1

A REPORT
ON



ANALYSIS OF CREDIT APPRAISAL PROCESS AT
PUNJAB NATIONAL BANK


BY
PRIYANKA BANSAL
1302004535







PUNJAB NATIONAL BANK





2

A REPORT
ON


ANALYSIS OF CREDIT APPRAISAL PROCESS AT
PUNJAB NATIONAL BANK


BY
PRIYANKA BANSAL
1302004535
SIKKIM MANIPAL UNIVERSITY

A Report Submitted in the partial fulfilment of the requirement of
MBA Program of
SIKKIM MANIPAL UNIVERSITY (KAMLA NAGAR)



Submitted to:
Company guide
Mr. Arun Kumar Rastogi
(Senior Manager)



Date of Submission: 4
TH
JUNE 2014

3

Authorization


This is to certify that the project report submitted is submitted as a partial fulfilment of the
requirement of MBA program of Sikkim manipal university (SMU).

This report is titled Analysis of Credit Appraisal Process at Punjab National Bank.




4

ACKNOWLEDGEMENT

I would like to express my profound gratitude to all those who have been instrumental in the
preparation of my project report. To start with, I would like to thank Punjab National Bank
for providing me the chance to undertake this internship study and allowing me to explore the
area of corporate credit provided by banks which was entirely new to me and which will
surely prove to be very beneficial to me in my future assignments, my studies and my career
ahead.

I wish to place on records, my deep sense of gratitude and sincere appreciation to Mr. Pankaj
Srivastava Assistant General Manager, Circle Office, and also my company guide Mr. Arun
Kumar Rastogi, Senior manager Credit dppt. Who suggested and helped me prepare the
frame work of the project. I would also like to thank him for his continuous support, advice
and encouragement, without which this report could never have been completed. His patience
and faith in my abilities always boosted my confidence.





PRIYANKA BANSAL








5

TABLE OF CONTENTS

EXECUTIVE SUMMARY
1. Introduction ---------------------------------------------------------------------------------------7
1.1 definition of banking ----------------------------------------------------------------------------7
1.2 punjab national bank- brief history ------------------------------------------------------------9
1.3 objectives of the project--------------------------------------------------------------------------10
1.4 methodology ---------------------------------------------------------------------------------------11
1.5 scope & limitations: ------------------------------------------------------------------------------11

2. Banking industry analysis ----------------------------------------------------------------------12
2.1 evolution of banking industry -----------------------------------------------------------------12
2.2 industry structure ----------------------------------------------------- ----------------------------13
2.3 industry model -------------------------------------------------------------------------------------18

3. Pestel analysis of industry ------------------------------------------------------------------------20
3.1 political scenario ---------------------------------------------------------------------------------21
3.2 economic scenario --------------------------------------------------------------------------------22
3.3performance of banking sector (2013)-----------------------------------------------------------23
3.4 technological , social and ethical aspects ------------------------------------------------------27

4 .Michael Poerter Analysis Of Indian Banking Industry -----------------------------------28
4.1 future growth factors ------------------------------------------------------------------------------33
4.2 challenges --------------------------------------------------------------------------------------------34

5.Company Analysis --------------------------------------------------------------------------------37
5.1 introduction -----------------------------------------------------------------------------------------37
5.2 business performance ------------------------------------------------------------------------------40
5.4 ratio analysis.---------------------------------------------------------------------------------------43.
5.4 share performance ----------------------------------------------------------------------------------45
5.5 swot analysis ---------------------------------------------------------------------------------------46.
6.Onsite Project --------------------------------------------------------------------------------------49
6.1 credit appraisal -------------------------------------------------------------------------------------52
6.2 types of fund based and non fund based loans -------------------------------------------------59
6.3 credit risk management----------------------------------------------------------------------------70
6.4 preventive monitoring system --------------------------------------------------------------------74
7.Npa Norms Under Pnb------------------------------------------------------------------------------76
8.On Site Project ---------------------------------------------------------------------------------------79
8.1 Recommendations ------------------------------------------------------------------------------109
9.Learning From Sip--------------------------------------------------------------------------------111
10.My Contribution --------------------------------------------------------------------------------112
11.Conclusion----------------------------------------------------------------------------------------113
12 References -----------------------------------------------------------------------------------------114
6

EXECUTIVE SUMMARY

In India, the banking sector has been remarkably successful in some respects. Its immense
size and enormous penetration in rural areas are exemplary among developing countries, as is
its solid reputation for stability among depositors.

This internship is being done in order to understand various credit facilities and processes
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 Division of the bank. Moreover, each loan proposals fall under powers of different
levels depending on the size of the proposal.

The internship is intended to understand the process of project appraisal for term loans and
assessment for working capital requirements being followed 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 study 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.

Since the project appraisal also includes a very essential step of Credit Risk Rating carried
out at Risk Management Division (RMD) of the bank, I also took training under risk
department for two weeks in order to closely understand the working.

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. The software used in this is known as PNB TRAC. 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 as the risk involved is lower.

7


1. INTRODUCTION

Banks today are important not just from the point of view of economic growth, but also
financial stability. In emerging economies, banks are special for three important reasons.

First, they take a leading role in developing other financial intermediaries and
markets.
Second, due to the absence of well developed equity and bond markets, the corporate
sector depends heavily on banks to meet its financing needs.
Finally, in emerging markets such as India, banks cater to the needs of a vast number
of savers from the household sector, which prefer assured income and liquidity and
safety of funds, because of their inadequate capacity to manage financial risks.

Indias banking sector has the potential to become the fifth largest banking sector globally by
2020 and the third largest by 2025. The industry has witnessed discernable development, with
deposits growing at a CAGR of 21.2 per cent (in terms of INR) in the period FY 0613; in
FY 13 total deposits stood at US$ 1,274.3 billion.

1.1 DEFINITION OF BANKING

The most basic function of a Bank is to lend money to the borrowers. Banks accept the
deposit from the public for safe-keeping and compensate them by paying interest. They lend
this money to others borrowers and earn higher interest on this money. Thus, banks act as
intermediaries between the people who have the money to lend and those who have the need
for money to carry out any business transactions.

In India, the definition of the business of banking has been given in the Banking Regulation
Act, (BR Act), 1949. According to Section 5(c) of the BR Act, 'a banking company is a
company which transacts the business of banking in India.' Further, Section 5(b) of the BR
Act defines banking as, 'accepting, for the purpose of lending or investment, of deposits of
money from the public, repayable on demand or otherwise, and withdraw able, by cheque,
draft, and order or otherwise.'

This definition points to the three primary activities of a commercial bank which distinguish
it from the other financial institutions. These are:
(i) maintaining deposit accounts including current accounts,
(ii) issue and pay cheques, and
(iii) collect cheques for the bank's customers.

The difference between the rates at which the interest is paid on deposits and is charged on
loans, is called the "spread", and is actually how the banks make profit. Banks lend money in
various forms and for practically every activity.
8

The others activities of Bank are:
a) Accept Deposits / Make Loans
b) Provide Safety
c) Act as Payment Agents
d) Buy/Hold Securities
e) Treasury Services
f) Loan Sales

The operations of Banks are can be classified into:

1. Retail Banking: Retail banking is the business of making consumer loans, mortgages ,
taking deposits and offering products such as savings account. The Retail banks compete
on convenience, the accessibility of branches and ATMs for example, cost such as the
rate of interest, and service charges, or combination of the two.

2. Commercial Banking: Commercial banking is not that different than retail banking, the
banking operations still revolve around collecting deposits, making loans and convincing
customers to use other fee-generating services. One of the primary differences is that
business customers tend to have somewhat more sophisticated demands from their banks,
often leaning on banks for assistance in managing their payables, receivables and other
treasury functions. Commercial also tends to be less demanding in terms of branch
networks and infrastructure, but more competitive in terms of rates and fees.

3. Private Banking: In addition to the standard bank service offerings, like savings
accounts and safe deposit boxes, private banks often offer a host of trust, tax and Planning
services.

4. Investment Banking: Investment banking is a very different business than commercial
banking, Investment banks specialize in underwriting the securities (equity and/or debt),
making markets for securities, trading for their own accounts and providing advisory
services to the corporate clients.

In India, the banking sector has been remarkably successful in some respects. Its immense
size and enormous penetration in rural areas are exemplary among developing countries, as is
its solid reputation for stability among depositors.

The last decade has seen many positive developments in the Indian banking sector. The
policy makers, which comprise the Reserve Bank of India (RBI), Ministry of Finance and
related government and financial sector regulatory entities, have made several notable efforts
to improve regulation in the sector. The sector now compares favourably with banking
sectors in the region on metrics like growth, profitability and non-performing assets (NPAs).
A few banks have established an outstanding track record of innovation, growth and value
creation. This is reflected in their market valuation.

9

This internship is being done in order to understand various credit facilities and processes
followed by one of the most reputed bank in the country, Punjab National Bank.

1.2 PUNJAB NATIONAL BANK: A BRIEF HISTORY

PNB was founded in the year 1895 at Lahore (presently in Pakistan) as an off-shoot of the
Swadeshi Movement. Among the inspired founders were Sardar Dayal Singh Majithia, Lala
HarKishen Lal, Lala Lalchand, Shri Kali Prosanna Roy, Shri E.C. Jessawala, Shri Prabhu
Dayal, Bakshi Jaishi Ram, Lala Dholan Dass.
With a common missionary zeal they set about establishing a national bank; the first one with
Indian capital owned, managed and operated by the Indians for the benefit of the Indians.
The Lion of Punjab, Lala Lajpat Rai, was actively associated with the management of the
Bank in its formative years.

PROFILE
With more than 119

years of strong existence and 6081 total branches including 5 foreign
branches, 6698 ATMs as on Dec13, Punjab National Bank is serving more than 87 million
esteemed customers. PNB, being one of the largest nationalized banks, has continued to
provide prudent and trustworthy banking services to its customers. The Bank enjoys strong
fundamentals, large franchise value and good brand image. To meet the growing aspirations
of the people and compete in these tough conditions, the Bank offers wide range of products
and services.

At present, commercial loans are available for practically all kinds of activities and also for
both long and short tenures. Based on customer profile, these loans are of two types:
Retail Loans
Corporate Loans

Retail Loans

This retail loan is meant for small entrepreneurs as well as individuals who are engaged in
some commercial activity and have the due capacity to repay the loan in time. Loans are
given on the strength of the means of the borrower with regards to their repaying capacity i.e
the credit worthiness of the borrower. The latter is judged through the cash streams (income)
or the fund flow from operations available with the borrower for repayment of the loan.

Corporate Loans

These loans are meant for corporate bodies (and larger other entities or constitutions like
proprietorships, partnerships and Pvt. Ltd.) engaged in any activity with the objective of
making profit. Banks often sanction loans to such entities only after a detailed research of
their management and financials such as experience of management, strength of their balance
sheet, income statement, the length of cash cycle, operating cycle and depending upon the
products available with respective banks.
10


There are various kinds of loan products available for corporate clients in India in form of
funded and non- funded credit facility( Funded are term loan, Working capital and Non
Funded are LC/BG which will be explained in detail in later stage of the report) . The loans
are prepared depending upon the need of the client and the product available with the lending
Bank.

Every loan proposal made to the bank is necessarily appraised by its officers and only then a
decision is taken whether to sanction the loan money or not. Corporate credit appraisal or
project appraisal is a fundamental business practice which assesses the potentialities of a
corporation in terms of financial capabilities to honour debts and other securities.

A critical role of credit rating is, in its very basic essence, to ensure that the borrowers
activity has good potential to repay debts and as such determine the level of confidence a
lender has with the borrower. The credit rating also determines the interest rate at which the
loan will be sanctioned to the borrower

According to Rose and Hudgins, Credit Analysis and Lending (2005), all credit officers
usually never lose sight of the 5 Cs of lending.

They are:
1. Character: The specific purpose for loan and serious intent to repay it.
2. Capacity: Whether the customer has legal authority to sign binding contract.
3. Cash: Whether the borrower has the ability to generate enough cash to repay the loan.
4. Collateral: Whether the borrower has adequate assets to support the loan.
5. Conditions: Must look at the industry and changing economic conditions to assess ability
to repay.

1.3 OBJECTIVE OF THE PROJECT:

The main objective of the study is to study the sanctioning procedure and analysis of the
term loan, working capital loan in depth and their appraisal by PUNJAB NATIONAL
BANK for corporate projects.

The project has following objectives:
To carry out the Financial Analysis/Appraisal of the borrower/Project. .
Understanding the Credit monitoring arrangement (CMA) data
Checking the viability of the project through ratio analysis.
Assessment of working capital limits and term loans.
Finding permissible banking finance ( PBF)
To assess the credit rating of borrower company.
To analyze the Non Performing Assets in Bank and various reasons that leads an account
to become an NPA.
11

1.4 METHODOLOGY

Sources of Data:
Data is collected is majorly done from secondary sources.
Secondary Sources:
Reading live project reports ; proposal , stock audit report , credit risk report
Analysing financials of the proposals
Checking the proper due diligence with PNB and RBI guidelines.
Various knowledge centers of Corporate Banking.

Techniques:
Techniques adopted for the project will be:
Exploratory and Analytical.
Learning from Live project
Cost and Value Analysis of projects using CMA Data, PBF analysis on MS Excel.


1.5 SCOPE & LIMITATIONS:

SCOPE:
The title of the project states that it is a decision making process regarding the granting of
credit facilities/ sanction of credit to the business client. It relates to determination of the Risk
of Default /credit risk which is nothing but the risk the borrower may be unwilling to owner
his obligations under the terms of contract for credit.
A major part of the asset of a bank consists of loan portfolio. Bank suffers maximum loss
when their assets turn into NPA.
It is at this stage that the credit risk is quantified in terms of default probabilities and also
recovery rates are determined. The credit risk is thus a major concern on management of asset
portfolio of any bank.
With the opening up of the economy, rapid changes are taking place in the technology and
financial sector, exposing banks to greater risks. Thus, in the present scenario efficient project
appraisal has assumed a great importance as it can check and prevent induction of weak
accounts to our loan portfolio. All possible steps need to be taken to strengthen pre sanction
appraisal.


LIMITATION OF THE STUDY:
1. Since credit appraisal is one of the very crucial area of banking, some of the technicalities
may not be revealed.
2. The use of internal records and files of the bank are restricted for trainees.
3. Borrowers detail is not disclosed as per NDA of the Bank


12

2. THE BANKING INDUSTRY


2.1 EVOLUTION OF INDIAN BANKING INDUSTRY

The banking industry of India started taking its shape after the independence in 1947. Though
the history of Indian banking industry can be traced as far back as 1806 with the
establishment of the Bank of Bengal, (which has now evolved as the State Bank of India) the
industry was in a state of turmoil.

From the year 1906 to1911, several banks were set up based on the principles of the Swadesi
movement started by M.K. Gandhi. The movement inspired Indian businessmen and
politicians to set up banks for the Indian community and several new banks were launched to
promote trade and finance in the country. Some of the prominent ones among these are Bank
of India, Corporation Bank, Bank of Baroda, Indian bank, Canara Bank, and Central bank of
India. Bank of Bengal, along with its sister banks, Bank of Bombay and Bank of Madras
(Now SBI), set up by British East India Company, merged in 1921 to give birth to Imperial
bank of India, now known as State bank of India.

After the partition of India post independence, the government took drastic steps to regulate
the banking industry. For example, in 1948, additional powers and authority were vested in
the Reserve bank of India (RBI) to monitor and regulate the functioning of the entire banking
system. The passing the Banking regulation acts in 1949, empowered RBI to further regulate,
inspect, and control Indian banks.

The nationalization and liberalization of banks 1969 and 1991 respectively also gave thrust
the development of the Indian banking sector. Nationalization resulted in 91% of government
holding in the banking industry and liberalization paved the path for private players to
participate in the industry. As a result, many private player banks like Oriental bank of
Commerce, HDFC bank, ICICI bank, and AXIS bank came into the sector. Foreign banks too
were permitted to set up their offices in India. The rationalization of FDI norms in 2002 also
allowed foreign players to acquire stakes in Indian banks.

These banks implemented innovative forms of banking like ATMs, mobile banking, phone
banking, internet banking, and debit/credit cards. The private players constantly improved
services in order to retain customers and win the severe competition which had become a
feature of the Indian banking industry.

Thus, the Indian banking industry has its foundations in the 18th century, and has had a
varied evolutionary experience since then. The initial banks in India were primarily traders
banks engaged only in financing activities. Banking industry in the pre-independence era
developed with the Presidency Banks, which were transformed into the Imperial Bank of
India and subsequently into the State Bank of India. The initial days of the industry saw a
13

majority private ownership and a highly volatile work environment. Major strides towards
public ownership and accountability were made with nationalisation in 1969 and 1980 which
transformed the face of banking in India. The industry in recent times has recognised the
importance of private and foreign players in a competitive scenario and has moved towards
greater liberalisation.
In the evolution of this strategic industry spanning over two centuries, immense
developments have been made in terms of the regulations governing it, the ownership
structure, products and services offered and the technology deployed. The entire evolution
can be classified into four distinct phases.
Phase I- Pre-Nationalisation Phase (prior to 1955)
Phase II- Era of Nationalisation and Consolidation (1955-1990)
Phase III- Introduction of Indian Financial & Banking Sector Reforms and Partial
Liberalisation (1990-2004)
Phase IV- Period of Increased Liberalisation (2004 onwards)


2.2 THE INDUSTRY STRUCTURE:
Currently the Indian banking industry has a diverse structure. The present structure of the
Indian banking industry has been analyzed on the basis of its organised status, business as
well as product segmentation.

14

Organisational Structure
The entire organised banking system comprises of scheduled and non-scheduled banks.
Largely, this segment comprises of the scheduled banks, with the unscheduled ones forming
a very small component. Banking needs of the financially excluded population is catered to
by other unorganised entities distinct from banks, such as, moneylenders, pawnbrokers and
indigenous bankers.
Scheduled Banks
A scheduled bank is a bank that is listed under the second schedule of the RBI Act, 1934. In
order to be included under this schedule of the RBI Act, banks have to fulfill certain
conditions such as having a paid up capital and reserves of at least 0.5 million and satisfying
the Reserve Bank that its affairs are not being conducted in a manner prejudicial to the
interests of its depositors. Scheduled banks are further classified into commercial and
cooperative banks. The basic difference between scheduled commercial banks and
scheduled cooperative banks is in their holding pattern. Scheduled cooperative banks are
cooperative credit institutions that are registered under the Cooperative Societies Act. These
banks work according to the cooperative principles of mutual assistance.
Scheduled Commercial Banks (SCBs):
Scheduled commercial banks (SCBs) account for a major proportion of the business of the
scheduled banks. As at end-March, 2009, 80 SCBs were operational in India. SCBs in India
are categorized into the five groups based on their ownership and/or their nature of
operations. State Bank of India and its six associates (excluding State Bank of Saurashtra,
which has been merged with the SBI with effect from August 13, 2008) are recognised as a
separate category of SCBs, because of the distinct statutes (SBI Act, 1955 and SBI
Subsidiary Banks Act, 1959) that govern them. Nationalised banks (10) and SBI and
associates (7), together form the public sector banks group and control around 70% of the
total credit and deposits businesses in India. IDBI ltd. has been included in the nationalised
banks group since December 2004. Private sector banks include the old private sector banks
and the new generation private sector banks- which were incorporated according to the
revised guidelines issued by the RBI regarding the entry of private sector banks in 1993. As
at end-March 2009, there were 15 old and 7 new generation private sector banks operating in
India.
Foreign banks are present in the country either through complete branch/subsidiary route
presence or through their representative offices. At end-June 2009, 32 foreign banks were
operating in India with 293 branches. Besides, 43 foreign banks were also operating in India
through representative offices.
15



Regional Rural Banks (RRBs) were set up in September 1975 in order to develop the rural
economy by providing banking services in such areas by combining the cooperative
specialty of local orientation and the sound resource base which is the characteristic of
commercial banks. RRBs have a unique structure, in the sense that their equity holding is
16

jointly held by the central government, the concerned state government and the sponsor bank
(in the ratio 50:15:35), which is responsible for assisting the RRB by providing financial,
managerial and training aid and also subscribing to its share capital.
Between 1975 and 1987, 196 RRBs were established. RRBs have grown in geographical
coverage, reaching out to increasing number of rural clientele. At the end of June 2008, they
covered 585 out of the 622 districts of the country. Despite growing in geographical
coverage, the number of RRBs operational in the country has been declining over the past
five years due to rapid consolidation among them. As a result of state wise amalgamation of
RRBs sponsored by the same sponsor bank, the number of RRBs fell to 86 by end March
2009.
Scheduled Cooperative Banks:
Scheduled cooperative banks in India can be broadly classified into urban credit cooperative
institutions and rural cooperative credit institutions. Rural cooperative banks undertake long
term as well as short term lending. Credit cooperatives in most states have a three tier
structure (primary, district and state level).
Non-Scheduled Banks:
Non-scheduled banks also function in the Indian banking space, in the form of Local Area
Banks (LAB). As at end-March 2009 there were only 4 LABs operating in India. Local area
banks are banks that are set up under the scheme announced by the government of India in
1996, for the establishment of new private banks of a local nature; with jurisdiction over a
maximum of three contiguous districts. LABs aid in the mobilisation of funds of rural and
semi urban districts. Six LABs were originally licensed, but the license of one of them was
cancelled due to irregularities in operations, and the other was amalgamated with Bank of
Baroda in 2004 due to its weak financial position.
Business Segmentation
The entire range of banking operations are segmented into four broad heads- retail banking
businesses, wholesale banking businesses, treasury operations and other banking activities.
Banks have dedicated business units and branches for retail banking, wholesale banking
(divided again into large corporate, mid corporate) etc.

