Credit Appraisal for Project Loans

UNITED BANK OF INDIA

SIP Project Report Submitted in partial fulfillment of the requirements for the PGDM Programme

By Piyush Ranjan 2010148

Supervisors: 1. Mr. Mrityunjay Kumar 2. Dr. Veena Pailwar

Institute of Management Technology, Nagpur 2010-2012

ACKNOWLEDGEMENT Success is not destination, but a journey- goes a proverb. I realize it even better during my Company Project Study. I would not have completed this journey without the help, guidance and support of certain people who acted as guides, friends and torch bearer along the way. I feel fortunate to be linked with United Bank of India, one of the top and oldest Public Sector banks in India. I deeply express my gratitude to United Bank of India for giving me an opportunity to work as a trainee at their Head office under Summer Internship Program. Past two months has been a great learning experience for me. First and foremost I would like to convey my deepest and sincere thanks to Mr. Mrityunjay kumar ( Manager), Corporate Business Group, UBI, HO, Kolkata as my project Mentor. I express my sincere thanks to all the staff members of UBI for their cooperation that has helped me a lot in completing this project.

Table of Contents Organisation of the Study The project is divided into the following parts: Chapter-I : Introduction It begins with an introduction to the project report, stating the objective and research methodology adopted. Limitations inherent in the project are also laid down.

Chapter-II : Bank/industry Profile This chapter is devoted to getting to know United Bank of India. UBI is a public sector bank. This chapter highlights the history of the bank, the Board of Directors, the awards received by the bank. The key financials and the core vision of the bank has also been included. Chapter-III : Conceptual Study This chapter gives an insight into credit appraisal in general. The five Cs of credit that are character, capital, capacity, collateral and condition have been described which are evaluated by the bank to determine the creditworthiness of the borrower. Chapter-IV : Credit Facilities The credit facilities provided by UBI have been included in this chapter. They include working capital facilities, term loan facility and retail credit. The bank also provides the non-fund facilities like Letter of Credit and Bank Guarantee which are defined in this chapter. Chapter-V : Appraisal for Term Loan and Working Capital Loan The appraisal process for TLand WC loan is described here. The information sources, the general guidelines for appraisal and the special guidelines for new, takeover and existing business units is mention in this part of the project. Chapter-VI : Various Components of Appraisal The various elements or components which are considered by the bank in the credit appraisal modus of UBI are elaborated in the chapter. These elements are very crucial in judging the capacity and character of the borrower.

Chapter-VII : Financial Parameters of Appraisal This chapter is devoted to the various financial parameters which are examined to assess the income flow and repayment capacity of the business. The financial parameters include the analysis of the financial statement and ratio analysis which are discussed here. Chapter-VIII : Appraisal of Security The evaluation of primary and secondary security is one of the most important components of credit assessment. The marketability, stability of value, ascertainability and transferability are the elements. Chapter-IX : Assessment of Working Capital Requirement The methods adopted by the bank for the assessment of the working capital requirement are described in this chapter. These methods are used to determine the actual requirement of credit to prevent excess or less credit being given to the business. Chapter-X : Appraisal for Non-Fund Facilities The appraisal of the non-fund facility like LC and BG is dealt in this chapter. The assessment of the requirement of these facilities is also detailed. Chapter-XI : Appraisal for Retail Credit The assessment of the retail credit proposals is the content of this chapter. The elements & documents for appraisal of Education and Home loan are described here. Chapter-XII : Case Study The case which was studied for the project has been detailed in this chapter. The components of credit appraisal were evaluated in respect to this case. Chapter-XIII : Findings and Suggestions After studying the credit appraisal modus of UBI, the findings made in the project are included in this chapter. Some suggestions have also been made which would be useful to the bank in improving its appraisal process. Chapter-XIV : Conclusion The project has been concluded in this chapter and contains the working experience at UBI.
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EXECUTIVE SUMMMARY The main purpose of the project is to understand the whole concept of Project financing, and its methods and needs of project financing in the form of different committee recommendation and methods. To know the needs and methods of project financing for term loan and working capital loan in small- scale industry as well as large-scale industry and various guidelines issued by the RBI for banking sector for Project finance. The project has been divided into two parts. In initial chapters of the project was given to general concept and fundamental principles for project financing, method of project financing, requirement of project financing in various types of industries, the finance requirement to the borrowers and the various approaches adopted by the borrowers for selecting the mode of financing. The later chapter covers various methods of project financing and its sub methods i.e. term loan and Working capital limit in project financing. Funding the requirement of the term loan and working capital is by the following procedures of Credit Monitoring Assessment (CMA), for funding of shortterm loan and long-term loan. And finally various committees recommendation and current scenario of the MPBF were elaborated in detail.

And the project includes the case study on electronics industry for which the procedure is actually applied to taro electronics Ltd. and the details of projection is highlighted.

1.1 Introduction The Banking sector is the lifeline of the economy and the major financial pillar in the financial system. Banking system is the fuel injecting system which spurs economic efficiency. Banks are the main intermediaries between the savers and borrowers. The main function of the commercial Banks is the acceptance of deposits and the lending of funds. They also play the inevitable role of credit creation in the economy. The Banking system has adopted the Base Rate system from 1st July 2010 replacing the Benchmark Prime Lending Rate (BPLR). Deposits are the main source of funds for commercial Banks. The higher the amount of deposits mobilized, the higher is the amount of funds lent. Lending of the funds constitutes the main business of any Banking company. The major portion of the Banks funds are employed by way of loans advances. A Banks income is predominantly earned from interest and commission on various services. The Banks mobilize savings from surplus-spending sector and lend them to the deficit-spending sector. However lending does carry certain inherent risks. As a Banker has to lend the funds raised by way of deposit from customers, he has to take calculated and assessed to take risk in lending. While providing credit a Banker follows a very cautious policy and conducts his business on basis of well known principles of credit appraisal in order to minimize the risk.

Objective of the Study The study was carried out with the following objectives to be accomplished: To study the credit appraisal system of UBI. To suggest and recommend ways that can improve the credit appraisal system. To carry out a case study.

CHAPTER-II BANK/INDUSTRY PROFILE

2.1 Bank overview United Bank of India (UBI) is one of India's major commercial Banks of India. It is a Government of India undertaking with major presence in eastern India. UBI was the result of the merger in 1950 of four Banks: Comilla Banking Corporation (founded by Narendra Chandra Datta in 1914) Bengal Central Bank (founded by Sri J.C. Das in 1918) Comilla Union Bank (founded by Sri L.B. Dutta in 1922) Hooghly Bank (founded by Sri D.N. Mukherjeee 1932). United Bank of India was constituted under the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 on July 19, 1969. The Head Office of the Bank was set up at 4 Clive Ghat Street presently known as N. C. Dutta Sarani, Kolkata 700 001which was shifted to its present location at 11 Hemanta Basu Sarani, Kolkata 700001 in 1972 for operational efficiency. Presently the Bank has a three-tier organisational setup consisting of its Head office in Kolkata, 28 Regional offices and 1600 branches spread all over India UBI played a significant role in the spread of Banking services in different parts of the country, more particularly in Eastern and North-Eastern India. UBI has sponsored 4 Regional Rural Banks (RRB) one each in West Bengal, Assam, Manipur and Tripura. These four RRBs together have over 1000 branches. United Bank of India has contributed 35% of the share capital/ additional capital to all the four RRBs in four different states. In its efforts to provide Banking services to the people living in the not easily accessible areas of the Sunderbans in West Bengal, UBI had established two floating mobile branches on motor launches which moved from island to island on different days of the week. The floating mobile branches were discontinued with the opening of full-fledged branches at the centres which were being served by the floating mobile branches. UBI is also known as the 'Tea Bank' because of its age-old association with the financing of tea gardens. It has been the largest lender to the tea industry. The

Bank has three full fledged Overseas Branches one each at Kolkata, New Delhi and Mumbai with fully equipped dealing room and SWIFT terminal . The operations of 500 branches have been computerised either fully or partially and Electronic Fund Transfer System came to be implemented in the Bank's branches at Kolkata, Delhi, Mumbai and Chennai. The Bank has ATMs all over the country and having Cash Tree arrangement with 11 other Banks. United Bank of India has made place in customers life with its quotes Unique Banking Ideas and The Bank that begins with U. The Base Rate of UBI has been set at 8.25% Table 2A MILESTONES OF UBI Year 1961 1964 1969 1970 1973 1976 1980 Details The Cuttack Bank Limited and The Tezpur Bank Limited merged with UBI Staff Training college at Kolkata (then Calcutta) was setup The Bank was nationalised by Government Of India Mobile branches were set up by the Bank Hindusthan Mercantile Bank Limited merged with the Bank Narang Bank of India Limited merged with the Bank Appointed as convenor of State Level Bankers Committee in West Bengal, Tripura and Manipur 1993 1995 2006 2007 2007 First branch brought under total branch mechanism Crossed business level of Rs. 10,000 crore Crossed business level of Rs. 50,000 crore Rolled out first CBS branch Setup United Bank Socio Economic Development Foundation Trust for rendering assistance to the weaker and under priviledge sections of the society. 2007 Setup the first Rural Development and Self Employment Training Institute to provide residential training to small farmers and unemployed youth free of cost. 2009 2009 2010 Achieved 100% CBS for all its branches Crossed business level of Rs. 100,000 crore Successfully completed the Initial Public Offering

2.3 United Vision To emerge as a dynamic, techno savvy, customer-centric, progressive and financially sound premier Bank of the country with pan India presence, sharply focused on business growth and profitability, with due emphasis on risk management in an environment of professionalism, trust and transparency, observing highest standard of corporate governance and corporate social responsibility, meeting the expectations of the shareholder as well as the aspirants of the employees.

TABLE2B BOARD OF DIRECTORS OF UBI Name Shri. Bhasker Sen Shri. S.L Bansal Shri. Sanjeev Jindal Shri. Tulsidas Bandyopadhyay Dr. Naina Sharma Shri. Suprita Sarkar Shri. Soumitra Talapatra Designation Chairman and Managing Director Executive Director Government Nominee Director RBI Nominee Director Non-Official Director Officers Employees Director Workmen Employee Director

TABLE 2C AWARDS RECEIVED BY UBI Year 2006 Details National Award for the second best performance in financing small scale units by Ministry of Small Scale Industries, Government of India 2007 Golden Jubilee Award for the best Bank in north east zone for excellence in the field of khadi and village industries from the Ministry of MSME,

Government of India 2007-08 2008 Best Bancassurance partner by Tata AIG National Award for the best Bank for excellence in field of Khadi and village industries for east and north east zones from the Ministry of MSME, Government of India 2008-09 2008-09 2009 Pinnacle Partner of the year by Tata AIG Highest contibutor to lives insured by Tata AIG National Award under Prime Minister Employment Guarantee Programme in north east zone from the Ministry of MSME, Government of India Source: Website of UBI 2.6 Highlights for Financial Year ended March 31, 2010 (FY10) Net Profit up by 74.5%. to Rs.322.36 cr (Rs 184.71cr in FY09) Net Interest Income up by 19.8% to Rs1391.23 cr (Rs1161.51 cr in FY09) Non Interest income up by 13.8% to Rs. 558.74 cr (Rs490.86Cr in FY09) Operating Profit up by 29.3% to Rs875.85 cr (Rs 677.23 cr in FY09) Advance up by 19.7 % to reach at Rs.42756 crore. Deposit up by 25.0% to reach Rs.68180 crore. The share of CASA stood at 38.2% Capital Adequacy : 12.80% ( 13.28% in FY09) TIER I Capital Adequacy: 8.14 % (7.56 % in FY09) Net Interest Margin at 2.24% ( 2.15% in FY09) Return on Average Assets (RoA) stood at 0.45% (0.34% in FY09) Return on Equity-(RoE) stood at 12.26% (8.15% in FY09) The Priority Sector Advances increased to Rs 14396 Crs as on March, 2010 registering a growth of 22.5% on yoy basis. The Gross NPA ratio and the Net NPA ratio stood at 3.21% and 1.84 % respectively. Book value per share is Rs.91.6.

