PROJECT ON

Analysis Of Credit
Appraisal

Swati Sucharita

16202204
CONTENTS
CHAPTER 1 Introduction

Objective
Methodology
Limitations

CHAPTER 2Commercial Bank and its Objective

Objective
Primary Function

CHAPTER 3Andhra Bank

History
Vision
Mission
Awards and Achievements

CHAPTER 4Credit Philosophy and Policy with Regards to Andhra Bank

Introduction to Credit Appraisal

A Case Study of XYZ MF Pvt Ltd

CONCLUSION
EXECUTIVE SUMMARY

Andhra Bank underwent a drastic change in terms of its working and policies after liberalization,
the field of Trade Finance and Credit Appraisal also witnessed these changes .The project deals
with the development of understanding of credit appraisal policies adopted by the bank. It also
helps in improving knowledge about credit appraisal system and to know the patterns of credit
appraisal in Andhra Bank. Credit appraisal is a holistic exercise which starts from the time a
prospective borrower walks into the branch and culminates in credit delivery and monitoring
with the objective of ensuring and maintaining the quality of lending and managing credit risk
within acceptable limits.

There are two types of proposals that are received by the Bank for funds. The first types of
proposals are for starting a new project or for setting up a new company, also known as project
financing and the other proposals are for additional funds requirements (working capital).
Financial requirements for Project Finance and Working Capital purposes are taken care of at the
Credit Department. Companies that intend to seek credit facilities approach the bank. Primarily,
credit is required for following purpose:

1. Working capital finance

2. Term loan for projects

Prior to nationalization the bank had a security centric approach for sanctioning the proposals i.e.
the Bank sanctioned the proposal for credit facility to the company when it had security against
the amount given. There are two types of securities and collateral. The primary security is the
asset created out of the Banks finance. Collateral security refers to other assets owned by the
company or its directors. Previously there were no regulatory issues or capital adequacy issues.
But it was observed that during boom period many people who did not even had the knowledge
about a particular industry jumped in and were interested for finance. Eventually such companies
resulted to be failures. RBI norms for Non-Performing Assets (NPA) are very strict. Thus to
avoid many of the accounts becoming NPAs the Bank changed its security centric approach.
Credit appraisal is done to evaluate the credit worthiness of a borrower. The creditappraisals for
any organization basically follow these steps: Assessment of creditneed, financial statement
analysis, and financial ratios of the company, credit rating,working capital requirement, term
loan analysis, submission of documents, NPAclassification and recovery.
CHAPTER 1

INTRODUCTION
Financial crises have become the main cause for recession. The world economy has been majorly
affected from the crisis. The fall of securities in stock exchange has become the root cause of
bankruptcy of many financial institutions and individuals. The root cause of the economic and
financial crisis is credit default of big companies and individuals which badly impacts the world
economy. So in the present scenario analyzing ones credit worthiness has become very
important for any financial institution before providing any form of credit facility so that such
situation doesnt arise in near future again.

Analysis of the credit worthiness of the borrowers is known as Credit Appraisal. In order to
understand the credit appraisal system followed by the banks this project has been conducted.
The project has analyzed the credit appraisal procedure with special reference to Andhra Bank
which includes knowing about the different credit facilities provided by the banks to its
customers, how a loan proposal is being made, what are the formalities that is to be satisfied and
most importantly knowing about the various credit appraisal techniques which are different for
each type of credit facility.

Before going further it is necessary to understand the need and basic framework of the project.
Therefore this chapter provides an introduction to the topic, objective of the project, reasons for
selecting the project and the basic structure and framework how the project proceeds. In order to
understand the importance of the topic selected an introduction to the overview of the
commercial bank, its functions, and present trends and growth in bank credit are required and it
is covered in this chapter.
Reasons for selecting the project

Whenever an individual or a company uses a credit that means they are borrowing money that
they promise to repay with in a pre-decided period. In order to assess the repaying capability i.e.
to evaluate their credit worthiness banks use various techniques that differ with the different
types of credit facilities provided by the bank. In the current scenario where it is seen that big
companies and financial institutions have been bankrupted just because of credit default so
Credit Appraisal has become an important aspect in the banking sector and is gaining prime
importance.

It is the incident of credit defaults that gave rise to the financial crisis of 2008-09. But in India
the credit default is comparatively less that other countries such as US. One of the reasons
leading to this may be good appraisal techniques used by banks and financial institutions in
India. Eventually the importance of this project is mainly to understand the credit appraisal
techniques used by the banks with special reference to Andhra Bank.

Scheme of the project

It covers the objective and structure of the project which is discussed as follows:-

Objective of the project

The overall objective of this project is to understand the current credit appraisal system used in
banks. The Credit Appraisal system has been analyzed as per the different credit facilities
provided by the bank. The detailed explanation about the techniques and process has been
discussed in detail in the further chapters.

Methodology
Sources of data: Secondary data source

Secondary data:Secondary data are those,which have already been collected by someone else.

Sources those helpful in research were:-

 1. Balance sheet of the company
2. Credit policy book of the bank
3. Office note prepared by bank
4. Bank website
5. Various articles, circulars and manuals of bank

Limitations of the study

There is no information regarding the total amount of credit available to a particular

industry thus the inclusion of industry analysis is limited.
All the proposals cannot be studied due to lack of time.
No involvement in the Banks credit appraisal process was possible.
CHAPTER 2

Commercial banks and its objectives

A commercial bank is a type of financial intermediary that provides checking accounts, savings
accounts, and money market accounts and that accepts time deposits. They accept deposits
fromthe public and lend them in the form of short-term loan to traders and manufacturers. They
provide working capital to the business in the form of overdraft and cash credit. Besides, they
perform a number of subsidiary services like collection of bills, cheques and drafts, buying
andselling of securities etc.Some use the term "commercial bank" to refer to a bank or a division
of a bank primarily dealing with deposits and loans from corporations or large businesses. This is
what people normally call a "bank". The term "commercial" was used to distinguish it from an
investment bank.

Commercial banks are the oldest, biggest and fastest growing financial intermediaries in India.
They are also the most important depositories of public savings and the most important
disbursers of finance. Commercial banking in India is a unique banking system, the like of which
exists nowhere in the world. The truth of this statement becomes clear as one studies the
philosophy and approaches that have contributed to the evolution of banking policy, programmes
and operations in India.

The banking system in India works under constraints that go with social control and public
ownership. The public ownership of banks has been achieved in three stages: 1995, july 1969
and April, 1980. Not only the public sector banks but also the private sector and foreign banks
are required to meet the targets in respect of sectoral deployment of credit, regional distribution
of branches, and regional credit deposit ratios. The operations of banks have been determined by
lead bank scheme, Differential Rate of interest scheme, Credit authorization scheme, inventory
norms and lending systems prescribed by the authorities, the formulation of credit plans, and
service area approach.

Commercial Banks in India have a special role in India. The privileged role of the banks is the
result of their unique features. The liabilities of Bank are money and therefore they are important
part of the payment mechanism of any country. For a financial system to mobilise and allocate
savings of the country successfully and productively and to facilitate day-to-day transactions
there must be a class of financial institutions that the public views are as safe and convenient
outlets for its savings. The structure and working of the banking system are integral to a
countrys financial stability and economic growth. It has been rightly claimed that the
diversification and development of Indian Economy are in no small measure due to the active
role banks have played financing economic activities of different sectors.
Major objectives of commercial banks

Primary functions of Commercial Banks in Lending Money

Money mobilized by bankers through accepting deposits is disbursed to the needy persons for
productive purposes. This function is very important because the economic development of the
country mainly depends on the credit schemes of banks. Banks lend money in different forms.
They can be either secured or unsecured. The most popular forms of lending are:
1. Overdraft.
2. Cash Credits.
3. Loans and Advances.
4. Discounting of Bills of Exchange.

1. Overdraft
An overdraft is an arrangement by which the customer is permitted to draw money over and
above the credit balance in his account. This facility is provided only to holders of current
accounts. It is granted against some collateral security. However the customers have to pay
interest for the overdrawn amount.
2. Cash Credit
Cash credit is a short-term credit given to the businessmen for meeting their working capital
requirements. It is normally made against certain security. Entire amount of loan will not be
given at one particular time. The banker opens the cash credit account in the name of the
borrower and permits him to withdraw money from time to time up to a certain limit fixed by the
value of stocks kept in the go-down of the borrower. The go-down remains in the possession of
the bank.
The borrower takes money from the cash credit account as per his requirements. He cannot at
any time exceed the credit limit allowed to him. Here interest is charged only on the amount
actually withdrawn by the account holders from the account. This type of loan is very popular
among businessmen in India.

3. Loans and Advances

These are direct loans given to all type of customers. These loans are given against the security
of the movable and immovable properties. The amount of loan is paid as cash, or customers
account is credited with it so that he can withdraw the amount from his account at any time. The
interest is charged on the full amount of the loan irrespective of the amount of cash withdrawn
by him.

