A SUMMER TRAINING REPORT ON CREDIT APPRAISAL

UNDERTAKEN AT

SUBMITTED BY TAILOR MAYANKKUMAR DINESHBHAI MBA (Semester - II) 2010-2011 Enrollment No: 107160592050

UNDER THE GUIDANCE OF: INTERNAL GUIDE: MRS. NUPUR ANGIRISH EXTERNAL GUIDE: P.K.VESUNA

SUBMITTED TO GIDC RAJJU SHROFF ROFEL INSTITUTE OF MANAGEMENT STUDIES, VAPI Gujarat Technological University

DECLARATION

I, Mr. MAYANK TAILOR Student of M.B.A Semester-II, GIDC RAJJU SHROFF

INSTITUTE OF MANAGEMENT STUDIES VAPI. hereby declare that the Report on Summer Training & project work entitled CREDIT APPRAISAL SURAT, GUJARAT is been result of my own work and has been carried out under supervision of PROF. NUPUR ANGIRISH.

I declare that this submitted work is done solely by me and to the best of my knowledge; no such work has been submitted by any other person for the award of post graduation degree or diploma.

I also declare that all the information collected from various secondary sources has been duly acknowledged in this project report.

PLACE: DATE:

Mayank Tailor

CERTIFICATE
This is to certify that Mr. MAYANK TAILOR has satisfactory completed the project work entitled, CREDIT APPRAISAL IN SURAT, GUJARAT. Based on the declaration made by the candidate and me association as a guide for carrying out this project work, I recommended this project for evaluation as a part of the MBA programme of Gujarat Technological University.

Place: VAPI Date: PROF: NUPUR ANGIRISH

Place: VAPI Date: Dr D.S.Sarupria Director

ACKNOWLEDGEMENT
My debts are many and I acknowledge them with much pride and delight. This summer project was undertaken as a part of MBA Programme pursuing at GIDC RAJJU SHROFF Rofel Institute of Management Studies, Vapi. (GRIMS). I would like to thank my institute and Central Bank of India which has provided me with the infrastructure and opportunity for doing this project work. I am very great full to Mr. P.K.VESUNA (Loan/Advances), who has given me the permission to carry out this project work at their esteemed organization. I am extremely great full to Dr. Dalpat Sarupria, Director of GIDC RAJJU SHROFF Rofel Institute of Management Studies, Vapi. (GRIMS), for his invaluable help and guidance throughout my work. He kindly evinced keen interest in my work and furnished some useful comments, which could enrich the work substantially. I am very much thankful to my internal guide Prof. NUPUR ANGIRISH for her keen guidance and support. In fact it is very difficult to acknowledge all the names and nature of help and encouragement provided by them. I would never forget the help and support extended directly or indirectly to me by all.

TABLE OF CONTENTS
PARTICULARS 1 2 3 RESEARCH METHODOLOGY INTRODUCTION TO BANKING SECTOR GLOBAL AND LOCAL SCENARIO OF BANKING SECTOR 4 5 6 7 8 9 10 11 12 13 INDUSTRY ANALYSIS INTRODUCTION TO CENTRAL BANK OF INDIA INTRODUCTION TO SME OVERVIEW OF CREDIT APPRAISAL CREDIT APPRAISAL MODEL CASE STUDY OTHER DEPARTMENT OF BANKS FINDING CONCLUSION BIBLIOGRAPHY 9 22 28 30 34 58 70 80 83 85 86 PAGE NO. 1 4

EXECUTIVE SUMMARY
I had a valuable experience doing my summer internship at Central Bank of India in Surat. The duration for my internship was 23 days, starting from 7th july 2011 to 29th july 2011 in Surat Main branch and, I was working on the CREDIT APPRISAL

My Project Guide was Mr.P.K.VESUNA for SURAT branch, respectively of his department. This was my First exposure to the corporate world and had an experience of working in a banking. I was directly working under loan/advances : I was working on the credit appraisal, which I feel is the basic requirement of any bank. While working I observed the significance of the loan/advances in a bank, its working. I also got to observe various functions of the bank department. The project, which was given to me in this period of my summer internship, project was to know the credit appraisal. For that, I have to talk to manager and try to understand concept of credit in the bank.

Thus during this internship-period working on project and simultaneously observing has proved to be a great experience in all as I have got to see and understand various situations of the employees. I would like to conclude by saying that it is been a great learning for me through this internship. I understand some realities of the bank , as, I was part of the everyday activities of the organization. I also learned the fact that no department can work on its own each department have to depend on other in one-way or the other.

RESEARCH METHODOLOGY

INTRODUCTION:
Credit appraisal means investigation/assessment done by the bank before providing any loans and advances/project finance and also checks the commercial, financial &industrial viability of the project proposed its funding pattern and further checks the primary & collateral security cover available for recovery of such funds.

PROBLEM STATEMENT:
To study the credit appraisal system in SME sector, at Central bank of India.

OBJECTIVES: To study the credit appraisal methods. To understand the commercial, financial & technical viability of the proposal proposed and its finding pattern.

DATA COLLECTION:

Primary data: Informal interview with manager and other staff members at Central bank of India

Secondary data:

Books websites database at Central bank of India library research

 BENEFICIARIES: Researchers:
This report will help researchers improving knowledge about the credit appraisal system and to have practical exposure of the credit appraisal system at Central bank of India.

Management Students:
The project will help the management student to know the patterns of credit appraisal in Central bank of India.

LIMITATION OF THE STUDY

As the credit appraisal is one of the crucial areas for any bank, some of the technicalities are not revealed. Credit appraisal system includes various types of detail studies for different areas of analysis, but due to time constraint, our analysis was of limited areas only.

INTRODUCTION TO BANKING SECTOR

A SNAPSHOT OF THE BANKING INDUSTRY

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

DEFINITION/MEANING OF A BANK
The word bank has originated from English word Banco, Bancus or Banque. Its meaning is bench or

table. In Europe in the middle age, the money transactions were undertaken sitting on a bench.

As per Indian Banking Act, A service to accept deposits from people with the intention to invest or lend with the condition of returning it immediately whenever demanded at any predetermined time. An institute this service is Bank

Banking is a service helpful to the business, its function is to borrow money from people and further lend the same.

While analyzing definition of bank as per Indian Banking Act, below mentioned matters are clarified:

(1) Bank accepts monetary deposits from people.

(2) The intention behind accepting these deposits is to invest or lend the respective fund.

(3) The function of accepting deposit or lending money is made under the condition that on demand or as predetermined otherwise the same amount has to be refunded immediately.

(4) The institution doing this type of business is called bank.

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

Scheduled commercial banks touched, on the deposit front, a growth of 14% as against 18% registered in the previous year. And on advances, the growth was 14.5% against 17.3% of the earlier year.

State Bank of India is still the largest bank in India with the market share of 20% ICICI and its two subsidiaries merged with ICICI Bank, leading creating the second largest bank in India with a balance sheet size of Rs. 1040bn.

Higher provisioning norms, tighter asset classification norms, dispensing with the concept of past due for recognition of NPAs, lowering of ceiling on exposure to a single borrower and group exposure etc., are among the measures in order to improve the banking sector.

A minimum stipulated Capital Adequacy Ratio (CAR) was introduced to strengthen the ability of banks to absorb losses and the ratio has subsequently been raised from 8% to 9%. It is proposed to hike the CAR to 12% by 2004 based on the Basle Committee recommendations.

Retail Banking is the new mantra in the banking sector. The home Loans alone account for nearly two-third of the total retail portfolio of the bank. According to one estimate, the retail segment is expected to grow at 30-40% in the coming years.

Net banking, phone banking, mobile banking, ATMs and bill payments are the new buzz words that banks are using to lure customers.

With a view to provide an institutional mechanism for sharing of information on borrowers / potential borrowers by banks and Financial Institutions, the Credit Information Bureau (India) Ltd. (CIBIL) was set up in August 2000. The Bureau provides a framework for collecting, processing and sharing credit information on borrowers of credit institutions. SBI and HDFC are the promoters of the CIBIL.

The RBI is now planning to transfer of its stakes in the SBI, NHB and National bank for Agricultural and Rural Development to the private players. Also, the Government has sought to lower its holding in PSBs to a minimum of 33% of total capital by allowing them to raise capital from the market. Banks are free to acquire shares, convertible debentures of corporate and units of equity oriented mutual funds, subject to a ceiling of 5% of the total outstanding advances (including commercial paper) as on March 31 of the previous year.

