RESEARCH METHODOLOGY

 INTRODUCTION:

Credit appraisal means investigation/assessment done by the bank before providing any
loans and advances/project finance and also checks the commercial, financial &industrial
viability of the project proposed its funding pattern and further checks the primary &
collateral security cover available for recovery of such funds.

 PROBLEM STATEMENT:

To study the credit appraisal system in SME sector, at AXIS Bank Ahmadabad.

 OBJECTIVES:

• To study the credit appraisal methods.

• To understand the commercial, financial & technical viability of the proposal

proposed and it’s finding pattern.

 RESEARCH DESIGN:

Analytical in nature.

 DATA COLLECTION:

• Primary data:

Informal interview with manager and other staff members at Axis Bank.

• Secondary data:

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  Books

 websites

 database at Axis Bank

 library research

 BENEFICIARIES:

• Researchers:

This report will help researchers improving knowledge about the credit appraisal system and
to have practical exposure of the credit appraisal system at AXIS Bank.
• Management Students:

The project will help the management student to know the patterns of credit appraisal in
Axis bank.

 LIMITATION OF THE STUDY:

• As the credit appraisal is one of the crucial areas for any bank, some of the

Technicalities are not revealed.

• Credit appraisal system includes various types of detail studies for different areas of
analysis, but due to time constraint, our analysis was of limited areas only.

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 CHAPTER 1
INTRODUCTION TO BANKING SECTOR

A snapshot of the banking industry

The Reserve Bank of India (RBI), as the central bank of the country, closely monitors
developments in the whole financial sector.

The banking sector is dominated by Scheduled Commercial Banks (SBCs). As at end March
2002, there were 296 Commercial banks operating in India. This included 27 Public Sector
Banks (PSBs), 31 Private, 42 Foreign and 196 Regional Rural Banks. Also, there were 67
scheduled co-operative banks consisting of 51 scheduled urban cooperative banks and 16
scheduled state co-operative banks.

Scheduled commercial banks touched, on the deposit front, a growth of 14% as against 18%
registered in the previous year. And on advances, the growth was 14.5% against 17.3% of the
earlier year.
State Bank of India is still the largest bank in India with the market share of 20% ICICI and
its two subsidiaries merged with ICICI Bank, leading creating the second largest bank in
India with a balance sheet size of Rs. 1040bn.
Higher provisioning norms, tighter asset classification norms, dispensing with the concept of
‘past due’ for recognition of NPAs, lowering of ceiling on exposure to a single borrower and
group exposure etc., are among the measures in order to improve the banking sector.
A minimum stipulated Capital Adequacy Ratio (CAR) was introduced to strengthen the
ability of banks to absorb losses and the ratio has subsequently been raised from 8% to 9%. It
is proposed to hike the CAR to 12% by 2004 based on the Basle Committee
recommendations.

Retail Banking is the new mantra in the banking sector. The home Loans alone account
for nearly two-third of the total retail portfolio of the bank. According to one estimate, the
retail segment is expected to grow at 30-40% in the coming years.

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Net banking, phone banking, mobile banking, ATMs and bill payments are the new buzz
words that banks are using to lure customers.
With a view to provide an institutional mechanism for sharing of information on borrowers /
potential borrowers by banks and Financial Institutions, the Credit Information Bureau
(India) Ltd. (CIBIL) was set up in August 2000. The Bureau provides a framework for
collecting, processing and sharing credit information on borrowers of credit institutions. SBI
and HDFC are the promoters of the CIBIL.

The RBI is now planning to transfer of its stakes in the SBI, NHB and National bank for
Agricultural and Rural Development to the private players. Also, the Government has sought
to lower its holding in PSBs to a minimum of 33% of total capital by allowing them to raise
capital from the market. Banks are free to acquire shares, convertible debentures of corporate
and units of equity oriented mutual funds, subject to a ceiling of 5% of the total outstanding
advances (including commercial paper) as on March 31 of the previous year.

The finance ministry spelt out structure of the government-sponsored ARC called the Asset
Reconstruction Company (India) Limited (ARCIL), this pilot project of the ministry would
pave way for smoother functioning of the credit market in the country. The government will
hold 49% stake and private players will hold the rest 51%- the majority being held by ICICI
Bank (24.5%).

Reforms in the Banking sector

The first phase of financial reforms resulted in the nationalization of 14 major banks in 1969
and resulted in a shift from Class banking to Mass banking. This in turn resulted in a
significant growth in the geographical coverage of banks. Every bank has to earmark a
minimum percentage of their Loan portfolio to sectors identified as “priority sectors”. The
manufacturing sector also grew during the 1970s in protected environs and the banking sector
was a critical source. The next wave of reforms saw the nationalization of 6 more commercial
banks in 1980. Since then the number scheduled commercial banks increased four-fold and
the number of banks branches increased eight-fold.

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After the second phase of financial sector reforms and liberalization of the sector in the early
nineties, the Public Sector Banks (PSB) s found it extremely difficult to complete with the
new private sector banks and the foreign banks. The new private sector banks first made their
appearance after the guidelines permitting them were issued in January 1993. Eight new
private sector banks are presently in operation. This banks due to their late start have access
to state-of-the-art technology, which in turn helps them to save on manpower costs and
provide better services.

During the year 2000, the State Bank of India (SBI) and its 7 associates accounted for a 25%
share in deposits and 28.1% share in credit. The 20 nationalized banks accounted for 53.5%
of the deposits and 47.5% of credit during the same period. The share of foreign banks
( numbering 42 ), regional rural banks and other scheduled commercial banks accounted for
5.7%, 3.9% and 12.2% respectively in deposits and 8.41%, 3.14% and 12.85% respectively in
credit during the year 2000

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Classification of Banks:

The Indian banking industry, which is governed by the Banking Regulation Act of India
1949 can be broadly classified into two major categories, non-scheduled banks and
scheduled banks. Scheduled banks comprise commercial banks and the co-operative
banks. In Terms of ownership, commercial banks can be further grouped into nationalized
banks, the State Bank of India and its group banks, regional rural banks and private sector
banks (the old / new domestic and foreign). These banks have over 67,000 branches
spread across the country. The Indian banking industry is a mix of the public sector,
private sector and foreign banks. The private sector banks are again spilt into old banks
and new banks.

Banking System in India

Reserve bank of India (Controlling Authority)

Development Financial institutions Banks

IFCI IDBI ICICI NABARD NHB IRBI EXIM Bank SIDBI

Commercial Regional Rural Land Development Cooperative

Banks Banks Banks Banks

Public Sector Banks Private Sector Banks

SBI Groups Nationalized Banks Indian Banks Foreign Banks

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 CHAPTER 2

GLOBAL AND LOCAL SCENARIO OF BANKING

SECTOR

Indian Banking System: The Current State & Road Ahead

Introduction
Recent time has witnessed the world economy develop serious difficulties in terms of lapse of
banking & financial institutions and plunging demand. Prospects became very uncertain
causing recession in major economies. However, amidst all this chaos India’s banking sector
has been amongst the few to maintain resilience.

A progressively growing balance sheet, higher pace of credit expansion, expanding

profitability and productivity akin to banks in developed markets, lower incidence of
nonperforming assets and focus on financial inclusion have contributed to making Indian
banking vibrant and strong. Indian banks have begun to revise their growth approach and re-
evaluate the prospects on hand to keep the economy rolling. The way forward for the Indian
banks is to innovate to take advantage of the new business opportunities and at the same time
ensure continuous assessment of risks.

A rigorous evaluation of the health of commercial banks, recently undertaken by the

Committee on Financial Sector Assessment (CFSA) also shows that the commercial banks
are robust and versatile. The single-factor stress tests undertaken by the CFSA divulge that
the banking system can endure considerable shocks arising from large possible changes in
credit quality, interest rate and liquidity conditions. These stress tests for credit, market and
liquidity risk show that Indian banks are by and large resilient.

Thus, it has become far more imperative to contemplate the role of the Banking Industry in
fostering the long term growth of the economy. With the purview of economic stability and
growth, greater attention is required on both political and regulatory commitment to long

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term development programme. FICCI conducted a survey on the Indian Banking Industry to
assess the competitive advantage offered by the banking sector, as well as the policies and
structures that are required to further the pace of growth. The results of our survey are given
in the following sections.

General Banking Scenario

The pace of development for the Indian banking industry has been tremendous over the past
decade. As the world reels from the global financial meltdown, India’s banking sector has
been one of the very few to actually maintain resilience while continuing to provide growth
opportunities, a feat unlikely to be matched by other developed markets around the world.
FICCI conducted a survey on the Indian Banking Industry to assess the competitive
advantage offered by the banking sector, as well as the policies and structures required to
further stimulate the pace of growth.

The predicament of the banks in the developed countries owing to excessive leverage and lax
regulatory system has time and again been compared with somewhat unscathed Indian
Banking Sector. An attempt has been made to understand the general sentiment with regards
to the performance, the challenges and the opportunities ahead for the Indian Banking Sector.

A majority of the respondents, almost 69% of them, felt that the Indian banking Industry was
in a very good to excellent shape, with a further 25% feeling it was in good shape and only
6% of the respondents feeling that the performance of the industry was just average. In fact,
an overwhelming majority (93.33%) of the respondents felt that the banking industry
compared with the best of the sectors of the economy, including pharmaceuticals,
infrastructure, etc.

Most of the respondents were positive with regard to the growth rate attainable by the Indian
banking industry for the year 2009-10 and 2014-15, with 53.33% of the view that growth
would be between 15-20% for the year 2009-10 and greater than 20% for 2014-15.

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On being asked what is the major strength of the Indian banking industry, which makes it
resilient in the current economic climate; 93.75% respondents feel the regulatory system to be
the major strength, 75% economic growth, 68.75% relative insulation from external market,
56.25% credit quality, 25% technological advancement and 43.75% our risk assessment
systems.

Change is the only constant feature in this dynamic world and banking is not an exception.
The changes staring in the face of bankers relates to the fundamental way of banking-which
is going through rapid transformation in the world of today. Adjust, adapt and change should
be the key mantra. The major challenge faced by banks today is the ever rising customer
expectation as well as risk management and maintaining growth rate. Following are the
results of the biggest challenge faced by the banking industry as declared by our respondents
(on a mode scale of 1 to 7 with 1 being the biggest challenge):

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They also asked their respondents to rate India on certain essential banking parameters
(Regulatory Systems, Risk Assessment Systems, Technological System and Credit Quality)
in comparison with other countries i.e. China, Japan, Brazil, Russia, Hong Kong, Singapore,
UK and USA.

The recent financial crisis has drawn attention to under-regulation of banks (mainly
investment banks) in the US. Though, the Indian story is quite different. Regulatory systems
of Indian banks were rated better than China, Brazil, Russia, and UK; at par with Japan,
Singapore and Hong Kong where as all our respondents feel that we are above par or at par
with USA. On comparing the results with their previous survey where the respondents had
rated Indian Regulatory system below par the US and UK system, they see that post the
financial crisis Indian Banks are more confident on the Indian Regulatory Framework.

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The global meltdown started as a banking crisis triggered by the credit quality. Indian banks
seem to have paced up in terms of Credit Quality. Credit quality of banks has been rated
above par than China, Brazil, Russia, UK and USA but at par with Hong Kong and Singapore
and 85.72% of the respondents feel that we are at least at par with Japan. Thus, they see that
the resilience the Indian Banks showed at the time of financial crisis has led to an attitudinal
shift of our respondents with the past survey indicating Credit quality of
Indian banks being below par than that of US and UK.

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As technology ingrains itself in all aspects of a bank’s functioning, the challenge lies in
exploiting the potential for profiting from investments made in technology. A lot needs to be
done on the technological front to keep in pace with the global economies, as is evident from
the survey results. Technology systems of Indian banks have been rated more advanced than
Brazil and Russia but below par with China, Japan, Hong Kong, Singapore, UK and USA.
They find no change on introspection of their past surveys which also highlighted the need
for Indian banks to pace up in adoption of advanced technology.

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Global Expansion of Indian Banking

The idea of creating bigger banks to take on competition sounds attractive but one must
realize even the biggest among Indian banks are small by global standards. The lack of global
scale for Indian banks came into sharp focus during the recent financial crisis which saw
several international banks reneging on their funding commitments to Indian companies, but
local banks could not step into the breach because of balance sheet limitations.

In this light, 93.75% of all respondents to their survey are considering expanding their
operations in the future. They further asked participants on the methods that they consider
suitable to meet their expansion needs. They divide them into organic means of growth that
comes out of an increase in the bank’s own business activity, and inorganic means that
includes mergers or takeovers.

13
We see from the above graph that amongst organic means of expansion, branch expansion
finds favor with banks while strategic alliances is the most popular inorganic method for

14
banks considering scaling up their operations. On the other hand, new ventures and buyout
portfolios are the least popular methods for bank expansion.

Scope for New Entrants

81.25% also felt that there was further scope for new entrants in the market, in spite of capital
management and human resource constraints, as there continue to remain opportunities in
unbanked areas. With only 30-35% of the population financially included, and the Indian
banking industry unsaturated with CAGR of well above 20%, participants in their survey felt
that the market definitely has scope to accommodate new players.

While there has been prior debate, they questioned banks on NBFCs and Industrial houses
being established as banking institutions and find opinion to be marginally against the notion,
with 35.71% in favour while 42.86% were against them being established as banks.

However, on further questioning, 57.14% of respondents feel that the above may be allowed
but only if it is along with specific regulatory limitations. Banks felt that limitations regarding
track record, ensuring adequate capitalization levels, a tiered license that enables new entrants
to enter into specific areas of the business only after satisfactorily achieving set milestones
for the prior stages, cap on promoter's holdings and wider public holding in addition to a
common banking regulator on a level playing field are essential before they may set
themselves up as banks.

Banking Activities

Over the last three decades, there has been a remarkable increase in the size, spread and scope
of activities of banks in India. The business profile of banks has transformed dramatically to
include non-traditional activities like merchant banking, mutual funds,new financial services
and products and the human resource development.

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Their survey finds that within retail operations, banks rate product development and
differentiation; innovation and customization; cost reduction; cross selling and technological
up gradation as equally important to the growth of their retail operations. Additionally a few
respondents also find pro-active financial inclusion, credit discipline and income growth of
individuals and customer orientation to be significant factors for their retail growth.

There is, at the same time, an urgent need for Indian banks to move beyond retail banking,
and further grow and expand their fee- based operations, which has globally remained one of
the key drivers of growth and profitability. In fact, over 80% of banks in their survey have
only up to 15% of their total incomes constituted by fee- based income; and barely 13% have
20-30% of their total income constituted by fee-based income.

Out of avenues for non-interest income, we see that Banc assurance (85.71%) and FOREX
Management (71.43%) remain most profitable for banks. Derivatives, understandably,
remains the least profitable business opportunity for banks as the market for derivatives is
still in its nascent stage in India.

There is nevertheless a visibly increased focus on fee based sources of income. 71% of banks
in their survey saw an increase in their fee based income as a percentage of their total income
for the FY 2008-09 as compared to FY 2007-08. Indian banks are fast realizing that fee-based
sources of income have to be actively looked at as a basis for future growth, if the industry is
to become a global force to reckon with.

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Financial Inclusion and Expansion of Banking Services

Transition from class banking to mass banking and increased customer focus is drastically
changing the landscape of Indian banking. Expansion of retail banking has a lot of potential
as retail assets are just 22% of the total banking assets and contribution of retail loans to GDP
stands merely at 6% in India vis-à-vis 15% in China and 24% in Thailand. All banks in their
survey weigh Cost effective credit delivery mechanisms (100%) as most important to the
promotion of financial inclusion. This was followed by factors such as identifying needs and
developing relevant financial products (75%), demographic knowledge and strong local
relations (62.5%) and ensuring productive use and adequate returns on credit employed
(43.75%) in decreasing levels of importance. In fact, India has an expanding middle class of
250 to 300 million people in need of varied banking services. While 60% of our population
has access to banks, only 15% of them have loan accounts and an overwhelming 70% of
farmers have no access to formal sources of credit, reflective of immense potential for the
banking system This is mirrored in the fact that while our survey finds no discernible shift in
the lending pattern of banks across Tier 1, Tier 2 and Tier 3 cities over the last two years,
93% Indian Banking System: The Current State & Road Ahead Page | 20 participants still
find rural markets to be to be a profitable avenue, with 53% of respondents finding it
lucrative in spite of it being a difficult market. Cost of accessing markets has been the only
sour note in the overall experience of our respondents in rural markets At the same time,
more than 81.25% of our respondents have a strategy in place to tap rural markets, with the
remainder as yet undecided on their plan of action. Tie ups with micro finance institutions
(MFIs)/SHG and introduction of innovative and customized products are considered most
important to approaching rural markets according to respondents, more so as compared to
internet kiosks, post offices and supply chain management techniques

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Additionally, 81.25% of respondents found branchless banking to be an effective and secure
way of reaching out to rural markets, with mobile, biometric and handheld devices, equally
popular amongst banks. Some respondents also found the Business Correspondents model to
be an untapped model for financial inclusion.
As Indian financial markets mature over time, there is also a need for innovative instruments
to deepen the market further. Suggestions ranged from micro saving and micro insurance
initiatives, Cash deposit machines, warehouse receipts, to prepaid cash cards, derivatives,
interest rate futures and credit default swaps as a means to further the financial inclusion and
expansionary process.

Credit Flow and Industry

India Inc is completely dependent on the Banking System for meeting its funding
requirement. One of the major complaints from the industry has in fact been high lending
rates in spite of massive cuts in policy rates by the RBI. We asked the banks what they felt
were major factors responsible for rigid prime lending rates.

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None of the banks in their survey considered the cap on bank deposit rates to be one of the
causes of inflexible lending rates. Due to long-term maturity, the trend seems to be changing.
However, there are other factors which have led to the stickiness of lending rates such as
wariness of corporate credit risk (33.33%), competition from government small savings
schemes (26.67%). Benchmarking of SME and export loans against PLR (20.00%) on the
other hand, do not seem to have as significant an influence over lending rates according to
banks.
The great Indian industrial engine has nevertheless continued to hum its way through most of
the year long crisis. We asked banks about the sectors that they consider to be most profitable
in the coming years (Fig. 12). All respondents were confident in the infrastructure sector
leading the profitability for the industry, followed by retail loans (73.33%) and others

(Source: Annual survey, February 2010)

(FEDERATION OF INDIAN CHAMBERS OF COMMERCE & INDUSTRY)

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 CHAPTER 3
INDUSTRY ANALYSIS

Competitive Forces Model

(Porter’s Five Force Model)

(2)

Potential Entrants is high as

development financial
institutions as well as private
and Foreign Banks have
entered in a big way

(5) (1) (4)

Organizing power of the Rivalry among existing Bargaining power of buyers

supplier is high. With the new firms has increased with is high as corporate can raise
financial instruments they are liberalization. New products funds easily due to high
asking higher return on the and improved customer Competition.
investments services is the focus.

(3)
The threat of substitute
product is very high like
credit unions and investment
houses. There are other
substitutes as well banks like
mutual funds, stocks,
government securities,
debentures, gold, real estate
etc.

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 1. Rivalry among existing firms
With the process of liberalization, competition among the existing banks has increased.
Each bank is coming up with new products to attract the customers and tailor made Loans
are provided. The quality of services provided by banks has improved drastically.

2. Potential Entrants
Previously the Development Financial Institutions mainly provided project finance
and development activities. But they now entered into retail banking which has resulted
into stiff competition among the exiting players.

3. Threats from Substitutes

Competition from the non-banking financial sector is increasing rapidly. The threat of
substitute product is very high like credit unions and in investment houses. There are other
substitutes as well banks like mutual funds, stocks, government securities, debentures,
gold, real estate etc.

4. Bargaining Power of Buyers

Corporate can raise their funds through primary market or by issue of GDRs, FCCBs. As
a result they have a higher bargaining power. Even in the case of personal finance, the
buyers have a high bargaining power. This is mainly because of competition.

5. Bargaining Power of Suppliers

With the advent of new financial instruments providing a higher rate of returns to
the investors, the investments in deposits is not growing in a phased manner. The
suppliers demand a higher return for the investments.

6. Overall Analysis
The key issue is how banks can leverage their strengths to have a better future. Since the
availability of funds is more and deployment of funds is less, banks should evolve new
products and services to the customers. There should be a rational thinking in sanctioning
Loans, which will bring down the NPAs. As there is a expected revival in the Indian
economy Banks have a major role to play.

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 SWOT Analysis

The banking sector is also taken as a proxy for the economy as a whole. The performance of
bank should therefore, reflect “Trends in the Indian Economy”. Due to the reforms in the
financial sector, banking industry has changed drastically with the opportunities to the work
with, new accounting standards new entrants and information technology. The deregulation
of the interest rate, participation of banks in project financing has changed in the environment
of banks.

The performance of banking industry is done through SWOT Analysis. It mainly helps to
know the strengths and Weakness of the industry and to improve will be known through
converting the opportunities into strengths. It also helps for the competitive environment
among the banks.

a) STRENGTHS

1. Greater securities of Funds

Compared to other investment options banks since its inception has been a better avenue in
terms of securities. Due to satisfactory implementation of RBI’s prudential norms banks have
won public confidence over several years.

