Project Report

SUMMER INTERNSHIP REPORT
Summer Internship Project Report

ON
CREDIT RATING AND PROJECT
FINANCE
AT
AMITABH AGRAWAL & COMPANY
Submitted by
NITIN JOSHI
Roll no 29
PGDM (2008-2010)
Institute of Manae!ent De"elo#!ent an$ Resea%&'
Pune( )1100)
NITIN JOSHI PGDM 2008-10
ROLL NO.29 IMDR
1
ACKNOWLEDGEMENT
Any task is not complete without thanking the people and organisation who made the task possible. I would
like to take this opportunity to express my heart felt gratefulness to Mr. Amitabh Agrawal Director Amitabh Agrawal
& co., who gae me an opportunity to undergo internship in his organi!ation.
I would also like to thank Mr. Parvez Khimani - Senior CA Executive, who was my guide and shared his experience
and insights during my stint at the organi!ation. I am also grateful to my team members Mr. Timothi Ishwarlal Kirkita
Retd. Technical Officer U! and Ms. Rani Panicker " #S $inance for helping me through out with their aluable
knowledge and opinions and proiding me their aluable feedback.
I am also thankful to my classmates who shared their daily experiences after a regular slog and taught me lateral ways
of looking at the same thing.
"esides those mentioned aboe, there were many others whom I met and who contributed in their own way towards
making the assignment a successful endeaour.
#I$I# %&S'I
ROLL NO.29 IMDR
2
EXECUTIVE SUMMARY
I worked as a (anagement $rainee in Amitabh Agrawal ) *ompany at Raipur +*,-. It is a serice organi!ation which
proides financial serices to the industries present in an around Raipur. $he internship program was of . weeks.
$he project consisted of two erticals/
$o produce *redit Rating Information of the industries for *RISI0.
$o generate Project reports. 1hich was again diided into/
- *orporate 0oan Projects
- "ank Appraisals
$he objecties of the projects were/
$o hae a better understanding of the credit rating system of *RISI0. .
$o know the technicalities of corporate loans.
$o know how a financial organi!ation proides serices to its clients.
$he areas of strengths and weaknesses of the organi!ation.
$o hae a first hand experience about how an organi!ation works or deals with its clients.
2or this purpose, I started with reading preious reports aailable in the organi!ation on Project 2inance, after haing a
fair idea I was gien a 0oan Project to work on by my guide under his guidance. After completing it I did one more
same kind of project without any helping hands, although my guide was always there to help me. $hen I started
reading material on *redit Rating and used the same approach for it too.
I completed two projects on *redit Rating and $wo on Project 2inance by the time the program ended.
Apart from this as I was in continuous contact with the people out there, I used to obsere them and there style of
working, which deeloped an insight for the industry. $his also helped me in performing the S1&$ analysis of the
organi!ation.
ROLL NO.29 IMDR
3
CONTENTS
S*+J,-T P.G, NO/
COMPANY PROFILE 1
PROJECT FINANCE 2
WORKING OF THE PROJECT APPRAISAL SECTION IN
FINANCIAL INSTITUTIONS
5
CREDIT RATING 11
RATING CRITERIA FOR PAPER INDUSTRY 21
RATING CRITERIA FOR STEEL INDUSTRY 25
SWOT ANALYSIS 31
ORGANIATIONAL PROCESSES 33
MY LEARNING E!PERIENCE 39
E!PERIENCE " PAINS # PLEASURES $1
INFERENCES $$
RECOMMENDATIONS $5
%I%LIOGRAPHY $&
COMPANY PROFILE
A(I$A"' A,RA1A0 ) *&(PA#3 is a financial consultancy, which proides serices in financial
ROLL NO.29 IMDR
$
sector. A(I$A"' A,RA1A0 ) *&(PA#3 is in business from last 45 years, it has come a long
way since its inception. As of now it is amongst the most renowned financial consultancies in and
around Raipur. It is doing business in whole of *hhattisgarh. As *hhattisgarh is an industrial state
and is rich in mineral ores, so it has ast potential for steel industries. As well as it is the only power
rich state in India so it has growing opportunities in other sectors also and such industrial pool
creates a pool of clients for the serices offered by A(I$A"' A,RA1A0 ) *&(PA#3.
It was formed by (R. A(I$A"' A,RA1A0, 6irector of A(I$A"' A,RA1A0 ) *&(PA#3, in the
year 78.8, with one partner proiding only audit serices, presently it is a full fledged financial
consultancy proiding a series of serices to the industries present in *hhattisgarh.
$he serices proided includes/
$ax *onsultant
Auditing
Project 2inancing
*redit Rating Information generation for *RISI0
0oan Projects
"ank Appraisals etc.
$he company is well renowned in Raipur and proiding ery good and effectie serices to its
clients. It employees a total of 9. employees excluding the blue collar workers in its different
departments. $his figure also contains the *A interns working there.
PROJECT FINANCE
6efined by the International Project 2inance Association +IP2A- as the following/
ROLL NO.29 IMDR
5
:$he financing of long;term infrastructure, industrial projects and public serices, based upon a
non;recourse +Project 2inance that is secured by some sort of collateral, usually property, plant,
e<uipment etc is known as non; recourse financing= $he issuer can sei!e the collateral if the
borrower defaults- or limited recourse financial structure, where project debt and e<uity used to
finance the project are paid back from the cashflow generated by the project>.
Explanation:
$he following is a hypothetical description of a basic project finance scheme.
Acme *oal *o. imports coal. ?nergen Inc. supplies energy to consumers. $he two companies
agree to build a power plant to accomplish their respectie goals. $ypically, the first step would be
to sign a memorandum of understanding to set out the intentions of the two parties. $his would be
followed by an agreement to form a joint enture.
Acme *oal and ?nergen form a SP* called Power 'oldings Inc. and diide the shares between
them according to their contributions. Acme *oal, being more established, contributes more capital
and takes @5A of the shares. ?nergen is a smaller company and takes the remaining B5A. $he
new company has no assets.
Power 'oldings then signs a construction contract with Acme *onstruction to build a power plant.
Acme *onstruction is an affiliate of Acme *oal and the only company with the know;how to
construct a power plant in accordance with AcmeCs deliery specification.
A power plant can cost hundreds of millions of dollars. $o pay Acme *onstruction, Power 'oldings
receies financing from a deelopment bank and a commercial bank. $hese banks proide a
guarantee to Acme *onstructionCs financier that the company can pay for the completion of
construction. Payment for construction is generally paid as such/ 75A up front, 75A midway
through construction, 75A shortly before completion, and @5A upon transfer of title to Power
'oldings, which becomes the owner of the power plant.
ROLL NO.29 IMDR
&
Acme *oal and ?nergen form Power (anage Inc., another SP*, to manage the facility. $he
ultimate purpose of the two SP*s +Power 'olding and Power (anage- is primarily to protect Acme
*oal and ?nergen. If a disaster happens at the plant, prospectie plaintiffs cannot sue Acme *oal
or ?nergen and target their assets because neither company owns or operates the plant.
A Sale and Purchase Agreement +SPA- between Power (anage and Acme *oal supplies raw
materials to the power plant. ?lectricity is then deliered to ?nergen using a wholesale deliery
contract. $he cashflow of both Acme *oal and ?nergen from this transaction will be used to repay
the financiers.
$his is a simple explanation which does not coer the mining, shipping, and deliery contracts
inoled in importing the coal +which in itself could be more complex than this scheme-, nor the
contracts for deliering the power to consumers. 'oweer, this seres to explain how and why
companies create SP*s and obtain financing for major projects.
Proj!t Apprai"al a" Gnral
Appraisal is a comprehensie and systematic reiew of all aspects of a project. Appraisal highlights
weak areas in the project with the ultimate object of strengthening them so as to ensure final
success of the project. $he main objectie of the appraisal is to improe and reamp the project
with the cooperation of the promoters. Since project appraisal is an exercise in future based on
certain assumptions, it is necessary to understand the enironment in which the project has to
sustain itself. Appraisal is a joint exercise by promoters and institutions. $he project should be
appraised within a time bound program D any undue delay in implementation is bound to distort
profitability projections and make success of the project a difficult task.
#o doubt a financial institution insists on its loan to be ade<uately secured by a proper charge on
the assets. 'oweer, the concept of a forced sale of the assets to recoer the loan is repugnant to
the thinking and responsibilities of a financial institution. $he real security is represented by the
surplus which the project is estimated to yield and the appraisal has to ensure doubly that such
surplus shall be aailable not only to meet the loan commitments but also to serice the risk capital
to a reasonable extent.
ROLL NO.29 IMDR
'
Proj!t Apprai"al in Finan!ial In"tit#tion"
#ormally "anks lends for a project in a consortium where the lead financial institution or bank
prepares the project appraisal reportEinformation memorandum in adance and after that financial
institution does a secondary type of project appraisal. $he lead institution appoints lender engineer,
lender legal counsellor and lender insurance adisor who assess the project in their terms and gie
their report.