17



Retail banking
It includes exposures to individuals or small businesses. Retail banking activities are
identified based on four criteria of orientation, granularity, product criterion and low value
of individual exposures. In essence, these qualifiers imply that retail exposures should be to
individuals or small businesses (whose annual turnover is limited to Rs. 0.50 billion) and
could take any form of credit like cash credit, overdrafts etc. Retail banking exposures to
one entity is limited to the extent of 0.2% of the total retail portfolio of the bank or the
absolute limit of Rs. 50 million. Retail banking products on the liability side includes all
types of deposit accounts and mortgages and loans (personal, housing, educational etc) on
the assets side of banks. It also includes other ancillary products and services like credit
cards, demat accounts etc.
The retail portfolio of banks accounted for around 21.3% of the total loans and advances of
SCBs as at end-March 2009. The major component of the retail portfolio of banks is housing
loans, followed by auto loans. Retail banking segment is a well diversified business
segment. Most banks have a significant portion of their business contributed by retail
banking activities. The largest players in retail banking in India are ICICI Bank, SBI, PNB,
BOI, HDFC and Canara Bank.
Among the large banks, ICICI bank is a major player in the retail banking space which has
had definitive strategies in place to boost its retail portfolio. It has a strong focus on
movement towards cheaper channels of distribution, which is vital for the transaction
intensive retail business. SBIs retail business is also fast growing and a strategic business
unit for the bank. Among the smaller banks, many have a visible presence especially in the
auto loans business. Among these banks the reliance on their respective retail portfolio is
high, as many of these banks have advance portfolios that are concentrated in certain usages,
such as auto or consumer durables. Foreign banks have had a somewhat restricted retail
portfolio till recently. However, they are fast expanding in this business segment. The retail
banking industry is likely to see a high competition scenario in the near future.
18

Wholesale banking
Wholesale banking includes high ticket exposures primarily to corporates. Internal processes
of most banks classify wholesale banking into mid corporates and large corporates according
to the size of exposure to the clients. A large portion of wholesale banking clients also
account for off balance sheet businesses. Hedging solutions form a significant portion of
exposures coming from corporates. Hence, wholesale banking clients are strategic for the
banks with the view to gain other business from them. Various forms of financing, like
project finance, leasing finance, finance for working capital, term finance etc form part of
wholesale banking transactions. Syndication services and merchant banking services are also
provided to wholesale clients in addition to the variety of products and services offered.
Wholesale banking is also a well diversified banking vertical. Most banks have a presence in
wholesale banking. But this vertical is largely dominated by large Indian banks. While a
large portion of the business of foreign banks comes from wholesale banking, their market
share is still smaller than that of the larger Indian banks. A number of large private players
among Indian banks are also very active in this segment. Among the players with the largest
footprint in the wholesale banking space are SBI, ICICI Bank, IDBI Bank, Canara Bank,
Bank of India, Punjab National Bank and Central Bank of India. Bank of Baroda has also
been exhibiting quite robust results from its wholesale banking operations.
Treasury Operations
Treasury operations include investments in debt market (sovereign and corporate), equity
market, mutual funds, derivatives, and trading and forex operations. These functions can be
proprietary activities, or can be undertaken on customers account. Treasury operations are
important for managing the funding of the bank. Apart from core banking activities, which
comprises primarily of lending, deposit taking functions and services; treasury income is a
significant component of the earnings of banks. Treasury deals with the entire investment
portfolio of banks (categories of HTM, AFS and HFT) and provides a range of products and
services that deal primarily with foreign exchange, derivatives and securities. Treasury
involves the front office (dealing room), mid office (risk management including independent
reporting to the asset liability committee) and back office (settlement of deals executed,
statutory funds management etc).
Other Banking Businesses
This is considered as a residual category which includes all those businesses of banks that do
not fall under any of the aforesaid categories. This category includes para banking activities
like hire purchase activities, leasing business, merchant banking, factoring activities etc.
2.3 THE INDUSTRY MODEL
A bank can generate its income or revenue in many different ways including interest,
transaction fees and financial advices and many other services. The main method is via
charging interest on the capital it lends out to the customers. The bank make profits from the
difference between the level of interest it pays for deposits like the Savings (and other very
low interest deposits like Current Account) and other sources of funds, and the level of
interest it charges in its lending activities like giving Housing Loans, Car loans and Project
Financing etc..
19

This difference is referred to as the spread between the cost of funds and the loan interest
rate. Historically, profitability from lending activities has been cyclical and dependent on the
needs and strengths of loan customers and the stage of the economic cycle. Fees and
financial advice constitute a more stable revenue stream and banks have therefore placed
more emphasis on these revenue lines to smooth their financial performance

The major operating income of a bank is the interest income (comprises 75-85% of the total
income of almost all Indian Banks). Apart from the interest income, a bank also generates
fee-based income in the form of commissions and exchange, income from treasury
operations and other income from other banking activities. As banks were assigned a special
role in the economic development of the country, RBI has stipulated that a portion of bank
lending should be for the development of under-banked and under- privileged sections,
which is called the priority sector. Current rules by the central bank ( RBI) stipulate that
domestic banks should lend 40% and the foreign banks should lend 32% of their net credit to
the priority sector which includes agriculture as one of the priority sector. On the other hand
if we look at the cost sides, the major items for a bank are the interest paid on different
types of deposits like savings and CAs, bonds issued and borrowings, and provisioning cost
for the Non-performing Assets (NPAs)
Products of the Banking Industry
The products of the banking industry broadly include deposit products, credit products and
customized banking services. Most banks offer the same kind of products with minor
variations. The basic differentiation is attained through quality of service and the delivery
channels that are adopted. Apart from the generic products like deposits (demand deposits
20

current, savings and term deposits), loans and advances (short term and long term loans) and
services, there have been innovations in terms and products such as the flexible term deposit,
convertible savings deposit (wherein idle cash in savings account can be transferred to a
fixed deposit), etc. Innovations have been increasingly directed towards the delivery
channels used, with the focus shifting towards ATM transactions, phone and internet
banking. Product differentiating services have been attached to most products, such as
debit/ATM cards, credit cards, nomination and demat services.

Other banking products include fee-based services that provide non-interest income to the
banks. Corporate fee-based services offered by banks include treasury products; cash
management services; letter of credit and bank guarantee; bill discounting; factoring and
forfeiting services; foreign exchange services; merchant banking; leasing; credit rating;
underwriting and custodial services. Retail fee-based services include remittances and
payment facilities, wealth management, trading facilities and other value added services.


3. THE CURRENT SENARIO : PESTEL ANALYSIS
Indias banking sector is currently valued at Rs 81 trillion (US$ 1.31 trillion). It has the
potential to become the fifth largest banking industry in the world by 2020 and the third
largest by 2025, according to an industry report. The face of Indian banking has changed over
the years. Banks are now reaching out to the masses with technology to facilitate greater ease
of communication, and transactions are carried out through the Internet and mobile devices.

With the Parliament passing the Banking Laws (Amendment) Bill in 2012, the landscape of
the sector is likely to change. The bill allows the Reserve Bank of India (RBI) to make final
21

guidelines on issuing new bank licenses. This could lead to a greater number of banks in the
country; the style of operation could also evolve with the integration of modern technology
into the industry.

Key Statistics
The revenue of Indian banks increased four-fold from US$ 11.8 billion to US$ 46.9 billion
in the period 20012010. In that phase, the profit after tax rose about nine-fold from US$ 1.4
billion to US$ 12 billion.
Banking Index with the Sensex (Bankex) that tracks the performance of primary banking
sector stocks grew at a compounded annual growth rate (CAGR) of nearly 20 per cent over
the period 20032012.
Total number of onsite and offsite ATMs of Indian Banks reached 100042 in July 2012

Recent Developments
The central banks of Japan and India have agreed to a proposal that expands the maximum
amount of the Bilateral Swap Arrangement (BSA) between the two countries to US $50
billion. The agreement is for a three-year period (201215); the previous size of the BSA
was US $15 million. The new agreement will enable the two countries to swap their local
currencies against the US dollar for an amount up to US$50 billion.
Public sector banks will soon offer customers insurance products from different companies
as against products from one company. The finance ministry has asked public sector banks to
become insurance brokers instead of corporate agents. This move was one of the steps stated
by finance minister Mr P Chidambaram in early 2013, as a way to increase insurance
penetration.

3.1 THE POLITICAL SCENARIO:

This period broadly coincides with the 2014 Indian elections to spur a public debate about
the program that the next government should pursue in order to return the country to a path
of high growth. There is however a dire demand to recommend policies in every major
sector of the Indian economy. The topic in debate is not only the political scenario but how
much is it conducive towards a stable economic picture as a whole.
Government Initiatives:
The Cabinet Committee on Economic Affairs (CCEA) has given the go-ahead to a proposal
to increase foreign holding in Axis Bank to 62 per cent from the current 49 per cent. The
move could lead to overseas investment of nearly Rs 7,250 crore (US$ 1.17 billion) into the
22

country. The approval is subject to foreign institutional investors (FII) holding being capped
at 49 per cent.
To counter the liquidity pressure faced by micro and small enterprises, the RBI will provide
refinance aggregating up to Rs 5,000 crore (US$ 813.16 million) to the Small Industries
Development Bank of India (SIDBI). SIDBI can use the funds for direct and onward lending
to banks. Also, in an effort to encourage more lending to medium enterprises, the RBI will
include incremental credit given to these units by scheduled commercial banks (which do not
include regional rural banks) under the domain of priority sector lending.
The RBI has issued extra guidelines for banks giving gold metal loans (GMLs). To safeguard
against fraud, the central bank has asked lenders to check the credit worthiness of borrowers;
collateral securities against the loan; and trade cycle of the manufacturing activity, before
sanctioning the loans. "Lack of proper monitoring mechanism and not ensuring end use of
GML has resulted in certain instances of frauds/misuse related to GML by certain
unscrupulous jewellers," stated the RBI in a notification.
The Cabinet Committee on Economic Affairs (CCEA) has given the green signal to a
proposal to increase foreign holding in Axis Bank from 49 per cent to 62 per cent. The move
could bring in overseas investment of nearly Rs 7,250 crore (US$ 1.20 billion) into the
country. The CCEA nod is dependent on FIIs holding capped at 49 per cent.
3.2 THE ECONOMIC SCENARIO:
The global slowdown has taken its toll on Indian economy. Besides, the domestic economy
too is having its own set of problems. High inflation, subdued growth, slowing investments,
undesirable current account deficit levels, high fiscal deficit and battered currency have
together made the growth visibility rather muted. The banking sector, being the barometer of
the economy, has succumbed to these challenges. Amidst this challenging scenario, the
Indian banking system is continues to deal with improvement in operational efficiency and
execution of prudent risk management practices

23

RBI's hawkish monetary policy stance in order to combat inflation has led to sharp increase
in interest rates during FY13. The elevated costs of deposits and limited pricing power
ensured margin pressures for most of the banks for major part of FY13.
The economy slowed to around 5.0% for the 201213 fiscal year compared with 6.2% in the
previous fiscal but still remained the 2nd fastest growing Major Economy of G20 just behind
China
.
According to Moody's, the Economic Growth Rate of India would be 5.5% in 2014-
15 India's GDP grew by 9.3% in 201011; thus, the growth rate has nearly halved in just
three years. GDP growth rose marginally to 4.8% during the quarter through March 2013,
from about 4.7% in the previous quarter. The government has forecast a growth rate of
6.1%6.7% for the year 201314, whilst the RBI expects the same to be at 5.7%.
.
3.3 The Performance of Indian Banking Sector
The Central Statistical organization (CSO) reported the lowest real GDP growth at 5%
during FY13. This growth stands lowest in the decade and even weaker than the recorded
during the first year of global financial crisis. Banking sector, being inextricably linked to
the economy, stood in a state of limbo for major part of FY13

During FY13, the gross bank credit grew at a slower pace recording 15.1% YoY growth
as against 17.3% a year ago. The numbers also stood below RBI's projections for FY13.
Sluggish demand conditions, weak monetary policy transmission, poor asset quality and
debilitating macro economic conditions led to lower credit growth during FY13

Except retail, the slowdown in credit was witnessed across sectors such as agriculture,
industry and service segments. The RBI data reveals that retail trade and credit card
outstanding were the only buoyant segments during FY13. Mid-sized businesses and
loans for professional services were the worst hit.

Against a backdrop of GDP growth deceleration, weak IIP data and persistent inflation
during FY13, banks became more risk averse to lending credit. This deceleration also
The data analysis


Details



2010



2011



2012



2013



2014

Real GDP Growth 9.6 6.9 4.4 5.7 5.5
Inflation 8.5 8 8.2 7 6.2
Consumer Price Index 10.4 8.4 10 7.7 6.6
Wholesale Price Index (WPI) 9.6 8.9 7.6 6.7 6.1
Short-term Interest Rate 6 8.1 7.9 6.6 6
Long-term Interest Rate 7.9 8.4 8.3 8 7.9
Fiscal Deficit (per cent of GDP) -6.9 -8.2 -8.5 -8.1 -7.5
Current Account Deficit (per cent of
GDP) -2.7 -4.2 -3.2 -3.8 -3.6
24

reflected banks' risk aversion in face of rising NPAs and increased leverage of corporate
balance sheets. The deceleration was observed across all bank groups, being high for
PSUs and private sector banks, which jointly account for above 90% of the total bank
credit.





25

The RBI had administered a 1% repo rate cut and injected liquidity through CRR and
SLR cuts as also through open market operations during FY13. However, banks have
only cut their base rate by meagre 0.25%-0.30% owing to the liquidity constraints and
weak deposit growth.

The aggregate deposits grew marginally to 14.2% at the end of March 2013 as against
13.8% in FY12. The growth differential between deposit and credit continued to
hover between 2-3% with deposit growth outpacing the credit growth. The credit-
deposit ratio was recorded at 78.1% during the same period. This ensured tight
liquidity conditions during the whole of the FY13


Following is the march quarter result of banking sector declared till date


Mar 2013 Mar 2014 YoY %-Change

Name
Net Sales
(Rs m)
PAT
(Rs m)
Net Sales
(Rs m)
PAT
(Rs m)
Net Sales
(%)
PAT
(%)
P/E*
(x)

ALLAHABAD BANK 42,524 1,262 48,115 1,578 13.1% 25.0% 4.6
ANDHRA BANK 33,590 3,446 37,213 881 10.8% -74.4% 9.7
AXIS BANK 70,476 15,552 79,652 18,423 13.0% 18.5% 12.5
BANK OF BARODA 90,716 10,661 102,886 11,728 13.4% 10.0% 8.6
CANARA BANK 84,651 7,254 105,397 6,108 24.5% -15.8% 6.3
CORPORATION
BANK
40,681 3,555 46,444 416 14.2% -88.3% 8.8
DCB BANK 2,532 341 3,079 391 21.6% 14.7% 10.3
DENA BANK 23,043 1,257 25,944 1,873 12.6% 49.0% 6.5
FEDERAL BANK 15,835 2,219 18,387 2,773 16.1% 25.0% 10.4
HDFC BANK 93,239 18,899 107,886 23,265 15.7% 23.1% 22.3
ICICI BANK 103,653 23,041 114,893 26,520 10.8% 15.1% 16.3
IDBI BANK 63,969 5,544 67,156 5,182 5.0% -6.5% 10.5
INDIAN BANK 35,620 2,922 39,107 2,713 9.8% -7.2% 5.6
INDIAN OVERSEAS
BANK
52,268 589 58,748 -559 12.4% -194.9% 28.7
INDUSIND BANK 18,228 3,074 21,793 3,871 19.6% 25.9% 20.0
ING VYSYA BANK 12,537 1,703 13,061 2,203 4.2% 29.4% 15.5
KOTAK MAH. BANK 29,468 6,656 30,323 6,633 2.9% -0.3% 26.9
ORIENTAL BANK 45,343 3,080 49,008 3,103 8.1% 0.8% 7.4
PNB 103,788 11,308 111,013 8,064 7.0% -28.7% 9.2
PUNJAB & SIND
BANK
19,050 1,245 21,361 359 12.1% -71.2% 4.5
SOUTH IND.BANK 11,654 1,538 13,026 1,246 11.8% -19.0% 6.4
SYNDICATE BANK 43,814 5,923 48,958 4,093 11.7% -30.9% 4.1
26

UNION BANK 66,251 7,894 76,707 5,790 15.8% -26.7% 6.3
UNITED BANK OF
INDIA
23,361 312 27,620 4,694 18.2% 1404.4% N.A.
VIJAYA BANK 24,036 2,241 28,389 1,358 18.1% -39.4% 6.3
YES BANK 22,877 3,622 25,681 4,302 12.3% 18.8% 11.6
Sector Aggregate 1,173,204 145,138 1,321,843 147,006 12.7% 1.3%


The findings :
CASA, the cheap source of funds for banks, also remained sluggish for the major part
of FY13. The elevated interest rates during FY13 led to migration of money from
CASA deposits to fixed deposits

Slower loan growth and weak CASA accretion resulted in margin (NIM) pressures for
the banking industry. Furthermore, lower NIMs combined with higher credit costs
that were earmarked for the bad and restructured loans dampened the earnings
performance of Indian banks during FY13

The sharp industrial slowdown during FY12 and FY13 took a toll on the asset quality
of the banks. Gross NPAs of 40 listed banks went up by 43.1% from levels a year ago.
The restructured book also spiked up dramatically with recast assets under CDR
standing around 50% more than the previous year. The repercussions were largely felt
by public sector banks as they were the ones to support the productive sectors of the
economy

Private sector banks, on the other hand, were better placed than its PSU peers during
FY13. Better asset quality, higher margins and strong loan growth boosted the
performance of private banks during the same period.

The prospects :

Going forward in FY14, the Economic Advisory Council of Prime minister expects the
economic growth to rise to 6.4% from the current 5% on the back of the recent structural
measures and normal monsoons

Growth is still a concern for the banking sector on account of a sustained slowdown in the
economy as well as reduced demand for credit on account of the current high interest rate
environment.

Sectors such as iron & steel, textiles, power generation, automobiles and ancillaries,
telecommunication, aviation, construction, real estate, infrastructure, steel and cement are
expected to throw-up challenges in terms of asset quality pressures for the forthcoming
periods.

27

The domestic economic slowdown will continue to play spoilsport resulting in increase in
non-performing loans and restructured loans especially for PSU banks. Given the greater
stress expected to confront PSU lenders going forward, the margins and earnings
performance are expected to take a hit..

As per regulatory requirements Indian banks need to shore up their capital base to adhere
to the incumbent BASEL III norms. With PSU banks falling short of the target, a
consistent annual equity infusion of Rs 160-180 bn is expected to flow from government
over the next 5 years. As per the FY13 budget, the government of India had allocated Rs
127 bn for capitalization of PSU banks and plans to invest Rs 140 bn in FY14

Going by the dynamic nature of the real economy, it is imperative that the banking system
will require being flexible and competitive. Notwithstanding the expanding branch
network of Indian banks, the banking penetration still stands low in comparison to the
global benchmark. Hence, the pressing need for financial inclusion and the issuances of
new banking licenses to the private sector will continue to take precedence even in FY14.

The RBI is in the process of issuing new bank licenses to those private players that would
stand consistent with the highest standards of transparency and diligence. Moreover,
necessary reforms, regulations for free entry and making the licensing process more
frequent also forms the agenda of the RBI for the coming periods

3.4 THE TECHNOLOGICAL ASPECTS:

Technology spread general banking concepts to people in the under-banked areas. All these
initiatives of promoting rural banking are taken with the help of mobile banking, self help
groups, microfinance institutions, etc.

New Media Mobile and Net banking is expected to become the second largest channel for
banking after ATMs: New channels used to offer banking services will drive the growth of
banking industry exponentially in the future by increasing efficiency and productivity by
acquiring new customer base. During the past 10 years, banking through ATMs and Net
Banking has shown a tremendous upsurge, which is still in the growth phase. After ATMs,
the mobile banking is another media which is expected to give another push to this industry
growth in a big way, with the help of new 3G and smart phone technology (mobile usage has
grown many folds over the years). This can be looked at as branchless banking and so will
also reduce costs as there is no need for physical infrastructure and human resources. This
will help in acquiring new customers, mainly who live in rural areas (though this will take
time due to technology and infrastructure issues). The IBA-FICCI-BCG in its report has
predicted that mobile banking would become the second largest channel of banking after
ATMs.

3.5 SOCIAL AND ETHICAL ASPECT:

There are some banks, which proactively undertake the responsibility to bear the social and
ethical aspects of banking. This is a challenge for commercial banks to consider the these
28

aspects in their working. Apart from profit maximization, commercial banks are supposed to
support those organizations, which have some social concerns.

Benedikter (2011) defines Social Banks as banks with a conscience. They focus on
investing in community, providing opportunities to the disadvantaged, and supporting social,
environmental, and ethical agendas. Social banks try to invest their money only in
endeavours that promote the greater good of society, instead of those, which generate private
profit just for a few. He has also explained the main difference between mainstream banks
and social banks that mainstream banks are in most cases focused solely on the principle of
profit maximization whereas, social banking implements the triple principle of profit-people-
planet .

On social and ethical aspects of Banking Industry that Banks can project themselves as a
socially and ethically oriented organization by disbursement of loans merely to those
organizations, which has social, ethical and environmental concerns


4. MICHAEL PORTER ANALYSIS FOR BANKING
INDUSTRY
Indias healthy financial and banking sector is its other strength. This sector has shown
immense resilience in the face of the global financial crisis, and the RBI has played an
important role in preserving financial stability through a unique combination of monetary
policies and macro-prudential regulations. While the banking sector has experienced increase
in bad loans in recent years, it is not cause for concern yet. However, with rising global
policy uncertainties and Indias strong linkage to the global financial system, India should
keep a close check on liquidity and the stability of the banking system. Appropriate measures
such as increased competition and supervision can improve banks efficiency and access to
markets, as well as contain the contagion risk of any global financial crises.

Following is the Michael porter analysis that will help to analyse the industry with a birds
eye through varied angles for a clearer picture of this industry.




In case of banking industry :
29



Supply The Reserve Bank of India (RBI) is the central banking and monetary authority
of India, and acts as the regulator and supervisor of commercial banks.
Liquidity is controlled by the Liquidity is controlled by the Reserve Bank of
India (RBI).
Demand India is a growing economy and demand for credit is high though it could be
cyclical.

Barriers to
entry
Licensing requirement, investment in technology and branch network, capital
and regulatory requirements.
Bargaining
power of
suppliers
High during periods of tight liquidity. Trade unions in public sector banks can be
anti reforms and orchestrate strikes. Depositors may invest elsewhere if interest
rates fall.

Bargaining
power of
customers

For good creditworthy borrowers bargaining power is high due to the availability
of large number of banks.

Competition High- There are public sector banks, private sector and foreign banks along with
non banking finance companies competing in similar business segments.
Plus the RBI is all set to issue more new banking licenses .recently it gave to
IDFC and Bandhan .
Due to homogenous kind of services offered by banks, large number of players
in the banking industry and other players such as NBFCs, competition is already
high. Recently, the RBI released the new Banking License Guidelines for
NBFCs. So, the number of players in the Indian banking industry is going to
increase in the coming years. This will intensify the competition in the industry,
which will decrease the market share of existing banks.
30



4.1 BARGAINING POWER OF SUPPLIER:

The RBI led tight liquidity situation eased gradually in Q3 in line with unwinding of
exceptional measures
The policy induced tight liquidity conditions during Q2 of 2013-14 eased considerably in
October 2013 with the gradual normalisation of exceptional monetary measures. Although
the festival-induced increase in currency in circulation kept the liquidity situation generally
tight in November 2013, the buoyant capital inflows under the Reserve Banks swap facilities
for banks overseas borrowings and non-resident deposit funds (which were operational till
November 30, 2013), eased domestic liquidity significantly. The narrowing of wedge
between the credit and deposit growth also contributed to improving the liquidity condition.
The easing of liquidity conditions got reflected in the under-utilisation of limits by the banks
under the overnight LAF repo and export credit refinance, a steady decline in access to the
MSF and the parking of excess liquidity with the Reserve Bank through reverse repos.




In order to manage the evolving liquidity situation, the Reserve Bank conducted two OMO
purchase auctions during Q3 of 2013-14, injecting liquidity to the tune of `161 billion.
Liquidity support was also provided through the variable rate 7-day and 14-day term repo
facility up to a limit of 0.5 per cent of the banking systems NDTL. Anticipating liquidity
stress in mid-December, induced by the advance tax outflows, an additional liquidity support
31

of `100 billion was provided through a 14-day term repo on December 13, 2013. As the strain
on market liquidity is expected to continue in view of the fiscal targets set for the year, the
Reserve Bank also conducted an OMO purchase auction injecting liquidity of `95 billion and
two 28-day term repos to ease the liquidity pressure in January 2014.

4.2 THE BARGAINING POWER OF CONSUMERS :
The bargaining power of the customer increases as and when his credit worthiness increases.
Since interest rates show high opportunity costs, banks have to cautiously fix their rate of
interest with respect to RBI and its guidelines .
Moreover as and when the number of banks increases, the consumer prefers to borrow from a
bank with low interest and lend to the one which has the highest.
The corporate projects hence very quickly respond to fluctuations in rate of interest subject to
its bargaining power.
Thus the strategies such as long term finance, a higher savings interest rate , easy options of
retail lending can impact the bargaing power of the consumer
4.3 THE SUBSTITUTE AVAILABLE :
Banking services are most reliable source of finance. however the lack of financial inclusion
can leave the consumer with options such as money lender or any NBFC .
Also , since banks offer homogeneous services , substitutes in terms of products are easy to
imitate . Insurance , mutual fund schemes are required to stay best or close to best on the
market
Thus , in order to retain customers it is a big challenge for any company to maintain close
customer relationships .
4.5 THE ENTRY BARRIER :
The conditions in the banking industry have changed and are changing all over the
world. In our country, economic reform and in particular financial sector reform has altered
the atmosphere in which the participants operate.

The size of the market is so large and with GDP likely to grow at 6 per cent in the
medium-to long-term, the Indian banking industry has become very attractive-as never before

Also, entry/exit norms-While regulatory barriers have been eased, desirable barriers exist in
the form of capital and other requirements. After all banking license cannot be like a driving
license. But, entry norms are fairly clear, though exit norms are not clear yet.

