Corporate Credit

CORPORATE CREDIT

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ACKNOWLEDGEMENT

This project report is guidance and knowledge imparted to me by mentors at Canara Bank, SME Sulabh, Circle Office, Mumbai during my summer internship. It was very valuable learning experience for me.

I would like to thank

Mr. Saurav Mitra Mrs. Sherly Madhubabu

Senior Manager (SME Sulabh, Circle Office, Mumbai) Credit Monitoring Officer (SME Sulabh, Circle Office, Mumbai)

Mrs. Ranjana Brahme

Officer (HRM Section)

I would like to give special thanks to our project guide Mrs. Sherly Madhubabu, because of whom I was able to gain the insights of various departments in Canara Bank within a short time period of two months. Last but not the least I would like to thank each and every staff member & entire non staff members of Canara Bank family for their support and help as and when required.

My special thanks and gratitude to Mrs. Ranjana Brahme, who were instrumental in granting this project to me.

Ashish Chanchlani

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Declaration

To, SME Sulabh, Canara Bank, Mumbai (Circle Office).

Sir, I hereby declare that the project work entitled CORPORATE CREDIT has been written and submitted, is my original work the empirical findings in the report are based on information collected by me and not copied from elsewhere. I understand that detection of any such coping is liable to be punished in any way the school deems fit.

Ashish Chanchlani

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CHAPTER PLAN
TABLE OF CONTENT
CHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 CHAPTER 5 Executive Summary. Objectives. Research methodology. Industry profile. Company profile 5.1 History of Canara Bank 5.2 Vision. 5.3 Mission CHAPTER6 Trade Finance 6.1 Concept Of Trade Finance. 6.2 Pre-Shipment Finance 6.3 Post-Shipment Finance.. 6.4 Letter Of Credit.. CHAPTER 7 Assessment of Working Capital & Term Loans 7.1 Working Capital and Its Assessment 7.2 Assessment of Term Loans CHAPTER 8 Credit Appraisal 8.1 INTRODUCTION.. 8.2 PRE-SANCTION APPRAISAL AND POST SANCTION SUPERVISION.. CHAPTER 9 CHAPTER 10 Case Study ABC Parts Pvt. Ltd Conclusion Bibliography..

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Chapter

EXECUTIVE SUMMARY

This project was undertaken at the Canara Bank, SME Sulabh, Circle Office Mumbai. Financial requirements for Project Finance and Working Capital purposes are taken care of at the SME Sulabh. Companies that intend to seek credit facilities approach the bank. Primarily, credit is required for following purposes: a. Working capital finance b. Term loan for mega projects c. Non Fund Based Limits like Letter of Guarantee, Letter of Credit etc. Project Financing discipline includes understanding the rationale for project financing, how to prepare the financial plan, assess the risks, design the financing mix, and raise the funds. In addition, one must understand some project financing plans have succeeded while others have failed. A knowledge-base is required regarding the design of

contractual arrangements to support project financing; issues for the host government legislative provisions, public/private infrastructure partnerships, public/private financing structures; credit requirements of lenders, and how to determine the project's borrowing capacity; how to analyze cash flow projections and use them to measure expected rates of return; tax and accounting considerations; and analytical techniques to validate the project's feasibility Project finance is different from traditional forms of finance because the credit risk associated with the borrower is not as important as in an ordinary loan transaction; what are most important are the identification, analysis, allocation and management of every risk associated with the project.

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The purpose of this project is to explain, in a brief and general way, the manner in which risks are approached by financiers in a project finance transaction. Such risk minimization lies at the heart of project finance. Efficient management of credit portfolio is of utmost importance as it has a tremendous impact on the Banks assets quality & profitability. The ongoing financial reforms have no doubt provided unparallel

opportunities to banks for growth, but have simultaneously exposed them to various risks, which need to be effectively managed. The study has been conducted with the purpose of getting in-depth knowledge about the credit appraisal and credit risk management procedure in the organization for the above said first two purposes.

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Chapter

OBJECTIVE

To study broad contours of management of credit, the loan policy, credit appraisal for business units i.e. for working capital loan or Term Loan

To utilize the above learning and study the creditworthiness organizations those approach CANARA BANK for credit. This would entail undertaking of the following procedures: i. ii. iii. iv. v. vi. Management Evaluation Business / Industry Evaluation Technical Evaluation Legal Evaluation Financial Evaluation Credit Risk Rating

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Chapter

RESEARCH METHODOLOGY

The methodology being used involves secondary source of information.

Secondary sources of Information Loan Policy and Internal Circulars of the bank. Research papers, power point presentations and PDF files prepared by the bank and its related officials. Referring to information provided by CIBIL, Income Tax files, Registrar of Companies (Ministry of Corporate Affairs), and Auditor reports.

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Chapter

INDUSTRY PROFILE

THE INDIAN BANKING INDUSTRY

The last decade has seen many positive developments in the Indian banking sector. The growth in the Indian Banking Industry has been more qualitative than quantitative and it is expected to remain the same in the coming years. Based on the projections made in the "India Vision 2020" prepared by the Planning Commission, the report forecasts that the pace of expansion in the balance-sheets of banks is likely to decelerate. The total assets of all scheduled commercial banks by end-March 2010 is estimated at Rs 40,90,000 crores. That will comprise about 65 per cent of GDP at current market prices as compared to 67 per cent in 2002-03. Bank assets are expected to grow at an annual composite rate of 13.4 per cent during the rest of the decade as against the growth rate of 16.7 per cent that existed between 1994-95 and 2002-03. It is expected that there will be large additions to the capital base and reserves on the liability side. The Indian Banking Industry can be categorized into non-scheduled banks and scheduled banks. Scheduled banks constitute of commercial banks and co-operative banks. There are about 67,000 branches of Scheduled banks spread across India. As far as the present scenario is concerned the Banking Industry in India is going through a transitional phase. The Public Sector Banks (PSBs), which are the base of the Banking sector in India account for more than 78 per cent of the total banking industry assets. Unfortunately they are burdened with excessive Non Performing assets (NPAs), massive manpower and lack of modern technology. On the other hand the Private Sector Banks are making tremendous progress. They are leaders in Internet banking, mobile banking, phone banking, ATMs. As far as foreign banks are concerned they are likely to succeed in the Indian Banking Industry.

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Currently, banking in India is generally fairly mature in terms of supply, product range and reach-even though reaching rural India still remains a challenge for the private sector and foreign banks. In terms of quality of assets and capital adequacy, Indian banks are considered to have clean, strong and transparent balance sheets relative to other banks in comparable economies in its region. The Reserve Bank of India is an autonomous body, with minimal pressure from the government. The stated policy of the Bank on the Indian Rupee is to manage volatility but without any fixed exchange rate-and this has mostly been true. With the growth in the Indian economy expected to be strong for quite some time-especially in its services sector-the demand for banking services, especially retail banking, mortgages and investment services are expected to be strong. One may also expect M&As, takeovers, and asset sales. In March 2006, the Reserve Bank of India allowed Warburg Pincus to increase its stake in Kotak Mahindra Bank (a private sector bank) to 10%. This is the first time an investor has been allowed to hold more than 5% in a private sector bank since the RBI announced norms in 2005 that any stake exceeding 5% in the private sector banks would need to be vetted by them. Currently, India has 88 scheduled commercial banks (SCBs) - 28 public sector banks (that is with the Government of India holding a stake), 29 private banks (these do not have government stake; they may be publicly listed and traded on stock exchanges) and 31 foreign banks. They have a combined network of over 53,000 branches and 17,000 ATMs. According to a report by ICRA Limited, a rating agency, the public sector banks hold over 75 percent of total assets of the banking industry, with the private and foreign banks holding 18.2% and 6.5% respectively. The policy makers, which comprise the Reserve Bank of India (RBI), Ministry of Finance and related government and financial sector regulatory entities, have made several notable efforts to improve regulation in the sector. The sector now compares favorably with banking sectors in the region on metrics like growth, profitability and non10

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performing assets (NPAs). Indian banks have compared favorably on growth, asset quality and profitability with other regional banks over the last few years. The banking index has grown at a compounded annual rate of over 51 per cent since April 2001 as compared to a 27 per cent growth in the market index for the same period. The interplay between policy and regulatory interventions and management strategies will determine the performance of Indian banking over the next few years. Management success will be determined on three fronts: i. Fundamentally upgrading organizational capability to stay in tune with the changing market ii. iii. Adopting value-creating M&A as an avenue for growth Continually innovating to develop new business models to access untapped opportunities Opportunities and Challenges for the Players The bar for what it means to be a successful player in the sector has been raised. Four challenges must be addressed before success can be achieved. i. The market is seeing discontinuous growth driven by new products and services that include opportunities in credit cards, consumer finance and wealth management on the retail side, and in fee-based income and investment banking on the wholesale banking side. These require new skills in sales & marketing, credit and operations ii. Banks will no longer enjoy windfall treasury gains that the decade-long secular decline in interest rates provided iii. With increased interest in India, competition from foreign banks will only intensify

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iv.

