A PROJECT REPORT ON

SME FINANCE
At
DENA BANK (VASHI)

TOWARDS FULFILLMENT OF THE REQUIREMENTS OF POST

GRADUATE DEGREE IN MASTER OF MANAGEMENT STUDIES OF
MUMBAI UNIVERSITY

SUBMITTED BY
NIYATI R. CHAUDHARY

MMS- ROLL NO.: M1324

BATCH 2013-2015

UNDER THE GUIDANCE OF

PROF. V. NARAYANAN

FATHER C.RODRIGUES INSTITUTE OF MANAGEMENT STUDIES

VASHI, NAVI MUMBAI

EXECUTIVE SUMMARY

I have undertaken a study on the topic SME Finance which deals with learning the
importance of financing the SME Sector at Dena Bank.
SME Finance is the funding of small and medium sized enterprises and represents a major
function of the general business finance market in which capital for firms of types is
supplied, acquired, and priced.
In India, SME is the biggest provider of employment next only to Agriculture. The SMEs
constitute 95% of total industrial units and constitute 40% of total industrial output.
Small and medium enterprises (SMEs) are critical for the economic and social development
of emerging markets. They play a major role in creating jobs and generating income for low
income people. In many emerging markets, however, access to financial services for SMEs
remains severely constrained.
For financing SMEs, bank offers fund based and non-fund based limits for SME. Fund limits
are those in which the banks funds are directly utilized, as for instance, in the case of limits
against stocks or purchasing/discounting of bills. In short in Fund based bank places certain
funds at the disposal of borrowers and borrowers avail these funds.
Non-fund based facilities are such facilities extended by banks which do not involve outgo of
funds from the bank when the customer avails the facilities but may at a later date crystallise
into financial liability if the customer fails to honour the commitment made by availing these
facilities.

INDEX
Sr. No.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18

Topics
Dena Bank- Introduction.................................................................
Introduction to MSME....................................................................
SMEs in India.................................................................................
Definition of MSME.......................................................................
SME Policy.....................................................................................
Common Characteristics of SMEs..................................................
Problems of SMEs..........................................................................
Steps for SME loans.......................................................................
Overview of Advances...................................................................
Methods of Assessment..................................................................
Ratio Analysis.................................................................................
Lending Methods............................................................................
Analysis of SME Proposal............................................................
My comments on financial indicators...........................................
Learning Experience.......................................................................
Conclusion......................................................................................
Findings..........................................................................................
Bibliography...................................................................................

Page No.
8
10
12
13
16
17
19
21
23
27
28
32
34
38
41
42
43
44

DENA BANK- Introduction

Dena Bank is one of the earliest nationalized banks in India; headquartered in Mumbai. Dena
Bank was founded by the family of Devkaran Nanjee under the name Devkaran Nanjee
Banking Company Ltd. It found its new name, Dena Bank Ltd. (Devkaran Nanjee) when it
was incorporated as a Public Company in December 1939. The bank was nationalised (and
therefore dropped "Limited" from its name) in 1969 along with 13 other banks in India. The
bank's head office is in Mumbai, with a network of 1464 branches (as on March 2013) across
the country. The bank has a network of 1427 ATMs across India (as on March 2013).
Dena Bank is one of the most prestigious banks of India having a good market share. The
Bank is one among the few banks to receive the World Bank loan for technological
upgradation and training. They are the first bank to introduce Minor Savings Scheme, Credit
card in rural India known a Dena Krishi Sakh Patra, Drive-in ATM counter of Juhu, Mumbai
and Customer rating system for rating Bank Services.

Products and services

Dena bank provides its banking products and services in several categories like

Personal banking
Priority and SME
International banking
Corporate banking
Retail banking
Mortgage loans
Credit cards

Mission
DENA BANK will provide its
Customers - premier financial services of great value,
Staff - positive work environment and opportunity for growth and achievement,
Shareholders - superior financial returns,
Community - economic growth

Vision
DENA BANK will emerge as the most preferred Bank of customer choice in its area of
operations, by its reputation and performance

Logo

The logo of Dena Bank depicts Goddess Lakshmi, the Goddess of Wealth, according to
Hindu mythology.
It was the desire of the founding fathers of the Bank that the Bank should be a symbol of
prosperity for all its clients, and the logo represents this promise.
The contemporary 'D' in the logo reflects the dynamism, dedication and the drive towards
customer satisfaction.

