SUMMER TRAINING REPORT

On

ADVANCES MANAGEMENT
Indian Overseas bank

Submitted in partial fulfillment of the requirements of Post Graduate Programme By

Gaurav Manchanda

2012-2014 FT-12-109 IILM Institute for Higher Education Greater Noida

DECLARATION FORM
I hereby declare that the Project work entitled ADVANCES 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.

Signature of Student: _____________ Name of Student: Date: Place: _______________

ACKNOWLEDGEMENT
I would like to express my gratitude to all those who gave me opportunity and help to complete this project report. I would like to thank Indian Overseas Bank for providing me opportunity to work with them and giving guidance in completing the project to the best of my abilities. I would like to extend my special gratitude to Miss Rashmi Agarwal, Assistant Manager, Advances Department, Indian Overseas Bank, for being my company guide and providing me an insight into various issues pertaining to the case mentioned in the report. Her professional advice given throughout the completion of this project will not be forgotten. I would also like to thank my team members Miss. Kritika Gupta and Mr. Anand Kumar for their assistance, motivation and being a continual source of encouragement and guiding me to complete this project successfully. I am highly indebted to Prof. Rajkishan Nair for his mentorship and valuable suggestions that gave immense confidence and encouragement that helped me to put in my best. I am also thankful to my parents because of whom I am capable of pursuing pgdm. Last but not the least I would like to thank my friends and classmates who gave me a positive feedback and a competitive frame of mind while making this report.

TABLE OF CONTENTS S.No Name of the Topic Executive Summary Objectives Company Profile Introduction Corporate Social Responsibility Socio- Economic responsibilities Page no. 6 8 9 11 11 Remarks

Chapter - 1 1.1 1.2 1.3

Chapter- 2 Introduction to the Project 2.1 General concepts of loans and Advances 2.2 Basel- II Accord A measure of Risk Adequacy 2.3 Lending and Advances 2.4 Types of Advances 2.5 Financial Analysis of Lending 2.6 Methods of Credit Rating 2.7 Methods of Assigning Credit Limits and Drawing Power 2.8 Securities used against Lending 2.9 Modes of Charging Securities 2.10 Credit Appraisal 2.11 Credit Appraisal Process Chapter - 3 3.1 3.2 3.3 Working Capital Finance Introduction Operating cycle Working capital financing by banks 3.4 Form of assistance

12 13 15 16 18 23 23 24 25 26 27

28 29 30 30

Chapter - 4 Working Methodology 4.1 Procedure of Credit Appraisal Chapter - 5 Analysis 5.1 Working Capital Analysis 5.2 Ratio Analysis

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41 45

Chapter - 6 Case Study XYZ Media Ltd. Recommendations Limitations Conclusion References

46 57 58 59 60

Executive Summary
Bank lending is an art as well as a science. There are several techniques, tools, methods and principles which are mechanical and can work as guide to action or aid to perfection with some of them have an inherent property that they are not static and are drawn from experiences primarily used for appraising a credit proposal. Every lender should remember and follow the basic principles of lending i.e. Safety, Security, Suitability, Profitability, Integrity, Adequacy of Finance and Diversion of Risk. While considering and sanctioning loans, banks usually investigate the prospective borrower effectively and efficiently. Effective investigation means the collection and interpretation of all the required data and efficient investigation will ensure that time and money are not wasted in the process. The prime focus of this report is to enlighten the purpose and process of credit investigation and subsequently how credit proposals are made. Different types of advances, method of assigning credit limit and drawing power to individuals and business units has also been a part of study during the internship period. The main purpose of the credit investigation is to determine the business reputation, credibility and responsibility of the individuals involved with particular reference to their experience in the line of activity, dealings with customers trading or dealing with them, management capability, professional reputation with their bankers, history of payment record and fulfillment of financial obligations, honesty and integrity, willingness to repay the debt. A thorough credit investigation should take into account the economic and business environment in which the prospective borrower is placed .The process of credit investigation involves study of both financial and non-financial aspects of the proposed borrower. Credit investigation includes ascertaining the creditworthiness of the guarantors also. Analysis of financial statements forms an integral part of a proposal and it is an important tool for decision making. Key financial indicators assist a banker in taking qualitative credit decisions. Normal credit risk is inherent in any advance. Analysis helps a banker in careful evaluation of risks to arrive at a decision on calculated risk. The basic aspects of analyzing financial statements include analysis of financial data of an organization in two statements i.e. balance sheet and profit and loss account. While the balance sheet reflects the financial position as on a particular date, the relative profit and loss account discloses the working results of the enterprise during the preceding twelve months. The major aim of analyzing the balance sheet is to examine the position of liquidity of the enterprise. The other important attachments of the balance sheet are the Auditors report and Directors report. The Auditors report is the end product of every audit which implies that the auditor has examined the relevant records, in accordance with generally accepted auditing practices and is expressing an opinion on whether or not the financial statements reflect a true and fair view of the state of affairs and the working results of an enterprise. Then the ratio analysis is one of the most important aspect which should be taken into consideration, this includes Tangible Net worth (TNW), Total outside liabilities (TOL)/Tangible Net Worth, Funded Debt to Equity Ratio, Current Ratio, Net Working Capital. Appraisal of Term Loan, Working Capital, Non-Fund based facilities, the credit rating methods applied by the bank to rate the credibility of the

prospective clients, risk management processes and Credit monitoring discussed in the report.

have also been

Later, the report includes the conversion of accounts into standard or bad debts. The treatment of those Non-performing assets and the recovery of the same along with the legal procedure followed by the bank are discussed in great detail. A model credit proposal of a company (with changed personal details) is also given in the report which was witnessed during the summer internship program. Finally, conclusion and recommendation as per the analysis during the training period winds up the report.

Objectives
The objective of this report is to understand the entire process involved in successful lending by the bank as per the norms of the Reserve Bank of India and the authority that governs the functioning of Indian Overseas Bank which involves principles of lending, Credit investigation i.e. the assessment of the credit worthiness of the borrowers and estimation of the net worth of the assets owned by him. The whole process of financial analysis involving assessment of the balance sheets, P & L account, ratio analysis, then the purpose and detailed analysis of the appraisal of term loan have also been a potential objective of this report. Working capital, Non-Fund based facilities, rating of borrower accounts, Credit Risk Management Policies, Credit Monitoring, Non Performing Assets (NPAs) and the recovery policies are also some of the vital castles of this report and one of the major objective of this report is to present detailed conceptualization which would prove to be valuable in comprehension and formation of credit proposal and Credit Monitoring Arrangement (CMA). The project is likely to help organization understand the various issues related to the advances, giving it certain solutions to reduce the loses due to non recovery of loans and maintain a healthy trend line of decreasing net NPA thereby helping it to maintain a balance between its deposits and advances and an increase in its percentage yield.