The loan is repayable in a lump sum on the expiry of the term for which loan was given. Banks
themselves are permitted to determine the rate of interest to be charged on direct loans. However,
banks are asked to observe the minimum rate known as Prime Lending Rate while fixing the
interest rate here.

4. Discounting of Bills of Exchange

Discounting of bills of exchange is another type of lending by the modern banks. If the holder
of bill of exchange needs money immediately, he can get it discounted by the bank. The bank
pays the value of the bill to the holder after deducting its commission. When the bill matures, the
bank gets payment from the party, which had accepted the bill. By discounting the bills, the
banker actually converts a future claim into present money, which enables the holder to carry on
his business smoothly. The banker should protect himself against bogus bills. Otherwise he will
incur a heavy loss.

Bank Credit
The borrowing capacity provided to an individual by the banking system, in the form of credit or
a loan is known as a bank credit. The total bank credit the individual has is the sum of the
borrowing capacity each lender bank provides to the individual.

The operating paradigms of the banking industry in general and credit dispensation in particular
have gone through a major upheaval.

Lending rates have fallen sharply.

Traditional growth and earning such as corporate credit has been either slow or not
profitable as before.
Banks moving into retail finance, interest rate on the once attractive retail loans also
started coming down.
Credit risks has went up and new types risks are surfaced
Types of credit-

Bank in India provide mainly short term credit for financing working capital needs although, as
will be seen subsequently, their term loans have increased over the years. The various types of
advances provide by them are: (a) Term Loans, (b) cash credit, (c) overdrafts, (d) demand Loans
, (e) purchase and discounting of commercial bills, and, (f) instalment or hire purchase credit.

Volume of Credit-
Commercial banks are a major source of finance to industry and commerce. The scheduled
advances to Small scale industries and allied services(Outstanding) has increased from Rs 17.04
billion in 1977 to Rs 129.68 billion in 1987, to Rs 457.71 in 1997, Rs 1012.85 in 2005-06 ,
5276.84 in 2011-12 and to Rs 9957.12 billion in 2015-16. Banks have introduced many
innovative schemes for the disbursement of credit. Among such schemes are village adoption,
agriculture development branches and equity fund for small units. Recently, most of the banks
have introduced attractive education loan schemes for pursuing studies at home or abroad. They
have introduced attractive educational loan schemes for pursuing studies at home or abroad.
They have moved in the direction of bridging certain defects or gaps in their policies, such as
giving too much credit to large scale industrial units and commerce and giving too little credit to
agriculture, small industries and so on.
The Public Sector Banks are still the leading lenders though growth has declined compared to
previous quarter. The credit growth rate has dipped sharply in foreign and private banks
compared to previous quarter. In all, the credit growth has slipped in this quarter.

The value of loans in India increased 5.5 percent year-on-year in the two weeks to April 14th,
2017. Loan Growth in India averaged 12.29 percent from 2012 until 2017, reaching an all time
high of 18.70 percent in April of 2012 and a record low of 4.10 percent in March of 2017.
Recent policy developments Regarding Bank Credit

Bank lending was done for a long time by assessing the working capital needs based on the
concept of MPBF (maximum permissible bank finance). This practice has been withdrawn with
the effect from April 15th 1997 in the sense that the date, banks have been left free to choose
their own method (from the method such as turnover, cash budget, present MPBF, or any other
theory) of assessing working Capital requirement of the borrowers.
The cash credit system has been the bane, yet it has exhibited a remarkable strength of survival
all these years. In spite of many efforts which were direct in nature, only a slow progress has
been made to reduce its importance and increase bill financing. Therefore a concrete and direct
policy step was taken on April 21, 1995 which made it mandatory for banks, consortia,
syndicates to restrict cash credit components to the prescribed limit, the balance being given in
the form of a short term loan, which would be a demand loan for a maximum period of one year,
or in case of seasonal industries, for six months. The interest rates on the cash credit and loan
components are to be fixed in accordance with the prime lending rates fixed by the banks. This
loan system was first made applicable to the borrowers with an MPBF of Rs 20 crore and
above; and in their case, the ratio of cash credit (loan) to MPBF was progressively reduced
(increased) from 75 (25) per cent in April 1995, to 60 (40) percent in September 1995, 40 (60)
per cent in April 1996, and 20 (80) percent in April 1997. With the withdrawal of instructions
about the MPBF in April 1997, the prescribed cash credit and loan components came to be
related to the working capital limit arrived in banks as per the method of their choice.

With effect from September 3, 1997, the RBI has permitted banks to raise their existing exposure
limit to a business group from 50% to 60%; the additional 10% limit being exclusively meant for
investment in infrastructure projects.

The term lending by banks also has subject to the limits fixed by RBI. In 1993, this limit was
raised from Rs 10 crore to Rs 50 crore in case of a loan for a single project by a single bank, and
from Rs 150 crore to Rs 200 crore for a single project by all the banks. The latter limit was
subsequently raised to Rs 500 crore in the case of general projects and Rs 1000 crore for power
projects. From September3, 1997 these caps on term lending by banks were removed subject to
their compliance with the prudential exposure norms.
The banks can invest in and underwrite shares and debentures of corporate bodies. At present,
they can invest five percent of their incremental deposits in equities of companies including other
banks. Their investment in shares/ Bonds of DFHI, Securities trading Corporation of India
(STCI), all Indian financial institutions and bonds (debentures) and preference shares of the
companies are excluded from this ceiling of five per cent with affect from April 1997. From the
same date banks could extend loans within this ceiling to the corporate against shares held by
them. They could also offer overdraft facilities to stock brokers registered with help of SEBI
against shares and debentures held by them for nine months without change of ownership.

The rates have gone down compared to previous quarter when it was seen that there was no
changes in loan rates in private and foreign banks. But then compared to rate cuts done by RBI,
they still need to go lower.

TRENDS OF BANK CREDIT IN INDIA

The credit and deposit growth of all SCBs have significantly declined during FY16. This is largely
contributed by the overall subdued performance of the public sector banks. Credit growth of all
SCBs slowed down to 8.8% in FY16 from 9.7% in FY15. Similarly, the deposit growth rate of all
SCBs decelerated to 8.1% in FY16 as compared to 10.7% in FY15. Private and foreign sector
banks outpaced public banks as the credit growth amongst the private and foreign sector stood
at 24.6% and 11.8% respectively, whereas that of public sector banks displayed a marginal
growth of 4% as of March 2016. Deposit growth amongst private and foreign sector banks were
marked at 17.3% and 13.3%, public sector banks showed a growth of merely 5.2% for FY16.

TRENDS FOR THE YEAR 2015-16

The credit growth of overall SCBs substantially decelerated to 8.6% in FY16 from 10.0% in FY15.
This was majorly due to stress in the balance sheet of public sector banks. Public sector banks
witnessed a credit growth of only 3.7% in comparison to a growth of 24.9% growth in by private
sector banks and 12.7% by foreign sector banks. The total business growth of all SCB also
declined to 7.5% in FY16 as compared to 10.0% in FY15. The credit growth has been the lowest
in the last 53 years. During FY16, public sector banks accounted for 72.8% share in the total
business, registering a growth of only 3.2% in comparison to 8.4% in FY15. The slow growth of
bank credit can largely be attributed to banks adopting an extra cautious approach on account
of rising NPAs and weak investment demand from corporate sector

Reasons for declining trend of bank credit

A major share of the economic growth has been led by the expansion of the service sector
Capital intensity and investment intensity required for growth in the current economic
context may not be as high as it used to be in the past.
In manufacturing sector more efficient utilization of existing capacities contributed to the
sectoral growth rather than any large addition of fresh capacities. The consequential
increase in the demand for credit was also subdued.
Greater and cheaper avenues for credit resulted in a bigger share of disintermediation
being resorted to by large borrowers.

Procedure for providing Bank Credit-

Banks offers different types of credit facilities to the eligible borrowers. For this, there are
several procedures, controls and guidelines laid out. Credit Appraisal, Sanctions, Monitoring and
Asset Recovery Management comprise the entire gamut of activities in the lending process of a
bank which are clearly shown as below:

Source- Self constructed

From the above chart we can see that Credit Appraisal is the core and the basic function of a
bank before providing loan to any person/company, etc. It is the most important aspect of the
lending procedure and therefore it is discussed in detail as below.
Credit Appraisal

Meaning - The process by which a lender appraises the creditworthiness of the prospective
borrower is known as Credit Appraisal. This normally involves appraising the borrowers
payment history and establishing the quality and sustainability of his income. The lender satisfies
himself of the good intentions of the borrower, usually through an interview.