The future aspects of financial inclusion motive and provision of banking licenses have
somehow eased the speculations about the entry .While YES bank and Kotak Mahindra were
given banking licenses in 2004 , IDFC and Bandhan are given in 2014 , where the list of
applicants carried 25 potential entrants.
32


4.6 THE COMPETITION

All industries are characterised by historical trends and new developments that either
gradually or speedily produce changes important enough to require a strategic response from
participating agents. The Indian banking industry is no exception. The rapid changes that
have occurred during the last few years in the financial sector have increased competition in
the banking industry.

PUBLIC SECTOR BANKS V/S PRIVATE SECTOR BANKS
Despite the existence of new private banks over the last two decades, PSU banks dominate in
deposits and lending.
Theres the trust factor too. As economic conditions turn dodgy, despite public sector banks
facing more asset quality issues than their rivals, people seem to prefer PSU names such as
SBI, believing in the tacit Government guarantee.
This impression has been strengthened by the Government infusing capital year after year
into PSU banks, to help them meet their capital adequacy norms.
In the last two years, SBI and its associates alone garnered about 3.8 lakh crore of
incremental deposits; this equals the amount amassed by all 20 private sector banks put
together. .

According to India Ratings & Research, employee productivity has improved steadily for
PSU banks. In 2012-13, the ratio of deposits per employee of a PSU bank was lower than that
for private players. The trend started to change from 2009-10. By 2012-13 the deposits per
employee stood at 7.2 crore for PSU banks against 5.2 crore for private banks.



The changes that are leading to competition are:

Also industry profitability-higher by the standards of the past or international standards is
attracting more new entrants. Hence, increasing competition in the industry. Product
innovations-Features such as home banking, ATMs are all making the industry to be
continuously alert, and fiercely competitive.

The markets are increasingly getting integrated in our country also. Domestic and foreign
currency, banking and non-banking are getting closer. Correspondingly, there are institutional
innovations and inter-linkages, both in ownership and operations - be it in depositories or
mutual funds.

The consumers of banking services are getting increasingly agile, enlightened, cost and
quality conscious. They are already forcing the pace of competition on price, product and
quality products.

33



The strategic alliance that can face competition

Competition does not mean that banks cannot enter into strategic alliances. The
clearing house is one form of strategic co-operation already in place. In fact, such
strategic cooperation will give banks a competitive advantage over others.

The banks should forge strategic alliance without undermining competition. At the same
time, there should not be any element of cartelisation. We can readily think of some areas
where banks can enter into strategic alliances.

First, technology related, where interconnectivity would be of great advantage.

Second, marketing related, such as exchange of information on credit record of
customers, customer guarantees, inter-bank participation, and of course, syndication.

Third, organisation related, especially in dialogues with the law makers and regulators
on the need for changes.
In fact, the scope for self regulation should be actively explored. Perhaps, there should
be a Conference to explore avenues for cooperation that will enhance the strengths of
banks in relation to others.

Fourth, incidentally, there can be what is termed as segmented alliances also. For
example, public sector banks can cooperate, as in fact they are doing now in some
cases, to create common supporting services that will help them to capture economies
of scale.


As per the above discussion, we can say that the biggest challenge for banking industry is to
serve the mass market of India. Companies have shifted their focus from product to customer.
The better we understand our customers, the more successful we will be in meeting their
needs.

4.7 THE FUTURE GROWTH FACTORS

India is one of the top 10 economies in the world, where the banking sector has tremendous
potential to grow. The last decade saw customers embracing ATM, internet and mobile
banking. The number of ATMs has doubled over the past few years, with more than 100,000
in the country at present (70 per cent in urban areas). They are estimated to further double by
2016, with over 50 per cent expected to be set up in small towns. Also, the scope for mobile
and internet banking is big. At the start of 2013, only 2 per cent of banking payments went
through the electronic system in the country. Today, mobility and customer convenience are
viewed as the primary factors of growth and banks are continuously exploring new
technology, with terms such as mobile solutions and cloud computing being used with greater
regularity


34

High growth of Indian Economy:
The growth of the Indian banking industry is closely linked with the growth of the overall
Indian economy. India is one of the fastest growing economies in the world and is likely to
remain on that path for many years to come. This will be supported by the continuous growth
in infrastructure, industry, services and agriculture sector in the country. The expectation is to
boost the corporate credit growth in the economy and provide ample opportunities to banks to
lend to fulfil these requirements in the future.

Rising Standard Of Living and Per Capita Income:
The rising standard of living and the per capita income of Indian people will be a driving
force for the growth of the retail credit loans. Indians of late have a very conservative outlook
towards the credit except for housing loans, car loans and other necessities. However, with an
increase in disposable income ( which has increased with the rise in per capita income) and
increased exposure to a range of various products, consumers have shown a higher
willingness to take credit, particularly, the young age group people. A study of the customer
profiles of different types of banks shows that foreign and private banks share of younger
customers is over 60% whereas public banks have only 32% customers under the age of 40.
The Private Banks have a much higher share of the more profitable mass affluent segment.

Financial Inclusion Program:
Currently, in India, 41% of the adult population doesnt have bank accounts, which indicates
a large untapped market for banking players. Under the Financial Inclusion Program, RBI is
trying to tap this untapped market and the growth potential in rural markets by volume
growth for banks. Financial inclusion is the delivery of banking services at an affordable cost
to the vast sections of disadvantaged and low income groups. The RBI has also taken many
initiatives such as Financial Literacy Program, promoting effective use of development
communication and using Information and Communication Technology (ICT) to spread
general banking concepts to people in the under-banked areas.

All these initiatives of promoting rural banking are taken with the help of mobile banking,
self help groups, microfinance institutions, etc. Financial Inclusion, on the one side, helps
corporate in fulfilling their social responsibilities and on the other side it is fuelling growth in
other industries and so as a whole economy.


4.8 CHALLENGES

More stringent capital requirements to achieve as per Basel III:
Recently, the RBI released draft guidelines for implementing Basel III. As per the proposal,
banks will have to augment the minimum core capital after a stringent deduction. The two
new requirements capital conservative buffer (an extra buffer of 2.5% to reduce risk) and a
counter cyclical buffer (an extra capital buffer if possible during good times) have also been
introduced for banks. As the name indicates that the capital conservative buffer can be dipped
during stressed period to meet the minimum regulatory requirement on core capital. In this
scenario, the bank would not be supposed to use its earnings to make discretionary payouts
such as dividends, shares buyback, etc. The counter cyclical buffer, achieved through a pro-
35

cyclical build up of the buffer in good times, is expected to protect the banking industry from
system- wide risks arising out of excessive aggregate credit growth.

For Basel II , the fact reveals that even under current Basel Norm II, Indian banks follow
more stringent capital adequacy requirements than their international counterparts. For Indian
Banks, the minimum common equity requirement is 3.6%, minimum tier I capital
requirement is 6% and minimum total capital adequacy requirement is 9% as against 2%, 4%
and 8% respectively recommended in the Basel II Norm. Due to this the capital adequacy
position of Indian banks is at comfortable level. So, going ahead, they should not face much
problem in meeting the new norms requirements. But as we saw earlier, private sector banks
and foreign banks have considerable high capital adequacy ratio, hence are not expected to
face any problem. But, public sector banks are lagging behind. So, the Government will have
to infuse capital in public banks to meet Basel III requirements. With the higher minimum
core Tier I capital requirement of 7-9.5% and overall Tier I capital of 8.5-11%, Banks ROE is
expected to come down.

Increasing non-performing and restructured assets:

Due to a slowdown in economic activity in past couple of years and aggressive lending by
banks many loans have turned non-performing assets. Restructuring of assets means loans
whose duration has been increased or the interest rate has been decreased. This happens due
to inability of the loan taking company/individual to pay off the debt. Both of these have
impacted the profitability of banks as they are required to have a higher provisioning amount
which directly eats into the profitability. The key challenge going forward for banks is to
increase loans and effectively manage NPAs while maintaining profitability.

Intensifying competition:

Due to homogenous kind of services offered by banks, large number of players in the banking
industry and other players such as NBFCs, competition is already high. Recently, the RBI
released the new Banking License Guidelines for NBFCs. So, the number of players in the
Indian banking industry is going to increase in the coming years. This will intensify the
competition in the industry, which will decrease the market share of existing banks.


Managing Human Resources and Development:

Banks have to incur a substantial employee training cost as the attrition rate is very high.
Hence, banks find it difficult manage the human resources and development initiatives.
Currently, there are many challenges before Indian Banks such as improving capital
adequacy requirement, managing non-performing assets, enhancing branch sales & services,
improving organization design; using innovative technology through new channels and
working on lean operations.

Apart from this, frequent changes in policy rates to maintain economic stability, various
regulatory requirements, etc. are additional key concerns. Despite these concerns, we expect
36

that the Indian banking industry will grow through leaps and bounds looking at the huge
growth potential of Indian economy. High population base of India, mobile banking
offering banking operations through mobile phones, financial inclusion, rising disposable
income, etc. will drive the growth Indian banking industry in the long-term. The Indian
economy will require additional banks and expansion of existing banks to meet its credit.

4.9 CONCLUDING POINTS

1. In order to mitigate above mentioned challenges Indian banks must cut their cost of their
services.
2. Another aspect to encounter the challenges is product differentiation. Apart from
traditional banking services, Indian banks must adopt some product innovation so that
they can compete in gamut of competition.
3. Technology up gradation is an inevitable aspect to face challenges. The level of consumer
awareness is significantly higher as compared to previous years. Now-a-days they need
internet banking, mobile banking and ATM services.
4. Expansion of branch size in order to increase market share is another tool to combat
competitors.
5. Therefore, Indian nationalized and private sector banks must spread their wings towards
global markets as some of them have already done it. Indian banks are trustworthy brands
in Indian market; therefore, these banks must utilize their brand equity as it is a valuable
asset for them.

























37

5. COMPANY ANALYSIS

Introduction


With more than 119

years of strong existence and 6081 total branches including 5 foreign
branches, 6698 ATMs as on Dec13, Punjab National Bank is serving more than 87 million
esteemed customers. PNB, being one of the largest nationalized banks, has continued to
provide prudent and trustworthy banking services to its customers. The Bank enjoys strong
fundamentals, large franchise value and good brand image. To meet the growing aspirations
of the people and compete in these tough conditions, the Bank offers wide range of products
and services


PNB has a policy of inclusive growth in the Indo-Gangetic region, which involves 'banking
for the unbanked'. In addition to its large network of rural branches, it has launched a
number of ATMs designed for disabled customers. PNB is also expanding its international
presence and is looking to open branches in Australia, Fiji, Indonesia and Canada.

PNB's equity shares are listed on Bombay Stock Exchange and the National Stock
Exchange of India. It is a constituent of the S&P CNX Nifty at the NSE
Shareholders (as on 31-Dec-2013) Shareholding
Promoter Group (Govt. of India) 58.87%
Foreign Institutional Investors (FII) 17.51%
Insurance Companies 15.46%
Individual shareholders 04.05%
Banks/Financial Institutions/Mutual Funds/UTI 03.02%
Others 01.09%
Total 100.0%

Financial Inclusion:
Financial inclusion has been priority area for the Bank as reflected in its mission "Banking
for the unbanked. With the launch of the GOI Scheme of FI under Swabhiman" Scheme,
the Bank moved to the TSP based model and covered 4588 villages having population of
over 2000 through BC Agents upto March 2012.
Areas of Operation
Priority sector
o Credit to agriculture
38

o Agriculture Debt Waiver and Debt Relief Scheme 2008.
o Micro Credit.
o Small and Medium Enterprises.
o Collateral Free Lending.
o MSME specialized and MSME Focus Branches.
o Credit to weaker section.
o Credit to women Beneficiaries.
o Promoting Financial Inclusion.
o Opening No Frill Account.
o Opening of Banking KIOSKS.
o Financial Literacy and Credit Counseling (FLCC).

Retail Credit.
Forex Business.
Treasury Operations.
Business Diversification.
o Mutual Fund Business.
o Gold Coin Business.
o Depository Services.
o Online Trading Facility.
o Insurance Business.
o Merchant Banking.
o Cash Management Services
o Door Step Banking.
o Credit Card Venture.
Transaction Banking.
Corporate Banking
International Banking/NRI

Product and Services

The bank is servicing its millions of customers with the following plethora of services:
Corporate Banking
Personal Banking
Industrial Banking
Agricultural Banking
International Banking

PNB OFFERS VARIOUS SCHEMES / PRODUCTS /SERVICES RELATING TO
INTERNATIONAL BANKING. THE BROAD DETAILS THRREOF ARE AS UNDER


Foreign Currency Non-resident Deposit A/c Scheme (FD)
Non-resident External Deposit A/c Scheme (SB/CA/FD)
Non-resident Ordinary Deposit A/c Scheme (SB/CA/FD/RD)
Foreign Inward Remittances Rupee Drawing Arrangements / Speed Remittances
with Exchange Houses
39

Money Transfer Schemes
PNB-NRI REMIT Scheme
Exchange of Foreign Currency Travellers Cheques/Notes
World Travel Card
Buyers / Suppliers Credit against Imports into India
Letter of Guarantee (issued on behalf of foreign bank)
Precious Metal Business (on consignment basis)
Gold (Metal) Loan Scheme for Domestic Jewellery Manufacturers.
ECGC Bank assurance - Selling of policies to exporters
Alternative Delivery Channels:
The Bank has the vast network of branches including specialised branches which are
offering multiple products and services to its customers. Bank also has a large network of
ATMs which provides facilities like Fund Transfer, Bill Payments mobile
registration for generation of SMS alerts, Direct Tax Payment request for stop
payment of cheques, etc.

The Bank is offering Internet Banking Services to its customers, which includes online
bills payment of utility services; on line Railways/air ticket booking, e payment towards
services like Excise Duty and service tax, etc.

It is also providing on line trading activity to its customers and demat accounts are also
getting available to the customers.


Bank has come out with SMS Alert and Mobile Banking Options to the customers, which
has led to tendering of Anytime Anywhere banking facility to the customers and keeping
the customers updated about all their financial transactions.

All the branches of the Bank are Real Time Gross Settlement (RTGS) /National
Electronic Fund Transfer (NEFT) enabled wherein customers can transfer funds at the
click of the mouse.
Wealth Management Products:
In the intense competitive environment, which is set to intensify further with the entry of new
players, the Bank is diversifying its revenue streams. During the FY'13, the Bank acquired
30% stake in MetLife India Insurance Company Ltd., creating a new entity named PNB
MetLife India Insurance Company Ltd. Apart from it, Bank is offering credit & debit card,
Gold Business, Merchant Banking, Mutual Fund, Factoring Services, etc.
. It is a member of the SWIFT and its branches are connected through its computer-based
terminal at Mumbai. With its state-of-art dealing rooms and well-trained dealers, the bank
offers an efficient FOREX dealing operations throughout India. The bank has been focusing
on expanding its operations outside India and has identified some of the emerging economies
which offer large business potential. Bank has set up a representative office at Almaty,
Kazakhstan w. e. f. 23
rd
October 1998.
40

Subsidiaries:
A. Domestic:

Sr
No.
Name of the Entity
Country of
Incorporation
Proportion of ownership
%
i) PNB Gilts Ltd. India 74.07
ii) PNB Housing Finance Ltd. India 51.01
iii) PNB Investment Services Ltd. India 100
iv)
PNB Insurance Broking Pvt.
Ltd.
India 81

Global Reach (Branches and Subsidiaries):

Backed by strong domestic performance, the Bank has its global aspirations as well.
Presently, the Bank has its overseas presence in 10 countries by way of 5 branches (Hong
Kong, Dubai, Kabul & OBU-Mumbai), 3 Subsidiaries (London, Bhutan & Kazakhstan) , a
Joint Venture (at Nepal) and 5 Representative Offices (Sydney, Shanghai, Oslo, Dubai &
Almaty).

5.2 THE BUSINESS PERFORMANCE

PNB)'s net profit declined 28.69% to Rs 806.35 crore on 8.18% growth in total income to Rs
12498.23 crore in Q4 March 2014 over Q4 March 2013. PNB's net profit declined 29.59% to
Rs 3342.57 crore on 3.66% growth in total income to Rs 47799.96 crore in the year ended 31
March 2014 over the year ended 31 March 2013.

PNB's ratio of net non-performing assets (NPAs) to net advances rose to 2.85% as of 31
March 2014, from 2.8% as on 31 December 2013 and 2.35% as on 31 March 2013. The
bank's ratio of gross NPAs to gross advances rose to 5.25% as on 31 March 2014, compared
with 4.96% as on 31 December 2013 and 4.27% as on 31 March 2013.

The bank's provisions and contingencies surged 44.73% to Rs 2138.69 crore in Q4 March
2014 over Q4 March 2013. The provision coverage ratio as on 31 March 2014 was 59.07%.
The bank's Capital Adequacy Ratio (CAR) as per Basel III norms stood at 11.52% as on 31
March 2014, compared with 11.02% as on 31 December 2013.

During Q3 FY14, Punjab National Bank maintained it NUMBER ONE position in
Domestic Business, Domestic Deposits, Domestic Advances, Saving Deposits, CASA
Deposits, Total Income, Interest Income, Non Interest Income, and Operating Profit amongst
nationalized bank. The performance highlights of the Bank in terms of business and profit are
shown below
41






Following are the financial statements :


FINANCIALS

* Results Consolidated
No. of
Months
Year
Ending
12
Mar-09*
12
Mar-10*
12
Mar-11*
12
Mar-12*
12
Mar-13*
High Rs 580 1,017 1,268 1,234 943
Low Rs 286 394 933 751 659
Income per share (Unadj.) Rs 621.0 695.8 869.6 1,105.5 1,218.7
Earnings per share
(Unadj.)
Rs 101.4 126.0 144.4 148.2 140.2
Diluted earnings per share Rs 88.3 109.7 126.4 138.8 136.8
Cash flow per share
(Unadj.)
Rs 260.0 298.6 336.1 315.2 302.6
Dividends per share
(Unadj.)
Rs 20.00 22.00 22.00 22.00 27.00
Adj. dividends per share Rs 17.42 19.16 19.25 20.61 26.36
Avg Dividend yield % 4.6 3.1 2.0 2.2 3.4
Book value per share
(Unadj.)
Rs 493.5 593.2 713.8 861.0 975.2
Adj. book value per share Rs 429.8 516.5 624.6 806.6 952.0
Shares outstanding (eoy) m 315.30 315.30 316.81 339.18 353.47
Bonus/Rights/Conversions - - PI PI PI
Avg Price / Income ratio x 0.7 1.0 1.3 0.9 0.7
Avg P/E ratio x 4.3 5.6 7.6 6.7 5.7
Avg P/CF ratio x 3.3 4.1 4.9 3.9 3.0
Avg Price/Bookvalue ratio x 0.9 1.2 1.5 1.2 0.8
Dividend payout % 19.7 17.5 15.2 14.8 19.3
Avg Mkt Cap Rs m 136,525 222,444 348,649 336,636 283,129
No. of employees `000 58.2 56.9 57.0 62.1 63.3
Total wages & salary Rs m 29,416 31,413 44,939 47,751 57,515
Avg. income/employee Rs Th 3,363.7 3,853.6 4,831.8 6,035.3 6,806.2
Avg. wages/employee Rs Th 505.4 551.8 788.1 768.6 908.7
Avg. net profit/employee Rs Th 549.3 697.8 802.3 808.9 782.8
42






INCOME DATA

* Results Consolidated
No. of
Months
Year
Ending
12
Mar-09*
12
Mar-10*
12
Mar-11*
12
Mar-12*
12
Mar-13*
Interest income Rs m 195,787 219,376 275,512 374,954 430,781
Other income Rs m 30,571 34,982 36,554 42,395 43,020
Interest expense Rs m 125,764 132,300 155,067 237,895 278,024
Net interest income Rs m 70,023 87,076 120,445 137,059 152,757
Operating expense Rs m 42,478 48,239 64,497 71,219 83,373
Gross profit Rs m 27,545 38,837 55,948 65,840 69,384
Gross profit margin % 14.1 17.7 20.3 17.6 16.1
Provisions/contingencies Rs m 9,632 14,372 25,561 36,522 44,539
Profit before tax Rs m 49,170 60,427 67,753 72,490 68,788
Extraordinary Inc (Exp) Rs m 0 0 0 0 0
Minority Interest Rs m -31 -159 -219 -270 -654
Prior Period Items Rs m 0 0 0 0 0
Tax Rs m 17,169 20,542 21,786 21,965 18,592
Profit after tax Rs m 31,970 39,726 45,748 50,255 49,542
Net profit margin % 16.3 18.1 16.6 13.4 11.5








CASH FLOW DATA

* Results Consolidated
No. of
Months
Year
Ending
12
Mar-09*
12
Mar-10*
12
Mar-11*
12
Mar-12*
12
Mar-13*
From Operations Rs m 22,225 17,743 73,607 -251 -6,925
43

From Investments Rs m -3,037 -1,743 -9,121 -3,970 -6,004
From Financial Activity Rs m 8,787 6,256 -6,080 4,507 -6,940
Net Cashflow Rs m 27,975 22,255 58,406 286 -19,869

With 38.27% share of CASA Deposits to Total Deposits, PNB maintained its Number one
position amongst peers. Further in terms of Bottom line performance, the Bank achieved
highest Operating Profit of Rs 8211 crore during 9M FY14 and Rs 2702 crore during Q3
FY14. Also, Net Interest Margin (NIM) at above 3.50% remained highest amongst peer
banks.
The Bank has a strong capital base with capital adequacy ratio of 11.62% as per Basel II and
11.02% as per Basel III as on Dec13 as. The Bank has maintained its number one position
with highest Book value per share of Rs.936.85 as at the end Dec13 amongst peers.


5.3 RATIO ANAYSIS OF PNB ( Q4 MARCH 2014)

Q4 RESULTS YOY

(Rs mn) Q4 FY14 Q3 FY14 % qoq Q4 FY13 % yoy
Total Interest Income 111,013 109,839 1.1 103,788 7.0
Interest expended (70,995) (67,628) 5.0 (66,001) 7.6
Net Interest Income 40,018 42,211 (5.2) 37,787 5.9
Other income 13,969 9,384 48.9 11,740 19.0
Total Income 53,987 51,596 4.6 49,527 9.0
Operating expenses (22,253) (24,572) (9.4) (21,010) 5.9
Provisions (21,387) (15,900) 34.5 (14,777) 44.7
PBT 10,347 11,123 (7.0) 13,740 (24.7)
Tax (2,284) (3,569) (36.0) (2,432) (6.1)
Reported PAT 8,064 7,554 6.7 11,308 (28.7)
EPS 89.1 83.5 6.7 128.0 (30.4)

KEY RATIOS

Key Ratios Q4 FY14 Q3 FY14 chg qoq Q4 FY13 chg yoy
NIM (%) 3.2 3.6 (0.4) 3.5 (0.3)
Yield on advances (%) 9.9 10.6 (0.7) 10.7 (0.8)
Yield on investments (%) 7.9 7.8 0.1 7.9 0.0
Yield on Funds (%) 8.0 8.4 (0.4) 8.5 (0.5)
Cost of Deposits (%) 6.1 6.3 (0.2) 6.6 (0.5)
44

Cost of Funds (%) 5.1 5.2 (0.1) 5.4 (0.3)
CASA (%) 38.3 38.3 0.0 39.2 (0.9)
C/D (x) 0.77 0.78 (0.00) 0.79 (0.01)
Non-interest income (%) 25.9 18.2 7.7 23.7 2.2
Non-int inc/Int exp (%) 19.7 13.9 5.8 17.8 1.9
Cost to Income (%) 41.2 47.6 (6.4) 42.4 (1.2)
Provisions/Income (%) 17.1 13.3 3.8 12.8 4.3
BV (Rs) 952.5 936.9 15.7 915.5 37.0
RoE (%) 9.3 8.9 0.4 14.0 (4.6)
RoA (%) 0.6 0.6 - 0.9 (0.4)
CAR (%) 11.5 11.0 0.5 12.7 (1.2)
Gross NPA (%) 5.3 5.0 0.3 4.3 1.0
Net NPA (%) 2.9 2.8 0.1 2.4 0.5

THE FINDINGS :

1. PNBs Loan growth increased year-on-year : Retail, SME and Agriculture were key
drivers
PNBs loan growth accelerated further from 10% yoy in Q3 FY14 to 13% yoy.
Sequentially, the advances grew by strong 7% driven by robust growth in Agri (20% qoq,
included PSL buyouts), Retail (7.8% qoq) and SME (6.5% qoq) segments. On yoy basis
also, growth in these segments stood significantly higher than the overall bank - Agri
(39% yoy), Retail (23% yoy) and SME (24% yoy). Within retail segment, housing loans
(comprising 44% of the portfolio) grew by healthy 19% yoy. Growth in the large
corporate segment was modest at 9% yoy; infra credit grew by 9% yoy and within that
exposure to power sector grew by 18% yoy. PNB expects its domestic loan book to grow
by 15% yoy during the current year,

2. Deposits profile continues to improve: domestic CASA ratio up 90bps QOQ
Deposits grew in-line with advances at 15% yoy during FY14. The growth in savings
deposits remained strong at 15% yoy and the share of domestic CASA improved by
90bps qoq to 41.3%. The share of high-cost deposits (preferential rates deposits >Rs1cr)
declined to 5% of total deposits from 12.5% at the end of FY13. PNBs deposits profile in
likely to further improve in coming quarters with domestic CASA ratio gradually inching-
up

3. Sharp decline in NIM :

During Q4 FY14, PNBs NIM witnessed a sharp correction of 40bps qoq thus surprising
the street negatively. This was despite a material 20bps qoq decline in cost of deposits on
the back of improvement in CASA ratio and lower share of high-cost deposits. The
blended yield on advances fell by substantial 70bps qoq due to sharp uptick in
delinquencies and lower re-pricing of some corporate loans. As per the bank, combined
45

these factors impacted interest income of the quarter by ~Rs2bn. PNB does not expect
any material improvement in NIM over the coming quarters.

