ANALYSIS OF CREDIT ADMINISTRATION PROCESS AND APPRAISAL OF TERM LOAN AND WORKING CAPITAL FINANCING PROPOSALS

By Keshika Wadhwa Enrollment No. 11BSP1431

PUNJAB NATIONAL BANK, Head Office

1

A REPORT ON ANALYSIS OF CREDIT ADMINISTRATION PROCESS AND APPRAISAL OF TERM LOAN AND WORKING CAPITAL FINANCING PROPOSALS

By

Keshika Wadhwa

Enrollment No. 11BSP1431

PUNJAB NATIONAL BANK, Head Office A report submitted in partial fulfillment of the requirements of PGPM program of IBS Gurgaon

Submitted to: 1. Prof. Monica Chopra 2. Mr. Anil sharma, Asst. General Manager, PNB, Head Office.

Date of submission: 11th June 2012

2

CERTIFICATE OF APPROVAL

The following Summer Project Report titled "Analysis of Credit Administration Process and Appraisal of Term Loan and Working Capital Financing Proposals " is hereby approved as a certified study in management carried out and presented in a manner satisfactory to warrant its acceptance as a prerequisite for the award of Post-Graduate Diploma in Management for which it has been submitted. It is understood that by this approval the undersigned do not necessarily endorse or approve any statement made, opinion expressed or conclusion drawn therein but approve the Summer Project Report only for the purpose it is submitted. Summer Project Report Examination Committee for evaluation of Summer Project Report Name Signature

1. Faculty Examiner ___________________ ___________________ 2. PG Summer Project Co-coordinator ________________ ___________________

ACKNOWLEDGEMENT
I wish to express my gratitude to PUNJAB NATIONAL BANK for giving me an opportunity to be a part of their esteemed organization and enhance my knowledge by granting permission to do summer training project under their guidance. I am deeply indebted to my company guide, Mr. Anil Sharma (AGM), of Punjab national bank for their valuable and enlightened guidance. They provided me with the opportunity to learn in the bank and spare their valuable time to help me. He provided me with immense opportunity to learn about the working at Credit Administration Department (CAD), HO. A special thanks to my faculty guide, Prof. Monika Chopra who has been the chief facilitator of this project and helped me enhance my knowledge in the field of banking sector. I am also thankful to the employees of PNB for providing great support and help in completion of the training. I am also highly thankful to Library staff of PNB who provided me the study materials and helped me during training. The learning during the project was immense and valuable. My work included the study of various aspects of Credit Administration.

Regards, Keshika Wadhwa IBS-Gurgaon

ExecutiveSummary
Bank is the main confluence that maintains and controls the flow of money to make the commerce of lending possible. Government uses it to control the flow of money by managing the CRR and thereby influencing the inflation level. The functions of the banks include accepting deposits from the public and other institutions and then to direct the deposits as loans and advances to parties for growth and development.

Today, corporate bodies require capital for two main purposes: To finance their new projects To meet their working capital requirements However, bank uses their deposits to provide credit facilities to various companies. It should be noted that there is always a limit on the amount of exposure, depending on the policies of the banks. This project explains various credit facilities and policies followed by one of the most reputed bank in the country, Punjab National Bank. Each bank has its own set of policies that must be followed while sanctioning a loan and care must be taken that the money provided by the bank is being used up for the intended purpose only. The task ranging from acceptance of loan proposal to sanctioning of loan is carried out at Credit Administration Division of the bank. Moreover, each loan proposals fall under powers of different levels depending on the size of the proposal.

Working here at PNB, I have learnt a lot of new things and have come across the practical implementations of various financial topics read during the course.

The study is undertaken to understand the process of Term Loans sanctioning and project appraisal carried out at PNB. With a developing economy and many multinational companies coming up, new projects are being undertaken. These projects require huge amount of capital and thus banks come forward to finance these projects depending on the feasibility of the project. PNB carries out an extensive of the project and checks for it feasibility and if the project seems to be feasible, a decision is taken. This process of carrying out the feasibility test of the project based on the financial position of the company is called Project Appraisal.

The project also covers the most important aspect of a company, Working Capital. Gross Working capital refers to the fund required for financing total current assets of a business unit. Net Working Capital, on the other hand, is the difference between the total current assets and current liabilities. This working capital is desired by the company for day to day operations and thus the company

approaches a bank for the financing of this requirement. PNB caters to most of the well known companies of India and is the leading lender in the country.

Along with this, the project includes an Overview of the PMS Section at HO. Preventive Monitoring System (PMS) is a post sanction credit-monitoring tool consisting of a number of signals/parameters for evaluating the health of a borrower account on a continuous basis. It assigns numerical score to each signal and denotes the health of an account based on indicators of past one year in a single numerical value called PMS Index Score.

Further, the project also covers the Credit Risk Rating carried out at Risk Management Department (RMD) of the bank. Rating is done in order to find out the capability or the willingness of the company to pay its debt. PNB uses its own model to rate a company and this model is one of its kind in the country. Depending on the type of project, a suitable model is chosen and based on financials of the company and the track record of the management, rating is done. This rating also helps in determining the rate of interest at which the loan should be given. Generally, a company with good ratings is gives loan at a lower ROI since the risk involved is lower.

Working at PNB has proved to be fruitful for me and I wish learn a lot more things in the next phase of training.

List of Tables
Table No. 1
2. 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23

Description
PNB Annual Results 2012 PNB Rating Chart PNB Risk Rating Models Sector Exposure Norms Gist Of the Proposal For Term Loan Company's Profile Facilities Recommended For Loan Exposure to the group and company Financial Statement Analysis Of The Company Key Financials Of The Company Primary Security For The Loan Security Description Collateral For The Loan Position Of The Account Cost Of The Project Means Of Finance Important Ratios Sensitivity Analysis Of Ratios Future Projections And Calculations CMA Sheet Form 2: Operating Statement CMA Sheet Form 3: Analysis Of Balance Sheet CMA Sheet Form 4: Current Assets And Liabilities CMA Sheet Form 5: MPBF

Contents
CERTIFICATEOFAPPROVAL....................................................................................................................3 ACKNOWLEDGEMENT.............................................................................................................................4 ExecutiveSummary.................................................................................................................................5 Listofabbreviations..............................................................................................................................11 1. 2. 3. 4. AboutPunjabNationalBank.........................................................................................................12 CreditDivision(CD).......................................................................................................................15 RiskManagementDepartment(RMD).........................................................................................16 AboutProject................................................................................................................................17 4.1. 4.2. 4.3. 5. ObjectivesoftheProject ......................................................................................................17 . ScopeoftheStudy................................................................................................................17 Methodology.........................................................................................................................18

CreditFacilities..............................................................................................................................18 5.1. 5.2. FundBasedFacilities.............................................................................................................19 NonfundBasedCredit..........................................................................................................20

6.

TermLoansandWorkingCapitalLoans........................................................................................21 6.1. 6.2. TermLoans............................................................................................................................21 WorkingCapitalLoans..........................................................................................................21

7.

TermLoanAppraisal.....................................................................................................................22 7.1. FinancialEvaluation..............................................................................................................23 ReclassificationandRearrangementofBalanceSheetitems.......................................23 CostofProject&MeansofFinancing...........................................................................25 ProjectionsofSales,Profits,CashFlowsandBalanceSheet........................................26 CalculatingkeyFinancialRatios....................................................................................26 SensitivityAnalysis........................................................................................................27

7.1.1. 7.1.2. 7.1.3. 7.1.4. 7.1.5. 7.2.

TechnoEconomicViability(TEV)..........................................................................................28 TechnicalAppraisal.......................................................................................................28 EconomicViability.........................................................................................................28 FinancialViability..........................................................................................................29

7.2.1. 7.2.2. 7.2.3. 7.3. 7.4. 8.

RiskAnalysis..........................................................................................................................29 ManagementEvaluation.......................................................................................................30

WorkingCapitalFinancingAppraisal............................................................................................32 8.1. 8.2. MethodsOfLending..............................................................................................................32 WorkingCapitalFinancingGuidelines..................................................................................33

8.2.1. 8.2.2. 8.2.3. 8.3. 8.4. 9. 10. 11.

TandonCommitteeRecommendations........................................................................33 ChoreCommitteeRecommendations..........................................................................34 NayakCommitteeRecommendations..........................................................................34

Datarequiredforassessmentofworkingcapitalrequirement............................................34 OtherDetails.........................................................................................................................35

Security.........................................................................................................................................35 Pricing .......................................................................................................................................35 . PostSanctionProcesses...........................................................................................................36 Ensuringenduseoffunds................................................................................................36 PreventiveMonitoringSystem(PMS)...............................................................................36 StockAudit........................................................................................................................37 MonitoringofWeakandIrregularAccounts....................................................................37

11.1. 11.2. 11.3. 11.4. 12.

CASEI:TermLoanFinancing(ABCLimited)............................................................................37 Introduction......................................................................................................................37 Theloanproposal.............................................................................................................37 ManagementEvaluation...................................................................................................39 Presentproposal...............................................................................................................39

12.1. 12.2. 12.3. 12.4.

Existing..................................................................................................................................................40 12.5. 12.7. CompliancetoExposureNorms........................................................................................40 FinancialEvaluation..........................................................................................................40

KeyFinancialsuptolastquarter............................................................................................................43 12.8. SECURITY...........................................................................................................................43

12.8.1. Primary..........................................................................................................................43 12.8.2. Collateral:......................................................................................................................44 12.9. Position of Account as on 22.03.2012 (Rs. In crs) .........................................................44 .

Limit......................................................................................................................................................44 Lastyear201011..................................................................................................................................44 12.10. 12.11. 12.12. 12.13. 12.14. 1. COSTOFTHEPROJECT......................................................................................................45 Strengths&Weakness......................................................................................................46 RatioAnalysis....................................................................................................................47 SensitivityAnalysis:...........................................................................................................48 FUTUREPROJECTIONSANDCALCULATION......................................................................49

CASEII:WorkingCapitalFinancing(ABCTradersLtd.).................................................................50 1.1. . CMADataAnalysisforWorkingCapitalFinancing ...............................................................61

1.2.

WorkingCapitalLoanProposal.............................................................................................69

Existing..................................................................................................................................................71 9. 2. PositionofAccountason13042011..........................................................................................74 ConclusionandRecommendations..............................................................................................76 2.1. 2.2. 3. Conclusions...........................................................................................................................76 Recommendations................................................................................................................79

References....................................................................................................................................81

10

Abbreviations
AGM Assistant General Manager BG Bank Guarantee CC Cash Credit CMD Chairman and Managing Director CO Circle Office CRMD Circle Risk Management Department CCA Core Current Assets CAD Credit Administration Department CD Credit Division CARD Credit Audit Review Division CASA Current Account/Savings Account CRMC Credit Risk Management Committee DSCR Debt Service Coverage Ratio DER Debt-Equity Ratio DTL Defered Tax Liability DPG Deferred Payment Gurantee DTA Deferred Tax Liability BD Discount of Bills ED Executive Director FACR Fixed Asset Coverage Ratio FB Fund Based GM General Manager HO Head Office IRMD Integrated Risk Management Division LCB Large Corporate Branch LC Letter of Credit LOC Letter of Credit MC Management Committee MPBF Maximum permissible Bank Finance MCB Mid Corporate Branch NWC Net Working Capital NFB Non Fund Based PMS Preventive Monitoring System PF Provident Fund PNB Punjab National Bank RBI Reserve Bank of India RMC Risk Management Committee RMD Risk Management Division TEV Techno-Economic Valuation TL Term Loan WC Working Capital ZO Zonal Office

11

1. AboutPunjabNationalBank
Punjab National Bank (PNB) was established in 1894 and is the second largest government owned and over all fourth largest bank in India. It has about 5100 branches across 764 cities and serves over 63 million customers. It has presence throughout the length and breadth of the country and offers a wide variety of banking services that include corporate and personal banking, industrial finance, agricultural finance, financing of trade and international banking. Among the clients of the bank are multinational companies, Indian conglomerates, medium and small industrial units, exporters and non-resident Indians. The large presence and vast resource base have helped the bank to build strong links with trade and industry. The strength of the bank lies in its corporate belief of growth and stability.

Vision of Punjab National Bank To evolve and position the bank as a world class progressive, cost effective and customer friendly institution providing comprehensive financial and related services, integrating frontiers of technology and serving various segments of society especially the weaker sections, committed to excellence in serving the public and also excelling in corporate values.

Mission of Punjab National Bank To provide excellent professional services and improve its position as a leader in the field of financial and related services, build and maintain a team of motivated and committed workforce with high work ethos, use latest technology aimed at customer satisfaction and act as effective catalyst for socio-economic development.

Financial Performance (2011-2012)

PNB continued its strong performance for the year 2011-12.Total business of the bank crossed Rs.6.73 lakh crore. Net Profit increased by 10.2 % in the Year 2012. Total income during FY 2012 increased to Rs. 40631 crore, recording a growth of 32.8% on account of 35.0% growth in Interest Income. Market share of the Bank in both deposits and Advances improved from 5.28% and 5.43% respectively in March11 to 5.60% (Deposits) and 5.55% (Advances) in March 2012. PNB continues to be among leading banks amongst nationalized banks
in net profit, operating margins, total business, deposits, advances, CASA deposits and customer base. Summary of the financials for this year is as below:

PARAMETERS Operating Profit

Mar11 (in Crore Rs.) 18130.28

Mar12(in Crore Rs.) 25848.03

12

Net Profit Deposit Total Business

Source: Annual Results 2012

4433 312899 555005

4884 379588 673000

Table1: Financial Summary of PNB for Year 2011-12

Global Footprint Backed by strong domestic performance, the Bank is planning to realize its global aspirations. Bank continues its selective foray in international markets with presence in 9 countries, with 2 branches at Hongkong, 1 each at Kabul and Dubai; representative offices at Almaty, Dubai, Shanghai and Oslo; a wholly owned subsidiary in UK; a joint venture with Everest Bank Ltd. Nepal and a JV banking subsidiary DRUK PNB Bank Ltd. in Bhutan. Bank is pursuing upgradation of its representative offices in China & Norway and is in the process of setting up a representative office in Sydney, Australia and taking controlling stake in JSC Dana Bank in Kazakhastan.

Punjab National Bank also maintains strong correspondent banking relationship with 200 leading international banks all over the world. It enhances its capacities to handle transaction world-wide. Besides, bank has Rupee Drawing arrangement, with exchange companies in the Gulf. Bank is a member of the SWIFT and 85 branches of the bank are connected through its computer-based terminal at Bombay. With its state-of-art dealing rooms and well-trained dealers, the bank offers efficient FOREX dealing operations in India. The bank has been focusing on expanding its operations outside India and has identified some of the emerging economies which offer large economies which offer large business potential. Bank has set up a representative office at Almaty, Kazakhstan w.e.f. 23rd October 1998.

New Initiatives
Initiatives are being taken to install Cash Deposit Machines in the branches which can provide a self service terminal where customers can deposit cash which will be directly credited to their account on real time basis.

Also, Self Service Pass Book Printer terminals are being installed in the branches and e-lobbies, which would help the customers to get the passbook updated at their convenience. Thus, improving day to day operational efficiency of the bank.

13

Organizational Structure

Fig1: Organization Structure at PNB

Product and Services Saving Accounts: Total Freedom Salary Account, PNB Prudent Sweep, PNB Vidyarthi SF Account Current Accounts: PNB Vaibhav, PNB Gaurav, PNB Smart Roamer Fixed Deposit Schemes: Spectrum Fixed Deposit Scheme, Anupam Account, Mahabachat Schemes, Multi Benefit Deposit Scheme Credit Schemes- Housing Laons, Car finanace, Personal Loan, Credit Cards Social Banking: Mahila Udyam Nidhi Scheme, Krishi Card, PNB Farmers Welfare Trust Corporate Banking: Term Loan and Working Capital Financing, fund Based and Non-fund based financing, Gold card scheme for exporters, EXIM Finance Business Sectors: PNB Karigar Credit Card, PNB Kushal Udhai, PNB PRagati Udhami, , NB Vikas Udhami, Cash Management Services Other Services and Businesses: Locker Facilites, Senior Citizens Scheme, PPF Schemes and Internet Banking , Mutual Fund Business, Gold Coin Business, Depository Services, Online Trading Facility, Insurance Business, Merchant Banking etc.

