Professional Documents
Culture Documents
on
Priyanka Dwivedi
2012-2014 FT-12-FS-414
DECLARATION FORM
I hereby declare that the Project work entitled CREDIT APPRAISAL AND WORKING CAPITAL FINANCE submitted by me for the Summer Internship during the Post Graduate Program to IILM Institute for Higher Education is my own original work and has not been submitted earlier either to IILM or to any other Institution for the fulfillment of the requirement for any course of study. I also declare that no chapter of this manuscript in whole or in part is lifted and incorporated in this report from any earlier / other work done by me or others.
ACKNOWLEDGEMENT
The satiation and euphoria that accompany the successful completion of task would be incomplete without the mention of the people who made it possible. I would first like to thank Indian Overseas Bank for providing me this opportunity for working with them and provided assistance in completing the project to the best of my abilities. I would like to extend my sincere gratitude to my project guide Mr. C. Krishna Kumar
and Mr. M.K. Gupta, the Chief Managers of the bank for their assistance, motivation and being
a continual source of encouragement and providing me an insight to the various issues pertaining to the cases mentioned in the report. I would also mention the support and guidance of the staff members at Regional Office of IOB who helped me throughout the period of training. Their professional advice given throughout the completion of this project will not be forgotten. I am also thankful to my institute IILM GSM for providing the necessary guidelines that helped me to complete the project. I would also like to offer my sincere thanks to my faculty guide, Ms.Swati Sharma for his benevolent and expertise guidance. Her mentorship gave valuable suggestions that helped me during the internship period. Her guidance gave immense confidence and encouragement that helped me to put my best.
TABLE OF CONTENTS S.No Name of the Topic Executive Summary Objectives Company Profile Introduction CSR activities Socio- Economic responsibilities Introduction to the Project Meaning of credit appraisal Credit Appraisal process Working Capital Finance Introduction Operating cycle Working capital financing by banks Form of assistance Working Methodology Procedure of Credit Appraisal Analysis Working Capital Analysis Ratio Analysis Case Study XYZ Media Ltd. Recommendations Limitations Conclusion References Page no. Remarks 6 7 8 9 11
Chapter - 1 1.1 1.2 1.3 Chapter- 2 2.1 2.2 Chapter - 3 3.1 3.2 3.3 3.4 Chapter - 4 4.1 Chapter - 5 5.1 5.2 Chapter - 6
12 13
14 15 16 16
20
29 33
34 45 46 47 48
FIGURES S.No Figure Name 1 Credit Appraisal Process 2 Operating Cycle 3 Credit Appraisal At IOB TABLES S.No 1 2 3 4 Table Name Research Methodology Current Assets And Current Liabilities Ratio Types Financial Indicators Page no. 18 31 33 36 Remarks Page no. 13 15 21 Remarks
GRAPHS and SNAPSHOTS S.NO 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Name of Graph /Snapshot TNW TOL/TNW Funded Debt to TNW NWC Current Ratio Net Sales Gross Profit ratio Operating Profit Ratio NPBT To Sales NPAT to TNW NPAT To Sales Snapshot 1 Balance sheet Snapshot 2 Profit /Loss A/c Snapshot 3 Analytical Ratios Page no. 37 38 38 39 40 40 41 41 42 42 42 23 25 27 Remarks
Executive Summary
I have taken up the project Credit Appraisals and Working Capital Financeat Indian Overseas Bank Rajendra Place for the period of 2 months under Loans and Advances department.IOB is a Chennai based and one of the nationalized bank of India that has substantive history since 1937.It is a pioneer in many fields Banking, Insurance and Industry with the twin objectives of specializing in foreign exchange business and overseas banking.. The project Credit Appraisals and Working Capital Finance deals with the process of sanctioning a credit proposal.Credit appraisal means an investigation/assessment done by the bank prior before providing any loans & advances/project finance & also checks the commercial, financial & technical viability of the project proposed its funding pattern & further checks the primary & collateral security cover available for recovery of such funds. The project work also included the working capital assessment. The methods that are used by the banks in order to calculate the loan limits are Turnover method (Nayak committee) and second method of lending of Tondons committee, also called MPBF. The financial viability of the borrower and its firm is analysed through firms CMA data or through its proposed financial statements like audited and provisional balance sheet and P/L account of previous years, current financial year and assessment year. The objective of this project is to study various kinds of cash credit facilities provided by the bank such as the three categories of cash credit followed by the bank are OCC(Open Cash credit),MCC (Miscellaneous cash credit )and ETF-CC(Easy Trade Finance).Another objective is to know how to assess the working capital limits to be sanctioned by the bank depending upon drawing power of the borrower, fims turnover and holding level of the firm. The most important part of this project is the case analysis of XYZ private limited.The company is availing the different kinds of cash credit facilities.It gives the clear understanding of financial ratios.It also explains the method used for assessing working capital limit.The project also contains the CMA data of the firm. During this internship period, it has given an insight to legal procedures which are needed to be verified before considering the proposal such procedures are CIBIL report generation,ECGC specific approval list, RBI defaulter list and willful defaulter list verification and watch out investors website approval. Different types of cash credit facilities ,term loans, methods of assigning working capital limits to the individuals and firms, has been the integral part of the study during two months of internship program. The whole two months period of internship gave me a richful experience of working in loans and advances department with deep understanding of lending procedures followed at Indian Overseas Bank.