4. Core fee growth improves; C/I ratio falls substantially on lower growth
Core fee growth markedly improved to 18% yoy from 10% yoy in the previous quarter.
Growth was particularly strong in the streams of loan processing (27% yoy) and bills &
remittances (27% yoy). Treasury profit and recovery of written-off accounts stood
significantly during the quarter at Rs1.9bn and Rs2.7bn respectively. Growth in opex
came-off to just 6% yoy thus driving a sharp improvement in cost/income ratio (from
48% to 41%) despite the sequential decline in NII.

5. Influx of impaired assets was much higher than expected; PAT dives 30% yoy on
higher provisioning
PNBs slippages came in at Rs44.5bn (our estimate was Rs21-22bn) representing an
alarmingly high annualized delinquency ratio of 5.3%. Of the above, Rs12.5bn slipped
from the standard restructured portfolio. This was very disappointing as the bank was
hopeful of continuing the resilient show of Q3 FY14 (delinquency ratio at 1.9%).
Recoveries, upgradations and write-offs comprised Rs22bn and therefore net addition to
GNPA block was Rs23bn, a 14% qoq increase taking the ratio to 5.3%. PNB made
substantial provisions against the new NPLs and the credit cost stood at annualized
205bps, a multi-quarter high. With elevated provisioning, the PCR was sustained at 59%.
Fresh restructuring continue to be high standing at Rs32bn for Q4 FY14 but the pipeline
is marginal at Rs12bn. Investment depreciation provision was substantially lower than
expected at Rs280mn. As a result of higher provisioning for impaired assets, PAT for the
quarter dived 30% yoy to Rs8bn.

6. Rate market performer; stock to underperform on asset quality concerns
Due to subdued asset quality outlook would preclude further valuation recovery in the
near term for PNB. Despite earning much better NIMs than most peers, PNB is unlikely
to report a materially higher RoA in FY15. However, we do expect banks RoA to
recover to 0.9% in FY16 on assumption that asset quality stress would significantly abate
by then.


5.4 SHARE PERFORMANCE OF PNB :


46



As per recent regulatory data, FIIs bought a net Rs 3,048 crore in Indian banks, while selling
a net of Rs 4868 crore in pharmaceutical and biotechnology shares this month as of March15.
As a result, banks have been one of the top performing sectors in March, at a time when both
Sensex and Nifty rose to their fresh record highs. The NSE's bank sub index has been up
about 15 percent so far this march , outperforming NSE's nearly 5 per cent gain.
Amongst the banking stocks , PNB has outperformed the bse index and reached a new 52
week high. The share price of the company is largely dependent on the baking moves taking
place in the economy and initiatives taken by RBI , also by any internal factor impacting the
company .

5.5 SWOT ANALYSIS

Strengths:

1. The Bank has made rapid strides in banking sector with the help of various technology
enabled products and services which are providing convenient banking to all the
customers including young generation which are techno savvy to the core.
2. Punjab National Bank maintains a strong correspondence banking relationship with 200
leading international banks all over the world which has enhanced its capacity to handle
transactions world-wide
3. Punjab National Bank, is extensively catering to banking needs of Non-resident Indians,
Importers & Exporters particularly relating to foreign exchange business including
Imports & Exports of Goods & Services as also Remittances etc.
4. Bank has extensively used technology to reach out to those which have remained away
from formal banking set up. Further, the Bank is actively participating in the Direct
Benefit Transfer (DBT) Programme of the Government leading to seamless transfer of
cash benefits into the accounts of beneficiaries,

Weakness:
47

1. Due to subdued asset quality outlook would preclude further valuation recovery in the
near term for PNB
2. Inadequate advertising and branding as compared to other banks
3. Key issues to watch out include management strategy on balance sheet growth, liability
mix and asset quality management.

Opportunities

As banks develop their strategies for giving customers access to their accounts through
various advanced services like e-banking, mobile banking and net banking, they should also
regard this emerging platform as a potential catalyst for generating operational efficiencies
and as a vehicle for new revenue sources.
Banking industrys opportunities include:

1. A growing economy,

2. Banking deregulation,

3. Increased client borrowing,

4. An increase in the number of banks,

5. An increase in the money supply,

6. Low government-set credit rates and

Larger customer checking account balances. Developing countries like India, has
a huge number of people who don
t have access to banking services due to scattered and fragmented locations. But if we talk
about those people who are availing banking services, their expectations are raising as the
level of services are increasing due to the emergence of Information Technology and
immense competition between the services & products provided by different banks. Since,
foreign banks are playing in Indian market, the number of services offered has increased and
banks have laid emphasis on meeting the customer expectations.
India's banking sector has made rapid strides in reforming and aligning itself to the new competitive business
environment.

THREATS


1. High transaction costs
A major concern before the banking industry is the high transaction cost of carrying non-
performing assets in their books. The growth led to strains in the operational efficiency of
banks and the accumulation of non-performing assets (NPAs) in their loan portfolios.


2. IT revolution
48

The Indian banks are subject to tremendous pressures to perform as otherwise their very
survival would be at stake. The application of IT and e-banking is becoming the order of the
day with the banking system heading towards virtual banking.


3. Timely technological up gradation
Already electronic transfers, clearings, settlements have reduced translation times. To face
competition it is necessary for banks to absorb the technology and upgrade their services.

4. Intense Competition
The RBI and Government of India kept banking industry open for the participants of private
sector banks and foreign banks. The foreign banks were also permitted to set up shop on
India either as branches or as subsidiaries. Due to this lowered entry barriers many new
players have entered the market such as private banks, foreign banks, non-banking finance
companies, etc. The foreign banks and new private sector banks have spearhead the hi-tech
revolution. For survival and growth in highly competitive environment banks have to follow
the prompt and efficient customer service, which calls for appropriate customer centric
policies and customer friendly procedures.

5. Privacy and Safety
Among the most important aspects of savings, i.e., safety, liquidity and profitability, safety is
at the top most priority. The areas which might endanger security in e-banking can be:

Credit risk
Liquidity, interest rate risk, market risks
Legal risk


6. Global banking:
The impact of globalization becomes challenges for the domestic enterprises as they are
bound to compete with global players. If we look at the Indian Banking Industry, then we
find that there are 36 foreign banks operating in India, which becomes a major challenge for
Nationalized and private sector banks.

7. Financial inclusion:
Financial inclusion has become a necessity in todays business environment. Whatever is
produced by business houses, that has to be under the check from various perspectives like
environmental concerns, corporate governance, social and ethical issues. In India, RBI has
initiated several measures to achieve greater financial inclusion, such as facilitating no-frills
accounts and GCCs for small deposits and credit.









49

6.ON SITE PROJECT : CREDIT APPRAISAL
BASICS OF BANK LENDING

Banks extend credit to different categories of borrowers for a wide variety of purposes. For
many borrowers, bank credit is the easiest to access at reasonable interest rates. Bank credit is
provided to households, retail traders, small and medium enterprises (SMEs), corporates, the
Government undertakings etc. in the economy.
Retail banking loans are accessed by consumers of goods and services for financing the
purchase of consumer durables, housing or even for day-to-day consumption. In contrast, the
need for capital investment, and day-to-day operations of private corporates and the
Government undertakings are met through wholesale lending. Loans for capital expenditure
are usually extended with medium and long-term maturities, while day-to-day finance
requirements are provided through short-term credit (working capital loans).
Principles of Lending and Loan Policy
Principles of Lending
To lend, banks depend largely on deposits from the public. Banks act as custodian of public
deposits. Since the depositors require safety and security of their deposits, want to withdraw
deposits whenever they need and also adequate return, bank lending must necessarily be
based on principles that reflect these concerns of the depositors. These principles include:
safety, liquidity, profitability, and risk diversion.

Safety
Banks need to ensure that advances are safe and money lent out by them will come back.
Since the repayment of loans depends on the borrowers' capacity to pay, the banker must be
satisfied before lending that the business for which money is sought is a sound one. In
addition, bankers many times insist on security against the loan, which they fall back on if
things go wrong for the business. The security must be adequate, readily marketable and free
of encumbrances.

Liquidity
To maintain liquidity, banks have to ensure that money lent out by them is not locked up for
long time by designing the loan maturity period appropriately. Further, money must come
back as per the repayment schedule. If loans become excessively illiquid, it may not be
possible for bankers to meet their obligations vis--vis depositors.

Profitability
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.
50



Risk diversification
To mitigate risk, banks should 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.
Loan Policy
Based on the general principles of lending, the Credit Policy Committee (CPC) of bank
prepares the basic credit policy of the Bank, which has to be approved by the Bank's Board of
Directors. The loan policy outlines lending guidelines and establishes operating procedures in
all aspects of credit management including standards for presentation of credit proposals,
financial covenants, rating standards and benchmarks, delegation of credit approving powers,
prudential limits on large credit exposures, asset concentrations, portfolio management, loan
review mechanism, risk monitoring and evaluation, pricing of loans, provisioning for bad
debts, regulatory/ legal compliance etc. The lending guidelines reflect the specific bank's
lending strategy (both at the macro level and individual borrower level) and have to be in
conformity with RBI guidelines. The loan policy typically lays down lending guidelines in
the following areas:
Level of credit-deposit ratio
Targeted portfolio mix
Hurdle ratings
Loan pricing
Collateral security
Credit Deposit (CD) Ratio
A bank can lend out only a certain proportion of its deposits, since some part of deposits have
to be statutorily maintained as Cash Reserve Ratio (CRR) deposits, and an additional part has
to be used for making investment in prescribed securities. Banks have the option of having
more cash reserves than CRR requirement and invest more in SLR securities than they are
required to. Further, banks also have the option to invest in non-SLR securities. Therefore,
the CPC has to lay down the quantum of credit that can be granted by the bank as a
percentage of deposits available. Currently, the average CD ratio of the entire banking
industry is around 70 percent, though it differs across banks.

Targeted Portfolio Mix
The CPC aims at a targeted portfolio mix keeping in view both risk and return. Toward this
end, it lays down guidelines on choosing the preferred areas of lending as well as the sectors
to avoid. Banks typically monitor all major sectors of the economy. They target a portfolio
mix in the light of forecasts for growth and profitability for each sector. If bank perceives
economic weakness in a sector, it would restrict new exposures to that segment and similarly,
growing and profitable sectors of the economy prompt bank to increase new exposures to
those sectors. This entails active portfolio management.
51



Hurdle ratings
There are a number of diverse risk factors associated with borrowers. Bank has a
comprehensive risk rating system that serves as a single point indicator of diverse risk factors
of a borrower. This helps taking credit decisions in a consistent manner. To facilitate this, a
substantial degree of standardization is required in ratings across borrowers. The risk rating
system should be so designed as to reveal the overall risk of lending. For new borrowers, a
bank usually lays down guidelines regarding minimum rating to be achieved by the borrower
to become eligible for the loan. This is also known as the 'hurdle rating' criterion to be
achieved by a new borrower.

Pricing of loans
Risk-return trade-off is a fundamental aspect of risk management. Borrowers with weak
financial position and, hence, placed in higher risk category are provided credit facilities at a
higher price (that is, at higher interest). The higher the credit risk of a borrower the higher
would be his cost of borrowing. To price credit risks, bank devises appropriate systems,
which usually allow flexibility for revising the price (risk premium) due to changes in rating.
In other words, if the risk rating of a borrower deteriorates, his cost of borrowing should rise
and vice versa.
At the macro level, loan pricing for a bank is dependent upon a number of its cost factors
such as cost of raising resources, cost of administration and overheads, cost of reserve assets
like CRR and SLR, cost of maintaining capital, percentage of bad debt, etc. Loan pricing is
also dependent upon competition.

Collateral security
As part of a prudent lending policy, bank usually advances loans against some security. The
loan policy provides guidelines for this. In the case of term loans and working capital assets,
bank takes as 'primary security' the property or goods against which loans are granted. In
addition to this, banks often ask for additional security or 'collateral security' in the form of
both physical and financial assets to further bind the borrower. This reduces the risk for the
bank. Sometimes, loans are extended as 'clean loans' for which only personal guarantee of the
borrower is taken.
Compliance with RBI guidelines
The credit policy of a bank should be conformant with RBI guidelines; some of the important
guidelines of the RBI relating to bank credit are discussed below.

Directed credit stipulations
The RBI lays down guidelines regarding minimum advances to be made for priority sector
advances, export credit finance, etc. These guidelines need to be kept in mind while
formulating credit policies for the Bank.

Capital adequacy
52

If a bank creates assets-loans or investment-they are required to be backed up by bank
capital; the amount of capital they have to be backed up by depends on the risk of individual
assets that the bank acquires. The riskier the asset, the larger would be the capital it has to be
backed up by. This is so, because bank capital provides a cushion against unexpected losses
of banks and riskier assets would require larger amounts of capital to act as cushion.

Credit Exposure Limits
As a prudential measure aimed at better risk management and avoidance of concentration of
credit risks, the Reserve Bank has fixed limits on bank exposure to the capital market as well
as to individual and group borrowers with reference to a bank's capital. Limits on inter-bank
exposures have also been placed. Banks are further encouraged to place internal caps on their
sectoral exposures, their exposure to commercial real estate and to unsecured exposures.

:Exposure norms for Commercial Banks in India
Exposure to Limit
1. Single Borrower 15% of capital fund (Additional 5% on
infrastructure exposure)
2. Group Borrower 40% of capital fund (Additional 10% on
infrastructure exposure)
3. NBFC 10% of capital fund
4. NBFC AFC 15% of capital fund
5. Indian Joint Venture/ Wholly owned
subsidiaries abroad/ Overseas step
down subsidiaries of Indian corporate
20% of capital fund
6. Capital Market Exposure
(a) Banks holding of shares in any
company

(b) Banks aggregate exposure to capital
market (solo basis)
(c) Banks aggregate exposure to capital
market (group basis)
(d) Banks direct exposure to capital
market (solo basis)
(e) Banks direct exposure to capital
market (group basis)

The lesser of 30% of paid-up share capital of
the company or 30% of the paid-up capital of
the banks
40% of its net worth

40% of its consolidated net worth

20% of its net worth

20% of its consolidated net worth
7. Gross holding of capital among
banks/ FIs
10% of capital fund
Source: Financial Stability Report, RBI, March 2010


6.1 CREDIT APPRAISAL

The Credit Appraisal involves providing loan or credit and other facilities to a borrower, for
setting up new projects, expansion, diversification and modernization of existing industrial
units a starting a new Project called the Green Field project. While considering the project for
53

sanction of credit, we evaluate the technical feasibility, commercial and economic viability
and financial soundness of the entire project and also the credit worthiness of the sponsor.
The repayment of the loans and facilities is normally fixed on case to case basis depending on
projected cash flow of the project or the borrower.

Every banking organization has a credit policy for the entire sanction process, but the
fundamental framework is essentially the same everywhere. At the centre is the ability to
generate profits while also ensuring that an organization has adequate regulatory capital for
economic losses and shareholders requirement during the entire tenure of the project. The
credit appraisal process requires a hierarchical structure throughout the credit organization. It
can vary in procedures, size and functions as well as be designed along geographic, product,
industry, or international divisions.

Based on the communication received from Department of Financial Services, Ministry of
Finance, Govt. of India, Credit Approval Committee (CAC) of the Board for approving credit
proposals falling beyond the vested loaning powers of CMD, but upto ` 400 crore has been
formed. With the introduction of the said committee, the credit proposal falling under MC
powers but not exceeding ` 400 crore shall now be approved by the Credit Approval
Committee (CAC) as under:

The ceiling of ` 400 crore shall be for the aggregate commitment per borrower including
adhoc limits, if any. For group accounts, CAC shall take aggregate exposure upto ` 800
crore. Vide LA CIR NO. 32 dt. 18.05.2012 & LACL 03 dt. 08.01.2013 constitution of
committees at HO/CO level is as under
CAC at HO level

Headed by Credit proposals

Constitution
HOCAC Level-
III

CMD Above ` 100
crore & upto `
400 crore

CMD, EDs, CGM / GMs of
Credit / Finance / IRMD and
IBD
HOCAC Level-II

Senior most ED

Above ` 50 crore
& upto ` 100
crore

EDs, GMs of Credit / Finance /
IRMD and Recovery Division
HOCAC Level-I


Senior most GM
(Credit)
Above `35 crore
but upto `50 crore

GMs (Credit), DGMs
(Credit/Finance/IRMD/Recovery


Components of Credit Appraisal Process

While assessing a loan application of the customer, the bank needs to know some basic
information: Incomes of applicants and co-applicants, age of applicants, educational
qualifications, profession, experience, additional sources of income, past loan record, family
history, employer/business, security of tenure, tax history, assets of applicants and their
54

financing pattern, recurring liabilities, other present and future liabilities and investments (if
any). Out of these, the incomes of applicants are the most important criteria to understand and
calculate the credit worthiness of the applicants.

As stated earlier, the actual norms decided by banks differ greatly. Each has certain norms
and guidelines which the customer needs to adhere to fit in to be eligible for a loan. Based on
these parameters, the maximum possible loan that the bank can sanction and the customer is
eligible for is worked out (by various predefined methods).

The banks follow a procedure for evaluating a proposal for a project. The basic objective is to
check whether the applicant fulfils various conditions prescribed by the lending institution
and the project is viable. The acceptance of a wrong proposal will result in the wastage of
scarce resources. These banks adopt the following procedure for lending:

1. Project Appraisal and Eligibility of Applicant : Every Bank and other financial
institutions appraise a project and sanction loan depending upon certain limits
prescribed beyond which they cannot go. Before processing the loan application, it is
important to find out whether the applicant is eligible under the norms of the Bank or
not. The second aspect which is looked into is to determine whether the borrowing
party has fulfilled various conditions prescribed by the Government of India (GoI). In
case some license is required from various government authorities. It should have
been taken or an assurance is received from the licensing authority. After satisfying
these prerequisites the project is appraised by a team of technical, financial team i.e.
credit and Advance department, corporate laon dept. of the Bank, from various
discussions with the promoters and clarifications sought on various points. The bank
considers financial assistance in the light of;
i. Guidelines for assistance to industries issued by the government or others concerned from
time to time.
ii. Guidelines issued by the bank in its circulars (latest)
iii. Policy decisions of the Board of Directors of the bank.

2. Technical Appraisal :

A technical appraisal involves the study of:
i. Feasibility and suitability of technical process keeping in mind various factors present
in Indian market.
ii. Location of the project in relation to the availability of raw materials, power: water.
Labour, fuel, transport, communication facilities and market for finished products.
iii. The scale of operations and its suitability of the project.
iv. The technical soundness of the projects.
v. Sources of purchasing plant and machinery and the reputation of suppliers. etc.
vi. Arrangement for the disposal of factory affluent and use of bye products, if any.
vii. The estimated cost of the project and probable selling price of the product.
viii. The schedule for completion of the project.
55


3. Economic Viability :

The economic appraisal will consider the national and industrial priorities of the project
export potential of the product employment potential, study of market.

4. Assessing Commercial Aspects :
The examination of commercial aspects relates to the arrangements for the purchase of raw
materials and sale of finished products. If the concern has some arrangement for sale then the
position of the party should be assessed.

5. Financial Feasibility :
The financial feasibility of a new and an existing concern will be assessed differently. The
assessment for a new concern will involve:
i. The needs for fixed assets, working capital and preliminary expenses will be
estimated to find out its needs.
ii. The financing plans will be studied in relation to capital structure, promoters
contribution, debt-equity ratio.
iii. Projected cash flow statements both during the construction and .operation periods
iv. Projected profitability and revenues.

6. Managerial Competence:

The success of a concern depends up on the competence of management. Proper application
of various policies will determine the Success of an enterprise. A lending institution would
see the background, qualifications, business experience of promoters and other persons
associated with management.

7. National Contribution:

Besides looking at the commercial profitability, national contribution of the project is also
taken into account. The role of the project in the national economy and its benefits to the
society in the form of good quality products, reasonable prices, employment generation,
helpful in social infrastructure etc. should be assessed. Development banks aim at the overall
welfare of the society.

8. Balancing of Various Factors :
Various factors should be balanced against each other. The circumstances of the individual
project will help in weighing various factors. Some factors may be strong as their in-depth
analysis should be avoided. In case a project is profitable, there will be no need to assess cash
flow. Weaknesses located in certain areas may be offset by the good points in the other. An
experienced management and sound economic outlook may compensate some weakness in
financial positions. The responsibility of lending bank lies in balancing judiciously different
considerations for arriving at a consensus.
56


9. Loan Sanction :

After the appraisal report on the project is prepared by the banks officers, it is placed before
the advisory committee consisting of experts drawn from various fields of the particular
industry. If the advisory committee is satisfied with the proposal then it recommends the case
to the higher authority along with its own report. When the assistance is sanctioned then a
letter to this effect is issued to the pay giving details of conditions.

10. Loan Disbursement:

The loan is disbursed after the execution of loan agreement. The execution of documents of
security or guarantee etc. should precede the disbursement of loan. In case some property is
pledged to the bank then title deeds of such property are properly scrutinized. The fulfillment
of various conditions proceeding to disbursement will determine the time of paying the
money to the party.
11. Follow up :

The job of a lending bank doesnt end by disbursing the loan. It has first to see whether the
construction .of the project is as per schedule decided earlier. In case there is some delay
taking place in executing the plans then the reasons for it should be determined. Later during
operations, the result should be properly followed. It should be seen whether the revenue
earned by the concern will be sufficient to meet its obligations or not so a proper follow up by
the bank will enable it to follow the progress of the unit. The Yearly review in case of
working capital loan and half yearly review in case of Term loan helps Bank monitor the
performance of the borrowing party.
There are many types of lending process of the bank. The bank has decision to provided loan
for customer.
40
i. Customer approach to the bank
ii. Loan application.
iii. Loan interview.
iv. submission of document
v. site/ Field visit
vi. Credit Analysis
vii. Loan disbursement
viii. Approval / rejection of the loan
ix. Monitoring of the loan


57

Relevant Data for Appraisal Study
The data relevant for study of above aspects should be collected from the borrower. The main
data required for appraisal would be available in application. These data comprise the
following:
i. Cost of project and means of financing;
ii. Profitability projections covering revenue, cost of production/expenditure etc.;
iii. Fund flow and Cash flow statements;
iv. Projected balance sheets.
1) Cost of Project & Means of Financing
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
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
2) Profitability Statement
It is prepared after considering the net sales figure and details of direct costs/expenses
relating to raw material, wages, power, fuel, consumable stores/spares and other
manufacturing expenses to arrive at a figure of gross profit.
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.
3) Fund-Flow Statement
A critical analysis of the statement shows the various changes in sources and applications
(uses) of funds to ultimately give the position of net funds available with the business for
repayment of the loans
4) Balance Sheet Projections
The statement helps to analyze as to what an enterprise owns and what it owes at a particular
point of time.
5) Key Financial Ratios
58

While analyzing the financial aspects of project, it would be advisable to analyze the
important financial ratios over a period of time as it may 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 =




The level of DER varies from case to case depending upon the nature of project, promoters
strength, availability of collateral securities etc. apart from the type of industry. In capital
intensive industries involving large capital investment, DER is normally higher as compared
to the other industries.
Debt Service Coverage Ratio
=



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

=



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 =

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.