14

2. CreditDivision(CD)
Commercial lending organization structure in PNB consists of Branches, Mid Corporate Branches (MCBs), Large Corporate Branches (LCBs) and Head Office (CD). Credit Division (CD) looks after the loan proposals which fall into the purview of GMs-HO/ED/CMD/MC/Board. Medium corporate branches are headed by AGMs and LCB as DGM. Authority to handle loan proposals is distributed as detailed below: 1) Loan proposals less than 35 Cr are dealt by MCBs and LCBs at their level and all other proposals are referred to Circle Office which are finally handled at Head Office. 2) MCBs handle proposals between Rs.5 crore and Rs.25 crore at places where LCBs are also located and loan proposals of Rs.5 crore and above at places where LCBs are not located. LCBs will handle loan proposals above Rs. 25 crore. 3) CD at Head Office prepares finals proposals which are then placed before ED, CMD or MC as per the quantum of proposals. 4) ED has authority to approve loan proposals less than 75 Cr. CMD approves proposals between 75 Cr and 100 Cr. Any proposal greater than need the approval of Management Committee.

The bank has introduced Grid/Committee system in credit sanction process wherein every loan proposal falling within the vested powers of DGM and above is discussed in a credit committee which on the merit of the case recommends the proposal to the sanctioning authority. Such committee have been formed both at HO and ZO level, The credit committee at HO includes GM Credit and CGM/GM-RMD. For credit proposals falling within the vested power of CGM/GM, the credit committee at HO includes DGM/AGM/Chief Manager-CD and DGM/AGM/Chief Manager RMD. The credit administration division is to be assisted by Risk Management Division (RMD) and Industry desk for risk vetting and techno-economic feasibility of credit proposal.

15

3. RiskManagementDepartment(RMD)
Credit risk is the possibility of loss associated with changes in the credit quality of the borrowers or counter parties. In a banks portfolio, losses stem from outright default due to inability or unwillingness of a borrower or counter party to honor commitments in relation to lending, settlement and other financial transactions. PNB has an elaborate risk management structure in place. Credit Risk management structure at PNB involves Integrated Risk Management Division (IRMD) RMD frames policies related to credit risk and develops systems and models for identifying, measuring and managing credit risks. It also monitors and manages industry risks. Circle Risk Management Departments (CRMDs) Risk Management Departments at circle level are known as CRMD. Their responsibilities include monitoring and initiating steps to improve the quality of the credit portfolio of the Circle, tracking down the health of the borrowal accounts through regular risk rating, besides assisting the respective Credit Committee in addressing the issues on risk. Risk Management Committee (RMC) It is a sub-committee of Board with responsibility of formulating policies/procedures and managing all the risks. Credit Risk Management Committee (CRMC) It is a top level functional committee headed by CMD and comprises of EDs, CGMs/GMs of Risk Management, Credit, Treasury etc. as per the directives of RBI. Credit Audit Review Division (CARD ) It independently conducts Loan Reviews/Audits. The risk management philosophy & policy of the bank focuses reducing exposure to high risk areas, emphasizing more on the promising industries, optimizing the return by striking a balance between the risk and the return on assets and striving towards improving market share to maximize shareholders value. The credit risk rating tool has been developed with a view to provide a standard system for assigning a credit risk rating to the borrowers of the bank according to their risk profile. This rating tool is applicable to all large corporate borrower accounts availing total limits (fund based and non-fund based) of more than Rs. 12 crore or having total sales/ income of more than Rs. 100 crore. The Bank has robust credit risk framework and has already placed credit risk rating models on central server based system PNB TRAC, which provides a scientific method for assessing credit risk rating of a client. Taking a step further during the year, the Bank has developed and placed on central server score based rating models in respect of retail banking. These processes have helped the Bank to

16

achieve fast & accurate delivery of credit; bring uniformity in the system and facilitate storage of data & analysis thereof. The analysis also involves analyzing the projections for the future years.

4. AboutProject
4.1. ObjectivesoftheProject
1. To gain insights into the Credit Administration processes of the banks. 2. To understand the different types of credit facilities and credit delivery mechanisms provided to industrial costumers viz. Overdraft, Cash Credit, Drawing Rights, Fund Based Credit, Non Fund Based Credit etc. 3. To understand the methods available for risk vetting of lending proposals, risk assessment models and the credit rating procedures used in Punjab National Bank. 4. To understand the appraisal process of Term Loan and Working Capital Financing proposals 5. To understand the factors affecting rate of interest levied viz. risk assessment, bank guidelines, sectoral policies, business considerations etc. 6. To understand various norms like credit exposure limits etc., that influence credit disbursal for various sectors, companies and business groups.

4.2.

ScopeoftheStudy

This report covers: 1) Credit Administration at PNB 2) Various types of Bank Finance Term Loans Financing 3) Corporate Loan Financing 4) Working Capital Financing 5) Appraisal Process of Term Loans and Working Capital 6) Post Sanction Processes 7) Case Study describing actual appraisal of a Term Loan proposal, Corporate loan and a Working Capital Financing Proposal

17

4.3.

Methodology

In order to learn and observe the practical applicability and feasibility of various theories and concepts, the following sources are being used: Primary Sources of Information 1. Discussions with the project guide and staff members. 2. Discussions with various other department head.

Secondary Sources of Information 1. RBI guidelines regulating the activities of the banks 2. Banks Credit policy and related circulars and guidelines issued by the bank. 3. Research papers, power point presentations and PDF files prepared by the bank and its related officials. 4. Study of proposals and manuals 5. Website of Punjab national bank and other net sources

5. CreditFacilities
Punjab National Bank provides different types of credit facilities according to the banking norms and convenience of the clients. Different type of facilities provided can be classified as below:

18

5.1.

FundBasedFacilities

Fund based facilities are those in that require immediate outlay of funds towards the borrowing party. Punjab National Bank provides following fund based facilties: 1. Overdrafts Overdraft accounts are treated as current accounts. Normally overdrafts are allowed against the Banks own deposits, government securities approved shares and/or debentures of companies, life insurance policies, government supply bills, cash incentive and duty drawbacks, personal security etc. Overdraft accounts should be kept in the ordinary current account head at branches.

2. Demand Loans A demand loan account is an advance for a fixed amount and no debits to the account are made subsequent to the initial advance except for interest, insurance premium and other sundry charges. As an amount credited to a demand loan account has the effect of permanently reducing the original advance, any further drawings permitted in the account will not be secured by the demand promissory note taken to cover the original loan. A fresh loan account must, therefore be opened for every new advance granted and a new demand promissory note taken as security. Demand loan would be a loan , which is payable on demand in one shot i.e. bullet repayment. Normally, demand loans are allowed against the Banks own deposits, government securities,

19

approved shares and/or debentures of companies, life insurance policies, pledge of gold/silver ornaments, mortagage of immovable property.

3. Cash credit Advances Cash credit account is a drawing account against the credit granted by the bank and is operated in exactly the same way as a current account on which an overdraft has been sanctioned. The various types of securities against which cash credits are allowed are pledge/hypothecation of goods or produce, pledge of documents of title to goods, mortgage of immovable property, book debts. Trust securities etc. In cash credit accounts the borrower is allowed to draw on account within the prescribed limit as and when required.

4. Bill Finance Bill finance are the advances against the inland bills are sanctioned in the form of limits for purchase of bills (ODD) or discount of bills (BD) or bills sent for collection. Bills are wither payable on demand or after usage period.

5.2.

NonfundBasedCredit

While fund based credit facilities require immediate outlay of funds from the bank, non-fund based facilities basically include the promises made by banks in favor of third party to provide monetary compensation on behalf of their clients if certain situations emerge or certain conditions are fulfilled. The non-fund based business is one of the main sources of bank income. Income is in the form of fees and commissions as compared to interest income in case of fund based lending. Non-fund based credit plays an important role in trade and commerce. The borrowing clients of banks prefer to avail of the non fund based facilities mainly because: a) The facility does not require immediate outlay of funds and therefore the cost of such funds tend to be lower than the cost of fund based credit facilities. b) A bank guarantee (BG) or letter of credit (LOC) issued by a bank on behalf of its client is an off-balance sheet item in the books of clients, hence do not show up as debt or liability. For the lending banks, cost of providing non-fund based facilities is significantly lower than the cost of providing fund-based facilities. Nevertheless, inherent risk associated with NFB credit facility are same as that attached with FB credit proposals. In case of default, provision of funds becomes necessary. Also, NFB exposure is facilities are not treated as off-balance sheet exposure and minimum capital adequacy need to be maintained against the NFB exposures as well. Assessment of Non Fund based facilities shall be subjected to the same degree of appraisal, scrutiny as in the case of fund based limits because outstanding in these facilities are to be reckoned at 100% for exposure purposes. Therefore, need based requirement of a borrower should be assessed after

20

reckoning the lead time, credit period available, source of supply, proximity of supplier, etc. in case of LCs and industry practices and business requirements in case of LGs. The working of NFB assessment is to be incorporated in the appraisal note. Further, while assessing non-fund facilities, cash flow aspects should also be taken into account. 1. Bank Guarantees BGs may be financial or performance in nature. In a financial guarantee, the issuing banks assumes an usual credit risk which is the domain of the banks. However, issue of a performance guarantee involved technical competency and managerial ability of a customer to ensure the performance of the contract for which guarantee has been drawn. Issuing banks responsibility against the BG is absolute. So proper appraisal needs to be done before issuing BG as it is the responsibility of the issuing bank to honor its guarantee when invoked.

2. Letter of Credit A document issued by a bank that guarantees the payment of a customer's draft; substitutes the bank's credit for the customer's credit. It is an undertaking issued by bank on behalf of the buyer to the seller, to pay for the goods and services, provided that the seller presents the documents which comply with the terms and conditions stipulated in the LOC. All letters of credit are irrevocable, i.e., cannot be amended or canceled without prior agreement of the beneficiary, the issuing bank and the confirming bank, if any. It is different from BG in the sense that in case of LOC, the issuing bank does not wait for the buyer to default, and for the seller to invoke the undertaking. While in BG, comes into play only when the principal party (the buyer) has failed to pay its supplier.

6. TermLoansandWorkingCapitalLoans
6.1. TermLoans

Term loans are those loans that are lent for extended period of time majorly for the capital expenditure by the firm. This is different from the short term loans which are mainly provided for meeting working capital requirements and maintaining short term liquidity. Term loans are provided for acquisition of fixed assets are to be repaid from the cash generated from the operations. Credit delivery for term loans are broadly through two means: Fund based and Non fund based. Fund based term loans like cash credit provided outright cash while non-fund based loans like Deferred Payment Guarantee(DPG) where the liability to make payment crystallizes after the bill again such guarantees are presented for payments. Term loans are sanctioned for acquisition of fixed assets like land, building , plant/machinery, office equipment, furniture-fixture and other capital expenditure like purchase of transport vehicles and

21

other vehicles, agricultural equipment etc. The term loan is a loan which is not a demand loan and is repayable in terms of i.e. in Instalments irrespective of the period or the security cover. Term loans are normally granted for the periods varying from three to seven years and under exceptional circumstances beyond seven years. The term loans with remaining maturity period of above 5 years shall not exceed 50% of the term deposits with remaining maturity period of above 5 years after taking into account the renewal of term deposits as per the past trend, as is being done for ALM. Since term loans are provided for a long tenure ensuring the viability of the project and sufficient generation of cash over a the long tenor of the loan becomes critical. Detailed process of appraising Term Loan proposals is given in next section.

6.2.

WorkingCapitalLoans

Working Capital refers to the current asset holdings of the firm.Net working capital is the difference between Current Assets and Current Liabilities. Working capital requirements depend on various business specific internal factors like operating efficiency, technology employed and the level of quality control. Current Assets may further be classified in to two components: i) A permanent Core Component

ii) Fluctuating Component A manufacturing enterprise has to maintain a minimum level of inventory at any point of time below which production could get impacted. This minimum level of current asset is called Core Current Asset level. This would be constantly tied up in the business with changes in sales and activity level. Fluctuating component is the portion above this level that is continuously changing due to changes in demand, seasonality of product etc. Businesses finance permanent core component through long-term sources of fund like equity or long term loans. Fluctuating Component is financed mainly by availing the short term loans and other credit facilities from the bank. Main focus here is to avoid overfunding or underfunding of the operations. While over funding will amount to locking up of assets unproductively as idling cash or inventories, at the same time under funding would seriously hamper the day-to-day operations and pose a threat to the survival of the businesses. Hence it is critical to correctly determine the maximum bank finance that should be provided. The process for this is explained in details in section 8.

7. TermLoanAppraisal
Prior to the sanctioning of a loan it goes through a well defined appraisal process where it is evaluated on various parameters . Proper due diligence is followed to mitigate the risk of default and fraud inherent in the lending process. The process followed is reviewed regularly to account for new

22

guidelines from the RBI and changes in banks credit policies. Various components of the appraisal process are as detailed below:

7.1.

FinancialEvaluation

It involves evaluation of financial statements of the borrowers to ascertain the financial health of the company. Financial statements are rearrangement as described in detail below and rearranged financial statements are used to ascertain the capital requirements, liquidity, long-term solvency, debtrepayment capacity etc. of the business involved. Various components of financial evaluation are as follows: 7.1.1. ReclassificationandRearrangementofBalanceSheetitems Financial statements contain the information about the financial health of enterprise. Since different applicants use different formats and classification of some of the items present in the balance sheet is subjective, it becomes necessary to re-arrange the balance sheet items to achieve standardization. Components of the balance sheet. are used in calculating ratios like Debt Equity Ratio (DER), DebtService Coverage Ratio (DSCR), Current Ratio, Fixed Asset Coverage Ratio (FACR), Maximum Permissible Bank Finance (MPBF) etc. There are guidelines from the RBI and Bank on the permissible values of these ratios and relaxation permissible, if any. So proper rearrangement of financial statements becomes critical in credit lending decision making. Classification of items into various heads depends on the policies of the bank. For PNB Classification of a particular liability as a current liability or long term liability etc. depends on the internal guidelines of the Bank. The reclassifications to be done as per the Banks/RBIs guidelines are detailed below:

Current Liabilities
Current liabilities include the known obligations to be within a year. These are classified as: 1. Short term borrowings including bills purchased and discounted excluding bank finance 2. Unsecured Loans 3. Public deposits maturing within the year 4. Sundry Creditors 5. Interest and Other Charges accrued but not due for payment 6. Advance/Progress Payments from customers 7. Deposits from dealers, selling agents etc. 8. Instalments of deferred payments, debentures, redeemable preference shares, long term deposits payable within one year 9. Statutory Liabilities like provision for PF dues, Taxes etc.

23

10. Miscellaneous Current Liabilities like proposed dividends, liabilities for expenses, gratuity payable within one year etc.

Current Assets
1. Cash and Bank balances 2. Investments in Govt./Trust Securities, for short term and fixed deposits with banks. Investments in shares and debentures etc. should be excluded from current assets. 3. Recoverable arising out of sales. 4. Instalment of deferred receivable due within one year. 5. Raw material and consumable spares including that under transit. But slow moving and obsolete items should be excluded from current assets and should be grouped as non-current assets. 6. Stock in process, and finished goods( including goods-in-transit) 7. Advance payment for tax, prepaid expenses, advance for purchase of raw material and consumables. But security deposit/tender deposit are classified as non-current assets irrespective of their maturity. 8. Monies receivable from contracted sales of fixed asset during the next 12 months.

Treatment of Export Receivables

a. For calculating MPBF, the amount of export receivables may be excluded from the current assets as need based limits for export receivables could be sanctioned and in respect of such receivables borrowers are not required to bring in 25% by way of Net Working Capital. b. Where an exporter desires, export receivable may be included in the total current assets for arriving at MPBF, but the minimum stipulated NWC(i.e. 25% of total current assets) may be reckoned after excluding the quantum of export receivables from the total current assets for fixing up the post shipment credit limit.

Treatment of Margin Money on account of LC/BG

RBI advises that banks should exclude the margin money from counting the current assets while assessing the working capital requirements

Treatment of Investment Made in Associate/Allied Companies/Subsidiaries etc.

Investments made in shares, debentures, etc. of a current nature, units of UTI and other mutual funds and in associate companies/subsidiaries and inter corporate deposits and loans are to be excluded from the current assets build up for calculating MPBF (Maximum Permissible Bank Finance).

24

Treatment of Redeemable Preference Shares

Preference shares redeemable within one year should be considered as current liabilities. However, preference shares redeemable after one year should be considered as term liabilities.

Treatment of Unsecured Loans

In case of Partnership, Proprietorship, and Private Ltd. Companies, the unsecured loans raised by friends, relatives, and directors etc. that remain in the business for continuous basis may be treated as quasi capital to the extent not exceeding 100% of tangible net worth of the party subject to the condition that these loans shall not be withdrawn during the currency of the loan and shall be subordinate to bank borrowings. Amount of unsecured loans over and above the net worth of the party should be treated as term liability for calculating various financial ratios. For Public Ltd. companies, the unsecured loans should be treated as long term debts.