Given the demographic shifts resulting from changes in age profile and household income, consumers will increasingly demand enhanced institutional capabilities and service levels from banks

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Chapter

COMPANY PROFILE

5.1. History of Canara Bank

Late Sri Ammembal Subba Rao Pai a philanthropist, founded Canara Bank as 'Canara Bank Hindu Permanent Fund' in 1906, this small seed blossomed into a limited company as 'Canara Bank Ltd.' in 1910 and became Canara Bank in 1969 after nationalization. "A good bank is not only the financial heart of the community, but also one with an obligation of helping in every possible manner to improve the economic conditions of the common people" - A. Subba Rao Pai.

Founding Principles 1. To remove Superstition and ignorance. 2. To spread education among all to sub-serve the first principle. 3. To inculcate the habit of thrift and savings. 4. To transform the financial institution not only as the financial heart of the community but the social heart as well. 5. To assist the needy. 6. To work with sense of service and dedication. 7. To develop a concern for fellow human being and sensitivity to the surroundings with a view to make changes/remove hardships and sufferings.
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Sound founding principles, enlightened leadership, unique work culture and remarkable adaptability to changing banking environment have enabled Canara Bank to be a frontline banking institution of global standards.

5.2. Mission
To provide quality banking services with enhanced customer orientation, higher value creation for stakeholders and to continue as a responsive corporate social citizen by effectively blending commercial pursuits with social banking.

5.3. VISION
To emerge as a Best Practices Bank by pursuing global benchmarks in profitability, operational efficiency, asset quality, risk management and expanding the global reach.

BRANCHES & OFFICES Our Bank has a network of more than 3002 branches, spread over 22 States/4 Union Territories of the country and, which are administered through Head Office at Bangalore:- Organizational Structure 34 Circle Offices

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BRANCHES AND OFFICES ABROAD The Bank has overseas presence as below: 1. 2. 3. 4. BRANCH at LONDON. BRANCH at HONG KONG. BRANCH at SHANGHAI, CHINA. A joint venture Bank in Moscow - COMMERCIAL BANK OF INDIA LLC -

(CBIL) with State Bank of India on 60:40 bases. Canara Bank have identified 21 overseas centers for opening branches/offices, out of which, Canara Bank have approval from RBI for opening branches in South Africa, Germany, Bahrain, Sultanate of Oman , Qatar, USA, Tanzania, Japan, Sharjah (UAE), Brazil and a Second Branch in UK.

The Bank's International Operations is being supported by a network of 537 Correspondent Banks, spread over 94 Countries.

Further, Bank has rupee drawing arrangement with 20 Exchange Houses and 18 Banks in the Middle East for channelizing the remittances of expatriates.

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Chapter

TRADE FINANCE

6.1 Concept of Trade Finance

Credit and finance is the life blood of any business whether domestic or international. It is more important in the case of export transactions due to the prevalence of novel nonprice competitive techniques encountered by exporters in various nations to enlarge their share of world markets. The selling techniques are no longer confined to mere quality, price or delivery schedules of the products but are extended to payment terms offered by exporters. Liberal payment terms usually score over the competitors not only of capital equipment but also of consumer goods. The payment terms however depend upon the availability of finance to exporters in relation to its quantum, cost and the period at preshipment and post-shipment stage. This project is an attempt to throw light on the various sources of export finance available to exporters, the schemes implemented by ECGC and EXIM for export promotion and the recent developments in the form of tie-EXIM tie-ups, credit policy announced by RBI in Oct 2001 and TRIMS. Export finance is a short term working capital finance allowed to an exporter. Finance and credit are available to help not only export production but also to sell overseas customers on credit.

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Need for Trade Finance To cover commercial & Non-commercial or political risks attendant on granting credit to a foreign buyer. To cover natural risks like an earthquake, floods etc. An exporter may avail financial assistance from any bank which considers the ensuing factors:Availability of the funds at the required time to the exporter. Affordability of the cost of funds.

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6.2 Pre-Shipment finance

Pre-shipment finance which is generally called packing credit is essentially a working capital advance made available for the specific purpose of procuring or processing or manufacturing of goods meant for export. Two essential features of packing credit advances are:a) There should be an export order or a letter of credit. b) The advances to be liquidated from the relative export proceeds.

Importance of Finance At Pre-Shipment Stage: To purchase raw material, and other inputs to manufacture goods. To assemble the goods in the case of merchant exporters. To store the goods in suitable warehouses till the goods are shipped. To pay for packing, marking and labeling of goods. To pay for pre-shipment inspection charges. To import or purchase from the domestic market heavy machinery and other capital goods to produce export goods. To pay for consultancy services. To pay for export documentation expenses.

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Different Forms of Pre-Shipment Finance: Cash Packing Credit Loan. Advance against Hypothecation. Advance against Pledge. Advance against Exports through Export Houses. Advance against Duty Draw Back (DBK).

6.3 Post-Shipment Finance

It is essentially an advance against receivables which will be in the form of shipping documents. Definition: Credit facility extended to an exporter from the date of shipment of goods till the realization of the export proceeds is called Post-shipment Credit.

Importance of Finance At Post-Shipment Stage: To pay to agents/distributors and others for their services. To pay for publicity and advertising in the overseas markets. To pay for port authorities, customs and shipping agents charges. To pay towards export duty or tax, if any. To pay towards ECGC premium. To pay for freight and other shipping expenses. To pay towards marine insurance premium, under CIF contracts. To meet expenses in respect of after sale service.

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To pay towards such expenses regarding participation in exhibitions and trade fairs in India and abroad. To pay for representatives abroad in connection with their stay board.

Different Forms of Post-Shipment Advances Export bills purchased / discounted Export bills negotiated Advances against bills sent on collection basis. Advances against exports on consignment basis. Advances against undrawn balances. Advances against duty drawback.

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6.4 Letter of Credit

Introduction: This is one of the most popular and more secured of method of payment in recent times as compared to other methods of payment. A L/C refers to the documents representing the goods and not the goods themselves. Banks are not in the business of examining the goods on behalf of the customers. Typical documents, which are required includes commercial invoice, transport document such as Bill of lading or Airway bill, an insurance documents etc. L/C deals in documents and not goods. A letter of credit is a banking mechanism which allows importers to offer secure terms to exporters.

A Letter of Credit can be defined as an undertaking by importers bank stating that payment will be made to the exporter if the required documents are presented to the bank within the validity of the L/C.

Parties Involved In Letter Of Credit: Applicant: The buyer or importer of goods Issuing bank: Importers bank, who issues the L/C Beneficiary: The party to whom the L/C is addressed. The Seller or supplier of goods. Advising bank: Issuing banks branch or correspondent bank in the exporters country to whom the L/C is send for Onward transmission to the beneficiary.

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Confirming bank: The bank in beneficiarys country, which Guarantees the credit on the request of the issuing Bank. Negotiating bank: The bank to whom the beneficiary presents his Documents for payment under L/C All letters of credit contain these elements: A payment undertaking given by the bank (issuing bank). On behalf of the buyer (applicant). To pay a seller (beneficiary). A given amount of money. On presentation of specified documents representing the supply of goods within specific time limits. These documents conforming to terms and conditions set out in the letter of credit. Documents to be presented at a specified place.

Put simply, the issuing bank's role is twofold: To guarantee to the seller that if compliant documents are presented, the bank will pay the seller the amount due. This offers security to the seller - the bank says in effect "We will pay you if you present documents (XYZ)" To examine the documents, and only pay if these comply with the terms and conditions set out in the letter of credit. This protects the buyer's interests the bank says "We will only pay your supplier on your behalf if they present documents (XYZ) that you have asked for"
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Chapter

ASSESSMENT OF WORKING CAPITAL AND TERM LOANS

7.1 WORKING CAPITAL AND ITS ASSESSMENT

The objective of running any industry is earning profits. An industry will require funds to acquire fixed assets like land and building, plant and machinery, equipments, vehicles etc and also to run the business i.e. its day to day operations. Working capital is defined, as the funds required for carrying the required levels of current assets to enable the unit to carry on its operations at the expected levels uninterruptedly. Thus working capital required (WCR) is dependent on i. ii. The volume of activity (viz. level of operations i.e. Production and Sales) The activity carried on viz. manufacturing process, product, production programme, and the materials and marketing mix. The purpose of assessing the WC requirement of the industry is to determine how the total requirements of funds will be met. The two sources for meeting these requirements are the units long-term sources (like capital and long term borrowings) and the shortterm borrowings from banks. The long-term resources available to the unit are called the liquid surplus or Net Working Capital (NWC). It can be explained by visualizing the process of setting up of industry. The units starts with a certain amount of capital, which will not normally be sufficient, even to meet the cost of fixed assets. The unit, therefore, arranges for a long-term loan from a financial institution or a bank towards a part of the cost of fixed assets. From these two sources after meeting the cost of fixed assets some funds remain to be used for working capital. This amount is the Net Working Capital or Liquid Surplus and will be one of the sources of meeting the working capital requirements.