Farious aspects of project appraisal which are considered D
7. (arket/; scope of the competition and possible competition from substitute from substitute
products
4. (anagement/; Assessment of the entrepreneur, board of directors, chief executie
B. $echnical D $hey follow the report of a company +group of engineers-, appointed by the
intermediaries +lead- or the company itself. In it, some key points are to be seen for
example if it is a power project then coal heat rate is to be considered.
G. 2inancial D $he major financial factors which are considered are as follows/;
6S*R H 7
IRR should be nearer to the interest rate of giing loan preailing in the market
+spread in respect of ,;sec is considered-
$he interest rate is decided in conersation with the company only.
Sensitiity analysis ; arious situations are judged such as if the interest rate goes
down, if the price of raw material increases.
?"I$, PA$, sources and application of funds, expenditures.
9. Socio; economic factors
Wor$in% o& t' Proj!t Apprai"al "!tion in Finan!ial In"tit#tion"
In the project appraisal section, there is one deputy secretary and fie A.&.Is. As normally 2inancial
Institutions lends when there is a consortium, the lead bank comes up with an information
memorandum +I(-. #ow this I( is gien to one of the A.&.Is who carefully erifies each and eery
ROLL NO.29 IMDR
8
point in it. (eanwhile the deputy secretary keeps an update of interest rates in comparison to the
spread of ,;secs. $hen the secretary sends a report to the executie director +?.6.- about the
interest rate which is to be fixed and the other important matters raised by the A.&. $he ?.6.
erifies and approes it and then sends it to the inestment committee who then approe it. &n the
day of meeting with the borrowing company and the lead, the A.&. puts up all the doubts about the
information memorandum and both the secretary and ?.6. negotiate with the lead to fix the interest
rates and decide on the terms of sanction. If all conditions are satisfied, the inestment is approed
and the funds are disbursed according to the terms of the agreement. If re<uired, sometimes site
isit is done. Also regular meetings with the lead are undertaken where the implementation and the
growth of the project are discussed.
(!#riti"ation:)
Parti" in*ol*+:)
$here are three parties basically inoled. 2irst one is borrower who is normally a bank. $he
second one the trustee who keeps the assets and the last one is the lender who may be a financial
institution. "asically it means pooling of loans of similar type +home loans, car loans- by the
borrowers and they sell the pool of assets to the trustee. 1hen the lender purchases these pools
from the trustee, the trustee issues pass through certificates to the lender. $he pass through
certificates +P$*- is kept with the custodians and seres as a security. If there is a default, the
li<uidation work is done by the trustee and it gies the proceedings to the lender.
In Amitabh Agrawal ) *o., I got an opportunity to analyse one steel industry project which was
already appraised. $his was of (Es (aruti 2errous Priate 0td.
I, Pro-otr.!o-pan/ pro&il or a""""-nt
ROLL NO.29 IMDR
9
Pro-otr0" pro&il 1Mar#ti Gro#p2:
All projects of this group are huge inestments
(anagement structure; good <ualifications
Shareholding pattern; maximum holding of the promoters
1orking results and the financial position; good amount of reseres and surpluses
,roup; well known the industry and good track record
Co-pan/ pro&il 1Mar#ti Frro#" Pri*at Lt+,2:
7- A3o#t pr*io#" proj!t i.e. P'AS?;I +implementation ; good progress-
Sole arranger of funds;S"I
Performance analysis +sources and application of funds-
4- Mana%-nt; able and good <ualifications
II, T!'ni!al a""""-nt
Lo!ation/ ; 2actors such as how is the land for construction= any forest coer= proximity to S', #'
or railway lines= aailability of water= inhabited or uninhabited site= major load centres as
considered. In case of (aruti 2errous Priate 0td., it was suitable. 2or ex;plant was G kms away
from railway station, rier was 7km away.
Lan+/ ; Should be sufficient and also scope should be there for future expansion. In (aruti 2errous
Priate 0td., land was taken on long term lease and it was conerted from agricultural use to
industrial use.
Main !o-ponnt" o& plant/ ; Jiln, furnace, condensing e<uipment, effluent disposal system.
&peration and maintenance/ ; largely in;house
Coal "#ppl/ a%r-nt/ ; coal supply agreement with (*0 and **0.
Coal tran"portation an+ 'an+lin%/ ; letter of comfort from Railways.
Ot'r &a!tor"/ ; Secondary fuel, ash handling system, water facilities, power eacuation system,
ROLL NO.29 IMDR
10
schedule of implementation.
III, Mar$t A""""-nt:)
Important inferences from latest *RIS I#2A* report for the Indian steel industry are as follows/
a. 6omestic steel industryIs margins to remain stable.
b. Prices are expected to remain firm due to stable global demand;capacity ratio.
c. 6omestic demand to remain buoyant.
d. Input costs to remain firm.
$heses positie expectations imply that the prospect of the unit under consideration can be
considered to be good in short ) medium terms.
(tl "!nario in In+ia/ ; IndiaCs rapid economic growth is being built on a frame of steel soaring
demand by sectors like infrastructure, real estate and automobiles, at home and abroad and has
put IndiaCs steel industry on the world steel map. $he rapid rise in the production has resulted in
India becoming the fifth largest producer of steel in the world, up by two places, on the back of
95.@7 million tonnes +($- production of crude steel and 97.8 ($ of finished steel. $he production
of finished steel grew by 7K.94 per cent, from GG.9G ($ in 4559;5K to G8.B8 ($ in 455K;5@. It is
estimated that by 4579;7K, India would become the second largest steel producer globally with an
annual production of 7B@ ($.
Co"t !o-ptiti*n""/ ; *ost higher than recently concluded other steel purchase agreements,
but not a concern because of gap in demand and supply.
I4, Finan!ial A""""-nt:)
a. (al"/
$he company started its commercial production in September 4559. $he #et Sales during the year
4559;5K were Rs.79..7 *ores which increased to Rs.95.G. *rores during 455K;5@ with the full
year operation of the Lnit. $he unit has estimated a net sales of Rs 98.79 *rs for the year 455@;5.
ROLL NO.29 IMDR
11
and with the expansion taking place net sales is proposed to increase to Rs.777.7G *rores as on
B7.5B.4558. $he unit has already achieed a net sales of Rs 9G.95 *rs as of 2ebruary 455.. $he
company plans to start commercial production in its expanded unit by %une 455. and as such the
estimated turn oer are <uite achieable. $he Sales has been further proposed to increase during
the subse<uent years with the increase in capacity utili!ation which is achieable and considered
satisfactory.
$here is ade<uate demand for Ingots in the local market. $he Re;rolling (ills already set up at
Raipur, "hilai areas are creating sufficient demand for Ingots. $he setting up of the new furnace will
help it to produce Ingots of heaier si!es and diersify its markets.
b. Pro&ita3ilit/:
$he PA$ during the year 4559;5K was Rs.5.57 *rore and Rs.5.7B *rore during 455K;5@ with fully
operational unit. $he PA$ has been estimated to increase to Rs.5.GB *rore during 455@;5.. 1ith
the proposed expansion and increase in operations the profitability shall further increase and has
been proposed at Rs.5.8@ *rore during 455.;58. 1ith the increase in operational efficiency and
increase in capacity utili!ation the PA$ has been proposed to increase further in coming years. $he
*ash accruals hae been estimated conseratiely which are sufficient to serice the interest and
installment of the expansion program.
c. TOL.TNW:
$he $#1 of the company was Rs.B..@ *rores as on B7.B.455@ as per Audited "alance Sheet of
the *ompany. $he $&0E$#1 ratio was 7.87 as on B7.B.455@ which shows financial strength of
company. $&0E$#1 is estimated at 7.B8 for 5@;5. and with the financing of new $erm loan of Rs
B.55 *rs and additional *ash *redit limit of Rs 4.95 *rs the ratio is likely to decline slightly to 7..5
in 455.. 'oweer with ploughing back of profits the ratio will further improe in the coming years
and would be within the bench mark leel of B.
d. C#rrnt Ratio & NWC:
$he current ratio as on B7.B.455@ is 7.BB which is at the acceptable indicatie leel of 7.BB.
?stimated ratio is 7.G9 for 455. and 7.GG for 455.;58. $he ratio declines slightly in 455.;58 as the
term loan instalments of Rs K5.55 lacs hae been classified as current liabilities. $he 0i<uidity leel
ROLL NO.29 IMDR
12
is comfortable throughout the period .#1* position of the unit is comfortably placed at Rs. B.49
*rs for the year 455.;58 which is a good sign.
T' o*rall proj!t+ pr&or-an! an+ &inan!ial in+i!ator" ar !on"i+r+ "ati"&a!tor/ an+
a!!pta3l,
Proj!t !o"t/ ; land and site deelopment, ?P* cost, financing charges, comparison with other
companies current projects, comparison with phase;I ?P* cost.
Man" o& &inan!/ ; ?<uity and 6ebt= Security and margins= Senior debt or subordinate debt
Performance indicators +cash flow projections-= 2A*R +2ixed assets coerage ratio- should be
more than 7= 6ebt serice resere re<uirement +resere of 7 or 4 months interest-= Interest
coerage H 7.