OBJECTIVES
The project Credit Appraisals and Working Capital Finance deals with the procedures of appraising a credit proposal and the methods to finance working capital required by the firms. Appraising a credit proposal is an important activity carried out by the credit department of the bank to determine whether to accept or reject the proposal for finance. The project deals in banking such as working capital methods of assessment, appraisal of credit reports. Working capital products include both fund and non-fund based products. The main objectives of this project are: To understand the entire process of sanctioning a credit proposal and various legal procedures. Study various types of working capital finance provided by banks. To know in details the procedure of assessment of working capital finance extended by banks. To study various kinds of cash credit facilities provided by the bank such as the three categories of cash credit followed by the bank are OCC(Open Cash credit),MCC (Miscellaneous cash credit )and ETF-CC(Easy Trade Finance). To get the understanding of financial statements like balance sheet and profit& loss account of the borrowing firms and analyzing financials of the company through ratio analysis To understand the various lending facilities provided by the bank to borrower like fund based (bank overdraft, term loan) and non fund based facilities (letter of credit & letter of guarantee). To know about various legal procedures required to be verified during appraisal of a credit proposal like CIBIL report generation, ECGC approval list, RBI defaulter list etc. To apply these procedure at a practical level with the help of case studies
IOB was one among the first to join Reserve Bank of India's negotiated dealing system for security dialing online. The Bank has finalised an e-commerce strategy and has developed the necessary Internet banking modules in-house. For the first time a Total Branch Automation package developed in-house has been customised in one of the Overseas Branches of the Bank. Most software developed in-house. During the year 2002-03, a new credit scheme Shubh Yatra' was introduced to provide loans to those who undertake foreign travel for tourism, employment and medical treatment. During the year 2004, the Government OF India selected IOB for channelising government credit to other countries, which runs into billions of dollars. And also in the same year the bank made tie up with Times Online Money to launch an Internet-based remittance product, e-Cash Home, targeted at NRIs in the US wishing to transfer money to India. IOB made pact with Chola for MF products. During the year 2005, the bank joined hands with Visa to offer debit cards to its esteemed customers. In the year 2006, IOB inked MoU with CRI Pumps. In September 2006, Indian Overseas Bank (IOB) has finally taken control of Bharat Overseas Bank (BhOB), an unlisted private bank. This is the first instance of a public sector bank taking over a strong private sector bank without resorting to the moratorium route. During May of the year 2007, Indian rating agency ICRA assigned an 'A1+' rating to the proposed 20 bln rupee certificates of deposit programme of Indian Overseas Bank, citing the bank's consistent and measured growth, the improvement in its asset quality through effective monitoring and collection systems, and improving core profitability. During June of the year 2008, IOB launched two new products namely IOB Gold' and IOB Silver' in savings account and IOB Classic' and IOB Super' under current account. IOB have a network of more than one thousand eight hundred branches all over India located in various metropolitan cities, urban, suburban and rural areas. IOB plans to set up banking operations in Malaysia in a joint venture with two other India-based banks Bank of Baroda and Andhra Bank with a minimum capital investment of RM320 million (US$100 million).
Several other CSR initiatives are: Upgradation of Farmers A special grant of 25 million rupees has been earmarked for five farmers schools to provide skill development and skill upgradation to farmers. Education academies have been set up in identified villages to support students who are weak in subjects like math and science. Narendras efforts in providing support to various cancer societys have saved many life. IOB-Sampoorna Project - A Total Village Development Project The Bank launched an innovative rural development project aiming at Total Village Development called IOB-Sampoorna in Kuthambakkam and Padur Villages in TiruvallurDistrict, Kameshwaram village in Nagapattinam District, Dhaliyur Village in CoimbatoreDistrict and Innambur village in Thanjavur District of Tamil Nadu. IOB-Sampoorna is an unique Project encompassing several livelihood initiatives in the villages to ensure all-inclusive growth of rural population. Sakthi Memorial Trust The Trust set up jointly by the Management of the Bank, Indian Overseas Bank Officers Association and All India Overseas Bank Employees' Union, to perpetuate the memory of Banks Founder Shri M.Ct.M. Chidambaram Chettiar, continued to provide entrepreneurial development training to women thereby empowering them socially and financially.The Trust has so far conducted 44 Entrepreneurial Development Programmes (EDPs) exclusively for women at various centres, benefiting 1,601 women. For the women entrepreneurs and Self Help Groups, 1013 Sakthi Bazaars' were organized at many branches, for exhibition cum sale of their products. Rural Self Employment Training Institutes (RSETIs) In line with the guidelines issued by Ministry of Rural Development, Govt of India, Bank had set up RSETIs at Thiruvananthapuram (Kerala State), Tirunelveli, Thanjavur and Trichy (Tamilnadu State) to provide training to farmers, members of SHGs, beneficiaries under SGSY, Educated Unemployed Youths, Artisans and Beneficiaries belonging to weaker sections.One Rural Training Centre was set up by the Bank (jointly with NABARD and Indian Bank)at Karaikudi (Sivaganga District, Tamil Nadu). Financial Literacy and Credit Counselling Centres (FLCCC) viz., SNEHA With a view to promoting financial education and awareness among general public the Bank set up two FLCCCs at Nagercoil and Trichy during the year under review. These centres will educate the people in rural and urban areas with regard to various financial products/ services available from formal financial sector, provide face-toface financial counselling services and offer debt counselling to indebted individuals.