Chapter 1 Company Profile 1.1 Introduction

Indian Overseas Bank (IOB) was founded in February 10th of the year 1937 by Shri. M. Ct. M. Chidambaram Chettyar, a pioneer in many fields Banking, Insurance and Industry with the twin objectives of specializing in foreign exchange business and overseas banking. IOB had the unique distinction of commencing business in 10th February 1937 (on the inaugural day itself) in three branches simultaneously - at Karaikudi and Chennai in India and Rangoon in Burma (presently Myanmar) followed by a branch in Penang. Indian Overseas Bank has an ISO certified in-house Information Technology department, which has developed the software that 900 branches use to provide online banking to customers. At the dawn of Independence IOB had 38 branches in India and 7 branches abroad. The Products & Services of the bank includes NRI Services, Personal Banking, Forex Services, Agri-Business Consultancy, Credit Cards, Any Branch Banking and ATM Banking. Saga of the IOB is covered into four categories, such as Pre-nationalization era (1947- 69), at the time of Nationalization (1969), Post - nationalization era (1969-1992) and Post-Reform Period Unprecedented developments (1992 & after). In Pre-nationalization era (1947- 69), IOB expanded its domestic activities and enlarged its international banking operations. As early as in 1957, the Bank established a training centre, which has now grown into a Staff College at Chennai with 9 training centres all over the country.IOB was the first Bank to venture into consumer credit. It introduced the popular Personal Loan scheme during this period. In 1964, the Bank made a beginning in computerization in the areas of inter-branch reconciliation and provident fund accounts. In 1968, IOB established a full-fledged department to cater exclusively to the needs of the Agriculture sector. At the time of Nationalization (1969), IOB was one of the 14 major banks that was nationalized in 1969. On the eve of Nationalization in 1969, IOB had 195 branches in India with aggregate deposits of Rs. 67.70 Crs. and Advances of Rs. 44.90 Crs. In Post - nationalization era (1969-1992), during the year 1973, IOB had to wind up its five Malaysian branches as the Banking law in Malaysia prohibited operation of foreign Government owned banks. This led to creation of United Asian Bank Berhad in which IOB had 16.67% of the paid up capital. In the same year Bharat Overseas Bank Ltd was created in India with 30% equity participation from IOB to take over IOB's branch at Bangkok in Thailand. In 1977, IOB opened its branch in Seoul and the Bank opened a Foreign Currency Banking Unit in the free trade zone in Colombo in 1979. The Bank sponsored 3 Regional Rural Banks viz. Puri Gramya Bank, Pandyan Grama Bank and Dhenkanal Gramya Bank. The Bank had setup a separate Computer Policy and Planning Department (CPPD) to implement the programme of computerization, to develop software packages on its own and to impart training to staff members in this field. In the year 1988, IOB acquired Bank of Tamil Nadu in a rescue. In Post-Reform Period - Unprecedented developments (1992 & after), IOB formulated its Web site during the month of February in 1997. The Bank got autonomous status during the year 1997-98. IOB had the distinction of being the first Bank in Banking Industry to obtain ISO 9001 Certification for its Computer
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Policy and Planning Department from Det Norske Veritas (DNV), Netherlands in September 1999. IOB started its STAR services in December of the year 1999 for speedy realisation of outstation cheques. Now the Banks has 14 STARS centres and one Controlling Centre for providing this service and in the same year started tapping the potential of Internet by enabling ABB cardholders in Delhi to pay their telephone bills by just logging on to MTNL web site and by authorising the Bank to debit towards the telephone bills. The Bank made a successful debut in raising capital from the public during the financial year 2000-01, despite a subdued capital market. IOB bagged the NABARD's award for credit linking the highest number of Self Help Groups for 2000-2001 among the Banks in Tamil Nadu. Mobile banking under SMS technology was implemented in Ahmadabad and Baroda. Pilot run of Phase I of the Internet Banking commenced covering 34 branches in 5 Metropolitan centers. IOB was one among the first to join Reserve Bank of India's negotiated dealing system for security dialing online. The Bank has finalized 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 customized 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 channelizing 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).

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1.2 Corporate Social Responsibility

Company has taken several CSR steps help the society upto the maximum possibility.These initiatives are: IOB-Sampoorna Project - A Total Village Development Project This project is primarily a rural development project aiming at complete development of Village or Total Village Development named as 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. This project is a unique example of Inclusive growth at rural level. Rural Self Employment Training Institutes (RSETIs) 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. Sakthi Memorial Trust The Trust set up by Indian Overseas Bank in the memories of Founder Shri M.Ct.M. Chidambaram Chettiar for the purpose of entrepreneurial development of women through Entrepreneurial Development Programmes (EDPs) to make them financially and socially strong. Financial Literacy and Credit Counselling Centres (FLCCC) viz., SNEHA For the purpose of financial literacy i.e. the awareness about financial products, IOB set various FLCCC With a view to promote financial education.

1.3 Socio-Economic Responsibilities

Rajbhasha (Official Language Policy) IOB promoted Hindi through IOB Praveen and Banking Pragya Courses. Other than this to promote Hindi IOB has taken various tangible steps like translating various meetings into Hindi, IOB official have access to Banking terminology available on IOB online .Various documents related to bank like pass books, statement of account, DD &Deposit receipts are also provided in Hindi. Availability of banks website is also an epitomic example of social inclusion step taken by IOB. . Aadhar Registration: IOB has provided the access to Aadhar registration and direct remittance facility.

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Chapter 2 Introduction to the project

2.1 General Concepts of Loans and Advances
BORROWER: A borrower in the loan agreement is a party which receives money and promises to repay it. The borrower can be an individual, a company, a firm etc. PURPOSE: A banker should always keep in mind that the purpose for which the borrower is applying for finance should not be anti social. The objective should be legal and should have good cause. BORROWERS STAKE OR MARGIN: The part of the loan that needs to be paid or contributed by the owner or venture. This percentage is fixed which depends on some important factors like nature of business, level of risk, guidelines of RBI. INTEREST: The profit generated by lending in return on the advances disbursed by the bank. SECURITY: Bank keeps adequate which may either be collateral in nature or in the form of personal guarantee. By doing this a borrower is bound to repay or it can also be considered as a an alternative for bank to recover its lending amount by liquidation of this security. Easily transferable, marketable and stable are some of the prime properties of the security which a banker should always keep in mind. PRINCIPLES OF LENDING Every lender should remember and follow the basic principles of lending: Safety The safety of funds lent by a bank is of paramount importance. The banks business rests upon the public trust it enjoys and anything likely to shake this confidence such as doubts regarding the safety of funds lodged with it, must be carefully avoided. The advance should be guaranteed to a reliable borrower who can repay the loan in the ordinary course of business. Security Security is taken as a form of insurance so that it is available to fall back upon in the event of some unforeseen developments taking place.

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 Suitability Banker should concentrate his lending on purposes, which are desirable from the stand point of economic health of the nation and economic imperatives of the country. Profitability An advance must be guaranteed at a rate of interest considered satisfactory in relation to the risk entailed and keeping in view the amount of work and expenses the amount will cause to the bank. Liquidity A bank would remain liquid if its advances are also liquid. In order to meet the demands of the depositors, it is essential for the banker to ensure that borrower would be in a position to repay the loan either on demand or within a reasonable period thereafter. Integrity No advance should be made to a borrower of doubtful integrity. A banker should be concerned about the business integrity of the borrower. Adequacy of finance A prudent banker would not lend a sum, which is inadequate to finance a given project. If he does, not only he kills the project but sinks the advance as well because, a partly completed project cannot generate money to pay for the investment. Timeliness Not only that adequate finance be made available to the borrower, it is also important that it is given in time. It is better not to give the finance at all rather than giving it after a considerable lapse of time. Many opportunities might have been last due to delay or many crises could have been averted but for the delay. Diversification of Risk Banker should be ensured that the advances are diversified in a good number of customers. 2.2 BASEL II ACCORD: A measure of risk adequacy For the purpose of regulations about how much capital banks should put aside to guard against various types of financial and operational risk , bank supervisors and central bankers from the 13 countries which forms the Basel Committee on Banking Supervision(BCBS) recommended Basel II or The New Accord (correct full name is the International
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Convergence of Capital Measurement and Capital Standards A Revised Framework) which is the second Basel published in June 2004.Its a kind of recommendations on banking laws and regulations. THE ACCORD IN OPERATION: Minimum Capital Requirement Supervisory review Market Discipline 1

BASEL II

MINIMUM CAPITAL REUIREMENT

SUPERVISORY REVIEW

MARKET DISCIPLINE

Capital charges Stipulation for the improvement of risk management

To avoid strategic, reputational risks and to practice best risk practices, creation of Supervision framework.

