term Loan) for import of machineries/equipments Sanction of Buyers Credit (capex) Limit of Rs. 150.00 lacs in lieu of Foreign L/C (capex) as a sub-limit of Term Loan Sanction of LER limit of Rs. 7.50 lacs (equivalent to forward cover exposure of Rs. 150.00 lacs) as a sub-limit of Term Loan Concession in Interest Rate and Processing Fees

83

Existing & Proposed Facilities Term Loan Foreign L/C capex (as a sub-limit of TL) Buyers Credit (as a sub-limit of TL) LER limit equivalent to forward cover of Rs. 150.00 lacs (as a sub-limit of TL) Total For construction of 3-star Hotel Purpose Tenor 82 months (including moratorium period of 16 months) Nil Nil Nil Type of Facility Existi ng Limits Nil Nil

(Rs. in lacs) Proposed Limits + Inc / Dec

1500.00 (150.00)

+1500.00 + (150.00)

(150.00) (7.50)

+ (150.00) +(7.50)

1500.00

+1500.00

Repayment to start from April 2011 Repayme nt i) 12 monthly instalments of Rs. 9.50 lacs each (April 2011 to March 2012) ii) 12 monthly instalments of Rs. 22.00 lacs each (April 2012 to March 2013) iii) 12 monthly instalments of Rs. 25.00 lacs each (April 2013 to March 2014) iv) 12 monthly instalments of Rs. 28.00 lacs each (April 2014 to March 2015) v) 12 monthly instalments of Rs. 31.25 lacs each (April 2015 to March 2016) vi) 6 monthly instalments of Rs. 18.50 lacs each (April 2016 to September 2016)

Interest to be serviced separately as and when debited.

84

Security & Guarantee

Primary

EM of Land & Building at the Project Site located at FP # 4, TPS # 45, Survey # 948, Near AUDA Garden, Off. 100 ft. Road, Prahaladnagar, Near S. G. Highway, Ahmadabad 51 (Projected Cost Rs. 15.07 crores) Hypothecation of entire movable fixed assets at the Project Site (Projected Cost Rs. 7.06 crores)

Collateral Guarantee

Nil. Personal guarantee of the directors of the company. The net worth details are as under: (Rs. in crores) Name of the Director Mr. Kailash R. Goenka Mr. Robin R. Goenka Mr. Ramavatar R. Goenka Total Net Worth 4.61 3.03 2.18 9.82

Unit visit The proposed site of the hotel project of the company was visited by Mr. Asim Bhaduri (Vice President - SME), Mr. P. C. Dash (AVP/SCO - SME) and Mr. Nishant Sharma (AVP/SSO - SME) and the same was reported satisfactory.

85

Proposed Project

SRPL has been incorporated as a Private Limited Company with main object of business of running hotel in all its aspects, lodging and boarding and to run, manage, acquire, control, own, purchase, hire the same including restaurant, caf, tavern, refreshment-room, lodging-house keepers etc. The company has proposed to set up a three star hotel with 96 rooms at S.G. highway. The project is located at one of the best locations and in the newly developed area of Ahmedabad City. This is situated at Sankalp Hotel Near AUDA Garden, Off 100 ft. Road, Prahaladnagar, S.G.Highway, Ahmedabad 380051. This area is the fastest developing area in the city and is surrounded by various business office premises, residential plots, various restaurants and other commercial complexes. Ahmedabad Railway Station is just 20 mins from the Hotel and International Airport is almost 30 mins from the location. Companys main purpose of the hotel is to encourage the corporate people who come for the business purposes. Hence the location of the project is ideal & the company wants to be a part of the growing popularity of this area.