Treatment of DTL and DTA(Deferred Tax Asset and Liability)

The tax effect of the timing difference originating during a period (Difference between Accounting Income and Taxable Income) is referred to as Deferred Tax Asset/Liability depending on whether the Tax rebate relating to the current accounting period would be available in the subsequent accounting periods has been claimed in advance during the current accounting period. DTA is arrived at through increasing the profits/ reducing the loss. The eligible tax rebate reflected as DTA can be recognized only if it is reasonably certain that the company will earn adequate profits in the subsequent accounting period(s). Till such time, it is in the nature of an intangible asset. Therefore, it should be reduced from the Net Worth to arrive at the TNW. Using similar logic, DTL is to be treated as part of the Net Worth. Since DTL/DTA are accounting treatments only, DTL is to be added to, and DTA is to be subtracted from, the net profit for arriving at PAT. 7.1.2. Cost of Project & Means of Financing Cost of project and sources of finance are ascertained to ensure the Financial viability of the project for which funding is sought.The major cost components of the project is given including land and building including transfer, registration and development charges as also plant and machinery, equipment for auxiliary services, including transportation, insurance, duty, clearing, loading and unloading charges etc. The means of financing the project cost may be one or more of the following: Equity capital from shareholders Preference capital from preference shareholders Capital subsidies from government

25

Debentures/ bonds issued by the company public issue or private placement Public deposits Unsecured loans from friends and relatives Term loans (including deferred payment guarantees) Lease finance

7.1.3. ProjectionsofSales,Profits,CashFlowsandBalanceSheet Revenues during the tenor of the loan are estimated for the project, base on the Techno-Economic evaluation and past performance. Revenue projection, in addition to the estimates of sales and other expenses are used to generate projection of profits and cash accruals during the loan tenor. Similarly, financing, repayment schedule etc. are used to arrive at balance sheet projections. Generally speaking, a unit may be considered as financially viable, progressive and efficient if it is able to earn enough profits not only to service its debts timely but also for future development/growth. 7.1.4. CalculatingkeyFinancialRatios Current financials of existing operations, project funding information like sources of funds etc. and future projections are used for calculating key financial ratios for a period of time. These ratios tell us a lot about a unit's liquidity position, managements' stake in the business, capacity to service the debts etc. The financial ratios which are considered important are discussed as under:

Debt-Equity Ratio (DER)

DER =

DER signifies how much the project is leveraged. For a project of private firm, equity capital is brought in by promoter and hence lower the DER higher are the promoters stake in the project. DER also vary from industry to industry. In capital intensive industries involving large capital investment, DER is normally higher as compared to the other industries.

Debt Service Coverage Ratio (DSCR)

26

DSCR=

This ratio provides a measure of the ability of an enterprise to service its debts i.e. `interest' and `principal repayment' besides indicating the margin of safety. The ratio may vary from industry to industry but has to be viewed with circumspection when it is less than 1.5. This ratio shows the relationship between cash generating capacity of the unit and its repayment obligation and indicates whether the cash flow would be adequate to meet the debt obligations and whether there is sufficient margin for the lending banker.

Tangible Net Worth to Total Outside Liabilities (TNW/TOL)

TNW/TOL=

This ratio gives a view of borrower's capital structure. If the ratio shows a rising trend, it indicates that the borrower is relying more on his own funds and less on outside funds and vice versa.

Profit-Sales Ratio

PSR

This ratio gives the margin available after meeting cost of manufacturing. It provides a yardstick to measure the efficiency of production and margin on sales price i.e. the pricing structure.

7.1.5. SensitivityAnalysis The sensitivity analysis is carried out by the bank in order to evaluate capacity of the project to absorb shocks due to adverse movement in prices/ some other adverse developments and sustain financial viability. The viability of a project is dependent on various factors which include selling price, cost of raw materials, cost of finance, availability of critical inputs and dependence on market like buyer/seller market, other key technical parameters etc. In the absence of any defined factors and its values for carrying out the sensitivity analysis, it has been decided that a common 5% sensitivity factor on sale price/cost price of major raw materials

27

should be applied in appraisals of all the projects irrespective of the industry. However, 10% sensitivity factor may be applied in highly volatile industries by assessing the expected volatility in sale price/ cost price of major raw materials in future on case to case basis.

7.2.

TechnoEconomicViability(TEV)

Techno Economic Valuation is mandatory for all the term loan proposals. Term loan proposals are for the funding requirements for new business development and business expansion. Since, loans are to repaid from the cash flow generated from the new business, it becomes necessary to ascertain the feasibility of the project and economic viability. Assets created from the capital expenditure done from the Term loan funds should have enough revenue generation potential so as to ensure the servicing of the loan. It is also necessary to make sure that finances sought are indeed meant for expenditure on the project and will not be deviated to capital markets and other activities. TEV involves market potential studies, stage of business cycle, technology related inputs and cost components including the reports on equipment/raw material suppliers, comparative study of similar projects and preparation of financial models for the individual project. Financial evaluation described in sub-section 7.1. is also a part of the TEV study. 7.2.1. TechnicalAppraisal Technical appraisal focuses on the feasibility of the project. Various components of the projects are evaluated for their technical soundness, cost expenditure on them and quality etc. some of the aspects of the projects that are looked upon are as below: a) b) c) d) e) f) g) h) i) j) k) Location and Site Raw material Plant & machinery, plant capacity and manufacturing process Land Building Technology & process Size of the plant Power Supply Water Supply Labour supply Implementation Schedule

7.2.2. EconomicViability This has bearing on the earning capacity of the project and earnings are dependent on sales. Therefore, the borrowers projection of sales should be assessed keeping in view the following factors: a) Demand and Supply position of the product and its substitutes;

28

b) c)

Proposed selling price vis-a-vis prices of the competing products; Quality of the product as against the quality of competing products

7.2.3. FinancialViability Financial viability seeks to determine: a) b) c) Whether cost of project and means of finance are realistic; Whether project is capable of profitable operations; Whether project is capable of generating adequate surpluses for servicing the debt and interest

and can take care of future organizational development; d) e) f) Whether estimates of cost of production fully cover all items of expenditure; Whether sources of finance are adequate; Whether there is a reasonable basis for competitive profitable operations.

7.3.

RiskAnalysis

PNB has elaborate risk management structure, process and procedures in place. Structure has been already described in section 7.3. . For the appraisal of the loan proposals, RMD provides the risk ratings for the client and project based in the patented internal models of the PNB that have been developed based on statistical analysis of data. These models are placed on central server based system PNB TRAC, which provides facility to assess credit risk rating of a client. This credit risk rating captures risk factors under four areas: 1. Financial evaluation (40%) 2. Business or industry evaluation (30%) 3. Management evaluation (20%) 4. Conduct of account (10%)

Cumulative weighted score is calculated and rating of the project/company is ascertained as per the chart below: Rating category AAA AA Minimum risk Marginal risk Above 80.00 Between 77.50 - 80.00 Between 72.50 77.50 Between 70.00 72.50 A Modest risk Between 67.50 70.00 Between 62.50 67.50 Between 60.00 62.50 AAA AA+ AA AAA+ A ADescription score obtained Grade

29

BB

Average risk

Between 57.50 60.00 Between 52.50 57.50 Between 50.00 52.50

BB+ BB BBB+ B BC D

Marginally acceptable risk

Between 47.50 50.00 Between 42.50 47.50 Between 40.00 42.50

C D

High risk Caution risk

Between 30.00 40.00 Below 30.00

Some of the important risk rating models used in loan appraisals are summarized as below: S.No. Credit Risk Rating Applicability Total Limit 1 2 Large Corporate Mid Corporate Above Rs. 15 Cr. Between 5 Cr.and 15 Cr. Sales Above Rs 100Cr. Between Rs 25 Cr and 100 Cr 3 New Models 4 Entrepreneur Business Model 5 Project Rating Above Rs. 5 Cr. Cost of Project

above 15 Cr New New Business et requiring finance b/w Cost of Project upto 20 Lakh and 5 cr Rs.15 Cr

Credit Risk Rating model All Banks and Financial Institutions for banks and FI

Table1. Rating Models and Their Applicability

PNB also takes into account the ratings of the company/project from the independent credit rating agencies like ICRA, CRISIL, Fitch, CARE etc. Rating history of the borrower is studied and any degradation in the rating demands causal analysis. In some cases, final sanction is conditional upon the completion of credit rating by external agencies.

7.4.

ManagementEvaluation

Management is examined carefully and methodically during the credit appraisal. Management evaluation entails:
a. Credit History of the Directors, Promoters etc b. Professional, experience and qualification of the promoters, directors and top management

30

c. Reputation of the promotors in project execution d. Performance of the management

Credit history of the management and the company is sought from the centralized credit databases like CIBIL, Equifax etc. Directors etc. should have positive credit reports and should not be there in the list of wilful defaulters circulated by RBI etc. Credit history is also sought from other banks where the company has accounts to find out any abnormal behaviour. Moreover, credit history and account behaviour of the companies belonging to the same business group (i.e. business houses) as the borrower is also taken into account. In case the accounts of any unit belonging to a Group become irregular and the concerned promoters do not co-operate with the Bank and Financial Institution to settle their dues, the Group will not be provided accommodation from the Bank. According to the banks guidelines, financial support for setting up of new ventures or expansion should not be extended to unit belonging to a group which is willful defaulter or non cooperative so as to ensure that no amount lent to a healthier unit of a group for its Working Capital requirements is transferred to another unit within the group by reducing the Current Ratio of transferor unit. For identification of cases of Promoter Groups/Companies for deterrent action, a coordinated approach be taken with Banks and Financial Institutions. However, Industrial Units in Public Sector are to be kept out of the purview of Group Approach.

7.5.

CompliancetoExposureNorms

Exposure includes credit exposure (funded and non-funded credit limits) and investment exposure (including underwriting and similar commitments) as well as certain types of investments in companies. The sanctioned limits or outstandings, whichever are higher, shall be reckoned for arriving at exposure limit. Further, nonfund based exposure is calculated at 100 percent of the limits or outstandings, whichever are higher. In case of fully drawn term loans, where there is no scope for re-drawal of any portion of the sanctioned limits, the outstanding shall be reckoned as exposure. However, in the case of other term loans, the exposure shall be computed as usual i.e. sanctioned limits or outstandings, whichever are higher. Maximum Industry Exposure Limit The bank has developed a model for fixation of industry wise credit exposure ceilings. The model captures external factors like rating of industry by external agency, nature of industry and its importance in economy as well as internal factors like level and trend of asset 31

impairment, exposure level and quality of exposure in the industry. This model provides scientific assessment and corresponding exposure ceiling level to an industry. These limits shall be reviewed on the basis of data analysis regularly. As the ceilings proposed are internal ceilings to achieve diversified growth of portfolio and reduce portfolio concentration, it is provided that the monitoring against such limits would be based on actual outstanding. However, undisbursed term loan amounts in any industry shall also be monitored closely. Further, the industry-wise exposures shall also be monitored closely by Credit Division, HO to especially those industries which have reached trigger level of 85% of exposure limit so that instances of breach of ceiling could be averted.

Industry/Sector Ceiling in percentage S. No.

1. 2. 3. 4. 5. 6. 7. 8. 9.

Sector

Exposure

All Engineering Chemicals, Dyes, Paints Construction Food Processing Iron and Steel Other Textiles Paper and Paper Products Petroleum Sugar

6% 3% 5% 5% 10% 5% 3% 3% 5%

Table 2. Business Sector Exposure Limits

8. WorkingCapitalFinancingAppraisal
Appraisal of working capital financing proposals is mainly focussed on accurate assessment of working capital needs of the business. Objective here is to avoid overfunding or underfunding of the operations. Working capital assessment is widely researched topic and has evolved over a time.

8.1.
i)

MethodsOfLending
working capital finance upto Rs.2 crore (upto Rs. 5 crore in case of SME units) shall continue.

Simplified method linked with turnover Simplified method based on turnover for assessing

32

ii) MPBF System Existing MPBF system with flexible approach is followed for units requiring working capital finance exceeding the above-mentioned amount. iii) Cash Budget System Cash Budget System shall be followed in Sugar, Tea, Service Sector, construction activity, Film Production accounts etc.

8.2.

WorkingCapitalFinancingGuidelines

8.2.1. TandonCommitteeRecommendations

This committee was formed in 1974 under the chairmanship of Shri P.L.Tandon for the purpose of calculating the effective working capital requirement. It fixed norms for 15 major industries and indicate the maximum permissible limits for inventory holdings. However, deviations werent allowed to meet unforeseen conditions. The three methods suggested for lending were: First Method of Lending: Banks can work out the working capital gap, i.e. total current assets less current liabilities other than bank borrowings (MPBF) and finance a maximum of 75 per cent of the gap; the balance to come out of long-term funds, i.e., owned funds and term borrowings. This approach was considered suitable only for very small borrowers i.e. where the requirements of credit were less than Rs.10 lacs. MPBF: 75% of working capital gap( Total Current Assets Other Current Liabilities) Second Method of Lending: Under this method, it was thought that the borrower should provide for a minimum of 25% of total current assets out of long-term funds i.e., owned funds plus term borrowings. A certain level of credit for purchases and other current liabilities will be available to fund the build up of current assets and the bank will provide the balance (MPBF). Consequently, total current liabilities inclusive of bank borrowings could not exceed 75% of current assets. RBI stipulated that the working capital needs of all borrowers enjoying fund based credit facilities of more than Rs. 10 lacs should be appraised (calculated) under this method.

33

MPBF: 75% Total Current Assets Other Current Liabilities Third Method of Lending: Under this method, the borrower's contribution from long term funds will be to the extent of the entire CORE CURRENT ASSETS, which has been defined by the Study Group as representing the absolute minimum level of raw materials, process stock, finished goods and stores which are in the pipeline to ensure continuity of production and a minimum of 25% of the balance current assets should be financed out of the long term funds plus term borrowings. MPBF: 75% [(Total Current Assets Core Current Assets) - Other Current Liabilities Third method of lending was not accepted by RBI for practical implementation and hence is of only academic interest.
8.2.2. ChoreCommitteeRecommendations

This committee streamlined the above guidelines further by stipulating annual review of working capital credit limits above 50 lac. Also the bifurcation of cash credit into demand loan and cash credit components has also been withdrawn.
8.2.3. NayakCommitteeRecommendations

Nayak committee recommended not to apply the norms for inventory and receivables. Rather, the working capital limits shall be computed on the basis of a minimum of 20% of their projected annual Turnover for new and existing units. Out of this, the borrower shall provide 1/5th of the estimated working capital requirement(5% of PATO) as margin money of working capital. The Bank has the policy of evaluating MPBF for those limits that exceed 2 crore and upto 5 crore, for limits less than 2 crore, the bank has a policy of following the simplified turnover method.

8.3.

Datarequiredforassessmentofworkingcapitalrequirement

For assessing the working capital needs of an organization, bank follows CMA (Credit Monitoring Arrangement). It is required by banks and other financial institutions, to introspect or study the minutes of balance sheet and other financial statements of a body corporate for financing their projects. In other words it is the detailed explanation of the balance sheet and other financial ratios of the firm or any other corporate. The CMA includes analysis of following six documents: i) Existing and proposed banking arrangements 34

ii) iii) iv) v) vi)

Operating statement Analysis of Balance Sheet Buildup of current assets and current liabilities Calculation of MPBF (Maximum Permissible Bank Finance) Fund Flow Statement

8.4.

OtherDetails

Assessment of PBF is most important part of Working Capital proposal evaluation. Working Capital proposals do not require viability studies viz. TEV and Financial viability as described in section 7.1. and 7.2. Apart from these differences Working capital financing proposals are evaluated on similar lines as the term loan proposals and involve risk analysis, management evaluation, compliance to exposure norms etc. as described in Section 7.

9. Security
All the loans are secured against the collaterals. During the loan appraisal process collateral are valued for margin of safety requirements and valuation is verified. Type of banks claim on the collateral i.e. mortgage, hypothecation, first pari-passu charge, lein etc is decided. In addition, the terms and condition for maintenance of the collateral are laid down. Further Guarantee is sought for the loan from the group holding company. This is known as Corporate Guarantee. Sometimes personal guarantee is also sought from the Promoters in case of privately held companies or partnerships. FACR is one critical financial ratio which is ascertained to ensure that loans are adequately covered by fixed assets.