The credit requirement must be assessed by all Indian Financial Institutions or specialized
institution set up for this purpose.
 Wherever financing of infrastructure project is taken up under a consortium / syndication
arrangement banks exposure shall not exceed 25%
Bank may also take up financing infrastructure project independently / exclusively in
respect of borrowers /promoters of repute with excellent past record in project
implementation.
In such cases due diligence on the inability of the projects are well defined and assessed.
State government guarantee may not be taken as a substitute for satisfactory credit
appraisal.

The important thing to remember is not to be overwhelmed by marketing or profit centre reasons
to book a loan but to take a balanced view when booking a loan, taking into account the risk
reward aspects. Generally everyone becomes optimistic during the upswing of the business
cycle, but tend to forget to see how the borrower will be during the downturn, which is a short-
sighted approach. Furthermore greater emphasis is given on financials, which are usually
outdated; this is further exacerbated by the fact that a descriptive approach is usually taken,
rather than an analytical approach, to the credit. Thus a forward looking approach should also be
adopted, since the loan will be repaid primarily from future cash flows, not historic performance;
however both can be used as good repayment indicators.
CHAPTER 3

Indian Banking Sector &Its Major Challenges

It is well recognized by the world that India is one of the fastest growing economies in the
world.Evidence from across the world suggests that a soundand evolved banking system is
required for sustained economic development.The last decade has seen many positive
developments in the Indian banking sector. The policy makers, which comprise the Reserve
Bank of India (RBI), Ministry of Finance and related government and financial sector regulatory
entities, have made several notable efforts to improve regulation in the sector. The sector now
compares favorably with banking sectors in the region on metrics like growth, profitability and
non-performing assets (NPAs). A few banks have established an outstanding track record of
innovation, growth and value creation. This is reflected in their market valuation. However,
improved regulations, innovation, growth and value creation in the sector remain limited to a
small part of it. The cost of banking intermediation in India is higher and bank penetration is far
lower than in other markets. Indias banking industry must strengthen itself significantly if it has
to support the modern and vibrant economy which India aspires to be. While the onus for this
change lies mainly with bank managements, an enabling policy and regulatory framework will
also be critical to their success.
The failure to respond to changing market realities has stunted the development of the financial
sector in many developing countries. A weak banking structure has been unable to fuel continued
growth, which has harmed the long-term health of their economies. In this white paper, we
emphasize the need to act both decisively and quickly to build an enabling, rather than a limiting,
banking sector in India.
Indian banks have compared favorably on growth, asset quality and profitability with other
regional banks over the last few years. The banking index has grown at a compounded annual
rate of over 51 per cent since April 2001 as compared to a 27 per cent growth in the market index
for the same period. Policy makers have made some notable changes in policy and regulation to
help strengthen the sector. These changes include strengthening prudential norms, enhancing the
payments system and integrating regulations between commercial and co-operative banks.
However, the cost of intermediation remains high and bank penetration is limited to only a few
customer segments and geographies. While bank lending has been a significant driver of GDP
growth and employment, periodic instances of the failure of some weak banks have often
threatened the stability of the system. Structural weaknesses such as a fragmented industry
structure, restrictions on capital availability and deployment, lack of institutional support
infrastructure, restrictive labor laws, weak corporate governance and ineffective regulations
beyond Scheduled Commercial Banks (SCBs), unless addressed, could seriously weaken the
health of the sector. Further, the inability of bank managements (with some notable exceptions)
to improve capital allocation, increase the productivity of their service platforms and improve the
performance ethic in their organizations could seriously affect future performance.India has
abetter banking system in place Vis a Vis other developing countries, but there are several issues
that need to be ironed out. Major challenges of Indian banking sector are mentioned below.
Interest rate risk
Interest rate risk can be defined as exposure of bank's net interest income to adverse movements
in interest rates. A bank's balance sheet consists mainly of rupee assets and liabilities. Any
movement in domestic interest rate is the main source of interest rate risk.

Over the last few years the treasury departments of banks have been responsible for a substantial
part of profits made by banks. Between July 1997 and Oct 2003, as interest rates fell, the yield
on 10-year government bonds (a barometer for domestic interest rates) fell, from 13 per cent to
4.9 per cent. With yields falling the banks made huge profits on their bond portfolios. Now as
yields go up (with the rise in inflation, bond yields go up and bond prices fall as the debt market
starts factoring a possible interest rate hike), the banks will have to set aside funds to mark to
market their investment. This will make it difficult to show huge profits from treasury
operations. This concern becomes much stronger because a substantial percentage of bank
deposits remain invested in government bonds. Banking in the recent years had been reduced to a
trading operation in government securities. Recent months have shown a rise in the bond yields
has led to the profit from treasury operations falling. The latest quarterly reports of banks clearly
show several banks making losses on their treasury operations. If the rise in yields continues the
banks might end up posting huge losses on their trading books. Given these facts, banks will
have to look at alternative sources of investment.

Interest rates and non-performing assets

The best indicator of the health of the banking industry in a country is its level of NPAs. Given
this fact, Indian banks seem to be better placed than they were in the past. A few banks have
even managed to reduce their net NPAs to less than one percent (before the merger of Global
Trust Bank into Oriental Bank of Commerce OBC was a zero NPA bank). But as the bond yields
start to rise the chances are the net NPAs will also start to go up. This will happen because the
banks have been making huge provisions against the money they made on their bond portfolios
in a scenario where bond yields were falling.

Reduced NPAs generally gives the impression that banks have strengthened their credit appraisal
processes over the years. This does not seem to be the case. With increasing bond yields,
treasury income will come down and if the banks wish to make large provisions, the money will
have to come from their interest income, and this in turn, shall bring down the profitability of
banks.

Competition in retail banking

The entry of new generation private sector banks has changed the entire scenario. Earlier the
household savings went into banks and the banks then lent out money to corporate. Now they
need to sell banking. The retail segment, which was earlier ignored, is now the most important of
the lot, with the banks jumping over one another to give out loans. The consumer has never been
so lucky with so many banks offering so many products to choose from. With supply far
exceeding demand it has been a race to the bottom, with the banks undercutting one another. A
lot of foreign banks have already burnt their fingers in the retail game and have now decided to
get out of a few retail segments completely. The nimble footed new generation private sector
banks have taken a lead on this front and the public sector banks are trying to play catch up. The
PSBs have been losing business to the private sector banks in this segment. PSBs need to figure
out the means to generate profitable business from this segment in the days to come.

The urge to merge

In the recent past there has been a lot of talk about Indian Banks lacking in scale and size. The
State Bank of India is the only bank from India to make it to the list of Top 100 banks, globally.
Most of the PSBs are either looking to pick up a smaller bank or waiting to be picked up by a
larger bank. The central government also seems to be game about the issue and is seen to be
encouraging PSBs to merge or acquire other banks. Global evidence seems to suggest that even
though there is great enthusiasm when companies merge or get acquired, majority of the
mergers/acquisitions do not really work. So in the zeal to merge with or acquire another bank the
PSBs should not let their common sense take a back seat. Before a merger is carried out cultural
issues should be looked into. A bank based primarily out of North India might want to acquire a
bank based primarily out of South India to increase its geographical presence but their cultures
might be very different. So the integration process might become very difficult. Technological
compatibility is another issue that needs to be looked into in details before any merger or
acquisition is carried out.

Impact of BASEL-II norms

Banking is a commodity business. The margins on the products that banks offer to its customers
are extremely thin vis a vis other businesses. As a result, for banks to earn an adequate return of
equity and compete for capital along with other industries, they need to be highly leveraged. The
primary function of the bank's capital is to absorb any losses a bank suffers (which can be written
off against bank's capital).Norms set in the Swiss town of Basel determine the ground rules for
the way banks around the world account for loans they give out. These rules were formulated by
the Bank for International Settlements in 1988. Essentially, these rules tell the banks how much
capital the banks should have to cover up for the risk that their loans might go bad. The rules set
in 1988 led the banks to differentiate among the customers it lent out money to. Different
weightage was given to various forms of assets, with zero percentage weightings being given to
cash, deposits with the central bank/govt. etc, and 100 per cent weighting to claims on private
sector, fixed assets, real estate etc. The summation of these assets gave us the risk-weighted
assets. Against these risk weighted assets the banks had to maintain a (Tier I + Tier II) capital of
9 per cent i.e. every Rs100 of risk assets had to be backed by Rs 9 of Tier I + Tier II capital. To
put it simply the banks had to maintain a capital adequacy ratio of 9 percent. The problem with
these rules is that they do not distinguish within a category i.e. all lending to private sector is
assigned a 100 per cent risk weighting, be it a company with the best credit rating or company
which is in the doldrums and has a very low credit rating. This is not an efficient use of capital.
The company with the best credit rating is more likely to repay the loan vis a vis the company
with a low credit rating. So the bank should be setting aside a far lesser amount of capital against
the risk of a company with the best credit rating defaulting vis a vis the company with a low
credit rating. With the BASEL-II norms the bank can decide on the amount of capital to set aside
depending on the credit rating of the company. Credit risk is not the only type of risk that banks
face. These days the operational risks that banks face are huge. The various risks that come under
operational risk are competition risk, technology risk, casualty risk, crime risk etc. The original
BASEL rules did not take into account the operational risks. As per the BASEL-II norms, banks
will have to set aside 15 per cent of net income to protect themselves against operational risks.