2. Banking network

After nationalization, banks have expanded their branches in the country, which has helped
banks build large networks in the rural and urban areas. Private banks allowed to operate but
they mainly concentrate in metropolis.

3. Large Customer Base

This is mainly attributed to the large network of the banking sector. Depositors in rural
areas prefer banks because of the failure of the NBFCs.

4. Low Cost of Capital

Corporate prefers borrowing money from banks because of low cost of capital. Middle
income people who want money for personal financing can look to banks as they offer at very
low rates of interests. Consumer credit forms the major source of financing by banks.

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 b) WEAKNESS

1. Basel Committee

The banks need to comply with the norms of Basel committee but before that it is challenge
for banks to implement the Basel committee standard, which are of international standard.

2. Powerful Unions

Nationalization of banks had a positive outcome in helping the Indian Economy as a whole.
But this had also proved detrimental in the form of strong unions, which have a major
influence in decision-making. They are against automation.

3. Priority Sector Lending

To uplift the society, priority sector lending was brought in during nationalization. This is
good for the economy but banks have failed to manage the asset quality and their intensions
were more towards fulfilling government norms. As a result lending was done for non-
productive purposes.

4. High Non-Performing Assets

Non-Performing Assets (NPAs) have become a matter of concern in the banking industry.
This is because reduced to meet the international standardsof change in the total outstanding
advances, which has to be reduced to meet the international standards.

c) OPPORTUNITIES

1. Universal Banking

Banks have moved along the value chain to provide their customers more products and
services. like home finance, Capital Markets, Bonds etc. Every Indian bank has an
opportunity to become universal bank, which provides every financial service under one roof.

2. Differential Interest Rates

As RBI control over bank reduces, they will have greater flexibility to fix their own interest
rates which depends on the profitability of the banks.

3. High Household Savings

Household savings has been increasing drastically. Investment in financial assets has also
increased. Banks should use this opportunity for raising funds.

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 4. Untapped Foreign Markets

Many Indian banks have not sufficiently penetrated in foreign markets to generate
satisfactory business therefore, it can be concluded clear opportunity exists in such markets.

5. Interest Banking

The advance in information technology has made banking easier. Business can Effectively
carried out through internet banking.

d) THREATS

1. NBFCs, Capital Markets and Mutual funds

There is a huge investment of household savings. The investments in NBFCs deposits,

Capital Market Instruments and Mutual Funds are increasing. Normally these instruments
offer better return to investors.

2. Changes in the Government Policy

The change in the government policy has proved to be a threat to the banking sector. Due to
some major changes in policies related to deposits mobilization credit deployment, interest
rates- the whole scenario of banking industry may change.

3. Inflation

The interest rates go down with a fall in inflation. Thus, the investors will shift his
investments to the other profitable sectors.

4. Recession

Due to the recession in the business cycle the economy functions poorly and this has proved
to be a threat to the banking sector. The market oriented economy and globalization has
resulted into competition for market share. The spread in the banking sector is very narrow.
To meet the competition the banks has to grow at a faster rates and reduce the overheads.
They can introduce the new products and develop the existing services.

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 CHAPTER 4
INTRODUCTION TO AXIS BANK

Axis Bank was the first of the new private banks to have begun operations in 1994, after the
Government of India allowed new private banks to be established. The Bank was promoted
jointly by the Administrator of the specified undertaking of the Unit Trust of India (UTI - I),
Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC)
and other four PSU insurance companies, i.e. National Insurance Company Ltd., The New
India Assurance Company Ltd., The Oriental Insurance Company Ltd. and United India
Insurance Company Ltd.

The Bank today is capitalized to the extent of Rs. 403.63 crores with the public holding (other
than promoters and GDRs) at 53.72%.

The Bank's Registered Office is at Ahmedabad and its Central Office is located at Mumbai.
The Bank has a very wide network of more than 896 branches and Extension Counters (as on
31st December 2009). The Bank has a network of over 4055 ATMs (as on 31st December
2009) providing 24 hrs a day banking convenience to its customers. This is one of the largest
ATM networks in the country.

The Bank has strengths in both retail and corporate banking and is committed to adopting the
best industry practices internationally in order to achieve excellence.

Mission

 Customer service and product innovation tuned to diverse needs of individual and
corporate clientele.

 Continuous technology up gradation while maintaining human values.

 Progressive globalization and achieving international standards.

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Core values

 Customer satisfaction through

• Providing quality service effectively and efficiently

• “smile, it enhances your face value” a service quality stressed on

• Periodic customers service audits

• Maximization of stakeholder value

Business divisions

 Treasury management

Treasury is responsible for the maintenance of the statutory requirements such as the cash
reserve ratio (CRR), statutory liquidity ratio (SLR) and the investment of such funds. It also
manages the assets and liabilities of the bank. Primary dealing activities can be classified into

• Money market operations

• Foreign exchange operations

• Derivatives

 Merchant Banking and capital markets

Axis Bank is a registered merchant Banker. The services offered are:

• Private placement/syndication

• Issue management

26
 • Debenture trustees

• Depository services

• Project advisory services, capital market services, advisory on Mergers & Acquisition

 Retail financial services

All branches have a dedicated financial advisory desk, wherein the mutual fund schemes are
marketed. The objective is to provide customers with a larger portfolio of investment avenues
thereby enhancing customer relationship. Other products handled by the department include
sale of Gold Coins as well as marketing of Depository services.

 Corporate and institutional banking

• Cash management Services

• Business current Accounts

• Correspondent Banking

• Government Business

 Retail Banking

27
Retail banking is one of the key departments in the bank. It has the largest variety in its
portfolio which consists of retail asset and retail liability products. Retail Banking by
definition implies banking services which are offered to individual customers as opposed to
corporate banking which is meant for companies.

 International banking

Major functions include

• Handling regulatory issues which include compliance with regulations of

various authorities such as RBI regulatios, FEMA etc

• Keeping a track of the business volumes being generated by the branches and
controlling the margins

• Maintaining relationship with correspondent Banks outside India

 Advances

The function involves extending fund and non-fund based credit facilities to different clients
in the country, the department aims to maximize the interest spread earned on funds available
with the bank while keeping the risk on the credit portfolio at acceptable limits. The
department also tries to maximize fee-based income from both fund based and non-fund
based activities.

Board of Directors:

Shri N.C. Singhal

Shri J.R. Varma
Dr. R.H. Patil
Smt. Rama Bijapurkar

28
Shri R.B. L. Vaish
Shri M.V. Subbiah
Shri Ramesh Ramanathan
Shri K.N. Prithviraj

29
 CHAPTER 5
INTRODUCTION TO SME

In the Indian context, the small and medium enterprises (SME) sector is broadly a Term used
for small scale industrial (SSI) units and medium-scale industrial units. Any industrial unit
with a total investment in its fixed assets or leased assets or hire-purchase asset of upto Rs 10
million, can be considered as an SSI unit and any investment of upto Rs 100 million can be
Termed as a medium unit. An SSI unit should neither be a subsidiary of any other industrial
unit nor be owned or controlled by any other industrial unit.

An SME is known by different ways across the world. In India, a standard definition surfaced
only in October 2, 2006, when the Ministry of Micro, Small and Medium Enterprises,
Government of India, imposed the Micro, Small and Medium enterprises Development
(MSMED) Act,2006.

This definition, however was changed according to the changing economic scenario and thus
has separate definitions to it. For instance, an SME definition for manufacturing enterprises is
different from what an SME definition for service enterprises has to say.

History

Small and Medium Enterprises or SMEs are vital for the growth and well being of the
country. This sector was recognized and given importance right from independence and is
being encouraged ever since then.

Though, it commenced on a small scale, it gradually gained significance, because it employed

a considerable number of people.

When it started gaining momentum, this sector was defined as an enterprise with investment
in plant and machinery of up to Rs 1 lakh and situated in towns and villages with strength of

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less than 50,000 people. The policy statement put in place special legislation to recognize and
protect self employed people in cottage and home industries. District industries canters
(DICs) were set up and made the focal point of SSI development, bypassing large cities and
state capitals. Also, the government started providing special services akin to product
standardization, quality control and marketing surveys in order to assist the SSIs in enabling
them to market their products in an underdeveloped market.

The scenario for the small-scale sector changed with the Industrial Policy of July 1991,
which, for the first time in India’s development history spoke of liberalization. What this
meant was that medium and large enterprises would no longer need licenses to run. Export-
oriented enterprises could be wholly foreign owned and foreign equity participation was
selectively allowed. Industries could import capital goods with much fewer restrictions.

1996 saw the government involved in the setting up of a higher level committee, known as
the Abid Hussain Committee, to review policies for small industries and recommend
measures to help formulate a strong and innovative policy package for the rapid development
of SMEs. With liberalization, rapid changes were seen in the Indian economy. Indian
companies were no longer insulated from the global economy. In fact, there was an urgent
need to make them, especially SMEs, more competitive and resilient.

In 1991, the growth rate of SSIs was almost three times that of the total industrial sector at
3.1 percent. From 1991 to 1995, the growth rate of SSIs exceeded that of the total industrial
sector. Yet, in 1995-96, the growth rate of SSIs was slightly lower than the total industrial
sector, however it increased again in 1996 and continued to be higher than the total industrial
growth rate till 1999. till 2006, the SME segment saw a lot more development and support
from the government.

Description of SME in the manufacturing sector

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The Term enterprise in the manufacturing context stands for an industrial undertaking or a
business concern involved in the production, processing or preservation of goods for the list
of eligible industries in the First Schedule to the Industries (Development and Regulation
Act), 1951.

For the Manufacturing Sector, the MSMED Act 2006 defines micro, small and medium
enterprises (MSMEs) as mentioned below:
 A micro enterprise is an enterprise where investment in plant and machinery does not
exceed Rs 25 lakh.

 The investment in plant and machinery in a small enterprise is more than Rs 25 lakh,
but does not exceed Rs 5 crore.

 A medium enterprise is one where the investment in plant and machinery is more than
Rs 5 crore, but does not exceed Rs 10 crore.

In all these, the cost excludes that of land, building and the items specified by the Ministry of
Small Scale Industries with its notification No SO 1722 (E) dated October 5, 2006.

SME definition for Service Enterprises

A service sector enterprise is defined as one involved in providing services. The following
points will explain how.
 Small road and water transport operators that can now own a fleet of vehicles not
exceeding ten in number.

 Small business, whose original cost price of equipment used for business, does not
exceed Rs 20 lakh.

 Professional and self-employed persons, whose borrowing limits do not exceed Rs 10

lakh of which not more than Rs 2 lakh should be for working capital requirements

 Professionally qualified medical practitioners setting up a practice in semi urban and

rural areas, whose borrowing limits should not be less than Rs 15 lakh with a sub-
ceiling of Rs 3 lakh for working capital requirements.

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Challenges faced by SME

The challenges being faced by the small and medium sector may be briefly set out as
Follows-

 Small and Medium Enterprises (SME), particularly the tiny segment of the small
enterprises have inadequate access to finance due to lack of financial information and
non-formal business practices. SMEs also lack access to private equity and venture
capital and have a very limited access to secondary market instruments.

 SMEs face fragmented markets in respect of their inputs as well as products and are
vulnerable to market fluctuations.

 SMEs lack easy access to inter-state and international markets.

 The access of SMEs to technology and product innovations is also limited. There is
lack of awareness of global best practices.

 SMEs face considerable delays in the settlement of dues/payment of bills by the large
scale buyers. With the deregulation of the financial sector, the ability of the banks to
service the credit requirements of the SME sector depends on the underlying
transaction costs, efficient recovery processes and available security. There is an
immediate need for the banking sector to focus on credit and SMEs

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 CHAPTER 6
OVERVIEW OF CREDIT APPRAISAL

Credit appraisal means an investigation/assessment done by the banks before providing any
Loans & advances/project finance & also checks the commercial, financial & technical
viability of the project proposed, its funding pattern & further checks the primary & collateral
security cover available for recovery of such funds.

Brief overview of Credit

Credit Appraisal is a process to ascertain the risks associated with the extension of the credit
facility. It is generally carried by the financial institutions, which are involved in providing
financial funding to its customers. Credit risk is a risk related to non-repayment of the credit
obtained by the customer of a bank. Thus it is necessary to appraise the credibility of the
customer in order to mitigate the credit risk. Proper evaluation of the customer is performed
this measures the financial condition and the ability of the customer to repay back the Loan in
future. Generally the credits facilities are extended against the security know as collateral.
But even though the Loans are backed by the collateral, banks are normally interested in the
actual Loan amount to be repaid along with the interest. Thus, the customer's cash flows are
ascertained to ensure the timely payment of principal and the interest.

It is the process of appraising the credit worthiness of a Loan applicant. Factors like age,
income, number of dependents, nature of employment, continuity of employment, repayment
capacity, previous Loans, credit cards, etc. are taken into account while appraising the credit
worthiness of a person. Every bank or lending institution has its own panel of officials for
this purpose.

However the 3 ‘C’ of credit are crucial & relevant to all borrowers/ lending, which must be
kept in mind, at all times.

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  Character

 Capacity
 Collateral
If any one of these are missing in the equation then the lending officer must question the
viability of credit. There is no guarantee to ensure a Loan does not run into problems;
however if proper credit evaluation techniques and monitoring are implemented then
naturally the Loan loss probability / problems will be minimized, which should be the
objective of every lending Officer.

Credit is the provision of resources (such as granting a Loan) by one party to another party
where that second party does not reimburse the first party immediately, thereby generating a
debt, and instead arranges either to repay or return those resources (or material(s) of equal
value) at a later date. The first party is called a creditor, also known as a lender, while the
second party is called a debtor, also known as a borrower.

Credit allows you to buy goods or commodities now, and pay for them later. We use credit to
buy things with an agreement to repay the Loans over a period of time. The most common
way to avail credit is by the use of credit cards. Other credit plans include personal Loans,
home Loans, vehicle Loans, student Loans, small business Loans, trade. A credit is a legal
contract where one party receives resource or wealth from another party and promises to
repay him on a future date along with interest. In simple Terms, a credit is an agreement of
postponed payments of goods bought or Loan. With the issuance of a credit, a debt is formed.

Basic types of credit

There are four basic types of credit. By understanding how each works, you will be able to
get the most for your money and avoid paying unnecessary charges.

Service credit is monthly payments for utilities such as telephone, gas, electricity, and water.
You often have to pay a deposit, and you may pay a late charge if your payment is not on
time.

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Loans let you borrow cash. Loans can be for small or large amounts and for a few days or
several years. Money can be repaid in one lump sum or in several regular payments until the
amount you borrowed and the finance charges are paid in full. Loans can be secured or
unsecured.

Installment credit may be described as buying on time, financing through the store or the
easy payment plan. The borrower takes the goods home in exchange for a promise to pay
later. Cars, major appliances, and furniture are often purchased this way. You usually sign a
contract, make a down payment, and agree to pay the balance with a specified number of
equal payments called installments. The finance charges are included in the payments. The
item you purchase may be used as security for the Loan.

Credit cards are issued by individual retail stores, banks, or businesses. Using a credit card
can be the equivalent of an interest-free Loan- end of each month.-if you pay for the use of it
in full at the

Brief overview of Loans

Loans can be of two types fund base & non-fund base:

 Fund Base includes:

• Working Capital
• Term Loan

 Non-fund Base includes:

• Letter of Credit
• Bank Guarantee
• Bill Discounting

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  Fund Base:

• Working capital

The objective of running any industry is earning profits. An industry will require funds to
acquire “fixed assets” like land, building, plant, machinery, equipments, vehicles, tools etc.,
& also to run the business i.e. its day-to-day operations.

Funds required for day to-day working will be to finance production & sales. For production,
funds are needed for purchase of raw materials/ stores/ fuel, for employment of labor, for
power charges etc. financing the sales by way of sundry debtors/ receivables.

Capital or funds required for an industry can therefore be bifurcated as fixed capital &
working capital. Working capital in this context is the excess of current assets over current
liabilities. The excess of current assets over current liabilities is treated as net, for storing
finishing goods till they are sold out & for working capital or liquid surplus & represents that
portion of the working capital, which has been provided from the long-Term source.

• Term Loan
A Term Loan is granted for a fixed Term of not less than 3 years intended normally for
financing fixed assets acquired with a repayment schedule normally not exceeding 8 years.

A Term Loan is a Loan granted for the purpose of capital assets, such as purchase of land,
construction of, buildings, purchase of machinery, modernization, renovation or
rationalization of plant, & repayable from out of the future earning of the enterprise, in
installments, as per a prearranged schedule.
From the above definition, the following differences between a Term Loan & the working
capital credit afforded by the Bank are apparent:

o The purpose of the Term Loan is for acquisition of capital assets.

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 o The Term Loan is an advance not repayable on demand but only in installments
ranging over a period of years.
o The repayment of Term Loan is not out of sale proceeds of the goods & commodities
per se, whether given as security or not. The repayment should come out of the future
cash accruals from the activity of the unit.
o The security is not the readily saleable goods & commodities but the fixed assets of
the units.

It may thus be observed that the scope & operation of the Term Loans are entirely different
from those of the conventional working capital advances. The Bank’s commitment is for a
long period & the risk involved is greater. An element of risk is inherent in any type of Loan
because of the uncertainty of the repayment. Longer the duration of the credit, greater is the
attendant uncertainty of repayment & consequently the risk involved also becomes greater.

However, it may be observed that Term Loans are not so lacking in liquidity as they appear
to be. These Loans are subject to a definite repayment programme unlike short Term Loans
for working capital (especially the cash credits) which are being renewed year after year.
Term Loans would be repaid in a regular way from the anticipated income of the industry/
trade.

These distinctive characteristics of Term Loans distinguish them from the short Term credit
granted by the banks & it becomes necessary therefore, to adopt a different approach in
examining the applications of borrowers for such credit & for appraising such proposals.

The repayment of a Term Loan depends on the future income of the borrowing unit. Hence,
the primary task of the bank before granting Term Loans is to assure itself that the anticipated
income from the unit would provide the necessary amount for the repayment of the Loan.
This will involve a detailed scrutiny of the scheme, its capital assets. Financial aspects,
economic aspects, technical aspects, a projection of future trends of outputs & sales &
estimates of cost, returns, flow of funds & profits.

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  Non-fund Base:
• Letter of credit
The expectation of the seller of any goods or services is that he should get the payment
immediately on delivery of the same. This may not materialize if the seller & the buyer are at
different places (either within the same country or in different countries). The seller desires to
have an assurance for payment by the purchaser. At the same time the purchaser desires that
the amount should be paid only when the goods are actually received. Here arises the need of
Letter of Credit (LCs). The objective of LC is to provide a means of payment to the seller &
the delivery of goods & services to the buyer at the same time.

Definition
A Letter of Credit (LC) is an arrangement whereby a bank (the issuing bank) acting at the
request & on the instructions of the customer (the applicant) or on its own behalf,

o Is to make a payment to or to the order of a third party (the beneficiary), or is to

accept & pay bills of exchange (drafts drawn by the beneficiary); or
o Authorizes another bank to effect such payment, or to accept & pay such bills of
exchanges (drafts); or
o Authorizes another bank to negotiate the Terms & conditions of the credit are
complied with. against stipulated document(s), provided that

• Bank Guarantees:
A contract of guarantee is defined as ‘a contract to perform the promise or discharge the
liability of the third person in case of the default’. The parties to the contract of guarantees
are:
a) Applicant: The principal debtor – person at whose request the guarantee is executed
b) Beneficiary: Person to whom the guarantee is given & who can enforce it in case of
default.
c) Guarantee: The person who undertakes to discharge the obligations of the applicant
in case of his default.

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Thus, guarantee is a collateral contract, consequential to a main co applicant & the
beneficiary.

Purpose of Bank Guarantees

Bank Guarantees are used to for both both preventive & remedial purposes. The guarantees
executed by banks comprise both performance guarantees & financial guarantees. The
guarantees are structured according to the Terms of agreement, viz., security, maturity &
purpose.

Branches may issue guarantees generally for the following purposes:

a) In lieu of security deposit/earnest money deposit for participating in tenders;
b) Mobilization advance or advance money before commencement of the project by the
contractor & for money to be received in various stages like plant layout,
design/drawings in project finance;
c) In respect of raw materials supplies or for advances by the buyers;
d) In respect of due performance of specific contracts by the borrowers & for obtaining
full payment of the bills;
e) Performance guarantee for warranty period on completion of contract which would
enable the suppliers to period to be over; realize the proceeds without waiting for
warranty) To allow units to draw funds from time to time from the concerned
indenters against part execution of contracts, etc.
f) Bid bonds on behalf of exporters
g) Export performance guarantees on behalf of exporters favoring the Customs
Department under EPCG scheme.

• Bill discounting:

Definition:
As per Negotiable Instrument Act, “The bill of exchange is an instrument in writing
containing an unconditional order, signed by the maker, directing a certain person to pay a
certain sum of money only to, or to the order of, a certain person, or to the bearer of that
instrument.”

