SMALL AND MEDIUM ENTERPRISES

FINANCING
FINAL PROJECT















ASSESSMENT OF THE PROCESS OF CREDIT
APPRAISAL IN SME SECTOR

Submitted By


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Under the Guidance of
Senior Manager
(Credit and Rehabilitation Department)

Project Work Undertaken At



CIRCLE OFFICE, CHANDIGARH


Report submitted in partial fulfillment of the requirements
for the award of
Post-Graduate Diploma in Banking and Finance (2012-2014)
By
National Institute of Bank Management, Pune

ACKNOWLEDGEMENT

I express my profound gratitude to all who have been instrumental in the preparation of this
project report. To start with, I am heartily thankful to the organization PUNJAB
NATIONAL BANK for providing the opportunity to undertake this summer internship
program which helped me to explore and understand the core area of the process of credit
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appraisal in SME sector and develop expertise which can prove to be potentially beneficial in
my future assignments, further studies and in fulfilling my career objectives.

I am grateful to for their support and guidance.

I wish to place in records my deep sense of gratitude for the contribution, guidance and
encouragement of my guide Mr. B.S. Sondhi (Senior Manager, Credit and Rehabilitation
Department) for continuous guidance and encouragement.

I am deeply grateful to Dean Sir, Prof. K. Ramesha, for giving me an opportunity, in the
form of Summer Internship, to have a practical learning experience at Punjab National Bank.
It will inculcate skill and confidence in me, for my future career orientation as a banker.

I would also like to extend special regards & thanks to all the staff and employees of the of
the Credit and Rehabilitation Department, Circle Office of Punjab National Bank especially
Mr. Amit Bansal for helping me during my internship.


SHIVANI MAHAJAN






TABLE OF CONTENTS



CHAPTER SUBJECT PAGE
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NO. NO.
1 INTRODUCTION 5
2 PUNJAB NATIONAL BANK : IN BRIEF 10
3 REVIEW OF LITERATURE 11
4 METHODOLOGY 17
5 ANALYSIS & RESULTS 20
CASE 1- MEGASTAR
CASE 2- ANG LIFESCIENCES
6 INTERPRETATION 30
7 CONCLUSION 33
8 EXECUTIVE SUMMARY 35
9 ISSUES 36
10 RECOMMENDATIONS 38
11 IMPLEMENTATION STRATEGY 41
12 SUGGESTIONS FOR FUTURE RESEARCH 42
13 BIBLIOGRAPHY 43




















CHAPTER 1
INTRODUCTION

The MSME sector in a developing country has a vital role in the economic and social development.
The promotion and growth of MSME sector has been a cardinal feature of the industrial policy over
the years. In India, the MSME sector contributes 8% of the countrys GDP, 45% of the manufactured
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output and 40% of exports and provides employment to about 60 million through 26 million
enterprises. The micro and small enterprises sector alone employs over 30 million people and is next
only to agriculture sector in employment generation. Thus, MSMEs are important for the national
objectives of growth with equity and inclusion.
With a view to ensure balanced growth of the MSMEs, Govt. of India has enacted the Micro, Small
and Medium Enterprises Development (MSMED) Act, 2006; services sector has become part of
Micro, Small & Medium Enterprises. The MSMEs engaged in manufacturing or production and
providing or rendering of services are defined as per MSMED Act 2006 for the purpose of bank
credit.
The policy is aimed to provide direction for the involvement of the bank in the growth of this sector.
This would also help the MSME sector which is identified as an Engine of Growth both in terms of
employment generation and improving production, to take advantage of various products offered by
the bank.

Definition of the MSME sector as per MSMED Act, 2006
A. Direct Finance (Loans/advances granted directly to MSMEs):
ENTERPRISE MANUFACTURING SERVICES
Enterprises engaged in the manufacture
or production, processing or
preservation of goods and whose
investment in plant and machinery is the
original cost excluding land and building
and the items specified by the Ministry
of MSME vide its notification No.
S.O.1722 (E) dated 05.10.2006, as
specified below:
Enterprises engaged in providing
or rendering of services and whose
investment in equipment (original
cost excluding land & building and
further, fitting and other items not
directly related to the service
rendered or as may be notified
under the MSMED Act, 2006) as
specified below: (These will
include small road & water
transport operators, small business,
retail trade, professional & self
employed persons and all other
service enterprises).

Micro
Investment in plant and machinery does
not exceed Rs. 25 lacs.
Investment in equipment does not
exceed Rs. 10 lacs.

Small
Investment in plant and machinery is
more than Rs. 25 lacs but does not
exceed Rs.5 crore.
Investment in equipment is more
than Rs.10 lacs but does not
exceed Rs.2 crore.

Medium
Investment in plant and machinery is
more than Rs.5crore but does not exceed
Rs.10 crore.
Investment in equipment is more
than Rs.2 crore but does not
exceed Rs.5 crore.




NOTE:
All advances granted to units in the Khadi & Village Industries Sector (KVI), irrespective of their size
of operations, location and amount of original investment in plant and machinery/ equipments will be
covered under Priority Sector advances and will be eligible for consideration under the sub-target of
the micro enterprises segment within the MSE (Micro and Small Enterprises) sector.

Advances to Micro and Small Enterprises constitute advances to Priority Sector.

Advances to Medium Enterprises constitute advances to Non Priority Sector.

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B. Indirect Finance (Loans/advances provided to MSMEs through certain agencies
involved in promotion/development of the MSME sector):

1. Persons involved in assisting the decentralized sector in the supply of inputs to and
marketing of outputs of artisans, village and cottage industries.

2. Advances to co-operatives of producers in the decentralized sector viz., artisans, village
and cottage industries.

3. Loans granted by banks to NBFCs for on-lending to Micro and Small Enterprises
(manufacturing as well as service).

Classification of finance to MSME Sector

Priority Sector Non Priority Sector
Loans/advances (both fund and non fund based)
(other than to Retail Trade) extended to Micro
and Small Enterprises(MSE) both industry and
service (direct and indirect finance)
Loans/advances (both fund and non fund based)
(other than to Retail Trade) extended to Medium
Enterprises both industry and service (direct
and indirect finance)
Loans/advances to retail traders:
a. Dealers of essential commodities (fair
price shops) and consumer co-operative
stores, without any ceiling in credit limit.
b. Private retail traders up to a credit limit
of Rs.20 lakhs only
Loans/advances to Retail Traders:
Credit facilities extended to retail traders other
than (a & b) of adjacent column.





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SECURITY NORMS

The security norms for lending to Micro and Small Enterprises (MSEs) are as under:

No collateral security/third party guarantee is insisted in respect of loans/advances to Micro & Small
Enterprises as under (including loans sanctioned under KVIC and other Govt. Sponsored schemes):


1. Upto Rs. 10 lacs (which is mandatory).

2. Upto Rs. 25 lacs in respect of units whose track record and financial position are good as per
Bank records.

3. Upto Rs. 100 lacs in respect of units in Micro & Small Enterprises sector whose borrowal
accounts are recovered under Credit Guarantee Fund Scheme for Micro & Small Enterprises
(CGTMSE).
The bank shall cover the loans/advances up to Rs. 100 lakhs granted to Micro & Small
Enterprises without collateral security and/or third party guarantee, under the Credit Guarantee
Scheme for Micro & Small Enterprises (CGSME) of Credit Guarantee Fund Trust for Micro & Small
Enterprises (CGTMSE).

4. Presently, CGTSME cover is not available for credit facilities extended to Retail Traders,
Educational Institutions, Training Institutes, Training-cum-Incubator Centre and loans and
advances to Medium Enterprises.

5. In respect of other Micro and Small Enterprises and the Medium Enterprises the guidelines
for obtaining collateral security/third party guarantee on case to case basis as determined by
the bank shall continue.

6. In respect of credit facilities extended to Micro and Small Enterprises (MSEs) wherever
collateral security and/or third party guarantee is not obtained, CGTMSE cover is to be
necessarily taken.













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Objectives of the Project

The main objective of the project is to study the credit management of SMEs and its appraisal process
carried out in the banks.


The other objectives are as follows:

1. To understand what is meant by SME
2. The objective of the project is to get practical exposure for MSME finance and the challenges
the banks are facing in financing to these sector.
3. What are the types of Credit facilities available for SMEs? How the assessment of credit
proposals is done?
4. To understand the commercial, financial & technical viability of the project & its funding
pattern.
5. To understand mechanism of credit rating.
6. To understand the post-disbursement monitoring measure.
7. To understand the quality of credit appraisal in PNB.
8. To get practical knowledge and exposure for MSME finance and the current challenges/issues
PNB is facing this sector and the corrective measures adopted by the bank.