COST OF PROJECT A Land & Building B Civil Construction and Civil Finishing C Furniture & Fixtures D Plant and Machinery E Preliminary and Pre-operative Cost F Contingencies TOTAL

Rs. in Crores 9.01 6.06 5.49 1.57 2.11 0.76 25.00

86

MEANS OF FINANCE A Equity Share Capital / Premium B Unsecured Loans C Term Loan TOTAL 3.00 7.00 15.00 25.00

Against the total cost of project of Rs. 25.00 crores, the company has 1requested for Term Loan assistance of Rs. 15.00 crores. Hence, the margin to be brought in by way of promoters contribution would be 40% of the total CAPEX for the proposed hotel project of the company by way of share capital/premium and unsecured Loans. Operational & Financial Analysis

Particulars

31.03.08 31.03.09 31.03.10 31.03.11 31.03.12 (Aud) (Aud) 489.64 85.68 0.51 86.19 7.49 7.59 71.11 48.96 56.45 (Est) 609.00 143.84 0.00 143.84 12.00 39.00 92.84 64.84 76.84 (Proj) (Proj)

Net Sales / Receipts Operating Profit Other Income PBDIT Depreciation & Amortisation Interest & Financial Charges Profit Before Tax (PBT) Profit After Tax (PAT) Cash Accruals

483.62 63.32 12.80 76.12 7.56 4.98 63.58 46.63 54.19

1333.00 2386.00 476.00 0.00 476.00 121.00 146.00 209.00 136.00 257.00 916.00 0.00 916.00 216.00 247.00 453.00 295.00 511.00

87

Share Capital Reserves & Surplus Misc. Exp. Not W/off Tangible Net Worth (TNW) USL as Quasi Equity Adjusted TNW Total Term Liabilities (TTL) Total Outside Liabilities (TOL) Net Sales Growth % PBDIT Margin % PAT Margin % ROCE TOL / TNW Adj. TOL / TNW TTL / TNW Adj. TTL / TNW Current Ratio Current Ratio w/o TL inst. Interest Coverage Ratio Net Operating Cash Flow (NOCF) Net Profit / NOCF NOCF / Interest

1.00 74.64 0.00 75.64 0.00 75.64 30.20 156.95 0.31% 15.74% 9.64% 64.78% 2.07 2.07 0.40 0.40 1.60 1.60 15.29 (49.39) (0.94) (9.92)

1.00 123.59 0.00 124.59 0.00 124.59 11.00 169.30 1.38% 17.60% 10.00% 58.04% 1.36 1.36 0.09 0.09 1.42 1.52 11.36 51.87 0.94 6.83

201.00 188.43 0.00 389.43 139.20 528.63

301.00 324.43 0.00 625.43 139.20

301.00 619.43 0.00 920.43 139.20

764.63 1059.63

1646.80 2192.80 1846.80 1848.80 2579.80 2497.80 22.44% 118.88% 78.99% 23.62% 10.65% 6.06% 5.10 3.50 4.59 3.12 1.51 2.41 3.69 77.57 0.84 1.99 35.71% 38.39% 10.20% 12.36% 12.00% 24.08% 4.35 3.37 3.73 2.87 1.44 2.80 3.26 300.00 0.45 2.05 2.86 2.36 2.16 1.74 1.52 3.24 3.71 650.00 0.45 2.63

88

NOCF / Financing Payments Total Debt / NOCF (No. of years)

(0.28) (0.61)

0.23 0.21

0.26 4.11

0.50 7.31

0.59 2.84

Rating The rating of the company as per SME Rating Tool comes to SME-2 (ABS 31.03.2009). The segment wise scoring is as under: Particulars Overall Scoring Financial scoring Business scoring Management scoring Industry scoring Rating SME-2 SME-3 SME-2 SME-2 SME-4

CIBIL/RBI/ECGC Defaulters List The name of the company and its directors are not appearing in CIBIL/RBIs defaulter/willful defaulter list as of 31.12.2008 (latest available). The name of the company and its directors are not appearing in ECGCs defaulter list as of 31.07.2008 (latest available)

89

Analysis a) The company belongs a recognized group named SANKALP, who has created a niche in the hospitality sector.