It requires banks to disclose capital structures, capital adequacy and risk exposures.

BASEL II
1. MINIMUM CAPITAL REQUIREMENTS Capital charges Stipulation for the improvement of risk management

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2. SUPERVISORY REVIEW PROCESS To avoid strategic, reputational risks and to practice best risk practices, creation of Supervision framework. 3. ENHANCEMENT OF MARKET DISCIPLINE It requires banks to disclose capital structures, capital adequacy and risk exposures.

1st Pillar-Minimum Capital Requirements

The first pillar depicts three major kind of risks i.e. credit risk, operational risk and market risk and also explains Capital Adequacy Ratio (CAR) or Capital to Risk Weighted Assets Ratio (CRAR) which says that , banks should maintain a minimum capital adequacy requirement of 8 % of risk assets. In this context, in India, the Reserve Bank of India (RBI) has mandated maintaining of 9% of minimum capital adequacy requirement. 2nd Pillar Supervisory Review The second pillar explains the regulatory response to the first pillar. It also helped in providing framework for guard or dealing with other risks like legal risk, resident risk etc. 3rd Pillar-Market Discipline and Disclosure The third pillar helps in viewing the best pisture of the market by means of greatly increases the disclosures so that counterparties can allowed to deal in appropriately.

2.3 Lending and Advances

Lending can be considered as a monetary provision where borrower reimburses installments .Being the most significant department of any bank in terms of profitability, loans and Advances also faces various kind of newly emerging risks. The ideal advance is one that is generated to reliable customer for a legal purpose where he has enough experience for efficient utilization of the amount and repays the amount within a given time frame as per the agreement.

2.3 What is the loan sanction procedure?

BORROWER Comes up with a proposal loan Collateral security Financial details LENDER (BANK) Verifies the purpose of loan Assess the credibility of borrower REGIONAL OFFICE Verifies the proposal Either approves (final sanction) or rejects

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Borrower comes to the bank with a loan proposal, colleateral security and appropriate financial details. Now bank verifies the purpose, credit worthiness and repayment capacity of the borrower. Than bank make a credit proposal of the borrower and send this credit proposal to the Regional Office . Now Regional Office verifies the proposal and then, either approve or reject the loan. Banks provide to kinds of loan facilities:

2.4 Types of Advances

Banks provide to kinds of loan facilities:

TYPES OF ADVANCES

FUND BASED ADVANCES Includes term loans, demand loans, cash credit, overdraft, bill discounted etc.

NON-FUND BASED ADVANCES

Includes Letters of credit and bank guarantee.

i.

Fund Based Facilities (Fund Based Advances) Fund based Facilities includes term loans, demand loans, cash credit, overdraft, bill discounted etc.

ii.

Non-Fund Based Facilities (Non Fund Based Advances) Non-Fund Based Facilities includes letters of credit and bank guarantee.

.Indian Overseas Bank offers a wide range of services in the loans and advances segment some of which are indexed here: i. Personal loan ii. Educational loans iii. Loans on bank term deposits iv. Loans against National Saving Certificates (NSC) v. Loans against Insurance Policies vi. Loans against Gold jewels
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vii. viii.

Loans against Collateral Security, Stocks and debtors Loans against shares.

Term Term of the loan can be defined as the length of the time in which borrower have to repay the loan or debt. Debt financing can be either long-term or short- term: i. Long Term Loan For the purpose of purchasing, improving or expanding fixed assets such as pant, facilities, major equipments and real estate one can seek bank for long term financing. If someone is buying some asset and seeking loan from bank he or she has to repay the amount within the useful life of the asset. In todays lending environment the rate of interest is more in long term debt financing because of the risk carry by the of the extending period of time. Long term debt financing also needs more substantial collateral. Short Term loan Cyclic needs, inventory needs, accounts payable and working capital are the prime mottos behind short term loans.

ii.

Secured and Unsecured debt

Debt financing can also be secured or unsecured. Secured Debt A secured loan is a promise to repay the debt along with the promise id secured by collateral of the debtor. Bank can recover the debt by seizing and liquidating the specific property .Lenders usually ask for collaterals from small startups for either long term or short term because it is the value of the pledged collateral which is critical to the secured lender. Lenders usually disburse loan after conservatively valuing the collateral of the borrower and even the lender can also loan only a percentage of the appraised value of the collateral, in this way lenders reduce the risk. The maximum loan amount, compared to the value of the collateral, is known as the loan-to-value ratio. Unsecured debt Unsecured loan is also a promise to pay a debt but without any security or collateral. Consumer Credit Card is a common example of unsecured loan but the main factors which substantially hold position in such kind of loans are credit worthiness of the borrower and reputation of the borrower. Sometimes it may also happen that working capital loans are also unsecured. Usually any lender dont sanction unsecured loan for small business till it has an established history and this is because of businesss risk. Such kinds of loans have much risk since lender cannot claim any priority claim against any particular property.

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Letter of Credit
With near cash characteristics i.e. no fluctuation with market conditions and can be cashed in when presented to the issuing bank, Letter of Credit has been considered as a valuable widely used collateral for many years in securities lending industry. Letter of Credit is a kind of bank guarantee which bank issues whenever there is a contract between two parties, according to which bank guarantees to pay the agreed amount on behalf of its client. Letter of credit is operationally efficient collateral which carries very low settlement risk. Usually used in international transactions, where two nations find it difficult to understand each other personally due to different legal systems .

Bank Guarantee
Bank guarantee is a kind of guarantee provided by a lending institution which depicts that if the debtor fails to repay a debt, bank will cover it . This kind of guarantee helps the debtor to expand the business by acquire goods, buy equipment or draw down loans. Bank guarantee is usually used in cases like when a buyer buys goods from seller. And it runs into cash flow difficulties and cant pay to the seller. Similarly if the supplier was unable to provide goods, the bank will pay from supplier side to buyer. Its a kind of safety measure for the supposing party in the transaction.

Specific types of bank loans

There are certain other specific kinds of loans which are issued by bank to small businesses: Working capital lines of credit for the ongoing cash needs of the business Credit cards: higher-interest, unsecured revolving credit Short-term commercial loans for one to three years Longer-term commercial loans: generally secured by real estate or other major assets Equipment leasing for assets you dont want to buy outright Letters of credit for businesses engaged in international trade

2.5 Financial analysis of lending

Financial analysis is a complete evaluation of the financial data for the purpose of assessment of stability, viability and profitability of a venture or project or business. A banker must go through financial analysis to assess the companys financial condition and to decide whether the borrower is able to repay the loan amount.