INTRODUCTION TO MSME

Micro, Small and Medium Enterprises (MSME) sector has emerged as a highly vibrant and
dynamic sector of the Indian economy over the last five decades. MSMEs not only play
crucial role in providing large employment opportunities at comparatively lower capital cost
than large industries but also help in industrialization of rural & backward areas, thereby,
reducing regional imbalances, assuring more equitable distribution of national income and
wealth. MSMEs are complementary to large industries as ancillary units and this sector
contribute enormously to the socio- economic development of the country.
The MSMEs constitute over 90% of total enterprises in most of the economies and are
credited with generating the highest rates of employment growth and account for a major
share of industrial production and exports.
In India, the Micro, Small & Medium Enterprises (MSMEs) play a pivotal role in the overall
industrial economy of the country.
Micro and Small Enterprises (MSEs) always represented the model of socio-economic
policies of Government of India which emphasized judicious use of foreign exchange for
import of capital goods and inputs; labour intensive mode of production; employment
generation; non concentration of diffusion of economic power in the hands of few (as in the
case of big houses); discouraging monopolistic practices of production and marketing; and
finally effective contribution to foreign exchange earning of the nation with low importintensive operations. It was also coupled with the policy of de-concentration of industrial
activities in few geographical centers.
In recent years the Micro, Small & Medium Enterprises (MSME) sector has consistently
registered higher growth rate compared to the overall industrial sector. With its agility and
dynamism, the sector has shown admirable innovativeness and adaptability to survive the
recent economic downturn and recession.

As per available statistics (4th Census of MSME Sector), this sector employs an estimated
59.7 million persons spread over 26.1 million enterprises. It is estimated that in terms of
value, MSME sector accounts for about 45% of the manufacturing output and around 40% of
the total export of the country.
MSMEs have been established in almost all-major sectors in the Indian industry such as:
_ Food Processing
_ Agricultural Inputs
_ Chemicals & Pharmaceuticals
_ Engineering; Electrical, Electronics
_ Electro-medical equipment
_ Textiles and Garments
_ Leather and leather goods
_ Meat products
_ Bio-engineering
_ Sports goods
_ Plastics products
_ Computer Software, etc.

Small and Medium Enterprises (SMEs) In India

The small and medium enterprises segment has been a topic of intense deliberation among
banks, financial institutions, industry and academicians. In India, small and medium
enterprises (SME) is a generic term used to describe small scale industrial (SSI) units and
medium-scale industrial units.
The Small and Medium Industries occupy a very important position in any economy.
Traditionally they produce certain specialized items for which they enjoy virtual monopoly of
skill and expertise developed over the years. Many items produced in the small scale sector
are also used as raw materials in the large scale industry and thus small scale industries
contribute to large scale production in no small measure.
The SME sector produces a wide range of industrial products such as food products,
beverages, tobacco and tobacco products, cotton textiles, wool, silk, synthetic products, jute,
hemp & jute products, wood & wood products, furniture & fixtures, paper & paper products,
printing publishing and allied industries, machinery, machines, apparatus, appliances and
electrical machinery. SME sector also has a large number of service industries.
In India, SME is the biggest provider of employment next only to Agriculture. The SMEs
constitute 95% of total industrial units and constitute 40% of total industrial output.
Formerly, both Government and RBI credit policy placed emphasis on manufacturing units
from the Small Scale Sector. However, in order to make the size of the unit and the
technology employed by firms to be globally competitive, the definition of Small Scale
Sector was revisited. Keeping in view the same and the global practices, it was decided to
broaden the concept of SSI Sector by inclusion of services within its ambit as also including
the Medium Enterprises in a composite sector of Small & Medium Enterprises.
Subsequently, MSMED Act was operationalised with effect from 2nd October 2006, which
defines an enterprise instead of an industry to give recognition to service sector and also
defines a medium enterprise to facilitate technology upgradation.
Banks were advised to formulate comprehensive and more liberal policies than the existing
policies in respect of loans to SME Sector.
8

DEFINITION OF MSME
MICRO:Micro (manufacturing) Enterprises
Enterprises engaged in the manufacturing/production or preservation of goods and
whose investment in plant and machinery (original cost excluding land and building) does
not exceed Rs. 25 lakh, irrespective of the location of the unit.

Micro (service) Enterprises

Enterprises engaged in the providing/rendering of services and whose investment in
equipment (original cost excluding land and building and furniture, fitting and such items as
in 1.1.2) does not exceed Rs. 10 lakh.

SMALL:Small (manufacturing) Enterprises:

Enterprises engaged in the manufacture/production or preservation of goods & whose
investment in plant and machinery (original cost excluding land and building & the items
specified by the Ministry of Small Scale Industries vide its notification No.S.O.1722 (E)
Dated October 5, 2006 as furnished in Annexure I) does not exceed Rs. 5 crores.

Small (service) Enterprises

Enterprises engaged in the providing/rendering of services and whose investment in
equipment (original cost excluding land and building & furniture, fittings and other not
directly related to the service rendered or as may be under the micro, Small and Medium
Enterprises development, (MSMED), Act 2006) does not exceed Rs. 2 crore.

MEDIUM:Medium (manufacturing) Enterprises

Enterprises engaged in the manufacture/production or preservation of goods and whose
investment in plant and machinery (original cost excluding land and building and the items
specified by the Ministry of Small Industries vide its notification No.S.O. 1722(E) dated
October 5, 2006) is more than Rs. 5 crore but does not exceed Rs. 10 crore.

