CREDIT APPRAISAL OF WORKING CAPITAL LOANS FOR CORPORATE CLIENTS

Abstract
The project was undertaken at Canara Bank. It is divided into 2 parts. Part I is theory based while Part II is application of such theories in real cases.

Part I India in the post liberalization period opened itself to the world and the phenomenal growth of the commercial banks gave tremendous boost to the economy. Along with large corporate houses more and more small and medium scale industries also grew with the financial assistance of the banks. Thus credit appraisal and sanction became a major function for the commercial banks. Industrial loans are given by the banks to facilitate entrepreneurship and are an asset in the books of the bank.

Following the withdrawal of mandatory instructions relating to assessment and supervision of working capital limits to the borrowers by the RBI, greater responsibility is cast on Banks in the matter. The Banks in their own interest have to self discipline themselves and at the same time maintain and monitor the financial discipline of their borrower clients. Greater supervision and surveillance on the credit portfolio is the need of the hour. Banks have to imbibe professionalism in the approach to lending by improving their assessment techniques, inventing and adopting new monitoring tools.

Different types of loans are offered by banks to enterprises i.e. either term loan or working capital loan. Just so the banker knows that the client will be able to furnish the loan amount along with interest charges, he ensues the process of credit appraisal. The authorities have to scrutinize the minutest of details about the company and the particular proposal with great accuracy. Each type of credit has different criteria that form the basis of the analysis. A deeprooted study of the financial position, the management and the technical feasibility is required before the loan is sanctioned. The assessment of the creditworthiness of the enterprise is also

essential in order to judge its ability to repay the loan and the interest amount. This project brings out how appraisal is done for term loans and working capital loans but with special interest given to later with respect to provisions followed at Canara Bank. It also speaks of the process of internal credit rating to judge the credibility of its client and how the bank prices its credit based on such ratings.

Working Capital can be financed in two ways by a bank. One is Fund based and the other is nonfund based. In this project, I have discussed the various methods of financing within the two broad categories. The project will also give an insight into the various mechanisms involved in export financing, the risks involved for a bank and how such risks can be mitigated from the view point of a banker.

The quantum of working capital varies from time to time and from activity to activity. Any unit would require working capital assistance from the raw materials are procured till the time the finished goods are sold and cash is realized. Due to so many activities taking place on continues basis, there is a need to assess the working capital from time to time. An attempt is made to understand the various methods of assessment of working capital.

Lastly, branches that handle such large accounts very rarely fund a project solely. This is because of exposure norms put forth by RBI. Other forms of banking arrangements are discussed in this report.

Part II This part deals with 2 cases that I dealt with during my time. In Case 1 (HS Ltd.), I have shown how internal credit rating was done for the company. In Case 2 (M/S TI Pvt. Ltd.), I have shown assessment of working capital requirement and details of consortium arrangement and security provided by the company.

Nikhil Sarawgi IBS, Bangalore