b) The group is having its presence since 1981 and has emerged as a reputed name since inception. The promoters of the company have rich experience in their line and belong to a resourceful family.

c) The promoters are having sound entrepreneur skills to acquire business opportunities to scale new heights.

d) The sales/receipts of the restaurant/franchisee business (existing) of the company were increased from Rs. 483.62 lacs in FY07-08 to Rs. 489.64 lacs in FY08-09. The company has achieved the sale of Rs. 373.74 lacs (Restaurant income of Rs. 300.25 lacs and Franchisee income of Rs. 73.49 lacs) upto 30.09.2009 against the estimated sale of Rs. 609.00 lacs (Restaurant income of Rs. 484.00 lacs and Franchisee income of Rs. 125.00 lac) for the year 2009-10, which indicates around 61% achievement of the estimated sales/receipts for the year 2009-10 and can be considered reasonable.

e) The net profit of the existing business of the company was increased from Rs. 46.63 lacs (NP margin of 9.64%) in FY07-08 to Rs. 48.96 lacs (NP margin of 10.00%) in FY08-09. The PBDIT of the existing activity of the company was increased from Rs. 76.12 lacs (PBDIT margin of 15.74%) in FY07-08 to Rs. 86.19 lacs (PBDIT margin of 17.60%) in FY08-09

f) The TOL/TNW of the company remained at 2.07 in FY07-08 and 1.36 in FY08-09. The TOL/TNW of the company has been estimated at 5.10 for FY09-10 considering the Loan Against Property of Rs. 420.00 lacs

90

taken for existing business and the proposed Term Loan disbursement of Rs. 1000.00 lacs during the current FY09-10.

g) The current ratio of the company remained above the benchmark level at 1.60 in FY07-08 and 1.42 in FY08-09. The same has been estimated at 1.51 for FY09-10 considering the existing business activity of the company during 2009-10. While considering the existing as well as proposed business activity of the company, the current ratio has been projected at 1.44 for FY10-11 and 1.52 for FY11-12.

h) The net operating and all ratios pertaining to NOCF were positive in FY08-09. The same have been estimated to be positive from FY09-10 onwards.

i) The company has shown a consistent growth since its inception and financials of the company are satisfactory.

91

CASE STUDY 3 Details of case study

Applicant Details 1 Name of the Applicant 2 Registered Office M/S. Vishesh Distributors Pvt. Ltd. (New Relationship) 401, Kalasagar, Behind Ratnamani Complex, Jodhpur Cross Road, Satellite, Ahmedabad - 380015

F/101, Swagat Plaza I, Bopal Amli Road, Bopal, Ahmedabad. Showroom (Fragrances) M: 9898052002

Showroom (Airtel)

19, Rudra Square, Judges bunglow cross road, Bodakdev, Ahmedabad. M: 9898052616

Godown (Beverage)

Sola Timber Market, After Sola Over Bridge, Behind Mahindra Showroom, Sola, Ahmedabad. M: 9898052041

Tel. No. 079-26747999 Mobile: 9898052001 (Ketan Shah) Contact Details 3 Constitution E-Mail: visheshd2000@gmail.com Private Limited Company Directors: 1. Mr. Ketan P. Shah (ACPPS7169H) 2. Mr. Pankaj C. Shah (ACYPS5908B) 3. Mrs. Dhara K. Shah (AMFPS2018F) 4. Mrs. Pina P. Shah (APAPS7788E)

92

Date of Establishment

Nature of Business

Company PAN No. AABCV2348Q Certificate of incorporation No. U51229GJ2001PTC39423, Dated 17.04.2001 Gujarat Sales Tax Registration No. 24074300543, dated 01.07.2002 Import Export Code No. 0807004081, dated 24.05.2007 Distributorship of Pepsi products, Airtel, Levis Struss Signature