Medium (service) Enterprises

Enterprises engaged in the providing/rendering of services and whose investment in
equipment (original cost excluding land and building and furniture, fittings as such items as
in 1.1.2) is more than Rs. 2 crore but does not exceed Rs. 5 crore.

Banks lending to medium enterprises will not be included for the purpose of reckoning
under priority sector.
Manufacturing Sector

Service Sector

Original Investment

in Plant & Machinery

in Equipments

Micro Enterprises

Up to Rs.25 lacs

Up to Rs. 10 lacs.

Small Enterprises

From Rs.25 lacs to Rs.500

From Rs.10 lacs to Rs.200

lacs

lacs.

From Rs.500 lacs to Rs.1000

From Rs.200 lacs to

lacs

Rs.500 lacs.

Medium Enterprises

Tiny Unit would be Micro Enterprises. SSI would be Small Enterprises.

SMEs have been established in almost all-major sectors in the Indian industry such as:
10

1. Agriculture inputs
2. Chemical & Pharmaceuticals
3. Electrical, Electronics
4. Bio-engineering
5. Engineering
6. Food Processing
7. Electro-medical equipment
8. Textiles and Garments
9. Sports goods
10. Plastics products
11. Meat Products
12. Computer software
13. Leather and Leather goods etc.

11

SME Policy

Objectives
The SME Loan Policy is framed with the following objectives:

To improve flow of credit to SME sector.

To formulate norms of lending to SME sector, to ensure availability of adequate

and timely credit to the sector.

To provide guidelines to the branches to dispense credit to SME sector.

To devise an organizational structure at all levels for handing SME credit portfolio
in a more focussed manner.

APPLICABILITY OF THE POLICY:

Our Banks loan policy document covers policy guidelines for sanctioning fund based
credit facilities such as Working Capital Facilities, Term Loan facilities and all Non Fund
Based facilities. In case of advances to Small and Micro units, being a Priority Sector
Advance, RBI guidelines/Govt. of India guidelines are followed. Thus, the captioned policy
shall always act as supplementary and not a substitute for our Banks Loan Policy.

12

COMMON CHARACTERISTICS OF SMEs

(a) Born out of individual initiatives & skills

SME startups tend to evolve along a single entrepreneur or a small group of entrepreneurs; in
many cases; leveraging on a skill set. There are other SMEs being set up purely as a means of
earning livelihood. These includes many trading and retail establishments while most
countries continue SMEs to manufacturing services, others adopt a broader definition and
include retailing as well.

(b) Greater operational flexibility

The direct involvement of owner, coupled with flat hierarchical structures and less number of
people ensure that there is greater operational flexibility. Decision making such as changes in
price mix or product mix in response to market conditions is faster.

(c) Low cost of production

SMEs have lower overheads. This translates to lower cost of production, at least upto limited
volumes.

(d) High propensity to adopt technology

Traditionally SMEs have shown a propensity of being able to adopt and internalize the
technology being used by them.

(e) High employment orientation

SMEs are usually the prime drives of jobs, in some cases creating upto 80%. Jobs SMEs tend
to be labor intensive per se and are able to generate more jobs for every unit of investment,
compared to their bigger counterparts.
13

(f) Utilization of locally available human & material resources

SMEs provide jobs locally and hence utilize manpower available locally. Since it is available
for them to transport materials over long distances, they often improvise with materials which
are available locally.

14

PROBLEMS OF SMES

Financial problems of SMEs:

The financial problem of SMEs is the Root Cause for all the other problems faced by the
SME sector. The small and medium industrialists are generally poor and there are no facilities
for cheap credit. They fall into the clutches of money lender who charges very high rates of
interest, or else they borrow from the dealers of their goods, who exploit them by completing
them to sell their products at very low price. After the nationalization of 14 major Indian
Banks in July, 1969, the Commercial banks were providing only a small proportion of SMEs
financial requirements. Credit to the SME sector continues to be non-commensurate with its
contribution to the total industrial output. As against the share of the village and SME at 40%
in the industrial out, its share in total credit to the industrial sector is only about 30%.

Raw Material problem of SMEs:

This difficulty is experienced in a very pronounced form. The quantity, quality and regularity
of the supply of raw materials are not satisfactory. There are no quantity discounts, since
they are purchased in small quantities and hence charged, higher prices by suppliers.
Difficulty is also experienced in procuring semi-manufactured materials. Financial weakness
stands in the way of securing raw materials in bulk in a competitive market.

Production problem of SMEs:

SME units suffer from inadequate work space, power, lighting and ventilation, and safety
measures etc. These short comings have tended to endanger the health of workmen and
have adversely affected the rate of production. Many units are following primitive methods
of production. Adoption of modern techniques is either disliked by the entrepreneurs is not
feasible. Wage rates and service conditions of small industries are not attractive to skilled
labor.
Managerial problem of SMEs:
15

Small scale industries in our country have suffered from the lack of entrepreneurial ability to
develop initiative and undertake risks in the unexplored industrial fields. The inefficiency in
management comes first among managerial problems. The entrepreneurial ability of
promoters of cottage industries and SMEs are handicapped by technical knowhow in the
areas of production, finance, accounting and marketing management.