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The remaining funds for working capital have to be raised from banks; banks normally provide working capital finance by way of advantage against stocks and sundry debtors. Banks, however, do not finance the full amount of funds required for carrying inventories and receivables: and normally insist on the stake of the enterprise at every stage, by way of margins. Bank finance is normally restricted to the amount of funds locked up less a certain percentage of margins. Margins are imposed with a view to have adequate stake of the promoter in the business both to ensure his adequate interest in the business and to act as a protection against any shocks that the business may sustain. The margins stipulated will depend on various factors like salability, quality, durability, price fluctuations in the market for the commodity etc. taking into account the total working capital requirements as assessed earlier, the permissible limit, up to which the bank finance cab be granted is arrived. While granting working capital advances to a unit, it will be necessary to ensure that a reasonable proportion of the working capital is met from the long-term sources viz. liquid surplus. Normally, liquid surplus or net working capital be at least 25% of the working capital requirement (corresponding to the benchmark current ratio of 1.33), though this may vary depending on the nature of industry/ trade and business conditions. Various methods for assessment of Working Capital are: 1. Operating cycle method 2. Traditional method of assessment of working capital requirement a. Raw material b. Stock in process c. Finished goods d. Sundry debtors (receivables) e. Expenses 3. Projected Annual Turnover Method for SME units (Nayak Committee)

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4. MPBF Method (Tandon and Chore Committee Recommendations) 5. Projected Balance Sheet Method (PBS)

7.2 Assessment of Term Loans

Term Loans are generally granted to finance capital expenditure, i.e. for acquisition of land, building and plant and machinery, required for setting up a new industrial undertaking or expansion/diversification of an existing one and also for acquisition of movable fixed assets. Term Loans are also given for modernization, renovation, etc. to improve the product quality or increase the productivity and profitability. The basic difference between short-term facilities and term loans is that short-term facilities are granted to meet the gap in the working capital and are intended to be liquidated by realization of assets, whereas term loans are given for acquisition of fixed assets and have to be liquidated from the surplus cash generated out of earnings. They are not intended to be paid out of the sale of the fixed assets given as security for the loan. This makes it necessary to adopt a different approach in examining the application of the borrowers for term credits. For the assessment to Term Loan Techno Economic Feasibility Study is done. The success of a feasibility study is based on the careful identification and assessment of all of the important issues for business success. A detailed Project Report is submitted by an entrepreneur, prepared by a approved agency or a consultancy organization. Such report provides in-depth details of the project requesting finance. It includes the technical aspects, Managerial Aspect, the Market Condition and Projected performance of the company. It is necessary for the appraising officer to cross check the information provided in the report for determining the worthiness of the project. The feasibility study is a part of Credit Appraisal process and the same is discussed in the following chapter.
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Chapter

CREDIT APPRAISAL

8.1 INTRODUCTION
Credit appraisal is a holistic exercise which starts from the time a prospective borrower walks into the branch and culminates in credit delivery and monitoring with the objective of ensuring and maintaining the quality of lending and managing credit risk within acceptable limits. There are two types of proposals that are received by the Bank for funds. The first types of proposals are for starting a new project or for setting up a new company, also known as project financing and the other proposals are for additional funds requirements (working capital). Financial requirements for Project Finance and Working Capital

purposes are taken care of at the Credit Department. Companies that intend to seek credit facilities approach the bank. Primarily, credit is required for following purposes:1. Working capital finance 2. Term loan for mega projects 3. Non fund based Limits like Letter of Guarantee, Letter of Credit Prior to nationalization the Bank had a security centric approach for sanctioning the proposals i.e. the Bank sanctioned the proposal for credit facility to the company when it had security against the amount given. There are two types of securities, primary and collateral. The primary security is the asset created out of the Banks finance. Collateral security refers to other assets owned by the company or its directors.

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Previously there were no regulatory issues or capital adequacy issues. But it was observed that during boom period many people who did not even had the knowledge about a particular industry jumped in and were interested for finance. Eventually such companies resulted to be failures. RBI norms for Non- Performing Assets (NPA) are very strict. Thus to avoid many of the accounts becoming NPAs the Bank changed its security centric approach. The process of credit appraisal would begin with the selection of the proponent. It would involve appraising the background of the proponent/ management, commercial, technical and financial appraisal. Appraisal of credit facilities would comprise two distinct segments: a) Appraising the acceptability of the customer b) Assessment of the customers credit needs. The appraisal would be different in respect of: a) Personal loans for consumer durables, houses etc; b) Loans to tiny business enterprises; c) Loans to agriculturalists; and, d) Credit facilities to firms, corpora te and others for business/trade/industry.

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8.1.1 Background of the proponent/management The identification of the borrower is done properly through scrutiny of his antecedents, experience, competence, integrity, initiative etc. This may be done by obtaining status reports from previous bankers or meaningful assessment of his dealings with the bank, if banking with it. In case of corporate, the management structure, the background of top management, needs to be scrutinized. The names of prospective borrowers/promoters should not appear in the list of defaulters published by RBI/ECGC etc or in any other list of undesirable customers. If so, ca re should be taken. To strengthen the credit appraisal further details of the status report received from another bank may be ascertained by the appraising officer by personally visiting his counterpart in the other bank remitting the report for a personal discussion. The gist of such a discussion may be recorded in a file and brought out in the proposal. KYC guidelines as framed by RBI and adopted by Bank are to be followed by the branches. In case of borrowers/promoters who have been identified as willful defaulters by banks and advised by RBI, there are certain penal provisions applicable. These are required to be complied without fail by branches.

8.1.2 Commercial appraisal The nature of the product, demand for the same, the existing and perceived competition in the segment, ability of the proponents to withstand the same,

government policies governing the industry, etc. need to be taken into consideration. The trade practices in respect of the product should be thoroughly understood

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8.1.3 Technical appraisal Technical appraisal of the project needs to be carried out for industrial activity proposals beyond the cut- off limits prescribed from time to time. Such appraisal may be carried out in-house by technical officers working in Technical Appraisal

Department/Technical Appraisal cells or officers having technical expertise for the same or by an outside agency as determined by the appropriate authority. Where technical appraisal is carried out by All India Financial Institutions. PSU Banks/other leading banks having expertise I the area and the same ma y be accepted for an appraisal purpose In case of service industry or preservation industry TEV study is not applicable unless the goods to be preserved require some change in their state through some industrial process. Exemptions from fresh techno- economic appraisal shall be available in the following categories: a) Where appraisal has been carried out by all India financial institutions/ Banks and such FIs/Banks themselves would be taking up exposure. b) Where appraisal has been carried out by leader of WC consortium and the branch/sanctioning authority observing no serious differences with such appraisal. c) In case of AAA (LC1 to LC2 or equivalent) /AA (LC3 to 4 or equivalent) rated accounts with other banks, where our bank proposes to join the consortium and/or sanction limits under multiple banking arrangement for the existing activity of the company/fir m, and the sanctioning authority decides not to insist for fresh TEV study. d) In case of well conducted existing accounts with credit rating of AAA (LC1 to LC2) and AA (LC3 to LC4) where only additional working capital limits are

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sought and diversification of the project is not proposed, and the sanctioning authority decides not to insist for fresh TEV study e) In case of well conducted existing accounts with credit rating of AAA (LC1 to LC2) and AA (LC3 to LC4)term loan requirements up to 25% of the working capital limits sanctioned, provide d expansion is in the same product line and without change in technology, and the sanctioning authority decides not to insist for fresh TEV study f) Accounts involving re-structuring under CDR will be guided by super majority decision taken by CDR Empowered Group. A TEVS report shall remain valid for a period of one year from the date of the report, subject to there being no change in the scope of the project, beyond which it needs to be referred for re-appraisal.