93

Brief Background M/S. Vishesh Distributors Pvt. Ltd. Is a private limited company, held by close family members. The company was established in year 2001. The group has been engaged in distribution of branded company products like Pepsico beverage products, Airtel, Levis Struss Signature, Amul, TATA, fragment shop, etc. The group was earlier distributor for companies like Himalaya, Wipro, Godrej, Parker, Parle, Adani & Lays. Now, due to strong marketing channel, the company is also entered in agreement with Levis signature for distribution of garments to their outlets & franchises in all over the Gujarat. Further the company is also having 14 commercial vehicles for distribution activities. . Present Proposal To meet the increasing business demand for the various distribution schemes, the company has requested for the OD limit of Rs. 180.00 lacs. by takeover of existing LAP from HDFC Bank & also requested to allow the Cash credit limit of Rs. 55.00 lacs from Vijaya Bank. The company wants to expand their existing business activity by enhancing working capital limit for smooth business operation.

Purpose of loan Limits Proposed Rate of Interest Validity of Limits Security Details

For General Business Purpose

OVERDRAFT - Rs. 180.00 lacs BPLR 2.50% i.e. 12.25% p.a. with monthly rests. (Presently BPLR is at 14.75% p.a.) 12 months only subject to review every year.

Primary Security: NIL

94

Collateral Security: Equitable Mortgage of following properties: 1. Residential flat situated at 401, Kalasagar Appartment, Opp. Star India Bazaar, Jodhpur, Satellite, Ahmedabad, belonging to Mr. Ketan P. Shah (Director). Estimated market value Rs. 80.00 lacs. 2. Shop at 101, 1st floor, Swagat Plaza I, Near Bopal Amli road, Bopal, Ahmedabad, belongs to Mrs. Dhara K. Shah (Director). Estimated market value Rs.41.00 lacs. 3. Shop at 19, 1st floor, Rudra Square, Near Bodakdev police chowki, Bodakdev, Ahmedabad, belongs to Mr. Ketan P. Shah (Director). Estimated market value Rs. 80.00 lacs. 4. Shop at 9-10, Ground floor, Sukriti Annexie, Near Prernatirth Bunglows-2, Satellite, Ahmedabad, belongs to Mr. Ketan P. Shah (Director). Estimated market value Rs. 100.00 lacs. Total market value of above properties is Rs. 301.00 lacs (Approx). Guarantee: Personal guarantee of: 1. Mr. Ketan P. Shah (Director & property holder). 2. Mrs. Dhara K. Shah (Director & property holder) 3. Mr. Pankaj C. Shah (Director) 4. Mrs. Pina P. Shah (Director) PDCs: Two PDCs for the entire overdraft limit each dated 3 months and 9 months from the date of first disbursement.

95

Processing Fees Documentation Risk Associated Risk mitigates

0.75% of the limit sanctioned plus applicable taxes (Nonrefundable) As per banks extent guidelines. The company is facing competition from the other distributors in the market. The above risk factor is mitigated as below: 1. Directors of the company, are having 10 years of rich experience in the field of distributorship 2. The company is frequently offering promotional schemes to its retail distributors 3. The company is having diverse clientele base in the market. The company has been visited by Mr. N. Ramachandran (AVP-

Unit Visit

SME), Ms. Disha Badani (Executive-SME), Mr. Nirav Ayer (Executive-SME), on 04.02.2010: Overall visit was found satisfactory. Rs. 5000/- plus applicable taxes (Non refundable)

Login Fees

96

Whether the names of the borrower or any of the promoters/directors Defaulter List appear(s) in: RBI defaulters List: No (The firm name and directors are not featuring in RBI Defaulters List as of 31.03.2009 - Latest Available). ECGC defaulter List: No

CIBIL: Credit card repayment record of Director Mr. Ketan P. Shah: In CIBIL of Mr. Ketan, it is observed that one credit card account from Standard Chartered Bank, with overdue amount Rs. 0.43 lacs, was observed written-off. However, Mr. Ketan has submitted that it was a due of Rs. 1100/-. Due to non - receipt of bill on time, there was interest charge levied on the actual amount. He, subsequently paid the actual amount, but not the interest amount, which as on date has become overdue of Rs. 43,723/- with interest charge.