Sickness of SMEs:
A serious problem which is hampering small and medium sector has been sickness. Many
small units have fallen sick due to one problem or the other. Sickness is caused by two sets of
factors, Internal and external factors. From among the various internal and external causes
of sickness the important ones are bad management, high rate of capital gearing, inadequacy
of finance, short of raw materials, outdated plant and machinery, low labor productivity etc.,
Besides these factors, some aggregate economic behavior of the country such as
availability of credit, volume of money supply, capital market activity or level of
investment and price level fluctuations, may have important bearing on industrial sickness in
the country.

16

Steps for SME Loans

Application for loan by SME to branch

Inspection/Survey of SME by the Executives of that branch.

Sending the Documents of survey by Local branch to the zonal branch

Preparing credentials of Promoters and firm by branch and investigating the same

Estimating the amount of loan to be sanctioned and forwarding the documents for sanction
documents for sanctioning.

If the loan is been sanctioned then disbursement of the loan amount into account of the SM
disbursement of the loan amount into account of the SME.

The above figure shows the steps for availing finance through Bank using loans. Here
is the brief description of the above shown procedure:

First of all the SME who wants to avail loan has to visit the local branch office of the
bank of their area, where by the loan application is been filled by the SME.

After that the executives of that branch check whether all the necessary
documents are provided by the SME or not, then if all necessary documents are
submitted the next step comes whereby the officials of that local branch go to the
premises of that SME and just have a brief survey of promoter as well as the
premises.

After they are satisfied they send the file of necessary documents to the zonal
branch, where by the credit appraisal takes place, which consist of credit
appraisal of promoter, financial appraisal, determining cost of project,
understanding various means of finance used, profitability estimate, cash flow
projections , marketing appraisal etc. This step brings out the clear picture whether
the loan should be given to the SME or not?
17

If the branch is satisfied with the details then it forward the request of granting loan
to the sanctioning authority.

And finally after the verification by sanctioning authority, the disbursement of loan
amount takes place in the account of that SME

This whole procedure right from application to disbursement of loan amount

takes approximately 20-25 days as the procedure involves analysis of
documents by various branches and thus the movement of documents amongst them,
if all this procedure would have taken place at single place then it would take only
10-12 days for disbursement.

18

BTCLetankrmshoGufdiFUNDASE
Overview of Advances: Credit Facilities

19

A. FUND BASED
Fund limits are those in which the banks funds are directly utilized, as for instance, in the
case of limits against stocks or purchasing/discounting of bills. In short in Fund based bank
places certain funds at the disposal of borrowers and borrowers avail these funds.
1.

CASH CREDIT

Cash credit/overdraft is a form of credit facility in which a borrower is sanctioned a prearranged limit with the freedom to borrow as much money as he requires. It is operated in
exactly the same way as a current account on which an overdraft has been sanctioned. In
case of flow of credit to the account, he can withdraw afresh subject to the limit sanctioned.
Bank charges interest on the outstanding balances.
The customer need not draw at once the whole of the credit limit sanctioned but can withdraw
from his cash-credit account as and when he needs the funds and deposit the surplus
cash/funds proceeds of sale etc., into the account.
The various types of securities against which CC is allowed are pledge, hypothecation of
goods or produce, pledge of documents of title to goods, mortgage of immovable property,
book debts, trust securities, etc.
In CC accounts borrower is allowed to draw on account within the prescribed limit, and when
required.

2. TERM LOAN
Term loans are sanctioned for acquisition of fixed assets like land, building, plant &
machinery, office equipments, furniture & fixture, etc for purchase of transport vehicles, for
purchase of agriculture equipments, machinery & other movable assets like tractors, pumps
sets, cattle, etc.
The term loan would be a loan, which is not a demand loan and is repayable in terms i.e.
installments irrespective of period or the security cover.
Term loans are normally granted for the period varying from 3 to 7 years and in exceptional
cases beyond 7 yrs.
20

B. NON FUND BASED

Non-fund based facilities are such facilities extended by banks which do not involve outgo of
funds from the bank when the customer avails the facilities but may at a later date crystallise
into financial liability if the customer fails to honour the commitment made by availing these
facilities.
Non-fund limits are those in which the banks funds are not directly involved but where the
banks funds would be involved in certain contingencies.
Non-fund based facilities are generally extended in the form of Bank Guarantees,
Acceptances and Letters of Credit.