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CHAPTER-III CONCEPTUAL STUDY(CONCEPTS/MODELS USED) Credit Appraisal in Banks

Credit Appraisal is the process by which a lender appraises the creditworthiness of the prospective borrower. Credit appraisal process of a customer lies in assessing if that customer is capable to repay the loan amount in the stipulated time, or not. Banks have their own methodology to determine if a borrower is creditworthy or not. It is determined in terms of the norms and standards set by the Banks. The bank has to make proper enquiry not only into the borrowers capacity to pay but also his willingness to repay the amount. Being a very crucial step in the sanctioning of a loan, the borrower needs to be very careful in planning his financing modes. The Banks need to be cautious, lest they end up increasing their risk exposure. All Banks employ their own unique objective, subjective, financial and non-financial techniques to evaluate the creditworthiness of their customers. The "Five C's" are the basic components of credit analysis which are as follows:

3.1 Character In assessing the creditworthiness of a person, first consideration is given to the character of the person. It is the general impression that the borrower makes on the prospective lender. The word character includes a number of personal characters like honesty, integrity, regularity and promptness in repaying his dues, sense of responsibility, reputation and goodwill he enjoys in the eyes of others. Banks will form a subjective opinion as to whether or not you are sufficiently trustworthy to repay the loan or generate a return on funds invested in your company. The lenders check the willingness and intentions of the borrower to repay. The educational background and experience and expertise to be considered. The quality of references and the background and experience levels of the employees will also be reviewed in case of business.

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3.2 Capacity The ability to repay is the most critical of the five factors, it is the primary source of repayment that is cash. The prospective lenders will want to know exactly how the customer intends to repay the loan. The lenders will consider the cash flow from the business or the income of individuals, timing of the repayment, and the probability of successful repayment of the loan. The success of an enterprise largely depends on the ability, competence and experience of the entrepreneur. If the borrower possesses these skills to run the business successfully, the bank considers it as a deserving case for granting credit. Payment history on existing credit relationships-personal or commercial is considered an indicator of future payment performance. Potential lenders also will want to know about other possible sources of repayment.

3.3

Capital

Here the Bank examines how well-capitalized the borrowers company is. Amount he has invested in the business is the money is an indication of how much the borrower is at risk should the business fail. The bank does not lend to any entrepreneur or individual who does not have adequate fund of his own. The Interested lenders and investors will expect the borrower to have contributed from his own sources and to have undertaken personal financial risk to establish the business before asking them to commit any funding. In case of failure of the business, the bank can realize his money if the borrowers capital is sufficient. The capital position of retail borrowers is analysed by his financial records.

3.4 Collateral Collateral are additional forms of security the borrower can provide the lender along with the primary security. Giving a lender collateral means that the borrower pledges an asset his own, such as house, to the lender with the agreement that it will be the repayment source in case he can't repay the loan. The banks evaluate the marketability, ascertainability, transferability and stability of value of the collateral. The collateral should be easily converted into cash, the market value of the security should not be highly fluctuating, the collateral should also be transferred easily into the banks name and the value of the collateral should be easily determined.

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3.5 Condition It describes the intended purpose of the loan. Will the money be used for working capital, additional equipment or inventory? The banks will also consider local economic conditions and the overall climate, both within the industry and in other industries that could affect the business of the borrower. The sensitivity of the income stream of the business or individuals to adverse conditions is examines by the banks. The condition will determine the repayment capacity of the borrower.

Thus, these 5 Cs of credit guide the banks in the credit appraisal strategy. They provide the requisite framework within which the banks formulate their credit inspection process. A successful appraisal system covers all the Cs and ascertains the risk associated with a credit proposal and the eligibility of the loan applicant for the credit.

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CHAPTER-IV CREDIT FACILTIES The credit facilities advanced by UBI can be divided into the following:

4.1 Working Capital Credit 4.2 Term Loan 4.3 Retail Credit The credit facility provided by the Bank can also be classified in to the following credit facilities:

Fund based credit This is a direct form of lending in which a loan with an actual cash outflow is given to the borrower by the Bank. In most cases, such a loan is backed by primary and/or collateral security. The loan can be to provide for financing capital goods and/or working capital requirements.

Non-fund based credit In this type of facility, the Bank makes no funds outlay. Facilities such as 'letters of credit' and 'guarantees' fall under the category of non fund based credit. But in case of default by the borrower to fulfill his commitment towards LC or BG, the non-fund facility gets crystallised into fund based

4.1 Working capital credit Working capital is the capital required by any business enterprise or unit to carry out its day to day operations particularly towards completing a working cycle. It includes the finance for purchase of raw material, wage payment, carriage inward and outward, etc. The Bank provides WC finance to meet these requirements of the borrower in the form both fund based and non-fund based facility for a period less than a year. However the credit limit of the facilities gets renewed year after year. The amount approved by the

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Bank is called Maximum Permissible Bank Finance. It is the maximum amount that the borrower can draw from the Banking system. WCC is provided in the following ways:

4.1.1 Cash Credit This is the most popular method of WC finance and the most flexible arrangement from the borrowers point of view. Under this facility, the debtor is allowed to withdraw funds from the Bank up to the sanctioned credit limit. The credit limit gets renewed year after year .He is not required to borrow the entire sanctioned credit once, rather he can draw periodically to the extent of his requirements and repay by depositing surplus funds in his CC account. Interest is payable on the amount actually utilized by the borrower. Generally the Bank does not recall such advance until and unless the account becomes NPA.

4.1.2 Overdraft Under this facility, the borrow is allowed to withdraw funds in excess of his current account balance up to a certain specified limit during a stipulated period against some security. Though overdrawn amount is repayable on demand, they generally continue for a long period by annual renewals of the limits. The borrower can withdraw and repay funds whenever he desires within the overall stipulation. Interest is charged on the daily balance subject to some minimum charges. The borrower operates the count through cheques.

4.1.3 Purchasing or Discounting of bills Under this facility the borrower can obtain credit from the Bank. The Bank purchases or discounts the borrowers bills. The amount provided under this facility is covered within the limit of Bill purchased or Bill Discounting. In case of purchasing of bills the Bank becomes the owner of the Bank but generally holds the bills as security for the credit. When the Bank discounts the bills, the borrower is paid the discounted amount and the Bank collects the full amount on maturity.

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4.2 Term Loan Term loan is a credit facility payable within a stipulated period in installment(s) spread over one year or more than a year. Repayment of term loan is made out of profit. Duration of the term loan is not normally over 7 years except in case of infrastructure and project finance where it may extend up to 15-20 years. Housing loans are part of long-term loans and in some cases repayment period may extend up to 20 years subject to fulfillment of other norms stipulated in lending policy UBI. Term loans are taken by the borrowers for the following purposes: Normal capital expenditure. The acquisition of fixed assets like land, building, machinery, vehicles, etc Modernization, renovation and expansion of existing units. Implementation of Brownfield/Greenfield projects.

Non fund Credit

1. Letter of Credit L/C is a commitment from a Bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount. The Bank opens the L/C in favour of the customers to facilitate the purchase of goods. If the customer does not make the payment to the supplier of goods, machinery or equipment within the credit period, the Bank makes the payment under the LC arrangement. This passes the risk of the suppliers to the Banker. In the event that the buyer is unable to make payment on the purchase, the Bank will be required to cover the full or remaining amount of the purchase .Bank extends LC facility to parties who are its regular customers. Further, it is desirable that LC limit should be with a fund based limit. LC is sanctioned for procurement of raw material, financing project

implementation/capital expenditures. Bank may also allow issuance of LC for procurement/ purchase of Capital Goods within the TL sanctioned for such projects. The amount of such LC should not exceed the cost of capital goods provided in the Project/Capital Cost.

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2 .Bank guarantee Bank Guarantee is an irrevocable commitment by a Bank to pay a specified sum of money in the event that the party requesting the guarantee fails to perform the promise or discharge the liability to a third person in case of the requestors default. This facility is provided for shorter period of less than 3 years however for projects guarantee for 10 15 years is also provided by UBI with permission from the Regional Manager Financial guarantee The Bank guarantees the customers financial worth, creditworthiness and capacity to take up financial risk to the extent of amount mentioned in the guarantee Financial . purposes are mainly for security deposit, mobilization advance, bid bond/earnest money. Guarantee for the purpose of mobilizing advance money from the buyer is considered as part of working capital finance Performance guarantee In this case the Bank guarantee relate to the technical, managerial, administrative experience and capacity of the customer to perform the specified contract The liabilities in both cases are reduced to monetary terms.

4.3 Retail Credit Retail lending will continue to be a thrust area for the Bank with special focus on its various retail credit products. The most important and popular retail credit facilities of UBI are the housing loan and education loan facility provided under the following schemes:

4.3.1 The United Education loan This scheme aims at providing financial support from the Bank to deserving/meritorious students for pursuing higher education in India and abroad. Educational loans are granted to individuals up to Rs. 10 lakh for studies in India and Rs. 20 lakh for studies abroad. The loan amount also includes the hostel fees, examination fees, travel expenses, purchase of books etc. The Bank has launched United Excel Education Loan Scheme for the students of IIT, IIM and other premier Institutions for pursuing Management, Medical and Technology courses.The loan is to be repaid in 5 to 7 years after commencement of repayment. The

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repayment will commence after a moratorium/ repayment holiday which is Course period plus 2 years or 6 months after getting job whichever is earlier.

4.3.2 United Housing Loan Scheme UBI through its united housing provides its customers to fulfill their dream of owing a house/ flat of their own choice at attractive terms. UBI provides the loan for the following purposes. 1. Purchase of ready built house/flat or house/flat under construction 2. Purchase of old house/flat not old over 35 years. 3. Construction of House on own land. 4. Renovation/extension/repair/ furnishing of owner-occupied or tenant-occupied house or flat. 5. Purchase of land for construction of house within 2 yrs 6. Purchase/ take-on of long-term lease (min. 10 yrs) of house/flat from Govt. Bodies/PSUs (unexpired lease period should exceed atleast years than repayment period of loan)

UBI provides a basket of credit facilities for facilitating the needs of the business activities and the retail borrowers. Each facility enables the borrowers to accomplish their objective at the same time they bring some risk for the bank. So this gives rise to the inherent necessity of inspection of the creditworthiness of the prospective borrowers before extending credit to them.

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CHAPTER-V APPRAISAL FOR WORKING CAPITAL and TERM LOAN The appraisal of working capital and term loan credit in UBI is done through a processing format prescribed by the Head Office. There are three types of processing formats for credit below 25lakhs, 25 lakhs to 1 crore , 1 crore and above.The processing format has a detailed note of the appraisal parameters considered by the Bank for processing the credit proposal. The detailed note is divided into various annexure. The Retail Banking Department has its own processing format for the appraisal of credit proposals. The bank also determines the actual amount of the fund or non-fund facility required by the bank. Incase of WC credit the WCR is determined by various method like the turnover method, 1st and 2nd method of lending and the cash budget method. The limit of the Term Loan is determined by the evaluation of the Project report submitted by the applicant of the loan

Research Methodology The projects includes the data which were collected by both primary and secondary sources Primary Data Primary data was collected from the officers of the Bank. Secondary Data Valuable information was collected from secondary sources like the varied lending proposals of the 1Bank, UBI Lending Policy Report, business magazines, business newspapers, internet sites and journals of UBI. 5.1 Information source for credit appraisal The credit evaluation process begins with the collection of information from the various sources about the borrower and his business unit to judge or assess the 5 Cs of credit in respect to the borrower. The Bank accumulates the data from the following sources:

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Interview with the management and employees of the Company. Credit Information Bureau of India Ltd (CIBIL) Memorandum of Association (MOA) of the Company Articles of Association (AOA) of the Company Auditors Report. Reserve Bank of India (RBI) Export Credit Guarantee Corporation (ECGC) Credit Rating Agencies Association of Traders/Chambers Securities and Exchange Board of India (SEBI)

Company Law Tribunal (CLT) Project Information Memorandum Various Tax Authorities like Income Tax, Sale Tax,etc Other Banks/ Banking circle Inspection of the business unit Buyers, suppliers to the business unit Media sources including internet

5.2 General guidelines for credit appraisal The borrower should have a credit risk rating of at leastUBICR-3 both for working capital and term loans. Under Basel II norms all corporate exposures exceeding Rs.10 crores should be rated by RBI accredited Credit Rating Agencies, viz. CARE, CRISIL, ICRA, FITCH and SMERA (for SME), etc. The rating done by external agency should be at least of Investment Grade that is BBB for long term loans and Working Capital Credit Proposals should be processed using limit-wise formats prescribed by HO from time to time conforming to the norms applicable as per lending policy and extant guidelines of the Bank. The business activity of the borrower should be in consonance with the lending policy of the Bank
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The proposals should conform to the norms regarding financial parameters. . In the case of small borrowers, the Bank ensures that the individual resides/ undertakes activity within the command area of the branch so that it becomes easy for the Bank to make physical examination of the unit cost effectively. Further discreet enquiries are made with on the nearby residents/business of the

establishments/employer/colleagues borrower.

standing/credit-worthiness

The Bank can take the help of professional agencies for the above due diligence process.