5(CR/ ; (aruti 2errous Priate 0td. 6S*R was greater than 7. 6S*RM +PA$N 6ep. N Interest
charge- E +Principal N Int. *harge-. (in 6S*R and Ag. 6S*R are also considered.
Ri"$ anal/"i" #"in% "n"iti*it/ charts where different parameters are taken and modified so that
impact on cost and profitability can be judged +such as changes in 6S*R because of change in
heat rate-.
4, Wor$in% Capital A""""-nt/
F#n+ 3a"+ li-it": $he *ompany has re<uested for sanction of working capital limits of Rs G95
lacs. $he assessment of working capital has been made under P"S method and the same is
justified from the proposed holding leel of inentories. 0imit of Rs. G95.55 lacs assessed under
P"S method has been considered need based and has been recommended for approal. 6etails
of the working capital assessments are gien.
Non &#n+ 3a"+ li-it":
ROLL NO.29 IMDR
13
Lttr o& Cr+it
$he company has to procure raw materials from suppliers through opening of 0etter of *redits in
their faor. $he company has re<uested for 0* limit of Rs.7.55 *rore with 49 A margin.
*onsidering the existing and proposed leel of actiity of the company, the re<uirement is need
based and genuine and has been recommended for approal.
Ban$ G#arant
$he company shall be re<uired to extend security deposit for supply of additional power load for
the proposed expansion. As per the recent practice, *S?" accepts "ank ,uarantee instead of the
deposit. $he company is also re<uired to extend "ank ,uarantee to few customers. $he company
has assessed for re<uirement of "ank ,uarantee and re<uest for "ank ,uarantee 0imit of Rs.7.55
*rore. $he re<uirement is need based and genuine and has been recommended for approal.
4I, (o!io)!ono-i! a""""-nt:)
Social cost benefits analysis, enironment considerations, contribution to the deelopment of
sector or the economy as a whole. (aruti 2errous Priate 0td. had cleared all the consents from
the arious regulatory authorities such as pollution boards, etc.
0astly the terms of sanction and the documents are properly checked.
MY LEARNING:
"roadly in project appraisal, they looked upon these aspects/;
7- Raw material /; land, location, coal, water
4- $echnology/; "$,, superior or sub; technology, suppliers
B- (arket/; Includes financial
G- Interest rates
CRE5IT RATING
A !r+it ratin% estimates the credit worthiness of an indiidual, corporation, or een a country. It is
an ealuation made by credit bureaus of a borrowerIs oerall credit history. A credit rating is also
known as an ealuation of a potential borrowerCs ability to repay debt, prepared by a credit bureau
at the re<uest of the lender "lackCs 0aw 6ictionary. *redit ratings are calculated from financial
history and current assets and liabilities. $ypically, a credit rating tells a lender or inestor the
ROLL NO.29 IMDR
1$
probability of the subject being able to pay back a loan. 'oweer, in recent years, credit ratings
hae also been used to adjust insurance premiums, determine employment eligibility, and establish
the amount of a utility or leasing deposit.
A poor credit rating indicates a high risk of defaulting on a loan, and thus leads to high interest
rates, or the refusal of a loan by the creditor.
If indiiduals thought that they were the only ones who had the use for loans, then corporate loans
will show them that they are incorrect. $he corporates, who are deemed to hae a large surplus of
cash, too find themseles at the mercy of the loan proiders +though not in the strictest sense of
the word-.
$he use for corporate loans may emerge out of two reasons. 2irstly, there maybe a shortage of
cash and the loan is re<uired to substitute the cash shortage. Secondly, they feel that the cash
balance will find more productie uses if the task at hand is accomplished with a loan.
$he position of the corporates is not as ulnerable as that of ordinary indiiduals, when it comes to
getting *orporate loans. "ecause of an increased bargaining power, corporates are able to grab a
much better deal than indiidual borrowers.
2inance is the lifeblood of any business. $herefore, while it will be prudent not to make an
injudicious use of corporate loans, it will neither be adantageous to stare the business of the
much needed capital. *orporates risk its capital by taking business decisions; the grounds for
profit. $he risk taking capacity is seerely stunted in the eent of shortage of capital. A stunted risk
taking capacity has its repercussions on the future of the corporate house.
2inding it too shocking to digest. $his is howeer true. Shortage of funds was particularly behind
many corporates not being able to complete assignments on time or not up to the <uality standards
stated.
In India, commercial credit rating agencies include *RISI0 and I*RA. $he credit bureaus for
indiiduals in India are *redit Information "ureau +India- 0imited +*I"I0- and *redit Registration
&ffice +*R&-.
ROLL NO.29 IMDR
15
Cr+it Ratin% an+ In&or-ation (r*i!" o& In+ia Lt+, 1CRI(IL2 is IndiaCs leading Ratings,
Research, Risk and Policy Adisory *ompany. *RISI0Is majority shareholder is Standard ) PoorCs,
a diision of $he (c,raw;'ill *ompanies and the worldCs foremost proider of financial market
intelligence.
*RISI0 offers domestic and international customers +IR?F#A, international arm and a diision of
*RISI0 handles international customers- with independent information, opinions and solutions
related to credit ratings and risk assessment= energy, infrastructure and corporate adisory=
research on IndiaCs economy, industries and companies= global e<uity research= fund serices= and
risk management.
*redit Rating Report/ A report containing detailed information on a personCs credit history, including
identifying information, credit accounts and loans, bankruptcies and late payments, and recent
in<uiries. It can be obtained by prospectie lenders with the borrowerCs permission, to determine
his or her creditworthiness.
*RISI0 RatingsC mission is to proide high;<uality, objectie, independent, and rigorous analytical
information to the marketplace. In order to achiee its mission, *RISI0 Ratings stries for analytic
excellence at all times, ealuates its rating criteria, methodologies and procedures on a regular
basis, and modifies or enhances them as necessary to respond to the needs of the Indian capital
markets.
*RISI0 Ratings endeaours to conduct the rating and sureillance processes in a manner that is
transparent and credible and that also ensures that the integrity and independence of such
processes are not compromised by conflicts of interest, abuse of confidential information or other
undue influences.
$his *ode of *onduct +the O*odeO- replaces the *RISI0 Ratings *ode of *onduct dated 6ecember
455K. *RISI0 Ratings has updated this *ode and amended it in order to align its policies and
procedures with the amendments in *ode of *onduct 2undamentals for *redit Rating Agencies
ROLL NO.29 IMDR
1&
published in 6ecember 455G, as amended in (ay 455. +the OI&S*& *odeO-, by the International
&rgani!ation of Securities *ommissions +OI&S*&O-. As re<uested by the I&S*& *ode, exceptions
to the I&S*& *ode are set forth in Section @ of this *ode.
'oweer, by making this *ode aailable to the public, *RISI0 Ratings does not assume any
responsibility or liability to any third party arising out of or relating to this *ode. $his *ode shall not
form a part of any contract with any third party and no third party shall hae any right +contractual
or otherwise- to enforce any of this *odeCs proisions, either directly or indirectly. *RISI0 Ratings in
its sole discretion may reise this *ode to reflect changes in market, legal and regulatory
circumstances and changes to *RISI0 RatingsC controls, policies and procedures.
*RISI0 Ratings expects all employees to comply with this *ode and the related policies,
procedures, and guidelines. Any exceptions to this *ode or the related policies, procedures, and
guidelines should be approed in writing by the Senior 6irector in charge of *RISI0 Ratings or
herEhis designee who shall be responsible for the interpretation of this *ode and the related
policies, procedures, and guidelines. ?ach year all *RISI0 Ratings employees shall be re<uired to
read the *ode and affirm their compliance with the *ode and all related *RISI0 Ratings policies
and guidelines by signing an Affirmation Statement.
2ailure to comply with this *ode and the related policies, procedures, and guidelines could be
sufficient reason for disciplinary action, including discharge and possible legal sanctions.
W'at ar Ratin%"6
Ratings are current opinions regarding the future creditworthiness of issuers or issues. Ratings are
based on information supplied to *RISI0 Ratings by the issuer or its agents and information
obtained by *RISI0 Ratings from other sources it considers reliable. *RISI0 Ratings relies on the
Issuer, its accountants, counsel, adisors and other experts for the accuracy, completeness and
timeliness of the information submitted in connection with the rating and sureillance processes.
ROLL NO.29 IMDR
1'
Ratings do not constitute inestment, financial or other adice. Ratings are not recommendations
to purchase, hold or sell a particular security or to make any other inestment decision. Ratings
and other opinions do not comment on the suitability of an inestment for a particular inestor and
should not be the only factor that is relied on when making any inestment decision. *RISI0
Ratings does not act as an inestment, financial, or other adisor to, and does not hae a fiduciary
relationship with, an issuer, inestor or any other person.
*RISI0 Ratings is not obligated to perform any due diligence or independent erification of any
information submitted to, or obtained by, *RISI0 Ratings in connection with the rating and
sureillance processes. *RISI0 Ratings does not perform an audit and does not undertake to erify
that the information submitted to, or obtained by *RISI0 Ratings is complete. Ratings are not
erifiable statements of fact. $he assignment of a rating to an issuer or an issue by *RISI0 Ratings
should not be iewed as a guarantee of the accuracy, completeness, or timeliness of the
information relied on in connection with the rating or the results obtained from the use of such
information.