Financial analysis assesses the firms:

1. Profitability Companys ability to earn income and both short term and long term growth which can be assessed by assessment of the companys income statements. 2. Solvency Ability of the company to repay long term payment of obligations.
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3. Liquidity Companys ability of covering immediate obligations and to maintain a healthy positive cash flow. 4. Stability The firms stability can be assessed by looking at its ability to sustain in the business for long term without incurring too much loss and these attributes can be assessed by balance sheet, P and L A/c and other non-financial indicators.

Steps involved in financial analysis of lending

Step 1:In this step, bank requires companys financial statement for at least 3 to 5 years for the purpose of assessment. Following are the required financial statements: Balance sheet Income statements Shareholders equity statement Cash flow statements

Step 2: includes a quick scanning of some important terms from one year to the next year. The prime aim of doing this exercise is to find out any significant fluctuations and if found then to subsequently conduct a relevant research to find out the reason so that any suspicion can be removed. Step 3: This step consist of a crude assessment of balance sheet for the purpose of scrutinizing large changes in the various components of balance sheet. i.e. companys assets and liabilities of equity e.g. if the amount for fixed assets have grown rapidly because of new facilities or acquisitions, one should also taken into consideration that whether the debt has also increased rapidly. Step 4: This step includes assessment of income statement which includes preparation of graphs and growths of the Revenue (sales) and Net Income (profit and earnings), and then there will be trend assessment over time. Each expense component of the income is calculated in terms of the percentage of sales of that year. Then there will be high lightening of the favorable and unfavorable components. Step 5: this step involves the assessment of the cash flow statement. This assessment gives clear picture about cash inflows and outflows. This statement shows that how the borrower is generating cash and how it is utilizing the same, which shows management efficiencies also what an investor is searching for.

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Calculation of Financial ratios

In financial analysis ratio analysis holds the position of most significant tool. Ratios are considered as the benchmark for evaluating exact performance of the company. Ratios are compared with some standards which are given below: Past ratios Competitors ratios Industry ratios Projected ratios

Bank uses following ratios for the purpose of analysis: Liquidity Ratio Degree of financial leverage of debt Profitability Efficiency Value

a) Analyzing Liquidity
Cash convertible assets are called as liquid assets. For the purpose of analysis of liquidity we should calculate two important ratios. These ratios are Current Ratio and Quick Ratio. We can calculate them as: 1. Current Ratio = Total Current Assets / Total Current liabilities 2. Quick Ratio = (Total Current Assets Inventories ) / Total Current Liabilities The benchmarks or rule of thumb or acceptable values are Current Ratio (2:1), Quick Ratio (1:1). The higher values of these two ratios indicate a greater liquidity and lower risk for short term lenders.

b) Analyzing Debt
Debt ratios show that how much a company depends on debt to finance its investments and operations and how much it is capable of repaying its debt obligation. Inability of the company to repay its debt obligation can take it into bankruptcy and the other face of the scenario says that debt is very useful because company can avail tax benefits on this as well. These ratios are: 1. Leverage Ratios 1a. Debt to Equity Ratio = Total Debt / Total Equity Here Total debt has both the debts i.e. i. ii. Short Term Debt = bank advances + the current portion of long- term debt Long Term Debt = bonds, leases, notes payable
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Debt to equity ratio shows firms degree of leverage or how much it depends upon external debt for financing purpose. 1b. Debt to Assets Ratio = Total Debt / Total Assets. Lowering of any of the above two ratios indicates the conservative nature of the company. However, no one can reject this fact that if a company does not use debt, it may loose investment and growth opportunities.

2. Interest Coverage (or Times Interest Earned) Ratio

Earnings before Interest and Taxes / Annual Interest Expense This ratio shows companys ability to repay fixed interest charges by current earnings. The fixed interest includes both short term and long term debt.

3. Cash Flow Coverage

Net Cash Flow / Annual Interest Expense Net Cash Flow = Net income is either subtracted from or added to non-cash items. Non cash items include equity income + minority interest in earnings of subsidiary + deferred income taxes + depreciation + depletion + amortization expenses. Usually we take Net Cash Flow = Net Income + Depreciation, because depreciation is the largest non-cash item in most companies. c) Analyzing Profitability The ratios which are the indicators of profitability are as follows: 1. Net Profit Margin = Profit after taxes / sales 2. Return on Assets (ROA) = Profit after taxes / Total Assets

3. Return on Equity ( ROE) =Profit after taxes / shareholders Equity (book value) 4. Earnings per Common Share (EPS) = ( Profits after taxes Preferred Dividend / Number of common shares outstanding

5. Payout Ratio = Cash Dividends / Net Income. As far as decision making is concerned, present value of the future profits is the main consideration in the mind of lender (bank). For the purpose of ascertaining future profits, bank analyzes past or current profits and this can be done by identifying historical and forecasted trends of profits and sales.

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d) Analyzing Efficiency
These ratios depicts that how efficiently firm has managed its assets. These ratios are as follow: 1. Inventory Turnover = Cost of Goods Sold / Average Inventory Inventory turnover indicates that how quickly the inventory got sold to produce sales. Higher ratio signifies that the firm manages inventories efficientlt by minimizing the investment in inventories.

2. Total Assets Turnover = Sales / Average Total Assets Total Assets Turnover shows that how much sales a firm is producing for every dollar of investment in assets. Higher ratio signifies better performance. 3. Accounts Receivable Turnover = Annual Credit Sales / Average Receivables 4. Average Collection Period = Average Accounts Receivable / (Total Sales / 365) Ratios like Accounts Receivable Turnover and Average Collection Period depicts that how much efficient the firm is in collecting cash from its sales credit. One can comprehend from lowering of this ratio that the firm is very strict in its credit policy which may repel customers but at the same time lowering of these ratios is also good. 5. Days in Inventory = Days in a year / Inventory turnover Days in inventory shows that how fastly the manufactures product is sold off the Shelf. It is also called as Shelf Life. e) Value Ratios These ratios indicate embedded value in stock. These ratios are: 1. Price to Earnings Ratio (P/E) = Current Market Price per Share / After-tax Earnings per Share 2. Dividend Yield = Annual Dividends per Share / Current Market Price per Share

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f) Debt Service Coverage Ratio (DSCR) Net Profit after tax* + Depreciation + Interest on T/L and other long term debts DSCR = -----------------------------------------------------------------Installment of T/L and other long term debts + Interest on T/L and other Long term debts

*(but before appropriation of dividends) This ratio is calculated on yearly basis from the year of commercial production to the last year of proposed repayment. DSCR of 2:1 or above is considered as an ideal ratio which indicates that for every rupee of debt to be repaid in one year, the cash profit available is rupees two , which indirectly shows a very comfortable and safe debt servicing capability. For large industries, an average DSCR of 1.5 with a minimum of 1.2 in one year and in case of SME units located in backward areas, a minimum DSCR of 1.5:1 is accepted.