10.

Pricing

Loan pricing which was earlier based on the BPLR (Benchmark Prime Lending Rate) regime has now been administered under BR (Base Rate) regime as per the RBI directives. Under BR system banks specify a base rate above which all the loans are priced. Base rate is revised from time to time as per the leads of RBI review of interest rates that depends on the macroeconomic situations. At PNB pricing of loans depends on following factors: a) Credit Rating of the Client Better the risk rating of a business lower is the spread (interest charged) over the base rate. b) Nature of the business sector Apart from the credit rating business sector to which a borrower belongs also effects the pricing of the loan. For example pricing for a business in Food processing sector with credit rating AA will be different from a business in Real estate sector having the same credit rating AA.

35

c) Special Business Considerations and Competitive Pressures In consortium financing, PNB have to keep the pricing in line with the other business partners. Also due to competitive consideration and a view of garnering further business from reputed clients discounts can be offered. Sometimes, there are special lending schemes for various sectors having specific pricing guidelines.

11.

PostSanctionProcesses

After the appraisal and sanctioning process, procedures for loan disbursal, legal documentation and continuous monitoring of the loan implementation i.e. end-use, collateral maintenance, financial health of the loanee etc. come into picture. Some of the important processes are as described below:

11.1.

Ensuringenduseoffunds

One aspect of the credit risk management and control is to ascertain the end use of the funds. This is because the risk profile of a loan is directly related to its prospected use. For example , if a loan issued for purchase of machinery is diverted to real estate investment or say to capital markets, then probability of its default increases considerably. Hence, it becomes necessary for banks to monitor the usage of the loaned funds. Financial statement issued by Chartered Accountants are analyzed to observe the spending of the funds. Moreover, PNB has put in place guidelines and procedure to ascertain the use of funds through actual inspection. Some of the illustrative measures that could be taken by the branches to ensure end-use of funds are: i) Meaningful scrutiny of quarterly progress reports/operating statements, balance sheets of the borrowers; ii) Regular inspection of borrowers assets charged to the Bank as security; iii) Periodical scrutiny of borrowers books of accounts: iv) Periodical visits to the assisted units; v) System of periodical stock audit, in case of working capital finance;

11.2.

PreventiveMonitoringSystem(PMS)

Bank has introduced Preventive monitoring system for large borrowal accounts. The system is applicable to all borrowal accounts having sanctioned limits (FB plus NFB) above Rs. 1 crore. The model for PMS has also been placed in central server environment. This system is a dynamic system for tracking the health and conduct of borrowal accounts to capture the

36

signals of early warning. Timely decision should be taken on the future course of action in the borrowal accounts depending upon PMS rank.

11.3.

StockAudit

Bank has a policy to conduct annual stock audit (including book debts) for all accounts with fund based working capital limits of Rs.5 crore and above whether standard or NPAs. Annual Stock Audit is compulsorily conducted in all accounts with risk rating B & below and having fund based working capital limits of Rs. 1 crore and above.

11.4.

MonitoringofWeakandIrregularAccounts

The bank has established systems for Inspection and control of its lending activity to ensure that loan accounts are conducted in terms of sanction so as to have a sound credit portfolio. Credit Division, HO monitors all weak and irregular loan accounts below standard category having outstanding of above Rs.10 lac on monthly basis.

12.

CASEI:TermLoanFinancing(ABCLimited)
12.1. Introduction

ABC Industries Limited (AIL) was incorporated in the year 20XX. It has established a unit for manufacturing SPONGE IRON or DIRECTLY REDUCED IRON (DRI) with an installed capacity of 100 TPD/30000 TPA. The company wants to avail loan for Ore Pelletising and Benefication Plant.

12.2.

Theloanproposal

Name of the Borrower : M/s ABC Industries Limited, BO and Circle Office : XYZ

37

GIST OF THE PROPOSAL Sanction of TL III of Rs 100 crs for setting up Pelletizing and Beneficiation project at COP of Rs 315.50 crs (debt component of Rs 195 crs ) at existing unit at abc district, AP. The door to door repayment is 10 years. For Term Loan : Purpose Setting up Iron Ore Pelletising and Beneficiation Plant with 600000 MTPA (6 lacs) and 612000(6.12 lacs) MTPA capacity respectively in abc district, AP Rs. 315.50 Rs. 195.00 Rs. 120.50 i.e 38.19 % Rs. 100.00 1.62: 1 7 years (28 quarterly Installments) 10 years ( including 7 years repayment period) + 3 years moratorium and implementation period)

Cost of Project Total Debt Promoters contribution Proposed TL(our share) DER Repayment Period Door to door tenor

Whether fresh/ renewal/ enht Fresh Term Loan Asset Classification as on Standard, PMS 2250 Rank-3 31.12.2011 and last PMS score Credit Risk Rating by Bank Rating Date of Score Reasons for ABS is B indicating Marginally Rating degradation Acceptable Risk Present B 23.03.12 43.71% Under *Given below New Project Previous B 17.09.11 44.67% 31.03.11 *Main reasons for the decline in the rating are as follow. - Delayed in implementation of the project - Increase in the Debts. Rating from External Agency Facility Rating Date of Rating Remarks #The external rating is rated rating Agency mapped to the internal rating Long CARE 26/12/2011 CARE NA of B Term of BB+# Rs. 220.86 Cr. Short CARE 26/12/2011 CARE Term of A4+ Rs. 16.Cr. Whether priority/non priority Non Priority Sector sector as per PS&LB guidelines (Latest being PS&LB/LBC/Codified Circular No. 11 dated 16.7.2011) Whether Agriculture/Retail/ Large SME/Others

38

a) Whether Sensitive Sector NO Real Estate/Capital Market b) Applicable Risk weight 150% Consortium/Multiple Banking Sole Banker for working capital limit & existing TL. However proposed term loan will be in participation with other Bank Lead Bank NA PNBs Share % Sole Banking Date of application 03.01.2012 Date of last sanction & NBG in its meeting dated 21.01.2012 has approved expression of authority/In Principle interest for consideration of term loan of Rs. 100 cr at the rate of Consent 14.50% per annum i.e., BR + 3.25% + TP, with 50% concession in upfront fee. Customer ID No. BRB003528 Activity code (as per ladder) 7502

12.3.

ManagementEvaluation
Promoters and Directors Profile

12.3.1.

The company AIL. is a public limited company with 4 percent share holding with Promoter of the Company. Group Name a. b. c. d. e. Constitution & constitution code Date of incorporation/ Establishment Dealing with PNB since Industry/Sector Business Activity (Product)/ Installed Capacity. M/s ABC INDUSTRIES LIMITED Public Limited Company,36 11th March 2008 2008 Steel Industry Existing Setup: Sponge Iron -60000 TPA Billets - 72000 TPA Project under Implementation: Sponge Iron -90000 TPA Rolling Mill -90000 TPA Captive Power Plant -16 MW Proposed Beneficiation 612000TPA Pelletising 600000TPA

12.4.

Presentproposal
39

In order to improve the efficiency of the kiln and quality of sponge iron ,the company has now planning to install an Iron ore pelletizing unit & Beneficiation plant on the existing land . This project is a major step towards backward integration and would enable the company to become an integrated Steel plant as the Sponge iron and Steel billets will be used as basic raw material for the rolling mill and the final product will be produced from Iron.The installed capacity of Iron Ore Pelletizing and Beneficiation Plant would be 6.00 lacs MTPA and 6.12 lacs MTPA respectively. The total cost of project is Rs.315.50 cr with promoter contribution of Rs. 120.50 cr ie. 38% and debt component of Rs. 195.00 cr. NBG in its meeting dt. 20.01.2012 has approved expression of interest for considering of Term Loan limit of Rs. 100.00 crs @ 14.50 p.a. i.e. BR+3.25% + TP, with 50% concession in applicable Upfront fee. a) Beneficiation Plant: Beneficiation helps in conservation of natural resources and waste management by upgrading of low grade and complex ores, which would have been otherwise considered as uneconomical. It improves the supply chain management as lower grade ores discarded in the mines can be upgraded. b) Pelletisation Plant: Pelletising turns very fine grained iron ore into balls of a certain diameter, known as pellets, which are suitable for blast furnace and direct reduction. The process of pelletisation combines mixing of raw material, forming the pellet and a thermal treatment baking the soft raw pellet to hard spheres.

Facilities Recommended : (Rs. in Crore) Nature Existing Fund Based CC(H) 30.00 Non Fund Based: FLC/ILC/SBLC* BG Term Loan1 (O/s) Term loan 2** Term loan 3 Limit of credit exposure on account of all derivative products TOTAL COMMITMENT 15.00 1.00 50.32 134.24 Nil

Proposed

Secured/Unsecured along with the basis thereof (As per RBIs guidelines) 30.00 Secured

15.00 1.00 50.32 134.24 100.00 Nil

Secured Secured Secured Secured Secured

230.56

330.56

Secured

*The Company has requested for approval of SBLC as in terms of its business model the company plans to purchase the Raw Material at lower price than Market Price for which supplier insist for SBLC/Bank Guarantee **Term loan 2 amount not fully disbursed. 40

12.5.

CompliancetoExposureNorms
As per Exposure Norms Amount (%age) 3706.52 9266.30 12% 30%

Existing Proposed %age of Banks Capital Funds as on 31.03.2011 (Rs.30887.68 crs) 330.56 1.07% Company 230.56 2.29% Group 609.81 709.81*

Observations: Exposure to the group and company is within the prescribed norms

12.6.
Agency CARE

CreditRatingbyExternalAgencies
Rating BB+ Date of Significance of Rating Rating 05.01.2012 Moderate Risk of default regarding timely servicing of financial obligation 05.01.2012 Minimal degree of safety regarding timely payment of financial obligations Purpose Validity Date long 04.01.2013

CARE

A4+

For term facilities For NFB limits

04.01.2013

12.7.

FinancialEvaluation
FinancialStatementAnalysis

12.7.1.

Two years earlier (say 31.3.09) Audited Gross Sales 0.00 - Domestic 0.00 - Export 0.00 % growth 0.00 Net sales (net of excise 0.00 duty etc.) Other Income 0.00 Operating Profit/Loss 0.00 Profit before tax 0.00 Profit after tax 0.00 Depreciation/ 0.00 Amortization of exp Cash profit/ (Loss) 0.00 EBIDTA/PBIDTA 0.00 Paid up capital 1.57

One year Previous year (say Projections earlier 31.3.11) for the year (say 2011-12 31.3.10) Audited Estimated Audited Projected 0.07 105.83 110.18 148.33 0.07 105.83 110.18 148.33 0.00 0.00 0.00 0.00 0.00 0.00 0.00 34.64% 0.07 105.83 110.18 148.33 0.00 0.01 0.01 -2.80 0.00 (2.80) 0.11 3.21 41 0.00 14.31 14.31 9.48 8.50 17.98 27.35 9.81 0.00 0.36 0.36 -1.29 5.40 4.11 6.76 5.74 0.00 5.59 5.59 3.36 8.50 11.86 26.96 9.190

Reserves and Surplus excluding revaluation resv Misc. expenditure not written off Accumulated losses Deferred Tax Liability/ Asset a) Tangible Net Worth b) Investment in allied concerns and amount of cross holdings c) Net owned funds/ Adjusted TNW (a b) Share application money Total Borrowings Secured Unsecured Investments Total Assets Out of which net fixed assets Current Assets Non current Assets Net Working Capital Current Ratio Debt Equity Ratio Term liability/ Adjusted TNW TOL/Adjusted TNW Operating Profit/Sales Long Term Sources Long Term Uses Surplus/ Deficit Short Term Sources Short Term Uses Surplus/ Deficit

13.50

43.52

97.65

91.54

121.89

0.09 0.00 0.00 14.98 Nil

0.09 2.80 2.81 46.65 3.16

0.00 0.00 1.44 108.90 Nil

0.07 4.09 4.38 97.50 3.16

0.00 0.00 5.20 136.28 3.16

14.98 8.20 13.30 12.79 0.51 0.00 37.23 33.30 3.93 0.00 3.18 5.24 0.57 1.57 0.61 Nil 36.48 33.30 3.18 0.75 3.93 (3.18)

43.49 0.00 78.66 77.54 1.12 0.00 128.96 91.81 33.81 3.34 11.15 1.49 1.28 2.28 1.76 0.14 106.30 95.15 11.15 22.66 33.81 (11.15)

108.90 0.00 115.38 115.38 0.00 0.00 235.26 190.14 45.12 0.00 14.47 1.47 0.88 1.88 1.16 0.14 204.61 190.14 14.47 30.65 45.12 (14.47)

94.34 2.83 131.12 129.87 1.25 0.00 279.16 198.21 77.60 3.35 15.16 1.24 1.16 2.16 1.78 0.0033 216.72 201.56 15.16 62.44 77.60 (15.16)

133.12 0.00 232.02 217.02 15.00 0.00 384.85 308.48 70.81 5.56 24.26 1.52 1.48 2.43 1.82 0.04 338.30 314.04 24.26 46.55 70.81 (24.26)

42

Key Financials upto last quarter Period ended Cumulative Corresponding % Accepted position as position as at Change for the Dec10 current on last year quarter/ HY/Q1 ended Dec 11 99.89 62.13 60.78 148.33 0..0 0.00 0.00 0.00 3.56 2.46 0.24 1483.33 0.16 1537.50 5.59 3.36 (Rs. Crore) Remarks %age achievement upto latest quarter/HY/Q1

Sales Other Income PBT PAT

*67.34 -0.00 -63.68 -73.21 --

Reason: Sales during three quarter of current year are slightly lower than the proportionate sales of 75 % of annual target for 2011-12 as during first quarter sales are generally low on account of rainy season. During the corresponding period last year sales achievement was 56.38 % of the annual budget. The company has informed that during 1st half year the sale achievement is lower in this industry on account of rainy season, particularly during first quarter of financial year. The sales normally peaked in the last quarter of year, as during 2010-11 the company posted sales of Rs. 48.04 cr during last quarter which was 44% of annual sales. The Company has achieved the sales of Rs. 31.68 cr during Jan & Feb 12. The company has achieved total sale of Rs. 131.57 crs. till Feb 12 against the annual target of Rs. 148.33 cr. i.e 88.70 %.

12.8.

SECURITY
Primary

12.8.1.

For Term Loan: The term loan is secured by way of following charge over the block assets both present and future . Term Loan Term Loan-I ( Rs 58 crore) Term Loan-II ( Rs 134.24 crore) Term Loan-III Security Ist charge over the block assets of the company present and future. The project cost is Rs. 98.00 cr. Ist charge on block Assets of the company Present and future. The project cost is Rs. 218.00 cr. 1st pari passu charge with other consortium members on the present and future block assets of company (for their term loan of Rs 95 crores). The project cost is Rs 315.50 Cr.

43

(Rs inCr) Security Description Area in Sq M or Sq Ft 67 acres 13 cents Ownersh ip Value Last sanction 1.44 Basis for Date Whether valuatio existing/ Present Realiz n fresh book able value value 1.440 1.44 Purchase 2008 Existing price

Industrial land (Existing) situated at Anantapur, Andhra Pradesh

In the name of the company

12.8.2.

Collateral:

Second charge on following assets Nature Security of limits Value of block assets as on: (as on 31-3-11) 45.12 Value of block assets excluding specific charge if any 45.12 Extent of first / second charge holders 19.67 (Rs. in Crore) Balance / residual value of charge available to bank/ consortium 25.45

Term Loan

Current Assets

12.9.

Position of Account as on 22.03.2012

(Rs. In crs)

Nature TL-1 TL-2 CC ILC/FLC ILG

Limit 58.00 134.24 30.00 15.00 1.00

VS 92.10 143.37 41.71

DP 49.71 88.29 30.00

Balance 49.71 88.29 29.49 12.06 00.000

Irregularity Nil Nil Nil

Value of the Account Limit Nature Working capital (FB) NFB Term Loan -1 Term Loan -2 Bills purchased/ collected Amount 30.00 16.00 58.00 134.24 Last year 2010-11 Interest/ Yield(%) Commission 1.88 6.26 7.43 12.81 4.41 3.29 (Rs. In crs) Current year up to Jan 12 Interest/ Yield(%) Commission 2.85 9.50 0.16 1.00 6.89 11.88 9.27 6.91 -

44

Any other income such as Escrow account fee, etc. Total

238.24

13.72

5.76

19.17

8.05

Nature of Limit: LC/LG

From 01.04.2011 to 31.12.2011

Nature of Limit: LC/LG Amount : Rs.16.00 cr In Cr Nature Amount Aggregate Value Commission Max LC of limit of limit No Availment Development/BG Invocation No. Amt. ILC/FLC 15.00 2 14.92 0.07 14.92 Nil Nil ILG/FLG 1.00 2 0.14 0.09 0.14 Nil Nil

12.10.