REFORMS IN THE BANKING SECTOR

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

After the second phase of financial sector reforms and liberalization of the sector in the early nineties, the Public Sector Banks (PSB) s found it extremely difficult to complete with the new

private sector banks and the foreign banks. The new private sector banks first made their appearance after the guidelines permitting them were issued in January 1993. Eight new private sector banks are presently in operation. These banks due to their late start have access to state-ofthe-art technology, which in turn helps them to save on manpower costs and provide better services.

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

CLASSIFICATION OF BANKS:

The Indian banking industry, which is governed by the Banking Regulation Act of India 1949 can be broadly classified into two major categories, non-scheduled banks and scheduled banks. Scheduled banks comprise commercial banks and the co-operative banks. In Terms of ownership, commercial banks can be further grouped into nationalized banks, the State Bank of India and its group banks, regional rural banks and private sector banks (the old / new domestic and foreign). These banks have over 67,000 branches spread across the country. The Indian banking industry is a mix of the public sector, private sector and foreign banks. The private sector banks are again spilt into old banks and new banks.

Banking System in India

Reserve bank of India (Controlling Authority)

Development Financial institutions

Bank

IFCI

IDBI ICICI

NABARD NHB

IRBI

EXIM Bank

SIDBI

Commercial Banks

Regional Rural Banks

Land Development Banks

Cooperative Banks

Public Sector Banks

Private Sector Banks

SBI Groups

Nationalized Banks

Indian Banks

Foreign Bank

GLOBAL AND LOCAL SCENARIO OF BANKING SECTOR

INDIAN BANKING SYSTEM: THE CURRENT STATE & ROAD AHEAD

INTRODUCTION:

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

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

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

Thus, it has become far more imperative to contemplate the role of the Banking Industry in fostering the long term growth of the economy. With the purview of economic stability and growth, greater

attention is required on both political and regulatory commitment to long term development programmed. FICCI conducted a survey on the Indian Banking Industry to assess the competitive advantage offered by the banking sector, as well as the policies and structures that are required to further the pace of growth. The results of our survey are given in the following sections.

GENERAL BANKING SCENARIO:

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

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

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

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

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

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

They also asked their respondents to rate India on certain essential banking parameters (Regulatory Systems, Risk Assessment Systems, Technological System and Credit Quality) in comparison with other countries i.e. China, Japan, Brazil, Russia, Hong Kong, Singapore, UK and USA.

The recent financial crisis has drawn attention to under-regulation of banks (mainly investment banks) in the US. Though, the Indian story is quite different. Regulatory systems of Indian banks were rated better than China, Brazil, Russia, and UK; at par with Japan, Singapore and Hong Kong where as all our respondents feel that we are above par or at par with USA. On comparing the results with their previous survey where the respondents had rated Indian Regulatory system below par the US and UK system, they see that post the financial crisis Indian Banks are more confident on the Indian Regulatory Framework.

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

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

GLOBAL EXPANSION OF INDIAN BANKING

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

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

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

SCOPE FOR NEW ENTRANTS:

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

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

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

BANKING ACTIVITIES:

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

Their survey finds that within retail operations, banks rate product development and differentiation; innovation and customization; cost reduction; cross selling and technological up gradation as equally

important to the growth of their retail operations. Additionally a few respondents also find proactive financial inclusion, credit discipline and income growth of individuals and customer orientation to be significant factors for their retail growth.

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

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

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

FINANCIAL INCLUSION AND EXPANSION OF BANKING SERVICES:

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

respondents have a strategy in place to tap rural markets, with the remainder as yet undecided on their plan of action. Tie ups with micro finance institutions (MFIs)/SHG and introduction of innovative and customized products are considered most important to approaching rural markets according to respondents, more so as compared to internet kiosks, post offices and supply chain management techniques

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

CREDIT FLOW AND INDUSTRY:

India Inc is completely dependent on the Banking System for meeting its funding requirement. One of the major complaints from the industry has in fact been high lending rates in spite of massive cuts in policy rates by the RBI. We asked the banks what they felt were major factors responsible for rigid prime lending rates.

None of the banks in their survey considered the cap on bank deposit rates to be one of the causes of inflexible lending rates. Due to long-term maturity, the trend seems to be changing. However, there are other factors which have led to the stickiness of lending rates such as wariness of corporate credit risk (33.33%), competition from government small savings schemes (26.67%). Benchmarking of SME and export loans against PLR (20.00%) on the other hand, do not seem to have as significant an influence over lending rates according to banks

The great Indian industrial engine has nevertheless continued to hum its way through most of the year long crisis. We asked banks about the sectors that they consider to be most profitable in the coming years (Fig. 12). All respondents were confident in the infrastructure sector leading the profitability for the industry, followed by retail loans (73.33%) and others

(Source: Annual survey, February 2010)

(FEDERATION OF INDIAN CHAMBERS OF COMMERCE & INDUSTRY)

INDUSTRY ANALYSIS
Competitive Forces Model: (Porters Five Force Model):

(2)

Potential Entrants is high as development financial institutions as well as private and Foreign Banks have entered in a big way (5) (1) (4)

Organizing power of the supplier is high. With the new financial instruments they are asking higher return on the investments

Rivalry among existing firms has increased with liberalization. New products and improved customer services is the focus.

Bargaining power of buyers is high as corporate can raise funds easily due to high Competition.

(3) The threat of substitute product is very high like credit unions and investment houses. There are other substitutes as well banks like mutual funds, stocks, government securities, debentures, gold, real estate etc.

ubstitute is high due to competition from NBFCs and insurance companies as they

1. Rivalry among existing firms

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

2. Potential Entrants

Previously the development financial Institutions

mainly

provided

project

finance

and

development activities. But they now entered into retail banking which has resulted into stiff competition among the exiting players.

3. Threats from Substitutes

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

4. Bargaining Power of Buyers

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

5. Bargaining Power of Suppliers

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

return for the investments.

6. Overall Analysis

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

SWOT ANALYSIS:

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

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

a) STRENGTHS

1. Greater securities of Funds

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

2. Banking network

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

3. Large Customer Base

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

4. Low Cost of Capital

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

b) WEAKNESS

1. Basel Committee

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

2. Powerful Unions

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

3. Priority Sector Lending

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

4. High Non-Performing Assets

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

c) OPPORTUNITIES

1. Universal Banking

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

2. Differential Interest Rates

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

3. High Household Savings

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

4. Untapped Foreign Markets

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

5. Interest Banking

The advance in information technology has made banking easier. Business can Effectively carried out through internet banking.

d) THREATS

1. NBFCs, Capital Markets and Mutual funds

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

2. Changes in the Government Policy

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

3. Inflation

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

4. Recession

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

INTRODUCTION TO CENTRAL BANK OF INDIA

Build a better life around us.

Establish in 1911, Central Bank of India was the first Indian commercial bank which was wholly owned and managed by Indians. The establishment of the Bank was the ultimate realization of the dream of Sir Sorabji Pochkhanawala, founder of the Bank. Sir Pherozesha Mehta was the first Chairman of a truly 'Swadeshi Bank'. In fact, such was the extent of pride felt by Sir Sorabji Pochkhanawala that he proclaimed Central Bank of India as the 'property of the nation and the country's asset'. He also added that 'Central Bank of India lives on people's faith and regards itself as the people's own bank'. During the past 99 years of history the Bank has weathered many storms and faced many challenges. The Bank could successfully transform every threat into business opportunity and excelled over its peers in the Banking industry. A number of innovative and unique banking activities have been launched by Central Bank of India and a brief mention of some of its pioneering services are as under:

1921 Introduction to the Home Savings Safe Deposit Scheme to build saving/thrift habits in all sections of the society.

1924 An Exclusive Ladies Department to cater to the Bank's women clientele. 1926 Safe Deposit Locker facility and Rupee Travellers' Cheques. 1929 Setting up of the Executor and Trustee Department. 1932 Deposit Insurance Benefit Scheme. 1962 Recurring Deposit Scheme.

Subsequently, even after the nationalisation of the Bank in the year 1969, Central Bank continued to introduce a number of innovative banking services as under:

1976 The Merchant Banking Cell was established. 1980 Centralcard, the credit card of the Bank was introduced. 1986 'Platinum Jubilee Money Back Deposit Scheme' was launched. 1989 The housing subsidiary Cent Bank Home Finance Ltd. was started with its headquarters at Bhopal in Madhya Pradesh. 1994 Quick Cheque Collection Service (QCC) & Express Service was set up to enable speedy collection of outstation cheques.