2.6 Methods of Credit Rating

Bank should check the credibility of the borrower for the purpose of which credit rating methods exist. A banker should always taken into consideration all the parameters that would prove to be helpful in determining of credibility of the borrower. Method of credit rating is explained letter on in the project with the help of a case study. In IOB, Internal Credit rating system works upto an advance proposal of Rs. 1 crore, but if the proposal is exceeding this amount or in order to make realistic assessment of credit risk, IOB had outsources from CRISIL a risk-credit model called Risk Assessment Model (RAM) for borrower accounts.

2.7 Methods of Assigning Credit limit and Drawing Power

Overdraft Facility for Individuals Overdraft facility is provided by Indian Overseas Bank on behalf of the Credibility of the customer, for the purpose of availing this facility to the individuals, their past six months accounts transaction is assessed. If the individual did not default in normal circumstances, then this facility is allowed to the customer by Indian Overseas Bank.Overdraft facility upto Rs 2 lacs can be provided to the customer on behalf of discretion from the branch manager and overdraft facility above Rs 2 lacs calls for permission and approval from Regional office. This limit is sanctioned against the total deposits of the individual where bank keeps 10 % as margin money.

23

 Cash Credit Facility for business Concern Bank usually assesses all the particulars of the customer who is looking for Cash Credit facility for business concern. The documents, a customer must submit to the bank for this purpose are as follows: Balance sheets for the past three years Recent Stock Statement which should consist of paid up stock, bank dont take stock on credit into consideration. Record of debtors showing book debts up to 90 days. Pan Card details Sales Turnover of past three years. If the sales turnover exceeds Rs 40 lacs, a certification from chartered accountant is also required. Assets and Liability statements of both the borrower and guarantor are required. Projected sales and balance sheets of two years is also required. On quarterly basis the customer is suppose to submit the stocks, debtors and sales statement for the purpose of review of his credit limit from time to time.

Drawing Power
Drawing power can be calculated as: Drawing Power = 75 % of stock + 50 % of debtors (both the stocks and debtors can be calculated as per the details furnished in the documents)

2.8 Securities Used against Lending

There are two kinds of securities: i. ii. Primary Securities Collateral Securities

Collateral securities are the securities that are accepted by the bank and can be legally liquefied if the borrower defaults on repayment. The securities which are accepted by the bank as collaterals are as follows: Policies Endowment policy is accepted by the bank e.g Life Insurance Policy of LIC. Banks usually sanction the loan up to 80-90% of the surrender value of the policy. Loans against policies are not common but they are offered against saving policies and this is one of the cheapest methods. National Savings Certificate (NSC) and Kendriya Vikas Patra (KVP) NSCs and KVPs can be transferred to the banks name by the borrower and can certainly be treated as bank security. Banks generally mark lien on the documents and inform the same to the issuing authority.
24

 Fixed Deposit Receipts (FDR) Bank usually take Fixed deposit Receipts (FDRs) as security against loans while keeping 10 % as margin. House Property In case of house loans, bank usually takes house property as security or insurance for the repayment of the loan. One can avail up to 80 % of the cost of the property. Other Assets Any appropriate possession like machinery, equipment or business property can be consider as securities and bank usually accepts them as collateral. In such cases the asset remains with the borrower unless there is default, in which case the asset goes to the bank. Generally banks dont provide credit facilities against equipments and machinery.

2.9 Modes of charging securities

Charging a security can be defined as creating a legal right to the banker to take recourse of the assets provided by the borrower if the borrower defaults on its part. There are five different ways of creating this legal right called as charging a security. These are: Lien By this mode called lien, a banker can retain goods provided by the borrower on its part as security by there is a special requirement of proving his diligence that it had no notice of defect in the title. Lien can be general and specific. Hypothecation This can be defined as charge on any movable property without transfer of its ownership to the creditor i.e. debtor will remain the owner but there is an obligation on the borrower that he has submit regular returns to the bank which indicates any increase or decrease in the value of the said goods to indicate any change in the which will indirectly help bank to determine his drawing limits. Pledge It is the opposite of the hypothecation which indicates that the goods in charge will remain in possession of the bank and borrower is not permitted to any withdrawal or additions to the stocks without banks permission. Mortgage It is the transfer of interest in specific movable property for the purpose of securing the payment of money advanced or to be advanced by way of loan, an exsisting or future debt, or the performance of an engagement which may give rise to a pecuniary liability.

1.

2.

3.

4.

25

2.10

Credit Appraisals

Credit appraisal is an important activity carried out by the loans and advances department of the bank to determine whether to accept or reject the proposal for financing its project. The project deals in credit facilities such as working capital methods of assessment, compilation of credit reports. The methods that are used by the banks in order to calculate the loan limits are Turnover method, MBPF system and Cash budget system. 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 firms financial performance is analyzed through ratio analyses. Financial requirements for project finance and working capital purposes are taken care of at the credit department. Companies that intend to seek credit facilities approach the bank. Primarily, credit is required for following purposes: 1. Working capital finance 2. Term loan for projects

26

2.11 Credit Appraisal Process FIGURE 1

Receipt of application from applicant

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)

Pre-sanction visit by bank officers

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

Preparation of CMA data

Proposal preparation

Assessment of working capital limits to be sanctioned (Turnover method or MBPF method)

Sanction/approval of proposal by appropriate sanctioning authority

Documentations, agreements, mortgages

Disbursement of cash credit limits or term loan

27

Chapter - 3 Working capital finance 3.1 Introduction

Working capital is the fund invested in current assets and is needed for meeting day to day expenses. It occupies an important place in a firms Balance Sheet. Working capital financing is a specialized area and is designed to meet the working requirements of a business. The Main sources of working capital financing are trade credit, bank credit, factoring and commercial paper. The firms generally enjoy easy access to the bank finance for meeting their working capital needs. But 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. The project attempts to analyse the role of bank credit in financing working capital needs of firms. Working capital is that portion of a firms capital which is employed in short term operations. Current assets represent Gross Working Capital. The excess of current assets over current liabilities is Net Working Capital. Current assets consists of all stocks including finished goods, work in progress, raw material, cash, marketable securities, accounts receivables, inventories, short term investments, etc. These assets can be converted into cash within an accounting year. Current liabilities represent the total amount of short term debt which must be settled within one year. They represent creditors, bills payable, bank overdraft, outstanding expenses, short term loans, etc. The working capital is the finance required to meet the costs involved during the operating cycle or business cycle. Operating cycle is the period involved from the time raw materials are purchased to the time they are converted into finished goods and the same are finally sold and realized. The need for current assets arises because of operating cycle. The operating cycle is a continuous process and therefore the need for current assets is felt constantly. Each and every current asset is nothing but blockage of funds. Therefore, these current assets need to be financed which is done through Working Capital Financing. There is always a minimum level of current assets or working capital which is continuously required by the firm to carry on its business operations. This minimum level of current assets is known as permanent or fixed working capital. It is permanent in the same way as the firms fixed assets are. This portion of working capital has to be financed by permanent sources of funds such as; share capital, reserves, debentures and other forms of long term borrowings. The extra working capital needed to support the changing production and sales is called fluctuating or variable or temporary working capital. This has to be financed on short term basis. The main sources for financing this portion are trade credit, bank credit, factoring and commercial paper.

28

3.2 Operating cycle:

The time between purchase of inventory items (raw material or merchandise) and their conversion into cash is known as operating cycle or working capital cycle. The longer the period of conversion the longer will be the period of operating cycle. A standard operating cycle may be for any time period but does not generally exceed a financial year. Obviously, the shorter the operating cycle larger will be the turnover of the fund invested for various purposes. The channels of investment are called current assets.