RELEVANCE

MSMEs are responsible for providing employment to a major chuck of population in India. They are
responsible for production of most of the inputs to major companies all across the world. Despite their
economic significance, SMEs face a number of bottlenecks that prevent them from achieving their full
potential. A major obstacle in SME development is its inability to access timely and adequate finance.
SMEs need various forms of support like term loans for setting up factories and plants or buying
machinery, they need working capital to meet their day-to-day requirements, they need facilities like
LCs, BGs as well as bill discounting etc. It is the banks which provide them with these facilities.
Hence, RBI has come up with various norms to ensure that the MSMEs are well supported and proper
infrastructure is in place to provide them with much needed financial help. Since the inception of the
norms by RBI Credit Management of SMEs has become a major thrust area for the banks.

SCOPE
This study will help in understanding everything related to Indian banking industry, SME sector of
the country, various credit facilities, and difference between fund-based and non-fund-based facilities
of credit, methods of assessment of credit proposals, appraisal system at Punjab National Bank.
Although we can study the effects of these facilities on various organizations throughout the country
but we are limiting the project till the study of these facilities on MSME sector. Hence the objective of
the project is to study all these facilities and other related activities carried out by the banks specific to
the MSME sector.





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CHAPTER 2
PUNJAB NATIONAL BANK: IN BRIEF

GENESIS

Since its humble beginning in 1895 with the distinction of being the first Swadeshi Bank to
have been started with Indian capital, Punjab National Bank has continuously strived for
growth in business. PNB is the largest nationalised Bank in the country in terms of
Branch Network, Total Business, Advances, Operating Profit and Low Cost CASA
Deposits. With over 72 million satisfied customers and 5937 domestic branches, PNB has
continued to retain its leadership position amongst the nationalized banks. The Bank enjoys
strong fundamentals, large franchise value and good brand image. Over the years PNB has
remained fully committed to its guiding principles of sound and prudent banking irrespective
of conditions. Bank has been earning many laurels and accolades in recognition to its service
towards doing good to society, technology usage and on its overall performance. Some of the
major awards won by the Bank are the Best Bank Award, Most Socially Responsive
Bank by Business World-PwC, Most Productive Public Sector Bank, Golden Peacock
Awards by Institute of Directors, etc
VISION

"To be a Leading Global Bank with Pan India footprints and become a household brand
in the Indo-Gangetic Plains providing entire range of financial products and services
under one roof"


MISSION
"Banking for the unbanked"







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CHAPTER 3
REVIEW OF LITERATURE

Principles of Lending

i. Identification of Borrower

The first step is to identify credibility and requirements of potential borrower during the first
meeting by asking him certain details mentioned below:

a) Name and address
b) Educational background and Qualification
c) Present bank with which the borrower is associated
d) Proposed business activity (project) to be financed
e) Experience, if any in the concerned field
f) Total Cost and Investment in project
g) Requirement of finance from bank
h) Present dealings with our bank
i) Industry outlook and competition
j) Potential market and marketing strategy
k) Average operating cycle i.e. period of converting raw material to finished goods
l) Securities likely to be offered by the borrower
m) Past performance if existing firm
n) 3 Cs - Character, Capacity and Credit Worthiness

ii. Purpose of the Loan
During the first meeting, the details of the loan requirements and purpose for which the loan
is to required must be assessed for which the borrower has to provide certain documents
containing the details of the business activity proposed, quantum of loan required and total
costs related to the project. Also the financial statement including Balance Sheet, Profit &
loss Statement, Estimated project cost and other necessary documents based on the project
requirements is to be submitted along with the Loan application form.

The proposal is seen in the light of following considerations:
a) Is it for productive purpose?
b) Is it a legitimate activity?
c) Is it new venture or existing?
d) If existing - is it for expansion or diversification?

iii. Quantum of Loan
a) Is should be need-based?
b) It should be timely
c) It should be along with borrowers stake/ margin (Varying between 5 to 25%)
d) It should neither be over-financed nor under-financed.

The borrower assesses the quantum of loan required for the project with the help of the
estimated cost of project and funds available with him and then bank assesses the loan
requirement of the borrower using various methods with the help of financial statements and
creditworthiness of the borrower. While estimating the borrowers requirement the bank also
assesses the viability of the project and profit generating capability of the borrower.
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iv. Period of Loan

a) It can be short or long term
b) Is should be adequate
c) It depends on whether the project is renewal/ revival/ enhancement
d) It should consider chances of contingencies

The estimation of period of loan depends upon the time required by the project to start
operations & generating turnover capable of making profit. For assessing period of loan,
financial techniques like Debt service coverage ratio, breakeven analysis and internal rate of
return are used which explain the viability of the project and how fast the project can be
implemented to generate earnings.

v. Source of Repayment

a) Out of business/salary income?
b) Is it self-liquidating i.e. a working capital account? Cash Credit Hypothecation or Pledge
(lock-n-key) facility?
c) Out of sale of asset(s) financed or disposal of collateral security?
d) Any other source of income like guarantor?

vi. Security Offered

a) Primary Security - stock, Book debts, assets, etc (Hypothecation, Pledge, etc )
b) Collateral security and other comforts
c) Secondary -3rd party guarantee or charge on immoveable property- Personal or Corporate
Guarantee

vii. Appraisal of Proposal / Sanction

viii. Convey Terms & conditions in writing

ix. Documentation

a) Properly filled up loan application form
b) Perfect document related to securities offered
c) Other required related documents

x. Disbursement, Inspection, Insurance & follow up asset verification, stock statements,
recovery, renewal.


TYPES OF LENDING

I. Fund Based Lending

In case of Fund Based Lending, the lending bank commits the physical outflow of funds. As such, the
funds position of the lending bank gets affected. The Fund Based Lending can be made by the banks
in the following forms-

a) Loan: - In this case, the entire amount of assistance is disbursed at one time only, either in
cash or by transfer to the companys account. It is a single advance. The loan may be repaid
in installments, the interests will be charged on outstanding balance.

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b) Overdraft: - In this case, the company is allowed to withdraw in excess of the balance
standing in its Bank account. However, a fixed limit is stipulated by the Bank beyond which
the company will not be able to overdraw the account. Legally, overdraft is a demand
assistance given by the bank i.e. bank can ask for the repayment at any point of time.
However in practice, it is in the form of continuous types of assistance due to annual renewal
of the limit. Interest is payable on the actual amount drawn and is calculated on daily product
basis.

c) Cash Credit: - In practice, the operations in cash credit facility are similar to those of
overdraft facility except the fact that the company need not have a formal current account.
Here also a fixed limit is stipulated beyond which the company is not able to withdraw the
amount. Legally, cash credit is a demand facility, but in practice, it is on continuous basis.
The interests is payable on actual amount drawn and is calculated on daily product basis.

d) Bills purchased or discounted: - This form of assistance is comparatively of recent origin.
This facility enables the company to get the immediate payment against the credit bills raised
by the company. The bank holds the bill as a security till the payment is made by the
customer. The entire amount of bill is not paid to the company. The Company gets only the
present worth of the amount of bill, the difference between the face value of the bill and the
amount of assistance being in the form of discount charges. On maturity, bank collects the full
amount of bill from the customer. While granting this facility to the company, the bank
inevitably satisfies itself about the credit worthiness of the customer. A fixed limit is
stipulated in case of the company, beyond which the bills are not purchased or discounted by
the bank.

e) Working Capital Term Loans: - To meet the working capital needs of the company, banks
may grant the working capital term loans for a period of 3 to 7 years, payable in yearly or half
yearly installments.

f) Packing Credit: - This type of assistance may be considered by the bank to take care of
specific needs of the company when it receives some export order. Packing credit is a facility
given by the bank to enable the company to buy the goods to be exported. If the company
holds a confirmed export order placed by the overseas buyer or a letter of credit in its favour,
it can approach the bank for packing credit facility.



II) Non-Fund Based: -


a) Letter of Credit

Introduction

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.




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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,
i. 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
ii. Authorizes another bank to effect such payment, or to accept & pay such bills of exchanges
(drafts); or
iii. Authorizes another bank to negotiate against stipulated document(s), provided that the terms
& conditions of the credit are complied with.