Further in line with the guidelines from Reserve Bank of India as also the Government of India, Central Bank has been playing an increasingly active role in promoting the key thrust areas of agriculture, small scale industries as also medium and large industries. The Bank also introduced a number of Self Employment Schemes to promote employment among the educated youth. Among the Public Sector Banks, Central Bank of India can be truly described as an All India Bank, due to distribution of its large network in 27 out of 29 States as also in 3 out of 7 Union Territories in India. Central Bank of India holds a very prominent place among the Public Sector Banks on

account of its network of 3656 branches and 178 extension counters at various centres throughout the length and breadth of the country. Customers' confidence in Central Bank of India's wide ranging services can very well be judged from the list of major corporate clients such as ICICI, IDBI, UTI, LIC, HDFC as also almost all major corporate houses in the country.In surat central bank have total 11 branches are works.

INTRODUCTION TO SME
In the Indian context, the small and medium enterprises (SME) sector is broadly a Term used for small scale industrial (SSI) units and medium-scale industrial units. Any industrial unit with a total investment in its fixed assets or leased assets or hire-purchase asset of up to Rs 10 million, can be considered as an SSI unit and any investment of up to Rs 100 million can be Termed as a medium unit. An SSI unit should neither be a subsidiary of any other industrial unit nor be owned or controlled by any other industrial unit. An SME is known by different ways across the world. In India, a standard definition surfaced only in October 2, 2006, when the Ministry of Micro, Small and Medium Enterprises, Government of India, imposed the Micro, Small and Medium enterprises Development (MSMED) Act,2006. This definition, however was changed according to the changing economic scenario and thus has separate definitions to it. For instance, an SME definition for manufacturing enterprises is different from what an SME definition for service enterprises has to say. HISTORY:

Small and Medium Enterprises or SMEs are vital for the growth and well being of the country. This sector was recognized and given importance right from independence and is being encouraged ever since then. Though, it commenced on a small scale, it gradually gained significance, because it employed a considerable number of people.

When it started gaining momentum, this sector was defined as an enterprise with investment in plant and machinery of up to Rs 1 lakh and situated in towns and villages with strength of less than 50,000 people. The policy statement put in place special legislation to recognize and protect self employed people in cottage and home industries. District industries canters (DICs) were set up and made the focal point of SSI development, bypassing large cities and state capitals. Also, the government started providing special services akin to product standardization, quality control and marketing surveys in order to assist the SSIs in enabling them to market their products in an underdeveloped market. The scenario for the small-scale sector changed with the Industrial Policy of July 1991, which, for the first time in Indias development history spoke of liberalization. What this meant was that medium and large enterprises would no longer need licenses to run. Export-oriented enterprises could be wholly foreign owned and foreign equity participation was selectively allowed. Industries could import capital goods with much fewer restrictions. 1996 saw the government involved in the setting up of a higher level committee, known as the Abid Hussain Committee, to review policies for small industries and recommend measures to help formulate a strong and innovative policy package for the rapid development of SMEs. With liberalization, rapid changes were seen in the Indian economy. Indian companies were no longer insulated from the global economy. In fact, there was an urgent need to make them, especially SMEs, more competitive and resilient. In 1991, the growth rate of SSIs was almost three times that of the total industrial sector at 3.1 percent. From 1991 to 1995, the growth rate of SSIs exceeded that of the total industrial sector. Yet, in 1995-96, the growth rate of SSIs was slightly lower than the total industrial sector, however it increased again in 1996 and continued to be higher than the total industrial growth rate till 1999. till 2006, the SME segment saw a lot more development and support from the government. DESCRIPTION OF SME IN THE MANUFACTURING SECTOR: The Term enterprise in the manufacturing context stands for an industrial undertaking or a business concern involved in the production, processing or preservation of goods for the list of eligible industries in the First Schedule to the Industries (Development and Regulation Act), 1951. For the Manufacturing Sector, the MSMED Act 2006 defines micro, small and medium enterprises (MSMEs) as mentioned below:

 A micro enterprise is an enterprise where investment in plant and machinery does not exceed Rs 25 lakh. The investment in plant and machinery in a small enterprise is more than Rs 25 lakh, but does not exceed Rs 5 crore. A medium enterprise is one where the investment in plant and machinery is more than Rs 5 crore, but does not exceed Rs 10 crore.
In all these, the cost excludes that of land, building and the items specified by the Ministry of Small Scale Industries with its notification No SO 1722 (E) dated October 5, 2006. SME DEFINITION FOR SERVICE ENTERPRISES: A service sector enterprise is defined as one involved in providing services. The following points will explain how.

Small road and water transport operators that can now own a fleet of vehicles not exceeding ten in number. Small business, whose original cost price of equipment used for business, does not exceed Rs 20 lakh. Professional and self-employed persons, whose borrowing limits do not exceed Rs 10 lakh of which not more than Rs 2 lakh should be for working capital requirements Professionally qualified medical practitioners setting up a practice in semi urban and rural areas, whose borrowing limits should not be less than Rs 15 lakh with a subceiling of Rs 3 lakh for working capital requirements.

CHALLENGES FACED BY SME: The challenges being faced by the small and medium sector may be briefly set out as Follows-

Small and Medium Enterprises (SME), particularly the tiny segment of the small enterprises have inadequate access to finance due to lack of financial information and non-formal business practices. SMEs also lack access to private equity and venture capital and have a very limited access to secondary market instruments.

 SMEs face fragmented markets in respect of their inputs as well as products and are vulnerable to market fluctuations. SMEs lack easy access to inter-state and international markets. The access of SMEs to technology and product innovations is also limited. There is lack of awareness of global best practices. SMEs face considerable delays in the settlement of dues/payment of bills by the large scale buyers. With the deregulation of the financial sector, the ability of the banks to service the credit requirements of the SME sector depends on the underlying transaction costs, efficient recovery processes and available security. There is an immediate need for the banking sector to focus on credit and SMEs

OVERVIEW OF CREDIT APPRAISAL

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

BRIEF OVERVIEW OF CREDIT:

Credit Appraisal is a process to ascertain the risks associated with the extension of the credit facility. It is generally carried by the financial institutions, which are involved in providing financial funding to its customers. Credit risk is a risk related to non-repayment of the credit obtained by the customer of a bank. Thus it is necessary to appraise the credibility of the customer in order to mitigate the credit risk. Proper evaluation of the customer is performed this measures the financial condition and the ability of the customer to repay back the Loan in future. Generally the credits facilities are extended against the security know as collateral. But even though the Loans are backed by the collateral, banks are normally interested in the actual Loan amount to be repaid along with the interest. Thus, the customer's cash flows are ascertained to ensure the timely payment of principal and the interest.

It is the process of appraising the credit worthiness of a Loan applicant. Factors like age, income, number of dependents, nature of employment, continuity of employment, repayment capacity, previous Loans, credit cards, etc. are taken into account while appraising the credit worthiness of a person. Every bank or lending institution has its own panel of officials for this purpose.

However the 3 C of credit are crucial & relevant to all borrowers/ lending, which must be kept in mind, at all times. Character

 Capacity Collateral If any one of these is missing in the equation then the lending officer must question the viability of credit. There is no guarantee to ensure a Loan does not run into problems; however if proper credit evaluation techniques and monitoring are implemented then naturally the Loan loss probability / problems will be minimized, which should be the objective of every lending Officer.

Credit is the provision of resources (such as granting a Loan) by one party to another party where that second party does not reimburse the first party immediately, thereby generating a debt, and instead arranges either to repay or return those resources (or material(s) of equal value) at a later date. The first party is called a creditor, also known as a lender, while the second party is called a debtor, also known as a borrower.

Credit allows you to buy goods or commodities now, and pay for them later. We use credit to buy things with an agreement to repay the Loans over a period of time. The most common way to avail credit is by the use of credit cards. Other credit plans include personal Loans, home Loans, vehicle Loans, student Loans, small business Loans, trade. A credit is a legal contract where one party receives resource or wealth from another party and promises to repay him on a future date along with interest. In simple Terms, a credit is an agreement of postponed payments of goods bought or Loan. With the issuance of a credit, a debt is formed.

BASIC TYPES OF CREDIT:

There are four basic types of credit. By understanding how each works, you will be able to get the most for your money and avoid paying unnecessary charges.

Service credit is monthly payments for utilities such as telephone, gas, electricity, and water. You often have to pay a deposit, and you may pay a late charge if your payment is not on time.

Loans let you borrow cash. Loans can be for small or large amounts and for a few days or several years. Money can be repaid in one lump sum or in several regular payments until the amount you borrowed and the finance charges are paid in full. Loans can be secured or unsecured.

Installment credit may be described as buying on time, financing through the store or the easy payment plan. The borrower takes the goods home in exchange for a promise to pay later. Cars, major appliances, and furniture are often purchased this way. You usually sign a contract, make a down payment, and agree to pay the balance with a specified number of equal payments called installments. The finance charges are included in the payments. The item you purchase may be used as security for the Loan.