*RISI0 Ratings reseres the right at any time to suspend, modify, lower, raise, or withdraw a rating
or place a rating on Rating 1atch in accordance with its policies, guidelines, and procedures.
$here has been an unprecedented amount of interest in the past few months in how banks
formulate and operate their credit risk management policies. At the end of %uly, the "asle
*ommittee on "anking Superision issued a consultatie paper, which outlines 7@ basic principles
to be followed in the credit risk management process.
All but two of these principles are directly concerned with implementing a credit policy. $he paper,
Principles for the management of credit risk, places much emphasis on the responsibility of senior
management to formulate, agree and implement a structured credit policy. Some of the main areas
coered by the paper concern credit approal processes, credit administration processes and
procedures and the application of controls on problem areas. $he paper also contains
recommendations on how a bank should define its oerall credit risk management strategy, which
forms the starting point for a credit policy.
ROLL NO.29 IMDR
18
"anks seem to hae realised it is in their interest to run a sensible, structured credit policy. 2or too
long, too many of them hae set credit limits in a disorganised, fragmented fashion. $hey hae
either used outmoded methodologies to calculate exposures against limits or hae spent
considerable time and effort to arrie manually at a global, consolidated iew of their exposures.
$he problems encountered during the worldwide economic turmoil of late 788. led many such
banks to appreciate the benefits of a rational, pragmatic credit policy that can be implemented
using the most appropriate systems and approaches.
Although the "asle paper says lending is the most obious source of credit risk, it also emphasises
that, in practice, credit risk arises from banking and trading actiity both on and off the balance
sheet. If anything, the paper does not emphasi!es enough the potential credit risk impact of off;
balance sheet and other trading actiity. *omments on this paper are re<uired by #oember B5,
which suggests that final rules are likely to be implemented by the middle of next year.
1hile the risk policy principles proposed by the "asle *ommittee are commendable, the key issue
for most banks is how they should actually be put into practice.
1hen a bankIs credit committee +or similar body- comes to approe a credit line, it is essential that
committee members hae a thorough understanding of eery aspect of the counterparty or
borrower. An experienced credit analyst should be responsible for collating the releant information
from a ariety of sources, including credit rating agencies, annual reports, market briefings and
other sources, such as the Internet.
$his approach highlights the importance not only of the basic ratings information proided by credit
rating agencies, but also of more detailed profiles of banks and companies, proided by the
organisations themseles. $his is especially important in emerging markets, where there is a lack
of accurate ratings data. Additionally, the information proided by rating agencies may not be kept
up to date with the speed of downgrades, as happened during RussiaIs financial crisis of August
788.. ?en all the aailable information is no real substitute for first;hand knowledge gained by
credit analysts and managers.
ROLL NO.29 IMDR
19
$he essential output from the credit approal process is the setting of the bankIs credit limits. Some
recent discussions hae concluded that credit limits are insufficiently flexible and limit the scope of
a bankIs traders, and that they should be replaced by sophisticated return on risk measures. Lsing
this approach, traders are allowed to deal up to any leel, proided they generate an ade<uate
return to compensate for the risk taken. $he greater the alue of the trades, the higher the return
demanded. "ut this can gie rise to extra dangers by encouraging excessie leerage, and is too
reliant on the use of alue;at;risk measures. 0imits are still needed to protect against eent risk.
$he ast majority of banks are not yet adanced enough in the use of return on risk methodologies,
and are unlikely to be so for some time. 2or most banks, therefore, limits will still be ital to control
the risk in all credit;related actiity.
$o monitor their banking and trading actiity in a controlled fashion and on a global basis, banks
must set multiple limits D by product, operational unit and customer subsidiary D for eery customer
or customer group. $hese limits are additional to the oerall limits traditionally applied by banks for
a whole customer group. 2or example, for a particular customer, there may be limits at seeral
leels in a bankIs product hierarchy +see figure 7-. Similarly, there may be separate limits for each
subsidiary +or branch- of a customer that the bank trades a particular product with.
$o maintain control oer these multiple limit leels, the highest leel limits applied to a particular
customer group are considered to be PmasterI limits and all other limits in the group are PsubI limits.
$his distinction is important because it helps to monitor exposures across counterparty groups and
to treat excesses. $he total of the sub limits can, and often should, be greater than the master limit,
as this enhances trading flexibility.
It is also increasingly important to set limits according to the residual maturity of the underlying
transactions. 2igure 4 shows how, within an oerall limit +with a top residual maturity ceiling of fie
years- of QK55,555, there are further limits of Q495,555 for business with a residual maturity of
more than one month and of Q795,555 for business with a residual maturity of more than one year.
Such an approach proides maximum control oer riskier, longer;term loans, while still allowing
larger olumes of short;term business.
ROLL NO.29 IMDR
20
"anks must also continue to set and adhere to limits reflecting the economic and political risks
associated with a particular country. In practical terms, country limits are only needed for areas
where such risks are considered significant, such as emerging markets. $o be useful, country limits
must be set lower than the sum of the limits of the indiidual customers based in that country.
$he "asle *ommittee proposals state that banks should set limits by industry sector, geographic
region and, oerall, for specific products, as well as using traditional customer and country limits. In
practice, these limits will tend to be more adisory than the customer limits, and may not
necessarily be set for eery geographic region. $raditionally, many banks hae monitored their total
exposures within these categories, but hae not felt the need to set ceilings on their exposures to
industry sectors, geographic regions or products. $oday, howeer, with a greater understanding of
the risk of contagion in, say, a particular industry, banks are realising the alue of such limits.
%ust as important as setting limits is calculating accurate exposures against them. A surprising
number of banks set limits and hold them on spreadsheets, isolated from the exposure. &thers
may hae a system to monitor limits and exposures, but continue to use the most basic
methodologies to measure the exposure against their limits. 2or example, many banks still
measure exposures against foreign exchange and deriatie limits on the basis of the principal
amounts inoled, rather than of the replacement cost of each trade, or using a statistical
approach. $his means the exposures may be incorrect, and that the limits set to accommodate
these types of exposures will be far higher than they should.
"anks must define the approaches to be used for calculating exposures against limits as part of
their credit policy. $he methodologies ary according to the type of product, and the aailability of
information in a bankIs computer systems. 2or current accounts and lending, the ledger balance
proides an ade<uate measure. $here has been some debate as to whether accruals should be
measured as part of the exposure. Some banks hae asserted they should not, as they would
simply write off the interest if necessary. 'oweer, in principle, accruals should be considered as
part of the credit exposure, since the default of the counterparty would almost certainly lead to the
loss of the interest income. Admittedly, many banks currently hae problems making this
information aailable to their credit risk management system.
ROLL NO.29 IMDR
21
2or issuer exposures on bonds and e<uities, the current market alue forms the ideal exposure
alue. 2or unsettled trades on these products, the counterparty exposure should be based on the
replacement cost of the trade, that is, the difference between the agreed sale or purchase price
and the current market price.
(ore sophisticated measures are necessary for foreign exchange and deriaties. $he most
common acceptable approach is to calculate the exposure based on the replacement cost of the
trade, plus an add;on alue based on its nominal alue. $his add;on alue is designed to reflect the
potential for future aderse moements in the replacement cost. $raditionally, most banks hae
adopted a ery broad;brush approach to determining the factors used in the add;on calculation.
(any hae used a similar approach to that used for capital ade<uacy purposes, where the add;on
factor aries according to one of three time;bands and one of fie broad product categories.
"anks need to take a more sophisticated approach to setting add;on factors, using a wider range
of time bands and product categories, and arying the add;on factors according to the currencies
inoled. $hese factors should be based on the historical olatility of interest and exchange rates in
each currency. 'oweer sophisticated the setting of add;on factors, this approach can neer be a
match for the use of a statistically based credit exposure calculation engine, employing techni<ues
such as (onte *arlo simulation. $his method can determine a full future profile oer time of the
exposure for a portfolio +see figure B-. $he greatest exposure in the future profile, measured at a
89A or 88A confidence leel, is normally used for comparison with the credit limit.
In most cases, this alue is likely to be considerably lower than the traditional exposure. Stress
tests should also be applied to credit exposures, using a range of real and hypothetical scenarios.
&nce the exposure has been calculated, defined administration processes must be set up to
monitor exposures against limits= reiew credit facilities prior to their approaching renewal= check
the legal alidity of elements, such as netting agreements= and update internal credit risk ratings.
$hese should be used to identify potential problem customers as early as possible. Senior
management should be informed, ideally at least monthly, of all new, increased and renewed limits.
ROLL NO.29 IMDR
22
As well as monitoring exposures to indiidual customers, banks must hae a policy for monitoring
concentrations of exposures in indiidual products, industries, countries, regions and connected
counterparties. $he key reason for monitoring concentration risk is the potential for aderse
economic moements that may hae a harmful effect on a whole area. Proided information is
aailable on a global basis, a bank can perform this type of monitoring simply, using straightforward
en<uiry tools that summarise its exposure to, say, different industry sectors, on a percentage basis.