5.3 Special guidelines for credit appraisal The Bank has some typical guidelines for the appraisal of takeover, new and existing units. The special rules for the acceptance or rejection of the credit proposal are as follows:

5.3.Take over proposal The proposal should confirm with the general guidelines of credit appraisal. In general Bank does not take any fresh exposure in account which has been classified as NPA with other Banks but the Bank takes over the Standard Assets. While taking over any credit exposure from other Bank, the borrowers purpose of shifting from the previous is thoroughly examined. Existing units of at least 3 years old with net profit (as per audited Balance Sheet for eligible cases) in the immediate preceding 3 years are only eligible for taking over. The Bank examines the account statements of the borrower from the existing Banker(s) to confirm satisfactory past dealings and operations of the borrower with the previous Bank. Take over in project implementation stage is generally avoided. Takeover proposals for infrastructure / construction / commercial real estate loans are considered at Head Office level due to the risks associated with such projects. The proposal should also confirm to the financial parameters used in the appraisal process.

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5.3.2 New proposal The appraisal of new exposures to the Bank is carefully done. In case of new projects / business, additional care should be taken as the historical data are not available. In the appraisal of such proposals special importance is given to the appraisal of promoters business acumen, his business contacts and experience to ensure that the business will be feasible and will be able to pay back its debtors. The risk rating exercise of the new proposal is made on the parent company already in existence as the historical financial data are available. The Bank does not take up new proposals where one time settlement/ compromise has been already done for the entity resulting in sacrifice by the Bank. In case of such proposals if the name of the Director/ promoter/entrepreneur appears in the RBI defaulters list, such proposals are not entertained by the Bank. New exposure under the CDR mechanism may be taken up by the Bank after through appraisal of the strength and track record of the promoters, performance of the company, default in servicing of interest and repayment of installment to the existing lenders, Asset classification with all existing lenders remain as Standard, credit rating and full security of tangibles. 5.3.3 Existing proposal (Renewal/Enhancement/Reduction) The WC limit (fund and non-fund based) are generally sanctioned for a period of 12 months only with provision for renewal on annual basis. As such regular WC facility (fund and non-fund based) needs to be reviewed and renewed not later than three (3) months from the due date. In case of TL, review of status containing conduct, compliance of sanctioned terms, performance vis-a-vis projection, progress of project implementation etc. on annual basis (from the date of first disbursement) is completed within 6 months The review, enhancement or reduction of the credit facilities is done by the Bank after an in- depth examination of the past and current performance of the business. Due importance is given to the performance measurement against the projections provided by the company. At the time of review / renewal of borrowers account where rating has slipped to UBICR4 or less,it is examined whether the slippage in rating is due to occurrence of

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certain internal and / or external factors which the borrowers unit may o vercome within a short period of time In cases under BIFR packages / CDR mechanism or restructuring / additional exposure may be considered by the Bank in deserving cases provided that provision for enhancement is as per approved package or the company i satisfactorily performing as per s approved package and additional requirement has been arisen out of normal/enhanced business activities.

CHAPTER-VI COMPONENTS OF CREDIT APPRAISAL In the credit appraisal process the Bank takes into account various non-financial data for deciding over the capacity, condition and creditworthiness of the company or business unit. These parameters are as follows:

6.1 Industry scenario While appraising a working capital/term loan proposal for commercial/industrial ventures, the situation of the respective industry is kept in view. The Bank subscribes to CRISIL and CMIE for getting updates on performance and outlooks of different industries. The Bank takes the help of such information as well as other market/industry sources. It is done to judge the competence / performance of the borrower amongst its peer group. The factors like growth of the industry over the years and the prospects of growth in future, demand driver, the number of competitors, contribution of the industry to economic development, domestic and foreign investment in the industry, export opportunities, price dominance, entry-exit barriers are examined.

6.2 Company profile and history The study of these factors is very essential to see the profitability and repayment trend in the past. It helps the Bank to judge the future income generation prospects of the business. The establishment details of the company, line of activity, presence of the
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company in various sectors, the promoters of the company, presence of the company or the group across the globe, employment generated by the company, growth in market capitalisation , net assets and net worth are the parameters which are considered.

6.3. Ownership of the company This covers the legal structure of company, i.e. is it public / private / listed. If listed then broker reports can be an additional source of information besides share price. Sole proprietorships / partnerships tend to be higher risk. Potential support can be provided by sister concerns, multinationals etc. While this can be a support it can also work as a disadvantage with possible diversion of funds to sister concerns which is addressed.

When dealing with individual Group companies the overall review of the Group exposure to ensure that the Group Risk is adequately analyzed and monitored, and Group limits also set.

6.4. Brief particulars of the Promoters and Chief Executives In the process of credit appraisal the Bank also seeks the particulars of the Promoters and the key management personnel of the company like their name, age, designation in the companys management, their educational qualification, experience and areas of expertise. This information helps the Bank to judge the managerial competence of these persons in successfully running the business. The Bank gets the assurance that the promoters are capable of implementing and managing the project and earning profit for the business to service their debt.

6.5. Details of the group companies The appraisal of a credit proposal is not limited to the particular company. The Bank also appraises its group companies. The information regarding the group companies like their name, line of activity, no of years in that industry, brief financials like net worth, income, profit are obtained by the Bank to examine the viability and feasibility of the group companies. This provides assurance to the Bank regarding the of the borrower company. This kind of appraisal is important in case of new proposals. The financials of the group companies are examined in detail in case of the appraisal of the loan proposal of a completely new business unit of that group as the financial of the units are unavailable.
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6.6. Background of the project/business activity Project feasibility report showing the project configuration and likely capital expenditure this is done by the company through reputed and experienced consulting firms. The supply of power, raw material, utilities, infrastructure, manpower etc are examined by the Bank in order to ensure that the business runs smoothly and gets regular cash inflows. In case of projects the techno-economic feasibility study is made by the Bank. This report is done by specialized agencies and submitted to the Bank

6.7. Observations by various authorities The Bank enquires if the name of the Company or any of its Directors appears in any of the default lists. The lists include RBI Defaulters List, RBI Willful Defaulters List, CIBIL List for suit filed A/Cs of Rs 1.00 crores and above, CIBIL List for suit filed A/Cs of Rs 0.25 crores and above, ECGC SAL List, NPA list of Bank. A scrutiny is made of any adverse orders/observations regarding the company, issued by Company Law Board and/or Securities and Exchange Board of India. The Bank also evaluates if there is any proceeding pending against the borrower for violation of statutory regulation relating to FEMA / Customs / Excise / Income Tax / Sales Tax etc.

6.8. Assumptions of the proposal The assumptions regarding capacity utilization, costs, output, depreciation etc underlying the projections of the proposal are appraised by the Bank. The reliability and correctness of the assumptions is checked. If these are not proper than the projections regarding income or revenue made on the basis of the assumptions might not be realized. Ultimately the repayment capacity of the business will be adversely affected.

6.9. Clearances and approvals The Bank in the process of credit appraisal examines whether the business unit has obtained the required clearances and approvals like land clearance, pollution clearance, environment clearance etc from the requisite authorities for carrying out the business activity or project. If the company does not comply with these requirements the Bank
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may be at risk due to the interruption or closing down of the business/ project resulting in non repayment of dues to the Bank.

6.10. Marketing and selling arrangements The Bank examines the availability of marketing arrangement made by the business concern for the selling of its products to the buyers. The bank evaluates the companys provision of advertising campaigns for the sale of its products or the companys appropriate arrangements for ensuring the disposal of the products produced. Or the business will not earn revenue and default in paying back the credit availed from the Bank.

6.11. Capital market particulars The capital markets particulars of the company are also by the Bank. The data examined are whether the company is listed in any stock exchange, the current market price of the share, 52 weeks high and low price of the share. If the company is listed in any stock exchange then the share price movements (high and low) in the last three years are studied. This gives the Bank an idea of the public reputation of the company by the share price movement. This also helps the Bank in the appraisal process to judge the earning capacity, dividend payment trend, affect of economic events on the share price of the company.

6.12. SWOT analysis The Bank does the SWOT analysis of the business unit or project to examine the strengths, weaknesses, opportunities and threats. This provides the Bank with valuable information regarding the present and future prospects of the business. It helps in examining whether the business is matching the resources with the opportunities while operating in a competitive environment.

6.13. Auditors details and their report Quality of auditors is ascertained to judge reliability of figures, and check if the accounts are qualified. The Bank depends on the information provided by the business for credit appraisal, so the Bank ensures that the data are thoroughly checked by reliable auditors. The auditors report is evaluated by the Bank to check the presence of any adverse comment regarding financials of the company.
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6.14. Credit exposure of the company Bank experience to date with borrower and use of facility are reviewed. Limits with other Banks should also be provided, besides ability to obtain additional debt i.e. Bank should avoid being in a situation of lender of last resort. Sole Banking relationships are undesirable as it shows too much reliance on one source. Proposed Limit will give the overall exposure to the company, which should be reviewed to see if it is warranted, in relation to facility purpose, size of sales, capital etc., besides the usual credit criteria

6.15. Risk Analysis and Mitigation In this part of credit appraisal the Bank analyses the risk associated with the working of the business unit and the required steps taken by the company to mitigate those risk so that they don not obstruct the working of the concern or the completion of the project. There are many other risks associated with the financing of business units which are specific to the particular type of project. So the common risks which are analyzed by the Banker are as follows: TABLE 6A RISK ANALYSIS ANDMITIGATION Risk type Promoter/Sponsor risk Analysis and mitigation The experience and qualification of the promoters. The capacity and track record of the promoter companies. The market reputation of the promoters. Promoters withdrawal risk Clearance/ approval risk The chances of change in the debtors management and control due to reduction in promoters contribution. The company has obtained clearance and approvals from various authorities etc Financial Equity risk- The adequacy of resources of the promoters to fund the necessary promoters contribution. The sources of equity requirement of the proposal. for the project like environment clearance, commencement of business certificate, incorporation certificate

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Financial debt

risk- The risk of raising funds through various sources of debt. The acceptance of the loan proposal of the company by the Bank based on its satisfactory credit track record and strong financial position.

Technology risk

The technology used by the company in the project. The use of proven and timely tested technology.

Cost risk

The risk of cost overrun Insurance cover of the project

Time risk

The risk of time overrun Proper monitoring of the project

Performance shortfall risk

Shortfall in performance parameters like power generation rate, The presence of qualified and experienced persons to execute the project. Performance shortfall leads to reduction in cash accruals

Off take risk

The analysis of the demand supply scenario The price for the supply of products by the company.