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Discounting of bill of exchange:
A seller (Drawer) if need cash, may handover the B/E to the Bank, NBFC, a company or a
high Net worth Individual and obtain ready cash this is known as discounting of bill. the
practice in India is that, the financing organization holds the original B/E till the drawee pays
on maturity. For discounting the bill, financiers charge an interest on the bill amount for the
duration of the bill which is called discount charges.normal maturity periods are 30, 60, 90,
120 days.

Types of Bills
1. Demand Bill
2. Usance Bill
3. Documentary Bills
a. Documents against acceptance (D/A) bills
b. Documents against payment (D/P) bills
4. Clean Bills

Advantages
o To Investors
1. Short Term source of finance
2. Outside the purview of Section 370 of Indian Companies Act 1956
3. No tax deducted at source
4. Flexibility

o To Banks
1. Safety of funds
2. Certainty of payment
3. Profitability

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 Credit Appraisal Process

Receipt of application from applicant

Receipt of documents
(Balance sheet, KYC papers, Different govt. registration no., MOA, AOA, and
properties documents

Pre-sanction visit by bank officers

Check for RBI defaulters list, willful defaulters list, CIBIL data, ECGC, Caution list
etc

Title clearance reports of the properties to be obtained from empanelled

Advocates

Valuation reports of the properties to be obtained from empanelled valuer/engineers

Preparation of financial data

Proposal preparation

Assessment of proposal

Sanction/approval of proposal by appropriate sanctioning authority

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 Documentations, agreements, mortgages

Disbursement of Loan

Post sanction activities such as receiving stock statements, review of accounts, renew
of accounts, etc
(On regular basis)

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 Loan administration pre- sanction process
Appraisal, Assessment and Sanction functions

1. Appraisal

A. Preliminary appraisal

 Sound credit appraisal involves analysis of the viability of operations of a business and
the capacity of the promoters to run it profitably and repay the bank the dues as and when
they fall

 Towards this end the preliminary appraisal will examine the following aspects of a
proposal.

• Bank’s lending policy and other relevant guidelines/RBI guidelines,

• Prudential Exposure norms,
• Industry Exposure restrictions,
• Group Exposure restrictions,
• Industry related risk factors,
• Credit risk rating,
• Profile of the promoters/senior management personnel of the project,
• List of defaulters,
• Caution lists,
• Acceptability of the promoters,
• Compliance regarding transfer of borrower accounts from one bank to another, if
applicable;
• Government regulations/legislation impacting on the industry; e.g., ban on financing
of industries producing/ consuming Ozone depleting substances;
• Applicant’s status vis-à-vis other units in the industry,
• Financial status in broad Terms and whether it is acceptable The Company’s
Memorandum and Articles of Association should be scrutinized carefully to ensure (i)
that there are no clauses prejudicial to the Bank’s interests, (ii) no limitations have

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 been placed on the Company’s borrowing powers and operations and (iii) the scope of
activity of the company.

 Further, if the proposal is to finance a project, the following aspects have to be examined:

• Whether project cost is prima facie acceptable

• Debt/equity gearing proposed and whether acceptable
• Promoters’ ability to access capital market for debt/equity support
• Whether critical aspects of project - demand, cost of production, profitability, etc. are
prima facie in order

 Required Documents for Process of Loan

a) Application for requirement of loan
b) Copy of Memorandum & Article of Association
c) Copy of incorporation of business
d) Copy of commencement of business
e) Copy of resolution regarding the requirement of credit facilities
f) Brief history of company, its customers & supplies, previous track records, orders In
hand. Also provide some information about the directors of the company
g) Financial statements of last 3 years including the provisional financial statement for
the year 2007-08
h) Copy of PAN/TAN number of company
i) Copy of last Electricity bill of company
j) Copy of GST/CST number
k) Copy of Excise number
l) Photo I.D. of all the directors
m) Address proof of all the directors
n) Copies related to the property such as 7/12 & 8A utara, lease/ sales deed, 2R
Permission, Allotment letter, Possession
o) Bio-data form of all the directors duly filled & notarized
p) Financial statements of associate concern for the last 3 years

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 After undertaking the above preliminary examination of the proposal, the branch will
arrive at a decision whether to support the request or not. If the branch (a reference to the
branch includes a reference to SECC/CPC etc. as the case may be) finds the proposal
acceptable, it will call for from the applicant(s), a comprehensive application in the
prescribed proforma, along with a copy of the proposal/project report, covering specific
credit requirement of the company and other essential data/ information. The information,
among other things, should include:

• Organizational set up with a list of Board of Directors and indicating the

qualifications, experience and competence of the key personnel in charge of the main
functional areas
• e.g., purchase, production, marketing and finance; in other words a brief on the
managerial resources and whether these are compatible with the size and scope of the
proposed activity.
• Demand and supply projections based on the overall market prospects together with a
copy of the market survey report. The report may comment on the geographic spread
of the market where the unit proposes to operate, demand and supply gap, the
competitors’ share, competitive advantage of the applicant, proposed marketing
arrangement, etc.
• Current practices for the particular product/service especially relating to Terms of
credit sales, probability of bad debts, etc.
• Estimates of sales cost of production and profitability.
• Projected profit and loss account and balance sheet for the operating years during the
• Currency of the Bank assistance.
• If request includes financing of project(s), branch should obtain additionally
a) Appraisal report from any other bank/financial institution in case appraisal has been
done by them.
b) ‘No Objection Certificate’ from Term lenders if already financed by them and
c) Report from Merchant bankers in case the company plans to access capital market,
wherever necessary.

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 In respect of existing concerns, in addition to the above, particulars regarding the history
of the concern, its past performance, present financial position, etc. should also be called
for. This data/information should be supplemented by the supporting statements
Such as:
a) Audited profit loss account and balance sheet for the past three years (if the latest
audited balance sheet is more than 6 months old, a pro-forma balance sheet as on a
recent date should be obtained and analysed). For non-corporate borrowers,
irrespective of market segment, enjoying credit limits of Rs.10 lacs and above from
the banking system, audited balance sheet in the IBA approved formats should be
submitted by the borrowers.
b) Details of existing borrowing arrangements, if any,
c) Credit information reports from the existing bankers on the applicant Company, and
d) Financial statements and borrowing relationship of Associate firms/Group
Companies.

B. Detailed Appraisal

 The viability of a project is examined to ascertain that the company would have the
ability to service its Loan and interest obligations out of cash accruals from the
business. While appraising a project or a Loan proposal, all the data/information
furnished by the borrower should be counter checked and, wherever possible, inter-
firm and inter-industry comparisons should be made to establish their veracity.

 The financial analysis carried out on the basis of the company’s audited balance
sheets and profit and loss accounts for the last three years should help to establish the
current viability.

 In addition to the financials, the following aspects should also be examined:

• The method of depreciation followed by the company-whether the company is

following straight line method or written down value method and whether the
company has changed the method of depreciation in the past and, if so, the reason
therefore;

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 • Whether the company has revalued any of its fixed assets any time in the past and the
present status of the revaluation reserve, if any created for the purpose;
• Record of major defaults, if any, in repayment in the past and history of past sickness,
• If any;
• The position regarding the company’s tax assessment - whether the provisions made
in the balance sheets are adequate to take care of the company’s tax liabilities;
• The nature and purpose of the contingent liabilities, together with comments thereon;
• Pending suits by or against the company and their financial implications (e.g. cases
relating to customs and excise, sales tax, etc.);
• Qualifications/adverse remarks, if any, made by the statutory auditors on the
company’s accounts;
• Dividend policy;
• Apart from financial ratios, other ratios relevant to the project;
• Trends in sales and profitability, past deviations in sales and profit projections, and
estimates/projections of sales values;
• Production capacity & use: past and projected;
o Estimated requirement of working capital finance with reference to acceptable
build up of inventory/ receivables/ other current assets;
• Projected levels: whether acceptable; and
• Compliance with lending norms and other mandatory guidelines as applicable

 Project financing:
If the proposal involves financing a new project, the commercial, economic and
Financial viability and other aspects are to be examined as indicated below:

• Statutory clearances from various Government Depts. / Agencies

• Licenses/permits/approvals/clearances/NOCs/Collaboration agreements, as applicable
• Details of sourcing of energy requirements, power, fuel etc.
• Pollution control clearance
• Cost of project and source of finance

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• Build-up of fixed assets (requirement of funds for investments in fixed assets to be
critically examined with regard to production factors, improvement in quality of
products, economies of scale etc.)
• Arrangements proposed for raising debt and equity
• Capital structure (position of Authorized, Issued/ Paid-up Capital, Redeemable
Preference Shares, etc.)
• Debt component i.e., debentures, Term Loans, deferred payment facilities, unsecured
Loans/ deposits. All unsecured Loans/ deposits raised by the company for financing a
project should be subordinate to the Term Loans of the banks/ financial institutions
and should be permitted to be repaid only with the prior approval of all the banks and
the financial institutions concerned. Where central or state sales tax Loan or
developmental Loan is taken as source of financing the project, furnish details of the
Terms and conditions governing the Loan like the rate of interest (if applicable), the
manner of repayment, etc.
• Feasibility of arrangements to access capital market
• Feasibility of the projections/ estimates of sales, cost of production and profits
covering the period of repayment
• Break Even Point in Terms of sales value and percentage of installed capacity under a
Normal production year
• Cash flows and fund flows
• Proposed amortization schedule
• Whether profitability is adequate to meet stipulated repayments with reference to
Debt Service Coverage Ratio, Return on Investment
• Industry profile & prospects
• Critical factors of the industry and whether the assessment of these and management
plans in this regard are acceptable
• Technical feasibility with reference to report of technical consultants, if available
• Management quality, competence, track record
• Company’s structure & systems
• Applicant’s strength on inter-firm comparisons

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For the purpose of inter-firm comparison and other information, where necessary, source data
from Stock Exchange Directory, financial journals/ publications, professional entities like
CRIS-INFAC, CMIE, etc. with emphasis on following aspects:

o Market share of the units under comparison

o Unique features
o Profitability factors
o Financing pattern of the business
o Inventory/Receivable levels
o Capacity utilization
o Production efficiency and costs
o Bank borrowings patterns
o Financial ratios & other relevant ratios
o Capital Market Perceptions
o Current price
o 52week high and low of the share price
o P/E ratio or P/E Multiple
o Yield (%)- half yearly and yearly

Also examine and comment on the status of approvals from other Term lenders, market view
(if anything adverse), and project implementation schedule. A pre-sanction inspection of the
project site or the factory should be carried out in the case of existing units. To ensure a
higher degree of commitment from the promoters, the portion of the equity / Loans which is
proposed to be brought in by the promoters, their family members, friends and relatives will
have to be brought upfront. However, relaxation in this regard may be considered on a case to
case basis for genuine and acceptable reasons. Under such circumstances, the promoter
should furnish a definite plan indicating clearly the sources for meeting his contribution. The
balance amount proposed to be raised from other sources, viz., debentures, public equity etc.,
should also be fully tied up.

C. Present relationship with Bank:

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 • Compile for existing customers, profile of present exposures:
• Credit facilities now granted
• Conduct of the existing account
• Utilization of limits - FB & NFB
• Occurrence of irregularities, if any
• Frequency of irregularity i.e., number of times and total number of days the account
was irregular during the last twelve months
• Repayment of Term commitments
• Compliance with requirements regarding submission of stock statements, Financial
• Follow-up Reports, renewal data, etc.
• Stock turnover, realization of book debts
• Value of account with break-up of income earned
• Pro-rata share of non-fund and foreign exchange business
• Concessions extended and value thereof
• Compliance with other Terms and conditions
• Action taken on Comments/observations contained in RBI Inspection Reports: CO
Inspection & Audit Reports

D. Credit risk rating: Draw up rating for (i) Working Capital and (ii) Term Finance.

E. Opinion Reports: Compile opinion reports on the company, partners/ promoters and
The proposed guarantors.

F. Existing charges on assets of the unit: If a company, report on search of charges with
ROC.

G. Structure of facilities and Terms of Sanction:

Fix Terms and conditions for exposures proposed - facility wise and overall:
• Limit for each facility – sub-limits
• Security - Primary & Collateral, Guarantee
• Margins - For each facility as applicable
• Rate of interest

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 • Rate of commission/exchange/other fees
• Concessional facilities and value thereof
• Repayment Terms, where applicable
• ECGC cover where applicable
• Other standard covenants

H. Review of the proposal:

Review of the proposal should be done covering (i) strengths and weaknesses of the exposure
proposed (ii) risk factors and steps proposed to mitigate them
(ii) Deviations, if any, proposed from usual norms of the Bank and the reasons therefore

I. Proposal for sanction:

Prepare a draft proposal in prescribed format with required backup details and with
recommendations for sanction.

J. Assistance to Assessment:
Interact with the assessor, provide additional inputs arising from the assessment, incorporate
these and required modifications in the draft proposal and generate an integrated final
proposal for sanction.

2. Assessment:
Indicative List of Activities Involved in Assessment Function is given below:

• Review the draft proposal together with the back-up details/notes, and the borrower’s
application, financial statements and other reports/documents examined by the
appraiser.
• Interact with the borrower and the appraiser.
• Carry out pre-sanction visit to the applicant company and their project/factory site.
• Peruse the financial analysis (Balance Sheet/ Operating Statement/ Ratio Analysis/
• Fund Flow Statement/ Working Capital assessment/Project cost & sources/ Break
Even analysis/Debt Service/Security Cover, etc.) to see if this is prima facie in order.

52
 If any deficiencies are seen, arrange with the appraiser for the analysis on the correct
lines.
• Examine critically the following aspects of the proposed exposure.

o Bank’s lending policy and other guidelines issued by the Bank from time to time
o RBI guidelines
o Background of promoters/ senior management
o Inter-firm comparison
o Technology in use in the company
o Market conditions
o Projected performance of the borrower vis-à-vis past estimates and performance
o Viability of the project
o Strengths and Weaknesses of the borrower entity.
o Proposed structure of facilities.
o Adequacy/ correctness of limits/ sub limits, margins, moratorium and repayment
schedule
o Adequacy of proposed security cover o Credit risk rating
o Pricing and other charges and concessions, if any, proposed for the facilities
o Risk factors of the proposal and steps proposed to mitigate the risk
o Deviations proposed from the norms of the Bank and justifications therefor

• To the extent the inputs/comments are inadequate or require modification, arrange for
additional inputs/ modifications to be incorporated in the proposal, with any required
modification to the initial recommendation by the Appraiser
• Arrange with the Appraiser to draw up the proposal in the final form.
• Recommendation for sanction: Recapitulate briefly the conclusions of the appraisal
and state whether the proposal is economically viable. Recount briefly the value of the
company’s (and the Group’s) connections. State whether, all considered, the proposal
is a fair banking risk. Finally, give recommendations for grant of the requisite fund-
based and non-fund based credit facilities.

53
3. Sanction:
Indicative list of activities involved in the sanction function is given below:

 Peruse the proposal to see if the report prima facie presents the proposal in a
comprehensive manner as required. If any critical information is not provided in the
proposal, remit it back to the Assessor for supply of the required data/clarifications.

 Examine critically the following aspects of the proposed exposure in the light of
corresponding instructions in force:
• Bank’s lending policy and other relevant guidelines
• RBI guidelines
• Borrower’s status in the industry
• Industry prospects
• Experience of the Bank with other units in similar industry
• Overall strength of the borrower
• Projected level of operations
• Risk factors critical to the exposure and adequacy of safeguards proposed
• There against
Value of the existing connection with the borrower
• Credit risk rating
• Security, pricing, charges and concessions proposed for the exposure and covenants
o Stipulated vis-à-vis the risk perception.

 Accord sanction of the proposal on the Terms proposed or by stipulating modified or

additional conditions/ safeguards, or Defer decision on the proposal and return it for
additional data/clarifications, or Reject the proposal, if it is not acceptable, setting out
the reasons.

Loan administration - Post sanction Credit process

.

54
Need

Lending decisions are made on sound appraisal and assessment of credit worthiness.
Past record of satisfactory performance and integrity are no guarantee for future
though they serve as a useful guide to project the trend in performance. Credit
assessment is made based on promises and projections. A loan granted on the basis of
sound appraisal may go bad because the borrower did not carry out his promises
regarding performance. It is for this reason that proper follow up and supervision is
essential. A banker cannot take solace in sufficiency of security for his loans. He has
to -
a) Make a proper selection of borrower
b) Ensure compliance with terms and conditions
c) Monitor performance to check continued viability of operations
d) Ensure end use of funds.
e) Ultimately ensure safety of funds lent.

Stages of post sanction process

The post-sanction credit process can be broadly classified into three stages viz., follow-up,
supervision and monitoring, which together facilitate efficient and effective credit
management and maintaining high level of standard assets. The objectives of the three stages
of post sanction process are detailed below.

Types of Lending Arrangements

55
Introduction
Business entities can have various types of borrowing arrangements. They are
 One Borrower – One Bank
 One Borrower – Several Banks (with consortium arrangement)
 One Borrower – Several Banks (without consortium arrangements – Multiple
 Banking
 One Borrower – Several Banks (Loan Syndication)

 One Bank
The most familiar amongst the above for smaller loans is the One Borrower-One Bank
arrangement where the borrower confines all his financial dealings with only one bank.

Sometimes, units would prefer to have banking arrangements with more than one bank on
account of the large financial requirement or the resource constraint of his own banker or due
to varying terms & conditions offered by different banks or for sheer administrative
convenience. The advantages to the bank in a multiple banking arrangement/ consortium
arrangement are that the exposure to an individual customer is limited & risk is proportionate.
The bank is also able to spread its portfolio. In the case of borrowing business entity, it is able
to meet its funds requirement without being constrained by the limited resource of its own
banker. Besides this, consortium arrangement enables participating banks to save manpower
& resources through common appraisal & inspection & sharing credit information.
The various arrangements under borrowings from more than one bank will differ on account
of terms & conditions, method of appraisal, coordination, documentation & supervision &
control.

 Consortium Lending
When one borrower avails loans from several banks under an arrangement among all the
lending bankers, this leads to a consortium lending arrangements. In consortium lending,
several banks pool banking recourses & expertise in credit management together & finance a
single borrower with a common appraisal, common documentation & joint supervision &
follow up. The borrower enjoys the advantage similar to single window availing of credit

56
facilities from several banks. The arrangement continues until any one of the bank moves out
of the consortium. The bank taking the highest share of the credit will usually be the leader of
consortium. There is no ceiling on the number of banks in a consortium.

 Multiple Banking Arrangement

Multiple Banking Arrangement is one where the rules of consortium do not apply & no inter
se agreement among banks exists. The borrower avails credit facility from various banks
providing separate securities on different terms & conditions. There is no such arrangement
called ‘Multiple Banking Arrangement’ & the term is used only to denote the existence of
banking arrangement with more than one bank. Banking Arrangement has come to stay as it
has some advantages for the borrower & the banks have the freedom to price their credit
products & non-fund based facility according to their commercial judgment. Consortium
arrangement occasioned delays in credit decisions & the borrower has found his way around
this difficulty by the multiple banking arrangement. Additionally, when units were not doing
well, consensus was rarely prevalent among the consortium members. If one bank wanted to
call up the advance & protect the security, another bank was interested in continuing the
facility on account of group considerations.

Points to be noted in case of multiple banking arrangements

• Though no formal arrangement exists among the financing banks, it is preferable to
have informal exchange of information to ensure financial discipline
• Charges on the security given to the bank should be created with utmost care to guard
against dilution in our security offered & to avoid double financing
• Certificates on the outstanding with the other banks should be obtained on the
periodical basis & also verified from the Balance sheet of the unit to avoid excess
financing

 Credit Syndication
A syndicated credit is an agreement between two or more lending institutions to provide a
borrower a credit facility using common loan documentation. It is a convenient mode of
raising long-term funds.

57
The borrower mandates a lead manager of his choice to arrange a loan for him. The mandate
spells out the terms of the loan & the mandated bank’s rights & responsibilities.
The mandated banker – the lead manger – prepares an information memorandum &
Circulates among prospective lender banks soliciting their participation in the loan. On the
basis of the memorandum & on their own independent economic & financial evolution the
leading banks take a view on the proposal. The mandated bank convenes the meeting to
discuss the syndication strategy relating to coordination, communication & control within the
syndication process & finalizes deal timing, management fees, cost of credit etc. The loan
agreement is signed by all the participating banks. The borrower is required to give prior
notice to the lead manger about loan drawal to enable him to tie up disbursements with the
other lending banks.