COSTOFTHEPROJECT
BENEFICIATION PLANT Rs in crs PELLETIZIN Total G PLANT

Sl. PARTICULARS No . 1 Land & Site Development 2 Buildings 3 4 5 6 7 8 Plant and Machinery Misc. Fixed Assets Contingencies Preoperative Expenses Preliminary Expenses Margin Money for Working Capital Total Cost of the Project

11.00 75.00 2.00 4.40 14.10 6.00 112.50

1.40 25.14 131.32 4.50 8.12 22.52 10.00 203.00

1.40 36.14 206.3 2 6.50 12.52 36.62 16.00 315.5 0

MEANS OF FINANCE Sl. PARTICULARS BENEFICIATION PELLETISING No PLANT PLANT 1. Equity Share Capital 78.00 42.50 2. Term Loan from Banks 125.00 70.00 TOTAL 203.00 112.50 Total Cost of Project including Existing project: Sl. No. PARTICULARS Proposed Expansion Beneficiation & 45 Project under Implementation (Sponge Iron, Rolling In crs Total 120.50 195.00 315.50 Rs in crs Total

1 2 3 4 5 6 7 8

Land & Site Development Buildings Plant and Machinery Misc. Fixed Assets Contingencies Preoperative Expenses Preliminary Expenses Margin Money for Working Capital Total Cost of the Project

Pelletising Plant Mill & Power Plant) 1.40 1.25 36.14 27.19 206.32 149.44 6.50 8.00 12.52 9.29 36.62 16.32 16.00 6.51 315.50 218.00

2.65 63.33 355.76 14.50 21.81 52.94 22.51 533.50 Rs. In crores Total

MEANS OF FINANCE INCLUDING EXISTING PROJECT Sl. PARTICULARS No Proposed Expansion Beneficiation & Pelletising Plant 120.50 195.00 315.50 Project under Implementation (Sponge Iron, Rolling Mill & Power Plant) 83.76 134.24 218.00

1. 2.

Equity Share Capital Term Loan TOTAL

204.26 329.24 533.50

12.11.

Strengths&Weakness

Strengths/Opportunities:
1. The promoters are highly experienced and have knowledge of Steel Industry 2. Proven and Efficient technology 3. Rich Mineral Resources & Proximity to raw materials makes the transportation of raw material easier and cheaper. 4. There are number of steel units are operating in the region. The availability of skilled and unskilled labor is evident and easily available. 5. Level of integration: The Company proposes to install sponge iron, induction furnace, Continuous casting machine for billets and rolling mill which will supply the end product i.e. long products. Apart from the core activity, the company also proposes to have beneficiation and pelletisation plant which will reduce the dependency on the quality iron ore and improve the efficiency of the rotary kiln, reduction of dust emission and also utilize the waste heat generated during sponge iron manufacturing to generate power. The level of integration will help in rationalizing the plant operation and plant economics

46

6. Weakness/Threats:

1. Endemic Deficiencies: Poor quality of some of the essential raw materials available in India, e.g., high ash content of indigenous coking coal is adversely affecting the productive efficiency of iron-making. As a result some of the raw materials have to be imported, increasing cost. Mitigant As the Company are using imported Coal in their existing Plant and from the proposed expansion of Beneficiation & Pelletisation Project, company will convert low grade iron ore into high grade iron ore that will help the Company to get better production at lower consumption of Coal. 2. Low Labor Productivity: In India the advantages of cheap labor get offset by low labor productivity. Labor productivity in Indian companies such as SAIL and TISCO is ~ 75 t/man year and ~100 t/man year, whereas for POSCO (Korea) and NIPPON (Japan) the productivity values are 1345 t/man year and 980 t/man year. Mitigant In the Companys proposed expansion total workmanship requirement is 290 man power for Beneficiation & Pelletisation Project of 0.60 Million TPA. Labour productivity for the project @ 70% utilization =600000/290*70/100= 1448.28 T/man per year. 3. Slowing Global Economy: Global economic recession has adversely affected the demand for iron & steel products around the world. With slowing global economies and uncertain economic climate in Europe with the advent of European debt crisis, economic activity in these regions will slow down and contract, leading to low demand from these major export markets for Indian manufacturers. Mitigant Indian economy is still growing comparative to European Country. 4. Price Sensitivity and Demand Volatility: The demand of iron & steel depends on the end-user requirements. The traders tend to exhibit price sensitivity and buy when there are at discounts. This volatility of price and demand often affects manufacturers because of their inability to tune their production in line with the market demand fluctuations. Mitigant: The demand of iron & steel are increasing day by day, if any change in the prices of raw material will not adverse effect towards demand & the party may transfer the increase to the customers.

12.12.

RatioAnalysis

Detailed projected profitability projections, balance-sheet, cash flow are as per Appendix 47

VII Stand Alone Company as a whole Project After completion of the project Debt-Equity Ratio 1.62 1.54 Average DSCR 2.33 1.85 Minimum DSCR 1.90 1.23 Interest coverage ratio (ISCR) 3.04 3.41 Internal Rate of Return (Pre Tax) 22.19 16.29 Break Even Point 32.11 41.94 Cash Break Even 22.09 20.69 Note: Above DSCR has been arrived at by taking interest rate of 14%.

12.13.

SensitivityAnalysis:

A) Sensitivity Analysis for Stand Alone Project: a) Selling Price - Reduced by 5% - Case A b) Raw Material Prices - Increased by 5% - Case B c) Interest Rate - increased by 1% - Case C Particulars Average DSCR Minimum DSCR IRR Pay Back Period Years BEP (2015- 70% util.) (%) Cash BEP (2015) (%) Base Case 2.33 1.90 22.19% 4.20 32.11 22.09 Case A 2.16 1.75 20.32% 4.64 35.36 24.33 Case B 2.24 1.81 21.10% 4.45 33.93 24.33 Case- C 2.30 1.84 22.39% 4.26 33.41 23.40

B) Sensitivity Analysis for the Company as a whole: a) Selling Price b) Raw Material Prices c) Interest Rate Particulars Average DSCR Minimum DSCR IRR Pay Back Period Years . Reduced by 3% - Case A Increased by 3% - Case B increased by 1% - Case C Case A 1.65 1.09 14.13% 8.10 Case B 1.72 1.17 14.97% 7.70 Case- C 1.82 1.33 16.41% 7.20

Base Case 1.85 1.23 16.29% 7.03

Summary of profitability, Break-Even, DSCR and IRR Total Capacity & projected sales ( Company as a whole)

48

Particulars Installed Capacity (MT) ROLLING Capacity Utilisation Total Production(MT) ROLLING Installed Capacity (MT) SMS Capacity Utilisation Total Production(MT) Captive Consumption Balance for sale Installed Capacity (MT) SI Capacity Utilisation Total Production(MT) Captive Consumption Balance for sale Inst. Capacity (LACSMT)PELLETISING Capacity Utilisation Total Production(Lacs MT) Captive Consumption ( lacs MT) Balance for sale ( Lacs MT) Balance for sale in Crs Total Sales Relisation Add. Opening Stock Less Closing Stock Sales Realisation ( Net)

2012 72000 70% 50400 50,400 60000 70% 42000 37800 4200

2013 90000 60% 27000 72000 80% 57600 28485 29,115 150000 50% 75000 43200 31800 6.00 149.52 235.84 2.30 3.49 3.49 5.50 148.33 233.83

2014 90000 70% 63000 72000 80% 57600 66465 150000 74% 111000 43200 67800 6.00 347.28 5.50 8.10 344.68

2015 90000 80% 72000 72000 80% 57600 75960 150000 80% 120000 43200 76800 6.00 70% 4.20 1.80 2.40 192.00 587.52 8.10 8.10 587.52

2016 90000 80% 72000 72000 80% 57600 75960 150000 90% 135000 43200 91800 6.00 80% 4.80 2.03 2.78 222.00 647.52 8.10 8.10 647.52

2017 90000 80% 72000 72000 80% 57600 75960 150000 100% 150000 43200 106800 6.00 90% 5.40 2.25 3.15 252.00 677.52 8.10 8.10 677.52

12.14.

FUTUREPROJECTIONSANDCALCULATION

(Amt in Crores) Year Ended Share Capital/ Warrants Internal Cash accruals Reserves and Surplus Deferred Tax Tangible Net Worth Term liabilities Debantures Working Capital Loans Net Block Total Current assets Current Liabilities 2015 Proj. 120.50 40.86 9.34 170.70 and 195.00 73.17 299.50 101.82 4.25 2016 Proj. 120.50 92.86 16.60 229.96 172.00 83.60 269.61 116.32 4.86 49 2017 Proj. 120.50 157.31 22.08 299.90 149.00 94.03 254.67 130.84 5.47 2018 Proj. 120.50 223.26 26.05 369.81 126.00 94.06 239.73 130.88 5.47 2019 Proj. 120.50 291.41 28.72 440.64 94.50 94.06 224.78 130.90 5.47 2020 Proj. 120.50 362.26 30.29 513.05 63.00 94.06 209.84 130.91 5.47 2021 Proj. 120.50 435.78 30.91 587.19 31.50 94.06 194.90 130.93 5.47

Net Current Assets Net Sales / Receipts Profit before tax Profit after tax Depreciation Internal Cash Accruals Debt Equity Ratio*

97.56 336.00 61.60 40.86 14.94 55.80 1.14

111.46 384.00 78.41 52.01 14.94 66.95 0.75 1.11 1.57 Years

125.37 432.00 97.16 64.45 14.94 79.39 0.50 0.81 1.71

125.41 432.00 99.42 65.95 14.94 80.89 0.34 0.60 1.90

125.43 432.00 102.75 68.15 14.94 83.10 0.21 0.43 2.38

125.44 432.00 106.81 70.84 14.94 85.79 0.12 0.31 3.33

125.46 432.00 110.85 73.52 14.94 88.47 0.05 0.21 6.19

Total outside liabilities to 1.57 TNW FACR 1.54 Pay Back Period - Years 4.20 DSCR - Average IRR 2.33 22.19%

IMPOTANT FINANCIAL INDICATORS (Company as a Whole) Year Equity Share Capital Share Premium Reserves and Surplus Deferred Tax Tangible Net Worth Term liabilities Unsecured Loan Working Capital Loans Net Block Investments Net Current Assets Net Sales / Receipts Profit before tax Profit after tax Depreciation Internal Cash Accruals Equity Dividend Paid Dividend (%) Debt Equity Ratio Total outside liabilities to TNW FACR Average DSCR Pay back period IRR 2012 6.96 124.85 4.47 5.20 136.28 187.02 15.00 30.00 314.48 3.16 46.44 148.33 5.59 3.36 8.50 11.87 1.24 1.75 1.68 1.85 7.03 16.29% 2013 9.08 183.27 22.73 7.19 215.08 295.67 16.50 76.93 471.09 3.16 108.09 233.83 21.99 16.26 18.31 34.57 1.28 1.58 1.59 Years 2014 10.29 218.21 50.10 9.18 278.60 343.21 16.50 91.81 542.49 3.16 122.57 344.68 40.11 26.59 28.11 54.69 1.20 12% 1.16 1.46 1.58 2015 10.29 218.21 97.27 19.21 325.77 315.74 16.50 150.49 506.55 3.16 204.43 587.52 59.00 38.95 43.44 82.38 1.81 18% 0.92 1.16 1.60 2016 10.29 218.21 155.89 25.79 384.39 265.28 16.50 161.55 469.84 3.16 221.38 647.52 82.19 54.45 44.21 98.67 2.41 23% 0.66 0.95 1.77 2017 10.29 218.21 208.31 29.38 436.81 214.82 16.50 176.62 432.35 3.16 237.14 677.52 77.29 51.23 44.99 96.22 2.41 23% 0.47 0.75 2.01 2018 10.29 218.21 261.15 30.38 489.65 164.35 16.50 176.62 394.08 3.16 237.14 677.52 81.81 54.25 45.76 100.02 2.41 23% 0.32 0.59 2.40

50

Project as standalone Debt Service Coverage Ratio 2015 Inflows Profit after Tax Depreciation Amortisation expenses 40.86 14.94 of 27.30 83.10 26.09 93.04 22.87 102.2 6 19.65 100.5 4 15.99 99.08 11.58 97.36 7.17 95.63 2.76 93.35 133.40 764.38 26.09 23.00 49.09 22.87 23.00 45.87 19.65 23.00 42.65 15.99 31.50 47.49 11.58 31.50 43.08 7.17 31.50 38.67 2.76 31.50 34.26 133.40 195.00 328.40 DSCR (A/B) 3.04 1.90 2.33 1.90 2.23 2.36 2.09 2.26 2.47 2.72 2.33 52.01 14.94 64.45 14.94 65.95 14.94 68.15 14.94 70.84 14.94 73.52 14.94 77.26 13.33 513.04 117.93 2016 2017 2018 2019 2020 2021 2022 Total

Interest on term loans Total Inflows (A)

Outflows - Interest on term loans 27.30 - Repayment of term loan 0.00 Total Outlows (B) 27.30

MINIMUM DSCR AVERAGE DSCR

DSCR- Raw Material Price increased by 5% 2015 Inflows 59.6 6 14.9 4 61.1 6 14.9 4 63.3 7 14.9 4 66.0 6 14.9 4 68.7 4 14.9 4 81.3 3 13.3 3 485. 19 117. 93 22.8 7 97.4 51 19.6 5 95.7 15.9 9 94.3 11.5 8 92.5 133. 40 2016 2017 2018 2019 2020 2021 2022 Tota l

Profit after Tax

37.13

47.75

Depreciation Amortisation expenses

14.94 of

14.94

Interest on term loans Total Inflows (A)

27.30 79.38

26.09 88.79

7.17 90.8

2.76 97.4

736. 52 -

Outflows 22.8 7 23.0 0 45.8 7 2.12 19.6 5 23.0 0 42.6 5 2.24 15.9 9 31.5 0 47.4 9 1.99 11.5 8 31.5 0 43.0 8 2.15

- Interest on term loans

27.30

26.09

7.17 31.5 0 38.6 7 2.35

2.76 31.5 0 34.2 6 2.84

133. 40 195. 00 328. 40 2.24

- Repayment of term loan 0.00

23.00

Total Outlows (B) DSCR (A/B)

27.30 2.91 1.81 2.24

49.09 1.81

MINIMUM DSCR AVERAGE DSCR

DSCR-Sale price decrease by 5% 2015 Inflows Profit after Tax Depreciation Amortisation expenses 34.48 14.94 of 26.09 85.75 22.87 94.06 19.65 92.34 15.99 90.88 11.58 89.16 7.17 87.43 2.76 93.74 133.40 710.09 26.09 23.00 49.09 1.75 22.87 23.00 45.87 2.05 19.65 23.00 42.65 2.16 15.99 31.50 47.49 1.91 11.58 31.50 43.08 2.07 7.17 31.50 38.67 2.26 2.76 31.50 34.26 2.74 133.40 195.00 328.40 2.16 44.72 14.94 56.24 14.94 57.74 14.94 59.95 14.94 62.64 14.94 65.32 14.94 77.66 13.33 458.75 117.93 2016 2017 2018 2019 2020 2021 2022 Total

Interest on term loans 27.30 Total Inflows (A) 76.72

Outflows - Interest on term loans 27.30 - Repayment of term loan 0.00 Total Outlows (B) DSCR (A/B) 27.30 2.81 1.75 2.16

MINIMUM DSCR AVERAGE DSCR

52

DSCR-Rate of Interest increased by 1% 201 6 50.7 7 14.9 4 201 9 67.4 0 14.9 4 202 0 70.3 0 14.9 4 202 1 73.1 8 14.9 4

2015 Inflows Profit after Tax Depreciation Amortisation expenses Interest on loans 39.56 14.94 of

2017 63.3 6 14.9 4

2018 65.0 1 14.9 4

2022 85.8 6 13.3 3

Total

515.45 117.93 -

term 29.25 83.76

Total Inflows (A)

27.9 6 93.6 7

24.5 1 102. 81

21.0 6 101. 01

17.1 3 99.4 7

12.4 0 7.68 2.95 97.6 95.8 102. 4 1 15

142.93 776.32 -

Outflows - Interest on term loans 29.25 - Repayment of term loan 0.00 Total Outlows (B) DSCR (A/B) 29.25 2.86 1.84 2.30