Credit cards are issued by individual retail stores, banks, or businesses. Using a credit card can be the equivalent of an interest-free Loan- end of each month.-if you pay for the use.

BRIEF OVERVIEW OF LOANS: Loans can be of two types fund base & non-fund base: Fund Base includes: Working Capital Term Loan

Non-fund Base includes: Letter of Credit Bank Guarantee

Fund Base: Working capital The objective of running any industry is earning profits. An industry will require funds to acquire fixed assets like land, building, plant, machinery, equipments, vehicles, tools etc., & also to run the business i.e. its day-to-day operations.

Funds required for day to-day working will be to finance production & sales. For production, funds are needed for purchase of raw materials/ stores/ fuel, for employment of labor, for power charges etc. financing the sales by way of sundry debtors/ receivables.

Capital or funds required for an industry can therefore be bifurcated as fixed capital & working capital. Working capital in this context is the excess of current assets over current liabilities. The excess of current assets over current liabilities is treated as net, for storing finishing goods till they are sold out & for working capital or liquid surplus & represents that portion of the working capital, which has been provided from the long-Term source.

Assessment of Working Capital in Central bank of India

Particulars 25% of estimated sales Less : 5% of estimated sales(A) OR Net working capital(B) ***** Which is higher ( A or B) *****

Amount *****

***** MPBF (Maximum Permissible Bank Finance) *****

Term Loan

A Term Loan is granted for a fixed Term of 3 years to 7 years intended normally for financing fixed assets acquired with a repayment schedule normally not exceeding 8 years.

A Term Loan is a Loan granted for the purpose of capital assets, such as purchase of land, construction of, buildings, purchase of machinery, modernization, renovation or rationalization of plant, & repayable from out of the future earning of the enterprise, in installments, as per a prearranged schedule. From the above definition, the following differences between a Term Loan & the working capital credit afforded by the Bank are apparent:

The purpose of the Term Loan is for acquisition of capital assets. The Term Loan is an advance not repayable on demand but only in installments ranging over a period of years. The repayment of Term Loan is not out of sale proceeds of the goods & commodities per se, whether given as security or not. The repayment should come out of the future cash accruals from the activity of the unit. The security is not the readily saleable goods & commodities but the fixed assets of the units.

It may thus be observed that the scope & operation of the Term Loans are entirely different from those of the conventional working capital advances. The Banks commitment is for a long period & the risk involved is greater. An element of risk is inherent in any type of Loan because of the uncertainty of the repayment. Longer the duration of the credit, greater is the attendant uncertainty of repayment & consequently the risk involved also becomes greater.

However, it may be observed that Term Loans are not so lacking in liquidity as they appear to be. These Loans are subject to a definite repayment programmed unlike short Term Loans for working capital (especially the cash credits) which are being renewed year after year. Term Loans would be repaid in a regular way from the anticipated income of the industry/ trade.

These distinctive characteristics of Term Loans distinguish them from the short Term credit granted by the banks & it becomes necessary therefore, to adopt a different approach in examining the applications of borrowers for such credit & for appraising such proposals.

The repayment of a Term Loan depends on the future income of the borrowing unit. Hence, the primary task of the bank before granting Term Loans is to assure itself that the anticipated income from the unit would provide the necessary amount for the repayment of the Loan. This will involve a detailed scrutiny of the scheme, its capital assets. Financial aspects, economic aspects, technical aspects, a projection of future trends of outputs & sales & estimates of cost, returns, flow of funds & profits.

Eligibility of term loan Particulars Cost of machineries Cost of accessories/equipment Total cost of machines Less : 25% of margin Eligible amount of term loan Amount ***** ***** ***** ***** *****

Non-fund Base: Letter of credit

The expectation of the seller of any goods or services is that he should get the payment immediately on delivery of the same. This may not materialize if the seller & the buyer are at different places (either within the same country or in different countries). The seller desires to have an assurance for payment by the purchaser. At the same time the purchaser desires that the amount should be paid only when the goods are actually received. Here arises the need of Letter of Credit (LCs). The objective of LC is to provide a means of payment to the seller & the delivery of goods & services to the buyer at the same time.

Definition A Letter of Credit (LC) is an arrangement whereby a bank (the issuing bank) acting at the request & on the instructions of the customer (the applicant) or on its own behalf, Is to make a payment to or to the order of a third party (the beneficiary), or is to accept & pay bills of exchange (drafts drawn by the beneficiary); or Authorizes another bank to effect such payment, or to accept & pay such bills of exchanges (drafts); or Authorizes another bank to negotiate the Terms & conditions of the credit are complied with. against stipulated document(s), provided that Bank Guarantees:

A contract of guarantee is defined as a contract to perform the promise or discharge the liability of the third person in case of the default. The parties to the contract of guarantees are: a) Applicant: The principal debtor person at whose request the guarantee is executed b) c) Beneficiary: Person to whom the guarantee is given & who can enforce it in case of default. Guarantee: The person who undertakes to discharge the obligations of the applicant in case of his default. Thus, guarantee is a collateral contract, consequential to a main co applicant & the beneficiary.

Purpose of Bank Guarantees

Bank Guarantees are used to for both preventive & remedial purposes. The guarantees executed by banks comprise both performance guarantees & financial guarantees. The guarantees are structured according to the Terms of agreement, viz., security, maturity & purpose.

Branches may issue guarantees generally for the following purposes: a) In lieu of security deposit/earnest money deposit for participating in tenders; b) Mobilization advance or advance money before commencement of the project by the contractor & for money to be received in various stages like plant layout, design/drawings in project finance;

c) In respect of raw materials supplies or for advances by the buyers; d) In respect of due performance of specific contracts by the borrowers & for obtaining full payment of the bills; e) Performance guarantee for warranty period on completion of contract which would enable the suppliers to period to be over; realize the proceeds without waiting for warranty) To allow units to draw funds from time to time from the concerned indenters against part execution of contracts, etc. f) Bid bonds on behalf of exporters

g) Export performance guarantees on behalf of exporters favoring the Customs Department under EPCG scheme. CREDIT APPRAISAL PROCESS:

Receipt of application from applicant

Receipt of documents (Balance sheet, KYC papers, Different govt. registration no., MOA, AOA, and properties documents Pre-sanction visit by bank officers

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

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

Preparation of financial data

Proposal preparation

Assessment of proposal

Sanction/approval of proposal by appropriate sanctioning authority

Documentations, agreements, mortgages

Disbursement of Loan

Post sanction activities

LOAN ADMINISTRATION PRE- SANCTION PROCESS:

Appraisal, Assessment and Sanction functions

1. Appraisal A. Preliminary appraisal Sound credit appraisal involves analysis of the viability of operations of a business and the capacity of the promoters to run it profitably and repay the bank the dues as and when they fall

Towards this end the preliminary appraisal will examine the following aspects of a proposal.

Banks lending policy and other relevant guidelines/RBI guidelines, Prudential Exposure norms, Industry Exposure restrictions, Group Exposure restrictions, Industry related risk factors, Credit risk rating, Profile of the promoters/senior management personnel of the project, List of defaulters, Caution lists, Acceptability of the promoters, Compliance regarding transfer of borrower accounts from one bank to another, if applicable; Government regulations/legislation impacting on the industry; e.g., ban on financing of industries producing/ consuming Ozone depleting substances; Applicants status vis--vis other units in the industry, Financial status in broad Terms and whether it is acceptable The Companys Memorandum and Articles of Association should be scrutinized carefully to ensure (i) that there are no clauses prejudicial to the Banks interests, (ii) no limitations have been placed on the Companys borrowing powers and operations and (iii) the scope of activity of the company. Required Documents for Process of Loan Application for requirement of loan

 Copy of Memorandum & Article of Association Copy of incorporation of business Copy of commencement of business Copy of resolution regarding the requirement of credit facilities Brief history of company, its customers & supplies, previous track records, orders In hand. Also provide some information about the directors of the company Financial statements of last 3 years including the provisional financial statement for the year 2010-11 Copy of PAN/TAN number of company Copy of last Electricity bill of company Copy of GST/CST number Copy of Excise number Photo I.D. of all the directors Address proof of all the directors Copies related to the property such as 7/12 & 8A utara, lease/ sales deed, 2R Permission, Allotment letter, Possession Bio-data form of all the directors duly filled & notarized Financial statements of associate concern for the last 3 years

After undertaking the above preliminary examination of the proposal, the branch will arrive at a decision whether to support the request or not. If the branch (a reference to the branch includes a reference to SECC/CPC etc. as the case may be) finds the proposal acceptable, it will call for from the applicant(s), a comprehensive application in the prescribed proforma, along with a copy of the proposal/project report, covering specific credit requirement of the company and other essential data/ information. The information, among other things, should include: Organizational set up with a list of Board of Directors and indicating the qualifications, experience and competence of the key personnel in charge of the main functional areas e.g., purchase, production, marketing and finance; in other words a brief on the managerial resources and whether these are compatible with the size and scope of the proposed activity. Demand and supply projections based on the overall market prospects together with a copy of the market survey report. The report may comment on the geographic spread of the

market where the unit proposes to operate, demand and supply gap, the competitors share, competitive advantage of the applicant, proposed marketing arrangement, etc. Current practices for the particular product/service especially relating to Terms of credit sales, probability of bad debts, etc. Estimates of sales cost of production and profitability. Projected profit and loss account and balance sheet for the operating years during the Currency of the Bank assistance. If request includes financing of project(s), branch should obtain additionally Appraisal report from any other bank/financial institution in case appraisal has been done by them. No Objection Certificate from Term lenders if already financed by them and Report from Merchant bankers in case the company plans to access capital market, wherever necessary.