Features of syndicated loans

• Arranger brings together group of banks
• Borrower is not required to have interface with participating banks, thus easy & hassle
fee
• Large loans can be raised through syndication by accessing global markets
• For the borrower, the competition among the lenders leads to finer terms
• Risk is shared
• Small banks can also have access to large ticket loans & top class credit appraisal
• & management

Advantages
• Strict, time-bound delivery schedule & drawals
• Streamlined process of documentation with clearly laid down roles & responsibilities
• Market driven pricing linked to the risk perception
• Competitive pricing but scope for fee-based income is also available
• Syndicated portions can be sold to another bank, if required
• Fixed repayment schedule & strict monitoring of default by markets which punish
indiscipline

58
 CHAPTER 7
CREDIT APPRAISAL MODEL AT AXIS BANK

Credit to SME Sector

AXIS bank provides credit to SME sector under following Schemes

 SME – Schematic (Fast Track)

It includes structured products basically to provide fast services to clients. It includes various
products like:

• Mpower OD and Mpower Term Loan

• Business Loan for Property
• Power Rent
• Power Trade
• Zero Collateral Loans (ZCL) to MSE under CGS
• Card Power
• Enterprise Power
• Business Power

• Mpower OD and Mpower Term Loan:

The product aims at to provide both Working capital and Term finance
requirements of a trade enterprise. The facility is in the form of a Cash Credit (for
Working Capital requirements) and Term Loan (Financing Capital expenditure).
The facility is secured by hypothecation of Working Capital assets and further
collateralized by charge over an immovable property/ financial asset. Non-Fund
based facilities can also be granted under the product. The maximum Loan
amount under the product is Rs. 2.50 Crs.

• Business Loan for Property:

59
The product is aimed at providing finance to business enterprises for acquition of
an immovable property. The facility is in the form of a Term Loan repayable by
EMIs. The maximum Loan amount under the product is Rs. 5 crores.

• Power Rent:
The product generally known in market parlance as “Lease Rental Discounting” is
aimed at providing a Term Loan to owners of properties against their lease rental
receivables. The Loan amount is assessed on the basis of the net present value of
the rental receivables over the lease period (after deducting margin and taxes).
The lease rentals are hypothecated in bank’s favor and the Loan is further
collateralized by charge over the property. The product specifies a minimum-
security coverage of 1.5 times. Maximum Loan amount under the product is Rs.
20 crores.

• Power Trade:
The product aims to provide both working capital and Term finance requirements
of a trade enterprise. The facility is in the form of a cash credit (for working
capital requirements) and Term Loan (financing capital expenditure). The facility
is secured by hypothecation of working capital assets and further collateralized by
charge over an immovable property/ financial asset. Non- fund based facilities can
also be granted under the product. The maximum Loan amount under the product
is Rs. 2.5 crores.

• Zero Collateral Loans (ZCL) to MSE under CGS:

This product facilitates the MSEs and software/IT related services to avail both
working capital and term finance from bank. The facility is secured by guarantee
cover of credit guarantee fund trust for micro and small enterprises (CGTMSE)
and there is no collateral security to be taken in such cases. Maximum loan
amount under the product is Rs. 1.00 crore.

• Card Power:
This is a scheme for financing credit/debit card receivables of units installing pour
EDC machines. Both demand loan & term loan facilities are offered to the

60
 borrowers, subject to a maximum of Rs. 2.5 crores. All trading/ retailing activities
(with a few exceptions like liquor, tobacco, seasonal business etc.), where credit/
debit cards are used are eligible for the loans.

• Enterprise Power:
This product has been developed to meet the credit needs of the Micro and small
enterprises covering both manufacturing and the service sectors. The facilities
offered include CC Rupee export credit; pre & post shipment credit & non-fund
based facilities like LC & BG. The maximum limit is restricted to Rs. 1.00 Crore.

• Busness Power:
Business Power is an unsecured Term Loan (Maximum loan amount under the
product is Rs. 35 lacs) to be repaid by way of EMI’s over a maximum period of 4
years.

 SME- Non Schematic (Standard)

For a business on the growth phase with a wide range of opportunities to explore, timely
availability of credit is an integral ingredient needed to scale new heights. Axis Bank
understands this and endeavor to be not just a bank but also financing partner, so that
focus on business needs becomes possible whereas Bank cater to meet financing needs.
Their services ranging from Funded to Non-Funded, from Short Term to Long Term and
from Credit to Trade Services ensures to get finance the way it is best suited for business.

Services:
• Cash Credit
• Working Capital Demand Loan
• Export Finance
• Short Term Loan
• Term Loan
• Clean Bill Discounting
• LC Backed Bill Discounting
• Co-Acceptance of Bills

61
 • Credit Facilities against Guarantee or Stand By Letter of Credit
issued by Foreign Banks
• Letter of Credit
• Bank Guarantee
• Solvency Certificates

• Cash Credit:
Bank offer Cash Credit facilities to meet day-to-day working capital needs. Cash
Credit is provided against the primary security of stock, debtors, other current
assets, etc., and/or collateral security of movable fixed assets, immovable
property, personal or corporate guarantee, etc. Interest is charged not on the
sanctioned amount but on the utilized amount

• Working Capital Demand Loan:

Bank also provides working capital facilities in the form of Working Capital
Demand Loan instead of cash credit facility. The primary or collateral security
will be as mentioned in cash credit facility. Here also interest is levied on the
amount drawn rather than on the amount utilized.

• Export Finance:
Bank provides finance for export activities in the form of Pre-Shipment Credit
against firm order and or Letter of Credit and Post shipment credit. Credit is
available for procuring raw materials, manufacturing the goods, processing and
packaging the goods and shipping the goods. Finance is provided in Indian or
foreign currency depending upon the need of the borrower.

• Short Term Loan:

Bank provides Working Capital facilities to meet day-to-day working capital
needs and Term Loan for capex. However there may be occasions where there is
need of ad hoc or short-Term finance for general corporate purposes, meeting
temporary mismatches in working capital or for meeting contingent expenses. In
such situations it provides Short Term Loans for tenure up to a year to ensure that

62
 business runs smoothly.

• Term Loan:
When there is need of long-Term funds for capex or capacity expansions or plant
modernization and so on. Keeping these requirements in mind Bank provides
Term Loans up to acceptable tenor with suitable moratorium, if required, and
repayment options structured on the basis of customer’s estimated cash flows.
These Loans are primarily secured by a first charge on the fixed assets acquired
through the Loan amount. Suitable collateral security is also taken whenever
required.

• Clean Bill Discounting:

Bank provides clean bill discounting facilities to fund receivables. Bank discount
bills or receivables and provide credit against that. This facility is provided for a
period of 3-6 months depending upon the tenor of the bill.

• LC Backed Bill Discounting:

Bank discount trade bills drawn under Letters of Credit issued by reputed banks
to fund receivables. This facility is provided for a period of 3-6 months
depending upon the tenor of the bill or Letter of Credit.

• Co-Acceptance of Bills:
Bank also provides co-acceptance of trade bills depending upon the need of the
borrower.

• Credit Facilities against Guarantee or Stand By Letter of Credit issued by

Foreign Banks:
Various foreign companies set up subsidiary in India. Bank provides funding to
such companies against guarantees or SBLCs of acceptable foreign banks.

• Letter of Credit:
Apart from fund based working capital facilities Bank provides a range of Non-

63
 Fund Based facilities such as Letter of credit, Bank Guarantees, Solvency
certificates, etc. Letter of Credit is provided to meet trade purchases. These are
generally provided for 3-6 months depending upon Trade cycle. Apart from this it
provides Import Letter of Credit for importing machinery or capital goods. Such
LCs are for tenure ranging from 1-3 years depending upon the need of the
borrower.

• Bank Guarantee:
Bank provides Bank Guarantee on behalf of its client to various other entities
such as Government, quasi govt bodies, corporate and so on. it provides a range
of guarantee such as Performance guarantee, financial guarantee, EPCG etc. The
tenure of Bank Guarantee range from 1 year to 10 years depending upon the
purpose of the guarantee.

• Solvency Certificates:
Bank also provides solvency certificate depending upon the need of the borrower.

Sanctioning powers for schematic Loans under MSME

and Mid Corporate

In order to have better control over the portfolio, it is felt that the budget for schematic
advances should be allotted only to select branches, where the potential and manpower
support exist for such business.

Accordingly, the budget for FY 08 has been restricted to select branches, to be decided by
Advances Cells. The Branch Heads of branches located at centers where Advances Cells have
been set up will not have any sanctioning powers. Branch Heads of stand-alone branches
where budgets have been allocated will have sanctioning powers as per delegation of powers
given below. The Branch Heads of other stand-alone branches where budgets have not been
allocated will not have any sanctioning powers. These branches would, however, continue to
source business and such proposals would be processed / sanctioned at the respective

64
 Advances Cells. Review / renewal of existing Loans at such branches would also be done at
the Advances Cells.

Branches would continue to be responsible for all post sanction formalities, maintaining
quality of assets held in their books, periodic updating of drawing power, obtention of stock
statements and periodical inspection of borrowal units.

The sanctioning powers, to be exercised by various officials would be as under.

Sanctioning Authority Exposure Limits Interest rates Reviewing Authority

(in Rs. Lacs) Concessions
Manager AVP / VP-Advances at
50 NIL
the Advances Cell
AVP 250 NIL VP-Advances
VP 1000 Upto 100 bps SVP – Advances
SVP (Advances) at ZO 2000 Upto 100 bps Zonal Head

All requests for interest rate concessions are to be forwarded to the Advances Cells.

The proposals sanctioned at Advances Cells / Zonal Offices during a particular month are to
be submitted for review by the next higher authority through a monthly control return, latest
by the 5th of the succeeding month, in the prescribed format and not on a case-by-case basis.
Similarly, the proposals sanctioned by the Branch Heads /Advances Cells (headed by
AVPs/Managers) during a particular month are to be submitted for review by the appropriate
authority at Zonal Office or Advances Cells as the case may be through a monthly control
return, latest by the 5th of the succeeding month, in the prescribed format and not on a case-
by-case basis. The concessions in rates of interest / variations authorised by the VP
(Advances) and SVP (Advances) during a particular month are to be submitted for review by
the SVP(Advances)/ Zonal Head respectively through a monthly control return, in the
prescribed format by the 5th of the succeeding month.

If a combination of schematic Loan products is to be offered, the combined exposure shoul be

the criterion while sanctioning the limits

65
 Introduction to Credit Risk Management

Definition

Of all different types of risks that a bank is subject to, credit risk can be defined as the risk of
failure on the part of the borrower to meet obligations towards the bank in accordance with
the Terms and conditions that have been agreed upon. Inability and/or unwillingness of the
borrower to repay debts may be the cause of such default.

The bank aims at minimizing this risk that could arise from individual borrowers or the entire
portfolio. The former can be addressed by having well-developed systems to appraise the
borrowers; the latter, on the other hand, can be minimized by avoiding concentration of credit
exposure with a few borrowers who have similar risk profiles. Credit risk management
becomes even more relevant in the light of the changes that have been brought about in the
economic environment, including increasing competition and thinning spreads on both the
sides of Balance sheet

Determinants of Credit Risk

Factors determining credit risk of a bank’s portfolio can be divided into external and internal
factors. The banks do not have control on external factors. These include factors across a
wide spectrum ranging from the state of the economy to the correlation among different
segments of industry. The risk arising out of external factors can be mitigated via
diversification of the credit portfolio across industries especially in light of any expectations
of adverse developments in the existing portfolio.

Given that the banks have very little control over such external factors, the bank can
minimize the credit risk that it faces mainly by managing the internal factors.
These include the internal policies and processes of the bank like Loan policies, appraisal
processes, monitoring systems etc. These internal factors can be taken care of, partly, via
effective rating and monitoring systems, entry level criteria etc. These processes would
enable improvement in the quality of credit decisions.

66
This would effectively improve the quality (and hence profitability) of the portfolio. While
monitoring systems are useful tool at post-sanction stage, rating systems act as important aid
at the pre-sanction stage.

Introduction to Credit Tools

The Bank has developed tools for better credit risk management. These focus on the areas of
rating of corporate (pre-sanctioning of Loans) and monitoring of Loans (post-sanctioning).
The focus of this manual is to familiarise the user with the credit rating tool.

 Credit Rating: Definition

Credit rating is the process of assigning a letter rating to borrowers indicating the
creditworthiness of the borrower. Rating is assigned based on the ability of the borrower
(company) to repay the debt and his willingness to do so. The higher the rating of a company,
the lower the probability of its default. The companies assigned with the same credit rating
have similar probability of default.

 Use in decision-making
Credit rating helps the bank in making several key decisions regarding credit including:

• Whether to lend to a particular borrower or not; What price to charge

• What are the products to be offered to the borrower and for what tenor
• At what level should sanctioning be done
• What should be the frequency of renewal and monitoring

It should, however, be noted that credit rating is one of the inputs used in taking credit
decisions. There are various other factors that need to be considered in taking the decision
(e.g., adequacy of borrower’s cash flow, collateral provided, relationship with the borrower).
The rating allows the bank to ascertain a probability of the borrower’s default based on past
data.

67
  Main features of the rating tool:
i) Comprehensive coverage of parameters.
ii) Extensive data requirement.
iii) Mix of subjective and objective parameters.
iv) Includes trend analysis.
v) 13 parameters are benchmarked against other players in the segment. The tool contains the
latest available audited data/ratios of other players in the segment. The data is updated at
intervals.
vi) Captures industry outlook.
vii) Eight grade ratings broadly mapped with external credit rating agency’s ratings prevalent
in India.

 Special features of the web based credit rating tool

i) Centralised data base.
ii) Easy accessibility and faster computation of scores.
iii) Selective access to users based on the area of operation. Branches have access to the data
pertaining to their branch only, Zonal offices have access to the data pertaining to all the
branches under their control and the Credit Department and Risk Department at Central
Office have access to all accounts.
iv) Adequate security system and provision of audit trails for confidentiality.
v) Maintaining of past rating records in the system for collection of empirical data on rating
migrations. This will enable the bank to arrive at PDs (Probability of Default) factor.

Rating Tool for Small and Medium Enterprises (SME)

The SME rating tool has been developed for the purpose of assigning a credit rating to the
SME borrower of the Bank. The aim of the tool is to provide a standardised system for the
bank to evaluate the credit risk of different borrowers. It should, however, be noted that this
tool is not the standalone exercise for the purpose of sanctioning of Loan to a SME borrower.
It should be supplemented with other inputs important in the sanctioning process.

68
The following broad areas have been considered for deTermining the rating of
borrowers in the SME category:

• Financial performance
• Business performance
• Industry outlook
• Quality of management
• Conduct of account (after roll out of the Monitoring tool)

Within each of these broad areas, various parameters have been used for obtaining an overall
rating of the borrower. In the following sections, we shall discuss in greater detail the
structure of the tool and the methodology of using it.

 Parameters used in credit rating of SME:

The rating tool for SME borrowers assigns the following weightages to each one of the four
main categories
i) Scenario (I) without monitoring

Parameter Weightage (%)

Financial performance 40
Operating performance of business 22.5
Quality of management 22.5
Industry outlook 15

ii) Scenario (II) with monitoring tool: The weightages would be conveyed separately on roll
out of the tool.

 Parameters used in the SME tool

69
 • Financial performance
The tool in its current form uses various parameters for rating a borrower on its
financial strength. These various sub-parameters give us an idea of the different
sources of risk being faced by a company in different areas.

• Operating performance of business

Operational efficiency of a borrower is important in deTermining the generation of
cash for repayment of its debt obligations. The parameters in this category assess the
borrower’s competence in its primary activities.

• Quality of management
Quality of the management of a borrowal unit has a direct impact on the performance
of the unit. Also, it would have a direct impact on the integrity of the borrower
especially in Terms of its willingness to repay its debt.

• Industry
In order to undertake the credit rating of any borrower, it is important to assess the
riskiness of the industry to which that borrower belongs. Borrowers, which are
similarly ranked in Terms of financial performance, operating performance of
business and quality of management may have different credit ratings due to the risks
inherent in their industry. The risk assessment in industry sectors is done at the
Central Office level and appropriate score for each industry has been allocated in the
tool. On selection of the relevant industry sector, the tool will automatically reckon
the allocated score.

 Three types under SME tool

i) Manufacturing
ii) Services and
iii) Trading

70
Various parameters under each of the above stated parameters for these three types of SME
tool are as under:

1 Manufacturing

i) Financial performance

Sr. No. Sub parameters Weightage (%)

F1 Net Sales Growth Rate (%) 10
F2 PBDIT Growth Rate (%) 7
F3 PBDIT/Sales (%) 10
F6 TOL/TNW 10
F7 Current Ratio 10
F8 Operating Cash Flow 8
F9 DSCR 8
F12*$ Foreign exchange risk 10
F13 Expected values of D/E, if 50% of NFB credit 5
devolves (corrected for margin)
F24 Realisability of Debtors 12
F27* State of export country economy 5
F28* Fund repatriation risk 5
TOTAL 100
* Applicable for export units
$Applicable for units having imports and or exports

ii) Operating performance of business

Sr. No. Sub parameters Weightage (%)

B7 Credit period allowed 10
B8 Credit Period Availed 10
B9 Working Capital Cycle 20
B10 Tax incentives 10
B13 Production Related Risk 10
B14 Product Related Risks 10
B15 Price Related Risk 10
B20 Client Risk 10
B21 Fixed Asset Turnover 10
TOTAL 100

iii) Quality of management

71
Sr. No. Sub parameters Weightage (%)
M1 HR policy/track record of industrial unrest 15
M2 Track Record in Default of Statutory Dues 16
M3 Market Report of Management reputation 15
M4 History of FERA violation/ED enquiry 8
M6 Too Optimistic Projections of Sales and Other 16
Financials
M9 Technical & Managerial Expertise 15
M8 Capability to raise money 15
TOTAL 100

2 Services

i) Financial performance

Sr. No. Sub parameters Weightage (%)

F1 Net Sales Growth Rate (%) 10
F2 PBDIT Growth Rate (%) 7
F3 PBDIT/Sales (%) 10
F6 TOL/TNW 10
F7 Current Ratio 10
F8 Operating Cash Flow 8
F9 DSCR 8
F12*$ Foreign exchange risk 10
F13 Expected values of D/E, if 50% of NFB credit 5
devolves (corrected for margin)
F24 Realisability of Debtors 12
F27* State of export country economy 5
F28* Fund repatriation risk 5
TOTAL 100
* Applicable for export units
$Applicable for units having imports and or exports

ii) Operating performance of business

Sr. No. Sub parameters Weightage (%)

M1 HR Policy/Track Record in Industrial Unrest 15
M3 Market Report of Management Reputation 20
M4 History of FERA violation/ED enquiry 10

72
M6 Too Optimistic Projections of Sales and Other 20
Financials
M8 Capability to raise money 15
M12 Mix of Professional and Traditional 20
Management
TOTAL 100

iii) Quality of management

Sr. No. Sub parameters Weightage (%)

M1 HR Policy/Track Record in Industrial Unrest 15
M3 Market Report of Management Reputation 20
M4 History of FERA violation/ED enquiry 10
M6 Too Optimistic Projections of Sales and Other 20
Financials
M8 Capability to raise money 15
M12 Mix of Professional and Traditional 20
Management
TOTAL 100

3 Trading

i) Financial performance

Sr. No. Sub parameters Weightage (%)

F1 Net Sales Growth Rate (%) 10
F2 PBDIT Growth Rate (%) 7
F3 PBDIT/Sales (%) 10
F6 TOL/TNW 10
F7 Current Ratio 10
F8 Operating Cash Flow 8
F9 DSCR 8
F12*$ Foreign exchange risk 10
F13 Expected values of D/E, if 50% of NFB credit 5
devolves (corrected for margin)
F24 Realisability of Debtors 12
F27* State of export country economy 5

73
F28* Fund repatriation risk 5
TOTAL 100
* Applicable for export units
$Applicable for units having imports and or exports

ii) Operating performance of business

Sr. No. Sub parameters Weightage (%)

B3 Inventory Turnover 16
B7 Credit period allowed 10
B8 Credit Period Availed 12
B9 Working Capital Cycle 16
B10 Tax incentives 10
B14 Product Related Risks 12
B15 Price Related Risk 12
B24 Sustainability of Sales 12
TOTAL 100

iii) Quality of management

Sr. No. Sub parameters Weightage (%)

M1 HR Policy/Track Record in Industrial Unrest 15
M2 Track Record in Default of Statutory Dues 16
M3 Market Report of Management Reputation 15
M4 History of FERA violation/ED enquiry 8
M6 Too Optimistic Projections of Sales and Other 16
Financials
M8 Capability to raise money 15
M12 Mix of Professional and Traditional 15
Management
TOTAL 100

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Definition of Parameters used in SME tool

F1 - Net Sales Growth Rate

Importance of this indicator
This ratio refers to the compounded annual growth rate of net sales over a period of three
years.
The company’s growth ratio vis-à-vis other companies in the industry will be a good tool to
assess its performance. If the growth rate is low compared to others in the industry, then it
will enable us to analyse the problems unique to this company.

Formula
The compounded annual growth rate over the past 3 years is calculated in percentage Terms.
CAGR (Compounded annual growth rate) for three years =
[{(Value of sales in current year)/(Value of sales in year –3)}(1/3) – 1}]*100
Thus it is the third root of sales in current year divided by sales three years ago,
minus 1, expressed as percent.

Notes
• Net sales = Gross sales – Indirect taxes
• For banks, NBFCs, and other financial institutions:
o Net sales = net interest income + other income

F2 - PBDIT Growth Rate

Importance of this indicator
This ratio refers to the compounded annual growth rate of profits before depreciation (non
cash), finance costs (interest) and tax over a period of three years.
A consistent growth in this ratio indicates an improved performance of the company,
reflected in increasing profitability (compared to its sales growth).