$he other key area where clear, enforceable procedures are ital is when managing excesses, ie,
when an exposure breaches the limit. A credit manager D rather than the relationship manager that
deals directly with the customer D must take responsibility for approing an excess, to aoid any
conflict of interests. $here should also be an escalation process in place so that exceptionally large
excesses are referred to the head of credit rather than to indiidual credit managers +see figure G-.
Senior management should be informed D on at least a weekly basis D of all excesses, and should
ensure an appropriate course of action is taken, normally ia a formal summary report.
*redit risk monitoring and implementing a credit policy should not be the responsibility of the credit
department alone. Senior management and members of the board must also take responsibility.
$hey need to be able to understand the key issues <uickly, which re<uires a clear presentation of
the information. $hey should receie summary printed reports, and should be encouraged to use
on;line systems capable of accessing the underlying information, to inestigate any specific
concerns rapidly and easily.
$oo often, these basic principles are being ignored because banks are either not fully aware of the
risks they are running or are not able to control those risks. 2or too long, in credit risk
management, banks hae relied on the knowledge inside peopleIs heads, but this approach is no
longer ade<uate. Robust, global systems D which can facilitate the setting of limits, undertake all
the necessary calculations and proide the triggers for monitoring D are essential. $he skills of
good <uality credit personnel will remain important, especially in the credit approal process and in
taking the correct actions when problems arise. $he ideal solution is a mixture of the right system,
the right adice to help implement that system and the right people in the bank to get the best out
of the system, together with a coherent credit policy and clear procedures for its application.
ROLL NO.29 IMDR
23
Con!l#"ion
A credit rating is a useful tool not only for the inestor, but also for the entities looking for inestors.
An inestment grade rating can put a security, company or country on the global radar, attracting
foreign money and boosting a nationCs economy. Indeed, for emerging market economies, the
credit rating is key to showing their worthiness of money from foreign inestors. And because the
credit rating acts to facilitate inestments, many countries and companies will strie to maintain and
improe their ratings, hence ensuring a stable political enironment and a more transparent capital
market.
RATING CRITERIA FOR PAPER IN57(TRY
I as a (anagement $rainee at Amitabh Agrawal ) *o. produced *redit Rating Information of (Es
0ohia Paper ) "oard Pt. 0td. for *RISI0. ,ien below is the criteria on the basis of which
*RISI0 rates any company from paper industry.
$he paper industry can broadly be diided into four product groups / 1riting and printing paper
+1PP-, industrial paper, specialty paper and #ews print +#P-. $he demand for paper products has
grown significantly in India in recent times= the growth is broadly linked to the oerall growth in
gross domestic product +,6P-. ,ien the low leel of per capita consumption of paper products in
ROLL NO.29 IMDR
2$
India= as compared to the global aerage, the domestic demand for paper is expected to grow at
rates higher than the global growth rate.
$he paper industry is characteri!ed by capital;intensie operations, fragmented markets and
uneconomic scale of operations. $hese constraints hamper the global competitieness of the
Indian paper industry= conse<uently IndiaIs exports which are primarily to neighbouring countries
such as "angladesh and Sri;lanka, hae traditionally been marginal. $he industry witnesses a high
degree of cyclicality mainly on account of the bunching up of capacity additions, resulting in
temporary demand supply imbalances rather than fluctuations in absolute demand, as is the case
with the deeloped economies.
$he domestic manufacturers hae been able to operate profitably in the past despite these
inherent constraints= this is owing to factors such as the high degree of tariff protection that has
helped keep the threat from imports negligible. 1ith the duty structure being rationali!ed, the
domestic market has increasingly begun to mirror trends in the international markets.
*RISI0 assesses the business position of the issuer in a comprehensie manner by analy!ing the
issuerIs market position and operating efficiencies. 1ithin this broad diision of the analysis,
*RISI0 examines the impact of the following key rating factors.
"usiness Risk Analysis
(arket position
Product segments
$he playersI presence in the commodity and specialty grades of the market will determine their
extent of ulnerability to cyclicality. In the commodity grade segment, the issuersI ability to sell a
dierse product range and cater to wide cross section of the market will moderate the effects of
cyclicality. 'oweer in the newsprint and niche segments such as coated or specialty paper, where
the market si!e is limited and the number of players is small, factors such as international price
moements and leel of import duty dictate the fortunes of the domestic players. 'ence for these
ROLL NO.29 IMDR
25
issuers it is essential to hae a competitie cost structure.
Flxi3l -an#&a!t#rin% &a!iliti"
$he ability of the issuer to alter the production mix +to shift between #P and 1PP, for instance, or
within the arious commodity grades in 1PP- according to market trends will be a crucial factor,
especially in a highly;cyclical industry such as paper.
5i"tri3#tion "trn%t'"
A large and geographically spread distribution network proides significant marketing strength and
reduces offtake per dealer. A loyal and dedicated indentorEdealer network will enable the issuer to
withstand market downtrends more effectiely. Such loyalty is normally built up by
sellingEdistribution policies such as unbiased allocation of olumes across the distribution channels
during market uptrends, ability to extend credit in periods of distress, and to supply a wide range of
products. $he customer profile in direct supplies and retail also has a bearing on a playersI
business risk profile.
Opratin% E&&i!in!/
Extnt o& Int%ration
$he nature of operations as reflected by the extent of integration determines the fixed cost intensity
of the business. Lnits that are fully integrated, right from pulping to conersion, will be more fixed
cost intensie, resulting in higher break een olumes. 6uring downturns in the industry, when pulp
prices tend to be lower, integrated manufacturers are unable to take adantage of the same. In
contrast, manufacturers with a lesser degree of integration are better positioned to withstand
downtrends owing to their lower leels of fixed cost intensity although this also means that their
profitability tends to be aerage een during industry uptrends.
Fi3r (o#r!in%
$he linkages created by the issuer to ensure a steady and ade<uate supply of raw materials are
critical. $he flexibility to use non;forest based sources such as bagasse and waste paper as raw
material is also important. $his is because of the limited forest coer and increasing need for
ROLL NO.29 IMDR
2&
enironmental awareness. 'oweer, a high usage of non;forest based fibre resources
limitsproduction capabilities to the lower end commodity grades of paper. $herefore, it is crucial for
the issuer to strike an appropriate balance based on market re<uirements.
$he extent of dependence on imported raw material such as waste paper and intermediates like
pulp is also of significant importance. As the olume of exports tends to be negligible in the
industry, a high leel of imports results in an unhedged position that exposes the company to
significant foreign exchange risks. A high leel of imports also re<uires significant li<uidity to
maintain ade<uate inentory = this is because imports are normally in <uantities that are
substantially higher than the daily production re<uirements.
Co"t (tr#!t#r
$his is another critical factor in the analysis of plant operations. In a highly cyclical business such
as paper, it is crucial for players to maintain a low cost manufacturer status so as to remain
competitie. *RISI0 compares the cost structures of issuers with those of the peer group, the
landed costs of imports and the past trends.
Capital Expn+it#r R8#ir-nt"
6eeloping economies usually experience high growth in demand= manufacturers therefore need
to constantly add capacities to retain market share. Also, inline with the (ontreal Protocal, the
paper industry is re<uired to eliminate the use of chlorine in bleaching by 4575. $o comply with this
enironmental regulation, manufacturers will need to incur further capital expenditure for their
existing facilities. In addition, the commoditi!ed nature of the business re<uires a regular
moderni!ation of production facilities in order to remain competitie. 1ith business being highly
capital intensie, the incremental funding re<uirements for capacity augmentation and
moderni!ation tend to be enormous. $he long gestation periods inoled in expansion projects also
re<uire that issuers hae considerable project implementation skills and financial strength to
implement these projects.
Ot'r opration &a!tor"
*RISI0 also assesses the following factors to determine performance efficiency/
ROLL NO.29 IMDR
2'
Plant utili!ation leels
Power aailability, tariff leels, extent of backup and facility for cogeneration of power
Power and chemical consumption factors
Pollution control measures
Finan!ial ri"$ anal/"i"
2or the analysis of the financial risk of a paper company, *RISI0 follows the standard criteria used
for all manufacturing companies. $his criterion is articulated in detail in our publications PRating
*riteria for manufacturing companiesI and P*RISI0Is approach to 2inancial RatiosI
Con!l#"ion
$hus, in *RISI0Is opinion, the key success factors for the paper sector include the presence of/
2lexibility in product mix
6istribution strengths
*ompetitie cost structure and
?fficient fibre sourcing capabilities
RATING CRITERIA FOR (TEEL IN57(TRY
I as a (anagement $rainee at Amitabh Agrawal ) *o. produced *redit Rating Information of (Es
*osmos *astings India 0td., Raipur, for *RISI0. ,ien below is the criteria on the basis of
which *RISI0 rates any company from steel industry.
*RISI0 approach to rating steel companies inoles ealuating their financial position and cash
flows in the context of their ability to withstand cyclical downturns. Prices are fairly olatile in the
cyclical steel industry. It is, therefore, critical that the companies hae the ability to withstand large
ROLL NO.29 IMDR
28
price fluctuations. &nly companies with strong businesses, inbuilt cost;efficiencies and low interest
costs can consistently withstand steel price cycle.