8.1.4 Financial appraisal Apart from ascertaining the need based character of the limits requested for, the financial health of the proponents, ability to absorb unanticipated financial costs need to be looked into which would include scrutiny of the cost of the project, means of financing, financial projections etc. important performance indicators like profitability ratios, debt-equity ratio, debt service coverage ratio, break even point, profit/volume ratio, payback period, benefit cost ratio, internal rate of return, sensitivity analysis, etc. need to be within acceptable parameters for that

industries/activities.

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Where higher limits are considered, detailed analysis of the financial health would be made and the following ratios computed:-

Current ratio Total outside liabilities/equity ratio Profit before interest and taxes/interest ratio Profit before tax/ net sales ratio Inventory + receivables/Sales ratio DSCR if the borrower enjoys any term loan with any bank/ FI even if no TL is being considered by the bank

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8.2 PRE-SANCTION APPRAISAL AND POST SANCTION SUPERVISION

Effectiveness of pre-sanction appraisal and post-sanction follow-up system in a bank can be gauged from the level of NPAs in its credit portfolio. Both the systems are of great significance particularly in the present scenario when the economy is globalizing and financial reforms are taking place, thereby exposing the bank to greater credit related risks. Such risks may include business industry outlook, financials, interest, quality of management, etc. a sound system helps banks to identify and sanction loan proposals that are technically, financially, commercially and economically sound.

8.2.1 Pre-sanction appraisal of projects A project report is a document which provides information about the proposed activityproduct/service to be undertaken both in terms of quantity and value, process of

manufacture, technology to be used, type of raw materials and machinery required and their supply position. The project report also provides information about the demand and supply position of the product, profitability projections, funds flow statements, schedule of repayment of the bank loan and important ratios. In addition to this it provides position of availability of licenses, permissions if any required from the government agencies, local/international market conditions and environmental factors having influence on the project for successful implementation of any project the background, experience, qualification of entrepreneurs/promoters also matter. The various aspects which should be examined while appraising any project are discussed as under:

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1.

Economic and Financial Appraisal

The aspects need to be analyzed under this head should include cost of the project and means of financing, cost of production, break-even analysis, balance sheet and profitability projections, funds flow statements (i) Cost of project The major cost components of any project can be grouped under the following heads: Land and building including transfer, registration, development and construction charges Plant and machinery, equipment for auxiliary services including sales tax, transportation, insurance, duty, foundation, power, etc. Office equipments, furniture/fixtures, lighting and other accessories etc. Consultancy and know-how fees payable to foreign collaborators or consultants who re imparting the know-how Annual recurring royalty payment is not reflected under this head but is accounted for under profitability Preliminary expanses that also include cost of incorporation of the company, its registration, preparation of feasibility report, market surveys etc. Pre-operative expenses incurred, such a s, salary, travelling, insurance, startup expenses, mortgage expenses etc. incurred before starting of commercial production Capital issue expenses in case of companies which are raising funds by issue of capital to public. Such expenses may include brokerage and commission, advertisement, printing, stationary etc.
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Provision for contingencies to meet any unforeseen expenses

(ii) Means of finance The cost of project can be financed through the following means/sources: Capital brought in by the promoters and shareholders in the form of equity/debentures Unsecured long-term loans and deposits raised from friends and relatives to remain in business till repayment of banks loans Term loans from institutions/banks which a re repayable over a period of time Deferred term credits by suppliers of plant/machinery, payable in installments over a period of time Raising funds through Euro-issues, foreign currency loans, premium on capital issues, etc. which are sometimes comparatively cheaper means of finance Subsidies and development loans provided by the central/state government in notified backward districts to attract entrepreneurs (iii) Profitability projections The profitability projections should be prepared based on assumptions which are realistic neither optimistic nor pessimistic. Projections are worked out for a period covering the repayment of loans. The appraisal of the projections should cover scrutiny of various items of revenue and cost to ensure that these are achievable. While preparing profitability projections, the past trends of performance in industry and other environmental factors influencing the cost and revenue items should also be considered objectively.
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(iv) Break-Even Analysis Analysis of break-even point of a business enterprise would help in knowing the level of output or sales at which would break-even, i.e. there is neither profit nor loss. The breakeven analysis can help in making vital decisions relating to fixation of selling price, make or buy decision, maximizing production of the item giving higher contribution etc. further, the break-even analysis can also help in understanding impact of important cost elements, such as, power, raw materials, labor etc. and optimizing product-mix to improve project profitability.

(v) Fund-Flow Statement A fund-flow statement is often described as a working capital flow statement. It is derived by comparing the balance sheets on two specified dates and finding out the net changes in the various items appearing in the balance sheets. A critical analysis of the statement shows the various changes in sources and applications of funds and to ultimately provide the position of net funds available with the business for repayment of the loans.

(vi) Balance sheet projections Study of projected balance sheet statements provides the position of assets and liabilities of a unit at a particular time. An appraisal of the projected balance sheet data would reveal whether the concern is healthy, growing, and has a promising future or is stagnating.

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(vii) Financial ratios While analyzing the financial aspects of project, it would be advisable to analyze the important financial ratios over a period of time as it would tell us a lot about a units liquidity position, managements stake in the business capacity to service the debts, etc. the financial ratios which are considered important may include debt-service coverage ratio, debt-equity ratio, current ratio, net profit to sales ratio, etc. But financial analysis has certain limitations and it does not disclose some of the following critical factors: Managerial competence Technological competence Turnover of people Obsolescence of technology Competition Marketing Thus the above aspects are also considered while appraising a project to make the appraisal activity more meaningful.

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2.

Appraisal of market demand and potential

The market demand and potential need to be examined for each product item after taking into account the demand/supply position, availability of substitutes, selling price, discount structure, arrangement for after sales services, etc. the main aspects to be critically analyzed under this head may include the following: Size of market for the product(s) both local and export based on present/expected demand and supply position Position of competitors indicating the levels at which they a re operating and as to how they are performing in terms of sales and profit. Buy-back arrangement under the foreign collaborations, if any, and for what quantity, price and period Selling price with complete break-up i.e. whole-sale, retail, discount structure, credit proposed to be offered etc. Analysis of import and export and the government policies having influence on the project. Future demand for the product(s) based on reports published in important journals, newspapers and views expressed by the government and trade association, etc. 3. Appraisal of Technical aspects

The appraisal of technical aspects of a project should cover the technology to be used and how far it is successful. The important aspects requiring examination should cover the following: Product(s) proposed to be manufactured or services rendered in terms of quantity, value and their application

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Location of unit indicating advantages and disadvantages, availability of infrastructural facilities, concessions available from the government in the area, etc. Size of the land and building and whether open and covered area is enough for present activity and for future expansion. Availability of technology and process of manufacture and whether the same has been subjected to frequent changes in the past Capacity of the plant/machinery, price, market report on the suppliers credentials and the on the performance of the machines. Specifications for raw material needed, sources of supply, availability position, transportation costs, etc. Arrangement made for inspection at intermediate and final stages of production, equipment needed for ensuring quality. Availability of licenses and clearances, if any, required from the central/state governments and other agencies for setting up of such a unit. It is generally seen that the new promoter(s) make heavy and disproportionate investments in fixed assets like land/building, plant/machinery, etc. which results in uneconomic working due to heavy interest burden on such investments if these remain under-utilized. At times adequate provision for funds is not made to take care of normal cost overruns which can even result in failure of the project. A proper technical appraisal can help in successful implementation of the project.

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4.

Appraisal of Management and Organization of Project

The identification of the borrower needs to be done properly through scrutiny of his antecedents, experience, competence, integrity, initiative etc. this may be done by obtaining status reports from previous bankers or meaningful assessment of his dealings with the bank, if banking with it. In case of corporate, the management structure, the background of top management, needs to be scrutinized. The names of prospective borrowers/promoters should not appear in the list of defaulters published by RBI/ECGC etc or in any other list of undesirable customers. If so, care should be taken. To strengthen the credit appraisal further details of the status report receive d from another bank may be ascertained by the appraising officer by personally visiting his counterpart in the other bank remitting the report for a persona l discussion. The gist of such a discussion may be recorded in a file and brought out in the proposal. KYC guidelines as framed by RBI and adopted by Bank are to be followed by the branches.

Willful defaulters In case of borrowers/promoters who have been identified as willful defaulters by banks and advised by RBI, there are certain penal provisions applicable. These are required to be complied without fail by branches.