Parties to the LC

i. Applicant The buyer who applies for opening LC
ii. Beneficiary The seller who supplies goods
iii. Issuing Bank The Bank which opens the LC
iv. Advising Bank The Bank which advises the LC after confirming authenticity
v. Negotiating Bank The Bank which negotiates the documents
vi. Confirming Bank The Bank which adds its confirmation to the LC
vii. Reimbursing Bank The Bank which reimburses the LC amount to negotiating bank
viii. Second beneficiary The additional beneficiary in case of transferable LCs


Confirming bank may not be there in a transaction unless the beneficiary demand confirmation by his
bankers & such a request is made part of LC terms. A bank will confirm an LC for his beneficiary if
opening bank requests this as part of LC terms. Reimbursing bank is used in an LC transaction by an
opening bank when the bank does not have a direct correspondent/branch through whom the
negotiating bank can be reimbursed. Here, the opening bank will direct the reimbursing bank to
reimburse the negotiating bank with the payment made to the beneficiary. In the case of transferable
LC, the LC may be transferred to the second beneficiary & if provided in the LC it can be transferred
even more than once.


b) 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:
i. Applicant: The principal debtor person at whose request the guarantee is executed
ii. Beneficiary: Person to whom the guarantee is given & who can enforce it in case of default.
iii. 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 contract between the applicant & the
beneficiary.

a) Deferred Payments Guarantees

A deferred payment guarantee is a contract under which a bank promises to pay the supplier the price
of machinery supplied by him on deferred terms, in agreed installments with stipulated interest in the
respective due dates, in case of default in payment thereof by the buyer. As far as the buyer of the
plant and machinery is concerned, it serves the same purpose as term loan.

b) Lease Finance

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A lease is a contract between the owner of an asset (the lessor) and its user (the lessee) for the right to
use the asset during a specified period in return for a mutually agreed periodic payment (the lease
rentals). The important feature of a lease contract is separation of the ownership of the asset from its
usage. Long-term, non-cancellable lease contracts are known as financial leases. The essential point
of financial lease agreement is that it contains a condition whereby the lessor agrees to transfer the
title for the asset at the end of the lease period at a nominal cost. At lease it must give an option to the
lessee to purchase the asset he has used at the expiry of the lease. Under this lease the lessor recovers
90% of the fair value of the asset as lease rentals and the lease period is 75% of the economic life of
the asset. The lease agreement is irrevocable. Practically all the risks incidental to the asset ownership
and all the benefits arising there from are transferred to the lessee who bears the cost of maintenance,
insurance and repairs. Only title deeds remain with the lessor. Financial lease is also known as capital
lease. In India, financial leases are very popular with high-cost and high technology equipment.

c) Hire Purchase Finance

Hire purchase is a purchase of an asset in which customer makes down payment and finance rest of
the amount through financial institutions or bank. On rest of the unpaid amount he pays interest at a
certain pre-described rate of interest. After making complete payment the asset becomes the legal
right of customer. With a hire purchase agreement, after all the payments have been made, the
business customer becomes the owner of the equipment. This ownership transfer either automatically
or on payment of an option to purchase fee.


Loan Guidelines & Objectives of Punjab National Bank

The prime objectives of the Loan Policy of bank :

The credit management & Risk policy of the bank at the macro level is an embodiment of the banks
approach to understand, measure and manage the credit risk and aims at ensuring sustained growth of
healthy loan portfolio while dispensing the credit and managing the risk. This would entail educing
exposures in high risk areas, emphasizing more on the promising industries/ productive sectors

Punjab National Bank Time Norms for disposal of Loan Applications

To facilitate timely disposal of application, the bank has launched MSME Credit scoring Model live
at all the branches. The following time norms should be adhered strictly:


Upto Rs.2 Lakh 2 weeks
Above Rs.2 Lakh and upto Rs.50 Lakh 4 weeks
Above Rs.50 and upto Rs.100 Lakh 5 -6 weeks
Above Rs. 100 lakh and upto Rs. 100 crore 6-7 weeks
Above Rs. 100 crore 8-9 weeks


SME Cell of Punjab National Bank
To drive the growth of MSME credit, the Bank has adopted a new business model by establishing
SME Cells for centralized processing and sanction of MSME credit proposals falling beyond the
sanctioning powers of the branches. The model envisages the following distinct advantages:

Faster decision and delivery of credit.
Focused approach for capturing the business and catering to MSME sector.
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Efficiency in credit appraisal, as the SME Cell is handling exclusively MSME
Credit.
Effective utilization of skilled manpower and developing specialization
Relief/support to branches for processing high value proposals
Exclusive marketing team to source the proposals and effective forward
linkages.

They are located in the premises of the respective Circle Offices

Roles and responsibilities of SME Cell

a. Shall adhere to all credit policy and operational guidelines, enumerated in the manual of
instructions/Circulars issued from time to time.
b. Shall process/handle the credit proposals falling beyond the branch powers and ensure disposal of
the same within the stipulated time frame duly adhering to the relevant norms including credit risk
assessment viz., fresh sanctions, renewal of existing limits (with or without enhancement),
additional limit, adhoc limit, ratification/approval/ modification in the existing sanction terms and
conditions, reduction in ROI/service charges by taking up with concerned authorities, debt
restructuring of MSME accounts and is responsible for growth in business and monitoring of
SME credit mobilized/handled through the Hub.
c. Shall capture the business by financing the supply chain of corporate.
d. Shall review (which is other than MTR) and monitor the accounts falling under the powers of
SME Cell.
e. Shall ensure that the sanction proceedings in respect of the proposals handled by it are issued
promptly to the branches/clients.
f. Shall keep HO updated about the performance of the Cell at periodical intervals.
g. Shall have good liaison with industry associations, district industry centres, cluster development
authorities, trade fair authorities etc, for promoting Bank's loan products and increasing MSME
credit exposure.




SME LENDING IN PNB :

AMOUNT OF LOAN
Term Loan (Need based).
Working Capital Requirement Computed and Sanctioned at 20% of projected realistic annual
turnover basis.
Composite Loan Limit has been raised to Rs. 100 Lakh (for Term Loan and Working
Capital).


APPLICATION
1. Simplified Loan Application Forms for convenience of borrowers.
2. Online Application.
3. Speedy Processing within specified time norms, i.e:-

COLLATERAL SECURITY
Advances upto Rs.10.00 Lakh without collateral security.
Advances over Rs.10 Lakh and upto Rs.25 Lakh, based on good track record and financial
position, no collateral insisted upon.
Advances upto Rs.100 Lakh guaranteed under Credit Guarantee Fund Trust for Micro &
Small Enterprises (for manufacturing & service enterprises) without collateral security / third
party guarantee.
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VARIOUS MSME SCHEMES:

1) Sarthak Udhyami : Scheme for financing Micro and Small Enterprises
2) PNB Pragati Udhyami : Scheme for financing industry related Services/ Business Enterprises
3) PNB Kushal Udhyami
4) PNB Garage Yojana
5) loans for setting up industrial Estates
6) PNB Vikas Udhyami : Scheme for loans acquisition of ISO 9000 Series Certification
7) SME Sahayog Scheme
8) PNB artisan Credit Card : Scheme to provide hassle free financial support to Artisans
9) PNB Laghu Udhyami Credit Card : a simplified loan delivery mechanism
10) Scheme for advances to Small Road Transport Operators
11) Scheme for advances to Owner-Driver of taxi cars, three wheeler, Station Wagons, Tempos, etc.



















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CHAPTER 4
METHODOLOGY

METHODOLOGY - DATA COLLECTION
Primary Data:
Discussions with the Senior Manager, SME Cell (Credit and rehabilitation department),
Circle Office, Chandigarh
Questions and interviews with representative sample of officers and employees.
Discussions with overseeing executive of SME & Priority Credit Group.
Secondary Data :
Various published sources like Credit Policy of the Bank, Term loan Manuals etc.
Manuals of Instructions and Circulars issued by the Bank time to time.
Websites of RBI, PUNJAB NATIONAL BANK, MSMEs, etc.
Various newspapers, periodicals and published articles on the industry that is being studied.


Data Analysis & Presentation :
Data Processing
After gathering the required data from different sources, processing, determining the job
specifications, the actual process of grading, rating and evaluating the job will be carried out. The job
values will be translated into different grades to implement the Memorandum of Understanding
signed with the Government.
Tools & Techniques to be used:
1) Current Ratio
The benchmark Current Ratio of 1.33 : 1 is always desirable, whereas it is felt that some relaxations
need to be made in this regard in case of SMEs. They may be permitted to maintain a minimum
current ratio 1:1 as against 1.25-1.33:1, stipulated for others. If there is deviation than stipulated range
then the sanctioning of limit is permitted by a authority one level higher than the sanctioning
authority. Classification of Current Assets and Current Liabilities under MPBF method would be
based on extant RBI/Bank guidelines.