27.9 6 23.0 0 50.9 6

24.5 1 23.0 0 47.5 1

21.0 6 23.0 0 44.0 6 2.29

17.1 3 31.5 0 48.6 3

12.4 0 31.5 0 43.9 0

7.68 31.5 0 39.1 8

2.95 31.5 0 34.4 5

142.93 195.00 337.93 2.30

1.84 2.16

2.05 2.22 2.45 2.96

MINIMUM DSCR AVERAGE DSCR

Projected Profitability Statement (Project as standalone)

Year Raw Materials Iron Ore for Benefication Other Raw Materials Electricity Labour & Plant Salaries Direct wages including all benefits Factory Supervision Total Factory Salaries (D) Other Manufacturing Costs Repairs & Maintenance Factory Insurance Total Factory Overheads (E) Estimated Cost of Production (A+B+C+D+E) Cost of Production Administrative expenses Selling & Distribution Expenses Total Cost of Sales 5.07 0.75 5.82 211.8 211.8 3.36 6.72 221.9 5.32 0.79 6.11 241.3 241.3 3.84 7.68 252.9 5.59 0.83 6.41 270.9 270.9 4.32 8.64 283.9 5.87 0.87 6.73 271.9 271.9 4.32 8.64 284.8 6.16 0.91 7.07 272.2 272.2 4.32 8.64 285.2 6.47 0.96 7.43 272.6 272.6 4.32 8.64 285.5 6.79 1 7.8 272.9 272.9 4.32 8.64 285.9 7.13 1.05 8.19 273.3 273.3 4.32 8.64 286.3 2.94 2.32 5.26 3.23 2.55 5.79 3.56 2.81 6.37 3.91 3.09 7 3.91 3.09 7 3.91 3.09 7 3.91 3.09 7 3.91 3.09 7 2015 182.3 131.7 50.61 18.41 2016 208.4 150.6 57.84 21.04 2017 234.4 169.4 65.07 23.67 2018 234.4 169.4 65.07 23.67 2019 234.4 169.4 65.07 23.67 2020 234.4 169.4 65.07 23.67 2021 234.4 169.4 65.07 23.67 2022 234.4 169.4 65.07 23.67

53

Total sales consumption EBITDA

Realisation-

without

Captive 336 114.1 27.3 10.24 37.54 14.94 61.6 11.4 9.34 40.86 384 131.2 26.09 11.7 37.8 14.94 78.41 19.14 7.26 52.01 432 148.1 22.87 13.16 36.04 14.94 97.16 27.23 5.48 64.45 432 147.2 19.65 13.17 32.82 14.94 99.42 29.51 3.97 65.95 432 146.9 15.99 13.17 29.15 14.94 102.8 31.92 2.67 68.15 432 146.5 11.58 13.17 24.74 14.94 106.8 34.39 1.57 70.84 432 146.1 7.17 13.17 20.33 14.94 110.9 36.7 0.62 73.52 432 145.7 2.76 13.17 15.92 13.33 116.5 39.12 0.1 77.26

Interest on Term Loans Interest on Working Capital Loans Total Finance Cost Depreciation Profit Before Tax Provision for Tax Deffered Tax UNIT PROFIT AFTER TAX

Projected Balance Sheet (Project as standalone) Year 20 201 201 201 201 12 3 4 5 6 SOURCES OF FUNDS Shareholders' Funds: - Equity capital with 30. 84. 120 120 120 premium/Warrants 13 35 .50 .50 .50 - Warrants/Others - Internal Generation - Reserves & Surplus 40. 92. 86 86 - Defered Tax 9.3 16. 4 60 Loan Funds: - Secured - Term Loans from FIs 25. 120 195 195 172 / Banks 00 .00 .00 .00 .00 - Working capital 73. 83. 17 60 - Unsecured TOTAL LIABILITIES 55. 204 315 438 485 13 .35 .50 .87 .56 APPLICATION OF FUNDS Gross Block 299 299 299 .50 .50 .50 Less : Depreciation 14. 29. 94 89 Net Block 299 284 269 .50 .56 .61 Capital Work-in- 50. 200 Progress 00 .00 Investments Current Assets : 54

201 7

201 8

201 9

202 0

202 1

202 2

120 .50 157 .31 22. 08

120 .50 223 .26 26. 05

120 .50 291 .41 28. 72

120 .50 362 .26 30. 29

120 .50 435 .78 30. 91

120 .50 513 .04 31. 01

149 .00 94. 03 542 .92

126 .00 94. 06 589 .87

94. 50 94. 06 629 .19

63. 00 94. 06 670 .11

31. 50 94. 06 712 .75

94. 06 758 .61

299 .50 44. 83 254 .67 -

299 .50 59. 77 239 .73 -

299 .50 74. 72 224 .78 -

299 .50 89. 66 209 .84 -

299 .50 104 .60 194 .90 -

299 .50 117 .93 181 .57 -

- Inventories - Receivables - Loans and advances Total current assets Less : Current Liabilities & Provisions Net current assets Bank Balance (Surplus) TOTAL ASSETS 5.1 3 55. 13

4.3 5 204 .35

16. 00 315 .50

51. 42 50. 40 101 .82 4.2 5 97. 56 56. 75 438 .87

58. 72 57. 60 116 .32 4.8 6 111 .46 104 .48 485 .56

66. 04 64. 80 130 .84 5.4 7 125 .37 162 .88 542 .92

66. 08 64. 80 130 .88 5.4 7 125 .41 224 .73 589 .87

66. 10 64. 80 130 .90 5.4 7 125 .43 278 .98 629 .19

66. 11 64. 80 130 .91 5.4 7 125 .44 334 .82 670 .11

66. 13 64. 80 130 .93 5.4 7 125 .46 392 .39 712 .75

66. 15 64. 80 130 .95 5.4 7 125 .48 451 .57 758 .61

Projected Cash Flow Statement (Project as standalone)

YEAR SOURCES OF FUNDS Internal Cash Accruals Equity Capital /Warrants - Warrants/Others PBT with term interest added back Depreciation and amortisation provision Increase in term loans Increase in borrowings for Work. Cap. Increase in current liabilities Sale of Investments Increase in Unsecured Loans TOTAL (A) APPLICATION OF FUNDS Capital expenditure Preliminary Expenses Increase in current assets Decrease in term loans Interest on term loan Decrease in bank borrowings Taxation Decrease in Unsecured Loans Decrease in current liabilities TOTAL (B) Op. Bal. of Cash & Bank Balances Net Surplus (A-B) Cl. Bal. of Cash & Bank Balances 50 5.13 5.13 50 150 150 5.13 -0.77 4.35 99.5 99.5 4.35 11.65 16 101.8 27.3 11.4 140.5 16 40.75 56.75 14.51 23 26.09 19.14 82.74 56.75 47.73 104.5 14.51 23 22.87 27.23 87.62 104.5 58.4 162.9 0.04 23 19.65 29.51 72.2 162.9 61.85 224.7 0.02 31.5 15.99 31.92 79.42 224.7 54.25 279 0.02 31.5 11.58 34.39 77.49 279 55.84 334.8 0.02 31.5 7.17 36.7 75.38 334.8 57.57 392.4 0.02 31.5 2.76 39.12 73.39 392.4 59.17 451.6 55.1 25 30.1 54.23 95 149.2 36.15 75 111.2 88.9 14.94 73.17 4.25 181.3 104.5 14.94 10.43 0.61 130.5 120 14.94 10.43 0.61 146 119.1 14.94 0.03 134.1 118.7 14.94 133.7 118.4 14.94 133.3 118 14.94 133 119.2 13.33 132.6 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

55

Break Even Point (Project as standalone) Ist Year Fixed Raw Materials Power and Fuel Salary and wages Repair & Maint. Depreciation Other Mnufacturing expenses Insurance Sell & Adm. Exps. Intt. on Term Loan Intt. on Bank Borr. Total Total Sales Turnover Capacity Utilisation avg Break Even Point(%) Cash Break Even 2nd Year Fixed 1.50 0.15 14.94

1.50 0.15 14.94

Variable - 182.34 - 18.41 3.76 4.92 - 0.75 6.08 5.07

Variable 208.39 21.04 4.29 5.17 5.32 0.79 6.52 11.70 263.23

4.00 27.30 47.89 336.00 70% 32.11 22.09

10.24 231.58 47.69 384.00 80% 31.59 21.69

5.00 26.09

Calculation of I.R.R. (Project as standalone) Years (As on 31st March) 2012 A) OUT FLOW Increas e in Fixed Asset 50.00 Net Worki ng Capital Total B) INFLO W Cash Accrua ls Divide 50.00

2013

2014 2015

201 6

2017

2018

201 9

202 0

2021

2022

150.0 0

99.5 0

150.0 0

99.5 0

101. 82 101. 82

14.5 1 14.5 1

14.5 1 14.5 1

0.04 0.04

0.02 0.02 0.02 0.02 0.02 0.02

0.02 0.02

0.00 -

0.00 -

55.8 0 -

66.9 79.3 5 9 56

80.8 9 -

83.1 85.7 0 9 88.47 -

90.59 -

nd (added back) Interest added back Modva t

27.3 0

26.0 22.8 9 7

19.6 5

15.9 11.5 9 8 7.17

2.76

Total Net of inflow outflo w (B-A ) 50.00 Net amount 50.00 Add : 5% of Fixed Assets Add : 100% of Curren t Assets

83.1 0

93.0 102. 4 26

100. 54

99.0 97.3 8 6 95.63

93.35

150.0 0 150.0 0

99.5 0 99.5 0

18.7 2 18.7 2

78.5 87.7 3 5 78.5 87.7 3 5

100. 50 100. 50

99.0 97.3 7 5 95.62 99.0 97.3 7 5 95.62

93.33

93.33

9.08

582.52 150.0 0 99.5 0 18.7 2 100. 50 -

Total I.R.R

50.00 22.19 %

78.5 87.7 3 5

99.0 97.3 7 5 95.62

684.92

Pay Back Period Calculation (Project as standalone) 201 Years 2013 4 2015 2016 NET ACCRUALS CASH 0.00 0.0 0 55.8 0 66.9 5

2017

2018

202 2019 0 83.1 0 85.7 9

79.39

80.89

ADD DIVIDEND

57

NET INFLOW

0.00

0.0 0 0.0 0

55.8 0 55.8 0

66.9 5 122. 75

79.39 202.1 4

80.89 283.0 3

83.1 0 366. 13

85.7 9 451. 92

NET CUMULATIVE INFLOW 0.00 CAPITAL COST OF THE PROJECT 299.50 PAYBACK PERIOD (YEARS) 4.20

Yea rs

Debt Equity Ratio (Project as standalone) Years Term Loan Total Debt 2013 120.0 0 120.0 0 2014 195.0 0 195.0 0 120.5 0 0.00 120.5 0 1.62 2015 195.0 0 195.0 0 120.5 0 9.34 40.86 170.7 0 1.14 2016 172.0 0 172.0 0 120.5 0 16.60 92.86 229.9 6 0.75 2017 149.0 0 149.0 0 120.5 0 22.08 157.3 1 299.9 0 0.50 2018 126.0 0 126.0 0 120.5 0 26.05 223.2 6 369.8 1 0.34 2019 94.50 94.50 120.5 0 28.72 291.4 1 440.6 4 0.21 2020 63.00 63.00 120.5 0 30.29 362.2 6 513.0 5 0.12 2021 31.50 31.50 120.5 0 30.91 435.7 8 587.1 9 0.05

Equity Share and prem. 84.35 Deffered Tax Reserve & Surplus 0.00 84.35 1.42

Total Equity Debt Equity Ratio

Fixed Assets Coverage Ratio (Project as standalone) Years 2015 2016 269.61 172.00 1.57 2017 2018 2019 2020 2021

Net Fixed Assets 284.56 Total Debt FACR 195.00 1.46

254.67 239.73 224.78 209.84 194.90 149.00 126.00 94.50 1.71 1.90 2.38 63.00 3.33 31.50 6.19

TOL/TNW Ratio (Project as standalone) Years Debt 2013 2014 120. 195.0 2015 195.0 2016 2017 2018 126.0 2019 94.50 2020 63.00 2021 31.50

172.00 149.00 58

00 Bank Borrowing Current Lia. Unsecured Loans TOL 120. 00

0 0.00 0.00 195.0 0

0 73.17 4.25 272.4 3 83.60 4.86 94.03 5.47 -

0 94.06 5.47 225.5 3 94.06 5.47 194.03 94.06 5.47 162.53 94.06 5.47 131.0 3

260.46 248.50

Interest Coverage Ratio (Project as standalone) Years 2015 2016 2017 2018 Profit After Tax Depreciation Intt. on Term Loan Total 40.86 14.94 27.30 83.10 52.01 14.94 26.09 93.04 64.45 14.94 22.87 102.26 65.95 14.94

2019 68.15 14.94

2020 70.84 14.94 11.58 97.36

2021 73.52 14.94 7.17 95.63

19.65 15.99 100.54 99.08

Intt. on Term Loan 27.30 Interest Coverage Ratio

26.09

22.87

19.65

15.99

11.58

7.17

3.04

3.57

4.47

5.12

6.20

8.41

13.34

Various Ratios at a Glance (Project as standalone) 20 20 201 201 20 Particulars 13 14 5 6 17 0 % of Total Income DSCR BEP 22.1 IRR 9% PAY BACK PERIOD ( in years) 4.20 FACR DEBT EQUITY TOL/TNW INTEREST COVERAGE RATIO 1.4 2 1.4 2 1.6 2 1.6 2 1.4 6 1.1 4 1.6 0 3.0 4 59 1.5 7 0.7 5 1.1 3 3.5 7 1.7 1 0.5 0 0.8 3 4.4 7 3.0 4 32. 11 1.9 0 31. 59

20 18

20 19

20 20

202 20 1 22 Av g. 2.3 3

2.2 3

2.3 6

2.0 9

2.2 6

2.4 7

2.7 2

1.9 0 0.3 4 0.6 1 5.1 2

2.3 8 0.2 1 0.4 4 6.2 0

3.3 3 0.1 2 0.3 2 8.4 1

0.0 5 0.2 2 13. 34

Term Loan Repayment Schedule 20 12 Term Loan - Total Opening Balance Sanctions/disbursement during the year 25. 00 25. 00 25. 00 95. 00 120 .00 120 .00 0.0 0 120 .00 75. 00 195 .00 195 .00 195 .00 195 .00 195 .00 27. 30 27. 30 195 .00 195 .00 23. 00 172 .00 26. 09 26. 09 172 .00 172 .00 23. 00 149 .00 22. 87 22. 87 149 .00 126 .00 94. 50 63. 00 31. 50 201 3 201 4 201 5 201 6 201 7 201 8 201 9 20 20 20 21 20 22

Less : Repayment during the year 25. Closing balance 00 Interest on Term Loan (14.00%) INTEREST COST ON TERM LOAN - I SUMMARY - TERM LOAN Closing Balance - Year- 25. end 00 Interest cost on term loans -

149 .00 23. 00 126 .00 19. 65 19. 65

126 .00 31. 50 94. 50 15. 99 15. 99

94. 50 31. 50 63. 00 11. 58 11. 58

63. 00 31. 50 31. 50 7.1 7 7.1 7

31. 50 31. 50 2.7 6 2.7 6

120 .00 -

195 .00 -

195 .00 27. 30

172 .00 26. 09

149 .00 22. 87

126 .00 19. 65

94. 50 15. 99

63. 00 11. 58

31. 50 7.1 7

2.7 6

60

 13. CASEII:WorkingCapitalFinancing(ABCTradersLtd.)
13.1. CMADataAnalysisforWorkingCapitalFinancing

PREPARATION OF CMA DATA FOR M/S XYZ LIMITED AND UNDERSTANDING WC ASSESSMENT This section illustrates how the company asking for working capital financing prepares CMA data. This involves analysis of balance sheet and calculation of maximum permissible bank finance. This CMA data is prepared using the balance sheet and the profit and loss account in the annual report of the company. CMA data contains six forms as illustrated: Form II: Operating statement This form is similar to the profit and loss account of the company and tells about the income and the expenditure of the company during the financial year. The cost of production and total cost of sales are determined which helps in calculating the net profit of the company. Items such as raw materials, depreciation, and spares consumption are directly involved with manufacturing activity and thus used to calculate the cost of production. Income from other sources is considered under item other income which is not directly related to the main activity of the company.