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8.2.2 Post-Sanction Supervision and Follow-Up Post sanction supervision and follow-up of loan accounts in banks has assumed a lot of significance as it helps in keeping a close watch on their performance and for initiating timely corrective action. Main objective of the post-sanction supervision is to ensure that the project financed is successfully implemented. Some of the important goals of monitoring are as under: 1. Periodical monitoring of the actual performance of assisted constituents vis--vis projections accepted a t the time of appraisal of credit facilities viz. Sales, operating Profits, Inventory and Debtor levels, Cash Flow etc. 2. Identifying and evaluating temporary / critical aberrations coming in the way of smooth functioning of the assisted company /s for timely restructuring. 3. Interacting regularly with the borrowers (and guarantors) through timely inspection in order to ascertain. Borrowers (management) stake and interest in the day to day business operations The production level, inventory level, trend of manufacturing/ sales, labor problems, maintenance of production units and market reports and other related issues. As to whether funds invested in business are adequately protected and whether day to day problems, if any, facing the business are resolved

satisfactorily. And understand the financial problems of the assisted companies without delay and to assist on regular or ad-hoc basis after evaluating the same on merits. Whether there are any impediments in timely service of interest, repayment of installments due to Bank
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As to whether the Banks funds are put to productive use As to whether there is any threat to the recovery of Banks funds invested in the business and to initiate timely, appropriate recovery measures in potentially nonperforming assets. The system adopted by the bank for follow-up of the loan accounts having working capital limits of Rs.50 lakhs and above is as advised by the Reserve Bank of India. The system is popularly known as Quarterly Information System (QIS) under which the following three formats have been prescribed for collecting information.

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Chapter

CASE STUDY ABC PARTS PVT. LTD

9.1BORROWERS PROFILE
Group Name Address of Regd./Corporate Office Constitution Date of incorporation Dealing with CANARA BANK since Industry/Sector Business Activity (Product) ABC Parts Private Limited 41, DLF, Industrial Area, New Delhi-110015 Private Limited 18/08/1960 Maintaining current account with Canara Bank, New Delhi for the last 8 years. Manufacturing of Auto & Tractor Parts (Large Scale) Engaged in Designing, Engineering and Manufacturing of Auto and Tractor components.

BACKGROUND The Company ABC Parts Pvt. Ltd. was incorporated in 1960. The borrower has setup manufacturing units at 4 locations for manufacturing of Automotive Parts. This company is an ISO-9001 2000 Certified Company and working speedily on achieving the TQ 14000. The Management of the company is experienced and working in the line since long and the party is having the regular orders for marketing of products and as well as contracts with corporate manufacturing units of Vehicles/Auto Mobiles. Because of their standing the company is getting repeated orders. The Company is supplying its product to manufacture of Automobile/Vehicles Manufacturer unit as Original Equipment Manufacturers. The company has set up in- house R&D facility in their unit, sophisticated instrumentation laboratory, testing laboratory etc., which reflects the broad vision of the company to withstand the changing environment. 42

Corporate Credit

SHAREHOLDING Major Share holders Promoters Holding FIs/ Mutual Funds/UTI/Banks/FIIs NRIs/OCBs Public Total No. of shares 100000 NIL NIL NIL 100000 Amt. in Rs. Lacs 100.00 NIL NIL NIL 100.00 % Holding 100% NIL NIL NIL 100%

FACILITIES REQUIRED Nature Fund Based CC(H) Fund Based Ceiling Non Fund Based Non Fund Based Ceiling Term Loan TOTAL COMMITMENT NIL 1600.00 2500.00 Secured Secured
Rs. In Lacs

Proposed

Secured/Unsecured (As per

RBIs guidelines)

900.00 900.00

Secured

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9.2 CREDIT APPRAISAL FOR ABC PARTS PVT. LTD

I. MANAGERIAL EVALUATION 1. Market reputation on the promoter / management of the company: Satisfactory

2. Brief Profile of Directors Shri Mahender Kumar Bhunsali, aged 80 years, promoted the business of auto ancillaries after completing his education. He has been founder of the company and is presently the chairman of the company. Looking at his rich experience along with his forward looking capabilities, excellent work and ability to progress as per the changing industry scenario, he was honored by Udyog Patra Award Shri Munish Kumar Bhunsali, aged 46 years, son of Shri Mahendra Kumar Bhunsali joined his fathers business after completing his Graduation. He has now been associated with this business for twenty-four years and is presently Managing Director of the company Smt. Meenal Bhunsali W/o of Shri Munish Kumar Bhunsali aged 44 years, is also a graduate. She has also been associated with the business for last eight years and presently Director in the company

3. Quality of Management (Including Corporate Governance): Management of the company is well experienced and have more than 40 year experience in the auto parts line.

4. Succession Planning: Is been taken care of

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Corporate Credit 5. Confidential Reports: Satisfactory 6. Marketing: The endless pursuit for quality excellence for over four decades has earned ABC the unswerving confidence of leading automotive and tractor manufactures, that's why its components are used as Original Equipment in vehicles manufactured. The company supplies its products to various ORIGINAL VEHICLE MANUFACTURERS like: Escorts Tractors Limited, Tractors and Farm Equipment Limited (Massey Ferguson U.K) Carraro India Ltd., (Carraro Spa, Italy) Samey Deutz Fahr India Ltd.,(Samey, Italy) Eicher Tractors (Valtra, Brazil) Ford New Holland (CNH, Italy) "Sonalika" International Tractors Ltd (Renault, France) International Auto Ltd. etc.

On the other hand company have well experienced management, good marketing team and vide market network of customers of its products.

7. Borrowers' diversification, expansion, modernization program: The company is setting up a new manufacturing facility, as a part of companys overall expansion/integration plant for its production activities. For the above purpose, a plot of land measuring about 11,190 sq. meters has been allotted to the company by New Okhala Industrial Development Association, near New-Delhi. The Company Intend to set up new machinery there for setting up a new plant to cater growing demands of its customers, who have already placed orders to increase supply.

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II. BUSINESS EVALUATION

Comments on industry scenario and industry outlook: The past few years have witnessed a continuous influx of global auto majors in India. Many auto majors have established facilities, which have also been aided by the liberal government policy. India crossed million-mark last fiscal, which has set the domestic auto ancillary industry on a roll. Auto MNCs are also launching their latest models in India. The domestic auto industry has also come up with new and quality models. Consequently, the importance for precision auto components has been growing. The increase in demand for auto components in India has also resulted in an increase in revenues and exports. Exports of auto components from India have witnessed a CAGR of over 19% over the last six years. The auto component sector is on a growth trajectory as is evident by the fact that an auto component has been designated as a Thrust Sector by the Government of India under the EXIM Policy. Also, the problems of high rejection rates which plagued the domestic auto ancillary industry has been overcome which is exhibited in number of overseas deals concluded by the domestic industry amidst stiff competition from other Asian countries. The Government has extended various fiscal incentives and policy measures which have helped the industry. Critically, outsourcing of automobile components that have relatively high engineering and design content from suppliers in low cost countries like India, is gaining momentum fast. It is estimated that in the next 10 years the auto components industry will reach USD 33-40 billion. Going by the current trends in the domestic automotive industry and as stated above, it is expected that the indigenous demand for auto components will also reach USD 13-15 46

Corporate Credit billion in the next 10 years and about USD 20-25 billion would be exported. To meet the combined demand from domestic and international customers the industry will have to make significant incremental investment Hence, the Indian auto component industry (and by sequel the forging industry) is poised to achieve a position in the top slot in the world and will be in all probability a major driver of growth and employment in the domestic economy. The fortunes of the auto ancillary sector are closely linked to those of the auto sector. Demand swings in any of the segments (cars, two-wheelers, commercial vehicles) have an impact on auto ancillary demand. Demand is derived from original equipment manufacturers (OEM) as well as the replacement market. Replacement demand accounts for close to 57% of total demand, while OEMs account for 27%, with exports accounting for the balance 16%. The Indian auto component industry had an estimated 480 companies operating in this area in FY05, employing more than 250,000 people and the industry exported goods worth estimated at US$ 1.4 bn. Share of exports to output is estimated to have increased from 15% in FY04 to 16% in FY05. One area where domestic units compare favorably with their international peers is it terms of costs. Lower labour costs give Indian auto ancillary companies an absolute cost advantage. India's strength in exports lies in forgings, castings and plastics historically. But this is changing with more component manufactures investing in upgradation of technology in recent years

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Corporate Credit III. TECHNICAL EVALUATION

1. Land & Building - The Party has proposed to setup the designing , engineering and manufacturing unit at Noida II having the area of 11,190 sq Mts The Party has already constructed approx 45000 sq feet Industrial Shed. The building area is sufficient for the installation of the plant and machinery and for smooth working of the unit.