Formula
The compounded annual growth rate over the past 3 years is calculated in
percentage Terms.
CAGR (Compounded average growth rate) for three years =

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[{(Value of PBDIT in current year)/(Value of PBDIT 3 years back)}(1/3) – 1}]*100
Thus it is the third root of PBDIT in current year divided by PBDIT three years
ago, minus 1, expressed as percent.

Notes
• PBDIT denotes profit before depreciation, interest and tax.
• For banks, NBFCs, and other financial institutions, use PBT instead of PBDIT

F3 - PBDIT/Sales
Importance of this ratio
This ratio indicates the profit before depreciation, interest and tax as a percentage of net sales.
The profit before interest, depreciation and tax is an indicator of the operational efficiency. If
this ratio as a percentage of sales is high, then it is a positive indication of the operating
efficiency in Terms of raw material consumption, employee productivity and power
consumption among other things. A high value indicates greater profitability and hence
betters capability to repay the debt. The ratio is a measure of the margin available to a
company from its operations.

Formula
This ratio (in %) is computed by dividing the PBDIT with Net Sales.
(PBDIT/Net Sales) x 100
• PBDIT = Operating profit before depreciation, interest and tax
• For banks, NBFCs, and other financial institutions:
o Net sales = net interest income + other income
o Use PBT instead of PBDIT

F6 - TOL/TNW
Importance of this ratio
This ratio gives a holistic representation of total outside liabilities in relation to tangible net
worth of company. It reflects the capacity of the business unit to assure the creditors of the
security they have for payment of both interest and instalment. It indicates the extent to which
the creditors are covered by asset.
This ratio shows how much outside borrowings are resorted to in comparison with owners’
funds
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Formula
The total outside liabilities are divided with the tangible net worth of the
company.

Total Outside Liabilities

Tangible Net Worth

• TOL = Total liabilities - TNW

• TNW as defined in Debt Equity ratio
• Also calculate this ratio for banks, NBFCs and other financial institutions, as it will
give an indication of the capital adequacy of the company

F7 - Current Ratio
Importance of this ratio
Current assets of company are the assets that can be easily liquidated and converted into cash.
The current ratio measures short-Term liquidity of the company and ability to meet its short-
Term financial obligations. A high ratio is good from the point of view of the bank but a very
high ratio may affect profitability through a high inventory carrying cost.
Formula
The ratio is worked out by dividing the Current Assets with Current Liabilities
Current Assets
Current liabilities (including instalments due during the year)

• To get a meaningful current ratio, we should account for the vulnerability of a company to
short Term insolvency. The current ratio could be high because of excess inventory or slow
realisation of debtors. Therefore, current assets must not include inventory which is older
than the normal working cycle of company (say 6-8 month), receivables over 6 months, dies,
spares required for more than 9 months of production and disputed receivables. If such
“excess assets” exist then please make necessary notes in the remarks column. In such cases
please indicate your assessment of the value of current ratio.
• Also calculate this ratio for banks, NBFCs and other financial institutions, as it will give an
indication of the duration mismatch of the company’s balance sheet

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 F8 - Operating Cash Flow
Importance of this indicator
This measure indicates the company’s cash inflows and outflows arising from its operations.
It is different from funds flow of business.
It helps us to evaluate the company’s ability to generate cash inflows from operations to pay
debt, interest and dividends, and to explain the difference between net income and net cash
flow for operating activities. The operating cash flow can indicate the company’s need for
external financing.
While funds flow is good to match long Term and short Term use and source of funds, this
indicator tries to capture the capability of the firm to be able to meet its business obligations
.
Calculation
Operating cash flow ( for the last financial year) is computed in the following manner

Head Amount
Net Sales
Other income
Total receipts
Less: COGS
Gross Profit
Less: SGA/Operating expenses
PBDIT
- Increase / + decrease in non cash current assets
+ Increase / - decrease in current liabilities
Operating cash
Less: Income tax paid
Post tax operating cash
Less: Interest paid on LT & ST
Less: Dividend paid
Cash from operations

Repayment due of long Term debt

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How to rate
Compare “cash flow from operations” to “repayment due of long Term debt”.
The rating is done as explained in the table below.

Description Score
The company is likely to default on repayment of its Loans and O
Interest
The company is not in a position to meet its repayment obligations 1
from its own resources and it faces difficulties to arrange outside
funds
The company is in a position to meet its repayment obligation from 2
its own resources and Term funds that are already applied for (and
expected to be sanctioned shortly)
The company is in a position to meet its repayment obligation from 3
its own resources and Term funds
The company is in a comfortable position to meet its repayment 4
obligation from its own resources (no need for outside funds)

F9 - DSCR (Debt Service Coverage Ratio)

Importance of this ratio
This ratio measures the capacity of the company to service its debt i.e. repayment of principal
and interest. DSCR measures the number of times a company’s earnings cover its total long-
Term debt-servicing requirement, including interest and principal repayments in Term Loans,
over a period of one year.
This ratio will help us to evaluate if an adequate cash flow will be available to meet debt
obligation and also for providing margin of safety to lenders. This ratio also helps to
deTermine the time when repayment should commence and the pay-back period of the Loan.
This ratio is a good indicator of the long-Term solvency of a company.

Formula
The profit before depreciation and interest (PBDI) is divided by installments due
during the year plus interest.
P B D I__________
Instalments for the year + interest

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• Do not fill in this ratio for banks, NBFCs and other financial institutions

F12 - Foreign exchange risk

Importance of this indicator
Adverse movements in the foreign exchange rate can have a tremendous impact on the
company’s financial strength.
Foreign exchange risk may be either transaction based or portfolio based. Transaction based
risk is due to time lags between purchases being made and payment being made, or sales
being made and payment being received against these sales. Portfolio based risk is on account
of foreign exchange Loans where the repayment is made on future dates in foreign currency.
The rater needs to know how the likely fluctuation in exchange rate will affect the profits of
the company. Depending on composition of international trade, the adverse exchange rate
movement could affect the profitability/cash flow. Prudent borrowers hedge their exposure to
foreign exchange. Only the un-hedged part of the foreign exchange exposure should be taken
into account.

How to rate
The rater has to subjectively rate this indicator on a score of 0 to 4 based on his perception
and knowledge of the foreign exchange risk. A potential model to allocate score can be the
following:

Description Score
The risk involved is > 10% of TNW 0
The risk involved is between 8% and 10% of 1
TNW
The risk involved is between 5% and 8% of TNW 2
The risk involved is less than 5% of TNW 3
The entire portfolio is hedged 4

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Important notes

• The foreign exchange risk can be quantified by using the forward exchange rates prevailing
in the currency market.
• The risk involved can be estimated by evaluating two measures:
1. exports as % of TNW
2. Natural hedge involved, with a proxy measure being (1- imports divided by exports)
(always divide the smaller number by the larger one). When this ratio is
1, foreign exchange risk from exports and imports cancels each other out (provided it is
to/from similar currency zones)

Example: total sales = 100, exports = 20, imports = 10, TNW = 200
Risk involved = exports x (1- imports/exports) = 20 x (1- 10/20) = 10
= 5% of TNW

• Also calculate this ratio for banks, NBFCs and other financial institutions

F13 - Expected values of Debt Equity ratio if 50% NFB credit devolves
Importance of this indicator
This indicator gives us an idea about the future expected debt equity structure in an extreme
situation.
It recalculates the Debt/Equity ratio when 50% of non-fund based limits devolve. In doing so,
it gives a sense of the long-Term financial stability in an extreme situation. This is quite a
good comforting factor for the bank. Most companies have to put up a margin for their non-
fund based credits. The new D/E ratio will have to be corrected for this when the limits
devolve, since part of it will be covered by the margin

Calculation
The calculation is the same as for F5 – Debt/Equity ratio, with
Debt = Long Term debt
+ 50% of the company’s non-fund based limits
- margin that the company put up for its non-fund based limits.

• Do not calculate this ratio for banks, NBFCs and other financial institutions

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 F24 - Realisability of Debtors
Importance of this indicator
This indicator should indicate the quality of the debtors of the company and if money can be
recovered from them quickly and easily. A lot depends on how auditors have treated the
receivables.

There are many ways in which the auditors can play around with the receivables viz. the
receivables may be disputed. Receivables may be unrelated to business activity of the
company or there could be high amount of bad debts in the receivable portfolio of the
company. Any delay in receipt of payment from debtors/non-receipt of amount can hamper
the production cycle of a company as well as increase collection costs and the probability of
default on the part of the debtor of the company. Hence the realisability of the debtors of a
company is a critical input for assessing the financial risk of a borrower.

F27 – State of the export country economy

Importance of this indicator
The economy of the country(ies) to which is being exported, will have a significant impact on
the exporter’s business. A slowdown in the economic growth might even have a more than
linear impact on the exporter’s turnover and profitability, since importers will typically may
have the reaction to cut costs by cutting relationships with overseas’ suppliers.

How to rate
The rater has to subjectively rate this indicator on a score of 0 to 4 based on his perception
and knowledge of the foreign exchange risk. The minimum score of 0 could be assigned to
exporters who trade the bulk of their products/services with 1 single country, that is currently
in a recession. The maximum score of 4 can be granted to parties who have a wide portfolio
of export countries, with most (or all) of these countries showing strong economic growth.

F28 – Fund repatriation risk

Importance of this indicator
Exporters are often paid in the currency of the country to which they export.Some of these
currencies may be difficult to exchange or to wire back to India. In that case, significant costs
and risks are involved in the repatriation of funds, which could affect the overall risk profile
of the exporter

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How to rate
The rater has to subjectively rate this indicator on a score of 0 to 4 based on his perception
and knowledge of the foreign exchange risk. The minimum score of 0 could be assigned to an
exporter who trades the bulk of his products/services with a country that has very stringent
foreign exchange and currency repatriation policies. The maximum score of 4 could be
granted to exporters who only trade with countries, which have no restrictions on the flow or
repatriation of funds.

B3 - Inventory Turnover(Trading)
Importance of this ratio
This ratio indicates the velocity (number of times) with which the inventory circulates in the
business, during the relevant period.

A decrease in ratio could be a significant danger signal. Low ratio could indicate the presence
of slow moving items in stock. A high ratio is good from the point of liquidity since
inventory will be quickly converted into cash. This ratio also indicates the efficiency of the
company in utilizing its inventory and maintaining it at an optimum level. Thus, the higher
the ratio, the higher the sales per unit of investment in inventories. A lower ratio results in
high carrying cost and blocking of funds, thus limiting the liquidity of the company.

Formula
The ratio is worked out by dividing the net sales with average inventory maintained.
Net sales
Average inventories
• Average inventory = (opening stock of inventory + closing stock of inventory)/2
• Inventory = raw materials + WIP + finished goods
• Do not calculate this ratio for banks, NBFCs and other financial institutions

B7 - Credit period allowed

Importance of this indicator
This indicates the period of realisation of sales proceeds. It is the average length of time that
customers who buy on credit take to pay their dues. It indicates the efficiency of management
in debt collection.

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A lower value of this ratio indicates a speedy realisation of sale proceeds. The industry’s
practice should be given due consideration. A high ratio could be indicative of disputed
receivables or a high amount of bad debts. The appraisal officer should be careful when
assessing this ratio, since it also reflects the bargaining power enjoyed by the company in the
market with respect to the buyers.

Formula
The period of collection (in days) is calculated by dividing the average debtors outstanding
with average daily sales.
Average debtors
Average daily sales

Average debtors = (Sundry debtors in the beginning of the year + sundry debtors at the
close of the year)/2

• Do not calculate this ratio for banks, NBFCs and other financial institutions

B8 - Credit period availed

Importance of this indicator
It measures the average time taken by the company to pay its suppliers for purchases made on
credit. This ratio relates credit availed to its total purchases. This indicator is a measure of the
bargaining power that the company enjoys with its suppliers. A stronger company will avail a
longer credit period from its suppliers than a weak company. A longer credit period offered
by suppliers also indicates that the suppliers are confident of the ability of the company to
pay
them. A word of caution, a very high ratio could indicate short-Term liquidity problems also.

Formula
The credit period availed (in days) is computed by dividing the average (non financial)
creditors outstanding during the year with average daily cost of sales.
Average creditors
Average daily cost of sales

Average creditors = (Sundry creditors in the beginning of the year + sundry creditors at

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the close of the year)/2

• Do not calculate this ratio for banks, NBFCs and other financial institutions

B9 – Working capital cycle (Manufacturing, Trading)

Importance of this indicator
Working capital represents an important part of the employed capital of many companies.
Therefore, a good performing company should carefully manage this part of its assets, since it
represents an important invest Also, the way a company go about their working capital, says
a lot about the management of the company. In a sense one could argue that good working
capital management is an indicator of good management Factors to be considered Inventory
turnover and credit period allowed

How to calculate
Net sales
Working capital

Working capital = Raw materials and spares+ Finished and semi finished goods+
Debtors

• Do not calculate this ratio for banks, NBFCs and other financial institutions

B10 - Tax Incentives

Importance of this indicator
Tax incentives can be a major driver of profitability for many companies. A unit located in
backward area or in some of the states (like Goa or union territory of Daman & Diu etc.)
enjoy special tax incentives. (Both states grant income tax and sales tax holidays for 3-5 yrs.)
Such tax holiday period is helpful for company to take advantage especially in a commodity
market and thus improve profitability.
How to rate
The rater has to subjectively rate this indicator on a score of 0 to 4 based on his perception
and knowledge of the government policies and industry. The rater should also be aware of the
management strengths and their ability to make best use of the existing government

85
incentives. Score of 4 indicates a high probability of successfully getting tax incentives.
Score of 0 means no or negative effect of taxes.

B13 - Production related risk (Manufacturing)

Importance of this indicator
This measures the risk of a company with respect to its production activities. It evaluates the
ability of company to sustain the production activity at a diversified level. A company having
little production related uncertainties in production would be better placed in the industry.
Problems in production would lead to impact on overall performance of the company. Thus
the efficiency, stability and consistency of quality of the production activities are a critical
deTerminant of performance. The state of technology can be considered an overall driver of
this risk

Factors to be considered
Capacity Utilisation; Availability of raw material, State of technology used; Flexibility in
product manufacturing; Patents and proprietary technology; R&D Number of manufacturing
plants.

How to rate
The rater has to subjectively rate this indicator on a score of 0 to 4 based on his perception
and knowledge of the production risk. A potential model to allocate score can be the
following:
Score =2, if company is upgrading Score = 4, if company is upgrading
but has old technology and technology is new
Score = 0,1 if company is not Score = 3, if company is not upgrading but
upgrading and has old technology has new technology

• Do not calculate this ratio for banks, NBFCs, other financial institutions or service
Companies
B14 – Product/service related risk
Importance of this indicator
This indicator measures the risk relating to the products manufactured / services provided by
the company.

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The risks associated with the product can be those related to obsolescence, substitution,
decrease in demand etc. A product should be of a consistent high quality; otherwise its
market reputation will suffer. The company’s ability to standardize product quality, getting
ISI benchmarks or ISO certificates will add to its advantage. The expected product life cycle
will also contribute to the overall product risk. The shorter the expected life of the product,
the riskier the company’s business performance
.
Factors to be considered
Product range; Product/service quality; Brand value, Highly customized product/service;
Obsolescence, Demand supply position/gap.
How to rate
The rater has to subjectively rate this indicator on a score of 0 to 4 based on his perception
and knowledge of the product risk. A potential model to allocate score can be the following:

Description Score
High variability in product/service quality (e.g. frequent recalls) and 0
short product life (<1 year)
High variability in product/service quality and medium product life 1
(1 to 3 years)
Low variability in product/service quality and medium product life 2
(1 to 3 years)
No variability in product/service quality and long product life (> 3 3
years)
No variability in product/service quality and very long product life (> 5 4
years)

B15 - Price Related Risk

Importance of this indicator
This indicator measures the ability of a company to dictate prices in the marketplace as well
as to cut its prices in case of a price war. The price competitiveness of a company is an
important indicator of the competitive position of a company. A company that is in a position
to charge a premium over its competitors is better placed in the industry. Similarly, a

87
company with lower costs is in a good position to withstand price competition in the market.
If the company’s products enjoy a high reputation, it can price the product to its advantage.

Factors to be considered
Economies of scale/cost effective technology; Brand Equity; Pricing Flexibility; Financing
edge over competitors; Bargaining power of buyers

How to rate
The rater has to subjectively rate this indicator on a score of 0 to 4 based on his/her
perception and knowledge of the price risk. A score of 4 means that the company is not at all
subject to price risk, i.e. can charge a sustainable price premium. A score of 0 indicates that
the company has no control at all over its price, thus being subject to high price risks.

B20 – Client risk(Services, Manufacturing)

Importance of this indicator
Smaller to midsized companies can face considerable risks at the client side. This risk is
twofold: number of clients and quality of clients. Medium-sized companies sometimes
depend on a very small portfolio of clients, or have 1 predominant clients who makes or
breaks the company. Also, medium sized companies are sometimes closely connected to
clients with a shady or poor reputation. This might not only adversely impact their own
reputation, but also
represent a barrier to recruiting and retaining of talent, innovation, …

Factors to be considered
Number of clients, quality/reputation of clients

How to rate
The rater has to subjectively rate this indicator on a score of 0 to 4 based on his/her
perception and knowledge of the client risk. A score of 4 means that the company has a well
diversified portfolio of high quality clients. A score of 0 indicates that the company depends
on a small set of clients, which can be perceived as 2nd or 3rd rank in their respective
industry.
B21 – Fixed asset turnover (Manufacturing)
Importance of this indicator

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Fixed assets represent an important part of the capital employed at manufacturing companies.
A well performing company should therefore make sure that it gets the maximum out of its
machine park.
How to rate
Net sales
Fixed tangible assets

With fixed tangible assets = replacement or acquisition value of fixed tangible assets
(land, machines, buildings,..)

B22 – Quality of internal processes & systems (Services)

Importance of this indicator
The business performance of service companies is often determined by the quality of their
internal processes and systems. It is therefore important to assess how these companies score
on these dimensions, since they will be an important contributor to the potential success and /
or risk of the company

Factors to consider
Consistency of delivered service, timeliness or response time, internal sharing of know-how,
quality of internal training programs,

How to rate
The rater has to subjectively rate this indicator on a score of 0 to 4 based on his/her
perception and knowledge of the quality of internal processes and systems. A score of 4
means that the company’s processes and systems are considered top class in the industry. A
score of 0 indicates that the company has a very poor service offering and resulting
reputation.

B23 – Competence to innovate(Services)

Importance of this indicator
The success of a company can often be related to the overall performance of its service
offering. Therefore, a company’s capability to develop services which respond to its users’
needs (through efficiency, customization, effectiveness …) will influence its competitive
position and hence its success

89
How to rate
The rater has to subjectively rate this indicator, based on his understanding of the company’s
innovation capabilities. A rating scale from 0 to 4 will be used. A score of 2 means that the
company can be seen as having “average” innovation skills. A score of 3 or 4 indicates a
stronger or outstanding (respectively) innovational strength compared to its competitors. A
score of 1 or 0 indicates a weaker or poor (respectively) innovation skill compared to
competitors.

B24 – Sustainability of sales(Trading)

Importance of this indicator
An important driver of the success of a trading company, is the level of sales it is able to
generate. Therefore, the risk associated with a trading company is very much linked to the
sustainability of its sales. A company with sustainable sales will have a core portfolio of
products, which will not switch quickly. Opportunistic trading companies do run the risk of
making the wrong “bet”, resulting in impressive declines in sales.

How to rate
The rater has to subjectively rate this indicator, based on his understanding of the company’s
sales sustainability. A rating scale from 0 to 4 will be used. The maximum score of 4 can be
assigned to trading companies with a strong portfolio of core products, showing continuous
growth as a result of a well laid out strategy. The minimum score of 0 could be given to
opportunistic trading companies, showing a very random path in performance, and without a
clear-cut strategy.

Subjective Assessment of Quality of Management

How to rate:
The rater should rate the ratios and indicators on the score of 0 to 4 depending on his
understanding and comfort levels.
A score of 4 means that the rater feels that promoters and their management will perform
very well on the ratio/indicator. Adversely, the rater should assign a score of 0 if he/she
thinks that management will perform poorly on the ratio/indicator.

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The importance of each of the above ratios and indicators are now listed.

M1 - HR policy / Track record of industrial unrest

Importance of this indicator
This factor relates to labour unrest, lock out, and work slow down, strike and strained
management – employee relation. Industrial harmony is a key factor for success of an
industry/business. In short, this indicator reflects the quality of the company’s HR policy.

Factors to assess include: is the HR system fair and equitable, are promotions based on
merits, does the company provide a supportive environment, and do employees feel
appreciated?

M2 - Track record in default of statutory dues (e.g. Electricity bills, PF dues, etc.)
(Manufacturing ,Trading)
Importance of this indicator
This factor takes into account the seriousness of the company and its management towards
contractual obligation. If management is not serious about the legal and statutory dues then
there is a high probability of it not being committed to fulfil the Loans taken from the bank.

M3 - Market report of management reputation

Importance of this indicator
This market report assesses the reputation or general perception about integrity and fair
dealing of the promoters. The reputation of promoters regarding their integrity, adhering to
commitments, fair dealings has important bearing on quality of management. This
incidentally becomes one of the most important ratios and indicators, as past behaviour is
often a good proxy for their future behaviour.
Adverse performance of associate concerns controlled by the corporate should also be
considered.