Over the last few years, the falling interest rates, gave banks very little incentive to lend to
projects, as the return did not compensate them for the risk involved. This led to the banks
getting into the retail segment big time. It also led to a lot of banks playing it safe and putting in
most of the deposits they collected into government bonds. Now with the bond party over and
the bond yields starting to go up, the banks will have to concentrate on their core function of
lending. The banking sector in India needs to tackle these challenges successfully to keep
growing and strengthen the Indian financial system.

Furthermore, the interference of the central government with the functioning of PSBs should
stop. A fresh autonomy package for public sector banks is in offing. The package seeks to
provide a high degree of freedom to PSBs on operational matters. This seems to be the right way
to go for PSBs. The growth of the banking sector will be one of the most important inputs that
shall go into making sure that India progresses and becomes a global economic super power.

Andhra Bank at a Glance

"Andhra Bank" was founded by the eminent freedom fighter and a multifaceted genius,
Dr.BhogarajuPattabhiSitaramayya. The Bank was registered on 20th November 1923 and
commenced business on 28th November 1923 with a paid up capital of Rs 1.00 lakh and an
authorised capital of Rs 10.00 lakhs.
Andhra Bank is a medium-sized public sector bank (PSB) of India, with a network of 2803
branches, 4 extension counters, 38 satellite offices and 3636 automated teller machines (ATMs)
as of 31 Mar 2016.During 201112, the bank entered the states of Tripura and Himachal
Pradesh. The bank now operates in 25 states and three Union Territories. Andhra Bank has its
headquarters in Hyderabad, India.
The Government of India owns 63.97% of its share capital as on 31 Dec 2015. The state
owned Life Insurance Corporation of India holds 7.66% of the shares. The bank has done a total
business of 3,106 billion (US$48 billion) and has earned a net profit of 5.40
billion (US$84 million) for the Financial Year 2015-16.
Andhra Bank is a pioneer in introducing Credit Cards in the country in 1981.
Andhra Bank has ranked No.1 in terms of number of Life Insurance Policies mobilised amongst
all the agency banks dealing with the Life Insurance Corporation of India. The bank also has tie-
up with United India Insurance Company Limited under Bancassurance (Non-Life)
Togetherness is the Theme
The Symbol of Infinity denotes a Bank that is prepared to do anything,
to go to any lengths, for the customer
The Blue pointer on the top represents the philosophy of a Bank that is
always looking for growth and newer directions.
The Key hole represents Safety and Security
The Chain indicates togetherness
The colours Red and Blue denote dynamism and solidity

HISTORY
BhogarajuPattabhiSitaramayya founded Andhra Bank in 1923 in Machilipatnam, Andhra
Pradesh. The bank was registered on 20 November 1923 and commenced business on 28
November 1923 with a paid up capital of 100,000 (US$1,600) and an authorised capital of 1
million (US$16,000) In 1956, linguistic division of States was promulgated and Hyderabad was
made the capital of Andhra Pradesh. The registered office of the bank was subsequently shifted
to Andhra Bank Buildings, Sultan Bazar, Hyderabad. In the second phase of nationalisation of
commercial banks commenced in April 1980, the bank became a wholly owned Government
bank. In 1964, the bank merged with Bharat Lakshmi Bank and further consolidated its position
in Andhra Pradesh.
IndiaFirst Life Insurance Company is a life insurance company in India. It is a joint venture
between two of Indias public sector banks Bank of Baroda (44%) and Andhra Bank (30%),
and UKs financial and investment company Legal &General(26%). It was incorporated in
November 2009. It has its headquarters in Mumbai. IndiaFirst Life made more than 2
billion (US$31 million) in turnover in just four and half months since the insurance company
became operational. IndiaFirst Life insurance company is headquartered in Mumbai. IndiaFirst is
the first life insurance company to be recommended for ISO certification within 7 months of
inception
VISION

To become a significant player, providing full range of banking services through innovative
customer centric products and to maximize stake holders

MISSION

To work together towards delivering excellent customer service by leveraging on technology and
human resources to attain world class performance standards.

Products and Services

Corporate banking
Personal banking
Industrial finance
Agriculture finance
Financing of trade
International banking
Home loan
Auto loan
ATM/Debit card
Deposit interest rate
Credit interest rate
Other services: lockers facility, internet banking, EFT & Clearing services etc

AWARDS AND ACHIEVEMENTS

Andhra Bank was ranked 532nd for the year ended 31 March 2007 amongst Top 1000 Banks in
the world by "The Banker" a London-based publication based on Tier I Capital as defined by
Basel's Bank for International Settlements (BIS).
CHAPTER 4

Credit Philosophy & Policy with regards to Andhra Bank

An ideal advance is the one given to a reliable customer for an approval purpose with adequate
experience, safe in knowledge that the money will be used to advantage and repayment will be
made within a reasonable period from trade receipts or known maturities due on or about given
dates.

CREDIT POLICY

Bank follows following broad policy imperatives:-

Reduction in dependence upon short term corporate loans, especially unsecured

exposures.
Aiming to achieve more sanctions at levels closer to the customer.
Changing the mix of the portfolio in favor of better diffused and higher yielding credit.
Building competencies in credit management through training & promotion of self-
directed learning.

Objectives in Credit

To maintain healthy balance between-

Credit volumes
Earnings
Asset quality

within the framework of regulatory prescriptions, corporate goals and banks social
responsibilities.

Credit Appraisal process at Andhra Bank

Credit Appraisal at Andhra bank can be categorized under 2 heads-

1. Pre-sanction process
2. Post-sanction process
Pre sanction process

(1)Receipt of proposal from the borrower

The borrower can be a new connection or an existing connection. The proposal can be either of
the following-(i) Grant of cash credit/ overdraft for meeting business requirements, (ii) Grant of
Bank Guarantee, Letter of Credit and Bill Discounting, (iii) Application of Term loan (short
term, medium term & long term), (iv) Enhancement of existing credit limit, (v) Renewal of
credit limit, (vi) Temporary/ adhoc overdraft facility

(2)Forms and statements to be submitted by the borrower

The following documents are to be submitted by the borrower to avail a credit facility-

Loan application form duly filled in all respects, along with following Annexures-

1. Profile of the Company

2. Salient features of Memorandum & article of Association
3. Details of Board of Directors
4. Share Holding Pattern / Ownership structure
5. Details of the Project, Plant Capacity etc.
6. Cost of the Project & Means of finance (with details of comparison for similar project)
7. Present Banking Arrangement
8. Present Financial Performance of the company - ( it should be supported by financial
statements for last three years and projections for next two years)
9. Highlights & Performance of the Group Companies
10. Manufacturing Process
11. Plant Machinery Arrangement / Origin / Price etc.
12. Operation & Management
13. Industry Scenario
14. Cash Flow Statement
15. Risk Analysis
 16. Projected Profitability, BEP, DSCR, FACR and Sensitivity Analysis etc. ( to be
submitted additionally in case of Term Loan)
Copy of latest stock statement and book debt statement.
A detailed project report covering marketability and Techno-economic feasibility in
case of new projects/expansion/modernization.
Credit declaration form (ADV-80) duly filled in, applicable to prop./partners/
guarantors/ directors/ companies.

(3)Pre- Credit Appraisal format

A pre- credit appraisal format is to be submitted by the concerned branch immediately to the
Credit Appraisal Cell at Zonal office on receipt of a proposal. The format is given in the
Annexure 1

(4)Financial Analysis

Financial analysis is a tool which evaluates the financial position and operative performance
of a business concern. It involves analyzing the important financial indicators such as Sales
and Profit of the company for the last few years, the trend in growth rate, long term
liabilities& assets, current assets & liabilities and the Capital structure and determining the
reasons thereof for any increase or decrease.

2 important tools for financial analysis in Andhra bank are-

Discounted Cash flow techniques( in case of Project appraisal)

Financial Statement Analysis (all the proposals)

Discounted cash flow techniques are used for project Appraisal. The techniques used are-

1. Net Present Value (NPV)

2. Internal Rate of Return (IRR)

Financial Statement Analysis

It involves analyzing the Balance sheet, Profit & loss statement and Cash flow statement of the
company with respect to trend in sales, cost of goods sold, Profits and Capital structure. Ratio
Analysis is the major tool used. It is done mainly to determine-

Liquidity of the firm

Solvency of the firm

Liquidity of the firm is determined by calculating and analyzing the Current ratio of the firm.

It is calculated as-

Current ratio = Current Assets /Current Liabilities

Current assets are the assets which are convertible within a year and current liabilities are the
liabilities which are to be disposed off within a year.