The director has also filed a case against SCB regarding the same, to the Consumer Education & Research Society and it is in process till date. The director has submitted the copy of the relevant documents to our bank.

However, considering below facts, we may consider the Credit Card written-off status as acceptable: 1. The borrower is having satisfactory repayment track record of CC, LAP & term loan with HDFC Bank & Vijaya bank. 2. Relevant documentary proofs available for CIBIL case.

97

Credit Score Parameters (Enclosed Credit Scoring Sheet) Present Score (ABS 31.03.09) Financial Non Financial Overall Rating 36.00 30.00 66.00 SME 3 (Acceptable)

98

Performance details Particulars 31.03.2007 31.03.2008 31.03.2009 31.03.2010 31.03.2011 31.03.2012 Audited Sales Other Income Total Income PBDIT Depreciation Interest Interest & remuneration to Directors PBT PAT PBT Margin % Cash Accruals TNW(Unadjusted) Unsecured Loans from friends & relatives TNW (Adjusted) TOL(Adjusted) TOL(Unadjusted) 38.94 52.38 183.99 222.93 56.25 70.26 148.91 205.16 95.46 111.41 127.13 222.59 78.46 116.42 250.71 329.17 78.46 123.42 259.41 337.87 78.46 131.42 260.79 339.25 4.80 1.94 1.68 0.15 5.46 13.44 2.40 2.26 2.03 0.21 8.41 14.01 2.50 3.56 2.40 0.39 8.98 15.95 2.75 7.00 5.00 0.61 11.91 37.96 3.00 10.00 7.00 0.66 13.91 44.96 3.25 11.50 8.00 0.74 14.91 52.96 1273.31 23.49 1296.80 23.44 3.78 12.92 Audited 1032.33 32.39 1064.72 28.59 6.38 17.55 Audited 884.53 30.33 914.86 31.58 6.58 18.94 Estimated Projected Projected 1125.00 30.00 1155.00 45.27 6.91 28.61 1475.00 30.00 1505.00 50.54 6.91 30.63 1525.00 30.00 1555.00 52.29 6.91 30.63

99

TOL/TNW(Unadjust ed) TOL/TNW(Adjusted) Debtors - Less than 6 months - More than 6 months Debtors holding (in days) Current Ratio Current Asset Current Liabilities 18.62 1.61 187.52 116.30 16.22 1.70 160.33 94.37 29.55 2.26 185.98 82.16 38.02 1.33 328.10 246.72 38.02 1.37 350.71 255.42 38.02 1.43 367.00 256.80 0.00 0.00 0.00 0.00 0.00 0.00 64.97 45.88 71.60 117.19 153.65 158.85 16.59 3.51 64.97 14.64 2.12 45.88 13.96 1.14 71.60 8.67 2.15 117.19 7.51 2.10 153.65 6.41 1.98 158.85

100

Analysis a) The group has been engaged in distribution of branded company products like Pepsico beverage products, Airtel, Levis Struss Signature, Amul, TATA, fragment shop, etc. b) Key promoter and pioneer of the company is Mr. Ketan P. Shah., engaged in the distribution activities since last more than 10 years. c) He has gained good knowledge and skill especially in the field of marketing aspects. He is handling total business affairs with sound business and management policy. d) The company had registered sales of Rs. 1273.31 lacs in FY. 2006-07, Rs. 1032.33 lacs in FY. 2007-08 and sales of Rs. 884.53 lacs in FY. 2008-09. e) The company is having Airtel distributorship, under which it was selling prepaid mobile cards also. This business was with high turnover and low margin basis. The company has closed that prepaid card section in year 2007. Further to this company was having TATAs distributorship, which was closed in the mid of the year 2009 & hence, there was decline in sales during past 3 years. Current year, company has entered into new agreement with Levis Signature, through which it is expecting turnover of Rs. 50.00 lacs every month. f) The company has booked net profit (PBT) of Rs. 2.26 lacs during FY 2007-08 as against Rs. 1.94 lacs of FY 2006-07, registering Y-o-Y growth of 16.50%. During FY. 2008-09, the net profit of the company increased to Rs. 3.56 lacs. g) Despite of decrease in turnover of the company, profitability is on increasing trend. Also, PBDIT of the company is at quite higher level of Rs. 31.58 lacs for the FY 2008-09 & Rs. 28.59 lacs for the FY 2007-08, which can be considered as satisfactory.