10
12
Receipt of documents (Audited, Provisional or Projected Balance sheets, Valuation reports of properties, Legal Opinion, ROC documents, Guarantors Statement, Debtors & Stock statements for 120 days)
Verification of legal procedures (Check for RBI defaulters list, Wilful defaulters list, CIBIL Report, ECGC specific approval list, check for watchoutinvestors website etc.) Property and unit /stock inspection
Proposal preparation
13
14
Payments to creditors
Loan: In this case, the entire amount of assistance is disbursed at one time only, either in cash or by transfer to the companys account. It is a single advance. The loan may be repaid in instalments, the interests will be charged on outstanding balance. Overdraft Overdraft is a credit facility in the nature of a Credit Account from which the borrower can avail the funds anytime at his convenience but whose Upper Limit is fixed depending on the value of the security offered by the borrower to the bank. Overdraft can be availed against any financial assets like Fixed Deposits, Bonds, Shares Securities, Gold & Silver Jewelry or Physical Assets like Motor Car, Pool of Vehicles, Immovable Properties like Factory Land etc.Overdraft helps you meet your short-term funding needs and allows you to leverage every business opportunity that comes your way against the security of residential or commercial property. Bills purchased or discounted This facility enables the company to get the immediate payment against the credit bills raised by the company. The bank holds the bill as a security till the payment is made by the customer. The entire amount of bill is not paid to the company. The Company gets only the present worth of the amount of bill, the difference between the face value of the bill and the amount of assistance being in the form of discount charges. On maturity, bank collects the full amount of bill from the customer. Packing Credit This type of assistance may be considered by the bank to take care of specific needs of the company when it receives some export order. Packing credit is a facility given by the bank to enable the company to buy the goods to be exported. If the company holds a confirmed export order placed by the overseas buyer or a letter of credit in its favour, it can approach the bank for packing credit facility.
Bank Guarantee:
Suppose Company A is the selling company and Company B is the purchasing company. Company A does not know Company B and as such is concerned whether Company B will make the payment or not. In such circumstances, D who is the Bank of Company B, opens the Bank Guarantee in favour of Company A in which it undertakes to make the payment to Company A if Company B fails to honour its commitment to make the payment in future. As such, interests of Company A are protected as it is assured to get the payment, either from
17
Company B or from its Bank D. As such, Bank Guarantee is the mode which will be found typically in the sellers market. As far as Bank D is concerned, while issuing the guarantee in favour of Company A, it does not commit any outflow of funds. As such, it is a Non-Fund Based Lending for Bank D. If on due date, Bank D is required to make the payment to Company A due to failure on account of Company B to make the payment, this Non-Fund Based Lending becomes the Fund Based Lending for Bank D which can be recovered by Bank D from Company B. For issuing the Bank Guarantee, Bank D charges the Bank Guarantee Commission from Company B which gets decided on the basis of two factorswhat is the amount of Bank Guarantee and what is the period of validity of Bank Guarantee. In case of this conventional for of Bank Guarantee, both company A as well as Company B get benefited as it is able to make the credit purchases from Company A without knowing Company A. As such, Bank Guarantee transactions will be applicable in case of credit transactions. In some cases, interests of purchasing company are also to be protected. Suppose that Company A which manufactures capital goods takes some advance from the purchasing Company B. If Company A fails to fulfil its part of contract to supply the capital goods to Company B, their needs to be to be some protection available to Company B. In such circumstances, Bank C which is the banker of Company A opens a Bank Guarantee in Favour of Company B in which it undertakes that if Company A fails to fulfil its part of the contract, it will reimburse any losses incurred by Company B due to this non fulfilment of contractual obligations. Such Bank Guarantee is technically referred to as performance Bank Guarantee and it ideally found in the buyers market.
Letter of Credit:
The non-fund based lending in the form of letter of credit is very regularly found in the international trade. In case the exporter and the importer are unknown to each other. Under these circumstances, exporter is worried about getting the payment from the importer and importer is worried as to whether he will get the goods or not. In this case, the importer applies to his bank in his country to open a letter of credit in favour of the exporter whereby the importers bank undertakes to pay the exporter or accept the bills or drafts drawn by the exporter on the exporter fulfilling the terms and conditions specified in the letter of credit.
18
19
Primary Data: Observation, Discussion with the company guide at the bank. The company profile , its guidelines and principles. Secondary Data: Secondary data relating to the procedure of assessment of working capital finance, old sanction proposals, RBI guidelines etc., financial statements have been sourced from the branch and referenced books.