A high current ratio indicates blockage of companys funds.

In Andhra bank, a standard ratio of 1:1 is considered for import-export business concerns. For
other business concerns, the standard current ratio to be maintained is 1.33:1.

Solvency of the firm is determined by using-

(i) Debt- Equity ratio which is calculated as

D.E.R = Term Liabilities/Tangible Net worth

The company where outside term liabilities are very large as compared to owned funds is said to
be trading on thin equity and this may affect profit since the term loans carry an obligation of
paying interest.

(ii) Ratio of total outside liabilities to Net worth

= T.O.L/Net worth

The total outside liabilities includes Current liabilities also. This ratio indicates the proportion of
total liabilities which are to be paid from the total promoters margin.

(iii) Debt service coverage ratio (DSCR)

This ratio indicates the capacity of a unit to repay the term loan and a unit can repay the loan
only when the unit generates profits. Repayment of term loan without generation of surplus will
lead to reduction in working capital, tight liquidity position and further deterioration in the
working of the unit. It is calculated as-

DSCR= PAT+ Depreciation+ Interest on term loans

Interest on term loans+ Installments of term loans

This ratio is calculated during the entire repayment period separately for each year of the project
and also as an average for the entire payment period.

Ratios play a very important role in the appraisal of term loans:

Fresh term loan- D.E.R should not normally be above 3:1, for capital intensive industries it may
be up to 5.00:1, in case of loans to PSU, it may be 7.00:1.

In case of term loan, minimum average DSCR of 1.30:1 will be considered for any new
connection.

(5)Working Capital Assessment

Banks cannot finance the total requirement. A margin of the requirement has to be arranged by
the company from its own sources.

Methods used by Andhra bank for working capital assessment are-

Credit facilities of village industries, tiny industries and other SME (SSI units) having an
aggregate fund based working capital limits up to Rs. 5 Crore will be computed on the basis of
minimum 20% of their projected annual sales turnover for new as well as existing units.

In case of other borrowers whose working capital requirement is up to Rs. 2.00 crore, the
assessment will be done under Turnover method.

Post- sanction process

Monitoring of Loan accounts

I. Submission of Monitoring Formats

After disbursement of loan, it becomes an important function of the Branch Managers to keep
constant watch on the operation of accounts. They should monitor the accounts very closely so
that any irregularity likely to develop in the account may be nipped in the bud. In order to
strengthen monitoring of accounts, Credit Monitoring Report should be submitted in the
following manner:

Name of Statement Applicability (Based Period To whom to be

on Aggregate Fund or submitted
Non-Fund based
Limit)
Credit Monitoring Rs. 5.00 crores and Monthly Credit Monitoring
Report E1 above Deptt,HO under copy to
ZO
Credit Monitoring Rs 1.00 crore and Monthly 1.AB1 to
Report E2 abovebut below Rs GradedAccounts:Zonal
5.00 crores Office(copy to be sent
to Credit Monitoring
Deptt,HO on Quarterly
Basis)
2.AB5 to
GradedAccounts:Head
Office(copy to be sent
to ZO Office)
Credit Monitoring Rs. 10.00 lacs and Quarterly Zonal Office
Report E3 above but below
Rs.100.00 lacs

II. Monitoring of potential NPA

Close monitoring is done for all the accounts at all the levels. PNPA is identified in the following
cases-

Where interest, installment, bill is overdue or a/c is above limit/DP and irregularity is persisting
for more than 45 days and up to 90 days.

No credit turnover in the account for last one month

Credit turnover is inadequate to cover interest debited, and such other cases

Consolidated position of Branch PNPA is submitted on quarterly basis to ZO and ZO will submit
the consolidated position to HO on quarterly basis.

III. Stock Audit

Stock Audit in the case of borrower accounts with aggregate credit limit of Rs 5.00 crores&
above (including NPA) will be done once in a year and for seasonal industries it should be
carried out during peak season. Besides, accounts aggregating 30% of the total outstanding
exposure under borrower accounts falling in the range of aggregate limit of Rs 30.00 lacs to Rs
5.00 crores within the zone (as per schedule decided by Z.O) will also be subjected to stock audit
during the year in such a manner that stocks audit in all accounts under this range is conducted in
rotation.

IV. Security register

Part 1: Recording of security documents other than mortgage

Part 2: Recording of mortgage documents

Part3: Recording of insurance documents

V. Renewals of Limits

All the limits are reviewed within 1 year from date of sanction

Proposal for review of the account is submitted to sanctioning authority before 1 month from
date of expiry of limit
The accounts which are not reviewed within 3 months of the expiry of limit are treated as
irregular

Quarterly position of review of account is submitted to ZO within 15 days from the close of
quarter.

Process of Credit appraisal for Term Loans

Term loans- Loans which are repayable in not less than 36 months are referred to as term loans.
In the interest of sound risk management practices, banks monitor the percentage of Term loans
in their credit portfolio with a view to keeping the term loan component within a pre-determined
percentage.
Requirements to be obtained with the proposal:

a) Copies of project report

b) Where loan is on participation basis, a copy of the appraisal note of the lead institution / bank
should be obtained.

c) Scrutiny of proposals

The scope of the project:

Background of promoters
Government consents
The technical appraisal
Cost of the project
Sources of finance
The schedule of implementation
The financial projections and profitability
Cash flow statements
Calculation of debt service coverage ratio (DSCR)
Breakeven analysis
d) Disbursement
e) Follow up (post sanction)
Assessment :

For assessment purposes the forms prescribed are used and debt equity ratio, average DSCR,
BEP, pay back period, etc. are taken into consideration. The following minimum financial
parameters are required to be satisfied for a Term loan proposal to merit consideration:

Not more than 2.33:1(1.7:1 may be accepted in

the case of real estate sector and generally for
Debt Equity Ratio
different type of industry different level of DER
is acceptable.)
Not less than 1.5to 2 (ratio lower than this is to
be looked into)
Average DSCR

Ratios for appraising term loans:

Debt equity ratio: long term debt

Tangible net worth

Average DSCR : Net profit + Depreciation + interest on TL

Term loan installment + interest on TL

Breakeven point : Fixed cost_______

Sales-Variable cost (contribution)
 It should be noted that the banks generally consider only term loans repayable within
5 to 7 yrs. Term loans with maturity beyond 7 yrs are normally not experienced
except infrastructure loans.

Debt Equity Ratio:

Ameasure of a company's financial leverage calculated by dividing its total

liabilities by stockholders' equity. It indicates what proportion of equity and debt the company is
using to finance its assets.

Also known as the Personal Debt/Equity Ratio, this ratio can be applied to personal financial
statements as well as companies'.
A high debt/equity ratio generally means that a company has been aggressive in
financing its growth with debt. This can result in volatile earnings as a result of the
additional interest expense. If a lot of debt is used to finance increased operations
(high debt to equity), the company could potentially generate more earnings than it
would have without this outside financing. If this were to increase earnings by a
greater amount than the debt cost (interest), then the shareholders benefit
as more earnings are being spread among the same amount of shareholders. However,
the cost of this debt financing may outweigh the return that the company generates on
the debt through investment and business activities and become too much for the
company to handle.This can lead to bankruptcy, which would leave shareholders
withnothing.
The debt/equity ratio also depends on the industry in which the company operates.
For example for large projects (with project cost Rs. 100 crore and above) in Power,
acceptable level of DER is 2.33:1, in Iron and Steel Industry 2.25:1 , in Infrastructure
and Capital Intensive projects 2:1 and in Real Estate, level of DER is 1.75:1. The CH,
GM, ED and CMD have powers to further relax.

Debt Service CoveragRatio (DSCR):

The ultimate purpose of project appraisal is to ascertain the viability of a project which has a
direct bearing on the repayment of the instalments under the proposed term loan / deferred
payment guarantee. While the repayment program will depend upon the profitability of a project,
the quantum of annual instalments has to be related to the size of the annual cash flows. The
repayment schedule should, therefore, be fixed after ascertaining the annual servicing by the debt
service coverage ratio.

The debt service coverage ratio is the core test ratio in project financing. This ratio indicates the
degree of viability of a project and influences in fixing the repayment period, and the quantum of
annual instalments. For the purpose of this ratio , debt means maturing term obligations viz.
instalments payable during a year under all the term loans/ deferred payment guarantees and
service means cash accruals (service) available to cover the maturing obligation (debt) during
each year.

The debt service coverage ratio indicates the ability of the firm to generate cash accruals for
repayment of installment and interest. For example, a DSCR of 3:1 indicates that for each Re.1/-
long term debt including interest to be paid the business generates cash accrual of Rs.3/- to be
utilized for repayment of debt. The difference between the accruals and debt is known as margin
of safety (Rs.2/- in this case).
The ratio of 1.5 to 2 is considered reasonable. Ratio lower than this should be further looked
into. A very high ratio may indicate the need for lower moratorium period/repayment of loan in
a shorter schedule. This ratio provides a measure of the ability of an enterprise to service its
debts i.e. `interest' and `principal repayment' besides indicating the margin of safety. The ratio
may vary from industry to industry but has to be viewed with circumspection when it is less
than 1.5.