Current Ratio =



It is a measure of firms short term solvency. It indicates the availability of current assets in
rupees for every one rupee of current liability. A ratio greater than one means that the firm
has more current assets than current claims against them. Higher the ratio greater the short
term liquidity. This ratio is indicative of short term financial position of a business enterprise.
59

6) Sensitivity Analysis
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 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) Management and Organization
Appraisal of project would not be complete till it throws enough light on the person(s) behind
the project i.e. management and organization of the unit. It is seen that some projects may
fail not because these are not viable but because of the ineffectiveness of the management
and the organization in controlling various functions like production, marketing, finance,
personnel, etc. The appraisal report should highlight the strengths and weaknesses of the
management by commenting on the background, qualifications, experience, and capability of
the promoter(s), key management personnel, effectiveness of the internal control systems,
relation with labour, working conditions, wage structure, and the other assigned essential
functions.
GENERAL GUIDELINES:
Appraisal report should critically analyze and comment on various important functional areas
like technical, marketing, economic, financial, management etc. and comment on their
strengths and weaknesses, if any. The report should answer objectively various questions
which may arise in the mind like what, why, where, when, how & who relating to all the
above functional areas & should be conclusive as far as possible. The assumptions should be
realistic. The report should reflect three cardinal rules in its content: A.B.C which stands for
Accuracy, Brevity & Clarity; so that it proves useful and helpful in taking decisions as to
whether the project is technically feasible and economically viable and in this case it is
viable.

6.2 TYPES OF FUND BASED AND NON FUND BASED FINANCE

1. FUND BASED :
a) Term loan
b) Working capital loan
Packing credit , bank overdraft , inland bill.

60

2. NON FUND BASED
a) Letter of credit
b) Bank guarantee


Fund based:
Overdraft:
When a customer maintaining a current account is allowed by the bank to draw more
than the Credit balance in the account, such facility is called an overdraft facility. At
the request and Requirement of customer temporary overdraft are allowed. However,
against certain securities, regular overdraft limits are sanctioned.
Salient features of this type of account are as under
i. Overdraft accounts are maintained in current account ledgers. Depending upon
business Requirements, for regular overdraft limits either some folio in current
account ledger are reserved or separate ledger is maintained.
ii. All rules applicable to current account are applicable to overdraft account. Overdraft
is a running account and hence debits and credits are freely allowed.

Cash credit:
A cash-credit is an arrangement to extend short term working capital facility under which
the bank establishes a credit limit and allows the customers to borrow money up to a
certain limit. Under the system, bank sanctions a limit called the cash-credit limit to each
borrower up to which he is allowed to borrow against the security of stipulated tangible
assets i.e. stocks, books debts etc. the customer need not draw at once the whole of the
credit limit sanctioned but can Withdraw from his cash-credit account as and when he
needs the funds and deposit the surplus cash/funds proceeds of safe etc. into the account.

Inland Bills:
In this case, the bank sanctioned a limit to the Customer and the client can Discount those
bills and will pay the money to the Borrower and the bank will take the money from the
Debtor of the borrower on due date of the Bill.

Packing Credit:
In case of Packing credit, the borrower wants the money to purchase the Raw material
when the borrower has to export the goods, but the borrower dont have money to
purchase raw material and then manufacture and then export the goods, in that case the
borrower approaches to the bank for getting the credit for Pre- Shipment purpose then
bank will provide the credit after confirming that the borrower has actually to export and
goods and after getting the guarantee from the Buyer that he will pay the money on
getting the goods.


Non Fund Based:
61


Buyers Credit( Letter of comfort):
In case of buyers credit, the Bank arranges fund from some other bank which bank had
to pay on behalf of the borrower, the Bank issues Letter of comfort to that Bank which
shows an assurance that bank will pay the money as and when due. This is most polular in
case of Consortium.
Letter of Credit:
A binding document that a buyer can request from his bank in order to guarantee that the
payment for goods will be transferred to the seller. Basically, a letter of credit gives the
seller reassurance that he will receive the payment for the goods. Modern banks facilitate
trade and commerce by rendering valuable services to the business community. Apart
from providing appropriate mechanism for making payments arising out of trade
transactions, the banks gear the machinery of commerce, especially in useful like between
the buyer and the seller who are often too far away from and too unfamiliar with cash
other.
Opening or issuing letter of credit is one of the important services provided by the banks
for these purpose. The foundation of the banking business is the confidence reposed in the
banking institutions by the people in general and the mercantile community in particular.
The standing, reputation and goodwill earned by a banking institution enables it to issue
instruments, known as letter of credit, in favors of traders and banks to meet the needs of
their customer.


TERM LOAN
5.1Definition of Term Loan
Term loans also referred as term finance; represent a source of debt finance which is utilized
for establishing or expanding a manufacturing unit by the acquisition of fixed assets. These
are generally repayable in more than one year but less than 10 years. Such loans are raised for
expansion, diversification and modernization of the enterprise. The primary sources of such
loans are financial institutions. These are repayable in fixed monthly, quarterly or half yearly
installments and secured by term loan agreements between the borrower and the bank.

Term loans are generally granted to finance capital expenditure, i.e. acquisition of land,
building and plant & machinery, required for setting up a new industrial undertaking or
expansion/ diversification of an existing one and also for acquisition of movable fixed assets.
Term loans are also given for modernization, renovation etc. to improve the product quality
or increase the productivity and profitability.

Term loans are normally granted for periods varying from 3-7 years and in exceptional cases
beyond 7 years. The exact period for which particular loan is sanctioned depends on the
circumstances of the case.

62

The basic difference between short term facilities and tem loans is that short term facilities
are granted to meet the gap in the working capital and are intended to be liquidated by
realization of assets, whereas term loans are given for acquisition of fixed assets and have to
be liquidated from the surplus cash generated out of earning. There are not intended to be
paid out of the sale of the fixed assets given as security for the loan. This makes it necessary
to adopt a different approach in examining the application of the borrowers for term credit.
Features of Term Loan
Following are the different features of term loans:
Currency: Financial institutions give rupee term loans as well as foreign currency term
loans.
Security: All loans provided by financial institutions, along with interest, liquidated
damages, commitment charges, expenses etc. are secured by way of:
(a) First equitable mortgage of all immovable properties of the borrower, both present
and future; and
(b) Hypothecation of all movable properties of the borrower , both present and future,
subject to prior charges in favor of commercial banks for obtaining working
capital advance in the normal course of business
Interest payment and principal repayment: These are definite obligations which are
payable irrespective of the financial situation of the firm.
Restrictive Covenants: FIs impose restrictive conditions on the borrowers depending
upon the nature of the project and financial situation of the borrower.

Term Loan Sanction Procedure
The procedure associated with a term loan sanction involves the following steps:

1. Submission of loan application: The borrower submits an application form which
seeks comprehensive information about the project such as:
i. Promoters background
ii. Particulars of industrial concern
iii. Cost of project
iv. Means of financing
v. Marketing and selling arrangements
vi. Economic considerations

2. Initial processing of loan application: The loan application is reviewed to ascertain
whether it is complete for processing, if it is incomplete then it is sent back to the
borrower for resubmission with all relevant information.

3. Appraisal of the proposed project: The detailed appraisal of the project covers the
marketing, technical, managerial, and economic aspects.


63

4. Issue of letter of sanction: If the project is accepted, a financial letter of sanction is
approved to the borrower.

5. Acceptance of terms and conditions by the borrowing unit: On receiving the letter
of sanction the borrowing unit convenes its board meeting at which the terms and
conditions associated with the letter of sanction are accepted and appropriate
resolution is passed to the effect.


6. Execution of loan Agreement: After receiving the letter of acceptance from the
borrowers. The FI sends the draft of the agreement to the borrower to be executed by
the authorized person

7. Creation of Security: The term loans and the DPG assistance provided by the
financial institutions are secured through the first mortgage, by way of deposit of title
deeds, of immovable properties and hypothecation of movable properties.
8. Disbursement of loan: Periodically, the borrower is required to submit the
information on the physical progress of the projects, financial status of the projects,
arrangements made for financing the projects, contribution made by the promoters,
projected fund flow statement, compliance with various statutory requirements and
fulfillment of disbursement conditions.

9. Monitoring: Monitoring of the project is done at the implementation stage as well at
the operational stage.

Pre-Sanction Inspection
Once the incumbent is satisfied with the information furnished by the borrower that
the proposal for the term loan is worth consideration, he should inspect the factory or
place of business to check the authenticity of the information supplied. Inspection can
bring into light certain factors which are not revealed by mere study of financial
statements. Even in case of new unit, inspection of factory site is necessary.
The assets of the concern which are proposed to be charged should be verified
physically and the title of the borrowers on the same should be examined.
The books of the accounts and other relevant papers should be verified to see if all
liabilities, claims, contingencies, disputes have been admitted by the concern.
Such an inspection can focus on the unfavourable aspects or weaknesses of the unit
and can help to a large extent in making an assessment of the proposal.
Term Loan exposure to a borrower/group shall be within the prudential norms of capital
adequacy and per borrower/group exposure stipulated by bank.
The Bank shall take steps to strengthen in-house term loan appraisal or get the term loan
proposals appraised by any reputed appraisal agency wherever required, keeping in view the
exposure of the bank.
Debt service coverage ratio benchmark:
64

In case of term loans, net debt service coverage ratio, i.e. exclusive of interest payable, this
shall normally not go below 2. Minimum Average Gross DSCR of 1.5:1 will be considered as
reasonable requirement for new as well as existing connection.
In case of highly capital intensive projects/ infrastructure projects, DSCR up to 1.25:1 may be
considered on case to case basis. This is In view of the long gestation period and time
required in generation of cash flows in case of capital intensive units and infrastructure
projects, the relaxation shall take care of specific cases where the same is warranted.
Similarly, risk factor is relatively lower where repayments are assured by way of annuity
payments from the Government Department / lease rentals. In such cases, DSCR upto 1.3:1
may be considered.
The DSCR is calculated as follows :


Particulars Year Year Year
Net profit
Depreciation
Other non cash
expenses

Interest on term loans
Total funds
available for debt
servicing (A)

Total debt
obligation (B)

DSCR (A/B)


The main purpose of appraisal of term loan is to confirm whether funds are safe in the hands
of a potential borrower and whether the project would generate sufficient cash surplus from
operations to service the debt and repay the principal amount. For this purpose, a scrutiny of
the projected statements by using analytical tools is a must.

Further, judgment has to be exercised by the credit officer by taking a view on assumptions
made in preparing the projected statements and overall integrity and reputation of the
borrower based on available information. Thus, appraisal of term loan involves two major
criterions to decide on the borrowers request: (A) Borrowers Appraisal and (B) Project
Appraisal


WORKING CAPITAL:

Any industrial establishment requires generally two kinds of funds. The first one is long-
term funds which are required for the purchase of fixed assets such as land, building,
65

machineries, electrical installations, start up expenses, development expenses, purchase of
goodwill, purchase of furniture, purchase of vehicles and other items to bring the
establishment into operation.

The second kind is short-term funds. These are required to meet the needs of day-to-day
expenses such as raw-materials, stores, power and fuel, salaries, wages, administrative
expenses, interest, sales and distribution expenses and other expenses to produce the saleable
goods, upto the realization of the sale proceeds. Till the sale proceeds are realized, the
inventory is built up to facilitate smooth production and outstanding bills i.e. debtors are also
financed by the short-term funds. In due course the establishment also gets some credit from
their supplier which is indirect financing of the short-term funds.

Funds utilized for the current assets constitute working capital.
It is in fact the life-blood of the unit . The concept used for working capital may be gross
working capital or net working capital.

Gross working capital constitutes current assets, whereas working capital gap means current
asset minus current liabilities. Working capital, also known as net working capital, is a
financial metric which represents operating liquidity available to a business. Along with fixed
assets such as plant and equipment, working capital is considered a part of operating capital.
It is calculated as current assets minus current liabilities.

If current assets are less than current liabilities, an entity has a working capital deficiency,
also called a working capital deficit. A company can be having assets and profitability but
short of liquidity if its assets cannot readily be converted into cash when required. Positive
working capital is required to ensure that a firm is able to continue its operations and that it
has sufficient funds to satisfy both maturing short-term debt and upcoming operational
expenses.

The management of working capital involves managing inventories, accounts receivable and
payable and cash. How much working capital will be required by a particular industrial
undertaking will depend upon the production cycle i.e. from the time raw material is
purchased to the time goods are sold and cash is realized (operating cycle). Therefore, the
working capital for a unit would mean the total current assets it has to hold.

Many newly started units become sick or run into fatal problems due to defective financial
plan. The plan adopted may fail to provide adequate capital to meet the needs of both fixed
and working capital, particularly the later. There are instances where units have been able to
obtain sufficient funds to buy a plant but failed to equip the same and conduct production
operations successfully because of faulty assessment of working capital needs.

If a borrower approaches for funds for this purpose, bankers examine the technical feasibility,
economic validity and managerial competency before deciding to sanction the loan. There is
not much problem to sanction it, provided the banker is satisfied about the earning capacity
66

and the repayment schedule. Both the bankers as well as borrower have to decide about it
only once.

On the other hand, amount of working capital required by the concerned unit may vary from
time to time, depending upon various factors such as cost of raw material, utilization
capacity, marketing arrangements etc. It is on account of this fact that entrepreneurs usually
spend most of their time to manage working capital requirements.

As per the Operating cycle concept, a firms operating cycle typically consists of three
primary activities: purchasing resources, producing products and distributing (selling) the
products. Here, the firms activities create fund flow that is being both unsynchronized and
uncertain. This is unsynchronized because, cash disbursements (payments for purchases)
usually take place before cash receipts (Collection of receivables). Further, they are also
uncertain because, future sales and costs, which generate the respective receipts and
disbursements, cannot be forecasted with complete accuracy. Hence, assessment of working
capital is not merely an arithmetic exercise but also involves judgement of the bank.



Decisions relating to working capital and short term financing are referred to as working
capital management. These involve managing the relationship between a firm's short-term
assets and its short-term liabilities. The goal of working capital management is to ensure
that the firm is able to continue its operations and that it has sufficient cash flow to
satisfy both maturing short-term debt and upcoming operational expenses.

67


Data required for assessment of working capital requirement
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
ii) Operating statement
iii) Analysis of Balance Sheet
iv) Buildup of current assets and current liabilities
v) Calculation of MPBF (Maximum Permissible Bank Finance)
vi) Fund Flow Statement

Assessment of Fund Based Working Capital
While public sector banks in India are nominally independent entities they are subject to
intense regulation by the Reserve Bank of India (RBI). This includes rules about how much
the bank should lend to individual borrowersthe so-called maximum permissible bank
finance. There are multiple methods as suggested by different committees from time to time.
We have discussed following recommendations by three committees:
1. Nayak Committee (Simplified Turnover Method) :This method of assessing
working capital requirement of a firm is given by Nayak Committee. The
committee headed by Mr. P.R. Nayak examined the adequacy of institutional credit to
SSI sector and gave its recommendations which are as under:
a. Under this method, bank credit for working capital purposes for borrowers
requiring fund based limits up to Rs. 5 crore for SSI borrowers and Rs. 2 crore in
case of other borrowers, may be assessed at minimum of 25% of the projected
annual turnover of which should be provided by the borrower (i.e. minimum
margin of 5% of the annual turnover to be provided by the borrower) and balance
4/5
th
(i.e. 20% of the annual turnover) can be extended by way of working capital
finance.
b. The projected turnover or output value may be interpreted as projected gross sales
which will include excise duty also.
c. Since the bank finance is only intended to support the need based requirement of a
borrower, if the available NWC (net long term surplus funds) is more than 5%of
the turnover the former should be reckoned for assessing the extent of bank
finance.

2. Tandon Committee :A committee headed by Mr. P.L. Tandon, ex-chairman of PNB,
was constituted with view to suggest improvement in the existing ash credit system. It
68

submitted its report on guidelines for follow up of credit in August 1974, suggesting
three methods of lending. These are as follows:
1
st
Method of Lending: 75% of the working capital gap (WCG = Total current assets
Total current liabilities other than bank borrowings) is financed by the bank and the
balance 25% of the WCG considered as margin is to come out of long term source i.e.
owned funds and term borrowings. This will give rise to a minimum current ratio of
1.17:1. The difference of 0.17 (= 1.17 1) represents the borrowers margin which is
known as Net Working Capital (NWC).
2
nd
Method of Lending: Bank will finance maximum up to 75% of total current
assets (TCA) and borrower has to provide a minimum of 25% of total current assets
as the margin out of long term sources. This will give a minimum current ratio of
1.33:1.
3
rd
Method of Lending: This is same as 2
nd
method of lending, but excluding core
current assets from total assets and the core current assets are financed out of long
term funds of the company. The term core current assets refers to the absolute
minimum level of investment in current assets, which is required at all times to carry
out minimum level of business activity. The current ratio is further improved to
1.79:1.

Examples:
Current Liabilities Current Assets
Creditors for purchase 100 Raw material 200
Other current liability 50 Stock in process 20
Bank Borrowings 200 Finished Goods 90
Receivables 50
Other current assets 10
350 370



1
st
Method 2
nd
Method 3
rd
Method
Total CA 370 Total CA 370 Total CA 370
Less Total CL -
Bank Borrowing 150 Less 25% of CA 92
Less Core CA from
long term sources 95

WCG 220 278 275
25% of WCG
from long term
sources 55
Less Total CL -
Bank Borrowings 150
Less 25% from long
term sources 69



Less Total CL - Bank
Borrowings 150
MPBF 165 MPBF 128 MPBF 56
Current Ratio 1.17:1 Current Ratio 1.33:1 Current Ratio 1.79:1

69

3. Chore Committee
The R.B.I constituted, in April 1979, a working group under the chairmanship of Sri K.B
Chore, to review the system of cash credit with the particular reference to the gap between
sanctioned limit and the extent of their utilization. It was also asked to suggest alternative
type of credit facilities which would ensure greater credit discipline and enable the banks to
relate the credit limits to increase in output or other productive activities.
The committee recommended assessment of working capital requirements have to be
mandatorily assessed based on 2
nd
method of lending suggested by Tandon Committee except
for sick/Units under rehabilitation.
As such, the banks are presently assessing need based WC financing under 2
nd
Method of
lending.


Ways in which Bank is involved in Financing:

1. Loan Syndication:
In case of Loan Syndication the borrower approaches one bank and that bank will
arranges fund for the borrower from other banks. In this case the Bank to which borrower
has approached may be a part of the financing bank or May not by, it is on own discretion
of the bank. In this type of financing, it is very easy for the borrower since borrower need
not to approach each and every bank individually; the bank will approach to different
banks.
For syndication of loan, Bank will be free to decide its own terms and conditions and rate
of interest / other charges etc. The Bank will go for loan syndication in project financing
depending on its Asset-Liability position and risk profile of the portfolio. Bank will prefer
such proposals for loan syndication, which will facilitate earning of substantial revenue in
the form of Handling Charge/Syndication Fees. The Bank shall avoid taking undue large
share in such syndication.

2. Multiple Banking:
In this case the borrower will approach to each and every bank individually and ask for
working capital limit. There is no lead bank in case of multiple banking arrangements and
each bank uses its own method of accessing Working capital limits.

3. Consortium:
In case of Consortium also the borrower will approach to different banks individually, the
only difference between consortium and Multiple banking arrangement is that there is
Lead Bank in case of Consortium and all the other banks to follow the terms and
condition laid down by Lead Bank. The RBI guidelines for mandatory formation of
consortium in respect of working capital limits of Rs.50.00 Crore and above from the
Banking system stand withdrawn. However, considering the risk involved in large
exposures, it will be Banks endeavor to ensure that wherever possible, large advances are
made in consortium or on syndication basis.
70


Bank will prefer to have, subject to prudential norm, at least 5% share as a member of
consortium for a meaningful participation in the consortium. However, it will be the sole
discretion of the Bank to take up enhanced share on pro rata basis irrespective of its status
in the consortium. Bank will take its own credit decision on the borrower. Bank may
consider opting out of the consortium in case it is not satisfied with the performance /
financial operations of the borrower.
Bank's own appraisal method of lending as mentioned above will be followed in case of
consortium arrangement where Bank is leader of the consortium. However, in cases
where Bank is not the consortium leader, the appraisal done by Consortium Leader will
be given due importance, but the Bank will also have to carry out its own assessment and
if it shows major variation from that assessed by the leader, necessary clarification should
be obtained from the leader and a need based limit will be sanctioned.

6.3 CREDIT RISK MANAGEMENT
Credit risk is the possibility of loss associated with changes in the credit quality of the
borrowers or counter parties. The counter parties may include individual, small & medium
enterprises, corporate, bank, financial institution, or a sovereign.

Credit Risk Management - Framework The overall framework of credit risk management in
the bank would comprise of following building blocks:




Risk management is the identification, assessment and prioritization of risks followed
by co-ordinate and economical application of resources to minimize, monitor and
control the probability or impact of unfortunate events.
The risk that a borrower might fail to meet its obligations towards the bank in accordance
with the agreed terms and conditions, is the credit risk contracted during sanctioning of loan.
It is the risk of default of on the part of borrower, which could be due to either inability or
unwillingness to repay his debts.
Factors determining credit risk:
State of Economy
Wide swing in commodity prices
Trade restrictions
Fluctuations in foreign exchange rates and interest rates
Economic sanctions
Government policies
Some company specific factors are:
Management Expertise\
Company Policies
Labour Relations
The internal factors within the bank, influencing credit risk for a bank are:
71

Deficiencies in loan policies/ administration
Absence of prudential concentration limits
Inadequate defined lending limits for loan officers or credit committees
Deficiencies and appraisal of borrowers financial position
Excessive dependence on collateral without ascertaining its quality/ reliability
Absence of loan review mechanism
The risk management philosophy & policy of the Bank is an embodiment of the Banks
approach to understand measure and manage risk and aims at ensuring sustained growth of
healthy asset portfolio. This would entail in reducing exposure in 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.
Following procedure is followed at PNB, CO for risk rating:

The head office of the bank at Rajendra place receives the proposals of various
organizations demanding loans.
They receive a copy of the companys financial results. The branches also send their
rating after some initial screening to the head office for vetting.
These branches obtain the data from the proposal and the discussions with other banks
in the consortium. They can also contact the company for further clarifications
The auditors report and notes to accounts serve as a useful guide. The past records of
companys transactions with the bank (if any) are also considered.
The officials at the HO study and check the financials and the subjective parameters.
Then the final rating is done after making suitable amendments.

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 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.

This credit risk rating captures risk factors under four areas:
1. Financial evaluation (40%)
2. Business or industry evaluation (20%)
3. Management evaluation (25%)
4. Conduct of account (15%)
72

Financial evaluation
Under this, various parameters are taken and based on the financial data scores are
assigned during the risk rating process.
The financial evaluation involves past financials classified based on industry comparison
and absolute comparison.
Following are some of the parameters, which have been explained in detail:
A. Liquidity Parameter
a. Current Ratio
b. Debt Service Coverage Ratio

B. Profitability Parameter
a. Return on Investment

C. Operating Efficiency Parameter

D. Other Parameters
a. Future risk expectations
b. Cash flow adequacy
c. Transparency in financial statements of the company
d. Quality of the inventory
e. Reliability of the debtors
f. Quality of investment / loans and advances to other companies
g. Trends in the financial performance over the past few years

Business evaluation
It involves the evaluation of the operating efficiency of the concerned company under
which various factors are considered which is extremely important for risk rating
purposes. These could be raw material/ cost of production or it could be credit period
availed and allowed. All these factors help in judging the efficiency in operating the
business.