2. Plant and Machinery: It is reported by the party that they are one of the largest integrated plant of its kind for manufacturing Auto and Tractor Component in North India spread over sprawling area of 57,340 sq feet at different locations in Delhi, Faridabad and Noida. There are different types of shops i.e grinding shop, Turning centers, Machine Shops, ensuring high productivity and better quality to keep pace with the ever rising quality standards. The party is also having HEAT TREATMENT SHOP with hardening, annealing, carbonizing, tampering furnaces which make the component to withstand strength in operating conditions of the parts.. The party has submitted the quotations from the suppliers/manufacturers with the term and conditions for supply. The credential of the suppliers is verified for the supply of the machinery as per bank guidelines.

3. Raw Materials: The basic raw material required for the unit is forging of auto parts , stainless steel, welding rods and store items etc. The material is available through local suppliers/ units and most of the raw material is purchased from Delhi & NCR.

4. Manufacturing Process: The auto parts being manufactured under strict quality control by using latest CNC Machines of improved technology, modern process control devices monitored by microprocessors and backed by a competent team of technical personnel to

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Corporate Credit ensure strict quality norms as laid down by the OEM units/ Manufacturer of Tractors and other Vehicles.

5. Production Capacity: The stated projections are accepted by the bank as they both match and are in sync the installed capacity and the market demand. The new plant will become operational in the mid of the financial year 2010-11 and production capacity of the company will increased.

6. Quality Control: The party has proposed to set up in- house R&D facility comprising of pilot plant facility, sophisticated instrumentation laboratory, testing laboratory etc. for Raw Material and finished goods etc. Quality control test are being undertaken for raw material and other products at stages of production. The product shall meet all the specification requirement of their client.

7. Staff and Labor: As the machines are semi automatic and the unit is located at the Nodia, which is the approved industrial area. So, there is no problem of skilled and unskilled labor and it will be easily available as per the requirement of the party as and when required for the proposed unit at Noida.

8. Power: The party has taken the temporary power load connection of 20KW for completion of construction at Noida unit.

9. Other Infrastructure: The unit of the party is situated at Noida, it is a developed industrial area and is connected to other parts of the country by roads and rails routes. All types of facilities like postal, telecommunication, transportation etc. are easily/already available. 49

Corporate Credit IV. LEGAL EVALUATION

Status of various statutory approvals and clearances: For the Noida Unit Company has already obtained the Various approvals such as sanction of building plan, Electricity/Power Load Connection, Water Connection, Pollution Control Clearance. The other units of the Company are already working at different locations in Faridabad and Delhi. The Director of the company has reported that they have obtained the all approvals required for the units for manufacturing of auto parts i.e, registration of the units with the concerned departments i.e. SSI registration, Income tax, Sales Tax, authorization from Pollution control board.

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Corporate Credit V. FINANCIAL EVALUATION Financial Statements of the company are as follows

PROFIT AND LOSS ACCOUNT: ABC PARTS PVT. LTD

(In Rs. Lacs)

31.03.2007 Audited Sales Turnover % rise or fall in sales Cost of sales Operating Profit Other Income Profit Before Tax Provision for taxes Profit After Tax Depreciation Cash Profit 1868.41 126.98 17.40 144.38 40.00 104.38 41.97 146.35 1995.39

31.03.2008 Audited 2047.12 2.59 1954.42 92.70 7.44 100.14 40.00 60.14 52.91 113.05

31.03.2009 Audited 2584.65 26.26 2502.28 82.37 17.84 100.21 69.74 30.47 74.08 104.55

31.03.2010 Provisional 2379.88 -7.92 2270.66 109.22 12.39 121.61 3.67 117.94 84.98 202.92

31.03.2011 Projection 4840.00 103.37 4405.56 434.44 20.00 454.44 113.59 340.85 344.00 684.85

BALANCE SHEET: ABC PARTS PVT. LTD

(In Rs. Lacs)

31.03.2007 Audited Share capital Reserves and Surplus Share App. Money Quasi Capital Def. Tax liability/ Loss Revaluation Reserves Net Worth 100.00 482.55 0.00 17.45 0.00 0.00 600.00

31.03.2008 Audited 100.00 542.69 0.00 32.79 0.00 0.00 675.48

31.03.2009 Audited 100.00 573.16 0.00 45.84 32.81 0.00 751.81

31.03.2010 Provisional 100.00 691.10 75.00 60.88 32.81 0.00 959.79

31.03.2011 Projection 175.00 1064.68 0.00 75.00 0.00 0.00 1314.68

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Secured Loans Unsecured Loans Term Liabilities Working Capital Advances Sundry Creditors Statutory Liabilities Adv from Customers Other current Liabilities Current Liabilities Total Outside Liabilities Total Liabilities 496.55 0.00 496.55 0.00 496.60 0.00 0.00 707.92 1204.52 1701.07 2301.07 685.86 0.00 685.86 461.01 400.67 0.00 0.00 187.91 1049.59 1735.45 2410.93 981.12 0.00 981.12 482.21 694.94 0.00 0.00 105.32 1282.47 2263.59 3015.40 1119.01 0.00 1119.01 442.79 633.65 0.00 0.00 85.00 1161.44 2280.45 3240.24 1819.54 0.00 1819.54 900.00 100.00 0.00 0.00 138.59 1138.59 2958.13 4272.81

Fixed Assets Depreciation Lease Asset Net Block Inventories Sundry Debtors Cash & bank balance Advances to suppliers Loans & advances Advance Tax Other Current Assets Current Assets Investments Security Deposits Margin Money Exp. Not WO Non-current Assets Total Assets

1640.29 792.19 0.00 848.10 426.89 735.23 13.38 0.00 0.00 0.00 277.47 1452.97 0.00 0.00 0.00 0.00 0.00 2301.07

1830.50 845.10 0.00 985.40 602.67 353.35 68.33 64.57 0.00 0.00 330.22 1419.14 6.39 0.00 0.00 0.00 6.39 2410.93

2372.27 919.18 0.00 1453.09 796.42 473.80 3.72 38.14 0.00 0.00 243.75 1555.83 6.48 0.00 0.00 0.00 6.48 3015.40

2590.20 1004.16 0.00 1586.04 932.02 326.43 37.19 44.23 0.00 0.00 307.85 1647.72 6.48 0.00 0.00 0.00 6.48 3240.24

3998.99 1398.16 0.00 2600.83 979.28 403.33 19.30 0.00 0.00 113.59 150.00 1665.50 6.48 0.00 0.00 0.00 6.48 4272.81

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Corporate Credit BUILD UP OF NWC: ABC PARTS PVT. LTD

(In Rs. Lacs)

31.03.2007 Audited Long Term Approach Net Worth Term Loans Total Long Term Sources Net Fixed Assets Other Non Current Asset Total Long Term Uses Surplus / Deficit Short Term Approach Current Liabilities (Sources) Current Assets (Uses) Surplus / Deficit 600.00 496.55 1096.55 848.10 0.00 848.10 248.45

31.03.2008 Audited 675.48 685.86 1361.34 985.40 6.39 991.79 369.55

31.03.2009 Audited 751.81 981.12 1732.93 1453.09 6.48 1459.57 273.36

31.03.2010 Provisional 959.79 1119.01 2078.80 1586.04 6.48 1592.52 486.28

31.03.2011 Projection 1314.68 1819.54 3134.22 2600.83 6.48 2607.31 526.91

1204.52 1452.97 -248.45

1049.59 1419.14 -369.55

1282.47 1555.83 -273.36

1161.44 1647.72 -486.28

1138.59 1665.50 -526.91

FINANCIAL INDICATORS: ABC PARTS PVT. LTD

(In Rs. Lacs)

31.03.2007 Audited Intangible Assets TNW Investments in allied co. Adjusted TNW Current Ratio Debt/Equity NWC TOL/TNW TOL/ Adjusted TNW Operating Profit / Sales (%) PAT / Sales (%) FACR 0.00 600.00 0.00 600.00 1.21 0.83 248.45 2.84 2.84 6.36 5.23 1.71

31.03.2008 Audited 0.00 675.48 0.00 675.48 1.35 1.02 369.55 2.57 2.57 4.53 2.94 1.44

31.03.2009 Audited 0.00 751.81 0.00 751.81 1.21 1.31 273.36 3.01 3.01 3.19 1.18 1.48

31.03.2010 Provisional 0.00 959.79 0.00 959.79 1.42 1.17 486.28 2.38 2.38 4.59 4.96 1.42

31.03.2011 Projection 0.00 1314.68 0.00 1314.68 1.46 1.38 526.91 2.25 2.25 8.98 7.04 1.43

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Corporate Credit Brief discussion on Financial Indicators 1. Paid up capital / TNW a. Authorized capital of the company is Rs.100 Lacs comprising of 1 Lac-equity shares of Rs. 100/- each. Paid up capital are Rs. 100 Lacs comprising of 1 Lacequity shares of Rs 100/- each. It has been projected at the level of Rs 175.00 Lacs during current year. The company already inducted Rs. 75.00 Lacs as Share application money, which will be converted in to Paid up share Capital before disbursement of limits by the bank. The Company will increase the Authorized Capital Limit after the Sanction of the Proposal but before the disbursement of the loan. b. TNW of the company is steadily increasing with full retention of profits. It was Rs. 582.55 Lacs as on 31.03.2007 and increased to Rs. 675.48 Lacs as on 31.03.2008 and further increased to Rs. 751.81 Lacs as on 31.03.2009. It has been estimated / projected at Rs. 959.79 Lacs and Rs.1314.68 Lacs respectively as at 31.03.2010 and 31.03.2011 due to retention of estimated/projected internal accruals and proposed induction of capital in the business. Keeping in view of the past trend of profitability, estimates/projections of TNW can be accepted.