101

h) The company has been marginally increasing its TNW (unadjusted) Yo-Y basis i.e. from Rs. 13.44 lacs in FY. 2006-07 to Rs. 15.95 lacs in FY. 2007-09. The TNW for the FY 2009-10 is estimated at higher side of Rs. 37.96 lacs, mainly due to ploughing back of entire profit and infusion of fresh capital by directors with decrease in unsecured Loans from directors. . i) The current ratio of the company for FY 2007-08 has been 1.70 & at 2.26 for FY 2008-09. The current ratio estimated for FY 2009-10 is 1.33 times, mainly on account of proposed credit limit of Rs. 180.00 lacs from our bank and the same may be considered as satisfactory.

102

CASE STUDY 4 Details of case study

Name of the Applicant Work Office Address

Suchi Wires (New Relationship)

189, G.I.D.C. Estate, Por-Ramangamdi, Dist. Vadodara-391243 Residence Address

Contact Details

Deep Jyoti-2, Block No. 404, 405, Opp. Gujarat Tractor, Vishwamitri, Vadodara.

0265-2645431, 3098431 0265-2831649 (O) M: 9824034470 (Rajendrabhai) Proprietorship Firm Constitutio n Proprietor: Mr. Rajendra Vallavhbhai. Patel Date of Establishmen t 31.01.1992 (GST Registration No. 24691601368) (SSI Registration No. 240191100480, dated 07.06.2007)

PAN: ACSPP2512N Nature of Business Manufacturer of HB (Half hard bend) & MS (Mild stone) wires

103

Brief Background M/s Suchi Wires is a proprietorship firm established in year 1992. Mr. Rajendra Vallabhbhai Patel is a proprietor of the firm. Firm is mainly engaged in the business of manufacturing of iron wires, cutting & stretching it into different sizes according to customers requirements. The proprietor was working with administrative department of school in his initial career before 20 years. Proprietor then started trading in wires with friends at small level, on seeing the business potential, he decided to establish the business in the name of Suchi Wires. The proprietor is Commerce Graduate & aged about 51 years. He started business in year 1992 and having experience of around 17 years in the same line of business. Mrs. Niyati Patel (sister of the proprietor) manages administrative work related to the business. Mr. Kalpesh Patel (Brother-in-law of the proprietor) looks after the technical support. The proprietor looks after the finance & overall management. There are 16 workers in the firm, working in 2 shifts a day. Applicant purchases wires of different diameters & then processes it through different machines to stretch them and prepare wires of particular diameter & size, as per the requirements/specifications of the clients. To prepare the wires according to customers requirement, work processes like wire drawing, cutting, bending etc. are performed. Iron wires are used in making grill of fridge back, table fan cover, stapler pins, u-pins, etc.

104

 Major Suppliers of the applicant are: National Small Industries Corporation Ltd. (Ahmedabad) Shanti Fintrade Ltd. (Raipur) Roundwell Steel Corporation (Ahmedabad) Shree Vinayak Steels (Billimora)

Major Buyers of the applicant are: Gandhi Special Tubes Ltd. (Halol) Vijay jyot Seats Pvt. Ltd. (Halol) Lalit Engineers (Vadodara) Almonard Pvt. Ltd. (Vadodara)