20
21
1. PRE SANCTION PROCESS: When a customer required any credit facility or working capital loan he is required to complete application form and submit the same to the bank.Also the borrower has to submit the required information along with the application form. Pre sanction process requires following documents and information which are analysed prior to raising the credit proposal Audited balance sheets and profit and loss accounts for the previous three year Estimated balance sheet for current year. Projected balance sheet for next year Profile for promoters/directors, senior management personnel of the company Obtain Guarantors statement Examine for preliminary appraisal RBI guidelines and Policies Prudential exposure norms and bank lending policy Industry exposure restriction and related risk factors. Obtain RAM rating ,CRISIL rating Compliance regarding transfer of borrowers accounts from one bank to another bank Government regulation / legislation impact on the industry Acceptability of the promoter and applicant status with regards to other unit to industries. Credit report of accounts running with other banks Arrive at the preliminary decision. Evaluation of prime and collateral security Examine/analysis /assessment Financial ratio & Dividend policy. Depreciation method Revaluation of fixed assets. Records of defaults (Tax, dues etc.) Pending suits having financial implication (Customs, excise etc.) Check for RBI defaulter list, Willful defaulter list, ECGC specific approval list,CIBIL report. Qualifications to balance sheet auditors remarks etc. Trend in sales and profitability and estimates /projection of sales. Production capacities and utilization: past & projected production efficiency and cost. Estimated working capital gap W.R.T acceptable build-up of inventory/receivables/other current assets and bank borrowing patterns. Assess MPBF determine facilities required Companys structure and system Profitability factor, Inventory/Receivable level, Capacity utilization
22
2. Preparation of CMA data Credit Monitoring Arrangement (CMA) data is a very important area in the process of credit appraisals. It is a critical analysis of current & projected financial statements of a loan applicant by the banker. CMA data is a systematic analysis of working capital management of a borrower and objective of this statement is to ensure the usage of long term and short term fund have been used for the given purpose.CMA data is also beneficial for analysing financial indicators .CMA data at Indian Overseas Bank is prepared in main 3 components statements. Balance sheet - Balance sheet analysis for the current & projected financial years is the first statement in CMA data. This statement gives the detailed analysis of Current & noncurrent assets, fixed assets, cash & bank position, current & noncurrent liabilities of the borrower. Also this statement indicates the net worth position of the borrower for the projected years. Balance sheet analysis gives a complete financial position of the borrower and cash generating capacity during the projected years. Below is the snapshot of CMA data of XYZ Media Ltd. Co. prepared at IOB as a part of the project.
SNAPSHOT - 1
Type of Financials Year ended 1.ASSETS 1.1CURRENT ASSETS I. Inventories Raw Materials Stock in process Finished Goods Consumable Spares Audited 2011 BALANCE SHEET Audited 2012 Provisional 2013 Projected 2014
TOTAL INVENTORIES II. Trade Debtors Domestic Debtors over six months Domestic Debtors less than six months Export Debtors over six months Export Debtors less than six months TOTAL DEBTORS III. Other Current Assets Cash and Bank Balance Prepaid Expenses Advance Tax Deposits with Excise and Sales Tax Loans and Advances Others/Dep margin with Bank/cenvat input
198.59
240.45
160.00
110.00
23
Total Other Current Assets SUB- TOTAL (a) 1.2 FIXED ASSETS I. Land & Buildings II. Plant & Machinery III. Sundries Gross Fixed Assets Less: Depreciation to date Net Fixed Assets (b) Capital Work in Progress
762.07 1,662.55
851.95 2,082.50
919.97 2,079.97
875.67 2,085.67
0.00
136.51
91.00
91.00
II. Others Non Current Assets Investment in other companies Loans and Advances Overdue debitors security and other deposits Non-Moving Inventories Others
56.51 Total Other Non Current Assets SUB-TOTAL (c) Deferred Tax Asset (d) 1.4 INTANGIBLE ASSETS (e) TOTAL ASSETS (a+b+c+d+e) 56.51 0.00 0.00 2,027.52 2011 31-Mar-11
Year ended 2. LIABILITIES 2.1.CURRENT LIABILITIES I. Borrowings from IOB From other Banks Commercial Paper sub- total II. Creditors for Purchases III. Other Current Liabilities Creditiors for Expenses Provision TL due within one year Outstanding Expenses