2) Debt: Equity Ratio

The following may be accepted as the benchmark in this regard:
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W/C Limits up to Rs.5 Crores to Micro & Small Enterprises : 4:1.
W/C Limits over Rs.5 Crores to Micro & Small Enterprises : 3:1.
W/C Limits to Medium Enterprises : 3:1.
3) Debt Service Coverage Ratio

The benchmark accepted for this parameter is 1.50 which is desired and can be accepted at
1.25 in some cases with proper explanation for SME projects.

4) Fund flow Analysis

The fund flow analysis for a project is done to assess the short term need of finances which
are met by long term sources available. The fund flow statement helps in assessing Net
Working Capital and is considered satisfactory if the firm has its short term requirements
fully met by long term sources and the firm do not faces any long term deficits.

5) Sensitivity Analysis

In this tool we analyze the impact of adverse developments on certain significant variables
like DSCR, Sales, Net profit, etc. due to escalation in raw material cost, decrease in capacity
utilization etc. with the help of this technique we can analyze various scenarios which can
develop in case of contingencies and thus helps in understanding the viability of the project in
stressed situation.












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CHAPTER 5
ANALYSIS & RESULTS
CASE 1
MEGASTAR FOODS PRIVATE LIMITED is a private limited company formed on 28
th
November,
2011 registered with Registrar of Companies, Punjab and Chandigarh, Ministry of Corporate Affairs.
Having registered office at Plot No. 807, Industrial Area, Phase-II, Chandigarh. In terms of the
Memorandum & Articles of Associations, the main objects of the company are to carry on the
business of running of Roller Flour Mill

Proposal at a Glance:
Under the present proposal MEGASTAR FOODS PRIVATE LIMITED envisages to set up a Roller
Flour Mill at Village Solkhian, Tehsil & Distt. Ropar, Punjab. The Proposed project shall be equipped
with all facilities for the production

Cost of project and means of finance :

S.N
O.
PARTICULARS PROPOSED
COST
ALREADY
INCURRED
As on
19.01.2013
COST YET TO
BE
INCURRED
1 Land 53.88 53.88 0.00
2 Building 136.40 64.22 72.18
3 Plant and Machinery 533.39 51.00 482.39
4 Misc. Fixed Assets 1.40 0.00 1.40
5
Preliminary and preoperative
expenses
32.88 5.85 27.03
6 Securities 18.39 17.89 0.50
7 M.M. For working capital 206.04 10.17 195.87
TOTAL 982.38 203.01 779.37




Means of Finance:

S.
NO.
PARTICULARS
ACTUAL
AS ON
31.03.2012
ADDITION
PROPOSED
FUNDS
ALREADY
INUCTED
FUNDS
YET TO BE
INDUCTED
TOTAL
COST
1 Partners Capital 156.69 156.69
2 Unsecured Loans 1.99 1.99
3 Term Loan 50.60 25.00 25.00 75.60
4 Internal Cash accruals 17.14 13.26 3.88 17.14
TOTAL 209.28 42.14 13.26 28.88 251.42

21 | P a g e

Debt Equity Ratio :
For expansion plan : 1.46 : 1
For over all project : 0.43 : 1

Promoters contribution :
For expansion plan : 40.67%
For over all project : 69.93%

INFRASTRUCTURE FACILITIES:

LOCATION:
The site is located at village solkhian, Tehsil and distt. Ropar, Punjab. The site map is enclosed for
your reference. There is no problem in approach to factory.

Land :

Party has purchased a plot of land area measuring 12 Bighas 1 Biswa or say 2.51 acres and the
construction as per approved building plan has been started, the photographs for the same are
enclosed. The party has obtained CLU from deptt. of Town and Country Planning Punjab.

High tension line is passing over the said land and the party to get these lines shifted by
applying to concerned authority before starting any construction as the Raw material godown is
proposed under the HT line the photograph for the same is attached. In the CLU issued it is
mentioned that no construction is to be done under H.T/L.T transmission electric lines if any
passing through the site or shall get these lines shifted by applying to concerned authority.
BM to get the legal opinion done from the advocate and ensure that the title is clear in the name
of Company and no adverse features are there.

BUILDING:

The building comprises of one main Raw Material godown which is proposed under H.T transmission
line, one raw material godown for regular working of mill, one work shed for installation of
machinery of flour mill. Party has proposed one more work shed for expansion in future. One finished
material godown and office block. The party has changed the location of entrance gate which is not as
per approved layout plan.

Total building area is sufficient for housing the existing as well as machinery proposed under
expansion program.

POWER:
It is essentially required for the operation of plant and machinery, equipments and for the general
purpose.
The party has got sanction of power load for 495 KW form Punjab State power com. Ltd. The
sanctioned load is sufficient for the said plant. The sanction letter is attached with the report.

Standby Arrangements:
Party is not having any standby arrangement in form of Gen Set and not planning for any standby.

Water:
The party has arrangement of their own bore well water supply and the water is also available from
govt. supply line.

Machinery and Equipment:
Installed set up of machine and proposed to be installed are sufficient for the production.


22 | P a g e

Raw material:
The raw material required is wheat which is available in market; the promoters are already dealing in
the current activity so no problem foreseen in purchase of raw material.

Capacity Utilization
The proposed capacity utilization is as under:




The existing Kuber Flour Mill is running at 60% capacity utilization, Moreover the company is not
having any standby arrangement for power supply. The party is has said that they will be selling the
material to Nestle Thaliwan but no MOU has been signed so far. Keeping in view that the promoters
are experienced in the activity and both the existing units are in profit we are assuming capacity
utilization as under. Promoter has also cleared that they will be achieving production of 90-95 T.P.D
for first year of production.

BREAK EVEN POINT ANALYSIS - The Break even point at 65.79% sales
Debt Equity Ratio - The Debt Equity Ratio is 1.46
Average DSCR - the Average DSCR is 2.66

SENSTIVITY ANALYSIS:

Particulars DSCR
Maximum Minimum Average
Normal 2.08 6.42 2.66
On reduction in sales price by 5% -1.35 -0.26 -0.43

Above position reveal that project is more sensitive to increase in the sales price.




CASE II

SANCTIONING AUTHORITY
MC CMD ED Others

The proposal falls under the powers of COCAC I on account of restructuring of proposed exposure of
Rs. 1311.26 lacs.
1
st
Year 2
nd
Year 3
rd
Year onwards
70% 80%
85%
23 | P a g e


Reference No. / Date: 1488002012000026 DATED 27.12.2012

1. Name of the Borrower and BO & Controlling Office : M/s ANG Life Sciences (I) Pvt. Ltd.
BO Sector 9 D Chandigarh
Rs. In crores

GIST OF THE PROPOSAL
A. Sanction of Working Capital Limits with reduction from the existing level:-
Restructuring of working capital limits under DRM SME :- (Rs. in lacs)
Existing Proposed
2012-13 2013-14
FB 300.00 175.00 200.00
NFB 275.00 275.00 275.00
TOTAL 575.00 450.00 475.00

B. Sanction of FITL of Rs. 249.42 lacs being the amount of interest on WC limits Rs. lacs 64.70
lacs and Rs. 145.11 lacs on Term Loans till 30.09.2012 and further interest of Rs. 39.60 lacs on TL
for next 6 months (upto 31.03.2013), repayable in 60 monthly installments on ballooning basis
starting from October 2012. The interest on FITL be serviced as and when due.
C. Reschedulement of TL existing TL of Rs. 586.84 lacs (TL I, II & III) principal outstanding as on
COD i.e. 30.09.2012 repayable in 60 monthly installments with moratorium period of 12 months from
COD i.e. first installments to start w.e.f October 2013.

C. Approval of ROI/ Service charges as under:-

Facility Existing Proposed Applicable
rate
Income Earned
Last Year Current year
upto_______

Rate of
interest
Intt. Non-
Intt.
Intt. Non-
Intt.
CC BR
+3.50%
BR +
2.50%
BR +3.50% 6.88
TL BR
+3.50%
+0.50%TP
BR +
2.50% +
0.50%TP
BR +3.50%
+0.50%TP
0.00
WCTL Na BR+2.50%
+0.50%TP
NA
FITL Na BR + 1%
+0.50%TP
NA
Processing
Fee
As
applicable
Rs. 225/-
per lacs on
FB and
50% of
same on
NFB limits
0.79 1.47
Upfront Fee NA NA NA
24 | P a g e

Lead Bank
Fee
NA NA NA
Commission
on NFB
As
applicable
As
applicable
As
applicable
- 0.23 - 3.54
Other
charges, if
any
As
applicable
As
applicable
As
applicable

The account turned NPA as on 30.06.2011 and interest in the account has not been recognized as
income during 2011-12 and during current year also. However, we are proposing the conversion of
same into FITL.