Market Position
Evaluating the market position for the purpose of risk rating is extremely important to
judge the competitive position of the company and analyzing the input related risk,
product related risk, price competitiveness and other market factors and then giving
scores for the purpose of calculating the aggregate market position.

Management evaluation
It is done by comparing the targets set with the targets achieved by the management
during the year. Subjective assessment is also done based on the factors risk like track
record or sincerity of the management.

Conduct of Account Evaluation
This evaluation involves PMS rating. PMS is a macro level monitoring tool. In other
words, it is a close actions oriented follow up of the health of borrower. It aims to
minimize the loan losses by capturing early warning signals of deterioration and taking
73

preventive action. It has a memory of one year and reporting frequently is linked to credit
rating.

How to rate
The ratios of the company are compared with the benchmark ratios and rating is given to the
company up to 2 decimal points based on its position within the benchmark values.
Procedure for evaluation at PNB is as follows:
1. Each industry has its own risk and depending on it, a suitable risk factor is chosen and
industry risk is adjusted into the score of rating.
2. These areas cover different parameters based on which the past and the future
performance of the company are evaluated.
3. The combined scores of these areas are calculated.

4. Then based on the weight age assigned (given in brackets above) the overall score is
calculated.
5. This overall score is used to determine the ratings as illustrated in following table:



Table: The rating and score matrix
Rating Category Description Score obtained Grade
AAA Minimum risk Above 80.00 AAA
AA Marginal risk Between 77.50 -
80.00
AA+
Between 72.50
77.50
AA
Between 70.00
72.50
AA-
A Modest risk Between 67.50
70.00
A+
Between 62.50
67.50
A
Between 60.00
62.50
A-
BB Average risk Between 57.50
60.00
BB+
Between 52.50
57.50
BB
Between 50.00 BB-
74

52.50
B Marginally
acceptable risk
Between 47.50
50.00
B+
Between 42.50
47.50
B
Between 40.00
42.50
B-
C High risk Between 30.00
40.00
C
D Caution risk Below 30.00 D
Based on the above table rating is done. Once the rating is done, the rate of interest at
which the bank will be lending the money is determined. Normally, a company with
higher rating is given loan at a lower interest as compared to company with lower ratings.
This is because the risk involved with higher rated company is lower


6.4 PREVENTIVE MONITORING SYSTEM

PMS is a post sanction credit monitoring online system containing number of parameters and
signals. It enables the lender to judge health of the borrowal account on continuous basis. On
the basis of numerical score assigned, PMS index score is calculated and health of the
account is judged. PMS is substitute to Quarterly Review Sheet (QRS). PMS Report is to
be submitted within 15 days from the close of relevant quarter

Credit Monitoring/Post-sanction follow up is an important ingredient of a sound Credit
Management System and calls for monitoring of the health/conduct of borrowal accounts on
regular intervals on a continuous basis. It is also pivotal for improving the Asset (Credit
Portfolio) Quality of the bank.

Pre-requisites of Good Monitoring System
A good Credit Monitoring System should have the following features :
Comprehensive detection of Signals
Thorough Probe/Analysis of observed signals
Fast Remedial Actions

Salient features
Comprehensive Covers indicators of conduct of account, business performance etc.
Objective - Health of the account is reflected as a single numerical score.
Diagnostic - The reasons behind deterioration is analyzed for taking remedial steps.
Memory - Unsatisfactory features or irregularities are accounted for one year.
75

Preventive - Timely action / corrective measures can be taken in Early Warning Category
accounts

Benefits of PMS over QMS
PMS covers a wide variety of indicators/signals many of which are not part of
existing QRS, like cheques returned, financial indiscipline, analysis/measuring of
irregularity in the account, behavior of account with other Banks/FIs, market
intelligence, etc. PMS has, as such, a comprehensive coverage.
Existing QRS, is a subjective report whereas PMS provides for maximum objectivity
as definite scores have to be assigned to each irregularity/signal by the dealing official
in accordance with the predetermined scoring patterns/rates
In QRS, overall view of account is aggregated in words / subjective perception
whereas In PMS, overall view on health/conduct of an account is captured in one
single numerical figure (called PMS Index Score).
In QRS, generally, only irregularities are mentioned Whereas PMS captures and
analyses reasons behind unsatisfactory signals observed in the conduct of an account.
It also provides action plan. Thus, its focus is on prevention of loss for which action
is intended to be taken at the early warning stage.
In QRS, focus is only on last quarter whereas, PMS has memory of one year i.e. to
say, information regarding conduct of an account is stored for one year to facilitate a
comprehensive view of account conduct at any point of time as also to ensure that no
unsatisfactory signal is forgotten.

PMS enables grading/ranking of borrowal accounts on a scale of 1 to 10 (called PMS
Ranking Scale) from follow up angle and taking timely corrective action in case of Early
Warning and Warning cases.

PMS report :

PMS report consists of 8 Parts
PART I > Brief Profile of the A/c
PART II > PMS Index Score and reasons for the irregularities
PART III> Financial / Operational performance
PART IV> Details of un-complied important terms & conditions of sanctions
PART V > Status of outstanding serious inspection irregularities
PART V > Status of outstanding serious inspection irregularities
PART VI > Position of the account(s) as at the end of the quarter.
PART-VII> Details of Security Verification , Insurance, Stock Audit, Consortium
Meeting.
PART VIII > Comments & Action plan

PMS SCORE :

PMS Ranking scale is a 10 Point Scale based on PMS Index Score, where the starting point
(1) represents the Best and the other end (10) the Most Unsatisfactory position.

The Health of the Borrower is classified on the basis of PMS Ranking as under:
76

PMS SCORE PMS RANK CATEGORY
0-1000 1
HEALTHY
1001-2000 2
2001-3000 3
EARLY WARNING
3001-4000 4
4001-5000 5
5001-6000 6
WARNING
6001-7000 7
7001-8000 8
8001-10000 9
LIKELY NPA/NPA
Above 10000 10


7. NPA NORMS UNDER PNB

BACKGROUND: Prudential norms for NPA were introduced by RBI wef 1/4/92,and
norms for NPA classification the delinquency period of were 4 quarters (non-recovery of
interest/instalment up to 4 quarters) and the same has been reduced to 3 quarters in 1994, 2
quarters in 1995 and 90 days w.e.f. 31.03.2004.

INCOME RECOGNITION:

Classification of account as non-performing asset is based on record of recovery.
Availability of security or net worth of borrower/guarantor is not to be taken into
account.
Interest on advances against term deposits, NSCs, IVPs, KVPs and Life policies may
be taken to income account on the due date, provided adequate margin is available in
the account.
Fees/Commission earned by banks as a result of reschedulement of outstanding debts,
should be recognized on accrual basis over the period of time covered by
reschedulement.
On an account turning NPA, the interest already charged and not collected is to be
reversed by debiting Profit and Loss account, and further application of interest is to
be stopped. However, banks may continue to record such accrued interest in a
Memorandum account in their books

Sr.
No.
Category of account Criteria for classification of account as NPA
1 Term Loan if interest and/or instalment of principal remain overdue
for a period of more than 90 days .
77

Sr.
No.
Category of account Criteria for classification of account as NPA
2 Cash Credits and
Overdrafts
i) if the account remains out of order for a period of more
than 90 days
Conditions for treating the account as out of order:
(a) The outstanding balance remains continuously in excess
of the sanctioned limit/drawing power.
(b) Though the outstanding balance is less than the
sanctioned limit/drawing power but there are no credits
continuously for 90 days as on the date of balance sheet or
credits are not enough to cover the interest debited during
the same period
(ii) The outstanding in the account based on drawing power
calculated from stock statements older than three
months, would be deemed as irregular.
A working capital borrowable account will become NPA if
such irregular drawings are permitted in the account for a
continuous period of 90 days even though the unit may be
working or the borrowers financial position is satisfactory.
(iii) An account where the regular/ad-hoc credit limits have
not been reviewed/renewed within 180 days from the due
date/date of regular/ad-hoc sanction, will be treated as NPA.
3 Bills Purchased and
Discounted
if the bill remains overdue for a period of more than 90 days
4 Direct Agricultural
Advances
the instalment of principal or interest thereon remains
overdue for two Crop seasons for short duration crops(or
one crop season for long duration crop).
The crop season for each crop, which means the period
up to harvesting of the crops raised, would be as
determined by the State Level Bankers Committee in each
State.
5 Securitization
transaction
amount of liquidity facility remains outstanding for more
than 90 days
6 Derivative transactions the overdue receivables representing positive mark-to-
market value of a derivative contract, if these remain unpaid
for a period of 90 days from the specified due date for
payment.
7 Other Accounts if any amount to be received in respect of that facility
remains overdue for a period of more than 90 days
8 Accounts where a
solitary or a few
credits are recorded
before the balance
sheet date
Where the account indicates inherent weakness on the basis
of the data available, the account should be deemed as a
NPA. In other genuine cases, the banks must furnish
satisfactory evidence to the Statutory Auditors/Inspecting
Officers about the manner of regularisation of the account to
eliminate doubts on their performing status.
78

Sr.
No.
Category of account Criteria for classification of account as NPA
9 Overdue Amount due to the bank under any credit facility is overdue,
if it is not paid on the due date fixed by the bank


PROVISIONS FOR NPA ACCOUNTS

SR.
No.
Category of
NPA
CRITERIA RATE OF PROVISION
1 Sub- Standard







Unsecured
exposure
if a/c is NPA for less
than or equal to 12
months (wef
31/3/05).

Unsecured exposure
is defined as an
exposure where the
realisable value of
the security, as
assessed by the
bank/approved
valuers/Reserve
Banks inspecting
officers, is not more
than 10 percent, ab-
initio, of the
outstanding
exposure.
A general provision @ of 10% on total
outstanding be made without making any
allowance for DICGC/ECGC/CGTMSE
guarantee cover and securities available for
advances secured by way of tangible
assets.


For unsecured advances provision will be
20% of the outstanding.
2 Doubtful if a/c is NPA for a
period exceeding 12
months (wef
31/3/05) or when
realizable value of
security is less than
50% of value
assessed at the time
of last inspection.

(i) Unsecured Portion: Provision @ 100%
of unsecured portion,
(ii) Secured Portion: On tangible security-
Up to one year doubtful-20 %
One to three year doubtful-30%
More than 3 year doubtful- 100%

Provision is to be made on outstanding net
of DI.
3 Loss asset If so identified by
bank/auditor or
realizable value of
security assessed by
bank/auditor is less
than 10 % of
outstanding in the
a/c.
100% of Net Outstanding.

79

8. THE CASE STUDY AT PUNJAB NATIONAL BANK
CREDIT APPRAISAL IN SMALL AND MEDIUM
ENTERPRISES
AXXX EXPORTS

The small and medium enterprises today constitute a very important segment of the Indian
economy. SMEs sector has emerged as a dynamic and vibrant sector of the economy. The
turnaround in manufacturing and other sectors, which has occurred in the face of increased
global competition, is due to improved efficiency following the various policy reforms in
recent years. Small and medium enterprises (SMEs) constitute 6 per cent of GDP, 34 per cent
of national exports and account for the employment of more than 30 million people.

Advances To Small & Medium Enterprises (SME)

Banks lending to the Micro and Small enterprises engaged in the manufacture or production
of goods specified in the first schedule to the Industries (Development and regulation) Act,
1951 and notified by the Government from time to time is reckoned for priority sector
advances.

However, bank loans up to Rs.5 crore per borrower / unit to Micro and Small Enterprises
engaged in providing or rendering of services and defined in terms of investment in
equipment under MSMED Act, 2006 are eligible to be reckoned for priority sector advances.
Lending to Medium enterprises is not eligible to be included for the purpose of computation
of priority sector lending
As per extant policy, certain targets have been prescribed for banks for lending to the Micro
and Small enterprise (MSE) sector. In terms of the recommendations of the Prime Ministers
Task Force on MSMEs (Chairman: Shri T.K.A. Nair, Principal Secretary), banks have been
advised to achieve a 20 per cent year-on-year growth in credit to micro and small enterprises,
a 10 per cent annual growth in the number of micro enterprise accounts and 60% of total
lending to MSE sector as on preceding March 31st to Micro enterprises.
As per RBI , In order to ensure that sufficient credit is available to micro enterprises within
the MSE sector, banks should ensure that:
(a) 40 per cent of the total advances to MSE sector should go to micro (manufacturing)
enterprises having investment in plant and machinery up to Rs. 10 lakh and micro (service)
enterprises having investment in equipment up to Rs. 4 lakh ;
(b) 20 per cent of the total advances to MSE sector should go to micro (manufacturing)
enterprises with investment in plant and machinery above Rs. 10 lakh and up to Rs. 25 lakh,
and micro (service) enterprises with investment in equipment above Rs. 4 lakh and up to Rs.
10 lakh. Thus, 60 per cent of MSE advances should go to the micro enterprises


80

The project : Axxx exports

BRIEF HISTORY :

M/s AXXX Exports is the proprietorship concern of Mr. Vinay Kumar Sharma. The
firm was established in the year 1985 and dealing with our bank since April, 2000. Mr.
V.K.Sharma started his career as a business executive with M/s Associated
Merchandising Corporation USA. He started his own exports in October 1985 under the
name of M/s AXXX Exports.

The firm is exporting Indian Artistic Handicraft for Christmas Festival. The product is of
small value being Christmas Gifts and decorative items. It is mainly exporting to USA.

The Industry is competitive one with season specific demand. The period of sourcing of
orders is February-April every year. For procurement of orders samples are prepared and
sent to buyers. In addition to this they also participate in Foreign as well as inland Fairs
and Exhibition. On receipt of orders, goods are manufactured through various suppliers
as well as self manufactured. All process is done manually. Raw Material is procured
locally. After inspection of goods by buyers authorized agents, the goods exported as
per the direction of the buyers to reach to the ports at respective countries by July-
October every year and are distributed to various parts of the countries for sale in the
month of November-December every year. The product being manufactured / exported
by the firm is handmade handicrafts and the entire manufacturing activity is highly
labour intensive. All finishing and Packing/Marking of the pieces are done within the
firm premises itself under supervision of Production Department.

M/s AXXX Exports carried out its activities in different plakhes i.e. in Nizamuddin and
Jangpura till year 2003 and after 2003 the firm has shifted their entire operation to a
rented factory at C-44, Sector-57,NOIDA which is the Head office and unit of the firm.
The main reason to shift their operation was mainly due to the fact that their existing
unit was in the non- conformity area and the factory was not fulfilling the International
Standard.

The firm got 100% EOU status during the financial year 2004-05 and they got 100%
Tax Exemption upto 31.3.2009 or first 10 years whichever is earlier. But the firm has
now decided to opt out of EOU Scheme as there are lots of restrictions for the units
operating under EOU Scheme such as they can export only those items for which they
have obtained licence. Though the units get tax benefits they are deprived of export
incentive benefits such as Duty drawback and DEPB.

CURRENT STATUS
A TL of Rs 225.00 Lakh was sanctioned under the vested power of the Zonal office of
the factory building situated at Plot No. 77, Block A, at Sector -57, NOIDA, Distt.
81

Gautam Budh Nagar, UP. As per last sanction the party was sanctioned FBWC of Rs
500.00 Lakh which was later on reduced to Rs 400.00 Lakh on a/c of discounting of
FDR held as a collateral security. The party is also availing Term loan(Car) of Rs. 34
lakh,(OS Rs 20.57 Lakh). and OD against tangible collateral security of Rs.330 lakh (on
monthly reducing basis OS Rs 190.90 Lakh).

The firm is at present availing Packing Credit limit of Rs. 400 lakh for the peak season
and Rs. 150 lakh for the non-peak season and FOBD/FOUBP/FOBNLC/FOUBNLC
(SUB CEILING FOUB LIMIT RS. 30 LAKH) of Rs.400 lakh with fund based ceiling of
Rs. 400 lakh.

The party has now requested for renewal of their fund based limits with the
following amendments in the existing limit:

Packing credit limit to be sanctioned in foreign current instead of in Indian currency and
adjustment may also be made in foreign currency.

Running Packing Credit limit to be sanctioned instead of normal packing credit limit as
their number of buyers are more and even one buyer issues various number of orders
with different delivery period.

PRESENT PROPOSAL

1. Review of limits for 3 months on existing terms and conditions against the
recommendations of CM(B) for renewal of Packing Credit limit of Rs.400 lakh and
FOBP/FOUBP/FOBNLC/FOUBNLC (SUB-CEILING FOUBP RS.30 LAKH) within
fund based ceiling of Rs. 400 lakh. packing Credit limit is to be made availing to the
party in foreign currency(PCFC)
2. Continuance of OD against tangible security with monthly reducing DP.
3. Continuance of TL OS Rs 190.90 Lakh for building and Rs 20.57 Lakh for car
4. Approval for sanction of Running Packing Credit limit in foreign currency..

Whether fresh/renewal/
enhancement
REVIEW of limit
Asset Classification as on
31.12.2007

Credit Risk Rating by Bank
duly vetted by CORMD
Rating Date of
Rating
Score ABS Reasons for
degradation
Present BB 17.03.14 51.49 31.03.14 *
Previous A 65.65 31.3.13 -
* Credit risk rating has declined from A to BB due to decline
in sales during last FY by 26% and decline in profit after tax
due to appreciation in Rupee.
Whether Agriculture/Retail/ SME
82

SME/Large
a) Whether Sensitive Sector
Real Estate/Capital Market
b) Applicable Risk weight
NO
Consortium/Multiple Banking NO
Lead Bank NA
PNBs Share % 100%
Date of Receipt of Proposal at
CO
22.12.2013, date of last reply received on 12.03.2014
Date of last sanction &
authority
12.3.2014 Zonal Manager

2. Borrowers Profile

1. Group Name M/S AXXX EXPORTS
2. Address of Regd. Office A-7XX, SECTOR XX, NOIDA
3. Works/Factory A-XX, SECTO XX, NOIDA, UP
4. Constitution PROPRIETORSHIP
5. Date of incorporation/Estb. 1985
6. Dealing with PNB since APRIL 2000
7. Industry/Sector SME
8. Business Activity (Product) Manufacturing and export of handicraft
goods.

3. PROPRIETOR :

SHRI XX SHARMA


e) Share Holding Pattern as on:

Proprietorship concern

4A Facilities Recommended :
If any of them, in the list of Caution Advices circulated
by the Bank from time to time/RBI's/Wilful defaulters'
list/Caution List of ECGC/CIBIL Database:

NO
If any one of them connected in the past with any
NPA/OTS/Compromise/unscrupulous defaulters

NO
If any of them, related to Directors/Senior Officers of
PNB:

NO
Management Change since last sanction, if any NIL
83

(Rs. in Lakhs)
Nature EXISTING PROPOSED
PACKING CREDIT 400 (peak season)
150 (non-peak season)
400 (peak season)
150 (non-peak
season)
WCDL - -
FOBP/FOUBP/FOBNLC/
FOUBNLC
400(peak season)
150 (non-peak season)
400(peak season)
150 (non-peak
season)
Fund Based Ceiling 400 (peak season)
150 (non-peak season)
400 (peak season)
150 (non-peak
season)
Term Loan( CAR LOAN) 20.57 20.57
OD against Tangible
Assets
(Monthly reducing basis)
257.00 257.00
Term Loan (Bldg) 190.90 190.90
Total 868.14 868.14

4.B Maximum Permissible Exposure Norms


Co. A Co. B Total
a) Fund Based Working Capital limits 400.00 - 400.00
b) Non Fund Based - - -
c) Term Loan O/s (car loan) 20.57 - 20.57
Term Loan (Bldg.) Rs. 225 lakh 190.90 190.90
d) OD against IP 257.00 257.00
e) Total of (a), (b), (c) & (d) 868.47 - 868.47
f) Total exposure as %age of Banks capital
funds
- - -
g) Banks permissible exposure level in terms
of our latest audited Balance Sheet
With in permissible exposure norms
4C Short Term Loans sanctioned by PNB in last 12 months, if any

NA

4D Details of facilities provided outside consortium, if any

NA

5A Facilities from PNB Subsidiaries/Exposure by way of investment in Equity/
Debentures / Derivatives / Foreign Exchange etc. :
84


NA

5B Term Loans from other Banks/Financial Institutions/Other Institutions -
(including Lease, ICDs, Corporate Loans, Debentures etc.)

(Rs. in lakh)
Sr.no. Name of
the
Bank/FI
Facility
Sanctioned
Balance O/s
As on 27-052-
09
Overdue, if
any
Rate of
Interest
1. ICICI CAR LOAN 2.22 0.00 11.58%
2. ICICI CAR LOAN 5.05 0.00 11.58%
3. ICICI CAR LOAN 7.08 0.00 11.58%
4. ICICI PERSONAL
LOAN
0.88 0.00 11.58%
5. Axis
BANK
CAR LOAN 1.54 0.00 12.33%

CM(B) has confirmed that all accounts are running regular.


6A Details of Group /Allied/Associate firms and the facilities sanctioned to them
along with conduct of these accounts with our Bank/ other Banks and comments
on adverse indicators, if any.

Name of the
Company
Activity
Financials Dealing Bank Facilities
Nature
&
Amount
M/S ACE DCOR PNB, MCC DEFENCE
CA
COL.NEWDELHI. A/C

It is a family concern

6.B Comments on conduct of these accounts with our bank/other banks

Branch has informed that m/s ace dcor is maintaining a current account, the conduct
of the account is good. Mr. AXXX sharma (son of Shri Vinay Kumar Sharma)is the
proprietor of the firm.

7A(i) Financial position
(Rs. in Lakh)
85


31/03/11
Audited
31/03/12
Audited
31/03/13
Audited
Sales 822.40 969.19 714.00
PAT 128.44 90.32 -65.33
Cash profit 143.36 105.65 -47.95
TNW 280.70 312.23 174.57
Unsecured loans 81.18 50.18 24.40
NWC 228.20 317.10 69.67
Current ratio 2.63 3.25 1.12
DER 0.54 0.55 0.78
Long term funds 432.38 483.68 336.67
Long term uses 204.18 166.58 267.00
Short term funds 139.75 141.12 572.09
Short term uses 367.95 458.22 641.77
TOL / TNW 2.09 2.21 4.20
Operating profit / sales 15.62 9.32 (--)

7A (ii) Key Financials upto last quarter

Latest last quarter as on 31.12.2013

(Rs.in lakh)
Sales 650.00
Operating profit 95.00
Cash profit 55.00
Net profit 25.00
Current assets 260.00
Current liability 15.00

7B Capital Market Perception :

Sole Proprietorship not applicable

7C Comments on Financial Indicators (only major variation/trends to be explained)

Sales:-

The firm has achieved the sales of Rs.971.84 lakh as on 31.03.12 against the sales of
Rs.842.78 lakh as on 31.03.11 ,showing a growth of 15.31%thus achieved 97.18% of
the projected sales during the year ended 31.03.12. However the sale as at 31.3.2013
was Rs. 714.29 lakh against the estimated sale of Rs.800 lakh and actual sales of Rs
842.78 Lakh as on 31-03-2012.The reason for the decline in sales as informed that
the party was operating 100% EOU for exporting the Indian Artistic Handicraft-
86

Articles for Christmas festivities and as such they were not allowed to export the
other articles and product under 100% EOU Scheme. However they have now
initiated action for opting out of EOU Scheme of Government of India. The party
has started export of home furnishing items, however the same suffered set back due
to international recession.

Reason for non achievement of targeted sales for the year 20012-13.

Branch has submitted that party could not achieve the targeted sales for year 2008 due
to their sticking to one particular item as it was 100% EOU unit.

The party has estimated the sale at Rs.650 lakh as on 31.03.2014 and have already
achieved sale of Rs.650 lakh upto 31.12.2013 the period of January to March is lean
period for the party. Based on this the party has projected a sales of Rs.750 lakh for
the next year. Looking to the performance of the party during this FY the CM(B) has
accepted a sales projection of Rs.750.00 Lakh for assessment of PBF for the FY 2009-
2010.