24
Others/Advances taken
91.61
67.37
72.25
65.30
SUB-TOTAL (e) 2.2.DEFERRED LIABILITIES I. Term Loan from IOB II. Term Loan from institutions III. Other Long Term Liabilities Preference Shares Long-term loans from other banks Foreign currency loans NCD borrowings Others Other Long term liability which have been taken as Quasi Equity Total Other Long Term Liabilities SUB-TOTAL (f) 2.3.CAPITAL AND SURPLUS I. Paid up Capital II. Reserves and Surplus III. Revaluation Reserves Share Application Money SUB-TOTAL (g) Deferred Tax Liability (h) TOTAL LIABILITIES (e+f+g+h) Off Balance Sheet Debt Current Portion of Long Term Debt
97.51 84.16
65.00 100.00
56.00 80.00
0.00 70.00
51.94 1,141.30 0.00 29.00 0.00 1,222.24 0.00 2,027.77 0.00 42.70
65.96 1,297.82 0.00 5.00 0.00 1,368.78 0.00 2,714.03 0.00 16.67
66.56 1,348.16 0.00 6.00 0.00 1,420.72 0.00 2,730.97 0.00 29.00
72.56 1,411.81 0.00 6.00 0.00 1,490.37 0.00 2,781.67 0.00 66.00
Profit and loss P &L is the second component of CMA data of a company and shows the company's revenues and expenses during a particular period. It indicates net sales, gross profit, operating profit, profit before tax (PBT), and net profit after tax (NPAT). SNAPSHOT -2
Year ended PROFIT AND LOSS 1.NET SALES I.Domestic Sales - Cash II.Domestic Sales - Credit iii. Exports Less Excise Duty Total Net Sales 31-Mar-11 31-Mar-12 31-Mar-13 31-Mar-14
25
2. COST OF SALES Opening stock finished goods Opening stock WIP Opening stock RM - Indigenous Opening stock RM - Imported Add Purchases RM - Indigenous Add Purchases RM - Imported Stores consumed Manufacturing Expenses Depreciation Add:Purchases Finished Goods Less Closing stock finished goods Less closing stock WIP Less closing stock RM - Indigenous Less closing stock RM -- Imported Cost of Sales Cost of Production 3. GROSS PROFIT(+)/LOSS(-) (1-2) 4. SELLING & ADM. EXP. 5. INTEREST & FIN.CHARGES
0.00 0.00 774.15 0.00 0.00 0.00 0.00 51.99 45.31 0.00 0.00 0.00 0.00 0.00 871.45 871.45 599.13 498.37 63.83
0.00 0.00 997.87 0.00 0.00 0.00 0.00 56.91 46.34 0.00 0.00 0.00 0.00 0.00 1,101.12 1,101.12 875.30 735.02 81.02
0.00 0.00 1,260.00 0.00 0.00 0.00 0.00 95.20 55.00 0.00 0.00 0.00 0.00 0.00 1,410.20 1,410.20 989.80 845.40 87.00
0.00 0.00 1,325.00 0.00 0.00 0.00 0.00 105.10 60.00 0.00 0.00 0.00 0.00 0.00 1,490.10 1,490.10 1,109.90 954.25 97.00
Total (4+5) 6.OPERATING PROFIT/LOSS 7.I.OTHER INCOME Sale of Scrap Interest Received Profit on Sale of FA / INV Others
562.20 36.93
816.04 59.26
932.40 57.40
1,051.25 58.65
Total Other Income 7 II.LESS OTHER EXPENSES Loss on Sale of FA / INV Loss on Currency Fluctuation Misc. Exp written off Others
Total Other Expenses Other Income Net of Expenses 8.PROFIT BEFORE TAX/LOSS 9.INCOME-TAX PROVISION 10.NET PROFIT AFTER TAX/LOSS 11.N.P.BEFORE DEP.&TAX 12.N.P.BEFORE DEP.TAX&INT. 13. CASH GENERATION
26
Analytical and comparative Ratios- Ratio Analysis is a form of Financial Statement Analysis that is used to obtain a quick indication of a firm's financial performance in several key areas. The computation of ratios facilitates the comparison of firms which differ in size. Ratios can be used to compare a firm's financial performance with industry averages. In addition, ratios can be used in a form of trend analysis to identify areas where performance has improved or deteriorated over time. SNAPSHOT - 3
Year ended ANALYTICAL AND COMPARATIVE RATIOS I.FINANCIAL INDICATORS 1.TANGIBLE NETWORTH 2.TOTAL OUTSIDE LIAB.TO TNW (TOL-USL)/(TNW+USL) 3.FUNDED DEBT TO TNW 4.NET WORKING CAPITAL 5.CURRENT RATIO 6.STOCK HOLDINGS 6.1.RAW MATERIALS R.M. HOLDING (IN MTHS) 6.2.STOCK IN PROCESS SIP HOLDING (IN MTHS) 6.3.FINISHED GOODS FG HOLDING (IN MTHS) 6.4.CONSUMABLE SPARES CON.SPARE CONSUMED CON.SPARE HOLD(MTHS) 7.SUNDRY DEBTORS (DOMESTIC) SUNDRY DEBTORS (EXPORT) GROSS SALES (DOMESTIC) GROSS SALES (EXPORT) RECEIVABLES HOLD(MTHS) (DOMESTIC) RECEIVABLES HOLD(MTHS) (EXPORT) 8. CREDITORS FOR PURCHASES PURCHASES CREDIT AVAIL (MONTHS) 31-Mar-11 31-Mar-12 31-Mar-13 31-Mar-14
1,222.24 0.66 0.30 0.28 1,198.04 3.58 0.00 198.59 3.08 0.00 0.00 0.00 0.00 0.00 0.00 #DIV/0! 701.89 0.00 1,470.58 0.00 5.73 #DIV/0! 3.35 0.00 #DIV/0!
1,368.78 0.98 0.26 0.57 1,523.39 3.72 0.00 240.45 2.89 0.00 0.00 0.00 0.00 0.00 0.00 #DIV/0! 990.10 0.00 1,976.42 0.00 6.01 #DIV/0! 9.31 0.00 #DIV/0!
1,420.72 0.92 0.27 0.52 1,505.72 3.62 0.00 160.00 1.52 0.00 0.00 0.00 0.00 0.00 0.00 #DIV/0! 1,000.00 0.00 2,400.00 0.00 5.00 #DIV/0! 10.00 0.00 #DIV/0!
1,490.37 0.87 0.32 0.42 1,414.37 3.11 0.00 110.00 1.00 0.00 0.00 0.00 0.00 0.00 0.00 #DIV/0! 1,100.00 0.00 2,600.00 0.00 5.08 #DIV/0! 12.00 0.00 #DIV/0!