Demand risk

Market growth enhancing demand for the concerns products Sales opportunity for the business concern

Foreign exchange Fluctuation of Indian rupee against foreign currency risk Payment by the company towards imported components Hedging facility taken by the borrower Interest rate risk The interest rates are in line with current market scenario or not The sensitivity for increase in interest rate and the ability of the company to service its debts Force risk Majeure Unexpected risk of flood , earthquake etc Insurance cover obtained by the firm

Risk of change in Modification, repeal or enactment of any laws law Change in any consents, approval or license Change in interpretation or application of Indian Law

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CHAPTER-VI FINANCIAL PARAMETERS OF CREDIT APPRAISAL

The appraisal of the financial parameters for advancing credit is the most important step in the appraisal process. The Bank analyses the financial of the projected data and the past data if available. While analysing the financial parameters of past financial years due weight is given on last audited financials. However, when major part of a financial year has been passed or during the interim period between close of a financial year and completion of audit, the performance during current/just concluded year should also be considered along with the financial parameters for taking credit decision. The basic financial parameters, which form the foundation of the Banks credit appraisal, are as follows; 7.1 Financial statement analysis

The main purpose of studying the financial statement is to ascertain the financial health of the company and to appraise whether the unit is healthy enough to repay the borrowing from the Bank. The Banks obtain the audited financial statements for at least past three years of the business. While analysing the audited financials, Auditors Report and Notes on Accounts should be carefully examination. Beside last audited financials and current performances, all credit decisions are also based on future estimate/projections. Such estimates/projections based on assumptions are critically examined and only realistic ones are accepted for taking credit decisions. The main source of repayment is profit. Thus the lender, the Bank has to necessarily ascertain the profit earning capacity of the unit. Where due to reasons beyond the control of the unit, there is a fall in profit or there is a negative profit, the Bank can get its debt paid by the sale of the assets of the company. Profitability and solvency indicates the inherent strength of the concern in repaying the debt but actual payment of the debt can be made only if the concern has enough cash or liquid assets. Thus study of liquidity is also equally important the Bank. Besides this the overall financial health of a unit depends on efficiency of operation or activity and structure of different sources of capital/fund marshaled by the unit. Thus the study of financial statement involves the study of the Solvency, Liquidity, Profitability, Leverage, Activity of the concern.
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While examining audited financials of corporate entities the auditors notes to the account should be studied for the accounting policies and practices followed by the business entity, details of contingent liabilities including guarantee obligation, claims relating to income tax/sales tax/excise duty/custom duty pending in the courts/tribunals. The information gathered as above shall enable the Bank to get an idea on the business ethics adopted by the constituent.

7.1.1Analysis of Balance sheet The classification of the Balance sheet items should be done by the company strictly as per the RBI guidelines. The liabilities are classified into three groups namely Net worth, Term liabilities and Current Liabilities on the basis of the time of payment. Items in net worth are the permanent source of and need not be paid back. Term liability items are payable after one year while Current liability items are payable in short term that is within a year. The assets are also grouped according to their nature namely fixed, cur rent, contingent and other noncurrent assets. Fixed assets are those acquired for long term purpose. Intangible assets are which are not available for payment of debt as long as the business runs. Current assets are those which take part in the operating cycle of the business. Other non current assets are slow moving assets not acquired for normal business purpose.

7.1.2Analysis of profit and loss account Bank requires the operating statement to be prepared in the specified format of RBI for examination of the performance of the concern during a period. This format shows the Gross Profit, Operating Profit, Profit before tax and Profit after tax which helps the Bank to point out the efficiency/inefficiency in the business operations.

7.1.3Analysis of cash flow statement The cash flow statement of the business needs to be prepared in the prescribed format specified by RBI. Cash plays essential part in the running of the business for making payments to suppliers, salaries, wages and mainly the interest to the Bank. The business may run profitably but there may not be adequate cash. The inflow and outflow of cash is analysed to see the firms ability to coordinate its financial operations properly. The

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increase / decrease in CA and CL, increase/decrease of term loans, increase in equity etc change the cash generated from the business.

7.1.4Analysis of funds flow statement A funds flow statement helps to find out the diversion of funds if any. It is prepared on the basis of long term sources and uses of funds. Diversion means use of short term source of funds for long term purpose. Short term source of funds liabilities are payable on demand or on short notice. In case such funds are deployed for long term use like purchase of fixed assets or intangible assets or inter corporate investments the units is almost likely to face liquidity crunch and cannot meet its current liabilities in time. It changes the self-liquidating nature of WC advances, weakens the liquidity and financial It the funds flow statement also reveals the purpose for which the profit during the year is utilized as it affects the internal strength of the company in difficult situation. The Bank is also carefully examines the diversion of the funds of the borrower for external uses like donations, share market investment etc. diversion changes the self liquidating nature of WC advances, weakens liquidity and the financial stability of the unit. There is shortage of WC, underutilization of capacity thereby reducing profitability. It is a risky situation for the Bank.

7.1.5Breakeven analysis The financial viability of the business or project can be studied by the breakeven analysis A term loan should be serviced out of profit. If the unit functions at a level of sale at which there is no profit, it is natural that it cannot repay the term loan installments. This is why the Bank calculating the break even point. Once the BEP is calculated the sale projection made in the profitability statement is compared with BEP sale. In case the difference between the BEP and projected sales is very low, the Bank finds it risky to finance a minor deviation in some elements of the projected cost may result in a loss and nonpayment of the term loan. On the other hand where the projected sale is appreciably higher than the break even point, the probability of earning some profit is there even if there are some deviations in projections. The Bank prefers a unit with comparatively low BEP. The Bank also examines the Margin of Safety of the unit and prefers to finance units with higher margin.
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7.1.6 Cost of project and means of finance The cost of the project includes all the expenditure required to bring the project into the stage of commercial production and consists of the major components like Land and Site Development, Building , Plant and Machinery, cost of technology, Preliminary expenses, margin on WC, provisions for contingencies. The means of financing can be Capital, surplus, quasi equity, term credit, WC credit. The importance of examining the cost and means of finance by the Bank is to know Whether the means of finance is sufficient as compared to the cost Whether the Debt Equity ratio satisfactory as per the Banks benchmark requirement. Whether the promoters contribution is as per the Banks requirement The average cost of finance and how it compares to the return from the project.

7.1.7 Sensitivity analysis Sensitivity analysis is a form of quantitative research. It is done in case of term loans proposals for Rs.10 crore and above to examine the effects of different adverse scenarios on loan servicing capacity, which is a tool to judge the strength of the proposal. The lender becomes aware of the difficulties that the uncertainties can cause. This analysis identifies how much decrease in inflow or increase in outflow can be tolerated by the project due to changes in the most crirical factors affecting the cash flow. These critical factors may vary from project to project depending upon the nature of the industry, the gestation period, regulatory controls etc. The effect on the IRR, NPV, DSCR, BEP etc. due to changes in the most critical (sensitive) parameters is studied .The analysis suffers from the drawback that one factor is taken at a time, which may not be the case in actual scenario. The parameters are as follows: Increase/Decrease in Selling Price. Increase /Decrease in Debt. Increase/Decrease in Capacity Utilisation. Increase/Decrease in Working Capital.

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7.2 Ratio Analysis Ratios are important indicators of the financial capacity of an organization to meet its commitments. Ratio analysis is a quantitative technique in financial management. This is a technique for assessing the financial health of a unit from the accounting data. This is a tool for credit/ project appraisal for Bankers and financial institutions. This measures the past performance of an organization and helps projecting the future trends. A ratio by itself has very little meaning unless it is compared with some appropriate standard. So the Bank has determined standard for comparison of the most important ratios 7.2.1 Capital Gearing Ratios The capital gearing is seen to assess the owners financial strength or commitment. For ascertaining this there are two major ratios which are:

1.TOL/TNW Ratio = Total outside liability Tangible Net Worth This is the ratio of the total outside liability to the tangible net worth. It is used by the Bank to determine the ability of the Bank to service all its obligations out of the net worth. The unit is said to be solvent if its tangible assets are more than its outside liabilities. Lower the ratio better for the Bank as better is the creditworthiness of the business concern. If the unit depends more on the outside borrowings like BB and other debt, then there are greater chances of default and the negative c ovenants also put restrictions on the businesss working. It is ascertained in case of all type of credit proposals. Tangible assets = (Share capital +Share application money+ Reserves and Surplus)(Intangible assets like goodwill, patents etc. ) Total outside liabilities = Current Liabilities + Term Liabilities.

2. D/E Ratio = Long term debt Owners fund

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Debt equity Ratio is one of the most important indicators for assessing the risk in term lending. This ratio measures the proportion of debt capital to owned fund. There should be a proper mix of borrowed fund and owned fund in a business. Higher degree of borrowed funds will result in a position where the owners lack sufficient stake in the business and no Bank relishes such position. The ratios of the last audited financial year if available or the estimated year is compared with the Banks benchmark. These ratios are to be analyzed and variations in them are critically examined to be reflected in the appraisal note. TOL/TNW or TOL / NOF and Debt/Equity ratios for various kinds of exposures should not exceed the following values: TABLE 7.2A BENCHMARK TOL/TNW AND D/E RATIO FOR TAKEOVER PROPOSALS Nature of Exposure TOL / TNW D/E Ratio 3:1 4:1 3:1 2.5:1 -

Industrial Unit including manufacturing unit under MSME 4:1 Infrastructure/ Construction / Real Estate Service (including Service unit under MSME) Trading Units NBFC(TOL/NOF) Source: Lending Policy of UBI 6:1 4:1 3:1 6:1

TABLE 7.2B BENCHMARK TOL/TNW AND D/E RATIO FOR NEW PROPOSALS Nature of Exposure Industrial Unit including manufacturing unit under MSME Infrastructure / Construction / Real Estate Companies Service (including Service unit under MSME) Trading Units NBFC(TOL/NOF) Source: Lending Policy of UBI TOL/ TNW D /E Ratio 4:1 6:1 6:1 3:1 10:1 3:1 4:1 4:1 2.5:1 -

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TABLE7.2C BENCHMARK TOL/TNW AND D/E RATIOS FOR EXIXTING PROPOSALS Nature of exposure Industrial Unit including manufacturing unit under MSME Infrastructure / Construction / Real Estate Companies Service (including Service unit under MSME) Trading Units Source: Lending Policy of UBI TOL/TNW D/E 5:1 7:1 7:1 3.5:1 4:1 5:1 5:1 3:1

6.2.2 Liquidity Liquidity is reflection of the borrowers strength or ability to meet the current commitments .To ascertain this, following ratios/parameters which are calculated in appraisal of WCC 1. Current Ratio The current ratio can be found out with and without TL/Debenture/Bond/preference share repayment redemption installment = Current Assets Current liabilities This ratio measures the short-term solvency of the company. It shows the liquidity position of the enterprise or its ability to meet current obligations. Higher ratio may be good from the point of view of creditors. In the long run very high current ratio may affect profitability. This ratio does not show the quality of assets therefore the composition of various types of Current Assets has, therefore, to be seen while interpreting the ratio. The current ratio of the last audited balance sheet of the company is taken for the purpose of equating with the standard ratio. CR (without taking in to account repayment of term loan falling due within next 12 months as Current Liabilities) for various loan proposals are fixed in the banks lending polic

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TABLE 7.2D BENCHMARK CR FOR DIFFERENT LOAN PROPOSALS Nature of credit proposal All Proposals MSME Export Credit Minimum ratio 1.33:1 1.25:1 1.18:1

The CR of the last audited financial year if available or the projected year is compared with the Banks benchmark parameter. 2. Inventory Turnover Ratio = Cost of goods sold/ Sales Average inventory This ratio measures the velocity of conversion of stock into sales. A high ratio indicates efficient management of inventory, the more frequently the stocks are sold, the lesser the money required to finance them. However a low ratio shows dull business, poor quality goods etc. The Bank also carefully investigates very high or very low ratio.

3. Debtor Turnover Ratio = Net annual credit sales Average trade debtors This ratio indicates the velocity of debt collection of the firm. It shows the number of times the debtors turn in a year. Higher the value, more efficient is the management of debtors. A very high ratio can also be due to lack of resources to sell on credit thereby losing the sales and profit. There is no benchmark for this ratio prescribed by the Bank.