105

Present Proposal Purpose of Loan Limits Proposed Rate of Interest & Validity of Limits Security Details Primary: Hypothecation of current assets of the firm. Collateral: A) Equitable mortgage of following properties: 1. Factory premise of Suchi Wires situated at Plot No. 428, GIDC, Ramangamdi, Por, Vadodara. Property belongs to Mr. Rajendra V. Patel (proprietor) & approximate market value of the property is Rs. 45.00 lacs. 2. Residential property situated at Deep Jyot-2, Block No. 404 & 405, Opp. Gujarat tractor, Vshwamitri, Vadodara. The property belongs to Mr. Rajendra V. Patel (proprietor) & approximate market value of the property is Rs. 15.00 lacs. B) Hypothecation of fixed assets of the firm. Guarantee: Personal guarantee of: 1. Mr. Rajendra Vallabhbhai Patel (Proprietor) 2. Mr. Kalpesh Patel (Brother-in-law of the proprietor) Visit to the location of Firm The unit of the firm was jointly visited by Mr. N Ramachandran (AVP-SME), Mr. Sachin gupta (Deputy Manager-SME) & Mr. Sameep Buch (Manager-Axis Sales) on 12.10.2009. Overall conduct of the business was found regular. The visit was satisfactory. BPLR-2.25% i.e. 12.50% (BPLR at present is 14.75%) 12 months only subject to review every year. CC limit of Rs. 50.00 lacs. Working capital limit

106

Processing Fees Login Fees

1.00% of sanctioned CC limit, plus applicable taxes (nonrefundable). Rs. 5000/- plus applicable taxes, to be taken upfront (Non refundable)

Defaulter List

Whether the names of the borrower or any of the promoters/directors appear(s) in: RBI defaulters List: No (The firm name and proprietors name are not featuring in RBI defaulters list latest available of 31.12.2008) ECGC defaulter List: No CIBIL: Satisfactory

Credit Scoring Credit Score (Enclose Credit Scoring Sheet) Parameters (ABS 31/03/2009) Financial Business & Management Industry Rating SME Overall 81.92 28.00 42.78 11.14 2

Score

107

Performance details

Particulars

31.03.2007 31.03.2008 31.03.2009 31.03.2010 31.03.2011 Audited Audited 204.49 1.69 206.18 5.16 1.23 0.22 3.71 3.71 1.80 4.94 26.27 Audited 431.02 3.39 434.41 11.13 1.31 1.27 8.55 8.55 1.97 9.86 34.08 Estimated Projected 568.57 4.08 572.65 21.04 1.18 5.47 14.39 14.39 2.51 15.57 46.96 625.43 4.9 630.33 22.80 1.06 5.48 16.26 16.26 2.58 17.32 61.72

Sales Other Income Total Income PBDIT Depreciation Interest PBT PAT PBT Margin % Cash Accruals TNW(Unadjusted) Unsecured Loans from friends & relatives TNW (Adjusted) TOL(Adjusted) TOL(Unadjusted) TOL/TNW(Unadjusted) TOL/TNW(Adjusted)

119.73 1.06 120.79 3.91 0.52 0.11 3.28 3.28 2.72 3.8 20.63

16.50 37.13 26.89 43.39 2.10 0.72

19.90 46.17 27.98 47.88 1.82 0.61

76.03 110.11 64.05 140.08 4.11 0.58

68.53 115.49 80.95 149.48 3.18 0.70

66.53 128.25 83.95 150.48 2.44 0.65

108

Debtors - Less than 6 months - More than 6 months Debtors holding (in days) Current Ratio Current Asset Current Liabilities