27
II. PROFITABILITY RATIOS 9. NET SALES INCREASE/DECR.SALES 10.PERCENT.INCR. SALES 11.GROSS PROFIT TO SALES 12.OP.PROFIT TO SALES 13.N.P.BEFORE TAX TO SALES 14.N.P.AFTER TAX TO TNW 15. TOTAL BANK BORROWINGS 16. NPAT/Sales
3. Assessment of working capital limits - A unit needs working capital funds mainly to carry current assets required for its operations. Proper assessment of funds required for working capital is essential not only in the interest of the concerned unit but also in the national interest to use the scare credit according to production requirements. When a borrower demands for a credit facility from the bank, the bank has to assess the limits of working capital to be sanctioned. Proper assessment of working capital requirement may be done as underi. TURNOVER METHOD (Nayak Committee Recommendations) a. Mainly used for SMEs (Small and Medium Enterprises). b. Not appropriate for manufacturing and big trading companies. ii. CASH BUDGET SYSTEM a. Mainly used for service sector companies b. Cash inflow Cash outflow = Bank finance in form of WC TONDON COMMITTEE RECOMMENDATIONS a. It has three methods of lending. b. Out of 3 methods recommended, method II also known as Maximum Permissible Bank Finance (MPBF) is mainly used by the banks for assessment of WC finance 4. Appraisal and Recommendation
iii.
This is the last step of appraising the credit proposal. All lending made or proposed by the branches must be in conformity with banks lending policy and within the budget allocations made from time to time. In this connection officers are expected to be thorough with the Loan Policy Document. Managers should strictly adhere to all the instructions and guidelines issued by the Central Office from time to time. It is primarily the responsibility of the Branch Managers to ensure the safety of all the advances of their branches. It is the basic duty of the Branch Managers and the other officials to protect the banks interest in all the transactions of the bank handled by them including advances. When the entire assessment is done ,the proposal is sent to discretionary powers to appraise the credit proposal
28
Chapter 5 ANALYSIS
The project involves the following tools for analysing the given project proposal: Working capital analysis Ratio analysis
29
1. DRAWING POWER OF THE BORROWER The drawing power that a borrower enjoys at any one point depends on each components of working capital. The bank for each component, which the borrower must hold as his contribution to finance working capital, prescribes margins. The drawing power of the borrower can be best explained with the following illustration Illustration: Suppose a borrower has Rs 100.00 lacs as working capital limit sanctioned to him by a bank. The security provided by the borrower to the bank is the hypothecation of inventory. Suppose, the borrower needs to hold an inventory level of say 130 lacs in order to enjoy Rs 100 lacs as his working capital limit. The actual level of inventory with the borrower at a point is say 110 lacs.The inventory margin prescribed by the bank is say 25 % Therefore with this inventory level, the borrower enjoys only Rs 82.5 lacs as his working capital limit as against Rs 100 lacs. 2. SECURITY Banks provide credit on the basis of the following modes of security from the borrowers. Hypothecation: the banks provide credit to borrowers against the security of movable property, usually inventory of goods. Mortgage: It is the transfer f a legal / equitable interest in specific immovable property for securing the payment of debt. Pledge: The goods which are offered as security, are transferred to the physical possession of the lender.
30
31
norms. Depending on the size of credit required, the funding of these current assets (working capital needs) of the corporates could be met by one of the following methods: First method of lending Banks can work out the working capital gap, i.e. total current assets less current liabilities other than bank borrowings (called Maximum Permissible Bank Finance or MPBF) and finance a maximum of 75 per cent of the gap; the balance to come out of long-term funds, i.e., owned funds and term borrowings. This approach was considered suitable only for very small borrowers i.e. where the requirements of credit were less than Rs.10 lacs Second method of lending This is the most commonly used methods by bnks.Under this method, it was thought that the borrower should provide for a minimum of 25% of total current assets out of long-term funds i.e., owned funds plus term borrowings. A certain level of credit for purchases and other current liabilities will be available to fund the build up of current assets and the bank will provide the balance (MPBF). Consequently, total current liabilities inclusive of bank borrowings could not exceed 75% of current assets. RBI stipulated that the working capital needs of all borrowers enjoying fund based credit facilities of more than Rs. 10 lacs should be appraised (calculated) under this method. Third methods of lending Under this method, the borrower's contribution from long term funds will be to the extent of the entire CORE CURRENT ASSETS, which has been defined by the Study Group as representing the absolute minimum level of raw materials, process stock, finished goods and stores which are in the pipeline to ensure continuity of production and a minimum of 25% of the balance current assets should be financed out of the long term funds plus term borrowings. But This method was not accepted for implementation.
vii.
The level of credit limits to be assessed by turnover method ' has since been increased to Rs. 2.00 crores for all categories of borrowers and further to Rs. 5.00 crores for SSI units. The banks have further been given discretion to apply this method upto any level of limits not below the limits specified by Reserve Bank of India and frame a suitable policy in this regard.
Detailed ratio analysis for the case study of XYZ Media Ltd. Has been mentioned in the next section.
33
102.69 31.01.13 He has experience of more than a decade in the field of advertising. Has rich experience in the field of real estate, hospitality & timber imports. 25.55 31.01.13 More than four years of experience in advertising field.
Mr. Y
Director
27
Mr. Z
Director
45
34.60 31.01.13 Worked as director in MNC. He is associated with advertising field for more than 9 years.