Operating Cycle- FIGURE 2 Cash

Receipt from debtors

Purchase of Raw material

Creation of Receivables (Debtors)

(Debtors)

Creation of A/c payable (Creditors)

Sales of Finished Goods

Payments to creditors

Warehousing Of Finished Goods

Manufacturing operation: wages & salaries, fuel, power, etc

Office, selling, distribution and other expenses 29

3.3 WORKING CAPITAL FINANCING BY BANKS

A commercial bank is a business organization which deals in money i.e. lending and borrowing of money. They perform all types of functions like accepting deposits, advancing loans, credit creation and agency functions. Besides these usual functions, one of the most important functions of banks is to finance working capital requirement of firms. Working capital advances forms major part of advance portfolio of banks. In determining working capital requirements of a firm, the bank takes into account its sales and production plans and desirable level of current assets. The amount approved by the bank for the firms working capital requirement is called credit limit. Thus, it is maximum fund which a firm can obtain from the bank. On the basis of the estimates submitted by the company, the bank may decide the amount of assistance which may be extended, after considering the margin requirements. This margin is to provide the cushion against the reduction in the value of security. If the company fails to fulfil its obligations, the bank may be required to realize the security for recovering the dues. Margin money is meant to take care of the possible reduction in the value of security .

3.4 Form of Assistance:

After deciding the amount of overall assistance to be extended to the company, the bank can disburse the amount in any of the following forms: Fund Based Non-Fund Based Lending

30

Chapter -4 Working Methodology

This is analytical research area where we analyses information with cause and its effects relationship. This analysis leads to the simple conclusions of whether to provide assistance of working capital to the institution for business. When entrepreneurs for financing working capital requirements approach the banks, the bank has to examine the viability of the project before agreeing to provide working capital for it. Financial institutions & bank while providing term loan finance to unit for acquisition of fixed assets does a detailed viability study. They have to ensure that the project will generate sufficient return on the resources invested in it. The viability of a project depends on technical feasibility, marketability of the products, at a profitable price, availability of financial resources in time & proper management of the unit. In brief the project should satisfy the tests of technical, commercial, financial & managerial feasibility. The proposed methodology for fulfilling the objectives is as follows: The project is based on secondary source of data. Secondary data have been mainly obtained from reports, records and books of M/s. XYZ Media LTD. The data also collected from audited financial statements periodicals and other records maintained by M/s. XYZ Media LTD. The methodology includes the detailed study of data of the borrower as provided by the bank officials for analytical study which have been utilised for the case study. After the detailed study of the data, the pre and post requisites of lending are analysed. Preparation of CMA data of the borrowing firm. RESEARCH METHODOLOGY TABLE -1 Research Type Source of Data Sample Unit Sample Sample Technique Analysis Tool used Analytical Primary and Secondary Industries applying for loan Case studies Allocation of Case Financial Analysis

31

 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, and RBI guidelines etc., financial statements have been sourced from the branch and referenced books.

4.1 Procedure of Credit Appraisal at IOB

Credit appraisal is a means of 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. At Indian Overseas Bank, Credit Appraisal is a long procedure which is required to be done before the credit document is sent to higher authorities. Credit Appraisal process at IOB involves major 5 steps. They are as follows:

32

CREDIT APPRAISAL FIGURE 3

PRE SANCTION PROCESS

Preparation of CMA data

Assessment of Working Capital Limits

APPRAISAL & RECOMMANDATION

33

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

34

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

198.59 0.00 0.00 0.00

240.45 0.00 0.00 0.00

160.00 0.00 0.00 0.00

110.00 0.00 0.00 0.00

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

0.00 701.89 0.00 0.00 701.89

0.00 990.10 0.00 0.00 990.10

0.00 1,000.00 0.00 0.00 1,000.00

0.00 1,100.00 0.00 0.00 1,100.00

11.32 0.00 0.00 750.75 0.00 0.00

20.11 0.00 0.00 831.84 0.00 0.00

19.97 0.00 0.00 900.00 0.00 0.00

25.67 0.00 0.00 850.00 0.00 0.00

35

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 0.00 394.33 394.33 85.87 308.46 0.00

0.00 0.00 506.79 506.79 131.91 374.88 0.00

0.00 0.00 600.00 600.00 180.00 420.00 0.00

0.00 0.00 700.00 700.00 240.00 460.00 0.00

1.3 NON-CURRENT ASSETS I. Investments in/Loans to subsidiaries/associates

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

0.00 0.00 0.00 56.51 0.00

0.00 0.00 0.00 120.13 0.00

0.00 0.00 0.00 140.00 0.00

0.00 0.00 0.00 145.00 0.00

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

120.13 256.64 0.00 0.00 2,714.02 2012 31-Mar12

140.00 231.00 0.00 0.00 2,730.97 2012 31-Mar-12

145.00 236.00 0.00 0.00 2,781.67 2014 31-Mar-14

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 Others/Advances taken

312.35 0.00 0.00 312.35 3.35 0.00 14.50 42.70 0.00 91.61

439.76 0.00 0.00 439.76 9.31 0.00 26.00 16.67 0.00 67.37

440.00 0.00 0.00 440.00 10.00 0.00 23.00 29.00 0.00 72.25

500.00 0.00 0.00 500.00 12.00 0.00 28.00 66.00 0.00 65.30

36

Total Other Current Liabilities IV. Creditors on Capital Account

148.81 0.00 464.51

110.04 0.00 559.11

124.25 0.00 574.25

159.30 0.00 671.30

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

0.00 0.00 0.00 0.00 0.00 159.35 159.35 341.02

0.00 0.00 0.00 0.00 0.00 621.14 621.14 786.14

0.00 0.00 0.00 0.00 0.00 600.00 600.00 736.00

0.00 0.00 0.00 0.00 0.00 550.00 550.00 620.00

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

1,470.58 0.00 0.00 0.00 1,470.58

1,976.42 0.00 0.00 0.00 1,976.42

2,400.00 0.00 0.00 0.00 2,400.00

2,600.00 0.00 0.00 0.00 2,600.00

37

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

2.35 0.00 0.00 6.74

5.10 0.00 0.00 11.82

0.00 0.00 0.00 16.20

7.00 0.00 0.00 15.00

Total Other Income 7 II.LESS OTHER EXPENSES Loss on Sale of FA / INV Loss on Currency Fluctuation Misc. Exp written off Others

9.09 0.00 0.00 0.00 0.00

16.92 0.00 0.00 0.00 0.00

16.20 6.00 0.00 0.00 10.00

22.00 0.00 0.00 0.00 0.00

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 14.DIVIDEND

0.00 9.09 46.02 14.50 31.52 91.33 155.16 76.83 0.00

0.00 16.92 76.18 26.00 50.18 122.52 203.54 96.52 0.00

16.00 0.20 57.60 23.00 34.60 112.60 199.60 105.60 0.00

0.00 22.00 80.65 28.00 52.65 140.65 237.65 112.65 0.00

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15. PREFERENCE DIVIDEND 16.RETAINED PROFIT 17.NET CASH ACCRUAL

0.00 31.52 76.83

0.00 50.18 96.52

0.00 34.60 105.60

0.00 52.65 112.65

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) II. PROFITABILITY RATIOS 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!