7.2.3 Profitability ratios Beside Profit before and after tax (PBT and PAT), Profit before depreciation, interest, tax and amortization (PBDITA) is also to be examined. PBDITA indicates the borrowers capability to earn from its operations. Any variations in these parameters are examined with the help of the following ratios;

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1. Net Profit Ratio = Net profit after tax/PAT Sales This ratio is the reflection of the efficiency of the management in manufacturing, selling, administrative and other activities of the firm. It also indicates the firms capacity to face adverse economic conditions such as low demand, price competition etc. Higher the ratio better it is as the Bank is assured of the sufficiency of profit in the business. 2. PBDIT/ Sales Ratio = Profit before depreciation, interest and tax Sales It indicates the operational efficiency of the business. Higher the ratio better for the business and the Bank. Higher ratio indicates that the firm will be able to service the interest charges comfortably. x 100 x 100

7.2.4 Cash Accrual Elimination of non-cash income/expenditures from the net profit element and helps to understand the Borrowers capability to meet obligations from its operation. However, as the priority obligations like repayment/redemption/lease rentals are to be met from cash only, this ability can be better understood by Priority Obligation Ratio. It is desirable that all appraisals for working capital/term loan of Rs.5 crores and above should contain this ratio for the immediate preceding financial year to understand the Borrowers capability to meet priority obligations from operations 1. Priority Obligation Ratio (Operating Cash Inflow Operating cash outflow) = Priority outflow Operating Cash inflow = Net sales + Other operating income Add/(less): Decrease/(Increase) in Sundry debtors/receivables Operating Cash Outflow= Consumption of raw materials, stores, spares and consumables + Power and Fuel + Direct wages + Other manufacturing costs (excluding depreciation) + selling and marketing expenses + General administrative (excluding non-operating and non-cash expenses)
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Add/(less): Increase/(decrease) in closing stock of raw materials, consumables Add/(less): Decrease/(Increase) in sundry creditors

stores, spares and

Add/(less): Increase/(decrease) in loans and advances (excluding advance to capital goods and other non-operating advances) Add: Payment/deemed payment of Taxes Less: Opening Cash and Bank balance Priority Outflow = Repayment of Term Loan + Redemption of Bond/Debenture/Deposit/ Preference Share + Interest

7.2.5 Other Ratios 1. Debt Service Coverage Ratio (DSCR) DSCR is the most important ratio to be examined in case of TL proposals. Running an enterprise with financial support from Banks/financial institutions requires their loans to be repaid with interest. Therefore, an entrepreneur must generate surplus, adequate to meet repayment obligations. Computation of DSCR is based on gross cash generation. However, DSCR computation shall not be applicable in case of repayment of short term loan and loans where repayment obligation is not met out of the profit of the borrowing companies. The minimum and the average DRCR of the projected years is compared with the benchmark as per the Banks lending policy = Net profit after tax+ Interest (on long term loans) + Depreciation+ preliminary exp. Interest on TL+ Installment on TL The DSCR of all the projected years in which the business will repay the TL are calculated and the min. and avg. DSCR are compared with the benchmark. Average DSCR during the repayment period should be at least 1.5:1, for infrastructure at least 1.33:1 Minimum Debt Service Coverage Ratio in any year should not be less than 1.20:1

2. Promoters contribution This is analysed by the Bank in order to ensure promoters control over management of any business activity, the Bank ensures that the promoters contribution should not be less than 20% of the total equity in the business unit or for a particular project. This parameter is mainly in case of term loan proposals.

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3. Loan to value Ratio = Short term Bank borrowing Working Capital Gap This ratio indicates the portion of the WCG which is financed out of the Bank borrowings. The rest amount is financed out of the NWC. The lower the ratio, the better for the Bank as it reduces the danger of repayment default for the Bank.

4. Internal Rate of Return (IRR) IRR of a project is that discount rate which makes its NPV equal to zero .It is the discount rate that equates the present value of future cash flows with the initial outlay. In the NPV calculation we assume that the interest rate is known and determine the NPV. In the IRR calculation, we set the NPV equal to zero and determine the discount rate that satisfies this condition. The decision rule for IRR is Accept project if the IRR is greater than the interest rate and reject if IRR is less than the interest rate of Bank finance to the project

5. Asset coverage ratio (ARC) In case of proposals where both WCC and TL are given ARC is calculated. It shows the number of times the value of the security is of the loan amount. It denotes how safe the Bank in providing credit against the security to the business. Higher the ratio better for the Bank as in case of default the Bank can recover the amount out of the security The ACR of the projected year is considered for comparison with the benchmark of the Bank TABLE 7.2E COMPUTATION OF ARC Details A) B) C) D) E) F) G) H) Value of Primary Security Value of Additional Security Value of Total Security (A+ B) Term Loan Outstanding /limit Outstanding balance in WC / WC limit Non-fund based limit Total Exposure (including fund and non fund) (D+E+F) Asset Coverage Ratio (C / G) Proposed value

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6. Fixed asset coverage ratio This ratio indicates the number of times the fixed security covers the credit amount. This ratio is calculated in case of term loans. The minimum FACR after the construction period is taken for equating with the standard one. This ratio serves the same purpose as that of ACR TABLE7.2F COMPUTATION OF FACR Details A) B) C) D) E) Net Fixed Assets as primary security Value of additional security in the form of Fixed assets Total Value of fixed assets (A+ B) Term Loan outstanding/limit FACR (C / D) Proposed value

For WC Loans the ARC should preferably be 1.33 or more but should not be less than 1.20 For proposals involving both WC and TL, ARC should preferably be1.50 or more, but should not be less than 1.20 For TL, FACR should preferably be 1.50 or more, but should not be less than 1.20. . Trend analysis Study of one years financial statement in isolation hardly solves any purpose for the Bank. The Bank generally examines 3 years financial statements and compares the trends of the major financial parameters like sales, cost of production and different ratios etc during these years. The trend will reveal whether the unit is prospering or deteriorating year after year.

Inter firm comparison While appraising working capital/term loan proposals of Rs.10 crore and above, interfirm comparison, wherever possible, should be done to judge the competence / performance of the borrower amongst its peer.

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CHAPTER-VIII APPRAISAL OF SECURITY

The Bank asks for security from the borrower before the sanction of credit. The security acts as a cushion for the Bank in case the borrower defaults in making the repayment. There are two type of securities which are as follows:

8.1 Primary Security It is the security against which Bank finance is made or the security (asset) which is created out of the Bank finance.

8.2 Collateral Security It is the security which is obtained in addition to primary security. It is also called short collateral.

Pre-sanction inspection of place of activities or office of the enterprise or business unit is done to ascertain the existence of the unit as well as the assets offered as prime/collateral security and their acceptability The appraisal of the primary and collateral security involves the examination of the following attributes of the security by the Bank:

Marketability- the ease with which the security is converted into cash. Ascertainability - the ease with which the value of the security is determined. Stability of value- the fluctuation in the market value of the security. Transferability- the ease with which it is transferred to the Banks name. Full details are provided by the borrower to the Bank, besides description of security as the alternative loan repayment source and its realizable value, where possible. It should be properly insured by a Bank approved Insurance Company and covered against various risks. Frequent independent verification of the security is done by the Bank to check the attributes of the security.

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If the security taken is not saleable, then this should be recognized and the risk addressed e.g. if there is only a sole seller of the product, then there will be no other buyer for his assets, in event of a forced sale. The Bank will thus be left with an unrealizable asset. Where receivables are taken as security, then quality / should be reviewed, which would enable the Bank to assess the reliability of this asset as a loan repayment source. Banks should not lend in an inferior position; all charges on security should be First Registered and pari-passu with other lenders, to ensure the Banks interests are properly covered. If the Directors' guarantees are taken then separate individual Net worth statements or tax returns should be provided to support these guarantees and judge their capacity to repay guaranteed amounts. In respect to the appraisal of the securities the Asset coverage ratio and the Fixed Asset coverage ratios are calculated and compared with the benchmark parameters. The company has to get all its securities duly insured and keep the insurance policy in force till the currency of the credit facility of the bank. The copies of the insurance policy should be furnished to the bank.

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CHAPTER-IX ASSESSMENT OF WORKING CAPITAL REQUIREMENT In respect of borrowers having aggregate fund -based WC limit up to Rs.5.00 crore (except Information Technology and Software Industry where the ceiling is Rs.2.00 crore) from the Banking system, the Turnover method is followed for sanction of loans .This margin translates to a current ratio of 1.25:1. The assessment of such credit requirement can also be done by the 1st Method of Lending as per Tandon Committee recommendations. The WCR which ever is lower in between both the methods is accepted. For all other borrowers (except seasonal industries) having fund based WC limit over Rs.5.00 crore, the Bank follows the 2nd Method of Lending which translates to the desirable level of current ratio of 1.33:1. In case of certain seasonal industries like tea, sugar mills, cold storage, brick fields, etc, and certain specified sectors like advances to borrowers engaged in construction business and information technology and software sector the Bank follows cash budget system.

9.1 Assessment of Maximum Permissible Bank Finance (MPBF) The assessment of MPBF will be possible if the following terms are known: TABLE9A DEFINITION OF TERMS FOR MPBF Terms MPBF Definition It is the maximum amount of need based finance required by a unit. Total Current Assets (TCA) This includes all the assets of the business unit divided into inventory, receivables and other current assets which are cash, investment.

Other Current Liabilities (OCL)

These are the current liabilities other than Bank borrowing and include sundry creditors, bills payable, advances from customers, provision for tax etc.

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Bank Borrowing (BB)

Incase OCL and NWC are not sufficient to meet the finance needs of current assets then the unit borrows from Bank short term finance.

Net Working Capital (NWC)

This is the surplus of long term sources of funds over long term uses. It is the contribution from long term sources used for financing total current Assets or WC.

Working Capital Gap (WCG)

It is the extent of WC which cannot be financed out of the other current liabilities.

The steps involved in the calculation of MPBF are as follows:

9.1.1Estimation of the projected level of operations The business makes the projection of the sales for the future period, the Banker ascertains if the figures and the assumptions they are based on are realistic. The net sales are compared with the past figures to examine if they are in line with the past trend. In case of new units the reasonableness is checked using the data of the similar units, capacity utilization and demand scenario.

8.1.2Estimation of the projected level of TCA The TCA is the current asset required for sustaining one WC cycle. The length of the WC cycle is determined by the holding period of raw material, WIP, finished goods and receivables. Holding period: the number of month of raw material, WIP, finished goods and receivables a unit kept in stock is called the holding period.

Holding period of raw material=

Average stock of RM RM consumption per month

Similarly the holding period of finished goods, WIP and receivables are found out The Bank checks the projections by comparing with the past figures or with similar units in case of new business to ensure that the borrower does not project higher level of raw material, WIP and finished goods. Besides this the projection of other current assets like cash, Bank balance, are also examined.

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TCA Requirement= projected RM Consumption+ projected cost of production+ projected cost of sales + projected sales

9.1.3Estimation of the projected level of other current liabilities: Sundry creditors and other current liabilities are a source of financing the NWC. The number of days of credit enjoyed by the unit can de calculated by the following formula: = (Sundry creditors + Bills payable) outstanding Purchase per month The borrower may project a low level of sundry creditors to claim more Bank finance. So the Banker should not allow very low level of projection unless convincing reasons are submitted. Other items in the other current liabilities are also projected at reasonable level depending on the past trend. WCG= TCA- OCL

9.1.4Determination of NWC The Bank does not finance the entire WCG. Some portion of the NWC is brought by the unit. As per the Tandon Committee Recommendation, the borrower should bring 25% of the WCG (1 st method of lending) or 25% of the TCA (2 nd method). MPBF =WCG-NWC as per Tandon Committee WCG-NWC available in the business MPBF whichever is lower is accepted to prevent the dependence of the business on Bank finance. TABLE 9B ASSESMENT OF WORKING CAPITAL LIMIT (1ST and 2ND METHOD Particulars (A)Break up of Current Assets 1.Raw materials 2.Work in progress 3.Finished goods 4.Receivables 5.Other current assets TOTAL(A)
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Amount

B. Current Liabilities(excluding short term Bank borrowings) 1.Sundry creditors 2.Other current liabilities TOTAL(B) (C) Working Capital Gap(A-B) (D) Projected NWC 1ST METHOD (E) 25% of WCG (F)WCG E (G)WCG D (H) MPBF (item F or G, whichever is less) 2ND METHOD E) 2 (E) 25% of TCA F) (F) WCG E G) (G) WCG D H) (H) MPBF (item F or G, whichever is less)
D

9.2 Turnover method This method was also resulted from the Tandon Committee. It is simple to understand and calculate. The minimum permissible Bank finance is 20% of sales turnover and the borrower brings rest as margin money. TABLE 8C ASSESSMENT OF WORKING CAPITAL LIMIT (TURNOVER METHOD) Particulars (A) Projected sales for the year (B) Working Capital Requirement (25% of Projected Sales) (C) Of which Minimum Permissible Bank Finance ( 20% of A) (D) Working Capital Margin to be provided by the Borrower ( 5% of A) Amount

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9.3 Cash Budget Method

The WCR according to the cash budget method is done in the following manner: The borrower submits the cash budget (cash inflow including margin and outflow) to the Bank. The actual and the projected financial statements are also provided to the Bank. The budget is prepared for one year and divided into forecasts for smaller periods like month or quarter. The peak level of Bank finance required during the course of the year corresponding to peak deficit in cash flow. The interim level of Bank finance required as forecasted by the split budget The maximum limit is fixed on the basis of peak requirement while interim limits will be fixed as per interim levels indicated in divided period budget. The desirable margin on annual basis will be as per benchmark current ratio, during split period the margin may fall below desirable level. The minimum current ratio during peak deficit must not be below 1:1. Drawing in the account will be regulated by the split period cash budget compared to the actual cash flow along with stock and receivable statements.