D. Approval of other Issues, if any :

1. To permit the substitution of personal guarantee of Sh. Gian Chand Arora (NMs of Rs. 28.66 lacs)
with that of Sh. Neeraj Gupta (NMs of Rs. 34.72 lacs) due to old age of Sh. Gian Chand Arora.
2. Allocation of CC (H) limit of Rs. 10 lacs each at BO: Basant Avenue, Amritsar and BO Baddi for
operational convenience.
3. To permit the waiver of Intersol charges for transfer to/from main account to the accounts where
limits are allocated vice-versa.


Whether fresh/renewal/ enhancement Restructuring of existing debts under DRM SME scheme by
way of
Asset Classification as on 30.09.2012
and last PMS score
Sub Standard
PMS rank not applicable.
Credit Risk Rating by Bank is -------
--- indicating ------------ risk
Rating Date of
Rating
Score ABS Reasons for
degradation
Present PNB

NS
06.12.12 NA 31.03.12 NPA-SS
Previous A- 14.12.10 61.35 31.03.10 NA
Rating from External Agency (The
external rating should be mapped to
the internal rating)
Facility
rated
Rating Date of
rating
Rating
Agency
Remarks



This is an NPA account, the rating from outside agency has
not been got done and same will be stressed after the up
gradation of the account.

Whether priority/non priority sector
as per PS&LB guidelines (Latest
being PS&LB/LBC/Codified Circular
No. 11 dated 16.7.2011)
Sub-sector may also be mentioned.
MSME(Manufacturing) Medium (Non priority)

Whether Agriculture/Retail/
SME/Others (Please specify)
Others
a) Whether Sensitive Sector
Real Estate/Capital Market
b) Applicable Risk weight
NA
This is Sub standard account, NPA since 30.6.2011

Consortium/Multiple Banking Sole Banking
Lead Bank NA
PNBs Share % 100%
Date of application Initially the firm submitted the proposal in February 2012 but
25 | P a g e

Date of receipt of proposal
- At BO/CO/HO
Date of clarifications, if any, received
at CO/HO
Date of submission of proposal
Remarks
the same could not be processed due to non submission of
complete information. Later On the firm submitted the
proposal, in October 2012 and the complete proposal in all
respect along with required information on 5/12/12
Date of last sanction & authority/In
Principle Consent
25.1.2011, CH, CO chd.
Customer ID No. CFF000132
Activity code (as per ladder) 7309



Justification & Viability of the Project:

i) In terms of LA Cir. 14/2011 (DRM SME), the viability of the project has to be established
before going for restructuring.

In this regard, it is submitted that the TEV of the project was conducted by Sh. B. S. Sondhi,
Sr. Manager (Industry), Circle Office; Chandigarh who vide his report dated 05.12.12 has
stated that the unit is technically feasible and economically viable. He has submitted a
detailed report, a copy of which is enclosed with this proposal and the same is an integral part
of the proposal. We concur with the views submitted by Sr. Manager (Industry). The detailed
projections are furnished as per annexure.

The compliance of other viability criteria as per LA Cir 14/2011 dated 31.1.2011, DRM for
SMEs is as under:-

PARTICULARS DRM for SMEs Compliances
Minimum Average DSCR 1.25 The average DSCR is 2.13 times
Maximum period within which
the unit should become viable
7 years The unit is viable.
Maximum repayment period of
all term loans/FITL/WCTL.
10 years The project is viable and all proposed
loan shall be repaid in full within a
maximum period of 7 years from the
cutoff date of restructuring...
Minimum Promoters
Contribution of which at least
50% must come upfront.
15% of the long term
requirement of funds plus
the monetary value of the
sacrifices made by the
lenders
No fresh term loan has been proposed
and the promoter has contributed Rs.
148.53 lacs by way of unsecured loans
after 31.3.2011 and up to 30.09.2012.
These unsecured loans have been
contributed from friends and relatives.
The company has deposited Rs. 251.84
lacs in due date after the classification of
account as NPA as on 30.60.2012 and we
have issued the fresh LCs of Rs. 200 lacs.
So the party has already inducted the
sufficient funds in the company by way
of their contribution, resulting in the
reduction in the CC limits by Rs. 75 lacs
26 | P a g e

approx.

ii) The CIBIL data in respect of director(s) and guarantor(s) as well as Company has been drawn.
Nothing adverse has been observed except some credit card/personal loan overdue. While
extracting CIBIL of Company, NO Company found has been extracted meaning thereby
that the loan details of the PNB in respect of Company has not been feeded into the system.
iii) Although the past conduct of the Company was not satisfactory and the reasons for the same
was observed as dispute among the directors. However with the taking over the charge of the
company by Shri Rajesh Gupta and his family, exclusively, it is hoped that the conduct of
account will be satisfactory in future.
In view of the above the restructuring proposal of the party may please be considered on the existing
terms and conditions.
The calculated DSCR is as under :- (Rs. in lacs)
2013 2014 2015 2016 2017 2018 2019 Total
Net profit after tax
-
100.73 171.32 253.41 354.77 463.13 541.17 540.09 2223.17
Depreciation 68.74 70.04 72.14 76.54 84.34 93.34 102.84 567.98
Interest on Term Loan 122.34 107.49 94.10 75.64 54.09 31.22 5.21 490.09
Add: Intt. on WC limits upto
30.09.12 (converted into
FITL) 38.68
Total funds available 129.04 348.85 419.65 506.94 601.56 665.73 648.14 3281.23
Repayment of term loan 0.00 61.82 118.68 164.91 164.91 188.89 137.05 836.26
Interest on Term Loan 122.34 107.49 94.10 75.64 54.09 31.22 5.21 490.09
Less : FITL 108.76 108.76
Repayment of unsecured
loans 0 26.00 20.00 30.00 75.00 50.00 125.00 326.00
Total Debts to be served 13.58 195.32 232.78 270.55 294.00 270.11 267.26 1543.59
DSCR 9.50* 1.79 1.80 1.87 2.05 2.46 2.43 2.13
Average D.S.C.R. 2.13
*DSCR is 9.50 during current year; this is mainly on account of the deferment of the interest by
creating FITL.

The average DSCR is 2.13:1, which is satisfactory.
A) Justification for working capital sanction
i) Assessment of Fund Based Limits (Rs. in lacs)
ii) Justification for Fund based working capital limits proposed : (Rs. in lacs)

31.03.12 31.03.13 31.03.14
Actual Estimated Projected
Sales 677.08 1545.15 1931.44
Cost of Production 839.40 1649.33 1833.97
Cost of Sales 877.18 1697.88 1823.83
Purchases 524.64 1218.84 1451.00
NWC Projected/Actual 12.30 155.92 219.45
Current Ratio 1.02 1.33 1.38

The unit started commercial production on 27.09.2008. They had in the past already achieved
sales of Rs.677.08 lacs up to September 2012 and further Rs. 175.16 lacs and Rs.194.87 lacs
during October and November 2012 respectively. Total sales achievements up to November 2012
come to Rs. 1047.11 lacs. During the current year the party has estimated sales of Rs.1545.15
27 | P a g e

Lacs for the current year and Rs. 1931.44 lacs for next year. The company has submitted that they
have already achieved the sales of Rs. 10.47 Crore till 30.11.2012. In view of the above, the
projected sales are acceptable.
The unit of the company was not functioning smoothly during last year due to the change in
management and the year 2011-12 may not be treated as the base for calculations.

PBF Calculation is as under:- Rs in lacs
31.03.2012 31.03.13 31.03.14
Actual Estimated Projected
Level of Current Assets
Stock- RM 112.97 83.48 99.38
Stock WIP 70.60 54.44 64.40
Stock FG 98.84 56.34 66.48
Receivables 231.87 327.77 409.20
Total 514.28 522.03 639.46
Other Current Assets
Cash/Bank 35.76 63.86 66.49
Advances to
suppliers

Others 61.69 45.00 85.00
Total OCA 97.45 108.86 151.49

Level of Current Liabilities
Creditors 223.94 291.56 361.70
OCL 10.22 8.42 9.80
Total CL 234.16 299.98 371.50
Holding level of CA and CL (Months)
31.03.12
Actual
Last
Accepted
31.03.13
Estimated
31.03.14
Projected
RM 2.58 1.00 0.83 0.83
SIP 1.01 1.00 0.50 0.50
FG 1.35 0.51 0.50 0.50
Receivables 4.11 3.80 2.50 2.50
Creditors 5.12 3.00 3.00 3.00



Justification of Norms:-
Stocks:-
Raw Material
The projected level of RM is 0.83 months as against past accepted of 1.00 months, which
is justified. Hence accepted for the purpose of PBF,

SIP
The projected level of SIP is 0.50 months as against the last accepted of 1.00 months,
which is justified. Hence accepted for the purpose of PBF

FG
The projected level of FG is 0.50 months as against the last accepted level of 0.51
months, which is justifiable, hence accepted.