In respect of existing concerns, in addition to the above, particulars regarding the history of the concern, its past performance, present financial position, etc. should also be called for. This data/information should be supplemented by the supporting statements Such as: Audited profit loss account and balance sheet for the past three years (if the latest audited balance sheet is more than 6 months old, a pro-forma balance sheet as on a recent date should be obtained and analyzed). For non-corporate borrowers, irrespective of market segment, enjoying credit limits of Rs.10 lacs and above from the banking system, audited balance sheet in the IBA approved formats should be submitted by the borrowers. Details of existing borrowing arrangements, if any, Credit information reports from the existing bankers on the applicant Company, and Financial statements and borrowing relationship of Associate firms/Group Companies.

B. Detailed Appraisal

The viability of a project is examined to ascertain that the company would have the ability to service its Loan and interest obligations out of cash accruals from the business. While appraising a project or a Loan proposal, all the data/information furnished by the borrower should be

counter checked and, wherever possible, inter-firm and inter-industry comparisons should be made to establish their veracity.

The financial analysis carried out on the basis of the companys audited balance sheets and profit and loss accounts for the last three years should help to establish the current viability.

In addition to the financials, the following aspects should also be examined:

The method of depreciation followed by the company-whether the company is following straight line method or written down value method and whether the company has changed the method of depreciation in the past and, if so, the reason therefore; Whether the company has revalued any of its fixed assets any time in the past and the present status of the revaluation reserve, if any created for the purpose; Record of major defaults, if any, in repayment in the past and history of past sickness, The position regarding the companys tax assessment - whether the provisions made in the balance sheets are adequate to take care of the companys tax liabilities; The nature and purpose of the contingent liabilities, together with comments thereon; Pending suits by or against the company and their financial implications (e.g. cases relating to customs and excise, sales tax, etc.); Qualifications/adverse remarks, if any, made by the statutory auditors on the companys accounts; Dividend policy; Apart from financial ratios, other ratios relevant to the project; Trends in sales and profitability, past deviations in sales and profit projections, and estimates/projections of sales values; Production capacity & use: past and projected; o Estimated requirement of working capital finance with reference to acceptable build up of inventory/ receivables/ other current assets; Projected levels: whether acceptable; and Compliance with lending norms and other mandatory guidelines as applicable

Project financing:

 If the proposal involves financing a new project, the commercial, economic and Financial viability and other aspects are to be examined as indicated below:

Statutory clearances from various Government Depts. / Agencies Licenses/permits/approvals/clearances/NOCs/Collaboration agreements, as applicable Details of sourcing of energy requirements, power, fuel etc. Pollution control clearance Cost of project and source of finance Build-up of fixed assets (requirement of funds for investments in fixed assets to be critically examined with regard to production factors, improvement in quality of products, economies of scale etc.) Arrangements proposed for raising debt and equity Capital structure (position of Authorized, Issued/ Paid-up Capital, Redeemable o Preference Shares, etc.)

Debt component i.e., debentures, Term Loans, deferred payment facilities, unsecured Loans/ deposits. All unsecured Loans/ deposits raised by the company for financing a project should be subordinate to the Term Loans of the banks/ financial institutions and should be permitted to be repaid only with the prior approval of all the banks and the financial institutions concerned. Where central or state sales tax Loan or developmental Loan is taken as source of financing the project, furnish details of the Terms and conditions governing the Loan like the rate of interest (if applicable), the manner of repayment, etc. Feasibility of arrangements to access capital market Feasibility of the projections/ estimates of sales, cost of production and profits covering the period of repayment Break Even Point in Terms of sales value and percentage of installed capacity under a o Normal production year

Cash flows and fund flows Proposed amortization schedule Whether profitability is adequate to meet stipulated repayments with reference to Debt Service Coverage Ratio, Return on Investment Industry profile & prospects

 Critical factors of the industry and whether the assessment of these and management plans in this regard are acceptable Technical feasibility with reference to report of technical consultants, if available Management quality, competence, track record Companys structure & systems Applicants strength on inter-firm comparisons

For the purpose of inter-firm comparison and other information, where necessary, source data from Stock Exchange Directory, financial journals/ publications, professional entities like CRIS-INFAC, CMIE, etc. with emphasis on following aspects:

Market share of the units under comparison Unique features Profitability factors Financing pattern of the business Inventory/Receivable levels Capacity utilization Production efficiency and costs Bank borrowings patterns Financial ratios & other relevant ratios Capital Market Perceptions Current price 52week high and low of the share price P/E ratio or P/E Multiple Yield (%)- half yearly and yearly

Also examine and comment on the status of approvals from other Term lenders, market view (if anything adverse), and project implementation schedule. A pre-sanction inspection of the project site or the factory should be carried out in the case of existing units. To ensure a higher degree of commitment from the promoters, the portion of the equity / Loans which is proposed to be brought

in by the promoters, their family members, friends and relatives will have to be brought upfront. However, relaxation in this regard may be considered on a case to case basis for genuine and acceptable reasons. Under such circumstances, the promoter should furnish a definite plan indicating clearly the sources for meeting his contribution. The balance amount proposed to be raised from other sources, viz., debentures, public equity etc., should also be fully tied up.

C. Present relationship with Bank:

Compile for existing customers, profile of present exposures: Credit facilities now granted Conduct of the existing account Utilization of limits - FB & NFB Occurrence of irregularities, if any Frequency of irregularity i.e., number of times and total number of days the account was irregular during the last twelve months Repayment of Term commitments Compliance with requirements regarding submission of stock statements, Financial Follow-up Reports, renewal data, etc. Stock turnover, realization of book debts Value of account with break-up of income earned Pro-rata share of non-fund and foreign exchange business Concessions extended and value thereof Compliance with other Terms and conditions Action taken on Comments/observations contained in RBI Inspection Reports: CO Inspection & Audit Reports

D. Credit risk rating: Draw up rating for (i) Working Capital and (ii) Term Finance.

E. Opinion Reports: Compile opinion reports on the company, partners/ promoters and the proposed guarantors.

F. Existing charges on assets of the unit: If a company, report on search of charges with ROC.

G. Structure of facilities and Terms of Sanction: Fix Terms and conditions for exposures proposed - facility wise and overall: Limit for each facility sub-limits

 Security - Primary & Collateral, Guarantee Margins - For each facility as applicable Rate of interest Rate of commission/exchange/other fees Concessional facilities and value thereof Repayment Terms, where applicable ECGC cover where applicable Other standard covenants

H. Review of the proposal: Review of the proposal should be done covering (i) strengths and weaknesses of the exposure proposed (ii) risk factors and steps proposed to mitigate them (ii) Deviations, if any, proposed from usual norms of the Bank and the reasons therefore

I. Proposal for sanction: Prepare a draft proposal in prescribed format with required backup details and with recommendations for sanction.

J. Assistance to Assessment: Interact with the assessor, provide additional inputs arising from the assessment, incorporate these and required modifications in the draft proposal and generate an integrated final proposal for sanction.

2. Assessment: Indicative List of Activities Involved in Assessment Function is given below:

 Review the draft proposal together with the back-up details/notes, and the borrowers application, financial statements and other reports/documents examined by the appraiser. Interact with the borrower and the appraiser. Carry out pre-sanction visit to the applicant company and their project/factory site. Peruse the financial analysis (Balance Sheet/ Operating Statement/ Ratio Analysis/ Fund Flow Statement/ Working Capital assessment/Project cost & sources/ Break Even analysis/Debt Service/Security Cover, etc.) to see if this is prima facie in order. If any deficiencies are seen, arrange with the appraiser for the analysis on the correct lines. Examine critically the following aspects of the proposed exposure.