In the case of extending WCC, the banks appraisal process includes the determination of the MPBF, which is the maximum amount that the bank advances to the borrower

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CHAPTER X APPRAISAL FOR NON-FUND CREDIT FACILITIES The appraisal for the grant of Non fund facilities like Bank guarantee and Letter of credit follows the same procedure as in the case of Fund based facilities. The various components mentioned in the previous chapters are evaluated to determine the creditworthiness of the borrower for availing these facilities. 10.1 Parameters for Non-fund facilities UBI provides Non-fund facilities in the form of Letter of Credit and Bank guarantee. When an application for the issue of BG or LC is received by the Bank, it thoroughly evaluated as in case of TL and WCC, along with this the Banks fo llows a 10 point format for appraisal which is as follows: TABLE 10A PARAMETERS FOR BG and LC Parameters 1.Purpose 2. Beneficiary 3. Value 4. Margin 5. Usance 6. Security 7. Retirement 8. Past experience 9. Commission 10. Overall/TNW Bank guarantee/Letter of credit Examination of the purpose for which the BG or LC will be used. Examines the persons who shall be benefited by the facility. Shows the amount of the LC or BG facility. Shows the margin against which the facility is provided. The time period of the use of the facility. The security against which LC or BG is granted. Shows the repayment period of the amount. Examines the past experience of the Bank with the borrower. The commission to be paid as per the Banks guidelines. Examines if the debtors will be able to repay the whole borrowed amount.

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10.2Assessment of BG and LC limit

10.2.1 Assessment of Bank guarantee requirement At the time of issuing financial guarantees, Bank satisfies that the

customer would be in a position to reimburse the Bank in case the Bank is required to make the payment under the guarantee. In case of performance guarantee Bank exercises due caution and

sees that it has sufficient experience with the customer to satisfy themselves that the customer has the necessary experience, capacity and means to perform the obligations under the contract and is not likely to commit any default. The assessment of the BG limit is made by the Bank keeping in mind the following points: Outstanding BG amount. Amount of BG expiring during the assessment period. The number of orders under execution and the number to be procured. Amount of bids required to be procured for the planned order. Advances available for such orders

10 2 2Assessment of Letter of Credit requirement While providing LC facility the Bank estimates the total LC requirement of the borrower. The Bank does this to prevent the borrower from getting extra credit or suffering due to lack of the adequate amount TABLE 10B ASSESMENT OF LC REQUIREMENT Particulars Inland (I) (A) Foreign (F) (B)

A) Total material to be purchased during the year Nature of LC Sight B) Out of which material to be purchased under LC C) Lead time (in days) D) Usance period of LC (days) E) Total period ( C + D) F) Number of order to be placed per year (365 /E) G) LC requirement (B / F)

Usance

Sight

Usance

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H) Proposed LC limit (I and F) ( A + B )

CHAPTER XI APPRAISAL OF RETAIL CREDIT The appraisal process of the retail credit proposal begins with an interview with the prospective borrower by the Banks loan officers. The interview is made in a comfortable and friendly manner. The loan officer tries to get true information on the eligibility, security, repayment capacity, source of income, financial Position, marital status, dependents , no. of earning members in family, social status, repayment Record of previous loans, Banking and savings habits ,honesty and integrity, ability to pay, life style, qualification, work experience, assets and liabilities, life insurance of the loan applicant The extraction of true information from the applicant depends on the interview pattern, style, ability and experience of the credit officer of the Bank. If it is found that applicants answers are not consistent and genuine cross verification is done and if not satisfied, the Bank does not proceed further.

11.1Appraisal of Education Loan

11.1.1. Eligibility of the borrower 1. The student should be an Indian National. 2. The student should have Secured admission to professional/technical course in India or Abroad through Entrance Test/Merit based Selection process. 11.1.2. Eligible courses for availing education loan These courses mentioned below are selected by the bank for the grant of loan as these courses can ensure the employment of the student pursuing them. The employment of the student guarantees the bank the repayment of the education loan availed by the student.
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(A)For Study in India: Graduation Courses : B.A., B.Com, B.Sc., etc. Post Graduation Courses : Masters and Ph.D. Professional Courses : Engineering, Medical, Agriculture, Veterinary, Law, Dental, Management, Computer, etc. Computer Certificate Courses of reputed Institutes accredited to Dept. of Electronics or Institutes affiliated to University. Courses like ICWA, CA, CFA, etc. Courses conducted by IIM, IIT, IISC, XLRI, NIFT, etc. Courses offered in India by reputed foreign Universities. Evening Courses of approved Institutes. Other Courses leading to Diploma/ Degree, etc. conducted by Colleges/ Universities approves by UGC/ Govt./ AICTE/ AIBMS/ ICMS, etc. (B) For Study Abroad Graduation: For job- oriented professional/technical courses offered by reputed Universities. Post Graduation: MCA, MBA, MS, etc. Courses conducted by CIMA- London, CPA in USA etc

11.1.3 Documents to be submitted by the student/ guardian Permission of the University/College accepting the student for enrollment, the letter of admission if received is to be submitted Declaration/ affidavit confirming that no loan has been availed from other bank; the parents/guardians are not defaulting with any bank. Details of the Brochure of the course and Institution along with the mention of the course fee and other costs Proof of scholarship offered to the student. PAN of the student/guardian, Voter ID (if available), age proof of the student, Existing Bank A/C along with residential proof Proof of Passport for study abroad Proof of passage money required (cost of travel expenses) Proof of margin money requirement available with the parents/guardians
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11.1.4. The appraisal process Disbursement of Educational Loan is effected at the bank branch where the student has permanent residence (command area - 10 kms radius of the Branch) The career of the student is analysed to see that the student is meritorious and has surety of being employed after the course. The proper enquiry of the course and the institution is done by the information furnished by the student and the internet. The bank checks if the course is creditworthy to get suitable employment for the students. On the basis of this the above mentioned courses have been made eligible by the bank for granting credit. Arrangement is be made with the institution to furnish the name of the recruiting authority at the time of campus recruitment compulsorily to assess the surety of the recruitment of the student. Assessment of future income of the students for repayment of loan installments is ensured in all cases. Parents/guardians are made co- obligator. The security can be in the form of land / building / Govt. securities /Public sector Bonds/units of UTI ,NSC ,KVP,LIC policy gold, shares/debentures, bank deposit in the name of student / parent/guardian or any other third party with suitable margin. Wherever the land/building is already mortgaged, the unencumbered portion can be taken as security on II charge basis provided it covers the required loan amount.

The student should strive to secure suitable employment after the Course is completed. As soon as he secures employment, he should furnish the Bank with full particulars of such employment including income there from. The parent/guardian must give an undertaking that he/she/they will inform the Bank about such employment within 15 days of getting job.

11.2. Appraisal of Home loan

11.2.1 Verification of Documents / Information submitted by Applicant The appraisal of the home loan proposals are done separately for the salaried class and the professional and self-employed borrower as the income stream is different in both
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the cases which affect the repayment capacity of the borrower. While the salaried class has a steady and assured flow of income, the professionals and self-employed do not have a continuous flow of income, it may be high at sometime and low at the other.

For Salaried Class Verification of employment of the borrower. Verification in respect to employer, employee, designation, department and salary deductions. Copy of Employer Identity Card / Employer certificate ,copy of appointment letter / increment letter / promotion letter Copy of photo Identity Card / Voter ID Card / Ration Card / Passport / Driving License / Photo Credit Card/ Pan card Verification of operating Bank statement, Unusual transactions, cheque , returns ,max. and min balance, cheque return charges Verification of Bank statement from existing Banker. The existing loan account if any is also examined. Salary details is verified from employer Components like bonus, overtime perquisites, Medical aids, included in salary bill to be excluded for computation of loan eligibility are verified Statutory deductions like Income tax, Prof. Tax, PF and existing loan installment to be included in deductions are also examined Verification of Residence, employment and property Electricity Bill / Telephone bill Mobile Bill of residence Customer Information Report from CIBIL and PAN from NSDL site if available

For Professional and Self-Employed Verification of continuous profit for last 3 years from 3 years audited balance sheet and profit and loss account. Registration Certificate of Professional Tax, Service Tax, VAT Copy of photo Identity Card / Voter ID Card / Ration Card / Passport / Driving License / PAN Card/Credit Card bills Membership Certificate , Membership ID Card in respect of professionals and Registration Certificate under Shop Restrictive Act Verification of Nature of business and no. of yrs in current business
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Business Stability and no. of employees Office premises (rented/ owned/ shared/ etc),accessibility to business premises, external and internal condition of premises Level of activity and no. of clients visit per day. Creditors / debtors reference wherever possible. Any unusual variation in income and expense should be clarified. In the Balance Sheet, the closing balance of previous yearend opening balance of current year must tally. Verification ITR from Income Tax Department (by branch official or outside agency) Checking whether, the profit /income has been unduly escalated in order to avail higher amount of loan by comparing with previous year. The Bank seeks clarification. If not satisfied, then an average for the last three years is taken Electricity Bill / Telephone bill of business of establishment or residence Customer Information Report from CIBIL and PAN from NSDL site if available.

The bank thoroughly examines the above mentioned documents submitted by the applicant to ascertain his capability to repay the loan. security The property financed by the Bank is taken as the security by the Bank by way of mortgage .In case such security is not feasible then Banks own Term Deposit, LIP, NSC, KVP, Relief Bonds etc. or any other security acceptable to Bank or by mortgage of any other house property of adequate value can be used as security. Additional security is not required in case of salaried class if employer ensures disbursement of salary through salary payment a/c with the Bank or remittance of EMI deducted from the salary and attachment of terminal benefits or ensures disbursement of terminal benefit through the financing branch. however for the other class of borrowers 10% to 20% of the loan amount by way of Banks own Term Deposit, LIP, NSC, KVP, Relief Bonds etc. or any other security acceptable to Bank, or Personal Guarantee of one or two persons (acceptable to the Bank) having Net Worth at least 125% of the loan amount. The Bank has made it mandatory for the borrower to obtain insurance of the house property.