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 M4 - History of FERA violation /ED enquiry
Importance of this indicator
A company may have a track record of FERA violation or might have faced raids by the
Enforcement Directorate. Companies also indulge in unhealthy practice of electricity thefts or
evasion of ST, IT or Excise or indulge in Hawala transactions, under-invoicing or over-
invoicing. Such instances speak about poor integrity of company and indicate about company
working against national interest.

M6 – Too optimistic projections of sales and other financials

Importance of this indicator
There is sometimes a conscious attempt to over-estimate financial projections to secure
excess borrowings. Recurrent non-achievement of targets could be indicative of such
practice. Careful scrutiny of past track records help develop an idea of reliability of
projections.

M8 – Capability to raise resources

Importance of this indicator
Management’s capability of raising additional resources is an important factor in assessing
the creditworthiness of the company. If management is likely to find additional outside
funding (from capital market, partners, family, group company,…) whenever this is
necessary, this should contribute to a reduced risk for the bank.

M9 - Technical & Managerial expertise(Manufacturing)

Importance of this indicator
This indicator relates to the technical knowledge and experience of the promoters in the
relevant area of operation. Technical skills will contribute to a greater efficiency of
operations and quality of products. Managerial know-how will enable management to avoid
typical pitfalls and to put together a consistent and feasible strategy.

M12 – Mix of professional and traditional management (Services,Tarding)

Importance of this indicator
This indicator tries to evaluate the professionalism of the company’s management. It is
important that the management consists of people who know the business, the industry and
who have the necessary experience to make things work. However, a lot of companies are

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still family-owned, which is often reflected in the composition of the management team.
Therefore, it is important to assess if the company maintains a good balance between
traditional management (who often own the client relations) and professional management.

Monitoring Tool

Introduction
The web based credit rating model consists of the following two tools:
1) Credit rating tool
2) Monitoring tool

The model has been provided with the following two options:
1) Scenario I
2) Scenario II

At the time of sanctioning of a fresh advance, the concerned client should be rated in the
credit rating model under the Scenario I option. This would activate the Credit rating tool
provided in the rating model and based on the data entered, the tool would compute a credit
rating for the client.

After the sanction and disbursement of the advance, rating of the borrower should be
reviewed at a frequency indicated by the rating wise schedule (as indicated in the Credit
Policy of the Bank). This rating exercise should be done in the model under the Scenario II
option. This would activate both the Credit rating tool and the Monitoring tool in the
model. The model would re-compute the overall rating after reckoning the data both from
rating tool and the monitoring tool. Once an account has been re-rated using the Scenario-II
option, further modifications / re-ratings pertaining to that account will compulsorily have
to be done using Scenario-II option only. In other words, the access to Scenario-I option will
be blocked in such cases

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The following LCMC SME
Scenario 1 Scenario II Scenario 1 Scenario II
weightages have been
allocated under the
above stated respective
scenarios: Parameters
Financial 40.00 35.00 55.00 47.50
Business 22.50 17.50 15.00 15.00
Management 22.50 20.00 15.00 15.00
Industry 15.00 12.50 15.00 12.50
Monitoring Tool Not Applicable 15.00 Not Applicable 10.00
(Conduct)

(The above stated weightages are subject to change)

Bases on an exercise conducted to examine the robustness of the monitoring tool; the
erstwhile conduct rating parameters have been condensed and divided into two groups:

1) Hurdles: These are parameters which lack the discriminating power between a good
and a bad account but they are nevertheless important as far as behavior of an obligor
is concerned.
2) Discriminants: These are parameters which have higher discriminating power between
a good and a bad account and maybe used for predicting defaults.

Since inputs for the monitoring tool will be available with the branches, data input in the
monitoring tool will be done by the branches only. In case of any clarifications the user may
get in touch with the Risk Department at Central Office

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 Parameter

Hurdles

A1 Creation of Charge on Primary Security

A2 Creation of charge on collateral and / or execution of personal /

corporate guarantee

A3 Other Terms & conditions not complied with

A4 Receipt of periodical data / Stock & Book Debt statements

A5 Receipt of Balance Sheet / Renewal data

A6 Compliance of financial covenants

A7 Unit inspection reports observations

A8 Routing of proportionate turnover / business

A9 Utilisation of facilities (not applicable for Term Loan)

A10 Adequacy of insurance for the primary / collateral security

B1 Negative Deviation in Net Sales (actual vs. estimates)

B2 Financial Discipline

Overdue discounted bills during the period under review

Devolved bill under L/C outstanding during the period under

review

Invoked BGs issued outstanding during the period under review

Frequency of RETURN of cheques per quarter deposited by

borrower

Frequency of issuing of cheques without sufficient balance per

quarter

Payment of INTEREST or INSTALMENT

B3 Frequency of requests for Ad Hoc increase in limits

B4 Frequency of overdrawing in CC account

B5 Any other adverse features financial / non-financial, including

corporate governance issues such as adverse publicity, strictures
from regulators, political risk and adverse trade environment not
covered elsewhere
95
.
Hurdles

A1: Creation of Charge on Primary Security

Primary security refers to the asset/s taken as the main tangible security for the funding of
which the bank grants finance, such as inventory, receivables, other current assets, fixed
assets, etc. When these assets are taken as security, they should be properly charged to the
bank by way of hypothecation, mortgage, pledge and assignment which should be legally
enforceable. In case the primary security is not properly created or charged as required under
the relevant law, the bank’s advance may become unsecured thus increasing the risk in the
exposure. Check whether the charge on primary security stipulated in the sanction has been
created and registered with the RoC (where ever required) or any other authority. If any of
the requirements of proper creation of charge on the primary security is not fulfilled, charge
on the stipulated security is considered as not created for this exercise. Even if the delay in
creation of security is allowed by the sanctioning authority, security is considered as not
created.

A2: Creation of charge on collateral and / or execution of personal / corporate

guarantee

Collateral security is taken as an additional security over and above the primary security. The
collateral security offers additional comfort to the bank partly mitigating the risk involved in
the exposure. The requirements stated in respect of the primary security (under A1) are
applicable for the collateral security also.

96
A personal / corporate guarantee further enhances the degree of mitigation of risk. It is
important to ensure that these have been executed / obtained strictly as per the sanction
Terms and legal requirements.

A3: Other Terms & conditions not complied with

Apart from the security, various other Terms and conditions are stipulated for enabling the
bank to mitigate risk from the exposure. Some of the stipulations assume greater importance
to the safety of advance such as obtention of NOC from the existing lenders for creation of
first / second / paripassu charge in favour of the bank, bringing in another bank for sharing /
tying up the gap, end use certification, etc.

A4: Receipt of periodical data / Stock & Book Debt statements

Timely receipt of various data from the borrower is of utmost importance in monitoring the
health of an account. Apart from deTermining the drawing power (where ever applicable),
the data is considered as an indicator of conduct of the borrower’s business operation which
have implication on the conduct / performance of the account. Non receipt of such data (for
any reason whatsoever) itself is considered as a risk factor. Even in case of frequent delays in
submission of stock statements, FFR, etc the parameter should be rated as ‘Not Complied’.

A5: Receipt of Balance Sheet / Renewal data

The balance sheet is one of the sources of tangible information on the company’s operation
which can be objectively analysed to assess the effectiveness of the business model. Scrutiny
of the balance sheet can help notice salient and abnormal features in the areas of cash flow,
fund flow, capital base, production, inventories, receivables, sales, borrowings, diversion of
funds, and profitability. A timely submitted balance sheet enables the Bank to assess potential
adverse features and take appropriate action well in time. Non finalisation of audited balance
sheet, non submission / delayed submission of audited balance sheet / renewal data reflects
poorly on the corporate governance of the borrower and considered as one of the risk factors.

A6: Compliance of financial covenants

Financial covenants are stipulated for mitigating risk in an exposure. Some of these
stipulations relate to creation of Debt Service Reserve, maintenance of minimum asset cover,
current ratio level, TOL/TNW ratio, infusion of funds by promoters, raising of long Term

97
funds, liquidation of investments, restrictions of investments/dividend etc. These risk
mitigation measures provide extra comfort to the bank while sanctioning the advance. In case
the stipulated financial covenants are not complied with, partly or fully, the exposure would
carry a higher risk which needs to be captured in the monitoring tool.

A7: Unit inspection reports observations

Physical inspection of borrower’s unit enables the bank to verify the information supplied by
the borrower. Inspection should cover the following indicative areas:
• Idle plant and machinery.
• Attendance of labour / staff and their working conditions.
• Adequate availability of utilities / infrastructure such as water, power, etc.
• Quality & value of inventory & finished product.
• Legal / statutory / lender’s notices pasted in the factory or on the Plant and Machineries.

In case of borrowers engaged in activities other than manufacturing, the borrower’s godown /
office / branches / outlets should be visited for ascertaining the overall conduct of business.

A8: Routing of proportionate turnover / business

The user is required to select whether the borrower enjoys:

Sole Banking

Multiple / Consortium Banking

And rate the borrower as per the options provided there under.

Apart from supplementing other income from the borrower the routing of entire /
proportionate turnover / business enables the bank to capture the borrower’s cash flow which
an important indicator of the borrower’s operations.
In case of sole banking arrangement, the borrower is expected to route its entire turnover /
business through the bank. In other cases, at least proportionate business should be routed.
Points to note:
In case of Term Loan facility without working capital facility, the routing of
turnover/business through the bank is considered as an added advantage to the bank, although
it may not be one of the stipulations.

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A9: Utilisation of facilities (not applicable for Term Loan)
Full utilisation of cash credit facilities without variations for a long period requires closer
scrutiny to ensure that the liquidity of the borrower is not strained. The parameter intends to
capture such risk. Optimum utilisation of account apart from indicating soundness of
borrower’s cash flow also ensures adequate earnings for the bank.

A10: Adequacy of insurance for the primary / collateral security

Inadequacy of insurance indicates low value of assets or the possibility that the borrower has
inadequate interest in the assets. Underinsurance would result in application of ‘average
clause’ leading lower settlement of claim. These implications are undesirable from a lender’s
point of view.

Discriminants

B1: Negative Deviation in Net Sales (actual vs. estimates)

The amount of estimated/projected net sales is one of the major parameters of credit
assessment. Non-achievement of estimated/projected net sales by the company indicates
setback in the borrower’s business performance. Non-achievement of sales could be one of
the early indicators of the weakening of an account and we need to look for the reason/s for
the set back. The user needs to input the sales turnover as per the latest Audited Annual report
as well as the sales turnover estimated / projected in the credit appraisal for the corresponding
period.

B2: Financial Discipline

Overdue discounted bills during the period under review

Non realisation of bills discounted by the bank reflects adversely on the borrower’s customer
profile and hence considered as risk.

Devolved bill under L/C outstanding during the period under review

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Adequate cash flows are one of the important indicators of satisfactory health of a borrower.
Devolvement of bills under LC indicates inadequate cash flows of the borrower. Historically,
in most of the cases, such features are the starting point of financial deficiency ultimately
leading to default. A borrower having adequate cash flows and efficient cash flow
management system would not allow devolvement of contingent liability such as bills under
LC.
Invoked BGs issued outstanding during the period under review

Invocation of a guarantee indicates the borrower’s failure to perform the contract or meet the
requirement for which the guarantee was issued and considered as a risk factor. Further, non-
payment of the invoked Bank Guarantee obligation within a reasonable period is considered
risky.

Frequency of return of cheques per quarter deposited by borrower

Return of cheques deposited by the borrower indicates low credit worthiness of the
borrower’s clients or the goods supplied by the borrowers do not conform to the Terms of
sale qualitatively. This may ultimately affect the business of the borrower and hence
considered as a risk factor.

Frequency of issuing of cheques without sufficient balance per quarter deposited by

borrower

Issuance of cheques by the borrower without maintaining sufficient balance in the account
impacts his credit worthiness. This would have negative impact on the health of the borrower.
Payment of interest or instalment

Failure to meet interest / instalment payment obligation indicates crystallization of credit risk.
Default / delay in payment of interest or instalment represent a strong warning signal about
the health of the account.

B3: Frequency of requests for Ad Hoc increase in limits

Frequent requests for ad hoc increase in limits indicate lack of proper management of funds
or inability of the borrower to raise funds from other sources or lack of cash flows to manage
the working capital cycle. The signal adds to risk profile of the borrower.
B4: Frequency of overdrawing in CC account

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The requirement of working capital finance is assessed on the basis of borrower’s estimated /
projected level of operations. Hence, the borrower should be able to manage his funds
requirement within the sanctioned facilities. Frequent overdraft of the CC account due to any
reason (such as Term instalment, interest, temporary liquidity mismatch etc.) indicates poor
management of working capital finance and may be a potential risk of default.

B5: Any other adverse features financial / non-financial, including corporate

governance issues such as adverse publicity, strictures from regulators, political risk
and adverse trade environment not covered elsewhere

No exposure is risk free nor can all risk factors in an exposure be objectively listed or
foreseen at a given point of time. As this parameter is subjective the rater should select a
suitable option based on his/her understanding of the borrower and the exposure.
Factors including market forces like capital market perception (continuous fall in the stock
price which are signals of deteriorating financial conditions, as well as other issues) may be
considered while selecting the option.

Rating Scales
The rating tool for SME has an 8-point rating scale, which ranges from SME 1 to SME 8.

Borrower Rating Range of Scores Risk Level

SME 1 Above 85 Lowest risk
SME 2 76-85 Lower risk
SME 3 66-75 Low risk
SME 4 56-65 Moderate risk
SME 5 46-55 High risk
SME 6 36-45 High risk
SME 7 26-35 Higher risk
SME 8 Below 26 Highest risk

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 CHAPTER-8

CASE STUDY- 1

Details of case study

Name M/s Dynemic Products Limited (DPL)
Constitution Public Limited Company
Office Address B- 301, Satyamev Complex-1, Opp. New Gujarat High Court,
S.G.Highway, Sola, Ahmedabad-380 060, Gujarat, India.
Line of activity Manufacturing of Food Colour Products
Sector Chemical and Chemical Products
Dealing with us New Connection
Incorporation 14th June 1990
Name of Directors Mr. Dashrathbhai Prahladbhai Patel (DIN : 00008160)
Mr. Rameshbhai Bhagwanbhai Patel (DIN : 00037568)
Mr. Hitendra Hargovinddas Sheth (DIN : 00037705)
Mr. Jagdishbhai Sevantilal Shah (DIN : 00037826)
Mr. Harishbhai Keshavlal Shah (DIN : 00037932)
Mr. Bhagwandas Kalidas Patel (DIN : 00045845)
Mr. Dixit Bhagwandas Patel (DIN : 00045883)
Mr. Shashikant Purshottambhai Patel (DIN : 00045957)
Mr. Vishnubhai Gangarambhai Patel (DIN : 00270413)
Mr. Shankarlal Baluram Mundra (DIN : 00388204)
Group Not a recognized group
Rating External: Not done.
Internal: SME 3 (ABS 31.03.2009)
Associate Concern Dynemic Overseas (India) Private Limited
Dynemic USA Inc.
Share holding pattern As mentioned below
Share Price movement Listed on the BSE
Current Market Price – Rs.14.55/- (27.11.2009)
52 week high/low – Rs. 29.20 ( 22 Apr' 09) / Rs. 10.00 ( 16 Jan' 09)
Brief Background:
The Company was incorporated on 14th June, 1990 as Private Limited Company. The Name
was subsequently changed to Dynemic Products Limited on 31/12/1992. The Company was

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promoted with the objective of carrying on the business of manufacturing S.P.C.P, the raw
material for Food Color, reactive & Raazole Dyes.

In the Year 2000 the company acquired the running business of M/s Safforn Dye Stuff
Industries and started manufacturing wide range of food colors at the premises 3709/6, GIDC
Estate, Ankleshwar having plot area of admeasuring 3700 Sq.Mtr.

As the company aims to provide entire range qualitative and quantitative service to food
industry, as its Unit I. The company commenced manufacturing of food colors namely
Tratrazine in the year 2000-01. Both the units at Ankleshwar are Ultra modern and have eco
friendly plants with in house testing facilities to control quality at every level of
manufacturing. The Company gained goodwill in the short span of time due to its quality
product. The company has well equipped state of art in house laboratory which conduct test
of every parameter of food color & Dye intermediates laid down under national and
international authorities. The Company exports its product to around 41 countries worldwide.
All these have led the company to acquire and retain a status of largest manufacturer and
supplier of food colors and dye intermediates in India.

Qualitative Factors:
 The Company has a pro-active Management and Promoters who have hands on
experience in manufacturing of Dyes InTermediaries and Food Colours.
 Profit making Company since last 13 years.
 The company has to its credit an award for Indirect Export of Self Manufactured Dyes
for the year 2001-02 & 2002- 03 received by Gujarat Dyestuffs Manufacturers’
Association.
 The company has obtained certificate of approval From Bureau Verities Quality
International (BVQI) for achievement of ISO 9001: 2000 quality standards, the
Company has also received certificate of approval from Bureau Verities Quality
International (BVQI) for achievement of 14001:1996 and 14001:2004 quality
standards for both its units satiated at Ankleshwar.
 The company has also obtained HAACP Code: 2003 certificate of registration from
TQCS International (Group) Pty Ltd under food safety programme for both its units
situated at Ankleshwar

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  The company was awarded with trophy for export performance of more than Rs. 6.00
& 8.00 Crore for Self
 Manufactured Indirect Export of Dyes & inTermediates in the year 2002-03 by
Gujarat Dyestuffs Manufacturers’Association.
 Both the Units of the company are exporting Oriented Units and have obtained the
status of One Star Export House.

Marketing Strategy/Marketing arrangement

Strong and experience people are leading company’s marketing department. Company’s total
turnover is divided into:
 Exports Sales
 Local Sales

 Exports Sales:
• Company’s 70% turnover is generated by way of exports sales. Company has its own
presence in all most all countries. The company is exporting Food colors in Latin
America, African countries, Middle East, Far East, US and Europe. Almost all export
customers are dealing with company for many years.
• Out of total exports turnover 60 to 70% percentage orders are repeated orders and rest
of the orders are new orders.
• The Company has region wise Export Managers who can cater the need of customers
individually. Due to the quality and timely delivery of the material the company have
less competition from these countries.
• Globally many countries have discontinued production of Dyes, Food colors and
Intermediates, new market has opened for Indian manufacturer of Dyes and
Intermediates. As Dynemic Products Ltd is already a well recognized name in the
field globally, it has more opportunities to grab from growing International market.

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  Local Sales:
• In Local Market Company is doing marketing its Dyes & Intermediates to the end
customers.
• The company is the largest manufacturer of S.P.C.P in India which generating
repeated order from the local customers.
• Now, company is planning to market the food colors in small packing through its
dealers and distributors which cater the local needs.
• Company is also planning to arrange marketing arrangement with soft drink
manufactures and pharmaceutical manufactures for food colors.

Proposal for Proposal for fresh sanction of credit facilities by way of take over (with

enhancement) from HDFC Bank

a) Sanction of Cash Credit Limit of Rs. 500.00 lacs for working capital
requirement ( take over of Rs. 500.00 lacs from HDFC Bank).
b) Sanction of Letter of Credit (Inland/Foreign) of Rs. 300.00 lacs for
working capital requirement as a sub-limit of cash credit limit (take over of Rs.
300.00 lacs from HDFC Bank).
c) Sanction of EPC/FBD/FBP/PCFC/PSCFC of Rs. 500.00 lacs for working
capital requirement as a sub -limit of cash credit limit (take over of Rs. 500.00
lacs from HDFC Bank).
d) Sanction of Corporate Loan of Rs. 200.00 lacs (take over of Working
Capital Term Loan of Rs. 200.00 lacs from HDFC Bank).
e) Sanction of LER limit of Rs. 25.00 lacs (equivalent to forward cover of
Rs.500.00 lacs).
f) Waiver of credit opinion report from existing bankers of M/s. DPL
(HDFC Bank) and group concerns of M/s. DPL i.e. M/s. Dynemic Overseas
(India) Limited based on justifications given in the proposal.
g) Concession in processing fees at Rs. 1.00 lacs against norm of 1.00%.
h) Permitting time of 30 days for completion of take over formalities with
HDFC and creation of mortgage by CMC.