$he key parameter that *RISI0 considers in ealuating a steel companyIs business risk profile
include the leel of competition, the companyIs market position , product mix, cost position, leel of
integration in rations, technology standards and operating parameters. $hese factors are broadly
classified into market position and operating efficiency/
B#"in"" Ri"$ Anal/"i"
Mar$t Po"ition
$he key factors that drie a companyIs market position are its market share and company profile.
$he former is related to a companyIs si!e and is an important determinant of its position in the
highly fragmented steel industry. $he large, well;diersified companies typically hae greater ability
to withstand external shocks, easier access to capital markets and greater bargaining power with
suppliers and customers. *onse<uently, large si!e tends to hae a faorable impact on credit
profile, although the benefits can be oershadowed by a weal capital structure or poor cost
position.
A steel companyIs customer profile determines its business position. for instance, a client base of
auto and auto ancillary companies is more stable than one that compromises the trade segment.
Since sales in the former are generally goerned by contracts, they ensure long term stability. In
some cases, prices are also negotiated for a fixed period, reducing the companyIs exposure to
price fluctuations.
*RISI0 beliees that a well diersified client base is a positie factor/ this is because a setback in a
particular end;user segment has a lower impact on the companyIs total sales as compared to a
company with a high client concentration. $e diersification may also be across geographies, and
include export sales.
A companyIs market position is also analy!ed in the context of the leel of competition in the
ROLL NO.29 IMDR
29
industry.
L*l o& !o-ptition
$he leel of competition that a steel producer needs to contend with, is critical in assessing the
companyIs oerall credit <uality. $he intensity of the competition is influenced by the demand;
supply balance in the companyIs product category and geographical markets it operates in. local
freight economics also has a critical bearing on the companyIs ability to stae off the competition.
$he critical supply issues are installed and operating capacity anticipated capacity additions.
A3ilit/ to rationali9 !apa!it/ an+ a!'i* pro+#!tion !#t)3a!$"
In order to analy!e demand, *RISI0 examines the expected growth rates of the user industries and
then works out the expected growth rate for the steel industry. In general, the steel consumption is
highly cyclical with capital goods, consumer durables and construction accounting for a significant
portion of the oerall end;user base. 3et, end uses for certain products tend to be more stable
such as the recession;resistant consumer packaging industry, which is the primary market for tin;
mill products.
$he demand pattern also depends upon the stage of deelopment the economy is in. $ypically,
longs are used to build infrastructure. 'ence, their consumption is higher than flats in a deeloping
country. Similarly, flats hae a higher consumption in deeloped economies since they are primarily
used to manufacture consumer goods, automobiles and the like.
Pro+#!t Mix
In terms of product mix, *RISI0 examines both the product range and extent of alue;addition. A
wide product range enables a company to cater to a larger client base and thereby, diersify risks.
$he product range may coer seeral grades and product types. $he latter, essentially, entails flat
and long products.
In the Indian context, it is a prudent strategy for steel companies to adopt a judicious mix of flat and
long products. $his is because prices for long products are generally more stable for flat products,
though the latter are typically more profitable.
ROLL NO.29 IMDR
30
$he extent of alue;addition is another crucial factor differentiating steel companies. Falue;added
products offer a higher reali!ation and hence, boost a companyIs profitability. $he cost of adding
alue is generally much lower than the incremental reali!ation that such products offer. "esides it is
also expected that the olatility trends in alue added products is of a lower order than semi;
finished steel products such as billets.
In the flat segment, alue;added products include cold;rolled steel, color coated steel, galani!ed
steel and tin plated steel. In the long product segment, alue addition inoles producing more of
wires, wire ropes and rails. 'igher profitability and more stable cash flows are significant benefits of
selling a greater <uantum of alue;added products.
Opratin% &&i!in!/
Co"t po"ition
Steel companies hae ery low control oer end prices= therefore, the key success is in keeping
costs low. $he key costs determinants are technology, manufacturing route, operational integration
and operational efficiency parameters. Since the steel industry is capital;intensie, and has a fairly
high fixed cost base, a company can also control costs by maximi!ing capacity utili!ation. Some of
these parameters are discussed below.
T!'nolo%/
State;of;art technology can enable a company to achiee a competitie cost position. "ut for a
particular choice of technology, factors like the management teamIs experience, workforce training
and operating and maintenance practices influence the companyIs oerall efficiency parameters.
Man#&a!t#rin% Ro#t
Steel can be manufactured through the integrated route or through mini;mills. $he integrated route
uses iron ore, coke and lime stone while mini;mills produce steel by melting scrap or scrap
substitutes +like sponge iron- in an electric arc furnace +?A2-. Some plants combine the
ROLL NO.29 IMDR
31
adantages of both routes by using a mini;blast furnace +("2- to make iron and an ?A2 to make
steel.
$he *orex route, an alternatie to "last 2urnace, is basically an integrated process that uses non;
coking coal instead of coking coal, thereby reducing costs. In India, most of the steel is produced
through the integrated route since the mini;millsI operations are constrained by their high power
costs +the ?A2 is an energy;intensie process as significant power is re<uired to melt scrap-. $he
*orex route is operationally superior to the blast furnace route in terms of operating costs +as it can
use higher ash content;coal- but has a higher incidence of capital cost than the blast furnace route.
Oprational Int%ration
$he greater the extent of integration in a steel companyIs operations, the lower its costs. *oal is a
significant cost component in steel manufacturer. *ompanies with captie iron;ore and coal
sources are at a significant cost adantage oer non;integrated players. In India, howeer, the lack
of metallurgy grade coal is a significant handicap. Some companies oercome this by using a mix
of local and imported coal while others import their entire coal re<uirements.
Similarly, ?A2;based producers must hae access to a low;cost supply of scrap substitutes such
as hot bri<uetted iron or direct reduced iron, +sponge iron- since both the cost and aailability of
scrap are issues in India. $hey must also hae access to captie power due to energy;intensie
nature of manufacturing. $he plantIs distance from its key raw material sources is another
important consideration determining the landed cost of raw material and eentually, the final cost of
manufacture.
Oprational Para-tr"
*RISI0 looks at some key operational parameters while assessing a companyIs operating
efficiency. $hese include the energy consumption leel in blast furnace, blast furnace productiity,
coke rate, labor productiity and percentage of steel produced through the continuous casting
technology. *RISI0 also measures the production yield, which is the ratio of the <uantity of finished
steel shipments to the total raw steel produced.
ROLL NO.29 IMDR
32
Capital In*"t-nt"
Another key issue is a companyIs capital re<uirement, either to expand capacity or to upgrade
existing facilities. $he steel industry continuously re<uires heay capital expenditure to maintain
modern and efficient facilities.
In some deeloping countries like India, mills need costly moderni!ation to compete effectiely in
the global marketplace. *RISI0 examines the construction risks, technological challenges and
additional constraints that these companies face on their financial flexibility as they pursue their
capital expenditure programs.
A strong financial profile is important to a steel companyIs credit strength for two main reasons/
steel producers with a weak balance sheet are less likely to withstand business downturns and
maintain there inestment program, thereby losing out in efficiency race. Players with a strong
financial profile will also be able to ac<uire weaker competitors during a downturn.
Finan!ial Ri"$ Anal/"i"
2or the analysis of financial risk of a steel company, *RISI0 follows the standard criteria used for
all manufacturing companies. $his criterian is presented in detail in our publications P Rating
*riteria for (anufacturing *ompaniesI and *RISI0Is Approach to 2inancial RatiosI.
Con!l#"ion
$hus, in *RISI0Is opinion the key success factors for the steel sector include the presence of/
,lobally competitie cost structure
Presence of captie power plant= coal and iron mines
Share of alue;added products in sales
6iersity in client base
ROLL NO.29 IMDR
33
(WOT ANALY(I(
STRE!T"S
&perational ?xcellence. $he organi!ation proides prompt and efficient serices.
ROLL NO.29 IMDR
3$
As it works in many segments like Auditing, 0oan Projects, "ank Appraisals, $ax
*onsultation etc. so it has a strong #etwork of different industries and has a kind of
monopoly not only in Raipur but is famous in all oer the *hhattisgarh industrial area.
*ustomer 2ocus. $his has led the organi!ation to build a strong industrial customer base.
Seeral years of experience and understanding of the industry.
'ae a good "rand Image and one of the fastest growing consultancies in Raipur.
#EAKESS
It is concentrated in and around industrial centers and ignores the commercial and other
!ones as a targeted customer base.
&nly one office and that too not in the industrial area.
$he facilities proided by Amitabh Agrawal ) *o. in this sector are limited as compared to
other organi!ations, may be because of the limited man power aailable. 2or e.g.; they
donIt go ) collect the data from the company neither they delier it to there place.
#egligent to compare the rates and serices offered by other consultancies that pose a
competition.
0ack of speciali!ation.
0ack of Adertisement about the arious financial serices proided by the organi!ation.