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CHAPTER- XII CASE STUDY

A/c: Taro Electronics Limited

Proposal for the review of the account with enhancement of the overall limit from Rs. 38.15 crore to Rs. 39.34 crore, under the following sub limits:

Nature Term Loan Cash Credit LC (I and F ) Total

Existing 31.15 5.00 2.00 38.15

Proposed 24.34 11.00 4.00 39.34

Rate of interest/commission BPLR-75bps,presently, 11.25% p.a BPLR-50bps,presently, 11.50% p.a 50% of banks normal rate

1. Company Profile: Name of the Company: Address: Regd./ Corporate office: Factory / plant: Constitution: Year of incorporation: Line of activity: Aurangabad, Maharastra Kashipur, Uttarakhand Public Limited Company (Unlisted ) 27.05.2007 Manufacture of Colour TV set, Refrigerator, Washing Machines and Air Conditioners Name of Directors: Sh. Anirudha V. Dhoot Sh. Pradipkumar N. Dhoot Sh. Suresh M. Hegde Sh. Atul Galande Sh. S. Lakshminarayan Sector: Electrical and Electronics Equipments Director Director Director Director Director Taro Electronics Limited

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2. Whether the name of the company or any of its Directors appears in the following default list RBI defaulters list as on 30.09.2009 No RBI Willful defaulters list ( non suit ) No CIBIL List (suit filed {willful defaulters}-Rs. 25 lacs and above) as on No 31.03.2009 CIBIL List (suit filed-Rs. \100.00 lacs and above) as on 09.05.2010 No ECGC Specific Approval List No RBI Caution List as on 02.06.2010 No Banks NPA List as on 2.06.2010 No 3. Shareholding pattern (as on 31.07.2009): Names of Share holder KAIL Ltd Varu Industries Ltd. Vidacon Industries Ltd. Tus Overseas Inc. Total Share market particulars: SEBI observation if any: Not Listed Nil Rs/crores 27.53 6.35 20.12 52.00 106.00 % Holding 25.97 5.99 18.98 49.06 100.00

Company law board observation if any: Nil

4. Credit relation since: Date of last review:

29.10.2007 27.03.2009

5. Health of the A/C: Asset classification: IMACs Rating: Rating by outside agency: Standard UBICR3 (audited financials 2008 -09) A minus awarded by FITCH India Ltd on 15 th September 2009. 6. Group: Name: Group Companies: Vidacon Group Vidacon Industries, KAIL Ltd, Trad Electronics Ltd., Mil Appliances Ltd., Applim (India) Ltd

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Group Exposure : Name of the companies VTL VIL TEL Total Limit Rs. Crs 400.00 200.00 38.15 638.15 Asset Classification Yet to be disbursed Standard Standard Date of last sanction/review 23.12.2009 17.05.2010 27.03.2009

6. Key financial parameters: Particulars 31.07.2008 Audited 158.13 Tangible Net Worth 198.69 Term Liability 299.42 Net block 212.161 Current Assets 155.21 Current Liabilities 57.40 Net working capital 111.70 Operating income 0.66 Profit before tax 0.24 Profit after tax 2.24 TOL/TNW Ratio Current Ratio (excld. TL 1.66 installment) DSCR D/E Ratio 1.26 31.07.2009 Audited 186.28 244.79 302.90 370.43 242.26 128.17 972.50 29.10 26.80 2.61 1.84 1.015 1.31 31.07.2010 Estimated 228.68 226.21 305.58 570.23 420.92 149.31 1310.54 45.99 42.08 2.83 1.50 1.225 0.99 31.07.2011 Projected 278.42 200.16 307.25 656.99 485.66 171.33 1515.29 54.37 49.75 2.46 1.48 1.33 0.72

7. Benchmark parameters as per Banks Lending Policy vis--vis present proposal Parameters 1. credit risk rating 2. current ratio 3. TOL/TNW 4.Asset coverage ratio 5. DSCR 6. D/E 7.Promoters As per lending policy Present Proposal as on 31.07.2009 Min. UBICR3 UBICR3 Min.1.33 1.84 Max. 5:1 2.61 Preferably 1.50 or more 2.01 but not less than 1.20 Max.1.33 1.015 Min. 1.20 Max. 3:1 1.31 Normally should be 100% Status of compliance Complied Complied Complied Complied Not complied Complied Complied
57

20% of total equity contribution All the parameters are within the banks benchmark limit except DSCR. The DSCR stands at 1.015 much below the banks benchmark of 1.20. The company could not generate enough profit after tax due to the global financial crisis as a result of which the DSCR was so low.

8. Industry Scenario: India has an increasingly affluent middle class population that, on the back of rapid economic growth, has made the countrys consumer electronics industry highly dynamic. The industry has been witnessing significant growth in recent years due to several factors, such as retail boom, growing disposable income and availability of easy finance schemes. But still, the consumer electronics goods, like refrigerators, televisions and air conditioners, have low penetration in the country, leaving vast room for future growth. The Indian consumer electronics market stood at an estimated US$ 5 Billion as of the end of 2009, and is further projected to grow at a CAGR of around 15% during the forecast period (2010-2013) attracting foreign companies.

9. Company Profile and history: Taro Electronics Ltd., is a new company belonging to Vidacon group, formed to look after the new project of VIL .,at Kashipur. VIL, felt that this large project should have its own identity and have decided to form this new company by the name TEL, and has transferred all the assets so far created in Phase I of the project at Kashipur to the new company. TEL incorporated on 29th May 2007 is promoted by Tus, KAIL, VIL and VAL, companies belonging to Vidacon Group having combined net worth of Rs.8888 crs with presence in Electronics, Home Appliances Business in India and abroad.

10. Business Details: TEL has set up State of the art technology for manufacturing and assembling of 15 lacs nos. of Colour TVs (CRTs), LCDs, 6 lacs nos. refrigerators, 3 lacs nos. of washing machine and 3 lacs nos. of Air Conditioners. The plant has integrated with common facilities for plastic molding shop, press shop, paint shop and thermocole shop. The plant layout and its mechanism facilitate effective material handling at optimum cost.
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The products are marketed through VIL. TEL.has entered into 100% Buy Back agreement with VIL to market and sell its product in the open market. The company is also supplying its products to its competitors for full utilization. 11. Auditors Report The auditing of the company has been carried out bay Kadam and Co., a reputed and experienced auditing firm of Ahmednagar .As per the Auditors Report for the year 2008-09, the Company has not defaulted in the repayment of dues to banks and financial institutions. The Company has been regular in depositing undisputed statutory dues.

11. SWOT analysis Strengths The promoters have reasonable experience in the line of activity, as they are one of the leading brands in the consumer electronics sector. The company has entered into a long term buy back arrangement with VIL, so that the company does not need to make extra efforts to sell the products. The plant is set up in Uttarakhand which offers many tax incentives for being an industrially backward area. The company uses the state of art technology which offers it competitive advantage. Weaknesses The consumer electronics segment is highly competitive and consumers are extremely price sensitive. This sector requires constant technology innovations so the company has to make constant investment to remain up to date. Opportunities Growing market owing to rising per capita income. High growth potential in North Indian market. Treats Strong competition from multinational companies. Competitors have high investment in RandD so they can frequently introduce innovations.

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12. Assumptions The company has made assumptions regarding the capacity utilization in the different years. The capacity utilization in the year 2010, 2011 and 2012 will be 80%, 85% and 90% respectively. The company has achieved the utilization of 70% capacity in 2009 which it had projected. The company takes the services of SIJCON Consultants Pvt. Ltd for consultancy in architectural and civil engineering works. SIJCON is a leading consultant with 46 years of experience.

13. Marketing and selling arrangements The company has a buy back arrangement with VIL. It sells 85% of its products to its group companies and rest to other buyers. So the company is assured of the disposal of its products. The group has launched an aggressive advertising campaign which is quite successful. 14. Risk analysis and Mitigation Risk type Promoter/Sponsor risk Promoters withdrawal risk Financial Equity Financial debt Analysis and mitigation The sponsor has sufficient experience in the sector. The market reputation is very good. The promoter has set up the company with a backward integration to its line of activity.

risk- The promoter has infused equity up front The promoter has capacity to infuse further equity risk- The credit to the company has been granted on consortium basis No default has been made till date so it will have no problem in getting further loan from the consortium members.

Technology risk

The company uses state of art technology It has technical arrangements with Techneglan Inc and Samsung.

Performance shortfall risk

The company has qualified engineers trained in the plants of Toshiba, Kenwood, etc. The company has set up two 1MW power plants for critical operations even in power failure.

Environment risk

The company does not generate major hazardous effluents.

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The solid waste in the form of scraps are sold off Liquid effluents are handled in an effluent treatment plant and are then used for gardening. Demand risk The company sells 85% of its output to a group company. High demand in Northern India. Foreign exchange Fluctuation of Indian rupee against foreign currency, risk The company borrows 10-15% of raw materials from foreign suppliers. Hedging facility like forward has been taken by the company 15. Security for the credit facilities: Term Loan: Pari- pasu first charge on all immovable and movable fixed asstes of the company Second charge on current assets Working Capital: Pari-pasu first charge on entire receivables and inventories of the business activity Second charge on fixed assets Corporate guarantee: VIL Personal guarantee: Mr. Venu Gopal Dhoot, Mr. Pradip Kumar Dhoot and Shri Raj Kumar Dhoot. The company has obtained insurance of all the assets charged as security with the bank for the tenure of the credit facility. The insurance documents have been submitted with the bank 16. Financial Statement Analysis Particulars 31.07.08 Audited Ordinary Share Capital Reserves Deferred Tax Liability Intangible Assets Tangible Net Worth 106.00 52.25 0.25 0.37 158.13 31.07.09 Audited 106.00 79.05 1.54 0.31 186.28 31.07.10 31.07.11

Estimated Projection 106.00 121.14 1.54 0.00 228.68 106.00 170.88 1.54 0.00 278.42

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Term Liability Net Block incl. CWIP Non Current Assets Current Assets Current Liability Net Working Capital Operating Income Other Income PBDIT Depreciation and Amortization PBIT Interest PBT Prov. for Current Tax Prov. for Deferred Tax PAT Depreciation and Amortization Deferred Tax Cash Generation

198.69 299.42 0.00 212.61 155.21 57.40 111.70 1.17 7.66 3.58 4.08 3.41 0.67 0.18 0.25 0.24 3.58 0.25 4.07

244.79 302.90 0.00 370.43 242.26 128.17 972.50 0.32 79.28 14.18 65.10 36.00 29.10 1.02 1.28 26.80 14.18 1.28 42.26

226.21 305.58 0.00 570.23 420.92 149.31 1310.54 1.50 105.94 17.78 88.16 42.17 45.99 3.91 0.00 42.08 17.78 0.00 59.86

200.16 307.25 0.00 656.99 485.66 171.33 1515.29 1.50 115.19 18.33 96.86 42.49 54.37 4.62 0.00 49.75 18.33 0.00 68.08

Sales: 2008-09 was the first full year of Companys operation, wherein the company achieved Net Sales of Rs. 972.50 crores. The Companys projected sales for the year 2009-10 is Rs. 1310.54 crores, around 35% higher than the previous years actual sales. Profitability: PBDIT to Sales ratio for the year 2008-09 was to 8.15% which is higher than last years ratio of 6.86%, but lower than the estimated 9.62% for the year. This was due to the forex losses that the company suffered during the global crisis. The Company

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has achieved PAT of Rs. 26.80 crores for the year 2009, it expects improvement in margins and has estimated PAT at Rs. 42.08 crores for 2009-10. Current Ratio: The current ratio for 2008-09 is 1.53 and that projected for 2009-10 is 1.35, which is within the benchmark limit of the bank. There is a fall in the CR due to increase in the short term interest on account of enhanced WC limit. TOL / TNW ratio: The TOL / TNW ratio for 2008-09 is 2.61 and that projected for 2009-10 is 2.83, which is within the acceptable level.

Calculation of ACR: Particulars Net block Receivables Inventory Total TL WC loan Total ACR Rs. in crs 31.07.2009 31.07.2010 Audited Estimated 302.90 305.58 162.28 251.34 197.55 290.33 662.73 847.25 210.85 169.77 118.04 275.00 328.89 444.77 2.01 1.90

17. Assessment of Working Capital Requirement Holding period justification Particulars 31.07.2009 Actual Raw Material Work in Progress Finished Goods Receivables Advance to supplier of RM Sundry Creditors Month Consumption 2.09 31.07.2010 Projected 2.13 0.33 0.51 2.30 0.07 0.94

Month Cost of Production 0.23 Month Cost of Sales Month Sales Month Purchase Month Purchase 0.38 2.00 0.04 0.86

Raw Material:
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The Company is required to keep stock of RM (picture tubes, motors, compressors, ac coil, paint, etc.) of different size/ quality/ quantity as per order under execution. In line with the tradition, this year also, the VIL is launching a series of new models in LCD TVs, CRT TVs, washing machines, air conditioners and refrigerators. Almost all the new products will be produced by TEL. Therefore, the holding level of raw materials from 2.09 to 2.13 may be accepted. Work in Progress: Work in Progress for 2009-10 is taken at 0.33 months against 0.23 months in the previous year, which may be accepted as the company produces products of different varieties. Finished Goods: The production of the company is done based on the orders .The company follows the Just In Time method for inventory management. However the products are economical to transport in bulk, due to which the Company has to hold the finished goods. The demand for the companys products is increasing due to the recovery of the economy from the global crisis, the prices of LCDs are falling and the group has launched an aggressive marketing campaign. Also steps have already been taken to further penetrate the so far untapped market. Dealer network at the group level is being further widened. In view of the above the level of inventory for 2009-10 is estimated at 0.51 months, which may be accepted.