Receivables:- The projected level of debtors is 2.50 months as against the last accepted
level of 3.80 months, which is justified. Hence accepted for the purpose of PBF.

28 | P a g e

OCA: They have been accepted in lump sum and comprise of cash/bank balances,
advances to suppliers, advance income tax and other current assets. The projected level is
lower as compared to last year.

Creditors:-The creditors have been accepted at 3.00 months level as compared to last
year level of app. 5.12 months level and last accepted level of 3 months. The company
has informed that due to shortage of funds it had not been able to pay the price of goods
purchased on credit. But now they are reducing the level of creditors and also enable it to
purchase at competitive prices and sometime it can also avail some discount which will
also improve the credibility and profitability of the company. Hence the projected level of
creditors has been accepted.


Other CL:- The level of OCL projected is also reasonable. Hence the projected level is
justified.
PBF is worked out as per traditional method

S.No. 2012-13 2013-14
Estimated Projected
1 Chargeable Current Assets 522.03 639.46
2. Other Current Assets 108.86 151.49
3. Total Current Assets 630.89 790.95
4. Other Current Liabilities 299.98 371.50
5. Working Capital Gap 330.91 419.45
6. Margin Requirement @25% of
TCA
157.72 197.74
7. NWC Projected 155.92 219.45
8. Col.5minus 6 173.19 221.71
9. Col.5 minus 7 174.99 200.00
10. Maximum PBF 175.00 200.00

Thus PBF of Rs.175.00 Lacs is calculated for 2012-13 and Rs.200.00 Lacs for 2013-14.
We are proposing that the PBF for the year 2013-14 will be released with prior
permission of CO after obtaining the PBS / ABS as at 31.3.13 and ensuring that the key
figures are in line with the projections submitted.

b) Justification for Non Fund based limits
Non fund based Limits:- (Rs. in lacs)
2012-13
Annual Purchases 1218.84
Purchases against LC (80%) 975.07
Monthly Purchases 81.25
Usance Period (Mths) 3.00
Lead Time(Mths) Average 0.50
Total Time (Mths) 3.50
LC Required 284.39
LC Recommended 275.00

Overall usance is taken for 3 months
Justification of LC:
Purchase against L/C is considered to be about 80% of the total purchases.
LC is required to purchase raw material from supplier in and outside India to maintain
continuous supply of RM. Hence we are proposing ILC/FLC (DA/DP) limit of Rs. 275.00
lacs. Further, we recommend margin of 15% with usance on ILC and FLC at 90 days and
29 | P a g e

180 days respectively, which is according to last sanction. So it is recommended.

c) Justification for FITL
The account is NPA since 30.06.2011 and the RI/DI in the account as on 30.09.2012 is as
under:- (Rs. in lacs)

Nature Limit Interest
Overdue #
Principal
Overdue
CC(H) 300.00 64.70 0.00
TL-I 457.50 106.33 128.87
TL-II 164.80 33.90 41.15
TL-II 45.00 4.88 6.51
Total 209.81 175.53

# includes DI of Rs. 12.25 lacs and Penal Interest of Rs. 20.39 lacs and the same has been
taken into consideration in respective account while calculating the interest.
The party has requested for conversion of the above outstanding interest as on 30.09.2012
into FITL and also requested for funding the further interest on TLs upto 31.3.2013 which is
approx of Rs. 39.61 lacs totaling to Rs. 249.42 lacs. The FITL is proposed to be repayable in
60 monthly installments on ballooning basis starting from October 2012 i.e. one year
moratorium from COD. The interest on FITL @ 12% be serviced as and when due.
In view of the fact that as proposed in the TEV study report, we recommend for sanction of
FITL of Rs. 249.42 lacs.

d) Justification for Rephasement of the Term Loans.

The company is presently availing the following 3 term loans :- (Rs. in lacs)
Nature Date of
sanction
Limit Ledger o/s Principal
Overdue
TL-I 18.09.06 457.50* 430.06 128.87
TL-II 18.02.08 164.80* 137.27 41.15
TL-II 25.01.11 45.00 19.51 6.51
Total 667.30 586.84 175.53
*Both of these term loans were rescheduled vide DGM CH sanction dated 31.03.2009.
Due to the problems as enumerated elsewhere in the proposal, the company could not service the TL
promptly and the account is in NPA category since 30.06.2011. The company has requested for
reschedulement of the TL installments. The TEV study has proposed the repayment of the TL in
phased manner as under :- (Rs. in lacs)













The interest on TL upto 31.3.2013 is proposed to be funded as FITL. The interest after 01.04.2013
will be serviced as and when levied. The ROI proposed on TL is 13.50% (BR+2.50%+0.50%TP).

Year No. of
Installments
Amount of
instalment
Total
2013-14 6 7.34x6 44.01
2014-15 12 7.34x12 88.03
2015-16 12 9.78x12 117.37
2016-17 12 9.78x12 117.37
2017-18 12 9.78x12 117.37
2018-19 6 6x17.12 102.70
Total 586.85
30 | P a g e

13. Pricing

(a) Justification

The applicable ROI in the account is BR +3.50% as per the last sanction, as the rating as per ABS of
31.3.2010 is A and account has turned NPA as on 30.06.2011 and the rating as per the module is
PNB-NS and calculated rate for A rated borrower is BR +3.50% for SME borrowers till the account is
upgraded and credit risk rating as per the Credit Risk rating module is done. However at the time of
last sanction concession of 0.5% from applicable rate of interest was allowed to the party which was
withdrawn from the date of classification of account under NPA category.

The ROI proposed as per the restructuring scheme is as under:-

Parameter Rate of interest
proposed
Applicable Proposed concession
Working Capital BR +3.50% BR+3.50% Nil
FITL BR+1%+0.50%TP BR+3.50%+0.50%TP 2.50%
Term Loan BR+2.50%+0.50%TP 1.00%

The proposed concessions falls within the vested powers of COCAC I. In view of the fact that the
company is in liquidity problem and their accounts are NPA, we recommend for approval of the
above ROI. The proposed concession will be with right to recompense.

(b) ROI/other charges stipulated by other participating banks, if applicable : NA

14. Other Issues not discussed elsewhere

A. To permit the substitution of personal guarantee of Sh. Gian Chand Arora (NMs of Rs.
28.66 lacs) with that of Sh. Neeraj Gupta (NMs of Rs. 34.72 lacs) due to old age of Sh. Gian
Chand Arora.
Sh. Gian Chand Arora, is the father of Sh. Marut Arora, who was previously the director of company.
The company has requested that the guarantee of Sh. Gian Chand Arora be substituted with Sh.
Neeraj Gupta. As Sh. Marut Arora has already resigned from the management of the company and his
father Sh. Gian Chand Arora having age of 60 years is not ready to give the guarantee rather stressing
for the release of the guarantee. Sh. Arora is also bed ridden. In view of the above, the company has
requested for substitution of the personal guarantee of Sh Gian Chand Arora (NM of Rs. 28.66 lacs)
with that of Sh. Neeraj Gupta (NMs of Rs. 34.72 lacs). In view of the fact that the guarantee is being
substituted with the person having better NMs (including IP).
In view of the genuine reasons explained by the party, we recommend for the substitution of the
personal guarantees as above.

B. Allocation of CC (H) limit of Rs. 10 lacs each at BO: Basant Avenue, Amritsar and BO
Baddi for operational convenience.
The company is having their factory at Baddi and the corporate office at Amritsar. The company has
requested for allocation of limits of Rs. 10 lacs each at BO Baddi and BO Basant Avenue, Amritsar
for their operational convenience. In view of the genuine request of the company, we recommend for
allocation of the limits as above.

C. Waivement of intersol charges in respect of accounts where the limit is being allocated
i.e Baddi and Basant Avenue, Amritsar and BO Sector 9-D Chandigarh
In view of the allocation of limits at Baddi and BO: Basant Avenue the company has requested for
waivement of Intersol charges for the transactions to be entered between/among all the above 3
accounts and which is also justified.