OPPORT7NITIE(
Raipur, on the erge of becoming a tier;I city, is confronting a tremendous amount of
change in business scenario= accordingly a good opportunity can be foreseen in industrial
sector.
0iberali!ation of administration rules for promotion of business in the state.
Raipur is also an important industrial hub of the country and is also a mineral rich state
which will attract more businessmen.
ROLL NO.29 IMDR
35
1ith the strategic collaboration of *hase (anhattan "ank and recently Standard
*hartered "ank, it can be a dominant player in the market by leeraging the resources itIs
collaborators hae.
1ith the goernment now increasing its effort for improing the industrial image of he state
) the city, as well as the state has the potential clients for this industry.
THREAT(
,iant players like Suneel %ohri ) company hae a larger share of business.
#egligence of the organi!ation towards the competition is the reason these competitors
hae a larger share of the pie.
$here is also threat from the other priate companies being aggressie and area
concentrated in this market.
$here is a large scope of growth in this market hence a larger number of new players are
entering eery day into this industry.
$he other priate players with speciali!ed work force in a particular segment are eating up
their market share with the kind of serices they offer and the network they hae around
the corners of the state.
ROLL NO.29 IMDR
3&
ORGANI:ATIONAL PROCE((E(
Moti*ational For!";
$here is a system for Performance ?aluation in place. ?ach ?mployee is ealuated on the basis
of hisEher performance at the end of the month and that ?mployee is awarded with the "est
?mployee of the month. Also there are some financial incenties and gifts. $hese all happen at
branch leel and the head;office does not hae a role to play in it.
$here were times when I got to interact with the other employees in the office on an informal leel.
Lsually, this happened either during the lunch or in the tea breaks when two or more of us would
end up near the ending machine. People were gien ample amount of freedom to do their work
and do it at their own.
$he enironment of the office is also too open and informal. $he office lay out is open
compartments where the whole staff used to sit from attendant to the 6irector of the company, in
his own cabin. $his type of enironment was helpful as people could not engage themseles in
unnecessary talks and instead concentrated on their work.
I was working in one of the Serice organi!ation, which is in Raipur. $here was a formal time fixed
for the office work. "ut still, if someone had any important work, sEhe could leae early. $hat did not
mean that sEhe could leae hisEher job. &ne has to complete hisEher job before leaing the office
but yes other colleagues help that person to finish before. It was surprising to see such helpful
nature in this professional enironment. $here were not mere colleagues but friends.
ROLL NO.29 IMDR
3'
Co--#ni!ation Pro!"";
At the first glance anyone will find that eeryone in the agency is clear as to what is happening and
the goals and objecties areEmust be clear to all the people working out there, een I thought
so in the beginning. A closer look or after spending some time one reali!es that the people
who are at the junior leel are clueless as to what is happening or why they are doing, what
they are doing.
?ery day in the afternoons oer the lunch and in the eenings oer coffee and snacks, when all
used to gather, starting from the 6irector to the all other teams ) the blue collar workers, good
work done by any of the employees was discussed highlighting the positie aspects of herEhim.
&ne thing I liked the most was all the employees used direct medium of communication. $hey met
personally for eery work and that did not lead to any confusion.
$he amount of communication and interaction was enough to maintain a healthy work culture.
Although, there was a formal line of command from the top to the bottom, there were also informal
channels extending upwards and sideways, which let in an atmosphere of relaxation and comfort.
$here was no fixed dress code, as far as the departments were concerned but the blue collar
workers wee proided dresses and it was compulsory for them to come in the dress code regularly.
If somebody looks superficially there was no politics or backbiting in the organi!ation. At least I
belieed it for a fortnight, but then I slowly begin to understand the secret politics that was taking
place in my department. $hough the reasons were <uite professional but some amount of
indifference was there. Still the best part was it was all adding up to the betterment of the
employees and the company.
Intra!tion < In&l#n! Pro!"";
?eryone knows that one has to work in teams if they want to hae the adantages of synergy.
$here was a spirit of bonhomie and camaraderie amongst the employees as they worked in teams
towards achieing organi!ational objecties. A healthy competition existed amongst the arious
ROLL NO.29 IMDR
38
teams handling different segments and generating different reports. I also got along well with most
of the people there and they also accepted me as a part of them. I was always helped wheneer
re<uired and a ery nice friendly relation deeloped as time went by.
As I used to directly report to the 6irector of the organi!ation, so I used to discuss and ask seeral
<uestions to him in the eenings after the dayIs work. $here used to be a "rainstorming session
eery week, which also takes care whether the weeks commitments hae been met or not. $he
process calls for lot of inolement and participation. 2ormal brainstorming in the conference room
is done on major issues. As summer trainees een I was made to participate actiely in it and was
gien a chance to suggest and state my opinion. It was highly encouraging on the part of the top
management to gie us a patient hearing and at times een consider our suggestion.
$he working atmosphere is ery informal= there is a lot of interaction among the different
employees not only in one particular department but also throughout the organi!ation. $he informal
meetings and chat oer lunch, tea, breaks also bring about discussions and criticisms about
functioning of organi!ation, which though not ery explicitly but does act as a major influencing
factor.
5!i"ion < -a$in% pro!"";
6ecisions were taken at all leels. (ost of the employees had risen from the rank, with their
experience supported by some formal management education, being the guiding light for decision;
making. $he top management takes major decisions and the middle leel has no role to play in
this, the lower leel is out of <uestion of the whole process.
$he organi!ation is performing in the Serice Sector. 2or them it is the people and the processes,
which are important. $here has to be synchroni!ation among the arious departments of the
organi!ation. (ostly the 6irector took the major decisions but he always welcomed ideas and gae
ROLL NO.29 IMDR
39
it a thought.
As the organi!ation structure is not a ery complex one, the decisions were communicated easily
and there is a lot of transparency. $his is also because the ?mployees in the organi!ation uses
direct medium of communication. $hey do not call the attendant for the transferring any message.
Sometimes, it led to chaos but still the impact was better and there was no confusion among the
employees for any work.
?mployees are sent to workshops that are organi!ed in (umbai or 6elhi to update them and to be
abreast with the latest deelopments in this field. I obsered here that the decisions being made
hae always been implemented, though there were some politics inoled within the organi!ation
to take all the credits.
Goal < "ttin% pro!"";
,oals are the barometer from which one can know how far one has reached in a particular
direction that one intended to go. $hey are also the parameters against which one can compare
their performance and get the necessary feedback to come back on course or improe further.
In the organi!ation it was first hand experience of seeing all these theoretical concepts actually
being put into use. (ost of the times goals were in terms of deadlines and performance. It meant
that eeryday work of the office should be completed that day itself, otherwise the people related to
that work used to stay in the night till they complete the remaining.
2or getting enhanced performance from the employees there are many incentie schemes adopted
by the company. ,oal setting is done by taking inputs from all departments during the monthly
meetings.
ROLL NO.29 IMDR
$0
Control pro!"";
If things are not in control then the situation can become unmanageable, which might lead to lot of
wastage of time, money and efforts D all scarce things. $herefore it becomes necessary that there
is a proper mechanism whereby on can check what is happening around the organi!ation.
*ontrol was exercised at all leels, but more so at higher leels. $his could be because of more
concern with oneIs immediate tasks at the lower leels and a more holistic iew at higher leels. A
formal method of performance appraisal existed, which was totally dependent on experience and
seniority and most importantly it was not conducted on a regular basis.
I found most of the people working in the lower leel to be indifferent towards the goals of the
organi!ation. $hey are bidding their time out and gathering experience before moing on. $he top
management is also aware of this and surprisingly they are ; at least from the look of the things ;
not concerned about the whole matter. 1hen they can ery well know that they can do something.
Pr&or-in% !'ara!tri"ti!";
Productiity of employees was definitely aboe aerage, as rarely did I see anyone wasting time.
?eryone seemed to hae the right amount of work to do. Absenteeism was low and people
seemed to enjoy their work in the beginning, but with passage of time I got to know that the reason
of less absenteeism was the pressure from the client to meet deadlines, een then the <uality of
output was good and there was less of wastage.
&erall, the experience has been ery encouraging. $he work culture was conducie for great
performance. $here was political dynamics, making the ambience ery interesting to work.
Interactions were healthy and my colleagues were co;operatie.
ROLL NO.29 IMDR
$1
$here was no wastage of resources. $hatIs why operational expenses of the organi!ation are
amongst the lowest. $his also keeps the cost of running a office low thus, increasing per ?mployee
profit of the company.
ROLL NO.29 IMDR
$2
MY LEARNING E=PERIENCE
1hen I left the organi!ation after eight weeks of my summer training, I went back and reiewed the
whole episode in my mind. I tried to figure out what I had learnt and how my perspecties hae
changed. I was also trying out to figure the relation between theory and practice.
As my project inoled a lot of interaction with people I learned how to behae with officials, how to
get things done .&ne of the most significant things that I would like to mention, apart from the
technical knowledge is how I learnt to control my feelings, ego and handle relationships.
$he first thing that I noticed was the huge gap between theory and practice. 1hateer we learn
and study in class and from books cannot be implemented as such in the real world situations.