Receivables: Vidacon and its group companies are the major customer of the Company. The actual holding level for 2008-09 is 2.00 months and is estimated for 2009-10 is 2.30 months receivable, which is in line with the market average of 2 3 months. The Debtors Turnover ratio of Videocon Industries Limited has also increased to 2.18 in the year 2008-09 (PY 1.86), which in turn has resulted in higher Debtors Turnover ratio for TEL.

Sundry Creditors The RM is procured from outside India as well as from domestic market. However, only around 2% of the required RM is imported remaining is purchased from domestic market. Around 50% of imported and 75% of domestic RM is purchased by the
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company without LC for which the Company has to make payment within 15 days.The remaining procurement of raw material is required to be made under LC. Company procures domestic purchase under LC with 2 3 months usance.. The Company imports raw material under maximum 180 days Usance. The transit time from the port of shipment to Indian Port and to factory is usually 5 months and is considered reasonable. In view of the above, the holding period of creditors is taken at 0.94 which may be accepted Determination of MPBF (Amount in Rs. Crores) 31.07.2009 Particulars Audited Sales Raw Material Consumption Cost of Production Cost of Sales Raw Material Purchased Current Assets Cash and Bank Balance Fixed Deposits with Banks Receivables Raw Material Work in Progress Finished Goods Advance to supplied of Raw Material Advance Payment of Tax Other Current Assets TCA Current Liability (Other than ST/WC Borrowings) 0.58 5.03 162.28 152.46 17.12 27.97 3.28 0.00 1.71 370.43 1.56 12.00 251.34 207.25 33.23 49.85 7.50 1.50 6.00 570.23 972.50 874.42 901.43 875.67 920.51 Estimated 1310.54 1167.38 1199.89 1178.01 1222.17 31.03.2010

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Sundry Creditors Prov. For Taxation Other Current Assets Installment of TL due within 1 year TCL Computation of MPBF WCG 25% of TCA Projected NWC A) WCG- 25% OF TCA B) WCG- Projected NWC MPBF (lower of A and B)

66.03 1.02 16.11 41.06 124.22

95.95 3.91 5.00 41.06 145.92

424.31 142.56 149.31 278.75 275.00 275.00

The MPBF of the company for the year 2009-10 has been estimated at Rs.275.00 crores based on the estimated sales of RS.1310.00 crores. The company has already achieved sales of Rs.635.75 crores in the first half year and is confident of achieving the projected amount by the end of the year.

Appraisal for LC facility: The raw materials required by the Company are sourced from outside India as well as from domestic market. Around 50% of imported and 25% of domestic RM is procured by the use of LC. The LC requirement of the company has been determined as under: Assessment of LC requirement Particulars Total material to be purchased during the year Nature of LC Out of which material to be purchased under LC Lead time Usance period Total period of LC Total LC cycle in year

Rs.1222.17 Inland Rs.51.63crs 45 days 180 days 225 days 1.6

Foreign Rs.249.17crs 15 days 90 days 105 days 3.43

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LC requirement

32.27crs

72.64crs

The total LC limit works out to around Rs. 105 crores for 2009-10. The present LC limit sanctioned by the consortium is Rs. 85 crores. The enhanced LC limit as assessed by the Company has already been accepted by IDBI Bank, the consortium leader and they have increased their sanction limit from Rs. 45 crores to Rs. 55 crores and other members of the consortium are also processing for enhancement of the sanction limit. As per the allocation made by IDBI Bank, the Company has requested our bank for enhancement of the cash credit limit from Rs. 2.00 crores to Rs. 4.00 crores. \ Parameters of LC: 1.Purpose 2.Beneficiary 3. Value 4. Margin 5. Usance 6. Security 7. Retirement 8. Past experience 9. Commission Letter of credit Raw material/ stores/ spares/ consumables Raw material suppliers in India and abroad Rs. 4.00 crs 10% cash margin Inland- upto max. 90 days Foreign- upto max. 180 days Same as WCC From the own source of the company Yet to be availed 50% of banks normal rate

Rationale for Recommendation: The Company is promoted by Viacon Group, which has sufficient past experience in the line of activity of Consumer Electronics and Durables. The project is essentially a backward integration of the business activity of the Group and is expected to provide operational synergies. The Company is enjoying exemption of excise duty for first 10 years, income tax for first 5 years and concessional Central Sales Tax @ 1% for first 5 year, for being situated in Uttarakhand, which makes its product cost competitive.

The case study provided a deep insight into the credit appraisal procedure followed at UBI. This case was a combination of enhancement of WCC and LC limit along with the renewal of the TL limit, so the typical parameters of examination specific to each type of
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credit facility could be studied. The financial analysis also revealed the adverse effect of financial downturn and the revival of the company. This case facilitated the practical inspection of the various aspects of appraisal.

CHAPTER-XIII FINDINGS AND SUGGESSTIONS

From the study carried out on the credit assessment procedure of UBI some very important observations were made. In the project some recommendations corresponding to the defects noticed in the credit appraisal system have been made. These suggestions can help the bank in improving the assessment strategy and cover the inefficiencies.

12.1. Findings The judging of the character of the borrower is the most difficult task in the appraisal process. The bank emphasizes on the minimum credit rating of UBICR 3 of each prospective borrower. The bank takes extra care in the assessment of the credit to new unit or projects. The projections for future made by the borrower cannot be completely relied upon as the future is extremely uncertain. Many important financial ratios like the Priority Obligation Ratio, Interest coverage ratio, etc do not have any benchmark parameter or standard to compare with as in case of ratios like ACR, TOL/TNW, FACR etc. In the appraisal of the financial parameters equal importance if laid on both the projected and historical data. It was found that most of the credit proposals do not obtain rating from external agencies which is a mandatory parameter for appraisal. The appraisal system of UBI is not very stringent; a number of deviations are there in the sanction of loans by the next higher authority. The capital market conditions of any listed company are not given due importance in the appraisal process. The reasons for the adverse movement in the share prices are not properly analysed and not mentioned in the processing format.

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The evaluation of the reliability of the assumptions relating to the projected data is the most critical step in the inspection process. The appraisal process of home loan is divided into salaried class and for professional/ self employed on the basis of difference in regularity of income stream.

12.2. Suggestions

The deviations in the sanctioning of the loan proposals should be removed. This may result in the borrowers account ending up as NPA. Standards for comparison should be set for many other important ratios in the credit appraisal process like debtors turnover ratio, priority obligation ratio etc. The Bank should make it mandatory for the business units to obtain credit rating from outside agencies. The Bank can have agreements with these agencies which can undertake the rating of the borrowers of the Bank. The processing format of the Bank for credit appraisal can be made more organized. Related parameters should be clubbed together so that the analysis becomes easier. The assumptions given by the borrower regarding the projections made should be more thoroughly examined. The prospective borrower especially the business units should have proper mitigation for all types of risk else it is the bank who will suffer the default. There can be expansion of the courses eligible for availing education loan for studying abroad. In case of ratios like TOL/TNW and D/E ratio only the upper limit if fixed in the Banks benchmarks. There should also be a lower limit for the ratios. It is not feasible if the ratios become too less. The cash budget method of assessment of WCR can be usually followed by the Bank as it provides the details of the monthly capital requirement of the unit and fixation of credit limit. The bank should emphasize more on inter firm anlysis as it gives a clear picture of the present and future condition of the business.

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CHAPTER-XIV CONCLUSION

The project carried out on the credit appraisal system of UBI was a successful one. This project gave me ample opportunity to have exposure in the field of finance in a reputed organisation. In the 2 months term of the project, the various types of loan proposals were examined by me. The research helped me understand the vivid aspects of appraisal which are analysed by the bank. Credit appraisal is a very crucial step in Banks lending process to assess the ability and the willingness to repay the loan by the borrower. It determines the creditworthiness of the loan applicant. The bank intends to minimize its risk in the lending of loans due to which the bank lays emphasis on proper credit evaluation. The character of the credit applicant is the most difficult C to evaluate which depends on the experience and skills of the credit officers to examine this C. The bank carefully evaluates the various components like income stream of the borrower, industry analysis, risk mitigation system, financial statements etc to judge the repayment capacity of the borrower. The banks Lending Policy prescribes specific format for the evaluation of the financial statement and benchmark ration for ratio analysis. The appraisal of retail credit proposals is relatively easier than the working capital and term loan proposals. However credit appraisal does not make the bank completely risk free as nothing is certain in the world. The case which was analysed in the project gave me more insight into the modus operandi of appraisal strategy of the bank. In the course of the project some things in the appraisal system dissatisfied me. These defects can render the credit inspection procedure ineffective, so in order to overcome them a few recommendations have been made .I hope these suggestions would be

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helpful for UBI. As a whole the experience of working in the credit operations department of UBI was a very enriching one.

Limitations of Study In the course of the project study on credit appraisal the following problems were faced:

The time allotted for the project was limited to study the appraisal of diverse loan proposals Primary data collection was difficult due to the busy schedule of the Bank officials.

Scope for future improvements: Better availability of primary data can further improve the findings of the study.

BIBLIOGRAPHY

Books and Journals 1. Dash, S. K., (2009), Tit Bits of General Banking. Bank House, Bhubaneswar. 2. Varsaney, P. N., (2004), Banking Law and Practice. Sultan Chand and Sons New delhi, Pg 4.18-4.40. 3. Pandey, I. M., (2008), Financial Management. Vikash Publication House Pvt Ltd, New Delhi, Pg 658-665. 4. Lending Policy of United Bank of India, CPPMI Department. 5. UBI STC Bulletin.

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Websites www.google.com www.yahoo.com www.unitedbankofindia.com www.economictimes/indiatimes.com

Appendices

A/C ACR BB BEP BG BIFR CA CAGR CARE CASA CDR CL CMIE CR CRISIL CWIP DSCR ECGC FACR

Account Asset Coverage Ratio Bank Borrowing Break Even Point Bank Guarantee Board of Industrial & Financial Reconstruction Current Assets Compounded Annual Growth Rate Credit Analysis & Research Ltd. Current Account Savings Account Corporate Debt Restructuring Current Liabilities Centre for Monitoring India Economy Current Ratio Credit Rating Information Services of India Ltd. Capital Work In Progress Debt Service Coverage Ratio Export Credit Guarantee Corporation Fixed Asset Coverage Ratio
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FCL FEMA H.O ICRA IRR ITR KVP LC LCD LIP MPBF MSME NOF NPA NPV NSC NSDL NWC PAN PAT PBT RBI RM RTL SEBI TCA UBI UBICR UTI VAT WC WCC WCG WIP

Foreign Currency Loan Foreign Exchange Management Act Head Office Investment Information & Credit Rating Agency of India Ltd. Internal Rate of Return Income Tax Return Kisan Vikas Patra Letter of Credit Liquid Crystal Display Life Insurance Policy Maximum Permissible Bank Finance Micro Small and Medium Enterprise Net Owned Fund Non Performing Assets Net Present Value National Savings Certificate National Securities Depository Ltd. Net Working Capital Permanent Account Number Profit After Tax Profit Before Tax Reserve Bank of India Raw Material Rupee Term Loan Securities & Exchange Board of India Total Current Assets United Bank of India United Bank of India Credit Rating Unit Trust of India Value Added Tax Working Capital Working Capital Credit Working Capital Gap Work in Progress
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