TNW:-

The Net worth of the firm has also improved from Rs.280.70 lakh as on 31.03.2011
to Rs.312.22 lakh as on 31.03.12. Due to retention of profits. However the net
worth has declined as at 31.3.2008 is Rs.174 LAKH. This is because the party has
purchased factory building at A-77, NOIDA, UP. The party has estimated a TNW of
Rs.186.41 lakh as on 31.03.2014 and party has projected to induct an amount of Rs
50.00 Lakh besides retaining PAT of current year Similarly party has projected to
induct an amount of Rs 90.00 Lakh during next FY to attain a TNW of RS .256.41
lakh as on 31.03.2015.
We are stipulating that CM(B) to ensure that party to induct the funds as estimated in
CMA data for the FY 2013-2014 and FY 2014-2015.

Profit Before Tax:-

Profit before Tax has declined due to the fall in the value of dollar. The party incurred
a loss of Rs .65.33 Lakh against a PAT of Rs 90.32 Lakh as on 31-03-2012 on a/c of
increase in cost of production and cost of sales substantially on a/c of inflationary
pressure coupled with low realization in appreciation in RS during last FY.The party
has now realigned their strategy and taken steps to cut cost, reduction in ROI, and
other controlling measure for reduction of cost. and has projected a PAT of Rs.20.00
Lakh for the period ended 31-03-14 and Rs 20.00 Lakh for the next FY.The co has
already achieved PBT of Rs 25.00 Lakh up to 31-01-2014 as per provisional data
submitted .

NWC:
87


NWC of the party has been declining during the last 3 years .NWC declined from Rs
108.09 Lakh as on 31-03-07 to Rs 69.67 Lakh as on 31-03-08.The party has projected
a NWC of Rs 271.00 Lakh as on 31-03-09 and Rs 227.81 Lakh as on 31-03-10.The
decline in NWC during the CFY is on a/c of payment of TL and diversion of short
term funds to long term use .

Over all performance is satisfactory

7D Details of investment in Shares, Debentures, Units or diversion of funds outside
the business etc. (Along with comments in case of increase)

The firm has made investment of Rs. 4,00,000/- in the following schemes of PNB:

1. Principal Infrastructure & Services, and

2. Principal Mutual Fund scheme

7.E Details of Liabilities not accounted for/Contingent liabilities

-NIL-

7.F Status/details of adverse comments/ Qualification by Auditors of the borrowing
unit

-NIL-

7.G Position of assessment of income tax/sales tax/wealth tax of the borrowing
concern/partners/proprietor

Sale Tax Assessment for 2005-06 completed and for assessment year 2005-06 under
process.

Wealth Tax Return and I.T.Return has been filed upto 31.3.2008.

7.H Information on litigation initiated by other banks/FIs against the borrower as per
latest Audited Balance Sheet, if any

-NIL-

7.I Overall likely impact of (7.B to 7.F) on the financial position of the borrowing
unit
-NIL-

88

8. SECURITY

A. Primary
i) For working capital limits

PACKING CREDIT LIMIT: HYPOTHECATION OF RAW MATERIALS,
STOCK-IN-PROCESS AND FINISHED GOODS.

FOBP/FOUBP/FOBNLC/FOUBNLC: FOREIGN DOCUMENTARY
DEMAND/USANCE BILLS ACCOMPANIED BY SHIPPING DOCUMENTS
DRAWN ON FIRST CLASS FOREIGN BUYERS COVERING CONSIGNMENTS
OF EXPORTED GOODS, AS PER ORDER/LC OF APPROVED BANK.

ii) OD AGAINST TANGIBLE COLLATERAL SECURITY:
NIL

iii) For Term Loan:
EM of following IP in the name of the Company
(Rs. in Lakh)
Security
Description
Ownership Value Basis for
valuation
Date Whether
existing/
fresh
MARKET
VALUE
Present
book
value
Realisable
value
EM of
property
No.77-
Block A,
Sector -57,
NOIDA
AXXX
exports
Prop.
V.K.Sharma
610 480 VALUATION
REPORT OF
M/S B.D.
SHARMA
ASSOCIATES
25.12.07 Existing
CM (B) has assessed the RV of the IP is Rs 490.00 Lakh as on 28-02-09 and submitted certificate
in terms of LA Cir no 12/2007

Collateral security

Against OD IP


The value of collateral vis avis the exposure of the party is as under

i) First/Second/Third charge/Paripassu charge
Security
Description
Ownership Value Basis for
valuation
Date Whether
existing/
fresh
MARKET
VALUE
Present
book
value
Realisable
value
A-45,
NIZAMUDDIN
EAST, NEW
DELHI
SHRI
V.K.
SHARMA
618.00 500.00 VALUATION
REPORT OF
M/S B.D.
SHARMA
ASSOCIATES.
22.10.2007 EXISTING



89

(Rs. in Lakh)
Nature
of limits
Security Value of
block
assets as
on:
31.3.2007
Value of block
assets
excluding
specific charge
if any
Extent of
first /
second
charge
holders
Balance / residual
value of charge
available to
bank/consortium
Working
Capital
IST CHARGE
ON
FIXED/BLOCK
ASSETS OF
THE FIRM
121.01 NIL 100% 100%

ii) Personal Guarantee
(RS. IN LAKH)
Name of
Guaranto
r
Relationshi
p with
borrower
Net Worth

Immovable
property
Date of
confidential report
Prev.
As at
31.3.200
7
Present
As at
31.3.200
8
Prev.
As at
31.3.200
7
Present
As at
31.3.200
8
Prev. Presen
t
SHRI
AXXX
SHARMA
SON 91.00 22.00 20.11.200
7

SMT.
OMWATI
SHARMA
WIFE 121.51 - - 20.11.200
7



iv Comments on changes, if any.

Nil

V Status of creation of charge: -NA-
Total exposure and collateral security available upto march 2008 and after march 2008
is given below:

90

EXPOSURE
RS. IN LAKH
TOTAL EXPOSURE AFTER
MARCH 2008
Fund based limit 400.00
OD against tangible
collateral security(reduced
DP)
264.10
Term Loan 188.21
Car Loan (o/s) 19.60
OD FDR -
TOTAL 871.91

COLLATERAL SECURITY
RS. IN LAKH
AFTER MARCH
2008 (Realizable
value of the
property)
Extenst of first
charge
Residual value
available
Extension of EM of
property situated at A-
45, Nizamuddin East
New Delhi.
500.00 IN OD a/c 283.00
Bal RS 188.21
217.00
Extension of EM of
property at A-77,
Sector 57, NOIDA ( to
be created)
480.00 188.21 291.79
TOTAL 980.00 508.79
91


The collateral available to cover all the facilities is Rs 508.79 Lakh against exposure
of Rs 871.91

8. C Security Margin ( Fixed Asset Coverage Ratio for term loans)

Existing Proposed
Nature Book value FACR Book Value FACR on project
completion
Primary -NA-
Collateral
Total


9. Position of Account as on 27.02.2009
(Rs. in Lakh)
Nature Limit VS DP Balance Irregularity
PACKING CREDIT 150 129.63 97.22 53.51 NIL
FOBP/FOUBP/FOBNLC/FOUBNLC 150 nil NIL

CAR LOAN 34 36.81 19.60 19.60 NIL
OD (MORTGAGE) 330 500.00 264.10 264.10 NIL
TERM LOAN (BLDG.) 225 480 188.21 188.21 NIL
CAR LOAN 34 20.57 NIL
545.99


92

10.A Conduct of the Account including details of terms & conditions not complied
with;
NIL-

10.B i) Value of the Account
(Rs. in _______)
Period Nature of
Limit
Amount Interest/Commission Earned Yield (%)
1.2008 TO
31.12.2008
CC 500 Branch has earned intrest of Rs
43.25 Lakh from the a/c .Yield
is not ascertainable in view of
peak limit and non peak
limit,TL not disbursed during
FY 2012-2013.
Around 6%
OD (M) 330
T/L 225

10.B ii) Deposits including Escrow/TRA account with details
NIL

10.C Review of the Account and Summary of serious irregularities pointed out by
Banks Inspectors, Concurrent Auditors, Credit Audit & Review Division
(CA&RD), RBI Inspectors, Statutory Auditors, observations of Stock Audit
Report, Comment on Preventive Monitoring Score Trends, (and status of
rectification of these irregularities)

CM(B) has confirmed that there are no IR irregularities outstanding in the account.



B. (i) Industry Rating as per RMD :

Neutral

B (ii) Detailed Industry Scenario and Comments on management, production and
marketing as well as Borrowers' diversification, expansion, modernization
programme

The Industry is a competitive one with a season specific demand. The peak period for
sourcing of orders is April to September. The goods are dispatched to reach the
importers by August to October and are distributed to various parts of the respective
countries. The eventual sales of the products start only in December.

The industry is one of the few, which remains largely unaffected by economic
slowdowns, as the products are small value items meant as Christmas Gifts.

93

11.C Comments on management, production and marketing

Sri V K Sharma, Propriter is well-qualified persons having rich experience in this
field and is looking after production and Management. Experienced personnel head
the stores, documentation and accounts department. Marketing is being taken care of
successfully by the proprietor himself through his old established contacts with the
overseas buyers as well as by visits abroad. Further, finishing and packing of the
pieces are done within the firms premises itself under strict supervision of the
production manager.

11.D Borrowers' diversification, expansion, modernization programme, if any:

The firm has informed that they are opting out of 100% EOU scheme and expanding
their business by way of exporting Home Furnishing & Garments. The firm has
purchased their own factory premises at Plot No. 77, Block A, at Sector -57,
NOIDA, Distt. Gautam Budh Nagar, UP at a total cost of Rs. 300.00 lakh ( Rupees
Three Crores only), for which the bank has sanctioned T/L of Rs. 225 lakh.

12. Present Proposal

5. Review of limits for 3 months on existing terms and conditions against the
recommendations of CM(B) for renewal of Packing Credit limit of Rs.400 lakh and
FOBP/FOUBP/FOBNLC/FOUBNLC (SUB-CEILING FOUBP RS.30 LAKH)
within fund based ceiling of Rs. 400 lakh. packing Credit limit is to be made availing
to the party in foreign currency(PCFC)
6. Continuance of OD against tangible security with monthly reducing DP.
7. Continuance of TL OS Rs 190.90 Lakh for building and Rs 20.57 Lakh for car

Approval of other issue

Approval for sanction of Running Packing Credit limit in foreign currency..

a) Justification for working capital sanction

CMA data enclosed.

i) Assessment of Fund Based Limits

Sr.no. Item Current
Years
Estimates
2013-2014
Accepted
for
assessment
Year
2014-205
Chargeable current assets 520.00 520.00
94

Other current assets 122.81 122.81
1. Total current assets 436.00 642.81
2. Other current liabilities 15.00 15.00
3. Working capital gap 421.00 627.81
4. Net Working Capital at 25% of Total
Current Assets less Export Receivables
100.25 85.70
5. Actual / projected NWC 271.00 227.81
6. Item 3-4 320.75 541.30
7. Item no. 3-5 150.00 400.00
8. PBF 150.00 400.00

1. Justification for Fund based working capital limits proposed
(Rs.in lakh)
Particulars
31/03/2013
Audited
31-03-14
Estimated
31-03-15
projected
31.03.16
Accepted
Sales 714.00 650.00 750.00 750.00
( % age growth) -26.33 -32.93 5.04 5.04
Cost of Sales 583.89 442.62 541.00 541.00
( % age to sales) 81.78 68.10 72.13 72.13
Cost of Production 574.59 540.62 541.00 541.00
( % age to sales) 80.47 83.17 72.13 72.13
Basic Data (value per
month)
Sales 59.50 54.17 62.50 62.50
Cost of Sales 48.66 36.89 45.08 45.08
Cost of Production 47.88 45.05 45.08 45.08
Holding Levels
Raw Material
Consumption 1.20 1.11 1.11 1.11
WIP 1.30 1.33 1.33 1.33
Finished Goods 0.12 2.98 2.44 2.44
Receivables 0.11 0.65 4.80 4.80
Chargable Current
Assets
Raw Material 57.50 50.00 50.00 50.00
WIP 62.12 60.00 60.00 60.00
Finished Goods 6.00 110.00 110.00 110.00
spares 0.00 0.00 0.00 0.00
Sundry Debtors 6.32 35.00 300.00 300.00
Chrgable Current
Assets 131.94 255.00 520.00 520.00
Advance to supplier 333.24 125.00 100.00 100.00
95

FD 55.80 0.00 0.00 0.00
Other C Assets 120.79 56.00 22.81 22.81
Total 509.83 181.00 122.81 122.81
Total Current Assets 641.77 436.00 642.81 642.81
Other Current Liabilities 43.71 15.00 15.00 15.00
Working Capital Gap 598.06 421.00 627.81 627.81
NWC 69.67 205.59 227.81 227.81
PBF 528.39 215.41 400.00 400.00

Now the Peak season of the firm has started CM branch has recommended
Renewal of Packing Credit Limit from Rs. 400.00 lakh and
FOBP/FOUBP/FOBNLC/FOUBNLC Limit of Rs.400.00 lakh with Fund Based
Ceiling of Rs. 400 lakh during the peak season ( from April to September) and Rs.
150 lakh during the non-peak season (from October to March) besides
continuance of OD against tangible security and TL for car..

a) Justification for sanction of above mentioned limits:

M/s AXXX Exports was initially availing Packing Credit limit of Rs. 500 lakh
and FOBP/FOUBP/FOBNLC/FOUBNLC limit of Rs.500 lakh with Fund based
ceiling of Rs. 500 lakh for peak period and Rs. 150 lakh for non peak period. The
limit was last renewed on 30.4.2007 by DGM (Zone). The limit was reduced to
Rs. 50 lakh vide Zonal office letter dated 3.12.2008 while sanctioning OD limit
against tangible collateral security of Rs. 330 lakh.During last sanction the limit
was increased to Rs 500.00 Lakh for peak season and Rs 150.00 Lakh for non
peak season i.e Packing Credit Limit from Rs. 50 lakh to Rs. 500 lakh and
FOBP/FOUBP/FOBNLC/FOUBNLC Limit from Rs. 50 lakh to Rs. 500 lakh with
Fund Based Ceiling of Rs. 500 lakh during the peak season ( from April to
September) and Rs. 150 lakh during the non-peak season (from October to
March). Party was also allowed OD against FD kept as a collateral security which
was later liquidated out of the proceeds of FD and limit was also reduced to Rs
400.00 Lakh


During last sanction the sales of Rs. 1300 lakh was accepted by the CM (B) on the
basis of partys negotiation with their foreign buyers on the basis of the new rates
and the fact that the firm has proposed to export garments and Home Furnishing
Products besides handicraft items.

Holding Period (Months) with justification for acceptance

The firm normally avails the full limit only for six months (during peak season
April to September) as such they require higher level of inventory holding period
during April to September as compared to non-peak season October to March.
96

The average holding period for the raw material, goods in process is
approximately one month and in consonance with past trend. Level of holding of
finished goods has been projected and accepted by branch 2.12 months for 2008-
09 as compared to previous years actual level of holding of 1.23 months
(31.03.06) and 0.15 months (31.03.07). Branch / party has stated that projected
level of 2.12 months has been accepted in view of the reason that peak season
holding level of finished goods remains higher. However on the basis of previous
assessment where the holding level of we may reduce the holding level at 1.80
months keeping in view the past trend. The amount of Finished goods comes to
Rs.93.40 lakh.

Party has projected export receivable level at 4.50 months for its peak season. We
however, accepting the export receivable level at 4.20 months keeping in view the
realization period is higher as informed by the branch. The amount in absolute
term comes to Rs.280 lakh.

Current Liabilities Sundry Creditors has been projected as Rs.90 lakh for the
period 2008-09 by the party but the branch has accepted the level at Rs.80 lakh in
view of the past trend. Now for the renewal of limit party has submitted the CMA
data on the following assumption of holding period

iii) Assessment of Fund Based Limits

Raw material

The holding level of stock was 1.20 months of cost of sales in 2012-13. Now the
party has projected the level at 1.11 months and 1.11 months for 2008-09, &
2009-2010 which is much below the level of last year in the line of past actuals of
31.3.2008 hence accepted.

Work in progress

The holding level of stock was 1.30 months of cost of sales in 2012-13. Now the
party has projected the level at 1.33 months for 2008-09 & 2009-2010 which is as
per past performance and in the lines of past actuals of 31.3.2008 hence accepted.

Finished Stock

The holding level of stock was 0.12 months of cost of sales in 2012-13. Now the
party has projected the level at 2.98 months and 2.44 months for 2008-09 & 2009-
2010. The projections are on much higher level but the fact that the party is
engaged in export of handicraft items to USA, which is sold in Christmas Season,
the party has to kept higher stock during the peak season therefore BM has
accepted the level of 2.44 months for the next financial year.
97

Export receivables

The level of the Sundry Debtors was 0.11 months in 2006-2007 which increased
to 2.82 months in last financial year .The party has projected the level of 4.80
months sales for 2009-10 respectively which is much higher than the the level of
last year and as per past norms . Due to competition, credit is being offered upto
180 days to the customer in the industry, accordingly the party has to offer the
same to remain in the market or as per market condition.

c. Other Current Assets

The level of other current assets was Rs.487.92 lakh as on 31.03.2008, which
includes cash in hand & Bank , an advance to suppliers Rs 333.24 Lakh and FD
Rs 55.80 Lakha and other current assets of Rs98.88 lakhs which proposed to
reduced to RS 181.00 lakh as on 31-03-2009 and Rs 122.81 lakh as on 31-03-2010
with substantial reduction in advance to supplier and in other current assets and
hence acceptable

d. Creditors

The sundry creditors were Rs 12.76 Lakh as on 31-03-08 which increased to
100.00 Lakh equivalents to 10 days. Earlier the party use to purchase material on
cash basis. However, the party has projected sundry creditors to the tune of Rs.15
lakh, which is higher than the actual sundry creditors of Rs.100.00 lakh as on
31.03.2009 & 31-03-10 at the level of 5 days, hence accepted.

Net working Capital


31-03-08
Audited
31-03-09
Estimated
31-03-10
Projected
Build Up of NWC
Capital 174.57 186.41 256.41
Reserves 0.00 0.00 0.00

Net Worth 174.57 186.41 256.41
Term Loan 137.70 451.54 371.40
Unsecured Loans 24.40 34.00 0.00
Long Term Outside Funds 162.10 485.54 371.40
Total Long Term Funds 336.67 671.95 627.81
Net Block 201.59 400.95 400.00
Non Current assets 65.41 65.41 0.00
Total Long Term
Investments 267.00 466.36 400.00

98

NWC 69.67 205.59 227.81

The party has estimated a TNW of Rs 186.41 lakh as on 31-03-09 and Rs 256.41
Lakh with the assumption that the PAT will be retained and party to further induct
a Capital of Rs 50.00 Lakh during the FY 2008-2009 and RS 90.00 Lakh in FY
2009-2010.We are stipulating that the party to raise the capital as projected above
and attain the level of NWC of Rs 271.00 Lakh as on 31-03-09 and Rs 227.81
Lakh as on 31-03-10.

b) Justification for Non Fund based limits

-NA-
c) Justification for term loan/DPG:

-NA-

13. Pricing:

Facility Existing Proposed
(Rs.)
Applicabl
e rate
Justificatio
n for
concessions
, if any

Rate of
interest
PC FC As per card
rate
As per card
rate
As per
card rate
N.A
Rate of
interest
FOBP/FOBNLC
/
FOUBNLC
Rs
BPLR-
3.25%=8.25
% upto 180
days.
BPLR-
3.25%=8.25
% upto 180
days.
As per
banks
guidelines
N.A.
Processing
Fee
PC

Normal processing fee shall be charged in the account.
Upfront Fee Nil N.A.
Commission
on export limit
FOBP/FOBNLC
/
FOUBNLC
As per FEDAI rules
Commission
on NFB
NA Normal commission as per bank guidelines shall be
charged in the account.
Other charges,
if any
Documentatio
n
FB & NFB Normal charges as per bank guidelines shall be charged
in the account.


99

14. Other Issues:

1. Sanction of Running Packing Credit in foreign currency.

The party has requisitioned for allowing the facility on running packaging credit
facility in PCFC. The extant guidelines stipulates that Running Account facility under
PCFC Scheme is available on the same lines as the facility is available under Rupee
credit. The guidelines as circulated vide Risk Management Division (Policy Section)
circulars from time to time are applicable to the requests from the exporters seeking
Running Account facility under PCFC. For the sake of convenience, some of the
guidelines are given here under: -
The facility may be extended provided the need for 'Running Account facility has
been established by the exporters, to the satisfaction of the bank.
'Running Account' Facility should be allowed to exporters who are categorized as
BB+ borrowers having good past track record and where the requirement of trade
justifies the same.
In all cases, where the 'Running Account ' facility under PCFC has been extended, the
Letters of Credit / firm orders should be produced within a reasonable period of time
i.e. within a period of one month from the date of sanction. A letter of commitment
for lodgment of LCs/firm orders within the time frame of 30 days be obtained from
the exporter and kept on record.
The branches should mark off individual export bills, as and when they are received
for negotiation / collection, against the earliest outstanding pre-shipment credit on
'First in First out (FIFO) ' basis. Needless to add that, while marking off the pre-
shipment credit in the manner indicated above, banks should ensure that concessional
credit available in respect of individual pre-shipment credit does not go beyond 180
days. Running account packing credit facility can be marked off with proceed of
export documents against which no packing credit has been drawn by the exporter.
The 'Running Account' Facility does not envisage any relaxation with regard to the
stipulated period for which pre-shipment credit at lower rate of interest is made
available. It will therefore, be necessary to ensure that the facility is not misused by
the exporters for inventory build up/other purposes and the limits sanctioned to them
are need based keeping in view either their past performance in exports or potential
thereof.
Pre Shipment Credit Running Account facility would be available to exporters only
if they are complying with terms & conditions laid down in letter & spirit. If it is
noticed that the exporter is found to be abusing the facility, the facility should be
withdrawn forthwith. In all such cases .branches should insist on production of letter
of credit or firm order before granting a pre-shipment advance.
The CH has been authorized to extend Pre shipment credit Running Account facility.

2. Sanction of packing credit in foreign currency

The party has requested for sanction of PC limit in FC to avail the facility which
is additional window for providing preshipment credit to Indian exporter at
international ROI. PCFC scheme cover only cash export currecy.The facilities
can be sanctioned disbursed in one of the convertible currency but for sake of
convince our bank is providing facilities in USD,GBP and EUR.
100


Source of funds :

Lendable funds under the scheme shall be available from the foreign currency
balance held by the bank under FCNR B, EEFC RFC scheme, line of credit
from banks Abroad and also the foreign currency funds generated through buy
sell swaps in the domestic forex market .For granting PCFC

Though eligibility criteria no separate sanction of preshipment export credit
limit is needed for PCFC it shall be allowed with in the Rs sanction limit of
preshipment credit. We may advise the CM (B) to adhere the guidelines as
contained in FE Cir no 50/05 on PCFC which is summarized as under .

Minimum amount :

For operational and account convince each request for PCFC should be
rounded of the nearest hundred.

Period of credit :

The PCFC will be available as in case of Rupee credit initially for maximum
period of 180 days now extended to 270.00 days.

Disbursement of PCFC:

PCFC will be disbursed to exporters by applying the TT buying rate of the
currency.

Extension of period :

Any extension of credit will be subject to same terms and conditions as
applicable for extension of Rupee packing credit and will also have interest cost
of 2% above the rate for initial period of 180 days prevailing at the time of
extension. For extension with in 180 days no additional interest will be charged.

Spread and interest in PCFC:

Lending rate should not exceed LIBOR/EURO+3.5% excluding with holding
tax PCFC can be provided through swaps and in this case swap cost will also be
borne by exporter in addition to the interest.

101

Interest on PCFC :

Interest on PCFC may be charged at monthly interval or the actual no of days
which ever is earlier against sales of foreign currency at TT selling rates or out
of balances in EEFC a/cs or out of discounted value of export bill if PCFC is
liquidated .What ever interest is charged reporting should be made to FEO as
per procedure.