Banks lending policy and other guidelines issued by the Bank from time to time RBI guidelines Background of promoters/ senior management Inter-firm comparison Technology in use in the company Market conditions Projected performance of the borrower vis--vis past estimates and performance Viability of the project Strengths and Weaknesses of the borrower entity. Proposed structure of facilities. Adequacy/ correctness of limits/ sub limits, margins, moratorium and repayment schedule Adequacy of proposed security cover o Credit risk rating Pricing and other charges and concessions, if any, proposed for the facilities Risk factors of the proposal and steps proposed to mitigate the risk Deviations proposed from the norms of the Bank and justifications there for

To the extent the inputs/comments are inadequate or require modification, arrange for additional inputs/ modifications to be incorporated in the proposal, with any required modification to the initial recommendation by the Appraiser Arrange with the Appraiser to draw up the proposal in the final form. Recommendation for sanction: Recapitulate briefly the conclusions of the appraisal and state whether the proposal is economically viable. Recount briefly the value of the companys (and the Groups) connections. State whether, all considered, the proposal is a

fair banking risk. Finally, give recommendations for grant of the requisite fund-based and non-fund based credit facilities.

3. Sanction: Indicative list of activities involved in the sanction function is given below:

Peruse the proposal to see if the report prima facie presents the proposal in a comprehensive manner as required. If any critical information is not provided in the proposal, remit it back to the Assessor for supply of the required data/clarifications.

Examine critically the following aspects of the proposed exposure in the light of corresponding instructions in force: Banks lending policy and other relevant guidelines RBI guidelines Borrowers status in the industry Industry prospects Experience of the Bank with other units in similar industry Overall strength of the borrower Projected level of operations Risk factors critical to the exposure and adequacy of safeguards proposed There against

Value of the existing connection with the borrower

Credit risk rating Security, pricing, charges and concessions proposed for the exposure and covenants Stipulated vis--vis the risk perception.

Accord sanction of the proposal on the Terms proposed or by stipulating modified or additional conditions/ safeguards, or Defer decision on the proposal and return it for additional data/clarifications, or Reject the proposal, if it is not acceptable, setting out the reasons.

Loan administration - Post sanction Credit process: . Need

Lending decisions are made on sound appraisal and assessment of credit worthiness. Past record of satisfactory performance and integrity are no guarantee for future though they serve as a useful guide to project the trend in performance. Credit assessment is made based on promises and projections. A loan granted on the basis of sound appraisal may go bad because the borrower did not carry out his promises regarding performance. It is for this reason that proper follow up and supervision is essential. A banker cannot take solace in sufficiency of security for his loans. He has to a) Make a proper selection of borrower b) Ensure compliance with terms and conditions c) Monitor performance to check continued viability of operations d) Ensure end use of funds. e) Ultimately ensure safety of funds lent.

Stages of post sanction process

The post-sanction credit process can be broadly classified into three stages viz., follow-up, supervision and monitoring, which together facilitate efficient and effective credit management and maintaining high level of standard assets. The objectives of the three stages of post sanction process are detailed below.

TYPES OF LENDING ARRANGEMENTS:

Introduction Business entities can have various types of borrowing arrangements. They are One Borrower One Bank One Borrower Several Banks (with consortium arrangement) One Borrower Several Banks (without consortium arrangements Multiple Banking One Borrower Several Banks (Loan Syndication)

One Bank The most familiar amongst the above for smaller loans is the One Borrower-One Bank arrangement where the borrower confines all his financial dealings with only one bank.

Sometimes, units would prefer to have banking arrangements with more than one bank on account of the large financial requirement or the resource constraint of his own banker or due to varying terms & conditions offered by different banks or for sheer administrative convenience. The advantages to the bank in a multiple banking arrangement/ consortium arrangement are that the exposure to an individual customer is limited & risk is proportionate. The bank is also able to spread its portfolio. In the case of borrowing business entity, it is able to meet its funds requirement without being constrained by the limited resource of its own banker. Besides this, consortium arrangement enables participating banks to save manpower & resources through common appraisal & inspection & sharing credit information. The various arrangements under borrowings from more than one bank will differ on account of terms & conditions, method of appraisal, coordination, documentation & supervision & control.

Consortium Lending When one borrower avails loans from several banks under an arrangement among all the lending bankers, this leads to a consortium lending arrangements. In consortium lending, several banks pool

banking recourses & expertise in credit management together & finance a single borrower with a common appraisal, common documentation & joint supervision & follow up. The borrower enjoys the advantage similar to single window availing of credit facilities from several banks. The arrangement continues until any one of the bank moves out of the consortium. The bank taking the highest share of the credit will usually be the leader of consortium. There is no ceiling on the number of banks in a consortium.

Multiple Banking Arrangement Multiple Banking Arrangement is one where the rules of consortium do not apply & no inter se agreement among banks exists. The borrower avails credit facility from various banks providing separate securities on different terms & conditions. There is no such arrangement called Multiple Banking Arrangement & the term is used only to denote the existence of banking arrangement with more than one bank. Banking Arrangement has come to stay as it has some advantages for the borrower & the banks have the freedom to price their credit products & non-fund based facility according to their commercial judgment. Consortium arrangement occasioned delays in credit decisions & the borrower has found his way around this difficulty by the multiple banking arrangements. Additionally, when units were not doing well, consensus was rarely prevalent among the consortium members. If one bank wanted to call up the advance & protect the security, another bank was interested in continuing the facility on account of group considerations.

Points to be noted in case of multiple banking arrangements Though no formal arrangement exists among the financing banks, it is preferable to have informal exchange of information to ensure financial discipline Charges on the security given to the bank should be created with utmost care to guard against dilution in our security offered & to avoid double financing Certificates on the outstanding with the other banks should be obtained on the periodical basis & also verified from the Balance sheet of the unit to avoid excess financing

Credit Syndication

A syndicated credit is an agreement between two or more lending institutions to provide a borrower a credit facility using common loan documentation. It is a convenient mode of raising long-term funds.

The borrower mandates a lead manager of his choice to arrange a loan for him. The mandate spells out the terms of the loan & the mandated banks rights & responsibilities. The mandated banker the lead manger prepares an information memorandum & Circulates among prospective lender banks soliciting their participation in the loan. On the basis of the memorandum & on their own independent economic & financial evolution the leading banks take a view on the proposal. The mandated bank convenes the meeting to discuss the syndication strategy relating to coordination, communication & control within the syndication process & finalizes deal timing, management fees, cost of credit etc. The loan agreement is signed by all the participating banks. The borrower is required to give prior notice to the lead manger about loan drawal to enable him to tie up disbursements with the other lending banks.

Features of syndicated loans Arranger brings together group of banks Borrower is not required to have interface with participating banks, thus easy & hassle fee Large loans can be raised through syndication by accessing global markets For the borrower, the competition among the lenders leads to finer terms Risk is shared Small banks can also have access to large ticket loans & top class credit appraisal & management Advantages Strict, time-bound delivery schedule Streamlined process of documentation with clearly laid down roles & responsibilities Market driven pricing linked to the risk perception Competitive pricing but scope for fee-based income is also available Syndicated portions can be sold to another bank, if required Fixed repayment schedule & strict monitoring of default by markets which punish indiscipline

CREDIT APPRAISAL MODEL

CREDIT TO SME SECTOR

Central bank of India provides credit to SME sector under following Schemes
SME Schematic (Fast Track)

It includes structured products basically to provide fast services to clients. It includes various products like:

Business Loan for Property Power Rent Power Trade Zero Collateral Loans (ZCL) to MSE under CGS Card Power Enterprise Power Business Power .

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

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

Power Trade: The product aims to provide both working capital and Term finance requirements of a trade enterprise. The facility is in the form of a cash credit (for working capital requirements) and Term Loan (financing capital expenditure). The facility is secured by hypothecation of working capital assets and further collateralized by charge over an immovable property/ financial asset. Non- fund based facilities can also be granted under the product. The maximum Loan amount under the product is Rs. 2.5 crores.

Zero Collateral Loans (ZCL) to MSE under CGS: This product facilitates the MSEs and software/IT related services to avail both working capital and term finance from bank. The facility is secured by guarantee cover of credit guarantee fund trust for micro and small enterprises (CGTMSE) and there is no collateral security to be taken in such cases. Maximum loan amount under the product is Rs. 1.00 crore.

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

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

Business Power:

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

For a business on the growth phase with a wide range of opportunities to explore, timely availability of credit is an integral ingredient needed to scale new heights. Central Bank understands this and endeavor to be not just a bank but also financing partner, so that focus on business needs becomes possible whereas Bank cater to meet financing needs.

Their services ranging from Funded to Non-Funded, from Short Term to Long Term and from Credit to Trade Services ensures to get finance the way it is best suited for business.