BREAK EVEN POINT OR COST VOLUME PROFIT (CVP) ANALYSIS:

A. The breakeven point is calculated to note the level of production at which the unit neither
earns profit nor incur loss. BEP is the level of operations (in terms of sales or production or
capacity utilization) at which total revenues are equal to total operating costs (fixed and variable)
or, in other words, the operating profit is equal zero. He firm starts earning operating profits only
after the break-even is reached. At BEP, contribution exactly equals the fixed costs.
B. The formula for calculating the break-even point for each year is as under:

Total fixed cost/Contribution

C. Certain items of the cost that are to be incurred by the unit irrespective of the level of
production are called as fixed cost. The same includes depreciation, repairs and maintenance,
interest, certain portion of salaries, rent, insurance, selling expenses other than variable items and
administrative expenses

D. The variable cost changes with the levels of production. It includes cost of raw materials,
direct wages and other items, which are apportion able to unit of production.

E. The breakeven point is generally expressed in terms of percentage of capacity utilization

Break even analysis is generally expressed in terms of percentage of capacity utilisation.

The CVP analysis provides answers to such questions as: level of

operations needed to avoid loss, level of sales required to achieve targeted profit, effect of
product mix on profits, impact of expansion, most and least profitable products etc. Break-even
analysis is the most widely used form of the CVP analysis.
Break-even analysis is one of the most useful techniques of
profit planning and controlling. The break-even analysis can help in making vital decisions
relating to fixation of selling price make or buy decision, maximizing production of the item
giving higher contribution etc. Further, the break-even analysis can help in understanding the
impact of important cost factors, such as, power, raw material, labor, etc. and optimizing
product-mix to improve project profitability.

It is a useful method for considering also the risk implications of alternative actions. From one
alternative a firm may expect higher profit and also a higher break-even point, while another
alternative may produce comparatively lower profit but at a lower break-even point. The firm has
to weigh the probability (riskiness) of reaching the break-even in the first case before choosing
that alternative. Generally, the preferred alternative would be where the break-even will be
reached earlier.
Caution:
Relationship between revenue, variable costs and volume may not be linear.
It is not always easy to have a clean separation of costs into fixed and variable
components.
Fixed costs may be stepped not fixed over all volumes.
Complexity involved in using BEP analysis in multi-product businesses
Illustration:
Assumed:

Normal year production 75 lakh units (93.75% of installed

capacity)
Fixed Costs Rs. 13.71 lakh
Variable Costs Rs. 13.35 lakh
Sales realization Rs. 41.25 lakh
Contribution Rs. 27.90 lakh

BEP (production) : (Fixed cost / Contribution)* 75 lakh = 36.85 lakh units

BEP (capacity utilization): (Fixed cost / Contribution)* 93.75 = 46.07%

BEP (sales) : (Fixed cost / Contribution)* Rs. 41.25 lakh = Rs. 20.27 lakh

SENSITIVITYANALYSIS

Projects do not always run to plan. Costs and benefits estimated at an early stage of a project
may indicate a profitable project, but this profit could be eroded by an increase in costs or a
decrease in the value of the benefits (the revenue). Sensitivity Analysis involves changing
input variable estimates from an original set of estimates (called the base case) and determine
their impact on a projects measured results, such as NPV (or IRR) from investors viewpoint,
or DSCR from bankers point of view.
The Sensitivity Analysis helps in arriving at profitability of the project wherein critical or
sensitive elements are identified which are assigned different values and the values assigned are
both optimistic and pessimistic such as increasing or reducing the sale price/sale volume,
increasing or reducing the cost of inputs etc. and then the project viability is ascertained.

The critical variables can then be thoroughly examined by generally selecting the pessimistic
options so as to make possible improvements in the project and make it operational on viable
lines even in the adverse circumstances.

In the absence of any defined factors and its values for carrying out the sensitivity analysis, a
common 5% sensitivity factor on sale price/cost price of major raw materials is to be applied
in appraisals of all the projects irrespective of the industry. However, 10% sensitivity factor may
be applied in highly volatile industries by assessing the expected volatility in sale price/ cost
price of major raw materials in future on case to case basis.

Analysis of credit proposal of Term Loan

A.BORROWER PROFILE

Powers : Circle office Note No: Date:

Branch : 0188- Credit rating- : N.A
Baramunda Existing B based on ABS 31.03.2015
CRAS
Proposed
External Rating : ICRA,during August 2015following ratings to m/s XYZ microfinance pvt
ltd
Instruments Amount(in Rscrore) Rating
Non convertible 29.2 BBB(Stable)assigned
debenture programme
Term loan-Bank 245.8 BBB(Stable)
Limits reaffirmed
Unallocated-Bank 6.2 BBB(Stable)reaffirme
Limits d
Zone : Bhubaneswar Asset Classification : N.A.
Present Reference : Proposal for sanction of following:
1. Sanction of short term loan of Rs 20.00 crores
2. Approval of deviation in TOL/TNW(4.48) as per ABS 31.03.2015
3. Approval of waiver of due diligence by external agency

PARTICULARS OF BORROWER:

Name of the borrower M/s. Annapurna Microfinance Private

Limited
Constitution NBFC-MFI
Brief details of the present reference Sanction of short term loan of Rs 20.00 crores
Asset Classification Standard

1 Constitution NBFC-MFI
2 Address of Regd. Office Plot no 1215/1401,Khandagiri
Bari,Infront of
JayadevVatika,Bhubaneswar 751030
3 Group to which the company belongs N.A.
4 Date of incorporation 30.04.1986
5 Sector NBFC-MFI
6 Nature of activity Micro finance on lending to women
SHGs
State whether the above activity is covered under the Main Objects Main Objects Clause
Clause or Other Object Clause in the memorandum of association:
7 Details of registration with RBI Registration no. B.04.00027 dated
22.10.2013 , Classified as Non-
Banking Finance Company- MFI
To carry on the business of non-
banking financial institution without
accepting deposits.
8 Capital adequacy(%)(CRAR) 23.27% as on march 31,2015
9 Compliance with prudential norms Complied with RBI registration
available
10 Rating for deposit acceptance NA
11 Ceiling of deposit acceptance exposure of the bank to the NA
unit and group as per RBI guidelines
12 Exposure ceiling of the bank to a company 6 times of net owned funds(as on
31.03.2015)
63.67*6=Rs 484.86 crore
13 Exposure ceiling of the bank to a group 6 times of net owned funds(as on
31.03.2015)
 63.67*6=Rs 484.86 crore

Details of Existing and proposed limits with the bank: (Rs in crores)

Facility Existing Limit O/s Proposed Limits :Rate of Interest

Proposed
Short term loan 0.00 0.00 20.00 As applicable as
per CRRM
Rating
Total - - 20.00

Exposure: (Rs in crores)

Particulars Ceiling as per RBI Constitution wise Banks exposure

norms ceiling as per our Existing Proposed
bank policy
To the unit 6 times NOF=484.86 0.00 20.00
To the group NA Nil 20.00

Computation of NOF: (As per RBI master circular on lending to NBFC)

Particulars as at 31.03.2015 Rs in
Cr
(A) The aggregate of the paid-up equity capital and free reserves as disclosed in the
latest balance sheet of the company
Equity Capital 24.20
ADD: Free Reserves(excluding Revaluation Reserve, Special Reserve, Reserve 37.47
created under Sec.45 IC of RBI)
ADD: Compulsory convertible preference share 24.00
Less: Accumulated balance of loss; --
Less: Deferred Revenue Expenditure/Unamortized Expenditure 4.86
Less: Other intangible assets --
Total(A) 80.81
10% of A 8.08
Further Reduced by Investments in Shares of:
Subsidiaries/companies in the same group/Other related parties --
All other Non-Banking Financial Companies; --
Total-(1) --
Book Value of Debentures, bonds, O/s loans and advances made to and deposits --
with
Subsidiaries of such company/companies in the same group/other related parties --
Total-(2) --
Grand total (1+2)=(B) --
(C)Excess of (B) exceeding 10% of (A) 0.00
Net owned funds (A-B) 80.81
6 times NOF 484.86
Secured/unsecured loans as on 31.03.2015 367.49
Proposed sharing of requirement through term loans 20.00
Total proposed exposure 387.48
Share 5.169
Primary Security:

Exclusive charge on specific Term Loan Receivables & Underlying Assets.