39

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

1,470.58 #REF! #REF! 40.74 2.51 3.13 2.58 312.35 2.14

1,976.42 505.84 34.40 44.29 3.00 3.85 3.67 439.76 2.54

2,400.00 #REF! #REF! 41.24 2.39 2.40 2.44 440.00 1.44

2,600.00 200.00 8.33 42.69 2.26 3.10 3.53 500.00 2.03

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

iii.

4. Appraisal and Recommendation 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

40

Chapter 5 ANALYSIS
The project involves the following tools for analysing the given project proposal: Working capital analysis Ratio analysis

5.1 Working capital analysis

All enterprises engaged in manufacturing or trading or providing services require finance for their day-to-day operations, the amount required to finance day-to-day operation is called working capital & the assets & liabilities are created during the operating cycle are called current assets & current liabilities. The total of all the current assets is called gross working capital & the excess of current assets over current liabilities is called net working capital. When entrepreneurs for financing working capital requirements approach the banks, the bank has to examine the viability of the project before agreeing to provide working capital for it. Financial institutions & bank while providing term loan finance to unit for acquisition of fixed assets does a detailed viability study. They have to ensure that the project will generate sufficient return on the resources invested in it. In brief the project should satisfy the tests of technical, commercial, financial & managerial feasibility. Proper co-ordination amongst banks & financial institution is necessary to judge the viability of a project & to provide working capital at appropriate time without any delay. In the view of scarcity of bank credit, its increasing demand from various sectors of economy & its importance in the development of economy, bank should provide working capital finance according to production requirements. Therefore it is necessary to make a proper assessment of total requirement of the working capital, which depends on the nature of the activities of an enterprise & the duration of its operating cycle. It has to be ensured that the unit will have regular supply of raw material to facilitate uninterrupted production. The unit should be able to maintain adequate stock of finished goods for smooth sales operation. The requirement of trade credit, facilities to be given by the unit to its customers should also be assessed on the basis of practice prevailing in the particular industry/trade which assessing above requirements, it should also be ensured that carrying cost of inventories & duration of credit to customers are minimized. After assessing the total requirement of working capital, a part of working capital requirement should be financed for the long term & partly by determining maximum permissible bank finance.

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5.1.2 Factors for Deciding Working Capital Limits

Drawing power of the borrower Security

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.

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5.1.3 Assessment of working capital limit:

In order to calculate net working capital & maximum permissible bank finance, it is necessary to have proper classification of various items of current assets & current liabilities. All illustrative lists of current assets & current liabilities for the purpose of assessment of working capital are furnished below: TABLE - 2 Current Assets Cash and bank balances Investments Receivables Inventories Advance payment Prepaid expenses Sundry debtors Current Liabilities Short term borrowings Unsecured loan Sales-tax, excise, etc. Deposits Interest and financial charges accrued Provision for taxes Sundry creditors

5.1.4 Methods of financing working capital

Bank follows certain norms in granting working capital finance to companies. These norms have been greatly influenced by the reconditions of various committees appointed by the RBI from time to time.RBI has made certain recommendations for lending credit facilities especially to SMEs (Small and Medium Enterprises) for which no tangible security is needed. Recommendations suggested that bank credit will be provided on the basis of operating cycle and its inventories or turnover period. Following committees were appointed to provide bank credit to SMEs Tondon Committee Nayak Committee

1. Tondon Committee (Operating cycle Method)

Reserve Bank of India constituted a 'Study Group' with Shri Prakash Tandon as Chairman in July, 1974 to frame necessary guidelines on bank credit for commercial banks for follow-up & supervision of bank credit for ensuring proper end-use of funds. Its main recommendations related to norms for inventory and receivables, the approach to lending, style of credit, follow ups & information system. As per the recommendations of Tondon Committee, the corporates should be discouraged from accumulating too much of stocks of current assets and should move towards very lean inventories and receivable levels. The committee even suggested the maximum levels of Raw Material, Stock-in-process and Finished Goods which a corporate operating in an industry should be allowed to accumulate These levels were termed as inventory and receivable 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:
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 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 banks. 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.

2. Nayak committee (Turnover Method)

Reserve Bank of India constituted a Committee on 9 December 1991 under the Chairmanship of Shri P.R. Nayank, Deputy Governor to examine the difficulties confronting the small scale industries (SSI) in the country in the matter of securing finance. The representative of the SSI associations had earlier placed before the Governor, Reserve Bank of India, various problems, issues and the difficulties which the SSI sector had been facing. Turnover method can be illustrated as: i. ii. iii. iv. v. vi. vii. Lets say ,sales or Turnover is X Now, calculate 25% of X Also, Calculate 5% of X Now,Net Working Capital Available Take Y as the maximum of (iii or iv) Subtract Y from (ii),lets say this amount as Z. Therefore Z is the amount that would be financed by the banks.

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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.

5.2 Ratio analysis

Ratio analysis is a widely used tool of financial analysis. It can be used to compare the risk and return relationships of different sizes. It is defined as the systematic use of ratio to interpret the financial statements so that the strengths and weaknesses of a firm as well as its historical performance and current financial condition can be determined. A ratio is a quantity that denotes the proportional amount or magnitude of one quantity relative to another. The ratios show the relationship in the more meaningful way so as to enable us to draw conclusion from than a single figure. Ratios are calculated from current year numbers and are then compared to previous years, other companies, the industry, or even the economy to judge the performance of the company. Ratio analysis is predominately used by proponents of fundamental analysis. Ratios which are used by Indian Overseas Bank for the purpose of financial analysis are: TABLE - 3 FINANCIAL INDICATORS TNW TOL/TNW TOL-USW/TNW+USW Funded Debt to TNW Net Working Capital ratio Current ratio PROFITABILITY RATIOS Net Sales Gross Profit to Sales Operating profit to Sales NPBT To sales NPAT to TNW NPAT To Sales

Detailed ratio analysis for the case study of XYZ Media Ltd. Has been mentioned in the next section.

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Chapter 6 CASE STUDY XYZ Media Ltd.

XYZ Media Ltd was incorporated as a private limited company with an objective to provide for outdoor advertising solutions to various companies for marketing their products. It is reportedly known as one among the first five advertising companies in Delhi NCR to provide complete outdoor advertising solutions. Company is engaged in renting out display advertising spaces at various media/ public utilities which are developed & maintained by the subject company such as Countdown Timers, Bus Queue Shelters, Public Utilities, etc.Also the company has to maintain the allotted sites for such term as mentioned in the contract. In turn company gets the advertising rights on those spaces/ infrastructure developed, which it rents out to corporate and other clients. Company is taking orders from various other companies and advertising agencies to advertise their products or services on various media available with the subject, and charge monthly service rentals/ display charges for the advertisements so displayed. Date of establishment Sector Industrial classification Banking with us since Enjoying Credit facilities since Names of Directors Designation Age 18.03.2002 MSME Media Advertising March 2005 March 2006 Worth (Rs in lacs) Amount Mr. X Director 54 As on Experience (in brief)

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

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34.60 31.01.13 Worked as director in MNC. He is associated with advertising field for more than 9 years.