31 | P a g e

CHAPTER 6
INTERPRETATION

CASE 1:

SWOT ANALYSIS
Strengths
The promoters are Qualified and Experienced.

Weakness:
Presently promoters are depending upon existing customers and trying to get orders from Nestle
Thaliwan, As such promoters may face problem in sale of product at such a high level.

Opportunities
Opportunity to improve quality standards.
To explore themselves at higher level.

Threats
Market is highly competitive.
Changes in govt. policies.


CASE II
Strengths & Weakness with mitigants, if any

Strengths:

- Company has set up a state of art line of production and has well qualified quality control and
assurance staff.
- The company is an established player in the Pharma sector having good track record till
31.3.2011.
- After takeover management has accelerated efforts to tie-up with new companies for getting
more business.
- The company has set up a separate marketing division for taking care of marketing of the
products and requirements etc.
- The unit is set up in township where HP Govt. has provided all required infrastructure
facilities with incentives like capital subsidy, excise duty and sales tax exemption for 10 years
32 | P a g e

and availability of cheap electricity.
Weaknesses:
- Two promoter directors conversant with the Pharma sector have resigned and remaining
promoter director is from the building construction sector. Newly inducted director also has
no experience in this sector.

Mitigants:
- The Rajesh Gupta is technocrat and running a construction company successfully under his
proprietorship since long. He is associated with company since inception of this company and
fully involved him in this company. With the passage of time he attained good experience in
Pharma sector also and the same is evident from the 1
st
six months working of the current
financial year.

Opportunities:

- The companys has invested fresh funds after takeover of management to upgrade its in house
testing facilities and to qualify WHO norms which will help the company to step in export
market in future.

Threats:
- Inherent threat of competition associated from peer sector companies in operation in the area.
Mitigates:
- The company has installed latest technology plant and has edge over other companies due to
new technology production facilities.














33 | P a g e

CHAPTER 7
CONCLUSIONS

CASE STUDY I
A. The parameters on which pre-sanction appraisal has been based are subject to variation at very
fast pace. Hence, post sanction and post disbursement period should be reviewed at quick
intervals and any requirement, which has not been covered in above appraisal, should be
immediately looked into and corrective measures are taken.

B. The unit will employ professional and experienced work force for machines proposed to be
installed under expansion program.

C. The genuineness of the data submitted by the party please be verified.

D. Branch to ensure that matching Electric Power Load is installed at unit site.
All local certificates/permissions to be obtained and held on record.

E. As discussed in report that High tension line is passing over the said land and the party to get
these lines shifted by applying to concerned authority before starting any construction as the Raw
material godown is proposed under the HT line the photograph for the same is attached. In the
CLU issued it is mentioned that no construction is to be done under H.T/L.T transmission electric
lines if any passing through the site or shall get these lines shifted by applying to concerned
authority. Before sanction/disbursement BM to ensure compliance of instructions issued by deptt
of Town and Country Planning Punjab.


CASE II
In view of the above, we recommend for the approval of the following facilities for restructuring of
account under DRM-SME:-

A. Sanction of Working Capital Limits with reduction from the existing level:-
Restructuring of working capital limits under DRM SME :- (Rs. in lacs)
Existing Proposed
2012-13 2013-14
FB 300.00 175.00 200.00
NFB 275.00 275.00 275.00
TOTAL 575.00 450.00 475.00

B. Sanction of FITL of Rs. 249.42 lacs being the amount of interest on WC limits Rs. lacs
64.70 lacs and Rs. 145.11 lacs on Term Loans till 30.09.2012 and further interest of Rs. 39.60 lacs
on TL for next 6 months (upto 31.03.2013), repayable in 60 monthly installments on ballooning
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basis starting from October 2012. The interest on FITL be serviced as and when due.

C. Reschedulement of TL existing TL of Rs. 586.84 lacs (TL I, II & III) principal outstanding as
on COD i.e. 30.09.2012 repayable in 60 monthly installments with moratorium period of 12
months from COD i.e. first installments to start w.e.f October 2013.

D. The approval of ROI on the WCTL, TL as discussed under column no. 13 of the board note :-

Parameter Rate of interest
proposed
Applicable Proposed concession
Working Capital BR +3.50% BR+3.50% Nil
FITL BR+1%+0.50%TP BR+3.50%+0.50%TP 2.50%
Term Loan BR+2.50%+0.50%TP 1.00%


















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CHAPTER 8
EXECUTIVE SUMMARY

The project deals with various aspects related to the credit appraisal process. It deals with various
facilities provided by the bank to its borrowers and other related facilities. It includes all the details
which I learnt from the two months duration of my internship.

In the introduction chapter, MSMEs definition, its contribution in the countrys growth, security
norms, objective, relevance and scope of this project report has been included in brief. The second
chapter includes about the introduction of Punjab National Bank, in which I have done this project.
Next chapter is review of literature, which includes principles of lending, types of lending, loan
guidelines and objectives of Punjab National Bank, information of SME Cell of Punjab National
Bank, details about term loan, etc.

The fourth chapter is about the methodology adopted in conducting this project. The next chapter
includes the analysis and results. Under this three case studies are included. The next part includes the
interpretation of the case studies included in the previous part. This part includes the work done in the
previous part. The next chapter includes the conclusions of these case studies.

On the basis of the previous work done in the report, recommendations, implementation strategy,
suggestions for future research and bibliography are followed.















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CHAPTER 9
ISSUES

MSME FINANCING AND CREDIT TRENDS AND ISSUES

1.1 Tariff Inversion
Tariffs are not entirely free from inversion, that is, higher rates on inputs like steel, plastics, energy,
and metals semi-manufactured than on finished products. This inversion which, since the reform was
at its peak in the late 1990s, has declined but not disappeared. Inversion particularly hurts small firms
since they have a comparative advantage in .manufacturing. in its original sense. Additionally,
the very high uncompensated costs of energy, especially electricity and petroleum - based energy,
which are not vetted even for export industries, impose large costs on location of manufacturing.

1.2 Exchange Rates Not Aggressive Enough
Exchange-rate policies have been particularly hurtful to small firms, especially in areas dominated
by SMEs, like textiles. The effective exchange rate of the rupee has been higher than the value that
prevailed at the end of the stabilization period.
If it can move back to those values the small firms of export can rise, as can manufactured goods
production. It is worth remembering that export-led growth economies greatly under- valued their
currencies for long periods to prime the export engine.

1.3 Erroneous Sickness Data
In reporting the data on lending to small firms banks include loans made out under many sop
programs of the Planning Commission. Most of these are giveaways at best. Naturally, this magnifies
the scenario of overall sickness of and loans outstanding against small firms. In reality, the
nonperforming loans outstanding against small firms are much smaller than in lending to medium and
large firms. Such erroneous data bases not only outsiders against lending to small firms but the
bankers themselves.

1.4 Underdeveloped Venture Capital Industry
Compounding the problem of non-availability and high cost of credit is the fact that venture capital
institutions in the country are shy of exploiting emerging entrepreneurial opportunities for small
firms. They suffer from a banking mindset, bureaucratic norms, and target orientation, and focus on
the growth phase of enterprises.

1.5 Exit System
Considering the volatile market situation in India, businessmen particularly in the MSME sector are
walking a tight financial rope. Amidst uncertainties, entrepreneurs need government help in exiting a
business when it is no longer financially viable or at least after he has spent his last rupee to keep it
running.
About a third of small industries at the all India level are classified as sick. According to the third
All India Census of SSIs 2001-02, 11 States of the 35 States and Union Territories share among
themselves 89% of the sick and incipient units and 9 among them have 69% of the units closed.
These numbers speak of the units that have entered the books of the financing institutions. There are
many who did not borrow but fell sick. They have assets like the land and machinery, which are
locked for decades without remedy. A rough estimate of such assets in the industrial estates alone
would be 5-6% of the GDP!!
The acknowledged problems common to small enterprises as a whole persisting for over four decades
include: lack of demand, lack of access to finance, non-availability of raw material, inadequate and
high cost infrastructure, low capability for technological up-gradation etc.
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The direct intervention in the credit market for SMEs did some good, but it has also engendered the
growth due to the banks lending to some sectors that lead to avoidable portfolio risks. Banks carry
now as much as 30-35% in the unacknowledged sick industries portfolio. RBI Annual Reports on
sickness and rehabilitation, despite redefining sickness and reformulating guidelines for rehabilitation,
indicate that the banks are averse to take on rehabilitation.






