1. BANK GUARANTEE
Bank Guarantee is a promise by Bank on behalf of its customer to a third party to pay an
amount specified in guarantee deed in case the customer fails to perform the obligation as
stipulated in deed.
Issuing of guarantees on the behalf of their customers to third parties is one of the services
rendered by banks. Such guarantees are contracts to perform the promise or discharge the
liability of the constituent on whose behalf they are given, in case of his default or failure to
perform the contracts undertaken by him.
The party in whose favor the guarantee is given is called the beneficiary, whereas the issuing
bank is called the guarantor and the third party on whose behalf of guarantee is given is
called the principal debtor. Every guarantee must specify the amount and period of the
liability to be undertaken by the bank.
Bank Guarantee can be financial guarantee or performance guarantee.

2. LETTER OF CREDIT
Letter of Credit is a document issued by Bank which usually provides an irrevocable
undertaking for payment to a beneficiary against submission of documents as stated in letter
of credit.

21

Letter of credit (LC) is issued by the bank at the request of its customer in favor of third party
informing him that the bank undertakes to accept the bills drawn on its customers up to the
amount stated in the Letter of credit subject to fulfillment of the conditions stipulated therein.
Therefore, when bank issues Letter of credit, it assumes responsibility to pay its beneficiary
on production of bills drawn in accordance with the terms and conditions of the Letter of
credit.

WORKING CAPITAL FINANCE

Working Capital Finance (WCF) is extended for carrying out normal trading/ manufacturing
activities. The working capital finance is provided for a relatively shorter period generally for
a period of 1 year and renewed on yearly basis considering the performance of the borrower.
The Working Capital Finance is considered only after project nearing completion and after
full tie up of term loan requirement.
The Working Capital limits of the borrower are assessed by adopting various methods such as
Projected Turnover Method (Nayak Committee Recommendation), Permissible Bank Finance
Method, Cash Budget Method etc. depending upon the aggregate working capital limit
required / enjoyed from the banking system, nature of activity, production cycle etc.

22

Methods of assessment or lending methods

Type of borrower

Method of assessment

For credit limit up to Rs 2crore

Turnover Method

(Rs 5Crore in case of MSME)

But in case when working capital cycle is

higher, the borrower will have the choice to
be assessed under Turnover method or
Modified MPBF method.

For credit limit beyond Rs 2crore

Modified MPBF method.

(Rs 5crore in case of MSME)

For industries where operations are seasonal

or project based in nature like tea, sugar,
software, contractors, builders & developers,
etc

In case of software industry

Working capital upto Rs. 2crore - Turnover
method with an option to borrower to be
assessed under cash budget method
Working capital above Rs. 2crore Cash
Budget Method

Contractor/ Builder & Developers

Cash Budget method or Modified MPBF
method as deemed fit on case to case basis.

Other Seasonal industries viz sugar, tea, jute,

etc
Cash Budget Method

23

Ratio Analysis
The performance of a unit is judged in the following parameters:a) Growth in sales
b) Margin of profit
c) Utilization (i.e. turnover) of assets
d) Financial strength/health
Financial ratios in respect of these parameters should be calculated and used as a measure of
evaluation of performance. However, ratio by themselves cannot be good or bad but must be
judged against ratio of previous years or against those of similar units in the same industry or
of an entire industry. Reasons for an upward or downward trend in ratios have to be found
and the ratios interpreted accordingly.

1. Growth in Sales:
Growth in sales is an important indicator of progress of a unit. The growth may be either in
terms of value or in terms of number of unit sold. Thus, although the figures may show an
increase in sales, the increase may be due to an increase in the price per unit.

The ratio for evaluating growth in sales is

Percentage increase = (Current years sales - Previous years sales) *100
Previous years sales
This ratio can be calculated in terms of amount or in terms of number of unit sold.

24

2. Margin of profit:
Every concern would like to make profit. However, the margin of profit and the quantum
have to be compared over the years. There are four ratios through which this can be done.

a) Gross margin ratio = Gross Profit * 100

Net Sales
b) Operating profit margin ratio =

Operating profit * 100

Net Sales

c) PBIT ratio = Profit before interest & tax * 100

Net Sales

d) Net profit margin ratio = Net profit * 100

Net Sales
The higher the ratio, the higher is the operating efficiency of the unit.

3. Utilization of Assets:
The efficiency of a concern is judged from the extent to which it utilizes its assets. If assets
are not fully utilized, it would mean that the money invested in these assets is lying idle and
this is a cost to the firm. The assets could be land and building, plant and machinery or
inventory or debtors; each of these should be utilized in such a way that they contribute the
maximum towards the profits of the firm. For a manufacturing concern, the use of assets is
for achieving sales and hence ratios based on sales and assets are used to evaluate
performance. The following ratios are useful:a) Total assets turnover ratio =
b) Current assets turnover =

Gross Sales
Total Tangible Assets
Gross Sales
Current Assets

25

c) Fixed assets turnover ratio =

Gross Sales
Fixed Assets

Normally, a higher ratio means better utilization of assets. However, too high a ratio
(especially Current Assets Turnover ratio) could mean inadequate investment for that levels
of activity-in other words, over trading.