Handling charges 0.50% PA on the amount of PCFC /EBR/FOBD on the
amount of availment at the time of disbursement 0.75% PA for PCFC availed
for import purpose. In all cases, where the 'Running Account ' facility under
PCFC has been extended, the Letters of Credit / firm orders should be produced
within a reasonable period of time i.e. within a period of one month from the
date of sanction. A letter of commitment for lodgment of LCs/firm orders
within the time frame of 30 days be obtained from the exporter and kept on
record.

16. Credit risk rating and key risk area and its mitigations

The credit risk rating of the party is BB- as vetted by CORMD. The Credit risk rating
has down graded from A as on 31-03-07 on a/c of following reason.

Company has neither achieved target of sales nr of profits during last financial year
During he FY 2012-2013 company incurred a loss of Rs 65.33 Lakh
ROCE is negative i,e 11.59
Current ratio is below the bench mark 0.41
DSCR is negative I,e -0.66 on a/c f decline in profit.
Decline in sales
TNW declined from Rs 312.23 Lakh to Rs 174.57 Lakh.

We are stipulating that the BM to take immediate measure and ensure improvement
in financials to safe guard bank interest.

15. Strengths & Weakness with mitigates, if any

STRENGTH:

The firm is in the trade for more than two decades and have high experience in the
field. Shri V.K.Sharma, is well qualified person having rich experience in this field.

WEAKNESS:

Exchange fluctuation risk.
The major market for the product of the firm is USA and the present recession in USA
may have adverse effect on the business of the firm.

OPPORTUNITY:
102


After purchase of the factory the firm is in a position to expand their business activity.

THREAT:

Continued downfall of dollar will have adverse effect on the profitability of the firm.
Further any economic and political changes in the country and abroad can have
adverse effect on the business of the firm.

16. Detailed Terms and Conditions of Sanction

AXXX EXPORTS

Facility No.1:
Nature : RUNNING PACKING CREDIT

LIMIT : RS.400.00 LAKH for peak season(April to September)
& Rs.150.00 lakh for non peak season (October to March)
(Packing credit shall be disbursed in Foreign currency
And the same shall be adjusted in foreign currency.

Margin : 25% on value of stock


Interest : As per bank guide lines.


Security 1
st
charge on entire current assets(present &
future)of
the firm by way of hypothecation of Raw Material,
Stock-in-Process & Finished Goods receivables & all
other current assets.

Drawing Power :

1. DP will be revised every month by the bank on receipt of stock statement.
2. No Drawing Power shall be allowed against-

a. Old, deteriorated and unsalable stocks.
b. Spares of more than 1 year old.
c. Stocks which are unpaid for after netting with Book Debt as per Banks
guidelines.
3.Stocks which are more than 6 months old.

103

ii) Deposits of confirmed orders and/or original irrevocable LCs of approved foreign
banks.
OR
In case of exports from Merchant Exporters/Export House/Export Order Holder
(EOH), Borrower to submit purchase orders from Export Order Holder alongwith
letter of disclaimer from the EOH for not having availed any limits against the order
accompanied by banks certificate that no PC has been availed by EOH against the
Expr Contract/Order.

4. . Stock Valuation The stocks to be valued at cost price or market price or FOB
value whichever is lowest.

5. Insurance : Borrower shall get the hypothecated stocks, including stocks
in transit, insured for full value covering the risks of fire, thefts,
burglary, SRCC(Strikes, Riots, Civil Commotion) earthquake,
terrorist risk, floods, riots etc., in the joint name Bank & the
borrower with Agreed bank clause at borrowers cost.
Stock in transit will be insured against all transit risks.
The policies/cover notes or duly attested copies thereof will be
obtained and plakhed on the records of the bank.


7. Nature of accounting: The facility of packing credit may be allowed on running
account basis0 provided all the terms & conditions and
guidelines of HO, as amended from time to time are complied
with and hypothecation agreement duly amended to cover
running account for PC facility to be obtained.

8..Stock Verification : Stocks under packing credit advance to be checked on
monthly basis at irregular interval by Banks officials and
borrower to facilitate the Bank in this regard.

9. . Period of packing Credit: Each packing credit shall be adjusted by the borrower
within the specified period(maximum 180 days) duly assessed
on the basis of the total operating cycle from procurement of
raw material to actual shipment of finished goods or validity
period of Export Order/LC, whichever is earlier.

10..ECGC Cover :Advance shall be got covered ;under WTPCG Scheme of
ECGC at borrowers cost.

11. The PC shall be adjusted with the proceeds received from the
Export House/ export bills. Borrower shall give an undertaking
that the bills relating to exports against which packing credit
has been allowed by us will be negotiated only through our
bank.

12. The borrower shall certify that they are not on the Exporters
caution list f RBI or Specific Approval list of ECGC. The
borrower shall undertake to inform the bank immediately if and
104

when their name is included in the aforesaid list(s). Branch
shall also verify this independently.


13. The borrower to furnish a stamped undertaking that all
exchange control/import trade control regulations will be
complied with and that the conduct, operation and
maintenance of packing credit would be strictly as per laid
down instructions of the Bank/RBI/FEDAI.ECGC.

14. Any advance payment received against supplies have to be
deposited with the bank in PC account.


15. The outstanding in the account/limit will always be co-
related to the unutilized portion of confirmed orders/LCs on
hand.

16. For shipment th goods shall be sent to approved clearing agents
through approved transporters/rail only. In no case these are to
be sent to unapproved clearing agents or through unapproved
transporters without prior approval of Banks competent
authority.

Running Account facility under PCFC Scheme is available on
the same lines as the facility is available under Rupee credit.

17. For the sake of convenience, some of the guidelines are given
here under: The facility may be extended provided the need for
'Running Account facility be allowed to the party, to the
satisfaction of the bank and having categorized in BB rating
and having good past track record and where the requirement of
trade justifies the same.

In all cases, where the 'Running Account ' facility under PCFC has been
extended, the Letters of Credit / firm orders should be produced within a
reasonable period of time i.e. within a period of one month from the date of
sanction. A letter of commitment for lodgment of LCs/firm orders within the
time frame of 30 days be obtained from the exporter and kept on record.
The branches should mark off individual export bills, as and when they are
received for negotiation / collection, against the earliest outstanding pre-
shipment credit on 'First in First out (FIFO) ' basis. Needless to add that,
while marking off the pre-shipment credit in the manner indicated above,
banks should ensure that concessional credit available in respect of individual
pre-shipment credit does not go beyond 180 days. Running account packing
credit facility can be marked off with proceed of export documents against
which no packing credit has been drawn by the exporter.
105

The 'Running Account' Facility does not envisage any relaxation with regard
to the stipulated period for which pre-shipment credit at lower rate of interest
is made available. It will therefore, be necessary to ensure that the facility is
not misused by the exporters for inventory build up/other purposes and the
limits sanctioned to them are need based keeping in view either their past
performance in exports or potential thereof.
Pre Shipment Credit Running Account facility would be available to
exporters only if they are complying with terms & conditions laid down in
letter & spirit. If it is noticed that the exporter is found to be abusing the
facility, the facility should be withdrawn forthwith. In all such cases
Branches should insist on production of letter of credit or firm order before
granting a pre-shipment advance.
Running Account facility should not be granted to Sub suppliers.

Considering the large interest differential between Rupee Credit and Foreign
Currency Credit, the branches are advised to introduce a system to closely monitor the
production of firm order/LC subsequently by exporters and also the end use of funds.
It has to be ensured by the branches that no diversion of funds is made for domestic
use.

In case of non-utilization of PCFC drawls for export purposes, the penal rate of 2%
over the rate of "Export Credit not otherwise specified (ECNOS) from the date of
advance should be charged on the rupee equivalent of principal amount from the
exporter. In addition, the branches should withdraw the Running Account ' Facility
with immediate effect for the concerned exporter customer.

In the event of early delivery (Pre-payment by the exporter) beyond one month period
under PCFC Scheme, the funding cost, if any, to the bank involved on account of
absorbing mis-matching of maturities should be borne by the exporter and the amount
chargeable on account of this shall be advised by the relevant FEO to the concerned
branch office.
106

Facility No.2

Nature FOBP/FOUBP/FOBNLC/FOUBNLC

Amount Rs.400.00 LAKH for peak season. (April to Sept) & Rs.150.00
lakh
for non peak season(October to March)
Interest As per bank guidelines.
Commission As per FEDAI Rules
Margin NIL
Usance 90 days

1. Security: Docy. / usance export bills accompanied with shipping documents
including Bill of Lading/Airway Bill(as the case may be ) drawn on foreign
buyers/dealers covering consignment of exported goods.
2. Transit Period/Detention Period: As per normal transit period specified by FEDAI.
3. Overdue Interest: In case of bills which remained overdue beyond the normal transit
period for which ceiling rate of interest is stipulated by FEDAI, overdue interest, as
specified shall be charged and recovered from the borrower.
4. ECGC Cover: ECGC cover under Whole Turnover Post Shipment guarantee scheme
to be obtained.
5. Proceeds of such bills to be utilized towards reduction/adjustment of concerned
packing credit advance.
ii) First/Second/Third charge/Paripassu charge
(Rs. in Lakh)
Nature
of limits
Security Value of
block
assets as
on:
31.3.2012)

Value of block
assets
excluding
specific charge
if any
Extent of
first /
second
charge
holders
Balance / residual
value of charge
available to
bank/consortium
Working
Capital
IST CHARGE
ON
FIXED/BLOCK
ASSETS OF
THE FIRM
166.57 NIL 100% 100%

iv) Personal Guarantee
(RS. IN LAKH)
Name of
Guarantor
Relationship
with
borrower
Net Worth

Immovable property Date of confidential
report
Prev.
As at
31.3.2011
Present
As at
31.3.2012
Prev.
As at
31.3.2011
Present
As at
31.3.2012
Prev. Present
SHRI AXXX
SHARMA
SON 63.46 91.00 12.00 22.00 28.3.2007 20.11.2007
SMT.
OMWATI
SHARMA
WIFE 126.51 121.51 - - 28.3.2007 20.11.2007

107


1. The party to undertake that in complicit terms that they shall work within the
sanctioned limits and would confirm half yearly balance acknowledging the
liability due or to be due and would confirm exclusive dealings with your
bank. In case, they are found dealing with other Bank without prior
information/specific approval, the bank will have the full and absolute option
to dispense with the facilities immediately and the party agree to abide by the
decisions and adjust the borings immediately.

2. The party to undertake that they shall make satisfactory arrangement for the
watch and ward of the machinery/building/goods/pledged/hypothecated to the
bank and shall be responsible for any loss cause by theft, fire riot or civil
commotion. They shall pay all the rents, taxes and other outgoings of the
godown/machinery, premises where the security shall be kept. The Bank has
full right to debit/charge incidental charges/processing charges and other
charges at its discretion in accounts.

3. The party to undertake not to change the location of their unit/work plakhe
without the consent of Bank, nor shall they change the constitution of their
unit/firm, without banks permission.

4. The party to declare that all the statutory dues including provident fund dues,
have ben duly paid.

5. The borrower/s agree/s not to induct on the Board of the borrower/s a person,
who has been identified as a willful defaulter as per definition given as per
RBI directions/guidelines or Banks guidelines as a director on the Board of
the borrower/s. If any director who is Willful Defaulter as per definition
above referred, is on the Board of borrower/s or becomes so while being a
director on the Board of the borrower/s, the borrower/s undertake/s to get him
removed from the Board of the borrower/s. The borrowers agree/s to make
necessary amendments in the Articles of Association of borrower/s to make
the above requirement as ground for removal of directors and furnish a copy
of Articles of Association as amended to the bank.

6. Party to undertaker that there is no pending court cases of banks/financial
institutions/other financial institutions/other financiers against
borrower/guarantors.

7. The party hereby authorize the bank to get the machinery/building/stock
pledged/hypothecated in the above mentioned accounts comprehensively
insured against fire/theft and other risk(s) at their cost with any approved
Insurance company with usual Banks clause and the party to undertake to
deposit cheques etc. received in claim in the Bank for adjustment of dues etc.
The premium on such insurance will be debited to the partys account/s. All
claims arising out of any mis-hapening will be received by the Bank.

8. Notwithstanding anything to the contrary, the Bank has a right to withhold
disbursement and withdraw disbursed facilities(fund based and non fund
based) without any prior notice. The action of the Bank in withholding/not
108

releasing/withdrawing the facility will be final and the bank is under no
obligation to explain the reasons to the borrowers. The borrower will not have
any right to demand the release of the facility or claim damages/compensation
from the bank for non disbursement/withdrawal of sanctioned facilities.





The collateral available to cover all the facilities is Rs 508.79 Lakh against exposure of Rs
871.91
(Rs. in Lakh)

31.03.11
Audited
31.03.12
Audited
31.03.13
Audited
31.03.14
Estimated
31.03.15
Projected
Sales 822.40 969.19 714.00 650.00 750.00
PAT 128.44 90.32 -65.33 20.00 20.00
Cash profit 143.36 105.65 -47.95 70.00 70.00
TNW 280.70 312.23 174.57 186.41 *256.41
Unsecured loans 81.18 50.18 24.40 34.00 0.00
NWC 228.20 317.10 69.67 205.59 227.81
Current ratio 2.63 3.25 1.12 2.19 1.54
DER 0.54 0.55 0.78 2.42 1.45
Long term funds 432.38 483.68 336.67 671.95 627.81
Long term uses 204.18 166.58 267.00 466.36 400.00
Short term funds 139.75 141.12 572.09 208.19 415.00
Short term uses 367.95 458.22 641.77 436.00 642.81
TOL / TNW 2.09 2.21 4.20 3.72 3.06

*Party proposed to induct fresh capital Rs.50 lakh to improve current ratio.

Key Financials upto last quarter
Latest last quarter as on 31.12.2008
(Rs.in lakh)
Sales 650.00
Operating profit 95.00
Cash profit 55.00
Net profit 25.00
Current assets 260.00
Current liability 15.00

We may review the limit against the recommendation of BM for renewal of Packing
Credit Limit of Rs.400 lakh and FOBP/FOUBP/FOBNLC/FOUBNLC Limit of
Rs.400 (Sub ceiling FOUBP Rs.30.00 lakh) with fund based ceiling of Rs.400 lakh
109

during the peak season (from April to September) and Rs.150 lakh during the non-
peak season (from October to March) for the following reason.

Stipulations :

The PCFC will be extended only, on the basis of letter of credit opened in favour of
the party, by an overseas buyer or a confirmed and irrevocable order for the export of
goods from India or any other evidence of an order for export from India having been
plakhed on the exporter or some other person. It shall be allowed within the Rupee
sanctioned limits of preshipment credit and the borrowing under the scheme will be
subject to compliance with all existing credit disciplines like MPBF etc.

Interest on PCFC: Interest on PCFC may be charged at monthly interval or the
actual no of days which ever is earlier against sales of foreign currency at TT selling
rates or out of balances in EEFC a/cs or out of discounted value of export bill if PCFC
is liquidated .What ever interest is charged reporting should be made to FEO as per
procedure.
CM(B) to ensure that the guidelines as circulated vide Risk Management Division
(Policy Section) circulars from time to time are applicable to the requests from the
exporters seeking Running Account facility under PCFC
Incumbent incharge to ensure that the party induct capital of Rs.50 lakh by FY 2009-
2010 to achieve the projected NWC of Rs.227.81 lakh as on 31.03.2010.
All the properties (IP) EM to the Bank must be verified by obtained certified copy of
title deeds, CM to ensure that the compliance.
BM to obtain the Audited Balance Sheet in next 3 month and submit renewal proposal
based on the performance of FY 2008-2009. Submitted for review of a/c for 3 month
in view of above deficiencies , particularly to induct long term funds, better
management of working capital, reduction on non current assets

Please ensure strict compliance of all the term and conditions of the sanction. In case
any discrepancy / inconsistency, the same may be brought to our notice immediately.

Further, confirmation to the effect that all the terms & conditions of the sanction have
been complied with be submitted to us at the earliest within maximum three weeks.

8.1 Recommendations:

In view of the good experience of promoter in setting up and successfully running
existing unit , satisfactory conduct of a/c and keeping in view of their past association
with our bank as well as their excellent track record CM(B) has recommend for
renewal of facilities and Convert the existing Packing credit facility into running a/c
PC limit in Foreign Currency.

We may review the limit against the recommendation of BM for renewal of Packing
Credit Limit of Rs. 400 lakh and FOBP/FOUBP/FOBNLC/FOUBNLC Limit of
Rs.400 (Sub ceiling FOUBP Rs. 30.00 lakh) with fund based ceiling of Rs. 400 lakh
during the peak season ( from April to September) and Rs. 150 lakh during the non-
peak season (from October to March) for the following reason .
110



Company has neither achieved target of sales nor of profits during last financial
year
During he FY 2012-2013 company incurred a loss of Rs 65.33 Lakh
ROCE is negative i,e 11.59
Current ratio is below the bench mark 0.41
DSCR is negative i,e -0.66 on a/c of decline in profit.
Decline in sales
TNW declined from Rs 312.23 Lakh to Rs 174.57 Lakh and consequent down
grading of credit risk rating in the account from A as on 31-03-13 to BB- as on
31-03-13
Declining trend of NWC and diversion of short terms fund to long term use.

It can be advised to the BM to obtain the Audited Balance Sheet in next 3 month and
submit renewal proposal based on the performance of FY 2013-2014. Submitted for
review of a/c for 3 month in view of above deficiencies , particularly to induct long
term funds, better management of working capital, reduction on non current assets

Packing Credit Limit of Rs. 400 lakh and FOBP/FOUBP/FOBNLC/FOUBNLC
Limit of Rs.400 (Sub ceiling FOUBP Rs. 30.00 lakh) with fund based ceiling of Rs.
400 lakh during the peak season ( from April to September) and Rs. 150 lakh during
the non-peak season (from October to March

Continuance of OD limit of against tangible security
Continuance of TL for Car
Recommendation to Circle Head for allowing Conversion of the existing Packing
credit facility into running a/c PC limit in Foreign Currency.

General Recommendations with respect to SME financing


The recommendations are the few things I have noticed in the operation of the bank
and which needs to be rectified for increasing the efficiency:

1. Bank should try to minimize the duplication of work by preparing a common Joint
Note/Process note as it will help in avoiding wastage of the time of the employees.
2. Bank should try to sanction the loan as early as possible by reducing the gap between the
branch office ,regional office and Corporate office ,and this can be done by sharing
document online and working on it simultaneously.
3. Product innovations in banks have set the rule of the game Innovate or perish. The
same rule applies to SME segment. At present, there is a vast gap between requirements
of the SME customer and availability of suitable/matching products and services in the
public sector banks. Therefore, bank should try to minimize this Gap between
requirement and availability of Finance.
4. The process followed in sanctioning the loan and documentation required is
cumbersome; hence it is suggested to make the process easier.
5. Bank should develop flexible systems and procedures for dealing with SME customers
and modify their role to be a facilitator. It may either provide software to these customers
111

to prepare stock and financial statements or help and guide them in preparation of renewal
proposal / statements.
6. Bank should try that all the information should be reached to the SMEs so that they must
be aware of all the policies and interest Rate regarding SMEs.
7. Bank should open specialized SME branches in every region so as to encourage SME
financing.


9. LEARNING FROM SIP

My internship was in the credit department of the circle office at Punjab national bank . under
the guidance of my company guide I got the opportunity to learn and experience the practical
application of finance and understand the intricacies that are involved while sanctioning any
project in the process of credit appraisal.

It is equally interesting to mention that I found every loan request made by the clients were
unique by the nature of facility demanded, type of industry, volume of operations, funding
pattern and experience of the businessmen hence, each and every loan request has some or
the other issues which are distinctive.

The major findings of the study are every sanction of credit facility is start with
proposal note which Include all the require details for credit appraisal.
Ratio Analysis is found to be the major tool used by the bank for the purpose of
financial analysis of the borrower.
The speed of sanction is found to be time consuming for some proposals which is
accounted to the discretionary pattern followed by the bank.
Learnt about the Tagging Arrangement done by the bank so as to not let any irregular
account convert into an NPA.
Researched on TEV analysis and sensitivity analysis for term loans
How critically the interest rates are decided for a loan


The internship at PUNJAB NATIONAL BANK has proved to be a ground for invaluable
learning not only in the field of banking but also in terms of inter-corporate / personal or
professional skills. This project has helped me understand the intricacies of corporate banking
and has given me a good exposure of Credit Appraisal Projects.

I got to understand various types of Credit Facilities, its assessment, Analysis of financial
statements, preparation and analysis of Credit Monitoring Arrangement (CMA) along with
ratio analysis and its implication depending upon the type of industry.

I also got exposure to the process of Credit Risk Management department in Punjab national
bank which plays an important role in deciding the interest rate to be charged to any borrower
while drafting the project proposal for Loan sanction.


While undergoing the training in CRMD I realised the importance of the following

how essential it is to understand the industry from which the company belongs to
112

how the rating fluctuates with changing economic conditions
how the availability of resources can be detrimental for a company to get its loan
sanctioned
how management plays a vital role
and lastly the conduct of account
The practical application of credit rating in the banks software PNB TRAC
Worked with 6 credit rating project reports and did their credit rating in pnb trac
Worked with 3 reports for PMS SCORE
The proposals consisted of
Learnt about three different types of credit rating models applicable to three different
industries
Manufacturing sector business evaluation
Service sector business evaluation
Trading sector business evaluation
Learnt about how a subjective assessment of management evaluation is done .


Last but not the least this project helped me understand that every loan application is unique
in nature in terms of facility demanded, type of industry, volume of operations, funding
pattern and experience of the businessmen hence unique challenges and distinctive ways to
find the solution.

10 MY CONTRIBUTION

While working as a trainee in the credit department I tried with best efforts to assist our
company guide in the process involved in c redit sanctioning and day to day office work .

A brief summary of my work is given below:
1. Used excel for CMA data analysis and finding out net permissible banking finance for
various proposals that came under my company guide.
2. Read proposals of various industries like power , steel , distilleries , dyeing company ,
real estate firm.
3. Also did credit rating of few firms during the traing under CRMD with the help of PNB
TRAC , the operating system in CRMD
4. Assisted sir for observations under special purpose vehicle a railways company
5. Reading the sanctioned reports to analyse the differences and similarities between my
observation and the actual report analysis
6. Drafted letters to be sent to branch and head office regarding the queries as per generated
by the circle office.
7. Also carried out sensitivity and TEV analysis for various projects that i came across in
these 3 months






113

11. CONCLUSION

While my training under Credit Department i realised that how important the professional
expertise in evaluating the creditworthiness of the borrower , his business .I closely
understood the role of a credit analyst , the usefulness of ratio analysis , and the interpretation
of the financial statements .
The study clearly shows that Credit appraisal is a stringent process and requires sincere and
thorough knowledge of both theory and practical knowledge of credit officer to successfully
appraise the proposal. Credit Appraisal process is extremely important for a bank because the
cost of a bad loan is enormous. Therefore , the art of understanding the process is appreciable
and it was a great opportunity for me both in terms of knowledge enhancement and corporate
exposure .



114

12. References

Websites
1. www.rbi.org
2. www.ibef.org
3. www.pnbindia.in
4. http://blog.ficci.com/q1-gdp-growth-rate-india/1343/
5. http://www.tradingeconomics.com/india/gdp-growth-annual.
6. www.investopedia.com
7. http://www.business-standard.com/article/economy-policy/fdi-into-india-declines-13-5-
in-
8. http://www.dinodiacapital.com/pdfs/indian%20banking%20industry%20-
9. http://www.kpmg.com/in/en/issuesandinsights/articlespublications/documents/perform
ance-benchmarking-report-12-new.pdf
10. http://www.tradingeconomics.com/india/gdp-growth-annual.
11. fitch report : 2013 outlook: indian banks.

Books:
1. Introduction to project financing author: Andrew Fight
2. The art and science of credit appraisal author : Anil A Deshpande
3. PNB guidelines
4. Manual books of Punjab National Bank

Journals:
1. http://www.equitymaster.com/research-it/sector-info/bank/banking-sector-analysis-
report.asp
2. http://borjournals.com/research_papers/jul_2013/1391m.pdf
3. http://rbidocs.rbi.org.in/rdocs/speeches/pdfs/69038.pdf