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

Cash Credit:

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

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

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

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

Term Loan: When there is need of long-Term funds for capacity expansions or plant modernization and so on. Keeping these requirements in mind Bank provides Term Loans up to acceptable tenor with suitable moratorium, if required, and repayment options

structured on the basis of customers estimated cash flows. These Loans are primarily secured by a first charge on the fixed assets acquired through the Loan amount. Suitable collateral security is also taken whenever required.

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

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

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

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

Letter of Credit: Apart from fund based working capital facilities Bank provides a range of Non-Fund Based facilities such as Letter of credit, Bank Guarantees, Solvency certificates, etc. Letter of Credit is provided to meet trade purchases. These are generally provided for 36 months depending upon Trade cycle. Apart from this it provides Import Letter of Credit for importing machinery or capital goods. Such LCs are for tenure ranging from 1-

3 years depending upon the need of the borrower.

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

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

Sanctioning powers for schematic Loans under MSME and Mid Corporate:

In order to have better control over the portfolio, it is felt that the budget for schematic advances should be allotted only to select branches, where the potential and manpower support exist for such business. Accordingly, the budget for FY 11 has been restricted to select branches, to be decided by Advances Cells. The Branch Heads of branches located at centers where Advances Cells have been set up will not have any sanctioning powers. Branch Heads of stand-alone branches where budgets have been allocated will have sanctioning powers as per delegation of powers given below. The Branch Heads of other stand-alone branches where budgets have not been allocated will not have any sanctioning powers. These branches would, however, continue to source business and such proposals would be processed / sanctioned at the respective Advances Cells. Review / renewal of existing Loans at such branches would also be done at the Advances Cells. Branches would continue to be responsible for all post sanction formalities, maintaining quality of assets held in their books, periodic updating of drawing power, and obtention of stock statements and periodical inspection of borrowed units.

All requests for interest rate concessions are to be forwarded to the Advances Cells.

The proposals sanctioned at Advances Cells / Zonal Offices during a particular month are to be submitted for review by the next higher authority through a monthly control return, latest by the 5th of the succeeding month, in the prescribed format and not on a case-by-case basis. Similarly, the proposals sanctioned by the Branch Heads /Advances Cells (headed by AVPs/Managers) during a particular month are to be submitted for review by the appropriate authority at Zonal Office or Advances Cells as the case may be through a monthly control return, latest by the 5th of the succeeding month, in the prescribed format and not on a case-by-case basis. The concessions in rates of interest / variations authorized by the VP (Advances) and SVP (Advances) during a particular month are to be submitted for review by the SVP(Advances)/ Zonal Head respectively through a monthly control return, in the prescribed format by the 5th of the succeeding month. If a combination of schematic Loan products is to be offered, the combined exposure should be the criterion while sanctioning the limits

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

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

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

Given that the banks have very little control over such external factors, the bank can minimize the credit risk that it faces mainly by managing the internal factors. These include the internal policies and processes of the bank like Loan policies, appraisal processes, monitoring systems etc. These internal factors can be taken care of, partly, via effective rating and monitoring systems, entry level criteria etc. These processes would enable improvement in the quality of credit decisions.

This would effectively improve the quality (and hence profitability) of the portfolio. While monitoring systems are useful tool at post-sanction stage, rating systems act as important aid at the pre-sanction stage.

INTRODUCTION TO CREDIT TOOLS:

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

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

Use in decision-making Credit rating helps the bank in making several key decisions regarding credit including:

Whether to lend to a particular borrower or not; what price to charge What are the products to be offered to the borrower and for what tenor? At what level should sanctioning be done? What should be the frequency of renewal and monitoring?

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

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

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

RATING TOOL FOR SMALL AND MEDIUM ENTERPRISES (SME):

The SME rating tool has been developed for the purpose of assigning a credit rating to the SME borrower of the Bank. The aim of the tool is to provide a standardized system for the bank to evaluate the credit risk of different borrowers. It should, however, be noted that this tool is not the standalone exercise for the purpose of sanctioning of Loan to a SME borrower. It should be supplemented with other inputs important in the sanctioning process.

The following broad areas have been considered for determining the rating of borrowers in the SME category:

Financial performance Business performance Industry outlook Quality of management Conduct of account (after roll out of the Monitoring tool)

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

Parameters used in the SME tool

Financial performance The tool in its current form uses various parameters for rating a borrower on its financial strength. These various sub-parameters give us an idea of the different sources of risk being faced by a company in different areas.

Operating performance of business

Operational efficiency of a borrower is important in determining the generation of cash for repayment of its debt obligations. The parameters in this category assess the borrowers competence in its primary activities.

Quality of management Quality of the management of a borrower unit has a direct impact on the performance of the unit. Also, it would have a direct impact on the integrity of the borrower especially in Terms of its willingness to repay its debt.

Industry In order to undertake the credit rating of any borrower, it is important to assess the riskiness of the industry to which that borrower belongs. Borrowers, which are similarly ranked in Terms of financial performance, operating performance of business and quality of management may have different credit ratings due to the risks inherent in their industry. The risk assessment in industry sectors is done at the Central Office level and appropriate score for each industry has been allocated in the tool. On selection of the relevant industry sector, the tool will automatically reckon the allocated score.

RATING SCALES: tool for SME has an 9-point rating scale, which ranges from A++ to The rating D.

Borrower Rating A++ A+ A

Range of Scores Above 90 85-90 80-84

Risk Level Lowest risk Lower risk Low risk

B+ B C+ C D+ D

70-79 60-69 56-69 51-55 45-50 Below 45

Low risk Moderate risk Moderate risk High risk Higher risk Highest risk

CASE STUDY

DETAILS OF CASE STUDY Name Constitution Office Address Shree rang traders Public Limited Company B- 301, city light road , athawagate Surat-395 003, Gujarat Line of activity Sector Dealing with us Incorporation Name of Directors Manufacturing of Food Colour Products Chemical and Chemical Products New Connection 15th june 2004 Mr. Atulbhai Prahladbhai Patel Mr. Rameshbhai Bhagwanbhai Patel Mr. Hitendra Hargovinddas Patel Group Rating Associate Concern Not a recognized group SME 3 (ABS 31.03.2009) Dynemic Overseas (India) Private Limit

BRIEF BACKGROUND: The Company was incorporated on 15th june 2004 as Private Limited Company. The Company was promoted with the objective of carrying on the business of manufacturing S.P.C.P, the raw material for Food Color, reactive & Raazole Dyes.

In the Year 2008 the company acquired the running business of M/s Safforn Dye Stuff Industries and started manufacturing wide range of food colors at the premises 3709/6, GIDC Estate, Ankleshwar having plot area of admeasuring 3700 Sq.Mtr. As the company aims to provide entire range qualitative and quantitative service to food industry, as its Unit I. The company commenced manufacturing of food colors namely Tratrazine in the year 2007-08. Both the units at Ankleshwar are Ultra modern and have eco friendly plants with in house testing facilities to control quality at every level of manufacturing. The Company gained goodwill in the short span of time due to its quality product. The company has well equipped state of art in house laboratory which conduct test of every parameter of food color & Dye intermediates laid down under national and international authorities. QUALITATIVE FACTORS: The Company has a pro-active Management and Promoters who have hands on experience in manufacturing of Dyes Intermediaries and Food Colours. Profit making Company since last 5 years. The company has obtained certificate of approval From Bureau Verities Quality International (BVQI) for achievement of ISO 9001: 2000 quality standards, the Company has also received certificate of approval from Bureau Verities Quality International (BVQI) for achievement of 14001:1996 and 14001:2004 quality standards for both its units satiated at Ankleshwar. The company was awarded with trophy for export performance of more than Rs. 6.00 & 8.00 Crore for Self.

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

Exports Sales Local Sales

Exports Sales: Companys 70% turnover is generated by way of exports sales. Company has its own presence in all most all countries. The company is exporting Food colors in Latin America,

African countries, Middle East, Far East, US and Europe. Almost all export customers are dealing with company for many years.

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

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

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

Local Sales:

In Local Market Company is doing marketing its Dyes & Intermediates to the end customers. The company is the largest manufacturer of S.P.C.P in India which generating repeated order from the local customers.