4. Financial Strength:
There are two aspects of financial strength- liquidity and solvency.
Liquidity is the ability of the firm to pay off current liabilities (normally) by the conversion of
assets into cash through sales.

Current Ratio =

Current Assets
Current Liabilities

According to the guidelines given to DENA BANK the ideal level is at 1.33:1 however the
acceptable level is at 1.17:1.

Liquidity can also be measured through,

Net Working Capital = Current assets Current liabilities
The higher the ratio, the higher is liquidity.

In order to judge whether the borrower will able to pay loan installments and interest
periodically, the Debt Service Coverage Ratio (D.S.C.R.) is used. It is calculated thus:

26

Debt Service Coverage Ratio

= Net profit (after tax) + interest on long term loan + depreciation
Installment of long term loan + interest on long term loan
It is also important for the bank to assess the firms debt paying capacity over a period. Such
capacity is derived by calculating ratio like Debt Service Coverage Ratio minimum
acceptable level is 1.50.

Debt Equity Ratio

It is a financial ratio indicating the relative proportion of equity and debt used to finance
a company's assets. This ratio is also known as Risk, Gearing or Leverage. A high debt equity
ratio is not preferable by an investor as the company already has acquired high amount of
funds from market thereby reducing the investor share over the securities available,
increasing the risk.

Interest coverage ratio:Interest Coverage Ratio is an indicator as to the number of times the profit covers the
interest liability of the company. This is a risk parameter and an indicator to the extent to
which the interest liability will be serviced on the time. Interest for this purpose would mean
gross interest payable by the borrower and profit would mean the gross profit before interest.

Interest Coverage Ratio = Net profit + Depreciation + Interest

Interest

The more the number of times of coverage of interest the better it would be for the financial
strength of the company. Interest coverage should be minimum 1.5 times.

27

LENDING METHODS
1. Modified MPBF method
2. Turnover method
3. Cash budget method

Modified MPBF method

For credit limit beyond Rs 2crore (Rs 5crore in case of MSME)
Contractor/ Builder & Developers (Cash Budget method or Modified MPBF method as
deemed fit on case to case basis.)
1. Total Current Assets
2. Other Current Liabilities (Other than bank borrowing)
3. Working Capital Gap (WCG)
(1 - 2)
4. Min. stipulated Net Working Capital, i.e. 25% of ( WCG-export receivable)
5. Actual/Projected net working capital
6. Item 3 minus item 4
7. Item 3 minus item 5
8. Maximum Permissible Bank Finance (Item 6 or 7 whichever is lower)
9. Excess borrowings representing short fall in NWC (4 - 5)
Turnover method
For credit limit up to Rs 2crore (Rs 5Crore in case of MSME)
In case of software industry when working capital upto Rs. 2crore (Turnover method with
an option to borrower to be assessed under cash budget method)
1. Projected annual Turnover/Gross sales
2. Working capital requirement @ 25 % of PAT
3. Bank borrowing @20% of PAT
4. Minimum NWC @ 5% of PAT
5. Actual NWC/Projected NWC
6. MPBF [2-3]
Cash Budget method
In case of software industry when working capital above Rs. 2crore
In case of contractor/ Builder & Developers (Cash Budget method or Modified MPBF
method as deemed fit on case to case basis.)
28

Other Seasonal industries viz sugar, tea, jute, etc

Beginning Cash Balance
Expected Cash Receipts:
Cash sales
Collection of accounts receivable
Other income
Total Cash
Expected Cash Payments:
Raw materials (or inventory)
Payroll
Other direct expenses
Advertising
Selling expenses
Administrative expenses
Plant and equipment expenditures
Other payments
Total Cash Expenses
Ending Cash Balance

29

Analysis of SME Proposal (Case-study)

Proposal for
Sanction of Fresh Cash Credit Hypothecation (Stock-cum- Book Debts) limit of Rs 67.50 lacs
(Rupees Sixty Seven Lacs Fifty Thousands)
Name of Business entity
Business Address
Line of Activity

M/S XYZ
Mumbai
Traders in Building Material & Ceramics
Authorized Distributor of ABC

Banking History
M/S XYZ is proprietary concern established on 01.08.2007.
The firm is engaged in the business of trading of Building materials & titles and is authorized
distributor of MNO since 01.08.2008. The promoter is well experienced in this line of activity.
At present firm is maintaining current accounts with IDBI Bank, Abhudaya Co-op Bank, etc.
They are not enjoying any credit facilities with any bank.
The Credit Opinion Report from IDBI Bank has been obtained and satisfactory operation
observed without having any credit facility.
Further to that, Branch has also obtained Credit Report from X Bank and Y Bank and found
operation is satisfactory.
Business of the firm is growing and to meet the increased working capital needs of the
growing business firm has requested for working capital finance.
The firm is presently operating from hired shop / goes down in Mumbai.
The firm has offered immovable property situated at Mumbai having realizable value of
Rs.67.50 lacs as collateral security which will cover 100% of the proposed limit.
The limit requested falls within the norms lay down by our Bank under Trade Finance
Scheme.
The proposal Complies with the norms laid down are given here under:
1) The Firm is dealing with Commodities like Titles and building material.
2) The proprietor is permanent residents of Mumbai.
3) The Property offered as Collateral Security is also located within Mumbai.
4) The Firm is to bank exclusively with Dena Bank for Business Purposes. All other
accounts with other banks are proposed to be closed before release of the limit.