2. Sales: Gross Sales of the company is showing increasing trend. Sales have increased from Rs. 20.47 crores in 2007-08 to Rs. 25.85 crores in 2008-2009. Thus the company has registered a growth of more than 26% over the last year. But sale during the financial year 2009-10 did not register any growth, due to fluctuation in the foreign market export sale of the company decreased from the last financial year. The company has achieved net sales of Rs 22.30 crore during the financial year 2009-10. The company is estimating the sale on the basis of order in hand. In view of the recovery of economy since Oct. 2009, Company is expecting the good growth rate in sale in coming financial years, Another reason of the healthy estimates are good government policies for export out of India and recovery of overall global market from the financial crunch. The new plant of

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Corporate Credit the company will become function in the mid of the financial year 2010-11, which will increase the production capacity of the company. The company has good demand of its product in the market. Increase in the production capacity of the company will increase the turnover of the company. Based on its existing clientele and the demand in the market of the products of the company, the company is estimating its Gross turnover for the financial year 2010-11 at Rs.48.40 Crore. Keeping in view the overall growth in the automobile and auto part manufacturing market, the estimated turnover of the company can be accepted.

3. Other income: The other income of the company includes interest on FDR, Rebate and Discounts received, Foreign Exchange Benefit etc. The other incomes for the year end 31.03.2008 were Rs. 7.44 Lacs and for the year ending 31.03.2009 were Rs. 17.84 Lacs. The other incomes of the company as per the provisional balance sheet for the financial year 2009-10 have Rs. 12.39 Lacs. The company is estimating other income at Rs. 20.00 for the financial year 2010-11.The Company estimated these income by taking care of interest receivable on FDR and current discounts /rebate policies of the suppliers. Keeping in view the past records of the company, Estimates/Projections of Other Incomes can be accepted.

4. Profitability: PAT / Sale of the company for the financial year 2007-08 was 3% and for the financial year 2008-09 was 1% . The PAT of the company for the financial year 2008-09 was decreased because of increase in the depreciation and Interest expenditure of the company. Due to expansion and installation of new equipments during the financial year, depreciation and financial expenses of the company increased disproportionately as compared to the increase in gross sale of the company. These expenses were 10.68% of turnover for the financial year 2008-09 in comparison to 8.59% for the financial year 2007-08. As per the provisional balance sheet for the financial year 2009-10 the company achieved profitability @ 4.96% (PAT/Sale) upto 31.03.2010. The company is estimating the profitability for the financial year 2010-11 at 7.04%. Increase 55

Corporate Credit in the production capacity of the company will reduce the operation cost of the company and the profitability of the company will increase. Keeping in view the industry scenario and past trends of the company projections/estimates of the profitability of the company can be accepted.

5. Investments: The Company has made investments in Fixed Deposits. The value of Fixed Deposits at the end of the financial year 2008-09 is Rs. 6.48 Lacs.

6. Current ratio: Current ratio of the company for the financial year ending 31.03.2007 & 31.03.2008 was 1.21:1 & 1.35:1 .But current ratio for the financial year 2008-09 was 1.22:1 which is little lower than the bench mark of the bank i.e, 1.33:1 which was due to expansion plan of the company and formation of long term assets of the company during the financial year 2008-09 to increase the overall profitability of the company. The company used its internal accrual for purchase of capital assets of the company. In spite of using its short term funds for the purchase of the capital assets the NWC of the company is positive. The expansion in the capital assets has increased the size of the plant and profitability of the company which also improve the short term liquidity of the company. As per the provisional balance sheet for the financial year 2009-10 the current ratio of the company is 1.42, which is above the bench mark of the bank. Keeping in view the past records/trends of the company estimated level current ratio can be accepted.

7. Debt Equity Ratio: Debt Equity Ratio of the company for the financial year 2007-08

was 1.02:1 and for the financial year 2008-09 was 1.31:1. As per provisional Balance sheet of the company the debt equity ratio for the financial year 2009-10 is 1.17. The Company has estimated it debt equity ratio for current financial year at 1.38:1. The debt equity ratio of the company is below the acceptable bench mark of the bank i.e. 3:1 and proves the long term solvency of the company. Hence keeping in view the past trends of the company estimates/ projections of Debt Equity ratio of the company can be accepted. 56

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9.3 PRESENT PROPOSAL

The Borrower, ABC PARTS Pvt. Ltd. approached to the Bank for the Sanction of following facilities:For Sanction of Working Capital Limit of Rs. 900.00 Lacs And, for Sanction of Term Loan of Rs.1600.00 Lacs (by way of takeover of Term Loan of Rs. 612.00 Lacs from SBBJ, Barakhamba Road, New Delhi and sanction of Fresh Term Loan of Rs. 988.00 Lacs for New Plant & Machinery at Noida Unit)

1. JUSTIFICATION FOR WORKING CAPITAL SANCTION MAXIMUM PERMISSIBLE BANK FINANCE: ABC PARTS PVT. LTD
(In Rs. Lacs)

Inventories Sundry Debtors Chargeable Current Assets Other Current Assets Total Current Assets Other Current Liabilities Working Capital Gap (A) Minimum Stipulated Working Capital -25% of TCA (B) Actual / Projected NWC (C) PBF 1 ( A - B ) PBF 2 ( A - C ) MPBF

31.03.2007 Audited 426.89 735.23 1162.12 290.85 1452.97 1204.52 248.45

31.03.2008 Audited 602.67 353.35 956.02 463.12 1419.14 588.58 830.56

31.03.2009 Audited 796.42 473.80 1270.22 285.61 1555.83 800.26 755.57

31.03.2010 Provisional 932.02 326.43 1258.45 389.27 1647.72 718.65 929.07

31.03.2011 Projection 979.28 403.33 1382.61 282.89 1665.50 238.59 1426.91

363.24 248.45 -114.79 0.00 -114.79

354.79 369.55 475.78 461.01 461.01

388.96 273.36 366.61 482.21 366.61

411.93 486.28 517.14 442.79 442.79

416.38 526.91 1010.54 900.00 900.00

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2. JUSTIFICATION FOR TERM LOAN

a. Purpose: Sanction of Fresh Term Loan of Rs. 988.00 Lacs for purchase of New Plant & Machinery at new unit at New Okhla Industrial Area, Noida.

b. Summary of Cost of Project and Means of Finance

Cost of Project Cost of Machinery Electricity and Water Connection Total Means of Finance Term Loan Unsecured Loans Share Capital & internal accruals Total

Amount 1313.79 20.00 1333.79 Amount 988.00 75.00 270.79 1333.79

(In Rs. Lacs)

c. Sources of Promoters Contribution and the time schedule as to when the funds will be brought. Promoters of the company have already contributed Rs. 75.00 Lacs by way of share application money and Rs. 60.88 Lacs as unsecured loan up to 31.03.2010 as unsecured loans. Promoters will introduce remaining amount of unsecured loans Rs.14.12 Lacs during the current financial year. The balance amount of promoters contribution & internal accrual will be arranged by 100% retention of profits for the financial year 2009-10 and 2010-11.