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

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

Proposal for

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

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

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

b) Sanction

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

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

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

over of Rs. 500.00 lacs from HDFC Bank).

d) Sanction

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

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

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

f)

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

g)

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

Existing & Proposed (Rs. in lacs) Facilities Existing Proposed + Inc / Dec -Proposed Limits (CBI) 500.00

Type of Facility
Limits (HDFC) Cash Credit Limit Stock cum 500.00 Book Debt Corporate Loan 200.00

---

200.00 (500.00)

EPC/FBD/FBP/PCFC/PSCFC As a (500.00) sub limit of Cash Credit Limit LC(Inland /Foreign) - As a sub limit (300.00) of Cash Credit Limit LER Limit (as a sub-limit of CC (15.00) limit) 700.00

--

(300.00)

+25.00

+25.00

+25.00

725.00

Total WC/LC/LER : To meet working capital requirements. Purpose

Tenor

Corporate Loan : For NWC built up. WC/LC/LER : 12 months. Corporate Loan : 24 months from the date of first disbursement.

Repaymen t

WC/LC/LER : On Demand. Corporate Loan : 23 monthly instalments of Rs. 834000 each and last instalment of Rs. 818000. Interest to be serviced as and when debited.

Security

Primary

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

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

Collateral

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

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

ii.

Office situated at B- 301,308,309,310 Satyamev Complex-1, Opp. New Gujarat High Court, S.G.Highway, Sola, Ahmedabad-380 060, Gujarat admeasuring 4272 square feets standing in the name of M/s. Dynemic Products Limited.

iii.

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

Ankleshwar, Dist.Bharuch admeasuring 12290.80 sq. mts. standing in name of M/s. Dynemic Products Limited.

Guarantee

Personal Guarantee of :

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

Credit enhance ment Interest Rate LC Charges

Nil.

BPLR - 3.50% i.e. 11.25% p.a. with monthly rests (presently BPLR @ 14.75%). Banks standard schedule of charges.

Processin Rs. 1 lacs for the sanctioned facilities plus applicable taxes. g fees Banking Arrange ment Multiple with Sutex Bank (Proposed).

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

Operational & Financial Analysis

(Rs. in lacs) Particulars 31.03.07 (Actuals) Gross Sales Net Sales 3231.12 3231.12 31.03.08 (Actuals) 3657.70 3657.70 13.20% 313.80 (5.36) 412.89 50.62 48.47 308.44 184.99 103.07 8.58% 31.03.09 (Actuals) 4911.20 4911.20 34.27% 261.62 56.07 503.87 96.12 146.12 317.69 190.03 153.62 5.33% 31.03.10 31.03.11 (Proj.) 6500.00 6500.00 32.35% 621.29 55.00 881.74 110.94 149.50 676.29 446.42 424.83 9.56% (Proj.) 7500.00 7500.00 15.38% 729.97 65.00 1018.09 107.00 181.12 794.97 524.76 499.22 9.73%

Net Sales Growth Rate % 12.79% Operating Profit Other Income PBDIT Depreciation Interest PBT PAT Cash Profit 227.49 141.52 322.88 47.94 47.45 369.01 266.95 182.35

Operating Profit Margin 7.04% % PBDIT Margin % PAT Margin % 9.99% 8.26%

11.29% 5.06% 1132.84 2707.33 1589.26

10.26% 3.87% 1132.84 2764.96 2331.73

13.57% 6.87% 1132.84 3078.84 2890.12

13.57% 7.00% 1132.84 3471.06 3094.44

Paid up Capital Equity 1132.84 Unadjusted TNW Unadjusted TOL 2649.73 1109.42

Unadjusted TOL/ TNW Adjusted TNW Adjusted TOL Adjusted TOL/ TNW Interest Coverage Current Ratio DSCR NOCF Net Profit / NOCF NOCF / Interest NOCF Payments /

0.42 2710.84 1048.31 0.39 9.82 1.76 7.67 105.69 2.53 2.23

0.59 2725.68 1570.91 0.58 8.44 1.34 1.83 230.12 0.80 4.75 0.13

0.84 2828.34 2268.35 0.80 3.84 0.94 1.21 654.38 0.29 4.48 0.29

0.94 3237.48 2731.48 0.84 6.27 1.13 2.35

0.89 3629.70 2935.80 0.81 5.98 1.24 2.20

(269.99) 149.24 (1.65) (1.81) (0.08) 3.52 0.82 0.04

Financing 0.08

Total Debt / NOCF (No. of 1.17 years)

0.78

0.60

(0.45)

(0.00)

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

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

Analysis

a) The promoters of the company are having rich experience of more than 5 years in various Industries.

b) The proposed expansion of the company is having huge market potentials.

c) The Company is the leader in Manufacturing and export of food colours.

d) The overall credit rating of company is SME 3.

e) The business is 5 years old.

f)

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

g) Since the company is into Manufacturing of Food Colours, the net margin normally remains between 5.00% - 9.00%. The net profit of the company was decreased from Rs. 266.95 lacs in FY06-07 (Aud) showing margin of 8.26% to Rs. 184.99 lacs in FY07-08 (Aud) showing margin of 5.06%. However, the same was maintained at Rs. 190.03 lacs in FY08-09 (Aud) showing margin of 3.87% due to decrease in margins in the chemical industry on account of raw material price fluctuations worldwide. The same was an aberration. But, now the

industry is on revival and boom path. Considering the same, the company has estimated the profit of Rs. 446.42 lacs for FY09-10 @ margin of 6.87%, which may be accepted.

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

i)

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

j)

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

k) The overall conduct of the account, repayment status etc. at Sutex Bank and HDFC is satisfactory.

l)

The main director is dynamic and has rich experience of more than 15 years in his line of activity.

m) The company is a registered SSI unit.

n) Market reference of the company is satisfactory . o) The overall projected performance and financial of the unit are satisfactory.

OTHER DEPARTMENT OF BANKS:

SAVING DEPARTMENT
In individuals have create he/she open the which first step to create relationship between bank and customers with minimum balance which is Rs. 1000/- . In saving account bank will be give interest @ 3.50% on balance amount. Also nominee facility available for this account. There are no limits of numbers of withdrawal/deposit money in the bank.

Document requires for opening saving account are below: 2 passport size color photo Voting card/driving license Pan card Sign of recognition person (who have already account in bank)

CURRENT DEPARTMENT
Current account is useful for business. Amount can be withdrawn any number of times from this account. Bank does not pay interest or pay at very lower rate. I this account minimum certain amount has to be kept credit. In this account overdraft facility can be availed. The account holder is issued with passbook, cheque book, pay-in-slip etc. Account holder open the account in central bank of India with minimum balance is Rs. 7500/-.

Document requires for opening current account in bank are below: Identification of each partner Pan card Electricity bills of firm/business India non-judicial stamp paper

Whom to be eligible for open this account Proprietary firm Partnership firm Pvt. Ltd

Public. ltd Trust Club Association H.U.F. Other (please specify)

FIXED DEPOSIT RECEPIT

The account; in which deposit is kept for certain fixed term, is called fixed deposit account. Bank can utilize this deposit for fixed term. The depositor cannot withdraw amount for specific term. On completion of term the depositor has to discharge the receipt by signing on the back side of the receipt over the revenue stamp and tender it to bank for payment. Then bank returns the amount of deposit together with interest. The highest interest is earned on this deposit account.

Demand Draft
DD stands for Demand Draft. Demand draft is a cheque written by one bank to its representative bank or cheque issued by one bank to another on its (issuing banks) credit. There is an order to pay the amount to the person mentioned in the draft. It is safe and easy to send money to

outstation through draft. The person who is sending money can get the draft issued from his bank drawn in the name of receiver on the bank of the receivers village/town. For this sender has to request the banker to issue draft by paying draft amount and its commission. The issuing bank orders the addressed bank to make payment of the draft amount to the person indicated in the draft. The person making payment collects the draft issued and sends it to the person, whom he to make payment. The respective individual can get the draft amount. Draft can be crossed. Payment of such crossed draft is credited to the respective account.

ATM

ATM stands for Automatic Teller Machine. If any person with his fixed deposit/saving account/current account has given guarantee for his financial soundness bank gives ATM card / Debit card. In certain branches of the bank the machines are installed which can accept such cards. The card holder can withdraw the amount greater than minimum decided and lesser than the credit he has in his account with the help of such card. The required amount can be received for 24 hours by operating buttons of the machines. This machine can pay cash, accept deposit and can handle other simple banking transactions.

FINDINGS

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

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

Credit & risk go hand in hand

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

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

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

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

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

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

The norms of the bank for providing loans are not stringent, i.e. even if a particular client is not having the favorable estimated and financial performance, based on its past record and future growth perspective, the loan is provided.

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

From the study of Credit appraisal of SME, it can be concluded that credit appraisal should therefore be based on the following factors, the same are applied at Central bank of India:

Financial performance Business performance Industry outlook Quality of management Conduct of account

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

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

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

BIBLIOGRAPHY

WEB SITES:
www.rbi.org.in www.centralbankof india.com www.indianbankassociation.com www.scird.com www.project99.com

BOOKS:
Credit and banking By: K. C. Nanda