Collateral Security: 10% of the sanctioned amount in the form of FD

Guarantors: personal Guarantee of Promoters:

ShriGovinda Chandra Pattanaik b) ShriDibyajyotiPattanaik

XYZ Microfinance Pvt Ltd is a NBFC-MFI doing microfinance since 2009. However the
existence of Mission Annapurna under the umbrella of peoples forum is a NGO which is
working since 1981 for the destitute & poor ladies. The microfinance business of Peoples
Forum has been taken over by Annapurna Microfinance Pvt Ltd. Annapurna Microfinance
transformed into Reserve Bank Of India(RBI) regulated Non-Banking Financial Company
(NBFC-MFI) in 2013. They are lending to women SHGs.

XYZ Microfinance Pvt Ltd is running its business in six states-

Odisha,Chhattisgarh,Maharashtra, Madhya Pradesh, Bihar and Jharkhand covering 80 districts
having 157 branches and providing loans to 54,951 SHG Groups which have 5,66,657
members with it. AMPL is having the mission of empowering 10, 00,000 poor women by 2018.

Incofin Investments (a Belgium based private equity), SIDBI, SIDBI Venture Capital and BIO
(Belgian Investment Organization) are the stakeholders in the company. The funding partners of
AMPL include various Banks and Fis like Development Credit Bank, Oikcredit, IFMR Capital,
Ananya Finance, Caspian, Axis Bank, BharatiyaMahila Bank, Bank of Baroda, and SBI,
Corporation Bank, Yes Bank, Canara Bank etc.

XYZMFL is financed by 31 Banks and Financial institutions. The total outstanding as on

31.10.2015 is Rs 507.00 Crores. The company has proposed to obtain finance of Rs 558.00
Crores from the banks and FIs during 2015-16. Out of which Rs 297 crores have already been
sanctioned as on 30.09.2015. And the company has applied with various Banks for obtaining
finance of Rs 261 crores out of which for Rs 20 crores the company has approached our Bank.
The organization is working with 5.67 lakh poor women. They have staff strength of around
1244.

Marketing arrangements: The Company is operating through branches of 6 states with around
1244 staff who undertake the marketing job.

Major development if any that have taken place in the company: The Company has
expanded its geographical outreach to increase its client base. From starting in 2009, it was
operating in two states (Chhattisgarh and Odisha) till 2014; the company is now operating in four
more states i.e. Jharkhand, Bihar, Madhya Pradesh, Maharashtra, making a total of six states.
The number of districts and branches which were 26 and 54 respectively, in March 2014, has
increased to 80 and 157. The gross loan portfolio has increased by around 144%, and the number
of active members has increased by around 98% from September 2014. Currently the number of
active members is 4.65 lakhs.

Apart from the operational development, the grading of the company has been upgraded to M2+
from M2 by ICRA. Bank loan rating has also been upgraded by ICRA from BBB- to BBB.

Areas of strength and weakness

Strengths:

Experience of two decades

Moved ahead with complying all the latest norms prescribed by RBI

157 branches in 80 districts of Odisha, Chhattisgarh, Maharashtra, MP, Jharkhand & Bihar with
1244 staffs.

Assets quality with less than 0.55% of the total portfolio as NPA as on 31.03.2011 and 0.17% as
on 30.09.2013. The company has successfully reduced the PAR> 30 days to 0.08% in September
2015.

Effective computerized MIS system for tracking.

Established system of internal audit & control with all the branches being audited once in a
month.

Diversified Sources of Funds

Existence of Risk Mitigation Unit

AMPL having access to capital has raised equity during this crucial time for Microfinance
Industry. The company is planning to infuse fresh capital in FY16, the process for which has
already started.
WEAKNESS

The microfinance programme is for development of the rural households and as the target
segment is vulnerable to different type of economic & social risks hence the margins are less and
risk of defaults are high.

Microfinance loans are without any collateral hence there is no fall back option for the
organization.

High cost involved in imparting training & motivating the SHG groups.

It takes a minimum of three months for a new Group to take loan.

Future outlook of the company:

The company through its effect management system has planned to achieve certain objectives.

To increase its disbursement to Rs 870 Cr in 2016 and Rs 1424.57 Cr in 2017, so that yearly
disbursement would grow by 90% in 2016 and 64% in 2017.

Since, the company is continuously expanding, the staff strength has also to be increased
specially the field officers which the company projects that it would grow at a CAGR of 37% to
reach out to the increasing number of clients. The number of credit officers as on September
2015 is 490, and it is projected to increase to 872 by March 2016 and around 1200 in 2017.

The number of branches, which is currently 157, is target to increase to around 450 by 2019.

The client base is also aimed to grow at CAGR OF 42%. The number of clients which is
currently 4.65 lakhs is aimed to increase to 5.86 lakhs by March 2016 and 8.74 lakhs in 2017.

The company has also planned to infuse equity of around Rs 94 Cr by March 2016 and Rs 153
Cr in FY 18.

XYZ MF Pvt Ltd

Performance/financial Audited Audited Audited Estimated Projected Provisiona

indicators 31.03.13 31.03.14 31.03.15 31.03.16 31.03.17 l
31.09.15
Net Sales 1009.54 2333.15 5620.31 12630.35 24168.72 5959.38
Other Income 45.21 255.64 407.15 526.38 1097.00 201.75
Profit before tax 271.03 621.26 452.41 1688.58 4038.39 1057.48
Profit after tax 178.64 419.89 305.65 1140.72 2669.37 685.24
Depreciation 4.72 14.91 90.30 130.23 168.77 61.07
Cash generation 183.36 434.80 395.95 1270.95 2838.14 746.31
Paid up capital 1293.73 1864.48 2619.51 4022.72 4022.72 3455.70
Tangible Net Worth 2473.51 5863.95 8766.26 20063.10 22898.03 9804.47
Fixed Assets 21.25 85.98 213.50 247.77 299.06 307.79
Term Liabilities 2388.03 5915.73 19659.93 52455.71 87590.47 28605.72
Investments 0.00 0.00 0.00 0.00 0.00 0.00
Current Assets 8522.02 19338.86 36438.89 71270.29 103677.000 48595.93
Current Liabilities 4854.83 10078.17 19576.32 23070.80 36981.38 24918.27
Actual Net Working 3667.19 9260.69 16862.57 48199.49 66695.62 23677.66
Capital
Current Ratio 1.76 1.92 1.86 3.09 2.80 1.95
TOL/TNW 2.93 2.73 4.48 3.76 5.44 5.46
Debt equity ratio 0.97 1.01 2.24 2.61 3.83 2.92
Interest Coverage 1.73 1.55 1.18 1.26 1.32 0.00
ratio
Net profit/Net sales 17.70 18.00 5.44 9.03 11.04 11.50
(%)
Dividend Paid (%) N.A. N.A. N.A. N.A. N.A. N.A.
Dividend/Net profit N.A. N.A. N.A. N.A. N.A. N.A.
(%)
EPS 1895.38 4455.07 3242.97 12103.13 28322.23 7270.45
Financial Indicators: (Rs in
lakhs)

Net Receipts:

The main activity of the company is financing to women SHG Groups. The main source of
income of the Company is interest income on loans.

Other income:

Other income mainly consists of interest on fixed deposit

31.03.2013 3.1.03.2014 31.03.2015

Hire charges
Lease income
Interest income on 664.70 1747.30 4430.78
portfolio loans
Dividend income
Other incomes
i)interest income on 45.21 255.29 407.15
FD with banks
ii)other operating 344.83 586.20 1189.53
income
The income has shown increase by 102.92% owing to increase in disbursement in various
regions which has resulted in overall growth in GLP, and hence there is substantial increase in
interest income on portfolio.

Operating profit (Net profit before tax):

The operative profit has decreased by 27% in 2015 owing to increase in operating expenses, as
number of branches are continuously increasing, hence no. of employees have increased thereby
increasing the overall employee benefit expenses. As informed by the company the profitability
has been affected by some changes brought in by their Auditors in the recognition of income and
expenses. One major expense is that of MSOP against which a provision of Rs 1.35 Cr was
made.

Profit after tax:

The profit after tax of the company for FY 2013-2014 and Rs FY 2014-2015 is Rs 419.89 lakhs
and Rs 305.67 lakhs respectively.

Tangible Net Worth:

The net worth of the company has increased by Rs 2902.31 lakhs in 2015 owing to increase in
paid up capital, Rs 24 Cr. CCD has been converted to equity which resulted in increase in net
worth of the company. The amount in share premium account has also increased by more than
170%.

TOL/TNW:

The total outside liabilities to tangible net worth has increased from 2.73 to 4.48 owing to
increase in term loan liabilities. The ratio is within the maximum level of 4.

Current ratio:

The current ratio of the company as on March 2015 was 1.86 as against 1.92 as on March 2014.

The deterioration in current ratio is owing to increase in current portion of loan, which has
increased by more than 100% in 2014.

Debt Equity Ratio:

Debt equity ratio has increased from 1.01 as on March 2014 to 2.24 as on March 2015 owing to
increase in loan liabilities.