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CHAPTER 10
RECOMMENDATIONS

1. Mechanism for reminder of documents submission
There have been numerous instances where the borrower is not clear about which document needs to
be submitted and when. A list is provided by the bank for the same yet there are many borrowers who
do not submit the required documents on time. These shortcomings come out during the auditing
process after which the banks contact the concerned borrower to obtain the required documents and
reports. One of the most common document which is found missing is the Quarterly Performance
Report (QPR). Banks must come up with a mechanism to alert the borrower if the report has not been
submitted and deadline is approaching. This will ensure that the bank will be updated about the
borrower throughout the period when the borrower has taken debt from the bank. It also helps keep a
tab on the activities of the borrower and instills discipline in the borrowers. This also saves time of the
auditor and improves the efficiency of the bank.

2. Differential interest rates
If possible different benchmarks must be set for different industries belonging to different sectors.
Similarly, different interest rates must be applied to different sectors since there is usually a very vast
difference between different sectors. Geographical locations must also be looked at while coming up
with the interest rates. Using similar rates for different sectors as well as different locations impedes
the uniform growth of the economy.

3. Overcome information asymmetry
Accurate information about the borrower is a critical input for decision-making by banks in the
lending process. Where information asymmetry (a situation where business owners or managers know
more about the prospects for, and risks facing their business than their lenders) exists, lenders may
respond by increasing lending margins to levels in excess of that which the inherent risks would
require.

However, the sheer ticket size of SME lending makes it unviable for banks to invest in development
of information systems about SME borrowers. In such situations, banks may also curtail the extent of
lending even when SMEs are willing to pay a fair risk adjusted cost of capital. The implication of
raising interest rates and/or curtailing lending is that banks will not be able to finance as many
projects as otherwise would have been the case.

The length of the relationship between a bank and its SME customers is an important factor in
reducing information asymmetry, as an established relationship helps to create economies of scale
in information production. A relationship between a SME and a bank of considerable duration allows
the bank to build up a good picture of the SME, the industry within which it operates and the caliber
of the people running the business. The closer the relationship, the better are the signals received by
the bank regarding managerial attributes and business prospects.
SMEs are required to provide accurate and qualitative information to the banks for them to undertake
a reliable risk assessment. Accurate risk assessments obviously rely upon good information regarding
the SME and its prospects. Hence, it is suggested that banks should make efforts to encourage
SMEs to improve the quality of information provided.



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4. NPA Reduction
Insufficient data on the SMEs, the lack of credible published information about their financial health,
the high vulnerability of small players in a liberalizing market and the inadequacy of risk management
systems in banks are also factors leading to higher NPAs and lower profitability than potential in
SME lending. This can be overcome by collection of authentic data on the SME segment, educating
the enterprises on the need for reliable financial data, evolving suitable risk models and close
monitoring of accounts by the bank.

5. Adopt cross-country perspectives
Increased competition in financial markets in developed countries has led several Governments and
Banking Regulators to encourage banks and other financial institutions to launch a number of
initiatives to serve the financing needs of SMEs effectively. Some of these initiatives (along with
necessary government and regulatory support) include the promotion of venture capital; receivables
financing; leasing finance; soft loans, grants, and guarantees for entry into public tenders; setting up
of special financing companies with state participation; micro-finance programmes, etc. For instance,
New Zealand has introduced a scheme called BIZ Investment Ready, which targets innovative
businesses and entrepreneurs seeking funds to expand, diversify or commercialize a new concept. The
European Union has devised a scheme to facilitate contacts between SMEs and banks and other
financial institutions, by developing a code of good practice for SME lending. The Philippines has
instituted a financing program called SME Force (SME Financing for Organizationally Competent
and Excellent Franchise Businesses), which is a franchise development financing facility that will be
implemented with the participation of franchiser organizations

6. Better training
There is a critical need to devote substantial resources to improving the skills and capabilities of
banks' lending officers, especially with regard to the analysis of the SMEs' financial statements.
Understanding the nature of the borrower's business and the cash-flow required is paramount to
preventing the creation of NPAs.

7. Innovative Delivery channels
They need to improve their delivery platforms by using Internet banking, mobile banking and card-
based platforms for delivery of transaction-banking as well as credit products, and enhance the service
element. SMEs look for convenience and simplicity in their banking requirements and banks should
deliver these through an effective use of technology

8. Updated policy
The Bank should keep on revising its Credit Policy which will help Banks effort to correct the course
of the policies. The Chairman and Managing Director/Executive Director should make modifications
to the procedural guidelines required for implementation of the Credit Policy as they may become
necessary from time to time on account of organizational needs.

9. Timely disbursement
The time period taken by the banks to sanction the limits should be significantly reduced to allow the
borrowers to make use of the credit when the need is most felt.

10. Monitoring

Closely monitoring and inspecting the activities and stocks of the borrowers from time to time can
avoid the misuse of working capital


11. New facilities

Bank must extend working capital finance through non-fund based facilities.

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12. SME Cells

Specialized SME Cells should be available in thrust areas in order to promote manufacturing and
industrial units in a specific industrial area. Thus SME Cells must be opened at prominent places
where there is huge opportunity of customers seeking loan facilities for their various needs.

13. 4-C Approach

Banks are now better equipped to handle the needs of the SME sector due to the improvement in their
technology and risk management. It helps the bank to recognize SME clusters by adopting the 4-C
approach of: Customer focus, Cost control, Cross-selling and Containing risk.

Bank recognizes the important role of Micro, Small and Medium Enterprises (MSME) in the
economic development through their contribution to GDP, export and employment generation.
Towards this, as at the end of March 2013, credit to MSME sector was 61,478 crores constituting
22.07% of total credit.
Without adequate bank finance, SMEs cannot acquire or absorb new technologies nor can they
expand to compete in global markets or even strike business linkages with larger firms. Similarly,
banks cannot consider the financing of SMEs as a viable option unless their priorities are addressed
by SMEs. In this regard, SMEs should be assisted largely by public initiatives involving participation
of the banking industry. In India, however, the various public initiatives for promoting finance to
SMEs have not been as successful as envisaged because there has been some overlapping of regional
and national initiatives. Efforts to harmonize the standards and practices, therefore, need to be
properly coordinated to facilitate SME finance further.

















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CHAPTER 10
IMPLEMENTATION STRATEGY

The implementation strategy which is followed in banks is through the circulars and policy guidelines
which are being forwarded to concerned departments and then a follow up is being done that whether
the guidelines issued are being followed. This methodology is successful in banks due to presence of
strong communication system with the help of the good connectivity of each level with different
levels and effective organization setup which caters to well established implementations of the rules
and guidelines.
Thus recommendations provided above can be implemented with the help of improved policies with
the help of deeper research and analysis of customer and banks own requirements.
In case of credit Appraisal process various committees have provided their recommendations from
time to time and further the regulator is expected to continuously focus on improvements that can be
made in this area with help of analyzing various peculiarities regarding rate of interest and certain
sectors which need more focus.















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CHAPTER 11
SUGGESTIONS FOR FUTURE RESEARCH

My project work is mainly concerned with the system adopted by Punjab National Bank for appraisal
of credit proposal of MSME borrower. As per my findings system & guidelines are perfect but there
is scope of improvement in implementation. Further study can be made to reduce the time taken from
canvassing a MSME borrower to sanction loan from branch through our RO/CO/HO.

Further research can also be made in field of analysis & assessment of need of the borrower in order
to provide full support in growth of MSME sector of the economy.

I have listed some of the problems faced by MSMEs in order to obtain finance for their smooth
operation. I have also listed some likely solutions which might come in handy to avoid the problems
faced by the MSMEs. But, how to implement these solutions in the practical scenario has not been
discussed. Future research in this regard will be beneficial to both, the bank as well as the borrowers.
It will also help the government in achieving the desired results and expedite the growth of the
economy.

Similarly, I have listed that the bank and the borrower need to be alerted in case of an incomplete or
irregular submission of documents by the borrower. This can be implemented with the help of a
software application. How this can be implemented can be a part of future research.

I have recommended that there be different benchmarks for different sectors of the economy. An
analysis on whether this is feasible or not and how this can be implemented may be studied in detail.













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CHAPTER 12
BIBLIOGRAPHY

List of websites:
www.rbi.org
www.pnbindia.in
www.planningcommision.nic.in
www.indiabudget.nic.in
www.web.worldbank.org.
www.google.com
www.msme.gov.in

List of circulars of Punjab National Bank on:
Credit Policy
Delegation of Power
Rate of Interest
Working Capital Finance Manual
RBI Master Circular on Priority Sector
RBI master Circular on MSMEs
RBI Master Circular on Micro lending
Daily Newspaper
Credit Reports of two MSME firms
Management of Bank Lending book- Dr. V. S. Kaveri