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Existing &
Proposed Facilities
(Rs. in lacs)
Existing Proposed Proposed
Type of Facility Limits + Inc / Limits
(HDFC) – Dec (Axis Bank)
Cash Credit Limit – Stock cum Book 500.00 -- 500.00
Debt
Corporate Loan 200.00 -- 200.00
EPC/FBD/FBP/PCFC/PSCFC – As a (500.00) -- (500.00)
sub limit of Cash Credit Limit
LC(Inland /Foreign) - As a sub limit (300.00) -- (300.00)
of Cash Credit Limit
LER Limit (as a sub-limit of CC (15.00) +25.00 +25.00
limit)
700.00 +25.00 725.00
Total
WC/LC/LER : To meet working capital requirements.
Purpose
Corporate Loan : For NWC built up.
Tenor WC/LC/LER : 12 months.
Corporate Loan : 24 months from the date of first disbursement.
Repayment WC/LC/LER : On Demand.
Corporate Loan : 23 monthly instalments of Rs. 834000 each and last instalment
of Rs. 818000. Repayment to commence from December 2009.
Interest to be serviced as and when debited.
Security Primary  Hypothecation of entire current assets (Pari passu) of the

company (Both present & future). (Value as on 31.03.2009

is of Rs. 1326.42 lacs).
 Hypothecation over Plant and Machinery (Pari Passu)
(Both present & future). (Value is of Rs. 1529.55 lacs as
per empanelled valuer of Citi Bank).
Collateral Pari – Passu charge being shared by Citi Bank Limited on
following properties :
i. Factory Land and Building, Plant and Machinery at Plot No.
6401,6415,6416, G.I.D.C., Ankleshwar, Dist.Bharuch
admeasuring 5664 sq.mts. standing in name of M/s. Dynemic
Products Limited.
ii. Office situated at B- 301,308,309,310 Satyamev Complex-1,
Opp. New Gujarat High Court, S.G.Highway, Sola,
Ahmedabad-380 060, Gujarat admeasuring 4272 square feets

106
 standing in the name of M/s. Dynemic Products Limited.
iii. Factory Land and Building, Plant and Machinery at Plot No.
3709/6,3710/3,3710/1, G.I.D.C., Ankleshwar, Dist.Bharuch
admeasuring 12290.80 sq. mts. standing in name of M/s.
Dynemic Products Limited.
Guarantee Personal Guarantee of :

 Mr. B.K.Patel having net worth of Rs. 264.88 lacs

(approx.) as on 31.03.2009.
 Mr. Ramesh B.Patel having net worth of Rs. 152.57 lacs
(approx.) as on 31.03.2009.
 Mr. Dashrath P.Patel having net worth of Rs. 257.89 lacs
(approx.) as on 31.03.2009.
 Mr. Shashikant P.Patel having net worth of Rs. 148.22 lacs
(approx.) as on 31.03.2009.
 Mr. Dixit B.Patel having net worth of Rs. 36.33 lacs
(approx.) as on 31.03.2009.

Credit Nil.
enhancement
Interest Rate BPLR - 3.50% i.e. 11.25% p.a. with monthly rests (presently BPLR @ 14.75%).
LC Charges Bank’s standard schedule of charges.
Processing fees Rs. 1 lacs for the sanctioned facilities plus applicable taxes.
Banking Multiple with Citi Bank (Proposed).
Arrangement

Unit visit
The unit was visited Mr. Asim Bhaduri (VP – SME and Center Head), Mr. P.C.Dash (AVP
and SCO – SME) and Mr. Kuntal Bhatt (Manager and RM - SME) on 13th November 2009
and the overall operations of the unit were found to be satisfactory.

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 Operational & Financial Analysis
(Rs. in lacs)
Particulars 31.03.07 31.03.08 31.03.09 31.03.10 31.03.11
(Actuals) (Actuals) (Actuals) (Proj.) (Proj.)
Gross Sales 3231.12 3657.70 4911.20 6500.00 7500.00
Net Sales 3231.12 3657.70 4911.20 6500.00 7500.00
Net Sales Growth Rate % 12.79% 13.20% 34.27% 32.35% 15.38%
Operating Profit 227.49 313.80 261.62 621.29 729.97
Other Income 141.52 (5.36) 56.07 55.00 65.00
PBDIT 322.88 412.89 503.87 881.74 1018.09
Depreciation 47.94 50.62 96.12 110.94 107.00
Interest 47.45 48.47 146.12 149.50 181.12
PBT 369.01 308.44 317.69 676.29 794.97
PAT 266.95 184.99 190.03 446.42 524.76
Cash Profit 182.35 103.07 153.62 424.83 499.22
Operating Profit Margin % 7.04% 8.58% 5.33% 9.56% 9.73%
PBDIT Margin % 9.99% 11.29% 10.26% 13.57% 13.57%
PAT Margin % 8.26% 5.06% 3.87% 6.87% 7.00%
Paid up Capital - Equity 1132.84 1132.84 1132.84 1132.84 1132.84
Unadjusted TNW 2649.73 2707.33 2764.96 3078.84 3471.06
Unadjusted TOL 1109.42 1589.26 2331.73 2890.12 3094.44
Unadjusted TOL/ TNW 0.42 0.59 0.84 0.94 0.89
Adjusted TNW 2710.84 2725.68 2828.34 3237.48 3629.70
Adjusted TOL 1048.31 1570.91 2268.35 2731.48 2935.80
Adjusted TOL/ TNW 0.39 0.58 0.80 0.84 0.81
Interest Coverage 9.82 8.44 3.84 6.27 5.98
Current Ratio 1.76 1.34 0.94 1.13 1.24
DSCR 7.67 1.83 1.21 2.35 2.20
NOCF 105.69 230.12 654.38 (269.99) 149.24
Net Profit / NOCF 2.53 0.80 0.29 (1.65) 3.52
NOCF / Interest 2.23 4.75 4.48 (1.81) 0.82
NOCF / Financing Payments 0.08 0.13 0.29 (0.08) 0.04
Total Debt / NOCF (No. of 1.17 0.78 0.60 (0.45) (0.00)
years)

Rating

The rating of the company as per SME Rating Tool comes to SME - 3 (ABS 31.03.2009).
The segment wise scoring is as under:

Particulars Rating
Overall Scoring SME-3
Financial scoring SME-4
Business scoring SME-3

108
 Management scoring SME-3
Industry scoring SME-3

CIBIL/RBI/ECGC Defaulters’ List/CA Verification/ Auditor Verification

Particulars As of Date Position

RBI Defaulters list 31.12.2008 No match found.
ECGC Specific Approval List 31.07.2008 No match found.
CIBIL Defaulters List Satisfactory.
CA Verification (Auditor) 13.11.2009 Verified.
Auditor’s Firm Verification 13.11.2009 Verified.

Reference Check

Reference check was made through some of Bank’s clients in the same line of activity
financed by Axis bank and the same was reported to be satisfactory.

Analysis

a) The promoters of the company are having rich experience of more than 19 years in
various Industries.

b) The proposed expansion of the company is having huge market potentials.

c) The Company is the leader in Manufacturing and export of food colours.

d) The overall credit rating of company is SME –3.

e) The business is 19 years old.

f) The sale of the company has been showing an increasing trend throughout the years
under consideration. The sale of the company was increased from Rs. 3231.12 lacs in
FY06-07 (Aud) to Rs. 3657.70 lacs (Aud) in FY07-08 and further to Rs. 4911.20 lacs
in FY08-09 (Aud).

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g) Since the company is into Manufacturing of Food Colours, the net margin normally
remains between 5.00% - 9.00%. The net profit of the company was decreased from
Rs. 266.95 lacs in FY06-07 (Aud) showing margin of 8.26% to Rs. 184.99 lacs in
FY07-08 (Aud) showing margin of 5.06%. However, the same was maintained at Rs.
190.03 lacs in FY08-09 (Aud) showing margin of 3.87% due to decrease in margins
in the chemical industry on account of raw material price fluctuations worldwide. The
same was an aberration. But, now the industry is on revival and boom path.
Considering the same, the company has estimated the profit of Rs. 446.42 lacs for
FY09-10 @ margin of 6.87%, which may be accepted.

h) The TOL/TNW of the company increased from 0.42 in FY06-07 (Aud) to 0.59 in
FY07-08 (Aud) and to 0.84 in FY08-09 (Aud). The company has estimated
TOL/TNW at 0.94 and 0.89 for FY09-10 and FY10-11 respectively on account of
increased bank borrowings, which may be considered comfortable.

i) The current ratio of the company was 1.76 in FY06-07 (Aud) which decreased to 1.34
in FY07-08 (Aud) and which further plummeted to 0.94 in FY08-09 (Aud), on
account of capex expansion which will be completed in the current fiscal. The
company has estimated its current ratio at 1.13 and 1.24 for FY09-10 and FY10-11,
which is reasonably acceptable as regards to the liquidity position of the company.

j) The NOCF is positive during FY 2008-09 (Aud) by Rs. 654.38 lacs. NOCF is
estimated negative in FY 2009 –10 at Rs. 269.99 lacs, as per projected financials
submitted by the company on account of increase in stock and receivables which is
keeping in line with the increase in turnover and the holding levels are as per the
industry practice.

k) The overall conduct of the account, repayment status etc. at Citi Bank and HDFC is
satisfactory.

l) The main director is dynamic and has rich experience of more than 20 years in his line
of activity.

m) The company is a registered SSI unit.

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 n) Market reference of the company is satisfactory
.
o) The overall projected performance and financial of the unit are satisfactory.

111
 CASE STUDY-2
Details of case study
Sankalp Recreation Pvt. Ltd. (SRPL)
Name
Constitution Private Limited Company
Group Sankalp
Date of 05.02.2002
Incorporation
Name of Directors Mr. Kailash R. Goenka
Mr. Robin R. Goenka
Mr. Ramavatar R. Goenka
Registered Office “Sankalp Square”, Opp. Gurukul, Drive-in Road, Ahmedabad –
350052
Ph.: 079-27499200 (F) 079-27499300
Proposed Hotel Site FP # 4, TPS # 45, Survey # 948, Near AUDA Garden, Off. 100 ft.
Road, Prahaladnagar, Near S. G. Highway, Ahmedabad – 350051
Line of activity Existing: Restaurant / Franchisee income from Restaurant
Proposed: Hotel/Hospitality
Dealing with us New Connection
Rating Internal: SME-2 (ABS 31.03.2009)
External: Not rated

Brief Background
The “SANKALP” group is a chain of specialty theme based retail restaurant outlets. SRPL
has been incorporated on 05.02.2002. However, the group is having its presence into the
Hospitality business for more than two decades and has their esteemed reputation in the
market. The company has been floated by the promoters Mr. Ramavatar Ranglal Goenka &
his two sons Mr. Kailash Goenka and Mr. Robin Goenka. The Founder of this chain Mr.
Ramavtar Goenka, ventured in to the business in 1981 with the opening of its flagship
restaurant at Ashram Road, Ahmedabad, India and there has been no looking back since then.
Knowing the South Indian cuisine very well, he set up the theme-based restaurant in
Ahmedabad and got an overwhelming response.

It has been the culmination of inherent desire to give customer an innovative specialty brand
that gave birth to Sankalp Restaurant. With over forty highly profitable outlets and a large

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loyal customer base to boast off, the group is all set to launch into international market with
its brands and food product exports merchandising too.

Proposal Details

Proposal • Sanction of Term Loan of Rs. 1500.00 lacs for Hotel Project

• Sanction of one-time Foreign Letter of Credit (capex) facility of Rs. 150.00

lacs (as a sub-limit of Term Loan) for import of machineries/equipments
• Sanction of Buyer’s Credit (capex) Limit of Rs. 150.00 lacs in lieu of
Foreign L/C (capex) as a sub-limit of Term Loan
• Sanction of LER limit of Rs. 7.50 lacs (equivalent to forward cover
exposure of Rs. 150.00 lacs) as a sub-limit of Term Loan
• Concession in Interest Rate and Processing Fees
Existing & (Rs. in lacs)
Proposed Type of Facility Existing Proposed + Inc /
Facilities Limits Limits – Dec
Term Loan Nil 1500.00 +1500.00
Foreign L/C capex (as a sub-limit of TL) Nil (150.00) + (150.00)
Buyer’s Credit (as a sub-limit of TL) Nil (150.00) + (150.00)
LER limit equivalent to forward cover of Nil (7.50) +(7.50)
Rs. 150.00 lacs (as a sub-limit of TL)
Total Nil 1500.00 +1500.00
For construction of 3-star Hotel
Purpose
Tenor 82 months (including moratorium period of 16 months)

Repayment to start from April 2011

Repayment i) 12 monthly instalments of Rs. 9.50 lacs each (April 2011 to March 2012)
ii) 12 monthly instalments of Rs. 22.00 lacs each (April 2012 to March 2013)
iii) 12 monthly instalments of Rs. 25.00 lacs each (April 2013 to March 2014)
iv) 12 monthly instalments of Rs. 28.00 lacs each (April 2014 to March 2015)
v) 12 monthly instalments of Rs. 31.25 lacs each (April 2015 to March 2016)
vi) 6 monthly instalments of Rs. 18.50 lacs each (April 2016 to September
2016)

Interest to be serviced separately as and when debited.

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Security & Guarantee

Primary • EM of Land & Building at the Project Site located at FP # 4, TPS # 45,
Survey # 948, Near AUDA Garden, Off. 100 ft. Road, Prahaladnagar, Near S.
G. Highway, Ahmedabad – 51 (Projected Cost Rs. 15.07 crores)
• Hypothecation of entire movable fixed assets at the Project Site (Projected
Cost Rs. 7.06 crores)
Collateral Nil.
Guarantee Personal guarantee of the directors of the company. The net worth details are as
under:

(Rs. in crores)

Name of the Director Net Worth

Mr. Kailash R. Goenka 4.61
Mr. Robin R. Goenka 3.03
Mr. Ramavatar R. Goenka 2.18
Total 9.82

Unit visit
The proposed site of the hotel project of the company was visited by Mr. Asim Bhaduri (Vice
President - SME), Mr. P. C. Dash (AVP/SCO - SME) and Mr. Nishant Sharma (AVP/SSO -
SME) and the same was reported satisfactory.

Proposed Project

SRPL has been incorporated as a Private Limited Company with main object of business of
running hotel in all its aspects, lodging and boarding and to run, manage, acquire, control,
own, purchase, hire the same including restaurant, café, tavern, refreshment-room, lodging-
house keepers etc. The company has proposed to set up a three star hotel with 96 rooms at
S.G. highway.

The project is located at one of the best locations and in the newly developed area of
Ahmedabad City. This is situated at “Sankalp Hotel” Near AUDA Garden, Off 100 ft. Road,
Prahaladnagar, S.G.Highway, Ahmedabad - 380051. This area is the fastest developing area

114
in the city and is surrounded by various business office premises, residential plots, various
restaurants and other commercial complexes. Ahmedabad Railway Station is just 20 mins
from the Hotel and International Airport is almost 30 mins from the location. Company’s
main purpose of the hotel is to encourage the corporate people who come for the business
purposes. Hence the location of the project is ideal & the company wants to be a part of the
growing popularity of this area.

COST OF PROJECT Rs. in Crores

A Land & Building 9.01
B Civil Construction and Civil Finishing 6.06
C Furniture & Fixtures 5.49
D Plant and Machinery 1.57
E Preliminary and Pre-operative Cost 2.11
F Contingencies 0.76
TOTAL 25.00

MEANS OF FINANCE
A Equity Share Capital / Premium 3.00
B Unsecured Loans 7.00
C Term Loan 15.00
TOTAL 25.00
Against the total cost of project of Rs. 25.00 crores, the company has requested for Term
Loan assistance of Rs. 15.00 crores. Hence, the margin to be brought in by way of promoters’
contribution would be 40% of the total CAPEX for the proposed hotel project of the company
by way of share capital/premium and unsecured Loans.

Operational & Financial Analysis

Particulars 31.03.08 31.03.09 31.03.10 31.03.11 31.03.12

(Aud) (Aud) (Est) (Proj) (Proj)
Net Sales / Receipts 483.62 489.64 609.00 1333.00 2386.00
Operating Profit 63.32 85.68 143.84 476.00 916.00
Other Income 12.80 0.51 0.00 0.00 0.00
PBDIT 76.12 86.19 143.84 476.00 916.00
Depreciation & Amortisation 7.56 7.49 12.00 121.00 216.00
Interest & Financial Charges 4.98 7.59 39.00 146.00 247.00
Profit Before Tax (PBT) 63.58 71.11 92.84 209.00 453.00
Profit After Tax (PAT) 46.63 48.96 64.84 136.00 295.00
Cash Accruals 54.19 56.45 76.84 257.00 511.00
Share Capital 1.00 1.00 201.00 301.00 301.00
Reserves & Surplus 74.64 123.59 188.43 324.43 619.43

115
Misc. Exp. Not W/off 0.00 0.00 0.00 0.00 0.00
Tangible Net Worth (TNW) 75.64 124.59 389.43 625.43 920.43
USL as Quasi Equity 0.00 0.00 139.20 139.20 139.20
Adjusted TNW 75.64 124.59 528.63 764.63 1059.63
Total Term Liabilities (TTL) 30.20 11.00 1646.80 2192.80 1846.80
Total Outside Liabilities (TOL) 156.95 169.30 1848.80 2579.80 2497.80
Net Sales Growth % 0.31% 1.38% 22.44% 118.88% 78.99%
PBDIT Margin % 15.74% 17.60% 23.62% 35.71% 38.39%
PAT Margin % 9.64% 10.00% 10.65% 10.20% 12.36%
ROCE 64.78% 58.04% 6.06% 12.00% 24.08%
TOL / TNW 2.07 1.36 5.10 4.35 2.86
Adj. TOL / TNW 2.07 1.36 3.50 3.37 2.36
TTL / TNW 0.40 0.09 4.59 3.73 2.16
Adj. TTL / TNW 0.40 0.09 3.12 2.87 1.74
Current Ratio 1.60 1.42 1.51 1.44 1.52
Current Ratio w/o TL inst. 1.60 1.52 2.41 2.80 3.24
Interest Coverage Ratio 15.29 11.36 3.69 3.26 3.71
Net Operating Cash Flow (NOCF) (49.39) 51.87 77.57 300.00 650.00
Net Profit / NOCF (0.94) 0.94 0.84 0.45 0.45
NOCF / Interest (9.92) 6.83 1.99 2.05 2.63
NOCF / Financing Payments (0.28) 0.23 0.26 0.50 0.59
Total Debt / NOCF (No. of years) (0.61) 0.21 4.11 7.31 2.84

Rating
The rating of the company as per SME Rating Tool comes to SME-2 (ABS 31.03.2009). The
segment wise scoring is as under:

Particulars Rating
Overall Scoring SME-2
Financial scoring SME-3
Business scoring SME-2
Management scoring SME-2
Industry scoring SME-4

CIBIL/RBI/ECGC Defaulters’ List

The name of the company and its directors are not appearing in CIBIL/RBI’s defaulter/willful
defaulter list as of 31.12.2008 (latest available). The name of the company and its directors
are not appearing in ECGC’s defaulter list as of 31.07.2008 (latest available)

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Analysis

a) The company belongs a recognized group named SANKALP, who has created a niche
in the hospitality sector.

b) The group is having its presence since 1981 and has emerged as a reputed name since
inception. The promoters of the company have rich experience in their line and belong
to a resourceful family.

c) The promoters are having sound entrepreneur skills to acquire business opportunities
to scale new heights.

d) The sales/receipts of the restaurant/franchisee business (existing) of the company

were increased from Rs. 483.62 lacs in FY07-08 to Rs. 489.64 lacs in FY08-09. The
company has achieved the sale of Rs. 373.74 lacs (Restaurant income of Rs. 300.25
lacs and Franchisee income of Rs. 73.49 lacs) upto 30.09.2009 against the estimated
sale of Rs. 609.00 lacs (Restaurant income of Rs. 484.00 lacs and Franchisee income
of Rs. 125.00 lac) for the year 2009-10, which indicates around 61% achievement of
the estimated sales/receipts for the year 2009-10 and can be considered reasonable.

e) The net profit of the existing business of the company was increased from Rs. 46.63
lacs (NP margin of 9.64%) in FY07-08 to Rs. 48.96 lacs (NP margin of 10.00%) in
FY08-09. The PBDIT of the existing activity of the company was increased from Rs.
76.12 lacs (PBDIT margin of 15.74%) in FY07-08 to Rs. 86.19 lacs (PBDIT margin
of 17.60%) in FY08-09

f) The TOL/TNW of the company remained at 2.07 in FY07-08 and 1.36 in FY08-09.
The TOL/TNW of the company has been estimated at 5.10 for FY09-10 considering
the Loan Against Property of Rs. 420.00 lacs taken for existing business and the
proposed Term Loan disbursement of Rs. 1000.00 lacs during the current FY09-10.

g) The current ratio of the company remained above the benchmark level at 1.60 in
FY07-08 and 1.42 in FY08-09. The same has been estimated at 1.51 for FY09-10
considering the existing business activity of the company during 2009-10. While

117
 considering the existing as well as proposed business activity of the company, the
current ratio has been projected at 1.44 for FY10-11 and 1.52 for FY11-12.

h) The net operating and all ratios pertaining to NOCF were positive in FY08-09. The
same have been estimated to be positive from FY09-10 onwards.

i) The company has shown a consistent growth since its inception and financials of the
company are satisfactory.

118
 CASE STUDY 3
Details of case study

Applicant Details
1
Name of the M/S. Vishesh Distributors Pvt. Ltd. (New Relationship)
Applicant
2 Registered Office 401, Kalasagar, Behind Ratnamani Complex, Jodhpur Cross Road, Satellite,
Ahmedabad - 380015

Showroom F/101, Swagat Plaza I, Bopal Amli Road, Bopal, Ahmedabad.