31/3/2010 AUDITED 1. Gross sales (i) Domestic sales (ii)Export sales Add Revenue Income Total Less Excise duty Net Sales % age rise(+)or fall (-) in net sales as compared to preveous year(annualised) Cost of sales i)Raw materials(including stores and other items used in the process of manufacture) (a)Imported (b)Indigeneous ii)Other spares (a)Imported (b)Indigenous iii)Power and fuel 14687.70 8405.07 110.57 23203.34 0.00 23203.34 9.96

31/3/2011 AUDITED 15992.98 10636.80 181.99 26811.77 0.00 26811.77 15.55

31/3/2012 ESTIMATES 19092.25 11947.41 100.00 31139.66 0.00 31139.66 16.14

2. 3. 4.

5.

14653.32

16861.20

19952.45

0.00 14653.32 1561.70 429.55 1132.15 2229.21

5.98 16855.22 1724.71 519.53 1205.18 2402.54

0.00 19952.45 2097.75 550.00 1547.75 2593.11

61

6. 7. 8. 9. 10. 11.

12. 13. 14. 15.

16. 17.

iv) Direct labour (Factory wages and salaries) v)Other mfg. expenses vi)Depreciation vii)SUB TOTAL viii) Add :Opening stock in process Sub total ix)Deduct :Closing stock in process x) Cost of production xi) Add Opening stock of finished goods xii) Less Closing stock of finished goods xiii)SUB TOTAL(Total cost of sales) selling,general and administrative expenses SUB TOTAL Operating profit before Interest Interest Operating profit after Interest (i) Add other non operating income (a) Waste sales (b) Export incentive (c) Insurance claim (d) Interest (e) others sub total (income) (ii) Deduct othe non operating expenses (a) quota expenses (b) loss on sale of fixed asset (c) Prior period adjustment (d) sub total (expenses) (iii) Net other non operating income\exp Profit before tax/loss {10 + 11 (iii)} Provision for taxes Provision for defeered tax liability Net profit/loss (12-13) (a) Equity dividend paid-amt (Already paid+B.S.provision) (b) Dividend rate (on p.shares only) Retained profit (14-15) Retained profit/loss profit (%age)

1183.16 3.36 1449.97 21080.72 670.13 21750.85 414.29 21336.56 879.64 486.62 21729.58 1495.94 23225.52 -22.18 1565.93 -1588.11

1289.45 2.81 1389.10 23669.81 414.29 24084.10 565.04 23519.06 486.62 481.11 23524.57 1516.44 25041.01 1770.76 1490.89 279.87

1377.46 5.00 1454.94 27480.72 565.04 28045.76 684.04 27361.71 481.11 679.09 27163.73 1639.20 28802.93 2336.73 1610.06 726.66

0.00 0.00 0.00 0.00 0.00 0.00

0.00 0.00 0.00 0.00 0.00 0.00

0.00 0.00 0.00 0.00 0.00 0.00

0.00 0.00 -1588.11 -2.11 -281.19 -1304.81 0.00

0.00 0.00 279.87 0.23 87.46 192.18 0.00

0.00 0.00 726.66 138.84 19.31 568.51 0.00

-1304.81 100.00

192.18 100.00

568.51 100.00

62

Form III: Analysis of balance sheet This form gives a detailed analysis of the balance sheet of the company. The balance sheet contains two important parts assets and liabilities. However, while talking about working capital assessment, we are basically interested in Current assets and current liabilities. Current Assets are those assets for the companies that are reasonably expected to be converted into cash within one year during the normal course of business. Current assets include cash, account receivables, inventories, short term investments, prepaid expenses and many others as explained in the form. These assets are used for the main activity of the business and must be kept at certain reasonable level for the efficient working of the business. For example, cash can be used to purchase raw materials from which finished goods can be manufactured. These current assets are very necessary for day to day operations of the company. Current Liabilities are the companys debts or obligations that are due within one year. They appear on the balance sheet and include many important items such as short term debt, sundry creditors, provisions for taxation, dividend payable, advances from customers and installments of term loans. These liabilities are obligations that must be fulfilled within one year and form an important part of working capital since these are the short term sources of funds. The form gives a detailed analysis of current assets and current liabilities which can be used to calculate the working capital requirements as shown in form V of CMA data.
ANALYSIS OF BALANCE SHEET LIABILITIES CURRENT LIABILITIES Short term bank borrowing from banks (including bills purchased, discounted and excess borrowing placed ib repayment basis) (i) From applicant bank (ii) From other banks (iii) (of which BP & BD) Sub total (A) Short term borrowings from Others Sundry creditor (Trade) Advance payments from customers/deposits from dealers Provision for taxation Dividend payable Other statutory liabilities (due within one year) Deposits/Instalments of term loans/DPGs/Debentures, etc. (due within one year) Deposits/Redemption of Pref.capital (due within one year) Other current liabilities & 31/3/2010 AUDITED 31/3/2011 AUDITED 31/3/2012 ESTIMATES

1.

5879.31 0.00 (925.00) 5879.31 0.00 347.50 43.57 0.00 0.00 54.70 684.43

7143.26 0.00 (644.80) 7143.26 0.00 1261.06 29.01 0.00 0.00 60.75 1075.27

8272.23 0.00 (769.52) 8272.23 0.00 1104.92 30.00 0.00 0.00 60.00 1664.08

2. 3. 4. 5. 6. 7. 8.

0.00 548.79

0.00 618.57

0.00 620.00

9.

63

10. 11. 12. 13. 14.

15. 16. 17. 18. 19. 20. 21. 22. 23. 23a. 24. 25.

provisions (due within 1 yr) (Specify major items) Interest accrued but not due Commission payable Others capital creditors Sub-total (B) Total current liabilities (total of 1 to 9 excld 1(iii) TERM LIABILITIES Preferance shares (redeemable after one year) Term loans (excld instalments payable within one year) Deferred Payment Credits (creditors for capital items) (excluding instalments due within one year) Others- Capital Creditors & provisions Other term liabilities TOTAL TERM LIABILITIES TOTAL OUTSIDE LIABILITIES (item 10 plus item 17) Ordinary share capital Capital Subsidy Deferred Tax Liability Other reserves (excluding provisions) Share Premium Surplus(+) or deficit(-) in Profit & Loss account Others ( NET WORTH TOTAL LIABILITIES ASSETS CURRENT ASSETS Cash and Bank Balances Investments(other than long term Investments) (i) Government & other trustees Securities (ii) Fixed deposits with banks (i) Receivables other than deferred & exports (including bills purchased and discounted by banks) Local Sale (ii) Export receivables Instalments of deferred receivables within one year Inventory (i) Raw materials (including

66.37 123.11 359.31 0.00 1678.99 7558.30

68.03 132.88 417.66 0.00 3044.66 10187.92

65.00 130.00 425.00 0.00 3478.99 11751.23

1729.80 12067.56

1904.80 10670.11

1854.80 9856.03

229.48 388.04 90.44 14505.32 22063.62 2129.20 0.00 68.94 1479.10 -1610.85 0.00 2066.39 24130.02 31/3/2009 AUDITED 70.95 0.00

223.75 166.08 98.86 13063.60 23251.52 2129.20 0.00 156.40 1462.85 -1418.67 0.00 2329.78 25581.30 31/3/2010 AUDITED 21.44 0.00

312.50 200.00 200.00 12423.33 24174.56 2129.20 0.00 175.71 1450.35 -850.16 0.00 2905.10 27079.66 31/3/2011 ESTIMATES 21.44 0.00

26. 27.

28.

1936.86

2172

2625.18

1936.86 1387.80

2172.00 1125.44

2625.18 1244.52

29. 30.

4049.74

6367.75

7718.44

64

31. 32. 33.

34. 35. 36. 36. 37. 38.

39. 40. 41. 42.

43. 44. 45.

stores & other items used in the process of manufacture) a) Imported b) Indigenous (ii) Stocks-in-process (iii) Finished Goods (iv) Other consumables spares a) Imported b) Indigenous Advance to suppliers of raw materials & stores/spares Advance payment of taxes Other current assets (specify major items) cst/export incentive receivables Other Prepaid Exp. TOTAL CURRENT ASSETS (Total of 26 to 33) FIXED ASSETS Gross Block (land & building machinery, work-in-process) Depreciation to date NET BLOCK (35-36) OTHER NON-CURRENT ASSETS Investments/book debts/advances/ deposits which are not Current Assets Non-consumables stores & spares Other non-current assets TOTAL OTHER NON CURR.ASSETS Intangible assets (patents, goodwill, prelim, expenses, bad/ doubtful expenses not provided for etc.) TOTAL ASSETS (34+37+41+42) TANGIBLE NET WORTH (24-42) NET WORKIG CAPITAL [(17+24)-(37+41+42)]

0.00 2908.78 414.29 486.62 67.32 172.73 93.84 17.45 888.75 179.96 708.79 0.00 8445.39

0.00 5055.42 565.04 481.11 83.52 182.66 322.55 26.40 1307.71 470.75 836.96 0.00 11343.29

0.00 6055.31 684.04 679.09 75.00 225.00 150.00 25.00 1265.00 415.00 850.00 0.00 13049.59

26809.06 11242.18 15566.88 117.75

26746.43 12625.67 14120.76 117.25

27993.43 14080.61 13912.82 117.25

0.00 0.00 117.75 0.00

0.00 0.00 117.25 0.00

0.00 0.00 117.25 0.00

24130.02 2066.39 887.08

25581.30 2329.78 1155.37

27079.66 2905.10 1298.36

The above table shows the calculation of net working capital for XYZ Limited the working capital requirements for 2011 is Rs 1298.36 lacs and for the next year, it is Rs 1428.60 lacs. The next form shows the various holding levels of current assets which is very important from bankers point of view. The banker verifies these various holding periods and compares it with the peers and previous years so as to get to know the acceptable level. This can be very important in working capital assessment.

65

Form IV: Comparative statement of current assets and liabilities This form explains the operating cycle of the company. Operating cycle forms an integral part of the companys business and helps in understanding the health of the business. The operating cycle is calculated using various parameters as given below (Raw material holding period + Work in process holding period + finished goods holding period + receivables collection period) accounts payable period The figures in brackets in the form indicate these stated parameters and can be used to calculate the operating cycle. The company analyzes these parameters comparing it with previous years to understand the trend, check whether the values are reasonable or not and to finally know the health of the business. It must be noted these values can be in days or months.
ANALYSIS OF CURRENT ASSETS AND LIABILITIES A. CURRENT ASSETS Raw materials (including stores & other items used in the process of manufacturing) a) Imported Amount 31/3/2010 31/3/2011 31/3/2012 -

1.

0.00

0.00

0.00

b) Indigenous Amount Months' consumption 2. Other consumables spares, excluding those included in (1) above a) Imported Amount Months' consumption b) Indigenous Amount Months' consumption 3. Stocks-in-process: Amount Months' cost of production

2908.78 2.38

5055.42 3.60

6055.31 3.64

67.32 1.88

83.52 1.93

75.00 1.64

172.73 0.62 414.29

182.66 0.61 565.04

225.00 0.65 684.04

0.23

0.29

0.30

66

4.

Finished Goods Months' cost of sales Receivables other than export & deferred receivables (including bills purchased & discounted by banks) Amount Months' domestic sales (excldg def payment sales) Export receivables (including bills purchased & discount) Amount Months' export sales Advances to suppliers of materials & stores/spares, Consumables Other current assets including cash & bank balances & defer receivables due within one yr (specify major items) Cash & Bank balances Invstmt except long-term instlmts of def recoverables others TOTAL CURRENT ASSETS

486.62 0.27

481.11 0.25

679.09 0.30

5.

1936.86

2172.00

2625.18

1.58

1.63

1.65

6.

7.

1387.80 1.98 93.84

1125.44 1.27 322.55

1244.52 1.25 150.00

8.

977.15

1355.55

1311.44

9. II. CURRENT LIABILITIES (other than bank borrowings for working capital 10.

8445.39 31/3/2009 AUDITED

11343.29 31/3/2010 AUDITED

13049.59 31/3/2011 ESTIMATES

11. 12.

Creditors for purchase of raw materials, stores and consumable Spares Amount Month's purchases) Advances from Customers Statutory liabilities Other current liabilitiesspecify major items) a) S.T. borrowings-Others

347.50 0.21 43.57 54.70

1261.06 0.63 29.01 60.75

1104.92 0.50 30.00 60.00

13.

0.00

0.00

0.00

67

14.

b) Dividend payable c) Instalments of TL.DPG and public deposits d) Redemption of Pref. Shares due within year e) Other current liabilities and Provisions TOTAL

0.00 684.43

0.00 1075.27

0.00 1664.08

0.00 548.79 1678.99

0.00 618.57 3044.66

0.00 620.00 3478.99

The months cost of sales or holding period is compared with previous years so as to understand the working capital requirements. There has not been enough variation for the company and the holding level seems reasonable.

Form V: Maximum permissible bank finance

COMPUTATION OF MPBF FOR WORKING CAPITAL 31/3/2010 AUDITED FIRST METHOD OF LENDING 1. 2. Total Current Assets Other current liabilities (Other than bank borrowings/ term loan) installment payable in next year) Working capital gap Min. stipulated Net working capital (25% of WCG excluding export receivables) Actuals/projected net working Capital Item 3 minus item 4 Item 3 minus item 5 Maximum permissible bank finance (lower of 6 or 7) Excess borrowings representing shortfall in NWC SECOND METHOD OF LENDING Total current assets Other current liabilities (Other than bank borrowings/ term loan) installment payable in next year) Working capital gap Min.stipulated Net w.capital (25% of Total current assets excluding export receivables) Actuals/projected net working Capital 8445.39 994.56 11343.29 1969.39 13049.59 1814.92 31/3/2011 AUDITED 31/3/2012 ESTIMATES

3. 4.

7450.83 1515.76

9373.90 2062.12

11234.67 2497.54

5. 6. 7. 8. 9.

887.08 5935.07 6563.75 5935.07

1155.37 7311.79 8218.53 7311.79

1298.36 8737.13 9936.31 8737.13

1. 2.

8445.39 994.56

11343.29 1969.39

13049.59 1814.92

3. 4.

7450.83 1764.40

9373.90 2554.46

11234.67 2951.27

5.

887.08

1155.37

1298.36

68

6. 7. 8. 9.

Item 3 minus item 4 Item 3 minus item 5 Maximum permissible bank finance (lower of 6 or 7) Excess borrowings representing shortfall in NWC

5686.43 6563.75 5686.43

6819.44 8218.53 6819.44

8283.41 9936.31 8283.41

Following analysis can be made on basis of above table: The bank is eligible to give Rs 8283.41 lacs as working capital in the year 2013. Actual NWC is basically the Working capital that must be arranged by the owner in order to meet the requirements. In the year 2013, owner could arrange only 1298.36 lacs as against 2951.27 lacs required and thus, he ends up having an excess borrowing of Rs 1652.91 lacs. The bank provides the company with bank finance of 8283.41 lacs. It must be noted that the bank can only provide company with 75% of working capital gap and not more than that.

13.2.

WorkingCapitalLoanProposal

Name of the Borrower : ABC International Ltd, BO & Controlling Office : BO ECE House, New Delhi. CO South Delhi GIST OF THE PROPOSAL: Renewal of existing working capital limits of the Co and sanction of adhoc CC limit of Rs 3.00 crs , review of existing TLs and approval of other issues as per item 13& 14 of the note. Sanction of Working Capital Limits Existing As per last ED sanction FB NFB 22.35 1.35 Proposed 21.00 1.35

Approval of other Issues, if any

Whether fresh/renewal/ Review of WC limits enhancement Asset Classification as on 31- Standard, PMS score 300 03-12 and last PMS score Credit Risk Rating by Bank is Ratin Date of Score ABS B g Rating Present B 21-0742.77 31-0311 11 Previou C 22-0938.89 31-03s 10 10 69

Reasons for degradation

Rating from External Agency (The external rating should be mapped to the internal rating) Not yet done.

Facility rated Long Term Short Term Others NO

Rating

Date of rating 30-082011 30-082011

Rating Agency Care Care

Remark s

BB PS4

Whether Agriculture/Retail/ SME/Others (Please specify) a) Whether Sensitive Sector Real Estate/Capital Market b) Applicable Risk weight

Consortium/Multiple Banking Lead Bank PNBs Share % Date of application Date of receipt of application at BO/CO/HO Date of last sanction &authority Customer ID No. Activity code (as per ladder)

100% Consortium BOI Existing 30% Proposed 22.06% 20-03-12 20-03-12 05-01-2011, ED 100502671 6502

2.