34
REQUIREMENT OF: Enhancement in cash credit limits & LG limit to Rs.5.00crs & Rs.2.60crs respectively with projected sales of Rs 26 crores for the year 2013-14 To raise term loan of 6.60 crores PURPOSE: In 2010, company acquired two major tenders for a term of five years from DMRC. For the same purpose we issued a bank Guarantee of Rs 216.00lacs on behalf of the subject company in favour of DMRC. Company requires term loan to erect 42 super structures at Gwalior for advertising
Security
Prime Security -Stocks- Rs 160.00 lacs -Book Debts- Rs 1000.00 lacs -Fixed Assets- Rs 420.00 lacs (As per ABS- 31.03.13) Rs.1580 lacs
Total value:
Collateral security
Total value:
Forced Sales Value of property (FSV) Agra- 35.00 lacs Faridabad- 156.00 lacs IP Extn. Delhi- 115.00 lacs Gujarat-60.00 lacs Fixed Deposit- 57.00 lacs Collateral Coverage: 51% Rs. 423 lacs
Banking Arrangement: Subject is presently enjoying CC limit of Rs 330.00lacs, Term loan of Rs 175.00lacs and LG of Rs 230.00lacs, from IOB, Vanasthali branch. Limits are utilized judiciously and operations in the account are reported to be satisfactory. Past Performance: Sales of the company are increasing continuously over the last 3 years. It achieved sales of Rs 910.74lacs in 2009-10 compared to Rs 884.70lacs in 2008-09, which translated in increase of 2.94% over previous year. In FY2010-11 they achieved sales of Rs 1470.58lacs i.e. 73.53% of their projections (`2000.00lacs). In FY 2011-12, company has estimated sales of Rs 2200.00lacs
35
(audited) (Provisional) (Projections) 1,976.42 59.26 50.18 96.52 1,523.39 3.72 1,368.78 0.98 0.26 2,400.00 57.40 34.60 105.60 1,505.72 3.62 1,420.72 0.92 0.27 2,600.00 58.65 52.65 112.65 1,414.37 3.11 1,490.37 0.87 0.32
(audited) (Provisional) (Projections) 1,368.78 786.14 559.11 2,714.03 374.88 0.00 2,082.50 0.00 2,714.02 1,420.72 736.00 574.25 2,730.97 420.00 0.00 2,079.97 0.00 2,730.97 1,490.37 620.00 671.30 2,781.67 460.00 0.00 2,085.67 0.00 2,781.67
36
The TNW increased from Rs 1222.24 lacs in 2010-11 to Rs 1368.78 lacs in FY 2011-12 by retention of profits of Rs 50.18 and balance by induction of capital by Rs 96.36 lacs. Further in 2012-13 the TNW of the company increased to Rs 1420.72 lacs by retaining profits of Rs 34.60 lacs and balance by induction of fresh capital of Rs 17.34 lacs.The company further projected to achieve the TNW of Rs 1490.37 lacs in FY 2013-14 by retention of profits of Rs 52.65 lacs and balance by induction of fresh capital of Rs 17.00 lacs. The subjects projected TNW of Rs 1581.32 lacs for the FY 2014-15 by retention of Rs 72.95 lacs and balance by increasing the capital by Rs 18.00 lacs, which is acceptable.
GRAPH - 1
TNW(in lacs)
1600 1400 1200 1000 800 600 400 200 0 2011-12 2012-13 2013-14 2014-15 1222.24 1368.78 1420.72 1490.37
37
TOL/TNW
1.2 1 0.8 0.6 0.4 0.2 0 2011-12 2012-13 2013-14 2014-15 0.66 0.98 0.92 0.87
38
GRAPH-4
Current ratio
It helps to measure liquidity and financial strength, indication of availability of current assets to pay current liabilities. The higher the ratio betters the liquidity position. Generally it should be at least 1.33. Current ratio for the company is at a comfortable level from last 4 years Current ratio for the company is at a comfortable level from last 4 years. CR for the company as on 31.03.2011 was 3.58, which is well above the benchmark level of 1.25:1(for SME units). For FY 2011-12, it is at 3.72 & estimated at 3.62 as on 31.03.13. The projected CR is 3.11 & 3.20 as on 31.03.14 & 31.03.15 respectively, which may be accepted. However debtor needs to be realized on a faster pace to improve liquidity
39
GRAPH -5
Current Ratio
3.8 3.6 3.4 3.2 3 2.8 2011-12 2012-13 2013-14 2014-15 3.11 3.58 3.72 3.62
GRAPH- 6
40
GRAPH-7
GRAPH-8
41
NPBT to Sales
5 4 3 2 1 0 2011-2 2012-13 2013-14 2014-15 3.13 2.4 3.85 3.1
NPAT to TNW
4 3.5 3 2.5 2 1.5 1 0.5 0 3.67 2.58 2.44 3.53
2011-2
2012-13
2013-14
2014-15
NPAT TO SALES -
GRAPH 11
NPAT to Sales
3 2.5 2 1.5 1 0.5 0 2011-2 2012-13 2013-14 2014-15 1.44 2.14 2.54 2.03
42
Particulars
31.03.2011 (Audited)
Stock The average inventory period for raw material is reducing over the years. It has reduced from 3.08 months as on 31.03.11 to 2.89 months as on 31.03.12. It is further reducing to 1.52 months & 1 month as on 31.03.13 & 31.03.14 respectively. The subjects further projected to reduce the stovk holding to 0.87 months which is acceptable.