22.08 22.08 0.00

33.74 33.74 0.00

74.13 74.13 0.00

94.76 94.76 0.00

104.24 104.24 0.00

67.31 1.40 37.76 26.89

60.22 1.44 43.57 30.36

62.78 1.77 113.59 64.05

60.83 1.66 134.55 80.95

60.83 1.76 147.88 83.95

109

Analysis a) The market reputation of promoter is satisfactory. b) Firm has achieved sales of Rs. 204.49 lacs in FY. 2007- 08 and Rs. 431.02 lacs in FY. 2008-09, this is more than double of the last year. Firm has submitted estimated sales of Rs. 568.57 lacs for FY 2009-10, against which firm has achieved sales turnover of Rs. 235.70 lacs till 31st October 2009, which is 41.45 % of estimated sales. c) Profitability of the firm is also showing increasing trend y-o-y bases. Firm has achieved PBT of Rs. 3.71 lacs in FY 2007-08 & Rs. 8.55 lacs in FY 2008-09. Profitability has also rose in line with increase in sales of previous financial year. PBDIT of the firm is also on increasing trend, which can be considered as satisfactory. d) Net worth of the firm is increasing y-o-y bases, with plough back of the profit in the business. Unadjusted gearing of the firm is on higher side for FY 2008-09 mainly due to higher side of creditors at particular point in March 2009. In March 2009, proprietor submitted that purchase of raw material was at better price & the suppliers also allowed credit period. Hence, the creditor base was on higher side. e) Debtors level of the firm is average 60 days for all the past 3 years. Proprietor has submitted that average payment duration is 60 days maintained in the business. Debtors maintain regularity in payment, which can be considered as acceptable. f) The Current Ratio of the firm has been on higher side, above the benchmark level of 1.33 for all the past 3 years. Current ratio for FY 2007-08 was 1.44 & for FY 2008-09 was at 1.77. Estimated ratio is 1.66 for FY 2009-10. Although, it has been maintained above the benchmark level, which can be considered as acceptable.

110

CHAPTER 8 FINDINGS

Credit appraisal is done to check the commercial, financial & technical viability of the project proposed its funding pattern & further checks the primary or collateral security cover available for the recovery of such funds

Credit is the core activity of the banks & important source of their earnings which go to pay interest to depositors, salaries to employees & dividend to shareholders

Credit & risk go hand in hand

In the business world risk arises out of: Deficiencies / lapses on the part of the management Uncertainties in the business environment Uncertainties in the industrial environment Weakness in the financial position

Banks main function is to lend funds/ provide finance but it appears that norms are taken as guidelines not as a decision making

A bankers task is to indentify/assess the risk factors/parameters & manage/mitigate them on continuous basis

The Credit Appraisal process adopted by the bank take into account all possible factors which go into appraising the risk associated with a loan
111

 These have been categorized broadly into financial, business, industrial, management risks & are rated separately

The assessment of financial risk involves appraisal of the financial strength of the borrower based on performance & financial indicators

The norms of the bank for providing loans are not stringent, i.e. even if a particular client is not having the favorable estimated and financial performance, based on its past record and future growth perspective, the loan is provided. By providing various schemes of loans, Axis bank tries to cater to the financial requirements of almost all the types of SME units.

112

CHAPTER 9 CONCLUSION
Finance management is the backbone of any organizations and hence yields a number of job options ranging from strategic financial planning to sales.

From the study of Credit appraisal, it can be concluded that credit appraisal should therefore be based on the following factors, the same are applied at Axis Bank: Financial performance Business performance Industry outlook Quality of management Conduct of account

Axis Bank loan policy contains various norms for sanction of different types of loans. These all norms do not apply to each & every case. Axis Bank norms for providing loans are flexible & it may differ from case to case.

Usually, it is seen that credit appraisal is basically done on the basis of fundamental soundness. But, after different types of case studies, our conclusion was such that credit appraisal system is not only looking for financial wealth. Other strong parameters also play an important role in analyzing credit worthiness of the firm/company.

In all, the viability of the project from every aspect is analyzed, as well as type of business, industry, promoters, past records, experience, projected data and estimates, goals, long term plans also plays crucial role in increasing chances of getting project approved for loan.
113

BIBLIOGRAPHY

Web Sites: www.bankersindia.com www.wikipedia.com www.rbi.org.in www.Axis Bank.com www.indianbankassociation.com Books: Credit and banking By: K. C. Nanda

114

115