Borrowers Profile a. Group Name b. Address of Regd./Corporate Office NO group

RC Industrial Area, NKP, Distt.

b. Works/Factory RC Industrial Area,NKP, Distt. c. Constitution and constitution code as Ltd Co,35 per ladder d. Date of incorporation/ 24.04.1984 Establishment e. Dealing with PNB since October 1999 f. Industry/Sector Textile Cotton yarn and woven fabrics Manufacturing & Export of Cotton Yarn, g. Business Activity (Product)/ Installed Capacity. Woven & Knitted Fabric, Installed capacity as
on 31-03-2012

Spindles airjet : 39312 Nos. Looms : 126 Nos Denim fabric in million mtrs 15

70

4.A Facilities Recommended : Nature Fund Based Existing Proposed (Rs. in Crore) Secured/Unsecured along with the basis thereof (As per RBIs guidelines) 11.10 Secured 3.90 Unsecure/secured 1.00) Secured

CC(H)/PC 11.10 WCDL 3.90 FOBP/FOUBP/CCBD (1.00) BD(LC) with in FOBP/FOUBP Others(outside PBF) 5.55 4.20 FOBP/FOUBLC 1.80 1.80 Standby PC/PCFC Fund Based Ceiling 22.35 21.00 Non Fund Based ILC/FLC ILG/ FLG Non Fund Based Ceiling 1.35 1.35 Corp Loan(OS) I 3.30 3.30 Secured Term Loan(OS) II 4.90 4.90 Do Limit of credit exposure on account of all derivative products TOTAL COMMITMENT 31.90 30.55

Unsecured Do

4.B Our Commitment and Maximum Permissible Exposure Norms Existing Proposed %age of Banks Capital As per Exposure Norms Funds as on 31.03.______ Amount (%age) Company 31.90 31.90 Group 30.55 30.55

Credit Rating by agencies {CRISIL/ICRA/CARE/FITCH INDIA} with purpose of such rating : Agency Rating Date of Significance Purpose Validity Rating of Rating Date CARE BB(long 30-08-2010 satisfactory General One Year term)

19.3

OTHER INCOME

Other income is on account of scrap sales, interest received from buyers and Misc. Income. During the year 2010-11, the company earned other income of Rs. 1.81 crores and has estimated / projected the same at 1.00 crores for the current year and next year respectively. Considering the level of operations of the company, the estimates/projections appear reasonable and may be accepted.

71

PROFITABILITY Year 2008-09 (Audited) 2009-10 (Audited) 2010-11 (Audited) 2011-12 (Estimated) 2012-13 (Projected) Net Profit -14.67 -13.05 1.92 5.69 10.37 Net Profit/ Sales (%) -6.99 -5.65 0.72 1.83 2.94 Cash Profit % Change -1.82 1.45 15.81 20.24 24.92 179.96 990.34 28.02 23.12

The company recorded net profit of Rs. 1.92 crores for the year 2010-11 on a sales turnover of Rs. 266.30 crores (Net Profit/sales ratio: 0.72%) against estimated net profit of Rs. 0.11 crores and sales turnover of Rs. 243.07 crores. The company has surpassed all the estimates. In the previous year (2010-11), company has crossed their break even point and registered profit of Rs. 1.92 crores. In the current year company has estimated profit of Rs. 5.69 crores and projected net profit of Rs. 10.37 crores for the year 2012-13. The company has identified that out of its three divisions i.e. spinning, weaving and denim, denim division being a value addition is performing better as compared to other divisions. The company therefore is going to increase its denim capacity by 50% and the same will be operational from 1/1/2012. OBC have already sanctioned Rupee Term Loan of Rs. 8.50 crores. The pay back period is three years for the additional investment in denim division. The company has further informed that it is continuously trying to improve its productivity, efficiency, and net realization and reducing its cost by regular training of its personnel, changing product mix, developing new markets etc. There are efforts are reflected in the performance. In view of the above, we may accept profitability estimates / projections submitted by the company.

CURRENT RATIO Year 2008-09 (Audited) 2009-10 (Audited) 2010-11 (Audited) 2011-12 (Estimated) 2012-13 (Projected)

Current Ratio 1.19 1.11 1.11 1.11 1.12

The current ratio of the Company as on 31.03.2011 was at 1.11 as against estimates of 1.12, submitted at the time of last review so the current ratio as on 31.03.2011 was more or less as per the estimates only. It is pertinent to mention that the current ratio of the company has been below the banks benchmark of 1.33 in earlier years also. The reasons explained by the company are:a) The company has incurred losses during the year 2008-09 & 2009-10 resulting in reduction in NWC. b) Increase in repayment of Term loans as majority of terms loan instalments are going to commence from the year 2011-12 only. Term loan installments falling due within one year are shown as part of Current Liabilities as per details given below :-

72

As on 31.03.08 31.03.09 31.03.10 31.03.11 31.03.12

Amount (Rs. In Crores) 3.32 6.84 10.75 16.64 20.57

Repayments during 2009-10 2010-11 2011-12 2012-13 2013-14

Current ratio is estimated at 1.11 and 1.12 as on 31.03.2012 & 31.03.2013 respectively. Therefore, treatment of term loan installments falling due within one year as current liabilities is affecting current ratio. However, despite of above constraints, company has been regular in meeting its obligation towards servicing of interest on WCFBL and interest and installments of corporate loan availed at our end. In view of the above, we may accept lower estimated / projected current ratio of 1.11 as on 31.03.2011 and 31.03.2012 respectively. 19.7 DEBT EQUITY RATIO (DER)

Year 2008-09 (Audited) 2009-10 (Audited) 2010-11 (Audited) 2011-12 (Estimated) 2012-13 (Projected)

Debt equity Ratio 6.94 11.05 10.70 8.85 6.09

Term Liab/TNW 4.36 7.26 6.35 4.55 2.70

The Debt Equity ratio was 11.05 as on 31.03.2010 and 10.70 as on 31.03.2011 (as against 10.83 estimated at the time of last review). The higher DER is attributed to losses incurred by the company during the year 2008-09 & 2009-10 which has resulted in erosion of TNW. DER is estimated at 8.85 and projected at 6.09 as on 31.03.2012 and 31.03.2013 respectively in view of improved profitability and repayment of term loan.

8. A.

SECURITY Primary For existing working capital limits o 1st pari-passu charge on existing and future current assets of the company which has been created by execution of Joint documents by the consortium on 08-02-2012 for Rs 92.50 for the consortium and charge registered with ROC on 11.02.2012.

For existing Corporate Loan & Term Loan

o 1st pari-passu charge on existing and future fixed assets of the company has been created on 22-01-09 on the IP at plot No SP-2/1(A) &SP -2-2 at NKP industrial Area , Distt Alwar Raj (leasehold land measuring 160,000 sq mts) as confirmed by IFCI for our Corp loan of Rs 6.00 crs and TL of Rs 6.20 crs.(charge registered on 26-02-09)

73

B.

Collateral

i) Personal /Corporate Guarantee (Rs. In crs) Name of Relation Net Worth Guarantor with borrower Prev. Present 31.3.10 31.3.11 Sh. XXX CMD 0.65 0.78 M/s. KP Ltd. Group Co 12.75 12.80

IP Prev . -Present --

Date of confidential report Prev. Present* 17-08-10 17-08-10 . .

Latest CR being complied ii) 2nd charge on block assets for working capital limits
a) b) c) d) Value of block assets as on 31.03.2011 Extent of first charge holders Balance (residual charge) Our share 30% 141.21 117.45 23.76 7.13

Rs in crs

As per ABS 31.03.11

Security Descriptio n

Area in Ownershi Sq M or p Sq Ft

Last sanctio n 138.67

SP2/1(A) &SP -2-2

160,00 The CO 0 sq mts

Value(block assets) Presen Realisabl t e BV value(3103-11) 138.67 138.67

Basis for Dat valuatio e n

Whethe r existing / fresh existing

Balance sheet

310311

8c

Status of creation of second charge:

Second charge on the above mentioned IPs at Neemrana Raj. for present enhanced working capital limits as per our sanction dated 5.1.2011 has since been created on 25.03.2012. 9. Position of Account as on 13-04-2012 Nature PC/CC FOBNLC ILC/FLC TLI TLII Limit* 16.80 4.20 1.35 6.00 6.20 VS DP Balance 23.06 16.00 15.86 2.93 3.30 4.90 2.93 0.90 3.30 4.90 (Rs. in crs) Irregularity Nil Nil Nil Nil Nil

74

Justification for working capital sanction i) Assessment of Fund Based Limit Previous Year (Actuals) 113.43 102.18 30.45 10.75 93.73 25.55 Current Year 2011- Accepted 201112 12 (Estimates) 130.50 130.50 118.05 34.79 16.64 112.35 29.51 118.05 34.79 16.64 112.35 29.51

(a) Total Current Assets (b) Current Assets net of exports receivables (c) Other Current Liabilities* (d)Term Loan Instalments due in next one year (e) Working Capital Gap (a (c-d)) (f) Minimum stipulated Net Working Capital (25% of "b") (g) Actual/Projected Net Working Capital (h) (e f) (i) (e-g) (h) MPBF (lower of "h" and "I") (i) Excess Borrowings, if any *Including TL instalments

11.55 68.18 82.18 68.18 --

12.98 82.84 99.37 82.84 --

12.98 82.84 99.37 82.84 --

Strengths & Weakness with mitigants, if any Strengths Promoters have experience in textile line and are well known in their industry. State of the Art manufacturing facilities. Cost competitiveness and knowledge of the market. Weak nesses 1. Increasing competition from new entrants and existing exporters. Mitigant: In view of good standing of the Co, it is capable of meeting the competition. 2. Being agricultural commodity, supplies / prices at times are affected by weather / climatic conditions. This may affect profit margins. Mitigant long experience of the Co enables it to withstand such adversities. Company purchases cotton during crop season and is having experience in hedging against adverse movements. Recommendations: In view of the above we recommend for sanction of the following limits

75

(Rs. in crs) Limits Existing TL 1&2,Rs 8.20 WC (FB) 22.35 NFB 1.35 Total/ 31.90 Ceiling

proposed 1&2, Rs 8.20 21.00 1.35 30.55

14.

ConclusionandRecommendations
14.1. Conclusions
Lending is more of an art than an exact science. Taking perfect lending decision requires understanding the business of the company and analyzing it from multiple perspectives. While attempt is made to infuse objectivity in the appraisal, sound lending decision involves taking subjective view of the proposal. This is where experience and judgement of the appraiser play a key role.

Since banks lend the funds deposited by the general public with expectation of safety and security the lending decisions taken by banks primarily focus on the safety of funds. Risk aversion and risk diversion are the main parameters in bank lending.

To remain viable, a bank must earn adequate profit on its investment. This calls for adequate margin between deposit rates and lending rates. In this respect, appropriate fixing of interest rates on both advances and deposits is critical. Unless interest rates are competitively fixed and margins are adequate, banks may lose customers to their competitors and become unprofitable.

To mitigate risk, banks lend to a diversified customer base. Diversification should be in terms of geographic location, nature of business etc. If, for example, all the borrowers of a bank are concentrated in one region and that region gets affected by a natural disaster, the bank's profitability can be seriously affected.

Banks achieve diversification by specifying strict exposure norms that limit the exposure to a particular industry, business group and company.

Term loan appraisal mainly focuses on the viability of the project and its ability to generate enough cash to service the debt over the tenure of the loan.

76

Appraisal Working capital financing proposal is focused on ascertaining the working capital requirements of the fund. Over funding will lead to operational inefficiencies while under funding could impact the normal operation.

Different industries possess different challenges in WC assessment as, the WC cycle vary from industry to industry.

Post sanction processes that include monitoring of accounts, ensuring end-use of funds etc. are as critical as pre-sanction appraisal process for the security of funds.

In general terms, the project is likely to receive favorable consideration and detailed appraisal is taken if: o o o o o o It has priority according to Govt and bank guidelines The promoters inspire confidence The technology being adopted is well proven. The product to be traded has market potential The promoters contribution is not unreasonably low. Profitability estimates are conservative and indicate repayment of proposed institutional loans.

The project is rejected without detailed appraisal if it has some of the following features: o o o o o o o Bankers report on the promoters is not satisfactory Promoters are reported to have indulged in illegal and anti social activities. Financial position of the promoter company is not satisfactory. Cost of the project is unduly high. Promoters contribution is unusually low and promoters decline to increase it Debt equity ratio abnormally low Industry to which a particular unit belongs has low priority or is included in the negative list in govt. guidelines. o Location of the proposed unit has apparent disadvantages eg far removed from sources of raw materials.

77

Second hand equipment to be acquired is too old and will not have trouble free residual life

o o

Process know how has become obsolete There is no certainty that utilities like power, water will be available by the time the project needs them.

78

 14.2. Recommendations
1. More stress should be placed on collateral valuations. Since term loans are advanced for diverse category of businesses, sector expert should be roped in for collateral valuations. 2. Collaterals should be estimated gross amount, expressed in terms of money, that could be typically realized from a liquidation sale, given a reasonable period of time to find a purchaser (or purchasers), with the seller being compelled to sell on an asis, where-is basis, as of a specific date.

3. If any of the critical ratios is marginally unfavorable then additional collaterals could be charged or pricing of the loan could be revised upward to compensate for the additional risk. 4. Working capital loan financing requires frequent interaction between lender and loanee. Bank should also finance working capital requirements of the company in addition to the term loan to the same. Not only this will bring additional business to the bank but also, in effect, it will lead to continuous monitoring of financial and operational health of the business. 5. Due to increased activism and regulatory crises like that with spectrum allocation, mining leases, land acquisitions issues, environmental

considerations etc. viability of otherwise sound projects is threatened. Social, political and economical risks should also be taken into consideration while deciding project viability. Evaluation of these risks should be made mandatory in TEV report. In addition, while assessing the risk rating for a particular project, these factors must be taken into account. 6. Intercompany transactions should be taken into account while analyzing financial statements. This is particularly important for the companies belonging to a closely held group because intercompany transaction may be used to make financial of the borrowing group companies look good. 7. More stress should be placed on the analysis of cash flows. Income is calculated based on accounting principles while debt has to be serviced

79

through the cash flows. With short term perspective, a profitable firm may not be good for lending purpose if it do not generate enough cash to service the debt. Cash flow based computation of working capital requirement has also been recommended by the RBI for assessment of working capital requirement. Cash flows factor in the past trends and also take into account the company specific factors 8. As described above a profitable firm is not necessarily also good for lending purpose in short term. Firm may be generating good accounting profits but there could be serious liquidity problems. To identify these issues, NWC to Sales ratio could be calculated while appraising working capital financing proposals. Ideally this ratio should be around 8% - 12%. If NWC to Sales ratio is less then it means that business is growing too fast without building an adequate backup in the form of NWC also there are chances of serious liquidity problems and company is relying more on short term funds. 9. Financial and operational performance of the company applying for loan should be compared with its industry peers. Relative performance comparisons will not only highlight the management capability but also help in identifying any abnormalities in the information submitted by the company. 10. Forward looking statements with respect to sales, profitability etc. provided in the DPR and other reports submitted by the company should be treated with caution. Market analysis, demand analysis, sales projections etc. should be evaluated on with prevailing norms. Earlier performance and trend analysis could be used to ensure objectivity in forward looking statements.

80

References
1. Mukherjee, DD (2010), Credit Appraisal Risk Analysis & Decision Making, Jain Book Depot 2. Ganguin, B. and Bilardello,J (2005), Fundamentals of Corporate Credit Analysis, McGraw-Hill 3. PNB, Annual Report ( 2010-2011)PNB 4. Ready Reckoner 2010 5. Martin, J. P. and Cendrowski, H. (2010), Financial Statement Fraud and the Lending Decision, COMMERCIAL LENDING REVIEW 6. Kiehnau, L. and Budyak, J. T. (2009),The Valuation of Collateral, THDE SECURED LENDER 7. Gunjan,M; Vikram,S. and Soumyadeep,S.(2010), Indian Banks' Methods for Assessing Working Capital, Advances In Management, Vol. 3 (12) Dec. (2010) pp716 8. Bidani,S.N. and Sahay,B. (1988), How Bank Credit is Administered:Supervision and Follow-up, Vision Books, Delhi 9. Hale, Roger H.H. (1983), Credit Analysis-A Completer Guide, John Wiley & Sons Inc., NewYork 10. Donaldson, T.H. (1983), Understanding Corporate Credit, Macmillan 11. Chatterjee, A. (1978), Bank Credit Management (How to Lend Effectively), Suneja Publishing Corporation, Delhi 12. Earlier studies done on Credit Division

81