Sundry Debtors The holding level for Debtors is 5 months of sale. In view of the activity and past trend the said holding level is acceptable. However branch to arrive at DP on Debtors upto 120 days old debtors only.
Sundry Creditors The holding level of creditors has increased from 0.05 months to 0.11 months as on 31.03.2012. It has reduced to 0.10 months as on 31.03.2013. the projected holding level as on 31.03.2013 &b 31.03.2014 is 0.11 months & 0.13 months respectively which is acceptable.
43
44
RECOMMENDATIONS
1. All the documents required to appraise the project should be asked at the time of application only rather than later by the bank 2. The bank must bring more transparency in appraisal of the project, there should be explanation for a appraisal of the project that was sanctioned by higher authority. 3. The bank must not rely on software or information provided by the client the bank should dig in for other sources in order to draw a real picture for the company. 4. Credit scoring allows lenders to determine whether or not you fill the profile of the type of customers they are looking for. 5. Banks should not rely on the documents provided by the client,they must inspect each and every element of credit document. 6. Banks concerned should continuously monitor loans to identify accounts that have potential to become non-performing. 7. At the time of projections due to lack of documents, the projections are done. 8. Indian Overseas Bank uses only ratio analysis tool for assessment, it should also bring Capital Budgeting Techniques for assessment of working capital. 9. Bank provide loan on the basis of only re-payment capacity of the borrower and hence it is suggested to adopt some modern methods to appraise the loan to the business to check the feasibility of the project for appraising such high amount of loan. 10. Bank must extend working capital finance through non-fund based facilities. 11. Another ideal method would be to use LC as the primary source of extending, working capital clubbed with bill discounting. This would ensure that the credit isput to the right use by the borrower and repayment is guaranteed to the bank. 12. The bank must further secure themselves by holding a second charge on all the fixed assets of the borrower.
45
LIMITATIONS
1. As far as the illustration and analysis of the case study is concerned, the project is limited to Indian Overseas Bank,Regional office ,Rajendra place 2. Matters related to Banks asset classification / income recognition procedures, investment are not given by the bank. 3. The project involves a case study of a firm for which the entire assessment has been done but the personal details and the companys name are intentionally kept hidden. 4. The project uses only ratio analysis tool for working capital assessment and it does not involve various other financial tool like capital budgeting technique. 5. The study of the project is limited to the types of advances funded by the bank i.e.IOB and not all types of advances.
46
CONCLUSION
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 Following points has been taken out of the project as the main crux of the study which Bank considers while sanctioning the working capital limit to the concern: 1. Turnover size of the concern: The bank normally gives working capital limit upto 2025 % of the turnover estimated (for the year under review) by the concern. 2. Current ratio should be 1.33: 1. Hence all the CR ratio level must above the benchmark level of 1.33 ,only then the proposal would be accepted. 3. Total Outside Liability/ Net Worth Ratio should lie in the limit of 4:1. 4. As a measure to incentive to export sector while calculating the margin i.e. 25% of current assets, export receivables are excluded from current assets. 5. Additional credit needs of exporters arising out of firm order/ confirmed letter of credit (which are not taken into account while fixing regular credit limits of borrowers) are to be met in full even if sanction of such additional credit limit exceeds MPBF 6. Credit limits of the borrowing concern in the sugar industry may be determined on the basis of a current ratio of 1:1. 7. Sick/weak units under rehabilitations will be exempted from the application of 2nd method of lending. 8. Term loan Installments payable within the next twelve months time are excluded from current liabilities while calculating MPBF but included while calculating Current Ratio. From the above discussion we can say that bank credit occupies an important place in financing working capital requirements of industries. Working capital financing is a specialized line of business and largely dominated by commercial banks. Generally, the bank finance for meeting working capital needs is easily available to firms. But it has been always difficult to determine the norms for an adequate quantum of bank credit required by an industry for working capital purpose. Various committees have been set up for examining the working capital financing by banks and to recommend norms for and to regulate bank credit. Besides this from time to time, Reserve Bank of India has been issuing guidelines and directives to the banks to strengthen the procedures and norms for working capital financing.
47
REFERENCES
1. Real Estate Advances-Guidelines.ADV (2009),ADV/422/2010-11 ,BOI Advances General Instructions ,volume 2. 2. RBI. Management of advances(2012).RBI recommendations,Annexture 1,para 2.7 3. Bhalla, V. K., (2003), Working Capital Management, New Delhi, Anmol Publications Private Limited, 5th Edition. 4. Srinivasa, S., (1999), Cash and Working Capital Management, New Delhi, Vikas Publishing House Private Limited. 5. Tandon, Chore, Kannan and Certain Other Committees Recommendation,Retrived from http://www.rushabhinfosoft.com/webpages/BHTML/CH-16.htm 6. Credit facilities,Retrived from www.iob.in 7. Tondon committee and Nayak Committee Recommendations, Retrived from www.docstoc.com 8. RBI. Master Circular- Loans and Advances Statutory and Other Restrictions(201112), RBI/2011-12/59,Retrived from http://www.rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=6514 9. Market portfolio,Retrived from http://www.indiainfoline.com. 10. Pamela Peterson Drake( 2012),study on Financial Ratio Analysis
48