$hey hae to be modified according to the re<uirement and at least at best, these principles can be
used as tools.
$he theories of motiation work, but only at a subconscious leel. #obody use them as they are
propounded. (odern day thinkers express their iews in business maga!ines like '"R that
incenties reward doesnIt work as motiators. "ut as a matter of fact, incenties are used to
motiate the work force.
*onincing the management about the new trends and philosophies in management itself is a
difficult task because management fears to experiment with new concepts. ?en in my
organi!ation, which in true sense is a 47st century company, some things are still old fashioned as
that of the ,oernment offices.
I would specifically like to mention here that my boss was not an ("A and company is into a major
spree of recruiting management graduates. $heir belief in those management graduates is
<uestionable. &ut of the 7. employees working in our 6iision, only two were management;
,raduates.
ROLL NO.29 IMDR
$3
Another thing that struck me regarding motiation, while I was working with the loan projects team
is that no one can motiate a person until he is self;motiated. $his was amply clear from the
reaction of the team to any new project. (ost of them belieed that they had enough of this kind of
work.
?xperience wise, the summer internship helped in proiding an insight into how market functions
and how the organi!ation reacts to the enironment. Since I was in Raipur, the experience was
different and phenomenal. $here is a lack of professional attitude in the market. Also the consumer
behaior is <uite unpredictable at times. *onsumers do not look for the worth of the product or
serices rather they go by the instinct, brand name or their own perception. $o create an image in
such a market re<uires a lot of efforts because one does not know what property is going to click
with the customers.
ROLL NO.29 IMDR
$$
E=PERIENCE ) PAIN( AN5 PLEA(7RE(
In terms of my learning I am fully satisfied. (y only worry constantly was that I at this stage
of my career was not fully competent in terms of knowledge of a highly intricate system like
the (anagement "3 &bjecties. (y only <ualification for this kind of a enture was the
willingness to learn, and the willingness to work hard from my side, from the other side my
<ualification at the organi!ation was the trust inested in me by the 6irector and my project
guide (r. Pare! Jhimani. If I look back I think I was ery raw for this kind of a project. A
lot many times I felt thoroughly inade<uate to handle the pressure and the responsibility. I
was always anxious that I should do not anything wrong in my ignorance, since I saw lie
repercussions of eery new action. "ut at the same time had I got any other assignment I
would still hae done it +then be it credit rating or loan projects-. I would definitely hae
learnt how to do it. "ut I loed being a part of this particular project.
I learnt to adjust to the surroundings. 2or e.g. throughout the training I had to go from
computer to computer begging, and complete my entire work when someone or the other
did not need the computer. I actually sat after office hrs completing work and neer once
gae that as an excuse for not completing the work. $hat was the only discomfort that I
had, in terms of the facilities at Amitabh Agrawal ) *ompany. "ut I was not the only one,
when some of the staff did not hae their own computer, then it was impossible to get me
one. "ut this problem didnIt persist for a long, in the mid of the internship the director of the
company saw me once wondering for the computer and then he told me to use his
computer ) sit in his cabin wheneer I am in need of computer and he is not working on it.
As a trainee one would adjust to anything, but I wonder if tomorrow I get a job where I
hae to go to eery person in the office and literally beg for the computer, I would do that.
2rom the grapeine of the campus, regarding summer training I had prepared myself for
the worst, which is why all these things do not mean anything. In fact I was surprised that I
was treated extremely well at Amitabh Agrawal ) *ompany, een though a large amount of
it was due to the fact that my project guide happened to be the Senior *A ?xecutie and
my reporting was directly to the 6irector. In fact this shielded me from lot of things there.
$here are no ego hassles in going for alms, as trainees are not supposed to hae egos etc
ROLL NO.29 IMDR
$5
unless you really encounter gross injustice. $he purpose is clear; you are there to learn, to
do your work and go. 3ou do not hae a formal role in the system, and therefore no rights.
"ut once you become a paid employee the <uestion of rights and priileges trickles in. (y
sole purpose as a trainee was to learn, to proe my worth, whateer that was, since I
neer had any work experience. I am amused at my own standpoint now.
$his summer training reinforced my decision to be in the field of 2inance. I think, I hae
seen the worst, in terms of the resistance towards change and the pressure that comes
with it. So this decision to be in 2inance is not due to some lofty ideals now, I know the
conse<uences and the pressure of the other side of the coin.
A guilt that I still feel is that I did not obsere or een come in contact with most of the
teams of the organi!ation. $he only cadre that I came across and got to know properly is
the management at Amitabh Agrawal ) *ompany. $his whole experience of training in
2inance in that sense remained elite oriented in tandem with the popular fallacy that
(anagement is only for the administration, whereas the management philosophy does not
make any such distinction.
I understood the importance of timely and prompt documentation during the training
although it was boring to sit and key in data day after day.
In terms of obseration of organi!ational reality, I think I did that ery earnestly, at times
consciously at times unconsciously. 6uring the initial period of the training my location of
obseration was that of an outsider to the organi!ation, in the midst of it somewhere it
became that of an insider and now again whilst writing this report my location is that of an
outsider to it. 2rom these angles I find my perception of the organi!ational reality
tremendously arying.
$he most important lesson that I learnt was, that work goes on without you also, nothing is
going to stop for you, and organi!ations hae and must hae eternal identity and
ROLL NO.29 IMDR
$&
existence. 1hen I left after the training many things were half way, lots of things were
remaining to be done, and in my folly I thought :how would they do it without me>R
2rom my own experience and from the discussions with other fellow students, I often
wonder whether summer trainees are hired to state that candid obious, which the office
bearers in the organi!ation do not want to say themseles, in other words do organi!ations
want to shoot from the trainees shoulderR 1hat we see is definitely not so uni<ue that they
can not see it themseles. &r is it that a lot more is at stake for them to be truthful and
candid than for usR
It was a personal achieement since I stayed with my elder brother after a long time.
&ne of the phenomenon that astounded me at Amitabh Agrawal ) *ompany was that een
after haing almost no delegation of authority how the director alone used to manage
things in his personal and professional life, and still remain chilled, smiling, full of energy
and cool though he always has seeral things going on in his mind at the same moment, I
truly admire him and hae seen such an indiidual for the first time.
ROLL NO.29 IMDR
$'
INFERENCE(
>, *orporate are hesitant to change their consultants. Almost all of them were satisfied with
their consultants. $he corporate that are in business for oer two decades hae deeloped
a strong bondage with their consultants. ?en the consultants are liberal to them. In some
case, the clients are also so confident of the consultant that they release payment before
the official due date. $he banks swear by their names, as they are their loyal customers.
$he clients receie all facilities and serices re<uired by them.
?, $he industries which might shift in near future are restricted to do business with
consultancies, which proide them serices.
@, &ther consultancies who are giing alue added serices to their clients are not affecting
their business as of now but may do so in the near future.
A, ?en in the era of modern information and technology, Industries still rely on some of the
old methods of old consultancies, which this organi!ation has an adantage oer as they
are totally technology oriented. And for this, they are not ready to compare the serices
and rates offered by their consultancy to that of technology upgraded consultancies that
are offering better serices and effectie rates.
B, (any of the industries want the consultants to meet them and educate them about the
serices they offer, the amount they charge for those serices and the efficient ways for
documentation.
C, Also the industries do not bother to search for the operational excellence but the
consultancy in their close proximity.
ROLL NO.29 IMDR
$8
RECOMMEN5ATION(
>, Man poDr "'orta%: $he organi!ation should gie it a serious thought that it is not
haing enough human resources to handle een the day to day operations of it. $here is purely
shortage of man power. $he organi!ation most of the times is dependent upon the *A interns
for its regular operations also. $here is urgent re<uirement of human resources at all leels of
organi!ation.
?, Cratin% ADarn"": (any of the organi!ationIs clients also do not know what serices
the consultancy is offering. $he serices should be well adertised by word of mouth to all the
clients by the organi!ation.
@, Broa+n t' C#"to-r 3a": $he organi!ation should be enthusiastic for small and
medium scale companies also= the organi!ationIs strategy is to seek star corporate houses for
business. As small traders sometimes do big business and they can add to the olume.
A, Moti*ation o& -plo/": $he organi!ation should take serious steps to retain the
important resources to it. It is ery important to keep employees happy and motiated at the
work place. Although the working conditions are good but may be because of the monotony of
work employees feels demotiated and bugged from doing the same kind of work again and
again. &ne more reason to it probably be the stress which they feels because of the deadline
concept.
ROLL NO.29 IMDR
$9
BIBLIOGRAPHY
www.managementparadise.com
www.scribd.com
www.crisil.com
Risk (anagement and 2inancial Institution by %ohn *. 'ull
*orporate Resource allocation/ 2inancial, Strategic ) &rganisational perspecties by
$omkins *
*apital Inestment ) 2inancial 6ecision by 0ei
Risk management by *ouh, (.,6. ,alai and R. (ark
ROLL NO.29 IMDR
50

Project Report

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Project Report

Uploaded by

Copyright:

Available Formats

SUMMER INTERNSHIP REPORT

Summer Internship Project Report

You might also like