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5) The Firm is registered under Sales Tax.

6) Sales Tax return for the current financial year 2012-13 has been obtained and verified.
7) Appropriate License is issued by Competent Authority under Shop & Establishment
Act.
8) The limits are secured by more than 100% collateral security.
9) The total DER is well within maximum permitted level as per Schemes guidelines
Details of existing facilities enjoyed / Current A/c with us, if any & conduct of account
Fresh Limit Proposed.
The account is newly canvassed by the Branch. The firm is not having any limit and now
requested for fresh Cash Credit limit of Rs 80.00 lacs.

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Details of existing limits enjoyed / Current A/c with Banks, present

1. IDBI Bank.
2. Abhudaya Bank
3. Kotak Mahindra Bank
4. HDFC Bank
5. Term Loan of Rs.38.00 lacs against Shop from Abhudaya Co-op Bank with present
O/S of Rs.26.27 lacs.
6. Housing Loan of Rs.9.49 lacs from Abhudaya Co-op Bank with present O/S of Rs.8.96
lacs.
Hence it is stipulated that all the above current accounts to be closed before release of Limit in
compliance with Trade Finance Policy and firm to exclusively bank with us.
Further, branch to obtain satisfactory credit report from the Abhyudaya Co-op Bank for loan
accounts maintained with them before disbursement of proposed limit.

Key Financial Indicators

(For borrowers with credit limit in excess of Rs.10 lacs or Turnover in excess of Rs.40 lacs,
financial data from audited B/S to be taken)
S/N

Description

2010-11

2011-12

2012-13

2013-14

A
B
C

Turnover (gross sales)

Net Profits before Tax
Total Outside

Audited
341.48
15.00
115.35

Audited
357.37
16.70
83.32

Estimated
470.00
22.15
143.77

Projected
587.50
25.83
155.00

D
E
F
G

Liabilities
Net Worth
Debt Equity Ratio [c/d]
Current Ratio
Interest Coverage

29.02
3.97
1.74
4.42

39.32
2.12
1.73
5.50

53.47
2.69
1.50
3.18

70.29
2.20
1.57
2.59

Ratio
Current Asset Turnover

9.43

7.32

6.27

6.53

Ratio
Security Offered

Primary (1) Hypothecation of Stocks and Book

Value of Primary Security

debts.
Stock- Rs 79.03 lacs (As per Stock Statement Nov

(Stock + Book Debts)

2011)

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Book debt- Rs 84.74 lacs

Realizable Value of Collateral &

Total- Rs 163.77 lacs

Realizable Value : Rs 67.50 lac

Collateral Coverage
Rate of Interest
Internal Credit Rating

Coverage of collateral : 100.00%

Base Rate+2.05=12.50%
Score : 81
Grade : BBB

Computation of limits
(Rs in lacs)
S no
A
B
C
D
E
F
F
G

Particulars
Actual Turnover of previous year
Projected Turnover for current year
% change in turnover (B should not be more than 125% of A)
Accepted Sales Turnover i.e. 125% of previous sales turnover
Permissible limit (20% of D)
Margin requirement (5% of D)
Amount of limit Requested
MPBF (least of D & E)
Of which : Fund based

Amount
Rs 357.37
Rs 470.00
31%
Rs 446.71
Rs 89.34
Rs 22.33
Rs 67.50
Rs 67.50
Rs 67.50

Non-Fund based
Actual Net Working Capital AS of 31.03.2012 against the

Nil
Rs.48.98

minimum margin requirement of Rs.22.33 lacs

In view of the above and looking too good relationship and better business opportunity,
branch has recommended for sanction of CCH Limit of Rs.67.50 lacs to the firm.

My Comments on financial indicators

Sales Turnover: The sales turnover of the firm has increased from Rs.341.48 lacs as of
31.03.2011 to Rs.357.37 lacs as of 31.03.2012 representing a growth of 5%. The Firm has
estimated Sales Turnover of Rs 470.00 lacs for the year 2012-13 representing a growth of
31% over the previous year, which they are confident to achieve as they have already
reported a turnover of Rs.352.32 lacs for the period from April, 2012 to December,15 2012
which when amortized comes to 100%. Hence the estimated sales turnover of Rs. 470.00 lacs
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for 2012-13 can be considered as achievable and accepted. Similarly, for the year ending
31.03.2014 the firm has projected sales turnover of Rs.587.50 lacs representing a growth of
around 25%, which is also considered as achievable looking to the past track record and
availability of working capital.