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Corporate Credit d. Projections for the profitability of the project

PROJECTIONS - ABC PARTS PVT. LTD. 201011 Net sales Profit after Tax Depriciation Cash Profit 201112 201213 201314 201415 201516 201617 201718 201819

4251.33 4677.46 5145.21 5648.73 256.83 224.81 481.64 316.38 266.09 582.47 350.91 226.17 577.08 385.66 207.25 592.91

6202.6 6811.86 7482.05 7850.65 8237.69 414.55 176.16 590.71 489.72 164.74 654.46 551.54 140.03 691.57 570.83 149.02 719.85 606.02 126.67 732.69

(In Rs. Lacs)

Imp: Detailed projected financial statements are not shown in the report due to confidentiality of the data

e. Present physical & financial status of project, if any Basement of the factory building is already constructed. Present Financial Status of the project is PARTICULARS Cost of Construction Cost of Electricity and Water Connection Total Cost Incurred NIL 1.65 1.65 Cost to be Incurred 1313.79 18.35 1332.14 Total Cost 1313.79 20.00 1333.79
(In Rs lacs)

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Corporate Credit f. Implementation Schedule Activity Land Acquisition Building and Civil Construction Delivery of Equipment at site Installation of Equipments Commissioning of plant Start Date Already Already March ,2010 June, 2010 August,2010 Done June 2010 ( Shed Measuring 45000 Sq Ft is already Constructed) June,10 July,10 Sept,10 Completion Date

g. Proposed Repayment Schedule Scheduled date of Completion of Project Commercial Operations Date (COD Implementation period (in months) Moratorium (in months) Repayment period in months/quarters/ Half year No. of installment Starting Date End Date (Last installment) Door to door tenor Sept 2010 Oct 2010 6 Months 12 Months 84 Months 84 Oct 2011 Sept 2018 102 months

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Corporate Credit

9.4 SECURITY
1. Primary i) For working capital limits: Hypothecation of Companys present and future raw material, Stock in process, finished goods, stores and spares and other current assets and Book Debts ii) For Term Loan: First charges on plant and machinery purchased from fresh term loan of Rs. 988.00 Lacs. Security Cover Available Description of Security Land Situated at, Nodia, U.P. Building and Sheds Plant & Machinery* Other Fixed Assets** Total Book Value 365.68 519.55 1671.87 56.21 2613.31 Market Value 1100.00 519.55 1671.87 56.21 3347.63
(In Rs lacs)

iii) Personal /Corporate Guarantee: Name of Guarantor Mr. M K Bhunsali Mr. Munish Kumar Bhunsali Mrs. Kumad Bhunsali Position Chairman MD Director Net Worth As on 31.03.10 394.95 389.45 124.56 Immovable property As on 31.03.10 261.00 261.00 40.50
(In Rs lacs)

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Corporate Credit

9.5 CREDIT RISK RATING ABC PARTS PVT LTD.

The account was rated under the Large Corporate Model. The following rating have been obtained by both: branch office and zone office 1. FINANCIAL EVALUATION i. Past Financials CO Value 2.38 1.42 1.56 12.29 0.53 Benchmark Values 0 >5.00 <1.00 <1.00 <8% >6.00 1 5.00-4.00 1.00-1.25 1.00-1.25 8-12% 6.00-5.00 2 4.00-2.50 1.25-1.50 1.25-1.75 12-15% 5.00-4.00 3 2.50-1.00 1.50-2.00 1.75-2.50 15-25% 4.00-3.00 4 <1.00 >2.00 >2.50 >25% <3.00 3.08 2.68 2.62 2.10 4.00 Rate

Category

Parameter TOL/TNW Current Ratio DSCR ROCE (Inv + Rec) / Net sales

Past Financials Absolute Comparison

ii. Category

Future risk and subjective assessment Parameter Comments There is no other contingent liability It will lead to more sales. The financial statements are prepared in accordance with generally accepted accounting principles The expected variance in the value may be less than 5% Rate 4.00 3.00 2.00

Impact of contingent Future risk liability Impact of Expansion Subjective Transparency in Assessment accounting of Financials Quality of inventory

3.00

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Corporate Credit Reliability of Debtors There is no disclosure of debtors 2.00

2.

BUSINESS EVALUATION A. Market position evaluation Parameter Comments Rate 3.00 The firm has achieved a sales growth of around 48% during the years 2007 08. It is expected that company will be in a position to achieve a sales growth of around 10 25% in the current year 3.00

Competitive position Expected sales growth

Input related risk Availability of raw material Raw material is easily available from nearby and other critical inputs states Proximity to skilled Labor The firm is located in industrial in NOIDA inputs are available easily

3.00 3.00

3.00

Production related risk State of technology used The firm has adopted proven technology better than its peers

4.00 4.00

Product related risk Product range Firm is mainly engaged in the processing of OEM Quality of product is reported to be better than the peers

3.00 3.00

Product quality

3.00

Marketing

3.00

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Corporate Credit Distribution network Firm has a well developed distribution network 3.00 3.00

Geographical diversity of the Firm is selling its product directly to the vehicle market manufacturers

B. Industry risk evaluation Industry risk evaluation for auto ancillary industry 75%

3.

MANAGEMENT EVALUATION A. Objective

Parameter Actual gross sales Targeted sales Actual PBT Targeted PBT

Co Value 2379.88 2208.91 144.38 137.57

Rate

<75%

75% - 79%

80% - 89%

90% - 95%

>95%

4.00

<75%

75% - 79%

80% - 89%

90% - 95%

>95%

4.00

(in Rs lacs)

B. Subjective S. No. 1 2 Parameter Management set up Commitment and sincerity Comments The firm is in operation since 1960 The management is reported to be reliable Rate 3.00 3.00

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Corporate Credit and sincere 3 4 Track record in debt payment Financial strength/ flexibility The account is running satisfactorily with us Management is capable of arranging funds but with a time lag 2.00 2.00

4.

CONDUCT OF ACCOUNT EVALUATION Parameter Comments No irregularity is observed with our bank in last 2 yrs Operations in account are healthy Timely submission of data Rate 3.00 3.00 3.00

Status of account Operations in account Submission of financial data

TOTAL SCORE Factor Financial Evaluation Business Evaluation Management Evaluation Conduct of Account AGGREGATE SCORE
(The Aggregate Score of 71.25 refers to CANARA BANK- AA-)

% score obtained 75.00 Industry 60.00

Weight 40.00% 25.00%

Weighted Score 30.00 15.00

&

75.00 75.00

20.00% 15.00%

15.00 11.25 71.25

THIS MEANS THE RATING OF THE BORROWER IS CANARA BANK AA-

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Corporate Credit DETERMINATION OF ROI From the internal circular of the bank on ROI the corresponding ROI for auto ancillary firm having a credit risk rating of AA- are: BPLR + 1.50% for Working Capital limit, and BPLR + 1.50% + 0.50% for Term loan
Imp: The rating as shown in the above section is not a replication of the original model in any form, And the values and calculation of scores is for the purpose of understanding the process

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Corporate Credit

9.6 RECOMMENDATIONS:
On examining the request of the Company, the following were observed: The Management of the company is well experienced. The Company has been in operation for past 40 years and has been earning profits continuously. The company has good track record in dealing with Banks. The overall financial position of the company is satisfactory.

Keeping in view the increasing profitability and financial position of the company, the following are recommended

For Sanction Term Loan of Rs. 1600.00 Lacs ( including Takeover of Term Loan of Rs. 612 Lacs from State Bank of Bikaner and Jaipur) for purchase of new plant and machinery . For Sanction Working Capital limit of Rs. 900.00 Lacs

ii

The facilities desired by the borrowers are subject to the given ROI and Terms and Conditions. Nature Fund Based Term Loan TOTAL COMMITMENT Applicable ROI BPLR + 1.50% BPLR + 1.50% + 0.50% Limits Sanctioned 900.00 1600.00 2500.00
(In Rs lacs)

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Corporate Credit

Chapter

10

CONCLUSION

The study at Canara Bank gave a vast learning experience to me and has helped to enhance my knowledge. During the study I learnt how the theoretical financial analysis aspects are used in practice during the working capital finance assessment. I have realized during my project that a credit analyst must own multi-disciplinary talents like financial, technical as well as legal knowhow. The credit appraisal for working capital finance system has been devised in a systematic way. There are clear guidelines on how the credit analyst or lending officer has to analyze a loan proposal. It includes phase-wise analysis which consists of 5 phases: 1. 2. 3. 4. 5. Financial statement analysis Working capital and its assessment techniques Credit risk assessment Documentation Loan administration

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Corporate Credit

BIBLOGRAPHY

1. Books: i) PAUL R. KRUGMAN and MAURICE OBSTFELD, 2003. International Economics Theory and Policy, SIXTH EDITION. New York. Pearson Education International. ii) GHASSEM A. HOMAIFAR, 2004. Managing Global Financial and Foreign Exchange Rate Risk. New Jersey. Wiley Publication. iii) Manuals and journals of Canara Bank

2. From Websites: i) Reserve Bank of India, Link: http://www.rbi.org.in ii) Ministry of Finance, Government of India, Link: http://www.finmin.nic.in iii) Director General of Foreign Trade, Government of India, Link: http://dgft.gov.in iv) Pages from Yahoo, Link: http://yahoo.finance.com v) Indian Chamber of Commerce, Link: www.iccwbo.org vi) Canara Bank Link: http://www.canarabank.com

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