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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

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FINANCIAL ANALYSIS TABLE -4

BRIEF FINANCIAL INDICATORS OF SUBJECT COMPANY:
lacs) 31.03.11 (audited) Net Sales Operating Profit Net Profit after Tax Cash Accrual Net Working Capital Current Ratio Tangible Networth TOL/TNW (TOL-USL)/(TNW+USL) 1,470.58 36.93 31.52 76.83 1,198.04 3.58 1,222.24 0.66 0.30 31.03.12 31.03.13 31.03.14 31.03.15 (Projections) 2,800.00 83.95 72.95 137.95 1,460.32 3.20 1,581.32 0.81 0.30 (Rs in

(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

Abridged financial position

31.03.11 (audited) Capital & Reserves Long Term Liabilities Current Liabilities TOTAL Fixed Assets Non-Current Assets Current Assets Intangible Assets TOTAL 1,222.24 341.02 464.51 2,027.77 308.46 0.00 1,662.55 0.00 2,027.52 31.03.12 31.03.13 31.03.14 31.03.15 (Projections) 1,581.32 620.00 662.35 2,863.67 500.00 0.00 2,122.67 0.00 2,863.67

(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

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RATIO ANALYSIS 1. Financial Ratios

TNW- Tangible Net Worth A measure of the physical worth of a company, which does not include any value derived from intangible assets such as copyrights, patents and intellectual property. Tangible Net Worth = Total Assets Liabilities Intangible Assets. TNW of the company is increasing continuously over the last 4 years. This can be seen from the table given below (in lacs): 31.03.2011 TNW + NPAT (Additions) TNW for Next FY 1222.24 50.18 96.36 1368.78 31.03.2012 1368.78 34.60 17.34 1420.72 31.03.2013 1420.72 52.65 17.00 1490.37 31.03.2014 1490.37 72.95 18.00 1581.32

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 1222.24 1368.78 1420.72 1490.37

200
0 2011-12 2012-13 2013-14 2014-15

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 TOL/TNW - Total outside Liabilities / Tangible Net Worth

Indicate size of stakes, stability and degree of solvency. : The ratio for the company has improved to 0.66 in FY 2010-11, which is well below the maximum acceptable level of 4:1. The ratio has improved due to increase in TNW, reflecting availability of sufficient TNW as compared to the outside liability. For FY 2011-12 & 2012-13, the ratio is projected at 0.98 & 0.92 respectively. For FY 2013-14 & 2014-15, the ratio projected at 0.87 & 0.81 respectively, which is at a comfortable level and may be accepted.

GRAPH 2

TOL/TNW
1.2 1 0.8 0.6 0.4 0.66 0.98 0.92 0.87

0.2
0 2011-12 2012-13 2013-14 2014-15

Funded debt to TNW

Measures a company's leverage or the safety of principal on long-term debt. The larger the ratio,the riskier the enterprise. The value is computed by dividing total debt by total equity minus intangible assets. The long term debt and the total outside liabilities are quite low compared to equity. Hence, the financial position of the unit is good.

GRAPH - 3

Funded debt to TNW

0.57 0.6 0.4 0.2 0 0.52 0.42

0.28

2011-12

2012-13

2013-14

2014-15

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 Net Working Capital

Net working capital= Current assets- Current liabilities.The ratio shows that the company has good working capital in hand to meet its obligations and it also increasing gradually and hence the project looks feasible. NWC is estimated to increase in 2011-12 from Rs 1198.04 lacs as on 31.03.11 to Rs 1523.39 lacs as on 31.03.2012. The subjects estimated NWC of Rs 1534.72 lacs in the current FY whereas the subjects projected to achieve NWC of Rs 1480.37 and Rs 1460.32 in the FY 2013-14 & 2014-15 respectively which is acceptable. However as CR is at a comfortable level, it reflects availability of sufficient NWC in to system.

GRAPH-4

Net Working Capital (in lacs)

1600 1400 1200 1000 800 600 1198.04 1523.39 1505.72 1414.37

400
200 0

2011-12

2012-13

2013-14

2014-15

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

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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

2. Profitability ratios Net sales

Sales of the company are increasing continuously over the last 3 years. It achieved sales of Rs 1976.42lacs in 2011-12 compared to Rs 1470.58 lacs in FY 2010-11. In FY2012-13 the company has achieved actual sales of Rs. 2686 lacs against estimated sales of Rs. 2400 lacs. The subjects have projected to achieve sales of Rs 2600lacs & Rs 2800 lacs for the FY 201314 & 2014-15 respectively which is acceptable.

GRAPH- 6

Net Sales(in lacs)

3000 2500 2000 1500 1000 500 0 2011-2 2012-13 2013-14 2014-15 1470.58 1976.42 2400 2600

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 Gross profit Ratio

A higher ratio of gross profit to sales is a sign of good management as it implies that the cost if production of the firm is relatively low. : Profit for the FY 2010 was Rs 31.52 lacs which increased to Rs 50.18 lacs in the FY 2010-11. The provisional profits for the FY 2012-13 dropped to Rs 34.60 lacs in FY 2012-13 whereas the subjects projected to achieve profits of Rs 52.65 lacs & Rs 72.95 lacs for 2014 & 2015 respectively, which is acceptable.

GRAPH-7

Gross Profit to Sales

45 44 43 42 41 40 39 38 2011-2 2012-13 2013-14 2014-15 41.24 44.28 42.69

40.74

Operating Profit ratio

This ratio is the test of the operational efficiency with which the business is being carried. The operating ratio should be low enough to leave a portion of sales to give a fair return to the investors. Compared to other years 2012-13 is very high thus decreasing the efficiency of the comapany. The increase may be due to increase in overhead and other financial charges and the management should check the increase. Operating profit ratio = op. profit / net sales.

GRAPH-8

Operating Profit to Sales

4 3 3 2 1 0 2011-2 2012-13 2013-14 2014-15 2.51 2.39 2.26

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 NPBT TO Sales (Net Profit Before Tax) GRAPH -9

NPBT to Sales
5 4 3 2 1 3.13 2.4 3.85 3.1

0
2011-2 2012-13 2013-14 2014-15

NPAT to TNW (Net Profit After Tax) GRAPH-10

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

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 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 2.14 2.54 2.03

1.44

Working Capital Assessment

A. Acceptability of projected level of operation (Sales & Profitability) Sales: Sales of the company are increasing continuously over the last 3 years,which is acceptable. Profits: Profits are satisfactory to accept the proposal. B. Acceptability of inventory holding

Particulars

31.03.2011 (Audited)

31.03.2012 (Audited) 2.89 6.01 0.11

31.03.2013 (Provisional) 1.52 5.00 0.10

31.03.2014 (Projected) 1.00 5.08 0.11

31.03.2015 (Projected) 0.87 5.14 0.13

Stocks Sundry Debtors Sundry Creditors

3.08 5.73 0.05

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.

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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

Assessment as Per Second Method of Lending: (Tondon Committee)

Rs (in lacs) Total Current Assets Total current Liability(OTBB) Working Capital Gap Margin (25%of TCA) Actual/Projected NWC MPBF 2085.67 105.30 1980.37 521.42 1480.37 500.00

Assessment Of Term Loan

The T/L of Rs175 lacs was sanctioned to party showing outstanding of Rs52.05 lacs against DP of Rs 52.14 Lacs as at 23.05.13. In view of this and considering profitability position and DSCR we may review and DP whichever is lower with existing repayment programme

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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.

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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.

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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 Instalments 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.

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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

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