Net Profit before Tax: The Net Profit of the firm shows an increasing trend over the past
years. The profit margins are in the range of 3-4% which is considered as satisfactory looking
to the bulk business module of the firm. The profits of the firm is at par with the Industry
standards. The profits including margins are expected to improve during the current year
ending 31.03.2013 and same trend is projected for 2014 and the same can be considered as
achievable.

Current Ratio: The current ratio for the past two years as well as estimated/ projected for the
next two years can be considered as satisfactory as the same are above the benchmark level of
Policy guidelines.

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Debt equity ratio: The Capital/ Net worth of the firm is strong and it is increasing due
retention of retained earnings. More over the proprietor is retaining major portion of the
profit in the business and hence current net worth of the firm is satisfactory.
In view of the above the Debt Equity Ratio (DER) for the year 2011 & 2012 is comfortable at
3.97 and 2.12 respectively as against the maximum permissible level of 6:1 as required under
Trade Finance scheme. Further the estimated/ projected DER for 31.03.2013 & 31.03.2014 is
well within the maximum permissible level of 6:1 and can be considered as satisfactory.

Interest Service Coverage Ratio: The above ratios on actual basis for the last two years as
well as estimated level for the current year ending 31.03.2013 are above the minimum
required level and hence can be considered as satisfactory.
The overall financial position of the firm is satisfactory and with the increase in business over
the next years the financial position is expected to further improve.

Projected Turnover
The Sales Turnover of the firm shows an increasing trend from Rs.341.48 lacs as of
31.03.2011 to Rs.357.37 lacs as of 31.03.2012 representing a growth of 5%.
The Firm has estimated Sales Turnover of Rs 470.00 lacs for the 2012-13 representing a
growth of 31% over the previous year, which they are confident to achieve as they have
already reported a turnover of Rs.352.32 lacs for the period from April,2012 to December, 15
2012 which when they annualized comes to 105%. Hence the estimated sales turnover of
Rs.470.00 lacs for 2012-13 can be considered as achievable and accepted. Similarly, for the
year ending 31.03.2014 the firm has projected sales turnover of Rs.587.50 lacs representing a
growth of around 25%, which is also considered as achievable looking to the past track
record and availability of working capital.

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Debt Equity Ratio

Debt Equity Ratio (DER) for the year 2011 & 2012 is comfortable at 3.97 and 2.12
respectively as against the maximum permissible level of 6:1 as required under Trade Finance
Scheme. Further the estimated / projected DER for 31.03.2013 & 31.03.2014 is well within
the maximum permissible level of 6:1 and can be considered as satisfactory.

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Learning Experience

It was a great experience to join a Nationalized Bank for training and learning things. I learnt
a lot in the Credit Department (SME) of Dena Bank. Here I worked on appraisals, which are
beyond the scope of this project. The new day in the premises of the bank started with a new
project report in the hands. After reading carefully the whole project report, I had to make
proposals on a format of crediting appraisal of the bank.
Various proposals were look after by me. After making the proposals, I handed over all the
work done to my senior. He used to make necessary corrections in the work done and hence it
was an opportunity for me to learn more and more.
Hence the whole experience of working in such a place was amazing. I learnt to a great extent
about the whole procedures to sanction a limit to the different borrowers.

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Conclusions

The project gives the detailed knowledge of the whole process of sanction a limit which Dena
Bank performs.
Starting from the loan application from the borrower and compilation of Confidential Reports
on him and the guarantor, the process continues till the disbursement of loan and after it the
close monitoring till the adjustments of Banks Loan.
The project was an attempt to understand and perform the work in the credit transaction and
the credit appraisal which I had included in this project is just an example of it.
I had worked on many such appraisals, which are beyond the scope of this project. Hence the
whole experience of working in such a Nationalized Bank was amazing. I found lots of things
to learn and understand here. Hence to conclude, I just state that it was a great job done in a
Nationalized Bank with the experienced employees.

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Findings

After undertaking the in depth theoretical study such as types of advances, SME
policy of DENA BANK, CMA, working capital and various financial under SMEs, it was
found that the several Industries are growing through credit/advances granted by banks
and SMEs is a one of the fast growing Industries within all the sectors.

In India, the Micro and Small Enterprises (MSEs) sector plays a pivotal role in the
overall industrial economy of the country. It is estimated that in terms of value, the sector
accounts for about for 39% of the manufacturing output and around 33% of the total
export of the country. Further, in recent years the MSE sector has consistently registered
higher growth rate compared to the overall industrial sector. The major advantage of the
sector is its employment potential at low capital cost. As per available statistics, this
sector employs an estimated 31 million persons spread over 12.8 million enterprises and
the labour intensity in the MSE sector is estimated to be almost 4 times higher than the
large enterprises.

Thus SME plays a very significant role in the socio-economic development of the
country.

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Bibliography
www.denabank.com
en.wikipedia.org/wiki/Dena_Bank

Circulars and Policy of Dena bank

Proposals of SME

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