ASSESSMENT OF TERM LOAN/DPG:

The company is presently availing term loans from a number of banks and the term loan o/s as
on 31.10.2015 is to tune of Rs 507.00 crores.

The company had proposed to obtain finance of Rs 558.00 crores funds in the form of loans from
banks and FI for 2015-16. Out of which Rs 297 crores are sanctioned and disbursed by Sept
2015. The company is approaching various banks for finance of the remaining Rs 261 crores.
The company requested for sanction of short term loan of Rs 20.00 crore to be repayable in 36
months with 33 monthly instalments and 3 months gestation period.
 FY 16
Cost of Project Amt (lacs)
Disbursement 87033.75
Term Loan Repayment 19921.09
Total 106954.84

Means of Finance
Repayment from Borrowers 50319.65
Term Loan 40102.66
NCD 14951.43
Equity Infusion 9400
Net Cash Accrual 1227.07
Total 116000.82

ASSESSMENT OF WORKING CAPITAL REQUIREMENTS: Not Applicable

NON FUND BASED LIMITS: Not Applicable

SHARING OF FUND BASED AND NON FUND BASED CREDIT LIMITS IN CASE OF
CONSORTIUM: Not Applicable

BRANCH VIEWS AND RECOMMENDATIONS:

Branch recommended for sanction of following:

Sanction of short term loan of Rs 20.00 crore

Approval of deviation in TOL/TNW(4.48) as per ABS 31.03.15
Approval of waiver of due diligence by external agency

Zonal office views and recommendations:

Compliance with loan policy

Particulars As per policy Present Compliance

proposal(ABS Yes or No
31.03.15)
Exposure norm 20.00 yes
applicable to
category(amt in crs)
Current ratio Minimum 1.33 1.86 Yes
TOL/TNW 4.00(maximum) 4.48 No
Capital gearing ratio Maximum 10 NA NA
Pre sanction unit Done Done Yes
inspection
Credit rating Done B(CRAS) Yes

Pre Sanction Unit Inspection Report

The pre sanction unit inspection was done. The registered office was visited by Branch Manager,
Advances Officers and Senior Manager Credit ZO. The chief finance officer of the company
briefed about the sourcing, appraisal, sanction, recovery methods implemented by them and
measure taken to reduce turnaround time. They have also shown the loan application,
documentation, computerized MIS system, software solutions etc. they also exhibited the module
by which they are operating through mobile.

Credit Investigation Report

The company approached Bank directly in order to widen their existing set of lenders and
to bring in more number of banks.
The market opinion about the borrower is satisfactorily, as per information obtained from
other lenders.

Due diligence report by Branch

The company has approached Bank directly to meet their enhanced loan
requirements, as they intend to spread their loan among PSBs.
The total Assets under management reached 494.26 crores.
The company is transparent in sharing information or any other details.
As per information available, the company is servicing the loans promptly.
The company is in existence since many years and is profit making.
Bank loan rating has also been upgraded by ICRA from BBB- to BBB.

Hence the proposal is considered as fair banking risk and can be considered favorably.

Waiver of External Due diligence by Approved Agency:

It was recommended for waiver of external due diligence by external agency keeping in view of
the satisfactory dealings of the company with other banks and financial institutions under
multiple banking arrangement and the company being rated by external agency ICRA. Further,
the company has submitted an external due diligence report done by SRB & Associates,
Company secretaries in Sept 2015.

Internal Credit Rating:

The company has secured B rating as per CRAS rating (as per ABS)

External Credit Rating:

ICRA, during August 2015 following ratings to M/s Annapurna Microfinance Private Limited

Instrument Amount(in Rscrore) Rating

Non Convertible Debenture 29.2 BBB(Stable) assigned
Programme
Term Loan- Bank Limits 245.8 BBB(Stable) reaffirmed
Unallocated-Bank Limits 6.2 BBB(Stable)reaffirmed

Rate of Interest:

The company is requesting for finer rate of interest at BR + 2.00% p.a.

DSCR Calculation: (Rs in Cr)

Year 2016 2017 2018 2019 2020 TOTAL

Particulars
Cash Accural 1227.08 2763.69 5291.86 7987.42 12174.47 29444.51
Principal received 50319.65 86405.39 135358.77 199147.18 301945.16 773176.15
Interest on Term Loan 7105.12 13065.23 21684.85 33478.60 46776.09 122109.89
OVERALL
TOTAL Rs. 58651.85 102234.31 162335.48 240613.19 360895.71 924730.55
Repayment of Term
Loan
PRINCIPAL PAID 19921.09 29955.71 44527.22 71018.47 116613.39 282035.89
Interest on Term Loan 7105.12 13065.23 21684.85 33478.60 46776.09 122109.89
OVERALL 0.00 0.00 0.00 0.00 0.00 0.00
TOTAL Rs. 27026.21 43020.95 66212.07 104497.07 163389.48 404145.78

DSCR 2.17 2.38 2.45 2.30 2.21 2.29

Average DSCR 2.29

The maturity pattern of assets and liabilities as on 31.03.2015 is as under (Rs in Crs)

1day to Over Over 2 Over 3 Over 6 Over 1 Over 3 Over Total

30/31 one months months months year to years 5
days(one month upto 3 to 1 to 1 3 years to 5 years
month) to 2 months year year years
months
Liabilities
Borrowings 12.20 15.65 13.70 47.26 81.96 167.41 29.30 - 367.49
from banks
Market
Borrowings
Total 12.20 15.65 13.70 47.26 81.96 167.41 29.30 - 367.49
Assets
Advances 19.06 21.22 21.17 60.28 105.45 100.39 - - 327.56
Investments 0.36 - - - - - - - 0.36
Total 19.42 21.22 21.17 60.28 105.45 100.39 29.30 - 327.92
Asset over 7.22 5.56 7.47 13.02 23.49 (67.02) (29.30) - (39.56)
Liability

Loan portfolio and provision for standard and non-performing assets as on March 31, 2015

Portfolio loans outstanding (Gross) (Rs in Crs)

Asset Classification March 31, 2015 March 31, 2014

Standard Asset 327.23 98.82
Non-Performing Assets 0.33 0.16
Total 327.56 98.98

Provision for Standard and Non-Performing Assets (Rs in Crs)

Asset March 31,2014 Provision made Provision written March 31,2015

Classification during the year back during the
year
Standard Asset 0.82 2.17 - 3.00
Non-Performing 0.16 0.12 - 0.28
Assets
Total 0.98 2.29 - 3.28

Portfolio loan outstanding (Net) (Rs in Crs)

Asset Classification March 31,2015 March 31,2014
Standard Asset 324.24 98.00
Non-Performing Assets 0.05 -
Total 324.29 98.00

The financials of the company are satisfactorily

Particulars 31.03.2014 31.03.2015

PAT 4.20 3.06
Tangible Networthy 58.64 87.66
CRAR% 56.34% 23.07%
-CRAR-Tier I Capital 30.84% 15.53%
-CRAR-Tier II Capital 25.50% 7.54

Conclusion

Credit appraisal is a process of appraising the credit worthiness of loan applicants. The fund of
depositors i.e. general public are mobilised by means of such advances / investments. Thus it is
extremely important for lender bank to assess the risk associated with credit, thereby ensure the
security for fund deposited by depositors. Therefore my analyses regarding credit appraisal
procedure of Andhra Bank are as follows:-

In case of retail lending bank strictly follow its circular and fulfils all requirement of
necessary documents required for different types of loan so that bank do not suffer any
types of loss.
Bank is very much particular about CIBIL report of borrowers in case of each type of
lending.
Bank lending process in case of retail loan is very much fast after compiling with all the
criteria of bank.
In case of project financing bank follow lengthy norms to check the feasibility of the
project such as:-
I. Firstly personal appraisal of promoter is done by the bank to ensure that
promoters are experienced in the line of business and capable to implement
and run the project efficiently.
 II. Secondly detail study about the technical aspect is done to find the technical
soundness of project such as proper scrutiny of financial report is done,
valuation of property by government approved valuer is done and view
regarding each and every area of project is done under technical analysis.
III. A detail study relating financial viability of project is done by detail study of
cash flow, fund flow statements and by calculating import ratio which is very
much necessary for project appraisal such as DSCR, DER etc. the main
purpose of financial appraisal is insure that project will ensure sufficient
surplus to repay the instalment and interest.
IV. Risk analysis is done by bank to determine the risk associated with the
project. This is mainly done by sensitivity analysis and by AB credit rating or
scoring. With sensitive analysis feasibility of project is determined under
worsened condition. Credit rating or AB scoring is done of various
parameters such as personal, management, financial etc , thereby determine
credit worthiness of customer..
V. It is on basis of credit risk level, a collateral security to be given by borrower
is determined.

This shows that Andhra Bank has sound credit appraisal system