(Fragrances) M: 9898052002

Showroom (Airtel) 19, Rudra Square, Judges bunglow cross road, Bodakdev, Ahmedabad.
M: 9898052616

Godown Sola Timber Market, After Sola Over Bridge, Behind Mahindra Showroom,
(Beverage) Sola, Ahmedabad.
M: 9898052041

Tel. No. 079-26747999

Contact Details Mobile: 9898052001 (Ketan Shah)
E-Mail: visheshd2000@gmail.com
3 Constitution Private Limited Company
Directors:
1. Mr. Ketan P. Shah (ACPPS7169H)
2. Mr. Pankaj C. Shah (ACYPS5908B)
3. Mrs. Dhara K. Shah (AMFPS2018F)
4. Mrs. Pina P. Shah (APAPS7788E)

Company PAN No. AABCV2348Q

4 Date of • Certificate of incorporation No. U51229GJ2001PTC39423, Dated
Establishment 17.04.2001
• Gujarat Sales Tax Registration No. 24074300543, dated 01.07.2002
• Import Export Code No. 0807004081, dated 24.05.2007
5 Nature of Business Distributorship of Pepsi products, Airtel, Levi’s Struss Signature

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 Brief Background
M/S. Vishesh Distributors Pvt. Ltd. Is a private limited company, held by close family
members. The company was established in year 2001.

The group has been engaged in distribution of branded company products like Pepsico
beverage products, Airtel, Levi’s Struss Signature, Amul, TATA, fragment shop, etc.

The group was earlier distributor for companies like Himalaya, Wipro, Godrej, Parker, Parle,
Adani & Lays.

Now, due to strong marketing channel, the company is also entered in agreement with Levi’s
signature for distribution of garments to their outlets & franchises in all over the Gujarat.
Further the company is also having 14 commercial vehicles for distribution activities.

Present Proposal

To meet the increasing business demand for the various distribution schemes, the company
has requested for the OD limit of Rs. 180.00 lacs. by takeover of existing LAP from HDFC
Bank & also requested to allow the Cash credit limit of Rs. 55.00 lacs from Vijaya Bank. The
company wants to expand their existing business activity by enhancing working capital limit
for smooth business operation.

Purpose of loan For General Business Purpose

Limits OVERDRAFT - Rs. 180.00 lacs
Proposed
Rate of Interest BPLR –2.50% i.e. 12.25% p.a. with monthly rests. (Presently BPLR is at 14.75% p.a.)
Validity of 12 months only subject to review every year.
Limits
Security Details Primary Security: NIL
Collateral Security:
Equitable Mortgage of following properties:
1. Residential flat situated at 401, Kalasagar Appartment, Opp. Star India
Bazaar, Jodhpur, Satellite, Ahmedabad, belonging to Mr. Ketan P. Shah
(Director). Estimated market value Rs. 80.00 lacs.
2. Shop at 101, 1st floor, Swagat Plaza I, Near Bopal Amli road, Bopal,
Ahmedabad, belongs to Mrs. Dhara K. Shah (Director). Estimated market
value Rs.41.00 lacs.
3. Shop at 19, 1st floor, Rudra Square, Near Bodakdev police chowki,
Bodakdev, Ahmedabad, belongs to Mr. Ketan P. Shah (Director).

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 Estimated market value Rs. 80.00 lacs.
4. Shop at 9-10, Ground floor, Sukriti Annexie, Near Prernatirth Bunglows-2,
Satellite, Ahmedabad, belongs to Mr. Ketan P. Shah (Director). Estimated
market value Rs. 100.00 lacs.

Total market value of above properties is Rs. 301.00 lacs (Approx).

Guarantee: Personal guarantee of:
1. Mr. Ketan P. Shah (Director & property holder).
2. Mrs. Dhara K. Shah (Director & property holder)
3. Mr. Pankaj C. Shah (Director)
4. Mrs. Pina P. Shah (Director)
PDC’s:
Two PDC’s for the entire overdraft limit each dated 3 months and 9 months from the
date of first disbursement.
0.75% of the limit sanctioned plus applicable taxes (Non-refundable)
Processing Fees
As per bank’s extent guidelines.
Documentation
The company is facing competition from the other distributors in the market.
Risk Associated
The above risk factor is mitigated as below:
Risk mitigates 1. Directors of the company, are having 10 years of rich experience in the field of
distributorship
2. The company is frequently offering promotional schemes to its retail
distributors
3. The company is having diverse clientele base in the market.
The company has been visited by Mr. N. Ramachandran (AVP-SME), Ms. Disha
Unit Visit
Badani (Executive-SME), Mr. Nirav Ayer (Executive-SME), on 04.02.2010:
Overall visit was found satisfactory.
Rs. 5000/- plus applicable taxes (Non refundable)
Login Fees

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 Whether the names of the borrower or any of the promoters/directors appear(s) in: -
Defaulter List
RBI defaulters List: No (The firm name and directors are not featuring in RBI
Defaulters’ List as of 31.03.2009 - Latest Available).
ECGC defaulter List: No

CIBIL:
Credit card repayment record of Director Mr. Ketan P. Shah:
In CIBIL of Mr. Ketan, it is observed that one credit card account from Standard
Chartered Bank, with overdue amount Rs. 0.43 lacs, was observed written-off.
However, Mr. Ketan has submitted that it was a due of Rs. 1100/-. Due to non -
receipt of bill on time, there was interest charge levied on the actual amount.
He, subsequently paid the actual amount, but not the interest amount, which as on date
has become overdue of Rs. 43,723/- with interest charge.

The director has also filed a case against SCB regarding the same, to the “Consumer
Education & Research Society” and it is in process till date.
The director has submitted the copy of the relevant documents to our bank.

However, considering below facts, we may consider the Credit Card written-off
status as acceptable:
1. The borrower is having satisfactory repayment track record of CC, LAP &
term loan with HDFC Bank & Vijaya bank.
2. Relevant documentary proofs available for CIBIL case.

Credit Score
Parameters Present Score
(Enclosed Credit (ABS – 31.03.09)
Scoring Sheet) Financial 36.00
Non – Financial 30.00
Overall 66.00
Rating SME 3
(Acceptable)

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 Performance details
Particulars 31.03.200731.03.200831.03.200931.03.201031.03.201131.03.2012
Audited Audited Audited Estimated Projected Projected
Sales 1273.31 1032.33 884.53 1125.00 1475.00 1525.00
Other Income 23.49 32.39 30.33 30.00 30.00 30.00
Total Income 1296.80 1064.72 914.86 1155.00 1505.00 1555.00
PBDIT 23.44 28.59 31.58 45.27 50.54 52.29
Depreciation 3.78 6.38 6.58 6.91 6.91 6.91
Interest 12.92 17.55 18.94 28.61 30.63 30.63
Interest & remuneration to Directors 4.80 2.40 2.50 2.75 3.00 3.25
PBT 1.94 2.26 3.56 7.00 10.00 11.50
PAT 1.68 2.03 2.40 5.00 7.00 8.00
PBT Margin % 0.15 0.21 0.39 0.61 0.66 0.74
Cash Accruals 5.46 8.41 8.98 11.91 13.91 14.91
TNW(Unadjusted) 13.44 14.01 15.95 37.96 44.96 52.96
Unsecured Loans from friends &
relatives 38.94 56.25 95.46 78.46 78.46 78.46
TNW (Adjusted) 52.38 70.26 111.41 116.42 123.42 131.42
TOL(Adjusted) 183.99 148.91 127.13 250.71 259.41 260.79
TOL(Unadjusted) 222.93 205.16 222.59 329.17 337.87 339.25
TOL/TNW(Unadjusted) 16.59 14.64 13.96 8.67 7.51 6.41
TOL/TNW(Adjusted) 3.51 2.12 1.14 2.15 2.10 1.98
Debtors 64.97 45.88 71.60 117.19 153.65 158.85
- Less than 6 months 64.97 45.88 71.60 117.19 153.65 158.85
- More than 6 months 0.00 0.00 0.00 0.00 0.00 0.00
Debtors holding (in days) 18.62 16.22 29.55 38.02 38.02 38.02
Current Ratio 1.61 1.70 2.26 1.33 1.37 1.43
Current Asset 187.52 160.33 185.98 328.10 350.71 367.00
Current Liabilities 116.30 94.37 82.16 246.72 255.42 256.80

123
Analysis

a) The group has been engaged in distribution of branded company products like Pepsico
beverage products, Airtel, Levi’s Struss Signature, Amul, TATA, fragment shop, etc.

b) Key promoter and pioneer of the company is Mr. Ketan P. Shah., engaged in the
distribution activities since last more than 10 years.

c) He has gained good knowledge and skill especially in the field of marketing aspects.
He is handling total business affairs with sound business and management policy.

d) The company had registered sales of Rs. 1273.31 lacs in FY. 2006-07, Rs. 1032.33
lacs in FY. 2007-08 and sales of Rs. 884.53 lacs in FY. 2008-09.

e) The company is having Airtel distributorship, under which it was selling prepaid
mobile cards also. This business was with high turnover and low margin basis. The
company has closed that prepaid card section in year 2007. Further to this company
was having TATA’s distributorship, which was closed in the mid of the year 2009 &
hence, there was decline in sales during past 3 years. Current year, company has
entered into new agreement with Levi’s Signature, through which it is expecting
turnover of Rs. 50.00 lacs every month.

f) The company has booked net profit (PBT) of Rs. 2.26 lacs during FY 2007-08 as
against Rs. 1.94 lacs of FY 2006-07, registering Y-o-Y growth of 16.50%. During
FY. 2008-09, the net profit of the company increased to Rs. 3.56 lacs.

g) Despite of decrease in turnover of the company, profitability is on increasing trend.

Also, PBDIT of the company is at quite higher level of Rs. 31.58 lacs for the FY
2008-09 & Rs. 28.59 lacs for the FY 2007-08, which can be considered as
satisfactory.

124
h) The company has been marginally increasing its TNW (unadjusted) Y-o-Y basis i.e.
from Rs. 13.44 lacs in FY. 2006-07 to Rs. 15.95 lacs in FY. 2007-09. The TNW for
the FY 2009-10 is estimated at higher side of Rs. 37.96 lacs, mainly due to ploughing
back of entire profit and infusion of fresh capital by directors with decrease in
unsecured Loans from directors. .

i) The current ratio of the company for FY 2007-08 has been 1.70 & at 2.26 for FY
2008-09. The current ratio estimated for FY 2009-10 is 1.33 times, mainly on account
of proposed credit limit of Rs. 180.00 lacs from our bank and the same may be
considered as satisfactory.

125
 CASE STUDY 4
Details of case study

Name of the Suchi Wires (New Relationship)

Applicant

Work Office
Address 189, G.I.D.C. Estate, Por-Ramangamdi, Dist. Vadodara-391243

Residence Deep Jyoti-2, Block No. 404, 405, Opp. Gujarat Tractor, Vishwamitri, Vadodara.
Address

Contact 0265-2645431, 3098431

Details 0265-2831649 (O)
M: 9824034470 (Rajendrabhai)
Proprietorship Firm 31.01.1992
Constitution Date of (GST Registration No.
Proprietor: Mr. Rajendra E 24691601368)
Vallavhbhai. Patel st (SSI Registration No.
a 240191100480, dated
PAN: ACSPP2512N bl 07.06.2007)
is
h
m
e
nt
Nature of Manufacturer of HB (Half hard bend) & MS (Mild stone) wires
Business

Brief Background
M/s Suchi Wires is a proprietorship firm established in year 1992. Mr. Rajendra Vallabhbhai
Patel is a proprietor of the firm.

Firm is mainly engaged in the business of manufacturing of iron wires, cutting & stretching it
into different sizes according to customers’ requirements.
The proprietor was working with administrative department of school in his initial career
before 20 years. Proprietor then started trading in wires with friends at small level, on seeing
the business potential, he decided to establish the business in the name of Suchi Wires.

126
The proprietor is Commerce Graduate & aged about 51 years. He started business in year
1992 and having experience of around 17 years in the same line of business.

Mrs. Niyati Patel (sister of the proprietor) manages administrative work related to the
business. Mr. Kalpesh Patel (Brother-in-law of the proprietor) looks after the technical
support. The proprietor looks after the finance & overall management.

There are 16 workers in the firm, working in 2 shifts a day.

Applicant purchases wires of different diameters & then processes it through different
machines to stretch them and prepare wires of particular diameter & size, as per the
requirements/specifications of the clients.

To prepare the wires according to customers requirement, work processes like wire drawing,
cutting, bending etc. are performed. Iron wires are used in making grill of fridge back, table
fan cover, stapler pins, u-pins, etc.

 Major Suppliers of the applicant are:

National Small Industries Corporation Ltd. (Ahmedabad)
Shanti Fintrade Ltd. (Raipur)
Roundwell Steel Corporation (Ahmedabad)
Shree Vinayak Steels (Billimora)

 Major Buyers of the applicant are:

Gandhi Special Tubes Ltd. (Halol)
Vijay jyot Seats Pvt. Ltd. (Halol)
Lalit Engineers (Vadodara)
Almonard Pvt. Ltd. (Vadodara)

127
 Present Proposal

Purpose of Loan Working capital limit

Limits Proposed CC limit of Rs. 50.00 lacs.
Rate of Interest & BPLR-2.25% i.e. 12.50% (BPLR at present is 14.75%)
Validity of Limits 12 months only subject to review every year.
Security Details Primary: Hypothecation of current assets of the firm.

Collateral:

A) Equitable mortgage of following properties:

1. Factory premise of Suchi Wires situated at Plot No. 428, GIDC,

Ramangamdi, Por, Vadodara. Property belongs to Mr. Rajendra V.
Patel (proprietor) & approximate market value of the property is Rs.
45.00 lacs.
2. Residential property situated at Deep Jyot-2, Block No. 404 & 405,
Opp. Gujarat tractor, Vshwamitri, Vadodara. The property belongs
to Mr. Rajendra V. Patel (proprietor) & approximate market value
of the property is Rs. 15.00 lacs.

B) Hypothecation of fixed assets of the firm.

Guarantee:

Personal guarantee of:

1. Mr. Rajendra Vallabhbhai Patel (Proprietor)

2. Mr. Kalpesh Patel (Brother-in-law of the proprietor)

Visit to the The unit of the firm was jointly visited by Mr. N Ramachandran (AVP-
location of Firm SME), Mr. Sachin gupta (Deputy Manager-SME) & Mr. Sameep Buch
(Manager-Axis Sales) on 12.10.2009.

Overall conduct of the business was found regular. The visit was
satisfactory.
Processing Fees 1.00% of sanctioned CC limit, plus applicable taxes (non-refundable).
Login Fees Rs. 5000/- plus applicable taxes, to be taken upfront (Non - refundable)
Defaulter List Whether the names of the borrower or any of the promoters/directors
appear(s) in:

128
 RBI defaulters List: No (The firm name and proprietor’s name are not
featuring in RBI defaulters list latest available of 31.12.2008)

ECGC defaulter List: No

CIBIL: Satisfactory

Credit Scoring

Credit Score
(Enclose Credit Score
Parameters
Scoring Sheet) (ABS 31/03/2009)
Financial 28.00

Business & Management 42.78

Industry 11.14
Overall 81.92

Rating

SME 2

129
 Performance details

Particulars 31.03.2007 31.03.2008 31.03.2009 31.03.2010 31.03.2011

Audited Audited Audited Estimated Projected
Sales 119.73 204.49 431.02 568.57 625.43
Other Income 1.06 1.69 3.39 4.08 4.9
Total Income 120.79 206.18 434.41 572.65 630.33
PBDIT 3.91 5.16 11.13 21.04 22.80
Depreciation 0.52 1.23 1.31 1.18 1.06
Interest 0.11 0.22 1.27 5.47 5.48
PBT 3.28 3.71 8.55 14.39 16.26
PAT 3.28 3.71 8.55 14.39 16.26
PBT Margin % 2.72 1.80 1.97 2.51 2.58
Cash Accruals 3.8 4.94 9.86 15.57 17.32
TNW(Unadjusted) 20.63 26.27 34.08 46.96 61.72
Unsecured Loans from
friends & relatives 16.50 19.90 76.03 68.53 66.53
TNW (Adjusted) 37.13 46.17 110.11 115.49 128.25
TOL(Adjusted) 26.89 27.98 64.05 80.95 83.95
TOL(Unadjusted) 43.39 47.88 140.08 149.48 150.48
TOL/TNW(Unadjusted) 2.10 1.82 4.11 3.18 2.44
TOL/TNW(Adjusted) 0.72 0.61 0.58 0.70 0.65
Debtors 22.08 33.74 74.13 94.76 104.24
- Less than 6 months 22.08 33.74 74.13 94.76 104.24
- More than 6 months 0.00 0.00 0.00 0.00 0.00
Debtors holding (in days) 67.31 60.22 62.78 60.83 60.83
Current Ratio 1.40 1.44 1.77 1.66 1.76
Current Asset 37.76 43.57 113.59 134.55 147.88
Current Liabilities 26.89 30.36 64.05 80.95 83.95

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Analysis

a) The market reputation of promoter is satisfactory.

b) Firm has achieved sales of Rs. 204.49 lacs in FY. 2007- 08 and Rs. 431.02 lacs in FY.
2008-09, this is more than double of the last year. Firm has submitted estimated sales
of Rs. 568.57 lacs for FY 2009-10, against which firm has achieved sales turnover of
Rs. 235.70 lacs till 31st October 2009, which is 41.45 % of estimated sales.

c) Profitability of the firm is also showing increasing trend y-o-y bases. Firm has
achieved PBT of Rs. 3.71 lacs in FY 2007-08 & Rs. 8.55 lacs in FY 2008-09.
Profitability has also rose in line with increase in sales of previous financial year.
PBDIT of the firm is also on increasing trend, which can be considered as
satisfactory.

d) Net worth of the firm is increasing y-o-y bases, with plough back of the profit in the
business. Unadjusted gearing of the firm is on higher side for FY 2008-09 mainly due
to higher side of creditors at particular point in March 2009. In March 2009,
proprietor submitted that purchase of raw material was at better price & the suppliers
also allowed credit period. Hence, the creditor base was on higher side.

e) Debtor’s level of the firm is average 60 days for all the past 3 years. Proprietor has
submitted that average payment duration is 60 days maintained in the business.
Debtors maintain regularity in payment, which can be considered as acceptable.

f) The Current Ratio of the firm has been on higher side, above the benchmark level of
1.33 for all the past 3 years. Current ratio for FY 2007-08 was 1.44 & for FY 2008-09
was at 1.77. Estimated ratio is 1.66 for FY 2009-10. Although, it has been maintained
above the benchmark level, which can be considered as acceptable.

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 CHAPTER 9

FINDINGS

 Credit appraisal is done to check the commercial, financial & technical viability of the
project proposed its funding pattern & further checks the primary or collateral security
cover available for the recovery of such funds

 Credit is the core activity of the banks & important source of their earnings which go
to pay interest to depositors, salaries to employees & dividend to shareholders

 Credit & risk go hand in hand

 In the business world risk arises out of:-

• Deficiencies / lapses on the part of the management
• Uncertainties in the business environment
• Uncertainties in the industrial environment
• Weakness in the financial position

 Bank’s main function is to lend funds/ provide finance but it appears that norms are
taken as guidelines not as a decision making

 A banker’s task is to indentify/assess the risk factors/parameters & manage/mitigate

them on continuous basis

 The Credit Appraisal process adopted by the bank take into account all possible
factors which go into appraising the risk associated with a loan

 These have been categorized broadly into financial, business, industrial, management
risks & are rated separately

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 The assessment of financial risk involves appraisal of the financial strength of the
borrower based on performance & financial indicators

 The norms of the bank for providing loans are not stringent, i.e. even if a particular
client is not having the favorable estimated and financial performance, based on its
past record and future growth perspective, the loan is provided.

 By providing various schemes of loans, Axis bank tries to cater to the financial
requirements of almost all the types of SME units.

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 CHAPTER 10

CONCLUSION

 Finance management is the backbone of any organizations and hence yields a number
of job options ranging from strategic financial planning to sales.

 From the study of Credit appraisal of SME, it can be concluded that credit appraisal
should therefore be based on the following factors, the same are applied at Axis Bank:
• Financial performance
• Business performance
• Industry outlook
• Quality of management
• Conduct of account

 Axis Bank loan policy contains various norms for sanction of different types of loans.
These all norms do not apply to each & every case. Axis Bank norms for providing
loans are flexible & it may differ from case to case.

 Usually, it is seen that credit appraisal is basically done on the basis of fundamental
soundness. But, after different types of case studies, our conclusion was such that
credit appraisal system is not only looking for financial wealth. Other strong
parameters also play an important role in analyzing credit worthiness of the
firm/company.

 In all, the viability of the project from every aspect is analyzed, as well as type of
business, industry, promoters, past records, experience, projected data and estimates,
goals, long term plans also plays crucial role in increasing chances of getting project
approved for loan.

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 BIBLIOGRAPHY

Web Sites
www.rbi.org.in
www.Axis Bank.com
www.indianbankassociation.com
www.bankersindia.com
www.wikipedia.com
Books:
“Credit and banking” By: K. C. Nanda

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